NOTE 2 – GENTIVA MERGER

On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (1) $14.50 in cash (the “Cash Consideration”), without interest, and (2) 0.257 of a validly issued, fully paid and nonassessable share of Kindred common stock, par value $0.25 per share (the “Stock Consideration”). The purchase price totaled $722.3 million and was comprised of $544.8 million of Cash Consideration and $177.5 million of Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.

NOTE 2 – GENTIVA MERGER (Continued)

The following transactions (collectively, the “Financing Transactions”) occurred in connection with the Gentiva Merger:

•

the Company issued $1.35 billion aggregate principal amount of senior notes;

•

the Company issued approximately 15 million shares of its common stock through two common stock offerings and issued 9.7 million shares of its common stock as the Stock Consideration;

•

the Company issued 172,500 tangible equity units (the “Units”); and

•

the Company amended its credit facilities.

The Company used the net proceeds from the Financing Transactions to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt, and pay related transaction fees and expenses.

Operating results in the third quarter of 2016 included transaction and integration costs totaling $1.2 million and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2016 included transaction and integration costs totaling $3.8 million, retention and severance costs totaling $0.7 million, and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results in the third quarter of 2015 included transaction and integration costs totaling $1.1 million, and retention and severance costs totaling $1.9 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2015 included transaction and integration costs totaling $35.2 million, retention and severance costs totaling $58.8 million, a lease termination charge of $0.8 million and financing costs totaling $23.4 million related to the Gentiva Merger. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million).

A note receivable totaling $25 million was acquired in the Gentiva Merger. The note receivable was collected in full during the third quarter of 2015 and the Company received all of the cash proceeds.

Purchase price allocation

The Gentiva Merger purchase price of $722.3 million was allocated based upon the estimated fair value of the tangible and intangible assets, and goodwill.

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The following is the Gentiva Merger purchase price allocation (in thousands):

Cash and cash equivalents	$	64,695
Accounts receivable		265,034
Other current assets		123,428
Property and equipment		46,732
Identifiable intangible assets:
Certificates of need (indefinite life)		256,921
Medicare certifications (indefinite life)		94,500
Trade names (indefinite life)		22,200
Trade name		15,600
Non-compete agreements		1,820
Leasehold interests		1,439
Total identifiable intangible assets		392,480
Deferred tax assets		37,429
Other assets		74,407
Current portion of long-term debt		(53,075	)
Accounts payable and other current liabilities		(319,004	)
Long-term debt, less current portion		(1,124,288	)
Deferred tax liabilities		(47,748	)
Other liabilities		(126,088	)
Noncontrolling interests		(3,992	)
Total identifiable net assets		(669,990	)
Goodwill		1,392,271
Net assets	$	722,281

The fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 15).

The value of gross contractual accounts receivable before determining uncollectable amounts totaled $278.9 million. Accounts estimated to be uncollectable totaled $13.9 million.

The weighted average life of the definite lived intangible assets consisting primarily of a trade name is three years.

The aggregate goodwill arising from the Gentiva Merger is based upon the expected future cash flows of the Gentiva operations, which reflect both growth expectations and cost savings from combining the operations of the Company and Gentiva. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was assigned to the Company’s home health reporting unit ($612.2 million), hospice reporting unit ($614.0 million) and community care reporting unit ($166.1 million).

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):

	Three months ended			Nine months ended
	September 30,			September 30,
	2015			2015
Revenues	$	1,764,516		$	5,435,657
Loss from continuing operations attributable to Kindred		(14,501	)		(56,221	)
Loss attributable to Kindred		(12,231	)		(56,950	)
Loss per common share:
Basic:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)
Diluted:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Gentiva Merger for the periods presented. The unaudited pro forma financial data presented excludes transaction, integration, retention and severance costs, a lease termination charge, and financing costs totaling $135.2 million incurred by both the Company and Gentiva in connection with the Gentiva Merger. These costs have been eliminated from the results of operations for 2015 and have been reflected as expenses incurred as of January 1, 2014 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $559.7 million and $77.6 million, respectively, in the third quarter of 2016 and $525.0 million and $67.5 million, respectively, in the third quarter of 2015. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $1.6 billion and $211.8 million, respectively, for the nine months ended September 30, 2016 and $1.4 billion and $168.7 million, respectively, for 2015 since the date of the Gentiva Merger.