Gentiva Health Services 10Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended October 1, 2006


o		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		(I.R.S. Employer
incorporation or organization)		Identification No.)


3 Huntington Quadrangle, Suite 200S, Melville, NY		11747-4627

(Address of principal executive offices)		(Zip Code)

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

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. Yesþ Noo

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

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares outstanding of the registrant’s Common Stock, as of November 6, 2006, was 27,293,444.

INDEX


	Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – October 1, 2006 and January 1, 2006		3

Consolidated Statements of Income (Unaudited) – Three Months and Nine Months Ended October 1, 2006 and October 2, 2005		4

Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended October 1, 2006 and October 2, 2005		5

Notes to Consolidated Financial Statements (Unaudited)		6-27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27-42

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		43

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		44

Item 1A. Risk Factors		44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 3. Defaults Upon Senior Securities		44

Item 4. Submission of Matters to a Vote of Security Holders		44

Item 5. Other Information		44

Item 6. Exhibits		45

SIGNATURES		46
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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)


	October 1, 2006			January 1, 2006
ASSETS
Current assets:
Cash, cash equivalents and restricted cash	$	31,935		$	38,617
Short-term investments		33,575			49,750
Receivables, less allowance for doubtful accounts of $9,527 and $8,657 at October 1, 2006 and January 1, 2006, respectively		182,733			139,635
Deferred tax assets		25,893			15,974
Prepaid expenses and other current assets		12,091			7,816

Total current assets		286,227			251,792

Fixed assets, net		47,133			24,969
Deferred tax assets, net		—			18,099
Intangible assets, net		202,406			5,831
Goodwill		280,078			6,763
Other assets		24,417			19,111

Total assets	$	840,261		$	326,565

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,829		$	13,870
Payroll and related taxes		29,236			9,777
Deferred revenue		20,268			7,455
Medicare liabilities		10,562			7,220
Cost of claims incurred but not reported		23,238			25,276
Obligations under insurance programs		35,067			32,883
Other accrued expenses		42,248			25,985

Total current liabilities		173,448			122,466

Long-term debt		353,000			—
Deferred tax liabilities, net		28,942			—
Other liabilities		19,709			21,945

Shareholders’ equity:
Common stock, $.10 par value; authorized 100,000,000 shares; issued and outstanding 27,274,963 and 23,034,954 shares at October 1, 2006 and January 1, 2006, respectively		2,727			2,303
Additional paid-in capital		294,312			225,847
Accumulated deficit		(30,732	)		(45,996	)
Accumulated other comprehensive loss		(1,145	)		—

Total shareholders’ equity		265,162			182,154


Total liabilities and shareholders’ equity	$	840,261		$	326,565

See notes to consolidated financial statements.

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Nine Months Ended
	October 1, 2006			October 2, 2005			October 1, 2006			October 2, 2005
Net revenues	$	286,169		$	219,559		$	813,470		$	646,801
Cost of services sold (excluding depreciation)		167,360			138,544			472,760			404,401

Gross profit		118,809			81,015			340,710			242,400
Selling, general and administrative expenses		(101,017	)		(72,026	)		(290,413	)		(216,443	)
Depreciation and amortization		(4,393	)		(2,291	)		(11,391	)		(5,938	)

Operating income		13,399			6,698			38,906			20,019
Interest expense		(7,408	)		(266	)		(17,382	)		(802	)
Interest income		862			651			2,519			2,064

Income before income taxes		6,853			7,083			24,043			21,281
Income tax expense		(1,539	)		(2,832	)		(8,779	)		(4,255	)

Net income	$	5,314		$	4,251		$	15,264		$	17,026


Net income per common share:
Basic	$	0.20		$	0.18		$	0.58		$	0.73

Diluted	$	0.19		$	0.17		$	0.56		$	0.68


Weighted average shares outstanding:
Basic		27,178			23,329			26,207			23,349

Diluted		27,983			25,076			27,040			25,018

See notes to consolidated financial statements.

Gentiva Health Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


	Nine Months Ended
	October 1, 2006			October 2, 2005
OPERATING ACTIVITIES:
Net income	$	15,264		$	17,026
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,391			5,938
Provision for doubtful accounts		5,416			4,329
Reversal of tax audit reserves		(800	)		(4,200	)
Equity-based compensation expense		2,951			—
Windfall tax benefits associated with equity-based compensation		(1,729	)		—
Deferred income tax expense		8,909			4,408
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable		855			(14,666	)
Prepaid expenses and other current assets		(1,474	)		(1,856	)
Accounts payable		(8,190	)		(719	)
Payroll and related taxes		5,496			6,416
Deferred revenue		(2,745	)		2,704
Medicare liabilities		1,518			(3,085	)
Cost of claims incurred but not reported		(2,038	)		(1,117	)
Obligations under insurance programs		1,571			(2,432	)
Other accrued expenses		8,750			(3,669	)
Other, net		201			178

Net cash provided by operating activities		45,346			9,255


INVESTING ACTIVITIES:
Purchase of fixed assets		(16,286	)		(6,043	)
Acquisition of businesses, net of cash acquired		(212,422	)		(12,059	)
Purchase of short-term investments available-for-sale		(143,095	)		(125,000	)
Maturities of short-term investments available-for-sale		159,270			153,950
Maturities of short-term investments held to maturity		—			10,000

Net cash (used in) provided by investing activities		(212,533	)		20,848


FINANCING ACTIVITIES:
Proceeds from issuance of common stock		9,742			5,650
Windfall tax benefits associated with equity-based compensation		1,729			—
Proceeds from issuance of debt		370,000			—
Healthfield debt repayments		(195,305	)		—
Other debt repayments		(17,000	)		—
Changes in book overdrafts		(1,395	)		(1,635	)
Debt issuance costs		(6,930	)		—
Repurchases of common stock		—			(13,514	)
Repayment of capital lease obligations		(336	)		(294	)

Net cash provided by (used in) financing activities		160,505			(9,793	)


Net change in cash, cash equivalents and restricted cash		(6,682	)		20,310
Cash, cash equivalents and restricted cash at beginning of period		38,617			31,924

Cash, cash equivalents and restricted cash at end of period	$	31,935		$	52,234


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	7,680		$	361
Income taxes	$	2,400		$	701

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:

During the nine months ended October 1, 2006, the Company issued 3,194,137 shares of common stock in connection with the acquisition of The Healthfield Group, Inc. on February 28, 2006.

See notes to consolidated financial statements.

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 comprehensive home health services throughout most of the United States through its reportable business segments: Home Health, CareCentrix® and Other Related Services, which encompasses the Company’s hospice, respiratory therapy and home medical equipment (“HME”), infusion therapy and consulting services businesses. See Note 14 for a description of the Company’s reportable business segments for fiscal 2006.

On February 28, 2006, the Company completed the acquisition of The Healthfield Group, Inc. (“Healthfield”), a leading provider of home healthcare, hospice and related services, as further described in Note 5. In connection with the acquisition, the Company entered into a new credit agreement which provided for a $370 million term loan and a $75 million revolving credit facility and a Guarantee and Collateral Agreement, as further described in Note 9, and issued approximately 3.2 million shares of common stock.

Gentiva was incorporated in the State of Delaware on August 6, 1999 and became an independent public company on March 15, 2000.

The accompanying interim consolidated financial statements are unaudited, and have been prepared by Gentiva using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K for the year ended January 1, 2006 and pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. 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 interim financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America.

2. Accounting Policies

Cash, Cash Equivalents and Restricted Cash

The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash of $22.0 million at October 1, 2006 and January 1, 2006 primarily represents segregated cash funds in a trust account designated as collateral under the Company’s insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative collateral. Interest on all restricted funds accrues to the Company. As of October 1, 2006, the Company had operating funds of approximately $6.3 million exclusively relating to a non-profit hospice operation in Florida. Included in cash and cash equivalents are amounts on deposit with financial institutions in excess of $100,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these financial institutions are viable entities and believes any risk of loss is remote.

Short-Term Investments

The Company’s short-term investments consist primarily of AAA-rated auction rate securities and other debt securities with an original maturity of more than three months and less than one year on the acquisition date in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in debt securities are classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading.

Available-for-sale investments are carried on the balance sheet at fair value which for the Company approximates cost. Auction rate securities of $33.6 million and $49.8 million at October 1, 2006 and January 1, 2006, respectively, are classified as available-for-sale and are expected to be available to meet the Company’s current operational needs and accordingly are classified as short-term investments. The interest rates on auction rate securities are reset to current interest rates periodically, typically 7, 14 and 28 days. Contractual maturities of the auction rate securities exceed ten years.

Debt securities which the Company has the intent and ability to hold to maturity are classified as held-to-maturity investments and are reported at amortized cost which approximates fair value. The Company has no investments classified as held-to-maturity investments.

The Company has no investments classified as trading securities.

Cash Flow Hedge

The Company utilizes a derivative financial instrument to manage interest rate risk. Derivatives are held only for the purpose of hedging such risk, not for speculative purposes. The Company’s derivative instrument consists of a two year interest rate swap agreement designated as a cash flow hedge of the variability of cash flows associated with a portion of the Company’s variable rate term loan (see Note 9).

While the Company believes the derivative will effectively help manage its risk, the derivative is subject to the risk that the counterparty is unable to perform under the terms of the swap agreement. The Company executed the derivative with a counterparty that is a well known major financial institution. The Company has monitored the credit worthiness of its counterparty and based on this analysis considers nonperformance by its counterparty to be unlikely.

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the derivative instrument is recorded at fair value on the Company’s consolidated balance sheet. Changes in the fair value of the derivative are reported in shareholders’ equity in accumulated other comprehensive income (loss) until earnings are affected by the hedged item. The effectiveness of the Company’s derivative 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 October 1, 2006, the Company had unrealized losses on the derivative of $1.1 million recorded in accumulated other comprehensive loss.

3. New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles (“GAAP”) and expands disclosures about fair value measurements. This Statement will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is evaluating the impact of adopting this standard and expects it to have no material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through an adjustment in comprehensive income of a business entity. This Statement will be effective for financial statements of an employer with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. The Company does not expect the adoption of this Statement to impact its consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which requires that realization of an uncertain income tax position must be more likely than not (i.e., greater than 50 percent likelihood of receiving a benefit) before it can be recognized in the financial statements. FIN 48 further prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The Interpretation also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. This Interpretation is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2006. The Company will adopt this Interpretation in the first quarter of fiscal 2007 and is evaluating the impact on its consolidated financial statements.

4. Medicare Revenues

Medicare revenues for the first nine months of fiscal 2006 included approximately $1.9 million received in settlement of the Company’s appeal filed with the U.S. Provider Relations Review Board (“PRRB”) related to the reopening of all of its 1999 cost reports. (See Note 12).

5. Acquisitions

Carolina Vital Care and Lazarus House Hospice

During the second quarter of fiscal 2006, the Company completed two acquisitions to expand home infusion services in the Carolinas and hospice services into Tennessee.

The Company acquired the assets of Carolina Vital Care, a home infusion pharmacy business based in Charlotte, North Carolina, and commitments related to certain contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement.

The Company acquired certain assets and the operations of Lazarus House Hospice, a not-for-profit provider of licensed hospice services based in Tennessee, pursuant to an asset purchase agreement.

The combined purchase price for the two acquisitions was $4.5 million. As of October 1, 2006, the combined purchase price was allocated to goodwill ($1.0 million), identifiable intangible assets ($3.1 million), and other assets ($0.4 million) and reflects reclassifications made during the third quarter of fiscal 2006 based on the preliminary results of an independent valuation analysis. The purchase price allocation is subject to further adjustment following the completion of an independent valuation analysis of certain net assets acquired.

Healthfield

On February 28, 2006, the Company completed the acquisition of 100 percent of the equity interest of Healthfield, a leading provider of home healthcare, hospice and related services with approximately 130 locations primarily in eight southeastern states. Total consideration for the acquisition was $466.0 million in cash and shares of Gentiva common stock, including transaction costs of $11.2 million. Total consideration included $2.0 million in adjustments recorded since the acquisition to reflect a change in estimate relating to the final true-up of working capital and net debt as of the Healthfield closing date, as well as incremental closing costs. Final consideration is subject to various post closing adjustments. In connection with the transaction, the Company repaid Healthfield’s existing long-term debt, including accrued interest and prepayment penalties, aggregating $195.3 million. The Company funded the purchase price using (i) $363.3 million of borrowings under a new senior term loan facility, exclusive of debt issuance costs, (see Note 9); (ii) 3,194,137 shares of Gentiva common stock at a fair value of $53.3 million, determined based on the average stock price for the period beginning two days prior and ending two days after the measurement date, February 24, 2006; and (iii) existing cash balances of $49.4 million.

The Company acquired Healthfield to strengthen and expand the Company’s presence in the Southeast United States, which has favorable demographic trends and includes important Certificate of Need states, diversify the Company’s business mix, provide a meaningful platform for the Company to enter the hospice business, as well as expansion into respiratory therapy and HME services and infusion therapy as a direct provider of services, and expand its current specialty programs.

The transaction was accounted for in accordance with the provisions of SFAS No. 141, “Business Combination” (“SFAS 141”). Accordingly, Healthfield’s results of operations are included in the Company’s consolidated financial statements from the acquisition date. The purchase price 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 independent appraisals, discounted cash flows, quoted market prices, and management estimates derived from an independent valuation analysis of the intangible assets acquired.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):


Cash	$	13,843
Accounts receivable		47,342
Deferred tax assets		8,189
Fixed assets		15,030
Identifiable intangible assets		195,933
Goodwill		272,358
Other assets		3,281

Total assets acquired		555,976

Accounts payable and accrued liabilities		(48,721	)
Short-term and long-term debt		(195,305	)
Deferred tax liability		(39,990	)
Other liabilities		(900	)

Total liabilities assumed		(284,916	)

Net assets acquired	$	271,060

The valuation of the intangible assets by component and their respective useful life is as follows (in thousands):


	Intangible		Useful
	asset		life
Tradenames	$	15,881	10 years
Customer relationships		10,680	10 years
Certificates of need		169,372	indefinite

Total	$	195,933

The estimated fair values of the assets acquired and liabilities assumed as noted above reflect the completion of the independent valuation analysis and post closing adjustments through October 1, 2006. The Company expects that between 15 percent and 20 percent of the aggregate amount of goodwill and identifiable intangible assets will be amortizable for tax purposes.

Pro Forma Results

The following unaudited pro forma financial information presents the combined results of operations of the Company and Healthfield as if the acquisition had occurred at January 3, 2005, the beginning of the first quarter of fiscal 2005. The pro forma results presented below for the nine months ended October 1, 2006 combine the results of the Company for such period and the historical results of Healthfield from January 1, 2006 through February 28, 2006. The pro forma results presented below for the three months and nine months ended October 2, 2005 combine the results of the Company for such periods and the historical results of Healthfield for the respective three month and nine month periods (in thousands, except per share data):


	Three
	Months Ended		Nine Months Ended
	October 2, 2005		October 1, 2006		October 2, 2005
Net revenues	$	296,403	$	863,991	$	869,487
Net income	$	6,862	$	15,447	$	20,837

Net income per common share:
Basic	$	0.26	$	0.57	$	0.79
Diluted	$	0.24	$	0.56	$	0.74

Weighted average shares outstanding:
Basic		26,524		26,874		26,543
Diluted		28,271		27,707		28,212

The pro forma results above reflect adjustments for (i) interest on debt incurred, at the Company’s weighted average interest rate of 7.1 percent, (ii) amortization of identifiable intangibles related to the Healthfield acquisition and (iii) income tax provision at a normalized tax rate of 39 percent for each period. 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 2006 and 2005 fiscal years.

Heritage Home Care Services

On May 1, 2005, the Company completed the purchase of certain assets and the operations of Heritage Home Care Services, Inc. (“Heritage”), a Utah-based provider of home healthcare services, and assumed certain liabilities related to contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement, for cash consideration of $11.5 million, exclusive of working capital requirements. In connection with the acquisition, the Company also incurred transaction costs of $0.6 million. A valuation analysis of the purchase price was performed and costs have been recorded as goodwill ($5.4 million), fixed assets and other assets ($0.4 million), and identifiable intangible assets ($6.3 million).

6.Restructuring and Integration Costs

During the third quarter and first nine months of fiscal 2006, the Company recorded restructuring and integration costs of approximately $1.7 million and $4.4 million, respectively, as further described below.

CareCentrix Restructuring Activities

During the first nine months of fiscal 2006, the Company recorded charges of $0.7 million and in the fourth quarter of fiscal 2005 recorded charges of $0.8 million, in connection with a restructuring plan associated with its CareCentrix operations. This plan included the closing and consolidation of two Regional Care Centers in response to changes primarily in the nature of services provided to CIGNA Health Corporation (“Cigna”) members under an amended contract entered into in late 2005. The Company completed this restructuring during the second quarter of fiscal 2006.

Integration Activities

The Company recorded charges of $1.7 million and $3.7 million during the third quarter and first nine months of fiscal 2006, respectively, in connection with integration activities relating to the Healthfield acquisition. Charges include severance costs in connection with the termination of personnel, discretionary bonuses to certain employees in connection with the Healthfield acquisition and write off of prepaid fees in connection with the former credit facility that was terminated on February 28, 2006. The Company expects to incur additional integration costs throughout fiscal 2006, but the aggregate amount of such costs cannot be determined at this time.

The costs incurred and cash expenditures associated with CareCentrix restructuring and Healthfield integration activities by component were as follows (in thousands):


	CareCentrix Restructuring									Integration Activities
	Compensation			Facility						Compensation
	and Severance			Lease and						and Severance
	Costs			Other Costs			Total			Costs			Other Costs			Total
Beginning Balance at January 2, 2005	$	—		$	—		$	—		$	—		$	—		$	—

Charge in 2005		770			19			789			—			—			—
Cash expenditures		—			(19	)		(19	)		—			—			—


Ending Balance at January 1, 2006		770			—			770			—			—			—

Charge in first quarter 2006		643			15			658			1,232			107			1,339
Cash expenditures		(1,407	)		(14	)		(1,421	)		(816	)		—			(816	)
Asset write off		—			—			—			—			(107	)		(107	)


Ending Balance at April 2, 2006		6			1			7			416			—			416

Charge in second quarter 2006		52			—			52			196			475			671
Cash expenditures		(58	)		(1	)		(59	)		(223	)		(475	)		(698	)


Ending Balance at July 2, 2006		—			—			—			389			—			389

Charge in third quarter 2006		—			—			—			939			753			1,692
Cash expenditures		—			—			—			(422	)		(751	)		(1,173	)

Ending Balance at October 1, 2006		—			—			—			906			2			908

The balance of unpaid charges relating to Healthfield integration activities as well as a restructuring plan adopted in fiscal 2002 aggregated $2.1 million at October 1, 2006 and January 1, 2006, of which the 2002 plan had remaining lease obligations of $1.2 million and $1.4 million at October 1, 2006 and January 1, 2006, respectively, which was included in other accrued expenses in the consolidated balance sheets.

7. Goodwill and Other Intangible Assets

Goodwill and identifiable intangible assets were recorded during first nine months of fiscal 2006 in connection with acquisition activity further described in Note 5. The gross carrying amount and accumulated amortization of each category of identifiable intangible assets and goodwill as of October 1, 2006 and January 1, 2006 were as follows (in thousands):


	As of October 1, 2006							As of January 1, 2006
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated					Useful
	Amount		Amortization			Net Balance		Amount		Amortization			Net Balance		Life
Amortized intangible assets:
Covenants not to compete	$	1,473	$	(369	)	$	1,104	$	1,198	$	(173	)	$	1,025	5 Years
Customer relationships		17,450		(1,459	)		15,991		3,970		(311	)		3,659	10 Years
Tradenames		17,028		(1,089	)		15,939		1,147		—			1,147	10 Years

Subtotal		35,951		(2,917	)		33,034		6,315		(484	)		5,831

Unamortized intangible assets:
Certificates of need		169,372		—			169,372		—		—			—

Total identifiable intangible assets	$	205,323	$	(2,917	)	$	202,406	$	6,315	$	(484	)	$	5,831


Goodwill	$	280,078	$	—		$	280,078	$	6,763	$	—		$	6,763

Goodwill acquired in connection with the Healthfield acquisition has been assigned to the Home Health segment. All intangible assets have been assigned to the Home Health segment with the exception of $9.3 million in certificate of need associated with a Hospice certificate of need that has been assigned to the Other Related Services segment. The estimated amortization expense for the remainder of 2006 is $1.0 million and for each of the next five succeeding years approximates $4.0 million for fiscal years 2007 through 2009, $3.8 million for fiscal year 2010 and $3.7 million for fiscal year 2011.

8. Earnings Per Share

Basic and diluted earnings per share for each period presented has been computed by dividing net income 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):


	Three Months Ended				Nine Months Ended
	October 1, 2006		October 2, 2005		October 1, 2006		October 2, 2005
Net income	$	5,314	$	4,251	$	15,264	$	17,026


Basic weighted average common shares outstanding		27,178		23,329		26,207		23,349

Shares issuable upon the assumed exercise of stock options and in connection with the employee stock purchase plan using the treasury stock method		805		1,747		833		1,669


Diluted weighted average common shares outstanding		27,983		25,076		27,040		25,018

Net income per common share:
Basic	$	0.20	$	0.18	$	0.58	$	0.73
Diluted	$	0.19	$	0.17	$	0.56	$	0.68

9. Revolving Credit Facility and Long-Term Debt

Credit Arrangements

Prior to February 28, 2006, the Company had a Credit Facility that provided up to $55 million in borrowings, including up to $40 million which was available for letters of credit. The Company could borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.

On February 28, 2006, in connection with the Healthfield acquisition, the Company entered into a new credit agreement (“Credit Agreement”). The Credit Agreement provides for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million repayable in quarterly installments of 1 percent per annum (with the remaining balance due at maturity on March 31, 2013) and (ii) a six year revolving credit facility of $75.0 million, of which $55.0 million is available for the issuance of letters of credit and $10.0 million is available for swing line loans. There is a pre-approved $25.0 million increase available to the revolving credit facility. Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the Credit Agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined), mandatory prepayments of the term loan are required in the amounts specified in the Credit Agreement.

Interest under the Credit Agreement accrues at Base Rate or Eurodollar Rate (plus 1.25 percent for Base Rate Loans and 2.25 percent for Eurodollar Rate Loans) for both the revolving credit facility and the term loan. Overdue amounts bear interest at 2 percent per annum above the applicable rate. After the completion of two post-closing fiscal quarters, the interest rates under the Credit Agreement are reduced if the Company meets certain reduced leverage targets (as defined) as follows:


	Term Loan
Revolving Credit	Consolidated	Margin for	Margin for
Consolidated Leverage Ratio	Leverage Ratio	Base Rate Loans	Eurodollar Loans
³3.5	³3.5	1.25%	2.25%
<3.5 &³3.0	<3.5 &³3.0	1.00%	2.00%
<3.0 &³ 2.5	<3.0	0.75%	1.75%
<2.5		0.50%	1.50%

The Company is also subject to a revolving credit commitment fee equal to 0.5 percent per annum of the average daily difference between the total revolving credit commitment and the total outstanding borrowings and letters of credit, excluding amounts outstanding under swing loans. After the completion of two post-closing fiscal quarters, the commitment fee is reduced to 0.375 percent per annum if the Company’s consolidated leverage ratio (as defined) is less than 3.5. As of October 1, 2006, the consolidated leverage ratio (as defined) approximated 4.2.

The Credit Agreement requires the Company to meet certain financial tests. These tests include a consolidated leverage ratio (as defined) and a consolidated interest coverage ratio (as defined). The Credit Agreement also contains additional covenants which, among other things, require the Company to deliver to the lenders specified financial information, including annual and quarterly financial information, and limit the Company’s ability to do the following, subject to various exceptions and limitations: (i) merge with other companies; (ii) create liens on its property; (iii) incur additional debt obligations; (iv) enter into transactions with affiliates, except on an arms-length basis; (v) dispose of property; (vi) make capital expenditures; and (vii) pay dividends or acquire capital stock of the Company or its subsidiaries. As of October 1, 2006, the Company was in compliance with the covenants in the Credit Agreement.

To assist in managing the potential interest rate risk associated with its floating rate term loan under the Credit Agreement, on July 3, 2006, the Company entered into a two year interest rate swap agreement with a notional value of $170 million. Under the swap agreement, the Company pays a fixed rate of 5.665 percent per annum plus an applicable margin (an aggregate of 7.915 percent per annum) on the $170 million rather than a fluctuating rate plus an applicable margin. (See also Note 2.)

During the quarter ended October 1, 2006, the Company made prepayments of $7.0 million under its term loan. As of October 1, 2006, the Company had outstanding borrowings under the term loan of $353.0 million. The term loan requires the Company to make quarterly installment payments of $925,000, beginning June 30, 2006, with the remaining balance due at maturity on March 31, 2013. Prepayments are first applied against the quarterly installments in direct order of maturity for eight installments and then pro rata based on the remaining outstanding principal amount of such installments, including the balance due at maturity. As of October 1, 2006, maturities under the term loan were as follows: no maturities through fiscal 2007, $1.8 million for fiscal 2008, $3.6 million per year for fiscal 2009 through fiscal 2010 and $336.7 million thereafter. There were no borrowings outstanding under the revolving credit facility as of October 1, 2006.

Total outstanding letters of credit were approximately $20.1 million at October 1, 2006, under the current Credit Agreement, and $20.2 million at January 1, 2006, under the former Credit Facility. The letters of credit, which expire one year from the date of issuance, were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. The Company also had outstanding surety bonds of $2.6 million at October 1, 2006 and $2.5 million at January 1, 2006.

Guarantee and Collateral Agreement

On February 28, 2006, the Company also entered into a Guarantee and Collateral Agreement, among the Company and certain of its subsidiaries, in favor of the Administrative Agent (the “Guarantee and Collateral Agreement”). The Guarantee and Collateral Agreement grants a collateral interest in all real property and personal property of the Company and its subsidiaries, including stock of its subsidiaries. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the Credit Agreement by substantially all subsidiaries of the Company.

Other

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

For the third quarter and first nine months of fiscal 2006, net interest expense was approximately $6.5 million and $14.9 million, respectively, consisting primarily of interest expense associated with the term loan borrowings and fees associated with the Credit Agreement and outstanding letters of credit and amortization of debt issuance costs, partially offset by interest income of $0.9 million and $2.5 million, respectively, earned on short-term investments and existing cash balances. Net interest income for the third quarter and first nine months of fiscal 2005 represented interest income of approximately $0.7 million and $2.1 million, respectively, partially offset by fees relating to the Credit Facility and outstanding letters of credit.

10. Shareholders’ Equity

Changes in shareholders’ equity for the nine months ended October 1, 2006 were as follows (in thousands except share amounts):


								Accumulated
			Additional					Other
	Common		Paid-in		Accumulated			Comprehensive
	Stock		Capital		Deficit			Loss			Total
Balance at January 1, 2006	$	2,303	$	225,847	$	(45,996	)	$	—		$	182,154

Comprehensive income:
Net income		—		—		15,264			—			15,264
Unrealized loss on interest rate swap, net of tax		—		—		—			(1,145)			(1,145	)

Total comprehensive income		—		—		15,264			(1,145)			14,119

Income tax benefits associated with equity-based compensation		—		2,861		—			—			2,861

Healthfield acquisition		319		53,016		—			—			53,335


Equity-based compensation expense		—		2,951		—			—			2,951

Issuance of stock upon exercise of stock options and under stock plans for employees and directors (1,045,872 shares)		105		9,637		—			—			9,742


Balance at October 1, 2006	$	2,727	$	294,312	$	(30,732	)	$	(1,145	)	$	265,162

Comprehensive income amounted to $4.2 million and $4.3 million for the third quarter of fiscal 2006 and fiscal 2005, respectively, and $14.1 million and $17.0 million for the first nine months of fiscal 2006 and fiscal 2005, respectively.

During the three months ended October 2, 2005, the Company purchased 65,800 shares of its common stock at an aggregate cost of approximately $1.2 million or $18.07 per share. For the first nine months of fiscal 2005, the Company purchased 822,100 shares of its common stock at an aggregate cost of approximately $13.5 million or $16.44 per share. On April 14, 2005, the Company extended its stock repurchase activity with the announcement of the Company’s fifth stock repurchase program authorized by the Company’s Board of Directors, under which the Company could repurchase and retire up to an additional 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. The Company made no repurchases of its common stock during the nine months ended October 1, 2006.

As of October 1, 2006, the Company had remaining authorization to repurchase an aggregate of 683,396 shares of its outstanding common stock.

11. Equity-Based Compensation Plans

In 2004, the shareholders of the Company approved the 2004 Equity Incentive Plan (the “2004 Plan”) as a replacement for the 1999 Stock Incentive Plan (the “1999 Plan”). Under the 2004 Plan, 3.5 million shares of common stock plus any remaining shares authorized under the 1999 Plan as to which awards had not been made are available for grant. The maximum number of shares of common stock for which grants may be made in any calendar year to any 2004 Plan participant is 500,000. The 2004 Plan permits the grant of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) stock units and (vi) cash. The exercise price of options granted under the 2004 Plan can generally not be less than the fair market value of the Company’s common stock on the date of grant.

In 1999, the Company adopted the Stock & Deferred Compensation Plan for Non-Employee Directors, which was amended and restated on January 1, 2004 and further amended on May 6, 2005. Under the plan, each non-employee director receives an annual deferred stock unit award valued at $40,000 credited quarterly to the director’s share unit account, which will be paid to the director in shares of the Company’s common stock following termination of the director’s service on the Board. The total number of shares of common stock reserved for issuance under this plan is 150,000.

In 1999, the Company adopted an employee stock purchase plan (“ESPP”), as amended on February 24, 2005, subject to shareholder approval which was obtained on May 6, 2005, to provide an aggregate of 2,400,000 shares of common stock available for issuance under the ESPP. All employees of the Company, who have been employed for 60 days or more prior to the beginning of an offering period and who customarily work at least twenty hours per week, are eligible to purchase stock under this plan. The Compensation, Corporate Governance and Nominating Committee of the Company’s Board of Directors administers the plan and has the power to determine the terms and conditions of each offering of common stock. The purchase price of the shares under the ESPP is the lesser of 85 percent of the fair market value of the Company’s common stock on the first business day or the last business day of the six month offering period. Employees may purchase shares having a fair market value of up to $25,000 per calendar year. The maximum number of shares of common stock that may be sold to any employee in any offering, however, will generally be 10 percent of that employee’s compensation during the period of the offering.

On December 15, 2005, the Compensation, Corporate Governance and Nominating Committee of the Board of Directors of the Company approved the acceleration of vesting of stock options exercisable for approximately 716,000 shares of the Company’s common stock under the Company’s 1999 Plan, so that the options became fully vested and exercisable as of the close of business on December 30, 2005. The other terms of the options remain unchanged. The affected options, which represented approximately 20 percent of the Company’s total outstanding options, were granted from June 14, 2002 through January 27, 2004 and have exercise prices that range from $7.50 to $12.87 per share and a weighted average exercise price of $11.08 per share. These options include approximately 393,000 options held by the executive officers of the Company. Of the options subject to accelerated vesting, approximately 52 percent had original vesting dates between January 27, 2006 and January 3, 2007 and approximately 37 percent had original vesting dates between January 27, 2007 and December 31, 2007, with the remainder vesting after December 31, 2007.

Accelerating the vesting of these options eliminates the future compensation expense that the Company would have otherwise recognized in its consolidated statements of income with respect to these options when SFAS No. 123(Revised), “Share-Based Payment” (“SFAS 123(R)”), became effective. SFAS 123(R) became effective for the Company on January 2, 2006 and requires that compensation expense associated with stock options be recognized in the Company’s consolidated statements of income, instead of as previously presented on a pro forma basis within a footnote disclosure included in the Company’s consolidated financial statements. The future compensation expense that was eliminated as a result of the acceleration of the vesting of these options was approximately $2.3 million on an after tax basis.

Prior to January 2, 2006, the Company accounted for equity-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company’s ESPP is disclosed, based on the vesting provisions of the individual grants, but not charged to expense.

Effective January 2, 2006, the Company adopted the fair value method of accounting for equity-based compensation arrangements in accordance with SFAS 123(R). Under the provisions of SFAS 123(R), the estimated fair value of share based awards granted under the Company’s equity-based compensation plans is recognized as compensation expense over the vesting period of the award. The Company used the modified prospective method of transition under which compensation expense is recognized for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption. In accordance with the modified prospective method of transition to SFAS 123(R), the Company has not restated prior period financial statements to reflect compensation expense under SFAS 123(R).

Stock option grants in fiscal 2006 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. Stock option grants in fiscal 2005 fully vest over a four year period based on a vesting schedule that provides for one-third vesting after each of years one, three and four. Prior to the acceleration of vesting of certain stock options, as discussed in more detail above, stock option grants that were awarded in fiscal 2004 and prior years were scheduled to fully vest over periods ranging from three to six years.

For the third quarter and the first nine months ended October 1, 2006, the Company recorded equity-based compensation expense of $1.2 million and $3.0 million, respectively, which is reflected as selling, general and administrative expense in the consolidated statements of income, as calculated on a straight-line basis over the vesting periods of the related options in accordance with the provisions of SFAS 123(R). For the third quarter and the first nine months ended October 2, 2005, the Company recorded no compensation expense pursuant to the provisions of APB 25.

The weighted-average fair values of the Company’s stock options granted during the first nine months of fiscal 2006 and fiscal 2005, calculated using the Black-Scholes option-pricing model and other assumptions, are as follows:


	Nine Months Ended
	October 1, 2006			October 2, 2005
Weighted-average fair value of options granted	$	7.28		$	6.13
Risk-free interest rate		4.79	%		3.73	%
Expected volatility		35	%		35	%
Contractual life	10 years			10 years
Expected dividend yield		0	%		0	%

For stock options granted during the fiscal 2005 and 2006 periods, the expected life of an option is estimated to be 2.5 years following its vesting date and forfeitures are reflected in the calculation using an estimate based on experience.

Compensation expense is calculated for the fair value of the employee’s purchase rights under the ESPP, using the Black-Scholes option pricing model. Assumptions for the first nine months of fiscal 2006 and fiscal 2005 are as follows:


	Nine Months Ended
	October 1, 2006						October 2, 2005
	1st offering			2nd offering			1st offering			2nd offering
	Period			Period			Period			Period
Risk-free interest rate		4.42	%		5.30	%		2.63	%		3.32	%
Expected volatility		32	%		34	%		27	%		33	%
Expected life	0.5 years			0.5 years			0.5 years			0.5 years
Expected dividend yield		0	%		0	%		0	%		0	%

A summary of Gentiva stock option activity as of October 1, 2006 and changes during the nine months then ended is presented below:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Life (Years)		Value
Balance as of January 2, 2006		3,568,288		$	10.38
Granted		947,500			18.22
Exercised		(909,712	)		8.60
Cancelled		(197,026	)		16.28

Balance as of October 1, 2006		3,409,050		$	12.69		7.3	$	12,781,037

Exercisable Options		2,049,013		$	9.45		6.2	$	14,330,561

During the first nine months of fiscal 2006, the Company granted 947,500 stock options to officers and employees under its 2004 Plan at an average exercise price of $18.22 and a weighted-average, grant-date fair value of options of $7.28. The total intrinsic value of options exercised during the nine months ended October 1, 2006 and October 2, 2005 was $7.9 million and $4.0 million, respectively.

A summary of the status of the Company’s nonvested options as of October 1, 2006 and changes during the nine months then ended is presented below:


				Weighted-
				Average
	Nonvested			Grant-Date
	Options			Fair Value

Nonvested Balance as of January 2, 2006		983,127		$	6.04
Granted		947,500			7.28
Vested		(396,212	)		5.08
Cancelled		(174,378	)		6.91

Nonvested Balance as of October 1, 2006		1,360,037		$	7.07

As of October 1, 2006, the Company had $6.4 million of total unrecognized compensation cost related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of options vested during the first nine months of fiscal 2006 and 2005 was $2.0 million and $1.1 million, respectively.

The following table presents net income and basic and diluted income per common share, for the third quarter and first nine months ended October 2, 2005, had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company’s ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”) (in thousands, except per share amounts):


	Three Months Ended			Nine Months Ended
	October 2, 2005			October 2, 2005
Net income — as reported	$	4,251		$	17,026
Pro forma adjustments:
Deduct: Total equity-based compensation expense determined under fair value based method for all awards, net of tax		(852	)		(2,916	)

Net income — pro forma	$	3,399		$	14,110


Net income per share — as reported
Basic	$	0.18		$	0.73
Diluted	$	0.17		$	0.68
Net income per share — pro forma
Basic	$	0.15		$	0.60
Diluted	$	0.14		$	0.56

12. Legal Matters

Litigation

In addition to the matters referenced in this Note 12, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Management does not expect that these other legal actions will have a material adverse effect on the business or financial condition of the Company.

Indemnifications

Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation (“Olsten”), the former parent corporation of the Company (the “Split-Off”). In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business.

In connection with the Healthfield transaction, the parties have agreed to indemnify each other for certain liabilities and representations as set forth in the related acquisition agreement.

Government Matters

PRRB Appeal

The Company’s annual cost reports, which were filed with the Centers for Medicare & Medicaid Services (“CMS”), were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the 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. During fiscal 2004, the Company received an aggregate of $10.4 million in connection with the reopening of the 1997 and 1998 cost reports.

The fiscal intermediary completed the reopening of the 1999 cost reports. In connection with the reopening of the 1999 cost reports, the Company received an aggregate amount of $5.5 million, of which $1.9 million and $3.6 million was recorded as net revenues during the first quarter of fiscal 2006 and the fourth quarter of fiscal 2005, respectively. The time frame for resolving all items relating to the 2000 cost reports cannot be determined at this time.

Subpoena

On April 17, 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations (“OIG”). The subpoena seeks 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. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. On February 17, 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. The Company has provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intends to cooperate fully with any future OIG or DOJ information requests. To the Company’s knowledge, the government has not filed a complaint against the Company.

13. Income Taxes

The Company recorded a federal and state income tax provision of $1.5 million for the third quarter of fiscal 2006, of which $0.7 million represented a current tax benefit and $2.2 million represented a deferred tax provision. For the nine months ended October 1, 2006, the Company recorded a federal and state income tax provision of $8.8 million representing a current tax benefit of $0.1 million and a deferred tax provision of $8.9 million.

The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 22.5 percent for the quarter ended October 1, 2006 is primarily due to (i) the impact of the adoption of SFAS 123(R) (approximately 4.8 percent), (ii) state taxes and other items partially offset by tax exempt interest (approximately 4.3 percent), offset by (iii) the release of $0.8 million of tax reserves associated with the expiration of the statute of limitations (approximately 11.6 percent) and (iv) additional state net operating loss carryforwards resulting from the finalization of prior year state tax audits (approximately 10.0 percent).

The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 36.5 percent for the first nine months of fiscal 2006 is primarily due to (i) the impact of the adoption of SFAS 123(R) (approximately 3.4 percent), (ii) state taxes and other items partially offset by tax exempt interest (approximately 4.2 percent), offset by (iii) the release of $0.8 million of tax reserves associated with the expiration of the statute of limitations (approximately 3.3 percent) and (iv) additional state net operating loss carryforwards resulting from the finalization of prior year state tax audits (approximately 2.8 percent).

The Company recorded federal and state income tax provisions of $2.8 million and $4.3 million for the third quarter and first nine months of fiscal 2005, respectively. The income tax provision for the first nine months of fiscal 2005 included a $4.2 million release of tax reserves related to the favorable resolution of tax audit issues for the years 1997 through 2000. The Company had agreed to assume the responsibility for these items in connection with its Split-Off from Olsten in March 2000. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective tax rate of 20 percent for the first nine months is primarily due to the release of tax reserves and state taxes.

Deferred tax assets and deferred tax liabilities were as follows (in thousands):


	October 1, 2006			January 1, 2006
Deferred tax assets:
Current:
Reserves and allowances	$	13,528		$	10,477
Federal net operating loss and other carryforwards		9,717			3,325
Other		2,648			2,172

Total current deferred tax assets		25,893			15,974


Noncurrent:
Intangible assets		49,768			22,074
Federal net operating loss		4,817			—
State net operating loss		8,563			6,657
Less: valuation allowance		(4,124	)		(4,124	)

Total noncurrent deferred tax assets		59,024			24,607

Total assets		84,917			40,581


Deferred tax liabilities:
Noncurrent:
Intangible assets		(75,465	)		—
Fixed assets		(3,599	)		(2,375	)
Developed software		(6,254	)		(3,504	)
Acquisition reserves		(1,475	)		—
Other		(1,173	)		(629	)

Total noncurrent deferred tax liabilities		(87,966	)		(6,508	)

Net deferred tax (liabilities) assets	$	(3,049	)	$	34,073

At October 1, 2006, the Company had federal tax credit carryforwards of $1.5 million and federal net operating loss carryforwards of $37.3 million, all of which expire in 2025. Deferred tax assets relating to the federal net operating loss carryforwards approximate $13.1 million. In addition, the Company had state net operating loss carryforwards that expire between 2006 and 2013. Deferred tax assets relating to the state net operating loss carryforwards approximate $8.6 million. The Company maintains a valuation allowance of $4.1 million in recognition that certain state net operating loss carryforwards may expire before realization.

14. Business Segment Information

The Company’s operations involve servicing patients and customers through its three reportable business segments: Home Health, CareCentrix and Other Related Services, which encompasses the Company’s hospice, respiratory therapy and HME, infusion therapy and consulting services businesses. Prior to the acquisition of Healthfield, the Home Health segment included the Company’s consulting business and one HME location.

Home Health

The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs.

Direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, 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 Program, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;

	•		Gentiva Safe Strides^(SM) Program, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

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

	•		Gentiva Rehab Without Walls, which provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.

CareCentrix

The CareCentrix segment encompasses Gentiva’s ancillary care benefit management and the coordination of integrated homecare services for managed care organizations and health benefit plans. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and chronic infusion therapies, home medical equipment, and respiratory products and services for managed care organizations and health benefit plans. CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the providers for services to the patient. CareCentrix provides services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer’s enrollees.

Other Related Services

Hospice

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

Respiratory Therapy and Home Medical Equipment

Respiratory therapy and HME services are provided to patients at home through branch locations primarily in the southeast United States. Patients are offered a broad portfolio of products and services that serve as an adjunct to traditional home health nursing and hospice care. Respiratory therapy services are provided to patients who suffer from a variety of conditions including asthma, chronic obstructive pulmonary diseases, cystic fibrosis and other respiratory conditions. Home medical equipment includes hospital beds, wheelchairs, ambulatory aids, bathroom aids, patient lifts and rehabilitation equipment.

Infusion Therapy

Infusion therapy is provided to patients at home through pharmacy locations in Alabama, Georgia and North Carolina. Infusion therapy serves as a complement to the Company’s traditional service offering, providing clients with a comprehensive home health provider while diversifying the Company’s revenue base. Services provided include: (i) enteral nutrition, (ii) antibiotic therapy, (iii) total parenteral nutrition, (iv) pain management, (v) chemotherapy, (vi) patient education and training and (vii) nutrition management.

Consulting

The Company provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.

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 reporting, tax compliance, risk management, procurement, marketing, 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 directly attributable to the specific segment. Intersegment revenues represent Home Health segment revenues primarily generated from services provided to the CareCentrix segment. Segment assets represent net accounts receivable, inventory, identifiable intangible assets, goodwill and certain other assets associated with segment activities. Intersegment assets represent accounts receivable associated with services provided by the Home Health segment to the CareCentrix segment. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.

For the third quarter and nine months ended October 1, 2006, net revenues relating to the Company’s participation in Medicare amounted to $136.1 million and $367.9 million, respectively, of which $119.1 million and $329.9 million, respectively, was included in the Home Health segment and $17.0 million and $38.0 million, respectively, was included in the Other Related Services segment. For the third quarter and first nine months ended October 2, 2005, net revenues from Medicare amounted to $67.3 million and $194.4 million, respectively, all of which was included in the Home Health segment. Revenues from Cigna amounting to $52.1 million and $64.7 million for the third quarter of fiscal 2006 and 2005, respectively, and $160.2 million and $186.2 million for the first nine months of fiscal 2006 and 2005, respectively, were included in the CareCentrix segment.

Net revenues associated with the Other Related Services segment are as follows (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2006		October 2, 2005		October 1, 2006		October 2, 2005
Hospice	$	19,834	$	—	$	44,604	$	—
Respiratory services and HME		8,322		490		19,772		1,446
Infusion therapies		3,006		—		7,032		—
Consulting services		886		898		2,663		2,534

Total net revenues	$	32,048	$	1,388	$	74,071	$	3,980

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


							Other
	Home Health			CareCentrix			Related Services		Total
Three months ended October 1, 2006 (unaudited)
Net revenue — segments	$	192,343		$	64,829		$	32,048	$	289,220

Intersegment revenues										(3,051	)

Total net revenue									$	286,169

Operating contribution	$	23,567	(1)	$	5,661		$	6,333	$	35,561

Corporate expenses										(17,769	)(1)
Depreciation and amortization										(4,393	)
Interest expense, net										(6,546	)

Income before income taxes									$	6,853


Three months ended October 2, 2005 (unaudited)
Net revenue — segments	$	137,740		$	84,569		$	1,388	$	223,697

Intersegment revenues										(4,138	)

Total net revenue									$	219,559

Operating contribution	$	12,865		$	6,314		$	208	$	19,387

Corporate expenses										(10,398	)
Depreciation and amortization										(2,291	)
Interest income, net										385

Income before income taxes									$	7,083


Nine months ended October 1, 2006 (unaudited)
Net revenue — segments	$	549,791	(1,3)	$	199,411	(2)	$	74,071	$	823,273

Intersegment revenues										(9,803	)

Total net revenue									$	813,470

Operating contribution	$	68,648	(1,3)	$	18,346	(2)	$	13,839	$	100,833

Corporate expenses										(50,536	)(1)
Depreciation and amortization										(11,391	)
Interest expense, net										(14,863	)

Income before income taxes									$	24,043

Segment assets	$	588,250		$	49,870		$	28,147	$	666,267

Intersegment assets										(1,048	)
Corporate assets										175,042

Total assets									$	840,261


Nine months ended October 2, 2005 (unaudited)
Net revenue — segments	$	405,898		$	250,572		$	3,980	$	660,450

Intersegment revenues										(13,649	)

Total net revenue									$	646,801

Operating contribution	$	36,085		$	20,321		$	705	$	57,111

Corporate expenses										(31,154	)(4)
Depreciation and amortization										(5,938	)
Interest income, net										1,262

Income before income taxes									$	21,281

Segment assets	$	76,896		$	65,785		$	1,258	$	143,939

Intersegment assets										(1,288	)
Corporate assets										193,220

Total assets									$	335,871


(1)		Home Health operating contribution for the third quarter and first nine months of fiscal 2006 included costs of $0.6 million and $1.7 million, respectively, and corporate expenses included costs of $1.1 million and $2.0 million for the third quarter and first nine months of fiscal 2006, respectively, in connection with integration activities relating to the Healthfield acquisition. (See Note 6.)

(2)		For the first nine months ended October 1, 2006, CareCentrix included restructuring costs of $0.7 million associated with the restructuring relating to the closing and consolidation of two Regional Care Centers. (See Note 6.)


		In addition, net revenue and operating contribution for the first nine months of fiscal 2006 included an increase of $0.6 million which represented incremental revenue relating to a classification change of a CareCentrix contract.

(3)		The Home Health segment net revenues and operating contribution for the first nine months of fiscal 2006 included funds received of $1.9 million related to the $5.5 million settlement of the Company’s appeal filed with the PRRB related to the reopening of all of its 1999 Medicare cost reports. (See Note 12.)

(4)		For the nine months ended October 2, 2005, corporate expenses included a credit of $0.8 million relating to a favorable arbitration settlement.

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

Forward-looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

	•		general economic and business conditions;

	•		demographic changes;

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

	•		legislative proposals for healthcare reform;

	•		changes in Medicare and Medicaid reimbursement levels;

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

	•		liability and other claims asserted against the Company;

	•		ability to attract and retain qualified personnel;

	•		availability and terms of capital;

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

	•		ability of customers to pay for services;

	•		business disruption due to natural disasters or terrorist acts;

	•		ability to successfully integrate the operations of Healthfield and achieve expected synergies and operational efficiencies from the acquisition, in each case within expected timeframes or at all;

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

	•		a material shift in utilization within capitated agreements; and

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

Forward-looking statements are found throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its 2005 Annual Report on Form 10-K and various filings with the SEC. The reader is encouraged to review these risk factors and filings.

General

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial position. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report.

The Company’s results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006 and in other filings with the SEC.

Significant Developments

Healthfield Acquisition

On February 28, 2006, the Company completed the acquisition of 100 percent of the equity interest of Healthfield, a leading provider of home healthcare, hospice and related services with approximately 130 locations primarily in eight southeastern states. Total consideration for the acquisition was $466.0 million in cash and shares of Gentiva common stock, including transaction costs of $11.2 million. Total consideration included $2.0 million in adjustments recorded since the acquisition to reflect a change in estimate relating to the final true-up of working capital and net debt as of the Healthfield closing date, as well as incremental closing costs. Final consideration is subject to various post closing adjustments. In connection with the transaction, the Company repaid Healthfield’s existing long-term debt, including accrued interest and prepayment penalties, aggregating $195.3 million. The Company funded the purchase price using (i) $363.3 million of borrowings under a new senior term loan facility, exclusive of debt issuance costs, (see Note 9); (ii) 3,194,137 shares of Gentiva common stock at fair value of $53.3 million, determined based on the average stock price for the period beginning two days prior and ending two days after the measurement date, February 24, 2006; and (iii) existing cash balances of $49.4 million.

The Company acquired Healthfield to strengthen and expand the Company’s presence in the Southeast United States, which has favorable demographic trends and includes important Certificate of Need states, diversify the Company’s business mix and provide a meaningful platform into hospice, as well as expansion into new business lines such as respiratory and HME and infusion and expand its current specialty programs.

On February 28, 2006, in connection with the Healthfield acquisition, the Company entered into a Credit Agreement. The Credit Agreement provides for an aggregate borrowing amount of $445.0 million including (i) a seven year term loan of $370.0 million repayable in quarterly installments of 1 percent per annum (with the remaining balance due at maturity on March 31, 2013) and (ii) a six year revolving credit facility of $75.0 million, of which $55.0 million is available for the issuance of letters of credit and $10.0 million is available for swing line loans. See Note 9 to the consolidated financial statements included in this report for more information about the Credit Agreement and related agreements.

Overview

Gentiva Health Services, Inc. is the nation’s largest provider of comprehensive home health and related services. Gentiva serves patients through more than 500 direct service delivery units within over 400 locations in 35 states, and through CareCentrix, which manages home health services for major managed care organizations throughout the United States and delivers them 24 hours a day, 7 days a week in all 50 states through a network of more than 3,000 third-party provider locations, as well as Gentiva locations. The Company is a single source for skilled nursing; physical, occupational, speech and neurorehabilitation services; hospice services; social work; nutrition; disease management education; help with daily living activities; respiratory therapy and home medical equipment; infusion therapy services; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.

Commencing in fiscal 2006, the Company identified three business segments for reporting purposes: Home Health, CareCentrix and Other Related Services, which encompasses the Company’s hospice, respiratory therapy and HME, infusion therapy and consulting services businesses. The Company believes that this presentation aligns the Company’s financial reporting with the manner in which the Company has recently commenced to manage its business operations following the acquisition of Healthfield with a focus on the strategic allocation of resources and separate branding strategies among the business segments. Prior to the acquisition of Healthfield, the Home Health segment included the Company’s consulting business and one HME location.

Home Health

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

	•		Gentiva Safe Strides^(SM) Program, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;

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

	•		Gentiva Rehab Without Walls, which provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.

CareCentrix

Other Related Services

Hospice

Respiratory Therapy and Home Medical Equipment

Infusion Therapy

Consulting

Results of Operations

Revenues

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


	Third Quarter									First Nine Months
(Dollars in millions)							Percentage									Percentage
	2006			2005			Variance			2006			2005			Variance
Home Health	$	192.3		$	137.7			39.6	%	$	549.8		$	405.9			35.5	%
CareCentrix		64.8			84.6			(23.3	%)		199.4			250.6			(20.4	%)
Other Related Services		32.1			1.4			2209.5	%		74.1			4.0			1761.3	%
Intersegment revenues		(3.0	)		(4.1	)		(26.3	%)		(9.8	)		(13.7	)		(28.2	%)

Total net revenues	$	286.2		$	219.6			30.3	%	$	813.5		$	646.8			25.8	%

The Company’s net revenues increased by $66.6 million, or 30.3 percent, to $286.2 million for the quarter ended October 1, 2006 as compared to the quarter ended October 2, 2005. For the nine months ended October 1, 2006 as compared to the nine months ended October 2, 2005, net revenues increased by $166.7 million, or 25.8 percent, to $813.5 million from $646.8 million.

Home Health

Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Third quarter 2006 net revenues were $192.3 million, up $54.6 million, or 39.6 percent, from $137.7 million in the prior year period. For the first nine months of fiscal 2006, net revenues were $549.8 million, a $143.9 million or a 35.5 percent increase compared to $405.9 million for the corresponding period of fiscal 2005.

Net revenues derived from former Healthfield locations were approximately $56 million and $132 million for the third quarter and first nine months of fiscal 2006, respectively. However, in connection with activities relating to integration following the Healthfield acquisition on February 28, 2006, there has been and will continue to be a commingling of business and resources between Gentiva branch locations and former Healthfield locations in selected overlap markets in the southeast United States affecting the Company’s ability to provide Healthfield specific information.

Revenues generated from Medicare were $119.1 million in the third quarter of 2006 as compared to $67.3 million in the third quarter of 2005. This increase resulted from (i) the impact of the Healthfield acquisition; and (ii) growth from existing Gentiva locations fueled primarily by increased volume in specialty programs and continuing improvement in revenue per admission. For branch locations that were part of either Gentiva or Healthfield for more than one year, Medicare revenues increased by 7 percent between the third quarters of 2005 and 2006. Medicare revenues represented approximately 62 percent of total Home Health revenues in the 2006 third quarter as compared to 49 percent of total Home Health revenues in the 2005 third quarter. Revenues from other payer sources were $73.2 million in the third quarter of 2006 as compared to $70.4 million in the third quarter of 2005. This increase resulted primarily from Medicaid and Local Government and Commercial Insurance and Other revenues from former Healthfield locations (approximately $8.5 million) offset by a decrease of approximately $5 million in Commercial Insurance and Other revenues due to Gentiva’s decision to exit certain unprofitable business as the Company continues to pursue more favorable commercial pricing.

For the nine months ended October 1, 2006 and October 2, 2005, revenues generated from Medicare were $329.9 million and $194.4 million, respectively, due to the reasons noted above as well as a Medicare special item of $1.9 million recorded and received during the first quarter of fiscal 2006 representing a partial settlement of the Company’s appeal filed with the PRRB related to the reopening of its 1999 cost reports. Medicare revenues as a percent of total Home Health revenues for the first nine months of 2006 and 2005 were 60 percent and 48 percent, respectively.

Revenues from all other payer sources were $219.9 million for the nine months ended October 1, 2006 as compared to $211.5 million for the nine months ended October 2, 2005 due to the impact of the Healthfield acquisition (approximately $19 million) offset by a decrease of approximately $11 million in Commercial Insurance and Other revenues.

CareCentrix

CareCentrix segment revenues are derived from the Commercial Insurance and Other payer group only. Third quarter 2006 net revenues were $64.8 million, a 23.3 percent decline from $84.6 million reported in the prior year period. For the first nine months of fiscal 2006, net revenues were $199.4 million, a 20.4 percent decline compared to $250.6 million for the corresponding period of fiscal 2005. The decrease in net revenues for both the third quarter and nine month periods is due primarily to (i) the termination of a contract with TriWest Healthcare Alliance (“TriWest”) on November 29, 2005; and (ii) a change in the contract with Cigna, effective February 1, 2006, whereby the Company no longer provides respiratory therapy services and certain home medical equipment to members of Cigna plans. Revenues derived from Cigna decreased by approximately $13 million and $26 million in the third quarter and first nine months of 2006 as compared to the corresponding periods of the prior year.

Other Related Services

Other Related Services segment revenues are derived from all three payer groups. Third quarter and first nine months of fiscal 2006 net revenues of $32.1 million and $74.1 million, respectively, includes hospice, respiratory therapy and HME services, and infusion therapy net revenues, as well as revenues derived from consulting services. For the third quarter and first nine months of fiscal 2005, net revenues of $1.4 million and $4.0 million, respectively, were generated entirely from the consulting business and one HME location. The increase in revenues in both the third quarter and first nine months of fiscal 2006 was due to revenues generated from Healthfield operations subsequent to its acquisition on February 28, 2006.

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


	Third Quarter							First Nine Months
(Dollars in millions)					Percentage							Percentage
	2006		2005		Variance			2006		2005		Variance
Medicare	$	136.1	$	67.4		102.2	%	$	367.9	$	194.4		88.3	%
Medicaid and Local Government		45.5		37.6		20.9	%		132.4		112.0		18.1	%
Commercial Insurance and Other		104.6		114.6		(8.8	%)		313.2		340.4		(8.0	%)

	$	286.2	$	219.6		30.3	%	$	813.5	$	646.8		25.8	%

Gross Profit

(Dollars in millions)
	Third Quarter									First Nine Months
	2006			2005			Variance			2006			2005			Variance
Gross profit	$	118.8		$	81.0		$	37.8		$	340.7		$	242.4		$	98.3
As a percent of revenues		41.5	%		36.9	%		4.6	%		41.9	%		37.5	%		4.4	%

As a percentage of revenues, gross profit increased 4.6 percentage points and 4.4 percentage points in the third quarter and first nine months of fiscal 2006, respectively, as compared to the corresponding periods of fiscal 2005. The increases in gross margin percentage are primarily attributable to significant changes in the Company’s business mix resulting primarily from the impact of the Healthfield acquisition and the resulting increase in Medicare revenue at a traditionally higher gross margin than other business lines and to a lesser extent (i) organic revenue growth in Medicare, especially in the Company’s specialty programs; (ii) the Company’s progress in exiting unprofitable commercial business within the Home Health segment; and (iii) less revenue in the lower gross margin CareCentrix business as compared to the prior year periods.

To a lesser extent, the gross profit percentage in the 2006 periods was positively impacted by improved CareCentrix pricing and for the nine month period, incremental gross margin relating to a classification change of a CareCentrix contract and cost of claims incurred but not reported (0.1 and 0.3 percentage points for the third quarter and nine months, respectively) and the Medicare special item discussed above (0.2 percentage points for the nine months) as well as productivity gains in the clinician workforce and increased revenue per admission in the Home Health segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $29.0 million to $101.0 million for the quarter ended October 1, 2006, as compared to $72.0 million for the quarter ended October 2, 2005 and $74.0 million to $290.4 million for the nine months ended October 1, 2006, as compared to $216.4 million for the nine months ended October 2, 2005.

The increases for the third quarter and the first nine months of fiscal 2006, as compared to the corresponding periods of fiscal 2005, were attributable to (i) corporate and field operating costs associated with the Healthfield operations following the acquisition on February 28, 2006 (approximately $29 million for the third quarter and $68 million for the first nine months of 2006); (ii) restructuring and integration costs of $1.7 million and $4.4 million, respectively, related to severance and other integration costs associated with the Healthfield acquisition as well as for the nine month period, realignment of the CareCentrix operations in response to changes in the nature of services provided to Cigna members; (iii) equity-based compensation costs of $1.2 million and $3.0 million, respectively, associated with the adoption of SFAS 123(R); and (iv) the absence of an $0.8 million favorable arbitration settlement recorded in the first nine months of fiscal 2005. In addition, the Company incurred incremental salaries and consulting costs to support information services and its strategic technology projects and various other expenses during the fiscal 2006 periods offset by cost reductions of $2.4 million during the third quarter and $6.6 million during the first nine months of fiscal 2006 in the CareCentrix business.

Selling, general and administrative expenses were positively impacted in the third quarter and first nine months of fiscal 2006 by approximately $1 million associated with synergies realized from the consolidation of Gentiva and Healthfield back office functions. The Company’s integration efforts are continuing, and, in this regard the Company expects to realize cost reductions in expenses of $3 million for the fiscal year 2006.

Depreciation and Amortization

Depreciation and amortization increased $2.1 million to $4.4 million in the third quarter of 2006 and $5.5 million to $11.4 million for the nine months ended October 1, 2006 as compared to the corresponding periods of 2005. The increases were primarily attributable to amortization of identifiable intangible assets of $1.0 million and $2.4 million in the third quarter and first nine months of 2006, respectively, as compared to $0.3 million for the third quarter and first nine months of fiscal 2005, as well as depreciation expense relating to the Healthfield operations acquired in 2006.

Interest Expense and Interest Income

For the third quarter and first nine months of fiscal 2006, net interest expense was approximately $6.5 million and $14.9 million, respectively, consisting primarily of interest expense associated with the term loan borrowings, fees associated with the Credit Agreement and outstanding letters of credit and amortization of debt issuance costs, partially offset by interest income of $0.9 million and $2.5 million, respectively, earned on short-term investments and existing cash balances. Net interest income for the third quarter and first nine months of fiscal 2005 represented interest income of approximately $0.7 million and $2.1 million, respectively, partially offset by fees and other costs relating to the Company’s revolving credit facility and outstanding letters of credit.

Income before Income Taxes

Components of income before income taxes were as follows:

(Dollars in millions)
	Third Quarter									First Nine Months
	2006			2005			Variance			2006			2005			Variance
Operating Contribution:
Home Health	$	23.6		$	12.9		$	10.7		$	68.7		$	36.1		$	32.6
CareCentrix		5.7			6.3			(0.6	)		18.3			20.3			(2.0	)
Other Related Services		6.3			0.2			6.1			13.8			0.7			13.1

Total Operating Contribution		35.6			19.4			16.2			100.8			57.1			43.7

Corporate expenses		(17.8	)		(10.4	)		(7.4	)		(50.5	)		(31.2	)		(19.3	)
Depreciation and amortization		(4.4	)		(2.3	)		(2.1	)		(11.4	)		(5.9	)		(5.5	)
Interest (expense) income, net		(6.5	)		0.4			(6.9	)		(14.9	)		1.3			(16.2	)


Income before income taxes	$	6.9		$	7.1		$	(0.2	)	$	24.0		$	21.3		$	2.7
As a percent of revenue		2.4	%		3.2	%		(0.8	%)		3.0	%		3.3	%		(0.3	%)

Income Taxes

The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 36.5 percent for the first nine months of 2006 is primarily due to (i) the impact of the adoption of SFAS 123(R) (approximately 3.4 percent), (ii) state taxes and other items partially offset by tax exempt interest (approximately 4.2 percent), offset by (iii) the release of $0.8 million of tax reserves associated with the expiration of the statute of limitations (approximately 3.3 percent) and (iv) additional state net operating loss carryforwards resulting from the finalization of prior year state tax audits (approximately 2.8 percent).

Net Income

For the third quarter of fiscal 2006, net income was $5.3 million, or $0.19 per diluted share, compared with net income of $4.3 million, or $0.17 per diluted share, for the corresponding period of 2005.

For the first nine months of fiscal 2006, net income was $15.3 million, or $0.56 per diluted share, compared with net income of $17.0 million, or $0.68 per diluted share, for the first nine months of fiscal 2005.

Net income for the 2006 third quarter reflected a pre-tax charge of $1.7 million, or $0.04 per diluted share, relating to restructuring and integration costs and a net cost of $0.04 per diluted share representing a pre-tax charge of $1.2 million resulting from the implementation of a new accounting rule on equity-based compensation and its impact on the Company’s effective tax rate.

Net income for the first nine months of fiscal 2006 included: (i) a special item related to Medicare, noted under the heading “Revenues” above, which had a positive pre-tax impact of $1.9 million, or $0.04 per diluted share; (ii) pre-tax restructuring and integration costs of $4.4 million, or $0.10 per diluted share; and (iii) a net cost of $0.10 per diluted share representing a pre-tax charge of $3.0 million resulting from the implementation of a new accounting rule for equity-based compensation and its impact on the Company’s effective tax rate.

Net income for the first nine months of fiscal 2005 included $4.2 million, or $0.17 per diluted share, relating to the favorable resolution of tax audit issues noted under the heading “Income Taxes” above.

Liquidity and Capital Resources

Liquidity

The Company’s principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payer arrangements.

During the third quarter of 2006, cash provided by operating activities was $11.0 million and cash generated from the issuance of common stock upon exercise of stock options and under the ESPP was $1.3 million. In the 2006 third quarter, the Company used $7.0 million of cash for capital expenditures and $7 million on voluntary debt prepayments relating to the Company’s term loan.

The Company generated net cash from operating activities of $45.3 million in the nine months ended October 1, 2006 as compared to net cash provided by operating activities of $9.2 million in the nine months ended October 2, 2005. The increase of $36.1 million in net cash provided by operating activities between the 2005 and 2006 periods was primarily driven by changes impacting the statements of income, changes in accounts receivable and other assets and changes in current liabilities.

Cash flow impacting the statements of income represents the sum of net income and all adjustments to reconcile net income to net cash provided by operating activities and are summarized as follows (in thousands):


	Nine Months Ended
	October 1, 2006			October 2, 2005			Variance
OPERATING ACTIVITIES:
Net income	$	15,264		$	17,026		$	(1,762	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,391			5,938			5,453
Provision for doubtful accounts		5,416			4,329			1,087
Reversal of tax audit reserves		(800	)		(4,200	)		3,400
Equity-based compensation expense		2,951			—			2,951
Windfall tax benefits associated with equity-based compensation		(1,729	)		—			(1,729	)
Deferred income tax expense		8,909			4,408			4,501

Cash flow impacting the statements of income	$	41,402		$	27,501		$	13,901

The $13.9 million difference in “Cash flow impacting the statements of income” between the 2005 and 2006 periods is primarily related to improvements in net income after adjusting for components of income that do not have an impact on cash, such as depreciation and amortization, the reversal of tax audit reserves, and deferred income tax expense and, during the 2006 nine month period, equity-based compensation expense.

Cash flow from operating activities between the 2005 and 2006 reporting periods was positively impacted by $15.5 million as a result of changes in accounts receivable represented by a $14.7 million increase in the 2005 period and a $0.8 million reduction in the 2006 period, exclusive of accounts receivable of acquired businesses as of the respective acquisition dates. The change in accounts receivable relates primarily to strong cash collections during the 2006 period, including collection of a portion of the accounts receivable attributable to the TriWest account partially offset by an industry-wide hold placed by the fiscal intermediaries during the last two weeks of September on Medicare payments of approximately $8 million, which the Company received in early October 2006. Cash flow from operating activities was positively impacted by $0.4 million as a result of changes in prepaid expenses and other current assets of ($1.5) million in the 2006 period as compared to ($1.9) million in the 2005 period.

Cash flow from operating activities was positively impacted by $6.3 million as a result of changes in current liabilities of ($1.9) million in the 2005 period and $4.4 million in the 2006 period. A summary of the changes in current liabilities impacting cash flow from operating activities for the nine month fiscal period ended October 1, 2006 follows (in thousands):


	Nine Months Ended
	October 1, 2006			October 2, 2005			Variance
OPERATING ACTIVITIES:
Changes in current liabilities:
Accounts payable	$	(8,190	)	$	(719	)	$	(7,471	)
Payroll and related taxes		5,496			6,416			(920	)
Deferred revenue		(2,745	)		2,704			(5,449	)
Medicare liabilities		1,518			(3,085	)		4,603
Cost of claims incurred but not reported		(2,038	)		(1,117	)		(921	)
Obligations under insurance programs		1,571			(2,432	)		4,003
Other accrued expenses		8,750			(3,669	)		12,419

Total changes in current liabilities	$	4,362		$	(1,902	)	$	6,264

The primary drivers for the $6.3 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:

	•		Accounts payable, which had a negative impact on cash of $7.5 million, and payroll and related taxes, which had a negative impact of $0.9 million, between the 2005 and 2006 reporting periods primarily related to the timing of payments.

	•		Deferred revenue, which increased at a slower rate between the 2005 and 2006 reporting periods, exclusive of businesses acquired.

	•		Medicare liabilities, which had a positive impact of $4.6 million, between the 2005 and 2006 reporting periods, primarily related to the repayment of partial episode payments to CMS in the first nine months of fiscal 2005.

	•		Cost of claims incurred but not reported, which had a negative impact of $0.9 million, on the changes in operating cash flows between the 2005 and 2006 reporting periods due to lower claims activity resulting from the change in the nature of services provided under the Cigna agreement and the impact of termination of the TriWest contract.

	•		Obligations under insurance programs, which had a positive impact on the change in operating cash flow of $4.0 million, between the 2005 and 2006 reporting periods primarily as a result of an increase in workers’ compensation and health and welfare benefit liabilities due to an increase in the number of covered associates.

	•		Other accrued expenses, which had a positive impact on the change in operating cash flow of $12.4 million, between the 2005 and 2006 reporting periods due primarily to accrued interest payable associated with the Credit Agreement and lower incentive and commission payments during the first nine months of fiscal 2006, as well as changes in various other accrued expenses.

Working capital at October 1, 2006 was approximately $113 million, a decrease of $16 million as compared to approximately $129 million at January 1, 2006, primarily due to:

	•		a $23 million decrease in cash, cash equivalents, restricted cash and short-term investments;

	•		a $43 million increase in accounts receivable, due to the acquisition of accounts receivable associated with the Healthfield operations;

	•		a $10 million increase in deferred tax assets;

	•		a $4 million increase in prepaid expenses and other assets due to prepayments made in connection with the Company’s insurance programs; and

	•		a $51 million increase in current liabilities, consisting of increases in Medicare liabilities ($3 million), payroll and related taxes ($20 million), deferred revenue ($13 million), obligations under insurance programs ($2 million), and other accrued expenses ($16 million), partially offset by a decrease in accounts payable ($1 million) and cost of claims incurred but not reported ($2 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities.

Days Sales Outstanding (“DSO”) as of October 1, 2006 were 58 days, an increase of one day from January 1, 2006. DSO was negatively impacted by two days at October 1, 2006 due to the industry-wide hold placed by the fiscal intermediaries during the last two weeks of September on Medicare payments, which the Company received in early October 2006.

Accounts receivable attributable to major payer sources of reimbursement at October 1, 2006 and January 1, 2006 were as follows (in thousands):


	October 1, 2006
	Total		Current		31 – 90 days		91 – 180 days		Over 180 days
Medicare	$	79,828	$	33,722	$	33,201	$	9,976	$	2,929
Medicaid and Local Government		23,239		11,788		7,382		2,097		1,972
Commercial Insurance and Other		80,941		49,129		16,452		8,378		6,982
Self — Pay		8,252		767		1,310		1,983		4,192

Gross Accounts Receivable	$	192,260	$	95,406	$	58,345	$	22,434	$	16,075


	January 1, 2006
	Total		Current		31 – 90 days		91 – 180 days		Over 180 days
Medicare	$	31,623	$	15,686	$	12,198	$	2,906	$	833
Medicaid and Local Government		20,383		12,326		5,958		1,425		674
Commercial Insurance and Other		90,624		53,155		18,413		9,303		9,753
Self — Pay		5,662		823		1,165		1,584		2,090

Gross Accounts Receivable	$	148,292	$	81,990	$	37,734	$	15,218	$	13,350

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


	Three Months Ended						Nine Months Ended
	October 1, 2006			October 2, 2005			October 1, 2006			October 2, 2005
Medicare		48	%		31	%		45	%		30	%
Medicaid and Local Government		16	%		17	%		16	%		17	%
Commercial Insurance and Other		36	%		52	%		39	%		53	%

		100	%		100	%		100	%		100	%

In November 2005, CMS announced a 2.8 percent increase in home health reimbursement; however, on February 1, 2006, Congress acted to hold constant existing reimbursement rates for 2006 (except for a 5 percent rural add-on premium reflected in reimbursement rates for specifically defined rural areas of the country effective January 1, 2006.) In November 2006, CMS announced an increase of 3.3 percent in the home health market basket effective January 1, 2007; however, the rate increase could be reduced or eliminated by Congress prior to or after its effective date.

Medicare reimbursement rates for hospice services increased by 3.4 percent, effective October 1, 2006.

There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in the Company’s exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes it is currently in compliance with these standards and regulations.

The Company was party to a contract, as amended, with Cigna, effective January 1, 2004, pursuant to which the Company provided or contracted with third party providers to provide home nursing services, acute and chronic infusion therapies, home medical equipment, and respiratory products and services to patients insured by Cigna. For the third quarter and first nine months of fiscal 2006, Cigna accounted for approximately 18 percent and 20 percent of the Company’s total net revenues, respectively, compared to approximately 29 percent for the third quarter and first nine months of fiscal 2005. These decreases in Cigna revenues as a percent of total revenues principally reflect revenue growth resulting from the Healthfield acquisition and lower revenues from Cigna as a result of recent changes in the Cigna contract. Effective February 1, 2006, the Company no longer provides respiratory therapy services and certain home medical equipment services under its Cigna contract. However, the Company extended its relationship with Cigna by entering into an amendment to its contract on October 27, 2005 relating to the coordination of the provision of direct home nursing and related services, home infusion services and certain other specialty medical equipment. The term of the contract, as now amended, extends to January 31, 2009, and automatically renews thereafter for additional one year terms unless terminated. Under the termination provisions, each party has the right to terminate the agreement on January 31, 2008, under certain conditions, if the party terminating provides written notice to the other party on or before September 1, 2007. Each party also has the right to terminate at the end of each subsequent one year term by providing at least 90 days advance written notice to the other party prior to the start of the new term. If Cigna chose to terminate or not renew the contract, or to significantly modify its use of the Company’s services, there could be a material adverse effect on the Company’s cash flow.

Net revenues generated under capitated agreements with managed care payers were approximately 6 percent and 7 percent of total net revenues for the third quarter and first nine months of fiscal 2006, respectively, and 11 percent for the third quarter and first nine months of fiscal 2005.

Credit Arrangements

Prior to February 28, 2006, the Company had a revolving credit facility that provided up to $55 million in borrowings, including up to $40 million which was available for letters of credit. The Company could borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.

On February 28, 2006, in connection with the Healthfield acquisition, the Company entered into a new Credit Agreement. The Credit Agreement provides for an aggregate borrowing amount of $445.0 million of senior secured credit facilities consisting of (i) a seven year term loan of $370.0 million repayable in quarterly installments of 1 percent per annum (with the remaining balance due at maturity on March 31, 2013) and (ii) a six year revolving credit facility of $75.0 million, of which $55.0 million is available for the issuance of letters of credit and $10.0 million will be available for swing line loans. There is a pre-approved $25.0 million increase available to the revolving credit facility. Upon the occurrence of certain events, including the issuance of capital stock, the incurrence of additional debt (other than that specifically allowed under the Credit Agreement), certain asset sales where the cash proceeds are not reinvested, or if the Company has excess cash flow (as defined), mandatory prepayments of the term loan are required in the amounts specified in the Credit Agreement.


Revolving Credit	Term Loan
Consolidated	Consolidated	Margin for			Margin for
Leverage Ratio	Leverage Ratio	Base Rate Loans			Eurodollar Loans
³3.5	³3.5		1.25	%		2.25	%
<3.5 &³3.0	<3.5 &³3.0		1.00	%		2.00	%
<3.0 &³2.5	<3.0		0.75	%		1.75	%
<2.5			0.50	%		1.50	%

Guarantee and Collateral Agreement

On February 28, 2006, the Company also entered into a Guarantee and Collateral Agreement, among the Company and certain of its subsidiaries, in favor of the Administrative Agent. The Guarantee and Collateral Agreement grants a security interest in all real property and personal property of the Company and its subsidiaries, including stock of its subsidiaries. The Guarantee and Collateral Agreement also provides for a guarantee of the Company’s obligations under the Credit Agreement by substantially all subsidiaries of the Company.

Insurance Programs

The Company may be subject to workers’ compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically.

The Company is responsible for the cost of individual workers’ compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company’s workers’ compensation program are guaranteed by letters of credit and segregated restricted cash balances.

Capital Expenditures

The Company’s capital expenditures for the nine months ended October 1, 2006 were $16.3 million as compared to $6.0 million for the same period in fiscal 2005. The Company intends to make investments and other expenditures to upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry, among other things. In this regard, management expects that capital expenditures for fiscal 2006 will approximate $22 million. Management expects that the Company’s capital expenditure needs will be met through operating cash flow and available cash reserves.

Cash Resources and Obligations

The Company had cash, cash equivalents, restricted cash and short-term investments of approximately $65.5 million as of October 1, 2006. The restricted cash of $22.0 million at October 1, 2006 related primarily to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company’s insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative collateral, including letters of credit and surety bonds. In addition, restricted cash included $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company.

The Company anticipates that repayments to Medicare for Partial Episode Payments and prior year cost report settlements will be made periodically through 2006. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.

The Company made no purchases of its common stock during the first nine months of 2006. As of October 1, 2006, the Company had remaining authorization to repurchase an aggregate of 683,396 shares of its outstanding common stock.

Management anticipates that in the near term the Company may make voluntary prepayments on the term loan rather than stock repurchases with certain excess cash resources.

Contractual Obligations and Commercial Commitments

As of October 1, 2006, the Company had outstanding borrowings of $353 million under the term loan of the Credit Agreement. There were no borrowings under the revolving credit facility. Debt repayments, future minimum rental commitments for all non-cancelable leases and purchase obligations at October 1, 2006 are as follows (in thousands):


	Payment due by period
			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		4-5 years		5 years
Long-term debt obligations	$	353,000	$	—	$	4,526	$	7,242	$	341,232
Capital lease obligations		2,027		1,001		1,000		26		—
Operating lease obligations		75,732		22,823		31,077		16,430		5,402
Purchase obligations		350		350		—		—		—

Total	$	431,109	$	24,174	$	36,603	$	23,698	$	346,634

During the first nine months of fiscal 2006, the Company made voluntary debt prepayments of $17.0 million relating to its original $370 million term loan. These prepayments extinguished all required principal payments on the term loan until mid-2008. During the first week of October 2006, the Company made additional prepayments of $5 million on the term loan.

The Company had total letters of credit outstanding of approximately $20.1 million at October 1, 2006 and at January 1, 2006. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company’s obligations as further discussed above under the heading “Cash Resources and Obligations.” The Company also had outstanding surety bonds of $2.6 million and $2.5 million at October 1, 2006 and January 1, 2006, respectively.

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

Management expects that the Company’s working capital needs for fiscal 2006 will be met through operating cash flow and its existing cash balances. The Company may also consider other alternative uses of cash including, among other things, acquisitions, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company’s Board of Directors and may require the approval of its lenders. If cash flows from operations, cash resources or availability under the Credit Agreement fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company is exposed to market risk from fluctuations in interest rates. The interest rate on the Company’s borrowings under the Credit Agreement can fluctuate based on both the interest rate option (i.e., base rate or LIBOR plus applicable margins) and the interest period. As of October 1, 2006, the total amount of outstanding debt subject to interest rate fluctuations was $183.0 million. A hypothetical 100 basis point change in short-term interest rates as of that date would result in an increase or decrease in interest expense of $1.8 million per year, assuming a similar capital structure.

To assist in managing the potential interest rate risk associated with its floating rate term loan under the Credit Agreement (see Note 9 to the consolidated financial statements included in this report), on July 3, 2006, the Company entered into a two year interest rate swap agreement with a notional value of $170 million. Under the swap agreement, the Company will pay a fixed rate of 5.665 percent per annum plus an applicable margin (an aggregate of 7.915 percent per annum) on the $170 million rather than a fluctuating rate plus an applicable margin.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures

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

Changes in internal control over financial reporting

As required by the Exchange Act Rule 13a-15(d), the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s internal control over financial reporting to determine whether any change occurred during the quarter ended October 1, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter. The Company expects to exclude Healthfield from the assessment of internal control over financial reporting as of December 31, 2006 because it was acquired by the Company in a purchase business combination on February 28, 2006.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

See Note 12 to the consolidated financial statements included in this report for a description of legal matters and pending legal proceedings, which description is incorporated herein by reference.

Item 1A.Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

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

None.

Item 3.Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

Corporate Integrity Agreement

In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, effective until August 18, 2004, subject to the Company’s filing of a final annual report with the Department of Health and Human Services, Office of Inspector General, in form and substance acceptable to the government. The Company has filed a final annual report and is awaiting closure by the government.

The Company believes that it has been in compliance with the corporate integrity agreement and has timely filed all required reports. If the Company has failed to comply with the terms of its corporate integrity agreement, the Company will be subject to penalties. The corporate integrity agreement applies to the Company’s businesses that bill the federal government health programs directly for services, such as its nursing brand, and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under the corporate integrity agreement, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as to provide certain training to employees.

Item 6.Exhibits


Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation of Company. (1)

3.2		Amended and Restated By-Laws of Company. (1)

4.1		Specimen of common stock. (4)

4.2		Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (2)

4.3		Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*


(1)		Incorporated herein by reference to Form 8-K of Company dated May 12, 2006 and filed May 15, 2006.

(2)		Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663).

(3)		Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663).

(4)		Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663).

*		Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		GENTIVA HEALTH SERVICES, INC.

		(Registrant)

Date: November 10, 2006		/s/ Ronald A. Malone Ronald A. Malone
		Chairman and Chief Executive Officer

Date: November 10, 2006		/s/ John R. Potapchuk

		John R. Potapchuk
		Executive Vice President, Chief Financial Officer and Treasurer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Gentiva Health Services (GTIV) Inactive 10-Q2006 Q3 Quarterly report

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