SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2001
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-433-5801
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, New York 11747-8943
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common equity (Common Stock)
held by non-affiliates of the registrant as of March 25, 2002 was $559,727,545
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 25, 2002, was 25,952,611.
Information contained in this Report, other than historical information,
should be considered forward-looking and is subject to various risk factors and
uncertainties. For instance, the Company's strategies and operations involve
risks of competition, changing market conditions, changes in laws and
regulations affecting it and the health care industry and numerous other factors
discussed in this Report and in the 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.
Introduction
Gentiva Health Services, Inc. ("Gentiva" or the "Company") became an
independent publicly owned company on March 15, 2000, when all of the common
stock of the Company was issued to the stockholders of Olsten Corporation, a
Delaware corporation ("Olsten"), the former parent corporation of the Company
(the "Split-Off"). Prior to the Split-Off, all of the assets and liabilities of
Olsten's health services business (formerly known as Olsten Health Services)
were transferred to the Company pursuant to a separation agreement and other
agreements between Gentiva, Olsten and Adecco SA ("Adecco"). Gentiva was
incorporated in the state of Delaware on August 6, 1999.
The Company operates its health services business in the United States and
currently provides specialty pharmaceutical services (including infusion therapy
and distribution services) and home health care services.
Significant Development
On January 2, 2002 the Company entered into an asset purchase agreement
with Accredo Health, Incorporated ("Accredo") pursuant to which Accredo agreed
to acquire substantially all of the assets of the Company's specialty
pharmaceutical services business for a purchase price of $415 million, subject
to adjustment in accordance with the asset purchase agreement. The consideration
is payable to the Company half in cash and half in shares of Accredo common
stock. The sale of the specialty pharmaceutical services business is conditioned
upon, among other things, the approval of the shareholders of each company and
other customary conditions. Completion of the transaction is expected in the
second quarter of 2002. It is currently expected that following the sale of the
specialty pharmaceutical business, the Company will distribute substantially all
of the proceeds to its shareholders.
Specialty Pharmaceutical Services
The Company's specialty pharmaceutical services business is coordinated
through its network of 40 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;
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o marketing and distribution services for pharmaceutical, biotechnology
and medical service firms; and
o clinical support services for pharmaceutical and biotechnology firms.
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 rare, chronic diseases including hemophilia, primary pulmonary
hypertension, immunodeficiency/autoimmune disorders and growth disorders.
Some of the Company's other significant specialty pharmaceutical services
also include:
o Antibiotic therapies, which are the infusion of antibiotic medications
into a patient's bloodstream. These medications are typically used to
treat a variety of serious infections and diseases.
o Total Parenteral Nutrition (TPN), which is the long-term provision of
nutrients for patients with chronic gastrointestinal conditions. These
nutrients are infused through surgically implanted central vein
catheters or through peripherally inserted central catheters. Enteral
nutrition is the infusion of nutrients through a feeding tube inserted
directly into a patient's digestive tract. This long-term therapy is
prescribed for patients who are unable to eat and drink normally.
o Chemotherapy, which is the infusion of drugs in a patient's
bloodstream to treat various forms of cancer.
o Pain management, which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
o Wholesale distribution of various pharmaceutical products.
Home Health Care Services
The Company's home health care services business is conducted through more
than 275 locations and delivers a wide range of services principally through its
Nursing and CareCentrix business units.
The Company's nursing unit operates licensed and Medicare-certified nursing
agencies located in 35 states, of which 97% are accredited by the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO). These branches
provide various combinations of skilled nursing and therapy services,
paraprofessional nursing services and homemaker services to pediatric, adult and
mature adult patients. Reimbursement sources for this unit include government
programs, including Medicare and Medicaid as well as other state and county
programs, and private sources including health insurance plans, managed care
organizations, long term care insurance plans and personal funds. The Company's
nursing unit is organized in five geographic regions, each staffed with a
clinical, operational and sales management team. Regions are further separated
into operating areas. Each area is comprised of branches, each of which is led
by an agency director and staffed with clinical and administrative support staff
as
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well as associates who deliver direct patient care. The caregivers are employed
on either a full-time basis or are paid on a per visit or per diem basis.
The Company's CareCentrix unit provides an array of outsourcing services
and coordinates the delivery of home nursing services, acute and chronic
infusion therapies and durable medical equipment for managed care organizations
and health plans. These services are delivered through an extensive nationwide
network of credentialed providers which also includes the Company's nursing
unit. CareCentrix accepts case referrals from a wide variety of sources,
verifies eligibility and benefits and transfers case requirements to
credentialed providers for service to the patient. The unit provides services to
its customers, including the fulfillment of case requirements, case management,
provider credentialing, eligibility and benefits verification, data reporting
and analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within the CareCentrix unit are
structured as fee-for-service, whereby a payor is billed on a per usage basis
for various services, and at-risk capitation, whereby the payor is billed on the
basis of projected usage per member per month, subject to certain limitations.
The Company's home health care services business also delivers services to
its customers through smaller business units that include Rehab Without Walls, a
unit providing rehabilitation services for patients with brain or spinal cord
injuries or disease, and Gentiva Business Services, a unit providing software,
billing, management and consulting services to other home health agencies.
Payors
In fiscal years 2001, 2000 and 1999, approximately 61 percent, 63 percent
and 64 percent, respectively, of the Company's revenues were attributable to
commercial pay sources, 21 percent, 21 percent and 20 percent, respectively, of
the Company's revenues were attributable to Medicaid reimbursement, state
reimbursed programs and other state/county funding programs, and 18 percent, 16
percent and 16 percent, respectively, of the Company's revenues were
attributable to Medicare reimbursement. In fiscal years 2001, 2000 and 1999,
Cigna Healthcare accounted for approximately 19 percent, 15 percent and 11
percent, respectively, of revenues. The Company has renewed its contract with
Cigna Healthcare for the seventh consecutive year, with the current contract
expiring on December 31, 2003, with an option to renew. No other payor accounts
for 10 percent or more of the Company's revenues. The revenues from commercial
payors are primarily generated under fee for service contracts which are
traditionally one year in term and renewable automatically on an annual basis,
unless terminated by either party. For fiscal years 2000 and 1999, revenues
include revenues from health care staffing services business and Canadian
operations, both of which were sold in the fourth quarter of fiscal 2000.
Source and Availability of Personnel
Specialty pharmaceutical services. Employees are generally full-time,
salaried personnel and include licensed professionals, such as pharmacists and
nurses. Employees are recruited through various means, including advertising in
local and national media, job fairs and solicitations on web sites. Currently,
the specialty pharmaceutical services industry, as a whole, is experiencing some
shortage of pharmacists.
Home health care services. To maximize the cost effectiveness and
productivity of caregivers, the Company utilizes customized systems and
procedures that have been developed and refined over the years. Personalized
matching to recruit and select applicants who fit the patients' individual needs
is achieved through initial applicant profiles, personal interviews, skill
evaluations and background and reference checks. Caregivers are recruited
through a variety of sources, including advertising in local and national media,
job fairs, solicitations on web sites, direct mail and telephone solicitations,
as well as referrals obtained directly from clients and other
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caregivers. Caregivers are generally paid on a per visit or per diem basis, or
are employed on a full-time salaried basis. The Company also employs caregivers
who are paid on an hourly basis for time actually worked. In certain areas of
the United States, the Company, along with its competitors, is currently
experiencing a shortage of licensed professionals. A continued shortage of
professionals could have a material adverse effect on the Company's business.
Trademarks
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including REHAB WITHOUT WALLS(R), CHRONICARE(R) and
A.C.C.E.S.S.(R) or in the process of being registered with the U.S. Patent and
Trademark Office, including CARECENTRIX(SM), CARE YOU CAN COUNT ON(SM) and
GENTIVA(SM).
Business Environment
Specialty pharmaceutical services. The specialty pharmaceutical services
industry has been and continues to be fueled by significant developments of new
drugs and therapies by biotechnology and pharmaceutical manufacturers. Many of
these drugs and therapies require specialized storage, distribution and handling
by specialty pharmaceutical services companies. In addition, the complexity of
these therapies often requires properly trained nurses and pharmacists to
administer and monitor the therapies for the patients.
Home health care services. Factors that the Company believes have
contributed and will contribute to the development of home health care in
particular include recognition that home health care can be a cost-effective
alternative to lengthy, more expensive institutional care; an aging population;
increasing consumer awareness and interest in home health care; the
psychological benefits of recuperating from an illness or accident in one's own
home; and advanced technology that allows more health care procedures to be
provided at home.
The Company is actively pursuing relationships with managed care
organizations. The Company believes that its nationwide office network,
financial resources and the quality, range and cost-effectiveness of its
services are important factors as it seeks opportunities in its managed care
relationships in a consolidating home health care industry. In addition, 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 offers the direct and managed provision of care
as a single source, thereby optimizing utilization.
Marketing and Sales
Specialty pharmaceutical services. The Company has sought to grow its
specialty pharmaceutical services through a business development team which is
responsible for tracking new biological drugs and negotiating distribution
arrangements for those drugs. The Company has also supported its sales efforts
of pharmaceuticals with sales representatives who market the Company's services
directly to hospitals, physician groups and managed care.
Home health care services. In general, the Company obtains clients through
personal and corporate sales presentations, telephone marketing calls, direct
mail solicitation, referrals from other clients and advertising in a variety of
local and national media, including the Yellow Pages, newspapers, magazines,
trade publications and radio. The Company also maintains an Internet web site
(www.gentiva.com) that describes the Company, its services and products.
Marketing efforts also involve personal contact with case managers for managed
health care programs, such as those involving health maintenance organizations
and preferred provider organizations, insurance company representatives and
employers with self-funded employee health benefit programs. The Company does
not seek reimbursement from government payors for unallowable marketing and
sales expenses.
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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 an extensive office network. The Company also
empowers its branch directors with a high level of responsibility, providing
incentives to manage the business effectively at the local level, one of the
central ingredients in a business where relationships are vital to success.
Competitive Position
Specialty pharmaceutical services. The specialty pharmaceutical services
business is highly competitive. Companies engaged in this business include
national chain pharmacies, mail order pharmacies, hospital-based pharmacies and
specialty pharmaceutical distributors. The Company's primary national
competitors are Caremark RX, Inc. (CTS), Accredo and Priority Healthcare
Corporation. Based on an investment banking research report published in 2000,
the Company believes that its specialty pharmaceutical services business
currently has approximately an 11% market share in the specialty pharmaceutical
services industry. Competition is based on quality of care and service
offerings, as well as upon patient and referral source relationships, price and
reputation.
Home health care services. The segments of the home health care industry in
which the Company operates are also highly competitive and fragmented. Home
health care nursing providers range from facility-based (hospital, nursing home,
rehabilitation facility, government agency) agencies to independent companies to
visiting nurse associations and nurse registries. They can be not-for-profit
organizations or for-profit organizations. In addition, there are relatively few
barriers to entry in some segments of the home health care market in which the
Company operates. The Company's primary competitors for its home health care
nursing services business are hospital-based home health agencies, local home
health agencies, and visiting nurse associations. Based on a published industry
study and a government website, the Company believes it holds the number one
market position in home health care nursing as a national provider, which it
believes to be currently approximately a 2% to 3% market share. The Company
competes with other home health care providers on the basis of availability of
personnel, quality and expertise of services and the value and price of
services. The Company believes that it has a favorable competitive position,
attributable mainly to its widespread office network and the consistently high
quality and targeted services it has provided over the years to its patients, as
well as to its screening and evaluation procedures and training programs for
caregivers.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payors, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
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Number of Persons Employed
At December 30, 2001, the Company had approximately 4,400 full-time
administrative staff, including 1,500 full-time administrative staff employed in
the specialty pharmaceutical services business. In addition, the Company had
approximately 500 full-time caregivers, including 90 employed in the specialty
pharmaceutical services business. The Company also employs caregivers on a
temporary basis, as needed, to provide home health care services. In fiscal
2001, the average number of temporary caregivers employed on a weekly basis was
approximately 12,000. The Company believes that its relationships with its
employees are generally good.
---------------------
The Company believes that it maintains insurance coverages that are
adequate for the purpose of its business.
For a discussion of certain regulations to which the Company's business is
subject, see "Regulations" under Item 3, PART I below.
Selected financial information relating to the Company's industry segments
is found in Note 14 of Notes to Consolidated Financial Statements of the Company
and its subsidiaries, which are included in this Report.
Item 2. Properties.
The Company headquarters is leased and is located at 3 Huntington
Quadrangle 2S, Melville, New York 11747-8943. Other major regional
administrative offices leased by the Company are located in Overland Park,
Kansas and Tampa, Florida. The Company also maintains leases for other offices
and locations on various terms expiring on various dates.
Item 3. Legal Proceedings.
Litigation
In addition to the matters referenced in this Item 3, the Company is party
to certain legal actions arising in the ordinary course of business including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
On November 22, 2000, the jury, in an age-discrimination lawsuit commenced
in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten
Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio
(the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff
against Olsten consisting of $675,000 in compensatory damages, $30 million in
punitive damages and an undetermined amount of attorneys' fees. The jury found
that, although Olsten had lawfully terminated the plaintiff's employment, its
failure to transfer or rehire the plaintiff rendered Olsten liable to the
plaintiff. The parties filed several post-trial motions, and following a March
23, 2001 hearing on the parties' respective post trial motions, the trial court,
on May 17, 2001, denied all post-trial motions, and entered judgment for the
plaintiff for the full amount of compensatory and punitive damages, and awarded
the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants
timely filed a notice of appeal with the Court of Appeals, Seventh Appellate
District, Mahoning County, Ohio and on June 19, 2001, the Company posted a
supersedeas bond for the full amount of the judgment, plus interest. On October
12, 2001, the Company timely filed its appellate brief with the Court of
Appeals. Plaintiff filed its response brief on January 14, 2002, and defendants'
reply brief was filed on
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February 8, 2002. Oral arguments have not been scheduled yet. The Company
intends to defend itself vigorously in this matter.
On January 2, 2002, Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva
Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508, an
amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act and that the defendant had wrongfully terminated the plaintiff.
The plaintiff claimed that infusion pumps delivered to patients did not supply
the full amount of medication, allegedly resulting in substandard care and
overbilling to the government. Based on a review of the court's docket sheet,
the plaintiff filed a complaint under seal in March 2001. In October 2001, the
United States Government filed a notice with the court declining to intervene in
this matter, and on October 24, 2001, the court ordered that the seal be lifted.
Plaintiff filed a motion to amend complaint on December 27, 2001 and served the
complaint that same day. Defendant's answer and counterclaim were filed on
February 25, 2002. The Company has denied the allegations of wrongdoing in the
complaint and intends to defend itself vigorously in this matter.
On November 1, 2001, the Company received notice of the entry of an Order
dated October 25, 2001, unsealing a complaint in an action captioned United
States of America ex rel. Lee Einer v. Olsten Corporation, No. CIV-S-99-0860
DFL/DAD filed with the U.S. District Court for the Eastern District of
California. This civil action was brought pursuant to the False Claims Act. The
original sealed complaint was filed in April 1999 and alleged that Olsten
falsely took into income during the conversion of its financial data systems
alleged overpayments due to payors. In November 2000, plaintiff filed an amended
complaint adding the allegation that Olsten made false representations to the
United States government in connection with a settlement agreement entered into
in July 1999. The Company acknowledged service of the amended complaint on
November 29, 2001 and filed its answer and counterclaim on December 3, 2001.
Plaintiff filed his reply to counterclaim, counterclaim against the Company and
cross claim against the United States government on January 18, 2002. The
Company's answer was filed on February 12, 2002. The Company believes that it
was the filing of the original complaint that triggered the December 1999
document subpoena from the Department of Health and Human Services, Office of
Inspector General, which is discussed below under "Government Investigations."
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of
the Company's subsidiaries, initiated three arbitration proceedings against
hospitals owned by Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which
Kimberly had management services agreements to provide services to the
hospitals' home health agencies. The basis for each of the arbitrations is that
Columbia/ HCA sold the home health agencies without assigning the management
services agreements and, as a result, Columbia/HCA has breached the management
services agreements. In response to the arbitrations, Columbia/HCA has asserted
that the arbitrations be consolidated and stayed, in part based upon its alleged
claims against Kimberly for breach of contract, and requested indemnity and
possibly return of management fees. Columbia/HCA has not yet formally presented
these claims in the arbitrations or other legal proceedings and has not yet
quantified the claims. Still pending before the arbitrators is Columbia/HCA's
request to consolidate the proceedings, which Kimberly has opposed. The
proceedings are currently in abeyance pending ruling on Columbia/HCA's motion to
consolidate.
On June 23, 2000, the Company was served with a complaint in a purported
class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S.
District Court for the Middle District
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of Tennessee, captioned Ultimate Home Health Care, Inc. v. Columbia/HCA
Healthcare Corp., No. 3-00-0560, (the "Tennessee Lawsuit"). On July 21, 2000,
the Company was served with an amended complaint in the Tennessee Lawsuit, which
named as defendants Columbia/HCA, Columbia Homecare Group, Olsten Health
Management a/k/a Hospital Contract Management Services and Olsten Corporation.
The amended complaint alleged, among other things, that the defendants' business
practices in connection with home health care patient referrals between 1994 and
1996 violated provisions of Federal antitrust laws, the Racketeer Influenced and
Corrupt Organizations Act (RICO), the Tennessee Consumer Protection Act and
state common law and sought unspecified compensatory damages, punitive damages,
treble damages and attorneys' fees on behalf of a proposed class of home
healthcare companies and/or agencies which conducted business in Tennessee,
Texas, Florida and/or Georgia. By an order dated January 21, 2001, the Court
ruled on defendants' motion to dismiss and dismissed plaintiffs' RICO and state
common law tort claims, but allowed plaintiff's other claims to proceed to
discovery. After conducting some discovery on the issues, on October 10, 2001
plaintiff filed a notice of withdrawal of certain allegations and subsequently
filed a second amended complaint that dropped all class action allegations and
all antitrust claims. On December 6, 2001 the parties stipulated to the
dismissal of the action with each party to bear its own costs, and on December
13, 2001, the court entered an order dismissing the suit in its entirety.
Furthermore, in connection with the Split-Off, the Company agreed to
assume, to the extent permitted by law, the liabilities, if any, arising out of
(and to indemnify Olsten for) the above lawsuits and arbitration proceedings and
other liabilities arising out of the health services business, including any
such liabilities arising after the Split-Off in connection with the government
investigations described below. In addition, in connection with the sale of the
specialty pharmaceutical services business, the Company has agreed to retain and
indemnify Accredo for specified liabilities including the litigation described
above and the government investigations described below.
Government Investigations
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. After preliminary discussions with the Office of Inspector
General, the Company believes the subpoena relates to an investigation of
possible overpayments to it by the Medicare program. The Company provided the
Office of Inspector General and other government agencies with requested
documents and cooperated fully with this investigation. On November 1, 2001, the
Company received notice of the entry of an Order dated October 25, 2001,
unsealing a complaint in an action captioned United States of America ex rel.
Lee Einer v. Olsten Corporation, which is discussed above under "Litigation." In
connection with the unsealing of the complaint, and as recited in the Order
unsealing the complaint, the United States gave notice to the District Court
that the United States was declining to intervene in the action. The Company
believes that it was this complaint that gave rise to the December 1999 document
subpoena, and that following an almost two year investigation into the
allegations made in the complaint, the United States decided not to intervene
and not to proceed with this action. The Company believes that the government
has concluded its investigation into this matter.
In early February 2000, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. The Company believes the subpoena relates to its agencies'
cost reporting procedures concerning contracted nursing and home health aide
costs. The Company continues to
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provide the Office of Inspector General and other government agencies with the
requested documents and to cooperate fully with their investigation. At this
time, the Company is unable to assess the probable outcome or potential
liability, if any, arising from this subpoena.
In October 1998, in connection with its settlement of a government
investigation into the health care practices of Quantum Health Resources (a
subsidiary of the Company) for a period prior to 1997, Olsten executed a
corporate integrity agreement with the U.S. Department of Justice, the Office of
Inspector General of the U.S. Department of Health and Human Services, the U.S.
Secretary of Defense (for the CHAMPUS/Tricare Program) and the Attorneys General
for the States of New York and Oklahoma. The October 1998 corporate integrity
agreement applied to the Company's specialty pharmaceutical services business
and focused on the training and billing of blood factor products for
hemophiliacs and was in effect until December 31, 2001. On February 12, 2002,
the Company filed its final report required by the 1998 corporate integrity
agreement.
In connection with the July 19, 1999 settlement with various government
agencies, Olsten executed a separate corporate integrity agreement with the
Office of Inspector General of the Department of Health and Human Services which
will remain in effect until August 18, 2004. The July 1999 corporate integrity
agreement applies to the Company's businesses that bill the federal government
health programs directly for services, such as its home care nursing business
(but excluding the specialty pharmaceutical services business). This corporate
integrity agreement focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of claims.
Under each of the corporate integrity agreements, the Company is required,
for example, to maintain a corporate compliance officer to develop and implement
compliance programs, to retain an independent review organization to perform
annual reviews and to maintain a compliance program and reporting systems, as
well as provide certain training to employees.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. The Company is in
compliance with both corporate integrity agreements and has timely filed all
required reports. If the Company fails to comply with the terms of either of its
corporate integrity agreements, the Company will be subject to penalties.
Regulations
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
o Medicare, Medicaid, TRICARE and other government-funded reimbursement
programs;
o reporting requirements, certification and licensing standards for
pharmacies and certain home health agencies; and
o in some cases, certificate-of-need requirements.
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The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, TRICARE 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 to actual or potential referral sources for obtaining or
influencing patient referrals;
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 relationships;
o laws against the filing of false claims; and
o laws against making payment or offering items of value to patients to
induce their self-referral to the provider.
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.
Periodic and random audits conducted or directed by these agencies could result
in a delay in receipt, or an adjustment to the amounts of reimbursements due or
received under Medicare, Medicaid, TRICARE and other federal health programs.
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 TRICARE programs and can subject the provider to substantial civil and/or
criminal penalties.
The Balanced Budget Act of 1997 provided for, among other things, a 15
percent reduction in home health interim payment system limits. The
implementation of this reduction in the payment caps has been delayed until
October 1, 2002. The Center for Medicare and Medicaid Services currently
estimates that the reduction in payment caps, if implemented, may reduce
payments to home health agencies for services provided under the Medicare
program by approximately 7 percent.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
Item 4(a). Executive Officers of the Company.
The following table sets forth certain information regarding each of the
Company's executive officers as of March 25, 2002:
Executive Officer Position and Offices with
Name Since Age the Company
- --------------------------------- ------------------------- ------ --------------------------
Edward A. Blechschmidt 1999 49 President, Chief Executive
Officer and Chairman of the
Board of Directors
John J. Collura 1999 55 Executive Vice President,
Chief Financial Officer and
Treasurer
Ronald A. Malone 2000 47 Executive Vice President
and President, Home Health
Care Services Division
Robert J. Nixon 1999 45 Executive Vice President
and President, Specialty
Pharmaceutical Services
Division
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Executive Officer Position and Offices with
Name Since Age the Company
- --------------------------------- ------------------------- ------ --------------------------
Richard C. Christmas 1999 47 Senior Vice President and
Chief Information Officer
E. Rodney Hornbake, M.D. 2000 51 Senior Vice President and
Chief Medical Officer
Patricia C. Ma 1999 40 Senior Vice President,
General Counsel and
Secretary
Vernon A. Perry 1999 50 Senior Vice President -
Nursing Services
David C. Silver 2000 59 Senior Vice President -
Human Resources
2001 30 Vice President and Chief
Christopher L. Anderson Compliance Officer
2001 49 Vice President and
John R. Potapchuk Controller
The executive officers are elected annually by the Board of Directors.
Edward A. Blechschmidt
Mr. Blechschmidt has served as president, chief executive officer and
chairman of the board of directors of the Company since November 1999. He served
as the chief executive officer and a director of Olsten from February 1999 until
March 2000. He was also the president of Olsten from October 1998 until March
2000 and served as the chief operating officer of Olsten from October 1998 to
February 1999. From August 1996 to October 1998 he was president and chief
executive officer of Siemens Nixdorf Americas, an information technology
company.
John J. Collura
Mr. Collura has served as the executive vice president, chief financial
officer and treasurer of the Company since November 1999. He served as senior
vice president and chief financial officer of Olsten Health Services from 1998
to March 2000. From 1996 to 1998, Mr. Collura was corporate director of
financial and business development operations of Partners Healthcare, an
integrated health care delivery system.
Ronald A. Malone
Mr. Malone has served as executive vice president of the Company since
March 2000. Prior to joining the Company, he served in various positions with
Olsten, including executive vice president of Olsten and president, Olsten
Staffing Services, United States and Canada, from January 1999 to March 2000.
From 1994 to December 1998, he served successively as Olsten's senior vice
president, southeast division; senior vice president, operations; and executive
vice president, operations.
Robert J. Nixon
Mr. Nixon has served as executive vice president of the Company since
November 1999. He had been a member of Olsten Health Services' senior management
team since joining Olsten in 1994, serving in various capacities, including as a
senior vice president.
11
Richard C. Christmas
Mr. Christmas has served as senior vice president of the Company since
November 1999. He joined Olsten in 1992 and has served as regional director,
area vice president and project manager-vice president for a business and
technology reengineering project for Olsten.
E. Rodney Hornbake, M.D.
Dr. Hornbake has served as senior vice president and chief medical officer
of the Company since March 2000, having joined the Company in November 1999.
Prior to that, Dr. Hornbake served as vice president and medical director of the
North Shore-LIJ Health System in New York. Prior to that, Dr. Hornbake was chief
medical officer for Aetna Professional Management Corporation and chief of
medicine for the Park Ridge Health System in New York.
Patricia C. Ma
Ms. Ma has served as the Company's senior vice president, general counsel
and secretary since November 1999. She joined Olsten in 1994. Since 1998 she
served as general counsel and vice president of Olsten Health Services. From
1994 to 1998, Ms. Ma served in various legal positions with Olsten Health
Services, including vice president, assistant general counsel, assistant vice
president and senior counsel.
Vernon A. Perry, Jr.
Mr. Perry has served as senior vice president of the Company since November
1999. He joined Olsten in 1994. From 1996 to 1999, he served as senior vice
president of network management for Olsten Health Services. From 1994 to 1996,
he served as vice president of business development, primarily responsible for
the health services business development.
David C. Silver
Mr. Silver has served as senior vice president of the Company since March
2000. He joined Olsten in 1998 as director, human resources planning and
development and in April 1999 became vice president, human resources for
Olsten's staffing services business. Prior to joining Olsten he held senior
Human Resources positions with the Bank of Tokyo, Supermarkets General
Corporation, Chase Manhattan Bank and Amerada Hess. From 1989 to 1998 he served
as president of a human resources consulting firm delivering organizational
change, leadership development and general human resources consulting services.
Christopher L. Anderson
Mr. Anderson has served as the chief compliance officer and vice president
of audit services and quality assurance of the Company since March 2000. He
served as chief compliance officer of Olsten from November 1998 to March 2000.
From 1996 to 1998, Mr. Anderson was vice president of compliance and government
affairs of Housecall Medical Resources, Inc., a home care service company.
John R. Potapchuk
Mr. Potapchuk has served as vice president of finance and controller of the
Company since March 2000. He joined Olsten in 1991 and served in various
corporate financial management positions with Olsten Health Services, including
vice president and operations controller and vice president of finance. Prior to
that, Mr. Potapchuk served in senior management positions for
PricewaterhouseCoopers LLP and Deloitte & Touche.
12
---------------------
After the sale of the specialty pharmaceutical services business or shortly
thereafter, upon election by the Company's board of directors, the following
individuals will serve as officers of the Company: Mr. Ronald A. Malone, chief
executive officer and chairman of the board of directors; Mr. John R. Potapchuk,
chief financial officer, treasurer and secretary; Mr. Vernon A. Perry, Jr.,
president and chief operating officer; and Mr. Christopher L. Anderson, chief
compliance officer. After such sale or shortly thereafter, it is further
expected that the following individuals will no longer be employed as officers
of the Company: Messrs Edward A. Blechschmidt, John J. Collura, Robert J. Nixon,
Richard C. Christmas, E. Rodney Hornbake and David C. Silver and Ms. Patricia C.
Ma.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
As of March 16, 2000, the Company's common stock has been quoted on The
Nasdaq National Market under the symbol "GTIV". Prior thereto, there was no
established public trading market for shares of the Company's common stock.
The following table sets forth the high and low bid information for shares
of the Company's common stock for each quarter during fiscal 2000 and 2001:
- -------------------------------------------------------------------------------
2000 High Low
- -------------------------------------------------------------------------------
1st Quarter (beginning $ 7.25 $ 5.25
March 16)
- -------------------------------------------------------------------------------
2nd Quarter 10.00 6.19
- -------------------------------------------------------------------------------
3rd Quarter 14.00 7.63
- -------------------------------------------------------------------------------
4th Quarter 14.38 10.19
- -------------------------------------------------------------------------------
2001 High Low
- -------------------------------------------------------------------------------
1st Quarter $20.38 $13.06
- -------------------------------------------------------------------------------
2nd Quarter 23.50 15.60
- -------------------------------------------------------------------------------
3rd Quarter 20.90 16.35
- -------------------------------------------------------------------------------
4th Quarter 22.44 15.66
- -------------------------------------------------------------------------------
Holders
As of March 25, 2002 there were approximately 2,100 holders of record of
the Company's common stock (including participants in the Company's employee
stock purchase plan, brokerage firms holding the Company's common stock in
"street name" and other nominees).
13
Dividends
The Company has never paid any cash dividends on its common stock. The
Company does not expect to pay any dividends on its common stock for the
foreseeable future, except it is currently expected that following the sale of
the Company's specialty pharmaceutical services business, the Company will
distribute substantially all the proceeds from such sale to its shareholders.
Any future payments of dividends and the amount of the dividends will be
determined by the board of directors from time to time based on the Company's
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant by the Company's board of directors. In
addition, the Company's credit facility also contains restrictions on the
Company's ability to declare and pay dividends. See Item 7, PART II.
Item 6. Selected Financial Data.
The following table provides selected historical consolidated financial
data of the Company as of and for each of the fiscal years in the five-year
period ended December 30, 2001. The data has been derived from the Company's
audited consolidated financial statements. The historical consolidated financial
information presents the Company's results of operations and financial position
as if the Company was a separate entity from Olsten for all years presented. The
historical financial information may not be indicative of the Company's future
performance and may not necessarily reflect what the financial position and
results of operations of the Company would have been if the Company was a
separate stand-alone entity during the years presented.
Fiscal Year Ended
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- ------------- ------------- --------------
(53 weeks)
Statement of Operations Data (In thousands except per share amount)
- ---------------------------- ---------------------------------------------------------------------------------------------
Net revenues $1,377,687 $1,506,644 $1,489,822 $1,330,303 $1,433,854
Gross profit 459,079 485,000 505,426 421,407 520,586
Selling, general and administrative
expenses 436,065 615,198 509,658 552,528 460,254
Net income (loss) 20,988(1) (104,200)(2) (15,086)(3) (101,465)(4) 26,847
Net income (loss) per share (5)
Basic 0.91 (5.05) (0.74) (4.99) 1.32
Diluted 0.85 (5.05) (0.74) (4.99) 1.32
Average shares outstanding (5)
Basic 23,186 20,637 20,345 20,345 20,345
Diluted 25,869 20,637 20,345 20,345 20,345
Balance Sheet Data (at end of year)
- -----------------------------------
Cash and cash equivalents $ 71,999 $ 452 $ 2,942 $ 799 $ -
Restricted cash 35,164 - - - -
Working capital 401,201 348,684 438,536 367,915 346,135
Total assets 838,334 805,484 1,063,105 945,738 783,478
Long-term debt and other securities - 20,000 - 86,250 86,250
Tangible net worth (6) 401,166 335,447 454,994 305,743 295,707
Shareholders' equity 621,707 566,149 705,291 561,859 530,270
(1) Net income in fiscal 2001 reflects special charges of approximately
$3.0 million in connection with the settlement of the Gile v. Olsten
Corporation, et al and the State of
14
Indiana v. Quantum Health Resources, Inc. and Olsten Health Services,
Inc. lawsuits and for various other legal costs. See Note 4 to the
Company's Consolidated Financial Statements.
(2) Net loss for fiscal 2000 reflects restructuring and other special
charges aggregating $153.2 million, of which $14.9 million is recorded
in cost of services sold and $138.3 million is included in selling,
general and administrative expenses. See Note 4 to the Company's
Consolidated Financial Statements. Net loss for fiscal 2000 also
reflects a gain of $36.7 million relating to the sale of the Company's
staffing services business and Canadian operations. See Note 3 to the
Company's Consolidated Financial Statements.
(3) Net loss for fiscal 1999 reflects a restructuring pre-tax charge of
$15.2 million for the realignment of business units as part of a new
restructuring plan. This charge is included in selling, general and
administrative expenses. See Note 4 to the Company's Consolidated
Financial Statements.
(4) Net loss in fiscal 1998 reflects restructuring and other special
pre-tax charges totaling approximately $122 million. These charges
resulted from $66 million related to the restructuring of the
Company's businesses and a special charge of $56 million for the
settlement of two federal investigations. These provisions include a
reduction in revenues of $14 million, a charge to cost of sales of $15
million and $93 million in selling, general and administrative
expenses.
(5) Basic and diluted earnings per share and the average shares
outstanding for each of the fiscal years 1997, 1998 and 1999 have been
computed based on 20,345,029 shares of common stock. Such amount is
based on the number of shares of the Company's common stock issued on
March 15, 2000, the date of the split-off. See Note 2 to the Company's
Consolidated Financial Statements.
(6) Tangible net worth represents the amount of shareholders' equity
reduced by intangibles, principally goodwill, net of accumulated
amortization.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial position. This discussion and analysis should be
read in conjunction with the Company's consolidated financial statements and
related notes included elsewhere in this report.
Significant Developments
On January 2, 2002, the Company entered into a definitive agreement with
Accredo Health, Incorporated ("Accredo") to sell the assets and business of the
Company's Specialty Pharmaceutical Services business, including certain
corporate assets and operations, for $415 million, subject to adjustment, to be
paid half in cash and half in shares of Accredo common stock provided that the
average closing price per share of Accredo common stock on the NASDAQ National
Market for the twenty trading days ending on the second trading day prior to the
closing of the acquisition is between $31 and $41 per share. If the average
closing price is outside of these limits, the number of Accredo shares to be
issued will be fixed at the outside levels, and the value of the stock
consideration will fluctuate, increasing if the average closing price is above
$41 and decreasing if the average closing price is below $31. The purchase price
of $415 million is
15
also subject to adjustment for changes in the net book value of the Specialty
Pharmaceutical Services business as of the closing date of the acquisition, to
the extent that such net book value is outside of the range between $247.5
million and $252.5 million. (At December 30, 2001, the net book value of the
Specialty Pharmaceutical Services business was within such range.)
The Company intends to distribute substantially all of the consideration it
receives in connection with the sale of the Specialty Pharmaceutical Services
business to its shareholders following the closing of the transaction.
Management expects that the disposition will be consummated during the second
quarter of 2002 and that a gain will be recorded on the disposition.
The Specialty Pharmaceutical Services business will be treated as a
discontinued operation following the date on which shareholders approve the
transaction. Subsequent to the closing date of the transaction, the Company
intends to operate in the Home Health Services business.
Year Ended December 30, 2001 Compared to Year Ended December 31, 2000
General
The comparability of the Company's results of operations between fiscal
year 2001 and fiscal year 2000 was impacted by several items which are briefly
described below.
o On March 15, 2000, the Company was Split-off from Olsten Corporation
("Olsten") through the issuance of all of the Company's common stock
to Olsten's shareholders and the Company became an independent,
publicly-owned company. Prior thereto, the Company operated Olsten's
health services business as a wholly-owned subsidiary of Olsten. The
accompanying consolidated financial statements reflect the financial
position, results of operations and cash flows of the Company as if it
were a separate entity for all periods presented. The consolidated
financial statements have been prepared using the historical basis of
assets and liabilities and historical results of operations related to
the Company.
o During fiscal year 2001, the Company recorded special charges of
approximately $3.0 million in connection with the settlement of the
Gile v. Olsten Corporation, et al, and the State of Indiana v. Quantum
Health Resources, Inc. and Olsten Health Services, Inc. lawsuits and
for various other legal costs. These legal matters are further
discussed in Note 9. These special charges are reflected in selling,
general and administrative expenses in the accompanying consolidated
statement of operations.
o During the fiscal year 2000, the Company recorded restructuring and
special charges aggregating $153.2 million. Of this amount, charges of
$138.3 million were reflected in selling, general and administrative
expenses. These charges included (i) an incremental provision for
doubtful accounts of $112.0 million, (ii) a $7.2 million charge to
reflect estimated settlement costs in excess of insurance coverage
related to class action securities and derivative lawsuits assumed by
the Company from Olsten Corporation under an indemnification provision
in connection with the Split-off and government inquiries in New
Mexico and North Carolina, (iii) a $5.7 million charge in connection
with the implementation of and transition to the PPS system for
Medicare reimbursement and (iv) restructuring charges of $5.5 million
relating to the closing and consolidation of twelve nursing branch
locations and the realignment and consolidation of certain corporate
and administrative support functions.
16
In addition, special charges of $3.8 million for the fiscal year 2000
were incurred in connection with the change of the Company's name to
Gentiva Health Services, Inc. These special charges primarily
consisted of costs incurred and paid for consulting fees, promotional
items and advertising.
Furthermore, charges of $4.1 million were incurred in the fiscal year
2000 to reflect obligations resulting from the Company's Split-off
from Olsten and transition costs associated with the establishment of
the Company as an independent, publicly-owned entity. These special
charges included change of control and compensation and benefit
payments of $3.6 million made to certain former employees of the
Company and Olsten and a current executive officer of the Company, and
transition costs of $0.5 million relating to registration costs,
professional fees and other items.
During fiscal year 2000, an adjustment of $6.4 million was recorded in
cost of services sold for changes in cost estimates arising from the
systems conversion and physical inventory procedures which were
performed during the third quarter of fiscal 2000. The Company also
recorded a charge to cost of sales of $8.5 million in fiscal 2000 to
reflect an increase in estimated liabilities to service providers
under certain managed care contracts. Such changes in the estimated
liabilities were the result of the Company obtaining more timely and
accurate claim experience information as a result of completing a
system conversion which enhanced its claims reporting functionality.
o Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in
providing services to eligible beneficiaries subject to both per visit
and per beneficiary limits in accordance with the Interim Payment
System (the "IPS") established through the Balanced Budget Act of
1997. These costs are reported in annual cost reports which are filed
with the Medicare fiscal intermediary and are subject to audit.
Effective October 1, 2000, the IPS was replaced by a Prospective
Payment System ("PPS") for Medicare home care reimbursement. Under
PPS, the Company is eligible to receive a fixed reimbursement which
covers a specified treatment period for each patient. The
reimbursement rate is established based on a clinical assessment of
the severity of the patient's condition, service needs and certain
other factors. The rate is subject to adjustment if there are
significant changes in the patient's condition during the specified
treatment period. Net revenues attributable to the Medicare program as
a percentage of total consolidated net revenues were 18 percent in
fiscal 2001 and 16 percent in 2000.
o During the fourth quarter of fiscal 2000, the Company sold its health
care staffing services business and its Canadian operations. For the
fiscal year ended December 31, 2000, the Company recorded revenues of
$145 million, gross profit of $37 million and selling, general and
administrative expenses of $27 million relating to the businesses that
were sold.
Results of Operations
Revenues
After adjusting for the Staffing and Canadian operations which were sold
during the fourth quarter of fiscal 2000, net revenues increased by $16 million
or 1.2 percent to $1.38 billion during fiscal 2001 as compared to fiscal 2000
primarily due to a $40 million or 5.7 percent increase in Specialty
Pharmaceutical Services revenue, of which $17 million related to an increase in
intersegment revenues which was provided to the Home Health Services segment by
the Specialty Pharmaceutical Services segment that was eliminated in
consolidation, offset somewhat by a $7 million or 1.0 percent decline in Home
Health Services revenue. Overall, net
17
revenues in fiscal 2001 decreased by $129 million or 8.6 percent as compared to
fiscal 2000, of which $145 million related to fiscal 2000 revenues for the
aforementioned sold operations.
During fiscal 2001, the Company experienced unit volume increases in
several core chronic therapies in the Specialty Pharmaceutical Services segment.
These therapies included (i) Flolan, an intravenous therapy used in the
treatment of pulmonary arterial hypertension, which increased by 8.0 percent,
(ii) intravenous immune globulin (IVIG), used in the treatment of primary immune
deficiency and other diagnoses, which increased by 20.4 percent and (iii) growth
hormone, used in the treatment of growth hormone disorder, which increased by
13.6 percent. Revenue growth was negatively impacted by some product shortages
of recombinant coagulation therapy, which is used in the treatment of
hemophilia. In addition, revenue relating to acute infusion products decreased
2.5 percent due to management's decision to terminate certain contracts in an
effort to improve revenue quality and cash flow. Due to significant purchases by
wholesale customers early in 2001, revenue relating to Oxandrin, an oral
pharmaceutical for involuntary weight loss, increased 17.5 percent during fiscal
2001 as compared to fiscal 2000.
The decline in Home Health Services revenue during fiscal 2001 was
attributable primarily to lower volume resulting from transitional issues
associated with the implementation of the PPS for Medicare reimbursement and the
impact of the closing of certain home care nursing branches during the fourth
quarter of fiscal 2000.
Gross Profit
Gross profit margins as a percentage of net revenues increased from 32.2
percent in the fiscal 2000 to 33.3 percent in fiscal 2001. Of the total increase
in margins, 1.0 percent can be attributed to the special charges associated with
the inventory adjustment of $6.4 million and a $8.5 million charge to reflect an
increase in estimated liabilities to service providers under certain managed
care contracts which was recorded during fiscal 2000. The remaining increase in
margins was primarily attributable to productivity enhancements resulting from a
change in clinical protocols and rate increase in Home Health Services (which
increased total Company margins by 0.4 percent) as well as the absence of lower
margin Staffing and Canadian operations which were sold in late 2000 (which
increased total Company margins by 0.8 percent) offset by a change in business
mix reflecting growth in the lower margin Specialty Pharmaceutical Services
products and higher costs attributable to certain biological and pharmaceutical
products due to product shortages (which decreased total Company margins by 1.1
percent).
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $436 million
during fiscal 2001 as compared to $615 million during fiscal 2000 due to (i)
special charges of $138 million which were recorded in the fiscal 2000 period,
(ii) the reduction of $27 million in costs associated with the sale of the
Staffing and Canadian operations, (iii) efficiency improvement efforts in Home
Health Services branch operations, certain Specialty Pharmaceutical Services
administrative functions and corporate administrative support departments, and
(iv) the closing of certain home care nursing branches during the fourth quarter
of fiscal 2000.
Excluding the effects of the businesses that were sold and the special
charges recorded in the periods as described above, selling, general and
administrative expenses as a percentage of net revenues were 31.4 percent and
33.0 percent for fiscal 2001 and 2000, respectively.
Interest Expense, Net
Net interest expense was approximately $0.2 million and $9.9 million in
fiscal 2001 and 2000, respectively. Net interest expense for fiscal 2001
represented primarily fees relating to the revolving credit facility and
outstanding letters of credit and, for the first half of fiscal 2001, the 10
percent convertible preferred trust securities offset by interest income of
approximately $2.8
18
million. During the fiscal year ended December 31, 2000, net interest expense
also included interest on the outstanding 4 3/4 percent convertible subordinated
debentures which matured and were retired in October 2000, net intercompany
borrowings with Olsten up to the Split-off date and interest on borrowings under
the credit facility subsequent to the Split-off date.
Income Taxes
Income tax expense for the fiscal 2001 period consisted primarily of taxes
relating to certain state jurisdictions. The Company had estimated net operating
loss carry forwards (NOLs) of approximately $89.7 million as of December 30,
2001. Because of the uncertainty of ultimate realization of the net deferred tax
asset, the Company has established a valuation allowance for the deferred tax
asset that is not otherwise used to offset deferred tax liabilities. The Company
expects its effective tax rate to be less than 10 percent until such time as the
NOLs are utilized.
Net Income (Loss)
The Company recorded net income of $21.0 million or $0.85 per diluted share
in fiscal 2001 compared with a net loss of $104.2 million or $(5.05) per diluted
share in fiscal 2000.
Year Ended December 31, 2000 Compared to Year Ended January 2, 2000
Results of Operations
Revenues
During fiscal 2000, net revenues increased by $17 million or 1.1 percent to
$1.507 billion as compared to net revenues of $1.490 billion during fiscal 1999.
Net revenue growth can be attributed to an increase of $35 million or 5.1
percent in Specialty Pharmaceutical Services revenue, of which $20 million
related to an increase in intersegment revenues which were provided to the Home
Health Services segment by the Specialty Pharmaceutical Services segment that
was eliminated in consolidation, and a $9 million or 1.3 percent increase in
Home Health Services revenue offset by a $7 million decrease in revenues for the
Staffing and Canadian operations which were sold during the fourth quarter of
fiscal 2000.
In the Specialty Pharmaceutical Services business, revenue growth for
fiscal 2000 was attributable to volume increases in the pulmonary hypertension
therapy Flolan(R) which increased by 23.5 percent and the nutrition support
therapies such as Total Parental Nutrition (TPN), which increased by 40.9
percent. The revenue growth in these therapies, however, was negatively impacted
by some product shortages of recombinant coagulation therapy, which is used in
the treatment of hemophilia, and the Bayer Corporation's decision in 1999 to
begin directly distributing Prolastin(R), an intravenous therapy used in the
treatment of the hereditary disorder Alpha 1 Antirypsin Deficiency. In 1999,
Prolaston revenue approximated $19 million.
The increase in Home Health Services revenue related to growth in volume
with managed care customers offset by a decline in nursing revenues due to the
transition to the new Medicare reimbursement system which became effective on
October 1, 2000 as well as the continued shortage of nursing and other caregiver
personnel in certain parts of the country and the impact of the closing of
certain home care nursing branches during fiscal 2000 and 1999.
Prior to the sale of the Staffing and Canadian operations in the fourth
quarter of fiscal 2000, revenue growth for fiscal 2000 reflected volume and rate
increases due to strong market demand created by industry growth and a shortage
of full time employees in the institutional, occupational and alternate site
health care organizations serviced by the Staffing Services business.
19
Gross Profit
Gross profit margins, as a percentage of net revenues, decreased from 33.9
percent in fiscal 1999 to 32.2 percent in fiscal 2000. Of the total decrease in
margins, 1.0 percent can be attributed to the special charges associated with
the inventory adjustment of $6.4 million and the increase in liabilities to
service providers under certain managed care contracts of $8.5 million which
were recorded in fiscal 2000. The remaining decrease in margins was primarily
attributable to a change in business mix and higher costs attributable to
certain biological and pharmaceutical products in the Specialty Pharmaceutical
Services business due to product shortages, partly offset by productivity
enhancements and rate increases in Home Health Services.
Selling, General and Administrative Expenses
For fiscal 2000, selling, general and administrative expenses were $615
million as compared to $510 million for fiscal 1999. This increase resulted from
a change in the amount of restructuring and other special charges affecting
selling, general and administrative expenses from $15 million in fiscal 1999 to
$138 million in fiscal 2000 offset somewhat by the impact of efficiency
improvement efforts and the closing of home care nursing branches. Excluding the
impact of restructuring and other special charges recorded in both years,
selling, general and administrative expenses were 31.7 percent of revenues in
fiscal 2000 and 33.2 percent of revenues in fiscal 1999.
Restructuring and Other Special Charges
During fiscal 2000 and 1999, the Company recorded restructuring and other
special charges aggregating $153.2 million and $15.2 million, respectively.
Fiscal 2000
Restructuring and other special charges during fiscal 2000 aggregated
$153.2 million, of which $14.9 million was recorded in cost of services sold.
The remaining charges of approximately $138.3 million were recorded in selling,
general and administrative expenses and included charges to restructure business
operations of $5.5 million, an incremental charge of $112.0 million for
increases in the allowance for doubtful accounts and receivable writeoffs,
charges of $5.7 million associated with the implementation of the Prospective
Payment System for Medicare reimbursement, settlement costs of $7.2 million,
Split-off/transition costs of $4.1 million and name change and other costs of
$3.8 million. A further description of the nature of such restructuring and
other special charges is presented below.
Restructuring of Business Operations
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring plan which included the closing
and consolidation of twelve nursing branch locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's Staffing Services business and Canadian
operations. These charges included employee severance of $2.9 million relating
to the termination of 270 employees in nursing branches and certain corporate
and administrative departments, asset writedowns of $1.2 million and future
lease payments and other associated costs of $1.4 million.
Bad Debt/Receivables Write-Off
During fiscal 2000 Gentiva launched several initiatives including (i)
changes to systems, operational processes and procedures in its contracting,
delivery, billing and collection functions and inventory management, (ii)
development of numerous enhancements to the billing and
20
collections systems, and (iii) hiring of external consultants to pursue focused
collection efforts on specific aged accounts receivable. These initiatives are
further described herein.
The Specialty Pharmaceutical Services division implemented a new billing
and collection system in the fourth quarter of 1999. Difficulties were
encountered in the functionality of the billing system from the date of
implementation through the second quarter of 2000 that resulted in an inability
to effectively bill new accounts and obtain appropriate documentation and
support the follow-up of outstanding accounts. As such, management made a
decision to shift efforts from outstanding account follow-up and collections to
billing of new accounts.
In May 2000, Gentiva hired an external consultant to undertake an accounts
receivable reduction engagement and to enhance the billing and collection
process. During the third quarter of 2000, as a result of the work performed by
the consultant, a significant number of receivable accounts previously thought
to be collectible were identified as uncollectible. In addition, the collection
results of the consultants were significantly lower than previously estimated.
In addition, during the third quarter of 2000, the system implementation
difficulties were resolved and a significant number of billing and collection
system enhancements were made which provided management new information as to
the collectibility of receivables that was previously unavailable. As a result
of the consultants efforts and new information, management redefined its reserve
strategy and redirected its efforts to new receivable balances that resulted in
the additional required provision for doubtful accounts.
In connection with these activities, Gentiva recorded an incremental
provision for doubtful accounts of $112.0 million relating to all government and
commercial payors, of which $90.0 million related to Specialty Pharmaceutical
Services business and $22.0 million related to the Home Health Services
business. This incremental provision for doubtful accounts was reflected in
selling, general and administrative expenses in the accompanying consolidated
statement of operations for the year ended December 31, 2000.
PPS Implementation Costs
The Company recorded charges of $5.7 million in connection with the
implementation of and transition to the PPS system for Medicare reimbursement.
Such charges included costs relating to the development of care protocols,
training of field personnel and changes in estimates of settlement amounts.
Settlement Costs
The Company also recorded a $7.2 million charge in the third quarter of
fiscal 2000 to reflect estimated settlement costs in excess of insurance
coverage relating to class action securities and derivative lawsuits, the
obligation for which was assumed by the Company from Olsten under an
indemnification provision in connection with the Split-off, as well as estimated
settlement costs related to government inquiries in New Mexico and North
Carolina (See Note 9 to the consolidated financial statements).
Split-off/Transition Costs
Special charges of $4.1 million were incurred during fiscal 2000 to reflect
obligations resulting from the Company's Split-off from Olsten and transition
costs associated with the establishment of the Company as an independent,
publicly-owned entity. These special charges included change of control and
compensation and benefit payments of $3.6 million made to certain former
employees of the Company and Olsten and a current executive officer of the
Company, and transition costs of $0.5 million relating to registration costs,
professional fees and other items.
21
Name Change and Other
Special charges of approximately $3.8 million were incurred in fiscal 2000
in connection with the change of the Company's name to Gentiva Health Services,
Inc. These special charges primarily consisted of costs incurred and paid for
consulting fees, promotional items and advertising.
Costs of Services Sold
An adjustment of $6.4 million was recorded in cost of services sold for
changes in cost estimates arising from the systems conversion and physical
inventory procedures which were performed during the third quarter of fiscal
2000. The Company recorded a charge to cost of sales of $8.5 million in the
fourth quarter of fiscal 2000 to reflect an increase in estimated liabilities to
service providers under certain managed care contracts. Such changes in the
estimated liabilities were the result of the Company obtaining more timely and
accurate claim experience information as a result of completing a system
conversion which enhanced its claims reporting functionality.
Fiscal 1999
In the quarter ended April 4, 1999, the Company recorded a restructuring
charge totaling $16.7 million. This charge was for the realignment of business
units as part of a new restructuring plan, including compensation and severance
costs of $5 million to be paid to operational support staff, branch
administrative personnel and management, asset write-offs of $6.5 million,
related primarily to fixed assets being disposed of in offices being closed and
facilities being consolidated as well as fixed assets and goodwill attributable
to the Company's exit from certain businesses previously acquired but not within
the Company's strategic objectives and integration costs of $5.2 million,
primarily related to obligations under lease agreements for offices and other
facilities being closed.
As of the end of fiscal 1999, substantially all of the closures and
consolidation of facilities and expected terminations had occurred. These
activities have resulted in lower costs than originally estimated and, as a
result, the Company recognized a benefit of $1.5 million in the fourth quarter
of fiscal 1999 to reflect this change in estimate. The realignment of the
business units achieved a reduction of expenses of about $3 million in 1999, due
to reduced employee, lease and depreciation expenses.
Gain on Sales of Businesses
During the fourth quarter of fiscal 2000, the Company recorded a gain of
$36.7 million on the sale of its health care staffing services business and its
Canadian operations. In connection with the sale of the health care staffing
services business, the Company received cash proceeds of $66.5 million. These
proceeds are subject to adjustment (upward or downward) in accordance with the
terms of the purchase and sale agreement related to final closing balance sheet
items. The Company recorded a gain of approximately $44.4 million on the sale.
As a result of the sale of its home care nursing services operations in
Canada, the Company received approximately $1.5 million in cash proceeds,
including settlements of the final closing balance sheet, and a minority
interest in the acquiror. The Company recorded a charge of approximately $5.2
million as a result of the impairment of goodwill. In addition, cumulative
translation losses of approximately $2.5 million were reversed from the
accumulated other comprehensive loss component of stockholders' equity and were
reflected as a loss. No other gain or loss was recorded on the sale.
22
Interest Expense, Net
Interest expense, net was $10 million in fiscal 2000 and $17 million in
fiscal 1999. Interest expense, net represented primarily interest on the
outstanding 4 3/4 percent convertible subordinated debentures during fiscal 1999
and the period from January 3, 2000 to October 1, 2000 (the debentures' maturity
date), net intercompany borrowings with Olsten for fiscal 1999 and the period
from January 3, 2000 to March 15, 2000 (the Split-off date) and, subsequent to
March 15, 2000, borrowings and fees relating to the revolving credit facility
and the mandatorily redeemable securities.
Interest expense, net includes interest income of $0.8 million in fiscal
2000 and $0.3 million in fiscal 1999.
Income Taxes
Income tax expense for fiscal 2000 consisted of taxes relating to certain
state jurisdictions. The Company has estimated net operating loss carry forwards
(NOLs) of approximately $76 million as of December 31, 2000. Because of the
uncertainty of ultimate realization of the net deferred tax asset, the Company
has established a valuation allowance of approximately $57 million for the
deferred tax asset that is not otherwise used to offset deferred tax
liabilities. The valuation allowance had the effect of reducing the Company's
effective tax rate for fiscal 2000. The Company expects its effective tax rate
to be below 10 percent until such time as the NOLs are utilized.
Net Income (Loss)
The Company recorded a net loss of $104.2 million or $(5.05) per diluted
share in fiscal 2000 compared with a net loss of $15.1 million or $(0.74) per
diluted share in fiscal 1999.
Liquidity and Capital Resources
Working capital at December 30, 2001, was $401 million, an increase of $52
million as compared to $349 million at December 31, 2000. Net receivables
decreased by $51 million during fiscal 2001 as a result of improved cash
collections driven by enhancements in the billing system for Specialty
Pharmaceutical Services and process and technology changes in Home Health
Services billing and collection units as well as increases in billing through
electronic data interchange. Days Sales Outstanding ("DSO") was 111 days at
December 31, 2000, after adjusting for the sale of the Company's staffing
services business and Canadian operations. DSO was 94 days at December 30, 2001
as a result of improved cash collections in the Specialty Pharmaceutical
Services business, which has a DSO of 113 days, and the Home Health Services
business, which had a DSO of 68 days. Of the total improvement of 17 days in
fiscal 2001, a reduction in DSO of 8 days occurred in the fourth quarter.
Cash and cash equivalents, including restricted cash, increased by
approximately $107 million as of December 30, 2001 as compared to December 31,
2000 as a result of (i) cash flow from operations, net of a decrease in book
overdrafts which were included in accounts payable at December 31, 2000, of
approximately $82 million, (ii) Medicare advances, net of payments for estimated
settlements, of approximately $21 million, and (iii) proceeds from the exercise
of stock options of approximately $14 million, offset somewhat by capital
expenditures of approximately $10 million. In early 2001, the Center for
Medicare and Medicaid Services, formerly known as the Health Care Financing
Administration, issued cash advances to certain Medicare providers in connection
with the transition from the IPS to the PPS for Medicare reimbursement. Such
advances, which were reflected in accrued expenses in the accompanying
consolidated balance sheet as of December 30, 2001, are expected to be repaid
during the second quarter of fiscal 2002.
23
The Company maintains a credit facility, which provides for up to $150
million in borrowings. The Company may borrow up to a maximum of 80 percent of
eligible accounts receivable, as defined. At the Company's option, the interest
rate on borrowings under the credit facility is based on the London Interbank
Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25
percent. The Company is subject to an unused line fee equal to 0.375 percent per
annum of the average daily difference between $150 million and the total
outstanding borrowings and letters of credit. In addition, the Company must pay
a fee equal to 2.25 percent per annum of the aggregate face amount of
outstanding standby letters of credit.
The credit facility, which expires in 2004, includes certain covenants
requiring the Company to maintain a minimum tangible net worth and minimum
earnings before interest, taxes, depreciation and amortization. Other covenants
in the credit facility include limitation on mergers, consolidation,
acquisitions, indebtedness, liens, capital expenditures and dispositions of
assets and other limitations with respect to the Company's operations. Certain
of these covenants would be violated if the Company does not negotiate a new
credit facility or receive a consent from its lenders in connection with the
sale of the Specialty Pharmaceutical Services business. The Company's
obligations under the credit facility are collateralized by all of the Company's
tangible and intangible personal property, and other equipment. As of December
30, 2001, the Company was in compliance with its financial covenants and had
borrowing capacity under the credit facility, after adjusting for outstanding
letters of credit, of approximately $124 million.
In June 2001, the Company's credit facility was amended to increase the
portion of the facility available for letters of credit from $30 million to
either (i) $40 million or (ii) $70 million in the event that the Company elected
to post a letter of credit in lieu of an appellate bond for all or a part of the
total amount of the judgment (including interest) in the Fredrickson v. Olsten
Health Services Corp. and Olsten Corporation case while the Company pursues its
appeal of the judgment as further discussed in Note 9. A supersedeas bond in the
amount of $35 million was posted to satisfy the judgment plus interest. Under
the terms of the bond, cash equal to the amount of the bond is held in a
segregated account and is reported as restricted cash in the consolidated
balance sheet as of December 30, 2001.
As described in Note 9 to the Company's Consolidated Financial Statements,
the Company has pending litigation and a government investigation. At this time,
the Company is unable to assess the probable outcome of some of these matters
and an unfavorable resolution of any of these matters could have a material
adverse affect on the Company. In particular, in connection with the Fredrickson
case, if a final non-appealable order is rendered against the Company consistent
with the lower court's ruling, the Company could be required to pay a full $35
million judgment plus additional accrued interest. Any resolution of this matter
(by settlement or final non-appealable court order) could have a material
adverse effect on the Company's results of operations, cash flows and financial
condition.
As a result of the pending sale of the Specialty Pharmaceutical Services
business, the Company is currently in discussions with its existing
administrative agent for an underwriting of a new credit facility which would
provide for borrowing capacity of up to $65 million and a new four-year term as
well as rates, conditions and covenants similar to its existing facility.
Although the execution of a new revolving credit agreement cannot be assured,
the Company expects the new credit facility to be established at or prior to the
consummation date of the sale of the Specialty Pharmaceutical Services business.
The terms of the existing credit facility would require that the Company obtain
a consent from its lenders prior to the closing of the sale of the Specialty
Pharmaceutical Services business.
Although the Company had cash and cash equivalents, including approximately
$35 million of restricted cash, of approximately $107 million at December 30,
2001, approximately $21 million represented cash advances from the Medicare
program which are expected to be repaid by the Company during 2002,
approximately $14 million is expected to be paid upon the closing of the sale of
the Specialty Pharmaceutical Services business as transaction costs
24
(including advisor fees and payments under change in control agreements and
severance arrangements), approximately $9 million may be required to cover a
portion of the corporate taxes resulting from the receipt of consideration from
the sale of the Specialty Pharmaceutical Services business and up to $20 million
is intended to be used in connection with a cash tender offer for all of the
Company's stock options which will commence prior to the closing of the
sale of the Specialty Pharmaceutical Services business. After considering the
aforementioned cash outflows and anticipated cash flow from operations and cash
proceeds from the exercise of stock options that could be generated through the
closing date, the Company expects to have a balance of cash and cash
equivalents, including restricted cash in excess of $60 million following the
distribution to stockholders of the consideration to be received from Accredo
Health, Incorporated upon the sale of the Specialty Pharmaceutical Services
business.
Management believes cash flows from operations, existing cash and cash
equivalent balances, borrowings available under the credit facility and other
financing options will be adequate to support the Company's operating
requirements both before and after the disposition of the Specialty
Pharmaceutical Services business. The Company would not have been profitable in
fiscal 2001 if results of operations for the Specialty Pharmaceutical Services
business were excluded and prior to any reduction in corporate and other
administrative expenses. The Company is currently evaluating alternative
realignment and consolidation initiatives in an effort to achieve cost savings
and profitability following the sale of the Specialty Pharmaceutical Services
business. However, there can be no assurance that such cost savings and
profitability will be achieved.
The Company intends to make investments and other expenditures to, among
other things, upgrade its computer technology and system infrastructure and
comply with regulatory changes in the industry. These capital expenditures are
not expected to exceed $10 million in fiscal 2002. If cash flows from operations
or availability under the existing or 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.
Contractual Obligations and Commercial Commitments
At December 30, 2001, the Company had no long-term debt and no significant
capital lease obligations. Future minimum rental commitments, net of sublease
rentals, for all non-cancelable operating leases having an initial or remaining
term in excess of one year at December 30, 2001, segregated by year, are $21.8
million in fiscal 2002, $16.7 million in fiscal 2003, $12.4 million in fiscal
2004, $7.3 million in fiscal 2005, $2.4 million in fiscal 2006 and $0.3 million
thereafter.
The Company had total letters of credit of approximately $25.7 million
outstanding under its credit facility at December 30, 2001. The letters of
credit, which expire one year from date of issuance, are issued to guarantee
payments under the Company's workers compensation program and for certain other
commitments. In March 2002, approximately $24.3 million of the outstanding
letters of credit expired and were renewed for an additional one year term.
The Company has no other off-balance sheet arrangements and has not entered
into any transactions involving unconsolidated, limited purpose entities or
commodity contracts.
Impact of Recent Accounting Pronouncements
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer
25
be amortized but will be subject to annual impairment tests in accordance with
SFAS 142. Other intangible assets will continue to be amortized over their
estimated useful lives. At December 30, 2001, the Company had net intangible
assets, principally goodwill, of $220.5 million, of which approximately $217.3
million related to the Home Health Services business.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in fiscal year 2002. Management does not expect that
the new criteria for recording intangible assets separate from goodwill will
require the Company to reclassify any of its intangible assets. The Company
expects that in fiscal 2002 it will no longer record approximately $10 million
of amortization relating to existing goodwill.
The Company will also perform required impairment tests of goodwill and
indefinite lived intangible assets as of the beginning of fiscal year 2002. The
Company believes that adoption of the SFAS 142 will result in a writedown for
goodwill impairment which could have a material impact on the net income and
financial position of the Company's Home Health Services business in the period
in which the new accounting principle is adopted; however, implementation of the
new SFAS 142 is not expected to have any impact on cash flow from operations.
Due to the assumptions and variables involved in determining value of the
Company's stock associated with the Home Health Services business, the Company
has not yet determined the amount of the goodwill writedown.
Accounting for Impairment and Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which supersedes Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"). SFAS 144 further refines SFAS 121's requirement
that companies recognize an impairment loss if the carrying amount of a
long-lived asset is not recoverable based on its undiscounted future cash flows
and measure an impairment loss as the difference between the carrying amount and
fair value of the asset. In addition, SFAS 144 provides guidance on accounting
and disclosure issues surrounding long-lived assets to be disposed of by a sale.
SFAS 144 also extends the presentation of discontinued operations to include
more disposal transactions. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 (fiscal 2002 for the Company). Management believes that
the adoption of SFAS 144 will not have a material effect on the Company's
consolidated results of operations or financial position.
Impact of Inflation
The Company does not believe that inflation has had a material impact on
its results of operations during the past three fiscal years.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates of the Company relate to revenue recognition, the
collectibility of accounts receivable, the cost of claims incurred but not
reported, obligations under workers compensation and professional liability
insurance programs and Medicare settlement and investigation issues.
A description of the accounting policies and a discussion of the significant
estimates and judgments associated with such policies are described below.
26
Revenue Recognition
Under fee-for-service agreements with patients and commercial and certain
government payors, net revenues are recorded based on net realizable amounts to
be received in the period in which the services and products are provided or
delivered. Under full risk capitated arrangements with managed care customers,
net revenues are recognized based on a predetermined monthly contractual rate
for each member of the managed care plan regardless of the services provided.
Under the Prospective Payment System for Medicare reimbursement, net revenues
are recorded based on a reimbursement rate which varies based on the severity of
the patient's condition, service needs and certain other factors; revenue is
recognized ratably over the estimated period in which services are provided and
revenue is subject to adjustment if there are significant changes in the
patient's condition during the treatment period or if the patient is discharged
but readmitted to another agency within the same sixty day episodic period.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payer and other reasons unrelated to credit
risk. Revenue adjustments are deducted from gross accounts receivable. These
revenue adjustments, particularly in the Specialty Pharmaceutical Services
business, are based on significant assumptions and judgments which are
determined by Company management based on historical trends.
The process for recognizing revenue under capitated contracts and the majority
of fee-for-service arrangements is generally straight-forward. The process for
estimating revenue to be recognized under the Medicare program is based on
certain assumptions and judgments, including the average length of time of each
treatment as compared to a standard sixty day episode, the appropriateness of
the clinical assessment of each patient at the time of certification and the
level of adjustments to the fixed reimbursement rate relating to patients who
receive a limited number of visits, have significant changes in condition or are
subject to certain other factors during the episode.
Collectibility of Accounts Receivable
The process for estimating the ultimate collection of receivables, particularly
with respect to fee-for-service arrangements, involves significant assumptions
and judgments. In this regard, the Company has implemented a standardized
approach to estimate and review the collectibility of its receivables based on
accounts receivable aging trends. Historical collection and payor reimbursement
experience is an integral part of the estimation process related to determining
the allowance for doubtful accounts. In addition, the Company assesses the
current state of its billing functions in order to identify any known collection
or reimbursement issues to determine the impact, if any, on its reserve
estimates, which involve judgment. The Company believes that the collectibility
of its receivables is directly linked to the quality of its billing processes,
most notably those related to obtaining the correct information to bill
effectively for the services that are provided. Revisions in reserve estimates
are recorded as an adjustment to the provision for doubtful accounts which is
reflected in selling, general and administrative expenses. The Company believes
that its collection and reserve processes, along with the monitoring of its
billing processes, help to reduce the risk associated with material revisions to
reserve estimates resulting from adverse changes in collection and reimbursement
experience and billing functions.
Cost of Claims Incurred But Not Reported
Under full risk capitated arrangements with managed care customers, the Company
estimates the cost of claims incurred but not reported based on applying
actuarial assumptions, historical patterns of utilization to authorized levels
of service, current enrollment statistics and other information. In addition,
under fee-for-service arrangements with certain managed care
27
customers, the Company also estimates the cost of claims incurred but not
reported and the estimated revenue relating thereto in situations in which the
Company is responsible for care management and patient services are performed by
a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves significant
assumptions and judgments which relate to and may vary depending on the services
authorized at each of our care management centers, historical patterns of
service utilization and payment trends. These assumptions and judgments are
evaluated on a quarterly basis and changes in estimated liabilities for costs
incurred but not reported are determined based on such evaluation.
Obligations Under Workers Compensation and Professional Liability Insurance
Programs
The Company may be subject to workers compensation claims and lawsuits alleging
negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk but is substantially self-insured for most
of these claims. The Company recognizes its obligations associated with these
programs in the period the claim is incurred. The cost of both reported claims
and claims incurred but not reported, up to specified deductible limits, are
estimated based on historical data, industry statistics, current enrollment
statistics and other information. Such estimates and the resulting reserves are
reviewed and updated periodically, and any adjustments resulting there from are
reflected in earnings currently.
The Company maintains insurance coverage which caps its exposure on individual
claims. The Company is responsible for the cost of individual workers
compensation claims up to $500,000 per incident and individual professional
liability claims up to $500,000 per incident through March 15, 2002 and
$1,000,000 per incident thereafter. The Company also maintains excess liability
coverage relating to professional liability and casualty claims which provides
insurance coverage for individual claims of up to $25,000,000 in excess of the
deductible amount. The Company believes that present insurance coverage and
reserves are sufficient to cover currently estimated exposures but there can be
no assurance that the Company will not incur liabilities in excess of recorded
reserves.
Settlement Issues and Government Investigations
Prior to October 1, 2000 reimbursement of Medicare home care nursing services
was based on reasonable, allowable costs incurred in providing services to
eligible beneficiaries subject to both per visit and per beneficiary limits in
accordance with the Interim Payment System established through Balanced Budget
Act of 1997. These costs are reported in annual cost reports, which are filed
with the Center for Medicare and Medicaid Services (CMS), are subject to audit
by the fiscal intermediary engaged by CMS. The fiscal intermediary has not
completed its audit of the fiscal 2000 cost reports and the review of cost
limits relating to certain of the Company's Medicare providers. Although
management believes that established reserves are sufficient, it is possible
that adjustments resulting from such audit by the fiscal intermediary could
result in adjustments to the consolidated financial statements that exceed
established reserves.
The Company has filed appeals with the Provider Reimbursement Review Board for
the years 1997, 1998 and 1999 concerning audit adjustments made by its Medicare
fiscal intermediary. These audit adjustments relate to the methodology used by
the Company in allocating a portion of its residual overhead cost on the
Medicare cost reports. The Company believes its methodology used to allocate
such overhead cost was accurate and consistent with past practice accepted by
the fiscal intermediary; however, the Company has recorded the impact of the
audit adjustments in its consolidated financial statements and has not recorded
any anticipated recovery from the appeals. The Company is unable to predict the
outcome of these appeals.
In addition, as discussed in Note 9 to the Consolidated Financial Statements,
the Company is subject to a government investigation and has provided the Office
of Inspector General and other
28
government agencies with requested documents and has cooperated fully with the
investigation. At this time, the Company is unable to assess the probable
outcome or potential liability, if any, arising from this investigation;
however, an unfavorable resolution of this matter could have a negative impact
on the Company's results of operations and cash flows in the period in which the
investigation is concluded.
Forward Looking Information
Certain of the matters discussed in this Annual Report on Form 10-K should
be considered "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and are subject to various risk factors and
uncertainties.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to the market risk for changes in the interest rates
related to the fair value of its fixed rate Quantum debentures until their
repayment in October 2000. Generally, the fair market value of fixed rate debt
will increase as interest rates fall and decrease as interest rates rise. The
Company had no interest rate exposure on fixed rate debt at December 30, 2001.
Item 8. Financial Statements and Supplementary Data.
The following financial statements and financial schedule of the Company
are included in this report:
Page(s) in this
Report
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 30, 2001 and
December 31, 2000 F-3
Consolidated Statements of Operations for the three years
ended December 30, 2001 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 30, 2001 F-5
Consolidated Statements of Cash Flows for the three years
ended December 30, 2001 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts for the F-37
three years ended December 30, 2001
29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no such changes or disagreements.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following information, as reported to the Company, is shown below for
each director: name, age and principal occupation; period during which he or she
has served as a director; position, if any, with the Company; certain business
experience; other directorships held; and the committees of the Board of
Directors on which the director serves.
Class I - Directors with Terms Expiring in 2004
Victor F. Ganzi.................... Mr. Ganzi has served as a director
of the Company and Chairman of the
Audit Committee of the Board since
November 1999. He served as a
director of Olsten Corporation 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. Mr.
Ganzi is 55 years old.
Josh S. Weston..................... Mr. Weston has served as a director
of the Company and Chairman of the
Human Resources and Compensation
Committee of the Board since
November 1999. He served as a
director of Olsten Corporation from
1995 until 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 Aegis Communications,
Inc., Automatic Data Processing,
Inc., Exult Inc., J. Crew Inc. and
Russ Berrie Corp. and a trustee of
Atlantic
30
Health Systems, Inc. Mr. Weston is
73 years old.
Gail Wilensky...................... Dr. Wilensky has served as a
director of the Company and a
member of the Audit Committee of
the Board since March 2000. She is
currently the John M. Olin Senior
Fellow at Project HOPE, an
international health foundation,
and Co-Chair of the President's
Task Force To Improve Healthcare
Delivery For Our Nation's Veterans.
From 1997 - 2001, she chaired the
Medicare Payment Advisory
Commission. She served as deputy
assistant to President George H.
Bush for policy development from
March 1992 to January 1993 and as
administrator of the Health Care
Financing Administration from
January 1990 to March 1992. 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, Syncor International
and United HealthCare. Dr. Wilensky
is 58 years old.
Class II - Directors with Terms Expiring in 2002
Edward A. Blechschmidt............. Mr. Blechschmidt has served as
president, chief executive officer
and chairman of the board of
directors of the Company since
November 1999. He served as the
chief executive officer and a
director of Olsten Corporation from
February 1999 until March 2000. He
was also the president of Olsten
Corporation from October 1998 until
March 2000 and served as the chief
operating officer of Olsten
Corporation 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. Mr.
Blechschmidt is 49 years old.
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 UBS Paine Webber, a
member of the New York Stock
Exchange, where he has worked since
1991. He is the brother-in-law of
Mr. Stuart
31
Olsten, a director of the Company.
Mr. Grabowski is 47 years old.
Raymond S. Troubh.................. Mr. Troubh has served as a director
of the Company and a member of the
Human Resources and Compensation
Committee of the Board since
November 1999 and as a member of
the Audit Committee of the Board
since May 2000. He served as a
director of Olsten Corporation from
1993 until 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.,
Enron Corp., General American
Investors Company, Health Net,
Inc., Hercules Incorporated,
Starwood Hotels and Resorts, Triarc
Companies and WHX Corporation. Mr.
Troubh became a director of Enron
Corp. in November 2001. He is also
a Trustee of Petrie Stores
Liquidating Trust. Mr. Troubh is 75
years old.
Class III - Directors with Terms Expiring in 2003
Stuart R. Levine................... Mr. Levine has served as a director
of the Company and a member of the
Human Resources and Compensation
Committee of the Board since
November 1999. He served as a
director of Olsten Corporation from
1995 until March 2000. Since June
1996 he has served as the chairman
and chief executive officer of
Stuart Levine and Associates LLC,
an international consulting and
training company. From September
1992 to June 1996 he was chief
executive officer of Dale Carnegie
& Associates, Inc. He is the author
of the best seller, The Leader in
You. Mr. Levine currently serves as
a trustee of North Shore - LIJ
Health System, and for 15 years,
until 1995, he served as a vice
chairman of North Shore Hospital.
Mr. Levine is 54 years old.
Stuart Olsten...................... Mr. Olsten has served as a director
of the Company since November 1999.
He served as a director of Olsten
Corporation from 1986 until March
2000. From February 1999 until
March 2000 he was the chairman of
the board of directors of Olsten
Corporation. He was vice chairman
of Olsten Corporation from August
1994 to February 1999 and was
president of Olsten Corporation
from April 1990 to February 1999.
Since April 2001, he has been
chairman of Olsten Venture
Partners, which acquires and
manages companies in the food
service industry. He is a director
of Adecco SA. He is the
32
brother-in-law of Mr. Steven
Grabowski, a director of the
Company. Mr. Olsten is 49 years
old.
For information about the Company's executive officers, see Item 4(a)
"Executive Officers of the Company" included in PART I hereof.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and the
rules thereunder require the Company's directors and officers and persons who
beneficially own more than ten percent of its outstanding Common Stock to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company and to furnish the Company with copies of all Section 16(a) forms
they file. To the Company's knowledge, based solely on review of copies of
reports furnished to the Company and upon representations made, the Company
believes that during the fiscal year ended December 30, 2001, all persons
subject to the Section 16(a) filing requirements filed the required reports on a
timely basis, except that Steven E. Grabowski, a director of the Company, filed
two late reports, one in December 2001 covering a transaction in September 2001
and the other in January 2002 covering a transaction in August 2001.
Item 11. Executive Compensation.
The Company began operating as an independent publicly traded company
following its Split-Off from Olsten on March 15, 2000. The information shown
below reflects the annual and long-term compensation, from all sources, of the
chief executive officer of the Company and the other four most highly
compensated executive officers of the Company at December 30, 2001 (the "Named
Officers") for services rendered in all capacities to the Company and its
subsidiaries during fiscal 2001 and 2000.
Summary Compensation Table
Long Term
Compensation
------------
Annual Compensation Awards
---------------------------------- ------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year (1) Salary($) Bonus ($) ($) (2) Options(#) ($) (3)
- --------------------------- ------- --------- --------- -------- --------- ----------
Edward A. Blechschmidt ......... 2001 $600,000 $700,000 $7,707 60,000 $ 906,445
President, 2000 458,654 650,000 7,777 90,000 3,758,078
Chief Executive Officer and
Chairman of the Board (4)
John J. Collura ................ 2001 340,000 200,000 6,015 40,000 70,531
Executive Vice President, 2000 330,791 140,000 4,693 65,000 86,447
Chief Financial Officer
and Treasurer
Robert J. Nixon ................ 2001 380,000 165,000 4,115 40,000 37,679
Executive Vice President 2000 379,038 150,000 2,973 65,000 30,469
Ronald A. Malone ............... 2001 375,000 180,000 3,099 40,000 38,551
Executive Vice President (5) 2000 284,519 200,000 3,162 65,000 26,919
E. Rodney Hornbake ............. 2001 275,000 60,000 1,433 15,000 11,472
Senior Vice President and 2000 273,791 65,000 1,461 20,000 14,155
Chief Medical Officer
- ---------------
(1) Gentiva was not a reporting company prior to March 15, 2000.
33
(2) Gross-up of taxable portion of fringe benefit.
(3) Represents profit sharing and matching contributions by Gentiva for the
Named Officers pursuant to Gentiva's Nonqualified Retirement and Savings
Plan for fiscal 2001 and for the period March 15, 2000 through December 31,
2000. In addition, for fiscal 2000 for Messrs. Collura and Nixon includes
matching contributions made to Olsten Corporation's Nonqualified Retirement
and Savings Plan in the amounts of $5,241 and $4,565, respectively, for the
period January 3, 2000 through March 14, 2000. For fiscal 2001, also
includes for Mr. Blechschmidt a one-time payment of $815,253 for excise
taxes imposed by reason of the receipt of amounts payable under his
separation, consulting and non-competition agreement with Olsten and its
parent company, Adecco SA, and $3,939 of above-market interest earned on
deferred compensation and for Mr. Collura payment by Gentiva of $34,891 for
relocation expenses. For fiscal 2000, also includes for Mr. Blechschmidt a
one-time payment of $3,700,000 from Gentiva's now terminated Supplemental
Executive Retirement Plan and $625 of above-market interest earned on
deferred compensation and for Mr. Collura payment by Gentiva of $58,140 for
relocation expenses.
(4) For fiscal 2000, Mr. Blechschmidt salary shown is for the period March 15,
2000 through December 31, 2000. In addition, for the period January 3, 2000
through March 14, 2000, (i) Mr. Blechschmidt was paid $236,538 in salary
and for unused vacation by Olsten Corporation for services performed by Mr.
Blechschmidt for Olsten Corporation and its subsidiaries, including the
Company, and (ii) $7,096 in matching contributions were made to Olsten
Corporation's Nonqualified Retirement and Savings Plan for Mr.
Blechschmidt. Other payments to Mr. Blechschmidt made by Olsten Corporation
and Adecco SA in connection with the Split-Off are not reflected in the
Summary Compensation Table.
(5) For fiscal 2000, Mr. Malone's salary shown is for the period March 15, 2000
through December 31, 2000.
Stock Options
Stock Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------
Percent Potential Realizable
Number of of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Appreciation for
Options Employees in Price Expiration Option Term (1)
Name Granted (#)(2) Fiscal Year ($Sh) Date 5% ($) 10% ($)
-------------- ------------ -------- ------ -------- ----------
Edward A. Blechschmidt 60,000 6.5% $13.1875 1/2/11 $497,616 $1,261,014
John J. Collura ...... 40,000 4.3 13.1875 1/2/11 331,744 840,676
Robert J. Nixon ...... 40,000 4.3 13.1875 1/2/11 331,744 840,676
Ronald A. Malone ..... 40,000 4.3 13.1875 1/2/11 331,744 840,676
E. Rodney Hornbake ... 15,000 1.6 13.1875 1/2/11 124,404 315,254
- ----------------
(1) The dollar amounts under the indicated columns are the result of
calculation at the 5% and 10% rates set forth by the Securities and
Exchange Commission and are not intended to forecast possible future
appreciation of Gentiva's stock price.
(2) The options were granted at an exercise price equal to the fair market
value of Gentiva's Common Stock on the date of the grant. The options have
a ten-year term and become exercisable over a three-year period in
increments of 33-1/3% per year beginning with the first anniversary of the
date of the grant. The vesting of all outstanding options of the Company
will accelerate upon the closing of the sale of the Company's specialty
pharmaceutical services business.
34
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year End (#) at Fiscal Year End ($)
----------------------------- ----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Edward A. Blechschmidt 417,609 $7,258,988 339,464 120,000 $6,293,544 $1,505,625
John J. Collura ...... 115,148 1,964,707 0 83,332 0 1,057,999
Robert J. Nixon ...... 231,016 3,369,169 36,816 83,332 462,148 1,057,999
Ronald A. Malone ..... 17,598 276,947 4,070 83,332 65,629 1,057,999
E. Rodney Hornbake ... 6,668 80,891 0 28,332 0 349,249
Employment Agreement, Change in Control Agreements and Severance Agreements
On March 14, 2000, the Company entered into an employment agreement with
Mr. Blechschmidt, its 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 from such date. During the term of the
agreement, Mr. Blechschmidt will receive (i) a base salary of $600,000 per year
and (ii) 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 could 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
upon death or disability, termination of his employment for cause, termination
of his employment without cause or termination by Mr. Blechschmidt of his
employment for good reason. 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 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 are deemed 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 described below.
The employment 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 also entered into a change in control agreement with
the Company, similar to the terms described below.
The following Named 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 and Robert J. Nixon. These
agreements have a term of three years, commencing on March 15, 2000. They
generally provide benefits in the event (i) 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) or (ii) 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
are terminated by the Company without cause up to a year
35
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 a cash
payment equal to two times the employee's base salary and target bonus;
continued benefits for the two years following the termination or until such
earlier date that the employee obtains comparable benefits from another
employer; 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 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: a person or group (with certain exceptions for the Olsten
family) beneficially owns at least 25 percent or more of the voting stock;
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; 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; if the Company is liquidated; or 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 his or her
agreement, the Company will pay that employee's attorney's fees which result
from the 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.
Upon the closing of the sale of the Company's specialty pharmaceutical
services business or shortly thereafter, the following Named Officers will no
longer be employed by the Company and their change in control agreements will be
triggered: Edward A. Blechschmidt, John J. Collura, and Robert J. Nixon. In
addition, upon such closing or shortly thereafter, the following officers will
no longer be employed by the Company and their change in control agreements will
be triggered: Richard C. Christmas, David C. Silver, and Patricia C. Ma. As a
result of these change in control agreements, the Company will be required to
pay an aggregate of approximately $6.2 million and provide such other benefits
in accordance with the change in control agreements.
The Named Officers (with the exception of Mr. Blechschmidt, who is party to
an employment agreement) are parties to severance agreements in connection with
their employment with the Company. These severance agreements generally provide
that, in the event the 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 officer has the right to receive payments for periods ranging
from twelve to eighteen months in an amount based on that officer's base salary
at the time of termination. Additionally, the severance agreements provide that
the Company will provide these 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.
Human Resources and Compensation Committee Report on Executive Compensation
Compensation Philosophy
The Company's executive compensation philosophy is to align the interests
of the Company's shareholders and its executive officers, while also promoting
teamwork among those executives. The Board of Directors and the Human Resources
and Compensation Committee, which administers the Company's executive
compensation programs have implemented this philosophy through a compensation
program which combines three components: base salary, bonuses and stock options.
36
Base Salary
The base salaries of executive officers are determined by several factors,
including comparisons with industry levels. In addition, salary determinations
were made in conjunction with other compensation components discussed herein, to
focus attention on Company goals.
Bonuses
The Human Resources and Compensation Committee's policy is to provide a
portion of officers' compensation through performance-based and discretionary
annual bonuses as incentives to achieve the Company's financial and operational
goals and increase shareholder value. The Company's bonus arrangements for its
executive officers are intended to make a major portion of each executive
officer's compensation dependent on the Company's overall performance. Such
bonuses are also intended to link executive compensation to shareholder value
and to encourage the executives to act as a team. Bonuses are also intended to
recognize the executive's individual contributions to the Company.
Stock Options
The Company's 1999 Stock Incentive Plan is used as a means to attract,
retain and motivate selected employees of the Company. The 1999 Stock Incentive
Plan provides for the grant to eligible employees of incentive stock options and
non-qualified stock options.
Compensation of the Chief Executive Officer
Mr. Blechschmidt's base salary is set at $600,000 per annum under the terms
of his employment agreement with the Company.
In determining Mr. Blechschmidt's bonus for fiscal year 2001, the Human
Resources and Compensation Committee concluded that the Company had performed
well under his leadership, either meeting or making significant progress with
respect to its goals and objectives. In recognition of strong individual and
Company performance in fiscal year 2001 and consistent with its compensation
philosophy, the Human Resources and Compensation Committee awarded Mr.
Blechschmidt a bonus of $700,000.
The Human Resources and Compensation Committee granted 60,000 stock options
to Mr. Blechschmidt in fiscal year 2001 as long-term incentives, vesting over
three years. In determining the number of options granted, the Human Resources
and Compensation Committee considered the value of long-term incentives provided
by other comparable companies, as reported in surveys. The Human Resources and
Compensation Committee also considered Mr. Blechschmidt's total compensation, as
well as his past and expected future contributions to the Company's achievement
of its long-term performance goals.
Human Resources and Compensation Committee:
Josh S. Weston, Chairman
Stuart R. Levine
Raymond S. Troubh
Compensation of Directors
Each non-employee member of the Board of Directors receives an annual
retainer fee of $25,000, up to half of which may be paid in cash on a quarterly
basis with the remainder paid in shares of the Company's Common Stock.
Non-employee directors may also defer the portion of their annual retainer fee
paid in shares into a share unit account. In addition, any non-employee
directors who serve as chairperson of a committee of the Board receive $2,000
annually for acting as chairperson. Non-employee directors also receive $1,000
for each Board or committee
37
meeting they attend ($500 if attendance is by telephone). All directors,
regardless of whether or not they are employees of the Company, receive
reimbursement for out-of-pocket expenses incurred in connection with attending
meetings of the Board of Directors. After joining the Board, each non-employee
director received stock options exercisable for up to 5,000 shares of the
Company's Common Stock, with any future grants to be determined by the Board of
Directors.
Shareholder Return Performance Graph
Set forth below is a line graph comparing the cumulative total return on
the Company's Common Stock against the cumulative total return of the Nasdaq
Market Index and a peer issuer group selected by the Company (the "Peer Group
Index") for the period commencing on March 16, 2000 (when the Company's Common
Stock was first quoted on Nasdaq) and ending December 30, 2001.
The Peer Group Index is comprised of the following publicly traded
companies: Accredo Health, Incorporated; Apria Healthcare Group Inc.; Caremark
RX, Inc.; Matria Healthcare, Inc.; and Option Care, Inc.
The line graph assumes that $100 was invested on March 16, 2000 in each of
the Company's Common Stock, the Nasdaq Market index and the Peer Group Index and
that all dividends (if any) were reinvested. Media General Financial Services
furnished the data for the graph.
[PERFORMANCE GRAPH]
- -------------------------------------------------------------------------------
3/16/2000 12/31/00 12/30/01
- -------------------------------------------------------------------------------
Gentiva Health Services, Inc. $100.00 $222.92 $366.67
- -------------------------------------------------------------------------------
NASDAQ Market Index 100.00 53.34 42.52
- -------------------------------------------------------------------------------
Peer Group Index 100.00 212.92 243.41
- -------------------------------------------------------------------------------
38
Item 12. Securities Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 25, 2002, the amount of
beneficial ownership of Gentiva's common stock by the executive officers of
Gentiva who are named in the Summary Compensation Table; each director of
Gentiva; each beneficial owner of more than five percent of Gentiva's common
stock; and all executive officers and directors of Gentiva as a group. For the
purpose of the table, a person or group of persons is deemed to have "beneficial
ownership" of any shares that such person or group has the right to acquire
within 60 days after such date through the exercise of options or exchange or
conversion rights, but such shares are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
Amount of Shares
of Common Stock and
Nature of Beneficial Percent of Class
Ownership(1)(2) Owned (if more
Name of Beneficial Owner (3)(4) than 1%)
- ------------------------ ----------------- ----------------
Edward A. Blechschmidt ..................................... 589,464 2.2%
John J. Collura ............................................ 66,703 -
E. Rodney Hornbake ......................................... 18,334 -
Ronald A. Malone ........................................... 70,703 -
Robert J. Nixon ............................................ 109,947 -
Victor F. Ganzi ............................................ 45,257 -
Steven E. Grabowski(5) ..................................... 1,371,706 5.3%
Stuart R. Levine ........................................... 34,824 -
Stuart Olsten(6) ........................................... 1,541,927 5.9%
Raymond S. Troubh(7) ....................................... 136,021 -
Josh S. Weston ............................................. 7,800 -
Gail Wilensky .............................................. 7,562 -
Cheryl Olsten(8) ........................................... 1,371,706 5.3%
Steinberg Priest Capital Management Company, Inc.(9) ....... 1,671,873 6.4%
12 East 49th Street
New York, NY
All executive officers and directors as a group (18 persons) 3,481,184(10) 13.1%
(1) Unless otherwise indicated, the stockholders identified in this table have
sole voting and investment power with respect to the shares beneficially
owned by them.
(2) Includes beneficial ownership of the following number of shares that may be
acquired upon exercise of presently exercisable stock options under
Gentiva's stock option plans: Mr. Blechschmidt-- 389,464; Mr. Collura--
35,000; Dr. Hornbake-- 11,666; Mr. Malone-- 39,070; Mr. Nixon-- 71,816; Mr.
Ganzi-- 5,000; Mr. Grabowski-- 5,000; Mr. Levine-- 5,000; Mr. Olsten--
5,000; Mr. Troubh--5,000; Mr. Weston-- 5,000; and Dr. Wilensky 5,000.
(3) Includes beneficial ownership of the following number of whole shares
acquired and currently held under Gentiva's Employee Stock Purchase Plan:
Mr. Collura-- 341; Mr. Malone-- 3,212; and Mr. Nixon--2,115.
(4) Includes beneficial ownership of the following number of shares
representing the equivalent of units deferred under Gentiva's Stock &
Deferred Compensation Plan for Non-Employee Directors Mr. Ganzi -- 5,124;
Mr. Grabowski 5,124; Mr. Olsten -- 5,124; and Mr. Troubh
39
-- 5,124.
(5) Mr. Grabowski's holdings include 1,425 shares owned directly and 1,360,157
shares beneficially owned by his wife, Cheryl Olsten, as to which shares he
disclaims beneficial ownership. See footnote (8).
(6) Mr. Stuart Olsten's holdings include 845,813 shares owned directly and 300
shares owned 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.
(7) Mr. Troubh's holdings include 56,149 shares owned directly and 69,748
shares owned by a limited partnership.
(8) Ms. Cheryl Olsten owns directly 674,797 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 and 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 11,549 shares beneficially
owned by her husband, Mr. Grabowski, as to which shares she disclaims
beneficial ownership.
(9) Based on a Schedule 13G (Amendment No. 1) dated January 28, 2002 and filed
with the Securities and Exchange Commission, Steinberg Priest Capital
Management Company, Inc. held sole voting power as to 780,423 of such
shares and sole dispositive power as to 1,671,873 of such shares.
(10) Includes 2,775,487 shares owned by executive officers and directors,
685,201 shares that may be acquired upon exercise of presently exercisable
stock options and 20,496 shares representing shares deferred as share
units.
40
Item 13. Certain Relationships and Related Transactions.
Gentiva Obligated Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust
On March 15, 2000 certain 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 a trust
("Trust"), of which the Company owned all the common equity. The investments
were 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 $650,0000; Messrs. Ganzi and Weston, $600,000 each; Mr. Levine
$250,000; Messrs. 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 current and former personnel, an aggregate of $350,000; 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 of 1933. The convertible trust preferred
securities were convertible into the Company's common stock at a conversion
price of $9.319219. The Company made a $618,600 investment in the Trust to
acquire its common securities. The Company issued $20,618,600 of convertible
subordinated debentures to the Trust on the same terms, including, but not
limited to, maturity, interest, conversion and redemption price, as the 10%
convertible trust preferred securities in exchange for $20,618,600.
In August 2001 the Company called for redemption all of its outstanding 10%
convertible trust preferred securities at a redemption price of 108 percent of
their original principal amount. In accordance with the terms of the trust
agreement and other related documents, holders were permitted to convert prior
to the date called for redemption. All of the convertible trust preferred
securities were converted, and none were redeemed. Following conversion of the
10% convertible trust preferred securities held by them, the above-named
individuals received whole shares of the Company's common stock as follows:
Miriam Olsten, 788,692; Mr. Blechschmidt, 134,131; Stuart Olsten and Cheryl
Olsten, 107,305 each; Mr. Troubh, 69,748; Messrs. Ganzi and Weston, 64,383 each;
Mr. Levine, 26,826; Messrs. Malone and Nixon, 10,730; Mr. Collura and Dr.
Hornbake, 5,365 each; and Messrs. Christmas, Perry and Silver and Ms. Ma, 2,682
each.
Incorrectly Identified Incentive Stock Options
The exercise by Messrs. Blechschmidt, Collura and Nixon of stock options in
2001 which were incorrectly identified by the Company as incentive stock options
(instead of as nonqualified stock options) resulted in an acceleration of income
tax liability to such individuals and the acceleration of related income tax
deductions by the Company. The Company, after consultation with counsel, has
agreed to reimburse such individuals, on an after tax basis, for certain costs
attributable to the acceleration of their tax liabilities as follows: Mr.
Blechschmidt ($173,721), Mr. Collura ($11,355) and Mr. Nixon ($3,472). The
Company has also agreed to reimburse each of them for any penalties resulting
from the failure to pay estimated taxes on a timely basis due to such
acceleration.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
- Report of Independent Accountants
- Consolidated Balance Sheets as of December 30, 2001 and December
31, 2000
- Consolidated Statements of Operations for the three years ended
December 30, 2001
- Consolidated Statements of Changes in Shareholders' Equity for
the three years ended December 30, 2001
- Consolidated Statements of Cash Flows for the three years ended
December 30, 2001
- Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
- Schedule II - Valuation and Qualifying Accounts for the three
years ended December 30, 2001
(a)(3) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Company(1)
3.2 Restated By-Laws of Company(1)
4.1 Specimen of common stock(3)
4.2 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock(1)
4.3 Form of Certificate of Designation of Series A Cumulative
Non-Voting Redeemable Preferred Stock(2)
4.4 Trust Agreement among the Company, Wilmington Trust Company, the
Administrative Trustees named therein and the holders from time
to time of the convertible trust preferred securities dated March
9, 2000(4)
4.5 Indenture between the Company and Wilmington Trust Company dated
March 15, 2000(4)
10.1 Separation Agreement dated August 17, 1999, among Olsten
Corporation, Aaronco Corp. and Adecco SA(1)*
10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and among
Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health
Services Holding Corp.(1)
42
10.3 Form of Rights Agreement dated March 2, 2000 between the Company
and EquiServe Limited Partnership, as rights agent(1)
10.4 Company's Executive Officers Bonus Plan(1)*
10.5 Company's 1999 Stock Incentive Plan(4)*
10.6 Company's Stock & Deferred Compensation Plan for Non-Employee
Directors (4)*
10.7 Company's Employee Stock Purchase Plan (1)*
10.8 Omnibus Amendment No. 2 dated January 18, 2000, by and among
Olsten Corporation, Adecco SA, Olsten Health Services Holding
Corp., the Company and Staffing Acquisition Corporation (1)
10.9 Loan and Security Agreement dated March 13, 2000 by and between
Fleet Capital Corp., on behalf of the lenders named therein, the
Company, Olsten Health Services Holding Corp. and the
subsidiaries named therein(4)
10.10 Form of Employment Agreement with Edward A. Blechschmidt (2)*
10.11 Form of Change in Control Agreement with Executive Officers of
Company(4) *
10.12 Form of Change in Control Agreement with Edward A. Blechschmidt
(4)*
10.13 Form of Severance Agreement with Executive Officers of Company
(2)*
10.14 Amendment No. 1 dated June 30, 2000 to Trust Agreement among the
Company, Wilmington Trust Company, the Administrative Trustees
named therein and the holders from time to time of the
convertible trust preferred securities (5)
10.15 Amendment No. 1 dated June 30, 2000 to Indenture between the
Company and Wilmington Trust Company (5)
10.16 First Amendment and Consent Agreement dated September 15, 2000
to the Loan Agreement by and among the lending institutions named
therein, Fleet Capital Corporation, the Company, Olsten Health
Services Holding Corp. and the subsidiaries named therein(6)
10.17 Purchase and Sale Agreement dated August 25, 2000 by and between
the Company and InteliStaf Group, Inc. (formerly known as GS
Acquisition Co.) (6)
10.18 Second Amendment and Consent Agreement dated as of November 20,
2000 to the Loan Agreement by and among the lending institutions
named therein, Fleet Capital Corporation, the Company, Olsten
Health Services Holding Corp. and the subsidiaries named therein
(7)
10.19 Third Amendment dated as of June 1, 2001 to the Loan Agreement
by and among the lending institutions named therein, Fleet
Capital Corporation, the Company, Olsten Health Services Holding
Corp. and the subsidiaries named therein (8)
10.20 Fourth Amendment and Consent Agreement dated as of August 22,
2001 to the Loan Agreement by and among the lending institutions
named therein, Fleet
43
Capital Corporation, the Company, Olsten Health Services Holding
Corp. and the subsidiaries named therein +
10.21 Asset Purchase Agreement, dated as of January 2, 2002, by and
between Accredo Health Incorporated, the Company and the Sellers
named therein (9)
21. List of Subsidiaries of Company +
23. Consent of PricewaterhouseCoopers LLP, independent accountants +
- -------------------------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement on Form S-4, dated January 20, 2000 (File
No. 333-88663).
(2) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement on Form S-4, dated February 4, 2000 (File
No. 333-88663).
(3) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement on Form S-4, dated February 9, 2000 (File
No. 333-88663).
(4) Incorporated herein by reference to Form 10-K of Company for the
fiscal year ended January 2, 2000.
(5) Incorporated herein by reference to Form 10-Q of Company for
quarterly period ended July 2, 2000.
(6) Incorporated herein by reference to Form 10-Q of Company for
quarterly period ended October 1, 2000.
(7) Incorporated herein by reference to Form 10-K of Company for the
fiscal year ended December 31, 2000.
(8) Incorporated herein by reference to Form 10-Q of Company for
quarterly period ended September 30, 2001.
(9) Incorporated herein by reference to Registration Statement on
Form S-4, dated February 8, 2002 (File No. 333-82396), of Accredo
Health, Incorporated.
* Management contract or compensatory plan or arrangement
+ Filed herewith
(b) Report on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. GENTIVA HEALTH
SERVICES, INC.
Date: March 29, 2002 By: /s/ Edward A. Blechschmidt
----------------------------------------------
Edward A. Blechschmidt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 2002 By: /s/ Edward A. Blechschmidt
-------------------------------------------------
Edward A. Blechschmidt
President and Chief Executive Officer and
Director (Principal Executive Officer)
Date: March 29, 2002 By: /s/ John J. Collura
-------------------------------------------------
John J. Collura
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
Date: March 29, 2002 By: /s/ Victor F. Ganzi
-------------------------------------------------
Victor F. Ganzi
Director
Date: March __, 2002 By:
-------------------------------------------------
Steven E. Grabowski
Director
Date: March 29, 2002 By: /s/ Stuart R. Levine
-------------------------------------------------
Stuart R. Levine
Director
Date: March 29, 2002 By: /s/ Stuart Olsten
-------------------------------------------------
Stuart Olsten
Director
Date: March 29, 2002 By: /s/ Raymond S. Troubh
-------------------------------------------------
Raymond S. Troubh
Director
Date: March 29,2002 By: /s/ Josh S. Weston
-------------------------------------------------
Josh S. Weston
Director
Date: March 29, 2002 By: /s/ Gail Wilensky
-------------------------------------------------
Gail Wilensky
Director
45
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets as of December 30, 2001
and December 31, 2000....................................................F-3
Consolidated Statements of Operations for the three years
ended December 30, 2001..................................................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 30, 2001..............................F-5
Consolidated Statements of Cash Flows for the three years
ended December 30, 2001..................................................F-6
Notes to Consolidated Financial Statements.................................F-7
Schedule II - Valuation and Qualifying Accounts for the
three years ended December 30, 2001......................................F-37
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Gentiva Health Services, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Gentiva Health Services, Inc. and Subsidiaries (the "Company") at December 30,
2001 and December 31, 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 6, 2002
F-2
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 30, 2001 December 31, 2000
------------------------- -------------------------
ASSETS
Current assets
Cash and cash equivalents $ 71,999 $ 452
Restricted cash 35,164 -
Receivables, less allowance for doubtful accounts of
$88,155 and $105,962, respectively 368,196 419,178
Inventories 47,600 51,111
Prepaid expenses and other current
assets 47,396 50,333
------------------------- -------------------------
Total current assets 570,355 521,074
Fixed assets, net 30,449 36,961
Intangibles, principally goodwill, net of accumulated
amortization of $113,977 and $103,573, respectively 220,541 230,702
Other assets 16,989 16,747
------------------------- -------------------------
TOTAL ASSETS $838,334 $805,484
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 57,726 $ 74,083
Accrued expenses 63,874 50,682
Payroll and related taxes 16,094 17,305
Insurance costs 31,460 30,320
------------------------- -------------------------
Total current
liabilities 169,154 172,390
Other liabilities 47,473 46,945
Gentiva-obligated mandatorily redeemable convertible
securities of a subsidiary holding solely Gentiva debentures - 20,000
Shareholders' equity
Common stock, $.10 par value; authorized 100,000,000 shares,
issued and outstanding 25,638,794 and 21,196,693 shares,
respectively 2,564 2,120
Additional paid-in capital 722,725 689,163
Accumulated deficit (103,582) (124,570)
Accumulated other comprehensive loss - (564)
------------------------- -------------------------
Total shareholders'
equity 621,707 566,149
------------------------- -------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $838,334 $ 805,484
========================= =========================
See notes to consolidated financial statements.
F-3
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Fiscal Years Ended
-----------------------------------------------------------
2001 2000 1999
------------------- ---------------- ----------------
Net revenues $1,377,687 $1,506,644 $1,489,822
Cost of services sold 918,608 1,021,644 984,396
------------------- ---------------- ----------------
Gross profit 459,079 485,000 505,426
Selling, general and administrative
expenses (436,065) (615,198) (509,658)
Gain on sale of businesses - 36,682 -
Interest expense, (151) (9,878) (16,975)
------------------- ---------------- ----------------
Income (loss) before income taxes 22,863 (103,394) (21,207)
Income tax expense (benefit) 1,875 806 (6,121)
------------------- ---------------- ----------------
Net income (loss) $ 20,988 $ (104,200) $ (15,086)
=================== ================ ================
Net income (loss) per share
Basic $ 0.91 $ (5.05) $ (0.74)
=================== ================ ================
Diluted $ 0.85 $ (5.05) $ (0.74)
=================== ================ ================
Average shares outstanding
Basic 23,186 20,637 20,345
=================== ================ ================
Diluted 25,869 20,637 20,345
=================== ================ ================
See notes to consolidated financial statements.
F-4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 30, 2001
(In thousands, except share amounts)
Additional
Common Stock Paid-in
Shares Amount Capital
----------- ---------- ----------
Balance at January 3, 1999 $20,435,029 $ 2,035 $ 567,525
Comprehensive income (loss):
Net loss and cumulative translation
adjustment - - -
Net transactions with Olsten - - 158,473
----------- ---------- ----------
Balance at January 2, 2000 20,345,029 2,035 725,998
Comprehensive income (loss):
Net loss - - -
Cumulative translation adjustment - - -
Reversal of cumulative translation
adjustment related to Canadian
operations sold during the year - - -
Unrealized loss on investments - - -
----------- ---------- ----------
Subtotal - - -
Net transactions with Olsten - - (41,786)
Issuance of stock upon exercise of stock
options and under stock plans for employees
and directors 851,664 85 4,951
----------- ---------- ----------
Balance at December 31, 2000 21,196,693 2,120 689,163
Comprehensive income:
Net income - - -
Realized loss on investments - - -
----------- ---------- ----------
Subtotal - - -
Conversion of Gentiva-obligated
mandatorily redeemable convertible
securities of a subsidiary
holding solely Gentiva debentures 2,146,105 214 19,786
Issuance of stock upon exercise of stock
options and under stock plans for
employees directors 2,296,996 230 13,776
----------- ---------- ----------
Balance at December 30, 2001 $25,638,794 $ 2,564 $ 722,725
=========== ========== ==========
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Deficit) Loss Total
------------ --------------- ------------
Balance at January 3, 1999 $ (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
------------- --------------- ------------
Balance at January 2, 2000 (20,370) (2,372) 705,291
Comprehensive income (loss):
Net loss (104,200) - (104,200)
Cumulative translation adjustment - (176) (176)
Reversal of cumulative translation
adjustment related to Canadian
operations sold during the year - 2,548 2,548
Unrealized loss on investments - (564) (564)
------------- --------------- ------------
Subtotal (104,200) 1,808 (102,392)
Net transactions with Olsten - - (41,786)
Issuance of stock upon exercise of stock
options and under stock plans for employees
and directors - - 5,036
------------- --------------- ------------
Balance at December 31, 2000 (124,570) (564) 566,149
Comprehensive income:
Net income 20,988 - 20,988
Realized loss on investments - 564 564
------------- --------------- ------------
Subtotal 20,988 564 21,552
Conversion of Gentiva-obligated
mandatorily redeemable convertible
securities of a subsidiary
holding solely Gentiva debentures - - 20,000
Issuance of stock upon exercise of stock
options and under stock plans for
employees directors - - 14,006
-------------- --------------- ------------
Balance at December 30, 2001 $ (103,582) $ - $ 621,707
============== =============== ============
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
----------------------------------------------------
2001 2000 1999
----------------- --------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 20,988 $ (104,200) $ (15,086)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 26,522 31,682 33,625
Provision for doubtful accounts 35,221 144,883 38,687
(Gain) loss on sale of businesses and fixed assets (255) (36,682) 1,909
Deferred income taxes - 774 13,047
Changes in assets and liabilities, net of effects
from acquisitions and dispositions:
Accounts receivable 15,761 (21,339) (161,829)
Inventories 3,511 42,107 (2,942)
Prepaid expenses and other current assets 2,937 (5,673) (18,219)
Current liabilities (13,735) (63,243) (29,755)
Other, net 848 2,683 (902)
----------------- --------------- ------------
Net cash provided by (used in) operating
activities 91,798 (9,008) (141,465)
----------------- --------------- ------------
INVESTING ACTIVITIES:
Purchases of fixed assets, net (10,067) (8,549) (19,001)
Proceeds from sale of businesses and fixed
assets 475 67,734 -
Deposits into restricted cash (35,164) - -
Acquisitions of businesses, net of cash acquired - - (1,724)
----------------- --------------- ------------
Net cash (used in) provided by investing
activities (44,756) 59,185 (20,725)
----------------- --------------- ------------
FINANCING ACTIVITIES:
Issuance of mandatorily redeemable and other securities - 20,100 -
Net transactions with Olsten - 5,226 158,473
(Decrease) increase in book overdrafts (10,379) (2,285) 12,664
Retirement of long-term debt - (78,087) (6,804)
Debt issuance costs - (2,657) -
Advance from Medicare program 20,878 - -
Proceeds from issuance of common stock 14,006 5,036 -
----------------- --------------- ------------
Net cash provided by (used in) financing
activities 24,505 (52,667) 164,333
----------------- --------------- ------------
Net increase (decrease) in cash and cash
equivalents 71,547 (2,490) 2,143
Cash and cash equivalents at beginning of year 452 2,942 799
----------------- --------------- ------------
Cash and cash equivalents at end of year $ 71,999 $ 452 $ 2,942
================= =============== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 2,046 $ 10,346 $ 3,975
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible preferred trust
securities to common stock $ 20,000 - -
See notes to consolidated financial statements.
F-6
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Background
On March 15, 2000, Gentiva Health Services, Inc. and its Subsidiaries (the
"Company") were split-off (the "Split-off") from Olsten Corporation ("Olsten")
through the issuance of all of the Company's shares of common stock to Olsten's
shareholders and the Company became an independent, publicly-owned company. On
such date, Olsten also merged its remaining staffing and information technology
businesses with those of Adecco SA pursuant to a Merger Agreement (the
"Merger"). Prior to the Split-off, the Company operated Olsten's health services
business as a wholly-owned subsidiary of Olsten.
In connection with the Split-off and Merger, the Company entered into a
$150 million credit facility as discussed in Note 6, issued mandatorily
redeemable and other securities as discussed in Note 7, settled certain
transactions with Olsten as discussed in Note 8, and agreed to assume certain
obligations and commitments including those described in Notes 8 and 10 and the
shareholders of Olsten approved various stock plans for the Company as described
in Note 11.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position, results of operations, changes in shareholders' equity and cash flows
of the Company as if it were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical basis
of assets and liabilities and historical results of operations related to the
Company.
The Company's selling, general and administrative expenses included a
management fee of approximately $1.0 million for fiscal 2000 and $5.0 million
for fiscal 1999. This fee represented an allocation of certain general corporate
overhead expenses related to Olsten's corporate headquarters. Management
believes the allocations related to general corporate overhead expenses were
reasonable; however, the costs charged to the Company were not necessarily
indicative of the costs that would have been incurred if the Company had been a
stand-alone entity during the period for which such expenses were allocated.
Subsequent to the Split-off, the Company began to perform these functions using
its own resources or purchased services, and additionally, the Company has been
responsible for the costs and expenses associated with the management of a
public corporation.
Net interest expense as presented in the consolidated statements of
operations included net interest expense of approximately $3.0 million for
fiscal 2000 and $13.0 million for fiscal 1999 relating to the intercompany
balances with Olsten. Such intercompany balances have been reflected as a
contribution to capital at January 2, 2000 and as of the Split-off date.
Additionally, prior to the Split-off, income taxes were calculated on a
separate company basis. The Company's financial results prior to the Split-off
included the costs experienced by the Ols-
F-7
ten benefit plans for employees for whom the Company assumed responsibility on
the Split-off date. As part of the Split-off and Merger, the Company, Olsten and
Adecco SA entered into a Separation Agreement, Tax Sharing Agreement and an
Employee Benefits Allocation Agreement, which address the allocation of assets
and liabilities and govern future relationships between them.
Note 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's fiscal year ends on the Sunday
nearest to December 31st, which was December 30, 2001 for fiscal 2001, December
31, 2000 for fiscal 2000 and January 2, 2000 for fiscal 1999.
Revenue Recognition
Revenues and related costs, including labor, payroll taxes, fringe
benefits, products and supplies and contractor costs are recognized in the
period in which the services and products are provided or delivered. Revenues
are recorded based on fee-for-service or capitated agreements with customers and
third party payors, estimates of expected reimbursement under arrangements with
Medicare and state reimbursed programs, and management fees generated from
services provided to hospital-based home health agencies and are adjusted in
future periods as final settlements are determined. Net revenues from state
reimbursed programs amounted to 21 percent, 21 percent and 20 percent of total
consolidated net revenues in fiscal 2001, 2000 and 1999, respectively.
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System (the "IPS") established through
the Balanced Budget Act of 1997. These costs are reported in annual cost reports
which are filed with the Center for Medicare and Medicaid Services ("CMS") and
are subject to audit. Effective October 1, 2000, the IPS was replaced by a
Prospective Payment System ("PPS") for Medicare home care reimbursement. Under
PPS, the Company is eligible to receive a fixed reimbursement which covers a
specified treatment period for each patient. The reimbursement rate is
established based on a clinical assessment of the severity of the patient's
condition, service needs and certain other factors. The rate is subject to
adjustment if there are significant changes in the patient's condition during
the specified treatment period. Medicare billings under PPS are initially
recognized as deferred revenue and are subsequently amortized into revenue over
the patient's treatment period. Reimbursement rate adjustments are accrued on an
estimated basis in the period related services are provided and are adjusted in
future periods as final reimbursement rates are determined. Net revenues
attributable to the Medicare program as a percentage of total consolidated net
revenues were 18 percent in fiscal 2001, 16 percent in fiscal 2000 and 16
percent in fiscal 1999. As of December 30, 2001, deferred revenue of
approximately $5.2 million relating to the Medicare PPS program was included in
accrued expenses.
F-8
Under full risk capitated arrangements with managed care customers, the
Company recognizes revenue based on a predetermined monthly contractual rate for
each member of the managed care plan regardless of the services provided.
Capitation payments received in advance of the service period are recorded as
deferred revenue. The Company assumes responsibility for all costs associated
with services provided under these capitated arrangements and these costs are
accrued in the period they are incurred. The costs of claims incurred but not
reported are based on applying actuarial assumptions, historical patterns of
utilization to authorized levels of service, current enrollment statistics and
other information. Net revenues from capitated agreements with managed care
payors as a percentage of total consolidated net revenues were 8 percent, 7
percent and 6 percent in fiscal 2001, 2000 and 1999, respectively. As of
December 30, 2001, accrued expenses included estimated amounts payable to third
party service providers under managed care contracts of approximately $20.2
million.
Revenues are recorded based on estimated net realizable amounts to be
received from patients and commercial and certain government payors under
fee-for-service arrangements for services rendered during the period.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payor and other reasons unrelated to credit
risk. Revenue adjustments are deducted directly from gross accounts receivable.
Management prepares various analyses to evaluate its receivable valuation
accounts including: accounts receivable aging trends, historical collection and
write-off data and other statistical information by business line.
One non-governmental customer accounted for approximately 19 percent, 15
percent and 11 percent of total consolidated net revenues in fiscal 2001, 2000
and 1999, respectively.
Accounts receivable included approximately $10 million as of December 30,
2001 and $21 million as of December 31, 2000 which relate to third party
settlement and contractual accounts.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The most significant estimates relate to revenue recognition, the
collectibility of accounts receivable, the cost of claims incurred but not
reported, obligations under workers compensation and professional liability
insurance programs and Medicare settlement and investigation issues.
F-9
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents and restricted cash deposited with banks and
financial institutions include highly liquid investments with original
maturities of three months or less.
Restricted cash represents funds held in a segregated account as collateral
for a supersedeas bond in the amount of $35.2 million which was posted to
satisfy the judgment plus interest in the Fredrickson v. Olsten Health Services
Corp. and Olsten Corporation case while the Company pursues its appeal of the
judgment as further discussed in Note 9. Interest on the funds accrue to the
Company.
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 improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
Intangibles
Intangibles, principally goodwill, associated with acquired businesses are
being amortized on a straight-line basis over periods ranging from 10 to 40
years. Amortization expense recorded for fiscal 2001, 2000 and 1999 was
approximately $10.4 million, $11.2 million, and $11.0 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the undiscounted future cash flows is less than the carrying amount of
the asset, a loss is recognized for the difference between the fair value
(discounted future cash flows) and carrying value of the asset. Impairment loss
on assets to be sold, if any, is based on the estimated proceeds to be received,
less estimated costs to sell.
Insurance Costs
The Company is obligated for certain costs under various insurance
programs, including employee health and welfare, workers compensation and
professional liability. The Company recognizes its obligations associated with
these policies in the period the claim is incurred. The costs of both reported
claims and claims incurred but not reported, up to specified deductible limits,
relating to these programs are estimated based on historical data, current
enrollment statistics and other informa-
F-10
tion. Such estimates and the resulting reserves are reviewed and updated
periodically, and any adjustments resulting therefrom are reflected in earnings
currently.
Foreign Currency Translation
Prior to the sale of the Company's Canadian operations in November 2000,
financial statements denominated in Canadian dollars were translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses and cash flows. Translation adjustments were recorded
within accumulated other comprehensive income/loss. As a result of the sale of
the Company's Canadian operations, cumulative translation adjustments of
approximately $2.5 million were reversed from accumulated other comprehensive
loss and reflected as a component of gain on sale of businesses in the
accompanying consolidated statement of operations. Transaction gains and losses
that arose from exchange rate fluctuations were not significant.
Earnings Per Share
Basic net income (loss) per share for each year presented has been computed
by dividing net income (loss) by the weighted average number of shares
outstanding for each respective year. Diluted net income (loss) per share for
each year presented has been computed using the weighted average number of
common equivalent shares outstanding.
During fiscal 2001, the weighted average numbers of shares outstanding were
23,186,000. As discussed in Note 7, the 10 percent convertible preferred trust
securities in the amount of $20.0 million were converted into 2,146,105 shares
of common stock and such shares were included in the weighted average number of
shares outstanding from the date of conversion.
Dilutive common equivalent shares in fiscal 2001 included (i) an
incremental 1,454,000 shares that would have been issued if the 10 percent
convertible preferred trust securities were converted at the beginning of the
year and (ii) 1,229,000 shares that would be issued upon the assumed exercise of
stock options under the treasury stock method.
During fiscal 2000, the basic and diluted weighted average numbers of
shares outstanding were 20,637,000. The computation of diluted net loss per
share for the fiscal 2000 period excluded the effect of shares issuable upon the
conversion of the 4 3/4 percent convertible subordinated debentures, which
matured and were retired in October 2000, and the 10 percent convertible
preferred trust securities and the exercise of stock options since their
inclusion would have an antidilutive effect on earnings.
Basic and diluted net loss per share for fiscal 1999 have been computed
based solely on the shares of the Company's stock issued on the Split-off date.
F-11
Income Taxes
The Company has been included, where applicable, in the consolidated income
tax returns of Olsten for periods up to the Split-off date. The provisions for
the income taxes in the consolidated statements of operations have been
calculated on a separate company basis. The Company provides for taxes based on
current taxable income and the future tax consequences of temporary differences
between the financial reporting and income tax carrying values of its assets and
liabilities. The Company files its own consolidated tax return for periods
subsequent to March 15, 2000.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical amounts.
The carrying amounts of the Company's cash and cash equivalents and
restricted cash accounts receivable, accounts payable and accrued expenses
approximate fair value because of their short maturity.
Reclassification
Certain reclassifications have been made to the 2000 and 1999 consolidated
financial statements to conform to current year presentation.
Recent Accounting Pronouncements
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142"). Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with SFAS 142. Other intangible assets will
continue to be amortized over their estimated useful lives. At December 30,
2001, the Company had net intangible assets, principally goodwill, of $220.5
million, of which approximately $217.3 million related to the Home Health
Services business.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in fiscal year 2002. Management does not expect that
the new criteria for recording intangible assets separate from goodwill will
require the Company to reclassify any of its intangible assets. The Company
experts that in fiscal 2002, it will no longer record approximately $10 million
of amortization relating to its existing goodwill.
The Company will also perform required impairment tests of goodwill and
indefinite lived intangible assets as of the beginning of fiscal year 2002. The
Company believes that adoption of
F-12
SFAS 142 will result in a writedown for goodwill impairment which will have a
material impact on the net income and financial position of the Company's Home
Health Services business in the period in which the new accounting principle is
adopted; however, implementation of the new SFAS 142 is not expected to have any
impact on cash flows from operations. Due to the assumptions and variables
involved in determining value of the Company's stock associated with the Home
Health Services business, the Company has not yet determined the amount of the
goodwill writedown.
Accounting for Impairment and Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which supersedes Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"). SFAS 144 further refines SFAS 121's requirement
that companies recognize an impairment loss if the carrying amount of a
long-lived asset is not recoverable based on its undiscounted future cash flows
and measure an impairment loss as the difference between the carrying amount and
fair value of the asset. In addition, SFAS 144 provides guidance on accounting
and disclosure issues surrounding long-lived assets to be disposed of by a sale.
SFAS 144 also extends the presentation of discontinued operations to include
more disposal transactions. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 (fiscal 2002 for the Company). Management believes that
the adoption of SFAS 144 will not have a material effect on the Company's
consolidated results of operations or financial position.
Note 3. Acquisitions and Dispositions
In October 2000, the Company consummated the sale of its health care
staffing services business and received cash proceeds of $66.5 million. As of
December 30, 2001 these proceeds are subject to adjustment (upward or downward)
in accordance with the terms of the purchase and sale agreement related to final
closing balance sheet items. The Company recorded a gain of approximately $44.4
million on the sale.
In November 2000, the Company finalized the sale of its home care nursing
services operations in Canada. As consideration for the sale, the Company
received approximately $1.5 million in cash proceeds, including settlement of
the final closing balance sheet, and a minority interest in the acquiror. The
Company recorded a charge of approximately $5.2 million as a result of the
impairment of goodwill due to the pending sale of the business. In addition,
cumulative translation adjustments of approximately $2.5 million were reversed
from the accumulated other comprehensive loss component of stockholders' equity
and reflected as a loss in the gain on sales of businesses component of the
consolidated statement of operations. No other gain or loss was recorded on the
sale.
Net revenues associated with the Company's health care staffing services
business and its Canadian operations amounted to $145 million and $152 million
in fiscal 2000 and 1999, respectively.
F-13
In 1999, the Company acquired several home care operations for an aggregate
purchase price of $1.7 million.
Note 4. Restructuring and Other Special Charges
During fiscal 2001, 2000 and 1999, the Company recorded restructuring and
other special charges aggregating $3.0 million, $153.2 million and $15.2
million, respectively.
Fiscal 2001
During the fiscal year of 2001, the Company recorded special charges of
approximately $3.0 million in connection with the settlement of the Gile v.
Olsten Corporation, et al, and the State of Indiana v. Quantum Health Resources,
Inc. and Olsten Health Services, Inc. lawsuits and for various other legal
costs. These legal matters are further discussed in Note 9. These special
charges are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of operations.
Fiscal 2000
Restructuring and other special charges during fiscal 2000 aggregated
$153.2 million, of which $14.9 million was recorded in cost of services sold.
The remaining charges of approximately $138.3 million were recorded in selling,
general and administrative expenses and included charges to restructure business
operations of $5.5 million, an incremental charge of $112.0 million for
increases in the allowance for doubtful accounts and receivable writeoffs,
charges of $5.7 million associated with the implementation of the PPS for
Medicare reimbursement, settlement costs of $7.2 million, Split-off/transition
costs of $4.1 million and name change and other costs of $3.8 million. A further
description of the nature of such restructuring and other special charges is
presented below.
Restructuring of Business Operations
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring plan which included the closing
and consolidation of twelve nursing branch locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's Staffing Services business and Canadian
operations. These charges included employee severance of $2.9 million relating
to the termination of 270 employees in nursing branches and certain corporate
and administrative departments, asset writedowns of $1.2 million and future
lease payments and other associated costs of $1.4 million. As of December 30,
2001, the twelve nursing branch locations were closed or consolidated; the
unpaid portion of these restructuring charges aggregated $0.2 million.
Bad Debt/Receivables Write-Off
During fiscal 2000 Gentiva launched several initiatives including (i)
changes to systems, operational processes and procedures in its contracting,
delivery, billing and collection functions and inventory management, (ii)
development of numerous enhancements to the billing and collection sys-
F-14
tems, and (iii) hiring of external consultants to pursue focused collection
efforts on specific aged accounts receivable. These initiatives are further
described herein.
The Specialty Pharmaceutical Services division implemented a new billing
and collection system in the fourth quarter of 1999. Difficulties were
encountered in the functionality of the new billing system from the date of
implementation through the second quarter of 2000 that resulted in an inability
to effectively bill new accounts and obtain appropriate documentation and
support the follow-up of outstanding accounts. As such, management made a
decision to shift efforts from outstanding account follow-up and collections to
billing of new accounts.
In May 2000, Gentiva hired an external consultant to undertake an accounts
receivable reduction engagement and to enhance the billing and collection
process. During the third quarter of 2000, as a result of the work performed by
the consultant, a significant number of receivable accounts previously thought
to be collectible were identified as uncollectible. In addition, the collection
results of the consultants were significantly lower than previously estimated.
In addition, during the third quarter of 2000, the system implementation
difficulties were resolved and a significant number of billing and collection
system enhancements were made which provided management new information as to
the collectibility of receivables that was previously unavailable. As a result
of the consultant efforts and new information, management redefined its reserve
strategy and redirected its efforts to new receivable balances that resulted in
the additional required provision for doubtful accounts.
In connection with these activities, Gentiva recorded an incremental
provision for doubtful accounts of $112.0 million relating to all government and
commercial payors, of which $90.0 million related to the Specialty
Pharmaceutical Services business and $22.0 million related to the Home Health
Services business. This incremental provision for doubtful accounts was
reflected in selling, general and administrative expenses in the accompanying
consolidated statement of operations for the year ended December 31, 2000.
PPS Implementation Costs
The Company recorded charges of $5.7 million in connection with the
implementation of and transition to the PPS system for Medicare reimbursement.
Such charges included costs relating to the development of care protocols,
training of field personnel and changes in estimates of settlement amounts.
Settlement Costs
The Company also recorded a $7.2 million charge in the third quarter of
fiscal 2000 to reflect estimated settlement costs in excess of insurance
coverage relating to class action securities and derivative lawsuits, the
obligation for which was assumed by the Company from Olsten under an
indemnification provision in connection with the Split-off, as well as
settlement costs related to government inquiries in New Mexico and North
Carolina (See Note 9).
F-15
Split-off/Transition Costs
Special charges of $4.1 million were incurred during fiscal 2000 to reflect
obligations resulting from the Company's Split-off from Olsten and transition
costs associated with the establishment of the Company as an independent,
publicly-owned entity. These special charges included change of control and
compensation and benefit payments of $3.6 million made to certain former
employees of the Company and Olsten and a current executive officer of the
Company, and transition costs of $0.5 million relating to registration costs,
professional fees and other items.
Name Change and Other
Special charges of approximately $3.8 million were incurred in fiscal 2000
in connection with the change of the Company's name to Gentiva Health Services,
Inc. These special charges primarily consisted of costs incurred and paid for
consulting fees, promotional items and advertising.
Costs of Services Sold
An adjustment of $6.4 million was recorded in cost of services sold for
changes in cost estimates arising from the systems conversion and physical
inventory procedures which were performed during the third quarter of fiscal
2000. The Company recorded a charge to cost of sales of $8.5 million in the
fiscal 2000 to reflect an increase in estimated liabilities to service providers
under certain managed care contracts. Such changes in the estimated liabilities
were the result of the Company obtaining more timely and accurate claim
experience information as a result of completing a system conversion which
enhanced its claims reporting functionality.
Fiscal 1999
In the quarter ended April 4, 1999, the Company recorded a restructuring
charge aggregating $16.7 million. This charge was for the realignment of
business units as part of a new restructuring plan, including compensation and
severance costs of $5 million to be paid to operational support staff, branch
administrative personnel and management, asset write-offs of $6.5 million
related primarily to fixed assets being disposed of in offices being closed and
facilities being consolidated, as well as fixed assets and goodwill attributable
to the Company's exit from certain businesses previously acquired but not within
the Company's strategic objectives, and integration costs of $5.2 million,
primarily related to obligations under lease agreements for offices and other
facilities being closed. As of the end of fiscal 1999, substantially all of the
closures and consolidations of facilities and expected terminations have
occurred. These activities have resulted in lower costs than originally
estimated and, as a result, the Company recognized a benefit of $1.5 million in
the fourth quarter of fiscal 1999 to reflect this change in estimate. Such
benefit is included in selling, general and administrative expenses.
At January 3, 1999, the Company reflected accrued expenses of $57.6 million
representing the unpaid portion of restructuring and special charges recorded in
fiscal 1998. The majority of this accrued expense was for the settlement of two
federal investigations focusing on the Company's
F-16
Medicare home office cost reports and certain transactions with Columbia/HCA
Healthcare Corporation ("Columbia/HCA"). The agreements in connection with the
settlements were finalized and signed on July 19, 1999. On August 11, 1999,
Olsten paid $61 million pursuant to the settlement, approximately $5 million of
which was accrued as part of the Company's 1996 merger, integration and other
special charges.
The major components of the charges as well as the activity during the
fiscal years 2001, 2000 and 1999 were as follows (in thousands):
Accounts Compensation Integration
Settlements receivable, net and Severance Costs Other Total
and Other Assets Costs
------------ ------------------ ---------------- ------------ ------- ---------
Fiscal 1998 Charge
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
Cash expenditures - - - (214) - (214)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 31, 2000 - - - - - -
------------ ------------------ ---------------- ------------ ------- ---------
Fiscal 1999 Charge - 6,490 5,020 5,190 - 16,700
Cash expenditures - - (2,787) (3,310) - (6,097)
Non-cash write-offs - (6,490) - - - (6,490)
Adjustments - - (803) (697) - (1,500)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at January 2, 2000 - - 1,430 1,183 - 2,613
Cash expenditures - - (1,378) (629) - (2,007)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 31, 2000 - - 52 554 - 606
Cash expenditures - (52) 380) (432)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 30, 2001 - - 174 174
------------ ------------------ ---------------- ------------ ------- ---------
Fiscal 2000 Charge 7,200 124,605 2,900 9,413 9,125 153,243
Cash expenditures (7,200) - (880) (8,906) - (16,986)
Non-cash write-offs - (124,319) - - - 124,319)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 31, 2000 - 286 2,020 507 9,125 11,938
Cash expenditures (1,860) (480) (9,125) (11,465)
Non-cash write-offs (286) (286)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 30, 2001 - - 160 27 - 187
------------ ------------------ ---------------- ------------ ------- ---------
Fiscal 2001 Charge 2,000 - - - 1,011 3,011
Cash expenditures (2,000) - - - (1,011) (3,011)
------------ ------------------ ---------------- ------------ ------- ---------
Balance at December 30, 2001 - - - - - -
------------ ------------------ ---------------- ------------ ------- ---------
Balance of all charges
combined at
December 30, 2001 $ - $ - $ 160 $ 201 $ - $ 361
============ ================== ================ ============ ======= =========
The balance of unpaid charges at each year-end date was included in accrued
expenses in the consolidated balance sheets.
F-17
Note 5. Fixed Assets, Net
(in thousands) Useful Lives December 30, 2001 December 31, 2000
- -------------- ------------ ----------------- -----------------
Computer equipment and software........... 3-5 Years $ 64,198 $ 65,617
Furniture and fixtures.................... 5 Years 30,077 31,737
Buildings and improvements................ Lease Term 19,070 19,056
Machinery and equipment................... 5 Years 17,070 14,222
130,415 130,632
------------------ ------------------
Less accumulated depreciation............. (99,966) (93,671)
------------------ ------------------
$ 30,449 $ 36,961
================== ==================
Depreciation expense was approximately $16.1 million in fiscal 2001, $20.5
million in fiscal 2000 and $22 million in fiscal 1999.
Note 6. Long-Term Debt
On March 13, 2000, the Company entered into a credit facility, which
provides for up to $150 million in borrowings, including up to $30 million which
is available for letters of credit. The Company may borrow up to a maximum of 80
percent of eligible accounts receivable, as defined. At the Company's option,
the interest rate on borrowings under the credit facility is based on the London
Interbank Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus
0.25 percent . Total outstanding letters of credit were approximately $25.7
million as of December 30, 2001. There were no borrowings outstanding under the
credit facility as of December 30, 2001. The Company is subject to an unused
line fee equal to 0.375 percent per annum of the average daily difference
between $150 million and the total outstanding borrowings and letters of credit.
In addition, the Company must pay a fee equal to 2.25 percent per annum of the
aggregate face amount of outstanding standby letters of credit.
In June 2001, the Company's credit facility was amended to increase the
portion of the facility available for letters of credit from $30 million to
either (i) $40 million or (ii) $70 million in the event that the Company elected
to post a letter of credit in lieu of an appellate bond for all or a part of the
total amount of the judgment plus interest in the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation case while the Company pursues its appeal
of the judgment as further discussed in Note 9. A supersedeas bond in the amount
of $35.2 million was posted to satisfy the judgment plus interest. Under the
terms of the bond, cash equal to the amount of the bond is held in a segregated
account as collateral for the bond and the interest relating thereto accrues to
the Company. The cash in the segregated account is reported as restricted cash
in the accompanying consolidated balance sheet as of December 30, 2001.
The credit facility, which expires in 2004, includes certain covenants
requiring the Company to maintain a minimum tangible net worth and minimum
earnings before interest, taxes, depreciation and amortization and provides
limitations on certain other activities. Loans under the credit facility will be
collateralized by all of the Company's tangible and intangible personal
property, other than equipment. In the third quarter of fiscal 2000, the
agreement was amended to lower the minimum
F-18
tangible net worth covenant to $325 million at December 31, 2000 and thereafter
increasing by 50 percent of the consolidated net income of the Company. The
Company was in compliance with its financial covenants as of December 30, 2001.
In 1993, the Company's Quantum subsidiary, issued $86.3 million of 4 3/4%
convertible subordinated debentures maturing on October 1, 2000. In January
1999, $7.7 million of the convertible subordinated debentures were retired at
88.5 percent of the principal amount, resulting in a gain of approximately
$900,000. In June 2000, $10.0 million of the debentures were retired at 95.25
percent of the principal amount, resulting in a gain of $475,000. The remaining
$68.6 million of debentures were retired, together with accrued interest of
approximately $1.6 million, on October 2, 2000 (the first business day after
maturity) with borrowings from the credit facility. Borrowings under the credit
facility were repaid in October 2000 upon receipt of proceeds from the sale of
the staffing services business as well as cash flow from operations.
Interest expense in the accompanying statements of operations is presented
net of interest income of $2,825,000 in fiscal 2001, $803,000 in fiscal 2000 and
$336,000 in fiscal 1999.
Note 7. Mandatorily Redeemable and Other Securities
Gentiva Obligated Mandatorily Redeemable Preferred
Securities of a Subsidiary Trust
On March 15, 2000, certain of the Company's and Olsten's directors,
officers and management and other related parties and other investors purchased
$20 million of 10 percent convertible trust preferred securities issued by a
Trust, of which the Company owns all the common equity. Simultaneously and in
connection with the issuance by the Trust of the convertible trust preferred
securities, the Company issued to the Trust $20 million of its 10 percent
convertible subordinated debentures. The convertible preferred trust securities
would be mandatorily redeemable on March 15, 2005 and may be optionally redeemed
after March 15, 2001 and prior to the mandatory redemption date at a declining
premium over face amount (8% at March 15, 2001 declining 2% annually through
maturity). The convertible subordinated debentures have the same terms as the
convertible trust preferred securities, including, but not limited to, maturity,
interest, conversion and redemption price.
The Trust which issued the convertible trust preferred securities was a
special purpose trust. The Trust's operations were limited to issuing the
convertible trust preferred securities and holding the Company's convertible
subordinated debentures. The Trust could pay dividends only to the extent that
the Company pays interest on its convertible subordinated debentures.
If the Company announces the redemption of its convertible subordinated
debentures and, as a result, the Trust intends to redeem the convertible
preferred trust securities, the holders of the preferred trust securities have
the option to convert their securities into the Company's common stock at a
conversion price of $9.319219 until two days before the scheduled redemption
date.
F-19
On August 7, 2001, the Company's Board of Directors authorized the Company
to call for the redemption of its 10 percent convertible subordinated debentures
on or about September 14, 2001 at a redemption price of 108 percent of the
original principal amount of the debentures in accordance with the terms of an
Indenture dated March 15, 2000, between the Company and Wilmington Trust
Company. During fiscal year 2001, the Company issued 2,146,105 shares of common
stock upon the conversion of $20.0 million of the convertible preferred trust
securities. No convertible preferred trust securities were redeemed. As of
December 30, 2001, there were no convertible subordinated debentures of the
Company and no convertible preferred trust securities of the Trust outstanding.
Cumulative Preferred Stock
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000. Such amount is reflected in other liabilities in the
consolidated balance sheet as of December 30, 2001 and December 31, 2000.
Holders of the cumulative preferred stock will be entitled to receive
cumulative cash dividends at an annual rate of LIBOR plus 2% on the stated
liquidation preference of $1,000 per share, payable quarterly in arrears out of
assets legally available for payment of dividends, when and as declared by the
Company's board of directors on March 31, June 30, September 30 and December 31
of each year, commencing June 30, 2000. Dividends will accumulate and be
cumulative from the issue date. In the event of any voluntary or involuntary
liquidation, dissolution or other winding-up of the Company or, at the option of
the Company on or after March 10, 2005 or the holder on or after May 10, 2005,
the holders of cumulative preferred stock will be entitled to receive the stated
liquidation preference or a redemption price of $1,000 per share.
Note 8. Transactions with Olsten
Net transactions with Olsten, included in shareholders' equity, include the
accumulated excess of cash outlays made on the Company's behalf and management
fees charged to the Company by Olsten over cash receipts generated by the
Company. In accordance with the terms of the Separation Agreement, intercompany
balances at October 31, 1999 of approximately $507 million have been contributed
to the Company's capital in its entirety. The Separation Agreement provides that
on October 31, 1999 if the sum of (a) indebtedness for borrowed money, (b) the
deferred purchase price of property and (c) up to $10 million of transactions
fees related to the transactions contemplated by the Separation Agreement and
the Merger Agreement, less cash on hand (referred to as net debt) of Olsten and
its subsidiaries (excluding the Company
F-20
and its subsidiaries) was (i) greater than $750 million, then the new
intercompany account would reflect a payable by the Company to Olsten equal to
the amount of excess, or (ii) less than $750 million, then the new intercompany
account would reflect a payable by Olsten to the Company, in an amount equal to
the shortfall or (iii) equal to $750 million, then no payment would be made in
connection with the new debt calculation. Pursuant to the Separation Agreement,
on October 31, 1999, net debt of Olsten and its subsidiaries (excluding the
Company and its subsidiaries) was $718 million and accordingly, the Company was
to receive approximately $32 million in cash (referred to as the true-up amount)
on or prior to the Split-off date. As of January 2, 2000, the Company had
received approximately $23 million of the true-up amount; in fiscal 2000, the
Company received the remaining balance of the true-up amount and following the
Split-off the Company paid Olsten approximately $13 million to settle the
intercompany account balance which primarily related to advances for management
fees, additional borrowings and interest expense on intercompany balances.
In addition, under the terms of the Separation Agreement relating to the
Split-off, the Company assumed the obligation for the funding of liabilities of
the non-qualified supplemental executive retirement plan for certain of its
employees and former employees of Olsten. During the first quarter of 2000,
payments of $12.1 million were made under this program; these payments exceeded
assets of the plan which were transferred to the Company by $3.6 million due
primarily to benefits paid to former Olsten employees and a current executive
officer of the Company. Furthermore, the Company also assumed excise tax
obligations of approximately $0.8 million for a former executive officer of
Olsten (and current executive officer of the Company). Approximately $1.0
million of the aggregate net obligations of $4.4 million was included in
restructuring and other special charges based on Olsten's allocation methodology
for general corporate overhead expenses. The remaining $3.4 million associated
with these obligations was charged directly to additional paid-in capital.
In addition, under the terms of the Separation Agreement, the Company also
agreed to assume a lease for an Olsten subsidiary, that was unrelated to the
operation of the Company, commencing September 2000. In this connection, the
present value of future lease obligations and other costs exceed estimated
sublease rentals by $1.7 million. Such amount was charged directly to additional
paid-in capital during fiscal 2000.
An estimated tax benefit of $4.1 million relating to the aforementioned
obligations was credited to additional paid-in capital.
In accordance with the tax sharing agreement governing the Split-off, any
net operating losses generated up to the Split-off were to be transferred and
utilized by Olsten. Accordingly, on March 15, 2000 the Company transferred
approximately $49.7 million of tax benefits relating to those net operating
losses to Olsten. Such amount is reflected as a reduction of additional paid-in
capital in fiscal 2000.
Olsten used a centralized cash management system. As a result, cash and
cash equivalents (other than actual cash on hand) were not allocated to the
Company prior to October 31, 1999. On October 31, 1999, the Company ceased
participation in Olsten's cash management system and established its own cash
management system.
Included in selling, general and administrative expenses were $0.6 million,
and $1.4 million in fiscal 2000 and 1999, respectively, relating to staffing
services provided to the Company by Olsten.
F-21
Note 9. Legal Matters
Litigation
In addition to the matters referenced below, the Company is party to
certain legal actions arising in the ordinary course of business including legal
actions arising out of services rendered by its various operations, personal
injury and employment disputes.
On November 22, 2000, the jury, in an age-discrimination lawsuit commenced
in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten
Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio
(the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff
against Olsten consisting of $675,000 in compensatory damages, $30 million in
punitive damages and an undetermined amount of attorneys' fees. The jury found
that, although Olsten had lawfully terminated the plaintiff's employment, its
failure to transfer or rehire the plaintiff rendered Olsten liable to the
plaintiff. The parties filed several post-trial motions, and following a March
23, 2001 hearing on the parties' respective post trial motions, the trial court,
on May 17, 2001, denied all post-trial motions, and entered judgment for the
plaintiff for the full amount of compensatory and punitive damages, and awarded
the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants
timely filed a notice of appeal with the Court of Appeals, Seventh Appellate
District, Mahoning County, Ohio and on June 19, 2001, the Company posted a
supersedeas bond for the full amount of the judgment, plus interest. On October
12, 2001, the Company timely filed its appellate brief with the Court of
Appeals. Plaintiff filed its response brief on January 14, 2002, and defendants'
reply brief was filed on February 8, 2002. Oral arguments have not been
scheduled yet. The Company intends to defend itself vigorously in this matter.
On January 2, 2002, Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva
Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508, an
amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act and that the defendant had wrongfully terminated the plaintiff.
The plaintiff claimed that infusion pumps delivered to patients did not supply
the full amount of medication, allegedly resulting in substandard care and
overbilling to the government. Based on a review of the court's docket sheet,
the plaintiff filed a complaint under seal in March 2001. In October 2001, the
United States Government filed a notice with the court declining to intervene in
this matter, and on October 24, 2001, the court ordered that the seal be lifted.
Plaintiff filed a motion to amend complaint on December 27, 2001 and served the
complaint that same day. Defendant's answer and counterclaim were filed on
February 25, 2002. The Company has denied the allegations of wrongdoing in the
complaint and intends to defend itself vigorously in this matter.
On November 1, 2001, the Company received notice of the entry of an Order
dated October 25, 2001, unsealing a complaint in an action captioned United
States of America ex rel. Lee Einer v. Olsten Corporation, No. CIV-S-99-0860
DFL/DAD filed with the U.S. District Court for the Eastern District of
California. This civil action was brought pursuant to the False Claims Act. The
original
F-22
sealed complaint was filed in April 1999 and alleged that Olsten falsely took
into income during the conversion of its financial data systems alleged
overpayments due to payors. In November 2000, plaintiff filed an amended
complaint adding the allegation that Olsten made false representations to the
United States government in connection with a settlement agreement entered into
in July 1999. The Company acknowledged service of the amended complaint on
November 29, 2001 and filed its answer and counterclaim on December 3, 2001.
Plaintiff filed his reply to counterclaim, counterclaim against the Company and
cross claim against the United States government on January 18, 2002. The
Company's answer was filed timely on February 12, 2002. The Company believes
that it was the filing of the original complaint that triggered the December
1999 document subpoena from the Department of Health and Human Services, Office
of Inspector General, which is discussed below under "Government
Investigations."
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of
the Company's subsidiaries, initiated three arbitration proceedings against
hospitals owned by Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which
Kimberly had management services agreements to provide services to the
hospitals' home health agencies. The basis for each of the arbitrations is that
Columbia/ HCA sold the home health agencies without assigning the management
services agreements and, as a result, Columbia/HCA has breached the management
services agreements. In response to the arbitrations, Columbia/HCA has asserted
that the arbitrations be consolidated and stayed, in part based upon its alleged
claims against Kimberly for breach of contract, and requested indemnity and
possibly return of management fees. Columbia/HCA has not yet formally presented
these claims in the arbitrations or other legal proceedings and has not yet
quantified the claims. Still pending before the arbitrators is Columbia/HCA's
request to consolidate the proceedings, which Kimberly has opposed. The
proceedings are currently in abeyance pending ruling on Columbia/HCA's motion to
consolidate.
On June 23, 2000, the Company was served with a complaint in a purported
class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S.
District Court for the Middle District of Tennessee, captioned Ultimate Home
Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560, (the
"Tennessee Lawsuit"). On July 21, 2000, the Company was served with an amended
complaint in the Tennessee Lawsuit, which named as defendants Columbia/HCA,
Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract
Management Services and Olsten Corporation. The amended complaint alleged, among
other things, that the defendants' business practices in connection with home
health care patient referrals between 1994 and 1996 violated provisions of
Federal antitrust laws, the Racketeer Influenced and Corrupt Organizations Act
(RICO), the Tennessee Consumer Protection Act and state common law and sought
unspecified compensatory damages, punitive damages, treble damages and
attorneys' fees on behalf of a proposed class of home healthcare companies
and/or agencies which conducted business in Tennessee, Texas, Florida and/or
Georgia. By an order dated January 21, 2001, the Court ruled on defendants'
motion to dismiss and dismissed plaintiffs' RICO and state common law tort
claims, but allowed plaintiff's other claims to proceed to discovery. After
conducting some discovery on the issues, on October 10, 2001 plaintiff
F-23
filed a notice of withdrawal of certain allegations and subsequently filed a
second amended complaint that dropped all class action allegations and all
antitrust claims. On December 6, 2001 the parties stipulated to the dismissal of
the action with each party to bear its own costs, and on December 13, 2001, the
court entered an order dismissing the suit in its entirety.
In Gile v. Olsten Corporation, et al, U.S. District Court for the Central
District of California, No. 97-9363-NM, plaintiff filed an age discrimination
suit against Olsten Corporation, Olsten Health Services, and a certain
individual in December 1997. The defendants denied the allegations of
discrimination on the basis that plaintiff's termination was part of a reduction
in force. The individual defendant was dismissed from the action, and the
remaining corporate defendants filed a motion for summary judgment that was
granted by the District Court in February 1999. The plaintiff appealed the
District Court's order to the Ninth Circuit Court of Appeals and in December,
2000, the Court of Appeals issued its ruling which reversed the District Court
and remanded the case for trial. On or about June 19, 2001, the Company and the
plaintiff agreed to settle this matter and entered into a confidential
settlement agreement with full release.
In July 1999, the Indiana Attorney General's Office filed a lawsuit against
Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health
Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011,
alleging that Olsten was overpaid by Medicaid, failed to properly disclose
information to Medicaid and engaged in improper billing. The alleged violations
predate Olsten's acquisition of Quantum Health Resources in June 1996. The
lawsuit sought unspecified monetary damages, double or treble damages, penalties
and investigative costs. The parties resolved this matter during fiscal 2001
pursuant to a confidential Settlement agreement and full release. There is no
ongoing obligation on the part of the Company arising from this settlement.
In late 2000, after engaging in a mediation conducted by a third-party
mediator, the parties to the previously disclosed Class Action (In re Olsten
Corporation Securities Litigation, No. 97-CV-5056 (DRH), U.S. District Court for
the Eastern District of New York) and Derivative Lawsuit (Rubin v. May, No.
17135-NC, Delaware Chancery Court) reached an agreement to settle both lawsuits
for the aggregate sum of $25 million which was subject to approval by the
respective courts. The Company's insurers funded $18 million of the proposed
settlement sum. The Company funded the $7 million balance and recorded a special
charge for that amount during fiscal 2000. On August 7, 2001, the Delaware
Chancery Court gave final approval to the settlement of the Derivative Lawsuit
and, on August 31, 2001, the District Court issued its final approval to the
settlement of the Class Action.
Furthermore, in connection with the Split-Off, the Company agreed to
assume, to the extent permitted by law, the liabilities, if any, arising out of
(and to indemnify Olsten for) the above lawsuits and arbitration proceedings and
other liabilities arising out of the health services business, including any
such liabilities arising after the Split-Off in connection with the government
investigations described below. In addition, in connection with the pending sale
of the Specialty pharmaceutical Services business, as discussed in note 16, the
Company has agreed to retain and indemnify Accredo for specified liabillity
including the litigation described above and the government's investigations
described below.
F-24
Government Investigations
In early February 2000, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. The Company believes the subpoena relates to its agencies'
cost reporting procedures concerning contracted nursing and home health aide
costs. The Company continues to provide the Office of Inspector General and
other government agencies with the requested documents and to cooperate fully
with their investigation. At this time, the Company is unable to assess the
probable outcome or potential liability, if any, arising from this subpoena.
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. After preliminary discussions with the Office of Inspector
General, the Company believes the subpoena relates to an investigation of
possible overpayments to it by the Medicare program. The Company provided the
Office of Inspector General and other government agencies with requested
documents and cooperated fully with this investigation. On November 1, 2001, the
Company received notice of the entry of an Order dated October 25, 2001,
unsealing a complaint in an action captioned United States of America ex rel.
Lee Einer v. Olsten Corporation, which is discussed above under "Litigation." In
connection with the unsealing of the complaint, and as recited in the Order
unsealing the complaint, the United States gave notice to the District Court
that the United States was declining to intervene in the action. The Company
believes that it was this complaint that gave rise to the December 1999 document
subpoena, and that following an almost two year investigation into the
allegations made in the complaint, the United States decided not to intervene
and not to proceed with this action. The Company believes that the government
has concluded its investigation into this matter.
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 $23.8 million in
2001, $25.0 million in 2000 and $22.5 million in 1999.
Future minimum rental commitments and sublease rentals for all
noncancellable leases having an initial or remaining term in excess of one year
at December 30, 2001, including the lease for a former Olsten subsidiary which
the Company agreed to assume commencing September 16, 2000 under the terms of
the Separation Agreement, are as follows (in thousands):
F-25
Fiscal Year Total Commitment Sublease Rentals Net
----------- ---------------- ---------------- ---
2002 $ 23,320 $ 1,527 $ 21,793
2003 18,140 1,448 16,692
2004 13,774 1,343 12,431
2005 8,147 890 7,257
2006 2,449 - 2,449
Thereafter 349 - 349
In connection with the Split-off, the Company entered into an agreement on
March 16, 2000 pursuant to which a director of the Company and Olsten agreed not
to compete with the Company for a four year period. In return for this
agreement, the Company paid a lump sum of $250,000. Following the Split-off the
Company paid its past president, who did not continue with the Company, $2.0
million pursuant to a change in control agreement. Such amounts were charged to
expense in 2000.
Note 11. Stock Plans
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's 1999 Stock Incentive Plan ("1999 Plan") under
which 5 million shares of common stock were reserved for issuance upon exercise
of options thereunder. The maximum total number of shares of common stock for
which grants may be made to any employee, consultant or director under the 1999
plan in any calendar year is 300,000. These options may be awarded in the form
of incentive stock options ("ISOs") or non-qualified stock options ("NQSOs").
The option price of an ISO and NQSO cannot be less than 100 percent and 85
percent, respectively, of the fair market value at the date of grant. As of
December 30, 2001, the Company has granted options for 2,063,407 shares.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's Stock & Deferred Compensation Plan for
Non-Employee Directors, which provides for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors may elect to
receive in cash and the remainder of which will be paid in the form of shares of
common stock of the Company and also allows deferral of such payment of shares
until termination of director's service. The total number of shares of common
stock reserved for issuance under this plan is 150,000. During fiscal 2001 and
2000, the Company issued 3,370 shares and 9,440 shares under the plan; as of
December 30, 2001, 20,496 shares were deferred.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of an employee stock purchase plan for the Company. All employees
of the Company, who have been employed for at least eight months and whose
customary employment exceeds twenty hours per week, will be eligible to purchase
stock under this plan. The human resources and compensation committee of the
Company's Board of Directors administers the plan and has the power to determine
the terms and conditions of each offering of common stock. The maximum number of
shares of common stock, which may be sold to any employee in any offering,
however, will generally be 10 percent of that employee's compensation during the
period of the offering. A total of 1,200,000 shares of common stock
F-26
are reserved for issuance under the employee stock purchase plan. During fiscal
2001 and 2000, the Company issued 205,639 shares and 142,788 shares,
respectively, under the plan.
Effective as of the Split-off date, all options to purchase Olsten stock
("Olsten stock options") held by the Company's employees became options to
purchase the Company's common stock ("Gentiva stock options") and the Company's
employees became fully vested in the Gentiva stock options. Olsten stock options
were converted into Gentiva stock options at the ratio of 1 to 2.077; the
exercise price of a Gentiva stock option represents 48.1 percent of the
corresponding Olsten stock option exercise price.
A summary of Gentiva stock options for fiscal 2001 and fiscal 2000 is
presented below.
2001 2000
--------------------------------------- --------------------------------------
Weighted Weighted
Stock average Stock average exercise
Options exercise price Options price
----------------- ------------------ -------------- --------------------
Options outstanding, beginning of
year 3,689,006 $ - - -
Granted in connection with
conversion of Olsten options - - 3,476,616 6.33
Granted 939,000 13.22 1,124,407 5.88
Exercised (2,156,796) 6.22 (699,436) 5.51
Cancelled (124,610) 10.04 (212,581) 10.84
----------------- ------------------ -------------- --------------------
Options outstanding, end of
year 2,346,600 $ 8.61 3,689,006 $ 6.09
================= ================== ============== ====================
Options exercisable, end of
year 838,168 $ 5.82 2,683,506 $ 5.82
================= ================== ============== ====================
A summary of Olsten stock options for the period from January 3, 2000
through March 15, 2000 and fiscal year 1999 for employees assigned to the
Company is as follows:
2000 1999
------------------------------ ------------------------------
Stock Weighted Stock Weighted
Options average Options average
exercise price exercise price
------------------------------ ------------------------------
Olsten options outstanding,
beginning of year 1,697,362 $ 13.15 1,446,067 $ 15.72
Granted - - 498,700 7.84
Exercised (2,720) 8.55 (6,467) 1.28
Cancelled (20,778) 13.61 (240,938) 16.18
Converted to Gentiva options (1,673,864) 13.15 - -
------------------------------ ------------------------------
Olsten options outstanding,
end of period - $ - 1,697,362 $ 13.15
============================== ==============================
Olsten options exercisable,
end of period - $ - 633,597 $ 18.77
============================== ==============================
F-27
The weighted average fair value of the Company's and Olsten's stock
options, calculated using the Black-Scholes option pricing model, granted during
2001, 2000 and 1999, is $7.76, $2.93 and $3.15, 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 2001, 2000 and 1999,
respectively; risk-free interest rates of 4.88, 6.14 to 6.65, and 4.70 percent;
dividend yield of 0 percent for 2001, 2000 and 1999; expected lives of five
years for all; and volatility of 65 percent for 2001, 47 percent for 2000 and 35
percent for 1999.
The following table summarizes information about Gentiva stock options
outstanding at December 30, 2001.
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Range of exercise prices Number Weighted Weighted Number at Weighted
at average average December 30, 2001 average
December 30, exercise remaining exercise
2001 price contractual life price
- -------------------------- --------------------- ---------------- ----------------- ------------------ ---------------
$ 2.86 to $ 3.49 330,965 $ 3.40 7.07 330,965 $ 3.40
$ 3.61 to $ 4.39 70,673 3.97 6.82 70,673 3.97
$ 5.56 to $ 6.75 748,552 5.72 8.20 136,618 5.69
$ 6.80 to $ 8.69 156,724 7.16 5.55 150,058 7.16
$ 8.92 to $ 12.50 156,454 10.79 4.57 146,122 10.68
$ 13.19 to $ 14.50 875,500 13.20 9.01 - -
$ 16.70 to $ 20.75 7,732 18.75 5.30 3,732 19.38
------------------- -------------- ----------------- ------------------ ---------------
$ 2.86 to $ 20.75 2,346,600 $ 8.61 7.87 838,168 $ 5.82
=================== ============== ================= ================== ===============
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
under the stock option plans. Had compensation cost for the Company's and
Olsten's stock option plans been determined based on the fair value at the grant
date for awards consistent with the provisions of SFAS No. 123, the Company's
net income (loss) and net income (loss) per share would have been changed to the
pro forma amounts indicated below (in thousands, except per share amounts):
2001 2000 1999
---- ---- ----
Net income (loss) - as reported 20,988 $(104,200) $(15,086)
Net income (loss) - pro forma 17,986 (106,052) (16,864)
Basic income (loss) per share - as reported 0.91 (5.05) (0.74)
Basic income (loss) per share - pro forma 0.78 (5.14) (0.83)
F-28
Note 12. Income Taxes
Comparative analyses of the provision (benefit) for income taxes
follows (in thousands):
2001 2000 1999
---- ---- ----
Current
Federal $ -- $ -- $ (19,586)
State and local 1,875 1,580 170
Foreign -- -- 248
----------------- ----------------- -------------------
1,875 1,580 (19,168)
----------------- ----------------- -------------------
Deferred
Federal -- (774) 13,047
State and local -- --
----------------- ----------------- -------------------
-- (774) 13,047
----------------- ----------------- -------------------
$ 1,875 $ 806 $ (6,121)
================= ================= ===================
A reconciliation of the differences between income taxes computed at
Federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
2001 2000 1999
---- ---- ----
Income taxes computed at Federal statutory tax rate $ 8,002 $ (36,188) $ (7,422)
State income taxes, net of Federal
benefit and valuation allowance 1,219 1,027 111
Capital loss on disposition of domestic subsidiary - (14,008) -
Amortization of intangibles 756 858 902
Nondeductible meals and entertainment 303 312 265
Other (1) 81 23
(Decrease) Increase in Federal valuation allowance (8,404) 48,724 -
------------------------------------------------------------
$ 1,875 $ 806 $ (6,121)
============================================================
F-29
Deferred tax assets and deferred tax liabilities are as follows (in
thousands):
December 30, 2001 December 31, 2000
Deferred tax assets
Reserves and allowances $ 48,663 $ 58,132
Net operating loss (Federal and state) 36,230 31,206
Other 3,347 470
Less: valuation allowance (57,330) (57,556)
-----------------------------------------------
Total deferred tax asset 30,910 32,252
-----------------------------------------------
Deferred tax liabilities
Capitalized software (2,035) (2,130)
Intangible assets (26,859) (26,280)
Depreciation (2,016) (3,842)
------------------------------------------------
Total deferred tax liability (30,910) (32,252)
------------------------------------------------
Net deferred tax asset (liability) $ - $ -
==================== =======================
In accordance with the Tax Sharing Agreement, any net operating losses
generated up to the Split-off are to be allocated to and utilized by Olsten. As
of March 15, 2000, approximately $49.7 million of recorded tax benefits related
to these net operating losses have been transferred to Olsten. At the end of
2001, Gentiva had a federal net operating loss carryforward of $89.7 million
generated after Split-off date, all of which will expire by 2020. Approximately
$31.3 million of the net operating loss carry forward relates to stock options,
the benefits of which, when realized, will be credited to stockholders' equity.
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. The lack of historical pre-tax income
creates uncertainty about the Company's ability to earn taxable income and
realize tax benefits in future years. Therefore, management has provided a
valuation allowance for its deferred tax assets.
Note 13. Benefit Plans for Permanent Employees
Olsten and its subsidiaries maintained qualified and non-qualified defined
contribution retirement plans for its salaried employees, which provide for a
partial match of employee savings under the plans and for discretionary
profit-sharing contributions based on employee compensation. The Company
established similar retirement plans and assumed the obligations under the
Olsten plans for those employees assigned to the Company at the date of the
Split-off.
F-30
Olsten also maintained a non-qualified supplemental executive retirement
program for key employees and officers. Certain employees of the Company were
eligible to participate in the Olsten sponsored plan. Prior to the Split-off the
Company established its own non-qualified supplemental executive retirement plan
substantially similar to the Olsten plan. The Olsten plan was terminated prior
to the Split-off, and the Company terminated its plan after the Split-off.
With respect to the Company's non-qualified defined contribution retirement
plan for salaried employees, all pre-tax contributions, matching contributions
and profit sharing contributions (and the earnings therein) are held in a Rabbi
Trust and are subject to the claims of the general, unsecured creditors of the
Company. All post-tax contributions are held in a secular trust and are not
subject to the claims of the creditors of the Company. The fair value of the
assets held in the Rabbi Trust and the liability to plan participants as of
December 30, 2001 totaling approximately $10.3 million are indicated in other
assets and other liabilities on the accompanying consolidated balance sheet.
Company contributions under the defined contribution plans were
approximately $3.3 million in 2001, $2.7 million in 2000 and $3.6 million in
1999.
Note 14. Business Segment Information
The Company operates in the United States and, during fiscal 2000 and 1999,
operated in Canada, servicing patients and customers through the following
business segments: Specialty Pharmaceutical Services, Home Health Services and,
for the fiscal 2000 and 1999 periods, Staffing Services. These segments are
briefly described below.
Specialty Pharmaceutical Services includes (i) the distribution of drugs
and other biological and pharmaceutical products and professional support
services for individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
administration of antibiotics, chemotherapy, nutrients and other medications for
patients with acute or episodic disease states, (iii) distribution services for
pharmaceutical, biotechnology and medical service firms and (iv) clinical
support services for pharmaceutical and biotechnology firms.
Home Health Services includes (i) professional and paraprofessional
services, including skilled nursing, rehabilitation and other therapies, home
health aide and personal care services, to individuals with acute illnesses,
long-term chronic health conditions, permanent disabilities, terminal illnesses
or post-procedural needs and (ii) care management and coordination for managed
care organizations and self-insured employees.
Staffing Services included services to institutional, occupational and
alternate site health care organizations by providing health care professionals
to meet supplemental staffing needs. Canada included professional and
paraprofessional services to individuals in home and institutional settings.
Both Staffing Services and Canada constituted less than 10 percent of the net
revenues, operating contribution and the total assets of the Company and, as
such, were combined for segment reporting purposes.
F-31
The Company and its chief decision makers evaluate performance and allocate
resources based on operating contributions of the reportable segments, which
exclude corporate expenses, depreciation, amortization and interest expense, but
include revenues and all other costs directly attributable to the specific
segment. Intersegment revenues represent Specialty Pharmaceutical Services
segment revenues generated from services provided to the Home Health Services
segment. Identifiable assets of the segments reflect net accounts receivable and
inventories associated with segment activities. All other assets, including
goodwill, are assigned to corporate for the benefit of all segments for purposes
of segment disclosure.
During fiscal 2001, the Company changed its evaluation performance
methodology, as described below, which resulted in a change in reportable
segments. In the fiscal 2000 and 1999 periods, clinical support services for the
pharmaceutical and biotechnology firms and staffing services provided under a
state contract were included in the Staffing Services segment. In 2001, the
Company considers these services to be part of the Specialty Pharmaceutical
Services segment and Home Health Services segment, respectively. In addition,
services relating to care management and coordination for managed care
organizations and self-insured employees were allocated between Specialty
Pharmaceutical Services and Home Care Nursing Services segments in the fiscal
2000 periods based on the nature of services rendered; in 2001, the Company
considers these services to be part of the Home Health Services segment.
Furthermore, Canadian operating results were included in the Home Care Nursing
Services segment in the prior year periods and are now reflected in the Staffing
and Canada results for presentation purposes. Prior year segment data has been
reclassified to conform with the current year presentation.
F-32
Information about the Company's operations is as follows (in thousands):
Specialty
Pharmaceutical Home Health Staffing and
Services Services Canada Total
-------------------- -------------- --------------- --------------
Year ended December 30, 2001
Net revenues - segments $ 739,315 $ 729,577 $ - $ 1,468,892
==================== ============== ===============
Intersegment revenues (91,205)
--------------
Net revenues $ 1,377,687
==============
Operating contribution $ 72,945 51,423 $ - $ 124,368
==================== ============== ===============
Corporate expenses (71,821)
Special Charges - corporate (3,011)
--------------
Earnings before interest expense, taxes,
depreciation and amortization 49,536
Depreciation and amortization (26,522)
Interest income, net (151)
--------------
Income before income taxes $ 22,863
==============
Segment assets $ 286,503 140,838 $ - $ 427,341
==================== ============== ===============
Intersegment assets (11,545)
--------------
Segment assets, net $415,796
Corporate assets 422,538
--------------
Total assets $ 838,334
==============
Year ended December 31, 2000
Net revenues - segments $ 699,327 736,547 145,218 1,581,092
==================== ============== ===============
Intersegment revenues (74,448)
--------------
Net revenues $ 1,506,644
==============
Operating contribution before special charges $ 84,644 40,317 10,802 135,763
Special charges - segments (97,025) (37,966) - (134,991)
-------------------- -------------- --------------- --------------
Operating (loss) contribution $ (12,381) 2,351 $ 10,802 772
==================== ============== ===============
Special charges - corporate (18,252)
Gain on sales of businesses 36,682
Corporate expenses (81,036)
--------------
Loss before interest expense,
taxes, depreciation and amortization (61,834)
Depreciation and amortization (31,682)
Interest expense, net (9,878)
--------------
Loss before income taxes $ (103,394)
==============
Segment assets $ 302,833 185,208 $ - 488,041
==================== ============== ===============
Intersegment assets (17,752)
--------------
Segment assets, net $ 470,289
Corporate assets 335,195
--------------
Total assets $ 805,484
==============
F-33
Specialty
Pharmaceutical Home Health Staffing and
Services Services Canada Total
-------------------- -------------- --------------- --------------
Year ended January 2, 2000
Net revenues - segments $ 665,126 $ 727,228 $ 152,067 $ 1,544,421
==================== ============== ===============
Intersegment revenues (54,599)
--------------
Net revenues $ 1,489,822
==============
Operating contribution before special
charges $ 95,059 $ 26,576 $ 8,970 $ 130,605
Special charges - segments (1,730) (13,090) (380) (15,200)
-------------------- -------------- --------------- --------------
Operating contribution (loss) $ 93,329 $ 13,486 $ 9,369 $ 115,405
==================== ============== ===============
Corporate expenses (86,012)
--------------
Earnings before interest expense, taxes,
depreciation and amortization 29,393
Depreciation and amortization (33,625)
Interest expense, net (16,975)
--------------
Loss before income taxes $ (21,207)
==============
Segment assets $ 230,323 $ 414,278 $ 24,077 $ 668,678
==================== ============== ===============
Intersegment assets -
--------------
Segment assets, net $ 668,678
Corporate assets 394,337
--------------
Total assets $ 1,063,015
==============
Financial information, summarized by geographic area, is as follows (in
thousands):
Net Revenues Long-lived assets
Year ended December 30, 2001
United States $1,377,687 $ 267,979
=================== ================
Year ended December 31, 2000
United States $1,472,316 $ 281,978
Canada
34,328 2,232
------------------- ----------------
$1,506,644 $ 284,410
=================== ================
Year ended January 2, 2000
United States $1,446,532 $ 302,601
Canada 43,290 1,183
------------------- ----------------
$1,489,822 $ 303,784
=================== ================
F-34
Note 15. Quarterly Financial Information (Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
------------ ------------ ------------ ------------
$ $ $ $
------------ ------------ ------------ ------------
(in thousands, except share amounts)
Year ended December 30, 2001
Net revenues $357,178 $335,444 $ 328,262 $356,803
Gross profit 116,430 113,635 112,100 116,914
Net income 6,112 2,318 6,246 6,312
Net income per share:
Basic 0.28 0.10 0.26 0.25
Diluted 0.26 0.10 0.24 0.24
Year ended December 31, 2000
Net revenues $384,607 $383,270 $ 380,325 $358,442
Gross profit 128,502 128,624 118,165 109,709
Net income (loss) (1,906) 2,171 (130,346) 25,881
Net income (loss) per share:
Basic (0.09) 0.11 (6.30) 1.23
Diluted (0.09) 0.10 (6.30) 1.05
During the year ended December 30, 2001, the Company recorded special
charges of $3.0 million in the second quarter in connection with the settlement
of the Gile v. Olsten Corporation, et al, and the State of Indiana v. Quantum
Health Resources, Inc. and Olsten Health Services, Inc. lawsuits and for various
other legal costs.
During the year ended December 31, 2000, the Company recorded restructuring
and other special charges of $5.6 million in the first quarter, $1.2 million in
the second quarter, $126.8 million in the third quarter and $19.6 million in the
fourth quarter. In addition, the Company recorded a charge of $5.2 million in
the third quarter of fiscal 2000 resulting from impairment of goodwill and gain
of $41.9 million in the fourth quarter of fiscal 2000 relating to sales of
businesses. The first quarter of 1999 included $16.7 million of special charges
and the fourth quarter of 1999 included a benefit of $1.5 million relating to
these special charges as indicated in Note 4.
F-35
Note 16. Subsequent Event
On January 2, 2002, the Company entered into a definitive agreement with
Accredo Health, Incorporated ("Accredo") to sell the assets and business of the
Company's Specialty Pharmaceutical Services business, including certain
corporate assets and operations, for $415 million, subject to adjustment, to be
paid half in cash and half in shares of Accredo common stock provided that the
average closing price per share of Accredo common stock on the NASDAQ National
Market for the twenty trading days ending on the second trading day prior to the
closing of the acquisition is between $31 and $41 per share. If the average
closing price is outside of these limits, the number of Accredo shares to be
issued will be fixed at the outside levels, and the value of the stock
consideration will fluctuate, increasing if the average closing price is above
$41 and decreasing if the average closing price is below $31. The purchase price
of $415 million is also subject to adjustment for changes in the net book value
of the Specialty Pharmaceutical Services business as of the closing date of the
acquisition, to the extent that such net book value is outside of the range
between $247.5 million and $252.5 million. (At December 30, 2001, the net book
value of the Specialty Pharmaceutical Services business was within such range.)
The Company intends to distribute substantially all of the consideration it
receives in connection with the sale to shareholders following the closing of
the transaction. Management expects that the disposition will be consummated
during the second quarter of 2002 and that a gain will be recorded on the
disposition.
The Specialty Pharmaceuticals Services business will be treated as a
discontinued operation following the date on which shareholders approve the
transaction. Subsequent to the closing date of the transaction, the Company
intends to operate in the home health services business.
F-36
GENTIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 30, 2001
(in thousands)
Additions
Balance at charged to costs
Beginning of and Balance at end
period expenses Deductions of period
------------ ---------------- ---------- ---------------
Allowance for Doubtful Accounts:
For the Year Ended December 30, 2001 $105,962 $35,221 $(53,028) $88,155
For the Year Ended December 31, 2000 $36,759 $144,883 $(75,680) $105,962
For the Year Ended January 2, 2000 $25,596 $38,687 $(27,524) $36,759
F-37