-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gl6Q/OoDGIqWMNddKZh6vmJgmuh40hSrMGhUT3GmjMcMk6i88SF5w0SkipwVDO/y Rogr2OFpitb097YV8YKqNQ== 0000950162-01-500587.txt : 20010816 0000950162-01-500587.hdr.sgml : 20010816 ACCESSION NUMBER: 0000950162-01-500587 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENTIVA HEALTH SERVICES INC CENTRAL INDEX KEY: 0001096142 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 364335801 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15669 FILM NUMBER: 1715719 BUSINESS ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 BUSINESS PHONE: 6315017000 MAIL ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 FORMER COMPANY: FORMER CONFORMED NAME: OLSTEN HEALTH SERVICES HOLDING CORP DATE OF NAME CHANGE: 19991001 10-Q 1 gentiva2ndqtr2001.txt 2ND QUARTER 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 2001 Commission File No. 1-15669 Gentiva Health Services, Inc. (Exact name of Registrant as specified in its charter) DELAWARE 36-433-5801 -------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Huntington Quadrangle 2S, Melville, NY 11747-8943 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 501-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's Common Stock, as of August 9, 2001 was 23,049,907. INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - July 1, 2001 (Unaudited) and December 31, 2000 2 Consolidated Statements of Income (Unaudited) - Three and Six Months Ended July 1, 2001 and July 2, 2000 3 Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended July 1, 2001 and July 2, 2000 4 Notes to Consolidated Financial Statements (Unaudited) 5-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings 21-23 Item 2. Change in Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23-24 Item 6. Exhibits and Reports on Form 8-K 24-27 SIGNATURES 28 PART I - FINANCIAL INFORMATION Item 1. Financial Statements.
Gentiva Health Services, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) July 1, 2001 December 31, 2000 ----------------- -------------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 77,070 $ 452 Receivables, less allowance for doubtful accounts of $91,222 and $105,962, respectively 384,896 419,178 Inventories 48,813 51,111 Prepaid expenses and other current assets 46,723 50,333 ----------------- -------------------- Total current assets 557,502 521,074 Fixed assets, net 31,252 36,961 Intangible assets, net 225,474 230,702 Other assets 17,534 16,747 ----------------- -------------------- Total assets $ 831,762 $ 805,484 ================= ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 71,566 $ 74,083 Accrued expenses 61,086 50,682 Payroll and related taxes 19,112 17,305 Insurance costs 28,136 30,320 ----------------- -------------------- Total current liabilities 179,900 172,390 Other liabilities 47,344 46,945 Gentiva - obligated mandatorily redeemable convertible securities of a subsidiary holding solely Gentiva debentures 19,400 20,000 Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; issued and outstanding 22,995,058 and 21,196,693 shares, respectively 2,300 2,120 Additional paid-in capital 699,774 689,163 Accumulated deficit (116,140) (124,570) Accumulated other comprehensive loss (816) (564) ----------------- -------------------- Total shareholders' equity 585,118 566,149 ----------------- -------------------- Total liabilities and shareholders' equity $ 831,762 $ 805,484 ================= ====================
See notes to consolidated financial statements. -2-
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended ---------------------------------- ----------------------------------- July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000 -------------- ------------------ ---------------- ----------------- Net revenues $335,444 $383,270 $692,622 $767,877 Cost of services sold 221,809 254,646 462,557 510,751 -------------- ------------------ ---------------- ----------------- Gross profit 113,635 128,624 230,065 257,126 Selling, general and administrative expenses 110,964 122,785 220,349 250,317 Interest expense, net 152 2,112 585 6,348 -------------- ------------------ ---------------- ----------------- Income before income taxes 2,519 3,727 9,131 461 Income tax expense 201 1,556 701 196 -------------- ------------------ ---------------- ----------------- Net income $ 2,318 $ 2,171 $ 8,430 $ 265 ============== ================== ================ ================= Net income per share: Basic $ 0.10 $ 0.11 $ 0.39 $ 0.01 ============== ================== ================ ================= Diluted $ 0.10 $ 0.10 $ 0.36 $ 0.01 ============== ================== ================ ================= Average shares outstanding: Basic 22,265 20,513 21,859 20,429 ============== ================== ================ ================= Diluted 23,859 21,823 23,382 21,681 ============== ================== ================ =================
See notes to consolidated financial statements. -3-
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended ------------------------------------ July 1, 2001 July 2, 2000 ------------------------------------ OPERATING ACTIVITIES: Net income $ 8,430 $ 265 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,625 16,141 Provision for doubtful accounts 18,550 16,917 Gain on sale/disposal of assets (167) - Changes in assets and liabilities: Accounts receivable 15,732 (45,829) Inventories 2,298 18,726 Prepaid expenses and other current assets 3,610 (899) Current liabilities (2,989) (48,696) Other, net (640) 1,834 ------------------------------------ Net cash provided by (used in) operating activities 58,449 (41,541) ------------------------------------ INVESTING ACTIVITIES: Purchase of fixed assets (2,796) (3,620) Proceeds from sale of assets 275 - ------------------------------------ Net cash used in investing activities (2,521) (3,620) ------------------------------------ FINANCING ACTIVITIES: Proceeds from issuance of common stock 10,191 1,234 Issuance of mandatorily redeemable and other securities - 20,100 Net transactions with Olsten - 5,226 Proceeds from revolving credit facility - 26,191 Debt issuance costs - (2,564) Increase (decrease) in book overdrafts (10,379) 3,856 Retirement of debt - (9,525) Advances from Medicare program 20,878 - ------------------------------------ Net cash provided by financing activities 20,690 44,518 ------------------------------------ Net increase (decrease) in cash and cash equivalents 76,618 (643) Cash and cash equivalents at beginning of period 452 2,942 ------------------------------------ Cash and cash equivalents at end of period $ 77,070 $ 2,299 ====================================
See notes to consolidated financial statements. -4- Gentiva Health Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Accounting Policies The accompanying interim consolidated financial statements are unaudited, but have been prepared by Gentiva Health Services, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 2. Background and Basis of Presentation On March 15, 2000, the Company and its subsidiaries were split-off (the "Split-off") from Olsten Corporation ("Olsten") through the issuance of all of the Company's shares of common stock to Olsten's shareholders and the Company became an independent, publicly-owned company. Prior to the Split-off, the Company operated Olsten's health services business as a wholly-owned subsidiary of Olsten. The accompanying interim consolidated financial statements for periods prior to or including March 15, 2000 reflect the results of operations, financial position and cash flows of the Company as if it were a separate entity for all periods presented. Such consolidated financial statements have been prepared using the historical basis in the assets and liabilities and historical results of operations related to the Company. The Company's selling, general and administrative expenses included a management fee of approximately $1.0 million for the first six months of fiscal 2000. This fee represented an allocation of certain general corporate overhead expenses related to Olsten's corporate headquarters. Management believes the allocations related to general corporate overhead expenses were reasonable; however, the costs charged to the Company were not necessarily indicative of the costs that would have been incurred if the Company had been a stand-alone entity during the period for which such expenses were allocated. Subsequent to the Split-off, the Company began to perform these functions using its own resources or purchased services. Net interest expense as presented in the consolidated statement of income included net interest expense of approximately $2.7 million for the first six months of fiscal 2000 relating to the intercompany balances with Olsten. Such intercompany balances were reflected as a contribution to capital as of the Split-off date. -5- 3. Earnings per Share Basic net income per share for each period presented has been computed by dividing net income by the weighted average number of shares outstanding for each respective period. Diluted net income per share for each period presented has been computed using the weighted average number of common and dilutive common equivalent shares outstanding. For the second quarter and first six months of fiscal 2001, the weighted average numbers of shares outstanding were 22,265,000 and 21,859,000, respectively. Dilutive common equivalent shares represented 1,594,000 shares for the second quarter and 1,523,000 shares for the six month period that would be issued upon the assumed exercise of approximately 2.8 million stock options under the treasury stock method. For the second quarter and first six months of fiscal 2000, the weighted average numbers of shares outstanding were 20,513,000 and 20,429,000, respectively. Dilutive common equivalent shares represented 1,310,000 shares for the second quarter and 1,252,000 shares for the six month period that would be issued upon the assumed conversion of stock options under the treasury stock method. The computation of diluted net income per share excluded the effect of approximately 2.1 million shares issuable upon the conversion of the 10 percent convertible preferred trust securities for the quarter and year to date fiscal 2001 and 2000 periods since the increase in net income resulting from the exclusion of after-tax interest expense relating to these securities and the increase in shares outstanding resulting from conversion would have an antidilutive effect on earnings. For the fiscal 2000 periods, shares issuable upon the conversion of the 4 3/4 percent convertible subordinated debentures, which matured and were retired in October 2000, were also excluded from the diluted net income per share computation because of their antidilutive effect on earnings. 4. Restructuring and Special Charges During the second quarter of fiscal 2001, the Company recorded special charges of approximately $3.0 million in connection with the settlement of the Gile v. Olsten Corporation, et al, and the State of Indiana v. Quantum Health Resources, Inc. and Olsten Health Services, Inc. lawsuits and for various other legal costs. These legal matters are further discussed in Note 8. These special charges are reflected in selling, general and administrative expenses in the accompanying consolidated statement of income. During the six months ended July 2, 2000, the Company recorded special charges aggregating $6.8 million which were reflected in selling, general and administration expenses in the accompanying statement of income. Of this amount, charges of $4.1 million were incurred to reflect obligations resulting from the Company's Split-off from Olsten and transition costs associated with the establishment of the Company as an independent, publicly-owned entity. These special charges included change of control and compensation and benefit payments of $3.6 million made to certain former employees of the Company and Olsten and a -6- current executive officer of the Company, and transition costs of $0.5 million relating to registration costs, professional fees and other items. In addition, special charges of $1.2 million in the second quarter and $2.7 million in the first six months of fiscal 2000 were incurred in connection with the change of the Company's name to Gentiva Health Services, Inc. These special charges primarily consisted of costs incurred and paid for consulting fees, promotional items and advertising. The Company recorded charges of $5.5 million in the fourth quarter of fiscal 2000 in connection with a restructuring of certain business operations. As of December 31, 2000 and July 1, 2001, the unpaid portion of these restructuring charges aggregated $3.4 million and $1.8 million, respectively, as a result of cash payments made during the six month period. 5. Current Liabilities In early 2001, the Center for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration, issued cash advances to certain Medicare providers in connection with the transition from the Interim Payment System to the Prospective Payment System for Medicare reimbursement. Such advances are expected to be repaid during the first quarter of fiscal 2002. In the first quarter of fiscal 2001, the Company received a cash advance, net of payments for estimated settlements relating to cost report filings, of approximately $20.9 million which was reflected in accrued expenses in the accompanying consolidated balance sheet as of July 1, 2001. 6. Cash and Revolving Credit Facility As of July 1, 2001, there were no outstanding borrowings and total outstanding letters of credit approximated $25.7 million under the Company's $150 million amended revolving credit facility which expires in 2004. The Company was in compliance with the financial covenants of the credit facility as of July 1, 2001. In June 2001, the Company's credit facility was amended to increase the portion of the facility available for letters of credit from $30 million to either (i) $40 million or (ii) $70 million in the event that the Company elects to post a letter of credit in lieu of an appellate bond for all or a part of the total amount of the judgment plus interest in the Fredrickson v. Olsten Health Services Corp. and Olsten Corporation case while the Company pursues its appeal of the judgment as further discussed in Note 8. As of July 1, 2001, a supersedeas bond in the amount of $35.2 million was posted to satisfy the judgment plus interest. Under the terms of the bond, cash equal to the amount of the bond is held in a segregated account as collateral for the bond and the interest relating thereto accrues to the Company. The cash in the segregated account is reflected in cash and cash equivalents in the accompanying consolidated balance sheet. At its discretion, the Company may substitute a letter of credit for the segregated cash to collateralize the bond. -7- 7. Shareholders' Equity Changes in shareholders' equity during the six months ended July 1, 2001 were as follows (in thousands):
Common Additional Accumulated Accumulated Total Stock Paid-in Deficit Other Capital Comprehensive Loss ------------ ------------ ---------------------------------- ----------- Balance at December 31, 2000 $2,120 $689,163 $(124,570) $ (564) $ 566,149 Comprehensive income: Net income 8,430 8,430 Unrealized loss on investments (252) (252) Issuance of stock upon conversion of convertible preferred trust securities 6 594 600 Issuance of stock upon exercise of stock options and under stock plans for employees and directors 174 10,017 10,191 ------------ ------------ ---------------------------------- ----------- Balance at July 1, 2001 $2,300 $699,774 $ (116,140) $ (816) $ 585,118 ============ ============ ================================== ===========
Total comprehensive income amounted to $2.7 million and $2.1 million during the second quarter of fiscal 2001 and 2000, respectively, and $8.2 million and $0.3 million during the first six months of fiscal 2001 and 2000, respectively. In June 2001, the Company issued 64,383 shares of common stock upon the conversion of $0.6 million of the convertible preferred trust securities at a conversion price of $9.319219. 8. Legal Matters Litigation In addition to the matters referenced below, the Company is party to certain legal actions arising in the ordinary course of business including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. In late 2000, after engaging in a mediation conducted by a third-party mediator, the parties to the previously disclosed Class Action (In re Olsten Corporation Securities Litigation, No. 97-CV-5056 (DRH), U.S. District Court for the Eastern District of New York) and Derivative Lawsuit (Rubin v. May, No. 17135-NC, Delaware Chancery Court) reached an agreement to settle both lawsuits for the aggregate sum of $25 million which was subject to -8- approval by the respective courts. The Company's insurers funded $18 million of the proposed settlement sum. The Company funded the $7 million balance and recorded a special charge for that amount during fiscal 2000. By order dated April 30, 2001, the District Court preliminarily approved the settlement of the Class Action and scheduled a settlement fairness hearing for August 31, 2001. On August 7, 2001, the Delaware Chancery Court approved the settlement of the Derivative Lawsuit. In July 1999, the Indiana Attorney General's Office filed a lawsuit against Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011, alleging that Olsten was overpaid by Medicaid, failed to properly disclose information to Medicaid and engaged in improper billing. The alleged violations predate Olsten's acquisition of Quantum Health Resources in June 1996. The lawsuit sought unspecified monetary damages, double or treble damages, penalties and investigative costs. The parties resolved this matter during the second quarter of fiscal 2001 pursuant to a confidential Settlement agreement and full release. There is no ongoing obligation on the part of the Company arising from this settlement. On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's subsidiaries, initiated three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had management services agreements to provide services to the hospitals' home health agencies. The basis for each of the arbitrations is that Columbia/ HCA sold the home health agencies without assigning the management services agreements and, as a result, Columbia/HCA has breached the management services agreements. In response to the arbitrations, Columbia/HCA has asserted that the arbitrations be consolidated and stayed, in part based upon its alleged claims against Kimberly for breach of contract, and requested indemnity and possibly return of management fees. Columbia/HCA has not yet formally presented these claims in the arbitrations or other legal proceedings and has not yet quantified the claims. Still pending before the arbitrators is Columbia/HCA's request to consolidate the proceedings, which Kimberly has opposed. On June 23, 2000, the Company was served with a Complaint in a purported class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S. District Court for the Middle District of Tennessee, captioned Ultimate Home Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560, (the "Tennessee Lawsuit"). The Company was served with an Amended Complaint in the Tennessee Lawsuit on July 21, 2000, which names as defendants Columbia/HCA, Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract Management Services (one of the Company's subsidiaries) and Olsten Corporation. The Amended Complaint alleges, among other things, that the defendants' business practices in connection with home health care patient referrals between 1994 and 1996 violated provisions of Federal antitrust laws, the Racketeer Influenced and Corrupt Organizations Act (RICO), the Tennessee Consumer Protection Act (TCPA), and state common law. The Amended Complaint seeks unspecified compensatory damages, punitive damages, treble damages and attorneys' fees on behalf of a proposed class of home healthcare companies and/or agencies which conducted business in Tennessee, Texas, Florida and/or Georgia. In September 2000, the defendants filed a motion to dismiss the Amended Complaint, and by an order dated January 21, -9- 2001, the Court dismissed plaintiffs' RICO and state common law tort claims. The Court also held that the plaintiffs had properly pleaded the antitrust, TCPA and civil conspiracy claims and allowed those claims to proceed to discovery. Plaintiff's motion for class certification is due to be filed with the court by August 24, 2001. Because the Tennessee Lawsuit is in a relatively preliminary discovery stage, the Company is unable at this time to assess the probable outcome of or potential liability arising from such lawsuit. On November 22, 2000, the jury in an age-discrimination lawsuit commenced in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio (the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff against Olsten consisting of $675,000 in compensatory damages, $30 million in punitive damages and an undetermined amount of attorneys' fees. The jury found that, although Olsten had lawfully terminated the plaintiff's employment, its failure to transfer or rehire the plaintiff rendered Olsten liable to the plaintiff. The defendants posted a court ordered bond in the amount of $675,000 and filed several post-trial motions, including a motion seeking the entry of judgment in the defendants' favor notwithstanding the verdict or, in the alternative, a new trial or a remittitur of the punitive damages award. The plaintiff filed post-trial motions in connection with the entry of the judgment and the amount of the bond posted by defendants. Following a hearing on the parties' respective post-trial motions on March 23, 2001, the trial court, on May 17, 2001, denied all post-trial motions, and entered judgment for the plaintiff for the full amount of compensatory and punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants timely filed a Notice of Appeal with the Court of Appeals, Seventh Appellate District, Mahoning County, Ohio, and on June 19, 2001, the Company posted a supersedeas bond for the full amount of the judgment, plus interest. The Company continues to defend this matter vigorously. In Gile v. Olsten Corporation, et al, U.S. District Court for the Central District of California, No. 97-9363-NM, plaintiff filed an age discrimination suit against Olsten Corporation, Olsten Health Services, and a certain individual in December 1997. The defendants denied the allegations of discrimination on the basis that plaintiff's termination was part of a reduction in force. The individual defendant was dismissed from the action, and the remaining corporate defendants filed a motion for summary judgment that was granted by the District Court in February 1999. The plaintiff appealed the District Court's order to the Ninth Circuit Court of Appeals and in December, 2000, the Court of Appeals issued its ruling which reversed the District Court and remanded the case for trial. On or about June 19, 2001, the Company and the plaintiff agreed to settle this matter and entered into a confidential settlement agreement with full release. In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, the liabilities, if any, arising out of (and to indemnify Olsten for) the above lawsuits and arbitration proceedings and other liabilities arising out of the health services business, including any such liabilities arising after the Split-Off in connection with the government investigations described below. -10- Government Investigations In early December 1999, Olsten received a document subpoena from the Department of Health and Human Services, Office of Inspector General, and Office of Investigations. After preliminary discussions with the Office of Inspector General, the Company believes the subpoena relates to an investigation of possible overpayments to it by the Medicare program. In early February 2000, the Company received a document subpoena from the Department of Health and Human Services, Office of Inspector General, and Office of Investigations. The Company believes the subpoena relates to its agencies' cost reporting procedures concerning contracted nursing and home health aide costs. The Company has provided and continues to provide the Office of Inspector General with the requested documents and continues to cooperate fully with its investigations. At this time, the Company is unable to assess the probable outcome or potential liability, if any, arising from these subpoenas. The Company believes that it is possible that one or both of these investigations may have been triggered by lawsuits under federal or state whistle blower statutes against Olsten or the Company. 9. Subsequent Event On August 7, 2001, the Company's Board of Directors authorized the Company to redeem its 10 percent convertible subordinated debentures at a redemption price of 108 percent of the original principal amount of the debentures plus accrued and unpaid interest in accordance with the terms of an Indenture dated March 15, 2000, between the Company and Wilmington Trust Company. These debentures, which are due in 2005, were issued to a Trust of which the Company owns all the common equity. Upon such redemption, the Trust, in turn, is required to use the proceeds of such redemption to redeem all of its convertible preferred trust securities in accordance with the terms of a Trust Agreement dated March 9, 2000. Holders of the trust securities may elect to convert such securities into the Company's common stock until two business days prior to the redemption date at a conversion price of $9.319219. The scheduled redemption date is September 14, 2001. At July 1, 2001, $19.4 million of the above referenced Gentiva-obligated mandatorily redeemable securities were outstanding. If all such securities are converted, the Company's outstanding common stock will increase by approximately 2.1 million shares. 10. Business Segment Information The Company operates in the United States and operated in Canada during the fiscal 2000 periods, servicing patients and customers through the following business segments: Specialty Pharmaceutical Services, Home Health Services and, for a portion of the fiscal 2000 periods, Staffing Services and Canada. These segments are briefly described below. -11- Specialty Pharmaceutical Services includes (i) the distribution of drugs and other biological and pharmaceutical products and professional support services for individuals with chronic diseases, such as hemophilia, primary pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the administration of antibiotics, chemotherapy, nutrients and other medications for patients with acute or episodic disease states, (iii) distribution services for pharmaceutical, biotechnology and medical service firms and (iv) clinical support services for pharmaceutical and biotechnology firms. Home Health Services includes (i) professional and paraprofessional services, including skilled nursing, rehabilitation and other therapies, home health aide and personal care services, to individuals with acute illnesses, long-term chronic health conditions, permanent disabilities, terminal illnesses or post-procedural needs and (ii) care management and coordination for managed care organizations and self-insured employees. Staffing Services included services to institutional, occupational and alternate site health care organizations by providing health care professionals to meet supplemental staffing needs. Canada included professional and paraprofessional services to individuals in home and institutional settings. Both Staffing Services and Canada constituted less than 10 percent of the net revenues, operating contribution and the total assets of the Company and, as such, were combined for segment reporting purposes. The Company and its chief decision makers evaluate performance and allocate resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization and interest expense, but include revenues and all other costs directly attributable to the specific segment. Intersegment revenues represent Specialty Pharmaceutical Services segment revenues generated from services provided to the Home Health Services segment. Identifiable assets of the segments reflect net accounts receivable and inventories associated with segment activities. All other assets are assigned to the Company for the benefit of all segments. During fiscal 2001, the Company changed its evaluation performance methodology, as described below, which resulted in a change in reportable segments. In the fiscal 2000 periods, clinical support services for the pharmaceutical and biotechnology firms and staffing services provided under a state contract were included in the Staffing Services segment. The Company now considers these services to be part of the Specialty Pharmaceutical Services segment and Home Health Services segment, respectively. In addition, services relating to care management and coordination for managed care organizations and self-insured employees were allocated between Specialty Pharmaceutical Services and Home Care Nursing Services segments in the fiscal 2000 periods based on the nature of services rendered; the Company now considers these services to be part of the Home Health Services segment. Furthermore, Canadian operating results were included in the Home Care Nursing Services segment in the prior year periods and are now reflected in the Staffing and Canada results for presentation purposes. Prior period segment data has been reclassified to conform with the current year presentation. -12- Information about the Company's operations is as follows (in thousands):
Specialty Home Staffing Total Pharmaceutical Health and Services Services Canada ----------------- ------------ ----------- ----------- Three months ended July 1, 2001 - ------------------------------- Net revenues - segments $178,328 $179,705 $ - $358,033 ================= ============ =========== Intersegment revenues (22,589) ----------- Net revenues $ 335,444 =========== Operating contribution $ 17,072 $ 12,774 $ - $ 29,846 ================= ============ =========== Corporate expenses (17,529) Special charges - corporate (3,011) ----------- Earnings before interest expense, taxes, depreciation and amortization 9,306 Depreciation and amortization (6,635) Interest expense, net (152) ----------- Income before income taxes $ 2,519 =========== Three months ended July 2, 2000 - ------------------------------- Net revenues - segments $ 171,899 $ 187,167 $ 42,089 $ 401,155 =============== ============= =========== Intersegment revenues (17,885) ----------- Net revenues $ 383,270 =========== Operating contribution $20,848 $ 11,114 $ 3,153 $ 35,115 =============== ============= =========== Corporate expenses (20,111) Special charges - corporate (1,191) ----------- Earnings before interest expense, taxes, depreciation and amortization 13,813 Depreciation and amortization (7,974) Interest expense, net (2,112) ----------- Income before income taxes $ 3,727 ===========
-13-
Specialty Home Staffing Pharmaceutical Health and Services Services Canada Total ------------------ -------------- ------------------------------- Six months ended July 1, 2001 - ----------------------------- Net revenues - segments $374,215 $365,322 $ - $ 739,537 ================== ============== ================= Intersegment revenues (46,915) -------------- Net revenues $ 692,622 ============== Operating contribution $ 33,919 $ 27,554 $ - $ 61,473 ================== ============== ================= Corporate expenses (35,121) Special charges - corporate (3,011) -------------- Earnings before interest expense, taxes, depreciation and amortization 23,341 Depreciation and amortization (13,625) Interest expense, net (585) -------------- Income before income taxes $ 9,131 ============== Segment assets $275,899 $157,810 $ - $ 433,709 ================== ============== ================= Corporate assets 398,053 --------------- Total assets $ 831,762 =============== Six months ended July 2, 2000 - ----------------------------- Net revenues - segments $340,894 $376,711 $ 83,768 $ 801,373 ================== ============== ================= Intersegment revenues (33,496) -------------- Net revenues $ 767,877 ============== Operating contribution $ 43,421 $ 22,147 $ 5,652 $ 71,220 ================== ============== ================= Corporate expenses (41,159) Special charges - corporate (6,791) -------------- Earnings before interest expense, taxes, depreciation and amortization 23,270 Depreciation and amortization (16,461) Interest expense, net (6,348) -------------- Income before income taxes $ 461 =============== Segment assets $460,075 $192,629 $ 26,160 $ 678,864 ================== ============== ================= Corporate assets 335,273 --------------- Total assets $ 1,014,137 ===============
-14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The comparability of the Company's results of operations between the second quarter and the first six months of fiscal 2001 and 2000 was impacted by several items which are briefly described below. o On March 15, 2000, the Company was Split-off from Olsten Corporation ("Olsten") through the issuance of all of the Company's common stock to Olsten's shareholders and the Company became an independent, publicly-owned company. Prior thereto, the Company operated Olsten's health services business as a wholly-owned subsidiary of Olsten. The accompanying consolidated financial statements for periods prior to and including March 15, 2000 reflect the financial position, results of operations and cash flows of the Company as if it were a separate entity for all periods presented. Such consolidated financial statements have been prepared using historical basis of assets and liabilities and historical results of operations related to the Company. o During the second quarter of fiscal 2001, the Company recorded special charges of approximately $3.0 million in connection with the settlement of the Gile v. Olsten Corporation, et al, and the State of Indiana v. Quantum Health Resources, Inc. and Olsten Health Services, Inc. lawsuits and for various other legal costs. These legal matters are further discussed in Note 8. These special charges were reflected in selling, general and administration expenses in the accompanying consolidated statement of income. During the six months ended July 2, 2000, the Company recorded special charges aggregating $6.8 million which were reflected in selling, general and administration expenses in the accompanying statement of income. Of this amount, charges of $4.1 million were incurred to reflect obligations resulting from the Company's Split-off from Olsten and transition costs associated with the establishment of the Company as an independent, publicly-owned entity. These special charges included change of control and compensation and benefit payments of $3.6 million made to certain former employees of the Company and Olsten and a current executive officer of the Company, and transition costs of $0.5 million relating to registration costs, professional fees and other items. In addition, special charges of $1.2 million in the second quarter of fiscal 2000 and $2.7 million in the first six months of fiscal 2000 were incurred in connection with the change of the Company's name to Gentiva Health Services, Inc. These special -15- charges primarily consisted of costs incurred and paid for consulting fees, promotional items and advertising. o Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System (the "IPS") established through the Balanced Budget Act of 1997. These costs are reported in annual cost reports which are filed with the Medicare fiscal intermediary and are subject to audit. Effective October 1, 2000, the IPS was replaced by a Prospective Payment System ("PPS") for Medicare home care reimbursement. Under PPS, the Company is eligible to receive a fixed reimbursement which covers a specified treatment period for each patient. The reimbursement rate is established based on a clinical assessment of the severity of the patient's condition, service needs and certain other factors. The rate is subject to adjustment if there are significant changes in the patient's condition during the specified treatment period. Net revenues attributable to the Medicare program as a percentage of total consolidated net revenues were 17 percent in the second quarter and first six months of both fiscal 2001 and 2000. o During the fourth quarter of fiscal 2000, the Company sold its health care staffing services business and its Canadian operations. In the first quarter and first six months of fiscal 2000, the Company recorded revenues of $42 million and $84 million, respectively, gross profit of $11 million and $22 million, respectively, and selling, general and administrative expenses of $8 million and $16 million, respectively, relating to the businesses that were sold. The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Results of Operations Revenues After adjusting for the Staffing and Canadian operations which were sold during the fourth quarter of fiscal 2000, net revenues decreased by $6 million or 1.7% to $335 million during the second quarter of fiscal 2001 as compared to the second quarter of fiscal 2000 primarily due to a $7 million or 4 percent decline in Home Health Services revenues. This decrease was partially offset by a $6 million or 3.7 percent increase in the Specialty Pharmaceutical Services segment which included an increase of $5 million in intersegment revenues generated from services provided to the Home Health Services segment that is eliminated in consolidation. Overall, net revenues in the second quarter of fiscal 2001 decreased by $48 million or 12.5 percent as compared to the second quarter of fiscal 2000, of which $42 million in revenues related to the aforementioned sold operations. -16- After adjusting for the sales of the Staffing and Canadian operations as noted above, net revenues increased by $9 million or 1.2 percent to $693 million during the first six months of fiscal 2001 as compared to the corresponding period of fiscal 2000. This increase was driven by growth in the Specialty Pharmaceutical Services segment of $33 million or 9.8 percent, of which $13 million related to intersegment revenues, offset by a decline of $11 million in Home Health Services revenue. Overall, net revenues decreased by $75 million or 9.8 percent during the first six months of fiscal 2001 as compared to the corresponding period of the prior year which included $84 million in revenue related to the sold operations. In the Specialty Pharmaceutical Services business, revenue growth was attributable to volume increases in several core chronic therapies, including Flolan, IVIG, growth hormone products and biological response modifiers. This revenue growth, however, was negatively impacted by some product shortages of recombinant coagulation therapy, which is used in the treatment of hemophilia. The decline in Home Health Services revenue during the second quarter and first six months of fiscal 2001 was attributable primarily to the continuing transition to new clinical protocols as part of the new Medicare reimbursement system and the impact of the closing of certain home care nursing branches during the fourth fiscal quarter at 2000 as well as the continued shortage of nursing and caregiver personnel in certain parts of the country. Gross Profit Gross profit margins, as a percentage of net revenues, increased from 33.6 percent in the second quarter of fiscal 2000 to 33.9 percent in the second quarter of fiscal 2001. The increase in margins was primarily attributable to productivity enhancements resulting from a change in clinical protocols and rate increases in Home Health Services as well as the absence of lower margin Staffing and Canadian operations which were sold in late 2000 offset by a change in business mix reflecting growth in the lower margin Specialty Pharmaceutical Services products and higher costs attributable to certain biological and pharmaceutical products due to product shortages. Gross profit margins decreased from 33.5 percent in the first six months of fiscal 2000 to 33.2 percent in the first six months of fiscal 2001. This decrease in margins was primarily attributable to growth in lower margin Specialty Pharmaceutical Services products and higher costs associated with certain biological and pharmaceutical products due to product shortages. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $111 million during the second quarter of fiscal 2001 as compared to $123 million during the second quarter of fiscal 2000 due to (i) the reduction of $8 million in costs associated with the sale of the Staffing and Canadian operations, (ii) efficiency improvement efforts in Home Health Services and corporate administrative support departments, and (iii) the closing of certain home care nursing branches during the fourth quarter of fiscal 2000. These decreases were offset by special charges of $3 million in connection with certain legal matters recorded during the second -17- quarter of fiscal 2001, compared to $1.2 million in special charges associated with the Company's name change recorded during the second quarter of fiscal 2000. For the first six months of fiscal 2001, selling, general and administrative expenses were $220 million as compared to $250 million for the first six months of fiscal 2000. This decrease resulted from the reduction of $16 million in costs associated with the sale of the Staffing and Canadian operations, the impact of efficiency improvement efforts and the closing of home care nursing branches as well as a change in special charges from $6.8 million in the fiscal 2000 period to $3 million in the fiscal 2001 period. Excluding the effects of the Canadian and Staffing Services businesses that were sold and the special charges recorded in the periods as described above, selling, general and administrative expenses as a percentage of net revenues were 32.2 percent and 33.3 percent during the first six months of fiscal 2001 and 2000, respectively, and 31.4 percent and 33.2 percent during the second quarter of fiscal 2001 and 2000, respectively. Interest Expense, Net Interest expense, net was approximately $0.6 million and $6.3 million in the first six months of fiscal 2001 and 2000, respectively, and $0.2 million and $2.1 million in the second quarters of fiscal 2001 and 2000, respectively. Interest expense, net for the second quarter and first six months of fiscal 2001 represented primarily interest on the mandatorily redeemable securities and fees relating to the revolving credit facility offset by interest income of approximately $0.9 million and $1.4 million, respectively. During the second quarter and six month periods of fiscal 2000, interest expense, net also included interest on the outstanding 4 3/4 percent convertible subordinated debentures which matured and were retired in October 2000, net intercompany borrowings with Olsten up to the Split-off date and interest on borrowings under the credit facility subsequent to the Split-off date. Income Taxes Income tax expense for the fiscal 2001 period consisted primarily of taxes relating to certain state jurisdictions. The Company had estimated net operating loss carryforwards (NOLs) of approximately $76 million as of December 31, 2000. Because of the uncertainty of ultimate realization of the net deferred tax asset, the Company has established a valuation allowance for the deferred tax asset that is not otherwise used to offset deferred tax liabilities. The Company expects its effective tax rate to be below 10 percent until such time as the NOLs are utilized. For the fiscal 2000 periods, the effective tax rates approximated 42 percent which differed from the statutory rate due to nondeductible goodwill amortization and other nondeductible items. -18- Liquidity and Capital Resources Working capital at July 1, 2001, was $378 million, an increase of $29 million as compared to $349 million at December 31, 2000. Net receivables decreased by $34 million in the first six months of fiscal 2001 as a result of improved cash collections driven by enhancements in the billing system for Specialty Pharmaceutical Services as well as increases in billings through electronic data interchange. After adjusting for the sale of the Company's staffing services business and Canadian operations, adjusted Days Sales Outstanding ("DSO") was 111 days at December 31, 2000. DSO was reduced by 7 days to 104 days at July 1, 2001 as a result of improved cash collections. Cash and cash equivalents increased by approximately $77 million as of July 1, 2001 as compared to December 31, 2000 as a result of (i) cash flow from operations, net of decrease in book overdrafts which were included in accounts payable at December 31, 2000, of approximately $48 million, (ii) Medicare advances, net of payments for estimated settlements, of approximately $21 million, and (iii) proceeds from the exercise of stock options of approximately $10 million, offset somewhat by capital expenditures of approximately $2 million. In early 2001, the Center for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration, issued cash advances to certain Medicare providers in connection with the transition from the IPS to the PPS for Medicare reimbursement. Such advances are expected to be repaid during the first quarter of fiscal 2002. In the first quarter of fiscal 2001, the Company received a cash advance, net of payments for estimated settlements relating to cost report filings, of approximately $21 million which was reflected in accrued expenses in the accompanying consolidated balance sheet as of July 1, 2001. The Company maintains a credit facility, which provides for up to $150 million in borrowings, including amounts which are available for letters of credit. The Company may borrow up to a maximum of 80 percent of eligible accounts receivable, as defined. At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25 percent. As of July 1, 2001, there were no borrowings outstanding under the credit facility and total outstanding letters of credit approximated $25.7 million. The Company is subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between $150 million and the total outstanding borrowings and letters of credit. In addition, the Company must pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding standby letters of credit. The amended credit facility, which expires in 2004, includes certain covenants requiring the Company to maintain a minimum tangible net worth and minimum earnings before interest, taxes, depreciation and amortization. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, capital expenditures and dispositions of assets and other limitations with respect to the Company's operations. The Company's obligations under the credit facility are collateralized by all of the Company's tangible and intangible personal property, and other equipment. As of July 1, 2001, the Company was in compliance with its financial covenants and had borrowing capacity under the credit facility of approximately $124 million. -19- In June 2001, the Company's credit facility was amended to increase the portion of the facility available for letters of credit from $30 million to either (i) $40 million or (ii) $70 million in the event that the Company elects to post a letter of credit in lieu of an appellate bond for all or a part of the total amount of the judgment plus interest in the Fredrickson v. Olsten Health Services Corp. and Olsten Corporation case while the Company pursues its appeal of the judgment as further discussed in Note 8. As of July 1, 2001, a supersedeas bond in the amount of $35 million was posted to satisfy the judgment plus interest. Under the terms of the bond, cash equal to the amount of the bond is held in a segregated account as collateral for the bond and the interest relating thereto accrues to the Company. The cash in the segregated account is reflected in cash and cash equivalents in the accompanying consolidated balance sheet. At its discretion, the Company may substitute a letter of credit for the segregated cash to collateralize the bond. Management believes cash flows from operations, borrowings available under the credit facility and other financing options, including issuance of debt or equity securities under an effective shelf registration statement will be adequate to support the ongoing operations and to meet debt service requirements for the foreseeable future. The Company intends to make investments and other expenditures to, among other things, upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry. If cash flows from operations or availability under the credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to the market risk for changes in the interest rates related to the fair value of its fixed rate Quantum debentures until their repayment in October 2000. Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company had no interest rate exposure on fixed rate debt at July 1, 2001. OTHER: INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS INVOLVE RISKS OF COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS AND REGULATIONS AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER FACTORS DISCUSSED IN THIS DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. -20- PART II - OTHER INFORMATION Item 1. Legal Proceedings In addition to the matters referenced below, the Company is party to certain legal actions arising in the ordinary course of business including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. In late 2000, after engaging in a mediation conducted by a third-party mediator, the parties to the previously disclosed Class Action (In re Olsten Corporation Securities Litigation, No. 97-CV-5056 (DRH), U.S. District Court for the Eastern District of New York) and Derivative Lawsuit (Rubin v. May, No. 17135-NC, Delaware Chancery Court) reached an agreement to settle both lawsuits for the aggregate sum of $25 million, which was subject to approval by the respective courts. The Company's insurers funded $18 million of the proposed settlement sum. The Company funded the $7 million balance and recorded a special charge for that amount during fiscal 2000. By order dated April 30, 2001, the District Court preliminarily approved the settlement of the Class Action and scheduled a settlement fairness hearing date for August 31, 2001. On August 7, 2001, the Delaware Chancery Court approved the settlement of the Derivative Lawsuit. In July 1999, the Indiana Attorney General's Office filed a lawsuit against Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011, alleging that Olsten was overpaid by Medicaid, failed to properly disclose information to Medicaid and engaged in improper billing. The alleged violations predate Olsten's acquisition of Quantum Health Resources in June 1996. The lawsuit sought unspecified monetary damages, double or treble damages, penalties and investigative costs. The parties have resolved this matter during the second quarter of fiscal 2001 pursuant to a confidential Settlement agreement and full release. There is no ongoing obligation on the part of the Company arising from this settlement. On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's subsidiaries, initiated three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had management services agreements to provide services to the hospitals' home health agencies. The basis for each of the arbitrations is that Columbia/HCA sold the home health agencies without assigning the management services agreements and, as a result, Columbia/HCA has breached the management services agreements. In response to the arbitrations, Columbia/HCA has asserted that the arbitrations be consolidated and stayed, in part based upon its alleged claims against Kimberly for breach of contract, and requested indemnity and possibly return of management fees. Columbia/HCA has not yet formally presented these claims in the arbitrations or other legal proceedings and has not yet quantified the claims. Still pending before the arbitrators is Columbia/HCA's request to consolidate the proceedings, which Kimberly has opposed. -21- On June 23, 2000, the Company was served with a Complaint in a purported class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S. District Court for the Middle District of Tennessee, captioned Ultimate Home Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560, (the "Tennessee Lawsuit"). The Company was served with an Amended Complaint in the Tennessee Lawsuit on July 21, 2000, which names as defendants Columbia/HCA, Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract Management Services (one of the Company's subsidiaries) and Olsten Corporation. The Amended Complaint alleges, among other things, that the defendants' business practices in connection with home health care patient referrals between 1994 and 1996 violated provisions of Federal antitrust laws, the Racketeer Influenced and Corrupt Organizations Act (RICO), the Tennessee Consumer Protection Act (TCPA), and state common law. The Amended Complaint seeks unspecified compensatory damages, punitive damages, treble damages and attorneys' fees on behalf of a proposed class of home healthcare companies and/or agencies which conducted business in Tennessee, Texas, Florida and/or Georgia. In September 2000, the defendants filed a motion to dismiss the Amended Complaint, and by an order dated January 21, 2001, the Court dismissed plaintiffs' RICO and state common law tort claims. The Court also held that the plaintiffs had properly pleaded the antitrust, TCPA and civil conspiracy claims and allowed those claims to proceed to discovery. Plaintiff's motion for class certification is due to be filed with the court by August 24, 2001. Because the Tennessee Lawsuit is in a relatively preliminary discovery stage, the Company is unable at this time to assess the probable outcome of or potential liability arising from such lawsuit. On November 22, 2000, the jury in an age-discrimination lawsuit commenced in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio (the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff against Olsten consisting of $675,000 in compensatory damages, $30 million in punitive damages and an undetermined amount of attorneys' fees. The jury found that, although Olsten had lawfully terminated the plaintiff's employment, its failure to transfer or rehire the plaintiff rendered Olsten liable to the plaintiff. The defendants posted a court ordered bond in the amount of $675,000 and filed several post-trial motions, including a motion seeking the entry of judgment in the defendants' favor notwithstanding the verdict or, in the alternative, a new trial or a remittitur of the punitive damages award. The plaintiff filed post-trial motions in connection with the entry of the judgment and the amount of the bond posted by defendants. Following a hearing on the parties' respective post-trial motions on March 23, 2001, the trial court, on May 17, 2001, denied all post-trial motions, and entered judgment for the plaintiff for the full amount of compensatory and punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants timely filed a Notice of Appeal with the Court of Appeals, Seventh Appellate District, Mahoning County, Ohio, and on June 19, 2001, the Company posted a supersedeas bond for the full amount of the judgment, plus interest. The Company continues to defend this matter vigorously. In Gile v. Olsten Corporation, et al, U.S. District Court for the Central District of California, No. 97-9363-NM, plaintiff filed an age discrimination suit against Olsten Corporation, -22- Olsten Health Services, and a certain individual in December 1997. The defendants denied the allegations of discrimination on the basis that plaintiff's termination was part of a reduction in force. The individual defendant was dismissed from the action, and the remaining corporate defendants filed a motion for summary judgment that was granted by the District Court in February 1999. The plaintiff appealed the District Court's order to the Ninth Circuit Court of Appeals and in December 2000, the Court of Appeals issued its ruling which reversed the District Court and remanded the case for trial. On or about June 19, 2001, the Company and the plaintiff agreed to settle this matter and entered into a confidential settlement agreement with full release. In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, the liabilities, if any, arising out of (and to indemnify Olsten for) the above lawsuits and arbitration proceedings and other liabilities arising out of the health services business, including any such liabilities arising after the Split-Off in connection with the government investigations described below in Item 5. Other Information. Item 2. Change in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of stockholders was held on May 18, 2001. The shareholders of the Company ratified the Board of Directors' appointment of PricewaterhouseCoopers LLP as independent accountants for the Company for the 2001 fiscal year as follows: For Against Abstentions Broker Non-Votes --- ------- ----------- ---------------- 21,033,545 12,464 7,864 0 The following directors were nominated and elected to serve as Directors of the Company for a term of three years or until their successors shall have been duly elected and qualified: Nominee For Withheld - ------- --- -------- Victor F. Ganzi 20,052,340 1,001,533 Josh S. Weston 21,034,503 19,370 Gail Wilensky 20,046,235 1,007,638 The term of office as a Director of the Company for Edward A. Blechschmidt, Steven E. Grabowski and Raymond S. Troubh continued after the meeting and expires in 2002 or until their successors shall have been duly elected and qualified. The term of office as a Director of the Company for Stuart R. Levine and Stuart Olsten continued after the meeting and expires in 2003 or until their successors shall have been duly elected and qualified. Item 5. Other Information In early December 1999, Olsten received a document subpoena from the Department of Health and Human Services, Office of Inspector General, and Office of Investigations. After preliminary discussions with the Office of Inspector General, the Company believes the subpoena relates to an investigation of possible overpayments to it by the Medicare program. In early February 2000, the Company received a document subpoena from the Department of Health and Human Services, Office of Inspector General, and Office of Investigations. The Company believes the subpoena relates to its agencies' cost reporting procedures concerning contracted nursing and home health aide costs. The Company has provided and continues to provide the Office of Inspector General with the requested documents and continues to cooperate fully with its investigations. At this time, the Company is unable to assess the probable outcome or potential liability, if any, arising from these subpoenas. The Company believes that it is possible that one or both of these investigations may have been triggered by lawsuits under federal or state whistle blower statutes against Olsten or the Company. In connection with the July 19, 1999 settlement with various government agencies, Olsten executed a separate corporate integrity agreement with the Office of Inspector General -23- of the Department of Health and Human Services which will remain in effect until August 18, 2004. The July 1999 corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its home care nursing business (but excluding the specialty pharmaceutical services business). This corporate integrity agreement focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under each of the corporate integrity agreements, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as provide certain training to employees. The Company's compliance program will be implemented for all newly established or acquired business units if their type of business is covered by the corporate integrity agreements. Reports under each integrity agreement are to be filed annually with the Department of Health and Human Services, Office of Inspector General. After each corporate integrity agreement expires, the Company is to file a final annual report with the government. The Company is in compliance with both corporate integrity agreements and has timely filed all required reports. If the Company fails to comply with the terms of either of its corporate integrity agreements, the Company will be subject to penalties. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Number Description 3.1 Restated Certificate of Incorporation of Company. (1) 3.2 Restated By-Laws of Company. (1) 4.1 Specimen of common stock. (3) 4.2 Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (1) 4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (2) 4.4 Trust Agreement among the Company, Wilmington Trust Company, the Administrative Trustees named therein and the holders from time to time of the convertible trust preferred securities dated March 9, 2000. (4) 4.5 Indenture between the Company and Wilmington Trust Company dated March 15, 2000. (4) -24- 10.1 Separation Agreement dated August 17, 1999, among Olsten Corporation, Aaronco Corp. and Adecco SA. (1)* 10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and among Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health Services Holding Corp. (1) 10.3 Form of Rights Agreement dated March 2, 2000 between the Registrant and Equiserve Limited Partnership, as rights agent. (1) 10.4 Company's Executive Officers Bonus Plan. (1)* 10.5 Company's 1999 Stock Incentive Plan. (4)* 10.6 Company's Stock & Deferred Compensation Plan for Non-Employee Directors. (4)* 10.7 Company's Employee Stock Purchase Plan. (1)* 10.8 Omnibus Amendment No. 2 dated January 18, 2000, by and among Olsten Corporation, Adecco SA, Olsten Health Services Holding Corp., the Company and Staffing Acquisition Corporation. (1) 10.9 Loan and Security Agreement by and between Fleet Capital Corp., on behalf of the lenders named therein, the Company, Olsten Health Services Holding Corp. and the subsidiaries named therein, dated March 13, 2000. (4) 10.10 Form of Employment Agreement with Edward A. Blechschmidt. (2)* 10.11 Form of Change of Control Agreement with Executive Officers of Company. (4)* 10.12 Form of Change in Control Agreement with Edward A. Blechschmidt. (4)* 10.13 Form of Severance Agreement with Executive Officers of Company. (2)* 10.14 Amendment No. 1 dated June 30, 2000 to Trust Agreement among the Company, Wilmington Trust Company, the Administrative Trustees named therein and the holders from time -25- to time of the convertible trust preferred securities. (5) 10.15 Amendment No. 1 dated June 30, 2000 to Indenture between the Company and Wilmington Trust Company. (5) 10.16 First Amendment and Consent Agreement dated September 15, 2000 to the Loan Agreement by and among the lending institutions named therein, Fleet Capital Corporation, the Company, Olsten Health Services Holding Corp. and the subsidiaries named therein. (6) 10.17 Purchase and Sale Agreement dated August 25, 2000 by and between the Company and Intelistaf Group, Inc. (formerly known as GS Acquisition Co.) (6) 10.18 Second Amendment and Consent Agreement dated as of November 20, 2000 to the Loan Agreement by and among the lending institutions named therein, Fleet Capital Corporation, the Company, Olsten Health Services Holding Corp. and the subsidiaries named therein (7) 10.19 Third Amendment to Loan and Security Agreement dated as of June 1, 2001 by and among the lending institutions named therein, Fleet Capital Corporation, the Company, Olsten Health Services Holding Corp. and the subsidiaries named therein.** 21.1 List of Subsidiaries of Company. (2) ---------------------------------------------------------------------- (1) Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form S-4, dated January 20, 2000 (File No. 333-88663). (2) Incorporated herein by reference to Amendment No. 3 to the Registration Statement on Form S-4, dated February 4, 2000 (File No. 333-88663). (3) Incorporated herein by reference to Amendment No. 4 to the Registration Statement on Form S-4, dated February 9, 2000 (File No. 333-88663). (4) Incorporated herein by reference to Form 10-K for the Registrant for the fiscal year ended January 2, 2000. (5) Incorporated herein by reference to Form 10-Q for the Regis- -26- trant for the period ended July 2, 2000. (6) Incorporated herein by reference to Form 10-Q for the Registrant for the period ended October 1, 2000. (7) Incorporated herein by reference to Form 10-K for the Registrant for the fiscal year ended December 31, 2000. * Management contract or compensatory plan or arrangement. ** Filed herewith (b) Reports on Form 8-K No reports on Form 8-K have been filed during the period covered by this report. -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 15, 2001 /S/ Edward A. Blechschmidt ------------------------------------ Edward A. Blechschmidt President and Chief Executive Officer Date: August 15, 2001 /S/ John J. Collura ------------------------------------ John J. Collura Executive Vice President, Chief Financial Officer and Treasurer -28- EX-10.19 3 gentiva1019ex.txt THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT This Third Amendment to Loan and Security Agreement ("Amendment") is made as of the 1st day of June, 2001 by and among the lending institutions listed in Annex I to the Loan Agreement (as defined below) (each a "Lender" and, collectively, the "Lenders"), FLEET CAPITAL CORPORATION, a Rhode Island corporation with an office at 200 Glastonbury Boulevard, Glastonbury, CT 06033, as administrative agent for Lenders ("Agent"), and GENTIVA HEALTH SERVICES, INC., a Delaware corporation with its chief executive office at 3 Huntington Quadrangle 25, Melville, NY 11747 ("Company"), OLSTEN HEALTH SERVICES HOLDING CORP., a Delaware corporation with its chief executive office at 3 Huntington Quadrangle 25, Melville, NY 11747 ("OHS") and each of the SUBSIDIARY BORROWING CORPORATIONS listed on the signature pages hereto (each of Company, OHS and each Subsidiary Borrowing Corporation is a "Borrower" and, collectively, "Borrowers"). BACKGROUND A. Borrower, Agent and Lenders are parties to a certain Loan and Security Agreement dated March 13, 2000 (as it has been, may herein or hereafter be modified, amended, restated or replaced from time to time, the "Loan Agreement") pursuant to which Borrowers established certain financing arrangements with Lenders. The Loan Agreement and all instruments, documents and agreements executed in connection therewith or related thereto are referred to herein collectively as the "Loan Documents." All capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. B. Borrowers have requested and Agent and Lenders have agreed to certain modifications and amendments to the Loan Agreement subject to the terms and conditions of this Amendment. NOW, THEREFORE, with the foregoing background incorporated by reference and made a part hereof, and intending to be legally bound, the parties agree as follows: 1. Amendment to Loan Agreement. (a) Letters of Credit. Section 1.3 of the Loan Agreement is hereby amended and restated in its entirety as follows: 1.3 Letters of Credit; LC Guaranties. Each Lender agrees, severally, that a letter of credit subfacility shall be made available to Borrower as part of the Total Revolving Credit Facility as set forth in this -2- section. In order to implement this letter of credit subline, Agent agrees, for so long as no Default or Event of Default exists, and if requested by Borrower, to: (i) issue its, or cause to be issued by its Affiliate, standby Letters of Credit for the account of Borrower or (ii) execute LC Guaranties by which Agent or its Affiliate shall guaranty the payment or performance by Borrower of its reimbursement obligations with respect to standby Letters of Credit and standby letters of credit issued for Borrower's account by other Persons in support of Borrower's obligations (other than obligations for the repayment of Money Borrowed), provided that the LC Amount at any time shall not exceed the lesser of (i) Seventy Million Dollars ($70,000,000.00) and (ii) the Borrowing Base minus the sum of outstanding Revolving Credit Loans and reserves permitted by subsection 1.1.1 hereof, if any. No Letter of Credit of LC Guaranty may have an expiration date that is after the last day of the Original Term except to the extent that Borrower provides Agent, for the ratable benefit of the Lenders, at the time of and as a condition to the issuance thereof with cash or cash equivalent collateral acceptable to Agent in the face amount thereof. Any amounts paid by Agent or Issuer under any LC Guaranty or in connection with any Letter of Credit shall be treated as Revolving Credit Loans, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. Each Lender shall be directly and unconditionally obligated to Agent, according to its Pro Rata Percentage, to reimburse Agent, without setoff or deduction of any kind of nature, for honoring any drawing under any Letter of Credit or making any payment under any LC Guaranty (without regard to the occurrence of a Default or an Event of Default including, without limitation, following the commencement of any bankruptcy, reorganization, insolvency, liquidation or dissolution proceeding). The amount of Agent's payment (and the respective reimbursements of the Lenders to Agent, as applicable) shall automatically constitute a Revolving Credit Loan without regard to any borrowing condition herein and without any request, consent or other action of Borrower. (b) Performance Bonds. In the event that Borrower elects to obtain a judgment bond instead of having Issuer issue a Letter of Credit in connection with the judgment entered by the Court of Common Pleas for Mahoning County, Ohio, Section 1.3 of the Loan Agreement shall be amended as stated above except that Forty Million Dollars ($40,000,000.00) shall replace Seventy Million Dollars ($70,000,000.00) and Section 8.2.3(i) shall be amended and restated in its entirety as follows: -3- (i) bid bonds, performance bonds, surety bonds, letters of credit or similar obligations made in the ordinary course of business (including bonds to secure payment of judgments) which do not, in the aggregate, exceed Forty Million Dollars ($40,000,000.00) at any one time; and and Section 8.2.5(g) shall be amended and restated in its entirety as follows: (g) pledges or deposits to secure the performance of bids, trade contracts (other than for Borrowed Money), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (including bonds to secure payment of judgments), provided that such obligations do not, in the aggregate, exceed Forty Million Dollars ($40,000,000.00) at any one time; 2. Representations and Warranties. Each Borrower represents and warrants as follows: (a) The execution and delivery by such Borrower of this Amendment and performance by such Borrower of the transactions herein contemplated (i) are and will be within such Borrower's corporate powers, (ii) have been authorized by all necessary corporate action, and (iii) are not and will not be in contravention of any order of any court or other agency or government, of law or any other indenture, agreement or undertaking to which such Borrower is a party or by which the property of any Borrower is bound, or in conflict with, or result in a breach of or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or undertaking or result in the imposition of any lien, charge or incumbrance of any nature on such Property of any Borrower. (b) This Amendment and any other agreements, instruments and documents executed and/or delivered in connection herewith shall be valid, binding and enforceable against such Borrower in accordance with their respective terms. (c) After giving effect to this Amendment, (i) the representations and warranties contained herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to Agent or Lenders on or prior to the date hereof shall be correct and accurate on and as of the date hereof as though made on and as of such date (subject to the provisions of Section 7.2 of the Loan Agreement); and (ii) no Default or Event of Default has occurred and is continuing on the date hereof or would result from this Amendment becoming effective in accordance with its terms. -4- (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment or the performance by such Borrower of the Loan Agreement, as amended hereby. 3. Effectiveness Conditions. This Amendment shall be effective upon completion of the following conditions precedent (all documents to be in form and substance reasonably satisfactory to Agent and Lenders and their counsel in their sole discretion): (a) Execution and delivery to Agent of this Amendment by all required parties; (b) no Default or Event of Default shall have occurred and remain outstanding under the Existing Loan Documents; and (c) Payment of all costs and expenses of Agent as provided for in Section 8 below. 4. Continued Effectiveness of the Loan and Security Agreement and Loan Documents. Each Borrower hereby (a) confirms and agrees that each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date hereof (i) all references in the Loan Agreement to "this Loan and Security Agreement," this "Agreement," "hereof," "hereto," "hereunder" or words of like import referring to the Loan Agreement, and (ii) all references in any other Loan Document to "the Loan and Security Agreement," the "Loan Agreement," "thereto," "thereof," "thereunder," or words of like import referring to the Loan and Security Agreement shall mean the Loan and Security Agreement as amended by this Amendment; and (b) confirms and agrees that to the extent that any such Loan Document purports to assign or pledge to Agent or to grant a security interest in or lien on, any collateral as security for the obligations of Borrowers from time to time existing in respect of the Loan Agreement and the Loan Documents is hereby ratified and confirmed in all respects. Nothing herein contained is intended to in any manner affect, impair or limit the validity, priority and extent of Agent's existing security interest in and Liens upon the Collateral. 5. No Waiver. Each Borrower hereby acknowledges and agrees that Lenders have not waived any Default or Event of Default now existing or hereafter arising. Accordingly, this Amendment is without prejudice to Agent and Lenders and Agent and Lenders reserve all of their rights under the Loan Agreement, the Loan Documents, at law and otherwise regarding any Default or Event of Default that may exist or hereafter arise. Without limiting the generality of the foregoing, Lenders' making any future extension of credit to Borrowers shall not be deemed a waiver by Lenders of any of their rights and remedies under the Loan Agreement and the Existing Loan Documents and Lenders expressly reserve their rights to -5- require, as a condition to any such future extension of credit, that Borrowers fully comply with all terms and conditions of the Loan Agreement and the other Loan Documents as amended hereby. 6. Amendment as Loan Document. Each Borrower hereby acknowledges and agrees that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if (i) any representation or warranty made by Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made, or (ii) Borrowers shall fail to perform or observe any term, covenant or agreement contained in this Amendment. 7. Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the substantive laws of the State of New York. 8. Expenses. Borrowers will pay on demand all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, and each other agreement or document executed and delivered in connection herewith. 9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same respective agreement. Counterparts by facsimile shall bind the parties hereto. 10. Waiver of Trial by Jury. EACH BORROWER, THE AGENT AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE AGENT OR THE LENDERS IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. SIGNATURES ON FOLLOWING PAGES -6- IN WITNESS WHEREOF, this Amendment has been duly executed on the day and year first specified above. GENTIVA HEALTH SERVICES, INC. By:______________________________ Print name:________________________ Title:_____________________________ OLSTEN HEALTH SERVICES HOLDING CORP. By:______________________________ Print name:________________________ Title:_____________________________ {SIGNATURES CONTINUED ON FOLLOWING PAGE} -7- SUBSIDIARY BORROWING CORPORATIONS: New York Healthcare Services, Inc. OHS Service Corp. Olsten Certified HealthCare Corp. Olsten Health Services (Certified), Inc. Olsten Health Services (Infusion), Inc. Olsten Health Services (Quantum) Corp. Olsten Health Services (USA), Inc. Olsten Network Management, Inc. Olsten Network Management (Area One) Corp. Olsten Network Management (Area Two) Corp. Olsten Network Management (Area Three) Corp. Olsten Services of New York, Inc. QC-Medi New York, Inc. Quality Care-USA, Inc. Quality Managed Care, Inc. The I.V. Clinic, Inc. The I.V. Clinic III, Inc. By:______________________________ Print Name:_______________________ Title:_____________________________ {SIGNATURES CONTINUED ON FOLLOWING PAGE} -8- ACKNOWLEDGED, ACCEPTED AND AGREED: GUARANTORS: Care One Health Alternatives, Inc. (AL corporation) Care One Health Alternatives, Inc. (NC corporation) CCI-ASDS, Inc. Chronic Health Management of California Commonwealth Home Care, Inc. Health Care Services Olsten, Ltd. Kimberly Home HealthCare, Inc. Olsten Kimberly Quality Care, Inc. Partners First Management, Inc. Prospective Health Network, Inc. QHR Southwest Business Trust QHR Southwest Holdings Corp. Quantum Care Network, Inc. Quantum Disease Management, Inc. Quantum Health Resources, Inc. (DE corporation) Quantum Health Resources, Inc. (NY corporation) Quantum Health Resources SW LP Skilled Nursing Services, Inc. The I.V. Clinic II, Inc. By:______________________________________ Print Name:_______________________________ Title:____________________________________ {SIGNATURES CONTINUED ON FOLLOWING PAGE} -9- AGENT: FLEET CAPITAL CORPORATION By:___________________________ Print Name:____________________ Title:__________________________ LENDERS: FLEET CAPITAL CORPORATION By:___________________________ Print Name:____________________ Title:__________________________ GMAC COMMERCIAL CREDIT LLC By:___________________________ Print Name:____________________ Title:__________________________ U.S. BANK NATIONAL ASSOCIATION By:___________________________ Print Name:____________________ Title:__________________________ {SIGNATURES CONTINUED ON FOLLOWING PAGE} -10- debis FINANCIAL SERVICES, INC. By:______________________________ Print name:________________________ Title:_____________________________ DIME COMMERCIAL CORP. By:______________________________ Print name:________________________ Title:_____________________________ IBJ WHITEHALL BUSINESS CREDIT CORPORATION By:______________________________ Print name:________________________ Title:_____________________________ NATIONAL BANK OF CANADA By:______________________________ Print name:________________________ Title:_____________________________ SIEMENS CREDIT CORPORATION By:______________________________ Print name:________________________ Title:_____________________________ -----END PRIVACY-ENHANCED MESSAGE-----