Addus HomeCare
Annual Report 2010

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2010OR¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission file number 001-34504 ADDUS HOMECARE CORPORATION(Exact name of registrant as specified in its charter) Delaware 20-5340172(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)2401 South Plum Grove RoadPalatine, Illinois 60067(Address of principal executive offices)(847) 303-5300(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each Exchange on which RegisteredCommon Stock, par value $0.001 The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(b) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x.Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x.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 duringthe 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 requirementsfor the past 90 days. Yes x No ¨.Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes ¨ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer ¨ Smaller reporting company x(Do not check if a 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 xThe aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the last sale price on The NasdaqGlobal Market on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $33,081,211.As of March 25, 2011, there were 10,751,086 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCECertain portions of the registrant’s Definitive Proxy Statement for its 2011 Annual Meeting of Stockholders (which is expected to be filed with the Commissionwithin 120 days after the end of the registrant’s 2010 fiscal year) are incorporated by reference into Part III of this Annual Report on Form 10-K.within 120 days after the end of the registrant’s 2010 fiscal year) are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART I 2 Item 1. Business 2 Item 1A. Risk Factors 20 Item 1B. Unresolved Staff Comments Item 2. Properties 37 Item 3. Legal Proceedings 37 Item 4. Reserved 38 PART II 39 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 39 Item 6. Selected Financial Data 40 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 68 Item 8. Financial Statements and Supplementary Data 68 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 Item 9A. Controls and Procedures 68 Item 9B. Other Information 69 PART III 70 Item 10. Directors, Executive Officers and Corporate Governance 70 Item 11. Executive Compensation 70 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 70 Item 13. Certain Relationships and Related Transactions; and Director Independence 70 Item 14. Principal Accountant Fees and Services 70 PART IV 71 Item 15. Exhibits and Financial Statement Schedules 71 Table of ContentsSPECIAL CAUTION CONCERNING FORWARD-LOOKING STATEMENTSWhen included in this Annual Report on Form 10-K, or in other documents that we file with the Securities and Exchange Commission (“SEC”) or instatements made by or on behalf of the Company, words like “believes,” “belief,” “expects,” “plans,” “anticipates,” “intends,” “projects,” “estimates,”“may,” “might,” “would,” “should” and similar expressions are intended to identify forward-looking statements as defined by the Private Securities LitigationReform Act of 1995. These forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially fromthose described therein. These risks and uncertainties include, but are not limited to the following: changes in Medicare and other medical payment levels,changes in or our failure to comply with existing Federal and State laws or regulations or the inability to comply with new government regulations on a timelybasis, competition in the homecare industry, changes in the case mix of consumers and payment methodologies, changes in estimates and judgmentsassociated with critical accounting policies, our ability to maintain or establish new referral sources, our ability to attract and retain qualified personnel,changes in payments and covered services due to the economic downturn and deficit spending by Federal and State governments, future cost containmentinitiatives undertaken by third party payors, our access to financing due to the volatility and disruption of the capital and credit markets, our ability to meetdebt service requirements and comply with covenants in debt agreements, business disruptions due to natural disasters or acts of terrorism, our ability tointegrate and manage our information systems, our expectations regarding the size and growth of the market for our services, the acceptance of privatizedsocial services, our expectations regarding changes in reimbursement rates, authorized hours and eligibility standards of state governmental agencies, thepotential to settle litigation, and the effect of those changes on our results of operations in 2011 or for periods thereafter, our ability to successfully implementour integrated service model to grow our business, our ability to continue identifying and pursuing acquisition opportunities and expand into new geographicmarkets, the effectiveness, quality and cost of our services and various other matters, many of which are beyond our control.Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should notrely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to releasepublicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances uponwhich any forward-looking statement may be based, except as required by law. For a discussion of some of the factors discussed above as well as additionalfactors, see Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Critical Accounting Policies” within “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”.Unless otherwise provided, “Addus,” “we,” “us,” “our,” and the “Company” refer to Addus HomeCare Corporation and our consolidated subsidiariesand “Holdings” refers to Addus HomeCare Corporation. When we refer to 2010, 2009, and 2008, we mean the twelve month period then ended December 31,unless otherwise provided.A copy of this Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC, including all exhibits, is available on ourinternet website at http://www.addus.com on the “Investor Relations” page link. Information contained on, or accessible through, our website is not a part of,and is not incorporated by reference into, this Annual Report on Form 10-K. 1Table of ContentsPART I ITEM 1.BUSINESSOverviewWe are a comprehensive provider of a broad range of social and medical services in the home. Our services include personal care and assistance withactivities of daily living, skilled nursing and rehabilitative therapies, and adult day care. Our consumers are individuals with special needs who are at risk ofhospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmentalagencies, commercial insurers, and private individuals. We provide our services through over 129 locations across 19 states to over 27,000 consumers.We operate our business through two segments, home & community services and home health services. Our home & community services are social, ornon-medical, in nature and include assistance with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of dailyliving. We provide home & community services on a long-term, continuous basis, with an average duration of 20 months per consumer. Our home healthservices are medical in nature and include physical, occupational and speech therapy, as well as skilled nursing. We generally provide home health services ona short-term, intermittent or episodic basis to individuals recovering from an acute medical condition, with an average length of care of 80 days.The comprehensive nature of our social and medical services enables us to maintain a long-term relationship with our consumers as their needs changeover time and provides us with diversified sources of revenue. To meet our consumers’ changing needs, we utilize an integrated service delivery modelapproach that allows our consumers to access social and medical services from one homecare provider and appeals to referral sources who are seeking aprovider with a breadth of services, scale and systems to meet consumers’ needs effectively. Our integrated service model is designed to reduce serviceduplication, which lowers health care costs, enhances consumer outcomes and satisfaction and lowers our operating costs, as well as drives our internalgrowth strategy. In our target markets, our care and service coordinators work with our caregivers, consumers and their providers to review our consumers’current and anticipated service needs and, based on this continuous review, identify areas of service duplication or new service opportunities. This approach,combined with our integrated service delivery model, enabled us to derive approximately 25% of our Medicare home health cases in 2010 from our home &community consumer base.Addus HomeCare Corporation was incorporated in Delaware in 2006 under the name Addus Holding Corporation for the purpose of acquiring AddusHealthCare, Inc. (“Addus HealthCare”). Addus HealthCare was founded in 1979. Our principal executive offices are located at 2401 South Plum Grove Road,Palatine, Illinois 60067. Our telephone number is (847) 303-5300.Our Market and OpportunityWe provide services to the elderly and adult infirmed who need long-term care and assistance with essential, routine tasks of life, as well as Medicare-eligible beneficiaries who are in need of recuperative care services following an acute medical condition. The Georgetown University Long-Term Care FinancingProject estimated total expenditures in 2005 for services such as these, including services provided in the home or in a community-based setting, as well as ininstitutions such as skilled nursing facilities, at over $205 billion. It is estimated that 49.0% of these expenditures were paid for by Medicaid, 20.4% byMedicare, 18.1% by private pay, 7.2% by private insurance and 5.3% by other sources. Homecare services is the fastest growing segment within this overallmarket. According to Thomson Reuters (formerly Metstat), Medicaid expenditures for home & community services increased from $7.5 billion in 1995 to$37.9 billion in 2007, representing a compound annual growth rate, or CAGR, of 14.4%. According to the Medicare Payment Advisory Commission, orMedPAC, an independent congressional agency that advises Congress on issues involving the Medicare program. Medicare expenditures on home health careincreased from $8.5 billion in 2001 to $13.7 billion in 2007, representing a CAGR of 8.3%. According to MedPAC, Medicare spent $19 billion on homehealth care in 2009. 2Table of ContentsAccording to the Centers for Medicare and Medicaid Services, or CMS, payment for homecare services, which does not include personal care servicesfunded primarily under Medicaid waiver programs, was $59 billion in 2007, and is forecasted to increase to $135 billion in 2018, representing a CAGR of7.8%. In addition to the projected growth of government-sponsored homecare services, the private duty market for our services is growing rapidly. We provideour private duty consumers with all of the services we provide to both our home & community and home health consumers.Historically, there were limited barriers to entry in the homecare industry. As a result, the industry developed in a highly fragmented manner, with manysmall local providers. Few companies have a significant market share across multiple regions or states. According to the National Association for HomeCare & Hospice, or NAHC, as of 2007, there were over 9,000 Medicare-certified homecare agencies. In addition, while difficult to estimate, there are manynon-licensed, non-certified homecare agencies. More recently, the homecare industry has been subject to increased regulation. In several states, providers arenow required to obtain state licenses or registrations and must comply with laws and regulations governing standards of practice. Providers must dedicatesubstantial resources to ensure continuing compliance with all applicable regulations and significant expenditures may be necessary to offer new services or toexpand into new markets. Any failure to comply with this growing and changing regulatory regime could lead to the termination of rights to participate infederal and state-sponsored programs and the suspension or revocation of licenses. We believe limitations on the availability of new licenses, the rising costand complexity of operations and pressure on reimbursement rates due to constrained government resources create barriers for new providers and mayencourage industry consolidation.Our Growth StrategyOur ability to grow our net service revenues is closely correlated with the number of consumers to whom we provide our services. Our continued growthdepends on our ability to maintain our existing payor client relationships, establish relationships with new payors, enter into new contracts and increase ourreferral sources. Our continued growth is also dependent upon the authorization by state agencies of new consumers to receive our services. We believe there areseveral market opportunities for growth. The U.S. population of persons aged 65 and older is growing, and the U.S. Census Bureau estimates that thispopulation will more than double by 2050. Additionally, we believe the overwhelming majority of individuals in need of care generally prefer to receive care intheir homes or community-based settings. Finally, we believe the provision of home & community services is more cost-effective than the provision of similarservices in an institutional setting for long-term care. We intend to grow as an integrated provider of homecare services. The following are the key elements ofour growth strategy: • Expand our comprehensive, integrated service model. Our comprehensive, integrated model provides significant opportunities to effectivelymarket to a wide range of payor clients and referral sources, many of whom are responsible for consumers with both social and medical serviceneeds. We have implemented this model in approximately 49% of our current locations and intend to extend this model to all of our markets, bothorganically and through strategic acquisitions. • Drive growth in existing markets. We intend to drive growth in our existing markets by enhancing the breadth of our services, increasing thenumber of referral sources and leveraging and expanding our payor relationships in each market. We intend to achieve this growth by continuingto educate referral sources about the benefits of our services and maintaining our emphasis on high quality care for our consumers. To takeadvantage of the growing demand for quality and reputable homecare services from private duty consumers, we are focusing on increasing andenhancing the private pay services we provide to consumers in all of our locations. By providing private duty services through our existinghome & community and home health employees, we expect to increase our net service revenues without a corresponding increase in our operatingcosts. • Growth through acquisitions. We intend to continue to grow with selective acquisitions. Our home & community segment acquisitions have beenfocused on facilitating entry into new states such 3Table of Contents as New Jersey, Idaho, Nevada, North Carolina, South Carolina and Georgia, whereas our home health segment acquisitions have been focused oncomplementing our existing home & community business in Idaho, Indiana and South Carolina, enabling us to provide a more comprehensiverange of services in those locations. Acquisitions in the home health segment, while not significant, reflect our goal of being a comprehensiveprovider of both home & community and home health services in the markets in which we operate. • Expand into new markets organically. We intend to offer our services in geographic markets contiguous to our existing markets through de novoagency development.Our Services by SegmentWe deliver comprehensive homecare services to our consumers through two business segments, home & community services and home health services.Our home & community services assist consumers, who would otherwise be at risk of placement in a long-term care institution, with activities of daily living.Our home health services provide restorative measures to consumers with chronic diseases or after hospitalization. We offer an integrated care approach whichdelivers an integrated care plan to our consumers utilizing services from both divisions. We believe this approach allows consumers to stay within our deliverysystem as their health care needs change and to continue to receive a full spectrum of services in a home or community-based setting. This approach alsoreduces the costs to the health care system associated with frequent hospitalization or admission into a skilled nursing facility or other health care institution.Home & Community ServicesOur home & community services segment provides a broad range of services primarily in consumers’ homes on an as-needed, hourly basis, mostly toolder adults and younger disabled persons. Our home & community services segment, which accounted for $220.8 million, or 81.2%, of our net servicerevenues in 2010, primarily involves providing assistance with activities of daily living. These services, generally provided by para-professional staff such ashomecare aides, are of a social rather than medical nature, and include personal care, home support services and adult day care.Personal care and home support services are provided to consumers who are unable to independently perform some or all of their activities of dailyliving. Our services are needed when assistance from family or community members is insufficient or where caregiver respite is needed. Personal care servicesinclude bathing, grooming, mouth care, skin care, assistance with feeding and dressing and medication reminders. Home support services include mealplanning and preparation, housekeeping and transportation services. A consumer may need such services on a temporary or long-term basis to addresschronic or acute conditions. Each payor client establishes its own eligibility standards, determines the type, amount, duration and scope of services, andestablishes the applicable reimbursement rate. The average duration of our provision of home & community services is approximately 20 months perconsumer.We also operate five adult day centers in Illinois which provide an integrated program of skilled and support services and designated health services foradults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to and from thecenters, the provision of meals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction.Most of our home & community services are provided pursuant to agreements with state and local governmental social and aging service agencies. Theseagreements generally have a stated term of one to two years and generally may be terminated by the counterparty upon 60 days’ notice. They are typicallyrenewed for one- to five-year terms, provided we have complied with licensing, certification and program standards, and other regulatory requirements.Reimbursement rates and methods vary by state and service type, but are typically based on an hourly or unit-of-service basis. In 2010, approximately 94.2%of our home & community net service 4Table of Contentsrevenues were derived from state and local government programs, while approximately 5.8% of our home & community net service revenues were derivedfrom insurance programs and private duty consumers.Home Health ServicesServices provided to consumers by our home health services segment are typically prescribed by a physician following an in-home nursing assessmentor a consumer’s discharge from a hospital, skilled nursing facility, rehabilitation center or other institutional setting. Services may be provided in lieu of, ordelay the need for, hospitalization. Our home health services are provided on an intermittent basis to consumers who are typically unable to leave their homeswithout considerable effort. Our home health services are provided by skilled nurses, physical, occupational and speech therapists, medical social workersand home health aides. We provide these services to the homebound elderly, adult infirm and children, including the high-risk pediatric population.We provide home health services after an acute illness or surgical intervention, or after an exacerbation or worsening of a chronic disorder that typicallyrequires hospitalization or other institutionalization. These services include disease management instruction, wound care, occupational and speech therapy,risk assessment and prevention and education. We have also developed disease-specific plans for consumers with diabetes, congestive heart failure, post-orthopedic surgery or injury and respiratory diseases.Our home health net service revenues accounted for $50.9 million, or 18.8%, of our net service revenues in 2010. Of these net service revenues, 64.1%were reimbursed by Medicare, 19.4% by state and local government programs, 10.0% by insurance programs and 6.5% from other private payors.The following table presents our locations by segment, setting forth acquisitions, start-ups and closures for the period January 1, 2008 to December 31,2010: Home &Community HomeHealth Total Total at January 1, 2008 75 29 104 Acquired 16 2 18 Start-up 2 1 3 Closed/Merged (2) (1) (3) Total at December 31, 2008 91 31 122 Start-up 3 — 3 Closed/Merged (2) (1) (3) Total at December 31, 2009 92 30 122 Acquired 8 3 11 Start-up 3 — 3 Closed/Merged (7) — (7) Total at December 31, 2010 96 33 129 As of December 31, 2010, we provided our services through over 129 locations across 19 states. As part of our comprehensive service model, we haveintegrated and provide both home & community and home health services in nine states.Our payor clients are principally federal, state and local governmental agencies. The federal, state and local programs under which they operate aresubject to legislative, budgetary and other risks that can influence reimbursement rates. Our commercial insurance carrier payor clients are typically for profitcompanies and are continuously seeking opportunities to control costs. We are seeking to grow our private duty business in both of our segments and ourMedicare business in our home health segment. 5Table of ContentsFor 2010, 2009 and 2008, our payor revenue mix by segment was as follows: Home & Community 2010 2009 2008 State, local and other governmental programs 94.2% 95.8% 96.9% Commercial 0.8 0.5 0.1 Private duty 5.0 3.7 3.0 100.0% 100.0% 100.0% Home Health 2010 2009 2008 Medicare 64.1% 61.3% 58.3%State, local and other governmental programs 19.4 21.0 23.4 Commercial 10.0 10.8 11.4 Private duty 6.5 6.9 6.9 100.0% 100.0% 100.0%We also measure the performance of each segment using a number of different metrics. For our home & community segment, we consider billable hours,billable hours per business day, revenues per billable hour and the number of consumers, or census. For our home health segment, we consider Medicarecensus, non-Medicare census, Medicare admissions and Medicare revenues per episode completed.We derive a significant amount of our net service revenues from our operations in Illinois and California, which represented 52% and 13%; 49% and16%; and 46% and 18% of our total net service revenues for the years ended December 31, 2010, 2009 and 2008, respectively.A significant amount of our net service revenues are derived from two specific payor clients. The Illinois Department on Aging, in the home &community segment, and Medicare, in the home health segment, accounted for 38% and 12%; 34% and 12%; and 32% and 12% of our total net servicerevenues for the years ended December 31, 2010, 2009 and 2008, respectively.CompetitionThe homecare industry is highly competitive, fragmented and market specific. Each local market has its own competitive profile and no singlecompetitor has significant market share across all of our markets. Our competition consists of home health providers, private caregivers, larger publicly heldcompanies, privately held homecare companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-basedorganizations and self-directed care programs. In addition, certain governmental payors contract for services with independent providers such that ourrelationships with these payors are not exclusive, particularly in California. We have experienced, and expect to continue to experience, competition from newentrants into our markets. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of consumers or payors, any ofwhich could harm our business. In addition, some of our competitors may have greater financial, technical, political and marketing resources, namerecognition on a larger number of consumers and payors than we do.Sales and MarketingWe focus on initiating and maintaining working relationships with state and local governmental agencies responsible for the provision of the services weoffer. We target these agencies in our current markets and in geographical areas that we have identified as potential markets for expansion. We also seek toidentify service 6Table of Contentsneeds or changes in the service delivery or reimbursement system of governmental entities and attempt to work with and provide input to the responsiblegovernment personnel, provider associations and consumer advocacy groups.We receive substantially all of our consumers from third party referrals. Generally, family members of potential homecare consumers are made aware ofavailable in-home or alternative living arrangements through a state or local case management system. These systems are operated by governmental or privateagencies. We receive referrals from state departments on aging, rehabilitation, mental health and children’s services, county departments of social services, theVeterans Health Administration and city departments on aging. Other service referrals, particularly in our home health division, come from physicians,hospitals, long-term care facilities and private insurers. Accordingly, there is no single referral source that accounts for a substantial portion of our referrals.In our home & community services division, we provide ongoing education and outreach to our target communities, both to inform residents about stateand locally-subsidized care options and to communicate our role in providing quality home & community services. We also utilize consumer-direct sales,marketing and advertising programs designed to attract consumers. Our home health services are marketed through a dedicated sales team which consists ofaccount executives and care coordinators. Our account executives market our services to potential referral sources including physicians and to large retirementhousing programs. Our care coordinators facilitate our integrated service offering by working in unison with our home & community services segmentresources. Our care coordinators identify consumers who are being served by our home & community care givers and conduct an initial evaluation of theconsumer’s needs for services offered by our home health division. If there are specific health needs identified we facilitate an evaluation by a qualified nursefor admission into the home health segment and proceed to obtain appropriate physician orders for the provision of home health services.Payment for ServicesWe are compensated for our services by federal, state and local government programs, such as Medicaid funded programs and Medicaid waiverprograms, other state agencies and Medicare, as well as the Veterans Health Administration, commercial insurers and private duty consumers.The following table sets forth net service revenues derived from each of our major payors during the indicated periods as a percentage of total net servicerevenues: Payor Group Year Ended December 31, 2010 2009 2008 Illinois Department on Aging 37.8% 34.3% 31.6% Medicare 12.0 11.6 11.7 Nevada Medicaid 5.4 6.5 7.5 Riverside County Department of Public Social Services 4.4 5.4 6.6 Private duty 5.3 4.3 3.8 Commercial insurance 2.5 2.7 2.4 Other federal, state and local payors 32.6 35.2 36.4 Total 100.0% 100.0% 100.0% Illinois Department on AgingWe provide homecare services pursuant to agreements with the Illinois Department on Aging, which is funded by Medicaid and general revenue funds ofthe State of Illinois. Consumers are identified by case managers contracted independently with the Illinois Department on Aging. Once a consumer has beenevaluated 7Table of Contentsand determined to be eligible for the program, the case manager refers the consumer to a list of authorized providers, from which the consumer selects theprovider. We provide our services in accordance with a care plan developed by the case manager and under administrative directives from the IllinoisDepartment on Aging. We are reimbursed on an hourly fee for service basis. Due to its revenue deficiencies and financing issues, the State of Illinois iscurrently reimbursing us on a delayed basis with respect to these agreements. These payment delays have adversely impacted, and may further adverselyimpact, our liquidity, and may result in the need to increase borrowings under our credit facility. Other delayed payor reimbursements from the State of Illinoishave also contributed to the increase in our receivables balances.MedicareMedicare is the U.S. government’s health insurance program funded by the Social Security Administration for individuals aged 65 or older,individuals under the age of 65 with certain disabilities and individuals of all ages with end-stage renal disease. Eligibility for Medicare does not depend onincome, and coverage is restricted to reasonable and medically-necessary treatment.Medicare home health rates are based on the severity of the consumer’s condition, his or her service needs and other factors relating to the cost ofproviding services and supplies. Through the Medicare Prospective Payment System, or PPS, Medicare pays providers of home health care at fixed,predetermined rates for services bundled into 60-day episodes of home health care. Medicare base episodic rates are set annually through federal legislation, asfollows: Period Base episodicPayment (1) January 1, 2008 through December 31, 2008 $2,270 January 1, 2009 through December 31, 2009 2,272 January 1, 2010 through December 31, 2010 2,313 January 1, 2011 through December 31, 2011 2,192 (1)The actual episode payment rates vary based on the scoring of Outcome and Assessment Information Set or OASIS responses which then categorizecharacteristics into home health resource groups with a corresponding rate of payment. The per episode payment is typically reduced or increased bysuch factors as the consumer’s clinical, functional and services utilization domains.Medicare payments can be adjusted through changes in the base episodic payments and recoveries of overpayments for, among other things, unusuallycostly care for a particular consumer, low utilization, transfers to another provider, the level of therapy services required and the number of episodes of careprovided. In addition, Medicare can also reduce levels of reimbursement if a provider is unable to produce appropriate billing documentation or acceptablemedical authorizations. Medicare reimbursement, on an episodic basis, is subject to adjustment if the consumer is discharged but readmitted within the same60-day episodic period.On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act and on March 30, 2010, the President signed into lawthe Health Care and Education Reconciliation Act of 2010 (collectively both laws are referred to herein as the “Health Reform Act”). The Health Reform Actincludes several provisions that may affect reimbursement for home health agencies. The Health Reform Act is broad, sweeping reform, and is subject tochange, including through the adoption of related regulations, the way in which its provisions are interpreted and the manner in which it is enforced. Wecannot assure you that the provisions of the Health Reform Act will not adversely impact our business, results of operations or financial position. We may beunable to mitigate any adverse effects resulting from the Health Reform Act.On July 14, 2010, the Office for Civil Rights of the U.S. Department of Health and Human Services (the “OCR”) published proposed regulations toimplement the Health Information Technology for Economic and Clinical Health Act. Failure to comply with Health Insurance Portability and AccountabilityAct, or HIPAA, could result in fines and penalties that could have a material adverse effect on us. 8Table of ContentsOn July 23, 2010, CMS published its proposed Home Health Prospective Payment System Update for Calendar Year 2011 (“Proposed 2011 HomeHealth PPS Update”). A proposed overall reduction in the home health payment base rate of 4.9% included a reduction for each 60-day episode and theconversion factor for non-routine medical supplies (“NRS”) of 3.79%. The 3.79% decrease, which also will be imposed in 2012, is a result of the CMSdetermination that there has been a general increase in case mix that CMS believes is unwarranted. CMS believes that this “case-mix creep” is due to improvedcoding, coding practice changes, and other behavioral responses to the change in reimbursement that went in to effect in 2009, including greater use of hightherapy treatment plans above what CMS believes is related to an increase in patient acuity. CMS warned that it will continue to monitor changes in case-mix.If new data identifies additional increases in case-mix, CMS will immediately impose further reductions. The Health Reform Act requires a physiciancertifying a patient for home health services to document that the physician or a non-physician practitioner under the direction of the physician has had a face-to-face encounter with the patient. In CMS’s proposed Home Health Update for 2011 (the “2011 Proposed Home Health Rule”), CMS proposed regulations thatwould require the face-to-face encounter to take place within thirty days of the home health start date. An additional face-to-face encounter within two weeks ofthe start date would be required if the original face-to-face encounter did not primarily relate to the reason for the home health services.In November 2010, CMS released its Home Health Prospective Payment System Update for Calendar Year 2011 (the “Final 2011 Home Health PPSUpdate”). There is a 1.1% market basket increase for 2011 (after application of the mandated 1% reduction) and a mandated 3.79% rate reduction. The final2011 payment base rate reflects a 0.3% decrease from the proposed market basket rate in July 2010. CMS announced that it is postponing its proposed 3.79%reduction in home health rates for calendar year 2012 pending its further monitoring of case-mix changes. Home health agencies that do not submit requiredquality data will be subject to a 2% reduction in the market basket update.CMS made some revisions to its proposed regulations regarding face-to-face-encounters. The physician or non-physician practitioner must have a face-to-face encounter with the patient within 90 days of the home health start date. If there is no face-to-face encounter within the 90 day period or if the encounterdid not relate to the reason for home health, a face-to-face encounter must occur within 30 days after the home health start date. CMS emphasized that thecertification must be dated by the physician (not the home health agency) and the patient must be under the care of a physician while receiving home healthservices. But, the face-to-face encounter is only required for the initial certification. The certifying physician may not be the home health agency medicaldirector and the physician or non-physician practitioner may not have a financial relationship with the home health agency. CMS also is requiring that fortherapy services, a qualified therapist (not a therapy assistant) must assess the patient, measure progress, and document progress toward therapy goals at leastonce every 30 days. For patients requiring 13 or 19 therapy visits, the qualified therapist must perform this evaluation at the 13th and 19th therapy visit. Therequirement is relaxed for patients in rural areas, requiring the qualified therapist evaluation any time after the 10th visit and not later than the 13th visit, andafter the 16th therapy visit but not later than the 19th visit. If more than one therapy is furnished, an evaluation must be made by a qualified therapist foreach therapy.The face-to-face encounter requirement was to have become effective January 1, 2011. After pleas from home health and hospice provider associations,hospitals and some members of Congress, in December CMS announced a suspension of the requirement until April 1, 2011. Representatives from theindustry, hospital and physician groups and AARP have asked CMS to postpone the face-to-face encounter requirement for another three months, to July 1,2011. On March 18, 2011, a coalition of industry groups, physician groups and AARP met with CMS to request the further extension. It is reported that theCMS representative expressed concern about the additional extension, questioning whether physicians would be more ready in July than they would be inApril. He also pointed out that CMS has little flexibility because the requirement is based on a statute passed by Congress and that CMS took a risk when itgranted the suspension to April 1 but took comfort in support from key Congressional offices. A leading home health and hospice provider association thathad representatives at the 9Table of Contentsmeeting has expressed its belief that “the odds favor” a further extension, however, we cannot predict whether an extension will be granted.CMS also announced that it is going to assess a variety of home health issues, including the current therapy threshold reimbursement. CMS alsoclarified its rules regarding change of ownership of home health agencies and the 36-month rule. If there is a change of ownership within 36 months ofenrollment in Medicare or within 36 months of a prior change of ownership, the home health agency must undergo a new survey. CMS clarified that indirectownership changes are not subject to the 36-month rule. There are also several exceptions to the 36-month rule but in order to qualify, the home health agencymust have submitted two or more consecutive cost reports (excluding low utilization cost reports or no cost report). Exceptions to the 36-month rule includedeath of an owner and changes in business structure as long as ownership remains the same.In its March 2011 report to Congress, MedPAC made several recommendations that could adversely affect the home health industry and potentially ourbusiness. MedPAC stated that the home health benefit has significant vulnerabilities that need to be addressed urgently, and recommended policies to improvepayment accuracy, establish beneficiary incentives, and strengthen program integrity. MedPAC believes Medicare payments are well in excess of costs andconcludes that home health payments need to be significantly reduced. Although the Home Health Compare measures (which measure quality of care) for 2010are similar to those for previous years, showing improvement in the functional measures and mostly unchanged rates of adverse events, MedPAC stated thatsupplemental measures of quality that focus on specific conditions are needed to assess home health quality and has a project underway to develop newmeasures.In addition, MedPAC believes the current home health payment system is flawed and creates incentives for patient selection because it believes thecurrent case-mix system may overvalue therapy services and undervalue non-therapy services. MedPAC has looked at alternative models and recommends thatDHHS implement a revised payment system to deal with these flaws. MedPAC believes its model would eliminate the incentive to provide more therapy visitssolely to increase payment; significantly improve payment accuracy for non-therapy services, the majority of services provided; improve the accuracy ofpayments for high-cost beneficiaries who have significant nursing and home health aid needs, and encourage agencies to focus on beneficiary characteristicswhen setting plans of care. MedPAC estimates that its model would lower payments for therapy episodes by 10% and increase payments for non-therapyepisodes by 25%. Payments for dual-eligible Medicare beneficiaries would increase by 1.3%. Payments for hospital-based home health aides would increase7.5%, while payments for freestanding agencies would fall by 1.4%. Payments to nonprofit agencies would likely increase by 7% on average. Agencies thatprovided the most non-therapy episodes would see an increase of 16.7%, while those that provided the most therapy services would see a decrease of 18.3%.MedPAC also believes that home health services may be over-utilized and that adding a cost-sharing requirement would give beneficiaries some incentiveto weigh the value of home health services before accepting them and would dissuade beneficiaries from using a service when it has minimal value. It alsobelieves that cost sharing would also mitigate incentives in the home health PPS that reward volume. MedPAC seemed to recommend a co-payment of $150 perepisode. MedPAC advises implementation of cost sharing only for those beneficiaries that do not receive home health services following an inpatient stay. Dualeligibles would not be affected. Their co-payment would be paid by Medicaid, or would be waived if their state Medicaid did not cover the cost.MedPAC advised that DHHS needs to audit home health agencies where there appears to be marked overultilization. MedPAC recommended that as afirst step, DHHS should focus on areas that have home health use rates that are more than twice the national average and where more than 20% of all fee-for-service beneficiaries used home health services. MedPAC’s advises that DHHS should review claims in these areas to determine whether evidence of fraudexists, and implement its new authorities in the Health Reform Act if warranted. 10Table of ContentsMedPAC made the following recommendations to Congress: • DHHS, with its Office of Inspector General, should conduct medical review activities in counties that have aberrant home health utilization; • DHHS should implement the new authorities to suspend payment and the enrollment of new providers if they indicate significant fraud; • Congress should direct the DHHS to begin a two-year rebasing of home health rates in 2013 and eliminate the market basket update for 2012; • DHHS should revise the home health case-mix system to rely on patient characteristics to set payment for therapy and nontherapy services andshould no longer use the number of therapy visits as a payment factor; and • Congress should direct DHHS to establish a per episode copay for home health episodes that are not preceded by hospitalization or post-acute careuse.Nevada MedicaidWe provide services pursuant to an agreement with the State of Nevada Division of Health Care Financing and Policy under Nevada Medicaid’sPersonal Care Options program. Under this agreement, we identify consumers through community outreach efforts, who are then qualified by the State ofNevada to receive services. We provide personal care and other in-home supportive services under this program. All services are reimbursed on an hourly feefor service basis.Riverside County Department of Public Social ServicesWe provide services pursuant to an agreement with the County of Riverside, California under its In-Home Support Services Program. Under thisagreement, we serve consumers referred to us by County employed social workers in accordance with the term and conditions of a Quality Assurance WorkPlan. We provide personal care and other assistance with activities of daily living under this program. All services are reimbursed on an hourly fee for servicebasis. The current agreement has a term of three years beginning July 1, 2009 and is subject to annual renewal by the County Board of Supervisors. We havesubmitted a proposal for continued services for an additional 1 to 3 year term beginning on July 1, 2011. This proposal is a competitive bid and has beensubmitted to the County of Riverside purchasing department and is currently in the county review process. A tentative decision regarding the proposedagreement is expected on approximately May 15, 2011 with a final approval by the County Board shortly thereafter.We have similar county sponsored agreements with other California counties including Butte, San Mateo and Santa Barbara counties.Our arrangements with all of our California county payors are not exclusive in nature. Rather, each county is permitted to contract for services fromindependent providers with a registry of independent providers managed by the county authority. The independent provider programs represent a competitivethreat to us but we believe independent providers do not provide the level of management or supervision that the counties or the individuals receiving serviceswould have if the contract were with us.Private DutyOur private duty services are provided on an hourly basis. Our rates are established to achieve a pre-determined gross profit margin, and are competitivewith those of other local providers. We bill our private duty consumers for services rendered either bi-monthly or monthly, and in certain circumstances weobtain a two-week deposit from the consumer. Other private duty payors include workers’ compensation programs/insurance, preferred provider organizationsand other managed care companies and employers. 11Table of ContentsCommercial InsuranceMost long-term care insurance policies contain benefits for in-home services, home health care and adult day care. Policies are generally subject to dollarlimitations on the amount of daily, weekly or monthly coverage provided. Depending on the type of service, coverage for services may be predicated on aphysician determination that the care is necessary or on the development of a plan for care in the home.Other Federal, State and Local PayorsMedicaid Funded Programs and Medicaid Waiver ProgramsMedicaid is a state-administered program that provides certain social and medical services to qualified low-income individuals, and is jointly funded bythe federal government and individual states. Reimbursement rates and methods vary by state and service type, but are typically based on an hourly or unit-of-service basis. Rates are subject to adjustment based on statutory and regulatory changes, administrative rulings, government funding limitations andinterpretations of policy by individual state agencies. Within guidelines established by federal statutes and regulations, each state establishes its own eligibilitystandards, determines the type, amount, duration and scope of services, sets the rate of payment for services and administers its own program, subject tofederal oversight. Most states cover Medicaid beneficiaries for intermittent home health services, as well as continuous services for children and young adultswith complicated medical conditions, and certain states cover home and community-based services.Veterans Health AdministrationThe Veterans Health Administration operates the nation’s largest integrated health care system, with more than 1,400 sites of care, and provides healthcare benefits to eligible military veterans. The Veterans Health Administration provides funding to regional and local offices and facilities that support the in-home care needs of eligible aged and disabled veterans by contracting directly with local in-home care providers, and to the aid and attendance pension, whichpays veterans for their otherwise unreimbursed health and long-term care expenses. We currently have relationships and agreements with the Veterans HealthAdministration to provide such services in Illinois, Arkansas and California.Veterans Deserve ProgramOur Veterans Deserve program is an educational and advocacy program directed towards low-income veterans and their surviving spouses requiring in-home assistance with long-term care. A Veterans Deserve consumer applies for and receives an increase in his or her funded benefits from the Veterans HealthAdministration to cover his or her costs for in-home assistance. The consumer then pays us directly for services received as a private pay consumer.OtherOther sources of funding are available to support homecare services in different states and localities. In addition, many states appropriate general fundsor special use funds through targeted taxes or lotteries to finance homecare services for senior citizens and people with disabilities. Depending on the state, thesefunds may be used to supplement existing Medicaid waiver programs or for distinct programs that serve non-Medicaid eligible consumers.Government RegulationOverviewOur business is subject to extensive and increasing federal, state and local regulation. Changes in the law or new interpretations of existing laws mayhave a dramatic effect on the definition of permissible activities, the 12Table of Contentsrelative cost of doing business, and the methods and amounts of payment for care by both governmental and other payors. Departments of the federalgovernment are currently considering how to implement programs and policy changes and mandated demonstration projects in the Health Reform Act.Congress expects that the changes in the Health Reform Act will decrease overall Medicare spending in the next ten years from what it was expected to be beforepassage of the Health Reform Act. As a result of the Health Reform Act the number of Medicaid beneficiaries will increase as planned by the law and inaddition, there may be additional increases if employers terminate their employee health plans. It is impossible to know at this time what effect, if any, thiswill have on budgetary allocations for our services. Even prior to the passage of the Health Reform Act, Medicaid authorities and state legislatures werereviewing and assessing alternative health care delivery systems and payment methodologies. The health care industry has experienced, and is expected tocontinue to experience, extensive and dynamic change. In addition, differences among state laws may impede our ability to expand into certain markets. If wefail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability toparticipate in federal or state programs.Medicaid and Medicare ParticipationTo participate in and qualify for reimbursement under Medicaid programs, we are subject to various requirements imposed by federal and stateauthorities. We must comply with regulations promulgated by the DHHS in order to participate in the Medicare program and receive payments. If we were toviolate the applicable federal and state regulations, we could be excluded from participation in federal and state healthcare programs and be subject tosubstantial civil and criminal penalties.Patient Protection and Affordable Care ActOn March 23, 2010, the President signed into law the Health Reform Act . The Health Reform Act includes several provisions that may affectreimbursement for home health agencies. Congress directed the Secretary of DHHS to develop a program for value-based purchasing for payments to homehealth agencies. The program is intended to include development of measures of quality and efficiency, reporting, collection and validation of qualitymeasures, methods for disclosure of performance information and any other issues the Secretary of DHHS deems appropriate. The Health Reform Act alsocreates within CMS a Center for Medicare and Medicaid Innovation, or CMMI, to test innovative payment and service delivery systems to reduce programexpenditures while maintaining or enhancing quality. Among the issues that are to be addressed by CMMI are: allowing the states to test new models of care forindividuals dually eligible for Medicare and Medicaid, supporting “continuing care hospitals” that offer post acute care during the 30 days followingdischarge, funding home health providers that offer chronic care management services, and establishing pilot programs that bundle acute care hospitalservices with physician services and post-acute care services, including home health services for patients with certain selected conditions. We may havedifficulty negotiating for a fair share of the bundled payment. In addition, we may be unfairly penalized if a consumer is readmitted to the hospital within 30days of discharge for reasons beyond our control.The Health Reform Act is currently the subject of more than 20 constitutional challenges in federal courts. Some federal courts have upheld theconstitutionality of the Health Reform Act or dismissed cases on procedural grounds. Others have held that the requirement that individuals maintain healthinsurance or pay a penalty to be unconstitutional and have either found the Health Reform Act void in its entirety or left the remainder of the law intact. Theselawsuits are subject to appeal and several are on appeal. In addition, there have been efforts in Congress to repeal or amend the Health Reform Act. It is difficultto predict the impact of the Health Reform Act due to its complexity, lack of implementing regulations or interpretive guidance, gradual or potentially delayedimplementation, pending court challenges and possible amendment or repeal, as well as our inability to foresee how individuals and businesses will respond tothe choices afforded them by the law.The Health Reform Act mandates a 1% reduction in the market basket update for 2011 and 2012 and a market basket productivity adjustment for 2015and subsequent years. The market basket reductions may result 13Table of Contentsin a negative adjustment. The Health Reform Act reduces total payments for all home health agencies for outliers from 5% to 2.5%, and, in addition,beginning in 2011 caps payments to any one home health agency to no more than 10% of the payments received by the home health agency in a year. It alsorequires CMS to rebase payments for home health services, reducing payments beginning 2013 with a four-year phase-in and full implementation in 2016.Reductions may not exceed 3.5% of the reimbursement in effect on March 23, 2010.Physicians ordering home health services under Medicare and Medicaid are required to have a face-to-face encounter with the patient within a time frameset by the Secretary of the DHHS before ordering the home health service, but a nurse practitioner or clinical nurse specialist working in collaboration with aphysician would be permitted to conduct the face-to-face encounter. These face-to-face meetings are expected to be required for services provided after April 1,2011. A coalition of industry leaders, physician groups and others have requested a suspension of the face-to-face encounter requirement until July 1, 2011.Home health agencies will be required to conduct background checks on all individuals involved in direct care.The Secretary of the DHHS is required to conduct a study to evaluate the quality of care among efficient home health agencies taking into accountseverity of illness, looking at methods to revise payments systems, the validity and reliability of the OASIS instrument, and other areas determinedappropriate by the Secretary of the DHHS, with a report to Congress no later than March 1, 2011. In addition, Congress directed MedPAC to conduct a studyevaluating the effect of rebasing on access to care, quality outcomes, the number of home health agencies, rural agencies, urban agencies, for-profit agenciesand nonprofit agencies, and to deliver a report to Congress no later than 2015. Neither of these studies is supposed to result in a reduction of guaranteed homehealth benefits under Medicare.MedPAC released its March 2011 Report to Congress on March 15, 2011. MedPAC made the following recommendations to Congress: • DHHS, with its Office of Inspector General, should conduct medical review activities in counties that have aberrant home health utilization; • DHHS should implement the new authorities to suspend payment and the enrollment of new providers if they indicate significant fraud; • Congress should direct the DHHS to begin a two-year rebasing of home health rates in 2013 and eliminate the market basket update for 2012; • DHHS should revise the home health case-mix system to rely on patient characteristics to set payment for therapy and nontherapy services andshould no longer use the number of therapy visits as a payment factor; and • Congress should direct DHHS to establish a per episode copay for home health episodes that are not preceded by hospitalization or post-acute careuse.The Secretary of the DHHS is also required to conduct a study on home health costs for providing services to low income Medicare beneficiaries,beneficiaries in medically underserved areas and beneficiaries with varying levels of severity of illness, and may conduct a demonstration project taking intoaccount the results of such study.The Health Reform Act requires states to study the use of technology in providing home health services under a Medicaid plan and improving servicedelivery and coordination across the care continuum (including the use of wireless patient technology to improve coordination and management of care andpatient adherence to recommendations made by their provider). In addition, home health providers will be required as a condition of their Medicaid enrollmentto report to the state regarding measures for determining the quality of services in accordance with requirements set by the DHHS. When appropriate andfeasible, a designated provider is required to use health information technology in providing the State with such information. 14Table of ContentsThe Health Reform Act provides for the appointment of a 15-member Independent Medicare Advisory Board, or IMAB, appointed by the President thatwill have authority to recommend cost cutting measures to Congress to control the growth of Medicare spending, reducing expenditures to certain targetedamounts and other changes to the Medicare program. Congress will be severely limited in its ability to debate or modify recommendations of the IMAB, givingthe IMAB broad powers to reduce Medicare spending and modify the program.The Health Reform Act is broad, sweeping reform, and is subject to change, including through the adoption of related regulations, and the way in whichits provisions are interpreted and the manner in which it is enforced. We cannot assure you that the provisions described above, or that any other provisions ofthe Health Reform Act, will not adversely impact our business, results of operations or financial results. We may be unable to mitigate any adverse effectsresulting from the Health Reform Act.Permits and LicensureHome health agencies operate under licenses granted by the health authorities of their respective states. In addition, certain health care practitionersemployed by our home health services segment require individual state licensure and/or registration and must comply with laws and regulations governingstandards of practice. Our home & community services are authorized and / or licensed under various state and county requirements. Our para-professionalstaff employed by our home & community services segment generally have no licensure requirements. We believe we are currently licensed appropriately whererequired by the laws of the states in which we operate, but additional licensing requirements may be imposed upon us in existing markets or markets that weenter in the future.Certain states carefully restrict expansion by existing providers or entry into the market by new providers and permit such activities only where unmetneed exists resulting either from population increases or a reduction in competing providers. Companies seeking to provide health care services in these statesare required to obtain a certificate of need or permit of approval issued by the state health planning agency. We provide homecare services in many states wherea certificate of need is required for a home health agency to provide Medicare-covered services. We may be unable to obtain certificates of need that may berequired in the future if we expand the scope of our services, if state laws change to impose additional certificate of need requirements or if we expand into newstates that require certificates of need.Federal and State Anti-Kickback LawsFor purposes of the federal health care programs, including Medicaid and Medicare, the federal government enforces the federal Anti-Kickback Law thatprohibits the offer, payment, solicitation or receipt of any remuneration to or from any person or entity to induce or in exchange for the referral of patientscovered by federal health care programs. The federal Anti-Kickback Law also prohibits the purchasing, leasing, ordering or arranging for any item, facility orservice covered by the government payment programs (or the recommendation thereof) in exchange for such referrals. In the absence of an applicable safeharbor that may be available, a violation of the Anti-Kickback Law may occur even if only one purpose of a payment arrangement is to induce patientreferrals. The federal Anti-Kickback Law is very broad in scope and is subject to modifications and differing interpretations. Violations are punishable bycriminal fines, civil penalties, imprisonment or exclusion from participation in reimbursement programs. States, including Illinois, Nevada and California,also have similar laws proscribing kickbacks, some of which are not limited to services for which government-funded payment may be made. As a result ofamendments to the Anti-Kickback Law in the Health Reform Act , it is not necessary to prove either knowledge of the law or the specific intent to violate it inorder to prove liability.Stark LawsWe may also be affected by the federal physician self-referral prohibition, known as the “Stark Law.” The Stark Law prohibits physicians frommaking a referral for certain health care items or services, including home health services, if they, or their family members, have a financial relationship withthe entity receiving the 15Table of Contentsreferral unless the financial relationship meets an exception in the Stark Law or its regulations. No bill may be submitted for reimbursement in connection witha prohibited referral. Violations are punishable by civil monetary penalties on both the person making the referral and the provider rendering the service. Suchpersons or entities are also subject to exclusion from federal and state healthcare programs. We believe our compensation agreements with physicians who serveas medical directors meet the requirements for the personal services exception and that our operations comply with the Stark Law.Many states, including Illinois, Nevada and California, have also enacted statutes similar in scope and purpose to the Stark Law. These state laws maymirror the federal Stark Laws or may be broader in scope, as they generally apply regardless of payor and may apply to other licensed health careprofessionals in addition to physicians. The available guidance and enforcement activity associated with such state laws vary considerably. Some states alsohave laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, if such arrangements are designed toinduce or to encourage the referral of patients to a particular provider.Beneficiary Inducement ProhibitionThe federal Civil Monetary Penalties Law (“CMPL”) imposes substantial penalties for offering remuneration or other inducements to influence federalhealth care beneficiaries’ decisions to seek specific governmentally reimbursable items or services, or to choose particular providers. The CMPL also can beused for civil prosecution of the Anti-Kickback Law. Sanctions under the CMPL include substantial financial penalties as well as exclusion fromparticipation in all federal and state health care programs.The False Claims ActUnder the federal False Claims Act, the government may fine any person, company or corporation that knowingly submits, or participates insubmitting, claims for payment to the federal government which are false or fraudulent, or which contain false or misleading information. Any such person orentity that knowingly makes or uses a false record or statement to avoid paying the federal government may also be subject to fines under the False ClaimsAct. Private parties may initiate whistleblower lawsuits against any person or entity under the False Claims Act in the name of the government and may sharein the proceeds of a successful suit. The penalty for violation of the False Claims Act is a minimum of $5,500 and a maximum of $11,000 for eachfraudulent claim plus three times the amount of damages caused to the government as a result of each fraudulent claim. A False Claims Act violation mayprovide the basis for the imposition of administrative penalties as well as exclusion from participation in governmental health care programs, includingMedicare and Medicaid. In addition to the False Claims Act, the federal government may use several criminal statutes to prosecute the submission of false orfraudulent claims for payment to the federal government.The Fraud Enforcement and Recovery Act, signed by the President in May 2009, expanded the grounds for liability under the False Claims Act byproviding for enforcement against any person or entity that knowingly makes, uses or causes to be made or used, a false record or statement material to a falseor fraudulent claim. The statute’s definition of “claim” makes clear that this includes false records or claims made to the government or to contractors or otherrecipients of federal funds. Further, the new definition of “material” includes statements or records having a natural tendency to influence, or be capable ofinfluencing, the payment or receipt of money or property. The recent amendments clarify that specific intent to defraud the government is not required forliability under the False Claims Act.Amendments to the False Claims Act in the Health Reform Act provide that the government or a whistleblower may bring a False Claims Act case if anarrangement violates either the Anti-Kickback Law or the Stark Law.Many states, including Illinois, Nevada and California, have similar false claims statutes that impose additional liability for the types of acts prohibitedby the False Claims Act. 16Table of ContentsFraud Alerts and Advisory OpinionsFrom time to time, various federal and state agencies, such as the DHHS, issue pronouncements that identify practices that may be subject to heightenedscrutiny, as well as practices that may violate fraud and abuse laws. For example, the Office of Inspector General’s 2010 and 2009 Work Plans describe anumber of issues that are being examined with respect to home health agencies. We believe, but cannot assure you, that our operations comply with theprinciples expressed by the Office of Inspector General in these reports and special fraud alerts.Combating health care fraud and abuse is a priority of President Obama’s administration. For example, in May 2009, the DHHS and the U.S.Department of Justice announced a new and aggressive interagency task force called the Health Care Fraud Prevention and Enforcement Action Team whoseefforts will include, among other things, expansion of strike force teams, assistance with state Medicaid audits, and use of technology to analyze CMS data inreal time. Home health agencies have been a special target of these teams.Health Insurance Portability and Accountability ActHealth Information Privacy and Security StandardsThe Health Insurance Portability and Accountability Act , or HIPAA, privacy regulations contain detailed requirements concerning the use anddisclosure of individually identifiable health information by “HIPAA covered entities,” which includes our company. In addition to the privacy requirements,HIPAA covered entities must implement certain security standards to protect the integrity, confidentiality and availability of certain electronic healthinformation. The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) provisions of the American Recovery andReinvestment Act, or ARRA, which was enacted in February 2009, has imposed additional privacy and security requirements on health care providers and ontheir business associates. The HITECH Act also established certain health information security breach notification requirements which became effectiveFebruary 22, 2010. A covered entity must notify any individual whose protected health information is “breached,” which means an unauthorized acquisition,access, use or disclosure that compromises the security or privacy of the protected health information. If the breach involves the information of 500 or moreindividuals in a single state or jurisdiction, the covered entity must also notify the media of the breach. If the breach involves the information of 500 or moreindividuals from any jurisdiction, the covered entity must also notify the Secretary of the DHHS, who will post notice of the breach on the DHHS website.Covered entities must make annual notification to the Secretary of the DHHS of all impermissible disclosures of protected health information that occurred inthe prior year. Failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.Violations of the HIPAA privacy and security standards may result in civil or criminal penalties depending upon the nature of the violation. TheHITECH Act provides for increased civil penalties for violations under HIPAA. Civil penalties are tiered according to conduct, from $100 per violation with amaximum of $25,000 per year, to the maximum penalty of $50,000 per occurrence and $1.5 million per year. Criminal penalties can apply to employees ofcovered entities or other individuals who knowingly access, use or disclose protected health information for improper purposes with tiered fines of up to$250,000 and imprisonment for up to ten years. The OCR has stepped up enforcement of HIPAA violations and has imposed significant financial and otherpenalties on entities that have violated the law. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.Most states, including Illinois, Nevada and California, also have laws that protect the privacy and security of confidential personal information. Forexample, California’s patient’s medical information regulation imposes penalties of up to $25,000 per patient for an initial occurrence and up to $17,500 persubsequent occurrence. These laws may be similar to or even more protective than the federal provisions. Not only may some of these state laws impose finesand penalties upon violators, but some may afford private rights of action to individuals who believe their personal information has been misused. 17Table of ContentsAnti-Fraud Provisions of HIPAAHIPAA also defines new healthcare fraud crimes to include, among other things, knowingly and willfully attempting to defraud any health care benefitprogram, including as both government and private commercial plans, or knowingly and willfully falsifying or concealing a material fact or making amaterially false or fraudulent statement in connection with claims for health care services. Violation of this statute is a felony and may result in fines,imprisonment and/or exclusion from governmental health care programs.Civil Monetary PenaltiesThe DHHS may impose civil monetary penalties upon any person or entity that presents, or causes to be presented, certain ineligible claims for medicalitems or services. The amount of penalties varies, depending on the offense, from $2,000 to $50,000 per violation plus treble damages for the amount at issueand exclusion from federal health care programs, including Medicare and Medicaid. In addition, persons who have been excluded from the Medicare orMedicaid program may not retain ownership in a participating entity. Participating entities that permit continued ownership by excluded individuals, thatcontract with excluded individuals, and the excluded individuals themselves, may be penalized. Penalties are also applicable in certain other cases, includingviolations of the federal Anti-Kickback Law, payments to limit certain patient services and improper execution of statements of medical necessity.Surveys and AuditsWe are subject to routine and periodic surveys and audits by various governmental agencies and other payors. From time to time, we receive and respondto survey reports containing statements of deficiencies. Periodic and random audits conducted or directed by these agencies could result in a delay in receipt oran adjustment to the amount of reimbursements due or received under federal or state programs. Violation of the applicable federal and state health careregulations can result in excluding a health care provider from participating in the Medicare and/or Medicaid and other federal and state healthcare programsand can subject the provider to substantial civil and/or criminal penalties.Pursuant to the Tax Relief and Health Care Act of 2006, the DHHS created a permanent and national recovery audit program to identify improperMedicare payments made on claims of health care services provided to Medicare beneficiaries. The program uses recovery audit contractors, or RACs, toidentify the improper Medicare payments and protect the Medicare Trust Fund from fraud, waste and abuse. An initial demonstration project implemented inseveral states resulted in the return of over $900 million in overpayments to Medicare between 2005 and 2008. RACs are paid a contingent fee based on theimproper payments identified.Environmental, Health and Safety LawsWe are subject to federal, state and local regulations governing the storage, transport, use and disposal of hazardous materials and waste products. In theevent of an accident involving such hazardous materials, we could be held liable for any damages that result, and any liability could exceed the limits or falloutside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all.Insurance Programs and CostsWe maintain workers’ compensation, general and professional liability, automobile, directors’ and officers’ liability, fiduciary liability and excessliability insurance. We offer various health insurance plans to full-time and part-time employees. We believe our insurance coverage and self-insurance reservesare adequate for our current operations. However, we cannot assure you that any potential losses or asserted claims will not exceed such insurance coverageand self-insurance reserves. 18Table of ContentsEmployeesThe following is a breakdown of our part- and full-time employees who provide home & community services and home health services, as well as theemployees in our National Support Center, as of December 31, 2010: Full-time Part-time Total Segment Employment Home & community services 2,080 9,882 11,962 Home health services 257 955 1,212 National Support Center 98 12 110 Total 2,435 10,849 13,284 Our homecare aides are our employees who provide substantially all of the services provided by our home & community services division. Ourhomecare aides comprise approximately 90% of our total workforce. In most cases, our homecare aides undergo a criminal background check, and areprovided with pre-service training and orientation and an evaluation of their skills. In many cases, homecare aides are also required to attend ongoing in-services education. In certain states, our homecare aides are required to complete certified training programs and maintain a state certification; however, nostate in which we operate requires homecare aides to maintain a license similar to that of a nurse or therapist. Approximately 65% of our total employees arerepresented by labor unions. We maintain strong working relationships with these labor unions.Our TechnologyWe have licensed the Horizon Homecare software solution from McKesson Information Solutions, LLC, or McKesson, to address our administrative,office, clinical and operating information system needs, including compliance with HIPAA requirements and Medicare’s PPS. Horizon Homecare assists ourstaff in gathering information to improve the quality of consumer care, optimize financial performance, adjust consumer mix, promote regulatory complianceand enhance staff efficiency. Horizon Homecare supports intake, personnel scheduling, office clinical and reimbursement management in an integrateddatabase. The Horizon Homecare software is hosted by McKesson in a secure data center, which provides multiple redundancies for storage, power,bandwidth and security. Using this technology, we are able to standardize the care delivered across our network of locations and effectively monitor ourperformance and consumer outcomes. We have also leveraged this technology over the last several quarters for our home & community segment to implement acentralized billing and collections function at our national support center.We have developed internally an innovative and highly scalable customized payroll management system. This system has been utilized for almost tenyears to maintain and produce our payroll. This software is integrated with Horizon Homecare and other clinical data-management systems, and includes afeature for general ledger population, tax reporting, managing wage assignments and garnishments, on-site check printing, direct-deposit paychecks, andcustomizable heuristic analytical controls. Secure management reports are made available centrally and through our internal reporting module. This systemwas designed, and is continually maintained and updated, to satisfy our unique payroll and reporting needs with a minimum amount of operator training andlabor. 19Table of ContentsITEM 1A.RISK FACTORSThe risks described below, and risks described elsewhere in this Form 10-K, could have a material adverse effect on our business andconsolidated financial condition, results of operations and cash flows and the actual outcome of matters as to which forward-looking statements aremade in this Form 10-K. The risk factors described below and elsewhere in this Form 10-K are not the only risks we face. Our business andconsolidated financial condition, results of operations and cash flows may also be materially adversely affected by factors that are not currently knownto us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions.If any of the following risks are actually realized, our business and consolidated financial condition, results of operations and cash flows couldbe materially adversely affected. In that case, the trading price of our common stock could decline.You should refer to the explanation of the qualifications and limitations on forward-looking statements under “Special Caution ConcerningForward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.Changes to Medicaid, Medicaid waiver or other state and local medical and social programs could adversely affect our net service revenues andprofitability.For the year ended December 31, 2010, we derived 80% of our net service revenues from agreements that are directly or indirectly paid for by state andlocal governmental agencies, such as Medicaid funded programs and Medicaid waiver programs. Governmental agencies generally condition their agreementswith us upon a sufficient budgetary appropriation. If a governmental agency does not receive an appropriation sufficient to cover its contractual obligationswith us, it may terminate an agreement or defer or reduce the amount of the reimbursement we receive. Almost all the states in which we operate are facingbudgetary shortfalls due to the current economic downturn and the rising costs of health care, and as a result, have made, are considering or may considermaking changes in their Medicaid, Medicaid waiver or other state and local medical and social programs. The Deficit Reduction Act of 2005 permits states tomake benefit cuts to their Medicaid programs, which could affect the services for which states contract with us. Changes that states have made or mayconsider making to address their budget deficits include: • limiting increases in, or decreasing, reimbursement rates; • redefining eligibility standards or coverage criteria for social and medical programs or the receipt of homecare services under those programs; • increasing the consumer’s share of costs or co-payment requirements; • decreasing the number of authorized hours for recipients; • slowing payments to providers; • increasing utilization of self-directed care alternatives or “all inclusive” programs; or • shifting beneficiaries to managed care programs.Certain of these measures have been implemented by, or are proposed in, states in which we operate. For example, California has considered a number ofproposals, including potential changes in eligibility standards and Illinois has delayed payments to providers. Selected programs in Washington, New Jersey,and Missouri have reduced rates for the fiscal year started July 1, 2010. In 2010, we derived approximately 52% of our total net service revenues from servicesprovided in Illinois, 13% of our total net service revenues from services provided in California, 7.8% of our total net service revenues from services providedin Washington and 5.9% of our total net service revenues from services provided in Nevada. Because a substantial portion of our business is concentrated inthese states, any significant reduction in expenditures that pay for our services in these states and 20Table of Contentsother states in which we do business may have a disproportionately negative impact on our future operating results. Provisions in the Health Reform Actincrease eligibility for Medicaid, which may cause a reallocation of Medicaid funding. It is difficult to predict at this time what the effect of these changeswould be on our business. If changes in Medicaid policy result in a reduction in available funds for the services we offer, our net service revenues could benegatively impacted.All states currently benefit from increased federal matching percentage rates (“FMAP”) granted under the ARRA, which increases the share of federaldollars paid to states for services to Medicaid beneficiaries. The enhanced percentages were set to expire as of December 31, 2010 which would have occurredin the middle of most states’ 2011 fiscal year (July 2010 to June 2011). On August 10, 2010, President Obama signed into law a six-month FMAP extensionthrough June 2011. The law scaled back the FMAP increase from the initial 6.2% to 3.2% for the first quarter (January 2011 through March 2011) and 1.2%for the second quarter (April 2011 through June 2011). Those states with unemployment continue to receive additional percentage points in funding during thesix-month extension. It is difficult to estimate the impact lower FMAP increases will have on state budgets and particularly funding of Medicaid, Medicaidwaiver or other state and local medical and social programs during the extension period and any subsequent changes to FMAP upon the expiration of theextension in June 2011. Because a substantial portion of our business is concentrated in these programs, any significant reduction in expenditures that pay forour services may have a disproportionately negative impact on our future operating results.Changes to eligibility requirements or methods of reimbursement for home health aides in the Illinois Medicaid program could adversely affectour net service revenues and profitability.We derive 42% of our revenue from the Illinois Medicaid program. On January 25, 2011, the governor of Illinois signed into law a comprehensiveMedicaid reform law that is expected to achieve savings of $624 to $774 million over five years. Among other things, subject to federal government approvalthe law expands requirements for coordination of care for Medicaid beneficiaries, tightens the Medicaid eligibility process by requiring greater documentation toestablish eligibility and requirements annual redetermination of eligibility. The law also establishes a moratorium on eligibility expansion and phasing out ofpermitting unpaid bills from one fiscal year to be paid in the following fiscal year. The law also will permit the state to move long-term care patients frominstitutional settings to less expensive community-based care. It is difficult to ascertain at this time what impact, if any, the new law will have on our business.If the law results in individuals having more difficulty in qualifying for the Medicaid program or results in fewer Medicaid beneficiaries qualifying for ourservices it would adversely affect our service revenues and profitability.Delays in reimbursement due to state budget deficits or otherwise have decreased, and may in the future further decrease, our liquidity.There is generally a delay between the time that we provide services and the time that we receive reimbursement or payment for these services. Themajority of the 19 states in which we operate are operating with budget deficits for their current fiscal year. These and other states may in the future delayreimbursement, which would adversely affect our liquidity. Specifically, the State of Illinois is currently reimbursing us on a delayed basis, including withrespect to our agreements with the Illinois Department on Aging, our largest payor, and as a result, our open receivable balance derived from our agreementswith the State of Illinois increased by $4.6 million in 2010. Our reimbursements from the State of Illinois could be further delayed. In addition, from time totime, procedural issues require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Additionally, unanticipated delaysin receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely impact our liquidity and workingcapital. Because we fund our operations primarily through the collection of accounts receivable, any delays in reimbursement would result in the need toincrease borrowings under our credit facility. 21Table of ContentsThe implementation or expansion of self-directed care programs in states in which we operate may limit our ability to increase our marketshare and could adversely affect our revenue.Self-directed care programs are funded by Medicaid and state and local agencies and allow the consumer to exercise discretion in selecting home &community service providers. Consumers may hire family members, friends or neighbors to provide services that might otherwise be provided by a home &community service agency provider, such as our company. Most states and the District of Columbia have implemented self-directed care programs, to varyingdegrees and for different types of consumers. States are under pressure from the federal government and certain advocacy groups to expand these programs.CMS has provided states with specific Medicaid waiver options for programs that offer person-centered planning, individual budgeting or self-directedservices and support as part of the CMS Independence Plus initiative introduced in 2002 under an Executive Order of the President. Certain privatefoundations have also granted resources to states to develop and study programs that provide financial accounts to consumers for their long-term care needs,and counseling services to help prepare a plan of care that will help meet those needs. Expansion of these self-directed programs may erode our Medicaidconsumer base and could adversely affect our net service revenues.Failure to renew a significant agreement or group of related agreements may materially impact our revenue.In 2010, we derived approximately 37.8% of our net service revenues under agreements with the Illinois Department on Aging, 5.4% of our net servicerevenues under an agreement with Nevada Medicaid and 4.4% of our net service revenues under an agreement with the Riverside County (California)Department of Public Social Services. Each of our agreements is generally in effect for a specific term. For example, the services we provide to the IllinoisDepartment on Aging are provided under a number of agreements that expire at various times through 2013, while our agreement with the Riverside CountyDepartment of Public Social Services is reevaluated and subject to renewal annually. Even though our agreements are stated to be for a specific term, they aregenerally terminable by the counterparty upon 60 days’ notice. Our ability to renew or retain our agreements depends on our quality of service and reputation,as well as other factors over which we have little or no control, such as state appropriations and changes in provider eligibility requirements. Additionally,failure to satisfy any of the numerous technical renewal requirements in connection with our proposals for agreements could result in a proposal being rejectedeven if it contains favorable pricing terms. Failure to obtain, renew or retain agreements with major payors may negatively impact our results of operations andrevenue. We can give no assurance these agreements will be renewed on commercially reasonable terms or at all.Our industry is highly competitive, fragmented and market-specific, with limited barriers to entry.We compete with home health providers, private caregivers, larger publicly held companies, privately held homecare companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-based organizations and self-directed care programs. In addition, certaingovernmental payors contract for services with independent providers such that our relationships with these payors are not exclusive, particularly inCalifornia. Our primary competition is from local service providers in the markets in which we operate. Some of our competitors have greater financial,technical, political and marketing resources, name recognition or a larger number of consumers and payors than we do. In addition, some of theseorganizations offer more services than we do in the markets in which we operate. Consumers or referral sources may perceive that local service providers andnot-for-profit agencies deliver higher quality services or are more responsive. These competitive advantages may limit our ability to attract and retain referralsin local markets and to increase our overall market share.There are limited barriers to entry in providing home-based social and medical services, and the trend has been for states to eliminate many of thebarriers that historically existed. For example, Illinois changed the way in which it procures home & community service providers in 2009, allowing allproviders that are willing and capable to obtain state approval and provide services. This may increase competition in that state, and because we derivedapproximately 55% of our home & community net service revenues from services provided in Illinois in 2010, this increased competition could negativelyimpact our business. 22Table of ContentsLocal competitors may develop strategic relationships with referral sources and payors. This could result in pricing pressures, loss of or failure to gainmarket share or loss of consumers or payors, any of which could harm our business. In addition, existing competitors may offer new or enhanced servicesthat we do not provide, or be viewed by consumers as a more desirable local alternative. The introduction of new and enhanced service offerings, incombination with the development of strategic relationships by our competitors, could cause a decline in revenue, a loss of market acceptance of our servicesand a negative impact on our results of operations.We might not be awarded the renewal for our Riverside County Department of Public Social Services contract.We have submitted a proposal to the Riverside County Department of Public Social Services for continued services for an additional 1 to 3 year termbeginning on July 1, 2011. This proposal is a competitive bid and has been submitted to the County of Riverside purchasing department and is currently inthe county review process. Our arrangements with all of our California county payors, including the County of Riverside, are not exclusive in nature. Rather,each county is permitted to contract for services from independent providers with a registry of independent providers managed by the county authority. Theindependent provider programs represent a competitive threat to us. We derived approximately 4.4% of our total 2010 net services revenue from this contractand if we are not awarded the renewal it could negatively impact our business. We cannot assure you that our agreement with the Riverside County Departmentof Public Social Services will be renewed on commercially reasonable terms or at all.Our profitability could be negatively affected by a reduction in reimbursement from Medicare or other payors.For the year ended December 31, 2010, we received approximately 12% of our net service revenues from Medicare. We generally receive fixed paymentsfrom Medicare for our services based on a projection of the services required by our consumers, which is generally based on acuity. For our Medicareconsumers, we typically receive a 60-day episodic-based payment. Although Medicare currently provides for an annual adjustment of payment rates based onthe increase or decrease of the medical care expenditure category of the Consumer Price Index, these rate increases may be less than actual inflation or costs,and could be eliminated or reduced in any given year. The base episode rate for home health services is also subject to an annual market basket adjustment. Amarket basket is a fixed-weight index that measures the cost of a specified mix of goods and services as compared to a base period. The home health marketbasket, which is used to adjust annually the Medicare base episodic rate for home health services, measures inflation or deflation in the prices of a mix ofhome health goods and services. This annual adjustment could also be eliminated or reduced in any given year. The Health Reform Act mandates a 1%reduction in the market basket update for 2011 and 2012 and a market basket productivity adjustment for 2015 and subsequent years. The market basketreductions may result in a negative adjustment. Medicare has in the past reclassified home health resource groups. As a result of reclassifications, we couldreceive lower reimbursement rates depending on the consumer’s case mix and services provided. Medicare reimbursement rates could also decline due to theimposition of co-payments or other mechanisms that shift responsibility for a portion of the amount payable to beneficiaries. Rates could also decline due toadjustments to the wage index. Changes could also occur in the therapy payment thresholds. Our profitability for Medicare reimbursed services largelydepends upon our ability to manage the cost of providing these services. If we receive lower reimbursement rates, or if our cost of providing services increasesby more than the annual Medicare price adjustment, our profitability could be adversely impacted.The amount of reimbursement based on the home health market basket may be reduced with respect to an agency seeking reimbursement if certainrequirements are not met. Reduction in the payments and cost limits for the identified basket of goods based on deflation or failure to meet certain requirementsis referred to in the industry as a market basket reduction. Under the 2010 final regulations, the home health market basket increase will be reduced by twopercentage points to zero if an agency fails to submit certain required quality data. The required quality data consists of a set of data elements that are used toassess outcomes for adult homecare patients, which include, among other things, improvements in ambulation, bathing and surgical wound status. 23Table of ContentsIn its March 2011 report to Congress, MedPAC made several recommendations that could adversely affect the home health industry and potentially ourbusiness, including recommendations that Congress rebase the payment system in a manner that would increase payments for non-therapy services anddecrease payments for therapy services and a recommendation to impose a beneficiary copayment for individuals that do not begin home health servicesfollowing an inpatient stay or a stay in a post acute care facility. The Health Reform Act requires CMS to rebase payments for home health services, reducingpayments beginning in 2013 with a four-year phase-in and full implementation in 2016. On July 23, 2010, CMS published the Proposed 2011 Home HealthPPS Update. A proposed overall reduction in the home health payment base rate of 4.9% included a reduction for each 60-day episode and the conversionfactor for NRS of 3.79%. The 3.79% decrease, which also will be imposed in 2012, is a result of the CMS determination that there has been a general increasein case mix that CMS believes is unwarranted. CMS believes that this “case-mix creep” is due to improved coding, coding practice changes, and otherbehavioral responses to the change in reimbursement that went into effect in 2009, including greater use of high therapy treatment plans above what CMSbelieves is any increase in patient acuity. CMS warned that it will continue to monitor changes in case-mix. If new data identifies additional increases in case-mix, CMS will impose further reductions that will not be phased in over multiple years.In November 2010, CMS released the Final 2011 Home Health PPS Update. There will be a 1.1% market basket increase for 2011 (after application ofthe mandated 1% reduction) and a mandated 3.79% rate reduction. The final 2011 payment base rate reflects a 0.3% decrease from the proposed marketbasket rate in July 2010. CMS announced that it is postponing its proposed 3.79% reduction in home health rates for calendar year 2012 pending its furthermonitoring of case-mix changes. Home health agencies that do not submit required quality data will be subject to a 2% reduction in the market basket update.CMS made some revisions to its proposed regulations regarding face-to-face-encounters. The physician or non-physician practitioner must have a face-to-face encounter with the patient within 90 days of the home health start date. If there is no face-to-face encounter within the 90 day period or if the encounterdid not relate to the reason for home health, a face-to-face encounter must occur within 30 days after the home health start date. CMS emphasized that thecertification must be dated by the physician (not the home health agency) and the patient must be under the care of a physician while receiving home healthservices. But, the face-to-face encounter is only required for the initial certification. The certifying physician may not be the home health agency medicaldirector and the physician or non-physician practitioner may not have a financial relationship with the home health agency. CMS also is requiring that fortherapy services, a qualified therapist (not a therapy assistant) must assess the patient, measure progress, and document progress toward therapy goals at leastonce every 30 days. For patients requiring 13 or 19 therapy visits, the qualified therapist must perform this evaluation at the 13th and 19th therapy visit. Therequirement is relaxed for patients in rural areas, requiring the qualified therapist evaluation any time after the 10th visit and not later than the 13th visit, andafter the 16th therapy visit but not later than the 19th visit. If more than one therapy is furnished, an evaluation must be made by a qualified therapist foreach therapy. The Final 2011 Home Health PPS Update set an effective date for the face-to-face encounter requirement of January 1, 2011. After pleas fromhome health and hospice provider associations, physician groups and others, CMS suspended the requirement until April 1, 2011. These groups have askedfor a further suspension until July 1, 2011. Although a representative from CMS expressed concern about a further suspension, questioning whetherphysicians would be more ready in July than in April, and noting that the requirement is based on a statutory mandate, a leading association of home healthand hospice providers has expressed its belief that “the odds favor” a further extension. We cannot predict whether a suspension of the face-to-face encounterrequirement will be granted.CMS also announced that it is going to assess a variety of home health issues, including the current therapy threshold reimbursement. CMS alsoclarified its rules regarding change of ownership of home health agencies and the 36-month rule. If there is a change of ownership within 36 months ofenrollment in Medicare or within 36 months of a prior change of ownership, the home health agency must undergo a new survey. CMS clarified that indirectownership changes are not subject to the 36-month rule. There are also several exceptions to the 36-month rule but in order to qualify, the home health agencymust have submitted two or more consecutive cost 24Table of Contentsreports (excluding low utilization cost reports or no cost report). Exceptions to the 36-month rule include death of an owner and changes in business structureas long as ownership remains the same.Any reduction in Medicare and Medicaid reimbursements or imposition of copayments that dissuade beneficiary use of our services would materiallyadversely affect our profitability.Private payors, including commercial insurance companies, could also reduce reimbursement. Any reduction in reimbursement from private payorswould adversely affect our profitability.Failure of physicians or non-physician practitioners to have required face-face-encounters could adversely affect our ability to attract newpatients.The Health Reform Act requires a physician or non-physician practitioner to have a face-to-face encounter with each new home health patient. CMS isrequiring an encounter related to the reason for home health services to occur within 90 day prior to the home health start date or within 30 days after the startdate. The face-to-face encounter requirement for home health and hospice providers was to become effective January 1, 2011. However, due to concerns thatsome providers may need additional time to establish operational protocols necessary to comply with face-to-face encounter requirements, CMS delayed fullenforcement of the requirements until the second quarter of 2011. A coalition of home health and hospice provider associations, physician groups and othershave requested a further delay until the third quarter of 2011. CMS has expressed concern over an additional delay and we cannot predict whether one will begranted. Beginning with the second quarter, or possibly the third quarter, CMS will expect home health and hospice agencies to have fully established suchinternal processes and have appropriate documentation of required encounters. If face-to-face encounters become burdensome, some consumers may not be ableto receive home health services, which could have a negative impact on our future operating results.We are subject to extensive government regulation. Changes to the laws and regulations governing our business could negatively impact ourprofitability and any failure to comply with these regulations could adversely affect our business.The federal government and the states in which we operate regulate our industry extensively. The laws and regulations governing our operations, alongwith the terms of participation in various government programs, impose certain requirements on the way in which we do business, the services we offer, andour interactions with consumers and the public. These requirements relate to: • licensure and certification; • adequacy and quality of health care services; • qualifications and training of health care and support personnel; • confidentiality, maintenance and security issues associated with medical records and claims processing; • relationships with physicians and other referral sources; • operating policies and procedures; • addition of facilities and services; and • billing for services.These laws and regulations, and their interpretations, are subject to frequent change. These changes could reduce our profitability by increasing ourliability, increasing our administrative and other costs, increasing or decreasing mandated services, forcing us to restructure our relationships with referralsources and providers or requiring us to implement additional or different programs and systems. Failure to comply could lead to the 25Table of Contentstermination of rights to participate in federal and state-sponsored programs, the suspension or revocation of licenses and other civil and criminal penalties anda delay in our ability to bill and collect for services provided.The Health Reform Act includes several provisions that may affect reimbursement for home health agencies. Congress directed the Secretary of DHHS todevelop a program for value-based purchasing program for payments to home health agencies. The Health Reform Act also creates CMMI, to test payment andservice delivery systems to reduce program expenditures. Among the issues that are to be addressed by CMMI are establishing pilot programs that bundle acutecare hospital services with physician services and post-acute care services, including home health services for patients with certain selected conditions. Wemay have difficulty negotiating for a fair share of the bundled payment. In addition, we may be unfairly penalized if a consumer is readmitted to the hospitalwithin 30 days of discharge for reasons beyond our control. The Health Reform Act also requires CMS to rebase payments for home health services, reducingpayments beginning 2013 with a four-year phase-in and full implementation in 2016. Reductions may not exceed 3.5% of the reimbursement in effect onMarch 23, 2010. The Health Reform Act mandates a 1% reduction in the market basket update for 2011 and 2012 and a market basket productivityadjustment for 2015 and subsequent years. The market basket reductions may result in a negative adjustment. The Health Reform Act reduces total paymentsfor all home health agencies for outliers from 5% to 2.5%, and, in addition, beginning 2011 caps payments to any one home health agency to no more than10% of the payments received by the home health agency in a year. The Health Reform Act provides for the appointment of a 15-member IMAB that will haveauthority to recommend cost cutting measures to Congress to control the growth of Medicare spending, reducing expenditures to certain targeted amounts andother changes to the Medicare program. The IMAB would be appointed by the President. Congress will be severely limited in its ability to debate or modifyrecommendations of the IMAB, giving the IMAB broad powers to reduce Medicare spending and modify the program.The Health Reform Act is broad, sweeping reform, and is subject to change, including through the adoption of related regulations, the way in which itsprovisions are interpreted and the manner in which it is enforced. The Health Reform Act is currently the subject of more than 20 constitutional challenges infederal courts. Some federal courts have upheld the constitutionality of the Health Reform Act or dismissed cases on procedural grounds. Others have held thatthe requirement that individuals maintain health insurance or pay a penalty to be unconstitutional and have either found the Health Reform Act void in itsentirety or left the remainder of the law intact. These lawsuits are subject to appeal and several are on appeal. In addition, there have been efforts in Congress torepeal or amend the Health Reform Act. It is difficult to predict the impact of the Health Reform Act due to its complexity, lack of implementing regulations orinterpretive guidance, gradual or potentially delayed implementation, pending court challenges and possible amendment or repeal, as well as our inability toforesee how individuals and businesses will respond to the choices afforded them by the law. We cannot assure you, however, that the provisions describedabove, or that any other provisions of the Health Reform Act, will not adversely impact our business, results of operations or financial results. We may beunable to mitigate any adverse effects resulting from the Health Reform Act.The HITECH Act established certain health information security breach notification requirements. A covered entity must notify any individual whoseprotected health information is breached. While we believe that we protect individuals’ health information, if our information systems are breached, we mayexperience reputational harm that could adversely affect our business. Recently, the OCR, which is charged with enforcement of HIPAA, has imposedsubstantial fines and compliance requirements on covered entities whose employees improperly disclosed individuals’ health information. Failure to complywith HIPAA and the HITECH Act could result in fines and penalties that could have a material adverse effect on us.MedPAC made the following recommendations to Congress: • DHHS, with its Office of Inspector General, should conduct medical review activities in counties that have aberrant home health utilization; 26Table of Contents • DHHS should implement the new authorities to suspend payment and the enrollment of new providers if they indicate significant fraud; • Congress should direct the DHHS to begin a two-year rebasing of home health rates in 2013 and eliminate the market basket update for 2012; • DHHS should revise the home health case-mix system to rely on patient characteristics to set payment for therapy and nontherapy services andshould no longer use the number of therapy visits as a payment factor; and • Congress should direct DHHS to establish a per episode copay for home health episodes that are not preceded by hospitalization or post-acute careuse.Many of the recommendations made by MedPAC in its March 2011 report to Congress could adversely affect the home health industry and potentiallyour business.We are subject to federal and state laws that govern our employment practices. Failure to comply with these laws, or changes to these laws thatincrease our employment-related expenses, could adversely impact our operations.We are required to comply with all applicable federal and state laws and regulations relating to employment, including occupational safety and healthrequirements, wage and hour requirements, employment insurance and equal employment opportunity laws. These laws can vary significantly among statesand can be highly technical. Costs and expenses related to these requirements are a significant operating expense and may increase as a result of, among otherthings, changes in federal or state laws or regulations requiring employers to provide specified benefits to employees, increases in the minimum wage and localliving wage ordinances, increases in the level of existing benefits or the lengthening of periods for which unemployment benefits are available. We may not beable to offset any increased costs and expenses. Furthermore, any failure to comply with these laws, including even a seemingly minor infraction, can result insignificant penalties which could harm our reputation and have a material adverse effect on our business.In addition, certain individuals and entities, known as excluded persons, are prohibited from receiving payment for their services rendered to Medicaidor Medicare beneficiaries. If we inadvertently hire or contract with an excluded person, or if any of our current employees or contractors becomes an excludedperson in the future without our knowledge, we may be subject to substantial civil penalties, including up to $10,000 for each item or service furnished by theexcluded individual to a Medicare or Medicaid beneficiary, an assessment of up to three times the amount claimed and exclusion from the program.Under the Health Reform Act , beginning in 2014, if we continue to provide a medical plan, we will be required to provide a minimum level of coveragefor all full-time employees. Should any full-time employee receive subsidized coverage through an exchange, we could be liable for an annual penalty equal tothe lesser of $3,000 for each full-time employee receiving subsidized coverage or $2,000 for each of our full-time employees. The impact of these penalties mayhave a significant impact on our profitability.We are subject to reviews, compliance audits and investigations that could result in adverse findings that negatively affect our net servicerevenues and profitability.As a result of our participation in Medicaid, Medicaid waiver, Medicare programs, Veterans Health Administration programs and other state and localgovernmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, audits and investigations by governmentalauthorities and other third parties to verify our compliance with these programs and agreements as well as applicable laws, regulations and conditions ofparticipation. If we fail to meet any of the conditions of participation or coverage, we may receive a notice of deficiency from the applicable surveyor orauthority. Failure to institute a plan of 27Table of Contentsaction to correct the deficiency within the period provided by the surveyor or authority could result in civil or criminal penalties, the imposition of fines orother sanctions, damage to our reputation, cancellation of our agreements, suspension or revocation of our licenses or disqualification from federal and statereimbursement programs. These actions may adversely affect our ability to provide certain services, to receive payments from other payors and to continue tooperate. Additionally, actions taken against one of our locations may subject our other locations to adverse consequences. We may also fail to discover allinstances of noncompliance by our acquisition targets, which could subject us to adverse remedies once those acquisitions are complete. Any termination ofone or more of our locations from the Medicare program or another state or local program for failure to satisfy such program’s conditions of participation couldadversely affect our net service revenues and profitability.Payments we receive in respect of Medicaid and Medicare can be retroactively adjusted after a new examination during the claims settlement process oras a result of pre- or post-payment audits. Federal, state and local government payors may disallow our requests for reimbursement based on determinationsthat certain costs are not reimbursable because proper documentation was not provided or because certain services were not covered or deemed necessary. Inaddition, other third-party payors may reserve rights to conduct audits and make reimbursement adjustments in connection with or exclusive of auditactivities. Significant adjustments as a result of these audits could adversely affect our revenues and profitability.In 2006, the federal government launched a national pilot program utilizing independent contractors known as recovery audit contractors, or RACs, toidentify and recoup Medicare overpayments. RACs are paid a contingent fee based on amounts recouped. An initial demonstration project implemented inseveral states resulted in the return of over $900 million in overpayments to Medicare between 2005 and 2008 from various provider types. California was theonly state in which we operate that participated in the initial pilot program. The RAC program is now permanently implemented in all 50 states. Thisexpansion may lead to an increase in the number of overpayment reviews, more aggressive audits and more claims for recoupment. If future Medicare RACreviews result in significant refund payments, it would have an adverse effect on our financial results.Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreementsand renew existing agreements.Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as a qualityservice provider among governmental authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes, rehabilitationcenters, advocacy groups, consumers and their families, other referral sources and the public. While we believe that the services that we provide are of highquality, if studies mandated by Congress in the Health Reform Act to make public quality measures are implemented and if our quality measures are deemedto be not of the highest value, our reputation could be negatively affected. Negative publicity, changes in public perceptions of our services or governmentinvestigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain new agreements. Increasedgovernment scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services. Any of these eventscould have a negative effect on our business, financial condition and operating results.Our growth strategy depends on our ability to manage growing and changing operations and we may not be successful in managing thisgrowth.Our business plan calls for significant growth in business over the next several years through the expansion of our services in existing markets and theestablishment of a presence in new markets. This growth will place significant demands on our management team, systems, internal controls and financialand professional resources. In addition, we will need to further develop our financial controls and reporting systems to accommodate future growth. This couldrequire us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems andexpanding our information 28Table of Contentstechnology infrastructure. Our inability to effectively manage growth could have a material adverse effect on our financial results.In addition, our growth strategy calls for further development of our consumer-oriented, integrated service delivery model. We may not be successful inimplementing this strategy in each of the markets in which we operate. Additionally, even if this strategy is successfully implemented, integration of servicesmay not lead to growth as anticipated. Furthermore, this strategy could lead to changes that may adversely affect our business, such as altering our mix ofpayors, increasing our exposure to liabilities, increasing the regulations to which we are subject and increasing our overhead.Future acquisitions or start-ups may be unsuccessful and could expose us to unforeseen liabilities.Our growth strategy includes geographical expansion into new markets and the addition of new services in existing markets through the acquisition oflocal homecare service providers. These acquisitions involve significant risks and uncertainties, including difficulties assimilating acquired personnel andother corporate cultures into our business, the potential loss of key employees or consumers of acquired providers, and the assumption of liabilities andexposure to unforeseen liabilities of acquired providers. In the past, we have made acquisitions that have not performed as expected or that we have been unableto successfully integrate with our existing operations. In addition, our due diligence review of acquired businesses may not successfully identify all potentialissues. For example, we were unable to fully integrate one acquired business because we were unable to procure a necessary government endorsement. Thefailure to effectively integrate future acquisitions could have an adverse impact on our operations.In the last three years, in addition to acquisitions, we have grown our business through start-up, or de novo, locations, and we may in the future startup new locations in existing and new markets. Start-ups involve significant risks, including those relating to licensure, accreditation, hiring new personnel,establishing relationships with referral sources and delayed or difficulty in installing our operating and information systems. We may not be successful inestablishing start-up locations in a timely manner due to generating insufficient business activity and incurring higher than projected operating cost that couldhave a material adverse effect on our financial condition, results of operations and cash flows.Effective January 1, 2010, CMS implemented a prohibition of the sale or transfer of the Medicare Provider Agreement for any Medicare-certified homehealth agency that has been in existence for less than 36 months or that has undergone a change of ownership in the last 36 months. CMS clarified its rulesregarding change of ownership of home health agencies and the 36-month rule. If there is a change of ownership within 36 months of enrollment in Medicare orwithin 36 months of a prior change of ownership, the home health agency must undergo a new survey. CMS clarified that indirect ownership changes are notsubject to the 36-month rule. There are also several exceptions to the 36-month rule but in order to qualify, the home health agency must have submitted two ormore consecutive cost reports (excluding low utilization cost reports or no cost report). Exceptions to the 36-month rule include death of an owner and changesin business structure as long as ownership remains the same.These limitations may reduce the number of home health agencies that otherwise would have been available for acquisition and may limit our ability tosuccessfully pursue our acquisition strategy.We may be unable to pursue acquisitions or expand into new geographic regions without obtaining additional capital or consent from ourlenders.At December 31, 2010 and December 31, 2009, we had cash balances of $0.8 million and $0.5 million, respectively. As of December 31, 2010 we had$33.3 million outstanding on our credit facility. After giving effect to the amount drawn on our credit facility, approximately $6.8 million of outstanding lettersof credit and borrowing limits based on an advanced multiple of adjusted EBITDA, we had $13.5 million available for 29Table of Contentsborrowing under the credit facility as of December 31, 2010. Since our credit facility provides for borrowings based on a multiple of an EBITDA ratio, anydeclines experienced in our EBITDA would result in a decrease in our available borrowings under our credit facility.We cannot predict the timing, size and success of our acquisition efforts, our efforts to expand into new geographic regions or the associated capitalcommitments. If we do not have sufficient cash resources or availability under our credit facility, our growth could be limited unless we obtain additionalequity or debt financing. In the future, we may elect to issue additional equity securities in conjunction with raising capital, completing an acquisition orexpanding into a new geographic region. Such issuances would be dilutive to existing shareholders. In addition, our credit facility prohibits us fromconsummating more than three acquisitions in any calendar year, and, in any event, does not permit the purchase price for any one acquisition to exceed$500,000, in each case without the consent of the lenders. The consideration we paid in connection with nine of the 12 acquisitions we completed in the pastfour years exceeded $500,000. In addition, our credit facility requires, among other things, that we are in pro forma compliance with the financial covenantsset forth therein and that no event of default exists before and after giving effect to any proposed acquisition. Our ability to expand in a manner consistent withhistoric practices may be limited if we are unable to obtain such consent from our lenders.Access to additional capital and credit markets, at a reasonable cost, may be necessary for us to fund our operations, including potential acquisitionsand working capital requirements. We currently rely on one financial institution for funding under our credit facility and any instability in the financialmarkets or the negative impact of local, national and worldwide economic conditions on that financial institution could impact our short and long-termliquidity needs to meet our business requirements.Our business may be harmed by labor relations matters.We are subject to a risk of work stoppages and other labor relations matters because our hourly workforce is highly unionized. As of December 31,2010, approximately 65% of our hourly workforce was represented by two national unions, including the Service Employees International Union, which isour largest union. Our local labor agreements will be negotiated as they expire, which will occur at various times through 2011. Upon expiration of thesecollective bargaining agreements, we may not be able to negotiate labor agreements on satisfactory terms with these labor unions. A strike, work stoppage orother slowdown could result in a disruption of our operations and/or higher ongoing labor costs, which could adversely affect our business. Labor costs arethe most significant component of our total expenditures and, therefore, an increase in the cost of labor could significantly harm our business.Migration of our consumers to Medicare managed care providers could negatively impact our operating results.Historically, we have generated a substantial portion of our net service revenues from Medicare and certain other payors on an episodic, prospectivebasis. Under the Medicare Prescription Drug Improvement and Modernization Act of 2003, the United States Congress allocated significant additional fundsand other incentives to Medicare managed care providers in order to promote greater participation in those plans by Medicare beneficiaries. These managed careproviders typically reimburse us after services are provided, and then on a fee-for-service or per visit basis. Our margins on services provided to managed careproviders are lower than our margins on services provided on an episodic basis and paid for on a prospective basis. If these allocations of funds have theintended result, our margins could decline, which could cause our operating results to suffer.We are subject to federal and state laws that govern our financial relationships with physicians and other health care providers, includingpotential or current referral sources.We are required to comply with federal and state laws, generally referred to as “anti-kickback laws,” that prohibit certain direct and indirect paymentsor other financial arrangements that are designed to encourage the 30Table of Contentsreferral of patients to a particular medical services provider. In addition, certain financial relationships, including ownership interests and compensationarrangements, between physicians and providers of designated health services, such as our company, to whom those physicians refer patients, are prohibitedby the Stark Law and similar state laws. Under both the anti-kickback laws and the Stark Law, there are a number of safe harbors and exceptions that permitcertain carefully constrained relationships. For example, we currently utilize the personal services exception to the Stark Law for our contractual relationshipswith certain physicians who provide medical director services to our company and who are current or potential referral sources. Courts or regulatory agenciesmay interpret the federal Anti-Kickback Laws , the Stark Law and similar state laws regulating relationships between health care providers and physicians inways that will implicate our business. Provisions in the Health Reform Act make it easier to prosecute an Anti-Kickback Law violation as it is no longernecessary for the government to prove that a person had the specific intent to violate the statute. The Health Reform Act permits the government or awhistleblower to file an action under the False Claims Act if there an arrangement that violates the Anti-Kickback Law or the Stark Law. In addition, theDHHS may withhold payments if it believes in its discretion that there is credible evidence of fraud. Violations of these laws could lead to fines and exclusionsor other sanctions that could have a material adverse effect on our business.We are required to comply with laws governing the transmission of privacy of health information.HIPAA requires us to comply with standards for the exchange of health information within our company and with third parties, such as payors,business associates and consumers. These include standards for common health care transactions, such as claims information, plan eligibility, paymentinformation, the use of electronic signatures, unique identifiers for providers, employers, health plans and individuals and security, privacy and enforcement.The HITECH Act amended HIPAA to impose new requirements for protecting the privacy and security of individuals’ health information, requirements tonotify individuals and in some circumstances the media if there is a breach of individuals’ health information, and imposed a four-tier system of enhancedfinancial penalties. We could be subject to criminal penalties and civil sanctions if we fail to comply with these standards. New standards and regulationsmay be adopted governing the use, disclosure and transmission of health information with which we may be required to comply.New standards and regulations may be adopted governing the use, disclosure and transmission of health information with which we may be required tocomply. We could be subject to criminal penalties and civil sanctions if we fail to comply with these standards.Our operations subject us to risk of litigation.Operating in the homecare industry exposes us to an inherent risk of wrongful death, personal injury, professional malpractice and other potentialclaims or litigation brought by our consumers and employees. Because we operate in this industry, from time to time, we are subject to claims alleging that wedid not properly treat or care for a consumer that we failed to follow internal or external procedures that resulted in death or harm to a consumer or that ouremployees mistreated our consumers, resulting in death or harm. We are also subject to claims arising out of accidents involving vehicle collisions brought byconsumers whom we are transporting or from employees driving to or from home visits. We operate five adult day centers which provide transportation for ourelderly and disabled consumers. Each of our vehicles transports seven to 14 passengers to and from our locations. The concentration of consumers in onevehicle increases the risk of larger claims being brought against us in the event of an accident.In addition, regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our services and seekto impose monetary penalties on us. We could be required to pay substantial amounts to respond to regulatory investigations or, if we do not prevail, damagesor penalties arising from these legal proceedings. We also are subject to potential lawsuits under the False Claims Act or other federal and state whistleblowerstatutes designed to combat fraud and abuse in our industry. These lawsuits can involve significant monetary awards or penalties which may not be coveredby our insurance. If our third-party 31Table of Contentsinsurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results ofoperations and financial condition. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract management from runningour business or irreparably damage our reputation.Our insurance liability coverage may not be sufficient for our business needs.Although we maintain insurance consistent with industry practice, the insurance we maintain may not be sufficient to satisfy all claims made againstus. For example, we have a $350,000 deductible per person/per occurrence under our workers’ compensation insurance program. We cannot assure you thatclaims will not be made in the future in excess of the limits of our insurance, and any such claims, if successful and in excess of such limits, may have amaterial adverse effect on our business or assets. We utilize historical data to estimate our reserves for our insurance programs. If losses on asserted claimsexceed the current insurance coverage and accrued reserves, our business, results of operations and financial condition could be adversely affected. Changes inour annual insurance costs and self-insured retention limits depend in large part on the insurance market, and insurance coverage may not continue to beavailable to us at commercially reasonable rates, in adequate amounts or on satisfactory terms.Inclement weather or natural disasters may impact our ability to provide services.Inclement weather may prevent our employees from providing authorized services. We are not paid for authorized services that are not delivered due tothese weather events. Furthermore, prolonged inclement weather or the occurrence of natural disasters in the markets in which we operate could disrupt ourrelationships with consumers, employees and referral sources located in affected areas and, in the case of our corporate office, our ability to provideadministrative support services, including billing and collection services. For example, our corporate headquarters and a number of our agencies are located inthe Midwestern United States and California, increasing our exposure to blizzards and other major snowstorms, ice storms, tornados, flooding andearthquakes. Future inclement weather or natural disasters may adversely affect our business and consolidated financial condition, results of operations andcash flows.Our business depends on our information systems. Our operations may be disrupted if we are unable to effectively integrate, manage andmaintain the security of our information systems.Our business depends on effective and secure information systems that assist us in, among other things, gathering information to improve the quality ofconsumer care, optimizing financial performance, adjusting consumer mix, monitoring regulatory compliance and enhancing staff efficiency. We rely on anexternal service provider, McKesson, to provide continual maintenance, upgrading and enhancement of our primary information systems used for ouroperational needs. The software we license from McKesson supports intake, personnel scheduling, office clinical and centralized billing and receivablesmanagement in an integrated database, enabling us to standardize the care delivered across our network of locations and monitor our performance andconsumer outcomes. To the extent that McKesson becomes insolvent or fails to support the software or systems, or if we lose our license with McKesson, ouroperations could be negatively affected. We also depend upon a proprietary payroll management system that includes a feature for general ledger population, taxreporting, managing wage assignments and garnishments, on-site check printing, direct-deposit paychecks and customizable heuristic analytical controls. Ifwe experience a reduction or interruption in the performance, reliability or availability of our information systems, or fail to restore our information systemsafter such a reduction or interruption, our operations and ability to produce timely and accurate reports could be adversely affected. Because of the confidentialhealth information and consumer records we store and transmit, loss of electronically-stored information for any reason could expose us to a risk of regulatoryaction, litigation and liability. 32Table of ContentsThe agreements that govern our credit facility contain various covenants that limit our discretion in the operation of our business.Our credit facility agreement requires us to comply with customary financial and non-financial covenants. The financial covenants require us tomaintain a maximum fixed charge ratio and a maximum leverage ratio, and limit our capital expenditures. Our credit facility also includes non-financialcovenants including restrictions on our ability to: • transfer assets, enter into mergers, make acquisitions or experience fundamental changes; • make investments, loans and advances; • incur additional indebtedness and guarantee obligations; • create liens on assets; • enter into affiliate transactions; • enter into transactions other than in the ordinary course of business; • incur capital lease obligations; and • make capital expenditures.The restrictions in our credit facility impose significant operating and financial restrictions on our ability to take actions that may be in our bestinterests.Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of control or otherbusiness combination or otherwise cause us to take action with which you might not agree.Eos Capital Partners III, L.P. and Eos Partners SBIC III, L.P., or the Eos Funds, together beneficially own approximately 37.4% of our outstandingcommon stock. As a result, the Eos Funds have the ability to significantly influence all matters submitted to our stockholders for approval, including: • changes to the composition of our board of directors, which has the authority to direct our business and appoint and remove our officers; • proposed mergers, consolidations or other business combinations; and • amendments to our certificate of incorporation and bylaws which govern the rights attached to our shares of common stock.In addition, two of our directors are affiliated with the Eos Funds.This concentration of ownership of shares of our common stock could delay or prevent proxy contests, mergers, tender offers, open-market purchaseprograms or other purchases of shares of our common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing marketprice of our common stock. The interests of the Eos Funds may not always coincide with the interests of the other holders of our common stock. Thisconcentration of ownership may also adversely affect our stock price.We may not be able to attract, train and retain qualified personnel.We must attract and retain qualified personnel in the markets in which we operate in order to provide our services. We compete for personnel with otherproviders of social and medical services as well as companies in other service-based industries. Competition may be greater for skilled personnel, such asregional and agency directors, therapists and registered nurses. Our ability to attract and retain personnel depends on several factors, including our ability toprovide employees with attractive assignments and competitive benefits and salaries. We 33Table of Contentsare continuing to build our executive management team by searching for a replacement for our division leader in our home health services division. Aconsultant has been engaged to oversee our home health services operations on an interim basis until a permanent replacement is hired. The loss of one or moreof the members of the executive management team or the inability of a new management team to successfully execute our strategies may adversely affect ourbusiness. If we are unable to attract and retain qualified personnel, we may be unable to provide our services, the quality of our services may decline, and wecould lose consumers and referral sources.We may be more vulnerable to the effects of a public health catastrophe than other businesses due to the nature of our consumers.The majority of our consumers are older individuals with complex medical challenges, many of whom may be more vulnerable than the general publicduring a pandemic or in a public health catastrophe. Our employees are also at greater risk of contracting contagious diseases due to their increased exposure tovulnerable consumers. For example, if a flu pandemic were to occur, we could suffer significant losses to our consumer population or a reduction in theavailability of our employees and, at a high cost, be required to hire replacements for affected workers. Accordingly, certain public health catastrophes couldhave a material adverse effect on our financial condition and results of operations.We depend on the services of our executive officers and other key employees.Our success depends upon the continued employment of certain members of our senior management team. We also depend upon the continuedemployment of the individuals that manage several of our key functional areas, including operations, business development, accounting, finance, humanresources, marketing, information systems, contracting and compliance. The departure of any member of our senior management team may materiallyadversely affect our operations.If we were required to write down all or part of our goodwill and/or our intangible assets, our net earnings and net worth could be materiallyadversely affected.Goodwill and intangible assets with finite lives represent a significant portion of our assets. We had $63.9 million of goodwill and $13.6 million ofintangible assets recorded on our consolidated balance sheet at December 31, 2010. Goodwill represents the excess of cost over the fair market value of netassets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, itmight indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. We also perform an annual reviewof our goodwill and intangible assets to determine if they have become impaired which would require us to write down the impaired portion of these assets. Ifwe were required to write down all or a significant part of our goodwill and/or intangible assets, our net earnings and net worth could be materially adverselyaffected.The market price of our common stock may be volatile and this may adversely affect our stockholders.The price at which our common stock trades may be volatile. The stock market has recently experienced significant price and volume fluctuations thathave affected the market prices of all securities, including securities of health care companies. The market price of our common stock may be influenced bymany factors, including: • our operating and financial performance; • variances in our quarterly financial results compared to expectations; • the depth and liquidity of the market for our common stock; • we have a small base of registered shares of common stock consisting of the 5.4 million shares we issued in our IPO, which representsapproximately 50% of our total common shares outstanding, that 34Table of Contents could result in significant stock price movements upward or downward based on low levels of trading volume in our common stock; • future sales of common stock or the perception that sales could occur; • investor perception of our business and our prospects; • developments relating to litigation or governmental investigations; • changes or proposed changes in health care laws or regulations or enforcement of these laws and regulations, or announcements relating to thesematters; or • general economic and stock market conditions.In addition, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operatingperformance of homecare companies. These broad market and industry factors may materially reduce the market price of our common stock, regardless ofour operating performance. In the past, securities class-action litigation has often been brought against companies following periods of volatility in the marketprice of their respective securities. We may become involved in this type of litigation in the future. Litigation of this type is often expensive to defend and maydivert our management team’s attention as well as resources from the operation of our business.We do not anticipate paying dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return onyour investment will depend solely on appreciation in the price of our common stock.We do not pay dividends on our shares of common stock and intend to retain all future earnings to finance the continued growth and development of ourbusiness and for general corporate purposes. In addition, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Anyfuture payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our board ofdirectors.If securities or industry analysts fail to publish research or reports about our business or publish negative research or reports, or our resultsare below analysts’ estimates, our stock price and trading volume could decline.The trading market for our common stock may depend in part on the research and reports that industry or securities analysts publish about us or ourbusiness. We do not have any control over these analysts. If analysts fail to publish reports on us regularly or at all, we could fail to gain visibility in thefinancial markets, which in turn could cause our stock price or trading volume to decline. If one or more analysts do cover us and downgrade their evaluationsof our stock or our results are below analysts’ estimates, our stock price would likely decline. In addition, due to the small number of analysts covering us, asingle comment or report from one of the analysts whether positive or negative, could result in a significant increase or decrease in our stock price.Provisions in our organizational documents and Delaware law could delay or prevent a change in control of our company, which couldadversely affect the price of our common stock.Provisions in our amended and restated certificate of incorporation and bylaws and anti-takeover provisions of the Delaware General Corporation Law,could discourage, delay or prevent an unsolicited change in control of our company, which could adversely affect the price of our common stock. Theseprovisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of the board ofdirectors. Provisions in our amended and restated certificate of incorporation and bylaws that could delay or prevent an unsolicited change in control include: • a staggered board of directors; 35Table of Contents • limitations on persons authorized to call a special meeting of stockholders; and • the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholderapproval.As a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. This section generally prohibits us from engaging inmergers and other business combinations with stockholders that beneficially own 15% or more of our voting stock, or with their affiliates, unless ourdirectors or stockholders approve the business combination in the prescribed manner. However, because the Eos Funds acquired their shares prior to ourinitial public offering completed on November 2, 2009, Section 203 is currently inapplicable to any business combination with the Eos Funds or theiraffiliates. In addition, our amended and restated bylaws require that any stockholder proposals or nominations for election to our board of directors must meetspecific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations.If we fail to achieve and maintain effective internal control over financial reporting, our business and stock price could be adversely impacted.Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires our management to report on, and may require our independentpublic accounting firm to attest to, the effectiveness of our internal controls over financial reporting. It is likely that we will not be required to comply with thereporting requirements under Section 404(b) of the Sarbanes-Oxley Act in the 2011 calendar year since our public float is currently significantly below the$75.0 million threshold for becoming an accelerated filer. Compliance with SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Actrequires annual management assessments of the effectiveness of our internal control over financial reporting. This requirement increases our legal and financialcompliance costs, makes some activities more difficult, time-consuming or costly and may also place strain on our personnel, systems and resources.Compliance with public reporting and Sarbanes-Oxley Act requirements will require us to build out our compliance, accounting and finance staff. Inconnection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficienciesor material weaknesses that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with therequirements of Section 404. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officersand employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not,however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produceaccurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, ifwe fail to satisfy the requirements of Section 404 on a timely basis, we could be subject to regulatory scrutiny and sanctions, our ability to raise capital couldbe impaired, investors may lose confidence in the accuracy and completeness of our financial reports and our stock price could be adversely affected. Inaddition, we could have undetected internal control weaknesses and deficiencies if we are not required to comply with Section 404(b) of the Sarbanes-OxleyAct, which would not subject us to the requirement for our independent public accounting firm to attest to the effectiveness of our internal controls overfinancial reporting.Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges forour management team.Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform andConsumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty forpublic companies and significantly increased the costs and risks associated with accessing the U.S. public markets. We are committed to maintaining highstandards of internal controls over financial reporting, corporate governance and public 36Table of Contentsdisclosure. As a result, we intend to continue to invest appropriate resources to comply with evolving standards, and this investment has resulted and willlikely continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activitiesto compliance activities.Declines in earnings could create future liquidity problems.The availability of funds under the revolving credit portion of our credit facility is based on the lesser of (i) the product of adjusted EBITDA, asdefined, for the most recent 12-month period multiplied by the specified advance multiple, up to 3.0, less the outstanding senior indebtedness and letters ofcredit or (ii) $55.0 million less the outstanding revolving loans and letters of credit. As of December 31, 2010 our total availability under our credit facilitywas $13.5 million. The current Federal and state economic and reimbursement environments and state budgetary pressures to decrease or eliminate services weprovide could negatively affect our future earnings. This decrease in earnings would reduce the availability of funds under our credit facility which could havea negative impact on our future operating results. ITEM 2.PROPERTIESWe do not own any real property. As of December 31, 2010, we operated at 128 leased properties including our National Support Center. Home &community services are operated out of 94 of these facilities, while home health services are operated out of 33 of these facilities. We lease approximately20,847 square feet of an office building in Palatine, Illinois, which serves as our corporate headquarters, from a member of our board of directors and theformer Chairman of Addus HealthCare. ITEM 3.LEGAL PROCEEDINGSAs previously disclosed, on March 26, 2010, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois onbehalf of a class consisting of all persons or entities who purchased or otherwise acquired our common stock between October 27, 2009 and March 18, 2010,in connection with our IPO. The Complaint, which was amended on August 10, 2010, asserts claims against us and individual officers and directorspursuant to Sections 11 and 15 of the Securities Act of 1933 and alleges, inter alia, that our registration statement was materially false and/or omitted thefollowing: (1) that our accounts receivable included at least $1.5 million in aging receivables that should have been reserved for; and (2) that our home healthsegment’s revenues were falling short of internal forecasts due to a slowdown in admissions from our integrated services program due to the State of Illinois’effort to develop new procedures for integrating care. A motion to dismiss the Complaint was filed on behalf of the defendants on September 20, 2010. We andthe other defendants have denied and continue to deny all charges of wrongdoing or liability arising out of any conduct, statements, acts or omissions allegedin the Complaint.In addition, on April 16, 2010, Robert W. Baird & Company, on behalf of the underwriters of the IPO, notified us that the underwriters are seekingindemnification in respect of the above-referenced action pursuant to the underwriting agreement entered into in connection with the IPO.As previously reported, on March 21, 2011, we and the other named defendants entered into a stipulation of settlement with the plaintiffs with respect tothe class action, pursuant to which we are to cause $3,000,000 to be paid into a settlement fund. The monetary amount of this settlement is covered byinsurance.On March 22, 2011, the United States District Court for the Northern District of Illinois preliminarily approved the settlement and scheduled a July 21,2011 hearing to consider, among other things, whether to finally approve the settlement of the class action. If the settlement is given final approval by thecourt, the class action will be dismissed with prejudice.The effectiveness of the stipulation of settlement and the settlement incorporated therein is conditioned on the following remaining conditions: (i) the courtfinally approving the settlement, (ii) any judgment of dismissal 37Table of Contentsentered by the court becoming final and (iii) any judgment of dismissal entered in the derivative action described below becoming final. There can be noassurance the settlement will be approved or become effective.As previously disclosed, on November 1, 2010, a shareholder derivative action was filed by a shareholder on behalf of Holdings in the Circuit Court ofCook County, Illinois by Paul Wes Bockley, an alleged shareholder of Holdings. The complaint asserts claims against certain of our individual officers anddirectors, and against Holdings as a nominal defendant, for breach of fiduciary duty, corporate waste and unjust enrichment based, inter alia, on allegedmaterial misstatements and omissions in the registration statement relating to our IPO. The alleged misstatements and omissions are essentially the same asthose asserted in class action litigation, discussed above.As previously reported, on March 21, 2011, we and the other defendants entered into a stipulation of settlement with the plaintiff with respect to theshareholder derivative action, pursuant to which we have agreed to cause the plaintiff’s counsel’s fees and expenses in an amount up to and including$200,000 to be paid. In addition, we have agreed to adopt certain corporate governance measures. The monetary amount of this settlement is covered byinsurance.The shareholder derivative action settlement remains subject to preliminary and final approval by the court. A motion for preliminary approval of theshareholder derivative action settlement is scheduled to be heard by the court on March 31, 2011.The effectiveness of the stipulation of settlement and the settlement incorporated therein is conditioned upon the following remaining conditions: (i) thecourt preliminarily and finally approving the settlement, (ii) any judgment of dismissal entered by the court becoming final and (iii) any judgment ofdismissal entered in the class action described above becoming final. If the settlement is given final approval by the Derivative Action Court, the DerivativeAction will be dismissed with prejudice. There can be no assurance that the settlement will be approved or become effective.Illinois Attorney General’s Health Care Bureau and Military & Veterans Rights Bureau served a Civil Investigative Demand (“CID”) on AddusHealthCare in early November 2010. The CID sought information concerning our Veterans Deserve program. While the CID primarily sought generalinformation regarding our administration of the program, there were specific details sought concerning certain individuals.We submitted our response to the CID on January 7, 2011. On February 15, 2011, the Assistant Attorney General issued a Supplemental CID, whichcontained a written complaint from individuals in the program. The Supplemental CID seeks additional information concerning the administration of theprogram and many of the questions appear to be tailored to respond to specific complaints contained in this latest complaint. We are cooperating with theinvestigation and are in the process of preparing a response to the Supplemental CID.From time to time, we are subject to claims and suits arising in the ordinary course of our business, including claims for damages for personal injuries.In our management’s opinion, the ultimate resolution of any of these pending claims and legal proceedings will not have a material adverse effect on ourfinancial position or results of operations. ITEM 4.RESERVED 38Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESMarket InformationOur common stock has been trading on The Nasdaq Global Market under the symbol “ADUS” since our IPO on October 27, 2009. Prior to that time,there was no public market for our common stock. The holders of our common stock are entitled to one vote per share on any matter to be voted upon bystockholders. All shares of common stock rank equally as to voting and all other matters. The table below sets forth the high and low sales prices for ourcommon stock, as reported by The Nasdaq Global Market, for each of the periods indicated. High Low 2010 Fourth Quarter $4.63 $2.80 Third Quarter 5.89 3.75 Second Quarter 6.28 4.64 First Quarter 9.72 5.52 2009 Fourth Quarter $9.50 $7.52 Third Quarter — — Second Quarter — — First Quarter — — HoldersAs of March 15, 2011, there were 20 holders of record of our common stock.DividendsHistorically, we have not paid dividends on our common stock, and we currently do not intend to pay any dividends on our common stock. Wecurrently plan to retain any earnings to support the operation, and to finance the growth, of our business rather than to pay cash dividends. Payments of anycash dividends in the future will depend on our financial condition, results of operations and capital requirements as well as other factors deemed relevant byour board of directors. Our credit facility restricts our ability to declare or pay any dividend or other distribution unless no default then exists or would occuras a result thereof, and we are in pro forma compliance with the financial covenants contained in our credit facility after giving effect thereto. 39Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following table sets forth selected financial information derived from our consolidated financial statements for the periods and at the dates indicated.The information is qualified in its entirety by and should be read in conjunction with the consolidated financial statements and related notes includedelsewhere in this Annual Report on Form 10-K. Successor (5) Predecessor (5) 2010 2009 2008 2007 September 19,2006 toDecember 31,2006 January 1,2006 toSeptember 18,2006 Consolidated Statements of Income Data: Net service revenues (1) $271,732 $259,305 $236,306 $194,567 $52,256 $125,927 Cost of service revenues 191,853 182,693 167,254 139,268 36,767 91,568 Gross profit 79,879 76,612 69,052 55,299 15,489 34,359 General and administrative expenses (3)(7) 63,841 59,924 52,112 44,233 11,764 28,391 Depreciation and amortization (2) 4,046 4,913 6,092 6,029 1,919 439 Total operating expenses 67,887 64,837 58,204 50,262 13,683 28,830 Operating income 11,992 11,775 10,848 5,037 1,806 5,529 Interest expense, Net (3) 3,004 6,773 5,755 4,808 1,327 650 Income from continuing operations before income taxes 8,988 5,002 5,093 229 479 4,879 Income tax expense (2) 2,960 1,400 1,070 32 82 434 Net income from continuing operations 6,028 3,602 4,023 197 397 4,445 Discontinued operations: Income from discontinued operations, net of tax expense of $36in the period from January 1, 2006 to September 18, 2006and net of tax benefit of $10 in 2005 — — — — — 366 Net income 6,028 3,602 4,023 197 397 4,811 Less: Preferred stock dividends, undeclared subject to paymentupon conversion; declared and converted in November 2009 — (5,387) (4,270) (3,882) (1,070) — Net income (loss) attributable to common shareholders $6,028 $(1,785) $(247) $(3,685) $(673) $4,811 Basic income (loss) per common share: From continuing operations $0.57 $(0.66) $(0.24) $(3.62) $(0.66) $4,115.78 From discontinued operations — — — — — 339.28 Basic earnings per common share $0.57 $(0.66) $(0.24) $(3.62) $(0.66) $4,455.06 Diluted income (loss) per common share: From continuing operations $0.57 $(0.66) $(0.24) $(3.62) $(0.66) $4,115.78 From discontinued operations — — — — — 339.28 Diluted earnings per common share $0.57 $(0.66) $(0.24) $(3.62) $(0.66) $4,455.06 Weighted average number of common shares and potentialcommon shares outstanding: Basic 10,604 2,707 1,019 1,019 1,019 1 Diluted 10,606 2,707 1,019 1,019 1,019 1 40Table of Contents Successor Predecessor 2010 2009 2008 2007 September 19,2006 toDecember 31,2006 January 1,2006 toSeptember 18,2006 Operational Data: General: Adjusted EBITDA (in thousands) (4) $16,293 $16,985 $17,212 $12,010 $3,939 $6,334 States served at period end 19 16 16 14 12 12 Locations at period end 129 122 122 104 92 93 Employees at period end 13,284 12,559 12,137 10,797 9,440 9,439 Home & Community Data: Average weekly census 20,878 20,182 19,432 17,117 16,275 16,044 Billable hours (in thousands) 13,132 12,835 12,139 10,421 2,864 6,798 Billable hours per business day 51,905 50,333 47,418 40,867 39,778 37,352 Revenues per billable hour $16.81 $16.37 $15.57 $14.36 $13.88 $13.88 Home Health Data: Average weekly census: Medicare 1,485 1,427 1,270 1,130 1,114 1,187 Non-Medicare 1,491 1,528 1,413 1,435 1,442 1,389 Medicare admissions (6) 8,330 7,734 7,232 6,223 1,690 4,516 Medicare revenues per episode completed $2,634 $2,569 $2,606 $2,563 $2,534 $2,534 Percentage of Revenues by Payor: State, local or other governmental 80% 81% 82% 81% 80% 80% Medicare 12 12 12 13 14 14 Other 8 7 6 6 6 6 Successor 2010 2009 2008 2007 2006 Consolidated Balance Sheet Data: Cash $816 $518 $6,113 $21 $3 Accounts receivable, net of allowances 70,954 70,491 49,237 43,330 36,325 Goodwill and intangibles 77,500 72,564 64,961 63,158 55,530 Total assets 166,924 161,315 135,748 118,656 100,911 Total debt 45,185 49,239 63,176 54,653 44,818 Stockholders’ equity 88,091 80,567 34,575 34,550 37,291 (1)Acquisitions completed in 2010 included $5.7 million of growth in net service revenues for the year ended December 31, 2010 compared to the yearended December 31, 2009. Acquisitions completed in 2008 included in 2009 accounted for $5.2 million of growth in net service revenues for the yearended December 31, 2009 compared to the year ended December 31, 2008. Acquisitions completed in 2008 and the results for the first twelve months of2007 acquisitions included in 2008 accounted for $24.6 million of the growth in net service revenues for the year ended December 31, 2008 compared tothe year ended December 31, 2007. Acquisitions completed in 2007 accounted for $4.2 million of the growth in net service revenues for the year endedDecember 31, 2007 compared to the combined net service revenues for the periods from January 1, 2006 to September 18, 2006 and fromSeptember 19, 2006 to December 31, 2006. (2)The September 19, 2006 acquisition of Addus HealthCare by Holdings resulted in a stepped-up basis of the assets of the successor compared to thepredecessor. In addition, the predecessor filed as an S corporation with earnings for federal and for selected state taxes passed through to eachshareholder’s tax return, while the successor files as a C corporation with earnings for federal and state purposes taxed at the company level. (3)During 2009 we incurred one-time charges relating to our IPO which included $1.2 million of separation costs related to the former Chairman of AddusHealthCare which was charged to general and administrative expenses; a charge to interest expense pursuant to the contingent payment agreement inwhich an amount equal to $12.7 million was paid upon the completion of our IPO , of which $1.8 million 41Table of Contents was deemed interest expense; and the write-off of $0.8 million in unamortized debt issuance costs relating to our former credit facility that was chargedto interest expense. (4)We define Adjusted EBITDA as net income plus depreciation and amortization, net interest expense, income tax expense and stock-based compensationexpense. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with GAAP. It should not be consideredin isolation or as a substitute for net income, operating income or any other measure of financial performance calculated in accordance with GAAP.Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating our operating performance for the followingreasons: • By reporting Adjusted EBITDA, we believe that we provide investors with insight and consistency in our financial reporting and present a basisfor comparison of our business operations between current, past and future periods. Adjusted EBITDA allows management, investors and othersto evaluate and compare our core operating results, including return on capital and operating efficiencies, from period to period, by removing theimpact of our capital structure (interest expense), asset base (amortization and depreciation), tax consequences and non-cash stock-basedcompensation expense from our results of operations, and also facilitates comparisons with the core results of our public company peers. • Our change from S-corporation status to C-corporation status for Federal income tax purposes on September 19, 2006 resulted in fluctuations inour tax expense or benefit unrelated to our results of operations. • We believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance ofother public companies, and therefore may be useful as a means of comparison with those companies, when viewed in conjunction withtraditional GAAP financial measures. • We adopted ASC Topic 718 “Share-Based Payment,” on September 19, 2006, the effective date of our 2006 Stock Incentive Plan (the “2006Plan”), and recorded stock-based compensation expense of $0.3 million, $0.3 million, $0.3 million, and $0.9 million for the years endedDecember 31, 2010, 2009, 2008 and 2007, respectively. We recorded stock-based compensation of $0.2 million for the period fromSeptember 19, 2006 through December 31, 2006. This fluctuation in expense primarily resulted from one option grant in 2006 with a one-yearvesting period, with other option grants being subject to five-year vesting periods. By comparing our Adjusted EBITDA in different periods, ourinvestors can evaluate our operating results without the additional variations caused by stock-based compensation expense, which is notcomparable from year to year due to differing vesting periods and is a non-cash expense that is not a key measure of our operations.In addition, management has chosen to use Adjusted EBITDA as a performance measure because the amount of non-cash expenses, such asdepreciation, amortization and stock-based compensation expense, may not directly correlate to the underlying performance of our businessoperations, and because such expenses can vary significantly from period to period as a result of new acquisitions, full amortization ofpreviously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be. This facilitates internalcomparisons to historical operating results, as well as external comparisons to the operating results of our competitors and other companies in thehomecare industry. Because management believes Adjusted EBITDA is useful as a performance measure, management uses Adjusted EBITDA: • as one of our primary financial measures in the day-to-day oversight of our business to allocate financial and human resources across ourorganization, to assess appropriate levels of marketing and other initiatives and to generally enhance the financial performance of our business; • in the preparation of our annual operating budget, as well as for other planning purposes on a quarterly and annual basis, including allocations inorder to implement our growth strategy, to determine appropriate levels of investments in acquisitions and to endeavor to achieve strong coreoperating results; 42Table of Contents • to evaluate the effectiveness of business strategies, such as the allocation of resources between our divisions, the mix of organic growth andacquisitive growth and adjustments to our payor mix; • as a means of evaluating the effectiveness of management in directing our core operating performance, which we consider to be performance thatcan be affected by our management in any particular period through their allocation and use of resources that affect our underlying revenue andprofit-generating operations during that period; • for the valuation of prospective acquisitions, and to evaluate the effectiveness of integration of past acquisitions into our company; and • in communications with our board of directors concerning our financial performance.Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA haslimitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reportedunder GAAP. Some of these limitations include: • Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect interest expense or interest income; • Adjusted EBITDA does not reflect cash requirements for income taxes; • although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future,and Adjusted EBITDA does not reflect any cash requirements for these replacements; and • other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.Management compensates for these limitations by using GAAP financial measures in addition to Adjusted EBITDA in managing the day-to-day andlong-term operations of our business. We believe that consideration of Adjusted EBITDA, together with a careful review of our GAAP financial measures, isthe most informed method of analyzing our company.The following table sets forth a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA: Successor Predecessor Year Ended December 31, September 19,2006 toDecember 31,2006 January 1,2006 toSeptember 18,2006 2010 2009 2008 2007 (in thousands) Reconciliation of Adjusted EBITDA to net income: Net income $6,028 $3,602 $4,023 $197 $397 $4,811 Net interest expense 3,004 6,773 5,755 4,808 1,327 650 Income tax expense 2,960 1,400 1,070 32 82 434 Depreciation and amortization 4,046 4,913 6,092 6,029 1,919 439 Stock-based compensation expense 255 297 272 944 214 — Adjusted EBITDA (7) $16,293 $16,985 $17,212 $12,010 $3,939 $6,334 43Table of Contents(5)Holdings was incorporated in Delaware on July 27, 2006 and acquired Addus HealthCare on September 19, 2006. Holdings is a holding company andhas no material assets other than all of the capital stock of Addus HealthCare. The application of purchase accounting rules to the financial statementsof Holdings resulted in different accounting bases from Addus HealthCare and, accordingly, different financial information for the periods beginning onor after September 19, 2006. We refer to Holdings and its subsidiaries, including Addus HealthCare, following the acquisition, as the successor forpurposes of the presentation of the financial information below. We refer to Addus HealthCare prior to its acquisition by Holdings as the predecessor forpurposes of the presentation of the financial information.The selected historical consolidated statements of income data for the fiscal years ended December 31,2010, 2009, and 2008 and the balance sheet dataas of December 31, 2010 and 2009, were derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form10-K. The selected historical consolidated statements of income data for the periods year ended December 31, 2007, January 1, 2006 throughSeptember 18, 2006 and September 19, 2006 through December 31, 2006, and the balance sheet data as of December 31,2008, 2007 and 2006, werederived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. (6)Medicare admissions represents the aggregate number of new cases approved for Medicare services during a specified period. (7)Adjusted EBITDA for 2009 includes a $1.2 million charge related to the separation agreement with the former Chairman of Addus HealthCare. 44Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in thisAnnual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differmaterially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report onForm 10-K.OverviewWe are a comprehensive provider of a broad range of social and medical services in the home. Our services include personal care and assistance withactivities of daily living, skilled nursing and rehabilitative therapies, and adult day care. Our consumers are individuals with special needs who are at risk ofhospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmentalagencies, commercial insurers, and private individuals. We provide our services through over 129 locations across 19 states to over 27,000 consumers.We operate our business through two segments, home & community services and home health services. Our home & community services are social, ornon-medical, in nature and include assistance with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of dailyliving. We provide home & community services on a long-term, continuous basis, with an average duration of 20 months per consumer. Our home healthservices are primarily medical in nature and include physical, occupational and speech therapy, as well as skilled nursing. We generally provide home healthservices on a short-term, intermittent or episodic basis to individuals recovering from an acute medical condition, with an average length of care of 80 days.The comprehensive nature of our social and medical services enables us to maintain a long-term relationship with our consumers as their needs changeover time and provides us with diversified sources of revenue. To meet our consumers’ changing needs, we utilize an integrated service delivery modelapproach that allows our consumers to access social and medical services from one homecare provider and appeals to referral sources who are seeking aprovider with a breadth of services, scale and systems to meet consumers’ needs effectively. Our integrated service delivery model enables our consumers toaccess services from both our home & community services and home health services divisions, thereby receiving the full spectrum of their social and medicalhomecare service needs from a single provider. Our integrated service model is designed to reduce service duplication, which lowers health care costs, enhancesconsumer outcomes and satisfaction and lowers our operating costs, as well as drives our internal growth strategy. In our target markets, our care and servicecoordinators work with our caregivers, consumers and their providers to review our consumers’ current and anticipated service needs and, based on thiscontinuous review, identify areas of service duplication or new service opportunities.Our ability to grow our net service revenues is closely correlated with the number of consumers to whom we provide our services. Our continued growthdepends on our ability to maintain our existing payor client relationships, establish relationships with new payors, enter into new contracts and increase ourreferral sources. Our continued growth is also dependent upon the authorization by state agencies of new consumers to receive our services. We believe there areseveral market opportunities for growth. The U.S. population of persons aged 65 and older is growing, and the U.S. Census Bureau estimates that thispopulation will more than double by 2050. Additionally, we believe the overwhelming majority of individuals in need of care generally prefer to receive care intheir homes or community-based settings. Finally, we believe the provision of home & community services is more cost-effective than the provision of similarservices in an institutional setting for long-term care.We have historically grown our business primarily through organic growth, complemented with selective acquisitions. Our home & community segmentacquisitions have been focused on facilitating entry into new states such as New Jersey, Idaho, Nevada, North Carolina, South Carolina and Georgia, whereasour home health 45Table of Contentssegment acquisitions have been focused on complementing our existing home & community business in Idaho, Indiana and South Carolina, enabling us toprovide a more comprehensive range of services in those locations. Acquisitions in the home health segment, while not significant, reflect our goal of being acomprehensive provider of both home & community and home health services in the markets in which we operate.On July 26, 2010, we entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which we acquired the operations and certainassets of Advantage Health Systems, Inc., a South Carolina corporation (“Advantage”). Advantage is a provider of home & community, home health andhospice services in South Carolina and Georgia, which expanded our services across 19 states. The total consideration payable pursuant to the PurchaseAgreement was $8.3 million, comprised of $5.1 million in cash, common stock consideration with a deemed value of $1.2 million resulting in the issuance of248,000 common shares, a maximum of $2.0 million in future cash consideration subject to the achievement of certain performance targets set forth in anearn-out agreement and the assumption of certain specified liabilities.On November 2, 2009, we completed our IPO consisting of the sale of 5,400,000 shares of common stock at $10.00 per share. After deducting theunderwriters’ discounts and transaction fees and expenses, the net proceeds to us from the sale of shares in the IPO were $47.5 million. Transaction costsrelated to the IPO of $2.7 million were charged directly to additional paid-in capital.In March 2010, the President signed into law the Health Reform Act, which includes several provisions that may affect reimbursement for home healthagencies. The Health Reform Act is broad, sweeping reform, and is subject to change, including through the adoption of related regulations, the way in whichits provisions are interpreted and the manner in which it is enforced. We cannot assure you that the provisions of the Health Reform Act will not adverselyimpact our business, results of operations or financial position. We may be unable to mitigate any adverse effects resulting from the Health Reform Act.On July 14, 2010, the OCR published proposed regulations to implement the Health Information Technology for Economic and Clinical Health Act.Failure to comply with Health Insurance Portability and Accountability Act, or HIPAA, could result in fines and penalties that could have a material adverseeffect on the Company. Recently, the OCR has imposed substantial financial and other penalties on covered entities that improperly disclosed individuals’health information.On July 23, 2010, CMS published the Proposed 2011 Home Health PPS Update. A proposed overall reduction in the home health payment base rate of4.9% included a reduction for each 60-day episode and the conversion factor for NRS of 3.79%. The 3.79% decrease, which also will be imposed in 2012, isa result of the CMS determination that there has been a general increase in case mix that CMS believes is unwarranted. CMS believes that this “case-mixcreep” is due to improved coding, coding practice changes, and other behavioral responses to the change in reimbursement that went in to effect in 2009,including greater use of high therapy treatment plans above what CMS believes is related to an increase in patient acuity. CMS warned that it will continue tomonitor changes in case-mix. If new data identifies additional increases in case-mix, CMS will immediately impose further reductions. The Health Reform Actrequires a physician certifying a patient for home health services to document that the physician or a non-physician practitioner under the direction of thephysician has had a face-to-face encounter with the patient. In CMS’s 2011 Proposed Home Health Rule, CMS proposed regulations that would require theface-to-face encounter to take place within thirty days of the home health start date. An additional face-to-face encounter within two weeks of the start datewould be required if the original face-to-face encounter did not primarily relate to the reason for the home health services.On November 3, 2010, CMS released its Final 2011 Home Health PPS Update. There will be a 1.1% market basket increase for 2011 (after applicationof the mandated 1% reduction) and a mandated 3.79% rate reduction. The final 2011 payment base rate reflects a 0.3% decrease from the proposed marketbasket rate in July 2010. CMS announced that it is postponing its proposed 3.79% reduction in home health rates for calendar year 2012 pending its furthermonitoring of case-mix changes. Home health agencies that do not submit required quality data will be subject to a 2% reduction in the market basket update. 46Table of ContentsCMS made some revisions to its proposed regulations regarding face-to-face-encounters. The physician or non-physician practitioner must have a face-to-face encounter with the patient within 90 days of the home health start date. If there is no face-to-face encounter within the 90 day period or if the encounterdid not relate to the reason for home health, a face-to-face encounter must occur within 30 days after the home health start date. CMS emphasized that thecertification must be dated by the physician (not the home health agency) and the patient must be under the care of a physician while receiving home healthservices. But, the face-to-face encounter is only required for the initial certification. The certifying physician may not be the home health agency medicaldirector and the physician or non-physician practitioner may not have a financial relationship with the home health agency. The Final 2011 Home Health PPSUpdate provided that the face-to-face-encounter requirement would be effective January 1, 2011. In December 2010, in response to requests from home healthand hospice provider associations, physician groups and others, CMS announced a suspension of the requirement until April 1, 2011. These groups haverequested another suspension until July 1, 2011. CMS has expressed concern about granting another extension. Although a leading home heath and hospiceprovider association has expressed it’s believe that “the odds favor” a further extension, we cannot predict whether an extension of the face-to-face encounterrequirement will be granted.CMS also is requiring that for therapy services, a qualified therapist (not a therapy assistant) must assess the patient, measure progress, and documentprogress toward therapy goals at least once every 30 days. For patients requiring 13 or 19 therapy visits, the qualified therapist must perform this evaluation atthe 13th and 19th therapy visit. The requirement is relaxed for patients in rural areas, requiring the qualified therapist evaluation any time after the 10th visitand not later than the 13th visit, and after the 16th therapy visit but not later than the 19th visit. If more than one therapy is furnished, an evaluation must bemade by a qualified therapist for each therapy.CMS also announced that it is going to assess a variety of home health issues, including the current therapy threshold reimbursement. CMS alsoclarified its rules regarding change of ownership of home health agencies and the 36-month rule. If there is a change of ownership within 36 months ofenrollment in Medicare or within 36 months of a prior change of ownership, the home health agency must undergo a new survey. CMS clarified that indirectownership changes are not subject to the 36-month rule. There are also several exceptions to the 36-month rule but in order to qualify, the home health agencymust have submitted two or more consecutive cost reports (excluding low utilization cost reports or no cost report). Exceptions to the 36-month rule includedeath of an owner and changes in business structure as long as ownership remains the same. 47Table of ContentsSegmentsWe operate our business through two segments, home & community services and home health services. We have organized our internal managementreports to align with these segment designations. As such, we have identified two reportable segments, home & community and home health, applying thecriteria in ASC 280, “Disclosure about Segments of an Enterprise and Related Information”. The following table presents our locations by segment, settingforth acquisitions, start-ups and closures for the period January 1, 2008 to December 31, 2010: Home &Community HomeHealth Total Total at January 1, 2008 75 29 104 Acquired 16 2 18 Start-up 2 1 3 Closed/Merged (2) (1) (3) Total at December 31, 2008 91 31 122 Start-up 3 — 3 Closed/Merged (2) (1) (3) Total at December 31, 2009 92 30 122 Acquired 8 3 11 Start-up 3 — 3 Closed/Merged (7) — (7) Total at December 31, 2010 96 33 129 As of December 31, 2010, we provided our services through 129 locations across 19 states. As part of our comprehensive service model, we haveintegrated and provide both home & community and home health services in nine states.Our payor clients are principally federal, state and local governmental agencies. The federal, state and local programs under which they operate aresubject to legislative, budgetary and other risks that can influence reimbursement rates. Our commercial insurance carrier payor clients are typically for profitcompanies and are continuously seeking opportunities to control costs. We are seeking to grow our private duty business in both of our segments.For 2010, 2009, and 2008, our payor revenue mix by segment was as follows: Home & Community 2010 2009 2008 State, local and other governmental programs 94.2% 95.8% 96.9% Commercial 0.8 0.5 0.1 Private duty 5.0 3.7 3.0 100.0% 100.0% 100.0% Home Health 2010 2009 2008 Medicare 64.1% 61.3% 58.3%State, local and other governmental programs 19.4 21.0 23.4 Commercial 10.0 10.8 11.4 Private duty 6.5 6.9 6.9 100.0% 100.0% 100.0% 48Table of ContentsWe also measure the performance of each segment using a number of different metrics. For our home & community segment, we consider billable hours,billable hours per business day, revenues per billable hour and the number of consumers, or census. For our home health segment, we consider Medicarecensus, non-Medicare census, Medicare admissions and Medicare revenues per episode completed.We derive a significant amount of our net service revenues from our operations in Illinois and California, which represented 52% and 13%; 49% and16%; and 46% and 18% of our total net service revenues for the years ended December 31, 2010, 2009 and 2008, respectively.A significant amount of our net service revenues are derived from two specific payor clients. The Illinois Department on Aging, in the home &community segment, and Medicare, in the home health segment, accounted for 38% and 12%; 34% and 12%; and 32% and 12% of our total net servicerevenues for the years ended December 31, 2010, 2009 and 2008, respectively.Components of our Statements of IncomeNet Service RevenuesWe generate net service revenues by providing our home & community services and home health services directly to consumers. We receive payment forproviding such services from our payor clients, including federal, state and local governmental agencies, commercial insurers and private individuals.Home & community segment revenues are typically generated on an hourly basis. Our home & community segment revenues were generated principallythrough reimbursements by state, local and other governmental programs which are partially funded by Medicaid or Medicaid waiver programs, and to alesser extent from private duty and insurance programs. Net service revenues for our home & community segment are principally provided based onauthorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and recognized as net servicerevenues at the time services are rendered.Home health segment revenues are primarily generated on a per episode or visit basis rather than on a flat fee or an hourly basis. Our home healthsegment revenues are generated principally through reimbursements by the Medicare program, and to a lesser extent from Medicaid and Medicaid waiverprograms, commercial insurers and private duty. Net service revenues from home health payors, other than Medicare, are readily determinable and recognizedas net service revenues at the time the services are rendered. Medicare reimbursements are based on 60-day episodes of care. The anticipated net servicerevenues from an episode are initially recognized as accounts receivable and deferred revenues and subsequently amortized as net service revenues ratably overthe 60-day episodic period. At the end of each episode of care, a final claim billing is submitted to Medicare and any changes between the initial anticipated netservice revenues and final claim billings are recorded as an adjustment to net service revenues. For open episodes, we estimate net service revenues based onhistorical data and adjust for the difference between the initial anticipated net service revenues and the ultimate final claim amount.Cost of Service RevenuesWe incur direct care wages, payroll taxes and benefit-related costs in connection with our employees providing our home & community and home healthservices. We also provide workers’ compensation and general liability coverage for these employees.Employees are also reimbursed for their travel time and related travel costs. For home health services, we provide medical supplies and occasionally hirecontract labor services to supplement existing staffing in order to meet our consumers’ needs.General and Administrative ExpensesOur general and administrative expenses consist of expenses incurred in connection with our segments’ activities and as part of our centraladministrative functions. 49Table of ContentsOur general and administrative expenses for home & community and home health services consist principally of supervisory personnel, carecoordination and office administration costs. Our general and administrative expenses for home health also include additional staffing for clinical andadmissions processing. These expenses consist principally of wages, payroll taxes and benefit-related costs; facility rent; operating costs such as utilities,postage, telephone and office expenses; and bad debt expense.Our corporate general and administrative expenses cover the centralized administrative departments of accounting, information systems, humanresources, billing and collections and contract administration, as well as national program coordination efforts for marketing and private duty. These expensesprimarily consist of compensation, including stock-based compensation, payroll taxes, and related benefits; legal, accounting and other professional fees;rents and related facility costs; and other operating costs such as software application costs, software implementation costs, travel, general insurance andbank account maintenance fees.Depreciation and Amortization ExpensesWe amortize our intangible assets with finite lives, consisting of trade names, trademarks and non-compete agreements, principally on acceleratedmethods based upon their estimated useful lives. Depreciable assets at the segment level consist principally of furniture and equipment, and for the home &community segment, also include vehicles for our adult day centers.A substantial portion of our capital expenditures is infrastructure-related or for our corporate office. Corporate asset purchases consist primarily ofnetwork administration and telephone equipment, operating system software, furniture and equipment. Depreciable and leasehold assets are depreciated oramortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms.Interest ExpenseOur interest bearing obligations consist principally of our credit facility, dividend notes, notes payable in respect of acquisitions and a derivativefinancial instrument that did not qualify as an accounting hedge under ASC Topic 815, “ Accounting for Derivative Instruments and Hedging Activities ”.As such, material changes in the value of the instrument are included in interest expense in any given period.Income Tax ExpenseAll of our income is from domestic sources. We incur state and local taxes in states in which we operate. The differences from the federal statutory rateof 34% are principally due to state taxes and the use of federal employment tax credits.Preferred Stock Dividends, Undeclared Subject to Payment Upon ConversionPrior to the completion of our IPO, we had 37,750 shares of series A preferred stock issued and outstanding, all of which were converted into shares ofour common stock on November 2, 2009. Shares of our series A preferred stock accumulated dividends each quarter at a rate of 10%, compounded annually.We accrued these undeclared dividends because the holders had the option to convert their shares of series A preferred stock into common stock at any timewith the accumulated dividends payable in cash or a note payable. Our series A preferred stock was converted into 4,077,000 shares of common stock inconnection with the completion of our IPO on November 2, 2009. We paid $0.2 million of the $13.1 million outstanding accumulated dividends as ofNovember 2, 2009 with the remaining $12.9 million being converted into 10% junior subordinated promissory notes, which we refer to as the dividend notes.The dividend notes were amended on March 18, 2010 as described below in “Liquidity and Capital Resources”. 50Table of ContentsResults of OperationsYear Ended December 31, 2010 Compared to Year Ended December 31, 2009The following table sets forth, for the periods indicated, our consolidated results of operations. 2010 2009 Change Amount % ofNet ServiceRevenues Amount % ofNet ServiceRevenues Amount % (in thousands, except percentages) Net service revenues: Home & Community $220,752 81.2% $210,107 81.0% $10,645 5.1% Home Health 50,980 18.8 49,198 19.0 1,782 3.6 Total 271,732 100.0 259,305 100.0 12,427 4.8 Operating income before corporate expenses: Home & Community 22,685 10.3 20,397 9.7 2,288 11.2 Home Health 5,308 10.4 6,752 13.7 (1,444) (21.4)Total 27,993 10.3 27,149 10.5 844 3.1 Corporate general and administrative expenses 15,279 5.6 14,585 5.6 694 4.8 Corporate depreciation and amortization 722 0.3 789 0.3 (67) (8.5)Total operating income 11,992 4.4 11,775 4.5 217 1.8 Interest expense, net 3,004 1.1 6,773 2.6 (3,769) (55.6) Income from operations before taxes 8,988 3.3 5,002 1.9 3,986 79.7 Income tax expense 2,960 1.1 1,400 0.5 1,560 (111.4) Net income 6,028 2.2 3,602 1.4 2,426 67.4 Less: Preferred stock dividends, undeclared subject to paymentupon conversion; declared and converted in November 2009 — — (5,387) (2.1) 5,387 100.0 Net income (loss) attributable to common shareholders $6,028 2.2% $(1,785) (0.7)% $7,813 437.7% Our net service revenues increased by $12.4 million, or 4.8%, to $271.7 million for 2010 compared to $259.3 million for 2009. This increaserepresents 5.1% growth in home & community net service revenues and 3.6% growth in home health net service revenues. Home & community revenuegrowth was driven by an increase in service hours provided, program rate increases and revenues attributable to the acquisition of Advantage on July 26,2010. Our home health growth in revenue in 2010 was primarily due to an increase in Medicare revenue reflecting an increase of 7.7% in Medicare admissionsand the revenue contribution from the acquisition of Advantage. This increase was partially off-set by a decrease in non-Medicare census relating to state, localand other governmental programs.Total operating income, expressed as a percentage of net service revenues, for the year ended December 31, 2010 and 2009, was 4.4% and 4.5%,respectively. 51Table of ContentsHome & Community SegmentThe following table sets forth, for the periods indicated, a summary of our home & community segment’s results of operations through operatingincome, before corporate expenses: 2010 2009 Change Amount % of NetServiceRevenues Amount % of NetServiceRevenues Amount % (in thousands, except percentages) Net service revenues $220,752 100.0% $210,107 100.0% $10,645 5.1% Cost of service revenues 164,636 74.6 156,623 74.5 8,013 5.1 Gross profit 56,116 25.4 53,484 25.5 2,632 4.9 General and administrative expenses 30,745 13.9 29,732 14.2 1,013 3.4 Depreciation and amortization 2,686 1.2 3,355 1.6 (669) (19.9)Operating income $22,685 10.3% $20,397 9.7% $2,288 11.2% Segment Data: Billable hours (in thousands) 13,132 12,835 297 2.3% Billable hours per business day 51,905 50,333 1,572 3.1% Revenues per billable hour $16.81 $16.37 $0.44 2.7% Average weekly census 20,878 20,182 696 3.4% Net service revenues from state, local and other governmental programs accounted for 94.2% and 95.8% of home & community net service revenues forthe year ended December 31, 2010 and 2009, respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net servicerevenues.Net service revenues increased $10.6 million, or 5.1%, to $220.8 million for the year ended December 31, 2010 compared to $210.1 million for the yearended December 31, 2009. Net service revenue growth in the home & community segment included the Advantage acquisition, which contributed $4.6 millionin service revenues or 2.2% of the increase in 2010. The remainder of the growth in net services revenues of $6.0 million, or 2.9% was primarily attributableto a 2.9% increase in revenue per billable hour.Gross profit, expressed as a percentage of net service revenues, decreased by 0.1% to 25.4% for the year ended December 31, 2010, from 25.5% in2009. Excluding the gross profit contribution from Advantage, gross profit, expressed as a percentage of net service revenues, decreased by 0.2% to 25.3% in2010 compared to 25.5% in 2009.The decrease of 0.2% was principally due to contractual field wage increases that became effective during the second half of2010.General and administrative expenses, expressed as a percentage of net service revenues, decreased 0.3% to 13.9% for the year ended December 31, 2010,from 14.2% in 2009. Excluding the general and administrative expenses from Advantage, general and administrative expenses increased $0.3 million, or 2.3%,to $30.0 million for the year ended December 31, 2010 compared to $29.7 million in 2009. The increase was primarily due to an increase of $0.9 million inconsulting, legal related costs, and other administrative expenses, partially off-set by a $0.6 million reduction in management bonuses and wage related costs.Depreciation and amortization, expressed as a percentage of net service revenues, decreased by 0.4% to 1.2% for the year ended December 31, 2010, from1.6% in 2009. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $2.5 million and $3.2 million for the yearended December 31, 2010 and 2009, respectively. 52Table of ContentsHome Health SegmentThe following table sets forth, for the periods indicated, a summary of our home health segment’s results of operations through operating income, beforecorporate expenses: 2010 2009 Change Amount % of NetServiceRevenues Amount % of NetServiceRevenues Amount % (in thousands, except percentages) Net service revenues $50,980 100.0% $49,198 100.0% $1,782 3.6% Cost of service revenues 27,217 53.4 26,070 53.0 1,147 4.4 Gross profit 23,763 46.6 23,128 47.0 635 2.7 General and administrative expenses 17,817 34.9 15,607 31.7 2,210 14.2 Depreciation and amortization 638 1.3 769 1.6 (131) (17.0) Operating income $5,308 10.4% $6,752 13.7% $(1,444) (21.4)% Segment Data: Average weekly census: Medicare 1,485 1,427 58 4.1% Non-Medicare 1,491 1,528 (37) (2.4)% Medicare admissions 8,330 7,734 596 7.7% Medicare revenues per episode completed $2,634 $2,569 $65 2.5% Net service revenues from Medicare accounted for 64.1% and 61.3% of home health net service revenues for 2010 and 2009, respectively. Non-Medicarenet service revenues, in order of significance, include Medicaid and other governmental programs (including the Veterans Health Administration), commercialinsurers and private duty payors.Net service revenues increased $1.8 million, or 3.6%, to $51.0 million for the year ended December 31, 2010 compared to $49.2 million for 2009.Revenue from the Advantage acquisition contributed $1.1 million to net service revenues for the year ended December 31, 2010. Excluding the acquisition ofAdvantage, net service revenues increased $0.7 million, or 1.4%, to $49.9 million for 2010 compared to $49.2 million for 2009. This net service revenueincrease of 1.4% is primarily attributable to a 6.1% increase in Medicare admissions to 8,206 in 2010 and due to a 2.5% increase in our Medicare rate perepisode, partially off-set by a decrease in non-Medicare related revenues. The decrease in non-Medicare revenues is driven by selected payors where specificcontracts were not renewed, lower rates were negotiated or we experienced a reduction in the number of consumers receiving continuous care.Gross profit, expressed as a percentage of net service revenues, decreased by 0.4% to 46.6% for the year ended December 31, 2010, from 47.0% for2009. Excluding the gross profit contribution from Advantage, gross profit, expressed as a percentage of net service revenues, decreased by 0.5% to 46.5% in2010 compared to 47.0% in 2009. The decrease of 0.5% is primarily due to favorable Medicaid pricing adjustments recorded in 2009 which did not reoccur in2010 and also due to 2010 cost increases relating to higher than normal Medicare final claim adjustments, travel-related costs and a slight increase in thenumber of visits per episode, partially offset by an increased mix in higher margin Medicare business.General and administrative expenses, expressed as a percentage of net service revenues, increased 3.2% to 34.9% for the year ended December 31, 2010,from 31.7% for 2009. Excluding the acquisition of Advantage, general and administrative expenses, expressed as a percentage of net service revenues,increased 3.0% to 34.7% for 2010, from 31.7% for 2009. General and administrative expenses, when excluding Advantage, increased $1.7 million, or 10.8%,to $17.3 million for the year ended December 31, 2010 compared to $15.6 million in 2009. The increase was primarily due to our investment in salesmanagement and sales resources resulting in an increase of $1.4 million in wage and travel related expenses and $0.3 million in severance and relatedconsulting costs. 53Table of ContentsDepreciation and amortization, expressed as a percentage of net service revenues, decreased by 0.3% to 1.3% for the year ended December 31, 2010, from1.6% for 2009. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $0.6 million and $0.8 million for the yearended December 31, 2010 and 2009, respectively.Corporate General and Administrative ExpenseCorporate general and administrative expenses increased $0.7 million, or 4.8%, to $15.3 million for the year ended December 31, 2010, from $14.6million in 2009. These expenses, expressed as a percentage of net service revenues, were consistent at 5.6% for the year ended December 31, 2010 and 2009.Excluding $1.2 million in 2009 severance costs related to the former Chairman of Addus HealthCare who terminated his employment in conjunction with ourIPO, general and administrative expenses increased $1.9 million, or 13.9%. This increase was primarily due to an increase of $1.3 million for publiccompany legal and professional fees and $0.5 million in separation and related replacement search fees relating to the resignation of our Chief FinancialOfficer.Interest ExpenseNet interest expense decreased by $3.8 million, or 55.6%, to $3.0 million for the year ended December 31, 2010, from $6.8 million for 2009. Whenexcluding $1.8 million interest expense for 2009 that related to a contingent payment agreement in conjunction with the completion of our IPO and $0.8 millionrelating to the 2009 write-off of unamortized debt issuance costs, interest expense decreased by $1.2 million or 28.6%. This decrease in our net interest expenseis due to a reduction in interest rates and lower debt levels and due to $0.2 million of prompt payment interest income recorded for payments received relatingto legislation enacted in Illinois.Income Tax ExpenseOur effective tax rates for the year ended December 31, 2010 and 2009 were 32.9% and 28.0%, respectively. The principal difference between the Federaland state statutory rates and our effective tax rate is the use of Federal employment opportunity tax credits. The increase in our 2010 effective tax rate isprincipally due to the decrease in the benefit provided from our tax credits in proportion to higher pre-tax income. 54Table of ContentsResults of OperationsYear Ended December 31, 2009 Compared to Year Ended December 31, 2008The following table sets forth, for the periods indicated, our consolidated results of operations. 2009 2008 Change Amount % ofNet ServiceRevenues Amount % ofNet ServiceRevenues Amount % (in thousands, except percentages) Net service revenues: Home & Community $210,107 81.0% $189,006 80.0% $21,101 11.2% Home Health 49,198 19.0 47,300 20.0 1,898 4.0 Total 259,305 100.0 236,306 100.0 22,999 9.7 Operating income before corporate expenses: Home & Community 20,397 9.7 17,632 9.3 2,765 15.7 Home Health 6,752 13.7 5,819 12.3 933 16.0 Total 27,149 10.5 23,451 9.9 3,698 15.8 Corporate general and administrative expenses 14,585 5.6 11,792 5.0 2,793 23.7 Corporate depreciation and amortization 789 0.3 811 0.3 (22) (2.7) Total operating income 11,775 4.5 10,848 4.6 927 8.5 Interest expense, net 6,773 2.6 5,755 2.4 1,018 17.7 Income from operations before taxes 5,002 1.9 5,093 2.2 (91) (1.8) Income tax expense 1,400 0.5 1,070 0.5 330 30.8 Net income 3,602 1.4 4,023 1.7 (421) (10.5) Less: Preferred stock dividends, undeclared subject topayment upon conversion; declared and converted inNovember 2009 (5,387) (2.1) (4,270) (1.8) (1,117) (26.2) Net income (loss) attributable to common shareholders $(1,785) (0.7)% $(247) (0.1)% $(1,538) (622.7)% Our net service revenues increased by $23.0 million, or 9.7%, to $259.3 million for 2009 compared to $236.3 million for 2008. This increaserepresents 11.2% growth in home & community net service revenues and 4.0% growth in home health net service revenues. Home & community revenuegrowth was driven by acquisitions, growth in service hours provided, and program rate increases. Home health revenue growth was driven by increasedMedicare revenues offset by our decision to discontinue providing certain contracted services on lower margin contracts. Total operating income, expressed aspercentage of net service revenues, decreased 0.1% to 4.5% for 2009, compared to 4.6% for 2008. This decrease in operating income was primarily the resultof separation costs associated with our former Chairman and an increase in our provision for doubtful accounts which were partially off-set by improvedgross profit margins in both of our segments, as discussed below. 55Table of ContentsHome & Community SegmentThe following table sets forth, for the periods indicated, a summary of our home & community segment’s results of operations through operatingincome, before corporate expenses: 2009 2008 Change Amount % of NetServiceRevenues Amount % of NetServiceRevenues Amount % (in thousands, except percentages) Net service revenues $210,107 100.0% $189,006 100.0% $21,101 11.2% Cost of service revenues 156,623 74.5 141,859 75.1 14,764 10.4 Gross profit 53,484 25.5 47,147 24.9 6,337 13.4 General and administrative expenses 29,732 14.2 25,167 13.3 4,565 18.1 Depreciation and amortization 3,355 1.6 4,348 2.3 (993) (22.8) Operating income $20,397 9.7% $17,632 9.3% $2,765 15.7% Segment Data: Billable hours (in thousands) 12,835 12,139 696 5.7% Billable hours per business day 50,333 47,418 2,915 6.1% Revenues per billable hour $16.37 $15.57 $0.80 5.1% Average weekly census 20,182 19,432 750 3.9% Net service revenues from state, local and other governmental programs accounted for 95.8% and 96.9% of home & community net service revenuesfor 2009 and 2008, respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net service revenues.Net service revenues increased $21.1 million, or 11.2%, to $210.1 million for 2009 compared to $189.0 million for 2008. Net service revenue growthin the home & community segment was driven by acquisitions completed in 2008, and an increase in both total billable hours and revenues per billable hour.Acquisitions completed in 2008 accounted for $4.8 million of the growth in net service revenues for 2009 compared to 2008. These acquisitions provided0.3 million in billable hours, average revenue per billable hour of $16.57 and increased average weekly census of 308. The remainder of the growth in netservice revenues of $16.3 million was attributable to organic growth. Organic growth was driven by an increase in billable hours accounting for $6.3 millionand an increase in revenues per billable hour accounting for $10.0 million which was due to a $0.80 per hour increase in the average billable rate during 2009.During 2009 we experienced some program rate increases in five states and some program rate decreases in three states within the 16 states in which weoperate.Gross profit, expressed as a percentage of net service revenues, increased by 0.6% to 25.5% for 2009, from 24.9% for 2008. Higher marginsattributable to acquisitions completed in 2008 accounted for 0.1% of the increase. The remaining increase of 0.5% was principally attributed to billable rateincreases in excess of wage increases.General and administrative expenses, expressed as a percentage of net service revenues, increased 0.9% to 14.2% for 2009, from 13.3% for 2008. Higherexpenses attributable to acquisitions completed in 2008 accounted for 0.3% of this increase. The remaining increase of 0.6% was principally attributable to anincrease of $2.0 million in bad debt expense, partially offset by other administrative cost reductions during 2009. The increase in bad debt expense during2009 reflects the deterioration in our accounts receivable aging, most of which occurred in the fourth quarter of 2009, due to a slowdown in payments andbilling related issues.Depreciation and amortization, expressed as a percentage of net service revenues, decreased by 0.7% to 1.6% for 2009, from 2.3% for 2008.Amortization of intangibles, which are principally amortized using accelerated methods, totaled $3.2 million and $4.2 million for 2009 and 2008, respectively. 56Table of ContentsHome Health SegmentThe following table sets forth, for the periods indicated, a summary of our home health segment’s results of operations through operating income, beforecorporate expenses: 2009 2008 Change Amount % of NetServiceRevenues Amount % of NetServiceRevenues Amount % (in thousands, except percentages) Net service revenues $49,198 100.0% $47,300 100.0% $1,898 4.0% Cost of service revenues 26,070 53.0 25,395 53.7 675 2.7 Gross profit 23,128 47.0 21,905 46.3 1,223 5.6 General and administrative expenses 15,607 31.7 15,153 32.0 454 3.0 Depreciation and amortization 769 1.6 933 2.0 (164) (17.6) Operating income $6,752 13.7% $5,819 12.3% $933 16.0% Segment Data: Average weekly census: Medicare 1,427 1,270 157 12.4% Non-Medicare 1,528 1,413 115 8.1% Medicare admissions 7,734 7,232 502 6.9% Medicare revenues per episode completed $2,569 $2,606 $(37) (1.4)% Net service revenues from Medicare accounted for 61.3% and 58.3% of home health revenues for 2009 and 2008, respectively. Non-Medicare net servicerevenues, in order of significance, include Medicaid and other governmental programs (including the Veterans Health Administration), commercial insurersand private duty payors.Net service revenues increased by $1.9 million, or 4.0%, to $49.2 million for 2009 compared to $47.3 million for 2008. Net service revenue growth inthe home health segment was principally driven by an increase in Medicare and non-Medicare census. Acquisitions completed in 2008 accounted for $0.4million of the growth in net service revenues for 2009. The remainder of the growth in net service revenues of $1.5 million was attributable to organic growth.Medicare revenues, which included $0.3 million from acquisitions, increased by $2.6 million, or 9.4%, to $30.2 million for 2009 compared to $27.6 millionin 2008, principally due to increased census. We experienced a year over year decrease in the net service revenues per episode completed of 1.4%, principallydue to lower acuity rates. Our non-Medicare revenues declined by $0.7 million, or 3.5%, to $19.0 million in 2009 compared to $19.7 million for 2008.During the second half of 2008, we conducted a review of contracts that did not provide reasonable profit margins resulting in decisions to stop takingreferrals on certain contracts. As a result, net service revenues declined on these contracts for 2009 compared to 2008, negatively impacting growth by $1.9million, or 4.0% of home health net service revenues.Gross profit, expressed as a percentage of net service revenues, increased by 0.7% to 47.0% for 2009, from 46.3% for 2008. Contributing to theincreased gross profit percentage was the decision to decline referrals on certain lower-margin contracts and due to an increased mix of higher margin Medicarebusiness, and a decrease in lower margin infusion therapy customers. We experienced a decrease in our gross profit margins in the fourth quarter of 2009 dueto lower field staff productivity and higher travel and training related costs.General and administrative expenses, expressed as a percentage of net service revenues, decreased 0.3% to 31.7% for 2009, from 32.0% for 2008. Costsavings from the elimination of administrative and clinical staff positions in 2008 were partially offset by expansion of supervisory management positions. 57Table of ContentsDepreciation and amortization, expressed as a percentage of net service revenues, decreased by 0.4% to 1.6% for 2009, from 2.0% for 2008.Amortization of intangibles, which are principally amortized using accelerated methods, was slightly lower for 2009 compared to 2008.Corporate General and Administrative ExpensesCorporate general and administrative expenses increased $2.8 million, or 23.7%, to $14.6 million in 2009. This $2.8 million increase includes $1.2million in severance costs related to the former Chairman of Addus HealthCare who terminated his employment in conjunction with our IPO that wascompleted on November 2, 2009. Excluding this severance cost in 2009, corporate general and administrative expenses increased by $1.6 million to $13.4million in 2009, 5.2% of net service revenues in 2009, compared to 5.0% of net service revenues in 2008. The increase of $1.6 million is primarily due to$1.3 million in wages and wage related costs primarily for key staff additions to strengthen our back office operations in accounting and information systemsand a net increase of $0.3 million related to other general corporate costs in 2009.Interest ExpenseInterest expense increased by $1.0 million, or 17.7%, to $6.8 million for 2009 from $5.8 million for 2008. Interest expense for 2009 includes $1.8million in interest relating to a contingent payment agreement pursuant to which we paid an additional $12.7 million to the former owners of Addus HealthCare(including our President and Chief Executive Officer, another member of our board of directors and certain of our other stockholders) in conjunction with our2006 acquisition of Addus HealthCare. Interest expense also includes $0.8 million for the write-off of debt issuance costs relating to our credit facility that waspaid in full on November 2, 2009. Excluding these one-time interest charges of $2.6 million, interest expense decreased by $1.6 million during 2009. Thisdecrease in our net interest expense reflects lower interest rates in 2009 and due to the effect of our interest rate agreement discussed below. Our total interestbearing obligations decreased by $6.9 million during the year ended December 31, 2009.In March 2007, we entered into a three year interest rate agreement designed to reduce variability associated with a portion of our term loan balanceoutstanding under our then-existing credit facility. The interest rate swap agreement has a notional value of $22.5 million and a LIBOR cap and floor rate,before the applicable margin, of 6.0% and 3.72%, respectively. While this agreement minimizes the impact on cash flows from interest rate volatility, it doesnot qualify as an accounting hedge under ASC Topic 815. As such, changes in the value of this agreement are reflected in interest expense during the period ofchange. The mark-to-market adjustment resulted in a gain to operations of $0.6 million and a charge to operations of $0.8 million for 2009 and 2008,respectively.Income Tax ExpenseOur effective tax rates for 2009 and 2008 were 28.0% and 21.0%, respectively. The principal reason for the difference between the statutory rate of 34.0%and our effective tax rates is the use of federal work opportunity tax credits. The 2009 effective tax rate increased by 7.0% which was primarily due to a 4.4%increase related to our IPO , in connection with which the former Chairman of Addus HealthCare entered into a separation agreement which terminated hisemployment with Addus HealthCare. As a result of the termination and the time permitted to exercise any vested options expiring following such termination,299,776 stock options were not exercised and deemed forfeited and $0.2 million in deferred tax assets were written off. In addition, a decrease in our federalwork opportunity tax credit in 2009 resulted in a 2.7% increase in our effective tax rate. 58Table of ContentsLiquidity and Capital ResourcesOverviewOur primary sources of liquidity are cash from operations and borrowings under our credit facility. At December 31, 2010 and 2009, we had cashbalances of $0.8 million and $0.5 million, respectively.Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes, operatingexpenses, interest and taxes. Due to its revenue deficiencies and financing issues, the State of Illinois has been reimbursing us on a delayed basis with respectto our various agreements including our largest payor, the Illinois Department on Aging. As a result, the open net receivable balance from the State of Illinoisincreased by $4.5 million for the year ended December 31, 2010, from $44.3 million as of December 31, 2009 to $48.8 million as of December 31, 2010.While the net receivable balance has increased, this is a result of increased business activities with the State of Illinois. We have experienced an improvement inthe payment amounts received from the State of Illinois in 2010 as compared to 2009. These payment delays have adversely impacted, and may furtheradversely impact, our liquidity, and may result in the need to increase borrowings under our credit facility. Delayed reimbursements from our other State ofIllinois payors and deterioration in the aging in the private duty business have also contributed to the increase in our receivables balances.On March 18, 2010, we entered into the first amendment (the “First Amendment”) to our credit facility. The First Amendment (i) increased themaximum aggregate amount of revolving loans available to us by $5.0 million to $55.0 million, (ii) modified our maximum senior debt leverage ratio from2.75 to 1.0 to 3.00 to 1.0 for the twelve (12) month period ending March 31, 2010 and each twelve (12) month period ending on the last day of each fiscalquarter thereafter and (iii) increased the advance multiple used to determine the amount of the borrowing base from 2.75 to 3.00.On March 18, 2010, we also amended our subordinated dividend notes that we issued on November 2, 2009 in the aggregate original principal amountof $12.9 million. A balance of $7.8 million was outstanding on the dividend notes as of December 31, 2009. Pursuant to the amendments, the dividend noteswere amended to (i) extend the maturity date of the notes from September 30, 2011 to December 31, 2012, (ii) modify the amortization schedule of the notes toreduce the annual principal payment amounts from $4.5 million to $1.3 million in 2010; from $3.3 million to $2.5 million in 2011; and provide for totalpayments in 2012 of $4.0 million and (iii) permit, based on our leverage ratio, the prepayment of all or a portion of the principal amount of the notes, togetherwith interest on the principal amount.On July 26, 2010, we entered into a second amendment (the “Second Amendment”) to our credit facility. The Second Amendment provided for a $5.0million term loan component of the credit facility, the proceeds of which were used to finance a portion of the purchase price payable in connection with ouracquisition of certain assets of Advantage effective July 25, 2010. The term loan will be repaid in 24 equal monthly installments commencing February 2011.Interest on the new term loan under the credit facility is payable either at a floating rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or theLIBOR rate for term periods of one, two, three or six months plus a margin of 4.6%. Interest will be paid monthly or at the end of the relevant interest period.The term loan has a maturity date of January 5, 2013. The total consideration payable pursuant to the Purchase Agreement was $8.3 million, comprised of$5.1 million in cash, common stock consideration with a deemed value of $1.2 million resulting in the issuance of 248,000 common shares, a maximum of$2.0 million in future cash consideration subject to the achievement of certain performance targets set forth in an earn-out agreement and the assumption ofcertain specified liabilities. The contingent earn-out obligation has been recorded at its fair value of $1.6 million, which is the present value of our obligationbased on probability-weighted estimates of the achievement of certain performance targets, as defined.As of December 31, 2010 we had $33.3 million outstanding on our credit facility. After giving effect to the amount drawn on our credit facility,approximately $6.8 million of outstanding letters of credit and borrowing limits based on an advanced multiple of adjusted EBITDA, we had $13.5 millionavailable for borrowing under the credit facility as of December 31, 2010. 59Table of ContentsWhile our growth plan is not dependent on the completion of acquisitions, if we do not have sufficient cash resources or availability under our creditfacility, or we are otherwise prohibited from making acquisitions, our growth could be limited unless we obtain additional equity or debt financing or unlesswe obtain the necessary consents from our lenders. We believe the available borrowings under our credit facility which, when taken together with cash fromoperations, will be sufficient to cover our working capital needs for at least the next 12 months.Cash FlowsThe following table summarizes historical changes in our cash flows for: 2010 2009 2008 (in thousands) Net cash provided by (used in) operating activities $10,703 $(8,925) $4,606 Net cash used in investing activities (6,200) (14,848) (5,415) Net cash (used in) provided by financing activities (4,205) 18,178 6,901 Year Ended December 31, 2010 Compared to Year Ended December 31, 2009Net cash provided by operating activities was $10.7 million in 2010, compared to net cash used in operating activities of $8.9 million for 2009. The2010 improvement in cash provided from operations of $19.6 million was primarily due to improvements in accounts receivable resulting from an increase inpayments received from the State of Illinois and our continued focus on cash collections. The 2010 improvement in cash provided from accounts receivable netof reserves was $20.8 million which resulted from an increase in accounts receivable of $0.5 million in 2010 compared to an increase of $21.3 million in2009. The improvement in accounts receivable during 2010 was partially off-set by $1.2 million of net cash used in operations for accounts payable, accruedexpenses, taxes, and prepaid and other assets due to the timing of the related payments.Net cash used in investing activities was $6.2 million for 2010 and $14.9 million for 2009. Our investing activities for 2010 include cash due atclosing of $5.1 million for the acquisition of Advantage, payment of $0.5 million pursuant to the contingent payment agreement entered into in connectionwith a 2008 acquisition, and $0.6 million in capital expenditures. Our investing activities for 2009 included a payment of $12.7 million pursuant to thecontingent payment agreement entered into in connection with the 2006 acquisition of Addus HealthCare, $1.4 million in contingent consideration paymentsmade on previously acquired businesses, and $0.7 million in capital expenditures.Net cash used in financing activities was $4.2 million for 2010 compared to net cash provided by financing activities of $18.2 million in 2009. Ourfinancing activities during 2010 were primarily driven by borrowings of $5.0 million under our new term loan, net payments of $5.3 million on our creditfacility, payments of $1.3 million on our dividend notes and net payments of $2.6 million on all other notes.Our financing activities for 2009 were primarily driven by our IPO that was completed on November 2, 2009 and our credit facility, consisting of a$50 million revolving line of credit. We used the $47.5 million net proceeds from our IPO, together with $29.5 million of initial borrowings under our creditfacility to make total payments of $72.7 million related to the repayment of amounts outstanding under our prior credit facility, to make a payment requiredby a contingent payment agreement previously entered into with the former owners of Addus HealthCare, to pay a portion of the dividends accrued on ourseries A preferred stock that converted into shares of common stock in connection with the offering, to pay a one-time consent fee to certain former holders ofsuch shares of series A preferred stock, to pay the former Chairman of Addus HealthCare amounts required by his separation and general release agreementand to pay related fees and expenses. As of December 31, 2009 we had $38.5 million outstanding on the credit facility. 60Table of ContentsYear Ended December 31, 2009 Compared to Year Ended December 31, 2008Net cash used in operating activities was $8.9 million in 2009, compared to net cash provided by operating activities of $4.6 million for 2008. Net cashused in operating activities during 2009 was primarily the result of an increase in net accounts receivable of $21.3 million, of which our largest payor, theIllinois Department on Aging, accounted for $17.8 million.Net cash used in investing activities was $14.8 million for 2009 and $5.4 million for 2008. Our investing activities for 2009 include a payment of$12.7 million pursuant to the contingent payment agreement entered into in connection with the 2006 acquisition of Addus HealthCare, $1.4 million incontingent consideration payments made on previously acquired businesses, and $0.7 million in capital expenditures.Net cash provided by financing activities was $18.2 million for 2009 compared to $6.9 million in 2008. Our financing activities for 2009 wereprimarily driven by our IPO that was completed on November 2, 2009 and our credit facility. We used the $47.5 million net proceeds from our IPO, togetherwith $29.5 million of initial borrowings under our credit facility to make total payments of $72.7 million related to the repayment of amounts outstandingunder our prior credit facility, to make a payment required by a contingent payment agreement previously entered into with the former owners of AddusHealthCare, to pay a portion of the dividends accrued on our series A preferred stock that converted into shares of common stock in connection with theoffering, to pay a one-time consent fee to certain former holders of such shares of series A preferred stock, to pay the former Chairman of Addus HealthCareamounts required by his separation and general release agreement and to pay related fees and expenses. As of December 31, 2009 we had $38.5 millionoutstanding on the credit facility.Outstanding Accounts ReceivableOutstanding accounts receivable, net of the allowance for doubtful accounts, increased by $0.5 million for the year ended December 31, 2010 ascompared to December 31, 2009. The increase was primarily attributable to higher revenues and delays in reimbursements from certain payors.We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. Ourprovision for doubtful accounts is estimated and recorded primarily by aging receivables utilizing eight aging categories and applying our historical collectionrates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certain large payorsanalyzed separately from other payor groups. In our evaluation of these estimates, we also consider delays in payment trends in individual states due to budgetor funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with required documentation and disputes withspecific payors. We have experienced increases in the aging of our accounts receivable resulting from billing delays during the conversion process, eitherprocedural or internal, related to both acquired agencies and transferring our existing home & community locations from a legacy system to the centralizedMcKesson operating system. Reasons for the delays include obtaining approvals from federal and state governmental agencies of provider numbers weacquired with our acquisitions, McKesson payor and billing set-up processes and required staff training. During 2010 and 2009 we have also experienced asignificant increase in our private duty business, which inherently carries a higher collection risk, especially in our home & community segment. Unlike ourstate, local and other governmental payors, these customers are responsible for their own payment (a portion of which may be funded through qualified veteranbenefits). Contributing to higher receivable balances are veteran benefits that may take several months to be awarded by the Veterans Health Administration. 61Table of ContentsOur collection procedures include review of account agings and direct contact with our payors. We have historically not used collection agencies. Anuncollectible amount, not governed by amount or aging, is written off to the allowance account only after reasonable collection efforts have been exhausted. Thefollowing tables detail our accounts receivable before reserves by payor category, showing Illinois governmental payors separately, and segment and the relatedallowance amount at December 31, 2010 and 2009: December 31, 2010 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (in thousands, except percentages) Home & Community Illinois governmental based programs $30,228 $14,060 $960 $1,926 $47,174 Other state, local and other governmental programs 10,730 248 1,188 1,636 13,802 Private duty and commercial 2,095 790 1,026 830 4,741 43,053 15,098 3,174 4,392 65,717 Home Health Medicare 4,768 1,294 246 36 6,344 Other state, local and other governmental programs 303 69 24 94 490 Private duty and commercial 2,317 600 360 181 3,458 Illinois governmental based programs 1,011 241 253 163 1,668 8,399 2,204 883 474 11,960 Total $51,452 $17,302 $4,057 $4,866 $77,677 Related aging % 66.2% 22.3% 5.2% 6.3% Allowance for doubtful accounts $6,723 Reserve as % of gross accounts receivable 8.7% December 31, 2009 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (in thousands, except percentages) Home & Community Illinois governmental based programs $26,208 $14,536 $1,685 $543 $42,972 Other state, local and other governmental programs 12,595 1,633 2,274 631 17,133 Private duty and commercial 1,869 809 454 108 3,240 40,672 16,978 4,413 1,282 63,345 Home Health Medicare 4,433 1,123 483 157 6,196 Other state, local and other governmental programs 1,726 163 134 126 2,149 Private duty and commercial 1,346 415 397 169 2,327 Illinois governmental based programs 367 187 147 586 1,287 7,872 1,888 1,161 1,038 11,959 Total $48,544 $18,866 $5,574 $2,320 $75,304 Related aging % 64.5% 25.1% 7.4% 3.0% Allowance for doubtful accounts $4,813 Reserve as % of gross accounts receivable 6.4% We calculate our days sales outstanding (“DSO”) by taking the accounts receivable outstanding net of the allowance for doubtful accounts anddeducting deferred revenues at the end of the period, divided by the total net service revenues for the last quarter, multiplied by the number of days in thatquarter. The adjustment for 62Table of Contentsdeferred revenues relates to Medicare receivables which are recorded at the inception of each 60 day episode of care at the full requested anticipated payment(“RAP”) amount. Our DSOs at December 31, 2010 and December 31, 2009 were 90 days and 96 days, respectively. The DSO for our largest payor, theIllinois Department on Aging, at December 31, 2010 and 2009 were 138 days and 142 days, respectively.IndebtednessCredit FacilityOur credit facility, most recently amended on July 26, 2010, provides a $55.0 million revolving line of credit expiring November 2, 2014, and a $5.0million term loan maturing January 5, 2013, and includes a $15.0 million sublimit for the issuance of letters of credit. Substantially all of the subsidiaries ofHoldings are co-borrowers, and Holdings has guaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first prioritysecurity interest in all of Holdings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.The availability of funds under the revolving credit portion of the credit facility is based on the lesser of (i) the product of adjusted EBITDA, asdefined, for the most recent 12-month period for which financial statements have been delivered under the credit facility agreement multiplied by the specifiedadvance multiple, up to 3.00, less the outstanding senior indebtedness and letters of credit, and (ii) $55.0 million less the outstanding revolving loans andletters of credit. Interest on the revolving line of credit and term loan amounts outstanding under the credit facility is payable either at a floating rate equal to the30-day LIBOR, plus an applicable margin of 4.6% or the LIBOR rate for term periods of one, two, three or six months plus a margin of 4.6%. Interest on thecredit facility will be paid monthly on or at the end of the relevant interest period, as determined in accordance with the credit facility agreement. The borrowerswill pay a fee equal to 0.5% per annum of the unused portion of the revolving portion of the credit facility. Issued stand-by letters of credit will be charged at arate of 2% per annum payable monthly.The credit facility contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws,maintenance of permits, maintenance of insurance and property and payment of taxes. The credit facility also contains certain customary financial covenantsand negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to stay below amaximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions on guarantees,indebtedness, liens, dividends, distributions, investments and loans, subject to customary carve outs, restrictions on Holdings’ and the borrowers’ ability toenter into transactions other than in the ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendaryear, or for the purchase price of any one acquisition to exceed $0.5 million, in each case without the consent of the lenders, restrictions on mergers, transfersof assets, acquisitions, equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changes and linesof business. We were in compliance with all of our credit facility covenants at December 31, 2010.Dividend NotesOn November 2, 2009, in conjunction with our IPO, all outstanding shares of Holdings’ series A preferred stock were converted into an aggregate4.077 million shares of common stock at a ratio of 1:108. Total accrued and unpaid dividends on the series A preferred stock were $13.1 million as ofNovember 2, 2009, at which time a dividend payment of $0.2 million was made and the remaining $12.9 million in unpaid preferred dividends wereconverted into dividend notes. The dividend notes are subordinated and junior to all obligations under our credit facility. On November 2, 2009, we made amandatory payment of $4.0 million on the dividend notes. Interest on the outstanding dividend notes accrues at a rate of 10% per annum, compoundedannually. The outstanding principal amount of the dividend notes was originally payable in eight equal consecutive quarterly installments 63Table of Contentswhich commenced on December 31, 2009 and each March 31, June 30, September 30 and December 31 of each year thereafter until paid in full. Interest on theunpaid principal balance of the dividend notes is due and payable quarterly in arrears together with each payment of principal.On March 18, 2010, we amended our subordinated dividend notes. Pursuant to the amendments, the dividend notes were amended to (i) extend thematurity date of the dividend notes from September 30, 2011 to December 31, 2012, (ii) modify the amortization schedule of the dividend notes to reduce theannual principal payment amounts from $4.5 million to $1.3 million in 2010; from $3.4 million to $2.5 million in 2011; and amended total payments in2012 to $4.1 million, and (iii) permit, based on our leverage ratio, the prepayment of all or a portion of the principal amount of the dividend notes, togetherwith interest on the principal amount. A balance of $6.6 million was outstanding on the dividend notes as of December 31, 2010.Off-Balance Sheet ArrangementsAs of December 31, 2010, we did not have any off-balance sheet guarantees or arrangements with unconsolidated entities.Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements prepared inaccordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, revenues and expense and related disclosures. We base our estimates and judgments onhistorical experience and other sources and factors that we believe to be reasonable under the circumstances; however, actual results may differ from theseestimates. We consider the items discussed below to be critical because of their impact on operations and their application requires our judgment and estimates.Revenue RecognitionApproximately 95% of our home & community segment revenues are derived from Medicaid and Medicaid waiver programs under agreements withvarious state and local authorities. These agreements provide for a service term ranging from one year to an indefinite term. Services are provided based onauthorized hours, determined by the relevant state or local agency, at an hourly rate specified in the agreement or fixed by legislation. Services to other payors,such as private or commercial clients, are provided at negotiated hourly rates and recognized in net service revenues as services are provided. We provide forappropriate allowances for uncollectible amounts at the time the services are rendered.Approximately 64% of our home health segment revenues are derived from Medicare. Home health services are reimbursed by Medicare based onepisodes of care. Under PPS, an episode of care is defined as a length of care up to 60 days per patient with multiple continuous episodes allowed. Billings perepisode under PPS vary based on the severity of the patient’s condition and are subject to adjustment, both higher and lower, for changes in the patient’smedical condition and certain other reasons. At the inception of each episode of care, we submit a request for anticipated payment, or RAP, to Medicare for50% to 60% of the estimated PPS reimbursement. We estimate the net PPS revenues to be earned during an episode of care based on the initial RAP billing,historical trends and other known factors. The net PPS revenues are initially recognized as deferred revenues and subsequently amortized as net servicerevenues ratably over the 60-day episodic period. At the end of each episode of care, a final claim billing is submitted to Medicare and any changes between theinitial RAP and final claim billings are recorded as an adjustment to net service revenues. For open episodes, we estimate net revenues based on historical data,and adjust net service revenues for the difference, if any, between the initial RAP and ultimate final claim amount. We did not record any significantadjustments of prior period net PPS estimates. 64Table of ContentsThe other approximately 36% of revenues in our home health segment are from state and local governmental agencies, commercial insurers and privateindividuals. Services are primarily provided to these payors on a per visit basis based on negotiated rates. As such, net service revenues are readilydeterminable and recognized at the time the services are rendered. We provide for appropriate allowances for uncollectible amounts at the time the services arerendered.Accounts Receivable and Allowance for Doubtful AccountsWe are paid for our services primarily by state and local agencies under Medicaid or Medicaid waiver programs, Medicare, commercial insurancecompanies and private individuals. While our accounts receivable are uncollateralized, our credit risk is somewhat limited due to the significance of Medicareand state agency payors to our results of operations. Laws and regulations governing the Medicaid and Medicare programs are complex and subject tointerpretation. Amounts collected may be different than amounts billed due to client eligibility issues, insufficient or incomplete documentation, services atlevels other than authorized and other reasons unrelated to credit risk.Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based on qualifying servicesapproved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, theinterest income is recognized when received and reported in the income statement caption, interest expense, net. We recorded $0.2 million of prompt paymentinterest income in the fourth quarter of 2010.We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. Ourallowance for doubtful accounts is estimated and recorded primarily by aging receivables utilizing eight aging categories and applying our historical collectionrates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certain large payorsanalyzed separately from other payor groups. In our evaluation of these estimates, we also consider delays in payment trends in individual states due to budgetor funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with required documentation and disputes withspecific payors. Historically, we have not experienced any write-off of accounts as a result of a state operating with budget deficits. While we regularly monitorstate budget and funding developments for the states in which we operate, we consider losses due to state credit risk on outstanding balances as remote. Webelieve that our recorded allowance for doubtful accounts is sufficient to cover potential losses; however, actual collections in subsequent periods may requirechanges to our estimates.Goodwill and Other Intangible AssetsIntangible assets are stated at fair value at the time of acquisition and the carrying value of goodwill is the residual of the purchase price over the fairvalue of the net assets acquired and liabilities assumed. Our intangible assets with finite lives, consisting of trade names, trademarks and non-competeagreements, are amortized principally on accelerated methods based upon their estimated useful lives. In accordance with ASC Topic 350, “Goodwill andOther Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill and indefinite lived intangible assets arerequired to be tested for impairment at least annually using a two-step method. We test goodwill for impairment at the reporting unit level on an annual basis,as of October 1, or whenever circumstances change, such as a significant change in business climate or regulatory changes that would indicate that animpairment may have occurred. The evaluation of goodwill impairment involves comparing the current fair value of each reporting unit to the recorded value,including goodwill. We use a combination of a discounted cash flow, or DCF, model and the market multiple analysis method to determine the current fairvalue of each reporting unit. The DCF model was prepared using revenue and expense projections based on our current operating plan. As such, a number ofsignificant assumptions and estimates are involved in the application of the DCF model to forecast revenue growth, price changes, gross profits, operatingexpenses and operating cash flows. As part of the second step of this evaluation, if the carrying value of goodwill exceeds its fair value, an impairment losswould be recognized. 65Table of ContentsWe completed our annual impairment test of goodwill as of October 1, 2010 and determined that no goodwill impairment existed as of October 31, 2010.Although we believe that the financial projections used in the assessment are reasonable and appropriate for our two reporting units, there is uncertaintyinherent in those projections. As of December 31, 2010, we determined that no events or circumstances from October 1, 2010 through December 31, 2010indicated that a further assessment was necessary. However, the current Federal and state economic and reimbursement environments and state budgetarypressures to decrease or eliminate services provided by us could have a negative effect on our future earnings and cash flows from operations, as well as ourtotal stockholders’ equity exceeding our market capitalization as of December 31, 2010, are all factors indicating the possibility of future impairment to ourgoodwill.Our total stockholders’ equity was $88.1 million as of December 31, 2010 and our market capitalization was $44.1 million based on 10.8 millionshares of common stock outstanding as of December 31, 2010. While the market capitalization of approximately $44.1 million is below our stockholders’equity and was considered in our evaluation of fair value, the market capitalization metric is only one indicator of fair value. In our opinion, the marketcapitalization approach, by itself, is not a reliable indicator of our value.We will continue to monitor market conditions and determine if any additional interim review of goodwill is warranted. Further deterioration in themarket or actual results as compared with our projections may ultimately result in a future impairment. In the event that we determine goodwill is impaired inthe future, we would need to recognize a non-cash impairment charge, which could have a material adverse effect on our consolidated balance sheet and resultsof operations.Long-Lived AssetsWe review our long-lived assets and finite lived intangibles (except goodwill and other intangible assets, as described above) for impairment wheneverchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, we compare the estimatedfuture undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. If the carrying amount of an asset exceeds itsestimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value ofthe asset, generally determined by discounting the estimated future cash flows.Workers’ Compensation ProgramOur workers’ compensation insurance program has a $350,000 deductible component. We recognize our obligations associated with this program in theperiod the claim is incurred. The cost of both the claims reported and claims incurred but not reported, up to the deductible, have been accrued based onhistorical claims experience, industry statistics and an actuarial analysis performed by an independent third party. We monitor our claims quarterly andadjust our reserves accordingly. These costs are recorded primarily in the cost of services caption in the consolidated statement of income. Under the agreementpursuant to which we acquired Addus HealthCare, claims under our workers’ compensation insurance program that relate to December 31, 2005 or earlier arethe responsibility of the selling shareholders in the acquisition, subject to certain limitations.Interest Expense, netOur net interest expense consists of interest costs on our credit facility and other debt instruments and is recorded net of any interest income recorded byus. Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based on qualifying servicesapproved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, theinterest income is recognized when received and reported in the income statement caption, interest expense, net. We recorded $0.2 million of prompt paymentinterest income in the fourth quarter of 2010. 66Table of ContentsIncome TaxesWe account for income taxes under the provisions of ASC Topic 740, “Accounting for Income Taxes.” The objective of accounting for income taxes isto recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events thathave been recognized in our financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of our assets andliabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC 740 also requires that deferred tax assets be reduced by avaluation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.New Accounting PronouncementsIn August 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-24, Health Care Entities (Topic 954): Presentation of InsuranceClaims and Related Insurance Recoveries which clarifies for medical malpractice claims or similar contingent liabilities, a health care entity should not netinsurance recoveries against a related claim liability. The amendments in the this ASU are effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2010. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.Contractual Obligations and CommitmentsWe have outstanding letters of credit of $6.8 million at December 31, 2010. These standby letters of credit benefit our third party insurer for our highdeductible workers’ compensation insurance program. The amount of letters of credit is negotiated annually in conjunction with the insurance renewals. Weanticipate our commitment will increase as we continue to grow our business and more years are the responsibility of the successor.The following table summarizes our cash contractual obligations as of December 31, 2010: Contractual Obligation Total Less than1 Year 1 - 2Years 3 - 4Years More than5 Years (in thousands) Credit facility $33,250 $— $— $33,250 $— Term loan 5,000 2,292 2,708 — — Dividend notes (4) 6,569 2,500 4,069 — — Contingent liability 1,600 500 1,100 — — Other debt 366 366 — — — Interest on all debt (1) 7,244 2,392 3,506 1,346 — Operating leases 8,406 2,831 3,341 1,190 1,044 Total contractual obligations (2) (3) $62,435 $10,881 $14,724 $35,786 $1,044 (1)Interest is calculated at the applicable debt borrowing rate as of December 31, 2010.(2)The above table excludes contingent consideration in connection with earn-outs related to acquisitions completed prior to December 31, 2009. We believethe maximum aggregate potential earn-outs were $0.5 million at December 31, 2010. We cannot quantify the exact amounts to be paid because they arebased on the achievement of certain future annual revenue or EBITDA thresholds.(3)Our credit facility was entered into on November 2, 2009 and matures on November 2, 2014. On March 18, 2010, we entered into the First Amendmentto our credit facility. The First Amendment (i) increased the maximum aggregate amount of revolving loans available to us by $5.0 million to $55.0million, (ii) modified our maximum senior debt leverage ratio from 2.75 to 1.0 to 3.00 to 1.0 for the twelve (12) month period ending March 31, 2010and each twelve (12) month period ending on the last day of each fiscal quarter thereafter and (iii) increased the advance multiple used to determine theamount of the borrowing base from 2.75 to 1.0 to 3.00 to 1.0. On July 26, 2010, we entered into the Second Amendment to our credit facility. TheSecond Amendment provided for a $5.0 million term loan component of the credit 67Table of Contents facility, the proceeds of which were used to finance a portion of the purchase price payable in connection with our acquisition of certain assets ofAdvantage effective July 25, 2010. The term loan will be repaid in 24 equal monthly installments which commenced in February 2011. Interest on thenew term loan under the credit facility is payable either at a floating rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or the LIBORrate for term periods of one, two, three or six months plus a margin of 4.6%. Interest will be paid monthly or at the end of the relevant interest period.The term loan has a maturity date of January 5, 2013.(4)On March 18, 2010, we amended our subordinated dividend notes that we issued on November 2, 2009 in the aggregate original principal amount of$12.9 million. A balance of $6.6 million was outstanding on the dividend notes as of December 31, 2010. Pursuant to the amendments, the dividendnotes were amended to (i) extend the maturity date of the notes from September 30, 2011 to December 31, 2012, (ii) modify the amortization schedule ofthe notes to reduce the annual principal payment amounts from $4.5 million to $1.3 million in year 2010 and from $3.4 million to $2.5 million in2011; and provides for total payments in 2012 of $4.1 million and (iii) permit, based on our leverage ratio, the prepayment of all or a portion of theprincipal amount of the notes, together with interest on the principal amount.Impact of InflationWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subjectto significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harmour business, financial condition and results of operation. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures about Market RiskWe are exposed to market risk from fluctuations in interest rates. As of December 31, 2010, our weighted average interest rate on our credit facility was4.86% on total indebtedness of $38.3 million. The impact on a 1.0% increase or decrease in interest rates would increase or decrease interest expense by $0.4million. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur consolidated financial statements together with the related notes and the report of independent registered public accounting firm, are set forth on thepages indicated in Item 15. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, andreported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by a company in the reports that it files 68Table of Contentsor submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.Based on the evaluation of our disclosure controls and procedures as of December 31, 2010, our Chief Executive Officer and Chief Financial Officerconcluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of our management, including our principalexecutive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on theframework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in Internal Control—Integrated Framework , our management concluded our internal control over financial reporting waseffective as of December 31, 2010.Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fairpresentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even thosesystems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.Changes in Internal Controls Over Financial ReportingThere was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. ITEM 9B.OTHER INFORMATIONNone 69Table of ContentsPART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K as we intend to file our definitive Proxy Statement for the 2011Annual Meeting of Stockholders pursuant to Regulation 14A of the Exchange Act not later than 120 days after the end of the fiscal year covered by this AnnualReport, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item is incorporated by reference to the 2011 Proxy Statement to be filed with the SEC within 120 days after the end ofthe year ended December 31, 2010.Independent Director CompensationOn March 25, 2011, the Board of Directors adopted changes to our director compensation policy such that independent directors will receive theirannual grants of restricted shares of our common stock valued at $10,000 on the second business day following the filing of our Annual Report on Form 10-Keach year. Each independent director’s shares of restricted stock will vest on the anniversary of his initial grant. A copy of the modified Independent DirectorCompensation Policy is attached hereto as Exhibit 10.36.Code of Conduct and EthicsWe have adopted a code of ethics that applies to all of our directors, officers and employees, including our Chief Executive Officer (principal executiveofficer) and Chief Financial Officer (principal financial officer). This code of ethics, which is entitled Code of Business Conduct and Ethics, is posted at ourinternet website, http://www.addus.com. Any amendments to, or waivers of the code of ethics will be disclosed on our website promptly following the date ofsuch amendment or waiver. ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to the 2011 Proxy Statement to be filed with the SEC within 120 days after the end ofthe year ended December 31, 2010. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item is incorporated by reference to the 2011 Proxy Statement to be filed with the SEC within 120 days after the end ofthe year ended December 31, 2010. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to the 2011 Proxy Statement to be filed with the SEC within 120 days after the end ofthe year ended December 31, 2010. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item is incorporated by reference to the 2011 Proxy Statement to be filed with the SEC within 120 days after the end ofthe year ended December 31, 2010. 70Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)Consolidated Financial Statements 1.Consolidated Financial Statements. The consolidated financial statements as listed in the accompanying “Index to Consolidated FinancialInformation” in page F-1 are filed as part of this Annual Report. 2.Consolidated Financial Statement Schedule. Schedules have been omitted because they are not applicable or are not required or theinformation required to be set forth in those schedules is included in the consolidated financial statements or related notes. All otherschedules not listed in the accompanying index have been omitted as they are either not required or not applicable, or the requiredinformation is included in the consolidated financial statements or the notes thereto. (b)Exhibits ExhibitNumber Description of Document 3.1 Amended and Restated Certificate of Incorporation of Addus HomeCare Corporation dated as of November 2, 2009 (filed on November 20,2009 as Exhibit 3.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein) 3.2 Amended and Restated Bylaws of Addus HomeCare Corporation (filed on September 21, 2009 as Exhibit 3.5 to Amendment No. 2 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 4.1 Form of Common Stock Certificate (filed on October 2, 2009 as Exhibit 4.1 to Amendment No. 4 to the Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein) 4.2 Registration Rights Agreement, dated September 19, 2006, by and among Addus HomeCare Corporation, Eos Capital Partners III, L.P., EosPartners SBIC III, L.P., Freeport Loan Fund LLC, W. Andrew Wright, III, Addus Term Trust, W. Andrew Wright Grantor RetainedAnnuity Trust, Mark S. Heaney, James A. Wright and Courtney E. Panzer (filed on July 17, 2009 as Exhibit 4.2 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein) 4.3 Amended and Restated Unsecured 10% Junior Subordinated Promissory Note, dated as of March 18, 2010, by and between AddusHomeCare Corporation and Eos Capital Partners III, L.P. in the principal amount of $6,074,493.24 (filed on March 18, 2010 as Exhibit99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein) 4.4 Amended and Restated Unsecured 10% Junior Subordinated Promissory Note, dated as of March 18, 2010, by and between AddusHomeCare Corporation and Eos Partners SBIC III, L.P. in the principal amount of $1,744,265.26 (filed on March 18, 2010 as Exhibit99.3 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.1 Separation and General Release Agreement, dated as of September 20, 2009, between Addus HealthCare, Inc. and W. Andrew Wright, III(filed on September 21, 2009 as Exhibit 10.1(b) to Amendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.2 Amended and Restated Employment and Non-Competition Agreement, dated May 6, 2008, between Addus HealthCare, Inc. and Mark S.Heaney (filed on July 17, 2009 as Exhibit 10.2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated byreference herein) 71Table of ContentsExhibitNumber Description of Document10.3 Amendment to the Amended and Restated Employment and Non-Competition Agreement, dated September 30, 2009, between AddusHealthCare, Inc. and Mark S. Heaney (filed on October 2, 2009 as Exhibit 10.2(a) to Amendment No. 4 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.4 Agreement and General Release, dated as of September 2, 2010, between Addus HealthCare, Inc. and Frank Leonard (filed on September 7,2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.5 Employment Agreement, dated November 29, 2010, by and between Addus HealthCare, Inc. and Dennis Meulemans (filed on December 1,2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.6 Amended and Restated Employment and Non-Competition Agreement, dated August 27, 2007, between Addus HealthCare, Inc. and DarbyAnderson (filed on July 17, 2009 as Exhibit 10.4 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated byreference herein)10.7 Amendment to the Amended and Restated Employment and Non-Competition Agreement, dated September 30, 2009, between AddusHealthCare, Inc. and Darby Anderson (filed on October 2, 2009 as Exhibit 10.4(a) to Amendment No. 4 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.8 Separation Agreement, Waiver and General Release, dated as of November 23, 2010, between Addus HealthCare, Inc. and Sharon Rudden(filed on November 30, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by referenceherein)10.9 Employment Agreement effective January 19, 2011, by and between Addus HealthCare, Inc. and Daniel Schwartz (filed on January 4, 2011as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.10 Amended and Restated Employment and Non-Competition Agreement, dated October 8, 2008, between Addus HealthCare, Inc. and David W.Stasiewicz (filed on July 17, 2009 as Exhibit 10.6 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporatedby reference herein)10.11 Amendment No. 1 to Amended and Restated Employment and Non-Competition Agreement between Addus HealthCare, Inc. and David W.Stasiewicz (filed on October 2, 2009 as Exhibit 10.6(a) to Amendment No. 4 to Addus HomeCare Corporation’s Registration Statement onForm S-1 and incorporated by reference herein)10.12 Employment and Non-Competition Agreement, dated March 23, 2007, between Addus HealthCare, Inc. and Paul Diamond (filed on July 17,2009 as Exhibit 10.7 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.13 Amendment to the Employment and Non-Competition Agreement, dated September 30, 2009, between Addus HealthCare, Inc. and PaulDiamond (filed on October 2, 2009 as Exhibit 10.7(a) to Amendment No. 4 to Addus HomeCare Corporation’s Registration Statement on FormS-1 and incorporated by reference herein)10.14 Addus HealthCare, Inc. Home Health and Home Care Division Vice President and Regional Director Bonus Plan (filed on July 17, 2009 asExhibit 10.10 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 72Table of ContentsExhibitNumber Description of Document10.15 Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan (filed on July 17, 2009 as Exhibit 10.11 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.16 Addus Holding Corporation 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.12 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.17 Director Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.13 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.18 Executive Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.14 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.19 Form of Indemnification Agreement (filed on July 17, 2009 as Exhibit 10.16 to Addus HomeCare Corporation’s Registration Statement onForm S-1 and incorporated by reference herein)10.20 License Agreement, dated March 24, 2006, between McKesson Information Solutions, LLC and Addus HealthCare, Inc. (filed on August 26,2009 as Exhibit 10.17 to Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated byreference herein)10.21 Contract Supplement to the License Agreement, dated March 24, 2006 (filed on August 26, 2009 as Exhibit 10.17(a) to Amendment No. 1 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.22 Contract Supplement to the License Agreement, dated March 28, 2006 (filed on August 26, 2009 as Exhibit 10.17(b) to Amendment No. 1 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.23 Amendment to License Agreement, dated March 28, 2006, between McKesson Information Solutions, LLC and Addus HealthCare, Inc. (filedon August 26, 2009 as Exhibit 10.17(c) to Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 andincorporated by reference herein)10.24 Lease, dated April 1, 1999, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17, 2009 as Exhibit 10.18 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.25 First Amendment to Lease, dated as of April 1, 2002, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17, 2009 asExhibit 10.18(a) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.26 Second Amendment to Lease, dated as of September 19, 2006, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17,2009 as Exhibit 10.18(b) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.27 Third Amendment to Lease, dated as of September 1, 2008, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17,2009 as Exhibit 10.18(c) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.28 Addus HomeCare Corporation 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20 to Amendment No. 2 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 73Table of ContentsExhibitNumber Description of Document10.29 Form of Incentive Stock Option Award Agreement under the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20(a) toAmendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.30 Form of Restricted Stock Award Agreement under the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20(b) toAmendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.31 Loan and Security Agreement, dated as of November 2, 2009, by and among Addus HealthCare, Inc., Addus HealthCare (Idaho), Inc.,Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (New Jersey), Inc., Addus HealthCare (NorthCarolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home Health Agency, Inc., Little Rock Home Health Agency, Inc., Lowell HomeHealth Agency, Inc., PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers, Fifth Third Bank, asagent, the financial institutions that are or may from time to time become parties thereto, and Addus HomeCare Corporation, as guarantor(filed on November 5, 2009 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by referenceherein)10.32 Consent and Amendment No. 1 to the Loan and Security Agreement, dated as of March 18, 2010, by and among Addus HealthCare, Inc.,Addus HealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (New Jersey), Inc.,Addus HealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home Health Agency, Inc., Little Rock Home HealthAgency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers,Fifth Third Bank, as agent, the financial institutions that are or may from time to time become parties thereto, and Addus HomeCareCorporation, as guarantor (filed on March 18, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated by reference herein)10.33 Joinder, Consent and Amendment No. 2 to Loan and Security Agreement, dated as of July 26, 2010, by and among Addus HealthCare, Inc.,Addus HealthCare (South Carolina), Inc., Addus HealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada),Inc., Addus HealthCare (New Jersey), Inc., Addus HealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home HealthAgency, Inc., Little Rock Home Health Agency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and ProfessionalReliable Nursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions that are or may from time to time becomeparties thereto, and Addus HomeCare Corporation, as guarantor (filed on July 27, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’sCurrent Report on Form 8-K and incorporated by reference herein)10.34 Asset Purchase Agreement dated as of July 26, 2010, by and among Addus HealthCare (South Carolina), Inc., Advantage Health Systems,Inc., Paul Mitchell as the Seller Representative and the Sellers set forth on Exhibit A thereto (filed on July 27, 2010 as Exhibit 99.2 to AddusHomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.35 Earn-Out Agreement dated as of July 26, 2010, by and among Addus HealthCare (South Carolina), Inc., Advantage Health Systems, Inc.,Paul Mitchell as the Seller Representative and the Sellers set forth on therein (filed on July 27, 2010 as Exhibit 99.3 to Addus HomeCareCorporation’s Current Report on Form 8-K and incorporated by reference herein)10.36 Summary of Independent Director Compensation Policy*21.1 Subsidiaries of the Addus HomeCare Corporation*23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm* 74Table of ContentsExhibitNumber Description of Document31.1 Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002*31.2 Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002*32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002**32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002** *Filed herewith**Furnished herewith 75Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. Addus HomeCare CorporationBy: /S/ MARK S. HEANEY Mark S. Heaney,President and Chief Executive OfficerDate: March 28, 2011Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the date indicated: Signature Title Date/S/ MARK S. HEANEY Mark S. Heaney President and Chief Executive Officer (PrincipalExecutive Officer) March 28, 2011/S/ DENNIS B. MEULEMANS Dennis B. Meulemans Chief Financial Officer (Principal Financial Officer) March 28, 2011/S/ MARK L. FIRST Mark L. First Director March 28, 2011/S/ SIMON A. BACHLEDA Simon A. Bachleda Director March 28, 2011/S/ W. ANDREW WRIGHT, III W. Andrew Wright, III Director March 28, 2011/S/ STEVEN I. GERINGER Steven I. Geringer Director March 28, 2011/S/ WAYNE B. LOWELL Wayne B. Lowell Director March 28, 2011/S/ R. DIRK ALLISON R. Dirk Allison Director March 28, 2011 76Table of ContentsINDEX TO CONSOLIDATED FINANCIAL INFORMATION Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Changes in Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1Table of ContentsReport of Independent Registered Public Accounting FirmAddus HomeCare Corporation and SubsidiariesPalatine, IllinoisWe have audited the accompanying consolidated balance sheets of Addus HomeCare Corporation and Subsidiaries as of December 31, 2010 and 2009,and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010.We have also audited the schedule in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of materialmisstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule,assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements and schedule. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Addus HomeCareCorporation and Subsidiaries at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the periodended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. Chicago, Illinois /s/ BDO USA, LLPMarch 28, 2011 F-2Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2010 and 2009(amounts and shares in thousands, except per share data) 2010 2009 Assets Current assets Cash $816 $518 Accounts receivable, net of allowances of $6,723 and $4,813 at December 31, 2010 and 2009, respectively 70,954 70,491 Prepaid expenses and other current assets 7,704 6,937 Deferred tax assets 6,324 5,700 Income taxes receivable — 732 Total current assets 85,798 84,378 Property and equipment, net of accumulated depreciation and amortization 2,923 3,133 Other assets Goodwill 63,930 59,482 Intangibles, net of accumulated amortization 13,570 13,082 Deferred tax assets — 509 Other assets 703 731 Total other assets 78,203 73,804 Total assets $166,924 $161,315 Liabilities and stockholders’ equity Current liabilities Accounts payable $3,304 $3,763 Accrued expenses 26,529 25,557 Current maturities of long-term debt 5,158 7,388 Deferred revenue 2,141 2,189 Total current liabilities 37,132 38,897 Long-term debt, less current maturities 40,027 41,851 Deferred tax liabilities 562 — Other long-term liabilities 1,112 — Total liabilities 78,833 80,748 Commitments, contingencies and other matters Stockholders’ equity Preferred stock—$.001 par value; 10,000 authorized and 0 shares issued and outstanding as of December 31, 2010and 2009, respectively — — Common stock—$.001 par value; 40,000 authorized and 10,751 and 10,499 shares issued and outstanding as ofDecember 31, 2010 and 2009, respectively 11 10 Additional paid-in capital 82,106 80,611 Retained earnings (deficit) 5,974 (54)Total stockholders’ equity 88,091 80,567 Total liabilities and stockholders’ equity $166,924 $161,315 See accompanying notes to consolidated financial statements F-3Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2010, 2009 and 2008(amounts and shares in thousands, except per share data) For the Year EndedDecember 31, 2010 2009 2008 Net service revenues $271,732 $259,305 $236,306 Cost of service revenues 191,853 182,693 167,254 Gross profit 79,879 76,612 69,052 General and administrative expenses 63,841 59,924 52,112 Depreciation and amortization 4,046 4,913 6,092 Total operating expenses 67,887 64,837 58,204 Operating income 11,992 11,775 10,848 Interest expense, net 3,004 6,773 5,755 Income from operations before income taxes 8,988 5,002 5,093 Income tax expense 2,960 1,400 1,070 Net income 6,028 3,602 4,023 Less: Preferred stock dividends, undeclared subject to payment on conversion; declared and converted inNovember 2009 — (5,387) (4,270)Net income (loss) attributable to common shareholders $6,028 $(1,785) $(247)Basic and diluted income (loss) per common share $0.57 $(0.66) $(0.24)Weighted average number of common shares and potential common shares outstanding: Basic 10,604 2,707 1,019 Diluted 10,606 2,707 1,019 See accompanying notes to consolidated financial statements F-4Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the years ended December 31, 2010, 2009 and 2008(amounts and shares in thousands) Common Stock Preferred Stock AdditionalPaid-InCapital RetainedEarnings(Deficit) TotalStockholders’Equity Shares Amount Shares Amount Dividends Balance at December 31, 2007 1,019 $1 38 $37,750 $(4,952) $1,157 $594 $34,550 Dividends accrued on preferred stock — — — — (4,270) — — (4,270) Stock-based compensation — — — — — 272 — 272 Net income — — — — — — 4,023 4,023 Balance at December 31, 2008 1,019 1 38 37,750 (9,222) 1,429 4,617 34,575 Dividends accrued on preferred stock — — — — (5,387) — — (5,387) Dividends on preferred stock — — — — 14,609 (6,336) (8,273) — Conversion of Series A preferred stock to common stock 4,077 4 (38) (37,750) — 37,746 — — Net proceeds from issuance of common stock, net ofunderwriters’ discount and transaction costs 5,400 5 — — — 47,475 — 47,480 Issuance of shares of common stock under restricted stockaward agreements 3 — — — — — — — Stock-based compensation — — — — — 297 — 297 Net income — — — — — — 3,602 3,602 Balance at December 31, 2009 10,499 10 — — — 80,611 (54) 80,567 Issuance of shares of common stock under restricted stockaward agreements 4 1 — — — — — 1 Stock-based compensation — — — — — 255 — 255 Stock issued for acquisition 248 — — — — 1,240 — 1,240 Net income — — — — — — 6,028 6,028 Balance at December 31, 2010 10,751 $11 — $— $— $82,106 $5,974 $88,091 See accompanying notes to consolidated financial statements F-5Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2010, 2009 and 2008(amounts in thousands) For the YearEnded December 31, 2010 2009 2008 Cash flows from operating activities Net income $6,028 $3,602 $4,023 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 4,046 4,913 6,092 Deferred income taxes 447 (735) (815) Change in fair value of financial instrument (191) (586) 778 Stock-based compensation 255 297 272 Contingent purchase price deemed interest expense — 1,802 — Write-off of debt issuance costs — 794 — Amortization of debt issuance costs 179 590 483 Provision for doubtful accounts 4,429 4,514 2,451 Gain on sale of assets — — (11) Changes in operating assets and liabilities, net of acquired businesses: Accounts receivable (4,892) (25,768) (8,313) Prepaid expenses and other current assets (767) (1,790) (2,610) Income taxes 732 (272) (752)Checks issued against future deposits — — (3,956)Accounts payable (459) (116) 502 Accrued expenses 944 3,816 5,974 Deferred revenue (48) 14 488 Net cash provided by (used in) operating activities 10,703 (8,925) 4,606 Cash flows from investing activities Acquisitions of businesses (5,588) (14,177) (5,026) Proceeds on sale of equipment — — 17 Purchases of property and equipment (612) (671) (406) Net cash used in investing activities (6,200) (14,848) (5,415) Cash flows from financing activities Net proceeds from issuance of common stock — 47,480 — Borrowings on term loan — — 8,500 Payments on term loan — (53,368) (5,192)Net borrowings (repayments) on revolving credit loans — (7,694) 3,908 Net borrowings on new term loan 5,000 — — Net borrowings (payments) on credit facility (5,250) 38,500 — Payments on preferred stock dividends — (1,673) — Payments on subordinated dividend notes (1,250) (5,117) — Debt issuance costs (151) (756) (272)Net borrowings (repayments) on other notes payable (2,554) 806 (43)Net cash (used in) provided by financing activities (4,205) 18,178 6,901 Net change in cash 298 (5,595) 6,092 Cash, at beginning of period 518 6,113 21 Cash, at end of period $816 $518 $6,113 Supplemental disclosures of cash flow information Cash paid for interest $3,555 $5,872 $4,606 Cash paid for income taxes 1,457 2,405 3,084 Supplemental disclosures of non-cash investing and financing activities Issuance of subordinated promissory notes payable for acquisitions $— $— $1,350 Contingent and deferred consideration accrued for acquisitions 1,615 709 1,528 Undeclared accrued preferred stock dividends — 5,387 4,270 Tax benefit related to the amortization of tax goodwill in excess of book basis 160 425 135 Conversion of accrued preferred dividends into subordinated dividend notes — 12,936 — See accompanying notes to consolidated financial statements F-6Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)1. Significant Accounting PoliciesBasis of Presentation and Description of BusinessThe consolidated financial statements include the accounts of Addus HomeCare Corporation (“Holdings”) and its subsidiaries (together with Holdings,the “Company” or “we”). The Company provides home & community and home health services through a network of locations throughout the United States.These services are primarily performed in the homes of the consumers. The Company’s home & community services include assistance to the elderly,chronically ill and disabled with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of daily living. Home &community services are primarily performed under agreements with state and local governmental agencies. The Company’s home health services are operatedthrough licensed and Medicare certified offices that provide physical, occupational and speech therapy, as well as skilled nursing services to pediatric, adultinfirm and elderly patients. Home health services are reimbursed from Medicare, Medicaid and Medicaid-waiver programs, commercial insurance and privatepayors.On July 10, 2009, Holdings changed its name to Addus HomeCare Corporation from Addus Holding Corporation.On October 1, 2009, Holdings’ board of directors approved a 10.8-for-1 stock split, increasing the number of issued and outstanding shares ofcommon stock from 94 to 1,019. All share and per share data, except for par value, have been adjusted to reflect the stock split for all periods presented. Inconjunction with this stock split, Holdings’ board of directors and stockholders approved an increase in the number of authorized shares of common stock to40,000. Additionally, on November 2, 2009, Holdings increased the number of authorized shares of preferred stock from 100 to 10,000.On November 2, 2009, Holdings completed its initial public offering (the “IPO”), consisting of the sale of 5,400 shares of common stock at $10.00 pershare. After deducting the underwriters’ discounts and transaction fees and expenses, the net proceeds to the Company from the sale of shares in the IPO were$47,480. Transaction costs related to the IPO of $2,720 were charged directly to additional paid-in capital.Principles of ConsolidationAll intercompany balances and transactions have been eliminated in consolidation.Revenue RecognitionThe Company generates net service revenues by providing home & community services and home health services directly to consumers. The Companyreceives payments for providing such services from federal, state and local governmental agencies, commercial insurers and private individuals.Home & CommunityThe home & community segment net service revenues are principally provided based on authorized hours, determined by the relevant agency, at anhourly rate specified in agreements or fixed by legislation and recognized as revenues at the time services are rendered. Home & community net servicerevenues are reimbursed by state, local and other governmental programs which are partially funded by Medicaid or Medicaid waiver programs, with theremainder reimbursed through private duty and insurance programs. F-7Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Home HealthThe home health segment net service revenues are primarily generated on a per episode or per visit basis. Home health segment net service revenuesconsist of approximately 64% of Medicare services with the balance being non-Medicare services derived from Medicaid, commercial insurers and privateduty. Home health net service revenues reimbursed by Medicare are based on episodes of care. Under the Medicare Prospective Payment System (“PPS”), anepisode of care is defined as a length of care up to 60 days with multiple continuous episodes allowed per patient. Medicare billings under PPS vary based onthe severity of the patient’s condition and are subject to adjustment, both positive and negative, for changes in the patient’s medical condition and certain otherreasons. At the inception of each episode of care a request for anticipated payment (“RAP”) is submitted to Medicare for 50% to 60% of the estimated PPSreimbursement. The Company estimates the net PPS revenues to be earned during an episode of care based on the initial RAP billing, historical trends andother known factors. The net PPS revenues are initially recognized as deferred revenues and subsequently amortized as net service revenues ratably over the60-day episodic period. At the end of each episode of care a final claim billing is submitted to Medicare and any changes between the initial RAP and finalclaim billings are recorded as an adjustment to net service revenues. No significant adjustments from initial estimates have been recorded as a result of theprocess. Other non-Medicare services are primarily provided on a per visit basis determinable and recognized as revenues at the time services are rendered.Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonablepossibility that recorded estimates may change in the near term. The Company believes that it is in compliance in all material respects with all applicable lawsand regulations.Allowance for Doubtful AccountsThe Company establishes its allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected.The Company estimates its provision for doubtful accounts primarily by aging receivables utilizing eight aging categories, and applying its historicalcollection rates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certainlarge payors analyzed separately from other payor groups. In the Company’s evaluation of these estimates, it also considers delays in payment trends inindividual states due to budget or funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with requireddocumentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level management believes is sufficient to coverpotential losses. However, actual collections could differ from our estimates.Property and EquipmentProperty and equipment are recorded at cost and depreciated over the estimated useful lives of the related assets by use of the straight-line method exceptfor internally developed software which is amortized by the sum-of-years digits method. Maintenance and repairs are charged to expense as incurred. Theestimated useful lives of the property and equipment are as follows: Computer equipment 3 – 5 yearsFurniture and equipment 5 – 7 yearsTransportation equipment 5 yearsComputer software 5 – 10 yearsLeasehold improvements Lesser of useful life or lease term, unless probability oflease renewal is likely F-8Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) GoodwillThe Company’s carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitionsincluding the acquisition of Addus HealthCare, Inc. (“Addus HealthCare”). In accordance with Accounting Standards Codification TM (“ASC”) Topic 350,“Goodwill and Other Intangible Assets ,” goodwill and intangible assets with indefinite useful livesare not amortized. The Company tests goodwill forimpairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change inbusiness climate or regulatory changes that would indicate that an impairment may have occurred. Goodwill and indefinite lived intangible assets are requiredto be tested for impairment at least annually using a two-step method. The first step in the evaluation of goodwill impairment involves comparing the currentfair value of each reporting unit to the recorded value, including goodwill. The Company uses the combination of a discounted cash flow model (“DCFmodel”) and the market multiple analysis method to determine the current fair value of each reporting unit. The DCF model was prepared using revenue andexpense projections based on the Company’s current operating plan. As such, a number of significant assumptions and estimates are involved in theapplication of the DCF model to forecast revenue growth, price changes, gross profits, operating expenses and operating cash flows. The cash flows werediscounted using a weighted average cost of capital ranging from 13.5% to 15.5%, which was management’s best estimate based on the capital structure of theCompany and external industry data. As part of the second step of this evaluation, if the carrying value of goodwill exceeds its fair value an impairment losswould be recognized.The Company completed its annual impairment test of goodwill as of October 1, 2010 and determined that no goodwill impairment existed as ofOctober 31, 2010. Although the Company believes that the financial projections used in the assessment are reasonable and appropriate for its two reportingunits, there is uncertainty inherent in those projections. As of December 31, 2010 the Company determined that no events or circumstances from October 1,2010 through December 31, 2010 indicated that a further assessment was necessary. However, the current Federal and state economic and reimbursementenvironments and state budgetary pressures to decrease or eliminate services provided by the Company could have a negative effect on future earnings andcash flows from operations, as well as the Company’s total stockholders’ equity exceeding its market capitalization as of December 31, 2010, are all factorsindicating the possibility of future impairment to the Company’s goodwill.The Company’s total stockholders’ equity was $88,091 as of December 31, 2010 and the Company’s market capitalization was approximately$44,079 based on 10,751 shares of common stock outstanding as of December 31, 2010. While the market capitalization of approximately $44,079 is belowthe Company’s stockholders’ equity and was considered in its evaluation of fair value, the market capitalization metric is only one indicator of fair value. Inthe Company’s opinion, the market capitalization approach, by itself, is not a reliable indicator of the value for the Company.The Company will continue to monitor market conditions and determine if any additional interim review of goodwill is warranted. Further deteriorationin the market or actual results as compared with the Company’s projections may ultimately result in a future impairment. In the event that the Companydetermines goodwill is impaired in the future, it would need to recognize a non-cash impairment charge, which could have a material adverse effect on itsconsolidated balance sheet and results of operations. F-9Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Intangible AssetsThe Company’s identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-competeagreements. Amortization is computed using straight-line and accelerated methods based upon the estimated useful lives of the respective assets, which rangefrom two to 25 years.ASC Topic 350 requires that the fair value of intangible assets with finite lives be estimated and compared to the carrying value. The Companyestimates the fair value of these intangible assets using the income approach. The Company recognizes an impairment loss when the estimated fair value of theintangible asset is less than the carrying value. Intangible assets with finite lives are amortized using the estimated economic benefit method over the useful lifeand assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.The income approach, which the Company uses to estimate the fair value of its reporting units and intangible assets, is dependent on a number offactors including estimates of future market growth and trends, forecasted revenue and costs, expected periods the assets will be utilized, appropriate discountrates and other variables. The Company bases its fair value estimates on assumptions the Company believes to be reasonable but which are unpredictable andinherently uncertain. Actual future results may differ from those estimates. In addition, the Company makes certain judgments about the selection ofcomparable companies used in the market approach in valuing its reporting units, as well as certain assumptions to allocate shared assets and liabilities tocalculate the carrying values for each of the Company’s reporting units.Long-Lived AssetsThe Company reviews its long-lived assets and finite lived intangibles (except goodwill and intangible assets, as described above) for impairmentwhenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, the Companycompares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. If the carrying amount ofan asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds theestimated fair value of the asset, generally determined by discounting the estimated future cash flows. No impairment charge was recorded in 2010, 2009 or2008.Debt Issuance CostsThe Company amortizes debt issuance costs on a straight-line method over the term of the related debt.Workers’ Compensation ProgramThe Company’s workers’ compensation program has a $350 deductible component. The Company recognizes its obligations associated with thisprogram in the period the claim is incurred. The cost of both the claims reported and claims incurred but not reported, up to the deductible, have been accruedbased on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. The future claims paymentsrelated to the workers’ compensation program are secured by letters of credit.Derivative Financial InstrumentThe Company utilized a derivative financial instrument to minimize interest rate risk. The Company’s derivative instrument consisted of a three-yearinterest rate agreement designed to reduce the variability of cash F-10Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) flows associated with a portion of the Company’s term debt. As the hedge accounting criteria established in ASC Topic 815, “Derivatives and Hedging”have not been met, the Company accounted for the instrument at its fair value and recognizes any changes in its fair value in earnings for the period.ASC Topic 820, “Fair Value Measurements,” establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.These categories include in descending order of priority: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little orno market data exists, therefore requiring an entity to develop its own assumptions.The fair value of the swap was calculated using proprietary models utilizing observable inputs (Level 2) as well as future assumptions related to interestrates and other applicable variables. These calculations were performed by the financial institution which is counterparty to the applicable swap agreement andreviewed by the Company. The Company used these reported fair values to adjust the asset or liability as appropriate. The interest rate swap agreementconcluded in March of 2010.Interest Expense, netThe Company’s net interest expense consists of interest costs on its credit facility and other debt instruments and is recorded net of any interest incomerecorded by the Company. Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based onqualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments arenot certain, the interest income is recognized when received and reported in the income statement caption, interest expense, net. The Company recordedapproximately $170 of prompt payment interest income in the fourth quarter of 2010.Income TaxesThe Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes”. The objective of accounting for income taxes is torecognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events thathave been recognized in its financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of the Company’sassets and liabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferred tax assets bereduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC Topic 740, alsoprescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in atax return. In addition, ASC Topic 740 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements foruncertain tax positions.Stock-based CompensationThe Company has two stock incentive plans, the 2006 Stock Incentive Plan (the “2006 Plan”) and the 2009 Stock Incentive Plan (the “2009 Plan”) thatprovide for stock-based employee compensation. The Company accounts for stock-based compensation in accordance with ASC Topic 718, “StockCompensation.” Compensation expense is recognized on a graded method under the 2006 Plan and on a straight-line basis under the 2009 Plan over thevesting period of the awards based on the fair value of the options. Under the 2006 Plan, F-11Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) the Company historically used the Black-Scholes option pricing model to estimate the fair value of its stock based payment awards, but beginningOctober 28, 2009 under its 2009 Plan it began using an enhanced Hull-White Trinomial model. The determination of the fair value of stock-based paymentsutilizing the Black-Scholes model and the Enhanced Hull-White Trinomial model is affected by Holdings’ stock price and a number of assumptions,including expected volatility, risk-free interest rate, expected term, expected dividends yield, expected forfeiture rate, expected turn-over rate, and the expectedexercise multiple.Net Income (Loss) Per Common ShareNet income (loss) per common share, calculated on the treasury stock method, is based on the weighted average number of shares outstanding duringthe period. The Company’s outstanding securities that may potentially dilute the common stock are stock options and restricted stock awards. Included in theCompany’s calculation for the year ended December 31, 2010 were 588 stock options which were out-of-the money and therefore anti-dilutive and 6 restrictedstock awards with 2 included in the weighted diluted shares outstanding for 2010. For the years ended December 31, 2009 and 2008, the Company reported anet loss and any potentially dilutive securities would be antidilutive, therefore, no additional shares were considered in the calculation of diluted earnings pershare.EstimatesThe financial statements are prepared by management in conformity with GAAP and include estimated amounts and certain disclosures based onassumptions about future events. Accordingly, actual results could differ from those estimates.Fair Value of Financial InstrumentsThe Company’s financial instruments consist of cash, accounts receivable, payables and debt. The carrying amounts reported in the consolidatedbalance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of theseinstruments. The Company’s long-term debt with variable interest rates approximates fair value based on instruments with similar terms.New Accounting PronouncementsIn August 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claimsand Related Insurance Recoveries which clarifies for medical malpractice claims or similar contingent liabilities, a health care entity should not net insurancerecoveries against a related claim liability. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginningon or after December 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.2. AcquisitionsOn July 26, 2010, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company acquiredcertain assets of Advantage Health Systems, Inc., a South Carolina corporation (“Advantage”). The total consideration payable pursuant to the PurchaseAgreement was $8,380, comprised of $5,140 in cash, common stock consideration with a deemed value of $1,240 resulting in the F-12Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) issuance of 248 common shares, and a maximum of $2,000 in future cash consideration subject to the achievement of certain performance targets set forth inan earn-out agreement and the assumption of certain specified liabilities.On July 26, 2010, the Company entered into an amendment (the “Second Amendment”) to its credit facility. The Second Amendment provides for a newterm loan component of the credit facility in the aggregate principal amount of $5,000 with a maturity date of January 5, 2013. The requisite lenders alsoconsented to the acquisition, effective July 25, 2010, of certain assets of Advantage, by the Company, pursuant to the Purchase Agreement. The new term loanwill be repaid in 24 equal monthly installments which began in February 2011. Interest on the new term loan under the credit facility is payable either at afloating rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or the LIBOR rate for term periods of one, two, three or six months plus a marginof 4.6%. Interest will be paid monthly or at the end of the relevant interest period.The Company’s acquisition of Advantage has been accounted for in accordance with ASC Topic 805, “Business Combinations” and the resultantgoodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets ”. Assets acquired and liabilitiesassumed were recorded at their fair values as of December 31, 2010. The total purchase price is $7,980 and is comprised of: Total Cash $5,140 Issuance of 248 Addus shares at $5.00 per share (valued at a price per share equal to the average closing price ofthe Company’s stock for the three most recent trading days preceding the closing, subject to a floor of $5.00 pershare) 1,240 Contingent earn-out obligation (net of $92 discount) 1,600 Total purchase price $7,980 The contingent earn-out obligation has been recorded at its fair value of $1,600, which is the present value of the Company’s obligation based onprobability-weighted estimates of the achievement of certain performance targets, as defined.Under business combination accounting, the total purchase price will be allocated to Advantage’s net tangible and identifiable intangible assets based ontheir estimated fair values. Based upon our management’s valuation, the total purchase price has been allocated as follows: Total Goodwill $4,272 Identifiable intangible assets 3,631 Property and equipment 77 Total purchase price allocation $7,980 Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill amounts arenot amortized, but rather are tested for impairment at least annually. In the event that we determine that the value of goodwill has become impaired, we willincur an impairment charge for the amount during the fiscal quarter in which such determination is made. F-13Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Identifiable intangible assets acquired consist of trade names and trademarks, certificates of need and state licenses, customer relationships, and non-compete agreements. The estimated fair value of identifiable intangible assets was determined by our management.The following table contains unaudited pro forma consolidated income statement information assuming the Advantage acquisition closed on January 1,2010 and 2009. For the Year EndedDecember 31, 2010 2009 Net service revenues $279,133 $272,494 Operating income 12,440 12,633 Net income $6,172 $3,974 Less: Preferred stock dividends, undeclared subject to payment on conversion;declared and converted November 2009 — (5,387) Net income (loss) attributable to common shareholders $6,172 $(1,413) Basic income (loss) per share $0.57 $(0.48)Diluted income (loss) per share $0.57 $(0.48)The pro forma disclosures in the table above include adjustments for interest expense, amortization of intangible assets and tax expense to reflect resultsthat are more representative of the combined results of the transactions as if they had occurred on January 1, 2010 and 2009. This pro forma information ispresented for illustrative purposes only and may not be indicative of the results of operation that would have actually occurred. In addition, future results mayvary significantly from the results reflected in the pro forma information.3. Property and EquipmentProperty and equipment consisted of the following: December 31, 2010 2009 Computer equipment $1,485 $1,220 Furniture and equipment 1,001 936 Transportation equipment 532 471 Leasehold improvements 1,217 1,199 Computer software 2,745 2,461 6,980 6,287 Less accumulated depreciation and amortization (4,057) (3,154) $2,923 $3,133 Computer software includes $1,500 of internally developed software that was recognized in conjunction with the acquisition of Addus HealthCare.Depreciation and amortization expense predominantly related to computer equipment and software is reflected in general and administrative expenses andtotaled $902, $960, and $962 for the three years ended December 31, 2010, 2009 and 2008, respectively. F-14Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) 4. Goodwill and Intangible AssetsThe Company’s goodwill and identifiable intangible assets have been recorded at the acquisition date. The following is a summary of the goodwillactivity by segment and in total for the years ended December 31, 2010 and 2009. Home &Community HomeHealth Total Goodwill, at December 31, 2008 $37,911 $10,015 $47,926 Adjustments to previously recorded goodwill 8,963 2,593 11,556 Goodwill, at December 31, 2009 46,874 12,608 59,482 Acquisitions in 2010 3,738 534 4,272 Adjustments to previously recorded goodwill 208 (32) 176 Goodwill, at December 31, 2010 $50,820 $13,110 $63,930 Adjustments to the previously recorded goodwill relate primarily to contingent consideration that is generally earned and determined at specific futuredates, and credits related to amortization of tax goodwill in excess of book basis.In September 2006, in connection with Holdings’ acquisition of Addus HealthCare, the Company entered into a contingent payment agreement with theformer stockholders of Addus HealthCare. The Company agreed that the former stockholders would be entitled to additional consideration, subject to the termsand conditions set forth in the contingent payment agreement. In conjunction with Holdings’ IPO completed on November 2, 2009 and pursuant to thecontingent payment agreement, the contingent payment recipients received an aggregate amount equal to $12,721 upon completion of the IPO, of which $1,802was deemed interest expense and the remaining balance of $10,919 was recorded as additional goodwill in 2009.The carrying amount and accumulated amortization of each identifiable intangible asset category consisted of the following at December 31, 2010 and2009: December 31, 2010 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Customer and referral relationships $26,675 $16,491 $10,184 Trade names and trademarks 4,587 2,180 2,407 State Licenses (1) 790 — 790 Non-competition agreements 408 219 189 $32,460 $18,890 $13,570 (1)Non-amortizing intangible asset F-15Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) December 31, 2009 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Customer and referral relationships $24,235 $13,808 $10,427 Tradenames and trademarks 4,365 1,780 2,585 Non-competition agreements 229 159 70 $28,829 $15,747 $13,082 Amortization expense related to the identifiable intangible assets amounted to $3,144, $3,953 and $5,130 for the three years ended December 31, 2010,2009 and 2008, respectively. Goodwill and state licenses are not amortized pursuant to ASC Topic 350.The estimated future intangible amortization expense is as follows: For the year endedDecember 31, 2011 $2,767 2012 2,129 2013 1,720 2014 1,386 2015 1,120 Thereafter 3,658 Total $12,780 5. Details of Certain Balance Sheet AccountsPrepaid expenses and other current assets consist of the following: December 31, 2010 2009 Prepaid health insurance $5,337 $4,884 Prepaid workers’ compensation and liability insurance 1,386 1,321 Prepaid rent 198 219 Other 783 513 $7,704 $6,937 F-16Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Accrued expenses consisted of the following: December 31, 2010 2009 Accrued payroll $10,453 $10,819 Accrued workers’ compensation insurance 8,218 7,131 Accrued payroll taxes 1,579 2,153 Accrued health insurance 3,858 3,318 Accrued interest 144 717 Current portion of contingent earn-out obligation 502 — Other 1,775 1,419 $26,529 $25,557 The Company provides health insurance coverage to qualified union employees providing home & community services in Illinois through a Taft-Hartleymulti-employer health and welfare plan under Section 302(c)(5) of the Labor Management Relations Act of 1947. The Company’s insurance contributionsequal the amount reimbursed by the State of Illinois. Contributions are due within five business days from the date the funds are received from the State.Amounts due of $3,808 and $3,267 for health insurance reimbursements and contributions were reflected in prepaid insurance and accrued insurance atDecember 31, 2010 and 2009, respectively.The Company’s workers’ compensation program has a $350 deductible component. The Company recognizes its obligations associated with thisprogram in the period the claim is incurred. The cost of both the claims reported and claims incurred but not reported, up to the deductible, have been accruedbased on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. The future claims paymentsrelated to the workers’ compensation program are secured by letters of credit. These letters of credit totaled $6,765 and $7,165 at December 31, 2010 and2009, respectively.As part of the terms of the acquisition of Addus HealthCare in 2006, all 2005 and prior workers’ compensation claims are the obligation of the formerstockholders of Addus HealthCare. Approximately $3,750 in cash escrows and deposits were set-aside from the purchase price of Addus HealthCare ascollateral for these 2005 and prior claims as of December 31, 2010. The outstanding loss reserves associated with the 2005 and prior workers’ compensationpolicies approximated $2,844 at December 31, 2010.The Company had an interest rate agreement to manage its exposures to movements in interest rates. The related derivative financial instrument isaccounted for on a full mark-to-market basis through current earnings. Accrued interest included a $0 and $191 mark-to-market liability at December 31,2010 and 2009, respectively. The interest rate swap agreement expired in March 2010. F-17Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) 6. Long-Term DebtLong-term debt consisted of the following: December 31, 2010 2009 Revolving credit loan $33,250 $38,500 Term loan 5,000 — Subordinated dividend notes bearing interest at 10.0% 6,569 7,819 Insurance note payable, due May 2011 and bearing interest at 2.9% 366 — Insurance notes payable, due May 2010 and bearing interest at 4.7% — 870 Subordinated promissory note, due July 2010 and bearing interest at 8.0% — 250 Subordinated promissory note, due October 2010 and bearing interest at 8.0% — 500 Subordinated promissory note, due December 2010 and bearing interest at 8.0% — 1,250 Subordinated promissory note, due December 2010 and bearing interest at 6.0% — 50 Total 45,185 49,239 Less current maturities (5,158) (7,388) Long-term debt $40,027 $41,851 Senior Secured Credit FacilityOn November 2, 2009, in conjunction with the Company’s IPO, the Company entered into a new senior secured credit facility, which the Companyrefers to as the new credit facility. The new credit facility initially provided a $50,000 revolving line of credit with a term of five years, and a $15,000sublimit for the issuance of letters of credit. Substantially all of the subsidiaries of Holdings are co-borrowers, and Holdings has guaranteed the borrowers’obligations under the new credit facility. The new credit facility is secured by a first priority security interest in all of Holdings’ and the borrowers’ currentand future tangible and intangible assets, including the shares of stock of the borrowers.The proceeds from the initial borrowings under the new credit facility were used, together with net proceeds from the Company’s IPO, to repay $57,185outstanding under the Company’s then-existing credit facility as of November 2, 2009, to make a payment required by a contingent payment agreementpreviously entered into with the former owners of Addus HealthCare, to pay a portion of the dividends accrued on the Company’s series A preferred stock thatconverted into shares of the Company’s common stock in connection with the IPO, to pay a one-time consent fee to certain former holders of such shares ofseries A preferred stock, to pay the former Chairman of Addus HealthCare amounts required by his separation and general release agreement and to pay relatedfees and expenses.On March 18, 2010, the Company entered into an amendment (the “First Amendment”) to its new credit facility. The First Amendment (i) increased themaximum aggregate amount of revolving loans available to the F-18Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Company by $5,000 to $55,000, (ii) modified the Company’s maximum senior leverage ratio from 2.75 to 1.0 to 3.00 to 1.0 for each twelve month periodending on the last of day of each fiscal quarter thereafter and (iii) increased the advance multiple used to determine the amount of the borrowing base from 2.75to 1.0 to 3.0 to 1.0.On July 26, 2010, the Company entered into the Second Amendment to its new credit facility. The Second Amendment provided for a new term loancomponent of the credit facility in the aggregate principal amount of $5,000 with a maturity date of January 5, 2013. The requisite lenders also consented tothe acquisition, effective July 25, 2010, of certain assets of Advantage by the Company, pursuant to the Purchase Agreement. The new term loan will berepaid in 24 equal monthly installments which commenced February 2011. Interest on the new term loan under the credit facility is payable either at a floatingrate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or the LIBOR rate for term periods of one, two, three or six months plus a margin of 4.6%.Interest will be paid monthly or at the end of the relevant interest period.The availability of funds under the revolving credit portion of the new credit facility, as amended by the First Amendment, is based on the lesser of(i) the product of adjusted EBITDA, as defined in the new credit facility agreement, for the most recent 12-month period for which financial statements havebeen delivered under the new credit facility agreement multiplied by the specified advance multiple, up to 3.0, less the outstanding senior indebtedness andletters of credit, and (ii) $55,000 less the outstanding revolving loans and letters of credit. Interest on the amounts outstanding under the revolving creditportion of the new credit facility is payable either at a floating rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or the LIBOR rate for termperiods of one, two, three or six months plus a margin of 4.6%. Interest will be paid monthly or at the end of the relevant interest period, as determined inaccordance with the new credit facility agreement. The borrowers will pay a fee equal to 0.5% per annum of the unused portion of the revolving portion of thenew credit facility. Issued stand-by letters of credit will be charged at a rate of 2% per annum payable monthly. On December 31, 2010 the interest rate on therevolving credit loan facility was 4.86% (30 day LIBOR rate was 0.26%) and total availability was $13,478.The new credit facility contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws,maintenance of permits, maintenance of insurance and property and payment of taxes. The new credit facility also contains certain customary financialcovenants and negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to staybelow a maximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions onguarantees, indebtedness, liens, dividends, distributions, investments and loans, restrictions on the Company’s ability to enter into transactions other than inthe ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, or for the purchase price of anyone acquisition to exceed $500, in each case without the consent of the lenders, restrictions on mergers, transfers of assets, acquisitions, subsidiaries andaffiliate transactions, and restrictions on fundamental changes and lines of business. The Company was in compliance with all of its covenants atDecember 31, 2010.Under the Company’s prior credit facility, interest on the borrowings was at an index, as defined, or LIBOR rate. The index base rate was the higher ofthe prime rate or the federal funds rate plus 0.5%. For borrowings under the revolving credit loan portion of the prior credit facility, the interest rate included anapplicable margin of 2.75% for an index rate loan and 3.75% for a LIBOR rate loan. For borrowings under the term loan portion of the prior credit facility, theinterest rate included an applicable margin ranging from 2.50% to 3.50% for an index rate loan and 3.50% to 4.50% for a LIBOR rate loan, depending on theCompany’s leverage ratio. F-19Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) Subordinated Dividend NotesOn November 2, 2009, in conjunction with the IPO, all outstanding shares of Holdings’ series A preferred stock were converted into an aggregate 4,077shares of common stock at a ratio of 1:108. Total accrued and unpaid dividends on the series A preferred stock were $13,109 as of November 2, 2009, atwhich time a dividend payment of $173 was made and the remaining $12,936 in unpaid preferred dividends were converted into dividend notes. Thedividend notes are subordinated and junior to all obligations under the Company’s new credit facility. On November 2, 2009, the Company made amandatory payment of $4,000 on the dividend notes. Interest on the outstanding dividend notes accrues at a rate of 10% per annum, compounded annually.The outstanding principal amount of the dividend notes was originally payable in eight equal consecutive quarterly installments which commenced onDecember 31, 2009 and each March 31, June 30, September 30 and December 31 of each year thereafter until paid in full. Interest on the unpaid principalbalance of the dividend notes is due and payable quarterly in arrears together with each payment of principal.On March 18, 2010, the Company amended its subordinated dividend notes. A balance of $7,819 was outstanding on the dividend notes as ofDecember 31, 2009. Pursuant to the amendments, the dividend notes were amended to (i) extend the maturity date of the dividend notes from September 30,2011 to December 31, 2012, (ii) modify the amortization schedule of the dividend notes to reduce the annual principal payment amounts from $4,468 to$1,250 in 2010; from $3,351 to $2,500 in 2011; and amended total payments in 2012 to $4,069, and (iii) permit, based on the Company’s leverage ratio,the prepayment of all or a portion of the principal amount of the dividend notes, together with interest on the principal amount.Other NotesDuring 2010 and 2009, the Company financed its general liability and workers’ compensation insurance premiums with a $1,031 and $2,393promissory note, respectively. The notes have 12 month term periods with monthly principal and interest payments.Aggregate maturities of long-term debt at December 31, 2010, are as follows: For the year endedDecember 31, 2011 $5,158 2012 6,569 2013 208 2014 33,250 Total $45,185 F-20Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) 7. Income TaxesIncome tax expense is comprised of the following: December 31, 2010 2009 2008 Current Federal $2,178 $1,957 $1,497 State 335 603 523 Deferred Federal 388 (1,022) (787)State 59 (138) (163)Provision for income taxes $2,960 $1,400 $1,070 The tax effects of certain temporary differences between the Company’s book and tax bases of assets and liabilities give rise to significant portions of thedeferred income tax assets at December 31, 2010 and 2009. The deferred tax assets consisted of the following: December 31, 2010 2009 Deferred tax assets Current Accounts receivable allowances $2,619 $1,859 Accrued compensation 1,207 1,458 Accrued workers’ compensation 3,201 2,846 Accrued interest — 74 Other 188 216 Total current deferred tax assets 7,215 6,453 Deferred tax liabilities Current Prepaid insurance (891) (753) Net deferred tax assets—current 6,324 5,700 Deferred tax assets Long-term Property and equipment 179 178 Stock-based compensation 470 446 Total long-term deferred tax assets 649 624 Deferred tax liabilities Long-term Goodwill and intangible assets (1,211) (115)Net deferred tax assets (liabilities)—non-current (562) 509 Total net deferred tax assets $5,762 $6,209 F-21Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) A reconciliation of the statutory federal tax rate of 34.0% to the effective income tax rate for the years ended December 31, 2010, 2009, and 2008 issummarized as follows: December 31, 2010 2009 2008 Federal income tax at statutory rate 34.0% 34.0% 34.0% State and local taxes, net of federal benefit 4.9 4.6 4.3 Jobs tax credits, net (7.9) (16.3) (19.0) Nondeductible meals and entertainment 1.0 1.2 0.8 Tax asset adjustment—stock options 0.9 4.4 — Other — 0.1 0.9 Effective income tax rate 32.9% 28.0% 21.0% The Company is subject to taxation in jurisdictions in which it operates. The Company continues to remain subject to examination by U.S. federalauthorities for the years 2007 through 2010 and for various state authorities for the years 2006 through 2010. As part of the acquisition of Addus HealthCarein 2006, the selling stockholders of the predecessor agreed to assume and indemnify the successor for any federal or state tax liabilities prior to the acquisitiondate.The total amount of unrecognized tax benefits under ASC Topic 740 at December 31, 2010 was $115. If recognized, the entire amount would favorablyimpact the effective tax rate in future periods. Interest and penalties related to income tax liabilities are recognized in interest expense and general andadministrative expenses, respectively. The Company does not anticipate a material change in its liabilities for uncertain tax positions during the next12 months.A summary of the activities associated with the Company’s reserve for unrecognized tax benefits is as follows: UnrecognizedTax Benefits Balance at January 1, 2008 $— Increases related to current year tax positions 75 Balance at December 31, 2008 75 Increases related to current year tax positions 40 Balance at December 31, 2009 115 Increases related to current year tax positions — Balance at December 31, 2010 $115 F-22Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) 8. Stock OptionsStock OptionsThe Company’s 2006 Stock Incentive Plan (the “2006 Plan”) provides for the grant of non-qualified stock options to directors and eligible employees,as defined in the 2006 Plan. A total of 899 of Holdings’ shares of common stock were reserved for issuance under the 2006 Plan. The number of options to begranted and the terms thereof were approved by Holdings’ board of directors. The option price for each share of common stock subject to an option may begreater than or equal to the fair market value of the stock at the date of grant. The stock options generally vest ratably over a five year period and expire 10years from the date of grant, if not previously exercised.In September 2009, the Company’s board of directors and stockholders adopted and approved the Addus HomeCare Corporation 2009 Stock IncentivePlan (the “2009 Plan”). The 2009 Plan provides for the grant of 750 incentive stock options, nonqualified stock options, stock appreciation rights, restrictedstock, deferred stock units, restricted stock units, other stock units and performance shares.A summary of stock option activity and weighted average exercise price is as follows: For The Year Ended December 31, 2010 WeightedAverageExercisePrice 2009 WeightedAverageExercisePrice 2008 WeightedAverageExercisePrice Options Options Options Outstanding, beginning of period 607 $9.51 802 $9.35 787 $9.26 Granted 91 4.30 105 10.00 104 10.19 Forfeited/Cancelled (110) 9.95 (300) 9.26 (89) 9.26 Outstanding, end of period 588 $8.63 607 $9.51 802 $9.35 The following table summarizes stock options outstanding and exercisable at December 31, 2010: Exercise Price Outstanding Exercisable Options WeightedAverageRemainingContractualLife InYears WeightedAverageExercisePrice Options WeightedAverageRemainingContractualLife InYears WeightedAverageExercisePrice $4.06 – $ 5.45 91 9.9 $4.30 1 9.6 $5.45 $9.26 398 6.0 9.26 308 6.0 9.26 $10.00 – $10.19 99 8.6 10.04 24 8.4 10.07 588 7.0 $8.63 333 6.2 $9.30 The Company historically used under its 2006 Plan the Black-Scholes option pricing model to estimate the fair value of its stock based paymentawards, but beginning October 28, 2009 under its 2009 Plan it began using an enhanced Hull-White Trinomial model. The determination of the fair value ofstock-based payments utilizing the Black-Scholes model and the Enhanced Hull-White Trinomial model is affected by Holdings’ stock price and a number ofassumptions, including expected volatility, risk-free interest rate, expected term, expected dividends F-23Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) yield, expected forfeiture rate, expected turn-over rate, and the expected exercise multiple. Holdings did not have a history of market prices of its common stockas it was not a public company prior to the IPO, and as such it estimates volatility based on the volatilities of a peer group of publicly traded companies. Theexpected term of options is based on the Company’s estimate of when options will be exercised in the future. The risk-free interest rate assumption is based onobserved interest rates appropriate for the terms of the Company’s awards. The dividend assumption is based on the Company’s history and expectation ofnot paying dividends. The expected turn-over rate represents the expected forfeitures due to employee turnover and is based on historical rates experienced bythe Company. The expected exercise multiple represents the mean ratio of the stock price to the exercise price at which employees are expected to exercise theiroptions.The weighted-average estimated fair value of employee stock options granted as calculated using the Black-Scholes model and the Enhanced Hull-WhiteTrinomial model and the related assumptions follow: For the year ended December 31, 2010Grants 2009Grants 2008Grants Weighted average fair value $1.88 $4.28 $3.02 Risk-free discount rate 2.89% –2.99% 3.00% – 3.10% 3.00% – 3.30% Expected life 6.5 years 6.5 years 5 years Dividend yield — — — Volatility 42% – 51% 42% – 51% 34% – 37% Expected turn-over rate(1) 5% 5% — Expected exercise multiple(1) 2.2 2.2 — (1)These assumptions are used with the Enhanced Hull-White Trinomial model which the Company began using on October 28, 2009.Stock option compensation expense totaled $241, $294 and $272 for the three years ended December 31, 2010, 2009 and 2008, respectively. As ofDecember 31, 2010, there was $811 of total unrecognized compensation cost that is expected to be recognized over a period of five years.There is no intrinsic value on vested and outstanding stock options at December 31, 2010 due to the weighted average exercise prices for vested andoutstanding stock options being below fair market value as of December 31, 2010. There were no stock options exercised during the three year period endedDecember 31, 2010 and as a result the Company did not receive any cash from option exercises and did not realize any related tax benefits. In conjunction withthe IPO, the former Chairman of Addus HealthCare entered into a separation agreement which terminated his employment with Addus HealthCare. As a resultof the termination and the time permitted to exercise any vested options expiring following such termination, 300 stock options were not exercised and deemedforfeited.Restricted Stock AwardsIn fiscal year 2010, management awarded 4 shares of restricted stock awards under the 2009 Plan to members of the Board of Directors with a weightedaverage fair value of $5.21 per share. As of December 31, 2010, $34 of unearned compensation related to unvested awards of restricted stock will berecognized over the remaining vesting terms of the awards. F-24Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) The following table summarizes the status of unvested restricted stock awards outstanding at December 31, 2010 and 2009: For The Year Ended December 31, 2010 Weighted-AverageGrant DateFair Value 2009 Weighted-AverageGrant DateFair Value RestrictedStockAwards RestrictedStockAwards Unvested restricted stock awards 3 $10.00 — $— Awarded 4 5.21 3 10.00 Vested (1) 10.00 — — Forfeited — — — — Unvested restricted stock awards at 6 $6.85 3 $10.00 Restricted stock award compensation expense totaled $14, $3 and $0 for the three years ended December 31, 2010, 2009 and 2008, respectively.As of December 31, 2010, shares reserved under the 2006 and 2009 Plans were 479 and 575, respectively. The Company does not plan on issuing anyfurther grants under the 2006 Plan.9. Operating Leases and Related Party TransactionsThe Company leases its location office space under various operating leases that expire through 2019. In addition to rent the Company is typicallyresponsible for taxes, maintenance, insurance and common area costs. A number of the office leases also contain escalation and renewal option clauses. TheCompany is not a party to any sublease rentals. Total rent expense on these office leases was $3,441, $3,173 and $2,621 for the years ended December 31,2010, 2009, and 2008, respectively.The Company leases its corporate office space from a member of its board of directors, who is also a stockholder of the Company, under the terms ofan operating lease that expires in September 2012. The lease agreement provides for a renewal option of five years, commencing upon the expiration of theinitial term of the lease. Rental expense relating to this lease amounted to $367, $368 and $350 for the years ended December 31, 2010, 2009 and 2008,respectively.The following is a schedule of the future minimum rental payments, exclusive of taxes and other operating expenses, required under the Company’soperating leases. Non-Related Party Rent Related Party Rent Amount 2011 $2,444 $387 $2,831 2012 1,946 274 2,220 2013 1,121 — 1,121 2014 687 — 687 2015 503 — 503 Thereafter 1,044 — 1,044 Total $7,745 $661 $8,406 F-25Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) In addition, Addus HealthCare had a consulting agreement with Eos Management, Inc. (“Eos Management”), under which Eos Management was entitledto an annual management fee of $350. In September 2009, Addus HealthCare entered into a termination agreement with Eos Management, pursuant to whichthe parties agreed that the management consulting agreement would terminate immediately prior to the successful completion of a public offering. Themanagement consulting agreement was terminated in November 2009 in conjunction with the IPO. No termination fees were paid in connection with suchtermination. The total management fee expense included in the Company’s financial statements was $0, $292 and $350 for the years ended December 31,2010, 2009, and 2008, respectively.In September 2009, Holdings entered into a consent fee agreement with the Eos Funds, pursuant to which Holdings agreed to pay to the Eos Funds ortheir designee(s) an aggregate amount equal to $1,500 promptly following the successful completion of a public offering in consideration for their agreement towaive certain of their rights under Holdings’ stockholders’ agreement and registration rights agreement to permit a public offering to be completed, to converttheir shares of series A preferred stock into shares of Holdings’ common stock immediately prior to the successful completion of a public offering and toaccept dividend notes in respect of the accrued and unpaid dividends thereon in lieu of cash. In conjunction with the Company’s IPO, Holdings paid $1,500to the Eos Funds pursuant to the consent fee agreement.In conjunction with the IPO, the former Chairman of Addus HealthCare terminated his employment with the Company in accordance with a separationagreement entered into in September 2009. The separation agreement required the Company to pay the former Chairman a total of $1,142 within 30 daysfollowing the completion of the IPO and provide certain benefits with expected costs of approximately $94 through 2012.10. Stockholder’s EquityAcquisitionsOn July 26, 2010, in conjunction with the purchase of certain assets of Advantage by the Company, pursuant to the Purchase Agreement, the Companyissued 248 shares of its common stock with a value of $1,240.Initial Public OfferingOn November 2, 2009, Holdings completed its IPO consisting of the sale of 5,400 shares of common stock at $10.00 per share. After deducting theunderwriters’ discounts and transaction fees and expenses, the net proceeds to the Company from the sale of shares in the IPO were $47,480. Transactioncosts related to the IPO of $2,720 were charged directly to additional paid-in capital.Stock Split and Increase in Authorized SharesOn October 1, 2009, Holdings’ board of directors approved a 10.8-for-1 stock split, increasing the number of issued and outstanding shares ofcommon stock from 94 to 1,019. All share and per share data, except for par value, have been adjusted to reflect the stock split for all periods presented. Inaddition, Holdings’ board of directors and stockholders approved an increase in the number of authorized shares of common stock to 40,000.Series A Preferred StockOn September 19, 2006, Holdings issued 38 shares of series A preferred stock for $37,750. The series A preferred stock accumulated undeclareddividends at a rate of 10% per year, compounded annually, and was F-26Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) entitled to participate in any dividends on the common stock based on the number of shares of common stock into which the preferred stock was convertible.All dividends were cumulative and accrued quarterly and were payable in cash, or notes, as amended, when declared. At December 31, 2008, and through theIPO accrued but undeclared dividends were reflected as a reduction of stockholders’ equity. In the absence of sufficient retained earnings or additional paid incapital, the undeclared dividends were shown as a separate charge in the stockholders’ equity section. The board of directors has not declared any dividendson the common stock.On November 2, 2009, in conjunction with the IPO, all outstanding shares of Holdings’ series A preferred stock were converted into an aggregate 4,077shares of common stock at a ratio of 1:108. Total accrued and unpaid dividends on the series A preferred stock were $13,109 as of November 2, 2009, atwhich time a dividend payment of $173 was made and the remaining $12,936 in unpaid preferred dividends were converted into dividend notes. Thedividend notes are subordinated and junior to all obligations under the Company’s new credit facility. On November 2, 2009, the Company made amandatory payment of $4,000 on the dividend notes. Interest on the outstanding dividend notes accrues at a rate of 10% per annum, compounded annually.The outstanding principal amount of the dividend notes was originally payable in eight equal consecutive quarterly installments commencing on December 31,2009 and each March 31, June 30, September 30 and December 31 of each year thereafter until paid in full. Interest on the unpaid principal balance of thedividend notes is due and payable quarterly in arrears together with each payment of principal.2009 Stock Incentive PlanIn September 2009, the Company’s board of directors and stockholders adopted and approved the 2009 Plan. The 2009 Plan provides for the grant of750 incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units, restricted stock units, other stockunits and performance shares.11. Segment DataThe Company provides home & community and home health services primarily in the home of the consumer. The Company’s locations are organizedprincipally along these lines of service. The home & community and home health services lines have been identified as reportable segments applying thecriteria in ASC Topic 280, “Disclosure about Segments of an Enterprise and Related Information.” The accounting policies of the segments are the sameas those described in the Summary of Significant Accounting Policies. Intersegment net service revenues are not significant. All services are provided in theUnited States.The Company evaluates the performance of its segments through operating income which excludes corporate depreciation and general corporate expenses.General corporate expenses consist principally of accounting and finance, information systems, billing and collections, human resources and national salesand marketing administration. For calendar 2009 general corporate administrative expenses included $1,235 of separation costs related to the formerChairman of Addus HealthCare. The Company does not identify capital expenditures by segment, due to the low level of expenditures directly related to eithersegment in its internal financial reports. Identifiable assets by segment consist of accounts receivable, goodwill, identifiable intangible assets and other assets.Corporate assets consist primarily of cash balances, current and non-current deferred income taxes, and property and equipment, net of accumulateddepreciation.Addus HomeCare does not track its assets by segment and does not allocate interest expense or income taxes to its operating segments. These costs arenot included in the evaluation of the financial performance of the operating segments. F-27Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) The following is a summary of segment information for the years ended December 31, 2010, 2009 and 2008: For the Year Ended December 31, 2010 2009 2008 Net service revenue Home & Community $220,752 $210,107 $189,006 Home Health 50,980 49,198 47,300 $271,732 $259,305 $236,306 Operating income Home & Community $22,685 $20,397 $17,632 Home Health 5,308 6,752 5,819 General corporate expenses & corporate depreciation (16,001) (15,374) (12,603) $11,992 $11,775 $10,848 Depreciation and Amortization Home & Community $2,686 $3,355 $4,348 Home Health 638 769 933 Corporate 722 789 811 $4,046 $4,913 $6,092 Total and identifiable assets Home & Community $122,356 $117,768 $90,942 Home Health 28,938 27,243 24,430 Corporate 15,630 16,304 20,376 $166,924 $161,315 $135,748 12. Employee Benefit PlansThe Company’s 401(k) Retirement Plan covers all non-union employees. The 401(k) plan is a defined contribution plan that provides for Companymatching contributions. Matching contributions are discretionary and subject to change by management. Under the provisions of the 401(k) plan, employeescan contribute up to the maximum percentage and limits allowable under the Code. The Company provided a matching contribution, equal to 6.0% of theemployees’ contributions, totaling $51, $51, and $30 for the year ended December 31, 2010, 2009, and 2008, respectively.13. Commitments and ContingenciesLegal ProceedingsAs previously disclosed, on March 26, 2010, a class action lawsuit was filed in the United States District Court for the Northern District of Illinois onbehalf of a class consisting of all persons or entities who purchased or otherwise acquired our common stock between October 27, 2009 and March 18,2010, in connection with the Company’s IPO. The Complaint, which was amended on August 10, 2010, asserts claims against the Company and individualofficers and directors pursuant to Sections 11 and 15 of the Securities Act of 1933 and alleges, F-28Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) inter alia, that the Company’s registration statement was materially false and/or omitted the following: (1) that the Company’s accounts receivable included atleast $1.5 million in aging receivables that should have been reserved for; and (2) that the Company’s home health segment’s revenues were falling short ofinternal forecasts due to a slowdown in admissions from the Company’s integrated services program due to the State of Illinois’ effort to develop newprocedures for integrating care. A motion to dismiss the Complaint was filed on behalf of the defendants on September 20, 2010. We and the other defendantshave denied and continue to deny all charges of wrongdoing or liability arising out of any conduct, statements, acts or omissions alleged in the Complaint. TheCompany believes the claims are without merit and intends to defend the litigation vigorously. In addition, on April 16, 2010, Robert W. Baird & Company,on behalf of the underwriters of the IPO, notified the Company that the underwriters are seeking indemnification in respect of the above-referenced actionpursuant to the underwriting agreement entered into in connection with the IPO.In addition, on April 16, 2010, Robert W. Baird & Company, on behalf of the underwriters of the IPO, notified us that the underwriters are seekingindemnification in respect of the above-referenced action pursuant to the underwriting agreement entered into in connection with the IPO.As previously reported, on March 21, 2011, we and the other named defendants entered into a stipulation of settlement with the plaintiffs with respect tothe class action, pursuant to which we are to cause $3,000,000 to be paid into a settlement fund. The monetary amount of this settlement is covered byinsurance.On March 22, 2011, the United States District Court for the Northern District of Illinois preliminarily approved the settlement and scheduled a July 21,2011 hearing to consider, among other things, whether to finally approve the settlement of the class action. If the settlement is given final approval by thecourt, the class action will be dismissed with prejudice.The effectiveness of the stipulation of settlement and the settlement incorporated therein is conditioned on the following remaining conditions: (i) the courtfinally approving the settlement, (ii) any judgment of dismissal entered by the court becoming final and (iii) any judgment of dismissal entered in thederivative action described below becoming final. There can be no assurance the settlement will be approved or become effective.As previously disclosed, on November 1, 2010, a shareholder derivative action was filed by a shareholder on behalf of the Company in the CircuitCourt of Cook County, Illinois by Paul Wes Bockley, an alleged shareholder of the Company. The complaint asserts claims against certain individual officersand directors of the Company, and against the Company as a nominal defendant, for breach of fiduciary duty, corporate waste and unjust enrichmentbased, inter alia, on alleged material misstatements and omissions in the registration statement relating to the Company’s IPO. The alleged misstatements andomissions are essentially the same as those asserted in class action litigation, discussed above.As previously reported, on March 21, 2011, we and the other defendants entered into a stipulation of settlement with the plaintiff with respect to theshareholder derivative action, pursuant to which we have agreed to cause the plaintiff’s counsel’s fees and expenses in an amount up to and including$200,000 to be paid. In addition, we have agreed to adopt certain corporate governance measures. The monetary amount of this settlement is covered byinsurance.The shareholder derivative action settlement remains subject to preliminary and final approval by the court. A motion for preliminary approval of theshareholder derivative action settlement is scheduled to be heard by the court on March 31, 2011. F-29Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) The effectiveness of the stipulation of settlement and the settlement incorporated therein is conditioned upon the following remaining conditions: (i) thecourt preliminarily and finally approving the settlement, (ii) any judgment of dismissal entered by the court becoming final and (iii) any judgment ofdismissal entered in the class action described above becoming final. If the settlement is given final approval by the Derivative Action Court, the DerivativeAction will be dismissed with prejudice. There can be no assurance that the settlement will be approved or become effective.Illinois Attorney General’s Health Care Bureau and Military & Veterans Rights Bureau served a Civil Investigative Demand (“CID”) on AddusHealthCare in early November 2010. The CID sought information concerning Addus HealthCare’s Veterans Deserve program. While the CID primarily soughtgeneral information regarding our administration of the program, there were specific details sought concerning certain individuals.The Company submitted its response to the CID on January 7, 2011. On February 15, 2011, the Assistant Attorney General issued a SupplementalCID, which contained a written complaint from individuals in the program. The Supplemental CID seeks additional information concerning theadministration of the program and many of the questions appear to be tailored to respond to specific complaints contained in this latest complaint. TheCompany is cooperating with the investigation and is in the process of preparing a response to the Supplemental CID.The Company is a party to other legal and/or administrative proceedings arising in the ordinary course of its business. It is the opinion of managementthat the outcome of such proceedings will not have a material effect on the Company’s financial position and results of operations.Contingent PaymentIn conjunction with the 2006 acquisition of Addus HealthCare, the sellers were entitled to receive a contingent payment equal to the lesser of $10,000plus 8% per annum compounded annually or the net value of the Company less the target amount, as defined in the agreement. The target amount representedthe total of (i) $37,750, plus 10% per annum compounded annually plus (ii) the cash consideration received from the issuance of any securities that weresenior to the series A preferred stock (“Senior Securities”) and any accrued and unpaid dividends with respect to such Senior Securities, if any, less (iii) theprincipal amount of any series A preferred stock or Senior Securities that were redeemed or otherwise repurchased and any dividends paid or otherdistributions made on the series A preferred stock, Senior Securities or common stock of Holdings. The contingent payment amount was due upon the earliestof a public offering with net proceeds of not less than $50,000, the sale, liquidation or dissolution of the Company which resulted in a net value of theCompany greater than the target amount, or September 19, 2011. Based on its final determination, goodwill will be adjusted for the amount of the actualpayment. In conjunction with the IPO and pursuant to the contingent payment agreement, the contingent payment recipients received an aggregate amount equalto $12,721 upon completion of the IPO, of which $1,802 was deemed interest expense and the remaining balance of $10,919 was recorded as additionalgoodwill.Employment AgreementsThe Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to four yearsand include non-compete and nondisclosure provisions, as well as provide for defined severance payments in the event of termination. F-30Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(amounts and shares in thousands, except per share data)—(Continued) 14. Significant PayorsA substantial portion of the Company’s net service revenues and accounts receivables are derived from services performed for federal, state and localgovernmental agencies. Medicare and one state governmental agency represented 12% and 38%; 12% and 34%; and 12% and 32% of the Company’s netservice revenues for 2010, 2009, and 2008, respectively.The related receivables due from Medicare and the state agency represented 9% and 58% of the Company’s accounts receivable at December 31, 2010,respectively, and 8% and 49% of the Company’s accounts receivable at December 31, 2009, respectively.15. Concentration of CashFinancial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash. The Companymaintains cash with financial institutions which, at times, may exceed federally insured limits. The Company believes it is not exposed to any significantcredit risk on cash.16. UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATIONThe following is a summary of our unaudited quarterly results of operations (amounts and shares in thousands, except per share data): Year Ended December 31, 2010 Year Ended December 31, 2009 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Net service revenues $70,120 $69,842 $67,165 $64,605 $65,697 $66,803 $64,966 $61,839 Gross profit 21,191 20,132 19,736 18,820 19,592 19,655 19,227 18,138 Operating income 3,231 2,797 3,272 2,692 791 (1) 4,046 3,812 3,126 Net income (loss) 1,537 1,479 1,654 1,358 (1,784) (1) 2,090 1,931 1,365 Net income (loss) attributable tocommon shareholders $1,537 $1,479 $1,654 $1,358 $(3,730) (1) $933 $789 $223 Average shares outstanding Basic 10,745 10,681 10,500 10,500 7,715 1,019 1,019 1,019 Diluted 10,745 10,681 10,500 10,500 7,715 5,162 1,113 1,117 Income (loss) per common share Basic 0.14 0.14 0.16 0.13 (0.48) 0.92 0.77 0.22 Diluted 0.14 0.14 0.16 0.13 (0.48) 0.18 0.71 0.20 (1)Included in the fourth quarter of 2009 are one-time charges resulting from the IPO which reduced operating income, net income before preferreddividends, and net income per share by $1,235, $2,353, and $0.55, respectively. F-31Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSSCHEDULE II(In thousands) Allowance for doubtful accounts Balance atbeginningof period Additions/charges Deductions* Balance atend ofperiod Year ended December 31, 2010 Allowance for doubtful accounts $4,813 4,429 2,519 $6,723 Year ended December 31, 2009 Allowance for doubtful accounts $2,693 4,514 2,394 $4,813 Year ended December 31, 2008 Allowance for doubtful accounts $2,055 2,451 1,813 $2,693 *Write-offs, net of recoveries F-32Table of ContentsEXHIBIT INDEX ExhibitNumber Description of Document 3.1 Amended and Restated Certificate of Incorporation of Addus HomeCare Corporation dated as of November 2, 2009 (filed on November 20,2009 as Exhibit 3.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein) 3.2 Amended and Restated Bylaws of Addus HomeCare Corporation (filed on September 21, 2009 as Exhibit 3.5 to Amendment No. 2 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 4.1 Form of Common Stock Certificate (filed on October 2, 2009 as Exhibit 4.1 to Amendment No. 4 to the Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein) 4.2 Registration Rights Agreement, dated September 19, 2006, by and among Addus HomeCare Corporation, Eos Capital Partners III, L.P., EosPartners SBIC III, L.P., Freeport Loan Fund LLC, W. Andrew Wright, III, Addus Term Trust, W. Andrew Wright Grantor RetainedAnnuity Trust, Mark S. Heaney, James A. Wright and Courtney E. Panzer (filed on July 17, 2009 as Exhibit 4.2 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein) 4.3 Amended and Restated Unsecured 10% Junior Subordinated Promissory Note, dated as of March 18, 2010, by and between AddusHomeCare Corporation and Eos Capital Partners III, L.P. in the principal amount of $6,074,493.24 (filed on March 18, 2010 as Exhibit99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein) 4.4 Amended and Restated Unsecured 10% Junior Subordinated Promissory Note, dated as of March 18, 2010, by and between AddusHomeCare Corporation and Eos Partners SBIC III, L.P. in the principal amount of $1,744,265.26 (filed on March 18, 2010 as Exhibit99.3 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.1 Separation and General Release Agreement, dated as of September 20, 2009, between Addus HealthCare, Inc. and W. Andrew Wright, III(filed on September 21, 2009 as Exhibit 10.1(b) to Amendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.2 Amended and Restated Employment and Non-Competition Agreement, dated May 6, 2008, between Addus HealthCare, Inc. and Mark S.Heaney (filed on July 17, 2009 as Exhibit 10.2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated byreference herein)10.3 Amendment to the Amended and Restated Employment and Non-Competition Agreement, dated September 30, 2009, between AddusHealthCare, Inc. and Mark S. Heaney (filed on October 2, 2009 as Exhibit 10.2(a) to Amendment No. 4 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.4 Agreement and General Release, dated as of September 2, 2010, between Addus HealthCare, Inc. and Frank Leonard (filed on September 7,2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.5 Employment Agreement, dated November 29, 2010, by and between Addus HealthCare, Inc. and Dennis Meulemans (filed on December 1,2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.6 Amended and Restated Employment and Non-Competition Agreement, dated August 27, 2007, between Addus HealthCare, Inc. and DarbyAnderson (filed on July 17, 2009 as Exhibit 10.4 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporatedby reference herein)Table of ContentsExhibitNumber Description of Document10.7 Amendment to the Amended and Restated Employment and Non-Competition Agreement, dated September 30, 2009, between AddusHealthCare, Inc. and Darby Anderson (filed on October 2, 2009 as Exhibit 10.4(a) to Amendment No. 4 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.8 Separation Agreement, Waiver and General Release, dated as of November 23, 2010, between Addus HealthCare, Inc. and Sharon Rudden(filed on November 30, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by referenceherein)10.9 Employment Agreement effective January 19, 2011, by and between Addus HealthCare, Inc. and Daniel Schwartz (filed on January 4, 2011as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.10 Amended and Restated Employment and Non-Competition Agreement, dated October 8, 2008, between Addus HealthCare, Inc. and David W.Stasiewicz (filed on July 17, 2009 as Exhibit 10.6 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporatedby reference herein)10.11 Amendment No. 1 to Amended and Restated Employment and Non-Competition Agreement between Addus HealthCare, Inc. and David W.Stasiewicz (filed on October 2, 2009 as Exhibit 10.6(a) to Amendment No. 4 to Addus HomeCare Corporation’s Registration Statement onForm S-1 and incorporated by reference herein)10.12 Employment and Non-Competition Agreement, dated March 23, 2007, between Addus HealthCare, Inc. and Paul Diamond (filed on July 17,2009 as Exhibit 10.7 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.13 Amendment to the Employment and Non-Competition Agreement, dated September 30, 2009, between Addus HealthCare, Inc. and PaulDiamond (filed on October 2, 2009 as Exhibit 10.7(a) to Amendment No. 4 to Addus HomeCare Corporation’s Registration Statement on FormS-1 and incorporated by reference herein)10.14 Addus HealthCare, Inc. Home Health and Home Care Division Vice President and Regional Director Bonus Plan (filed on July 17, 2009 asExhibit 10.10 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.15 Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan (filed on July 17, 2009 as Exhibit 10.11 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.16 Addus Holding Corporation 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.12 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 and incorporated by reference herein)10.17 Director Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.13 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.18 Executive Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.14 to Addus HomeCareCorporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.19 Form of Indemnification Agreement (filed on July 17, 2009 as Exhibit 10.16 to Addus HomeCare Corporation’s Registration Statement onForm S-1 and incorporated by reference herein)10.20 License Agreement, dated March 24, 2006, between McKesson Information Solutions, LLC and Addus HealthCare, Inc. (filed on August 26,2009 as Exhibit 10.17 to Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated byreference herein)Table of ContentsExhibitNumber Description of Document10.21 Contract Supplement to the License Agreement, dated March 24, 2006 (filed on August 26, 2009 as Exhibit 10.17(a) to Amendment No. 1 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.22 Contract Supplement to the License Agreement, dated March 28, 2006 (filed on August 26, 2009 as Exhibit 10.17(b) to Amendment No. 1 toAddus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.23 Amendment to License Agreement, dated March 28, 2006, between McKesson Information Solutions, LLC and Addus HealthCare, Inc. (filedon August 26, 2009 as Exhibit 10.17(c) to Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 andincorporated by reference herein)10.24 Lease, dated April 1, 1999, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17, 2009 as Exhibit 10.18 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.25 First Amendment to Lease, dated as of April 1, 2002, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17, 2009 asExhibit 10.18(a) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.26 Second Amendment to Lease, dated as of September 19, 2006, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17,2009 as Exhibit 10.18(b) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.27 Third Amendment to Lease, dated as of September 1, 2008, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17,2009 as Exhibit 10.18(c) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.28 Addus HomeCare Corporation 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20 to Amendment No. 2 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.29 Form of Incentive Stock Option Award Agreement under the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20(a) toAmendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.30 Form of Restricted Stock Award Agreement under the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20(b) toAmendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.31 Loan and Security Agreement, dated as of November 2, 2009, by and among Addus HealthCare, Inc., Addus HealthCare (Idaho), Inc.,Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (New Jersey), Inc., Addus HealthCare (NorthCarolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home Health Agency, Inc., Little Rock Home Health Agency, Inc., Lowell HomeHealth Agency, Inc., PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers, Fifth Third Bank, asagent, the financial institutions that are or may from time to time become parties thereto, and Addus HomeCare Corporation, as guarantor(filed on November 5, 2009 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by referenceherein)10.32 Consent and Amendment No. 1 to the Loan and Security Agreement, dated as of March 18, 2010, by and among Addus HealthCare, Inc.,Addus HealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (New Jersey), Inc.,Addus HealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home Health Agency, Inc., Little Rock Home HealthAgency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers,Fifth Third Bank, as agent, the financial institutions that are or may from time to time become parties thereto, and Addus HomeCareCorporation, as guarantor (filed on March 18, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated by reference herein)Table of ContentsExhibitNumber Description of Document10.33 Joinder, Consent and Amendment No. 2 to Loan and Security Agreement, dated as of July 26, 2010, by and among Addus HealthCare, Inc.,Addus HealthCare (South Carolina), Inc., Addus HealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada),Inc., Addus HealthCare (New Jersey), Inc., Addus HealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home HealthAgency, Inc., Little Rock Home Health Agency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and ProfessionalReliable Nursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions that are or may from time to time becomeparties thereto, and Addus HomeCare Corporation, as guarantor (filed on July 27, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’sCurrent Report on Form 8-K and incorporated by reference herein)10.34 Asset Purchase Agreement dated as of July 26, 2010, by and among Addus HealthCare (South Carolina), Inc., Advantage Health Systems,Inc., Paul Mitchell as the Seller Representative and the Sellers set forth on Exhibit A thereto (filed on July 27, 2010 as Exhibit 99.2 to AddusHomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.35 Earn-Out Agreement dated as of July 26, 2010, by and among Addus HealthCare (South Carolina), Inc., Advantage Health Systems, Inc.,Paul Mitchell as the Seller Representative and the Sellers set forth on therein (filed on July 27, 2010 as Exhibit 99.3 to Addus HomeCareCorporation’s Current Report on Form 8-K and incorporated by reference herein)10.36 Summary of Independent Director Compensation Policy*21.1 Subsidiaries of the Addus HomeCare Corporation*23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm*31.1 Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002*31.2 Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002*32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002**32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Actof 2002** *Filed herewith**Furnished herewithExhibit 10.36The Addus HomeCare Corporation (the “Corporation”) updated independent director compensation policy provides that independent directors receive anannual retainer of $22,500 for service on the Corporation’s board of directors, $1,500 per in-person scheduled board meeting (whether attended in person ortelephonically) and $750 per telephonic board meeting. The chairmen of the Corporation’s audit committee, compensation committee and nominating andcorporate governance committee receive an additional annual retainer of $12,000, $7,500 and $5,000, respectively. Independent directors who serve oncommittees receive $1,000 per committee meeting attended. Independent directors are reimbursed for reasonable expenses incurred in attending board ofdirectors meetings, committee meetings and stockholder meetings. In addition, each independent director is entitled to receive an annual grant of restrictedshares of the Corporation’s common stock valued at $10,000, which shall be awarded two (2) business days after the Corporation files its Annual Report onForm 10-K with the Securities and Exchange Commission. Each grant of restricted stock to an independent director shall vest on the next anniversary of thedate on which such director received his initial grant of restricted stock. The foregoing independent director compensation is subject to review and adjustmenton the recommendation of the Corporation’s nominating and corporate governance committee.Exhibit 21.1SUBSIDIARIES OF THE REGISTRANT Name of Subsidiary State ofIncorporation Doing Business As NameAddus FEA, Inc. Illinois —Addus HealthCare (Delaware), Inc. Delaware —Addus HealthCare (Idaho), Inc. Delaware A Full Life HomeCareAddus HealthCare (Indiana), Inc. Delaware Addus HealthCareAddus HealthCare (Nevada), Inc. Delaware A Full Life AgencyDesert PCASu Casa Personal CareSilver State Personal CareAddus HealthCare (New Jersey), Inc. Delaware —Addus HealthCare (North Carolina), Inc. Delaware Down East HealthCareAddus HealthCare (South Carolina), Inc. Delaware —Addus HealthCare, Inc. Illinois Addus HealthCareAddus Personal Care ServicesBenefits Assurance Co., Inc. Delaware Ft. Smith Home Health Agency, Inc. Arkansas CareNetwork of Ft. SmithLittle Rock Home Health Agency, Inc. Arkansas CareNetwork of Little RockLowell Home Health Agency, Inc. Arkansas CareNetwork of LowellPHC Acquisition Corporation California Addus HealthCareProfessional Reliable Nursing Service Inc. California Addus HealthCareExhibit 23.1 233 N. Michigan Ave., Suite 2500 Chicago, Illinois 60601 Telephone: 312-856-9100 Fax: 312-856-1379Consent of Independent Registered Public Accounting FirmAddus Homecare CorporationPalatine, IllinoisWe hereby consent to the incorporation by reference in Registration Statement No. 333-164413 on Form S-8, of our report dated March 28, 2011, relating to theconsolidated financial statements of Addus HomeCare Corporation, which appears in this Form 10-K./s/ BDO USA, LLPChicago, ILMarch 28, 2011Exhibit 31.1CERTIFICATIONI, Mark S. Heaney, President and Chief Executive Officer of Addus HomeCare Corporation certify that: 1.I have reviewed this annual report on Form 10-K of Addus HomeCare Corporation (the “Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the Registrant’s internal control over financial reporting; and 5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting.Date: March 28, 2011 /s/ MARK S. HEANEY Mark S. HeaneyPresident and Chief Executive OfficerExhibit 31.2CERTIFICATIONI, Dennis B. Meulemans, Chief Financial Officer of Addus HomeCare Corporation, certify that: 1.I have reviewed this annual report on Form 10-K of Addus HomeCare Corporation (the “Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the Registrant’s internal control over financial reporting; and 5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting.Date: March 28, 2011 /s/ Dennis B. Meulemans Dennis B. MeulemansChief Financial OfficerExhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 of Addus HomeCare Corporation (the “Company”) asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark S. Heaney, President and Chief Executive Officer of theCompany, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2011 By: /s/ MARK S. HEANEY Mark S. Heaney President and Chief Executive OfficerExhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 of Addus HomeCare Corporation (the “Company”) asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis B. Meulemans, Chief Financial Officer of the Company,certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2011 By: /s/ Dennis B. Meulemans Dennis B. Meulemans Chief Financial Officer

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