UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2003

OR

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File No. 1-15669

Gentiva Health Services, Inc.
(Exact name of Registrant as specified in its charter)

            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 ___

            Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  X         No ___

The number of shares outstanding of the Registrant's Common Stock, as of May 8, 2003 was 26,762,346.

 

 

INDEX

 

PART I - FINANCIAL INFORMATION

Item 1.                             Financial Statements

Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)

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Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

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Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

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Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

                1.                Accounting Policies

                Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides home health services throughout the United States and delivers a wide range of services principally through its Gentiva Health Services and CareCentrix® brands ("Home Health Services business").

                The accompanying interim consolidated financial statements are unaudited, but have been prepared by Gentiva 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.

                Cash Equivalents and Short-term Investments

                The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents.  The Company classifies investments with an original maturity of more than three months on the acquisition date as short-term investments.  Short-term investments, which consisted of investments in U.S. Government obligations having a maturity of less than one year at March 30, 2003, are classified as "held to maturity" investments and are reported at amortized cost which approximates fair value.

                Stock Based Compensation Plans

                During the first three months of fiscal 2003, the Company granted 690,000 new options under its existing option plans to officers, directors and employees at an average exercise price of $8.74 per share.  At March 30, 2003, there were 2,846,076 options outstanding at a weighted average exercise price of $6.02.

                The Company has chosen to adopt the disclosure only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"), and continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations.  Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. 

                The following table presents net income (loss) and basic and diluted earnings per common share, had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148:

 

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                The weighted average fair value of the Company's stock options granted during the first quarter of fiscal 2003 was $3.35, calculated using the Black-Scholes option-pricing model.  The fair value of options granted in the fiscal 2003 period was estimated on the date of grant with the following weighted average assumptions:  risk-free interest rate of 3.18 percent; dividend yield of 0 percent; expected lives of five years; and volatility of 36 percent.  No options were granted during the first quarter of fiscal 2002.

                2.                Background and Basis of Presentation

                On June 13, 2002, the Company sold substantially all of the assets of its specialty pharmaceutical services ("SPS") business to Accredo Health, Incorporated ("Accredo") and received payment of cash in the amount of $207.5 million (before a $0.9 million reduction resulting from a closing net book value adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6 million, based on the closing price of Accredo common stock on the NASDAQ National Market on June 13, 2002).  The cash consideration, less a holdback of $3.5 million for certain income taxes the Company expected to incur, and the Accredo common stock were then distributed as a special dividend to the Company's shareholders.

                The operating results of the SPS business, including corporate expenses directly attributable to SPS operations, and related income taxes, are reflected as discontinued operations in the accompanying consolidated statement of operations for the three months ended March 31, 2002.  Continuing operations includes the results of the Home Health Services business, including corporate expenses that did not directly relate to SPS, for the first quarter of fiscal 2003 and fiscal 2002.  Results of all prior periods have been reclassified to conform to this presentation.

                In addition, under the Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), the SPS business had been reported as a segment of the Company.  Subsequent to the sale of the SPS business, the Company operates its remaining Home Health Services business as a single reporting unit.

                3.                Earnings (loss) per Share

                Basic and diluted earnings (loss) per share for each period presented has been computed by dividing the net income (loss) by the weighted average number of shares outstanding for each respective period.  The computations of the basic and diluted per share amounts for the Company's continuing operations were as follows (in thousands, except per share amounts):

 

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                For the first quarter of fiscal 2002, in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), the common shares used in computing the diluted per share amount for continuing operations shall be used for discontinued operations, cumulative effect of accounting change and net income, although the impact may be antidilutive.

                For the quarter ended March 31, 2002, diluted weighted average common shares outstanding excludes the incremental 1.2 million shares that would be issued upon the assumed exercise of stock options under the treasury stock method, since their inclusion would be antidilutive on earnings. 

                4.                Acquisition and Disposition of Businesses

                Acquisition of First Home Care Business

                On March 28, 2003, the Company completed the purchase of certain assets and the business of First Home Care-Houston, Inc. and FHCH, Inc. pursuant to an asset purchase agreement for cash consideration of $1.3 million.  The allocation of the purchase price is in progress and expected to be completed during the second quarter of fiscal 2003. 

                Sale of Specialty Pharmaceutical Services Business

                On June 13, 2002, the Company consummated the sale of its SPS business to Accredo Health, Incorporated (the "SPS Sale").  The SPS Sale was effected pursuant to an asset purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002, between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.

                The assets of the SPS business acquired by Accredo in the SPS Sale were assets used by Gentiva in the business of:

 

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                Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired the SPS business in consideration for:

                Based on the closing price of the Accredo common stock on June 13, 2002 ($51.89 per share), the value of the stock consideration was $262.6 million. 

                In connection with the SPS Sale, the Company's Board of Directors declared a dividend, payable to shareholders of record on June 13, 2002, of all the common stock consideration and substantially all the cash consideration received from Accredo.  The cash consideration received by the Company before the closing net book value adjustment was $207.5 million; however, the amount distributed to the Company's shareholders was reduced by $3.5 million to $204 million as a holdback for income taxes the Company expected to incur on the proceeds received in excess of $460 million as detailed in the Company's proxy statement, dated May 10, 2002.  The special dividend, which was delivered to the distribution agent on June 13, 2002 for payment to the Company's shareholders, resulted in shareholders of record on the record date receiving $7.76 in cash and .19253 shares of Accredo common stock (valued at $9.99 per share based on the June 13, 2002 closing price of $51.89 per share of Accredo common stock) for each share of Gentiva common stock held.  The total value of the special dividend amounted to $17.75 per share.  Cash was paid in lieu of fractional shares.

                In connection with the SPS sale, the Company incurred $16.2 million in transaction costs which related to investment banking fees, legal and accounting costs, change in control and other employee related payments and miscellaneous other costs.

                SPS revenues and operating results for the period presented were as follows (in thousands):

                5.                Goodwill and Other Intangible Assets ("SFAS 142")

                In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the criteria for recording intangible assets separate from goodwill.  SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles.  Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill and certain intangibles is more than its estimated fair value.  The Company adopted SFAS 142 as of the beginning of fiscal 2002 (December 31, 2001).  The provisions of SFAS 142 require

 

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that a transitional impairment test be performed as of the beginning of the year the statement is adopted.  The provisions of SFAS 142 also require that a goodwill impairment test be performed annually or on the occasion of other events that indicate a potential impairment. 

                The new criteria for recording intangible assets separate from goodwill did not require any reclassification in the Company's consolidated financial statements.

                At December 30, 2001, the Company had goodwill of $220.5 million, of which $217.3 million related to the Home Health Services business and $3.2 million related to the SPS business.  The SPS goodwill of $3.2 million was acquired by Accredo as a component of the net assets of the SPS business.  The Company's transitional impairment test indicated that there was an impairment of goodwill relating to the Home Health Services business upon adoption of SFAS 142 as further described below.

                The impairment test is a two step process that begins with the estimation of the fair value of each reporting unit.  The first step screens for potential impairment and the second step measures the amount of the impairment.  The estimate of fair value of the Home Health Services business, as of December 31, 2001, considered publicly available information as well as financial projections and estimates prepared by outside advisors and was determined by subtracting the agreed-upon purchase price for the SPS business from the market capitalization of the Company.  As part of the first step to assess potential impairment, management compared the estimate of fair value for the Home Health Services business to the book value of the business unit's net assets.  Since the book value of Home Health Services' net assets was greater than its estimated fair value, management proceeded to the second step to measure the impairment.  The second step compared the implied fair value of goodwill with its carrying value.  The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the carrying amount of the reporting unit's goodwill is greater than its implied fair value, an impairment loss would be recognized in the amount of the excess.

                Based on the results of the transitional impairment tests, the Company determined that an impairment loss relating to goodwill had occurred and recorded a pre-tax, non-cash charge of $217.3 million, as cumulative effect of accounting change in the accompanying consolidated statement of operations for the first quarter of fiscal 2002.  The Company recorded a deferred tax benefit of approximately $66 million resulting from this non-cash charge and increased its tax valuation allowance by the same amount.  The deferred tax benefit was recorded by eliminating a deferred tax liability of approximately $27 million and recording a deferred tax asset of approximately $39 million. See Note 9 to the consolidated financial statements.

                6.                Revolving Credit Facility and Restricted Cash

                The Company's credit facility provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit.  The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.  Borrowing availability under the credit facility is reduced by $10 million until such quarter in 2003 in which the trailing 12 month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, as defined, exceeds $15 million.  As of March 30, 2003, the trailing 12 month EBITDA threshold was achieved. 

                At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent.  In addition, the Company must pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit.  Beginning in 2003, the applicable margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million.  The Company met this requirement as of March 30, 2003.  The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million.  The Company is subject to an unused

 

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line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit.  For 2003, the unused credit line fee decreases to 0.375 percent provided the minimum EBITDA target described above is achieved, but is subject to reinstatement to the higher fee in the event that the Company's trailing 12 month EBITDA falls below $20 million.  The Company met this requirement as of March 30, 2003. 

                Total outstanding letters of credit were approximately $27.6 million at December 29, 2002 and $20.3 million as of March 30, 2003.  The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments.  During the first quarter of fiscal 2003, the Company segregated $7.3 million of cash funds in a trust account to replace certain letters of credit. These funds are considered restricted cash and are reported as part of cash, cash equivalents and restricted cash in the accompanying consolidated balance sheet as of March 30, 2003. Interest on the funds in the trust account accrues to the Company. The Company, at its option, may terminate the trust agreement by providing equivalent amounts of alternative security, allowed under the program, to include letters of credit and surety bonds. There were no borrowings outstanding under the credit facility as of March 30, 2003.

                The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined.  Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions, capital expenditures and dispositions of assets and other limitations with respect to the Company's operations.  The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to 1.0 percent if terminated during year one, 0.5 percent if terminated in year two and 0.25 percent if terminated in year three, of $55 million (or $45 million during the time when borrowing availability is reduced by $10 million due to EBITDA requirements).  Loans under the credit facility will be collateralized by all of the Company's tangible and intangible personal property, other than equipment.  As of March 30, 2003, the Company was in compliance with these covenants.

                The Company has no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

                7.                Shareholders' Equity

                Changes in shareholders' equity for the three months ended March 30, 2003 were as follows (in thousands):

 

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                Comprehensive income amounted to $5.2 million for the first quarter of fiscal 2003 and a comprehensive loss of $209.2 million was recorded for the first quarter of fiscal 2002.

                8.                Legal Matters

                Litigation

                In addition to the matters referenced in this Note 8, 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.

                Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508.  On January 2, 2002, this amended complaint was served on the Company alleging that the defendant submitted false claims to the government for payment in violation of the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully terminated the plaintiff.  The plaintiff claimed that infusion pumps delivered to patients did not supply the full amount of medication, allegedly resulting in substandard care.  Based on a review of the court's docket sheet, the plaintiff filed a complaint under seal in March 2001.  In October 2001, the United States government filed a notice with the court declining to intervene in this matter, and on October 24, 2001, the court ordered that the seal be lifted.  The Company filed its responsive pleading on February 25, 2002, and discovery has now commenced.  The Company has denied the allegations of wrongdoing in the complaint and intends to defend itself vigorously in this matter.  This case is in discovery, and the Company is unable to assess the probable outcome or potential liability, if any, arising from this matter; therefore, a range of damages, if any, cannot be determined.

                Indemnifications

                Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off").  In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business.

                The Company and Accredo have agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the SPS business.  The Company has also agreed to indemnify Accredo for the retained liabilities and for tax liabilities and Accredo has agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the acquisition.  The representations and warranties generally survive for the period of two years after the closing of the acquisition, except that:

                Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million.

 

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                These indemnification rights are the exclusive remedy from and after the closing of the acquisition, except for the right to seek specific performance of any of the agreements in the related asset purchase agreement, in any case where a party is guilty of fraud in connection with the acquisition, and with respect to tax liabilities and obligations.

                On May 6, 2003, the Company received correspondence from Accredo giving the Company notice of Accredo's indemnification rights for any breach under the Asset Purchase Agreement related to the adequacy of the accounts receivable reserves in accordance with Section 8.3 of the Asset Purchase Agreement; however, no breach of a representation or warranty was asserted against the Company in the correspondence. 

                Government Investigation

                On April 17, 2003, the Company received a document subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations.  The subpoena seeks information regarding the Company's implementation of prior settlements with the government, the implementation of the Company's corporate integrity agreements and the Company's treatment on cost reports of employees engaged in sales and marketing efforts.  The Company is cooperating with the government in responding to the subpoena and has engaged in discussions with the government regarding the timing and scope of production.  To the Company's knowledge, the government has not filed a complaint against the Company. 

                9.                Income Taxes

                The Company recorded state income and federal alternative minimum taxes of approximately $0.6 million for the three months ended March 30, 2003.  The Company's effective tax rate of approximately 10.5 percent was lower than the statutory income tax rate due to the impact of a valuation allowance offsetting the realization of tax benefits associated with a net operating loss carryforward and other deferred tax assets.

                During the first quarter of fiscal 2002, income tax expense from continuing operations was $26.9 million which reflects an additional valuation allowance recorded against certain deferred tax assets in connection with the adoption of SFAS 142 and the subsequent write-off of goodwill; the corresponding tax benefit for the same amount was recorded in the cumulative effect of accounting change line item as reported in the accompanying consolidated statement of operations during the first quarter of fiscal year 2002.

                Deferred tax assets and deferred tax liabilities were as follows (in thousands):

 

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                At March 30, 2003, the Company had a federal net operating loss carryforward of $21.4 million, which will begin to expire by 2020.  Because of the uncertainty of the ultimate realization of net deferred tax assets, a valuation allowance is maintained relating to deferred tax assets that are not otherwise used to offset deferred tax liabilities.  The benefits associated with approximately $19.6 million of deferred tax assets related to stock option compensation deductions, when ultimately realized, will be credited to shareholders' equity.

Item 2.                 Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

                Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based upon the Company's current plans, expectations and projections about future events.  However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following:

                Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations."  The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report.  The Company is not obligated to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in various filings with the Securities and Exchange Commission, including its 2002 Annual Report on Form 10-K and you are encouraged to review these risk factors and filings.

                The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial position.  This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report.

General

                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 29, 2002 and in other filings with the Securities and Exchange Commission.

 

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Significant Developments

                On June 13, 2002, the Company sold substantially all of the assets of its specialty pharmaceutical services business ("SPS") to Accredo Health, Incorporated ("Accredo") and received payment of cash in the amount of $207.5 million (before a $0.9 million reduction resulting from a closing net book value adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6 million, based on the closing price of Accredo common stock on the NASDAQ National Market on June 13, 2002).  The cash consideration, less a holdback of $3.5 million for certain income taxes the Company expected to incur, and the Accredo common stock were then distributed as a special dividend to the Company's shareholders.

                The operating results of the SPS business, including corporate expenses directly attributable to SPS operations, and related income taxes, are reflected as discontinued operations in the accompanying consolidated statement of operations for the three months ended March 31, 2002.  Continuing operations includes the results of the Home Health Services business, including corporate expenses that did not directly relate to SPS, for the first quarter of fiscal 2003 and fiscal 2002. Results of all prior periods have been reclassified to conform to this presentation.

Results of Operations

                Revenues

                Net revenues increased by $9 million, or 4.8 percent to $202 million for the quarter ended March 30, 2003 as compared to the quarter ended March 31, 2002.  Revenue growth in the first quarter of fiscal 2003 was reported in each major payor group, driven primarily by increases in the Company's commercial insurance business which experienced improvements in both rates and volume. 

                For the quarter ended March 30, 2003, as compared to the quarter ended March 31, 2002, net revenues from Medicare increased by $0.4 million or 0.9 percent to $42.6 million, Commercial and Other payors increased by $8.4 million or 7.7 percent to $117.1 million, and Medicaid and Other Government payors increased by $0.4 million or 1.1 percent to $42.3 million. 

                As compared to the first quarter of 2002, Medicare revenues increased in the first quarter of 2003 despite the negative impact of an overall 4.9 percent reduction in Medicare reimbursement rates (approximately $2.1 million), which became effective for Medicare patients beginning in October 2002, as well as the impact from the recent elimination of the rural add-on provision ($0.1 million) for home health services.

                The growth in net revenues from Commercial and Other payors was driven by a combination of pricing and volume increases from existing customers (approximately 5 percent) and new contracts that were signed in early 2003 (approximately 2.5 percent).

                Gross Profit

                Gross profit was approximately $68.8 million for the quarter ended March 30, 2003 and $63.6 million for the quarter ended March 31, 2002.  As a percentage of net revenues, gross profit margins increased from 33.0 percent for the quarter ended March 31, 2002, to 34.0 percent for the quarter ended March 30, 2003.  This increase was due primarily to improvements in utilization in both commercial insurance business and Medicare (0.8 percent), as well as reductions in medical supply costs (0.3 percent) and workers compensation costs (0.7 percent), offset somewhat by the Medicare rate decrease (0.8 percent). 

                Selling, General and Administrative Expenses

                Selling, general and administrative expenses increased $0.2 million or 0.3 percent to $63.0 million for the quarter ended March 30, 2003, as compared to $62.8 million for the quarter ended March 31, 2002.  This increase was due to increases in costs relating to HIPAA training ($0.3 million), the completion of the Company's technology refresh program ($0.3 million) and bad debt relating to patient pay balances ($1.2 million), partially offset by

 

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reductions in corporate administrative expenses resulting from restructuring efforts following the SPS Sale in the second quarter of fiscal year 2002.

                Interest Income, Net

                Net interest income was approximately $43 thousand for the quarter ended March 30, 2003 and $0.2 million for the quarter ended March 31, 2002.  Net interest income represented interest income of approximately $0.3 million for the first quarter of 2003 and $0.6 million for the first quarter of fiscal 2002 partially offset by fees relating to the revolving credit facility and outstanding letters of credit.  Interest income declined in the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002 due to a decline in interest rates on cash and cash equivalents and, to a lesser extent, a decrease in average cash balances during the period.

                Income Taxes

                The Company recorded state income and federal alternative minimum taxes of approximately $0.6 million for the three months ended March 30, 2003. The Company's effective tax rate of approximately 10.5 percent was lower than the statutory income tax rate due to the impact of a valuation allowance offsetting the realization of tax benefits associated with a net operating loss carryforward and other deferred tax assets.  Because of the uncertainty of the ultimate realization of net deferred tax assets, a valuation allowance is maintained relating to deferred tax assets that are not otherwise used to offset deferred tax liabilities.  The Company had a federal net operating loss carryforward of $21.4 million as of March 30, 2003. 

                During the first quarter of fiscal 2002, income tax expense from continuing operations was $26.9 million which reflects an additional valuation allowance recorded against certain deferred tax assets in connection with the adoption of SFAS 142 and the subsequent write-off of goodwill; the corresponding tax benefit for the same amount was recorded in the cumulative effect of accounting change line item as reported in the accompanying consolidated statement of operations during the first quarter of fiscal year 2002.

                Net Income (Loss)

                For the first quarter of fiscal 2003, net income was $5.2 million, or $0.19 per share, compared with a net loss of $209.2 million, or $8.10 per share, for the corresponding period of 2002.  Total Company net loss in the first quarter of fiscal 2002 included a loss from continuing operations of $25.9 million, or $1.00 per share, income from discontinued operations, net of tax, of $7.2 million, or $0.28 per share, and a loss relating to the cumulative effect of an accounting change, net of tax, of $190.5 million, or $7.38 per share.

                Discontinued operations reported in the 2002 period included the operating results of the SPS business, which was sold to Accredo. The cumulative effect of the accounting change, which reflects the net write-off of substantially all of the Company's goodwill, represented the non-cash charge resulting from the adoption of SFAS 142 (Goodwill and Other Intangible Assets) during the first quarter of 2002.

Liquidity and Capital Resources

                Liquidity

                The Company's principal source of liquidity is the collection of its accounts receivable.  For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payor arrangements.

                Days Sales Outstanding ("DSO") decreased by one day from December 29, 2002 to 58 days at March 30, 2003.  Working capital at March 30, 2003 was $109 million, an increase of $5 million as compared to $104 million at December 29, 2002, primarily due to:

 

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                The Company is party to a contract with CIGNA Health Corporation ("Cigna"), pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna.  For the first quarter of fiscal 2003, Cigna accounted for 38 percent of the Company's total net revenues.  The Company has renewed the contract with Cigna for the seventh consecutive year, with the current contract expiring on December 31, 2003, with an option to renew.  If Cigna chose to terminate or not renew the contract, or to significantly modify its use of the Company's services, there could be a material adverse effect on the Company's cash flow.

                The Company participates in the Medicare, Medicaid and other federal and state healthcare programs.  For the first quarter of fiscal 2003, the Company's participation in the Medicare program accounted for 21 percent, and the Company's participation in the Medicaid and other federal and state healthcare programs accounted for 21 percent, of the Company's net revenues.  On October 1, 2002, the reduction in home health payment limits mandated under the Balanced Budget Act of 1997 became effective.  The change in payment limits reduced payments under the Medicare program to home health agencies for open episodes of care on or after October 1, 2002 by approximately 7 percent.  Simultaneous with this reduction, market basket rate increases of 2.1 percent adjusted for certain wage indices were also implemented, resulting in an overall reduction in reimbursement rates of approximately 4.9 percent.  This reduction had a negative impact of approximately $2.1 million on net revenues for the quarter ended March 30, 2003.  Although a further market basket rate increase is scheduled to become effective October 1, 2003, that increase is currently under Congressional review. In addition, Medicare reimbursement related to home health services performed in specifically defined rural areas of the country will be further reduced as the ten percent rural add-on provision for home health services expired as of April 1, 2003.  The elimination of the ten percent rural add-on provision negatively impacted the Company's net revenues by approximately $0.1 million for the first quarter of fiscal year 2003. Reductions in Medicaid reimbursement rates and limitations on payment increases may also occur.

                There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs, including compliance with the Company's corporate integrity agreement.  As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies.  Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs.  Violation of the applicable federal and state health care regulations can result in the Company's exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties.  The Company believes it is currently in compliance with these standards and regulations.

                The Company's credit facility provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit.  The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.  Borrowing availability under the new credit facility is reduced by $10 million until such quarter in 2003 in which the trailing 12 month EBITDA, excluding certain restructuring costs and special charges recorded by the Company during fiscal 2002, as defined, exceeds $15 million.  As of March 30, 2003, the trailing 12 months EBITDA threshold was achieved.

                At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent.  In addition, the Company must pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit. Beginning in 2003, the applicable margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees decrease by 0.25 percent

 

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to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million.  The Company met this requirement as of March 30, 2003.  The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million.  The Company is subject to an unused line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount, as defined, and the total outstanding borrowings and letters of credit.  For 2003, the unused credit line fee decreases to 0.375 percent provided the minimum EBITDA target described above is achieved, but is subject to reinstatement to the higher fee in the event that the Company's trailing 12 month EBITDA falls below $20 million. The Company met this requirement as of March 30, 2003. 

                Total outstanding letters of credit were $20.3 million as of March 30, 2003.  The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments.  There were no borrowings outstanding under the credit facility as of March 30, 2003.  As of March 30, 2003, the Company had borrowing capacity under the credit facility, after adjusting for outstanding letters of credit, of approximately $35 million. 

                The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions, capital expenditures and dispositions of assets and other limitations with respect to the Company's operations.  The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to 1.0 percent if terminated during year one, 0.5 percent if terminated in year two and 0.25 percent if terminated in year three, of $55 million (or $45 million during the time when borrowing availability is reduced by $10 million due to EBITDA requirements).  Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment.

                The credit facility includes provisions, which, if not complied with, could require early payment by the Company.  These include customary default events, such as failure to comply with financial covenants, insolvency events, non-payment of scheduled payments, acceleration of other financial obligations and change in control provisions.  In addition, these provisions include an account obligor whose accounts are more than 25 percent of all accounts of the Company over the previous 12-month period canceling or failing to renew its contract with the Company and ceasing to recognize the Company as an approved provider of health care services, or the Company revoking the lending agent's control over its governmental lockbox accounts.  The Company does not have any trigger events in the credit facility that are tied to changes in its credit rating or stock price.  As of March 30, 2003, the Company was in compliance with these covenants.

                Capital Expenditures

                The Company's capital expenditures for the first quarter of fiscal 2003 and fiscal 2002 were $2.5 million and $0.7 million, respectively.  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.  In this regard, management expects that capital expenditures will not exceed $10 million for the remainder of fiscal 2003.  Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves.

                Cash Resources and Obligations

                The Company had cash, cash equivalents and restricted cash of $96.0 million as of March 30, 2003.  The restricted cash relates to cash funds of $7.3 million that have been segregated in a trust account to replace certain letters of credit.  Restricted cash is discussed further in the Liquidity section entitled "Contractual Obligations and Commercial Commitments." 

 

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                The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made over the next 12 months.  These amounts are reflected as Medicare liabilities in the accompanying consolidated balance sheets as of March 30, 2003 and December 29, 2002, respectively.

                Management expects that the Company's working capital needs for fiscal 2003 will be met through operating cash flow and its existing cash balance.  The Company may also consider other alternative uses of cash including, among other things, acquisitions, share repurchases and cash dividends.  These uses of cash would require the approval of both the Company's Board of Directors and its lender.  If cash flows from operations, cash resources 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.

                Contractual Obligations and Commercial Commitments

                At March 30, 2003, the Company had no long-term debt and no significant capital lease obligations.

                The Company had total letters of credit outstanding under its credit facility of approximately $27.6 million at December 29, 2002 and $20.3 million at March 30, 2003.  The letters of credit, which expire one year from date of issuance, are issued to guarantee payments under the Company's workers compensation program and for certain other commitments.  The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company's obligations. During the first quarter of fiscal 2003, the Company segregated $7.3 million of cash funds in a trust account to replace certain letters of credit. Interest on the funds in the trust account accrues to the Company. The Company, at its option, may terminate the trust agreement by providing equivalent amounts of alternative security, allowed under the program, to include letters of credit and surety bonds. 

                The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

                Critical Accounting Policies

                Revenue Recognition

                Under fee-for-service agreements with patients and commercial and certain government payors, net revenues are recorded based on net realizable amounts to be received in the period in which the services and products are provided or delivered.  Under capitated arrangements with managed care customers, net revenues are recognized based on a predetermined monthly contractual rate for each member of the managed care plan regardless of the services provided.  Under the Prospective Payment System ("PPS") for Medicare reimbursement, net revenues are recorded based on a reimbursement rate which varies based on the severity of the patient's condition, service needs and certain other factors; revenue is recognized ratably over the period in which services are provided. Revenue is subject to adjustment during this period if there are significant changes in the patient's condition during the treatment period or if the patient is discharged but readmitted to another agency within the same 60 day episodic period. Medicare billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process for recognizing revenue under the Medicare program is based on certain assumptions and judgments, including the average length of time of each treatment as compared to a standard 60 day episode, the appropriateness of the clinical assessment of each patient at the time of certification and the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, have significant changes in condition or are subject to certain other factors during the episode. Deferred revenue of approximately $4.4 million relating to the Medicare PPS program was included in other accrued expenses in the consolidated balance sheets as of March 30, 2003 and December 29, 2002, respectively.

                Revenue adjustments result from differences between estimated and actual reimbursement amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk.  Revenue adjustments are deducted from gross accounts receivable.  These revenue adjustments are based on significant assumptions and judgments which are determined by Company management based on historical trends.

 

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                Net revenues attributable to major payor sources of reimbursement are as follows:

                The Company is party to a contract with CIGNA Health Corporation ("Cigna"), pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna.  For the first quarter of fiscal 2003 and 2002, Cigna accounted for approximately 38 percent and 37 percent, respectively, of the Company's total net revenues. The Company has renewed the contract with Cigna for a seventh consecutive year, with the current contract expiring on December 31, 2003, with an option to renew. 

                Net revenues generated under capitated agreements were approximately 16 percent of total net revenues for each of the first quarters of fiscal 2003 and 2002. Fee-for-service contracts with other commercial payors are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.

                Collectibility of Accounts Receivable

                The process for estimating the ultimate collection of receivables, particularly with respect to fee-for-service arrangements, involves significant assumptions and judgments.  In this regard, the Company has implemented a standardized approach to estimate and review the collectibility of its receivables based on accounts receivable aging trends.  Historical collection and payor reimbursement experience is an integral part of the estimation process related to determining the allowance for doubtful accounts.  In addition, the Company assesses the current state of its billing functions in order to identify any known collection or reimbursement issues to determine the impact, if any, on its reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to the provision for doubtful accounts which is reflected in selling, general and administrative expenses.  The Company believes that its collection and reserve processes, along with the monitoring of its billing processes, help to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection, reimbursement experience and billing functions.

                Cost of Claims Incurred But Not Reported

                Under capitated arrangements with managed care customers, the Company estimates the cost of claims incurred but not reported based on applying actuarial assumptions, historical patterns of utilization to authorized levels of service, current enrollment statistics and other information.  In addition, under fee-for-service arrangements with certain managed care customers, the Company also estimates the cost of claims incurred but not reported and the estimated revenue relating thereto in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider.

                The estimate of cost of claims incurred but not reported involves significant assumptions and judgments which relate to and may vary depending on the services authorized at each of the Company's care management centers, historical patterns of service utilization and payment trends.  These assumptions and judgments are evaluated on a quarterly basis and changes in estimated liabilities for costs of claims incurred but not reported are determined based on such evaluation.

 

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                Obligations under Insurance Programs

                The Company is obligated for certain costs under various insurance programs, including employee health and welfare, workers compensation and professional liability. 

                The Company may be subject to workers compensation claims and lawsuits alleging negligence or other similar legal claims.  The Company maintains various insurance programs to cover this risk but is substantially self-insured for most of these claims.  The Company recognizes its obligations associated with these programs in the period the claim is incurred.  The cost of both reported claims and claims incurred but not reported, up to specified deductible limits, have generally been estimated based on historical data, industry statistics, the Company's own home health specific historical claims experience, current enrollment statistics and other information.  Such estimates and the resulting reserves are reviewed and updated periodically.

                The Company maintains insurance coverage on individual claims.  The Company is responsible for the cost of individual workers compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter.  The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers compensation program are guaranteed by letters of credit, surety bonds and segregated cash balances.  During the first quarter of fiscal 2003, the Company segregated $7.3 million of cash funds in a trust account to replace certain letters of credit. Interest on the funds in the trust account accrues to the Company. 

                The Company, at its option, may terminate the trust agreement by providing equivalent amounts of alternative security allowed under the program, including letters of credit and surety bonds.  The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.

                Settlement Issues

                Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997.  These costs were reported in annual cost reports, which were filed with the Center for Medicare and Medicaid Services ("CMS"), and are subject to audit by the fiscal intermediary engaged by CMS.  The fiscal intermediary has not completed its audit of the fiscal 2000 cost reports and the review of cost limits relating to certain of the Company's Medicare providers.  Furthermore, settled cost reports relating to certain years prior to fiscal 2000 could be subject to reopening of the audit process by the fiscal intermediary.  Although management believes that established reserves are sufficient, it is possible that adjustments resulting from such audits by the fiscal intermediary could result in adjustments to the consolidated financial statements that exceed established reserves.

                The Company has filed appeals with the Provider Reimbursement Review Board for the years 1997, 1998 and 1999 concerning audit adjustments made by its Medicare fiscal intermediary.  These audit adjustments relate to the methodology used by the Company in allocating a portion of its residual overhead cost on the Medicare cost reports.  The Company believes its methodology used to allocate such overhead cost was accurate and consistent with past practice accepted by the fiscal intermediary; however, the Company has recorded the impact of the audit adjustments in its consolidated financial statements and has not recorded any anticipated recovery from the appeals.  The Company is unable to predict the outcome of these appeals.

                Goodwill and Other Intangible Assets ("SFAS 142")

                In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the criteria for recording intangible assets separate from goodwill.  SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles.  Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of

 

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operations, but instead are reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill and certain intangibles is more than its estimated fair value.  The Company adopted SFAS 142 as of the beginning of fiscal 2002 (December 31, 2001).  The provisions of SFAS 142 require that a transitional impairment test be performed as of the beginning of the year the statement is adopted.  The provisions of SFAS 142 also require that a goodwill impairment test be performed annually or on the occasion of other events that indicate a potential impairment. 

                The new criteria for recording intangible assets separate from goodwill did not require any reclassification in the Company's consolidated financial statements.

                At December 30, 2001, the Company had goodwill of $220.5 million, of which $217.3 million related to the Home Health Services business and $3.2 million related to the SPS business.  The SPS goodwill of $3.2 million was acquired by Accredo as a component of the net assets of the SPS business.  The Company's transitional impairment test indicated that there was an impairment of goodwill relating to the Home Health Services business upon adoption of SFAS 142 as further described below.

                The impairment test is a two step process that begins with the estimation of the fair value of each reporting unit.  The first step screens for potential impairment and the second step measures the amount of the impairment.  The estimate of fair value of the Home Health Services business, as of December 31, 2001, considered publicly available information as well as financial projections and estimates prepared by outside advisors and was determined by subtracting the agreed-upon purchase price for the SPS business from the market capitalization of the Company.  As part of the first step to assess potential impairment, management compared the estimate of fair value for the Home Health Services business to the book value of the business unit's net assets.  Since the book value of Home Health Services' net assets was greater than its estimated fair value, management proceeded to the second step to measure the impairment.  The second step compared the implied fair value of goodwill with its carrying value.  The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the carrying amount of the reporting unit's goodwill is greater than its implied fair value, an impairment loss would be recognized in the amount of the excess.

                Based on the results of the transitional impairment tests, the Company determined that an impairment loss relating to goodwill had occurred and recorded a pre-tax, non-cash charge of $217.3 million, as cumulative effect of accounting change in the accompanying consolidated statement of operations for the quarter ended March 31, 2002.  The Company recorded a deferred tax benefit of approximately $66 million resulting from this non-cash charge and increased its tax valuation allowance by the same amount.  The deferred tax benefit was recorded by eliminating a deferred tax liability of approximately $27 million and recording a deferred tax asset of approximately $39 million. See Note 9 to the consolidated financial statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

                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 or other market risk at March 30, 2003.

Item 4.    Controls and Procedures

                Evaluation of disclosure controls and procedures

                The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) for the Company.  The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days before the filing date of this quarterly report, have concluded that the Company's disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic SEC filings.

 

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                Change in internal controls

                There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of the evaluation.  As a result, no corrective actions were taken.

 

 

 

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PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

Litigation

                In addition to the matters referenced in this Item 1, 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.

                Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508.  On January 2, 2002, this amended complaint was served on the Company alleging that the defendant submitted false claims to the government for payment in violation of the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully terminated the plaintiff.  The plaintiff claimed that infusion pumps delivered to patients did not supply the full amount of medication, allegedly resulting in substandard care.  Based on a review of the court's docket sheet, the plaintiff filed a complaint under seal in March 2001.  In October 2001, the United States government filed a notice with the court declining to intervene in this matter, and on October 24, 2001, the court ordered that the seal be lifted.  The Company filed its responsive pleading on February 25, 2002, and discovery has now commenced.  The Company has denied the allegations of wrongdoing in the complaint and intends to defend itself vigorously in this matter.  This case is in discovery, and the Company is unable to assess the probable outcome or potential liability, if any, arising from this matter; therefore, a range of damages, if any, cannot be determined.

Indemnifications

                Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off").  In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business.

                The Company and Accredo have agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the SPS business.  The Company has also agreed to indemnify Accredo for the retained liabilities and for tax liabilities and Accredo has agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the acquisition.  The representations and warranties generally survive for the period of two years after the closing of the acquisition, except that:

                Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million.

                These indemnification rights are the exclusive remedy from and after the closing of the acquisition, except for the right to seek specific performance of any of the agreements in the related asset purchase agreement, in any

 

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case where a party is guilty of fraud in connection with the acquisition, and with respect to tax liabilities and obligations.

                On May 6, 2003, the Company received correspondence from Accredo giving the Company notice of Accredo's indemnification rights for any breach under the Asset Purchase Agreement related to the adequacy of the accounts receivable reserves in accordance with Section 8.3 of the Asset Purchase Agreement; however, no breach of a representation or warranty was asserted against the Company in the correspondence. 

Government Investigation

                On April 17, 2003, the Company received a document subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations.  The subpoena seeks information regarding the Company's implementation of prior settlements with the government, the implementation of the Company's corporate integrity agreements and the Company's treatment on cost reports of employees engaged in sales and marketing efforts.  The Company is cooperating with the government in responding to the subpoena and has engaged in discussions with the government regarding the timing and scope of production.  To the Company's knowledge, the government has not filed a complaint against the Company. 

Item 2.    Changes 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

                None.

Item 5.    Other Information

                In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, which will remain in effect until August 18, 2004.  The corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its nursing brand (but excludes the SPS business), and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims.  Under the corporate integrity agreement, 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 to provide certain training to employees.

                The Company's compliance program is required to be implemented for all newly established or acquired business units if their type of business is covered by the corporate integrity agreement.  Reports under the integrity agreement are to be filed annually with the Department of Health and Human Services, Office of Inspector General.  After the corporate integrity agreement expires, the Company is to file a final annual report with the government.  The Company believes it is in compliance with the corporate integrity agreement and has timely filed all required reports.  If the Company fails to comply with the terms of its corporate integrity agreement, the Company will be subject to penalties.

 

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Item 6.     Exhibits and Reports on Form 8-K

(a)	Exhibit Number	Description
	3.1	Restated Certificate of Incorporation of Company. (1)
	3.2	Certificate of Correction to Certificate of Incorporation, filed with the Delaware Secretary of State on July 1, 2002. (2)
	3.3	Restated By-Laws of Company. (2)
	4.1	Specimen of common stock. (4)
	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. (3)
	10.19	Consulting Agreement dated as of July 1, 2002 between Gail R. Wilensky and Gentiva Health Services (USA), Inc. (Replaces Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2002.) *
	99.1	Certification of Chief Executive Officer dated May 14, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	99.2	Certification of Chief Financial Officer dated May 14, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(1)	Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4, dated January 19, 2000 (File No. 333-88663).
(2)	Incorporated herein by reference to Form 10-Q of Company for the quarterly period ended June 30, 2002.
(3)	Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4, dated February 4, 2000 (File No. 333-88663).
(4)	Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4, dated February 9, 2000 (File No. 333-88663).
*	Filed herewith

 

(b)           Reports on Form 8-K

                None.

 

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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 14, 2003	/s/ Ronald A. Malone                                                          Ronald A. Malone Chairman and Chief Executive Officer
Date:  May 14, 2003	/s/ John R. Potapchuk                                                         John R. Potapchuk Senior Vice President and Chief Financial Officer

 

 

 

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CERTIFICATIONS

I, Ronald A. Malone, certify that:

 

Date:  May 14, 2003

/s/ Ronald A. Malone                                                          Ronald A. Malone Chairman and Chief Executive Officer

 

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CERTIFICATIONS

I, John R. Potapchuk, certify that:

 

Date:  May 14, 2003

/s/ John R. Potapchuk                                                         John R. Potapchuk Senior Vice President and Chief Financial Officer

 

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