DISCONTINUED OPERATIONS

Sale of Home Health Business

On March 31, 2014, the Company completed the sale of substantially all of the Company’s Home Health Services segment (the “Home Health Business”) pursuant to the Stock Purchase Agreement dated as of February 1, 2014 (the “Stock Purchase Agreement”), as amended, by and among LHC Group, Inc., a Delaware corporation, and certain of its subsidiaries (collectively, the “Buyer”) and the Company and Elk Valley Professional Affiliates, Inc. (“EVPA”), South Mississippi Home Health, Inc. (“SMHH”), and Deaconess Homecare, LLC (collectively the “Seller”). The Buyer agreed to acquire the Home Health Business, consisting of (1) all of the issued and outstanding shares of capital stock of EVPA owned by the Seller, (2) all of the issued and outstanding shares of capital stock of SMHH owned by the Seller, and (3) all of the issued and outstanding membership interests in two limited liability companies (collectively, the “Holding Newcos” and, together with EVPA and SMHH, the “Subject Companies”) that were wholly-owned subsidiaries of the Seller, formed for the purpose of the sale to hold indirectly the Seller’s other assets and operating liabilities related to the operation of the Home Health Business. On the closing date, the Company also entered into an Amendment No. 1 (the “Amendment”) to the Stock Purchase Agreement in connection with the closing. The Amendment modified the Stock Purchase Agreement to (i) exclude from the home health business conducted by the Company at one of its locations, and (ii) reduce by $0.5 million the total consideration to be received by the Company, to approximately $59.5 million.

Pursuant to the terms of the Stock Purchase Agreement, as amended, the Company received total consideration of approximately $59.5 million paid in cash (the “Purchase Price”). The Company used a portion of the net proceeds from the sale to pay down a portion of the Company’s outstanding debt. The Purchase Price is subject to adjustment for net working capital of the Subject Companies as of the closing date.

The sale of the Home Health Business is consistent with the Company’s continuing strategic evaluation of its non-core businesses and its decision to continue to focus growth initiatives and capital in the Infusion Services segment.

On March 31, 2014, the carrying value of the net assets of the Subject Companies was as follows (in thousands):



	Carrying Value
Net accounts receivable	$	12,597
Prepaid expenses and other current assets	242
Total current assets	12,839
Property and equipment, net	402
Goodwill	33,784
Intangible assets	15,400
Other non-current assets	28
Total assets	62,453
Accounts payable	673
Amounts due to plan sponsors	229
Accrued expenses and other current liabilities	3,008
Total liabilities	3,910
Net assets	$	58,543

The carrying value of the net assets of the Subject Companies above is subject to adjustment for net working capital as defined in the Stock Purchase Agreement. The estimated pre-tax gain on sale of the Home Health Business is approximately $1.0 million based on the March 31, 2014 net asset balances above and before broker's fees, legal expenses and other one-time transactions costs. The net assets of the Subject Companies have been reclassified to discontinued operations for all prior periods in the accompanying unaudited consolidated financial statements.

The operating results included in discontinued operations of the Home Health Business for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):



	Three Months Ended March 31,
	2014			2013
Revenue	$	17,541		$	17,942
Gross profit	$	6,739		$	7,255
Selling, general and administrative expenses	6,589			5,785
Bad debt expense	658			217
Income (loss) from operations	(508		)	1,253
Gain on sale before income taxes	995			—
Broker's fee and legal expenses	2,875			—
Impairment of assets	452			—
Other costs and expenses	47			—
Income (loss) before income taxes	(2,887		)	1,253
Income tax expense (benefit)	(3,832		)	519
Income (loss) from discontinued operations, net of income taxes	$	945		$	734

Pharmacy Services Asset Sale

On February 1, 2012, the Company entered into a Community Pharmacy and Mail Business Purchase Agreement (the “2012 Asset Purchase Agreement”) by and among Walgreen Co. and certain subsidiaries (collectively, the "Buyers") and the Company and certain subsidiaries (collectively, the "Sellers") with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to the Sellers' traditional and specialty pharmacy mail operations and community retail pharmacy stores.

Pursuant to the terms of the 2012 Asset Purchase Agreement, the Company received a total purchase price of approximately $173.8 million. As a result of the Pharmacy Services Asset Sale, the Company has recognized a total pretax gain of $108.1 million, net of transaction costs and other one-time charges as a result of the transaction.

The purchase price excluded all accounts receivable and working capital liabilities related to the operations subject to the Pharmacy Services Asset Sale, which were retained by the Company. No amounts related to the net accounts receivable retained by the Company remained at December 31, 2013.

The transaction included the sale of 27 community pharmacy locations, and certain assets of three community pharmacy locations, and three traditional and specialty mail service operations, which constituted all of the Company's operations in the community pharmacy and mail order lines of business. As a result of the divestiture process, the Company assessed its continuing operations in order to align its corporate structure with its remaining operations. As part of these efforts, the Company has incurred and expects to continue to incur additional expenses that may impact the Company's future consolidated financial statements. These additional costs, including employee severance and other benefit-related costs, facility-related costs, and other one-time charges are included in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations.

The operating results of the divested traditional and specialty pharmacy mail operations and community pharmacies included in discontinued operations for the three months ended March 31, 2014 and 2013, are summarized below (in thousands):



	Three Months Ended March 31,
	2014			2013
Revenue	$	—		$	(20	)
Gross profit	$	(27	)	$	(68	)
Operating expenses	810			619
Interest (income) expense	—			(28		)
Income tax expense	—			(238		)
Income (loss) from discontinued operations, net of income taxes	$	(837	)	$	(421	)

Operating expenses during the three months ended March 31, 2014 primarily consist of legal fees related to the legal proceedings discussed in Note 9 - Commitments and Contingencies.

Effective January 8, 2014, the Company entered into a Stipulation and Order of Settlement and Dismissal (the “Federal Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”) and a qui tam relator (the “Relator”). The Federal Settlement Agreement represented the federal and private component of an agreement in principle to settle all civil claims under the False Claims Act and related statutes and all common law claims that could have been brought by the DOJ and Relator that arose out of the distribution of the Novartis Pharmaceutical Corporation’s product Exjade® (the “Medication”) by the Company's traditional and specialty pharmacy mail operations and community retail pharmacy stores prior to its divestiture in May 2012. Further, effective February 11, 2014, the Company entered into State Settlement Agreements with the offices of the Attorneys General of thirty-five states (the "Settling States"). The State Settlement Agreements represented the state component of the Company's agreement in principle to settle the claims that could have been brought by the Settling States that arose out of the distribution of the Medication. During the year ended December 31, 2013, the Company accrued $15.0 million related to the Settlement Agreements and included the amount and related legal fees and expenses in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations (see Note 10 - Commitments and Contingencies).

As of March 31, 2014 and December 31, 2013, there were accruals of $12.7 million and $16.3 million, respectively, related to these costs in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The accrual activity consisted of the following (in thousands):



	Legal Settlement			Employee Severance and Other Benefits			Other Costs			Total
Balance at December 31, 2013	$	15,000		$	92		$	1,195		$	16,287
Expenses	14			—			975			989
Cash payments	(3,014		)	(92		)	(1,321		)	(4,427		)
Non-cash charges and adjustments	—			—			(152		)	(152		)
Balance at March 31, 2014	$	12,000		$	—		$	697		$	12,697