GENTIVA HEALTH SERVICES INC - FORM 10-Q

GENTIVA HEALTH SERVICES INC - FORM 10-Q - August 8, 2012

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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 June 30, 2012

¨	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 x 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).

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 27, 2012, was 30,566,762.

INDEX


		Page No.
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011		3

	Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2012 and 2011		4

	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2012 and 2011		5

	Notes to Consolidated Financial Statements (Unaudited)		6-37

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38-54

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		54

Item 4.	Controls and Procedures		54-55

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		55

Item 1A.	Risk Factors		56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 3.	Defaults Upon Senior Securities		56

Item 4.	Mine Safety Disclosures		56

Item 5.	Other Information		56

Item 6.	Exhibits		57

SIGNATURES			58

EXHIBIT INDEX			59

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	155,278		$	164,912
Accounts receivable, less allowance for doubtful accounts of $12,807 and $11,562 at June 30, 2012 and December 31, 2011, respectively		260,031			290,589
Deferred tax assets, net		17,214			26,451
Prepaid expenses and other current assets		46,402			38,379

Total current assets		478,925			520,331

Note receivable from CareCentrix		25,000			25,000
Fixed assets, net		44,374			46,246
Intangible assets, net		208,210			214,874
Goodwill		641,669			641,669
Other assets		80,843			82,208

Total assets	$	1,479,021		$	1,530,328


LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	15,443		$	14,903
Accounts payable		13,008			12,613
Payroll and related taxes		37,964			42,027
Deferred revenue		38,516			34,114
Medicare liabilities		25,703			23,066
Obligations under insurance programs		52,926			54,976
Accrued nursing home costs		22,706			24,223
Other accrued expenses		62,293			89,270

Total current liabilities		268,559			295,192

Long-term debt		922,682			973,222
Deferred tax liabilities, net		33,167			32,498
Other liabilities		34,355			26,885

Equity:
Gentiva shareholders’ equity:
Common stock, $0.10 par value; authorized 100,000,000 shares; issued 31,694,922 and 31,435,264 shares at June 30, 2012 and December 31, 2011, respectively		3,169			3,144
Additional paid-in capital		392,860			387,803
Treasury stock, 1,260,879 and 655,802 shares at June 30, 2012 and December 31, 2011, respectively		(17,852	)		(12,878	)
Accumulated deficit		(159,382	)		(178,131	)

Total Gentiva shareholders’ equity		218,795			199,938
Noncontrolling interests		1,463			2,593

Total equity		220,258			202,531


Total liabilities and equity	$	1,479,021		$	1,530,328

See notes to consolidated financial statements.

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Net revenues	$	427,691		$	448,712		$	863,343		$	899,821
Cost of services sold		222,737			234,151			455,598			464,907

Gross profit		204,954			214,561			407,745			434,914
Selling, general and administrative expenses		(163,928	)		(191,638	)		(337,635	)		(364,371	)
Gain on sale of businesses		5,447			—			5,447			—
Dividend income		—			4,613			—			4,613
Interest income		697			639			1,358			1,304
Interest expense and other		(23,352	)		(21,425	)		(45,515	)		(48,973	)

Income from continuing operations before income taxes and equity in net earnings of CareCentrix		23,818			6,750			31,400			27,487
Income tax expense		(9,646	)		(2,412	)		(12,175	)		(10,531	)
Equity in net earnings of CareCentrix		—			336			—			890

Income from continuing operations		14,172			4,674			19,225			17,846
Discontinued operations, net of tax		—			666			—			1,113

Net income		14,172			5,340			19,225			18,959
Less: Net income attributable to noncontrolling interests		(263	)		(151	)		(476	)		(318	)

Net income attributable to Gentiva shareholders	$	13,909		$	5,189		$	18,749		$	18,641


Comprehensive income	$	14,172		$	5,340		$	19,225		$	18,481


Basic earnings per common share:
Income from continuing operations attributable to Gentiva shareholders	$	0.46		$	0.15		$	0.61		$	0.58
Discontinued operations, net of tax		—			0.02			—			0.04

Net income attributable to Gentiva shareholders	$	0.46		$	0.17		$	0.61		$	0.62


Weighted average shares outstanding		30,338			30,293			30,532			30,210


Diluted earnings per common share:
Income from continuing operations attributable to Gentiva shareholders	$	0.46		$	0.15		$	0.61		$	0.57
Discontinued operations, net of tax		—			0.02			—			0.04

Net income attributable to Gentiva shareholders	$	0.46		$	0.17		$	0.61		$	0.61


Weighted average shares outstanding		30,446			30,846			30,632			30,809


Amounts attributable to Gentiva shareholders:
Income from continuing operations	$	13,909		$	4,523		$	18,749		$	17,528
Discontinued operations, net of tax		—			666			—			1,113

Net income	$	13,909		$	5,189		$	18,749		$	18,641

See notes to consolidated financial statements.

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	For the Six Months Ended
	June 30, 2012			June 30, 2011
OPERATING ACTIVITIES:
Net income	$	19,225		$	18,959
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,722			15,120
Amortization and write-off of debt issuance costs		7,020			9,654
Provision for doubtful accounts		3,746			4,525
Equity-based compensation expense		3,442			3,966
Windfall tax benefits associated with equity-based compensation		—			(194	)
Gain on sale of businesses		(5,447	)		—
Equity in net earnings of CareCentrix		—			(890	)
Deferred income tax expense (benefit)		9,906			(54	)
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable		26,251			(496	)
Prepaid expenses and other current assets		(7,524	)		6,253
Accounts payable		395			(4,124	)
Payroll and related taxes		(4,063	)		(3,454	)
Deferred revenue		4,402			1,099
Medicare liabilities		2,723			(13,606	)
Obligations under insurance programs		(2,050	)		(7,760	)
Accrued nursing home costs		(1,517	)		(3,800	)
Other accrued expenses		(28,204	)		(5,563	)
Other, net		6,117			242

Net cash provided by operating activities		49,144			19,877


INVESTING ACTIVITIES:
Purchase of fixed assets		(6,941	)		(8,717	)
Proceeds from sale of businesses, net of cash transferred		6,090			13,581
Acquisition of businesses, net of cash acquired		—			(320	)

Net cash (used in) provided by investing activities		(851	)		4,544


FINANCING ACTIVITIES:
Proceeds from issuance of common stock		1,640			6,235
Windfall tax benefits associated with equity-based compensation		—			194
Repayment of long-term debt		(50,000	)		(23,438	)
Repurchase of common stock		(4,974	)		—
Debt issuance costs		(4,125	)		(13,457	)
Repayment of capital lease obligations		(73	)		(145	)
Other		(395	)		(413	)

Net cash used in financing activities		(57,927	)		(31,024	)


Net change in cash and cash equivalents		(9,634	)		(6,603	)
Cash and cash equivalents at beginning of period		164,912			104,752

Cash and cash equivalents at end of period	$	155,278		$	98,149


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid	$	38,402		$	41,577
Income taxes paid	$	4,014		$	6,676

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITY:

In connection with the acquisition of The Healthfield Group, Inc. on February 28, 2006, the Company received 14,334 shares of common stock in the second quarter of 2011, from the Healthfield escrow account to satisfy certain pre-acquisition liabilities paid by the Company.

See notes to consolidated financial statements.

Gentiva Health Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Background and Basis of Presentation

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

Effective May 31, 2012, the Company completed the sale of its Gentiva consulting business to MP Healthcare Partners, LLC, pursuant to an asset purchase agreement, for cash consideration of approximately $0.3 million.

During the second quarter of 2012, the Company sold eight home health branches and four hospice branches in Louisiana, pursuant to an asset purchase agreement, for total consideration of approximately $6.4 million. The Company received proceeds of approximately $5.9 million during the second quarter and first six months of 2012 and established a receivable of approximately $0.5 million.

Effective October 14, 2011, the Company sold its homemaker services agency business in Illinois (“IDOA”) pursuant to an asset purchase agreement. The financial results of this business are presented as discontinued operations in the Company’s consolidated financial statements for the three and six months ended June 30, 2011. See Note 3 for additional information.

Effective September 10, 2011, the Company completed the sale of its Rehab Without Walls^® business. The financial results of the Rehab Without Walls^® business are presented as discontinued operations in the Company’s consolidated financial statements for the three and six months ended June 30, 2011. See Note 3 for additional information.

Effective April 29, 2011, the Company purchased the outstanding member units representing the noncontrolling interest in Odyssey Healthcare of Augusta, LLC (“Augusta”) for approximately $0.3 million. As a result of the transaction, the Company owns 100 percent of the outstanding member units of Augusta.

In addition, the Company has completed various other transactions that have impacted the Company’s results of operations and financial condition and are reflected therein as further described in Note 3.

The accompanying interim consolidated financial statements are unaudited, and have been prepared by the Company using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, 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 statement of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the consolidated statements of financial position, comprehensive income 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.

The Company’s consolidated financial statements include the accounts and operations of the Company and its subsidiaries in which the Company owns more than a 50 percent interest. Noncontrolling interests, which relate to the minority ownership held by third party investors in certain of the Company’s hospice programs, are reported below net income under the heading “Net income attributable to noncontrolling interests” in the Company’s consolidated statements of comprehensive income and presented as a component of equity in the Company’s consolidated balance sheets. All balances and transactions between the consolidated entities have been eliminated.

Note 2.

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 $6.4 million and $5.0 million at June 30, 2012 and December 31, 2011, respectively, which relate exclusively to a non-profit hospice operation managed in Florida.

Investments

At both June 30, 2012 and December 31, 2011, the Company had no remaining ownership interest in CareCentrix Holdings Inc. During the second quarter of 2011, the Company exchanged 135,870 shares of class A preferred stock of CareCentrix Holdings Inc.

for shares of class A common stock of CareCentrix Holdings Inc. The Company then sold such shares of class A common stock to a new investor in CareCentrix. The Company received $18.2 million of which $4.6 million represented accumulated and unpaid dividends on the preferred shares which were reflected in dividend income in the Company’s consolidated statements of comprehensive income.

At June 30, 2012 and December 31, 2011, the Company had assets of $27.9 million and $26.3 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.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its credit agreement and senior notes. As of June 30, 2012 and December 31, 2011, the Company had unamortized debt issuance costs of $50.8 million and $53.7 million, respectively, recorded in other assets in the Company’s consolidated balance sheets. During the first six months of 2012, the Company incurred incremental debt issuance costs of approximately $5.3 million in connection with an amendment to the Company’s Term Loan A, Term Loan B and revolving credit facilities. Approximately $4.1 million of these costs have been capitalized and are being amortized over the remaining life of the debt using an effective interest rate methodology. In addition, the Company wrote off prepaid debt issuance costs of approximately $0.5 million, which is reflected in interest expense in the Company’s consolidated statement of comprehensive income, associated with the reduction in the revolving credit facility.

During the first six months of 2011, the Company (i) incurred incremental debt issuance costs of approximately $10.9 million and (ii) recorded a write-off of deferred debt issuance costs of approximately $3.5 million in connection with the refinancing of the Company’s Term Loan A and Term Loan B under the Company’s credit agreement. See Note 10 for additional information.

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. Repairs and maintenance costs are expensed as incurred. As of June 30, 2012 and December 31, 2011, fixed assets, net were $44.4 million and $46.2 million, respectively.

Goodwill and Other Indefinite-Lived Intangible Assets

The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various operating units. The Company compares the fair value of each operating unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the operating unit is less than the carrying value of its goodwill. To determine the fair value of the Company’s operating units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, or other valuation methodologies, as appropriate.

If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.

During 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill. The Company recorded a non-cash charge to reduce the carrying value of certain identifiable intangible assets, as well as goodwill, to their estimated fair values. See Note 8 for additional information.

The Company also completed its annual impairment test of goodwill and indefinite-lived intangible assets for the Company’s operating units as of December 31, 2011, which indicated that there was no additional impairment.

Obligations Under Self Insurance Programs

As of June 30, 2012 and December 31, 2011, the Company’s obligations under insurance programs were $52.9 million and $55.0 million, respectively. The decrease is primarily attributable to favorable claim trends and the timing of payments.

Workers’ compensation and professional and general liability expenses were $2.9 million and $7.6 million for the second quarter and first six months of 2012, respectively, as compared to $2.1 million and $6.3 million for the corresponding periods of 2011. Employee health and welfare expenses were $22.5 million and $46.1 million for the second quarter and first six months of 2012, respectively, as compared to $24.4 million and $44.7 million for the corresponding periods of 2011.

Nursing Home Costs

For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Company contracts with nursing homes for the nursing homes to provide patients’ room and board services. The state must pay the Company, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95 percent of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under the Company’s standard nursing home contracts, the Company pays the nursing home for these room and board services at the Medicaid daily nursing home rate. Nursing home costs are partially offset by nursing home net revenue, and the net amount is included in cost of services sold in the Company’s consolidated statements of comprehensive income.

Note 3.

Acquisitions and Dispositions

Acquisitions

Odyssey Healthcare of Augusta, LLC

Dispositions

Gentiva Consulting, Louisiana Home Health and Hospice Dispositions

During the second quarter of 2012, the Company sold eight home health branches and four hospice branches in Louisiana, pursuant to an asset purchase agreement, for total consideration of approximately $6.4 million. The Company received proceeds of approximately $5.9 million during the first six months of 2012 and established a receivable of approximately $0.5 million.

In connection with the sales, the Company recorded a gain on sale of businesses in the Company’s consolidated statements of comprehensive income of approximately $5.4 million for the second quarter and first six months of 2012.

Home Health and Hospice Branch Dispositions

In the fourth quarter of 2011, the Company entered into asset purchase agreements to sell the assets of certain home health branches in Utah, Michigan and Nevada, as well as a hospice branch in Texas. In addition, the Company entered into an option agreement to sell the assets of the Company’s home health branch in Brooklyn, New York pending approval by the Public Health Council and New York State Agencies.

Homemaker Services Agency and Rehab Without Walls^® Dispositions

Effective October 14, 2011, the Company completed the sale of its IDOA business to Premier Home Health Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $2.4 million, consisting of (i) cash proceeds of approximately $2.0 million and (ii) an escrow fund of approximately $0.4 million, to be received by the Company subject to certain post closing conditions. During the first six months of 2012, the Company reduced the escrow fund receivable to approximately $0.3 million as a result of certain post closing conditions and received such funds in July 2012.

Effective September 10, 2011, the Company completed the sale of its Rehab Without Walls^® business to Southern Home Care Services, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $9.8 million. The consideration consisted of (i) cash proceeds of approximately $9.2 million and (ii) an escrow fund of approximately $0.6 million that will be received by the Company subject to certain post closing conditions.

Net revenues and operating results for the second quarter and first six months of 2011 for the homemaker services agency business in Illinois and the Rehab Without Walls^®^® HME and IV businesses (in thousands):


	Second Quarter 2011			First Six Months 2011

Net revenues	$	8,231		$	15,937


Gain before income taxes	$	1,105		$	1,846
Income tax expense		(439	)		(733	)

Discontinued operations, net of tax	$	666		$	1,113

Note 4.

Fair Value of Financial Instruments

The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for the note receivable from CareCentrix and long-term debt. The fair values for the note receivable from CareCentrix 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.

Financial Instruments Recorded at Fair Value

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


	June 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	54,045	$	—	$	—	$	54,045	$	54,006	$	—	$	—	$	54,006
Rabbi Trust:
Mutual funds		21,891		—		—		21,891		25,626		—		—		25,626
Money market funds		6,006		—		—		6,006		697		—		—		697

Total assets	$	81,942	$	—	$	—	$	81,942	$	80,329	$	—	$	—	$	80,329


Liabilities:
Payables to plan participants	$	27,897	$	—	$	—	$	27,897	$	26,323	$	—	$	—	$	26,323

Assets held in 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 the 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 the 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 held in the Company’s account represent cash equivalents and were classified in cash and cash equivalents in the Company’s consolidated balance sheets at June 30, 2012 and December 31, 2011.

Other Financial Instruments

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


	June 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Note receivable from CareCentrix	$	25,000	$	26,900	$	25,000	$	26,600

Liabilities:
Long-term obligations	$	938,125	$	849,705	$	988,125	$	863,313

The estimated fair value of the note receivable from CareCentrix 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 19, 2017, after considering assumptions relating to risk factors and economic conditions. See Note 6 for additional information.

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.

Cash Flow Hedge

The Company may utilize derivative financial instruments to manage interest rate risk. Derivatives are held only for the purpose of hedging such risk, not for speculative purposes. The Company’s derivative instruments consisted of (i) a one-year interest cap with a notional value of $220.0 million and (ii) until March 9, 2011, two-year forward starting interest rate swaps with notional value of $300.0 million, each agreement designated as a cash flow hedge of the variability of cash flows associated with a portion of the Company’s variable rate term loans. During the first quarter of 2011, the Company terminated the two-year forward starting interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B facilities under its credit agreement. The Company paid approximately $0.3 million to terminate the interest rate swaps, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income in 2011. The Company’s interest rate cap expired in November 2011. The Company held no derivative instruments as of June 30, 2012 or December 31, 2011.

Note 5.

Net Revenues and Accounts Receivable

Net revenues in the Home Health and Hospice segments were derived from all major payer classes and were as follows (in millions):


	Second Quarter							First Six Months
	2012		2011		Percentage Variance			2012		2011		Percentage Variance
Medicare:
Home Health	$	186.1	$	199.8		(6.8	%)	$	376.8	$	401.4		(6.1	%)
Hospice		179.6		180.0		(0.2	%)		361.5		361.0		0.2	%

Total Medicare		365.7		379.8		(3.7	%)		738.3		762.4		(3.2	%)
Medicaid and Local Government		18.3		21.0		(13.1	%)		37.7		41.9		(10.1	%)
Commercial Insurance and Other:
Paid at episodic rates		21.3		20.0		6.5	%		41.3		38.7		6.6	%
Other		22.4		27.9		(19.8	%)		46.0		56.8		(18.9	%)

Total Commercial Insurance and Other		43.7		47.9		(8.8	%)		87.3		95.5		(8.6	%)

Total net revenues	$	427.7	$	448.7		(4.7	%)	$	863.3	$	899.8		(4.1	%)

For the second quarter and first six months of 2012, the Company recorded hospice Medicare cap expense of $1.1 million and $3.2 million, respectively, which is reflected in net revenues in the Company’s consolidated statements of comprehensive income. For the second quarter and first six months of 2011, the Company recorded hospice Medicare cap expense of $1.1 million and $1.7 million, respectively. The Medicare payment cap, which is calculated for each provider by the Medicare fiscal intermediary at the end of the hospice cap period, is determined by multiplying the number of first time patient admissions during the cap period by the Medicare cap amount, subject to certain adjustments. Medicare revenue paid to a provider during the twelve month cap period that ends annually on October 31 cannot exceed the aggregate Medicare payment cap calculated for the related twelve month period. As of June 30, 2012 and December 31, 2011, the Company had Medicare cap liabilities of $18.8 million and $15.6 million, respectively, which was reflected in Medicare liabilities in the Company’s consolidated balance sheets.

Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):


	June 30, 2012			December 31, 2011
Medicare	$	193,707		$	217,028
Medicaid and Local Government		40,116			46,553
Commercial Insurance and Other		39,015			38,570

Gross Accounts Receivable		272,838			302,151
Less: Allowance for doubtful accounts		(12,807	)		(11,562	)

Net Accounts Receivable	$	260,031		$	290,589

The Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $2.1 million as of both June 30, 2012 and December 31, 2011.

The Company’s only financing receivable is the note receivable from CareCentrix, Inc. The Company measures impairment based on the present value of expected cash flows after considering assumptions relating to risk factors and economic conditions. On an ongoing basis, the Company assesses the credit quality based on the Company’s review of CareCentrix, Inc.’s financial position and receipt of interest payments when due. Based on the Company’s analysis, as of June 30, 2012 and December 31, 2011, the Company had no allowances for credit losses.

Note 6.

Note Receivable from and Investment in CareCentrix

The Company holds a $25 million subordinated promissory note from CareCentrix, Inc. In connection with the sale of the Company’s ownership interest in CareCentrix Holdings, the maturity date of the note was extended to the earlier of March 19, 2017, which is five and one-half years from the closing of the transaction, 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 promissory note, which is included in interest income in the Company’s consolidated statements of comprehensive income, amounted to $0.6 million and $1.3 million for the second quarter and first six months of both 2012 and 2011, respectively.

During 2011, the Company sold its equity investment in CareCentrix Holdings. The Company recognized $0.3 million and $0.9 million of equity in the net earnings of CareCentrix for the second quarter and first six months of 2011, respectively.

Note 7.

Cost Savings Initiatives and Other Restructuring Costs, Acquisition and Integration Activities and Legal Settlements

The Company recorded net charges relating to restructuring, acquisition and integration activities, and legal settlements of $5.4 million for the first six months of 2012 and $21.2 million and $25.0 million for the second quarter and first six months of 2011, respectively, which were recorded in selling, general and administrative expenses in the Company’s consolidated statements of comprehensive income.

Cost Savings Initiatives and Other Restructuring Costs

During the last half of 2011, the Company undertook a comprehensive review of its branch structure, support infrastructure and other significant expenditures in order to reduce its ongoing operating costs given the challenging rate environment the Company was facing. As a result of this effort, the Company closed or divested of 34 home health branches and 9 hospice branches during the fourth quarter of 2011 and 4 home health branches in the first quarter of 2012, and completed significant reductions in staffing levels in regional, area and corporate support functions. In connection with these activities, the Company recorded charges of $0.5 million and $1.3 million in the second quarter and first six months of 2012, respectively, related to severance costs, facility lease and other costs.

During the second quarter and first six months of 2011, the Company recorded charges of $0.5 million and $1.8 million, 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 non-cash charges of approximately $0.4 million, recorded in the second quarter of 2011, associated with the acceleration of compensation expense relating to future vesting of stock options under severance agreements for certain of the Company’s former executive officers.

Acquisition and Integration Activities

The Company recorded positive adjustments of $0.5 million and $0.9 million for the second quarter and the first six months of 2012, respectively, related to acquisition and integration activities. During the second quarter and first six months of 2011, the Company recorded charges of $2.2 million and $4.7 million, respectively, in connection with costs of acquisition and integration activities, primarily related to the Odyssey transaction. These costs consisted of legal, accounting and other professional fees and expenses, severance costs and facility lease costs.

Legal Settlements

During the first six months of 2012, the Company recorded legal settlements of $5.0 million related to certain of the wage and hour litigation and paid approximately $26.0 million in settlement with the United States regarding Odyssey’s provision of continuous care services prior to the Company’s acquisition of Odyssey in August 2010. See Note 13 for additional information.

During the first six months of 2011, the Company recorded charges of $18.5 million related to discussions of potential legal settlements associated with the continuous care investigation assumed in connection with the Odyssey transaction. See Note 13 for additional information.

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


	Cost Savings and Other Restructuring			Acquisition & Integration			Legal Settlements			Total

Ending balance at December 31, 2010	$	2,893		$	3,984		$	12,500		$	19,377

Charge in first quarter 2011		1,259			2,506			—			3,765
Cash expenditures		(1,490	)		(2,346	)		—			(3,836	)

Ending balance at March 31, 2011		2,662			4,144			12,500			19,306

Charge in second quarter 2011		504			2,242			18,500			21,246
Cash expenditures		(788	)		(2,198	)		(12,500	)		(15,486	)
Non-cash expenditures		(407	)		—			—			(407	)

Ending balance at June 30, 2011	$	1,971		$	4,188		$	18,500		$	24,659


Ending balance at December 31, 2011	$	8,671		$	3,708		$	26,000		$	38,379

Charge in first quarter 2012		842			(409	)		4,958			5,391
Cash expenditures		(3,527	)		(755	)		(25,958	)		(30,240	)
Non-cash expenditures		19			(216	)		—			(197	)

Ending balance at March 31, 2012		6,005			2,328			5,000			13,333

Charge in second quarter 2012		542			(517	)		—			25
Cash expenditures		(2,462	)		(421	)		(5,000	)		(7,883	)
Non-cash expenditures		(114	)		—			—			(114	)

Ending balance at June 30, 2012	$	3,971		$	1,390		$	—		$	5,361

The balance of unpaid charges relating to cost savings initiatives and other restructuring costs, acquisition and integration activities and legal settlements approximated $5.4 million at June 30, 2012 and $38.4 million at December 31, 2011, which were included in other accrued expenses in the Company’s consolidated balance sheets.

Note 8.

Identifiable Intangible Assets and Goodwill

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of June 30, 2012 and December 31, 2011 were as follows (in thousands):


	June 30, 2012									December 31, 2011									Useful Life
	Home Health			Hospice			Total			Home Health			Hospice			Total			Useful Life
Amortized intangible assets:

Covenants not to compete	$	1,473		$	15,675		$	17,148		$	1,473		$	15,675		$	17,148		2-5 Years
Less: accumulated amortization		(1,423	)		(12,369	)		(13,792	)		(1,411	)		(9,144	)		(10,555	)

Net covenants not to compete		50			3,306			3,356			62			6,531			6,593


Customer relationships		27,196			910			28,106			27,196			910			28,106		5-10 Years
Less: accumulated amortization		(16,478	)		(344	)		(16,822	)		(15,304	)		(299	)		(15,603	)
accumulated impairment losses		(27	)		—			(27	)		(27	)		—			(27	)

Net customer relationships		10,691			566			11,257			11,865			611			12,476


Tradenames		18,215			16,730			34,945			18,215			16,730			34,945		5-10 Years
Less: accumulated amortization		(11,369	)		(3,188	)		(14,557	)		(10,522	)		(2,346	)		(12,868	)
accumulated impairment losses		(411	)		—			(411	)		(411	)		—			(411	)

Net tradenames		6,435			13,542			19,977			7,282			14,384			21,666


Subtotal		17,176			17,414			34,590			19,209			21,526			40,735


Indefinite-lived intangible assets:
Medicare licenses and certificates of need		220,285			98,526			318,811			220,285			98,526			318,811		Indefinite
Less: accumulated impairment losses		(144,672	)		(519	)		(145,191	)		(144,672	)		—			(144,672	)

Net medicare licenses and certificates of need		75,613			98,007			173,620			75,613			98,526			174,139

Total identifiable intangible assets	$	92,789		$	115,421		$	208,210		$	94,822		$	120,052		$	214,874

During the second quarter of 2012, the Company recorded a charge of approximately $0.5 million to reflect the transfer of the Medicare licenses associated with the sale of the four hospice branches in Louisiana, which is recorded in gain on sale of businesses in the Company’s consolidated statements of comprehensive income for the three month and six month periods ended June 30, 2012. The Company recorded amortization expense of approximately $3.1 million and $6.2 million for the second quarter and first six months of 2012, respectively, and $3.3 million and $6.5 million for the second quarter and first six months of 2011, respectively. The estimated amortization expense for the remainder of 2012 is $4.7 million and for each of the next five succeeding years approximates $7.4 million for 2013, $5.7 million for 2014, $5.6 million for 2015, $3.4 million for 2016, and $2.9 million for 2017.

The gross carrying amount of goodwill as of June 30, 2012 and December 31, 2011 and activity during the first six months of 2012 were as follows (in thousands):


	Home Health			Hospice			Total
Balance at December 31, 2010	$	264,679		$	820,387		$	1,085,066
Goodwill adjustment		2,379			11,261			13,640
Accumulated impairment losses		(263,370	)		(193,667	)		(457,037	)

Balance at December 31, 2011	$	3,688		$	637,981		$	641,669
Goodwill acquired during 2012		—			—			—

Balance at June 30, 2012	$	3,688		$	637,981		$	641,669

During 2011, the Company reclassified deferred tax assets of $13.6 million associated with the classification of deductible intangible assets and goodwill related to a 2006 acquisition. The impact of this reclassification was an increase in goodwill in the Home Health and Hospice segments of $2.4 million and $11.2 million, respectively, and a decrease in non-current deferred tax assets of $13.6 million.

Note 9.

Earnings Per Share

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


	For the Three Months Ended				For the Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Net income attributable to Gentiva shareholders	$	13,909	$	5,189	$	18,749	$	18,641


Basic weighted average common shares outstanding		30,338		30,293		30,532		30,210

Shares issuable upon the assumed exercise of stock options and under stock plans for employees and directors using the treasury stock method		108		553		100		599


Diluted weighted average common shares outstanding		30,446		30,846		30,632		30,809


Basic earnings per common share
Net income attributable to Gentiva shareholders	$	0.46	$	0.17	$	0.61	$	0.62


Diluted earnings per common share:
Net income attributable to Gentiva shareholders	$	0.46	$	0.17	$	0.61	$	0.61

For the second quarter and first six months of 2012, approximately 2.9 million and 3.0 million stock options and restricted stock awards, respectively, were excluded from the computations of diluted earnings per share, as their inclusion would be anti-dilutive. For both the second quarter and first six months of 2011, approximately 1.1 million stock options were excluded from the computations of diluted earnings per share as their inclusion would be anti-dilutive.

Note 10.

Long-Term Debt

Credit Arrangements

At June 30, 2012, the Company’s credit arrangements included a senior secured credit agreement providing (i) a $200 million Term Loan A facility, (ii) a $550 million Term Loan B facility and (iii) a $110 million revolving credit facility (collectively, the “Credit Agreement”), and $325 million aggregate principal amount of 11.5% Senior Notes due 2018 (the “Senior Notes”). The Credit Agreement’s revolving credit facility also includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swing line loans.

As of June 30, 2012 and December 31, 2011, the Company’s long-term debt consisted of the following (in thousands):


	June 30, 2012			December 31, 2011
Credit Agreement:
Term Loan A, maturing August 17, 2015	$	146,693		$	158,653
Term Loan B, maturing August 17, 2016		466,432			504,472
11.5% Senior Notes due 2018		325,000			325,000

Total debt		938,125			988,125
Less: current portion of long-term debt		(15,443	)		(14,903	)

Total long-term debt	$	922,682		$	973,222

In response to uncertainties around Medicare reimbursement rates and to ensure compliance under its Credit Agreement as of December 31, 2011, on November 28, 2011, the Company entered into Amendment No. 2 to the Credit Agreement (“Amendment No. 2”). In addition, on March 6, 2012, the Company entered into Amendment No. 3 to the Credit Agreement (“Amendment No. 3”) in order to provide increased flexibility in the Company’s debt covenants over the remaining term of the Credit Agreement and reasonable assurance with respect to the Company’s ability to remain in compliance with its debt covenants beyond January 1, 2012, including the maximum consolidated leverage ratio and the minimum interest coverage ratio, which are discussed below under “Debt Covenants.” Among other things, Amendment No. 3 also reduced the revolving credit facility from $125 million to $110 million.

2012, and capitalized costs associated with the revolving credit facility of approximately $0.8 million. Outstanding letters of credit were $45.4 million and $41.8 million at June 30, 2012 and December 31, 2011, respectively. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of June 30, 2012, the Company’s unused and available borrowing capacity under the Credit Agreement was $64.6 million.

As of June 30, 2012, the mandatory aggregate principal payments of long-term debt were $2.9 million in 2012, $25.0 million in each of 2013 and 2014, $93.8 million in 2015 and $466.4 million in 2016 under the Credit Agreement, and $325.0 million thereafter under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 8.2 percent per annum at June 30, 2012 and 6.9 percent per annum at December 31, 2011.

The Term Loan A facility is subject to mandatory principal payments of $25 million per year, payable in equal quarterly installments, with the remaining balance of the original $200 million loan payable on August 17, 2015. Pursuant to Amendment No. 3, the Company made a prepayment of $12.0 million on its Term Loan A facility in the first quarter of 2012. There are no required payments on the Company’s Term Loan A facility until the end of the fourth quarter of 2012, at which time a principal payment of $2.9 million is required and $6.3 million per quarter thereafter. The Term Loan B facility is subject to mandatory principal payments of $13.8 million per year, payable in equal quarterly installments. Pursuant to Amendment No. 3, the Company made a prepayment of $38.0 million on its Term Loan B facility in the first quarter of 2012. As a result of the prepayment, there are no required payments on the Company’s Term Loan B facility until August 17, 2016, at which time a payment of the outstanding balance of $466.4 million is required.

On March 9, 2011, the Company entered into a First Refinancing Amendment to the Credit Agreement (“Amendment No. 1”), which provided for, among other things, (i) refinancing of the outstanding indebtedness under the Company’s senior secured Term Loan A and Term Loan B facilities, (ii) elimination of the requirement to hedge a certain portion of the Company’s variable rate debt, (iii) a reduction in the minimum Base Rate from 2.75 percent to 2.25 percent, (iv) a reduction in the minimum Eurodollar Rate from 1.75 percent to 1.25 percent, (v) reductions in Term Loan B Applicable Rates to 3.50 percent for Eurodollar Rate Loans and 2.50 percent for Base Rate Loans as compared to 5.00 percent and 4.00 percent, respectively, under the previous arrangement and (vi) reductions in the Applicable Rate for Term Loan A as reflected in the table below.


	Previous Applicable Rate						Amended Applicable Rate
Consolidated Leverage Ratio	Eurodollar Rate Loans and Letter of Credit Fees			Base Rate Loans			Eurodollar Rate Loans and Letter of Credit Fees			Base Rate Term A Loans			Base Rate Term B Loans
> 3.0:1		5.00	%		4.00	%		3.25	%		2.25	%		2.25	%
> 2.0:1 and < 3.0:1		4.50	%		3.50	%		3.00	%		2.00	%		2.00	%
< 2.0:1		4.00	%		3.00	%		2.75	%		1.75	%		1.75	%

In addition, Amendment No. 1 provided for a reduction in the Company’s minimum consolidated interest coverage ratio to a ratio of 2.25 to 1.00 from the previous ratio of 2.75 to 1.00. As discussed below under “Debt Covenants,” Amendment No. 3 provided for a further reduction in the minimum consolidated interest coverage ratio.

The interest rate per annum on borrowings under the Credit Agreement is based on, at the option of the Company, (i) the Eurodollar Rate or (ii) the Base Rate, plus an Applicable Rate. The Base Rate represents the highest of (x) the Bank of America prime rate, (y) the federal funds rate plus 0.50 percent and (z) the Eurodollar Rate plus 1.00 percent. In connection with determining the interest rates on the Term Loan A and Term Loan B facilities, in no event shall the Eurodollar Rate be less than 1.25 percent and the Base Rate be less than 2.25 percent. The Company may select interest periods of one, two, three or six months for Eurodollar Rate loans. Interest is payable at the end of the selected interest period. From August 17, 2010 through March 9, 2011, the interest rate on borrowings under the Credit Agreement was 6.75 percent per annum. From March 9, 2011 through March 5, 2012, the interest rate on Term Loan A borrowings was 4.50 percent and on Term Loan B borrowings was 4.75 percent. Giving effect to Amendment No. 3, subsequent to March 5, 2012, the interest rate on Term Loan A borrowings is 6.25 percent and on Term Loan B borrowings is 6.50 percent. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility.

Prior to Amendment No. 1, the Credit Agreement included a requirement that the Company enter into and maintain interest rate swap contracts covering a notional value of not less than 50 percent of the Company’s aggregate consolidated outstanding indebtedness (other than total revolving credit outstanding), including the Senior Notes, for a period of not less than three years. On November 15, 2010, the Company entered into derivative instruments consisting of (i) a one-year interest rate cap with a notional value of $220.0 million and (ii) two-year forward starting interest rate swaps with notional value of $300.0 million. Under the interest rate cap, the Company would pay a fixed rate of 1.75 percent per annum plus an applicable rate (an aggregate of 6.75 percent per annum for the period beginning November 15, 2010 through December 30, 2011) on the $220 million rather than a variable rate plus an applicable rate should the variable rate plus applicable rate exceed 6.75 percent. In connection with Amendment No. 1, the Company terminated the two-year forward starting interest rate swaps and paid a termination fee of approximately $0.3 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income for the six months ended June 30, 2011.

The Company may voluntarily repay outstanding loans under the revolving credit facility or Term Loan A at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. For the period from March 9, 2011 to September 9, 2011, the Company was subject to a prepayment premium equal to 1.0 percent of the aggregate principal amount of Term Loan B. Prepayment and commitment reductions will be required in connection with (i) certain asset sales, (ii) certain extraordinary receipts such as certain insurance proceeds, (iii) cash proceeds from the issuance of debt, (iv) 50 percent of the proceeds from the issuance of equity with step-downs based on leverage, with certain exceptions, and (v) 75 percent of “Excess Cash Flow” (as defined in the Credit Agreement) with two step-downs based on the Company’s leverage ratio.

In connection with the refinancing pursuant to Amendment No. 1, the Company paid a two percent prepayment penalty on its Term Loan B facility of approximately $10.9 million which was recorded as deferred debt issuance costs. In accordance with applicable guidance, due to changes in some of the participating lenders, the Company recorded a write-off of a portion of its deferred debt issuance costs of approximately $3.5 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income for the six months ended June 30, 2011.

Debt Covenants

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s and its subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock, create liens on assets, enter into sale and leaseback transactions, engage in mergers or consolidations with other companies, sell assets, pay dividends, repurchase capital stock, make investments, loans and advances, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements, repay certain indebtedness, change the nature of the Company’s business, change accounting policies and practices, grant negative pledges and incur capital expenditures. In addition, after giving effect to Amendment No. 3, the Credit Agreement requires the Company to maintain no more than a maximum consolidated leverage ratio as shown in the second table below and no less than a minimum cash interest coverage ratio of 2.00 to 1.00 through June 30, 2013, 1.75 to 1.00 from September 30, 2013 through June 30, 2014 and 2.00 to 1.00 thereafter and also contains certain customary affirmative covenants and events of default. The previously required ratio was 2.25 to 1.00 for all periods.

On November 28, 2011, the Company entered into Amendment No. 2, which provided for modification to the definition of “Consolidated EBITDA” contained in the Credit Agreement to allow for the add-back of costs associated with the Company’s cost realignment activities and operating losses associated with branches closed or sold during the fourth quarter of 2011 and to reset the maximum consolidated leverage ratio for the fourth quarter of 2011 to 4.75 to 1.00. As of June 30, 2012, the Company was in compliance with all covenants in the Credit Agreement.

The maximum consolidated leverage ratio under Amendment No. 2 was as follows:


For the period		Maximum Consolidated Leverage Ratio
August 17, 2010 to September 30, 2011		£ 4.75:1
October 1, 2011 to September 30, 2012		£ 4.50:1
October 1, 2012 to September 30, 2013		£ 3.75:1
Thereafter		£ 3.00:1

On March 6, 2012, the Company entered into Amendment No. 3 to the Credit Agreement, which provided, among other things, for (i) an increase by 175 basis points per annum of the interest rates applicable to each of outstanding Term Loan A loans and Term Loan B loans, (ii) an increase in the Company’s permitted maximum consolidated leverage ratio as set forth in the table below, (iii) an amendment to the consolidated interest coverage ratio (and corresponding definitions) to provide that consolidated interest charges included in such calculation are such charges paid in cash (as compared with the previous covenant that included non-cash interest charges), along with a decrease in the Company’s permitted minimum consolidated cash interest coverage ratio to (a) 2.00 to 1.00 through June 30, 2013, (b) 1.75 to 1.00 from September 30, 2013 through June 30, 2014 and (c) 2.00 to 1.00 thereafter, (iv) amendments to the definition of “Consolidated EBITDA,” which include the ability to add-back certain costs associated with the Company’s cost realignment and operating losses associated with certain facilities and branches closed or sold by the Company during the fourth quarter of 2011 and during 2012 and an increase in the add-back for litigation settlement costs, (v) an addition of a mechanism for the Company to make discounted prepayments of Term Loan A loans and Term Loan B loans pursuant to Dutch auction procedures and (vi) a reduction of the revolving credit facility from $125 million to $110 million. As a condition to effectiveness of Amendment No. 3, the Company paid $50 million of the outstanding term loans under the Credit Agreement, applied ratably between the Term Loan A facility and the Term Loan B facility. The Company also paid certain fees in connection with Amendment No. 3, including a consent fee to each lender approving Amendment No. 3 in an amount equal to 0.50% of its respective term loans and revolving credit commitments. In connection with Amendment No. 3, the Company incurred costs of approximately $5.3 million. Approximately $4.1 million of these costs (including the $0.8 million associated with the revolving credit facility) have been capitalized and are being amortized over the remaining life of the debt using an effective interest rate.

The increase in Gentiva’s permitted maximum consolidated leverage ratio under Amendment No. 3 is set forth in the following table:


Four Fiscal Quarters Ending		Maximum Consolidated Leverage Ratio
March 31, 2012 to September 30, 2014		£ 6.25:1
Each fiscal quarter thereafter		£ 5.75:1

As of June 30, 2012, the Company’s consolidated leverage ratio was 4.8x and the Company’s interest coverage ratio was 2.7x.

Guaranty Agreement and Security Agreement

Gentiva and substantially all of its subsidiaries (the “Guarantor Subsidiaries”) entered into a guaranty agreement pursuant to which the Guarantor Subsidiaries have agreed, jointly and severally, fully and unconditionally to guarantee all of the Company’s obligations under the Credit Agreement. Additionally, Gentiva and its Guarantor Subsidiaries entered into a security agreement pursuant to which a first-priority security interest was granted in substantially all of the Company’s and its Guarantor Subsidiaries’ present and future real, personal and intangible assets, including the pledge of 100 percent of all outstanding capital stock of substantially all of the Company’s domestic subsidiaries to secure full payment of all of the Company’s obligations for the ratable benefit of the lenders.

Senior Notes

The Senior Notes are unsecured, senior subordinated obligations of the Company. The Senior Notes are guaranteed by all of Gentiva’s subsidiaries that are guarantors under the Credit Agreement. Interest on the Senior Notes accrues at a rate of 11.5 percent per annum and is payable semi-annually in arrears on March 1 and September 1. Gentiva will make each interest payment to the holders of record on the immediately preceding February 15 and August 15.

The Senior Notes mature on September 1, 2018 and are generally free to be transferred. Gentiva may redeem the Senior Notes, in whole or in part, at any time prior to the first interest payment of 2014, at a price equal to 100 percent of the principal amount of the Senior Notes redeemed plus an applicable make-whole premium based on the present value of the remaining payments discounted at the treasury rate plus 50 basis points plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to September 1, 2013, Gentiva may redeem up to 35 percent of the aggregate principal amount of the Senior Notes with the net cash proceeds of a qualified equity offering at a redemption price equal to 111.5 percent of the aggregate principal amount, provided that (i) at least 65 percent of the aggregate principal amount of Senior Notes originally issued remain outstanding after the occurrence of such redemption and (ii) such redemption occurs within 180 days after the closing of a qualified equity offering.

On or after September 1, 2014, Gentiva may redeem all or part of the Senior Notes at redemption prices set forth below plus accrued and unpaid interest and Additional Interest, if any, as defined in the indenture relating to the Senior Notes during the twelve month period beginning on September 1 of the years indicated below:


Year	Percentage
2014		105.750	%
2015		102.875	%
2016 and thereafter		100.000	%

Other

The Company has equipment capitalized under capital lease obligations. At June 30, 2012 and December 31, 2011, the Company had no obligations under long-term capital leases. The current portion of obligations under capital leases was $0.1 million at both June 30, 2012 and December 31, 2011, respectively, and was recorded in other accrued expenses on the Company’s consolidated balance sheets.

Note 11.

Equity

Changes in equity for the six months ended June 30, 2012 and 2011 were as follows (in thousands, except share amounts):


	Gentiva Shareholders
	Common Stock				Additional Paid-in			Retained Earnings Accumulated			Accumulated Other Comprehensive			Treasury			Noncontrolling
	Shares		Amount		Capital			(Deficit)			Income (Loss)			Stock			Interests			Total
Balance at December 31, 2010		30,799,091	$	3,080	$	372,106		$	272,394		$	478		$	(12,484	)	$	2,658		$	638,232

Comprehensive income:
Net income		—		—		—			18,641			—			—			318			18,959
Changes in fair value of interest rate swaps		—		—		—			—			(768	)		—			—			(768	)
Realized loss on interest rate swaps		—		—		—			—			290			—			—			290

Total comprehensive income		—		—		—			18,641			(478	)		—			318			18,481

Income tax benefits associated with the exercise of non-qualified stock options		—		—		259			—			—			—			—			259
Equity-based compensation expense		—		—		4,361			—			—			—			—			4,361
Net issuance of stock upon exercise of stock options and under stock plans for employees and directors		420,593		42		6,204			—			—			—			—			6,246
Purchase of non-controlling interest		—		—		(352	)		—			—			—			32			(320	)
Distribution to partnership interests		—		—		—			—			—			—			(478	)		(478	)
Treasury shares:
Common stock received from Healthfield escrow (14,334 shares)		—		—		—			—			—			(394	)		—			(394	)

Balance at June 30, 2011		31,219,684	$	3,122	$	382,578		$	291,035		$	—		$	(12,878	)	$	2,530		$	666,387


Balance at December 31, 2011		31,435,264	$	3,144	$	387,803		$	(178,131	)	$	—		$	(12,878	)	$	2,593		$	202,531

Comprehensive income:
Net income		—		—		—			18,749			—			—			476			19,225

Total comprehensive income		—		—		—			18,749			—			—			476			19,225

Equity-based compensation expense		—		—		3,442			—			—			—			—			3,442
Net issuance of stock upon exercise of stock options and under stock plans for employees and directors		259,658		25		1,615			—			—			—			—			1,640
Purchase of non-controlling interest		—		—		—			—			—			—			(1,111	)		(1,111	)
Distribution to partnership interests		—		—		—			—			—			—			(495	)		(495	)
Treasury shares:
Stock repurchase (605,077 shares)		—		—		—			—			—			(4,974	)		—			(4,974	)

Balance at June 30, 2012		31,694,922	$	3,169	$	392,860		$	(159,382	)	$	—		$	(17,852	)	$	1,463		$	220,258

Comprehensive income amounted to $14.2 million and $19.2 million for the second quarter and first six months of 2012, respectively, and $5.3 million and $18.5 million for the second quarter and first six months of 2011, respectively. The amounts reflected in accumulated other comprehensive income (loss) for the six months ended June 30, 2011 are reflected net of tax of approximately $0.4 million.

On April 14, 2005, the Company announced that its Board of Directors had authorized the repurchase of up to 1,500,000 shares of the Company’s outstanding common stock (the “2005 Repurchase Program”). In addition, on March 13, 2012, the Company announced that its Board of Directors had authorized the repurchase of up to $5,000,000 of shares of the Company’s outstanding common stock (the “2012 Repurchase Program”). During the three months ended June 30, 2012, the Company repurchased 605,777 shares of its common stock at an average cost of $8.22 per share and a total cost of approximately $5.0 million. Due to these repurchases, as of June 30, 2012, the Company had no remaining shares authorized under the 2005 Repurchase Program and remaining authorization under the 2012 Repurchase Program to repurchase common stock with an aggregate purchase price of up to $1.5 million, subject to the additional limitations set forth below.

The Company’s Credit Agreement provides for repurchases of the Company’s common stock not to exceed $5.0 million per year, and not to exceed $20.0 million per year if the consolidated leverage ratio is less than or equal to 3.5:1 immediately after giving effect on a pro forma basis to the repurchase. The indenture governing the Company’s Senior Notes also contains limitations on the Company’s repurchases of its common stock.

Note 12.

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 2004 Equity Incentive Plan (amended and restated) (“2004 Plan”), (ii) the Stock & Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) 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 both the second quarter and first six months of 2012, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $1.8 million and $3.4 million, respectively, as compared to $2.3 million and $4.0 million for the corresponding periods of 2011, which were reflected as selling, general and administrative expense in the consolidated statements of comprehensive income. During the second quarter of 2011, the Company recorded non-cash compensation expense of approximately $0.4 million associated with modifications of stock options for a former executive, which is reflected as selling, general and administrative expense in the consolidated statements of comprehensive income and is categorized as restructuring costs. See Note 7.

Stock Options

The weighted average fair values of the Company’s stock options granted during the first six months of 2012 and 2011 calculated using the Black-Scholes option pricing model and other assumptions, were as follows.


	Six Months Ended
	June 30, 2012			June 30, 2011
Weighted average fair value of options granted	$	8.33		$	11.30
Risk-free interest rate		0.77% - 0.95	%		2.15	%
Expected volatility		64	%		44	%
Contractual life		7 years			7 years
Expected life		3.4 - 5.4 years			4.5 -6.5 years
Expected dividend yield		0	%		0	%

Stock option grants in 2011 and 2012 vest over a three-year period based on a vesting schedule that provides for one-third vesting after each year. Stock option grants in 2006 through 2010 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 June 30, 2012 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 December 31, 2011		4,228,907		$	15.59

Granted		36,000			8.46

Exercised		—			—

Cancelled		(306,461	)		12.86


Balance as of June 30, 2012		3,958,446		$	15.74		5.4	$	1,936,380


Exercisable options		2,156,077		$	20.13		4.6	$	—

There were no options exercised during the six months ended June 30, 2012. The total intrinsic value of options exercised during the six months ended June 30, 2011 was $1.9 million. As of June 30, 2012, the Company had $3.9 million of unrecognized compensation expense related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of options that vested during the first six months of 2012 was $3.4 million.

Performance Share Units

The Company may grant performance share units under its 2004 Plan. Performance share units result in the issuance of common stock at the end of a three-year period and may range between zero and 150 percent of the performance share units granted at target in 2010 and between zero and 200 percent of the performance share units granted at target in 2011, based on the achievement of defined thresholds of the performance criteria over a three-year period (in the case of performance share units granted in 2010) and at the end of a one-year period (in the case of performance share units granted in 2011).

A summary of Gentiva performance share unit activity as of June 30, 2012 is presented below:


	Number of Performance Share Units			Weighted- Average Exercise Price
Balance as of December 31, 2011		125,800		$	26.33

Granted		—			—

Vested		—			—

Cancelled		(3,200	)		26.74


Balance as of June 30, 2012		122,600		$	26.32

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 June 30, 2012 and 2011, the Company had $1.4 million and $2.5 million, respectively, of total unrecognized compensation cost related to performance share units. This compensation expense is expected to be recognized over a weighted-average period of 1.4 years and 2.1 years, respectively.

Restricted Stock

A summary of Gentiva restricted stock activity as of June 30, 2012 is presented below:


	Number of Restricted Shares			Weighted- Average Exercise Price		Aggregate Intrinsic Value
Balance as of December 31, 2011		377,750		$	25.30

Granted		—			—

Exercised		—			—

Cancelled		(7,500	)		26.55


Balance as of June 30, 2012		370,250		$	25.27	$	2,565,833

The restricted stock fully vests at the end of a three-year or five-year period, depending on the individual grants. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.

As of June 30, 2012, the aggregate intrinsic value of the restricted stock awards was $2.6 million. The Company had $5.6 million and $7.6 million of total unrecognized compensation cost related to restricted stock as of June 30, 2012 and 2011, respectively. This compensation expense is expected to be recognized over a weighted-average period of 2.8 years and 3.5 years, respectively.

Directors Deferred Share Units

Under the Company’s DSU Plan, 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 of Directors. In May of 2012, the Company’s shareholders approved increasing the aggregate number of shares of common stock available for issuance under the plan by 350,000 shares; therefore, the total number of shares of common stock reserved for issuance under this plan is 650,000, of which 314,608 shares were available for future grants as of June 30, 2012. During the first six months of 2012, the

Company granted 37,287 stock units under the DSU Plan at a grant date weighted-average fair value of $6.03 per stock unit. Prior to the increase in the aggregate shares available for issuance in May of 2012, there were insufficient deferred stock units available under the DSU Plan for the full quarterly equity grant to each non-employee director in the first quarter of 2012. Therefore, the Company also made a cash payment of approximately $28,100 to each non-employee director during the first six months of 2012. Under the DSU Plan, 225,005 stock units were outstanding as of June 30, 2012.

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 ESPP regardless of their actual or scheduled hours of service. During the first six months of 2012, the Company issued 259,448 shares of common stock under its ESPP. Under the Company’s ESPP, compensation expense is equal to the 15 percent discount from the fair market value of the Company’s common stock on the date of purchase.

On May 10, 2012, the shareholders of the Company authorized an additional 1,800,000 shares of the Company’s stock for issuance under the ESPP Plan.

Note 13.

Legal Matters

Litigation

In addition to the matters referenced in this Note 13, 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, financial condition, results of operations, liquidity or capital resources 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 have alleged 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 (“NCWHA”). On October 8, 2010, the Court granted the Company’s motion to transfer the venue of the lawsuit to the United States District Court for the Northern District of Georgia. On April 13, 2011, the Court granted plaintiffs’ motion for conditional certification of the FLSA claims as a collective action. On May 26, 2011, the Court bifurcated the FLSA portion of the suit into a liability phase, in which discovery is scheduled to close on August 28, 2012, and a damages phase, to be scheduled pending outcome of the liability phase. Following a motion for partial summary judgment by the Company regarding the New York state law claims, plaintiffs agreed voluntarily to dismiss those claims in a filing on December 12, 2011. Plaintiffs continue to seek class certification of allegedly similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA and two years under the North Carolina statute. Plaintiffs filed a motion for certification of a North Carolina state law class for NCWHA claims on January 20, 2012. The Company filed a motion for partial summary judgment on plaintiffs’ claims under the NCWHA on March 22, 2012. These motions have been briefed in full by both parties and are currently awaiting the Court’s decision. Plaintiffs also filed a motion for partial summary judgment with regard to the Company’s liability for plaintiffs’ FLSA claims on April 3, 2012. The Company moved for a continuance for its response to plaintiffs’ motion to provide time to obtain full discovery. On April 19, 2012, the Court denied plaintiffs’ motion with leave to re-file and granted the Company’s motion for continuance.

Based on the information the Company has at this time in the Rindfleisch lawsuit, the Company is unable to assess the probable outcome or potential liability, if any, arising from this proceeding on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this lawsuit at this time. The Company intends to defend itself vigorously in this lawsuit.

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 complaint further alleges that California employees were subject to violations of state laws requiring meal and rest breaks, accurate wage statements and timely payment of wages. 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. The parties held mediation discussions on August 3, 2011 and March 7, 2012. The parties have finalized the terms of a monetary settlement, and the Company has paid $5 million in escrow to settle all claims in the lawsuit, including the plaintiff’s attorney’s fees and costs. The settlement is subject to court approval.

On December 29, 2011, Odyssey HealthCare, Inc. was served with a complaint captioned United States of America and the State of Illinois ex rel. Laurie Geschrey and Laurie Janus v. Generations Healthcare, LLC, Odyssey HealthCare, Inc. Narayan Ponakala and Catherine Ponakala, which was filed on April 19, 2010 as a qui tam action in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 10 C 2413, under the provisions of the Federal False Claims Act, the Illinois Whistleblower Reward and Protection Act and the Illinois Whistleblower Act. The plaintiffs, two former employees of Generations Healthcare, LLC, a hospice company whose assets were acquired by Odyssey on December 31, 2009, are the relators and allege that defendants committed fraud against the United States and the State of Illinois by, among other things, recruiting and certifying patients as being eligible for hospice care when they were known not to be eligible and falsifying patients’ medical records in support of the claims for reimbursement. Relators further allege that Odyssey was aware of Generations Healthcare’s alleged fraudulent business practices. Both the United States and the State of Illinois declined to intervene in the action, and the complaint was unsealed on December 1, 2011. Relators seek statutory damages, which are three times the amount of any actual damages suffered by the United States and the State of Illinois, the maximum statutory civil penalty due under the statutes plus all costs and attorneys fees. Additionally, relators seek back pay plus interest and other damages because of defendants’ alleged retaliation against relators.

Odyssey filed a motion to dismiss the complaint against it on March 23, 2012. That motion is fully briefed and is pending before the court. Odyssey is also pursuing indemnification from Generations Healthcare and its owners, who are defendants in this action. Given the preliminary stage of this action, the Company is unable to assess the probable outcome or potential liability, if any, arising from this action on the business, financial condition, results of operations, liquidity or capital resources of the Company or Odyssey. Odyssey intends to defend itself vigorously in the action.

Odyssey Merger Litigation

Three putative class action lawsuits were filed in connection with the Company’s 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 named the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits were 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. On October 8, 2010, the District Court consolidated the Hemminger and Pompano Beach actions and transferred the Hemminger action to County Court No. 5 in Dallas County, Texas. On October 12, 2010, Gentiva entered a general denial with respect to the material allegations in both the Pompano Beach and Hemminger complaints. On December 16, 2010, defendants in the actions executed a Memorandum of Understanding with plaintiffs reflecting an agreement in principle to settle each of the actions for additional disclosures which were included in Odyssey’s Definitive Proxy Statement on Schedule 14A, filed on July 9, 2010. Defendants also agreed not to contest an application for attorneys’ fees not exceed $675,000 to be made by plaintiffs. On February 17, 2012, the court preliminarily approved a settlement of the Pompano Beach, Hemminger and Hansen actions. The settlement became final following court approval at a final settlement hearing on May 18, 2012.

Federal Securities Class Action Litigation

Between November 2, 2010 and October 25, 2011, five shareholder class actions were filed against Gentiva and certain of its current and former officers and directors in the United States District Court for the Eastern District of New York. Each of these actions asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with the Company’s participation in the Medicare Home Health Prospective Payment System (“HH PPS”). Following consolidation of the actions, and the appointment of Los Angeles City Employees’ Retirement System as lead plaintiff and Kaplan Fox & Kilsheimer LLP as lead counsel, on April 16, 2012, a consolidated shareholder class action complaint, captioned In re Gentiva Securities Litigation, Civil Action No. 10-CV-5064, was filed in the United States District Court for the Eastern District of New York. The complaint, which names Gentiva and certain current and former officers and directors as defendants, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Sections 11 and 15 of the Securities Act of 1933, in connection with the Company’s participation in the HH PPS. The complaint alleges, among other things, that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purposes of triggering higher reimbursement rates under the HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock during the period between July 31, 2008 and October 4, 2011. On June 15, 2012, defendants filed a motion to dismiss the complaint.

Given the preliminary stage of the action, the Company is unable to assess the probable outcome or potential liability, if any, arising from the action on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for the action at this time. The defendants intend to defend themselves vigorously in the action.

Shareholder Derivative Litigation

On January 4, 2011 and October 31, 2011, two actions were filed against certain of Gentiva’s current and former directors in Superior Court of DeKalb County in the State of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions were consolidated and, on February 9, 2012, plaintiffs filed a consolidated complaint (the “Georgia State Court Action”). The Georgia State Court Action, which names certain of Gentiva’s current and former directors as defendants, alleges, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. On March 26, 2012, defendants filed a motion to dismiss the Georgia State Court Action and further requested a transfer to the Superior Court of Cobb County. That motion is fully briefed and is now pending before the Cobb County court.

On October 7 and October 13, 2011, two actions were filed against certain of Gentiva’s current and former directors and officers in the United States District Court for the Northern District of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions also asserted a claim under Section 14(a) of the Securities Exchange Act of 1934. The actions were consolidated and, on March 5, 2012, plaintiffs filed a consolidated complaint (the “Georgia Federal Court Action”). The Georgia Federal Court Action, which names certain of Gentiva’s current and former directors and officers as defendants, alleges, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. The complaint further alleges that the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders was materially false and misleading. On April 16, 2012, defendants filed a motion to dismiss the Georgia Federal Court Action. That motion is fully briefed and is pending before the court.

Given the preliminary stage of the actions, the Company is unable to assess the probable outcome or potential liability, if any, arising from these actions on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for these actions at this time. The defendants intend to defend themselves vigorously in these actions.

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 is unable to predict when the Centers for Medicare & Medicaid Services (“CMS”) will finalize all items relating to the 2000 cost reports.

Senate Finance Committee Report

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 publicly traded home healthcare companies mentioned in a Wall Street Journal article that explored the relationship between the CMS’ home health policies and the utilization rates of some health agencies. The Company responded to this request as well as to supplemental requests for information. On October 3, 2011, the Senate Finance Committee released its report, which generally criticized certain of the home health therapy practices of publicly traded home healthcare companies, including the Company. The Company maintains its belief that it has provided and is providing the highest quality of care and has received and continues to receive payment within the standards set forth by the reimbursement system

established by CMS. The Company is unable to assess the probable outcome or potential liability, if any, arising from this matter on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.

Subpoena

On July 13, 2010, the SEC informed the Company that the SEC had commenced an investigation relating to the Company’s participation in the Medicare Home Health Prospective Payment System, and, on July 16, 2010, the Company received a subpoena from the SEC requesting certain documents in connection with its investigation. Similar to the Senate Finance Committee request, the SEC subpoena, among other things, focused on issues related to the number of and reimbursement received for therapy visits before and after changes in the Medicare reimbursement system, relationships with physicians, compliance efforts including compliance with fraud and abuse laws, and certain documents sent to the Senate Finance Committee. The Company is unable to assess the probable outcome or potential liability, if any, arising from this matter on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for this matter at this time.

Investigations Involving Odyssey

On February 14, 2008, Odyssey received a letter from the Medicaid Fraud Control Unit of the Texas Attorney General’s office notifying Odyssey that the Texas Attorney General was conducting an investigation concerning Medicaid hospice services provided by Odyssey, including its practices with respect to patient admission and retention, and requesting medical records of approximately 50 patients served by its programs in the State of Texas. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of this investigation, the Texas Attorney General’s views of the issues being investigated or any actions that the Texas Attorney General may take.

On May 5, 2008, Odyssey received a letter from the U.S. Department of Justice (“DOJ”) notifying Odyssey that the DOJ was conducting an investigation of VistaCare, Inc. (“VistaCare”) and requesting that Odyssey provide certain information and documents related to the DOJ’s investigation of claims submitted by VistaCare to Medicare, Medicaid and the U.S. government health insurance plan for active military members, their families and retirees, formerly the Civilian Health and Medical Program of the Uniformed Services (“TRICARE”), from January 1, 2003 through March 6, 2008, the date Odyssey completed the acquisition of VistaCare. Odyssey has been informed by the DOJ and the Medicaid Fraud Control Unit of the Texas Attorney General’s Office that they are reviewing allegations that VistaCare may have billed the federal Medicare, Medicaid and TRICARE programs for hospice services that were not reasonably or medically necessary or performed as claimed. The basis of the investigation is a qui tam lawsuit filed in the United States District Court for the Northern District of Texas by a former employee of VistaCare. The lawsuit alleges, among other things, that VistaCare submitted false claims to Medicare and Medicaid for hospice services that were not medically necessary and for hospice services that were referred in violation of the anti-kickback statute. The court unsealed the lawsuit on October 5, 2009 and Odyssey was served on January 28, 2010. In connection with the unsealing of the complaint, the DOJ filed a notice with the court declining to intervene in the qui tam action at such time. The Texas Attorney General also filed a notice of non-intervention with the court. These actions should not be viewed as a final assessment by the DOJ or the Texas Attorney General of the merits of this qui tam action. Odyssey continues to cooperate with the DOJ and the Texas Attorney General in their investigation. The relator has continued to pursue the qui tam lawsuit. VistaCare filed motions to dismiss the relator’s complaint on March 30, 2010 and April 2, 2012. The court issued orders on the motions to dismiss on March 9, 2011 and July 23, 2012. Consistent with the court’s orders, relator’s false claims act claims based on alleged medically unnecessary hospice services and for hospice services referred in violation of the anti-kickback statute are permitted to proceed to discovery. Based on the information that Odyssey has at this time, the Company cannot predict the outcome of the qui tam lawsuit, the governments’ continuing investigation, the DOJ’s or Texas Attorney General’s views of the issues being investigated, other than the DOJ’s and Texas Attorney General’s notice declining to intervene in the qui tam action, or any actions that the DOJ or Texas Attorney General may take.

On October 28, 2011, the Assistant United States Attorney for the Northern District of Texas notified Odyssey and the Company of the existence of a second qui tam lawsuit against VistaCare, doing business as VistaCare Hospice, Odyssey Healthcare, Inc., and Gentiva Healthcare Services, that had initially been filed on October 29, 2010, in the Northern District of Alabama, but transferred to the Northern District of Texas due to the similarity of allegations with the first qui tam lawsuit. A non-intervention order and unsealing of the second complaint was entered by the District Court for the Northern District of Texas on October 27, 2011. The Company believes this action should not be viewed as a final assessment by the DOJ of the merits of this qui tam action. On February 28, 2012, the court ordered a stay in this qui tam action until the court rules on the pending motion to dismiss in the first qui tam action. The court lifted the stay on July 23, 2012 following the court entry of an order ruling on the motion to dismiss in the first qui tam action. The Company anticipates that this second qui tam action will proceed in due course. VistaCare denies the allegations made in the second qui tam action and will vigorously defend against them. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of this second qui tam lawsuit, the government’s continuing investigation, the DOJ’s views of the issues being investigated, other than the DOJ’s non-intervention in the qui tam action, or any actions that the DOJ may take.

On January 5, 2009, Odyssey received a letter from the Georgia State Health Care Fraud Control Unit notifying Odyssey that the Georgia State Health Care Fraud Unit was conducting an investigation concerning Medicaid hospice services provided by VistaCare from 2003 through 2007 and requesting certain documents. Odyssey is cooperating with the Georgia State Health Care Fraud Control Unit and has complied with the document request. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the Georgia State Health Care Fraud Control Unit’s views of the issues being investigated or any actions that the Georgia State Health Care Fraud Control Unit may take.

On February 23, 2010, Odyssey received a subpoena from the Department of Health and Human Services, Office of Inspector General (“OIG”), requesting various documents and certain patient records of one of Odyssey’s hospice programs relating to services performed from January 1, 2006 through December 31, 2009. Odyssey is cooperating with the OIG and has completed its subpoena production. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the OIG’s views of the issues being investigated or any actions that the OIG may take.

The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made at this time with regard to the above investigations involving Odyssey. Based on the limited information that Odyssey has at this time regarding such investigations, the Company is unable to predict the impact, if any, that such investigations may have on Odyssey’s and the Company’s business, financial condition, results of operations, liquidity or capital resources.

On February 2, 2009, Odyssey received a subpoena from the OIG requesting certain documents related to Odyssey’s provision of continuous care services from January 1, 2004 through January 22, 2009. Odyssey subsequently received two additional subpoenas from the OIG requesting medical records for certain patients who had been provided continuous care services by Odyssey during the same time period. On February 15, 2012, Odyssey entered into a settlement agreement with the United States, acting through the DOJ and on behalf of the OIG, regarding Odyssey’s provision of continuous care services prior to the Company’s acquisition of Odyssey in August 2010. Pursuant to the settlement agreement Odyssey paid the United States $25 million.

Note 14.

Income Taxes

The Company recorded an income tax provision of $9.6 million and $12.2 million for the second quarter and first six months of 2012, respectively. The Company’s effective income tax rate for the first six months of 2012 was 38.8 percent. The rate for the first six months is lower than what is expected for the year as a result of an issue being effectively settled with the IRS and a reversal of related reserves in the first six months of 2012. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 38.8 percent for the first six months of 2012 is primarily due to state income taxes, net of federal benefit (approximately 5.1 percent) and other items (approximately 0.8 percent), partially offset by changes in tax reserves (approximately 2.1 percent).

The Company recorded an income tax provision of $2.4 million and $10.5 million for the second quarter and first six months of 2011, respectively. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 38.3 percent for the first six months of 2011 is primarily due to state income taxes, net of federal benefit (approximately 4.6 percent) and other items (approximately 0.6 percent), partially offset by changes in tax reserves (approximately 1.9 percent)

Note 15.

Business Segment Information

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

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 38 states, from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services 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.

In addition, through May 31, 2012, the Company provided consulting services to home health agencies, which included operational support, billing and collection activities, and on-site agency support and consulting. For 2011, the Company’s Rehab Without Walls^® and homemaker services business in Illinois are reflected as discontinued operations in accordance with applicable accounting guidance. See Note 3 for additional information.

Hospice

The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 28 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. The Hospice segment also delivers services to its customers through focused specialty programs that include:

•

Dementia Specialty Program, which provides an individualized disease management program addressing the physical needs specific to Alzheimer’s and dementia patients and support mechanisms for their caregivers;

•

Cancer Specialty Program, which provides advanced pain and symptom management for patients coping with the effects of cancer;

•

Cardiac Specialty Program, which helps patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control; and

•

Pulmonary Specialty Program, which addresses the needs of patients who have experienced a respiratory crisis by increasing quality of life and promoting comfort by specialized symptom management.

Corporate Expenses

Corporate 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 expenses, depreciation, amortization and net interest costs, but include revenues and all other costs (including special items) 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
	2012						2011
	Home Health		Hospice		Total		Home Health		Hospice		Total
Medicare	$	186.1	$	179.6	$	365.7	$	199.8	$	180.0	$	379.8
Medicaid and Local Government		11.6		6.7		18.3		13.4		7.6		21.0
Commercial Insurance and Other:
Paid at episodic rates		21.3		—		21.3		20.0		—		20.0
Other		16.7		5.7		22.4		21.1		6.8		27.9

Total net revenues	$	235.7	$	192.0	$	427.7	$	254.3	$	194.4	$	448.7


	First Six Months
	2012						2011
	Home Health		Hospice		Total		Home Health		Hospice		Total
Medicare	$	376.8	$	361.5	$	738.3	$	401.4	$	361.0	$	762.4
Medicaid and Local Government		23.5		14.2		37.7		26.6		15.3		41.9
Commercial Insurance and Other:
Paid at episodic rates		41.3		—		41.3		38.7		—		38.7
Other		34.1		11.9		46.0		43.7		13.1		56.8

Total net revenues	$	475.7	$	387.6	$	863.3	$	510.4	$	389.4	$	899.8

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


	Home Health			Hospice			Total
For the three months ended June 30, 2012
Net revenue	$	235,687		$	192,004		$	427,691

Operating contribution	$	36,383	(1)	$	35,146	(1)	$	71,529

Corporate expenses								(23,211	)(1)
Depreciation and amortization								(7,292	)
Gain on sale of businesses								5,447
Interest expense and other, net								(22,655	)

Income from continuing operations before income taxes and equity in earnings of affiliate							$	23,818


For the three months ended June 30, 2011
Net revenue	$	254,343		$	194,369		$	448,712

Operating contribution	$	34,828		$	36,687		$	71,515

Corporate expenses								(41,105	)(1)
Depreciation and amortization								(7,487	)
Dividend income								4,613	(2)
Interest expense and other, net								(20,786	)

Income from continuing operations before income taxes and equity in earnings of affiliate							$	6,750


For the six months ended June 30, 2012
Net revenue	$	475,651		$	387,692		$	863,343

Operating contribution	$	62,259	(1)	$	67,628	(1)	$	129,887

Corporate expenses								(45,055	)(1)
Depreciation and amortization								(14,722	)
Gain on sale of businesses								5,447
Interest expense and other, net								(44,157	)(3)

Income from continuing operations before income taxes and equity in earnings of affiliate							$	31,400


Segment assets	$	235,918		$	873,878		$	1,109,796

Corporate assets								369,225

Total assets							$	1,479,021


For the six months ended June 30, 2011
Net revenue	$	510,382		$	389,439		$	899,821

Operating contribution	$	76,710	(1)	$	72,824	(1)	$	149,534

Corporate expenses								(63,910	)(1)
Depreciation and amortization								(15,081	)
Dividend income								4,613	(2)
Interest expense and other, net								(47,669	)(3)

Income from continuing operations before income taxes and equity in earnings of affiliate							$	27,487


Segment assets	$	650,004		$	1,052,487		$	1,702,491

Corporate assets								388,102

Total assets							$	2,090,593

(1)	For the first six months of 2012, the Company recorded charges relating to cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements of $5.4 million.

For the second quarter and first six months of 2011, the Company recorded charges relating to cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements of $21.2 million and $25.0 million, respectively. Of these amounts, $18.5 million related to legal settlements associated with the Odyssey acquisition.

The charges were reflected as follows for segment reporting purposes (dollars in millions):


	Second Quarter					Six Months
	2012			2011		2012			2011
Home Health	$	(0.1	)	$	—	$	5.7		$	0.3
Hospice		0.3			—		0.1			0.7
Corporate expenses		(0.2	)		21.2		(0.4	)		24.0

Total	$	—		$	21.2	$	5.4		$	25.0

(2)	For both the second quarter and first six months of 2011, the Company recognized dividend income of $4.6 million as a result of the sale of a portion of the Company’s preferred equity in CareCentrix.

(3)

For the first six months of 2012, interest expense and other, net included charges of $0.5 million relating to the write-off of deferred debt issuance costs associated with the revolving credit facility. In addition, interest expense and other, net for the first six months of 2011 included charges of $3.8 million associated with terminating the Company’s interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B under the Company’s credit agreement. See Note 10 for additional information.

Note 16.

Supplemental Guarantor and Non-Guarantor Financial Information

Gentiva’s guarantor subsidiaries are guarantors to the Company’s debt securities which are registered under the Securities Act of 1933, as amended. The condensed consolidating financial statements presented below are provided pursuant to Rule 3-10 of Regulation S-X. Separate financial statements of each subsidiary guaranteeing Gentiva’s debt securities are not presented because the guarantor subsidiaries are jointly and severally, fully and unconditionally liable under the guarantees, and 100 percent owned by the Company. There are no restrictions on the ability to obtain funds from these subsidiaries by dividends or other means.

The following condensed consolidating financial statements include the balance sheets as of June 30, 2012 and December 31, 2011, statements of comprehensive income for the three months and six months ended June 30, 2012 and 2011 and statements of cash flows for the six months ended June 30, 2012 and 2011 of (i) Gentiva Health Services, Inc. (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting), (ii) its guarantor subsidiaries, (iii) its non-guarantor subsidiaries, and (iv) the eliminations necessary to arrive at the information for the Company on a consolidated basis.

Condensed Consolidating Balance Sheet

June 30, 2012

(In thousands)


	Gentiva Health Services, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	114,028	$	—	$	41,250	$	—		$	155,278
Receivables, net		—		257,909		21,467		(19,345	)		260,031
Deferred tax assets, net		—		14,848		2,366		—			17,214
Prepaid expenses and other current assets		—		33,384		13,375		(357	)		46,402

Total current assets		114,028		306,141		78,458		(19,702	)		478,925
Note receivable from CareCentrix		—		25,000		—		—			25,000
Fixed assets, net		—		44,074		300		—			44,374
Intangible assets, net		—		208,110		100		—			208,210
Goodwill		—		635,605		6,064		—			641,669
Investment in subsidiaries		1,042,892		28,384		—		(1,071,276	)		—
Other assets		—		80,835		8		—			80,843

Total assets	$	1,156,920	$	1,328,149	$	84,930	$	(1,090,978	)	$	1,479,021


LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	15,443	$	—	$	—	$	—		$	15,443
Accounts payable		—		31,274		1,079		(19,345	)		13,008
Other current liabilities		—		186,477		53,988		(357	)		240,108

Total current liabilities		15,443		217,751		55,067		(19,702	)		268,559
Long-term debt		922,682		—		—		—			922,682
Deferred tax liabilities, net		—		33,167		—		—			33,167
Other liabilities		—		34,339		16		—			34,355

Total Gentiva shareholders’ equity		218,795		1,042,892		28,384		(1,071,276	)		218,795
Noncontrolling interests		—		—		1,463		—			1,463

Total equity		218,795		1,042,892		29,847		(1,071,276	)		220,258

Total liabilities and equity	$	1,156,920	$	1,328,149	$	84,930	$	(1,090,978	)	$	1,479,021

Condensed Consolidating Balance Sheet

December 31, 2011

(In thousands)


	Gentiva Health Services, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	124,101	$	—	$	40,811	$	—		$	164,912
Receivables, net		—		283,552		18,168		(11,131	)		290,589
Deferred tax assets, net		—		24,560		1,891		—			26,451
Prepaid expenses and other current assets		—		32,619		6,904		(1,144	)		38,379

Total current assets		124,101		340,731		67,774		(12,275	)		520,331
Note receivable from CareCentrix		—		25,000		—		—			25,000
Fixed assets, net		—		45,917		329		—			46,246
Intangible assets, net		—		214,774		100		—			214,874
Goodwill		—		635,605		6,064		—			641,669
Investment in subsidiaries		1,063,962		25,173		—		(1,089,135	)		—
Other assets		—		82,200		8		—			82,208

Total assets	$	1,188,063	$	1,369,400	$	74,275	$	(1,101,410	)	$	1,530,328


LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	14,903	$	—	$	—	$	—		$	14,903
Accounts payable		—		22,913		831		(11,131	)		12,613
Other current liabilities		—		223,165		45,655		(1,144	)		267,676

Total current liabilities		14,903		246,078		46,486		(12,275	)		295,192
Long-term debt		973,222		—		—		—			973,222
Deferred tax liabilities, net		—		32,498		—		—			32,498
Other liabilities				26,862		23					26,885

Total Gentiva shareholders’ equity		199,938		1,063,962		25,173		(1,089,135	)		199,938
Noncontrolling interests		—		—		2,593		—			2,593

Total equity		199,938		1,063,962		27,766		(1,089,135	)		202,531

Total liabilities and equity	$	1,188,063	$	1,369,400	$	74,275	$	(1,101,410	)	$	1,530,328

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended June 30, 2012

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total

Net revenues	$	—		$	416,774		$	13,930		$	(3,013	)	$	427,691
Cost of services sold		—			216,455			9,295			(3,013	)		222,737

Gross profit		—			200,319			4,635			—			204,954
Selling, general and administrative expenses		—			(159,965	)		(3,963	)		—			(163,928	)
Gain on sale of assets		—			5,447			—			—			5,447
Interest (expense) and other, net		(22,678	)		—			23			—			(22,655	)
Equity in earnings of subsidiaries		26,850			53			—			(26,903	)		—

Income from continuing operations before income taxes and equity in net earnings of CareCentrix		4,172			45,854			695			(26,903	)		23,818
Income tax benefit (expense)		9,737			(19,004	)		(379	)		—			(9,646	)

Income from continuing operations		13,909			26,850			316			(26,903	)		14,172
Discontinued operations, net of tax		—			—			—			—			—

Net income		13,909			26,850			316			(26,903	)		14,172
Noncontrolling interests		—			—			(263	)		—			(263	)

Net income attributable to Gentiva shareholders	$	13,909		$	26,850		$	53		$	(26,903	)	$	13,909

Comprehensive income	$	13,909		$	26,850		$	316		$	(26,903	)	$	14,172

Condensed Consolidating Statement of Comprehensive Income

For the Three Months Ended June 30, 2011

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total

Net revenues	$	—		$	438,576		$	12,827		$	(2,691	)	$	448,712
Cost of services sold		—			232,800			4,042			(2,691	)		234,151

Gross profit		—			205,776			8,785			—			214,561
Selling, general and administrative expenses		—			(187,809	)		(3,829	)		—			(191,638	)
Dividend income					4,613			—						4,613
Interest (expense) and other, net		(20,799	)		—			13			—			(20,786	)
Equity in earnings of subsidiaries		18,001			3,435			—			(21,436	)		—

Income from continuing operations before income taxes and equity in net earnings of CareCentrix		(2,798	)		26,015			4,969			(21,436	)		6,750
Income tax benefit (expense)		7,987			(8,851	)		(1,548	)		—			(2,412	)
Equity in net earnings of CareCentrix		—			336			—			—			336

Income from continuing operations		5,189			17,500			3,421			(21,436	)		4,674
Discontinued operations, net of tax		—			501			165			—			666

Net income		5,189			18,001			3,586			(21,436	)		5,340
Noncontrolling interests		—			—			(151	)		—			(151	)

Net income attributable to Gentiva shareholders	$	5,189		$	18,001		$	3,435		$	(21,436	)	$	5,189


Comprehensive income	$	5,189		$	18,001		$	3,586		$	(21,436	)	$	5,340

Condensed Consolidating Statement of Comprehensive Income

For the Six Months Ended June 30, 2012

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total

Net revenues	$	—		$	840,201		$	28,243		$	(5,101	)	$	863,343
Cost of services sold		—			445,056			15,643			(5,101	)		455,598

Gross profit		—			395,145			12,600			—			407,745
Selling, general and administrative expenses		—			(329,513	)		(8,122	)		—			(337,635	)
Gain on sale of assets					5,447			—			—			5,447
Interest (expense) and other, net		(44,221	)		—			64			—			(44,157	)
Equity in earnings of subsidiaries		44,937			2,213			—			(47,150	)		—

Income from continuing operations before income taxes and equity in net earnings of CareCentrix		716			73,292			4,542			(47,150	)		31,400
Income tax benefit (expense)		18,033			(28,355	)		(1,853	)		—			(12,175	)

Income from continuing operations		18,749			44,937			2,689			(47,150	)		19,225
Discontinued operations, net of tax		—			—			—			—			—

Net income		18,749			44,937			2,689			(47,150	)		19,225
Noncontrolling interests		—			—			(476	)		—			(476	)

Net income attributable to Gentiva shareholders	$	18,749		$	44,937		$	2,213		$	(47,150	)	$	18,749


Comprehensive income	$	18,749		$	44,937		$	2,689		$	(47,150	)	$	19,225

Condensed Consolidating Statement of Comprehensive Income

For the Six Months Ended June 30, 2011

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total

Net revenues	$	—		$	880,021		$	25,502		$	(5,702	)	$	899,821
Cost of services sold		—			460,447			10,162			(5,702	)		464,907

Gross profit		—			419,574			15,340			—			434,914
Selling, general and administrative expenses		—			(357,185	)		(7,186	)		—			(364,371	)
Dividend income		—			4,613			—			—			4,613
Interest (expense) and other, net		(47,699	)		—			30			—			(47,669	)
Equity in earnings of subsidiaries		48,024			5,726			—			(53,750	)		—

Income from continuing operations before income taxes and equity in net earnings of CareCentrix		325			72,728			8,184			(53,750	)		27,487
Income tax benefit (expense)		18,316			(26,421	)		(2,426	)		—			(10,531	)
Equity in net earnings of CareCentrix		—			890			—			—			890

Income from continuing operations		18,641			47,197			5,758			(53,750	)		17,846
Discontinued operations, net of tax		—			827			286			—			1,113

Net income		18,641			48,024			6,044			(53,750	)		18,959
Noncontrolling interests		—			—			(318	)		—			(318	)

Net income attributable to Gentiva shareholders	$	18,641		$	48,024		$	5,726		$	(53,750	)	$	18,641


Comprehensive income	$	18,163		$	48,024		$	6,044		$	(53,750	)	$	18,481

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2012

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated Total
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities	$	(20,697	)	$	65,807		$	4,034		$	—	$	49,144


INVESTING ACTIVITIES:
Purchase of fixed assets		—			(6,911	)		(30	)		—		(6,941	)
Proceeds from sale of businesses		—			6,090			—			—		6,090

Net cash used in investing activities		—			(821	)		(30	)		—		(851	)


FINANCING ACTIVITIES:
Proceeds from issuance of common stock		1,640			—			—			—		1,640
Repayment of long-term debt		(50,000	)		—			—			—		(50,000	)
Debt issuance costs		(4,125	)		—			—			—		(4,125	)
Repurchase of common stock		(4,974	)		—			—			—		(4,974	)
Repayment of capital lease obligations		(73	)		—			—			—		(73	)
Other		3,198			(28	)		(3,565	)		—		(395	)
Net payments related to intercompany financing		64,958			(64,958	)		—			—		—

Net cash used in financing activities		10,624			(64,986	)		(3,565	)		—		(57,927	)


Net change in cash and cash equivalents		(10,073	)		—			439			—		(9,634	)
Cash and cash equivalents at beginning of period		124,101			—			40,811			—		164,912

Cash and cash equivalents at end of period	$	114,028		$	—		$	41,250		$	—	$	155,278

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2011

(In thousands)


	Gentiva Health Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated Total
OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities	$	(15,957	)	$	35,192		$	642		$	—	$	19,877


INVESTING ACTIVITIES:
Purchase of fixed assets		—			(8,604	)		(113	)		—		(8,717	)
Proceeds from sale of businesses		13,581			—			—			—		13,581
Acquisition of businesses		—			(320	)		—			—		(320	)

Net cash provided by (used in) investing activities		13,581			(8,924	)		(113	)		—		4,544


FINANCING ACTIVITIES:
Proceeds from issuance of common stock		6,235			—			—			—		6,235
Windfall tax benefits associated with equity-based compensation		194			—			—			—		194
Repayment of long-term debt		(23,438	)		—			—			—		(23,438	)
Debt issuance costs		(13,457	)		—			—			—		(13,457	)
Repayment of capital lease obligations		(145	)		—			—			—		(145	)
Other		—			623			(1,036	)		—		(413	)
Net payments related to intercompany financing		26,891			(26,891	)		—			—		—

Net cash (used in) provided by financing activities		(3,720	)		(26,268	)		(1,036	)		—		(31,024	)


Net change in cash and cash equivalents		(6,096	)		—			(507	)		—		(6,603	)
Cash and cash equivalents at beginning of period		63,816			—			40,936			—		104,752

Cash and cash equivalents at end of period	$	57,720		$	—		$	40,429		$	—	$	98,149

Note 17.

Subsequent Events

Advocate Hospice acquisition

Effective July 22, 2012, the Company acquired Advocate Hospice LLC in Danville, Indiana pursuant to an asset purchase agreement for consideration of approximately $5.5 million, which consideration also included entering into an option purchase agreement with a third party covering membership interests in Advocate Hospice. Additional consideration of up to $2 million is payable if certain earnout conditions are met. The acquisition enables the Company to expand its coverage in central and southern Indiana and to leverage its hospice and home health capabilities in the state.

Item 2.

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

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 on the Company of healthcare reform legislation and its implementation through governmental regulations;

•

legislative proposals for healthcare reform;

•

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;

•

ability to access capital markets;

•

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 acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;

•

ability to maintain compliance with financial covenants under the Company’s credit agreement;

•

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 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 year ended December 31, 2011 and in various other 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 year ended December 31, 2011 and in other filings with the SEC.

Overview

Gentiva Health Services, Inc. (“Gentiva” or the “Company”) is a leading provider of home health services and hospice services serving patients through approximately 420 locations in 41 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 under which the Company generates a majority of its net revenues are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s services to its patients. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“Affordable Care Act”), which represents a $39.5 billion reduction in Medicare home health spending over an extended period. The law phases in the reductions over seven 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 some provisions of the Affordable Care Act may be subject to further clarification and modification through the rule-making process. In addition, 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 has also decided to reduce participation in certain Medicaid and other state and county programs. The commercial insurance industry is also continually seeking ways to control the cost of services to patients that it covers, one way being to require greater efficiencies from its providers, including home healthcare companies.

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 more than 20,000 Medicare certified 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; being the leader in growth in the local markets the Company serves; 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 and leveraging technology to support the Company’s various initiatives; strengthening the Company’s balance sheet to support future growth; and educating our legislative and policymaking leaders on the value of the home health and hospice benefits to our nation’s seniors. The Company anticipates executing these strategies by continuing to expand its sales presence, making operational improvements, 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.

The Company’s operations involve servicing its patients and customers through its Home Health segment and its Hospice segment. This presentation aligns financial reporting with the manner in which the Company manages its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. Discontinued operations represent services and products provided to patients through the Company’s Rehab Without Walls^® business, the Company’s homemaker agency business in Illinois and the Company’s HME and IV business. See Note 3 to the Company’s consolidated financial statements for additional information.

Home Health

•

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.

Hospice

•

Cancer Specialty Program, which provides advanced pain and symptom management for patients coping with the effects of cancer;

•

Cardiac Specialty Program, which helps patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control; and

•

Pulmonary Specialty Program, which addresses the needs of patients who have experienced a respiratory crisis by increasing quality of life and promoting comfort by specialized symptom management.

Acquisitions

Dispositions

Gentiva Consulting Disposition

Louisiana Home Health and Hospice Dispositions

Home Health and Hospice Branch Dispositions

Homemaker Services Agency Disposition

Rehab Without Walls^® Disposition

Results of Operations

The comparison of results of operations between 2012 and 2011 has been impacted significantly by the following items:

•

The Company recorded net charges relating to restructuring, acquisition and integration activities and legal settlements of $5.4 million for the first six months of 2012 and $21.2 million and $25.0 million in the second quarter and first six months of 2011, respectively;

•

During the second quarter of 2012, the Company sold eight home health branches and four hospice branches in Louisiana.

During the fourth quarter of 2011, the Company closed 34 locations (25 home health and 9 hospice) and sold 9 home health branches as a result of a comprehensive review of its branch structure, support infrastructure and other significant expenditures in response to the challenging Medicare reimbursement rate environment. In addition, during the first quarter of 2012 the Company closed four additional home health branches.

The Company’s net revenues comparisons were negatively impacted by these branch sales and closures for the second quarter and first six months of 2012 by approximately $22 million and $41 million, respectively, as compared to the corresponding periods of 2011.

•

The Company recognized dividend income of approximately $4.6 million in the second quarter and first six months of 2011 representing a 12% cumulative preferred dividend received on the partial sale of the Company’s preferred stock investment in CareCentrix in April 2011.

Net Revenues

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


	Second Quarter							First Six Months
	2012		2011		Percentage Variance			2012		2011		Percentage Variance
Home Health	$	235.7	$	254.3		(7.3	%)	$	475.7	$	510.4		(6.8	%)
Hospice		192.0		194.4		(1.2	%)		387.6		389.4		(0.5	%)

Total net revenues	$	427.7	$	448.7		(4.7	%)	$	863.3	$	899.8		(4.1	%)

Net revenues by major payer source are as follows (in millions):


	Second Quarter
	2012						2011
	Home Health		Hospice		Total		Home Health		Hospice		Total
Medicare	$	186.1	$	179.6	$	365.7	$	199.8	$	180.0	$	379.8
Medicaid and Local Government		11.6		6.7		18.3		13.4		7.6		21.0
Commercial Insurance and Other:
Paid at episodic rates		21.3		—		21.3		20.0		—		20.0
Other		16.7		5.7		22.4		21.1		6.8		27.9

Total net revenues	$	235.7	$	192.0	$	427.7	$	254.3	$	194.4	$	448.7


	First Six Months
	2012						2011
	Home Health		Hospice		Total		Home Health		Hospice		Total
Medicare	$	376.8	$	361.5	$	738.3	$	401.4	$	361.0	$	762.4
Medicaid and Local Government		23.5		14.2		37.7		26.6		15.3		41.9
Commercial Insurance and Other:
Paid at episodic rates		41.3		—		41.3		38.7		—		38.7
Other		34.1		11.9		46.0		43.7		13.1		56.8

Total net revenues	$	475.7	$	387.6	$	863.3	$	510.4	$	389.4	$	899.8

For the second quarter of 2012 as compared to the second quarter of 2011, net revenues decreased by $21.0 million, or 4.7 percent, to $427.7 million from $448.7 million. For the first six months of 2012 as compared to the first six months of 2011, net revenues decreased by $36.5 million, or 4.1 percent, to $863.3 million from $899.8 million.

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 2012 net revenues were $235.7 million, down $18.6 million, or 7.3 percent, from $254.3 million in the prior year period. For the first six months of 2012, net revenues were $475.7 million, down $34.7 million, or 6.8 percent, from $510.4 million in the prior year period. The decrease is primarily attributable to closed or divested branches, the net decrease in Medicare reimbursement rates and additional decreases in the Medicaid and Local Government and Commercial Insurance and Other payer sources as the Company continues its strategy to reduce or eliminate certain lower gross margin business.

A summary of the impact on net revenues from branches that were closed or divested for each of the respective reporting periods in 2011 and 2012 follows (in millions):


	Second Quarter							First Six Months
	2011		2012		Impact			2011		2012		Impact
Medicare	$	13.5	$	0.5	$	(13.0	)	$	27.3	$	3.5	$	(23.8	)
Medicaid and Local Government		0.4		0.3		(0.1	)		0.8		0.6		(0.2	)
Commercial Insurance and Other:
Paid at episodic rates		1.8		0.2		(1.6	)		3.3		0.7		(2.6	)
Other		2.2		—		(2.2	)		4.5		0.2		(4.3	)

Total net revenues	$	17.9	$	1.0	$	(16.9	)	$	35.9	$	5.0	$	(30.9	)

The Company’s episodic revenues decreased 5.6 percent and 5.0 percent for the second quarter and first six months of 2012, respectively. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows (dollars in millions):


	Second Quarter							First Six Months
	2012		2011		Percentage Variance			2012		2011		Percentage Variance
Home Health
Medicare	$	186.1	$	199.8		(6.8	%)	$	376.8	$	401.4		(6.1	%)
Non-Medicare PPS		21.3		20.0		6.5	%		41.3		38.7		6.6	%

Total	$	207.4	$	219.8		(5.6	%)	$	418.1	$	440.1		(5.0	%)

Key Company statistics related to episodic revenues were as follows:


	Second Quarter							First Six Months
	2012		2011		Percentage Variance			2012		2011		Percentage Variance
Episodes		71,400		71,600		(0.3	%)		144,800		144,400		0.3	%

Revenue per episode	$	2,905	$	3,070		(5.4	%)	$	2,890	$	3,050		(5.2	%)

Episode volume for the second quarter of 2012 decreased 0.3 percent and for the first six months of 2012 increased 0.3 percent. Excluding the impact of branch closures and divestures, episodes would have increased by 6.9 percent for both the second quarter and first six months of 2012 compared to the same periods in 2011. Similarly, admissions decreased by 2.1 percent for the second quarter, from 49,900 in the second quarter of 2011 to 48,800 in the second quarter of 2012, and by 0.6 percent for the first six months of 2012, from 100,800 for the first six months of 2011 to 100,200 in the first six months of 2012. Excluding the impact of branch closures and divestures, admissions would have increased by 5.0 percent and 6.0 percent for the second quarter and first six months of 2012, respectively, compared to the same periods in 2011. There were approximately 1.46 episodes and 1.44 episodes, respectively, for each admission during the second quarter and first six months of 2012 compared to 1.44 episodes and 1.43 episodes, respectively, for each admission during the second quarter and first six months of 2011.

In both the second quarter and first six months of 2012, Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 88 percent as compared to 86 percent for the corresponding periods in 2011. In the second quarter of 2012, revenues from specialty programs as a percent of total Medicare and non-Medicare PPS Home Health revenues were 48 percent as compared to 50 percent for the second quarter of 2011. In the first six months of both 2012 and 2011, revenues from specialty programs as a percent of total Medicare and non-Medicare PPS Home Health revenues were 48 percent.

Revenues from Medicaid and Local Government payer sources were $11.6 million and $23.5 million in the second quarter and first six months of 2012, respectively, as compared to $13.4 million and $26.6 million in the second quarter and first six months of 2011, respectively. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $16.7 million in the second quarter of 2012 as compared to $21.1 million in the second quarter of 2011. For the first six months of 2012, as compared to the corresponding period of 2011, revenues from Commercial Insurance and Other payer sources were $34.1 million and $43.7 million, respectively.

Net revenues from the Company’s Rehab Without Walls^® business were $5.8 million and $11.2 million in the second quarter and first six months of 2011, respectively. Net revenues from the Company’s homemaker services agency business in Illinois were $2.4 million and $4.7 million in the second quarter and first six months of 2011. These amounts are included within discontinued operations in the Company’s consolidated statements of comprehensive income.

Hospice

Hospice revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Second quarter and first six months of 2012 net revenues were $192.0 million and $387.6 million, respectively, as compared to $194.4 million and $389.4 million in the corresponding periods of 2011, respectively.

A summary of the impact on net revenues from branches that were closed or divested for each of the respective reporting periods in 2011 and 2012 follows (in millions):


	Second Quarter							First Six Months
	2011		2012		Variance			2011		2012		Variance
Medicare	$	5.6	$	0.8	$	(4.8	)	$	11.7	$	2.6	$	(9.1	)
Medicaid and Local Government		0.4		—		(0.4	)		0.9		—		(0.9	)
Commercial Insurance and Other:		0.2		—		(0.2	)		0.6		0.1		(0.5	)

Total net revenues	$	6.2	$	0.8	$	(5.4	)	$	13.2	$	2.7	$	(10.5	)

Key Company statistics relating to Hospice were as follows:


	Second Quarter							First Six Months
	2012		2011		Percentage Variance			2012		2011		Percentage Variance
Average Daily Census		13,700		13,900		(1.4	%)		13,700		13,900		(1.4	%)

Revenue per Patient Day	$	154	$	154		0.0	%	$	155	$	155		0.0	%

For both the second quarter and first six months of 2012, Average Daily Census (“ADC”) approximated 13,700 patients as compared to 13,900 patients for both the second quarter and first six months of 2011. The average length of stay of patients at discharge was 86 days and 89 days for the second quarter and first six months, respectively, of both 2012 and 2011.

Medicare revenues were $179.6 million and $361.5 million in the second quarter and first six months of 2012, respectively, as compared to $180.0 million and $361.0 million in the corresponding periods of 2011. Medicaid revenues were $6.7 million and $14.2 million for the second quarter and first six months of 2012, respectively, as compared to $7.6 million and $15.3 million for the corresponding periods of 2011. Commercial Insurance and Other revenues in the second quarter and first six months of 2012 were $5.7 million and $11.9 million, respectively, as compared to $6.8 million and $13.1 million in the corresponding periods of 2011.

Gross Profit

The following table reflects gross profit by business segment for 2012 and 2011 (dollars in millions):


	Second Quarter									First Six Months
	2012			2011			Variance			2012			2011			Variance
Gross Profit:
Home Health	$	117.5		$	129.2		$	(11.7	)	$	234.7		$	263.9		$	(29.2	)
Hospice		87.5			85.4			2.1			173.0			171.0			2.0

Total	$	205.0		$	214.6		$	(9.6	)	$	407.7		$	434.9		$	(27.2	)


As a percent of revenue:
Home Health		49.8	%		50.8	%		(1.0	%)		49.3	%		51.7	%		(2.4	%)
Hospice		45.6	%		43.9	%		1.7	%		44.6	%		43.9	%		0.7	%
Total		47.9	%		47.8	%		0.1	%		47.2	%		48.3	%		(1.1	%)

Gross profit decreased by $9.6 million or 4.5 percent for the second quarter of 2012 as compared to the second quarter of 2011. For the first six months of 2012, gross profit decreased by $27.2 million or 6.2 percent as compared to the first six months of 2011.

For the second quarter and first six months of 2012, gross profit as a percentage of revenues within the Home Health segment declined by 1.0 percent and 2.4 percent, respectively, as compared to the corresponding periods of 2011. The decreases resulted from (i) the net decrease in Medicare reimbursement rates for 2012, partially offset by (ii) closed or divested branches with lower gross profit percentages, (iii) growth in the Company’s higher margin specialty programs, and (iv) continued elimination or reduction of certain low margin Medicaid and local government business and commercial business.

Hospice gross profit as a percentage of revenues increased 1.7 percent and 0.7 percent for the second quarter and first six months of 2012, respectively, as compared to the second quarter and first six months of 2011.

Gross profit was impacted by depreciation expense of $0.2 million in the second quarter of both 2012 and 2011 as compared to $0.5 million and $0.4 million, respectively, in the first six months of 2012 and 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 14.5 percent or $27.7 million to $163.9 million for the second quarter of 2012, as compared to $191.6 million for the second quarter of 2011, and decreased 7.3 percent or $26.8 million to $337.6 million for the first six months of 2012, as compared to $364.4 million for the first six months of 2011. If charges, as noted below, relating to cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements of $5.4 million in the first six months of 2012 and $21.2 million and $25.0 million in the second quarter and first six months of 2011, respectively, were excluded, the decrease in selling, general and administrative expenses would have been approximately 3.8 percent or $6.5 million for the second quarter of 2012 as compared to the second quarter of 2011, and 2.1 percent and $7.1 million for the first six months of 2012 as compared to the first six months of 2011.

The decrease in the second quarter of 2012, as compared to the second quarter of 2011, was primarily attributable to (i) legal settlements ($18.5 million), (ii) Home Health field operating, selling and administrative costs ($12.6 million), (iii) cost savings initiatives and other restructuring costs ($2.7 million), (iv) decrease in provision for doubtful accounts ($0.6 million), (v) equity-based compensation expense ($0.5 million) and (vi) depreciation and amortization ($0.2 million). These costs were partially offset by an increase in (i) corporate administrative expenses ($4.0 million) and (ii) Hospice field operating, selling and administrative costs ($3.4 million).

The decrease in the first six months of 2012, as compared to the first six months of 2011, was primarily attributable to (i) legal settlements ($13.5 million), (ii) Home Health field operating, selling and administrative costs ($19.1 million), (iii) cost savings initiatives and other restructuring costs ($6.1 million), (iv) decrease in provision for doubtful accounts ($0.9 million), (v) equity-based compensation expense ($0.5 million) and (vi) depreciation and amortization ($0.4 million). These costs were partially offset by an increase in (i) corporate administrative expenses ($6.0 million) and (ii) Hospice field operating, selling and administrative costs ($7.7 million). During the first six months of 2012, selling, general and administrative expenses were negatively impacted by the costs associated with Amendment No. 3 to the Company’s credit agreement of approximately $1.2 million.

Depreciation and amortization expense included in selling, general and administrative expenses was $7.0 million and $14.2 million in the second quarter and first six months of 2012, respectively, as compared to $7.3 million and $14.6 million for the corresponding periods of 2011.

Dividend Income

During the second quarter of 2011, the Company exchanged 135,870 of its shares of class A preferred stock of CareCentrix Holdings Inc. for shares of class A common stock of CareCentrix Holdings Inc. The Company then sold such shares of class A common stock to a new investor in CareCentrix. The Company received $18.2 million of which $4.6 million represented accumulated and unpaid dividends on the preferred shares which were reflected in dividend income in the Company’s consolidated statements of comprehensive income. See Note 2 to the Company’s consolidated financial statements for additional information.

Interest Income and Interest Expense and Other

For the second quarter and first six months of 2012, net interest expense and other was approximately $22.7 million and $44.2 million, respectively, consisting primarily of interest expense and other of $23.4 million and $45.5 million, respectively, associated with the term loan borrowings, fees associated with the Company’s 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 and, for the first six months of 2012, charges of $0.5 million relating to the write-off of deferred debt issuance costs associated with the Company’s revolving credit facility.

For the second quarter and first six months of fiscal 2011, net interest expense and other was approximately $20.8 million and $47.7 million, respectively, consisting primarily of interest expense and other of $21.4 million and $49.0 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 $0.6 million and $1.3 million, respectively, earned on investments and existing cash balances and for the first six months of 2011, charges of $3.8 million relating to the write-off of deferred debt issuance costs and fees associated with the termination of the Company’s interest rate swaps in connection with the refinancing of the Company’s Term Loan A and Term Loan B facilities.

Income Tax Expense

Discontinued Operations, Net of Tax

For the second quarter and first six months of 2011, discontinued operations, net of tax reflected a gain of $0.7 million, or $0.02 per diluted share, and $1.1 million, or $0.04 per diluted share, respectively, associated with the Company’s homemaker services agency business in Illinois, the Company’s Rehab Without Walls^® business and a change in settlement of the Company’s post closing liabilities in connection with the sale of its HME and IV businesses.

Net Income Attributable to Gentiva Shareholders

For the second quarter of 2012, net income attributable to Gentiva shareholders was $13.9 million, or $0.46 per diluted share, compared with net income of $5.2 million, or $0.17 per diluted share, for the corresponding period of 2011. For the first six months of 2012, net income attributable to Gentiva shareholders was $18.7 million, or $0.61 per diluted share, compared to $18.6 million, or $0.61 per diluted share, for the first six months of 2011.

The Company uses adjusted income from continuing operations, a non-GAAP financial measure, as a supplemental measure of Company performance. The Company defines adjusted income from continuing operations attributable to Gentiva shareholders as income from continuing operations attributable to Gentiva shareholders, excluding charges relating primarily to cost savings initiatives and other restructuring costs, acquisition and integration activities and legal settlements, including tax reserves on those legal settlements. The Company considers adjusted income from continuing operations to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of the Company’s business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of the Company’s core operating performance. Management uses adjusted income from continuing operations attributable to Gentiva shareholders to evaluate overall performance and compare current operating results with other companies in the healthcare industry and should not be considered in isolation or as a substitute for income from continuing operations, net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Since adjusted income from continuing operations attributable to Gentiva shareholders is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures in other companies.

After adjusting for certain items which include cost savings initiatives and other restructuring costs, acquisition and integration costs and legal settlements, and tax reserves as noted in the tables below, adjusted income from continuing operations attributable to Gentiva shareholders was $10.7 million, or $0.35 per diluted share, for the second quarter of 2012 as compared to $14.4 million, or $0.47 per diluted share, for the corresponding period of 2011. Adjusted income from continuing operations attributable to Gentiva shareholders was $18.1 million, or $0.59 per diluted share, for the first six months of 2012 as compared to $29.7 million, or $0.96 per diluted share, for the corresponding period of 2011.

A reconciliation of adjusted income from continuing operations attributable to Gentiva shareholders to income from continuing operations, the most directly comparable GAAP financial measure, follows (in thousands, except per share amounts):


	For the Three Months Ended
	June 30, 2012								June 30, 2011
	Gross			Net of Tax			Per Diluted Share		Gross			Net of Tax			Per Diluted Share
Adjusted income from continuing operations attributable to Gentiva shareholders				$	10,695		$	0.35				$	14,404		$	0.47
Dividend income		—			—			—		4,613			2,805			0.09
Gain on sale of businesses		5,447			3,248			0.11		—			—			—
Cost savings initiatives and other restructuring, legal settlement and acquisition and integration costs		(25	)		(34	)		—		(21,246	)		(12,686	)		(0.41	)

Income from continuing operations attributable to Gentiva shareholders					13,909			0.46					4,523			0.15
Add back: Net income attributable to noncontrolling interests					263			0.01					151			—

Income from continuing operations				$	14,172		$	0.47				$	4,674		$	0.15


	For the Six Months Ended
	June 30, 2012									June 30, 2011
	Gross			Net of Tax			Per Diluted Share			Gross			Net of Tax			Per Diluted Share
Adjusted income from continuing operations attributable to Gentiva shareholders				$	18,140		$	0.59					$	29,668		$	0.96
Dividend income		—			—			—			4,613			2,805			0.09
Gain on sale of businesses		5,447			3,248			0.11			—			—			—
Cost savings initiatives and other restructuring, legal settlement and acquisition and integration costs		(5,416	)		(3,215	)		(0.11	)		(25,011	)		(14,945	)		(0.48	)
Tax reserves on OIG legal settlement		576			576			0.02			—			—			—

Income from continuing operations attributable to Gentiva shareholders					18,749			0.61						17,528			0.57
Add back: Net income attributable to noncontrolling interests					476			0.02						318			0.01

Income from continuing operations				$	19,225		$	0.63					$	17,846		$	0.58

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 October 2010.

The Company’s credit agreement provides for $860.0 million in senior secured credit facilities for the Company, comprising term loan facilities aggregating $750.0 million and a revolving credit facility of $110 million, which was reduced from $125 million as a result of an amendment to the Company’s credit agreement entered into on March 6, 2012. The Company also realized $325.0 million in gross proceeds from the issuance and sale by the Company of senior unsecured notes. See Note 10 to the Company’s consolidated financial statements for additional information.

During the first six months of 2012, net cash provided by operating activities was $49.1 million. In addition, the Company had proceeds from the sale of businesses of $6.1 million and $1.6 million from purchases under the Company’s Employee Stock Purchase Plan (“ESPP”). During the six months ended June 30, 2012, the Company used $4.1 million for debt issuance costs, $50.0 million for the repayment of debt, $6.9 million for capital expenditures and $5.0 million for repurchases of the Company’s common stock under the Company’s stock repurchase program.

Net cash provided by operating activities increased by $29.2 million from $19.9 million for the first six months of 2011 to $49.1 million in the first six months of 2012. The increase was primarily due to improvements in accounts receivable ($26.7 million), changes in current liabilities ($8.9 million), other ($5.8 million) and net cash provided by operations prior to changes in assets and liabilities ($1.5 million), partially offset by changes in prepaid expenses and other current assets ($13.7 million).

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


	For the Six Months Ended
	June 30, 2012			June 30, 2011			Variance
OPERATING ACTIVITIES:
Net income	$	19,225		$	18,959		$	266
Adjustments to add back non-cash items affecting net income:
Depreciation and amortization		14,722			15,120			(398	)
Amortization of debt issuance costs		7,020			9,654			(2,634	)
Provision for doubtful accounts		3,746			4,525			(779	)
Equity-based compensation expense		3,442			3,966			(524	)
Windfall tax benefits associated with equity-based compensation		—			(194	)		194
Gain on sale of businesses		(5,447	)		—			(5,447	)
Equity in net earnings of CareCentrix		—			(890	)		890
Deferred income tax expense (benefit)		9,906			(54	)		9,960

Total cash provided by operations prior to changes in assets and liabilities	$	52,614		$	51,086		$	1,528

The $1.5 million difference in “Total cash provided by operations prior to changes in assets and liabilities” between the 2012 and 2011 periods is primarily related to 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 businesses and deferred income taxes.

A summary of the changes in current liabilities, excluding the current portion of long-term debt, impacting cash flow from operating activities follows (in thousands):


	For the Six Months Ended
	June 30, 2012			June 30, 2011			Variance
OPERATING ACTIVITIES:
Changes in current liabilities:
Accounts payable	$	395		$	(4,124	)	$	4,519
Payroll and related taxes		(4,063	)		(3,454	)		(609	)
Deferred revenue		4,402			1,099			3,303
Medicare liabilities		2,723			(13,606	)		16,329
Obligations under insurance programs		(2,050	)		(7,760	)		5,710
Accrued nursing home costs		(1,517	)		(3,800	)		2,283
Other accrued expenses		(28,204	)		(5,563	)		(22,641	)

Total changes in current liabilities	$	(28,314	)	$	(37,208	)	$	8,894

The primary drivers for the $8.9 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:

•

Accounts payable, which had a positive impact of $4.5 million between the 2012 and 2011 reporting periods, primarily related to timing of payments.

•

Payroll and related taxes, which had a negative impact of $0.6 million between the 2012 and 2011 reporting periods, primarily due to timing of the Company’s payroll processing.

•

Deferred revenue, which had a positive impact of $3.3 million between the 2012 and 2011 reporting periods.

•

Medicare liabilities, which had a positive impact of $16.3 million between the 2012 and 2011 reporting periods.

•

Obligations under insurance programs, which had a positive impact on the change in operating cash flow of $5.7 million between the 2012 and 2011 reporting periods, primarily related to timing of payments under the Company’s insurance programs.

•

Accrued nursing home costs, which had a positive impact on the change in operating cash flow of $2.3 million between the 2012 and 2011 reporting periods, due primarily to the timing of payments.

•

Other accrued expenses, which had a negative impact on the change in operating cash flow of $22.6 million between the 2012 and 2011 reporting periods, due primarily to the impact of payments associated with the settlement of the Odyssey continuous care investigation, payments associated with the Company’s cost savings initiatives and other restructuring costs, acquisition and integration activities as well as timing of accrued interest payments under the Company’s credit facilities.

Working capital at June 30, 2012 was approximately $210 million, a decrease of $15 million as compared to approximately $225 million at December 31, 2011, primarily due to:

•

a $8 million increase in prepaid expenses and other current assets;

•

a $10 million decrease in cash and cash equivalents;

•

a $31 million decrease in accounts receivable;

•

a $9 million decrease in deferred tax assets; and

•

a $27 million decrease in current liabilities, consisting of decreases in payroll and related taxes ($4 million), obligations under insurance programs ($2 million), nursing home costs ($2 million), other accrued expenses ($27 million) partially offset by increases in current portion of long-term debt ($1 million), deferred revenue ($4 million) and Medicare liabilities ($3 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities.

As of June 30, 2012, Days Sales Outstanding (“DSO”) relating to continuing operations was 52 days, a decrease of 9 days from March 31, 2012, primarily driven by resolution of hospice accounts receivable associated with a vendor billing system upgrade and processing delays with the Company’s Medicare intermediaries.

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 44 days at June 30, 2012 and 53 days at March 31, 2012.

Accounts receivable attributable to major payer sources of reimbursement at June 30, 2012 and December 31, 2011 were as follows (in thousands):


	June 30, 2012
	Total		0 - 90 days		91 - 180 days		181 - 365 days		Over 1 year
Medicare	$	193,707	$	169,745	$	15,880	$	7,205	$	877
Medicaid and Local Government		40,116		27,566		6,318		6,238		(6	)
Commercial Insurance and Other		37,109		25,900		6,137		4,115		957
Self - Pay		1,906		703		630		464		109

Gross Accounts Receivable	$	272,838	$	223,914	$	28,965	$	18,022	$	1,937


	December 31, 2011
	Total		0 - 90 days		91 - 180 days		181 - 365 days		Over 1 year
Medicare	$	217,028	$	191,366	$	20,638	$	4,363	$	661
Medicaid and Local Government		46,553		32,576		10,515		3,418		44
Commercial Insurance and Other		36,454		27,230		5,814		2,484		926
Self - Pay		2,116		699		699		563		155

Gross Accounts Receivable	$	302,151	$	251,871	$	37,666	$	10,828	$	1,786

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
	2012									2011
	Home Health			Hospice			Total			Home Health			Hospice			Total
Medicare		79	%		94	%		86	%		79	%		93	%		85	%
Medicaid and Local Government		5			3			4			5			4			5
Commercial Insurance and Other:
Paid at episodic rates		9			—			5			8			—			4
Other		7			3			5			8			3			6

Total net revenues		100	%		100	%		100	%		100	%		100	%		100	%


	Six Months Ended
	2012									2011
	Home Health			Hospice			Total			Home Health			Hospice			Total
Medicare		79	%		93	%		86	%		79	%		93	%		85	%
Medicaid and Local Government		5			4			4			5			4			5
Commercial Insurance and Other:
Paid at episodic rates		9			—			5			8			—			4
Other		7			3			5			8			3			6

Total net revenues		100	%		100	%		100	%		100	%		100	%		100	%

CMS has implemented various payment updates to the base rates for Medicare home health including (i) annual market basket updates, (ii) beginning in 2008, annual reductions in rates to reduce aggregate case mix increases that CMS believes are unrelated to patients’ health status (“case mix creep adjustment”), (iii) adjustments to rates associated with changes to the home health outlier policy, (iv) wage index and other changes and (v) increases for defined rural areas of the country. During both the second quarter and first six months of 2012, approximately 23 percent of the Company’s episodic revenue was generated in designated rural areas.

In July 2012, CMS issued a preliminary rule to update and revise Medicare home health payments for calendar year 2013. This is comprised of a net market basket update of 1.50 percent, which includes the 1 percent reduction mandated by the Affordable Care Act, offset by a case mix creep adjustment of 1.32 percent. The net effect of these changes, if finalized, would increase the base rate for an episode of service by 0.18 percent to $2,143, subject to further impact from wage index adjustments.

A summary of the components of Gentiva’s annual Medicare home health reimbursement base episodic rate adjustment follows:


Calendar Year	Net Market Basket Update			Case Mix Creep Adjustment			Outlier Payment Adjustment			Rural Add-on / Other			Net Reimbursement Change			Base Episodic Rate
2013 (1)		1.50	%		(1.32	%)		—			—			0.18	%	$	2,143
2012		1.40	%		(3.79	%)		—			—			(2.39	%)	$	2,139
2011		1.10	%		(3.79	%)		(2.50	%)		0.30	%		(4.89	%)	$	2,192
2010		2.00	%		(2.75	%)		2.50	%		0.50	%		2.25	%	$	2,313

(1)	Based upon a preliminary rule issued by CMS in July 2012.

Actual episodic rates will vary from the base episodic rates noted in the table above due to (i) the determination of case mix which reflects the clinical condition, functional abilities and service needs of each individual patient, (ii) wage indices applicable to the geographic region where the services are performed and (iii) the impact of the rural add-on provision.

As a condition for Medicare payment, the Affordable Care Act mandates that prior to certifying a patient’s eligibility for the home health benefit, the certifying physician must document that the physician or an allowed non-physician practitioner, had a face-to-face encounter with the patient. The encounter must occur within 90 days prior to the start of care or 30 days after the start of care. In addition, the Affordable Care Act requires that a hospice physician or nurse practitioner have a face-to-face encounter with hospice patients during the 30-day period prior to the 180th day recertification and each subsequent recertification, and that the certifying hospice physician attest that such a visit took place. The face-to-face requirements for home health and hospice providers became effective January 1, 2011. However, CMS delayed full enforcement of the requirements until April 1, 2011. In addition, in July 2011, CMS proposed comparable face-to-face encounters for people receiving Medicaid home health services.

The Affordable Care Act also imposed additional therapy assessment requirements. A professional qualified therapist assessment must take place at least once every 30 days during a therapy patient’s course of treatment. For those qualified patients needing 13 or more or 19 or more therapy visits, a qualified therapist must perform the therapy service required, re-assess the patient, and measure and document the effectiveness of the 13th visit and the 19th visit for all therapy disciplines caring for the patient. The new therapy assessment requirements were effective April 1, 2011.

In July 2012, CMS released a final rule, effective for services provided October 1, 2012 through September 30, 2013, that provides for a 0.9 percent increase for Medicare hospice rates, consisting of a 2.6 percent market basket increase, offset by a 0.7 percent productivity adjustment factor, a 0.6 percent budget neutrality adjustment factor, estimated wage index changes of 0.1 percent and a reduction of 0.3 percent defined by the Affordable Care Act. In July 2011, CMS released a final rule, effective for services provided October 1, 2011 through September 30, 2012, that provided for a 2.5 percent increase for Medicare hospice rates, consisting of a 3.0 percent market basket increase, offset by a 0.5 percent decrease due to updated wage index data and a budget neutrality adjustment factor.

Overall payments made by Medicare for hospice services are subject to cap amounts calculated by Medicare. Total Medicare payments for hospice services are compared to the aggregate cap amount for the hospice cap period. In July 2012, CMS announced the cap amount for the 2012 cap year of $25,377 per beneficiary, which period runs from November 1, 2011 through October 31, 2012.

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.

The discussion above on Medicare home health rates and Medicare hospice rates does not consider the impact of the 2 percent reduction in Medicare payment rates under sequestration, which is authorized by the Budget Control Act of 2011 and scheduled to take effect beginning in January 2013.

Credit Arrangements

As of June 30, 2012, the Company’s credit arrangements include a senior secured credit agreement providing (i) a $200 million Term Loan A facility, (ii) a $550 million Term Loan B facility and (iii) a $110 million revolving credit facility (which was reduced from $125 million on March 6, 2012) (collectively the “Credit Agreement”), and $325 million aggregate principal amount of 11.5% Senior Notes due 2018 (the “Senior Notes”). The Credit Agreement’s revolving credit facility also includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swing line loans.

As of June 30, 2012, advances under the revolving credit facility may be made, and letters of credit may be issued, up to the $110 million borrowing capacity of the facility at any time prior to the facility expiration date of August 17, 2015. In connection with the reduction in the revolving credit facility, the Company wrote-off prepaid issuance costs of approximately $0.5 million, which is reflected in interest expense and other in the Company’s consolidated statement of comprehensive income for the six months ended June 30, 2012, and capitalized costs associated with the revolving credit facility of approximately $0.8 million. Outstanding letters of credit were $45.4 million at June 30, 2012 and $41.8 million at December 31, 2011. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of June 30, 2012, the Company’s unused and available borrowing capacity under the Credit Agreement was $64.6 million.


	Amended Applicable Rate						Previous Applicable Rate
Consolidated Leverage Ratio	Eurodollar Rate Term A Facility			Base Rate Term A Facility			Eurodollar Rate Term A Facility			Base Rate Term A Facility
³ 3.0:1		3.25	%		2.25	%		5.00	%		4.00	%
³ 2.0:1 and < 3.0:1		3.00	%		2.00	%		4.50	%		3.50	%
< 2.0:1		2.75	%		1.75	%		4.00	%		3.00	%

The Company may select interest periods of one, two, three or six months for Eurodollar rate loans. Interest is payable at the end of the selected interest period. From August 17, 2010 through March 9, 2011, the interest rate on borrowings under the Credit Agreement was 6.75 percent per annum. From March 9, 2011 through March 5, 2012, the interest rate on Term Loan A borrowings was 4.50 percent and on Term Loan B borrowings was 4.75 percent. Giving effect to Amendment No. 3, subsequent to March 6, 2012, the interest rate on Term Loan A borrowings was 6.25 percent and on Term Loan B borrowings was 6.50 percent. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility.

Debt Covenants

On November 28, 2011, the Company entered into Amendment No. 2 to the Credit Agreement, which provided for modification to the definition of “Consolidated EBITDA” contained in the Credit Agreement to allow for the add-back of costs associated with the Company’s cost realignment activities and operating losses associated with branches closed or sold during the fourth quarter of 2011 and to reset the maximum consolidated leverage ratio for the fourth quarter of 2011 to 4.75 to 1.00. As of June 30, 2012, the Company was in compliance with all covenants in the Credit Agreement.

The maximum consolidated leverage ratio under Amendment No. 2 was as follows:


For the period		Maximum Consolidated Leverage Ratio
August 17, 2010 to September 30, 2011		£ 4.75:1
October 1, 2011 to September 30, 2012		£ 4.50:1
October 1, 2012 to September 30, 2013		£ 3.75:1
Thereafter		£ 3.00:1

On March 6, 2012, the Company entered into Amendment No. 3 to the Credit Agreement, which provided, among other things, for (i) an increase by 175 basis points per annum of the interest rates applicable to each of outstanding Term Loan A loans and Term Loan B loans, (ii) an increase in the Company’s permitted maximum consolidated leverage ratio as set forth in the table below, (iii) an amendment to the consolidated interest coverage ratio (and corresponding definitions) to provide that consolidated interest charges included in such calculation are such charges paid in cash (as compared with the previous covenant that included non-cash interest charges), along with a decrease in the Company’s permitted minimum consolidated cash interest coverage ratio to (a) 2.00 to 1.00 through June 30, 2013, (b) 1.75 to 1.00 from September 30, 2013 through June 30, 2014 and (c) 2.00 to 1.00 thereafter, (iv) amendments to the definition of “Consolidated EBITDA,” which include the ability to add-back certain costs associated with the Company’s cost realignment and operating losses associated with certain facilities and branches closed or sold by the Company during the fourth quarter of 2011 and during 2012 and an increase in the add-back for litigation settlement costs, (v) an addition of a mechanism for the Company to make discounted prepayments of Term Loan A loans and Term Loan B loans pursuant to Dutch auction procedures, and (vi) a reduction of the revolving credit facility from $125 million to $110 million. As a condition to effectiveness of Amendment No. 3, the Company paid $50 million of the outstanding term loans under the Credit Agreement, applied ratably between the Term Loan A facility and the Term Loan B facility. The Company also paid certain fees in connection with Amendment No. 3, including a consent fee to each lender approving Amendment No. 3 in an amount equal to 0.50% of its respective term loans and revolving credit commitments. In connection with Amendment No. 3, the Company incurred costs of approximately $5.3 million. Approximately $4.1 million of these costs (including the $0.8 million associated with the revolving credit facility) have been capitalized and are being amortized over the remaining life of the debt using an effective interest rate.

The increase in Gentiva’s permitted maximum consolidated leverage ratio under Amendment No. 3 is set forth in the following table:


Four Fiscal Quarters Ending		Maximum Consolidated Leverage Ratio
March 31, 2012 to September 30, 2014		£ 6.25:1
Each fiscal quarter thereafter		£ 5.75:1

As of June 30, 2012, the Company’s consolidated leverage ratio was 4.8x and the Company’s interest coverage ratio was 2.7x.

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 thousand per incident which occurred prior to March 15, 2002 and $1 million 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 million 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 June 30, 2012 were $6.9 million as compared to $8.7 million for the six months ended June 30, 2011. 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 $14 million and $16 million for 2012. 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 $155.3 million as of June 30, 2012, including operating funds of approximately $6.4 million exclusively relating to a non-profit hospice operation managed in Florida.

The Company anticipates that repayments to Medicare for (i) payments received in excess of hospice cap limits, (ii) partial episode payments and (iii) prior year cost report settlements will be made periodically. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.

During the six months ended June 30, 2012, the Company repurchased 605,077 shares of its outstanding common stock for total consideration of approximately $5.0 million. The Company’s Credit Agreement provides for repurchases of the Company’s common stock not to exceed $5.0 million per year, and not to exceed $20.0 million per year if the consolidated leverage ratio is less than or equal to 3.5:1 immediately after giving effect on a pro forma basis to the repurchase. The indenture governing the Company’s Senior Notes also contains limitations on the Company’s repurchases of its common stock.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

As of June 30, 2012, the Company had outstanding borrowings of $938.1 million under the term loans of the senior credit facilities and the senior unsecured notes. Debt repayments, future minimum rental commitments for all non-cancelable leases and purchase obligations at June 30, 2012 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	$	613,125	$	15,443	$	50,000	$	547,682	$	—
Notes repayment		325,000		—		—		—		325,000
Interest payments (1)		393,779		77,328		150,096		110,293		56,062
Capital lease obligations		93		93		—		—		—
Operating lease obligations		127,124		42,024		56,712		20,798		7,590

Total	$	1,459,121	$	134,888	$	256,808	$	678,773	$	388,652

(1)	Long-term debt obligations include variable interest payments based on London Interbank Offered Rate (“LIBOR”) plus an applicable interest rate margin. At June 30, 2012, the cash interest rate on the Company’s term loan borrowings approximated 8.2 percent per annum.

Pursuant to Amendment No. 3, the Company made a prepayment of $12.0 million on its Term Loan A facility on March 6, 2012. There are no required payments on the Company’s Term Loan A facility until the end of the fourth quarter of 2012, at which time a principal payment of $2.9 million is required and $6.3 million per quarter thereafter. The Term Loan B facility is subject to mandatory principal payments of $13.8 million per year, payable in equal quarterly installments. Pursuant to Amendment No. 3, the Company made a prepayment of $38.0 million on its Term Loan B facility on March 6, 2012. As a result of the prepayment, there are no required payments on the Company’s Term Loan B facility until August 17, 2016, at which time a payment of the outstanding balance of $466.4 million is required.

The Company had total letters of credit outstanding of approximately $45.4 million at June 30, 2012 and $41.8 million at December 31, 2011. 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 $0.2 million at both June 30, 2012 and December 31, 2011.

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 2012 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 loans, 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, pursue the sale of certain assets or other investments or consider other 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 June 30, 2012, the total amount of outstanding debt subject to interest rate fluctuations was $613.1 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 $6.1 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.

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 June 30, 2012 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.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

Odyssey Merger Litigation

Three putative class action lawsuits were filed in connection with the Company’s 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 named the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits were 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. On October 8, 2010, the District Court consolidated the Hemminger and Pompano Beach actions and transferred the Hemminger action to County Court No. 5 in Dallas County, Texas. On October 12, 2010, Gentiva entered a general denial with respect to the material allegations in both the Pompano Beach and Hemminger complaints. On December 16, 2010, defendants in the actions executed a Memorandum of Understanding with plaintiffs reflecting an agreement in principle to settle each of the actions for additional disclosures which were included in Odyssey’s Definitive Proxy Statement on Schedule 14A, filed on July 9, 2010. Defendants also agreed not to contest an application for attorneys’ fees not to exceed $675,000 to be made by plaintiffs. On February 17, 2012, the court preliminarily approved a settlement of the Pompano Beach, Hemminger and Hansen actions. The settlement became final following court approval at a final settlement hearing on May 18, 2012.

See also Note 13 Legal Matters 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.

Corporate Integrity Agreement

Odyssey HealthCare, Inc. (“Odyssey”), a wholly-owned subsidiary of the Company, entered into a five-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General of the United States Department of Health and Human Services (“OIG”), which became effective on February 15, 2012, concurrent with the execution of a settlement agreement with the United States, acting through the United States Department of Justice and on behalf of the OIG, that resolved the investigation regarding Odyssey’s provision of continuous care services prior to the Company’s acquisition of Odyssey in August 2010. Although the covered conduct related to services prior to the Company’s acquisition of Odyssey, the CIA, for operational and organizational consistency, relates to all of the Company’s hospice operations.

Under the CIA, Odyssey must maintain its compliance officer and its compliance committee, which must be chaired by the compliance officer and meet at least quarterly. Odyssey must also provide general and special training for covered persons, which include all employees of Odyssey and certain employees of the Company and members of the Company’s Board of Directors. Odyssey must engage an accounting, audit or consulting firm to perform verification and unallowable cost reviews. In addition, Odyssey’s eligibility review team must review the eligibility of Odyssey’s Medicare beneficiaries for the hospice services those beneficiaries received and prepare an eligibility review report. In the event that Odyssey changes locations, closes a business unit or location, purchases or establishes a new business unit or location, or sells any or all of its business units or locations, Odyssey must provide the OIG with at least 30 days’ notice. Odyssey must submit to the OIG annually a report with respect to the status of, and findings regarding, Odyssey’s compliance activities. If Odyssey fails to comply with the terms of the CIA, it will be subject to penalties.

Item 1A.

Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


(c)		ISSUER PURCHASES OF EQUITY SECURITIES (1)


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) Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
April (4/1/12 - 4/30/12)		605,077	$	8.20		605,077	$	1,470,449
May (5/1/12 - 5/31/12)		—		—		—		1,470,449
June (6/1/12 - 6/30/12)		—		—		—		1,470,449

Total		605,077	$	8.20		605,077

(1)

On April 14, 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, all of such shares had been repurchased. On March 13, 2012, the Company announced that its Board of Directors had authorized the repurchase of up to $5,000,000 of shares of the Company’s outstanding common stock. As of the end of the period covered by this table, approximately $1,470,449 of shares may yet be repurchased under such authorization.

(2)	The Company also incurred a commission cost of $0.02 per share repurchased.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

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. (2)

4.1		Specimen of common stock. (3)

4.2		Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (4)

4.3		Indenture, dated August 17, 2010, by and among Gentiva, the Guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee. (5)

4.4		Form of 11.5% Senior Note (5)

10.1		Summary Sheet of Company compensation to non-employee directors, effective May 10, 2012. *

10.2		Amendment No. 1 to Employee Stock Purchase Plan, as amended. (6)

10.3		Amendment No. 3 to Stock & Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of December 31, 2007. (7)

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.**

101.INS		XBRL Instance Document.***

101.SCH		XBRL Taxonomy Extension Schema Document.***

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.***

101.DEF		XBRL Taxonomy Definition Linkbase Document.***

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document.***

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.***

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

(2)	Incorporated herein by reference to Form 8-K of Company dated and filed November 7, 2011.

(3)	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).

(4)	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).

(5)	Incorporated herein by reference to Form 8-K of Company dated and filed August 17, 2010.

(6)	Incorporated herein by reference to Appendix B to definitive Proxy Statement of Company dated and filed March 27, 2012.

(7)	Incorporated herein by reference to Appendix A to definitive Proxy Statement of Company dated and filed March 27, 2012.

*	Filed herewith

**	Furnished herewith

***

Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.

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: August 8, 2012		/s/ Tony Strange
		Tony Strange
		Chairman, Chief Executive Officer and President

Date: August 8, 2012		/s/ Eric R. Slusser
		Eric R. Slusser
		Executive Vice President,
		Chief Financial Officer and Treasurer

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. (2)

4.1		Specimen of common stock. (3)

4.2		Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (4)

4.3		Indenture, dated August 17, 2010, by and among Gentiva, the Guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee. (5)

4.4		Form of 11.5% Senior Note (5)

10.1		Summary Sheet of Company compensation to non-employee directors, effective May 10, 2012. *

10.2		Amendment No. 1 to Employee Stock Purchase Plan, as amended. (6)

10.3		Amendment No. 3 to Stock & Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of December 31, 2007. (7)

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.**

101.INS		XBRL Instance Document.***

101.SCH		XBRL Taxonomy Extension Schema Document.***

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.***

101.DEF		XBRL Taxonomy Definition Linkbase Document.***

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document.***

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.***

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

(2)	Incorporated herein by reference to Form 8-K of Company dated and filed November 7, 2011.

(3)	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).

(4)	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).

(5)	Incorporated herein by reference to Form 8-K of Company dated and filed August 17, 2010.

(6)	Incorporated herein by reference to Appendix B to definitive Proxy Statement of Company dated and filed March 27, 2012.

(7)	Incorporated herein by reference to Appendix A to definitive Proxy Statement of Company dated and filed March 27, 2012.

*	Filed herewith

**	Furnished herewith

***

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company