Addus HomeCare Annual Report 2014

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 OF 1934For the fiscal year ended December 31, 2014OR¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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.)2300 Warrenville RoadDowners Grove, IL 60515(Address of principal executive offices)630-296-3400(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 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for 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 x 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. xIndicate 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 xNon-accelerated filer ¨ Smaller reporting company ¨(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, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was $246,868,346.As of March 1, 2015, there were 11,009,879 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCECertain portions of the registrant’s Definitive Proxy Statement for its 2015 Annual Meeting of Stockholders (which is expected to be filed with theCommission within 120 days after the end of the registrant’s 2014 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 16 Item 1B. Unresolved Staff Comments 33 Item 2. Properties 33 Item 3. Legal Proceedings 33 Item 4. Mine Safety Disclosures 33 PART II 34 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34 Item 6. Selected Financial Data 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 58 Item 8. Financial Statements and Supplementary Data 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 Item 9A. Controls and Procedures 59 Item 9B. Other Information 61 PART III 62 Item 10. Directors, Executive Officers and Corporate Governance 62 Item 11. Executive Compensation 62 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 62 Item 13. Certain Relationships and Related Transactions, and Director Independence 62 Item 14. Principal Accountant Fees and Services 62 PART IV 63 Item 15. Exhibits and Financial Statement Schedules 63 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 operational and reimbursement processes at thestate level, changes in Medicaid, Medicare and other medical payment levels, changes in or our failure to comply with existing federal and state laws orregulations or the inability to comply with new government regulations on a timely basis, competition in the home and community based service industry,changes in the case mix of consumers and payment methodologies, operational changes resulting from the assumption by managed care organizations ofresponsibility for managing and paying for home and community based services to consumers, changes in estimates and judgments associated with criticalaccounting policies, our ability to maintain or establish new referral sources, our ability to attract and retain qualified personnel, changes in payments andcovered services due to the overall economic conditions and deficit spending by federal and state governments, future cost containment initiativesundertaken by third party payors, our access to financing due to the volatility and disruption of the capital and credit markets, our ability to meet debt servicerequirements and comply with covenants in debt agreements, business disruptions due to natural disasters or acts of terrorism, our ability to integrate andmanage our information systems, our expectations regarding the size and growth of the market for our services, the acceptance of privatized social services,our expectations regarding changes in reimbursement rates, authorized hours and eligibility standards of state governmental agencies, the potential to settlelitigation, and the effect of those changes on our results of operations in 2014 or for periods thereafter, our ability to successfully implement our coordinatedcare model to grow our business, our ability to attract referrals, our ability to continue identifying and pursuing acquisition opportunities and expand intonew geographic markets, the impact of acquisitions on our business, the effectiveness, quality and cost of our services and various other matters, many ofwhich 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 and Estimates” within “Management’s Discussion and Analysisof Financial Condition 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 2014, 2013 and 2012, 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, 2014 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. 1Table of ContentsPART I ITEM 1.BUSINESSOverviewWe are a provider of comprehensive home and community based services, which are provided primarily in the home, and focused on the dual eligible(Medicare/Medicaid) population. Our services include personal care and assistance with activities of daily living, and adult day care. Our consumers areprimarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal,state and local governmental agencies, managed care organizations, commercial insurers and private individuals. We currently provide home and communitybased services to over 31,000 consumers through 129 locations across 22 states, including 5 adult day centers in Illinois. Over the course of 2014, we servedover 43,000 consumers.A summary of our financial results for 2014, 2013 and 2012 is provided in the table below: 2014 2013 2012 (Amounts in Thousands) Net service revenues – continuing operations $312,942 $265,941 $244,315 Net service revenues – discontinued operations — 6,462 38,822 Net income from continuing operations 11,963 11,163 9,288 Earnings (loss) from discontinued operations 280 7,982 (1,653) Net income $12,243 $19,145 $7,635 Total assets $180,803 $163,934 $149,857 Historically our services were provided under agreements with state and local government agencies established to meet the needs of our consumers.Our consumers are predominately “dual eligible” and as such are eligible to receive both Medicare and Medicaid funded home-based care. As a result ofcertain legislation enacted by the federal government, states are being incentivized to initiate dual eligible demonstration programs and other managedMedicaid initiatives, which are designed to coordinate the services provided through these two programs, with the overall objective to better coordinateservice delivery and over the long term to reduce costs. Increasingly states are implementing these managed care programs and as such are transitioningmanagement of individuals such as our consumers to local and national managed care organizations. Under these arrangements the managed careorganizations have an economic incentive to provide home and community based services to consumers as a means to better manage the acute careexpenditures of their membership.The home and community based services we provide include assistance with bathing, grooming, dressing, personal hygiene and medication reminders,and other activities of daily living. We provide these services on a long-term, continuous basis, with an average duration of approximately 20 months perconsumer. Our adult day centers provide a comprehensive program of skilled and support services and designated medical services for adults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to and from the centers, the provision ofmeals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction.We utilize a coordinated care model that is designed to improve consumer outcomes and satisfaction as well as lower the cost of acute care treatmentand reduce service duplication. We believe this coordinated care model to be especially valuable to managed care organizations that have economicresponsibility for both home and community services as well as acute care expenditures. Over the long term, we believe this model will be a differentiator andas a result we expect to receive increased referrals from the managed care organizations.Through our coordinated care model, we utilize our home care aides to observe and report changes in the condition of our consumers for the purpose ofearly intervention in the disease process, thereby preventing or 2Table of Contentsreducing the cost of medical services by avoiding emergency room visits, and/or reducing the need for hospitalization. We will coordinate the servicesprovided by our team with those of selected health care agencies as appropriate. Changes in consumers’ condition are evaluated by appropriately trainedmanagers and referred to either appropriate medical personnel including the consumers’ primary care physicians or managed care organizations for treatmentand follow-up. We believe this approach to the provision of care to our consumers and the integration of our services into the broader healthcare continuumare attractive to managed care organizations and others who are ultimately responsible for the healthcare needs and costs of our consumers and over time willincrease our business with them.We are investing in technology based solutions to support and facilitate our coordinated care model. We utilize an Integrated Voice Response, “IVR”system and smart phones applications to communicate with the homecare aides. Through these applications we are able to identify changes in healthconditions with automated alerts forwarded to appropriate management team for triaging and evaluation. In addition, the technology is used to record basictransaction information about each visit including: start and end times to a scheduled shift, mileage reimbursement, text messages to the homecare aide andcommunication of basic payroll information. Our plans for this technology include development of a web portal to provide the ability to communicate thisbasic information about individual clients to the managed care organizations.We are growing through selective acquisitions, based on an overall strategy to expand our presence in current markets and to expand our footprint inmarkets where the home and community business is moving to managed care organizations. We completed two acquisitions in December 2013 and June2014 that expanded our presence in two existing markets and provided us with a base of operations in two new targeted managed care states. EffectiveJanuary 1, 2015, we acquired Priority Home Health Care, Inc., a company headquartered in Cleveland, Ohio that operates six offices in the Cleveland, Akronand Columbus areas. We anticipate these transactions to be accretive to earnings in 2015.Effective March 1, 2013, we sold substantially all of the assets used in our home health business (the “Home Health Business”) in Arkansas, Nevadaand South Carolina, and 90% of the Home Health Business in California and Illinois, to subsidiaries of LHC Group, Inc. (the “Purchasers”) for a cash purchaseprice of approximately $20,000,000. We retained a 10% ownership interest in the Home Health Business in California and Illinois. The assets sold included19 home health agencies and two hospice agencies in five states. On December 30, 2013, we sold one home health agency in Pennsylvania for approximately$200,000. The results of the Home Health Business sold and one additional agency in Idaho which was closed in November 2012, are reflected asdiscontinued operations for all periods presented herein. Continuing operations include the results of operations previously included in our home &community segment and three agencies previously included in our home health segment. Following the sale of the Home Health Business, we manage andinternally report our business in one segment. Because regulatory requirements in Delaware and Indiana require home and community based services to beprovided by a licensed home health agency, we will continue to provide limited home health services reimbursable by Medicare in these agencies in order tomaintain these licenses. In addition, Priority Home Health Care maintains enrollment in but does not derive significant revenues from Medicare.We believe the sale of the Home Health Business substantially positioned us for future growth. The sale allowed us to focus both management andfinancial resources to address changes in the home and community based services industry and to address the needs of managed care organizations as theybecome more responsible for the state sponsored programs. We have improved our financial performance by concentrating our efforts on our home andcommunity business that is growing and profitable. We have improved our overall financial position by eliminating our debt and adding to our cash reserves.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 2300 Warrenville Road,Downers Grove, Illinois 60615. Our telephone number is 630-296-3400. Our internet address is www.addus.com. Through our 3Table of Contentswebsite, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and allamendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish such information to the SEC.Our Market and OpportunityWe provide home and community based services to the elderly and other adult infirm who need long-term care and assistance with activities of dailyliving. A report by CMS, in consultation with Truven Health Analytics, from April 28, 2014, estimated total Medicaid expenditures for home and communitybased services in 2012 (the most recent year in their data set) to be almost $70 billion, representing an annual compound rate of growth of 8.2% over theperiod from 2007-2012. The report also notes that spending on home and community based services constituted about 50% of total spending in 2012 byMedicaid on the group of programs Medicaid refers to as “long-term services and supports” (with the remaining 50% being spent on institutional programs,i.e. nursing homes and mental health facilities), up from 18% in 1995 (the earliest year in the data set).In addition to the projected growth of government-sponsored home and community based services, the private duty market for our services is growingrapidly. We provide our private duty consumers with all of the services we provide to our government-sponsored home and community based consumers.Historically, there were limited barriers to entry in the home and community based services industry. As a result, the home and community basedservices industry developed in a highly fragmented manner, with many small local providers. Few companies have a significant market share across multipleregions or states. According to the National Association for Home Care & Hospice, or NAHC, as of 2013, there were over 33,000 homecare and hospiceagencies in the United States. Approximately 15,000 were Medicare-certified homecare and hospice agencies, while the remaining 18,000 represent thenumber of licensed home and community based services agencies in the United States providing services similar to those we provide. In addition, whiledifficult to estimate, there are many non-licensed, non-certified home and community based services agencies.More recently, the home and community based services industry has been subject to increased regulation. In several states, providers are now requiredto obtain state licenses or registrations and must comply with laws and regulations governing standards of practice. Providers must dedicate substantialresources to ensure continuing compliance with all applicable regulations and significant expenditures may be necessary to offer new services or to expandinto new markets. Any failure to comply with this growing and changing regulatory regime could lead to the termination of rights to participate in federaland state-sponsored programs and the suspension or revocation of licenses. We believe limitations on the availability of new licenses, the increasing focus onimproving health outcomes, the rising cost and complexity of operations and pressure on reimbursement rates due to constrained government resources maycreate barriers for new providers and may encourage industry consolidation.The Federal Coordinated Health Care Office was established to effectively integrate benefits for consumers who are enrolled in both Medicare andMedicaid, also known as dual eligibles, and improve coordination between the federal and state governments to ensure that dual eligibles have full access toitems and services to which they are entitled. Stated goals of the Federal Coordinated Health Care Office are to ensure that the dual eligible population hasfull access to seamless high quality health care and to make the system as cost-effective as possible. The Federal Coordinated Health Care Office works withthe Centers for Medicare & Medicaid Services (“CMS”), state Medicaid agencies, and other federal and state agencies, as well as physicians and others, toprovide technical assistance and educational tools to improve care coordination between Medicare and Medicaid and to reduce costs, improve beneficiaryexperience and educate dual eligibles regarding care coverage. It also performs policy and program analysis and develops policy and programrecommendations regarding dual eligibles.The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, both laws are referred toherein as the “Health Reform Act”), encourages states to integrate 4Table of Contentsthe state managed Medicaid home and community based programs with managed Medicare programs. The objective of these initiatives is to enhance thecoordination of benefits between the two programs and to lower overall costs. The integrated programs are being structured as three year pilots. Nationally,18 states are currently pursuing financial or administrative alignment for dual eligible beneficiaries, including 6 of the 22 states in which we provide services.We believe that our coordinated care program and our commitment to our technology platform make us well-suited to partner with managed careorganizations to address the needs of the dual eligible population. These programs will eliminate service duplication between home and community basedprograms and traditional Medicare home health. We believe our ability to identify changes in our consumers’ health and condition before the medical needrequires acute intervention will lower the overall cost of care and will be recognized as an added benefit of our services. We believe this approach to theprovision of care to our consumers and the integration of our services into the broader healthcare continuum is particularly attractive to managed careorganizations and others who are ultimately responsible for the healthcare needs of our consumers and over time will increase our business with them.Our Growth StrategyOur net service revenues growth is closely correlated with the number of consumers to whom we provide our services. Our continued growth dependson our ability to provide consistently good care, maintain our existing payor client relationships, establish relationships with new payors 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 thereare several 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 carein their homes or community-based settings. Finally, we believe the provision of home and community based services is more cost-effective than theprovision of similar services in an institutional setting for long-term care. The following are the key elements of our growth strategy: • Consistently provide high-quality care. We schedule our home care aides to perform their services at times mutually determined by ourconsumers. The home care aides are required to perform tasks as defined within the individual plan of care. We manage the performance of ourhome care aides through regular visits while in our consumer homes. • Drive growth in existing markets. We are growing in our existing markets overall by enhancing the breadth of our services, increasing thenumber of referral sources and leveraging and expanding our payor relationships in each market. We are achieving this growth by continuing toeducate referral sources about the benefits of our services. • Market the benefits of our coordinated care model to managed care organizations serving the dual eligible populations. Our coordinated caremodel provides significant opportunities to effectively market to a wide range of payor clients and referral sources, many of whom areresponsible for consumers with both social and medical service needs. We are seeking to partner with managed care organizations to address theneeds of the dual eligible population in light of governmental incentives for consumers to enroll in managed care plans. We believe that ourapproach to the provision of care to our consumers and the integration of our services into the broader healthcare industry is particularlyattractive to managed care organizations and others who are ultimately responsible for the healthcare needs of our consumers and over time webelieve this approach will increase our business. • Grow through acquisitions. We continue to grow with selective acquisitions. Our strategy is to expand within our existing markets and to entermarkets where states are transitioning the management of home and community services to managed care organizations. 5Table of Contents • Expand into new markets. We offer our services in geographic markets contiguous to our existing markets through de novo agencydevelopment. We also anticipate we will have opportunities to develop new agencies in response to requests from managed care organizations.Our ServicesWe deliver services to our consumers through 129 individual agencies located in 22 states and 5 adult day centers in Illinois. Our home andcommunity based services assist consumers, who would otherwise be at risk of placement in a long-term care institution, with activities of daily living.Services are primarily provided to older adults and younger disabled persons in consumers’ homes on an as-needed, hourly basis. These services,generally provided by home and community based service aides, include non-medical care such as 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 caregivers respite is needed. Personal careservices include bathing, grooming, oral care, skincare, assistance with feeding and dressing and medication reminders. Home support services include mealplanning and preparation, housekeeping and transportation services. Many consumers need such services on a long-term basis to address chronic or acuteconditions. Each payor client establishes its own eligibility standards, determines the type, amount, duration and scope of services, and establishes theapplicable reimbursement rate in accordance with applicable law. The average duration of our provision of home and community based services isapproximately 20 months per consumer.We also operate five adult day centers in Illinois which provide a comprehensive program of skilled and support services and designated healthservices for adults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to andfrom the centers, the provision of meals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction.Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programsunder which they operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. Managed care organizations as anextension of our state payors are subject to similar economic pressures. Our commercial insurance carrier payor clients are typically for profit companies andare continuously seeking opportunities to control costs. We are also seeking to grow our private duty business.Most of our services are provided pursuant to agreements with state and local governmental social and aging service agencies. These agreementsgenerally have a term of one to two years and may be terminated with 60 days’ notice. They are typically renewed for one to five-year terms, provided that wehave complied with licensing, certification and program standards, and other regulatory requirements. Reimbursement rates and methods vary by state andservice type, but are typically based on an hourly or unit-of-service basis. Managed care organizations are becoming an increasing portion of our payor mixas states shift from the management of their programs to managed care organizations. In 2014, approximately 86.4% of our net service revenues fromcontinuing operations were derived from state and local government programs, with 9.1% derived from managed care organizations, while approximately4.5% of net service revenues from continuing operations were derived from insurance programs and private duty consumers. 6Table of ContentsFor 2014, 2013 and 2012, our revenue mix by payor type for continuing operations was as follows: Year Ended December 31, 2014 2013 2012 State, local and other governmental programs 86.4% 94.1% 94.9% Managed care organizations 9.1 1.0 0.0 Private duty 3.4 3.9 4.1 Commercial 1.1 1.0 1.0 100.0% 100.0% 100.0% We derive a significant amount of our net service revenues from our operations in Illinois, New Mexico, Washington and California. The percentagesof total revenue for each of these significant states for 2014, 2013 and 2012 are listed below. % of Total Revenue for theYears Ended December, 31 State 2014 2013 2012 Illinois 60.6% 65.5% 63.7% New Mexico 8.2 2.1 1.7 Washington 5.0 6.5 7.2 California 4.9 5.8 6.9 A significant amount of our net service revenues from continuing operations are derived from one specific payor client, the Illinois Department onAging, which accounted for 53.2%, 58.8% and 57.3% of our total net service revenues from continuing operations for the years ended December 31, 2014,2013 and 2012, respectively.We also measure the performance of our business through review of our billable hours per client, billable hours per business day, revenues per billablehour and the number of consumers served, or census.CompetitionThe home and community based services industry is highly competitive, fragmented and market specific. Each local market has its own competitiveprofile and no single competitor has significant market share across all of our markets. Our competition consists of home and community based serviceproviders, home health providers, private caregivers, larger publicly held companies, privately held companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-based organizations, managed care organizations and self-directed care programs. In addition,certain governmental payors contract for services with independent providers such that our relationships with these payors are not exclusive. This isparticularly true in California where the independent provider is an individual who provides services for one consumer and is paid directly by the countywhere services are delivered. We have experienced, and expect to continue to experience, competition from new entrants into our markets. Increasedcompetition may result in pricing pressures, loss of or failure to gain market share or loss of consumers or payors, any of which could harm our business. Inaddition, some of our competitors may have greater financial, technical, political and marketing resources and name recognition with consumers and payors.Sales and MarketingWe focus on initiating and maintaining working relationships with state and local governmental agencies responsible for the provision of the serviceswe offer. 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 needs or changes in the service delivery or reimbursement system of governmental entities and attempt to work with and provide input to theresponsible government personnel, provider associations and consumer advocacy groups. 7Table of ContentsWe are establishing new referral relationships with various managed care organizations who are contracting with the states for the management of thestate Medicaid programs under dual eligible demonstration and similar Medicaid managed care programs. We have met with all contracted managed careorganizations in markets where we serve our clients and are building those relationships necessary to insure continued referrals of new clients.We receive substantially all of our consumers from third-party referrals. Generally, family members of potential consumers are made aware of availablein-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,the Veterans Health Administration and city departments on aging.We provide ongoing education and outreach to our target communities, both to inform the community about state and locally-subsidized care optionsand to communicate our role in providing quality home and community based services. We also utilize consumer-direct sales, marketing and advertisingprograms designed to attract consumers.Payment for ServicesWe are compensated for substantially all of our services by federal, state and local government programs, such as Medicaid funded programs andMedicaid waiver programs, other state agencies, the Veterans Health Administration, commercial and managed care organizations and private dutyconsumers.The following table sets forth net service revenues from continuing operations derived from each of our major payors during the indicated periods as apercentage of total net service revenues from continuing operations. Year Ended December 31, Payor 2014 2013 2012 Illinois Department on Aging 53.2% 58.8% 57.3% Washington Department of Social and Health Services 4.6 6.6 6.4 United HealthCare of New Mexico 3.4 0.0 0.0 Other federal, state and local payors 25.7 28.7 31.2 Other managed care organizations 8.6 1.0 0.0 Private duty 3.4 3.9 4.1 Commercial insurance 1.1 1.0 1.0 Total 100.0% 100.0% 100.0% Illinois Department on AgingWe provide home and community based services pursuant to agreements with the Illinois Department on Aging, which is funded by Medicaid andgeneral revenue funds of the State of Illinois. Consumers are identified by case managers contracted independently with the Illinois Department on Aging.Once a consumer has been evaluated and determined to be eligible for the program, the case manager refers the consumer to a list of authorized providers,from which the consumer selects the provider. We provide our services in accordance with a care plan developed by the case manager and underadministrative directives from the Illinois Department on Aging. We are reimbursed on an hourly fee for service basis.Due to its revenue deficiencies and financing issues, the State of Illinois is currently providing reimbursement on a delayed basis with respect to theseagreements. These payment delays could adversely impact our liquidity, and may result in the need to increase borrowings under our credit facility. Otherdelayed payor reimbursements from the State of Illinois could contribute to an increase in our receivables balances. 8Table of ContentsWashington Department of Social and Health ServicesWe provide home and community based services pursuant to agreements with the Washington Department of Social and Health Services, which isfunded by Medicaid and general revenue funds of the State of Washington. Consumers are identified by area Agency on Aging case managers contractedindependently with the Washington Department of Social and Health Services. Once a consumer has been evaluated and determined to be eligible for theprogram, the case manager refers the consumer to a list of authorized providers, from which the consumer selects the provider. We provide our services inaccordance with a care plan developed by the case manager and under administrative directives from the Washington Department of Social and HealthServices. We are reimbursed on an hourly fee for service basis.United HealthCare of New MexicoWe provide services under contract with United HealthCare of New Mexico (“United HealthCare”) under the Community Long Term Care Services(CoLTS) program. This is a managed Medicaid program pursuant to which the State of New Mexico has contracted with several commercial insurance payersto manage home and community based services as well as other long-term social services. Under this agreement, consumers are qualified for services andreferred to us by United Healthcare. We provide personal care and other in-home support services under this program. Our relationship with UnitedHealthCare is not exclusive as United HealthCare has a network of providers who provide similar services to it. All services are reimbursed on an hourly feefor service basis.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 fundedby the federal government and individual states. Reimbursement rates and methods vary by state and service type, but are typically based on an hourly orunit-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 owneligibility standards, determines the type, amount, duration and scope of services, sets the rate of payment for services and administers its own program,subject to federal oversight. Most states cover Medicaid beneficiaries for intermittent home health services, as well as continuous services for children andyoung adults with complicated medical conditions, and certain states cover home and community-based services.In an effort to control escalating Medicaid costs, states are increasingly requiring Medicaid beneficiaries to enroll in managed care plans. Under ahealth reform bill signed into law in January 2012, Illinois set a goal to increase the percentage of Medicaid beneficiaries in Medicaid managed care plansfrom the then current 8% to 50% by 2015. The State fell just short of that goal, enrolling approximately 1,400,000 of its 3,100,000 Medicaid population inmanaged care plans as of January 2015. The State plans to enroll an additional 800,000 people in managed care plans in the next few months. Under thesemanaged care programs, states are increasingly requiring Medicaid beneficiaries to work with case managers.Veterans Health AdministrationThe Veterans Health Administration operates the nation’s largest integrated health care system, with more than 1,800 sites of care, and provides healthcare benefits, including home and community based services, to eligible military veterans. The Veterans Health Administration provides funding to regionaland local offices and facilities that support the in-home care needs of eligible aged and disabled veterans by contracting directly with local in-home careproviders, and to the aid and attendance pension, which pays veterans for their otherwise 9Table of Contentsunreimbursed health and long-term care expenses. We currently have relationships and agreements with the Veterans Health Administration to provide homeand community based services in several states, with the largest Veterans Health Administration services being provided in Illinois, Arkansas and California.OtherOther sources of funding are available to support home and community based services in different states and localities. In addition, many statesappropriate general funds or special use funds through targeted taxes or lotteries to finance home and community based services for senior citizens andpeople with disabilities. Depending on the state, these funds may be used to supplement existing Medicaid waiver programs or for distinct programs thatserve non-Medicaid eligible consumers.Other Managed Care OrganizationsMany states are moving the administration of their Medicaid home and community based programs to commercially-managed care insurancecompanies. This transition is due to federal and state initiatives to address the needs of the dual eligible population and an overall desire to better manage thecosts of the Medicaid long term care programs. Reimbursement from the managed care organizations is generally on an hourly, fee for service basis with ratesconsistent with the individual state funded rates.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 providerorganizations and employers.Commercial Insurance/Long-Term Care InsuranceMost long-term care insurance policies contain benefits for in-home services and adult day care. Policies are generally subject to dollar limitations onthe amount of daily, weekly or monthly coverage provided. Depending on the type of service, coverage for services may be predicated on a physician ornurse determination that the care is necessary or on the development of a plan for care in the home.Exposure for Payments Previously ReceivedAs described above under the caption “Business—Overview,” we sold our Home Health Business effective March 1, 2013, pursuant to an AssetPurchase Agreement, dated as of February 7, 2013 (the “Home Health Purchase Agreement”), with LHC Group, Inc. and the Purchasers identified therein.Pursuant to the Home Health Purchase Agreement, we retained a 10% ownership interest in the Home Health Business in California and Illinois. In addition,not included in the sale were four home health agencies in Delaware, Idaho, Indiana and Pennsylvania. The home health agency in Pennsylvania was sold onDecember 30, 2013 and the agency in Idaho was closed in November 2012 and efforts to sell the Idaho agency were abandoned in December 2013.While we no longer receive substantial payments from Medicare for home health services, pursuant to the Home Health Purchase Agreement, we areobligated to indemnify the Purchasers for, among other things, (i) penalties, fines, judgments and settlement amounts arising from a violation of certainspecified statutes, including the False Claims Act, the Civil Monetary Penalties Law, the federal Anti-Kickback Statute, the Stark Law or any state lawequivalent in connection with the operation of the Home Health Business prior to the consummation of the sale (the “Closing”), and (ii) any liability relatedto the failure of any reimbursement claim submitted to certain government programs for services rendered by the Home Health Business prior to the 10Table of ContentsClosing to meet the requirements of such government programs, or any violation prior to the Closing of any health care laws. Such liabilities includeamounts to be recouped by, or repaid to, such government programs as a result of improperly submitted claims for reimbursement or those discovered as aresult of audits by investigative agencies. All services that we have provided that have been or may be reimbursed by Medicare are subject to retroactiveadjustments and/or total denial of payments received from Medicare under various review and audit provisions included in the program regulations. Thereview period is generally described as six years from the date the services are provided but could be expanded to ten years under certain circumstances iffraud is found to have existed at the time of original billing. In the event that there are adjustments relating to the period prior to the Closing, we may berequired to reimburse the Purchasers for the amount of such adjustments.Medicare is the U.S. government’s health insurance program funded by the Social Security Administration for individuals aged 65 or older, individualsunder the age of 65 with certain disabilities and individuals of all ages with end-stage renal disease. Eligibility for Medicare does not depend on income, andcoverage is restricted to reasonable and medically-necessary treatment.Medicare home health rates are based on a Medicare episodic rate set annually through federal legislation. The rate covers a 60-day episode of care.Payment for each patient’s episode of care is based on the severity of the consumer’s condition, his or her service needs and other factors relating to the costof providing services and supplies.In addition, Medicare payments can be adjusted through changes in the payment rate and recoveries of overpayments for, among other things,unusually costly care for a particular consumer, low utilization, transfers to another provider, the level of therapy services required, the number of episodes ofcare provided, and if the consumer is discharged but readmitted within the same 60-day episodic period. In addition, Medicare can also reduce levels ofreimbursement if a provider is unable to produce appropriate billing documentation or acceptable medical authorizations.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 eligible full-time and part-time employees. We believe our insurance coverage and self-insurance reserves are adequate for our current operations. However, we cannot assure you that any potential losses or asserted claims will not exceed suchinsurance coverage and self-insurance reserves.EmployeesThe following is a breakdown of our part- and full-time employees, as well as the employees in our National Support Center, as of December 31, 2014: Full-time Part-time Total Continuing Operations – Home and Community Based Services 3,388 14,501 17,889 National Support Center 138 27 165 3,526 14,528 18,054 Our home and community based service aides provide substantially all of our services and comprise approximately 96.3% of our total workforce. Ourhome and community based services aides undergo a criminal background check, and are provided with pre-service training and orientation and anevaluation of their skills. In many cases, home and community based services aides are also required to attend ongoing in-services education. In certainstates, our home and community based services aides are required to complete certified training programs and maintain a state certification; however, no statein which we operate requires home and community 11Table of Contentsbased services aides to maintain a license similar to that of a nurse or therapist. Approximately 61.3% of our total employees are represented by labor unions.We maintain strong working relationships with these labor unions. We have a national agreement with the Service Employees International Union (the“SEIU”). Wages and benefits are negotiated at the local level at various times throughout the year.TechnologyWe have licensed the Horizon Homecare software solution (“Horizon Homecare”) from McKesson Information Solutions, LLC (“McKesson”), toaddress our administrative, office, clinical and operating information system needs, including compliance with the Health Insurance Portability andAccountability Act, or HIPAA, requirements. Horizon Homecare assists our staff in gathering information to improve the quality of consumer care, optimizefinancial performance, adjust consumer mix, promote regulatory compliance and enhance staff efficiency. Horizon Homecare supports intake, personnelscheduling, office clinical and reimbursement management in an integrated database. The Horizon Homecare software is hosted by McKesson in a secure datacenter, which provides multiple redundancies for storage, power, bandwidth and security. Using this technology, we are able to standardize the care deliveredacross our network of locations and effectively monitor our performance and consumer outcomes. We have also leveraged this technology to implement acentralized billing and collections function at our national support center.During most of 2014, we used an internally developed and customized payroll management system to calculate and produce our payroll. Wetransitioned all payroll and human resource functions to a commercial human resource and payroll system vendor, provided by Ultimate Software during thefourth quarter of 2014 and the first quarter of 2015. The Ultimate Software solution is a web based provider of integrated human resource and payrollsoftware, which supports our management with the systems and reporting necessary to manage our employees. Both software systems are integrated withHorizon Homecare and other clinical data-management systems, and include features for tax reporting, managing wage assignments and garnishments, on-sitecheck printing, general ledger population and direct-deposit paychecks. Secure management reports are made available centrally and through our internalreporting module.We utilize commercial vendors for electronic visit verification pursuant to which our home and community based service aids record their beginningand ending times for services provided through either an interactive voice recognition (IVR) system or cell phone based system. We have supplemented thesecommercial systems with company developed mobile applications that allow our homecare aides the ability to communicate with our support center, torequest additional work if available, to monitor or change their schedules and to inquire about payroll information. In addition, our software developmentincludes features to allow our homecare aides to communicate changes in the health condition of our consumers. We utilize this information to support ourcoordinated care model and to communicate to managed care organizations.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 relative cost of doing business, and the methods and amounts of payment for care byboth governmental and other payors. Departments of the federal government are currently considering how to implement programs and policy changes andmandated demonstration projects in the Health Reform Act. As a result of the Health Reform Act, it is expected that the number of Medicaid beneficiaries willincrease (although several states in which we operate have declined to expand Medicaid eligibility) and in addition, there may be additional increases ifemployers terminate their employee health plans. It is impossible to know at this time what effect, if any, this will have on budgetary allocations for ourservices. The health care industry has experienced, and is expected to continue to experience, extensive and dynamic change. In addition, differences amongstate laws may impede our ability to expand into certain markets. If we fail to comply with applicable laws and regulations, we could suffer 12Table of Contentscivil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal or state programs. See also “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Overview.”Medicaid ParticipationTo participate in and qualify for reimbursement under Medicaid programs, we are subject to various requirements imposed by federal and stateauthorities. If we were to violate the applicable federal and state regulations, we could be excluded from participation in federal and state healthcare programsand be subject to substantial civil and criminal penalties. New federal regulations took effect on March 17, 2014 setting forth eligibility requirements forhome and community based services provided under Medicaid waiver programs. The regulations specify that home and community based settings must beintegrated in and support full access to the greater community, selected by individuals from among different setting options, ensure privacy rights ofindividuals, optimize autonomy and independence in making life choices, and facilitate individual choice regarding services and supports. In addition, theregulations impose several conditions on provider-owned or controlled residential settings. All states are required to submit transition plans to CMS byMarch 17, 2015, detailing any actions necessary for the state to achieve compliance with the new requirements. Several states have submitted transition plansalready or made draft plans available for public comment prior to submission to CMS. Home and community based service providers will face costsassociated with compliance with these regulations, but it is difficult to ascertain the impact of these costs at this time and these costs will vary from state tostate depending on how the requirements are implemented.Health Reform ActThe Health Reform Act includes several provisions that may affect reimbursement for our services. The Health Reform Act is broad, sweeping reform,and is subject to change, including through the adoption of related regulations, the way in which its provisions are interpreted and the manner in which it isenforced. Although the Health Reform Act provides for expansion of eligibility for Medicaid enrollment, 21 states, including some in which we do business,have opted not to participate in Medicaid expansion. The Health Reform Act also creates within CMS a Center for Medicare and Medicaid Innovation, orCMMI, to test innovative payment and service delivery systems to reduce program expenditures while maintaining or enhancing quality. Among the issuesthat are to be addressed by CMMI are: allowing the states to test new models of care for individuals dually eligible for Medicare and Medicaid, supporting“continuing care hospitals” that offer post-acute care during the 30 days following discharge, funding home health providers that offer chronic caremanagement services, and establishing pilot programs that bundle acute care hospital services with physician services and post-acute care services, includinghome health services for patients with certain selected conditions. We may have difficulty negotiating for a fair share of the bundled payment. In addition, wemay be unfairly penalized if a consumer is readmitted to the hospital within 30 days of discharge for reasons beyond our control.We cannot assure you that the provisions described above, or that any other provisions of the Health Reform Act or amendment thereto, will notadversely impact our business, results of operations or financial position.Permits and LicensureOur home and community based services are authorized and / or licensed under various state and county requirements. Our home and community basedaides generally have no licensure requirements, although in certain states, they are required to complete training programs and maintain state certification.We believe we are currently licensed appropriately where required by the laws of the states in which we operate, but additional licensing requirements may beimposed upon us in existing markets or markets that we enter in the future. 13Table of ContentsApplicable Federal and State LawsAnti-Kickback Laws: The federal government enforces the federal law, commonly known as the Anti-Kickback Statute that prohibits 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 patients covered by federalhealth care programs such as Medicare and Medicaid. The federal Anti-Kickback Statute also prohibits the purchasing, leasing, ordering or arranging for anyitem, facility or service covered by the government payment programs (or the recommendation thereof) in exchange for such referrals. Many states, includingIllinois, Nevada and California also have similar laws proscribing kickbacks, some of which are not limited to services for which government-fundedpayment may be made. Violations of these provisions are punishable by criminal fines, civil penalties, imprisonment or exclusion from participation inreimbursement programs.The Stark Law and other Prohibitions on Physician Self-Referral: We may also be affected by the federal law, commonly known as the “Stark Law,”that prohibits physicians from making a referral for health care items or services, including home health services, if they, or their family members, have afinancial relationship with the entity receiving the referral unless certain conditions are met. Violations are punishable by civil monetary penalties on boththe person making the referral and the provider rendering the service. Such persons or entities are also subject to exclusion from federal and state healthcareprograms. We believe our compensation agreements with physicians who served as medical directors in our home health agencies meet the requirements forthe 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.Beneficiary Inducement Prohibition: The federal Civil Monetary Penalties Law (“CMPL”) imposes substantial penalties for offering remuneration orother inducements to influence federal health care beneficiaries’ decisions to seek specific governmentally reimbursable items or services, or to chooseparticular providers. The CMPL also can be used for civil prosecution of the Anti-Kickback Statute. Sanctions under the CMPL include substantial financialpenalties as well as exclusion from participation in all federal and state health care programs.The False Claims Act: Under the federal False Claims Act, the government may fine any person, company or corporation that knowingly submits, orparticipates in submitting, claims for payment to the federal government which are false or fraudulent, or which contain false or misleading information. Anysuch person or entity that knowingly makes or uses a false record or statement to avoid paying the federal government may also be subject to fines under theFalse Claims Act. Private parties may initiate whistleblower lawsuits against any person or entity under the False Claims Act in the name of the governmentand may share in 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 foreach fraudulent claim plus three times the amount of damages caused to the government as a result of each fraudulent claim. A False Claims Act violationmay provide 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.Amendments to the False Claims Act in the Health Reform Act provide that a provider must report and return overpayments within 60 days ofidentifying the overpayment or the claims for the services that generated the overpayments become false claims subject to the False Claims Act.Overpayments include payments for services for which the provider does not have proper documentation. On February 13, 2015, CMS announced that it willdelay finalizing regulations that were intended to clarify when a payment is “identified” for purposes of the 60-day rule. Notwithstanding the delay,providers are still required to comply with the rule even though there is considerable uncertainty over exactly when the 60-day period begins. 14Table of ContentsMany 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.Fraud Alerts: From time to time, various federal and state agencies, such as the U.S. Department of Health and Human Services (“HHS”), issuepronouncements that identify practices that may be subject to heightened scrutiny, as well as practices that may violate fraud and abuse laws. We believe, butcannot assure you, that our operations comply with the principles expressed by the Office of the Inspector General (the “OIG”) in these reports and specialfraud alerts.HIPAA and the HITECH Act: HIPAA privacy regulations contain detailed requirements concerning the use and disclosure of individually identifiablehealth information by “HIPAA covered entities,” which includes our company. In addition to the privacy requirements, HIPAA covered entities mustimplement certain security standards to protect the integrity, confidentiality and availability of certain electronic health information. The Health InformationTechnology for Economic and Clinical Health Act (“HITECH Act”) imposes additional privacy and security requirements and breach notificationobligations on health care providers and on their business associates. Failure to comply with HIPAA or the HITECH Act could result in fines and penaltiesthat 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.Civil Monetary Penalties: HHS may impose civil monetary penalties upon any person or entity that presents, or causes to be presented, certainineligible claims for medical items or services. The amount of penalties varies, depending on the offense, from $2,000 to $50,000 per violation plus trebledamages for the amount at issue and exclusion from federal health care programs, including Medicare and Medicaid. In addition, persons who have beenexcluded from the Medicare or Medicaid program may not retain ownership in a participating entity. Participating entities that permit continued ownershipby excluded individuals, that contract with excluded individuals, and the excluded individuals themselves, may be penalized. Penalties are also applicablein certain other cases, including violations of the federal Anti-Kickback Law, payments to limit certain patient services and improper execution of statementsof 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 andrespond to survey reports containing statements of deficiencies. Periodic and random audits conducted or directed by these agencies could result in a delay inreceipt or an adjustment to the amount of reimbursements due or received under federal or state programs. Violation of the applicable federal and state healthcare regulations can result in excluding a health care provider from participating in the Medicare and/or Medicaid and other federal and state healthcareprograms and can subject the provider to substantial civil and/or criminal penalties.Pursuant to the Tax Relief and Health Care Act of 2006, HHS created a permanent and national recovery audit program to identify improper Medicarepayments made on claims of health care services provided to Medicare beneficiaries. The program uses recovery audit contractors, or RACs, to identify theimproper Medicare payments and protect the Medicare Trust Fund from fraud, waste and abuse. Since the start of the program, RACs have identified morethan $8 billion in improper payments. RACs are paid a contingent fee based on the improper payments identified. On December 30, 2014, CMS announced aseries of changes to the RAC audit program aimed at reducing the burden on providers, enhancing CMS’ oversight of RACs and increasing programtransparency. CMS also instituted Zone Program Integrity Contracts (“ZPICs”) for additional audit of Medicare providers, including home health agencies. 15Table of ContentsEnvironmental, 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. Inthe event of an accident involving such hazardous materials, we could be held liable for any damages that result, and any liability could exceed the limits orfall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. ITEM 1A.RISK FACTORSThe risks described below, and risks described elsewhere in this Form 10-K, could have a material adverse effect on our business and consolidatedfinancial condition, results of operations and cash flows and the actual outcome of matters as to which forward-looking statements are made in thisForm 10-K. The risk factors described below and elsewhere in this Form 10-K are not the only risks we face. Our business and consolidated financialcondition, results of operations and cash flows may also be materially adversely affected by factors that are not currently known to us, by factors that wecurrently 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 could bematerially 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 client caseload, units of service,net service revenues, gross profit and profitability.For the year ended December 31, 2014, we derived approximately 86.4% of our net service revenues from continuing operations from agreements thatare directly or indirectly paid for by state and local governmental agencies, such as Medicaid funded programs and Medicaid waiver programs. Governmentalagencies generally condition their agreements with us upon a sufficient budgetary appropriation. If a governmental agency does not receive an appropriationsufficient to cover its contractual obligations with us, it may terminate an agreement or defer or reduce the amount of the reimbursement we receive. Almostall the states in which we operate experience periodic financial pressures and budgetary shortfalls due to changing economic conditions and the rising costsof health care, and as a result, have made, are considering or may consider making changes in their Medicaid, Medicaid waiver or other state and localmedical and social programs. The Deficit Reduction Act of 2005 permits states to make benefit cuts to their Medicaid programs, which could affect theservices for which states contract with us. Changes that states have made or may consider 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 home and community based services underthose 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 organizations.Certain of these measures have been implemented by, or are proposed in, states in which we operate. The Governor of Illinois has proposed a budgetthat contemplates many of these above-mentioned changes in order to 16Table of Contentscontrol costs in the Illinois. In 2014, we derived approximately 60.6% of our total net service revenues from continuing operations from services provided inIllinois, 8.2% of our total net service revenues from continuing operations in New Mexico, 5.0% of our total net service revenues from continuing operationsfrom services provided in Washington and 4.9% of our total net service revenues from continuing operations from services provided in California. Riverside,California is planning to move substantially all of its Medicaid recipients to a self-directed model for care delivery beginning in July 2015. Because asubstantial portion of our business is concentrated in these states, any significant reduction in expenditures that pay for our services in these states and otherstates in which we do business may have a disproportionately negative impact on our future operating results. Provisions in the Health Reform Act increaseeligibility for Medicaid, which may cause a reallocation of Medicaid funding. It is difficult to predict at this time what the effect of these changes would beon our business. If changes in Medicaid policy result in a reduction in available funds for the services we offer, our net service revenues could be negativelyimpacted.Under the Health Reform Act, the federal medical assistance percentage (the “FMAP”) paid by the federal government to states that elect to provideMedicaid coverage to low income adults who were previously ineligible for Medicaid is 100% for calendar years 2014-2016 and gradually decreases to 90%in 2020 and thereafter. Not all states in which we do business may elect to provide coverage to newly eligible individuals. We are not able at this time todetermine the impact that these changes will have on our business.In March 2013, the federal government implemented certain budgetary restrictions, commonly known as sequestration. Although Medicaid is exemptfrom these automatic cuts, sequestration remains in place and could negatively impact reimbursement or authorizations for services under our federal or statecontracts.A number of states have initiated efforts to combat Medicaid fraud and overpayments. If the number of Medicaid applicants or recipients issignificantly reduced as a result of these efforts, the number of consumers we serve could be reduced, which could negatively affect our business and resultsof operations.State efforts to transition their home and community based programs to being administered by managed care organizations could adversely affect ournet service revenues and our profitability.Under the Health Reform Act, states are encouraged to integrate the state managed Medicaid home and community based programs with managedMedicare programs. The objective of these initiatives is to enhance the coordination of benefits between the two programs and to lower overall costs.Nationally, 18 states are currently pursuing financial or administrative alignment for dual eligible beneficiaries, including 6 of the 22 states in whichwe provide services. However, the timing for implementation of these demonstration projects are unknown at this time. In addition, the final regulationsimplementing these programs modify the requirements and definitions around home and community-based settings. We cannot assure you that: we will beable to secure favorable contracts with all or some of the managed care organizations; our reimbursement under these programs will remain at current levels;that the authorizations for services will remain at current levels or that our profitability will remain at levels consistent with past performance. If states inwhich we provide services transition their home and community based programs to managed care organizations and we are not able to participate throughcontracts with managed care organization or otherwise, we could lose revenue generated in those states, even in states in which we currently have contracts toprovide home and community based services.In certain states, where the transition to managed care organizations is occurring, operational processes are not well defined. Membership is beingassigned by the respective state agency to the managed care organizations, but often communication of the changes is not clear to either the managed careorganizations or the consumers. Membership, new referrals and the related authorization for services to be provided are being delayed, resulting in delays inservice delivery to our consumers. Payments for services rendered are often delayed due to confusion in membership assignment and the referral processes. Tothe extent these processes are not improved, revenue growth rates, cash flow and profitability for services provided may be negatively affected. 17Table of ContentsThe implementation of Accountable Care Organizations (ACOs) may limit our ability to increase our market share and could adversely affect ourrevenues.CMS published final ACO regulations in October 2011, which established a shared savings program to facilitate coordination and cooperation amongproviders to improve the quality of care for Medicare fee-for-service beneficiaries and reduce unnecessary costs. These programs are focused on efforts byhospitals and physician groups to organize and coordinate patient care and are not directed toward home and community based service providers. Inaddition, several states have implemented, or plan to implement, accountable care models for their Medicaid populations. If we are not included indevelopment of these programs, or if the ACOs establish similar services to include home and community based programs for their participants, we are at riskfor losing market share and for a loss of our current business. Other cost savings initiatives may be presented by the government and commercial payors tocontrol costs and reduce hospital admissions / readmissions in which we could be financially at risk. We cannot predict at this time what effect ACOs or likeorganizations may have on our company.Efforts to reduce the costs of the Illinois Department on Aging program could adversely affect our service revenues and profitability.In 2014, we derived approximately 53.2% of our revenue from continuing operations from the Illinois Department on Aging programs. Since 2011, theState of Illinois has undertaken a number of initiatives to reduce the costs of the Illinois Department on Aging program, such as the mandated utilization ofan electronic visit verification (EVV) system by all providers. In his budget proposal for 2016, the Governor of Illinois has suggested several measures toreduce the costs of the Illinois Department on Aging, including restrictions on new referrals and reduced authorized hours for new and existing clients. Theproposal includes additional changes aimed at reducing expenditures by the Illinois Department on Aging, including an income cap and a higher thresholdof need for eligibility in the Community Care Program and elimination of the add-on rate the Illinois Department on Aging had been paying CommunityCare Program service providers to help those providers pay for employee healthcare. It is difficult to ascertain how significant an impact these initiatives willhave on our business. If they impact the eligibility of our consumers, the number of hours authorized or services provided to existing consumers, they wouldadversely affect our service revenues and profitability.Delays in reimbursement due to state budget deficits may increase in the future, adversely affecting 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 22 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. Our reimbursements from the State of Illinois could be further delayedbecause current forecasts indicate higher state deficits in the near future. In addition, from time to time, procedural issues require us to resubmit claims beforepayment is remitted, which contributes to our aged receivables. Additionally, unanticipated delays in receiving reimbursement from state programs due tochanges in their policies or billing or audit procedures may adversely impact our liquidity and working capital. Because we fund our operations primarilythrough the collection of accounts receivable, any significant delays in reimbursement could result in the need to increase borrowings under our creditfacility.Our revenue may be negatively impacted by a failure to appropriately document services, resulting delays in reimbursement and relatedindemnification obligations.Reimbursement to us is conditioned upon providing the correct administrative and billing codes and properly documenting the services themselves,including the level of service provided, and the necessity for the services. If incorrect or incomplete documentation is provided or inaccurate reimbursementcodes are utilized, 18Table of Contentsthis could result in nonpayment for services rendered and could lead to allegations of billing fraud. This could subsequently lead to civil and criminalpenalties, including exclusion from government healthcare programs, such as Medicare and Medicaid. In addition, third-party payors may disallow, in wholeor in part, requests for reimbursement based on determinations that certain amounts are not covered, services provided were not medically necessary, orsupporting documentation was not adequate. Pursuant to the Home Health Purchase Agreement, we are obligated to indemnify the Purchasers for, amongother things, (i) penalties, fines, judgments and settlement amounts arising from a violation of certain specified statutes, including the False Claims Act, theCivil Monetary Penalties Law, the federal Anti-Kickback Statute, the Stark Law or any state law equivalent in connection with the operation of the HomeHealth Business prior to the Closing, and (ii) any liability related to the failure of any reimbursement claim submitted to certain government programs forservices rendered by the Home Health Business prior to the Closing to meet the requirements of such government programs, or any violation prior to theClosing of any health care laws. Such liabilities include amounts to be recouped by, or repaid to, such government programs as a result of improperlysubmitted claims for reimbursement or those discovered as a result of audits by investigative agencies. All services that we have provided that have been ormay be reimbursed by Medicare are subject to retroactive adjustments and/or total denial of payments received from Medicare under various review and auditprovisions included in the program regulations. The review period is generally described as six years from the date the services are provided but could beexpanded to ten years under certain circumstances if fraud is found to have existed at the time of original billing. In the event that there are adjustmentsrelating to the period prior to the Closing, we may be required to reimburse the Purchasers or the government for the amount of such adjustments, whichcould adversely affect our business and financial condition. In addition, timing delays may cause working capital shortages. Working capital management,including prompt and diligent billing and collection, is an important factor in achieving our financial results and maintaining liquidity. It is possible thatdocumentation support, system problems, provider issues or industry trends may extend our collection period, which may materially adversely affect ourworking capital, and our working capital management procedures may not successfully mitigate this risk.The implementation or expansion of self-directed care programs in states in which we operate may limit our ability to increase our market share andcould 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 andcommunity based service providers. Consumers may hire family members, friends or neighbors to provide services that might otherwise be provided by ahome and community based service agency provider, such as our company. Most states and the District of Columbia have implemented self-directed careprograms, to varying degrees and for different types of consumers. States are under pressure from the federal government and certain advocacy groups toexpand these programs. CMS has provided states with specific Medicaid waiver options for programs that offer person-centered planning, individualbudgeting or self-directed services and support as part of the CMS Independence Plus initiative introduced in 2002 under an Executive Order of thePresident. Certain private foundations have also granted resources to states to develop and study programs that provide financial accounts to consumers fortheir 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 programsmay erode our Medicaid consumer 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 2014, we derived approximately 53.2% of our net service revenues from continuing operations under agreements with the Illinois Department onAging, 4.6% of our net service revenues from continuing operations under an agreement with the State of Washington and 3.4% of our net service revenuesfrom continuing operations under an agreement with United HealthCare of New Mexico. Each of our agreements is generally in effect for a specific term. Forexample, the services we provide to the Illinois Department on Aging are provided under a number of agreements that expire at various times through 2015. 19Table of ContentsEven though our agreements are for a specific term, they are generally terminable with 60 days’ notice. Our ability to renew or retain our agreementsdepends 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 inprovider eligibility requirements. Additionally, failure to satisfy any of the numerous technical renewal requirements in connection with our proposals foragreements could result in a proposal being rejected even if it contains favorable pricing terms. Failure to obtain, renew or retain agreements with majorpayors may negatively impact our results of operations and revenue. We can give no assurance these agreements will be renewed on commercially reasonableterms or at all.Our industry is highly competitive, fragmented and market-specific, with limited barriers to entry.We compete with home and community based service providers, home health providers, private caregivers, larger publicly held companies, privatelyheld companies, privately held single-site agencies, hospital-based agencies, not-for-profit organizations, community-based organizations and self-directedcare programs. In addition, certain governmental payors contract for services with independent providers such that our relationships with these payors are notexclusive, particularly in California. Some of our competitors have greater financial, technical, political and marketing resources, name recognition or alarger number of consumers and payors than we do. In addition, some of these organizations offer more services than we do in the markets in which weoperate. Consumers or referral sources may perceive that local service providers and not-for-profit agencies deliver higher quality services or are moreresponsive. These competitive advantages may limit our ability to attract and retain referrals in 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 and community based service providers in 2009, allowingall providers that are willing and capable to obtain state approval and provide services. This may increase competition in that state, and because we derivedapproximately 60.6% of our net service revenues from continuing operations from services provided in Illinois in 2014, this increased competition couldnegatively impact our business.Local 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 services thatwe do not provide, or be viewed by consumers as a more desirable local alternative. The introduction of new and enhanced service offerings, in combinationwith the development of strategic relationships by our competitors, could cause a decline in revenue, a loss of market acceptance of our services and anegative impact on our results of operations.Our profitability could be negatively affected by a reduction in reimbursement from payors.States such as Illinois are experiencing large budget deficits, which may result in lower payments. The Governor of Illinois has proposed a budget forthe State’s fiscal year 2016 which has certain provisions that would limit the budget and related services provided by the Illinois Department onAging. While not yet passed by the State, if enacted these changes could affect the number of clients we serve and our growth in the State. To the extent theState continues to have fiscal issues, reimbursement from the State may be negatively impacted. In addition, private payors, including commercial insurancecompanies, could also reduce reimbursement. Any reduction in reimbursements or imposition of copayments that dissuade the use of our services, or anyreduction in reimbursement from private payors, could materially adversely affect our profitability. 20Table of ContentsWe 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 include matters related to: • licensure and certification; • adequacy and quality of services; • qualifications and training of personnel; • confidentiality, maintenance and security issues associated with medical records and claims processing; • the use and disclosure of protected health information; • relationships with physicians and other referral sources; • operating policies and procedures; • addition of facilities and services; and • billing for services.These laws and regulations, including the Health Reform Act, and their interpretations, are subject to frequent change. These changes could reduce ourprofitability by increasing our liability, increasing our administrative and other costs, increasing or decreasing mandated services, forcing us to restructureour relationships with referral sources and providers or requiring us to implement additional or different programs and systems. Failure to comply could leadto the termination of rights to participate in federal and state-sponsored programs, the suspension or revocation of licenses and other civil and criminalpenalties and a delay in our ability to bill and collect for services provided. We cannot assure you that the provisions described above will not adverselyimpact our business, results of operations or financial results. Further, we may be unable to mitigate any adverse effects resulting from the Health Reform Act.The Health Reform Act amended the False Claims Act to provide that a provider must report and return overpayments within 60 days of identifying theoverpayment or the claims for the services that generated the overpayments become false claims subject to the False Claims Act. Overpayments includepayments for services for which the provider does not have proper documentation. If we were to identify documentation failures that could not be correctedwe could be required to return payments received for those claims within the mandated 60-day time period. If we fail to identify and return overpaymentswithin the required 60-day period we could be subject to suits under the False Claims Act by the government or relators (whistleblowers). On February 13,2015, CMS announced that it will delay finalizing regulations that were intended to clarify when a payment is “identified” for purposes of the 60-day rule.Notwithstanding the delay, providers are still required to comply with the rule even though there is considerable uncertainty over exactly when the 60-dayperiod begins. These requirements could have a material adverse impact on our business and operations. During an internal evaluation of billing processes,we discovered documentation errors in a number of claims that we had submitted to Medicare and consistent with applicable law, in March 2014, wevoluntarily remitted approximately $1,800,000 to the government. See Note 7 to the Consolidated Financial Statements, Details of Certain Balance SheetAccounts, included elsewhere herein for more information.As noted in “Business-Overview” section above, new federal regulations took effect on March 17, 2014 setting forth eligibility requirements for homeand community based services provided under Medicaid waiver programs. Home and community based service providers will face costs associated withcompliance with these regulations, but it is difficult to ascertain the impact of these costs at this time and these costs will vary from state to state dependingon how the requirements are implemented. 21Table of ContentsOn October 6, 2014, CMS issued a proposed rule that would revise the Medicare and Medicaid conditions of participation for home health agencies.The proposed rule would require home health agencies to develop, implement and maintain an agency-wide, data-driven quality assessment andimprovement program and a system of communication and integration to identify patient needs and coordinate care. The proposed rule also aims to clarifyand expand current patient rights requirements and contains several other clarifications and updates largely focused on creating a more patient-centered,data-driven, outcome-oriented process for patient care. While we sold our Home Health Business, as discussed in “Business-Overview” above, we retain somelimited Medicare business as a result of our acquisition of Priority Home Health Care, Inc. and otherwise. If the proposed rule is finalized, we expect to facecosts associated with compliance with such changes.On December 11, 2014, CMS proposed a star rating methodology for home health agencies to meet the Health Reform Act’s call for more transparent,public information on provider quality. All Medicare-certified home health agencies would be eligible to receive a star rating (from one to five stars) basedon a number of quality measures, such as timely initiation of care, drug education provided to patients, fall risk assessment, depression assessments,improvements in bed transferring and bathing, among others. Ratings would be available on the Home Health Compare website. CMS is currently solicitingfeedback from stakeholders on the proposed program and has set an implementation target of Summer 2015. It is not clear at this time what impact, if any, theproposed rating system would have on our remaining home health business.In October 2013, California enacted the Home Care Services Consumer Protection Act. The act establishes a licensing program for home careorganizations, and requires background checks, basic training, and tuberculosis screening for the aides that are employed by home care organizations. Homecare organizations and aides will have until January 1, 2016 to comply with the new licensing and background check requirements. Although we sold thebulk of our home health business in California in March 2013, we continue to operate in California. The requirements of the act are expected to imposeadditional costs on us.We are subject to various other federal and state regulations and laws, including anti-referral laws, the Anti-Kickback Statute, the Stark Law, the FalseClaims Act, Fraud Alerts, HIPPA and the HITECH Act as described in the Section “Government Regulation”. Failure to comply with these regulations orviolations of these laws could lead to fines and exclusions or other sanctions that could have a material effect on our 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 that increaseour 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 andlocal living wage ordinances, increases in the level of existing benefits or the lengthening of periods for which unemployment benefits are available. We maynot be able to offset any increased costs and expenses. Furthermore, any failure to comply with these laws, including even a seemingly minor infraction, canresult in significant 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 Medicaid,Medicare and other federal and state healthcare program beneficiaries. If we inadvertently hire or contract with an excluded person, or if any of our currentemployees or contractors becomes an excluded person 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 the excluded individual to a federal or state healthcare program beneficiary, an assessment of up to three timesthe amount claimed and exclusion from the program. 22Table of ContentsUnder the Health Reform Act, we are required to provide a minimum level of coverage for 70 percent of our full-time employees in 2015 or be subjectto an annual penalty. For 2016, coverage must extend to 95% of our full-time employees. Approximately 22% of our employees are not provided anymedical coverage. We are evaluating our options to minimize our exposure as a result of this requirement. If we determine that we will provide medicalcoverage for these employees, the costs could be material and have a significant effect on our profitability. If we determine not to offer medical coverage, wecould be assessed fines or penalties for individuals who seek medical coverage through federal and state health exchanges. Depending on the number ofemployees who seek coverage in this manner, the penalties could be material and have a significant effect on our profitability.In September 2013, the United States Department of Labor (the “Department of Labor”) announced the adoption of a rule that extended the minimumwage and overtime pay requirements of federal law to most direct care workers, such as home health aides, personal care aides and certified nursing assistants.These employees have been exempt from federal wage laws since 1974. The new rule was slated to take effect on January 1, 2015, (though the Department ofLabor announced on October 7, 2014 that it would delay enforcement of the rule until June 30, 2015). However, two decisions from the United States DistrictCourt for the District of Columbia, handed down on December 22, 2014 and January 14, 2015, invalidated key provisions in the rule, effectively restoring thestatus quo in which home care agencies and other third party employers can utilize the “companionship services” exemption to the minimum wage andovertime requirements of the Fair Labor Standards Act. The applicability of the rule remains uncertain, however, as the Department of Labor filed a notice ofappeal of these rulings with the United States Court of Appeals for the District of Columbia on January 23, 2015.A number of states already require that direct care workers receive state-mandated minimum wage and/or overtime pay. Opponents say that the newprotections will make in-home care more expensive for government programs such as Medicaid that pay for such services, and that the new rule could resultin a reduction in covered services. We will continue to evaluate the effect of the new rule on our operations.We are subject to reviews, compliance audits and investigations that could result in adverse findings that negatively affect our net service revenues andprofitability.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. Pursuant to the Home Health Purchase Agreement, we are obligated to indemnify the Purchasers for, among other things, (i) penalties, fines,judgments and settlement amounts arising from a violation of certain specified statutes, including the False Claims Act, the Civil Monetary Penalties Law,the federal Anti-Kickback Statute, the Stark Law or any state law equivalent in connection with the operation of the Home Health Business prior to theClosing, and (ii) any liability related to the failure of any reimbursement claim submitted to certain government programs for services rendered by the HomeHealth Business prior to the Closing to meet the requirements of such government programs, or any violation prior to the Closing of any health care laws.Such liabilities include amounts to be recouped by, or repaid to, such government programs as a result of improperly submitted claims for reimbursement orthose discovered as a result of audits by investigative agencies. All services that we have provided that have been or may be reimbursed by Medicare aresubject to retroactive adjustments and/or total denial of payments received from Medicare under various review and audit provisions included in the programregulations. The review period is generally described as six years from the date the services are provided but could be expanded to ten years under certaincircumstances if fraud is found to have existed at the time of original billing. In the event that there are adjustments relating to the period prior to the Closing,we may be required to reimburse the Purchasers for the amount of such adjustments, which could adversely affect our business and financial condition.Payments we receive in respect of Medicaid and Medicare can be retroactively adjusted after a new examination during the 23Table of Contentsclaims settlement process or as a result of pre- or post-payment audits. Federal, state and local government payors may disallow our requests forreimbursement based on determinations that certain costs are not reimbursable because proper documentation was not provided or because certain serviceswere not covered or deemed necessary. In addition, other third-party payors may reserve rights to conduct audits and make reimbursement adjustments inconnection with or exclusive of audit activities. Significant adjustments as a result of these audits could adversely affect our revenues and profitability.If we fail to meet any of the conditions of participation or coverage with respect to state licensure or our participation in Medicaid, Medicaid waiver,Medicare programs, Veterans Health Administration programs and other state and local governmental programs, we may receive a notice of deficiency fromthe applicable surveyor or authority. Failure to institute a plan of action to correct the deficiency within the period provided by the surveyor or authoritycould result in civil or criminal penalties, the imposition of fines or other sanctions, damage to our reputation, cancellation of our agreements, suspension orrevocation of our licenses or disqualification from federal and state reimbursement programs. These actions may adversely affect our ability to provide certainservices, to receive payments from other payors and to continue to operate. Additionally, actions taken against one of our locations may subject our otherlocations to adverse consequences. We may also fail to discover all instances of noncompliance by our acquisition targets, which could subject us to adverseremedies once those acquisitions are complete. Any termination of one or more of our locations from any federal, state or local program for failure to satisfysuch program’s conditions of participation could adversely affect our net service revenues and profitability.Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreements andrenew existing agreements.Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as aquality service provider among governmental authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes,rehabilitation centers, advocacy groups, consumers and their families, other referral sources and the public. While we believe that the services that we provideare of high quality, if studies mandated by Congress in the Health Reform Act to make public quality measures are implemented and if our quality measuresare deemed to be not of the highest value, our reputation could be negatively affected. Negative publicity, changes in public perceptions of our services orgovernment investigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain newagreements. Increased government scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services.Any of these events could have a negative effect on our business, financial condition and operating results.In addition, in connection with the sale of our Home Health Business, we granted a license to the Purchasers that allows them to use certain of ourintellectual property, including the Addus name, for the provision of skilled nursing and related physical therapy healthcare services to individuals in theirhomes and hospice services in California, Illinois, Arkansas, South Carolina and Nevada. Although the use of the intellectual property is required to beconsistent and at least equal to the level of quality and brand perception prior to the sale, we do not have operational control over the Purchasers. As a result,home health agencies operated by the Purchasers may not be operated in a manner consistent with the standards we uphold at our agencies. If such agenciesdo not maintain operational standards consistent with the standards we demand of our agencies, the image and brand reputation of Addus may suffer and ourbusiness may be materially affected.Our growth strategy depends on our ability to manage growing and changing operations and we may not be successful in managing this growth.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 financial andprofessional 24Table of Contentsresources. In addition, we will need to further develop our financial controls and reporting systems to accommodate future growth. This could require us toincur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding ourinformation technology infrastructure. Our inability to effectively manage growth could have a material adverse effect on our financial results.Future acquisitions or growth initiatives 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 service providers. These acquisitions involve significant risks and uncertainties, including difficulties assimilating acquired personnel and othercorporate cultures into our business, the potential loss of key employees or consumers of acquired providers, and the assumption of liabilities and exposure tounforeseen liabilities of acquired providers. In the past, we have made acquisitions that have not performed as expected or that we have been unable tosuccessfully 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.We have grown our business through de novo locations and we may in the future open new locations in existing and new markets. De novo locationsinvolve risks, including those relating to accreditation, hiring new personnel, establishing relationships with referral sources and delays or difficulty ininstalling our operating and information systems. We may not be successful in establishing de novo locations in a timely manner due to generatinginsufficient business activity and incurring higher than projected operating cost that could have a material adverse effect on our financial condition, resultsof operations and cash flows.We may be unable to pursue acquisitions or expand into new geographic regions without obtaining additional capital or consent from our lenders.At December 31, 2014 and December 31, 2013, we had cash balances of $13,363,000 and $15,565,000, respectively. As of December 31, 2014, we hadno outstanding debt on our credit facility. After giving effect to the amount drawn on our credit facility, approximately $15,464,000 of outstanding letters ofcredit and borrowing limits based on an advanced multiple of adjusted EBITDA, we had $39,536,000 available for borrowing under the credit facility as ofDecember 31, 2014. Since our credit facility provides for borrowings based on a multiple of an EBITDA ratio, any declines experienced in our EBITDAwould 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$2,000,000, in each case without the consent of the lenders. The consideration we paid in connection with 12 of the 15 acquisitions we completed exceeded$2,000,000. In addition, our credit facility requires, among other things, that we are in pro forma compliance with the financial covenants set forth thereinand that no event of default exists before and after giving effect to any proposed acquisition. Our ability to expand in a manner consistent with historicpractices 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 25Table of Contentsinstitution for funding under our credit facility and any instability in the financial markets or the negative impact of local, national and worldwide economicconditions on that financial institution could impact our short and long-term liquidity needs to meet our business requirements.As a result of the indemnification provisions of the Home Health Purchase Agreement pursuant to which we sold Home Health Business, we may incurexpenses and liabilities related to periods up to the date of sale or pursuant to our other indemnification obligations thereunder.As a result of the indemnification provisions of the Home Health Purchase Agreement pursuant to which we sold the Home Health Business, we haveagreed to indemnify the Purchasers for, among other things, (i) penalties, fines, judgments and settlement amounts arising from a violation of certain specifiedstatutes, including the False Claims Act, the Civil Monetary Penalties Law, the federal Anti-Kickback Statute, the Stark Law or any state law equivalent inconnection with the operation of the Home Health Business prior to the Closing, and (ii) any liability related to the failure of any reimbursement claimsubmitted to certain government programs for services rendered by the Home Health Business prior to the Closing to meet the requirements of suchgovernment programs, or any violation prior to the Closing of any health care laws. Such liabilities include amounts to be recouped by, or repaid to, suchgovernment programs as a result of improperly submitted claims for reimbursement or those discovered as a result of audits by investigative agencies. Allservices that we have provided that have been or may be reimbursed by Medicare are subject to retroactive adjustments and/or total denial of paymentsreceived from Medicare under various review and audit provisions included in the program regulations. The review period is generally described as six yearsfrom the date the services are provided but could be expanded to ten years under certain circumstances if fraud is found to have existed at the time of originalbilling. In the event that there are adjustments relating to the period prior to the Closing, we may be required to reimburse the Purchasers for the amount ofsuch adjustments, which could adversely affect our business and financial condition.In addition, pursuant to the Home Health Purchase Agreement, we are obligated to indemnify the Purchasers for breaches of representations, warrantiesand covenants, certain taxes and liabilities related to the pre-Closing period (other than specifically identified assumed liabilities). Any liability we have tothe Purchasers under the Home Health Purchase Agreement could adversely affect our results of operations.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 31,2014, approximately 61.3% of our workforce was represented by two national unions, including the Service Employees International Union, which is ourlargest union. We have a national agreement with the SEIU. Wages and benefits are negotiated at the local level at various times throughout the year. Thesenegotiations are often initiated when we receive increases in our hourly rates from various state agencies. Upon expiration of these collective bargainingagreements, we may not be able to negotiate labor agreements on satisfactory terms with these labor unions. A strike, work stoppage or other slowdown couldresult in a disruption of our operations and/or higher ongoing labor costs, which could adversely affect our business. Labor costs are the most significantcomponent of our total expenditures and, therefore, an increase in the cost of labor could significantly harm our business.Our operations subject us to risk of litigation.Operating in the home and community based services industry exposes us to an inherent risk of wrongful death, personal injury, professionalmalpractice and other potential claims or litigation brought by our consumers and employees. Because we operate in this industry, from time to time, we aresubject to claims alleging that we did not properly treat or care for a consumer that we failed to follow internal or external procedures that resulted in death orharm to a consumer or that our employees mistreated our consumers, resulting in death or harm. We are also subject to claims arising out of accidentsinvolving vehicle collisions brought by consumers whom we 26Table of Contentsare transporting or from employees driving to or from home visits. We operate five adult day centers which provide transportation for our elderly and disabledconsumers. Each of our vehicles transports 7 to 14 passengers to and from our locations. The concentration of consumers in one vehicle increases the risk oflarger 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 andseek to impose monetary penalties on us. We could be required to pay substantial amounts to respond to regulatory investigations or, if we do not prevail,damages or penalties arising from these legal proceedings. We also are subject to potential lawsuits under the False Claims Act or other federal and statewhistleblower statutes designed to combat fraud and abuse in our industry. These lawsuits can involve significant monetary awards or penalties which maynot be covered by our insurance. If our third-party insurance coverage and self-insurance coverage reserves are not adequate to cover these claims, it couldhave a material adverse effect on our business, results of operations and financial condition. Even if we are successful in our defense, civil lawsuits orregulatory proceedings could distract us from running our 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. Changesin our 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 locatedin the 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 and maintain thesecurity 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 fails to support the software or systems, or if we lose our license with McKesson, our operations could benegatively affected. 27Table of ContentsOur business also depends on a comprehensive payroll and human resources system for basic payroll functions and reporting, payroll tax reporting,managing wage assignments and garnishments. We rely on an external service provider, Ultimate Software, to provide continual maintenance, upgrading andenhancement of our primary human resource and payroll systems. To the extent that Ultimate Software fails to support the software or systems, or any of therelated support services provided by them, our internal operations could be negatively affected.Because of the confidential health information and consumer records we store and transmit, loss of electronically-stored information for any reasoncould expose us to a risk of regulatory action, litigation and liability.If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to processtransactions and produce timely and accurate reports could be adversely affected. If we experience difficulties with the transition and integration ofinformation systems or are unable to implement, maintain, or expand our systems properly, we could suffer from, among other things, operational disruptions,regulatory problems, and increases in administrative expenses.We have full backup of our key information systems. Should our support center become inoperable as a result of a natural disaster or terrorist acts, itwould take substantial amount of time and resources to restore our business to the current state of operation. This risk is becoming even more critical as weare centralizing more of our business operations. The disruption to the business would be material and would affect our operational and financialperformance.We rely on several vendors for telecommunication and internet access, with a high percentage of our agencies supported by one vendor. To the extentservices are interrupted, our individual offices may lose basic telephone service and access to our centralized computer systems. To the extent these delaysare frequent, or impact a large number of offices, or occur for extended periods of time, it could disrupt our business and would have a negative effect on ourability to serve our clients and potentially have a negative impact on our financial performance.Our business requires the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries inthe field of cryptography or other events or developments could result in compromises or breaches of our security systems and consumer data stored in ourinformation systems. Anyone who circumvents our security measures could misappropriate our confidential information or cause interruptions in our servicesor operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses or software programs thatdisable or impair computers have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems whichcould disrupt our operations or make our systems inaccessible. We may be required to expend significant capital and other resources to protect against thethreat of security breaches or to alleviate problems caused by breaches. Our security measures may be inadequate to prevent security breaches, and ourbusiness operations would be negatively impacted by cancellation of contracts and loss of consumers if security breaches are not prevented.In addition, we are required to comply with the privacy and security laws and regulations of HIPAA and the HITECH Act. If our privacy and securitypractices are not in compliance with HIPAA and/or if we fail to satisfy the breach notification requirements of the HITECH Act in the event of a securitybreach, we could be subject to significant fines and penalties. Penalties under the HIPAA (as increased by the HITECH Act) can be as high as $50,000 perviolation (with an annual maximum of $1,500,000) depending on the degree of culpability. 28Table 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; • make capital expenditure; and • pay dividends.Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of control or other businesscombination 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 36.5% of our outstandingcommon stock as of December 31, 2014. As a result, the Eos Funds have the ability to significantly influence all matters submitted to our stockholders forapproval, 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, one of our directors is 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-prevailingmarket price 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. Our ability to attract and retain personnel depends on several factors, including our ability to provide employees withattractive assignments and competitive benefits and salaries.The loss of one or more of the members of the executive management team or the inability of a new management team to successfully execute ourstrategies may adversely affect our business. If we are unable to attract and retain qualified personnel, we may be unable to provide our services, the quality ofour services may decline, and we could lose consumers and referral sources. 29Table of ContentsWe 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 exposureto vulnerable 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 materially adverselyaffected.Goodwill and intangible assets with finite lives represent a significant portion of our assets. Goodwill represents the excess of cost over the fair marketvalue of net assets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on ourbalance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. If as part of ourannual review of goodwill and intangibles, we were required to write down all or a significant part of our goodwill and/or intangible assets, our net earningsand net worth could be materially adversely affected, which could affect our flexibility to obtain additional financing. In addition, if our assumptions used inpreparing our valuations for purposes of impairment testing differ materially from actual future results, we may record impairment charges in the future andour financial results may be materially adversely affected. We had $64,220,000 of goodwill and $10,347,000 of intangible assets recorded on ourconsolidated balance sheet at December 31, 2014.It is not possible at this time to determine if there will be any future impairment charge, or if there is, whether such charges would be material. We willcontinue to review our goodwill and other intangible assets for possible impairment. We cannot be certain that a downturn in our business or changes inmarket conditions will not result in an impairment of goodwill or other intangible assets and the recognition of resulting expenses in future periods, whichcould adversely affect our results of operations for those periods.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; 30Table of Contents • we have a small base of registered shares of common stock consisting of the 5,400,000 shares we issued in our initial public offering (“IPO”),which represents approximately 49.0% of our total common shares outstanding, that could result in significant stock price movements upward ordownward 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 theoperating performance of homecare companies. These broad market and industry factors may materially reduce the market price of our common stock,regardless of our operating performance. In the past, securities class-action litigation has often been brought against companies following periods ofvolatility in the market price of their respective securities. We have been and may become involved in this type of litigation in the future. Litigation of thistype is often expensive to defend and may divert 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 on yourinvestment 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 ofour business 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, credit facility limitations, earnings and other factorsdeemed relevant by our board of directors.If securities or industry analysts fail to publish research or reports about our business or publish negative research or reports, or our results are belowanalysts’ 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 theirevaluations of our stock or our results are below analysts’ estimates, our stock price would likely decline. In addition, due to the small number of analystscovering us, a single comment or report from one of the analysts whether positive or negative, could result in a significant increase or decrease in our stockprice.Provisions in our organizational documents and Delaware law could delay or prevent a change in control of our company, which could adversely affectthe 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 31Table of Contentseffect of making it more difficult for third parties to replace our current management without the consent of the board of directors. Provisions in our amendedand restated certificate of incorporation and bylaws that could delay or prevent an unsolicited change in control include: • a staggered board of directors; • 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 engagingin mergers 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 our IPO,Section 203 is currently inapplicable to any business combination with the Eos Funds or their affiliates. In addition, our amended and restated bylaws requirethat any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, whichmake 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 requires our independentregistered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. Compliance with SEC regulations adoptedpursuant to Section 404 of the Sarbanes Oxley Act requires annual management assessments of the effectiveness of our internal control over financialreporting. Compliance with Section 404 of the Sarbanes-Oxley Act has increased our legal and financial compliance costs making some activities moredifficult, time-consuming or costly and may also place strain on our personnel, systems and resources.As a result of our increased stock price and overall market value as of the end of the second quarter of 2013, we became subject to the requirements ofSection 404 of Sarbanes-Oxley. Accordingly, we are now required to have an audit of our internal controls over financial reporting.If we fail to satisfy the requirements of Section 404 on a timely basis, we could be subject to regulatory scrutiny and sanctions, our ability to raisecapital could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and our stock price could be adverselyaffected.Compliance with changing regulations including specific program compliance, corporate governance and public disclosure will result in additionalexpenses and pose challenges for our management team.The state agencies that contract for our services require our compliance with various rules and regulations affecting the services we provide. We have acompliance officer who monitors and reports on our efforts for achieving the desired results. State agencies are recommending increased rules and regulationsin an effort to control the growth of these programs and their overall costs. The implementation of these changes may require the Company to increase theirefforts to remain compliant, may reduce the authorizations for services to be provided, may result in certain consumers no longer being eligible for ourservices all of which may result in lower revenues and increased costs, reducing our operating performance and profitability. If we continue to serve ourconsumers without addressing these increased regulations we are at risk for non-compliance with program requirements and potential penalties.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 there-under, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty forpublic companies and 32Table of Contentssignificantly increased the costs and risks associated with accessing the U.S. public markets. We are committed to maintaining high standards of internalcontrols over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriate resources to complywith evolving standards, and this investment has resulted and will likely continue to result in increased general and administrative expenses and a diversionof management time and attention from revenue-generating activities to 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 in the credit agreement, for the most recent 12-month period for which financial statements have been delivered under the credit agreementmultiplied by the specified advance multiple, up to 3.25, less the outstanding senior indebtedness and letters of credit, and (ii) $55,000,000 less theoutstanding revolving loans and letters of credit. Interest on the revolving line of credit may be payable at (i) a floating rate equal to the one-month LIBOR,plus a margin of 3.5%, (ii) the LIBOR rate for term periods of one, two or three months, plus a margin of 3.5% or (iii) the base rate, plus a margin of 1.6%,where the base rate is equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal fundsrate, plus a margin of 0.5% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with a one month interest period advanced on such day,plus a margin of 3%. We 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 ofcredit are charged at a rate of 2.0% per annum payable monthly. We did not have any amounts outstanding under the credit facility as of December 31, 2014,and the total availability under the revolving credit loan facility was $39,536,000 as of December 31, 2014.The current federal and state economic and reimbursement environments and state budgetary pressures to decrease or eliminate services we providecould negatively affect our future earnings. This decrease in earnings would reduce the availability of funds under our credit facility which could have anegative impact on our future operating results. ITEM 1B.UNRESOLVED STAFF COMMENTSNone. ITEM 2.PROPERTIESWe do not own any real property. As of December 31, 2014, we operated at 130 leased properties including our National Support Center. Home andcommunity based services are operated out of 129 of these facilities. As part of the sale of the Home Health Business, a portion of 10 of the facilities arecurrently subleased to the Purchasers. We lease approximately 59,000 square feet of office space in Downers Grove, Illinois, which serves as our corporateheadquarters. ITEM 3.LEGAL PROCEEDINGSFrom 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.MINE SAFETY DISCLOSURESNot applicable. 33Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY 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 2014 Fourth Quarter $24.29 $24.00 Third Quarter 23.50 23.24 Second Quarter 24.32 23.51 First Quarter 29.45 28.56 2013 Fourth Quarter $32.40 $21.13 Third Quarter 29.94 17.62 Second Quarter 20.72 11.17 First Quarter 14.07 7.12 HoldersAs of December 31, 2014, 38.6% of our shares were held by Company insiders. An additional 47.6% of the stock was held by 95 institutional investors.As of February 23, 2015, Addus HomeCare Corporation had approximately 2,200 shareholders, including 32 shareholders of record.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. 34Table of ContentsEquity Compensation PlanThe following table presents securities authorized for issuance under our equity compensation plans at December 31, 2014. Plan Category Number of Securities to beIssued Upon Exercise ofOutstanding Options,Warrants and Rights (1) Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights (2) Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (ExcludingSecurities Reflected inthe First Column) (3) Equity Compensation Plans Approved bySecurity Holders 684,370 $11.43 1,389,387 Equity Compensation Plans Not Approved bySecurity Holders — — — Total 684,370 $11.43 1,389,387 (1)Includes both grants of stock options and unvested share awards. (2)Includes weighted-average exercise price of outstanding stock options only. (3)Represents shares of common stock that may be issued pursuant to our 2006 stock incentive plan (the “2006 Plan”) or our 2009 stock incentive plan(the “2009 Plan”). We do not plan on issuing any further grants under the 2006 Plan. There are 825,583 shares of common stock that may be issuedpursuant to the 2009 Plan. 35Table 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 datesindicated. The information is qualified in its entirety by and should be read in conjunction with the consolidated financial statements and related notesincluded elsewhere in this Annual Report on Form 10-K. For the Years Ended December 31, 2014 2013 2012 2011 2010 (Amounts In Thousands, Except Per Share Data) Consolidated Statements of Income Data: Net service revenues (1) $312,942 $265,941 $244,315 $230,105 $230,099 Cost of service revenues 229,207 198,202 180,264 168,632 170,376 Gross profit 83,735 67,739 64,051 61,473 59,723 General and administrative expenses 61,834 50,118 46,362 45,858 47,042 Revaluation of contingent consideration (4) — — — (469) — Gain on sale of agency — — (495) — — Depreciation and amortization 3,830 2,160 2,521 3,167 3,408 Total operating expenses 65,664 52,278 48,388 48,556 50,450 Operating income from continuing operations 18,071 15,461 15,663 12,917 9,273 Interest income (5) (18) (188) (155) (2,263) (155) Interest expense 698 674 1,723 2,524 3,159 Total interest expense, net 680 486 1,568 261 3,004 Income from continuing operations before income taxes 17,391 14,975 14,095 12,656 6,269 Income tax expense 5,428 3,812 4,807 4,244 1,902 Net income from continuing operations 11,963 11,163 9,288 8,412 4,367 Discontinued Operations Net income (loss) from Home Health Business (3) 280 (980) (1,653) (10,393) 1,661 Gain on sale of Home Health Business, net of tax — 8,962 — — — Earnings (losses) from discontinued operations 280 7,982 (1,653) (10,393) 1,661 Net income (loss) $12,243 $19,145 $7,635 $(1,981) $6,028 Basic income (loss) per common share: Continuing operations $1.10 $1.03 $0.86 $0.78 $0.41 Discontinued operations 0.02 0.74 (0.15) (0.96) 0.16 Basic income (loss) per common share: $1.12 $1.77 $0.71 $(0.18) $0.57 Diluted income (loss) per common share: Continuing operations $1.08 $1.01 $0.86 $0.78 $0.41 Discontinued operations 0.02 0.72 (0.15) (0.96) 0.16 Diluted income (loss) per common share: $1.10 $1.73 $0.71 $(0.18) $0.57 Weighted average number of common shares and potential common shares outstanding: Basic 10,900 10,826 10,764 10,752 10,604 Diluted 11,114 11,075 10,784 10,752 10,606 36Table of Contents For the Years Ended December 31, 2014 2013 2012 2011 2010 (Actual Numbers, Except Adjusted EBITDA and Billable Hours inThousands) Key Metrics: General: Adjusted EBITDA (2) $23,759 $18,796 $18,525 $16,415 $12,936 States served at period end 22 21 19 19 19 Locations at period end 129 121 96 96 107 Employees at period end 18,054 16,585 13,836 12,463 11,716 Operational Data: Average billable census 31,019 26,802 25,104 23,877 23,743 Billable hours 18,335 15,621 14,388 13,504 13,599 Average billable hours per census per month 49 49 48 47 48 Billable hours per business day 71,903 59,850 55,126 51,938 52,103 Revenues per billable hour $17.07 $17.02 $16.98 $17.04 $16.92 Percentage of Revenues by Payor: State, local and other governmental 87% 94% 95% 94% 93% Managed care organizations 9 1 — — — Private duty 3 4 4 5 6 Commercial 1 1 1 1 1 As of December 31, 2014 2013 2012 2011 2010 (Amounts In Thousands) Consolidated Balance Sheet Data: Cash $13,363 $15,565 $1,737 $2,020 $816 Accounts receivable, net of allowances 68,333 61,354 71,303 72,368 70,954 Goodwill and intangibles 74,567 68,788 56,906 58,739 77,500 Total assets 180,803 163,934 149,857 154,692 166,924 Total debt 3,663 — 16,458 31,527 45,185 Stockholders’ equity 127,956 113,856 94,417 86,441 88,091 (1)Acquisitions completed in 2014 accounted for $7,536,000 of growth in net service revenues from continuing operations for the year endedDecember 31, 2014. Acquisitions completed in 2013 accounted for $21,945,000 and $1,692,000 of growth in net service revenues from continuingoperations for the years ended December 31, 2014 and 2013, respectively. (2)We define Adjusted EBITDA as earnings before discontinued operations, interest expense, taxes, depreciation, amortization, stock-based compensationexpense and M&A expense. Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with generallyaccepted accounting principles in the United States (GAAP). It should not be considered in isolation or as a substitute for net income, operating incomeor 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 37Table of Contents and depreciation), tax consequences and non-cash stock-based compensation expense from our results of operations, M&A expense and alsofacilitates comparisons with the core results of our public company peers. • 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 Accounting Standards Codification (“ASC”) Topic 718 “Share-Based Payment,” on September 19, 2006, the effective date of our2006 Stock Incentive Plan (the “2006 Plan”), and recorded stock-based compensation expense of $827,000, $515,000, $341,000, $331,000 and$255,000 for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. By comparing our Adjusted EBITDA in differentperiods, our investors can evaluate our operating results without stock-based compensation expense, which is a non-cash expense that is not akey 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 of previouslyacquired tangible and intangible assets or the timing of new stock-based awards, as the case may be. This facilitates internal comparisons to historicaloperating results, as well as external comparisons to the operating results of our competitors and other companies in the home and community basedservices 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; • to evaluate the effectiveness of business strategies, such as the allocation of resources, the mix of organic growth and acquisitive growth andadjustments 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 reported underGAAP. 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; 38Table of Contents • 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 thefuture, and Adjusted EBITDA does not reflect any cash requirements for these replacements; • Adjusted EBITDA does not reflect any goodwill and intangible asset impairment charges; • Adjusted EBITDA does not reflect any revaluation of contingent consideration; • Adjusted EBITDA does not reflect any stock based compensation; 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 financialmeasures, is the 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: Year Ended December 31, 2014 2013 2012 2011 2010 (Amounts In Thousands) Reconciliation of Adjusted EBITDA to net income (loss): Net income (loss) $12,243 $19,145 $7,635 $(1,981) $6,028 Less: (Earnings) loss from discontinued operations, net of tax (280) (7,982) 1,653 10,393 (1,661) Net income from continuting operations 11,963 11,163 9,288 8,412 4,367 Interest expense, net 680 486 1,568 261 3,004 Income tax expense from continuing operations 5,428 3,812 4,807 4,244 1,902 Depreciation and amortization 3,830 2,160 2,521 3,167 3,408 M&A expenses 1,031 660 — — — Stock-based compensation expense 827 515 341 331 255 Adjusted EBITDA (1) $23,759 $18,796 $18,525 $16,415 $12,936 (1)The selected historical Consolidated Statements of Income data for the fiscal years ended December 31, 2014, 2013, 2012, 2011 and 2010, werederived from our audited consolidated financial statements included in the Annual Report on Form 10-K for the applicable year. (3)During December 2012, in anticipation of the sale of the Home Health Business we reported the operating results of our Home Health Business asdiscontinued operations. On February 7, 2013, we entered into the Home Health Purchase Agreement with the Purchasers. In 2011, we determined thatall of the $15,989,000 allocated to goodwill and intangible assets for our home health reportable unit was impaired and recorded an impairment loss of$15,989,000. (4)Adjusted EBITDA for 2011 includes a $469,000 non-cash gain for the revaluation of contingent consideration originally estimated for the purchase ofassets from Advantage Health Systems, Inc. 39Table of Contents(5)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,the interest income is recognized when received. We recorded no prompt payment interest income for the year ended December 31, 2014 and$185,000, $155,000, $2,263,000 and $155,000 in prompt payment interest for the years ended December 31, 2013, 2012, 2011 and 2010, respectively. 40Table 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 this AnnualReport on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially fromthose we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.OverviewWe are a provider of comprehensive home and community based services, which are provided primarily in the home, and focused on the dual eligible(Medicare/Medicaid) population. Our services include personal care and assistance with activities of daily living, and adult day care. Our consumers areprimarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal,state and local governmental agencies, managed care organizations, commercial insurers and private individuals. We currently provide home and communitybased services to over 31,000 consumers through 129 locations across 22 states, including 5 adult day centers in Illinois. Over the course of 2014, we servedover 43,000 consumers.A summary of our financial results for 2014, 2013 and 2012 is provided in the table below: 2014 2013 2012 (Amounts in Thousands) Net service revenues – continuing operations $312,942 $265,941 $244,315 Net service revenues – discontinued operations — 6,462 38,822 Net income from continuing operations 11,963 11,163 9,288 Earnings (loss) from discontinued operations 280 7,982 (1,653) Net income $12,243 $19,145 $7,635 Total assets $180,803 $163,934 $149,857 Historically our services were provided under agreements with state and local government agencies established to meet the needs of our consumers.Our consumers are predominately “dual eligible” and as such are eligible to receive both Medicare and Medicaid funded home-based care. As a result ofcertain legislation enacted by the federal government, states are being incentivized to initiate dual eligible demonstration programs and other managedMedicaid initiatives, which are designed to coordinate the services provided through these two programs, with the overall objectives to better coordinateservice delivery and over the long term to reduce costs. Increasingly states are implementing these managed care programs and as such are transitioningmanagement of individuals such as our consumers to local and national managed care organizations. Under these arrangements the managed careorganizations have an economic incentive to provide home and community based services to consumers as a means to better manage the acute careexpenditures of their membership.The home and community based services we provide include assistance with bathing, grooming, dressing, personal hygiene and medication reminders,and other activities of daily living. We provide these services on a long-term, continuous basis, with an average duration of approximately 20 months perconsumer. Our adult day centers provide a comprehensive program of skilled and support services and designated medical services for adults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to and from the centers, the provision ofmeals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction.We utilize a coordinated care model that is designed to improve consumer outcomes and satisfaction, as well as lower the cost of acute care treatmentand reduce service duplication. We believe this coordinated care model to be especially valuable to managed care organizations that have economicresponsibility for both home 41Table of Contentsand community services as well as acute care expenditures. Over the long term, we believe this model will be a differentiator and as a result we expect toreceive increased referrals from the managed care organizations.Through our coordinated care model, we utilize our home care aides to observe and report changes in the condition of our consumers for the purpose ofearly intervention in the disease process, thereby preventing or reducing the cost of medical services by avoiding emergency room visits, and/or reducing theneed for hospitalization. We will coordinate the services provided by our team with those of other health care agencies as appropriate. Changes in consumers’conditions are evaluated by appropriately trained managers and referred to either appropriate medical personnel including the consumers’ primary carephysicians or managed care organizations for treatment and follow-up. We believe this approach to the care to our consumers and the integration of ourservices into the broader healthcare continuum are attractive to managed care organizations and others who are ultimately responsible for the healthcareneeds and costs of our consumers and over time will increase our business with them.We are investing in technology based solutions to support and facilitate our coordinated care model. We utilize an Integrated Voice Response, “IVR”system and smart phones applications to communicate with the homecare aides. Through these applications we are able to identify changes in healthconditions with automated alerts forwarded to appropriate management team for triaging and evaluation. In addition, the technology is used to record basictransaction information about each visit including: start and end times to a scheduled shift, mileage reimbursement, text messages to the homecare aide andcommunication of basic payroll information. Our plans for this technology include development of a web portal to provide the ability to communicate thisbasic information about individual clients to the managed care organizations.We are growing through selective acquisitions, based on an overall strategy to expand our presence in current markets and to expand our footprint inmarkets where the home and community business is moving to managed care organizations. We completed two acquisitions in December 2013 and June2014 that expanded our presence in two existing markets and provided us with a base of operations in two new targeted managed care states. EffectiveJanuary 1, 2015, we acquired Priority Home Health Care, Inc., a company headquartered in Cleveland, Ohio and operating six offices in the Cleveland, Akronand Columbus areas. We anticipate these transactions to be accretive to earnings in 2015.Effective March 1, 2013, we sold substantially all of the assets used in our home health business (the “Home Health Business”) in Arkansas, Nevadaand South Carolina, and 90% of the Home Health Business in California and Illinois, to subsidiaries of LHC Group, Inc. (the “Purchasers”) for a cash purchaseprice of approximately $20,000,000. We retained a 10% ownership interest in the Home Health Business in California and Illinois. The assets sold included19 home health agencies and two hospice agencies in five states. Effective December 30, 2013, we sold one home health agency in Pennsylvania forapproximately $200,000. The results of the Home Health Business sold and one additional agency in Idaho which was closed in November 2012, arereflected as discontinued operations for all periods presented herein. Continuing operations include the results of operations previously included in our home& community segment and three agencies previously included in our home health segment. Following the sale of the Home Health Business, we manage andinternally report our business in one segment. Because regulatory requirements in Delaware and Indiana require home and community based services to beprovided by a licensed home health agency, we will continue to provide limited home health services reimbursable by Medicare in these agencies in order tomaintain these licenses. In addition, Priority Home Health Care maintains enrollment in but does not derive significant revenues from Medicare.We believe the sale of the Home Health Business substantially positioned us for future growth. The sale allowed us to focus both management andfinancial resources on changes in the home and community based services industry and to address and the needs of managed care organizations as theybecome more responsible for state sponsored programs. We have improved our financial performance by concentrating our efforts on our home andcommunity business that is growing and profitable. We have improved our overall financial position by eliminating our debt and adding to our cash reserves. 42Table of ContentsBusinessThe results of the Home Health Business sold are reflected as discontinued operations for all periods presented herein. Continuing operations includethe results of operations previously included in our home and community segment and three agencies previously included in our home health segment.Following the sale of the Home Health Business, we manage and internally report our business in one segment. As of December 31, 2014, we provided ourhome and community based services through 129 locations across 22 states including 5 adult day centers in Illinois.Our payor clients are principally federal, state and local governmental agencies and, increasingly, managed care organizations. The federal, state andlocal programs under which the agencies operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. We arebeginning to experience and anticipate a further transition of business from government payors to managed care organizations with which we are seeking togrow our business given our emphasis on coordinated care and the prevention of acute care. Managed care organizations are commercial insurance carrierswho are under contract with various federal and state governmental agencies to manage the provision of home and community based services. Their objectiveis to lower total health care costs by integrating the provision of home and community based services with those benefit programs responsible for theprovision of acute care services to their consumers. We are also seeking to grow our private duty business. Our commercial insurance carrier payor clients aretypically for-profit companies and are continuously seeking opportunities to control costs.For the year ended December 31, 2014, 2013 and 2012, our payor revenue mix for continuing operations was: Year Ended December 31, 2014 2013 2012 State, local and other governmental programs 86.4% 94.1% 94.9% Managed care organizations 9.1 1.0 0.0 Private duty 3.4 3.9 4.1 Commercial 1.1 1.0 1.0 100.0% 100.0% 100.0% We derive a significant amount of our net service revenues from our continuing operations in Illinois, which represented 60.6%, 65.5% and 63.7% andof our total net service revenues from continuing operations for the years ended December 31, 2014, 2013 and 2012, respectively.A significant amount of our net service revenues from continuing operations are derived from one payor client, the Illinois Department on Aging,which accounted for 53.2%, 58.8% and 57.3% of our total net service revenues from continuing operations for the years ended December 31, 2014, 2013 and2012, respectively.We also measure the performance of our business using a number of different metrics. We consider billable hours, billable hours per business day,revenues per billable hour and the number of consumers, or census.Components of our Statements of IncomeNet Service RevenuesWe generate net service revenues from continuing operations by providing our services directly to consumers. We receive payment for providing suchservices from our payor clients, including federal, state and local governmental agencies, commercial insurers and private consumers.Net service revenues from continuing operations are typically generated based on services rendered and reimbursed on an hourly basis. Our net servicerevenues from continuing operations were generated principally through reimbursements by state, local and other governmental programs which are partiallyfunded by Medicaid 43Table of Contentsprograms, managed care organizations and to a lesser extent from private duty and insurance programs. Net service revenues from continuing operations areprincipally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation orcontract, and recognized as net service revenues at the time services are rendered.Cost of Service RevenuesWe incur direct care wages, payroll taxes and benefit-related costs from continuing operations in connection with providing our services. We alsoprovide workers’ compensation and general liability coverage for these employees.Employees are also reimbursed for their travel time and related travel costs.General and Administrative ExpensesOur general and administrative expenses from continuing operations consist of expenses incurred in connection with our activities and as part of ourcentral administrative functions.Our general and administrative expenses from continuing operations consist principally of supervisory personnel, care coordination and officeadministration costs. These expenses include wages, payroll taxes and benefit-related costs; facility rent; operating costs such as utilities, postage, telephoneand office expenses; and bad debt expense. We have initiated efforts to centralize administrative tasks currently conducted at the branch locations. The costsrelated to these initiatives are included in the general and administrative expenses from continuing operations. Other centralized expenses from continuingoperations include administrative departments of accounting, information systems, human resources, billing and collections and contract administration, aswell as national program coordination efforts for marketing and private duty. These expenses primarily consist of compensation, including stock-basedcompensation, payroll taxes, and related benefits; legal, accounting and other professional fees; rents and related facility costs; and other operating costssuch as software application costs, software implementation costs, travel, general insurance and bank account maintenance fees.Depreciation and Amortization ExpensesWe amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competeagreements, principally using accelerated methods based upon their estimated useful lives. Depreciable assets consist principally of furniture and equipment,network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms.Interest IncomeLegislation 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 statement of operations as interest income. While we may be owed additional promptpayment interest, the amount and timing of receipt of such payments remains uncertain and we have determined that we will continue to recognize promptpayment interest income when received.Interest ExpenseInterest expense from continuing operations consists of interest costs on our credit facility, capital lease obligations and other debt instruments. 44Table of ContentsIncome Tax ExpenseAll of our income from continuing operations is from domestic sources. We incur state and local taxes in states in which we operate. The differencesfrom the federal statutory rate of 34.5% and 35.0% in 2014 and 2013, respectively, are principally due to the inclusion of state taxes and the use of federalemployment tax credits that lower our effective tax rate.Discontinued OperationsDiscontinued operations consists of the results of operations, net of tax for our Home Health Business that was sold effective March 1, 2013 and theresults of operations for an agency in Pennsylvania that was sold on December 30, 2013 and an agency in Idaho that was closed in November 2012.Results of OperationsYear Ended December 31, 2014 Compared to Year Ended December 31, 2013The following table sets forth, for the periods indicated, our consolidated results of operations. 2014 2013 Change Amount Net ServiceRevenues Amount Net ServiceRevenues Amount % (Amounts In Thousands, Except Percentages) Net service revenues $312,942 100.0% $265,941 100.0% $47,001 17.7% Cost of service revenues 229,207 73.2 198,202 74.5 31,005 15.6 Gross profit 83,735 26.8 67,739 25.5 15,996 23.6 General and administrative expenses 61,834 19.8 50,118 18.8 11,716 23.4 Depreciation and amortization 3,830 1.2 2,160 0.8 1,670 77.3 Total operating expenses 65,664 21.0 52,278 19.8 13,386 25.6 Operating income from continuing operations 18,071 5.8 15,461 5.8 2,610 16.9 Interest income (18) — (188) (0.1) 170 (90.4) Interest expense 698 0.2 674 0.3 24 3.6 Total interest expense, net 680 0.2 486 0.2 194 39.9 Income from continuing operations before income taxes 17,391 5.6 14,975 5.6 2,416 16.1 Income tax expense 5,428 1.7 3,812 1.4 1,616 42.4 Net income from continuing operations 11,963 3.8 11,163 4.2 800 7.2 Discontinued operations: Earnings from Home Health Business, net of tax 280 0.1 7,982 3.0 (7,702) (96.5) Net income $12,243 3.9% $19,145 7.2% $(6,902) (36.1)% Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Average billable census 31,019 26,802 4,217 15.7% Billable hours 18,335 15,621 2,714 17.4 Average billable hours per census per month 49 49 — — Billable hours per business day 71,903 59,850 12,053 20.1 Revenues per billable hour $17.07 $17.02 $0.05 0.3% 45Table of ContentsNet service revenues from state, local and other governmental programs accounted for 86.4% and 94.1% of net service revenues for 2014 and 2013,respectively. Managed care organizations accounted for 9.1% and 1.0% of net serve revenues in 2014 and 2013 respectively, with private duty andcommercial payors accounting for the remainder of net service revenues.Net service revenues increased $47,001,000 or 17.7%, to $312,942,000 for 2014 compared to $265,941,000 for the same period in 2013. The increasewas primarily due to a 15.7% increase in average billable census, of which 45.6% is same store census growth and 54.4% is related to acquisitions.Gross profit, expressed as a percentage of net service revenues, increased to 26.8% for 2014, from 25.5% in 2013. The increase was primarily due tolower than anticipated workers’ compensation expense and recent acquisitions with higher margins.General and administrative expenses, expressed as a percentage of net service revenues increased to 19.8% for 2014, from 18.8% in 2013. General andadministrative expenses increased to $61,834,000 in 2014 as compared to $50,118,000 in 2013. The increase in general and administrative expenses was dueto an increase in expenses related to our acquisitions, transaction costs for acquisitions and increased expenditures related to information technology,Sarbanes-Oxley compliance efforts and legal and consulting fees for the year ended December 31, 2014 as compared to 2013.Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.2 % from 0.8 % for the year ended December 31, 2014and 2013, respectively. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $2,414,000 and $1,346,000 for theyear ended December 31, 2014 and 2013, respectively.Interest IncomeLegislation 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 income”. We received no prompt payment interest in2014 and $185,000 in 2013. We are not anticipating being owed additional prompt payment interest for the state’s fiscal year ending June 30, 2014. Whilewe may be owed additional prompt payment interest in the future, the amount and timing of receipt of such payments remains uncertain and we havedetermined that we will continue to recognize prompt payment interest income when received. The state amended its prompt payment interest terms, effectiveJuly 1, 2011, which changed the measurement period for outstanding invoices from a 60-day to a 90-day outstanding period.Interest Expense, NetInterest expense, net, increased to $680,000 from $486,000 for the year ended December 31, 2014 as compared to December 31, 2013. The increase isprimarily as a result of the capital lease agreements entered into on July 12 and September 11, 2014 as described in the Notes to Consolidated FinancialStatements 8. Long-Term Debt.Income Tax ExpenseOur effective tax rates from continuing operations for 2014 and 2013 were 31.2% and 25.5%, respectively. The principal difference between the federaland state statutory rates and our effective tax rate is the use of federal employment opportunity tax credits. 46Table of ContentsDiscontinued OperationsEffective March 1, 2013, we sold substantially all of the assets used in our Home Health Business as described in Item 1. Therefore, we have segregatedthe Home Health Business operating results and presented them separately as discontinued operations for all periods presented (see note 2—“DiscontinuedOperations” of the Notes to the Consolidated Financial Statements included elsewhere herein).The table below summarizes the results of discontinued operations. 2014 2013 (Amounts In Thousands) Net service revenues $— $6,462 Cost of service revenues — 3,692 Gross profit — 2,770 General and administrative expenses (470) 4,442 Depreciation and amortization — — Operating income (loss) from discontinued operations 470 (1,672) Income tax (benefit) 190 (692) Earnings (loss) from discontinued operations $280 $(980) No revenues were recorded for the year ended December 31, 2014 related to the Home Health Business because that business was sold. We retained theworking capital of our Home Health Business when it was sold. The net earnings from discontinued operations for the year ended December 31, 2014represents the final settlement of previously estimated working capital amounts. The losses for the year ended December 31, 2013 were primarily due to thewind down of our Home Health Business. 47Table of ContentsResults of OperationsYear Ended December 31, 2013 Compared to Year Ended December 31, 2012The following table sets forth, for the periods indicated, our consolidated results of operations. 2013 2012 Change Amount % ofNet ServiceRevenues Amount % ofNet ServiceRevenues Amount % (Amounts In Thousands, Except Percentages) Net service revenues $265,941 100.0% $244,315 100.0% $21,626 8.9%Cost of service revenues 198,202 74.5 180,264 73.8 17,938 10.0 Gross profit 67,739 25.5 64,051 26.2 3,688 5.8 General and administrative expenses 50,118 18.8 46,362 19.0 3,756 8.1 Gain on sale of agency — — (495) (0.2) 495 * Depreciation and amortization 2,160 0.8 2,521 1.0 (361) (14.3)Total operating expenses 52,278 19.7 48,388 19.8 3,890 8.0 Operating income from continuing operations 15,461 5.8 15,663 6.4 (202) (1.3)Interest income (188) (0.1) (155) (0.1) (33) 21.3 Interest expense 674 0.3 1,723 0.7 (1,049) (60.9)Total interest expense, net 486 0.2 1,568 0.6 (1,082) (69.0)Income from continuing operations before income taxes 14,975 5.6 14,095 5.8 880 6.2 Income tax expense 3,812 1.4 4,807 2.0 (995) (20.7)Net income from continuing operations 11,163 4.2 9,288 3.8 1,875 20.2 Discontinued operations: Earnings (loss) from home health business, net of tax 7,982 3.0 (1,653) (0.7) 9,635 (582.9)Net income $19,145 7.2% $7,635 3.1% $11,510 150.8%Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Average billable census 26,802 25,104 1,698 6.8%Billable hours 15,621 14,388 1,233 8.7 Average Billable hours per census per month 49 48 1 2.1 Billable hours per business day 59,850 55,126 4,724 8.6 Revenues per billable hour $17.02 $16.98 $0.04 .02% *Percentage information not meaningfulNet service revenues from state, local and other governmental programs accounted for 94.1% and 94.9% of net service revenues for 2013 and 2012,respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net service revenues.Net service revenues increased $21,626,000, or 8.9%, to $265,941,000 for 2013 compared to $244,315,000 for the same period in 2012. The increasewas primarily due to a 6.8% increase in average census and a related 8.7% increase in billable hours.Gross profit, expressed as a percentage of net service revenues, decreased to 25.5% for 2013, from 26.2% in 2012. This decrease as a percent of revenueof 0.7% is primarily due to increased wage costs for home care aides. 48Table of ContentsGeneral and administrative expenses, expressed as a percentage of net service revenues decreased to 18.8% for 2013, from 19.0% in 2012. General andadministrative expenses increased to $50,118,000 in 2013 as compared to $46,362,000 in 2012. In 2013, we had cost increases in administrative wages, anincrease legal and consulting expenses for acquisitions and business development initiatives, increased telecom and technology related costs, an increase inmanagement bonuses and an increase in bad debt expense.Depreciation and amortization, expressed as a percentage of net service revenues, decreased to 0.8 % for 2013, from 1.0% in 2012. Amortization ofintangibles, which are principally amortized using accelerated methods, totaled $1,346,000 and $1,674,000 for 2013 and 2012, respectively.Interest IncomeLegislation 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 income. We received $185,000 in prompt paymentinterest in 2013 and $155,000 in 2012. While we may be owed additional prompt payment interest, the amount and timing of receipt of such paymentsremains uncertain and we have determined that we will continue to recognize prompt payment interest income when received. The state amended its promptpayment interest terms, effective July 1, 2011, which changed the measurement period for outstanding invoices from a 60-day to a 90-day outstandingperiod.Interest Expense, NetInterest expense was $674,000 and $1,723,000 for 2013 and 2012, respectively. Interest expense decreased $1,049,000 primarily due to a reduction inoutstanding debt.Income Tax Expense (Benefit)Our effective tax rates from continuing operations for 2013 and 2012 were 25.5% and 34.1%, respectively. The principal difference between the federaland state statutory rates and our effective tax rate is the use of federal employment opportunity tax credits. Our effective tax rate for 2012 does not includeany earned 2012 federal employment opportunity tax credits, which were recognized in 2013 as the federal employment opportunity tax credits werereinstated in January 2013.Discontinued OperationsEffective March 1, 2013, we sold substantially all of the assets used in our Home Health Business as described in Item 1. Therefore, we have segregatedthe Home Health Business operating results and presented them separately as discontinued operations for all periods presented (see note 2—“DiscontinuedOperations” of the Notes to the Consolidated Financial Statements included elsewhere herein). 49Table of ContentsThe table below depicts the results of discontinued operations. 2013 2012 (Amounts In Thousands) Net service revenues $6,462 $38,822 Cost of service revenues 3,692 20,818 Gross profit 2,770 18,004 General and administrative expenses 4,442 20,743 Depreciation and amortization — 13 Operating income (loss) from discontinued operations (1,672) (2,752) Income tax (benefit) (692) (1,099) Net loss from discontinued operations $(980) $(1,653) The losses for 2013 are primarily related to the wind-down of the business after the sale on March 1, 2013. Operating losses for 2012 were primarily dueto reduced sales, higher costs to treat consumers and our inability to reduce fixed general and administrative costs at a rate consistent with revenue declines.Liquidity and Capital ResourcesOur discussion below regarding our liquidity and capital resources includes discontinued operations.OverviewOur primary sources of liquidity are cash from operations and borrowings under our credit facility. We renewed our credit facility on the termsdescribed below on August 11, 2014. At December 31, 2014 and December 31, 2013, we had cash balances of $13,363,000 and $15,565,000, respectively.As of December 31, 2014 and 2013 we had no balances outstanding under the revolving credit portion of our credit facility. After giving effect to theamount drawn on our credit facility, approximately $15,464,000 and $12,411,000 of outstanding letters of credit as of December 31, 2014 and 2013,respectively and borrowing limits based on an advance multiple of adjusted EBITDA, we had $39,536,000 and $42,279,000 available for borrowing underthe credit facility as of December 31, 2014 and 2013, 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 reimbursed us on a delayed basis with respect to ourvarious agreements including with our largest payor, the Illinois Department on Aging. The open receivable balance from the State of Illinois increased by$273,000 from $44,409,000 as of December 31, 2013 to $44,136,000 as of December 31, 2014.The State of Illinois’ payments have been sporadic and delayed in the past. Should payments become delayed in the future, the delays would adverselyimpact our liquidity and may result in the need to increase borrowings under our credit facility.Credit FacilityOn August 11, 2014, we renewed our credit facility. Our credit facility provides a $55,000,000 revolving line of credit expiring November 2, 2019 andincludes a $27,500,000 sublimit for the issuance of letters of credit. On November 6, 2014, we amended our credit facility, with retroactive effect toSeptember 30, 2014. The credit facility was amended to (i) reduce the floating interest rate from one-month LIBOR, plus a margin of 4.6% to one-monthLIBOR, plus a margin of 3.5%, (ii) reduce the interest rate for loans based on term periods of one, 50Table of Contentstwo or three months from the LIBOR rate, plus a margin of 4.6% to the LIBOR rate, plus a margin of 3.5% and (iii) increase the allowed capital expendituresfor the fiscal year ending 2014 from $5,000,000 to $7,000,000. Substantially all of the subsidiaries of Holdings are co-borrowers, and Holdings hasguaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first priority security interest in all of Holdings’ and theborrowers’ 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, as amended, is based on the lesser of (i) the product of adjustedEBITDA, as defined in the credit agreement, for the most recent 12-month period for which financial statements have been delivered under the creditagreement multiplied by the specified advance multiple, up to 3.25, less the outstanding senior indebtedness and letters of credit, and (ii) $55,000,000 lessthe outstanding revolving loans and letters of credit. Interest on the revolving line of credit may be payable at (i) a floating rate equal to the one-monthLIBOR, plus a margin of 3.5%, (ii) the LIBOR rate for term periods of one, two or three months, plus a margin of 3.5% or (iii) the base rate, plus a margin of1.6%, where the base rate is equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate”, (b) the sum of the federalfunds rate, plus a margin of 0.5% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with a one month interest period advanced onsuch day, plus a margin of 3.0%. We pay a fee equal to 0.5% per annum of the unused portion of the revolving portion of the credit facility. Issued stand-byletters of credit are charged at a rate of 2.0% per annum payable monthly. We did not have any amounts outstanding on the credit facility as of December 31,2014, and the total availability under the revolving credit loan facility was $39,536,000 and $42,279,000, as of December 31, 2014 and 2013, respectively.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 our ability to enter into transactionsother than in the ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, or for the purchaseprice of any one acquisition to exceed $2,000,000, in each case without the consent of the lenders, restrictions on mergers, transfers of assets, acquisitions,equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changes and lines of business.While our growth plan is not entirely dependent on the completion of acquisitions, if we do not have sufficient cash resources or availability under ourcredit facility, or we are otherwise prohibited from making acquisitions, our growth could be limited unless we obtain additional equity or debt financing orunless we obtain the necessary consents from our lenders. We believe the available borrowings under our credit facility which, when taken together with cashfrom operations, 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 the years ended December 31, 2014, 2013 and 2012: 2014 2013 2012 (Amounts in Thousands) Net cash provided by operating activities $7,028 $27,393 $15,405 Net cash provided by (used in) investing activities (13,633) 2,893 (619) Net cash provided by (used in) financing activities 4,403 (16,458) (15,069) 51Table of ContentsYear Ended December 31, 2014 Compared to Year Ended December 31, 2013Net cash provided by operating activities was $7,028,000 for the year ended December 31, 2014, compared to $27,393,000 for the same period in2013. This decrease in cash provided by operations was primarily due to a decrease in collections on our accounts receivable.Net cash used in investing activities was $13,633,000 for the year ended December 31, 2014, compared to cash provided by investing activities of$2,893,000 for the year ended December 31, 2013. Our investing activities for the year ended December 31, 2014 included purchases of property andequipment related to our corporate headquarters in Downers Grove, IL, the purchase of a new payroll system and the acquisition of Aid & Assist as describedin Note 4 to the Consolidated Financial Statements. Our investing activities for the year ended December 31, 2013 were $16,105,000 in net proceedsreceived from the sale of the Home Health Business less $12,325,000 related to acquisitions made during the year and the purchase of $887,000 of propertyand equipment.Net cash provided by financing activities was $4,403,000 for the year ended December 31, 2014 as compared to net cash used by financing activitiesof $16,458,000 for the year ended December 31, 2013. Our financing activities for the year ended December 31, 2014 were primarily related to capital leaseobligations entered into during the year to finance purchases of property and equipment related to our corporate headquarters in Downers Grove, IL. Ourfinancing activities for the year ended December 31, 2013 were primarily driven by net payments of $16,250,000 on the revolving credit portion of our creditfacility, and $208,000 in payments on our term loan.Year Ended December 31, 2013 Compared to Year Ended December 31, 2012Net cash provided by operating activities was $27,393,000 for 2013, compared to $15,405,000 in 2012. This increase in cash provided by operationswas primarily due to an increase in cash generated from continuing operations totaling approximately $2,300,000, less cash used in discontinued operationstotaling approximately $1,800,000, plus amounts provided by net changes in working capital of approximately $11,500,000.Net cash provided by investing activities was $2,893,000 for 2013. Our investing activities for 2013 were $16,105,000 in net proceeds received fromthe sale of the Home Health Business less $12,325,000 related to acquisitions made during the year and the purchase of $887,000 of property and equipment.Our investing activities for 2012 were $1,114,000 for capital expenditures less a $495,000 payment received for the sale of an agency.Net cash used in financing activities was $16,458,000 for 2013 as compared to net cash used of $15,069,000 in 2012. Our financing activities for 2013were primarily driven by net payments of $16,250,000 on the revolving credit portion of our credit facility and $208,000 in payments on our term loan. Ourfinancing activities in 2012 were primarily driven by $8,500,000 in payments on the revolving credit portion of our credit facility, $4,069,000 in paymentson subordinated dividend notes and $2,500,000 in payments on our term loan.Outstanding Accounts ReceivableGross accounts receivable as of December 31, 2014 and 2013 were $72,214,000 and $65,494,000, respectively. Outstanding accounts receivable, netof the allowance for doubtful accounts, increased by $6,720,000 as of December 31, 2014 as compared to December 31, 2013. The increase in accountsreceivable is primarily attributable to accounts receivable acquired as part of our acquisitions and the general increase in our overall business.Gross accounts receivable as of December 31, 2013 was $65,494,000. Outstanding accounts receivable, net of the allowance for doubtful accounts,decreased by $10,275,000 as of December 31, 2013 as compared to December 31, 2012, with $7,373,000 representing the collection of Home HealthBusiness accounts receivable. 52Table of ContentsWe 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 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 our evaluation of these estimates, we also consider other factors including: delays in paymenttrends in individual 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 that our management believes is sufficient tocover potential losses. However, actual collections could differ from our estimates.Our 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.The following tables detail our accounts receivable before reserves by payor category, showing Illinois governmental payors separately, and the relatedallowance amount at December 31, 2014, December 31, 2013 and December 31, 2012: December 31, 2014 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) Continuing Operations Illinois governmental based programs $37,406 $5,298 $670 $762 $44,136 Other state, local and other governmental programs 12,951 1,815 1,284 60 16,110 Managed care organizations 6,524 1,167 919 258 8,868 Private duty and commercial 2,658 299 173 (30) 3,100 59,539 8,579 3,046 1,050 72,214 Aging % continuing operations 82.4% 11.9% 4.2% 1.5% Discontinued Operations Medicare — — — — — Other state, local and other governmental programs — — — — — Private duty and commercial — — — — — Illinois governmental based programs — — — — — — — — — — Total $59,539 $8,579 $3,046 $1,050 $72,214 Aging % of total 82.4% 11.9% 4.2% 1.5% Allowance for doubtful accounts $3,881 Reserve as % of gross accounts receivable 5.4% 53Table of Contents December 31, 2013 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) Continuing Operations Illinois governmental based programs $40,584 $2,912 $430 $483 $44,409 Other state, local and other governmental programs 14,551 1,659 914 116 17,240 Private duty and commercial 2,586 380 142 112 3,220 57,721 4,951 1,486 711 64,869 Aging % continuing operations 89.0% 7.6% 2.3% 1.1% Discontinued Operations Medicare — — 744 — 744 Other state, local and other governmental programs — — — — — Private duty and commercial — — (119) — (119)Illinois governmental based programs — — — — — — — 625 — 625 Total $57,721 $4,951 $2,111 $711 $65,494 Aging % of total 88.1% 7.6% 3.2% 1.1% Allowance for doubtful accounts $4,140 Reserve as % of gross accounts receivable 6.3% December 31, 2012 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) Continuing Operations Illinois governmental based programs $38,339 $13,374 $1,076 $126 $52,915 Other state, local and other governmental programs 10,248 845 610 329 12,032 Private duty and commercial 1,936 360 127 401 2,824 50,523 14,579 1,813 856 67,771 Aging % continuing operations 74.5% 21.5% 2.7% 1.3% Medicare 4,751 955 188 — 5,894 Other state, local and other governmental programs 340 109 58 — 507 Private duty and commercial 965 211 164 30 1,370 Illinois governmental based programs 128 19 35 45 227 6,184 1,294 445 75 7,998 Total $56,707 $15,873 $2,258 $931 $75,769 Aging % of total 74.9% 20.9% 3% 1.2% Allowance for doubtful accounts $4,466 Reserve as % of gross accounts receivable 5.9% We calculate our continuing operations days sales outstanding (“DSO”) by taking the accounts receivable outstanding net of the allowance fordoubtful accounts divided by the total net service revenues for the last quarter, multiplied by the number of days in that quarter. Our DSOs from continuingoperations were 80, 85 and 86 days at December 31, 2014, December 31, 2013 and December 31, 2012, respectively. The DSOs for our largest payor, theIllinois Department on Aging, at December 31, 2014, December 31, 2013 and December 31, 2012 were 85, 97 and 122 days, respectively. We may not receivepayments on a consistent basis in the near term and our DSOs and the DSO for our largest payor may increase. The change in the reserve as percentage ofgross accounts receivable to 5.4% in 2014 from 6.3% in 2013 is attributable to the improvement in DSOs outstanding 54Table of Contentsat the end of the respective years. The change to 6.3% in 2013 from 5.9% in 2012 is attributable to the Medicare receivables in the 2012 balances which havea historically higher collection rate and accordingly a lower reserve rate.Dividend NotesPrior 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 $173,000 of the $13,109,000 outstanding accumulated dividends as ofNovember 2, 2009 with the remaining $12,936,000 being converted into 10% junior subordinated promissory notes, which we refer to as the dividend notes.The dividends notes were subordinated and junior to all obligations under our credit facility. Our dividend notes were repaid in full during the fourth quarterof 2012.Off-Balance Sheet ArrangementsAs of December 31, 2014, 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 andestimates.Revenue RecognitionThe majority of our revenues for 2014, 2013 and 2012 from continuing operations are derived from Medicaid and Medicaid waiver programs underagreements with various state and local authorities. These agreements provide for a service term from one year to an indefinite term. Services are providedbased on authorized hours, determined by the relevant state or local agency, at an hourly rate specified in the agreement or fixed by legislation. Services toother 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 for appropriate allowances for uncollectible amounts at the time the services are rendered.Accounts Receivable and Allowance for Doubtful AccountsWe are paid for our services primarily by state and local agencies under Medicaid or Medicaid waiver programs, managed care organizations,commercial insurance companies and private consumers. While our accounts receivable are uncollateralized, our credit risk is somewhat limited due to thesignificance of governmental payors to our results of operations. Laws and regulations governing the governmental programs in which we participate arecomplex and subject to interpretation. Amounts collected may be different than amounts billed due to client eligibility issues, insufficient or incompletedocumentation, services at levels 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 55Table of Contentsof time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received and reported in theincome statement caption, interest income. We received no prompt payment interest in 2014 and approximately $185,000 and $155,000 in prompt paymentinterest in 2013 and 2012, respectively. While we may be owed additional prompt payment interest, the amount and timing of receipt of such paymentsremains uncertain and we have determined that we will continue to recognize prompt payment interest income when received.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 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 our evaluation of these estimates, we also consider delays in payment trends in individual statesdue to budget or funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with required documentation anddisputes with specific payors. Historically, we have not experienced any write-off of accounts as a result of a state operating with budget deficits. While weregularly monitor state budget and funding developments for the states in which we operate, we consider losses due to state credit risk on outstandingbalances as remote. We believe that our recorded allowance for doubtful accounts is sufficient to cover potential losses; however, actual collections insubsequent periods may require changes to our estimates.GoodwillOur carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitions including theacquisition of Addus HealthCare, Inc. (“Addus HealthCare”), In accordance with ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill andintangible assets with indefinite useful lives are not amortized. We test goodwill for impairment at the reporting unit level on an annual basis, as of October 1,or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that animpairment may have occurred. We may use a qualitative test, known as “Step 0,” or a two-step quantitative method to determine whether impairment hasoccurred. We can elect to perform Step 0, an optional qualitative analysis, and based on the results skip the remaining two steps. In 2014, 2013 and 2012, weelected to implement Step 0. The results of our Step 0 assessment indicated that it was more likely than not that the fair value of our reporting unit exceededits carrying value and therefore we concluded that there were no impairments for the years ended December 31, 2014 , 2013 or 2012.Long-Lived AssetsWe review our long-lived assets and finite lived intangibles for impairment whenever changes in circumstances indicate that the carrying amount of anasset may not be recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assetsto the net carrying amount of such assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized forthe amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, generally determined by discounting the estimated futurecash flows. No impairment charge was recorded for the years ended December 31, 2014, 2013 or 2012.Indefinite-lived AssetsWe also have indefinite-lived assets that are not subject to amortization expense such as licenses and in certain states certificates of need to conductspecific operations within geographic markets. Our management has concluded that these assets have indefinite lives, as management has determined thatthere are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets and we intend to renew thelicenses indefinitely. The licenses and certificates of need are tested annually for impairment. No impairment was recorded for the years ended December 31,2014, 2013 or 2012. 56Table of ContentsWorkers’ Compensation ProgramOur workers’ compensation insurance program has a $350,000 deductible component. We recognize our obligations associated with this program inthe period 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 and adjustour reserves accordingly. These costs are recorded primarily in the cost of services caption in the consolidated statement of operations. Under the agreementpursuant to which we acquired Addus HealthCare, claims under our workers’ compensation insurance program that relate to December 31, 2005 or earlierwere the responsibility of the selling shareholders in the acquisition, subject to certain limitations. The responsibility of the selling shareholders for theseclaims was terminated on December 29, 2014. In August 2010, the FASB issued Accounting Standards Update No 2010-24, Health Care Entities (Topic 954),“Presentation of Insurance Claims and Related Insurance Recoveries” (“ASU 2010-24”), which clarifies that companies should not net insurance recoveriesagainst a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. As ofDecember 31, 2014, December 31, 2013 and December 31, 2012 we recorded $1,457,000, $821,000 and $953,000, respectively, in workers’ compensationinsurance recovery receivables and a corresponding increase in its workers’ compensation liability. The workers’ compensation insurance recovery receivableis included in our prepaid expenses and other current assets on the balance sheet.Interest IncomeLegislation 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 statement of operations caption, interest income. We received no prompt payment interest in2014 and approximately $185,000 and $155,000 in prompt payment interest in 2014, 2013 and 2012, respectively. While we may be owed additionalprompt payment interest, the amount and timing of receipt of such payments remains uncertain and we have determined that we will continue to recognizeprompt payment interest income when received.New Accounting PronouncementsOn April 10, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property,Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The new guidancechanges the requirements for reporting a discontinued operation. Only a disposal representing a strategic shift that has a major effect on the entity’soperations and financial results will have to be reported as a discontinued operation. Examples of strategic shifts meeting the new criteria include a disposalof a major geographical area, a major line of business, or a major equity-method investment. Under this new guidance, many disposals that might be routineand not a change in an entity’s strategy no longer will be reported as discontinued operations. For each comparative period, an entity’s statement of financialposition must present separately the assets and liabilities of a disposal group qualifying as a discontinued operation. The ASU requires additional disclosuresabout the assets, liabilities, revenues, expenses, and cash flows of a discontinued operation. An entity also will be required to disclose the pretax income orloss attributable to a disposal of a significant component that does not qualify for discontinued operations presentation. ASU 2014-08 is effective for publiccompanies for annual and interim periods beginning on or after December 15, 2014.In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), whichsupersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goodsor services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenuerecognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interimperiods therein, 57Table of Contentsusing either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period withthe option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized atthe date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 onour consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.Contractual Obligations and CommitmentsWe had outstanding letters of credit of $15,464,000 at December 31, 2014. These standby letters of credit benefit our third party insurer for our highdeductible workers’ compensation insurance program. The amount of the letters of credit is negotiated annually in conjunction with the insurance renewals.We anticipate our commitment will increase as we continue to grow our business and more years become our responsibility as responsibility shifts from theformer owners of Addus HealthCare to us.The following table summarizes our cash contractual obligations as of December 31, 2014: Contractual Obligations Total Less than1 Year 1-2Years 3-4Years More than5 Years (Amounts in Thousands) Capital leases 3,944 1,105 2,210 629 — Operating leases 16,884 3,528 4,968 2,804 5,584 Total Contractual Obligations $20,828 $4,633 $7,178 $3,433 $5,584 As described in Note 4 to the Condensed Consolidated Financial Statements, the acquisition agreements for Aid & Assist at Home, LLC andCoordinated Home Health Care, LLC contained contingent earn-out obligations. At December 31, 2014, we determined the combined value of theseliabilities is $2,120,000.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 becomesubject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do socould harm our business, financial condition and results of operation. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures about Market RiskHistorically, we have been exposed to market risk due to fluctuations in interest rates. As of December 31, 2014, we had no outstanding indebtednesswith variable interest rates and therefore no current exposure. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur consolidated financial statements together with the related notes and the report of our independent registered public accounting firm, are set forthon the pages indicated in Item 15. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. 58Table of ContentsITEM 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, 2014. 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 or submits under the Exchange Act isaccumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure.Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2014.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 ChiefExecutive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based onthe framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basedon our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded our internal control over financialreporting was effective as of December 31, 2014.Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed,have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statementpreparation and presentation.BDO USA, LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Form 10-K, hasissued a report on our internal control over financial reporting, which is included herein.Changes in Internal Controls Over Financial ReportingThe Company implemented changes in its internal control over financial reporting in response to the material weaknesses identified in 2013. Materialweaknesses identified in 2013 in information technology controls were remediated as the Company re-organized the structure of the Information TechnologyDepartment to properly segregate duties, implemented a formal change management process, and conducted detail user reviews of access to key systems.Deficiencies in payroll processes were remediated as the Company implemented and enhanced its review and monitoring of existing controls andimplemented additional controls over changes to employee payroll information. These improvements were fully implemented in the fourth quarter of 2014.In accordance with SEC regulations, management excluded from its assessment the internal control over financial reporting at Aid & Assist at Home,LLC, which was acquired on June 1, 2014 and whose financial statements constitute 5.1% of total assets as of December 31, 2014 and 2.4% of revenues forthe year ended December 31, 2014. 59Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersAddus HomeCare CorporationDowners Grove, ILWe have audited Addus HomeCare Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).Addus HomeCare Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.As indicated in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment ofand conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Aid & Assist at Home, LLC, which wasacquired on June 1, 2014, and which is included in the consolidated balance sheets of Addus HomeCare Corporation as of December 31, 2014, and therelated consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. Aid & Assist at Home, LLC constituted 5.1% of totalassets as of December 31, 2014, and 2.4% of revenues for the year then ended. Management did not assess the effectiveness of internal control over financialreporting of Aid & Assist at Home, LLC because of the timing of the acquisition which was completed on June 1, 2014. Our audit of internal control overfinancial reporting of Addus HomeCare Corporation also did not include an evaluation of the internal control over financial reporting of Aid & Assist atHome, LLC.In our opinion, Addus HomeCare Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31,2014, based on the COSO criteria. 60Table of ContentsWe also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Addus HomeCare Corporation as of December 31, 2014 and 2013, and the related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2014 and our report dated March 16, 2015 expressed an unqualified opinion thereon./s/ BDO USA, LLPChicago, ILMarch 16, 2015 ITEM 9B.OTHER INFORMATIONNone. 61Table 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 the2014 Annual 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 thisAnnual Report, 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 2015 Proxy Statement to be filed with the SEC within 120 days after the endof the year ended December 31, 2014.Independent Director CompensationOn March 13, 2015, our board of directors adopted changes to our director compensation policy, effective March 1, 2015. The new policy providesthat (i) our independent directors shall receive an increase in their annual retainer to $35,000, (ii) the annual retainers payable to the chairmen of the auditcommittee, compensation committee and nominating and corporate governance committee will be increased to $15,000, $10,000 and $7,500, respectively,and (iii) the amount of annual restricted stock awards granted to independent directors will be increased to $40,000 per year, vesting on the first anniversaryof the date of issuance. Grants of such restricted stock shall be made following our annual meeting each year beginning with our 2015 annual meeting. Acopy of the updated Independent Director Compensation Policy is attached hereto as Exhibit 10.31. ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to the 2015 Proxy Statement to be filed with the SEC within 120 days after the endof the year ended December 31, 2014. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item is incorporated by reference to the 2015 Proxy Statement to be filed with the SEC within 120 days after the endof the year ended December 31, 2014. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to the 2015 Proxy Statement to be filed with the SEC within 120 days after the endof the year ended December 31, 2014. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item is incorporated by reference to the 2015 Proxy Statement to be filed with the SEC within 120 days after the endof the year ended December 31, 2014. 62Table 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 ConsolidatedFinancial Information” in page F-1 are filed as part of this Annual Report.Schedule II—Valuation and Qualifying AccountsSchedules have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules isincluded in the consolidated financial statements or related notes. All other schedules not listed in the accompanying index have been omitted as they areeither not required or not applicable, or the required information 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 to AddusHomeCare 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 Retained AnnuityTrust, Mark S. Heaney, James A. Wright and Courtney E. Panzer (filed on July 17, 2009 as Exhibit 4.2 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 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 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) 63Table of ContentsExhibitNumber Description of Document10.5 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)10.6 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)10.7 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)10.8 Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan (filed on July 17, 2009 as Exhibit 1011 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.9 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)10.10 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)10.11 Executive Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.14 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)10.12 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)10.13 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)10.14 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)10.15 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)10.16 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)10.17 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)10.18 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) 64Table of ContentsExhibitNumber Description of Document10.19 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)10.20 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)10.21 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)10.22 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)10.23 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)10.24 Loan and Security Agreement, dated as of November 2, 2009, by and among Addus HealthCare, Inc., Addus HealthCare (Idaho), Inc., AddusHealthCare (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 Health Agency, Inc., Lowell Home Health Agency,Inc., PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financialinstitutions 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 reference herein)10.25 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)10.26 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 Health Agency,Inc., Little Rock Home Health Agency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and Professional ReliableNursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions that are or may from time to time become partiesthereto, and Addus HomeCare Corporation, as guarantor (filed on July 27, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s CurrentReport on Form 8-K and incorporated by reference herein) 65Table of ContentsExhibitNumber Description of Document10.27 Joinder, Consent and Amendment No. 3 to the Loan and Security Agreement, dated as of March 24, 2011, 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., AddusHealthCare (South Carolina), Inc. Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions thatare or may from time to time become parties thereto, and Addus HomeCare Corporation, as guarantor (filed on May 25, 2011 as Exhibit 99.1to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated herein by reference)10.28 Amendment No. 4 to Loan and Security Agreement, dated as of July 26, 2011, effective as of June 30, 2011, by and among AddusHealthCare, Inc., Addus HealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (NewJersey), Inc., Addus HealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., Fort Smith Home Health Agency, Inc., Little Rock HomeHealth Agency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc., AddusHealthCare (South Carolina), Inc., Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions fromtime to time parties thereto, and Addus HomeCare Corporation, as guarantor (filed on July 29, 2011 as Exhibit 99.1 to Addus HomeCareCorporation’s Current Report on Form 8-K and incorporated herein by reference)10.29 Amendment No. 2 to Employment and Non-Competition Agreement, dated November 17, 2011, by and between Addus HealthCare, Inc. andMark S. Heaney (filed on November 23, 2011 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated herein by reference)10.30 Amendment No. 5 to Loan and Security Agreement, dated as of March 2, 2012, 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 Health Agency, Inc., LowellHome Health Agency, Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc., Addus HealthCare (South Carolina),Inc., Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions from time to time parties thereto,and Addus HomeCare Corporation, as guarantor (filed on March 16, 2012 as Exhibit 10.41 to Addus HomeCare Corporation’s Annual Reporton Form 10-K and incorporated herein by reference)10.31 Summary of Independent Director Compensation Policy*10.32 The Executive Nonqualified “Excess” Plan Adoption Agreement, by Addus HealthCare, Inc., dated April 1, 2012 (filed on April 5, 2012 asExhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein)10.33 The Executive Nonqualified Excess Plan Document, dated April 1, 2012 (filed on April 5, 2012 as Exhibit 99.2 to Addus HomeCareCorporation’s Current Report on Form 8-K and incorporated herein by reference)10.34 Employment Agreement, effective June 18, 2012, by and between Addus Healthcare, Inc. and Inna Berkovich (filed on June 20, 2012 asExhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated herein by reference) 66Table of ContentsExhibitNumber Description of Document10.35 Asset Purchase Agreement, dated as of February 7, 2013, by and among Addus HealthCare, Inc., its subsidiaries identified therein, LHCGroup, Inc. and its subsidiaries identified therein (filed on March 6, 2013 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Reporton Form 8-K and incorporated by reference herein)10.36 Amended and Restated Credit and Guaranty Agreement, dated as of August 11, 2014, 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 Health Agency, Inc., LowellHome Health Agency, Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc., Addus HealthCare (Delaware), Inc. andCura Partners, LLC, as borrowers, Addus HomeCare Corporation, the other credit parties from time to a time a party thereto, the variousinstitutions from time to time a party thereto, as lenders, and Fifth Third Bank as agent and L/C issuer (filed on August 11, 2014 as Exhibit10.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein).10.37 Amendment No 1. to Amended and Restated Credit and Guaranty Agreement, dated as of November 6, 2014 and effective as of September 30,2014, 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., PHC Acquisition Corporation,Professional Reliable Nursing Service, Inc., Addus HealthCare (South Carolina), Inc., Addus HealthCare (Delaware), Inc. and Cura Partners,LLC, as borrowers, Addus HomeCare Corporation, the other credit parties from time to time a party thereto, the various institutions from timeto time a party thereto, as lenders, and Fifth Third Bank as agent and L/C issuer (filed on November 7, 2014 as Exhibit 10.2 to AddusHomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein).10.38 Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. and MaxineHochhauser (filed on December 15, 2014 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated byreference herein).10.39 Amendment to Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. andDarby Anderson (filed on December 15, 2014 as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated by reference herein).21.1 Subsidiaries of 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 Section302 of 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 Act of2002** 67Table of ContentsExhibitNumber Description of Document101 The following materials from Addus HomeCare Corporation’s Annual Report on Form 10-K for the years ended December 31, 2014,formatted in Extensive Business Reporting Language (XBRL), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income,(iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to the ConsolidatedFinancial Statements.* *Filed herewith**Furnished herewith 68Table 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 onits behalf by the undersigned, thereunto duly authorized. Addus HomeCare CorporationBy: /s/ MARK S. HEANEY Mark S. Heaney,President and Chief Executive OfficerDate: March 16, 2015Pursuant 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 (Principal ExecutiveOfficer) and Director March 16, 2015/s/ DENNIS B. MEULEMANS Dennis B. Meulemans Chief Financial Officer (Principal Financial and AccountingOfficer) March 16, 2015/s/ MARK L. FIRST Mark L. First Director March 16, 2015/s/ SIMON A. BACHLEDA Simon A. Bachleda Director March 16, 2015/s/ STEVEN I. GERINGER Steven I. Geringer Director March 16, 2015/s/ R. DIRK ALLISON R. Dirk Allison Director March 16, 2015 69Table 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 Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersAddus HomeCare CorporationDowners Grove, IllinoisWe have audited the accompanying consolidated balance sheets of Addus HomeCare Corporation as of December 31, 2014 and 2013 and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. In connectionwith our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the accompanying index. Thesefinancial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements 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 are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that ouraudits 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 at December 31, 2014 and 2013, and the results of its operations and its cash flow for each of the three years in the period ended December 31,2014, in conformity with accounting principles generally accepted in the United States of America.Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Addus HomeCareCorporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2015 expressed anunqualified opinion thereon. /s/ BDO USA, LLPChicago, IL March 16, 2015 F-2Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2014 and 2013(amounts and shares in thousands, except per share data) 2014 2013 Assets Current assets Cash $13,363 $15,565 Accounts receivable, net of allowances of $3,881 and $4,140 at December 31, 2014 and 2013, respectively 68,333 61,354 Prepaid expenses and other current assets 7,168 6,235 Deferred tax assets 8,508 8,326 Total current assets 97,372 91,480 Property and equipment, net of accumulated depreciation and amortization 7,695 2,634 Other assets Goodwill 64,220 60,026 Intangibles, net of accumulated amortization 10,347 8,762 Investments in joint ventures 900 900 Other assets 269 132 Total other assets 75,736 69,820 Total assets $180,803 $163,934 Liabilities and stockholders’ equity Current liabilities Accounts payable $3,951 $4,633 Current portion of capital lease obligations 986 — Current portion of contingent earn-out obligation 1,000 — Accrued expenses 37,268 40,904 Total current liabilities 43,205 45,537 Long-term liabilities Deferred tax liabilities 5,845 3,441 Capital lease obligations, less current portion 2,677 — Contingent earn-out obligation, less current portion 1,120 1,100 Total long-term liabilities 9,642 4,541 Total liabilities 52,847 50,078 Stockholders’ equity Common stock—$.001 par value; 40,000 authorized and 11,010 and 10,913 shares issued and outstanding as ofDecember 31, 2014 and 2013, respectively 11 11 Additional paid-in capital 84,929 83,072 Retained earnings 43,016 30,773 Total stockholders’ equity 127,956 113,856 Total liabilities and stockholders’ equity $180,803 $163,934 See accompanying Notes to Consolidated Financial Statements F-3Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2014, 2013 and 2012(amounts and shares in thousands, except per share data) For the Year Ended December 31, 2014 2013 2012 Net service revenues $312,942 $265,941 $244,315 Cost of service revenues 229,207 198,202 180,264 Gross profit 83,735 67,739 64,051 General and administrative expenses 61,834 50,118 46,362 Gain on sale of agency — — (495) Depreciation and amortization 3,830 2,160 2,521 Total operating expenses 65,664 52,278 48,388 Operating income from continuing operations 18,071 15,461 15,663 Interest income (18) (188) (155) Interest expense 698 674 1,723 Total interest expense, net 680 486 1,568 Income from continuing operations before income taxes 17,391 14,975 14,095 Income tax expense 5,428 3,812 4,807 Net income from continuing operations 11,963 11,163 9,288 Discontinued operations: Income (loss) from Home Health Business, net of tax 280 (980) (1,653) Gain on sale of Home Health Business, net of tax — 8,962 — Earnings (losses) from discontinued operations 280 7,982 (1,653) Net income $12,243 $19,145 $7,635 Net income per common share Basic income per share Continuing operations $1.10 $1.03 $0.86 Discontinued operations 0.02 0.74 (0.15) Basic income per share $1.12 $1.77 $0.71 Diluted income per share Continuing operations $1.08 $1.01 $0.86 Discontinued operations 0.02 0.72 (0.15) Diluted income per share $1.10 $1.73 $0.71 Weighted average number of common shares and potential common shares outstanding: Basic 10,900 10,826 10,764 Diluted 11,114 11,075 10,784 See accompanying Notes to Consolidated Financial Statements F-4Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the years ended December 31, 2014, 2013 and 2012(amounts and shares in thousands) Common Stock AdditionalPaid inCapital RetainedEarnings TotalStockholders’Equity Shares Amount Balance at December 31, 2011 10,775 11 82,437 3,993 86,441 Issuance of shares of common stock under restricted stock award agreements 43 — — — — Stock-based compensation — — 341 — 341 Shares issued 5 — — — — Net income — — — 7,635 7,635 Balance at December 31, 2012 10,823 $11 $82,778 $11,628 $94,417 Issuance of shares of common stock under restricted stock award agreements 63 — — — — Stock-based compensation — — 515 — 515 Common shares withheld for witholding taxes on exercise of options (67) — (221) — (221) Shares issued 94 — — — — Net income — — — 19,145 19,145 Balance at December 31, 2013 10,913 $11 $83,072 $30,773 $113,856 Issuance of shares of common stock under restricted stock award agreements 36 — — — — Stock-based compensation — — 827 — 827 Excess tax benefit from exercise of stock options — — 816 — 816 Shares issued 61 — 214 — 214 Net income — — — 12,243 12,243 Balance at December 31, 2014 11,010 $11 $84,929 $43,016 $127,956 See accompanying Notes to Consolidated Financial Statements F-5Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2014, 2013 and 2012(amounts in thousands) For the YearEnded December 31, 2014 2013 2012 Cash flows from operating activities: Net income $12,243 $19,145 $7,635 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization 3,830 2,160 2,544 Deferred income taxes 2,221 4,701 839 Stock-based compensation 827 515 341 Amortization of debt issuance costs 154 166 215 Provision for doubtful accounts 2,818 3,019 2,877 Gain on sale of Home Health Business — (15,284) — Gain on sale of agency — — (495) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (9,276) 7,818 (1,812) Prepaid expenses and other current assets (873) 1,061 (18) Accounts payable (850) 435 (1,149) Accrued expenses (4,066) 3,657 4,428 Net cash provided by operating activities 7,028 27,393 15,405 Cash flows from investing activities: Acquisitions of businesses (7,172) (12,325) — Acquisition of customer list (50) — — Net proceeds from sale of Home Health Business — 16,105 — Net proceeds from sale of agency — — 495 Purchases of property and equipment (6,411) (887) (1,114) Net cash provided by (used in) investing activities (13,633) 2,893 (619) Cash flows from financing activities: Net repayments on term loan — (208) (2,500) Net payments on revolving credit loan — (16,250) (8,500) Payments on subordinated dividend notes — — (4,069) Excess tax benefit from exercise of stock options 816 — — Cash received from exercise of stock options 214 — — Borrowings on capital lease obligations 4,033 — — Payments for debt issuance costs (290) — — Payments on capital lease obligations (370) — — Net cash provided by (used in) financing activities 4,403 (16,458) (15,069) Net change in cash (2,202) 13,828 (283) Cash, at beginning of period 15,565 1,737 2,020 Cash, at end of period $13,363 $15,565 $1,737 Supplemental disclosures of cash flow information: Cash paid for interest $698 $725 $1,557 Cash paid for income taxes 4,465 5,689 1,758 Supplemental disclosures of non-cash investing and financing activities Contingent and deferred consideration accrued for acquisitions $1,020 $1,100 $— Tax benefit related to the amortization of tax goodwill in excess of book basis 123 160 159 See accompanying Notes to Consolidated Financial Statements F-6Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements1. 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”). The Company is a provider of comprehensive home and community based services, which are provided primarily in the home, and focusedon the dual eligible (Medicare/Medicaid) population. The Company’s services include personal care and assistance with activities of daily living, and adultday care. The Company’s consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill anddisabled. The Company’s payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and privateindividuals. The Company currently provides home and community based services to over 31,000 consumers through 129 locations across 22 states,including 5 adult day centers in Illinois.Discontinued OperationsOn February 7, 2013, subsidiaries of Holdings entered into an Asset Purchase Agreement with LHC Group, Inc. and certain of its subsidiaries (the“Home Health Purchase Agreement”). Pursuant to the Home Health Purchase Agreement, effective March 1, 2013, the purchasers acquired substantially allthe assets of the Company’s home health business in Arkansas, Nevada and South Carolina and 90% of its home health business in California and Illinois,with the Company retaining 10% ownership in such locations, for cash consideration of $20,000,000.The Company’s home health services were operated through licensed and Medicare certified offices that provided physical, occupational and speechtherapy, as well as skilled nursing services to pediatric, adult infirm and elderly patients. Home health services were reimbursed from Medicare, Medicaid andMedicaid-waiver programs, commercial insurance and private payors (see note 2).Principles of ConsolidationAll intercompany balances and transactions have been eliminated in consolidation. The Company’s investment in entities with less than 20%ownership or in which the Company does not have the ability to influence the operations of the investee are being accounted for using the cost method andare included in investments in joint ventures.Revenue RecognitionThe Company generates net service revenues by providing services directly to consumers. The Company receives payments for providing services fromfederal, state and local governmental agencies, commercial insurers and private consumers. The Company’s continuing operations, which include the resultsof operations previously included in its home and community segment and agencies in three states previously included in its home health segment, areprincipally provided based on authorized hours, determined by the relevant agency, at an hourly rate specified in agreements or fixed by legislation andrecognized as revenues at the time services are rendered. Home and community based service revenues are reimbursed by state, local and other governmentalprograms which are partially funded by Medicaid or Medicaid waiver programs, with the remainder reimbursed through private duty and insurance programs.Laws and regulations governing the Medicaid and Medicare programs are complex and subject to interpretation. As a result, there is at least areasonable possibility that recorded estimates may change in the near term. The Company believes that it is in compliance in all material respects with allapplicable laws and regulations. F-7Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 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 becollected. The Company estimates its provision for doubtful accounts primarily by aging receivables utilizing eight aging categories and applying itshistorical collection rates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups,with certain large payors analyzed separately from other payor groups. In the Company’s evaluation of these estimates, it also considers delays in paymenttrends in individual 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 that the Company’s management believes issufficient to cover potential losses. However, actual collections could differ from the Company’s 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 methodexcept for internally developed software which is amortized by the sum-of-years digits method. Maintenance and repairs are charged to expense as incurred.The estimated 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 probabilityof lease renewal is likelyGoodwillThe 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 ASC Topic 350, “Goodwill and Other Intangible Assets,”goodwill and intangible assets with indefinite useful lives are not amortized. The Company tests goodwill for impairment at the reporting unit level on anannual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes thatwould indicate that an impairment may have occurred. The Company may use a qualitative test, known as “Step 0,” or a two-step quantitative method todetermine whether impairment has occurred. In Step 0, the Company can elect to perform an optional qualitative analysis and based on the results skip thetwo step analysis. In 2014, 2013 and 2012, the Company elected to implement Step 0 and was not required to conduct the remaining two step analysis. Theresults of the Company’s Step 0 assessments indicated that it was more likely than not that the fair value of its reporting unit exceeded its carrying value andtherefore the Company concluded that there was no impairments for the years ended December 31, 2014, 2013 or 2012.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 twenty-five years. F-8Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Intangible assets with finite lives are amortized using the estimated economic benefit method over the useful life and assessed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not be recoverable. The Company would recognize an impairment loss when theestimated future non-discounted cash flows associated with the intangible asset is less than the carrying value. An impairment change would then be recordedfor the excess of the carrying value over the fair value. The Company estimates the fair value of these intangible assets using the income approach. Noimpairment charge was recorded for the years ended December 31, 2014, 2013 or 2012.The income approach, which the Company uses to estimate the fair value of its intangible assets (other than goodwill), 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.The Company also has indefinite-lived intangible assets that are not subject to amortization expense such as certificates of need and licenses toconduct specific operations within geographic markets. The Company’s management has concluded that certificates of need and licenses have indefinitelives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of theseintangible assets, and the Company intends to renew and operate the certificates of need and licenses indefinitely. The certificates of need and licenses aretested annually for impairment. No impairment was recorded for the years ended December 31, 2014, 2013 or 2012.Debt Issuance CostsThe Company amortizes debt issuance costs on a straight-line method over the term of the related debt. This method approximates the effective interestmethod.Workers’ Compensation ProgramThe Company’s workers’ compensation program has a $350,000 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.Interest IncomeLegislation 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 statement of operations as interest income. The Company received no prompt paymentinterest in 2014 and $185,000 and $155,000 in prompt payment interest in 2013 and 2012, respectively. While the Company may be owed additionalprompt payment interest, the amount and timing of receipt of such payments remains uncertain and the Company has determined that it will continue torecognize prompt payment interest income when received. F-9Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Interest ExpenseThe Company’s interest expense consists of interest costs on its credit facility, capital lease obligations and other debt instruments.Income Tax ExpensesThe 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 theCompany’s assets and liabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferredtax assets be reduced 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 Topic740, also prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to betaken in a tax return. In addition, ASC Topic 740 provides guidance on derecognition, classification, accounting in interim periods and disclosurerequirements for uncertain 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”)that provide 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 and restricted stock awards. Under the 2006 Plan, the Company historically used theBlack-Scholes option pricing model to estimate the fair value of its stock based payment awards, but beginning October 28, 2009 under its 2009 Plan itbegan using an enhanced Hull-White Trinomial model. The determination of the fair value of stock-based payments utilizing the Black-Scholes model andthe Enhanced Hull-White Trinomial model is affected by Holdings’ stock price and a number of assumptions, including expected volatility, risk-free interestrate, expected term, expected dividends yield, expected forfeiture rate, expected turn-over rate and the expected exercise multiple.Net Income Per Common ShareNet income per common share, calculated on the treasury stock method, is based on the weighted average number of shares outstanding during theperiod. The Company’s outstanding securities that may potentially dilute the common stock are stock options and restricted stock awards.Included in the Company’s calculation for the year ended December 31, 2014 were 684,000 stock options of which 146,000 were out-of-the moneyand 80,000 restricted stock awards with 14,000 included in the weighted diluted shares outstanding for 2014.Included in the Company’s calculation for the year ended December 31, 2013 were 647,000 stock options of which none were out-of-the money and96,000 restricted stock awards with 44,000 included in the weighted diluted shares outstanding for 2013.Included in the Company’s calculation for the year ended December 31, 2012 were 596,000 stock options of which 501,000 were out-of-the moneyand therefore anti-dilutive and 57,000 restricted stock awards with 12,000 included in the weighted diluted shares outstanding for 2012. F-10Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) EstimatesThe financial statements are prepared by management in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and includeestimated amounts and certain disclosures based on assumptions 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 carrying value of the Company’s long-term debt with variable interest rates approximates fair value based on instruments with similar terms.The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to goodwill andindefinite-lived intangible assets and also when determining the fair value of contingent considerations. To determine the fair value in these situations, theCompany uses Level 3 inputs, such as discounted cash flows, or if available, what a market participant would pay on the measurement date.The Company utilizes the income approach to estimate the fair value of its intangible assets derived from acquisitions. In addition, discounted cashflows were used to estimate the fair value of the Company’s investment in joint ventures.New Accounting PronouncementsOn April 10, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property,Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The new guidancechanges the requirements for reporting a discontinued operation. Only a disposal representing a strategic shift that has a major effect on the entity’soperations and financial results will have to be reported as a discontinued operation. Examples of strategic shifts meeting the new criteria include a disposalof a major geographical area, a major line of business, or a major equity-method investment. Under this new guidance, many disposals that might be routineand not a change in an entity’s strategy no longer will be reported as discontinued operations. For each comparative period, an entity’s statement of financialposition must present separately the assets and liabilities of a disposal group qualifying as a discontinued operation. The ASU requires additional disclosuresabout the assets, liabilities, revenues, expenses, and cash flows of a discontinued operation. An entity also will be required to disclose the pretax income orloss attributable to a disposal of a significant component that does not qualify for discontinued operations presentation. ASU 2014-08 is effective for publiccompanies for annual and interim periods beginning on or after December 15, 2014.In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), whichsupersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goodsor services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenuerecognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interimperiods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the F-11Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect ofinitially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluatingthe impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt thestandard in 2017.Reclassification of Prior Period BalancesCertain reclassifications have been made to prior period amounts to conform to the current-year presentation. Previously, the contingent earn-outobligation for the Coordinated Home Health Care, LLC acquisition described in Note 4 had been classified as an Accrued expense on the Company’sConsolidated Balance Sheets. The Company revised the classification in the current year’s report to Contingent earn-out obligation, less current portion, along-term liability. In addition, in the current year’s report, deferred revenue has been included in Accrued expenses. Previously, this amount was separatelylisted on the Consolidated Balance Sheets.2. Discontinued OperationsDuring December 2012, in anticipation of the sale of substantially all of the assets used in its home health business (the “Home Health Business”), theCompany reported the operating results of the Home Health Business as discontinued operations in accordance with ASC 360-10-45, “ Impairment orDisposal of Long-Lived Assets.” On February 7, 2013, the Company entered into the Home Health Purchase Agreement, pursuant to which subsidiaries ofLHC Group, Inc. agreed to acquire substantially all the assets of the Home Health Business in Arkansas, Nevada and South Carolina and 90% of the HomeHealth Business in California and Illinois, with the Company retaining 10% ownership in such locations, for cash consideration of $20,000,000. Thetransaction was consummated effective March 1, 2013. In addition, the results of operations for an agency in Pennsylvania that was sold on December 30,2013 and an agency in Idaho that was closed on November 30, 2012 are included in discontinued operations.The Company has included the financial results of the Home Health Business in discontinued operations for all periods presented. In connection withthe discontinued operations presentation, certain financial statement footnotes have also been updated to reflect the impact of discontinued operations.The following table presents the net service revenues and earnings attributable to discontinued operations, which include the financial results for theyears ended December 31, 2014, 2013 and 2012: 2014 2013 2012 (Amounts in Thousands) Net service revenues $— $6,462 $38,822 Income (loss) before income taxes 470 (1,672) (2,752) Income tax expense (benefit) 190 (692) (1,099) Earnings (loss) from discontinued operations $280 $(980) $(1,653) F-12Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The following table presents the net gain on the sale of the Home Health Business which was recorded in the year ended December 31, 2013: Gain(Amounts inThousands) Gain before income taxes $15,284 Income tax expense (6,322) Net income from discontinued operations 8,962 Pursuant to the Home Health Purchase Agreement, the Company retained $625,000 of accounts receivable, net as of December 31, 2013. In addition,the Company retained the related accrued expenses and accounts payable associated with the Home Health Business as of December 31, 2013.3. Sale of AgencyDuring February 2012, the Company completed its sale of a home health agency located in Portland, Oregon for approximately $525,000 with netproceeds of approximately $495,000 after the payment of closing related expenses. The Company recorded a $495,000 pre-tax gain on the sale of the agencyas part of continuing operations.4. AcquisitionsEffective June 1, 2014, the Company acquired Cura Partners, LLC, which conducts business under the name Aid & Assist at Home, LLC (“Aid &Assist”), in order to further expand the Company’s presence in the State of Tennessee. The total consideration for the transaction was $8,192,000, comprisedof $7,172,000 in cash and $1,020,000, which has not yet been paid, representing the estimated fair value, subject to the achievement of certain performancetargets set forth in an earn-out agreement. The related acquisition costs were $508,000 and were expensed as incurred. The results of operations from thisacquired entity are included in the Company’s statement of operations from the date of the acquisition.The Company’s acquisition of Aid & Assist has been accounted for in accordance with ASC Top 805, “Business Combinations,” and the resultantgoodwill and other intangible assets will be accounted for under ASC Topic 350 “ Goodwill and Other Intangible Assets .” The acquisition was recorded atits fair value as of June 1, 2014. The total purchase price is $8,192,000 and is comprised of: Total(Amounts inThousands) Cash $7,172 Contingent earn-out obligation 1,020 Total purchase price $8,192 The contingent earn-out obligation has been recorded at its fair value of $1,020,000, which is the present value of the Company’s obligation to pay upto $1,168,000 based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between theparties. As of December 31, 2014, the Company revalued this liability at $200,000. F-13Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Under business combination accounting, the total purchase price will be allocated to Aid & Assist’s net tangible and identifiable intangible assetsbased on their estimated fair values. Based upon management’s preliminary valuation, the total purchase price has been allocated as follows: Total(Amounts inThousands) Goodwill $4,317 Identifiable intangible assets 3,950 Accounts receivable (net) 521 Furniture, fixtures and equipment 65 Other current assets 60 Accrued liabilities (553) Accounts payable (168) Total purchase price allocation $8,192 Management’s assessment of qualitative factors affecting goodwill for Aid & Assist includes: estimates of market share at the date of purchase, abilityto grow in the market, synergy with existing Company operations and the presence of managed care payors in the market.Identifiable intangible assets acquired consist of trade names and trademarks, customer relationships and non-compete agreements. The estimated fairvalue of identifiable intangible assets was determined by the Company’s management. It is anticipated that the net intangible and identifiable intangibleassets, including goodwill, are deductible for tax purposes. These estimates are provisional and are subject to change.The Aid & Assist acquisition accounted for $7,536,000 of net service revenues from continuing operations for the year ended December 31, 2014.The Company entered into two definitive acquisition agreements to acquire home and community based businesses during 2013 to further its presencein both existing states and to expand into new states. On October 17, 2013 the Company entered into an asset purchase agreement to acquire the entire homeand community based business of Medi Home Private Care Division of Medical Services of America, Inc. The acquisition included two agencies located inSouth Carolina which were closed effective November 1, 2013; four agencies located in Tennessee and two agencies located in Ohio which closed in January2014. The Company also entered into an asset purchase agreement to acquire the assets of Coordinated Home Health Care, LLC a personal care businesslocated in New Mexico on November 7, 2013. The combined purchase price for these two acquisitions was $12,325,000 at the close and a maximum of$2,250,000 in future cash based on certain performance. The purchase included sixteen offices located in Southern New Mexico. The transaction closedeffective December 1, 2013. The related acquisitions costs were $735,000 for the Medi Home Private Care Division of Medical Services of America, Inc. andCoordinated Home Health Care, LLC deals, and were expensed as incurred. The results of operations from these acquired entities are included in ourstatement of operations from the dates of the respective acquisitions. F-14Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company’s acquisition of the assets of Coordinated Home Health Care, LLC (“CHHC”) has been accounted for in accordance with ASC Top 805,“Business Combinations” and the resultant goodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other IntangibleAssets”. Assets acquired and liabilities assumed were recorded at their fair values as of December 1, 2013. The total purchase price is $12,825,000 and iscomprised of: Total(Amounts inThousands) Cash $11,725 Contingent earn-out obligation 1,100 Total purchase price $12,825 The contingent earn-out obligation was recorded at its fair value of $1,100,000, which is the present value of the Company’s obligation to up to$2,250,000 based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between theparties. As of December 31, 2014, the Company recorded $1,000,000 as the current portion of contingent earn out obligation payable in 2015 and revaluedthe remaining liability at $920,000.Under business combination accounting, the total purchase price was allocated to CHHC’s net tangible and identifiable intangible assets based ontheir estimated fair values. Based upon management’s valuation, the total purchase price was allocated as follows: Total(Amounts inThousands) Goodwill $9,488 Identifiable intangible assets 3,300 Accounts receivable 888 Prepaid expenses 35 Furniture, fixtures and equipment 58 Deposits 15 Accounts payable (81) Accrued liabilities (864) Other liabilities (14) Total purchase price allocation $12,825 Management’s assessment of qualitative factors affecting goodwill for CHHC includes: estimates of market share at the date of purchase, ability togrow in the market, synergy with existing Company operations and the presence of managed care payors in the market.Identifiable intangible assets acquired consist of trade names and trademarks, customer relationships and non-compete agreements. The estimated fairvalue of identifiable intangible assets was determined by management. It is anticipated that the net intangible and identifiable intangible assets, includinggoodwill, are deductible for tax purposes.Acquisitions completed during the fourth quarter 2013 accounted for $21,945,000 and $1,692,000 of net service revenues from continuing operationsfor the years ended December 31, 2014 and 2013, respectively. F-15Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The following table contains unaudited pro forma consolidated income statement information assuming the Aid & Assist and CHHC acquisitionsclosed on January 1, 2013: For The Year Ended December 31, 2014 2013 (Amounts in Thousands) Net service revenues $318,352 $298,395 Operating income from continuing operations 18,080 15,890 Net income from continuing operations 12,022 10,050 Earnings from discontinued operations 280 7,982 Net income $12,302 $18,032 Net income per common share Basic income per share Continuing operations $1.05 $0.99 Discontinued operations 0.02 0.74 Basic income per share $1.07 $1.72 Diluted income per share Continuing operations $1.03 $0.96 Discontinued operations 0.02 0.72 Diluted income per share $1.05 $1.68 The pro forma disclosures in the table above include adjustments for, amortization of intangible assets and tax expense and acquisition costs to reflectresults that are more representative of the combined results of the transactions as if they had occurred on January 1, 2013. 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 resultsmay vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact offuture events that may occur after the acquisition, such as anticipated cost savings from operating synergies.5. Property and EquipmentProperty and equipment consisted of the following: December 31, 2014 2013 (Amounts in Thousands) Computer equipment $2,537 $2,110 Furniture and equipment 2,224 1,099 Transportation equipment 673 588 Leasehold improvements 4,609 1,628 Computer software 5,105 3,749 15,148 9,174 Less accumulated depreciation and amortization (7,453) (6,540) $7,695 $2,634 F-16Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Computer software includes $3,109,000 of internally developed software. Depreciation and amortization expense predominantly related to computerequipment and software and leasehold improvements is reflected in general and administrative expenses and totaled $1,416,000, $814,000 and $870,000 forthe years ended December 31, 2014, 2013 and 2012, respectively.6. Goodwill and Intangible AssetsThe 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. In accordance with ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill and intangible assetswith indefinite useful lives are not amortized. The Company tests goodwill for impairment on an annual basis, as of October 1, or whenever potentialimpairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that impairment may have occurred.Goodwill is required to be tested for impairment at least annually. The Company can elect to perform Step-0 an optional qualitative analysis and basedon the results skip the remaining two steps. In 2014, 2013 and 2012, the Company elected to implement Step 0 and was not required to conduct theremaining two step analysis. In performing its goodwill assessment for 2014, 2013 and 2012, the Company evaluated the following factors that affect futurebusiness performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events,reporting unit factors and company stock price. As a result of the assessment of these qualitative factors, the Company has concluded that it is more likelythan not that the fair values of the reporting unit goodwill as of December 31, 2014, 2013 and 2012 exceed the carrying values of the unit. Accordingly, thefirst and second steps of the goodwill impairment test as described in FASB ASC 350-20-35, which includes estimating the fair values of the Company, arenot considered necessary.The goodwill for the Company’s continuing operations was $64,220,000 and $60,026,000 as of December 31, 2014 and 2013, respectively.A summary of goodwill and related adjustments for continuing operations is provided below: Goodwill(Amounts inThousands) Goodwill, at December 31, 2012 $50,536 Additions for acquisitions 9,650 Adjustments to previously recorded goodwill (160) Goodwill, at December 31, 2013 $60,026 Additions for acquisitions 4,317 Adjustments to previously recorded goodwill (123) Goodwill, at December 31, 2014 $64,220 Adjustments to the previously recorded goodwill are primarily credits related to amortization of tax goodwill in excess of book basis.The 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 twenty-five years. F-17Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company also has indefinite-lived assets that are not subject to amortization expense such as licenses and in certain states certificates of need toconduct specific operations within geographic markets. The Company has concluded these assets have indefinite lives, as management has determined thatthere are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets and the Company intends torenew the licenses indefinitely. The licenses and certificates of need are tested annually for impairment using the cost approach. Under this methodassumptions are made about the cost to replace the certificates of need. No impairment charges were recorded in the years ended December 31, 2014, 2013 or2012.The carrying amount and accumulated amortization of each identifiable intangible asset category consisted of the following for continuing operationsat December 31, 2014 and 2013: Customerand referralrelationships Tradenames andtrademarks StateLicenses Non-competitionagreements Total (Amounts in Thousands) Gross balance at January 1, 2013 $24,908 $4,081 $150 $408 $29,547 Additions for acquisitions 1,438 1,200 — 1,100 3,738 Accumulated amortization (21,138) (2,995) — (390) (24,523) Net Balance at December 31, 2013 5,208 2,286 150 1,118 8,762 Gross balance at January 1, 2014 26,346 5,281 150 1,508 33,285 Additions 50 — — — 50 Additions for acquisitions 1,500 1,900 — 550 3,950 Accumulated amortization (22,497) (3,619) — (822) (26,938) Net Balance at December 31, 2014 $5,399 $3,562 $150 $1,236 $10,347 Amortization expense for continuing and discontinued operations related to the identifiable intangible assets amounted to $2,414,000, $1,346,000and $1,674,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Goodwill and state licenses are not amortized pursuant to ASC Topic350.The estimated future intangible amortization expense is as follows: For the year ended December 31, Total (Amount inThousands) 2015 $2,561 2016 2,396 2017 1,897 2018 1,771 2019 808 Thereafter 764 Total $10,197 F-18Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 7. Details of Certain Balance Sheet AccountsPrepaid expenses and other current assets consist of the following: December 31, 2014 2013 (Amounts in Thousands) Prepaid health insurance $2,762 $3,192 Prepaid workers’ compensation and liability insurance 1,326 1,173 Prepaid rent 595 455 Workers’ compensation insurance receivable 1,457 821 Other 1,028 594 $7,168 $6,235 Accrued expenses consisted of the following: December 31, 2014 2013 (Amounts in Thousands) Accrued payroll $12,703 $12,932 Accrued workers’ compensation insurance 14,081 13,347 Accrued health insurance (3) 3,540 3,731 Indemnification reserve (1) 1,263 3,224 Accrued payroll taxes 3,287 1,755 Accrued professional fees 1,500 1,319 Amounts due to LHCG (2) — 2,196 Other 894 2,400 $37,268 $40,904 (1)As a condition of the sale of the Home Health Business to subsidiaries of LHC Group. Inc. (“LHCG”) the Company is responsible for any adjustmentsto Medicare and Medicaid billings prior to the closing of the sale. In connection with an internal evaluation of the Company’s billing processes, itdiscovered documentation errors in a number of claims that it had submitted to Medicare. Consistent with applicable law, the Company voluntarilyremitted $1,840,000 to the government in March 2014. The Company, using its best judgment, has estimated a total of $1,263,000 for billingadjustments remaining. (2)Amounts due to LHCG pursuant to a billing services arrangement between the Company and LHCG. (3)The Company provides health insurance coverage to qualified union employees providing home and community based services in Illinois through aTaft-Hartley multi-employer health and welfare plan under Section 302(c)(5) of the Labor Management Relations Act of 1947. The Company’sinsurance contributions equal the amount reimbursed by the State of Illinois. Contributions are due within five business days from the date the fundsare received from the State. Amounts due of $2,404,000 and $3,163,000 for health insurance reimbursements and contributions were reflected inprepaid insurance and accrued insurance at December 31, 2014 and 2013, respectively. F-19Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company’s workers’ compensation program has a $350,000 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 $15,464,000 and $12,411,000 at December 31,2014 and 2013.As part of the terms of the acquisition of Addus HealthCare in 2006, all 2005 and prior workers’ compensation claims were the obligation of the formerstockholders of Addus HealthCare. During the fourth quarter of 2014, Addus entered into an agreement pursuant to which the responsibility of the sellingshareholders for these claims was terminated. The outstanding loss reserves associated with the 2005 and prior workers’ compensation policies approximated$779,000 and $604,000 at December 31, 2014 and 2013, respectively. The Company received $841,000 in cash and escrow amounts in exchange for thetermination of these liabilities.8. Long-Term DebtCapital LeasesOn July 12, 2014 and September 11, 2014, the Company executed two 48-month capital lease agreements for $2,650,000 and $1,428,000,respectively, with First American Commercial Bancorp, Inc. The capital leases were entered into to finance property and equipment at the Company’s newcorporate headquarters in Downers Grove, IL. The underlying assets are included in “Property and equipment, net of accumulated depreciation andamortization” in the accompanying Consolidated Balance Sheets. These capital lease obligations require monthly payments through September 2018 andhave implicit interest rates that range from 3.0% to 3.3%. At the end of the term, the Company has the option to purchase the assets for $1 per leaseagreement.An analysis of the leased property under capital leases by major classes is as follows. Classes of Property Asset Balances atDecember 31, 2014(Amounts in Thousands) Leasehold Improvements $2,928 Furniture & Equipment 526 Computer Equipment 431 Computer Software 147 Less: Accumulated Depreciation (239) $3,793 F-20Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The future minimum payments for capital leases as of December 31, 2014 are as follows: Capital Lease(Amounts In Thousands) 2015 $1,105 2016 1,105 2017 1,105 2018 629 Total minimum lease payments 3,944 Less: amount representing estimated executory costs (such as taxes,maintenance and insurance), including profit thereon, included intotal minimum lease payments (68) Net minimum lease payments 3,876 Less: amount representing interest (1) (213) Present value of net minimum lease payments (2) $3,663 (1)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at lease inception. (2)Reflected in the balance sheet as current and noncurrent obligations under capital leases of $986,000 and $2,677,000, respectively.Senior Secured Credit FacilityOn August 11, 2014, the Company renewed its credit facility. The Company’s credit facility provides a $55,000,000 revolving line of credit expiringNovember 2, 2019 and includes a $27,500,000 sublimit for the issuance of letters of credit. On November 6, 2014, the Company amended its credit facility,with retroactive effect to September 30, 2014. The credit facility was amended to (i) reduce the floating interest rate from one-month LIBOR, plus a margin of4.6% to one-month LIBOR, plus a margin of 3.5%, (ii) reduce the interest rate for loans based on term periods of one, two or three months from the LIBORrate, plus a margin of 4.6% to the LIBOR rate, plus a margin of 3.5% and (iii) increase the allowed capital expenditures for the fiscal year ending 2014 from$5,000,000 to $7,000,000. Substantially all of the subsidiaries of Holdings are co-borrowers, and Holdings has guaranteed the borrowers’ obligations underthe credit facility. The credit facility is secured by a first priority security interest in all of Holdings’ and the borrowers’ current and future tangible andintangible assets, including the shares of stock of the borrowers.The availability of funds under the revolving credit portion of the credit facility, as amended, is based on the lesser of (i) the product of adjustedEBITDA, as defined in the credit agreement, for the most recent 12-month period for which financial statements have been delivered under the creditagreement multiplied by the specified advance multiple, up to 3.25, less the outstanding senior indebtedness and letters of credit, and (ii) $55,000,000 lessthe outstanding revolving loans and letters of credit. Interest on the revolving line of credit may be payable at (i) a floating rate equal to the one-monthLIBOR, plus a margin of 3.5%, (ii) the LIBOR rate for term periods of one, two or three months, plus a margin of 3.5% or (iii) the base rate, plus a margin of1.6%, where the base rate is equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federalfunds rate, plus a margin of 0.5% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with a one month interest period advanced onsuch day, plus a margin of 3%. The Company F-21Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) pays 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 are charged at a rateof 2.0% per annum payable monthly. The Company did not have any amounts outstanding on the credit facility as of December 31, 2014, and the totalavailability under the revolving credit loan facility was $39,536,000 and $42,279,000, as of December 31, 2014 and December 31, 2013, respectively.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 the Company’s ability to enter intotransactions other than in the ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, or forthe purchase price of any one acquisition to exceed $2,000,000, in each case without the consent of the lenders, restrictions on mergers, transfers of assets,acquisitions, equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changes and lines ofbusiness.Subordinated Dividend NotesOn November 2, 2009, in conjunction with the IPO, all outstanding shares of Holdings’ series A preferred stock were converted into an aggregate4,077,000 shares of common stock at a ratio of 1:108. Total accrued and unpaid dividends on the series A preferred stock were $13,109,000 as ofNovember 2, 2009, at which time a dividend payment of $173,000 was made and the remaining $12,936,000 in unpaid preferred dividends were convertedinto dividend notes. The dividend notes are subordinated and junior to all obligations under the Company’s credit facility. On November 2, 2009, theCompany made a mandatory payment of $4,000,000 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 installmentswhich 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 onthe unpaid principal balance 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, 000 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 $4,468,000 to$1,250,000 in 2010; from $3,351,000 to $2,500,000 in 2011; and amended total payments in 2012 to $4,069,000, and (iii) permit, based on the Company’sleverage ratio, the prepayment of all or a portion of the principal amount of the dividend notes, together with interest on the principal amount. The Companyrepaid the subordinated dividend notes in the fourth quarter of 2012. F-22Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 9. Income TaxesThe current and deferred federal and state income tax provision, for continuing operations are comprised of the following: December 31, 2014 2013 2012 (Amounts in Thousands) Current Federal $2,231 $2,926 $3,745 State 976 435 792 Deferred Federal 1,915 393 196 State 306 58 74 Provision for income taxes $5,428 $3,812 $4,807 The tax effects of certain temporary differences between the Company’s book and tax bases of assets and liabilities give rise to significant portions ofthe deferred income tax assets at December 31, 2014 and 2013. The deferred tax assets consisted of the following: December 31, 2014 2013 (Amounts in Thousands) Deferred tax assets Current Accounts receivable allowances $1,568 $1,664 Accrued compensation 1,365 849 Accrued workers’ compensation 5,099 5,365 Other 899 923 Total current deferred tax assets 8,931 8,801 Deferred tax liabilities Current Prepaid insurance (423) (475) Net deferred tax assets—current 8,508 8,326 Deferred tax assets Long-term Transaction costs 612 — Property and equipment (394) 52 Reserves 510 1,295 Stock-based compensation 713 861 Other (218) — Total long-term deferred tax assets 1,223 2,208 Deferred tax liability Long-term Goodwill and intangible assets (7,068) (5,649) Total long-term deferred tax liabilities (5,845) (3,441) Total net deferred tax assets $2,663 $4,885 F-23Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realizationof deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.Management considers projected future taxable income and tax-planning strategies in making this assessment. Based on this assessment, managementbelieves it is more likely than not that the Company will realize its deferred income tax assets as of December 31, 2014.A reconciliation of the statutory federal tax rate of 34.5%, 35.0% and 34.0% to the effective income tax rate, for continuing operations for the yearsended December 31, 2014, 2013, and 2012, is summarized as follows: December 31, 2014 2013 2012 Federal income tax at statutory rate 34.5% 35.0% 34.0% State and local taxes, net of federal benefit 5.9 5.2 5.9 Jobs tax credits, net (1) (9.9) (6.8) (7.5) Nondeductible meals and entertainment 0.5 0.4 (0.8) Other 0.2 (8.3) 2.5 Effective income tax rate 31.2% 25.5% 34.1% (1)Included in the jobs tax credit for the year ended December 31, 2012 was a one-time benefit of a 2.4% reduction from the Company’s statutory tax ratefor the jobs tax credits earned in 2012 but not recorded until 2013. The federal employment opportunity tax credits were reinstated in 2013 and werenot an allowable deduction in 2012.The Company is subject to taxation in the jurisdictions in which it operates. The Company continues to remain subject to examination by U.S. federalauthorities for the years 2010 through 2014 and for various state authorities for the years 2010 through 2014. As part of the acquisition of Addus HealthCarein 2006, the selling stockholders agreed to assume and indemnify the successor for any federal or state tax liabilities prior to the acquisition date.The total amount of unrecognized tax benefits under ASC Topic 740 at December 31, 2014 was $115,000. If recognized, the entire amount wouldfavorably impact the effective tax rate in future periods. Interest and penalties related to income tax liabilities are recognized in interest expense and generaland administrative 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(Amounts inThousands) Balance at December 31, 2012 $115 Increases related to current year tax positions — Balance at December 31, 2013 $115 Increases related to current year tax positions — Balance at December 31, 2014 $115 F-24Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 10. Stock Options and Restricted Stock AwardsStock OptionsThe 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 899,000of Holdings’ shares of common stock were reserved for issuance under the 2006 Plan. The number of options to be granted and the terms thereof wereapproved by Holdings’ board of directors. The option price for each share of common stock subject to an option may be greater than or equal to the fairmarket value of the stock at the date of grant. The stock options generally vest ratably over a five year period and expire 10 years from the date of grant, if notpreviously exercised.In September 2009, the Company’s board of directors and stockholders adopted and approved the 2009 Plan. The 2009 Plan provides for the grant of1,500,000 incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units, restricted stock units, otherstock units and performance shares.A summary of stock option activity and weighted average exercise price is as follows: For The Year Ended December 31, 2014 2013 2012 Options(Amounts inThousands) WeightedAverageExercisePrice Options(Amountsin Thousands) WeightedAverageExercisePrice Options(Amountsin Thousands) WeightedAverageExercisePrice Outstanding, beginning of period 647 $8.80 596 $8.11 775 $7.69 Granted 121 22.97 177 10.93 36 4.49 Exercised (66) 6.90 (94) 9.09 (5) 4.53 Forfeited/Cancelled (18) 9.26 (32) 7.89 (209) 6.02 Outstanding, end of period 684 $11.43 647 $8.80 596 $8.11 The following table summarizes stock options outstanding and exercisable at December 31, 2014: Outstanding Exercisable Exercise Price Options WeightedAverageRemainingContractualLife inYears WeightedAverageExercisePrice Options WeightedAverageRemainingContractualLife inYears WeightedAverageExercisePrice $4.06-$5.93 113,000 6.5 $4.73 78,000 6.4 $4.92 $8.91-$23.22 571,370 5.7 12.76 324,619 3.3 9.56 684,370 $11.43 402,619 $8.66 The Company historically used the Black-Scholes option pricing model to estimate the fair value of its stock based payment awards under its 2006Plan, 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 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 stock as it was not a public company prior to the IPO, andas such management estimates volatility based on the volatilities of a peer group of publicly traded companies. The F-25Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) expected 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 basedon observed 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 experiencedby the Company. The expected exercise multiple represents the mean ratio of the stock price to the exercise price at which employees are expected toexercise their options.The weighted-average estimated fair value of employee stock options granted as calculated using the Black-Scholes model and the Enhanced Hull-White Trinomial model and the related assumptions follow: For the Year Ended December 31, 2014Grants 2013Grants 2012GrantsWeighted average fair value $10.69 $5.14 $2.09Risk-free discount rate 2.12% – 2.73% 2.07% – 2.96% 1.59% – 1.95%Expected life 7.70 – 8.20 years 6.00 – 6.25 years 6.00 – 6.50 yearsDividend yield — — — Volatility 47% 47% 42% – 51%Expected turn-over rate 5% 5% 5%Expected exercise multiple 2.2 2.2 2.2Stock option compensation expense, for continuing and discontinued operations, totaled $502,000, $276,000 and $181,000 for the years endedDecember 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, there was $1,659,000 of total unrecognized compensation cost that is expectedto be recognized over a period of five years.The intrinsic value of vested and outstanding stock options was $6,286,000 and $8,785,000, respectively as of December 31, 2014. The intrinsic valueof stock options exercised during the year ended December 31, 2014 was $1,025,000. There were 66,000 stock options exercised of which 26,000 shares ofcommon stock were issued as part of a cashless exchange and 94,000 stock options exercised of which 67,000 shares of common stock were issued as part of acashless exchange in 2014 and 2013, respectively.Restricted Stock AwardsIn 2014, management awarded 36,000 shares of restricted stock awards under the 2009 Plan with a weighted average grant date fair value of $22.75 pershare. As of December 31, 2014, $939,000 of unearned compensation related to unvested awards of restricted stock will be recognized over the remainingvesting terms of the awards. F-26Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The following table summarizes the status of unvested restricted stock awards outstanding at December 31, 2014, 2013 and 2012: For The Year Ended December 31, 2014 2013 2012 RestrictedStockAwards(Amounts inThousands) WeightedAverageGrantDate FairValue RestrictedStockAwards(Amounts inThousands) WeightedAverageGrantDate FairValue RestrictedStockAwards(Amounts inThousands) WeightedAverageGrantDate FairValue Unvested restricted stock awards, beginning of period 70 $9.13 42 $4.80 21 $5.95 Awarded 36 22.75 63 9.61 44 4.48 Vested (22) 10.34 (32) 4.65 (20) 5.14 Forfeited (5) 6.66 (3) 5.32 (3) 5.93 Unvested restricted stock awards, end of period 79 $15.16 70 $9.13 42 $4.80 The fair market value of restricted stock awards that vested during the year ended December 31, 2014 was $598,000.Restricted stock award compensation expense, for continuing and discontinued operations, totaled $325,000, $239,000 and $160,000 for the yearsended December 31, 2014, 2013 and 2012, respectively.Shares available under the 2006 Plan and the 2009 Plan were 564,000 and 826,000, respectively, as of December 31, 2014. The Company does notplan on issuing any further grants under the 2006 Plan.11. Operating Leases and Related Party TransactionsThe Company leases its branch office space under various operating leases that expire at various dates through 2024. In addition to rent, the Companyis typically responsible for taxes, maintenance, insurance and common area costs. A number of the office leases also contain escalation and renewal optionclauses. Total rent expense on these office leases was $2,707,000, $2,442,000 and $3,380,000 for continuing and discontinued operations for the years endedDecember 31, 2014, 2013, and 2012, respectively. In connection with the sale of the Home Health Business, the Company entered into subleases for all or aportion of 13 of the Company’s leased properties and assigned nine leases to the purchasers. Assigned leases are not included in the schedule below.The Company entered into a 132 month lease with a third party for approximately 59,000 square feet of office space in Downers Grove, IL for itscorporate headquarters. The Company assumed occupancy in May 2014. Rental expense relating to this lease amounted to $503,000 for the year endedDecember 31, 2014. Previously, the Company leased its corporate office space from a former member of its board of directors, who is also a stockholder of theCompany. Under the terms of an operating lease that expired in June 2013; this lease agreement operated on a month to month basis through May 2014.Rental expense relating to this lease amounted to $200,000, $483,000 and $486,000 for the years ended December 31, 2014, 2013 and 2012, respectively.During 2011, the Company entered into a lease for its telecom system under a five year operating lease that expires in June 2016. Total expense on thetelecom lease for continuing and discontinued operations was $366,000, $379,000 and $285,000 for the years ended December 31, 2014, 2013 and 2012,respectively. F-27Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The following is a schedule of the future minimum payments, exclusive of taxes and other operating expenses, required under the Company’soperating leases. The payments owed with respect to the subleased properties have been included from the table below because the Company remains liablefor payments in the event that the sublessee does not make the required payment to the landlord. Rent (Amount inThousands) 2015 $3,528 2016 2,915 2017 2,053 2018 1,555 2019 1,249 Thereafter 5,584 Total $16,884 12. Stockholders’ Equity2009 Stock Incentive PlanIn September 2009, the Company’s board of directors and stockholders adopted and approved the 2009 Plan. The 2009 Plan when establishedprovided for the grant of 750,000 incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units,restricted stock units, other stock units and performance shares. In May 2013, the Company’s Board of Directors and stockholders approved an increase in thenumber of incentive stock options to 1,500,000 which was approved by the stockholders at the 2013 Annual Meeting.13. Segment DataThe Company historically segregated its results into two distinct reporting segments: the home & community segment and the home health segment.As a result of the sale of the Home Health Business, the Company has reported the operating results for the Home Health Business in discontinued operations.Therefore, all of the Company’s operations are reported as one operating segment.14. 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 matchingcontributions by the Company. Matching contributions are discretionary and subject to change by management. Under the provisions of the 401(k) plan,employees can contribute up to the maximum percentage and limits allowable under the Internal Revenue Code of 1986. The Company provided a matchingcontribution, equal to 6.0% of the employees’ contributions, totaling $30,000, $46,000 and $44,000 for continuing and discontinued operations for the yearended December 31, 2014, 2013, and 2012, respectively.15. Commitments and ContingenciesLegal ProceedingsThe Company is a party to legal and/or administrative proceedings arising in the ordinary course of its business. It is the opinion of management thatthe outcome of such proceedings will not have a material effect on the Company’s financial position and results of operations. F-28Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 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.16. 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. The Illinois Department on Aging accounted for 53.2%, 58.8% and 57.3% of the Company’s net service revenues for 2014, 2013,and 2012, respectively.The related receivables due from the Illinois Department on Aging represented 54.2% and 65.6% of the Company’s accounts receivable atDecember 31, 2014 and 2013, respectively.17. Concentration of CashFinancial instruments that potentially subject the Company to significant concentrations of credit risk include cash. The Company maintains cash withfinancial institutions which, at times, may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash. F-29Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 18. Unaudited Summarized Quarterly Financial InformationThe following is a summary of the Company’s unaudited quarterly results of operations (amounts and shares in thousands, except per share data): Year Ended December 31, 2014 Year Ended December 31, 2013 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Net service revenues $82,636 $81,658 $76,965 $71,683 $69,882 $67,306 $65,755 $62,998 Gross profit 22,647 21,840 20,580 18,668 18,102 17,226 16,613 15,798 Operating income from continuing operations 5,242 4,961 4,098 3,770 3,476 4,263 3,980 3,742 Net income from continuing operations 3,643 3,237 2,729 2,354 3,124 2,770 2,582 2,687 Earnings (loss) from discontinued operations 280 — — — (2,239) (203) (150) 10,574 Net income $3,923 $3,237 $2,729 $2,354 $885 $2,567 $2,432 $13,261 Average shares outstanding: Basic 10,929 10,927 10,903 10,850 10,838 10,787 10,785 10,778 Diluted 11,143 11,154 11,138 11,110 11,154 11,071 11,016 10,845 Income (loss) per common share: Basic Continuing operations $0.33 $0.30 $0.25 $0.22 $0.29 $0.26 $0.24 $0.25 Discontinued operations 0.03 — — — (0.21) (0.02) (0.01) 0.98 Basic net income per share $0.36 $0.30 $0.25 $0.22 $0.08 $0.24 $0.23 $1.23 Diluted net income per share Continuing operations $0.33 $0.29 $0.25 $0.21 $0.28 $0.25 $0.23 $0.25 Discontinued operations 0.02 — — — (0.20) (0.02) (0.01) 0.98 Diluted net income per share $0.35 $0.29 $0.25 $0.21 $0.08 $0.23 $0.22 $1.23 F-30Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 19. Subsequent EventEffective January 1, 2015, the Company acquired Priority Home Health Care, Inc. for approximately $4,250,000, in order to further expand theCompany’s presence in the State of Ohio. Priority Home Health Care, Inc. is a company headquartered in Cleveland, Ohio that operates six offices in theCleveland, Akron and Columbus areas. The related acquisition costs were $421,000, and such costs were expensed as incurred and are included in theCompany’s results for 2014.VALUATION AND QUALIFYING ACCOUNTSSCHEDULE II(Amounts In Thousands) Allowance for doubtful accounts Balance atbeginningof period Additions/charges Deductions* Balance atend ofperiod Year ended December 31, 2014 Allowance for doubtful accounts $4,140 2,818 3,077 $3,881 Year ended December 31, 2013 Allowance for doubtful accounts $4,466 3,020 3,346 $4,140 Year ended December 31, 2012 Allowance for doubtful accounts $7,189 2,877 5,600 $4,466 *Write-offs, net of recoveries F-31Table 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 to AddusHomeCare 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 Retained AnnuityTrust, Mark S. Heaney, James A. Wright and Courtney E. Panzer (filed on July 17, 2009 as Exhibit 4.2 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 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-1and 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 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) 10.5 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) 10.6 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) 10.7 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) 10.8 Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan (filed on July 17, 2009 as Exhibit 10.11 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein)Table of ContentsExhibitNumber Description of Document 10.9 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) 10.10 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) 10.11 Executive Form of Option Award Agreement under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.14 to AddusHomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 10.12 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) 10.13 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) 10.14 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) 10.15 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) 10.16 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) 10.17 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) 10.18 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) 10.19 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) 10.20 Third Amendment to Lease, dated as of September 1, 2008, between W. Andrew Wright, III and Addus HealthCare, Inc. (filed on July 17, 2009as Exhibit 10.18(c) to Addus HomeCare Corporation’s Registration Statement on Form S-1 and incorporated by reference herein) 10.21 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) 10.22 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) 10.23 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)Table of ContentsExhibitNumber Description of Document 10.24 Loan and Security Agreement, dated as of November 2, 2009, by and among Addus HealthCare, Inc., Addus HealthCare (Idaho), Inc., AddusHealthCare (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 Health Agency, Inc., Lowell Home Health Agency, Inc.,PHC Acquisition Corporation and Professional Reliable Nursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financialinstitutions 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 reference herein) 10.25 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) 10.26 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 Health Agency,Inc., Little Rock Home Health Agency, Inc., Lowell Home Health Agency, Inc., PHC Acquisition Corporation and Professional ReliableNursing Service, Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions that are or may from time to time become partiesthereto, and Addus HomeCare Corporation, as guarantor (filed on July 27, 2010 as Exhibit 99.1 to Addus HomeCare Corporation’s CurrentReport on Form 8-K and incorporated by reference herein) 10.27 Joinder, Consent and Amendment No. 3 to the Loan and Security Agreement, dated as of March 24, 2011, 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., AddusHealthCare (South Carolina), Inc. Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions thatare or may from time to time become parties thereto, and Addus HomeCare Corporation, as guarantor (filed on May 25, 2011 as Exhibit 99.1to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated herein by reference) 10.28 Amendment No. 4 to Loan and Security Agreement, dated as of July 26, 2011, effective as of June 30, 2011, 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, Professional Reliable Nursing Service, Inc., Addus HealthCare(South Carolina), Inc., Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions from time to timeparties thereto, and Addus HomeCare Corporation, as guarantor (filed on July 29, 2011 as Exhibit 99.1 to Addus HomeCare Corporation’sCurrent Report on Form 8-K and incorporated herein by reference)Table of ContentsExhibitNumber Description of Document 10.29 Amendment No. 2 to Employment and Non-Competition Agreement, dated November 17, 2011, by and between Addus HealthCare, Inc. andMark S. Heaney (filed on November 23, 2011 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated herein by reference) 10.30 Amendment No. 5 to Loan and Security Agreement, dated as of March 2, 2012, 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 Health Agency, Inc., LowellHome Health Agency, Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc., Addus HealthCare (South Carolina),Inc., Addus HealthCare (Delaware), Inc., as borrowers, Fifth Third Bank, as agent, the financial institutions from time to time parties thereto,and Addus HomeCare Corporation, as guarantor (filed on March 16, 2012 as Exhibit 10.41 to Addus HomeCare Corporation’s Annual Reporton Form 10-K and incorporated herein by reference) 10.31 Summary of Independent Director Compensation Policy* 10.32 The Executive Nonqualified “Excess” Plan Adoption Agreement, by Addus HealthCare, Inc., dated April 1, 2012 (filed on April 5, 2012 asExhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated by reference herein) 10.33 The Executive Nonqualified Excess Plan Document, dated April 1, 2012 (filed on April 5, 2012 as Exhibit 99.2 to Addus HomeCareCorporation’s Current Report on Form 8-K and incorporated herein by reference) 10.34 Employment Agreement, effective June 18, 2012, by and between Addus Healthcare, Inc. and Inna Berkovich (filed on June 20, 2012 asExhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated herein by reference) 10.35 Asset Purchase Agreement, dated as of February 7, 2013, by and among Addus HealthCare, Inc., its subsidiaries identified therein, LHCGroup, Inc. and its subsidiaries identified therein (filed on March 6, 2013 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Reporton Form 8-K and incorporated by reference herein) 10.36 Amended and Restated Credit and Guaranty Agreement, dated as of August 11, 2014, 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 Health Agency, Inc., LowellHome Health Agency, Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc., Addus HealthCare (Delaware), Inc. andCura Partners, LLC, as borrowers, Addus HomeCare Corporation, the other credit parties from time to a time a party thereto, the variousinstitutions from time to time a party thereto, as lenders, and Fifth Third Bank as agent and L/C issuer (filed on August 11, 2014 as Exhibit10.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein). 10.37 Amendment No 1. to Amended and Restated Credit and Guaranty Agreement, dated as of November 6, 2014 and effective as of September 30,2014, 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., PHC Acquisition Corporation,Professional Reliable Nursing Service, Inc., Addus HealthCare (South Carolina), Inc., Addus HealthCare (Delaware), Inc. and Cura Partners,LLC, as borrowers, Addus HomeCare Corporation, the other credit parties from time to time a party thereto, the various institutions from timeto time a party thereto, as lenders, and Fifth Third Bank as agent and L/C issuer (filed on November 7, 2014 as Exhibit 10.2 to AddusHomeCare Corporation’s Quarterly Report on Form 10-Q and incorporated by reference herein).Table of ContentsExhibitNumber Description of Document 10.38 Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. and MaxineHochhauser (filed on December 15, 2014 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K and incorporated byreference herein). 10.39 Amendment to Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. andDarby Anderson (filed on December 15, 2014 as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K andincorporated by reference herein). 21.1 Subsidiaries of 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 Section302 of 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 Act of2002** 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 Act of2002** 101 The following materials from Addus HomeCare Corporation’s Annual Report on Form 10-K for the years ended December 31, 2014, formattedin Extensive Business Reporting Language (XBRL), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii)Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to the ConsolidatedFinancial Statements.* *Filed herewith**Furnished herewithExhibit 10.31SUMMARY OF INDEPENDENT DIRECTOR COMPENSATION POLICYThe Addus HomeCare Corporation (the “Corporation”) independent director compensation policy provides that independent directors receive anannual retainer of $35,000 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 and corporate governance committee receive anadditional annual retainer of $15,000, $10,000 and $7,500, respectively. Independent directors who serve on the audit committee receive $1,500 per auditcommittee meeting attended and independent directors who serve on other committees receive $1,000 per committee meeting attended. Independentdirectors are also reimbursed for reasonable expenses incurred in attending board of directors meetings, committee meetings and stockholder meetings.In addition, each independent director is entitled to receive an annual grant of restricted shares of the Corporation’s common stock valued at $40,000,which shall be awarded following the Corporation’s annual meeting each year beginning with the Corporation’s 2015 annual meeting. Each grant ofrestricted stock to an independent director shall vest on the first anniversary of the date of issuance.The foregoing independent director compensation is effective March 1, 2015 and is subject to review and adjustment on the recommendation of theCorporation’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 HealthCare Addus Personal Care Services Benefits Assurance Co., Inc. Delaware —Cura Partners, LLC Tennessee Aid & Assist at Home, LLCPHC Acquisition Corporation California Addus HealthCarePriority Home Health Care, Inc. Ohio —Professional Reliable Nursing Service Inc. California Addus HealthCareExhibit 23.1Consent of Independent Registered Public Accounting FirmAddus Homecare CorporationDowners Grove, IllinoisWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-192163) and Form S-8 (Nos. 333-190433 and 333-164413) of Addus HomeCare Corporation of our reports dated March 16, 2015, relating to the consolidated financial statements and financial statementschedule, and the effectiveness of Addus HomeCare Corporation’s internal control over financial reporting, which appear in this Form 10-K./s/ BDO USA, LLPChicago, ILMarch 16, 2015Exhibit 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 thisreport; 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 control 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 forexternal purposes 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 16, 2015 /s/ MARK S. HEANEY Mark S. HeaneyPresident and Chief Executive OfficerExhibit 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 thisreport; 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 control 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 forexternal purposes 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 16, 2015 /s/ Dennis B. Meulemans Dennis B. MeulemansChief Financial OfficerExhibit 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, 2014 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 theCompany. Date: March 16, 2015 By: /s/ MARK S. HEANEY Mark S. Heaney President and Chief Executive OfficerExhibit 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, 2014 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 theCompany. Date: March 16, 2015 By: /s/ Dennis B. Meulemans Dennis B. Meulemans Chief Financial Officer

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