Attached files

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EX-10.6 - SUMMARY SHEET OF COMPANY COMPENSATION TO NON-EMPLOYEE DIRECTORS - GENTIVA HEALTH SERVICES INCdex106.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - GENTIVA HEALTH SERVICES INCdex312.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - GENTIVA HEALTH SERVICES INCdex322.htm
EX-10.4 - AMENDED SEVERANCE AGREEMENT WITH JOHN R. POTAPCHUK - GENTIVA HEALTH SERVICES INCdex104.htm
EX-10.5 - AMENDED SEVERANCE AGREEMENT WITH STEPHEN B. PAIGE - GENTIVA HEALTH SERVICES INCdex105.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - GENTIVA HEALTH SERVICES INCdex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - GENTIVA HEALTH SERVICES INCdex321.htm
EX-10.2 - EXECUTIVE OFFICERS BONUS PLAN, AS AMENDED - GENTIVA HEALTH SERVICES INCdex102.htm
EX-10.3 - AMENDMENT NO. 1 TO STOCK & DEFERRED COMPENSATION PLAN - GENTIVA HEALTH SERVICES INCdex103.htm
Table of Contents

 

 

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 July 4, 2010

OR

 

¨ 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)

 

 

 

Delaware   36-4335801

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3350 Riverwood Parkway, Suite 1400, Atlanta, GA 30339-3314

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 951-6450

 

 

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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨            Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock, as of July 22, 2010, was 29,807,722.

 

 

 


Table of Contents

INDEX

 

          Page No.

PART I - FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Consolidated Balance Sheets (Unaudited) – July 4, 2010 and January 3, 2010

   3
  

Consolidated Statements of Income (Unaudited) – Three and Six Months Ended July 4,  2010 and June 28, 2009

   4
  

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended July 4,  2010 and June 28, 2009

   5
  

Notes to Consolidated Financial Statements (Unaudited)

   6-25

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26-40

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   40

Item 4.

  

Controls and Procedures

   40-41

PART II - OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   42

Item 1A.

  

Risk Factors

   42-44

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   45

Item 3.

  

Defaults Upon Senior Securities

   45

Item 4.

  

(Removed and Reserved)

   45

Item 5.

  

Other Information

   45

Item 6.

  

Exhibits

   46

SIGNATURES

   47

EXHIBIT INDEX

   48

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

     July 4, 2010     January 3, 2010  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 191,066      $ 152,410   

Receivables, less allowance for doubtful accounts of $10,370 and $9,304 at July 4, 2010 and January 3, 2010, respectively

     168,541        182,192   

Deferred tax assets

     14,300        17,205   

Prepaid expenses and other current assets

     25,358        13,904   

Current assets held for sale

     —          2,549   
                

Total current assets

     399,265        368,260   

Note receivable from affiliate

     25,000        25,000   

Investment in affiliate

     25,100        24,336   

Fixed assets, net

     65,258        65,913   

Intangible assets, net

     253,085        251,793   

Goodwill

     304,080        299,534   

Non-current assets held for sale

     —          8,689   

Other assets

     26,943        24,410   
                

Total assets

   $ 1,098,731      $ 1,067,935   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 5,967      $ 8,982   

Payroll and related taxes

     24,701        23,463   

Deferred revenue

     40,149        36,359   

Medicare liabilities

     16,145        7,525   

Obligations under insurance programs

     44,037        41,636   

Other accrued expenses

     35,465        47,045   

Current portion of long-term debt

     —          5,000   
                

Total current liabilities

     166,464        170,010   

Long-term debt

     232,000        232,000   

Deferred tax liabilities, net

     71,895        73,259   

Other liabilities

     23,602        21,503   

Shareholders’ equity:

    

Common stock, $.10 par value; authorized 100,000,000 shares; issued 30,395,939 and 29,936,893 shares at July 4, 2010 and January 3, 2010, respectively

     3,040        2,994   

Additional paid-in capital

     365,731        355,429   

Retained earnings

     248,483        220,239   

Treasury stock, 641,468 and 466,468 shares at July 4, 2010 and January 3, 2010, respectively

     (12,484     (7,499
                

Total shareholders’ equity

     604,770        571,163   
                

Total liabilities and shareholders’ equity

   $ 1,098,731      $ 1,067,935   
                

See notes to consolidated financial statements.

 

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Table of Contents

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     July 4, 2010     June 28, 2009     July 4, 2010     June 28, 2009  

Net revenues

   $ 297,099      $ 284,838      $ 594,230      $ 561,202   

Cost of services sold

     135,249        134,144        275,839        268,025   
                                

Gross profit

     161,850        150,694        318,391        293,177   

Selling, general and administrative expenses

     (125,535     (120,529     (264,771     (240,033

Gain (loss) on sale of assets, net

     —          (85     103        5,747   

Interest income

     650        817        1,314        1,618   

Interest expense and other

     (1,766     (2,688     (3,514     (5,880
                                

Income from continuing operations before income taxes and equity in net earnings of affiliate

     35,199        28,209        51,523        54,629   

Income tax expense

     (15,415     (11,104     (21,757     (19,634

Equity in net earnings of affiliate

     439        263        763        541   
                                

Income from continuing operations

     20,223        17,368        30,529        35,536   

Discontinued operations, net of tax

     (1,304     (273     (2,285     (419
                                

Net income

   $ 18,919      $ 17,095      $ 28,244      $ 35,117   
                                

Basic earnings per common share:

        

Income from continuing operations

   $ 0.68      $ 0.60      $ 1.03      $ 1.22   

Discontinued operations, net of tax

     (0.04     (0.01     (0.08     (0.01
                                

Net income

   $ 0.64      $ 0.59      $ 0.95      $ 1.21   
                                

Weighted average shares outstanding

     29,770        28,959        29,715        28,952   
                                

Diluted earnings per common share:

        

Income from continuing operations

   $ 0.66      $ 0.59      $ 1.00      $ 1.20   

Discontinued operations, net of tax

     (0.04     (0.01     (0.08     (0.01
                                

Net income

   $ 0.62      $ 0.58      $ 0.92      $ 1.19   
                                

Weighted average shares outstanding

     30,618        29,396        30,568        29,606   
                                

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands, except share amounts)

(Unaudited)

 

     For the Six Months Ended  
     July 4, 2010     June 28, 2009  

OPERATING ACTIVITIES:

    

Net income

   $ 28,244      $ 35,117   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     8,807        11,145   

Amortization of debt issuance costs

     614        681   

Provision for doubtful accounts

     4,903        4,045   

Equity-based compensation expense

     3,191        3,466   

Windfall tax benefits associated with equity-based compensation

     (711     (585

Realized loss on auction rate securities

     —          1,000   

Gain on sale of assets and businesses, net

     (169     (5,747

Equity in net earnings of affiliate

     (763     (541

Deferred income tax expense

     1,542        1,458   

Changes in assets and liabilities, net of effects from acquisitions and dispositions:

    

Accounts receivable

     8,748        (1,082

Prepaid expenses and other current assets

     (9,158     (1,602

Accounts payable

     (3,015     481   

Payroll and related taxes

     1,241        90   

Deferred revenue

     3,790        4,981   

Medicare liabilities

     8,620        (371

Obligations under insurance programs

     2,401        (1,569

Other accrued expenses

     (10,844     (1,776

Other, net

     538        271   
                

Net cash provided by operating activities

     47,979        49,462   
                

INVESTING ACTIVITIES:

    

Purchase of fixed assets

     (5,613     (12,403

Proceeds from sale of assets and businesses

     8,796        5,619   

Acquisition of businesses

     (8,500     (2,200

Maturities of short-term investments available-for-sale

     —          2,550   
                

Net cash used in investing activities

     (5,317     (6,434
                

FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock

     5,612        5,910   

Windfall tax benefits associated with equity-based compensation

     711        585   

Repayment of long-term debt

     (5,000     (14,000

Repurchase of common stock

     (4,985     (4,813

Repayment of capital lease obligations

     (344     (441
                

Net cash used in financing activities

     (4,006     (12,759
                

Net change in cash and cash equivalents

     38,656        30,269   

Cash and cash equivalents at beginning of period

     152,410        69,201   
                

Cash and cash equivalents at end of period

   $ 191,066      $ 99,470   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Interest paid

   $ 3,219      $ 5,172   

Income taxes paid

   $ 25,054      $ 15,831   

See notes to consolidated financial statements.

 

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Table of Contents

Gentiva Health Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

  1. Background and Basis of Presentation

Gentiva Health Services, Inc. (“Gentiva” or the “Company”) provides home health services throughout most of the United States and hospice services in the southeast United States. The Company’s operations involve servicing its patients and customers through (i) its Home Health segment and (ii) its Hospice segment.

On May 23, 2010, the Company entered into an Agreement and Plan of Merger to acquire Odyssey HealthCare, Inc. (“Odyssey”), a leading provider of hospice services. In connection with the acquisition, the Company is expected to enter into a new $925 million Credit Agreement and issue and sell $305 million of unsecured subordinated notes. See Note 17 for additional information about the acquisition and related financing. The Company’s existing credit arrangements, which are described in Note 11, will be terminated upon the consummation of the Odyssey acquisition. During the second quarter of 2010, the Company incurred approximately $2.0 million of costs associated with Odyssey merger and acquisition activities as more fully described in Note 8. Other than these costs, the impact of the acquisition and related financing agreements will be reflected in the Company’s fiscal 2010 results of operations and financial condition as of the acquisition closing date, which is expected to occur on or around August 16, 2010.

In February 2010, the Company consummated the sale of its respiratory therapy and home medical equipment and infusion therapy businesses (“HME and IV”). During the fourth quarter of 2009, the Company committed to a plan to exit its HME and IV businesses and met the requirements to designate these businesses as held for sale in accordance with applicable accounting guidance. The financial results of these operating segments are reported as discontinued operations in the Company’s consolidated financial statements.

In addition, the Company has completed various other transactions impacting the Company’s results of operations and financial condition as further described in Note 4. The impact of these transactions has been reflected in the Company’s results of operations and financial condition from their respective closing dates.

The accompanying interim consolidated financial statements are unaudited, and have been prepared by Gentiva using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K for the year ended January 3, 2010 and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of the statement of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the statements of financial position, results of operations and cash flows prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. 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.

 

  2. New Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-06, or ASU No. 10-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. ASU No. 10-06 requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements, and describe the reasons for the transfers. Also, it requires additional disclosure regarding purchases, sales, issuances and settlements of Level 3 measurements. ASU No. 10-06 is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU No. 10-06 did not have a material impact on the Company’s consolidated financial statements.

 

  3. Accounting Policies

Cash and Cash Equivalents

The Company considers all investments with a maturity date three months or less from their date of acquisition to be cash equivalents, including money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. Cash and cash equivalents also included amounts on deposit with several major financial institutions in excess of the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these major financial institutions are viable entities.

The Company had operating funds of approximately $5.1 million and $5.5 million at July 4, 2010 and January 3, 2010, respectively, which exclusively relate to a non-profit hospice operation managed in Florida.

Investments

At July 4, 2010 and January 3, 2010, the Company held an ownership interest of approximately 30 percent in the combined preferred and common equity of CareCentrix Holdings Inc. The Company’s ongoing ownership interest is subject to dilution following any equity issuances to employees of CareCentrix Holdings Inc. and any other parties. The Company

 

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accounts for its investment in this unconsolidated affiliate using the equity method of accounting, since the Company has the ability to exercise significant influence, but not control, over the affiliate. Significant influence is deemed to exist because the Company’s ownership interest in the voting stock of the affiliate is between 20 percent and 50 percent as well as through the Company’s representation on the affiliate’s Board of Directors. The Company’s equity ownership interest in CareCentrix Holdings Inc. is recorded in investment in affiliate in the accompanying consolidated balance sheets.

At July 4, 2010 and January 3, 2010, the Company had assets of $22.0 million and $20.0 million, respectively, held in a Rabbi Trust for the benefit of participants of the Company’s non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in a Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.

The Company’s investments in debt securities with an original maturity greater than three months, if any, would be classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading. As of July 4, 2010 and January 3, 2010, the Company held no investments with an original maturity greater than three months.

Inventory

Inventories are stated at the lower of cost or market utilizing the specific identification method. At January 3, 2010, the Company’s inventory was approximately $2.4 million and related primarily to products utilized in the Company’s HME and IV businesses, which were classified in current assets held for sale. The Company carried no inventory at July 4, 2010.

Fixed Assets

Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement.

As of July 4, 2010 and January 3, 2010, fixed assets, net were $65.3 million and $65.9 million, respectively, and included deferred software development costs of $33.7 million and $37.0 million, respectively, primarily related to the Company’s LifeSmart clinical management system. The Company depreciates its clinical management software on a straight-line basis utilizing a seven year useful life, at the time that the technology becomes available for its intended use within a specific branch. Depreciation expense, relating to this item, approximated $0.2 million and $0.4 million for the second quarter and first six months of fiscal 2010, respectively.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its credit agreement. The Company had unamortized debt issuance costs of $3.1 million at July 4, 2010 and $2.7 million at January 3, 2010, recorded in other assets.

Home Medical Equipment

As of July 4, 2010 and January 3, 2010, the net book value of home medical equipment was approximately $1.7 million and $1.9 million, respectively, representing monitoring and other devices used primarily in the Company’s home health business, which are included in fixed assets, net in the Company’s consolidated balance sheet. Net book value of home medical equipment utilized in the Company’s HME and IV businesses approximated $3.7 million at January 3, 2010, which was reflected in non-current assets held for sale in the Company’s consolidated balance sheet.

Obligations Under Self Insurance Programs

Workers’ compensation and professional and general liability expenses were $1.7 million and $8.9 million for the second quarter and first six months of 2010, respectively, as compared to $3.1 million and $7.0 million for the corresponding periods of 2009.

Employee health and welfare expenses were $12.9 million and $25.0 million for the second quarter and first six months of 2010, respectively, as compared to $13.7 million and $27.1 million for the corresponding periods of 2009.

 

  4. Acquisitions and Dispositions

Acquisitions

        Effective May 15, 2010, the Company completed its acquisition of the assets and business of United Health Care Group, Inc. with six branches throughout the state of Louisiana. Total consideration of $6.0 million, excluding transaction costs and subject to post-closing adjustments, was paid at the time of closing and was funded from the Company’s existing cash reserves. The acquisition significantly broadens the Company’s market position in the state of Louisiana. The purchase price was allocated to goodwill ($2.3 million), identifiable intangible assets, primarily certificates of need ($3.6 million) and other assets ($0.1 million).

 

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Effective March 5, 2010, the Company completed its acquisition of the assets and business of Heart to Heart Hospice of Starkville, LLC, a provider of hospice services with two offices in Starkville and Tupelo, Mississippi. Total consideration of $2.5 million, excluding transaction costs and subject to post-closing adjustments, was paid at the time of closing and was funded from the Company’s existing cash reserves. The acquisition expands the Company’s coverage area to 44 counties in north, central and southern Mississippi. The purchase price was allocated to goodwill ($2.2 million), identifiable intangible assets ($0.2 million) and other assets ($0.1 million).

The financial results of the acquired operations are included in the Company’s consolidated financial statements from the acquisition date. The purchase price for both acquisitions was allocated to the underlying assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired is recorded as goodwill. The Company has determined the estimated fair values based on discounted cash flows, and management’s valuation of the intangible assets acquired.

Dispositions

HME and IV Businesses Disposition

Effective February 1, 2010, the Company completed the sale of its HME and IV businesses to a subsidiary of Lincare Holdings, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $16.4 million, consisting of (i) cash proceeds of approximately $8.5 million, (ii) approximately $2.5 million associated with operating and capital lease buyout obligations, (iii) an escrow fund of $5.0 million, which was recorded at estimated fair value of $3.2 million, to be received by the Company based on achieving a cumulative cash collections target for claims for services provided for a period of one year from the date of closing and (iv) an escrow fund of approximately $0.4 million for reimbursement of certain post closing liabilities. During the first six months of 2010, the Company recorded a $0.1 million pre-tax gain, net of transaction costs in discontinued operations, net of tax, in the Company’s consolidated statement of income. Transaction costs of $0.7 million consisted primarily of professional fees and expenses.

The major classes of assets of the HME and IV businesses that were sold on February 1, 2010 and assets classified as held for sale on the Company’s January 3, 2010 consolidated balance sheet were as follows (in thousands):

 

     As of Date of Sale    January 3, 2010

Current assets:

     

Inventory

   $ 2,367    $ 2,367

Prepaid expenses and other current assets

     32      182
             

Total current assets

     2,399      2,549

Non-current assets:

     

Fixed assets, net

     5,401      5,145

Intangible assets, net

     781      781

Goodwill

     2,732      2,732

Other assets

     25      31
             

Total non-current assets

     8,939      8,689
             

Total

   $ 11,338    $ 11,238
             

There were no liabilities classified as held for sale as the Company did not transfer any pre-closing liabilities in the transaction. Accounts receivable and liabilities associated with the HME and IV businesses approximated $11 million and $3 million, respectively as of the date of sale. The Company retained accounts receivable, net associated with these businesses of approximately $2.0 million at July 4, 2010 and $10.2 million at January 3, 2010.

 

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HME and IV net revenues and operating results for the periods presented were as follows (in thousands):

 

     Second Quarter     First Six Months  
     2010     2009     2010     2009  

Net revenues

   $ —        $ 13,265      $ 3,956      $ 25,818   
                                

Loss before income taxes

   $ (2,171   $ (423   $ (5,498   $ (649

Gain on sale of business

     —          —          66        —     

Income tax benefit

     867        150        3,147        230   
                                

Discontinued operations, net of tax

   $ (1,304   $ (273   $ (2,285   $ (419
                                

Depreciation and amortization expense relating to discontinued operations amounted to $1.4 million and $2.8 million for the second quarter and first six months of 2009, respectively. The Company recorded no depreciation and amortization expense relating to the first six months of 2010 as the assets were treated as held-for-sale at January 3, 2010, in accordance with applicable guidance.

Upon the designation of these businesses as held for sale in the fourth quarter of 2009, the assets of the businesses were recorded at the lower of their carrying value or their estimated fair value less costs to sell. The Company performed a goodwill impairment test which indicated an impairment of the goodwill associated with these businesses and recorded a write-down of goodwill of approximately $9.6 million in discontinued operations for the fourth quarter of 2009.

Other Asset Disposition

Effective January 30, 2010, the Company sold assets associated with a home health branch operation in Iowa for cash consideration of approximately $0.3 million and recognized a gain of approximately $0.1 million recorded in gain on sale of assets, net in the Company’s consolidated statement of income for the six months ended July 4, 2010.

Pediatric and Adult Hourly Services Disposition

During the first six months of 2009, the Company sold assets associated with certain branch offices that specialized primarily in pediatric home health care services for total consideration of $6.5 million. The sales related to seven offices in five cities and included the adult home care services in the affected offices. The Company received $5.9 million in cash at the close of the sale and $0.6 million as a final payment in September 2009. The sales, after deducting related costs, resulted in a net gain before income taxes of $5.7 million. This gain is included in gain on sale of assets, net in the Company’s consolidated statement of income for the six months ended June 28, 2009.

 

  5. Fair Value of Financial Instruments

The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for notes receivable from affiliate and long-term debt. The fair values for notes receivable from affiliate and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and adjustments recorded only if an impairment charge is required. The carrying amount of the Company’s accounts receivable, accounts payable and certain other current liabilities approximates fair value due to their short maturities.

Fair value is defined under authoritative guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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Financial Instruments Recorded at Fair Value

The Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis was as follows (in thousands):

 

     July 4, 2010    January 3, 2010
     Level 1    Level 2    Level 3    Total    Level 1    Level 2    Level 3    Total

Assets:

                       

Money market funds

   $ 97,447    $ —      $ —      $ 97,447    $ 79,919    $ —      $ —      $ 79,919

Rabbi Trust

     22,037      —        —        22,037      19,980      —        —        19,980
                                                       

Total assets

   $ 119,484    $ —      $ —      $ 119,484    $ 99,899    $ —      $ —      $ 99,899
                                                       

Liabilities:

                       

Payables to plan participants

   $ 22,037    $ —      $ —      $ 22,037    $ 19,980    $ —      $ —      $ 19,980

Assets of the Rabbi Trust are held for the benefit of participants of the Company’s non-qualified defined contribution retirement plan. The value of assets held in a Rabbi Trust is based on quoted market prices of securities and investments, including money market accounts and mutual funds, maintained within the Rabbi Trust. The corresponding amounts payable to plan participants are equivalent to the underlying value of assets held in the Rabbi Trust. Assets held in a Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets. Money market funds represent cash equivalents and were classified in cash and cash equivalents in the Company’s consolidated balance sheets.

At the beginning of fiscal 2009, the Company held auction rate securities with par value of $13 million classified as long-term investments with an estimated fair value of 85 percent of par, due to the reduced liquidity for these securities as a result of failed auctions. During the first six months of fiscal 2009, the Company (i) sold $3.0 million of auction rate securities at 85 percent of par and (ii) contracted to sell $5.0 million of auction rate securities at 89 percent of par, which settled in early July. In connection with these transactions, the Company recognized an impairment loss of approximately $0.6 million and $1.0 million for the second quarter and first six months of 2009, respectively, which was reflected in interest expense and other in the Company’s consolidated statements of income. For the first six months of 2009, changes in fair value of the Company’s Level 3 financial assets were as follows (in thousands):

 

     Total  

Balance at December 28, 2008

   $ 11,050   

Unrealized gain in other comprehensive income

     200   

Settlements

     (2,550
        

Balance at June 28, 2009

   $ 8,700   
        

Other Financial Instruments

The carrying amount and estimated fair value of the Company’s other financial instruments were as follows (in thousands):

 

     July 4, 2010    January 3, 2010
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value

Assets:

           

Note receivable from affiliate

   $ 25,000    $ 26,000    $ 25,000    $ 26,000

Liabilities:

           

Long-term debt

   $ 232,000    $ 227,940    $ 232,000    $ 216,900

The estimated fair value of the note receivable from affiliate was determined from Level 3 inputs based on an income approach using the discounted cash flow method. The fair value represents the net present value of (i) the after tax cash flows relating to the note’s annual income stream plus (ii) the return of the invested principal using a maturity date of March 25, 2014 (see Note 7), after considering assumptions relating to risk factors and economic conditions.

 

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In determining the estimated fair value of long-term debt, Level 2 inputs based on the use of bid and ask prices were considered. Due to the infrequent number of transactions that occur related to the long-term debt, the Company does not believe an active market exists for purposes of this disclosure.

 

  6. Net Revenues and Accounts Receivable

Net revenues by major payer classification were as follows:

 

      Second Quarter     First Six Months  

(Dollars in millions)

   2010    2009    Percentage
Variance
    2010    2009    Percentage
Variance
 

Medicare:

                

Home Health

   $ 207.4    $ 194.1    6.8   $ 415.0    $ 380.2    9.2

Hospice

     19.4      16.7    16.1        37.6      33.0    13.9   
                                        

Total Medicare

     226.8      210.8    7.6        452.6      413.2    9.5   

Medicaid and Local Government

     18.6      23.3    (20.1     38.0      49.8    (23.9

Commercial Insurance and Other:

                

Paid at episodic rates

     21.3      19.2    11.2        42.2      35.3    19.5   

Other

     30.4      31.5    (3.6     61.4      62.9    (2.2
                                        

Total Commercial Insurance and Other

     51.7      50.7    2.0        103.6      98.2    5.6   
                                        

Total net revenues

   $ 297.1    $ 284.8    4.3   $ 594.2    $ 561.2    5.9
                                        

Net revenues in the Home Health and Hospice segments were derived from all major payer classes. Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):

 

     July 4, 2010     January 3, 2010  

Medicare

   $ 123,891      $ 126,927   

Medicaid and Local Government

     12,618        16,465   

Commercial Insurance and Other

     42,402        48,104   
                

Gross Accounts Receivable

     178,911        191,496   

Less: Allowance for doubtful accounts

     (10,370     (9,304
                

Net Accounts Receivable

   $ 168,541      $ 182,192   
                

Net accounts receivable associated with the Company discontinued operations were approximately $2.0 million and $10.2 million at July 4, 2010 and January 3, 2010, respectively. The Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $3.9 million and $3.8 million as of July 4, 2010 and January 3, 2010, respectively.

 

  7. Note Receivable from and Investment in Affiliate

The Company currently holds an approximate 30 percent equity ownership interest in CareCentrix Holdings Inc., whose CareCentrix subsidiary is a leading national provider of ancillary care benefit management services for major managed care organizations. The Company’s ongoing ownership interest is subject to dilution following any equity issuances to employees of CareCentrix Holdings Inc. and any other parties.

The Company holds a $25 million convertible subordinated promissory note from CareCentrix. The note is due on the earliest of March 25, 2014, a public offering by CareCentrix Holdings, or a sale of CareCentrix Holdings. The note bears interest at a fixed rate of 10 percent, which is payable quarterly, provided that CareCentrix remains in compliance with its senior debt covenants. Interest on the CareCentrix note, which is included in interest income in the consolidated statements of income, amounted to $0.6 million for both the second quarter of 2010 and 2009, and $1.3 million for both the first six months of 2010 and 2009. The Company recognized approximately $0.4 million and $0.7 million of equity in the net earnings of affiliate for the second quarter and first six months of 2010, respectively, and $0.3 million and $0.5 million for the corresponding periods of 2009.

During the second quarter of 2010, the Company recorded a receivable from CareCentrix of $1.8 million in connection with the tax impact of settlement charges relating to the settlement of a commercial contractual dispute involving the Company’s former subsidiary, CareCentrix for which the Company will be reimbursed upon realization of the tax deduction.

 

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  8. Restructuring and Integration Costs, Merger and Acquisition Activities and Legal Settlements

During the second quarter and first six months of 2010, the Company recorded net charges relating to restructuring and integration costs, merger and acquisition activities, and legal settlements of $2.5 million and $18.0 million, respectively, and $0.6 million and $1.5 million for the corresponding periods in 2009.

Restructuring and Integration Costs

During the second quarter and first six months of 2010, the Company recorded charges of $1.9 million and $2.3 million, respectively, as compared to $0.6 million and $1.4 million for the second quarter and first six months of 2009, respectively, in connection with restructuring activities, including severance costs in connection with the termination of personnel and facility lease and other costs. These charges included a non-cash charge of approximately $0.6 million, recorded in the second quarter of 2010, associated with the acceleration of compensation expense relating to future vesting of stock options under severance agreements for certain of the Company’s executive officers. Additional restructuring and integration costs to be incurred during fiscal 2010, largely related to the relocation of the Company’s corporate headquarters from Melville, New York to Atlanta, Georgia and back office integration, are expected to approximate $1 million for the remainder of 2010.

Merger and Acquisition Activities

During the second quarter and first six months of 2010, the Company recorded charges of $2.0 million in connection with costs of merger and acquisition activities, primarily related to the Odyssey transaction. These costs consisted of legal, accounting and other professional fees and expenses as well as costs of obtaining required regulatory approvals. Charges for merger and acquisition activities were $0.1 million for the second quarter and first six months of 2009.

Legal Settlements

During the second quarter of 2010, the Company recorded a net reduction in charges related to legal settlements of $1.4 million which included (i) a reduction of $1.8 million associated with the reclassification of the tax impact of the settlement charges recorded in the first quarter of 2010, and (ii) incremental legal fees of approximately $0.4 million, both relating to the settlement of the three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix.

For the first six months of 2010, the Company recorded legal settlements of $13.7 million consisting of (i) settlement costs and legal fees of $4.2 million related to a three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix and (ii) incremental charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the federal government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods. See Note 14 Legal Matters for further information.

 

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The costs incurred and cash expenditures associated with these activities by component were as follows (in thousands):

 

     Restructuring     Merger &
Acquisition
    Legal
Settlements
    Total  

Ending balance at December 28, 2008

   $ 99      $ —        $ 3,000      $ 3,099   

Charge in first quarter 2009

     785        114        —          899   

Cash expenditure

     (355     (114     —          (469
                                

Ending balance at March 29, 2009

     529        —          3,000        3,529   

Charge in second quarter 2009

     602        4        —          606   

Cash expenditure

     (270     (4     —          (274
                                

Ending balance at June 28, 2009

   $ 861      $ —        $ 3,000      $ 3,861   
                                

Ending balance at January 3, 2010

   $ 646      $ —        $ 3,000      $ 3,646   

Charge in first quarter 2010

     357        —          15,134        15,491   

Cash expenditure

     (396     —          (751     (1,147
                                

Ending balance at April 4, 2010

     607        —          17,383        17,990   

Charge in second quarter 2010

     1,882        2,034        (1,440     2,476   

Cash expenditure

     (316     (471     (5,222     (6,009

Non-cash adjustment

     (577     —          1,800        1,223   
                                

Ending balance at July 4, 2010

   $ 1,596      $ 1,563      $ 12,521      $ 15,680   
                                

The balance of unpaid charges relating to restructuring, integration, and merger and acquisition activities approximated $3.2 million at July 4, 2010 and $0.6 million at January 3, 2010, which were included in other accrued expenses in the Company’s consolidated balance sheets. Unpaid charges associated with the government investigation were included in Medicare liabilities in the Company’s consolidated balance sheets and aggregated $12.5 million at July 4, 2010 and $3.0 million at January 3, 2010.

 

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  9. Identifiable Intangible Assets and Goodwill

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of July 4, 2010 and January 3, 2010 were as follows (in thousands):

 

     July 4, 2010     January 3, 2010     Useful Life
     Home
Health
    Hospice     Total     Home
Health
    Hospice     Total    

Amortized intangible assets:

              

Covenants not to compete

   $ 1,473      $ 275      $ 1,748      $ 1,323      $ 275      $ 1,598      5 Years

Less: accumulated amortization

     (1,225     (225     (1,450     (1,132     (197     (1,329  
                                                  

Net covenants not to compete

     248        50        298        191        78        269     

Customer relationships

     27,196        910        28,106        27,016        660        27,676      5-10 Years

Less: accumulated amortization

     (10,014     (162     (10,176     (8,580     (121     (8,701  
                                                  

Net customer relationships

     17,182        748        17,930        18,436        539        18,975     

Tradenames

     18,215        130        18,345        18,215        130        18,345      10 Years

Less: accumulated amortization

     (7,769     (30     (7,799     (6,834     (24     (6,858  
                                                  

Net tradenames

     10,446        100        10,546        11,381        106        11,487     
                                                  

Subtotal

     27,876        898        28,774        30,008        723        30,731     

Indefinite-lived intangible assets:

              

Certificates of need

     220,285        4,026        224,311        217,036        4,026        221,062      Indefinite
                                                  

Total identifiable intangible assets

   $ 248,161      $ 4,924      $ 253,085      $ 247,044      $ 4,749      $ 251,793     
                                                  

The gross carrying amount of goodwill as of January 3, 2010 and July 4, 2010 and activity during the first six months of 2010 were as follows (in thousands):

 

     Home Health    Hospice    Total

Balance at January 3, 2010

   $ 262,334    $ 37,200    $ 299,534

Goodwill acquired during 2010

     2,345      2,201      4,546
                    

Balance at July 4, 2010

   $ 264,679    $ 39,401    $ 304,080
                    

The Company recorded amortization expense of approximately $1.3 million and $2.5 million for the second quarter and first six months of 2010, respectively, and $1.2 million and $2.4 million for the corresponding periods of 2009. The estimated amortization expense for the remainder of 2010 is $2.5 million and for each of the next five succeeding years approximates $4.9 million for fiscal year 2011 through 2012, $4.5 million for fiscal year 2013, $4.2 million for fiscal year 2014, and $4.0 million for fiscal year 2015.

 

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  10. Earnings Per Share

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

 

     For the Three Months Ended    For the Six Months Ended
     July 4, 2010    June 28, 2009    July 4, 2010    June 28, 2009

Net income from continuing operations

   $ 20,223    $ 17,368    $ 30,529    $ 35,536

Basic weighted average common shares outstanding

     29,770      28,959      29,715      28,952

Shares issuable upon the assumed exercise of stock options and in connection with the employee stock purchase plan using the treasury stock method

     848      437      853      654
                           

Diluted weighted average common shares outstanding

     30,618      29,396      30,568      29,606
                           

Net income from continuing operations per common share:

           

Basic

   $ 0.68    $ 0.60    $ 1.03    $ 1.22

Diluted

   $ 0.66    $ 0.59    $ 1.00    $ 1.20

For the second quarter and first six months of 2010 approximately 2.3 million and 2.9 million stock options, respectively, were excluded from the computations of diluted earnings per share as compared to approximately 2.6 million and 2.1 million stock options, respectively, for the second quarter and first six months of 2009, as their inclusion would be anti-dilutive for the periods presented.

 

  11. Long-Term Debt

Credit Arrangements

The Company’s credit agreement, which was entered into on February 28, 2006, provided for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million and (ii) a six year revolving credit facility of $75.0 million. On March 5, 2008, in accordance with the provisions of its credit agreement, the Company and certain of its lenders agreed to increase the revolving credit facility from $75.0 million to $96.5 million. Of the total revolving credit facility, $55 million is available for the issuance of letters of credit and $10 million was available for swing line loans. On January 22, 2010, the revolving credit facility was reduced to $80 million and the facility swing line loan feature was formally eliminated as further discussed below.

Although the credit agreement requires the Company to make quarterly installment payments on the term loan with the remaining balance due at maturity on March 31, 2013, the administrative agent under the credit agreement determined in early 2008 that the Company had made sufficient prepayments to extinguish all required quarterly installment payments due under the credit agreement on the term loan.

Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the credit agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined in the agreement), mandatory prepayments of the term loan are required in the amounts specified in the credit agreement.

On January 22, 2010, the Company entered into the Third Amendment to the Credit Agreement (“the Amendment”) which, among other things, provided for lenders’ consent to the sale of its HME and IV businesses. In addition, the Amendment formally removed Lehman Commercial Paper, Inc. as a participating lender under the Credit Agreement and, as a result, the revolving credit facility under the Credit Agreement was reduced from $96.5 million to $80.0 million and the facility’s swing line loan feature was eliminated.

The Company had outstanding term loan borrowings of $232.0 million and $237.0 million as of July 4, 2010 and January 3, 2010, respectively; as of such dates, there were no outstanding borrowings under the revolving credit facility and outstanding letters of credit were $35.0 million. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of July 4, 2010, the Company’s unused and available credit line approximated $45.0 million.

 

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The credit agreement requires the Company to meet certain financial tests. These tests include a consolidated leverage ratio and a consolidated interest coverage ratio. The credit agreement also contains additional covenants which, among other things, require the Company to deliver to the lenders specified financial information, including annual and quarterly financial information, and limit the Company’s ability to do the following, subject to various exceptions and limitations: (i) make certain investments, including acquisitions; (ii) create liens on its property; (iii) incur additional debt obligations; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) dispose of property; (vi) make capital expenditures; and (vii) pay dividends or acquire capital stock of the Company or its subsidiaries. As of July 4, 2010, the Company was in compliance with all covenants in the credit agreement. As of July 4, 2010, the consolidated leverage ratio was 1.5.

Interest under the credit agreement accrues at Base Rate or Eurodollar Rate (plus an applicable margin based on the table presented below) for both the revolving credit facility and the term loan. Fees on outstanding letters of credit are based on the applicable margin. Overdue amounts bear interest at 2 percent per annum above the applicable rate. The applicable margin component of interest rates under the credit agreement is based on the Company’s consolidated leverage ratio as follows:

 

Revolving
Credit

Consolidated

Leverage Ratio

   Term Loan
Consolidated
Leverage
Ratio
  Margin for
Base Rate Loans
    Margin for
Eurodollar Loans
 
³ 3.5    ³ 3.5   1.25   2.25
< 3.5 & ³ 3.0    < 3.5 & ³ 3.0   1.00   2.00
< 3.0 & ³ 2.5    < 3.0   0.75   1.75
< 2.5      0.50   1.50

The Company is also subject to a revolving credit commitment fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit commitment and the total outstanding borrowings and letters of credit. The interest rate on term loan borrowings averaged 2.1 percent and 2.0 percent per annum for the second quarter and first six months of 2010, respectively, and 2.6 percent and 2.8 percent per annum for the second quarter and first six months of 2009, respectively. The interest rate on term loan borrowings approximated 2.1 percent per annum at July 4, 2010.

Guarantee and Collateral Agreement

The Company has entered into a Guarantee and Collateral Agreement, among the Company and substantially all of its subsidiaries, in favor of the administrative agent under the credit agreement (the “Guarantee and Collateral Agreement”). The Guarantee and Collateral Agreement grants a collateral interest in all real property and personal property of the Company and its subsidiaries signatory to the Guarantee and Collateral Agreement, including stock of such subsidiaries. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the credit agreement by substantially all subsidiaries of the Company.

Financing Commitment Letter

For a description of the financing commitment letter dated May 23, 2010 the Company entered into with Bank of America, N.A. and certain other parties see Note 17.

Other

The Company has equipment capitalized under capital lease obligations. At July 4, 2010 and January 3, 2010, long-term capital lease obligations were $0.3 million and $0.5 million, respectively, and were recorded in other liabilities on the Company’s consolidated balance sheets. The current portion of obligations under capital leases was $0.4 million and $0.7 million at July 4, 2010 and January 3, 2010, respectively, and was recorded in other accrued expenses on the Company’s consolidated balance sheets.

 

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  12. Shareholders’ Equity

Changes in shareholders’ equity for the six months ended July 4, 2010 were as follows (in thousands, except share amounts):

 

     Common Stock    Additional
Paid-in
Capital
   Retained
Earnings
   Treasury
Stock
    Total  
     Shares    Amount           

Balance at January 3, 2010

   29,936,893    $ 2,994    $ 355,429    $ 220,239    $ (7,499   $ 571,163   

Comprehensive income:

                

Net income

   —        —        —        28,244      —          28,244   

Income tax benefits associated with the exercise of non-qualified stock options

   —        —        968      —        —          968   

Equity-based compensation expense

   —        5      3,186      —        —          3,191   

Other non-cash compensation expense

   —        —        577      —        —          577   

Issuance of stock upon exercise of stock options and under stock plans for employees and directors

   459,046      41      5,571      —        —          5,612   

Stock repurchase (175,000 shares)

   —        —        —        —        (4,985     (4,985
                                          

Balance at July 4, 2010

   30,395,939    $ 3,040    $ 365,731    $ 248,483    $ (12,484   $ 604,770   
                                          

Comprehensive income amounted to $18.9 million and $28.2 million for the second quarter and first six months of fiscal 2010, respectively, and $17.2 million and $35.5 million for the second quarter and first six months of fiscal 2009, respectively.

The Company has an authorized stock repurchase program under which the Company can repurchase and retire up to 1,500,000 shares of its outstanding common stock. The repurchases can occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During the six months ended July 4, 2010, the Company repurchased 175,000 shares of its outstanding common stock at an average cost of $28.49 per share and a total cost of approximately $5.0 million. As of July 4, 2010, the Company had remaining authorization to repurchase an aggregate of 180,568 shares of its outstanding common stock. The Company’s credit agreement provides, with certain exceptions, for a limit of $5.0 million per fiscal year for repurchases of the Company’s common stock.

 

  13. Equity-Based Compensation Plans

The Company provides several equity-based compensation plans under which the Company’s officers, employees and non-employee directors may participate, including: (i) the Amended and Restated 2004 Equity Incentive Plan (“2004 Plan”), (ii) the Stock & Deferred Compensation Plan for Non-Employee Directors and (iii) the Employee Stock Purchase Plan (“ESPP”). Collectively, these equity-based compensation plans permit the grants of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) performance units, (vi) stock units and (vii) cash, as well as allow employees to purchase shares of the Company’s common stock under the ESPP at a pre-determined discount.

For the second quarter and six months of fiscal 2010, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $1.6 million and $3.2 million, respectively, as compared to $1.7 million and $3.5 million for the corresponding periods of fiscal 2009, which were reflected as selling, general and administrative expense in the consolidated statements of income. During the second quarter of fiscal 2010, the Company recorded a non-cash compensation expense of approximately $0.6 million associated with the acceleration of compensation expense relating to future vesting of stock options under severance agreements for certain of the Company’s executive officers, which is reflected as selling, general and administrative expense in the consolidated statement of income and is categorized as restructuring costs. See Note 8.

 

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Stock Options

The weighted-average fair values of the Company’s stock options granted during the first six months of fiscal 2010 and fiscal 2009, calculated using the Black-Scholes option pricing model and other assumptions, were as follows:

 

     Six Months Ended
     July 4, 2010    June 28, 2009

Weighted average fair value of options granted

   $ 10.82    $ 8.85

Risk-free interest rate

     2.66%      1.56%

Expected volatility

     43%      34%

Contractual life

     7 years      10 years

Expected life

     4.5 - 6.5 years      4.5 - 6.5 years

Expected dividend yield

     0%      0%

Stock option grants in fiscal 2010 and fiscal 2009 fully vest over a four year period based on a vesting schedule that provides for one-half vesting after year two and an additional one-fourth vesting after each of years three and four. The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock price over a period corresponding to the expected term of the stock option. Forfeitures are estimated utilizing the Company’s historical forfeiture experience. The expected life of the Company’s stock options is based on the Company’s historical experience of the exercise patterns associated with its stock options.

A summary of Gentiva stock option activity as of July 4, 2010 and changes during the six months then ended is presented below:

 

     Number of
Options
    Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Life (Years)
   Aggregate
Intrinsic
Value

Balance as of January 3, 2010

   3,269,540      $ 19.19      

Granted

   208,850        25.64      

Exercised

   (283,700     15.10      

Cancelled

   (19,388     24.52      
                  

Balance as of July 4, 2010

   3,175,302      $ 19.94    6.4    $ 14,020,066
                        

Exercisable options

   1,708,127      $ 16.08    5.3    $ 12,344,054
                        

The total intrinsic value of options exercised during the six months ended July 4, 2010 and June 28, 2009 was $3.8 million and $2.9 million, respectively. As of July 4, 2010, the Company had $5.6 million of unrecognized compensation expense related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of options that vested during the first six months of fiscal 2010 was $3.0 million.

Performance Share Units

The Company may grant performance share units under its 2004 Plan. Performance units result in the issuance of common stock at the end of the three year performance period and may range between zero and 150 percent of the target shares granted based on the achievement of defined thresholds of the performance criteria. During the first six months of 2010, the Company granted 39,800 performance share units at target to officers and employees at a weighted average fair value on the grant date of $25.61 per unit. These performance share units carry performance criteria measured on annual diluted earnings per share targets and fully vest at the end of a three year period provided the performance criteria are met. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.

As of July 4, 2010, the Company had $0.8 million of total unrecognized compensation cost related to performance share units. This compensation expense is expected to be recognized over a weighted-average period of 2.5 years.

 

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Restricted Stock

During the first six months of 2010, the Company granted 59,050 shares of restricted stock at a grant date fair value of $25.93 per share and cancelled 900 shares of restricted stock, at a grant date fair value of $25.65 per share. The restricted stock fully vests at the end of a three year period. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.

As of July 4, 2010, the aggregate intrinsic value of the restricted stock awards was $1.4 million and the Company had $1.2 million of total unrecognized compensation cost related to restricted stock. This compensation expense is expected to be recognized over a weighted-average period of 2.6 years.

Directors Deferred Share Units

Under the Company’s Stock & Deferred Compensation Plan for Non-Employee Directors, each non-employee director receives an annual deferred stock unit award credited quarterly and paid in shares of the Company’s common stock following termination of the director’s service on the Board. During the first six months of 2010, the Company granted 8,617 stock units under the Stock & Deferred Compensation Plan for Non-Employee Directors at a grant date fair value of $27.41 per share unit. On May 13, 2010, the Company’s Board of Directors amended the Plan and increased the annual deferred stock award under the Plan from $55,000 to $80,000. As of July 4, 2010, 95,526 share units were outstanding under the plan.

Employee Stock Purchase Plan

The Company provides an ESPP under which the offering period is three months and the purchase price of shares is equal to 85 percent of the fair market value of the Company’s common stock on the last day of the three month offering period. All employees of the Company are eligible to purchase stock under the plan regardless of their actual or scheduled hours of service. During the second quarter and first six months of 2010, the Company issued 53,251 shares and 102,567 shares, respectively, of common stock under its ESPP. Under the Company’s ESPP, compensation expense is calculated for the fair value of the employee’s purchase rights using the Black-Scholes option pricing model. Assumptions for the respective offering periods of fiscal 2010 and fiscal 2009 are as follows:

 

     Six Months Ended
     July 4, 2010    June 28, 2009
     1st Offering
Period
   2nd Offering
Period
   1st Offering
Period
   2nd Offering
Period

Risk-free interest rate

   0.16%    0.12%    0.20%    0.20%

Expected volatility

   31%    45%    116%    61%

Expected life

   0.25 years    0.25 years    0.25 years    0.25 years

Expected dividend yield

   0%    0%    0%    0%

On May 13, 2010, the shareholders of the Company authorized an additional 1,500,000 shares of the Company’s common stock for issuance under the ESPP.

 

  14. Legal Matters

Litigation

In addition to the matters referenced in this Note 14, 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. Management does not expect that these other legal actions will have a material adverse effect on the business or financial condition of the Company.

On May 10, 2010, a collective and class action complaint entitled Lisa Rindfleisch et al. v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of New York against the Company in which five former employees allege wage and hour law violations. The former employees claim they were paid pursuant to “an unlawful hybrid” compensation plan that paid them on both a per visit and an hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The plaintiffs allege continuing violations of federal and state law and seek damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act. Plaintiffs seek class certification of similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA, six years under the New York statute and two years under the North Carolina statute.

 

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On June 11, 2010, a collective and class action complaint entitled Catherine Wilkie, individually and on behalf of all others similarly situated v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of California against the Company in which a former employee alleges wage and hour violations under the FLSA and California law. The complaint alleges that the Company paid some of its employees on both a per visit and hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The plaintiff seeks class certification, attorneys’ fees, back wages, penalties, and damages going back three years on the FLSA claim and four years on the state wage and hour claims.

Given the preliminary stage of the Rindfleisch and Wilkie lawsuits, the Company is unable to assess the probable outcome or potential liability, if any, arising from these proceedings. The Company intends to defend itself vigorously in these lawsuits.

Three putative class action lawsuits have been filed in connection with the Company’s proposed acquisition (“Merger”) of Odyssey HealthCare, Inc. (“Odyssey”). The first, entitled Pompano Beach Police & Firefighters’ Retirement System v. Odyssey HealthCare, Inc. et al., was filed on May 27, 2010 in the County Court, Dallas County, Texas. The second, entitled Eric Hemminger et al. v. Richard Burnham et al., was filed on June 9, 2010 in the District Court, Dallas, Texas. The third, entitled John O. Hansen v. Odyssey HealthCare, Inc. et al., was filed on July 2, 2010 in the United States District Court for the Northern District of Texas. All three lawsuits name the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits are brought by purported stockholders of Odyssey, both individually and on behalf of a putative class of stockholders, alleging that Odyssey’s board of directors breached its fiduciary duties in connection with the Merger by failing to maximize shareholder value and that the Company and Odyssey aided and abetted the alleged breaches. All three lawsuits seek equitable relief, including, among other things, to enjoin consummation of the Merger, rescission of the related Agreement and Plan of Merger and an award of all costs, including reasonable attorneys’ fees. The Pompano Beach Police & Firefighters’ suit also seeks additional proxy disclosure regarding the Merger. The Company believes that these lawsuits are without merit and intends to vigorously defend itself; however, there can be no assurance that the Company will be successful in its defense.

Indemnifications

Healthfield

Upon the closing of the acquisition of The Healthfield Group, Inc. (“Healthfield”) on February 28, 2006, an escrow fund was created to cover potential claims by the Company after the closing. Covered claims, which are also subject to the Company’s contractual indemnification rights, include, for example, claims relating to legal proceedings existing as of the closing date, taxes for the pre-closing periods and medical malpractice and workers’ compensation claims relating to any act or event occurring on or before the closing date. The escrow fund initially consisted of 1,893,656 shares of Gentiva’s common stock valued at $30 million and $5 million in cash. The first $5 million of any disbursements consist of shares of Gentiva’s common stock; the next $5 million of any disbursements consist of cash; and any additional disbursements consist of shares of Gentiva’s common stock. The escrow fund has been subject to releases of shares of Gentiva’s common stock and cash in the escrow fund to certain principal stockholders of Healthfield, less the amount of claims the Company makes against the escrow fund. The Company has received disbursements from the escrow fund, through December 29, 2009, totaling 138,640 shares of common stock representing fair value of approximately $2.7 million. The Company has recorded the shares received as treasury stock in the Company’s consolidated balance sheets.

CareCentrix Disposition

In connection with the disposition of a majority ownership interest in the Company’s CareCentrix business in 2008 (the “CareCentrix Transaction”) the Company has agreed to indemnify the Buyer Parties (as such term is defined in the Stock Purchase Agreement dated as of August 20, 2008 covering the CareCentrix Transaction) for any inaccuracy in or breach of any representation or warranty of the Company in such Stock Purchase Agreement and for any breach or nonperformance of any covenant or obligation made or incurred by the Company in such Stock Purchase Agreement. The Company also agreed to indemnify the Buyer Parties for certain liabilities arising from an arbitration proceeding in which the Company and CareCentrix were parties that related to a commercial contractual dispute, which was settled on April 14, 2010. In connection with this settlement, the Company recorded settlement costs and legal fees of approximately $4.2 million in the first six months of 2010. The Company’s representations and warranties, with certain exceptions, generally survive for the period of eighteen months from the closing of the CareCentrix Transaction, which occurred on September 25, 2008. With certain exceptions, the Company is generally not liable to indemnify for any inaccuracy in or breach of its representations or warranties in the Stock Purchase Agreement until the aggregate amount of claims for indemnification exceeds $1.5 million, and then, only for claims in excess of $1.5 million up to an aggregate maximum amount equal to $15 million.

Pediatric and Adult Hourly Services Disposition

The Company has agreed to guarantee the indemnification obligations of certain of the Company’s subsidiaries to the purchaser of assets associated with certain branch offices that specialized primarily in pediatric home health care services and adult home care services that were sold effective March 14, 2009. The indemnification obligations generally related to representations, warranties, covenants and agreements made by such subsidiaries in the related asset purchase agreement, as well as to such subsidiaries’ related pre-closing operations, liabilities, claims and proceedings. The representations and warranties made by the Company’s subsidiaries, with certain exceptions, generally survive for a period of two years from the closing date. The maximum aggregate liability of the Company for any breaches of such representations or liabilities is $6.0 million.

HME and IV Disposition

The Company has agreed to indemnify the Lincare Indemnified Parties (as such term is defined in the Asset Purchase Agreement dated as of February 1, 2010 (“APA”) covering the sale on such date of the Company’s HME and IV businesses) from any claims arising from (i) any breach of, or failure to perform, any representations, warranties, covenants and other

 

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obligations by certain of the Company’s subsidiaries, as sellers under the APA, (ii) the Lincare Indemnified Parties’ being required to assume or discharge any of certain specified excluded liabilities under the APA or (iii) the Lincare Indemnified Parties’ being required to assume or discharge by operation of law any indebtedness, liability or obligation of certain of the Company’s subsidiaries, as sellers under the APA, other than certain specified liabilities assumed by Lincare Inc. The representations, warranties, covenants and agreements made by the Company’s subsidiaries in the APA generally survive for a period of two years from the closing date, except that certain specified representations and warranties survive for the applicable statute of limitations. The maximum aggregate liability of the Company for any breaches of representations and warranties contained in the APA is $14 million.

Government Matters

PRRB Appeal

In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board (“PRRB”) concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company’s consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company’s cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed.

The fiscal intermediary completed the reopening of all 1997, 1998 and 1999 cost reports and determined that the adjustment to allowable costs aggregated $15.9 million which the Company has received and recorded as adjustments to net revenues in the fiscal years 2004 through 2006. The Company expects to finalize all items relating to the 2000 cost reports during late 2010 or early 2011.

Senate Finance Committee Request

In a letter dated May 12, 2010, the United States Senate Finance Committee requested information from the Company regarding its Medicare utilization rates for therapy visits. The letter was sent to all of the publicly traded home healthcare companies mentioned in a recent Wall Street Journal article that explored the relationship between the Centers for Medicare & Medicaid Services home health policies and the utilization rates of some health agencies. The Company has responded to the request. Given the preliminary stage of the Senate Finance Committee inquiry, we are unable to assess the probable outcome or potential liability, if any, arising from this matter.

Subpoenas

In April 2003, the Company received a subpoena from the Department of Health and Human Services, Office of Inspector General, Office of Investigations (“OIG”). The subpoena sought information regarding the Company’s implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company’s treatment on cost reports of employees engaged in sales and marketing efforts. In February 2004, the Company received a subpoena from the U.S. Department of Justice (“DOJ”) seeking additional information related to the matters covered by the OIG subpoena. In early May 2010, the Company reached an agreement in principle, subject to final approvals, with the government to resolve this matter. Under the agreement, the Company will pay the government $12.5 million, of which $9.5 million was recorded as a charge in the first six months of 2010 with the remaining $3 million covered by a previously-recorded reserve.

See also Note 18 Subsequent Events regarding a subpoena that the Company received on July 16, 2010 from the Securities and Exchange Commission.

 

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  15. Income Taxes

The Company’s provision for income taxes consists of current and deferred federal and state income tax expense. On continuing operations, the Company recorded an income tax provision of $15.4 million for the second quarter of 2010 and $21.8 million for the six months ended July 4, 2010. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 42.2 percent for the first six months of 2010 is primarily due to state taxes (approximately 4.9 percent), an increase in a capital loss and related valuation allowance relating to the CareCentrix legal settlement (approximately 2.1 percent) and other items (approximately 0.2 percent).

The Company recorded a federal and state income tax provision of $11.1 million for the second quarter of 2009 and $19.6 million for the first six months of 2009. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 35.9 percent for the first six months of 2009 was primarily due to (i) state taxes (approximately 4.9 percent) and (ii) other items (approximately 1.2 percent), offset by the favorable impact of a reduction of the capital loss carryforward valuation allowance (approximately 5.2 percent).

At July 4, 2010, the Company had capital loss carryforwards of $14.6 million that begin expiring in 2013. The deferred tax asset relating to this capital loss carryover is $5.9 million. A valuation allowance of $5.5 million has been recorded to reduce this deferred tax asset to its estimated realizable value since the capital loss carryover may expire before realization. The Company has additional losses that are capital in nature that do not expire since they have not yet been triggered for income tax reporting purposes. The deferred tax asset relating to these losses is $1.2 million and a valuation allowance of $1.2 million has been recorded to reduce this deferred tax asset to its estimated realizable value since the Company does not currently or in the foreseeable future, have capital gains to utilize these losses.

In addition, the Company had state net operating loss carryforwards of approximately $110 million, which expire between 2010 and 2029. Deferred tax assets relating to state net operating loss carryforwards approximated $5.5 million. A valuation allowance of $3.0 million has been recorded to reduce this deferred tax asset to its estimated realizable value since certain state net operating loss carryforwards may expire before realization.

 

  16. Business Segment Information

The Company’s operations involve servicing its patients and customers through (i) its Home Health segment and (ii) its Hospice segment.

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs, its Rehab Without Walls® unit and its consulting business.

The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and, to a lesser extent, homemaker services generally to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

   

Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides® , which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

Through its Rehab Without Walls® unit, the Company also provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases. In addition, the Company provides consulting services to home health agencies which include operational support, billing and collection activities, and on-site agency support and consulting.

 

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Hospice

The Hospice segment serves terminally ill patients in the southeast United States. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.

Corporate Administrative Expenses

Corporate administrative expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment, including equity-based compensation expense. Corporate and administrative support functions represent primarily information services, accounting and finance, tax compliance, risk management, procurement, marketing, clinical administration, training, legal and human resource benefits and administration.

Other Information

The Company’s senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate administrative expenses, depreciation, amortization and net interest costs, but include revenues and all other costs (including special items and restructuring and integration costs) directly attributable to the specific segment. Segment assets represent net accounts receivable, identifiable intangible assets, goodwill, and certain other assets associated with segment activities. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.

Segment net revenues by major payer source were as follows (in millions):

 

     Second Quarter
     2010    2009
     Home
Health
   Hospice    Total    Home
Health
   Hospice    Total

Medicare

   $ 207.4    $ 19.4    $ 226.8    $ 194.1    $ 16.7    $ 210.8

Medicaid and Local Government

     17.8      0.8      18.6      22.6      0.7      23.3

Commercial Insurance and Other:

                 

Paid at episodic rates

     21.3      —        21.3      19.2      —        19.2

Other

     29.7      0.7      30.4      30.7      0.8      31.5
                                         

Total net revenues

   $ 276.2    $ 20.9    $ 297.1    $ 266.6    $ 18.2    $ 284.8
                                         
     First Six Months
     2010    2009
     Home
Health
   Hospice    Total    Home
Health
   Hospice    Total

Medicare

   $ 415.0    $ 37.6    $ 452.6    $ 380.2    $ 33.0    $ 413.2

Medicaid and Local Government

     36.4      1.6      38.0      48.5      1.3      49.8

Commercial Insurance and Other:

                 

Paid at episodic rates

     42.2      —        42.2      35.3      —        35.3

Other

     60.1      1.3      61.4      61.3      1.6      62.9
                                         

Total net revenues

   $ 553.7    $ 40.5    $ 594.2    $ 525.3    $ 35.9    $ 561.2
                                         

 

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Segment information about the Company’s operations is as follows (in thousands):

 

     Home Health     Hospice     Total  

For the three months ended July 4, 2010

      

Net revenue - segments

   $ 276,231      $ 20,868      $ 297,099   
                        

Operating contribution

   $ 60,924      $ 4,084 (1)    $ 65,008   
                  

Corporate expenses

         (24,264 )(1) 

Depreciation and amortization

         (4,429

Interest expense, net

         (1,116
            

Income before income taxes

       $ 35,199   
            

For the three months ended June 28, 2009

      

Net revenue - segments

   $ 266,587      $ 18,251      $ 284,838   
                        

Operating contribution

   $ 51,608 (1)    $ 2,723      $ 54,331   
                  

Corporate expenses

         (19,943 )(1) 

Depreciation and amortization

         (4,223

Loss on sale of assets, net

         (85

Interest expense and other, net

         (1,871 )(2) 
            

Income before income taxes

       $ 28,209   
            

For the six months ended July 4, 2010

      

Net revenue - segments

   $ 553,704      $ 40,526      $ 594,230   
                        

Operating contribution

   $ 105,616 (1)    $ 7,622 (1)    $ 113,238   
                  

Corporate expenses

         (50,811 )(1) 

Depreciation and amortization

         (8,807

Gain on sale of assets, net

         103   

Interest expense, net

         (2,200
            

Income before income taxes

       $ 51,523   
            

Segment assets

   $ 669,013      $ 54,690      $ 723,703   
                  

Corporate assets

         375,028   
            

Total assets

       $ 1,098,731   
            

For the six months ended June 28, 2009

      

Net revenue - segments

   $ 525,341      $ 35,861      $ 561,202   
                        

Operating contribution

   $ 97,321 (1)    $ 4,704      $ 102,025   
                  

Corporate expenses

         (40,578 )(1) 

Depreciation and amortization

         (8,303

Gain on sale of assets, net

         5,747   

Interest expense and other, net

         (4,262 )(2) 
            

Income before income taxes

       $ 54,629   
            

Segment assets

   $ 662,183      $ 50,413      $ 712,596   
                  

Corporate assets

         294,968   
            

Total assets

       $ 1,007,564   
            

 

(1) For the second quarter of 2010, the Company recorded net charges relating to legal settlements, restructuring and merger and acquisition costs of $2.5 million, which included (i) a reduction of $1.8 million associated with the reclassification of the tax impact of the settlement charges recorded in the first quarter of 2010, (ii) incremental legal fees of approximately $0.4 million both related to a three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix and (iii) restructuring and merger and acquisition costs of $3.9 million. For the second quarter of 2009, the Company recorded charges related to restructuring and merger and acquisition activities of $0.6 million.

 

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For the first six months of 2010, the Company recorded net charges relating to legal settlements, restructuring and merger and acquisition costs of $18.0 million, which included (i) settlement costs and legal fees of $4.2 million related to a three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix, (ii) incremental charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods and (iii) restructuring and merger and acquisition costs of $4.3 million. For the first six months of 2009, the Company recorded charges relating to restructuring and merger and acquisition activities of $1.5 million. See Note 8 and Note 14. The charges were reflected as follows for segment reporting purposes (dollars in millions):

 

     Second Quarter    Six Months
     2010    2009    2010    2009

Home Health

   $ —      $ 0.4    $ 9.5    $ 0.5

Hospice

     0.1      —        0.1      —  

Corporate administrative expenses

     2.4      0.2      8.4      1.0
                           

Total

   $ 2.5    $ 0.6    $ 18.0    $ 1.5
                           

 

(2) For the second quarter and first six months of fiscal year 2009, interest expense and other, net includes impairment losses of $0.6 million and $1.0 million, respectively, recognized in connection with the sale of a portion of the Company’s auction rate securities. See Note 5.

 

  17. Significant Developments

Odyssey Transaction

On May 23, 2010, the Company entered into an Agreement and Plan of Merger (“Plan of Merger”) with GTO Acquisition Corp., a Delaware corporation wholly-owned by the Company (“Merger Sub”), and Odyssey HealthCare, Inc., a Delaware corporation (“Odyssey”). Upon the terms and conditions set forth in the Plan of Merger, Merger Sub will merge with and into Odyssey with Odyssey continuing as the surviving corporation and as a subsidiary wholly-owned by the Company (“Merger”). Upon consummation of the Merger, each issued and outstanding share of Odyssey common stock will be exchanged for the right to receive $27.00 in cash, without interest. Consummation of the Merger is subject to customary conditions and is expected to close on or around August 16, 2010.

Bank Financing

On May 23, 2010, the Company entered into a financing commitment letter (“Commitment Letter”) with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Bank PLC, Barclays Capital, the investment banking division of Barclays Bank PLC, General Electric Capital Corporation, GE Capital Markets, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc. (collectively, the “Commitment Parties”), pursuant to which the Commitment Parties have agreed, subject to the terms and conditions contained in the Commitment Letter, to provide and/or arrange for (a) $925.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $800.0 million and a revolving credit facility of $125.0 million; and (b) $305.0 million in gross proceeds from the issuance and sale by the Company of senior unsecured notes or, if and to the extent that less than $305 million in aggregate principal amount of such notes are issued and sold on or prior to the consummation of the Merger, $305.0 million of senior unsecured loans under a bridge facility.

 

  18. Subsequent Events

SEC Subpoena

In a letter dated July 13, 2010, the SEC requested that the Company preserve all documents between January 1, 2000 and the present that relate to the Company’s participation in the Medicare home health prospective payment system. On July 16, 2010, the Company received a subpoena from the SEC requesting the production of documents. The Company believes the investigation by the SEC is similar to the SEC’s ongoing investigations and the inquiry from the Senate Finance Committee. The Company plans to comply with the subpoena and cooperate with the investigation. Given the preliminary stage of the SEC investigation, the Company is unable to assess the probable outcome or potential liability, if any, arising from this matter.

 

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

Significant Developments

On May 23, 2010, the Company entered into an Agreement and Plan of Merger (“Plan of Merger”) with GTO Acquisition Corp., a Delaware corporation wholly-owned by the Company (“Merger Sub”), and Odyssey HealthCare, Inc., a Delaware corporation (“Odyssey”). Upon the terms and conditions set forth in the Plan of Merger, Merger Sub will merge with and into Odyssey with Odyssey continuing as the surviving corporation and as a subsidiary wholly-owned by the Company (“Merger”). Upon consummation of the Merger, each issued and outstanding share of Odyssey common stock will be exchanged for the right to receive $27.00 in cash, without interest. Consummation of the Merger is subject to customary conditions and is expected to close on or around August 16, 2010.

In connection with the Odyssey acquisition, the Company also entered into a financing commitment letter on May 23, 2010 (“Commitment Letter”) with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Bank PLC, Barclays Capital, the investment banking division of Barclays Bank PLC, General Electric Capital Corporation, GE Capital Markets, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc. (collectively, the “Commitment Parties”), pursuant to which the Commitment Parties have agreed, subject to the terms and conditions contained in the Commitment Letter, to provide and/or arrange for (a) $925.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $800.0 million and a revolving credit facility of $125.0 million; and (b) $305.0 million in gross proceeds from the issuance and sale by the Company of senior unsecured notes or, if and to the extent that less than $305 million in aggregate principal amount of such notes are issued and sold on or prior to the consummation of the Merger, $305.0 million of senior unsecured loans under a bridge facility.

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,” “assumes,” “trends” 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;

 

   

impact of recently passed healthcare reform legislation and its subsequent implementation through government regulations;

 

   

changes in Medicare, Medicaid, and commercial payer reimbursement levels;

 

   

the outcome of any inquiries into the Company’s operations and business practices by governmental authorities;

 

   

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

 

   

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 revenues associated with major payer sources;

 

   

ability of customers to pay for services;

 

   

business disruption due to natural disasters, pandemic outbreaks or terrorist acts;

 

   

ability to successfully integrate the operations of Odyssey HealthCare, Inc. and other acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;

 

   

effect on liquidity of the Company’s debt service requirements; and

 

   

changes in estimates and judgments associated with critical accounting policies and estimates.

Forward-looking statements are found throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on

 

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forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company does not have any intention or obligation 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 its Annual Report on Form 10-K for the fiscal year ended January 3, 2010, in Item 1A of PART II of this Quarterly Report on Form 10-Q and in various filings with the SEC. The reader is encouraged to review these risk factors and filings.

General

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Gentiva’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.

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 January 3, 2010 and in other filings with the SEC.

Overview

Gentiva Health Services, Inc. is a leading provider of home health services and hospice services serving patients through approximately 340 locations located in 39 states.

The Company provides a single source for skilled nursing; physical, occupational, speech and neurorehabilitation services; hospice services; social work; nutrition; disease management education; help with daily living activities; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.

The federal and state government programs are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s services to patients.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the “Affordable Care Act”) which represents a $39.5 billion reduction in Medicare home health spending over the next ten years. The bill phases in the reductions over the next eight years, including rebasing of Medicare reimbursement rates over a four year period beginning in 2014, with reductions resulting from rebasing not to exceed 3.5 percent in any one year. The Company anticipates that many of the provisions of the Affordable Care Act may be subject to further clarification and modification through the rule-making process. In this regard, CMS has recently proposed several changes to Medicare home health payments in 2011 and 2012 as further discussed in the “Liquidity” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The commercial insurance industry is continually seeking ways to control the cost of services to patients that it covers. One of the ways it seeks to control costs is to require greater efficiencies from its providers, including home healthcare companies. Various states have addressed budget pressures by considering or implementing reductions in various healthcare programs, including reductions in rates or changes in patient eligibility requirements.

The Company believes that several marketplace factors can contribute to its future growth. First, the Company is a leader in a highly fragmented home healthcare and hospice industry populated by approximately 14,200 providers of varying size and resources. Second, the cost of a home healthcare visit to a patient can be significantly lower than the cost of an average day in a hospital or skilled nursing institution. And third, the demand for home care is expected to grow, primarily due to an aging U.S. population. The Company expects to capitalize on these factors through a determined set of strategic priorities, as follows: growing revenues from services provided to the geriatric population, with a particular emphasis on expanding the penetration of the Company’s innovative specialty programs; focusing on clinical associate recruitment, retention and productivity; evaluating and closing opportunistic acquisitions; seeking further operating leverage through more efficient utilization of existing resources; implementing technology to support the Company’s various initiatives; and further strengthening the Company’s balance sheet to support future growth. The Company anticipates executing these strategies by continuing to expand its sales presence, developing and marketing its managed care services, making operational improvements and deploying new technologies, providing employees with leadership training and instituting retention initiatives, ensuring strong ethics and corporate governance, and focusing on shareholder value.

Management intends the discussion of the Company’s financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company’s financial statements.

 

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The Company’s operations involve servicing patients and customers through (i) its Home Health segment and (ii) its Hospice segment. Discontinued operations represent services and products provided to patients through the HME and IV businesses.

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs, its Rehab Without Walls® unit and its consulting business. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 39 states, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and, to a lesser extent, homemaker services generally to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:

 

   

Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

 

   

Gentiva Safe Strides® , which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

 

   

Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;

 

   

Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and

 

   

Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.

Through its Rehab Without Walls® unit, the Company also provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases. In addition, the Company provides consulting services to home health agencies which include operational support, billing and collection activities, and on-site agency support and consulting.

Hospice

The Hospice segment serves terminally ill patients in the southeast United States. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.

Acquisitions

Effective May 15, 2010, the Company completed its acquisition of the assets and business of United Health Care Group, Inc., a provider of home health services in Louisiana. Total consideration of $6.0 million, excluding transaction costs and subject to post closing adjustments, was paid at the time of closing and was paid from the Company’s existing cash reserves. The acquisition expands the Company’s home health coverage to the majority of the state of Louisiana.

Effective March 5, 2010, the Company completed its acquisition of the assets and business of Heart to Heart Hospice of Starkville, LLC, a provider of hospice services with two offices in Starkville and Tupelo, Mississippi. Total consideration of $2.5 million, excluding transaction costs and subject to post-closing adjustments, was paid at the time of closing and was funded from the Company’s existing cash reserves. The acquisition expands the Company’s coverage area to 44 counties in north, central and southern Mississippi.

The impact of these transactions has been reflected in the Company’s results of operations and financial condition from their respective closing dates. See Note 4.

Dispositions

HME and IV Businesses Disposition

Effective February 1, 2010, the Company completed the sale of its HME and IV businesses to a subsidiary of Lincare Holdings, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $16.4 million, consisting of (i) cash proceeds of approximately $8.5 million, (ii) approximately $2.5 million associated with operating and capital lease buyout obligations, (iii) an escrow fund of $5.0 million, which was recorded at estimated fair value of $3.2 million, to be received by the Company based on achieving a cumulative cash collections target for claims for services provided for a

 

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period of one year from the date of closing and (iv) an escrow fund of approximately $0.4 million for reimbursement of certain post closing liabilities. During the first six months of 2010, the Company recorded a $0.1 million pre-tax gain, net of transaction costs in discontinued operations, net of tax, in the Company’s consolidated statement of income.

Pediatric and Adult Hourly Services Disposition

During the first six months of 2009, the Company sold assets associated with certain branch offices that specialized primarily in pediatric home health care services for total consideration of $6.5 million. The sales related to seven offices in five cities and included the adult home care services in the affected offices. The Company received $5.9 million in cash at the close of the sale and $0.6 million as the final payment in September 2009. The sales, after deducting related costs, resulted in a net gain before income taxes of $5.7 million. This gain is included in gain on sale of assets, net in the Company’s consolidated statement of income and consolidated statement of cash flows for the six months ended June 28, 2009.

Results of Operations

The historical results that follow present a discussion of the Company’s consolidated operating results using the historical results of Gentiva prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for the periods presented.

Net Revenues

A summary of the Company’s net revenues by segment follows:

 

      Second Quarter     First Six Months  

(Dollars in millions)

   2010    2009    Percentage
Variance
    2010    2009    Percentage
Variance
 

Home Health

   $ 276.2    $ 266.6    3.6   $ 553.7    $ 525.3    5.4

Hospice

     20.9      18.2    14.3        40.5      35.9    13.0   
                                        

Total net revenues

   $ 297.1    $ 284.8    4.3   $ 594.2    $ 561.2    5.9
                                        

A summary of the Company’s net revenues by payer follows (in millions):

 

     Second Quarter
     2010    2009
     Home
Health
   Hospice    Total    Home
Health
   Hospice    Total

Medicare

   $ 207.4    $ 19.4    $ 226.8    $ 194.1    $ 16.7    $ 210.8

Medicaid and Local Government

     17.8      0.8      18.6      22.6      0.7      23.3

Commercial Insurance and Other:

                 

Paid at episodic rates

     21.3      —        21.3      19.2      —        19.2

Other

     29.7      0.7      30.4      30.7      0.8      31.5
                                         

Total net revenues

   $ 276.2    $ 20.9    $ 297.1    $ 266.6    $ 18.2    $ 284.8
                                         
     First Six Months
     2010    2009
     Home
Health
   Hospice    Total    Home
Health
   Hospice    Total

Medicare

   $ 415.0    $ 37.6    $ 452.6    $ 380.2    $ 33.0    $ 413.2

Medicaid and Local Government

     36.4      1.6      38.0      48.5      1.3      49.8

Commercial Insurance and Other:

                 

Paid at episodic rates

     42.2      —        42.2      35.3      —        35.3

Other

     60.1      1.3      61.4      61.3      1.6      62.9
                                         

Total net revenues

   $ 553.7    $ 40.5    $ 594.2    $ 525.3    $ 35.9    $ 561.2
                                         

Net revenues increased by $12.3 million or 4.3 percent for the second quarter of 2010 as compared to the second quarter of 2009. Net revenues increased by $33.0 million or 5.9 percent for the first six months of 2010 as compared to the first six months of 2009.

 

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Incremental net revenues related to businesses acquired in 2009 and 2010 approximated $6.5 million and $10.7 million for the second quarter and first six months of 2010, respectively, as compared to the respective periods of 2009. Net revenues generated from assets that were sold in 2009 and 2010 were $0.1 million for the first six months of 2010 as compared to $1.0 million and $6.5 million for the second quarter and first six months of 2009.

Home Health

Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Second quarter 2010 net revenues were $276.2 million, up $9.6 million, or 3.6 percent, from $266.6 million in the prior year period. For the first six months of 2010, net revenues were $553.7 million, up $28.4 million or 5.4 percent, from $525.3 million in the prior year period.

The Company’s episodic revenues grew 7.2 percent and 10.0 percent for the second quarter and first six months of 2010. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows:

 

     Second Quarter     First Six Months  

(Dollars in millions)

   2010    2009    Percentage
Variance
    2010    2009    Percentage
Variance
 

Home Health

                

Medicare

   $ 207.4    $ 194.1    6.8   $ 415.0    $ 380.2    9.2

Paid at episodic rates

     21.3      19.2    11.2        42.2      35.3    19.5   
                                        

Total

   $ 228.7    $ 213.3    7.2   $ 457.2    $ 415.5    10.0
                                        

Episodic revenue growth, excluding the impact of acquisitions completed in 2009 and the first six months of 2010, was 5 percent and 8 percent, respectively for the second quarter and first six months of 2010 compared to the corresponding periods of 2009.

Key Company statistics related to episodic revenues were as follows:

 

     Second Quarter     First Six Months  
     2010    2009    Percentage
Variance
    2010    2009    Percentage
Variance
 

Episodes

     69,800      67,500    3.4     142,600      134,300    6.2

Revenue per episode

   $ 3,280    $ 3,160    3.8   $ 3,210    $ 3,090    3.9

Growth in episodes was driven by an increase in admissions of more than 4 percent, from 46,600 admissions in the second quarter of 2009 to 48,600 admissions in the second quarter of 2010 and by more than 7 percent, from 93,500 admissions in the first six months of 2009 to 100,250 admissions in the first six months of 2010. There were approximately 1.4 episodes for each admission during the second quarter and first six months of both the 2009 and 2010 periods. Factors contributing to the improvements in revenue per episode for the second quarter and first six months of 2010 include (i) growth in the Company’s therapy-based specialty programs that have a higher level of reimbursement, (ii) a shift in mix toward higher acuity cases, (iii) a 3.0 percent add-on to Medicare payments for services to patients in rural areas effective April 1, 2010 in which the Company generated approximately 20 percent and 22 percent of its episodic revenue during the second quarter and first six months of 2010, respectively, and (iv) a 2.0 percent market basket update for Medicare home health payments effective January 1, 2010.

In the second quarter of 2010, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 82.8 percent as compared to 80.0 percent for the corresponding period in 2009. In the second quarter of 2010, revenues from specialty programs as a percent of total Medicare and non-Medicare PPS Home Health revenues were 42 percent as compared to 37 percent for the second quarter of 2009.

In the first six months of 2010, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 82.6 percent as compared to 79.1 percent for the corresponding period in 2009. In the first six months of 2010, revenues from specialty programs as a percent of total Medicare and non-Medicare PPS Home Health revenues were 42 percent as compared to 36 percent for the first six months of 2009.

Revenues from Medicaid and Local Government payer sources were $17.8 million and $36.4 million in the second quarter and first six months of 2010, respectively, as compared to $22.6 million and $48.5 million in the second quarter and first six months of 2009, respectively. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $29.7 million in the second quarter of 2010 as compared to $30.7 million in the second quarter of 2009. For the first six months of 2010 as compared to the corresponding period of 2009, revenues from Commercial Insurance and Other payer sources were $60.1 million and $61.3 million, respectively.

 

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The disposition in 2009 of the majority of the Company’s assets associated with certain branch offices that specialized primarily in pediatric home health care services, as well as certain other assets associated with Medicaid programs in upstate New York, contributed to the decreases in Medicaid and Local Government revenues of $0.7 million and $4.3 million for the second quarter and first six months of fiscal 2010 and the decreases in Commercial Insurance and Other revenues by $0.2 million and $1.8 million for the second quarter and first six months of fiscal 2010. Additional decreases in the Medicaid and Local Government payer sources resulted primarily from the Company’s ongoing strategy to reduce or eliminate certain lower gross margin business as the Company continues to pursue more favorable commercial pricing and a higher mix of Medicare and non-Medicare PPS business.

Hospice

Hospice revenues are derived from all three payer groups. Second quarter and first six months of fiscal 2010 net revenues were $20.9 million and $40.5 million as compared to $18.2 million and $35.9 million in the corresponding periods of 2009. Average daily census was approximately 1,680 and 1,620 in the second quarter and first six months of 2010, an increase of 13 percent and 11 percent compared to the second quarter and first six months of 2009.

Medicare revenues were $19.4 million and $37.6 million in the second quarter and first six months of 2010 as compared to $16.7 million and $33.0 million in the corresponding periods of 2009. Medicaid revenues were $0.8 million and $1.6 million for the second quarter and first six months of 2010, compared to $0.7 million and $1.3 million for the corresponding periods of 2009. Commercial Insurance and Other revenues in the second quarter and first six months were $0.7 million and $1.3 million, compared to $0.8 million and $1.6 million in the corresponding periods of 2009.

Gross Profit

 

     Second Quarter     First Six Months  

(Dollars in millions)

   2010     2009     Variance     2010     2009     Variance  

Gross profit

   $ 161.9      $ 150.7      $ 11.2      $ 318.4      $ 293.2      $ 25.2   

As a percent of revenue

     54.5     52.9     1.6     53.6     52.2     1.4

Gross profit increased by $11.2 million or 7.4 percent for the second quarter of 2010 as compared to the second quarter of 2009. For the first six months of 2010, gross profit increased by $25.2 million or 9.0 percent as compared to the first six months of 2009.

As a percentage of revenues, gross profit of 54.5 percent in the second quarter of 2010 represented a 1.6 percentage point increase as compared to the second quarter of 2009. As a percentage of revenues, gross profit of 53.6 percent in the first six months of 2010 represented a 1.4 percentage point increase as compared to the first six months of 2009. The increase in gross profit percentage was attributable primarily to (i) changes in revenue mix in the Home Health segment, (ii) an ongoing initiative to change the pay structure of Home Health clinicians from a salaried basis to a pay-per-visit basis which allows the Company to better match revenues with expenses, (iii) improved processes and management over various components of cost of services sold, such as mileage expenses and productive materials and (iv) for the second quarter of 2010, favorable trends under the Company’s insurance programs.

The changes in revenue mix in the Home Health segment resulted from (i) organic revenue growth in Medicare, particularly in the Company’s specialty programs, and the non-Medicare PPS business, and (ii) the elimination or reduction of certain low margin Medicaid and local government business and commercial business, including pediatric and adult hourly services and other business in home health branch offices that were sold in 2009. These changes contributed to an overall increase in gross margin within the Home Health segment from 53.6 percent and 52.9 percent in the second quarter and first six months of 2009 compared to 55.2 percent and 54.2 in the second quarter and first six months of 2010.

Gross profit as a percentage of revenues in Hospice increased from 43.5 percent and 42.6 percent in the second quarter and first six months of 2009 to 45.6 percent and 45.3 percent in the second quarter and first six months of 2010. The increase in gross profit percentage was primarily related to the ability to leverage the fixed portion of the direct costs as average daily census increased, as noted above and improved management of direct costs on a per patient day basis.

Gross profit was impacted by depreciation expense of $0.2 million and $0.4 million in the second quarter and first six months in both 2010 and 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.0 million to $125.5 million for the quarter ended July 4, 2010, as compared to $120.5 million for the quarter ended June 28, 2009, and increased $24.8 million to $264.8 million for the six months ended July 4, 2010, as compared to $240.0 million for the six months ended June 28, 2009. If charges relating to restructuring, merger and acquisition activities, and legal settlements as noted below of $2.5 million and $18.0 million, respectively for the second quarter and first six months of 2010 as compared to $0.6 million and $1.5 million for the second quarter and first six months of 2009 were excluded, the increase in selling, general and administrative expenses would have been 2.6 percent or $3.1 million for the quarter ended July 4, 2010 and 3.5 percent or $8.3 million for the six months ended July 4, 2010 as compared to the quarter and first six months ended June 28, 2009.

 

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The increase of $5.0 million for the second quarter of 2010 as compared to the corresponding period of 2009 was primarily attributable to (i) Home Health segment field selling costs, exclusive of acquisitions, to support higher revenue volume in the 2010 period as compared to the 2009 period ($0.4 million), (ii) incremental costs in the 2010 period associated with acquired operations in Home Health ($1.6 million, including $1.4 million of operating costs and $0.2 million of selling expense), (iii) Hospice field operating and selling expenses to support higher revenue volume including acquired revenue ($0.2 million), (iv) corporate administrative expenses, excluding restructuring and integration costs, as noted below ($2.1 million), (v) restructuring and merger and acquisition costs ($3.3 million, representing the difference between $3.9 million in the second quarter of 2010 and $0.6 million in the second quarter of 2009) and (vi) depreciation and amortization ($0.2 million). These increases in costs were partially offset by decreases in (i) costs associated with home health care branches sold in 2009 ($0.4 million), (ii) lower Home Health segment field operating costs in the 2010 period as compared to the 2009 period ($0.4 million), (iii) a net reduction in charges relating to the settlement of the three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix ($1.4 million), which included a reduction of $1.8 million associated with the reclassification of the tax impact of the settlement charges recorded in the first quarter of 2010 and incremental legal fees of approximately $0.4 million, and (iv) reduction in provision for doubtful accounts ($0.6 million).

The increase of $24.8 million for the first half of 2010 as compared to the corresponding period of 2009 was primarily attributable to (i) the costs for legal settlements of a three year old commercial contractual dispute involving the Company’s former subsidiary CareCentrix and incremental reserves associated with an agreement in principle, subject to final approvals, to resolve the government investigation that began in 2003 relating to the Company’s cost reports for the 1998 to 2000 periods ($13.7 million), (ii) Home Health segment field operating and selling costs, exclusive of acquisitions, to support higher revenue volume in the 2010 period as compared to the 2009 period ($2.0 and $1.7 million, respectively), (iii) incremental costs in the 2010 period associated with acquired operations in Home Health ($3.1 million, including $2.7 million of operating costs and $0.4 million of selling expense), (iv) Hospice field operating and selling expenses to support higher revenue volume including acquired revenue ($0.4 million), (v) corporate administrative expenses, excluding restructuring and merger and acquisition costs, as noted below ($3.2 million), (vi) restructuring and merger and acquisition costs ($2.8 million, representing the difference between $4.3 million in the first six months of 2010 and $1.5 million in the first six months of 2009), and (vii) depreciation and amortization ($0.5 million). These increases in costs were partially offset by decreases in (i) costs associated with home health care branches sold in 2009 ($1.7 million), (ii) equity-based compensation expense ($0.3 million) and (iii) reduction in provision for doubtful accounts ($0.6 million).

Depreciation and amortization expense included in selling, general and administrative expenses was $4.2 million and $8.4 million in the second quarter and first six months of 2010, respectively, as compared to $4.0 million and $7.9 million for the corresponding periods of 2009, respectively.

Gain on Sale of Assets, Net

For the first six months of 2010, the Company recorded a pre-tax gain of approximately $0.1 million, in connection with the sale of assets associated with a home health branch operation in Iowa.

The Company recorded a pre-tax gain of approximately $5.7 million during the first six months of 2009, in connection with the sale of assets and certain branch offices that specialized primarily in pediatric home health care services. There was no income tax expense relating to the gain on the sale of assets due to the utilization of a portion of a capital loss carryforward that was created in connection with the CareCentrix disposition in 2008.

Interest Income and Interest Expense and Other

For the second quarter and first six months of fiscal 2010, net interest expense and other was approximately $1.1 million and $2.2 million, consisting primarily of interest expense and other of $1.8 million and $3.5 million, respectively, associated with borrowings and fees under the credit agreement and outstanding letters of credit and amortization of debt issuance costs, partially offset by interest income of $0.7 million and $1.3 million, respectively, earned on investments and existing cash balances.

For the second quarter and first six months of fiscal 2009, net interest expense and other was approximately $1.9 million and $4.3 million, respectively, consisting primarily of interest expense and other of $2.7 million and $5.9 million, respectively, associated with borrowings and fees under the credit agreement and outstanding letters of credit and amortization of debt issuance costs, partially offset by interest income of $0.8 million and $1.6 million, respectively, earned on investments and existing cash balances. Interest expense and other for the quarter and six months ended June 28, 2009 also included $0.6 and $1.0 million, respectively, of realized losses on the Company’s auction rate securities. The decrease in interest expense and other between the 2010 and 2009 periods related primarily to (i) lower Eurodollar rates in the 2010 periods, (ii) lower outstanding term loan borrowings in the 2010 periods, and (iii) the realized losses on the Company’s auction rate securities for the 2009 periods noted above.

 

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Income from Continuing Operations before Income Taxes

Components of income from continuing operations before income taxes and equity in earnings of affiliate were as follows:

 

      Second Quarter     First Six Months  

(Dollars in millions)

   2010     2009     Variance     2010     2009     Variance  

Operating contribution:

            

Home Health

   $ 60.9      $ 51.6      $ 9.3      $ 105.6      $ 97.3      $ 8.3   

Hospice

     4.1        2.7        1.4        7.6        4.7        2.9   
                                                

Total operating contribution

     65.0        54.3        10.7        113.2        102.0        11.2   

Corporate expenses

     (24.3     (19.9     (4.4     (50.8     (40.5     (10.3

Depreciation and amortization

     (4.4     (4.2     (0.2     (8.8     (8.3     (0.5

Gain (loss) on sale of assets, net

     —          (0.1     0.1        0.1        5.7        (5.6

Interest expense and other, net

     (1.1     (1.9     0.8        (2.2     (4.3     2.1   
                                                

Income for continuing operations before income taxes and equity in earnings of affiliate

   $ 35.2      $ 28.2      $ 7.0      $ 51.5      $ 54.6      $ (3.1

As a percent of revenue

     11.8     9.9     1.9     8.7     9.7     -1.0

Home Health operating contribution included no charges relating to restructuring, legal settlements and merger and acquisition activities for the second quarter of 2010 and $9.5 million for the first six months of 2010 as compared to $0.1 million and $0.5 million for the corresponding periods of 2009.

Hospice operating contribution included charges relating to restructuring activities of $0.1 million for both the second quarter and first six months of 2010. There were no charges relating to restructuring activities for the corresponding periods of 2009.

Corporate administrative expenses included charges relating to restructuring, legal settlements and merger and acquisition activities of $2.4 million and $8.4 million for the second quarter and first six months of 2010 as compared to $0.2 million and $1.0 million for the corresponding periods of 2009.

Income Tax Expense

The Company’s provision for income taxes consists of current and deferred federal and state income tax expense. On continuing operations, the Company recorded an income tax provision of $15.4 million for the second quarter of 2010 and $21.8 million for the six months ended July 4, 2010. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 42.2 percent for the first six months of 2010 was primarily due to state taxes (approximately 4.9 percent), an increase in a capital loss and related valuation allowance relating to the CareCentrix legal settlement (approximately 2.1 percent) and other items (approximately 0.2 percent) .

The Company recorded a federal and state income tax provision of $11.1 million for the second quarter of 2009 and $19.6 million for the first six months of 2009. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 35.9 percent for the first six months of 2009 was primarily due to the (i) state taxes (approximately 4.9 percent) and (ii) other items (approximately 1.2 percent), offset by the favorable impact of a reduction of the capital loss carryforward valuation allowance (approximately 5.2 percent).

Discontinued Operations, Net of Tax

For the second quarter and first six months of 2010, discontinued operations, net of tax reflected a loss of $1.3 million, or $0.04 per diluted share, and $2.3 million, or $0.08 per diluted share, respectively. For the six month period of 2010, discontinued operations included a pre-tax gain on the sale of the HME and IV businesses of $0.1 million. Discontinued operations, net of tax for the second quarter and first six months of 2009 reflected an operating loss of $0.3 million, or $0.01 per diluted share and $0.4 million or $0.01 per diluted share, respectively.

 

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Net Income

For the second quarter of fiscal 2010, net income was $18.9 million, or $0.62 per diluted share, compared with net income of $17.1 million, or $0.58 per diluted share, for the corresponding period of 2009. For the first six months of fiscal 2010, net income was $28.2 million, or $0.92 per diluted share, compared with net income of $35.1 million, or $1.19 per diluted share, for the first six months of fiscal 2009.

Net income for the second quarter of 2010 included (A) income from continuing operations of $20.2 million, or $0.66, per diluted share and (B) loss from discontinued operations of $1.3 million or $0.04 per diluted share. Income from continuing operations for the second quarter was impacted by charges relating to restructuring, legal settlements and merger and acquisition activities of $2.5 million, or $0.08 per diluted share, relating to (i) a net reduction in charges related to legal settlements of $1.4 million which included a reduction of $1.8 million associated with the reclassification of the tax impact of the settlement charges recorded in the first quarter of 2010, and incremental legal fees of approximately $0.4 million, both relating to the settlement of the three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix, (ii) pre-tax restructuring charges of $1.9 million and (iii) pre-tax merger and acquisition costs of $2.0 million, primarily relating to the pending acquisition of Odyssey HealthCare, Inc.

Net income for the first six months of 2010 included (A) income from continuing operations of $30.5 million, or $1.00, per diluted share and (B) loss from discontinued operations of $2.3 million or $0.08 per diluted share. Income from continuing operations for the first six months was impacted by charges relating to restructuring, legal settlements and merger and acquisition activities of $18.0 million, or $0.37 per diluted share, relating to (i) a net charges related to legal settlements of $13.7 million or $0.29 per diluted share relating to the settlement of the three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix and charges in connection with an agreement in principle, subject to final approvals, between the Company and the government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods, (ii) pre-tax charges of $2.3 million, or $0.04 per diluted share for the first six months of 2010 associated with restructuring activities, and (iii) costs of $2.0 million or $0.04 per diluted share, in merger and acquisition activities relating to the pending Odyssey acquisition.

Net income for the second quarter and first six months of 2009 included (A) income from continuing operations of $17.4 million, or $0.59 per diluted share and $35.5 million, or $1.20 per diluted share, respectively, and (B) loss from discontinued operations of $0.3 million, or $0.01 per diluted share and $0.4 million, or $0.01 per diluted share, respectively.

Net income for the second quarter and first six months of 2009 included (i) a pre-tax charge of $0.6 million, or $0.01 per diluted share, and $1.5 million or $0.03 per diluted share, respectively, associated with restructuring and integration activities, and (ii) for the six month period, a pre-tax gain of $5.7 million, or $0.19 per diluted share, related to the sale of assets and certain branch offices that specialized primarily in pediatric home health care services.

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 governmental payer or third party commercial arrangements. Additional liquidity is provided from existing cash balances and the Company’s credit arrangements, principally through its revolving credit facility, and could be provided in the future through the issuance of up to $300 million of debt or equity securities under a universal shelf registration statement filed with the SEC in September 2007.

In connection with the Odyssey acquisition, the Company also entered into a financing commitment letter with Bank of America, N.A. and other parties dated May 23, 2010, to provide and/or arrange for (a) $925.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $800.0 million and a revolving credit facility of $125.0 million; and (b) $305.0 million in gross proceeds from the issuance and sale by the Company of senior unsecured notes or, if and to the extent that less than $305 million in aggregate principal amount of such notes are issued and sold on or prior to the consummation of the Merger, $305.0 million of senior unsecured loans under a bridge facility. See also Note 17.

During the first six months of 2010, cash provided by operating activities was $48.0 million. In addition, the Company received net proceeds of $8.8 million principally from the sale of its HME and IV businesses and generated cash from the issuance of common stock upon exercise of stock options and under the Company’s Employee Stock Purchase Plan (“ESPP”) of $5.6 million. In the first six months of 2010, the Company used $5.0 million for the repayment of debt, $5.6 million for capital expenditures, $8.5 million for acquisition of businesses and $5.0 million for repurchases of common stock.

Net cash provided by operating activities decreased by $1.5 million, from $49.5 million for the first six months of 2009 to $48.0 million in the first six months of 2010. The decrease was primarily driven by decreases in net cash provided by operations prior to changes in assets and liabilities ($4.4 million) and prepaid expenses and other current assets ($7.6 million) offset by improvements in accounts receivables ($9.8 million), increases in current liabilities ($0.4 million) and other ($0.3 million).

 

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Adjustments to add back non-cash items affecting net income are summarized as follows (in thousands):

 

     For the Six Months Ended  
     July 4, 2010     June 28, 2009     Variance  

OPERATING ACTIVITIES:

      

Net income

   $ 28,244      $ 35,117      $ (6,873

Adjustments to add back non-cash items affecting net income:

      

Depreciation and amortization

     8,807        11,145        (2,338

Amortization of debt issuance costs

     614        681        (67

Provision for doubtful accounts

     4,903        4,045        858   

Equity-based compensation expense

     3,191        3,466        (275

Windfall tax benefits associated with equity-based compensation

     (711     (585     (126

Realized loss on auction rate securities

     —          1,000        (1,000

Gain on sale of assets and businesses, net

     (169     (5,747     5,578   

Equity in net earnings of affiliate

     (763     (541     (222

Deferred income tax expense

     1,542        1,458        84   
                        

Total cash provided by operations prior to changes in assets and liabilities

   $ 45,658      $ 50,039      $ (4,381
                        

The $4.4 million difference in “Total cash provided by operations prior to changes in assets and liabilities” between the 2009 and 2010 periods is primarily related to reductions in net income after adjusting for components of income that do not have an impact on cash, such as depreciation and amortization, equity-based compensation expense, gain on sale of assets and businesses, net and deferred income taxes.

A summary of the changes in current liabilities impacting cash flow from operating activities follows (in thousands):

 

     For the Six Months Ended  
     July 4, 2010     June 28, 2009     Variance  

OPERATING ACTIVITIES:

      

Changes in current liabilities:

      

Accounts payable

   $ (3,015   $ 481      $ (3,496

Payroll and related taxes

     1,241        90        1,151   

Deferred revenue

     3,790        4,981        (1,191

Medicare liabilities

     8,620        (371     8,991   

Obligations under insurance programs

     2,401        (1,569     3,970   

Other accrued expenses

     (10,844     (1,776     (9,068
                        

Total changes in current liabilities

   $ 2,193      $ 1,836      $ 357   
                        

The primary drivers for the $0.4 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:

 

   

Accounts payable, which had a negative impact of $3.5 million, between the 2009 and 2010 reporting periods, primarily related to the disposition of the Company’s HME and IV businesses and timing of payments.

 

   

Payroll and related taxes, which had a positive impact of $1.2 million between the 2009 and 2010 reporting periods.

 

   

Deferred revenue, which had a negative impact of $1.2 million between the 2009 and 2010 reporting periods.

 

   

Medicare liabilities, which had a positive impact of $9.0 million between the 2009 and 2010 reporting periods, primarily related to incremental unpaid charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods.

 

   

Obligations under insurance programs, which had a positive impact on the change in operating cash flow of $4.0 million between the 2009 and 2010 reporting periods, primarily related to incremental unpaid charges recorded in the first six months of 2010 compared to 2009.

 

   

Other accrued expenses, which had a negative impact on the change in operating cash flow of $9.1 million between the 2009 and 2010 reporting periods, due primarily to increases in payments under the Company’s incentive compensation programs in 2010 and timing of income tax payments.

Working capital at July 4, 2010 was approximately $233 million, an increase of $35 million, as compared to approximately $198 million at January 3, 2010, primarily due to:

 

   

a $39 million increase in cash and cash equivalents;

 

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an $11 million increase in prepaid expenses and other current assets; offset by

 

   

a $4 million decrease in current liabilities, consisting of decreases in accounts payable ($3 million), current portion of long-term debt ($5 million) and other accrued expenses ($12 million), partially offset by increases in Medicare liabilities ($9 million), deferred revenue ($4 million), obligations under insurance programs ($2 million) and in payroll and related taxes ($1 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities; and

 

   

a $14 million decrease in accounts receivable;

 

   

a $3 million decrease in deferred tax assets;

 

   

a $2 million decrease in current assets held for sale as a result of the completion of the sale of the Company’s HME and IV businesses effective February 1, 2010.

Days Sales Outstanding (“DSO”) relating to continuing operations as of July 4, 2010 were 51 days, a decrease of three days from January 3, 2010, primarily related to strong cash collections during the second quarter as well as the release of held Medicare billing pending the receipt of the tie-in notice from the Centers for Medicare and Medicaid Services (“CMS”) associated with acquisitions completed in late 2009.

At the commencement of an episode of care under the Medicare and non-Medicare PPS for Home Health, the Company records accounts receivable and deferred revenue based on an expected reimbursement amount. Accounts receivable is adjusted upon the receipt of cash and deferred revenue is amortized into revenue over the average patient treatment period. For informational purposes, if net accounts receivable and deferred revenue were combined for purposes of determining an alternative DSO calculation which measures open net accounts receivable divided by average daily recognized revenues, the alternative DSO would have been 39 days at July 4, 2010 and 43 days at January 3, 2010.

 

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Accounts receivable attributable to major payer sources of reimbursement at July 4, 2010 and January 3, 2010 were as follows (in thousands):

 

     July 4, 2010
     Total    0 - 90 days    91 - 180 days    181 - 365 days    Over 1 year

Medicare

   $ 123,891    $ 109,978    $ 8,452    $ 3,610    $ 1,851

Medicaid and Local Government

     12,618      10,061      999      1,091      467

Commercial Insurance and Other

     38,539      28,171      5,151      3,226      1,991

Self - Pay

     3,863      953      1,274      1,052      584
                                  

Gross Accounts Receivable

   $ 178,911    $ 149,163    $ 15,876    $ 8,979    $ 4,893
                                  
     January 3, 2010
     Total    0 - 90 days    91 - 180 days    181 - 365 days    Over 1 year

Medicare

   $ 126,927    $ 106,774    $ 13,530    $ 4,937    $ 1,686

Medicaid and Local Government

     16,465      12,867      1,686      1,454      458

Commercial Insurance and Other

     44,312      34,127      5,518      3,512      1,155

Self - Pay

     3,792      1,523      1,224      836      209
                                  

Gross Accounts Receivable

   $ 191,496    $ 155,291    $ 21,958    $ 10,739    $ 3,508
                                  

The Company participates in Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications by segment were as follows:

 

     Second Quarter Ended  
     2010     2009  
     Home
Health
    Hospice     Total     Home
Health
    Hospice     Total  

Medicare

   75   93   77   73   92   74

Medicaid and Local Government

   6      4      6      8      4      8   

Commercial Insurance and Other:

            

Paid at episodic rates

   8      —        7      7      —        7   

Other

   11      3      10      12      4      11   
                                    

Total net revenues

   100   100   100   100   100   100
                                    
     Six Months Ended  
     2010     2009  
     Home
Health
    Hospice     Total     Home
Health
    Hospice     Total  

Medicare

   75   93   76   72   92   74

Medicaid and Local Government

   6      4      7      9      4      9   

Commercial Insurance and Other:

            

Paid at episodic rates

   8      —        7      7      —        6   

Other

   11      3      10      12      4      11   
                                    

Total net revenues

   100   100   100   100   100   100
                                    

Effective January 1, 2010, CMS implemented payment updates for Medicare home health which represented a net increase in reimbursement of approximately 1.8 percent, consisting of (i) a 2.0 percent market basket update, (ii) a modification to the home health outlier policy with a related increase in home health base rates of 2.5 percent and (iii) a 2.75 percent reduction in home health system payment rates to reduce aggregate case mix increases that CMS believes are unrelated to patients’ health status (“case mix creep adjustment”), representing the third year of a four year phase-in. In addition, as a result of the recent passage of the Affordable Care Act a 3.0 percent add-on to Medicare payments made for home health services to patients in rural areas has been implemented effective April 1, 2010. During the first six months of 2010, approximately 22 percent of the Company’s episodic revenue was generated in designated rural areas.

Effective October 1, 2009, CMS implemented a net 1.4 percent increase in payments to hospices serving Medicare beneficiaries.

 

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On July 16, 2010, CMS announced proposed changes to Medicare home health payments for calendar year 2011 and 2012 which, if implemented, would represent a net decrease in reimbursement of approximately 4.75 percent. The proposed reimbursement changes consist of (i) a 2.4 percent positive market basket update, (ii) a 1.0 percent reduction to the market basket update as directed by healthcare reform, (iii) a 2.5 percent reduction in the base rate to reverse the 2010 benefit resulting from changes in the home health outlier policy, (iv) fractional benefits resulting from the fourth quarter of the rural add-on provision which was implemented on April 1, 2010 (an incremental 0.15 percent) and wage index updates and (v) a case mix creep adjustment of 3.79 percent, instead of the expected reduction of 2.71 percent. In addition, CMS proposed an additional fifth year case mix creep adjustment of 3.79 percent in 2012 and various other changes to promote efficiency in payment and program integrity. The CMS proposal is subject to a comment period, with a final rule expected to be issued during the fourth quarter of 2010. CMS also finalized Medicare hospice rates for the year beginning October 1, 2010, establishing an increase of 1.8 percent, consisting of a 2.6 percent market basket increase, offset by a 0.8 percent reduction due to the second year of a seven year phase-in of the budget neutrality adjustment factor.

There are certain standards and regulations that the Company must adhere to in order to continue to participate in Medicare, Medicaid and other federal and state healthcare programs. 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 in or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in our exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes that it is currently in compliance with these standards and regulations.

In a letter dated July 13, 2010, the SEC requested that the Company preserve all documents between January 1, 2000 and present that relate to the Company’s participation in the Medicare home health prospective payment system. On July 16, 2010, the Company received a subpoena from the SEC requesting the production of documents. The Company believes the investigation by the SEC is similar to the SEC’s ongoing investigations and the inquiry from the Senate Finance Committee. The Company plans to comply with the subpoena and cooperate with the investigation.

Credit Arrangements

The Company’s credit agreement, which was entered into on February 28, 2006, provided for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million and (ii) a six year revolving credit facility of $75.0 million. On March 5, 2008, in accordance with the provisions of its credit agreement, the Company and certain of its lenders agreed to increase the revolving credit facility from $75.0 million to $96.5 million. Of the total revolving credit facility, $55 million is available for the issuance of letters of credit and $10 million was available for swing line loans. On January 22, 2010, the revolving credit facility was reduced to $80 million and the facility swing line loan feature was formally eliminated as further discussed below.

Although the credit agreement requires the Company to make quarterly installment payments on the term loan with the remaining balance due at maturity on March 31, 2013, the administrative agent under the credit agreement determined in early 2008 that the Company has made sufficient prepayments to extinguish all required quarterly installment payments due under the credit agreement on the term loan.

Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the credit agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined in the agreement), mandatory prepayments of the term loan are required in the amounts specified in the credit agreement.

On January 22, 2010, the Company entered into the Third Amendment to the Credit Agreement (“the Amendment”) which, among other things, provided for lenders’ consent to the sale of its HME and IV businesses. In addition, the Amendment formally removed Lehman Commercial Paper, Inc. as a participating lender under the Credit Agreement and, as a result, the revolving credit facility under the Credit Agreement was reduced from $96.5 million to $80.0 million and the facility’s swing line loan feature was eliminated.

The Company had outstanding term loan borrowings of $232.0 million and $237.0 million as of July 4, 2010 and January 3, 2010, respectively; as of such dates, there were no outstanding borrowings under the revolving credit facility and outstanding letters of credit were $35.0 million. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of July 4, 2010, the Company’s unused and available credit line approximated $45.0 million.

The credit agreement requires the Company to meet certain financial tests. These tests include a consolidated leverage ratio and a consolidated interest coverage ratio. The credit agreement also contains additional covenants which, among other things, require the Company to deliver to the lenders specified financial information, including annual and quarterly financial information, and limit the Company’s ability to do the following, subject to various exceptions and limitations: (i) make certain investments, including acquisitions; (ii) create liens on its property; (iii) incur additional debt obligations; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) dispose of property; (vi) make capital expenditures; and (vii) pay dividends or acquire capital stock of the Company or its subsidiaries. As of July 4, 2010, the Company was in compliance with all covenants in the credit agreement. As of July 4, 2010, the consolidated leverage ratio was 1.5.

Interest under the credit agreement accrues at Base Rate or Eurodollar Rate (plus an applicable margin based on the table presented below) for both the revolving credit facility and the term loan. Fees on outstanding letters of credit are based on the applicable margin. Overdue amounts bear interest at 2 percent per annum above the applicable rate. The applicable margin component of interest rates under the credit agreement is based on the Company’s consolidated leverage ratio as follows:

 

Revolving Credit

Consolidated

Leverage Ratio

  

Term Loan

Consolidated

Leverage Ratio

 

Margin for

Base Rate Loans

   

Margin for

Eurodollar Loans

 

³ 3.5

   ³ 3.5   1.25   2.25

< 3.5 & ³ 3.0

   < 3.5 & ³ 3.0   1.00   2.00

< 3.0 & ³ 2.5

   < 3.0   0.75   1.75

< 2.5

     0.50   1.50

 

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The Company is also subject to a revolving credit commitment fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit commitment and the total outstanding borrowings and letters of credit. The interest rate on term loan borrowings averaged 2.1 percent and 2.0 percent per annum for the second quarter and first six months of 2010, respectively, and 2.6 percent and 2.8 percent per annum for the second quarter and first six months of 2009, respectively. The interest rate on term loan borrowings approximated 2.1 percent per annum at July 4, 2010.

The Company also had outstanding surety bonds of $1.3 million and $3.2 million at July 4, 2010 and January 3, 2010, respectively.

Guarantee and Collateral Agreement

The Company has entered into a Guarantee and Collateral Agreement, among the Company and substantially all of its subsidiaries, in favor of the administrative agent under the credit agreement (the “Guarantee and Collateral Agreement”). The Guarantee and Collateral Agreement grants a collateral interest in all real property and personal property of the Company and its subsidiaries signatory to the Guarantee and Collateral Agreement, including stock of such subsidiaries. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the credit agreement by substantially all subsidiaries of the Company.

Insurance Programs

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 with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits and retention amounts, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. These estimates and the resulting reserves are reviewed and updated periodically.

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.

Capital Expenditures

The Company’s capital expenditures for the six months ended July 4, 2010 were $5.6 million as compared to $12.4 million for the six months ended June 28, 2009. Capital expenditures associated with the Company’s HME and IV business for the first six months of 2010 were $0.3 million and $2.7 million for the first six months of 2009. The Company intends to make investments and other expenditures to upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry, among other things. In this regard, management expects that capital expenditures will range between $15 million and $17 million for fiscal 2010. 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 and cash equivalents of approximately $191.1 million as of July 4, 2010, including operating funds of approximately $5.1 million exclusively relating to a non-profit hospice operation managed in Florida.

The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made periodically through 2010. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.

During the six months ended July 4, 2010, the Company repurchased 175,000 shares of its outstanding common stock at an average cost of $28.49 per share and a total cost of approximately $5.0 million. The Company’s credit agreement provides, with certain exceptions, for a limit of $5.0 million per fiscal year for the repurchases of the Company’s common stock.

 

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Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

As of July 4, 2010, the Company had outstanding borrowings of $232.0 million under the term loan of the credit agreement. Debt repayments, future minimum rental commitments for all non-cancelable leases and purchase obligations at July 4, 2010 are as follows (in thousands):

 

     Payment due by period

Contractual Obligations

   Total    Less than
1 year
   1-3 years    4-5 years    More than
5 years

Long-term debt obligations:

              

Term loan repayments

   $ 232,000    $ —      $ 232,000    $ —      $ —  

Interest payments (1)

     13,289      4,832      8,457      —        —  

Capital lease obligations

     741      446      295      —        —  

Operating lease obligations

     75,659      25,679      35,867      11,914      2,199

Purchase obligations

     3,882      2,588      1,294      —        —  
                                  

Total

   $ 325,571    $ 33,545    $ 277,913    $ 11,914    $ 2,199
                                  

 

(1) Long-term debt obligations include variable interest payments based on London Interbank Offered Rate (“LIBOR”) plus an applicable interest rate margin. At July 4, 2010, the interest rate on the Company’s term loan borrowings approximated 2.1 percent per annum.
(2) The table excludes $0.9 million of unrecognized tax benefits due to uncertainty regarding the timing of future cash payments, if any, related to the liabilities recorded in accordance with the guidance for uncertain tax positions.

During the six months ended July 4, 2010, the Company made a $5.0 million prepayment on its term loan. The Company had total letters of credit outstanding of approximately $35.0 million at July 4, 2010 and January 3, 2010. 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. 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. The Company also had outstanding surety bonds of $1.3 million and $3.2 million at July 4, 2010 and January 3, 2010, respectively.

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

Management expects that the Company’s working capital needs for 2010 will be met through operating cash flow and existing cash resources. The Company may also consider other alternative uses of cash including, among other things, acquisitions, voluntary prepayments on the term loan, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company’s Board of Directors and may require the approval of its lenders. If cash flows from operations, cash resources or availability under the credit agreement fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company is exposed to market risk from fluctuations in interest rates. The interest rate on the Company’s borrowings under the credit agreement can fluctuate based on both the interest rate option (i.e., base rate or Eurodollar rate plus applicable margins) and the interest period. As of July 4, 2010, the total amount of outstanding debt subject to interest rate fluctuations was $232.0 million. A hypothetical 100 basis point change in short-term interest rates as of that date would result in an increase or decrease in interest expense of $2.3 million per year, assuming a similar capital structure.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

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Changes in internal control over financial reporting

As required by the Exchange Act Rule 13a-15(d), the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s internal control over financial reporting to determine whether any change occurred during the quarter ended July 4, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

On May 10, 2010, a collective and class action complaint entitled Lisa Rindfleisch et al. v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of New York against the Company in which five former employees allege wage and hour law violations. The former employees claim they were paid pursuant to “an unlawful hybrid” compensation plan that paid them on both a per visit and an hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The plaintiffs allege continuing violations of federal and state law and seek damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act. Plaintiffs seek class certification of similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA, six years under the New York statute and two years under the North Carolina statute.

On June 11, 2010, a collective and class action complaint entitled Catherine Wilkie, individually and on behalf of all others similarly situated v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of California against the Company in which a former employee alleges wage and hour violations under the FLSA and California law. The complaint alleges that the Company paid some of its employees on both a per visit and hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The plaintiff seeks class certification, attorneys’ fees, back wages, penalties, and damages going back three years on the FLSA claim and four years on the state wage and hour claims.

Given the preliminary stage of the Rindfleisch and Wilkie lawsuits, the Company is unable to assess the probable outcome or potential liability, if any, arising from these proceedings. The Company intends to defend itself vigorously in these lawsuits.

Three putative class action lawsuits have been filed in connection with the Company’s proposed acquisition (“Merger”) of Odyssey HealthCare, Inc. (“Odyssey”). The first, entitled Pompano Beach Police & Firefighters’ Retirement System v. Odyssey HealthCare, Inc. et al., was filed on May 27, 2010 in the County Court, Dallas County, Texas. The second, entitled Eric Hemminger et al. v. Richard Burnham et al., was filed on June 9, 2010 in the District Court, Dallas, Texas. The third, entitled John O. Hansen v. Odyssey HealthCare, Inc. et al., was filed on July 2, 2010 in the United States District Court for the Northern District of Texas. All three lawsuits name the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits are brought by purported stockholders of Odyssey, both individually and on behalf of a putative class of stockholders, alleging that Odyssey’s board of directors breached its fiduciary duties in connection with the Merger by failing to maximize shareholder value and that the Company and Odyssey aided and abetted the alleged breaches. All three lawsuits seek equitable relief, including, among other things, to enjoin consummation of the Merger, rescission of the related Agreement and Plan of Merger and an award of all costs, including reasonable attorneys’ fees. The Pompano Beach Police & Firefighters’ suit also seeks additional proxy disclosure regarding the Merger. The Company believes that these lawsuits are without merit and intends to vigorously defend itself; however, there can be no assurance that the Company will be successful in its defense.

See also Note 14 to the consolidated financial statements included in this report for a description of certain other legal matters and pending legal proceedings, which description is incorporated herein by reference.

 

Item 1A. Risk Factors

Our Company is subject to certain risks as disclosed in PART I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2010. The following new risk factors should be read in conjunction with those risk factors previously disclosed:

Our growth strategy, including the effective integration of strategic ventures and acquisitions, may not be successful and could have a material adverse effect on our revenues, cash flows, liquidity and results of operations.

The future growth of our business and our future financial performance will depend on, among other things, our ability to increase our revenue base through a combination of internal growth and strategic ventures, including acquisitions such as our proposed acquisition of Odyssey. Future revenue growth and improved financial performance cannot be assured, as it is subject to various risk factors, including:

 

   

the effects of competition;

 

   

the uncertainty as to levels of Medicare, Medicaid and private health insurance reimbursement;

 

   

our ability to generate new and retain existing contracts with major payer sources;

 

   

our ability to attract and retain qualified personnel, especially in a business environment experiencing a shortage of clinical professionals;

 

   

our ability to identify, negotiate and consummate desirable acquisition opportunities on reasonable terms; and

 

   

our ability to effectively integrate acquired businesses.

 

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The process of integrating any acquired business, including, following its anticipated acquisition, Odyssey, involves risks. These risks include, but are not limited to:

 

   

demands on management related to the increase in the size of our business;

 

   

diversion of management’s attention from the management of daily operations;

 

   

difficulties in the assimilation of different corporate cultures and business practices;

 

   

difficulties in conforming the acquired company’s accounting systems and policies to ours;

 

   

retaining employees who may be vital to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;

 

   

integrating management information systems with ours; and

 

   

costs and expenses associated with any undisclosed or potential liabilities.

Failure to successfully integrate any acquired business, including, following its anticipated acquisition, Odyssey, may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such business. In addition, acquisitions could result, and completion of the anticipated acquisition of Odyssey will result, in the incurrence of additional debt and related interest expense, contingent liabilities, and depreciation and amortization expenses related to tangible and intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flows.

We may not be able to achieve the estimated future cost savings expected to be realized as a result of our proposed acquisition of Odyssey or any future acquisitions. Failure to achieve such estimated future cost savings could have an adverse effect on our financial condition and results of operations.

We may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from our proposed acquisition of Odyssey or other future acquisitions, either in the amount or within the time frame that we expect. In addition, the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. Our ability to realize anticipated cost savings, synergies, and revenue enhancements in connection with any acquisition may be affected by a number of factors, including, but not limited to, the following:

 

   

the use of more cash or other financial resources on integration and implementation activities than we expect;

 

   

increases in other expenses unrelated to such acquisition, which may offset the cost savings and other synergies from the acquisition;

 

   

our ability to eliminate duplicative back office overhead and redundant selling, general, and administrative functions; and

 

   

our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.

Anticipated cost savings in connection with a proposed acquisition reflect estimates and assumptions made by our management as to the benefits and associated expenses and capital spending with respect to our cost savings initiatives, and it is possible that these estimates and assumptions may not ultimately reflect actual results. In addition, these estimated cost savings may not actually be achieved in the timeframe anticipated or at all. If we fail to realize anticipated cost savings, synergies, or revenue enhancements in connection with our proposed acquisition of Odyssey or other future acquisitions, our financial results may be adversely affected, and we may not generate the cash flow from operations that we anticipate.

We have incurred significant indebtedness, and, upon the expected completion of our proposed acquisition of Odyssey, we would incur substantial additional indebtedness which can materially and adversely affect our liquidity, financial condition, results of operations and cash flows.

At July 4, 2010, our indebtedness under the senior term loan under our credit facility was $232.0 million. We expect to refinance this indebtedness and incur approximately $1.1 billion aggregate principal amount of new indebtedness in connection with the anticipated consummation of our proposed acquisition of Odyssey, following which we would be highly leveraged. Our high degree of leverage could have important consequences, including:

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;

 

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increasing our vulnerability to adverse changes in general economic and industry conditions;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and

 

   

placing us at a competitive disadvantage compared to our competitors who are less highly leveraged than we are.

Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive, regulatory and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be able to provide sufficient proceeds to meet these obligations or to execute our business strategy successfully. As a result of this indebtedness and additional indebtedness we may incur, demands on our cash resources would increase, which could affect our liquidity, financial condition and results of operations, which could negatively affect the market price of our common stock.

The Senate Finance Committee is conducting an inquiry into certain of our practices, and the SEC has commenced an investigation relating to our participation in the Medicare Home Health Prospective Payment System.

In a letter dated May 12, 2010, the United States Senate Finance Committee requested information from us regarding our Medicare utilization rates and amount of therapy services furnished to each beneficiary. The letter was sent to all of the publicly traded home healthcare companies mentioned in a Wall Street Journal article that explored the relationship between CMS home health policies and the utilization rates of some home health agencies. As part of our initial production of documents, on May 26, 2010 the Senate Finance Committee requested supplemental information relating to our compliance program, policies and procedures and billing manuals. We have responded to these requests. Additionally, on July 13, 2010, the SEC informed us that it has commenced an investigation relating to our participation in the Medicare Home Health Prospective Payment System and, on July 16, 2010, we received a subpoena from the SEC requesting certain documents in connection with its investigation. We are in the process of responding to the SEC’s request.

Given the preliminary stage of both the Senate Finance Committee inquiry and the SEC investigation, we are unable to assess the probable outcome or potential liability, if any, arising from either matter. There can be no assurances that we will not experience negative publicity with respect to these matters or that additional investigations by other government agencies may not be initiated for which we could incur fines or other losses as a result, including a reduction in reimbursement for certain services we perform.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Repurchases of Equity Securities (1) (2)

 

Period

   (a) Total
Number
of Shares
Purchased
   (b) Average
Price Paid
per Share (2)
   (c) Total Number
of Shares Purchased
as Part of Publicly
Announced  Plans
or Programs
   (d) Maximum Number
of Shares that May
Yet be Purchased
Under the  Plans
or Programs

April (4/5/10 - 5/9/10)

   119,385    $ 28.49    119,385    214,433

May (5/10/10 - 6/6/10)

   33,865      28.46    33,865    180,568

June (6/7/10 - 7/4/10)

   —        —      —      180,568
                   

Total

   153,250    $ 28.48    153,250   
                   

 

(1) On April 1, 2005, the Company announced that its Board of Directors had authorized the repurchase of up to 1,500,000 shares of its outstanding common stock. As of the end of the period covered by this table, 1,319,432 shares had been repurchased.

 

(2) The Company incurred a commission cost of $0.04 per share repurchased.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description

  3.1    Amended and Restated Certificate of Incorporation of Company. (1)
  3.2    Amended and Restated By-Laws of Company. (1)
  4.1    Specimen of common stock. (4)
  4.2    Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (2)
  4.3    Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3)
10.1    Employee Stock Purchase Plan, as amended. (5) +
10.2    Executive Officers Bonus Plan, as amended. *+
10.3    Amendment No. 1 to Stock & Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of December 31, 2007. *+
10.4    Amended Severance Agreement with John R. Potapchuk dated as of May 13, 2010. *+
10.5    Amended Severance Agreement with Stephen B. Paige dated as of May 13, 2010. *+
10.6    Summary Sheet of Company compensation to non-employee directors, effective May 13, 2010. *+
10.7    Agreement and Plan of Merger dated as of May 23, 2010 among Gentiva Health Services, Inc., GTO Acquisition Corp. and Odyssey HealthCare, Inc. (6)
10.8    Financing Commitment Letter dated May 23, 2010 among Gentiva Health Services, Inc., Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Bank PLC, Barclays Capital, General Electric Capital Corporation, GE Capital Markets, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc. (6)
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

 

(1) Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.

 

(2) 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).

 

(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).

 

(5) Incorporated herein by reference to the Registration Statement of Company on Form S-8 filed May 27, 2010 (Reg. No. 333-167127).  

 

(6) Incorporated herein by reference to Form 8-K of Company dated and filed May 24, 2010.

 

* Filed herewith

 

+ Management contract or compensatory plan or arrangement

 

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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.

 

   

GENTIVA HEALTH SERVICES, INC.

(Registrant)

Date: July 30, 2010    

/s/ Tony Strange

    Tony Strange
    Chief Executive Officer and President
Date: July 30, 2010    

/s/ Eric R. Slusser

    Eric R. Slusser
    Executive Vice President,
    Chief Financial Officer and Treasurer

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description

  3.1    Amended and Restated Certificate of Incorporation of Company. (1)
  3.2    Amended and Restated By-Laws of Company. (1)
  4.1    Specimen of common stock. (4)
  4.2    Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (2)
  4.3    Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3)
10.1    Employee Stock Purchase Plan, as amended. (5) +
10.2    Executive Officers Bonus Plan, as amended. *+
10.3    Amendment No. 1 to Stock & Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of December 31, 2007. *+
10.4    Amended Severance Agreement with John R. Potapchuk dated as of May 13, 2010. *+
10.5    Amended Severance Agreement with Stephen B. Paige dated as of May 13, 2010. *+
10.6    Summary Sheet of Company compensation to non-employee directors, effective May 13, 2010. *+
10.7    Agreement and Plan of Merger dated as of May 23, 2010 among Gentiva Health Services, Inc., GTO Acquisition Corp. and Odyssey HealthCare, Inc. (6)
10.8    Financing Commitment Letter dated May 23, 2010 among Gentiva Health Services, Inc., Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Bank PLC, Barclays Capital, General Electric Capital Corporation, GE Capital Markets, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc. (6)
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*

 

(1) Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.

 

(2) 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).

 

(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).

 

(5) Incorporated herein by reference to the Registration Statement of Company on Form S-8 filed May 27, 2010 (Reg. No. 333-167127).  

 

(6) Incorporated herein by reference to Form 8-K of Company dated and filed May 24, 2010.

 

* Filed herewith

 

+ Management contract or compensatory plan or arrangement

 

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