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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 or
 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 number 000-33267
 
 Odyssey HealthCare, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    43-1723043(IRS Employer
Identification Number)717 N. Harwood, Suite 1500
Dallas, Texas(Address of principal executive offices)
    
    75201(Zip Code)
 Registrants telephone number, including area code:
(214) 922-9711
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share
    
    The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o
  Large accelerated
filer oAccelerated
filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



FORM 10-K
 ODYSSEY HEALTHCARE, INC.
For the Year Ended December 31, 2008
 TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    
    4Item 1A.
    
    Risk Factors
    
    
    25Item 1B.
    
    Unresolved Staff Comments
    
    
    36Item 2.
    
    Properties
    
    
    37Item 3.
    
    Legal Proceedings
    
    
    37Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    39Item 6.
    
    Selected Financial Data
    
    
    41Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    42Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    61Item 8.
    
    Financial Statements and Supplementary Data
    
    
    61Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    61Item 9A.
    
    Controls and Procedures
    
    
    61Item 9A(T).
    
    Controls and Procedures
    
    
    64Item 9B.
    
    Other Information
    
    
    64PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    64Item 11.
    
    Executive Compensation
    
    
    64Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    64Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    65Item 14.
    
    Principal Accountant Fees and Services
    
    
    65PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    66Signatures
    
    
    70EX-21EX-23.1EX-31.1EX-31.2EX-32
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FORWARD-LOOKING STATEMENTS
  
    
    general market conditions;
    
    adverse changes in reimbursement levels under Medicare and Medicaid programs;
    
    adverse changes in the Medicare payment cap limits and increases in our estimated
Medicare cap contractual adjustments;
    
    decline in patient census growth;
    
    increases in inflation including inflationary increases in patient care costs;
    
    our ability to effectively implement our 2009 operations and development strategies;
    
    our ability to successfully integrate and operate acquired hospice programs;
    
    our dependence on patient referral sources and potential adverse changes in patient
referral practices of those referral sources;
    
    our ability to attract and retain healthcare professionals;
    
    increases in our bad debt expense due to various factors including an increase in the
volume of pre-payment reviews by Medicare fiscal intermediaries;
    
    adverse changes in the state and federal licensure and certification laws and
regulations;
    
    adverse results of regulatory surveys;
    
    delays in licensure and/or certification of hospice programs and inpatient units;
    
    government and private party legal proceedings and investigations;
    
    cost of complying with the terms and conditions of our corporate integrity agreement;
    
    adverse changes in the competitive environment in which we operate;
    
    changes in state or federal income, franchise or similar tax laws and regulations; and
    
    adverse impact of natural disasters.
  3




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PART I
 
 Item 1. Business
 Overview and Business Strategy
 Overview
     
    
    a physician;
    
    a patient care manager;
    
    one or more registered nurses;
    
    one or more certified home health aides;
    
    a medical social worker;
    
    a chaplain;
    
    a homemaker; and
    
    one or more specially trained volunteers.
  4




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
    
    the provision of coordinated care and treatment;
    
    clear accountability for clinical outcomes and cost of services; and
    
    the potential reduction of stress and dysfunction on patients and their families.
  Business Strategy
  Improve our organic growth:
 Number ofMedicare-CertifiedHospice Programsfor the QuarterEnded
December 31,Average Daily Patient Census
    
    2007
    
    20080-50
    
    
    13
    
    
    
    751-100
    
    
    25
    
    
    
    28101-200
    
    
    27
    
    
    
    41200+
    
    
    7
    
    
    
    18
 Broaden our patient mix:
 Increase our efficiencies:
 5




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Growth through selectively acquiring other hospices and other development activities:
 Improve the recruitment, retention and development of our senior program level management:
 Revenues and Industry Segments
  Principal Office and State of Incorporation
  Hospice Services and Payment
  
    
    Nursing care
    
    Medical social services
    
    Physician services
    
    Patient counseling (dietary, spiritual and other)
    
    General inpatient care
    
    Medical supplies and equipment
    
    Drugs for pain control and symptom management
 6




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
    
    Home health aide services
    
    Homemaker services
    
    Therapy (physical, occupational and speech)
    
    Respite inpatient care
    
    Family bereavement counseling
     Reimbursement Range as ofDecember 31, 2008 (1)Level of Care
    
    Description of Care
    
    (Inclusive of Wage Index)Routine Home Care
    
    Hospice services provided
in the patients home or
other residence. Accounted
for 97.2% and 97.5% of our
total days of care in 2007
and 2008, respectively.
    
    $120.74-$202.64Continuous Home Care
    
    Continuous care provided in
the patients home or other
residence during a period
of crisis to manage acute
pain or other medical
symptoms for a minimum of
eight hours per day, with
nursing care accounting for
at least half of the care
provided. Paid on an hourly
basis. Accounted for 0.9%
and 0.6% of our total days
of care in 2007 and 2008,
respectively.
    
    $704.68-$1,182.75
(per diem equivalent)General Inpatient Care
    
    Care provided in a hospital
or other inpatient facility
to manage acute pain and
other medical symptoms that
cannot be managed
effectively in a home
setting. Accounted for 1.7%
of our total days of care
for both 2007 and 2008.
    
    $542.95-$882.40
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Reimbursement Range as ofDecember 31, 2008 (1)Level of Care
    
    Description of Care
    
    (Inclusive of Wage Index)Respite Inpatient Care
    
    Care provided for up to
five days in a hospital or
other inpatient facility to
relieve the patients
family or other caregivers.
Accounted for 0.2% of our
total days of care for both
2007 and 2008.
    
    $128.69-$195.86
 
 (1)
    
    These rates do not include the impact of the delay in the implementation of the phase out of
the budget neutrality adjustment factor used to compute the hospice wage index. See 
Overview of Government Payments.  PercentageEffective Date of Rate Increase
    
    IncreaseOctober 1, 2004
    
    
    3.3
    %October 1, 2005
    
    
    3.7
    %October 1, 2006
    
    
    3.4
    %October 1, 2007
    
    
    3.3
    %October 1, 2008
    
    
    3.6
    %
 Hospice Utilization and Market Opportunity
  Acceleration of Hospice Use:
 Length of Stay:
 Aging Population in the United States:
 Our Hospice Services and Centralized Support Center
  8




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Caregivers:
  Community Education Representatives:
 Increasing Our Patient Census:
 Where We Provide Our Care:
  Medicare-Covered Care:
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Diagnoses:
 Percentage ofPatients Admittedby Primary DiagnosisPrimary Diagnosis
    
    2006
    
    
    2007
    
    
    2008Cancer
    
    
    32
    %
    
    
    31
    %
    
    
    31
    %End-stage heart disease
    
    
    18
    
    
    
    18
    
    
    
    17Dementia
    
    
    19
    
    
    
    17
    
    
    
    14Debility
    
    
    15
    
    
    
    9
    
    
    
    12Lung disease
    
    
    8
    
    
    
    8
    
    
    
    9End-stage kidney disease
    
    
    3
    
    
    
    3
    
    
    
    3End-stage liver disease
    
    
    2
    
    
    
    2
    
    
    
    2Other
    
    
    3
    
    
    
    12
    
    
    
    12Totals
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 10




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Hospice Programs, Inpatient Facilities and Support Center
 Hospice Programs and Inpatient Facilities:
  Alabama     Arizona    Arkansas   California          Colorado    Delaware   Florida    Georgia        Illinois   Indiana
 Louisiana     Massachusetts   Michigan    Mississippi    Missouri    Nebraska   Nevada    New Jersey   New Mexico    Ohio     Oregon   Pennsylvania     Rhode Island
 South Carolina    Tennessee    Texas                     Utah    Virginia     Wisconsin
   
 (1)
    
    We had a total of nineteen inpatient facilities as of December 31, 2008 with a total of
274 beds.(2)
    
    Both Odyssey and VistaCare have a hospice program that is Medicare certified in the
respective location. 11




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Support Center:
  Government Regulation and Payment Structure
    What are Medicare and Medicaid?
 Medicare Conditions of Participation.
 12




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
    
    Governing Body. Each hospice must have a governing body that assumes full responsibility
for the overall management and operations of a hospice and for ensuring that all services
are provided in a manner consistent with accepted standards of practice. The governing body
must designate one individual who is responsible for the day-to-day administrative
operations of the hospice. The designated individual must be a hospice employee and must
possess the education and experience required by the governing body.
    
    Direct Provision of Core Services.Medicare limits those services for which a hospice
may use individual independent contractors or contract agencies to provide care to
patients. Specifically, substantially all nursing, social work and counseling services must
be provided directly by hospice employees meeting specific educational and professional
standards. During periods of peak patient loads or under extraordinary circumstances, the
hospice may be permitted to use contract workers, but the hospice must agree in writing to
maintain professional, financial and administrative responsibility for the services
provided by those individuals or entities.
    
    Medical Director. Each hospice must have a medical director who is a physician and who
assumes responsibility for overseeing the medical component of the hospices patient care
program. When the medical director is not available, a physician designated by the hospice
assumes the same responsibilities and obligations as the medical director. The medical
director may be employed by or under contract with the hospice.
    
    Professional Management of Non-Core Services. A hospice may arrange to have non-core
services such as therapy services, home health aide services, medical supplies or drugs
provided by a non-employee or outside entity. If the hospice elects to use an independent
contractor to provide non-core services, then the hospice must do so through a written
agreement, and must retain administrative and financial management and supervision over
staff and services to ensure the provision of quality hospice care. Written agreements for
arranged services must require that all services be authorized by hospice, furnished in a
safe and effective manner by qualified personnel, and delivered in accordance with the
patients plan of care.
    
    Plan of Care. The hospices interdisciplinary group must establish an individualized
written plan of care for each hospice patient in collaboration with the patients attending
physician, the medical director or designated hospice physician, the patient or
representative and the primary caregiver. The plan of care must be established prior to
providing care to any hospice patient. The plan must assess the patients needs and specify
the hospice care and services to be provided to meet those needs and also must be reviewed
and updated at specified intervals.
    
    Continuation of Care. A hospice may not discontinue or reduce care provided to a
Medicare or Medicaid beneficiary if the individual becomes unable to pay for that care.
    
    Admission to Hospice Care.A hospice shall admit a patient only on the recommendation of
the medical director in consultation with, or with input from, the patients attending
physician (if any).
    
    Election of Hospice Benefit. An individual who meets the eligibility requirements for
hospice care must file an election statement with the particular hospice that will provide
care to the individual. If the individual is physically or mentally incapacitated, his or
her representative must file the election statement. An individual or the individuals
representative may revoke the individuals election of hospice care at any time.
    
    Training.A hospice must provide orientation and ongoing training for its employees and
contracted staff who have patient and family contact. A hospice must assess the skills and
competency of all individuals
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furnishing care, including volunteers furnishing services, and, provide in-service training
and education programs where required. The hospice must have written policies and procedures
describing its methods of assessment of competency and maintain a written description of the
in-service training provided during the previous 12 months.
    
    Quality Assessment and Performance Improvement. A hospice must develop, implement and
maintain a hospice-wide quality assessment and performance improvement program involving
all hospice services, including services provided under arrangement or contract.
    
    Interdisciplinary Group. A hospice must designate an interdisciplinary group to provide
or supervise hospice care services. The interdisciplinary group develops and updates plans
of care, and establishes policies governing the day-to-day provision of hospice services.
The interdisciplinary group must include at least a physician, registered nurse, social
worker and spiritual or other counselor. A registered nurse must be designated to
coordinate the plan of care and to ensure continuous assessment of each hospice patients
and familys needs.
    
    Volunteers. Hospice programs are required to recruit and train volunteers to provide
patient care services or administrative services. Volunteer services must comprise at least
five percent of the total patient care hours provided by all paid hospice employees and
contract staff.
    
    Licensure.Each hospice and all hospice personnel must be licensed, certified or
registered in accordance with applicable federal, state and local laws and regulations.
    
    Central Clinical Records. Hospice programs must maintain clinical records for each
hospice patient that are organized in such a way that they may be easily retrieved. The
clinical records must be complete and accurate and protected against loss, destruction and
unauthorized use. The clinical records must be retained for 6 years after the death or
discharge of the patient, unless state law stipulates a longer period of time.
    
    Criminal Background Checks.Hospice programs must obtain a criminal background check on
all hospice employees who have direct patient contact or access to patient records. Hospice
contracts must require that all contracted entities obtain criminal background checks on
contracted employees who have direct patient contact or access to patient records.
  Surveys.
 Certificate of Need Laws and Other Restrictions.
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Limits on the Acquisition or Conversion of Non-Profit HealthCare Organizations.
 Overview of Government Payments
  st
  
    
    have relatively higher payments per day at the beginning of a patients hospice care
and relatively lower payments per day as the duration of the hospice patients stay
increases,
    
    include relatively higher payments for the costs associated with patient death at the
end of the hospice patients stay, and
    
    implement the payment system changes in 2013, with a brief transitional period.
  15




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Medicare.
  The Medicare Cap.
 Dollar Amount Cap.
  Medicare Cap Year Ending October 31,
    
    Medicare Cap Amount2006
    
    $
    20,5852007
    
    $
    21,4102008
    
    $
    22,3862009 (estimated)
    
    $
    22,834
 16




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Accrued Medicare Cap Contractual AdjustmentsYear Ending December 31,2006
    
    
    2007
    
    
    2008(in thousands)Beginning balance  accrued Medicare cap
contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682Medicare cap contractual adjustments
    
    
    8,853
    (1)
    
    
    5,039
    (2)
    
    
    6,852
    (3)Medicare cap contractual adjustments -
discontinued operations
    
    
    7,611
    (4)
    
    
    2,651
    (4)
    
    
    (27
    )(4)Payments to Medicare fiscal intermediaries
    
    
    (1,983
    )
    
    
    (12,687
    )
    
    
    (12,996
    )Balances acquired from VistaCare
    
    
    
    
    
    
    
    
    
    
    8,208Reclassification to accounts payable
    
    
    (2,685
    )(5)
    
    
    
    
    
    
    Ending balance  accrued Medicare cap
contractual adjustments
    
    $
    26,679
    
    
    $
    21,682
    
    
    $
    23,719
 
 (1)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year.(2)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(3)
    
    Includes additional accrual of $1.0 million related to
the 2005 and 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are related to
all programs that we discontinued and sold during 2006, 2007 and 2008.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to accounts
payable in December 2006 and were paid in January 2007 to the Medicare fiscal intermediary.  
    
    the actual number of Medicare beneficiary patient admissions and discharges and the
dates of occurrence of each;
    
    changes in the average length of stay at our hospice programs;
    
    fluctuations in admissions and discharges at our hospice programs;
    
    possible enrollment of beneficiaries in our hospice programs who may have previously
elected Medicare hospice coverage through another hospice program and whose Medicare cap
amount is prorated for the days of service for the previous hospice admission;
    
    possible enrollment of beneficiaries with another hospice program who had been on
previous hospice service with one of our own hospice programs and discharged from our
hospice program and whose Medicare cap amount is prorated between the programs for the days
of service for the subsequent hospice admission;
    
    fiscal intermediary disallowances of certain beneficiaries and changes in calculation
methodology;
    
    uncertainty surrounding length of patient stay in various patient groups, particularly
with respect to non-cancer patients; and
    
    the fact that we are not advised of the Medicare cap amount that will be used by
Medicare to calculate our Medicare cap contractual adjustment until the latter part of the
Medicare cap year, requiring us to use an estimate of that amount throughout the year.
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Inpatient Care Cap.
 Fiscal Intermediary Reviews.
  Medicare Six-Month Eligibility Rule and Waiver of Other Medicare Benefits.
  Medicaid.
 18




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Long-Term Care Facility Residents.
 Other Healthcare Regulations
 Fraud and Abuse Laws and Anti-Kickback Statute.
    19




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HIPAA Fraud and Abuse Provisions.
 Civil Monetary Penalties Statute.
 False Claims Act.
 State False Claims Laws.
 The Stark Law and State Physician Self-Referral Laws.
  20




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Prohibition on Employing or Contracting with Excluded Providers.
 Corporate Practice of Medicine and Fee-Splitting.
  Regulation Governing the Privacy and Transmission of Healthcare Information
  
    
    standardization of certain electronic patient health, administrative and financial
data;
    
    privacy standards protecting the privacy of individually identifiable health
information; and
    
    security standards protecting the confidentiality and integrity of electronically held
individually identifiable health information.
 21




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Additional Federal and State Healthcare Laws.
 Surveys and Certification.
 Employment Laws and Regulations.
  22




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Compliance and Quality Assessment and Performance Improvement Programs
  
    
    a compliance officer and committee;
    
    a corporate code of business conduct and ethics and standards of conduct;
    
    employee education and training;
    
    an internal system for reporting concerns on a confidential, anonymous basis;
    
    ongoing internal auditing and monitoring programs; and
    
    a means for enforcing the compliance program policies.
    
    
    on-going education of staff and quarterly quality assessment and performance
improvement meetings at each of our hospice programs and at our Support Center;
    
    quarterly comprehensive audits of patient charts and site operations performed by each
of our hospice programs; and
    
    at least once a year, a comprehensive audit of patient charts and site operations
performed on each of our hospice programs by our clinical compliance staff.
   23




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Competition
   Insurance
  Employees
  Available Information
   24




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Item 1A. Risk Factors
  If we fail to comply with the terms of our Corporate Integrity Agreement, we could be subject to
substantial monetary penalties or suspension or termination from participation in the Medicare and
Medicaid programs.
  We are highly dependent on payments from Medicare and Medicaid. If there are changes in the rates
or methods governing these payments for our services, our net patient service revenue and profits
could materially decline.
 st
  25




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
    
    have relatively higher payments per day at the beginning of a patients hospice care
and relatively lower payments per day as the length of the duration of the hospice
patients stay increases,
    
    include relatively higher payments for the costs associated with patient death at the
end of the hospice patients stay, and
    
    implement the payment system changes in 2013, with a brief transitional period.
  We are subject to a Medicare cap amount which is calculated by Medicare. Our net patient service
revenue and profitability could be adversely affected by limitations on Medicare payments.
  We operate in an industry that is subject to extensive federal, state and local regulation, and
changes in law and regulatory interpretations could reduce our net patient service revenue and
profitability.
  
    
    payment for services;
    
    conduct of operations, including fraud and abuse, anti-kickback prohibitions, physician
self-referral prohibitions and false claims;
    
    privacy and security of medical records;
    
    employment practices; and
 26




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
    
    facility and professional licensure, including certificates of need, surveys,
certification and recertification requirements, and corporate practice of medicine
prohibitions.
       27




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Almost half of our hospice patients reside in nursing homes. Changes in the laws and regulations
regarding payments for hospice services and room and board provided to our hospice patients
residing in nursing homes could reduce our net patient service revenue and profitability.
   28




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If we are unable to maintain relationships with existing patient referral sources or to establish
new referral sources, our growth and profitability could be adversely affected.
  Our growth strategy to develop new hospice programs in new and existing markets may not be
successful, which could adversely impact our growth and profitability.
  
    
    identify markets that meet our selection criteria for new hospice programs;
    
    hire and retain a qualified management team to operate each of our new hospice
programs;
    
    manage a large and geographically diverse group of hospice programs;
    
    become Medicare and Medicaid certified in new markets;
    
    generate sufficient hospice admissions in new markets to operate profitably in these
new markets; or
    
    compete effectively with existing programs in new markets.
 Our growth strategy to acquire other hospices may not be successful and the integration of future
acquisitions may be difficult and disruptive to our ongoing business.
  
    
    our ability to identify suitable acquisition candidates;
    
    our ability to negotiate favorable acquisition terms, including purchase price, which
may be adversely affected due to increased competition with other buyers;
    
    the availability of financing on terms favorable to us, or at all;
    
    our ability to integrate effectively the systems and operations of acquired hospices;
 29




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
    
    our ability to retain key personnel of acquired hospices; and
    
    our ability to obtain required regulatory approvals.
   Our loss of key senior management personnel or our inability to hire and retain skilled employees
at a reasonable cost could adversely affect our business and our ability to increase patient
referrals.
   A nationwide shortage of qualified nurses could adversely affect our profitability and our ability
to grow and continue to provide quality, responsive hospice services to our patients as nursing
wages and benefits increase.
  Medical reviews and audits by governmental and private payors could result in material payment
recoupments and payment denials, which could negatively impact our business.
  30




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If any of our hospice programs fails to comply with the Medicare conditions of participation, that
program could be terminated from the Medicare program, thereby adversely affecting our net patient
service revenue and profitability.
   Many states have certificate of need laws or other regulatory provisions that may adversely impact
our ability to expand into new markets and thereby limit our ability to grow and to increase our
net patient service revenue.
  We may not be able to compete successfully against other hospice providers, and competitive
pressures may limit our ability to maintain or increase our market position and adversely affect
our profitability.
  
    
    community-based hospice providers;
    
    national and regional companies;
    
    hospital-based hospice and palliative care programs;
    
    nursing homes; and
    
    home health agencies.
  31




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If our costs were to increase more rapidly than the fixed payment adjustments we receive for our
hospice services from Medicare and Medicaid, our profitability could be negatively impacted.
  st
 Federal and state legislative and regulatory initiatives relating to patient privacy could require
us to expend substantial sums on acquiring and implementing new information systems.
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Our net patient service revenue and profitability may be constrained by cost containment
initiatives undertaken by insurers and managed care companies.
  A significant reduction in the carrying value of our goodwill could have a material adverse effect
on our profitability.
  Professional and general liability claims and hired and non-owned auto liability claims may have
an adverse effect on us either because our insurance coverage may be inadequate to cover the
losses or because claims against us, regardless of merit or eventual outcome, may adversely affect
our reputation, our ability to obtain patient referrals or our ability to expand our business.
   An adverse ruling against us in certain litigation could have an adverse effect on our financial
condition and results of operations.
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Because of conditions in the credit markets we may not be able to access our funds that are
currently invested in auction rate securities without incurring a substantial loss on the
disposition of such securities.
  We may need additional capital to fund our operations and finance our growth, and we may not be
able to obtain it on terms acceptable to us, or at all.
  The Credit Agreement contains, and future debt agreements may contain, various covenants that
limit our discretion in the operation of our business.
  
    
    incur more debt;
    
    redeem or repurchase stock, pay dividends or make other distributions;
    
    make certain investments;
 34




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
    
    create liens;
    
    enter into transactions with affiliates;
    
    make certain acquisitions;
    
    merge or consolidate; and
    
    transfer or sell assets.
  We are dependent on the proper functioning of our information systems to efficiently manage our
business.
  Our inability to effectively integrate, manage and keep secure our information systems could
disrupt our operations.
    Provisions in our charter documents, under Delaware law, and in our stockholder rights plan
could discourage a takeover that stockholders may consider favorable.
  35




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
    
    authorize the issuance by the board of directors of preferred stock without the
requirement of stockholder approval, which could make it more difficult for a third party
to acquire a majority of our outstanding voting stock;
    
    provide for a classified board of directors with staggered, three-year terms;
    
    prohibit cumulative voting in the election of directors;
    
    prohibit our stockholders from acting by written consent;
    
    limit the persons who may call special meetings of stockholders;
    
    prohibit our stockholders from amending our bylaws unless the amendment is approved by
the holders of at least 80% of our shares of common stock; and
    
    establish advance notice requirements for nominations for election to the board of
directors or for proposing matters to be approved by stockholders at stockholder meetings.
     
 Item 1B. Unresolved Staff Comments
  36




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Item 2. Properties
  
 Item 3. Legal Proceedings
     37




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Item 4. Submission of Matters to a Vote of Security Holders
  38




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 Market for Common Stock.
 High
    
    Low2007First Quarter
    
    $
    14.40
    
    
    $
    11.85Second Quarter
    
    $
    13.96
    
    
    $
    11.81Third Quarter
    
    $
    12.50
    
    
    $
    9.23Fourth Quarter
    
    $
    11.14
    
    
    $
    9.062008First Quarter
    
    $
    11.15
    
    
    $
    8.27Second Quarter
    
    $
    11.28
    
    
    $
    8.57Third Quarter
    
    $
    10.99
    
    
    $
    8.38Fourth Quarter
    
    $
    10.47
    
    
    $
    6.76
 Dividends.
  
    
    any applicable contractual restrictions limiting our ability to pay dividends;
    
    our earnings;
    
    our financial condition;
    
    our ability to fund capital requirements; and
    
    other factors our board of directors deems relevant.
 Recent Sales of Unregistered Securities.
 Repurchases of Common Stock.
  39




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40




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##### Table of Contents



Item 6. Selected Financial Data
   Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008(In thousands, except per share amounts)Statements of Operations Data:Net patient service revenue
    
    $
    312,908
    
    
    $
    348,592
    
    
    $
    379,218
    
    
    $
    398,232
    
    
    $
    616,050Operating expenses:Direct hospice care
    
    
    165,713
    
    
    
    193,823
    
    
    
    222,496
    
    
    
    233,664
    
    
    
    361,445General and administrative (1)
    
    
    86,448
    
    
    
    102,980
    
    
    
    115,771
    
    
    
    131,577
    
    
    
    199,142Government settlement
    
    
    
    
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    Provision for uncollectible accounts
    
    
    7,505
    
    
    
    4,023
    
    
    
    4,007
    
    
    
    5,344
    
    
    
    10,907Depreciation and amortization
    
    
    3,603
    
    
    
    4,002
    
    
    
    5,080
    
    
    
    5,723
    
    
    
    7,868Total operating expenses
    
    
    263,269
    
    
    
    317,828
    
    
    
    347,354
    
    
    
    376,308
    
    
    
    579,362Income from continuing operations
before other income (expense)
    
    
    49,639
    
    
    
    30,764
    
    
    
    31,864
    
    
    
    21,924
    
    
    
    36,688Other income (expense):Loss on write-down of property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )
    
    
    (150
    )Interest income
    
    
    359
    
    
    
    1,341
    
    
    
    2,576
    
    
    
    2,509
    
    
    
    1,968Interest expense
    
    
    (118
    )
    
    
    (198
    )
    
    
    (188
    )
    
    
    (208
    )
    
    
    (7,430
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (257
    )241
    
    
    
    1,143
    
    
    
    2,388
    
    
    
    2,076
    
    
    
    (5,869
    )Income from continuing operations
before provision for income taxes
    
    
    49,880
    
    
    
    31,907
    
    
    
    34,252
    
    
    
    24,000
    
    
    
    30,819Provision for income taxes
    
    
    18,891
    
    
    
    13,263
    
    
    
    12,124
    
    
    
    8,001
    
    
    
    11,141Income from continuing operations
    
    
    30,989
    
    
    
    18,644
    
    
    
    22,128
    
    
    
    15,999
    
    
    
    19,678Loss from discontinued operations, net
of income taxes (2)
    
    
    4,007
    
    
    
    (88
    )
    
    
    (2,399
    )
    
    
    (3,888
    )
    
    
    (5,252
    )Net income
    
    $
    34,996
    
    
    $
    18,556
    
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    14,426Income (loss) per common share:Basic:Continuing operations
    
    $
    0.85
    
    
    $
    0.54
    
    
    $
    0.65
    
    
    $
    0.48
    
    
    $
    0.60Discontinued operations
    
    $
    0.11
    
    
    $
    0.00
    
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.96
    
    
    $
    0.54
    
    
    $
    0.58
    
    
    $
    0.36
    
    
    $
    0.44Diluted:Continuing operations
    
    $
    0.82
    
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    0.48
    
    
    $
    0.59Discontinued operations
    
    $
    0.11
    
    
    $
    0.00
    
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.93
    
    
    $
    0.53
    
    
    $
    0.57
    
    
    $
    0.36
    
    
    $
    0.43Weighted average shares outstanding:Basic
    
    
    36,445
    
    
    
    34,384
    
    
    
    34,145
    
    
    
    33,029
    
    
    
    32,674Diluted
    
    
    37,551
    
    
    
    34,935
    
    
    
    34,529
    
    
    
    33,188
    
    
    
    33,188
 41




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##### Table of Contents



Year Ended December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008(Unaudited)(Dollars in thousands)Operating Data:Number of
Medicare-certified
hospice programs(3)
    
    
    60
    
    
    
    63
    
    
    
    66
    
    
    
    67
    
    
    
    94Admissions(4)
    
    
    28,620
    
    
    
    30,972
    
    
    
    32,001
    
    
    
    32,246
    
    
    
    46,772Days of care(5)
    
    
    2,449,038
    
    
    
    2,607,854
    
    
    
    2,747,888
    
    
    
    2,791,780
    
    
    
    4,212,771Average daily census(6)
    
    
    6,691
    
    
    
    7,145
    
    
    
    7,528
    
    
    
    7,649
    
    
    
    11,510Cash flows provided by
operating activities
    
    $
    47,124
    
    
    $
    58,171
    
    
    $
    32,623
    
    
    $
    12,814
    
    
    $
    21,049Cash flows (used in)
provided by investing
activities
    
    $
    (41,170
    )
    
    $
    (52,845
    )
    
    $
    (27,183
    )
    
    $
    4,391
    
    
    $
    (97,187
    )Cash flows (used in)
provided by financing
activities
    
    $
    (19,387
    )
    
    $
    (14,994
    )
    
    $
    (13,051
    )
    
    $
    (12,391
    )
    
    $
    119,795
 As of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008(Dollars in thousands)Balance Sheet Data:Working capital
    
    $
    63,259
    
    
    $
    62,639
    
    
    $
    70,555
    
    
    $
    75,275
    
    
    $
    82,429Total assets
    
    $
    204,091
    
    
    $
    244,967
    
    
    $
    269,986
    
    
    $
    275,209
    
    
    $
    460,951Total long-term debt, including current portion
    
    $
    14
    
    
    $
    9
    
    
    $
    3
    
    
    $
    1
    
    
    $
    123,075Stockholders equity
    
    $
    162,080
    
    
    $
    167,298
    
    
    $
    179,596
    
    
    $
    182,837
    
    
    $
    200,071
 
 (1)
    
    Includes stock-based compensation of $287, $721, $5,616, $3,829 and $4,347 for the years
ended December 31, 2004, 2005, 2006, 2007 and 2008, respectively. Also, general and
administrative expenses include expenses for hospice care and support center.(2)
    
    See Note 7 to our consolidated financial statements included elsewhere in this Annual Report
on Form 10-K for a discussion of loss from discontinued operations, net of income taxes.(3)
    
    Number of Medicare-certified hospice programs at end of each respective year.(4)
    
    Represents the total number of patients admitted into our hospice programs during the period.(5)
    
    Represents the total days of care provided to our patients during the period.(6)
    
    Represents the average number of patients for whom we provided hospice care each day during
the period and is computed by dividing days of care by the number of days during the period. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
  Overview
  42




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Developed Hospices
      Acquisitions
  43




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##### Table of Contents



Discontinued Operations
     44




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##### Table of Contents



Net Patient Service Revenue
   45




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##### Table of Contents



st
 Expenses
   46




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##### Table of Contents



Year Ended December 31,2006
    
    2007
    
    2008Direct hospice care expenses:Salaries, benefits and payroll taxes
    
    
    39.0
    %
    
    
    39.1
    %
    
    
    38.3
    %Pharmaceuticals
    
    
    5.3
    
    
    
    5.2
    
    
    
    4.8Medical equipment and supplies
    
    
    5.3
    
    
    
    5.3
    
    
    
    5.8Inpatient costs
    
    
    2.5
    
    
    
    2.2
    
    
    
    2.2Other (including medical director fees, contracted patient care
services, nursing home costs and mileage)
    
    
    6.6
    
    
    
    6.9
    
    
    
    7.6Total
    
    
    58.7
    %
    
    
    58.7
    %
    
    
    58.7
    %General and administrative expenses  hospice care:Salaries, benefits and payroll taxes
    
    
    13.7
    %
    
    
    14.5
    %
    
    
    14.0
    %Leases
    
    
    2.7
    
    
    
    2.9
    
    
    
    2.8Other (including insurance, recruiting, travel, telephone and printing)
    
    
    3.7
    
    
    
    4.0
    
    
    
    4.2Total
    
    
    20.1
    %
    
    
    21.4
    %
    
    
    21.0
    %General and administrative expenses  support center:Salaries, benefits and payroll taxes
    
    
    4.4
    %
    
    
    4.6
    %
    
    
    5.9
    %Stock-based compensation
    
    
    1.5
    
    
    
    1.0
    
    
    
    0.7Leases
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4Legal and accounting fees
    
    
    1.3
    
    
    
    1.9
    
    
    
    1.1Other (including insurance, recruiting, travel, telephone and printing)
    
    
    2.8
    
    
    
    3.8
    
    
    
    3.2Total
    
    
    10.4
    %
    
    
    11.7
    %
    
    
    11.3
    %
 47




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007
    
    
    2008Direct hospice care expenses:Salaries, benefits and payroll taxes
    
    $
    53.87
    
    
    $
    55.76
    
    
    $
    56.06Pharmaceuticals
    
    
    7.35
    
    
    
    7.43
    
    
    
    7.05Medical equipment and supplies
    
    
    7.25
    
    
    
    7.53
    
    
    
    8.44Inpatient costs
    
    
    3.44
    
    
    
    3.09
    
    
    
    3.18Other (including medical director fees, contracted patient care
services, nursing home costs and mileage)
    
    
    9.06
    
    
    
    9.89
    
    
    
    11.07Total
    
    $
    80.97
    
    
    $
    83.70
    
    
    $
    85.80General and administrative expenses  hospice care:Salaries, benefits and payroll taxes
    
    $
    18.91
    
    
    $
    20.69
    
    
    $
    20.52Leases
    
    
    3.68
    
    
    
    4.14
    
    
    
    4.04Other (including insurance, recruiting, travel, telephone and printing)
    
    
    5.13
    
    
    
    5.65
    
    
    
    6.13Total
    
    $
    27.72
    
    
    $
    30.48
    
    
    $
    30.69
 Stock-Based Compensation Charges
   Provision for Income Taxes
  Critical Accounting Policies
  48




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Net Patient Service Revenue and Allowance for Uncollectible Accounts
   Medicare Regulation
 The Medicare Cap.
 Dollar Amount Cap.
 Inpatient Care Cap
 49




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##### Table of Contents



Accrued Medicare Cap Contractual AdjustmentsYear ending December 31,2006
    
    
    2007
    
    
    2008(in thousands)Beginning balance  accrued Medicare cap
contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682Medicare cap contractual adjustments
    
    
    8,853
    (1)
    
    
    5,039
    (2)
    
    
    6,852
    (3)Medicare cap contractual adjustments 
discontinued operations
    
    
    7,611
    (4)
    
    
    2,651
    (4)
    
    
    (27
    )(4)Payments to Medicare fiscal intermediaries
    
    
    (1,983
    )
    
    
    (12,687
    )
    
    
    (12,996
    )Balances acquired from VistaCare
    
    
    
    
    
    
    
    
    
    
    8,208Reclassification to accounts payable
    
    
    (2,685
    )(5)
    
    
    
    
    
    
    Ending balance  accrued Medicare cap
contractual adjustments
    
    $
    26,679
    
    
    $
    21,682
    
    
    $
    23,719
 
 (1)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year.(2)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(3)
    
    Includes additional accrual of $1.0 million related to
the 2005 and 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are related
to all programs that the Company has discontinued and sold during 2006, 2007 and 2008.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to accounts
payable in December 2006 and were paid in January 2007 to the Medicare fiscal intermediary.  Insurance Risks
  Goodwill
  50




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51




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##### Table of Contents



Results of Operations
  Year Ended December 31,2006
    
    2007
    
    2008Net patient service revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating expenses:Direct hospice care
    
    
    58.7
    
    
    
    58.7
    
    
    
    58.7General and administrative  hospice care
    
    
    20.1
    
    
    
    21.4
    
    
    
    21.0General and administrative  support center
    
    
    10.4
    
    
    
    11.7
    
    
    
    11.3Provision for uncollectible accounts
    
    
    1.1
    
    
    
    1.3
    
    
    
    1.8Depreciation and amortization
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.291.6
    
    
    
    94.5
    
    
    
    94.0Income from continuing operations before other income (expense)
    
    
    8.4
    
    
    
    5.5
    
    
    
    6.0Other income (expense), net
    
    
    0.6
    
    
    
    0.5
    
    
    
    (1.0
    )Income from continuing operations before provision for income taxes
    
    
    9.0
    
    
    
    6.0
    
    
    
    5.0Provision for income taxes
    
    
    (3.2
    )
    
    
    (2.0
    )
    
    
    (1.8
    )Income from continuing operations
    
    
    5.8
    
    
    
    4.0
    
    
    
    3.2Loss from discontinued operations, net of income taxes
    
    
    (0.6
    )
    
    
    (1.0
    )
    
    
    (0.9
    )Net income
    
    
    5.2
    %
    
    
    3.0
    %
    
    
    2.3
    %
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2008
  Year Ended December 31,2007
    
    
    2008
    
    
    $ Change
    
    
    % Change(In thousands, except % change)Net patient service revenue
    
    $
    398,232
    
    
    $
    616,050
    
    
    $
    217,818
    
    
    
    54.7
    %Operating expenses:Direct hospice care
    
    
    233,664
    
    
    
    361,445
    
    
    
    127,781
    
    
    
    54.7General and administrative  hospice care
    
    
    85,093
    
    
    
    129,285
    
    
    
    44,192
    
    
    
    51.9General and administrative  support center
    
    
    46,484
    
    
    
    69,857
    
    
    
    23,373
    
    
    
    50.3Provision for uncollectible accounts
    
    
    5,344
    
    
    
    10,907
    
    
    
    5,563
    
    
    
    104.1Depreciation and amortization
    
    
    5,723
    
    
    
    7,868
    
    
    
    2,145
    
    
    
    37.5376,308
    
    
    
    579,362
    
    
    
    203,054
    
    
    
    54.0Income from continuing operations before other income (expense)
    
    
    21,924
    
    
    
    36,688
    
    
    
    14,764
    
    
    
    67.3Other income (expense)
    
    
    2,076
    
    
    
    (5,869
    )
    
    
    (7,945
    )
    
    
    (382.7
    )Income from continuing operations before provision for income taxes
    
    
    24,000
    
    
    
    30,819
    
    
    
    6,819
    
    
    
    28.4Provision for income taxes
    
    
    8,001
    
    
    
    11,141
    
    
    
    3,140
    
    
    
    39.2Income from continuing operations
    
    
    15,999
    
    
    
    19,678
    
    
    
    3,679
    
    
    
    23.0Loss from discontinued operations, net of income taxes
    
    
    3,888
    
    
    
    5,252
    
    
    
    1,364
    
    
    
    35.1Net income
    
    $
    12,111
    
    
    $
    14,426
    
    
    $
    2,315
    
    
    
    19.1
    %
 52




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##### Table of Contents



Net Patient Service Revenue
  Direct Hospice Care Expenses
  General and Administrative Expenses  Hospice Care
  General and Administrative Expenses  Support Center
  53




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##### Table of Contents



Provision for Uncollectible Accounts
  Depreciation and Amortization Expense
  Other Income (Expense)
  Provision for Income Taxes
  Year Ended December 31, 2006 Compared to Year Ended December 31, 2007
  Year Ended December 31,2006
    
    
    2007
    
    
    $ Change
    
    
    % Change(In thousands, except % change)Net patient service revenue
    
    $
    379,218
    
    
    $
    398,232
    
    
    $
    19,014
    
    
    
    5.0
    %Operating expenses:Direct hospice care
    
    
    222,496
    
    
    
    233,664
    
    
    
    11,168
    
    
    
    5.0General and administrative  hospice care
    
    
    76,176
    
    
    
    85,093
    
    
    
    8,917
    
    
    
    11.7General and administrative  support center
    
    
    39,595
    
    
    
    46,484
    
    
    
    6,889
    
    
    
    17.4Provision for uncollectible accounts
    
    
    4,007
    
    
    
    5,344
    
    
    
    1,337
    
    
    
    33.4Depreciation and amortization
    
    
    5,080
    
    
    
    5,723
    
    
    
    643
    
    
    
    12.7347,354
    
    
    
    376,308
    
    
    
    28,954
    
    
    
    8.3Income from continuing operations before other income (expense)
    
    
    31,864
    
    
    
    21,924
    
    
    
    (9,940
    )
    
    
    (31.2
    )Other income (expense)
    
    
    2,388
    
    
    
    2,076
    
    
    
    (312
    )
    
    
    (13.1
    )Income from continuing operations before provision for income taxes
    
    
    34,252
    
    
    
    24,000
    
    
    
    (10,252
    )
    
    
    (29.9
    )Provision for income taxes
    
    
    12,124
    
    
    
    8,001
    
    
    
    (4,123
    )
    
    
    (34.0
    )Income from continuing operations
    
    
    22,128
    
    
    
    15,999
    
    
    
    (6,129
    )
    
    
    (27.7
    )Loss from discontinued operations, net of income taxes
    
    
    2,399
    
    
    
    3,888
    
    
    
    (1,489
    )
    
    
    (62.1
    )Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    (7,618
    )
    
    
    (38.6
    )%
 54




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##### Table of Contents



Net Patient Service Revenue
  Direct Hospice Care Expenses
  General and Administrative Expenses  Hospice Care
  General and Administrative Expenses  Support Center
  55




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##### Table of Contents



Provision for Uncollectible Accounts
  Depreciation and Amortization Expense
  Other Income (Expense)
  Provision for Income Taxes
  Liquidity and Capital Resources
    56




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57




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58




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Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(In thousands)Long-Term Debt
    
    $
    123,075
    
    
    $
    6,394
    
    
    $
    23,976
    
    
    $
    33,566
    
    
    $
    59,139New Billing System
    
    
    2,024
    
    
    
    2,024
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    64,550
    
    
    
    18,425
    
    
    
    25,141
    
    
    
    14,412
    
    
    
    6,572Total Contractual Obligations
    
    $
    189,649
    
    
    $
    26,843
    
    
    $
    49,117
    
    
    $
    47,978
    
    
    $
    65,711
 Off-Balance Sheet Arrangements
  Interest Rate and Foreign Exchange Risk
 Interest Rate Risk.
 Foreign Exchange.
 Recent Accounting Pronouncements
   59




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Payment, Legislative and Regulatory Changes
  60




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##### Table of Contents



Inflation
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
   61




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Managements Report on Internal Control over Financial Reporting.
   Internal Control Integrated Framework.
  62




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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders of Odyssey HealthCare, Inc.
       /s/ Ernst & Young LLP 
 63




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##### Table of Contents



Item 9A(T). Controls and Procedures
 .
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Equity-Based Compensation Plans.
 EQUITY COMPENSATION PLAN INFORMATION
 (c)(a)
    
    
    
    
    
    
    Number of SecuritiesNumber of Securities
    
    
    
    
    
    
    Remaining Availableto be Issued
    
    
    (b)
    
    
    for Future IssuanceUpon Exercise of
    
    
    Weighted-Average
    
    
    Under Equity CompensationOutstanding Options,
    
    
    Exercise Price of
    
    
    Plans (ExcludingWarrants, Awards
    
    
    Outstanding Options,
    
    
    SecuritiesPlan Category
    
    and Rights
    
    
    Warrants, and Rights
    
    
    Reflected in Column(a))(In thousands, except weighted average exercise price)Equity Compensation
Plans Approved by
Stockholders
    
    
    2,997
    (1)
    
    $
    16.12
    
    
    
    1,812Equity Compensation
Plans Not Approved
by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,997
    
    
    $
    16.12
    
    
    
    1,812
 64




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##### Table of Contents



(1)
    
    Includes (i) 44,860 unvested restricted stock units awarded to certain executive officers on
December 20, 2006, (ii) 149,360 unvested time-based restricted stock units awarded to certain
executive officers on February 12, 2008, (iii) 373,083 unvested incentive-based restricted
stock units awarded to certain executive officers on February 12, 2008, (iv) 126,146 unvested
time-based restricted stock units awarded to certain executive officers on February 12, 2008,
(v) 36,000 unvested restricted units awarded to the members of the Board of Directors on May
2, 2008 and (vi) 15,000 unvested restricted stock units awarded to one senior management
employee on June 15, 2008. Restricted stock units are not included in the calculation of the
weighted-average exercise price since there is no exercise price associated with the award. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  65




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
     ExhibitNumber
    
    Description2.1 
    
    Agreement and Plan of Merger, dated January 15, 2008, among Odyssey HealthCare
Holding Company, OHC Investment, Inc. and VistaCare, Inc. (incorporated by
reference to Exhibit 2.1 to Odyssey HealthCare, Incs (the Company) Current
Report on Form 8-K as filed with the Securities and Exchange Commission (the
Commission) on January 15, 2008)2.2 
    
    Form of Stockholder Agreement, dated January 15, 2008, among Odyssey
HealthCare Holding Company, OHC Investment, Inc. and each of the following
directors and executive officers of VistaCare, Inc.: Richard R. Slager, John
Crisci, Stephen Lewis, Roseanne Berry, Henry Hirvela, James T. Robinson, James
C. Crews, Jon M. Donnell, Jack A. Henry, Geneva B. Johnson, Pete A. Klisares
and Brian S. Tyler (incorporated by reference to Exhibit 2.2 to the Companys
Current Report on Form 8-K as filed with the Commission on January 15, 2008)3.1 
    
    Fifth Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Companys Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with the
Commission on September 13, 2001)3.2 
    
    Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Companys Registration Statement on Form S-1 (Registration No.
333-51522) as filed with the Commission on December 8, 2000)3.3 
    
    First Amendment to the Second Amended and Restated Bylaws of Odyssey
HealthCare, Inc., effective as of December 20, 2007 (incorporated by reference
to Exhibit 3.2 to the Companys Current Report on Form 8-K as filed with the
Commission on December 21, 2007)3.4 
    
    Second Amendment to the Second Amended and Restated Bylaws of Odyssey
HealthCare, Inc., effective as of May 20, 2008 (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K as filed with the
Commission on May 20, 2008)4.1 
    
    Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Companys Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on August 2, 2001)4.2 
    
    Second Amended and Restated Registration Rights Agreement, dated July 1, 1998,
by and among Odyssey HealthCare, Inc. and the security holders named therein
(incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with the
Commission on December 8, 2000)4.3 
    
    Rights Agreement (the Rights Agreement) dated November 5, 2001, between
Odyssey HealthCare, Inc. and Rights Agent (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form 8-A as filed with
the Commission on December 8, 2001)4.4 
    
    Form of Certificate of Designation of Series A Junior Participating Preferred
Stock (included as Exhibit A to the Rights Agreement (Exhibit 4.3 hereto))10.1.1 
    
    Amended and Restated Credit Agreement, dated May 24, 2007, by and among
General Electric Capital Corporation, a Delaware corporation, individually as
Lender and as Agent for the Lenders, the other Lenders signatory thereto,
Odyssey HealthCare Operating A, LP, a Delaware limited partnership,
 66




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##### Table of Contents



ExhibitNumber
    
    DescriptionOdyssey
HealthCare Operating B, LP, a Delaware limited partnership, Hospice of the
Palm Coast, Inc., a Florida not for profit corporation, and the other Credit
Parties signatory thereto (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K as filed with the Commission on May 30,
2007)10.1.2 
    
    Second Amended and Restated Credit Agreement, dated February 28, 2008, by and
among General Electric Capital Corporation, a Delaware corporation,
individually as Lender and as Agent for the Lenders, the other Lenders
signatory thereto, Odyssey HealthCare Operating A, LP, a Delaware limited
partnership, Odyssey HealthCare Operating B, LP, a Delaware limited
partnership, Hospice of the Palm Coast, Inc., a Florida not for profit
corporation, OHC Investment Inc., a Delaware corporation, and the other Credit
Parties signatory thereto (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K as filed with the Commission on March 4,
2008)10.1.3 
    
    Amendment No. 1 to Second Amended and Restated Credit Agreement, dated
November 7, 2008, by and among General Electric Capital Corporation, a
Delaware corporation, individually as Lender and as Agent for the Lenders, the
other Lenders signatory thereto, Odyssey HealthCare Operating A, LP, a
Delaware limited partnership, Odyssey HealthCare Operating B, LP, a Delaware
limited partnership, Hospice of the Palm Coast, Inc., a Florida not for profit
corporation, and VistaCare, Inc., a Delaware corporation (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q as
filed with the Commission on November 10, 2008)10.2 
    
    Amended and Restated Employment Agreement, by and between Odyssey HealthCare,
Inc. and Robert A. Lefton, effective as of October 11, 2005 (unless otherwise
specified therein) (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Commission on December 24, 2008)10.3 
    
    Amended and Restated Employment Agreement, by and between Odyssey HealthCare,
Inc. and Brenda A. Belger, effective as of August 1, 2005 (unless otherwise
specified therein) (incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K as filed with the Commission on December 24, 2008)10.4 
    
    Amended and Restated Employment Agreement, by and between Odyssey HealthCare,
Inc. and W. Bradley Bickham, effective as of August 1, 2005 (unless otherwise
specified therein) (incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K as filed with the Commission on December 24, 2008)10.5 
    
    Amended and Restated Employment Agreement, by and between Odyssey HealthCare,
Inc. and R. Dirk Allison, effective as of October 30, 2006 (unless otherwise
specified therein) (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K as filed with the Commission on December 24, 2008)10.6.1 
    
    Employment Agreement by and between Odyssey HealthCare, Inc. and Craig P.
Goguen, dated July 26, 2007 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K as filed with the Commission on July 30,
2007)10.6.2 
    
    Amended and Restated Employment Agreement, by and between Odyssey HealthCare,
Inc. and Craig P. Goguen, effective as of August 20, 2007 (unless otherwise
specified therein) (incorporated by reference to Exhibit 10.5 to the Companys
Current Report on Form 8-K as filed with the Commission on December 24, 2008)10.7 
    
    Employment Agreement, by and between Odyssey HealthCare, Inc. and Frank
Anastasio, dated March 17, 2008 (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K as filed with the Commission on March
21, 2008)10.8 
    
    Agreement by and among Odyssey HealthCare, Inc. and Richard R. Burnham,
effective as of January 1, 2007 (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K as filed with the Commission on
January 5, 2007)10.9.1 
    
    Odyssey HealthCare, Inc. Stock Option Plan (the Stock Option Plan)
(incorporated by reference to Exhibit 10.5 to the Companys Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with the
Commission on December 8, 2000)10.9.2 
    
    First Amendment to the Stock Option Plan, dated January 31, 2001 (incorporated
by reference to Exhibit 10.5.2 to the Companys Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 333-51522) as filed with
the Commission on September 13, 2001)
 67




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ExhibitNumber
    
    Description10.10.1 
    
    2001 Equity-Based Compensation Plan (incorporated by reference to Exhibit 10.6
to the Companys Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on September 13,
2001)10.10.2 
    
    First Amendment to the 2001 Equity-Based Compensation Plan, dated May 5, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K as filed with the Commission On May 5, 2005)10.10.3 
    
    Second Amendment to the 2001 Equity-Based Compensation Plan, dated May 5, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report
on Form 10-Q as filed with the Commission on August 8, 2005)10.10.4 
    
    Form of Restricted Stock Award Agreement pursuant to the 2001 Equity  Based
Compensation Plan Management Stock Option Agreement (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K as filed with the
Commission on January 12, 2005)10.10.5 
    
    Odyssey HealthCare, Inc. Equity-Based Compensation Plan Management Stock
Option Agreement, dated October 11, 2005, by and between Odyssey HealthCare,
Inc. and Robert A. Lefton (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K as filed with the Commission on October
12, 2005)10.10.6 
    
    Form of Restricted Stock Unit Award Agreement under the Odyssey HealthCare
Inc. 2001 Equity Based Compensation Plan  Time Based RSU Award (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K as
filed with the Commission on February 26, 2007)10.10.7 
    
    Form Restricted Stock Unit Award Agreement under the Odyssey HealthCare Inc.
2001 Equity Based Compensation Plan  Additional Incentive Based RSU Award
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K as filed with the Commission on February 26, 2007)10.10.8 
    
    Form of Restricted Stock Award Agreement under the Odyssey HealthCare, Inc.
2001 Equity-Based Compensation Plan  Non-Employee Director Award
(incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report
on Form 10-Q as filed with the Commission on November 9, 2007)10.11.1 
    
    Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the
Companys Amendment No. 2 to Registration Statement on Form S-1 (Registration
No. 333-51522) as filed with the Commission on September 13, 2001)10.11.2 
    
    First Amendment to Employee Stock Purchase Plan,
dated March 6, 200210.12 
    
    Form of Indemnification Agreement between Odyssey HealthCare, Inc. and its
directors and officers (incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on Form S-1 (Registration No. 333-51522) as
filed with the Commission on December 8, 2000)10.13.1 
    
    Promissory Note and Warrant Purchase Agreement, dated May 22, 1998, by and
among Odyssey HealthCare, Inc. and the other parties thereto (incorporated by
reference to Exhibit 10.10.1 to the Companys Registration Statement on Form
S-1 (Registration No. 333-51522) as filed with the Commission on December 8,
2000)10.13.2 
    
    Form of Warrant, dated May 22, 1998 (incorporated by reference to Exhibit
10.10.2 to the Companys Registration Statement on Form S-1 (Registration No.
333-51522) as filed with the Commission on December 8, 2000)10.13.3 
    
    First Amendment to Warrants, dated December 6, 2000 (incorporated by reference
to Exhibit 10.10.3 to
the Companys Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on
August 2, 2001)10.14 
    
    Settlement Agreement, dated July 6, 2006, among the United States of America
acting through the entities named therein, JoAnn Russell and Odyssey
HealthCare, Inc. (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K as filed with the Commission on July 12, 2006)10.15 
    
    Corporate Integrity Agreement, dated July 6, 2006, between the Office of
Inspector General of the Department of Health and Human Services and Odyssey
HealthCare, Inc. (incorporated by Reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K as filed with the Commission on July 12, 2006)21 
    
    Subsidiaries of Odyssey HealthCare, Inc.*23.1 
    
    Consent of Ernst & Young LLP*31.1 
    
    Certification required by Rule 13a-14(a), dated March 12, 2009, by Robert A.
Lefton, Chief Executive
 68




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ExhibitNumber
    
    DescriptionOfficer*31.2 
    
    Certification required by Rule 13a-14(a), dated March 12, 2009, by R. Dirk
Allison, Chief Financial Officer*32 
    
    Certification required by Rule 13a-14(b), dated March 12, 2009, by Robert A.
Lefton, Chief Executive Officer, and R. Dirk Allison, Chief Financial
Officer**
 
 
    
    Management contract or compensatory plan or arrangement.*
    
    Filed herewith.**
    
    Furnished herewith. 
 69




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##### Table of Contents



SIGNATURES
  ODYSSEY HEALTHCARE, INC.By:
    /s/ ROBERT A. LEFTONRobert A. LeftonPresident and Chief Executive Officer   Signature
    
    Title
    
    Date/s/ ROBERT A. LEFTON

Robert A. Lefton
    
    President, Chief Executive Officer,
and Director (Principal Executive
Officer)
    
    March 12, 2009/s/ R. DIRK ALLISON

R. Dirk Allison
    
    Senior Vice President, Chief Financial
Officer, Assistant Secretary and
Treasurer (Principal Financial and
Accounting Officer)
    
    March 12, 2009/s/ RICHARD R. BURNHAM

Richard R. Burnham
    
    Chairman of the Board
    
    March 12, 2009/s/ JAMES E. BUNCHER

James E. Buncher
    
    Director
    
    March 12, 2009/s/ JOHN K. CARLYLE

John K. Carlyle
    
    Director
    
    March 12, 2009/s/ PAUL J. FELDSTEIN

Paul J. Feldstein
    
    Director
    
    March 12, 2009/s/ ROBERT A. ORTENZIO

Robert A. Ortenzio
    
    Director
    
    March 12, 2009/s/ SHAWN S. SCHABEL

Shawn S. Schabel
    
    Director
    
    March 12, 2009/s/ DAVID L. STEFFY

David L. Steffy
    
    Director
    
    March 12, 2009
 70




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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageOdyssey HealthCare, Inc.Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    F-3Consolidated Statements of Income for the years ended December 31, 2006, 2007 and 2008
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2007 and 2008
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
    
    F-6Notes to Consolidated Financial Statements for the years ended December 31, 2006, 2007 and 2008
    
    F-7
 F-1




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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders of Odyssey HealthCare, Inc.
    Accounting for Uncertainty in Income Taxes  An Interpretation of FASB
Statement No.109
  /s/ Ernst & Young LLP 
  F-2




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ODYSSEY
HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 December 31,2007
    
    
    2008(In thousands, exceptshare and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,386
    
    
    $
    56,043Short-term investments
    
    
    49,793
    
    
    
    Accounts receivable from patient services, net of
allowance for uncollectible accounts of $4,363 and
$9,789 at December 31, 2007 and 2008, respectively
    
    
    77,433
    
    
    
    127,922Deferred tax assets
    
    
    1,400
    
    
    
    13,319Income taxes receivable
    
    
    1,968
    
    
    
    66Prepaid expenses and other current assets
    
    
    5,414
    
    
    
    7,906Assets of discontinued operations
    
    
    3,061
    
    
    
    2,067Total current assets
    
    
    151,455
    
    
    
    207,323Property and equipment, net of accumulated depreciation
    
    
    21,526
    
    
    
    22,816Goodwill
    
    
    98,179
    
    
    
    189,521Long-term investments
    
    
    
    
    
    
    16,659Licenses
    
    
    2,313
    
    
    
    11,295Trademarks
    
    
    
    
    
    
    7,235Other assets
    
    
    
    
    
    
    1,227Intangibles, net of accumulated amortization
    
    
    1,736
    
    
    
    4,875Total assets
    
    $
    275,209
    
    
    $
    460,951LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,109
    
    
    $
    4,906Accrued compensation
    
    
    16,797
    
    
    
    27,493Accrued nursing home costs
    
    
    14,146
    
    
    
    16,478Accrued Medicare cap contractual adjustments
    
    
    21,682
    
    
    
    23,719Other accrued expenses
    
    
    17,445
    
    
    
    45,904Current maturities of long-term debt
    
    
    1
    
    
    
    6,394Total current liabilities
    
    
    76,180
    
    
    
    124,894Long-term debt, less current maturities
    
    
    
    
    
    
    116,681Deferred tax liabilities
    
    
    14,041
    
    
    
    13,610Other liabilities
    
    
    1,256
    
    
    
    3,233Commitments and contingencies
    
    
    
    
    
    
    Minority interests in consolidated subsidiaries
    
    
    895
    
    
    
    2,462Stockholders equity:Common stock, $.001 par value:75,000,000 shares authorized  38,063,439 and
38,137,834 shares issued at December 31, 2007 and
2008, respectively, and 32,716,367 and 32,790,762
shares outstanding at December 31, 2007 and 2008,
respectively
    
    
    38
    
    
    
    38Additional paid-in capital
    
    
    113,339
    
    
    
    117,732Retained earnings
    
    
    139,414
    
    
    
    153,840Accumulated other comprehensive loss, net of income taxes
    
    
    
    
    
    
    (1,585
    )Treasury stock, at cost, 5,347,072 shares held at
December 31, 2007 and 2008, respectively
    
    
    (69,954
    )
    
    
    (69,954
    )Total stockholders equity
    
    
    182,837
    
    
    
    200,071Total liabilities and stockholders equity
    
    $
    275,209
    
    
    $
    460,951
 F-3




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##### Table of Contents



ODYSSEY
HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands, except per share amounts)Net patient service revenue
    
    $
    379,218
    
    
    $
    398,232
    
    
    $
    616,050Operating expenses:Direct hospice care
    
    
    222,496
    
    
    
    233,664
    
    
    
    361,445General and administrative  hospice care
    
    
    76,176
    
    
    
    85,093
    
    
    
    129,285General and administrative  support center (inclusive
of stock-based compensation of $5,616, $3,829 and
$4,347 for the years ended December 31, 2006, 2007 and
2008, respectively)
    
    
    39,595
    
    
    
    46,484
    
    
    
    69,857Provision for uncollectible accounts
    
    
    4,007
    
    
    
    5,344
    
    
    
    10,907Depreciation
    
    
    4,779
    
    
    
    5,480
    
    
    
    7,437Amortization
    
    
    301
    
    
    
    243
    
    
    
    431347,354
    
    
    
    376,308
    
    
    
    579,362Income from continuing operations before other income
(expense)
    
    
    31,864
    
    
    
    21,924
    
    
    
    36,688Other income (expense):Loss on write-down of property
    
    
    
    
    
    
    (211
    )
    
    
    (150
    )Interest income
    
    
    2,576
    
    
    
    2,509
    
    
    
    1,968Interest expense
    
    
    (188
    )
    
    
    (208
    )
    
    
    (7,430
    )Minority interest in income of consolidated subsidiaries
    
    
    
    
    
    
    (14
    )
    
    
    (257
    )2,388
    
    
    
    2,076
    
    
    
    (5,869
    )Income from continuing operations before provision for
income taxes
    
    
    34,252
    
    
    
    24,000
    
    
    
    30,819Provision for income taxes
    
    
    12,124
    
    
    
    8,001
    
    
    
    11,141Income from continuing operations
    
    
    22,128
    
    
    
    15,999
    
    
    
    19,678Loss from discontinued operations, net of income taxes
    
    
    2,399
    
    
    
    3,888
    
    
    
    5,252Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    14,426Income (loss) per common share:Basic:Continuing operations
    
    $
    0.65
    
    
    $
    0.48
    
    
    $
    0.60Discontinued operations
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.58
    
    
    $
    0.36
    
    
    $
    0.44Diluted:Continuing operations
    
    $
    0.64
    
    
    $
    0.48
    
    
    $
    0.59Discontinued operations
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.57
    
    
    $
    0.36
    
    
    $
    0.43Weighted average shares outstanding:Basic
    
    
    34,145
    
    
    
    33,029
    
    
    
    32,674Diluted
    
    
    34,529
    
    
    
    33,188
    
    
    
    33,188
 F-4




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ODYSSEY
HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Additional
    
    
    
    
    
    
    Accumulated Other
    
    
    
    
    
    
    TotalCommon Stock
   
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    Equity(Amounts in thousands)Balance at
January 1, 2006
    
    
    37,411
    
    
    $
    37
    
    
    $
    98,624
    
    
    $
    107,192
    
    
    $
    
    
    
    $
    (38,555
    )
    
    $
    167,298Stock-based compensation
    
    
    60
    
    
    
    
    
    
    
    5,616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,616Tax benefit related to
stock option exercises
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958Exercise of stock options
    
    
    361
    
    
    
    1
    
    
    
    2,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,993Issuance of shares under
Employee Stock Purchase
Plan
    
    
    38
    
    
    
    
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492Purchase of treasury stock,
at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,490
    )
    
    
    (17,490
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,729
    
    
    
    
    
    
    
    
    
    
    
    19,729Balance at
December 31, 2006
    
    
    37,870
    
    
    
    38
    
    
    
    108,682
    
    
    
    126,921
    
    
    
    
    
    
    
    (56,045
    )
    
    
    179,596Stock-based compensation
    
    
    9
    
    
    
    
    
    
    
    3,829
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,829Tax benefit related to
stock option exercises
    
    
    
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119Exercise of stock options
    
    
    161
    
    
    
    
    
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472Issuance of shares under
Employee Stock Purchase
Plan
    
    
    23
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Purchase of treasury stock,
at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,909
    )
    
    
    (13,909
    )Cumulative effect of change
in accounting for
uncertainties in income
taxes (FIN 48)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    382Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,111
    
    
    
    
    
    
    
    
    
    
    
    12,111Balance at
December 31, 2007
    
    
    38,063
    
    
    
    38
    
    
    
    113,339
    
    
    
    139,414
    
    
    
    
    
    
    
    (69,954
    )
    
    
    182,837Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,426
    
    
    
    
    
    
    
    
    
    
    
    14,426Unrealized loss on interest
rate swaps, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,303
    )
    
    
    
    
    
    
    (1,303
    )Unrealized loss on auction
rate securities, net of
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (282
    )
    
    
    
    
    
    
    (282
    )Comprehensive income, net
of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,841Stock-based compensation
    
    
    80
    
    
    
    
    
    
    
    4,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,347Tax benefit related to
stock option exercises
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Share cancellation for
payment of payroll tax
liabilities related to
vesting of restricted stock
    
    
    (35
    )
    
    
    
    
    
    
    (336
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )Exercise of stock options
    
    
    11
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Issuance of shares under
Employee Stock Purchase
Plan
    
    
    19
    
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Balance at December 31, 2008
    
    
    38,138
    
    
    $
    38
    
    
    $
    117,732
    
    
    $
    153,840
    
    
    $
    (1,585
    )
    
    $
    (69,954
    )
    
    $
    200,071
 F-5




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##### Table of Contents



ODYSSEY
HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands)Operating Activities:Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    14,426Adjustments to reconcile net income to net cash provided by operating
activities including discontinued operations:Loss from discontinued operations, net of taxes
    
    
    2,399
    
    
    
    3,888
    
    
    
    5,252Loss on write-down of property
    
    
    
    
    
    
    211
    
    
    
    150Minority interest in income of consolidated subsidiaries
    
    
    
    
    
    
    14
    
    
    
    257Depreciation and amortization
    
    
    5,080
    
    
    
    5,723
    
    
    
    7,868Amortization of deferred charges and debt discount
    
    
    109
    
    
    
    113
    
    
    
    892Stock-based compensation
    
    
    5,616
    
    
    
    3,829
    
    
    
    4,347Tax benefit related to stock option exercises
    
    
    (958
    )
    
    
    (119
    )
    
    
    (150
    )Provision for uncollectible accounts
    
    
    4,007
    
    
    
    5,344
    
    
    
    10,907Changes in operating assets and liabilities, net of acquisitions:Accounts receivable from patient services
    
    
    (8,103
    )
    
    
    (18,770
    )
    
    
    (21,980
    )Prepaid expenses and other current assets
    
    
    (11,734
    )
    
    
    458
    
    
    
    3,108Deferred taxes
    
    
    8,373
    
    
    
    (1,289
    )
    
    
    (2,083
    )Accrued government settlement
    
    
    (13,000
    )
    
    
    
    
    
    
    Accounts payable, accrued nursing home costs, accrued Medicare
cap contractual adjustments and other accrued expenses
    
    
    21,105
    
    
    
    1,301
    
    
    
    (1,945
    )Net cash provided by operating activities
    
    
    32,623
    
    
    
    12,814
    
    
    
    21,049Investing Activities:Cash paid for acquisitions, net of cash acquired of $22.8 million,
procurement of licenses and certificates of need
    
    
    (787
    )
    
    
    724
    
    
    
    (126,796
    )Cash received from the sale of hospice programs and property
    
    
    59
    
    
    
    698
    
    
    
    1,344Purchases of short-term and long-term investments
    
    
    (109,469
    )
    
    
    (49,053
    )
    
    
    (9,000
    )Sales of short-term and long-term investments
    
    
    95,365
    
    
    
    61,650
    
    
    
    41,693Purchases of property and equipment
    
    
    (12,351
    )
    
    
    (9,628
    )
    
    
    (4,428
    )Net cash (used in) provided by investing activities
    
    
    (27,183
    )
    
    
    4,391
    
    
    
    (97,187
    )Financing Activities:Proceeds from issuance of common stock
    
    
    3,485
    
    
    
    877
    
    
    
    46Cash received from sale of partnership interests
    
    
    
    
    
    
    881
    
    
    
    893Tax benefit related to stock option exercises
    
    
    958
    
    
    
    119
    
    
    
    150Purchase of treasury stock
    
    
    (17,490
    )
    
    
    (13,909
    )
    
    
    Payments of debt issue costs
    
    
    
    
    
    
    (357
    )
    
    
    (4,368
    )Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    130,000Payments on debt
    
    
    (4
    )
    
    
    (2
    )
    
    
    (6,926
    )Net cash (used in) provided by financing activities
    
    
    (13,051
    )
    
    
    (12,391
    )
    
    
    119,795Net (decrease) increase in cash and cash equivalents
    
    
    (7,611
    )
    
    
    4,814
    
    
    
    43,657Cash and cash equivalents, beginning of year
    
    
    15,183
    
    
    
    7,572
    
    
    
    12,386Cash and cash equivalents, end of year
    
    $
    7,572
    
    
    $
    12,386
    
    
    $
    56,043Supplemental cash flow information:Cash interest paid
    
    $
    89
    
    
    $
    95
    
    
    $
    5,529Income taxes paid
    
    $
    11,248
    
    
    $
    5,389
    
    
    $
    1,754
 F-6




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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 2007 and 2008
 1. Organization and Summary of Significant Accounting Policies
 Organization
     Principles of Consolidation
  Reclassification
   Cash and Cash Equivalents
  Short-term & Long-term Investments
   F-7




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##### Table of Contents



Fair Value of Financial Instruments
   
    
    Level 1 valuations use quoted prices in active markets for identical assets or
liabilities that are accessible at the measurement date. An active market is a market in
which transactions for the asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis.
    
    Level 2 valuations use inputs other than actively quoted market prices included within
Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active
markets, (b) quoted prices for identical or similar assets or liabilities in markets that
are not active, (c) inputs other than quoted prices that are observable for the asset or
liability such as interest rates and yield curves observable at commonly quoted intervals
and (d) inputs that are derived principally from or corroborated by observable market data
by correlation or other means.
    
    Level 3 valuations use unobservable inputs for the asset or liability. Unobservable
inputs are used to the extent observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or liability at
the measurement date.
 F-8




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##### Table of Contents



InterestARS
    
    
    Rate SwapsBalance at January 1, 2008
    
    $
    
    
    
    $
    Transfer from Level 1
    
    
    41,450
    
    
    
    Sales of securities
    
    
    (24,350
    )
    
    
    Unrealized loss included in other
comprehensive loss (before tax)
    
    
    (441
    )
    
    
    (2,042
    )Balance at December 31, 2008
    
    $
    16,659
    
    
    $
    (2,042
    )
 Accounts Receivable
   Goodwill and Other Non-Amortizable Intangible Assets
  F-9




---



##### Table of Contents



Net Patient Service Revenue
    F-10




---



##### Table of Contents



Accrued Medicare Cap Contractual AdjustmentsYear ending December 31,2006
    
    
    2007
    
    
    2008(in thousands)Beginning balance  accrued Medicare cap
contractual adjustments
    
    $
    14,883
    
    
    $
    26,679
    
    
    $
    21,682Medicare cap contractual adjustments
    
    
    8,853
    (1)
    
    
    5,039
    (2)
    
    
    6,852
    (3)Medicare cap
contractual adjustments 
discontinued operations
    
    
    7,611
    (4)
    
    
    2,651
    (4)
    
    
    (27
    )(4)Payments to Medicare fiscal intermediaries
    
    
    (1,983
    )
    
    
    (12,687
    )
    
    
    (12,996
    )Balances acquired from VistaCare
    
    
    
    
    
    
    
    
    
    
    8,208Reclassification to accounts payable
    
    
    (2,685
    )(5)
    
    
    
    
    
    
    Ending balance  accrued Medicare cap
contractual adjustments
    
    $
    26,679
    
    
    $
    21,682
    
    
    $
    23,719
 
 (1)
    
    Includes additional accrual of $3.1 million related to the 2005 Medicare cap year.(2)
    
    Includes additional accrual of $0.9 million related to the 2006 Medicare cap year.(3)
    
    Includes additional accrual of $1.0 million related to
the 2005 and 2006 Medicare cap year.(4)
    
    Medicare cap contractual adjustments reclassified to discontinued operations are related to
all programs that the Company has discontinued and sold during 2006, 2007 and 2008.(5)
    
    Amounts were reclassified from accrued Medicare cap contractual adjustments to accounts
payable in December 2006 and were paid in January 2007 to the Medicare fiscal intermediary.   Charity Care
   Direct Hospice Care Expenses
  F-11




---



##### Table of Contents



Property and Equipment and Other Intangible Assets
     Stock-Based Compensation
  Net Income Per Common Share
  F-12




---



##### Table of Contents



Discontinued Operations
  Income Taxes
   Self-Insured Liability Insurance
  Nursing Home Costs
  Advertising Costs
  F-13




---



##### Table of Contents



Deferred Rent Liability
  Derivative Financial Instruments
    Comprehensive Income (Loss)
   For the years ended December 31,2006
    
    
    2007
    
    
    2008Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    14,426Other comprehensive income or loss, net of tax:Unrealized loss on interest rate swaps
    
    
    
    
    
    
    
    
    
    
    (1,303
    )Unrealized loss on ARS
    
    
    
    
    
    
    
    
    
    
    (282
    )Comprehensive income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    12,841
  Use of Estimates
  F-14




---



##### Table of Contents



Recent Accounting Pronouncements
     F-15




---



##### Table of Contents



2. Acquisitions
   Cash
    
    $
    22,617Other current assets
    
    
    46,390Property and equipment
    
    
    4,959Other assets
    
    
    13,056Licenses
    
    
    8,982Trademarks
    
    
    7,235Other intangible assets
    
    
    456Goodwill
    
    
    90,980Total assets acquired
    
    
    194,675Current liabilities
    
    
    44,024Other liabilities
    
    
    1,155Net assets acquired
    
    $
    149,496
 F-16




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##### Table of Contents



For the yearsended December 31,(in millions, except per share data)2007
    
    2008Revenues
    
    $
    647.0
    
    
    $
    660.4Income from continuing operations
    
    
    15.7
    
    
    
    14.3Net income
    
    
    12.1
    
    
    
    9.5Income per common share:Basic:Continuing operations
    
    $
    0.48
    
    
    $
    0.44Net
    
    
    0.37
    
    
    
    0.29Diluted:Continuing operations
    
    $
    0.47
    
    
    $
    0.43Net
    
    
    0.36
    
    
    
    0.29
 3. Identifiable Intangible Assets
   F-17




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##### Table of Contents



4. Repurchase of Common Stock
   5. Stock Options and Restricted Stock Awards
   F-18




---



##### Table of Contents



Weighted-AverageRemainingWeighted-
    
    Contractual
    
    AggregateOutstanding
    
    Average
    
    Term
    
    IntrinsicRange of exercise prices
    
    Options
    
    Exercise Price
    
    (in years)
    
    Value$1.38 to $9.93
    
    
    457,714
    
    
    $
    8.25
    
    
    
    5.91
    
    
    $
    619,590$10.02 to $15.53
    
    
    843,858
    
    
    $
    13.28
    
    
    
    5.49
    
    
    
    $16.87 to $19.72
    
    
    389,202
    
    
    $
    18.04
    
    
    
    6.64
    
    
    
    $20.00 to $22.33
    
    
    332,248
    
    
    $
    22.26
    
    
    
    4.50
    
    
    
    $27.96 to $30.64
    
    
    229,744
    
    
    $
    30.11
    
    
    
    5.01
    
    
    
    Totals
    
    
    2,252,766
    
    
    $
    16.12
    
    
    
    5.58
    
    
    $
    619,590
       F-19




---



##### Table of Contents



2006
    
    2007
    
    2008Risk-free interest rate
    
    
    4.58
    %
    
    
    4.57
    %
    
    
    2.84
    %Expected life
    
    5
    years
    
    5
    years
    
    5
    yearsExpected volatility
    
    
    0.376
    
    
    
    0.496
    
    
    
    0.495Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
 F-20




---



##### Table of Contents



Weighted-AverageRemainingWeighted-
    
    Contractual
    
    AggregateAverage
    
    Term
    
    IntrinsicOptions
    
    Exercise Price
    
    (in years)
    
    ValueOutstanding at January 1, 2008
    
    
    3,253,004
    
    
    $
    16.38Granted
    
    
    20,000
    
    
    $
    10.06Exercised
    
    
    (10,846
    )
    
    $
    4.65Cancelled
    
    
    (1,009,392
    )
    
    $
    16.95Outstanding at December 31, 2008
    
    
    2,252,766
    
    
    $
    16.12
    
    
    
    5.58
    
    
    $
    619,590Exercisable at December 31, 2008
    
    
    1,877,491
    
    
    $
    16.91
    
    
    
    5.07
    
    
    $
    619,590
   Compensation PlanWeighted-AverageGrant-DateShares
    
    FairValueNon-vested at January 1, 2008
    
    
    1,196,929
    
    
    $
    7.19Granted
    
    
    764,921
    
    
    $
    9.08Vested
    
    
    (377,071
    )
    
    $
    9.18Cancelled
    
    
    (465,055
    )
    
    $
    6.56Non-vested at December 31, 2008
    
    
    1,119,724
    
    
    $
    8.07
   F-21




---



##### Table of Contents



6. Net Income Per Common Share
  Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands, except per share amounts)Numerator:Numerator for net income per shareIncome from continuing operations
    
    $
    22,128
    
    
    $
    15,999
    
    
    $
    19,678Loss from discontinued operations
    
    $
    2,399
    
    
    $
    3,888
    
    
    $
    5,252Net income
    
    $
    19,729
    
    
    $
    12,111
    
    
    $
    14,426Denominator:Denominator for basic net income per share  weighted average
shares
    
    
    34,145
    
    
    
    33,029
    
    
    
    32,674Effect of dilutive securities:Employee stock options and unvested restricted stock awards
    
    
    382
    
    
    
    157
    
    
    
    512Series B Preferred Stock Warrants convertible to common
stock
    
    
    2
    
    
    
    2
    
    
    
    2Denominator for diluted net income per share  adjusted
weighted average shares and assumed or actual conversions
    
    
    34,529
    
    
    
    33,188
    
    
    
    33,188Income (loss) per common share:Basic:Continuing operations
    
    $
    0.65
    
    
    $
    0.48
    
    
    $
    0.60Discontinued operations
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.58
    
    
    $
    0.36
    
    
    $
    0.44Diluted:Continuing operations
    
    $
    0.64
    
    
    $
    0.48
    
    
    $
    0.59Discontinued operations
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )Net income
    
    $
    0.57
    
    
    $
    0.36
    
    
    $
    0.43
  7. Discontinued Operations
    F-22




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##### Table of Contents



December 31,
    
    
    December 31,2007
    
    
    2008(In thousands)
    
    
    (In thousands)Prepaid expenses and other current assets
    
    $
    85
    
    
    $
    15Property and equipment, net of accumulated depreciation
    
    
    2,936
    
    
    
    2,052Medicare licenses
    
    
    40
    
    
    
    Total assets of discontinued operations
    
    $
    3,061
    
    
    $
    2,067
  Year Ended December 31,2006
    
    
    2007
    
    
    2008Net patient service revenue
    
    $
    30,613
    
    
    $
    22,766
    
    
    $
    6,200Pre-tax loss from operations
    
    $
    (3,459
    )
    
    $
    (5,960
    )
    
    $
    (8,776
    )Benefit for income taxes
    
    
    1,224
    
    
    
    1,988
    
    
    
    3,357Loss from discontinued operations
    
    $
    (2,235
    )
    
    $
    (3,972
    )
    
    $
    (5,419
    )Gains or
losses of certain assets sold, net of income taxes
    
    
    (164
    )
    
    
    84
    
    
    
    167Loss from discontinued operations, net of income taxes
    
    $
    (2,399
    )
    
    $
    (3,888
    )
    
    $
    (5,252
    )Loss per diluted share
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.16
    )
 F-23




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##### Table of Contents



8. Allowance for Uncollectible Accounts
  Balance at
    
    Provision for
    
    Write-Offs,
    
    Balance atBeginning of
    
    Uncollectible
    
    Net of
    
    End ofYear
    
    Accounts
    
    Recoveries
    
    Year(In thousands)Year ended December 31, 2006
    
    $
    2,029
    
    
    $
    4,007
    
    
    $
    (3,535
    )
    
    $
    2,501Year ended December 31, 2007
    
    $
    2,501
    
    
    $
    5,344
    
    
    $
    (3,482
    )
    
    $
    4,363Year ended December 31, 2008
    
    $
    4,363
    
    
    $
    10,907
    
    
    $
    (5,481
    )
    
    $
    9,789
 9. Property and Equipment
  December 31,2007
    
    
    2008(In thousands)Office furniture
    
    $
    6,959
    
    
    $
    9,676Computer hardware
    
    
    6,108
    
    
    
    6,870Computer software
    
    
    11,373
    
    
    
    12,676Equipment
    
    
    2,135
    
    
    
    3,640Motor vehicles
    
    
    369
    
    
    
    369Land
    
    
    1,098
    
    
    
    1,098Buildings
    
    
    5,662
    
    
    
    4,534Leasehold improvements
    
    
    8,600
    
    
    
    11,288Construction in progress
    
    
    
    
    
    
    39342,304
    
    
    
    50,544Less accumulated depreciation and amortization
    
    
    20,778
    
    
    
    27,728$
    21,526
    
    
    $
    22,816
  10. Other Accrued Expenses
  December 31,2007
    
    
    2008(In thousands)Workers compensation
    
    $
    2,182
    
    
    $
    8,895Inpatient
    
    
    5,020
    
    
    
    7,432Deferred rent
    
    
    1,649
    
    
    
    6,581Pharmacy
    
    
    333
    
    
    
    728Medical supplies and durable medical equipment
    
    
    1,677
    
    
    
    3,507Property taxes
    
    
    340
    
    
    
    487Medical director fees
    
    
    487
    
    
    
    661Professional fees
    
    
    962
    
    
    
    3,144New billing system
    
    
    2,646
    
    
    
    2,024Interest
    
    
    191
    
    
    
    1,195Federal taxes payable
    
    
    
    
    
    
    3,285Accounts receivable credit balances
    
    
    632
    
    
    
    1,813Other
    
    
    1,326
    
    
    
    6,152$
    17,445
    
    
    $
    45,904
 F-24




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##### Table of Contents



11. Term Loan, Line of Credit and Long-Term Debt
  December 31,2007
    
    
    2008(In thousands)Revolving line of credit
    
    $
    
    
    
    $
    Term loan due between 2008 and 2014
    
    
    
    
    
    
    123,075Leasehold improvement loans due between 2005 and 2008; interest at 6.50% and 10.37%
    
    
    1
    
    
    
    Less current maturities
    
    
    1
    
    
    
    6,394$
    
    
    
    $
    116,681
       F-25




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##### Table of Contents



2009
    
    $
    6,3942010
    
    
    11,1892011
    
    
    12,7872012
    
    
    15,1852013
    
    
    18,381Thereafter
    
    
    59,139Total
    
    $
    123,075
   12. Income Taxes
  December 31,2007
    
    
    2008(In thousands)Current deferred tax assets:Accounts receivable
    
    $
    (661
    )
    
    $
    2,919Insurance
    
    
    (306
    )
    
    
    255Accrued compensation
    
    
    1,188
    
    
    
    1,930Workers compensation
    
    
    1,082
    
    
    
    3,402Accrued Medicare cap contractual adjustments
    
    
    
    
    
    
    4,491Other
    
    
    97
    
    
    
    3221,400
    
    
    
    13,319Non-current deferred tax assets and liabilities:Deferred compensation
    
    
    2,951
    
    
    
    4,314Federal net operating loss
    
    
    
    
    
    
    3,211Accrued rent
    
    
    
    
    
    
    1,519Amortizable and depreciable assets
    
    
    (17,425
    )
    
    
    (24,254
    )Interest rate swaps and ARS
    
    
    
    
    
    
    897Other
    
    
    433
    
    
    
    703(14,041
    )
    
    
    (13,610
    )Net deferred tax liabilities
    
    $
    (12,641
    )
    
    $
    (291
    )
 F-26




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands)Current:Federal
    
    $
    6,148
    
    
    $
    6,416
    
    
    $
    12,268State
    
    
    636
    
    
    
    1,067
    
    
    
    1,6836,784
    
    
    
    7,483
    
    
    
    13,951Deferred:Federal
    
    
    4,748
    
    
    
    466
    
    
    
    (2,011
    )State
    
    
    592
    
    
    
    52
    
    
    
    (799
    )5,340
    
    
    
    518
    
    
    
    (2,810
    )$
    12,124
    
    
    $
    8,001
    
    
    $
    11,141
  Year Ended December 31,2006
    
    
    2007
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Tax at federal statutory rate
    
    $
    12,026
    
    
    
    35
    %
    
    $
    8,342
    
    
    
    35
    %
    
    $
    10,787
    
    
    
    35
    %State income tax, net of federal benefit
    
    
    661
    
    
    
    2
    
    
    
    727
    
    
    
    4
    
    
    
    852
    
    
    
    3Municipal interest income not included
in taxable income
    
    
    (777
    )
    
    
    (2
    )
    
    
    (739
    )
    
    
    (4
    )
    
    
    (567
    )
    
    
    (2
    )Income tax credits
    
    
    (130
    )
    
    
    (1
    )
    
    
    (313
    )
    
    
    (2
    )
    
    
    (279
    )
    
    
    (1
    )Other non-deductible expenses and other
    
    
    344
    
    
    
    1
    
    
    
    (16
    )
    
    
    
    
    
    
    348
    
    
    
    1$
    12,124
    
    
    
    35
    %
    
    $
    8,001
    
    
    
    33
    %
    
    $
    11,141
    
    
    
    36
    %
   Balance January 1, 2007
    
    $
    1,310Accrual of interest
    
    
    174Settlement payment
    
    
    (75
    )Reduction for lapse of statutes of limitations
    
    
    (87
    )Balance December 31, 2007
    
    
    1,322Accrual of interest
    
    
    85Balance December 31, 2008
    
    $
    1,407
   13. Retirement Plan
  F-27




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##### Table of Contents



14. Commitments and Contingencies
 Leases
   2009
    
    $
    18,4252010
    
    
    14,3562011
    
    
    10,7852012
    
    
    8,3162013
    
    
    6,096Thereafter
    
    
    6,572$
    64,550
 Contingencies
   F-28




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##### Table of Contents



F-29




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##### Table of Contents



F-30




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##### Table of Contents



15. Segment Reporting
  Year Ended December 31,2006
    
    
    2007
    
    
    2008(In thousands)Net patient service revenue:Northeast
    
    $
    36,935
    
    
    $
    46,445
    
    
    $
    65,605Southeast
    
    
    60,801
    
    
    
    66,216
    
    
    
    71,940South Central
    
    
    39,575
    
    
    
    40,455
    
    
    
    36,808Midwest
    
    
    51,618
    
    
    
    51,348
    
    
    
    61,292Texas
    
    
    59,748
    
    
    
    62,716
    
    
    
    73,835Mountain
    
    
    74,529
    
    
    
    71,205
    
    
    
    73,562West
    
    
    60,587
    
    
    
    60,708
    
    
    
    70,984VistaCare Central
    
    
    
    
    
    
    
    
    
    
    48,571VistaCare South
    
    
    
    
    
    
    
    
    
    
    37,749VistaCare West/North
    
    
    
    
    
    
    
    
    
    
    76,481Odyssey Support Center
    
    
    (4,575
    )
    
    
    (861
    )
    
    
    (777
    )$
    379,218
    
    
    $
    398,232
    
    
    $
    616,050Direct hospice care expenses:Northeast
    
    $
    21,395
    
    
    $
    25,714
    
    
    $
    37,197Southeast
    
    
    37,293
    
    
    
    42,037
    
    
    
    44,872South Central
    
    
    23,863
    
    
    
    26,106
    
    
    
    24,633Midwest
    
    
    27,692
    
    
    
    29,358
    
    
    
    35,984Texas
    
    
    37,122
    
    
    
    39,548
    
    
    
    45,912Mountain
    
    
    41,416
    
    
    
    39,420
    
    
    
    40,321West
    
    
    33,715
    
    
    
    31,481
    
    
    
    35,791VistaCare Central
    
    
    
    
    
    
    
    
    
    
    30,279VistaCare South
    
    
    
    
    
    
    
    
    
    
    21,862VistaCare West/North
    
    
    
    
    
    
    
    
    
    
    44,594$
    222,496
    
    
    $
    233,664
    
    
    $
    361,445Income (loss) from continuing operations before other income (expense):Northeast
    
    $
    5,833
    
    
    $
    9,935
    
    
    $
    13,750Southeast
    
    
    10,629
    
    
    
    9,045
    
    
    
    10,557South Central
    
    
    6,261
    
    
    
    3,703
    
    
    
    158Midwest
    
    
    13,974
    
    
    
    10,439
    
    
    
    10,990Texas
    
    
    9,395
    
    
    
    7,400
    
    
    
    10,313Mountain
    
    
    18,539
    
    
    
    16,474
    
    
    
    17,331West
    
    
    13,964
    
    
    
    15,056
    
    
    
    20,273VistaCare Central
    
    
    
    
    
    
    
    
    
    
    8,455VistaCare South
    
    
    
    
    
    
    
    
    
    
    6,342VistaCare West/North
    
    
    
    
    
    
    
    
    
    
    17,134VistaCare Support Center
    
    
    
    
    
    
    
    
    
    
    (12,664
    )Odyssey Support Center
    
    
    (46,731
    )
    
    
    (50,128
    )
    
    
    (65,951
    )$
    31,864
    
    
    $
    21,924
    
    
    $
    36,688
 F-31




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##### Table of Contents



Year Ended December 31,2006
    
    2007
    
    2008Average Daily Census:Northeast
    
    
    744
    
    
    
    926
    
    
    
    1,262Southeast
    
    
    1,342
    
    
    
    1,372
    
    
    
    1,377South Central
    
    
    816
    
    
    
    818
    
    
    
    719Midwest
    
    
    1,009
    
    
    
    1,007
    
    
    
    1,166Texas
    
    
    1,197
    
    
    
    1,228
    
    
    
    1,343Mountain
    
    
    1,396
    
    
    
    1,307
    
    
    
    1,282West
    
    
    1,024
    
    
    
    991
    
    
    
    1,124VistaCare Central
    
    
    
    
    
    
    
    
    
    
    1,001VistaCare South
    
    
    
    
    
    
    
    
    
    
    743VistaCare West/North
    
    
    
    
    
    
    
    
    
    
    1,4937,528
    
    
    
    7,649
    
    
    
    11,510
 December 31,2007
    
    
    2008(In thousands)Total Assets:Northeast
    
    $
    13,597
    
    
    $
    20,409Southeast
    
    
    27,110
    
    
    
    27,864South Central
    
    
    33,079
    
    
    
    31,717Midwest
    
    
    18,469
    
    
    
    24,221Texas
    
    
    39,527
    
    
    
    40,869Mountain
    
    
    46,491
    
    
    
    45,141West
    
    
    21,236
    
    
    
    21,305VistaCare Central
    
    
    
    
    
    
    33,948VistaCare South
    
    
    
    
    
    
    23,468VistaCare West/North
    
    
    
    
    
    
    76,828Odyssey Support Center
    
    
    75,700
    
    
    
    115,181$
    275,209
    
    
    $
    460,951
  South
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    VistaCare
    
    
    VistaCare
    
    
    VistaCareNortheast
    
    
    Southeast
    
    
    Central
    
    
    Midwest
    
    
    Texas
    
    
    Mountain
    
    
    West
    
    
    Central
    
    
    South
    
    
    West/North
    
    
    TotalJanuary 1, 2007
    
    $
    3,397
    
    
    $
    12,298
    
    
    $
    17,346
    
    
    $
    3,734
    
    
    $
    21,775
    
    
    $
    31,983
    
    
    $
    7,630
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    98,163Acquisitions
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16December 31, 2007
    
    
    3,397
    
    
    
    12,314
    
    
    
    17,346
    
    
    
    3,734
    
    
    
    21,775
    
    
    
    31,983
    
    
    
    7,630
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,179Acquisition
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    19,432
    
    
    
    12,988
    
    
    
    58,560
    
    
    
    91,342December 31, 2008
    
    $
    3,397
    
    
    $
    12,314
    
    
    $
    17,396
    
    
    $
    3,734
    
    
    $
    22,087
    
    
    $
    31,983
    
    
    $
    7,630
    
    
    $
    19,432
    
    
    $
    12,988
    
    
    $
    58,560
    
    
    $
    189,521
 F-32




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##### Table of Contents



16. Unaudited Quarterly Financial Information
  2008 Calendar QuartersFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Total net revenues
    
    $
    122,808
    
    
    $
    160,716
    
    
    $
    165,241
    
    
    $
    167,284Net income
    
    $
    1,533
    
    
    $
    1,653
    
    
    $
    5,887
    
    
    $
    5,354Net income per share  Basic
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.18
    
    
    $
    0.16Net income per share  Diluted
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.18
    
    
    $
    0.16Weighted average shares outstanding  Basic
    
    
    32,639
    
    
    
    32,660
    
    
    
    32,670
    
    
    
    32,724Weighted average shares outstanding  Diluted
    
    
    32,802
    
    
    
    32,872
    
    
    
    33,052
    
    
    
    32,936
 2007 Calendar QuartersFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Total net revenues
    
    $
    96,629
    
    
    $
    99,602
    
    
    $
    99,837
    
    
    $
    102,165Net income
    
    $
    3,655
    
    
    $
    4,178
    
    
    $
    3,061
    
    
    $
    1,216
    (a)Net income per share  Basic
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.04Net income per share  Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    0.04Weighted average shares outstanding  Basic
    
    
    33,540
    
    
    
    33,276
    
    
    
    32,732
    
    
    
    32,584Weighted average shares outstanding  Diluted
    
    
    33,736
    
    
    
    33,466
    
    
    
    32,891
    
    
    
    32,733
 
 (a)
    
    Net income for the fourth quarter 2007 was reduced as a result of a $2.3 million write-off of
capitalized certificate of need application costs. F-33