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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34504
ADDUS HOMECARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
6303 Cowboys Way, Suite 600
Frisco, TX
(Address of principal executive offices)
20-5340172
(I.R.S. Employer
Identification No.)
75034
(Zip Code)
469-535-8200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading Symbol(s)
ADUS
Name of each exchange on which registered
The Nasdaq Global Market
Securities 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 1934 during 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 filing requirements for the past 90
days. Yes ☐ No ☒.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
☒
☐
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 Nasdaq Global
Market on June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1,335,406,000.
As of July 31, 2020, there were 15,664,952 shares of common stock outstanding.
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TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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SPECIAL CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
When included in this Annual Report on Form 10-K, or in other documents that we file with the Securities and Exchange Commission (“SEC”) or in
statements 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 be forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. These statements are based on the beliefs and assumptions of our management based on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing
of certain events to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but
are not limited to:
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the anticipated impact to our business operations with respect to developments related to the COVID-19 pandemic, including, without
limitation, those related to the length and severity of the pandemic; its impact on our business operations, reimbursement and our consumer
population; measures we are taking to respond to the pandemic; the impact of government regulation and stimulus measures, including the
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), Paycheck Protection Program and Health Care Enhancement Act
(“PPPHCE Act”) and other enacted legislation; increased expenses related to personal protective equipment (“PPE”), labor, supply chain, or
other expenditures; and workforce disruptions and supply shortages and disruptions;
uncertainty regarding the implementation of the CARES Act, the PPPHCE Act, and any other future stimulus measures related to COVID-19;
changes in operational and reimbursement processes and payment structures at the state or federal levels;
changes in Medicaid, Medicare, other government program and managed care organizations policies and payment rates;
changes in, or our failure to comply with, existing, federal and state laws or regulations, or our failure to comply with new government laws or
regulations on a timely basis;
competition in the healthcare industry;
the geographical concentration of our operations;
changes in the case mix of consumers and payment methodologies;
operational changes resulting from the assumption by managed care organizations of responsibility for managing and paying for our services to
consumers;
the nature and success of future financial and/or delivery system reforms;
changes in estimates and judgments associated with critical accounting policies;
our ability to maintain or establish new referral sources;
our ability to renew significant agreements or groups of agreements;
our ability to attract and retain qualified personnel;
federal, city and state minimum wage pressure, including any failure of Illinois or any other governmental entity to enact a minimum wage
offset and/or the timing of any such enactment;
changes in payments and covered services due to the overall economic conditions, including economic and business conditions resulting from
the COVID-19 pandemic, and deficit spending by federal and state governments;
cost containment initiatives undertaken by state and other third-party payors;
our ability to access financing through the capital and credit markets;
our ability to meet debt service requirements and comply with covenants in debt agreements;
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business disruptions due to natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or
street demonstrations;
our ability to integrate and manage our information systems;
our expectations regarding the size and growth of the market for our services;
the acceptance of privatized social services;
our expectations regarding changes in reimbursement rates;
eligibility standards and limits on services imposed by state governmental agencies;
the potential for litigation;
discretionary determinations by government officials;
our ability to successfully implement our business model to grow our business;
our ability to continue identifying, pursuing, consummating and integrating acquisition opportunities and expand into new geographic markets;
the impact of acquisitions and dispositions on our business, including the potential inability to realize the benefits of the acquisition of Hospice
Partners of America, LLC (“Hospice Partners”);
the potential impact of the discontinuation or modification of LIBOR;
the effectiveness, quality and cost of our services;
our ability to successfully execute our growth strategy;
changes in tax rates;
the impact of public health emergencies, including the COVID-19 pandemic;
the impact of inclement weather or natural disasters; 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
not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to
release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or
circumstances upon which 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 additional factors, see Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies and Estimates.”
Unless otherwise provided, “Addus,” “we,” “us,” “our,” and the “Company” refer to Addus HomeCare Corporation and our consolidated
subsidiaries and “Holdings” refers to Addus HomeCare Corporation. When we refer to 2019, 2018 and 2017, 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, 2019 as filed with the SEC, including all exhibits, is available on our
internet website at http://www.addus.com on the “Investors” page link. Information contained on, or accessible through, our website is not a part of, and is
not incorporated by reference into, this Annual Report on Form 10-K.
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ITEM 1.
BUSINESS
Overview
PART I
Addus HomeCare Corporation was incorporated in Delaware in 2006 under the name Addus Holding Corporation for the purpose of acquiring
Addus HealthCare, Inc. (“Addus HealthCare”). Addus HealthCare was founded in 1979. We are a home care services provider operating in three segments:
personal care, hospice, and home health. Our services are principally provided in-home under agreements with federal, state and local government
agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly “dual eligible,” meaning they are
eligible to receive both Medicare and Medicaid benefits.
As of December 31, 2019, we provided services in 26 states through approximately 198 offices. For the years ended December 31, 2019, 2018 and
2017, we served approximately 61,000, 57,000 and 51,000 discrete consumers, respectively. As of June 30, 2020, we provided our services in 25 states
through 190 offices and served approximately 55,000 discrete individuals. Our personal care segment also includes staffing services, with clients including
assisted living facilities, nursing homes and hospice facilities.
A summary of our financial results for 2019, 2018 and 2017 is provided in the table below.
For the Years Ended December 31,
Net service revenues – continuing operations
Net income from continuing operations
(Loss) earnings from discontinued operations
Net income
Total assets
$
$
$
2019
648,791
25,811
(574)
$
25,237
2018 (1)
(Amounts in Thousands)
516,647
$
16,307
126
16,433
636,748
$
348,094
2017 (1)
425,994
11,806
147
11,953
265,837
$
$
$
(1) Net service revenues and net income from continuing operations, net income and total assets have been updated to reflect the immaterial error described in
Note 2 to the Notes to Consolidated Financial Statements.
Our services and operating model address a number of crucial needs across the healthcare continuum. Care provided in the home generally costs less
than facility-based care and is typically preferred by consumers and their families. By providing services in the home to the elderly and others who require
long-term care and support with the activities of daily living, we lower the cost of chronic and acute care treatment by delaying or eliminating the need for
care in more expensive settings. In addition, our caregivers observe and report changes in the condition of our consumers for the purpose of facilitating
early intervention in the disease process, which often reduces the cost of medical services by preventing unnecessary emergency room visits and/or hospital
admissions and re-admissions. We coordinate the services provided by our team with those of other healthcare providers and payors, as appropriate.
Changes in a consumer’s conditions are evaluated by appropriately trained managers and may result in a report to the consumer’s case manager at a
managed care organization or other payor. By providing care in the preferred setting of the home and by providing opportunities to improve the consumer’s
conditions and allow early intervention as indicated, our model also is designed to improve consumer outcomes and satisfaction.
We believe our model provides significant value to managed care organizations. States are increasingly implementing managed care programs for
Medicaid enrollees, and, as a result, managed care organizations have been increasingly responsible for the healthcare needs and the related healthcare
costs of our consumers. Managed care organizations have an economic incentive to better manage the healthcare expenditures of their members, lower
costs and improve outcomes. We believe that our model is well positioned to assist in meeting those goals while also improving consumer satisfaction, and,
as a result, we expect increased referrals from managed care organizations.
The Centers for Medicare & Medicaid Services (“CMS”) has issued final rules and policy updates that allow Medicare Advantage insurers to offer
beneficiaries more options and new types of benefits. Effective January 1, 2019, CMS expanded the scope of its “primarily health-related” supplemental
benefit standard, permitting plans to cover a broader array of services that increase health and improve quality of life, including coverage of non-skilled in-
home care. This policy change, emphasizing improving quality and reducing costs, aligns with our overall approach to care, and we believe the increased
demand for personal care from the Medicare Advantage population represents a potentially significant upside opportunity over the next several years.
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We utilize Interactive Voice Response (“IVR”) systems and smart phone applications to communicate with our caregivers. Through these
technologies, caregivers are able to report changes in health conditions to an appropriate manager for triage and evaluation. In addition, we use these
technologies to record basic information about each visit, record start and end times for a scheduled shift, track mileage reimbursement, send text messages
to the caregivers and communicate basic payroll information.
In 2013, we sold substantially all of the assets of our then Medicare certified nursing business (the “2013 Home Health Business”) in Arkansas,
Nevada, South Carolina and Pennsylvania, and 90% of the 2013 Home Health Business in California and Illinois. Effective October 1, 2017, we sold our
remaining 10% ownership interest in the 2013 Home Health Business in California and Illinois. The results of the 2013 Home Health Business sold are
reflected as discontinued operations for all periods presented herein. We maintain licensure as a Medicare home health agency in Ohio and Delaware in
connection with providing services in those states.
With the purchase of Ambercare Corporation (“Ambercare”), completed in the second quarter of 2018, we now maintain licensure as a Medicare
home health and hospice agency in New Mexico. Additionally, with the purchase of Hospice Partners on October 1, 2019, the Company expanded its
hospice operations through 21 locations in Idaho, Kansas, Missouri, Oregon, Texas and Virginia. Hospice Partners also launched a palliative care program
in Texas in 2018.
Our Market and Opportunity
We provide personal care services to the elderly and other infirm adults who require long-term care and assistance with activities of daily living.
Personal care services are a significant component of home and community-based services (“HCBS”), which have grown in significance and demand in
recent years. Demand for personal care services is expected to continue to grow due to the aging of the U.S. population, increased life expectancy, and
improved opportunities for individuals to receive home-based care as an alternative to institutional care. The population over the age of 65 nationally has
been consistently growing and the U.S. Census Bureau estimates that starting in 2030, when all baby boomers will be older than 65, Americans 65 years
and older will make up 21% of the population, up from 15% today.
Many states use both fee-for-service and managed care delivery models for personal care services, and the number of beneficiaries served through
managed care continues to grow. As of July 2019, 40 states contracted with risk-based managed care organizations to serve their Medicaid enrollees, with
21 of those states enrolling at least 75% of all elderly beneficiaries or those with disabilities in managed care organizations. In 23 states, some or all long-
term services and support is covered through Medicaid managed care arrangements.
In addition to the projected growth of government-sponsored personal care services, the private pay market for our services continues to expand. We
offer our private pay consumers the same services that we provide to our government-sponsored personal care consumers.
By serving an aging population in a home setting at a lower cost, we believe that home-based services have favorable opportunities. Historically,
there were limited barriers to entry in the personal care services industry. As a result, the personal care services industry developed in a highly fragmented
manner, with few large participants and many small ones. Few companies have a significant market share across multiple regions or states. The lack of
licensure or certification requirements in some states makes it difficult to estimate the number of personal care services agencies. We expect ongoing
consolidation within our industry, driven by the desire of healthcare systems and managed care organizations to narrow their networks of service providers,
and as a result of the industry’s increasingly complex regulatory, operating and technology requirements. We believe we are well positioned to capitalize on
a consolidating industry given our reputation in the market, strong payor relationships and integration of technology into our business model.
The personal care services industry has become subject to increased regulation. At the federal level, recent efforts have focused on improved
coordination of regulation across the various types of Medicaid programs through which personal care services are offered. For example, the 21st Century
Cures Act, as amended, mandated that states implement electronic visit verification (“EVV”), which is used to collect home visit data, such as when the
visit begins and ends. In several states, providers are now required to obtain state licenses or registrations and must comply with laws and regulations
governing standards of practice. Providers must dedicate substantial resources to ensure continuing compliance with all applicable regulations and
significant expenditures may be necessary to offer new services or to expand into new markets. The failure to comply with regulatory requirements could
lead to the termination of rights to participate in federal and state-sponsored programs and the suspension or revocation of licenses. We believe new
licensing requirements and regulations, including EVV, the increasing focus on improving health outcomes, the rising cost and complexity of operations,
technology and pressure on reimbursement rates due to constrained government resources may discourage new providers and may encourage industry
consolidation.
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The Medicare-Medicaid Coordination Office (“MMCO”) was established within CMS to effectively improve services for consumers who are
eligible for both Medicare and Medicaid, also known as “dual eligibles,” and improve coordination between the federal government and states to enhance
access to quality services to which they are entitled. The MMCO works with state Medicaid agencies, other federal and state agencies, physicians and
others, to make available technical assistance and educational tools to improve care coordination between Medicare and Medicaid and 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 payment for benefits provided to
“dual eligibles.”
We believe that our personal care program and our technology make us well-suited to partner with managed care organizations to address the needs
of the “dual eligible” population, and we believe that our ability to identify changes in our consumers’ health and condition before acute intervention is
required will lower the overall cost of care. We believe this approach to care delivery and the integration of our services into the broader healthcare
continuum are particularly attractive to managed care organizations and others who are ultimately responsible for the healthcare needs of our consumers
and over time will increase our business with them.
Our Growth Strategy
The growth of our net service revenues is closely correlated with the number of consumers to whom we provide our services. Our continued growth
depends on our ability to provide consistently high quality care, maintain our existing payor relationships, establish relationships with new payors and
increase our referral sources. Our continued growth is also dependent upon the authorization by state agencies of new consumers to receive our services.
We believe there are several market opportunities for growth. The U.S. population of persons aged 65 continues to grow, and the U.S. Census Bureau
estimates that this population will nearly double in size by 2060, according to projections published in March 2018. Additionally, we believe the
overwhelming majority of individuals in need of care generally prefer to receive care in their homes. Finally, we believe the provision of personal care
services is more cost-effective than the provision of similar services in institutional settings for long-term care. We plan to continue our revenue growth and
margin improvement and enhance our competitive positioning by executing on the following growth strategies:
Consistently Provide High-Quality Care
We schedule and require our caregivers to perform their services as defined within the individual plan of care. We monitor the performance of our
caregivers through regular supervisory visits in the homes of consumers. Our caregivers are provided with pre-service training and orientation and an
evaluation of their skills. In many cases, caregivers are also required to attend ongoing in-service education. In certain states, our caregivers are required to
complete certified training programs and maintain a state certification. The training provided assists to identify changes in our consumers’ health and
condition before acute intervention is required, which we believe lowers the overall cost of care.
Drive Organic Growth in Existing Markets
We intend to drive organic growth through several initiatives, including continuing to build and enhance our sales and marketing capabilities,
enhancing our business intelligence analytic capabilities and investing in technology and operations to drive efficiencies. We also expect our organic
growth will benefit from an increase in demand for our services by an aging population, our increased alignment with referral sources and payors. We also
are prepared to selectively open new offices in existing markets when an opportunity is identified and appropriate.
Market to Managed Care Organizations
As a scaled, national provider of home-based care, we are partnering with managed care organizations, taking advantage of an industry shift from
traditional fee-for-service Medicaid and toward managed care models, which aim to better coordinate care. We expect this shift to lead to narrower provider
networks where we can be competitive by offering a larger, more experienced partner to these organizations, as well as by providing more sophisticated
technology, electronic visit records and an outcomes-driven approach to service. We believe our coordinated care model and integration of services into the
broader healthcare industry are particularly attractive to managed care organizations. In particular, our expansion from primarily personal care services into
hospice and home health has increased our value to our managed care partners by diversifying our home-based care offerings.
Grow Through Acquisitions
In addition to our organic growth, we have been growing through acquisitions that have expanded our presence in current markets or facilitated our
entry into new markets. On July 1, 2020, we completed the acquisition of A Plus Health Care, Inc. (“A Plus”). During 2019, we completed four
acquisitions, one of which (VIP Healthcare Services (“VIP”)) was completed on June 1, 2019, two of which, Alliance Home Health Care (“Alliance”) and
Foremost Home Care (“Foremost”), were completed on August 1,
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2019 and one of which, Hospice Partners, was completed on October 1, 2019. We also completed three acquisitions during 2018 and two acquisitions
during 2017. Acquisitions completed in 2019 accounted for $55.8 million in net service revenues for the year ended December 31, 2019. Acquisitions
completed in 2018 accounted for $113.2 million and $75.2 million in net service revenues for the years ended December 31, 2019 and 2018, respectively.
Acquisitions completed in 2017 accounted for $21.2 million, $20.2 million and $8.6 million in net service revenues for the years ended December 31,
2019, 2018 and 2017, respectively.
Our active pipeline and strong financial position support additional acquisitions. With rising consolidation pressures in the industry, our focus is on
identifying growing markets with favorable demographics in states that are fiscally well managed and have a reasonable minimum wage environment and
where we have the potential to become one of the leading providers in the state in order to support our managed care organization strategy. We believe our
experience identifying and executing on opportunities generated by our acquisition pipeline, as well as our history of integrating acquisitions, will lead to
additional consolidation.
Our Services
Our services, which include non-medical personal care services, are provided to consumers who are unable to independently perform some or all of
their activities of daily living. Without our services, many of our consumers would be at increased risk of placement in a long-term care institution. With
the acquisition of Ambercare completed during the second quarter of 2018, we began to report our business with two additional segments, hospice and
home health. Prior to the Ambercare acquisition, we operated one business segment as a provider of personal care services.
Personal Care
Our personal care segment provides non-medical assistance with activities of daily living, primarily to persons who are at increased risk of
hospitalization or institutionalization, such as the elderly, chronically ill or disabled. The services we provide include assistance with bathing, grooming,
oral care, feeding and dressing, medication reminders, meal planning and preparation, housekeeping and transportation services. Many consumers need
such services on a long-term basis to address chronic or acute conditions. Each payor client establishes its own eligibility standards, determines the type,
amount, duration and scope of services, and establishes the applicable reimbursement rate in accordance with applicable law, regulations or contracts.
Hospice
Our hospice segment provides physical, emotional and spiritual care for people who are terminally ill as well as related services for their families.
The hospice services we provide include palliative nursing care, social work, spiritual counseling, homemaker services and bereavement counseling.
Generally, patients receiving hospice services have a life expectancy of six months or less.
Home Health
Our home health segment provides services that are primarily medical in nature to individuals who may require assistance during an illness or after
hospitalization and include skilled nursing and physical, occupational and speech therapy. We generally provide home health services on a short-term,
intermittent or episodic basis to individuals, typically to assist patients recovering from an illness or injury.
Our Payors
Our payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals.
The federal, state and local programs under which these organizations operate are subject to legislative, budgetary and other risks that can influence
reimbursement rates. Managed care organizations that operate as an extension of our government payors are subject to similar economic pressures. Our
commercial insurance payor clients are typically 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 agreements
generally 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,
provided that we have complied with licensing, certification and program standards, and other regulatory requirements. Reimbursement rates and methods
vary by state and service type, but are typically based on an hourly or unit-of-service basis. Managed care organizations are becoming an increasing portion
of our personal care segment payor mix as states shift from administering fee-for-service programs to utilizing managed care models. In our personal care
segment during 2019, approximately 52.2% of our net service revenues were derived from state and local government programs, with 41.3% derived from
managed care organizations, while approximately 3.7% and 1.6% of net service revenues were derived from private pay consumers and commercial
insurance programs, respectively.
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For 2019, 2018 and 2017, our revenue mix by payor type was as follows:
Personal Care
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Hospice
Medicare
Managed care organizations
Other
Home Health
Medicare
Managed care organizations
Other
2019
Years Ended December 31,
2018
2017
52.2 %
41.3
3.7
1.6
1.2
92.6 %
5.2
2.2
77.6 %
20.3
2.1
58.2 %
35.3
4.1
1.3
1.1
93.6 %
5.6
0.8
88.0 %
11.0
1.0
64.2 %
33.1
2.1
0.6
—
— %
—
—
— %
—
—
We derive a significant amount of our net service revenues from our operations in Illinois, New York and New Mexico. The percentages of total
revenue for each of these significant states for 2019, 2018 and 2017 were as follows:
State
Personal Care
Illinois
New York
New Mexico
All other states
Hospice
New Mexico
All other states
Home Health
New Mexico
% of Total Revenue for the
Years Ended December 31,
2019
2018
2017
42.6 %
18.7
13.0
25.7
72.4 %
27.6
47.3 %
13.3
12.0
27.4
100.0 %
—
100.0 %
100.0 %
52.6 %
13.7
8.8
24.9
—
—
—
A significant amount of our net service revenues from our personal care segment are derived from one specific payor client, the Illinois Department
on Aging, which accounted for 25.3%, 31.7% and 36.5% of our net service revenues for 2019, 2018 and 2017, respectively. The Illinois Department on
Aging’s payments for non-Medicaid consumers have been delayed in the past and may continue to be delayed in the future due to budget disputes. The
state of Illinois did not adopt comprehensive budgets for fiscal years 2016 or 2017, ended June 30, 2016 and June 30, 2017, respectively. On July 6, 2017,
the state of Illinois passed a budget for the state fiscal year 2018, which began on July 1, 2017, authorizing the Illinois Department on Aging to pay for our
services rendered to non-Medicaid consumers provided in prior fiscal years. On June 4, 2018, the state of Illinois passed a budget for state fiscal year 2019,
which began on July 1, 2018. On June 6, 2019, the state of Illinois passed a budget for state fiscal year 2020, which began on July 1, 2019.
In December 2014, the Chicago City Council passed an ordinance that, over a period of years, raised the minimum wage for Chicago workers,
resulting in an increase equal to $13 per hour by July 1, 2019, with increases adjusted based on the Consumer Price Index in subsequent years. The State of
Illinois finalized its fiscal year 2020 budget with the inclusion of an appropriation to raise in-home care rates to offset the costs of previous minimum wage
increases in Chicago and other areas of the state that were imposed beginning on July 1, 2018. These rates were originally set to be effective July 1, 2019,
with in-home care rates to be initially increased by 10.9% to $20.28 from $18.29 to partially offset the costs of the minimum wage hikes. Rates were then
further increased on January 1, 2020 by an additional 7.7% to $21.84, providing full funding for both the Chicago minimum wage increases and a statewide
raise for all current in-home caregivers. The State of Illinois finalized its fiscal year 2021 budget, with in-home care rates to be increased by 7.1% to $23.40
from $21.84, effective January 1, 2021, contingent upon federal CMS approval.
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On November 15, 2019, the State of Illinois received, and announced, CMS approval for both rate increases, with the first increase to be effective on
December 1, 2019, and the second increase to be effective January 1, 2020. In addition, the Illinois Department on Aging, in conjunction with Illinois’
Health Care and Family Services, announced that the new rates would become effective retroactive to July 1, 2019 for services covered by managed care
organizations. On January 15, 2020, the Department on Aging announced confirmation that a one-time bonus payment will be paid to providers who have
provided services to clients not enrolled in a managed care organization, for the time period of July 1, 2019 through November 30, 2019 using an updated
hourly rate of $20.28. The bonus payment of $6.8 million was recognized as net service revenues during the year ended December 31, 2019 and was
received in May of 2020.
On November 26, 2019, the Chicago City Council voted to approve additional increases in the Chicago minimum wage to $14 per hour beginning
July 1, 2020 to $15 per hour beginning July 1, 2021. The Company and its trade association will be looking for additional funding in the State of Illinois
fiscal year 2021 budget to offset the cost of these additional minimum wage increases.
There is no assurance that additional offsetting rate increases will be adopted in Illinois for fiscal years beyond fiscal year 2020, and our financial
performance will be adversely impacted for any periods in which an additional offsetting reimbursement rate increase is not in effect.
We measure the performance of each segment using a number of different metrics. For the personal care segment, these include average billable
census, billable hours, average billable hours per census per month, billable hours per business day, revenues per billable hour and same store growth
revenue by percent. For the hospice segment, these include new admissions, average daily census, average length of stay and revenue per patient day. For
the home health segment, these include admissions, recertifications, total volume and number of visits. See Part II, Item 6—“Selected Financial Data” for
more information on the Company’s metrics.
Competition
Our industry is highly competitive, fragmented and market specific. Each local market has its own competitive profile and no single 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-profit organizations,
community-based organizations, managed care organizations and self-directed care programs. In addition, certain governmental payors contract for services
with independent providers such that our relationships with these payors are not exclusive. We have experienced, and expect to continue to experience,
competition from new entrants into our markets. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of
consumers or payors, any of which could harm our business. In addition, some of our competitors may have greater financial, technical, political and
marketing resources, and name recognition with consumers and payors.
Sales and Marketing
We focus on initiating and maintaining working relationships with state and local governmental agencies responsible for the provision of the
services we 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 to identify service needs or changes in the service delivery or reimbursement system of governmental entities and attempt to work with and
provide input to the responsible government personnel, provider associations and consumer advocacy groups.
We establish new referral relationships with various managed care organizations that contract with the states for the servicing of the state Medicaid
programs. We have met with many contracted managed care organizations in markets we serve and believe we are building the relationships necessary to
generate continued referrals of new clients.
We receive substantially all of our consumers through third-party referrals, including state departments on aging, rehabilitation, mental health and
children’s services, county departments of social services, managed care organizations, the Veterans Health Administration and city departments on aging.
Generally, family members of potential consumers are made aware of available in-home or alternative living arrangements through state or local case
management systems. These systems are operated by governmental or private agencies.
We provide ongoing education and outreach in our target communities in order to inform the community about state and locally-subsidized care
options and to communicate our role in providing quality personal care services. We also utilize consumer-directed sales, marketing and advertising
programs designed to attract consumers. With respect to our hospice and home health patients, we receive substantially all of our referrals through other
health care providers, such as hospitals, physicians, nursing homes and assisted living facilities. We have a team of community liaisons in our hospice and
home health operations that educate and develop relationships with other health care providers and the community at large.
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Payment for Services
We are reimbursed for substantially all of our services by federal, state and local government programs, such as Medicaid state programs, managed
care organizations, other state agencies and the Veterans Health Administration. In addition, we are reimbursed by commercial insurance and private pay
consumers. Depending on the type of service, coverage for services may be 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. A significant amount of our net service revenues from our personal care segment are
derived from one specific payor client, the Illinois Department on Aging, which accounted for 25.3%, 31.7% and 36.5% of our net service revenues for
2019, 2018 and 2017, respectively.
Illinois Department on Aging
We provide personal care services pursuant to agreements with the Illinois Department on Aging, which coordinates programs and community-
based services intended to improve quality of life and preserve the independence of older individuals. The Illinois Department on Aging is funded by
Medicaid and general revenue funds of the state of Illinois, and also receives funding available under the federal Older Americans Act (“OAA”). The
Department on Aging’s Community Care Program (“CCP”) provides case management, adult day service, emergency home response and homemaker
services to individuals age 60 and over. Some of these services are provided through Medicaid waivers granted by CMS. Enrollment in the CCP has grown
significantly over the last ten years due to the aging of the population in Illinois.
Consumers are identified by case managers contracted independently with the Illinois Department on Aging. Once a consumer has been evaluated
and determined to be eligible for a program, an assigned case manager refers the consumer to a list of authorized providers, from which the consumer
selects the provider. We provide our services in accordance with a care plan developed by the case manager and under administrative directives from the
Illinois Department on Aging. We are reimbursed on an hourly fee-for-service basis.
Other Federal, State and Local Payors
Medicare
Medicare is a federal program that provides medical services to persons aged 65 or older and other qualified persons with disabilities or end-stage
renal disease. Each of our hospice and home care agencies must comply with the extensive conditions of participation in the Medicare program in order to
continue receiving Medicare reimbursement.
Medicare beneficiaries who have a terminal illness and a life expectancy of six months or less may elect to receive hospice benefits (i.e., palliative
services for management of a terminal illness) in lieu of standard Medicare coverage for treatment. Hospice services are paid under the Medicare Hospice
Prospective Payment System (“HPPS”), under which CMS sets a daily rate for each day a patient is enrolled in the hospice benefit. Hospice payment rates
increased by 2.6% in federal fiscal year 2020, which reflects a 3.0% market basket update; reduced by the multifactor productivity adjustment of 0.4
percentage points as required by the ACA. Additionally, hospice companies are subject to two specific payment limit caps under the Medicare program
each federal fiscal year: the inpatient cap and the aggregate cap. The inpatient cap limits the number of inpatient care days provided to no more than 20% of
the total days of hospice care provided to Medicare patients for the year. If a hospice exceeds the number of allowable inpatient care days, the hospice must
refund any amounts received for inpatient care that exceed the total of: (i) the product of the total reimbursement paid to the hospice for inpatient care
multiplied by the ratio of the maximum number of allowable inpatient days to the actual number of inpatient care days furnished by the hospice to
Medicare patients; and (ii) the product of the number of actual inpatient days in excess of the limitation multiplied by the routine home care rate. The
aggregate cap, which is calculated each federal fiscal year, limits the amount of Medicare reimbursement a hospice may receive, based on the number of
Medicare patients served. If a hospice’s Medicare payments exceed its aggregate cap, it must repay Medicare for the excess amount. In 2020, the aggregate
cap is $29,965.
Home health services for homebound patients are paid under the Medicare Home Health Prospective Payment System (“HHPPS”), which was
formerly based on a 60-day episode of care as a unit of service. The HHPPS permits multiple, continuous episodes per patient. Medicare payment rates for
episodes under HHPPS used to vary based on the severity of the patient’s condition as determined by an assessment of the patient’s Home Health Resource
Group score. However, the Bipartisan Budget Act of 2018 requires CMS to use a 30-day episode of care and implement the new Patient-Driven Groupings
Model (“PDGM”) beginning January 1, 2020. The PDGM model replaces the current case-mix system, which uses the number of visits to determine
payment, and will classify patients based on clinical characteristics. The PDGM is intended to shift toward a value-based payment system and remove the
incentive to overprovide care. CMS updates the HHPPS payment rates each calendar year. In 2020, HHPPS rates increased by 1.3%, which reflects a 1.5%
payment update as mandated by the Bipartisan Budget Act of 2018, offset by a 0.2 percentage point decrease in payments to home health agencies due to
changes in the rural add-on percentages also mandated by the Bipartisan Budget Act of 2018. CMS requires both hospice and home health providers to
submit quality reporting data each year. Hospice and home health providers that do not comply are subject to a 2 percentage point reduction to their market
basket update.
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Historically, CMS has paid home health providers 50% to 60% of anticipated payment at the beginning of a patient’s care episode through a request
for anticipated payment (“RAP”). However, to address potential program integrity risks, CMS is currently phasing out RAP payments. For calendar year
2020, CMS reduced RAP payments to 20% of the anticipated payment and limited those payments to existing home health providers. In calendar year
2021, CMS will not provide any up-front payments in response to a RAP but will continue to require home health providers to submit streamlined RAPs as
notice that a beneficiary is under a home health period of care. CMS will further reduce the administrative burden on providers in calendar year 2022,
replacing the RAP with a “Notice of Admission.”
Medicaid Programs
Medicaid is a state-administered program that provides certain social and medical services to qualified low-income individuals and is jointly funded
by the federal government and individual states. Reimbursement rates and methods vary by state and service type, but are typically based on an hourly or
unit-of-service basis. Rates are subject to adjustment based on statutory and regulatory changes, administrative rulings, government funding limitations and
interpretations of policy by individual state agencies. Within guidelines established by federal statutes and regulations, and subject to federal oversight,
each state establishes its own eligibility standards, determines the type, amount, duration and scope of services, sets the rate of payment for services and
administers its own program. States typically cover Medicaid beneficiaries for intermittent home health services as well as continuous services for children
and young adults with complicated medical conditions and cover home and community-based services for seniors and people with disabilities.
Many states are moving the administration of their Medicaid personal care programs to managed care organizations. This transition is due to an
overall desire to better manage the costs of the Medicaid long-term care programs. In addition, hospice and home health services are also reimbursed by
managed care organizations in many states. Reimbursement from the managed care organizations for personal care services is generally on an hourly, fee-
for-service basis with rates consistent with or as a percentage of the individual state funded rates.
Currently, personal care services and other HCBS are largely reimbursed on a fee-for-service basis. States receive permission from CMS to provide
personal care services under waivers of traditional Medicaid requirements. In an effort to control escalating Medicaid costs, states are increasingly
requiring Medicaid beneficiaries to enroll in managed care plans for better coordination of HCBS and health care services. A report issued by the Illinois
Department on Aging in 2016 indicates that over 60% of the state’s Medicaid population is enrolled in a care coordination program, many of which are
provided through various managed care entities including managed care organizations. In January 2018, Illinois began transitioning Medicaid beneficiaries
to the Health Choice Illinois statewide managed care program, which is serviced by various managed care organizations. The Illinois Department of
Healthcare and Family Services expected that managed care would expand through the Health Choice Illinois program to reach approximately 80% of
Medicaid enrollees. Effective July 1, 2019, the Health Choice Illinois program began coverage for home health and personal care services for certain dual-
eligible beneficiaries with HCBS waivers after previously delaying such coverage and enrollment.
Veterans Health Administration
The Veterans Health Administration operates the nation’s largest integrated healthcare system, with more than 1,900 sites of care, and provides
healthcare benefits, including personal care, hospice and home health services, to eligible military veterans. The Veterans Health Administration provides
funding to regional and local offices and facilities that support the in-home care needs of eligible aged and disabled veterans. Services are funded by local
Veterans Medical Centers and the aid and attendance pension, which reimburses veterans for their otherwise unreimbursed health and long-term care
expenses. We currently have relationships and agreements with the Veterans Health Administration to provide personal care services in several states,
principally in California, Illinois, New Mexico and Tennessee.
Other
Other sources of funding are available to support personal care, hospice and home health services in different states and localities. In addition, many
states appropriate general funds or special use funds through targeted taxes or lotteries to finance personal care services for senior citizens and individuals
with disabilities. Depending on the state, these funds may be used to supplement existing Medicaid programs or for distinct programs that serve non-
Medicaid eligible consumers.
COVID-19 Relief
On January 31, 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due
to a novel coronavirus. In March 2020, the World Health Organization declared the outbreak of COVID-19, a disease caused by this novel coronavirus, a
pandemic. This disease continues to spread throughout the United States and other parts of the world.
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As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other
administrative actions intended to assist healthcare providers in providing care to COVID-19 patients and other patients during the public health
emergency. These temporary measures include relief from Medicare conditions of participation requirements for healthcare providers, relaxation of
licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by
expanding the scope of services for which Medicare reimbursement is available, and limited waivers of fraud and abuse laws for activities related to
COVID-19 during the emergency period. The current federal public health emergency declaration expires October 23, 2020. The HHS Secretary may
renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever he
determines that the emergency no longer exists.
One of the primary sources of relief for healthcare providers is the CARES Act, which was expanded by the PPPHCE Act. Together, the CARES
Act and the PPPHCE Act include $175 billion in funding to be distributed through the Public Health and Social Services Emergency Fund (the “Relief
Fund”) to eligible providers, including public entities and Medicare- and/or Medicaid-enrolled providers. Relief Fund payments are intended to compensate
healthcare providers for lost revenues and health care related expenses incurred in response to the COVID-19 pandemic and are not required to be repaid,
provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from
the Relief Fund to reimburse expenses or losses that other sources are obligated to reimburse. In addition, the CARES Act expands the Medicare
Accelerated and Advance Payment Program to increase cash flow to providers impacted by the COVID-19 pandemic. Hospice and home health providers
may request an advance or accelerated payment of up to 100% of the Medicare payment amount for a three-month period (not including Medicare
Advantage payments). The Medicare Accelerated and Advanced Payment Program payments are a loan that providers must pay back. CMS must recoup
the advance payments beginning 120 days after receipt by the provider by withholding future Medicare payments for claims. However, in April 2020, CMS
suspended the Advance Payment Program, which is applicable to Part B providers, and announced it would reevaluate pending and new applications from
Part A providers for the Accelerated Payment Program in light of the direct payments made available through the Relief Fund. The CARES Act also
includes other provisions offering financial relief, for example temporarily lifting the Medicare sequester, which would have otherwise reduced payments
to Medicare providers by 2% (but also extending sequestration through 2030).
Due to the recent enactment of the CARES Act, the PPPHCE Act and other enacted legislation, there is still a high degree of uncertainty
surrounding their implementation. Further, the federal government is considering additional stimulus measures, federal agencies continue to issue related
regulations and guidance, and the public health emergency continues to evolve. We continue to assess the potential impact of the CARES Act, the PPPHCE
Act and other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows.
Commercial Insurance
Most long-term care insurance policies contain benefits for in-home services. Policies are generally subject to dollar limitations on the amount of
daily, weekly or monthly coverage provided.
Private Pay
Our private pay services are provided on an hourly or type of services basis. Our rates are established to achieve a pre-determined gross margin, and
are competitive with those of other local providers. We bill our private pay consumers for services rendered weekly, bi-monthly or monthly. Other private
payors include workers’ compensation programs/insurance, preferred provider organizations and employers.
Insurance Programs and Costs
We maintain workers’ compensation, general and professional liability, cyber, automobile, directors’ and officers’ liability, fiduciary liability and
excess liability 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 be certain that any potential losses or asserted claims will not exceed
such insurance coverage and self-insurance reserves.
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Employees
The following is a breakdown of our part- and full-time employees, including the employees in our national support center, as of December 31,
2019:
Caregivers and agency staff
National support centers
Full-time
Part-time
Total
4,713
289
5,002
28,231
5
28,236
32,944
294
33,238
Our caregivers, excluding agency staff, provide substantially all of our services and comprise approximately 96.4% of our total workforce. They
undergo a criminal background check and are provided with pre-service training and orientation and an evaluation of their skills. In many cases, caregivers
are also required to attend ongoing in-service education. In certain states, our caregivers are required to complete certified training programs and maintain a
state certification. Approximately 52.3% of our total employees are represented by labor unions. We maintain strong working relationships with these labor
unions. We have numerous collective bargaining agreements with the Service Employees International Union (“SEIU”), which are renegotiated from time
to time.
Technology
We currently utilize multiple applications to support our various lines of business and locations for patient accounting. For our personal care legacy
Addus locations, Ambercare and Alliance, we utilize the Horizon Homecare software solution (“Horizon”). For our home health and hospice locations, we
utilize Homecare Homebase. All locations acquired through our purchase of Arcadia Home Care & Staffing (“Arcadia”) utilize Continulink for their
personal care and staffing business. Further, the business operations acquired through our VIP and Foremost transactions rely on software licensed from
Arrow Healthcare Solutions (“Arrow”).
Each of these applications support their respective lines of business and locations with administrative, office, clinical and operating information
system needs, including assisting with the compliance of our operating systems with the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, requirements. Each assists our staff in gathering information to improve the quality of consumer care, optimize financial performance, promote
regulatory compliance and enhance staff efficiency. Each application is hosted by the vendor in a secure data center, which provides multiple redundancies
for storage, power, bandwidth and security.
In order to comply with current and future state and federal regulations around EVV use, we utilize several different vendors. In states with an
“open” model, we are able to choose our vendor and have standardized CellTrak as our preferred EVV vendor. In states mandating the EVV vendor, a
“closed” system, we utilize whichever vendor the state has mandated. In both cases, we have built interfaces between the EVV vendor and the patient
accounting system utilized in the respective branch location.
We license the Qlik Business Intelligence platform to provide historical, current, and forward-looking operational performance analysis. We
currently have our personal care business managed by Horizon, Continulink and Arrow integrated into Qlikview to provide a comprehensive view of the
business regardless of the application used. Qlikview provides high-level historical and current analytical views to measure performance against budget and
deliver insight into the various factors driving our execution against our financial, operational, and compliance goals. This analysis is available in summary
and detailed views to accommodate user needs from senior management down to the operators in the field.
We utilize ADPVantage Suite as our base human resources and payroll processing system and use their services and products to manage our leave of
absence processes, benefits, 401(k) and flexible spending account administration, garnishment services, payroll tax filings, ACA compliance and filings,
and time and attendance.
For financial management, we utilize Oracle’s Planning Budgeting Cloud Service as our solution for budgeting, forecasting, and financial reporting.
In the first quarter of 2019, we implemented Oracle Fusion as our solution for the general ledger, accounts payable and fixed assets.
Government Regulation
Overview
Our business is subject to extensive federal, state and local regulation. Changes in the laws and regulations, including as a result of governmental
responses to the COVID-19 pandemic, or new interpretations of existing laws and regulations may have a material impact on the definition of permissible
activities, the relative cost of doing business, and the methods and amounts of payment for care by both governmental and other payors. In addition,
differences among state laws may impede our ability to expand into certain markets. If we fail to comply with applicable laws and regulations, we could
suffer administrative civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in federal or state programs. In
addition, the healthcare industry has
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experienced, and is expected to continue to experience, extensive and dynamic change. It is difficult to predict the effect of these changes on budgetary
allocations for our services. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”
Medicare and Medicaid Participation
To participate in and qualify for reimbursement under Medicare, our home health agencies and hospices must comply with extensive conditions of
participation. Likewise, to participate in Medicaid programs, our personal care services, home health agencies and hospices are subject to various
requirements imposed by federal and state authorities. If we were to violate the applicable federal and state regulations governing Medicare or Medicaid
participation, we could be excluded from participation in federal and state healthcare programs and be subject to substantial administrative, civil and
criminal penalties.
Health Reform
The U.S. Congress and certain state legislatures have passed many laws and regulations in recent years intended to effect major change within the
national healthcare system, the most prominent of which is the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010 (collectively, “ACA”). As currently structured, the ACA affects how healthcare services are delivered and reimbursed through
the expansion of public and private health insurance coverage, reduction of growth in Medicare and Medicaid program spending, and the establishment and
expansion of programs that tie reimbursement to quality and integration. It includes several provisions that may affect reimbursement for our services.
However, the future of the ACA is unclear. The law has been subject to legislative and regulatory changes and court challenges, and the current presidential
administration and certain members of Congress have stated their intent to repeal or make additional significant changes to the ACA, its implementation or
interpretation. For example, in 2017, the President of the United States signed an executive order that directs agencies to minimize “economic and
regulatory burdens” of the ACA.
Effective January 1, 2019, as part of the Tax Cuts and Jobs Act, Congress eliminated the penalty associated with the individual mandate to maintain
health insurance. As a result of this change, a federal judge in Texas ruled in December 2018 that the individual mandate was unconstitutional and
determined the rest of the ACA was therefore invalid. In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the
individual mandate, but remanded the case for further consideration of how this decision affects the rest of the law. The law remains in place pending the
appeals process. The elimination of the individual mandate penalty and other changes may impact the number of individuals that elect to obtain public or
private health insurance or the scope of such coverage, if purchased.
The ACA, as enacted, requires states to expand Medicaid coverage to all individuals under age 65 with incomes effectively at or below 138% of the
federal poverty level. However, states may opt out of the expansion without losing existing federal Medicaid funding. Some of the states use or have
applied to use Medicaid waivers granted by CMS to implement expansion provisions, impose different eligibility or enrollment restrictions, or otherwise
implement programs that vary from federal standards. CMS administrators have indicated that they intend to increase state flexibility in the administration
of Medicaid programs and states continue to explore payment and delivery reform initiatives, including beneficiary work requirements, and quality of care
incentives. Enrollment in managed Medicaid plans has also increased in recent years, as state governments seek to control the cost of Medicaid programs.
Managed Medicaid programs enable states to contract with one or more entities for patient enrollment, care management and claims adjudication. The
states usually do not relinquish program responsibilities for financing, eligibility criteria and core benefit plan design.
The Center for Medicare and Medicaid Innovation, or CMMI, tests innovative payment and service delivery systems to reduce program
expenditures while maintaining or enhancing quality. For example, the CMMI has supported testing of new models of care for “dual eligibles,” funding of
home health providers that offer chronic care management services, and establishment of pilot programs that bundle acute care hospital services with
physician services and post-acute care services, which may include home health services for certain patients. The Improving Medicare Post-Acute Care
Transformation Act of 2014 (“IMPACT Act”) requires HHS, in conjunction with the Medicare Payment Advisory Commission, to propose a unified post-
acute care payment model by 2023. A unified post-acute care payment system would pay post-acute care providers, such as long-term care facilities, skilled
nursing facilities, and home health agencies, under a single framework according to a patient’s characteristics, rather than the post-acute care setting where
the patient receives treatment. These systems could have a material impact on our business. It is difficult to predict the nature and success of future
financial or delivery system reforms implemented by HHS, CMMI and other industry participants.
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Permits, Licensure and Certificate of Need
Our hospice, home health and personal care services are authorized and/or licensed under various state and county requirements, which cover a
variety of topics including standards regarding the provision of medical or care services, clinical records, personnel, infection control and care plans.
Additionally, health care professionals at our agencies are required to be individually licensed or certified under state law. Although our personal care
service caregivers are generally not subject to licensure requirements, certain states require them to complete pre- and post-employment training programs,
background checks, and, in certain instances, maintain state certification. We believe we are currently licensed appropriately as required by the laws of the
states in which we operate in all material respects, but additional licensing requirements may be imposed upon us in existing markets or markets that we
enter in the future.
Some states also require a provider to obtain a certificate of need or permit of approval (“CON”) before establishing, constructing, acquiring or
expanding certain health services, operations or facilities or making certain capital expenditures. In order to obtain a CON, a state health planning agency
must determine that a need exists for the project, with the intent to avoid unnecessary duplication of services.
Fraud and Abuse Laws
Anti-Kickback Laws: The federal Anti-Kickback Statute prohibits the offering, payment, solicitation or receipt of any remuneration to induce
referrals or orders for items or services covered by federal healthcare programs such as Medicare and Medicaid. Courts have interpreted this statute broadly
and held that 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 plus
damages of up to three times the total amount of remuneration involved and exclusion from participation in federal healthcare programs. In addition, the
submission of a claim for services or items generated in violation of the federal Anti-Kickback Statute may be subject to additional penalties under the
federal False Claims Act. Many states have similar laws proscribing 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 from
referring to an entity that provides certain “designated health services” covered by the Medicare and Medicaid program, including home health services, if
they, or their family members, have a financial relationship with the entity receiving the referral, unless an exception applies. The Stark Law also prohibits
entities that provide designated health services reimbursable by Medicare or Medicaid from billing these programs for any items or services that result from
a prohibited referral and requires the entities to refund amounts received for items or services provided pursuant to a prohibited referral. Violations of the
Stark Law may result in denial of payment, civil monetary penalties and exclusion from federal healthcare programs. Failure to refund amounts received as
a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim, which may result in additional penalties imposed under the
federal False Claims Act. The statute and regulations also provide for a penalty of over $165,000 for a circumvention scheme. We attempt to structure our
relationships, including compensation agreements with physicians who serve as medical directors in our home health agencies, to meet an exception to the
Stark Law, but we cannot provide assurance that every relationship is fully compliant. Many states have also enacted statutes similar in scope and purpose
to the Stark Law, although these laws may apply to all payors or a greater range of services.
The False Claims Act: Numerous state and federal laws govern the submission of claims for reimbursement and prohibit false claims or statements.
For example, the federal False Claims Act prohibits any person, company or corporation from knowingly presenting, or causing to be presented, claims for
payment to the federal government that are false or fraudulent, or which contain false or misleading information. “Knowingly” is defined 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 fraud involving issues
such as coding errors and billing for services not provided. Violations of other statutes, such as the federal Anti-Kickback Statute, can also serve 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 and return
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.
A provider determined to be liable under the False Claims Act may be required to pay three times the amount of actual damages sustained by the
federal government, in addition to mandatory civil monetary penalties that may amount to over $20,000 for each false or fraudulent claim. These penalties
will be updated annually based on changes to the consumer price index. Private parties may initiate whistleblower lawsuits alleging the defrauding of the
federal government by a provider and may receive a share of any settlement or judgment. When a private party brings an action under the federal False
Claims Act, the defendant generally is not made aware of the lawsuit under the federal government commences its own investigation or determines whether
it will intervene.
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Every entity that receives at least $5.0 million in Medicaid payments annually must have written policies regarding certain federal and state laws for
all employees, contractors and agents. These policies must provide detailed information about false claims, false statements and whistleblower protections.
Many states have similar false claims statutes that impose additional liability for the types of acts prohibited by 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 various
forms of fraud and abuse, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance fraud laws, and false claims acts,
which may extend to services reimbursable by any payer, including private insurers. For example, criminal penalties may be imposed upon any person or
entity that knowingly and willfully defrauds a health care benefit plan, willfully obstructing a criminal investigation of a healthcare offense or makes a
materially false statement in connection with delivery of or payment for health care services by a health care benefit plan. Further, the federal Civil
Monetary Penalties Law (“CMPL”) imposes substantial penalties for offering remuneration or other inducements to influence federal healthcare
beneficiaries’ decisions to seek specific governmentally reimbursable items or services or to choose particular providers. It also imposes penalties for
contracting with an individual or entity known to be excluded from a federal healthcare program. The CMPL requires a lower burden of proof than some
other fraud and abuse laws, including the federal Anti-Kickback Statute. Civil monetary penalties are 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 other offenses related to the delivery of items or services under those programs. Persons who have been
excluded from the Medicare or Medicaid program may not retain ownership in a participating entity. Participating entities that permit continued ownership
by excluded individuals, that contract with excluded individuals, and the excluded individuals themselves, may be penalized.
Payment Integrity
We are subject to routine and periodic surveys and audits by various governmental agencies and other payors. From time to time, we receive and
respond to survey reports containing statements of deficiencies. Periodic and random audits conducted or directed by these agencies could result in a delay
in receipt 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
a contingent fee based on the improper payments identified and corrected. CMS has also instituted Zone Program Integrity Contracts for additional audit of
Medicare providers, including home health agencies. By statute, states are required to enter into contracts with RACs to audit payments to Medicaid
providers, although states are allowed to request waivers of aspects of this requirement. Further, under the Medicaid Integrity Program, CMS employs
private contractors, referred to as Medicaid Integrity Contractors, to perform post-payment audits of Medicaid claims and identify overpayments. CMS is
transitioning some of its other integrity programs to a consolidated model by engaging Unified Program Integrity Contractors (“UPICs”) to perform audits,
investigations and other integrity activities.
From time to time, various federal and state agencies, such as HHS, issue pronouncements that identify practices that may be subject to heightened
scrutiny, as well as practices that may violate fraud and abuse laws. For example, the Office of the Inspector General issued an Investigative Advisory in
2012 that identified a number of program integrity vulnerabilities in the delivery of personal care services and recommending corrective actions by CMS.
In December 2016, CMS issued a bulletin highlighting safeguards that state Medicaid agencies can put in place around personal care services. It has also
issued guidance to personal care services agencies and attendants on avoiding improper payments. We believe, but cannot assure you, that our operations
comply with the principles expressed by HHS in these reports, advisories and guidance.
HIPAA and Other Privacy and Security Requirements
The HIPAA Administrative Simplification provisions and implementing regulations require the use of uniform electronic data transmission
standards and code sets for certain healthcare claims and reimbursement payment transactions submitted or received electronically. These provisions are
intended to encourage 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 regulations
extensively regulate the use, disclosure, confidentiality, availability and integrity of individually identifiable health information, known as “protected health
information,” and provide for a number of individual rights with respect to such information. These requirements apply to most healthcare providers, which
are known as “covered entities,” including our company. Vendors, known as “business associates,” that handle protected health information, on behalf of
covered entities must also comply with most HIPAA requirements. A covered entity may be subject to penalties as a result of a business associate violating
HIPAA, if the business associate is found to be an agent of the covered entity.
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Covered entities must, among other things, maintain privacy and security policies, train workforce members, maintain physical, administrative, and
technical safeguards, enter into confidentiality agreements with business associates, and permit individuals to access and amend their protected health
information. In addition, covered entities must report breaches of unsecured (unencrypted) protected health information to affected individuals without
unreasonable 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 cases
involving 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
laws that are more restrictive than HIPAA, which could result in additional penalties. For example, the Federal Trade Commission uses its consumer
protection authority to initiate enforcement actions against entities whose inadequate data security programs may expose consumers to fraud, identity theft
and privacy intrusions. Various state laws and regulations require entities that maintain individually identifiable information (even if not health-related) to
report data breaches to affected individuals and, in some cases, state regulators. We expect compliance with HIPAA and other privacy and security
standards to continue to impose significant costs on our business lines.
Environmental, Health and Safety Laws
We are subject to federal, state and local regulations governing the storage, transport, use and disposal of hazardous materials and waste products. In
the 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 or
fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all.
Access to Public Filings
Through our website, www.addus.com, 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 filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In
addition to our website, the SEC maintains an internet site that contains our reports, proxy and information statements, and other information that we file
electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Any of the risks described below, and the risks described elsewhere in this Form 10-K, could have a material adverse effect on our business and
consolidated financial condition, results of operations and cash flows, cause the trading price of our common stock to decline and cause the actual
outcome of matters to differ materially from our current expectations as reflected in forward-looking statements made in this Form 10-K. The risk factors
described below and elsewhere in this Form 10-K are not the only risks we face. Our business and consolidated financial condition, results of operations
and cash flows may also be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or
by factors that are not specific 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 Concerning
Forward-Looking Statements.” All forward-looking statements made by us are qualified by the risk factors described below.
Risks Related to Our Business and Industry
The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively
impacted, particularly if the U.S. economy remains unstable for a significant amount of time.
On January 31, 2020, the Secretary of HHS declared a national public health emergency due to a novel coronavirus. In March 2020, the World
Health Organization declared the outbreak of COVID-19, the disease caused by this novel coronavirus, a pandemic. The disease continues to spread
throughout the United States and other parts of the world. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the
situation is rapidly evolving. The spread of COVID-19 has caused many states and cities to declare states of emergency or disaster proclamations, including
the state of Texas and the city of Frisco, where we are headquartered. State and local governments, together with public health officials, have recommended
and mandated precautions to mitigate the spread of the virus, including the closure of public facilities and parks, schools, restaurants, many businesses and
other locations of public assembly. As a result, COVID-19 is significantly affecting overall economic conditions in the United States. Although many of the
restrictions have eased across the country, some areas are re-imposing closures and other restrictions, as a result of increasing rates of COVID-19 infection.
There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it or the duration or types of restrictions
that will be imposed or re-imposed. For that reason, we are unable to predict the long-term impact of the pandemic on our business at this time.
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Relevant authorities have universally designated our services as “essential services,” exempting our services and services providers from many of
the restrictions of the orders described above. However, our home health and hospice providers have experienced difficulty in accessing facility-based
patients because of concerns about the spread of COVID-19, and we expect that this difficulty will continue. While the COVID-19 pandemic has not had a
material effect on our business, financial condition and results of operations, the extent of future impact will depend on future developments that cannot be
accurately predicted at this time, including the severity and transmission rate of COVID-19 and the extent and effectiveness of containment actions taken.
For example, our employees that contract COVID-19 could be unable to continue to perform their duties, and we could face litigation if our employees or
customers contract COVID-19 while our employees perform their duties.
If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our
outstanding debt may be harmed. Furthermore, the COVID-19 pandemic has previously caused disruption in the financial markets and the businesses of
financial institutions and may do so again, potentially causing a slowdown in the decision-making of these institutions. This may affect the timing on which
we may obtain any additional funding and there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all.
Additionally, the economic slowdown caused by the COVID-19 pandemic poses significant risks to states’ budgets for the 2021 fiscal year, which began
July 1 in most states. Depending on the severity and length of a downturn, sales tax collections and income tax withholdings could continue to be depressed
in fiscal 2021 and, potentially, future fiscal years. States could face significant fiscal challenges and may have no choice but to revise their revenue
forecasts and adjust their budgets for fiscal 2021 and, potentially, future fiscal years, accordingly. In New York, which started its fiscal year April 1, the
state comptroller recently estimated that the state would collect at least $10 billion less than originally forecasted, the first year-to-year cut since 2011. The
current New York fiscal plan authorizes the state of New York to issue up to $8 billion in short-term bonds to provide funds in case of reduced revenues
during the fiscal year, tentatively scheduled for October 2020, December 2020 and March 2021. It also allows two state authorities to provide the state with
a $3 billion line of credit in the new fiscal year. Congress could provide additional relief with additional stimulus and relief legislation, including extension
of unemployment benefits and relief for states. We cannot determine the impact that COVID-19 may have on states budgets for 2020 or beyond, however,
such impacts could have a material adverse effect on our financial condition, results of operations and cash flows.
The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in an adverse effect on our
business, result of operations, financial condition, liquidity, cash flows and our ability to service our indebtedness. Furthermore, the COVID-19 pandemic
could heighten the risks in certain of the other risk factors described in this Annual Report on Form 10-K.
We are not participating in the financial relief programs available under the CARES Act and the PPPHCE Act, and therefore will not obtain or use
financial assistance from those programs. There can be no assurance as to the total amount of financial assistance we may receive from future
stimulus legislation, if any, or that we will be able to benefit from provisions intended to increase access to resources and ease regulatory burdens
for healthcare providers or that additional stimulus legislation will be enacted.
In response to the COVID-19 pandemic, the CARES Act and the PPPHCE Act authorize $175 billion in funding to be distributed to health care
providers through the Relief Fund. These funds are intended to reimburse eligible providers, including public entities and Medicare and/or Medicaid-
enrolled providers and suppliers, for healthcare-related expenses or lost revenues attributable to COVID-19. The Company did not request, but
automatically received, and subsequently returned funds from the Relief Fund. The Company has acquired and may in the future acquire companies that
have received funds from the Relief Fund. HHS has not yet allocated or distributed all funds from the Relief Fund, so the potential future impact to the
Company is unclear.
The CARES Act also makes other forms of financial assistance available to healthcare providers, including through Medicare and Medicaid
payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which makes available advance payments of
Medicare funds in order to increase cash flow to providers. In addition to financial assistance, the CARES Act and related legislation includes provisions
intended to increase access to medical supplies and equipment and ease legal and regulatory burdens on healthcare providers. Many of these measures, such
as flexibilities related to the provision of telehealth services, are effective only for the duration of the public health emergency. The current public health
emergency determination expires October 23, 2020. The HHS Secretary may choose to renew the declaration for successive 90-day periods for as long as
the emergency continues to exist and may terminate the declaration whenever he determines that the public health emergency no longer exists. It is unclear
whether and for how long the public health emergency declaration will be extended. The CARES Act also includes numerous income tax provisions
including changes to the net operating loss rules and business interest expense deduction rules.
Due to the recent enactment of the CARES Act, the PPPHCE Act and other enacted legislation, there is still a high degree of uncertainty
surrounding their implementation, and the COVID-19 pandemic continues to evolve. The federal government is considering additional stimulus efforts, but
we are unable to predict whether additional stimulus measures will be enacted or their impact. There can be no assurance as to the total amount of financial
and other types of assistance we will receive under existing or future legislation, if any, and it is difficult to predict the impact of such legislation on our
operations or how it will affect operations of our competitors. Further, there can be no assurance that the terms of provider relief funding or other programs
will not change in ways that affect funding we may receive or our eligibility to participate. We continue to assess the potential impact of COVID-19 and
government responses to the pandemic on our business, results of operations, financial condition and cash flows.
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We could face a variety of risks through our expansion into new lines of business.
In 2018, we expanded our lines of business to include hospice and home health with the acquisition of Ambercare, and to include facility staffing
operations through the acquisition of Arcadia. In 2019, through the completion of the acquisition of Hospice Partners, we significantly increased our
hospice business. Risks of our entry into the hospice and home health segments and adding facility staffing operations to our home care segment include,
without limitation, difficulties integrating new businesses with our ongoing operations, potential diversion of management’s time and other resources from
our existing personal care business, the need for additional capital and other resources to expand into these new lines of business, and inefficient integration
of operational and management systems and controls. In addition, new businesses that we acquire may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare and other laws and regulations, professional liabilities, workers’ compensation liabilities, and tax liabilities.
Although we generally attempt to exclude significant liabilities from our acquisitions and seek indemnification from sellers or insurance protection, we
may nevertheless have material liabilities for past activities of acquired businesses. Entry into a new line of business may also subject us to new laws and
regulations with which we are not familiar and may lead to increased litigation and regulatory risk. Additionally, any such new business line may be
disproportionately impacted by the COVID-19 pandemic with respect to PPE, infection control, facility and work-site access, or other related issues.
Our hospice operations are subject to annual Medicare caps. If we exceed the caps, our business and consolidated financial condition, results of
operations and cash flows could be materially adversely affected.
Overall payments made by Medicare to each hospice provider number (generally corresponding to each of our hospice agencies) are subject to an
inpatient cap and an aggregate cap, which are set each federal fiscal year. The inpatient cap limits the number of days of inpatient care to no more than 20%
of total patient care days. The aggregate cap limits the amount of Medicare reimbursement a hospice may receive, based on the number of Medicare
patients served. If a hospice’s Medicare payments exceed its inpatient or aggregate caps, it must repay Medicare for the excess amount. If payments
received under any of our hospice provider numbers exceed these caps, we may be required to reimburse Medicare such excess amounts, which could have
a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Reductions in reimbursement and other changes to Medicare, Medicaid, and other federal, state and local medical and social programs could
adversely affect our consumer caseload, units of service, net service revenues, gross profit and profitability.
A significant portion of our caseload and net service revenues are derived from government healthcare programs, primarily Medicare and Medicaid.
For the year ended December 31, 2019, we derived approximately 56.2% of our net service revenues from state and local governmental agencies, primarily
through Medicaid state programs. However, changes in government healthcare programs may decrease the reimbursement we receive or limit access to, or
utilization of, our services. As federal healthcare expenditures continue to increase and state governments face budgetary shortfalls, including as a result of
the COVID-19 pandemic, federal and state governments have made, and may continue to make, significant changes to the Medicare and Medicaid
programs and reimbursement received for services rendered to beneficiaries of such programs. For example, the Budget Control Act of 2011 requires
automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year, with a uniform percentage
reduction across all Medicare programs. CMS began imposing a 2% reduction on Medicare claims in April 2013, and these reductions have been extended
through 2030.
The Medicaid program, which is jointly funded by the federal and state governments, is often a state’s largest program. Governmental agencies
generally condition their agreements upon a sufficient budgetary appropriation. Almost all of the states in which we operate have experienced periodic
financial pressures and budgetary shortfalls due to challenging economic conditions, including as a result of COVID-19, and the rising costs of healthcare.
Reductions to federal support for state Medicaid or other programs could also result in budgetary shortfalls. As a result, many states have made, are
considering or may consider making changes in their Medicaid or other state and local medical and social programs, including enacting legislation designed
to reduce Medicaid expenditures.
Changes that may occur at the federal or state level to address budget deficits or otherwise contain costs include:
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limiting increases in, or decreasing, reimbursement rates;
redefining eligibility standards or coverage criteria for social and medical programs or the receipt of services under those programs;
increasing consumer responsibility, including through increased co-payment requirements;
decreasing benefits, such as limiting the number of hours of personal care services that will be covered;
changing reimbursement methodology and program participation eligibility;
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slowing payments to providers;
increasing utilization of self-directed care alternatives or “all inclusive” programs;
shifting beneficiaries to managed care organizations; and
implementing demonstration projects and alternative payment models.
Certain of these measures have been implemented by, or are proposed in, states in which we operate. For example, we provide support services as a
fiscal intermediary to the New York Consumer Directed Personal Assistance Program (“CDPAP”), a self-directed care alternative program that allows
eligible individuals who need help with activities of daily living or skilled nursing services to choose their caregivers. New York recently proposed
regulations to change the reimbursement methodology for fiscal intermediaries and has initiated a new Request For Offer (“RFO”) process to competitively
procure CDPAP fiscal intermediaries. These changes could have impact on our financial performance and ability to continue providing fiscal intermediaries
services if not selected in the competitive RFO process.
Additionally, New York has identified significant expenses in excess of its Medicaid budget. In his January 21, 2020 budget address, Governor
Cuomo stated his plans to address the Medicaid shortfall with a new Medicaid Redesign Team (“MRT”), which is tasked with reforming the state's
Medicaid program, preserving benefits and finding $2.5 billion in savings. The MRT recommendations were approved on March 19, 2020, and will be sent
to the governor and legislature for consideration in the state budget, with full discretion with regard to the effective dates in light of the healthcare and
economic disruption caused by COVID- 19. The results of the MRT’s recommendations and final budget could affect our operations and financial
performance.
In 2019, we derived approximately 38.2% of our net service revenues from services provided in Illinois, 16.7% of our net service revenues in New
York (including CDPAP services) and 19.9% of our net service revenues in New Mexico. Because a substantial portion of our business is concentrated in
these states, any significant reduction in expenditures that pay for our services or other significant changes in these states may have a disproportionately
negative impact on our future operating results. Illinois, in particular, operated without a state budget for fiscal years 2016 and 2017. The Illinois legislature
has enacted comprehensive state budgets for fiscal years 2018 through 2020. However, we cannot predict whether Illinois or other states material to our
operating results will timely pass budgets in subsequent years or experience changes or other challenges that negatively impact our ability to be reimbursed
for our services in a timely manner.
The ACA made significant changes to Medicare and Medicaid policy and funding, among other broad changes across the healthcare industry,
promoting a shift toward value-based care, including implementation of alternative payment models. The ACA also resulted in expanded Medicaid
eligibility in many states and the establishment of various demonstration projects and Medicaid programs under which states may apply to test new or
existing approaches to payment and delivery of Medicaid benefits. CMS has indicated that it will look to states to drive innovation and value through such
waivers and has taken steps to update program management, the waiver and state plan amendment approval process, and quality reporting, but the extent
and effect of these changes remain uncertain. Future health reform efforts or efforts to repeal or make additional significant changes to the ACA will likely
impact both federal and state programs.
If changes in Medicare, Medicaid or other state and local medical and social programs result in a reduction in available funds for the services we
offer or a reduction in the number of beneficiaries eligible for our services or a reduction in the number of hours or amount of services that beneficiaries
eligible for our services may receive, then our net service revenues and profitability could be negatively impacted. Our profitability depends principally on
the levels of government-mandated payment rates and our ability to manage the cost of providing services. In 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 Medicare, Medicaid or other payments may negatively impact payments from private payors, as well. Any reduction in reimbursements or
imposition of copayments that dissuade the use of our services, or any reduction in reimbursement from private payors, could also materially adversely
affect our profitability.
Federal and state regulation may impair our ability to consummate acquisitions or open new agencies.
Federal laws or regulations may adversely impact our ability to acquire home health agencies or open new start-up home health agencies. For
example, a Medicare regulation known as the “36 Month Rule” prohibits buyers of Medicare-certified home health agencies from assuming the Medicare
billing privileges of an acquired agency if the acquired agency either enrolled in Medicare or underwent a change in majority ownership fewer than 36
months prior to the acquisition, subject to certain exceptions. Instead, the buyer must enroll the acquired home health agencies as new providers with
Medicare. The 36 Month Rule can increase competition for acquisition targets that are not subject to the rule and may cause significant Medicare billing
delays for the purchases of home health agencies that are subject to the rule. Further, in the past, CMS has limited enrollment of new home health agencies.
If another moratorium is imposed on enrollment of new providers in a geographic area we desire to service, our ability to expand operations may be
impacted.
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Our ability to expand operations in a state will depend on our ability to obtain a state license to operate, and where required, CON approval. States
may limit the number of licenses they issue. The failure to obtain any required CON or license could impair our ability to operate or expand our business.
The implementation of alternative payment models and the transition of Medicaid and Medicare beneficiaries to managed care organizations may
limit our market share 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 to
organize and coordinate patient care while reducing unnecessary costs. Several states have implemented, or plan to implement, accountable care models for
their 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 losing
market share and for a loss of our current business.
We may be similarly impacted by increased enrollment of Medicare and Medicaid beneficiaries in managed care plans, resulting in a shift from
traditional fee-for-service models. Under the managed Medicare program, also known as Medicare Advantage, the federal government contracts with
private health insurers to provide Medicare benefits. Insurers may choose to offer supplemental benefits and impose higher plan costs on beneficiaries.
Approximately one-third of Medicare beneficiaries were enrolled in a Medicare Advantage plan in 2019, a figure that continues to grow. While hospice
services are currently reimbursed as a traditional fee-for-service program under Medicare Part A, hospice services may eventually be offered under
Medicare Advantage plans, which could result in reduced reimbursement, limited utilization, and increased competition for managed care contracts.
Enrollment in managed Medicaid plans is also growing, as states are increasingly relying on managed care organizations to deliver Medicaid
program services as a strategy to control costs and manage resources. We may experience increased competition for managed care contracts due to state
regulation and limitations. For instance, effective October 2018, New York limited the number of home care providers with which a managed Medicaid
plan can contract. We cannot assure you that we will be successful in our efforts to be included in plan networks, that we will be able to secure favorable
contracts with all or some of the managed care organizations, that our reimbursement under these programs will remain at current levels, that the
authorizations for services will remain at current levels or that our profitability will remain at levels consistent with past performance. In addition,
operational processes may not be well defined as a state transitions beneficiaries to managed care. For example, membership, new referrals and the related
authorization for services to be provided may be delayed, which may result in delays in service delivery to consumers or in payment for services rendered.
Difficulties with operational processes may negatively affect our revenue growth rates, cash flow and profitability for services provided.
Other alternative payment models 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 and New Mexico. Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in
these states could have an adverse effect on our business, financial condition or results of operations. Changes to the Medicaid programs in these states
could also have a disproportionately adverse effect on our business, financial condition, results of operations or cash flows. Additionally, New York and
Illinois have been some of the most significantly impacted areas to date by the COVID-19 pandemic, which 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 programs could adversely affect our service revenues and profitability.
For the years ended December 31, 2019 and 2018, we derived approximately 25.3% and 31.7%, respectively, of our revenue from the Illinois
Department on Aging programs. In the past, state government officials have attempted to reduce government spending by proposing changes aimed at
reducing expenditures by this department. The current governor, who took office in January 2019, is expected to continue the pursuit of cost reduction
initiatives. The nature and extent of any proposed future cost reduction initiatives is unknown. If future reforms impact the eligibility of consumers for
services, the number of hours authorized or otherwise restrict services provided to existing consumers, our service revenues, results of operations, financial
position and growth may be adversely affected.
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Delays in reimbursement due to state budget deficits may increase in the future, adversely affecting our liquidity.
We fund operations primarily through the collection of accounts receivable, but there is a delay between the time that we provide services and the
time that we receive reimbursement or payment for these services. Many of the states in which we operate are operating with budget deficits for their
current fiscal year and the economic impact of the COVID-19 pandemic likely will increase state deficits. 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, which contributes to our aged receivables. Additionally, unanticipated delays in receiving reimbursement from state programs due to changes in
their policies or billing or audit procedures may adversely impact our liquidity and working capital.
Failure to renew a significant payor agreement or group of related payor agreements may materially impact our revenue.
Each of our agreements is generally in effect for a specific term, but they are also generally terminable with 60 days’ notice. Our ability to renew or
retain our agreements depends on our quality of service and reputation, as well as other factors over which we have little or no control, such as state
appropriations and changes in provider eligibility requirements. Additionally, failure to satisfy any of the numerous technical renewal requirements in
connection with our proposals for agreements could result in a proposal being rejected even if it contains favorable pricing terms. Failure to obtain, renew
or retain agreements with major payors may negatively impact our results of operations and revenue. We can give no assurance these agreements will be
renewed on commercially reasonable terms or at all.
Our industry is highly competitive, fragmented and market-specific.
We compete with personal care service providers, hospice 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. Some of our competitors may have greater financial, technical, political and marketing resources, name recognition or a larger
number of consumers and payors than we do. In addition, some of these organizations offer more services than we do in the markets in which we operate.
These competitive advantages may limit our ability to attract and retain referrals in local markets and to increase our overall market share.
In many states, there are limited barriers to entry in providing personal care services. However, some states require entities to obtain a license before
providing home care services. Licensure is generally required of agencies providing home health and hospice services, though requirements vary by state.
Some states also require a provider to obtain a CON before establishing certain health services, operations or facilities. CON restrictions may reduce the
level of competition in a given industry or in a particular geographic region. In addition, economic changes such as increases in minimum wage and
changes in Department of Labor rules can also impact the ease of entry into a market. These factors may affect competition in our states.
Often our contracts with payors are not exclusive. Local competitors may develop strategic relationships with referral sources and payors. This
could result in pricing pressures, loss of or failure to gain market share or loss of consumers or payors, any of which could harm our business. In addition,
existing competitors may offer new or enhanced services that we do not provide, or be viewed by consumers as a more desirable local alternative. The
introduction of new and enhanced service offerings, in combination with the development of strategic relationships by our competitors, could cause a
decline in revenue, a loss of market acceptance of our services and a negative 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
to our 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,
along with the terms of participation in various government programs, impose certain requirements on the way in which we do business, the services we
offer, and our interactions with providers and consumers. These requirements include matters related to:
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licensure and certification and enrollment with government programs;
eligibility for services;
appropriateness and necessity of services provided;
adequacy and quality of services;
qualifications and training of personnel;
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confidentiality, maintenance, data breach, identity theft, security, inoperability, access and exchange of health-related and personal information
and medical records;
environmental protection, health and safety;
relationships with physicians, other referral sources and recipients of referrals;
operating policies and procedures;
addition of, and changes to, facilities and services;
adequacy and manner of documentation for services provided;
billing and coding for services;
timely and proper handling of overpayments; and
debt collection and communications with consumers.
These laws include, but are not limited to the federal Anti-Kickback Statute, the federal Stark law, the federal False Claims Act, the federal Civil
Monetary Penalties Law, other federal and state fraud and abuse, insurance fraud, and fee-splitting laws, which may extend to services reimbursable by any
payer, including private insurers, and federal and state laws governing the security and privacy of health information.
We currently have contractual relationships with current and potential referral sources and recipients, including hospitals and health systems, skilled
nursing facilities and certain physicians who provide medical director and clinical services to our Company. We attempt to structure our relationships to
meet applicable regulatory requirements, but we cannot provide assurance that every relationship is fully compliant.
Federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts throughout the healthcare industry.
While we endeavor to comply with applicable laws and regulations, we cannot assure you that our practices are fully compliant or that courts or regulatory
agencies will not interpret those laws and regulations in ways that will adversely affect our practices. We may also fail to discover instances of
noncompliance by businesses we acquire, which could subject us to adverse consequences. The laws and regulations governing our business are subject to
change, interpretations may evolve and enforcement focus may shift. These changes could subject us to allegations of impropriety or illegality, require
restructuring of relationships with referral sources and recipients or otherwise require changes to our operations. Failure to comply with applicable laws and
regulations could lead to civil sanctions and criminal penalties, the termination of rights to participate in federal and state healthcare programs, exclusion
from federal healthcare programs, the suspension or revocation of licenses and nonpayment or delays in our ability to bill and collect for services provided,
any of which could adversely affect our business, results of operations, or financial results.
In addition, as a result of our participation in Medicaid, Medicare and Veterans Health Administration programs and other state and local
governmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, compliance audits and investigations 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. Each of our home care and hospice agencies must comply with the extensive conditions of participation in the Medicare
program. If any of our agencies fail to meet any of the conditions of participation or coverage with respect to state licensure or our participation in
Medicaid, 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 the period provided by the surveyor
or authority could result in civil or criminal penalties, damage to our reputation, cancellation of our agreements, suspension or revocation of our licenses,
requirements to repay amounts received, disqualification from federal and state healthcare programs, deactivation or revocation of billing privileges, bars
on re-enrollment and other negative consequences. These actions may adversely affect our ability to provide certain services, to receive payments from
other payors and to continue to operate which could adversely affect our net service revenues and profitability. Additionally, we could face liability under
the False Claims Act if we submit claims to Medicare or Medicaid while not in compliance with certain conditions of participation. Further, actions taken
against one of our offices may subject our other offices to adverse consequences.
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Timing differences in reimbursement may cause liquidity problems.
There are timing differences in reimbursement from the time we provide services to the time we receive reimbursement or payment for these
services. These timing differences may result from such factors as changes by payors to data submission requirements, requests by fiscal intermediaries for
additional data or documentation, other Medicare or Medicaid issues, or information system problems, which may adversely impact our working capital.
Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. Our
working capital management procedures may not successfully negate this risk. Delays in receiving reimbursement or payments from Medicare, Medicaid
and other payors may adversely impact our working capital.
We are and have been subject to routine and periodic surveys, audits and investigations by various governmental agencies. In addition to surveys to
determine compliance with the conditions of participation, CMS has engaged a number of contractors (including Medicare Administrative Contractors
("MACs"), RACs and UPICs) to conduct audits to evaluate billing practices and identify overpayments. These audits can result in recoupments by
Medicare and other payors of amounts previously paid to us. In addition to audits by CMS contractors, individual states are implementing similar integrity
programs using Medicaid RACs. We are unable to predict what additional government regulations, if any, affecting our business may be enacted in the
future, how existing or future laws and regulations might be interpreted or whether we will be able to comply with such laws and regulations either in the
markets in which we presently conduct, or wish to commence, business. In June 2019, CMS began the Review Choice Demonstration for Home Health
Services demonstration in Illinois to identify and prevent fraud, reduce the number of Medicare appeals, and improve provider compliance with Medicare
program requirements. Home health agencies may initially select from the following claims review and approval processes: pre-claim review, post-payment
review, or a minimal post-payment review with a 25% payment reduction. Home health agencies that maintain high compliance levels will be eligible for
additional, less burdensome options. Beginning in March 2020, CMS paused certain claims processing for the Review Choice Demonstration due to the
COVID-19 pandemic. However, the agency expects to discontinue exercising enforcement discretion beginning in August 2020, regardless of the status of
the public health emergency. CMS is expanding the Review Choice Demonstration to certain other states, including Ohio and Florida in August 2020. We
are currently unable to predict what impact, if any, this program may have on our result of operations or financial position.
We are subject to federal, state and local laws and regulations that govern our employment practices, including minimum wage, living wage, and
paid time-off requirements. Failure to comply with these laws and regulations, or changes to these laws and regulations that increase our
employment-related expenses, could adversely impact our operations.
We are required to comply with all applicable federal, state and local laws and regulations relating to employment, including occupational safety and
health requirements, wage and hour and other compensation requirements, employee benefits, providing leave and sick pay, employment insurance, proper
classification of workers as employees or independent contractors, immigration and equal employment opportunity laws. These laws and regulations can
vary significantly among jurisdictions and can be highly technical. Costs and expenses related to these requirements are a significant operating expense and
may increase as a result of, among other things, changes in federal, state or local laws or regulations, or the interpretation thereof, requiring employers to
provide specified benefits or rights to employees, increases in the minimum wage and local living wage ordinances, increases in the level of existing
benefits or the lengthening of periods for which unemployment benefits are available. We may not be able to offset any increased costs and expenses.
Furthermore, any failure to comply with these laws requirements, including even a seemingly minor infraction, can result in significant penalties which
could harm our reputation and have a material adverse effect on our business. The COVID-19 pandemic has increased some of these risks, with certain
states modifying occupational health and safety guidelines in a manner that increases scrutiny and complexity of operations with respect to appropriate
training and use in the workplace of PPE and the possibility of corresponding regulatory audit activity with respect to the adequacy of our practices and
procedures. The COVID-19 pandemic has also resulted in states modifying standards associated with payment amounts and required justifications to
qualify for sick leave and unemployment benefits. These modifications may result in increased operational costs to us.
Since our operations are concentrated in Illinois, New York and New Mexico, we are particularly sensitive to changes in laws and regulations in
these states. For example, in December 2014, the Chicago City Council passed an ordinance that, over a period of years, raised the minimum wage for
Chicago workers, resulting in an increase equal to $13 per hour by July 1, 2019, with increases adjusted based on the Consumer Price Index in subsequent
years. The wage increase in 2016 did not have a material impact on us because of our existing wage scale. The 2017 wage increase was offset by a
reimbursement rate increase. In the budget process for the 2019 fiscal year, a similar provision was proposed but was not included in the final budget.
The State of Illinois finalized its fiscal year 2020 budget with the inclusion of an appropriation to raise in-home care rates to offset the costs of
previous minimum wage increases in Chicago and other areas of the state that were imposed beginning on July 1, 2018. These rates were originally set to
be effective July 1, 2019, with in-home care rates to be initially increased by 10.9% to $20.28 from $18.29 to partially offset the costs of the minimum
wage hikes. Rates were then further increased on January 1, 2020 by an additional 7.7% to $21.84, providing full funding for both the Chicago minimum
wage increases and a statewide raise for all current in-home caregivers. The State of Illinois finalized its fiscal year 2021 budget, with in-home care rates to
be increased by 7.1% to $23.40 from $21.84, effective January 1, 2021, contingent upon federal CMS approval.
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On November 15, 2019, the State of Illinois received, and announced, CMS approval for both rate increases, with the first increase to be effective on
December 1, 2019, and the second increase to be effective January 1, 2020. In addition, the Illinois Department on Aging, in conjunction with Illinois’
Health Care and Family Services, announced that the new rates would become effective retroactive to July 1, 2019 for services covered by managed care
organizations. On January 15, 2020, the Department on Aging announced confirmation that a one-time bonus payment will be paid to providers who have
provided services to clients not enrolled in a managed care organization, for the time period of July 1, 2019 through November 30, 2019 using an updated
hourly rate of $20.28. The bonus payment of $6.8 million was recognized as net service revenues during the year ended December 31, 2019, and was
received in May of 2020.
On November 26, 2019, the Chicago City Council voted to approve additional increases in the Chicago minimum wage to $14 per hour beginning
July 1, 2020 and to $15 per hour beginning July 1, 2021. The Company and its trade association will be looking for additional funding in the state of
Illinois fiscal year 2021 budget to offset the cost of these additional minimum wage increases.
Our business will benefit from the rate increases noted above, but there is no assurance that additional offsetting rate increases will be adopted in
Illinois for fiscal years beyond fiscal year 2020, and our financial performance will be adversely impacted for any periods in which an additional offsetting
reimbursement rate increase is not in effect.
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 current employees or contractors becomes an excluded person in the future without our knowledge, we may be subject to substantial civil penalties,
including up to $20,000 for each item or service furnished by the excluded individual to a federal or state healthcare program beneficiary, an assessment of
up to three times the amount claimed and exclusion from the program.
Each of our subsidiaries that employ an average of at least 50 full-time employees in a calendar year are required to offer a minimum level of health
coverage for 95% of our full-time employees in 2019 or be subject to an annual penalty.
Our business may be adversely impacted by healthcare reform efforts, including repeal of or significant modifications to the ACA.
In recent years, the U.S. Congress and certain state legislatures have considered and passed a large number of laws intended to result in significant
change to the healthcare industry. However, there is significant uncertainty regarding the future of the ACA, the most prominent of these reform efforts.
The law has been subject to legislative and regulatory changes and court challenges, and the current presidential administration and certain members of
Congress have stated their intent to repeal or make additional significant changes to the ACA, its implementation or its interpretation.
There is uncertainty regarding whether, when, and how the ACA will be further changed, what alternative provisions, if any, will be enacted, the
timing and implementation of alternative provisions, and the impact of alternative provisions on providers as well as other healthcare industry participants.
Members of Congress have proposed expanding government-funded coverage, including single payor proposals. We are unable to predict the nature and
success of future financial or delivery system reforms that may be implemented by other, non-governmental industry participants.
The industry trend toward value-based purchasing may negatively impact our revenues.
The trend in the healthcare industry toward value-based purchasing of healthcare services is growing among both government and commercial
payors. Value-based purchasing programs emphasize quality of outcome and efficiency of care provided, rather than quantity of care provided. For
example, Medicare requires hospices and home health agencies to report certain quality data in order to receive full reimbursement. Failure to report quality
data or poor performance may negatively impact the amount of reimbursement received. CMS currently has a value-based purchasing program affecting
home health providers in a number of pilot states, whereby providers receive payment bonuses or penalties based on their achievement of specified
performance measures. CMS may expand this program and establish new programs affecting a broader range of providers. In addition, CMS publishes
hospice quality measure data online to allow consumers and others to search and compare data for Medicare-certified hospice providers.
Other initiatives aimed at improving quality and cost of care include alternative payment models, including ACOs and bundled payment
arrangements. It is unclear whether alternative models will successfully coordinate care and reduce costs or whether they will decrease overall
reimbursement. Additionally, commercial payors have expressed intent to shift toward value-based reimbursement arrangements.
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We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more
common and to involve a higher percentage of reimbursement amounts. While we believe we are adapting our business strategies to compete in a value-
based reimbursement environment, we are unable at this time to predict how this trend will affect our results of operations. If we perform at a level below
the outcomes demonstrated by our competitors, are unable to meet or exceed quality performance standards under any applicable value-based purchasing
program, or otherwise fail to effectively provide or coordinate the efficient delivery of quality healthcare services, our reputation in the industry may be
negatively impacted, we may receive reduced reimbursement amounts and we may owe repayments to payors, causing our revenues, results of operations,
financial position and cash flows to decline.
Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreements and
renew existing agreements.
Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as a
quality 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
provide are of high quality, if our quality measures, which are published online by CMS, are deemed to be not of the highest value, our reputation could be
negatively affected. Negative publicity, changes in public perceptions of our services or government investigations 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 these events could have a negative effect on our business,
financial condition and operating results.
Our growth strategy depends on our ability to manage growing and changing operations and we may not be successful in managing 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
the establishment of a presence in new markets. This growth has placed and continues to place significant demands on our management team, systems,
internal controls and financial and professional resources. In addition, we will need to further develop our financial controls and reporting systems to
accommodate our growth. This could require us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing
the appropriate control systems and expanding our information technology infrastructure. Our inability to effectively manage growth could have a material
adverse effect on our financial results.
Previously completed or 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
of local service providers. These acquisitions involve significant risks and uncertainties, including difficulties assimilating acquired personnel and other
corporate cultures into our business, the potential loss of key employees or consumers of acquired providers, regulatory risks, the assumption of liabilities,
exposure to unforeseen liabilities of acquired providers, and the diversion of the management team’s attention. In the past, we have made acquisitions that
have not performed as expected or that we have been unable to successfully integrate with our existing operations. In addition, our due diligence review of
acquired businesses may not successfully identify all potential issues. Further, following completion of an acquisition, we may not be able to maintain the
growth rate, levels of revenue, earnings or operating efficiency that we and the acquired business have achieved or might achieve separately. While we
continue to seek out and pursue acquisition opportunities, we are doing so with additional caution and diligence due to COVID-19 considerations. The
failure to effectively integrate future acquisitions could have a material adverse impact on our operations.
We have grown our business through de novo offices and we may in the future selectively open new offices in existing and new states. De novo
offices involve risks, including those relating to accreditation, hiring new personnel, establishing relationships with referral sources and delays or difficulty
in installing our operating and information systems. We may not be successful in establishing de novo offices in a timely manner due to generating
insufficient business activity and incurring higher than projected operating cost that could have a material adverse effect on our financial condition, 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, 2019 and 2018, we had cash balances of $111.7 million and $70.4 million, respectively. As of December 31, 2019 and 2018, we
had $62.3 million and $20.0 million outstanding debt on our credit facility, respectively. After giving effect to the amount drawn on our credit facility,
approximately $10.0 million and $10.8 million of outstanding letters of credit at December 31, 2019 and 2018 and borrowing limits based on an advanced
multiple of adjusted EBITDA, we had $191.4 million and $137.4 million available for borrowing under our credit facility as of December 31, 2019 and
2018, respectively. Since our credit facility provides for borrowings based on a multiple of an EBITDA ratio, any declines in our EBITDA would result in a
decrease in our available borrowings under our credit facility.
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We cannot predict the timing, size and success of our acquisition efforts, our efforts to expand into new geographic regions or the associated capital
commitments. If we do not have sufficient cash resources or availability under our credit facility, our growth could be limited unless we obtain additional
equity or debt financing. In the future, we may elect to issue additional equity securities in conjunction with raising capital, completing an acquisition or
expanding into a new geographic region. For example, on September 9, 2019, we completed a public offering of an aggregate 2,300,000 shares of common
stock, par value $0.001 per share, including 300,000 shares of common stock sold pursuant to the exercise in full by the underwriters of their option to
purchase additional shares at a public offering price of $79.50 per share (the “Public Offering”). We used approximately $130.0 million from the net
proceeds of the Public Offering to fund the purchase price for our acquisition of Hospice Partners on October 1, 2019 and may use any remaining net
proceeds of the offering for general corporate purposes, including future acquisitions or investments, and the repayment of indebtedness outstanding under
our credit facility. Such issuances could be dilutive to existing shareholders. In addition, our ability under our credit facility to consummate acquisitions is
restricted if we exceed certain Total Net Leverage Ratio (as defined in the Credit Agreement, and subject to adjustments as provided therein) thresholds,
without the consent of the lenders; provided, however, in certain circumstances, in connection with a Material Acquisition (as defined in the Credit
Agreement), we can elect to increase our Total Net Leverage Ratio compliance covenant for the then current fiscal quarter and the three succeeding fiscal
quarters. Further, our credit facility requires, among other things, that we are in pro forma 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 the Home Health Business, we
may incur expenses 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
agreed to indemnify the purchasers of the Home Health Business (the “Purchasers”) for, among other things, (i) penalties, fines, judgments and settlement
amounts arising from a violation of certain specified statutes, including the False Claims Act, the Civil Monetary Penalties Law, the federal Anti-Kickback
Statute, the Stark Law or any state law equivalent in connection with the operation of the Home Health Business prior to the Closing, and (ii) any liability
related to the failure of any reimbursement claim submitted to certain government programs for services rendered by the Home Health Business prior to the
Closing to meet the requirements of such government programs, or any violation prior to the Closing of any healthcare laws. Such liabilities include
amounts to be recouped by, or repaid to, such government programs as a result of improperly submitted claims for reimbursement or those discovered as a
result of audits by investigative agencies. All services that we have provided that have been or may be reimbursed by Medicare are subject to retroactive
adjustments and/or total denial of payments received from Medicare under various review and audit provisions included in the program regulations. The
review period is generally 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 to have existed at the time of original billing. In the event that there are adjustments relating to the period prior to the Closing, we may be
required to reimburse the Purchasers for the amount of such adjustments, which could adversely affect our business and financial condition.
In addition, pursuant to the Home Health Purchase Agreement, we are obligated to indemnify the Purchasers for breaches of representations,
warranties and covenants, certain taxes and liabilities related to the pre-Closing period (other than specifically identified assumed liabilities). Any liability
we have to the 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,
2019, approximately 52.3% of our workforce was represented by the SEIU. We have numerous agreements with local SEIU affiliates which are
renegotiated from time to time. These negotiations are often initiated when we receive increases in our hourly rates from various state agencies. Upon
expiration of these collective bargaining agreements, we may not be able to negotiate labor agreements on satisfactory terms with these labor unions. A
strike, work stoppage or other slowdown could result in a disruption of our operations and/or higher ongoing labor costs, which could adversely affect our
business. Labor costs are the most significant component 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 other
potential claims or litigation brought by our consumers and employees. From time to time, we are subject to claims alleging that we did not properly treat
or care for a consumer that we failed to follow internal or external procedures that resulted in death or harm to a consumer or that our employees mistreated
our consumers, resulting in death or harm. We are also subject to claims arising out of accidents involving vehicle collisions brought by consumers whom
we are transporting, from employees driving to or from home visits or other affected individuals. We may also be subject to lawsuits from patients,
employees and others exposed to COVID-19 at our facilities or in connection with the services provided by our workforce in client residences and third
party facilities. Our professional and general liability insurance may not cover all claims against us.
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In addition, regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our services and
seek 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 and
state whistleblower statutes designed to combat fraud and abuse in our industry. 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 on our business, results of operations and financial condition. Even if we are successful in our defense,
civil lawsuits or regulatory proceedings could distract us from running our business or irreparably damage our reputation.
Our insurance liability coverage may not be sufficient for our business needs.
Although we maintain insurance consistent with industry practice, the insurance we maintain may not be sufficient to satisfy all claims made against
us. 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
of such limits, may have a material adverse effect on our business or assets. We utilize historical data to estimate our reserves for our insurance programs. If
losses on asserted claims exceed the current insurance coverage and accrued reserves, our business, results of operations and financial condition could be
adversely affected. Changes in our annual insurance costs and self-insured retention limits depend in large part on the insurance market, and insurance
coverage may not continue to be available to us at commercially reasonable rates, in adequate amounts or on satisfactory terms.
Inclement weather, natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street
demonstrations may impact our ability to provide services.
Inclement weather, natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street
demonstrations may prevent our employees from providing authorized services. We are not paid for authorized services that are not delivered due to these
events. Furthermore, prolonged disruptions as a result of such events in the markets in which we operate could disrupt our relationships with consumers,
employees and referral sources located in affected areas and, in the case of our corporate office, our ability to provide administrative support services,
including billing and collection services. For example, one of our support centers and a number of our agencies are located in the Midwestern United
States, New York and California, increasing our exposure to blizzards and other major snowstorms, ice storms, tornadoes, flooding, wildfires and
earthquakes. The impact of disasters and similar events is inherently uncertain. Future inclement weather, natural disasters, acts of terrorism, pandemics,
riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations may adversely affect our reputation, 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
the security of our information systems.
Our business depends on effective and secure information systems that assist us in, among other things, gathering information to improve the quality
of consumer care, optimizing financial performance, adjusting consumer mix, monitoring regulatory compliance and enhancing staff efficiency. We rely on
external service providers to provide continual maintenance, upgrading, and enhancement of our primary information systems used for our operational
needs. The software we license for our various patient information systems supports intake, personnel scheduling, office clinical and centralized billing and
receivables management in an integrated database, enabling us to standardize the care delivered across our network of offices and monitor our performance
and consumer outcomes. We utilize the Horizon Homecare software solution to support our personal care business for our legacy Addus locations,
Ambercare and Alliance. For our home health and hospice locations, we utilize Homecare Homebase to support these lines of business. All locations
acquired through our purchase of Arcadia utilize Continulink for their personal care and staffing business. Further, the business operations acquired through
our VIP and Foremost transactions rely on software licensed from Arrow. To the extent providers fail to support the software or systems, or if we lose our
licenses, our operations could be negatively affected. 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, ADP, to provide
continual maintenance, upgrading and enhancement of our primary human resource and payroll systems. To the extent that ADP fails to support the
software or systems, or any of the related support services provided by them, our internal operations could be negatively affected.
Our business also supports the use of EVV to collect visit submission information through our delivery of home care services. Our solution uses a
combination of IVR and GPS enabled smartphones to capture time in and time out, mileage and travel time, as well as the completed care plan tasks. We
license this software through CellTrak along with partnering with states who utilize other software. We rely on these providers to provide continual
maintenance, enhancements, as well as security of any protected data. To the extent that our EVV vendors fail to support these processes, our internal
operations could be negatively affected.
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Under the 21st Century Cures Act, as amended, states had until January 1, 2020 to establish standards for EVV for Medicaid-funded personal care
services. States that failed to meet this deadline could potentially lose, without an application for a good cause extension, an escalating amount of their
funding. To the extent that the states fail to properly implement EVV, our internal operations could be negatively affected.
The COVID-19 pandemic also has led to a substantial increase in administrative employees working remotely and, consequently, accessing our
system remotely. As a result, we are more dependent on our systems that facilitate remote access and potentially could experience increased risks.
If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to process
transactions and produce timely and accurate reports could be adversely affected. If we experience difficulties with the transition and integration of
information 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,
our operations would failover to our geographically separate disaster recovery datacenter with a quick return to operations for all sites and systems. All of
our sites 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, should
one 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
liability under HIPAA, consumer protection laws, common law and 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 computer systems to manage clinical and financial data, to communicate with our consumers, payors, vendors and other third
parties, and to summarize and analyze our operating results. We are required to comply with the federal and state privacy and security laws and
requirements, including HIPAA. In spite of our policies, procedures and other security measures used to protect our computer systems and data,
occasionally, we have experienced breaches that have required us to notify affected consumers and the government, and we have worked with consumers
and the government to resolve such issues. While these past breaches have not had a significant adverse impact on our business or results of operations,
there can be no assurance that we will not be subject to additional and/or more severe cyber-attacks or security breaches in the future. Such attacks or
breaches could result in loss of protected patient medical data or other information subject to privacy laws or disrupt our information technology systems or
business. In addition, various states, including California, Nevada and Massachusetts, have enacted and other states are expected to enact new laws and
regulations concerning privacy, data protection and information security. To the extent we are subject to such legislation, the potential effects of new
legislation are often far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an
effort to comply. The recently enacted laws often provide for civil penalties for violations, as well as a private right of action for data breaches that may
increase data breach litigation. If our privacy and security practices are not in compliance with HIPAA and other applicable privacy and security laws
and/or if we fail to satisfy applicable breach notification requirements in the event of a security breach, we could be subject to significant fines, penalties,
lawsuits and reputational harm. In addition, we may be at increased risk because we outsource certain services or functions to, or have systems that
interface with, third parties. Some of these third parties may store or have access to our data and may not have effective controls, processes, or practices to
protect our information from attack, damage, or unauthorized access. A breach or attack affecting any of these third parties could harm our business.
We may not be able to attract and retain qualified personnel or we may incur increased costs in doing so.
We must attract and retain qualified non-executive personnel in the markets in which we operate in order to provide our services. We compete for
personnel with other providers of social and medical services as well as companies in other service-based industries. This competition has increased
significantly as the unemployment rate has decreased in recent years. Increased competition for trained personnel or general inflationary pressures may
require that we enhance our pay and benefits packages to compete effectively for such personnel. We may not be able to offset such added costs by
increasing the rates we charge for our services. An increase in personnel costs could negatively impact our business. In addition, if we fail to attract and
retain qualified and skilled personnel, our ability to conduct our business operations effectively would be harmed.
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Competition may be greater for managers, such as regional and agency directors. Our ability to attract and retain personnel depends on several
factors, including our ability to provide employees with attractive 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 our strategies 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 of our services may decline, and
we could lose consumers and referral sources.
We may be more vulnerable to the effects of a public health emergency than other businesses due to the nature of our consumers and the physical
proximity required by our operations.
The majority of our consumers are older individuals with complex medical challenges, many of whom may be more vulnerable than the general
public during a pandemic or in a public health emergency. Our employees are also at greater risk of contracting contagious diseases due to their increased
exposure to vulnerable consumers. Our employees could also have difficulty attending to our consumers if a program of social distancing or quarantine is
instituted in response to a public health emergency. In addition, the Company may expand existing internal policies in a manner that may have a similar
effect. If a flu pandemic were to occur, we could suffer significant losses to our consumer population or a reduction in the availability of our employees
and, at a high cost, be required to hire replacements for affected workers. Since December 2019, the COVID-19 pandemic, a disease caused by the novel
coronavirus, has resulted in travel disruption and affected business operations across the world. According to the Centers for Disease Control and
Prevention, older adults and people with certain underlying medical conditions are at a higher risk for serious illness from COVID-19. Although the impact
of COVID-19 on our business has been minimal, the extent to which the COVID-19 pandemic may impact our results is uncertain. Accordingly, certain
public health emergencies could have a material adverse effect on our financial condition and results of operations.
We depend on the services of our executive team members.
Our success depends upon the continued employment of certain members of our executive team to manage several of our key functional areas,
including operations, business development, accounting, finance, human resources, marketing, information systems, contracting and compliance. In 2016
and 2017, we changed a majority of the members of senior management, beginning with our CEO. The departure of any member of our executive 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
adversely affected.
Goodwill and intangible assets with finite lives represent a significant portion of our assets. Goodwill represents the excess of cost over the fair
market value of net assets acquired in business combinations. For example, if our market capitalization drops significantly below the amount of net equity
recorded on 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 part of 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 net earnings and net worth could be materially adversely affected, which could affect our flexibility to obtain additional financing. In addition, if our
assumptions used in preparing our valuations for purposes of impairment testing differ materially from actual future results, we may record impairment
charges in the future and our financial results may be materially adversely affected. We had $275.4 million and $135.4 million of goodwill and
$57.1 million and $23.8 million of intangible assets recorded on our Consolidated Balance Sheets at December 31, 2019 and 2018, 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
will continue to review our goodwill and other intangible assets for possible impairment. We cannot be certain that a downturn in our business or changes
in market conditions will not result in an impairment of goodwill or other intangible assets and the recognition of resulting expenses in future periods,
which could adversely affect our results of operations for those periods.
Ineffective internal control over financial reporting could adversely impact our business and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires our management to report on, and requires our independent
registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. Compliance with SEC regulations adopted
pursuant to Section 404 of the Sarbanes Oxley Act requires annual management assessments of the effectiveness of our internal control over financial
reporting. Compliance with Section 404(b) of the Sarbanes-Oxley Act has increased our legal and financial compliance costs making some activities more
difficult, time-consuming or costly and may also place strain on our personnel, systems and resources.
Accordingly, we are required to have an audit of our internal controls over financial reporting. As described under Part II. Item 9A. “Controls and
Procedures” our management determined that a material weakness in internal controls existed as of December 31, 2018, and that two material weaknesses
existed as of December 31, 2019. The assessment was based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
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To the extent that we now or in the future have deficiencies in our internal controls over financial reporting that are not remediated, our ability to
accurately and timely report our financial position, results of operations, cash flows or key operating metrics could be impaired, which could result in a
material misstatement in our financial statements, late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated
financial statements or other corrective disclosures, or other material adverse effects on our business, reputation, results of operations, financial condition or
liquidity and could create a perception that our financial results do not fairly state our financial condition or results of operations, any of which could have
an adverse effect on the value of our stock.
Compliance with changing regulations including specific program compliance, corporate governance and public disclosure will result in additional
expenses 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 a compliance officer who monitors and reports on our efforts for achieving the desired results. State agencies are recommending increased rules and
regulations in an effort to control the growth of these programs and their overall costs. The implementation of these changes may require us to increase our
efforts to remain compliant, may reduce the authorizations for services to be provided, and may result in certain consumers no longer being eligible for our
services all of which may result in lower revenues and increased costs, reducing our operating performance and profitability. If we continue to serve our
consumers 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 and
Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for
public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. We are committed to maintaining high
standards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriate
resources to comply with evolving standards, and this investment has resulted and will likely continue to result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Restrictive covenants in the agreements governing our indebtedness may adversely affect us.
Our credit facility contains various covenants that limit our ability to take certain actions, including our ability to:
•
•
•
•
•
•
•
•
•
•
•
•
•
make, create, incur, assume or suffer to exist any lien;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
merge, consolidate, sell or otherwise dispose of all or substantially all our assets;
make restricted payments, including paying dividends and making certain loans and investments;
create, incur, assume, permit to exist, or otherwise become or remain directly or indirectly liable with respect to any additional indebtedness;
enter into transactions with affiliates;
engage in any line of additional line of business;
amend our organization documents;
make a change in accounting treatment or reporting practices, change our name or change our jurisdiction of organization or formation;
make any payment or prepayment of certain subordinated indebtedness;
enter into agreements that restrict dividends and certain other payments from subsidiaries;
engage in a sale leaseback or similar transaction; and
make certain capital expenditures.
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In addition, our credit facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other financial
condition tests. Our ability to meet these restrictive covenants and financial ratios and tests may be affected by events beyond our control, and we cannot
assure you that we will meet those tests.
A breach of any of these covenants could result in a default under our credit facility. Upon the occurrence of an event of default under our credit
facility, all amounts outstanding under our credit facility may become immediately due and payable and all commitments under our credit facility to extend
further credit may be terminated. The acceleration of any such indebtedness will result in an event of default under all of our other long-term indebtedness.
The potential cessation or modification of LIBOR may increase our interest expense or otherwise adversely affect us.
A substantial portion of our indebtedness under the credit facility bears interest at variable interest rates that use the London Inter-Bank Offered Rate
(“LIBOR”) as a benchmark rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends
to stop persuading or compelling banks to submit LIBOR quotations after 2021 (the “FCA Announcement”). The FCA Announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be assured after 2021, and LIBOR may cease to exist or otherwise be unsuitable for use as a
benchmark. Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or
more alternative benchmark rates. Although our credit facility provides for alternative base rates, some of those alternative base rates are related to LIBOR,
and the consequences of any potential cessation, modification or other reform of LIBOR cannot be predicted at this time. When LIBOR ceases to exist, we
most likely will need to amend the credit facility, and we cannot predict what alternative interest rate(s) will be negotiated with our counterparties. As a
result, our interest expense may increase, our ability to refinance some or all of our existing indebtedness may be impacted and our available cash flow may
be adversely affected.
Risks Related to Our Common Stock
The market price of our common stock may be volatile and this may adversely affect our stockholders.
The price at which our common stock trades may be volatile. The stock market has recently experienced significant price and volume fluctuations
that have affected the market prices of all securities, including securities of healthcare companies. The market price of our common stock may be
influenced by many 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;
future sales of common stock or debt or the perception that sales could occur;
investor perception of our business and our prospects;
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 the
operating 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 of
volatility 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 this
type is often expensive to defend and may divert our management team’s attention as well as resources from the operation of our business.
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We do not anticipate paying dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return on your
investment will depend solely on appreciation in the price of our common stock.
We have not paid dividends on our shares of common stock and intend to retain all future earnings to finance the continued growth and development
of our business and for general corporate purposes. In addition, we do not anticipate paying cash dividends on our common stock in the foreseeable future.
Any future payment of cash dividends will depend upon our financial condition, capital requirements, credit facility limitations, earnings and other factors
deemed relevant by our board of directors (the “Board”). Our credit facility restricts our ability to declare or pay any dividend or other distribution to
Holdings unless no default or event of default has occurred and is continuing or would arise as a result thereof and the aggregate amount of dividends and
distributions paid in any fiscal year does not exceed $7.5 million per annum.
If securities or industry analysts fail to publish research or reports about our business or publish negative research or reports, or our results are
below analysts’ estimates, our stock price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that industry or securities analysts publish about us or our
business. 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 the
financial markets, which in turn could cause our stock price or trading volume to decline. If one or more analysts do cover us and downgrade their
evaluations of our stock or our results are below analysts’ estimates, our stock price would likely decline. In addition, a single comment or report from one
of the analysts whether positive or negative, could result in a significant increase or decrease in our stock price. Further, our inclusion on or exclusion from
various published stock market indices may cause our stock price to rise or decline.
Provisions in our organizational documents and Delaware or certain other state laws could delay or prevent a change in control of our company,
which could 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.
These provisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of the Board.
Provisions in our amended and restated certificate of incorporation and bylaws that could delay or prevent an unsolicited change in control include:
•
•
•
a staggered board of directors;
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
stockholder approval.
As a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. This section generally prohibits us from
engaging in mergers and other business combinations with stockholders that beneficially own 15% or more of our voting stock, or with their affiliates,
unless our directors or stockholders approve the business combination in the prescribed manner. In addition, our amended and restated bylaws require that
any stockholder proposals or nominations for election to our Board must meet specific advance notice requirements and procedures, which make it more
difficult for our stockholders to make proposals or director nominations. Certain states in which we operate, such as New York, may require regulatory
approval of persons meeting such states’ definition of “controlling persons” or similar concepts, which could delay or deter a change of control or other
business combination with us.
We are able to issue shares of preferred stock with greater rights than our common stock.
Our Board is authorized to issue one or more series of preferred stock from time to time without any action on the part of our stockholders. Our
Board also has the power, without stockholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights,
dividend rights and preferences over our common stock with respect to dividends and other terms. If we issue preferred stock in the future that has a
preference over our common stock with respect to the payment of dividends or other terms, or if we issue preferred stock with voting rights that dilute the
voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We do not own any real property. We lease administrative offices for our local branches, none of which are individually material. We lease
approximately 59,000 and 31,000 square feet of office space in Downers Grove, Illinois and Frisco, Texas which serve as our support centers. We sublease
approximately 21,000 square feet of the unused office space in Downers Grove.
On February 17, 2020, we signed an eleven-year lease agreement to expand our Frisco, Texas support center to approximately 75,000 square feet.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are subject to legal and/or administrative proceedings incidental to our business. It is the opinion of management that the
outcome of pending legal and/or administrative proceedings will not have a material effect on our financial position and results of operations.
Further information with respect to this item may be found in Note 13 to the Consolidated Financial Statements in Part II, Item 8—“Financial
Statements and Supplementary Data,” which is incorporated herein by reference.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock is listed on The Nasdaq Global Market under the symbol “ADUS.”
Holders
As of December 31, 2019, 8.0% of our shares of common stock were held by our officers and directors and approximately 92.0% of our common
stock was held by 271 institutional investors. As of July 24, 2020, Addus HomeCare Corporation had approximately 13,526 shareholders of its common
stock, including 64 shareholders of record.
Dividends
We 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 our
common stock in the foreseeable future. We currently plan to retain any earnings to support the operation, and to finance the growth, of our business rather
than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, capital requirements, credit facility
limitations, earnings, as well as other factors deemed relevant by our Board. Our credit facility restricts our ability to declare or pay any dividend or other
distribution to Holdings unless no default or event of default has occurred and is continuing or would arise as a result thereof and the aggregate amount of
dividends and distributions paid in any fiscal year does not exceed $7.5 million per annum.
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from our Consolidated Financial Statements for the periods and at the dates
indicated. The information is qualified in its entirety by and should be read in conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this Annual Report on Form 10-K.
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As described in Note 2 to the Notes to Consolidated Financial Statements, the Company identified immaterial errors in previously issued financial
statements related to the Company’s determination of implicit price concessions necessary to reduce net service revenues to the amount expected to be
collected. Additionally, the correction reflects the impact on the Company’s income tax provision and related accounts as a result of correcting for the error
as discussed above. Additionally, the Company identified and corrected other immaterial unrelated income tax items impacting deferred tax assets and the
reserve for uncertain tax positions. The following data contain certain corrections of immaterial errors identified in previously reported amounts as further
described in footnote (3) below.
$
Consolidated Statements of Income Data:
Net service revenues (1)
Cost of service revenues
Gross profit
General and administrative expenses
Loss (gain) on sale of assets
Depreciation and amortization
Provision for doubtful accounts
Total operating expenses
Operating income from continuing operations
Interest income (2)
Interest expense
Total interest expense (income), net
Other income
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
(Loss) earnings from discontinued operations
Net income
$
Basic income per common share:
Continuing operations
Discontinued operations
Basic income per common share:
Diluted income per common share:
Continuing operations
Discontinued operations
Diluted income per common share:
Weighted average number of common shares and
potential common shares outstanding:
Basic
Diluted
$
$
$
$
2019
For the Years Ended December 31,
2018
2016
(Amounts In Thousands, Except Per Share Data)
2017
648,791 $
469,553
179,238
133,569
—
10,574
343
144,486
34,752
(1,523)
3,105
1,582
—
33,170
7,359
25,811
(574)
25,237 $
1.87 $
(0.04)
1.83 $
1.81 $
(0.04)
1.77 $
516,647 (3)
379,843
136,804 (3)
105,025
38
8,642
272
113,977 (3)
22,827 (3)
(2,592)
5,016
2,424
—
20,403 (3)
4,096 (3)
16,307 (3)
126
16,433 (3)
1.35 (3)
0.01
1.36 (3)
1.32 (3)
0.01
1.33 (3)
$
$
$
$
$
$
425,994
310,119
115,875
76,902
(2,467)
6,663
9,524 (3)
90,622 (3)
25,253 (3)
(66)
4,472
4,406
217
21,064 (3)
9,258 (3)
11,806 (3)
147
11,953 (3)
1.03 (3)
0.01
1.04 (3)
1.02 (3)
0.01
1.03 (3)
$
$
$
$
$
$
400,929
294,593
106,336
76,840
—
6,647
9,199 (3)
92,686 (3)
13,650 (3)
(2,812)
2,332
(480)
206
14,336 (3)
3,363 (3)
10,973 (3)
97
11,070 (3)
0.97 (3)
0.01
0.98 (3)
0.97 (3)
0.01
0.98 (3)
$
$
$
$
$
$
2015
336,997
245,492
91,505
66,273
—
4,717
5,416 (3)
76,406 (3)
15,099 (3)
(47)
786
739
—
14,360 (3)
3,568 (3)
10,792 (3)
270
11,062 (3)
0.98 (3)
0.03
1.01 (3)
0.96 (3)
0.02
0.98 (3)
13,816
14,248
12,049
12,383
11,470
11,623
11,292
11,349
10,986
11,189
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Key Metrics:
General:
Adjusted EBITDA * (4)
States served at period end
Locations at period end
Employees at period end
Operational Data:
Personal Care
Locations at period end
Average billable census * (5)
Billable hours * (6)
Average billable hours per census per month * (6)
Billable hours per business day * (6)
Revenues per billable hour * (6)
Same store growth revenue % * (7)
Hospice
Locations at period end
Admissions * (8)
Average daily census * (9)
Average length of stay * (10)
Patient days * (11)
Revenues per patient day * (12)
Home Health
Locations at period end
New admissions * (13)
Recertifications * (14)
Total volume * (15)
Visits * (16)
Percentage of Revenues by Payor:
Personal Care
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Hospice
Medicare
Managed care organizations
Other
Home Health
Medicare
Managed care organizations
Other
2019
For the Years Ended December 31,
2017
2016
2018
(Actual Numbers, Except Adjusted EBITDA in Thousands)
2015
$
$
58,697
26
198
33,238
$
42,476
24
171
33,153
$
35,782
24
116
26,097
$
30,509
24
114
23,070
22,702
22
119
21,395
116
35,343
23,833
56
91,664
17.86
$
114
33,944
23,088
57
88,460
17.35
$
119
32,756
19,556
50
75,214
17.22
$
$
$
152
39,188
29,732
63
113,915
19.50
8.2
35
3,095
1,783
107
349,866
153.20
11
3,347
2,658
6,005
108,863
$
148
37,597
26,934
59
103,195
18.23
2.8
13
1,061
528
136
128,819
146.33
10
1,757
1,443
3,200
53,711
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
52.2 %
41.3
3.7
1.6
1.2
92.6 %
5.2
2.2
77.6 %
20.3
2.1
36
58.2 %
35.3
4.1
1.3
1.1
93.6 %
5.6
0.8
88.0 %
11.0
1.0
64.0 %
33.0
2.0
1.0
—
— %
—
—
— %
—
—
71.0 %
26.0
2.0
1.0
—
— %
—
—
— %
—
—
—
—
—
—
—
—
—
—
—
—
—
78.0 %
18.0
3.0
1.0
—
— %
—
—
— %
—
—
Table of Contents
Consolidated Balance Sheet Data:
Cash
Accounts receivable, net of allowances
Goodwill and intangibles
Total assets
Total debt, net of debt issuance costs
Stockholders’ equity
2019
2018
As of December 31,
2017
(Amounts In Thousands)
2016
2015
$
$
111,714
149,680
332,447 (1)
636,748 (1)
59,892
475,592
$
70,406
98,316 (3)
159,226 (1)
(3)
(1)
348,094
17,284
268,491 (3)
53,754 $
85,321 (3)
106,935 (1)
(3)
(1)
265,719
39,860
170,337 (3)
8,013 $
113,022 (3)
87,951
228,740 (3)
25,013
154,674 (3)
4,104
81,813 (3)
77,980
183,658 (3)
2,991
138,426 (3)
(1)
(2)
Acquisitions completed in 2019 accounted for $55.8 million net service revenues for the year ended December 31, 2019. Acquisitions completed in 2018 accounted
for $113.2 million, and $75.2 million net service revenues for the years ended December 31, 2019 and 2018, respectively. Acquisitions completed in 2017 accounted
for $21.2 million, $20.2 million, and $8.6 million net service revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Acquisitions completed
in 2016 accounted for $76.2 million, $65.3 million, $58.6 million, and $52.7 million net service revenues for the years ended December 31, 2019, 2018, 2017 and
2016, respectively. Acquisitions completed in 2015 accounted for $6.5 million, $6.6 million, $9.3 million, $11.6 million and $9.7 million net service revenues for the
years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively. For the years ended December 31, 2019, 2018, 2017, 2016 and 2015, acquisitions
completed during those years represented $272.8 million, $167.3 million, $76.5 million, $64.3 million and $9.7 million, respectively, of net service revenues. See
Note 5 to the Notes to Consolidated Financial Statements for additional information regarding the increases in total assets and goodwill and intangibles related to
acquisitions during the years ended December 31, 2019, 2018 and 2017.
Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved 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. For the years ended December 31, 2019, 2018 and 2016, we received $0.7 million, $2.3 million and $2.8 million in prompt payment
interest. For the years ended December 31, 2017 and 2015, we did not receive material prompt payment interest.
(3)
Reflects a revised amount for the impact of correcting certain immaterial errors as described in Note 2 to the Notes to Consolidated Financial Statements
Refer to Note 2 to the Notes to Consolidated Financial Statement, for the corrections of immaterial errors reflected in the Consolidated Statements of Income for the
years ended December 31, 2018 and 2017; and the Consolidated Balance Sheet as of December 31, 2018.
Additionally, the Company’s 2016 and 2015 Consolidated Statements of Income were adjusted for these immaterial errors as follows:
•
•
•
Net service revenues, gross profit, operating income from continuing operations and income from continuing operations before taxes were decreased by
$1.8 million and $1.1 million, for the years ended December 31, 2016 and 2015, respectively.
Income tax expense decreased by $0.7 million and $0.4 million, for the years ended December 31, 2016 and 2015, respectively.
Net income from continuing operations and net income were decreased by $1.1 million and $0.7 million, for the years ended December 31, 2016 and
2015, respectively.
The Company’s 2017, 2016 and 2015 Consolidated Balance Sheets were adjusted for these immaterial errors as follows:
•
•
•
Accounts receivable, net of allowances decreased by $8.2 million, $7.1 million and $5.3 million, as of December 31, 2017, 2016 and 2015, respectively.
Deferred tax assets increased by $2.4 million, $3.1 million and $2.1 million, as of December 31, 2017, 2016 and 2015, respectively.
Stockholders’ equity decreased by $6.0 million, $4.2 million and $3.2 million, as of December 31, 2017, 2016 and 2015, respectively.
(4)
We define Adjusted EBITDA as net income before discontinued operations, net interest expense, interest income from Illinois, secondary offering costs, other non-
operating income, income tax expense, depreciation and amortization, merger and acquisition expense, stock-based compensation expense, restructure and severance
costs, IRS accrual, write down of deferred tax assets and impact of the Tax Cuts and Jobs Act of 2017 (the “tax reform act”), write-off of debt issuance costs and
(loss) gain on sale of assets. Adjusted EBITDA is a performance 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 performance calculated in accordance with GAAP. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled
measures reported by other companies.
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Management believes that Adjusted EBITDA is useful to investors, management and others in evaluating our operating performance for the following reasons:
•
•
•
By reporting Adjusted EBITDA, we believe that we provide investors with insight and consistency in our financial reporting and present a basis for
comparison of our business operations between current, past and future periods. We believe that Adjusted EBITDA allows management, investors and
others to evaluate and compare our core operating results, including return on capital and operating efficiencies, from period to period, by removing the
impact of our capital structure (interest expense), asset base (amortization and depreciation), tax consequences, stock-based compensation expense, and
other identified adjustments.
We believe that Adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate the financial performance of other
public companies.
We recorded stock-based compensation expense of $5.8 million, $4.1 million, $2.5 million, $1.1 million and $1.6 million for the years ended
December 31, 2019, 2018, 2017, 2016, and 2015, respectively. By comparing our Adjusted EBITDA in different periods, our investors can evaluate our
operating results without stock-based compensation expense, which is a non-cash expense which we believe is not a key measure of our operations.
In addition, management has chosen to use Adjusted EBITDA as a performance measure because we believe that the amount of non-cash expenses, such as
depreciation, amortization and stock-based compensation expense, may not directly correlate to the underlying performance of our business operations, and because
such expenses can vary significantly from period to period as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or
the timing of new stock-based awards, as the case may be. This facilitates internal comparisons to historical operating 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 our organization, 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 in order to
implement our growth strategy, to determine appropriate levels of investments in acquisitions and to endeavor to achieve strong core operating results;
to evaluate the effectiveness of business strategies, such as the allocation of resources, the mix of organic growth and acquisitive growth and adjustments
to our payor mix;
as a means of evaluating the effectiveness of management in directing our core operating performance, which we consider to be performance that can be
affected by our management in any particular period through their allocation and use of resources that affect our underlying revenue and profit-generating
operations during that period;
for the valuation of prospective acquisitions, and to evaluate the effectiveness of integration of past acquisitions into our company; and
in communications with our Board concerning our financial performance.
Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations 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 under GAAP. Some of these
limitations include:
•
•
•
•
•
•
•
•
•
•
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not reflect interest expense or interest income;
Adjusted EBITDA does not reflect other non-operating income from our investments in joint ventures;
Adjusted EBITDA does not reflect cash requirements for income taxes;
although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for these replacements;
Adjusted EBITDA does not reflect any mergers and acquisitions expenses;
Adjusted EBITDA does not reflect any stock-based compensation;
Adjusted EBITDA does not reflect any restructure and severance costs;
Adjusted EBITDA does not reflect any gains or losses on the sale of assets;
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•
•
•
Adjusted EBITDA does not reflect any write down of deferred tax assets/impact of the tax reform act;
Adjusted EBITDA does not reflect any write off of debt issuance costs; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Management compensates for these limitations by using GAAP financial measures in addition to Adjusted EBITDA in managing the day-to-day and long-term
operations of our business. We believe that consideration of Adjusted EBITDA, together with a careful review of our GAAP financial measures, is the most
informed method of analyzing our company.
The following table sets forth a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA:
Reconciliation of net income to Adjusted EBITDA (a):
Net income
Less: loss (earnings) from discontinued operations,
net of tax
Net income from continuing operations
Interest expense, net, excluding write-off of debt
issuance costs
Interest income from Illinois
Secondary offering costs
Other non-operating income
Income tax expense from continuing operations,
excluding write down of deferred tax
assets/impact of tax reform act
Depreciation and amortization
M&A expenses
Stock-based compensation expense
Restructure and severance costs
IRS accrual
Write down of deferred tax assets/impact of tax
reform act (b)
Write-off of debt issuance costs (c)
Loss (gain) on sale of assets
2019
2018
2017
2016
2015
Years Ended December 31,
(Amounts In Thousands)
$
25,237
$
16,433
(d) $
11,953
(d) $
11,070
(d) $
11,062 (d)
574
25,811
(126)
16,307
(d)
(147)
11,806
(d)
(97)
10,973
(d)
(270)
10,792 (d)
2,233
(651)
127
—
7,359
10,574
4,775
5,766
2,703
—
—
—
—
58,697
$
4,451
(2,253)
189
—
4,096
8,642
4,989
4,109
1,682
—
—
226
38
42,476
(d)
3,083
—
—
(217)
7,258
6,663
2,116
2,552
1,665
—
(d)
2,000
1,323
(2,467)
35,782
(d) $
(d) $
2,332
(2,812)
—
(206)
3,363
6,647
1,122
1,072
8,018
—
—
—
—
30,509
(d)
(d) $
786
(47)
—
—
3,568 (d)
4,717
1,013
1,573
—
300
—
—
—
22,702 (d)
Adjusted EBITDA
$
(a)
(b)
(c)
(d)
The selected historical Consolidated Statements of Income data for the fiscal years ended December 31, 2019, 2018, 2017, 2016 and 2015, were derived
from our audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.
Included in income tax expense on the Consolidated Statements of Income.
Included in interest expense on the Consolidated Statements of Income.
Reflects a revised amount for the impact of correcting certain immaterial errors as described in footnote (3) above.
Average billable census is the number of unique clients receiving a billable service during the year and is the total census divided by months in operation during the
period.
Billable hours is the total number of hours served to clients during the period. Average billable hours per census per month is billable hours divided by average
billable census. Billable hours per day is total billable hours divided by the number of business days in the period. Revenues per billable hour is revenue attributed to
billable hours divided by billable hours.
Same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least 52
full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures.
Represents referral process and new patients on service during the period.
Average daily census is total patient days divided by the number of days in the period.
39
(5)
(6)
(7)
(8)
(9)
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(10) Average length of stay is the average number of days a patient is on service, calculated upon discharge, and is total patient days divided by total discharges in the
period.
(11)
Patient days is days of service for all patients in the period.
(12)
Revenue per patient day is hospice revenue divided by the number of patient days in the period.
(13)
Represents new patients during the period.
(14) A home health certification period is an episode of care that begins with a start of care visit and continues for 60 days. If at the end of the initial episode of care, the
patient continues to require home health services, a recertification is required. This represents the number of recertifications during the period.
(15)
Total volume is total admissions and total recertifications in the period.
(16)
Represents number of services to patients in the period.
*
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing
operations and acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the
results of operations from period to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be
used to evaluate current operating results, identify trends affecting our business, determine the allocation of resources and assess the quality and potential
variability of our cash flows and earnings. We believe they are useful to investors in evaluating and understanding our business but should not be used
solely in assessing the Company’s performance. These key performance indicators should not be considered superior to, as a substitute for or as an
alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein to fully evaluate and understand the business
as a whole. These measures may not be comparable to similarly-titled performance indicators used by other companies.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our Consolidated Financial Statements and the related notes included elsewhere in this
Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ
materially 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-
K and other risks as well as other factors that are not currently known to us, that we currently consider immaterial or that are not specific to us, such as
general economic conditions.
Overview
The consolidated financial statements for the years ended December 31, 2018, December 31, 2017 and each of the interim periods of 2018 and the
first three quarters of 2019 have been revised to correct prior period errors as discussed in Note 2, “Revision of Previously Issued Financial Statements”
and Note 17, “Unaudited Summarized Quarterly Financial Information” to our consolidated financial statements included in this Annual Report on Form
10-K. Accordingly, this MD&A reflects the impact of those revisions.
We are a home care services provider operating in three segments: personal care, hospice and home health. Our services are principally provided in-
home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our
consumers are predominantly “dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted
for 37.8%, 33.9% and 33.1% of our revenue during the years ended December 31, 2019, 2018 and 2017, respectively.
A summary of our financial results for 2019, 2018 and 2017 is provided in the table below.
For the Years Ended December 31,
Net service revenues – continuing operations
Net income from continuing operations
(Loss) earnings from discontinued operations
Net income
Total assets
$
$
$
2019
648,791
25,811
(574)
$
25,237
2018 (1)
(Amounts in Thousands)
516,647
$
16,307
126
16,433
636,748
$
348,094
2017 (1)
425,994
11,806
147
11,953
265,837
$
$
$
(1)
Net service revenues and net income from continuing operations, net income and total assets have been updated to reflect the immaterial error described in Note 2 to
the Notes to Consolidated Financial Statements.
As of December 31, 2019, we provided our services in 26 states through approximately 198 offices. Our payor clients include federal, state and local
governmental agencies, managed care organizations, commercial insurers and private individuals. For the years ended December 31, 2019, 2018 and 2017,
we served approximately 61,000, 57,000 and 51,000 discrete individuals, respectively. Our personal care segment also includes staffing services, with
clients including assisted living facilities, nursing homes and hospice facilities.
COVID-19 Pandemic
On January 31, 2020, the HHS Secretary declared a national public health emergency due to a novel coronavirus. In March 2020, the World Health
Organization declared the outbreak of COVID-19, the disease caused by this novel coronavirus, a pandemic. This disease continues to spread throughout
the United States and other parts of the world. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is
rapidly evolving. The spread of COVID-19 has caused many states and cities to declare states of emergency or disaster proclamations, including the state
of Texas and the city of Frisco, where we are headquartered. State and local governments, together with public health officials, have recommended and
mandated precautions to mitigate the spread of the virus, including the closure of public facilities and parks, schools, restaurants, many businesses and
other locations of public assembly. As a result, COVID-19 is significantly affecting overall economic conditions in the United States. Although many of the
restrictions have eased across the country, some areas are re-imposing closures and other restrictions as a result of increasing rates of COVID-19 infection.
There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it or the duration or types of restrictions
that will be imposed. For that reason, we are unable to predict the long-term impact of the pandemic on our business at this time.
For the three and six months ended June 30, 2020, COVID-19 related costs were approximately $2.0 million and $2.3 million, respectively, which
were mostly offset by temporary rate increases from certain payors in our personal care segment of $1.7 million during the three and six months ended June
30, 2020. As of June 30, 2020, $1.6 million of payments received from payors for COVID-19 reimbursements have been recorded as deferred revenue and
will be recognized as we incur related expenses on behalf of the payor. Two of our primary markets, New York and Illinois, have been significantly affected
by the pandemic, with high numbers of cases reported. However, relevant authorities have universally designated our services as “essential services,”
exempting our
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services and service providers from many of the restrictions described above. In addition, the impact of the restrictions on the Company’s operations for our
consumer population has been minimal. For example, in our personal care services segment, we provide non-medical assistance with activities of daily
living, primarily to persons who are at increased risk of hospitalization or institutionalization, such as the elderly, chronically ill or disabled. Most of these
consumers are largely confined to their homes, and a significant number of our caregivers provide services to only one consumer, often a family member.
Because our top priority is to protect our consumers and their families, and our caregivers and their families, we have implemented several new procedures
to further reduce the risk of COVID-19 transmission, including a new screening process for both the caregiver and the consumer and the expansion of the
use of PPE from our hospice and home health segments to also include our personal care segment. We are not able to reasonably predict the total amount of
costs we will incur related to the COVID-19 pandemic, and such costs could be substantial. According to the Centers for Disease Control and Prevention,
older adults and people with certain underlying medical conditions are at a higher risk for serious illness from COVID-19.
Prior to the widespread impacts of COVID-19, the primary limitation on our growth had been the difficulty to attract and retain sufficient caregivers
in an environment of very low unemployment rates. With the widespread adverse impacts of the COVID-19 pandemic on the hospitality and other labor-
intensive industries, however, we have had, and believe we will continue to have, opportunities to recruit new caregivers. Further, CMS and many states
(including New York and Illinois) have granted temporary blanket waivers of certain onboarding requirements for new caregivers, significantly shortening
the onboarding process.
The COVID-19 pandemic has had a limited impact on our reimbursements. Although we experienced some consumers suspending their personal
care services due to health concerns, many of these consumers resumed our services within weeks. This reduction was partially offset by an increase in
demand for our services by patients recovering from COVID-19 who have been released from the hospital but are still suffering lingering effects of the
virus.
The economic slowdown caused by the COVID-19 pandemic poses significant risks to states’ budgets for the 2021 fiscal year, which began July 1
in most states. Depending on the severity and length of a downturn, sales tax collections and income tax withholdings could continue to be depressed in
fiscal 2021 and, potentially, future fiscal years. States could face significant fiscal challenges and may have no choice but to revise their revenue forecasts
and adjust their budgets for fiscal 2021 and, potentially, future fiscal years, accordingly. Indeed, Illinois, New York and New Mexico, our top three markets,
have revised revenue estimates down for the 2021 fiscal year. In New York, which started its fiscal year April 1, the state comptroller recently estimated
that the state would collect at least $10 billion less than originally forecasted, the first year-to-year cut since 2011. The current New York fiscal plan
authorizes the state of New York to issue up to $8 billion in short-term bonds to provide funds in case of reduced revenues during the fiscal year, tentatively
scheduled for October 2020, December 2020 and March 2021. It also allows two state authorities to provide the state with a $3 billion line of credit in the
new fiscal year. Congress could provide additional relief with additional stimulus and relief legislation, including extension of unemployment benefits and
relief for states. We cannot determine the impact that COVID-19 may have on states budgets for 2021 or beyond, however, such impacts could have a
material adverse effect on our financial condition, results of operations and cash flows.
At December 31, 2019, we had $111.7 million of cash on hand and $191.4 million of available, unused committed capacity under our credit facility.
Our credit facility requires us to maintain a total net leverage ratio not exceeding 3.75:1.00. As of December 31, 2019, our total net leverage ratio was zero.
Further, we were unable to timely file this Annual Report on Form 10-K, which would have included our audited financial statements for the year ended
December 31, 2019. The Company is required to deliver annual audited financial statements under the affirmative covenants of its Credit Agreement. The
Company obtained consent from the Required Lenders (as defined in the Credit Agreement) to extend the timeline of the audited financials for the year
ended December 31, 2019 to not later than October 31, 2020. Although we believe our liquidity position remains strong, we can provide no assurance that
we will remain in compliance with the covenants in our Credit Agreement, and in the future, it may prove necessary to seek an amendment with the bank
lending group under our credit facility. The COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of financial and
capital markets, and there can be no assurance that we will be able to raise additional funds on terms acceptable to us, if at all.
The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, we cannot currently predict with certainty the extent to
which our business, results of operations, financial condition or liquidity will ultimately be impacted. Given the dynamic nature of these circumstances, the
related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A
—“Risk Factors — The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be
negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time” of this Annual Report on Form 10-K.
In recognition of the significant threat to the liquidity of financial markets posed by the COVID-19 pandemic, the Federal Reserve and Congress
have taken dramatic actions to provide liquidity to businesses and the banking system in the U.S. For example, on March 27, 2020, the President signed
into law the CARES Act, a sweeping stimulus bill intended to bolster the U.S. economy. On April 24, 2020, the PPPHCE Act was enacted, an expansion of
the CARES Act. Together, the CARES Act and the PPPHCE Act authorize $175 billion in funding to be distributed to health care providers through Relief
Fund. This funding is intended to support healthcare providers by reimbursing them for healthcare-related expenses or lost revenues attributable to COVID-
19. In addition to relief funding, the CARES Act includes temporary changes to Medicare and Medicaid payment rules and relief from certain accounting
provisions. There can be no assurance that these governmental interventions will ultimately be successful or that any future interventions will prove
successful, and the financial markets may experience significant contractions in available liquidity. In April 2020, the Company received grants in an
aggregate principal amount of $6.9 million, for which it did not apply, from the Relief Fund
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as part of the automatic general distributions by HHS. The Company returned these funds in June 2020. While we may receive further financial, tax or
other relief and other benefits under and as a result of the CARES Act, the PPPHCE Act and other stimulus measures, it is not possible to estimate at this
time the need, availability, extent or impact of any such relief.
Acquisitions
In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets or facilitated our entry
into new markets where in-home care has been moving to managed care organizations.
On January 1, 2018, we acquired certain assets of LifeStyle in order to expand private pay services in Illinois. The total consideration for the
transaction was $4.1 million. On April 1, 2018, we completed the acquisition of certain assets of Arcadia for approximately $18.9 million. Arcadia
provides home care services through 26 offices in 10 states. We funded this acquisition through the delayed draw term loan portion of our credit facility. In
September 2018, we acquired certain affiliate branches of Arcadia for $0.6 million using cash on hand.
On May 1, 2018, we completed the acquisition of all of the issued and outstanding stock of Ambercare for approximately $39.6 million plus the
amount of excess cash held by Ambercare at closing (approximately $12.0 million). With the purchase of Ambercare, we expanded our personal care
operations and entered into our hospice and home health operations in the state of New Mexico. We funded this acquisition through the delayed draw term
loan portion of our credit facility.
On June 1, 2019, we completed the acquisition of VIP for approximately $29.9 million. With the purchase of VIP, we expanded our personal care
services in the state of New York and into the New York City metropolitan area. We funded this acquisition through the delayed draw term loan portion of
our credit facility and cash on hand.
On August 1, 2019, we completed the acquisition of Alliance for approximately $23.5 million. Additionally, on August 1, 2019, we acquired the
assets of Foremost for approximately $1.4 million. We funded these acquisitions through a combination of our revolving credit facility and available cash.
With the purchase of Alliance, we expanded our personal care, home health and hospice operations in the state of New Mexico. The addition of Foremost
will support our growth strategy in the New York City market area.
On October 1, 2019, we completed the acquisition of Hospice Partners for approximately $135.6 million. We funded the acquisition with a portion
of the net proceeds of our Public Offering. With the purchase of Hospice Partners, we expanded our hospice operations through 21 locations in Idaho,
Kansas, Missouri, Oregon, Texas and Virginia. Hospice Partners also launched a palliative care program in Texas in 2018.
On July 1, 2020, we completed the acquisition of A Plus for approximately $12.2 million, with funding provided by cash on hand. With the purchase
of A Plus, we expanded our personal care services in the state of Montana.
While we continue to identify and pursue acquisition opportunities, we are doing so with additional caution and diligence due to COVID-19
considerations.
Revenue by Payor and Significant States
Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local
programs under which the agencies operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. We are experiencing
a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the
reduction of the need for acute care.
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For the years ended December 31, 2019, 2018 and 2017, our revenue by payor and significant states by segment were as follows:
2019
Personal Care
2018 (1)
2017 (1)
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Total personal care segment net service revenues
Illinois
New York
New Mexico
All other states
Total personal care segment net service
revenues
Amount
(in Thousands)
303,479
239,559
21,765
9,204
6,721
580,728
$
$
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
285,973
173,391
20,003
6,173
5,401
490,941
52.2 % $
41.3
3.7
1.6
1.2
100.0 % $
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
273,525
140,993
8,739
2,737
—
425,994
58.2 % $
35.3
4.1
1.3
1.1
100.0 % $
2019
Personal Care
2018 (1)
2017 (1)
$
Amount
(in Thousands)
247,524
108,403
75,666
149,135
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
232,518
65,117
58,914
134,392
42.6 % $
18.7
13.0
25.7
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
224,257
58,360
37,588
105,789
47.3 % $
13.3
12.0
27.4
% of
Segment
Net
Service
Revenues
64.2 %
33.1
2.1
0.6
—
100.0 %
% of
Segment
Net
Service
Revenues
52.6 %
13.7
8.8
24.9
$
580,728
100.0 % $
490,941
100.0 % $
425,994
100.0 %
(1)
Net service revenues have been updated to reflect the immaterial error described in Note 2 to the Notes to Consolidated Financial Statements.
Medicare
Managed care organizations
Other
Total hospice segment net service revenues
New Mexico
All other states
Total revenue by state
Medicare
Managed care organizations
Other
Total home health segment net service
revenues
New Mexico
Amount
(in Thousands)
2019
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
Hospice
$
$
$
$
$
$
$
49,649
2,768
1,184
53,601
38,790
14,811
53,601
92.6 % $
5.2
2.2
100.0 % $
72.4 % $
27.6
100.0 % $
Home Health
17,652
1,047
151
18,850
18,850
—
18,850
93.6 %
5.6
0.8
100.0 %
100.0 %
—
100.0 %
Amount
(in Thousands)
2019
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
11,218
2,942
302
14,462
14,462
77.6 % $
20.3
2.1
100.0 % $
100.0 % $
6,034
752
70
6,856
6,856
88.0 %
11.0
1.0
100.0 %
100.0 %
We derive a significant amount of our net service revenues in Illinois, which represented 38.2%, 45.0% and 52.6% of our net service revenues for
the years ended December 31, 2019, 2018 and 2017, respectively.
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A significant amount of our net service revenues are derived from one payor client, the Illinois Department on Aging, the largest payor program for
our Illinois personal care operations, which accounted for 25.3%, 31.7% and 36.5% of our net service revenues for the years ended December 31, 2019,
2018 and 2017, respectively. The Illinois Department on Aging’s payments for non-Medicaid consumers have been delayed in the past and may continue to
be delayed in the future due to budget disputes. The state of Illinois did not adopt comprehensive budgets for fiscal years 2016 or 2017, ended June 30,
2016 and June 30, 2017, respectively. On July 6, 2017, the state of Illinois passed a budget for the state fiscal year 2018, which began on July 1, 2017,
authorizing the Illinois Department on Aging to pay for our services rendered to non-Medicaid consumers provided in prior fiscal years. On June 4, 2018,
the state of Illinois passed a budget for state fiscal year 2019, which began on July 1, 2018. On June 6, 2019, the state of Illinois passed a budget for state
fiscal year 2020, which began on July 1, 2019.
In December 2014, the Chicago City Council passed an ordinance that, over a period of years, raised the minimum wage for Chicago workers,
resulting in an increase equal to $13 per hour on July 1, 2019, with increases adjusted based on the Consumer Price Index in subsequent years.
The State of Illinois finalized its fiscal year 2020 budget with the inclusion of an appropriation to raise in-home care rates to offset the costs of
previous minimum wage increases in Chicago and other areas of the state that were imposed beginning on July 1, 2018. These rates were originally set to
be effective July 1, 2019, with in-home care rates to be initially increased by 10.9% to $20.28 from $18.29 to partially offset the costs of the minimum
wage hikes. Rates were then further increased on January 1, 2020 by an additional 7.7% to $21.84, providing full funding for both the Chicago minimum
wage increases and a statewide raise for all current in-home caregivers. The State of Illinois finalized its fiscal year 2021 budget, with in-home care rates to
be increased by 7.1% to $23.40 from $21.84, effective January 1, 2021, contingent upon federal CMS approval.
On November 15, 2019, the State of Illinois received and announced official CMS approval for both rate increases, with the first increase to be
effective on December 1, 2019, and the second increase to be effective on January 1, 2020. In addition, the Illinois Department on Aging, in conjunction
with Illinois’ Health Care and Family Services, announced that the new rates would become effective retroactive to July 1, 2019 for services covered by
managed care organizations. On January 15, 2020, the Department on Aging announced confirmation that a one-time bonus payment would be paid to
providers who have provided services to clients not enrolled in a managed care organization, for the time period of July 1, 2019 through November 30,
2019 using an updated hourly rate of $20.28. The bonus payment of $6.8 million was recognized as net service revenues during the year ended December
31, 2019, and was received in May of 2020.
On November 26, 2019, the Chicago City Council voted to approve additional increases in the Chicago minimum wage to $14 per hour beginning
July 1, 2020 to $15 per hour beginning July 1, 2021. The Company and its trade association will be looking for additional funding in the State of Illinois
fiscal year 2021 budget to offset the cost of these additional minimum wage increases.
Our business will benefit from the rate increases noted above, but there is no assurance that additional offsetting rate increases will be adopted in
Illinois for fiscal years beyond fiscal year 2020, and our financial performance will be adversely impacted for any periods in which an additional offsetting
reimbursement rate increase is not in effect.
Impact of Changes in Medicare and Medicaid Reimbursement
Home Health
CMS has issued final rules and policy updates that allow Medicare Advantage insurers to offer beneficiaries more options and new types of benefits.
Effective January 1, 2019, CMS expanded the scope of its “primarily health-related” supplemental benefit standard, permitting plans to cover a broader
array of services that increase health and improve quality of life, including coverage of non-skilled in-home care. This policy change, emphasizing
improving quality and reducing costs, aligns with our overall approach to care, and we believe the increased demand for personal care from the Medicare
Advantage population represents a potentially significant upside opportunity over the next several years.
In June 2019, CMS began the Review Choice Demonstration for Home Health Services demonstration in Illinois to identify and prevent fraud,
reduce the number of Medicare appeals, and improve provider compliance with Medicare program requirements. Home health agencies may initially select
from the following claims review and approval processes: pre-claim review, post-payment review, or a minimal post-payment review with a 25% payment
reduction. Home health agencies that maintain high compliance levels will be eligible for additional, less burdensome options. Beginning in March 2020,
CMS paused certain claims processing for the Review Choice Demonstration due to the COVID-19 pandemic. However, the agency expects to discontinue
exercising enforcement discretion beginning in August 2020, regardless of the status of the public health emergency. Following the resumption of the
demonstration, MACs will conduct post-payment review on claims that were submitted and paid during the pause. Further, CMS plans to expand the
Review Choice Demonstration to certain other states, including Ohio and Florida, in August 2020. We are currently unable to predict what impact, if any,
this program may have on our result of operations or financial position.
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Home health services provided to Medicare beneficiaries are paid under the Medicare Home Health Prospective Payment System (“HHPPS”).
Historically, the HHPPS was based on 60-day episodes of care and used a case-mix system that relied on the number of visits to determine payment.
Effective January 1, 2020, CMS began using a 30-day episode of care for home health payments and implemented the Patient-Driven Groupings Model
(“PDGM”) as part of the shift toward value-based care. The PDGM classifies patients based on clinical characteristics and other patient information into
payment categories and eliminates the use of therapy service thresholds. Also effective January 1, 2020, CMS finalized a policy allowing therapy assistants
to provide maintenance therapy services in the home and modified certain requirements relating to the home health plan of care.
CMS updates the HHPPS payment rates each calendar year. Effective January 1, 2020, HHPPS rates increased by 1.3%, which reflects a 1.5%
payment update as mandated by the Bipartisan Budget Act of 2018, offset by a 0.2 percentage point decrease in payments to home health agencies due to
changes in the rural add-on percentages also mandated by the Bipartisan Budget Act of 2018, among other adjustments. CMS requires both home health
and hospice providers to submit quality reporting data each year. Home health providers that do not comply are subject to a 2 percentage point reduction to
their market basket update.
Historically, CMS has paid home health providers 50% to 60% of anticipated payment at the beginning of a patient’s care episode through a request
for anticipated payment (“RAP”). However, to address potential program integrity risks, CMS is currently phasing out RAP payments. For calendar year
2020, CMS reduced RAP payments to 20% of the anticipated payment and limited those payments to existing home health providers. In calendar year
2021, CMS will not provide any up-front payments in response to a RAP but will continue to require home health providers to submit streamlined RAPs as
notice that a beneficiary is under a home health period of care. CMS will further reduce the administrative burden on providers in calendar year 2022,
replacing the RAP with a “Notice of Admission.”
Hospice
Hospice services provided to Medicare beneficiaries are paid under the Medicare Hospice Prospective Payment System, under which CMS sets a
daily rate for each day a patient is enrolled in the hospice benefit. CMS updates these rates each fiscal year. Effective October 1, 2019, CMS increased
hospice payment rates by 2.6%. This reflected a 3.0% market basket increase reduced by the multifactor productivity adjustment of 0.4 percentage points as
required by the ACA. Additionally, the aggregate cap, which limits the total Medicare reimbursement that a hospice may receive based on an annual per-
beneficiary cap amount and the number of Medicare patients served, was updated to $29,964.78 for fiscal year 2020. This amount reflects the hospice
payment update of 2.6%. If a hospice’s Medicare payments exceed its aggregate cap, it must repay Medicare the excess amount.
COVID-19 Relief
As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other
administrative actions intended to assist healthcare providers in providing care to COVID-19 patients and other patients during the public health
emergency. These temporary measures include relief from Medicare conditions of participation requirements for healthcare providers, relaxation of
licensure requirements for healthcare professionals, relaxation of privacy restrictions for telehealth remote communications, promoting use of telehealth by
expanding the scope of services for which Medicare reimbursement is available, and limited waivers of fraud and abuse laws for activities related to
COVID-19 during the emergency period. The current federal public health emergency declaration expires October 23, 2020. The HHS Secretary may
renew the declaration for successive 90-day periods for as long as the emergency continues to exist and may terminate the declaration whenever he
determines that the emergency no longer exists.
One of the primary sources of relief for healthcare providers is the CARES Act, which was expanded by the PPPHCE Act. Together, the CARES
Act and the PPPHCE Act include $175 billion in funding to be distributed through the Relief Fund to eligible providers, including public entities and
Medicare- and/or Medicaid-enrolled providers. Relief Fund payments are intended to compensate healthcare providers for lost revenues and health care
related expenses incurred in response to the COVID-19 pandemic and are not required to be repaid, provided that recipients attest to and comply with
certain terms and conditions, including limitations on balance billing and not using funds received from the Relief Fund to reimburse expenses or losses
that other sources are obligated to reimburse. In addition, the CARES Act expands the Medicare Accelerated and Advance Payment Program to increase
cash flow to providers impacted by the COVID-19 pandemic. Hospice and home health providers may request an advance or accelerated payment of up to
100% of the Medicare payment amount for a three-month period (not including Medicare Advantage payments). The Medicare Accelerated and Advanced
Payment Program payments are a loan that providers must pay back. CMS must recoup the advance payments beginning 120 days after receipt by the
provider by withholding future Medicare payments for claims. However, in April 2020, CMS suspended the Advance Payment Program, which is
applicable to Part B providers, and announced it would reevaluate pending and new applications from Part A providers for the Accelerated Payment
Program in light of the direct payments made available through the Relief Fund. The CARES Act also includes other provisions offering financial relief,
for example temporarily lifting the Medicare sequester from May 1 through December 31, 2020, which would have otherwise reduced payments to
Medicare providers by 2% (but also extending sequestration through 2030). The Medicare sequester relief resulted in a $0.3 million and $0.1 million
increase to hospice and home health net service revenues for the three and six months ended June 30, 2020.
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Due to the recent enactment of the CARES Act, the PPPHCE Act and other enacted legislation, there is still a high degree of uncertainty
surrounding their implementation. Further, the federal government is considering additional stimulus measures, federal agencies continue to issue related
regulations and guidance, and the public health emergency continues to evolve. We continue to assess the potential impact of the CARES Act, the PPPHCE
Act and other laws, regulations, and guidance related to COVID-19 on our business, results of operations, financial condition and cash flows.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis. We receive 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 are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate which
is either contractual or fixed by legislation and are recognized at the time services are rendered. We also record estimated implicit price concessions (based
primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect.
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”) which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. We
adopted the standard using the modified retrospective approach and did not record a cumulative catch-up adjustment as the timing and measurement of
revenue for our customers consistent with our prior revenue recognition model. However, the majority of what historically was classified as provision for
doubtful accounts under operating expenses is now treated as an implicit price concession factored into net service revenues.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers’
compensation and general liability coverage for our employees. Employees are also reimbursed for their travel time and related travel costs in certain
instances.
General and Administrative Expenses
Our general and administrative expenses from continuing operations include our costs for operating our network of local agencies and our
administrative offices. Our agency expenses from continuing operations consist of costs for supervisory personnel, our community care supervisors and
office administrative costs. Personnel costs include wages, payroll taxes, and employee benefits. Facility costs include rents, utilities, and postage,
telephone and office expenses. Our support center expenses include costs for accounting, information systems, human resources, billing and collections,
contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee
benefits, legal, accounting and other professional fees, travel, general insurance, rents, provision for doubtful accounts and related facility costs. Expenses
related to streamlining our operations such as costs related to terminated employees, termination of professional services relationships, other contract
termination costs and asset write-offs are also included in general and administrative expenses.
Depreciation and Amortization Expenses
Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment, and operating system software.
Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms.
We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-competition
agreements, principally using accelerated methods based upon their estimated useful lives.
Provision for Doubtful Accounts
For 2017, we established our allowance for doubtful accounts to the extent it was probable that a portion or all of a particular account will not be
collected. We established our provision for doubtful accounts primarily by reviewing the creditworthiness of significant customers and through evaluations
over the collectability of the receivables. An allowance for doubtful accounts was maintained at a level that our management believed was sufficient to
cover potential losses.
For 2018 and subsequent periods, subsequent adjustments that are determined to be the result of an adverse change in the payor’s ability to pay are
recognized as provision for doubtful accounts with the adoption of ASU 2014-09, Revenue from Contracts with Customers. The majority of what
historically was classified as provision for doubtful accounts under operating expenses is now treated as an implicit price concession factored into net
service revenues.
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Interest Income
Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved 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. For the years ended December 31, 2019 and 2018, we received $0.7 million and $2.3 million, respectively, in prompt payment
interest. For the year ended December 31, 2017, we did not receive any prompt payment interest. While we may be owed additional prompt payment
interest, the amount, timing, and intent to provide such payments remains uncertain, and we will continue to recognize prompt payment interest income
upon satisfaction of these constraints
Interest Expense
Interest expense is reported in the Consolidated Statements of Income when incurred and consists of (i) interest and unused credit line fees on the
credit facility evidenced by the Credit Agreement, and the credit facility evidenced by the 2017 Credit Agreement, as defined under “Liquidity and Capital
Resources,” (ii) interest on our financing lease obligations and (iii) amortization and write-off of debt issuance costs.
Other Income
For the year ended December 31, 2017, other income of $0.2 million consisted of income distributions received from investments in joint ventures,
which were sold on October 1, 2017. We accounted for this income in accordance with ASC Topic 325, “Investments—Other” and recognized the net
accumulated earnings only to the extent distributed by the joint ventures on the date received.
Income Tax Expense
All 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, 2019,
2018 and 2017, our federal statutory rate was 21.0%, 21.0% and 35.0%, respectively. The effective income tax rate was 22.2%, 20.1% and 44.0% for the
years ended December 31, 2019, 2018 and 2017, respectively. The difference between our federal statutory and effective income tax rates is principally due
to the inclusion of state taxes and non-deductible compensation, offset by an excess tax benefit and the use of federal employment tax credits.
Discontinued Operations
Effective March 1, 2013, we sold substantially all of the assets used in our 2013 Home Health Business as described in Part I, Item 1—“Business.”
Therefore, we have segregated the 2013 Home Health Business operating results and presented them separately as discontinued operations for all periods
presented, see Note 1 to the Notes to Consolidated Financial Statements for additional information.
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Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table sets forth, for the periods indicated, our consolidated results of operations.
Net service revenues
Cost of service revenues
Gross profit
General and administrative
expenses
Loss on sale of assets
Depreciation and amortization
Provision for doubtful accounts
Total operating expenses
Operating income from continuing
operations
Interest income
Interest expense
Total interest expense, net
Income from continuing operations
before income taxes
Income tax expense
Net income from continuing
operations
Discontinued operations:
(Loss) earnings from discontinued
operations
Net income
2019
Amount
Net Service
Revenues
2018 (1)
Amount
Net Service
Revenues
$
648,791
469,553
179,238
133,569
—
10,574
343
144,486
34,752
(1,523)
3,105
1,582
33,170
7,359
25,811
100.0 % $
72.4
27.6
20.6
—
1.6
0.1
22.3
5.4
(0.2)
0.5
0.2
5.1
1.1
4.0
516,647
379,843
136,804
105,025
38
8,642
272
113,977
22,827
(2,592)
5,016
2,424
20,403
4,096
16,307
100.0 % $
73.5
26.5
20.3
—
1.7
0.1
22.1
4.4
(0.5)
1.0
0.5
3.9
0.8
3.2
Change
Amount
%
132,144
89,710
42,434
25.6 %
23.6
31.0
28,544
(38)
1,932
71
30,509
11,925
1,069
(1,911)
(842)
12,767
3,263
27.2
(100.0)
22.4
26.1
26.8
52.2
(41.2)
(38.1)
(34.7)
62.6
79.7
9,504
58.3
(574)
25,237
$
(0.1)
3.9 % $
126
16,433
—
3.2 % $
(700)
8,804
(555.6)
53.6 %
(1)
For the year ended December 31, 2018, net service revenues, gross profit, operating income from continuing operations, income tax expense, net income from
continuing operations and net income have been updated to reflect the immaterial error, as discussed in Note 2 to the Notes to Consolidated Financial Statements.
Net service revenues increased by 25.6% to $648.8 million for the year ended December 31, 2019 compared to $516.6 million in 2018. The increase
was due to a 10.4% increase in billable hours and a 7.0% increase in revenues per billable hour in 2019 in our personal care segment. Billable hours
increased in our personal care segment in 2019 compared to 2018, partially due to the acquisition of VIP on June 1, 2019 and the acquisition of Alliance on
August 1, 2019, as well as an increase in same store billable census. Revenues per billable hour increased due to rate increases in several states. In addition,
net service revenue increased by $34.8 million and $7.6 million from our hospice and home health segments, respectively, during 2019 compared to 2018,
as further discussed below.
Gross profit, expressed as a percentage of net service revenues, increased to 27.6% for 2019, from 26.5% in 2018. The increase was due to a
decrease in direct service employee wages, taxes and benefit costs of 1.5%, partially offset by an increase in hospice supplies and equipment of 0.4%, as a
percentage of net service revenues.
General and administrative expenses increased to $133.6 million for the year ended December 31, 2019 compared to $105.0 million in 2018. The
increase in general and administrative expenses was primarily due to acquisitions that resulted in an increase in administrative employee wages, taxes and
benefit costs of $20.0 million, an increase in data processing of $1.3 million and an increase in rent expense of $1.3 million. In addition, professional fees
increased by $1.0 million and stock based compensation increased by $1.7 million in 2019 compared to 2018. General and administrative expenses,
expressed as a percentage of net service revenues increased to 20.6% for 2019, from 20.3% in 2018. The increase was primarily due to an increase in
administrative employee wages, taxes and benefit costs.
Depreciation and amortization increased to $10.6 million for the year ended December 31, 2019 from $8.6 million in 2018, primarily due to the
increase of intangible assets related to the fiscal year 2019 acquisitions.
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Interest Income
Interest income decreased by $1.1 million to $1.5 million for the year ended December 31, 2019 from $2.6 million in 2018. For the years ended
December 31, 2019 and 2018, we received $0.7 million and $2.3 million, respectively, in prompt payment interest.
Interest Expense
Interest expense decreased to $3.1 million for the year ended December 31, 2019 from $5.0 million in 2018. The decrease in interest expense was
primarily due to a lower outstanding loan balance under our credit facility in 2019 compared to 2018.
Income Tax Expense
All 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, 2019
and 2018, our federal statutory rate was 21.0%. The effective income tax rate was 22.2% and 20.1% for the years ended December 31, 2019 and 2018,
respectively. The difference between the federal statutory rate and our effective income tax rates is principally due to the inclusion of state taxes and non-
deductible compensation, offset by an excess tax benefit and the use of federal employment tax credits.
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Results of Operations – Segments
The following tables and related analysis summarize our operating results and business metrics by segment:
Personal Care Segment
Personal Care Segment
Amount
For the Years Ended December 31,
2019
2018 (1)
Change
% of
Segment
Net Service
Revenues
Amount
% of
Segment
Net Service
Revenues
Amount
%
(Amounts in Thousands, Except Percentages)
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Business Metrics (Actual Numbers, Except
Billable Hours in Thousands)
Locations at period end
Average billable census * (2)
Billable hours * (3)
Average billable hours per census per month * (3)
Billable hours per business day * (3)
Revenues per billable hour * (3)
Same store growth revenue % * (4)
Segment Revenue by Payor
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Total segment net service revenues
Segment Revenue by Significant States
Illinois
New York
New Mexico
All other states
Total segment net service revenues
$ 580,728
432,413
148,315
56,645
242
91,428
$
152
39,188
29,732
63
113,915
19.50
8.2
$
100.0 % $ 490,941
365,264
125,677
44,463
265
80,949
74.5
25.5
9.8
—
15.7 % $
100.0 % $
74.4
25.6
9.1
0.1
16.4 % $
89,787
67,149
22,638
12,182
(23)
10,479
18.3 %
18.4
18.0
27.4
(8.7)
12.9 %
148
37,597
26,934
59
103,195
18.23
2.8
$
1,591
2,798
4
10,720
1.27
$
4.2 %
10.4
6.8
10.4
7.0 %
$ 303,479
239,559
21,765
9,204
6,721
$ 580,728
52.2 % $ 285,973
173,391
41.3
20,003
3.7
6,173
1.6
5,401
1.2
100.0 % $ 490,941
58.2 %
35.3
4.1
1.3
1.1
100.0 %
$ 247,524
108,403
75,666
149,135
$ 580,728
42.6 % $ 232,518
65,117
18.7
58,914
13.0
134,392
25.7
100.0 % $ 490,941
47.3 %
13.3
12.0
27.4
100.0 %
(1)
(2)
(3)
For the year ended December 31, 2018, net service revenues, gross profit and segment operating income have been updated to reflect the immaterial error, as
discussed in Note 2 to the Notes to Consolidated Financial Statements.
Average billable census is the number of unique clients receiving a billable service during the year and is the total census divided by months in operation during the
period.
Billable hours is the total number of hours served to clients during the period. Average billable hours per census per month is billable hours divided by average
billable census. Billable hours per day is total billable hours divided by the number of business days in the period. Revenues per billable hour is revenue attributed to
billable hours divided by billable hours.
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(4)
*
Same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least
52 full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
We derive a significant amount of our net service revenues from operations in Illinois, which represented 42.6% and 47.3% of our net service
revenues for the years ended December 31, 2019 and 2018, respectively.
Net service revenues from state, local and other governmental programs accounted for 52.2% and 58.2% of net service revenues for the years ended
December 31, 2019 and 2018, respectively. Managed care organizations accounted for 41.3% and 35.3% of net service revenues for the years ended
December 31, 2019 and 2018, respectively, with commercial insurance, private pay and other payors accounting for the remainder of net service revenues.
One payor client, the Illinois Department on Aging, accounted for 25.3% and 31.7% of net service revenues for the years ended December 31, 2019 and
2018, respectively.
Net service revenues increased by 18.3% for the year ended December 31, 2019 compared to the year ended December 31, 2018. Net service
revenues increased primarily as a result of a 10.4% increase in billable hours and 7.0% increase in revenues per billable hour in the year ended
December 31, 2019 as compared to the year ended December 31, 2018. The increases were partially due to the acquisition of Ambercare on May 1, 2018,
the acquisition of VIP on June 1, 2019 and acquisition of Alliance on August 1, 2019.
Gross profit, expressed as a percentage of net service revenues, decreased from 25.6% for the year ended December 31, 2018 to 25.5% for the year
ended December 31, 2019 due to an increase in direct service employee wages, taxes and benefit costs of 0.1%.
General and administrative expenses increased by approximately $12.2 million for the year ended December 31, 2019. The increase in general and
administrative expenses was primarily due to acquisitions that resulted in a $8.2 million increase in administrative employee wages, taxes and benefit costs,
a $1.7 million increase in state license fees and costs and a $1.2 million increase in rent expenses for the year ended December 31, 2019.
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Hospice Segment
Hospice Segment
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Business Metrics (Actual Numbers)
Locations at period end
Admissions * (1)
Average daily census * (2)
Average length of stay * (3)
Patient days * (4)
Revenue per patient day * (5)
Segment Revenue by Payor
Medicare
Managed care organizations
Other
Total segment net service revenues
Segment revenue by significant states
New Mexico
All other states
Total segment net service revenues
$
$
$
$
$
$
$
2019
% of Segment
Net Service
Revenues
Amount
For the Years Ended December 31,
2018
Amount
% of Segment
Net Service
Revenues
(Amounts in Thousands, Except Percentages)
Change
Amount
%
53,601
27,203
26,398
12,304
95
13,999
100.0 % $
50.8
49.2
23.0
0.2
26.0 % $
18,850
10,010
8,840
3,737
5
5,098
100.0 % $
53.1
46.9
19.9
—
27.0 % $
34,751
17,193
17,558
8,567
90
8,901
184.4 %
171.8
198.6
229.2
1,800.0
174.6 %
35
3,095
1,783
107
349,866
153.20
13
1,061
528
136
128,819
146.33
$
2,034
1,255
(29)
221,047
6.87
$
191.7 %
237.7
(21.3)
171.6
4.7 %
49,649
2,768
1,184
53,601
92.6 % $
5.2
2.2
100.0 % $
17,652
1,047
151
18,850
93.6 %
5.6
0.8
100.0 %
38,790
14,811
53,601
72.4 % $
27.6
100.0 % $
18,850
—
18,850
100.0 %
—
100.0 %
(1)
(2)
(3)
(4)
(5)
*
Represents referral process and new patients on service during the period.
Average daily census is total patient days divided by the number of days in the period.
Average length of stay is the average number of days a patient is on service, calculated upon discharge, and is total patient days divided by total discharges in the
period.
Patient days is days of service for all patients in the period.
Revenue per patient day is hospice revenue divided by the number of patient days in the period.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
On May 1, 2018, upon the completion of our acquisition of Ambercare, we began operating our hospice segment. We expanded this segment with
the acquisitions of Alliance on August 1, 2019 and Hospice Partners on October 1, 2019. Hospice generates net service revenues by providing care to
patients with a life expectancy of six months or less, as well as related services for their families. Net service revenues from Medicare accounted for 92.6%
and 93.6% and managed care organizations accounted for 5.2% and 5.6% for the years ended December 31, 2019 and 2018, respectively.
Net service revenues increased by $34.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily
due the acquisitions of Ambercare on May 1, 2018, Alliance on August 1, 2019 and Hospice Partners on October 1, 2019 as well as an increase in average
daily census and revenue per patient days.
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Gross profit, expressed as a percentage of net service revenues was 49.2% and 46.9% for the years ended December 31, 2019 and 2018,
respectively. The increase in gross profit as a percentage of net service revenues was due to a decrease of pharmacy costs of 2.5% and direct service
employee wages, taxes and benefit costs of 0.5% related to acquisition synergies partially offset by direct service supplies by 0.5%.
The hospice segment’s general and administrative expenses primarily consist of administrative employee wages, taxes and benefit costs, rent,
information technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues was 23.0% and 19.9%
for the years ended December 31, 2019 and 2018, respectively. The increase in general and administrative expenses was primarily due to acquisitions that
resulted in a $7.2 million increase in administrative employee wages, taxes and benefit costs and a $0.5 million increase in rent expenses for the year ended
December 31, 2019.
Home Health Segment
Home Health Segment
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Business Metrics (Actual Numbers)
Locations at period end
New admissions * (1)
Recertifications * (2)
Total volume * (3)
Visits * (4)
Segment Revenue by Payor
Medicare
Managed care organizations
Other
Total segment net service revenues
Segment revenue by significant states
New Mexico
Total segment net service revenues
$
$
$
$
$
$
2019
% of Segment
Net Service
Revenues
Amount
For the Years Ended December 31,
2018
Amount
% of Segment
Net Service
Revenues
(Amounts in Thousands, Except Percentages)
Change
Amount
%
14,462
9,937
4,525
3,199
6
1,320
100.0 % $
68.7
31.3
22.1
—
9.1 % $
6,856
4,569
2,287
1,543
2
742
100.0 % $
66.6
33.4
22.6
—
10.8 % $
7,606
5,368
2,238
1,656
4
578
110.9 %
117.5
97.9
107.3
200.0
77.9 %
11
3,347
2,658
6,005
108,863
10
1,757
1,443
3,200
53,711
1,590
1,215
2,805
55,152
90.5 %
84.2
87.7
102.7 %
11,218
2,942
302
14,462
77.6 % $
20.3
2.1
100.0 % $
6,034
752
70
6,856
88.0 %
11.0
1.0
100.0 %
14,462
14,462
100.0 % $
100.0 % $
6,856
6,856
100.0 %
100.0 %
(1)
(2)
(3)
(4)
*
Represents new patients during the period.
A home health certification period is an episode of care that begins with a start of care visit and continues for 60 days. If at the end of the initial episode of care, the
patient continues to require home health services, a recertification is required. This represents the number of recertifications during the period.
Total volume is total admissions and total recertifications in the period.
Represents number of services to patients in the period.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
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On May 1, 2018, upon the completion of our acquisition of Ambercare, we began operating our home health segment. We expanded this segment
with the acquisition of Alliance on August 1, 2019. Home health generates net service revenues by providing home health services on a short-term,
intermittent or episodic basis to individuals, generally to treat an illness or injury. Net service revenues from Medicare accounted for 77.6% and 88.0% and
managed care organizations accounted for 20.3% and 11.0% for the years ended December 31, 2019 and 2018, respectively.
Net service revenues increased by $7.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily
due to an increase in total visits as well as the acquisitions of Ambercare on May 1, 2018 and Alliance on August 1, 2019.
Gross profit, expressed as a percentage of net service revenues was 31.3% and 33.4% for the years ended December 31, 2019 and 2018,
respectively. The decrease in gross profit as a percentage of net service revenues was due to an increase of direct employee wages, taxes and benefit costs
of 2.6%, partially offset by a decrease in supplies of 0.5%.
The home health segment’s general and administrative expenses consist of administrative employee wages, taxes and benefit costs, rent, information
technology and office expenses. General and administrative expenses, expressed as a percentage of net service revenues was 22.1% and 22.6% for the years
ended December 31, 2019 and 2018, respectively. The increase in general and administrative expenses was primarily due to acquisitions that resulted in a
$1.5 million increase in administrative employee wages, taxes and benefit costs and a $0.1 million increase in rent expenses for the year ended
December 31, 2019.
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table sets forth, for the periods indicated, our consolidated results of operations.
2018 (1)
2017 (2)
Change
Amount
Net Service
Revenues
Amount
Net Service
Revenues
Amount
%
Net service revenues
Cost of service revenues
Gross profit
General and administrative expenses
Loss (gain) on sale of assets
Depreciation and amortization
Provision for doubtful accounts
Total operating expenses
Operating income from continuing operations
Interest income
Interest expense
Total interest expense, net
Other income
Income from continuing operations before
income taxes
Income tax expense
Net income from continuing operations
Discontinued operations:
Earnings from discontinued operations
Net income
(Amounts In Thousands, Except Percentages)
100.0 % $
100.0 % $
$
516,647
379,843
136,804
105,025
38
8,642
272
113,977
22,827
(2,592)
5,016
2,424
—
20,403
4,096
16,307
73.5
26.5
20.3
—
1.7
0.1
22.1
4.4
(0.5)
1.0
0.5
—
3.9
0.8
3.2
425,994
310,119
115,875
76,902
(2,467)
6,663
9,524
90,622
25,253
(66)
4,472
4,406
217
72.8
27.2
18.1
(0.6)
1.6
2.2
21.3
5.9
—
1.0
1.0
0.1
21,064
9,258
11,806
4.9
2.2
2.8
90,653
69,724
20,929
28,123
2,505
1,979
(9,252)
23,355
(2,426)
(2,526)
544
(1,982)
(217)
(661)
(5,162)
4,501
21.3 %
22.5
18.1
36.6
(101.5)
29.7
(97.1)
25.8
(9.6)
3,827.3
12.2
—
(100.0)
(3.1)
(55.8)
38.1
126
16,433
$
—
3.2 % $
147
11,953
—
2.8 % $
(21)
4,480
(14.3)
37.5 %
(1)
(2)
For the year ended December 31, 2018, net service revenues, gross profit, operating income from continuing operations, income tax expense, net income from
continuing operations and net income have been updated to reflect the immaterial error, as discussed in Note 2 to the Notes to Consolidated Financial Statements.
For the year ended December 31, 2017, provision for doubtful accounts, operating income from continuing operations, income tax expense, net income from
continuing operations and net income have been updated to reflect the immaterial error, as discussed in Note 2 to the Notes to Consolidated Financial Statements.
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Net service revenues increased by 21.3% to $516.6 million for the year 2018 compared to $426.0 million in 2017. Net service revenues increased
primarily due to the acquisitions of Arcadia and Ambercare during the second quarter of 2018 and an increase in average billable census for personal care
services in 2018 as compared to 2017. This increase in net service revenues was offset by an $11.0 million decrease in net service revenues as a result of
our adoption of ASC 606. Under ASC 606 the majority of what historically was classified as provision for doubtful accounts under operating expenses is
now treated as an implicit price concession factored into net service revenues.
Gross profit, expressed as a percentage of net service revenues, decreased to 26.5% for 2018, from 27.2% in 2017. The decrease was primarily due
to our adoption of ASC 606, as described above, which resulted in a $11.0 million decrease in net service revenues. This decrease was offset by the
acquisition of the relatively higher margin Ambercare business in the second quarter of 2018.
General and administrative expenses increased to $105.0 million as compared to $76.9 million for 2018 and 2017, respectively. The increase in
general and administrative expenses was primarily due to acquisitions that resulted in an increase in administrative employee wages, taxes and benefit costs
of $14.3 million, an increase in acquisition expenses of $2.9 million and an increase in rent expense of $1.9 million. General and administrative expenses,
expressed as a percentage of net service revenues increased to 20.3% for 2018, from 18.1% in 2017. The increase was primarily due to our adoption of
ASC 606, as described above, which resulted in a $11.0 million decrease in net service revenues and an increase in administrative employee wages, taxes
and benefit costs.
Provision for doubtful accounts decreased by approximately $9.3 million to $0.3 million for 2018 compared to $9.5 million for the same period in
2017. The decrease was primarily due to our adoption of ASC 606 which resulted in a decrease in the provision for doubtful accounts as the majority of
what historically was classified as provision for doubtful accounts under operating expenses is now treated as an implicit price concession factored into net
service revenues.
Depreciation and amortization increased to $8.6 million from $6.7 million for the years ended December 31, 2018 and 2017, respectively, primarily
due to the increase of intangible assets related to the fiscal year 2018 acquisitions.
Interest Income
For the year ended December 31, 2018, we received $2.3 million in prompt payment interest. For the year ended December 31, 2017, we did not
receive any prompt payment interest.
Interest Expense
Interest expense increased to $5.0 million from $4.5 million for the year ended December 31, 2018 as compared to December 31, 2017. The
increases in interest expenses are primarily due to higher outstanding term loan balance under our credit facility in 2018 compared to 2017, offset by a
write-off of the unamortized debt issuance costs in the amount of $1.3 million upon the termination of our Terminated Senior Secured Credit Facility on
May 8, 2017.
Other Income
For the year ended December 31, 2017, other income of $0.2 million, consisted of income distributions received from the investments in joint
ventures, which were sold on October 1, 2017.
Income Tax Expense
All 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, 2018
and 2017, our federal statutory rate was 21.0% and 35.0%, respectively. The effective income tax rate was 20.1% and 44.0% for the years ended
December 31, 2018 and 2017, respectively. The difference between our federal statutory and effective income tax rates is principally due to the inclusion of
state taxes and the use of federal employment tax credits.
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Table of Contents
Results of Operations – Segments
The following tables and related analysis summarize our operating results and business metrics by segment:
Personal Care Segment
Personal Care Segment
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
2018 (1)
% of
Segment Net
Service Revenues
Amount
For the Years Ended December 31,
2017 (2)
Amount
% of
Segment Net
Service Revenues
Change
Amount
%
$
$
490,941
365,264
125,677
44,463
265
80,949
100.0 % $
74.4
25.6
9.1
0.1
16.4 % $
425,994
310,119
115,875
35,655
9,524
70,696
100.0 % $
72.8
27.2
8.4
2.2
16.6 % $
64,947
55,145
9,802
8,808
(9,259)
10,253
15.2 %
17.8
8.5
24.7
(97.2)
14.5 %
Business Metrics (Actual Numbers, Except
Billable Hours in Thousands)
Location at period end
Average billable census * (3)
Billable hours * (4)
Average billable hours per census per month * (4)
Billable hours per business day * (4)
Revenues per billable hour * (4)
Same store growth revenue % * (5)
Segment Revenue by Payor
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Total segment net service revenues
Segment Revenue by Significant States
Illinois
New York
New Mexico
All other states
Total segment net service revenues
148
37,597
26,934
59
103,195
18.23
2.8
285,973
173,391
20,003
6,173
5,401
490,941
232,518
65,117
58,914
134,392
490,941
$
$
$
$
$
116
35,343
23,833
56
91,664
17.86
$
2,254
3,101
3
11,531
0.37
$
6.4 %
13.0
5.4
12.6
2.1 %
58.2 % $
35.3
4.1
1.3
1.1
100.0 % $
273,525
140,993
8,739
2,737
—
425,994
47.3 % $
13.3
12.0
27.4
100.0 % $
224,257
58,360
37,588
105,789
425,994
64.2 %
33.1
2.1
0.6
—
100.0 %
52.6 %
13.7
8.8
24.9
100.0 %
(1)
(2)
(3)
(4)
For the year ended December 31, 2018, net service revenues, gross profit and segment operating income have been updated to reflect the immaterial error, as
discussed in Note 2 to the Notes to Consolidated Financial Statements.
For the year ended December 31, 2017, provision for doubtful accounts and segment operating income have been updated to reflect the immaterial error, as
discussed in Note 2 to the Notes to Consolidated Financial Statements.
Average billable census is the number of unique clients receiving a billable service during the year.
Billable hours is the total number of hours served to clients during a year.
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Table of Contents
(5)
*
Same store growth reflects the change in year-over-year revenue for the same store base. We define the same store base to include those stores open for at least
52 full weeks. This measure highlights the performance of existing stores, while excluding the impact of acquisitions, new store openings and closures.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
Net service revenues increased by 15.2% for the year ended December 31, 2018 compared to the year ended December 31, 2017. Net service
revenues increased primarily as a result of a 13.0% increase in billable hours in the year ended December 31, 2018 as compared to the year ended
December 31, 2017. The increases are primarily due to the acquisitions of Arcadia and Ambercare during the second quarter of 2018. In addition, net
service revenues increased as a result of a 12.6% increase in billable hours and a 2.1% increase in revenues per billable hour in the year ended
December 31, 2018 as compared to the year ended December 31, 2017. A significant amount of our net service revenues were derived from one payor
client, the Illinois Department on Aging, which accounted for 47.3% and 52.6% of net service revenues for the years ended December 31, 2018 and 2017,
respectively. These increases in net service revenues were offset by a $11.0 million decrease in net service revenues for the year ended December 31, 2018
as a result of our adoption of ASC 606. Under ASC 606 the majority of what historically was classified as provision for doubtful accounts under operating
expenses is now treated as an implicit price concession factored into net service revenues.
Gross profit, expressed as a percentage of net service revenues, decreased from 27.2% for the year ended December 31, 2017 to 25.6% for the year
ended December 31, 2018. The decrease was primarily due to our adoption of ASC 606, as described above, which resulted in a $11.0 million decrease in
net service revenues for the year ended December 31, 2018.
Provision for doubtful accounts decreased by approximately $9.3 million to $0.3 million for the year ended December 31, 2018 compared to $9.5
million for the year ended December 31, 2017. The decrease was primarily due to our adoption of ASC 606 which resulted in a decrease in the provision
for doubtful accounts for the year ended December 31, 2017, as the majority of what historically was classified as provision for doubtful accounts under
operating expenses is now treated as an implicit price concession factored into net service revenues.
General and administrative expenses increased by approximately $8.8 million for the year ended December 31, 2018. The increase in general and
administrative expenses was primarily due to acquisitions that resulted in a $6.4 million increase in administrative employee wages, taxes and benefit costs,
a $1.2 million increase in commissions, and a $0.7 million increase in rent expenses for the year ended December 31, 2018.
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Table of Contents
Hospice Segment
Hospice Segment
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Business Metrics (Actual Numbers)
Locations at period end
Admissions * (1)
Average daily census * (2)
Average length of stay * (3)
Patient days * (4)
Revenue per patient day * (5)
Segment Revenue by Payor
Medicare
Managed care organizations
Other
Total segment net service revenues
Segment revenue by significant states
New Mexico
All other states
Total segment net service revenues
For the Years Ended December 31,
2018
Amount
(Amounts in Thousands, Except Percentages)
% of Segment
Net Service
Revenues
$
$
$
$
$
$
$
18,850
10,010
8,840
3,737
5
5,098
13
1,061
528
136
128,819
146.33
17,652
1,047
151
18,850
18,850
—
18,850
100.0 %
53.1
46.9
19.9
—
27.0 %
93.6 %
5.6
0.8
100.0 %
100.0 %
—
100.0 %
(1)
(2)
(3)
(4)
(5)
*
Represents referral process and new patients on service during the period.
Average daily census is total patient days divided by the number of days in the period.
Average length of stay is the average number of days a patient is on service, calculated upon discharge, and is total patient days divided by total discharges in the
period.
Patient days is days of service for all patients in the period.
Revenue per patient day is hospice revenue divided by the number of patient days in the period.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
In the second quarter of 2018, with the completion of the acquisition of Ambercare, we began operating a hospice segment. Hospice generates net
service revenues by providing care to patients with a life expectancy of six months or less and their families. Net service revenues from Medicare and
managed care organizations accounted for 93.6% and 5.6% for the year ended December 31, 2018, respectively.
Gross profit, expressed as a percentage of net service revenues was 46.9% for the year ended December 31, 2018. General and administrative
expenses, expressed as a percentage of net service revenues was 19.9% for the year ended December 31, 2018. The hospice segment’s general and
administrative expenses primarily consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. The
hospice segment’s operating income was $5.1 million for the year ended December 31, 2018.
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Table of Contents
Home Health Segment
Home Health Segment
Operating Results
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Business Metrics (Actual Numbers)
Locations at period end
New admissions * (1)
Recertifications * (2)
Total volume * (3)
Visits * (4)
Segment Revenue by Payor
Medicare
Managed care organizations
Other
Total segment net service revenues
Segment revenue by significant states
New Mexico
Total segment net service revenues
For the Years Ended December 31,
2018
Amount
(Amounts in Thousands, Except Percentages)
% of Segment
Net Service
Revenues
$
$
$
$
$
$
6,856
4,569
2,287
1,543
2
742
10
1,757
1,443
3,200
53,711
6,034
752
70
6,856
6,856
6,856
100.0 %
66.6
33.4
22.6
—
10.8 %
88.0 %
11.0
1.0
100.0 %
100.0 %
100.0 %
(1)
(2)
(3)
(4)
*
Represents new patients during the period.
A home health certification period is an episode of care that begins with a start of care visit and continues for 60 days. If at the end of the initial episode of care, the
patient continues to require home health services, a recertification is required. This represents the number of recertifications during the period.
Total volume is total admissions and total recertifications in the period.
Represents number of services to patients in the period.
Management deems these metrics to be key performance indicators. Management uses these metrics to monitor our performance, both in our existing operations and
acquisitions. Many of these metrics serve as the basis of reported revenues and assessment of these, provide direct correlation to the results of operations from period
to period and facilitate comparison with the results of our peers. Historical trends established in these metrics can be used to evaluate current operating results,
identify trends affecting our business, determine the allocation of resources and assess the quality and potential variability of our cash flows and earnings. We believe
they are useful to investors in evaluating and understanding our business but should not be used solely in assessing the Company’s performance. These key
performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP
financial measures presented herein to fully evaluate and understand the business as a whole. These measures may not be comparable to similarly-titled performance
indicators used by other companies.
On May 1, 2018, with the acquisition of Ambercare, we began operating a home health segment. Home health generates net service revenues by
providing home health services on a short-term, intermittent or episodic basis to individuals, generally to treat an illness or injury. Net service revenues
from Medicare and managed care organizations accounted for 88.0% and 11.0% for the year ended December 31, 2018, respectively.
Gross profit, expressed as a percentage of net service revenues was 33.4% for the year ended December 31, 2018. General and administrative
expenses, expressed as a percentage of net service revenues was 22.6% for the year ended December 31, 2018. The home health segment’s general and
administrative expenses consist of administrative employee wages, taxes and benefit costs, rent, information technology and office expenses. The home
health segment’s operating income was $0.7 million for the year ended December 31, 2018.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash from operations and borrowings under our credit facility. During the year ended December 31, 2019, we
received cash proceeds from the issuance and sale of shares of common stock in our Public Offering as described below. As also described below, we
entered into a credit agreement on May 8, 2017 that replaced the 2015 Credit Agreement (as hereinafter defined). We amended and restated our credit
agreement on October 31, 2018 and entered into an amendment of that agreement on September 12, 2019. At December 31, 2019 and 2018, we had cash
balances of $111.7 million and $70.4 million, respectively.
We drew approximately $23.5 million on the revolver portion of our credit facility to fund, in part, the purchase price for the Alliance acquisition on
August 1, 2019. Additionally, we drew $19.6 million on the delayed draw term loan portion of our credit facility to fund, in part, the VIP acquisition on
June 1, 2019. At December 31, 2019, we had a total of $43.4 million in revolving loans, with an interest rate of 3.44%, and $18.9 million of term loans,
with an interest rate of 3.45%, outstanding on our credit facility. After giving effect to the amount drawn on our credit facility, approximately $10.0 million
of outstanding letters of credit and borrowing limits based on an advance multiple of adjusted EBITDA (as defined in the Credit Agreement), we had
$191.4 million available for borrowing under our credit facility.
During the year ended December 31, 2018, we drew a total of approximately $60.4 million on our delayed draw term loan under our credit facility
to fund the acquisitions of Ambercare and Arcadia. At December 31, 2018, the term loan was paid in full in connection with the Credit Agreement (as
hereinafter defined) entered into during the fourth quarter of 2018, as discussed below.
At December 31, 2018, we had a total of $20.0 million revolving loans outstanding on our credit facility with an interest rate of 4.35%. After giving
effect to the amount drawn on our credit facility, approximately $10.8 million of outstanding letters of credit and borrowing limits based on an advance
multiple of adjusted EBITDA (as defined in the Credit Agreement), we had $137.4 million available for borrowing under our revolving credit loan facility.
Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes,
operating expenses, interest and taxes. Due to its revenue deficiencies as well as budget and financing issues, from time to time the state of Illinois has
reimbursed us on a delayed basis with respect to our various agreements including with our largest payor, the Illinois Department on Aging. The open
receivable balance from the Illinois Department on Aging increased by $14.9 million from $22.7 million as of December 31, 2018 to $37.6 million as of
December 31, 2019. As discussed in Part I, Item 1—“Business” hereof, the State of Illinois finalized its fiscal year 2020 budget with the inclusion of an
appropriation to raise in-home care rates to offset previous minimum wage increases by the Chicago City Counsel, however, if future budgets are not
enacted in the State of Illinois, timely payments could be delayed in the future.
COVID-19
The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, we cannot currently predict with certainty the extent to
which our business, results of operations, financial condition or liquidity will ultimately be impacted. Given the dynamic nature of these circumstances, the
related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A.
—“Risk Factors—The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be
negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time.”
In April 2020, the Company received grants in an aggregate principal amount of $6.9 million, for which it did not apply, from the Relief Fund, as
part of the automatic general distributions by HHS, and in June 2020, the Company returned these funds. While we may receive further financial, tax or
other relief and other benefits under and as a result of the CARES Act, the PPPHCE Act and other stimulus measures, it is not possible to estimate at this
time the need, availability, extent or impact of any such relief.
Public Offering
On September 9, 2019, we completed a public offering of an aggregate 2,300,000 shares of common stock, par value $0.001 per share, including
300,000 shares of common stock sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares, at a public offering
price of $79.50 per share (the “Public Offering”). We received net proceeds of approximately $172.9 million, after deducting underwriting discounts and
estimated offering expenses of approximately $9.9 million, in connection with the completion of the Public Offering. We used approximately $130.0
million from the net proceeds of the offering to fund the purchase price for our acquisition of Hospice Partners on October 1, 2019 and may use any
remaining net proceeds of the offering for general corporate purposes, including future acquisitions or investments, and the repayment of indebtedness
outstanding under our credit facility.
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On August 20, 2018, we, together with Eos Capital Partners III, L.P. (the “Selling Stockholder”) completed a secondary public offering of an
aggregate 2,100,000 shares of common stock, par value $0.001 per share at a purchase price per share to the public of $59.00 (the “2018 Public Offering
Price”). Pursuant to the terms and conditions of the Underwriting Agreement, 1,075,267 shares of common stock were issued and sold by us (the “Primary
Shares”) and 1,024,733 shares of Common Stock were sold by the Selling Stockholder (the “Secondary Shares”). Net proceeds of approximately $59.1
million were received by us from the sale of 1,075,267 Primary Shares. On August 22, 2018, the underwriters exercised their full over-allotment option in
connection with the offering and, as a result, we issued and sold an additional 315,000 shares of common stock to the underwriters at the 2018 Public
Offering Price, less the underwriting discount. The over-allotment resulted in additional net proceeds to us of approximately $17.5 million. We used the
proceeds received from this offering for general corporate purposes, and to pay down the $102.6 million of our delayed term loan discussed above in
connection with the amendment and restatement of our credit facility. We did not receive any of the proceeds from the sale of the Secondary Shares. The
secondary offering resulted in an increase to additional paid in capital of approximately $76.6 million, net of issuance costs of $5.4 million, on our
Consolidated Balance Sheets at December 31, 2018.
Amended and Restated Senior Secured Credit Facility
On October 31, 2018, we entered into the Amended and Restated Credit Agreement, dated as of October 31, 2018, with certain lenders and Capital
One, National Association, as a lender and as agent for all lenders (as amended by the Amendment (as hereinafter defined), the “Credit Agreement”),
which amended and restated our 2017 Credit Agreement (as defined below). This credit facility totaled $269.6 million, inclusive of a $250.0 million
revolving loan and a $19.6 million delayed draw term loan and is evidenced by the Credit Agreement. This credit facility amended and restated our existing
senior secured credit facility totaling $250.0 million. As used throughout this Annual Report on Form 10-K, “credit facility” shall mean either the credit
facility evidenced by the Credit Agreement, the credit facility evidenced by the 2017 Credit Agreement, or the credit facility evidenced by the 2015 Credit
Agreement, as the case may be.
The maturity of this credit facility is May 8, 2023. Interest on this credit facility may be payable at (x) the sum of (i) an applicable margin ranging
from 0.75% to 1.50% based on the applicable senior net 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 an interest period of one month advanced on the applicable day (not to be less than 0.00%) plus a margin of 1.00% or (y) the sum
of (i) an applicable margin ranging from 1.75% to 2.50% based on the applicable senior net leverage ratio plus (ii) the offered rate per annum for similar
dollar deposits for the applicable interest period that appears on Reuters Screen LIBOR01 Page (not to be less than zero). Swing loans may not be LIBOR
loans. The availability of additional draws under this credit facility is conditioned, among other things, upon (after giving effect to such draws) the Total
Net Leverage Ratio (as defined in the Credit Agreement) not exceeding 3.75:1.00. In certain circumstances, in connection with a Material Acquisition (as
defined in the Credit Agreement), we can elect to increase our Total Net Leverage Ratio compliance covenant to 4.25:1.00 for the then current fiscal
quarter and the three succeeding fiscal quarters. In connection with this credit facility, we incurred approximately $0.9 million of debt issuance costs.
Addus HealthCare is the borrower, and its parent, Holdings, and substantially all of Holdings’ subsidiaries are guarantors under this credit facility,
and it is collateralized by a first priority security interest in all of our and the other credit parties’ current and future tangible and intangible assets, including
the shares of stock of the borrower and subsidiaries. The Credit Agreement contains affirmative and negative covenants customary for credit facilities of
this type, including limitations on us with respect to liens, indebtedness, guaranties, investments, distributions, mergers and acquisitions and dispositions of
assets.
We pay a fee ranging from 0.20% to 0.35% based on the applicable senior net leverage ratio times the unused portion of the revolving loan portion
of the credit facility.
The Credit Agreement 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 Agreement also contains certain customary financial
covenants and negative covenants that, among other things, include a requirement to maintain a minimum Interest Coverage Ratio (as defined in the Credit
Agreement), a requirement to stay below a maximum Total Net Leverage Ratio (as defined in the Credit Agreement) and a requirement to stay below a
maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, investments and loans, subject to customary
carve outs, a restriction on dividends (provided that Addus HealthCare may make distributions to us in an amount that does not exceed $7.5 million in any
year absent of an event of default, plus limited exceptions for tax and administrative distributions), a restriction on the ability to consummate acquisitions
(without the consent of the lenders) under our credit facility subject to compliance with the Total Net Leverage Ratio (as defined in the Credit Agreement)
thresholds, restrictions on mergers, dispositions of assets, and affiliate transactions, and restrictions on fundamental changes and lines of business.
On September 12, 2019, we entered into a First Amendment (the “Amendment”) to our Credit Agreement. The Amendment increased our credit
facility by $50.0 million in incremental revolving loans, for an aggregate $300.0 million in revolving loans. The Amendment provides that future
incremental loans may be for term loans or an increase to the revolving loan commitments. The Amendment further provides that the proceeds of the
incremental revolving loan commitments may be used for, among other things, general corporate purposes. In connection with this Amendment, we
incurred approximately $0.4 million of debt issuance costs.
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At December 31, 2019, we were in compliance with our financial covenants under the Credit Agreement. However, we were unable to timely file
this Annual Report on Form 10-K, which would have included our audited financial statements for the year ended December 31, 2019. The Company is
required to deliver annual audited financial statements under the affirmative covenants of its Credit Agreement. The Company obtained consent from the
Required Lenders (as defined in the Credit Agreement) to extend the timeline of the audited financials for the year ended December 31, 2019 to not later
than October 31, 2020.
Senior Secured Credit Facility
Prior to October 31, 2018, we were a party to a Credit Agreement, dated as of May 8, 2017 (the “2017 Credit Agreement”), with certain lenders and
Capital One, National Association, as a lender and swing lender and as agent for all lenders. This credit facility totaled $250.0 million, replaced our
previous senior secured credit facility, and terminated the Second Amended and Restated Credit and Guaranty Agreement, dated as of November 10, 2015,
as modified by the May 24, 2016 amendment (as amended, the “2015 Credit Agreement”), between us, certain lenders and Fifth Third Bank, as agent. The
credit facility evidenced by the 2015 Credit Agreement included a $125.0 million revolving loan, a $45.0 million term loan and an $80.0 million delayed
draw term loan.
On October 31, 2018, we repaid in full the outstanding debt balance of $102.6 million together with accrued interest of $0.5 million and amended
and restated the 2017 Credit Agreement.
Cash Flows
The following table summarizes historical changes in our cash flows for the years ended December 31, 2019, 2018 and 2017:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
2019
2018
2017
$
12,019
$
(188,697)
217,986
33,203 $
(67,789)
51,238
52,771
(24,268)
17,238
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net cash provided by operating activities was $12.0 million for the year ended December 31, 2019, compared to $33.2 million in 2018 due to
changes in accounts receivable primarily related to the growth in revenue and an increase in days sales outstanding (“DSO”) during the year ended
December 31, 2019 compared to 2018, as described below. The related receivables due from the Illinois Department on Aging represented 25.1% and
23.1% of net accounts receivable at December 31, 2019 and 2018, respectively.
Net cash used in investing activities was $188.7 million for the year ended December 31, 2019, compared to $67.8 million for the year ended
December 31, 2018. Our investing activities for the year ended December 31, 2019 primarily consisted of $135.6 million for the acquisition of Hospice
Partners, $29.9 million for the acquisition of VIP, $23.5 million for the acquisition of Alliance, and $4.6 million in purchases of property and equipment
primarily related to our ongoing investments in our technology infrastructure. Our investing activities for the year ended December 31, 2018 consisted of
$39.6 million for the acquisition of Ambercare, net of cash acquired of $12.0 million, $18.9 million for the acquisition of Arcadia, $3.3 million for the
acquisition of LifeStyle and $3.4 million in purchases of property and equipment primarily related to investments in our technology infrastructure.
Net cash provided by financing activities was $218.0 million for the year ended December 31, 2019 as compared to $51.2 million for the year ended
December 31, 2018. Our financing activities for the year ended December 31, 2019 primarily related to net proceeds from our Public Offering of $172.9
million, borrowings of approximately $23.5 million on the revolver portion of our credit facility to fund the Alliance acquisition, borrowings of $19.6
million on the delayed draw term loan portion of our credit facility to fund, in part, the VIP acquisition and $3.2 million in cash received from the exercise
of stock options. Our financing activities for the year ended December 31, 2018 were from net proceeds from our secondary offering of $76.6 million,
borrowings of $60.4 million on the delayed draw term loan portion of our credit facility to fund the acquisitions of Arcadia and Ambercare, $104.9 million
of payments on our term loan portion of the credit facility, $20.0 million borrowing on the revolver, $1.0 million in payments on financing lease obligations
and $1.0 million in cash received from the exercise of stock options.
Cash Flows
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
For the comparison of fiscal years 2018 and 2017, refer to Part II, Item 7—“Liquidity and Capital Resources” on Form 10-K for our fiscal year
ended December 31, 2018, filed with the SEC on March 15, 2019 under the subheading—“Year Ended December 31, 2018 Compared to Year Ended
December 31, 2017.”
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Outstanding Accounts Receivable
Gross accounts receivable as of December 31, 2019 and 2018 were $150.6 million and $99.2 million, respectively. Outstanding accounts receivable,
net of the allowance for doubtful accounts, increased by $51.4 million as of December 31, 2019 as compared to December 31, 2018. This increase is related
to the increase in DSO, the accrual of a one-time bonus payment from the Illinois Department on Aging of $6.8 million, received in May of 2020, as well
as increases of approximately $13 million with the acquisitions of Hospice Partners, VIP and Alliance during the year ended December 31, 2019. Our
collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. An
uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted.
We calculate our DSO by taking the accounts receivable outstanding net of the allowance for doubtful accounts divided by the net service revenues
for the last quarter, multiplied by the number of days in that quarter. Our DSOs were 72, 65 and 70 days at December 31, 2019, 2018 and 2017,
respectively. The DSOs for our largest payor, the Illinois Department on Aging, at December 31, 2019, 2018 and 2017 were 78, 51 and 74 days,
respectively. We may not receive payments on a consistent basis in the near term and our DSOs and the DSO for the Illinois Department on Aging may
increase despite the state of Illinois’s enactment of state budgets for fiscal years 2020 and 2021.
The economic slowdown caused by the COVID-19 pandemic poses significant risks to states’ budgets for the 2021 fiscal year, which began July 1
in most states. Depending on the severity and length of a downturn, sales tax collections and income tax withholdings could continue to be depressed in
fiscal 2021 and, potentially, future fiscal years. States could face significant fiscal challenges and may have no choice but to revise their revenue forecasts
and adjust their budgets for fiscal 2021 and, potentially, future fiscal years, accordingly. In New York, which started its fiscal year April 1, the state
comptroller recently estimated that the state would collect at least $10 billion less than originally forecasted, the first year-to-year cut since 2011. The
current New York fiscal plan authorizes the state of New York to issue up to $8 billion in short-term bonds to provide funds in case of reduced revenues
during the fiscal year, tentatively scheduled for October 2020, December 2020 and March 2021. It also allows two state authorities to provide the state with
a $3 billion line of credit in the new fiscal year. Congress could provide additional relief with additional stimulus and relief legislation, including extension
of unemployment benefits and relief for states. We cannot determine the impact that COVID-19 may have on states budgets for 2021 or beyond, however,
such impacts could have a material adverse effect on our financial condition, results of operations and cash flows.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet guarantees or arrangements with unconsolidated entities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements prepared in
accordance with GAAP. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities, revenues and expense and related disclosures.
Our significant accounting policies are described in Note 1 to the Notes to Consolidated Financial Statements. An accounting policy is deemed to be
critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if
different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial
statements. We base our estimates and judgments on historical experience and other sources and factors that we believe to be reasonable under the
circumstances, however, actual results may differ from these estimates. Our critical accounting policies requiring estimates, assumptions and judgments
that we believe have the most significant impact on our consolidated financial statements are described below.
Goodwill and Intangible Assets
Under business combination accounting, assets and liabilities are generally recognized at their fair values and the difference between the consideration
transferred, excluding transaction costs, and the fair values of the assets and liabilities is recognized as goodwill. The Company’s significant identifiable
intangible assets consist of customer and referral relationships, trade names and trademarks and state licenses. The Company uses various valuation
techniques to determine initial fair value of its intangible assets, including relief-from-royalty, income approach, discounted cash flow analysis, and multi-
period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation
approaches, we are required to make estimates and assumptions about future market growth and trends, forecasted revenue and costs, expected periods over
which the assets will be utilized, appropriate discount rates and other variables. The Company estimates the fair values of the trade names using the relief-
from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such revenue, the
tax rate and the discount rate. The Company estimates the fair value of existing indefinite-lived state licenses based on a blended approach of the
replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by estimating
future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. The Company estimates the fair
value of existing finite-lived state licenses based on a method of analyzing the definite revenue streams with the license and without the license, which
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involves estimating revenues and expenses, estimated time to build up to a current revenue base, which is market specific, and the non-licensed revenue
allocation, revenue growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of customer and referral relationships
based on a multi-period excess earnings method, which involves identifying revenue streams associated with the assets, estimating the attrition rates based
upon historical financial data, expenses and cash flows associated with the assets, contributory asset charges, rates of return for specific assets, growth
rates, discount rate and tax amortization benefits. The Company estimates the fair value of non-competition agreements based on a method of analyzing the
factors to compete and factors not to compete, which involves estimating historical financial data, forecasted financial statements, growth rates, tax
amortization benefit, discount rate, review of factors to compete and factors not to compete as well as an assessment of the probability of successful
competition for each non-competition agreement.
The carrying value of our goodwill is the excess of the purchase price over the fair value of the net assets acquired from various acquisitions. In
accordance with ASC Topic 350, Goodwill and Other Intangible Assets, goodwill and intangible 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 an impairment may have occurred. We may use a qualitative test,
known as “Step 0,” or a two-step quantitative method to determine whether impairment has occurred. In Step 0, we can elect to perform an optional
qualitative analysis and based on the results skip the two-step analysis. Additionally, it is our policy to update the fair value calculation of our reporting
units and perform the quantitative goodwill impairment test on a periodic basis. For the years ended December 31, 2019 and 2018, we performed the
quantitative analysis to evaluate whether an impairment occurred. In 2017, we elected to implement Step 0 and were not required to conduct the remaining
two-step analysis. Based on the totality of the information available, we concluded that it was more likely than not that the estimated fair values were
greater than the carrying values of the reporting units, and as such, no further analysis was required. We concluded that there were no impairments for the
years ended December 31, 2019, 2018 or 2017. As of December 31, 2019 and 2018, goodwill was $275.4 million and $135.4, respectively, included in our
Consolidated Balance Sheets.
Our identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-competition
agreements. Definite-lived intangible assets are amortized using straight-line and accelerated methods based upon the estimated useful lives of the
respective assets, which range from three to twenty-five years, and assessed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Customer and referral relationships are amortized systematically over the periods of expected economic benefit,
which range from five to ten years. We would recognize an impairment loss when the estimated future non-discounted cash flows associated with the
intangible asset are less than the carrying value. An impairment charge would then be recorded for the excess of the carrying value over the fair value. We
estimate the fair value of these intangible assets using the income approach. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets,
intangible assets with indefinite useful lives are not amortized. We test intangible assets with indefinite useful lives 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 an impairment may have occurred. No impairment charge was recorded for the years ended December 31, 2019, 2018 or
2017. As of December 31, 2019 and 2018, intangibles, net of accumulated amortization, was $57.1 million and $23.8 million, respectively, included in our
Consolidated Balance Sheets. Amortization of intangible assets is reported in the statement of income caption, “Depreciation and amortization” and not
included in the income statement caption cost of service revenues.
Revenue Recognition, Accounts Receivable and Allowances
Net service revenue is recognized at the amount that reflects the consideration the Company expects to receive in exchange for providing services
directly to consumers. Receipts are from federal, state and local governmental agencies, managed care organizations, commercial insurers and private
consumers for services rendered. The Company assesses the consumers' ability to pay at the time of their admission based on the Company's verification of
the customer's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Laws and regulations
governing the governmental programs in which we participate are complex and subject to interpretation. Net service revenue related to uninsured accounts,
or self-pay, is recorded net of implicit price concessions estimated based on historical collection experience to reduce revenue to the estimated amount we
expect to collect. Amounts collected from all sources may be less than amounts billed due to implicit price concessions resulting from client eligibility
issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences and other reasons unrelated to credit risk. We
monitor our net service revenues collections from these sources and record any necessary adjustment to net service revenue based upon management’s
assessment of historical write offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care
coverage and other collection indicators.
Accounts receivable is reduced to the amount expected to be collected in future periods for services rendered to customers prior to the balance sheet
date. Management estimates the value of accounts receivable, net of allowances for implicit price concessions based upon historical experience and other
factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts
billed, current contract and reimbursement terms, shifts in payors and other relevant information. Collection of service revenue we expect to receive is
normally a function of providing complete and
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correct billing information to the payors within the various filing deadlines. The evaluation of these historical and other factors involves complex,
subjective judgments impacting the determination of the implicit price concession assumption. In addition, we compare our cash collections to recorded net
service revenue and evaluate our historical allowances, including implicit price concessions, based upon the ultimate resolution of the accounts receivable
balance.
Prior to 2018, we established an allowance for doubtful accounts to the extent it was probable that a portion or all of a particular account would not
be collected. We established a provision for doubtful accounts primarily by reviewing the creditworthiness of significant customers and through evaluations
over the collectability of the receivables. An allowance for doubtful accounts was maintained at a level that our management believed was sufficient to
cover potential losses.
With the modified retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers, in 2018 subsequent adjustments that are
determined to be the result of an adverse change in the payor’s ability to pay are recognized as provision for doubtful accounts. The majority of what
historically was classified as provision for doubtful accounts under operating expenses is now treated as an implicit price concession factored into the
determination of net service revenues discussed above. Our collection procedures include review of account aging and direct contact with our payors. We
have historically not used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been
exhausted. As of December 31, 2019 and 2018, the allowance for doubtful accounts balance was $1.0 million and $0.9 million, respectively, which is
included in accounts receivable, net of allowances on our Consolidated Balance Sheets.
Recent Accounting Pronouncements
Refer to Note 1 to the Notes to Consolidated Financial Statements for further discussion.
Contractual Obligations and Commitments
We had outstanding letters of credit of $10.0 million at December 31, 2019. These standby letters of credit benefit our third-party insurer for our
high deductible workers’ compensation insurance program. The amount of the letters of credit is negotiated annually in conjunction with the insurance
renewals.
The following table summarizes our cash contractual obligations as of December 31, 2019:
Contractual Obligations
Total
Less than
1 Year
1-3
Years
(Amounts in Thousands)
3-5
Years
More than
5 Years
Revolving loan under the amended and
restated credit facility, 3.53% due 2023
Term loan under the amended and
restated credit facility, 3.55% due 2023
Interest payable on revolving and
term loans (1)
Operating leases
Total contractual obligations
$
43,458 $
— $
— $
43,458 $
18,865
735
1,960
16,170
10,105
23,593
96,021 $
3,276
7,975
11,986 $
5,828
11,266
19,054 $
1,001
3,963
64,592 $
$
—
—
—
389
389
(1)
As described in Note 9 to the Notes to Consolidated Financial Statements, interest on borrowings under the revolving and term loan are variable. The calculated
interest payable amounts above use actual rates available through January 2020 and assumes the January rates of 3.53% and 3.55%, respectively, are for all future
interest payable on revolving and term loans.
Impact of Inflation
Inflation in the past several years in the United States has been modest. Future inflation would have mostly negative impacts on our business. Rising
price levels might allow us to increase our fees to private pay clients, but would cause our operating costs, particularly the wages we pay our caregivers, to
increase. Further, our ability to realize rate increases from government programs might be limited despite inflation.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt, including, without limitation, the
potential impact of the discontinuation or modification of LIBOR. As of December 31, 2019, we had outstanding borrowings of approximately $62.3
million on our credit facility, all of which was subject to variable interest rates. As of December 31, 2018, we had outstanding borrowings of approximately
$20.0 million on our credit facility, all of which was subject to variable interest rates. If the variable rates on this debt were 100 basis points higher than the
rate applicable to the borrowing during the year ended December 31, 2019, our net income would have decreased by $0.3 million, or $0.02 per diluted
share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements together with the related Notes to Consolidated Financial Statements and the report of our independent
registered public accounting firm, are set forth on the pages indicated in Part IV, Item 15—“Exhibits and Financial Statement Schedules.”
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of December 31, 2019 due to the material weaknesses in internal control over financial reporting
described below.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO)”. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded our internal
control over financial reporting was not effective as of December 31, 2019, due to the material weaknesses identified below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Through the process of evaluating risks and corresponding changes to the design of existing or the implementation of new controls in light of the
significant growth of our Company, we have identified certain deficiencies in our application of the principles associated with the COSO framework that
management has concluded in the aggregate constitute a material weakness. We did not effectively design and maintain controls in response to the risks of
material misstatement. Specifically, changes to existing controls or the implementation of new controls have not been sufficient to respond to changes to
the risks of material misstatement in financial reporting. As a result of this deficiency in the design and implementation of an effective risk assessment, this
material weakness contributed to certain control deficiencies that management has concluded result in the following additional material weaknesses:
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• We did not design and maintain effective controls over the review and approval of hours worked and billed. Specifically, effective controls
were not designed and maintained to validate that hours worked and billed were complete and accurate in our accounting records. This
material weakness did not result in a misstatement of our annual or interim financial statements.
• We did not design and maintain effective controls over the accuracy of the implicit price concession assumption used in the estimation of
the recoverability of unadjudicated net service revenues (accounts receivable, net). This material weakness resulted in immaterial audit
adjustments to increase the provision for doubtful accounts and revision of our consolidated financial statements for the year ended
December 31, 2017, and to decrease net service revenues and accounts receivable and the revision of our consolidated financial statements
for the year ended December 31, 2018, and each of the interim periods of 2018 and the first three quarters of 2019.
These material weaknesses could have resulted in misstatements of the interim or annual consolidated financial statements and disclosures that
could have resulted in a material misstatement that would not be prevented or detected.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented
or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
We excluded Hospice Partners, Alliance and VIP, each of which are wholly-owned subsidiaries, from our assessment of internal control over
financial reporting as of December 31, 2019 because they were acquired in purchase business combinations on October 1, 2019, August 1, 2019 and June
1, 2019, respectively. Hospice Partners represented 2.3% of our revenues and 6.4% of our operating income, respectively, for the year ended December 31,
2019. Alliance represented 1.4% of our revenues and 5.9% of our operating income, respectively, for the year ended December 31, 2019. VIP represented
4.6% of our revenues and (0.5)% of our operating income, respectively, for the year ended December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which appears within Part IV, Item 15—“Exhibits and Financial Statement
Schedules.”.
Remediation Efforts with Respect to the Material Weaknesses
Our management has an ongoing remediation plan to address the material weaknesses described above. Over time, our Company has taken a
number of initial steps to address the risks related to a larger, more complex organization. We have identified dedicated internal resources supplemented
with third-party specialists to assist with formalizing a robust and detailed remediation plan and updated risk assessment, including identifying and
assessing those risks commensurate with the significant changes within our Company.
For the material weakness related to the review and approval of hours worked and billed, we continued the implementation of our remediation plan
which included obtaining and reviewing the 2019 Service Organization Control 1 Type 2 (“SOC 1 Type 2”) report from our preferred electronic visit
verification (“EVV”) vendor, enhancing existing controls to increase our level of precision, and adding new payroll controls. While significant progress has
been made, the previously identified material weakness continues to exist as of December 31, 2019, and we will consider remediation complete after the
applicable controls are designed, implemented, and operate for a sufficient period of time and management has concluded that these controls are designed
and operating effectively.
For the material weakness related to unadjudicated net service revenues, we have initiated steps to implement additional analyses using cash
collections data into our standing internal controls system. The material weakness will not be considered remediated until the applicable controls are
designed, implemented, and operate for a sufficient period of time and management has concluded that these controls are designed and operating
effectively.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and
15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
None.
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ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
PART III
Our Amended and Restated Bylaws (the “Bylaws”) divide our Board into three classes with the terms of office of each class ending in successive
years. Our Bylaws empower our Board to fix the exact number of directors and appoint persons to fill any vacancies on the Board until the next election of
the class for which such director was chosen. We have set forth below information with respect to directors of the Company. Certain members of the Board,
including Mark L. First and Steven I. Geringer, were initially elected pursuant to a shareholders’ agreement dated September 19, 2006 (the “Shareholders’
Agreement”). The Shareholders’ Agreement was terminated in connection with the Company’s initial public offering completed on November 2, 2009 (the
“2009 IPO”) and there are no remaining contractual rights to appoint directors. There are no other arrangements or understandings between any director
and any other person pursuant to which any director was or is selected as a director or nominee.
R. Dirk Allison, age 64, has served as a director of the Company since 2010, and as President and Chief Executive Officer since January 2016. Since
April 2019, Mr. Allison has served as a director of National Mentor Holdings, Inc., the holding company for Civitas Solutions, Inc., a home- and
community-based health and human services provider. From 2013 to 2015, Mr. Allison served as a director of Curo Health Services, LLC, a hospice care
provider. From 2013 to 2014, Mr. Allison served as the President and Chief Executive Officer of Correctional Healthcare Companies, Inc., a national
provider of correctional healthcare solutions. Prior to joining Correctional Healthcare Companies, Inc., Mr. Allison served as the President and Chief
Executive Officer of CCS Medical, Inc., a provider of mail order diabetic supplies, from 2011 to 2013. Prior to that, Mr. Allison served as Senior Vice
President, Chief Financial Officer and Treasurer of Odyssey Healthcare, Inc. (Nasdaq: ODSY), a provider of hospice services. Odyssey Healthcare, Inc.,
was acquired in 2010 by Gentiva Health Services, Inc. (Nasdaq: GTIV), a $2 billion provider of home health and hospice services. Prior to joining Odyssey
Healthcare, Inc. in 2006, Mr. Allison was Executive Vice President and Chief Financial Officer of Omniflight, Inc., an operator of aviation support services
to the healthcare industry. Prior to Omniflight, Inc., Mr. Allison served for approximately three and a half years as Executive Vice President and Chief
Financial Officer of Ardent Health Services LLC, an operator of acute care and behavioral care hospitals, and for approximately four years as Executive
Vice President, Chief Financial Officer and Treasurer of Renal Care Group, Inc. (NYSE: RCI), an operator of dialysis centers. Between 1987 and 1999, Mr.
Allison served as President and Chief Executive Officer of several publicly and privately held healthcare companies, including a physician practice
management company and several institutional pharmacy providers. Mr. Allison earned a Bachelor of Business Administration at the University of
Louisiana at Monroe (formerly Northeast Louisiana University) and a master’s degree in business administration at the University of Dallas. Mr. Allison is
a Certified Public Accountant (CPA). We believe Mr. Allison’s qualifications to serve as a director of our Company include his experience in the healthcare
industry and his expertise in business, corporate strategy and investment matters as well as his experience with multi-site healthcare companies and
knowledge of regulations regarding government reimbursements.
Michael Earley, age 65, has served as a director of the Company since 2014. Since 2013, Mr. Earley has also advised on healthcare services and
other businesses through a consulting company, Pelican Advisors, LLC, where he serves as Managing Member. Mr. Earley served as Chairman and CEO of
Metropolitan Health Networks, Inc. (NYSE: MDF), an operator of a provider services network, from 2003 to 2013. Mr. Earley has been an advisor to
public and privately owned companies, acting in a variety of management roles since 1997. From 1986 to 1997, Mr. Earley served in a number of senior
management roles, including Chief Executive Officer, Chief Operational Officer, Chief Financial Officer and Corporate Development Officer, for
Intermark, Inc. and Triton Group Ltd., both publicly traded diversified holding companies. Mr. Earley was CEO of Collins Associates, an institutional
money management firm, from 2000 through 2002. Mr. Earley has also served as a director for several public companies throughout his career. Mr. Earley
received undergraduate degrees in accounting and business administration from the University of San Diego. From 1978 to 1983, Mr. Earley was an audit
and tax staff member of Ernst & Young LLP. We believe Mr. Earley’s qualifications to serve as a director of our Company include his experience in the
healthcare industry, his financial literacy and his experience on other public company boards of directors.
Mark L. First, age 55, has served as a director of the Company since 2006. Mr. First held the title of President of the Company from 2006 to 2009;
however, Mr. First was not paid for his service in his capacity as President and had no involvement in the management of Addus Healthcare, Inc. (“Addus
Healthcare”). Mr. First is a Managing Director of Eos Management, L.P. (“Eos Management”) and its affiliates, which includes ECP Helios Partners III,
L.P., ECP General III, L.P. and Eos Partners SBIC III, L.P. (the “Eos Funds”), where he has been employed since 1994. Mr. First was previously an
investment banker with Morgan Stanley & Co., Incorporated (NYSE: MS) from 1991 to 1994. Mr. First has served as a director of PetIQ (Nasdaq: PETQ)
since 2013 and is a director of several privately owned companies. Mr. First earned a Bachelor of Science in economics from The Wharton School of the
University of Pennsylvania and a master’s degree in business administration from Harvard Business School. We believe Mr. First’s qualifications to serve
as a director of our Company include his financial literacy and experience in business, corporate strategy and investment matters.
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Steven I. Geringer, age 74, has served as a director of the Company since 2009 and as Chairman of the Board since January 2016. Mr. Geringer also
served on the board of directors of Envision Healthcare Corp. (NYSE: EVHC), an ambulatory surgery center, medical transportation and physician services
company from 2016 to October 2018, pursuant to its merger with AmSurg Corporation (Nasdaq: AMSG), on whose board of directors he had served since
1997, including serving as the chairman of the board of directors from 2009 to 2016. Mr. Geringer has also served on the board of directors of MedEquities
Realty Trust, Inc. (NYSE: MRT), a healthcare REIT, from August 2015 to 2019. From December 2012 to April 2015, Mr. Geringer was a managing
director at Alvarez & Marsal, LLC, a global professional services firm. Mr. Geringer serves on the boards of directors of several privately-held companies
including Imedex, LLC, a medical education provider, FastPace Urgent Care, an urgent care clinic operator, and Stratasan, LLC, a healthcare data analytics
software company. He also was chairman and a director of Qualifacts Systems, Inc., a software provider for behavioral health and human services
providers, from 2002 to its sale in July 2014. Mr. Geringer’s career has focused almost exclusively on healthcare services companies as a founder, adviser,
director and executive. Mr. Geringer earned a Bachelor of Science in economics from the University of Pennsylvania. We believe Mr. Geringer’s
qualifications to serve as a director of our Company and as Chairman of the Board include his financial literacy, experience in the healthcare industry, his
expertise in corporate strategy and development and his experience on other public company boards of directors.
Darin J. Gordon, age 49, has served as a director of the Company since October 2016. Mr. Gordon also has served as President and Chief Executive
Officer of the consulting firm Gordon & Associates, LLC. since 2016 and as a founding partner of Speire Healthcare Strategies, LLC, a healthcare
consulting firm, since June 2017. From 1996 to May 2016, Mr. Gordon was employed at the State of Tennessee’s Division of Health Care Finance and
Administration, an $11 billion healthcare enterprise that provided services to nearly 1.5 million Tennesseans. In 2006, he became the division’s Chief
Executive Officer and Director, which included his responsibilities as Director of TennCare, Tennessee’s Medicaid program. Prior to becoming the
division’s Chief Executive Officer and Director, Mr. Gordon also served as the division’s Director of Managed Care Programs and Chief Financial Officer.
Throughout his career, Mr. Gordon has held various board positions in both corporate and non-profit capacities, including at Advanced Care Partners and
Upperline Health, Inc. as well as at Siloam Health. Mr. Gordon earned a Bachelor of Science from Middle Tennessee State University. We believe Mr.
Gordon’s qualifications to serve as a director of our Company include his experience in business, corporate strategy and investment matters as well as his
knowledge of regulations regarding government reimbursements.
Jean Rush, age 63, has served as a director of the Company since October 2018. From 2015 to July 2018, Ms. Rush served as the Executive Vice
President of Government Markets at HighMark Inc., an affiliate of BlueCross BlueShield. During her tenure at HighMark Inc., Ms. Rush held various
board positions in both corporate and non-profit capacities, including Gateway Health Solutions, Highmark Delaware, West Virginia Family Health, and
Highmark Select Resources. Prior to serving at Highmark, Ms. Rush served in various executive roles with Centene Corporation (NYSE: CNC) from 2011
to 2015, most recently as Senior Vice President, Complex Care. Ms. Rush currently serves, and has served in the past, on the board of directors of
numerous privately owned healthcare companies. Ms. Rush is also a member of the board of directors and chair of the compensation committee of Women
Business Leaders in the U.S. Healthcare Industry. Ms. Rush earned a Bachelor of Arts at Boston College and a master’s degree in business administration
at the University of Connecticut. We believe Ms. Rush’s qualifications to serve as a director of our Company include her experience in the healthcare
industry, experience with Medicare and Medicaid, including Medicare Advantage, executive business experience and experience on other company boards
of directors.
Susan T. Weaver, M.D., age 59, has served as a director of the Company since October 2016. Since March 2020, Dr. Weaver has served as Chief
Executive Officer of KEPRO, a diversified healthcare information company, where she has been President since July 2018, and from July 2016 to July
2018, Dr. Weaver served as the Chief Executive Officer of the healthcare services company C3 HealthcareRx, LLC. Prior to joining C3 Healthcare Rx, she
was President of Transformation Health Partners, a healthcare consulting company she founded in 2015. From 2012 to 2015, Dr. Weaver served at Blue
Cross Blue Shield of North Carolina, the state’s largest health insurer, completing her service there as Chief Medical Officer. From 2009 to 2012, Dr.
Weaver held various executive positions at WakeMed Health & Hospitals, a healthcare services provider, including Executive Vice President of Medical
Affairs. Dr. Weaver has also served on the board of directors of Veritas Collaborative, LLC, a specialty healthcare company, since February 2017 and
AdaptHealth Corp. (Nasdaq: AHCO), a home medical equipment company, since November 2019. She previously served on the board of directors for DFB
Healthcare Acquisitions Corp. (Nasdaq: DFBH) until its merger with AdaptHealth Corp. Dr. Weaver also previously served on the board of directors of
several privately held healthcare companies and nonprofit organizations. Dr. Weaver earned a Bachelor of Science in psychology from Duke University and
an M.D. from the Duke University School of Medicine. She completed postgraduate training at Massachusetts General Hospital in Boston. Dr. Weaver is
board-certified in Internal Medicine and is a Fellow of the American College of Physicians. We believe Dr. Weaver’s qualifications to serve as a director of
our Company include her experience in the practice of medicine, business, corporate strategy and the healthcare industry as well as her knowledge of
regulations regarding government reimbursements.
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Executive Officers
The Company’s executive officers as of July 31, 2020 are:
•
•
R. Dirk Allison;
Brian Poff;
• W. Bradley Bickham;
•
•
•
•
Darby Anderson;
Laurie Manning;
Sean Gaffney;
David Tucker; and
• Michel Wattenbarger.
R. Dirk Allison—The principal occupation and employment experience of Mr. Allison during the last five years is set forth above under the heading
“Directors, Executive Officers and Corporate Governance—Directors.”
Brian Poff, age 48, has served as our Executive Vice President and Chief Financial Officer since May 2016. Mr. Poff has served in a number of
financial positions in both public and private healthcare companies. From October 2015 to April 2016, he served as Chief Financial Officer and Treasurer
of Oceans Healthcare, L.L.C., a provider of behavioral health services. Prior to Oceans Healthcare, Mr. Poff served as Senior Vice President of Finance,
Chief Accounting Officer and Treasurer for CCS Medical, Inc., a provider of mail order diabetic supplies, from November 2011 to October 2015. Prior to
CCS Medical, Mr. Poff served as the Corporate Controller for AccentCare, Inc., a provider of home health services. Mr. Poff also held the position of
Division Chief Financial Officer—Hospice Services for Gentiva Health Services, Inc. (Nasdaq: GTIV), provider of home health and hospice services, and
served as Assistant Controller for Odyssey HealthCare, Inc. (Nasdaq: ODSY), a provider of hospice services. Before working with Odyssey HealthCare,
Inc., he served as the Controller for Horizon Health Corporation, a provider of behavioral health services, until its acquisition by Psychiatric Solutions, Inc.,
a psychiatric hospital operator, whereby he was elevated to the role of Division CFO. Mr. Poff earned a Bachelor of Business Administration in Accounting
from Sam Houston State University.
W. Bradley Bickham, age 57, has served as our Executive Vice President and Chief Operating Officer since January 2017. Mr. Bickham has served
in a variety of senior leadership roles in both public and private healthcare companies, following tenures in the legal and accounting fields. From
September 2014 to January 2017, he served as Senior Vice President and Chief Legal Officer for United Surgical Partners International, an ambulatory
surgery provider. Previously, he served as Executive Vice President and Chief Legal Officer for a number of firms, including Correctional Healthcare
Companies, Inc., a provider of correctional healthcare solutions, from 2013 to August 2014 and CCS Medical, Inc., a provider of mail order diabetic
supplies, from 2012 to 2013. He also served as Vice President, and later Senior Vice President and General Counsel for Odyssey HealthCare, Inc. (Nasdaq:
ODSY), a provider of hospice services, from 2003 through its acquisition by Gentiva Health Services, Inc. (Nasdaq: GTIV), provider of home health and
hospice services, in 2010. Mr. Bickham earned both a Bachelor of Science in Accounting and a law degree from Louisiana State University.
Darby Anderson, age 54, has served as our Executive Vice President and Chief Strategy Officer since November 2019. Mr. Anderson previously
served as our Executive Vice President and Chief Development Officer from 2014 to November 2019 and as our Senior Vice President of Addus
HealthCare from 2013 to 2014. Mr. Anderson joined Addus HealthCare in 1996, and has served in such capacities as a Regional Manager, Midwest,
Regional Vice President, Midwest and East, and Vice President of Home and Community Services. Mr. Anderson earned a Bachelor of Arts degree from
Michigan State University.
Laurie Manning, age 65, has served as our Executive Vice President and Chief Human Resource Officer since August 2017. From 2012 to August
2017, Ms. Manning served as the Vice President, Human Resources for Epic Health Services, Inc., which provides home health services for medically
fragile children and adults in 21 states. Previously, she served at Humana, Inc. (NYSE: HUM) as Human Capital Leader, Human Resources and served 17
years with Concentra, Inc., a provider of healthcare services, for whom Ms. Manning most recently served for five years as Vice President, Human
Resources, East Region. Ms. Manning’s professional certifications include SPHR (Senior Professional Human Resources) and SHRM-SCP (Society for
Human Resource Management-Senior Certified Professional). She earned a Bachelor of Science degree from Bellevue University and a master’s degree in
organizational leadership from Norwich University.
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Sean Gaffney, age 41, has served as our Executive Vice President and Chief Legal Officer since April 2019. From 2015 to April 26, 2019, Mr.
Gaffney served as General Counsel for Encompass Health – Home Health & Hospice, the fourth largest U.S. provider of skilled home health services.
Previously, he served from 2014 to 2015 as the Executive Vice President of Corporate Development, General Counsel and Secretary of BroadJump, LLC, a
software start-up producing innovative hospital cost-reduction technology. Mr. Gaffney earned a Bachelor of Arts from The University of Dallas and a law
degree from Boston University School of Law, where he was a G. Joseph Tauro Scholar and managing editor of the Boston University International Law
Journal.
David Tucker, age 56, has served as our Executive Vice President and Chief Development Officer since November 7, 2019. From March 2018
through October 2019, Mr. Tucker served as our Senior Vice President of Business Development, and from July 2016 through February 2018, he served as
our Vice President Managed Care. Prior to joining the Company, Mr. Tucker served as Senior Vice President of Business Development for CCS Medical,
one of the nation’s largest providers of mail order diabetic supplies, from 2012 to July 2016. Mr. Tucker earned a Bachelor of Science degree from
Glenville State College.
Michael Wattenbarger, age 50, has served as our Executive Vice President and Chief Information Officer since November 7, 2019. From August
2019 to November 2019, Mr. Wattenbarger served as our Senior Vice President of Information Technology and from May 2018 to August 2019 as our Vice
President of Information Technology. Previously, Mr. Wattenbarger served as the Chief Information Officer of LifeCare Management Services, a health
care services company, from 2006 to May 2018. Mr. Wattenbarger earned both a Bachelor of Arts and a master’s degree in management information
science from Louisiana State University at Shreveport.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than ten percent of a registered class of
our equity securities (collectively, the “reporting persons”) to file reports of ownership and changes in ownership with the SEC and to furnish us with
copies of these reports. Based upon our review of reports filed with the SEC by the reporting persons, and based upon written representations received from
certain of the reporting persons, we believe that all of the reporting persons timely complied with the reporting requirements of Section 16(a) of the
Exchange Act during 2019.
Code of Conduct
We have adopted a Code of Conduct that is applicable to all of our employees, officers and members of our Board of Directors, and our subsidiaries.
The Code of Conduct addresses, among other things, legal compliance, conflicts of interest, corporate opportunities, protection and proper use of Company
assets, confidential and proprietary information, integrity of records, compliance with accounting principles and relations with government agencies. A
copy of the current version of our Code of Conduct is available in the Investors—Corporate Governance section of our internet website located at
www.addus.com. A copy of the Code of Conduct is also available in print, free of charge, to any stockholder who requests it by writing to Addus
HomeCare Corporation, 6303 Cowboys Way, Suite 600, Frisco, TX 75034. We intend to post amendments to or waivers from, if any, our Code of Conduct
at this location on our website, in each case to the extent such amendment or waiver would otherwise require the filing of a Current Report on Form 8-K
pursuant to Item 5.05 thereof.
Corporate Governance
Board of Directors
Our Board oversees our business and monitors the performance of management. The Board does not involve itself in day-to-day operations. The
directors keep themselves informed by discussing matters with the President and Chief Executive Officer, other key executives and our principal external
advisors, such as legal counsel, outside auditors, investment bankers and other consultants, by reading the reports and other materials that we send them
regularly and by participating in Board and committee meetings.
The Board usually meets four times per year in regularly scheduled meetings and will meet more often if necessary. The Board met eight times
during 2019. All directors attended at least 75% of the aggregate number of meetings of the Board and committees of the Board of which they were a
member held during the year ended December 31, 2019.
Audit Committee and Audit Committee Financial Expert
The Audit Committee is composed entirely of directors, whom the Board has affirmatively determined are independent of the Company and its
management as defined by the Nasdaq Stock Market Rules and Rule 10A-3 of the Exchange Act. The members of the Audit Committee are Michael
Earley, Steven I. Geringer, Darin J. Gordon and Jean Rush. Mr. Earley serves as chairman of the Audit Committee.
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The Board has also determined that each member of the Audit Committee satisfies the financial literacy requirements of the Nasdaq Stock Market
Rules and that Mr. Earley is an “audit committee financial expert,” as that term is defined under Item 407(d) of Regulation S-K. In making its
determination that Mr. Earley qualifies as an “audit committee financial expert,” the Board considered his education and the nature and scope of Mr.
Earley’s prior experience. The members of the Audit Committee are reviewed at least annually by the Board.
ITEM 11.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The purpose of this compensation discussion and analysis is to provide information about the material elements of compensation that is paid or
awarded to, or earned by, our named executive officers.
Named Executive Officers
Our named executive officers for the last completed fiscal year were as follows:
•
•
•
•
R. Dirk Allison, President and Chief Executive Officer;
Brian Poff, Executive Vice President, Chief Financial Officer, Treasurer and Secretary;
Sean Gaffney, Executive Vice President and Chief Legal Officer;
David Tucker, Executive Vice President and Chief Developer Officer; and
• Michael D. Wattenbarger, Executive Vice President and Chief Information Officer.
Mr. Gaffney, Mr. Tucker and Mr. Wattenbarger each became an executive officer of the Company in 2019, with the latter two promoted effective
November of 2019.
Overview of our Compensation Program and Compensation Philosophy and Objectives
Our compensation and benefits programs are designed to attract and retain talented, qualified executives to manage and lead the Company, to
motivate them to pursue corporate objectives, to align the interests of our executive with those of our shareholders and to maximize the long-term growth
of the Company. We believe that our compensation program allows us to meet the following objectives:
•
•
•
•
Reward the named executive officer for a job done well. While base salary, which is intended to provide reasonable fixed compensation for the
essential elements of a named executive officer’s position, remains an important component of a named executive officer’s compensation, our
performance-based cash and equity compensation plans comprise a significant portion of compensation.
Compensate named executive officers within market standards. We believe that competitive pay, together with our significant growth
opportunities and employee-centered corporate culture, allow us to attract and retain top-quality executives. To ensure the competitiveness of
our compensation levels within the comparable markets for executive talent, we direct the conduct of periodic independent consulting studies to
evaluate our executive compensation program in comparison to pertinent market data and specified peer companies.
Provide compensation that is fair to the named executive officer and the Company. We believe that it is important for named executive officers
to be fairly compensated, at levels reflective of their talents and experience, and the scope of their job responsibilities. We also believe that it is
important that each named executive officer perceives that his compensation is fair and equitable relative to his peers and others in the
organization. This perceived equity promotes executive retention and satisfaction, and is consistent with our beliefs and values.
Create a high-performance culture. We believe that named executive officers should strive to achieve and exceed performance expectations,
and drive the growth and success of the business. We also believe that superior performance warrants superior rewards. Our merit-based salary
increases and performance-based cash and equity compensation plans are designed to promote this high-performance culture and motivate our
executives to achieve at their highest potential.
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2019 Advisory Vote on Named Executive Officer Compensation
The Compensation Committee reviewed the results of the 2019 shareholder advisory vote on named executive officer compensation and
incorporated the results as one of the many factors considered in connection with the discharge of its responsibilities. Since the overwhelming majority of
shares voted at our 2019 annual meeting of shareholders were voted to approve the compensation program described in our 2019 Proxy Statement, the
Compensation Committee did not implement changes to our 2019 executive compensation program as a direct result of the shareholders’ advisory vote.
The Company also held a non-binding shareholder vote at the 2019 annual meeting of shareholders regarding whether to hold an advisory vote on
named executive officer compensation every one, two or three years, which supported an annual vote. This result represented a departure from the
Company’s prior practice of holding an advisory vote on named executive officer compensation every three years. Thus, the Company is presenting an
advisory vote on named executive officer compensation in its next Proxy Statement and the Company will take into account the results of that vote in
setting future compensation.
Role of the Compensation Committee, Consultants and Executive Officers in Determining Named Executive Officer Compensation
The targeted compensation range and amount of each element of our compensation program is determined by our Compensation Committee at the
time of initial hire, promotion or employment agreement renewal, taking into consideration our results of operations, long- and short-term goals, the
competitive market for the named executive officer and general economic factors. We then review compensation on an annual basis as described below. We
seek to combine the components of our executive compensation program to achieve a total compensation level appropriate for our size and corporate
performance. We then determine the amount of each element of compensation based on our compensation objectives.
Role of the Compensation Committee
The Compensation Committee has primary responsibility for all compensation decisions relating to our named executive officers. The
Compensation Committee reviews the aggregate level of our executive compensation, as well as the mix of elements used to compensate our named
executive officers on an annual basis. In addition, the targeted compensation range for each executive, along with the amount of each program element, is
determined by the Compensation Committee. During 2019, the Compensation Committee engaged FW Cook, its independent compensation consultant, to
provide advice as discussed in the following paragraph, which advice was used in making compensation decisions for 2019 and 2020.
Role of the Independent Compensation Consultant
The Compensation Committee has the authority to retain a compensation consultant or obtain advice from external legal, accounting or other
advisors to assist in the evaluation of executive compensation. The Compensation Committee retained FW Cook as its outside compensation consultant
during 2019. During 2019, FW Cook provided updated benchmarking information (as discussed below) and assisted the Compensation Committee with
setting the Company’s performance-based cash and equity compensation plans. FW Cook provided updated compensation information at an October 2019
Compensation Committee meeting at which two of the named executive officers were promoted. See “Compensation Discussion and Analysis—
Performance-Based Equity Compensation.”
The Compensation Committee reviewed the independence of FW Cook as required by SEC rules and the Nasdaq Stock Market Rules regarding
compensation consultants and has concluded that the work of FW Cook for the Compensation Committee does not raise any conflict of interest. All work
performed by the compensation consultant is subject to review and approval of the Compensation Committee. FW Cook provided no other services to the
Company and only received fees from the Company on behalf of the Compensation Committee.
Benchmarking
To ensure that our executive compensation program is competitive, the Compensation Committee has in prior years (most recently in October 2019)
reviewed an analysis of executive compensation at peer group companies assembled by FW Cook. The Compensation Committee uses the comparative
peer group data as a point of reference for compensation, but not as the determinative factor. The purpose of the comparison data is not to supplant the
analyses of internal pay equity, wealth accumulation and the individual performance of the executive officers that the Compensation Committee considers
when making compensation decisions. The Compensation Committee has full discretion in determining the nature and extent of the use of comparative
compensation data, including to elect not to use the data at all.
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There are very few directly comparable peer companies in our sector, so in determining our peer group, we selected companies with similar industry
focus, business complexity, and size and operating characteristics. The most recent targeted peer group consisted of the following companies:
•
•
•
•
•
•
•
•
•
•
Amedisys Inc.
American Renal Associates Holdings, Inc.
Capital Senior Living Corporation
Chemed Corporation
The Ensign Group, Inc.
LHC Group, Inc.
National Healthcare Corporation
RadNet, Inc.
Tivity Health, Inc.
U.S. Physical Therapy, Inc.
In 2019, Almost Family, Inc. and Civitas Solutions, Inc. were removed from the peer group as both were acquired. The Ensign Group, Inc.,
Chemed Corporation, RadNet, Inc., Tivity Health, Inc. and U.S. Physical Therapy, Inc. were added to the peer group due to their similarities as investor
peers and under the criteria cited above.
In 2019, FW Cook calculated the median total compensation (including the grant fair value of equity incentives) for this peer group. The
Compensation Committee also reviewed data in 2019 comparing individual compensation for its named executive officers to the average compensation for
comparable offices paid by the peer group.
Role of the Executive Officers
During 2019 and 2020, Mr. Allison participated in the meeting of the Compensation Committee at which compensation actions involving our named
executive officers (other than Mr. Allison) were discussed. Mr. Allison assisted the Compensation Committee by making recommendations and answering
Compensation Committee questions regarding executive performance and objectives relating to the named executive officers other than himself. Mr.
Allison recused himself and did not participate in any portion of any meeting of the Compensation Committee at which his compensation was discussed.
Elements of Our Named Executive Officer Compensation Program
The compensation we provide to our named executive officers is primarily comprised of three elements: base salary, performance-based cash
compensation, and performance-based equity compensation. We believe that offering these elements of compensation allows us to meet each of the
objectives of our compensation philosophy, as well as to remain competitive with the market for acquiring executive talent. We also provide our named
executive officers with certain other benefits and perquisites that are discussed below under “—Other Compensation.”
Base Salary
We utilize base salary as the primary means of rewarding our named executive officers for their individual job performance, providing them a secure
level of guaranteed cash compensation, and encouraging them to focus on their most important priorities and initiatives. The Compensation Committee
may adjust executive base salary levels based on performance, competitive market conditions, and/or changes in position scope and responsibilities.
We agree upon a base salary, which is not “at risk,” with each named executive officer at the time of initial employment or promotion, which
historically has been reflected in employment agreements. The amount of base salary initially offered to a new or newly-promoted named executive officer
reflects our views as to the individual named executive officer’s scope of anticipated responsibilities; past experience; and future potential to add value
through performance, knowledge, skills and expertise. This base salary level is also based on competitive industry salary practices.
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A named executive officer may receive a merit-based salary increase to the extent such named executive officer is eligible pursuant to his
employment agreement. In addition, we may adjust salary due to other circumstances, such as a change in responsibilities or position. Executive merit-
based salary increases, to the extent permitted by a named executive officer’s employment agreement, have generally been determined based on the named
executive officer’s performance of key Company and divisional or departmental objectives, as well as his effectiveness in performing his role.
Performance-Based Cash Compensation
A significant part of each named executive officer’s annual cash compensation is awarded under our individualized performance-based cash
compensation plans. Bonuses under these plans are intended to incentivize and reward our named executive officers for the achievement of certain financial
objectives. All performance-based cash compensation is based on the achievement of pre-established Company Adjusted EBITDA (defined below) targets,
in order to more directly align this element of compensation with shareholder value. Performance-based cash compensation is designed to be “at risk,” with
the named executive officer only receiving the maximum bonus if performance exceeds our expectations.
Our financial objectives are established to drive performance at or above Company budgetary levels, requiring that internal budget levels be
exceeded to achieve the maximum bonus potential.
For our named executive officers, the award opportunity for 2019 performance was based 100% on the achievement of certain levels of Adjusted
EBITDA. “Adjusted EBITDA” is the Company’s earnings before interest expense, income taxes, depreciation and amortization, as well as certain other
adjustments. A reconciliation of Adjusted EBITDA to the Company’s net income is available on page 38 of this Annual Report on Form 10-K. The target
Adjusted EBITDA goal was set based on the budget/forecast for the period reflecting a level of performance which at the time was anticipated to be
challenging, but achievable. The threshold Adjusted EBITDA goal was set to be reflective of performance at which the Compensation Committee believed
a portion of the award opportunity should be earned. The maximum level was set well above the target, requiring exemplary performance. The
Compensation Committee also mandated that the goals be revised upward based upon budget/forecast for acquisitions made during the year to reflect
performance in the period following acquisition. The table which follows provides the Adjusted EBITDA performance goals originally established by the
Compensation Committee for 2019, revised goals that reflect 2019 acquisitions, and the actual level of performance achieved (dollars in thousands):
Adjusted EBITDA (original)
Adjusted EBITDA (with acquisitions)
Adjusted EBITDA Goals
Threshold
Target
Maximum
Actual
$
$
43,537
49,469
$
48,375
54,965
53,212
60,463
N/A
58,697
The target amount for each annual performance bonus is set as a percentage of the named executive officer’s base salary and is based on the
achievement of certain levels of Adjusted EBITDA. The target opportunity for Mr. Allison in 2019 was 100% of base salary, and for the other named
executive officers the target opportunity was 75%. For promoted named executive officers, the Compensation Committee determined at the time of
promotion that the target should be pro-rated at ten months for their prior target opportunity and two months at their new target opportunity. The threshold
Adjusted EBITDA goal must be met in order for any payout to occur and payouts cannot exceed the maximum level, as set forth in the table below. The
following table shows the annual incentive opportunities and actual bonus percentages earned for our named executive officers with respect to 2019
performance:
Name
Mr. Allison
Mr. Poff
Mr. Gaffney
Mr. Tucker
Mr. Wattenbarger
Base Salary
Threshold % of
Base Salary
Adjusted EBITDA
Target % of Base
Salary
Maximum % of
Base Salary
$
625,000
389,000
300,000
295,000
295,000
50.0
37.5
37.5
37.5
37.5
100.0
75.0
75.0
75.0
75.0
150.0
112.5
112.5
112.5
112.5
Actual % of Base
Salary Earned(1)
100.0
75.0
75.0
75.0
75.0
(1)
Although the Company achieved Adjusted EBITDA in 2019 equal to 107% of the Adjusted EBITDA target, the plan provides discretion to the
Compensation Committee to award more or less than the formula indicates as the percentage earned, and the Compensation Committee determined
to reduce the award to 100% of target percentage for each named executive officer upon CEO recommendation due to the delay in filing this Annual
Report.
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For the fiscal year ending December 31, 2020, the Compensation Committee retained achievement of target levels of Adjusted EBITDA as the sole
criteria for performance-based cash compensation, with a threshold of 50% of target award at 90% of the Adjusted EBITDA target, and a maximum of
150% of target award at 110% of the Adjusted EBITDA target (and linear interpolation within those ranges). Finally, the Compensation Committee set the
target value of performance-based cash compensation as a percentage of base salary, as follows:
Name
Mr. Allison
Mr. Poff
Mr. Gaffney
Mr. Tucker
Mr. Wattenbarger
Performance-Based Equity Compensation
Target % of Base Salary
100%
75%
75%
75%
75%
We believe compensation in the form of incentive equity awards aligns the interests of our named executive officers with the interests of our
shareholders, and rewards our named executive officers for superior corporate performance. We believe this form of compensation is particularly effective
for those individuals who have the most impact on the management and success of our business, providing them with a valuable long-term incentive while
providing us with a valuable retention tool through the use of vesting periods. We also believe that equity incentives are an important part of a competitive
compensation structure necessary to attract and retain talented named executive officers.
The performance-based equity component of our named executive officer compensation program is designed to provide our senior management
with performance-based award opportunities, to drive superior long-term performance and to align the interests of our senior management with those of our
shareholders.
For each named executive officer, the award opportunity for 2019 performance was based entirely on the achievement of Adjusted EBITDA as
described above in the description of “—Performance-Based Cash Compensation.”
The target amount for each performance-based equity plan is set as a fixed dollar amount and is based on the achievement of certain performance
objectives, subject to adjustment at the discretion of the Compensation Committee. At the October 2019 Compensation Committee meeting at which two
named executive officers were promoted, the Compensation Committee received an updated compensation report from FW Cook that indicated the
Company’s equity component of long-term compensation was substantially below market relative to its public company peers. In consultation with the
compensation committee, the Committee determined to revise the target for the 2019 plan in order to meet its compensation goals, setting the following
target value of equity grants as a fixed dollar amount, as follows:
Name
Mr. Allison
Mr. Poff
Mr. Gaffney
Mr. Tucker
Mr. Wattenbarger
$
Target $ Amount(1)
1,500,000
500,000
300,000
200,000
200,000
(1)
Our Chief Operating Officer, Mr. Bickham, and our Chief Strategy Officer, Darby Anderson, were named executive officers for 2019 and their target
dollar amounts were set at $550,000 and $250,000, respectively. For promoted named executive officers, the Compensation Committee determined
at the time of promotion that the target should be pro-rated at six months for their prior target opportunity and six months at their new target
opportunity.
As with the performance-based cash compensation, the Compensation Committee set a threshold of 50% payout at 90% of the Adjusted EBITDA
target, and a maximum of 150% payout at 110% of the Adjusted EBITDA target (and linear interpolation within those ranges). Since the Company
achieved Adjusted EBITDA in 2019 equal to 107% of the Adjusted EBITDA target, the dollar value of equity awarded to Mr. Allison was $2,025,000, and
the dollar value of equity awarded to each of Messrs. Poff, Gaffney, Tucker and Wattenbarger was $675,000, $405,000, $135,000 and $135,000,
respectively. The dollar values derived from the calculations set forth above were converted into equity using the closing price of the Company’s common
stock on August 6, 2020 and granted as restricted stock, vesting over 3 years on March 2 of 2021, 2022 and 2023.
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The amounts of these grants, which were made under the Company’s 2017 Omnibus Incentive Plan (the “2017 Plan”), were as follows:
Name
Restricted Stock Awards
Mr. Allison
Mr. Poff
Mr. Gaffney
Mr. Tucker
Mr. Wattenbarger
$
20,853
6,951
4,171
1,390
1,390
For the fiscal year ending December 31, 2020, the Compensation Committee retained achievement of target levels of Adjusted EBITDA as the sole
criteria for performance-based equity compensation, with a threshold of 50% of target grant at 90% of the Adjusted EBITDA target, and a maximum of
150% of target grant at 110% of the Adjusted EBITDA target (and linear interpolation within those ranges). Finally, the Compensation Committee also
retained the target value of equity grants as a fixed dollar amount, as follows:
Name
Mr. Allison
Mr. Poff
Mr. Gaffney
Mr. Tucker
Mr. Wattenbarger
Other Compensation
$
Target $ Amount(1)
1,500,000
500,000
300,000
200,000
200,000
In addition to the primary compensation elements discussed above, we provide our named executive officers with limited benefits and perquisites as
described below in footnote 4 to the 2019 Summary Compensation Table. We consider these additional benefits to be a part of a named executive officer’s
overall compensation. These benefits generally do not impact the level of other compensation paid to our named executive officers, due to the fact that the
incremental cost to us of these benefits and perquisites represents a small percentage of each named executive officer’s total compensation package. We
believe that these enhanced benefits and perquisites provide our named executive officers with security, convenience and support services that allow them
to focus attention on carrying out their responsibilities to us. In addition, we believe that these benefits and perquisites help us to be competitive and retain
talented executives.
In addition, we offer other employee benefits to our named executive officers for the purpose of meeting current and future health and security needs
for the named executive officers and their families. These benefits, which we generally offer to all eligible employees, include medical, dental and life
insurance benefits, short-term disability pay, long-term disability insurance, flexible spending accounts for medical expense reimbursements and a 401(k)
retirement savings plan, which matches 6% of each dollar of compensation contributed to the plan by the employee, up to the maximum allowed by the
Internal Revenue Service.
Change in Control and Severance
Each of our named executive officers is eligible to receive contractually-provided severance benefits pursuant to his employment agreement. These
severance benefits are generally intended to match the terms that we believe to be standard within the market, show the named executive officer that we
have made an investment in the named executive officer and provide stability for both us and the named executive officer in a competitive market for
qualified talent. We believe that providing severance protection to our named executive officers upon their involuntary termination of employment or self-
termination for good reason is an important retention tool that is necessary in the competitive marketplace for talented executives. We believe that the
amounts of these payments and benefits and the periods of time during which they would be provided are fair and reasonable. We generally do not take into
account any amounts that may be received by a named executive officer following termination of employment when establishing current compensation
levels. The terms of each arrangement were determined in negotiation with the applicable named executive officer in connection with his hiring or
continued employment and were not based on any set formula. Our equity award agreements with each of the named executive officers also generally
provide for unvested options or restricted stock to vest immediately upon a change in control of the Company, provided the executive officer is actively
employed by the Company as of the change in control.
We believe that these change in control and severance arrangements provide additional benefits to the Company by allowing us to receive certain
covenants from our named executive officers in partial consideration of the compensation to be received upon a change in control or termination without
Reasonable Cause. These covenants include agreements not to compete, agreements not to solicit our employees, customers, referral sources or other
business relation, agreements not to disclose certain confidential and proprietary information (including trade secrets) and agreements not to disparage the
Company. These covenants are described in further detail below under “—Potential Payments upon Termination or Change in Control.” None of our named
executive officers are entitled to a tax gross-up in connection with a change in control payment.
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Anti-Hedging of Company Stock
Pursuant to the Company’s Insider Trading Policy, directors, officers and employees are prohibited from:
•
•
•
•
•
•
directly or indirectly engaging in transactions designed to or have the effect of hedging or offsetting any decrease in the market value of
Company stock;
buying or selling put options, call options or other derivatives of Company stock,
executing short sales of Company stock;
holding Company stock in margin accounts;
pledging any Company stock as collateral for a loan; and
establishing standing and limit orders (other than standing and limit orders under approved Rule 10b5-1 plans) without obtaining the consent of
the Company’s Securities Trading Officer and the Board (or a duly appointed committee thereof).
Financial Restatements
The Compensation Committee has not adopted a policy with respect to whether we will make retroactive adjustments to any cash or equity-based
incentive compensation paid to named executive officers (or others) where the payment was predicated upon the achievement of financial results that were
subsequently the subject of a restatement.
In 2015, the SEC issued proposed rules regarding the adoption of “claw back” policies by publicly listed companies in accordance with the
requirements of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). If and when final SEC rules
implementing these requirements have become effective, publicly listed companies will be required to adopt a “claw back” policy providing for the
recovery of certain incentive-based compensation from the executive officers of the company in the event the company is required to restate its financials
as a result of material noncompliance of the company with any financial reporting requirements under the securities laws. The Company intends to adopt a
compensation recoupment policy that will comply with the requirements of the Dodd-Frank Act if and when such final rules have become effective.
Effect of Accounting and Tax Treatment on Compensation Decisions
Section 162(m) of the Internal Revenue Code of 1986 (“Section 162(m)”) generally disallows a corporate deduction for compensation over $1.0
million paid to the Company’s Chief Executive Officer and certain other executive officers, unless the compensation constitutes “qualified performance-
based compensation” within the meaning of Section 162(m). The Compensation Committee has historically considered the impact of Section 162(m) in the
design of its compensation strategies and intends to administer executive compensation programs in a manner that will preserve the deductibility of
compensation paid to our executive officers. However, the Compensation Committee believes that shareholder interests are best served if it retains
discretion and flexibility in awarding compensation to our named executive officers, even where the compensation paid under such programs may not be
fully deductible, and the Compensation Committee may approve the payment of compensation that is outside the deductibility limitations of Section
162(m). Moreover, this exception allowing the full deductibility of “qualified performance-based compensation” does not apply to compensation paid after
January 1, 2018 unless paid pursuant to a written binding contract that was in effect on November 2, 2017. While considering the tax implications of its
compensation decisions, the Compensation Committee believes its primary focus should be to attract, retain and motivate executives and to align the
executives’ interests with those of our stakeholders.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by the SEC rules with management.
Based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and its Proxy Statement for its 2020 annual meeting of
shareholders.
The foregoing report has been approved by all members of the Compensation Committee.
Steven I. Geringer (Chairman)
Mark L. First
Susan T. Weaver, M.D.
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2019 Summary Compensation Table
The following table provides information regarding the compensation earned by each of our named executive officers for the fiscal years ended
December 31, 2019, 2018 and 2017.
Non-Equity
Incentive
Plan
Compensation
($)
(g) (3)
Change in
Pension Value
and non-
Qualified
Deferred
Compensation
Earnings ($)
(h)
All Other
Compensation
($)
(i) (4)
Option
Awards ($)
(f) (2)
Name and Principal Position
(a)
Year
(b)
R. Dirk Allison
President and Chief Executive Officer
Brian Poff
EVP, Chief Financial Officer, Secretary
and Treasurer
Sean Gaffney(1)
EVP, Chief Legal Officer
David Tucker
EVP, Chief Development Officer
Michael Wattenbarger
EVP, Chief Information Officer
Salary ($)
(c)
620,064
588,701
520,432
386,307
369,614
332,307
196,154
2019 $
2018
2017
2019
2018
2017
2019
2019
240,919
2019
245,942
Bonus ($)
(d)
—
$
—
—
—
—
Stock
Awards ($)
(e)
719,996
367,509
350,000
224,970
94,503
434,989
344,450
$
—
1,426,904
310,068
—
522,054
83,725
1,049,384
625,000
540,000
551,250
291,750
253,125
267,750
168,750
291,520
818,108
114,500
256,940
818,108
128,542
Total ($)
(j)
1,992,513
2,944,699
1,753,247
930,801
1,264,979
1,144,075
1,774,614
27,453
21,585
21,497
27,774
25,683
25,304
15,876
17,639
1,482,686
16,622
1,466,154
—
$
—
—
—
—
(1) Mr. Gaffney’s employment began on April 29, 2019, his base salary represents the amount of base salary earned for the period beginning on his
employment commencement date through December 31, 2019.
This column discloses the grant date fair value of option awards calculated in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 718. The assumptions we used in valuing options are described under the caption “Stock Options
and Restricted Stock Awards” in Note 11 to our consolidated financial statements in this Annual Report on Form 10-K.
Reflects annual cash incentive awards earned pursuant to the Company’s annual bonus program. The amounts in this column for fiscal year 2019
were paid on August 11, 2020. For information regarding our annual bonus program, see “—Compensation Discussion and Analysis—Performance-
Based Cash Compensation.”
Other compensation for 2019 includes the following amounts:
(2)
(3)
(4)
Name and Principal Position
Matching
Contributions
(4-a)
Life Insurance
Premium
(4-b)
Personal Benefit
(4-c)
Reimbursed
Expense
(4-d)
Total All Other
Compensation
R. Dirk Allison
Brian Poff
Sean Gaffney
David Tucker
Michael Wattenbarger
$
—
—
—
459
1,140
$
12,096
3,318
3,895
2,498
90
$
14,157
23,256
11,196
13,736
14,365
$
1,200
1,200
785
946
1,027
27,453
27,774
15,876
17,639
16,622
(4-a) Matching contributions paid under the Company’s 401(k) plan to each of the named executive officers.
(4-b) Term life insurance and group term life premium paid by the Company for the benefit of the named executive officers.
(4-c) The amounts in this column represent the Company’s contribution to the executive’s health, dental and vision benefits, as applicable.
(4-d) The amounts in this column represent the reimbursement of cell phone allowance for each of the named executive officers.
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Grants of Plan-Based Awards in 2019
The following table sets forth each grant of plan-based awards to our named executive officers during 2019:
Name
(a)
R. Dirk Allison
Brian Poff
Sean Gaffney
David Tucker
Michael
Wattenbarger
Estimated Future Payouts Under Non-Equity
Incentive Plan (2)
Estimated Future Payouts Under
Equity Incentive Plan (3)
Grant Date
(b)
$
3/1/2019
Threshold
($)
(c)
312,500
Target ($)
(d)
625,000
$
Maximum
($)
(e)
937,500
$
Threshold
($)
(c)
400,000
$
Target ($)
(d)
800,000
$
Maximum
($)
(e)
$ 1,200,000
145,875
291,750
437,625
125,000
250,000
375,000
112,500
225,000
337,500
—
—
—
157,200
314,400
471,601
40,000
80,000
120,000
165,625
331,250
496,875
40,000
80,000
120,000
3/1/2019
4/29/2019
4/29/2019
3/1/2019
11/7/2019
11/7/2019
3/1/2019
11/7/2019
11/7/2019
All Other
Stock
Awards:
Number
of Shares
of Stock
or Unit (#)
All Other
Options
Awards:
Number of
Securities
Underlying
Options (#)
Exercise
or Base
Price of
Options
Awards
($/Sh)
Grant
Date Fair
Value of
Stock and
Option
Awards
($)(1)
(f)
(g)
(h)
(i)
10,827
3,383
5,000
1,083
2,500
563
2500
719,996
224,970
344,450
1,049,384
72,020
219,500
818,108
37,440
219,500
818,108
40,000
68.89
25,000
87.80
25000
87.80
(1)
(2)
(3)
This column discloses the grant date fair value of restricted stock and option awards calculated in accordance with FASB ASC Topic 718. The
assumptions we used in valuing the awards are described under the caption “Stock Options and Restricted Stock Awards” in Note 11 to our
consolidated financial statements in this Annual Report on Form 10-K.
Award made pursuant to the Company’s 2019 Performance-Based Cash Compensation Plan, and described in further detail above under “—
Compensation Discussion & Analysis—Performance-Based Cash Compensation.”
Award made pursuant to the Company’s 2019 Performance-Based Equity Compensation Plan, and described in further detail above under “—
Compensation Discussion & Analysis—Performance-Based Equity Compensation.”
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Outstanding Equity Awards at 2019 Fiscal Year End
The following table lists all outstanding equity awards held by our named executive officers as of December 31, 2019:
Number of Securities Underlying Unexercised Options (#)
Name
Exercisable
R. Dirk Allison
$
Brian Poff
Sean Gaffney
David Tucker
Michael Wattenbarger
87,500
16,641
7,986
18,750
2,000
4,494
2,054
7,500
—
—
—
—
—
—
Unexercisable
$
37,500 (1) $
8,320 (2)
15,972 (3)
56,250 (4)
10,000 (5)
2,246 (6)
4,107 (7)
22,500 (8)
Options
Exercise
Price ($)
19.71
34.05
37.25
37.25
18.33
34.05
37.25
37.25
Option
Expiration
Date
1/21/2026
3/3/2027
3/2/2028
3/2/2028
5/9/2026
3/3/2027
3/2/2028
3/2/2028
40,000 (9)
68.89
4/29/2029
687 (10)
1,266 (11)
25,000 (12)
1,125 (13)
25,000 (14)
34.05
37.25
87.80
52.50
87.80
3/3/2027
3/2/2028
11/7/2029
4/30/2028
11/7/2029
Number of
Shares or
Units of
Stock that
have not
Vested (#)
Market Value
of Shares or
Units of Stock
that have not
vested ($) (15)
23,330
2,268,143
11,832
1,150,307
5,000
486,100
6,412
623,375
3,513
341,534
(1) Mr. Allison’s unexercisable options vested on January 21, 2020.
(2) Mr. Allison’s unexercisable options vested on March 3, 2020.
(3) Mr. Allison’s unexercisable options vest in two equal installments on each of March 2, 2020 and 2021.
(4) Mr. Allison’s unexercisable options vest in three equal installments on each of March 2, 2020, 2021 and 2022.
(5) Mr. Poff’s unexercisable options vested on May 9, 2020.
(6) Mr. Poff’s unexercisable options vested on March 3, 2020.
(7) Mr. Poff’s unexercisable options vest in two equal installments on each of March 2, 2020 and 2021.
(8) Mr. Poff’s unexercisable options vest in three equal installments on each of March 2, 2020, 2021 and 2022.
(9) Mr. Gaffney’s unexercisable options vest in four equal installments on each of April 29, 2020, 2021, 2022 and 2023.
(10) Mr. Tucker’s unexercisable options vested on March 3, 2020.
(11) Mr. Tucker’s unexercisable options vest in two equal installments on each of March 2, 2020 and 2021.
(12) Mr. Tucker’s unexercisable options will vest in four equal installments on November 7, 2020, 2021, 2022 and 2023.
(13) Mr. Wattenbarger’s unexercisable options vest in three equal installments on April 30, 2020, 2021 and 2022.
(14) Mr. Wattenbarger’s unexercisable options will vest in four equal installments on November 7, 2020, 2021, 2022 and 2023.
(15) The value for Messrs. Allison, Poff, Gaffney, Tucker and Wattenbarger’s equals the number of shares of unvested restricted stock held by each of
Messrs. Allison, Poff, Gaffney, Tucker and Wattenbarger’s, respectively, as of December 31, 2019, multiplied by the market price of Company
common stock at the close of December 31, 2019, which was $97.22 per share.
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Option Exercises and Stock Vested During Fiscal Year 2019
Name
R. Dirk Allison
Brian Poff
Sean Gaffney
David Tucker
Michael Wattenbarger
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise (#)
25,000
28,000
—
2,009
375
$
Value Realized
on Exercise
($)(1)
1,852,250
1,596,560
—
93,248
6,716
$
Number of
Shares
Acquired on
Vesting (#)
Value Realized
on Vesting
($)(2)
$
9,215
7,604
—
1,219
150
605,523
510,066
—
100,115
10,185
(1)
(2)
Value realized upon the exercise of option awards is based on the difference between the actual price at which the exercised shares were sold and the
exercise price of the options.
Value realized upon the vesting of stock awards is based on the closing price of our common stock on the applicable vesting date.
Pension Benefits
None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit pension plans sponsored
by us.
Nonqualified Deferred Compensation
None of our named executive officers participates in or has account balances in non-qualified deferred compensation plans sponsored by us.
Employment Agreements
We have entered into employment agreements with each of our named executive officers.
Employment Agreement with Mr. Allison
We have entered into an amended and restated employment agreement with Mr. Allison effective November 5, 2018. The initial term of Mr.
Allison’s agreement is four years from the date of Mr. Allison’s initial employment with the Company, which is February 29, 2016; after the initial term,
the agreement automatically renews for successive one-year terms, unless either party provides at least 180 days’ notice prior to the expiration of the
applicable term of its intention not to renew the agreement. Under the agreement, Mr. Allison is entitled to an annual base salary of $600,000, subject to
annual review and adjustment upward by our Compensation Committee thereafter. In addition, in the event that the Company attains a certain percentage of
its annual performance target, which target is determined by the Board in its sole discretion, Mr. Allison is eligible, at the discretion of the Compensation
Committee, to receive: (1) stock-based compensation with a target of up to 150% of his annual base salary, and (2) cash-based compensation with a target
of up to 150% of his annual base salary. Mr. Allison is entitled to receive benefits paid to similarly situated employees, which include participation in
health, disability and vacation plans. Mr. Allison is entitled to receive severance benefits upon termination of employment as described below under “—
Potential Payments upon Termination or Change in Control.”
Employment Agreement with Mr. Poff
We entered into an amended and restated employment agreement with Mr. Poff effective November 5, 2018. The initial term of Mr. Poff’s
agreement is four years from the date of Mr. Poff’s initial employment with the Company, which is May 10, 2016; after the initial term, the agreement
automatically renews for successive one-year terms, unless either party provides at least 30 days’ notice prior to the expiration of the applicable term of its
intention not to renew the agreement. Under the agreement, Mr. Poff is entitled to an annual base salary of $375,000, subject to annual review and
adjustment upward by our Compensation Committee thereafter. In addition, at the discretion of the Compensation Committee, he is eligible to receive an
annual bonus in an amount equal to up to 75% of his annual base salary, based on the Company’s evaluation of his performance compared to established
Company and/or individual objectives at the target levels, and up to a percentage of his annual base salary to be determined for performance against
established objectives at the maximum levels. Mr. Poff is entitled to receive benefits paid to similarly situated employees, which include, at a minimum,
participation in health, disability and vacation plans, as well as receipt of a life insurance policy with a death benefit of up to five times his base salary,
although we are not required to pay more than 3% of Mr. Poff’s base salary for such insurance policy. Mr. Poff is entitled to receive severance benefits
upon termination of employment as described below under “—Potential Payments upon Termination or Change in Control.”
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Employment Agreement with Mr. Gaffney
We entered into an employment agreement with Mr. Gaffney effective April 29, 2019. The initial term of Mr. Gaffney’s agreement is one year
ending on the first anniversary of the effective date of the agreement, which is April 29, 2020; after the initial term, the agreement automatically renews for
successive one-year terms, unless either party provides at least 30 days’ notice prior to the expiration of the applicable term of its intention not to renew the
agreement. Under the agreement, Mr. Gaffney is entitled to an annual base salary of $300,000, subject to annual review and adjustment upward by our
Compensation Committee thereafter. In addition, at the discretion of the Compensation Committee, he is eligible to receive an annual bonus in an amount
equal to up to 75% of his annual base salary, based on the Company’s evaluation of his performance compared to established Company and/or individual
objectives at the target levels, and up to a percentage of his annual base salary to be determined for performance against established objectives at the
maximum levels. Mr. Gaffney is entitled to receive benefits paid to similarly situated employees, which include, at a minimum, participation in health,
disability and vacation plans, as well as receipt of a life insurance policy with a death benefit of up to five times his base salary, although we are not
required to pay more than 3% of Mr. Gaffney’s base salary for such insurance policy. Mr. Gaffney is entitled to receive severance benefits upon termination
of employment as described below under “—Potential Payments upon Termination or Change in Control.”
Employment Agreement with Mr. Tucker
We entered into an amended and restated employment agreement with Mr. Tucker effective November 7, 2019. The initial term of Mr. Tucker’s
agreement is one year ending on the first anniversary of the effective date of the agreement, which is November 7, 2020; after the initial term, the
agreement automatically renews for successive one-year terms, unless either party provides at least 30 days’ notice prior to the expiration of the applicable
term of its intention not to renew the agreement. Under the agreement, Mr. Tucker is entitled to an annual base salary of $295,000, subject to annual review
and adjustment upward by our Compensation Committee thereafter. In addition, at the discretion of the Compensation Committee, he is eligible to receive
an annual bonus in an amount equal to up to 75% of his annual base salary, based on the Company’s evaluation of his performance compared to established
Company and/or individual objectives at the target levels, and up to a percentage of his annual base salary to be determined for performance against
established objectives at the maximum levels. Mr. Tucker is entitled to receive benefits paid to similarly situated employees, which include, at a minimum,
participation in health, disability and vacation plans, as well as receipt of a life insurance policy with a death benefit of up to five times his base salary,
although we are not required to pay more than 3% of Mr. Tucker’s base salary for such insurance policy. Mr. Tucker is entitled to receive severance benefits
upon termination of employment as described below under “—Potential Payments upon Termination or Change in Control.”
Employment Agreement with Mr. Wattenbarger
We entered into an amended and restated employment agreement with Mr. Wattenbarger effective November 7, 2019. The initial term of Mr.
Wattenbarger’s agreement is one year ending on the first anniversary of the effective date of the agreement, which is November 7, 2020; after the initial
term, the agreement automatically renews for successive one-year terms, unless either party provides at least 30 days’ notice prior to the expiration of the
applicable term of its intention not to renew the agreement. Under the agreement, Mr. Wattenbarger is entitled to an annual base salary of $295,000, subject
to annual review and adjustment upward by our Compensation Committee thereafter. In addition, at the discretion of the Compensation Committee, he is
eligible to receive an annual bonus in an amount equal to up to 75% of his annual base salary, based on the Company’s evaluation of his performance
compared to established Company and/or individual objectives at the target levels, and up to a percentage of his annual base salary to be determined for
performance against established objectives at the maximum levels. Mr. Wattenbarger is entitled to receive benefits paid to similarly situated employees,
which include, at a minimum, participation in health, disability and vacation plans, as well as receipt of a life insurance policy with a death benefit of up to
five times his base salary, although we are not required to pay more than 3% of Mr. Wattenbarger’s base salary for such insurance policy. Mr. Wattenbarger
is entitled to receive severance benefits upon termination of employment as described below under “—Potential Payments upon Termination or Change in
Control.”
Restrictive Covenants
Mr. Allison’s right to receive severance benefits is conditioned on strict compliance with certain covenants, including nondisclosure of certain
confidential and proprietary information, for two years (or for three years upon a Change of Control) after Mr. Allison’s termination:
•
•
•
•
noncompetition within 50 miles of any of our locations;
nonsolicitation of business from any of our customers;
nonsolicitation of our employees, customers, referral sources, suppliers, vendors, licensees or other business relations of the Company; and
nondisparagement of the Company.
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The right of the other named executive officers to receive severance benefits is conditioned on strict compliance with certain covenants, including
nondisclosure of certain confidential and proprietary information, for one year (or for two years upon a Change of Control) after the executive’s
termination:
•
•
•
•
noncompetition within 50 miles of any of our locations;
nonsolicitation of business from any of our customers;
nonsolicitation of our employees, customers, referral sources, suppliers, vendors, licensees or other business relations of the Company; and
nondisparagement of the Company.
Potential Payments upon Termination or Change in Control
We have entered into employment agreements with the named executive officers described above, that provide for payments and benefits in the
event of termination of employment. Under the employment agreements, each named executive officer is entitled to severance benefits if (i) we terminate
his employment other than for Reasonable Cause; (ii) if such executive officer resigns with Good Reason; and (iii) in the event of his death or suffering a
physical or mental Disability. The named executive officers are entitled to severance enhancements in the event they experience a termination by the
Company without Reasonable Cause or if they resign with Good Reason in connection with a Change in Control.
Reasonable Cause
Under the employment agreements for the named executive officers, Reasonable Cause is defined as:
•
•
•
•
•
•
•
material breach or omission by the executive of any of his duties or obligations under his employment agreement, if uncured after notice;
the executive willfully engaging in any action that materially damages, or that may reasonably be expected to materially damage, the Company
or our business or goodwill;
any breach by the executive officer of his fiduciary duties;
commission of any act involving fraud, the misuse or misappropriation of our money or property, any felony, the habitual use of drugs or other
intoxicants or chronic absenteeism;
gross negligence or willful misconduct by the executive;
gross insubordination by the executive, including intentional disregard of any reasonable directive from the Chief Executive Officer, or Board
(solely the Board, in the case of Mr. Allison); or
failure to perform any material directive in a timely and effective manner, if uncured after notice.
Good Reason
Under the employment agreement for Mr. Allison, Good Reason is defined as:
•
•
•
•
•
any reduction in base salary;
any material reduction in employment duties and responsibilities;
removal by the Company as Chief Executive Officer or as a member of the Board;
any material breach by the Company of any material term of Mr. Allison’s employment agreement, other than a breach which is remedied by
the Company within 10 days after receipt of written notice given by the executive;
a change in his direct reporting duty to a person other than the Board;
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•
•
the relocation of the Chief Executive Officer’s principal office to a location more than 50 miles from Frisco, Texas; or
if Addus HomeCare, Inc. were to become a direct or indirect wholly-owned subsidiary of a single operating company or other entity (the
“Operating Company”) and Mr. Allison were not to be employed as the Chief Executive Officer and a member of the board of directors (or
other analogous governing body) of the Operating Company.
Under the employment agreements for the other named executive officers, Good Reason is defined as:
•
•
•
•
•
any reduction in base salary;
any material reduction in employment duties and responsibilities;
any willful breach by the Company of any material term of the agreement, other than a breach which is remedied by the Company within 10
days after receipt of written notice given by the executive;
a change in direct reporting duty to a person other than the Chief Executive Officer or the Board; or
the relocation of the executive officer’s principal office to a location more than 50 miles from Frisco, Texas.
Disability
Under the employment agreements for our named executive officers, Disability is defined as the named executive officer suffering a physical or
mental disability (a “Disability”) so that such executive is or, in the opinion of an independent physician retained by the Company for purposes of this
determination will be, unable to perform his duties in a manner satisfactory to the Company for a period of ninety days out of any one hundred eighty
consecutive-day period.
Severance Benefits
If we terminate a named executive officer’s employment other than for Reasonable Cause or the executive resigns for Good Reason (as defined in
the respective named executive officers’ employment agreement), then, generally, such executive is entitled to the following:
•
•
Mr. Allison — (i) unpaid base salary for any period prior to the effective date of termination, (ii) a pro rata payment of bonus for any period
prior to the effective date of termination, and (iii) accrued but unpaid benefits, including vacation accrued pursuant to the Company’s vacation
policy. In addition, subject to strict compliance with the noncompetition, confidentiality and other covenants, Mr. Allison would receive (i)
severance pay equal to his base cash compensation, which is defined as the highest base salary in effect for the executive, payable in equal
installments for 24 months following termination, (ii) any unpaid bonus for a completed performance period that the Executive would have
earned had he remained employed through the date of payment, and (iii) after-tax cash payments equal to the Company’s share of COBRA
premiums for a period of up to 2 years.
Other named executive officers — (i) unpaid base salary for any period prior to the effective date of termination, (ii) a pro rata payment of
bonus for any period prior to the effective date of termination, and (iii) accrued but unpaid benefits, including accrued vacation time and
unused holidays. In addition, subject to strict compliance with the noncompetition, confidentiality and other covenants, the named executive
officer would receive (i) severance pay equal to his base cash compensation, which is defined as the highest base salary in effect for the
executive, payable in equal installments for 12 months following termination; plus (ii) after-tax cash payments equal to the Company’s share of
COBRA premiums for a period of 12 months.
Change in Control Severance Enhancements
The named executive officers are entitled to severance enhancements in the event they experience a termination by the Company without
Reasonable Cause or resign for Good Reason in connection with a Change in Control (each as defined in their respective agreements), as follows:
•
Mr. Allison — if Mr. Allison is terminated by the Company without Reasonable Cause or resigns for Good Reason within six months prior to or
one year following a Change in Control of the Company, then he would receive, in lieu of the amounts described above in “Severance Benefits”
(and less any such severance amounts already received), (i) an amount equal to 36 months of his annual cash compensation, which is defined as
the sum of the highest base salary in effect for the executive, plus the greater of the prior year’s bonus or the annualized amount of the
executive’s target bonus for the current year, payable in equal installments for 24 months following termination, (ii) any unpaid bonus for a
completed performance period that the Executive would have earned had he remained employed through the date of payment, and (iii) after-tax
cash payments equal to the Company’s share of 36 months of COBRA premiums, payable in equal installments for two years following
termination.
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•
The other named executive officers — if the executive is terminated by the Company without Reasonable Cause or resigns for Good Reason
within six months prior to or one year following a Change in Control of the Company, then he would receive, in lieu of the amounts described
above in “Severance Benefits” (and less any such severance amounts already received), (i) an amount equal to 24 months of his annual cash
compensation, which is defined as the sum of the highest base salary in effect for the executive, plus the greater of the prior year’s bonus or the
annualized amount of the executive’s target bonus for the current year, payable in equal installments for 12 months following termination, (ii) a
pro rata portion of the bonus he would have been entitled to receive had his employment not been terminated, plus (iii) after-tax cash payments
equal to the Company’s share of 24 months of COBRA premiums, payable in equal installments for one year following termination.
Treatment of Equity Awards
Upon a Change in Control or the Executive’s Death or Disability
Pursuant to their award agreements, all of our named executive officers are also entitled to immediate vesting of their unvested options and
restricted stock upon a Change in Control of the Company, provided the executive officer is actively employed by the Company as of the Change in
Control, or the named executive officer’s death or Disability (each as defined in the 2009 Plan and the 2017 Plan, as applicable).
Post-Termination Option Exercise Periods
Under the 2009 Plan, options generally remain exercisable for a maximum of three months following the named executive officer’s termination for
any reason, except (i) all options are forfeited upon a termination for Cause, (ii) vested options remain exercisable for a period of six months following
termination in the event of the named executive officer’s Retirement and (iii) vested options remain exercisable for a period of twelve months following
termination in the event of the named executive officer’s death or Disability (each term as defined in the 2009 Plan).
Under the 2017 Plan, options generally remain exercisable for a maximum of three months following the named executive officer’s termination for
any reason, except (i) all options will be forfeited upon a termination for Cause, (ii) vested options will remain exercisable for a period of six months
following termination in the event of the named executive officer’s Retirement and (iii) vested options will remain exercisable for a period of twelve
months following termination in the event of the named executive officer’s death or Disability (each term as defined in the 2017 Plan).
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Potential Payments upon Termination or Change in Control Table
The following table sets forth information concerning the payments that would be received by each named executive officer upon various
termination of employment scenarios, assuming the termination occurred on December 31, 2019. The table below only shows additional amounts that the
named executive officers would be entitled to receive upon termination, and does not show other items of compensation that may be earned and payable at
such time such as earned but unpaid base salary, bonuses or benefits:
Name
Dirk Allison (1)
Benefits
Payments on
Termination
without
Reasonable
Cause or for
Good
Reason ($)
Payments on
Termination
without
Reasonable
Cause, or for
Good Reason,
in Connection
with a Change
in Control ($)
Disability ($)
Death ($)
Brian Poff (2)
Sean Gaffney (3)
David Tucker (4)
Michael Wattenbarger (5)
Severance
Extension of Benefits
$
3,475,000
24,042
$
6,150,000
36,063
-
-
-
-
Value of Accelerated Vesting of Equity
Awards
Life Insurance Benefit Paid by Insurance
Company
Total
Severance
Extension of Benefits
Value of Accelerated Vesting of Equity
Awards
Life Insurance Benefit Paid by Insurance
Company
Total
Severance
Extension of Benefits
Value of Accelerated Vesting of Equity
Awards
Life Insurance Benefit Paid by Insurance
Company
Total
Severance
Extension of Benefits
Value of Accelerated Vesting of Equity
Awards
Life Insurance Benefit Paid by Insurance
Company
Total
Severance
Extension of Benefits
Value of Accelerated Vesting of Equity
Awards
Life Insurance Benefit Paid by Insurance
Company
Total
-
10,031,495
10,031,495
10,031,495
-
3,499,042
-
16,217,558
-
10,031,495
-
10,031,495
930,750
17,195
1,861,500
34,391
-
-
-
-
-
3,676,709
3,676,709
3,676,709
-
947,945
468,750
11,196
-
5,572,600
1,050,000
22,391
-
3,676,709
-
3,676,709
-
-
-
-
-
1,619,300
1,619,300
1,619,300
-
479,946
489,500
12,021
-
2,691,691
1,378,801
24,042
-
1,619,300
-
1,619,300
-
-
-
-
-
978,194
978,194
978,194
-
501,521
503,542
12,032
-
2,381,037
1,412,500
24,064
-
978,194
-
978,194
-
-
-
-
-
627,344
627,344
627,344
-
515,574
-
2,063,908
-
627,344
-
627,344
(1)
(2)
Represents amounts Mr. Allison would be entitled to receive pursuant to his employment agreement and equity award agreements. See “—
Employment Agreements” and “—Potential Payments upon Termination or Change in Control.”
Represents amounts Mr. Poff would be entitled to receive pursuant to his employment agreement and equity award agreements. See “—Employment
Agreements” and “—Potential Payments upon Termination or Change in Control.”
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(3)
(4)
(5)
Represents amounts Mr. Gaffney would be entitled to receive pursuant to his employment agreement and equity award agreements. See “—
Employment Agreements” and “—Potential Payments upon Termination or Change in Control.”
Represents amounts Mr. Tucker would be entitled to receive pursuant to his employment agreement and equity award agreements. See “—
Employment Agreements” and “—Potential Payments upon Termination or Change in Control.”
Represents amounts Mr. Wattenbarger would be entitled to receive pursuant to his employment agreement and equity award agreements. See “—
Employment Agreements” and “—Potential Payments upon Termination or Change in Control.”
Amounts of unpaid pro rata bonus are calculated using the non-discretionary bonuses actually paid for 2019 performance. Since Mr. Allison’s
agreement provides for a performance based equity bonus, his bonus amount includes the value of his performance based equity bonus. The employment
agreements for the remaining named executive officers only provide for a cash bonus, so their severance amounts are not calculated to include their equity
bonuses.
Amounts of prior year’s bonuses are calculated using the bonus actually paid (if any) for 2018 performance.
Compensation Risks
Based on our review, we believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have
a material adverse effect on the Company. In reaching this conclusion, with the oversight of the Compensation Committee, we have reviewed: our
employee compensation policies and practices, our mixture of cash and equity opportunities, our use of short-term and long-term performance-based
awards, use of financial metrics that are easily capable of review and avoidance of uncapped rewards.
Pay Ratio
As required by Section 953(b) of the Dodd-Frank Act and Item 402(u) of Regulation S-K, we are providing the following information about the
relationship of the annual total compensation of our employees and the annual total compensation of Mr. R. Dirk Allison, our President and Chief
Executive Officer at December 31, 2019. Our Chief Executive Officer’s total 2019 compensation was $1,992,513 as reported in the 2019 Summary
Compensation Table above, and the annual total compensation of our median employee was $10,133. Accordingly, our 2019 CEO to Median Employee
Pay Ratio was 197:1. Each individual’s total annual compensation can be comprised of different compensation elements and is dependent on where the
individual works.
In accordance with Instruction 2 to Item 402(u) of Regulation S-K, we are using the same “median employee” identified in 2018 in our 2019 pay
ratio calculation, as we believe that there has been no change in our employee population or employee compensation arrangements that we believe would
result in a significant change to our pay ratio disclosure for 2019. See our 2019 Proxy Statement for information regarding the process we utilized to
identify our “median employee.” We estimated the annual total compensation for that employee by applying the same rules as used for determining total
compensation for the named executive officers as reported in the 2019 Summary Compensation Table.
Please keep in mind that under the SEC’s rules and guidance, there are numerous ways to determine the compensation of a company’s median
employee, including the employee population sampled, the elements of pay and benefits used, any assumptions made and the use of statistical sampling. In
addition, no two companies have identical employee populations or compensation programs, and pay, benefits and retirement plans differ by country even
within the same company. As such, our pay ratio may not be comparable to the pay ratio reported by other companies.
2019 Director Compensation
Consistent with the Company’s independent director compensation policy, in 2019, our independent directors received an annual retainer of $45,000
for service on the Company’s Board, $1,500 per in-person scheduled board meeting (whether attended in person or telephonically) and $750 per telephonic
board meeting. The Chairman of the Board received an additional retainer of $25,000.
In addition, in 2019, the chairmen of the Company’s Audit Committee, Compensation Committee, Nominating and Corporate Governance
Committee and Government Affairs Committee received an additional annual retainer of $25,000, $10,000, $7,500 and $10,000, respectively. Directors
who served on the Audit Committee received $1,500 per Audit Committee meeting attended and independent directors who served on other committees
received $1,000 per committee meeting attended. Independent directors were also reimbursed for reasonable expenses incurred in attending Board
meetings, committee meetings and shareholder meetings.
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In addition, during 2019, each independent director received an annual grant of restricted shares of the Company’s common stock valued at
approximately $75,024, which was awarded following the Company’s annual meeting of shareholders. Each grant of restricted stock to an independent
director vests on the first anniversary of the date of issuance.
The foregoing independent director compensation is subject to review and adjustment on the recommendation of our Nominating and Corporate
Governance Committee.
The following information sets forth the compensation paid to our directors, whose compensation is not described above, for the year ended
December 31, 2019:
Name (a) (1)
Steven I. Geringer (2)
Michael Earley (3)
Darin J. Gordon (4)
Jean Rush (5)
Mark L. First (6)
Susan T. Weaver (7)
$
Fees Earned or
Paid in Cash ($)
Stock Awards
($) (1)
Total ($)
$
99,500
87,250
74,750
64,750
63,750
53,750
$
75,024
75,024
75,024
75,024
75,024
75,024
174,524
162,274
149,774
139,774
138,774
128,774
(1)
(2)
(3)
(4)
(5)
(6)
(7)
This column discloses the grant date fair value of stock awards calculated in accordance with FASB ASC Topic 718. The assumptions we used in
valuing equity incentives are described under the caption “Stock Options and Restricted Stock Awards” in Note 11 to our consolidated financial
statements in this Annual Report on Form 10-K.
As of December 31, 2019, Mr. Geringer held 1,071 unvested restricted shares.
The cash fees owed to Mr. Earley were paid to Pelican Advisory LLC, a limited liability company owned by Mr. Earley and the stock awards
granted to Mr. Earley were made to him directly as an individual. As of December 31, 2019, Mr. Earley held 1,071 unvested restricted shares.
As of December 31, 2019, Mr. Gordon held 1,071 unvested restricted shares.
As of December 31, 2019, Ms. Rush held 1,071 unvested restricted shares.
The cash fees owed to Mr. First were paid to an affiliate of the Eos Funds and the stock award granted to Mr. First were made to him directly as an
individual. As of December 31, 2019, Mr. First held 1,071 unvested restricted shares.
As of December 31, 2019, Dr. Weaver held 1,071 unvested restricted shares.
Compensation Committee Interlocks and Insider Participation
During 2019, Mr. Geringer, Mr. First and Dr. Weaver served on our Compensation Committee. None of the members of the Compensation
Committee has been an officer or employee of the Company. None of our executive officers serves on the board of directors or compensation committee (or
other board committee performing equivalent functions) of an entity that has an executive officer serving as a member of our Board on our Compensation
Committee.
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents securities authorized for issuance under our equity compensation plans at December 31, 2019:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Beneficial Ownership Table
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options,
warrants and rights
$
$
647,899
—
647,899
$
$
37.43
—
37.43
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities
reflected in column(a))
681,420
$
—
681,420
$
The following table sets forth information regarding beneficial ownership of our common stock, as of July 31, 2020, by the following:
•
•
•
•
each person, or group of affiliated persons, who is known by us to beneficially own 5% or more of any class of our voting securities;
each of our directors;
each of our named executive officers; and
all directors and executive officers as a group.
Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment
power of a security, and includes shares underlying options and warrants that are currently exercisable or exercisable within 60 days after the measurement
date. The information in the table below is based on information supplied by our directors and executive officers and public filings.
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Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole investment and voting power with
respect to their shares, except where community property laws may apply. Unless otherwise indicated, we deem shares of common stock subject to options
that are exercisable within 60 days of July 31, 2020 to be outstanding and beneficially owned by the person holding the options for the purpose of
computing percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the ownership percentage of any
other person. As of July 31, 2020, we did not have any warrants issued or outstanding. The percentage of shares beneficially owned is based on 15,664,952
shares of our common stock outstanding as of July 31, 2020. Except as otherwise indicated, the address of each person or entity named below is the address
of the Company, 6303 Cowboys Way, Suite 600, Frisco, Texas 75034.
Name of Beneficial Owner
Number of Shares
Beneficially Owned
Percent of Class
BlackRock (1)
Eos Funds (2)
The Vanguard Group (3)
Dimensional Fund Advisors LP (4)
TimeSquare Capital Management, LLC (5)
R. Dirk Allison (6)
Brian Poff (7)
Sean Gaffney (8)
David Tucker (9)
Michael Wattenbarger (10)
Darby Anderson (11)
Laurie Manning (12)
Brad Bickham (13)
Michael Earley
Mark L. First (2)
Steven I. Geringer
Darin J. Gordon
Jean Rush
Susan T. Weaver, M.D.
All directors and executive officers as a group (14 persons)
2,034,306
1,041,638
877,979
786,316
754,035
223,127
52,571
14,663
7,826
3,795
86,563
35,964
55,430
10,790
1,061,860
20,222
5,536
1,962
5,036
1,585,345
13.0%
6.6%
5.6%
5.0%
4.8%
1.4%
*
*
*
*
*
*
*
*
6.8%
*
*
*
*
9.9%
*
(1)
(2)
(3)
(4)
(5)
Less than one percent.
The information with respect to BlackRock, Inc. is based solely on its Schedule 13G/A filed with the SEC on February 4, 2020. BlackRock, Inc.
possesses sole voting power of 2,014,864 shares of common stock and sole dispositive power over 2,034,306 shares of common stock. The address
for BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
The information with respect to Eos Funds is based solely on its Schedule 13G/A filed with the SEC on February 11, 2020. The holdings of the Eos
Funds consist of 381,593 shares of common stock held by ECP Helios Partners III, L.P. (“Helios III”), 339,854 shares held by ECP General III, L.P.
(“General III”) and 320,191 shares held by Eos Partners SBIC III, L.P. (“SBIC III”). ECP III, LLC is the general partner of General III. Eos
Hyperion GP, LLC is the general partner of Helios III. Eos General, L.L.C. is the general partner of Eos Partners, L.P., which is the managing
member of Eos SBIC General III, L.L.C., the general partner of SBIC III. Eos Management, L.P. and its affiliates are collectively referred to as the
Eos Funds. As a managing director of Eos Management, L.P. and its affiliates, Mr. First may be deemed to share beneficial ownership of the shares
of common stock owned by the Eos Funds. Mr. First disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest
therein. Mr. First owns 20,222 shares of common stock directly. The address of each of the Eos Funds is 437 Madison Avenue, 14th Floor, New
York, New York 10022.
The information with respect to The Vanguard Group is based solely on its Schedule 13G filed with the SEC on February 12, 2020. The Vanguard
Group possesses sole voting power of 26,651 shares of common stock, shared voting power of 951 shares of common stock, sole dispositive power
over 852,195 shares of common stock and shared dispositive power over 25,784 shares of common stock. The address for The Vanguard Group is
100 Vanguard Blvd., Malvern, Pennsylvania 19355.
The information with respect to Dimensional Fund Advisors LP is based solely on its Schedule 13G/A filed with the SEC on February 12, 2020.
Dimensional Fund Advisors LP possesses sole voting power of 741,073 shares of common stock and sole dispositive power over 786,316 shares of
common stock. The address for Dimensional Fund Advisors LP is Building One, 6300 Bee Cave Road, Austin, Texas 78746.
The information with respect to TimesSquare Capital Management, LLC is based solely on its Schedule 13G filed with the SEC on February 14,
2020. TimeSquare Capital Management, LLC possesses sole voting power of 754,035 shares on common stock and sole dispositive power over
754,035 shares of common stock. The address for TimeSquare Capital Management, LLC is 7 Times Square, 42nd Floor, New York, NY 10036.
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(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Includes 178,433 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 10,506 shares of
unvested restricted stock, which have various vesting dates.
Includes 37,848 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 3,100 shares of
unvested restricted stock, which have various vesting dates.
Includes 10,000 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 3,750 shares of
unvested restricted stock, which have various vesting dates.
Includes 1,320 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 5,507 shares of unvested
restricted stock, which have various vesting dates.
Includes 375 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 3,175 shares of unvested
restricted stock, which have various vesting dates.
Includes 60,499 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 2,469 shares of
unvested restricted stock, which have various vesting dates.
Includes 24,108 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 7,469 shares of unvested
restricted stock, which have various vesting dates.
Includes 34,108 shares subject to options which are currently exercisable or exercisable within 60 days of July 31, 2020 and 8,934 shares of unvested
restricted stock, which have various vesting dates.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Policies and Procedures for Related Party Transactions
Our written Code of Conduct provides that our directors, officers and employees are not permitted to enter into a related person transaction with us
without the prior consent of our Audit Committee, or other independent committee of our Board in the event it is inappropriate for our Audit Committee to
review such transaction due to a conflict of interest. In addition, the charter of our Audit Committee states that the Audit Committee shall review and
approve all related person transactions. Any request for us to enter into a transaction with an executive officer, director, nominee for director, principal
shareholder, or any of such persons’ immediate family members or affiliates, or our employees, in which the amount involved may exceed $60,000, will
first be presented to our Audit Committee or such other committee for review, consideration and approval. All of our directors, officers and employees are
required to report any such related person transaction. In approving or rejecting the proposed agreement, our Audit Committee or such other committee will
consider the facts and circumstances available and deemed relevant, including, but not limited to, the risks, costs and benefits to us, the terms of the
transaction, the availability of other sources for comparable services or products and, if applicable, the impact on a director’s independence. Our Audit
Committee or such other committee will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best
interests, as our Audit Committee or such other committee determines in the good faith exercise of its discretion. Under our Code of Conduct, if we should
discover related person transactions that have not been approved, the Audit Committee or such other committee will be notified and will determine the
appropriate action, including ratification, rescission or amendment of the transaction. Notwithstanding the foregoing, compensatory transactions with our
related persons will be reviewed by our Compensation Committee.
Certain Relationships and Related Party Transactions
Other than as disclosed below, since January 1, 2019, there has not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or are a party in which the amount involved exceeded or exceeds $60,000 and in which any of our directors, executive
officers, holders of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will
have a direct or indirect material interest, other than compensation arrangements with directors and executive officers, which are described where required
under the captions “Executive Officers” and “Executive Compensation” appearing elsewhere in this Annual Report on Form 10-K, and the transactions
described below.
Limitation of Liability and Indemnification
Our amended and restated certificate of incorporation (the “Certificate of Incorporation”) contains provisions that limit the liability of our directors
for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our shareholders for
monetary damages for any breach of fiduciary duties as directors, except liability for the following:
•
•
•
•
any breach of their duty of loyalty to our Company or our shareholders;
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation
Law; and
any transaction from which the director derived an improper personal benefit.
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Our Bylaws provide that we are required to indemnify our directors and officers and may indemnify our employees and other agents to the fullest
extent permitted by Delaware law. Our Bylaws also provide that we will advance expenses incurred by a director or officer in advance of the final
disposition of any action or proceeding and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising
out of his or her actions in that capacity, regardless of whether our Bylaws would otherwise permit indemnification. We believe that these provisions are
necessary to attract and retain qualified directors and officers. We also maintain directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in our Certificate of Incorporation and Bylaws may discourage shareholders from bringing
a lawsuit against our directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against our directors and
officers, even though an action, if successful, might benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to
the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.
We are party to indemnification agreements with each of R. Dirk Allison, Michael Earley, Mark L. First, Steven I. Geringer, Darin J. Gordon, Jean
Rush and Susan T. Weaver, M.D., in their capacities as officers and directors, and with certain other of our former directors and officers (each, an
indemnitee). Pursuant to these agreements, we have agreed to hold each indemnitee harmless and indemnify him to the fullest extent permitted by law
against all expenses, judgments, penalties, fines and amounts paid in settlement including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of the indemnitee. We are not obligated to make any payment to any indemnitee that is finally determined to be unlawful. In
respect of any threatened, pending or completed proceeding in which we are jointly liable with an indemnitee, we will pay the entire amount of any
judgment or settlement without requiring the indemnitee to contribute. We will advance, to the extent permitted by law, all expenses incurred by or on
behalf of an indemnitee in connection with a proceeding. No amendment, alteration or repeal of our Certificate of Incorporation, our Bylaws or the
indemnification agreement with any indemnitee will limit any right of that indemnitee in respect of any action taken or omitted by that indemnitee prior to
such amendment. We anticipate that we will enter into similar indemnification agreements with any new member elected to our Board. With respect to Mr.
First and a certain former officer, we have agreed that, where the indemnitee has certain rights to indemnification, advancement of expenses and/or
insurance provided by any of the Eos Funds or their affiliates, we will be the indemnitor of first resort, we will be required to advance the full amount of
expenses incurred by the indemnitee, and we will waive and release the Eos Funds and their affiliates from any and all claims for contribution, subrogation
or any other recovery of any kind.
At present, we are not aware of any pending litigation or proceeding involving any of our directors, officers, employees or agents in their capacity as
such for which indemnification will be required or permitted. In addition, we are not aware of any other threatened litigation or proceeding that may result
in a claim for indemnification by any director or officer.
We have been informed that, in the opinion of the SEC, any indemnification of directors or officers for liabilities arising under the Securities Act of
1933, as amended, is against public policy and therefore unenforceable.
Other Relationships
Emily Zoccoli serves as the Company’s HR Director – HRIS, Analytics, and Integration. Ms. Zoccoli earned total compensation in respect of base
salary and bonus of approximately $109,000 for her services in 2019. Ms. Zoccoli also receives certain other benefits customary to similar positions within
the Company. Ms. Zoccoli’s father, James “Zeke” Zoccoli, served as our Executive Vice President and Chief Information Officer until July 31, 2019 and as
a non-executive advisor to the Company until July 31, 2020.
Director Independence
Our Board has affirmatively determined that each director other than R. Dirk Allison is “independent,” as defined by the Nasdaq Stock Market
Rules. Under the Nasdaq Stock Market Rules, a director can be independent only if the director does not trigger a categorical bar to independence and our
Board affirmatively determines that the director does not have a relationship which, in the opinion of our Board, would interfere with the exercise of
independent judgment by the director in carrying out the responsibilities of a director.
With respect to Mr. First, our Board considered Mr. First’s role as a Managing Director at Eos Management, an affiliate of the Eos Funds, and the
fact that the Eos Funds own a significant number of shares of our capital stock. See “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters—Beneficial Ownership Table.” In addition, our Board considered that Mr. First served as a non-employee, unpaid
executive officer of the Company prior to the 2009 IPO. After reviewing the existing relationships between us and the Eos Funds and their affiliates, and
considering that the affiliation of Mr. First with the Eos Funds positively aligns his interests with those of our public shareholders, our Board has
affirmatively determined that, in its judgment, Mr. First does not have any relationship that would interfere with the exercise of independent judgment in
carrying out his responsibilities as director under the Nasdaq Stock Market Rules.
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ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Auditor Fee Information
The following table presents fees for professional audit services rendered by PwC for the audit of our annual consolidated financial statements for
2019 and fees for other services rendered by PwC for fiscal year 2019:
PricewaterhouseCoopers (PwC)
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
Total
$
$
2019
2,088,382
2,095,000
25,000
4,208,382
(1)
(2)
(3)
Audit fees represent fees for professional services provided in connection with the audit of the Company’s consolidated financial statements, the
audit of the effectiveness of internal controls over financial reporting, the reviews of the Company’s quarterly financial statements, and the
involvement with the Company’s filings of registration statements.
Audit-related fees represent fees for professional services provided in connection with the re-audits of the Company’s 2017 and 2018 consolidated
financial statements.
Tax fees represented fees for the review of federal consolidated income tax return for the year ended December 31, 2018.
The following table presents fees for professional audit services rendered by EY for the audit of our annual consolidated financial statements for
2018 and fees for other services rendered by EY for fiscal year 2018:
Ernst & Young (EY)
Audit fees (1)
Tax fees (2)
All other fees (3)
Total
$
$
2018
1,785,623
209,612
254,659
2,249,894
(1)
(2)
(3)
Audit fees represented fees for professional services provided in connection with the audit of the Company’s audited financial statements, audit of
effectiveness of internal controls over financial reporting, reviews of the Company’s quarterly financial statements, audit of the Company’s
acquisitions of Ambercare Corporation and Arcadia Home Care & Staffing and fees related to the Company’s filings of registration statements.
Assistance with Code Section 6055 and 6056 reporting requirements, Code Section 4980H eligibility determinations, other tax-related compliance
and reporting aspects of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010,
and work opportunity tax credits.
Acquisition expenses related to due diligence, SEIU procedures, New York cost reporting, and Accounting Standards Update 2016-02, Leases (Topic
842) and related amendments, and services rendered in connection with a registration statement.
Pre-Approval Policy of Audit and Non-Audit Services
The Audit Committee charter requires the Audit Committee to pre-approve all audit and permitted non-audit services provided by the independent
auditor as well as the related fees. These services may include audit services, audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a
specific budget. The independent auditor and management are required to periodically report to the Audit Committee regarding the extent of services
provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also
pre-approve particular services on a case-by-case basis. The Audit Committee may delegate the pre-approval authority to a member or members of the
Audit Committee or may adopt pre-approval policies and procedures, to the extent permitted by applicable laws. Any pre-approvals made pursuant to
delegated authority or pre-approval policies and procedures must be presented to the full Audit Committee at its next meeting.
The Audit Committee pre-approved all services provided by EY in 2018 and by PwC in 2019. The Audit Committee has pre-approved all services
anticipated to be provided by PwC during 2020.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1), (2) The Financial Statements and Schedule II—Valuation and Qualifying Accounts listed on the index on page F-1 following are included
herein. All other schedules are omitted, either because they are not applicable or because the required information is shown in the financial
statements or the notes thereto.
(b) Exhibits
Exhibit
Number
3.1
EXHIBIT INDEX
Description of Document
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 reference
herein).
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 reference
herein).
Form of Common Stock Certificate (filed on October 2, 2009 as Exhibit 4.1 to Amendment No. 4 to Addus HomeCare Corporation’s
Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).
Description of Securities of Addus HomeCare Corporation Registered under Section 12 of the Exchange Act.
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).*
Addus HealthCare, Inc. Home Health and Home Care Division Vice President and Regional Director Bonus Plan (filed on July 17, 2009 as
Exhibit 10.10 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference
herein).*
Addus HealthCare, Inc. Support Center Vice President and Department Director Bonus Plan (filed on July 17, 2009 as Exhibit 10.11 to Addus
HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*
Addus Holding Corporation 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.12 to Addus HomeCare Corporation’s
Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*
Director Form of Non-Qualified Stock Option Certificate under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.13 to
Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*
Executive Form of Non-Qualified Stock Option Certificate under the 2006 Stock Incentive Plan (filed on July 17, 2009 as Exhibit 10.14 to
Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*
Form of Indemnification Agreement (filed on July 17, 2009 as Exhibit 10.16 to Addus HomeCare Corporation’s Registration Statement on
Form S-1 (File No. 333-160634) and incorporated by reference herein).
License Agreement for Horizon Homecare Software, 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).
Contract Supplement to License Agreement No. C0608555, dated March 24, 2006 (filed on August 26, 2009 as Exhibit 10.17(a) to
Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by
reference herein).
Contract Supplement to License Agreement No. 00608555, dated March 28, 2006 (filed on August 26, 2009 as Exhibit 10.17(b) to
Amendment No. 1 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by
reference herein).
Amendment to License Agreement No. C0608555, dated March 28, 2006, between McKesson Information Solutions LLC and Addus
HealthCare, Inc. (filed on August 26, 2009 as Exhibit 10.17(c) to Amendment No. 1 to Addus HomeCare Corporation’s Registration
Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).
97
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Table of Contents
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Form of Addus HomeCare Corporation 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20 to Amendment No. 2 to
Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and incorporated by reference herein).*
Form of Nonqualified Stock Option Award Agreement pursuant to the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit
10.20(a) to Amendment No. 2 to Addus HomeCare Corporation’s Registration Statement on Form S-1 (File No. 333-160634) and
incorporated by reference herein).*
Form of Restricted Stock Award Agreement pursuant to the 2009 Stock Incentive Plan (filed on September 21, 2009 as Exhibit 10.20(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).*
The Executive Nonqualified “Excess” Plan Adoption Agreement, by Addus HealthCare, Inc., dated April 1, 2012 (filed on April 5, 2012 as
Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by reference herein).*
The Executive Nonqualified Excess Plan Document (filed on April 5, 2012 as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report
on Form 8-K (File No. 001-34504) and incorporated herein by reference).*
Asset Purchase Agreement, dated as of February 7, 2013, by and among Addus HealthCare, Inc., its subsidiaries identified therein, LHC
Group, Inc. and its subsidiaries identified therein (filed on March 6, 2013 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report
on Form 8-K (File No. 001-34504) and incorporated by reference herein).
Employment and Non-Competition Agreement, effective December 15, 2014, by and between Addus HealthCare, Inc. and Maxine
Hochhauser (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).*
Securities Purchase Agreement, dated as of April 24, 2015, by and among Addus HealthCare, Inc., Margaret Coffey, Carol Kolar, South
Shore Home Health Service, Inc. and Acaring Home Care, LLC (filed on May 8, 2015 as Exhibit 10.1 to Addus HomeCare Corporation’s
Quarterly Report on Form 10-Q (File No. 001-34504) and incorporated by reference herein).
Separation Agreement and General Release, dated as of March 18, 2016, by and between Addus HealthCare, Inc. and Inna Berkovich (filed on
March 23, 2016 as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by
reference herein).*
Separation Agreement and General Release, effective May 25, 2016, by and between Addus HealthCare, Inc. and Donald Klink (filed on May
27, 2016 as Exhibit 99.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by reference
herein).*
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 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and
incorporated by reference herein).*
Severance Agreement and General Release, dated as of February 13, 2017, by and between Addus HomeCare Corporation and Maxine
Hochhauser (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).*
Credit Agreement, dated as of May 8, 2017, by and among Addus Healthcare, Inc., as the Borrower, the other parties from time to time a party
thereto, and Capital One, National Association, as a Lender and Swing Lender and as Agent for all Lenders, Suntrust Bank, as Documentation
Agent, Bank of the West, Compass Bank, Fifth Third Bank and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, the other financial
institutions party thereto, as Lenders, Capital One, National Association, Bank of the West, Compass Bank, Fifth Third Bank and JPMorgan
Chase Bank, N.A. and Suntrust Robinson Humphrey as Joint Lead Arrangers and Capital One, National Association, as Sole Bookrunner (filed
on May 9, 2017 as Exhibit 10.3 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-34504) and incorporated by
reference herein).
Addus HomeCare Corporation’s 2017 Omnibus Incentive Plan, effective as of April 27, 2017 (filed on June 16, 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).*
Form of Nonqualified Stock Option Award Agreement pursuant to the 2017 Omnibus Incentive Plan. (filed on March 14, 2018 as Exhibit
10.28 to Addus HomeCare Corporation’s Annual Report on Form 10-K (File No. 001-34504) and incorporated by reference herein).*
Form of Restricted Stock Award Agreement pursuant to the 2017 Omnibus Incentive Plan. (filed on March 14, 2018 as Exhibit 10.29 to Addus
HomeCare Corporation’s Annual Report on Form 10-K (File No. 001-34504) and incorporated by reference herein).*
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10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Amended and Restated Employment and Non-Competition Agreement, dated April 25, 2017, by and between Addus HealthCare, Inc. and
Brenda Belger (filed on August 8, 2017 as Exhibit 10.7 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-
34504) and incorporated by reference herein).*
Transition Agreement and Release, effective as of August 14, 2017, by and between Addus HealthCare, Inc. and Brenda Belger (filed on July
31, 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).*
Stock Purchase Agreement, dated February 27, 2018, by and among Addus Healthcare, Inc., Michael J. Merrell and Mary E. Merrell,
individually, Michael J. Merrell and Mary E. Merrell, as Trustees of the Merrell Revocable Trust UTA dated June 3, 2012, and Michael J.
Merrell and Mary E. Merrell, as Trustees of the Ambercare Corporation Employee Stock Ownership Plan Trust (filed on March 5, 2018 as
Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by reference herein).
Amended and Restated Credit Agreement by and among Addus HealthCare, Inc., as borrower, the Company, the other Credit Parties party
thereto, the Lenders and L/C Issuers party thereto, and Capital One, National Association, as administrative agent (filed on August 11, 2018 as
Exhibit 10.2 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-34504) and incorporated by reference herein).
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare,
Inc. and R. Dirk Allison (filed on August 11, 2018 as Exhibit 10.3 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File
No. 001-34504) and incorporated by reference herein). *
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare,
Inc. and Brian Poff (filed on August 11, 2018 as Exhibit 10.4 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No.
001-34504) and incorporated by reference herein). *
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare,
Inc. and James Zoccoli (filed on August 11, 2018 as Exhibit 10.5 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No.
001-34504) and incorporated by reference herein). *
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare,
Inc. and Darby Anderson (filed on August 11, 2018 as Exhibit 10.6 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File
No. 001-34504) and incorporated by reference herein). *
Second Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare,
Inc. and W. Bradley Bickham (filed on August 11, 2018 as Exhibit 10.7 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q
(File No. 001-34504) and incorporated by reference herein). *
Amended and Restated Employment and Non-Competition Agreement, dated November 5, 2018, by and between Addus HealthCare, Inc. and
Laurie Manning (filed on August 11, 2018 as Exhibit 10.8 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-
34504) and incorporated by reference herein). *
Amended and Restated Credit Agreement, dated as of October 31, 2018, by and among Addus HealthCare, Inc., as borrower, the Company, the
other Credit Parties party thereto, the Lenders and L/C Issuers party thereto, and Capital One, National Association, as administrative agent
(filed on November 8, 2018 as Exhibit 10.2 to Addus HomeCare Corporation’s Quarterly Report on Form 10-Q (File No. 001-34504) and
incorporated by reference herein).
Employment and Non-Competition Agreement, effective April 29, 2019, by and between Addus HealthCare, Inc. and Sean Gaffney (filed on
April 8, 2019 as Exhibit 99.2 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by
reference herein). *
10.40
Employment and Non-Competition Agreement, effective November 7, 2019, by and between Addus HealthCare, Inc. and David Tucker. *
10.41
10.42
10.43
Employment and Non-Competition Agreement, effective November 7, 2019, by and between Addus HealthCare, Inc. and Mike Wattenbarger.
*
Transition Agreement and Release, effective as of July 31, 2019, by and between Addus HealthCare, Inc. and James “Zeke” Zoccoli (filed on
July 24, 2019 as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form 8-K (File No. 001-34504) and incorporated by
reference herein). *
Equity Purchase Agreement, dated August 25, 2019, by and among Addus Healthcare, Inc., Hospice Partners of America, LLC, New Capital
Partners II – HS, Inc., Senior Care Services, LLC, Eastside Partners II, L.P., and New Capital Partners II, LLC (filed on September 3, 2019 as
Exhibit 2.1 to Addus HomeCare Corporation’s Registration Statement on Form S-3ASR (File No. 333-233600) and incorporated by reference
herein).
99
Table of Contents
10.44
21.1
23.1
31.1
31.2
32.1
32.2
First Amendment to Amended and Restated Credit Agreement, dated as of September 12, 2019, by and among Addus HealthCare, Inc., as the
Borrower, Addus HomeCare Corporation, other Credit Parties party thereto, Capital One, National Association, as administrative agent and as
a Lender, and the other Lenders party thereto (filed on September 13, 2019 as Exhibit 10.1 to Addus HomeCare Corporation’s Quarterly
Report on Form 10-Q (File No. 001-34504) and incorporated by reference herein).
Subsidiaries of Addus HomeCare Corporation.
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document).
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Calculation Linkbase Document.
101.LAB Inline XBRL Taxonomy Label Linkbase Document.
101.PRE Inline XBRL Presentation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).
*
Management compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
100
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Addus HomeCare Corporation
By:
/s/ R. DIRK ALLISON
R. Dirk Allison,
President and Chief Executive Officer
Date: August 10, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature
Title
Date
President and Chief Executive Officer (Principal Executive
August 10, 2020
Officer) and Director
Chief Financial Officer (Principal Financial and
August 10, 2020
Accounting Officer)
/s/ R. DIRK ALLISON
R. Dirk Allison
/s/ BRIAN POFF
Brian Poff
/s/ MICHAEL EARLEY
Michael Earley
/s/ MARK L. FIRST
Mark L. First
/s/ STEVEN I. GERINGER
Steven I. Geringer
/s/ DARIN J. GORDON
Darin J. Gordon
/s/ JEAN RUSH
Jean Rush
Director
Director
Director
Director
Director
/s/ SUSAN T. WEAVER, M.D., FACP
Susan T. Weaver, M.D., FACP
Director
101
August 10, 2020
August 10, 2020
August 10, 2020
August 10, 2020
August 10, 2020
August 10, 2020
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
Page
F-2
F-5
F-6
F-7
F-8
F-9
F-42
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been omitted.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Addus HomeCare Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Addus HomeCare Corporation and its subsidiaries (the “Company”) as of December 31,
2019 and 2018, and the related consolidated statements of income, of stockholders’ equity and of cash flows for each of the three years in the period ended
December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December
31, 2019 listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to the lack of
(i) design and maintenance of controls in response to the risks of material misstatement, (ii) design and maintenance of controls over the review and
approval of hours worked and billed, and (iii) design and maintenance of controls over the accuracy of the implicit price concession assumption used in the
estimation of the recoverability of unadjudicated net service revenues (accounts receivable, net).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there 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. The material weaknesses
referred to above are described in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered
these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and
our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated
financial statements.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above. Our responsibility
is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Table of Contents
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Hospice Partners, Alliance and VIP
from its assessment of internal control over financial reporting as of December 31, 2019, because they were acquired by the Company in purchase business
combinations during 2019. We have also excluded Hospice Partners, Alliance and VIP from our audit of internal control over financial reporting. Hospice
Partners, Alliance and VIP are wholly-owned subsidiaries whose total revenues and total operating income excluded from management’s assessment and
our audit of internal control over financial reporting represent approximately 2.3%, 1.4% and 4.6% of total revenues, respectively and approximately 6.4%,
5.9%, and (0.5)% of total operating income, respectively, of the related consolidated financial statement amounts for the year ended December 31, 2019.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Accounts Receivable, Net of Allowances for Implicit Price Concessions
As described in Note 1 to the consolidated financial statements, net service revenue is recognized at the amount that reflects the consideration the Company
expects to receive in exchange for providing services directly to consumers. Amounts collected may be less than amounts billed due to implicit price
concessions, resulting from client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences
and other reasons unrelated to credit risk. Management estimates the value of accounts receivable, net of allowances for implicit price concessions, based
upon historical experience and other factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection
experience in relation to amounts billed, current contract and reimbursement terms, shifts in payors and other relevant information. As disclosed by
management, the evaluation of these historical and other factors involves complex, subjective judgments. Accounts receivable, net of allowances for
implicit price concessions (before the allowance for bad debt), were $150.7 million as of December 31, 2019.
The principal considerations for our determination that performing procedures relating to the valuation of accounts receivable, net of allowances for
implicit price concessions is a critical audit matter are the significant judgment by management to determine the estimate, which in turn led to a high degree
of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence obtained related to the valuation of accounts
receivable, net of allowances for implicit price concessions. As described in the “Opinions on the Financial Statements and Internal Control over Financial
Reporting” section, a material weakness was identified related to the lack of design and maintenance of controls over the accuracy of the implicit price
concession assumption used in the estimation of the recoverability of unadjudicated net service revenues (accounts receivable, net).
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included, among others, (i) evaluating management’s process for developing the estimate of accounts receivable, net
of allowances for implicit price concessions, as well as the relevance and use of historical experience data as an input into the estimate, (ii) testing the
completeness and accuracy of the charges and payments used by management in the estimate by testing a sample of revenue transactions, (iii) evaluating
the historical accuracy of management’s process for developing the estimate of the amount which will ultimately be collected by comparing actual cash
collections to the
F-3
Table of Contents
previously recorded accounts receivable, and (iv) developing an independent expectation of the amount expected to be collected by management.
Developing the independent expectation involved calculating the percentage of cash collections as compared to the recorded accounts receivable balance as
of the end of the prior year and comparing that percentage to management’s collection expectation used to determine the current year estimate of accounts
receivable, net of allowances for implicit price concessions.
Valuation of Hospice Partners of America, LLC and VIP Health Care Services Identifiable Intangible Assets
As described in Notes 1 and 5 to the consolidated financial statements, during 2019, the Company completed the acquisitions of Hospice Partners of
America, LLC (“Hospice Partners”) and all of the assets of VIP Health Care Services (“VIP”) for net consideration of $135.6 million and $29.9 million,
respectively. As a result of these acquisitions, management recorded identifiable intangible assets related to trade names, non-competition agreements, state
licenses, and customer and referral relationships in the aggregate amount of $33.5 million. Management estimates the fair values of the trade names using
the relief-from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such
revenue, the tax rate and the discount rate. Management estimates the fair value of existing indefinite-lived state licenses based on a blended approach of
the replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by
estimating future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. Management estimates
the fair value of existing finite-lived state licenses based on a method of analyzing the definite revenue streams with the license and without the license,
which involves estimating revenues and expenses, estimated time to build up to a current revenue base, which is market specific, and the non-licensed
revenue allocation, revenue growth rates, discount rate and tax amortization benefits. Management estimates the fair value of customer and referral
relationships based on a multi-period excess earnings method, which involves identifying revenue streams associated with the assets, estimating the
attrition rates based upon historical financial data, expenses and cash flows associated with the assets, contributory asset charges, rates of return for specific
assets, growth rates, discount rate and tax amortization benefits. Management estimates the fair value of non-competition agreements based on a method of
analyzing the factors to compete and factors not to compete, which involves estimating historical financial data, forecasted financial statements, growth
rates, tax amortization benefit, discount rate, review of factors to compete and factors not to compete as well as an assessment of the probability of
successful competition for each non-competition agreement.
The principal considerations for our determination that performing procedures relating to the valuation of identifiable intangible assets resulting from the
acquisitions of Hospice Partners and VIP is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in applying procedures
relating to the fair value measurement of identifiable intangible assets acquired due to the significant amount of judgment by management when developing
the estimates; (ii) significant audit effort was necessary in evaluating the significant assumptions relating to the estimates, such as (a) the relief from royalty
rate and the discount rate for certain trade names, (b) the estimated time to obtain the license and the discount rate for certain indefinite-lived state licenses,
(c) the estimated time to build up to a current revenue base, non-licensed revenue allocation, revenue growth rates, and the discount rate for the finite-lived
state licenses, (d) the discount rate for the customer and referral relationships, and (e) the discount rate for one non-competition agreement (collectively, the
“identifiable intangible assets significant assumptions”); and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to estimating the fair value of identifiable intangible assets
recorded from the VIP and Hospice Partners acquisitions, including controls over development of the identifiable intangible assets significant assumptions.
These procedures also included, among others, testing management’s process for estimating the fair value of intangible assets, which included evaluating
the appropriateness of the valuation methods, testing the completeness and accuracy of underlying data used by management, and evaluating the
reasonableness of identifiable intangible assets significant assumptions. Evaluating the reasonableness of the identifiable intangible assets significant
assumptions, except for the discount rates, involved considering the following, as applicable, (i) past performance of the acquired businesses, and (ii)
economic and industry metrics and forecasts. In addition, the discount rates were evaluated by considering the cost of capital of comparable businesses and
other industry factors. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuation methods
used and the reasonableness of the discount rates.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
August 10, 2020
We have served as the Company’s auditor since 2019.
F-4
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2019 and 2018
(amounts and shares in thousands, except per share data)
2019
2018
Assets
Current assets
Cash
Accounts receivable, net of allowances
Prepaid expenses and other current assets
Total current assets
Property and equipment, net of accumulated depreciation and amortization
Other assets
Goodwill
Intangibles, net of accumulated amortization
Deferred tax assets, net
Operating lease assets, net
Total other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities
Accounts payable
Accrued payroll
Accrued expenses
Accrued workers’ compensation insurance
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Long-term debt, less current portion, net of debt issuance costs
Long-term operating lease liabilities
Other long-term liabilities
Total long-term liabilities
Total liabilities
Stockholders’ equity
Common stock—$.001 par value; 40,000 authorized and 15,617 and 13,126 shares
issued and outstanding as of December 31, 2019 and 2018, respectively
Additional paid-in capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
$
$
111,714
149,680
7,993
269,387
12,156
275,368
57,079
1,647
21,111
355,205
636,748
19,641
30,587
22,429
14,143
728
87,528
59,164
14,301
163
73,628
161,156
15
359,545
116,032
475,592
636,748
$
$
$
$
$
$
70,406
98,316
7,292
176,014
10,658
135,442
23,784
2,196
—
161,422
348,094
12,238
22,449
11,586
15,169
62
61,504
17,222
—
877
18,099
79,603
13
177,683
90,795
268,491
348,094
See accompanying Notes to Consolidated Financial Statements
F-5
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2019, 2018 and 2017
(amounts and shares in thousands, except per share data)
2019
For the Years Ended December 31,
2018
2017
Net service revenues
Cost of service revenues
Gross profit
General and administrative expenses
Loss (gain) on sale of assets
Depreciation and amortization
Provision for doubtful accounts
Total operating expenses
Operating income from continuing operations
Interest income
Interest expense
Total interest expense, net
Other income
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
(Loss) earnings from discontinued operations
Net income
Net income per common share
Basic income per share
Continuing operations
Discontinued operations
Basic income per share
Diluted income per share
Continuing operations
Discontinued operations
Diluted income per share
$
$
$
$
$
$
$
648,791
469,553
179,238
133,569
—
10,574
343
144,486
34,752
(1,523)
3,105
1,582
—
33,170
7,359
25,811
(574)
$
25,237
1.87 $
(0.04)
$
1.83
1.81
$
(0.04)
$
1.77
$
516,647
379,843
136,804
105,025
38
8,642
272
113,977
22,827
(2,592)
5,016
2,424
—
20,403
4,096
16,307
126
16,433
$
1.35
0.01
1.36
1.32
0.01
1.33
$
$
$
$
425,994
310,119
115,875
76,902
(2,467)
6,663
9,524
90,622
25,253
(66)
4,472
4,406
217
21,064
9,258
11,806
147
11,953
1.03
0.01
1.04
1.02
0.01
1.03
Weighted average number of common shares and potential common shares
outstanding:
Basic
Diluted
13,816
14,248
12,049
12,383
11,470
11,623
See accompanying Notes to Consolidated Financial Statements
F-6
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2019, 2018 and 2017
(amounts and shares in thousands)
Balance at January 1, 2017
Issuance of shares of common stock under
restricted stock award agreements
Forfeiture of shares of common stock under
restricted stock award agreements
Stock-based compensation
Shares issued for exercise of stock options
Net income
Balance at December 31, 2017
Issuance of shares of common stock under
restricted stock award agreements
Forfeiture of shares of common stock under
restricted stock award agreements
Stock-based compensation
Shares issued for exercise of stock options
Shares issued in secondary offering, net of offering
costs
Net income
Balance at December 31, 2018
Issuance of shares of common stock under
restricted stock award agreements
Forfeiture of shares of common stock under
restricted stock award agreements
Stock-based compensation
Shares issued for exercise of stock options
Shares issued in public offering, net of offering
costs
Net income
Balance at December 31, 2019
Common Stock
Shares
Amount
Additional
Paid in
Capital
Retained
Earnings
Total
Stockholders’
Equity
11,527
$
12
$
92,253
$
62,409
$
154,674
90
(36)
—
51
—
11,632
$
78
(16)
—
42
1,390
—
13,126
$
70
(4)
—
125
2,300
—
15,617
$
—
—
—
—
—
12
—
—
—
—
1
—
13
—
—
—
—
2
—
15
$
—
—
—
$
—
2,552
1,158
—
95,963
—
—
4,109
994
—
—
—
11,953
74,362
$
—
—
—
—
—
2,552
1,158
11,953
170,337
—
—
4,109
994
76,617
—
177,683
$
—
16,433
90,795
$
76,618
16,433
268,491
$
—
—
5,766
3,153
—
—
—
—
—
—
5,766
3,153
172,943
—
359,545
$
—
25,237
116,032
$
172,945
25,237
475,592
$
See accompanying Notes to Consolidated Financial Statements
F-7
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2019, 2018 and 2017
(amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities, net of acquisitions:
Depreciation and amortization
Non-cash restructuring
Deferred income taxes
Stock-based compensation
Amortization of debt issuance costs under the terminated
credit facility
Amortization of debt issuance costs under the credit facility
Provision for doubtful accounts
Contingent consideration
Loss (gain) on sale of assets
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from the sale of assets
Acquisitions of businesses, net of cash acquired
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs
Borrowings on revolver — credit facility
Borrowings on revolver — terminated credit facility
Borrowings on term loan — credit facility
Payments on revolver — credit facility
Payments on revolver — terminated credit facility
Payments on term loan — credit facility
Payments on term loan — terminated credit facility
Payments on financing lease obligations
Payments for debt issuance costs under the credit facility
Cash received from exercise of stock options
Net cash provided by financing activities
Net change in cash
Cash, at beginning of period
Cash, at end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosures of non-cash investing and financing activities
Leasehold improvements acquired through tenant allowances
Tax benefit related to the amortization of tax goodwill in excess of book basis
2019
For the Years
Ended December 31,
2018
2017
$
25,237
$
16,433
$
11,953
10,574
—
(1,063)
5,766
—
716
343
—
—
(37,478)
(792)
4,638
4,078
12,019
—
(184,076)
(4,621)
(188,697)
172,945
23,458
—
19,600
—
—
(735)
—
(63)
(372)
3,153
217,986
41,308
70,406
111,714
$
8,642
—
(375)
4,109
—
606
272
(847)
38
(697)
1,652
4,235
(865)
33,203
—
(62,440)
(5,349)
(67,789)
76,618
20,000
—
60,420
—
—
(104,858)
—
(1,013)
(923)
994
51,238
16,652
53,754
70,406
$
$
2,320
7,303
$
4,339
4,097
682
117
—
117
6,663
383
2,470
2,552
1,484
382
9,524
—
(2,467)
19,412
(2,467)
1,103
1,779
52,771
3,702
(24,354)
(3,616)
(24,268)
—
30,000
20,000
45,000
(30,000)
(20,000)
(563)
(24,063)
(1,432)
(2,862)
1,158
17,238
45,741
8,013
53,754
2,261
6,725
—
206
$
$
See accompanying Notes to Consolidated Financial Statements
F-8
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Description of Business
The Consolidated Financial Statements include the accounts of Addus HomeCare Corporation (“Holdings”) and its subsidiaries (together with
Holdings, the “Company,” “we,” “us,” or “our”). The Company operates as a multi-state provider of three distinct but related business segments providing
in-home services. In its personal care services segment, the Company provides non-medical assistance with activities of daily living, primarily to persons
who are at increased risk of hospitalization or institutionalization, such as the elderly, chronically ill or disabled. In its hospice segment, the Company
provides physical, emotional and spiritual care for people who are terminally ill as well as related services for their families. In its home health segment, the
Company provides services that are primarily medical in nature to individuals who may require assistance during an illness or after hospitalization and
include skilled nursing and physical, occupational and speech therapy. The Company’s payor clients include federal, state and local governmental agencies,
managed care organizations, commercial insurers and private individuals.
Principles of Consolidation
All intercompany balances and transactions have been eliminated in consolidation.
The Company used the cost method to account for its investments in joint ventures in which it owned 10% equity interests. The Company sold such
investments on October 1, 2017, and received proceeds of approximately $1.3 million and recorded a pre-tax gain of $0.4 million.
Discontinued Operations
In 2013, the Company sold substantially all of the assets used in its then home health business (the “2013 Home Health Business”) in Arkansas,
Nevada and South Carolina, and 90% of the 2013 Home Health Business in California and Illinois. Effective October 1, 2017, the Company sold its
remaining 10% ownership interest in the 2013 Home Health Business in California and Illinois. The results of the 2013 Home Health Business are reflected
as discontinued operations for all periods presented herein. For the year ended December 31, 2019, in connection with a 2013 Home Health Business
litigation settlement, the Company recognized an expense of $0.6 million. The lawsuit was dismissed in full on October 15, 2019. See Note 13 to the Notes
to Consolidated Financial Statements for additional information. For the years ended December 31, 2018 and 2017, discontinued operations consisted of
the reduction of the indemnification reserve, net of tax, for the Company’s 2013 Home Health Business.
Reclassification of Prior Period Balances
Certain reclassifications have been made to prior period amounts to conform to the current-year presentation including the reporting of accrued
payroll and accrued workers’ compensation insurance as separate line items on the Consolidated Balance Sheets. These reclassifications have no effect on
the reported net income for the years ended December 31, 2019, 2018 and 2017. In addition, see Note 2 for a discussion of the impact of correcting
immaterial errors in previously issued financial statements.
Revenue Recognition
Net service revenue is recognized at the amount that reflects the consideration the Company expects to receive in exchange for providing services
directly to consumers. Receipts are from federal, state and local governmental agencies, managed care organizations, commercial insurers and private
consumers for services rendered. The Company assesses the consumers' ability to pay at the time of their admission based on the Company's verification of
the customer's insurance coverage under the Medicare, Medicaid, and other commercial or managed care insurance programs. Laws and regulations
governing the governmental programs in which the Company participates are complex and subject to interpretation. Net service revenues related to
uninsured accounts, or self-pay, is recorded net of implicit price concessions estimated based on historical collection experience to reduce revenue to the
estimated amount the Company expects to collect. Amounts collected from all sources may be less than amounts billed due to implicit price concessions,
resulting from client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences and other
reasons unrelated to credit risk. The Company monitors our net service revenues and collections from these sources and records any necessary adjustment
to net service revenues based upon management’s assessment of historical write offs and expected net collections, business and economic conditions, trends
in federal, state and private employer health care coverage and other collection indicators.
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Notes to Consolidated Financial Statements—(Continued)
The initial estimate of net service revenues is determined by reducing the standard charge by any contractual adjustments, discounts, and implicit
price concessions. Subsequent changes to the estimate of net service revenues are generally recorded in the period of the change. Changes in estimates of
implicit price concessions, discounts, and contractual adjustments for performance obligations satisfied in prior years resulted in additional net service
revenue of $0.1 million and a reduction in net service revenue of $1.5 million, for the years ended December 31, 2019 and 2018, respectively. Subsequent
changes that are determined to be the result of an adverse change in the patient's ability to pay are recorded as bad debt expense.
Personal Care
The majority of the Company’s net service revenues are generated from providing personal care services directly to consumers under contracts with
state, local and other governmental agencies, managed care organizations, commercial insurers and private consumers. Generally, these contracts, which
are negotiated based on current contracting practices as appropriate for the payor, establish the terms of a customer relationship and set the broad range of
terms for services to be performed at a stated rate. However, the contracts do not give rise to rights and obligations until an order is placed with the
Company. When an order is placed, it creates the performance obligation to provide a defined quantity of service hours, or authorized hours, per consumer.
The Company satisfies its performance obligations over time, given that consumers simultaneously receive and consume the benefits provided by the
Company as the services are performed. As the Company has a right to consideration from customers commensurate with the value provided to customers
from the performance completed over a given invoice period, the Company has elected to use the practical expedient for measuring progress toward
satisfaction of performance obligations and recognizes patient service revenue in the amount to which the Company has a right to invoice.
Hospice Revenue
The Company generates net service revenues from providing hospice services to consumers who are terminally ill as well as related services for
their families. Net service revenues are recognized as services are provided and costs for delivery of such services are incurred. The estimated payment
rates are daily rates for each of the levels of care the Company delivers. Hospice companies are subject to two specific payment limit caps under the
Medicare program each federal fiscal year, the inpatient cap and the aggregate cap. The inpatient cap limits the number of inpatient care days provided to
no more than 20% of the total days of hospice care provided for the year. The aggregate cap limits the amount of Medicare reimbursement a hospice may
receive, based on the number of Medicare patients served. For the year ended December 31, 2019, the Company acquired a liability of $0.4 million related
to the Medicare inpatient cap limit. For the year ended December 31, 2018, the Company was below the payment limits and did not record a cap liability.
Home Health Revenue
The Company also generates net service revenues from providing home healthcare services directly to consumers mainly under contracts with
Medicare and managed care organizations. Generally, these contracts, which are negotiated based on current contracting practices as appropriate for the
payor, establish the terms of a relationship and set the broad range of terms for services to be performed on an episodic basis at a stated rate. Home health
Medicare services were paid under the Medicare Home Health Prospective Payment System (“HHPPS”), for the year ended December 31, 2019 which is
based on a 60-day episode of care as a unit of service. The HHPPS permits multiple, continuous episodes per patient. Medicare payment rates for episodes
under HHPPS vary based on the severity of the patient’s condition as determined by assessment of a patient’s Home Health Resource Group score.
The Company elects to use the same 60-day length of episode that Medicare recognized as standard but accelerate revenue upon discharge to align
with a patient’s episode length if less than the expected 60 days, which depicts the transfer of services and related benefits received by the patient over the
term of the contract necessary to satisfy the obligations. The Company recognizes revenue based on the number of days elapsed during an episode of care
within the reporting period. The Company satisfies its performance obligations as consumers receive and consume the benefits provided by the Company
as the services are performed. As the Company has a right to consideration from Medicare commensurate with the services provided to customers from the
performance completed over a given episodic period, the Company has elected to use the practical expedient for measuring progress toward satisfaction of
performance obligations. Under this method recognizing revenue ratably over the episode based on beginning and ending dates is a reasonable proxy for
the transfer of benefit of the service.
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Notes to Consolidated Financial Statements—(Continued)
Accounts Receivable and Allowances
Accounts receivable is reduced to the amount expected to be collected in future periods for services rendered to customers prior to the balance sheet
date. Management estimates the value of accounts receivable, net of allowances for implicit price concessions, based upon historical experience and other
factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts
billed, current contract and reimbursement terms, shifts in payors and other relevant information. Collection of net service revenues the Company expects
to receive is normally a function of providing complete and correct billing information to the payors within the various filing deadlines. The evaluation of
these historical and other factors involves complex, subjective judgments impacting the determination of the implicit price concession assumption. In
addition, the Company compares its cash collections to recorded net service revenues and evaluates its historical allowance for uncollectibles including
implicit price concessions, based upon the ultimate resolution of the accounts receivable balance.
Prior to 2018, the Company established an allowance for doubtful accounts to the extent it was probable that a portion or all of a particular account
will not be collected. The Company established its provision for doubtful accounts primarily by reviewing the creditworthiness of significant customers and
through evaluations over the collectability of the receivables. An allowance for doubtful accounts was maintained at a level that the Company’s
management believed was sufficient to cover potential losses.
With the modified retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers, in 2018 and subsequent periods, subsequent
adjustments that are determined to be the result of an adverse change in the payor’s ability to pay are recognized as provision for doubtful accounts. The
majority of what historically was classified as provision for doubtful accounts under operating expenses is now treated as an implicit price concession
factored into net service revenues. Our collection procedures include review of account aging and direct contact with our payors. We have historically not
used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted. As of
December 31, 2019 and 2018, the allowance for doubtful accounts balance was $1.0 million and $0.9 million, respectively, which is included in the account
receivable, net of allowances on the Company’s Consolidated Balance Sheets.
Property and Equipment
Property 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
Furniture and equipment
Transportation equipment
Computer software
Leasehold improvements
3—5 years
5—7 years
5 years
3—10 years
Lesser of useful life or lease term
Goodwill and Intangible Assets
Under business combination accounting, assets and liabilities are generally recognized at their fair values and the difference between the consideration
transferred, excluding transaction costs, and the fair values of the assets and liabilities is recognized as goodwill. The Company’s significant identifiable
intangible assets consist of customer and referral relationships, trade names and trademarks and state licenses. The Company uses various valuation
techniques to determine initial fair value of its intangible assets, including relief-from-royalty, income approach, discounted cash flow analysis, and multi-
period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation
approaches, we are required to make estimates and assumptions about future market growth and trends, forecasted revenue and costs, expected periods over
which the assets will be utilized, appropriate discount rates and other variables. The Company estimates the fair values of the trade names using the relief-
from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such revenue, the
tax rate and the discount rate. The Company estimates the fair value of existing indefinite-lived state licenses based on a blended approach of the
replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by estimating
future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. The Company estimates the fair
value of existing finite-lived state licenses based on a method of analyzing the definite revenue streams with the license and without the license, which
involves estimating revenues and expenses, estimated time to build up to a current revenue base, which is market specific, and the non-licensed revenue
allocation, revenue growth rates, discount rate and tax amortization benefits. The Company estimates the fair value of customer and referral relationships
based on a multi-period excess earnings method, which involves identifying revenue
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Notes to Consolidated Financial Statements—(Continued)
streams associated with the assets, estimating the attrition rates based upon historical financial data, expenses and cash flows associated with the assets,
contributory asset charges, rates of return for specific assets, growth rates, discount rate and tax amortization benefits. The Company estimates the fair
value of non-competition agreements based on a method of analyzing the factors to compete and factors not to compete, which involves estimating
historical financial data, forecasted financial statements, growth rates, tax amortization benefit, discount rate, review of factors to compete and factors not
to compete as well as an assessment of the probability of successful competition for each non-competition agreement.
The Company bases its fair value estimates on assumptions the Company believes to be reasonable but which are unpredictable and inherently
uncertain. Actual future results may differ from those estimates.
The Company’s carrying value of goodwill is the excess of the purchase price over the fair value of the net assets acquired from various
acquisitions. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite useful lives are not
amortized. The Company tests goodwill for impairment at the reporting unit level on 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 an impairment may have occurred. The
Company may use a qualitative test, known as “Step 0,” or a two-step quantitative method to determine whether impairment has occurred. In Step 0, the
Company can elect to perform an optional qualitative analysis and based on the results skip the two-step analysis. Additionally, it is the Company’s policy
to update the fair value calculation of our reporting units and perform the quantitative goodwill impairment test on a periodic basis. For the years ended
December 31, 2019 and 2018, the Company performed the quantitative analysis to evaluate whether an impairment occurred. In 2017, the Company elected
to implement Step 0 and were not required to conduct the remaining two-step analysis. Based on the totality of the information available, the Company
concluded that it was more likely than not that the estimated fair values were greater than the carrying values of the reporting units, and as such, no further
analysis was required. The Company concluded that there were no impairments for the years ended December 31, 2019, 2018 or 2017. As of December 31,
2019 and 2018, goodwill was $275.4 million and $135.4 million, respectively, included in the Company’s Consolidated Balance Sheets.
The Company’s identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-
competition agreements. Definite-lived intangible assets are amortized using straight-line and accelerated methods based upon the estimated useful lives of
the respective assets, which range from three to twenty-five years, and assessed for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Customer and referral relationships are amortized systematically over the periods of expected economic
benefit, which range from five to ten years. The Company would recognize an impairment loss when the estimated future non-discounted cash flows
associated with the intangible asset are less than the carrying value. An impairment charge would then be recorded for the excess of the carrying value over
the fair value. The Company estimates the fair value of these intangible assets using the income approach. In accordance with ASC Topic 350, Goodwill
and Other Intangible Assets, intangible assets with indefinite useful lives are not amortized. We test intangible assets with indefinite useful lives 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 an impairment may have occurred. No impairment charge was recorded for the years ended
December 31, 2019, 2018 or 2017. As of December 31, 2019 and 2018, intangibles, net of accumulated amortization, was $57.1 million and $23.8 million,
respectively, included in the Company’s Consolidated Balance Sheets. Amortization of intangible assets is reported in the statement of income caption,
“Depreciation and amortization” and not included in the income statement caption cost of service revenues.
Debt Issuance Costs
The Company amortizes debt issuance costs on a straight-line method over the term of the related debt. This method approximates the effective
interest method. In accordance with ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, the Company has classified the debt issuance costs
as a direct deduction from the carrying amount of the related liability.
Workers’ Compensation Program
The Company’s workers’ compensation insurance program has a $0.4 million deductible component. The Company recognizes its obligations
associated with this 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 been accrued based on historical claims experience, industry statistics and an actuarial analysis. The future claims payments related to the
workers’ compensation program are secured by letters of credit. These letters of credit totaled $10.0 million and $10.8 million at December 31, 2019 and
2018, respectively. The Company monitors its claims quarterly and adjusts its reserves accordingly. These costs are recorded primarily as the cost of
services on the Consolidated Statements of Income. As of December 31, 2019 and 2018, the Company recorded $14.1 million and $15.2 million,
respectively, in accrued workers’ compensation insurance on the Company’s Consolidated Balance Sheets. As of December 31, 2019 and 2018, the
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ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Company recorded $2.0 million and $1.7 million, respectively, in workers’ compensation insurance recovery receivables. The workers’ compensation
insurance recovery receivable is included in prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets.
Interest Income
Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved 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 and reported in the statement of income caption, “Interest income.” For the years ended December 31, 2019 and 2018, the
Company received $0.7 million and $2.3 million, respectively, in prompt payment interest. For the year ended December 31, 2017, the Company did not
receive any prompt payment interest. While the Company may be owed additional prompt payment interest in the future, the amount, timing and intent to
provide receipt of such payments remains uncertain, and the Company will continue to recognize prompt payment interest income upon satisfaction of
these constraints.
Interest Expense
Interest expense is reported in the Consolidated Statements of Income when incurred and consists of (i) interest and unused credit line fees on the
credit facility, evidenced by the Credit Agreement (as defined in Note 9) and the credit facility evidenced by the 2017 Credit Agreement (as defined in Note
9), (ii) interest on our financing lease obligations and (iii) amortization and write-off of debt issuance costs.
Income Tax Expense
The Company accounts for income taxes under the provisions of ASC Topic 740, Income Taxes. The objective of accounting for income taxes is to
recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that
have been recognized in its financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of the
Company’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
deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC Topic 740 also prescribes a recognition 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 tax positions. The Company recognizes interest and penalties accrued related to uncertain tax positions in interest
expense and penalties within operating expenses on the Consolidated Statements of Income. Uncertain tax positions are immaterial for all periods
presented.
Stock-based Compensation
The Company currently has one stock incentive plan, the 2017 Omnibus Incentive Plan (the “2017 Plan”), under which new grants of stock-based
employee compensation are made. The Company accounts for stock-based compensation in accordance with ASC Topic 718, Stock Compensation.
Compensation expense is recognized on a straight-line basis under the 2017 Plan over the vesting period of the equity awards based on the grant date fair
value of the options and restricted stock awards. The Company utilizes the Black-Scholes Option Pricing Model to value the Company’s options.
Forfeitures are recognized when they occur. Stock-based compensation expense was $5.8 million, $4.1 million and $2.5 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
Diluted Net Income Per Common Share
Diluted net income per common share, calculated on the treasury stock method, is based on the weighted average number of shares outstanding
during the 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, 2019 were approximately 648,000 stock
options outstanding, of which approximately 346,000 were dilutive. In addition, there were approximately 149,000 restricted stock awards outstanding, of
which approximately 86,000 were dilutive for the year ended December 31, 2019.
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ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Included in the Company’s calculation of diluted earnings per share for the year ended December 31, 2018 were approximately 683,000 stock
options outstanding, of which approximately 247,000 were dilutive. In addition, there were approximately 149,000 restricted stock awards outstanding, of
which approximately 88,000 were dilutive for the year ended December 31, 2018.
Included in the Company’s calculation of diluted earnings per share for the year ended December 31, 2017 were approximately 479,000 stock
options outstanding, of which approximately 101,000 were dilutive. In addition, there were approximately 143,000 restricted stock awards outstanding, of
which approximately 52,000 were dilutive for the year ended December 31, 2017.
Estimates
The financial statements are prepared by management in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and include
estimated amounts and certain disclosures based on assumptions about future events. The Company’s critical accounting estimates include the following
areas: revenue recognition, allowance for doubtful accounts, goodwill and intangibles and business combinations and when required, the quantitative
assessment of goodwill. Actual results could differ from those estimates.
Fair Value Measurements
The Company’s financial instruments consist of cash, accounts receivable, payables and debt. The carrying amounts reported on the Company’s
Consolidated Balance Sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature
of these instruments. The carrying value of the Company’s long-term debt with variable interest rates approximates fair value based on instruments with
similar terms using level 2 inputs as defined under ASC Topic 820, Fair Value Measurement.
The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to goodwill, if
required, and indefinite-lived intangible assets and also when determining the fair value of contingent consideration, if applicable. To determine the fair
value in these situations, the Company uses Level 3 inputs, under ASC Topic 820 and defined as unobservable inputs in which little or no market data
exists; therefore requiring an entity to develop its own assumptions, such as discounted cash flows, or if available, what a market participant would pay on
the measurement date.
The Company uses various valuation techniques to determine fair value of its intangible assets, including relief-from-royalty, income approach,
discounted cash flow analysis, and multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value
hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about future market growth and trends, forecasted revenue
and costs, expected periods over which the assets will be utilized, appropriate discount rates and other variables.
Going Concern
In connection with the preparation of the financial statements for the years ended December 31, 2019 and 2018, the Company conducted an
evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue
as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued. The evaluation
concluded that there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).
ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for all leases, including operating leases, with a term greater
than twelve months in their balance sheet. For income statement recognition purposes, leases will be classified as either a finance or an operating lease. In
July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provided entities with an additional transition method. We
elected to adopt the standard effective January 1, 2019 using the modified retrospective transition method. We elected the package of practical expedients
available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are, or contain, leases, (2)
lease classification and (3) initial direct costs. The most significant changes relate to the recognition of right-of-use assets and significant lease liabilities on
our consolidated balance sheet as a result of our operating lease obligations, as well as the impact of new disclosure requirements. Adoption of the new
standard did not have a significant impact on our results of operations or liquidity.
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ADDUS HOMECARE CORPORATION
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Notes to Consolidated Financial Statements—(Continued)
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding
financial assets and net investment 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 allowance for 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 the amount expected to be collected on the financial asset. In addition, the Company is designing and implementing new processes
and controls. ASU 2016-13 is effective as of January 1, 2020. Early adoption is permitted. We have reviewed our provision for doubtful accounts process
as required by ASU 2016-13. Management estimates allowances on accounts receivable based upon historical experience and other factors, including an
aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts billed, current contract
and reimbursement terms, shifts in payors and other current relevant information. Adoption of the new standard did not have a significant impact on our
results of operations or liquidity.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The
new guidance eliminates the requirement to calculate 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 charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment tests for periods beginning after
December 15, 2019. Adoption of the new standard did not have a significant impact on our results of operations or liquidity.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 requires customers in a
hosting arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to
determine which implementation costs to capitalize as assets or expense as incurred. The ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2019. Early adoption is permitted. Adoption of the new standard did not have a significant
impact on our results of operations or liquidity.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 intends
to simplify various aspects related to accounting for income taxes and removes certain exceptions to the general guidance in ASC 740. In addition, the
ASU clarifies and amends existing guidance to improve consistent application of its requirements. The ASU is effective for fiscal years, including interim
periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Adoption of the new standard is not expected to have an
impact on our results of operations or liquidity.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships,
and other transactions subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU provides
companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be
discontinued. Therefore, it will be in effect for a limited time through December 31, 2022. The ASU can be adopted no later than December 1, 2022 with
early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
2. Revision of Previously Issued Financial Statements
In connection with management finalizing their financial reporting close process for the year ended December 31, 2019, management identified
certain immaterial errors impacting the current period and previous periods dating back to periods prior to 2017, including interim periods within those
years. Specifically, management determined there were certain errors in the information utilized to accurately estimate the implicit price concessions
necessary to reduce net service revenues to the amount expected to be collected. Accordingly, management determined that our accounts receivable
allowance was understated. The correction reflects the impact on the Company’s income tax provision and related accounts as a result of correcting for the
error as discussed above. Additionally, the Company identified and corrected other immaterial unrelated income tax items impacting deferred tax assets and
the reserve for uncertain tax positions. At December 31, 2018, the deferred tax liability, net of $0.5 million was reclassified to reflect the Company’s
revised balance of a cumulative net deferred tax asset.
Management evaluated the impact of the errors on all previously issued financial statements and concluded such previously issued financial
statements were not materially misstated; however, to reflect such corrections in the 2019 financial statements would materially misstate the current fiscal
year. Accordingly, management revised previously issued financial statements to correct for the
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AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
impact of the errors. The Company’s consolidated financial statements have been revised from the amounts previously reported to correct these immaterial
errors as shown in the tables below and are reflected throughout the financial statements and related notes, as applicable. We also corrected our financial
statements for each of the interim periods in the years ended December 31, 2019 and 2018, see Note 17.
The Consolidated Balance Sheet has been revised to reflect the immaterial error for the year ended December 31, 2018.
Consolidated Balance Sheet as of December 31, 2018 (in thousands):
Accounts receivable, net of allowances
Prepaid expenses and other current assets
Deferred tax assets, net
Total assets
Deferred tax liabilities, net
Other long-term liabilities
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
As
Previously
Reported
Revision
As
Revised
$
$
108,000
7,098
—
355,388
494
635
79,855
275,533
355,388
$
$
(9,684) $
194
2,196
(7,294)
(494)
242
(252)
(7,042)
(7,294)
98,316
7,292
2,196
348,094
—
877
79,603
268,491
348,094
The cumulative effect of adjustments required to correct the errors in the financial statements for years prior to 2017 are reflected in the revised
opening retained earnings balance as of January 1, 2017. The cumulative effect of those adjustments on all periods prior to 2017 decreased retained
earnings as of January 1, 2017 by $4.2 million as reflected below.
Consolidated Statement of Stockholders’ Equity Opening Balance:
Balance at January 1, 2017
Revision
Balance at January 1, 2017, as revised
Common Stock
Shares
Amount
11,527
$
11,527
$
Additional
Paid in
Capital
Retained
Earnings
Total
Stockholders'
Equity
12
—
12
$
$
92,253
—
92,253
$
$
66,653
(4,244)
62,409
$
$
158,918
(4,244)
154,674
The Consolidated Statements of Income has been revised to reflect the immaterial error for the years ended December 31, 2018 and December 31,
2017. With the adoption of ASU 2014-09, Revenue from Contracts with Customers, in 2018, the majority of what historically was classified as provision
for doubtful accounts under operating expenses is treated as an implicit price concession factored into net service revenues. As a result of this adjustment,
we recorded an additional $1.5 million for the year ended December 31, 2018, for a total of $11.0 million, as a reduction to revenue that would have been
recorded as provision for doubtful accounts under the prior revenue recognition guidance.
F-16
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Consolidated Statements of Income (in thousands):
Net service revenues
Gross profit
Provision for doubtful accounts
Total operating expenses
Operating income from continuing operations
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Net income
Basic income per share from continuing operations
Diluted income per share from continuing operations
Basic income per share
Diluted income per share
For the Years Ended December 31,
As
Previously
Reported
$ 518,119
138,276
272
113,977
24,299
21,875
4,498
17,377
17,503
$
$
$
2018
Revision
As
Revised
(1,472) $ 516,647
136,804
(1,472)
272
—
113,977
—
22,827
(1,472)
20,403
(1,472)
4,096
(402)
16,307
(1,070)
16,433
(1,070) $
As
Previously
Reported
$ 425,994
115,875
8,409
89,507
26,368
22,179
8,645
13,534
13,681
$
1.44
1.40
$
1.45
1.41
$
(0.09)
(0.08)
(0.09)
(0.08)
$
$
1.35
1.32
$
1.36
1.33
$
1.18
1.16
1.19
1.17
$
$
2017
Revision
$
$
$
$
$
—
—
1,115
1,115
(1,115)
(1,115)
613
(1,728)
(1,728) $
(0.15)
(0.14)
(0.15)
(0.14)
$
$
As
Revised
425,994
115,875
9,524
90,622
25,253
21,064
9,258
11,806
11,953
1.03
1.02
1.04
1.03
Additionally, the Consolidated Statement of Cash Flows has been revised to reflect the immaterial error for the years ended December 31, 2018 and
December 31, 2017.
Consolidated Statements of Cash Flows (in thousands):
For the Years Ended December 31,
As
Previously
Reported
2018
Revision
As
Revised
As
Previously
Reported
2017
Revision
Net income
Provision for doubtful accounts
Deferred income taxes
Prepaid expenses and other current assets
Accrued expenses and other liabilities
Accounts receivable
Net cash provided by operating activities
3. Leases
$
$
$
17,503
272
(43)
1,964
(1,107)
(2,169)
$
33,203
(1,070) $
—
(332)
(312)
242
1,472
—
$
16,433
272
(375)
1,652
(865)
(697)
33,203
$
$
$
13,681
8,409
1,754
(2,364)
1,779
19,412
52,771
$
(1,728) $
1,115
716
(103)
—
—
—
$
As
Revised
11,953
9,524
2,470
(2,467)
1,779
19,412
52,771
We have historically entered into operating leases for local branches, our corporate headquarters and certain equipment. The Company’s current
leases have expiration dates through 2029. Certain of our arrangements have free rent periods and/or escalating rent payment provisions. We recognize rent
expense on a straight-line basis over the lease term. Certain of the Company’s leases include termination options and renewal options for periods ranging
from one to five years. Because we are not reasonably certain to exercise these renewal options, the options generally are not considered in determining the
lease term, and payments associated with the option years are excluded from lease payments.
F-17
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a
readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information
available at lease commencement.
Amounts reported in the Consolidated Balance Sheets as of December 31, 2019 for our operating leases were as follows:
Operating lease assets, net
Short-term operating lease liabilities (in accrued expenses)
Long-term operating lease liabilities
Total operating lease liabilities
Lease Costs
December 31, 2019
(Amounts in Thousands)
21,111
7,234
14,301
21,535
$
$
Components of lease cost were reported in general and administrative expenses in the Consolidated Statements of Income as follows:
Operating lease costs
Short-term lease costs
Total lease cost
Lease Term and Discount Rate
$
$
Weighted average remaining lease terms and discount rates for the year ended December 31, 2019 were as follows:
Operating leases:
Weighted average remaining lease term
Weighted average discount rate
Maturity of Lease Liabilities
A summary of our remaining operating lease payments as of December 31, 2019 were as follows:
For the Year Ended
December 31, 2019
(Amounts in Thousands)
7,219
585
7,804
3.42
5.14%
2019
Operating Leases
(Amounts in Thousands)
Due in 12-month period ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total future minimum rental commitments
Less: Imputed interest
Total lease liabilities
F-18
$
$
7,975
6,935
4,331
2,526
1,437
389
23,593
(2,058)
21,535
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The future minimum operating lease payments on non-cancelable leases as of December 31, 2018 under the accounting standards in effect as of that
period were as follows:
Due in 12-month period ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total future minimum rental commitments
Supplemental cash flow information
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Financing Leases
Operating Leases
(Amounts in Thousands)
6,374
4,820
3,460
2,377
2,130
1,382
20,543
For the Year Ended
December 31, 2019
(Amounts in Thousands)
7,574
10,299
$
$
$
$
Some of our financing leases include provisions to purchase the asset at the conclusion of the lease. The adoption of ASC 842 did not impact the
accounting for these leases. Financing leases were not material as of December 31, 2019 and 2018.
4. Public Offering
On September 9, 2019, the Company completed a public offering of an aggregate 2,300,000 shares of common stock, par value $0.001 per share,
including 300,000 shares of common stock sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares at a public
offering price of $79.50 per share (the “Public Offering”). The Company received net proceeds of approximately $172.9 million, after deducting
underwriting discounts and estimated offering expenses of approximately $9.9 million. The Company used approximately $130.0 million from the net
proceeds of the Public Offering to fund the purchase price for the Company’s acquisition of Hospice Partners of America, LLC (“Hospice Partners”), on
October 1, 2019 and may use any remaining net proceeds of the Public Offering for general corporate purposes, including future acquisitions or
investments, and the repayment of indebtedness outstanding under the Company’s credit facility. The Public Offering resulted in an increase to additional
paid in capital of approximately $172.9 million on the Company’s Consolidated Balance Sheets at December 31, 2019.
On August 20, 2018, the Company together with Eos Capital Partners III, L.P. (the “Selling Stockholder”) completed a secondary public offering of
an aggregate 2,100,000 shares of common stock, par value $0.001 per share at a purchase price per share to the public of $59.00 (the “2018 Public Offering
Price”). Pursuant to the terms and conditions of the Underwriting Agreement, 1,075,267 shares of Common Stock were issued and sold by the Company
(the “Primary Shares”) and 1,024,733 shares of Common Stock were sold by the Selling Stockholder (the “Secondary Shares”). The Company received net
proceeds of approximately $59.1 million from the sale of 1,075,267 Primary Shares. On August 22, 2018, the underwriters exercised their full over-
allotment option in connection with the offering and, as a result, the Company issued and sold an additional 315,000 shares of common stock to the
underwriters at the 2018 Public Offering Price, less the underwriting discount. The over-allotment resulted in additional net proceeds to the Company of
approximately $17.5 million. The Company used the net proceeds from the offering for general corporate purposes, and to pay down the $102.6 million of
our delayed term loan in connection with the amendment and restatement of our credit facility. The Company did not receive any of the proceeds from the
sale of the Secondary Shares. The secondary offering resulted in an increase to additional paid in capital of approximately $76.6 million, net of issuance
costs of $5.4 million, on the Company’s Consolidated Balance Sheets at December 31, 2018.
F-19
Table of Contents
5. Acquisitions
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The Company’s acquisitions have been accounted for in accordance with ASC Topic 805, Business Combinations, and the resulting goodwill and
other intangible assets were accounted for under ASC Topic 350, Goodwill and Other Intangible Assets. Under business combination accounting, the assets
and liabilities are generally recognized at their fair values and the difference between the consideration transferred, excluding transaction costs, and the fair
values of the assets and liabilities is recognized as goodwill. The results of each business acquisition are included on the Consolidated Statements of
Income from the date of the acquisition.
Management’s assessment of qualitative factors affecting goodwill for each acquisition includes estimates of market share at the date of purchase,
ability to grow in the market, synergy with existing Company operations and the payor profile in the markets.
Hospice Partners
On October 1, 2019, the Company completed the acquisition of the assets of Hospice Partners. The purchase price was approximately
$135.6 million. The purchase of Hospice Partners was funded through a portion of the net proceeds of our Public Offering. With the purchase of Hospice
Partners, we expanded our hospice operations through 21 locations in Idaho, Kansas, Missouri, Oregon, Texas and Virginia. The related acquisition costs
were $1.6 million for the year ended December 31, 2019 and integration costs were $0.6 million for the year ended December 31, 2019. These costs were
included in general and administrative expenses on the Consolidated Statements of Income and were expensed as incurred.
Based upon management’s valuations, which are preliminary and subject to completion of working capital adjustments, the fair values of the assets
and liabilities are as follows:
Goodwill
Identifiable intangible assets
Cash
Property and equipment
Accounts receivable
Operating lease assets, net
Other assets
Accounts payable
Accrued expenses
Accrued payroll
Deferred tax liability
Long-term operating lease liabilities
Total purchase price
Total
(Amounts in
Thousands)
112,484
18,090
5,705
164
6,506
2,518
632
(1,618)
(4,650)
(1,108)
(1,540)
(1,615)
135,568
$
$
Identifiable intangible assets acquired consist of $9.5 million in trade names with an estimated useful life of fifteen years, $2.5 million in non-
competition agreements with estimated useful lives of three to five years and $6.1 million of indefinite lived state licenses. The preliminary estimated fair
value of identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic 820, with the assistance of a valuation specialist.
The fair value analysis and related valuations reflect the conclusions of management. All estimates, key assumptions, and forecasts were either provided by
or reviewed by the Company. The goodwill and intangible assets acquired are deductible for tax purposes.
The Hospice Partners acquisition accounted for $14.8 million of net service revenues and $2.3 million of operating income for the year ended
December 31, 2019.
F-20
Table of Contents
Alliance Home Health Care
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
On August 1, 2019, the Company completed the acquisition of all of the assets of Alliance Home Health Care (“Alliance”). The purchase price was
approximately $23.5 million. The purchase of Alliance was funded through the Company’s revolving credit facility and available cash. With the purchase
of Alliance, the Company expanded its personal care, home health and hospice operations in the state of New Mexico. The related acquisition costs were
$0.4 million for the year ended December 31, 2019 and integration costs were $0.4 million for the year ended December 31, 2019. These costs were
included in general and administrative expenses on the Consolidated Statements of Income and were expensed as incurred.
Based upon management’s valuations, which are preliminary and subject to completion of working capital adjustments, the fair values of the assets
and liabilities are as follows:
Goodwill
Identifiable intangible assets
Cash
Accounts receivable
Accounts payable
Other liabilities
Total purchase price
Total
(Amounts in
Thousands)
16,646
5,422
260
1,665
(299)
(236)
23,458
$
$
Identifiable intangible assets acquired consist of $1.1 million in state licenses, subject to amortization, with an estimated useful life of ten years and
$4.3 million of indefinite lived state licenses. The preliminary estimated fair value of identifiable intangible assets was determined, using Level 3 inputs as
defined under ASC Topic 820, with the assistance of a valuation specialist. The fair value analysis and related valuations reflect the conclusions of
management. All estimates, key assumptions, and forecasts were either provided by or reviewed by the Company. The goodwill and intangible assets
acquired are deductible for tax purposes.
The Alliance acquisition accounted for $8.8 million of net service revenues and $2.1 million of operating income for the year ended December 31,
2019.
VIP Health Care Services
On June 1, 2019, the Company completed the acquisition of all of the assets of VIP Health Care Services (“VIP”). The purchase price was
approximately $29.9 million. The purchase of VIP was funded through a combination of the Company’s delayed draw term loan portion of its credit facility
and available cash. With the purchase of VIP, the Company expanded its personal care operations in the state of New York and into the New York City
metropolitan area. The related acquisition costs were $0.3 million for the year ended December 31, 2019 and integration costs were $0.5 million for the
year ended December 31, 2019. These costs were included in general and administrative expenses on the Consolidated Statements of Income and were
expensed as incurred.
F-21
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Based upon management’s valuations, which are preliminary and subject to completion of working capital adjustments, the fair values of the assets
and liabilities are as follows:
Goodwill
Identifiable intangible assets
Cash
Accounts receivable
Operating lease assets, net
Other assets
Property and equipment
Accounts payable
Accrued expenses
Accrued payroll
Long-term operating lease liabilities
Total purchase price
Total
(Amounts in
Thousands)
10,550
15,370
110
6,058
2,278
30
27
(462)
(770)
(1,742)
(1,531)
29,918
$
$
Identifiable intangible assets acquired consist of $10.7 million in state licenses, subject to amortization, and $4.7 million in customer relationships,
with estimated useful lives of six and eight years, respectively. The preliminary estimated fair value of identifiable intangible assets was determined, using
Level 3 inputs as defined under ASC Topic 820, with the assistance of a valuation specialist. The fair value analysis and related valuations reflect the
conclusions of management. All estimates, key assumptions, and forecasts were either provided by or reviewed by the Company. The goodwill and
intangible assets acquired are deductible for tax purposes.
The VIP acquisition accounted for $30.0 million of net service revenues for the year ended December 31, 2019, and $0.2 million of operating loss
for the year ended December 31, 2019.
Ambercare Corporation
On May 1, 2018, the Company completed the acquisition of all the issued and outstanding securities of Ambercare Corporation (“Ambercare”). The
purchase price was approximately $39.6 million, plus the amount of excess cash held by Ambercare at closing (approximately $12.0 million). The purchase
of Ambercare was funded by a delayed draw term loan under the Company’s credit facility. With the purchase of Ambercare, the Company expanded its
New Mexico personal care operations and entered into its hospice and home health segments in the state of New Mexico. The related acquisition costs were
$0.8 million for the year ended December 31, 2018, and integration costs were $0.2 million and $1.6 million for the years ended December 31, 2019 and
2018, respectively. These costs were included in general and administrative expenses on the Company’s Consolidated Statements of Income, and were
expensed as incurred. The results of Ambercare are included on the Company’s Consolidated Statements of Income from the date of the acquisition.
F-22
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Based upon management’s valuations, which are now final, the fair values of the assets and liabilities are as follows:
Goodwill
Cash
Identifiable intangible assets
Accounts receivable
Other assets
Property and equipment
Accrued expenses
Deferred tax liability
Financing lease
Accounts payable
Total purchase price
Total
(Amounts in
Thousands)
28,831
12,028
9,944
6,512
442
154
(4,073)
(2,138)
(75)
(3)
51,622
$
$
The Company acquired all of the outstanding stock of Ambercare. Identifiable intangible assets acquired consist of trade names and customer
relationships, with estimated useful lives ranging from three to fifteen years, as well as indefinite lived state licenses. The estimated fair value of
identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic 820, with the assistance of a valuation specialist. The fair
value analysis and related valuations reflect the conclusions of management. All estimates, key assumptions, and forecasts were either provided by or
reviewed by the Company. The goodwill and intangible assets acquired are non-deductible for tax purposes.
The Ambercare acquisition accounted for $36.7 million of net service revenues and $7.1 million of operating income for the year ended
December 31, 2018.
Arcadia Home Care & Staffing
On April 1, 2018, the Company acquired certain assets of Arcadia Home Care & Staffing (“Arcadia”), expanding its personal care services. The
total consideration for the transaction was $18.9 million and was funded by a delayed draw term loan under the Company’s credit facility. The related
acquisition costs were $0.8 million and $0.4 million for the years ended December 31, 2018 and 2017, and integration costs were $0.2 million and $1.1
million for the years ended December 31, 2019 and 2018, respectively. These costs were included in general and administrative expenses on the Company’s
Consolidated Statements of Income, and were expensed as incurred.
Based upon management’s valuations, which are now final, the fair values of the assets and liabilities are as follows:
Goodwill
Accounts receivable
Identifiable intangible assets
Property and equipment
Other assets
Accrued expenses
Accounts payable
Total purchase price
Total
(Amounts in
Thousands)
13,072
5,317
2,264
155
92
(1,540)
(508)
18,852
$
$
Identifiable intangible assets acquired consist of trade name, customer relationships and state licenses, with estimated useful lives ranging from
seven to fifteen years. The estimated fair value of identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic 820, with
the assistance of a valuation specialist. The fair value analysis and related valuations reflect the conclusions of management. All estimates, key
assumptions, and forecasts were either provided by or reviewed by the Company. The goodwill and intangible assets acquired are deductible for tax
purposes.
F-23
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The Arcadia acquisition accounted for $32.7 million of net service revenues and $4.7 million of operating income for the year ended December 31,
2018.
In September 2018, the Company acquired certain assets of affiliate branches of Arcadia for $0.6 million using cash on hand, the Company recorded
goodwill of $0.6 million on the Company’s Consolidated Balance Sheets. Goodwill generated from the acquisition is primarily attributable to expected
synergies with existing Company operations and the goodwill acquired is deductible for tax purposes.
LifeStyle Options, Inc.
Effective January 1, 2018, the Company acquired certain assets of LifeStyle Options, Inc. (“LifeStyle”) in order to expand private pay services in
Illinois. The total consideration for the transaction was $4.1 million, comprised of $3.3 million in cash and $0.8 million, representing the estimated fair
value of contingent consideration, subject to the achievement of certain performance targets set forth in an earn-out agreement. As of December 31, 2018,
the performance targets were not met and the contingent consideration was remeasured to zero.
Based upon management’s valuations, which are now final, the fair values of the assets and liabilities are as follows:
Goodwill
Identifiable intangible assets
Accounts receivable
Other assets
Property and equipment
Accrued expenses
Accounts payable
Total purchase price
Total
(Amounts in
Thousands)
2,751
1,152
573
32
18
(291)
(105)
4,130
$
$
Identifiable intangible assets acquired consist of trade name and customer relationships, with estimated useful lives ranging from ten to fifteen years.
The estimated fair value of identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic 820, with the assistance of a
valuation specialist. The fair value analysis and related valuations reflect the conclusions of management. All estimates, key assumptions, and forecasts
were either provided by or reviewed by the Company. The goodwill and intangible assets acquired are deductible for tax purposes.
The LifeStyle acquisition accounted for $5.8 million of net service revenues and $0.5 million of operating income for the year ended December 31,
2018.
Sun Cities Home Care
Effective October 1, 2017, the Company acquired certain assets of Community Partnered Resources, Inc. d/b/a Sun Cities Caregivers and d/b/a Sun
Cities Homecare (“Sun Cities”), in the state of Arizona, to enhance operations in an advantageous market. The total consideration for the transaction was
comprised of $2.3 million in cash. The related acquisition costs were $0.1 million and $0.1 million for the years ended December 31, 2018 and 2017,
respectively, were included in general and administrative expenses on the Company’s Consolidated Statements of Income, and were expensed as incurred.
F-24
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Based upon management’s valuations, which are now final, the fair values of the assets and liabilities are as follows:
Goodwill
Identifiable intangible assets
Accounts receivable
Cash
Other assets
Accrued expenses
Accounts payable
Total purchase price
Total
(Amounts in
Thousands)
1,089
682
254
321
10
(86)
(14)
2,256
$
$
Identifiable intangible assets acquired consist of trade name and customer relationships, with estimated useful lives ranging from seven to fifteen
years. The estimated fair value of identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic 820, with the assistance
of a valuation specialist. The fair value analysis and related valuations reflect the conclusions of management. All estimates, key assumptions, and forecasts
were either provided by or reviewed by the Company. The goodwill and intangible assets acquired are deductible for tax purposes.
The Sun Cities acquisition accounted for $0.7 million of net service revenues and $0.1 million of operating income for the year ended December 31,
2017.
Options Home Care
On April 24, 2017, the Company entered into a definitive securities purchase agreement with HB Management Group, Inc. to purchase Options
Services, Inc. d/b/a Options Home Care (“Options Home Care”). On August 1, 2017, the Company completed its acquisition of all the outstanding
securities of Options Home Care for a total purchase price of $22.6 million. Options Home Care is a provider of personal care services in more than 20
counties in New Mexico and the acquisition expands the footprint of the Company’s existing operations in the state. The related acquisition costs were $0.1
million and $0.7 million for the years ended December 31, 2018 and 2017, respectively, and integration costs of $0.1 million for the year ended December
31, 2017, were included in general and administrative expenses on the Company’s Consolidated Statements of Income, and were expensed as incurred.
Based upon management’s valuations, which are now final, the fair values of the assets and liabilities are as follows:
Goodwill
Identifiable intangible assets
Accounts receivable
Cash
Other assets
Accrued liabilities
Total purchase price
Total
(Amounts in
Thousands)
$
$
16,671
5,324
1,084
205
41
(701)
22,624
Identifiable intangible assets acquired consist of trade name and customer relationships and the estimated useful lives of the respective assets, which
range from three to ten years. The estimated fair value of identifiable intangible assets was determined, using Level 3 inputs as defined under ASC Topic
820, with the assistance of a valuation specialist. The fair value analysis and related valuations reflect the conclusions of management. All estimates, key
assumptions, and forecasts were either provided by or reviewed by the Company. The goodwill and intangible assets acquired are deductible for tax
purposes.
The Options Home Care acquisition accounted for $8.0 million of net service revenues and $1.5 million of operating income for the year ended
December 31, 2017.
F-25
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
For the year ended December 31, 2019, the following table contains unaudited pro forma Consolidated Income Statement information of the
Company as if each of the acquisitions of Hospice Partners, Alliance and VIP closed on January 1, 2018. For the year ended December 31, 2018, the
following table contains unaudited pro forma Consolidated Income Statement information of the Company as if each of the acquisitions of Ambercare,
Arcadia, LifeStyle, Sun Cities and Options closed on January 1, 2017. For the year ended December 31, 2017, the table contains unaudited pro forma
Consolidated Income Statement information of the Company as if each of the acquisitions of Sun Cities and Options Home Care closed on January 1, 2016.
Net service revenues
Operating income from continuing operations
Net income from continuing operations
Net income per common share from continuing operations
Basic income per share
Diluted income per share
For the Years Ended December 31,
(Amounts in Thousands, Unaudited)
2018
550,326 $
36,985
24,346
2019
726,727 $
46,571
35,748
2017
441,858
28,103
15,010
2.59 $
2.51 $
2.02 $
1.97 $
1.31
1.29
$
$
$
The pro forma disclosures in the table above include adjustments for amortization of intangible assets, tax expense and acquisition costs to reflect
results that are more representative of the combined results of the transactions. This pro forma information is presented for illustrative purposes only and
may not be indicative of the results of operations that would have actually occurred. In addition, future results may vary significantly from the results
reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the
acquisition, such as anticipated cost savings from operating synergies.
6. Property and Equipment
Property and equipment consisted of the following:
Computer equipment
Furniture and equipment
Transportation equipment
Leasehold improvements
Computer software
Less: accumulated depreciation and amortization
December 31,
2019
2018
(Amounts in Thousands)
$
$
5,304 $
3,410
157
3,749
9,563
22,183
(10,027)
12,156 $
3,768
3,161
156
2,962
6,712
16,759
(6,101)
10,658
Computer software includes $1.6 million and $1.3 million of internally developed software for the years ended December 31, 2019 and 2018,
respectively. Depreciation and amortization expense totaled $4.0 million, $2.5 million and $2.0 million for the years ended December 31, 2019, 2018 and
2017, respectively.
For the year ended 2017, the Company completed its sale of substantially all of the assets used in three adult day services centers in Illinois. In
connection with this sale, the Company received proceeds of approximately $2.4 million and recorded a pre-tax gain of $2.1 million reported in the
Company’s Statement of Income caption, “Loss (gain) on sale of assets.”
7. Goodwill and Intangible Assets
The Company did not record any impairment charges for the years ended December 31, 2019, 2018 or 2017. The goodwill for the Company was
$275.4 million and $135.4 million as of December 31, 2019 and 2018, respectively.
F-26
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
A summary of goodwill and related adjustments is provided below:
Personal Care
Hospice
Home Health
Total
Goodwill
Goodwill at December 31, 2017
Additions for acquisitions
Adjustments to previously recorded goodwill
Goodwill at December 31, 2018
Additions for acquisitions
Adjustments to previously recorded goodwill
Goodwill at December 31, 2019
$
$
90,339
22,135
(97)
112,377
14,368
(168)
126,577
$
(Amounts In Thousands)
$
—
22,200
—
22,200
124,750
33
$
—
865
—
865
941
2
$
146,983
$
1,808
$
90,339
45,200
(97)
135,442
140,059
(133)
275,368
The Company recognized goodwill in the personal care segment of $10.6 million related to the acquisition of VIP on June 1, 2019. In connection
with the acquisition of Alliance on August 1, 2019, the Company recognized goodwill in the personal care, hospice and home health segments of $3.4
million, $12.3 million and $0.9 million, respectively. Additionally, the Company recognized goodwill in the hospice segment of $112.5 million related to
the acquisition of Hospice Partners on October 1, 2019, during the year ended December 31, 2019. Other immaterial acquisitions totaled $0.4 million of
additional goodwill in the personal care segment. See Note 5 to the Notes to Consolidated Financial Statements for additional information regarding the
acquisitions made by the Company for the years ended December 31, 2019 and 2018.
For the years ended December 31, 2019 and 2018, adjustments to the previously recorded goodwill are primarily adjustments to accounts receivable
based on the final valuations.
The Company’s identifiable intangible assets consist of customer and referral relationships, trade names and trademarks, non-competition
agreements and state licenses. Amortization is computed using straight-line and accelerated methods based upon the estimated useful lives of the respective
assets, which range from three to twenty-five years. Customer and referral relationships are amortized systematically over the periods of expected
economic benefit, which range from five to ten years. Goodwill and certain state licenses are not amortized pursuant to ASC Topic 350. The carrying
amount and accumulated amortization of each identifiable intangible asset category consisted of the following at December 31, 2019 and 2018:
Intangible assets with indefinite lives
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets subject to amortization, net
Net balance at December 31, 2019
Intangible assets with indefinite lives
Intangible assets subject to amortization:
Gross carrying amount
Accumulated amortization
Intangible assets subject to amortization, net
Net balance at December 31, 2018
Customer
and referral
relationships
Trade
names and
trademarks
Non-
competition
agreements
(Amounts in Thousands)
State Licenses
Total
$
—
$
—
$
—
$
13,306 $
13,306
48,028
(35,665)
12,363
12,363
$
31,036
(12,941)
18,095
18,095
$
4,655
(2,234)
2,421
2,421
$
12,020
(1,126)
10,894
24,200 $
95,739
(51,966)
43,773
57,079
—
$
—
$
—
$
2,871 $
2,871
42,356
(32,752)
9,604
9,604
$
21,551
(10,638)
10,913
10,913
$
2,155
(1,981)
174
174
$
241
(19)
222
3,093 $
66,303
(45,390)
20,913
23,784
$
$
$
F-27
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
During the year ended December 31, 2019, the Company acquired state licenses, subject to amortization, and customer relationships of $10.7
million and $4.7 million, respectively, related to the acquisition of VIP, indefinite lived state licenses of $4.3 million and $1.1 million of state licenses,
subject to amortization, related to the acquisition of Alliance and trade names, indefinite lived state licenses and non-competition agreements of $9.5
million, $6.1 million and $2.5 million, respectively, related to the acquisition of Hospice Partners. Amortization expense related to the identifiable
intangible assets amounted to $6.6 million, $6.2 million and $4.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The weighted average remaining useful lives of identifiable intangible assets as of December 31, 2019 is 9.0 years.
The estimated future intangible amortization expense is as follows:
For the year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total, intangible assets subject to amortization
Total
(Amount in
Thousands)
6,935
6,440
5,419
4,936
4,692
15,351
43,773
$
$
8. Details of Certain Balance Sheet Accounts
Prepaid expenses and other current assets consist of the following:
Prepaid workers’ compensation and liability insurance
Workers’ compensation insurance receivable
Health insurance receivable
Other
Total prepaid expenses and other current assets
Accrued expenses consisted of the following:
Current portion of operating lease liabilities
Accrued health insurance
Accrued professional fees
Accrued payroll taxes
Other
Total accrued expenses
F-28
December 31,
2019
2018
(Amounts in Thousands)
2,040 $
1,989
1,567
2,397
7,993 $
1,840
1,692
564
3,196
7,292
December 31,
2018
2019
(Amounts in Thousands)
7,234 $
4,140
2,517
1,843
6,695
22,429 $
—
3,926
2,260
769
4,631
11,586
$
$
$
$
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
9. Long-Term Debt
Long-term debt consisted of the following:
Revolving loan under the credit facility
Term loan under the credit facility
Financing leases
Less unamortized issuance costs
Total
Less current maturities
Long-term debt
December 31,
2018
2019
(Amounts in Thousands)
$
$
43,458 $
18,865
21
(2,452)
59,892
(728)
59,164 $
20,000
—
81
(2,797)
17,284
(62)
17,222
Amended and Restated Senior Secured Credit Facility
On October 31, 2018, the Company entered into the Amended and Restated Credit Agreement, dated as of October 31, 2018, with certain lenders
and Capital One, National Association, as a lender and as agent for all lenders (as amended by the Amendment (as hereinafter defined), the “Credit
Agreement”), which amended and restated the Company’s existing credit agreement. This credit facility totaled $269.6 million, inclusive of a
$250.0 million revolving loan and a $19.6 million delayed draw term loan, and is evidenced by the Credit Agreement. This credit facility amended and
restated the Company’s existing senior secured credit facility totaling $250.0 million. As used throughout this Annual Report on Form 10-K, “credit
facility” shall mean the credit facility evidenced by the Credit Agreement. The maturity of this credit facility is May 8, 2023. Interest on the Company’s
credit facility may be payable at (x) the sum of (i) an applicable margin ranging from 0.75% to 1.50% based on the applicable senior net 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 an interest period of one month advanced on the
applicable day (not to be less than 0.00%) plus a margin of 1.00% or (y) the sum of (i) an applicable margin ranging from 1.75% to 2.50% based on the
applicable senior net leverage ratio plus (ii) the offered rate per annum for similar dollar deposits for the applicable interest period that appears on Reuters
Screen LIBOR01 Page (not to be less than zero). Swing loans may not be LIBOR loans. The availability of additional draws under this credit facility is
conditioned, among other things, upon (after giving effect to such draws) the Total Net Leverage Ratio (as defined in the Credit Agreement) not exceeding
3.75:1.00. In certain circumstances, in connection with a Material Acquisition (as defined in the Credit Agreement), the Company can elect to increase its
Total Net Leverage Ratio compliance covenant to 4.25:1.00 for the then current fiscal quarter and the three succeeding fiscal quarters. In connection with
this credit facility, the Company incurred approximately $0.9 million of debt issuance costs.
Addus HealthCare, Inc. (“Addus HealthCare”) is the borrower, and its parent, Holdings, and substantially all of Holdings’ subsidiaries are
guarantors under this credit facility, and it is collateralized by a first priority security interest in all of the Company’s and the other credit parties’ current
and future tangible and intangible assets, including the shares of stock of the borrower and subsidiaries. The Credit Agreement contains affirmative and
negative covenants customary for credit facilities of this type, including limitations on the Company with respect to liens, indebtedness, guaranties,
investments, distributions, mergers and acquisitions and dispositions of assets.
The Company pays a fee ranging from 0.20% to 0.35% based on the applicable senior net leverage ratio times the unused portion of the revolving
loan portion of the credit facility.
The Credit Agreement 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 Agreement also contains certain customary financial
covenants and negative covenants that, among other things, include a requirement to maintain a minimum Interest Coverage Ratio (as defined in the Credit
Agreement), a requirement to stay below a maximum Total Net Leverage Ratio (as defined in the Credit Agreement) and a requirement to stay below a
maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, investments and loans, subject to customary
carve outs, a restriction on dividends (provided that Addus HealthCare may make distributions to the Company in an amount that does not exceed
$7.5 million in any year absent of an event of default, plus limited exceptions for tax and administrative distributions), a restriction on the ability to
consummate acquisitions (without the consent of the lenders) under its credit facility subject to compliance with the Total
F-29
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Net Leverage Ratio (as defined in the Credit Agreement thresholds), restrictions on mergers, dispositions of assets, and affiliate transactions, and
restrictions on fundamental changes and lines of business. As of December 31, 2019, the Company was in compliance with its covenants under the Credit
Agreement. However, the Company was unable to timely file this Annual Report on Form 10-K, which would have included its audited financial
statements for the year ended December 31, 2019. The Company is required to deliver annual audited financial statements under the affirmative covenants
of its Credit Agreement. The Company obtained consent from the Required Lenders (as defined in the Credit Agreement) to extend the timeline of the
audited financials for the year ended December 31, 2019 to not later than October 31, 2020.
On September 12, 2019, the Company entered into a First Amendment (the “Amendment”) to its Credit Agreement. The Amendment increased the
Company’s credit facility by $50.0 million in incremental revolving loans, for an aggregate $300.0 million in revolving loans. The Amendment provides
that future incremental loans may be for term loans or an increase to the revolving loan commitments. The Amendment further provides that the proceeds
of the incremental revolving loan commitments may be used for, among other things, general corporate purposes. In connection with the modification of
this Amendment, the Company incurred approximately $0.4 million of debt issuance costs.
The Company drew approximately $23.5 million on the revolver portion of its credit facility to fund, in part, the purchase price for the Alliance
acquisition on August 1, 2019. Additionally, the Company drew $19.6 million under the delayed draw term loan portion of its credit facility to fund, in part,
the acquisition of VIP on June 1, 2019.
At December 31, 2019, the Company had a total of $43.4 million of revolving loans, with an interest rate of 3.44%, and $18.9 million of term loans,
with an interest rate of 3.45%, outstanding on its credit facility. After giving effect to the amount drawn on its credit facility, approximately $10.0 million
of outstanding letters of credit and borrowing limits based on an advance multiple of adjusted EBITDA (as defined in the Credit Agreement), the Company
had $191.4 million available for borrowing under its credit facility.
During the year ended December 31, 2018, the Company drew a total of approximately of $60.4 million of delayed draws terms under its credit
facility to fund the acquisition of Ambercare and Arcadia. At December 31, 2018, the term loan was paid in full in connection with the Credit Agreement
entered into during the fourth quarter of 2018, as discussed above.
At December 31, 2018, the Company had a total of $20.0 million of revolving loans outstanding on its credit facility, with an interest rate of 4.35%.
After giving effect to the amount drawn on its credit facility, approximately $10.8 million of outstanding letters of credit and borrowing limits based on an
advance multiple of adjusted EBITDA (as defined in the Credit Agreement), the Company had $137.4 million available for borrowing under its credit
facility.
Senior Secured Credit Facility
Prior to October 31, 2018, the Company was party to a Credit Agreement, dated as of May 8, 2017 (the “2017 Credit Agreement”), with certain
lenders and Capital One, National Association, as a lender and swing lender and as agent for all lenders. This credit facility totaled $250.0 million, replaced
the Company’s previous senior secured credit facility, and terminated the Second Amended and Restated Credit and Guaranty Agreement, dated as of
November 10, 2015, as modified by the May 24, 2016 amendment ( as amended, the “2015 Credit Agreement”), between the Company, certain lenders and
Fifth Third Bank, as agent. The credit facility evidenced by the 2015 Credit Agreement included a $125.0 million revolving loan, a $45.0 million term loan
and an $80.0 million delayed draw term loan.
On October 31, 2018, the Company repaid in full the outstanding debt balance of $102.6 million together with accrued interest of $0.5 million and
amended and restated the 2017 Credit Agreement.
F-30
Table of Contents
10. Income Taxes
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
The current and deferred federal and state income tax provision from continuing operations, are comprised of the following:
Current
Federal
State
Deferred
Federal
State
Provision for income taxes
2019
December 31,
2018
(Amounts in Thousands)
2017
$
$
5,876 $
2,442
(734)
(225)
7,359 $
2,883 $
1,562
(265)
(84)
4,096 $
5,828
1,078
2,447
(95)
9,258
The tax effects of certain temporary differences between the Company’s book and tax bases of assets and liabilities give rise to significant portions
of the deferred income tax assets (liabilities) at December 31, 2019 and 2018. The deferred tax assets (liabilities) consisted of the following:
Deferred tax assets
Long-term
Accounts receivable allowances
Accrued compensation
Accrued workers’ compensation
Transaction costs
Restructuring costs
Stock-based compensation
Operating lease liabilities
Other
Total long-term deferred tax assets
Deferred tax liabilities
Long-term
Goodwill and intangible assets
Property and equipment
Prepaid insurance
Operating lease assets, net
Other
Total long-term deferred tax liabilities
Valuation allowance
Total net deferred tax assets (liabilities)
December 31,
2019
2018
(Amounts in Thousands)
$
$
9,256 $
2,765
3,327
1,311
135
793
5,896
584
24,067
(15,079)
(1,037)
(534)
(5,606)
(164)
(22,420)
—
1,647 $
6,761
2,135
3,677
1,020
160
576
170
279
14,778
(11,048)
(903)
(508)
—
(123)
(12,582)
—
2,196
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
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers all available evidence in making this assessment.
F-31
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
A reconciliation for continuing operations of the statutory federal tax rate of 21.0%, 21.0% and 35.0% to the effective income tax rate, for the years
ended December 31, 2019, 2018, and 2017, is summarized as follows:
Federal income tax at statutory rate
State and local taxes, net of federal benefit
Jobs tax credits, net
162(m) disallowance for executive compensation
Nondeductible permanent items
Nondeductible penalties
2017 Tax Reform Act
Excess tax benefit
Other
Effective income tax rate
2019
December 31,
2018
2017
21.0 %
6.4
(8.3)
7.5
0.7
1.3
—
(6.7)
0.3
22.2 %
21.0 %
6.3
(10.7)
4.5
2.2
—
—
(2.7)
(0.5)
20.1 %
35.0 %
5.1
(6.5)
1.4
0.4
—
9.3
(0.6)
(0.1)
44.0 %
The effective income tax rate was 22.2%, 20.1% and 44.0% for the years ended December 31, 2019, 2018 and 2017, respectively. The difference
between our federal statutory and effective income tax rates is principally due to the inclusion of state taxes and non-deductible compensation, offset by an
excess tax benefit and the use of federal employment tax credits.
The Company is subject to taxation in the jurisdictions in which it operates. The Company continues to remain subject to examination by U.S.
federal authorities for the years 2016 through 2018 and for various state authorities for the years 2014 through 2018.
11. Stock Options and Restricted Stock Awards
The Board approved the 2017 Omnibus Incentive Plan (“the 2017 Plan”) as of April 27, 2017, which was approved by our shareholders on June 14,
2017. The 2017 Plan was intended to replace our existing incentive compensation plan, the 2009 Stock Incentive Plan (“the 2009 Plan”). All awards are
now granted from the 2017 Plan. Outstanding awards under the 2009 Plan will continue to be governed by the 2009 Plan and the agreements under which
they were granted.
The 2017 Plan allows us to grant performance-based incentive awards and equity-based awards (each an “Award”) to eligible employees, directors
and consultants in the form of Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock Units/Restricted Stock Units, Other Stock Units
or Performance Awards. The Company’s Board believes that the 2017 Plan is necessary to continue the Company’s effectiveness in attracting, motivating
and retaining employees, directors and consultants with appropriate experience and to increase the grantees’ alignment of interest with the Company’s
shareholders.
Under the 2017 Plan, Awards may be made in shares of our common stock. Subject to adjustment as provided by the terms of the 2017 Plan, the
maximum aggregate number of shares of common stock with respect to which awards may be granted under the 2017 Plan will be 1,182,270, less the
number of shares subject to awards that are granted pursuant to the 2009 Plan after March 31, 2017. The aggregate awards granted during any calendar year
to any single Participant cannot exceed (i) 500,000 shares subject to stock options or stock appreciation rights (“SARs”) or (ii) 300,000 shares subject to
Awards denominated in shares of common stock (whether or not settled in common stock). These individual annual limitations are cumulative in that any
shares of common stock or cash for which Awards are permitted to be granted to a Participant during a fiscal year are not covered by an Award in that fiscal
year, the number of shares of common stock will automatically increase in the subsequent fiscal years during the term of the 2017 Plan until the earlier of
the time the increase has been granted to the Participant, or the end of the third fiscal year following the year to which such increase relates.
Any shares of common stock subject to an Award under the 2017 Plan that are forfeited, canceled, settled in cash or otherwise terminated without a
distribution of shares to a Participant, or that are delivered by attestation or withheld by the Company in connection with an option exercise or the payment
of any required income tax withholding upon an option exercise or the vesting of restricted stock, will be deemed available for Awards under the 2017 Plan.
Additionally, any shares of common stock subject to an Award under the 2009 Plan that are forfeited, canceled, settled in cash or otherwise terminated
without a distribution of shares to a participant, or that are delivered by attestation or withheld by the Company in connection with an option exercise or the
payment of any required income tax withholding upon an option exercise or the vesting of restricted stock, will be deemed available for Awards under the
2017 Plan.
F-32
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Stock options are awarded with a strike price equal to the fair market value based on the closing price of our common stock on the date of grant.
Options granted typically vest over a service period ranging from three to four years and expire ten years from the date of grant. Restricted shares typically
vest over a service period ranging from one to four years and expire ten years from date of grant.
The exercise prices of stock options outstanding on December 31, 2019 range from $4.62 to $87.80. Restricted stock awards are full-value awards.
There were 0.7 million shares available for grant at December 31, 2019.
Stock Options
A summary of stock option activity and weighted average exercise price is as follows:
Outstanding, beginning of period
Granted
Exercised
Forfeited/Cancelled
Outstanding, end of period
For The Year Ended December 31,
2019
Options
(Amounts in
Thousands)
683 $
92
(126)
(1)
648 $
Weighted
Average
Exercise Price
29.60
79.21
25.11
52.50
37.43
The weighted-average estimated fair value of employee stock options granted as calculated using the Black-Scholes Option Pricing Model in 2019,
2018 and 2017, and the related assumptions follow:
Weighted average fair value
Risk-free discount rate
Expected life
Dividend yield
Volatility
2019
Grants
29.78
$
For the Year Ended December 31,
2018
Grants
14.72
$
$
1.72% - 2.29%
4.2 - 4.4 years
—
43%
2.32% - 2.84%
4.1 - 4.2 years
—
45%
2017
Grants
12.97
1.67% - 1.85%
3.6 - 4.2 years
—
47%
Stock option compensation expense totaled $2.5 million, $2.0 million and $1.1 million for the years ended December 31, 2019, 2018 and 2017,
respectively. As of December 31, 2019, there was $4.9 million of total unrecognized compensation cost that is expected to be recognized over a weighted
average period of 1.8 years.
The intrinsic value of vested and outstanding stock options was $16.7 million and $22.0 million, respectively, as of December 31, 2019.
As of December 31, 2019, there were 235,923 and 411,976 shares of stock options vested and unvested, respectively.
The intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $7.3 million, $1.8 million and
$0.5 million, respectively.
F-33
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Restricted Stock Awards
The following table summarizes the status of unvested restricted stock awards outstanding at December 31, 2019:
Unvested restricted stock awards, beginning of period
Awarded
Vested
Forfeited
Unvested restricted stock awards, end of period
For The Year Ended
December 31,
2019
Restricted
Stock
Awards
(Amounts in
Thousands)
Weighted
Average
Grant Date
Fair Value
149 $
69
(66)
(3)
149 $
36.10
68.91
35.58
53.54
51.10
The fair market value of restricted stock awards that vested during the year ended December 31, 2019 was $4.2 million.
Restricted stock award compensation expense totaled $3.3 million, $2.1 million and $1.4 million for the years ended December 31, 2019, 2018 and
2017, respectively. As of December 31, 2019, there was $5.0 million of total unrecognized compensation cost that is expected to be recognized over a
weighted average period of 1.6 years.
12. Employee Benefit Plans
The 401(k) retirement plan is a defined contribution plan that provides for matching contributions by the Company to all non-union employees.
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 U.S. Revenue Code. The Company provided a matching contribution, equal to 6.0% of the
employees’ contributions, totaling $0.2 million, $0.3 million and $44,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
13. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal and/or administrative proceedings incidental to its business. It is the opinion of management that
the outcome of pending legal and/or administrative proceedings will not have a material effect on our Consolidated Balance Sheets and Consolidated
Statements 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 the
Company and Cigna Corporation by Stop Illinois Marketing Fraud, LLC, a qui tam relator formed for the purpose of bringing this action. In the action, the
plaintiff alleged, inter alia, violations of the federal False Claims Act relating primarily to allegations of violations of the federal Anti-Kickback Statute and
allegedly improper referrals of patients from the Company’s home care division to the Company’s home health business, substantially all of which was sold
in 2013. The plaintiff sought 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 declined to intervene. Plaintiff amended its complaint on April 4, 2016 to include additional allegations in support of
its False Claims Act claims, including alleged violations of the federal Anti-Kickback Statute. The Company and Cigna Corporation filed a motion to
dismiss the amended complaint on June 6, 2016. On February 3, 2017, the Court granted Cigna Corporation’s motion to dismiss in full, and granted the
Company’s motion 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 underlying kickback allegations. On April 7, 2017, the Company filed a partial motion to dismiss the Second Amended Complaint. On May 24,
2017, the State of Illinois filed notice that it was declining to intervene in the plaintiff’s claim under the Illinois False Claims Act. On March 21, 2018, the
Court granted the Company’s motion to dismiss the Second Amended Complaint in part and narrowed the lawsuit to whether the federal False Claims Act
was violated with respect to home health services provided at three senior living facilities in Illinois. On September 24, 2019, the parties reached an
agreement to settle this lawsuit. In connection with the settlement, the Company recognized an expense of $0.6 million in discontinued operations for the
year ended December 31, 2019. The lawsuit was dismissed in full on October 15, 2019.
F-34
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Employment Agreements
During 2017, the Company entered into employment agreements with certain members of senior management. The terms of these agreements are up
to four years with the potential to auto-renew and include non-competition and nondisclosure provisions, as well as provide for defined severance payments
in the event of termination. On November 5, 2018 we amended and restated the employment agreements of each of our 2018 named executive officers in
order to: (i) increase the amount of severance that would be payable on certain terminations of employment in connection with a change in control (as
defined in the employment agreements), from two times annual compensation to three times annual compensation (as defined in the employment
agreements) in the case of our chief executive officer, and from one times annual compensation to two times annual compensation (as defined in the
employment agreements) in the case of our other named executive officers; (ii) provide that the enhanced severance for terminations of employment in
connection with a change in control would be payable if the named executive officers self-terminated for good reason (as defined in the employment
agreements); (iii) stipulate that severance for terminations of employment in connection with a change in control would include any unpaid bonus for a
performance period completed prior to termination (the chief executive officer already had this right); and (iv) adjust the duration of non-competition and
non-solicitation periods to match the number of years of annual compensation that the named executive officer would receive in severance.
A substantial percentage of the Company’s workforce is represented by the Service Employees International Union (“SEIU”) through local
collective bargaining agreements. These agreements are re-negotiated at various intervals. These negotiations are often initiated when the Company
receives increases in hourly rates from various state agencies. Upon expiration of these collective bargaining agreements, the Company may not be able to
negotiate labor agreements on satisfactory terms with these labor unions.
14. Segment Information
Operating segments are defined as components of a company that engage in business activities from which it may earn revenues and incur expenses,
and for which separate financial information is available and is regularly reviewed by the Company’s chief operating decision makers, to assess the
performance of the individual segments and make decisions about resources to be allocated to the segments. The Company operates as a multi-state
provider of three distinct but related business segments providing in-home services.
In its personal care segment, the Company provides non-medical assistance with activities of daily living, primarily to persons who are at increased
risk of hospitalization or institutionalization, such as the elderly, chronically ill or disabled. In its hospice segment, the Company provides physical,
emotional and spiritual care for people who are terminally ill as well as related services for their families. In its home health segment, the Company
provides services that are primarily medical in nature to individuals who may require assistance during an illness or after hospitalization and include skilled
nursing and physical, occupational and speech therapy.
The tables below set forth information about the Company’s reportable segments for the years ended December 31, 2019, 2018 and 2017 along with
the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements. Segment assets are
not reviewed by the Company’s chief operating decision maker function and therefore are not disclosed below.
Segment operating income consists of the net service revenues generated by a segment, less the direct costs of service revenues and general and
administrative expenses that are incurred directly by the segment. Unallocated general and administrative costs are those costs for functions performed in a
centralized manner and therefore not attributable to a particular segment. These costs include accounting, finance, human resources, legal, information
technology, corporate office support and facility costs and overall corporate management.
F-35
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
Personal Care
Hospice
Home Health
Total
For the Year Ended December 31, 2019
(Amounts in Thousands)
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
Net service revenues
Cost of services revenues
Gross profit
General and administrative expenses
Provision for doubtful accounts
Segment operating income
$
$
$
$
$
$
580,728
432,413
148,315
56,645
242
91,428
Personal Care
490,941
365,264
125,677
44,463
265
80,949
Personal Care
425,994
310,119
115,875
35,655
9,524
70,696
$
$
$
$
$
$
53,601
27,203
26,398
12,304
95
13,999
$
$
14,462
9,937
4,525
3,199
6
1,320
For the Year Ended December 31, 2018
(Amounts in Thousands)
Hospice
Home Health
18,850
10,010
8,840
3,737
5
5,098
$
$
6,856
4,569
2,287
1,543
2
742
For the Year Ended December 31, 2017
(Amounts in Thousands)
Hospice
Home Health
—
—
—
—
—
—
$
$
—
—
—
—
—
—
$
$
$
$
$
$
648,791
469,553
179,238
72,148
343
106,747
516,647
379,843
136,804
49,743
272
86,789
425,994
310,119
115,875
35,655
9,524
70,696
Total
Total
Segment reconciliation:
Total segment operating income
Items not allocated at segment level:
Other general and administrative expenses
Depreciation and amortization
Loss (gain) on sale of assets
Interest income
Interest expense
Other income
Income before income taxes
For the Years Ended December 31,
(Amounts in Thousands)
2018
2019
2017
$
106,747
$
86,789
$
70,696
61,421
10,574
—
(1,523)
3,105
—
33,170
$
55,282
8,642
38
(2,592)
5,016
—
20,403
$
41,247
6,663
(2,467)
(66)
4,472
(217)
21,064
$
F-36
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
15. Significant Payors
For 2019, 2018 and 2017, our revenue by payor type was as follows:
2019
Personal Care
2018 (1)
2017 (1)
State, local and other governmental programs
Managed care organizations
Private pay
Commercial insurance
Other
Total personal care segment net service revenues
Amount
(in Thousands)
303,479
239,559
21,765
9,204
6,721
580,728
$
$
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
285,973
173,391
20,003
6,173
5,401
490,941
52.2 % $
41.3
3.7
1.6
1.2
100.0 % $
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
273,525
140,993
8,739
2,737
—
425,994
58.2 % $
35.3
4.1
1.3
1.1
100.0 % $
% of
Segment
Net
Service
Revenues
64.2 %
33.1
2.1
0.6
—
100.0 %
Medicare
Managed care organizations
Other
Total hospice segment net service revenues
Medicare
Managed care organizations
Other
Total home health segment net service
revenues
Amount
(in Thousands)
2019
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
Hospice
$
$
$
$
49,649
2,768
1,184
53,601
92.6 % $
5.2
2.2
100.0 % $
Home Health
17,652
1,047
151
18,850
93.6 %
5.6
0.8
100.0 %
Amount
(in Thousands)
2019
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
11,218
2,942
302
14,462
77.6 % $
20.3
2.1
100.0 % $
6,034
752
70
6,856
88.0 %
11.0
1.0
100.0 %
The Company derives a significant amount of its net service revenues from its operations in Illinois, New York and New Mexico. The percentages
of total revenue for each of these significant states for 2019, 2018 and 2017 were as follows:
2019
Personal Care
2018 (1)
2017 (1)
Illinois
New York
New Mexico
All other states
Total personal care segment net service
revenues
$
Amount
(in Thousands)
247,524
108,403
75,666
149,135
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
232,518
65,117
58,914
134,392
42.6 % $
18.7
13.0
25.7
% of
Segment
Net
Service
Revenues
Amount
(in Thousands)
224,257
58,360
37,588
105,789
47.3 % $
13.3
12.0
27.4
% of
Segment
Net
Service
Revenues
52.6 %
13.7
8.8
24.9
$
580,728
100.0 % $
490,941
100.0 % $
425,994
100.0 %
F-37
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
New Mexico
All other states
Total hospice segment net service revenues
New Mexico
Total home health segment net service revenues
Hospice
Amount
(in Thousands)
2019
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
38,790
14,811
53,601
72.4 % $
27.6
100.0 % $
18,850
—
18,850
100.0 %
—
100.0 %
Home Health
2019
Amount
(in Thousands)
14,462
14,462
% of Segment
Net Service
Revenues
Amount
(in Thousands)
2018
% of Segment
Net Service
Revenues
100.0 % $
100.0 % $
6,856
6,856
100.0 %
100.0 %
$
$
$
$
A substantial portion of the Company’s net service revenues and accounts receivables are derived from services performed for state and local
governmental agencies. We derive a significant amount of our net service revenues in Illinois, which represented 38.2%, 45.0% and 52.6% of our net
service revenues for the years ended December 31, 2019, 2018 and 2017, respectively. The Illinois Department on Aging, the largest payor program for the
Company’s Illinois personal care operations, accounted for 25.3%, 31.7% and 36.5% of the Company’s net service revenues for 2019, 2018, and 2017,
respectively.
The related receivables due from the Illinois Department on Aging represented 25.1% and 23.1% of the Company’s net accounts receivable at
December 31, 2019 and 2018, respectively.
16. Concentration of Cash
The Company owns financial instruments that potentially subject the Company to significant concentrations of credit risk include cash. The
Company maintains cash with financial institutions which, at times, may exceed federally insured limits. The Company believes it is not exposed to any
significant credit risk on cash.
F-38
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
17. Unaudited Summarized Quarterly Financial Information
The following is a summary of the Company’s unaudited quarterly results of operations. See Note 2. Revision of Previously Issued Financial
Statements.
Year Ended December 31, 2019
Year Ended December 31, 2018
Net service revenues
Gross profit
Operating income from continuing
operations
Net income from continuing
operations
(Loss) earnings from discontinued
operations
Net income
Average shares outstanding:
Basic
Diluted
Income per common share:
Basic
Continuing operations
Discontinued operations
Basic net income per share
Diluted net income per share
Continuing operations
Discontinued operations
Diluted net income per share
Dec. 31
Sept. 30
Jun. 30
(Amounts and Shares in Thousands, Except Per Share Data)
$ 192,376 $ 168,993 $ 148,915 $ 138,507 $ 139,288 $ 137,341 $ 130,892 $ 109,126
27,583
35,377
36,415
37,429
57,542
39,693
36,827
45,176
Mar. 31
Mar. 31
Sept. 30
Jun. 30
Dec. 31
14,530
7,335
7,391
5,496
6,428
5,613
6,547
4,239
10,737
5,486
5,292
4,296
4,266
3,358
4,052
4,631
—
10,737 $
(574)
4,912 $
—
5,292 $
—
4,296 $
126
4,392 $
—
3,358 $
—
4,052 $
$
—
4,631
15,435
15,881
13,766
14,203
13,044
13,433
12,995
13,381
12,964
13,381
12,179
12,569
11,533
11,838
11,502
11,696
$
$
$
$
0.70 $
—
0.70 $
0.68 $
—
0.68 $
0.40 $
(0.04)
0.36 $
0.39 $
(0.04)
0.35 $
0.41 $
—
0.41 $
0.39 $
—
0.39 $
0.33 $
—
0.33 $
0.32 $
—
0.32 $
0.33 $
0.01
0.34 $
0.32 $
0.01
0.33 $
0.28 $
—
0.28 $
0.27 $
—
0.27 $
0.35 $
—
0.35 $
0.34 $
—
0.34 $
0.40
—
0.40
0.40
—
0.40
As described in Note 2 above, the Company identified immaterial errors in the Company’s previously issued Consolidated Financial Statements
related to implicit price concessions and provision for doubtful accounts. The correction reflects the impact on the Company’s income tax provision and
related accounts as a result of correcting for the immaterial error as discussed above. Additionally, the Company identified and corrected immaterial
unrelated income tax items impacting deferred tax assets and the reserve for uncertain tax positions, and other immaterial items.
The following are the effects of the corrections, of the immaterial errors on the Company’s unaudited quarterly results of operations. The unaudited
quarterly information will be revised in conjunction with the future filing of the Company’s unaudited quarterly financial statements for each of the 2020
quarterly periods.
Net service revenues
Gross profit
Operating income from
continuing operations
Net income from
continuing operations
Net income
Income per common share:
Basic
Diluted
For the Three Months Ended March 31, 2019
For the Three Months Ended March 31, 2018
Previously
reported
Revision
As Revised
Previously
reported
Revision
As Revised
$
139,254
37,574
$
(Amounts and Shares in Thousands, Except Per Share Data)
(747) $
(747)
138,507
36,827
$
109,476
27,933
$
(350) $
(350)
109,126
27,583
6,243
4,862
4,862
(747)
(566)
(566)
5,496
4,296
4,296
4,589
4,886
4,886
$
$
0.37
0.36
$
$
(0.04) $
(0.04) $
0.33
0.32
$
$
0.42
0.42
$
$
(350)
(255)
(255)
(0.02) $
(0.02) $
4,239
4,631
4,631
0.40
0.40
F-39
Table of Contents
Net service revenues
Gross profit
Operating income from
continuing operations
Net income from
continuing operations
Net income
Income per common share:
Basic
Diluted
Net service revenues
Gross profit
Operating income from
continuing operations
Net income from
continuing operations
Net income
Income per common share:
Basic
Diluted
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
For the Three Months Ended June 30, 2019
For the Three Months Ended June 30, 2018
Previously
reported
Revision
As Revised
Previously
reported
Revision
As Revised
$
149,692
40,470
$
(Amounts and Shares in Thousands, Except Per Share Data)
(777) $
(777)
148,915
39,693
$
131,258
35,743
$
(366) $
(366)
130,892
35,377
7,713
5,518
5,518
(322)
(226)
(226)
7,391
5,292
5,292
6,913
4,318
4,318
$
$
0.42
0.41
$
$
(0.01) $
(0.02) $
0.41
0.39
$
$
0.37
0.36
$
$
(366)
(266)
(266)
(0.02) $
(0.02) $
6,547
4,052
4,052
0.35
0.34
For the Three Months Ended September 30, 2019
For the Three Months Ended September 30, 2018
Previously
reported
Revision
As Revised
Previously
reported
Revision
As Revised
$
169,803
45,986
$
(Amounts and Shares in Thousands, Except Per Share Data)
(810) $
(810)
168,993
45,176
$
137,716
36,790
$
(375) $
(375)
137,341
36,415
7,280
5,441
4,867
55
45
45
7,335
5,486
4,912
5,988
3,631
3,631
$
$
0.36
0.34
$
$
—
0.01
$
$
0.36
0.35
$
$
0.29
0.28
$
$
(375)
(273)
(273)
(0.01) $
(0.01) $
Net service revenues
Gross profit
Operating income from continuing operations
Net income from continuing operations
Net income
Income per common share:
Basic
Diluted
$
$
$
18. Subsequent Events
Previously reported
For the Three Months Ended December 30, 2018
Revision
(Amounts and Shares in Thousands, Except Per Share Data)
As Revised
$
139,669
37,810
6,809
4,542
4,668
0.36
0.35
$
$
$
(381)
(381)
(381)
(276)
(276)
(0.02)
(0.02)
$
$
On February 17, 2020, the Company signed an eleven year lease agreement to expand its Frisco support center from 31,000 square feet to
approximately 75,000 square feet which will result in an increase in the operating lease asset, net and operating lease liability by approximately $13 million
and $17 million, respectively. The Frisco support staff is expected to move during the third quarter of 2020.
On January 31, 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due
to a novel coronavirus. In March 2020, the World Health Organization declared the outbreak of COVID-19, a disease caused by this novel coronavirus, a
pandemic. This disease continues to spread throughout the United States and other parts of the world. It is impossible to predict the effect and ultimate
impact of the COVID-19 pandemic as the situation is rapidly evolving. The spread of COVID-19 has caused public health officials to recommend and
mandate precautions to mitigate the spread of the virus, including the closure of public facilities and parks, schools, restaurants, many businesses and other
locations of public assembly. Although many of these restrictions have eased across the country and certain of these locations have reopened, to varying
degrees,
F-40
5,613
3,358
3,358
0.28
0.27
139,288
37,429
6,428
4,266
4,392
0.34
0.33
Table of Contents
ADDUS HOMECARE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
the COVID-19 pandemic has yet to show substantial signs of decline in the U.S. Some areas are re-imposing closures and other restrictions due to
increasing rates of COVID-19 cases. There are no reliable estimates of how long the pandemic will last, how many people are likely to be affected by it or
the duration or types of restrictions that will be imposed. For that reason, we are unable to predict the long-term impact of the pandemic on our business at
this time.
In April 2020, the Company received grants in an aggregate principal amount of $6.9 million from the Public Health and Social Services Emergency
Fund (“Relief Fund”) under the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) as part of the automatic general
distributions by HHS, for which it did not apply. The Company returned these funds in June 2020.
On July 1, 2020, we completed the acquisition of A Plus Health Care, Inc. (“A Plus”) for approximately $12.2 million, with funding provided by
cash on hand. With the purchase of A Plus, we expanded our personal care services in the state of Montana. The Company is currently assessing the fair
value of identifiable net assets acquired.
F-41
Table of Contents
Allowance for doubtful accounts
Year ended December 31, 2019
Allowance for doubtful accounts
Year ended December 31, 2018
Allowance for doubtful accounts
Year ended December 31, 2017
Allowance for doubtful accounts
*
Write-offs, net of recoveries
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(Amounts in Thousands)
Balance at
beginning of
period
Additions/
charges
Deductions*
Balance at
end of period
$
$
$
945
18,749
343
272
326 $
18,076 $
962
945
14,460
9,524
5,235 $
18,749
With the adoption of ASU 2014-09, Revenue from Contracts with Customers, in 2018 and subsequent periods, subsequent adjustments that are
determined to be the result of an adverse change in the payor’s ability to pay are recognized as provision for doubtful accounts. We recorded $11.0 million
for the year ended December 31, 2018 as a reduction to revenue that would have been recorded as provision for doubtful accounts under the prior revenue
recognition guidance. As described in Note 2 above, the Company identified immaterial errors in the Company’s previously issued Consolidated Financial
Statements related to the provision for doubtful accounts. The cumulative effect of those adjustments increased the allowance for doubtful accounts as of
December 31, 2018 and 2017, by $0.3 million and $8.2 million, respectively, of which $7.9 million resulted in an increase in deductions for the year ended
December 31, 2018.
F-42
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
As of December 31, 2019, Addus HomeCare Corporation (the “Corporation,” “we,” “us” and “our”) had one class of securities registered under Section 12
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our common stock, par value $0.001 per share (the “Common Stock”).
The following description is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to the actual terms and
provisions contained in our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) and our Amended and Restated Bylaws
(the “Bylaws”), each of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K, of which this Exhibit 4.3 is a part. We
encourage you to read our Certificate of Incorporation, our Bylaws and the applicable provisions of the Delaware General Corporation Law (“DGCL”), for
additional information.
Under our Certificate of Incorporation, we are authorized to issue 40,000,000 shares of Common Stock.
Description of Common Stock
Voting Rights
Each outstanding share of our Common Stock is entitled to one vote per share of record on all matters submitted to a vote of stockholders. At a meeting of
stockholders at which a quorum is present, for all matters other than the election of directors, all questions shall be decided by the vote of the holders of a
majority of the outstanding shares of stock entitled to vote thereon present in person or by proxy at the meeting, unless the matter is one upon which a
different vote is required by express provision of law or our Certificate of Incorporation or Bylaws. Directors will be elected by a plurality of the votes of
the shares present at a meeting. There is no provision for cumulative voting for the election of directors in our Certificate of Incorporation. This means that
the holders of a plurality of the shares voted can elect all of the directors then standing for election.
Dividends
Holders of our Common Stock are entitled to receive dividends or other distributions when, as, and if declared by our board of directors. The right of our
board of directors to declare dividends, however, is subject to any rights of the holders of other classes of our capital stock, any indebtedness outstanding
from time to time and the availability of sufficient funds under the DGCL to pay dividends.
Preemptive Rights
The holders of our Common Stock do not have preemptive rights to purchase or subscribe for any of our capital stock or other securities.
Redemption
The shares of our Common Stock are not subject to redemption by operation of a sinking fund or otherwise.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of our company, subject to the rights, if any, of the holders of other classes of our capital stock,
the holders of shares of our Common Stock are entitled to receive any of our assets available for distribution to our stockholders ratably in proportion to the
number of shares held by them.
Listing
Our Common Stock is listed on the Nasdaq Global Market under the symbol “ADUS.”
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is Computershare, 462 South 4th Street, Louisville, Kentucky 40202.
Miscellaneous
All of the outstanding shares of the our Common Stock are fully paid and nonassessable.
Certain Provisions of the DGCL and Our Certificate of Incorporation and Bylaws
The following is a summary of certain provisions of the DGCL and our Certificate of Incorporation and Bylaws that may be deemed to have an anti-
takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interest, including those
attempts that might result in a premium over the market price for the shares. These provisions could adversely affect the price of our Common Stock.
Staggered Board
Our Certificate of Incorporation and Bylaws divide our board of directors into three classes with staggered three-year terms. In addition, a director may be
removed only for cause and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of the stockholders entitled to vote at an
election for directors of the Corporation, voting as a single class. Any newly created directorship or any vacancy occurring in the board of directors for any
cause may be filled by a majority of the remaining members of the board of directors, although such majority is less than a quorum, or by the sole
remaining director. The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could make it more
difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of our company.
Special Meetings of Stockholders; Stockholder Action by Written Consent
Our Certificate of Incorporation provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or
special meeting of such holders and may not be effected by any consent in writing by such holders. Our Certificate of Incorporation and Bylaws also
provide that, except as otherwise required by law, special meetings of our stockholders can only be called by our chairman of the board or our board of
directors.
Super-majority stockholder vote required for certain actions.
The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s
certificate of incorporation or bylaws, unless the corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. A
66 2/3% vote is required for an amendment to or repeal of, our Certificate of Incorporation by our stockholders, unless such amendment or repeal is
declared advisable by the board of directors by the affirmative vote of at least 75% of the entire board of directors.
Authorization of undesignated preferred stock
Our Certificate of Incorporation permits our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and
privileges as they may designate (including the right to approve an acquisition or other change in our control). Accordingly, our board of directors is
authorized, without action by the stockholders, to issue preferred stock from time to time with such dividend, liquidation, conversion, voting and other
rights and restrictions as it may determine. All shares of any one series of our preferred stock will be identical, except that shares of any one series issued at
different times may differ as to the dates from which dividends may be cumulative. The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control without
further action by our stockholders and may adversely affect the market price of, and the voting and other rights of, the holders of our Common Stock.
Provisions of DGCL Governing Business Combinations
In general, we are subject to Section 203 of the DGCL. This section generally prohibits us from engaging in mergers and other business combinations with
stockholders that beneficially own 15% or more of our voting stock, or with their affiliates, unless our directors or stockholders approve the business
combination in the prescribed manner. However, because ECP Helios Partners III, L.P., ECP General III, L.P. and Eos Partners SBIC III, L.P., collectively
the Eos Funds, acquired their shares prior to our initial public offering on November 2, 2009, Section 203 is currently inapplicable to any business
combination with the Eos Funds or their affiliates.
Advanced Notice of Stockholders Proposals or Nominations
In addition, our Bylaws require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice
requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations.
AMENDED AND RESTATED
EMPLOYMENT AND NON-COMPETITION AGREEMENT
Exhibit 10.40
This AMENDED AND RESTATED EMPLOYMENT AND NON-COMPETITION AGREEMENT (this “Agreement”) is effective as of
November 7, 2019 (the “Effective Date”), by and between Addus HealthCare, Inc., an Illinois corporation (the “Company”), and David W. Tucker, an
individual domiciled in the State of Texas (the “Executive”). The Company and Executive are hereinafter sometimes referred to individually as a “Party”
and collectively as the “Parties.”
WHEREAS, the Company, its parent and its subsidiaries (collectively, the “Addus HealthCare Group”) provide home care, home health and
hospice services.
WHEREAS, the Parties desire to enter this Agreement to secure the Executive’s employment, all on the terms and conditions set forth herein;
WHEREAS, by virtue of the Executive’s employment by the Company pursuant to the terms hereof, the Executive will obtain and become
familiar with certain valuable confidential and proprietary information relating to the Addus HealthCare Group;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the Parties, intending to be legally bound,
agree as follows:
1.
Effectiveness; Term of Employment.
(a)
(b)
This Agreement shall automatically become effective on the Effective Date.
The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the period
commencing as of the Effective Date and ending on the first (1st) anniversary of the Effective Date, or on such earlier date as
provided pursuant to the terms and conditions of this Agreement (the “Initial Employment Term”). At the end of the Initial
Employment Term, this Agreement shall automatically renew for successive one (1) year terms (each, as may be earlier terminated
pursuant to the terms and conditions of this Agreement, an “Additional Employment Term” and together with the Initial
Employment Term, the “Employment Term”), unless either Party provides notice to the other of its or his intention not to renew this
Agreement at least thirty (30) days prior to the expiration of the Initial Employment Term or any Additional Employment Term (a
“Non-Renewal”). During the Employment Term, the Executive shall (i) devote substantially all of his professional time, loyalty, and
efforts to discharge his duties hereunder on a timely basis; (ii) use his best efforts to loyally and diligently serve the business and
affairs of the Addus HealthCare Group; and (iii) endeavor in all respects to promote, advance and further the Addus HealthCare
Group’s interests in all matters. To the extent it does not interfere with Executive’s duties hereunder in any material respect, the
Parties agree that this provision should not be construed as limiting Executive’s right to serve on up to one (1) board of, or
otherwise engage in activities on behalf of, charitable and civic organizations and, upon prior written approval of the Company, one
(1) board of a for profit entity that does not compete with the business of the Company.
2.
Employment Duties.
During the Employment Term, the Company will employ the Executive as its Executive Vice President - Chief Development Officer, a senior
executive position that reports directly to the Chief Executive Officer (“CEO”) of the Company. The Executive’s principal duties and responsibilities shall
be to oversee and direct the operations of the Addus HealthCare Group including the management and delivery of home care and services and the
performance of such other executive duties and responsibilities as may be assigned to him by the CEO or the Board of Directors and are consistent with the
Executive’s position as Chief Development Officer of the Company.
3.
Compensation.
The Company will pay the Executive as follows during the Employment Term:
(a)
Base Salary.
The Company shall pay the Executive a base salary at the annual rate of Two Hundred Ninety Five Thousand Dollars ($295,000),
which shall be paid in accordance with the normal payroll practices of the Company and shall be subject to applicable withholdings
and deductions. Thereafter, the Executive’s base salary shall be subject to review and adjustment upward by the compensation
committee (the “Compensation Committee”) of the board of directors of Addus HomeCare Corporation (“Addus HomeCare”) (the
“Board of Directors”) on or about each anniversary of the Effective Date for each year during the Employment Term (as adjusted
from time-to-time, the “Base Salary”).
(b)
Bonus.
The Executive, at the discretion of the Compensation Committee, shall be eligible (but not entitled) to receive an annual bonus as
set forth on Exhibit A hereto. The Compensation Committee, at its sole discretion, may determine the amount of the annual bonus,
if any, to which the Executive may become entitled based on the quantitative and qualitative factors described on Exhibit A or any
other factors the Compensation Committee may deem appropriate from time to time. All amounts payable pursuant to this
Section 3(b), if any, shall be paid within no more than thirty (30) days after completion of Addus HomeCare’s audited financial
statements for the most recently completed fiscal year, but in all events, in the fiscal year following the fiscal year in which the
performance occurred, and shall be subject to applicable withholdings and deductions. Bonus is not salary and is earned on the day
it is paid. To be eligible to receive the bonus, the Executive must be actively employed and must not have given notice of
termination on or prior to such date, except as expressly provided for in this Agreement.
(c)
Equity Awards.
The Executive shall be eligible to receive equity awards and, as of the Effective Date, Executive would be issued options to acquire
25,000 unrestricted shares of Addus common stock and granted 2,500 restricted shares of Addus common stock (the “Initial
Grants”). The Initial Grants vest annually over a four-year period, subject to the terms and conditions set forth in the Company’s
stock incentive plan and the respective stock agreements.
4.
Expenses.
It is recognized that the Executive, in the performance of his duties hereunder, may be required to expend sums for travel (e.g., airfare,
automobile rental, etc.), entertainment, and lodging. During the Employment Term, the Company shall reimburse the Executive for reasonable business
expenses incurred by him during the Employment Term in connection with the performance of his duties hereunder conditioned upon and subject to the
Company’s established policies and procedures, including written receipt from the Executive of an itemized accounting in accordance with the Company’s
regular business expense verification practices.
5.
Benefits.
During the Employment Term, the Executive shall be entitled to benefits under such plans, programs, or arrangements as the Board of Directors
may establish or maintain from time to time for similarly-situated employees, and in accordance with its policies, which may change at the sole discretion
of the Board of Directors. Benefits as of the Effective Date are:
(a)
Four (4) weeks of paid vacation during each year of employment. Subject to the Company’s established policies and procedures,
vacation may be carried over to a subsequent year of employment, not to exceed eight (8) weeks during any calendar year of
employment.
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(b)
(c)
(d)
(e)
(f)
(g)
(h)
Five (5) days personal/sick leave per year, with pay. Personal/sick days may be carried over to a subsequent year of employment,
not to exceed ten (10) days during any calendar year of employment.
Six (6) Company holidays, plus two (2) floating holidays, per year.
Coverage under the health benefit plan provided by the Company to its executives, which may change, at the sole discretion of the
Board of Directors, from time to time. The Company will cover the Executive and his dependents, if any, during the Employment
Term to the same extent and according to the same terms as the Company’s other executives are covered.
Life insurance policy with a face amount of up to five (5) times the Base Salary, provided that the Company shall not be required to
spend greater than three percent (3%) of the Base Salary in purchasing such insurance policy.
Short-term and long-term disability insurance to the same extent and according to the same terms as the Company’s other similarly-
situated executives are covered, which may change, at the sole discretion of the Board of Directors, from time to time.
Tuition reimbursement shall be available for courses relevant to the Executive’s position and taken at an accredited institution,
subject to prior approval by the Chief Executive Officer.
Participation in the Company’s 401(k) plan up to the defined Internal Revenue Service limit beginning 30 days after the Effective
Date or such other date as required under the plan. The Company will annually match 6% of the Executive’s annual contribution to
such plan during the Employment Term, subject to the Company’s established policies and procedures.
6.
Termination by the Company.
(a)
The Company may terminate the Executive’s employment hereunder at any time for Reasonable Cause. The term “Reasonable
Cause” shall be limited to the following:
(i) A material breach or omission by the Executive of any of his duties or obligations under this Agreement (except due to
Disability, as defined below) that the Executive shall fail to cure after receipt of written notice of such breach or omission from the
Company’s CEO or Board of Directors, which notice shall designate a reasonable period of time, if curable at all, of not less than
ten (10) business days within which the breach or omission must be cured to the reasonable satisfaction of the CEO or the Board of
Directors, as applicable, in order to prevent a termination for Reasonable Cause; provided, however, that the Executive shall only
be permitted the opportunity to cure such breaches or omissions a total of two times in any twelve (12)-month rolling period;
(ii) Willfully engaging in any action that materially damages, or that may reasonably be expected to materially damage, the Addus
HealthCare Group or the business or goodwill thereof;
(iii) Breaching the Executive’s fiduciary duty to the Addus HealthCare Group;
(iv) Committing any act involving fraud, misusing or misappropriating money or other property of the Addus HealthCare Group,
committing a felony, using illegal drugs, misusing or abusing prescriptive or over-the-counter drugs, habitually using other
intoxicants, or chronic absenteeism;
(v) Gross negligence or willful misconduct by the Executive;
(vi) Committing acts constituting gross insubordination, such as, without limitation, the intentional disregard of any reasonable
directive of the CEO or the Board of Directors; or
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(vii) failing to perform any material duty in a timely and effective manner and failing to cure any such performance deficiency after
receipt of written notice of the deficiency from the CEO or Board of Directors, which notice shall designate the reasonable period
of time, if curable at all, of not less than ten (10) days within which the performance deficiency must be cured to the reasonable
satisfaction of the CEO or the Board of Directors, as applicable, in order to prevent a termination for reasonable cause; provided,
however, that the Executive shall only be permitted the opportunity to cure such performance deficiencies a total of two times in
any twelve (12)-month rolling period.
The Executive’s employment hereunder shall be terminated in the event of his death, and the Company may terminate the
Executive’s employment hereunder if the Executive suffers a physical or mental disability (a “Disability”) so that the Executive is
or, in the opinion of an independent physician retained by the Company for purposes of this determination will be, unable to
perform his duties in a manner satisfactory to the Company for a period of ninety (90) days out of any one hundred eighty
(180) consecutive-day period (in which event the Executive shall be deemed to have suffered a permanent Disability).
The Company may terminate the Executive’s employment hereunder at any time for any other reason, or for no reason.
Termination of the Executive’s employment for any reason shall terminate the Employment Term but shall not affect the
Executive’s obligations pursuant to Section 9 hereof, which obligations shall remain in effect for the period therein provided.
(b)
(c)
(d)
7.
Termination by the Executive.
The Executive may terminate his employment with the Company (a) for Good Reason (as defined below) or (b) without Good Reason, in each
case, upon not less than thirty (30) days prior written notice to the Company; provided, however, that after the receipt of such notice, the Company may, in
its discretion accelerate the effective date of such termination at any time by written notice to the Executive. Termination of the Executive’s employment by
the Executive shall terminate the Employment Term but shall not affect the Executive’s obligations under Section 9 hereof, which obligations shall remain
in effect for the period therein provided. As used herein, “Good Reason” means (i) any reduction in the Executive’s Base Salary, (ii) any material reduction
to the Executive’s employment duties and responsibilities, (iii) any material breach by the Company of any material term of this Agreement, other than a
breach which is remedied by the Company within 10 days after receipt of written notice given by the Executive, (iv) a change in the Executive’s direct
reporting duty to a person other than the CEO of the Company or the Board of Directors; or (v) the relocation of the Executive’s principal office to a
location more than fifty (50) miles from Frisco, Texas.
8.
Rights and Obligations Upon Termination.
(a)
If the Executive’s employment is terminated by the Company pursuant to Section 6(a) or 6(b) hereof or by the Executive pursuant
to Section 7(b) hereof, the Executive or his estate shall have no further rights against the Addus HealthCare Group hereunder,
except for the right to receive, with respect to the period prior to the effective date of termination:
(i) Any unpaid Base Salary under Section 3(a) hereof for any period prior to the effective date of termination;
(ii) Any accrued but unpaid benefits under Section 5 hereof for any period prior to the effective date of termination; and
(iii) In the case of termination pursuant to Section 6(b), eligibility for life or disability insurance benefits described in Sections 5(e)
or (f), as applicable.
Such payments shall be made to the Executive whether or not the Company chooses to utilize the services of the Executive for the
required notice period specified in Section 7.
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(b)
If the Executive’s employment is terminated pursuant to Section 6(c) hereof or Section 7(a) hereof, or as a result of Non-Renewal
by the Company, the Executive shall be entitled to, in lieu of any further payments to the Executive for periods subsequent to the
date of termination:
(c)
(i) Any unpaid Base Salary under Section 3(a) hereof for any period prior to the effective date of termination;
(ii) A pro rata portion of the bonus under Section 3(b) hereof based on what Executive would have been entitled to receive pursuant
to the Company’s then-effective bonus plan had his employment not been terminated, which shall be payable following the time the
Company determines the amount of bonuses payable to its executives following the end of the year in which termination occurs,
which determination will be based on the actual performance of the Company;
(iii) Any accrued but unpaid benefits under Section 5 hereof for any period prior to the effective date of termination, in accordance
with the terms of the applicable plan or arrangement;
(iv) Conditioned upon the Executive’s strict compliance with the post-employment restrictions described in Section 9 below and
subject to applicable withholdings and deductions, severance pay (“Base Severance Pay”) in an amount equal to the Executive’s
Base Cash Compensation (as defined below) to be paid in equal installments on the Company’s regular pay dates over the twelve
(12) month period following termination of the Executive’s employment (subject to applicable withholdings and deductions), plus
after-tax cash payments equal to the difference between the premiums for COBRA continuation coverage that would be available to
Executive and the amount of premiums paid by similarly-situated active employees of the Company under the Company’s health,
dental, and/or vision insurance plans (calculated as of the first calendar month following Executive’s termination and then
multiplied by 12 months), for a period of one (1) year following the Executive’s date of termination of employment, to be paid in
equal installments on the Company’s regular pay dates (subject to applicable tax withholdings and deductions).
For purposes of this Agreement, “Base Cash Compensation” shall mean the highest annual Base Salary in effect for the Executive.
Notwithstanding anything to the contrary set forth herein, if the Executive’s employment is terminated by the Company pursuant to
Section 6(c) or by the Executive pursuant to Section 7(a) or as a result of Non-Renewal by the Company, in each case within six
(6) months prior to, or one (1) year following, a Change in Control (as defined below), the Executive shall be entitled to, in lieu of
the payments to be made pursuant to Section 8(b)(iv), (A) an amount equal to twenty four (24) months of the Executive’s Annual
Cash Compensation (as defined below) (subject to applicable withholdings and deductions), less any payment already received
pursuant to Section 8(b)(iv) (“Change of Control Severance Pay” and, together with Base Severance Pay, “Severance Pay”), which
shall be payable in accordance with the normal payroll practices of the Company in equal installments on the Company’s regular
pay dates over the twelve (12) month period following termination of the Executive’s employment, (B) any unpaid bonus for a
completed performance period that the Executive would have earned had he remained employed through date of payment, as
determined by the Company and paid at the same time bonuses are paid to other senior executives based upon the actual
performance of the Company, and (C) the Executive shall be eligible to receive after-tax cash payments equal to the difference
between the premiums for COBRA continuation coverage that would be available to Executive and the amount of premiums paid
by similarly-situated active employees of the Company under the Company’s health, dental and/or vision insurance plans
(calculated as of the first calendar month following Executive’s termination and then multiplied by 24 months), payable in equal
installments on the Company’s regular pay dates (subject to applicable tax withholdings and deductions) until one (1) year
following the termination of the Executive’s employment. As used herein, a “Change in Control” shall be deemed to have occurred
if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Addus HomeCare, or
a corporation owned
5
directly or indirectly by the stockholders of Addus HomeCare in substantially the same proportions as their ownership of stock of
Addus HomeCare, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of Addus HomeCare representing more than 50% of the total voting power represented by Addus HomeCare’s then
outstanding securities that vote generally in the election of directors (referred to herein as “Voting Securities”); or (ii) after the date
of this Agreement, the stockholders of Addus HomeCare approve (x) a merger or consolidation of Addus HomeCare with any other
corporation, other than a merger or consolidation that would result in the Voting Securities of Addus HomeCare outstanding
immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) more than 50% of the total voting power represented by the Voting Securities of Addus HomeCare or such
surviving entity outstanding immediately after such merger or consolidation, or (y) a plan of complete liquidation of Addus
HomeCare or an agreement for the sale or disposition by Addus HomeCare of (in one transaction or a series of transactions) all or
substantially all of Addus HomeCare’s assets.
For purposes of this Agreement, “Annual Cash Compensation” shall mean the sum of (a) the highest annual Base Salary in effect
for the Executive and (b) the greater of (i) the Executive’s bonus for the most recently-completed year (excluding any special
bonuses awarded for performance after the conclusion of the performance period), if any, or (ii) the annualized amount of the
Executive’s target bonus for the then current year.
(d)
The Executive acknowledges and agrees that the Company’s obligations to make payments pursuant to Sections 8(b)(iv) and 8(c)
above are expressly conditioned on the Executive timely executing, delivering and not revoking a customary general release in form
and substance satisfactory to the Company within the period that is sixty (60) days following the date of the Executive’s termination
of employment or service with the Company. To the extent that such sixty (60) day period spans two (2) calendar years, no payment
of any severance amount or benefit that is (i) considered to be nonqualified deferred compensation within the meaning of
Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance promulgated thereunder
(collectively, “Code §409A”) and (ii) conditioned upon the release, shall be made before the first day of the second calendar year,
regardless of when the release is actually executed and returned to the Company.
9.
Covenants of the Executive.
(a)
No Conflicts.
The Executive represents and warrants that he is not personally subject to any agreement, order, or decree that restricts his
acceptance of this Agreement and performance of his duties with the Company hereunder.
6
(b)
Non-Competition; Non-Solicitation.
During the Employment Term and during the Restrictive Period (as defined below), the Executive shall not, without the prior
written consent of the Company, directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any
other person or entity whom he may manage, control, participate in, consult with, render services for, or be employed by or
associated with, compete with the Business (as defined below) in any of the following described manners:
(i) Engage in, assist, or have any interest in, as principal, consultant, advisor, agent, financier, or employee, any business entity that
is, or that is about to become engaged in, providing goods or services in competition with the Addus HealthCare Group within a
geographic radius of fifty (50) miles from any Addus HealthCare Group branch office;
(ii) Solicit or accept any business (or help any other person solicit or accept any business) from any person or entity that on the
Effective Date is a customer of the Addus HealthCare Group, or during the Employment Term becomes a customer of the Addus
HealthCare Group, other than a customer that does not engage in the Business;
(iii) Induce or attempt to induce any employee of the Addus HealthCare Group to terminate such employee’s relationship with the
Addus HealthCare Group or in any way interfere with the relationship between the Addus HealthCare Group and any employee
thereof; or
(iv) Induce or attempt to induce any customer, referral source, supplier, vendor, licensee, or other business relation of the Addus
HealthCare Group to cease doing business with the Addus HealthCare Group, or in any way interfere with the relationship between
any such customer, referral source, supplier, vendor, licensee, or business relation, on the one hand, and the Addus HealthCare
Group, on the other hand.
For purposes hereof, the term “Business” means the business of providing home care services of the type and nature that the Addus
HealthCare Group performs and/or any other business activity in which the Addus HealthCare Group performs or program or
service under active development proposed to be performed and/or any other business activity in which the Addus HealthCare
Group becomes engaged in on or after the date hereof while the Executive is employed by the Company.
For purposes hereof, the term “Restrictive Period” means the period beginning on the date on which the Executive’s employment is
terminated by the Company or the Executive for any reason and ending on the first anniversary of such date; provided, however, if
the Executive is eligible for the compensation described in Section 8(c), “Restrictive Period” shall mean the period beginning on
the date on which the Executive’s employment is terminated by the Company or the Executive for any reason and ending on the
second anniversary of such date
Notwithstanding the foregoing provisions, nothing herein shall prohibit the Executive from owning one percent (1%) or less of any
securities of an Addus HealthCare Group competitor, if such securities are listed on a nationally recognized securities exchange or
traded over-the-counter. If, at the time of enforcement of this Section 9(b), a court holds that the restrictions stated herein are
unreasonable under the circumstances then existing, the Parties agree that the maximum period, scope or geographic area
reasonable under such circumstances shall be substituted for the stated period, scope or area determined to be reasonable under the
circumstances by such court.
(c)
Non-Disclosure.
The Executive recognizes and acknowledges that he will have access to certain confidential and proprietary information of Addus
HealthCare Group, including, but not limited to, Trade Secrets (as defined below) and other proprietary commercial information,
and that such information constitutes valuable, special, and unique property of Addus HealthCare Group. The Executive agrees that
he
7
will not, for any reason or purpose whatsoever, except in the performance of his duties hereunder, or as required by law, disclose
any of such confidential information to any person, entity, or governmental authority without express authorization of the
Company. This restriction shall not, however, prohibit the Executive from communicating with any Government Agency or
otherwise participating in any investigation or proceeding that may be conducted by any Government Agency, including providing
Company documents or other information, without consent of the Company. The Executive further agrees that he shall not, at any
time during the Employment Term or thereafter, without the express prior written consent of the Company, directly or indirectly, in
any capacity whatsoever, either on his own behalf or on behalf of any other person or entity that he manages, controls, participates
in, consults with, renders services for, or is employed by or associated with, disclose or use, except when necessary to further the
interests of the Business, any Trade Secret of the Addus HealthCare Group, whether such Trade Secret is in the Executive’s
memory or embodied in writing or other physical form. For purposes of this Agreement, “Trade Secret” means any information, not
generally known to, and not readily ascertainable by proper means by, other persons who can obtain economic value from its
disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the circumstances, including, but not
limited to, (i) trade secrets; (ii) information concerning the business or affairs of the Addus HealthCare Group, including its
products or services, fees, costs, and pricing structures, charts, manuals and documentation, databases, accounting and business
models, designs, analyses, drawings, photographs and reports, computer software, copyrightable works, inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, sales records,
and other proprietary commercial information; (iii) information concerning actual and prospective clients and customers of the
Addus HealthCare Group, including client and customer lists and other compilations; and (iv) information concerning employees,
contractors, and vendors of the Addus HealthCare Group, including personal information and information concerning the
compensation or other terms of employment of such individuals. “Trade Secret,” however, shall not include general “know-how”
information acquired by the Executive during the course of his employment that could have been obtained by him from public
sources without the expenditure of significant time, effort, and expense. Notwithstanding anything in this
8
Section 9(c) to the contrary, nothing herein shall prohibit Executive from making a good-faith, truthful report to a government
agency with oversight responsibility of the Company.
(d)
Covenant Regarding Confidential and Proprietary Information.
The Executive will promptly disclose in writing to the Company each improvement, discovery, idea, invention, and each proposed
publication of any kind whatsoever, relating to the Business made or conceived by the Executive either alone or in conjunction with
others while employed hereunder if such improvement, discovery, idea, invention, or publication results from or was suggested by
such employment (whether or not patentable and whether or not made or conceived at the request of or upon the suggestion of the
Company, and whether or not during his usual hours of work, whether in or about the premises of the Addus HealthCare Group and
whether prior or subsequent to the execution hereof). The Executive will not disclose any such improvement, discovery, idea,
invention or publication to any person, entity, or governmental authority, except to the Company. Each such improvement,
discovery, idea, invention, and publication shall be the sole and exclusive property of, and is hereby assigned by the Executive to,
the Company, and at the request of the Company, the Executive will assist and cooperate with the Company and any person or
entity from time to time designated by the Company to obtain for the Company or its designee the grant of any letters patent in the
United States of America and/or such other country or countries as may be designated by the Company, covering any such
improvement, discovery, idea, invention, or publication and will in connection therewith execute such applications, statements,
assignments, or other documents, furnish such information and data, and take all such other action (including, without limitation,
the giving of testimony) as the Company may from time to time reasonably request. The foregoing provisions of this Section 9(d)
shall not apply to any improvement, discovery, idea, invention, or publication for which no equipment, supplies, facilities, or
confidential and proprietary information of Addus HealthCare Group was used and that was developed entirely on the Executive’s
own time, unless (x) the improvement, discovery, idea, invention, or publication relates to the Business or the actual or
demonstrably anticipated research or development of the Business, or (y) the improvement, discovery, idea, invention, or
publication results from any work performed by the Executive for the Addus HealthCare Group.
(e)
Non-Disparagement.
The Executive agrees that, during the Employment Term and the Restrictive Period, he will not make any statement, either in
writing or orally, that is communicated publicly or is reasonably likely to be communicated publicly and that is reasonably likely to
disparage or otherwise harm the business or reputation of the Addus HealthCare Group, or the reputation of any of its current or
former directors, officers, employees, or stockholders.
(f)
Return of Documents and Other Property.
Upon termination of employment, the Executive shall return all originals and copies of books, records, documents, customer lists,
sales materials, tapes, keys, credit cards and other tangible property of Addus HealthCare Group within the Executive’s possession
or under his control.
(g)
Remedies for Breach.
In the event of a breach or threat of a breach of the provisions of this Section 9, the Executive hereby acknowledges that such
breach or threat of a breach will cause the Company to suffer irreparable harm and that the Company shall be entitled to an
injunction restraining the Executive from breaching such provisions. The foregoing shall not, however, be construed as prohibiting
the Company from having available to it any other remedy, either at law or in equity, for such breach or threatened breach,
including, but not limited to, the immediate cessation of employment and any remaining Severance Pay and benefits pursuant to
Section 8, the recovery of damages from the Executive, and the notification of any employer or prospective employer of the
Executive as to the limitations and restrictions contained in this Agreement (without limiting or affecting the
9
Executive’s obligations under the other paragraphs of this Section 9). In addition, the Executive also expressly acknowledges and
agrees that, in addition to the foregoing rights and remedies, the Executive shall reimburse the Company for all attorneys’ fees,
costs, and expenses incurred by Company to enforce the provisions of this Section 9.
(h)
Acknowledgement.
The Executive acknowledges that he will be directly and materially involved as a senior executive in all important policy and
operational decisions of Addus HealthCare Group. The Executive further acknowledges that the scope of the foregoing restrictions
has been specifically bargained between the Company and the Executive, each being fully informed of all relevant facts.
Accordingly, the Executive acknowledges that the foregoing restrictions of this Section 9 are fair and reasonable, are minimally
necessary to protect Addus HealthCare Group, its stockholders, and the public from the unfair competition of the Executive who, as
a result of his employment with the Company, will have had access to the most confidential and important information of Addus
HealthCare Group, its Business, and future plans. The Executive furthermore acknowledges that no unreasonable harm or injury
will be suffered by him from enforcement of the covenants contained herein and that he will be able to earn a reasonable livelihood
following termination of his employment notwithstanding enforcement of the covenants contained herein.
(i)
Right of Set Off.
In the event of a breach by the Executive of the provisions of this Agreement, the Company is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, and after ten (10) days prior written notice to the Executive, to set-off and
apply any and all amounts at any time held by the Company on behalf of the Executive and all indebtedness at any time owing by
the Addus HealthCare Group to the Executive against any and all of the obligations of the Executive now or hereafter existing, to
the extent such set-off would not result in a penalty under Code §409A with regard to amounts that are deemed deferred
compensation under Code §409A.
10.
Prior Agreement.
This Agreement contains the entire understanding of the Parties with respect to the matters set forth herein. Each Party acknowledges that there
are no warranties, representations, promises, covenants, or understandings of any kind except those that are expressly set forth in this Agreement. This
Agreement supersedes and is in lieu of any and all other agreements between the Executive and the Company or its predecessor or any subsidiary, and any
and all such employment agreements or arrangements are hereby terminated and deemed of no further force or effect.
11.
Assignment.
Neither this Agreement, nor any rights or duties of the Executive hereunder shall be assignable by the Executive, and any such purported
assignment by him shall be void. The Company may assign all or any of its rights hereunder.
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12.
Notices.
Unless specified in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed given upon receipt
or refusal thereof if delivered personally, sent by overnight courier service, mailed by registered or certified mail (return receipt requested), postage
prepaid, or emailed to the other Party’s email address on the Company’s computer network (except that email shall not be deemed given upon refusal
thereof). Notice to each Party, if mailed or sent by overnight courier service, shall be to the following addresses:
(a)
If to the Executive, to:
Fair Oaks
David W. Tucker
7908
Avenue
Dallas, TX 75038
(b)
If to the Company, to:
Addus HealthCare, Inc.
6801 Gaylord Parkway
Suite 110
Frisco, TX 75034
Attention: CEO
With a copy, which shall not constitute notice, to:
Bass Berry & Sims PLC
150 Third Avenue South
Suite 2800
Nashville, TN 37201
Attention: David Cox, Esq.
Telephone: (615) 742-6299
Facsimile: (615) 742-2864
E-mail: dcox@bassberry.com
Any Party may change its address for notice by giving all other Parties notice of such change pursuant to this Section 12.
13.
Amendment.
This Agreement may not be changed, modified, or amended except in writing signed by both Parties to this Agreement.
14.
Waiver of Breach.
The waiver by either Party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent
breach by either Party.
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15.
Invalidity of Any Provision.
The provisions of this Agreement are severable, it being the intention of the parties hereto that should any provision hereof be invalid or
unenforceable, such invalidity or enforceability of any provisions shall not affect the remaining provisions hereof, but the same shall remain in full force
and effect as if such invalid or unenforceable provision or provisions were omitted.
16.
409A Compliance.
This Agreement is intended to comply with or be exempt from Code §409A, and accordingly, to the maximum extent permitted, this
Agreement shall be interpreted to be in compliance with or exempt from Code §409A. Notwithstanding any other provision to the contrary, a termination of
employment with the Company shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of
“deferred compensation” (as such term is defined in §409A) upon or following a termination of employment unless such termination is also a “separation
from service” from the Company within the meaning of Code §409A and Section 1.409A-1(h) of the Treasury Regulations and, for purposes of any such
provision of this agreement, references to a “separation,” “termination,” “termination of employment or like terms shall mean “separation from service.” If
the Executive is a specified employee within the meaning of that term under Code §409A, then with regard to any payment that is considered non-qualified
deferred compensation under Code §409A and payable on account of a separation from service, such payment shall be made on the date which is the earlier
of (i) the expiration of the six (6)-month period measured from the date of such separation from service, and (ii) the date of the Executive’s death (the
“Delay Period”) to the extent required under Code §409A. Upon the expiration of the Delay Period, all payments delayed shall be paid to the Executive in a
lump sum, and all remaining payments due under this Agreement shall be paid or provided for in accordance with the normal payment dates specified
herein. To the extent any reimbursements or in-kind benefits under this Agreement constitute non-qualified deferred compensation for purposes of Code
§409A, (i) all such expenses or other reimbursements under this Agreement shall be made on or prior to the last day of the taxable year following the
taxable year in which such expenses were incurred by the Executive, (ii) any right to such reimbursement or in kind benefits is not subject to liquidation or
exchange for another benefit, and (iii) no such reimbursement, expenses eligible for reimbursement, or in-kind benefits provided in any taxable year shall
in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year. For purposes of Code §409A, the
Executive’s right to receive any installment payment pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct
payments. In no event shall any payment under this Agreement that constitutes non-qualified deferred compensation for purposes of Code §409A be
subject to offset, counterclaim, or recoupment by any other amount unless otherwise permitted by Code §409A.
17.
Governing Law.
This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Texas as applied to
agreements entirely entered into and performed in Texas by Texas residents exclusive of the conflict of laws provisions of any other state.
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18.
Survival.
Obligations under this Agreement which by their nature would continue beyond the termination of this Agreement, including without limitation
Sections 8 and 9, shall survive termination of this Agreement for any reason.
19.
Arbitration.
Except as set forth below, any controversy or claim arising out of or relating to this Agreement (including, without limitation, as to arbitrability
and any disputes with respect to the Executive’s employment with the Company or the termination of such employment), or the breach thereof, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect as of the date of filing of the
arbitration administered by a person authorized to practice law in the State of Texas and mutually selected by the Company and the Executive (the
“Arbitrator”). If the Company and the Executive are unable to agree upon the Arbitrator within fifteen (15) days, they shall each select an arbitrator within
fifteen (15) days, and the arbitrators selected by the Company and the Executive shall appoint a third arbitrator to act as the Arbitrator within fifteen
(15) days (at which point the Arbitrator alone shall judge the controversy or claim). The arbitration hearing shall commence within ninety (90) calendar
days after the Arbitrator is selected, unless the Company and the Executive mutually agree to extend this time period. The arbitration shall take place in
Dallas, Texas. The Arbitrator will have full power to give directions and make such orders as the Arbitrator deems just. Nonetheless, the Arbitrator
explicitly shall not have the authority, power, or right to alter, change, amend, modify, add, or subtract from any provision of this Agreement except
pursuant to Section 15. The Arbitrator shall issue a written decision that sets forth the essential findings and conclusions upon which the Arbitrator’s award
or decision is based within thirty (30) days after the conclusion of the arbitration hearing. The agreement to arbitrate will be specifically enforceable. The
award rendered by the Arbitrator shall be final and binding (absent fraud or manifest error), and any arbitration award may be enforced by judgment
entered in any court of competent jurisdiction. The Company and the Executive shall each pay one-half (1/2) of the fees of the Arbitrator. Notwithstanding
anything set forth above to the contrary, in the event that the Company seeks injunctive relief and/or specific performance to remedy a breach, evasion,
violation or threatened violation of this Agreement, the Executive irrevocably waives his right, if any, to have any such dispute decided by arbitration or in
any jurisdiction or venue other than a state or federal court in the State of Texas. For any such action, the Executive further irrevocably consents to the
personal jurisdiction of the state and federal courts in the State of Texas.
20.
WAIVER OF JURY TRIAL.
NO PARTY TO THIS AGREEMENT OR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF A PARTY
SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEDURE BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR THE DEALINGS OR THE RELATIONSHIP
BETWEEN THE PARTIES. NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED,
WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS SECTION 20
HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO
PARTY HERETO HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO THAT THE PROVISIONS OF THIS
SECTION 20 WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.
ADDUS HEALTHCARE, INC.
By: /s/ R. DIRK ALLISON
Name: R. Dirk Allison
Title:President and Chief Executive
Officer
/s/ DAVID W. TUCKER
David W. Tucker
Signature Page to Tucker Employment Agreement
Exhibit A
Bonus
The Executive is eligible to receive a bonus with a target amount of 75% of the Executive’s annual Base Salary during the applicable calendar
year (pro-rated for any partial year, including, without limitation, the 2019 calendar year, during which Executive’s bonus will be pro-rated based on 10
months of employment at the Senior Vice President level and 2 months of employment as Chief Development Officer), based on the Company’s evaluation
of the Executive’s performance compared to established Company and/or individual objectives, in each case, at the discretion of the Compensation
Committee of the Board of Directors. The Compensation Committee shall review and establish the objectives and threshold, target and maximum levels
with respect to such objectives annually.
AMENDED AND RESTATED
EMPLOYMENT AND NON-COMPETITION AGREEMENT
Exhibit 10.41
This AMENDED AND RESTATED EMPLOYMENT AND NON-COMPETITION AGREEMENT (this “Agreement”) is effective as of
November 7, 2019 (the “Effective Date”), by and between Addus HealthCare, Inc., an Illinois corporation (the “Company”), and Michael D. Wattenbarger,
an individual domiciled in the State of Texas (the “Executive”). The Company and Executive are hereinafter sometimes referred to individually as a
“Party” and collectively as the “Parties.”
WHEREAS, the Company, its parent and its subsidiaries (collectively, the “Addus HealthCare Group”) provide home care, home health and
hospice services.
WHEREAS, the Parties desire to enter this Agreement to secure the Executive’s employment, all on the terms and conditions set forth herein;
WHEREAS, by virtue of the Executive’s employment by the Company pursuant to the terms hereof, the Executive will obtain and become
familiar with certain valuable confidential and proprietary information relating to the Addus HealthCare Group;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the Parties, intending to be legally bound,
agree as follows:
1.
Effectiveness; Term of Employment.
(a)
(b)
This Agreement shall automatically become effective on the Effective Date.
The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the period
commencing as of the Effective Date and ending on the first (1st) anniversary of the Effective Date, or on such earlier date as
provided pursuant to the terms and conditions of this Agreement (the “Initial Employment Term”). At the end of the Initial
Employment Term, this Agreement shall automatically renew for successive one (1) year terms (each, as may be earlier terminated
pursuant to the terms and conditions of this Agreement, an “Additional Employment Term” and together with the Initial
Employment Term, the “Employment Term”), unless either Party provides notice to the other of its or his intention not to renew this
Agreement at least thirty (30) days prior to the expiration of the Initial Employment Term or any Additional Employment Term (a
“Non-Renewal”). During the Employment Term, the Executive shall (i) devote substantially all of his professional time, loyalty, and
efforts to discharge his duties hereunder on a timely basis; (ii) use his best efforts to loyally and diligently serve the business and
affairs of the Addus HealthCare Group; and (iii) endeavor in all respects to promote, advance and further the Addus HealthCare
Group’s interests in all matters. To the extent it does not interfere with Executive’s duties hereunder in any material respect, the
Parties agree that this provision should not be construed as limiting Executive’s right to serve on up to one (1) board of, or
otherwise engage in activities on behalf of, charitable and civic organizations and, upon prior written approval of the Company, one
(1) board of a for profit entity that does not compete with the business of the Company.
2.
Employment Duties.
During the Employment Term, the Company will employ the Executive as its Executive Vice President - Chief Information Officer, a senior
executive position that reports directly to the Chief Executive Officer (“CEO”) of the Company. The Executive’s principal duties and responsibilities shall
be to oversee and direct the operations of the Addus HealthCare Group including the management and delivery of home care and adult day care services
and the performance of such other executive duties and responsibilities as may be assigned to him by the CEO or the Board of Directors and are consistent
with the Executive’s position as Chief Information Officer of the Company.
3.
Compensation.
The Company will pay the Executive as follows during the Employment Term:
(a)
(b)
(c)
Base Salary. The Company shall pay the Executive a base salary at the annual rate of Two Hundred Ninety Five Thousand Dollars
($295,000), which shall be paid in accordance with the normal payroll practices of the Company and shall be subject to applicable
withholdings and deductions. Thereafter, the Executive’s base salary shall be subject to review and adjustment upward by the
compensation committee (the “Compensation Committee”) of the board of directors of Addus HomeCare Corporation (“Addus
HomeCare”) (the “Board of Directors”) on or about each anniversary of the Effective Date for each year during the Employment
Term (as adjusted from time-to-time, the “Base Salary”).
Bonus. The Executive, at the discretion of the Compensation Committee, shall be eligible (but not entitled) to receive an annual
bonus as set forth on Exhibit A hereto. The Compensation Committee, at its sole discretion, may determine the amount of the
annual bonus, if any, to which the Executive may become entitled based on the quantitative and qualitative factors described on
Exhibit A or any other factors the Compensation Committee may deem appropriate from time to time. All amounts payable
pursuant to this Section 3(b), if any, shall be paid within no more than thirty (30) days after completion of Addus HomeCare’s
audited financial statements for the most recently completed fiscal year, but in all events, in the fiscal year following the fiscal year
in which the performance occurred, and shall be subject to applicable withholdings and deductions. Bonus is not salary and is
earned on the day it is paid. To be eligible to receive the bonus, the Executive must be actively employed and must not have given
notice of termination on or prior to such date, except as expressly provided for in this Agreement.
Equity Awards. The Executive shall be eligible to receive equity awards and, as of the Effective Date, Executive would be issued
options to acquire 25,000 unrestricted shares of Addus common stock and granted 2,500 restricted shares of Addus common stock
(the “Initial Grants”). The Initial Grants vest annually over a four-year period, subject to the terms and conditions set forth in the
Company’s stock incentive plan and the respective stock agreements.
4.
Expenses.
It is recognized that the Executive, in the performance of his duties hereunder, may be required to expend sums for travel (e.g., airfare,
automobile rental, etc.), entertainment, and lodging. During the Employment Term, the Company shall reimburse the Executive for reasonable business
expenses incurred by him during the Employment Term in connection with the performance of his duties hereunder conditioned upon and subject to the
Company’s established policies and procedures, including written receipt from the Executive of an itemized accounting in accordance with the Company’s
regular business expense verification practices.
5.
Benefits.
During the Employment Term, the Executive shall be entitled to benefits under such plans, programs, or arrangements as the Board of Directors
may establish or maintain from time to time for similarly-situated employees, and in accordance with its policies, which may change at the sole discretion
of the Board of Directors. Benefits as of the Effective Date are:
(a)
(b)
(c)
Four (4) weeks of paid vacation during each year of employment. Subject to the Company’s established policies and procedures,
vacation may be carried over to a subsequent year of employment, not to exceed eight (8) weeks during any calendar year of
employment.
Five (5) days personal/sick leave per year, with pay. Personal/sick days may be carried over to a subsequent year of employment,
not to exceed ten (10) days during any calendar year of employment.
Six (6) Company holidays, plus two (2) floating holidays, per year.
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(d)
(e)
(f)
(g)
(h)
Coverage under the health benefit plan provided by the Company to its executives, which may change, at the sole discretion of the
Board of Directors, from time to time. The Company will cover the Executive and his dependents, if any, during the Employment
Term to the same extent and according to the same terms as the Company’s other executives are covered.
Life insurance policy with a face amount of up to five (5) times the Base Salary, provided that the Company shall not be required to
spend greater than three percent (3%) of the Base Salary in purchasing such insurance policy.
Short-term and long-term disability insurance to the same extent and according to the same terms as the Company’s other similarly-
situated executives are covered, which may change, at the sole discretion of the Board of Directors, from time to time.
Tuition reimbursement shall be available for courses relevant to the Executive’s position and taken at an accredited institution,
subject to prior approval by the Chief Executive Officer.
Participation in the Company’s 401(k) plan up to the defined Internal Revenue Service limit beginning 30 days after the Effective
Date or such other date as required under the plan. The Company will annually match 6% of the Executive’s annual contribution to
such plan during the Employment Term, subject to the Company’s established policies and procedures.
6.
Termination by the Company.
(a)
The Company may terminate the Executive’s employment hereunder at any time for Reasonable Cause. The term “Reasonable
Cause” shall be limited to the following:
(i) A material breach or omission by the Executive of any of his duties or obligations under this Agreement (except due to
Disability, as defined below) that the Executive shall fail to cure after receipt of written notice of such breach or omission from the
Company’s CEO or Board of Directors, which notice shall designate a reasonable period of time, if curable at all, of not less than
ten (10) business days within which the breach or omission must be cured to the reasonable satisfaction of the CEO or the Board of
Directors, as applicable, in order to prevent a termination for Reasonable Cause; provided, however, that the Executive shall only
be permitted the opportunity to cure such breaches or omissions a total of two times in any twelve (12)-month rolling period;
(ii) Willfully engaging in any action that materially damages, or that may reasonably be expected to materially damage, the Addus
HealthCare Group or the business or goodwill thereof;
(iii) Breaching the Executive’s fiduciary duty to the Addus HealthCare Group;
(iv) Committing any act involving fraud, misusing or misappropriating money or other property of the Addus HealthCare Group,
committing a felony, using illegal drugs, misusing or abusing prescriptive or over-the-counter drugs, habitually using other
intoxicants, or chronic absenteeism;
(v) Gross negligence or willful misconduct by the Executive;
(vi) Committing acts constituting gross insubordination, such as, without limitation, the intentional disregard of any reasonable
directive of the CEO or the Board of Directors; or
(vii) failing to perform any material duty in a timely and effective manner and failing to cure any such performance deficiency after
receipt of written notice of the deficiency from the CEO or Board of Directors, which notice shall designate the reasonable period
of time, if curable at all, of not less than ten (10) days within which the performance deficiency must be cured to the reasonable
satisfaction of the CEO or the Board of Directors, as applicable, in order to prevent a termination for reasonable cause; provided,
however, that the Executive shall only be permitted the opportunity to cure such performance deficiencies a total of two times in
any twelve (12)-month rolling period.
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(b)
(c)
(d)
The Executive’s employment hereunder shall be terminated in the event of his death, and the Company may terminate the
Executive’s employment hereunder if the Executive suffers a physical or mental disability (a “Disability”) so that the Executive is
or, in the opinion of an independent physician retained by the Company for purposes of this determination will be, unable to
perform his duties in a manner satisfactory to the Company for a period of ninety (90) days out of any one hundred eighty
(180) consecutive-day period (in which event the Executive shall be deemed to have suffered a permanent Disability).
The Company may terminate the Executive’s employment hereunder at any time for any other reason, or for no reason.
Termination of the Executive’s employment for any reason shall terminate the Employment Term but shall not affect the
Executive’s obligations pursuant to Section 9 hereof, which obligations shall remain in effect for the period therein provided.
7.
Termination by the Executive.
The Executive may terminate his employment with the Company (a) for Good Reason (as defined below) or (b) without Good Reason, in each
case, upon not less than thirty (30) days prior written notice to the Company; provided, however, that after the receipt of such notice, the Company may, in
its discretion accelerate the effective date of such termination at any time by written notice to the Executive. Termination of the Executive’s employment by
the Executive shall terminate the Employment Term but shall not affect the Executive’s obligations under Section 9 hereof, which obligations shall remain
in effect for the period therein provided. As used herein, “Good Reason” means (i) any reduction in the Executive’s Base Salary, (ii) any material reduction
to the Executive’s employment duties and responsibilities, (iii) any material breach by the Company of any material term of this Agreement, other than a
breach which is remedied by the Company within 10 days after receipt of written notice given by the Executive, (iv) a change in the Executive’s direct
reporting duty to a person other than the CEO of the Company or the Board of Directors; or (v) the relocation of the Executive’s principal office to a
location more than fifty (50) miles from Frisco, Texas.
8.
Rights and Obligations Upon Termination.
(a)
If the Executive’s employment is terminated by the Company pursuant to Section 6(a) or 6(b) hereof or by the Executive pursuant
to Section 7(b) hereof, the Executive or his estate shall have no further rights against the Addus HealthCare Group hereunder,
except for the right to receive, with respect to the period prior to the effective date of termination:
(i) Any unpaid Base Salary under Section 3(a) hereof for any period prior to the effective date of termination;
(ii) Any accrued but unpaid benefits under Section 5 hereof for any period prior to the effective date of termination; and
(iii) In the case of termination pursuant to Section 6(b), eligibility for life or disability insurance benefits described in Sections 5(e)
or (f), as applicable.
Such payments shall be made to the Executive whether or not the Company chooses to utilize the services of the Executive for the
required notice period specified in Section 7.
(b)
If the Executive’s employment is terminated pursuant to Section 6(c) hereof or Section 7(a) hereof, or as a result of Non-Renewal
by the Company, the Executive shall be entitled to, in lieu of any further payments to the Executive for periods subsequent to the
date of termination:
(i) Any unpaid Base Salary under Section 3(a) hereof for any period prior to the effective date of termination;
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(ii) A pro rata portion of the bonus under Section 3(b) hereof based on what Executive would have been entitled to receive pursuant
to the Company’s then-effective bonus plan had his employment not been terminated, which shall be payable following the time the
Company determines the amount of bonuses payable to its executives following the end of the year in which termination occurs,
which determination will be based on the actual performance of the Company;
(iii) Any accrued but unpaid benefits under Section 5 hereof for any period prior to the effective date of termination, in accordance
with the terms of the applicable plan or arrangement;
(iv) Conditioned upon the Executive’s strict compliance with the post-employment restrictions described in Section 9 below and
subject to applicable withholdings and deductions, severance pay (“Base Severance Pay”) in an amount equal to the Executive’s
Base Cash Compensation (as defined below) to be paid in equal installments on the Company’s regular pay dates over the twelve
(12) month period following termination of the Executive’s employment (subject to applicable withholdings and deductions), plus
after-tax cash payments equal to the difference between the premiums for COBRA continuation coverage that would be available to
Executive and the amount of premiums paid by similarly-situated active employees of the Company under the Company’s health,
dental, and/or vision insurance plans (calculated as of the first calendar month following Executive’s termination and then
multiplied by 12 months), for a period of one (1) year following the Executive’s date of termination of employment, to be paid in
equal installments on the Company’s regular pay dates (subject to applicable tax withholdings and deductions).
For purposes of this Agreement, “Base Cash Compensation” shall mean the highest annual Base Salary in effect for the Executive.
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(c)
Notwithstanding anything to the contrary set forth herein, if the Executive’s employment is terminated by the Company pursuant to
Section 6(c) or by the Executive pursuant to Section 7(a) or as a result of Non-Renewal by the Company, in each case within six
(6) months prior to, or one (1) year following, a Change in Control (as defined below), the Executive shall be entitled to, in lieu of
the payments to be made pursuant to Section 8(b)(iv), (A) an amount equal to twenty four (24) months of the Executive’s Annual
Cash Compensation (as defined below) (subject to applicable withholdings and deductions), less any payment already received
pursuant to Section 8(b)(iv) (“Change of Control Severance Pay” and, together with Base Severance Pay, “Severance Pay”), which
shall be payable in accordance with the normal payroll practices of the Company in equal installments on the Company’s regular
pay dates over the twelve (12) month period following termination of the Executive’s employment, (B) any unpaid bonus for a
completed performance period that the Executive would have earned had he remained employed through date of payment, as
determined by the Company and paid at the same time bonuses are paid to other senior executives based upon the actual
performance of the Company, and (C) the Executive shall be eligible to receive after-tax cash payments equal to the difference
between the premiums for COBRA continuation coverage that would be available to Executive and the amount of premiums paid
by similarly-situated active employees of the Company under the Company’s health, dental and/or vision insurance plans
(calculated as of the first calendar month following Executive’s termination and then multiplied by 24 months), payable in equal
installments on the Company’s regular pay dates (subject to applicable tax withholdings and deductions) until one (1) year
following the termination of the Executive’s employment. As used herein, a “Change in Control” shall be deemed to have occurred
if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Addus HomeCare, or
a corporation owned directly or indirectly by the stockholders of Addus HomeCare in substantially the same proportions as their
ownership of stock of Addus HomeCare, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of Addus HomeCare representing more than 50% of the total voting power represented by Addus
HomeCare’s then outstanding securities that vote generally in the election of directors (referred to herein as “Voting Securities”); or
(ii) after the date of this Agreement, the stockholders of Addus HomeCare approve (x) a merger or consolidation of Addus
HomeCare with any other corporation, other than a merger or consolidation that would result in the Voting Securities of Addus
HomeCare outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) more than 50% of the total voting power represented by the Voting Securities of
Addus HomeCare or such surviving entity outstanding immediately after such merger or consolidation, or (y) a plan of complete
liquidation of Addus HomeCare or an agreement for the sale or disposition by Addus HomeCare of (in one transaction or a series of
transactions) all or substantially all of Addus HomeCare’s assets.
For purposes of this Agreement, “Annual Cash Compensation” shall mean the sum of (a) the highest annual Base Salary in effect
for the Executive and (b) the greater of (i) the Executive’s bonus for the most recently-completed year (excluding any special
bonuses awarded for performance after the conclusion of the performance period), if any, or (ii) the annualized amount of the
Executive’s target bonus for the then current year.
(d)
The Executive acknowledges and agrees that the Company’s obligations to make payments pursuant to Sections 8(b)(iv) and 8(c)
above are expressly conditioned on the Executive timely executing, delivering and not revoking a customary general release in form
and substance satisfactory to the Company within the period that is sixty (60) days following the date of the Executive’s termination
of employment or service with the Company. To the extent that such sixty (60) day period spans two (2) calendar years, no payment
of any severance amount or benefit that is (i) considered to be nonqualified deferred compensation within the meaning of
Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance promulgated thereunder
(collectively, “Code §409A”) and (ii) conditioned upon the release, shall be made before the first day of the second calendar year,
regardless of when the release is actually executed and returned to the Company.
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9.
Covenants of the Executive.
(a)
(b)
No Conflicts. The Executive represents and warrants that he is not personally subject to any agreement, order, or decree that
restricts his acceptance of this Agreement and performance of his duties with the Company hereunder.
Non-Competition; Non-Solicitation. During the Employment Term and during the Restrictive Period (as defined below), the
Executive shall not, without the prior written consent of the Company, directly or indirectly, in any capacity whatsoever, either on
his own behalf or on behalf of any other person or entity whom he may manage, control, participate in, consult with, render services
for, or be employed by or associated with, compete with the Business (as defined below) in any of the following described manners:
(i) Engage in, assist, or have any interest in, as principal, consultant, advisor, agent, financier, or employee, any business entity that
is, or that is about to become engaged in, providing goods or services in competition with the Addus HealthCare Group within a
geographic radius of fifty (50) miles from any Addus HealthCare Group branch office;
(ii) Solicit or accept any business (or help any other person solicit or accept any business) from any person or entity that on the
Effective Date is a customer of the Addus HealthCare Group, or during the Employment Term becomes a customer of the Addus
HealthCare Group, other than a customer that does not engage in the Business;
(iii) Induce or attempt to induce any employee of the Addus HealthCare Group to terminate such employee’s relationship with the
Addus HealthCare Group or in any way interfere with the relationship between the Addus HealthCare Group and any employee
thereof; or
(iv) Induce or attempt to induce any customer, referral source, supplier, vendor, licensee, or other business relation of the Addus
HealthCare Group to cease doing business with the Addus HealthCare Group, or in any way interfere with the relationship between
any such customer, referral source, supplier, vendor, licensee, or business relation, on the one hand, and the Addus HealthCare
Group, on the other hand.
For purposes hereof, the term “Business” means the business of providing home care services of the type and nature that the Addus
HealthCare Group performs and/or any other business activity in which the Addus HealthCare Group performs or program or
service under active development proposed to be performed and/or any other business activity in which the Addus HealthCare
Group becomes engaged in on or after the date hereof while the Executive is employed by the Company.
For purposes hereof, the term “Restrictive Period” means the period beginning on the date on which the Executive’s employment is
terminated by the Company or the Executive for any reason and ending on the first anniversary of such date; provided, however, if
the Executive is eligible for the compensation described in Section 8(c), “Restrictive Period” shall mean the period beginning on
the date on which the Executive’s employment is terminated by the Company or the Executive for any reason and ending on the
second anniversary of such date
Notwithstanding the foregoing provisions, nothing herein shall prohibit the Executive from owning one percent (1%) or less of any
securities of an Addus HealthCare Group competitor, if such securities are listed on a nationally recognized securities exchange or
traded over-the-counter. If, at the time of enforcement of this Section 9(b), a court holds that the restrictions stated herein are
unreasonable under the circumstances then existing, the Parties agree that the maximum period, scope or geographic area
reasonable under such circumstances shall be substituted for the stated period, scope or area determined to be reasonable under the
circumstances by such court.
7
(c)
(d)
Non-Disclosure. The Executive recognizes and acknowledges that he will have access to certain confidential and proprietary
information of Addus HealthCare Group, including, but not limited to, Trade Secrets (as defined below) and other proprietary
commercial information, and that such information constitutes valuable, special, and unique property of Addus HealthCare Group.
The Executive agrees that he will not, for any reason or purpose whatsoever, except in the performance of his duties hereunder, or
as required by law, disclose any of such confidential information to any person, entity, or governmental authority without express
authorization of the Company. This restriction shall not, however, prohibit the Executive from communicating with any
Government Agency or otherwise participating in any investigation or proceeding that may be conducted by any Government
Agency, including providing Company documents or other information, without consent of the Company. The Executive further
agrees that he shall not, at any time during the Employment Term or thereafter, without the express prior written consent of the
Company, directly or indirectly, in any capacity whatsoever, either on his own behalf or on behalf of any other person or entity that
he manages, controls, participates in, consults with, renders services for, or is employed by or associated with, disclose or use,
except when necessary to further the interests of the Business, any Trade Secret of the Addus HealthCare Group, whether such
Trade Secret is in the Executive’s memory or embodied in writing or other physical form. For purposes of this Agreement, “Trade
Secret” means any information, not generally known to, and not readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use and is the subject of efforts to maintain its secrecy that are reasonable under the
circumstances, including, but not limited to, (i) trade secrets; (ii) information concerning the business or affairs of the Addus
HealthCare Group, including its products or services, fees, costs, and pricing structures, charts, manuals and documentation,
databases, accounting and business models, designs, analyses, drawings, photographs and reports, computer software, copyrightable
works, inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, sales records, and other proprietary commercial information; (iii) information concerning actual and
prospective clients and customers of the Addus HealthCare Group, including client and customer lists and other compilations; and
(iv) information concerning employees, contractors, and vendors of the Addus HealthCare Group, including personal information
and information concerning the compensation or other terms of employment of such individuals. “Trade Secret,” however, shall not
include general “know-how” information acquired by the Executive during the course of his employment that could have been
obtained by him from public sources without the expenditure of significant time, effort, and expense. Notwithstanding anything in
this Section 9(c) to the contrary, nothing herein shall prohibit Executive from making a good-faith, truthful report to a government
agency with oversight responsibility of the Company.
Covenant Regarding Confidential and Proprietary Information. The Executive will promptly disclose in writing to the
Company each improvement, discovery, idea, invention, and each proposed publication of any kind whatsoever, relating to the
Business made or conceived by the Executive either alone or in conjunction with others while employed hereunder if such
improvement, discovery, idea, invention, or publication results from or was suggested by such employment (whether or not
patentable and whether or not made or conceived at the request of or upon the suggestion of the Company, and whether or not
during his usual hours of work, whether in or about the premises of the Addus HealthCare Group and whether prior or subsequent
to the execution hereof). The Executive will not disclose any such improvement, discovery, idea, invention or publication to any
person, entity, or governmental authority, except to the Company. Each such improvement, discovery, idea, invention, and
publication shall be the sole and exclusive property of, and is hereby assigned by the Executive to, the Company, and at the request
of the Company, the Executive will assist and cooperate with the Company and any person or entity from time to time designated
by the Company to obtain for the Company or its designee the grant of any letters patent in the United States of America and/or
such other country or countries as may be designated by the Company, covering any such improvement, discovery, idea, invention,
or publication and will in connection therewith execute such applications, statements, assignments, or other documents, furnish
such information and data, and take all such other action (including, without limitation, the giving of testimony) as the Company
may from time to time reasonably request. The foregoing provisions of this Section 9(d) shall not apply to any improvement,
discovery, idea,
8
(e)
(f)
(g)
(h)
(i)
invention, or publication for which no equipment, supplies, facilities, or confidential and proprietary information of Addus
HealthCare Group was used and that was developed entirely on the Executive’s own time, unless (x) the improvement, discovery,
idea, invention, or publication relates to the Business or the actual or demonstrably anticipated research or development of the
Business, or (y) the improvement, discovery, idea, invention, or publication results from any work performed by the Executive for
the Addus HealthCare Group.
Non-Disparagement. The Executive agrees that, during the Employment Term and the Restrictive Period, he will not make any
statement, either in writing or orally, that is communicated publicly or is reasonably likely to be communicated publicly and that is
reasonably likely to disparage or otherwise harm the business or reputation of the Addus HealthCare Group, or the reputation of any
of its current or former directors, officers, employees, or stockholders.
Return of Documents and Other Property. Upon termination of employment, the Executive shall return all originals and copies
of books, records, documents, customer lists, sales materials, tapes, keys, credit cards and other tangible property of Addus
HealthCare Group within the Executive’s possession or under his control.
Remedies for Breach. In the event of a breach or threat of a breach of the provisions of this Section 9, the Executive hereby
acknowledges that such breach or threat of a breach will cause the Company to suffer irreparable harm and that the Company shall
be entitled to an injunction restraining the Executive from breaching such provisions. The foregoing shall not, however, be
construed as prohibiting the Company from having available to it any other remedy, either at law or in equity, for such breach or
threatened breach, including, but not limited to, the immediate cessation of employment and any remaining Severance Pay and
benefits pursuant to Section 8, the recovery of damages from the Executive, and the notification of any employer or prospective
employer of the Executive as to the limitations and restrictions contained in this Agreement (without limiting or affecting the
Executive’s obligations under the other paragraphs of this Section 9). In addition, the Executive also expressly acknowledges and
agrees that, in addition to the foregoing rights and remedies, the Executive shall reimburse the Company for all attorneys’ fees,
costs, and expenses incurred by Company to enforce the provisions of this Section 9.
Acknowledgement. The Executive acknowledges that he will be directly and materially involved as a senior executive in all
important policy and operational decisions of Addus HealthCare Group. The Executive further acknowledges that the scope of the
foregoing restrictions has been specifically bargained between the Company and the Executive, each being fully informed of all
relevant facts. Accordingly, the Executive acknowledges that the foregoing restrictions of this Section 9 are fair and reasonable, are
minimally necessary to protect Addus HealthCare Group, its stockholders, and the public from the unfair competition of the
Executive who, as a result of his employment with the Company, will have had access to the most confidential and important
information of Addus HealthCare Group, its Business, and future plans. The Executive furthermore acknowledges that no
unreasonable harm or injury will be suffered by him from enforcement of the covenants contained herein and that he will be able to
earn a reasonable livelihood following termination of his employment notwithstanding enforcement of the covenants contained
herein.
Right of Set Off. In the event of a breach by the Executive of the provisions of this Agreement, the Company is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, and after ten (10) days prior written notice to the
Executive, to set-off and apply any and all amounts at any time held by the Company on behalf of the Executive and all
indebtedness at any time owing by the Addus HealthCare Group to the Executive against any and all of the obligations of the
Executive now or hereafter existing, to the extent such set-off would not result in a penalty under Code §409A with regard to
amounts that are deemed deferred compensation under Code §409A.
10.
Prior Agreement.
9
This Agreement contains the entire understanding of the Parties with respect to the matters set forth herein. Each Party acknowledges that there
are no warranties, representations, promises, covenants, or understandings of any kind except those that are expressly set forth in this Agreement. This
Agreement supersedes and is in lieu of any and all other agreements between the Executive and the Company or its predecessor or any subsidiary, and any
and all such employment agreements or arrangements are hereby terminated and deemed of no further force or effect.
11.
Assignment.
Neither this Agreement, nor any rights or duties of the Executive hereunder shall be assignable by the Executive, and any such purported
assignment by him shall be void. The Company may assign all or any of its rights hereunder.
12.
Notices.
Unless specified in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed given upon receipt
or refusal thereof if delivered personally, sent by overnight courier service, mailed by registered or certified mail (return receipt requested), postage
prepaid, or emailed to the other Party’s email address on the Company’s computer network (except that email shall not be deemed given upon refusal
thereof). Notice to each Party, if mailed or sent by overnight courier service, shall be to the following addresses:
(a)
If to the Executive, to:
Michael D. Wattenbarger
2741 Old Shire Path Road
Prosper, TX 75038
If to the Company, to:
Addus HealthCare, Inc.
6801 Gaylord Parkway
Suite 110
Frisco, TX 75034
Attention: CEO
With a copy, which shall not constitute notice, to:
Bass Berry & Sims PLC
150 Third Avenue South
Suite 2800
Nashville, TN 37201
Attention: David Cox, Esq.
Telephone: (615) 742-6299
Facsimile: (615) 742-2864
E-mail: dcox@bassberry.com
Any Party may change its address for notice by giving all other Parties notice of such change pursuant to this Section 12.
13.
Amendment.
This Agreement may not be changed, modified, or amended except in writing signed by both Parties to this Agreement.
14.
Waiver of Breach.
10
The waiver by either Party of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent
breach by either Party.
15.
Invalidity of Any Provision.
The provisions of this Agreement are severable, it being the intention of the parties hereto that should any provision hereof be invalid or
unenforceable, such invalidity or enforceability of any provisions shall not affect the remaining provisions hereof, but the same shall remain in full force
and effect as if such invalid or unenforceable provision or provisions were omitted.
16.
409A Compliance.
This Agreement is intended to comply with or be exempt from Code §409A, and accordingly, to the maximum extent permitted, this
Agreement shall be interpreted to be in compliance with or exempt from Code §409A. Notwithstanding any other provision to the contrary, a termination of
employment with the Company shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of
“deferred compensation” (as such term is defined in §409A) upon or following a termination of employment unless such termination is also a “separation
from service” from the Company within the meaning of Code §409A and Section 1.409A-1(h) of the Treasury Regulations and, for purposes of any such
provision of this agreement, references to a “separation,” “termination,” “termination of employment or like terms shall mean “separation from service.” If
the Executive is a specified employee within the meaning of that term under Code §409A, then with regard to any payment that is considered non-qualified
deferred compensation under Code §409A and payable on account of a separation from service, such payment shall be made on the date which is the earlier
of (i) the expiration of the six (6)-month period measured from the date of such separation from service, and (ii) the date of the Executive’s death (the
“Delay Period”) to the extent required under Code §409A. Upon the expiration of the Delay Period, all payments delayed shall be paid to the Executive in a
lump sum, and all remaining payments due under this Agreement shall be paid or provided for in accordance with the normal payment dates specified
herein. To the extent any reimbursements or in-kind benefits under this Agreement constitute non-qualified deferred compensation for purposes of Code
§409A, (i) all such expenses or other reimbursements under this Agreement shall be made on or prior to the last day of the taxable year following the
taxable year in which such expenses were incurred by the Executive, (ii) any right to such reimbursement or in kind benefits is not subject to liquidation or
exchange for another benefit, and (iii) no such reimbursement, expenses eligible for reimbursement, or in-kind benefits provided in any taxable year shall
in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year. For purposes of Code §409A, the
Executive’s right to receive any installment payment pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct
payments. In no event shall any payment under this Agreement that constitutes non-qualified deferred compensation for purposes of Code §409A be
subject to offset, counterclaim, or recoupment by any other amount unless otherwise permitted by Code §409A.
17.
Governing Law.
This Agreement shall be governed by, and construed, interpreted and enforced in accordance with the laws of the State of Texas as applied to
agreements entirely entered into and performed in Texas by Texas residents exclusive of the conflict of laws provisions of any other state.
18.
Survival.
Obligations under this Agreement which by their nature would continue beyond the termination of this Agreement, including without limitation
Sections 8 and 9, shall survive termination of this Agreement for any reason.
19.
Arbitration.
Except as set forth below, any controversy or claim arising out of or relating to this Agreement (including, without limitation, as to arbitrability
and any disputes with respect to the Executive’s employment with the Company or the termination of such employment), or the breach thereof, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect as of the date of filing of the
11
arbitration administered by a person authorized to practice law in the State of Texas and mutually selected by the Company and the Executive (the
“Arbitrator”). If the Company and the Executive are unable to agree upon the Arbitrator within fifteen (15) days, they shall each select an arbitrator within
fifteen (15) days, and the arbitrators selected by the Company and the Executive shall appoint a third arbitrator to act as the Arbitrator within fifteen
(15) days (at which point the Arbitrator alone shall judge the controversy or claim). The arbitration hearing shall commence within ninety (90) calendar
days after the Arbitrator is selected, unless the Company and the Executive mutually agree to extend this time period. The arbitration shall take place in
Dallas, Texas. The Arbitrator will have full power to give directions and make such orders as the Arbitrator deems just. Nonetheless, the Arbitrator
explicitly shall not have the authority, power, or right to alter, change, amend, modify, add, or subtract from any provision of this Agreement except
pursuant to Section 15. The Arbitrator shall issue a written decision that sets forth the essential findings and conclusions upon which the Arbitrator’s award
or decision is based within thirty (30) days after the conclusion of the arbitration hearing. The agreement to arbitrate will be specifically enforceable. The
award rendered by the Arbitrator shall be final and binding (absent fraud or manifest error), and any arbitration award may be enforced by judgment
entered in any court of competent jurisdiction. The Company and the Executive shall each pay one-half (1/2) of the fees of the Arbitrator. Notwithstanding
anything set forth above to the contrary, in the event that the Company seeks injunctive relief and/or specific performance to remedy a breach, evasion,
violation or threatened violation of this Agreement, the Executive irrevocably waives his right, if any, to have any such dispute decided by arbitration or in
any jurisdiction or venue other than a state or federal court in the State of Texas. For any such action, the Executive further irrevocably consents to the
personal jurisdiction of the state and federal courts in the State of Texas.
20.
WAIVER OF JURY TRIAL.
NO PARTY TO THIS AGREEMENT OR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF A PARTY
SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEDURE BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR THE DEALINGS OR THE RELATIONSHIP
BETWEEN THE PARTIES. NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED,
WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS SECTION 20
HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO
PARTY HERETO HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO THAT THE PROVISIONS OF THIS
SECTION 20 WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
12
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.
ADDUS HEALTHCARE, INC.
By:
/s/ R. DIRK ALLISON
Name:
Title:
R. Dirk Allison
President and Chief Executive Officer
/s/ MICHAEL D. WATTENBARGER
Michael D. Wattenbarger
Signature Page to Wattenbarger Employment Agreement
Exhibit A
Bonus
The Executive is eligible to receive a bonus with a target amount of 75% of the Executive’s annual Base Salary during the applicable calendar
year (pro-rated for any partial year, including, without limitation, the 2019 calendar year, during which Executive’s bonus will be pro-rated based on 10
months of employment at the Senior Vice President level and 2 months of employment as Chief Information Officer), based on the Company’s evaluation
of the Executive’s performance compared to established Company and/or individual objectives, in each case, at the discretion of the Compensation
Committee of the Board of Directors. The Compensation Committee shall review and establish the objectives and threshold, target and maximum levels
with respect to such objectives annually.
Name of Subsidiary
A Plus Health Care, Inc.
Addus HomeCare Corporation
Addus HealthCare (Delaware), Inc.
Addus HealthCare (Idaho), Inc.
Addus HealthCare (Nevada), Inc.
Addus HealthCare (South Carolina), Inc.
Addus HealthCare, Inc.
Addus Nurse Care, Inc.
Alamo Area Home Hospice, LP
Alliance Home Health Care, LLC
Ambercare Corporation
Ambercare Home Health Care Corporation
Ambercare Hospice, Inc.
Cura Partners, LLC
House Calls of New Mexico, LLC
Hospice Partners of America Holding, LLC
Hospice Partners of America, LLC
Hospice Partners of Texas, LLC
HPA Medical Management, LLC
HPA Idaho, LLC (United Hospice)
H&PC of America, LLC
New Capital Partners II-HS, Inc.
Options Service, Inc.
PHC Acquisition Corporation
PRAC Holdings, Inc.
Priority Home Health Care, Inc.
Professional Reliable Nursing Services, Inc.
Serenity Palliative Care and Hospice, LLC
South Shore Home Health Service, Inc.
TR&B, LLC
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
State of
Incorporation
Montana
Delaware
Delaware
Delaware
Delaware
Delaware
Illinois
Delaware
Texas
New Mexico
New Mexico
New Mexico
New Mexico
Tennessee
New Mexico
Delaware
Delaware
Delaware
Delaware
Idaho
Delaware
Delaware
Colorado
California
Delaware
Ohio
California
Delaware
New York
Delaware
Doing Business As Name
A Plus Health Care
Addus Homecare Corporation
Addus HomeCare Delaware
Addus HomeCare
Desert PCA, Addus HomeCare
Addus HomeCare; Arcadia Home Care & Staffing
Addus HomeCare; Arcadia Home Care & Staffing
Sun City Caregivers; Lifestyle Options
Alamo Hospice
Alliance Home Health Care, LLC
Ambercare Corporation
Ambercare Home Health Care Corporation
Ambercare Hospice, Inc.
Addus HomeCare; Arcadia Home Care & Staffing
House Calls of New Mexico
Alamo Hospice of Conroe; Alamo Hospice of Waco; Hospice of
Virginia
Hospice Partners of America
Hospice Partners of Texas
Alamo Supportive Care; Serenity Supportive Care
Harrison’s Hope Hospice; Harrison’s Hope Twin Falls
H&PC of America
New Capital Partners II-HS
Options Service, Inc.
Addus HomeCare
Arcadia Home Care & Staffing
Addus HomeCare; Arcadia Home Care & Staffing
Arcadia Home Care & Staffing
Serenity Hospice
Addus HomeCare
TR&B
Pursuant to Item 601(b)(21)(ii) of Regulation S-K, certain subsidiaries have been omitted because, when considered in the aggregate, they do not constitute a significant
subsidiary.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-233600, 333-214988) and on Form S-8 (Nos.
333-219946, 333-190433, 333-164413) of Addus HomeCare Corporation of our report dated August 10, 2020 relating to the financial statements and
financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
August 10, 2020
CERTIFICATION
Exhibit 31.1
I, R. Dirk Allison, President and Chief Executive Officer of Addus HomeCare Corporation certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Addus HomeCare Corporation (the “Registrant”);
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially 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
the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: August 10, 2020
/s/ R. Dirk Allison
R. Dirk Allison
President and Chief Executive Officer
Exhibit 31.2
I, Brian Poff, Chief Financial Officer of Addus HomeCare Corporation, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Addus HomeCare Corporation (the “Registrant”);
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially 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
the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: August 10, 2020
/s/ Brian Poff
Brian Poff
Chief Financial Officer
Exhibit 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 OF 2002)
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 of Addus HomeCare Corporation (the
“Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Dirk Allison, President and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 10, 2020
BY:
/ S / R. DIRK ALLISON
R. Dirk Allison
President and Chief Executive Officer
Exhibit 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 OF 2002)
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 of Addus HomeCare Corporation (the
“Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Poff, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: August 10, 2020
BY:
/s/ Brian Poff
Brian Poff
Chief Financial Officer