SEC Filing | Addus HomeCare

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

¨	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		20-5340172
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2300 Warrenville Rd. Downers Grove, IL		60515
(Address of principal executive offices)		(Zip code)

630-296-3400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 x No ¨ .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $0.001 par value

Shares outstanding at October 31, 2015: 11,108,324

ADDUS HOMECARE CORPORATION

FORM 10-Q

INDEX


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements			3

Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014			3

Condensed Consolidated Statements of Income (Unaudited) For the Three and Nine Months Ended September 30, 2015 and 2014			4

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) For the Nine Months Ended September 30, 2015			5

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2015 and 2014			6

Notes to Condensed Consolidated Financial Statements (Unaudited)			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16

Item 3. Quantitative and Qualitative Disclosures About Market Risk			24

Item 4. Controls and Procedures			24

PART II. OTHER INFORMATION			25

Item 1. Legal Proceedings			25

Item 1A. Risk Factors			25

Item 6. Exhibits			26

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2015 and December 31, 2014

(Amounts and Shares in Thousands, Except Per Share Data)


	(Unaudited)		(Audited)
	September 30, 2015		December 31, 2014
Assets

Current assets
Cash	$	14,877	$	13,363
Accounts receivable, net of allowances of $4,188 and $3,881 at September 30, 2015 and December 31, 2014, respectively		78,395		68,333
Prepaid expenses and other current assets		7,644		7,168
Deferred tax assets		8,508		8,508

Total current assets		109,424		97,372

Property and equipment, net of accumulated depreciation and amortization		8,187		7,695

Other assets
Goodwill		65,962		64,220
Intangibles, net of accumulated amortization		10,179		10,347
Investment in joint venture		900		900
Other assets		404		269

Total other assets		77,445		75,736

Total assets	$	195,056	$	180,803

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	4,869	$	3,951
Current portion of capital lease obligations		1,100		986
Current portion of contingent earn-out obligation		1,250		1,000
Accrued expenses		42,118		37,268

Total current liabilities		49,337		43,205

Long-term liabilities
Deferred tax liabilities		5,832		5,845
Capital lease obligations, less current portion		2,162		2,677
Contingent earn-out obligation, less current portion		—		1,120

Total long-term liabilities		7,994		9,642

Total liabilities		57,331		52,847

Stockholders’ equity
Common stock—$.001 par value; 40,000 authorized and 11,108 and 11,010 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively		11		11
Additional paid-in capital		86,396		84,929
Retained earnings		51,318		43,016

Total stockholders’ equity		137,725		127,956

Total liabilities and stockholders’ equity	$	195,056	$	180,803

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2015 and 2014

(Amounts and Shares in Thousands, Except Per Share Data)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Net service revenues	$	84,331		$	81,658		$	252,055		$	230,306
Cost of service revenues		60,809			59,818			182,925			169,218

Gross profit		23,522			21,840			69,130			61,088

General and administrative expenses		18,041			15,773			52,617			45,576
Depreciation and amortization		1,197			1,106			3,504			2,684

Total operating expenses		19,238			16,879			56,121			48,260

Operating income		4,284			4,961			13,009			12,828

Interest income		(12	)		(8	)		(22	)		(16	)
Interest expense		175			188			527			500

Total interest expense, net		163			180			505			484

Income before income taxes		4,121			4,781			12,504			12,344
Income tax expense		1,234			1,544			4,202			4,024

Net income	$	2,887		$	3,237		$	8,302		$	8,320

Net income per common share
Basic income per share		0.26		$	0.30		$	0.76		$	0.76
Diluted income per share		0.26		$	0.29		$	0.74		$	0.75
Weighted average number of common shares and potential common shares outstanding:
Basic		11,007			10,927			10,978			10,985
Diluted		11,247			11,154			11,183			11,122

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015

(Amounts and Shares in Thousands)

(Unaudited)


	Common Stock					Additional Paid-in		Retained		Total Stockholders’
	Shares			Amount		Capital		Earnings		Equity
Balance at December 31, 2014		11,010		$	11	$	84,929	$	43,016	$	127,956

Issuance of shares of common stock under restricted stock award agreements		57			—		—		—		—
Forfeiture of shares of common stock under restricted stock award agreements		(3	)		—		—		—		—
Stock-based compensation		—			—		1,162		—		1,162
Shares issued		44			—		305		—		305
Net income		—			—		—		8,302		8,302

Balance at September 30, 2015		11,108		$	11	$	86,396	$	51,318	$	137,725

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2015 and 2014

(Amounts and Shares in Thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	8,302		$	8,320
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,504			2,684
Deferred income taxes		(13	)		—
Stock-based compensation		1,162			562
Amortization of debt issuance costs		46			119
Provision for doubtful accounts		2,974			2,832
Revaluation of contingent consideration		130			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(12,085	)		(3,077	)
Prepaid expenses and other current assets		(468	)		(642	)
Accounts payable		698			(1,188	)
Accrued expenses		4,536			(2,020	)

Net cash provided by operating activities		8,786			7,590

Cash flows from investing activities:
Acquisitions of businesses		(4,250	)		(7,186	)
Acquisition of customer list		(146	)		(50	)
Purchases of property and equipment		(1,316	)		(4,776	)

Net cash (used in) investing activities		(5,712	)		(12,012	)

Cash flows from financing activities:
Cash received from exercise of stock options		305			214
Borrowings on capital lease obligation		—			2,896
Payments for debt issuance costs		(86	)		—
Payments on capital lease obligations		(779	)		(129	)
Payment on contingent earn-out obligation		(1,000	)		—

Net cash (used in) provided by financing activities		(1,560	)		2,981

Net change in cash		1,514			(1,441	)
Cash, at beginning of period		13,363			15,565

Cash, at end of period	$	14,877		$	14,124

Supplemental disclosures of cash flow information:
Cash paid for interest	$	528		$	500
Cash paid for income taxes		575			3,883
Supplemental disclosures of non-cash investing and financing activities
Tax benefit related to the amortization of tax goodwill in excess of book basis		120			120
Contingent and deferred consideration accrued for acquisitions		—			1,020
Property and equipment acquired through capital lease obligations		378			1,137

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

The condensed consolidated financial statements include the accounts of Addus HomeCare Corporation (“Holdings”) and its subsidiaries (together with Holdings, the “Company” or “we”). The Company operates as one business segment and is a provider of comprehensive home and community based services that are primarily personal in nature, which are provided primarily in the home, and focused on the dual eligible (Medicare/Medicaid) population. The Company’s services include personal care and assistance with activities of daily living, and adult day care. The Company’s consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. The Company’s payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals. The Company currently provides home and community based services to over 32,000 consumers through 122 locations across 21 states, including 5 adult day centers in Illinois.

Principles of Consolidation

All intercompany balances and transactions have been eliminated in consolidation. The Company’s investment in entities with less than 20% ownership or in which the Company does not have the ability to influence the operations of the investee are being accounted for using the cost method and are included in investments in joint ventures.

Revenue Recognition

The Company generates net service revenues by providing services directly to consumers. The Company receives payments for providing services from federal, state and local governmental agencies, commercial insurers and private consumers. The Company’s services are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate specified in agreements or fixed by legislation and recognized as revenues at the time services are rendered. Home and community based service revenues are reimbursed by state, local and other governmental programs which are partially funded by Medicaid or Medicaid waiver programs, with the remainder reimbursed through private duty and insurance programs.

Laws and regulations governing the Medicaid and Medicare programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates may change in the near term. The Company believes that it is in compliance in all material respects with all applicable laws and regulations.

Allowance for Doubtful Accounts

The Company establishes its allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. The Company estimates its provision for doubtful accounts primarily by aging receivables utilizing eight aging categories and applying its historical collection rates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certain large payors analyzed separately from other payor groups. In the Company’s evaluation of these estimates, it also considers delays in payment trends in individual states due to budget or funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that the Company’s management believes is sufficient to cover potential losses. However, actual collections could differ from the Company’s estimates.

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 except for internally developed software which is amortized by the sum-of-years digits method. Maintenance and repairs are charged to expense as incurred. The estimated useful lives of the property and equipment are as follows:


Computer equipment			3 – 5 years
Furniture and equipment			5 – 7 years
Transportation equipment			5 years
Computer software			5 – 10 years
Leasehold improvements			Lesser of useful life or lease term, unless probability of lease renewal is likely

Goodwill

The Company’s carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitions including the acquisition of Addus HealthCare, Inc. (“Addus HealthCare”). In accordance with Accounting Standards Codification (“ASC”) Topic 350, “Goodwill and Other Intangible Assets ,” goodwill and intangible assets with indefinite useful lives are not amortized. The Company tests goodwill 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. In 2014, the Company elected to implement Step 0 and was not required to conduct the remaining two step analysis. The results of the Company’s Step 0 assessment indicated that it was more likely than not that the fair value of its reporting unit exceeded its carrying value and therefore the Company concluded that there were no impairments for the year ended December 31, 2014. No impairment charges were recorded for the three or nine months ended September 30, 2015 or 2014.

Intangible Assets

The Company’s identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses and non-compete agreements. Amortization is computed using straight-line and accelerated methods based upon the estimated useful lives of the respective assets, which range from two to twenty-five years.

Intangible assets with finite lives are amortized using the estimated economic benefit method over the useful life and assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company would recognize an impairment loss when the estimated future non-discounted cash flows associated with the intangible asset is less than the carrying value. An impairment change 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. No impairment charge was recorded for the three or nine months ended September 30, 2015 or 2014.

The income approach, which the Company uses to estimate the fair value of its intangible assets (other than goodwill), is dependent on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods the assets will be utilized, appropriate discount rates and other variables. 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 also has indefinite-lived intangible assets that are not subject to amortization expense such as certificates of need and licenses to conduct specific operations within geographic markets. The Company’s management has concluded that certificates of need and licenses have indefinite lives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets, and the Company intends to renew and operate the certificates of need and licenses indefinitely. The certificates of need and licenses are tested annually for impairment. No impairment was recorded for the three or nine months ended September 30, 2015 or 2014.

Workers’ Compensation Program

The Company’s workers’ compensation program has a $350,000 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 performed by an independent third party. The future claims payments related to the workers’ compensation program are secured by letters of credit.

Interest Income

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 and reported in the statement of income as interest income. For the three and nine months ended September 30, 2015 and 2014, the Company did not receive any prompt payment interest. While the Company may be owed additional prompt payment interest, the amount and timing of receipt of such payments remains uncertain, and the Company has determined that it will continue to recognize prompt payment interest income when received.

Interest Expense

The Company’s interest expense consists of interest costs on its credit facility and other debt instruments.

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 liabilities and assets 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 asset 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.

Stock-based Compensation

The Company has two stock incentive plans, the 2006 Stock Incentive Plan (the “2006 Plan”) and the 2009 Stock Incentive Plan (the “2009 Plan”) that provide for stock-based employee compensation. The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Stock Compensation.” Compensation expense is recognized on a graded method under the 2006 Plan and on a straight-line basis under the 2009 Plan over the vesting period of the awards based on the fair value of the options and restricted stock awards. Under the 2006 Plan, the Company historically used the Black-Scholes option pricing model to estimate the fair value of its stock based payment awards, but beginning October 28, 2009 under its 2009 Plan it began using an enhanced Hull-White Trinomial model. The determination of the fair value of stock-based payments utilizing the Black-Scholes model and the Enhanced Hull-White Trinomial model is affected by Holdings’ stock price and a number of assumptions, including expected volatility, risk-free interest rate, expected term, expected dividends yield, expected forfeiture rate, expected turn-over rate and the expected exercise multiple.

Net Income Per Common Share

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 for the three and nine months ended September 30, 2015 were 650,000 stock options outstanding, of which 217,000 and 199,000, respectively, were dilutive. In addition, there were 89,000 restricted stock awards outstanding, 23,000 and 5,000 of which were dilutive for the three and nine months ended September 30, 2015, respectively.

Included in the Company’s calculation for the three and nine months ended September 30, 2014 were 646,000 stock options outstanding, of which 208,000 and 216,000, respectively, were dilutive. In addition, there were 60,000 restricted stock awards outstanding, of which 19,000 and 12,000, respectively, were dilutive for the three and nine months ended September 30, 2014.

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. Accordingly, actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, payables and debt. The carrying amounts reported in the condensed 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.

The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to goodwill and indefinite-lived intangible assets and also when determining the fair value of contingent considerations. To determine the fair value in these situations, the Company uses Level 3 inputs, such as discounted cash flows, or if available, what a market participant would pay on the measurement date.

The Company utilizes the income approach to estimate the fair value of its intangible assets derived from acquisitions. In addition, discounted cash flows were used to estimate the fair value of the Company’s investment in joint ventures.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue for which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP. In July 2015, the FASB agreed to defer the effective date of the standard from January 1, 2017, to January 1, 2018, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the impact of adopting this update on its financial statements.

Reclassification of Prior Period Balances

Certain reclassifications have been made to prior period amounts. Previously, property and equipment acquired through certain capital lease obligations had been classified as borrowings on capital lease obligations under cash flows from financing activities and as a purchase of property and equipment under investing activities on the condensed consolidated statements of cash flows. Because ASC 230-10-50-5 requires that for transactions that are part cash and part non-cash, only the cash portion shall be reported in the statement of cash flows, the Company revised the portion of the classification for which its lessor paid the vendors directly to instead be presented as a supplemental disclosure under non-cash investing and financing activities.

2. Acquisitions

On April 24, 2015, the Company entered into a purchase agreement to acquire South Shore Home Health Service, Inc. and Acaring Home Care, LLC for approximately $18,000,000 to expand into the State of New York. The purchase agreement was filed as Exhibit 10.1 to the Company’s March 31, 2015 Quarterly Report on Form 10-Q. Statements made herein with respect to the purchase agreement are not complete and you should refer to the previously filed Exhibit 10.1 for a copy of the actual agreement. The related acquisition costs to date are $488,000 and are expensed as incurred.

Effective January 1, 2015, the Company acquired Priority Home Health Care, Inc. (“PHHC”), in order to further expand the Company’s presence in the State of Ohio. The total consideration for the transaction was comprised of $4,250,000 in cash. The related acquisition costs were $454,000 and were expensed as incurred. The results of operations from this acquired entity are included in the Company’s statement of income from the date of the acquisition.

The Company’s acquisition of PHHC has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resultant goodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets.” The acquisition was recorded at its fair value as of January 1, 2015. The total purchase price is $4,250,000. Under business combination accounting, the total purchase price will be allocated to PHHC’s net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s preliminary valuation, the total purchase price has been allocated as follows:


	Total (Amounts in Thousands)
Goodwill	$	1,862
Identifiable intangible assets		1,930
Accounts receivable (net)		951
Furniture, fixtures and equipment		58
Other current assets		8
Accrued liabilities		(339	)
Accounts payable		(220	)

Total purchase price allocation	$	4,250

Management’s assessment of qualitative factors affecting goodwill for PHHC includes: estimates of market share at the date of purchase; ability to grow in the market; synergy with existing Company operations and the presence of managed care payors in the market.

Identifiable intangible assets acquired consist of trade names and trademarks, customer relationships and non-compete agreements. The estimated fair value of identifiable intangible assets was determined by the Company’s management. It is anticipated that the net intangible and identifiable intangible assets, including goodwill, are deductible for tax purposes. These estimates are provisional and are subject to change.

The PHHC acquisition accounted for $2,500,000 and $7,160,000 of net service revenues for the three and nine months ended September 30, 2015, respectively.

Effective June 1, 2014, the Company acquired Cura Partners, LLC, which conducts business under the name Aid & Assist at Home, LLC (“Aid & Assist”), in order to further expand the Company’s presence in the State of Tennessee. The total consideration for the transaction was $8,192,000, comprised of $7,172,000 in cash and $1,020,000, representing the estimated fair value of contingent earn-out obligation. The related acquisition costs were $508,000 and were expensed as incurred. The results of operations from this acquired entity are included in the Company’s statement of income from the date of the acquisition.

The Company’s acquisition of Aid & Assist has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resultant goodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets .” The acquisition was recorded at its fair value as of June 1, 2014. The total purchase price is $8,192,000 and is comprised of:


	Total (Amounts in Thousands)
Cash	$	7,172
Contingent earn-out obligation		1,020

Total purchase price	$	8,192

As of June 1, 2014, the contingent earn-out obligation was recorded at its fair value of $1,020,000, which was the present value of the Company’s obligation to pay up to $1,168,000 based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between the parties. As of December 31, 2014, the Company revalued this liability at $200,000. This decline in the fair value of the contingent earn-out obligation reflects the acquisition’s failure to achieve performance targets expected at the date of acquisition for 2014 and the expectation that the acquisition will fail to achieve performance targets in 2015 and 2016.

Under business combination accounting, the total purchase price is allocated to Aid & Assist’s net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, the total purchase price has been allocated as follows:


	Total (Amounts in Thousands)
Goodwill	$	4,317
Identifiable intangible assets		3,950
Accounts receivable (net)		521
Furniture, fixtures and equipment		65
Other current assets		60
Accrued liabilities		(553	)
Accounts payable		(168	)

Total purchase price allocation	$	8,192

Management’s assessment of qualitative factors affecting goodwill for Aid & Assist includes: estimates of market share at the date of purchase; ability to grow in the market; synergy with existing Company operations and the presence of managed care payors in the market.

The Aid & Assist acquisition accounted for $2,524,000 and $8,231,000 of net service revenues for the three and nine months ended September 30, 2015, respectively, and $3,295,000 and $4,358,000 of net service revenues from operations for the three and nine months ended September 30, 2014, respectively.

The Company entered into two definitive acquisition agreements to acquire home and community based businesses during 2013 to further its presence in both existing states and to expand into new states. On October 17, 2013 the Company entered into an asset purchase agreement to acquire the entire home and community based business of Medi Home Private Care Division of Medical Services of America, Inc. The acquisition included two agencies located in South Carolina which were closed effective November 1, 2013; four agencies located in Tennessee and two agencies located in Ohio which closed in January 2014. The Company also entered into an asset purchase agreement to acquire the assets of Coordinated Home Health Care, LLC, a personal care business located in New Mexico (“CHHC”), on November 7, 2013. The combined consideration for these two acquisitions was $12,325,000 in cash at the close and a maximum of $2,250,000 in future cash based on certain performance. The purchase included sixteen offices located in Southern New Mexico. The transaction closed effective December 1, 2013. The related acquisitions costs were $735,000 for the Medi Home Private Care Division of Medical Services of America, Inc. and CHHC deals, and were expensed as incurred. The results of operations from these acquired entities are included in our statement of income from the dates of the respective acquisitions.

The Company’s acquisition of the assets of CHHC has been accounted for in accordance with ASC Topic 805, “Business Combinations” and the resultant goodwill and other intangible assets will be accounted for under ASC Topic 350 “Goodwill and Other Intangible Assets”. Assets acquired and liabilities assumed were recorded at their fair values as of December 1, 2013. The total purchase price was $12,825,000 and was comprised of:


	Total (Amounts in Thousands)
Cash	$	11,725
Contingent earn-out obligation		1,100

Total purchase price	$	12,825

As of December 1, 2013, the contingent earn-out obligation was recorded at its fair value of $1,100,000, which was the present value of the Company’s obligation to pay up to $2,250,000 based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between the parties. As of December 31, 2014, the Company revalued this liability at $1,920,000. This increase in the fair value of the contingent earn-out obligation reflects the acquisition’s excess achievement of performance targets for the year ended December 31, 2014 as a result of higher than anticipated rate of conversion to managed care organizations in the State of New Mexico. As of September 30, 2015, the contingent earn-out obligation was recorded at its fair value of $1,250,000. The Company increased this liability by $130,000 to accrue to the maximum earn-out obligation based on probability-weighted estimates of the achievement of certain performance targets, as defined in the earn-out agreement between the parties. $1,000,000 of the liability, which was recorded as the current portion at December 31, 2014, was subsequently paid during the second quarter of 2015.

Under business combination accounting, the total purchase price was allocated to CHHC’s net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, the total purchase price was allocated as follows:


	Total (Amounts in Thousands)
Goodwill	$	9,488
Identifiable intangible assets		3,300
Accounts receivable		888
Prepaid expenses		35
Furniture, fixtures and equipment		58
Deposits		15
Accounts payable		(81	)
Accrued liabilities		(864	)
Other liabilities		(14	)

Total purchase price allocation	$	12,825

Management’s assessment of qualitative factors affecting goodwill for CHHC includes: estimates of market share at the date of purchase; ability to grow in the market; synergy with existing Company operations and the presence of managed care payors in the market.

Identifiable intangible assets acquired consist of trade names and trademarks, customer relationships and non-compete agreements. The estimated fair value of identifiable intangible assets was determined by management. It is anticipated that the net intangible and identifiable intangible assets, including goodwill, are deductible for tax purposes.

Acquisitions completed during the fourth quarter 2013 accounted for $6,245,000 and $18,116,000 of net service revenues for the three and nine months ended September 30, 2015, respectively, and $5,821,000 and $16,004,000 of net service revenues for the three and nine months ended September 30 2014, respectively.

3. Goodwill and Intangible Assets

The Company’s carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitions including the acquisition of Addus HealthCare. In accordance with ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. The Company tests goodwill for impairment 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 impairment may have occurred.

Goodwill is required to be tested for impairment at least annually. The Company can elect to perform Step 0, an optional qualitative analysis and based on the results skip the remaining two steps. In 2014, the Company elected to implement Step 0 and was not required to conduct the remaining two step analysis. In performing its goodwill assessment for 2014, the Company evaluated the following factors that affect future business performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, reporting unit factors and company stock price. As a result of the assessments of these qualitative factors, the Company concluded that it was more likely than not that the fair values of the reporting unit goodwill as of December 31, 2014 exceed the carrying values of the unit. Accordingly, the first and second steps of the goodwill impairment test as described in ASC 350-20-35, which includes estimating the fair values of the Company, were not considered necessary.

The Company did not record any impairment charges for the three and nine months ended September 30, 2015. The Company will perform its annual impairment test for fiscal 2015 during the fourth quarter of 2015.

A summary of the goodwill activity for the nine months ended September 30, 2015 is provided below:


	Goodwill (Amounts in Thousands)
Goodwill, at December 31, 2014	$	64,220
Additions for acquisitions		1,862
Adjustments to previously recorded goodwill		(120	)

Goodwill, at September 30, 2015	$	65,962

Adjustments to the previously recorded goodwill are primarily credits related to amortization of tax goodwill in excess of book basis.

The Company also has indefinite-lived assets that are not subject to amortization expense such as licenses and in certain states certificates of need to conduct specific operations within geographic markets. The Company has concluded these assets have indefinite lives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets and the Company intends to renew the licenses indefinitely. The licenses and certificates of need are tested annually for impairment using the cost approach. Under this method assumptions are made about the cost to replace the certificates of need. No impairment charges were recorded in the three and nine months ended September 30, 2015 or 2014.

The carrying amount and accumulated amortization of each identifiable intangible asset category consisted of the following at September 30, 2015 and December 31, 2014:


	Customer and referral relationships			Trade names and trademarks			State licenses		Non- competition agreements			Total
	(Amounts in Thousands)
Gross balance at December 31, 2014	$	27,896		$	7,181		$	150	$	2,058		$	37,285
Accumulated amortization		(22,497	)		(3,619	)		—		(822	)		(26,938	)

Net Balance at December 31, 2014		5,399			3,562			150		1,236			10,347

Gross balance at January 1, 2015		27,896			7,181			150		2,058			37,285
Additions for acquisitions		910			980			—		40			1,930
Acquisition of customer list		146			—			—		—			146
Accumulated amortization		(23,666	)		(4,345	)		—		(1,171	)		(29,182	)

Net Balance at September 30, 2015	$	5,286		$	3,816		$	150	$	927		$	10,179

Amortization expense related to the identifiable intangible assets amounted to $767,000 and $2,244,000 for the three and nine months ended September 30, 2015, respectively, and $710,000 and $1,719,000 for the three and nine months ended September 30, 2014, respectively. Goodwill and state licenses are not amortized pursuant to ASC Topic 350.

4. Details of Certain Balance Sheet Accounts

Prepaid expenses and other current assets consisted of the following:


Details of Certain Balance Sheet Accounts	September 30, 2015 (Amounts in Thousands)		December 31, 2014 (Amounts in Thousands)
Prepaid health insurance (1)	$	1,045	$	2,762
Prepaid workers’ compensation and liability insurance		1,911		1,326
Prepaid rent		577		595
Workers’ compensation insurance receivable		3,157		1,457
Other		954		1,028

	$	7,644	$	7,168

Accrued expenses consisted of the following:


	September 30, 2015 (Amounts in Thousands)		December 31, 2014 (Amounts in Thousands)
Accrued payroll	$	16,794	$	12,703
Accrued workers’ compensation insurance		15,398		14,081
Accrued health insurance (1)		1,995		3,540
Indemnification reserve (2)		1,203		1,263
Accrued professional fees		1,355		1,500
Accrued payroll taxes		958		3,287
Other		4,415		894

	$	42,118	$	37,268

(1)

The Company provides health insurance coverage to qualified union employees providing home and community based services in Illinois through a Taft-Hartley multi-employer health and welfare plan under Section 302(c)(5) of the Labor Management Relations Act of 1947. The Company’s insurance contributions equal the amount reimbursed by the State of Illinois. Contributions are due within five business days from the date the funds are received from the State. Amounts due of $996,000 and $2,404,000 for health insurance reimbursements and contributions were reflected in prepaid insurance and accrued insurance at September 30, 2015 and December 31, 2014, respectively.

(2)

As a condition of the sale of substantially all of the assets used in the Company’s home health business to subsidiaries of LHC Group. Inc. (“LHCG”) in February 2013, the Company is responsible for any adjustments to Medicare and Medicaid billings prior to the closing. In connection with an internal evaluation of the Company’s billing processes, the Company discovered documentation errors in a number of claims that it had submitted to Medicare. Consistent with applicable law, the Company voluntarily remitted $1,840,000 to the U.S. government in March 2014. The Company, using its best judgment, has estimated a total of $1,203,000 for billing adjustments remaining.

5. Long-Term Debt

Capital Leases

On July 12, 2014, September 11, 2014 and April 13, 2015, the Company executed three 48-month capital lease agreements for $2,650,000, $1,428,000 and $378,000, respectively, with First American Commercial Bancorp, Inc. The capital leases were entered into to finance property and equipment at the Company’s new corporate headquarters in Downers Grove, IL. The underlying assets are included in “Property and equipment, net of accumulated depreciation and amortization” in the accompanying Unaudited Condensed Consolidated Balance Sheets. These capital lease obligations require monthly payments through September 2018 and have implicit interest rates that range from 3.0% to 3.6%. At the end of the term, the Company has the option to purchase the assets for $1 per lease agreement.

The following is an analysis of the leased property under capital leases by major classes.


Classes of Property	Asset Balances at September 30, 2015 (Amounts in Thousands)
Leasehold Improvements	$	2,928
Furniture & Equipment		526
Computer Equipment		635
Computer Software		303
Less: Accumulated Depreciation		(575	)

	$	3,817

The future minimum payments for capital leases as of September 30, 2015 are as follows:


	Capital Lease (Amounts In Thousands)
2015	$	303
2016		1,213
2017		1,213
2018		737
2019		29

Total minimum lease payments		3,495
Less: amount representing estimated executory costs (such as taxes, maintenance and insurance), including profit thereon, included in total minimum lease payments		(76	)

Net minimum lease payments		3,419
Less: amount representing interest (a)		(157	)

Present value of net minimum lease payments (b)	$	3,262

(a)	Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at lease inception.

(b)	Reflected in the balance sheet as current and noncurrent obligations under capital leases of $1,100,000 and $2,162,000, respectively.

Senior Secured Credit Facility

On August 11, 2014, the Company renewed its credit facility. The Company’s credit facility provides a $55,000,000 revolving line of credit expiring November 2, 2019 and includes a $27,500,000 sublimit for the issuance of letters of credit. On November 6, 2014, the Company amended its credit facility, with retroactive effect to September 30, 2014. The credit facility was amended to (i) reduce the floating interest rate from one-month LIBOR, plus a margin of 4.6% to one-month LIBOR, plus a margin of 3.5%, (ii) reduce the interest rate for loans based on term periods of one, two or three months from the LIBOR rate, plus a margin of 4.6% to the LIBOR rate, plus a margin of 3.5% and (iii) increase the allowed capital expenditures for the fiscal year ending 2014 from $5,000,000 to $7,000,000. Substantially all of the subsidiaries of Holdings are co-borrowers, and Holdings has guaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first priority security interest in all of Holdings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.

The availability of funds under the revolving portion of the credit facility, as amended, is based on the lesser of (i) the product of adjusted EBITDA, as defined in the credit agreement, for the most recent 12-month period for which financial statements have been delivered under the credit agreement multiplied by the specified advance multiple, up to 3.25, less the outstanding senior indebtedness and letters of credit, and (ii) $55,000,000 less the outstanding revolving loans and letters of credit. Interest on the revolving line of credit may be payable at (i) a floating rate equal to the one-month LIBOR, plus a margin of 3.5%, (ii) the LIBOR rate for term periods of one, two or three months, plus a margin of 3.5% or (iii) the base rate, plus a margin of 1.6%, where the base rate is equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal funds rate, plus a margin of 0.5% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with a one month interest period advanced on such day, plus a margin of 3%. The Company pays a fee equal to 0.5% per annum of the unused portion of the revolving portion of the credit facility. Issued stand-by letters of credit are charged at a rate of 2.0% per annum payable monthly. The Company did not have any amounts outstanding on the revolving portion of the credit facility as of September 30, 2015, and the total availability under the revolving credit loan facility reduced by the outstanding letters of credit was $41,504,000 and $39,536,000, as of September 30, 2015 and December 31, 2014, respectively.

The credit facility contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws, maintenance of permits, maintenance of insurance and property and payment of taxes. The credit facility also contains certain customary financial covenants and negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to stay below a maximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, distributions, investments and loans, subject to customary carve outs, a restriction on dividends (unless no default then exists or would occur as a result thereof, the Company is in pro forma compliance with the financial covenants contained in the credit facility after giving effect thereto, and the Company has an excess availability of at least 10% of the revolving credit commitment under the credit facility), restrictions on the Company’s ability to enter into transactions other than in the ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, or for the purchase price of any one acquisition to exceed $2,000,000, in each case without the consent of the lenders, restrictions on mergers, transfers of assets, acquisitions, equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changes and lines of business.

6. Income Taxes

A reconciliation of the statutory federal tax rate of 35.0% for the three and nine months ended September 30, 2015 and 2014 is summarized as follows:


	Three Months Ended September 30,
	2015			2014
Federal income tax at statutory rate		35.0	%		35.0	%
State and local taxes, net of federal benefit		5.2			5.9
Jobs tax credits, net		(9.7	)		(9.7	)
Nondeductible meals and entertainment		0.5			1.1
Other		(1.1	)		—

Effective income tax rate		29.9	%		32.3	%


	Nine Months Ended September 30,
	2015			2014
Federal income tax at statutory rate		35.0	%		35.0	%
State and local taxes, net of federal benefit		5.2			5.9
Jobs tax credits, net		(7.6	)		(8.9	)
Nondeductible meals and entertainment		0.6			0.6
Other		0.4			—

Effective income tax rate		33.6	%		32.6	%

7. Commitments and Contingencies

Legal Proceedings

The Company is a party to legal and/or administrative proceedings arising in the ordinary course of its business. It is the opinion of management that the outcome of such proceedings will not have a material effect on the Company’s financial position and results of operations.

Employment Agreements

The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to four years and include non-compete and nondisclosure provisions, as well as provide for defined severance payments in the event of termination.

A substantial percentage of the Company’s workforce is represented by the Service Employees International Union (“SEIU”). The Company has a national agreement with the SEIU. Wages and benefits are negotiated at the local level at various times throughout the year. 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.

8. Significant Payors

A substantial portion of the Company’s net service revenues and accounts receivables are derived from services performed for federal, state and local governmental agencies. The Illinois Department on Aging accounted for 50.0% and 52.1% of the Company’s net service revenues for the three months ended September 30, 2015 and 2014, respectively.

The Illinois Department on Aging accounted for 48.6% and 53.7% of the Company’s net service revenues for the nine months ended September 30, 2015 and 2014, respectively.

The related receivables due from the Illinois Department on Aging represented 51.3 % of the Company’s accounts receivable at September 30, 2015 and 54.2% of the Company’s accounts receivable at December 31, 2014.

9. Concentration of Cash

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of 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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate.

Overview

We operate as one business segment and are a provider of comprehensive home and community based services that are primarily personal in nature, which are provided primarily in the home, and focused on the dual eligible (Medicare/Medicaid) population. Our services include personal care and assistance with activities of daily living, and adult day care. Our consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals. We currently provide home and community based services to over 33,000 consumers through 122 locations across 21 states, including 5 adult day centers in Illinois. For the three and nine months ended September 30, 2015, we served over 35,000 and 44,000 consumers, respectively.

A summary of our financial results for the three and nine months ended September 30, 2015 and 2014 is provided in the table below:


	For the Three Months Ended September 30, (Amounts in Thousands)
	2015		2014
Net service revenues	$	84,331	$	81,658
Net income		2,887		3,237
Total assets		195,056		175,347

	For the Nine Months Ended September 30, (Amounts in Thousands)
	2015		2014
Net service revenues	$	252,055	$	230,306
Net income		8,302		8,320
Total assets		195,056		175,347

Historically our services were provided under agreements with state and local government agencies established to meet the needs of our consumers. Our consumers are predominately “dual eligible” and as such are eligible to receive both Medicare and Medicaid funded home-based care. As a result of certain legislation enacted by the federal government, states are being incentivized to initiate dual eligible demonstration programs and other managed Medicaid initiatives, which are designed to coordinate the services provided through these two programs, with the overall objectives to better coordinate service delivery and over the long term to reduce costs. Increasingly states are implementing these managed care programs and as such are transitioning management of individuals such as our consumers to local and national managed care organizations. Under these arrangements the managed care organizations have an economic incentive to provide home and community based services to consumers as a means to better manage the acute care expenditures of their membership.

The home and community based services we provide include assistance with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of daily living. We provide these services on a long-term, continuous basis, with an average duration of approximately 20 months per consumer. Our adult day centers provide a comprehensive program of skilled and support services and designated medical services for adults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to and from the centers, the provision of meals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction.

We utilize a coordinated care model that is designed to improve consumer outcomes and satisfaction, as well as lower the cost of acute care treatment and reduce service duplication. We believe this coordinated care model to be especially valuable to managed care organizations that have economic responsibility for both home and community services as well as acute care expenditures. Over the long term, we believe this model will be a differentiator and as a result we expect to receive increased referrals from the managed care organizations.

Through our coordinated care model, we utilize our home care aides to observe and report changes in the condition of our consumers for the purpose of early intervention in the disease process, thereby preventing or reducing the cost of medical services by avoiding emergency room visits, and/or reducing the need for hospitalization. We coordinate the services provided by our team with those of other health care agencies as appropriate. Changes in consumers’ conditions are evaluated by appropriately trained managers and referred to either appropriate medical personnel including the consumers’ primary care physicians or managed care organizations for treatment and follow-up. We believe this approach to the care to our consumers and the integration of our services into the broader healthcare continuum are attractive to managed care organizations and others who are ultimately responsible for the healthcare needs and costs of our consumers and over time will increase our business with them.

We are investing in technology based solutions to support and facilitate our coordinated care model. We utilize Integrated Voice Response (“IVR”) systems and smart phone applications to communicate with the homecare aides. A quarter of our employees utilize this technology and our plans are to increase the use of these software applications throughout the broader workforce. Through these applications we are able to identify changes in health conditions with automated alerts forwarded to appropriate management team for triaging and evaluation. In addition, the technology is used to record basic transaction information about each visit including: start and end times to a scheduled shift, mileage reimbursement, text messages to the homecare aide and communication of basic payroll information. Our plans for this technology include development of a web portal to provide the ability to communicate this basic information about individual clients to the managed care organizations.

In addition to our focus on organic growth, we are growing through selective acquisitions which expand our presence in current markets or which facilitate our entry into new markets where the home and community business is moving to managed care organizations. We completed two acquisitions in December 2013 and June 2014 that expanded our presence in two existing markets and provided us with a base of operations in two new targeted managed care states. On January 1, 2015, we acquired Priority Home Health Care, Inc., a company headquartered in Cleveland, Ohio and operating six offices in the Cleveland, Akron and Columbus areas. Additionally, on April 24, 2015, we entered into a purchase agreement to acquire South Shore Home Service, Inc. and Acaring Home Care, LLC to expand into the State of New York.

Business

As of September 30, 2015, we provided our home and community based services through 122 locations across 21 states including 5 adult day centers in Illinois.

Our payor clients are principally federal, state and local governmental agencies and, increasingly, managed care organizations. The federal, state 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 further transition of business from government payors to managed care organizations with which we are seeking to grow our business given our emphasis on coordinated care and the prevention of acute care. Managed care organizations are commercial insurance carriers who are under contract with various federal and state governmental agencies to manage the provision of home and community based services, improve the quality of care through prevention and provide a network for the delivery of health benefits and additional services. Their objective is to lower total health care costs by integrating the provision of home and community based services with those benefit programs responsible for the provision of acute care services to their consumers. We are also seeking to grow our private duty business. Our commercial insurance carrier payor clients are typically for-profit companies and are continuously seeking opportunities to control costs.

For the three and nine months ended September 30, 2015 and 2014 our payor revenue mix was:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
State, local and other governmental programs		78.1	%		85.9	%		77.8	%		88.6	%
Managed care organizations		18.1			9.5			18.2			6.8
Commercial		1.0			3.5			1.0			3.5
Private duty		2.8			1.1			3.0			1.1

		100.0	%		100.0	%		100.0	%		100.0	%

We derive a significant amount of our net service revenues from our operations in Illinois, which represented 60.4% and 60.0% of our total net service revenues for the three months ended September 30, 2015 and 2014, respectively. Net service revenues from our operations in Illinois represented 59.1% and 60.8% of our total net service revenues for the nine months ended September 30, 2015 and 2014, respectively.

A significant amount of our net service revenues are derived from one payor client, the Illinois Department on Aging, which accounted for 50.0% and 52.1% of our total net service revenues for the three months ended September 30, 2015 and 2014, respectively. The Illinois Department on Aging accounted for 48.6 % and 53.7% of our total net service revenues for the nine months ended September 30, 2015 and 2014, respectively.

We measure the performance of our business using a number of different metrics, including billable hours, billable hours per business day, revenues per billable hour and the number of consumers, or census.

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 or contract, and recognized as net service revenues at the time services are rendered.

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 these employees.

Employees are also reimbursed for their travel time and related travel costs.

General and Administrative Expenses

Our general and administrative expenses include our costs for operating our network of local agencies and our centralized support center.

Our agency expenses 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 including rents, utilities, postage, telephone and office expenses. Our centralized support center includes costs for accounting, information systems including software development, human resources, billing and collections, contracting, marketing, our contact center 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 and related facility costs.

Depreciation and Amortization Expenses

We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-compete agreements, principally using accelerated methods based upon their estimated useful lives. Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms.

Interest Income

Interest Expense

Interest expense consists of interest costs on our credit facility, capital lease obligations and other debt instruments and is reported in the statement of income when incurred.

Income Tax Expense

All of our income is from domestic sources. We incur state and local taxes in states in which we operate. The differences from the federal statutory rate of 35.0% for the three and nine months ended September 30, 2015 and 2014 are principally due to the inclusion of state and local taxes and the use of federal employment tax credits that lower our effective tax rate.

Results of Operations

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

The following table sets forth, for the periods indicated, our unaudited consolidated results of operations.


	For the Three Months Ended September 30,
	2015						2014						Change
	Amount			% Of Net Service Revenues			Amount			% Of Net Service Revenues			Amount			%
	(Amounts in Thousands, Except Percentages)
Net service revenues	$	84,331			100.0	%	$	81,658			100.0	%	$	2,673			3.3	%
Cost of service revenues		60,809			72.1			59,818			73.3			991			1.7

Gross profit		23,522			27.9			21,840			26.7			1,682			7.7
General and administrative expenses		18,041			21.4			15,773			19.3			2,268			14.4
Depreciation and amortization		1,197			1.4			1,106			1.4			91			8.2

Total operating expenses		19,238			22.8			16,879			20.7			2,359			14.0

Operating income		4,284			5.1			4,961			6.1			(677	)		(13.6	)

Interest income		(12	)		—			(8	)		—			(4	)
Interest expense		175			0.2			188			0.2			(13	)

Total interest expense, net		163			0.2			180			0.2			(17	)		(9.4	)

Income before income taxes		4,121			4.9			4,781			5.9			(660	)		(13.8	)
Income tax expense		1,234			1.5			1,544			1.9			(310	)		(20.1	)

Net income	$	2,887			3.4		$	3,237			4.0		$	(350	)		(10.8	)

Business Metrics (Actual Numbers, Except Billable Hours in Thousands)
Average billable census		32,407						32,032						375			1.2	%
Billable hours		4,860						4,794						66			1.4
Average billable hours per census per month		50.0						49.9						0.1			0.2
Billable hours per business day		74,768						74,912						(144	)		(0.2	)
Revenues per billable hour	$	17.35					$	17.03					$	0.32			1.9	%

Net service revenues from state, local and other governmental programs accounted for 78.1% and 85.9% of net service revenues for the three months ended September 30, 2015 and 2014, respectively. Managed care organizations accounted for 18.1% and 9.5% of net service revenues for the three months ended September 30, 2015 and 2014, respectively, with private duty and commercial payors accounting for the remainder of net service revenues.

Net service revenues increased $2,673,000, or 3.3%, to $84,331,000 for the three months ended September 30, 2015 compared to $81,658,000 for the same period in 2014. The increase was primarily due to a 1.2% increase in average billable census and a 1.9% increase in revenues per billable hour. Gross profit, expressed as a percentage of net service revenues, increased to 27.9% for the third quarter of 2015, compared to 26.7% for the same period in 2014. The increase was primarily due to improved workers’ compensation experience.

General and administrative expenses, expressed as a percentage of net service revenues increased to 21.4% for the three months ended September 30, 2015, from 19.3% for the three months ended September 30, 2014. General and administrative expenses increased to $18,041,000 as compared to $15,773,000 for the three months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expenses was due to an increase in costs related to wages, payroll taxes, stock compensation expenses, and increased expenditures related to legal, consulting, temporary office personnel and the ongoing installation of our new human resources and payroll information system for the three months ended September 30, 2015 as compared to 2014.

Depreciation and amortization, expressed as a percentage of net service revenues, remained consistent at 1.4% for the third quarter of 2015 and 2014. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $767,000 and $710,000 for the three months ended September 30, 2015 and 2014, respectively.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014


	For the Nine Months Ended September 30,
	2015						2014						Change
	Amount			% Of Net Service Revenues			Amount			% Of Net Service Revenues			Amount			%
	(Amounts in Thousands, Except Percentages)
Net service revenues	$	252,055			100.0	%	$	230,306			100.0	%	$	21,749			9.4	%
Cost of service revenues		182,925			72.6			169,218			73.5			13,707			8.1

Gross profit		69,130			27.4			61,088			26.5			8,042			13.2
General and administrative expenses		52,617			20.9			45,576			19.8			7,041			15.4
Depreciation and amortization		3,504			1.4			2,684			1.2			820			30.6

Total operating expenses		56,121			22.3			48,260			21.0			7,861			16.3

Operating income		13,009			5.2			12,828			5.6			181			1.4

Interest income		(22	)		—			(16	)		—			(6	)
Interest expense		527			0.2			500			0.2			27

Total interest expense, net		505			0.2			484			0.2			21			4.3

Income before income taxes		12,504			5.0			12,344			5.4			160			1.3
Income tax expense		4,202			1.7			4,024			1.7			178			4.4

Net income	$	8,302			3.3		$	8,320			3.6		$	(18	)		(0.2	)

Business Metrics (Actual Numbers, Except Billable Hours in Thousands)
Average billable census		32,808						32,753						55			0.2	%
Billable hours		14,626						13,511						1,115			8.3
Average billable hours per census per month		49.5						45.8						3.7			8.1
Billable hours per business day		76,176						70,737						5,439			7.7
Revenues per billable hour	$	17.23					$	17.05					$	0.18			1.1	%

Net service revenues from state, local and other governmental programs accounted for 77.8% and 88.6% of net service revenues for the nine months ended September 30, 2015 and 2014, respectively. Managed care organizations accounted for 18.2% and 6.8% of net service revenues for the nine months ended September 30, 2015 and 2014, respectively, with private duty and commercial payors accounting for the remainder of net service revenues.

Net service revenues increased $21,749,000, or 9.4%, to $252,055,000 for the nine months ended September 30, 2015 compared to $230,306,000 for the same period in 2014. The increase was primarily due to a 0.2% increase in average billable census and a 1.1% increase in revenues per billable hour. Gross profit, expressed as a percentage of net service revenues, increased to 27.4% for the nine months ended September 30, 2015, compared to 26.5% for the same period in 2014. The increase was primarily due to improved workers’ compensation experience.

General and administrative expenses, expressed as a percentage of net service revenues increased to 20.9% for the nine months ended September 30, 2015, from 19.8% for the nine months ended September 30, 2014. General and administrative expenses increased to $52,617,000 as compared to $45,576,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expenses was due to an increase in costs related to wages, payroll taxes and stock compensation expenses, and increased expenditures related to legal, consulting, temporary office personnel and the ongoing installation of our new human resources and payroll information system for the nine months ended September 30, 2015 as compared to 2014.

Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.4% from 1.2% for the nine months ended September 30, 2015 and 2014, respectively. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $2,244,000 and $1,719,000 for the nine months ended September 30, 2015 and 2014, respectively.

Interest Income

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 and reported in the income statement caption, “interest income”. We received no prompt payment interest for the three and nine months ended September 30, 2015 or 2014. We do not anticipate that we will be owed additional prompt payment interest.

Interest Expense, Net

Interest expense, net, decreased to $163,000 from $180,000 for the three months ended September 30, 2015 as compared to September 30, 2014. For the nine months ended September 30, 2014 as compared to September 30, 2015, interest expense, net increased to $505,000 from $484,000. The increase is primarily as a result of the capital lease agreements entered into on July 12, 2014, September 11, 2014 and April 13, 2015. See Note 5 to the Notes to Condensed Consolidated Financial Statements (Unaudited) Long-Term Debt for additional information.

Income Tax Expense

Our effective tax rates for the three months ended September 30, 2015 and 2014 were 29.9% and 32.3%, respectively. The principal difference between the federal and state statutory rates and our effective tax rate is attributable to federal employment opportunity tax credits.

Our effective tax rates for the nine months ended September 30, 2015 and 2014 were 33.6% and 32.6%, respectively. The principal difference between the Federal and State statutory rates and our effective tax rate is attributable to federal employment opportunity tax credits.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash from operations and borrowings under our credit facility. We renewed our credit facility on the terms described below on August 11, 2014. At September 30, 2015 and December 31, 2014, we had cash balances of $14,877,000 and $13,363,000, respectively.

As of September 30, 2015 and December 31, 2014, we had no balances outstanding under the revolving credit portion of our credit facility. After giving effect to approximately $13,496,000 and $15,464,000 of outstanding letters of credit as of September 30, 2015 and December 31, 2014, respectively, and borrowing limits based on an advanced multiple of adjusted EBITDA, we had $41,504,000 and $39,536,000 available for borrowing under the credit facility as of September 30, 2015 and December 31, 2014, respectively.

Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes, operating expenses, interest and taxes. Due to its revenue deficiencies and financing issues, from time to time the State of Illinois has reimbursed us on a delayed basis with respect to our various agreements including with our largest payor, the Illinois Department on Aging. The open receivable balance from the State of Illinois increased by $1,640,000, from $44,136,000 as of December 31, 2014 to $45,776,000 as of September 30, 2015.

The State of Illinois’ payments have been sporadic and delayed in the past. Should payments become further delayed in the future, the delays could adversely impact our liquidity and may result in the need to increase borrowings under our credit facility. Since the end of the third quarter, we collected an additional $17,005,000 in accounts receivable from the State of Illinois.

Credit Facility

On August 11, 2014, we renewed our credit facility. Our credit facility provides a $55,000,000 revolving line of credit expiring November 2, 2019 and includes a $27,500,000 sublimit for the issuance of letters of credit. On November 6, 2014, we amended our credit facility, with retroactive effect to September 30, 2014. The credit facility was amended to (i) reduce the floating interest rate from one-month LIBOR, plus a margin of 4.6% to one-month LIBOR, plus a margin of 3.5%, (ii) reduce the interest rate for loans based on term periods of one, two or three months from the LIBOR rate, plus a margin of 4.6% to the LIBOR rate, plus a margin of 3.5% and (iii) increase the allowed capital expenditures for the fiscal year ending 2014 from $5,000,000 to $7,000,000. Substantially all of the subsidiaries of Holdings are co-borrowers, and Holdings has guaranteed the borrowers’ obligations under the credit facility. The credit facility is secured by a first priority security interest in all of Holdings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.

The availability of funds under the revolving credit portion of the credit facility, as amended, is based on the lesser of (i) the product of adjusted EBITDA, as defined in the credit agreement, for the most recent 12-month period for which financial statements have been delivered under the credit agreement multiplied by the specified advance multiple, up to 3.25, less the outstanding senior indebtedness and letters of credit, and (ii) $55,000,000 less the outstanding revolving loans and letters of credit. Interest on the revolving line of credit may be payable at (i) a floating rate equal to the one-month LIBOR, plus a margin of 3.5%, (ii) the LIBOR rate for term periods of one, two or three months, plus a margin of 3.5% or (iii) the base rate, plus a margin of 1.6%, where the base rate is equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate”, (b) the sum of the federal funds rate, plus a margin of 0.5% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with a one month interest period advanced on such day, plus a margin of 3.0%. We pay a fee equal to 0.5% per annum of the unused portion of the revolving portion of the credit facility. Issued stand-by letters of credit are charged at a rate of 2.0% per annum payable monthly. We did not have any amounts outstanding on the revolving portion of the credit facility as of September 30, 2015, and the total availability under the revolving credit loan facility reduced by the outstanding letters of credit was $41,504,000 and $39,536,000, as of September 30, 2015 and December 31, 2014, respectively.

The credit facility contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws, maintenance of permits, maintenance of insurance and property and payment of taxes. The credit facility also contains certain customary financial covenants and negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to stay below a maximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, distributions, investments and loans, subject to customary carve outs, a restriction on dividends (unless no default then exists or would occur as a result thereof, we are in pro forma compliance with the financial covenants contained in the credit facility after giving effect thereto, and we have an excess availability of at least 10% of the revolving credit commitment under the credit facility), restrictions on our ability to enter into transactions other than in the ordinary course of business, a restriction on the ability to consummate more than three acquisitions in any calendar year, or for the purchase price of any one acquisition to exceed $2,000,000, in each case without the consent of the lenders, restrictions on mergers, transfers of assets, acquisitions, equipment, subsidiaries and affiliate transactions, subject to customary carve outs, and restrictions on fundamental changes and lines of business.

While our growth is not entirely dependent on acquisitions, if we do not have sufficient cash resources or availability under our credit facility, or we are otherwise prohibited from making acquisitions, our growth could be limited unless we obtain additional equity or debt financing or the necessary consents from our lenders. We believe the available borrowings under our credit facility which, combined with cash from operations, will be sufficient to cover our working capital needs for at least the next 12 months.

Cash Flows

The following table summarizes changes in our cash flows for the nine months ended September 30, 2015 and 2014:


	For the Nine Months Ended September 30, (Amounts in Thousands)
	2015			2014
Net cash provided by operating activities	$	8,786		$	7,590
Net cash (used in) investing activities		(5,712	)		(12,012	)
Net cash (used in) provided by financing activities		(1,560	)		2,981

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Net cash provided by operating activities was $8,786,000 for the nine months ended September 30, 2015, compared to cash provided by operations of $7,590,000 for the same period in 2014. This increase in cash provided by operations was primarily due to an increase in accrued expenses which was offset by a decrease in accounts receivable during this period.

Net cash used in investing activities was $5,712,000 for the nine months ended September 30, 2015 compared to cash used in investing activities of $12,012,000 for the nine months ended September 30, 2014. Our investing activities for the nine months ended September 30, 2015 were $1,316,000 in purchases of property and equipment to invest in our technology infrastructure, $4,250,000 for the acquisition of Priority Home Healthcare, Inc. as previously described in Note 2 to the Condensed Consolidated Financial Statements (Unaudited) and $146,000 for the acquisition of a customer list. Our investing activities for the nine months ended September 30, 2014 were purchases of property and equipment related to our new corporate headquarters in Downers Grove, IL and a new payroll system, the acquisition of Aid & Assist as described in Note 2 to the Condensed Consolidated Financial Statements (Unaudited), and the acquisition of a customer list.

Net cash used in financing activities was $1,560,000 for the nine months ended September 30, 2015 as compared to net cash provided by financing activities of $2,981,000 for the nine months ended September 30, 2014. Our financing activities for the nine months ended September 30, 2015 were a $1,000,000 payment on the CHHC contingent earn-out obligation as previously described in Note 2 to the Condensed Consolidated Financial Statements (Unaudited), $779,000 of payments on capital lease obligations and $86,000 payment for debt issuance costs and $305,000 of cash received for the exercise of employee stock options. Our financing activity for the nine months ended September 30, 2014 was primarily related to capital lease obligations to finance purchases of property and equipment related to our corporate headquarters in Downers Grove, IL.

Outstanding Accounts Receivable

Gross accounts receivable as of September 30, 2015 and December 31, 2014 were approximately $82,583,000 and $72,214,000, respectively. Outstanding accounts receivable, net of the allowance for doubtful accounts, increased by $10,062,000 as of September 30, 2015 as compared to December 31, 2014. The increase in accounts receivable is primarily attributable to delay in payment from the state of Illinois during the third quarter of 2015.

We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. Our provision for doubtful accounts is estimated and recorded primarily by aging receivables utilizing eight aging categories and applying our historical collection rates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certain large payors analyzed separately from other payor groups. In our evaluation of these estimates, we also consider other factors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates.

Our collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted.

The following tables detail our accounts receivable before reserves by payor category, showing Illinois governmental payors separately, and the related allowance amount at September 30, 2015 and December 31, 2014:


	September 30, 2015
	0-90 Days			91-180 Days			181-365 Days			Over 365 Days			Total
	(Amounts in Thousands, Except Percentages)
Illinois governmental based programs	$	43,444			816			417			1,099		$	45,776
Other state, local and other governmental programs		12,605			3,877			2,180			741			19,403
Managed care organizations		10,164			2,427			1,387			412			14,390
Private duty and commercial		2,442			471			237			(136	)		3,014

Total		68,655			7,591			4,221			2,116			82,583

Aging % of total		83.1	%		9.2	%		5.1	%		2.6	%
Allowance for doubtful accounts													$	4,188
Reserve as % of gross accounts receivable														5.1	%


	December 31, 2014
	0-90 Days			91-180 Days			181-365 Days			Over 365 Days			Total
	(Amounts in Thousands, Except Percentages)
Illinois governmental based programs	$	37,406			5,298			670			762		$	44,136
Other state, local and other governmental programs		12,951			1,815			1,284			60			16,110
Managed care organizations		6,524			1,167			919			258			8,868
Private duty and commercial		2,658			299			173			(30	)		3,100

Total		59,539			8,579			3,046			1,050			72,214

Aging % of total		82.4	%		11.9	%		4.2	%		1.5	%
Allowance for doubtful accounts													$	3,881
Reserve as % of gross accounts receivable														5.4	%

We calculate our days sales outstanding (“DSO”) by taking the accounts receivable outstanding net of the allowance for doubtful accounts divided by the total net service revenues for the last quarter, multiplied by the number of days in that quarter. Our DSOs were 86 days and 80 days at September 30, 2015 and December 31, 2014, respectively. The DSOs for our largest payor, the Illinois Department on Aging, at September 30, 2015 and December 31, 2014 were 92 days and 85 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. The change in the reserve as a percentage of gross accounts receivable to 5.1% as of September 30, 2015 from 5.4% as of December 31, 2014 is attributable to other state, local and other governmental programs and managed care organizations increase in total accounts receivable as well as improved aging.

Off-Balance Sheet Arrangements

As of September 30, 2015, 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 Condensed Consolidated Financial Statements (Unaudited) prepared in accordance with accounting principles generally accepted in the United States. 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. 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. We consider the items discussed below to be critical because of their impact on operations and their application requires our judgment and estimates.

Revenue Recognition

The majority of our revenues for the three and nine months ended September 30, 2015 and 2014 are derived from Medicaid and Medicaid waiver programs under agreements with various state and local authorities. These agreements provide for a service term from one year to an indefinite term. Services are provided based on authorized hours, determined by the relevant state or local agency, at an hourly rate specified in the agreement or fixed by legislation. Services to other payors, such as private or commercial clients, are provided at negotiated hourly rates and recognized in net service revenues as services are provided. We provide for appropriate allowances for uncollectible amounts at the time the services are rendered.

Accounts Receivable and Allowance for Doubtful Accounts

We are paid for our services primarily by state and local agencies under Medicaid or Medicaid waiver programs, managed care organizations, commercial insurance companies and private consumers. While our accounts receivable are uncollateralized, our credit risk is somewhat limited due to the significance of governmental payors to our results of operations. Laws and regulations governing the governmental programs in which we participate are complex and subject to interpretation. Amounts collected may be different than amounts billed due to client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized and other reasons unrelated to credit risk.

We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. Our allowance for doubtful accounts is estimated and recorded primarily by aging receivables utilizing eight aging categories and applying our historical collection rates to each aging category, taking into consideration factors that might impact the use of historical collection rates or payor groups, with certain large payors analyzed separately from other payor groups. In our evaluation of these estimates, we also consider delays in payment trends in individual states due to budget or funding issues, billing conversions related to acquisitions or internal systems, resubmission of bills with required documentation and disputes with specific payors. Historically, we have not experienced any write-off of accounts as a result of a state operating with budget deficits. While we regularly monitor state budget and funding developments for the states in which we operate, we consider losses due to state credit risk on outstanding balances as remote. We believe that our recorded allowance for doubtful accounts is sufficient to cover potential losses; however, actual collections in subsequent periods may require changes to our estimates.

Goodwill

Our carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitions including the acquisition of Addus HealthCare, Inc. (“Addus HealthCare”). In accordance with ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. 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. We can elect to perform Step 0, an optional qualitative analysis, and based on the results skip the remaining two steps. In 2014, we elected to implement Step 0. The results of our Step 0 assessment indicated that it was more likely than not that the fair value of our reporting unit exceeded its carrying value and therefore we concluded that there were no impairments for the year ended December 31, 2014. No impairment charges were recorded for the three or nine months ended September 30, 2015 or 2014.

Long-Lived Assets

We review our long-lived assets and finite lived intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, generally determined by discounting the estimated future cash flows. No impairment charge was recorded for the year ended December 31, 2014 or the three or nine months ended September 30, 2015 or 2014.

Indefinite-lived Assets

We also have indefinite-lived assets that are not subject to amortization expense such as licenses and in certain states certificates of need to conduct specific operations within geographic markets. Our management has concluded that these assets have indefinite lives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets and we intend to renew the licenses indefinitely. The licenses and certificates of need are tested annually for impairment. No impairment was recorded for the year ended December 31, 2014 or the three or nine months ended September 30, 2015 or 2014.

Workers’ Compensation Program

Our workers’ compensation insurance program has a $350,000 deductible component. We recognize our 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 performed by an independent third party. We monitor our claims quarterly and adjust our reserves accordingly. These costs are recorded primarily in the cost of services caption in the condensed consolidated statement of income. Under the agreement pursuant to which we acquired Addus HealthCare, claims under our workers’ compensation insurance program that related to December 31, 2005 or earlier were the responsibility of the selling shareholders in the acquisition, subject to certain limitations. The responsibility of the selling shareholders for these claims was terminated on December 29, 2014. In August 2010, the FASB issued Accounting Standards Update No 2010-24, Health Care Entities (Topic 954), “Presentation of Insurance Claims and Related Insurance Recoveries” (“ASU 2010-24”), which clarifies that companies should not net insurance recoveries against a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. As of September 30, 2015 and December 31, 2014, we recorded $3,157,000 and $1,457,000 in workers’ compensation insurance recovery receivables and a corresponding increase in its workers’ compensation liability. The workers’ compensation insurance recovery receivable is included in our prepaid expenses and other current assets on the balance sheet.

Income Taxes

We account for income taxes under the provisions of ASC Topic 740, “Accounting for 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 liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of our assets and liabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC Topic 740, 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.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue for which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP. In July 2015, the FASB agreed to defer the effective date of the standard from January 1, 2017, to January 1, 2018, with an option that permits companies to adopt the standard as early as the original effective date. Early application prior to the original effective date is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures. We have not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We are currently evaluating the impact of adopting this update on its financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Historically, we have been exposed to market risk due to fluctuations in interest rates. As of September 30, 2015, we had no outstanding indebtedness with variable interest rates and therefore no current exposure.

ITEM 4.

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 September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company 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 SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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 effective as of September 30, 2015.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal controls over financial reporting during the three months ended September 30, 2015 that were identified in connection with the evaluation referred to in the paragraph above that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Legal Proceedings

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the risk factors discussed under the caption “Risk Factors” set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to the risk factors previously disclosed under the caption “Risk Factors” in our Annual Report on Form 10-K, except as set forth below. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

We are subject to federal and state laws that govern our employment practices. Failure to comply with these laws, or changes to these laws that increase our employment-related expenses, could adversely impact our operations.

We are required to comply with all applicable federal and state laws and regulations relating to employment, including occupational safety and health requirements, wage and hour requirements, employment insurance and equal employment opportunity laws. These laws can vary significantly among states 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 or state laws or regulations requiring employers to provide specified benefits 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, 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.

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 $10,000 for each item or service furnished by the excluded individual to a federal or state healthcare program beneficiary, an assessment of up to three times the amount claimed and exclusion from the program.

Under the Health Reform Act, we are required to provide a minimum level of coverage for 70 percent of our full-time employees in 2015 or be subject to an annual penalty. For 2016, coverage must extend to 95% of our full-time employees. Approximately 22% of our employees are not provided any medical coverage. We are evaluating our options to minimize our exposure as a result of this requirement. If we determine that we will provide medical coverage for these employees, the costs could be material and have a significant effect on our profitability. If we determine not to offer medical coverage, we could be assessed fines or penalties for individuals who seek medical coverage through federal and state health exchanges. Depending on the number of employees who seek coverage in this manner, the penalties could be material and have a significant effect on our profitability.

In September 2013, the United States Department of Labor (the “Department of Labor”) announced the adoption of a rule that extended the minimum wage and overtime pay requirements of federal law to most direct care workers, such as home health aides, personal care aides and certified nursing assistants. These employees have been exempt from federal wage laws since 1974. The new rule was slated to take effect on January 1, 2015 (though the Department of Labor announced on October 7, 2014 that it would delay enforcement of the rule until June 30, 2015). In an action brought by the Home Care Association of America and related industry groups, the United States District Court for the District of Columbia invalidated key provisions in the Department of Labor’s rule, briefly restoring the status quo for home care organizations. However, the United States Court of Appeals for the District of Columbia overturned the D.C. District Court rulings on August 21, 2015 and reinstated the rule effective on or about October 13, 2015 (the date the D.C. Circuit formally issued its mandate). The home care industry coalition may seek further review with the United States Supreme Court, but the Supreme Court has refused to stay the effective date of the rule. The Department of Labor has said that it would only delay enforcement of the rule for thirty (30) days after the D.C. District Court formally issues its mandate, meaning that enforcement actions may begin as early as November 2015.

A number of states already require that direct care workers receive state-mandated minimum wage and/or overtime pay. Opponents say that the new protections will make in-home care more expensive for government programs such as Medicaid that pay for such services, and that the new rule could result in a reduction in covered services. We will continue to evaluate the effect of the new rule on our operations to determine if it will increase our labor costs, which could have a negative effect on our business, financial condition and operating results.

Item 6.

Exhibits


3.1		Amended and Restated Certificate of Incorporation of the Company dated as of November 2, 2009 (filed on November 20, 2009 as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q and incorporated by reference herein)

3.2		Amended and Restated Bylaws of the Company, as amended by the First Amendment to the Amended and Restated Bylaws (filed on May 9, 2013 as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q and incorporated by reference herein)

4.1		Form of Common Stock Certificate (filed on October 2, 2009 as Exhibit 4.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 and incorporated by reference herein)

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

101		Financial statements from the quarterly report on Form 10-Q of Addus HomeCare Corporation for the quarter ended September 30, 2015, filed on November 6, 2015 formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements.*

*	Filed herewith

**	Furnished herewith

SIGNATURES

Pursuant to the requirements 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*

Date: November 6, 2015	By:	/S/ MARK S. HEANEY

		Mark S. Heaney President and Chief Executive Officer (As Principal Executive Officer)

Date: November 6, 2015	By:	/S/ DONALD KLINK

		Donald Klink Chief Financial Officer (As Principal Financial Officer)

Exhibits


3.1		Amended and Restated Certificate of Incorporation of the Company dated as of November 2, 2009 (filed on November 20, 2009 as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q and incorporated by reference herein)

3.2		Amended and Restated Bylaws of the Company, as amended by the First Amendment to the Amended and Restated Bylaws (filed on May 9, 2013 as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q and incorporated by reference herein)

4.1		Form of Common Stock Certificate (filed on October 2, 2009 as Exhibit 4.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 and incorporated by reference herein)

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

101		Financial statements from the quarterly report on Form 10-Q of Addus HomeCare Corporation for the quarter ended September 30, 2015, filed on November 6, 2015, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements.*

*	Filed herewith

**	Furnished herewith

EX-31.1

Exhibit 31.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark S. Heaney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Addus HomeCare Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make 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;

3. 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;

4. The registrant’s other certifying officer 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

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 supervisions, 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 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):

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: November 6, 2015	By:	/s/ Mark S. Heaney
		Mark S. Heaney
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS OF VICE PRESIDENT & CORPORATE CONTROLLER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Donald Klink, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Addus HomeCare Corporation;

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: November 6, 2015	By:	/s/ Donald Klink
		Donald Klink
		Chief Financial Officer

EX-32.1

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 Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015 of Addus HomeCare Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark S. Heaney, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 6, 2015	By:	/s/ Mark S. Heaney
		Mark S. Heaney
		President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF VICE PRESIDENT & CORPORATE CONTROLLER

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 Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015 of Addus HomeCare Corporation (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald Klink, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: November 6, 2015	By:	/s/ Donald Klink
		Donald Klink
		Chief Financial Officer

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