Addus HomeCare
Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016OR☐ 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(g) 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 ☒.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 ☒.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 ☒ No ☐.Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☒Non-accelerated filer ☐ Smaller reporting company ☐(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 ☒The 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, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $129,127,802.As of March 1, 2017, there were 11,529,535 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCECertain portions of the registrant’s Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders (which is expected to be filed with theCommission within 120 days after the end of the registrant’s 2016 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 15 Item 1B. Unresolved Staff Comments 31 Item 2. Properties 31 Item 3. Legal Proceedings 31 Item 4. Mine Safety Disclosures 32 PART II 33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33 Item 6. Selected Financial Data 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 59 Item 8. Financial Statements and Supplementary Data 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 59 Item 9A. Controls and Procedures 60 PART III 63 Item 10. Directors, Executive Officers and Corporate Governance 63 Item 11. Executive Compensation 63 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63 Item 13. Certain Relationships and Related Transactions, and Director Independence 63 Item 14. Principal Accountant Fees and Services 63 PART IV 64 Item 15. Exhibits and Financial Statement Schedules 64 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 personal care service industry, the geographicalconcentration of our affiliated operations, changes in the case mix of consumers and payment methodologies, operational changes resulting from theassumption by managed care organizations of responsibility for managing and paying for personal care services to consumers, changes in estimates andjudgments associated with critical accounting policies, our ability to maintain or establish new referral sources, our ability to renew significant agreements orgroups of agreements, our ability to attract and retain qualified personnel, city and state minimum wage pressure, changes in payments and covered servicesdue to the overall economic conditions and deficit spending by federal and state governments, future cost containment initiatives undertaken by third partypayors, our ability to access financing through the capital and credit markets, our ability to meet debt service requirements and comply with covenants indebt agreements, business disruptions due to natural disasters or acts of terrorism, our ability to integrate and manage our information systems, ourexpectations regarding the size and growth of the market for our services, the acceptance of privatized social services, our expectations regarding changes inreimbursement rates, eligibility standards and limits on services imposed by state governmental agencies, the potential for litigation, our ability tosuccessfully implement our personal care model to grow our business, our ability to attract referrals, our ability to continue identifying, pursuing andintegrating acquisition opportunities and expand into new geographic markets, the impact of acquisitions on our business, the effectiveness, quality and costof our services and various other matters, many of which are beyond our control.Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should notrely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to releasepublicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances uponwhich any forward-looking statement may be based, except as required by law. For a discussion of some of the factors discussed above as well as additionalfactors, see Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Critical Accounting Policies 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 2016, 2015 and 2014, 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, 2016 as filed with the SEC, including all exhibits, is available on ourinternet website at http://www.addus.com on the “Investor” page link. Information contained on, or accessible through, our website is not a part of, and is notincorporated by reference into, this Annual Report on Form 10-K. 1Table of ContentsPART I ITEM 1.BUSINESSOverviewWe operate as one business segment and are a provider of comprehensive personal care services, which are principally provided in the home. Ourpersonal care services provide assistance with activities of daily living. Our consumers are primarily persons who are at risk of hospitalization orinstitutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmental agencies, managed careorganizations, commercial insurers and private individuals. As of December 31, 2016, we provided personal care services to over 33,000 consumers through114 locations across 24 states, including three adult day services centers in Illinois. For the years ended December 31, 2016, 2015 and 2014, we servedapproximately 50,000, 48,000, and 43,000 discrete consumers, respectively.A summary of our financial results for 2016, 2015 and 2014 is provided in the table below: For the Years Ended December 31, 2016 2015 2014 (Amounts in Thousands) Net service revenues – continuing operations $400,688 $336,815 $312,942 Net service revenues – discontinued operations — — — Net income from continuing operations 11,927 11,353 11,963 Earnings from discontinued operations 97 270 280 Net income $12,024 $11,623 $12,243 Total assets $231,030 $185,797 $180,803 Our services are predominantly provided in the home under agreements with state and local government agencies. Our consumers are predominately“dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. The federal government permits states to initiate dual eligibledemonstration programs and other managed Medicaid initiatives designed to coordinate the services provided through Medicare and Medicaid, with theoverall objective of improving care quality and reducing costs. States are increasingly implementing managed care programs to deliver care for Medicaidenrollees. Managed care organizations have an economic incentive to better manage the healthcare expenditures of their membership, and therefore seek toprovide care in a more cost-effective setting, such as a patient’s home. Managed care revenues account for 26.1%, 18.3% and 9.1% of our revenue mix for2016, 2015 and 2014, respectively.The personal care services we provide include assistance with bathing, grooming, oral care, skincare, assistance with feeding and dressing, medicationreminders, meal planning and preparation, housekeeping and transportation services and other activities of daily living. We provide these non-medicalservices on a long-term, continuous basis, with an average duration of approximately 26 months per consumer.Our model is designed to improve consumer outcomes and satisfaction, as well as lower the cost of acute care treatment and reduce serviceduplication. We believe our model to be especially valuable to managed care organizations that have economic responsibility for both personal care servicesas well as acute care expenditures. Over the long term, we believe our model will be a differentiator and as a result we expect to receive increased referralsfrom managed care organizations.We utilize home care aides to observe and report changes in the condition of our consumers for the purpose of early intervention in the disease process,with the goal of reducing the cost of medical services by preventing unnecessary emergency room visits and/or hospital admissions and re-admissions. Wecoordinate the services provided by our team with those of other healthcare agencies as appropriate. Changes in consumers’ conditions are evaluated byappropriately trained managers and may result in the condition being reported to the consumers’ case manager at the managed care organization or otherpayor, in some cases to the consumers’ primary care 2Table of Contentsphysicians for treatment or other follow-up. We believe this approach to the care of our consumers and the integration of our services into the broaderhealthcare continuum are attractive to managed care organizations and other payors who are ultimately responsible for the healthcare needs and costs of ourconsumers.We utilize Interactive Voice Response (“IVR”) systems and smart phone applications to communicate with our home care aides. Through thesetechnologies, we are able to identify changes in health conditions with automated alerts forwarded to an appropriate manager for triage and evaluation. Inaddition, we use technology to record basic transaction information about each visit, record start and end times for a scheduled shift, track mileagereimbursement, send text messages to the home care aide and communicate basic payroll information.In addition to our focus on organic growth, we have grown through selective acquisitions which have expanded our presence in current markets orwhich have facilitated our entry into new markets where the personal care business has been moving to managed care organizations. We completed sevenacquisitions during the period from December 2013 through December 2016.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 $20.0 million. 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$0.2 million. The results of the Home Health Business sold are reflected as discontinued operations for all periods presented herein. Following the sale of theHome Health Business, we have managed and internally reported our business in one segment. We maintain licensure as a home health agency in Delawareand, in order to provide personal care services in the state, provide limited home health services reimbursable by Medicare. Until ceasing business in the Stateof Indiana on August of 2015, we also provided limited home health services reimbursable by Medicare in order to comply with regulatory requirements thatpersonal care services be provided by a licensed home health agency. Priority Home Health Care, located in Ohio, also maintains enrollment in, but does notderive significant revenues from Medicare.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 website, 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 all amendments to those reports as soonas reasonably practicable after we electronically file such material with, or furnish such information to the SEC.Our Market and OpportunityWe provide personal care services to the elderly and other infirm adults who require long-term care and assistance with activities of daily living. Inrecent years, home and community-based services (“HCBS”), including personal care services, have grown in significance and demand. This trend isexpected to continue as a result of the aging of the U.S. population, increased life expectancy, and increased opportunities for individuals to receive home-based care as an alternative to institutionalization. The Patient Protection and Affordable Care Act, as amended by the Health Care and EducationReconciliation Act of 2010 (collectively, “ACA”), made available financial incentives through 2015 for state Medicaid programs that expanded HCBS as analternative to nursing homes and other institutional long-term care alternatives.In calendar year 2015, reported federal and state Medicaid expenditures for fee-for-service personal care services amounted to over $15 billion, anincrease of $2.3 billion from 2012. Federal and state governments spent approximately $152 billion on Medicaid long-term services and supports (“LTSS”)in federal fiscal year 2014, a 4% increase over 2013, with growth primarily attributable to HCBS. 3Table of ContentsMany states use both fee-for-service and managed care delivery models for personal care services, but the number of beneficiaries served throughmanaged care has grown. Between federal fiscal years 2013 and 2014, LTSS spending within Medicaid managed care programs grew at a rate of 55%. As ofJuly 2016, 39 states contracted with risk-based managed care organizations to serve their Medicaid enrollees, with 13 of those states enrolling at least 75% ofall elderly beneficiaries or those with disabilities in managed care organizations. In 23 states, some or all LTSS was provided through a managed carearrangement, and several states anticipate expanding these models geographically or to new populations in 2017. As of federal fiscal year 2016, the Centersfor Medicare & Medicaid Services (“CMS”) requires states to identify and estimate their institutional and HCBS expenditures within Medicaid managed care.In addition to the projected growth of government-sponsored personal care services, the private pay market for our services is continuing to expand.We provide our private pay consumers with the same services we provide to our government-sponsored personal care consumers.Historically, there were limited barriers to entry in the personal care services industry. As a result, the personal care services industry developed in ahighly fragmented manner, with many small local providers. Few companies have a significant market share across multiple regions or states. The lack oflicensure or certification requirements in some states makes it difficult to estimate the number of personal care services agencies. However, projectionspublished by the Centers for Disease Control and Prevention in 2016 indicate that social workers and home health and personal care aides are among thelong-term care services occupations that will grow the most by 2030.The personal care services industry has become subject to increased regulation. At the federal level, recent efforts have focused on improvedcoordination of regulation across the various types of Medicaid programs through which personal care services are offered. In several states, providers arenow required to obtain state licenses or registrations and must comply with laws and regulations governing standards of practice. Providers must dedicatesubstantial resources to ensure continuing compliance with all applicable regulations and significant expenditures may be necessary to offer new services orto expand into new markets. Any failure to comply with the regulatory regime could lead to the termination of rights to participate in federal and state-sponsored programs and the suspension or revocation of licenses. We believe compliance with new licensing requirements or regulations, the increasingfocus on improving health outcomes, the rising cost and complexity of operations and pressure on reimbursement rates due to constrained governmentresources may discourage for new providers and may encourage industry consolidation.The Medicare-Medicaid Coordination Office was established pursuant to the ACA to effectively improve services for consumers who are eligible forboth Medicare and Medicaid, also known as dual eligibles, and improve coordination between the federal and state governments in the delivery of items andservices to which they are entitled. The Medicare-Medicaid Coordination Office within the CMS, works with state Medicaid agencies, and other federal andstate agencies, as well as physicians and others, to make available technical assistance and educational tools to improve care coordination between Medicareand Medicaid, to reduce costs and improve beneficiary experience while reducing administrative and regulatory barriers between the programs. For example,the Financial Alignment Initiative is a demonstration project that tests capitated models and managed fee-for-service models of integrated care and paymentfor benefits provided to dual eligibles. Nationally, 13 states are currently participating in this initiative, including 7 of the 24 states in which we provideservices.We believe that our personal care program and our technology make us well-suited to partner with managed care organizations to address the needs ofthe dual eligible population. These programs reduce service duplication between personal care programs and traditional Medicare home health. We believethat our ability to identify changes in our consumers’ health and condition before acute intervention is required will lower the overall cost of care. Webelieve this approach to care delivery and the integration of our services into the broader healthcare continuum are 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. 4Table of ContentsOur 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 high quality care, maintain our existing payor client relationships, establish relationships with new payors and increaseour referral sources. Our continued growth is also dependent upon the authorization by state agencies of new consumers to receive our services. We believethere are 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. Finally, we believe the provision of personal care services is more cost-effective than the provision of similar services in an institutionalsetting 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 monitor the performance of ourhome care aides through regular supervisory visits in the homes of consumers. • Drive growth in existing markets. We have grown in our existing markets by enhancing the breadth of our services, increasing the number ofreferral sources and leveraging and expanding our payor relationships in each market. We have achieved this growth by educating referralsources about the benefits of our services. • Market the benefits of our personal care model to managed care organizations serving the dual eligible populations. Our personal care modelprovides significant opportunities to effectively market to a wide range of payor clients and referral sources, many of whom are responsible forconsumers with both social and medical service needs. We seek to partner with managed care organizations to address the needs of the dualeligible population in light of governmental incentives for consumers to enroll in managed care plans. We believe that our approach to theprovision of care to our consumers and the integration of our services into the broader healthcare industry are particularly attractive to managedcare organizations and others who are ultimately responsible for both the healthcare needs and related costs of our consumers. • Grow through acquisitions. Our strategy is to expand within our existing markets and to enter new markets. • 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 ServicesAs of December 31, 2016, we delivered services to our consumers through 114 individual agencies located in 24 states and three adult day servicescenters in Illinois. Our services, which include non-medical care such as personal care services, are provided to consumers who are unable to independentlyperform some or all of their activities of daily living. Without our services, many of our consumers would be at risk of placement in a long-term careinstitution.Personal care services are primarily provided to older adults and younger disabled persons in their homes on an as-needed, hourly basis. Typicallyprovided by home care aides, our services are needed when assistance from family or community members is insufficient or when caregivers need respite.Personal care services include assistance with bathing, grooming, oral care, skincare, assistance with feeding and dressing, medication reminders, mealplanning and preparation, housekeeping and transportation services and other activities of daily living. Many consumers need such services on a long-termbasis to address chronic or acute conditions. Each payor client establishes its own eligibility standards, determines the type, amount, duration and scope ofservices, 5Table of Contentsand establishes the applicable reimbursement rate in accordance with applicable law, regulations or contracts. We provide personal care services for anaverage duration of approximately 26 months per consumer.As of December 31, 2016, we also operated three adult day services centers in Illinois that each provides a comprehensive program of skilled andsupport services and certain health services for adults in a community-based group setting. These services include social activities, transportation to and fromthe centers, the provision of meals and snacks, personal care and therapeutic activities, such as exercise and cognitive interaction. In order to focus onproviding services to consumers in their homes, effective March 1, 2017, Addus ceased the adult day services businesses and sold substantially all of theassets used in our adult day services centers.Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programsunder which these organizations operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. Managed careorganizations that operate as an extension of our state payors are subject to similar economic pressures. Our commercial insurance carrier payor clients aretypically for profit companies and are continuously seeking opportunities to control costs.Most of our services are provided pursuant to agreements with state and local governmental social and aging service agencies. These agreementsgenerally have an initial term of one to two years and may be terminated with 60 days’ notice. They are typically renewed for one to five-year terms, providedthat we have complied with licensing, certification and program standards, and other regulatory requirements. Reimbursement rates and methods vary bystate and service type, but are typically based on an hourly or unit-of-service basis. Managed care organizations are becoming an increasing portion of ourpayor mix as states shift from the management of their programs to managed care organizations. In 2016, approximately 70.4% of our net service revenuesfrom continuing operations were derived from state and local government programs, with 26.1% derived from managed care organizations, whileapproximately 3.5% of net service revenues from continuing operations were derived from insurance programs and private pay consumers.For 2016, 2015 and 2014, our revenue mix by payor type for continuing operations was as follows: Year Ended December 31, 2016 2015 2014 State, local and other governmental programs 70.4% 77.7% 86.4% Managed care organizations 26.1 18.3 9.1 Private pay 2.4 3.0 3.4 Commercial insurance 1.1 1.0 1.1 100.0% 100.0% 100.0% We derive a significant amount of our net service revenues from our operations in Illinois, New York, New Mexico and Washington. The percentages oftotal revenue for each of these significant states for 2016, 2015 and 2014 were as follows: % of Total Revenue for theYears Ended December, 31 State 2016 2015 2014 Illinois 53.6% 59.5% 60.6% New York 12.9 — — New Mexico 7.5 8.5 8.2 Washington 4.5 4.9 5.0 6Table of ContentsA significant amount of our net service revenues from continuing operations are derived from one specific payor client, the Illinois Department onAging, which accounted for 42.1%, 48.8%, and 53.2% of our total net service revenues from continuing operations for 2016, 2015 and 2014, 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 personal care services industry is highly competitive, fragmented and market specific. Each local market has its own competitive profile and nosingle competitor has significant market share across all of our markets. Our competition consists of personal care service providers, home health providers,private caregivers, larger publicly held companies, privately held companies, privately held single-site agencies, hospital-based agencies, not-for-profitorganizations, community-based organizations, managed care organizations and self-directed care programs. In addition, certain governmental payorscontract for services with independent providers such that our relationships with these payors are not exclusive. This is particularly true in California whereindividuals act as independent providers, meaning individuals provide services for a consumer and are paid directly by the county where services aredelivered. We have experienced, and expect to continue to experience, competition from new entrants into our markets. Increased competition may result inpricing pressures, loss of or failure to gain market share or loss of consumers or payors, any of which could harm our business. In addition, some of ourcompetitors 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.We establish new referral relationships with various managed care organizations who contract with the states for the management of the state Medicaidprograms under dual eligible demonstration and similar Medicaid managed care programs. We have met with many contracted managed care organizations inmarkets where we serve our clients and believe we are building the relationships necessary to ensure continued referrals of new clients.We receive substantially all of our consumers through third-party referrals. Generally, family members of potential consumers are made aware ofavailable in-home or alternative living arrangements through a state or local case management system. These systems are operated by governmental orprivate agencies. We receive referrals from state departments on aging, rehabilitation, mental health and children’s services, county departments of socialservices, the Veterans Health Administration and city departments on aging.We provide ongoing education and outreach to our target communities in order to inform the community about state and locally-subsidized careoptions and to communicate our role in providing quality personal care services. We also utilize consumer-direct sales, marketing and advertising programsdesigned 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 7Table of ContentsAdministration, managed care organizations, commercial insurance and private pay consumers. Depending on the type of service, coverage for services maybe predicated on a case manager, physician or nurse determination that the care is necessary or on the development of a plan for care in the home.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 2016 2015 2014 Illinois Department on Aging 42.1% 48.8% 53.2% Other federal, state and local payors 28.3 28.9 33.2 Managed care organizations 26.1 18.3 9.1 Private pay 2.4 3.0 3.4 Commercial insurance 1.1 1.0 1.1 Total 100.0% 100.0% 100.0% Illinois Department on AgingWe provide personal care services pursuant to agreements with the Illinois Department on Aging, which is funded by Medicaid and general revenuefunds of the State of Illinois. Consumers are identified by case managers contracted independently with the Illinois Department on Aging. Once a consumerhas been evaluated and determined to be eligible for the program, the case manager refers the consumer to a list of authorized providers, from which theconsumer selects the provider. We provide our services in accordance with a care plan developed by the case manager and under administrative directivesfrom the Illinois Department on Aging. We are reimbursed on an hourly fee-for-service basis.Due to its revenue deficiencies, financing issues and delay in finalizing budgets, the State of Illinois is reimbursing providers on a delayed basis. Thesepayment delays could adversely impact our liquidity and may result in the need to increase borrowings under our credit facility. Delayed payorreimbursements from the State of Illinois could contribute to an increase in our receivables balances. The State of Illinois did not adopt a comprehensivebudget for fiscal year 2016, which ended on June 30, 2016, and it has not yet adopted a comprehensive budget for fiscal year 2017, which began on July 1,2016. Stopgap budget legislation was enacted on June 30, 2016, which appropriated funds through December 31, 2016. Without a budget, the State is notauthorized to pay for non-Medicaid consumers we serve. Non-Medicaid consumers from Illinois represent approximately 15% of our current total annualrevenues. Our accounts receivable, net of allowance for doubtful accounts at December 31, 2016, increased 37.7% compared to 2015, due in part to delaysfrom the State of Illinois in the second half of 2016. Accounts receivable attributable to delayed payments from the Illinois Department on Aging totaled$53.0 million at the end of 2016, approximately $36.8 million related to Non-Medicaid consumers and approximately $16.2 million related to Medicaidconsumers. Reimbursements from the State of Illinois could be further delayed due to the lack of a budget for fiscal year 2017 and because current forecastsindicate higher state deficits in the near future.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 8Table of Contentsstatutes and regulations, and subject to federal oversight, each state establishes its own eligibility standards, determines the type, amount, duration and scopeof services, sets the rate of payment for services and administers its own program. Most states cover Medicaid beneficiaries for intermittent home healthservices as well as continuous services for children and young adults with complicated medical conditions, and certain states cover home and community-based services.Currently, personal care services and other HCBS are largely reimbursed on a fee-for-service basis. However, states may seek permission from CMS toprovide personal care services under waivers of traditional Medicaid requirements. In an effort to control escalating Medicaid costs, states are increasinglyrequiring Medicaid beneficiaries to enroll in managed care plans that require beneficiaries to work with case managers. In 2012, Illinois enacted Medicaidlegislation requiring that 50% of Medicaid beneficiaries be enrolled in some type of care coordination program by 2015. A report issued by the IllinoisDepartment on Aging in 2016 indicates that over 60% of the state’s Medicaid population is enrolled in a care coordination program, many provided throughvarious managed care entities including managed care organizations.Veterans Health AdministrationThe Veterans Health Administration operates the nation’s largest integrated healthcare system, with more than 1,700 sites of care, and provideshealthcare benefits, including personal care services, to eligible military veterans. The Veterans Health Administration provides funding to regional and localoffices and facilities that support the in-home care needs of eligible aged and disabled veterans by contracting directly with local in-home care providers, andto the aid and attendance pension, which pays veterans for their otherwise unreimbursed health and long-term care expenses. We currently have relationshipsand agreements with the Veterans Health Administration to provide personal care services in several states, with the most Veterans Health Administrationservices being provided to eligible consumers in Illinois, Arkansas and California.OtherOther sources of funding are available to support personal care services in different states and localities. In addition, many states appropriate generalfunds or special use funds through targeted taxes or lotteries to finance personal care services for senior citizens and individuals with disabilities. Dependingon the state, these funds may be used to supplement existing Medicaid waiver programs or for distinct programs that serve non-Medicaid eligible consumers.Managed Care OrganizationsMany states are moving the administration of their Medicaid personal care programs to commercially managed care insurance companies. Thistransition is due to an overall desire to better manage the costs of the Medicaid long term care programs. Reimbursement from the managed careorganizations is generally on an hourly, fee-for-service basis with rates consistent with the individual state funded rates.Commercial InsuranceMost long-term care insurance policies contain benefits for in-home services and adult day services. Policies are generally subject to dollar limitationson the amount of daily, weekly or monthly coverage provided.Private PayOur private pay 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 pay consumers for services rendered either bi-monthly or monthly, and in certain circumstances weobtain a two- week deposit from the consumer. Other private payors include workers’ compensation programs/insurance, preferred provider organizations andemployers. 9Table of ContentsExposure 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, the agency in Idaho was closed in November 2012, the agency in Indiana was closed August 2015 and efforts to sell the Idaho agencywere 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 Closingto meet the requirements of such government programs, or any violation prior to the Closing of any healthcare laws. Such liabilities include amounts to berecouped by, or repaid to, such government programs as a result of improperly submitted claims for reimbursement or those discovered as a result of audits byinvestigative agencies. All services that we have provided that have been or may be reimbursed by Medicare are subject to retroactive adjustments and/ortotal denial of payments received from Medicare under various review and audit provisions included in the program regulations. The review period isgenerally described as six years from the date the services are provided but could be expanded to ten years under certain circumstances if fraud is found tohave 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 reimbursethe 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 regulation. 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. 10Table of ContentsEmployeesThe 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, 2016: Full-time Part-time Total Continuing Operations – Personal Care Services 2,252 20,613 22,865 National Support Center 197 8 205 2,449 20,621 23,070 Our home care aides provide substantially all of our services and comprise approximately 97.9% of our total workforce. They undergo a criminalbackground check, and are provided with pre-service training and orientation and an evaluation of their skills. In many cases, home care aides are alsorequired to attend ongoing in-services education. In certain states, our home care aides are required to complete certified training programs and maintain astate certification. Approximately 66.1% of our total employees are represented by labor unions. We maintain strong working relationships with these laborunions. We have a national agreement with the Service Employees International Union (the “SEIU”) which is currently under negotiation, as well asnumerous agreements with local SEIU affiliates which are renegotiated from time to time.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 assisting with the compliance of our operating systems with theHealth Insurance Portability and Accountability Act of 1996, or HIPAA, requirements. Horizon Homecare assists our staff in gathering information to improvethe quality of consumer care, optimize financial performance, adjust consumer mix, promote regulatory compliance and enhance staff efficiency. HorizonHomecare supports intake, personnel scheduling, office, clinical and reimbursement management in an integrated database. Horizon Homecare is hosted byMcKesson in a secure data center, which provides multiple redundancies for storage, power, bandwidth and security. Using this technology, we are workingto standardize the care delivered across our network of locations and monitor our performance and consumer outcomes.We have licensed the QlikView Business Intelligence software to provide historical, current, and forward-looking operational performance to identifyand create or improve our current business strategies. This software has been integrated with our Horizon platform to provide high level historical and currentanalytical views to measure performance and better understand the factors that are driving our key metrics in a real-time manner. We are also disseminatingdetailed visit information to line level management to identify clients where scheduling or visit activities are not on track to meet their servicing needs.We currently use the Ultipro system by Ultimate Software to address our human resources and payroll processing needs. Ultimate is a web basedprovider of integrated human resource and payroll software, which supports our management with the systems and reporting necessary to manage ouremployees. Both software systems are integrated with Horizon Homecare and other clinical data-management systems, and include features for tax reporting,managing wage assignments and garnishments, on-site check printing, general ledger population and direct-deposit paychecks. Secure management reportsare made available centrally and through our internal reporting module.We have made the decision to convert our payroll system from Ultimate to ADP and we expect this conversion to be complete in 2017. ADP willreduce the current cost of processing payroll while reducing issues and errors. We will be adding significant electronic support systems to our recruiting,human resources, payroll and accounting support functions. This conversion will solidify our ability to easily migrate acquired entities, improve complianceto state and regulatory requirements and supply needed self-service capabilities to various levels within the Company. 11Table of ContentsIn some states, we utilize commercial vendors for electronic visit verification pursuant to which our personal care service aides record their beginningand ending times for services provided through either an IVR system or cell phone based system. In the fall of 2016, we transitioned all company providedmobile devices to CellTrak for all mobile and IVR traffic unless otherwise mandated by a state to utilize a specific technology.Government RegulationOverviewOur business is subject to extensive federal, state and local regulation. Changes in the laws and regulations or new interpretations of existing laws andregulations may have a material impact on the definition of permissible activities, the relative cost of doing business, and the methods and amounts ofpayment for care by both governmental and other payors. In addition, differences among state laws may impede our ability to expand into certain markets. Ifwe fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our abilityto participate in federal or state programs. In addition the healthcare industry has experienced, and is expected to continue to experience, extensive anddynamic change. It is difficult to predict the effect of these changes on budgetary allocations for our services. See also “Management’s Discussion andAnalysis 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. Federal regulations set forth eligibility requirements for personal care services provided underMedicaid waiver programs. These regulations specify that home based settings must be integrated in and support full access to the greater community, beselected by individuals from among different setting options, ensure privacy rights of individuals, optimize autonomy and independence in making lifechoices, and facilitate individual choice regarding services and supports. We may face additional costs associated with compliance with these regulations,but these costs will vary from state to state, depending on how the requirements are implemented.Affordable Care ActThe U.S. Congress and certain state legislatures have passed many laws and regulations in recent years intended to effect major change within thenational healthcare system, the most prominent of which is the ACA. However, the future of the ACA is unclear following the 2016 federal elections. The newpresidential administration and certain members of Congress have stated their intent to repeal or make significant changes to the ACA, its implementation orinterpretation, but have not yet agreed upon specific proposals for replacement reforms. As currently structured, the ACA affects how healthcare services aredelivered and reimbursed through the expansion of health insurance coverage, reduction of growth in Medicare program spending, and the establishment andexpansion of programs that tie reimbursement to quality and integration. It includes several provisions that may affect reimbursement for our services. Itallows states to expand eligibility for Medicaid enrollment. A number of states, including some in which we operate, have not participated in Medicaidexpansion. Some of the states that did not expand Medicaid are evaluating or participating in an alternative waiver plan.The ACA established within CMS the Center for Medicare and Medicaid Innovation, or CMMI, to test innovative payment and service deliverysystems to reduce program expenditures while maintaining or enhancing quality. For example, the CMMI has supported testing of new models of care fordual eligibles, funding of home health providers that offer chronic care management services, and establishment of pilot programs that bundle acute carehospital services with physician services and post-acute care services, which may include home health services for certain patients. These systems could havea material impact on our business. 12Table of ContentsPermits and LicensureOur personal care services are authorized and/or licensed under various state and county requirements. Although our home care aides are generally notsubject to licensure requirements, certain states require them to complete training programs and maintain state certification. We believe we are currentlylicensed appropriately as required by the laws of the states in which we operate, but additional licensing requirements may be imposed upon us in existingmarkets or markets that we enter in the future. For example, California’s Home Care Services Consumer Protection Act was enacted in 2013. This statuteestablishes a licensing program for home care organizations and requires background checks, basic training, and tuberculosis screening for the aides that areemployed by home care organizations. Compliance by home care organizations and aides was expected by January 2016. Although we sold the bulk of ourhome health business in California in March 2013, we continue to operate in California and are subject to ongoing costs under the statute.Fraud and Abuse LawsAnti-Kickback Laws: The federal Anti-Kickback Statute prohibits the offering, payment, solicitation or receipt of any remuneration to induce referralsor orders for items or services covered by federal healthcare programs such as Medicare and Medicaid. Courts have interpreted this statute broadly and heldthat there is a violation if just one purpose of the remuneration is to generate referrals. Knowledge of the law or intent to violate the law is not required.Violations of the federal Anti-Kickback Statute may be punished by criminal fines, imprisonment, significant civil monetary penalties and exclusion fromparticipation in federal healthcare programs. In addition, the submission of a claim for services or items generated in violation of the federal Anti-KickbackStatute may be subject to additional penalties under the federal False Claims Act. Many states, including Illinois, Nevada and California have similar lawsproscribing kickbacks, some of which apply regardless of the source of payment for items or services.The Stark Law and other Prohibitions on Physician Self-Referral: The federal law commonly known as the “Stark Law” prohibits physicians fromreferring Medicare and Medicaid beneficiaries to an entity that provides certain “designated health services,” including home health services, if they, or theirfamily members, have a financial relationship with the entity receiving the referral, unless an exception applies. The Stark Law also prohibits entities thatprovide designated health services reimbursable by Medicare or Medicaid from billing these programs for any items or services that result from a prohibitedreferral and requires the entities to refund amounts received for items or services provided pursuant to a prohibited referral. Violations of the Stark Law mayresult in denial of payment, and are punishable by civil monetary penalties and exclusion from federal healthcare programs of both the person making thereferral and the provider rendering the service. Failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false orfraudulent claim, which may result in additional penalties imposed under the federal False Claims Act. We attempt to structure our relationships, includingcompensation agreements with physicians who served as medical directors in our home health agencies, to meet an exception to the Stark Law, but we cannotprovide assurance that every relationship is fully compliant. Many states, including Illinois, Nevada and California have also enacted statutes similar inscope and purpose to the Stark Law.The False Claims Act: Numerous state and federal laws govern the submission of claims for reimbursement and prohibit false claims or statements.Under the federal False Claims Act, for example, the government may fine any person, company or corporation that knowingly submits, or participates insubmitting, claims for payment to the federal government that are false or fraudulent, or which contain false or misleading information. “Knowingly” isdefined broadly, and includes submission of a claim with reckless disregard to its truth or falsity. The federal False Claims Act can be used to prosecute fraudinvolving issues such as coding errors and billing for services not provided. Violations of other statutes, such as the federal Anti-Kickback Statute, can alsoserve as a basis for liability under the federal False Claims Act. Among other potential bases for liability is the knowing and improper failure to report andreturn overpayments received from Medicare or Medicaid in a timely manner following identification of the overpayment. An overpayment is deemed to be“identified” when a person has, or should have through reasonable diligence, determined that an overpayment was received and quantified the overpayment. 13Table of ContentsA provider determined to be liable under the False Claims Act may be required to pay three times the amount of actual damages sustained by thefederal government, in addition to mandatory civil monetary penalties that range from $10,957 to $21,916 for each false or fraudulent claim, after taking2017 updates into account. These penalties will be updated annually based on changes to the consumer price index. Private parties may initiatewhistleblower lawsuits alleging the defrauding of the federal government by a provider and may receive a share of any settlement or judgment. When aprivate individual brings an action under the federal False Claims Act, the defendant generally is not made aware of the lawsuit under the federal governmentcommences its own investigation or determines whether it will intervene.Every entity that receives at least $5 million in Medicaid payments annually must have written policies regarding certain federal and state laws for allemployees, contractors and agents. These polices must provide detailed information about false claims, false statements and whistleblower protections.Many states, including Illinois, Nevada and California have similar false claims statutes that impose additional liability for the types of acts prohibitedby the False Claims Act.Other Fraud and Abuse Provisions: Criminal and civil penalties may be imposed under various other federal and state statutes that prohibit variousforms of fraud and abuse. For example, the federal Civil Monetary Penalties Law (“CMPL”) imposes substantial penalties for offering remuneration or otherinducements to influence federal healthcare beneficiaries’ decisions to seek specific governmentally reimbursable items or services or to choose particularproviders. It also imposes penalties for contracting with an individual or entity known to be excluded from a federal healthcare program. The CMPL requiresa lower burden of proof than some other fraud and abuse laws, including the federal Anti-Kickback Statute. Civil monetary penalties increased significantlyin 2016, were further adjusted in 2017, and will be updated annually based on changes to the consumer price index. In addition to the financial penalties,federal enforcement officials are able to exclude from Medicare or Medicaid any individuals or entities convicted of Medicare or Medicaid fraud or otheroffenses related to the delivery of items or services under those programs. Persons who have been excluded from the Medicare or Medicaid program may notretain ownership in a participating entity. Participating entities that permit continued ownership by excluded individuals, that contract with excludedindividuals, and the excluded individuals themselves, may be penalized.Payment IntegrityWe 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.Under the Recovery Audit Contractor (“RAC”) program, CMS contracts with third parties to identify improper Medicare payments. RACs are paid acontingent fee based on the improper payments identified and corrected. CMS has also instituted Zone Program Integrity Contracts (“ZPICs”) for additionalaudit of Medicare providers, including home health agencies. By statute, states are required to enter into contracts with RACs to audit payments to Medicaidproviders. Further, under the Medicaid Integrity Program, CMS employs private contractors, referred to as Medicaid Integrity Contractors (“MICs”), toperform post-payment audits of Medicaid claims and identify overpayments.From time to time, various federal and state agencies, such as the U.S. Department of Health and Human Services (“HHS”), issue pronouncements thatidentify practices that may be subject to heightened scrutiny, as well as practices that may violate fraud and abuse laws. For example, the Office of theInspector General (the “OIG”) issued an Investigative Advisory in 2012 that identified a number of program integrity vulnerabilities in the delivery ofpersonal care services and recommending corrective actions by CMS. In December 2016, CMS issued a bulletin highlighting safeguards that state Medicaidagencies can put in place around personal care services. It has also issued guidance to personal care services agencies and attendants on avoiding improperpayments. We believe, but cannot assure you, that our operations comply with the principles expressed by HHS in these reports, advisories and guidance. 14Table of ContentsHIPAA and Other Privacy and Security RequirementsThe HIPAA Administrative Simplification provisions and implementing regulations require the use of uniform electronic data transmission standardsand code sets for certain healthcare claims and reimbursement payment transactions submitted or received electronically. These provisions are intended toencourage electronic commerce in the U.S. healthcare industry.HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and its implementing regulationsextensively regulate the use, disclosure, confidentiality, availability and integrity of individually identifiable health information, known as “protected healthinformation,” and provide for a number of individual rights with respect to such information. These requirements apply to most healthcare providers, whichare known as “covered entities,” including our company. Vendors, known as “business associates,” that handle protected health information, on behalf ofcovered entities must also comply with most HIPAA requirements. A covered entity may be subject to penalties as a result of a business associate violatingHIPAA, if the business associate is found to be an agent of the covered entity.Covered entities must, among other things, maintain privacy and security policies, train workforce members, maintain physical, administrative, andtechnical safeguards, enter into confidentiality agreements with business associates, and permit individuals to access and amend their protected healthinformation. In addition, covered entities must report breaches of unsecured (unencrypted) protected health information to affected individuals withoutunreasonable delay, but not to exceed 60 calendar days from the discovery date of the breach. Notification must also be made to HHS and, in certain casesinvolving large breaches, to the media.HIPAA violations may result in criminal penalties and significant civil penalties. Our company is also subject to other applicable federal or state lawsthat are more restrictive than HIPAA, which could result in additional penalties. For example, the Federal Trade Commission uses its consumer protectionauthority to initiate enforcement actions against entities whose inadequate data security programs may expose consumers to fraud, identity theft and privacyintrusions. Various state laws and regulations require entities that maintain individually identifiable information (even if not health-related) to report databreaches to affected individuals and, in some cases, state regulators. We expect compliance with HIPAA and other privacy and security standards to continueto impose significant costs on our business lines.Environmental, Health and Safety LawsWe are subject to federal, state and local regulations governing the storage, transport, use and disposal of hazardous materials and waste products. 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 the 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, cause the trading price of our common stock to decline and cause the actual outcome of matters todiffer materially from our current expectations as reflected in forward-looking statements made in this Form 10-K. The risk factors described below andelsewhere in this Form 10-K are not the only risks we face. Our business and consolidated financial condition, results of operations and cash flows may alsobe materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are notspecific to us, such as general economic conditions.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. 15Table of ContentsRisks Related to Our Business and IndustryReductions in reimbursement and other changes to Medicaid, Medicaid waiver, other state and local medical and social programs could adverselyaffect our client caseload, units of service, net service revenues, gross profit and profitability.For the year ended December 31, 2016, we derived approximately 70.4% of our net service revenues from state and local governmental agencies,primarily through Medicaid and Medicaid waiver programs. Governmental agencies generally condition their agreements upon a sufficient budgetaryappropriation. Almost all of the states in which we operate have experienced periodic financial pressures and budgetary shortfalls due to challengingeconomic conditions and the rising costs of healthcare, and the Medicaid program is often a state’s largest program. As a result, many states have made, areconsidering or may consider making changes in their Medicaid, Medicaid waiver or other state and local medical and social programs, including enactinglegislation designed to reduce Medicaid expenditures.Changes at the federal level also affect Medicaid policy and funding and the healthcare industry more broadly. The ACA, for example, madesignificant changes to Medicaid eligibility requirements. Future health reform efforts or efforts to repeal or significantly change the ACA will likely impactstate programs. In addition, the federal government oversees various demonstration projects and Medicaid waiver programs under which states may apply totest new or existing approaches to payment and delivery of Medicaid benefits.If changes in Medicaid policy result in a reduction in available funds for the services we offer or a reduction in the number of beneficiaries eligible forour services, our net service revenues could be negatively impacted. Our profitability depends principally on the levels of government-mandated paymentrates and our ability to manage the cost of providing services.Changes that may occur at the federal or state level to address budget deficits or otherwise contain costs include: • limiting increases in, or decreasing, reimbursement rates; • redefining eligibility standards or coverage criteria for social and medical programs or the receipt of personal care services under those programs; • increasing consumer responsibility, including through increased co-payment requirements; • decreasing benefits available under Medicaid programs, such as limiting the number of hours of personal care services that will be covered; • 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. In 2016, we derived approximately 53.6% of ourtotal net service revenues from continuing operations from services provided in Illinois, 12.9% of our total net service revenues from continuing operationsin New York, 7.5% of our total net service revenues from continuing operations in New Mexico and 4.5% of our total net service revenues from continuingoperations from services provided in Washington. Because a substantial portion of our business is concentrated in these states, any significant reduction inexpenditures that pay for our services in these states and other states in which we do business may have a disproportionately negative impact on our futureoperating results. Illinois, in particular, is experiencing budgetary issues. The Governor of Illinois proposed a budget for fiscal year 2017 (which startedJuly 1, 2016) that contains several measures aimed at reducing costs associated with the Illinois Department on Aging. If enacted, these measures could affectthe number of clients we serve and our growth in Illinois. 16Table of ContentsIn some cases, commercial insurance companies and other private payors rely on government payment systems to determine payment rates. As a result,changes to government healthcare programs that reduce Medicaid payments may negatively impact payments from private payors, as well. Any reduction inreimbursements or imposition of copayments that dissuade the use of our services, or any reduction in reimbursement from private payors, could materiallyadversely affect our profitability.The implementation of alternative payment models and the transition of Medicaid beneficiaries to managed care organizations may limit our marketshare and could adversely affect our revenues.Many government and commercial payors are transitioning providers to alternative payment models that are designed to promote cost-efficiency,quality and coordination of care. For example, accountable care organizations (“ACOs”) incentivize hospitals, physician groups, and other providers toorganize and coordinate patient care while reducing unnecessary costs. Several states have implemented, or plan to implement, accountable care models fortheir Medicaid populations. If we are not included in these programs, or if ACOs establish programs that overlap with our services, we are at risk for losingmarket share and for a loss of our current business.We may be similarly impacted by state efforts to transition Medicaid beneficiaries to managed care organizations. States are increasingly relying onmanaged care to deliver services within their Medicaid programs as a strategy to control costs. We cannot assure you that we will be able to secure favorablecontracts with all or some of the managed care organizations, that our reimbursement under these programs will remain at current levels, that theauthorizations for services will remain at current levels or that our profitability will remain at levels consistent with past performance. In addition, operationalprocesses may not be well defined as a state transitions beneficiaries to managed care. For example, communication of changes to either the managed careorganization or the consumers may be unclear. Membership, new referrals and the related authorization for services to be provided may be delayed, whichmay result in delays in service delivery to consumers or in payment for services rendered. Difficulties with operational processes may negatively affect ourrevenue growth rates, cash flow and profitability for services provided.Other cost-saving initiatives may be presented by the government and commercial payors to control costs that subject our company to financial risk.We cannot predict at this time what effect alternative payment models may have on our company.Our revenues are concentrated in a small number of states which will make us particularly sensitive to regulatory and economic changes in those states.Our revenues are particularly sensitive to regulatory and economic changes in states in which we generate a significant portion of our revenues,including Illinois, New York, New Mexico and Washington. Accordingly, any change in the current demographic, economic, competitive or regulatoryconditions in these states could have an adverse effect on our business, financial condition or results of operations. Changes to the Medicaid programs inthese states could also have a disproportionately adverse effect on our business, financial condition, results of operations or cash flows.Efforts to reduce the costs of the Illinois Department on Aging program could adversely affect our service revenues and profitability.In 2016, we derived approximately 42.1% of our revenue from continuing operations from the Illinois Department on Aging programs. In his fiscal year2016 budget proposal, the Governor of Illinois proposed changes aimed at reducing expenditures by the Illinois Department on Aging, such as an income capand higher threshold of need for eligibility in the Community Care Program, as well as elimination of the add-on rate the Illinois Department on Aging hadbeen paying Community Care Program service providers to help those providers pay for employee healthcare. Illinois did not enact a budget for fiscal year2016 and therefore none of 17Table of Contentsthe Governor of Illinois’s proposals were enacted. The Governor of Illinois also issued a proposed budget for fiscal year 2017, which began July 1, 2016. Inhis proposed 2017 budget, the Governor again offered several measures intended to reduce costs associated with the Illinois Department on Aging, such asshifting non-Medicaid eligible seniors from the Community Care Program to a new program known as the Community Reinvestment Program, a move thatthe Governor estimated will save approximately $197 million in fiscal year 2017. At this time, it is difficult to ascertain how significant an impact theseinitiatives will have on our business. If they impact the eligibility of our consumers, the number of hours authorized or services provided to existingconsumers, they would adversely affect our service revenues and growth.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. Many ofthe states in which we operate are operating with budget deficits for their current fiscal year. These and other states may in the future delay reimbursement,which would adversely affect our liquidity. In addition, from time to time, procedural issues require us to resubmit claims before payment is remitted, whichcontributes to our aged receivables. Additionally, unanticipated delays in receiving reimbursement from state programs due to changes in their policies orbilling or audit procedures may adversely impact our liquidity and working capital. We fund operations primarily through the collection of accountsreceivable.Specifically, the State of Illinois is currently reimbursing us on a delayed basis. The State of Illinois did not adopt a comprehensive budget for fiscalyear 2016, which ended on June 30, 2016, and it has not yet adopted a comprehensive budget for fiscal year 2017, which began on July 1, 2016. Stopgapbudget legislation was enacted on June 30, 2016, which appropriated funds through December 31, 2016. Without a budget, the State is not authorized to payfor non-Medicaid consumers we serve. Non-Medicaid consumers from Illinois represent approximately 15% of our current total annual revenues. Ouraccounts receivable, net of allowance for doubtful accounts at December 31, 2016 increased 37.7% compared to 2015, due in part to delays from the State ofIllinois in the second half of 2016. Accounts receivable attributable to delayed payments from the Illinois Department on Aging totaled $53.0 million at theend of 2016, approximately $36.8 related to Non-Medicaid consumers and approximately $16.2 related to Medicaid consumers. Reimbursements from theState of Illinois could be further delayed due to the lack of a budget for fiscal year 2017 and because current forecasts indicate higher state deficits in the nearfuture.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 personalcare service providers. Consumers may hire family members, friends or neighbors to provide services that might otherwise be provided by a personal careservice agency provider, such as our company. Most states and the District of Columbia have implemented self-directed care programs, to varying degreesand for different types of consumers. States are under pressure from the federal government and certain advocacy groups to expand these programs. CMS hasprovided states with specific Medicaid waiver options for programs that offer person-centered planning, individual budgeting or self-directed services andsupport as part of the CMS Independence Plus initiative introduced in 2002 under an Executive Order of the President. Certain private foundations have alsogranted resources to states to develop and study programs that provide financial accounts to consumers for their long-term care needs, and counselingservices to help prepare a plan of care that will help meet those needs. Expansion of these self-directed programs may erode our Medicaid consumer base andcould adversely affect our net service revenues. 18Table of ContentsFailure to renew a significant agreement or group of related agreements may materially impact our revenue.In 2016, we derived approximately 42.1% of our net service revenues from continuing operations under agreements with the Illinois Department onAging. Each of our agreements is generally in effect for a specific term.Even 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 personal care service providers, 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 and self-directed care programs. Inaddition, certain governmental payors contract for services with multiple personal care service providers and other provider types such that our relationshipswith these payors are not exclusive. Some of our competitors may 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. These competitive advantages may limit our ability to attract and retain referrals in local markets and to increase our overall market share.In most states, there are limited barriers to entry in providing personal care services. The trend regarding these barriers is mixed; for example, Illinoischanged the way in which it procures personal care service providers in 2009, allowing, per federal Medicaid regulation, all providers that are willing andcapable to obtain state approval and provide services. However, more states have added a licensing requirement for home care services and economic changessuch as increases in minimum wage, the employer mandate under ACA, and changes in Department of Labor rules can also impact the ease of entry into amarket. These factors may affect competition in our states.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.If we fail to comply with the laws and extensive regulations governing our business, we could be subject to penalties or be required to make changes toour operations, which could negatively impact our profitability.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 providers and consumers. These requirements include matters related to: • licensure, certification and enrollment with government programs; • eligibility requirements and appropriateness of services provided necessity of care; 19Table of Contents • adequacy and quality of services; • qualifications and training of personnel; • confidentiality, maintenance, data breach, identity theft and security issues associated with health-related and personal information and medicalrecords; • environmental protection, health and safety; • relationships with physicians, other referral sources and recipients of referrals; • operating policies and procedures; • addition of facilities and services; • adequacy of documentation for services provided; • billing and coding for services; • timely and proper handling of overpayments; and • debt collection.These laws include, but are not limited to, HIPAA, HITECH, the Stark Law, the federal Anti-Kickback Statute, the federal False Claims Act and similarstate laws. While we endeavor to comply with applicable laws and regulations, we cannot assure you that our practices are fully compliant, or that courts orregulatory agencies will not interpret those laws and regulations in ways that will adversely affect our practices. Also, the laws and regulations governing ourbusiness are subject to change, interpretations may evolve or enforcement focus may shift. These changes could subject us to allegations of impropriety orillegality, require restructuring of relationships with referral sources and providers or otherwise require changes to our operations. Failure to comply withapplicable laws and regulations could lead to civil sanctions and criminal penalties, the termination of rights to participate in federal and state-sponsoredprograms, exclusion from federal healthcare programs, the suspension or revocation of licenses and nonpayment or delays in our ability to bill and collect forservices provided, any of which could adversely affect our business, results of operations, or financial results. Federal and state government agencies haveheightened and coordinated civil and criminal enforcement efforts throughout the healthcare industry.In addition, as a result of our participation in Medicaid, Medicaid waiver, Medicare programs, Veterans Health Administration programs and other stateand local governmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, compliance audits andinvestigations by governmental authorities and other third parties to verify our compliance with these programs and agreements as well as applicable laws,regulations and conditions of participation. If we fail to meet any of the conditions of participation or coverage with respect to state licensure or ourparticipation in Medicaid, Medicaid waiver, Medicare programs, Veterans Health Administration programs and other state and local governmental programs,we may receive a notice of deficiency from the applicable surveyor or authority. Failure to institute a plan of action to correct the deficiency within theperiod provided by the surveyor or authority could result in civil or criminal penalties, the imposition of fines or other sanctions, damage to our reputation,cancellation of our agreements, suspension or revocation of our licenses or disqualification from federal and state reimbursement programs. These actionsmay adversely affect our ability to provide certain services, to receive payments from other payors and to continue to operate. Further, actions taken againstone of our locations may subject our other locations to adverse consequences. We may also fail to discover all instances of noncompliance by our acquisitiontargets, which could subject us to adverse remedies once those acquisitions are complete. Any termination of one or more of our locations from any federal,state or local program for failure to satisfy such program’s conditions of participation could adversely affect our net service revenues and profitability. 20Table of ContentsWe are subject to federal and state laws that govern our employment practices, including minimum wage and local living wage ordinances. Failure tocomply with these laws, or changes to these laws that increase our employment-related expenses, could adversely impact our operations.We are required to comply with all applicable federal and state laws and regulations relating to employment, including occupational safety and healthrequirements, wage and hour requirements, employment insurance and equal employment opportunity laws. These laws can vary significantly among statesand can be highly technical. Costs and expenses related to these requirements are a significant operating expense and may increase as a result of, among otherthings, changes in federal or state laws or regulations requiring employers to provide specified benefits to employees, increases in the minimum wage 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$11,052 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.Under the ACA, each of our subsidiaries that employ employees (“EIN’s”) were required to offer a minimum level of health coverage for 95% of ourfull-time employees in 2016 or be subject to an annual penalty. Five of our EIN’s met this requirement and four did not. We are evaluating our options tominimize our exposure going forward. We could be assessed fines or penalties as a result of this matter if an employee obtains medical coverage throughfederal and state health exchanges.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, home 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). Two decisions from the United States Court for theDistrict of Columbia, handed down on December 22, 2014 and January 14, 2015, invalidated key provisions in the rule, effectively restoring the status quo inwhich home care agencies and other third party employers were able to utilize the “companionship services” exemption to the minimum wage and overtimerequirements of the Fair Labor Standards Act. However, on August 21, 2015, the United States District Court of Appeals for the District of Columbiareversed the lower court’s previous ruling and reinstated the Department of Labor’s rule to extend federal minimum wage and overtime pay protections tomost direct care workers. The rule became effective on October 13, 2015, and the Department of Labor began enforcement of the rule in November 2015. TheNational Association for Home Care and Hospice has appealed the Court of Appeals decision to the Supreme Court of the United States. The Supreme Courtrefused to grant certiorari and review the appeal. As a result the Department of Labor’s rule has become final. Historically, we did not rely on the exemption tominimum wage and overtime regulations that were eliminated by the Department of Labor. Certain acquired entities did rely on the exemption, however,beginning in November of 2015 all Addus HomeCare operations were in compliance with the new rules.A number of states also 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. 21Table of ContentsThe Department of Labor also issued a proposed rule that, among other things, would increase the minimum annual salary required for certainemployees to be classified as “exempt” from entitlement to overtime compensation under the Fair Labor Standards Act (“FLSA”) from $23,660 to $47,476.Under the proposed rule which was scheduled to go into effect on December 1, 2016, this salary level would be increased every three years and indexed to theaverage salary levels for full time employees as reported by the Bureau of Labor Statistics. If finalized in its current form, this proposed rule could increaseour costs by requiring us to pay overtime to additional employees. A number of states filed litigation against the Department of Labor seeking to block thisnew overtime rule. The federal district court judge for the Eastern District of Texas in which the case was filed issued a preliminary injunction onNovember 22, 2016, enjoining the Department of Labor from implementing and enforcing the overtime final rule. The Department of Labor has appealed thatruling and, in the meantime, the case before the district court is continuing to move forward.Our business may be adversely impacted if the ACA is repealed entirely or if provisions benefitting our operations are significantly modified as a resultof the 2016 federal elections.The 2016 federal elections have increased the likelihood that the ACA will be repealed, replaced, or significantly changed. The new presidentialadministration and certain members of Congress have stated their intent to repeal or make significant changes to the ACA, its implementation and itsinterpretation. In addition, the president signed an executive order that directs agencies to minimize “economic and regulatory burdens” of the ACA, but it isnot clear how this will be implemented. There is uncertainty regarding whether, when, and how the ACA will be changed, what alternative provisions, if any,will be enacted, and the impact of alternative provisions on providers and other healthcare industry participants. Certain provisions of the ACA, as currentlystructured, have been beneficial to our business and results of operations, including the Medicaid expansion. Government efforts to repeal or change the ACAor to implement alternative reform measures could cause our net revenues to decrease and our provision for bad debt to increase.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 ACA to make public quality measures are implemented and if our quality measures are deemed tobe not of the highest value, our reputation could be negatively affected. Negative publicity, changes in public perceptions of our services or governmentinvestigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain new agreements.Increased government scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services. Any of theseevents 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 and Illinois. Although the use of the intellectual property is required to be consistent and at least equal to the levelof 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 thePurchasers may not be operated in a manner consistent with the standards we uphold at our agencies. If such agencies do not maintain operational standardsconsistent with the standards we demand of our agencies, the image and brand reputation of Addus may suffer and our business may be materially affected. 22Table of ContentsOur 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 would place significant demands on our management team, systems, internal controls and financialand professional resources. In addition, we will need to further develop our financial controls and reporting systems to accommodate any such future growth.This could require us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate controlsystems and expanding our information technology infrastructure. Our inability to effectively manage growth could have a material adverse effect on ourfinancial 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 selectively open new locations in existing and new states. De novolocations involve risks, including those relating to accreditation, hiring new personnel, establishing relationships with referral sources and delays ordifficulty in installing our operating and information systems. We may not be successful in establishing de novo locations in a timely manner due togenerating insufficient business activity and incurring higher than projected operating cost that could have a material adverse effect on our financialcondition, results of 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, 2016 and December 31, 2015, we had cash balances of $8.0 million and $4.1 million, respectively. As of December 31, 2016, we had$24.1 million outstanding debt on our credit facility. As of December 31, 2015, we had no outstanding debt on our credit facility. After giving effect to theamount drawn on our credit facility, approximately $16.7 million of outstanding letters of credit at December 31, 2016 and 2015 and borrowing limits basedon an advanced multiple of adjusted EBITDA, we had $79.7 million and $58.2 million available for borrowing under the credit facility as of December 31,2016 and 2015, respectively. Since our credit facility provides for borrowings based on a multiple of an EBITDA ratio, any declines in our EBITDA wouldresult 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, consummating any individual acquisition with a purchase price in excess of $25.0 millionand consummating acquisitions with a total purchase price in excess of $40.0 million in the 23Table of Contentsaggregate over the term of the credit facility, without the consent of the lenders. In addition, our credit facility requires, among other things, that we are in proforma compliance with the financial covenants set forth therein and that no event of default exists before and after giving effect to any proposed acquisition.Our ability to expand in a manner consistent with historic practices may be limited if we are unable to obtain such consent from our lenders.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 healthcare 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 31,2016, approximately 66.1% of our workforce was represented by a national union, SEIU, which is our largest union. We have a national agreement with theSEIU which is currently under negotiation, as well as numerous agreements with local SEIU affiliates which are renegotiated from time to time. 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 personal care services industry exposes us to an inherent risk of wrongful death, personal injury, professional malpractice and otherpotential claims or litigation brought by our consumers and employees. Because we operate in this industry, from time to time, we are subject to claimsalleging that we did not properly treat or care for a consumer that we failed to follow internal or external procedures that resulted in death or harm 24Table of Contentsto a consumer or that our employees mistreated our consumers, resulting in death or harm. We are also subject to claims arising out of accidents involvingvehicle collisions brought by consumers whom we are transporting or from employees driving to or from home visits. As of December 31, 2016, we operatedthree adult day services centers which provide transportation for our elderly and disabled consumers. Each of our vehicles transports seven to fourteenpassengers to and from our locations. The concentration of consumers in one vehicle increases the risk of larger claims being brought against us in the eventof an accident. In order to focus on providing services to consumers in their homes, effective March 1, 2017, Addus ceased the adult day services businessesand sold substantially all of the assets used in our adult day services centers.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 federal False Claims Act or other federal andstate whistleblower statutes designed to combat fraud and abuse in our industry including the federal False Claims Act litigation discussed in Part I, Item 3hereof “Legal Proceedings.” This and other similar lawsuits can involve significant monetary awards or penalties which may not be covered by our insurance.If our third-party insurance coverage and self-insurance coverage reserves are not adequate to cover these claims, it could have a material adverse effect onour business, results of operations and financial condition. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract usfrom 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. We cannot assure you that claims will not be made in the future in excess of the limits of our insurance, and any such claims, if successful and in excess ofsuch limits, may have a material adverse effect on our business or assets. We utilize historical data to estimate our reserves for our insurance programs. Iflosses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations and financial condition could beadversely affected. Changes in our annual insurance costs and self-insured retention limits depend in large part on the insurance market, and insurancecoverage may not continue to be available 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, New York and California, increasing our exposure to blizzards and other major snowstorms, ice storms, tornadoes, floodingand earthquakes. The impact of disasters and similar events is inherently uncertain. Future inclement weather or natural disasters may adversely affect ourreputation, business and consolidated financial condition, results of operations and cash 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 25Table of Contentsprovider, McKesson, to provide continual maintenance, upgrading and enhancement of our primary information systems used for our operational needs. Thesoftware we license from McKesson supports intake, personnel scheduling, office clinical and centralized billing and receivables management in anintegrated database, enabling us to standardize the care delivered across our network of locations and monitor our performance and consumer outcomes. Tothe extent that McKesson fails to support the software or systems, or if we lose our license with McKesson, our operations could be negatively affected. Weanticipate the payroll conversion to ADP to be complete in 2017. To the extent the conversion is delayed or ADP fails to provide support services to ensurethe conversion is successfully completed, we could experience an increase in cost as well as a delay in acquisition integration. Either of these outcomes couldnegatively affect our operations.Our 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.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 main datacenter become inoperable because of a natural disaster or terrorist acts, ouroperations would failover to our geographically separate disaster recovery datacenter with a quick return to operations for all sites and systems. All of oursites and branch offices have redundant connections to our primary and backup datacenters using data lines and cellular connections through VPN or MPLS.The key business functions for our main sites also have redundancies with key functions geographically split between our two main facilities, shouldone not be available due to the above mentioned scenarios.While we believe these measures are reasonable, no system of information security is able to eliminate the risk of business disruptions.A cyber-attack or security breach could cause a loss of confidential consumer data, give rise to remediation and other expenses, expose us to liabilityunder HIPAA, consumer protection laws, common law or other legal theories, subject us to litigation and federal and state governmental inquiries,damage our reputation, and otherwise be disruptive to our business.We rely extensively on our computer systems to manage clinical and financial data, to communicate with our consumers, payors, vendors and otherthird parties, and to summarize and analyze our operating results. In spite of our policies, procedures and other security measures used to protect our computersystems and data, there can be no assurance that we will not be subject to cyber-attacks or security breaches in the future. Such attacks or breaches couldresult in loss of protected patient medical data or other information subject to privacy laws or disrupt our information technology systems or business,potentially exposing us to regulatory action, litigation and liability. We continue to prioritize cyber-security and the development of practices and controlsto protect our systems and data. We utilize sophisticated firewalls to mitigate external threats and attacks through daily security content updates andintrusion prevention policies. In addition, all email is scanned for threats and viruses as well as Domain Keys Identified Mail (DKIM) keys authentication andSender Policy Framework (SPF) records are utilized to mitigate spoofing and phishing attempts. Outgoing email is encrypted based on content and HIPAAregulations. In addition, 26Table of Contentswe are required to comply with the privacy and security laws and regulations of HIPAA as amended by HITECH. If our privacy and security practices are notin compliance with HIPAA and/or if we fail to satisfy applicable breach notification requirements in the event of a security breach, we could be subject tosignificant fines and penalties. Penalties under HIPAA can be as high as $55,910 per violation (with an annual maximum of $1,677,299 per provisionviolated) depending on the degree of culpability.Our current principal stockholders could 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 (the “Eos Funds”), together beneficially own approximately 34.0% of our outstandingcommon stock as of December 31, 2016. 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, Mark First, 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.We may be more vulnerable to the effects of a public health catastrophe than other businesses due to the nature of our consumers.The majority of our consumers are older individuals with complex medical challenges, many of whom may be more vulnerable than the general publicduring a pandemic or in a public health catastrophe. Our employees are also at greater risk of contracting contagious diseases due to their increased 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. 27Table of ContentsWe 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. We have recently changed a majority of the members of senior management,beginning with our CEO. The departure of any member of our senior management team may materially adversely 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. For example, if our market capitalization drops significantly below the amount of net equity recordedon our balance 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 partof our annual review of goodwill and intangibles, we were required to write down all or a significant part of our goodwill and/or intangible assets, our netearnings and net worth could be materially adversely affected, which could affect our flexibility to obtain additional financing. In addition, if ourassumptions used in preparing our valuations for purposes of impairment testing differ materially from actual future results, we may record impairmentcharges in the future and our financial results may be materially adversely affected. We had $73.9 million and $68.8 million of goodwill and $15.4 millionand $10.4 million of intangible assets recorded on our Consolidated Balance Sheets at December 31, 2016 and 2015, respectively.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.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 thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty forpublic companies and significantly increased the costs and risks associated with accessing the U.S. public markets. We are committed to maintaining highstandards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriateresources to comply with evolving standards, and this investment has resulted and will likely continue to result in increased general and administrativeexpenses and a diversion of management time and attention from revenue-generating activities to compliance activities. 28Table of ContentsRestrictive covenants in the agreements governing our indebtedness may adversely affect us.Our credit facility and the indentures governing our outstanding notes contain various covenants that limit our ability to take certain actions,including our ability to: • incur, assume or guarantee additional indebtedness; • issue redeemable stock and preferred stock; • repurchase capital stock; • make restricted payments, including paying dividends and making certain loans and investments; • redeem debt that is subordinated in right of payment to our outstanding notes; • create liens; • sell or otherwise dispose of assets, including capital stock of subsidiaries; • enter into agreements that restrict dividends and certain other payments from subsidiaries; • merge, consolidate, sell or otherwise dispose of substantially all our assets; • enter into transactions with affiliates; and • guarantee certain obligations.In addition, our credit facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other financial conditiontests. Our ability to meet these restrictive covenants and financial ratios and tests may be affected by events beyond our control, and we cannot assure youthat we will meet those tests.A breach of any of these covenants could result in a default under our credit facility and the indentures governing our outstanding notes. Upon theoccurrence of an event of default under our credit facility or the indentures governing our outstanding notes, all amounts outstanding under our credit facilityand our outstanding notes may become immediately due and payable and all commitments under the credit facility to extend further credit may beterminated. The acceleration of any such indebtedness will result in an event of default under all of our other long-term indebtedness.Risks Related to Our Common StockThe 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 healthcare companies. The market price of our common stock may be influenced bymany factors, including: • our operating and financial performance; • variances in our quarterly financial results compared to expectations; • the depth and liquidity of the market for our common stock; • we have a relatively small base of registered shares of common stock that could result in significant stock price movements upward or downwardbased on low levels of trading volume in our common stock; • future sales of common stock or debt or the perception that sales could occur; • investor perception of our business and our prospects; 29Table of Contents • developments relating to the occurrence of risks impacting our company, including any of the risk factors set forth herein; 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. Our credit facility restricts our ability to declare or pay any dividend or other distribution unless no default thenexists or would occur as a result thereof, we are in pro forma compliance with the financial covenants contained in the credit facility after giving effectthereto, we have an excess availability of at least 40% of the revolving credit commitment under the credit facility and the aggregate amount of dividendsand distributions paid in any fiscal year does not exceed $5.0 million.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 or certain other state laws could delay or prevent a change in control of our company, whichcould adversely affect the price of our common stock.Provisions in our amended and restated certificate of incorporation and bylaws and anti-takeover provisions of the Delaware General Corporation Law,could discourage, delay or prevent an unsolicited change in control of our company, which could adversely affect the price of our common stock. Theseprovisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of the board ofdirectors. Provisions in our amended and restated certificate of incorporation and bylaws that could delay or prevent an unsolicited change in controlinclude: • 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. 30Table of ContentsAs 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. Certain states in which we operate, such as New York, may requireregulatory approval of persons meeting such states’ definition of “controlling persons” or similar concepts, which could delay or deter a change of control orother business combination with us. ITEM 1B.UNRESOLVED STAFF COMMENTSNone. ITEM 2.PROPERTIESWe do not own any real property. As of December 31, 2016, we operated at 120 leased properties including our support centers. Personal care and adultday services are operated out of 114 of these facilities. As part of the sale of the Home Health Business, a portion of 5 of the facilities are currently subleasedto the Purchasers. We lease approximately 59,000 and 12,000 square feet of office space in Downers Grove, Illinois and Frisco, Texas which together serve asour corporate headquarters. In 2016, the contact center contained within the Downers Grove corporate headquarters closed. As a result, approximately 21,000square feet of the office space in Downers Grove is unused and related lease payments are included in restructuring and other expenses. ITEM 3.LEGAL PROCEEDINGSFrom time to time, we are subject to legal and/or administrative proceedings incidental to our business. It is the opinion of management that theoutcome of pending legal and/or administrative proceedings will not have a material effect on our financial position and results of operations.On January 20, 2016, we were served with a lawsuit that was filed in the United States District Court for the Northern District of Illinois against theCompany and Cigna Corporation by Stop Illinois Marketing Fraud, LLC, a qui tam relator formed for the purpose of bringing this action. In the action, theplaintiff alleges, inter alia, violations of the federal False Claims Act relating primarily to allegations of violations of the federal Anti-Kickback Statute andallegedly improper referrals of patients from our home care division to our home health business, substantially all of which was sold in 2013. The plaintiffseeks to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and its attorneys’ fees. The U.S.government has declined to intervene at this time. Plaintiff amended its complaint on April 4, 2016 to include additional allegations in support of its FalseClaims Act claims, including alleged violations of the federal Anti-Kickback Statute. We and Cigna Corporation filed a motion to dismiss the amendedcomplaint on June 6, 2016. Plaintiff filed its opposition to our motion on July 22, 2016. Our reply in further support of the motion to dismiss was filed onAugust 23, 2016. On February 3, 2017, the Court granted Cigna Corporation’s motion to dismiss in full, and granted our motion to dismiss in part allowingPlaintiff another chance to amend its complaint. Plaintiff timely filed a second amended complaint on March 10, 2017, withdrawing its conspiracy claimunder the Federal False Claims Act and adding an explicit claim under the Illinois False Claims Act for the same underlying kickback allegations. We intendto continue to defend the litigation vigorously and believe the case will not have a material adverse effect on our business, financial condition or results ofoperations.On May 4, 2016, Addus HealthCare, together with 59 other social service and healthcare providers in the State of Illinois, filed an action in the CircuitCourt of Cook County, Illinois against certain individuals in their official capacities as agents of the Illinois Department of Human Services, the IllinoisDepartment on Aging, the 31Table of ContentsIllinois Department of Public Health, the Illinois Department of HealthCare and Family Services, the Illinois Criminal Justice Information Authority, theIllinois Department of Corrections and the Illinois Department of Central Management Services, including the Governor of Illinois. On July 20, 2016, a thirdamended complaint was filed by the plaintiffs, who now comprise 97 similarly situated providers and provider organizations. In the action, the plaintiffs,including Addus HealthCare, allege to have entered into contracts with the various defendants based in part on the Governor’s proposed budget, whichprovided for funding for the services to be provided by plaintiffs thereunder. The Governor subsequently vetoed all of the relevant appropriations bills onJune 25, 2015, and again vetoed an appropriations bill that included funding for the contracts on June 10, 2016. While the defendant officer and agencyheads have continued to enforce such contracts, since August 1, 2016, we received an aggregate of approximately $65.4 million in payments from the Stateof Illinois from the stopgap budget enacted on June 30, 2016. In those actions, plaintiffs alleged the defendant officers and agency heads acted beyond thescope of their legal authority in entering into and enforcing contracts with no intent to perform under such contracts by failing to pay amounts duethereunder when due. The action also alleged that theGovernor of Illinois’ veto of appropriations for such contracts violated the Illinois Constitution. Plaintiffs sought injunctive relief to require payment ofoverdue bills to prevent irreparable harm, including imperiling the State’s infrastructure for delivery of human services. On August 31, 2016, the Courtdenied plaintiffs’ petitions for declaratory and injunctive relief and dismissed the actions with prejudice. Plaintiffs timely filed a notice of appeal onSeptember 30, 2016. ITEM 4.MINE SAFETY DISCLOSURESNot applicable. 32Table 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 2016 Fourth Quarter $36.30 $24.40 Third Quarter 27.43 17.35 Second Quarter 21.60 16.55 First Quarter 24.86 15.33 2015 Fourth Quarter $38.08 $18.75 Third Quarter 35.83 25.00 Second Quarter 29.19 22.86 First Quarter 24.68 20.64 HoldersAs of December 31, 2016, 37.6% of our shares were held by Company insiders. An additional 60.5% of the stock was held by 172 institutionalinvestors. As of February 17, 2017, Addus HomeCare Corporation had approximately 2,400 shareholders, including 18 shareholders of record.DividendsWe have never paid dividends on our common stock, including in the two most recent fiscal years, and we do not intend to pay any dividends on ourcommon stock in the foreseeable future. We currently plan to retain any earnings to support the operation, and to finance the growth, of our business ratherthan to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, capital requirements, credit facilitylimitations, earnings, as well as other factors deemed relevant by our board of directors. Our credit facility restricts our ability to declare or pay any dividendor other distribution unless no default then exists or would occur as a result thereof, we are in pro forma compliance with the financial covenants contained inthe credit facility after giving effect thereto, we have an excess availability of at least 40% of the revolving credit commitment under the credit facility andthe aggregate amount of dividends and distributions paid in any fiscal year does not exceed $5.0 million. 33Table of ContentsEquity Compensation PlanThe following table presents securities authorized for issuance under our equity compensation plans at December 31, 2016. Plan Category Number ofSecurities to beIssued UponExercise ofOutstandingOptions, Warrantsand Rights (1) Weighted-AverageExercise Price ofOutstandingOptions, Warrantsand Rights (2) Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (ExcludingSecurities Reflected inthe First Column) (3) Equity Compensation Plans Approved by Security Holders 404,757 $19.71 598,442 Equity Compensation Plans Not Approved by Security Holders — — — Total 404,757 $19.71 598,442 (1)Includes grants of stock options. (2)Includes weighted-average exercise price of outstanding stock options only. (3)Represents shares of common stock that may be issued pursuant to our 2009 stock incentive plan (the “2009 Plan”). 34Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following table sets forth selected financial information derived from our Consolidated Financial Statements for the periods and at the 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, 2016 2015 2014 2013 2012 (Amounts In Thousands, Except Per Share Data) Consolidated Statements of Income Data: Net service revenues (1) $400,688 $336,815 $312,942 $265,941 $244,315 Cost of service revenues 294,593 245,492 229,207 198,202 180,264 Gross profit 106,095 91,323 83,735 67,739 64,051 General and administrative expenses 84,213 70,452 61,834 50,118 46,362 Revaluation of contingent consideration — 130 — — — Gain on sale of agency — — — — (495) Depreciation and amortization 6,647 4,717 3,830 2,160 2,521 Total operating expenses 90,860 75,299 65,664 52,278 48,388 Operating income from continuing operations 15,235 16,024 18,071 15,461 15,663 Interest income (2) (2,812) (47) (18) (188) (155) Interest expense 2,332 786 698 674 1,723 Total interest (income) expense, net (480) 739 680 486 1,568 Other income 206 — — — — Income from continuing operations before income taxes 15,921 15,285 17,391 14,975 14,095 Income tax expense 3,994 3,932 5,428 3,812 4,807 Net income from continuing operations 11,927 11,353 11,963 11,163 9,288 Discontinued Operations Net income (loss) from Home Health Business (3) 97 270 280 (980) (1,653) Gain on sale of Home Health Business, net of tax — — — 8,962 — Earnings (losses) from discontinued operations 97 270 280 7,982 (1,653) Net income $12,024 $11,623 $12,243 $19,145 $7,635 Basic income (loss) per common share: Continuing operations $1.05 $1.03 $1.10 $1.03 $0.86 Discontinued operations 0.01 0.03 0.02 0.74 (0.15) Basic income per common share: $1.06 $1.06 $1.12 $1.77 $0.71 Diluted income (loss) per common share: Continuing operations $1.05 $1.02 $1.08 $1.01 $0.86 Discontinued operations 0.01 0.02 0.02 0.72 (0.15) Diluted income per common share: $1.06 $1.04 $1.10 $1.73 $0.71 Weighted average number of common shares and potential common shares outstanding: Basic 11,292 10,986 10,900 10,826 10,764 Diluted 11,349 11,189 11,114 11,075 10,784 35Table of Contents For the Years Ended December 31, 2016 2015 2014 2013 2012 (Actual Numbers, Except Adjusted EBITDA and Billable Hoursin Thousands) Key Metrics : General: Adjusted EBITDA (4) $32,094 $23,627 $23,759 $18,796 $18,525 States served at period end 24 22 22 21 19 Locations at period end 114 119 129 121 96 Employees at period end 23,070 21,395 18,054 16,585 13,836 Operational Data: Average billable census 33,944 32,756 31,019 26,802 25,104 Billable hours 23,088 19,556 18,335 15,621 14,388 Average billable hours per census per month 57 50 49 49 48 Billable hours per business day 88,460 75,214 71,903 59,850 55,126 Revenues per billable hour $17.35 $17.22 $17.07 $17.02 $16.98 Percentage of Revenues by Payor: State, local and other governmental programs 71% 78% 87% 94% 95% Managed care organizations 26 18 9 1 — Private pay 2 3 3 4 4 Commercial insurance 1 1 1 1 1 As of December 31, 2016 2015 2014 2013 2012 (Amounts In Thousands) Consolidated Balance Sheet Data: Cash $8,013 $4,104 $13,363 $15,565 $1,737 Accounts receivable, net of allowances 116,999 84,959 68,333 61,354 71,303 Goodwill and intangibles 89,319 79,195 74,567 68,788 56,906 Total assets 231,030 185,797 180,803 163,934 149,857 Capital lease obligations 2,433 2,991 3,663 — — Term loan, net of debt issuance costs 22,580 — — — 16,458 Stockholders’ equity 158,928 141,726 127,956 113,856 94,417 (1)Acquisitions completed in 2016 accounted for $52.7 million of growth in net service revenues from continuing operations for the year endedDecember 31, 2016. Acquisitions completed in 2015 accounted for $11.6 million and $9.7 million of growth in net service revenues from continuingoperations for the years ended December 31, 2016 and 2015, respectively. Acquisitions completed in 2014 accounted for $8.8 million, $10.7 millionand $7.5 million of growth in net service revenues from continuing operations for the years ended December 31, 2016, 2015 and 2014, respectively.Acquisitions completed in 2013 accounted for $25.8 million, $24.6 million, $21.9 million and $1.7 million of growth in net service revenues fromcontinuing operations for the years ended December 31, 2016, 2015, 2014 and 2013, respectively. (2)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 $2.8 million in prompt payment interest income for the year ended December 31, 2016,no prompt payment interest income for the years ended December 31, 2015 and 2014 and $0.2 million and $0.2 million for the years endedDecember 31, 2013 and 2012, respectively. 36Table of Contents(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. (4)We define Adjusted EBITDA as earnings before discontinued operations, interest expense, other non-operating income, taxes, depreciation,amortization, stock-based compensation expense, M&A expense restructuring charges and severance and other costs. Adjusted EBITDA is aperformance measure used by management that is not calculated in accordance with generally accepted accounting principles in the United States(“GAAP”). It should not be considered in isolation or as a substitute for net income, operating income or any other measure of financial performancecalculated in accordance with GAAP.Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating our operating performance for the followingreasons: • By reporting Adjusted EBITDA, we believe that we provide investors with insight and consistency in our financial reporting and present a basisfor comparison of our business operations between current, past and future periods. Adjusted EBITDA allows management, investors and othersto evaluate and compare our core operating results, including return on capital and operating efficiencies, from period to period, by removing theimpact of our capital structure (interest expense), asset base (amortization and depreciation), tax consequences, stock-based compensationexpense, M&A expense, restructuring charges and severance and other costs from our results of operations. • We believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance ofother public companies, and therefore may be useful as a means of comparison with those companies, when viewed in conjunction withtraditional GAAP financial measures. • We recorded stock-based compensation expense of $1.1 million, $1.6 million, $0.8 million, $0.5 million and $0.3 million for the years endedDecember 31, 2016, 2015, 2014, 2013 and 2012, respectively. By comparing our Adjusted EBITDA in different periods, our investors canevaluate our operating results without stock-based compensation expense, which is a non-cash expense that is not a key measure of ouroperations.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 personal care services 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; 37Table of Contents • 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; • Adjusted EBITDA does not reflect interest expense or interest income; • Adjusted EBITDA does not reflect other non-operating income from our investment in joint venture; • 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 stock based compensation; and • Adjusted EBITDA does not reflect any restructure charges; • Adjusted EBITDA does not reflect any severance and other costs; • Adjusted EBITDA does not reflect any IRS accrual adjustments; • 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. 38Table of ContentsThe following table sets forth a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA: Year Ended December 31, 2016 2015 2014 2013 2012 (Amounts In Thousands) Reconciliation of Adjusted EBITDA to net income (loss): Net income (loss) $12,024 $11,623 $12,243 $19,145 $7,635 Less: (Earnings) loss from discontinued operations, net of tax (97) (270) (280) (7,982) 1,653 Net income from continuing operations 11,927 11,353 11,963 11,163 9,288 Interest (income) expense, net (480) 739 680 486 1,568 Other non-operating income (206) — — — — Income tax expense from continuing operations 3,994 3,932 5,428 3,812 4,807 Depreciation and amortization 6,647 4,717 3,830 2,160 2,521 M&A expenses 1,122 1,013 1,031 660 — Stock-based compensation expense 1,072 1,573 827 515 341 Restructuring charges 4,787 — — — — Severance and other costs 3,231 — — — — IRS accrual — 300 — — — Adjusted EBITDA (1) $32,094 $23,627 $23,759 $18,796 $18,525 (1)The selected historical Consolidated Statements of Income data for the fiscal years ended December 31, 2016, 2015, 2014, 2013 and 2012, were derived from our audited Consolidated Financial Statementsincluded in the Annual Report on Form 10-K for the applicable year. 39Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion together with our Consolidated Financial Statements and the related notes included elsewhere in thisAnnual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differmaterially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-Kand other risks.OverviewWe operate as one business segment and are a provider of comprehensive personal care services, which are principally provided in the home. Ourpersonal care services provide assistance with activities of daily living. Our consumers are primarily persons who are at risk of hospitalization orinstitutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmental agencies, managed careorganizations, commercial insurers and private individuals. As of December 31, 2016, we provided personal care services to over 33,000 consumers through114 locations across 24 states, including three adult day services centers in Illinois. For the years ended December 31, 2016, 2015 and 2014, we servedapproximately 50,000, 48,000, and 43,000 discrete consumers, respectively.A summary of our financial results for 2016, 2015 and 2014 is provided in the table below: For the Years Ended December 31, 2016 2015 2014 (Amounts in Thousands) Net service revenues – continuing operations $400,688 $336,815 $312,942 Net service revenues – discontinued operations — — — Net income from continuing operations 11,927 11,353 11,963 Earnings from discontinued operations 97 270 280 Net income $12,024 $11,623 $12,243 Total assets $231,030 $185,797 $180,803 Our services are predominantly provided in the home under agreements with state and local government agencies. Our consumers are predominately“dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. The federal government permits states to initiate dual eligibledemonstration programs and other managed Medicaid initiatives designed to coordinate the services provided through Medicare and Medicaid, with theoverall objective of improving care quality and reducing costs. States are increasingly implementing managed care programs to deliver care for Medicaidenrollees. Managed care organizations have an economic incentive to better manage the healthcare expenditures of their membership, and therefore seek toprovide care in a more cost-effective setting, such as a patient’s home. Managed care revenues account for 26.1%, 18.3% and 9.1% of our revenue mix for2016, 2015 and 2014, respectively.The personal care services we provide include assistance with bathing, grooming, oral care, skincare, assistance with feeding and dressing, medicationreminders, meal planning and preparation, housekeeping and transportation services and other activities of daily living. We provide these non-medicalservices on a long-term, continuous basis, with an average duration of approximately 26 months per consumer.Our model is designed to improve consumer outcomes and satisfaction, as well as lower the cost of acute care treatment and reduce serviceduplication. We believe our model to be especially valuable to managed care organizations that have economic responsibility for both personal care servicesas well as acute care expenditures. Over the long term, we believe our model will be a differentiator and as a result we expect to receive increased referralsfrom managed care organizations. 40Table of ContentsWe utilize home care aides to observe and report changes in the condition of our consumers for the purpose of early intervention in the disease process,with the goal of reducing the cost of medical services by preventing unnecessary emergency room visits and/or hospital admissions and re-admissions. Wecoordinate the services provided by our team with those of other healthcare agencies as appropriate. Changes in consumers’ conditions are evaluated byappropriately trained managers and may result in the condition being reported to the consumers’ case manager at the managed care organization or otherpayor, in some cases to the consumers’ primary care physicians for treatment or other follow-up. We believe this approach to the care of our consumers andthe integration of our services into the broader healthcare continuum are attractive to managed care organizations and other payors who are ultimatelyresponsible for the healthcare needs and costs of our consumers.We utilize IVR systems and smart phone applications to communicate with the home care aides. Through these technologies we are able to identifychanges in health conditions with automated alerts forwarded to an appropriate manager for triage and evaluation. In addition, we use the technology torecord basic transaction information about each visit, record start and end times for a scheduled shift, track mileage reimbursement, text messages to the homecare aide and communicate basic payroll information.In addition to our focus on organic growth, we have been growing through selective acquisitions, which have expanded our presence in currentmarkets or which have facilitated our entry into new markets where the personal care business has been moving to managed care organizations. Wecompleted seven acquisitions during the period from December 2013 through December 2016.Effective March 1, 2013, we sold substantially all of the assets used in our Home Health Business in Arkansas, Nevada and South Carolina, and 90% ofthe Home Health Business in California and Illinois, to the Purchasers for a cash purchase price of approximately $20.0 million. We retained a 10%ownership interest in the Home Health Business in California and Illinois. The assets sold included 19 home health agencies and two hospice agencies in fivestates. On December 30, 2013, we sold one home health agency in Pennsylvania for approximately $0.2 million. The results of the Home Health Businesssold are reflected as discontinued operations for all periods presented herein. Following the sale of the Home Health Business, we have managed andinternally reported our business in one segment. We maintain licensure as a home health agency in Delaware and, in order to provide personal care services inthe state, provide limited home health services reimbursable by Medicare. Until ceasing business in the State of Indiana in August 2015, we also providedlimited home health services reimbursable by Medicare in order to comply with regulatory requirements that personal care services be provided by a licensedhome health agency. Priority Home Health Care, located in Ohio, also maintains enrollment in but does not derive significant revenues from Medicare.BusinessThe 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, 2016, we provided ourpersonal care services through 114 locations across 24 states, including three adult day services centers in Illinois. In order to focus on providing services toconsumers in their homes, effective March 1, 2017, Addus ceased the adult day services businesses and sold substantially all of the assets used in our adultday services centers.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 areexperiencing a further transition of business from government payors to managed care organizations with which we are seeking to grow our business givenour emphasis on coordinated care and the prevention of the need for acute care. Managed care organizations are commercial insurance carriers that are undercontract with various federal and state governmental agencies to provide and manage a full continuum of care. 41Table of ContentsFor the years ended December 31, 2016, 2015 and 2014, our payor revenue mix for continuing operations was: Year Ended December 31, 2016 2015 2014 State, local and other governmental programs 70.4% 77.7% 86.4% Managed care organizations 26.1 18.3 9.1 Private pay 2.4 3.0 3.4 Commercial insurance 1.1 1.0 1.1 100.0% 100.0% 100.0% We derive a significant amount of our net service revenues from our continuing operations in Illinois, which represented 53.6%, 59.5% and 60.6% ofour total net service revenues from continuing operations for the years ended December 31, 2016, 2015 and 2014, 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 42.1%, 48.8% and 53.2% of our total net service revenues from continuing operations for the years ended December 31, 2016, 2015 and2014, respectively.The State of Illinois’ payments have been delayed in the past and may continue to be delayed due to a budget impasse that began in 2015. The State ofIllinois did not adopt a comprehensive budget for fiscal year 2016, which ended on June 30, 2016, and it has not yet adopted a comprehensive budget forfiscal year 2017, which began on July 1, 2016. Stopgap budget legislation was enacted on June 30, 2016, which appropriated funds through December 31,2016. Without a budget, the State is not authorized to pay for non-Medicaid consumers we served. Non-Medicaid consumers from Illinois representapproximately 15% of our current total annual revenues. Our accounts receivable, net of allowance for doubtful accounts at December 31, 2016 increased37.7% compared to 2015, due in part to delays from the State of Illinois in the second half of 2016. Accounts receivable attributable to delayed paymentsfrom the Illinois Department on Aging totaled $53.0 million at the end of 2016, approximately $36.8 million thereof related to Non-Medicaid consumers andapproximately $16.2 related to Medicaid consumers. Reimbursements from the State of Illinois could be further delayed due to the lack of a budget for fiscalyear 2017 and because current forecasts indicate higher state deficits in the near future.We measure the performance of our business using a number of different metrics, including billable hours, billable hours per business day, revenues perbillable hour and the number of consumers, or census.In 2016, the increase in managed care organization revenue was mainly attributable to the South Shore acquisition.Components of our Statements of IncomeNet Service RevenuesWe generate net service revenues from continuing operations by providing our services directly to consumers and primarily on an hourly basis. Wereceive payment for providing such services from our payor clients, including federal, state and local governmental agencies, managed care organizations,commercial insurers and private consumers. Net service revenues from continuing operations are principally provided based on authorized hours, determinedby the relevant agency, at an hourly rate which is either contractual or fixed by legislation and are recognized at the time services are rendered. 42Table of ContentsCost 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 our employees.Employees are also reimbursed for their travel time and related travel costs.General and Administrative ExpensesOur general and administrative expenses from continuing operations include our costs for operating our network of local agencies and ouradministrative offices.Our agency expenses from continuing operations consist of costs for supervisory personnel, our community care supervisors and office administrativecosts. Personnel costs include wages, payroll taxes, and employee benefits. Facility costs including rents, utilities, postage, telephone and office expenses.Our support center and executive office includes costs for accounting, information systems, human resources, billing and collections, contracting, marketingand executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accountingand other professional fees, travel, general insurance, rents and related facility costs.During 2016, the Company took steps to streamline and simplify its operations. The expenses recorded for the year ended December 31, 2016 includedcosts related to terminated employees and other direct costs associated with implementing these initiatives. Other direct costs included contract terminationcosts, accelerated depreciation and asset write-offs. The Company incurred total pretax expenses related to these streamlining initiatives of approximately$8.0 million during the year ended December 31, 2016, which is included in general and administrative expenses on the Consolidated Statements of Income.The Company expects some additional restructuring and other costs to occur, however, the amount and timing cannot be determined at this time.Depreciation and Amortization ExpensesWe amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks, state licenses and non-compete agreements, principally using accelerated methods based upon their estimated useful lives. Depreciable assets consist principally of furniture andequipment, network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortizedon a straight-line method over their useful lives or, if less and if applicable, their lease terms.Interest IncomeIllinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 incomefrom continuing operations is recognized when received. For the year ended December 31, 2016, we received $2.8 million in prompt payment interest. Forthe years ended December 31, 2015 and 2014 we did not earn or receive any prompt payment interest.Interest ExpenseInterest expense from continuing operations consists of interest costs on our credit facility, capital lease obligations and other debt instruments and isreported in the statement of income when incurred. 43Table of ContentsOther IncomeFor the year ended December 31, 2016, other income from continuing operations of $0.2 million consists of income distributions received from thecost method investment in joint venture. No distributions were received during the years ended December 31, 2015 or 2014. We account for this income inaccordance with ASC Topic 325, “Investments—Other.” We recognize the net accumulated earnings only to the extent distributed by the joint venture on thedate received.Income Tax ExpenseAll of our income is from domestic sources. We incur state and local taxes in states in which we operate. For 2016 and 2015, our federal statutory rateswere 35.0% and 34.5%, respectively. The effective income tax rates were 25.2% and 26.1% for 2016 and 2015, respectively. The difference between federalstatutory and effective income tax rates was principally due to the inclusion of state taxes and the use of federal employment tax credits that lower oureffective tax rate.Discontinued OperationsDiscontinued operations consists of the reduction of the indemnification reserve, net of tax for our Home Health Business that was sold effectiveMarch 1, 2013 and the results of operations for an agency in Pennsylvania that was sold on December 30, 2013. 44Table of ContentsResults of OperationsYear Ended December 31, 2016 Compared to Year Ended December 31, 2015The following table sets forth, for the periods indicated, our consolidated results of operations. 2016 2015 Change Amount Net ServiceRevenues Amount Net ServiceRevenues Amount % (Amounts In Thousands, Except Percentages) Net service revenues $400,688 100.0% $336,815 100.0% $63,873 19.0% Cost of service revenues 294,593 73.5 245,492 72.9 49,101 20.0 Gross profit 106,095 26.5 91,323 27.1 14,772 16.2 General and administrative expenses 84,213 21.0 70,452 20.9 13,761 19.5 Revaluation of contingent consideration — — 130 — (130) (100.0) Depreciation and amortization 6,647 1.7 4,717 1.4 1,930 40.9 Total operating expenses 90,860 22.7 75,299 22.4 15,561 20.7 Operating income from continuing operations 15,235 3.8 16,024 4.8 (789) (4.9) Interest income (2,812) (0.7) (47) — (2,765) 5,883.0 Interest expense 2,332 0.6 786 0.2 1,546 196.7 Total interest (income) expense, net (480) (0.1) 739 0.2 (1,219) (165.0) Other income 206 0.1 — 0.2 206 Income from continuing operations before income taxes 15,921 4.0 15,285 4.5 636 4.2 Income tax expense 3,994 1.0 3,932 1.2 62 1.6 Net income from continuing operations 11,927 3.0 11,353 3.4 574 5.1 Discontinued operations: Earnings from Home Health Business, net of tax 97 — 270 0.1 (173) (64.1) Net income $12,024 3.0% $11,623 3.5% $401 3.5% Business Metrics (Actual Numbers, Except Billable Hours inThousands) Average billable census 33,944 32,756 1,188 3.6% Billable hours 23,088 19,556 3,532 18.1 Average billable hours per census per month 57 50 7 14.0 Billable hours per business day 88,460 75,214 13,246 17.6 Revenues per billable hour $17.35 $17.22 $0.13 0.8% (1)Average billable census is the number of unique clients receiving a billable service during a period. (2)Billable hours is the total number of hours served to clients during a period.Net service revenues from state, local and other governmental programs accounted for 70.4% and 77.7% of net service revenues for 2016 and 2015,respectively. Managed care organizations accounted for 26.1% and 18.3% of net service revenues in 2016 and 2015 respectively, with private andcommercial payors accounting for the remainder of net service revenues. A significant amount of our net service revenues in 2016 and 2015 were derivedfrom one payor client, Illinois Department on Aging, which accounted for 42.1% and 48.8% respectively, of our total net service revenues from continuingoperations. 45(1)(2)Table of ContentsNet service revenues increased $63.9 million, or 19.0%, to $400.7 million for 2016 compared to $336.8 million for 2015. The increase was primarilydue to the South Shore acquisition contributing net service revenues of $51.7 million in 2016 and a 3.6% increase in average billable census and a 0.8%increase in revenues per billable hour.Gross profit, expressed as a percentage of net service revenues, decreased to 26.5% for 2016, from 27.1% in 2015. The decrease was primarily due to theSouth Shore acquisition which is a lower margin business.General and administrative expenses, expressed as a percentage of net service revenues increased to 21.0% for 2016, from 20.9% in 2015. General andadministrative expenses increased to $84.2 million in 2016 as compared to $70.5 million in 2015. The increase in general and administrative expenses forthe years ended December 31, 2016 as compared to 2015 was primarily due to the following: • $4.8 million charge for lease commitments, a write-off of unamortized leasehold improvements, an equipment write-off resulting from the closureof three adult day services centers in Illinois during the third quarter of 2016, a write-off for unused contact center office space and a write-offrelated to the discontinued use of internally developed software and fees for the termination of various contracts with certain outside vendors. • $3.2 million severance expense was taken for terminated employees with employment and/or separation agreements. • $3.1 million increase in bad debt expense and a • $4.5 million increase in administrative employee wages, taxes and benefit costs, offset by a $1.2 million decrease in temporary office personnelexpense.Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.7% from 1.4 % for the year ended December 31, 2016and 2015, respectively. Amortization of intangibles, which are amortized using straight-line and accelerated methods, based upon the estimated useful livesof the respective assets, which range from two to twenty five years, totaled $4.9 million and $3.0 million for the years ended December 31, 2016 and 2015,respectively.Interest IncomeIllinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 isrecognized when received and reported in the income statement caption, “interest income.” For the year ended December 31, 2016 we received $2.8 millionin prompt payment interest. For the year ended December 31, 2015, we did not earn or receive any prompt payment interest.Interest ExpenseInterest expense increased to $2.3 million from $0.8 million for the year ended December 31, 2016 as compared to December 31, 2015. The increasewas primarily the result of draws on the senior credit facility of $52.0 million during 2016. See Note 7 to the Notes to Consolidated Financial Statements foradditional information.Other IncomeFor the year ended December 31, 2016, other income from continuing operations of $0.2 million consists of income distributions received from thecost method investment in joint venture. No distributions were received during the years ended December 31, 2015. We account for this income inaccordance with ASC Topic 325, “Investments—Other.” We recognize the net accumulated earnings only to the extent distributed by the joint venture on thedate received. 46Table of ContentsIncome Tax ExpenseAll of our income is from domestic sources. We incur state and local taxes in states in which we operate. For the years ended December 31, 2016 and2015 our federal statutory rate was 35.0% and 34.5%, respectively. The effective income tax rate was 25.2% and 26.1% for the years ended December 31,2016 and 2015, respectively. The difference between our federal statutory and effective income tax rates are principally due to the inclusion of state taxesand the use of federal employment tax credits that lower our effective tax rate.Discontinued OperationsEffective March 1, 2013, we sold substantially all of the assets used in our Home Health Business as described in Part I, Item 1. Therefore, we havesegregated the Home Health Business operating results and presented them separately as discontinued operations for all periods presented (see Note 2—“Discontinued Operations” to the Notes to the Consolidated Financial Statements included elsewhere herein).The table below summarizes the results of discontinued operations. 2016 2015 (Amounts In Thousands) Net service revenues $— $— Cost of service revenues — — Gross profit — — General and administrative expenses (163) (448) Depreciation and amortization — — Operating income from discontinued operations 163 448 Income tax 66 178 Earnings from discontinued operations $97 $270 No revenues were recorded for the year ended December 31, 2016 or 2015 related to the Home Health Business due to the sale of the business. For theyear ended December 31, 2016 and 2015, the earnings from discontinued operations represented our reduction of the Medicare indemnification reserve forthe Home Health Business sold for periods no longer subject to audit. As of December 31, 2016, the Company, using its best judgment, has estimated a totalof $0.4 million for billing adjustments for 2013, 2012 and 2011 which may be subject to Medicare audits. 47Table of ContentsResults of OperationsYear Ended December 31, 2015 Compared to Year Ended December 31, 2014The following table sets forth, for the periods indicated, our consolidated results of operations. 2015 2014 Change Amount Net ServiceRevenues Amount Net ServiceRevenues Amount % (Amounts In Thousands, Except Percentages) Net service revenues $336,815 100.0% $312,942 100.0% $23,873 7.6% Cost of service revenues 245,492 72.9 229,207 73.2 16,285 7.1 Gross profit 91,323 27.1 83,735 26.8 7,588 9.1 General and administrative expenses 70,452 21.0 61,834 19.8 8,618 13.9 Revaluation of contingent consideration 130 0.0 — 0.0 130 0.0 Depreciation and amortization 4,717 1.4 3,830 1.2 887 23.2 Total operating expenses 75,299 22.4 65,664 21.0 9,635 14.7 Operating income from continuing operations 16,024 4.8 18,071 5.8 (2,047) (11.3) Interest income (47) — (18) — (29) 161.1 Interest expense 786 0.2 698 0.2 88 12.6 Total interest expense, net 739 0.2 680 0.2 59 8.7 Income from continuing operations before income taxes 15,285 4.5 17,391 5.6 (2,106) (12.1) Income tax expense 3,932 1.2 5,428 1.7 (1,496) (27.6) Net income from continuing operations 11,353 3.4 11,963 3.8 (610) (5.1) Discontinued operations: Earnings from Home Health Business, net of tax 270 0.1 280 0.1 (10) (3.6) Net income $11,623 3.5% $12,243 3.9% $(620) (5.1)%Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Average billable census (1) 32,755 31,019 1,736 5.6% Billable hours (2) 19,556 18,335 1,221 6.7 Average billable hours per census per month 50 49 1 2.0 Billable hours per business day 76,390 71,903 4,487 6.2 Revenues per billable hour $17.22 $17.07 $0.15 0.9% (1)Average billable census is the number of unique clients receiving a billable service during a period. (2)Billable hours is the total number of hours served to clients during a period.Net service revenues from state, local and other governmental programs accounted for 77.7% and 86.4% of net service revenues for 2015 and 2014,respectively. Managed care organizations accounted for 18.3% and 9.1% of net service revenues in 2015 and 2014 respectively, with private and commercialpayors accounting for the remainder of net service revenues. A significant amount of our net service revenues in 2015 and 2014 were derived from one payorclient, Illinois Department on Aging, which accounted for 48.8% and 53.2% respectively, of our total net service revenues from continuing operations.Net service revenues increased $23.9 million, or 7.6%, to $336.8 million for 2015 compared to $312.9 million for 2014. The increase was primarily dueto a 5.6% increase in average billable census and a 0.9% increase in revenues per billable hour.Gross profit, expressed as a percentage of net service revenues, increased to 27.1% for 2015, from 26.8% in 2014. The increase was primarily due toimproved workers’ compensation experience. 48Table of ContentsGeneral and administrative expenses, expressed as a percentage of net service revenues increased to 21.0% for 2015, from 19.8% in 2014. General andadministrative expenses increased to $70.5 million in 2015 as compared to $61.8 million in 2014. The increase in general and administrative expenses ascompared to 2014 was due to an increase in costs related to wages, payroll taxes, stock compensation expenses, and increased expenditures related to legal,consulting, temporary office personnel and the ongoing installation of our new human resources and payroll information system for the year endedDecember 31, 2015.Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.4 % from 1.2 % for the year ended December 31, 2015and 2014, respectively. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $3.0 million and $2.4 million for theyears ended December 31, 2015 and 2014, respectively.Interest IncomeIllinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 isrecognized when received and reported in the income statement caption, “interest income.” We did not receive or earn any prompt payment interest in 2015and 2014 and $0.2 million in 2013.Interest Expense, NetInterest expense, net, increased to $0.7 million from $0.7 million for the year ended December 31, 2015 as compared to December 31, 2014. Theincrease was primarily as a result of the capital lease agreements entered into on July 12, 2014, September 11, 2014 and April 13, 2015 and interest on thenew senior credit facility entered into on November 10, 2015, as described in Note 7 to the Consolidated Financial Statements.Income Tax ExpenseOur effective tax rates from continuing operations for 2015 and 2014 were 26.1% and 31.2%, respectively. The principal difference between the federaland state statutory rates and our effective tax rate is the use of federal employment opportunity tax credits.Discontinued OperationsEffective March 1, 2013, we sold substantially all of the assets used in our Home Health Business as described in Part I, Item 1. Therefore, we havesegregated the Home Health Business operating results and presented them separately as discontinued operations for all periods presented (see Note 2—“Discontinued Operations” to the Notes to the Consolidated Financial Statements included elsewhere herein).The table below summarizes the results of discontinued operations. 2015 2014 (Amounts In Thousands) Net service revenues $— $— Cost of service revenues — — Gross profit — — General and administrative expenses (448) (470)Depreciation and amortization — — Operating income from discontinued operations 448 470 Income tax 178 190 Earnings from discontinued operations $270 $280 49Table of ContentsNo revenues were recorded for the year ended December 31, 2015 or 2014 related to the Home Health Business due to the sale of the business. For theyear ended December 31, 2015, the earnings from discontinued operations represents our reduction of the Medicare indemnification reserve for the HomeHealth Business sold for periods no longer subject to audit. We retained the working capital of our Home Health Business when it was sold. The earningsfrom discontinued operations for the year ended December 31, 2014 represents the final settlement of previously estimated working capital amounts.Liquidity and Capital ResourcesOur primary sources of liquidity are cash from operations and borrowings under our credit facility. We entered into an amendment to our credit facilityon the terms described below on May 24, 2016. At December 31, 2016 and 2015, we had cash balances of $8.0 million and $4.1 million, respectively.As of December 31, 2016, we had a total of $24.1 million outstanding on our credit facility. As of December 31, 2015, we had no balances outstandingon our credit facility. After giving effect to the amount drawn on our credit facility, approximately $16.7 million of outstanding letters of credit as ofDecember 31, 2016 and 2015 and borrowing limits based on an advance multiple of Adjusted EBITDA, we had $79.7 million and $58.3 million available forborrowing under the credit facility as of December 31, 2016 and 2015, 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, from time to time the State of Illinois has reimbursed us on a delayed basiswith respect to our various agreements including with our largest payor, the Illinois Department on Aging. The open receivable balance from the State ofIllinois increased by $18.9 million from $50.4 million as of December 31, 2015 to $69.3 million as of December 31, 2016.The State of Illinois’ payments have been delayed in the past and may continue to be delayed due to a budget impasse that began in 2015. The State ofIllinois did not adopt a comprehensive budget for fiscal year 2016, which ended on June 30, 2016, and it has not yet adopted a comprehensive budget forfiscal year 2017, which began on July 1, 2016. Stopgap budget legislation was enacted on June 30, 2016, which appropriated funds through December 31,2016. Without a budget, the State is not authorized to pay for non-Medicaid consumers we served. Non-Medicaid consumers from Illinois representapproximately 15% of our current total annual revenues. Our accounts receivable, net of allowance for doubtful accounts at December 31, 2016 increased37.7% compared to 2015, due in part to delays from the State of Illinois in the second half of 2016. Accounts receivable attributable to delayed paymentsfrom the Illinois Department on Aging totaled $53.0 million at the end of 2016, approximately $36.8 million thereof related to Non-Medicaid consumers andapproximately $16.2 related to Medicaid consumers. Reimbursements from the State of Illinois could be further delayed due to the lack of a budget for fiscalyear 2017 and because current forecasts indicate higher state deficits in the near future.There remains uncertainty surrounding the remainder of the 2017 fiscal year and future budgets. If payments from the State of Illinois continue to bedelayed in the future or become further delayed, or the Illinois State budget impasse is not resolved in the near term, the delays could adversely impact ourliquidity and result in the need to increase borrowings under our credit facility or cause us to pursue other liquidity options.Credit FacilityOn May 24, 2016, we entered into an amendment to our credit facility with certain lenders and Fifth Third Bank, as agent and letters of credit issuer.Our amended credit facility provides a $100.0 million revolving line of credit, a delayed draw term loan facility of up to $25.0 million and an uncommittedincremental term loan facility of up to $50.0 million, expiring November 10, 2020 and includes a $35.0 million sublimit for the issuance of letters of credit.The amended credit facility increased the specified advance multiple from 3.25 to 3.75 to 1.00 50Table of Contentsand the maximum permitted senior leverage ratio from 3.50 to 4.00 to 1.00. Except as modified by the May 24, 2016, amendment, the amended credit facilitycontains the same material terms as the previous agreement dated November 10, 2015. Substantially all of the subsidiaries of Holdings are co-borrowers, andHoldings has guaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first priority security interest in all ofHoldings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.The availability of funds under the revolving credit portion of 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 3.75, less the outstanding senior indebtedness and letters of credit, and (ii) $100.0 million less theoutstanding revolving loans and letters of credit. Interest on our credit facility may be payable at (x) the sum of (i) an applicable margin ranging from 2.00%to 2.50% based on the applicable leverage ratio plus (ii) a base rate 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 funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with aninterest period of one month advanced on the applicable day plus a margin of 3.00% or (y) the sum of (i) an applicable margin ranging from 3.00% to 3.50%based on the applicable leverage ratio plus (ii) the adjusted LIBOR that would be applicable to a loan with an interest period of one, two or three monthsadvanced on the applicable day or (z) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratio plus (ii) thedaily floating LIBOR that would be applicable to a loan with an interest period of one month advanced on the applicable day. We pay a fee ranging from0.25% to 0.50% per annum based on the applicable leverage ratio times the unused portion of the revolving portion of the credit facility. Issued stand-byletters of credit are charged at a rate equal to the applicable margin for LIBOR loans payable quarterly. On January 12, 2016, May 5, 2016 and July 14, 2016,we drew $10.0 million, $10.0 million and $10.0 million, respectively, of our revolving credit line to fund growth and on-going operations. On February 5,2016, we drew $22.0 million on our delayed draw term loan to fund the acquisition of South Shore. As a result of a provision in our amended credit facility,we were able to transfer $3.0 million of our revolving credit line debt to our term loan debt on May 24, 2016. During the month of August 2016, we fullyrepaid all outstanding amounts under the revolving portion of our credit facility. As of December 31, 2016, we had a total of $24.1 million outstanding onour credit facility and the total availability under our credit facility was $79.7 million. We did not have any amounts outstanding on our credit facility as ofDecember 31, 2015 and the total availability under our credit facility was $58.3 million.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, distributions, investments and loans, subject to customary carve outs, a restriction on dividends (unless no default then exists or wouldoccur as a result thereof, we are in pro forma compliance with the financial covenants contained in the credit facility after giving effect thereto, we have anexcess availability of at least 40% of the revolving credit commitment under the credit facility and the aggregate amount of dividends and distributions paidin any fiscal year does not exceed $5.0 million), restrictions on our ability to enter into transactions other than in the ordinary course of business, a restrictionon the ability to consummate more than three acquisitions in any calendar year, consummate any individual acquisition with a purchase price in excess of$25.0 million and consummate acquisitions with total purchase price in excess of $40.0 million in the aggregate over the term of the credit facility, in eachcase without the consent of the lenders, restrictions on mergers, transfers of assets, acquisitions, equipment, subsidiaries and affiliate transactions, subject tocustomary carve outs, and restrictions on fundamental changes and lines of business. As of December 31, 2016 and 2015, we were in compliance with all ofour credit facility covenants. 51Table of ContentsIf we do not have sufficient cash resources or availability under our credit facility, or we are otherwise prohibited from making acquisitions under theterms of our credit facility, our growth, including our ability to grow through acquisitions, could be limited unless we obtain additional equity or debtfinancing or the necessary consents from our lenders under our credit facility. We believe the available borrowings under our credit facility, combined withcash from 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, 2016, 2015 and 2014: 2016 2015 2014 (Amounts in Thousands) Net cash (used in) provided by operating activities $(743) $4,106 $7,028 Net cash used in investing activities (21,738) (10,724) (12,496) Net cash provided by (used in) financing activities 26,390 (2,641) 3,266 Year Ended December 31, 2016 Compared to Year Ended December 31, 2015Net cash used in operating activities was $0.7 million for the year ended December 31, 2016, compared to net cash provided by operating activities of$4.1 million for the same period in 2015. This increase in cash used in operations was primarily due to an increase in accounts receivable during this periodresulting from the delay in payments from the State of Illinois.Net cash used in investing activities was $21.7 million for the year ended December 31, 2016, compared to cash used in investing activities of $10.7million for the year ended December 31, 2015. Our investing activities for the year ended December 31, 2016 were $20.0 million for the acquisition of SouthShore as described in Note 3 to the Consolidated Financial Statements and $1.7 million in purchases of property and equipment related to new office spaceand investments in our technology infrastructure. Our investing activities for the year ended December 31, 2015 were $2.2 million in purchases of propertyand equipment to invest in our technology infrastructure, $4.3 million and $4.1 million for the acquisition of Priority Home Healthcare, Inc. and Five PointsHealthcare of Virginia, as described in Note 3 to the Consolidated Financial Statements and $0.1 million for the acquisition of a customer list.Net cash provided by financing activities was $26.4 million for the year ended December 31, 2016 as compared to net cash used in financing activitiesof $2.6 million for the year ended December 31, 2015. Our financing activities for the year ended December 31, 2016 were $52.0 million in draws on ourcredit facility to fund on-going operations and the acquisition of South Shore, a full repayment of the revolving portion of our credit facility in the amount of$27.0 million and $0.9 million payments on the term loan portion of our credit facility. Our financing activities also included $1.2 million of payments oncapital lease obligations, $3.0 million of cash received for the exercise of employee stock options, $1.1 million of excess tax benefit from exercise of stockoptions, $0.5 million payment for debt issuance costs and a $0.1 million payment for the contingent earn-out obligation related to our December 1, 2013acquisition of Coordinated Home Health Care, LLC. Our financing activities for the year ended December 31, 2015 were a $1.0 million payment on theCHHC contingent earn-out obligation as described in Note 3 to the Consolidated Financial Statements, $1.1 million of payments on capital lease obligationsand $1.2 million payment for debt issuance costs, $0.3 million of cash received for the exercise of employee stock options and $0.3 million of excess taxbenefit from exercise of stock options.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014Net cash provided by operating activities was $4.1 million for the year ended December 31, 2015, compared to $7.0 million for the same period in2014. This decrease in cash provided by operations was primarily due to an increase in accrued expenses and accounts receivable during this period. 52Table of ContentsNet cash used in investing activities was $10.7 million for the year ended December 31, 2015, compared to cash used in investing activities of $12.5million for the year ended December 31, 2014. Our investing activities for the year ended December 31, 2015 were $2.2 million in purchases of property andequipment to invest in our technology infrastructure, $4.3 million and $4.1 million for the acquisition of Priority Home Healthcare, Inc. and Five PointsHealthcare of Virginia, as described in Note 3 to the Consolidated Financial Statements and $0.1million for the acquisition of a customer list. Our investingactivities for the year ended December 31, 2014 included purchases of property and equipment related to our support center in Downers Grove, IL, thepurchase of a new payroll system and the acquisition of Aid & Assist as described in Note 3 to the Consolidated Financial Statements.Net cash used in financing activities was $2.6 million for the year ended December 31, 2015 as compared to net cash provided by financing activitiesof $3.3 million for the year ended December 31, 2014. Our financing activities for the year ended December 31, 2015 were a $1.0 million payment on theCHHC contingent earn-out obligation as described in Note 3 to the Consolidated Financial Statements, $1.1 million of payments on capital lease obligationsand $1.2 million payment for debt issuance costs, $0.3 million of cash received for the exercise of employee stock options and $0.3 million of excess taxbenefit from exercise of stock options. Our financing activities for the year ended December 31, 2014 were primarily related to capital lease obligationsentered into during the year to finance purchases of property and equipment related to our support center in Downers Grove, IL.Outstanding Accounts ReceivableGross accounts receivable as of December 31, 2016 and 2015 were $124.4 million and $89.8 million, respectively. Outstanding accounts receivable,net of the allowance for doubtful accounts, increased by $32.0 million as of December 31, 2016 as compared to December 31, 2015. The increase in accountsreceivable is primarily attributable to delay in both Medicaid and non-Medicaid payment from the State of Illinois for fiscal year 2017, accounts receivableacquired as part of our acquisitions and the general increase in our overall business.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. Weestablish our provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In our evaluation, we consider otherfactors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internalsystems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a levelthat our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates.Our collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. Anuncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted. 53Table of ContentsThe following tables detail our accounts receivable before reserves by payor category, showing Illinois governmental payors separately, and the relatedallowance amount at December 31, 2016, 2015 and 2014: December 31, 2016 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) Illinois governmental based programs $40,727 $25,619 $1,418 $1,585 $69,349 Other state, local and other governmental programs 20,786 3,090 2,117 3,002 28,995 Managed care organizations 14,039 3,341 2,848 2,679 22,907 Private pay and commercial insurance 2,439 399 265 8 3,111 Total $77,991 $32,449 $6,648 $7,274 $124,362 Aging % of total 62.8% 26.1% 5.3% 5.8% Allowance for doubtful accounts $7,363 Reserve as % of gross accounts receivable 5.9% December 31, 2015 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) Illinois governmental based programs $31,755 $16,315 $1,066 $1,276 $50,412 Other state, local and other governmental programs 13,218 4,473 3,507 1,308 22,506 Managed care organizations 8,867 1,711 1,969 598 13,145 Private pay and commercial insurance 3,118 454 225 (51) 3,746 Total $56,958 $22,953 $6,767 $3,131 $89,809 Aging % of total 63.4% 25.6% 7.5% 3.5% Allowance for doubtful accounts $4,850 Reserve as % of gross accounts receivable 5.4% December 31, 2014 0-90 Days 91-180 Days 181-365 Days Over365 Days Total (Amounts In Thousands, Except Percentages) 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 pay and commercial insurance 2,658 299 173 (30) 3,100 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%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 104, 92 and 80 days at December 31, 2016, 2015 and 2014, respectively. The DSOs for our largest payor, the Illinois Department on Aging,at December 31, 2016, 2015 and 2014 were 152, 101 and 85 days, respectively. We may not receive payments on a consistent basis in the near term and ourDSOs and the DSO for the Illinois Department on Aging may increase despite Illinois’s enactment of a stopgap budget on June 30, 2016. The increase in thereserve as a percentage of gross accounts receivable to 5.9% as of December 31, 2016 from 5.4% as of December 31, 2015 is attributable to additionalreserves needed for managed care organizations and 54Table of Contentsacquisition transitions. The reserve as percentage of gross accounts receivable remains the same for 2015 and 2014 at 5.4%.Off-Balance Sheet ArrangementsAs of December 31, 2016, 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 2016, 2015 and 2014 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 andrecognized in net service revenues as services are provided. Services to other payors, such as private or commercial clients, are provided at negotiated hourlyrates and recognized in net service revenues as services are provided. We provide for appropriate allowances for uncollectible amounts at the time theservices 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.Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 isrecognized when received and reported in the income statement caption, interest income. For the year ended December 31, 2016, we received $2.8 million inprompt payment interest. For the years ended December 31, 2015 and 2014 we did not earn or receive any prompt payment interest.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. Weestablish our provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In our evaluation, we consider otherfactors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internalsystems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a levelthat our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates. 55Table of ContentsGoodwillOur 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 2016, 2015 and 2014, 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, 2016, 2015 or 2014.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, 2016, 2015 or 2014.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 31,2016, 2015 or 2014.Workers’ Compensation ProgramOur workers’ compensation insurance program has a $0.4 million 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 income. Under the agreementpursuant to which we acquired Addus HealthCare, claims under our workers’ compensation insurance program that related 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, 2016, 2015 and 2014 we recorded $0.7 million, $1.3 million, and $1.5 million, respectively, in workers’ compensation insurance recoveryreceivables and a corresponding increase in our workers’ compensation liability. The workers’ compensation insurance recovery receivable is included in ourprepaid expenses and other current assets on the balance sheet. 56Table of ContentsInterest IncomeIllinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 incomefrom continuing operations is recognized when received. For the year ended December 31, 2016, we received $2.8 million in prompt payment interest. Forthe years ended December 31, 2015 and 2014 we did not earn or receive any prompt payment interest.Income TaxesWe account for income taxes under the provisions of ASC Topic 740, “Income Taxes.” The objective of accounting for income taxes is to recognizethe amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have beenrecognized in our financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of our assets and liabilities,are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferred tax assets be reduced by avaluation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC Topic 740, also prescribes arecognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.In addition, ASC Topic 740 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain taxpositions.Stock-based CompensationWe have two stock incentive plans, the 2006 Stock Incentive Plan (the “2006 Plan”) and the 2009 Stock Incentive Plan, as amended (the “2009 Plan”)that provide for stock-based employee compensation. We account for stock-based compensation in accordance with ASC Topic 718, “Stock Compensation.”Compensation expense is recognized on a graded method under the 2006 Plan and on a straight-line basis under the 2009 Plan over the vesting period of theawards based on the fair value of the options and restricted stock awards. Under the 2006 Plan, we historically used the Black-Scholes option pricing modelto estimate the fair value of our stock based payment awards, but beginning October 28, 2009 under our 2009 Plan we began using an enhanced Hull-WhiteTrinomial model. The determination of the fair value of stock-based payments utilizing the Black-Scholes model and the enhanced Hull-White Trinomialmodel is affected by Holdings’ stock price and a number of assumptions, including expected volatility, risk-free interest rate, expected term, expecteddividends yield, expected forfeiture rate, expected turn-over rate and the expected exercise multiple. Equity grants may no longer be granted under the 2006Plan.New Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contractswith Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promisedgoods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP and will be effective for us as of January 1, 2018.The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method and we have not yet selected whichtransition method we will apply. Our evaluation of ASU 2014-09 is not complete. The FASB has issued and may issue in the future, interpretative guidance,which may cause our evaluation to change. We have completed an initial review to determine the impact ASU 2014-09 and its subsequent updates throughDecember 31, 2016 will have on our Consolidated Financial Statements or financial statement disclosures upon adoption. Based on our preliminary review,we believe that the timing and measurement of revenue for our customers will be similar to our current revenue recognition. However, this view is preliminaryand could change based on the detailed analysis associated with the conversion and implementation phases of our ASU 2014-09 project. We will completeour assessment during 2017. 57Table of ContentsIn February 2016, the FASB issued ASU No. 2016-02, “Leases” which replaces existing leasing rules with a comprehensive lease measurement andrecognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities,with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. Forincome statement recognition purposes, leases will be classified as either a finance or an operating lease. We will be required to recognize and measure leasesat the beginning of the earliest period presented using a modified retrospective approach. Upon initial evaluation, we believe that the new standard will havea material impact on our Consolidated Balance Sheets but it will not affect our liquidity. We are continuing to evaluate other potential impacts to ourfinancial statements and accounting systems including whether we will need to secure new software to account for the change in leases.In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting.” ASU 2016-09 allows for simplification of several aspects of the accounting for share-based payment transactions including theincome tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU 2016-09, allexcess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense orbenefit in the income statement. ASU 2016-09 also requires recognition of excess tax benefits regardless of whether the benefit reduces taxes payable in thecurrent period. ASU 2016-09 further permits the withholding of an amount up to employees’ maximum individual tax rate in the relevant jurisdiction withoutresulting in a liability classification. ASU 2016-09 also requires any excess tax benefits be classified along with other income tax cash flows as an operatingactivity and cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity. ASU 2016-09 iseffective for public companies for interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact of ASU 2016-09 onour Consolidated Financial Statements.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments (Topic 326) Credit Losses.” ASU 2016-13 changes the impairment model formost financial assets and certain other instruments. Under the new standard, entities holding financial assets, including accounts receivables and netinvestment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowancefor credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at theamount expected to be collected on the financial asset. ASU 2016-13 is effective as of January 1, 2020. Early adoption is permitted. We are currentlyevaluating the impact of ASU 2016-13.In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effectivefor fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unlessimpracticable. If impracticable we would be required to apply the amendments prospectively as of the earliest date possible. We are currently evaluating theimpact that ASU 2016-15 will have on our statement of financial position or financial statement disclosures.In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The new guidance eliminates the requirement tocalculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entitieswill record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the currentStep 1). ASU 2017-04 is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. We are currently evaluating theprovisions of ASU 2017-04 to determine how our goodwill impairment testing will be impacted and whether we may elect to adopt ASU 2017-04 prior to thestated effective date. 58Table of ContentsContractual Obligations and CommitmentsWe had outstanding letters of credit of $16.7 million at December 31, 2016. 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.The following table summarizes our cash contractual obligations as of December 31, 2016: Contractual Obligations Total Less than1 Year 1-2Years 3-4Years More than5 Years (Amounts in Thousands) Term loan, 3.79% due 2020 24,063 1,250 2,500 20,313 — Interest payable on term loan 3,243 916 1,669 658 — Capital leases 2,617 1,561 1,056 — — Operating leases 16,515 3,855 5,565 3,675 3,420 Total Contractual Obligations $46,438 $7,582 $10,790 $24,646 $3,420 As described in Notes to the Consolidated Financial Statements 7. Long-Term Debt, interest on borrowings under the term loan are variable. Thecalculated interest payable amounts above use actual rates available through March 2017 and assumes the March 2017 rate of 3.79% for all futureinterest payable.As described in Note 3 to the Consolidated Financial Statements, the acquisition agreement for Aid & Assist at Home, LLC contains a contingent earn-out obligation, which expired December 31, 2016. At December 31, 2016 and 2015, we determined there was no liability for the Aid & Assist at Home, LLCcontingent earn-out obligation.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 RISKWe are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. As of December 31, 2016, we hadoutstanding borrowings of approximately $24.1 million on our credit facility, all of which was subject to variable interest rates. As of December 31, 2015, wehad no outstanding borrowings on our credit facility. If the variable rates on this debt were 100 basis points higher than the rate applicable to the borrowingduring the year ended December 31, 2016, our net income would have decreased by $0.2 million, or $0.01 per diluted share. We do not currently have anyderivative or hedging arrangements, or other known exposures, to changes in interest rates. 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 Part IV, Item 15. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. 59(1)(1)Table 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, 2016. 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 an issuer that are designed to ensure thatinformation required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, andreported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under theExchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.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, 2016.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, 2016.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.In accordance with SEC regulations, management excluded from its assessment the internal control over financial reporting of South Shore HomeHealth Service Inc., which was acquired on February 5, 2016 and whose financial statements constitute 7.9% of the total assets of the Company as ofDecember 31, 2016 and 12.9% and (7.0)% of the Company’s revenues and net income (loss) for the year ended December 31, 2016.BDO USA, LLP, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Form 10-K, hasissued an attestation report on our internal control over financial reporting, which is included herein.Changes in Internal Controls Over Financial ReportingA material weakness (as defined in SEC rule 12b-2) is a deficiency, or combination of deficiencies, in internal control over financial reporting such thatthere is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.During the fourth 60Table of Contentsquarter of 2015, our management determined that a material weakness in internal control over financial reporting existed. Specifically, controls regardingsegregation of duties and user access as well as monitoring and review controls related to billable and non-billable transactions were ineffective. There wereinsufficient controls over validating the completeness and accuracy of underlying data used in the operation of monitoring controls as well as ineffectivecontrols related to review of new hire, terminations and payroll changes. Because the Company’s revenue and payroll are dependent on the effectiveness ofthese controls, these deficiencies, in the aggregate, resulted in a reasonable possibility that a material misstatement of the Company’s revenue or payrollexpense may not be prevented or detected on a timely basis as of December 31, 2015.To remediate the material weakness described above, during 2016 we have implemented actions to improve our internal control over financialreporting and procedures including hiring financial leadership and personnel for the finance organization with appropriate experience and certification. Also,we have supplemented and enhanced resources and training for our organization. We effected proper tone at the top through these personnel changes andchanges in our policies. The personnel in these new functions established a structure that allows us to validate the completeness and accuracy of theunderlying data used in the operation of monitoring controls. We have implemented changes to user access to properly segregate duties and programmaticenhancements to the time maintenance process to improve monitoring and review controls of transactions. We have improved our monitoring and reviewcontrols for new hires, terminations, and payroll changes. Also, management redesigned processes, implemented more robust accounting policies, andintroduced new management review controls. As a result, we have improved the timeliness and the level of precision of our control activities. During thefourth quarter of 2016, we successfully completed the testing necessary to conclude that the material weakness has been remediated.Other than the changes described above, there were no changes in our internal control over financial reporting that occurred during the fiscal quarterended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 61Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersAddus HomeCare CorporationDowners Grove, IllinoisWe have audited Addus HomeCare Corporation’s internal control over financial reporting as of December 31, 2016, 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 South Shore Home Health ServicesInc., which was acquired on February 5, 2016, and which is included in the consolidated balance sheets of Addus HomeCare Corporation as of December 31,2016, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. South Shore Home Health ServicesInc., constituted 7.9% of total assets as of December 31, 2016, and 12.9% and (7.0)% of revenues and net income (loss), respectively, for the year then ended.Management did not assess the effectiveness of internal control over financial reporting of South Shore Home Health Services Inc. because of the timing ofthe acquisition which was completed on February 5, 2016. Our audit of internal control over financial reporting of Addus HomeCare Corporation also did notinclude an evaluation of the internal control over financial reporting of South Shore Home Health Services Inc.In our opinion, Addus HomeCare Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31,2016, based on the COSO criteria.We 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, 2016 and 2015, and the related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2016 and our report dated March 15, 2017 expressed an unqualified opinion thereon./s/ BDO USA, LLPChicago, IllinoisMarch 15, 2017 62Table of ContentsPART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K as we intend to file our definitive Proxy Statement for the2017 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 2017 Proxy Statement to be filed with the SEC not later than 120 days afterthe end of the fiscal year ended December 31, 2016.The Company has adopted a Code of Conduct that is applicable to all of its employees, officers and members of its Board of Directors, and itssubsidiaries. A copy of the current version of our Code of Conduct is available in the Investors — Corporate Governance section of our internet website athttp://www.addus.com/index.htm. A copy of the Code of Conduct is also available in print, free of charge, to any stockholder who requests it by writing toAddus HomeCare Corporation, 2300 Warrenville Road, Downers Grove, IL 60515. The Company intends to post amendments to or waivers, if any, from itsCode of Conduct at this location on its website, in each case to the extent such amendment or waiver would otherwise require the filing of a Current Reporton Form 8-K pursuant to Item 5.05 thereof. ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to the 2017 Proxy Statement to be filed with the SEC not later than 120 days afterthe end of the fiscal year ended December 31, 2016. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item is incorporated by reference to the 2017 Proxy Statement to be filed with the SEC not later than 120 days afterthe end of the fiscal year ended December 31, 2016. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to the 2017 Proxy Statement to be filed with the SEC not later than 120 days afterthe end of the fiscal year ended December 31, 2016. ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference to the 2017 Proxy Statement to be filed with the SEC not later than 120 days afterthe end of the fiscal year ended December 31, 2016. 63Table of ContentsPART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)Consolidated Financial Statements 1.Consolidated Financial Statements. The Consolidated Financial Statements as listed in the accompanying “Index to 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)ExhibitsEXHIBIT INDEX ExhibitNumber Description of Document 3.1 Amended and Restated Certificate of Incorporation of Addus HomeCare Corporation dated as of October 27, 2009 (filed on November 20,2009 as Exhibit 3.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-34504) and incorporated by referenceherein). 3.2 Amended and Restated Bylaws of Addus HomeCare Corporation, as amended by the First Amendment to Amended and Restated Bylaws(filed on May 9, 2013 as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-34504) and incorporated by referenceherein). 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 (File No. 333-160634) and incorporated by reference herein). 4.2 Registration Rights Agreement, dated September 19, 2006, by and among Addus Holding 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 4.3 to Addus HomeCare Corporation’sRegistration Statement on Form S-1 (File No. 333-160634) 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(File No. 333-160634) and incorporated by reference herein).*10.2 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 (File No. 333-160634) and incorporated by reference herein).*10.3 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 (File No. 333-160634) and incorporated by reference herein).* 64Table of ContentsExhibitNumber Description of Document10.4 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 (File No. 333-160634) and incorporated by referenceherein).*10.5 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 (File No. 333-160634) and incorporated by reference herein).*10.6 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 (File No. 333-160634) and incorporated by reference herein).*10.7 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 (File No. 333-160634) and incorporated by reference herein).*10.8 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 (File No. 333-160634) and incorporated by reference herein).*10.9 Form of Indemnification Agreement (filed on July 17, 2009 as Exhibit 10.16 to Addus HomeCare Corporation’s Registration Statement onForm S-1 (File No. 333-160634) and incorporated by reference herein).10.10 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 (File No. 333-160634)and incorporated by reference herein).10.11 Contract Supplement to the License Agreement No. C0608555, dated March 24, 2006 (filed on August 26, 2009 as Exhibit 10.17 toAmendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated byreference herein).10.12 Contract Supplement to the License Agreement No. 00608555, dated March 28, 2006 (filed on August 26, 2009 as Exhibit 10.17(b) toAmendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated byreference herein).10.13 Amendment to License Agreement No. C0608555, dated March 28, 2006, between McKesson Information Solutions, LLC and AddusHealthCare, Inc. (filed on August 26, 2009 as Exhibit 10.17(c) to Amendment No. 1 to Addus HomeCare Corporation’s RegistrationStatement on Form S-1 (File No. 333-160634) and incorporated by reference herein).10.14 Form of Addus HomeCare Corporation 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20 to Amendment No. 2 toAddus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*10.15 Form of Nonqualified Stock Option Award Agreement pursuant to the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit10.20(a) to Amendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporatedby reference herein).*10.16 Form of Restricted Stock Award Agreement pursuant to 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 (File No. 333-160634) and incorporated byreference herein).*10.17 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 (File No. 001-34504) and incorporated by reference herein).* 65Table of ContentsExhibitNumber Description of Document10.18 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 (File No. 001-34504) and incorporated herein by reference).*10.19 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 (File No. 001-34504) and incorporated by reference herein).10.20 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 (South Carolina),Inc., Addus HealthCare (Delaware), Inc. and Cura Partners, LLC, as borrowers, Addus HomeCare Corporation, the other credit parties fromtime to a time a party thereto, the various institutions from time to time a party thereto, as lenders, and Fifth Third Bank as agent and L/Cissuer (filed on August 11, 2014 as Exhibit 10.1 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-34504) andincorporated by reference herein).10.21 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 (File No. 001-34504) and incorporated by reference herein).10.22 Consent and Amendment No. 2 to Second Amended and Restated Credit and Guaranty Agreement, effective May 24, 2016, 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., PHC Acquisition Corporation, Professional ReliableNursing Service, Inc., Addus HealthCare (South Carolina), Inc., Addus HealthCare (Delaware), Inc., Cura Partners, LLC, Priority Home HealthCare, Inc. and South Shore Home Health Service Inc., as borrowers, Addus HomeCare Corporation, as guarantor, the other credit parties fromtime to time party thereto, the various institutions from time to time party thereto, as lenders, and Fifth Third Bank, as agent and L/C issuer(filed on May 24, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) andincorporated by reference herein).10.23 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 (File No. 001-34504) and incorporated by reference herein).*10.24 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 (File No. 001-34504) and incorporated by reference herein).* 66Table of ContentsExhibitNumber Description of Document10.25 Employment and Non-Competition Agreement, effective May 11, 2015, by and between Addus HealthCare, Inc. and Donald Klink (filed onApril 30, 2015 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated byreference herein).*10.26 Securities Purchase Agreement, dated as of April 24, 2015, by and among Addus Healthcare, Inc., Margaret Coffey, Carol Kolar, South ShoreHome Health Service, Inc. and Acaring Home Care, LLC (filed on May 8, 2015 as Exhibit 10.1 to Addus HomeCare Corporation’s QuarterlyReport on Form 10-Q (File No. 001-34504) and incorporated by reference herein).10.27 Second Amended and Restated Credit and Guaranty Agreement, dated as of November 10, 2015, among Addus HealthCare, Inc., AddusHealthCare (Idaho), Inc., Addus HealthCare (Indiana), Inc., Addus HealthCare (Nevada), Inc., Addus HealthCare (New Jersey), Inc., AddusHealthCare (North Carolina), Inc., Benefits Assurance Co., Inc., PHC Acquisition Corporation, Professional Reliable Nursing Service, Inc.,Addus HealthCare (South Carolina), Inc., Addus HealthCare (Delaware), Inc., Cura Partners, LLC and Priority Home Health Care, Inc., asborrowers, Addus HomeCare Corporation, as guarantor, the other credit parties from time to time party thereto, the various institutions fromtime to time party thereto, as lenders, and Fifth Third Bank, as agent and L/C issuer (filed on November 16, 2015 as Exhibit 99.1 to AddusHomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by reference herein).10.28 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 (File No. 001-34504) and incorporated by referenceherein).*10.29 Separation Agreement and General Release, dated as of April 29, 2015, by and between Addus HealthCare, Inc. and Dennis Meulemans (filedon April 30, 2015 as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated byreference herein).*10.30 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 (File No. 333-160634)and incorporated by reference herein).*10.31 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 (File No. 333-160634) and incorporated by reference herein).*10.32 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 (File No. 001-34504) and incorporated by reference herein).*10.33 Employment and Non-Competition Agreement, dated as of February 25, 2016, by and between Addus HealthCare, Inc. and James Zoccoli(filed on February 29, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) andincorporated by reference herein).*10.34 Employment and Non-Competition Agreement, dated as of February 29, 2016, by and between Addus HealthCare, Inc. and R. Dirk Allison(filed on March 2, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) andincorporated by reference herein).* 67Table of ContentsExhibitNumber Description of Document10.35 Separation Agreement and General Release, dated as of March 18, 2016, by and between Addus HealthCare, Inc. and Inna Berkovich (filed onMarch 23, 2016 as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated byreference herein).*10.36 Employment and Non-Competition Agreement, effective May 10, 2016, by and between Addus HealthCare, Inc. and Brian Poff (filed on May12, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by referenceherein).*10.37 Separation Agreement and General Release, effective May 25, 2016, by and between Addus HealthCare, Inc. and Donald Klink (filed on May27, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by referenceherein).*10.38 Employment and Non-Competition Agreement, effective June 1, 2016, by and between Addus HealthCare, Inc. and Brenda Belger (filed onJune 1, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated byreference herein).*10.39 Employment and Non-Competition Agreement, dated as of June 18, 2012, by and between Addus HealthCare, Inc. and Inna Berkovich (filedon June 20, 2012 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated byreference herein).*10.40 Separation Agreement and General Release, dated as of March 1, 2016, by and between Addus HomeCare Corporation and Mark S. Heaney(filed on March 2, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) andincorporated by reference herein).*10.41 Employment Agreement, dated January 16, 2017, by and between Addus HealthCare, Inc. and W. Bradley Bickham (filed on January 4, 2017as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by reference herein).*10.42 Separation Agreement and General Release, dated as of February 13, 2017, by and between Addus HomeCare Corporation and MaxineHochhauser (filed on January 18, 2017 as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504)and incorporated by reference herein).*21.1 Subsidiaries of Addus HomeCare Corporation23.1 Consent of BDO USA, LLP, Independent Registered Public Accounting Firm31.1 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 year ended December 31, 2016, 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. *Management compensatory plan or arrangement 68Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. Addus HomeCare CorporationBy: /s/ R. DIRK ALLISON R. Dirk Allison,President and Chief Executive OfficerDate: March 15, 2017Pursuant 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/ R. DIRK ALLISON R. Dirk Allison President and Chief Executive Officer (Principal ExecutiveOfficer) and Director March 15, 2017/s/ Brian Poff Brian Poff Chief Financial Officer (Principal Financial and AccountingOfficer) March 15, 2017/s/ MARK L. FIRST Mark L. First Director March 15, 2017/s/ SIMON A. BACHLEDA Simon A. Bachleda Director March 15, 2017/s/ STEVEN I. GERINGER Steven I. Geringer Director March 15, 2017/s/ MICHAEL EARLEY Michael Earley Director March 15, 2017/s/ Darin J. Gordon Darin J. Gordon Director March 15, 2017/s/ Susan T. Weaver, M.D., FACP Susan T. Weaver, M.D., FACP Director March 15, 2017 69Table of ContentsINDEX TO CONSOLIDATED FINANCIAL INFORMATION Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and StockholdersAddus HomeCare CorporationDowners Grove, IllinoisWe have audited the accompanying consolidated balance sheets of Addus HomeCare Corporation as of December 31, 2016 and 2015 and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. In connectionwith our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financialstatements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements andschedule 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, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31,2016, 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.As discussed in Note 8 to the consolidated financial statements, the Company has changed the presentation of its deferred tax assets and liabilities inits consolidated balance sheets due to the adoption of FASB ASU 2015-17—Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.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, 2016, 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 15, 2017 expressed anunqualified opinion thereon./s/ BDO USA, LLPChicago, IllinoisMarch 15, 2017 F-2Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2016 and 2015(amounts and shares in thousands, except per share data) 2016 2015 Assets Current assets Cash $8,013 $4,104 Accounts receivable, net of allowances of $7,363 and $4,850 at December 31, 2016 and 2015, respectively 116,999 84,959 Prepaid expenses and other current assets 5,998 4,858 Total current assets 131,010 93,921 Property and equipment, net of accumulated depreciation and amortization 6,648 8,619 Other assets Goodwill 73,906 68,844 Intangibles, net of accumulated amortization 15,413 10,351 Investment in joint venture 900 900 Non-current deferred tax asset, net 3,153 1,825 Other assets — 1,337 Total other assets 93,372 83,257 Total assets $231,030 $185,797 Liabilities and stockholders’ equity Current liabilities Accounts payable $4,486 $4,748 Current portion of long-term debt, net of debt issuance costs 2,531 1,109 Current portion of contingent earn-out obligation — 1,250 Accrued expenses 42,603 35,082 Total current liabilities 49,620 42,189 Long-term liabilities Long-term debt, less current portion, net of debt issuance costs 22,482 1,882 Total liabilities $72,102 $44,071 Stockholders’ equity Common stock—$.001 par value; 40,000 authorized and 11,527 and 11,108 shares issued and outstanding as ofDecember 31, 2016 and 2015, respectively $12 $11 Additional paid-in capital 92,253 87,076 Retained earnings 66,663 54,639 Total stockholders’ equity 158,928 141,726 Total liabilities and stockholders’ equity $231,030 $185,797 See accompanying Notes to Consolidated Financial Statements F-3Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2016, 2015 and 2014(amounts and shares in thousands, except per share data) For the Year Ended December 31, 2016 2015 2014 Net service revenues $400,688 $336,815 $312,942 Cost of service revenues 294,593 245,492 229,207 Gross profit 106,095 91,323 83,735 General and administrative expenses 84,213 70,452 61,834 Revaluation of contingent consideration — 130 — Depreciation and amortization 6,647 4,717 3,830 Total operating expenses 90,860 75,299 65,664 Operating income from continuing operations 15,235 16,024 18,071 Interest income (2,812) (47) (18) Interest expense 2,332 786 698 Total interest (income) expense, net (480) 739 680 Other income 206 — — Income from continuing operations before income taxes 15,921 15,285 17,391 Income tax expense 3,994 3,932 5,428 Net income from continuing operations 11,927 11,353 11,963 Earnings from discontinued operations 97 270 280 Net income $12,024 $11,623 $12,243 Net income per common share Basic income per share Continuing operations $1.05 $1.03 $1.10 Discontinued operations 0.01 0.03 0.02 Basic income per share $1.06 $1.06 $1.12 Diluted income per share Continuing operations $1.05 $1.02 $1.08 Discontinued operations 0.01 0.02 0.02 Diluted income per share $1.06 $1.04 $1.10 Weighted average number of common shares and potential common shares outstanding: Basic 11,292 10,986 10,900 Diluted 11,349 11,189 11,114 See accompanying Notes to Consolidated Financial Statements F-4Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the years ended December 31, 2016, 2015 and 2014(amounts and shares in thousands) Common Stock AdditionalPaid inCapital RetainedEarnings TotalStockholders’Equity Shares Amount 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 Issuance of shares of common stock under restricted stock award agreements 57 — — — — Forfeiture of shares of common stock under restricted stock award agreements (3) — — — — Stock-based compensation — — 1,573 — 1,573 Excess tax benefit from exercise of stock options — — 269 — 269 Shares issued 44 — 305 — 305 Net income — — — 11,623 11,623 Balance at December 31, 2015 11,108 $11 $87,076 $54,639 $141,726 Issuance of shares of common stock under restricted stock award agreements 108 0 0 — 0 Forfeiture of shares of common stock under restricted stock award agreements (69) 0 0 — 0 Stock-based compensation — — 1,072 — 1,072 Excess tax benefit from exercise of stock options — — 1,090 — 1,090 Shares issued 380 1 3,015 — 3,016 Net income — — — 12,024 12,024 Balance at December 31, 2016 11,527 $12 $92,253 $66,663 $158,928 See accompanying Notes to Consolidated Financial Statements F-5Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31, 2016, 2015 and 2014(amounts in thousands) For the Year Ended December 31, 2016 2015 2014 Cash flows from operating activities: Net income $12,024 $11,623 $12,243 Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of acquisitions: Depreciation and amortization 6,647 4,717 3,830 Non-cash restructuring 2,550 — — Deferred income taxes (1,328) 838 2,221 Stock-based compensation 1,072 1,573 827 Amortization of debt issuance costs 357 97 154 Provision for doubtful accounts 7,373 4,309 2,818 Revaluation of contingent consideration — 130 — Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (32,606) (19,512) (9,276) Prepaid expenses and other current assets (282) 2,318 (873) Accounts payable (1,530) 570 (850) Accrued expenses 4,980 (2,557) (4,066) Net cash (used in) provided by operating activities (743) 4,106 7,028 Cash flows from investing activities: Acquisitions of businesses (20,026) (8,365) (7,172) Acquisition of customer list — (146) (50) Purchases of property and equipment (1,712) (2,213) (5,274) Net cash used in investing activities (21,738) (10,724) (12,496) Cash flows from financing activities: Payments on term loan (938) — — Payments on revolver (27,000) — — Excess tax benefit from exercise of stock options 1,090 269 816 Payment on contingent earn-out obligation (100) (1,000) — Payments for debt issuance costs (503) (1,165) (290) Cash received from exercise of stock options 3,016 305 214 Borrowings on revolver 27,000 — — Borrowings on term loan 25,000 — — Borrowings on capital lease obligations — — 2,896 Payments on capital lease obligations (1,175) (1,050) (370) Net cash provided by (used in) financing activities 26,390 (2,641) 3,266 Net change in cash 3,909 (9,259) (2,202) Cash, at beginning of period 4,104 13,363 15,565 Cash, at end of period $8,013 $4,104 $13,363 Supplemental disclosures of cash flow information: Cash paid for interest $2,322 $786 $698 Cash paid for income taxes 5,087 911 4,465 Supplemental disclosures of non-cash investing and financing activities Contingent and deferred consideration accrued for acquisitions $— $— $1,020 Property and equipment acquired through capital lease obligations 618 378 1,137 Tax benefit related to the amortization of tax goodwill in excess of book basis 203 123 123 See accompanying Notes to Consolidated Financial Statements F-6Table 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 withHoldings, the “Company” or “we”). The Company operates as one reportable business segment and is a provider of comprehensive personal care services,which are provided primarily in the home. The Company’s personal care services provide assistance with activities of daily living and adult day services. TheCompany’s consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. TheCompany’s payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals.As of December 31, 2016, the Company provided personal care services to over 33,000 consumers (unaudited) through 114 locations across 24 states,including three adult day services centers in Illinois (unaudited).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 are principally providedbased on authorized hours, determined by the relevant agency, at an hourly rate specified in agreements or fixed by legislation and recognized as revenues atthe time services are rendered. Personal care service revenues are reimbursed by state, local and other governmental programs which are partially funded byMedicaid or Medicaid waiver programs, with the remainder reimbursed through private pay and insurance programs.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 establishes its provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In itsevaluation, the Company considers other factors including: delays in payment trends in individual states due to budget or funding issues; billingconversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowancefor doubtful accounts is maintained at a level that the Company’s management believes is sufficient to cover potential losses. However, actual collectionscould 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 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 years Furniture and equipment 5 – 7 years Transportation equipment 5 years Computer software 5 – 10 years Leasehold improvements Lesser of useful life or lease term, unlessprobability of lease renewal is likely F-7Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) GoodwillThe Company’s carrying value of goodwill is the excess of the purchase price over the fair value of the net assets acquired from various acquisitionsincluding the acquisition of Addus HealthCare, Inc. (“Addus HealthCare”). In accordance with Accounting Standards Codification (“ASC”) Topic 350,“Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. The Company tests goodwill forimpairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change inbusiness climate or regulatory changes that would indicate that an impairment may have occurred. The Company may use a qualitative test, known as “Step0,” or a two-step quantitative method to determine whether impairment has occurred. In Step 0, the Company can elect to perform an optional qualitativeanalysis and based on the results skip the two step analysis. In 2016, 2015 and 2014, the Company elected to implement Step 0 and was not required toconduct the remaining two step analysis. The results of the Company’s Step 0 assessments indicated that it was more likely than not that the fair value of itsreporting unit exceeded its carrying value and therefore the Company concluded that there were no impairments for the years ended December 31, 2016,2015 or 2014.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.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 charge 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, 2016, 2015 or 2014.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, 2016, 2015 or 2014.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. The Company has classified the debt issuance costs as a F-8Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) reduction of the related long-term debt as of December 31, 2016. For the year ended December 31, 2015, debt issuance costs are included in other assets onthe Consolidated Balance Sheets as the Company had no long-term debt outstanding during the year to offset the debt issuance costs.Workers’ Compensation ProgramThe Company’s workers’ compensation program has a $0.4 million deductible component. The Company recognizes its obligations associated withthis program 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 beenaccrued based on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. The future claimspayments related to the workers’ compensation program are secured by letters of credit.Interest IncomeIllinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved forpayment 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 isrecognized when received and reported in the statement of income as interest income. The Company received $2.8 million in prompt payment interest in2016 and did not earn or receive prompt payment interest in 2015 and 2014. While the Company may be owed additional prompt payment interest, theamount and timing of receipt of such payments remains uncertain and the Company has determined that it will continue to recognize prompt paymentinterest income when received.Interest ExpenseThe Company’s interest expense consists of interest costs on its credit facility, capital lease obligations and amortization of debt issuance costs and isreported in the statement of income when incurred.Other IncomeOther income consists of income distributions received from the investment in joint venture. The Company accounts for this income in accordancewith ASC Topic 325, “Investments—Other.” The Company recognizes the net accumulated earnings only to the extent distributed by the joint venture on thedate received.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. F-9Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Stock-based CompensationThe Company has two stock incentive plans under which stock-based employee compensation awards are outstanding, the 2006 Stock Incentive Plan(the “2006 Plan”) and the 2009 Stock Incentive Plan, as amended and restated (the “2009 Plan”). The Company accounts for stock-based compensation inaccordance with ASC Topic 718, “Stock Compensation.” Compensation expense is recognized on a graded method under the 2006 Plan and on a straight-line basis under the 2009 Plan over the vesting period of the awards based on the fair value of the options and restricted stock awards. Under the 2006 Plan,the Company historically used the Black-Scholes option pricing model to estimate the fair value of its stock based payment awards, but beginningOctober 28, 2009 under its 2009 Plan the Company began using an enhanced Hull-White Trinomial model. The determination of the fair value of stock-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 rateand the expected exercise multiple. Equity grants may no longer be granted under the 2006 Plan.Diluted Net Income Per Common ShareDiluted net income per common share, calculated on the treasury stock method, is based on the weighted average number of shares outstanding duringthe period. The Company’s outstanding securities that may potentially dilute the common stock are stock options and restricted stock awards.Included in the Company’s calculation of diluted earnings per share for the year ended December 31, 2016 were approximately 405,000 stock optionsoutstanding, of which approximately 30,000 were dilutive. In addition, there were approximately 103,000 restricted stock awards outstanding, of whichapproximately 27,000 were dilutive for the year ended December 31, 2016.Included in the Company’s calculation of diluted earnings per share for the year ended December 31, 2015 were approximately 650,000 stock optionsoutstanding, of which approximately 40,000 were out-of-the-money. In addition, there were approximately 89,000 restricted stock awards outstanding, ofwhich approximately 6,000 were dilutive for the year ended December 31, 2015.Included in the Company’s calculation of diluted earnings per share for the year ended December 31, 2014 were approximately 684,000 stock optionsoutstanding, of which approximately 146,000 were out-of-the money. In addition, there were approximately 80,000 restricted stock awards outstanding, ofwhich approximately 44,000 were dilutive for the year ended December 31, 2014.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 F-10Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) expenses approximate fair value because of the short-term nature of these instruments. The carrying value of the Company’s long-term debt with variableinterest 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, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its ownassumptions, 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. At the date of acquisition, acontingent earn-out obligation is recorded at its fair value, which is calculated as the present value of the Company’s maximum obligation based onprobability-weighted estimates of achievement of performance targets defined in the earn-out agreements. The Company reviews the fair valuationperiodically and adjusts the fair value for any changes in the maximum earn-out obligation based on probability-weighted estimates of achievement ofcertain performance targets defined in the earn-out agreements. In addition, discounted cash flows were used to estimate the fair value of the Company’sinvestment in joint ventures.Going ConcernIn connection with the preparation of the financial statements for the year ended December 31, 2016, the Company conducted an evaluation as towhether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concernwithin one year after the date of the issuance, or the date of availability, of the financial statements to be issued, noting that there did not appear to beevidence of substantial doubt of the entity’s ability to continue as a going concern.New Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contractswith Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promisedgoods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP and will be effective for the Company as ofJanuary 1, 2018. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method and we have not yetselected which transition method we will apply. The Company’s evaluation of ASU 2014-09 is not complete. The FASB has issued and may issue in thefuture, interpretative guidance, which may cause the Company’s evaluation to change. The Company has completed an initial review to determine the impactASU 2014-09 and its subsequent updates through December 31, 2016 will have on its Consolidated Financial Statements or financial statement disclosuresupon adoption. Based on the Company’s preliminary review, it believes that the timing and measurement of revenue for its customers will be similar to itscurrent revenue recognition. However, this view is preliminary and could change based on the detailed analysis associated with the conversion andimplementation phases of the Company’s ASU 2014-09 project. The Company will complete its assessment during 2017.In February 2016, the FASB issued ASU No. 2016-02, “Leases” which replaces existing leasing rules with a comprehensive lease measurement andrecognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities,with corresponding “right- F-11Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognitionpurposes, leases will be classified as either a finance or an operating lease. The Company will be required to recognize and measure leases at the beginning ofthe earliest period presented using a modified retrospective approach. Upon initial evaluation, the Company believes that the new standard will have amaterial impact on our Consolidated Balance Sheets but it will not affect our liquidity. The Company’s continuing to evaluate other potential impacts to itsfinancial statements and accounting systems including whether the Company will need to secure new software to account for the change in leases.In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting.” ASU 2016-09 allows for simplification of several aspects of the accounting for share-based payment transactions including theincome tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU 2016-09, allexcess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense orbenefit in the income statement. ASU 2016-09 also requires recognition of excess tax benefits regardless of whether the benefit reduces taxes payable in thecurrent period. ASU 2016-09 further permits the withholding of an amount up to employees’ maximum individual tax rate in the relevant jurisdiction withoutresulting in a liability classification. ASU 2016-09 also requires any excess tax benefits be classified along with other income tax cash flows as an operatingactivity and cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity. ASU 2016-09 iseffective for public companies for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of ASU2016-09 on its Consolidated Financial Statements.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments (Topic 326) Credit Losses.” ASU 2016-13 changes the impairment model formost financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are notaccounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be avaluation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to becollected on the financial asset. ASU 2016-13 is effective as of January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impactof ASU 2016-13.In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effectivefor fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unlessimpracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company iscurrently evaluating the impact that ASU 2016-15 will have on its statement of financial position or financial statement disclosures.In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The new guidance eliminates the requirement tocalculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge.Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the chargebased on the current Step 1). ASU 2017-04 is effective for annual and F-12Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) any interim impairment tests for periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU 2017-04 todetermine how its goodwill impairment testing will be impacted and whether it may elect to adopt ASU 2017-04 prior to the stated effective date.Reclassification of Prior Period BalancesCertain reclassifications have been made to prior period amounts to conform to the current-year presentation. On a retrospective basis, the Companyearly adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires an entity to classify deferred tax assets and liabilities as non-current on the Consolidated Balance Sheets and Notes to Consolidated Financial Statements. Previously, deferred tax assets and liabilities were separatedinto current and non-current amounts on the Consolidated Balance Sheets and Notes to Consolidated Financial Statements.2. Discontinued OperationsEffective March 1, 2013, the Company sold substantially all of the assets used in its home health business (the “Home Health Business”) in Arkansas,Nevada and South Carolina, and 90% of the Home Health Business in California and Illinois, to subsidiaries of LHC Group, Inc. (the “Purchasers”) for a cashconsideration of $20.0 million. The Company retained a 10% ownership interest in the Home Health Business in California and Illinois. On December 30,2013, the Company sold one home health agency in Pennsylvania for approximately $0.2 million. In accordance with ASC 360-10-45, “Impairment orDisposal of Long-Lived Assets,” the results of the Home Health Business and the Pennsylvania home health agency sold are reflected as discontinuedoperations for all periods presented herein.The Company has included the financial results of the Home Health Business in discontinued operations for all periods presented. As a condition ofthe sale of the Home Health Business to subsidiaries of LHC Group. Inc. (“LHCG”), the Company is responsible for any adjustments to Medicare andMedicaid billings prior to the closing of the sale. In connection with an internal evaluation of the Company’s billing processes, it discovered documentationerrors in a number of claims that it had submitted to Medicare. Consistent with applicable law, the Company voluntarily remitted $1.8 million to thegovernment in March 2014. As of December 31, 2016, the Company, using its best judgment, has estimated a total of $0.4 million for billing adjustments for2013, 2012 and 2011 which may be subject to Medicare audits. For the years ended December 31, 2016, 2015 and 2014, the Company reduced theindemnification reserve accrual by the amounts accrued for periods no longer subject to Medicare audits of $0.2 million, $0.4 million and $0.5 millionrespectively. This amount is reflected as a reduction in general and administrative expense of discontinued operations and reflected in the table below.The following table presents the net service revenues and earnings attributable to discontinued operations, which include the financial results for theyears ended December 31, 2016, 2015 and 2014: 2016 2015 2014 (Amounts in Thousands) Net service revenues $— $— $— Income before income taxes 163 448 470 Income tax expense 66 178 190 Net income from discontinued operations 97 270 280 F-13Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 3. AcquisitionsEffective February 23, 2016, the Company acquired certain assets of Lutheran Social Services of Illinois (“LSSI”) for approximately $0.1 million, inorder to expand its adult day services business within the State of Illinois. The results of operations from the acquisition of LSSI is included in the Company’sConsolidated Statements of Income from the date of the acquisition. The LSSI acquisition accounted for $1.0 million of net service revenues from continuingoperations and $0.1 million of net income from continuing operations for the year ended December 31, 2016.On April 24, 2015, Addus HealthCare entered into a Securities Purchase Agreement with Margaret Coffey and Carol Kolar (the “South Shore Sellers”),South Shore Home Health Service Inc. (“South Shore”) and Acaring Home Care, LLC (“Acaring”), pursuant to which Addus HealthCare agreed to acquire allof the issued and outstanding securities of each of South Shore and Acaring. On February 5, 2016, Addus HealthCare completed its acquisition of all theoutstanding securities of South Shore and Acaring for a total purchase price of $20.0 million (the “South Shore Purchase Price”). The related acquisitioncosts, included in general and administrative expenses on the Consolidated Statements of Income, were $1.3 million and were expensed as incurred. Theresults of operations from South Shore and Acaring are included in the Company’s Consolidated Statements of Income from the date of the acquisition.Acaring was dissolved on March 1, 2016, and its assets were transferred to South Shore.The Company’s acquisition of South Shore and Acaring has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and theresulting goodwill and other intangible assets was accounted for under ASC Topic 350 “ Goodwill and Other Intangible Assets.” The acquisition wasrecorded at its fair value as of February 5, 2016. Under business combination accounting, the South Shore Purchase Price was $20.0 million and was allocatedto South Shore’s net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, the total purchaseprice has been allocated as follows: Total(Amounts inThousands) Goodwill $5,265 Identifiable intangible assets 9,957 Accounts receivable 6,807 Other current assets 858 Accrued liabilities (1,593) Accounts payable (1,268) Total purchase price allocation $20,026 Management’s assessment of qualitative factors affecting goodwill for South Shore 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. F-14Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The South Shore acquisition accounted for $51.7 million of net service revenues from continuing operations and $0.8 million net loss of net incomefrom continuing operations for the year ended December 31, 2016.Effective November 9, 2015, the Company acquired certain assets of Five Points Healthcare of Virginia, LLC (“Five Points”), in order to further expandthe Company’s presence in the State of Virginia. The total consideration for the transaction was comprised of $4.1 million in cash. The related acquisitioncosts, included in general and administrative expenses on the Consolidated Statements of Income, were $0.4 million and were expensed as incurred. Theresults of operations from this acquired entity are included in the Company’s Consolidated Statements of Income from the date of the acquisition.The Company’s acquisition of Five Points has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resultinggoodwill and other intangible assets was accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets.” The acquisition of Five Points wasrecorded at its fair value as of November 9, 2015. The total purchase price was $4.1 million. Under business combination accounting, the total purchase pricewas allocated to Five Points’ net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, thetotal purchase price has been allocated as follows: Total(Amounts inThousands) Goodwill $2,885 Identifiable intangible assets 920 Accounts receivable 472 Accrued liabilities (155)Accounts payable (7)Total purchase price allocation $4,115 Management’s assessment of qualitative factors affecting goodwill for Five Points 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 the Company’s management. The net intangible and identifiable intangible assets, includinggoodwill, are deductible for tax purposes.The Five Points acquisition accounted for $4.1 million of net service revenues from continuing operations and $0.0 million of net income fromcontinuing operations for the year ended December 31, 2016 and $0.7 million of net service revenues from continuing operations and $0.0 million net loss ofnet income from continuing operations for the year ended December 31, 2015.Effective January 1, 2015, the Company acquired Priority Home Health Care, Inc. (“PHHC”), in order to further expand the Company’s presence in theState of Ohio. The total consideration for the transaction was comprised of $4.3 million in cash. The related acquisition costs, included in general andadministrative expenses on the Consolidated Statements of Income, were $0.5 million and were expensed as incurred. The results of operations from thisacquired entity are included in the Company’s Consolidated Statements of Income from the date of the acquisition. F-15Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company’s acquisition of PHHC has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resultant goodwilland other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets.” The acquisition was recorded at its fair valueas of January 1, 2015. The total purchase price is $4.3 million. Under business combination accounting, the total purchase price was allocated to PHHC’s nettangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, the total purchase price has beenallocated as follows: Total(Amounts inThousands) Goodwill $1,862 Identifiable intangible assets 1,930 Accounts receivable 951 Furniture, fixtures and equipment 58 Other current assets 8 Accrued liabilities (339)Accounts payable (220)Total purchase price allocation $4,250 Management’s assessment of qualitative factors affecting goodwill for PHHC 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 the Company’s management. It is anticipated that the net intangible and identifiable intangibleassets, including goodwill, are deductible for tax purposes.The PHHC acquisition accounted for $7.5 million of net service revenues from continuing operations and $0.3 million of net income from continuingoperations for the year ended December 31, 2016 and $9.0 million of net service revenues from continuing operations and $0.1 million of net income fromcontinuing operations for the year ended December 31, 2015.Effective 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 $8.2 million, comprisedof $7.1 million in cash and $1.0 million, representing the estimated fair value of contingent earn-out obligation. The related acquisition costs, included ingeneral and administrative expenses on the Consolidated Statements of Income, were $0.6 million and were expensed as incurred. The results of operationsfrom this acquired entity are included in the Company’s Consolidated Statements of Income from the date of the acquisition. F-16Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company’s acquisition of Aid & Assist has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resultantgoodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets.” The acquisition was recorded at itsfair value as of June 1, 2014. The total purchase price is $8.2 million and is comprised of: Total(Amounts inThousands) Cash $7,172 Contingent earn-out obligation 1,020 Total purchase price $8,192 As of June 1, 2014, the contingent earn-out obligation was recorded at its fair value of $1.0 million, which was the present value of the Company’sobligation to pay up to $1.2 million based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-outagreement between the parties. As of December 31, 2014, the Company revalued this liability at $0.2 million. As of December 31, 2016 and 2015, based onits valuations, the Company believes a liability does not exist for this contingent earn-out obligation. These declines in the fair value of the contingent earn-out obligation reflects the acquisition’s failure to achieve performance targets expected at the date of acquisition for 2014, 2015 and 2016. The contingentearn-out obligation expired December 31, 2016.Under business combination accounting, the total purchase price was allocated to Aid & Assist’s net tangible and identifiable intangible assets basedon their estimated fair values. Based upon management’s valuation, the total purchase price has been allocated as follows: Total(Amounts inThousands) Goodwill $4,317 Identifiable intangible assets 3,950 Accounts receivable 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. The net intangible and identifiable intangible assets, includinggoodwill, are deductible for tax purposes.The Aid and Assist acquisition accounted for $8.8 million of net service revenues from continuing operations and $0.3 million net loss of net incomefrom continuing operations for the year ended December 31, F-17Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 2016, $10.7 million of net service revenues from continuing operations and $0.1 million net loss of net income from continuing operations for the year endedDecember 31, 2015 and $7.5 million of net service revenues from continuing operations and $0.2 million of net income from continuing operations for theyear ended December 31, 2014.The following table contains unaudited pro forma consolidated income statement information assuming the South Shore acquisition closed onJanuary 1, 2015, the Five Points and PHHC acquisitions closed on January 1, 2014, and Aid and Assist acquisition closed on January 1, 2013. For the Years Ended December 31,(Amounts in Thousands) 2016 2015 2014 Net service revenues $405,524 $392,887 $334,517 Operating income from continuing operations 14,437 20,383 19,458 Net income from continuing operations 11,409 14,135 12,893 Earnings from discontinued operations 97 270 280 Net income $11,506 $14,405 $13,173 Net income per common share Basic income per share Continuing operations $1.01 $1.29 $1.18 Discontinued operations 0.01 0.02 0.03 Basic income per share $1.02 $1.31 $1.21 Diluted income per share Continuing operations $1.00 $1.27 $1.16 Discontinued operations 0.01 0.02 0.03 Diluted income per share $1.01 $1.29 $1.19 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 the South Shore acquisition had closed on January 1, 2015, the Five Pointsand PHHC acquisitions closed on January 1, 2014, and the Aid and Assist acquisition closed on January 1, 2013. This pro forma information is presented forillustrative purposes only and may not be indicative of the results of operation that would have actually occurred. In addition, future results may varysignificantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of futureevents that may occur after the acquisition, such as anticipated cost savings from operating synergies.For the acquisition of Coordinated Home Health Care, LLC on December 1, 2013, a contingent earn-out obligation was recorded at its fair value of$1.1 million, which was the present value of the Company’s obligation to pay up to $2.3 million based on probability-weighted estimates of the achievementof certain performance targets, as defined in the earn-out agreement between the parties. As of December 31, 2014, the Company revalued this liability at $1.9million. This increase in the fair value of the contingent earn-out obligation reflected the acquisition’s excess achievement of performance targets for the yearended December 31, 2014 as a result of higher than anticipated rate of conversion to managed care organizations in the State of New Mexico. $1.0 million ofthe liability, which was recorded as the current portion at December 31, 2014, was subsequently paid during the second quarter of 2015. As of December 31,2015, the remaining contingent earn-out obligation was recorded at its fair value of $1.3 million which is the maximum earn-out obligation based on F-18Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between the parties. The obligationwas paid during the second quarter of 2016. The contingent earn-out obligation expired December 31, 2015.4. Property and EquipmentProperty and equipment consisted of the following: December 31, 2016 2015 (Amounts in Thousands) Computer equipment $3,807 $3,499 Furniture and equipment 3,146 2,498 Transportation equipment 898 773 Leasehold improvements 3,551 4,756 Computer software 5,419 6,245 16,821 17,771 Less accumulated depreciation and amortization (10,173) (9,152) $6,648 $8,619 Computer software includes $2.9 million of internally developed software. The Company had disposals of property and equipment related to theclosure of three adult day services centers in Illinois during the third quarter of 2016 and unused contact center office space. Depreciation and amortizationexpense predominantly related to computer equipment and software and leasehold improvements totaled $1.7 million, $1.7 million and $1.4 million for theyears ended December 31, 2016, 2015 and 2014, respectively.5. 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 2016, 2015 and 2014, the Company elected to implement Step 0 and was not required to conduct theremaining two step analysis. In performing its goodwill assessment for 2016, 2015 and 2014, 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, 2016, 2015 and 2014 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 Company did not record any impairment charges for the years ended December 31, 2016, 2015, or 2014. The goodwill for theCompany’s continuing operations was $73.9 million and $68.8 million as of December 31, 2016 and 2015, respectively. F-19Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) A summary of goodwill and related adjustments for continuing operations is provided below: Goodwill(Amounts inThousands) Goodwill, at December 31, 2014 $64,220 Additions for acquisitions 4,747 Adjustments to previously recorded goodwill (123) Goodwill, at December 31, 2015 $68,844 Additions for acquisitions 5,265 Adjustments to previously recorded goodwill (203) Goodwill, at December 31, 2016 $73,906 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.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, 2016, 2015 or2014.The carrying amount and accumulated amortization of each identifiable intangible asset category consisted of the following for continuing operationsat December 31, 2016 and 2015: Customerand referralrelationships Tradenames andtrademarks StateLicenses Non-competitionagreements Total (Amounts in Thousands) Gross balance at January 1, 2015 $27,896 7,181 150 2,058 37,285 Acquisition of customer list 146 — — — 146 Additions for acquisitions 1,830 980 — 40 2,850 Accumulated amortization (24,055) (4,587) — (1,288) (29,930) Net Balance at December 31, 2015 5,817 3,574 150 810 10,351 Gross balance at January 1, 2016 29,872 8,161 150 2,098 40,281 Additions for acquisitions 4,800 5,100 — 57 9,957 Accumulated amortization (26,766) (6,296) — (1,763) (34,825) Net Balance at December 31, 2016 $7,906 $6,965 $150 $392 $15,413 F-20Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Amortization expense for continuing operations related to the identifiable intangible assets amounted to $4.9 million, $3.0 million and $2.4 millionfor the years ended December 31, 2016, 2015 and 2014, respectively. Goodwill and state licenses are not amortized pursuant to ASC Topic 350.The weighted average remaining lives of identifiable intangible assets as of December 31, 2016 is 6.1 years.The estimated future intangible amortization expense is as follows: For the year ended December 31, Total (Amount inThousands) 2017 $4,185 2018 3,835 2019 2,698 2020 1,593 2021 1,418 Thereafter 1,684 Total $15,413 6. Details of Certain Balance Sheet AccountsPrepaid expenses and other current assets consist of the following: December 31, 2016 2015 (Amounts in Thousands) Prepaid health insurance $2,238 $490 Prepaid workers’ compensation and liability insurance 1,190 1,526 Prepaid rent 568 578 Workers’ compensation insurance receivable 747 1,303 Other 1,255 961 $5,998 $4,858 Accrued expenses consisted of the following: December 31, 2016 2015 (Amounts in Thousands) Accrued payroll $17,509 $13,304 Accrued workers’ compensation insurance 12,823 14,116 Accrued health insurance (1) 4,092 950 Indemnification reserve (2) 419 754 Accrued payroll taxes 1,747 1,805 Accrued professional fees 1,485 1,084 Accrued severance (3) 1,326 — Accrued restructuring (4) 1,786 — Other 1,416 3,069 $42,603 $35,082 F-21Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) (1)The Company provides health insurance coverage to qualified union employees providing personal care services in Illinois through a Taft-Hartleymulti-employer health and welfare plan under Section 302(c)(5) of the Labor Management Relations Act of 1947. The Company’s insurancecontributions equal the amount reimbursed by the State of Illinois. Contributions are due within five business days from the date the funds are receivedfrom the State. Amounts due of $2.2 million and $0.5 million for health insurance reimbursements and contributions were reflected in prepaidinsurance and accrued insurance at December 31, 2016 and 2015, respectively. (2)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 $1.8 million to the government in March 2014. The Company, using its best judgment, has estimated a total of $0.4 million for billingadjustments for 2013, 2012 and 2011 services which may be subject to Medicare audits. For the years ended December 31, 2016 and 2015, theCompany reduced the indemnification reserve accrual by the amounts accrued for periods no longer subject to Medicare audits of $0.2 million and$0.4 million, respectively. This amount is reflected as a reduction in general and administrative expense of discontinued operations. (3)Accrued severance represents amounts payable to terminated employees with employment and/or separation agreements with the Company. (4)Accrued restructuring includes reserves for lease commitments related to the closure of three adult day services centers in Illinois during the thirdquarter of 2016 and unused contact center office space.The Company’s workers’ compensation program has a $0.4 million deductible component. The Company recognizes its obligations associated withthis program 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 beenaccrued based on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. The future claimspayments related to the workers’ compensation program are secured by letters of credit. These letters of credit totaled $16.7 million at December 31, 2016 and2015.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$0.7 million and $0.8 million at December 31, 2016 and 2015, respectively. The Company received $0.8 million in cash and escrow amounts in exchange forthe termination of these liabilities. F-22Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 7. Long-Term DebtLong-term debt consisted of the following: December 31, 2016 December 31, 2015 (Amounts in Thousands) Revolving credit loan $— $— Term loan 24,063 — Capital leases 2,433 2,991 Less unamortized issuance costs (1,483) — Total $25,013 $2,991 Less current maturities (2,531) (1,109) Long-term debt $22,482 $1,882 In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” which amended the previous presentation of debtissuance costs in the financial statements. ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balancesheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The Company adopted this standard on January 1,2016 and has classified the debt issuance costs as a reduction of long-term debt as of December 31, 2016. For the year ended December 31, 2015, debtissuance costs are included in other assets on the Consolidated Balance Sheets as the Company had no long-term debt outstanding during the year to offsetthe debt issuance costs.Capital LeasesOn July 12, 2014, September 11, 2014 and April 13, 2015, the Company executed three 48-month capital lease agreements for $2.7 million, $1.4million and $0.4 million, respectively, with First American Commercial Bancorp, Inc. The capital leases were entered into to finance property and equipmentat the Company’s corporate headquarters in Downers Grove, IL. The underlying assets are included in “Property and equipment, net of accumulateddepreciation and amortization” in the accompanying Consolidated Balance Sheets. These capital lease obligations require monthly payments throughSeptember 2019 and have implicit interest rates that range from 3.0% to 3.6%. At the end of the term, the Company has the option to purchase the assets for$1 per lease agreement.Effective October 1, 2016, the Company entered into a 25-month capital lease agreement for $0.6 million with Meridian Leasing Corporation. Thecapital leases were entered into to finance property and equipment for the Company’s telephone systems. The underlying assets are included in “Property andequipment, net of accumulated depreciation and amortization” in the accompanying Consolidated Balance Sheets. These capital lease obligations requiremonthly payments through October 2018 and have an implicit interest rate of 11.1%. At the end of the term, the Company has the option to purchase theassets for $1 per lease agreement. F-23Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) An analysis of the leased property under capital leases by major classes is as follows. Classes of Property Asset Balances atDecember 31, 2016(Amounts in Thousands) Leasehold Improvements $2,928 Furniture & Equipment 1,144 Computer Equipment 635 Computer Software 303 Total 5,010 Less: Accumulated Depreciation 2,556 $2,454 The future minimum payments for capital leases as of December 31, 2016 are as follows: Capital Lease(Amounts In Thousands) 2017 $ 1,561 2018 1,026 2019 30 Total minimum lease payments 2,617 Less: amount representing estimated executory costs (such as taxes,maintenance and insurance), including profit thereon, included intotal minimum lease payments (70) Net minimum lease payments 2,547 Less: amount representing interest (1) (114) Present value of net minimum lease payments (2) $2,433 (1)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at lease inception. (2)Included in the balance sheet as $1.4 million of the current portion of long-term debt and $1.0 million of the long-term debt, less current portion.Senior Secured Credit FacilityOn May 24, 2016, the Company entered into an amendment to its credit facility with certain lenders and Fifth Third Bank, as agent and letters of creditissuer. The Company’s amended credit facility provides a $100.0 million revolving line of credit, a delayed draw term loan facility of up to $25.0 million andan uncommitted incremental term loan facility of up to $50.0 million, expiring November 10, 2020 and includes a $35.0 million sublimit for the issuance ofletters of credit. The amended credit facility increased the specified advance multiple from 3.25 to 3.75 to 1.00 and the maximum permitted senior leverageratio from 3.50 to 4.00 to 1.00. Except as modified by the May 24, 2016 amendment, the amended credit facility contains the same material terms as theprevious agreement dated November 10, 2015. Substantially all of the subsidiaries of Holdings are co-borrowers, F-24Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) and Holdings has guaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first priority security interest in all ofHoldings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.The availability of funds under the revolving credit portion of the Company’s credit facility, 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 3.75, less the outstanding senior indebtedness and letters of credit, and (ii) $100.0 million lessthe outstanding revolving loans and letters of credit. Interest on our credit facility may be payable at (x) the sum of (i) an applicable margin ranging from2.00% to 2.50% based on the applicable leverage ratio plus (ii) a base rate equal to the greatest of (a) the rate of interest last quoted by The Wall StreetJournal as the “prime rate,” (b) the sum of the federal funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would be applicable to aloan with an interest period of one month advanced on the applicable day plus a margin of 3.00% or (y) the sum of (i) an applicable margin ranging from3.00% to 3.50% based on the applicable leverage ratio plus (ii) the adjusted LIBOR that would be applicable to a loan with an interest period of one, two orthree months advanced on the applicable day or (z) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratioplus (ii) the daily floating LIBOR that would be applicable to a loan with an interest period of one month advanced on the applicable day. The Companypays a fee ranging from 0.25% to 0.50% per annum based on the applicable leverage ratio times the unused portion of the revolving portion of the creditfacility. Issued stand-by letters of credit are charged at a rate equal to the applicable margin for LIBOR loans payable quarterly.On January 12, 2016, May 5, 2016 and July 14, 2016, the Company drew $10.0 million, $10.0 million and $10.0 million, respectively, of its revolvingcredit line to fund growth and on-going operations. On February 5, 2016, the Company drew $22.0 million on its delayed draw term loan to fund theacquisition of South Shore. As a result of a provision in the Company’s amended credit facility, the Company was able to transfer $3.0 million of itsrevolving credit line debt to the Company’s term loan debt on May 24, 2016. During the month of August 2016, the Company fully repaid all outstandingamounts under the revolving portion of the credit facility. As of December 31, 2016, the Company had a total of $24.1 million outstanding on the creditfacility and the total availability under the revolving credit loan facility was $79.7 million. The Company did not have any amounts outstanding on thecredit facility as of December 31, 2015 and the total availability under the revolving credit loan facility was $58.3 million.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, distributions, investments and loans, subject to customary carve outs, a restriction on dividends (unless no default then exists or wouldoccur as a result thereof, the Company is in pro forma compliance with the financial covenants contained in the credit facility after giving effect thereto, theCompany has an excess availability of at least 40% of the revolving credit commitment under the credit facility and the aggregate amount of dividends anddistributions paid in any fiscal year does not exceed $5.0 million), restrictions on the Company’s ability to enter into transactions other than in the ordinarycourse of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, consummate any individual acquisition witha purchase price in excess of $25.0 million and consummate acquisitions with total purchase price in excess of $40.0 million in the aggregate over the term ofthe credit facility, in each case without the consent of the lenders, restrictions on mergers, F-25Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) transfers of assets, acquisitions, equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changesand lines of business.8. Income TaxesThe current and deferred federal and state income tax provision for continuing operations, are comprised of the following: December 31, 2016 2015 2014 (Amounts in Thousands) Current Federal $4,400 $2,743 $2,231 State 908 528 976 Deferred Federal (1,147) 546 1,915 State (167) 115 306 Provision for income taxes $3,994 $3,932 $5,428 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, 2016 and 2015. The deferred tax assets consisted of the following: December 31, 2016 2015 (Amounts in Thousands) Deferred tax assets Long-term Accounts receivable allowances $2,960 $1,930 Accrued compensation 2,733 1,165 Accrued workers’ compensation 4,854 5,092 Transaction costs 1,137 917 Reserves 169 300 Restructuring costs 718 — Stock-based compensation 954 1,190 Other 524 926 Total long-term deferred tax assets 14,049 11,520 Deferred tax liabilities Long-term Goodwill and intangible assets (9,863) (8,346) Property and equipment (552) (697) Prepaid insurance (478) (473) Other (3) (179) Total long-term deferred tax liabilities (10,896) (9,695) Total net deferred tax assets $3,153 $1,825 (1)Prior year was adjusted to conform to current year presentation. F-26(1)Table 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, 2016.In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires an entity to classify deferred taxliabilities and assets as noncurrent within a classified balance sheet. Previous guidance required deferred tax liabilities and assets be separated into currentand noncurrent amounts on the balance sheet. The Company early adopted ASU 2015-17 in the fourth quarter of 2016 on a retrospective basis. The earlyadoption of this standard did not have a material impact on the Company’s financial position, consolidated results of operations or financial statementdisclosures.A reconciliation for continuing operation of the statutory federal tax rate of 35.0%, 34.5% and 34.5% to the effective income tax rate, for the yearsended December 31, 2016, 2015, and 2014, is summarized as follows: December 31, 2016 2015 2014 Federal income tax at statutory rate 35.0 % 34.5% 34.5% State and local taxes, net of federal benefit 5.2 5.2 5.9 Jobs tax credits, net (15.8) (11.1) (9.9) Nondeductible permanent items 0.9 0.5 0.5 Other (0.2) (3.4) 0.2 Effective income tax rate 25.1% 25.7% 31.2%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 2013 through 2016 and for various state authorities for the years 2012 through 2016.At December 31, 2016 and 2015, the Company did not have any unrecognized tax benefits under ASC Topic 740. During 2015, the Company believedthat it no longer had any uncertain tax positions that required a reserve and therefore recognized the previous $0.1 million unrecognized tax benefit during2015. During 2016, the Company did not record a reserve for uncertain tax positions.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, 2014 $115 Decreases related to current year tax positions (115) Balance at December 31, 2015 $— Decreases related to current year tax positions — Balance at December 31, 2016 $— F-27Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) The Company recognizes interest and penalties accrued related to uncertain tax positions in interest expense and penalties within operating expenseson the Consolidated Statements of Income. Accrued interest and penalties are included on the Consolidated Balance Sheets within accrued interest andpenalties for uncertain tax positions. The Company did not have any uncertain tax positions as of December 31, 2016 or December 31, 2015, and as a result,it has not recorded a liability for interest and penalties for either year respectively.9. 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. As ofDecember 31, 2016, a total of approximately 899,000 of Holdings’ shares of common stock were reserved for issuance under the 2006 Plan. The number ofoptions to be granted and the terms thereof were approved by Holdings’ board of directors. The option price for each share of common stock subject to anoption may be greater than or equal to the fair market value of the stock at the date of grant. The stock options generally vest ratably over a five year periodand expire 10 years from the date of grant, if not previously 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 ofapproximately 1,500,000 incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units, restricted stockunits, other stock units and performance shares.A summary of stock option activity and weighted average exercise price is as follows: For The Year Ended December 31, 2016 2015 2014 Options(Amounts inThousands) WeightedAverageExercisePrice Options(Amounts inThousands) WeightedAverageExercisePrice Options(Amounts inThousands) WeightedAverageExercisePrice Outstanding, beginning of period 650 $12.70 684 $11.43 647 $8.80 Granted 285 20.03 40 26.49 121 22.97 Exercised (380) 8.77 (44) 8.51 (66) 6.90 Forfeited/Cancelled (150) 17.40 (30) 10.53 (18) 9.26 Outstanding, end of period 405 $19.71 650 $12.70 684 $11.43 The following table summarizes stock options outstanding and exercisable at December 31, 2016: Exercise Price Outstanding Exercisable Options WeightedAverageRemainingContractualLife in Years WeightedAverageExercisePrice Options WeightedAverageRemainingContractualLife in Years WeightedAverageExercisePrice $4.46 - $8.91 30,453 5.50 $7.18 28,578 5.40 $7.07 $10.00 - $35.00 374,304 8.80 20.72 56,728 7.40 22.99 404,757 8.5 $19.71 85,306 6.80 $17.66 F-28Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 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 dividend 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 expected term of options is based on theCompany’s estimate of when options will be exercised in the future. The risk-free interest rate assumption is based on observed interest rates appropriate forthe terms of the Company’s awards. The dividend assumption is based on the Company’s history and expectation of not paying dividends. The expectedturn-over rate represents the expected forfeitures due to employee turnover and is based on historical rates experienced by the Company. The expectedexercise multiple represents the mean ratio of the stock price to the exercise price at which employees are expected to exercise their options.The weighted-average estimated fair value of employee stock options granted as calculated using the Enhanced Hull-White Trinomial model and therelated assumptions follow: For the Year Ended December 31, 2016 2015 2014 Grants Grants Grants Weighted average fair value $9.32 $9.18 $10.69 Risk-free discount rate 1.70% - 2.02% 2.29% 2.12% - 2.73% Expected life 8.20 years 8.20 years 7.70-8.20 years Dividend yield — — — Volatility 47% 47% 47% Expected turn-over rate 2% 2% 5% Expected exercise multiple 2.2 2.2 2.2 Stock option compensation expense, for continuing operations, totaled $0.6 million, $0.6 million and $0.5 million for the years ended December 31,2016, 2015 and 2014, respectively. As of December 31, 2016, there was $2.4 million of total unrecognized compensation cost that is expected to berecognized over a period of five years.The intrinsic value of vested and outstanding stock options was $1.5 million and $1.9 million, $5.9 million and $7.0 million and $6.3 million and $8.8million as of December 31, 2016, 2015 and 2014, respectively.The intrinsic value of stock options exercised during the year ended December 31, 2016, 2015 and 2014 was $3.9 million, $0.9 million and $1.0million, respectively.There were approximately 380,000, 44,000 and 66,000 stock options exercised in 2016, 2015 and 2014 respectively. For 2016 and 2015, none of theoptions exercised were issued as part of a cashless exchange. For 2014, 26,000 of the options exercised were issued as part of a cashless exchange.The Company recognized an excess tax benefit from the exercise of stock options of $1.1 million, $0.3 million and $0.8 million for 2016, 2015 and2014, respectively, as a credit to additional paid-in capital rather than a reduction of income tax expense. F-29Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) Restricted Stock AwardsIn 2016, management awarded 108,000 shares of restricted stock awards under the 2009 Plan with a weighted average grant date fair value of $21.14per share. As of December 31, 2016, $1.6 million of unearned compensation related to unvested awards of restricted stock will be recognized over theremaining vesting terms of the awards.The following table summarizes the status of unvested restricted stock awards outstanding at December 31, 2016, 2015 and 2014: For The Year Ended December 31, 2016 2015 2014 RestrictedStockAwards(Amounts inThousands) WeightedAverageGrantDate FairValue RestrictedStockAwards(Amounts inThousands) WeightedAverageGrantDate FairValue RestrictedStock Awards(Amountsin Thousands) WeightedAverageGrantDate FairValue Unvested restricted stock awards, beginning of period 84 $18.91 79 $15.16 70 $9.13 Awarded 108 21.14 58 23.32 36 22.75 Vested (20) 24.12 (38) 17.02 (22) 10.34 Forfeited (69) 17.17 (15) 21.46 (5) 6.66 Unvested restricted stock awards, end of period 103 $20.84 84 $18.91 79 $15.16 The fair market value of restricted stock awards that vested during the year ended December 31, 2016 was $0.4 million.Restricted stock award compensation expense, for continuing operations, totaled $0.5 million, $0.9 million and $0.3 million for the years endedDecember 31, 2016, 2015 and 2014, respectively.Shares available under the 2009 Plan were 598,442, as of December 31, 2016. The Company cannot issue any further grants under the 2006 Plan.10. Operating Leases and Related Party TransactionsThe Company leases its branch office space under various operating leases that expire at various dates through 2025. 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 $2.9 million, $3.0 million and $2.7 million for continuing operations for the years ended December 31,2016, 2015, and 2014, respectively. In connection with the sale of the Home Health Business, the Company entered into subleases for all or a portion of 5 ofthe 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 (unaudited) of office space in Downers Grove, ILfor its corporate headquarters. The Company assumed occupancy in May 2014. Rental expense relating to this lease amounted to $0.8 million and $0.8million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. In 2016, the contact center F-30Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) contained within the Downers Grove corporate headquarters closed. As a result, approximately 21,000 square feet (unaudited) of the office space in DownersGrove is unused and the related payments included in restructuring and other expenses. Additionally, the Company entered into a 64 month lease with a thirdparty for approximately 12,000 square feet (unaudited) of office space in Frisco, Texas which also serves as our corporate headquarters. The Companyassumed occupancy in July 2016. Rental expense relating to this lease amounted to $0.2 million for the year ended December 31, 2016. Previously, theCompany leased its corporate office space from a former member of its board of directors, who is also a stockholder of the Company. Under the terms of anoperating lease that expired in June 2013; this lease agreement operated on a month to month basis through May 2014. Rental expense relating to this leaseamounted to $0.2 million for the year ended December 31, 2014.During 2011, the Company entered into a lease for its telecom system under a five year operating lease that expired in June 2016. Total expense on thetelecom lease for continuing operations was $0.5 million, $0.6 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.In 2016, the Company decided to retain the leased telecom system by entering into a capital lease agreement for the fair value of the equipment as describedin Note 7 to the Consolidated Financial Statements.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 of $0.0 million and unoccupied properties of $1.8 million included in accruedrestructuring, have been included in the table below because the Company remains liable for payments in the event that the sublessee does not make therequired payment to the landlord. Rent (Amount inThousands) 2017 $3,855 2018 3,225 2019 2,340 2020 1,930 2021 1,745 Thereafter 3,420 Total $16,515 11. Segment DataThe Company historically segregated its results into two distinct reportable segments: the home & community segment and the home health segment.As a result of the sale of the Home Health Business, in 2013, the Company has reported the operating results for the Home Health Business in discontinuedoperations. Therefore, all of the Company’s continuing operations are reported as one operating segment.12. Employee Benefit PlansThe Company’s 401(k) Retirement Plan covers all non-union employees. The 401(k) plan is a defined contribution plan that provides for 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 $0.0 million for continuing operations for the years ended December 31, 2016, 2015and 2014, respectively. F-31Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 13. Commitments and ContingenciesLegal ProceedingsFrom time to time, the Company is subject to legal and/or administrative proceedings incidental to its business. It is the opinion of management thatthe outcome of pending legal and/or administrative proceedings will not have a material effect on our Consolidated Balance Sheets and ConsolidatedStatements of Income.On January 20, 2016, the Company was served with a lawsuit filed in the United States District Court for the Northern District of Illinois against theCompany and Cigna Corporation by Stop Illinois Marketing Fraud, LLC, a qui tam relator formed for the purpose of bringing this action. In the action, theplaintiff alleges, inter alia, violations of the federal False Claims Act relating primarily to allegations of violations of the federal Anti-Kickback Statute andallegedly improper referrals of patients from our home care division to our home health business, substantially all of which was sold in 2013. The plaintiffseeks to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and its attorneys’ fees. The U.S.government has declined to intervene at this time. Plaintiff amended its complaint on April 4, 2016 to include additional allegations in support of its FalseClaims Act claims, including alleged violations of the federal Anti-Kickback Statute. The Company and Cigna Corporation filed a motion to dismiss theamended complaint on June 6, 2016. Plaintiff filed its opposition to the Company’s motion on July 22, 2016. The Company’s reply in further support of themotion to dismiss was filed on August 23, 2016. On February 3, 2017, the Court granted Cigna Corporation’s motion to dismiss in full, and granted ourmotion to dismiss in part allowing Plaintiff another chance to amend its complaint. Plaintiff timely filed a second amended complaint on March 10, 2017,withdrawing its conspiracy claim under the Federal False Claims Act and adding an explicit claim under the Illinois False Claims Act for the same underlyingkickback allegations. The Company intends to defend the litigation vigorously believes the case will not have a material adverse effect on its business,financial condition or results of operations.On May 4, 2016, the Company, together with 59 other social service and healthcare providers in the State of Illinois, filed an action in the CircuitCourt of Cook County, Illinois against certain individuals in their official capacities as agents of the Illinois Department of Human Services, the IllinoisDepartment on Aging, the Illinois Department of Public Health, the Illinois Department of HealthCare and Family Services, the Illinois Criminal JusticeInformation Authority, the Illinois Department of Corrections and the Illinois Department of Central Management Services, including the Governor ofIllinois. On July 20, 2016, a third amended complaint was filed by the plaintiffs, who now comprise 97 similarly situated providers and providerorganizations. In the action, the plaintiffs, including the Company, allege to have entered into contracts with the various defendants based in part on theGovernor’s proposed budget, which provided for funding for the services to be provided by plaintiffs thereunder. The Governor subsequently vetoed all ofthe relevant appropriations bills on June 25, 2015 and again vetoed an appropriations bill that included funding for the contracts on June 10, 2016. Whilethe defendant officer and agency heads have continued to enforce such contracts, since August 1, 2016, the Company received an aggregate ofapproximately $65.4 million in payments from the State of Illinois from the stopgap budget enacted on June 30, 2016. In those actions, plaintiffs alleged thedefendant officers and agency heads acted beyond the scope of their legal authority in entering into and enforcing contracts with no intent to perform undersuch contracts by failing to pay amounts due thereunder when due. The action also alleged that the Governor of Illinois’ vetoes of appropriations for suchcontracts violated the Illinois Constitution. Plaintiffs sought injunctive relief to payment of overdue bills to prevent irreparable harm, including imperilingthe State’s infrastructure for delivery of human services. On August 31, 2016, the Court denied plaintiffs’ petitions for declaratory and injunctive relief anddismissed the actions with prejudice. Plaintiffs timely filed a notice of appeal on September 30, 2016. F-32Table 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 yearswith the potential to auto-renew and include non-compete and nondisclosure provisions, as well as provide for defined severance payments in the event oftermination.A substantial percentage of the Company’s workforce is represented by the Service Employees International Union (“SEIU”). The Company has anational agreement with the SEIU. Wages and benefits are negotiated at the local level at various times throughout the year. These negotiations are ofteninitiated when the Company receives increases in hourly rates from various state agencies. Upon expiration of these collective bargaining agreements, theCompany may not be able to negotiate labor agreements on satisfactory terms with these labor unions.14. Severance and RestructuringDuring 2016, the Company took steps to streamline and simplify its operations. The expenses recorded for year ended December 31, 2016 includedcosts related to terminated employees and other direct costs associated with implementing these initiatives. Other direct costs included contract terminationcosts, accelerated depreciation and asset write-offs. The Company incurred total pretax expenses related to these streamlining initiatives of approximately$8.0 million during the year ended December 31, 2016. The Company expects some additional restructuring and other costs to occur, however, the amountand timing cannot be determined at this time.The following provides the components of and changes in our severance and restructuring accruals: EmployeeTerminationCosts Restructuringand Other (Amounts in Thousands) Balance at December 31, 2015 $— $— Provision 3,230 4,786 Utilization (1,904) (3,000) Balance at December 31, 2016 $1,326 $1,786 Employee termination costs represent accrued severance payable to terminated employees with employment and/or separation agreements with theCompany. The terminations resulted mainly from the closure of the contact center and other changes made to the executive leadership team made during theyear ended December 31, 2016. The remaining accruals as of December 31, 2016 are expected to be paid through January 2019.Restructuring and other costs comprised of costs related to lease commitments and write-offs of leasehold improvements and property and equipmentresulting from the closure of three adult day services centers in Illinois and for unused contact center office space, costs related to a discontinued internallydeveloped software product and fees for the termination of various contracts with outside vendors for the year ended December 31, 2016.The aforementioned accruals are included in Accrued Expenses on the Consolidated Balance Sheets and the aforementioned expenses are included inGeneral and Administrative Expenses on the Consolidated Statements of Income. F-33Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 15. 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 42.1%, 48.8% and 53.2% of the Company’s net service revenues from continuingoperations for 2016, 2015, and 2014, respectively.The related receivables due from the Illinois Department on Aging represented 55.4% and 54.9% of the Company’s net accounts receivable atDecember 31, 2016 and 2015, respectively.16. 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-34Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) 17. Unaudited Summarized Quarterly Financial InformationThe following is a summary of the Company’s unaudited quarterly results of operations: Year Ended December 31, 2016 Year Ended December 31, 2015 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 (Amounts and Shares in Thousands, Except Per Share Data) Net service revenues $103,657 $103,502 $100,927 $92,602 $84,760 $84,331 $85,809 $81,915 Gross profit 28,658 27,423 25,695 24,319 22,193 23,522 23,682 21,926 Operating income from continuing operations 7,693 2,495 4,394 653 3,015 4,284 5,098 3,627 Net income from continuing operations 7,471 1,699 2,600 157 3,051 2,887 3,253 2,162 Earnings from discontinued operations 97 — — — 270 — — Net income $7,568 $1,699 $2,600 $157 $3,321 $2,887 $3,253 $2,162 Average shares outstanding: Basic 11,383 11,367 11,361 11,022 11,007 11,007 10,989 10,947 Diluted 11,494 11,417 11,385 11,178 11,220 11,247 11,212 11,612 Income per common share: Basic Continuing operations $0.66 $0.15 $0.23 $0.01 $0.28 $0.26 $0.30 $0.20 Discontinued operations 0.01 — — — 0.02 — — — Basic net income per share $0.67 $0.15 $0.23 $0.01 $0.30 $0.26 $0.30 $0.20 Diluted net income per share Continuing operations $0.65 $0.15 $0.23 $0.01 $0.27 $0.26 $0.29 $0.19 Discontinued operations 0.01 — — — 0.02 — — — Diluted net income per share $0.66 $0.15 $0.23 $0.01 $0.29 $0.26 $0.29 $0.19 18. Subsequent EventsOn January 3, 2017, Maxine Hochhauser ceased serving as the Chief Operating Officer of Addus HealthCare. Effective January 16, 2017, W. BradleyBickham was appointed as the Chief Operating Officer and Executive Vice President of Addus HealthCare. F-35Table of ContentsADDUS HOMECARE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements—(Continued) On January 30, 2017 and February 24, 2017, the Company drew $10.0 million and $10.0 million, respectively, of its revolving credit line, described inNotes to Consolidated Financial Statements 7. Long-Term Debt, to fund on-going operations.In order to focus on providing services to consumers in their homes, effective March 1, 2017, Addus ceased the adult day services businesses and soldsubstantially all of the assets used in our adult day services centers for approximately $2.4 million. The gain on the sale of the three remaining adult dayservices centers is approximately $2.1 million.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, 2016 Allowance for doubtful accounts $4,850 7,373 4,860 $7,363 Year ended December 31, 2015 Allowance for doubtful accounts $3,881 4,309 3,340 $4,850 Year ended December 31, 2014 Allowance for doubtful accounts $4,140 2,818 3,077 $3,881 *Write-offs, net of recoveries F-36Exhibit 21.1SUBSIDIARIES OF THE REGISTRANT Name of Subsidiary State ofIncorporation Doing Business As NameAddus HealthCare (Delaware), Inc. Delaware —Addus HealthCare (Idaho), Inc. Delaware A Full Life HomeCareAddus HealthCare (Indiana), Inc. Delaware Addus HealthCareAddus HealthCare (Nevada), Inc. Delaware Desert PCASilver State Personal CareAddus HealthCare (North Carolina), Inc. Delaware Down East HealthCareAddus HealthCare (South Carolina), Inc. Delaware —Addus HealthCare, Inc. Illinois Addus HealthCare Addus Personal Care Services Cura Partners, LLC Tennessee Aid & Assist at Home, LLCPriority Home Health Care, Inc. Ohio —South Shore Home Health Service, Inc. New York —Exhibit 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. 333-214988) and Form S-8 (No. 333-190433 and 333-164413) of Addus HomeCare Corporation of our reports dated March 15, 2017, 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, IllinoisMarch 15, 2017Exhibit 31.1CERTIFICATIONI, R. Dirk Allison, 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(s) 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 15d-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(s) 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 15, 2017 /s/ R. Dirk Allison R. Dirk AllisonPresident and Chief Executive OfficerExhibit 31.2CERTIFICATIONI, Brian Poff, 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(s) 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 15d-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(s) 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 15, 2017 /s/ Brian PoffBrian PoffChief Financial OfficerExhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Addus HomeCare Corporation (the “Company”) asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Dirk Allison, President and Chief Executive Officer of theCompany, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 15, 2017 By: /S/ R. DIRK ALLISON R. Dirk Allison President and Chief Executive OfficerExhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Addus HomeCare Corporation (the “Company”) asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Poff, Chief Financial Officer of the Company, certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 15, 2017 By: /s/ Brian Poff Brian Poff Chief Financial Officer

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