GENTIVA HEALTH SERVICES INC - FORM 10-Q - November 14, 2014

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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO U.S.C. SECTION 1350 - GENTIVA HEALTH SERVICES INCgtiv-ex321_20140930xq3.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-15669
 
Gentiva Health Services, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-4335801
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3350 Riverwood Parkway, Suite 1400, Atlanta, GA 30339-3314
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (770) 951-6450
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the registrant’s Common Stock, as of November 10, 2014, was 36,966,127.
 


INDEX
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 

2

PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
 
September 30, 2014
 
December 31, 2013 (Restated)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
114,206

 
$
86,957

Accounts receivable, less allowance for doubtful accounts of $10,303 and $10,680 at September 30, 2014 and December 31, 2013, respectively
285,718

 
289,905

Deferred tax assets, net
24,270

 
28,153

Prepaid expenses and other current assets
48,776

 
64,746

Total current assets
472,970

 
469,761

Notes receivable from CareCentrix
25,000

 
28,471

Fixed assets, net
42,048

 
49,375

Intangible assets, net
247,033

 
253,727

Goodwill
374,024

 
383,487

Other assets
64,151

 
68,647

Total assets
$
1,225,226

 
$
1,253,468

LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
51,138

 
$
45,325

Accounts payable
16,370

 
15,659

Payroll and related taxes
45,736

 
64,857

Deferred revenue
47,919

 
43,864

Medicare liabilities
17,640

 
23,894

Obligations under insurance programs
78,310

 
82,634

Accrued nursing home costs
19,014

 
22,219

Accrued interest expense
7,788

 
17,239

Other accrued expenses
59,039

 
59,779

Total current liabilities
342,954

 
375,470

Long-term debt
1,105,750

 
1,124,432

Deferred tax liabilities, net
6,264

 
8,483

Other liabilities
55,456

 
53,084

Equity:


 
 
Gentiva shareholders’ deficit:
 
 
 
Common stock, $0.10 par value; authorized 100,000,000 shares; issued 38,272,830 and 37,713,302 shares at September 30, 2014 and December 31, 2013, respectively
3,827

 
3,771

Additional paid-in capital
466,777

 
462,262

Treasury stock, 1,370,544 and 1,337,882 shares at September 30, 2014 and December 31, 2013, respectively
(19,165
)
 
(18,773
)
Accumulated deficit
(740,449
)
 
(758,136
)
Total Gentiva shareholders’ deficit
(289,010
)
 
(310,876
)
Noncontrolling interests
3,812

 
2,875

Total deficit
(285,198
)
 
(308,001
)
Total liabilities and shareholders' deficit
$
1,225,226

 
$
1,253,468

See notes to consolidated financial statements.

3

Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
 
September 30, 2014
 
September 30, 2013 (Revised)
Net revenues
$
498,006

 
$
410,492

 
$
1,483,551

 
$
1,240,507

Cost of services sold
270,659

 
220,478

 
811,077

 
660,998

Gross profit
227,347

 
190,014

 
672,474

 
579,509

Selling, general and administrative expenses
(188,494
)
 
(161,078
)
 
(567,722
)
 
(483,243
)
Goodwill and other long-lived asset impairment
—

 
—

 
—

 
(210,672
)
Interest income
633

 
639

 
1,899

 
2,066

Interest expense and other
(25,352
)
 
(22,981
)
 
(75,805
)
 
(68,849
)
Income (loss) before income taxes and equity in net loss of CareCentrix
14,134

 
6,594

 
30,846

 
(181,189
)
Income tax expense
(5,601
)
 
(2,943
)
 
(12,499
)
 
(2,827
)
Equity in net loss of CareCentrix, net of tax
(490
)
 
—

 
(490
)
 
—

Net income (loss)
8,043

 
3,651

 
17,857

 
(184,016
)
Net loss (income) attributable to noncontrolling interests
2

 
(88
)
 
(170
)
 
(425
)
Net income (loss) attributable to Gentiva shareholders
$
8,045

 
$
3,563

 
$
17,687

 
$
(184,441
)
Total comprehensive income (loss)
$
8,043

 
$
3,651

 
$
17,857

 
$
(184,016
)
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Net income (loss) attributable to Gentiva shareholders:
 
 
 
 
 
 
 
Basic
$
0.22

 
$
0.12

 
$
0.49

 
$
(5.97
)
Diluted
$
0.21

 
$
0.11

 
$
0.48

 
$
(5.97
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
36,369

 
31,037

 
36,285

 
30,921

Diluted
37,546

 
31,532

 
37,052

 
30,921

See notes to consolidated financial statements.


4

Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) 
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
17,857

 
$
(184,016
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,207

 
14,541

Amortization of debt issuance costs
4,813

 
9,687

Provision for doubtful accounts
3,927

 
3,766

Equity-based compensation expense
6,643

 
5,984

Windfall tax benefits associated with equity-based compensation
(56
)
 
(92
)
Goodwill and other long-lived asset impairment
—

 
210,672

Equity in net loss of CareCentrix, net of tax
490

 
—

Deferred income tax expense (benefit)
7,715

 
(6,696
)
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Accounts receivable
260

 
5,126

Prepaid expenses and other current assets
16,281

 
62

Accounts payable
711

 
(1,471
)
Payroll and related taxes
(19,121
)
 
(12,171
)
Deferred revenue
4,055

 
1,582

Medicare liabilities
(6,254
)
 
(12,156
)
Obligations under insurance programs
(4,324
)
 
5,555

Accrued nursing home costs
(3,205
)
 
2,430

Other accrued expenses
(9,915
)
 
(26,793
)
Other, net
4,955

 
2,559

Net cash provided by operating activities
46,039

 
18,569

INVESTING ACTIVITIES:
 
 
 
Purchase of fixed assets
(9,268
)
 
(14,214
)
Proceeds from sale of businesses, net of cash transferred
—

 
508

Proceeds from sale of assets
2,004

 
—

Acquisition of businesses, net of cash acquired
—

 
(4,638
)
Net cash used in investing activities
(7,264
)
 
(18,344
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
1,937

 
2,459

Windfall tax benefits associated with equity-based compensation
56

 
92

Payment of contingent consideration accrued at acquisition date
—

 
(1,675
)
Repayment of long-term debt
(13,744
)
 
(25,000
)
Debt issuance costs
(150
)
 
(449
)
Minority interest capital contribution
1,160

 
1,600

Distribution to minority interests
(393
)
 
(563
)
Other
(392
)
 
(447
)
Net cash used in financing activities
(11,526
)
 
(23,983
)
Net change in cash and cash equivalents
27,249

 
(23,758
)
Cash and cash equivalents at beginning of period
86,957

 
207,052

Cash and cash equivalents at end of period
$
114,206

 
$
183,294

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid
$
80,148

 
$
68,374

Income taxes paid
$
416

 
$
924

See notes to consolidated financial statements.

5

Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)





Note 1.
Background and Basis of Presentation
Gentiva Health Services, Inc. (“Gentiva” or the “Company”) provides home health, hospice and community care services throughout most of the United States. The Company’s operations involve servicing its patients and customers through its (i) Home Health segment, (ii) Hospice segment and (iii) Community Care segment.
The accompanying interim consolidated financial statements are unaudited and have been prepared by the Company using accounting principles consistent with those described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013 and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair statement of financial position, results of operations and cash flows for each period presented. Certain information and disclosures normally included in the consolidated statements of financial position, comprehensive income and cash flows prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted as permitted by such rules and regulations. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements.
The Company’s consolidated financial statements include the accounts and operations of the Company and its subsidiaries in which the Company owns more than a 50 percent interest. Noncontrolling interests, which relate to the minority ownership held by third party investors in certain of the Company’s hospice and home health programs, are reported below net income (loss) under the heading “Net loss (income) attributable to noncontrolling interests” in the Company’s consolidated statements of comprehensive income and presented as a component of equity in the Company’s consolidated balance sheets. All balances and transactions between the consolidated entities have been eliminated.

6

Note 1A.
Restatement and Revision of Previously Reported Consolidated Financial Statements
The Company determined that historically it had incorrectly applied applicable accounting guidance in accounting for its indefinite-lived intangible assets related to closed or consolidated licenses on a pooled basis and did not write-off license costs when the Company closed or consolidated individual operating locations and to correct certain assumptions used in its valuation models for goodwill and indefinite-lived intangibles. The Company has determined it should amortize the full license cost over the period of closure or consolidation.
In connection with the restatement of the Company's consolidated financial statements as of and for the year ended December 31, 2013 and as of and for the quarter ended March 31, 2014, in this Form 10-Q the Company has revised its consolidated statement of comprehensive loss and consolidated statement of cash flows as of and for the six month and nine month periods ended June 30, 2013 and September 30, 2013, respectively.

The following schedules reconcile the amounts as previously reported in the applicable financial statement to the corresponding revised amounts:
 
 
For the Six Months Ended June 30, 2013
Revised Consolidated Statement of Comprehensive Loss amounts (In thousands)
 
As Previously Reported
 
Revision Adjustments
 
Revised
Selling, general and administrative expenses
 
$
(321,814
)
 
$
(351
)
 
$
(322,165
)
Goodwill and other long-lived asset impairment
 
(224,320
)
 
13,648

 
(210,672
)
Income (loss) before income taxes
 
(201,080
)
 
13,297

 
(187,783
)
Income tax (expense) benefit
 
587

 
(471
)
 
116

Net income (loss)
 
(200,493
)
 
12,826

 
(187,667
)
Net income (loss) attributable to Gentiva shareholders
 
(200,830
)
 
12,826

 
(188,044
)
Total comprehensive income (loss)
 
(200,493
)
 
12,826

 
(187,667
)
Basic Earnings Per Share: Net loss attributable to Gentiva shareholders
 
$
(6.51
)
 
$
0.42

 
$
(6.09
)
Diluted Earnings Per Share: Net loss attributable to Gentiva shareholders
 
$
(6.51
)
 
$
0.42

 
$
(6.09
)
 
 
For the Nine Months Ended September 30, 2013
Revised Consolidated Statement of Comprehensive Loss amounts (In thousands)
 
As Previously Reported
 
Revision Adjustments
 
Revised
Selling, general and administrative expenses
 
$
(482,634
)
 
$
(609
)
 
$
(483,243
)
Goodwill and other long-lived asset impairment
 
(224,320
)
 
13,648

 
(210,672
)
Income (loss) before income taxes
 
(194,228
)
 
13,039

 
(181,189
)
Income tax (expense) benefit
 
(2,457
)
 
(370
)
 
(2,827
)
Net income (loss)
 
(196,685
)
 
12,669

 
(184,016
)
Net income (loss) attributable to Gentiva shareholders
 
(197,110
)
 
12,669

 
(184,441
)
Total comprehensive income (loss)
 
(196,685
)
 
12,669

 
(184,016
)
Basic Earnings Per Share: Net loss attributable to Gentiva shareholders
 
$
(6.38
)
 
$
0.41

 
$
(5.97
)
Diluted Earnings Per Share: Net loss attributable to Gentiva shareholders
 
$
(6.38
)
 
$
0.41

 
$
(5.97
)
 
 
For the Six Months Ended June 30, 2013
Revised Consolidated Statement of Cash Flows
(In thousands)
 
As Previously Reported
 
Revision Adjustments
 
Revised
Net income (loss)
 
(200,493
)
 
12,826

 
(187,667
)
Depreciation and Amortization
 
9,511

 
351

 
9,862

Goodwill and other long-lived asset impairment
 
224,320

 
(13,648
)
 
210,672

Deferred income tax expense (benefit)
 
(7,983
)
 
471

 
(7,512
)

7

 
 
For the Nine Months Ended September 30, 2013
Revised Consolidated Statement of Cash Flows
(In thousands)
 
As Previously Reported
 
Revision Adjustments
 
Revised
Net income (loss)
 
(196,685
)
 
12,669

 
(184,016
)
Depreciation and Amortization
 
13,932

 
609

 
14,541

Goodwill and other long-lived asset impairment
 
224,320

 
(13,648
)
 
210,672

Deferred income tax expense (benefit)
 
(7,066
)
 
370

 
(6,696
)

Note 2.
Accounting Policies
Cash and Cash Equivalents
The Company considers all investments with a maturity date three months or less from their date of acquisition to be cash equivalents, including money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. Cash and cash equivalents also included amounts on deposit with several major financial institutions in excess of the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these major financial institutions are viable entities.
The Company had operating funds of approximately $4.2 million and $5.5 million at September 30, 2014 and December 31, 2013, respectively, which relate exclusively to a non-profit hospice operation managed in Florida.
Investments
As of December 31, 2013, the Company held an investment, at cost, in CareCentrix Holdings Inc. of $0.9 million for shares that it expected to receive in settlement of certain tax amounts owed to the Company as set forth in the stock purchase agreement. During the third quarter of 2014, the Company finalized the settlement with CareCentrix. See Note 7 for additional information.
At September 30, 2014 and December 31, 2013, the Company had assets of $36.1 million and $34.7 million, respectively, held in a Rabbi Trust for the benefit of participants in the Company’s non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in a Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.
Debt Issuance Costs
The Company amortizes deferred debt issuance costs over the term of its credit agreement and senior notes. As of September 30, 2014 and December 31, 2013, the Company had unamortized debt issuance costs of $24.4 million and $28.3 million, respectively, recorded in other assets in the Company’s consolidated balance sheets.
Fixed Assets
Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement. Repairs and maintenance costs are expensed as incurred. As of September 30, 2014 and December 31, 2013, fixed assets, net were $42.0 million and $49.4 million, respectively.
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million. These charges are recorded in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013.
In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge related to developed software, of approximately $1.6 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013.

8

Goodwill and Other Indefinite-Lived Intangible Assets
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various reporting units upon the acquisition of the assets or stock of another third party business operation. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is a potential impairment of goodwill and other indefinite-lived intangible assets. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the operating unit is less than the carrying value of its goodwill. To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies, and reasonableness tests, as appropriate.
If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013. See Note 9 for additional information.
Obligations Under Self Insurance Programs
As of September 30, 2014 and December 31, 2013, the Company’s obligations under insurance programs were $78.3 million and $82.6 million, respectively. Workers’ compensation and professional and general liability expenses were $5.0 million and $15.0 million for the third quarter and first nine months of 2014, respectively, as compared to $6.6 million and $19.2 million for the corresponding periods of 2013. Employee health and welfare expenses were $21.4 million and $67.8 million for the third quarter and first nine months of 2014, respectively, as compared to $21.0 million and $64.0 million for the corresponding periods of 2013.
Nursing Home Costs
For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Company contracts with nursing homes for the nursing homes to provide patients’ room and board services. The state must pay the Company, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95 percent of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under the Company’s standard nursing home contracts, the Company pays the nursing home for these room and board services at the Medicaid daily nursing home rate. Nursing home costs are partially offset by nursing home net revenue, and the net amount is included in cost of services sold in the Company’s consolidated statements of comprehensive income. Net nursing home costs for the third quarter and first nine months of 2014 were $2.9 million and $7.3 million, respectively, as compared to $1.7 million and $7.2 million for the corresponding periods of 2013.
Note 3.
Recent Accounting Pronouncements
On May 28. 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for reporting periods beginning after December 15, 2016.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) (ASU 2013-11), which provides final guidance that requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance were effective as of the beginning of the Company's 2014 year.  The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

9

Note 4.
Acquisitions and Dispositions
Wake Forest Baptist Health Care at Home, LLC
Effective February 2014, the Company sold its Wilkesboro, North Carolina branch to Wake Forest Baptist Health Care at Home, LLC for $2.9 million. Total Care Home Health of North Carolina, LLC, a wholly-owned subsidiary of the Company, owns a 60 percent interest in Wake Forest Baptist Health Care at Home, LLC, which provides home health services in the Winston-Salem and Wilkesboro, North Carolina geographical areas.
Effective August 23, 2013, the Company acquired 60 percent interest in the membership units of Wake Forest Baptist Health Care at Home, LLC for approximately $2.4 million, consisting of $2.2 million in cash and $0.2 million of other assets, and entered into an operating agreement with Wake Forest University Baptist Medical Center to provide home health services in the Winston-Salem, North Carolina geographical area.
Harden Healthcare Holdings, Inc.
Effective October 18, 2013, the Company completed the acquisition of certain net assets relating to the home health, hospice and community care businesses of Harden Healthcare Holdings, Inc. ("Harden") pursuant to an Agreement and Plan of Merger dated as of September 18, 2013. The Company completed the acquisition as an entrance into the community care business, primarily throughout Texas, Oklahoma and Missouri, and to expand its geographic coverage for its home health and hospice businesses. Total consideration for the acquisition was $426.8 million, exclusive of transaction costs, consisting of approximately $365.0 million in cash, $53.8 million in shares of Gentiva's common stock and additional contingent consideration of $9.5 million, recorded at estimated fair value of approximately $8.1 million. The contingent consideration includes (i) a consulting agreement entered into with Capstar Partners, LLC, (ii) a sub-lease termination agreement entered into with Capstar Investment Partners, L.P., both which carry performance criteria tied to certain levels of community care program reimbursement rates in the State of Texas, as defined in the agreements, and (iii) a consulting agreement entered into with a former executive of Harden.
During the third quarter of 2014, the Company, in connection with finalizing its valuation of Harden, recorded adjustments to the preliminary fair values assigned to the assets and liabilities acquired in the transaction. These adjustments related to (i) an increase in deferred taxes of $9.7 million, (ii) a $0.3 million increase in identifiable intangible assets and (iii) a $0.2 million increase in other accrued liabilities with a corresponding decrease in goodwill. In addition, the Company recorded an increase in the accounts receivable fair value reserve of $1.5 million within the Home Health segment and a corresponding decrease in the accounts receivable fair value reserve for the Community Care segment.
Appalachian Regional Health Systems
Effective September 30, 2013, the Company completed its acquisition of the assets and business of Appalachian Regional Health Systems, a provider of home health services with offices in Boone and Newland, North Carolina. Total consideration of $2.7 million, subject to post-closing adjustments, consisted of $2.1 million from the Company's existing cash reserves and $0.6 million held in escrow for certain post closing matters. The purchase price was allocated to goodwill ($2.6 million) and identifiable intangible assets ($0.1 million).
Hope Hospice, Inc.
Effective April 30, 2013, the Company completed its acquisition of the assets and business, pursuant to an asset purchase agreement, of Hope Hospice, Inc., a provider of hospice services located in Rochester, Indiana. Total non-cash consideration of $1.0 million consisted of the assumption of Hope Hospice's outstanding debt and existing liabilities as of the closing date. The purchase price was allocated to Medicare licenses ($0.5 million), accounts receivable ($0.3 million) and goodwill ($0.2 million).
Note 5.
Fair Value of Financial Instruments
The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for the notes receivable from CareCentrix and long-term debt. The fair values for the notes receivable from CareCentrix and non-financial assets, such as fixed assets, intangible assets and goodwill, are measured periodically and adjustments recorded only if an impairment charge is required. The carrying amount of the Company’s accounts receivable, accounts payable and certain other current liabilities approximates fair value due to their short maturities.
Fair value is defined under authoritative guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use

10

of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The three levels of inputs are as follows:
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
•
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial Instruments Recorded at Fair Value
The Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis was as follows (in thousands): 
 
September 30, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
23,091

 
$
—

 
$
—

 
$
23,091

 
$
23,695

 
$
—

 
$
—

 
$
23,695

Rabbi Trust:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
31,175

 
—

 
—

 
31,175

 
28,945

 
—

 
—

 
28,945

Money market funds
4,963

 
—

 
—

 
4,963

 
5,737

 
—

 
—

 
5,737

Total assets
$
59,229

 
$
—

 
$
—

 
$
59,229

 
$
58,377

 
$
—

 
$
—

 
$
58,377

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payables to plan participants
$
36,138

 
$
—

 
$
—

 
$
36,138

 
$
34,682

 
$
—

 
$
—

 
$
34,682

Acquisition contingent liability
—

 
—

 
8,514

 
8,514

 
—

 
—

 
8,110

 
8,110

Total liabilities
$
36,138

 
$
—

 
$
8,514

 
$
44,652

 
$
34,682

 
$
—

 
$
8,110

 
$
42,792

Assets held in the Rabbi Trust are held for the benefit of participants in the Company’s non-qualified defined contribution retirement plan. The value of assets held in the Rabbi Trust is based on quoted market prices of securities and investments, including money market accounts and mutual funds, maintained within the Rabbi Trust. The corresponding amounts payable to plan participants are equivalent to the underlying value of assets held in the Rabbi Trust. Assets held in the Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets. Money market funds held in the Company’s account represent cash equivalents and were classified in cash and cash equivalents in the Company’s consolidated balance sheets at September 30, 2014 and December 31, 2013.
The estimated fair value of the acquisition contingent liabilities were determined using a discounted cash flow approach utilizing level 2 and level 3 inputs which included observable market discount rates, fixed payment schedules, and assumptions based on achieving certain pre-defined performance criteria. See Note 4 for further information.
The following table provides a summary of changes in fair value of the Company's Level 3 financial assets (in thousands):
 
 
Estimated Fair Value
 
Balance at December 31, 2013
 
$
8,110

 
Payment of contingent liability
 
(125
)
 
Included in earnings
 
279

(1) 
Harden acquisition contingent liability adjustment
 
250

 
Balance at September 30, 2014
 
$
8,514

 

(1)
Accretion of the present value of the contingent liability is recorded in interest expense and other in the Company's consolidated statements of comprehensive income. A 1 percent change in the discount rate would have an impact on the fair value of the contingent liability of approximately $0.2 million.

11

Other Financial Instruments
The carrying amount and estimated fair value of the Company’s other financial instruments were as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
 
 
 
 
 
 
 
Note receivable from CareCentrix
$
25,000

 
$
26,055

 
$
25,000

 
$
26,403

Seller financing note receivable from CareCentrix
—

 
—

 
3,471

 
3,471

Liabilities:
 
 
 
 
 
 
 
Long-term obligations
$
1,163,256

 
$
1,182,837

 
$
1,177,000

 
$
1,183,863

The estimated fair value of the note receivable from CareCentrix was determined from Level 3 inputs based on an income approach using the discounted cash flow method. The fair value represents the net present value of (i) the after tax cash flows relating to the note's annual income stream plus (ii) the return of the invested principal using a maturity date of March 19, 2017, after considering assumptions relating to risk factors and economic conditions. See Note 7 for additional information.
In determining the estimated fair value of long-term debt, Level 2 inputs based on the use of bid and ask prices were considered. Due to the infrequent number of transactions that occur related to the long-term debt, the Company does not believe an active market exists for purposes of this disclosure.
Note 6.
Net Revenues and Accounts Receivable
Net revenues in the Home Health and Hospice segments were derived from all major payer classes, while Community Care segment net revenues were derived primarily from Medicaid and Insurance payer classes. Net revenue by major payer classes were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
Percentage
Variance
 
2014
 
2013
 
Percentage
Variance
Medicare:
 
 
 
 
 
 
 
 
 
 
 
Home Health
$
214.9

 
$
191.8

 
12.0
 %
 
$
642.0

 
$
577.7

 
11.1
 %
Hospice
161.6

 
163.8

 
(1.3
)%
 
486.3

 
498.8

 
(2.5
)%
Total Medicare
376.5

 
355.6

 
5.9
 %
 
1,128.3

 
1,076.5

 
4.8
 %
Medicaid and Local Government
70.9

 
17.4

 
307.0
 %
 
212.8

 
54.4

 
291.4
 %
Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
21.5

 
15.1

 
42.8
 %
 
55.0

 
43.3

 
27.0
 %
Other
29.1

 
22.4

 
29.7
 %
 
87.5

 
66.3

 
31.8
 %
Total Commercial Insurance and Other
50.6

 
37.5

 
35.0
 %
 
142.5

 
109.7

 
29.9
 %
Total net revenues
$
498.0

 
$
410.5

 
21.3
 %
 
$
1,483.6

 
$
1,240.5

 
19.6
 %
For the third quarter and first nine months of 2014, the Company recorded hospice Medicare cap expense of $0.4 million and $1.5 million, respectively, as compared to hospice Medicare cap credits of $2.9 million and $4.5 million for the third quarter and first nine months of 2013, respectively, which are reflected in net revenues in the Company’s consolidated statements of comprehensive income. For the Medicare cap year 2014, which began November 1, 2013, the Company has recorded $1.8 million in Medicare cap expense and has seven hospice providers currently estimated to be in excess of Medicare cap limits.
The Medicare payment cap, which is calculated for each provider by the Medicare fiscal intermediary at the end of the hospice cap period, is determined under the proportional method. The proportional method allocates each beneficiary's Medicare payment cap based on the ratio of the number of days the beneficiary received hospice services from the Company over the total number of days the beneficiary received hospice services from all providers. The Medicare payment cap amount is then further allocated between the hospice cap periods based on the ratio of the number of days the Company provided hospices services during each cap period. The sum of each beneficiary's Medicare cap payment, as determined above, represents the aggregate Medicare payment cap. Medicare revenue paid to a provider during the hospice cap period cannot exceed the aggregate Medicare payment cap. As of September 30, 2014 and December 31, 2013, the Company had Medicare

12

cap liabilities of $3.7 million and $6.5 million, respectively, which are reflected in Medicare liabilities in the Company’s consolidated balance sheets.
Odyssey HealthCare, Inc. ("Odyssey"), prior to its acquisition by Gentiva, filed appeals with Centers for Medicare & Medicaid Services ("CMS") to change the methodology previously used to calculate the Medicare payment cap in order to utilize the proportional method of determining the payment cap, as described above. This method allocates the Medicare payment cap over the cap years that the beneficiary is on service. In connection with those appeals, the Company has received final settlement letters for many of its providers and recorded approximately $3.4 million and $5.9 million as net revenue for the third quarter and first nine months of 2013, respectively, in the Company's consolidated statements of comprehensive income.
Corporate Integrity Agreement
Under Odyssey's five-year Corporate Integrity Agreement ("CIA") with the Office of Inspector General of the United States Department of Health and Human Services ("OIG"), which became effective on February 15, 2012, Odyssey must engage a third party to perform verification and unallowable cost reviews. In addition, Odyssey's eligibility review team must review the eligibility of Odyssey's Medicare beneficiaries for the hospice services those beneficiaries received and prepare an eligibility review report. Odyssey must submit to the OIG annually a report with respect to the status of, and findings regarding, Odyssey's compliance activities. Any overpayments identified by Odyssey are paid back to the various Medicare administrative contractors by April 1st of the following year. If Odyssey fails to comply with the terms of the CIA, it will be subject to penalties. In connection with these eligibility reviews, the Company reduced reserves by approximately $0.4 million for the third quarter of 2014 and recorded reserves of approximately $1.9 million for the first nine months of 2014. The Company recorded reserves of $3.5 million and $5.0 million for the third quarter and first nine months of 2013, respectively, which are reflected as a reduction of net revenues in the Company's consolidated statements of comprehensive income.
PRRB Appeal
During the third quarter of 2013, the Company finalized its year 2000 cost reports, which are now being settled by CMS. In connection with the settlements, the Company recorded a positive adjustment of approximately $4.0 million to net revenues for the third quarter and first nine months of 2013, in the Company's consolidated statements of comprehensive income. See Note 14 for additional information.
Accounts Receivable
Accounts receivable attributable to major payer sources of reimbursement were as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Medicare
$
200,902

 
$
214,366

Medicaid and Local Government
51,113

 
48,183

Commercial Insurance and Other
44,006

 
38,036

Gross accounts receivable
296,021

 
300,585

Less: Allowance for doubtful accounts
(10,303
)
 
(10,680
)
Net accounts receivable
$
285,718

 
$
289,905

As of September 30, 2014 and December 31, 2013, the Commercial Insurance and Other payer group included self-pay accounts receivable relating to patient co-payments of $2.1 million and $2.4 million, respectively.
Note 7.
Investment in and Notes Receivable from CareCentrix
The Company holds a $25.0 million subordinated promissory note from CareCentrix, Inc. In connection with the sale of the Company’s ownership interest in CareCentrix Holdings on September 19, 2011, the maturity date of the note was extended to the earlier of March 19, 2017 or a sale of CareCentrix Holdings. The note bears interest at a fixed rate of 10 percent, which is payable quarterly, provided that CareCentrix remains in compliance with its senior debt covenants. Interest on the CareCentrix promissory note, which is included in interest income in the Company’s consolidated statements of comprehensive income, amounted to $0.6 million and $1.9 million for the third quarter and first nine months, respectively, of both 2014 and 2013.
Pursuant to the terms of the stock purchase agreement, approximately $10.6 million of the sale price due to the Company was placed into an escrow fund for future indemnification claims. As of September 30, 2014, approximately $0.7 million of the escrow fund was paid out to cover expenses related to an indemnified claim.

13

On August 24, 2012, the Company received notification from CareCentrix of its election to draw seller financing from the escrow fund pursuant to the terms of the stock purchase agreement. As such, the Company reclassified its escrow receivable of approximately $9.9 million from prepaid expenses and other current assets to a seller financing note from CareCentrix on the Company's consolidated balance sheet as of September 30, 2012. The seller financing note receivable, which bears interest at 18 percent, matures on the earlier of March 19, 2017 or upon the sale of CareCentrix Holdings. Interest on this note is payable quarterly, in kind, and will accrete as additional principal on the note. The Company expects to record interest income at the time of receipt as the note is part of the proposed settlement discussed below.
On September 17, 2012, the Company received a formal notice of claims for indemnification from CareCentrix. In the notice, CareCentrix asserted that the total claimed amounts exceed the total amount in escrow and demanded that the entire principal amount of the seller financing note receivable be reduced to zero. In anticipation of a settlement of claims alleged by the owner of CareCentrix and working capital adjustments as set forth in the stock purchase agreement, during the fourth quarter of 2012, the Company recorded a $6.5 million adjustment to the seller financing note receivable to reflect its revised estimated fair value of $3.4 million. The Company also established an investment in CareCentrix of $0.9 million for shares that it may receive as part of any settlement. During the third quarter of 2014, the Company received cash of approximately $3.6 million in settlement of the seller financing note receivable and the Company's investment in CareCentrix. In connection with the settlement, the Company recorded a loss of approximately $0.5 million in equity in net loss of CareCentrix, net of tax in the Company's consolidated statement of comprehensive income.
The Company’s financing receivables consist of the previously described $25.0 million subordinated promissory note from CareCentrix, Inc. dated September 19, 2011. The Company measures impairment based on the present value of expected cash flows after considering assumptions relating to risk factors and economic conditions. On an ongoing basis, the Company assesses the credit quality based on the Company’s review of CareCentrix, Inc.’s financial position and receipt of interest payments when due. Based on the Company’s analysis, as of September 30, 2014 and December 31, 2013, the Company had no allowances for credit losses.
Note 8.
Cost Savings Initiatives and Acquisition and Integration Activities
The Company recorded net charges relating to cost savings initiatives and acquisition and integration activities of $0.5 million and $10.5 million for the third quarter and first nine months of 2014, respectively, and $1.7 million and $2.6 million for the third quarter and first nine months of 2013, respectively, which were recorded in selling, general and administrative expenses in the Company’s consolidated statements of comprehensive income.
Cost Savings Initiatives
During the fourth quarter of 2013, the Company undertook a corporate restructuring initiative, referred to as "One Gentiva", to better align its home health, hospice and community care businesses under a common regional management structure. In addition, the Company undertook a branch rationalization initiative to review under performing branches. As a result of this review, the Company closed or consolidated 94 branches through the third quarter of 2014. As such, the Company recorded charges of $0.2 million and $4.3 million for the third quarter and first nine months of 2014, respectively, primarily related to severance and facility lease costs. The Company substantially completed these costs savings initiatives during the second quarter of 2014.
For the third quarter and first nine months of 2013, the Company recorded charges related to cost savings initiatives of $0.1 million and $0.3 million, respectively. These costs primarily related to a 2012 initiative to reduce ongoing operating costs related to branch structure and support infrastructure. The Company substantially completed these cost savings initiatives during the second quarter of 2013.
Acquisition and Integration Activities
The Company recorded charges of $0.3 million and $6.2 million for the third quarter and first nine months of 2014, respectively, and $1.6 million and $2.3 million for the third quarter and first nine months of 2013, respectively, primarily related to the Company's acquisition of Harden. These costs consisted of (i) severance and lease costs associated with consolidation of branches in overlapping markets and consolidation of back office functions and (ii) legal, accounting and other professional fees and expenses associated with the transaction. The Company expects to complete its integration activities in early 2015.

14

The costs incurred and cash expenditures associated with these activities by component were as follows (in thousands): 
 
Cost Savings Initiatives
 
Acquisition &
Integration
 
Total
Balance at December 31, 2012
$
1,685

 
$
1,011

 
$
2,696

Charge in first quarter 2013
47

 
94

 
141

Cash expenditures
(1,104
)
 
(322
)
 
(1,426
)
   Ending balance at March 31, 2013
628

 
783

 
1,411

Charge in second quarter 2013
138

 
606

 
744

Cash expenditures
(685
)
 
(234
)
 
(919
)
   Ending balance at June 30, 2013
81

 
1,155

 
1,236

Charge in third quarter 2013
77

 
1,622

 
1,699

Cash expenditures
(240
)
 
(283
)
 
(523
)
   Non-cash reclassification
476

 
(476
)
 
—

   Ending balance at September 30, 2013
$
394

 
$
2,018

 
$
2,412

 
 
 
 
 
 
Balance at December 31, 2013
$
6,722

 
$
9,703

 
$
16,425

Charge in first quarter 2014
2,713

 
2,628

 
5,341

Cash expenditures
(3,443
)
 
(3,472
)
 
(6,915
)
Non-cash expenditures
(60
)
 
(86
)
 
(146
)
   Ending balance at March 31, 2014
5,932

 
8,773

 
14,705

Charge in second quarter 2014
1,409

 
3,250

 
4,659

Cash expenditures
(2,994
)
 
(3,717
)
 
(6,711
)
Non-cash expenditures
(276
)
 
5

 
(271
)
   Ending balance at June 30, 2014
4,071

 
8,311

 
12,382

Charge in third quarter 2014
195

 
284

 
479

Cash expenditures
(1,302
)
 
(1,908
)
 
(3,210
)
Non-cash expenditures
35

 
3

 
38

   Ending balance at September 30, 2014
$
2,999

 
$
6,690

 
$
9,689

The balance of unpaid charges relating to cost savings initiatives and other restructuring costs and acquisition and integration activities approximated $9.7 million at September 30, 2014 and $16.4 million at December 31, 2013, which were included in other accrued expenses in the Company’s consolidated balance sheets.
Note 9.
Goodwill and Identifiable Intangible Assets
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various reporting units upon the acquisition of the assets or stock of another third party business operation. The Company compares the fair value of each reporting unit to the carrying amount of their allocated net assets to determine if there is a potential impairment of goodwill. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
To determine the fair value of the Company's reporting units, the Company uses a present value (discounted cash flow) technique corroborated by market multiples when available, a reconciliation to market capitalization or other valuation methodologies and reasonableness tests, as appropriate. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. The future occurrence of a potential indicator of impairment, such as, but not limited to, a significant adverse change in legal factors or business climate, reductions of projected patient census, an adverse action or assessment by a regulator, as well as other unforeseen factors, would require an interim assessment for some or all of the reporting units.

15

If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company's operations include three reporting units: Home Health, Hospice and Community Care. At March 31, 2013, the Company determined that a triggering event had occurred due to lower than expected average daily census and higher than expected discharge rates during the quarter and performed an interim impairment test of its Hospice reporting unit. For purposes of the interim impairment test, the Company applied certain assumptions that included, but were not limited to, patient census projections, gross margin assumptions, operating efficiencies and economies of scale. To determine fair value, the Company considered the income approach, which determines fair value based on estimated future cash flows of the reporting unit, discounted by an estimated weighted-average cost of capital (“discount rate”), which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. The Company used a discount rate of 9.5 percent to calculate the fair value of its Hospice reporting unit. Based on the results of the interim impairment test, the Company's Hospice reporting unit had an estimated fair value of approximately $555 million. As such, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million, which is reflected in goodwill and other long-lived asset impairment in the Company's consolidated comprehensive statement of income for the nine months ended September 30, 2013.
The gross carrying amount and accumulated amortization of each category of identifiable intangible assets as of September 30, 2014 and December 31, 2013 were as follows (in thousands): 
 
September 30, 2014
 
December 31, 2013 (Restated)
 
Useful
Life
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
 
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Covenants not to compete
$
2,157

 
$
16,183

 
$
1,029

 
$
19,369

 
$
2,157

 
$
16,183

 
$
1,029

 
$
19,369

 
2-5 Yrs
Less: accumulated amortization
(1,709
)
 
(15,837
)
 
(327
)
 
(17,873
)
 
(1,553
)
 
(15,720
)
 
(91
)
 
(17,364
)
 
 
Net covenants not to compete
448

 
346

 
702

 
1,496

 
604

 
463

 
938

 
2,005

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
27,196

 
910

 
—

 
28,106

 
27,196

 
910

 
—

 
28,106

 
5-10 Yrs
Less: accumulated amortization
(21,703
)
 
(549
)
 
—

 
(22,252
)
 
(19,997
)
 
(481
)
 
—

 
(20,478
)
 
 
accumulated impairment losses
(27
)
 
—

 
—

 
(27
)
 
(27
)
 
—

 
—

 
(27
)
 
 
Net customer relationships
5,466

 
361

 
—

 
5,827

 
7,172

 
429

 
—

 
7,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
19,267

 
17,528

 
11,922

 
48,717

 
19,267

 
17,528

 
11,922

 
48,717

 
5-10 Yrs
Less: accumulated amortization
(12,795
)
 
(4,368
)
 
(1,134
)
 
(18,297
)
 
(11,992
)
 
(3,763
)
 
(227
)
 
(15,982
)
 
 
accumulated impairment losses
(6,421
)
 
(13,122
)
 
—

 
(19,543
)
 
(6,421
)
 
(13,122
)
 
—

 
(19,543
)
 
 
Net tradenames
51

 
38

 
10,788

 
10,877

 
854

 
643

 
11,695

 
13,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses
714

 
9,289

 
—

 
10,003

 
714

 
8,021

 
—

 
8,735

 
 
Less: accumulated amortization
(714
)
 
(8,782
)
 
—

 
(9,496
)
 
(588
)
 
(6,812
)
 
—

 
(7,400
)
 
 
Net licenses
—

 
507

 
—

 
507

 
126

 
1,209

 
—

 
1,335

 
 
Amortized intangible assets
5,965

 
1,252

 
11,490

 
18,707

 
8,756

 
2,744

 
12,633

 
24,133

 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses and certificates of need
245,086

 
104,364

 
26,011

 
375,461

 
245,086

 
105,632

 
26,011

 
376,729

 

Less: accumulated impairment
          losses
(144,672
)
 
(2,463
)
 
—

 
(147,135
)
 
(144,672
)
 
(2,463
)
 
—

 
(147,135
)
 
 
Net licenses and certificates of need
100,414

 
101,901

 
26,011

 
228,326

 
100,414

 
103,169

 
26,011

 
229,594

 
 
Total identifiable intangible assets
$
106,379

 
$
103,153

 
$
37,501

 
$
247,033

 
$
109,170

 
$
105,913

 
$
38,644

 
$
253,727

 
 
The Company recorded amortization expense of approximately $2.5 million and $6.7 million for the third quarter and first nine months of 2014, respectively, and $1.2 million and $4.0 million for the third quarter and first nine months of 2013, respectively. The estimated amortization expense for the remainder of 2014 is $1.6 million and for each of the next five succeeding years approximates $4.1 million for 2015, $3.1 million for 2016, $2.4 million for 2017, $1.6 million for 2018, and $1.3 million for 2019.

16

The gross carrying amount of goodwill as of September 30, 2014 and December 31, 2013 and activity during the first nine months of 2014 were as follows (in thousands): 
 
Goodwill, Gross
 
Accumulated Impairment Losses
 
 
 
Home Health
 
Hospice
 
Community Care
 
Total
 
Home Health
 
Hospice
 
Total
 
Net
Balance at December 31, 2013 (Restated)
$
386,719

 
$
944,187

 
$
116,534

 
$
1,447,440

 
$
(263,370
)
 
$
(800,583
)
 
$
(1,063,953
)
 
$
383,487

Harden purchase accounting adjustment
(3,023
)
 
(3,021
)
 
(3,419
)
 
(9,463
)
 
—

 
—

 
—

 
(9,463
)
Balance at September 30, 2014:
$
383,696

 
$
941,166

 
$
113,115

 
$
1,437,977

 
$
(263,370
)
 
$
(800,583
)
 
$
(1,063,953
)
 
$
374,024

Note 10.
Earnings Per Share
Basic and diluted earnings per share for each period presented have been computed by dividing net income (loss) attributable to Gentiva shareholders by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts): 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
 
September 30, 2014
 
September 30, 2013 (Revised)
Net income (loss) attributable to Gentiva shareholders
$
8,045

 
$
3,563

 
$
17,687

 
$
(184,441
)
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
36,369

 
31,037

 
36,285

 
30,921

Shares issuable upon the assumed exercise of stock options and under stock plans for employees and directors using the treasury stock method
1,177

 
495

 
767

 
—

Diluted weighted average common shares outstanding
37,546

 
31,532

 
37,052

 
30,921

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.22

 
$
0.12

 
$
0.49

 
$
(5.97
)
Diluted
$
0.21

 
$
0.11

 
$
0.48

 
$
(5.97
)
 
 
 
 
 
 
 
 
Anti-dilutive shares by type:
 
 
 
 
 
 
 
Stock options
1,492

 
3,054

 
2,674

 
2,947

Performance share units
—

 
—

 
—

 
80

Restricted stock
—

 
—

 
—

 
232

Total anti-dilutive shares
1,492

 
3,054

 
2,674

 
3,259

For the third quarter and first nine months of 2014, approximately 1.5 million and 2.7 million, respectively, of stock options were excluded from the computations of diluted earnings per share, as their inclusion would be anti-dilutive. For the third quarter and first nine months of 2013, approximately 3.1 million and 3.3 million, respectively, of stock options, performance share units and restricted stock awards were excluded from the computations of diluted earnings per share as their inclusion would be anti-dilutive.
Note 11.
Long-Term Debt
Credit Arrangements
At September 30, 2014, the the Company’s credit arrangements included a senior secured credit agreement providing (i) a six-year $670 million Term Loan B facility, (ii) a five-year $155 million Term Loan C facility and (iii) a five-year $100 million revolving credit facility (collectively, the “Credit Agreement”), and $325 million aggregate principal amount of 11.5 percent Senior Notes due 2018 (the “Senior Notes”). The Credit Agreement’s revolving credit facility also includes borrowing capacity of $80 million available for letters of credit and $15 million for borrowings on same-day notice, referred to as swing line loans.

17

As of September 30, 2014 and December 31, 2013, the Company’s long-term debt consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Credit Agreement:
 
 
 
Term Loan B, maturing October 18, 2019, net of unamortized discount of $5,780 and $6,508 as of September 30, 2014 and December 31, 2013, respectively
$
659,196

 
$
663,492

Term Loan C, maturing October 18, 2018, net of unamortized discount of $589 and $735 as of September 30, 2014 and December 31, 2013, respectively
145,692

 
154,265

11.5% Senior Notes due 2018
325,000

 
325,000

Revolving Credit Facility
27,000

 
27,000

Total debt
1,156,888

 
1,169,757

Less: current portion of long-term debt
(51,138
)
 
(45,325
)
Total long-term debt
$
1,105,750

 
$
1,124,432

As of September 30, 2014, advances under the revolving credit facility could be made, and letters of credit could be issued, up to the $100 million borrowing capacity of the facility at any time prior to the facility expiration date of October 18, 2018. Outstanding letters of credit were $56.2 million and $52.0 million at September 30, 2014 and December 31, 2013, respectively. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of September 30, 2014, the Company’s unused and available borrowing capacity under the Credit Agreement was $16.8 million. As governed by the indenture covering the unsecured Senior Notes, the Company has a maximum permitted borrowing capacity, as defined, which may limit the Company's ability to borrow up to the full capacity of the revolving credit facility.
The Term Loan B facility is subject to mandatory principal payments of $6.7 million per year, payable in equal quarterly installments, with the remaining balance of the original $670 million loan payable on October 18, 2019. The Term Loan C facility is subject to mandatory principal payments, payable in quarterly installments. The mandatory principal payments for 2014 are $11.6 million and increase each year through the maturity date of the loan, October 18, 2018.
As of September 30, 2014, the mandatory aggregate principal payments of long-term debt were $51.1 million due during the twelve months ending September 30, 2015, $29.0 million due during the twelve months ending September 30, 2016, $35.8 million due during the twelve months ending September 30, 2017, $60.9 million due during the twelve months ending September 30, 2018, $30.0 million due during the twelve months ending September 30, 2019 and $631.5 million thereafter under the Credit Agreement, and $325.0 million due in September 2018 under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 7.8 percent per annum at September 30, 2014 and 8.2 percent per annum at December 31, 2013.
The Company may voluntarily repay outstanding loans under the revolving credit facility or the term loans at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. Prepayment and commitment reductions will be required in connection with (i) certain asset sales, (ii) certain extraordinary receipts such as certain insurance proceeds, (iii) cash proceeds from the issuance of debt and (iv) 75 percent of “Excess Cash Flow” (as defined in the Credit Agreement) with two step-downs based on the Company’s leverage ratio.
The interest rate per annum on borrowings under the Credit Agreement is based on, at the option of the Company, (i) the Eurodollar Rate, adjusted for certain costs plus an Applicable Margin or (ii) the Base Rate, plus an Applicable Rate. The Base Rate represents the highest of (x) the Barclays Bank prime rate, (y) the federal funds rate plus 0.50 percent or (z) the Eurodollar Rate adjusted for certain costs plus 1.00 percent. In connection with determining the interest rates on the Term Loan B and Term Loan C facilities, in no event shall the Eurodollar Rate be less than 1.25 percent and the Base Rate be less than 2.25 percent. The Company may select interest periods of one, two, three or six months for Eurodollar Rate loans. Interest is payable at the end of the selected interest period. The Company must also pay a fee of 0.50 percent per annum on unused commitments under the revolving credit facility. As of September 30, 2014, the interest rate on Term Loan B borrowings was 6.50 percent, on Term Loan C borrowings was 5.75 percent and on revolving credit borrowings was 4.77 percent.

18

The Applicable Rate component of the interest rate under the Company's Credit Agreement is based on the Company's consolidated leverage ratio as follows:
 
Applicable Rates
 
Eurodollar Rate for Revolving Credit Facility and Letter of Credit Fees
 
Base Rate for Revolving Credit Facility
 
Term Loan B
 
Term Loan C
Consolidated
Leverage Ratio
 
 
Eurodollar Rate
 
Base Rate
 
Eurodollar Rate
 
Base Rate
> 4.0:1
4.50%
 
3.50%
 
5.25%
 
4.25%
 
4.50%
 
3.50%
< 4.0:1
4.25%
 
3.25%
 
5.25%
 
4.25%
 
4.50%
 
3.50%
Debt Covenants
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s and its subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock, create liens on assets, enter into sale and leaseback transactions, engage in mergers or consolidations with other companies, sell assets, pay dividends, repurchase capital stock, make investments, loans and advances, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements, repay certain indebtedness, change the nature of the Company’s business, change accounting policies and practices, grant negative pledges and incur capital expenditures. The Credit Agreement also requires the Company to maintain a maximum consolidated leverage ratio, as calculated based on provisions in the Credit Agreement that provide for certain defined adjustments to consolidated EBITDA, and contains certain customary affirmative covenants and events of default.
Gentiva’s permitted maximum consolidated leverage ratio is set forth in the following table: 
Four Quarters Ending
Maximum Consolidated
Leverage Ratio
March 31, 2014 to March 31, 2015
≤ 6.75:1
June 30, 2015 to March 31, 2016
≤ 6.50:1
June 30, 2016 to March 31, 2017
≤ 6.25:1
June 30, 2017 to December 31, 2017
≤ 6.00:1
March 31, 2018 and each fiscal quarter thereafter
≤ 5.75:1
As of September 30, 2014, the Company’s consolidated leverage ratio was 5.8x. As of September 30, 2014, the Company was in compliance with all covenants in the Credit Agreement.
Guaranty Agreement and Security Agreement
Gentiva and substantially all of its subsidiaries (the “Guarantor Subsidiaries”) entered into a guaranty agreement pursuant to which the Guarantor Subsidiaries have agreed, jointly and severally, fully and unconditionally to guarantee all of the Company’s obligations under the Credit Agreement. Additionally, Gentiva and its Guarantor Subsidiaries entered into a security agreement pursuant to which a first-priority security interest was granted in substantially all of the Company’s and its Guarantor Subsidiaries’ present and future real, personal and intangible assets, including the pledge of 100 percent of all outstanding capital stock of substantially all of the Company’s domestic subsidiaries to secure full payment of all of the Company’s obligations for the ratable benefit of the lenders.
Senior Notes
The Senior Notes are unsecured, senior subordinated obligations of the Company. The Senior Notes are guaranteed by all of Gentiva’s subsidiaries that are guarantors under the Credit Agreement. Interest on the Senior Notes accrues at a rate of 11.5 percent per annum and is payable semi-annually in arrears on March 1 and September 1. Gentiva will make each interest payment to the holders of record on the immediately preceding February 15 and August 15.
The Senior Notes mature on September 1, 2018 and are generally free to be transferred. Gentiva may redeem the Senior Notes, in whole or in part, at any time prior to the first interest payment of 2014, at a price equal to 100 percent of the principal amount of the Senior Notes redeemed plus an applicable make-whole premium based on the present value of the remaining payments discounted at the treasury rate plus 50 basis points plus accrued and unpaid interest, if any, to the date of redemption.

19

On or after September 1, 2014, Gentiva may redeem all or part of the Senior Notes at redemption prices set forth below plus accrued and unpaid interest and Additional Interest, if any, as defined in the indenture relating to the Senior Notes during the twelve month period beginning on September 1 of the years indicated below: 
Year
Redemption Percentage
2014
105.750%
2015
102.875%
2016 and thereafter
100.000%
Note 12.
Equity
Changes in equity for the nine months ended September 30, 2014 and 2013 were as follows (in thousands, except share amounts):
 
Gentiva Shareholders
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained
Earnings
Accumulated (Deficit)
 
Treasury Stock
 
Noncontrolling Interests
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Balance at December 31, 2012 (Revised)
32,009,286

 
$
3,201

 
$
399,148

 
$
(153,075
)
 
$
(17,852
)
 
$
1,538

 
$
232,960

Comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
     Net (loss) income
—

 
—

 
—

 
(184,441
)
 
—

 
425

 
(184,016
)
Total comprehensive (loss) income
—

 
—

 
—

 
(184,441
)
 
—

 
425

 
(184,016
)
Income tax expense associated with the exercise of non-qualified stock options
—

 
—

 
(330
)
 
—

 
—

 
—

 
(330
)
Equity-based compensation expense
—

 
—

 
5,984

 
—

 
—

 
—

 
5,984

Net issuance of stock upon exercise of stock options and under stock plans for employees and directors
640,805

 
64

 
2,392

 
—

 
—

 
—

 
2,456

Minority interest capital contribution
—

 
—

 
—

 
—

 
—

 
1,600

 
1,600

Distribution to partnership interests
—

 
—

 
—

 
—

 
—

 
(563
)
 
(563
)
Treasury shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock withheld (25,801 shares) for payroll tax withholdings related to equity-based compensation
25,801

 
3

 
—

 
—

 
(286
)
 
—

 
(283
)
Balance at September 30, 2013 (Revised)
32,675,892

 
$
3,268

 
$
407,194

 
$
(337,516
)
 
$
(18,138
)
 
$
3,000

 
$
57,808

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013 (Restated)
37,713,302

 
$
3,771

 
$
462,262

 
$
(758,136
)
 
$
(18,773
)
 
$
2,875

 
$
(308,001
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
17,687

 
—

 
170

 
17,857

Total comprehensive income
—

 
—

 
—

 
17,687

 
—

 
170

 
17,857

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

 
—

 
(2,261
)
 
—

 
—

 
—

 
(2,261
)
Equity-based compensation expense
—

 
—

 
6,643

 
—

 
—

 
—

 
6,643

Net issuance of stock upon exercise of stock options and under stock plans for employees and directors
559,528

 
56

 
1,881

 
—

 
—

 
—

 
1,937

Minority interest capital contribution
—

 
—

 
—

 
—

 
—

 
1,160

 
1,160

Acquisition of non-controlling interest
—

 
—

 
(1,748
)
 
—

 
—

 
—

 
(1,748
)
Distribution to partnership interests
—

 
—

 
—

 
—

 
—

 
(393
)
 
(393
)
Treasury shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock withheld (32,662 shares) for payroll tax withholdings related to equity-based compensation
—

 
—

 
—

 
—

 
(392
)
 
—

 
(392
)
Balance at September 30, 2014
38,272,830

 
$
3,827

 
$
466,777

 
$
(740,449
)
 
$
(19,165
)
 
$
3,812

 
$
(285,198
)
Comprehensive income amounted to $8.0 million and $17.9 million for the third quarter and first nine months of 2014, respectively, as compared to comprehensive income of $3.7 million and comprehensive loss of $184.0 million for the third quarter and first nine months of 2013, respectively.
The Company has an outstanding stock repurchase plan authorized by its Board of Directors to repurchase of up to $5,000,000 of shares of the Company’s outstanding common stock (the “2012 Repurchase Program”). During the nine months

20

ended September 30, 2014 and September 30, 2013, the Company did not repurchase shares of its outstanding common stock. As of September 30, 2014, the Company had remaining authorization under the 2012 Repurchase Program to repurchase common stock with an aggregate purchase price of up to $1.5 million, subject to the additional limitations set forth below.
The Company’s Credit Agreement provides for repurchases of the Company’s common stock not to exceed $7.5 million per year, and not to exceed $25.0 million per year if the consolidated leverage ratio is less than or equal to 3.5:1 immediately after giving effect on a pro forma basis to the repurchase. The indenture governing the Company’s Senior Notes also contains limitations on the Company’s repurchases of its common stock.
Note 13.
Equity-Based Compensation Plans
The Company provides several equity-based compensation plans under which the Company’s officers, employees and non-employee directors may participate, including (i) the 2004 Equity Incentive Plan (amended and restated as of March 16, 2011, as further amended by Amendment Nos. 1 and 2 thereto) (“2004 Plan”), (ii) the Stock & Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) and (iii) the Employee Stock Purchase Plan (“ESPP”). Collectively, these equity-based compensation plans permit the grants of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) performance units, (vi) stock units and (vii) cash, as well as allow employees to purchase shares of the Company’s common stock under the ESPP at a pre-determined discount.
For the third quarter and first nine months of 2014, the Company recorded equity-based compensation expense, as calculated on a straight-line basis over the vesting periods of the related equity instruments, of $2.3 million and $6.6 million, respectively, as compared to $2.0 million and $6.0 million for the corresponding periods of 2013, which were reflected as selling, general and administrative expense in the consolidated statements of comprehensive income.
Stock Options
The weighted average fair values of the Company’s stock options granted during the first nine months of 2014 and 2013 calculated using the Black-Scholes option pricing model and other assumptions were as follows: 
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
Weighted average fair value of options granted
$
5.08

 
$
10.74

Risk-free interest rate
0.46% - 0.51%

 
0.29% - 0.54%

Expected volatility
60% - 63%

 
76% - 79%

Contractual life
7 years

 
7 years

Expected life
3.4 - 5.4 years

 
3.4 - 5.4 years

Expected dividend yield
—
%
 
—
%
During the first nine months of 2014, the Company issued 375,000 stock options that are both time-vesting (one-third each year) and carry a market vesting feature based on the average 30-day closing stock price of the Company's common stock based on stock price thresholds of $14, $16, and $18 (each covering one-third of the options granted). The fair value of the stock options granted ranged from $5.15 to $5.88 and was determined using the Monte Carlo stock option valuation model. Assumptions used in the model included volatility of 63 percent, risk-free interest rate of 1.32 percent, zero percent dividend yield, a forfeiture rate based on the Company's historical experience and a contractual life of seven years.
Stock option grants in 2011 through 2014 vest over a three-year period based on a vesting schedule that provides for one-third vesting after each year. In addition, the Company also issued stock options in 2013 and 2014 that are both time-vesting (one-third each year) and carry a market vesting feature based on the average 30-day closing stock price of the Company's common stock. Stock option grants in 2010 fully vest over a four-year period based on a vesting schedule that provides for one-half vesting after year two and an additional one-fourth vesting after each of years three and four. The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock price over a period corresponding to the expected term of the stock option. Forfeitures are estimated utilizing the Company’s historical forfeiture experience. The expected life of the Company’s stock options is based on the Company’s historical experience of the exercise patterns associated with its stock options.

21

A summary of Gentiva stock option activity as of September 30, 2014 and changes during the nine months then ended is presented below:
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Balance as of December 31, 2013
4,005,589

 
$
15.40

 
 
 
 
Granted
737,500

 
10.90

 
 
 
 
Exercised
(27,268
)
 
7.16

 
 
 
 
Cancelled
(722,674
)
 
19.65

 
 
 
 
Balance as of September 30, 2014
3,993,147

 
$
13.86

 
4.4
 
$
20,692,356

Exercisable options
2,404,269

 
$
16.71

 
3.6
 
$
9,208,192

Shares expected to vest as of September 30, 2014
1,534,806

 
$
9.51

 
5.5
 
$
11,163,322

The total intrinsic value of options exercised during the nine months ended September 30, 2014 and September 30, 2013 was $0.2 million and $0.4 million, respectively. As of September 30, 2014 and 2013, the Company had $4.2 million and $4.3 million, respectively, of total unrecognized compensation cost related to nonvested stock options. This compensation expense is expected to be recognized over a weighted-average period of 1.4 years and 1.5 years, respectively. The total fair value of options that vested during the first nine months of 2014 was $2.4 million.
Performance Based Awards
The Company may grant performance based awards under its 2004 Plan that are either settled in shares of the Company's common stock or settled in cash depending on the individual award type. Performance based awards may result in the issuance of a range of shares of common stock or cash based on the achievement of defined levels of performance criteria. Performance based awards also carry a three-year service period requirement from the date of grant to vest. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.
A summary of Gentiva's performance based cash award activity by grant year as of September 30, 2014 is presented below:
 
2012
 
2013
 
2014
Service period to vest:
3 years
 
3 years
 
3 years
Performance range of target:
0% - 200%
 
0% - 240%
 
0% - 240%
Performance measured on:
EPS
 
EPS
 
EPS
Performance measurement period:
1/2 based on 2012 results
 
30% based on 2013 results
 
100% based on 2016 results
 
1/2 based on 2014 results
 
70% based on 2015 results
 

Performance target achieved:
2012 - 85%
 
2013 - 0%
 

Performance cash:
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013 - Earned
$
1,804,656

 
$
—

 
$
—

Cancellations
(28,688
)
 
—

 
—

Balance at September 30, 2014 - Earned
$
1,775,968

 
$
—

 
$
—


 
 
 
 
 
Balance at December 31, 2013 - Unearned
$
2,123,125

 
$
4,638,750

 
$
—

Granted
—

 
—

 
5,795,250

Performance target not achieved
—

 
(1,076,250
)
 
—

Cancellations
(33,750
)
 
—

 
(80,000
)
Balance at September 30, 2014 - Unearned
$
2,089,375

 
$
3,562,500

 
$
5,715,250

For the third quarter and first nine months of 2014, the Company recorded $1.0 million and $2.9 million, respectively, of compensation expense associated with its performance based cash awards as compared to $0.8 million and $1.7 million for the

22

corresponding periods of 2013. As of September 30, 2014, the Company had unrecognized compensation cost at target of $5.3 million to be recognized over a weighted-average period of 1.9 years.
Restricted Stock
A summary of Gentiva restricted stock activity as of September 30, 2014 is presented below:
 
Number of
Restricted
Shares
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance as of December 31, 2013
635,400

 
$
18.27

 
 
Granted
366,000

 
10.79

 
 
Exercised
(88,900
)
 
26.58

 
 
Cancelled
(12,200
)
 
11.27

 
 
Balance as of September 30, 2014
900,300

 
$
14.54

 
$
15,107,034

Nonvested shares expected to vest as of September 30, 2014
846,994

 
$
14.74

 
$
14,212,557

The restricted stock fully vests at the end of a three-year or five-year period, depending on the individual grants. Forfeitures are estimated utilizing the Company’s historical forfeiture experience.
As of September 30, 2014, the aggregate intrinsic value of the restricted stock awards was $15.1 million. The Company had $6.2 million and $5.8 million of total unrecognized compensation cost related to restricted stock as of September 30, 2014 and 2013, respectively. This compensation expense is expected to be recognized over a weighted-average period of 1.8 years and 2.2, respectively.
Directors Deferred Share Units
Under the Company’s DSU Plan, each non-employee director receives an annual deferred stock unit award credited quarterly and paid in shares of the Company’s common stock following termination of the director’s service on the Board of Directors. The total number of shares of common stock reserved for issuance under this plan is 650,000, of which 160,294 shares were available for future grants as of September 30, 2014. During the first nine months of 2014 and 2013, the Company granted 46,543 and 48,894 stock units, respectively, under the DSU Plan at a grant date weighted-average fair value of $13.54 and $11.04 per stock unit, respectively. Under the DSU Plan, 379,319 stock units were outstanding as of September 30, 2014.
Employee Stock Purchase Plan
The Company provides an ESPP under which the offering period is three months and the purchase price of shares is equal to 85 percent of the fair market value of the Company’s common stock on the last day of the three-month offering period. All employees of the Company are eligible to purchase stock under the ESPP regardless of their actual or scheduled hours of service. Under the Company’s ESPP, compensation expense is equal to the 15 percent discount from the fair market value of the Company’s common stock on the date of purchase. During the first nine months of 2014 and 2013, the Company issued 170,076 and 217,230 shares of common stock, respectively, under its ESPP.
Note 14.
Legal Matters
Litigation
In addition to the matters referenced in this Note 14, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Management does not expect that these other legal actions will have a material adverse effect on the business, financial condition, results of operations, liquidity or capital resources of the Company.
On May 10, 2010, a collective and class action complaint entitled Lisa Rindfleisch et al. v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of New York against the Company in which five former employees ("Plaintiffs") alleged wage and hour law violations. The former employees claimed they were paid pursuant to “an unlawful hybrid” compensation plan that paid them on both a per visit and an hourly basis, thereby voiding their exempt status and entitling them to overtime pay. Plaintiffs alleged continuing violations of federal and state law and sought damages under the Fair Labor Standards Act (“FLSA”), as well as under the New York Labor Law and North Carolina Wage and Hour Act (“NCWHA”). On October 8, 2010, the Court granted the Company’s motion to transfer the venue of the lawsuit to the United States District Court for the Northern District of Georgia. On April 13, 2011, the Court granted Plaintiffs’ motion for conditional certification of the FLSA claims as a collective action. On May 26, 2011, the Court bifurcated the FLSA portion of

23

the suit into a liability phase, in which discovery closed on January 15, 2013, and a potential damages phase, to be scheduled pending outcome of the liability phase. Following a motion for partial summary judgment by the Company regarding the New York state law claims, Plaintiffs agreed voluntarily to dismiss those claims in a filing on December 12, 2011. Plaintiffs filed a motion for certification of a North Carolina state law class for NCWHA claims on January 20, 2012. On August 29, 2012, the Court denied Plaintiffs' motion for certification of a North Carolina state law class. The Company filed a motion for partial summary judgment on Plaintiffs’ claims under the NCWHA on March 22, 2012, which the Court granted on January 16, 2013. On February 14, 2013, the Company filed two motions for partial summary judgment with regard to the Company's liability for Plaintiffs' FLSA claims. On the same day, Plaintiffs filed a motion for partial summary judgment in their favor with regard to the Company's liability. On July 26, 2013, the Court denied the Company's motion for summary judgment with regard to the Company's liability for Plaintiffs' FLSA claims and granted Plaintiffs' motion for summary judgment. On November 4, 2013, the Court denied the Company's motion to amend the District Court's July 26 Order to certify two legal issues for immediate interlocutory appeal to the Eleventh Circuit Court of Appeals. In its Order, the Court established a 30-day deadline for the Company to file its motion for decertification of the FLSA collective action class, which the Company then filed on December 4, 2013. On April 18, 2014, the Court issued an Order granting the Company's motion for decertification and dismissing the opt-in plaintiffs from the lawsuit without prejudice. On the same day, Plaintiffs filed a motion to amend the Court's Order to delay the effective date of the dismissal of the opt-in plaintiffs' claims for 60 days, until June 17, 2014. On May 8, 2014, the Court entered an Order granting Plaintiffs’ motion to amend, thereby extending the effective date of dismissal through June 17, 2014.  On June 17, 2014, approximately 194 of the former 999 opt-in plaintiffs who had been dismissed from this case filed a new Complaint against the Company in the United States District Court for the Northern District of Georgia as a separate, follow-on lawsuit with identical claims captioned Cynthia Bailey et al. v. Gentiva Health Services, Inc. Plaintiffs amended their Complaint on July 30, 2014 to add an additional 217 plaintiffs to the lawsuit. These were individuals who had been dismissed from the Rindfleisch lawsuit and who wished to continue to pursue their claims.  Given the filing of the follow-on lawsuit, at the June 19, 2014 settlement conference in the Rindfleisch lawsuit, it was determined that this case would be stayed and administratively closed pending the outcome of global mediation of both lawsuits, which took place on September 12, 2014. The parties were unable to resolve the Rindfleisch and Bailey matters at the September 12 global mediation; however, they continue to engage in settlement negotiations notwithstanding. If there is no settlement which resolves all issues in the Rindfleisch lawsuit, this lawsuit will be re-opened upon the request of either party, so long as the request is made within 90 days following the September 12, 2014 mediation. The Company filed its answer and a motion to drop the Bailey plaintiffs for misjoinder on October 10, 2014. Plaintiffs in this lawsuit are seeking attorneys' fees, back wages and liquidated damages going back three years from the filing of the complaint under the FLSA.

Based on the information the Company has at this time in the Rindfleisch and Bailey lawsuits, the Company is unable to assess the probable outcome or potential liability, if any, arising from these proceedings on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for these lawsuits at this time. The Company intends to defend itself vigorously in these lawsuits.
On June 11, 2010, a collective and class action complaint entitled Catherine Wilkie, individually and on behalf of all others similarly situated v. Gentiva Health Services, Inc. was filed in the United States District Court for the Eastern District of California against the Company in which a former employee alleged wage and hour violations under the FLSA and California law. The complaint alleged that the Company paid some of its employees on both a per visit and hourly basis, thereby voiding their exempt status and entitling them to overtime pay. The complaint further alleged that California employees were subject to violations of state laws requiring meal and rest breaks, overtime pay, accurate wage statements and timely payment of wages. The plaintiff sought class certification, attorneys’ fees, back wages, penalties and damages going back three years on the FLSA claim and four years on the state wage and hour claims. The Company denies the plaintiff's allegations but, following a March 2012 mediation, agreed to pay a total settlement amount of $5 million to settle the collective and class action claims. The federal district court granted final approval of the settlement on March 26, 2013, and funds were disbursed to the participating class members, 99 percent of whom timely negotiated their settlement checks. The unclaimed wages will escheat to the State of California, and any balance remaining will be distributed to a cy pres beneficiary at the conclusion of the escheat process. A status conference is scheduled for June 22, 2015, at which time the parties will present a final accounting of the settlement fund, and the court is expected to approve distribution of the residual to the cy pres beneficiary and dismiss the case.
On July 10, 2013, the Company was served with a complaint captioned United States ex rel. Vicky White v. Gentiva Health Services, Inc., which had been filed on September 8, 2010 as a qui tam action in United States District Court for the Eastern District of Tennessee by a former employee, Vicky White, as relator. The United States had declined to intervene in this action on April 5, 2013. Relator seeks treble damages and civil penalties under the federal False Claims Act for alleged violations by the Company in presenting false claims for payment and receiving Medicare reimbursement for certain home health services it had provided and also seeks damages relating to her alleged retaliatory discharge by the Company. On September 6, 2013, the Company filed a motion to dismiss the action in its entirety. On June 25, 2014, the court granted in part

24

the Company's motion to dismiss and dismissed four of the five fraudulent schemes alleged by relator. The court denied the Company's motion to dismiss as to the remaining alleged fraudulent scheme of recertifying psychiatric patients and as to relator's claim of alleged retaliatory discharge. The Company filed its answer to the complaint on July 23, 2014. Given the preliminary stage of this action and the limited information that the Company has regarding this matter, the Company is unable to assess the probable outcome or potential liability, if any, arising from this action. The Company intends to defend itself vigorously in this lawsuit.
Federal Securities Class Action Litigation
Between November 2, 2010 and October 25, 2011, five shareholder class actions were filed against Gentiva and certain of its current and former officers and directors in the United States District Court for the Eastern District of New York. Each of these actions asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "1934 Act") in connection with the Company’s participation in the Medicare Home Health Prospective Payment System (“HH PPS”). Following consolidation of the actions and the appointment of Los Angeles City Employees’ Retirement System as lead plaintiff, on April 16, 2012, a consolidated shareholder class action complaint, captioned In re Gentiva Securities Litigation, Civil Action No. 10-CV-5064, was filed in the United States District Court for the Eastern District of New York. The complaint, which named Gentiva and certain current and former officers and directors as defendants, asserted claims under Sections 10(b) and 20(a) of the 1934 Act, as well as Sections 11 and 15 of the Securities Act of 1933 (the "1933 Act"), in connection with the Company’s participation in the HH PPS. The complaint alleged, among other things, that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purposes of triggering higher reimbursement rates under the HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock during the period between July 31, 2008 and October 4, 2011. On June 15, 2012, defendants filed a motion to dismiss the complaint. On March 25, 2013, the court granted defendants' motion to dismiss with leave to amend the complaint in accordance with the court's rulings as set forth in its March 25 order. On May 10, 2013, lead plaintiff filed a consolidated amended class action complaint, and, on June 24, 2013, defendants filed a motion to dismiss. On September 19, 2013, the court granted in part and denied in part defendants’ motion to dismiss. As a result of the court’s decision, the named current officers and directors were dismissed from the action, and certain claims against Gentiva and a former officer and a former officer/director remained. On October 3, 2013, the remaining defendants moved for partial reconsideration of the court’s September 19 order. On December 10, 2013, the court granted in part and denied in part the remaining defendants' motion for partial reconsideration. As a result of the court's decision, Gentiva and the former officer were dismissed from the action, and only a Section 10(b) claim against the former officer/director remains. On January 9, 2014, the former officer/director filed an answer to the consolidated amended class action complaint. On January 28, 2014, lead plaintiff filed a motion for the entry of final judgment under Rule 54(b) of the Federal Rules of Civil Procedure. On March 3, 2014, the court granted in part and denied in part lead plaintiff's motion under Rule 54(b), granting the motion to the extent lead plaintiff sought final judgment for the claims brought pursuant to the 1933 Act as to all defendants, and denying the motion to the extent lead plaintiff sought final judgment for the claims brought pursuant to the 1934 Act as to all defendants other than the former officer/director. As a result of the court's decision, on March 6, 2014, the court entered final judgment in favor of all defendants on lead plaintiff's claims under Sections 11 and 15 of the 1933 Act. On October 17, 2014, lead plaintiff filed a motion for class certification.
Given the preliminary stage of the action, the Company is unable to assess the probable outcome or potential liability, if any, arising from the action on the business, financial condition, results of operations, liquidity or capital resources of the Company. The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made for the action at this time. The defendants intend to defend themselves vigorously in the action.
Shareholder Derivative Litigation
On January 4, 2011 and October 31, 2011, two actions were filed against certain of Gentiva’s current and former directors in Superior Court of DeKalb County in the State of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions were consolidated and, on February 9, 2012, plaintiffs filed a consolidated complaint (the “Georgia State Court Action”). The Georgia State Court Action, which named certain of Gentiva’s current and former directors as defendants, alleged, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. On March 26, 2012, defendants filed a motion to dismiss the Georgia State Court Action and further requested a transfer to the Superior Court of Cobb County. On October 12, 2012, the Cobb County court granted defendants' motion to dismiss the consolidated complaint with prejudice. On November 30, 2012, one of the plaintiffs in the Georgia State Court Action made a demand on Gentiva's board of directors to take action to remedy the breaches of fiduciary duty alleged in the Georgia State Court Action. The board of directors formed a committee (the “Committee”) to consider the demand.

25

On October 7 and October 13, 2011, two actions were filed against certain of Gentiva’s current and former directors and officers in the United States District Court for the Northern District of Georgia, alleging, among other things, that Gentiva’s board of directors breached its fiduciary duties to the Company. The actions also asserted a claim under Section 14(a) of the Securities Exchange Act of 1934. The actions were consolidated and, on March 5, 2012, plaintiffs filed a consolidated complaint (the “Georgia Federal Court Action”). The Georgia Federal Court Action, which named certain of Gentiva’s current and former directors and officers as defendants, alleged, among other things, that Gentiva’s board of directors had actual or constructive knowledge that the Company’s public disclosures misrepresented and failed to disclose that the Company improperly increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under the HH PPS, which caused an artificial inflation in the price of Gentiva’s common stock. The complaint further alleged that the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders was materially false and misleading. On April 16, 2012, defendants filed a motion to dismiss the Georgia Federal Court Action and, on February 11, 2013, the court granted defendants' motion to dismiss with prejudice.  On March 11, 2013, one of the plaintiffs in the Georgia Federal Court Action filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit. On April 10, 2013, that plaintiff and defendants filed a joint motion to dismiss the appeal with prejudice in the Eleventh Circuit. On April 30, 2013, that motion was granted.  On August 2, 2013 and September 24, 2013, respectively, each of the plaintiffs in the Georgia Federal Court Action made a demand on Gentiva’s board of directors to take action to remedy the breaches of fiduciary duty alleged in the Georgia Federal Court Action.  The demands were considered by the Committee along with the November 30, 2012 demand, and, after conducting an investigation of the allegations contained in each of the three demands, the Committee and the Board determined that taking any or all of the demanded actions would not serve the best interests of Gentiva and its shareholders. Accordingly, the Board voted unanimously to reject the demands.
Government Matters
PRRB Appeal
In connection with the audit of the Company’s 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary’s methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board (“PRRB”) concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company’s consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company’s cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are finalized and being settled. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed.
The fiscal intermediary completed the reopening of all 1997, 1998 and 1999 cost reports and determined that the adjustment to allowable costs aggregated $15.9 million which the Company has received and recorded as adjustments to net revenues in the fiscal years 2004 through 2006. The 2000 cost reports are now finalized and being settled by the Centers for Medicare & Medicaid Services. In connection with the settlements, the Company recorded approximately $4.0 million as a positive adjustment to net revenues in the third quarter of 2013.
Investigations
Odyssey
On May 5, 2008, Odyssey HealthCare, Inc. (“Odyssey”) received a letter from the U.S. Department of Justice (“DOJ”) notifying Odyssey that the DOJ was conducting an investigation of VistaCare, Inc. (“VistaCare”) and requesting that Odyssey provide certain information and documents related to the DOJ’s investigation of claims submitted by VistaCare to Medicare, Medicaid and the U.S. government health insurance plan for active military members, their families and retirees, formerly the Civilian Health and Medical Program of the Uniformed Services (“TRICARE”), from January 1, 2003 through March 6, 2008, the date Odyssey completed the acquisition of VistaCare. Odyssey has been informed by the DOJ and the Medicaid Fraud Control Unit of the Texas Attorney General’s Office that they are reviewing allegations that VistaCare may have billed the federal Medicare, Medicaid and TRICARE programs for hospice services that were not reasonably or medically necessary or performed as claimed. The basis of the investigation is a qui tam lawsuit filed in the United States District Court for the

26

Northern District of Texas by a former employee of VistaCare. The lawsuit alleges, among other things, that VistaCare submitted false claims to Medicare and Medicaid for hospice services that were not medically necessary and for hospice services that were referred in violation of the anti-kickback statute. The court unsealed the lawsuit on October 5, 2009 and Odyssey was served on January 28, 2010. In connection with the unsealing of the complaint, the DOJ filed a notice with the court declining to intervene in the qui tam action at such time. The Texas Attorney General also filed a notice of non-intervention with the court. These actions should not be viewed as a final assessment by the DOJ or the Texas Attorney General of the merits of this qui tam action. Odyssey continues to cooperate with the DOJ and the Texas Attorney General in their investigation. The relator has continued to pursue the qui tam lawsuit. Odyssey and VistaCare filed motions to dismiss the relator’s complaint on March 30, 2010 and April 2, 2012. The court issued orders on the motions to dismiss on March 9, 2011 and July 23, 2012. Consistent with the court’s orders, relator’s false claims act claims based on alleged medically unnecessary hospice services and for hospice services referred in violation of the anti-kickback statute are permitted to proceed to discovery. On or about September 6, 2013, relator filed her fourth amended complaint. This pleading only alleged wrongdoing against VistaCare from January 1, 2003 through December 31, 2012 and did not allege any substantive wrongdoing against Odyssey or the Company and only asserted claims against them as purported successors in interest. On or about September 27, 2013, VistaCare answered the fourth amended complaint, and the Company and Odyssey moved to dismiss the allegations made against them. That motion to dismiss as to the Company and Odyssey was granted with prejudice by the court on July 23, 2014. The case has been set for trial on September 21, 2015. VistaCare, Odyssey, and the Company deny the allegations made in this qui tam action and will vigorously defend against them. Based on the information available at this time, the Company cannot predict the outcome of the qui tam lawsuit, the governments’ continuing investigation, the DOJ’s or Texas Attorney General’s views of the issues being investigated, other than the DOJ’s and Texas Attorney General’s notice declining to intervene in the qui tam action, or any actions that the DOJ or Texas Attorney General may take.
On February 23, 2010, Odyssey received a subpoena from the Department of Health and Human Services, Office of Inspector General (“OIG”), requesting various documents and certain patient records of one of Odyssey’s hospice programs relating to services performed from January 1, 2006 through December 31, 2009. Odyssey is cooperating with the OIG and has completed its subpoena production. Based on the limited information that Odyssey has at this time, the Company cannot predict the outcome of the investigation, the OIG’s views of the issues being investigated or any actions that the OIG may take.
The Company does not believe that an estimate of a reasonably possible loss or range of loss can be made at this time with regard to the above investigations involving Odyssey. Based on the limited information that Odyssey has at this time regarding such investigations, the Company is unable to predict the impact, if any, that such investigations may have on Odyssey’s and the Company’s business, financial condition, results of operations, liquidity or capital resources.
Harden
On or about June 19, 2014, the Company received a Civil Investigative Demand from the U.S. Department of Justice, Western District of Missouri, under the federal False Claims Act requesting complete medical records for 14 hospice patients and other documents of Hospice Care of the Midwest, L.L.C., a subsidiary of Harden Healthcare Holdings, LLC (“Harden Holdings”), for the period from January 1, 2009 through June 19, 2014. The Company is in the process of complying with the demand for documents and is cooperating with the investigation. The Company acquired Harden Holdings on October 18, 2013 and in general matters occurring prior to such date are subject to indemnification provisions in the related Merger Agreement.
On or about June 9, 2014, Iowa Hospice, L.L.C., a subsidiary of Harden Holdings, received a Subpoena Duces Tecum (“Subpoena”) from the Office of Investigations, Kansas City Regional Office of the Office of Inspector General of the Department of Health and Human Services. The Subpoena requests complete medical records for 17 hospice patients and other documents of Iowa Hospice, L.L.C. for the period from January 1, 2007 through June 9, 2014. Harden Holdings is in the process of complying with the Subpoena and is cooperating with the investigation. The Company acquired Harden Holdings on October 18, 2013 and in general matters occurring prior to such date are subject to indemnification provisions in the related Merger Agreement.
Based on the limited information that the Company has at this time, the Company is unable to predict the financial impact, if any, arising from the above investigations.
Other
On May 16, 2014, the Company received a letter from the U.S. Department of Justice, Civil Division, Commercial Litigation Branch and the United States Attorney’s Office of the Eastern District of Pennsylvania notifying it of an investigation under the federal False Claims Act regarding Gentiva Health Services, Inc. and related entities. The letter requested various documents related to the Company’s home health business for the time period January 1, 2008 through May 16, 2014 including documents related to chart audits of Medicare claims. The Company is cooperating with the investigation and is continuing to produce documents in response to the letter request. Based on the limited information that the Company has at this time, the Company is unable to predict the financial impact, if any, arising from this investigation.

27

Note 15.
Income Taxes
The Company recorded an income tax provision of $5.6 million and $12.5 million for the third quarter and first nine months of 2014, respectively. The Company’s effective income tax rate for the first nine months of 2014 was a 40.5 percent. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 40.5 percent for the first nine months of 2014 is primarily due to state income taxes, net of federal benefit (approximately 3.5 percent) and other items (approximately 2.0 percent).
The Company recorded an income tax provision of $2.9 million and $2.8 million for the third quarter and first nine months of 2013, respectively. The Company recorded tax expense on a book loss because the majority of goodwill impairment booked in the first quarter of 2013 was nondeductible for tax resulting in a small tax benefit being booked on the goodwill impairment.
The Company's effective income tax rate for the first nine months of 2013 was a negative 1.6 percent. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of negative 1.6 percent for the first nine months of 2013 is primarily due to the impact of goodwill (approximately 36.0 percent) and other items (approximately 0.6 percent).
As of September 30, 2014 and December 31, 2013, the Company had tax refund receivables of $11.4 million and $21.2 million, respectively. Tax refund receivables are classified in prepaid expenses and other current assets in the Company’s consolidated balance sheets.
Note 16.
Business Segment Information
The Company’s operations involve servicing its patients and customers through its Home Health, Hospice and Community Care segments.
Home Health
The Home Health segment is comprised of direct home nursing and therapy services operations, including specialty programs. The Company conducts direct home nursing and therapy services operations through licensed and Medicare-certified agencies, located in 38 states, from which the Company provides various combinations of skilled nursing and therapy services and paraprofessional nursing services to adult and elder patients. The Company’s direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:
•
Gentiva Orthopedics, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;
•
Gentiva Safe Strides®, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling;
•
Gentiva Cardiopulmonary, which helps patients and their physicians manage heart and lung health in a home-based environment;
•
Gentiva Neurorehabilitation, which helps patients who have experienced a neurological injury or condition by removing the obstacles to healing in the patient’s home; and
•
Gentiva Senior Health, which addresses the needs of patients with age-related diseases and issues to effectively and safely stay in their homes.
Hospice
The Hospice segment serves terminally ill patients and their families through Medicare-certified providers operating in 30 states. Comprehensive management of the healthcare services and products needed by hospice patients and their families are provided through the use of an interdisciplinary team. Depending on a patient’s needs, each hospice patient is assigned an interdisciplinary team comprised of a physician, nurse(s), home health aide(s), medical social worker(s), chaplain, dietary counselor and bereavement coordinator, as well as other care professionals.
The Hospice segment also delivers services through focused specialty programs that include:
•
Memory Care Specialty Program, which provides an individualized disease management program addressing the physical needs specific to Alzheimer's and dementia patients and support mechanisms for their caregivers; and

28

•
Cardiac Specialty Program, which helps patients and their physicians aggressively manage symptoms associated with heart disease, focusing on quality of life and pain control.
Community Care
The Community Care segment serves patients who have chronic or long-term disabilities and need help with routine personal care operating in 4 states: Texas, Missouri, Oklahoma and North Carolina. These services include help with personal needs, such as bathing and dressing, and household activities, such as laundry and shopping, all of which help enable the patient to remain at home. Community Care services are funded primarily through state Medicaid programs which vary state to state.
Corporate Expenses
Corporate expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment, including equity-based compensation expense. Corporate and administrative support functions represent primarily information services, accounting and finance, tax compliance, risk management, procurement, marketing, clinical administration, training, legal and human resource benefits and administration.
Other Information
The Company’s senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization and net interest costs, but include revenues and all other costs (including special items) directly attributable to the specific segment. Segment assets represent net accounts receivable, identifiable intangible assets, goodwill, and certain other assets associated with segment activities. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.
Segment net revenues by major payer source were as follows (in millions): 
 
Third Quarter
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
214.9

 
$
161.6

 
$
—

 
$
376.5

 
$
191.8

 
$
163.8

 
$
355.6

Medicaid and Local Government
8.6

 
6.1

 
56.2

 
70.9

 
10.8

 
6.6

 
17.4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
21.5

 
—

 
—

 
21.5

 
15.1

 
—

 
15.1

Other
23.4

 
4.7

 
1.0

 
29.1

 
17.2

 
5.2

 
22.4

Total net revenues
$
268.4

 
$
172.4

 
$
57.2

 
$
498.0

 
$
234.9

 
$
175.6

 
$
410.5

 
 
First Nine Months
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
642.0

 
$
486.3

 
$
—

 
$
1,128.3

 
$
577.7

 
$
498.8

 
$
1,076.5

Medicaid and Local Government
25.7

 
18.6

 
168.5

 
212.8

 
33.1

 
21.3

 
54.4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
55.0

 
—

 
—

 
55.0

 
43.3

 
—

 
43.3

Other
70.8

 
14.2

 
2.5

 
87.5

 
52.0

 
14.3

 
66.3

Total net revenues
$
793.5

 
$
519.1

 
$
171.0

 
$
1,483.6

 
$
706.1

 
$
534.4

 
$
1,240.5







29

Segment information about the Company’s operations is as follows (in thousands):
 
Home Health
 
 
Hospice
 
 
Community Care
 
 
Total
 
For the three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Net revenue
$
268,423

  
 
$
172,349

  
 
$
57,234

 
 
$
498,006

  
Operating contribution
$
36,725

(1)
 
$
27,043

(1)
 
$
8,081


 
$
71,849

  
Corporate expenses
 
 
 
 
 
 
 
 
 
(25,709
)
(1)
Depreciation and amortization
 
 
 
 
 
 
 
 
 
(7,287
)
 
Interest expense and other, net
 
 
 
 
 
 
 
 
 
(24,719
)
 
Income before income taxes and equity in net loss of CareCentrix
 
 
 
 
 
 
 
 
 
$
14,134

  
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2013 (Revised)
 
 
 
 
 
 
 
 
 
 
 
Net revenue
$
234,864

  
 
$
175,628

  
 
$
—

 
 
$
410,492

  
Operating contribution
$
31,922

(1)
 
$
22,365


 
$
—


 
$
54,287

  
Corporate expenses
 
 
 
 
 
 
 
 
 
(20,672
)
(1)
Depreciation and amortization
 
 
 
 
 
 
 
 
 
(4,679
)
 
Interest expense and other, net
 
 
 
 
 
 
 
 
 
(22,342
)
 
Income before income taxes
 
 
 
 
 
 
 
 
 
$
6,594

  
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Net revenue
$
793,467

  
 
$
519,073

  
 
$
171,011

 
 
$
1,483,551

  
Operating contribution
$
107,355

(1)
 
$
66,674

(1)
 
$
25,867

(1)
 
$
199,896

  
Corporate expenses
 
 
 
 
 
 
 
 
 
(73,937
)
(1)
Depreciation and amortization
 
 
 
 
 
 
 
 
 
(21,207
)
 
Interest expense and other, net
 
 
 
 
 
 
 
 
 
(73,906
)

Income before income taxes and equity in net loss of CareCentrix
 
 
 
 
 
 
 
 
 
$
30,846

  
Segment assets
$
397,678


 
$
340,412


 
$
168,686


 
$
906,776

  
Corporate assets
 
 
 
 
 
 
 
 
 
318,450


Total assets
 
 
 
 
 
 
 
 
 
$
1,225,226

  
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2013 (Revised)
 
 
 
 
 
 
 
 
 
 
 
Net revenue
$
706,141

  
 
$
534,366

  
 
$
—

 
 
$
1,240,507

  
Operating contribution
$
92,027

(1)
 
$
76,223

(1)
 
$
—


 
$
168,250

  
Corporate expenses
 
 
 
 
 
 
 
 
 
(57,443
)
(1)
Goodwill and other long-lived asset impairment
 
 
 
 
 
 
 
 
 
(210,672
)
(2)
Depreciation and amortization
 
 
 
 
 
 
 
 
 
(14,541
)
 
Interest expense and other, net
 
 
 
 
 
 
 
 
 
(66,783
)
 
Loss before income taxes
 
 
 
 
 
 
 
 
 
$
(181,189
)
  
Segment assets
$
249,313


 
$
636,705

(2)
 
$
—


 
$
886,018

  
Corporate assets
 
 
 
 
 
 
 
 
 
377,935

(2)
Total assets
 
 
 
 
 
 
 
 
 
$
1,263,953

  
 
(1)
For the third quarter and first nine months of 2014, the Company recorded charges relating to cost savings initiatives and acquisition and integration activities of $0.5 million and $10.5 million, respectively. For the third quarter and first nine months of 2013, the Company recorded charges relating to cost savings initiatives and acquisition and integration activities of $1.7 million and $2.6 million, respectively.

30

The charges were reflected as follows for segment reporting purposes (in millions): 
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
2014
 
2013
Home Health
$
0.1

 
$
0.1

 
$
0.7

 
$
0.1

Hospice
0.1

 
—

 
5.5

 
0.7

Community Care
—

 
—

 
0.1

 
—

Corporate expenses
0.3

 
1.6

 
4.2

 
1.8

Total
$
0.5

 
$
1.7

 
$
10.5

 
$
2.6

 
(2)
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million. See Note 9.
In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge, related to developed software, of approximately $1.6 million.
Hospice and corporate assets were reduced by $207.2 million and $3.5 million, respectively, as a result of the impairment.

31

Note 17.
Supplemental Guarantor and Non-Guarantor Financial Information
Gentiva’s guarantor subsidiaries are guarantors to the Company’s debt securities which are registered under the Securities Act of 1933, as amended. The condensed consolidating financial statements presented below are provided pursuant to Rule 3-10 of Regulation S-X. Separate financial statements of each subsidiary guaranteeing Gentiva’s debt securities are not presented because the guarantor subsidiaries are jointly and severally, fully and unconditionally liable under the guarantees, and 100 percent owned by the Company. There are no restrictions on the ability to obtain funds from these subsidiaries by dividends or other means.
The following condensed consolidating financial statements include the balance sheets as of September 30, 2014 and December 31, 2013, statements of comprehensive income for the three months and nine months ended September 30, 2014 and 2013 and statements of cash flows for the nine months ended September 30, 2014 and 2013 of (i) Gentiva Health Services, Inc. and (ii) its guarantor subsidiaries (in each case, reflecting investments in its consolidated subsidiaries under the equity method of accounting) and its non-guarantor subsidiaries along with eliminations necessary to arrive at the information for the Company on a consolidated basis.


32

Condensed Consolidating Balance Sheet
September 30, 2014
(In thousands)
 
 
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
84,708

 
$
—

 
$
29,498

 
$
—

 
$
114,206

Receivables, net
—

 
277,263

 
41,275

 
(32,820
)
 
285,718

Deferred tax assets, net
—

 
21,840

 
2,430

 
—

 
24,270

Prepaid expenses and other current assets
—

 
39,291

 
9,485

 
—

 
48,776

Total current assets
84,708

 
338,394

 
82,688

 
(32,820
)
 
472,970

Note receivable from CareCentrix
—

 
25,000

 
—

 
—

 
25,000

Fixed assets, net
—

 
41,511

 
537

 
—

 
42,048

Intangible assets, net
—

 
244,433

 
2,600

 
—

 
247,033

Goodwill
—

 
367,550

 
6,474

 
—

 
374,024

Investment in subsidiaries
766,995

 
23,709

 
—

 
(790,704
)
 
—

Other assets
24,440

 
39,704

 
7

 
—

 
64,151

Total assets
$
876,143

 
$
1,080,301

 
$
92,306

 
$
(823,524
)
 
$
1,225,226

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
51,138

 
$
—

 
$
—

 
$
—

 
$
51,138

Accounts payable
—

 
16,370

 
—

 
—

 
16,370

Other current liabilities
1,959

 
241,522

 
64,785

 
(32,820
)
 
275,446

Total current liabilities
53,097

 
257,892

 
64,785

 
(32,820
)
 
342,954

Long-term debt
1,105,750

 
—

 
—

 
—

 
1,105,750

Deferred tax liabilities, net
—

 
6,264

 
—

 
—

 
6,264

Other liabilities
6,306

 
49,150

 
—

 
—

 
55,456

Total Gentiva shareholders’ (deficit) equity
(289,010
)
 
766,995

 
23,709

 
(790,704
)
 
(289,010
)
Noncontrolling interests
—

 
—

 
3,812

 
—

 
3,812

Total (deficit) equity
(289,010
)
 
766,995

 
27,521

 
(790,704
)
 
(285,198
)
Total liabilities and equity (deficit)
$
876,143

 
$
1,080,301

 
$
92,306

 
$
(823,524
)
 
$
1,225,226



33

Condensed Consolidating Balance Sheet
December 31, 2013
(In thousands)
 
As Restated
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
55,388

 
$
—

 
$
31,569

 
$
—

 
$
86,957

Receivables, net
—

 
284,637

 
33,878

 
(28,610
)
 
289,905

Deferred tax assets, net
—

 
25,845

 
2,308

 
—

 
28,153

Prepaid expenses and other current assets
—

 
52,971

 
11,775

 
—

 
64,746

Total current assets
55,388

 
363,453

 
79,530

 
(28,610
)
 
469,761

Notes receivable from CareCentrix
—

 
28,471

 
—

 
—

 
28,471

Fixed assets, net
—

 
48,855

 
520

 
—

 
49,375

Intangible assets, net
—

 
251,127

 
2,600

 
—

 
253,727

Goodwill
—

 
379,880

 
3,607

 
—

 
383,487

Investment in subsidiaries
782,470

 
23,493

 
—

 
(805,963
)
 
—

Other assets
28,266

 
40,375

 
6

 
—

 
68,647

Total assets
$
866,124

 
$
1,135,654

 
$
86,263

 
$
(834,573
)
 
$
1,253,468

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
45,325

 
$
—

 
$
—

 
$
—

 
$
45,325

Accounts payable
—

 
15,377

 
282

 
—

 
15,659

Other current liabilities
—

 
283,483

 
59,613

 
(28,610
)
 
314,486

Total current liabilities
45,325

 
298,860

 
59,895

 
(28,610
)
 
375,470

Long-term debt
1,124,432

 
—

 
—

 
—

 
1,124,432

Deferred tax liabilities, net
—

 
8,483

 
—

 
—

 
8,483

Other liabilities
7,243

 
45,841

 
—

 
—

 
53,084

Total Gentiva shareholders’ (deficit) equity
(310,876
)
 
782,470

 
23,493

 
(805,963
)
 
(310,876
)
Noncontrolling interests
—

 
—

 
2,875

 
—

 
2,875

Total (deficit) equity
(310,876
)
 
782,470

 
26,368

 
(805,963
)
 
(308,001
)
Total liabilities and equity (deficit)
$
866,124

 
$
1,135,654

 
$
86,263

 
$
(834,573
)
 
$
1,253,468


34

Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended September 30, 2014
(In thousands)
 
 
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net revenues
$
—

 
$
485,106

 
$
16,645

 
$
(3,745
)
 
$
498,006

Cost of services sold
—

 
262,795

 
11,609

 
(3,745
)
 
270,659

Gross profit
—

 
222,311

 
5,036

 
—

 
227,347

Selling, general and administrative expenses
—

 
(182,876
)
 
(5,618
)
 
—

 
(188,494
)
Interest (expense) and other, net
(24,772
)
 
—

 
53

 
—

 
(24,719
)
Equity in earnings of subsidiaries
23,000

 
(261
)
 
—

 
(22,739
)
 
—

(Loss) income before income taxes and equity in net loss of CareCentrix
(1,772
)
 
39,174

 
(529
)
 
(22,739
)
 
14,134

Income tax benefit (expense)
9,817

 
(15,684
)
 
266

 
—

 
(5,601
)
Equity in net loss of CareCentrix
—

 
(490
)
 
—

 
—

 
(490
)
Net income (loss)
8,045

 
23,000

 
(263
)
 
(22,739
)
 
8,043

Noncontrolling interests
—

 
—

 
2

 
—

 
2

Net income (loss) attributable to Gentiva shareholders
$
8,045

 
$
23,000

 
$
(261
)
 
$
(22,739
)
 
$
8,045

Total comprehensive income (loss)
$
8,045

 
$
23,000

 
$
(263
)
 
$
(22,739
)
 
$
8,043


35

Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended September 30, 2013
(In thousands)
 
As Revised
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net revenues
$
—

 
$
398,047

 
$
16,429

 
$
(3,984
)
 
$
410,492

Cost of services sold
—

 
212,543

 
11,919

 
(3,984
)
 
220,478

Gross profit
—

 
185,504

 
4,510

 
—

 
190,014

Selling, general and administrative expenses
—

 
(156,119
)
 
(4,959
)
 
—

 
(161,078
)
Interest (expense) and other, net
(22,355
)
 
—

 
13

 
—

 
(22,342
)
Equity in earnings of subsidiaries
15,987

 
(459
)
 
—

 
(15,528
)
 
—

(Loss) income before income taxes
(6,368
)
 
28,926

 
(436
)
 
(15,528
)
 
6,594

Income tax benefit (expense)
9,931

 
(12,939
)
 
65

 
—

 
(2,943
)
Net income (loss)
3,563

 
15,987

 
(371
)
 
(15,528
)
 
3,651

Noncontrolling interests
—

 
—

 
(88
)
 
—

 
(88
)
Net income (loss) attributable to Gentiva shareholders
$
3,563

 
$
15,987

 
$
(459
)
 
$
(15,528
)
 
$
3,563

Total comprehensive income (loss)
$
3,563

 
$
15,987

 
$
(371
)
 
$
(15,528
)
 
$
3,651


36

Condensed Consolidating Statement of Comprehensive Income
For the Nine Months Ended September 30, 2014
(In thousands)
 
 
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net revenues
$
—

 
$
1,446,339

 
$
48,648

 
$
(11,436
)
 
$
1,483,551

Cost of services sold
—

 
790,399

 
32,114

 
(11,436
)
 
811,077

Gross profit
—

 
655,940

 
16,534

 
—

 
672,474

Selling, general and administrative expenses
—

 
(551,875
)
 
(15,847
)
 
—

 
(567,722
)
Interest (expense) and other, net
(74,063
)
 
—

 
157

 
—

 
(73,906
)
Equity in earnings of subsidiaries
62,347

 
427

 
—

 
(62,774
)
 
—

(Loss) income before income taxes and equity in net loss of CareCentrix
(11,716
)
 
104,492

 
844

 
(62,774
)
 
30,846

Income tax benefit (expense)
29,403

 
(41,655
)
 
(247
)
 
—

 
(12,499
)
Equity in net loss of CareCentrix
—

 
(490
)
 
—

 
—

 
(490
)
Net income
17,687

 
62,347

 
597

 
(62,774
)
 
17,857

Noncontrolling interests
—

 
—

 
(170
)
 
—

 
(170
)
Net income attributable to Gentiva shareholders
$
17,687

 
$
62,347

 
$
427

 
$
(62,774
)
 
$
17,687

Total comprehensive income
$
17,687

 
$
62,347

 
$
597

 
$
(62,774
)
 
$
17,857


37

Condensed Consolidating Statement of Comprehensive Income
For the Nine Months Ended September 30, 2013
(In thousands)
 
As Reported
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net revenues
$
—

 
$
1,203,258

 
$
48,498

 
$
(11,249
)
 
$
1,240,507

Cost of services sold
—

 
638,418

 
33,829

 
(11,249
)
 
660,998

Gross profit
—

 
564,840

 
14,669

 
—

 
579,509

Selling, general and administrative expenses
—

 
(468,270
)
 
(14,364
)
 
—

 
(482,634
)
Goodwill and other long-lived asset impairment
—

 
(224,320
)
 
—

 
—

 
(224,320
)
Interest (expense) and other, net
(66,829
)
 
—

 
46

 
—

 
(66,783
)
Equity in earnings of subsidiaries
(156,813
)
 
(7
)
 
—

 
156,820

 
—

(Loss) income before income taxes
(223,642
)
 
(127,757
)
 
351

 
156,820

 
(194,228
)
Income tax benefit (expense)
26,532

 
(29,056
)
 
67

 
—

 
(2,457
)
Net (loss) income
(197,110
)
 
(156,813
)
 
418

 
156,820

 
(196,685
)
Noncontrolling interests
—

 
—

 
(425
)
 
—

 
(425
)
Net (loss) income attributable to Gentiva shareholders
$
(197,110
)
 
$
(156,813
)
 
$
(7
)
 
$
156,820

 
$
(197,110
)
Total comprehensive (loss) income
$
(182,706
)
 
$
(156,813
)
 
$
418

 
$
142,416

 
$
(196,685
)
Revision Adjustments
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Selling, general and administrative expenses
$
—

 
$
(609
)
 
$
—

 
$
—

 
(609
)
Goodwill and other long-lived asset impairment
—

 
13,648

 
—

 
—

 
13,648

Equity in earnings of subsidiaries
12,669

 
—

 
—

 
(12,669
)
 
—

(Loss) income before income taxes
12,669

 
13,039

 
—

 
(12,669
)
 
13,039

Income tax benefit (expense)
—

 
(370
)
 
—

 
—

 
(370
)
Net (loss) income
12,669

 
12,669

 
—

 
(12,669
)
 
12,669

Net (loss) income attributable to Gentiva shareholders
12,669

 
12,669

 
—

 
(12,669
)
 
12,669

Total comprehensive (loss) income
12,669

 
12,669

 
—

 
(12,669
)
 
12,669



38

As Revised
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net revenues
$
—

 
$
1,203,258

 
$
48,498

 
$
(11,249
)
 
$
1,240,507

Cost of services sold
—

 
638,418

 
33,829

 
(11,249
)
 
660,998

Gross profit
—

 
564,840

 
14,669

 
—

 
579,509

Selling, general and administrative expenses
—

 
(468,879
)
 
(14,364
)
 
—

 
(483,243
)
Goodwill and other long-lived asset impairment
—

 
(210,672
)
 
—

 
—

 
(210,672
)
Interest (expense) and other, net
(66,829
)
 
—

 
46

 
—

 
(66,783
)
Equity in earnings of subsidiaries
(144,144
)
 
(7
)
 
—

 
144,151

 
—

(Loss) income before income taxes
(210,973
)
 
(114,718
)
 
351

 
144,151

 
(181,189
)
Income tax benefit (expense)
26,532

 
(29,426
)
 
67

 
—

 
(2,827
)
Net (loss) income
(184,441
)
 
(144,144
)
 
418

 
144,151

 
(184,016
)
Noncontrolling interests
—

 
—

 
(425
)
 
—

 
(425
)
Net (loss) income attributable to Gentiva shareholders
$
(184,441
)
 
$
(144,144
)
 
$
(7
)
 
$
144,151

 
$
(184,441
)
Total comprehensive (loss) income
$
(184,441
)
 
$
(144,144
)
 
$
418

 
$
144,151

 
$
(184,016
)

39

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2014
(In thousands)
 
 
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(32,770
)
 
$
80,338

 
$
(503
)
 
$
(1,026
)
 
$
46,039

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Purchase of fixed assets
—

 
(9,119
)
 
(149
)
 
—

 
(9,268
)
Proceeds from sale of assets
—

 
2,004

 
—

 
—

 
2,004

Capital contribution
—

 
(1,740
)
 
—

 
1,740

 
—

Proceeds from sale of businesses
—

 
2,900

 
—

 
(2,900
)
 
—

Acquisition of businesses, net of cash acquired
—

 
—

 
(2,900
)
 
2,900

 
—

Net cash used in investing activities
—

 
(5,955
)
 
(3,049
)
 
1,740

 
(7,264
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
1,937

 
—

 
—

 
—

 
1,937

Windfall tax benefits associated with equity-based compensation
56

 
—

 
—

 
—

 
56

Repayment of long-term debt
(13,744
)
 
—

 
—

 
—

 
(13,744
)
Debt issuance costs
(150
)
 
—

 
—

 
—

 
(150
)
Minority interest capital contributions
—

 
—

 
1,160

 
—

 
1,160

Majority interest capital contributions
—

 
—

 
1,740

 
(1,740
)
 
—

Distribution to minority interests
—

 
—

 
(393
)
 
—

 
(393
)
Distribution to majority interests
—

 
—

 
(1,026
)
 
1,026

 
—

Other
(361
)
 
(31
)
 
—

 
—

 
(392
)
Net payments related to intercompany financing
74,352

 
(74,352
)
 
—

 
—

 
—

Net cash provided by (used in) financing activities
62,090

 
(74,383
)
 
1,481

 
(714
)
 
(11,526
)
Net change in cash and cash equivalents
29,320

 
—

 
(2,071
)
 
—

 
27,249

Cash and cash equivalents at beginning of period
55,388

 
—

 
31,569

 
—

 
86,957

Cash and cash equivalents at end of period
$
84,708

 
$
—

 
$
29,498

 
$
—

 
$
114,206



40

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2013
(In thousands)
 
As Revised
Gentiva Health
Services, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(39,122
)
 
$
41,545

 
$
3,038

 
$
13,108

 
$
18,569

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Purchase of fixed assets
—

 
(13,872
)
 
(342
)
 
—

 
(14,214
)
Proceeds from sale of businesses
—

 
508

 
—

 
—

 
508

Acquisition of businesses, net of cash acquired
—

 
(4,538
)
 
(2,500
)
 
2,400

 
(4,638
)
Net cash (used in) provided by investing activities
—

 
(17,902
)
 
(2,842
)
 
2,400

 
(18,344
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
2,459

 
—

 
—

 
—

 
2,459

Windfall tax benefits associated with equity-based compensation
92

 
—

 
—

 
—

 
92

Payment of contingent consideration accrued at acquisition date
—

 
(1,675
)
 
—

 
—

 
(1,675
)
Intercompany dividend
2,300

 
—

 
(2,300
)
 
—

 
—

Repayment of long-term debt
(25,000
)
 
—

 
—

 
—

 
(25,000
)
Debt issuance costs
(449
)
 
—

 
—

 
—

 
(449
)
Minority interest capital contribution
—

 
—

 
1,600

 
—

 
1,600

Majority interest capital contribution
—

 
—

 
2,400

 
(2,400
)
 
—

Distribution to minority interests
—

 
—

 
(563
)
 
—

 
(563
)
Distribution to majority interests
—

 
—

 
(1,296
)
 
1,296

 
—

Other
(416
)
 
(31
)
 
—

 
—

 
(447
)
Net payments related to intercompany financing
21,937

 
(21,937
)
 
—

 
—

 
—

Net cash provided by (used in) financing activities
923

 
(23,643
)
 
(159
)
 
(1,104
)
 
(23,983
)
Net change in cash and cash equivalents
(38,199
)
 
—

 
37

 
14,404

 
(23,758
)
Cash and cash equivalents at beginning of period
166,140

 
—

 
40,912

 
—

 
207,052

Cash and cash equivalents at end of period
$
127,941

 
$
—

 
$
40,949

 
$
14,404

 
$
183,294




41

Note 18.
Subsequent Event

On October 9, 2014, Kindred Healthcare, Inc. (“Kindred”) and Gentiva Health Services, Inc. (“Gentiva”) announced that the companies have entered into a definitive merger agreement under which Kindred will acquire all of the outstanding shares of Gentiva common stock for $19.50 per share in a combination of cash and stock. The agreement was unanimously approved by the boards of directors of both companies.
Under the terms of the agreement, Gentiva shareholders will receive $14.50 per share in cash and $5.00 of Kindred common stock (which equates to 0.257 shares of Kindred common stock based upon an agreed upon fixed exchange ratio). The transaction is valued at $1.8 billion, including the assumption of net debt. The companies expect the closing of the transaction to occur in the first quarter of 2015.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
•
general economic and business conditions;
•
demographic changes;
•
changes in, or failure to comply with, existing governmental regulations;
•
impact on the Company of healthcare reform legislation and its implementation through governmental regulations;
•
legislative proposals for healthcare reform;
•
changes in Medicare, Medicaid and commercial payer reimbursement levels;
•
the outcome of any inquiries into the Company’s operations and business practices by governmental authorities;
•
compliance with any corporate integrity agreement affecting the Company's operations;
•
effects of competition in the markets in which the Company operates;
•
liability and other claims asserted against the Company;
•
ability to attract and retain qualified personnel;
•
ability to access capital markets;
•
availability and terms of capital;
•
loss of significant contracts or reduction in revenues associated with major payer sources;
•
ability of customers to pay for services;
•
business disruption due to severe weather conditions, natural disasters, pandemic outbreaks, terrorist acts or cyber attacks;
•
availability, effectiveness, stability and security of the Company's information technology systems;
•
ability to successfully integrate the operations of acquisitions the Company may make and achieve expected synergies and operational efficiencies within expected time-frames;
•
ability to maintain compliance with financial covenants under the Company’s credit agreement;
•
effect on liquidity of the Company’s debt service requirements; and
•
changes in estimates and judgments associated with critical accounting policies and estimates.
Forward-looking statements are found throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Annual Report on Form 10-K/A for the year ended December 31, 2013 and in various other filings with the SEC, including this Quarterly Report on Form 10-Q. The reader is encouraged to review these risk factors and filings.

42

General
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Gentiva’s results of operations and financial position. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report.
The Company’s results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013 and in other filings with the SEC.
Overview
Gentiva Health Services, Inc. (“Gentiva” or the “Company”) is a leading provider of home health services, hospice services and community care services serving patients through approximately 500 locations in 40 states.
The Company provides a single source for skilled nursing; physical, occupational, speech and neurorehabilitation services; hospice services; social work; nutrition; disease management education; help with daily living activities; and other therapies and services. Gentiva’s revenues are generated from federal and state government programs, commercial insurance and individual consumers.
The federal and state government programs under which the Company generates a majority of its net revenues are subject to legislative and other risk factors that can make it difficult to determine future reimbursement rates for Gentiva’s services to its patients. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“Affordable Care Act”), which represents a $39.5 billion reduction in Medicare home health spending over an extended period. The law phases in the reductions over seven years, including rebasing of Medicare reimbursement rates over a four year period beginning in 2014, with reductions resulting from rebasing not to exceed 3.5 percent in any one year. The Company anticipates that many of the provisions of the Affordable Care Act may be subject to further clarification and modification through the rule-making process.
The commercial insurance industry is continually seeking ways to control the cost of services to patients that it covers. One of the ways it seeks to control costs is to require greater efficiencies from its providers, including home healthcare companies. Various states have addressed budget pressures by considering or implementing reductions in various healthcare programs, including reductions in rates or changes in patient eligibility requirements. The Company has also decided to reduce participation in certain Medicaid and other state and county programs.
The Company believes that several marketplace factors can contribute to its future growth. First, the Company is a leader in a highly fragmented home healthcare and hospice industry populated by more than 16,000 Medicare certified providers of varying size and resources. Second, the cost of a home healthcare visit to a patient can be significantly lower than the cost of an average day in a hospital or skilled nursing institution and third, the demand for home care is expected to grow, primarily due to an aging U.S. population. In addition, the Company expanded its service offerings in 2013 to include community care services through its Harden acquisition in order to expand it presence along the continuum of care. The Company expects to capitalize on these factors through a determined set of strategic priorities, as follows: growing revenues from services provided to the geriatric population, with a particular emphasis on expanding the penetration of the Company’s innovative specialty programs; focusing on clinical associate recruitment, retention and productivity; evaluating and closing opportunistic acquisitions; seeking further operating leverage through more efficient utilization of existing resources; implementing technology to support the Company’s various initiatives; and strengthening the Company’s balance sheet to support future growth. The Company anticipates executing these strategies by continuing to expand its sales presence, making operational improvements and deploying new technologies, providing employees with leadership training and instituting retention initiatives, ensuring strong ethics and corporate governance, and focusing on shareholder value.
Management intends the discussion of the Company’s financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company’s financial statements.
The Company’s operations involve servicing its patients and customers through its Home Health, Hospice and Community Care segments. This presentation aligns financial reporting with the manner in which the Company manages its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. See Note 16 to the Company's consolidated financial statements for a description of the Company's reporting segments.

43

Results of Operations
The comparison of results of operations between 2014 and 2013 has been impacted significantly by the following items:
•
The Company recorded net charges relating to restructuring, acquisition and integration activities of $0.5 million and $10.5 million for third quarter and the first nine months of 2014, respectively, and $1.7 million and $2.6 million in the third quarter and first nine months of 2013, respectively.
•
The Company completed several acquisitions and closed a significant number of branch operations affecting the reporting periods presented as follows:
•
The Company completed the acquisition of Harden Healthcare Holdings, Inc. and its home health, hospice and community care businesses on October 18, 2013. Annualized net revenues of Harden at the acquisition date approximated $145 million from home health, $110 million from hospice and $221 million from community care. Net revenues specific to Harden for the third quarter and first nine months of 2014 are not available as subsequent to the acquisition date the Company consolidated or closed a significant number of Harden branches in overlapping and smaller markets for which reporting of separate results is no longer available.
•
During the fourth quarter of 2013 and continuing through early 2014, the Company undertook a branch rationalization initiative to review under performing branches and closed or consolidated 94 branches through the first half of 2014. As a result of the branch rationalization activities, for the third quarter and first nine months of 2014, the Company’s net revenues comparisons were negatively impacted by approximately $10 million and $28 million, respectively, as compared to the corresponding periods of 2013.
•
At March 31, 2013, the Company performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business. The analysis indicated that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million.
•
In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge, related to developed software, of approximately $1.6 million.

44

Net Revenues
A summary of the Company’s net revenues by segment follows (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
Percentage
Variance
 
2014
 
2013
 
Percentage
Variance
Home Health
$
268.4

 
$
234.9

 
14.3
 %
 
$
793.5

 
$
706.1

 
12.4
 %
Hospice
172.4

 
175.6

 
(1.9
)%
 
519.1

 
534.4

 
(2.9
)%
Community Care
57.2

 
—

 
—
 %
 
171.0

 
—

 
—
 %
Total net revenues
$
498.0

 
$
410.5

 
21.3
 %
 
$
1,483.6

 
$
1,240.5

 
19.6
 %
Net revenues by major payer source are as follows (in millions): 
 
Third Quarter
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
214.9

 
$
161.6

 
$
—

 
$
376.5

 
$
191.8

 
$
163.8

 
$
355.6

Medicaid and Local Government
8.6

 
6.1

 
56.2

 
70.9

 
10.8

 
6.6

 
17.4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
21.5

 
—

 
—

 
21.5

 
15.1

 
—

 
15.1

Other
23.4

 
4.7

 
1.0

 
29.1

 
17.2

 
5.2

 
22.4

Total net revenues
$
268.4

 
$
172.4

 
$
57.2

 
$
498.0

 
$
234.9

 
$
175.6

 
$
410.5

 
 
First Nine Months
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
$
642.0

 
$
486.3

 
$
—

 
$
1,128.3

 
$
577.7

 
$
498.8

 
$
1,076.5

Medicaid and Local Government
25.7

 
18.6

 
168.5

 
212.8

 
33.1

 
21.3

 
54.4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
55.0

 
—

 
—

 
55.0

 
43.3

 
—

 
43.3

Other
70.8

 
14.2

 
2.5

 
87.5

 
52.0

 
14.3

 
66.3

Total net revenues
$
793.5

 
$
519.1

 
$
171.0

 
$
1,483.6

 
$
706.1

 
$
534.4

 
$
1,240.5

For the third quarter of 2014 as compared to the third quarter of 2013, net revenues increased by $87.5 million, or 21.3 percent, to $498.0 million from $410.5 million. For the first nine months of 2014 as compared to the first nine months of 2013, net revenues increased by $243.1 million, or 19.6 percent, to $1.48 billion from $1.24 billion.
Home Health
Home Health segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Third quarter 2014 net revenues were $268.4 million, an increase of $33.5 million, or 14.3 percent, from $234.9 million in the prior year period. For the first nine months of 2014, net revenues were $793.5 million, an increase of $87.4 million, or 12.4 percent, from $706.1 million in the prior year period. The increase is primarily attributable to the Harden acquisition, partially offset by (i) the net decrease in Medicare reimbursement rates, effective January 1, 2014 and (ii) for the nine month period, the effect of the 2 percent Medicare rate reduction, known as sequestration, effective April 1, 2013.

45

The Company’s episodic revenues increased 14.3 percent and 12.2 percent for the third quarter and first nine months of 2014, respectively, as compared to the prior year periods. A summary of the Company’s combined Medicare and non-Medicare Prospective Payment System (“PPS”) business paid at episodic rates follows (in millions): 
 
Third Quarter

First Nine Months
 
2014

2013

Percentage
Variance

2014

2013

Percentage
Variance
Home Health











Medicare
$
214.9

 
$
191.8


12.0
%

$
642.0

 
$
577.7


11.1
%
Non-Medicare PPS
21.5

 
15.1


42.8
%

55.0

 
43.3


27.0
%
Total
$
236.4

 
$
206.9


14.3
%

$
697.0

 
$
621.0


12.2
%
Key Company statistics related to episodic revenues were as follows: 
 
Third Quarter

First Nine Months
 
2014

2013

Percentage
Variance

2014

2013

Percentage
Variance
Episodes
 
 
 
 
 
 
 
 
 
 
 
Medicare
76,100

 
65,100

 
16.8
 %
 
227,200

 
198,500

 
14.4
 %
Non-Medicare PPS
9,100

 
5,600

 
62.5
 %
 
23,600

 
15,400

 
53.2
 %
Total episodes
85,200

 
70,700

 
20.5
 %
 
250,800

 
213,900

 
17.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Revenue per episode
$
2,780

 
$
2,930

 
(5.2
)%
 
$
2,780

 
$
2,900

 
(4.3
)%
Episode volume for the third quarter of 2014 increased 20.5 percent and for the first nine months of 2014 increased 17.3 percent as compared to the corresponding periods of 2013. Similarly, admissions increased by 14.6 percent for the third quarter, from 48,100 in the third quarter of 2013 to 55,000 in the third quarter of 2014, and by 11.3 percent for the first nine months of 2014, from 146,700 for the first nine months of 2013 to 163,200 in the first nine months of 2014. There were approximately 1.55 and 1.54 episodes for each admission during the third quarter and first nine months of 2014, respectively, compared to 1.47 and 1.46 episodes for each admission during the third quarter and first nine months of 2013, respectively.
Revenues generated from Medicare were $214.9 million and $642.0 million for the third quarter and first nine months of 2014, respectively, an increase of 12.0 percent and 11.1 percent, respectively, as compared to $191.8 million and $577.7 million in the corresponding periods of 2013. Medicare revenues represented 80 percent and 81 percent of total Home Health revenues for the third quarter and first nine months of 2014 respectively, compared to 82 percent for both the third quarter and first nine months of 2013. Medicare and non-Medicare PPS revenues as a percent of total Home Health revenues were 88 percent for all periods reported.
Revenues from Medicaid and Local Government payer sources were $8.6 million and $25.7 million in the third quarter and first nine months of 2014, respectively, as compared to $10.8 million and $33.1 million in the third quarter and first nine months of 2013, respectively. Revenues from Commercial Insurance and Other payer sources, excluding non-Medicare PPS revenues, were $23.4 million in the third quarter of 2014 as compared to $17.2 million in the third quarter of 2013. For the first nine months of 2014 as compared to the corresponding period of 2013, revenues from Commercial Insurance and Other payer sources were $70.8 million and $52.0 million, respectively.
Hospice
Hospice revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. Third quarter and first nine months of 2014 net revenues were $172.4 million and $519.1 million, respectively, as compared to $175.6 million and $534.4 million in the corresponding periods of 2013. The decrease is primarily attributable to lower average daily census, partially offset by the acquisition of Harden and an increase in the average length of stay for the third quarter and first nine months of 2014 as compared to the third quarter and first nine months of 2013.

46

Key Company statistics relating to Hospice were as follows: 
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
Percentage
Variance
 
2014
 
2013
 
Percentage
Variance
Patient days (in thousands)
1,158

 
1,158

 
—
 %
 
3,497

 
3,468

 
0.8
 %
Revenue per Patient Day
$
149

 
$
152

 
(1.8
)%
 
$
148

 
$
154

 
(3.6
)%
For the third quarter and first nine months of 2014, Average Daily Census (“ADC”) approximated 12,600 patients and 12,800 patients, respectively, as compared to 12,600 patients and 12,700 patients, respectively, for the third quarter and first nine months of 2013. The average length of stay of patients at discharge was 103 days and 105 days for the third quarter and first nine months of 2014, respectively. The average length of stay of patients at discharge was 100 days and 97 days for the third quarter and first nine months of 2013, respectively.
Medicare revenues were $161.6 million and $486.3 million in the third quarter and first nine months of 2014, respectively, as compared to $163.8 million and $498.8 million in the corresponding periods of 2013. Medicaid revenues were $6.1 million and $18.6 million for the third quarter and first nine months of 2014, respectively, as compared to $6.6 million and $21.3 million for the corresponding periods of 2013. Commercial Insurance and Other revenues in the third quarter and first nine months of 2014 were $4.7 million and $14.2 million, respectively, as compared to $5.2 million and $14.3 million in the corresponding periods of 2013.
Community Care
Community Care segment revenues are derived from two payer groups: Medicaid and Local Government and Commercial Insurance and Other. Net revenues for the third quarter and first nine months of 2014 were $57.2 million and $171.0 million, respectively. Medicaid and Local Government revenues were $56.2 million and $168.5 million for the third quarter and first nine months of 2014, respectively, and Commercial Insurance and Other revenues were $1.0 million and $2.6 million for the third quarter and first nine months of 2014, respectively. Billed hours for the third quarter and first nine months of 2014 were 4,300 and 12,700, respectively. Revenue per billed hour for both the third quarter and first nine months of 2014 was $13.
Gross Profit
The following table reflects gross profit by business segment for 2014 and 2013 (in millions):
 
Third Quarter
 
First Nine Months
 
2014
 
2013
 
Variance
 
2014
 
2013
 
Variance
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
Home Health
$
132.4

 
$
115.1

 
$
17.3

 
$
392.1

 
$
345.4

 
$
46.7

Hospice
78.2

 
74.9

 
3.3

 
229.8

 
234.1

 
(4.3
)
Community Care
16.7

 
—

 
16.7

 
50.6

 
—

 
50.6

Total
$
227.3

 
$
190.0

 
$
37.3

 
$
672.5

 
$
579.5

 
$
93.0

As a percent of revenue:
 
 
 
 
 
 
 
 
 
 
 
Home Health
49.3
%
 
49.0
%
 
0.3
 %
 
49.4
%
 
48.9
%
 
0.5
 %
Hospice
45.4
%
 
42.7
%
 
2.7
 %
 
44.3
%
 
43.8
%
 
0.5
 %
Community Care
29.3
%
 
—
%
 
29.3
 %
 
29.6
%
 
—
%
 
29.6
 %
Total
45.7
%
 
46.3
%
 
(0.6
)%
 
45.3
%
 
46.7
%
 
(1.4
)%
Gross profit increased by $37.3 million, or 19.6 percent, for the third quarter of 2014 as compared to the third quarter of 2013. For the first nine months of 2014, gross profit increased by $93.0 million, or 16.0 percent, as compared to the first nine months of 2013. As a percentage of revenues, gross profit of 45.7 percent and 45.3 percent for the third quarter and first nine months of 2014, respectively, represented a 0.6 and 1.4 percentage point decrease, respectively, as compared to the same reporting periods in 2013. The decrease was primarily driven by the lower gross margin associated with the Company's Community Care business.
For the third quarter and first nine months of 2014, gross profit as a percentage of revenues within the Home Health segment increased by 0.3 percent and 0.5 percent, respectively, as compared to the corresponding periods of 2013.

47

Hospice gross profit as a percentage of revenues increased by 2.7 percent and 0.5 percent for the third quarter and first nine months of 2014, respectively, as compared to the corresponding periods of 2013. The increase in the third quarter and first nine months of 2014 reflects the impact of reductions in labor costs and other restructuring activities implemented through the first nine months of 2014.
Gross profit was impacted by depreciation expense of approximately $0.1 million and $0.2 million in the third quarter of 2014 and 2013, respectively, and $0.4 million and $0.5 million in the first nine months of 2014 and 2013, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 17.0 percent, or $27.4 million, to $188.5 million for the third quarter of 2014, as compared to $161.1 million for the third quarter of 2013, and increased 17.5 percent, or $84.5 million, to $567.7 million for the first nine months of 2014, as compared to $483.2 million for the first nine months of 2013.
If charges, as noted below, relating to cost savings initiatives and acquisition and integration activities of $0.5 million and $10.5 million for the third quarter and first nine months of 2014, respectively, and $1.7 million and $2.6 million for the third quarter and first nine months of 2013, respectively, were excluded, the increase in selling, general and administrative expenses would have been approximately 18.0 percent, or $28.6 million, for the third quarter of 2014, as compared to the third quarter of 2013, and 15.9 percent, or $76.6 million, for the first nine months of 2014, as compared to the first nine months of 2013.
The increase in selling, general and administrative expenses in the third quarter of 2014, as compared to the third quarter of 2013, was primarily attributable to (i) Home Health field operating, selling and administrative costs ($12.2 million), (ii) Community Care field operating, selling and administrative costs ($8.6 million), (iii) corporate administrative expenses ($6.1 million), (iv) depreciation and amortization ($2.6 million) and (v) equity-based compensation expense ($0.2 million). These costs were partially offset by (i) reductions in cost savings initiatives and acquisition and integration activities ($1.2 million), (ii) decrease in provision for doubtful accounts ($0.9 million) and (iii) Hospice field operating, selling and administrative costs ($0.2 million).
The increase in selling, general and administrative expenses in the first nine months of 2014, as compared to the first nine months of 2013, was primarily attributable to (i) Home Health field operating, selling and administrative costs ($29.1 million), (ii) Community Care field operating, selling and administrative costs ($24.4 million), (iii) corporate administrative expenses ($13.4 million), (iv) cost savings initiatives and acquisition and integration activities ($7.9 million), (v) depreciation and amortization ($6.7 million), (vi) Hospice field operating, selling and administrative costs ($2.1 million), (vii) equity-based compensation expense ($0.7 million) and (viii) increase in provision for doubtful accounts ($0.2 million).
Depreciation and amortization expense included in selling, general and administrative expenses was $7.1 million and $20.8 million for the third quarter and first nine months of 2014, respectively, as compared to $4.5 million and $14.0 million for the corresponding periods of 2013.
These increases in selling, general and administrative expenses were primarily due to the acquisition of Harden.
Goodwill and Other Long-Lived Asset Impairment
During the first nine months of 2013, the Company recorded non-cash charges of $210.7 million related to goodwill and other long lived assets.
At March 31, 2013, the Company determined that a triggering event had occurred due to lower than expected average daily census and higher than expected discharge rates during the quarter and performed an interim impairment test of its Hospice reporting unit. Based on the results of the interim impairment test, the Company's Hospice reporting unit had an estimated fair value of approximately $552 million. As such, the Company recorded a non-cash impairment charge relating to goodwill of approximately $207.2 million. As part of that analysis, the Company reviewed the valuation of its owned real estate utilized in the Hospice business and, based on that analysis, concluded that two of the Company's hospice inpatient units had estimated fair values lower than their carrying values and, as such, the Company recorded a non-cash impairment charge of approximately $1.9 million.
In addition, the Company conducted an evaluation of the various systems used to support its field operations. In connection with that review, the Company made a strategic decision to replace its business intelligence software platform and, as such, recorded a non-cash impairment charge, related to developed software, of approximately $1.6 million. The non-cash impairment charge is reflected in goodwill and other long-lived asset impairment in the Company's consolidated financial statements for the nine months ended September 30, 2013.

48

Interest Income and Interest Expense and Other
For the third quarter and first nine months of 2014, net interest expense and other was approximately $24.7 million and $73.9 million, respectively, consisting primarily of interest expense and other of $25.3 million and $75.8 million, respectively, associated with the term loan borrowings, fees associated with the Company’s credit agreement and outstanding letters of credit, and amortization of debt issuance costs and debt discounts, partially offset by interest income of $0.6 million and $1.9 million, respectively, earned on investments and existing cash balances.
For the third quarter and first nine months of 2013, net interest expense and other was approximately $22.3 million and $66.8 million, respectively, consisting primarily of interest expense and other of $23.0 million and $68.9 million, respectively, associated with the term loan borrowings, fees associated with the Company’s credit agreement and outstanding letters of credit, and amortization of debt issuance costs, partially offset by interest income of $0.7 million and $2.1 million, respectively, earned on investments and existing cash balances.
Income Tax (Expense) Benefit
The Company recorded an income tax provision of $5.6 million and $12.5 million for the third quarter and first nine months of 2014, respectively. The Company’s effective income tax rate for the first nine months of 2014 was a 40.5 percent. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of 40.5 percent for the first nine months of 2014 is primarily due to state income taxes, net of federal benefit (approximately 3.5 percent) and other items (approximately 2.0 percent).
The Company recorded an income tax provision of $2.9 million and an income tax benefit of $2.8 million for the third quarter and first nine months of 2013, respectively. The Company recorded tax expense on a book loss because the majority of goodwill impairment booked in the first quarter of 2013 was nondeductible for tax resulting in a small tax benefit being booked on the goodwill impairment.
The Company's effective income tax rate for the first nine months of 2013 was a negative 1.6 percent. The difference between the federal statutory income tax rate of 35 percent and the Company’s effective rate of negative 1.6 percent for the first nine months of 2013 is primarily due to the impact of goodwill (approximately 36.0 percent) and other items (approximately 0.6 percent).
Net Income (Loss) Attributable to Gentiva Shareholders
For the third quarter of 2014, net income attributable to Gentiva shareholders was $8.0 million, or $0.21 per diluted share, compared to $3.6 million, or $0.11 per diluted share, for the corresponding period of 2013. For the first nine months of 2014, net income attributable to Gentiva shareholders was $17.7 million, or $0.48 per diluted share, compared to a net loss of $184.4 million, or $5.97 per diluted share, for the first nine months of 2013.
The Company uses adjusted income attributable to Gentiva shareholders, a non-GAAP financial measure, as a supplemental measure of Company performance. The Company defines adjusted income attributable to Gentiva shareholders as income attributable to Gentiva shareholders, excluding (i) charges relating to cost savings initiatives and acquisition and integration activities, (ii) goodwill and other long-lived asset impairment, (iii) equity in net loss of CareCentrix, (iv) impact of closed locations and (v) impact of merger related expenses. The Company considers adjusted income attributable to Gentiva shareholders to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of the Company’s business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of the Company’s core operating performance. Management uses adjusted income attributable to Gentiva shareholders to evaluate overall performance and compare current operating results with other companies in the healthcare industry and should not be considered in isolation or as a substitute for net income, operating income or cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Since adjusted income attributable to Gentiva shareholders is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures in other companies.
After adjusting for certain items which include cost savings initiatives and acquisition and integration activities, goodwill and other long-lived asset impairment, impact of closed locations related to the Company's cost savings initiatives and merger related expenses as noted in the tables below, adjusted income attributable to Gentiva shareholders was $10.6 million, or $0.28 per diluted share, for the third quarter of 2014 as compared to $4.8 million, or $0.15 per diluted share, for the corresponding period of 2013. Adjusted income attributable to Gentiva shareholders was $29.3 million, or $0.79 per diluted share, for the first nine months of 2014 as compared to $18.7 million, or $0.60 per diluted share, for the corresponding period of 2013.

49

A reconciliation of adjusted income attributable to Gentiva shareholders to net income (loss), the most directly comparable GAAP financial measure, follows (in thousands, except per share amounts): 
 
For the Three Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
 
Gross
 
Net of Tax
 
Per
Diluted Share
 
Gross
 
Net of Tax
 
Per
Diluted Share
Adjusted income attributable to Gentiva shareholders
 
 
$
10,610

 
$
0.28

 
 
 
$
4,752

 
$
0.15

Cost savings initiatives and acquisition and integration activities
(479
)
 
(297
)
 
(0.01
)
 
(1,699
)
 
(1,032
)
 
(0.03
)
Loss on sale of CareCentrix included in equity in net loss of CareCentrix
(801
)
 
(490
)
 
(0.01
)
 
—

 
—

 
—

Impact of closed locations
(1,345
)
 
(823
)
 
(0.02
)
 
(258
)
 
(157
)
 
—

Merger related expenses
(1,558
)
 
(954
)
 
(0.03
)
 
—

 
—

 
(0.01
)
Income attributable to Gentiva shareholders
 
 
8,046

 
0.21

 
 
 
3,563

 
0.11

Add back: Net (loss) income attributable to noncontrolling interests
 
 
(2
)
 
—

 
 
 
88

 
0.01

Net income
 
 
$
8,044

 
$
0.21

 
 
 
$
3,651

 
$
0.12


 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
 
Gross
 
Net of Tax
 
Per
Diluted Share
 
Gross
 
Net of Tax
 
Per
Diluted Share
Adjusted income attributable to Gentiva shareholders
 
 
$
29,342

 
$
0.79

 
 
 
$
18,658

 
$
0.60

Cost savings initiatives and acquisition and integration activities
(10,479
)
 
(6,479
)
 
(0.17
)
 
(2,584
)
 
(1,570
)
 
(0.05
)
Goodwill and other long-lived asset impairment
—

 
—

 
—

 
(210,672
)
 
(201,159
)
 
(6.51
)
Loss on sale of CareCentrix included in equity in net loss of CareCentrix
(801
)
 
(490
)
 
(0.01
)
 
—

 
—

 
—

Impact of closed locations
(5,315
)
 
(3,284
)
 
(0.09
)
 
(609
)
 
(370
)
 
(0.01
)
Merger related expenses
(2,303
)
 
(1,402
)
 
(0.04
)
 
—

 
—

 
—

Income (loss) attributable to Gentiva shareholders
 
 
17,687

 
0.48

 
 
 
(184,441
)
 
(5.97
)
Add back: Net income attributable to noncontrolling interests
 
 
170

 
—

 
 
 
425

 
0.01

Net income (loss)
 
 
$
17,857

 
$
0.48

 
 
 
$
(184,016
)
 
$
(5.96
)
Liquidity and Capital Resources
Liquidity
The Company’s principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under governmental payer or third party commercial arrangements. Additional liquidity is provided from existing cash balances and the Company’s credit arrangements, principally through its revolving credit facility, and could be provided in the future through the issuance of up to $300 million of debt or equity securities under a universal shelf registration statement filed with the SEC in November 2013 and generally effective until December 2016. Any issuance of securities under the shelf registration statement would be subject to compliance with applicable strict limitations and requirements under the Company's credit arrangements and indenture covering its senior notes.
The Company’s credit agreement provides for $925.0 million in senior secured credit facilities, comprising term loan facilities aggregating $825.0 million and a revolving credit facility of $100 million. See Note 11 to the Company’s consolidated financial statements for additional information.

50

During the first nine months of 2014, net cash provided by operating activities was $46.0 million. In addition, the Company used $13.7 million for the repayment of debt and $9.3 million for capital expenditures. During the nine months ended September 30, 2014, the Company had proceeds of $2.0 million from sale of assets, $1.9 million from purchases under the Company’s Employee Stock Purchase Plan (“ESPP”) and $1.2 million from minority interest contributions.
Net cash provided by operating activities increased by $27.4 million from $18.6 million for the first nine months of 2013 to $46.0 million for the first nine months of 2014. The increase was primarily due to changes in prepaid expenses and other current assets ($16.2 million), the change in net cash provided by operations prior to changes in assets and liabilities ($8.7 million), changes in current liabilities ($5.0 million) and change in other ($2.4 million) partially offset by a decrease in accounts receivable ($4.9 million).
Adjustments to add back non-cash items affecting net income (loss) are summarized as follows (in thousands): 
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013 (Revised)
 
Variance
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
17,857

 
$
(184,016
)
 
$
201,873

Adjustments to add back non-cash items affecting net income (loss):
 
 
 
 
 
Depreciation and amortization
21,207

 
14,541

 
6,666

Amortization of debt issuance costs
4,813

 
9,687

 
(4,874
)
Provision for doubtful accounts
3,927

 
3,766

 
161

Equity-based compensation expense
6,643

 
5,984

 
659

Windfall tax benefits associated with equity-based compensation
(56
)
 
(92
)
 
36

Goodwill and other long-lived asset impairment
—

 
210,672

 
(210,672
)
Equity in net loss of CareCentrix, net of tax
490

 
—

 
490

Deferred income tax expense (benefit)
7,715

 
(6,696
)
 
14,411

Total cash provided by operations prior to changes in assets and liabilities
$
62,596

 
$
53,846

 
$
8,750

The $8.7 million difference in “Total cash provided by operations prior to changes in assets and liabilities” between the 2014 and 2013 periods is primarily related to net income (loss), after adjusting for components of income that do not have an impact on cash, such as depreciation and amortization, equity-based compensation expense, goodwill and other long-lived asset impairment and deferred income taxes.

51

A summary of the changes in current liabilities, excluding the current portion of long-term debt, impacting cash flow from operating activities follows (in thousands): 
 
For the Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Variance
OPERATING ACTIVITIES:
 
 
 
 
 
Changes in current liabilities:
 
 
 
 
 
Accounts payable
$
711

 
$
(1,471
)
 
$
2,182

Payroll and related taxes
(19,121
)
 
(12,171
)
 
(6,950
)
Deferred revenue
4,055

 
1,582

 
2,473

Medicare liabilities
(6,254
)
 
(12,156
)
 
5,902

Obligations under insurance programs
(4,324
)
 
5,555

 
(9,879
)
Accrued nursing home costs
(3,205
)
 
2,430

 
(5,635
)
Other accrued expenses
(9,915
)
 
(26,793
)
 
16,878

Total changes in current liabilities
$
(38,053
)
 
$
(43,024
)
 
$
4,971

The primary drivers for the $5.0 million difference resulting from changes in current liabilities that impacted cash flow from operating activities include:
•
Accounts payable, which had a positive impact of $2.2 million between the 2014 and 2013 reporting periods, primarily related to timing of payments.
•
Payroll and related taxes, which had a negative impact of $7.0 million between the 2014 and 2013 reporting periods, primarily due to timing of the Company’s payroll processing and the impact of the addition of a significant number of employees acquired in the Harden transaction.
•
Deferred revenue, which had a positive impact of $2.5 million between the 2014 and 2013 reporting periods, primarily related to increased volumes between the 2013 and 2014 reporting periods.
•
Medicare liabilities, which had a positive impact of $5.9 million between the 2014 and 2013 reporting periods.
•
Obligations under insurance programs, which had a negative impact on the change in operating cash flow of $9.9 million between the 2014 and 2013 reporting periods, primarily related to timing of payments under the Company’s insurance programs.
•
Accrued nursing home costs, which had a negative impact on the change in operating cash flow of $5.6 million between the 2014 and 2013 reporting periods, due to the timing of payments.
•
Other accrued expenses, which had a positive impact on the change in operating cash flow of $16.9 million between the 2014 and 2013 reporting periods, due primarily to increased incentive compensation and acquisition and integration reserves in the 2014 period as compared to the 2013 period.
Working capital at September 30, 2014 was approximately $130 million, an increase of $36 million as compared to approximately $94 million at December 31, 2013, primarily due to:
•
a $27 million increase in cash and cash equivalents;
•
a $16 million decrease in prepaid expenses and other current assets;
•
a $4 million decrease in accounts receivable;
•
a $4 million decrease in deferred tax assets; and
•
a $33 million decrease in current liabilities, consisting of decreases in payroll and related taxes ($19 million), accrued interest expense ($10 million), Medicare liabilities ($6 million), obligations under insurance programs ($4 million), nursing home costs ($3 million) and other accrued expenses ($1 million), partially offset by increases in deferred revenue ($4 million) and current portion of long-term debt ($6 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities.
As of September 30, 2014, Days Sales Outstanding (“DSO”) was 49 days, flat from December 31, 2013.
At the commencement of an episode of care under the Medicare and non-Medicare PPS for Home Health, the Company records accounts receivable and deferred revenue based on an expected reimbursement amount. Accounts receivable is adjusted upon the receipt of cash and deferred revenue is amortized into revenue over the average patient treatment period. For informational purposes, if net accounts receivable and deferred revenue were combined for purposes of determining an

52

alternative DSO calculation, which measures open net accounts receivable divided by average daily recognized revenues, the alternative DSO would have been 41 days at September 30, 2014 and 42 days at December 31, 2013.
Accounts receivable attributable to major payer sources of reimbursement at September 30, 2014 and December 31, 2013 were as follows (in thousands): 
 
September 30, 2014
 
Total
 
0 - 90 days
 
91 - 180 days
 
181 - 365 days
 
Over 1 year
Medicare
$
200,902

 
$
176,415

 
$
16,413

 
$
3,773

 
$
4,301

Medicaid and Local Government
51,113

 
45,426

 
4,318

 
1,298

 
71

Commercial Insurance and Other
41,919

 
33,507

 
5,864

 
1,580

 
968

Self - Pay
2,087

 
1,106

 
632

 
300

 
49

Gross Accounts Receivable
$
296,021

 
$
256,454

 
$
27,227

 
$
6,951

 
$
5,389

 
 
December 31, 2013
 
Total
 
0 - 90 days
 
91 - 180 days
 
181 - 365 days
 
Over 1 year
Medicare
$
214,366

 
$
186,154

 
$
20,601

 
$
5,552

 
$
2,059

Medicaid and Local Government
48,183

 
44,234

 
3,251

 
637

 
61

Commercial Insurance and Other
35,659

 
28,072

 
5,807

 
1,789

 
(9
)
Self - Pay
2,377

 
1,413

 
669

 
241

 
54

Gross Accounts Receivable
$
300,585

 
$
259,873

 
$
30,328

 
$
8,219

 
$
2,165

The Company participates in Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications by segment was as follows: 
 
Third Quarter Ended
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
80
%
 
94
%
 
—
%
 
76
%
 
82
%
 
93
%
 
87
%
Medicaid and Local Government
3

 
3

 
98

 
14

 
5

 
4

 
4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
8

 
—

 
—

 
4

 
6

 
—

 
4

Other
9

 
3

 
2

 
6

 
7

 
3

 
5

Total net revenues
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
 
Nine Months Ended
 
2014
 
2013
 
Home
Health
 
Hospice
 
Community Care
 
Total
 
Home
Health
 
Hospice
 
Total
Medicare
81
%
 
94
%
 
—
%
 
76
%
 
82
%
 
93
%
 
87
%
Medicaid and Local Government
3

 
3

 
99

 
14

 
5

 
4

 
4

Commercial Insurance and Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid at episodic rates
7

 
—

 
—

 
4

 
6

 
—

 
4

Other
9

 
3

 
1

 
6

 
7

 
3

 
5

Total net revenues
100
%
 
NaN

 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Home Health
The Centers for Medicare & Medicaid Services ("CMS") has implemented various payment updates to the base rates for Medicare home health including (i) annual market basket updates, (ii) annual reductions in rates to reduce aggregate case mix increases that CMS believes are unrelated to patients’ health status (“case mix creep adjustment”), (iii) adjustments to rates

53

associated with changes to the home health outlier policy, (iv) wage index and other changes and (v) adjustments for defined rural areas of the country.
On October 30, 2014, CMS issued the final rule which updates 2015 home health prospective payment system rates, including (i) a market basket increase of 2.6 percent (ii) a negative productivity factor adjustment of 0.5 percent, and (iii) a $80.95, or 2.82 percent, reduction for rebasing of Medicare reimbursement rates, with incremental annual reductions expected for years 2016 and 2017, capped at the 2013 base rate reduction of $80.95. The rule also provides for changes in the calculation of the case mix weighting and the Wage Index. CMS predicts that, on average, the impact on for-profit agencies will be a negative 0.3 percent.
On November 22, 2013, CMS issued the final rule for 2014 home health prospective payment system rates, which included (i) a market basket increase of 2.3 percent, (ii) rebasing of Medicare reimbursement rates, with annual reductions of 3.5 percent for each of the next four years beginning January 2014, (iii) changes in the Wage Index with no overall impact and (iv) rebasing all case mix weights to 1.0 from an average case mix weight of 1.3464 in 2012, as provided for under the Affordable Care Act. CMS has provided that the case mix weight rebasing is offset by increasing the base episodic rate by a similar amount which will increase the base episodic rate for 2014 to $2,869 from the 2013 rate of $2,138. The rule also provided for changes in low utilization payments amounts (“LUPAs”) and the removal of 170 diagnosis codes, among other changes. CMS predicts that, on average, home health agencies will experience an approximate 1.05 percent reduction in reimbursement for 2014. On April 1, 2013, the automatic reductions in Federal spending, known as "sequestration" were put in place, which mandated an additional 2 percent reduction in Medicare home health payments.

Actual episodic rates will vary from the base episodic rates due to (i) the determination of case mix which reflects the clinical condition, functional abilities and service needs of each individual patient and (ii) wage indices applicable to the geographic region where the services are performed and other adjustments provided for under the CMS regulations.
Hospice
On August 1, 2014, CMS released a final rule, effective for hospice services provided October 1, 2014 through September 30, 2015, which provides for a 1.4 percent increase for Medicare hospice rates, consisting of a 2.9 percent market basket increase, offset by a 0.8 percent budget neutrality adjustment factor and estimated wage index changes of 0.7 percent.
In August 2013, CMS released a final rule, effective for hospice services provided October 1, 2013 through September 30, 2014, which provides for a 1.0 percent increase for Medicare hospice rates, consisting of a 2.5 percent market basket increase, offset by a 0.8 percent budget neutrality adjustment factor and estimated wage index changes of 0.7 percent. In addition, on April 1, 2013, the automatic reductions in Federal spending, known as "sequestration," were put in place, which mandated an additional 2 percent reduction in Medicare hospice payments.
Community Care
Reimbursement for community care services that we provide is primarily through Medicaid and managed care providers and rates can vary state by state. There are currently various legislative efforts under way to increase minimum wage laws that could significantly impact the wage rates for personal care attendants the Company utilizes to provide such services.
 
There are certain standards and regulations that the Company must adhere to in order to continue to participate in Medicare, Medicaid and other federal and state healthcare programs. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay in or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in our exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes that it is currently in compliance with these standards and regulations.
Credit Arrangements
At September 30, 2014, the the Company’s credit arrangements included a senior secured credit agreement providing (i) a six-year $670 million Term Loan B facility, (ii) a five-year $155 million Term Loan C facility and (iii) a five-year $100 million revolving credit facility (collectively, the “Credit Agreement”), and $325 million aggregate principal amount of 11.5 percent Senior Notes due 2018 (the “Senior Notes”). The Credit Agreement’s revolving credit facility also includes borrowing capacity of $80 million available for letters of credit and $15 million for borrowings on same-day notice, referred to as swing line loans.

54

As of September 30, 2014, advances under the revolving credit facility could be made, and letters of credit could be issued, up to the $100 million borrowing capacity of the facility at any time prior to the facility expiration date of October 18, 2018. Outstanding letters of credit were $56.2 million and $52.0 million at September 30, 2014 and December 31, 2013, respectively. The letters of credit were issued to guarantee payments under the Company’s workers’ compensation program and for certain other commitments. As of September 30, 2014, the Company’s unused and available borrowing capacity under the Credit Agreement was $16.8 million. As governed by the indenture covering the unsecured Senior Notes, the Company has a maximum permitted borrowing capacity, as defined, which may limit the Company's ability to borrow up to the full capacity of the revolving credit facility.
The Term Loan B facility is subject to mandatory principal payments of $6.7 million per year, payable in equal quarterly installments, with the remaining balance of the original $670 million loan payable on October 18, 2019. The Term Loan C facility is subject to mandatory principal payments, payable in quarterly installments. The mandatory principal payments for 2014 are $11.6 million and increase each year through the maturity date of the loan, October 18, 2018.
As of September 30, 2014, the mandatory aggregate principal payments of long-term debt were $51.1 million due during the twelve months ending September 30, 2015, $29.0 million due during the twelve months ending September 30, 2016, $35.8 million due during the twelve months ending September 30, 2017, $60.9 million due during the twelve months ending September 30, 2018, $30.0 million due during the twelve months ending September 30, 2019, $631.5 million thereafter under the Credit Agreement and $325.0 million due in September 2018 under the Senior Notes. The weighted average cash interest rate on outstanding borrowings was 7.8 percent per annum at September 30, 2014 and 8.2 percent per annum at December 31, 2013.
Debt Covenants
The Company's Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio and contains certain customary affirmative covenants and events of default.
Four Quarters Ending
Maximum Consolidated
Leverage Ratio
March 31, 2014 to March 31, 2015
≤ 6.75:1
June 30, 2015 to March 31, 2016
≤ 6.50:1
June 30, 2016 to March 31, 2017
≤ 6.25:1
June 30, 2017 to December 31, 2017
≤ 6.00:1
March 31, 2018 and each fiscal quarter thereafter
≤ 5.75:1
As of September 30, 2014, the Company’s consolidated leverage ratio was 5.8x. As of September 30, 2014, the Company was in compliance with all covenants in the Credit Agreement. See Note 11 to the Company's consolidated financial statements for further information on the Company's debt covenants.
Insurance Programs
The Company may be subject to workers’ compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits and retention amounts, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. These estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers’ compensation claims and individual professional liability claims up to $500 thousand per incident which occurred prior to March 15, 2002 and $1 million per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25 million in excess of the underlying coverage limits. Payments under the Company’s workers’ compensation program are guaranteed by letters of credit.
Capital Expenditures
The Company’s capital expenditures for the nine months ended September 30, 2014 were $9.3 million as compared to $14.2 million for the nine months ended September 30, 2013. The Company intends to make investments and other expenditures to upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry, among other things. In this regard, management expects that capital expenditures will approximate $3.0 million for the

55

remainder of 2014. Management expects that the Company’s capital expenditure needs will be met through operating cash flow and available cash reserves.
Cash Resources and Obligations
The Company had cash and cash equivalents of approximately $114.2 million as of September 30, 2014, including operating funds of approximately $4.2 million exclusively relating to a non-profit hospice operation managed in Florida.
The Company anticipates that repayments to Medicare for (i) payments received in excess of hospice cap limits, (ii) partial episode payments and (iii) prior year cost report settlements will be made periodically. These amounts are included in Medicare liabilities in the accompanying consolidated balance sheets.
The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Management expects that the Company’s working capital needs for the balance of 2014 will be met through operating cash flow and existing cash resources. The Company may also consider other alternative uses of cash including, among other things, acquisitions, voluntary prepayments on the term loans, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company’s Board of Directors and may require the approval of its lenders. If cash flows from operations, cash resources or availability under a credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing, pursue the sale of certain assets or other investments or consider other alternatives designed to enhance liquidity.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company is exposed to market risk from fluctuations in interest rates. The interest rate on the Company’s borrowings under the Credit Agreement can fluctuate based on both the interest rate option (i.e., base rate or Eurodollar rate plus applicable margins) and the interest period. As of September 30, 2014, the total amount of outstanding debt subject to interest rate fluctuations was $838.3 million. A hypothetical 100 basis point change in short-term interest rates as of that date would result in an increase or decrease in interest expense of $8.4 million per year, assuming a similar capital structure.
Item 4.
Controls and Procedures
Evaluation of disclosure controls and procedures.
In connection with the restatement discussed in Note 1A - "Restatement and Revision of Previously Reported Consolidated Financial Statements" to our consolidated financial statements, management, including the Company’s Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2014 and our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weakness identified in the Company's internal control over financial reporting discussed below, the Company's disclosure controls and procedures were not effective as of September 30, 2014.
Management concluded that effective controls were not maintained over the accounting for goodwill and indefinite-lived intangible assets. Specifically, the Company’s controls were not effectively designed and did not operate at the appropriate level of precision to ensure completeness and accuracy of assumptions used in its valuation models for goodwill and indefinite-lived intangible assets and to reassess the lives of indefinite-lived intangible assets related to closed or consolidated locations. These control deficiencies resulted in the restatement of the Company’s consolidated financial statements for the year ended December 31, 2013 and the quarter ended March 31, 2014 and the revision of the Company’s consolidated financial statements for the year ended December 31, 2011 and the quarters ended March 31, 2013, June 30, 2013 and September 30, 2013.
Remediation
Management has re-assessed the design of the controls and modified processes related to the monitoring and oversight of key assumptions used in its valuation models for goodwill and indefinite-lived intangibles as well as enhanced monitoring and oversight controls in the application of applicable accounting guidance related to reassessing the lives of indefinite-lived intangible assets related to closed or consolidated locations. Management believes that these initiatives will remediate the material weakness in internal control over financial reporting described above. The Company will test the ongoing operating effectiveness of the revised controls in future periods. The material weakness cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

56

Changes in internal control over financial reporting.
As required by Exchange Act Rule 13a-15(d), the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s internal control over financial reporting to determine whether any change occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter.
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
Two putative class action lawsuits have been filed in the Court of Chancery of the State of Delaware in connection with the proposed acquisition (“Merger”) of the Company by Kindred Healthcare, Inc. The first, entitled Siew K. Stevens v. Gentiva Health Services, Inc. et al., C.A. No. 10261-VCG, was filed on October 20, 2004, and the second, entitled Milton Pfeiffer v. Gentiva Health Services, Inc. et al., C.A. No. 10281-VCG, was filed on October 24, 2014. Both lawsuits name the Company, the members of its board of directors, Kindred Healthcare Development 2, Inc. and Kindred Healthcare, Inc. as defendants. Both lawsuits were brought by purported stockholders of the Company, both individually and on behalf of a putative class of stockholders, alleging that the Company’s board of directors breached its fiduciary duties in connection with the Merger by failing to maximize shareholder value and by agreeing to lock up the Merger with various deal protection provisions and that the Company, Kindred Healthcare and Kindred Healthcare Development 2 aided and abetted the alleged breaches. Both lawsuits seek equitable relief, including, among other things, to enjoin the consummation of the Merger and an award of all costs and damages, including reasonable attorneys’ fees. The Company believes that these lawsuits are without merit and intends to vigorously defend itself; however, there can be no assurance that the Company will be successful in its defense.
See also Note 14 Legal Matters to the consolidated financial statements included in this report for a description of certain legal matters and pending legal proceedings, which description is incorporated herein by reference.
Item 1A.
Risk Factors
The Company is subject to certain risks as disclosed in Item 1A. of our Form 10-K/A for the year ended December 31, 2013 and in other filings we have made with the Securities and Exchange Commission. The following new risk factors should be read in connection with those risk factors previously disclosed:
Risks Related to the Pending Merger with Kindred Healthcare
Completion of the Merger is subject to various conditions, and the Merger may not occur even if we obtain stockholder approval.
On October 9, 2014, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Kindred Healthcare, Inc. and Kindred Healthcare Development 2, Inc. providing for the acquisition (“Merger”) of the Company by Kindred Healthcare. Consummation of the Merger is subject to customary closing conditions, including the approval and adoption of the Merger Agreement by the Company’s stockholders and the absence of legal restraints and prohibitions. Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s material obligations under the Merger Agreement.
As a result of these conditions, we cannot assure you that the Merger will be completed even if we obtain stockholder approval. If our stockholders do not approve the adoption of the Merger Agreement or if the Merger is not completed for any other reason, we expect that our current management, under the direction of our Board of Directors, will continue to manage the Company.
The Merger process could adversely affect our business.
Our efforts to complete the Merger could cause substantial disruptions in our business, which could have an adverse effect on our financial results. Among other things, uncertainty as to whether a transaction will be completed with Kindred may affect our ability to recruit prospective employees or to retain and motivate existing employees. Uncertainty as to the Company’s future could also adversely affect our business and our relationships with referral sources, suppliers, customers and other partners that deal with the Company, who could defer decisions concerning the Company or seek to change existing business relationships with the Company. Further, a substantial amount of the attention of management and employees may be directed toward the completion of the Merger and thus may be diverted from our day-to-day operations because matters related to the Merger (including integration planning) require substantial commitments of time and resources.

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The failure to complete the Merger could adversely affect our business.
We cannot assure you that the Merger will occur by the March 31, 2015 deadline set forth in the Merger Agreement, or at all. For example, the requisite number of holders of our common stock may not approve the proposed Merger at the special meeting of our stockholders to be called for that purpose. If the proposed Merger is not completed, the share price of our common stock will likely fall to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances described in the Merger Agreement, we may be required to pay a termination fee of up to $32.5 million if the Merger Agreement is terminated. Further, the failure of the proposed Merger to be completed may result in negative publicity and/or a negative impression of us in the investment community and may affect our relationship with employees, referral sources, suppliers and other partners in the business community.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course consistent with past practice (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger and otherwise may have a material adverse effect on our future results of operations or financial condition.
We are subject to litigation related to the pending Merger.
Two putative class action lawsuits have been filed in the Court of Chancery of the State of Delaware in connection with the Merger. The first, captioned Siew K. Stevens v. Gentiva Health Services, Inc. et al., was filed on October 20, 2014, and the second, captioned Milton Pfeiffer v. Gentiva Health Services, Inc. et al., was filed on October 24, 2014. These lawsuits are more fully described in Item 1 Legal Proceedings above. While we believe that the claims made in these lawsuits are without merit and intend to defend against such claims vigorously, there can be no assurance that we will prevail in their defense. Further, it is possible that additional claims beyond those that have already been filed will be brought by the current plaintiffs or by others in an effort to enjoin the proposed Merger or seek monetary relief from us. An unfavorable resolution of any such litigation surrounding the proposed Merger could delay or prevent the consummation of the proposed Merger. In addition, the cost to us of defending the litigation, even if resolved in our favor, could be substantial.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.

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Item 6.
Exhibits
 
Exhibit
Number
  
Description
2.1
 
Agreement and Plan of Merger, dated as of October 9, 2014, by and among the Company, Kindred Healthcare, Inc. and Kindred Healthcare Development 2, Inc. (1)
3.1
  
Amended and Restated Certificate of Incorporation of Company. (2)
3.2
  
Amended and Restated By-Laws of Company. (3)
3.3
 
Certificate of Designations of Series B Junior Participating Preferred Stock. (4)
4.1
  
Specimen of common stock. (5)
4.2
  
Certificate of Designations of Series B Junior Participating Preferred Stock. (4)
4.3
  
Rights Agreement, dated as of May 22, 2014, by and between Gentiva and Computershare Trust Company, N.A., as Rights Agent. (4)
4.4
 
Amendment to Rights Agreement, dated as of October 9, 2014, by and between the Company and Computershare Trust Company, N. A. as Rights Agents. (1)
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.**
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.**
101.INS
  
XBRL Instance Document.*
101.SCH
  
XBRL Taxonomy Extension Schema Document.*
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
  
XBRL Taxonomy Definition Linkbase Document.*
101.LAB
  
XBRL Taxonomy Extension Labels Linkbase Document.*
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
 
(1)
Incorporated herein by reference to Form 8-K of Company dated and filed October 14, 2014.
(2)
Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.
(3)
Incorporated herein by reference to Form 8-K of Company dated and filed November 7, 2011.
(4)
Incorporated herein by reference to Form 8-K of Company dated and filed May 23, 2014.
(5)
Incorporated herein by reference to Form 10-Q/A of Company for the quarterly period ended June 30, 2014.

*
Filed herewith
**
Furnished herewith




59

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GENTIVA HEALTH SERVICES, INC.
(Registrant)
 
 
Date: November 14, 2014
 
/s/ Tony Strange
 
 
Tony Strange
 
 
Chief Executive Officer
 
 
Date: November 14, 2014
 
/s/ Eric R. Slusser
 
 
Eric R. Slusser
 
 
Executive Vice President,
 
 
Chief Financial Officer and Treasurer


60

EXHIBIT INDEX
 
Exhibit
Number
  
Description
2.1
 
Agreement and Plan of Merger, dated as of October 9, 2014, by and among the Company, Kindred Healthcare, Inc. and Kindred Healthcare Development 2, Inc. (1)
3.1
  
Amended and Restated Certificate of Incorporation of Company. (2)
3.2
  
Amended and Restated By-Laws of Company. (3)
3.3
 
Certificate of Designations of Series B Junior Participating Preferred Stock. (4)
4.1
  
Specimen of common stock. (5)
4.2
  
Certificate of Designations of Series B Junior Participating Preferred Stock. (4)
4.3
  
Rights Agreement, dated as of May 22, 2014, by and between Gentiva and Computershare Trust Company, N.A., as Rights Agent. (4)
4.4
 
Amendment to Rights Agreement, dated as of October 9, 2014, by and between the Company and Computershare Trust Company, N. A. as Rights Agents. (1)
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.**
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.**
101.INS
  
XBRL Instance Document.*
101.SCH
  
XBRL Taxonomy Extension Schema Document.*
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
  
XBRL Taxonomy Definition Linkbase Document.*
101.LAB
  
XBRL Taxonomy Extension Labels Linkbase Document.*
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
 
(1)
Incorporated herein by reference to Form 8-K of Company dated and filed October 14, 2014.
(2)
Incorporated herein by reference to Form 8-K of Company dated and filed May 12, 2008.
(3)
Incorporated herein by reference to Form 8-K of Company dated and filed November 7, 2011.
(4)
Incorporated herein by reference to Form 8-K of Company dated and filed May 23, 2014.
(5)
Incorporated herein by reference to Form 10-Q/A of Company for the quarterly period ended June 30, 2014.

*
Filed herewith
**
Furnished herewith




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