10-Q 1 d214425d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from             to            

Commission File No. 1-15669

 

 

Gentiva Health Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4335801

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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).

 

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

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

The number of shares outstanding of the registrant’s Common Stock, as of November 3, 2011, was 30,794,262.

 

 

 


Table of Contents

INDEX

 

     Page No.  

PART I - FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets (Unaudited) – September 30, 2011 and December 31, 2010

     3   
  

Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended

September 30, 2011 and October 3, 2010

     4   
  

Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2011 and

October 3, 2010

     5   
  

Notes to Consolidated Financial Statements (Unaudited)

     6-40   

Item 2.

  

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

     41-59   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     59   

Item 4.

  

Controls and Procedures

     59   

PART II - OTHER INFORMATION

  

Item1.

  

Legal Proceedings

     60-61   

Item 1A.

  

Risk Factors

     61-62   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     62   

Item 3.

  

Defaults Upon Senior Securities

     62   

Item 4.

  

(Removed and Reserved)

     62   

Item 5.

  

Other Information

     62   

Item 6.

  

Exhibits

     63-64   

SIGNATURES

     65   

EXHIBIT INDEX

     66-67   

 

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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)

 

     September 30, 2011     December 31, 2010  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 196,092      $ 104,752   

Accounts receivable, less allowance for doubtful accounts of $9,519 and $7,654 at September 30, 2011 and December 31, 2010, respectively

     260,275        259,588   

Deferred tax assets

     31,411        28,155   

Prepaid expenses and other current assets

     37,436        48,910   
  

 

 

   

 

 

 

Total current assets

     525,214        441,405   

Note receivable from CareCentrix

     25,000        25,000   

Investment in CareCentrix

     —          25,635   

Fixed assets, net

     46,240        85,707   

Intangible assets, net

     219,156        374,057   

Goodwill

     641,669        1,085,066   

Other assets

     82,306        83,258   
  

 

 

   

 

 

 

Total assets

   $ 1,539,585      $ 2,120,128   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 13,437      $ 25,000   

Accounts payable

     13,686        15,562   

Payroll and related taxes

     27,835        44,163   

Deferred revenue

     39,618        36,387   

Medicare liabilities

     19,510        31,236   

Obligations under insurance programs

     54,552        61,899   

Accrued nursing home costs

     21,752        24,241   

Other accrued expenses

     101,325        78,153   
  

 

 

   

 

 

 

Total current liabilities

     291,715        316,641   

Long-term debt

     994,688        1,026,563   

Deferred tax liabilities, net

     32,108        111,199   

Other liabilities

     25,766        27,493   

Equity:

    

Gentiva shareholders’ equity:

    

Common stock, $.10 par value; authorized 100,000,000 shares; issued 31,263,771 and 30,799,091 shares at September 30, 2011 and December 31, 2010, respectively

     3,127        3,080   

Additional paid-in capital

     385,241        372,106   

Accumulated other comprehensive income

     —          478   

Retained (deficit) earnings

     (182,716     272,394   

Treasury stock, 655,802 and 641,468 shares at September 30, 2011 and December 31, 2010, respectively

     (12,878     (12,484
  

 

 

   

 

 

 

Total Gentiva shareholders’ equity

     192,774        635,574   

Noncontrolling interests

     2,534        2,658   
  

 

 

   

 

 

 

Total equity

     195,308        638,232   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,539,585      $ 2,120,128   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30, 2011     October 3, 2010     September 30, 2011     October 3, 2010  

Net revenues

   $ 449,748      $ 379,681      $ 1,349,569      $ 957,642   

Cost of services sold

     242,943        185,308        707,850        451,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     206,805        194,373        641,719        505,882   

Selling, general and administrative expenses

     (182,634     (169,311     (547,005     (429,188

Goodwill, intangibles and other long-lived asset impairment

     (643,305     —          (643,305     —     

Gain on sale of assets, net

     —          —          —          103   

Dividend income

     3,977        —          8,590        —     

Interest income

     659        663        1,963        1,977   

Interest expense and other

     (21,332     (13,443     (70,305     (16,957
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes and equity in net earnings of CareCentrix, including gain on sale

     (635,830     12,282        (608,343     61,817   

Income tax benefit (expense)

     87,538        (4,599     77,007        (25,534

Equity in net earnings of CareCentrix, including gain on sale

     68,692        518        69,582        1,281   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (479,600     8,201        (461,754     37,564   

Discontinued operations, net of tax

     5,983        24        7,096        (1,095
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (473,617     8,225        (454,658     36,469   

Less: Net income attributable to noncontrolling interests

     (134     (133     (452     (133
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Gentiva shareholders

   $ (473,751   $ 8,092      $ (455,110   $ 36,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share:

        

(Loss) income from continuing operations attributable to Gentiva shareholders

   $ (15.82   $ 0.27      $ (15.27   $ 1.26   

Discontinued operations, net of tax

     0.20        —          0.23        (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Gentiva shareholders

   $ (15.62   $ 0.27      $ (15.04   $ 1.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     30,337        29,808        30,257        29,747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share:

        

(Loss) income from continuing operations attributable to Gentiva shareholders

   $ (15.82   $ 0.27      $ (15.27   $ 1.23   

Discontinued operations, net of tax

     0.20        —          0.23        (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Gentiva shareholders

   $ (15.62   $ 0.27      $ (15.04   $ 1.19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     30,337        30,438        30,257        30,547   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Gentiva shareholders:

        

(Loss) income from continuing operations

   $ (479,734   $ 8,068      $ (462,206   $ 37,431   

Discontinued operations, net of tax

     5,983        24        7,096        (1,095
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (473,751   $ 8,092      $ (455,110   $ 36,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     For the Nine Months Ended  
     September 30, 2011     October 3, 2010  

OPERATING ACTIVITIES:

    

Net (loss) income

   $ (454,658   $ 36,469   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     22,534        14,774   

Amortization and write-off of debt issuance costs

     12,857        2,054   

Provision for doubtful accounts

     5,744        7,458   

Equity-based compensation expense

     5,863        4,624   

Windfall tax benefits associated with equity-based compensation

     (194     (714

Goodwill, intangible assets and other long-lived asset impairment

     643,305        —     

Gain on sale of assets and businesses

     (9,088     (169

Equity in net earnings of CareCentrix, including gain on sale, net of tax

     (69,582     (1,281

Deferred income tax (benefit) expense

     (95,672     (5,456

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

    

Accounts receivable

     (6,431     22,132   

Prepaid expenses and other current assets

     11,055        (12,662

Accounts payable

     (1,876     4,664   

Payroll and related taxes

     (16,328     (14,458

Deferred revenue

     3,231        4,737   

Medicare liabilities

     (11,726     9,329   

Obligations under insurance programs

     (7,347     2,359   

Accrued nursing home costs

     (2,489     12,186   

Other accrued expenses

     (14,518     (70

Other, net

     (333     5,673   
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,347        91,649   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Purchase of fixed assets

     (14,571     (9,309

Proceeds from sale of assets and businesses

     142,333        8,796   

Acquisition of businesses, net of cash acquired

     (320     (834,919
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     127,442        (835,432
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Proceeds from issuance of common stock

     7,005        6,968   

Windfall tax benefits associated with equity-based compensation

     194        714   

Proceeds from issuance of debt

     —          1,075,000   

Borrowings under revolving credit facility

     —          30,000   

Repayment of borrowings under revolving credit facility

     —          (30,000

Repayment of long-term debt

     (43,438     (237,000

Repayment of Odyssey long-term debt

     —          (108,822

Debt issuance costs

     (13,457     (58,324

Repurchase of common stock

     —          (4,985

Repayment of capital lease obligations

     (210     (508

Other

     (543     —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (50,449     673,043   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     91,340        (70,740

Cash and cash equivalents at beginning of period

     104,752        152,410   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 196,092      $ 81,670   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Interest paid

   $ 69,922      $ 5,230   

Income taxes paid

   $ 9,972      $ 35,196   

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 of the Company in the first nine months of 2011 from the Healthfield escrow account to satisfy certain pre-acquisition liabilities paid by the Company.

See notes to consolidated financial statements.

 

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Gentiva Health Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

  1.   Background and Basis of Presentation

Gentiva Health Services, Inc. (“Gentiva” or the “Company”) provides home health services 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 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. See Note 4 for additional information about the disposition.

During the third quarter of 2011, the Company committed to a plan to exit its homemaker services agency business in Illinois (“IDOA”) pursuant to an asset purchase agreement and met the requirements to designate this business as held for sale in accordance with applicable accounting guidance. The financial results of this business are presented as discontinued operations in the Company’s consolidated financial statements. See Note 4 for additional information. The disposition of this business was completed on October 14, 2011. See Note 18 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.

Effective August 17, 2010, the Company completed the acquisition of 100 percent of the equity interest of Odyssey HealthCare, Inc. (“Odyssey”), one of the largest providers of hospice care in the United States, operating approximately 100 Medicare-certified providers serving terminally ill patients and their families in 30 states. In connection with the acquisition, the Company entered into a new $875 million credit agreement and issued $325 million of senior unsecured notes. See Notes 4 and 11 for additional information about the acquisition and related financing.

In February 2010, the Company consummated the sale of its respiratory therapy and home medical equipment and infusion therapy businesses (“HME and IV”). The financial results of these operating segments are reported as discontinued operations in the Company’s consolidated financial statements.

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

The accompanying interim consolidated financial statements are unaudited, and have been prepared by 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, 2010, and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the statements of financial position, results of operations and cash flows prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements.

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 operations and presented as a component of equity in the Company’s consolidated balance sheets. All material balances and transactions between the consolidated entities have been eliminated.

The third quarter and first nine months of 2011 included 92 and 273 days of activity, respectively, as compared to 91 and 273 days in the third quarter and first nine months of fiscal 2010, respectively. This difference stems from the Company’s adopting a change to calendar quarter reporting periods in 2011 from its prior 13 week reporting periods in 2010.

 

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Certain reclassifications have been made to the fiscal 2010 consolidated financial statements to conform to the current year presentation including, among other things, a reclassification to non-current deferred tax assets and goodwill as of September 30, 2011 as further described in Note 9.

 

  2.   New Accounting Standards

On September 15, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350) (ASU 2011-08), which provides final guidance on goodwill impairment that gives companies the option to perform a qualitative assessment that may allow them to skip the annual two-step test and reduce costs. ASU 2011-08 gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform the two-step test. Otherwise, a company can skip the two-step test. The ASU is effective for the year beginning January 1, 2012 for the Company. The adoption of ASU 2011-08 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, which requires health care organizations that do not assess the collectability of a receivable before recognizing revenue to present their provision for bad debt related to patient service revenue as a deduction from revenue on the face of the statement of operations. Enhanced disclosure about policies for recognizing revenue, assessing bad debts and qualitative and quantitative information about changes in the allowance for doubtful accounts also are required. The guidance is effective for the first quarter of 2012 for the Company. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in shareholders’ equity. ASU 2011-05 requires that all items of net income, items of other comprehensive income and total comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 will be required for the quarter ending on or after March 31, 2012 and must be applied retrospectively. Although the presentation of financial statements will change, the Company does not expect the adoption of ASU 2011-05 to have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 primarily clarifies existing concepts in accounting principles generally accepted in the United States of America. However, ASU 2011-04 requires new disclosures for Level 3 fair value measurements including quantitative information about significant unobservable inputs, the valuation process in place for all Level 3 measurements, and a narrative description of the sensitivity of recurring Level 3 fair value measurements to changes in the unobservable inputs used. In addition, ASU 2011-04 requires disclosure of transfers between Level 1 and Level 2 of the fair value hierarchy, the hierarchy classification for assets and liabilities whose fair value is disclosed only in the footnotes, and, if applicable, the reason nonfinancial assets measured at fair value are being used in a manner that differs from their highest and best use. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.

 

  3.   Accounting Policies

Cash and Cash Equivalents

The Company considers all investments with a maturity date of 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.

 

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The Company had operating funds of approximately $5.5 million and $6.6 million at September 30, 2011 and December 31, 2010, respectively, which exclusively relate to a non-profit hospice operation managed in Florida.

Investments

On September 19, 2011, the Company sold its remaining investment in CareCentrix Holdings Inc. The Company recorded accumulated and unpaid dividends on the preferred shares of approximately $4.0 million and $8.6 million for the third quarter and first nine months of 2011, respectively, which were reflected in dividend income in the Company’s consolidated statements of operations. The Company also recorded a net gain of approximately $68.3 million, which is reflected in equity in net earnings of CareCentrix, including gain on sale in the Company’s consolidated statements of operations. At December 31, 2010, the Company held an ownership interest of approximately 30 percent in the combined preferred and common equity of CareCentrix Holdings Inc.

Prior to the disposition of CareCentrix Holdings Inc. on September 19, 2011, the Company accounted for its investment in CareCentrix Holdings Inc. using the equity method of accounting, since the Company had the ability to exercise significant influence, but not control, over the affiliate. Significant influence was deemed to exist through the Company’s representation on CareCentrix’s Board of Directors and as a result of the Company holding a $25 million subordinated promissory note from CareCentrix, Inc. See Note 7 for additional information. The Company’s equity ownership interest in CareCentrix Holdings Inc. was recorded in investment in CareCentrix as of December 31, 2010 in the accompanying consolidated balance sheets.

At September 30, 2011 and December 31, 2010, the Company had assets of $25.0 million and $26.0 million, respectively, held in a Rabbi Trust for the benefit of participants of the Company’s non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in 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.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its senior secured credit agreement utilizing an effective interest rate methodology. The Company had unamortized debt issuance costs of $55.1 million at September 30, 2011 and $54.3 million at December 31 2010, recorded in other assets in the Company’s consolidated balance sheets. During the first quarter 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 senior secured credit agreement. See Note 11 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 September 30, 2011 and December 31, 2010, fixed assets, net were $46.2 million and $85.7 million, respectively. In connection with the Odyssey acquisition, the Company conducted a strategic evaluation of its various field operating systems to review alternatives towards achieving a comprehensive platform, capable of handling both its Home Health and Hospice business segments. During the third quarter of 2011, the Company continued to progress with its review of alternatives to replacing various field operating systems and, in connection with that review, recorded a non-cash impairment charge of approximately $40.3 million related to developed software. In addition, the Company conducted a review of real estate it owned in Dothan, Alabama which indicated that the estimated fair value of the real estate was lower than the carrying value, and recorded a non-cash impairment charge of approximately $0.9 million. These charges are recorded in goodwill, intangible assets and other long-lived asset impairment in the Company’s consolidated financial statements for the third quarter and first nine months of 2011.

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

 

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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.

The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. 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.

The Company performed the annual impairment test of goodwill and other indefinite-lived intangible assets for its operating units and the results indicated that there was no impairment for the year ended December 31, 2010. During the third quarter of 2011, the Company determined an interim impairment test was required due to changes in the Company’s business climate, including uncertainties around Medicare reimbursement as the federal government works to reduce the federal deficit, that would more likely than not reduce the fair value below its carrying amount. The results of the impairment test indicated impairment of both goodwill and intangible assets. See Note 9 for additional information.

Obligations Under Self Insurance Programs

As of September 30, 2011 and December 31, 2010, the Company’s obligations under insurance programs were $54.6 million and $61.9 million, respectively. The decrease is primarily attributable to the settlement of certain outstanding insurance obligations for less than recorded reserves and timing of payments.

Workers’ compensation and professional and general liability expenses were $5.1 million and $11.2 million for the third quarter and first nine months of 2011, respectively, as compared to $3.9 million and $12.5 million for the corresponding periods of 2010.

Employee health and welfare expenses were $24.3 million and $68.5 million for the third quarter and first nine months of 2011, respectively, as compared to $17.1 million and $41.7 million for the corresponding periods of 2010, primarily resulting from an increased number of benefit eligible employees associated with the Odyssey acquisition.

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 offset by nursing home net revenue, and the net amount is included in cost of services sold in the Company’s consolidated statements of operations.

 

  4.   Acquisitions and Dispositions

Acquisitions

Odyssey Healthcare of Augusta, LLC

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.

Odyssey HealthCare, Inc.

Effective August 17, 2010, the Company completed the acquisition of 100 percent of the equity interest of Odyssey HealthCare, Inc., a leading provider of hospice care, operating approximately 100 Medicare-certified providers in 30 states. The Company completed the acquisition of Odyssey to expand the geographic coverage of its hospice services and to further diversify the Company’s business mix. Total consideration for the acquisition was $1.087 billion, consisting of payments of approximately (i) $963.9 million for Odyssey’s equity interest, (ii) $108.8 million to repay Odyssey’s existing long-term debt and accrued interest and (iii) $14.3 million of transaction costs incurred by Odyssey.

 

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The financial results of Odyssey are included in the Company’s consolidated financial statements from the acquisition date. The following unaudited pro forma financial information presents the combined results of operations of the Company and Odyssey as if the acquisition had been effective at January 4, 2010, the beginning of the first quarter of 2010. The pro forma results presented below for the three months and nine months ended October 3, 2010 combine the results of the Company for such periods and the historical results of Odyssey from January 1, 2010 through September 30, 2010 (in thousands, except per share amounts):

 

    

For the Three Months

Ended

    

For the Nine Months

Ended

 
     October 3, 2010      October 3, 2010  

Net revenues

   $ 470,743       $ 1,396,427   

Net income

     14,206         47,050   

Earnings per common share:

     

Basic

   $ 0.48       $ 1.58   

Diluted

   $ 0.47       $ 1.54   

Weighted average shares outstanding:

     

Basic

     29,808         29,747   

Diluted

     30,438         30,547   

The pro forma results above reflect adjustments for (i) interest on debt incurred calculated using the Company’s weighted average interest rate of 7.9 percent, (ii) income tax provision using an effective tax rate of 39.9 percent, (iii) amortization of incremental identifiable intangible assets and (iv) acquisition and integration costs incurred. The information presented above is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition had occurred as of the beginning of the Company’s 2010 reporting period.

Other Acquisitions

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

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

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

Dispositions

Rehab Without Walls® Disposition

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, consisting of (i) cash proceeds of approximately $9.2 million and (ii) an escrow fund of

 

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approximately $0.6 million, to be received by the Company in two increments. Approximately $0.1 million was received on October 28, 2011 in connection with the transaction closing associated with the Utah branches and the remainder will be held for twelve months to satisfy certain post closing obligations. During the third quarter and first nine months of 2011, the Company recorded a $9.1 million pre-tax gain, net of transaction costs, in discontinued operations, net of tax, in the Company’s consolidated statements of operations. Transaction costs of $0.4 million consisted primarily of professional fees and expenses. The Rehab Without Walls® business was included within the Company’s Home Health segment.

Homemaker Services Agency Business

During the third quarter of 2011, the Company committed to a plan to exit its homemaker services agency business in Joliet and Oak Park, Illinois and met the requirements to designate this business as held for sale in accordance with applicable accounting guidance. The Company entered into an asset purchase agreement with Premier Home Health Care Services, Inc., for total consideration of approximately $2.4 million, including a deposit of $1.0 million, which was placed in escrow during the third quarter in anticipation of the closing of the transaction. The transaction closed on October 14, 2011. During the three and nine months ended September 30, 2011, the Company recorded $0.3 and $0.8 million, respectively, of net income in discontinued operations in connection with this business. The homemaker services agency business was reported within the Company’s Home Health segment.

The major classes of assets of the Rehab Without Walls® business that were sold on September 10, 2011 and the homemaker services agency business classified as held for sale at September 30, 2011 were as follows (dollars in thousands):

 

     Rehab Without  Walls®
As of Date of Sale
   IDOA
As of September  30, 2011
   December 31, 2010

Non-current assets:

              

Fixed assets, net

     $ 167        $ 16        $ 143  

Other assets

       105          4          94  
    

 

 

      

 

 

      

 

 

 

Total non-current assets

       272          20          237  
    

 

 

      

 

 

      

 

 

 

Total

     $ 272        $ 20        $ 237  
    

 

 

      

 

 

      

 

 

 

The Company retained accounts receivable, net associated with Rehab Without Walls® of approximately $2.8 million as of the date of sale and $3.5 million at December 31, 2010. The Company retained accounts receivable, net associated with the homemaker services agency business of approximately $2.6 million at September 30, 2011 and $4.9 million at December 31, 2010. There were no liabilities classified as held for sale as the Company did not transfer any pre-closing liabilities in connection with the transactions.

Net revenues and operating results for the periods presented for Rehab Without Walls® and the homemaker services agency business were as follows (dollars in thousands):

 

     Third Quarter     First Nine Months  
         2011             2010             2011             2010      

Net revenues

   $ 6,699      $ 8,152      $ 22,636      $ 24,421   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 840      $ 1,081      $ 2,968      $ 3,069   

Gain on sale of business

     9,088        —          9,088        —     

Income tax expense

     (3,945     (397     (4,790     (1,219
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of tax

   $ 5,983      $ 684      $ 7,266      $ 1,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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HME and IV Businesses Disposition

Effective February 1, 2010, the Company completed the sale of its HME and IV businesses to a subsidiary of Lincare Holdings, Inc., pursuant to an asset purchase agreement, for total consideration of approximately $16.4 million, consisting of (i) cash proceeds of approximately $8.5 million, (ii) approximately $2.5 million associated with operating and capital lease buyout obligations, (iii) an escrow fund of $5.0 million, which was recorded at estimated fair value of $3.2 million, to be received by the Company based on achieving a cumulative cash collections target for claims for services provided for a period of one year from the date of closing and (iv) an escrow fund of approximately $0.4 million for reimbursement of certain post closing liabilities. During the first nine months of 2010, the Company recorded a $0.1 million pre-tax gain, net of transaction costs in discontinued operations, net of tax, in the Company’s consolidated statements of operations. Transaction costs of $0.7 million consisted primarily of professional fees and expenses. During the fourth quarter of 2010, the Company received $1.0 million in settlement of the escrow fund associated with cash collections and recorded a $2.2 million charge in discontinued operations, net of tax. During the first nine months of 2011, the Company received $0.1 million of the escrow fund for settlement of post closing liabilities and recorded a charge of $0.3 million, in discontinued operations, net in the Company’s consolidated statements of operations.

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

 

     Third Quarter     First Nine Months  
     2010         2011             2010      

Net revenues

   $ —        $ —        $ 3,956   
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

   $ (1,175   $ (282   $ (6,607

Gain on sale of business

     —          —          66   

Income tax benefit

     515        112        3,596   
  

 

 

   

 

 

   

 

 

 

Discontinued operations, net of tax

   $ (660   $ (170   $ (2,945
  

 

 

   

 

 

   

 

 

 

Other Asset Disposition

Effective January 30, 2010, the Company sold assets associated with a home health branch operation in Iowa for cash consideration of approximately $0.3 million and recognized a gain of approximately $0.1 million recorded in gain on sale of assets, net in the Company’s consolidated statement of operations for the nine months ended October 3, 2010.

 

  5.   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, long-term debt and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and adjustments recorded only if an impairment charge is required. The carrying amount of the Company’s accounts receivable, accounts payable and certain other current liabilities approximates fair value due to their short maturities.

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

 

   

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

 

   

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

 

   

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

 

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Financial Instruments Recorded at Fair Value

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

 

     September 30, 2011      December 31, 2010  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  

Assets:

                       

Money market funds

   $ 36,993       $ —         $ —         $ 36,993       $ 49,478       $ —         $ —         $ 49,478   

Rabbi Trust:

                       

Mutual funds

     19,256         —           —           19,256         25,422         —           —           25,422   

Money market funds

     5,771         —           —           5,771         610         —           —           610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 62,020       $ —         $ —         $ 62,020       $ 75,510       $ —         $ —         $ 75,510   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                       

Payables to plan participants

   $ 25,027       $ —         $ —         $ 25,027       $ 26,032       $ —         $ —         $ 26,032   

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 September 30, 2011 and December 31, 2010.

Other Financial Instruments

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

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Assets:

           

Note receivable from CareCentrix

   $ 25,000       $ 26,200       $ 25,000       $ 27,300   

Liabilities:

           

Long-term debt, including current portion

   $ 1,008,125       $ 839,206       $ 1,051,563       $ 1,093,588   

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 7 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 utilizes 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, until March 9, 2011, (ii) 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

 

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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 senior secured 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 income for the nine months ended September 30, 2011. See Note 11 for additional information.

While the Company utilizes the derivatives to help manage its risk, the derivatives are subject to the risk that the counterparties are unable to perform under the terms of the swap agreement. The Company executed the derivatives with various counterparties that are well known major financial institutions. The Company has monitored the creditworthiness of its counterparties and based on this analysis considers nonperformance by its counterparties to be unlikely.

In accordance with applicable guidance, the derivative instruments are recorded at fair value on the Company’s consolidated balance sheet. Changes in the fair value of the derivatives are reported in Gentiva shareholders’ equity in accumulated other comprehensive income until earnings are affected by the hedged item. The effectiveness of the Company’s derivatives was assessed at inception and is assessed on an ongoing basis, with any ineffective portion of the designated hedge reported currently in earnings. As of December 31, 2010, the Company had unrealized gains on the derivatives of $0.5 million recorded in accumulated other comprehensive income.

 

  6.   Net Revenues and Accounts Receivable

Net revenues by major payer classification were as follows (in millions):

 

     Third Quarter     First Nine Months  
     2011      2010      Percentage
Variance
    2011      2010      Percentage
Variance
 

Medicare:

                

Home Health

   $ 200.3       $ 205.4         (2.5 %)    $ 601.7       $ 620.4         (3.0 %) 

Hospice

     182.0         107.5         69.2     543.0         145.2         274.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Medicare

     382.3         312.9         22.2     1,144.7         765.6         49.5

Medicaid and Local Government

     21.2         19.3         10.2     63.2         51.9         21.7

Commercial Insurance and Other:

                

Paid at episodic rates

     19.3         22.0         (12.1 %)      58.1         64.2         (9.5 %) 

Other

     26.9         25.5         5.5     83.6         75.9         10.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Commercial Insurance and Other

     46.2         47.5         (2.7 %)      141.7         140.1         1.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 449.7       $ 379.7         18.5   $ 1,349.6       $ 957.6         40.9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the third quarter and first nine months of 2011, the Company recorded hospice Medicare cap expense of $1.7 million and $3.4 million, respectively, which is reflected in net revenues in the Company’s consolidated statements of operations. For both the third quarter and first nine months of 2010, the Company recorded hospice Medicare cap expense of $1.7 million, which is reflected in net revenues in the Company’s consolidated statements of operations. The 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 a twelve month period cannot exceed the aggregate Medicare payment cap. As of September 30, 2011 and December 31, 2010, the Company had Medicare cap liabilities of $14.8 million and $15.4 million, respectively, which was reflected in Medicare liabilities in the Company’s consolidated balance sheets.

 

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

 

     September 30, 2011     December 31, 2010  

Medicare

   $ 188,942      $ 186,621   

Medicaid and Local Government

     41,263        36,096   

Commercial Insurance and Other

     39,589        44,525   
  

 

 

   

 

 

 

Gross Accounts Receivable

     269,794        267,242   

Less: Allowance for doubtful accounts

     (9,519     (7,654
  

 

 

   

 

 

 

Net Accounts Receivable

   $ 260,275      $ 259,588   
  

 

 

   

 

 

 

The Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $2.5 million and $2.6 million as of September 30, 2011 and December 31, 2010, respectively.

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 September 30, 2011 and December 31, 2010, the Company had no allowances for credit losses.

 

  7.   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 remaining 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 operations, amounted to $0.7 million and $0.6 million for the third quarter of 2011 and 2010, respectively, and $2.0 million and $1.9 million for the first nine months of 2011 and 2010, respectively.

The Company recognized approximately $0.4 million and $1.3 million of equity in the net earnings of CareCentrix for the third quarter and first nine months of 2011, respectively, and $0.5 million and $1.3 million for the corresponding periods of 2010. At December 31, 2010, the Company held an approximate 30 percent ownership interest in the combined preferred and common equity of CareCentrix Holdings Inc.

Effective September 19, 2011, the Company sold its remaining investment in CareCentrix Holdings. The Company recorded accumulated and unpaid dividends on the preferred shares of approximately $4.0 million and $8.6 million for the third quarter and first nine months of 2011, respectively, which were reflected in dividend income in the Company’s consolidated statements of operations. The Company also recorded a net gain of approximately $68.3 million, including an escrow of approximately $10.6 million, which is reflected in equity in net earnings of CareCentrix, including gain on sale in the Company’s consolidated statements of operations.

During the first nine months of 2010, the Company recorded a receivable from CareCentrix of $1.8 million in connection with the tax impact of settlement charges relating to the settlement of a commercial contractual dispute involving CareCentrix. In connection with the sale of the Company’s investment in CareCentrix Holdings, the Company received the $1.8 million. See Note 8 for additional information.

 

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

During the third quarter and first nine months of 2011, the Company recorded charges relating to cost savings initiatives, acquisition and integration activities, other restructuring and legal settlements of $9.8 million and $34.9 million, respectively, and $22.8 million and $40.7 million for the corresponding periods in 2010, which were recorded in selling, general and administrative expenses in the Company’s consolidated statements of operations.

Cost Savings Initiatives

During the third quarter of 2011, the Company undertook a comprehensive review of its branch structure, support infrastructure and other significant spend areas in order to reduce its ongoing operating costs given the challenging rate environment the Company is facing. As a result of this effort, the Company has announced (i) the closing or divestiture of 33 home health branches and 9 hospice branches and (ii) significant reductions in staffing levels in regional, area and corporate support functions. In connection with these activities, the Company expects to record charges of $20 million to $25 million in the fourth quarter of 2011, related to severance costs, facility lease and other costs. During the third quarter and first nine months of 2011, the Company recorded charges of $0.8 million in connection with these cost savings initiatives.

Acquisition and Integration Activities

During the third quarter and first nine months of 2011, the Company recorded charges of $2.5 million and $7.3 million, respectively, compared to $21.5 million and $23.5 million during the third quarter and first nine months of 2010, 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. Additional acquisition and integration costs to be incurred during 2011 primarily relate to the Odyssey acquisition and are expected to range between $1.0 million and $2.0 million for the remainder of 2011.

Other Restructuring

During the first nine months of 2011, the Company recorded charges of $1.8 million, as compared to $1.3 million for the third quarter of 2010 and $3.5 million for the first nine months of 2010, in connection with other 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 and $0.6 million, recorded in the first nine months of 2011 and 2010, respectively, 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.

Legal Settlements

During the third quarter and first nine months of 2011, the Company recorded charges of $6.5 million and $25.0 million, respectively, related to discussion of potential legal settlements associated with certain of the investigations assumed in connection with the Odyssey transaction. See Note 14 for additional information.

During the first nine months of 2010, the Company recorded legal settlements of $13.7 million consisting of (i) settlement costs and legal fees of $4.2 million related to a three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix, and (ii) incremental charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the federal government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods. The settlement costs related to CareCentrix reflect a tax benefit of $1.8 million which was reimbursed to the Company from CareCentrix during the third quarter of 2011. Such benefit was classified in prepaid expenses and other current assets in the Company’s consolidated balance sheet as of December 31, 2010. See Note 14 for additional information.

 

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

 

     Cost Savings
Initiatives
  Acquisition
& Integration
  Other
Restructuring
  Legal
Settlements
  Total

Ending balance at January 3, 2010

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

Charge in first quarter 2010

       —           —           357         15,134         15,491  

Cash expenditure

       —           —           (396 )       (751 )       (1,147 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at April 4, 2010

       —           —           607         17,383         17,990  

Charge in second quarter 2010

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

Cash expenditure

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

Non-cash expenditures

       —           —           (577 )       1,800         1,223  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at July 4, 2010

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

Charge in third quarter 2010

       —           21,451         1,313         —           22,764  

Cash expenditure

       —           (17,860 )       (998 )       —           (18,858 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at October 3, 2010

     $ —         $ 5,154       $ 1,911       $ 12,521       $ 19,586  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at December 31, 2010

     $ —         $ 3,984       $ 2,893       $ 12,500       $ 19,377  

Charge in first quarter 2011

       —           2,506         1,259         —           3,765  

Cash expenditure

       —           (2,346 )       (1,490 )       —           (3,836 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at March 31, 2011

       —           4,144         2,662         12,500         19,306  

Charge in second quarter 2011

       —           2,242         504         18,500         21,246  

Cash expenditure

       —           (2,198 )       (788 )       (12,500 )       (15,486 )

Non-cash expenditures

       —           —           (407 )       —           (407 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at June 30, 2011

       —           4,188         1,971         18,500         24,659  

Charge in third quarter 2011

       824         2,520         —           6,500         9,844  

Cash expenditure

       (265 )       (1,491 )       (445 )       —           (2,201 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending balance at September 30, 2011

     $ 559       $ 5,217       $ 1,526       $ 25,000       $ 32,302  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The balance of unpaid charges relating to cost savings initiatives, acquisition and integration activities, other restructuring and legal settlements approximated $32.3 million at September 30, 2011, which were included in other accrued expenses in the Company’s consolidated balance sheets. The balance of unpaid charges relating to acquisition and integration activities and other restructuring approximated $6.9 million at December 31, 2010, which were included in other accrued expenses in the Company’s consolidated balance sheets. Unpaid charges associated with the government subpoena and investigation were included in Medicare liabilities in the Company’s consolidated balance sheets and aggregated $12.5 million at December 31, 2010, which was paid in the second quarter of 2011. See Note 14 for additional information.

 

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  9.   Identifiable Intangible Assets and Goodwill

During the third quarter of 2011, the Company determined a triggering event had occurred and performed an interim impairment test of its identifiable intangible assets and goodwill. The triggering event was the change in business climate, including uncertainties around Medicare reimbursement as the federal government works to reduce the federal deficit. The impairment assessment was completed as of August 31, 2011. The interim test concluded that the fair value of certain identifiable intangible assets, as well as goodwill, was less than their carrying value as of that date. The Company utilized a discounted cash flow approach to determine fair values. The Company then determined the implied fair value of goodwill by determining the fair value of all assets and liabilities. As a result of this process, the Company recorded a non-cash charge of approximately $602.1 million to reduce the carrying value of certain identifiable intangible assets, as well as goodwill, to their estimated fair values. The impairment loss is included within goodwill, intangibles and other long-lived assets impairment in the Company’s consolidated statements of operations.

The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of September 30, 2011 and December 31, 2010 were as follows (in thousands):

 

     September 30, 2011     December 31, 2010        
     Home                 Home                 Useful  
     Health     Hospice     Total     Health     Hospice     Total     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

     (1,294     (7,531     (8,825     (1,253     (2,671     (3,924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net covenants not to compete

     179        8,144        8,323        220        13,004        13,224     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Customer relationships

     27,196        910        28,106        27,196        910        28,106        5-10 Years   

Less: accumulated amortization

     (13,619     (276     (13,895     (11,456     (208     (11,664  

          impairment

     (27     —          (27     —          —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net customer relationships

     13,550        634        14,184        15,740        702        16,442     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Tradenames

     18,215        16,730        34,945        18,215        16,730        34,945        5-10 Years   

Less: accumulated amortization

     (10,099     (1,925     (12,024     (8,702     (663     (9,365  

          impairment

     (411     —          (411     —          —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net tradenames

     7,705        14,805        22,510        9,513        16,067        25,580     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Subtotal

     21,434        23,583        45,017        25,473        29,773        55,246     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Indefinite-lived intangible assets:

              

Medicare licenses and certificates of need

     220,285        98,526        318,811        220,285        98,526        318,811        Indefinite   

Less: impairment

     (144,672     —          (144,672     —          —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net medicare licenses and certificates of need

     75,613        98,526        174,139        220,285        98,526        318,811     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total identifiable intangible assets

   $ 97,047      $ 122,109      $ 219,156      $ 245,758      $ 128,299      $ 374,057     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

The Company recorded amortization expense of approximately $3.3 million and $9.8 million for the third quarter and first nine months of 2011, respectively, and $2.3 million and $4.8 million for the corresponding periods of 2010. The estimated amortization expense for the remainder of 2011 is $3.2 million and for each of the next five succeeding years approximates $11.4 million for 2012, $7.6 million for 2013, $5.8 million for 2014, $5.6 million for 2015, and $3.4 million for 2016.

The gross carrying amount of goodwill as of December 31, 2010 and September 30, 2011 and activity during the first nine months of 2011 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   

Less: impairment

     (263,370     (193,667     (457,037
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 3,688      $ 637,981      $ 641,669   
  

 

 

   

 

 

   

 

 

 

 

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During the third quarter of 2011, the Company reclassified deferred tax assets by $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 divisions of $2.4 million and $11.2 million, respectively, and a decrease in non-current deferred tax assets of $13.6 million.

 

  10.   Earnings Per Share

Basic and diluted earnings per share for each period presented have been computed by dividing net (loss) 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 Nine Months Ended  
     September 30, 2011     October 3, 2010      September 30, 2011     October 3, 2010  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income attributable to Gentiva shareholders

   $ (473,751   $ 8,092       $ (455,110   $ 36,336   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average common shares outstanding

     30,337        29,808         30,257        29,747   

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

     —          630         —          800   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     30,337        30,438         30,257        30,547   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per common share:

         

Net (loss) income attributable to Gentiva shareholders

   $ (15.62   $ 0.27       $ (15.04   $ 1.22   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per common share:

         

Net (loss) income attributable to Gentiva shareholders

   $ (15.62   $ 0.27       $ (15.04   $ 1.19   
  

 

 

   

 

 

    

 

 

   

 

 

 

For the third quarter and first nine months of 2011, due to the anti-dilutive effect on loss from continuing operations, discontinued operations and net loss for these periods excluded the effect of (i) 6.7 million and 5.1 million stock options, respectively, and (ii) 0.2 million of shares for both the third quarter and first nine months of 2011, issuable under stock plans for employees and directors using the treasury stock method.

For the third quarter and first nine months of 2010, approximately 3.0 million and 2.9 million stock options were excluded for the third quarter and first nine months of 2010, respectively, as their inclusion would be anti-dilutive.

 

  11.   Long-Term Debt

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 $125 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 September 30, 2011 and December 31, 2010, the Company’s long-term debt consisted of the following (in thousands):

 

     September 30, 2011     December 31, 2010  

Credit Agreement:

    

Term Loan A, maturing August 17, 2015

   $ 163,437      $ 180,000   

Term Loan B, maturing August 17, 2016

     519,688        546,563   

11.5% Senior Notes due 2018

     325,000        325,000   
  

 

 

   

 

 

 

Total debt

     1,008,125        1,051,563   

Less: current portion of long-term debt

     (13,437     (25,000
  

 

 

   

 

 

 

Total long-term debt

   $ 994,688      $ 1,026,563   
  

 

 

   

 

 

 

 

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Advances under the revolving credit facility may be made, and letters of credit may be issued, up to the $125 million borrowing capacity of the facility at any time prior to the facility expiration date of August 17, 2015. Outstanding letters of credit were $41.8 million at September 30, 2011 and $54.6 million at December 31, 2010. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of September 30, 2011, the Company’s unused and available borrowing capacity under the Credit Agreement was $83.2 million.

As of September 30, 2011, the mandatory aggregate principal payments of long-term debt are $20.3 million in 2012 and $38.8 million in each of the years 2013 and 2014, $107.5 million in 2015 and $802.7 million thereafter. There are no mandatory aggregate principal payments of long-term debt remaining in 2011. The weighted average cash interest rate on outstanding borrowings was 6.9 percent per annum at September 30, 2011 and 8.2 percent per annum at December 31, 2010.

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. During the nine months ended September 30, 2011, the Company made prepayments totaling $16.6 million on its Term Loan A facility. There are no required payments on the Company’s Term Loan A facility until the end of the first quarter of 2012, at which time a principal payment of $0.9 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, with the remaining balance of the original $550 million loan payable on August 17, 2016. During the third quarter and first nine months of 2011, the Company made prepayments totaling $16.6 million on its Term Loan B facility. There are no required payments on the Company’s Term Loan B facility until the end of the fourth quarter of 2012, at which time a principal payment of $0.6 million is required and $3.4 million per quarter, thereafter.

On March 9, 2011, the Company entered into a First Refinancing Amendment to the Credit Agreement (the “Amendment”), 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.

 

     Amended Applicable Rate     Previous Applicable Rate  
Consolidated    Eurodollar Rate     Base Rate     Eurodollar Rate     Base Rate  

Leverage Ratio

   Term A Facility     Term A Facility     Term A Facility     Term A Facility  

>3.0:1

     3.25     2.25     5.00     4.00

>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

In addition, the Amendment 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 ratios of 2.75 to 1.00.

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. Subsequent to March 9, 2011, the interest rate on Term Loan A borrowings was 4.50 percent and Term Loan B borrowings was 4.75 percent. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility.

 

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The Company’s Credit Agreement, in effect prior to the adoption of the Amendment, 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 the refinancing, 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 operations for the nine months ended September 30, 2011.

Gentiva 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, 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 operations for the nine months ended September 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, the Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio as shown in the table below and a minimum interest coverage ratio of 2.25 to 1.00 and also contains certain customary affirmative covenants and events of default. As of September 30, 2011, the Company was in compliance with all covenants in the Credit Agreement.

The maximum consolidated leverage ratio is as follows:

 

     Maximum Consolidated

For the period

   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

As of September 30, 2011, the Company’s consolidated leverage ratio was 4.4x and the Company’s interest coverage ratio was 2.6x.

While the Company was in compliance with all covenants in the Credit Agreement at September 30, 2011, the Company is currently in negotiations with its lenders under the Credit Agreement to obtain a waiver of compliance with its financial covenants or an amendment of its Credit Agreement for the fourth quarter of 2011. In response to changes in the Company’s business climate and uncertainties involving Medicare reimbursement as the federal government works to reduce the federal deficit, the Company is currently undergoing cost savings initiatives in order to reduce its ongoing operating costs. These initiatives include (i) the closing or divestiture of 33 home health branches and 9 hospice branches and (ii) significant reductions in staffing levels in regional, area and corporate support functions. In connection with these activities, the Company expects to record charges of $20 million to $25 million in the fourth quarter of 2011, related to severance costs, facility lease and other costs. As such, absent any changes, the Company will be out of compliance with the maximum consolidated leverage ratio in the Credit Agreement, which reduces to 4.5x for such quarter and therefore, in default. In addition, based on reductions in Medicare reimbursement for 2012 and possible outcomes from the Super Committee (a select group of 12 members of both the U.S. House of Representatives and U.S. Senate created under the Budget Control Act of 2011) working on proposals to further reduce federal deficit spending, the Company anticipates that it will be further out of compliance with its financial covenants under the Credit Agreement in 2012. If the Company does not meet its financial covenants and is unable to obtain a waiver or amendment of its Credit Agreement or other permitted remedies, the Company would default under its Credit Agreement which would allow its lenders to accelerate the amounts the Company owes under its Credit Agreement, or avail themselves of other remedies under the Credit Agreement, including foreclosure on the collateral securing its debt.

 

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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 liable 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 September 30, 2011 and December 31, 2010, long-term capital lease obligations were $0.1 million and $0.2 million, respectively, and were recorded in other liabilities on the Company’s consolidated balance sheets. The current portion of obligations under capital leases was $0.2 million and $0.3 million at September 30, 2011 and December 31, 2010, respectively, and was recorded in other accrued expenses on the Company’s consolidated balance sheets.

 

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  12.   Equity

Changes in equity for the nine months ended September 30, 2011 and October 3, 2010 were as follows (in thousands, except share amounts):

 

    Gentiva Shareholders              
                Additional                          
    Common Stock     Paid-in     Retained     Treasury     Noncontrolling        
    Shares     Amount     Capital     Earnings     Stock     Interests     Total  

Balance at January 3, 2010

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

Comprehensive income:

             

Net income

    —          —          —          36,336        —          133        36,469   

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

    —          —          971        —          —          —          971   

Equity-based compensation expense

    —          —          4,527        —          —          —          4,527   

Other non-cash compensation expense

    —          —          577        —          —          —          577   

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

    519,247        52        7,017        —          —          —          7,069   

Acquisition of capital contribution to noncontrolling interests

    —          —          —          —          —          2,410        2,410   

Stock repurchase (175,000 shares)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 3, 2010

    30,456,140      $ 3,046      $ 368,521      $ 256,575      $ (12,484   $ 2,543      $ 618,201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Gentiva Shareholders              
    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Noncontrolling
Interests
    Total  
    Shares     Amount              

Balance at December 31, 2010

    30,799,091      $ 3,080      $ 372,106      $ 272,394      $ 478      $ (12,484   $ 2,658      $ 638,232   

Comprehensive (loss) income:

               

Net (loss) income

    —          —          —          (455,110     —          —          452        (454,658

Unrealized loss on interest rate swap

    —          —          —          —          (768     —          —          (768

Realized loss on interest rate swap

    —          —          —          —          290        —          —          290   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    —          —          —          (455,110     (478     —          452        (455,136

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

    —          —          259        —          —          —          —          259   

Equity-based compensation expense

    —          11        6,259        —          —          —          —          6,270   

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

    464,680        36        6,969        —          —          —          —          7,005   

Purchase of non-controlling interest

    —          —          (352     —          —          —          32        (320

Distribution to partnership interests

    —          —          —          —          —          —          (608     (608

Treasury shares:

               

Common stock received from Healthfield escrow (14,334 shares)

    —          —          —          —          —          (394     —          (394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    31,263,771      $ 3,127      $ 385,241      $ (182,716   $ —        $ (12,878   $ 2,534      $ 195,308   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss amounted to $473.6 million and $455.1 million for the third quarter and first nine months of 2011, respectively, as compared to comprehensive income of $8.1 million and $36.5 million for the third quarter and first nine months of fiscal 2010, respectively. During the first nine months of 2011, the Company purchased the noncontrolling interest in one of the Company’s hospice programs for $0.3 million.

The Company has an authorized stock repurchase program under which the Company can repurchase and retire up to 1,500,000 shares of its outstanding common stock. The repurchases can occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During the nine months ended September 30, 2011, the Company did not repurchase shares of its outstanding common stock. As of September 30, 2011, the Company had remaining authorization to repurchase an aggregate of 180,568 shares of its outstanding common stock. The Company’s Credit Agreement and the indenture governing the Senior Notes provide for repurchases of the Company’s common stock not to exceed $5.0 million per year, and not to exceed $10.0 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.

 

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  13.   Equity-Based Compensation Plans

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

On May 12, 2011, the shareholders of the Company authorized an additional 2,100,000 shares of the Company’s common stock for issuance under the 2004 Plan.

For the third quarter and first nine months of 2011, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $1.9 million and $5.9 million, respectively, as compared to $1.4 million and $4.6 million for the corresponding periods of fiscal 2010, which were reflected as selling, general and administrative expense in the consolidated statements of operations. During the first nine months of 2011, the Company recorded non-cash compensation expense of approximately $0.4 million associated with modifications of stock options for a former executive. During the first nine months of fiscal 2010, the Company recorded non-cash compensation expense of approximately $0.6 million associated with the acceleration of compensation expense relating to future vesting of stock options under severance agreements for certain of the Company’s former executive officers, which is reflected as selling, general and administrative expense in the consolidated statement of operations and is categorized as other restructuring costs. See Note 8 for additional information.

Stock Options

The weighted-average fair values of the Company’s stock options granted during the first nine months of 2011 and fiscal 2010, calculated using the Black-Scholes option pricing model and other assumptions, were as follows:

 

     Nine Months Ended  
     September 30, 2011     October 3, 2010  

Weighted average fair value of options granted

   $ 11.30      $ 10.82   

Risk-free interest rate

     2.15     2.66

Expected volatility

     44     43

Contractual life

     7 years        7 years   

Expected life

     4.5 -6.5 years        4.5 -6.5 years   

Expected dividend yield

     0     0

Stock option grants in 2011 vest over a three-year period based on a vesting schedule that provides for one-third vesting after each year. Stock option grants in 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.

 

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A summary of Gentiva stock option activity as of September 30, 2011 and changes during the nine 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, 2010

     2,981,354      $ 19.94         

Granted

     185,100        26.60         

Exercised

     (202,384     18.25         

Cancelled

     (72,588     19.39         
  

 

 

   

 

 

       

Balance as of September 30, 2011

     2,891,482      $ 20.50         5.4       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable options

     2,011,307      $ 18.39         4.9       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

The total intrinsic value of options exercised during the nine months ended September 30, 2011 and October 3, 2010 was $1.9 million and $3.9 million, respectively. The Company’s outstanding stock options hold no intrinsic value as of September 30, 2011. As of September 30, 2011, the Company had $2.5 million of unrecognized compensation expense related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.3 years. The total estimated fair value of options that vested during the first nine months of 2011 was $4.6 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 the three-year performance 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.

A summary of Gentiva performance share unit activity as of September 30, 2011 is presented below:

 

     Number of
Performance
Share Units
    Weighted-
Average
Exercise
Price
 

Balance as of December 31, 2010

     36,200      $ 25.61   

Granted

     98,600        26.60   

Exercised

     —          —     

Earned

     (11,770     25.61   

Cancelled

     (2,900     26.36   
  

 

 

   

 

 

 

Balance as of September 30, 2011

     120,130      $ 26.40   
  

 

 

   

 

 

 

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 September 30, 2011, the Company had $1.7 million of total unrecognized compensation cost related to performance share units. This compensation expense is expected to be recognized over a weighted-average period of 2.1 years.

 

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Restricted Stock

A summary of Gentiva restricted stock activity as of September 30, 2011 is presented below:

 

     Number of
Restricted
Shares
    Weighted-
Average
Exercise
Price
     Aggregate
Intrinsic
Value
 

Balance as of December 31, 2010

     281,350      $ 24.92      

Granted

     114,500        26.61      

Exercised

     —          —        

Cancelled

     (4,100     26.17      
  

 

 

   

 

 

    

Balance as of September 30, 2011

     391,750      $ 25.33       $ 2,162,460   
  

 

 

   

 

 

    

 

 

 

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 September 30, 2011, the aggregate intrinsic value of the restricted stock awards was $2.2 million and the Company had $6.2 million of total unrecognized compensation cost related to restricted stock. This compensation expense is expected to be recognized over a weighted-average period of 3.3 years.

Directors Deferred Share Units

Under the Company’s Stock & Deferred Compensation Plan for Non-Employee Directors, each non-employee director receives an annual deferred stock unit award credited quarterly and paid in shares of the Company’s common stock following termination of the director’s service on the Board of Directors. During the first nine months of 2011, the Company granted 49,390 stock units under the Stock & Deferred Compensation Plan for Non-Employee Directors at a grant date weighted-average fair value of $13.22 per share unit. As of September 30, 2011, 157,474 share units were outstanding under the plan.

Employee Stock Purchase Plan

The Company provides an ESPP under which the offering period is three months and the purchase price of shares is equal to 85 percent of the fair market value of the Company’s common stock on the last day of the three-month offering period. All employees of the Company are eligible to purchase stock under the ESPP regardless of their actual or scheduled hours of service. During the first nine months of 2011, the Company issued 283,601 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.

 

  14.   Legal Matters

Litigation

In addition to the matters referenced in this Note 14, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Management does not expect that these other legal actions will have a material adverse effect on the business, 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 allege continuing violations of federal and state law and seek damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act. On October 8, 2010, the Court granted the Company’s motion to

 

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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. Plaintiffs seek class certification of allegedly similar employees and seek attorneys’ fees, back wages and liquidated damages going back three years under the FLSA, six years under the New York statute and two years under the North Carolina statute.

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

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

Odyssey Merger Litigation

Three putative class action lawsuits have been 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 name the Company, GTO Acquisition Corp., Odyssey and the members of Odyssey’s board of directors as defendants. All three lawsuits are brought by purported stockholders of Odyssey, both individually and on behalf of a putative class of stockholders, alleging that Odyssey’s board of directors breached its fiduciary duties in connection with the Merger by failing to maximize shareholder value and that the Company and Odyssey aided and abetted the alleged breaches. On September 28, 2010, plaintiff in the Hemminger action filed a motion for consolidation in the District Court, seeking to consolidate the Hemminger action with the Pompano Beach action. On October 8, 2010, the District Court granted plaintiff’s motion to consolidate 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 (“MOU”) with plaintiffs Pompano Beach Police & Firefighters’ Retirement System, Eric Hemminger and John O. Hansen 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 to be made by plaintiffs, which application shall not exceed $675,000. The settlement remains subject to notice to the putative class and court approval.

Federal Securities Class Action Litigation

On November 2, 2010, a putative shareholder class action complaint, captioned Endress v. Gentiva Health Services, Inc. et al., Civil Action No. 10-CV-5064, was filed in the United States District Court for the Eastern District of New York. The action, which names Gentiva and certain current and former officers as defendants, asserts 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”). The complaint alleges 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 July 20, 2010. On January 21, 2011, the Minneapolis Police Relief Association (the

 

27


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“MPRA”) moved to intervene as a named plaintiff in the action and further requested that, to the extent its motion was granted, the Court appoint it lead plaintiff. On February 7, 2011, the defendants filed a limited objection to the motion to intervene and, on February 17, 2011, the MPRA responded. On July 19, 2011, the Court granted the MPRA’s motion to intervene as a named plaintiff, but denied, without prejudice, its request to be appointed lead plaintiff. On July 25, 2011, plaintiff Endress filed a motion seeking to withdraw as plaintiff, and the MPRA renewed its motion seeking to be appointed lead plaintiff.

On September 14, October 11, October 20 and October 25, 2011, four additional putative shareholder class action complaints, captioned Cement Masons & Plasterers Joint Pension Trust v. Gentiva Health Services, Inc. et al., Civil Action No. 11-CV-4433, International Union of Operating Engineers Pension Fund of Eastern Pennsylvania and Delaware v. Gentiva Health Services, Inc. et al., Civil Action No. 11-CV-4906, Arkansas Teacher Retirement System v. Gentiva Health Services, Inc. et al., Civil Action No. 11-CV-5126, and Douglas Dahlgard v. Gentiva Health Services, Inc. et al., Civil Action No. 11-CV-5199, respectively, were filed in the United States District Court for the Eastern District of New York. Like the Endress action, the Cement Masons, International Union, Arkansas Teacher, and Dahlgard actions name Gentiva and certain current and former officers as defendants, and assert 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 HH PPS. The complaints allege 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 July 20, 2010 (Cement Masons), July 31, 2008 and September 30, 2011 (International Union and Arkansas Teacher), and July 31, 2008 and October 4, 2011 (Dahlgard).

On October 5, 2011, the Cement Masons & Plasterers Joint Pension Trust (“Cement Masons”) requested that the Court consolidate the Cement Masons action with the Endress action and further requested that the Court appoint Cement Masons lead plaintiff. On October 11, 2011, the International Union of Operating Engineers Pension Fund of Eastern Pennsylvania and Delaware (“International Union”) requested consolidation of the Cement Masons action and the International Union action with the Endress action and further requested that the Court appoint International Union lead plaintiff. On October 20, 2011, the Arkansas Teacher Retirement System (“Arkansas Teacher”) requested consolidation of the Cement Masons, International Union and Arkansas Teacher actions with the Endress action and further requested that the Court appoint Arkansas Teacher lead plaintiff. On October 27, 2011, Douglas Dahlgard (“Dahlgard”) requested consolidation of the Cement Masons, International Union, Arkansas Teacher and Dahlgard actions with the Endress action and further requested that the Court appoint Dahlgard lead plaintiff.

On November 2, 2011, the Court (i) granted plaintiff Endress’ motion to withdraw as plaintiff; (ii) ordered the consolidation of the Endress, Cement Masons, International Union, Arkansas Teacher and Dahlgard actions under the caption In re Gentiva Securities Litigation, Civil Action No. 10-CV-5064; and (iii) set a deadline of January 2, 2012 for all motions by any putative class member seeking to be appointed lead plaintiff.

The defendants have not yet responded to the complaints. 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.

Shareholder Derivative Litigation

On January 4, 2011, a shareholder derivative complaint, captioned Jacobs v. Malone et al., Civil Action No. 11-CV-1102-9, was filed in Superior Court of DeKalb County in the State of Georgia. The action, which names Gentiva’s current directors as defendants, alleges, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. Specifically, the complaint alleges that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the

 

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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 during the period between July 31, 2008 and July 20, 2010. On March 21, 2011, the action was stayed by stipulation among the parties pending a final decision on any motion to dismiss in the above-mentioned Endress action. On October 4, 2011, plaintiff in the Jacobs action filed a Notice of Termination of the Stay.

On October 7 and October 13, 2011, two additional shareholder derivative complaints, captioned Stevens v. Strange, et al., Civil Action No. 11-CV-3429, and Cuzzola v. Strange, et al., Civil Action No. 11-CV-3506, respectively, were filed in the United States District Court for the Northern District of Georgia. The Stevens and Cuzzola actions, which name Gentiva’s current directors and one former officer as defendants, allege, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions also assert a claim under Section 14(a) of the Securities Exchange Act of 1934. Like the Jacobs action, the complaints allege 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 complaints further allege that the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders was materially false and misleading.

On October 31, 2011, an additional shareholder derivative complaint, captioned Grossi v. Strange, et al., Civil Action No. 11-CV-11728-6, was filed in Superior Court of DeKalb County in the State of Georgia. The action, which names Gentiva’s current directors as defendants, alleges, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The complaint alleges 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 defendants have not yet responded to the complaints. 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.

Indemnification

HME and IV Disposition

The Company has agreed to indemnify the Lincare Indemnified Parties (as such term is defined in the Asset Purchase Agreement dated as of February 1, 2010 (“APA”) covering the sale on such date of the Company’s HME and IV businesses) from any claims arising from (i) any breach of, or failure to perform, any representations, warranties, covenants and other obligations by certain of the Company’s subsidiaries, as sellers under the APA, (ii) the Lincare Indemnified Parties’ being required to assume or discharge any of certain specified excluded liabilities under the APA or (iii) the Lincare Indemnified Parties’ being required to assume or discharge by operation of law any indebtedness, liability or obligation of certain of the Company’s subsidiaries, as sellers under the APA, other than certain specified liabilities assumed by Lincare Inc. The representations, warranties, covenants and agreements made by the Company’s subsidiaries in the APA generally survive for a period of two years from the closing date, except that certain specified representations and warranties survive for the applicable statute of limitations. The maximum aggregate liability of the Company for any breaches of representations and warranties contained in the APA is $14 million.

Government Matters

PRRB Appeal

In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and

 

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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 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 Centers for Medicare & Medicaid Services’ 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.

Subpoenas

In April 2003, the Company received a subpoena from the Department of Health and Human Services, Office of Inspector General, Office of Investigations (“OIG”). The subpoena sought information regarding the Company’s implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company’s treatment on cost reports of employees engaged in sales and marketing efforts. In February 2004, the Company received a subpoena from the U.S. Department of Justice (“DOJ”) seeking additional information related to the matters covered by the OIG subpoena. In early May 2010, the Company reached an agreement in principle, subject to final approvals, with the government to resolve this matter. Under the agreement, the Company agreed to pay the government $12.5 million, of which $9.5 million was recorded as a charge in the first nine months of 2010 with the remaining $3 million covered by a previously-recorded reserve. On May 24, 2011, a final settlement agreement in accordance with the earlier agreement in principle was entered into between the government and the Company resolving this matter and the Company paid the $12.5 million during the first nine months of 2011.

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 in the process of responding to the SEC’s request. 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.

 

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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 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 was unsealed on October 5, 2009 and served on Odyssey 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 that is in the motion to dismiss phase. 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. 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 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 February 2, 2009. On September 9, 2009, Odyssey received a second subpoena from the OIG requesting medical records for certain patients who had been provided continuous care services by Odyssey during the same time period. Odyssey is cooperating with the OIG and has completed its subpoena production for the two aforementioned subpoenas. On June 24, 2011, Odyssey received a third subpoena from the OIG requesting medical records for certain patients who had been provided continuous care services by Odyssey during the same time period. Based on the information that Odyssey has at this time, the Company cannot predict with certainty the outcome of the government’s continuing investigation.

On February 23, 2010, Odyssey received a subpoena from the 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.

During the third quarter and first nine months of 2011 and in connection with the above investigations involving Odyssey, the Company has recorded a reserve of $6.5 million and $25.0 million, respectively, for its litigation exposure that is probable and estimable. Except for this specific reserve, the Company does not believe that an estimate of a reasonably possible loss or range of loss can be made at this time. Based on the limited information that Odyssey has at this time regarding the investigations, the Company is unable to predict the additional impact, if any, that the investigations may have on Odyssey’s and the Company’s business, financial condition, results of operations, liquidity or capital resources.

 

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  15.   Income Taxes

The Company’s provision for income taxes consists of current and deferred federal and state income tax expense. On continuing operations, the Company recorded an income tax benefit of $87.5 million for the third quarter of 2011 and an income tax benefit of $77.0 million for the nine months ended September 30, 2011. The difference between the federal statutory income tax rate of 35.0 percent and the Company’s effective rate of 12.7 percent for the first nine months of 2011 is primarily due to state income taxes, net of federal benefit (approximately 4.7 percent), offset by the impact of impairment of goodwill, intangibles and other long-lived assets (approximately 26.2 percent) and other items (approximately 0.8 percent). In addition, the Company recorded reserves relating to uncertain tax positions associated with the deductibility of a portion of the Company’s payment to the Office of the Inspector General, as well as for uncertain tax positions on other legal settlement reserves. Excluding the tax impact of the impairment charges and reserves for uncertain tax positions, the Company’s effective tax rate relating to its continuing operations for both the third quarter and first nine months of 2011 would have been 39.6 percent.

The Company recorded a federal and state income tax provision of $4.6 million for the third quarter of fiscal 2010 and $25.5 million for the first nine months of 2010. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 41.3 percent for the first nine months of 2010 is primarily due to state taxes, net of federal benefit (approximately 5.0 percent) and an increase in a capital loss and related valuation allowance relating to the CareCentrix legal settlement (approximately 2.5 percent) offset somewhat by items relating to Odyssey, including positive changes in Odyssey tax reserves subsequent to the acquisition date net of certain non-deductible transaction costs (approximately 0.6 percent) and various other items (approximately 0.6 percent).

The Company continues to participate in the IRS’ Compliance Assurance Program (“CAP”) which began with the 2010 tax year. As a result of the Company’s participation in CAP, management anticipates closing the 2010 and 2011 federal tax years by the end of 2011 and 2012, respectively. The Company remains under examination for income and non-income tax filings in various state and local jurisdictions from 2006 through current filings.

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

In addition, the Company provides consulting services to home health agencies which include operational support, billing and collection activities, and on-site agency support and consulting. As of September 30, 2011, the Company’s Rehab Without Walls® and homemaker services businesses were reflected as discontinued operations in accordance with applicable accounting guidance. See Note 4 for additional information. Prior periods have been reclassified to conform with current presentation.

 

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Hospice

The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 30 states. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.

Corporate 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):

 

     Third Quarter  
     2011      2010  
     Home                    Home                
     Health      Hospice      Total      Health      Hospice      Total  

Medicare

   $ 200.3       $ 182.0       $ 382.3       $ 205.4       $ 107.5       $ 312.9   

Medicaid and Local Government

     13.2         8.0         21.2         14.7         4.6         19.3   

Commercial Insurance and Other:

                 

Paid at episodic rates

     19.3         —           19.3         22.0         —           22.0   

Other

     20.4         6.5         26.9         21.9         3.6         25.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 253.2       $ 196.5       $ 449.7       $ 264.0       $ 115.7       $ 379.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     First Nine Months  
     2011      2010  
     Home                    Home                
     Health      Hospice      Total      Health      Hospice      Total  

Medicare

   $ 601.7       $ 543.0       $ 1,144.7       $ 620.4       $ 145.2       $ 765.6   

Medicaid and Local Government

     39.8         23.4         63.2         45.7         6.2         51.9   

Commercial Insurance and Other:

                 

Paid at episodic rates

     58.1         —           58.1         64.2         —           64.2   

Other

     64.0         19.6         83.6         71.0         4.9         75.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenues

   $ 763.6       $ 586.0       $ 1,349.6       $ 801.3       $ 156.3       $ 957.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Home Health     Hospice     Total  

For the three months ended September 30, 2011

      

Net revenue—segments

   $ 253,240      $ 196,508      $ 449,748   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 28,717 (1)    $ 31,477 (1)    $ 60,194   
  

 

 

   

 

 

   

Corporate expenses

         (28,570 )(1) 

Goodwill, intangibles and other long-lived asset impairment

         (643,305 )(4) 

Dividend income

         3,977 (2) 

Depreciation and amortization

         (7,453

Interest expense, net of interest income

         (20,673
      

 

 

 

(Loss) income from continuing operations before income taxes and equity in earnings of CareCentrix, including gain on sale

       $ (635,830
      

 

 

 

For the three months ended October 3, 2010

      

Net revenue—segments

   $ 263,937      $ 115,744      $ 379,681   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 52,411 (1)    $ 23,894 (1)    $ 76,305   
  

 

 

   

 

 

   

Corporate expenses

         (45,300 )(1) 

Depreciation and amortization

         (5,943

Interest expense, net of interest income

         (12,780
      

 

 

 

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

       $ 12,282   
      

 

 

 

For the nine months ended September 30, 2011

      

Net revenue—segments

   $ 763,622      $ 585,947      $ 1,349,569   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 105,427 (1)    $ 104,301 (1)    $ 209,728   
  

 

 

   

 

 

   

Corporate expenses

         (92,480 )(1) 

Goodwill, intangibles and other long-lived asset impairment

         (643,305 )(4) 

Dividend income

         8,590 (2) 

Depreciation and amortization

         (22,534

Interest expense, net of interest income

         (68,342 )(3) 
      

 

 

 

(Loss) income from continuing operations before income taxes and equity in earnings of CareCentrix, including gain on sale

       $ (608,343
      

 

 

 

Segment assets

   $ 244,787      $ 871,212      $ 1,115,999   
  

 

 

   

 

 

   

Corporate assets

         423,586   
      

 

 

 

Total assets

       $ 1,539,585   
      

 

 

 

For the nine months ended October 3, 2010

      

Net revenue—segments

   $ 801,372      $ 156,270      $ 957,642   
  

 

 

   

 

 

   

 

 

 

Operating contribution

   $ 155,988 (1)    $ 31,516 (1)    $ 187,504   
  

 

 

   

 

 

   

Corporate expenses

         (96,111 )(1) 

Depreciation and amortization

         (14,699

Gain on sale of assets, net

         103   

Interest expense and other, net of interest income

         (14,980
      

 

 

 

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

       $ 61,817   
      

 

 

 

Segment assets

   $ 665,881      $ 1,064,348      $ 1,730,229   
  

 

 

   

 

 

   

Corporate assets

         388,015   
      

 

 

 

Total assets

       $ 2,118,244   
      

 

 

 

 

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(1) For the third quarter and first nine months of 2011, the Company recorded charges relating to cost savings initiatives, acquisition and integration costs, other restructuring and legal settlements of $9.8 million and $34.9 million, respectively.

For the third quarter of 2010, the Company recorded charges relating to acquisition and integration costs and other restructuring of $22.8 million.

For the first nine months of 2010, the Company recorded charges relating to acquisition and integration costs, other restructuring and legal settlements of $40.7 million, which included (i) settlement costs and legal fees of $4.2 million related to a three-year old commercial contractual dispute involving the Company’s former subsidiary, CareCentrix, (ii) incremental charges of $9.5 million in connection with an agreement in principle, subject to final approvals, between the Company and the government to resolve the matters which were subject to a 2003 subpoena relating to the Company’s cost reports for the 1998 to 2000 periods and (iii) acquisition and integration costs, and other restructuring of $27.0 million. See Note 8 and Note 14 for additional information.

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

 

     Third Quarter      Nine Months  
     2011      2010      2011      2010  

Home Health

   $ —         $ 0.3       $ 0.3       $ 9.8   

Hospice

     0.8         0.2         1.6         0.2   

Corporate administrative expenses

     9.0         22.3         33.0         30.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9.8       $ 22.8       $ 34.9       $ 40.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For the third quarter and first nine months of 2011, the Company recognized dividend income of $4.0 million and $8.6 million, respectively, as a result of the sale of the Company’s combined common and preferred ownership of CareCentrix.

 

(3) For the first nine months of 2011, interest expense and other, net of interest income included charges of $3.8 million relating to the write-off of deferred debt issuance costs and fees 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 senior secured credit agreement. See Note 11 for additional information.

 

(4) For both the third quarter and first nine months of 2011, the Company recorded non-cash impairment charges associated with goodwill, intangibles and other long-lived assets of $643.3 million. Home health, hospice and corporate assets were reduced by $408.4 million, $193.7 million and $41.2 million, respectively, as of September 30, 2011 as a result of the impairment.

 

  17.   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 September 30, 2011 and December 31, 2010, statements of operations for the three months and nine months ended September 30, 2011 and October 3, 2010 and statements of cash flows for the nine months ended September 30, 2011 and October 3, 2010 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. The condensed consolidating financial statements should be read in conjunction with the accompanying consolidated financial statements.

 

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Condensed Consolidating Balance Sheet

September 30, 2011

(In thousands)

 

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

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 155,434       $ —         $ 40,658       $ —        $ 196,092   

Receivables, net

     —           252,810         18,751         (11,286     260,275   

Deferred tax assets

     —           29,366         2,045         —          31,411   

Prepaid expenses and other current assets

     —           30,945         9,422         (2,931     37,436   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     155,434         313,121         70,876         (14,217     525,214   

Note receivable from CareCentrix

     —           25,000         —           —          25,000   

Fixed assets, net

     —           45,896         344         —          46,240   

Intangible assets, net

     —           219,056         100         —          219,156   

Goodwill

     —           635,605         6,064         —          641,669   

Investment in subsidiaries

     1,045,465         21,939         —           (1,067,404     —     

Other assets

     —           82,298         8         —          82,306   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,200,899       $ 1,342,915       $ 77,392       $ (1,081,621   $ 1,539,585   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Current portion of long-term debt

   $ 13,437       $ —         $ —         $ —        $ 13,437   

Accounts payable

     —           24,028         944         (11,286     13,686   

Other current liabilities

     —           215,575         51,948         (2,931     264,592   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     13,437         239,603         52,892         (14,217     291,715   

Long-term debt

     994,688         —           —           —          994,688   

Deferred tax liabilities, net

     —           32,108         —           —          32,108   

Other liabilities

     —           25,739         27         —          25,766   

Total Gentiva shareholders’ equity

     192,774         1,045,465         21,939         (1,067,404     192,774   

Noncontrolling interests

     —           —           2,534         —          2,534   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     192,774         1,045,465         24,473         (1,067,404     195,308   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,200,899       $ 1,342,915       $ 77,392       $ (1,081,621   $ 1,539,585   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

December 31, 2010

(In thousands)

 

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

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 63,816       $ —         $ 40,936       $ —        $ 104,752   

Receivables, net

     —           253,874         20,018         (14,304     259,588   

Deferred tax assets

     —           26,323         1,832         —          28,155   

Prepaid expenses and other current assets

     —           47,536         5,784         (4,410     48,910   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     63,816         327,733         68,570         (18,714     441,405   

Note receivable from CareCentrix

     —           25,000         —           —          25,000   

Investment in CareCentrix

     —           25,635         —           —          25,635   

Fixed assets, net

     —           85,446         261         —          85,707   

Intangible assets, net

     —           373,957         100         —          374,057   

Goodwill

     —           1,079,002         6,064         —          1,085,066   

Investment in subsidiaries

     1,623,321         28,082         —           (1,651,403     —     

Other assets

     26,032         57,212         14         —          83,258   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,713,169       $ 2,002,067       $ 75,009       $ (1,670,117   $ 2,120,128   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

Current portion of long-term debt

   $ 25,000       $ —         $ —         $ —        $ 25,000   

Accounts payable

     —           29,814         52         (14,304     15,562   

Other current liabilities

     —           236,309         44,180         (4,410     276,079   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     25,000         266,123         44,232         (18,714     316,641   

Long-term debt

     1,026,563         —           —           —          1,026,563   

Deferred tax liabilities, net

     —           111,199         —           —          111,199   

Other liabilities

     26,032         1,424         37         —          27,493   

Total Gentiva shareholders’ equity

     635,574         1,623,321         28,082         (1,651,403     635,574   

Noncontrolling interests

     —           —           2,658         —          2,658   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     635,574         1,623,321         30,740         (1,651,403     638,232   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,713,169       $ 2,002,067       $ 75,009       $ (1,670,117   $ 2,120,128   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

For the Three Months Ended September 30, 2011

(In thousands)

 

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

Net revenues

   $ —        $ 439,140      $ 13,299      $ (2,691   $ 449,748   

Cost of services sold

     —          228,306        17,328        (2,691     242,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          210,834        (4,029     —          206,805   

Selling, general and administrative expenses

     —          (178,773     (3,861     —          (182,634

Goodwill, intangibles and other long-lived asset impairment

     —          (643,305     —          —          (643,305

Dividend income

     —          3,977        —          —          3,977   

Interest (expense) income and other, net

     (20,687     —          14        —          (20,673

Equity in earnings (loss) of subsidiaries

     (461,283     (7,904     —          469,187        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes and equity in net earnings of CareCentrix, including gain on sale

     (481,970     (615,171     (7,876     469,187        (635,830

Income tax benefit (expense)

     8,219        79,399        (80     —          87,538   

Equity in net earnings of CareCentrix, including gain on sale

     —          68,692        —          —          68,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (473,751     (467,080     (7,956     469,187        (479,600

Discontinued operations, net of tax

     —          5,797        186        —          5,983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (473,751     (461,283     (7,770     469,187        (473,617

Noncontrolling interests

     —          —          (134     —          (134
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gentiva shareholders

   $ (473,751   $ (461,283   $ (7,904   $ 469,187      $ (473,751
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

Condensed Consolidating Statement of Operations

For the Three Months Ended October 3, 2010

(In thousands)

 

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

Net revenues

   $ —        $ 371,620      $ 11,136      $ (3,075   $ 379,681   

Cost of services sold

     —          183,270        5,113        (3,075     185,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          188,350        6,023        —          194,373   

Selling, general and administrative expenses

     —          (167,489     (1,822     —          (169,311

Interest (expense) income and other, net

     (12,805     —          25        —          (12,780

Equity in earnings of subsidiaries

     15,788        2,651        —          (18,438     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     2,983        23,512        4,226        (18,438     12,282   

Income tax benefit (expense)

     5,109        (8,171     (1,537     —          (4,599

Equity in net earnings of CareCentrix

     —          518        —          —          518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     8,092        15,859        2,689        (18,438     8,201   

Discontinued operations, net of tax

     —          (71     95        —          24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before noncontrolling interests

     8,092        15,788        2,784        (18,438     8,225   

Noncontrolling interests

     —          —          (133     —          (133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,092      $ 15,788      $ 2,651      $ (18,438   $ 8,092   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 30, 2011

(In thousands)

 

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

Net revenues

   $ —        $ 1,319,162      $ 38,801      $ (8,394   $ 1,349,569   

Cost of services sold

     —          688,754        27,490        (8,394     707,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          630,408        11,311        —          641,719   

Selling, general and administrative expenses

     —          (535,958     (11,047     —          (547,005 </