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 April 2, 2000
Commission File No. 1-15669
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Gentiva Health Services, Inc.
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(Exact name of Registrant as specified in its charter)
DELAWARE 36-433-5801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Broad Hollow Road, Melville, New York 11747-8905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 844-7800
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ____ No _X_
The number of shares outstanding of the Registrant's Common Stock, as
of May 12, 2000, was 20,531,456.
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INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Balance Sheets -- April 2, 2000
(Unaudited) and January 2, 2000 2
Consolidated Statements of Operations (Unaudited) -
Quarters Ended April 2, 2000
and April 4, 1999 3
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended April 2, 2000 and April 4, 1999 4
Notes to Consolidated Financial Statements
(Unaudited) 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18-19
Item 2. Change in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19-22
Item 6. Exhibits and Reports on Form 8-K 22-24
SIGNATURES 25
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
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<TABLE>
<CAPTION>
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
April 2, 2000 January 2,
2000
----------------------- ---------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,386 $ 2,942
Receivables, net 604,504 575,460
Inventories 82,983 93,218
Prepaid expenses and other current assets 40,380 87,611
----------------------- ---------------------
Total current assets 732,253 759,231
Fixed Assets, Net 47,711 51,809
Intangible Assets, Net 247,474 250,297
Other Assets 4,225 1,678
----------------------- ---------------------
Total Assets $ 1,031,663 $ 1,063,015
======================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 78,562 $ 78,562
Accounts payable 75,808 114,197
Accrued expenses 81,576 76,746
Payroll and related taxes 20,997 20,020
Insurance costs 30,472 31,170
----------------------- ---------------------
Total current liabilities 287,415 320,695
Other Liabilities 37,129 37,029
Long-Term Debt 25,477 -
Gentiva - Obligated Mandatorily Redeemable 20,000 -
Convertible Securities of a Subsidiary Holding Solely
Gentiva Debentures
Shareholders' Equity:
Common stock, $.10 par value; authorized 100,000,000
shares;
issued and outstanding 20,345,029 shares 2,035 2,035
Additional paid-in capital 684,120 725,998
Accumulated deficit (22,276) (20,370)
Accumulated other comprehensive loss (2,237) (2,372)
----------------------- ---------------------
Total Shareholders' Equity 661,642 705,291
----------------------- ---------------------
Total Liabilities and Shareholders' Equity $ 1,031,663 $ 1,063,015
======================= =====================
</TABLE>
See notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share amounts)
(Unaudited)
First Quarter Ended
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April 2, 2000 April 4, 1999
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<S> <C> <C>
Net revenues $ 384,607 $ 368,160
Cost of services sold 256,105 242,486
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Gross profit 128,502 125,674
Selling, general and administrative expenses 127,532 137,552
Interest expense, net 4,236 4,273
------------------ ----------------
Loss before income taxes (3,266) (16,151)
Income tax benefit 1,360 3,345
------------------ ----------------
Net loss $ (1,906) $ (12,806)
================== ================
SHARE INFORMATION:
Basic and diluted loss per share:
Net loss $ (0.09) $ (0.63)
=================== ===============
Average shares outstanding 20,345,029 20,345,029
=================== ===============
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
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April 2, 2000 April 4, 1999
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OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,906) $ (12,806)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,487 8,733
Provision for doubtful accounts 7,545 5,787
Changes in assets and liabilities, net of effect from
acquisitions:
Accounts receivable (36,589) (65,009)
Inventories 10,235 (867)
Prepaid expenses and other current assets 1,631 (2,600)
Current liabilities (30,596) 7,576
Other, net (732) (744)
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Net cash used in operating activities (41,925) (59,930)
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INVESTING ACTIVITIES:
Purchase of fixed assets (2,186) (5,283)
Acquisitions of businesses, net of cash acquired - (1,655)
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Net cash used in investing activities (2,186) (6,938)
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FINANCING ACTIVITIES:
Net transactions with Olsten 5,226 72,873
Decrease in book overdrafts (2,684) -
Retirement of long-term debt - (6,804)
Proceeds from revolving credit facility 25,477 -
Issuance of mandatorily redeemable securities 20,100 -
Debt issuance costs (2,564) -
---------------- -----------
Net cash provided by financing activities 45,555 66,069
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Net increase (decrease) in cash and cash equivalents 1,444 (799)
Cash and cash equivalents at beginning of period 2,942 799
---------------- -----------
Cash and cash equivalents at end of period $ 4,386 $ -
================ ============
</TABLE>
See notes to consolidated financial statements.
4
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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 generally accepted accounting principles.
2. Background and Basis of Presentation
On March 15, 2000, the Company was 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 thereto, the Company operated Olsten's health
services business as a wholly owned subsidiary of Olsten. The accompanying
interim consolidated financial statements reflect the results of operations,
financial position and cash flows of the Company as if it were a separate entity
for all periods presented. The consolidated financial statements have been
prepared using the historical basis in the assets and liabilities and historical
results of operations related to the Company.
Additionally, the Company's selling, general and administrative expenses
included a management fee of approximately $1.0 million and $1.2 million for the
first quarters of fiscal 2000 and 1999, respectively. 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 are reasonable; however, the costs of these items
deemed to be charged to the Company are not necessarily indicative of the costs
that would have been incurred if the Company had been a stand-alone entity.
Subsequent to the split-off, the Company began to perform these functions using
its own resources or purchased services and the Company is responsible for the
costs and expenses associated with the management of a public corporation.
Management estimates that had the Company been a separate entity for each period
presented, selling, general and administrative expenses would have been
approximately $1.2 million greater than the amounts presented in these
historical financial statements.
Net interest expense of approximately $4.2 million and $4.3 million during
the first quarter of fiscal 2000 and 1999, respectively, as presented in the
consolidated statements of operations included net interest expense of
approximately $2.7 million for the first quarter of 2000 and $3.3 million for
the first quarter of 1999 relating to the intercompany balances with
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Olsten. Such intercompany balances have been reflected as a contribution to
capital at the end of each period presented herein.
Earnings per share data has been computed based upon 20,345,029 shares of
common stock. Such amount is based on the number of shares of the Company's
stock issued on March 15, 2000, the date of the split-off. Pursuant to the terms
of the split-off, shareholders of Olsten received .25 shares of Gentiva Health
Services common stock for each share of Olsten common stock or Class B common
stock that they owned.
At April 2, 2000, outstanding options to purchase 4.6 million shares of
common stock were not included in the computation of diluted net loss per share
because to do so would have had an antidilutive effect for the period.
Similarly, the computation of diluted net loss per share excludes the effect of
any shares issuable upon the conversion of $78.6 million of 4 3/4% convertible
subordinated debentures due October 1, 2000 and $20 million of 10% convertible
trust preferred securities since their inclusion would also have had an
antidilutive effect.
3. Non-recurring and Special Charges
During the quarter ended April 2, 2000, the Company recorded non-recurring
and special charges aggregating $5.6 million. Of this amount, non-recurring
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
non-recurring charges included change of control, 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, including approximately
$1.0 million which is based on Olsten's methodology for allocating general
corporate overhead expenses as discussed in Note 6, and transition costs of $0.5
million relating to registration costs, professional fees and other items.
Approximately $1.0 million was unpaid and was included in accrued expenses as of
April 2, 2000.
Special charges of $1.5 million were incurred during the quarter ended
April 2, 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.
In the quarter ended April 4, 1999, the Company recorded a special charge
aggregating $16.7 million. This charge was for the realignment of business units
as part of a new restructuring plan, including compensation and severance costs
of $5 million to be paid to operational support staff, branch administrative
personnel and management, asset write-offs of $6.5 million related primarily to
fixed assets being disposed of in offices being closed and facilities being
consolidated, as well as fixed assets and goodwill attributable to the Company's
exit from certain business previously acquired but not within the Company's
strategic objectives, and integration costs of $5.2 million, primarily related
to obligations under lease agreements for offices and other facilities being
closed. Substantially all of the closures and consolidations of facilities and
expected terminations had occurred by January 2, 2000. These activities resulted
in
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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. Approximately $2.0 million of this special charge remains
unpaid as of April 2, 2000, representing compensation and severance costs of
$1.0 million and integration costs of $1.0 million.
4. 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.
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 are
collateralized by all of the Company's tangible and intangible personal
property, other than equipment.
At April 2, 2000, borrowings under the credit facility aggregated $25.5
million and there were approximately $19 million of standby letters of credit
outstanding. As of such date, the Company had borrowing capacity of
approximately $105.5 million available under the credit facility.
The current portion of long-term debt is an aggregate of $78.6 million
which represents the 4 3/4 convertible subordinated debentures which mature on
October 1, 2000.
5. Mandatorily Redeemable Securities
Cumulative Preferred Stock
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000. Such amount is reflected in other liabilities in the
consolidated balance sheet as of April 2, 2000.
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 redemption price of $1,000 per share.
Gentiva Obligated Mandatorily Redeemable Convertible Securities of a Subsidiary
Holding Solely Gentiva Debentures
On March 15, 2000, certain of the Company's and Olsten's directors,
officers and management and other related parties and other investors purchased
$20 million of 10% convertible trust preferred securities issued by a trust, of
which the Company owns all the common equity. The Company owns all of the common
equity of the trust. The convertible trust preferred securities are mandatorily
redeemable five years from
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issuance at a declining premium over face amount. Upon a change of control, as
defined, the holders of convertible trust preferred securities may require the
trust to purchase these securities at 100 percent of their face amount.
Dividends are payable quarterly in cash at the rate of 10 percent per annum, but
the trust may defer dividend payments for up to a total of twenty quarters, in
which case dividends will accrue. The convertible trust preferred securities are
convertible into the Company's common stock at a conversion price which is 17.5
percent above the average closing price of the Company's common stock during the
ten trading days following the earnings announcement of first quarter 2000
results.
Simultaneously with, and in connection with the issuance by the trust of
the convertible trust preferred securities, the Company issued to the trust $20
million of its 10% convertible subordinated debentures. The convertible
subordinated debentures have the same terms as the convertible trust preferred
securities, including but not limited to maturity, interest, conversion and
redemption price.
The trust which issued the convertible trust preferred securities is a
special purpose trust. The trust's operations are limited to issuing the
convertible trust preferred securities and holding the Company's convertible
subordinated debentures. The trust may pay dividends only to the extent that the
Company pays interest on its convertible subordinated debentures.
6. Shareholders' Equity
Changes in shareholders' equity during the three months ended April 2, 2000 were
as follows (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Loss Total
------------ -------------- ---------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 2000 $ 2,035 $725,998 $ (20,370) $ (2,372) $705,291
Comprehensive income (loss):
Net loss and cumulative
translation adjustment (1,906) 135 (1,771)
True-up payment made by Olsten 8,851 8,851
Obligations assumed in connection
with the split-off, net of tax benefit (1,029) (1,029)
Transfer to Olsten of tax benefits
relating to net operating losses (49,700) (49,700)
------------ -------------- ---------------- -------------------- -------------
Balance at April 2, 2000 $ 2,035 $684,120 $ (22,276) $ (2,237) $661,642
============ ============== ================ ==================== =============
</TABLE>
8
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See Note 7 for a description of the true-up payment made by Olsten.
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 were included in
non-recurring and special charges in the consolidated statement of operations
based on Olsten's allocation methodology for general corporate overhead
expenses. The remaining $3.4 million associated with these obligations were
charged directly to additional paid-in capital.
In addition, under the terms of the separation agreement, the Company also
agreed to assume the office lease for an Olsten subsidiary 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 the first quarter of 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 during the first quarter of 2000.
Total comprehensive loss amounted to $1.8 million and $12.8 million during
the first quarters of fiscal 2000 and 1999, respectively.
7. 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. Pursuant to the terms described in the
Separation Agreement, 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.
Approximately $23.1 million
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of the true-up amount was received by the Company prior to January 2, 2000; the
remaining $8.9 million was received by the Company during the first quarter of
2000.
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.
8. Business Segment Information
The Company operates in the United States and Canada, servicing patients
and customers through the following business segments: Specialty Pharmaceutical
Services, Home Care Nursing Services and Staffing Services. These segments are
briefly described below.
Specialty Pharmaceutical Services includes (i) the distribution of drugs
and other biological and pharmaceutical products and professional support
services for individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
administration of antibiotics, chemotherapy, nutrients and other medications for
patients with acute or episodic disease states and (iii) distribution services
for pharmaceutical, biotechnology and medical service firms.
Home Care Nursing Services includes (i) professional and paraprofessional
services, including skilled nursing, rehabilitation and other therapies, home
health aide and personal care services, to individuals with acute illnesses,
long-term chronic health conditions, permanent disabilities, terminal illnesses
or post-procedural needs and (ii) care management and coordination for managed
care organizations and self-insured employees.
Staffing Services includes (i) services to institutional, occupational and
alternate site health care organizations by providing health care professionals
to meet supplemental staffing needs and (ii) clinical support services for
pharmaceutical and biotechnology firms.
The Company evaluates performance and allocates resources based on
operating contributions of the reportable segments, which excludes corporate
expenses, depreciation, amortization and interest expense, but includes revenues
and all other costs directly attributable to the specific segment. Identifiable
assets of the segments reflect net accounts receivable and inventories
associated with segment activities. All other assets are assigned to the
corporation for the benefit of all segments.
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<TABLE>
<CAPTION>
Information about the Company's operations is as follows (in thousands):
Specialty Home Care
Pharmaceutical Nursing Staffing
Services Services Services Total
----------------- --------------- ------------- --------------
<S> <C> <C> <C>
Three months ended April 2, 2000
Net revenues $ 180,818 $ 167,895 $ 35,894 $ 384,607
=============== ============ =========== ==============
Operating contribution $ 25,212 $ 8,619 $ 2,631 $ 36,462
================= ============ ===========
Non-recurring and special charges (5,600)
Corporate expenses (21,405)
--------------
Earnings before interest expense, taxes
depreciation and amortization 9,457
Depreciation and amortization (8,487)
Interest expense, net (4,236)
--------------
Loss before income taxes $ (3,266)
==============
Segment assets $ 454,918 $ 206,314 $ 26,255 $ 687,487
=============== ============ =========== ==============
Three months ended April 4, 1999
Net revenues $ 168,419 $ 169,730 $ 30,011 $ 368,160
=============== ============ =========== ==============
Operating contribution before special charges $ 26,753 $ 5,323 $ 2,448 $ 34,524
Special charges (1,730) (14,590) (380) (16,700)
--------------- ------------- ----------- --------------
Operating contribution $ 25,023 $ (9,267) $ 2,068 17,824
=============== ============= ===========
Corporate expenses (20,969)
--------------
Loss before interest expense, taxes
depreciation and amortization (3,145)
Depreciation and amortization (8,733)
Interest expense, net (4,273)
--------------
Loss before income taxes $ (16,151)
==============
Segment assets $ 397,137 $ 187,858 $ 17,688 $ 602,583
============== ============= ========== ==============
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The historical unaudited consolidated financial information presents the
results of operations and financial position as if the Company was an
independent company for all periods presented. The historical financial
information may not be indicative of future performance and may not necessarily
reflect what the Company's financial position and results of operations would
have been if it were a separate stand-alone entity during the periods covered.
As an independent company, the Company expects to incur additional legal, risk
management, tax, treasury, human resources and administrative and other expenses
that it did not experience as a wholly-owned subsidiary of Olsten.
On March 15, 2000, the Company was 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 thereto, the Company operated Olsten's health
services business as a wholly owned subsidiary of Olsten. The accompanying
interim consolidated financial statements reflect the results of operations,
financial position and cash flows of the Company as if it were a separate entity
for all periods presented. The consolidated financial statements have been
prepared using the historical basis in the assets and liabilities and historical
results of operations related to the Company.
Our results of operations are impacted by various regulations and other
matters that are implemented from time to time in our industry, some of which
are described in the Company's Annual Rport on Form 10-K.
First Quarter 2000 and 1999 Results of Operations
Revenues
Net revenues increased by $16 million or 4.5 percent during the first
quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 driven by
growth in Specialty Pharmaceutical Services of $12 million or 7.4 percent and
Staffing Services of $6 million or 19.6 percent. These increases were offset by
a $2 million or 1.1 percent decrease in net revenues in Home Care Nursing
Services.
Gross Profit
Gross profit margins, as a percentage of net revenues decreased from 34.1
percent in the fiscal 1999 first quarter to 33.4 percent in the first quarter of
fiscal 2000. This decrease in margins is primarily attributable to a change in
business mix reflecting growth in the lower margin Staffing Services business
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 Care
Nursing Services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $128 million, or
33.2 percent of net revenues, for the first quarter of fiscal 2000, as compared
to $138 million or 37.4 percent of net revenues in the first quarter of fiscal
1999. Excluding the effects of non-recurring and special charges recorded in
both periods as described below, selling, general and administrative expenses
were 31.7 percent of net revenues during the fiscal 2000 quarter as compared to
32.8 percent of net revenues in the fiscal 1999 quarter. The decrease as a
percentage of net revenues was primarily attributable to the impact of
efficiency improvement efforts in Home Care Nursing Services and corporate
administrative support departments partially offset by increased information
system costs.
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During the quarter ended April 2, 2000, the Company recorded non-recurring
and special charges aggregating $5.6 million. Of this amount, non-recurring
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
non-recurring charges included change of control, 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, including approximately
$1.0 million which was based on Olsten's methodology for allocating general
corporate overhead expenses, and transition costs of $0.5 million relating to
registration costs, professional fees and other items. Approximately $1.0
million was unpaid and was included in accrued expenses as of April 2, 2000.
Furthermore, special charges of $1.5 million were incurred during the
quarter ended April 2, 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.
In the quarter ended April 4, 1999, the Company recorded a special charge
aggregating $16.7 million. This charge was for the realignment of business units
as part of a new restructuring plan, including compensation and severance costs
of $5 million to be paid to operational support staff, branch administrative
personnel and management, asset write-offs of $6.5 million related primarily to
fixed assets being disposed of in offices being closed and facilities being
consolidated, as well as fixed assets and goodwill attributable to the Company's
exit from certain business previously acquired but not within the Company's
strategic objectives, and integration costs of $5.2 million, primarily related
to obligations under lease agreements for offices and other facilities being
closed. Substantially all of the closures and consolidations of facilities and
expected terminations had occurred by January 2, 2000. These activities 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. Approximately $2.0 million of this special
charge remains unpaid as of April 2, 2000, representing compensation and
severance costs of $1.0 million and integration costs of $1.0 million.
Interest Expense
Interest expense was approximately $4.2 million and $4.3 million in the
first quarters of fiscal 2000 and 1999, respectively. Interest expense for each
period represented primarily interest on the outstanding Quantum debentures and
intercompany borrowings with Olsten.
Income Taxes
The effective income tax rate on income (loss) was 41.6 percent and 20.7
percent for the first quarter of fiscal 2000 and fiscal 1999, respectively. The
rates differ from statutory rates primarily because of non-deductible goodwill
amortization and other non-deductible items.
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Liquidity and Capital Resources
Historically, the Company has relied on cash flow from operations and
advances from Olsten to meet its operating and investing activities. In the
past, when liquidity needs exceeded cash flow, Olsten provided the necessary
funds. In accordance with the separation agreement governing the split-off, the
Company received approximately $32 million in cash (referred to as the true-up
amount), including $8.9 million during the fiscal 2000 first quarter, prior to
the March 15, 2000 split-off date. Following the split-off, the Company paid
Olsten approximately $13 million to settle the intercompany account balance
which related primarily to management fees, additional advances and interest
expense on intercompany balances. Furthermore, in connection with the split-off
the Company assumed certain liabilities, including supplemental executive
retirement plan and excise tax obligations for former Olsten employees and of
the office lease obligations for an Olsten subsidiary. As of March 15, 2000, the
Company is no longer able to use Olsten's capital resources to meet its needs
and has acquired third party financing, as described below, for such purposes.
The Company received $20 million of proceeds from the issuance by Gentiva
Trust, a Delaware statutory trust (the "Trust"), of 10% convertible trust
preferred securities on March 15, 2000. The Company owns all the common equity
in the Trust. The Trust's only asset is the 10% convertible subordinated
debentures of the Company. The Company entered into a credit facility, which
provides for up to $150 million in borrowings, including up to $30 million which
is available for letters of credit. The Company may borrow up to 80 percent of
eligible accounts receivable, as defined. The credit facility, which expires in
2004, includes covenants requiring the Company to maintain a minimum tangible
net worth and minimum earnings before interest, taxes, depreciation and
amortization. Other covenants in the credit facility include: limitations on
mergers, consolidations, acquisitions, indebtedness, liens, capital expenditures
and disposition of assets and other limitations with respect to the Company's
operations. The interest rate on borrowings under the credit facility is based
on the London Interbank Offered Rate (LIBOR) plus 2.5 percent or the lender's
prime rate plus 0.25 percent.
As of April 2, 2000, borrowings under the credit facility aggregated $25.5
million and there were approximately $19 million of standby letters of credit
outstanding. As of such date, the Company had an aggregate borrowing capacity of
approximately $105.5 million under the credit facility. By October 2000, the
Company will be required to repay its $78.6 million of 4-3/4% convertible
subordinated debentures. The Company is evaluating various options, including
use of the new credit facility, to repay these debentures.
Working capital at April 2, 2000 was $445 million, an increase of $7
million versus $438 million at January 2, 2000. Net receivables increased by $29
million to $605 million, predominantly due to conversion issues resulting from
the implementation of and transition to a new billing system for the Specialty
Pharmaceutical Services business. The Company will continue to make investments
in billing and accounts receivable systems and has realigned its billing and
collection units in an effort to improve cash flow from operations.
14
<PAGE>
Management believes cash flows from operations and borrowings available
under the new credit facility will be adequate to support the ongoing operations
and to meet debt service and principal repayment requirements for the
foreseeable future. The Company intends to make investments and other
expenditures to, among other things, upgrade its computer technology and system
infrastructure and relocate its headquarters. If cash flows from operations or
availability under the 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 for
operations and to refinance the convertible subordinated debentures which mature
on October 1, 2000.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the fair value of its fixed rate convertible subordinated
debentures. Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise.
Based on the overall interest rate exposure on the Company's fixed rate
borrowings at April 2, 2000, a 10 percent change in market interest rates would
not have a material effect on the fair value of the Company's debt.
Based on variable rate debt levels, a 10 percent change in market interest
rates (90 basis points on a weighted average) would have less than a 1 percent
impact on the Company's interest expense, net.
Other than intercompany transactions between the United States and the
Company's Canadian subsidiary, the Company generally does not have any
transactions that are denominated in a currency other than the functional
currency applicable to each entity.
Although currency fluctuations impact the Company's reported results of
operations, such fluctuations generally do not affect the Company's cash flow or
result in actual economic gains or losses. Each of the Company's subsidiaries
derives revenues and incurs expenses primarily within a single country, and
consequently, does not generally incur currency risks in connection with the
conduct of normal business operations.
Fluctuations in currency exchange rates may also impact the shareholders'
equity of the Company. The assets and liabilities of the Company's Canadian
subsidiary are translated into U.S dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated into U.S. dollars
at the weighted average exchange rate for the quarter. The resulting translation
adjustments are recorded in shareholders' equity as accumulated other
comprehensive income (loss).
Foreign exchange gains and losses have not been significant. The Company
does not engage in hedging activities. The Company did not hold any derivative
instruments at April 2, 2000.
16
<PAGE>
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.
17
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There is presently pending in the U.S. District Court for the Eastern
District of New York a purported class action filed by some Olsten stockholders
against Olsten and some of its directors and officers, captioned In re Olsten
Corporation Securities Litigation, No. 97-5056 (the "Class Action"). The class
action asserts claims for violations of the Securities Act and the Securities
Exchange Act, including claims that the directors and officers of Olsten
misrepresented information to stockholders relating to the government
investigations into Olsten's health services business described Item 5 - Other
Information. In December 1998, defendants filed a motion to dismiss the Amended
Complaint in this Class Action. In response to a request from the parties, the
Court, by Order dated April 27, 2000, dismissed without prejudice defendants'
dismissal motion, subject to its being re-filed on the previously-submitted
papers, and stayed the Class Action pending the outcome of the parties'
mediation efforts.
There is also pending in the Delaware Chancery Court a purported derivative
lawsuit filed by some Olsten stockholders against some directors and officers of
Olsten (and Olsten, as nominal defendant), captioned Rubin v. May, No. 17135-NC
(the "Derivative Suit"). This purported derivative lawsuit alleges that the
Olsten directors and officers breached their fiduciary duties to stockholders in
connection with the above-described class action and the below-described
government investigations. In September 1999, defendants filed a motion to
dismiss or, in the alternative, stay this Derivative Lawsuit. That motion has
not yet been briefed. In April 2000, plaintiffs served defendants with a set of
document requests; the deadline to respond thereto was adjourned to July 14,
2000. Subsequently, the parties jointly petitioned the Chancery Court to stay
all proceedings in the Derivative Lawsuit pending the outcome of the parties'
mediation efforts.
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. Discovery continues in
this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly") initiated
three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia/HCA") with which Kimberly had management services agreements to
provide services to the hospitals' home health agencies. The basis for each of
the arbitrations is that Columbia/HCA sold the home health agencies without
assigning the management services agreements and, as a result, Columbia/HCA has
breached the management services agreements. In response to the arbitrations,
Columbia/HCA has asserted that the arbitration be consolidated and stayed, in
part based upon its alleged claims against Kimberly for breach of contract, and
requested indemnity and possibly return of management fees. Columbia/HCA has not
yet formally presented these claims in the arbitrations or other legal
proceedings, and has not yet quantified the claims. The parties agreed to
suspend the proceedings until June 2000.
18
<PAGE>
Because the above lawsuits and arbitration proceedings are in relatively
preliminary stages and seek unspecified damages, penalties and/or reimbursement
for costs and expenses, the Company is unable at this time to assess the
probable outcome or potential liability arising from such litigation.
Furthermore, in connection with the split-off, the Company agreed to
assume, to the extent permitted by law, and indemnify Olsten for, the above
lawsuits and arbitration proceedings, together with any other liabilities
arising out of the health services business before or after the split-off,
including any such liabilities arising after the split-off in connection with
the government investigations described below.
Reference is made to the descriptions of legal proceedings in the Company's
Annual Report on Form 10-K for the year ended January 2, 2000.
Item 2. Change in Securities and Use of Proceeds
In March 2000, the Company sold 100 shares of its Series A Cumulative
non-voting Redeemable Preferred Stock in exchange for services in the amount of
$100,000. In March 2000, a subsidiary trust of the Company issued $20 million of
10% convertible trust preferred securities to certain of the Company's and
Olsten's directors, officers and management, other related parties and other
investors. The trust used the $20 million of gross proceeds to purchase $20
million of the Company's 10% Convertible Subordinated Debentures. The Company
used the net proceeds of the transaction to pay Olsten the amount owed for the
intercompany balance and for other corporate purposes. The above issuances were
made in reliance on the exemption from registration provided in Section 4(2) of
the Securities Act.
Reference is made to the notes to the Consolidated Financial Statements in
this Form 10-Q for a further description of the above securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
19
<PAGE>
Item 5. Other Information
The Company's business has been subject to extensive federal and state
governmental investigations regarding, among other things, the preparation of
Medicare costs reports, the relationship between it and Columbia/HCA and the
health services business related to the purchase by Columbia/HCA of some home
health agencies that were owned by the health services business and subsequently
managed under contract by a unit of the health services business, and some of
the health care practices of Quantum Health Resources, Inc. ("Quantum"),
including alleged improper billing and fraud against various federally funded
medical assistance programs, which largely occurred during the period prior to
Olsten's acquisition of Quantum in June 1996, which is referred to as the
"Quantum Investigation."
In October 1998, Olsten entered into a final settlement agreement with
several government agencies related to the Quantum Investigation. Under the
settlement, Olsten reimbursed the government approximately $4.5 million for
disputed claims under the Medicaid and CHAMPUS programs and entered into a
corporate integrity agreement.
On January 28, 1999, Olsten announced that it had been advised by the
United States Attorney's Office for the District of New Mexico ("New Mexico U.S.
Attorney's Office") that, in connection with the Quantum New Mexico
Investigation, it had dropped its criminal investigation into allegations of
improper billing and fraud against various federally funded medical assistance
programs by Quantum during the period between January 1992 and April 1997. By
letter dated February 1, 1999, the New Mexico U.S. Attorney's Office advised
Olsten that, having ended its criminal inquiry, the Office has referred the
Quantum matter to its Affirmative Civil Enforcement Section. The Company
continues to cooperate with the civil inquiry into the Quantum matter and to
explore with the New Mexico U.S. Attorney's Office the possibility of reaching a
negotiated monetary resolution of the matter. Any negotiated amount could
include multiple damages, interest and civil penalties.
On July 19, 1999, Olsten entered into written civil and criminal agreements
with the U.S. Department of Justice and the Office of Inspector General of the
U.S. Department of Health and Human Services settling the civil and criminal
aspects of the Cost Reports Investigation and the Columbia/HCA Investigation.
The settlement agreements provided for the payment of fines and penalties in the
amount of $61 million by Olsten, Kimberly, then a subsidiary of Olsten, pled
guilty to certain criminal violations of the federal mail fraud, conspiracy and
kickback statutes, Kimberly has been permanently excluded from participation in
Medicare, Medicaid and all other federal health care programs as defined in 42
U.S.C. ss.1320a-7b(f); and Olsten executed a corporate integrity agreement with
the Office of Inspector General of the U.S. Department of Health and Human
Services.
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
20
<PAGE>
Company believes the subpoena relates to an investigation of possible
overpayments to it by the Medicare program. In early February 2000, the Company
received a document subpoena from the Department of Health and Human Services,
Office of Inspector General, and Office of Investigations. The Company believes
the subpoena relates to its agencies' cost reporting procedures concerning
contracted nursing and home health aide costs. The Company intends to provide
the Office of Inspector General with the requested documents and cooperate fully
with its investigations. At this time, the Company is unable to assess the
probable outcome or potential liability, if any, arising from these subpoenas.
The Company believes that it is possible that one or more of these
investigations may be triggered by lawsuits under federal or state whistle
blower statutes against Olsten or the Company.
The Company continues to have discussions with the North Carolina Attorney
General's Office concerning questions that the Office has raised as to the
eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services and, thus, the Company's entitlement to
Medicaid reimbursement in connection with those services. At this time, the
Company is unable to assess the probable outcome of or potential liability
arising from this matter.
As noted above, in connection with the October 1998 settlement of the
Quantum Investigation, 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 that will be in effect until December 31, 2001. Also, 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. Under each of the corporate integrity agreements,
the Company is, for example, is required:
o to maintain a corporate compliance officer to develop and implement
compliance programs;
o to retain an independent review organization to perform annual
reviews; and
o to maintain a compliance program and reporting systems, as well as
provide certain training to employees.
The corporate integrity agreement entered into in connection with the
Quantum Investigation applies to the Company's specialty pharmaceutical services
business and focuses on the training and billing of blood factor products for
hemophiliacs. The July 19, 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). That corporate integrity
21
<PAGE>
agreement focuses on issues and training related to cost report preparation,
contracting, medical necessity and billing of claims.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. If the Company fails to
comply with the terms of either of its corporate integrity agreements, the
Company will be subject to penalties ranging from $1,500 to $2,500 for each day
of the breach.
In March 2000, Gentiva was notified by the U.S. Department of Justice that,
in light of the Adecco/Olsten merger and the split-off of Gentiva as an
independent public company, the Company has been substituted for Olsten in
connection with the civil settlement and corporate integrity agreements
referenced in this "Government Investigations" section.
Reference is made to the full descriptions of government investigations in
the Company's Annual Report on the Form 10-K for the year ended January 2, 2000.
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 Indenture dated October 8, 1993, between Quantum Health Resources Inc.
and First Trust National Association, as Trustee. (1)
4.3 Supplemental Indenture dated June 28, 1996, between Quantum Health
Resources Inc. and First Trust National Association, as Trustee. (1)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock. (2)
22
<PAGE>
4.5 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock. (2)
4.6 Second Supplemental Indenture dated March 15, 2000, between Quantum
Health Resources, Inc. and U.S. Bank Trust National Association
(formerly known as First Trust National Association) as Trustee. (5)
4.7 Trust Agreement among the Company, Wilmington Trust Company, the
Administrative Trustees named therein and the holders from time to
time of the convertible trust preferred securities dated March 9,
2000. (5)
4.8 Indenture between the Company and Wilmington Trust Company dated March
15, 2000. (5)
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. (5)
10.6 Company's stock & Deferred Compensation Plan for Non-Employee
Directors. (5)
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. (5)
10.10 Form of Employment Agreement with Edward A. Blechschmidt. (2)
10.11 Form of Change of Control Agreement with Executive Officers of
Company. (5)
10.12 Form of Change in Control Agreement with Edward A. Blechschmidt. (5)
10.13 Form of Severance Agreement with Executive Officers of Company. (2)
21.1 List of Subsidiaries of Company. (2)
27 Financial Data Schedule
23
<PAGE>
(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 the Post-Effective Amendment No. 1
on Form S-8 to Form S-4 dated March 27, 2000 (File No. 333-88663).
(5) Incorporated herein by reference to the Form 10-K for the Registrant
for the Fiscal year ended January 2, 20000
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter for the
period covered by this report.
Exhibit Index
Exhibit Description
27 Financial Data Schedule
24
<PAGE>
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: May 17, 2000 /s/ Edward A. Blechschmidt
------------------------------------------
Edward A. Blechschmidt
President and Chief Executive
Officer
Date: May 17, 2000 /s/ John J. Collura
-----------------------------------------
John J. Collura
Executive Vice President,
Chief Financial Officer and
Treasurer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial imformation extracted from Gentiva
Health Services, Inc. and Subsidiaries Consolidated Balance Sheet at April 2,
2000 and Gentiva Health Services, Inc. and Subsidiaries Consolidated Statement
of Income for the quarter ended April 2, 2000 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> APR-02-2000
<CASH> 4,386
<SECURITIES> 0
<RECEIVABLES> 642,901
<ALLOWANCES> 38,397
<INVENTORY> 82,983
<CURRENT-ASSETS> 732,253
<PP&E> 131,681
<DEPRECIATION> 79,872
<TOTAL-ASSETS> 1,031,663
<CURRENT-LIABILITIES> 287,415
<BONDS> 0
0
0
<COMMON> 2,035
<OTHER-SE> 659,607
<TOTAL-LIABILITY-AND-EQUITY> 1,031,663
<SALES> 384,607
<TOTAL-REVENUES> 384,607
<CGS> 256,105
<TOTAL-COSTS> 256,105
<OTHER-EXPENSES> 119,987
<LOSS-PROVISION> 7,545
<INTEREST-EXPENSE> 4,236
<INCOME-PRETAX> (3,266)
<INCOME-TAX> (1,360)
<INCOME-CONTINUING> (1,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,906)
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
