SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2002

Commission File No. 1-15669

GENTIVA HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)

 

3 Huntington Quadrangle 2S, Melville, New York 11747-8943
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (631) 501-7000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X                                                                    No  _

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

Yes  X                                                                    No  _

The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of June 28, 2002, the last business day of registrant's most recently completed second fiscal quarter, was $221,291,760 based on the closing price of the Common Stock on The Nasdaq National Market on such date.

The number of shares outstanding of the registrant's Common Stock, as of March  11, 2003, was 26,756,446.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information to be included in the registrant's definitive Proxy Statement, to be filed not later than 120 days after the end of the fiscal year covered by this Report, for the registrant's 2003 Annual Meeting of Shareholders is incorporated by reference into PART III hereof.

PART I

Item 1.     Business

Special Caution Regarding Forward-Looking Statements

This annual report on Form 10-K and other documents the Company  files with the Securities and Exchange Commission ("SEC") contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company and its future performance, liquidity and beliefs, management's assumptions and the health care industry. In addition, other written or oral statements that constitute forward-looking statements may be made by the Company or on the Company's behalf. Words such as "anticipate," "believe," "estimate," "expect," "goal," "intend," "plan," "project," "seek," "target," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, the Company does not have any intention or obligation to update publicly any  forward-looking statements after the distribution of this annual report on Form 10-K, whether as a result of new information, future events, changes in assumptions, or otherwise. 

Important factors that could cause the Company's actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section in this Item 1, in "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report.

Introduction

Gentiva Health Services, Inc. ("Gentiva" or the "Company") 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").  Prior to the Split-Off, all of the assets and liabilities of Olsten's health services business (formerly known as Olsten Health Services) were transferred to the Company pursuant to a separation agreement and other agreements among Gentiva, Olsten and Adecco SA ("Adecco").  Gentiva was incorporated in the state of Delaware on August 6, 1999.  The Company provides its home health services throughout most of the United States.

Information included in this annual report on Form 10-K refers to the Company's continuing home health services business, unless the context indicates otherwise.

Significant Development

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 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.

Home Health Services

The Company's home health services business is conducted through more than 250 locations and delivers a wide range of services principally through its Gentiva Health Services and CareCentrix^(R) brands.

The Company operates licensed and Medicare-certified nursing agencies located in 35 states, substantially all of which are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).  These agencies  provide various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, adult and elder patients.  Reimbursement sources include government programs, including Medicare and Medicaid, as well as other government programs, and private sources including health insurance plans, managed care organizations, long term care insurance plans and other private sources as well as personal funds.  The Company's nursing operations are organized in five

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geographic regions, each staffed with clinical, operational and sales teams.  Regions are further separated into operating areas.  Each operating area includes branch locations through which nursing agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as caregivers who deliver direct patient care.  The caregivers are employed on either a full-time basis or are paid on a per visit, per diem or per hour basis.

The Company's CareCentrix operation provides an array of outsourcing services and coordinates the delivery of home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services for managed care organizations and health plans.  These services are delivered through an extensive nationwide network of providers credentialed by the Company (approximately 1,800 at December 29, 2002), which also includes the Company's nursing locations.  CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the credentialed providers for services to the patient.  CareCentrix provides services to its customers, including the fulfillment of case requirements, case management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer's enrollees.  Contracts within CareCentrix are structured as fee-for-service, whereby a payor is billed on a per usage basis according to a fee schedule for various services, or as at-risk capitation, whereby the payor remits a monthly payment to the Company based on the number of members enrolled in the health plans under the capitation agreement, subject to certain limitations.

The Company's home health services business also delivers services to its customers through smaller business brands that include Gentiva Orthopedic Services, a program which  provides individualized home orthopedic rehabilitation services to patients recovering from bone and joint replacement surgery through the Company's Medicare certified agencies, Rehab Without Walls^(R), which  provides rehabilitation services for patients with brain or spinal cord injuries or disease, and Gentiva Business Services, which provides software, billing, management and consulting services to other home health agencies.

Payors

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 same periods noted in the table above, Cigna accounted for approximately 38 percent, 36 percent, and 26 percent, respectively, of the Company's net revenues. 

The Company has renewed its contract with Cigna for the seventh consecutive year, with the current contract expiring on December 31, 2003, with an option to renew.  No other commercial payor accounts for 10 percent or more of the Company's net revenues. Net revenues from commercial payors are primarily generated under fee for service contracts which are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.

Trademarks

The Company has various trademarks registered with the U.S. Patent and Trademark Office, including CARECENTRIX^(R), GENTIVA^(R) and REHAB WITHOUT WALLS^(R), or in the process of being registered with the U.S. Patent and Trademark Office, including LIFESMART^(SM).  A federally registered trademark in the United States is effective for ten years subject only to a required filing and the continued use of the mark by the Company, with the right of perpetual renewal. A federally registered trademark provides the presumption of

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ownership of the mark by the Company in connection with its goods or services and constitutes constructive notice throughout the United States of such ownership.  Management believes that the Company's name and trademarks are important to its operations and intends to continue to renew the trademark registrations thereof.

Business Environment

                Factors that the Company believes have contributed and will contribute to the development of home health services primarily include recognition that home health services can be a cost-effective alternative to lengthy, more expensive institutional care; aging demographics; increasing consumer awareness and interest in home health services; the psychological benefits of recuperating from an illness or accident in one's own home; and advanced technology that allows more health care procedures to be provided at home.

The Company is actively pursuing relationships with managed care organizations to secure additional managed care contracts.  The Company believes that its nationwide network of providers, financial resources, and the quality, range and cost-effectiveness of its services are important factors as it seeks opportunities in its managed care relationships in a consolidating home health services industry.  In addition, the Company believes that it has the local relationships, the knowledge of the regional markets in which it operates, and the cost-effective, comprehensive services and products required to compete effectively for managed care contracts and other referrals.  The Company offers the direct and managed provision of care as a single source, which it believes optimizes utilization.

Marketing and Sales

In general, the Company obtains patients and clients through personal and corporate sales presentations, telephone marketing calls, direct mail solicitation, referrals from other clients and advertising in a variety of local and national media, including the Yellow Pages, newspapers, magazines, trade publications and radio.  The Company also maintains an Internet website (www.gentiva.com) that describes the Company, its services and products.  Marketing efforts also involve personal contact with physicians, hospital discharge planners, and case managers for managed health care programs, such as those involving health maintenance organizations and preferred provider organizations, insurance company representatives and employers with self-funded employee health benefit programs.  The Company also empowers its branch directors with a high level of responsibility, providing incentives to manage the business effectively at the local level, within the limits of the  Company's policies and programs.

Competitive Position

The home health services industry in which the Company operates is highly competitive and fragmented.  Home health care providers range from facility-based (hospital, nursing home, rehabilitation facility, government agency) agencies to independent companies to visiting nurse associations and nurse registries.  They can be not-for-profit organizations or for-profit organizations.  In addition, there are relatively few barriers to entry in some of the home health services markets in which the Company operates.  The Company's primary competitors for its home health nursing business are hospital-based home health agencies, local home health agencies and visiting nurse associations.  Based on information contained in the Center for Medicare and Medicaid Services website, a government website containing information on the home health care market in 2001, the Company believes its home health services business holds approximately a 2% to 3% market share.  The Company competes with other home health care providers on the basis of availability of personnel, quality and expertise of services and the value and price of services.  The Company believes that it has a favorable competitive position, attributable mainly to its nationwide network of providers and the consistently high quality and targeted services it has provided over the years to its patients, as well as to its screening and evaluation procedures and training programs for caregivers.

The Company expects that industry forces will impact it and its competitors.  The Company's competitors will likely strive to improve their service offerings and price competitiveness.  The Company also expects its competitors to develop new strategic relationships with providers, referral sources and payors, which could result in increased competition.  The introduction of new and enhanced services, acquisitions and industry consolidation and the development of strategic relationships by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's services or price competition, or make the Company's services less attractive.

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Source and Availability of Personnel

To maximize the cost effectiveness and productivity of caregivers, the Company utilizes customized processes and procedures that have been developed and refined over the years.  Personalized matching to recruit and select applicants who fit the patients' individual needs is achieved through initial applicant profiles, personal interviews, skill evaluations and background and reference checks.  Caregivers are recruited through a variety of sources, including advertising in local and national media, job fairs, solicitations on websites, direct mail and telephone solicitations, as well as referrals obtained directly from clients and other caregivers.  Caregivers are generally paid on a per visit, per shift, per hour or per diem basis, or are employed on a full-time salaried basis.  The Company, along with its competitors, is currently experiencing a shortage of licensed professionals.  A continued shortage of professionals could have a material adverse effect on the Company's business.

Number of Persons Employed

At December 29, 2002, the Company had approximately 3,250 full-time administrative staff and approximately 500 salaried caregivers.  The Company also employs caregivers on a temporary basis, as needed, to provide home health services.  In fiscal 2002, the average number of non-salaried caregivers employed on a weekly basis in its home health services business was approximately 12,650.  The Company believes that its relationships with its employees are generally good.

Specialty Pharmaceutical Services

The assets of the SPS business sold by the Company to Accredo on June 13, 2002 were used by the Company in the business of:

• 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;

• the administration of antibiotics, chemotherapy, nutrients and other medications for patients with acute or episodic disease states;

• distribution services for pharmaceutical, biotechnology and medical service firms; and

• clinical support services for pharmaceutical and biotechnology firms.

The SPS business provided a wide range of home infusion therapies and also addressed therapeutic, socioeconomic, psychosocial and professional support needs for individuals with rare, chronic diseases including hemophilia, primary pulmonary hypertension and growth disorders.

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For a discussion of certain regulations to which the Company's business is subject, see "Regulations" under Item 3, "Legal Proceedings," below.

Subsequent to the sale of the SPS business, the Company has operated its remaining home health services business as a single reporting unit. Financial information relating to the home health services business is found in the consolidated financial statements of the Company and its subsidiaries which are included in this report. (See Note 3 to the consolidated financial statements.)

The Company has historically experienced a seasonal decline in the demand for its home health services during the third fiscal quarter.

Available Information

The Company's Internet address is www.gentiva.com.  The Company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on or after November 15, 2002, as soon as reasonably practicable after such material has been filed with, or furnished to, the SEC.

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RISK FACTORS

This annual report on Form 10-K contains forward-looking statements which involve a number of risks, uncertainties and assumptions.  Actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause actual results to differ materially include, without limitation, the risk factors discussed below and elsewhere in this annual report. 

Risks Related to the Company's Business and Industry

The Company's growth strategy may not be successful.

The future growth of the Company's business and its future financial performance will depend on, among other things, its ability to increase its revenue base through a combination of internal growth and strategic ventures, including acquisitions. The Company's home health services business experienced no growth during the fiscal periods from 1998 through 2001. During fiscal 2002, revenue from the Company's home health services business grew 5.3%; however, future revenue growth cannot be assured as it is subject to the effects of competition, various risk factors including the uncertainty of Medicare, Medicaid, and private health insurance reimbursement, the ability to generate new and retain existing contracts with major payor sources and the ability to attract and retain qualified personnel.

Competition among home health care companies is intense.

The home health services industry is highly competitive. The Company competes with a variety of other companies in providing home health services, some of which may have greater financial and other resources and may be more established in their respective communities. Competing companies may offer newer or different services than the Company and may thereby attract customers who are presently receiving the Company's home health services.

The cost of health care is funded substantially by government and private insurance programs. If such funding becomes limited or unavailable to the Company's customers, its business may be adversely impacted.

Third-party payors include Medicare, Medicaid and private health insurance providers. Third-party payors are increasingly challenging prices charged for health care services.  The Company cannot be assured that its services will be considered cost-effective by third-party payors, that reimbursement will be available, or that payors' reimbursement policies will not have a material adverse effect on the Company's ability to sell its services on a profitable basis, if at all. The Company cannot control reimbursement rates or policies for a significant portion of its business.

Possible changes in the case mix of patients, as well as payor mix and payment methodologies may have a material adverse effect on the Company's profitability.

The sources and amounts of the Company's patient revenues will be determined by a number of factors, including the mix of patients and the rates of reimbursement among payors.  Changes in the case mix of the patients as well as payor mix among private pay, Medicare and Medicaid may significantly affect the Company's profitability. In particular, any significant increase in the Company's Medicaid population or decrease in Medicaid payments could have a material adverse effect on its financial position, results of operations and cash flow, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

The loss of significant contracts could have a material adverse effect on the Company's financial condition and results of operations.

The Company has entered into service agreements with a number of managed care organizations to provide, or contracted 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 those organizations.  One such contract with Cigna accounted for 38% of the Company's total net revenues for the year ended

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December 29, 2002.  If the Cigna contract or any other similar significant contract were to terminate, it could materially adversely affect the Company's financial condition and results of operations.

Further consolidation of managed care organizations and other third-party payors may adversely affect the Company's  profits.

Managed care organizations and other third-party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services.  Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a smaller number of managed care organizations.  These organizations generally enter into service agreements with a limited number of providers for needed services.  To the extent that such organizations terminate the Company as a preferred provider and/or engage its competitors as a preferred or exclusive provider, the Company's business could be adversely affected. In addition, private payors, including managed care payors, could seek to negotiate additional discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements.

The Company and the healthcare industry continue to experience shortages in qualified home health service caregivers.

The Company competes with other healthcare providers for its employees.  As the demand for home health services continues to exceed the supply of available and qualified staff, the Company and its competitors have been forced to offer more attractive wage and benefit packages to these professionals.  Furthermore, the competitive arena for this shrinking labor market has created turnover as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the turnover rates has caused added pressure on the Company's operating margins.

The recent economic downturn may reduce reimbursement and covered services.

Recent data compiled by the National Conference of State Legislatures indicates that the recent economic downturn has had a detrimental effect on state revenues.  Historically, these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, the Company expects continuing cost containment pressures on Medicaid outlays for the Company's services in the states in which it operates. In addition, the economic downturn may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies which could result in reduced reimbursement rates.

The terrorist attacks of September 11, 2001 and the military and security activities which followed have impacted the United States economy and government spending priorities, and the effects of any further such developments pose risks and uncertainties to all U.S.-based businesses, including Gentiva. Deficit spending by the government as the result of adverse developments in the economy and costs of the government's response to the terrorist attacks could lead to increased pressure to reduce government expenditures for other purposes, including governmentally funded programs such as Medicare.

The agreement governing the Company's existing revolving credit facility contains and future debt agreements may contain, various covenants that limit the Company's discretion in the operation of its business.

The agreement and instruments governing the Company's existing revolving credit facility contain, and the agreements and instruments governing its future debt agreements may contain various restrictive covenants that, among other things, require it to comply with or maintain certain financial tests and ratios and restrict the Company's ability to:

• incur more debt;

• pay dividends, redeem stock or make other distributions;

• make certain investments;

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• create liens;

• enter into transactions with affiliates;

• make acquisitions;

• merge or consolidate; and

• transfer or sell assets.

The Company's ability to comply with these covenants is subject to various risks and uncertainties.  In addition, events beyond the Company's control could affect its ability to comply with and maintain the financial tests and ratios.  Any failure by the Company to comply with or maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to its existing revolving credit facility or future debt agreements. This could lead to the acceleration of the maturity of and the termination of the commitments to make further extension of credit.  The Company has no outstanding debt as of December 29, 2002 but could incur debt in the future. If the Company were unable to repay debt to its senior lenders, these lenders could proceed against the collateral securing that debt.  Even if the Company is able to comply with all applicable covenants, the restrictions on its ability to operate its business at its sole discretion could harm its business by, among other things, limiting its ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

The Company has risks related to obligations under its 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 these risks but is substantially self-insured for most of these claims. The Company also may be subject to exposure relating to employment law and other related matters for which the Company does not maintain insurance coverage. The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures; however, there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.

The Company has risks resulting from the sale of its SPS business.

The Company has agreed to indemnify Accredo for losses suffered or incurred by Accredo and its affiliates arising from the retained liabilities of the Company, breaches of the Company's representations, warranties, covenants or agreements under the asset purchase agreement between the Company and Accredo dated January 2, 2002, or agreements delivered pursuant thereto, failure to deliver good, valid and marketable title to the assets of the SPS business, and specified tax liabilities of the Company, including those related to the Company's split-off from Olsten Corporation.  The liabilities retained by the Company include litigation and causes of action arising prior to the closing of the sale of the SPS business.  The Company is unable to predict the amount, if any, that may be required for it to satisfy its indemnification obligations under the asset purchase agreement.  Should any significant payment be required, the Company may not have sufficient funds available to satisfy its potential indemnification obligations or may not be able to obtain the funds on terms satisfactory to the Company, if at all. 

In addition, with the sale of the SPS business, the Company is no longer able to deliver specialty pharmaceutical services, including the distribution of chronic drugs and therapies and the provision of acute infusion services, directly to payors and managed care providers, but will need to depend fully on subcontracts with third parties, including Accredo.  As a result, the Company may be more susceptible to fluctuations in volume and in the prices it pays to third parties for those services.  These fluctuations in pricing may add to the cost of providing the services and, as a result, adversely impact the Company's profitability. 

Risks Related to Health Care Regulation

Legislative and regulatory actions resulting in changes in reimbursement rates or methods of payment from Medicare and Medicaid, or implementation of other measures to reduce reimbursement for the Company's services, may have a material adverse effect on its revenues and operating margins.

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In fiscal 2002, the Company received 43% of its net revenues from Medicare and Medicaid, state and local reimbursement programs.  The healthcare industry is experiencing a strong trend toward cost containment, as the government seeks to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers.  These cost containment measures generally have resulted in reduced rates of reimbursement for services that the Company provides. 

In addition, the timing of payments made under these programs is subject to regulatory action and governmental budgetary constraints.  For certain Medicaid programs, the time period between submission of claims and payment has increased.  Further, within the statutory framework of the Medicare and Medicaid programs, there are a substantial number of areas subject to administrative rulings and interpretations that may further affect payments made under those programs.  Additionally, the federal and state governments may in the future reduce the funds available under those programs or require more stringent utilization and quality reviews of providers.  Moreover, there can be no assurances that adjustments from Medicare or Medicaid audits will not have a material adverse effect on the Company.

The Benefits Improvement and Protection Act of 2000 mandates a phase out of intergovernmental transfer transactions by states whereby states inflate the payments to certain public facilities to increase federal matching funds.  This action may reduce federal support for a number of state Medicaid plans.  The reduced federal payments may adversely affect aggregate available funds, thereby requiring states to reduce payments to all providers.  The Company operates in several of the states that will experience a contraction of federal matching funds.  With the repeal of the federal payment standards, there can be no assurances that budget constraints or other factors will not cause states to reduce Medicaid reimbursement or that payments will be made on a timely basis, thereby adversely affecting payments made under these Medicaid programs.

The Company conducts business in a heavily regulated industry, and changes in regulations and violations of regulations may result in increased costs or sanctions.

The Company's business is subject to extensive federal, state and, in some cases, local regulation. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs or reduce revenue and thereby adversely affect the financial viability of the Company's business.  Because these laws are amended from time to time and are subject to interpretation, the Company cannot predict when and to what extent liability may arise.  Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies, including fines, the revocation of licenses or decertification.  Unanticipated increases in operating costs or reductions in revenue could adversely affect the Company's liquidity.

The Company is subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against the Company if they assert that the Company has overcharged the programs or failed to comply with program requirements.

The operation of the Company's home health services business is subject to federal and state laws prohibiting fraud by healthcare providers, including laws containing criminal provisions, which prohibit filing false claims or making false statements in order to receive payment or obtain certification under Medicare and Medicaid programs, or failing to refund overpayments or improper payments.  Violation of these criminal provisions is a felony punishable by imprisonment and/or fines.  The Company may also be subject to fines and treble damage claims if it violates the civil provisions that prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment.  State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers.  The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Balanced Budget Act of 1997 ("BBA") expanded the penalties for health care fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs.  The Company has established policies and procedures that it believes are sufficient to ensure that it will operate in substantial compliance with these anti-fraud and abuse requirements, including the Company's Corporate Integrity Agreement.  While the Company believes that its business practices are consistent with Medicare and Medicaid programs criteria, those criteria are often vague and subject to change and interpretation.  The imposition of fines, criminal penalties or program exclusions could have a material adverse effect on the Company's financial condition, results of operations and cash flows.

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The Company is also subject to federal and state laws that govern financial and other arrangements between healthcare providers.

These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to encourage the referral of patients to a particular provider for medical products and services.  Furthermore, some states restrict certain business relationships between physicians and other providers of healthcare services.  Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care.  Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties.  These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies.

The Company faces additional federal requirements that mandate major changes in the transmission and retention of health information.

HIPAA was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs and to simplify health care administrative processes.  This simplification includes expanded protection of the privacy and security of personal medical data and requires the adoption of standards for the exchange of electronic health information.  Among the standards that the Secretary of Health and Human Services will adopt pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy and enforcement.  Although HIPAA was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, the Company believes that implementation of this law will result in additional costs.  Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on the Company.

Item 2.    Properties

The Company's headquarters is leased and is located at 3 Huntington Quadrangle 2S, Melville, New York 11747-8943.  Other major regional administrative offices leased by the Company are located in Overland Park, Kansas; Phoenix, Arizona; Hartford, Connecticut; Tampa, Florida; and Houston, Texas.  The Company also maintains leases for other offices and locations on various terms expiring on various dates.

Item 3.     Legal Proceedings

Litigation

In addition to the matters referenced in this Item 3, the Company is party to certain legal actions arising in the ordinary course of business including legal actions arising out of services rendered by its various operations, personal injury and employment disputes.

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.

United States of America ex rel. Lee Einer v. Olsten Corporation, No. CIV-S-99-0860 DFL/DAD, U.S. District Court for the Eastern District of California.  On November 1, 2001, the Company received notice of the entry of an Order dated October 25, 2001, unsealing the referenced complaint.  As recited in the Order unsealing the complaint, the United States gave notice to the District Court that the United States was declining to intervene

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in the action.  The Company believes that it was this complaint that gave rise to a document subpoena served on the Company in December 1999 from the Department of Health and Human Services, Office of Inspector General, and Office of Investigations.  The Company acknowledged service of the complaint on November 29, 2001 and timely filed responsive pleadings to the complaint.  On October 30, 2002, the relator dismissed the action with prejudice, and the government consented to the dismissal, without prejudice to its rights.

In 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's subsidiaries, initiated three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had management services agreements to provide services to the hospitals' home health agencies.  The basis for each of the arbitrations was that Columbia/HCA sold the home health agencies without assigning the management services agreements and, as a result, Columbia/HCA had breached the management services agreements.  In response to the arbitrations, Columbia/HCA had asserted that the arbitrations be consolidated and stayed, in part based upon its alleged claims against Kimberly for breach of contract, and requested indemnity and possibly return of management fees.  On November 18, 2002, the parties filed a notice of dismissal of the arbitrations.

Furthermore, in connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, the liabilities, if any, arising out of (and to indemnify Olsten for) the above proceedings and other liabilities arising out of the home health services business, including any such liabilities arising after the Split-Off in connection with the government investigation described below.

In addition, 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:

• representations and warranties related to health care compliance survive for three years after the closing of the acquisition;

• representations and warranties related to title of the assets and sufficiency of assets and employees survive for the applicable statute of limitations period; and

• representations and warranties related to tax matters survive until thirty days after the expiration of the applicable tax statute of limitations period, including any extensions of the applicable period, subject to certain exceptions.

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

Government Investigation

In 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 subpoena related to its agencies' cost reporting procedures concerning contracted nursing and home health aide costs.  To the Company's knowledge, the government has not filed a complaint against the Company.  The settlement of this matter was consummated on September 30, 2002.  (See Note 4 to the consolidated financial statements.)

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Corporate Integrity Agreement

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 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.

Regulations

The Company's business is subject to extensive federal and state regulations which govern, among other things:

• Medicare, Medicaid, TRICARE and other government-funded reimbursement programs;

• reporting requirements, certification and licensing standards for certain home health agencies; and

• in some cases, certificate-of-need requirements.

The Company's compliance with these regulations may affect its participation in Medicare, Medicaid, TRICARE and other federal health care programs.  The Company is also subject to a variety of federal and state regulations which prohibit fraud and abuse in the delivery of health care services.  These regulations include, among other things:

• prohibitions against the offering or making of direct or indirect payments to actual or potential referral sources for obtaining or influencing patient referrals;

• rules against physicians making referrals under Medicare for clinical services to a home health agency with which the physician or his or her immediate family member has certain types of financial relationships;

• laws against the filing of false claims; and

• laws against making payment or offering items of value to patients to induce their self-referral to the provider.

As part of the extensive federal and state regulation of the home health services business and under the Company's corporate integrity agreement, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies.  Periodic and random audits conducted or directed by these agencies could result in a delay in receipt, or an adjustment to the amounts of reimbursements due or received under Medicare, Medicaid, TRICARE and other federal health programs.  Violation of the applicable federal and state health care regulations can result in excluding a health care provider from participating in the Medicare, Medicaid and/or TRICARE programs and can subject the provider to substantial civil and/or criminal penalties.

On October 1, 2002, the reduction in home health payment limits mandated under the BBA became effective.  The Center for Medicare and Medicaid Services estimates that the reduction in payment limits will reduce payments under the Medicare program to home health agencies for open episodes of care on or after

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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 $2.0 million on net revenues for the fiscal year ended December 29, 2002.  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 10 percent rural add-on provision for home health services is scheduled to expire as of April 1, 2003.  The 10 percent rural add-on provision positively impacted the Company's net revenues by approximately $2 million for fiscal year 2002. Further, reductions in Medicaid reimbursement rates and limitations on payment increases may also occur.

Item 4.     Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

Executive Officers of the Company

The following table sets forth certain information regarding each of the Company's executive officers as of March 11, 2003:

Name	Executive Officer Since	Age	Position and Offices with the Company
Ronald A. Malone	2000	48	Chief Executive Officer and Chairman of the Board
Vernon A. Perry, Jr.	1999	51	President and Chief Operating Officer
Robert Creamer	2002	44	Senior Vice President, Financial Operations, and Chief Information Officer
Mary Morrisey Gabriel	2002	37	Senior Vice President, Sales
John R. Potapchuk	2001	50	Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Christopher L. Anderson	2001	31	Vice President, Audit Services and Quality Assurance, and Chief Compliance Officer

The executive officers are elected annually by the Board of Directors.

Ronald A. Malone

Mr. Malone has served as chief executive officer and chairman of the board of the Company since June 2002.  He served as executive vice president of the Company from March 2000 to June 2002.  Prior to joining the Company, he served in various positions with Olsten, including executive vice president of Olsten and president, Olsten Staffing Services, United States and Canada, from January 1999 to March 2000.  From 1994 to December 1998, he served successively as Olsten's senior vice president, southeast division; senior vice president, operations; and executive vice president, operations.

Vernon A. Perry, Jr.

Mr. Perry has served as president and chief operating officer of the Company since June 2002.  He served as senior vice president of the Company from November 1999 to June 2002.  From 1996 to 1999, he served as senior vice president of CareCentrix for Olsten Health Services.  He joined Olsten in 1994 as vice president for business development.

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Robert Creamer

Mr. Creamer has served as senior vice president, financial operations, and chief information officer of the Company since June 2002.  Prior thereto he served in various corporate financial management positions with the Company and Olsten Health Services, including vice president of finance-CareCentrix, vice president of financial operations and vice president of finance - Specialty Pharmaceutical Services.  He first joined Olsten in 1991.

Mary Morrisey Gabriel

                Ms. Morrisey Gabriel has served as senior vice president, sales, of the Company since July 2002.  From March 2000 to June 2002, Ms. Morrisey Gabriel served as senior vice president of National Accounts/North American Sales of Adecco, a staffing services company.  From October 1998 to March 2000, she served as Olsten's senior vice president of national accounts and prior thereto was Olsten's vice president of national accounts/business development.

John R. Potapchuk

Mr. Potapchuk has served as senior vice president, chief financial officer, treasurer and secretary of the Company since June 2002.  He served as vice president of finance and controller of the Company from March 2000 to June 2002.  He joined Olsten in 1991 and served in various corporate financial management positions with Olsten Health Services, including vice president and operations controller and vice president of finance.  Prior to that, Mr. Potapchuk served in senior management positions for PricewaterhouseCoopers LLP and Deloitte & Touche.

Christopher L. Anderson

Mr. Anderson has served as the chief compliance officer and vice president of audit services and quality assurance of the Company since March 2000.  He served as chief compliance officer of Olsten from November 1998 to March 2000.  From 1996 to 1998, Mr. Anderson was vice president of compliance and government affairs of Housecall Medical Resources, Inc., a home care service company.

PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

The Company's common stock is quoted on The Nasdaq National Market under the symbol "GTIV". 

The following table sets forth the high and low bid information for shares of the Company's common stock for each quarter during fiscal 2001 and 2002:

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(1)    On June 13, 2002, the Company paid a special dividend to its shareholders consisting of $7.76 cash and 0.19253 shares of Accredo common stock per share of Gentiva 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) following the sale of the Company's SPS business to Accredo. The total value of the special dividend amounted to $17.75 per share.

Holders

As of March 11, 2003, there were approximately 2,350 holders of record of the Company's common stock (including participants in the Company's employee stock purchase plan, brokerage firms holding the Company's common stock in "street name" and other nominees).

Dividends

Except for the special dividend in cash ($7.76) and in kind (0.19253 shares of Accredo common stock) per share of Gentiva common stock paid in June 2002, the Company has never paid any cash dividends on its common stock.  The Company does not currently expect to pay any dividends on its common stock.  Any future payments of dividends and the amount of the dividends will be determined by the board of directors from time to time based on the Company's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Company's board of directors, including any substantive change in the United States Tax Code.  In addition, the Company's credit facility also contains restrictions on the Company's ability to declare and pay dividends.  See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 6.                    Selected Financial Data

The following table provides selected historical consolidated financial data of the Company as of and for each of the fiscal years in the five-year period ended December 29, 2002.  The data have been derived from the Company's audited consolidated financial statements.  The historical consolidated financial information presents the Company's results of operations and financial position as if the Company were a separate entity from Olsten for all years presented. 

In addition, the operating results of the SPS business through the closing date of the sale to Accredo, including corporate expenses directly attributable to SPS operations, restructuring and special charges related to the SPS business, as well as the gain on the sale, net of transaction costs and related income taxes, are reflected as discontinued operations in the accompanying consolidated statements of operations.  Continuing operations includes the results of the Home Health Services business, including corporate expenses that did not directly relate to SPS, as well as restructuring and special charges.  In addition, for fiscal 2000, 1999 and 1998, continuing operations included the health care staffing services business and Canadian operations which were sold during the fourth quarter of fiscal 2000.  Results of all prior periods have been reclassified to conform to this presentation.

The historical financial information may not be indicative of the Company's future performance and may not necessarily reflect what the financial position and results of operations of the Company would have been if the Company was a separate stand-alone entity during all the years presented.

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(1)    For fiscal 2002, the Company sold its SPS business to Accredo in accordance with the asset purchase agreement, dated January 2, 2002, with the sale completed on June 13, 2002.  As such, the Company has reflected discontinued operations, including the gain on sale, of $191.6 million during fiscal 2002. Results for all prior years have been reclassified to conform to this presentation.  See Note 3 to the Company's consolidated financial statements.

(2)    For fiscal 2002, the Company adopted the provisions of SFAS 142 "Goodwill and Other Intangible Assets" and performed a transitional impairment test, resulting in a non-cash charge of $187.1 million.  See Note 2 to the Company's consolidated financial statements. 

(3)    Net loss in fiscal 2002 reflects restructuring and other special charges aggregating $46.1 million, of which $6.3 million is recorded in cost of services sold and $39.8 million is recorded in selling, general and administrative expenses.  See Note 4 to the Company's consolidated financial statements.

(4)    Net income in fiscal 2001 reflects special charges of approximately $3.0 million in connection with the settlement of the Gile v. Olsten Corporation, et al. and the State of Indiana v. Quantum Health Resources, Inc. and Olsten Health Services, Inc. lawsuits and for various other legal costs. These special charges are included in selling, general and administrative expenses.  See Note 4 to the Company's consolidated financial statements.

(5)    Net loss for fiscal 2000 reflects restructuring and other special charges aggregating $153.2 million, of which $97.0 million related to discontinued operations and $56.2 million related to continuing operations. Restructuring and special charges of $8.5 million are included in cost of services sold and $47.7 million is included in selling, general and administrative expenses.  See Note 4 to the Company's consolidated financial statements.  Net loss for fiscal 2000 also reflects a gain of $36.7 million relating to the sale of the Company's staffing services business and Canadian operations.

(6)    Net loss for fiscal 1999 reflects a restructuring charge of $15.2 million for the realignment of business units as part of a new restructuring plan.  This charge is included in selling, general and administrative expenses. 

(7)    Net loss in fiscal 1998 reflects restructuring and other special charges totaling approximately $122 million, of which $18 million related to discontinued operations and $104 million related to continuing operations.  These charges resulted from $66 million related to the restructuring of the Company's businesses and a special charge of $56 million for the settlement of two federal investigations.  The restructuring and other special charges of $104 million that related to continuing operations included a reduction in revenues of $14 million, a charge to cost of sales of $15 million and $75 million in selling, general and administrative expenses.

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(8)    Basic and diluted earnings per share and the average shares outstanding for each of the fiscal years 1998 and 1999 have been computed based on 20,345,029 shares of common stock.  Such amount is based on the number of shares of the Company's common stock issued on March 15, 2000, the date of the split-off.  See Note 2 to the Company's consolidated financial statements.

(9)    Tangible net worth represents the amount of shareholders' equity reduced by intangibles, principally goodwill, net of accumulated amortization.

(10)  Balance sheet data for the fiscal years ended 2001, 2000, 1999 and 1998 includes the assets of the SPS business, which was sold to Accredo on June 13, 2002.

(11)  Net revenues for fiscal 2000, 1999 and 1998 includes net revenues related to the home health services business of $736.5 million, $727.2 million and $715.6 million, respectively.

Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain statements contained in this Annual Report on Form 10-K, 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:

• general economic and business conditions;

• demographic changes;

• changes in, or failure to comply with, existing governmental regulations;

• legislative proposals for health care reform;

• changes in Medicare and Medicaid reimbursement levels;

• effects of competition in the markets the Company operates in;

• liability and other claims asserted against the Company;

• ability to attract and retain qualified personnel;

• availability and terms of capital;

• loss of significant contracts or reduction in revenue associated with major payor sources;

• ability of customers to pay for services;

• a material shift in utilization within capitated agreements; and

• changes in estimates and judgments associated with critical accounting policies as further described herein.

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 within this Annual Report on Form 10-K as well as in various filings with the Securities and Exchange Commission, 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.

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

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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 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 through the closing date of the sale to Accredo, including corporate expenses directly attributable to SPS operations, restructuring and special charges related to the SPS business, as well as the gain on the sale, net of transaction costs and related income taxes, are reflected as discontinued operations in the accompanying consolidated statements of operations.  Continuing operations includes the results of the Home Health Services business, including corporate expenses that did not directly relate to SPS, as well as restructuring and special charges.  In addition, for fiscal 2000, continuing operations included the health care staffing services business and Canadian operations which were sold during the fourth quarter of fiscal 2000.  Results of all prior periods have been reclassified to conform to this presentation.

Year Ended December 29, 2002 Compared to Year Ended December 30, 2001

Results of Operations

Revenues

Net revenues increased by $39 million, or 5.3 percent to $769 million during fiscal 2002 as compared to $730 million during fiscal 2001.  This increase was driven by a combination of increased rates to Commercial and Government payors, increased volume in nursing patient admissions and an increase in the number of Preferred Provider Organization enrollees served by the Company's CareCentrix unit, partially offset by a 4.9 percent net reduction in Medicare reimbursement rates, which became effective in October 2002. 

For fiscal year 2002, as compared to fiscal year 2001, net revenues from Medicare increased by $9.7 million or 6.3 percent to $162.3 million.  Commercial and Other payors net revenues increased by $30 million or 7.3 percent to $438.8 million and Local Government payors net revenues decreased $0.7 million or 0.4 percent to $167.4 million. 

Gross Profit

Gross profit was approximately $248 million for fiscal year 2002 compared to $246 million for fiscal year 2001.  As a percentage of net revenues, gross profit margins decreased from 33.7 percent for fiscal year 2001 to 32.2 percent for fiscal year 2002.

The decrease in margin was primarily related to a $6.3 million special charge relating principally to a refinement in the estimation process used to determine the Company's actuarially computed workers compensation and professional liability insurance reserves (see Note 4 to the consolidated financial statements).  This special charge had a negative impact on gross profit margins of 0.8 percent.  In addition to the special charge, the Company also recorded a revenue adjustment of $2.5 million, which had a 0.3 percent negative impact on margins, related to a change in the estimated amount of the repayment to Medicare for partial episode payments ("PEPs") from the inception of the Prospective Payment System of reimbursement ("PPS") in October 2000 through June 30, 2002.  The 4.9 percent net reduction in Medicare reimbursement rates, which became effective in October 2002, had a negative impact of approximately $2.0 million, or 0.3 percent, on gross profit margins for fiscal year 2002.  The remaining net decrease in gross margin percentage was attributable to various other factors, including training costs associated with orientation of additional full-time caregivers, increased insurance costs and changes in business mix due to growth in the CareCentrix business, which generates a lower gross margin but also requires lower administrative costs to service the business, offset by increased rates to Commercial and certain Government payors.

Selling, General and Administrative Expenses

                Selling, general and administrative expenses increased $17 million or 6.5 percent to $283 million during fiscal 2002 compared to $266 million during fiscal 2001.  These increases were driven by restructuring and special charges of $46.1 million during the second quarter ended June 30, 2002, of which approximately $40 million was reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002, as compared to $3 million of special charges which were reflected in the consolidated statement of operations for the fiscal year ended December 30, 2001.  These net increases were offset by reductions in amortization expense ($10 million) due to the implementation of SFAS

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No. 142 and net reductions ($10 million) in field and corporate administration expenses as a result of restructuring efforts and improvements in processes and technology, partially offset by an increase in selling expenses.

                Restructuring and special charges for the fiscal year ended December 29, 2002 are summarized and further described below (in thousands):

Fiscal 2002

Business Realignment Activities

The Company recorded charges of $6.8 million during the second quarter ended June 30, 2002 in connection with a restructuring plan.  This plan included the closing and consolidation of seven field locations and the realignment and consolidation of certain corporate and administrative support functions due primarily to the sale of the Company's SPS business.  These charges included employee severance of $0.9 million relating to the termination of 115 employees in field locations and certain corporate and administrative departments, and future lease payments and other associated costs of $5.9 million resulting principally from the consolidation of office space at the Company's corporate headquarters and a change in estimated future lease obligations and other costs in excess of sublease rentals relating to a lease for a subsidiary of the Company's former parent company which the Company agreed to assume in connection with its Split-Off in March 2000.  These charges are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations.  During fiscal year 2002, the Company paid $2.1 million in restructuring costs, leaving approximately $4.7 million of these restructuring charges unpaid, representing severance costs of $0.2 million which will be paid during 2003 and lease and other associated costs of $4.5 million which will be paid over the remaining lease terms. These unpaid restructuring charges are reflected in other accrued expenses in the accompanying consolidated balance sheet as of December 29, 2002.

Option Tender Offer

During the second quarter ended June 30, 2002, the Company effected a cash tender offer for all outstanding options to purchase its common stock for an aggregate option purchase price not to exceed $25 million.  In connection with this tender offer,