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.<