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 first quarter 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 $2.2 million as compared to $1.8 million for the corresponding period 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 three months of 2014 and 2013 calculated using the Black-Scholes option pricing model and other assumptions used in the option pricing model, were as follows:



	Three Months Ended
	March 31, 2014			March 31, 2013
Weighted average fair value of options granted	$	5.07		$	11.46
Risk-free interest rate	.46%			0.31% - 0.35%
Expected volatility	60		%	76		%
Contractual life	7 years			7 years
Expected life	3.4 - 5.4 years			3.4 - 5.4 years
Expected dividend yield	—		%	—		%

During the first quarter 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.

A summary of Gentiva stock option activity as of March 31, 2014 and changes during the three 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	735,500		10.89
Exercised	(7,334	)	5.86
Cancelled	(307,741	)	21.18
Balance as of March 31, 2014	4,426,014		$	14.27	4.7	$	3,762,925
Exercisable options	2,702,748		$	17.25	3.8	$	2,383,645
Shares expected to vest as of March 31, 2014	1,621,640		$	9.53	6.0	$	1,368,799

The total intrinsic value of options exercised during the three months ended March 31, 2014 and March 31, 2013 were $35 thousand and $0.3 million, respectively. As of March 31, 2014 and 2013, the Company had $3.6 million and $3.8 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 1.5 years for both years. The total fair value of options that vested during the first three months of 2014 was $1.7 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 March 31, 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	(18,063	)	—		—
Balance at March 31, 2014 - Earned	1,786,593		—		—

Balance at December 31, 2013 - Unearned	2,123,125		4,613,750		—
Granted	—		—		5,457,750
Performance target not achieved	—		(1,051,250	)	—
Cancellations	(21,250	)	—		—
Balance at March 31, 2014 - Unearned	2,101,875		3,562,500		5,457,750

For the first quarter of 2014, the Company recorded $1.0 million of compensation expense associated with its performance based cash awards as compared to $0.7 million for the corresponding period of 2013. As of March 31, 2014, the Company had unrecognized compensation cost at target of $7.0 million to be recognized over a weighted-average period of 2.2 years.

Restricted Stock

A summary of Gentiva restricted stock activity as of March 31, 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	364,000		10.77
Exercised	(88,900	)	26.58
Cancelled	(2,800	)	11.60
Balance as of March 31, 2014	907,700		$	14.51	$	8,278,224
Nonvested shares expected to vest as of March 31, 2014	823,419		14.82		7,509,590

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 March 31, 2014, the aggregate intrinsic value of the restricted stock awards was $8.3 million. The Company had $8.1 million and $7.5 million of total unrecognized compensation cost related to restricted stock as of March 31, 2014 and 2013, respectively. This compensation expense is expected to be recognized over a weighted-average period of 2.3 years and 2.6, 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 187,195 shares were available for future grants as of March 31, 2014. During the first three months of 2014 and 2013, the Company granted 19,642 and 16,404 stock units, respectively, under the DSU Plan at a grant date weighted-average fair value of $10.69 and $10.97 per stock unit, respectively. Under the DSU Plan, 352,418 stock units were outstanding as of March 31, 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 three months of 2014 and 2013, the Company issued 83,353 and 86,359 shares of common stock, respectively, under its ESPP.