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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-33267
---------------
ODYSSEY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1723043
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification Number)
717 N. HARWOOD, SUITE 1500
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
(214) 922-9711
(Registrant's telephone number, including area code)
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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of outstanding shares of the issuer's class of capital stock as
of November 7, 2003 was as follows: 36,290,228 shares of Common Stock, $.001 par
value.
FORM 10-Q
ODYSSEY HEALTHCARE, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------ -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 7,732 $ 1,177
Short-term investments ............................................ 25,898 43,660
Accounts receivable from patient services, net of
allowance for uncollectible accounts of $2,962 and
$3,868 at December 31, 2002 and September 30, 2003, respectively 35,652 43,615
Deferred tax assets ............................................... 1,752 314
Income taxes receivable ........................................... 667 261
Other current assets .............................................. 2,172 2,951
--------- ---------
Total current assets ......................................... 73,873 91,978
Property and equipment, net ......................................... 3,670 5,165
Debt issue costs, net ............................................... 25 --
Goodwill ............................................................ 46,527 63,687
Intangibles, net .................................................... 1,319 3,084
--------- ---------
Total assets ................................................. $ 125,414 $ 163,914
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 2,158 $ 4,322
Accrued compensation .............................................. 7,277 11,752
Accrued nursing home costs ........................................ 7,377 10,632
Other accrued expenses ............................................ 5,289 4,627
Current maturities of long-term debt and capital lease
obligations .................................................... 274 22
--------- ---------
Total current liabilities .................................... 22,375 31,355
Deferred tax liability .............................................. 1,779 2,889
Other liabilities ................................................... 327 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares -- 75,000,000
Issued and outstanding shares -- 35,067,136 at
December 31, 2002 and 36,289,566 at September 30, 2003 ......... 35 36
Additional paid-in capital ........................................ 79,191 84,990
Deferred compensation ............................................. (726) (412)
Retained earnings ................................................. 22,433 45,056
--------- ---------
Total stockholders' equity ................................... 100,933 129,670
--------- ---------
Total liabilities and stockholders' equity ................... $ 125,414 $ 163,914
========= =========
The accompanying notes are an integral part of these financial statements.
3
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------
2002 2003 2002 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
Net patient service revenue ............ $ 50,737 $ 71,049 $ 137,507 $ 196,005
Operating expenses:
Direct hospice care .................. 25,190 35,102 67,145 96,397
General and administrative ........... 15,983 21,138 45,005 57,858
Provision for uncollectible accounts . 423 1,236 1,723 3,074
Depreciation and amortization ........ 402 680 1,055 1,752
--------- --------- --------- ---------
41,998 58,156 114,928 159,081
--------- --------- --------- ---------
Income from operations ................. 8,739 12,893 22,579 36,924
Other income (expense):
Minority interest .................... 50 -- 50 --
Interest income ...................... 112 88 437 300
Interest expense ..................... (71) (35) (225) (139)
--------- --------- --------- ---------
91 53 262 161
--------- --------- --------- ---------
Income before provision for income taxes 8,830 12,946 22,841 37,085
Provision for income taxes ............. 3,425 5,099 8,679 14,463
--------- --------- --------- ---------
Net income ............................. $ 5,405 $ 7,847 $ 14,162 $ 22,622
========= ========= ========= =========
Net income per common share:
Basic net income per common share .... $ 0.15 $ 0.22 $ 0.41 $ 0.63
========= ========= ========= =========
Diluted net income per common share .. $ 0.15 $ 0.21 $ 0.39 $ 0.61
========= ========= ========= =========
Weighted average shares outstanding:
Basic ................................ 34,890 36,063 34,611 35,794
Diluted .............................. 36,777 37,791 36,542 37,163
The accompanying notes are an integral part of these financial statements.
4
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2002 2003
---- ----
(IN THOUSANDS)
(UNAUDITED)
Operating Activities
Net income ............................................. $ 14,162 $ 22,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................... 1,055 1,752
Amortization of deferred charges and debt discount .. 26 25
Stock-based compensation ............................ 528 315
Minority interest ................................... (50) --
Deferred tax (benefit) expense ...................... (409) 2,548
Provision for uncollectible accounts ................ 1,723 3,074
Tax benefit realized for stock option exercises ..... 556 1,022
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable ............................... (9,610) (11,364)
Other current assets .............................. (865) (373)
Accounts payable, accrued nursing home costs and
other accrued expenses ......................... 3,022 9,232
-------- --------
Net cash provided by operating activities ......... 10,138 28,853
Investing Activities
Cash paid for acquisitions ............................. (15,392) (19,320)
Increase in short-term investments ..................... (6,387) (17,762)
Purchases of property and equipment .................... (1,926) (2,852)
-------- --------
Net cash used in investing activities ............. (23,705) (39,934)
Financing Activities
Proceeds from issuance of common stock ................. 317 4,778
Distributions to minority partners ..................... (100) --
Proceeds from issuance of debt ......................... 15 8
Payments on debt ....................................... (2,971) (260)
-------- --------
Net cash provided by (used in) financing
activities ..................................... (2,739) 4,526
-------- --------
Net decrease in cash and cash equivalents ................ (16,306) (6,555)
Cash and cash equivalents, beginning of period ........... 20,072 7,732
-------- --------
Cash and cash equivalents, end of period ................. $ 3,766 $ 1,177
======== ========
Supplemental Cash Flow Information
Interest paid .......................................... $ 290 $ 114
Income taxes paid ...................................... $ 9,975 $ 10,869
The accompanying notes are an integral part of these financial statements.
5
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements of Odyssey
HealthCare, Inc. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 2002 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 27, 2003.
The consolidated balance sheet at December 31, 2002 has been derived from
the audited financial statements at that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.
Certain amounts have been reclassified to conform to the current presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149 "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS 149
did not have a material impact on the results of operations or financial
position of the Company.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective beginning after July 1, 2003. The adoption
of SFAS 150 did not have a material impact on the results of operations or
financial position of the Company.
3. ACQUISITIONS
In August 2003, the Company purchased substantially all the assets and
business of Omega Hospice, Ltd., a hospice located in Brownsville, Texas, with a
patient census of approximately 60. The purchase price, including transaction
costs, totaled $1.7 million. Assets acquired include licenses of $0.1 million, a
non-compete agreement of $0.2 million, and furniture and fixtures and goodwill
of $1.4 million.
Also in August 2003, the Company purchased substantially all the assets
and business of First State Hospice, L.L.C., a hospice located in Wilmington,
Delaware, with a patient census of approximately 15. The purchase price,
including transaction costs, totaled $0.5 million. Assets acquired include
licenses of $0.1 million, a non-compete agreement of $0.1 million, and furniture
and fixtures and goodwill of $0.3 million.
6
In September 2003, the Company purchased substantially all the assets and
business of Utah's Heritage Hospice, L.L.C., a hospice located in Salt Lake
City, Utah, with a patient census of approximately 280. The purchase price,
including transaction costs, totaled $11.8 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.2 million, and furniture
and fixtures and goodwill of $11.4 million. The purchase also includes a
retention bonus liability of $0.2 million to be paid following one year of
service from one of the members of Utah's Heritage Hospice, L.L.C.
Also in September 2003, the Company purchased certain assets of Grace,
Inc., a hospice located in Omaha, Nebraska, with a patient census of
approximately 35. The purchase price, including transaction costs, totaled $0.3
million. Assets acquired include a non-compete agreement of $0.1 million and
goodwill of $0.2 million.
The Company has made acquisitions to expand its base of hospice locations.
All acquisitions were accounted for under the purchase method of accounting. The
results of operations have been included in the consolidated financial
statements of the Company from the dates of acquisition.
Unaudited pro forma consolidated results of operations of the Company for
the nine months ended September 30, 2002 and 2003 are presented below. Such pro
forma presentation has been prepared assuming that the acquisitions acquired
through September 30, 2003, described above, have been made as of January 1 of
the year preceding the year of acquisition:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2003
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Pro forma net patient service revenue $ 163,986 $ 207,120
Pro forma net income ................. 16,051 23,081
Pro forma net income per common share:
Basic .............................. $ 0.46 $ 0.64
=========== ===========
Diluted ............................ $ 0.44 $ 0.62
=========== ===========
4. COMMON STOCK
On February 24, 2003 and August 12, 2003, the Company completed two
separate three-for-two stock splits, each payable in the form of a fifty percent
stock dividend. The accompanying consolidated financial statements and notes
thereto have been restated for all periods presented to reflect these stock
dividends.
5. STOCK BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation --
Transition and Disclosures" ("SFAS 148") in December 2002. SFAS 148 amends the
disclosure provisions and transition alternatives of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") and is effective for fiscal years ending after December 15, 2002. The
Company adopted the disclosure provisions of SFAS 148 effective December 31,
2002.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
123 to all stock-based compensation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
2002 2003 2002 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
Net income, as reported ............................ $ 5,405 $ 7,847 $ 14,162 $ 22,622
Add: Stock-based employee compensation expense
recorded, net of tax ............................. 101 60 327 192
Deduct: Fair value stock-based employee compensation
expense, net of tax .............................. (460) (647) (936) (1,589)
---------- ---------- ---------- ----------
Pro forma net income ............................... $ 5,046 $ 7,260 $ 13,553 $ 21,225
========== ========== ========== ==========
Earnings per share:
Basic - as reported ................................ $ 0.15 $ 0.22 $ 0.41 $ 0.63
Add: Stock-based employee compensation expense
recorded, net of tax ............................. 0.00 0.00 0.01 0.00
Deduct: Fair value stock-based employee compensation
expense, net of tax .............................. (0.01) (0.02) (0.03) (0.04)
---------- ---------- ---------- ----------
Basic - pro forma .................................. $ 0.14 $ 0.20 $ 0.39 $ 0.59
========== ========== ========== ==========
Diluted - as reported .............................. $ 0.15 $ 0.21 $ 0.39 $ 0.61
Add: Stock-based employee compensation expense
recorded, net of tax ............................. 0.00 0.00 0.01 0.00
Deduct: Fair value stock-based employee compensation
expense, net of tax .............................. (0.01) (0.02) (0.03) (0.04)
---------- ---------- ---------- ----------
Diluted - pro forma ................................ $ 0.14 $ 0.19 $ 0.37 $ 0.57
========== ========== ========== ==========
7
6. NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted net income per
common share:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2002 2003 2002 2003
---- ---- ---- ----
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT PER EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
Numerator
Numerator for diluted net income per share -
net income ............................... $ 5,405 $ 7,847 $14,162 $22,622
======= ======= ======= =======
Denominator
Denominator for basic net income per
share - weighted average shares ......... 34,890 36,063 34,611 35,794
Effect of dilutive securities:
Employee stock options .................. 1,858 1,698 1,902 1,339
Series B Preferred Stock Warrants
convertible to common stock ........... 29 30 29 30
------- ------- ------- -------
Denominator for diluted net income per
share - adjusted weighted average shares
and assumed or actual conversions ....... 36,777 37,791 36,542 37,163
======= ======= ======= =======
Net income per common share:
Basic net income per common share .......... $ 0.15 $ 0.22 $ 0.41 $ 0.63
======= ======= ======= =======
Diluted net income per common share ........ $ 0.15 $ 0.21 $ 0.39 $ 0.61
======= ======= ======= =======
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings arising in the
ordinary course of business. Although the results of litigation cannot be
predicted with certainty, management believes the outcome of pending litigation
will not have a material adverse effect, after considering the effect of the
Company's insurance coverage, on the Company's consolidated financial
statements.
The Company's current general and professional liability policy does not
provide coverage for claims that arise from acts that occurred prior to the
policy's start date of April 12, 2000. From March 12, 1999 to April 12, 2000,
Reliance National Insurance Company provided the Company's insurance coverage.
Since April 12, 2000, Lexington Insurance Company, a subsidiary of American
International Group, Inc., has provided the Company's insurance coverage. During
the fourth quarter of 2001, the Insurance Commissioner of the Commonwealth of
Pennsylvania placed Reliance National Insurance Company in liquidation. For the
three months ended September 30, 2003, the Company paid $0.5 million in
connection with a lawsuit settlement and related legal expenses and reversed
$0.3 million to operations. Based on the Company's estimation of open claims,
the Company is maintaining its legal reserve of $0.2 million at September 30,
2003, to cover potential losses resulting from current and future litigation
claims covered by Reliance National Insurance Company to the extent its assets
are not sufficient to pay such claims. Although the Company believes that the
amount recorded is adequate to cover its potential losses, there can be no
assurance that the Company's losses will not exceed the amount recorded. The
Company's profitability will be negatively impacted to the extent its actual
losses exceed the amount recorded.
8
8. SEGMENT REPORTING
Prior to 2002, the Company evaluated the performance of, and allocated
resources to, its hospice locations based on current operations and market
assessments on a hospice-by-hospice basis. The Company's continued growth in
2002 reshaped these bases for evaluation and the Company now has geographically
defined operating segments upon which to perform analysis and evaluate
performance. The three months and nine months ended September 30, 2002 amounts
have been restated to reflect the change in operating segments.
The Company currently evaluates performance and allocates resources
primarily on the basis of cost per day of care and income from operations. The
distribution of the Company's net patient service revenue, direct hospice care
expenses, income (loss) from operations (which is used by management for
operating performance review) and average daily census are summarized in the
following tables:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2003 2002 2003
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Net patient service revenue:
Northeast .................. $ 3,002 $ 3,995 $ 8,386 $ 11,701
Southeast .................. 2,333 3,173 6,342 8,704
Central .................... 4,111 6,147 12,576 16,204
South ...................... 8,128 10,553 19,434 29,718
Texas ...................... 10,258 14,839 27,987 40,962
Midwest .................... 5,148 6,384 14,896 18,265
Mountain ................... 10,470 16,093 28,441 42,871
West ....................... 7,287 9,865 19,445 27,580
Corporate .................. -- -- -- --
--------- --------- --------- ---------
$ 50,737 $ 71,049 $ 137,507 $ 196,005
========= ========= ========= =========
Direct hospice care expenses:
Northeast .................. $ 1,393 $ 1,953 $ 3,820 $ 5,480
Southeast .................. 1,114 1,579 3,036 4,198
Central .................... 2,041 3,050 5,573 7,766
South ...................... 4,131 5,176 9,585 14,531
Texas ...................... 5,493 7,931 15,318 21,843
Midwest .................... 2,444 3,053 6,517 8,733
Mountain ................... 5,099 7,721 13,901 20,569
West ....................... 3,468 4,630 9,328 13,254
Corporate .................. 7 9 67 23
--------- --------- --------- ---------
$ 25,190 $ 35,102 $ 67,145 $ 96,397
========= ========= ========= =========
Income (loss) from operations:
Northeast .................. $ 950 $ 1,147 $ 2,756 $ 3,713
Southeast .................. 797 879 2,108 2,789
Central .................... 1,162 1,817 4,737 5,064
South ...................... 2,593 3,270 6,277 9,140
Texas ...................... 2,865 4,362 7,541 11,818
Midwest .................... 1,835 1,712 5,613 4,948
Mountain ................... 3,299 5,725 8,604 15,171
West ....................... 2,306 3,340 5,818 8,969
Corporate .................. (7,068) (9,359) (20,875) (24,688)
--------- --------- --------- ---------
$ 8,739 $ 12,893 $ 22,579 $ 36,924
========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2002 2003
----- ----- ----- -----
Average Daily Census:
Northeast ......... 275 348 259 345
Southeast ......... 186 269 173 244
Central ........... 421 604 436 536
South ............. 843 1,031 680 992
Texas ............. 981 1,391 898 1,289
Midwest ........... 476 561 461 540
Mountain .......... 843 1,236 759 1,110
West .............. 594 758 537 720
----- ----- ----- -----
4,619 6,198 4,203 5,776
===== ===== ===== =====
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements used in the following discussion and elsewhere in this
Quarterly Report on Form 10-Q, including statements regarding our future
financial position and results of operations, business strategy and plans and
objectives of management for future operations and statements containing the
words "believe", "may", "will", "estimate", "continue", "anticipate", "intend",
"expect" and similar expressions, as they relate to us, are forward-looking
statements within the meaning of the federal securities laws. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions, which may cause our actual results, performance or achievements
to differ materially from those anticipated or implied by the forward-looking
statements. Such risks, uncertainties and assumptions include, but are not
limited to (i) the effect of reductions in amounts paid to us by the Medicare
and Medicaid programs, (ii) the effect of changes in healthcare licensure,
regulation and payment methods, (iii) our dependence on patient referrals, (iv)
our ability to develop new hospice locations in new markets or markets that we
currently serve, (v) our ability to identify suitable hospices to acquire on
favorable terms, (vi) our ability to integrate effectively the operations of
acquired hospices, (vii) our ability to attract and retain key personnel and
skilled employees, and (viii) our ability to obtain additional capital to
finance growth. Given these risks, uncertainties and assumptions, readers are
cautioned not to place undue reliance on such forward-looking statements, which
reflect management's view only as of the date of this Quarterly Report on Form
10-Q. We undertake no obligation to update or revise any of the forward-looking
statements or publicly announce any updates or revisions to any of the
forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions,
circumstances or assumptions underlying such statements. Reference is hereby
made to the disclosure contained under the heading "Risk Factors" in our Form
10-K filed with the Securities and Exchange Commission on March 27, 2003.
The following discussion of our financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and the related notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q.
OVERVIEW
We are one of the largest providers of hospice care in the United States.
We have grown rapidly since we opened our first hospice location in January
1996. Through the development of new hospice locations and a series of
acquisitions, we now have 64 Medicare-certified hospice providers to serve
patients and their families in 28 states. We currently have 79 locations,
including locations under development, in 30 states. We operate all of our
hospice locations through our operating subsidiaries. During the three months
ended September 30, 2003, our average daily census was 6,198 patients, which
represents a 34.2% increase over our average daily census for the three months
ended September 30, 2002 of 4,619 patients. During the nine months ended
September 30, 2003, our average daily census was 5,776 patients, which
represents a 37.4% increase over our average daily census for the nine months
ended September 30, 2002 of 4,203 patients. Our net patient service revenue of
$71.0 million for the three months ended September 30, 2003 represents an
increase of 40.0% over our net patient service revenue of $50.7 million for the
three months ended September 30, 2002. Our net patient service revenue of $196.0
million for the nine months ended September 30, 2003 represents an increase of
42.5% over our net patient service revenue of $137.5 million for the nine months
ended September 30, 2002. We reported net income of $7.8 million for the three
months ended September 30, 2003, which represents an increase of 45.2% over our
net income of $5.4 million for the three months ended September 30, 2002. We
reported net income of $22.6 million for the nine months ended September 30,
2003, which represents an increase of 59.7% over our net income of $14.2 million
for the nine months ended September 30, 2002.
On January 27, 2003, we announced that our Board of Directors had
authorized a three-for-two stock split payable in the form of a fifty percent
stock dividend that was distributed on February 24, 2003, to stockholders of
record at the close of business on February 6, 2003. We had approximately 15.8
million shares of common stock outstanding at the close of business on February
6, 2003 and issued approximately 7.9 million shares of common stock to the
stockholders of record.
On July 18, 2003, we announced that our Board of Directors had authorized
a three-for-two stock split payable in the form of a fifty percent stock
dividend to be distributed on August 12, 2003, to stockholders of record at the
close of business on July 28, 2003. We had approximately 23.9 million shares of
common stock outstanding at the close of business on July 28, 2003 and issued
approximately 12.0 million shares of common stock to the stockholders of record.
10
DEVELOPED HOSPICES
In the first quarter of 2002, our Norfolk, Virginia hospice became
Medicare and Medicaid certified. Our Austin, Texas and Montgomery, Alabama
hospices received Medicare certification during the second quarter of 2002, and
have since become Medicaid certified.
During the third quarter of 2002, our Chicago (South), Illinois and Tulsa,
Oklahoma hospices became Medicare certified. Our St. Louis, Missouri hospice
received Medicare certification in the fourth quarter of 2002. Our Chicago
(South), Illinois and St. Louis, Missouri hospices have since become Medicaid
certified.
In the first quarter of 2003, our Cleveland, Ohio hospice became Medicare
certified. In the second quarter of 2003, our Big Spring, Texas; Portland,
Oregon; and Philadelphia, Pennsylvania hospices received Medicare certification.
Our Cleveland, Ohio; Big Spring, Texas; and Portland, Oregon hospices have since
become Medicaid certified.
In the third quarter of 2003, our Mobile, Alabama; Cincinnati, Ohio; and
Toledo, Ohio hospices became Medicare certified. We also moved a provider number
to Temple, Texas which became active in the third quarter. We have started
development of seven additional hospices.
Once a hospice becomes Medicare certified, the process is started to
obtain Medicaid certification. This process takes approximately six months and
will vary from state to state.
ACQUISITIONS
During the second quarter of 2002, we acquired five hospices for a
combined purchase price of $11.0 million. We financed these acquisitions with
$11.0 million in cash proceeds from our initial public offering.
During the third quarter of 2002, we acquired four hospices for a combined
purchase price of $3.2 million, and also acquired the remaining 33% interest in
Hospice of Houston, L.P. for $1.1 million. We financed our acquisitions during
the third quarter, including Hospice of Houston, with $4.3 million in cash
proceeds from our initial public offering.
During the fourth quarter of 2002, we acquired three hospices for a
combined purchase price of $5.7 million. We financed these acquisitions with
$6.0 million in cash from the proceeds of our initial public offering.
During the first quarter of 2003, we acquired one hospice for a purchase
price of $3.0 million. We financed our acquisition with $3.0 million in cash
from the proceeds of our initial public offering.
During the second quarter of 2003, we acquired two hospices for a combined
purchase price of $1.8 million. We financed these acquisitions with $1.8 million
in cash from the proceeds of our initial public offering.
During the third quarter of 2003, we acquired four hospices for a combined
purchase price of $14.5 million. We financed these acquisitions with $2.7
million in cash from the proceeds of our initial public offering and $11.8
million in cash generated through our operations.
We accounted for these acquisitions as purchases.
Our strategy includes internal growth and expansion through new program
development and acquisitions. We continue to evaluate other potential
acquisition opportunities.
Goodwill from our hospice acquisitions was $63.7 million as of September
30, 2003. Goodwill was 49.1% of common stockholders' equity and 38.9% of total
assets as of September 30, 2003. Under new rules issued by the Financial
Accounting Standards Board, effective for fiscal 2002 and beyond, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with the new rules. Other
intangible assets continue to be amortized over their useful lives. We adopted
the new rules on accounting for goodwill and other intangible assets during
2002.
11
NET PATIENT SERVICE REVENUE
Net patient service revenue is the amount we believe we are entitled to
collect for our services, adjusted as described below. The amount we believe we
are entitled to collect for our services varies depending on the level of care
provided, the payor and the geographic area where services are rendered. Net
patient service revenue includes adjustments for charity care and estimated
payment denials (which we experience from time to time for reasons such as our
failure to submit complete and accurate claim documentation, our failure to
provide timely written physician certifications as to patient eligibility, or
the payor deems the patient ineligible for insurance coverage), contractual
adjustments, amounts we estimate we could be required to repay to Medicare, such
as payments that we would be required to make in the event that any of our
programs exceed the annual Medicare cap, and subsequent changes to initial level
of care determinations. We adjust our estimates from time to time based on our
billing and collection experience. We believe that we can reasonably estimate
such adjustments to net patient service revenue because we have significant
historical experience and because we have a centralized billing and collection
department that continually monitors the factors that could potentially result
in a change in estimates. There were no material changes in estimates to net
patient service revenue for the nine months ended September 30, 2002 and 2003.
We recognize net patient service revenue once the patient's hospice eligibility
has been certified, the patient's coverage from a payment source has been
verified and services have been provided to that patient.
We operate under arrangements with Medicare, Medicaid and other
third-party payors pursuant to which these payors reimburse us for services we
provide to hospice-eligible patients these payors cover, subject to our
submission of adequate and timely claim documentation. We have a patient intake
process that screens patients for hospice eligibility and identifies whether
their care will be covered by Medicare, Medicaid, private insurance, managed
care or self-pay. Whether Medicare or Medicaid will continue to provide
reimbursement for hospice care is dependent upon governmental policies.
Services provided under the Medicare program represented approximately
93.9% and 91.4% of our net patient service revenue for the three months ended
September 30, 2002 and 2003, respectively, and 94.5% and 92.8% of our net
patient service revenue for the nine months ended September 30, 2002 and 2003,
respectively. Services provided under Medicaid programs represented
approximately 3.8% and 4.2% of our net patient service revenue for the three
months ended September 30, 2002 and 2003, respectively, and 3.2% and 4.0% of our
net patient service revenue for the nine months ended September 30, 2002 and
2003, respectively. The payments we receive from the Medicare and Medicaid
programs are calculated using daily or hourly rates for each of the four main
levels of care we deliver (routine home care, general inpatient care, continuous
home care and respite care) and are adjusted based on geographic location.
Routine home care is the largest component of our gross patient service
revenue, representing 90.0% and 89.4% of gross patient service revenue for the
three months ended September 30, 2002 and 2003, respectively, and 89.7% and
89.3% of gross patient service revenue for the nine months ended September 30,
2002 and 2003, respectively. Inpatient care represented 8.1% and 8.7% of gross
patient service revenue for the three months ended September 30, 2002 and 2003,
respectively, and 8.3% and 8.8% of gross patient service revenue for the nine
months ended September 30, 2002 and 2003, respectively. Continuous home care and
respite care, combined, represented most of the remaining gross patient service
revenue for these periods.
The principal factors that impact net patient service revenue are our
average daily census, levels of care provided to our patients and changes in
Medicare and Medicaid payment rates due to adjustments for inflation. Average
daily census is affected by the number of patients referred by new and existing
referral sources, and admitted into our hospice program, and average length of
stay of those patients once admitted. Average length of stay is impacted by
patients' decisions of when to enroll in hospice care after diagnoses of
terminal illnesses and, once enrolled, the length of the terminal illnesses. Our
average hospice length of stay has increased from 63 days for the three months
ended September 30, 2002 to 78 days for the three months ended September 30,
2003 and has increased from 63 days for the nine months ended September 30, 2002
to 74 days for the nine months ended September 30, 2003.
Payment rates under the Medicare and Medicaid programs are indexed for
inflation annually; however, the increases have historically been less than
actual inflation. On October 1, 2002 and October 1, 2003, the base Medicare
payment rates for hospice care increased by approximately 3.4% over the base
rates previously in effect. These rates were further adjusted by the hospice
wage index. Any future decreases in or reductions in the rate of increase in
Medicare and Medicaid payments would likely have an adverse impact on our net
patient service revenue and profitability.
MEDICARE AND MEDICAID REGULATION
We are subject to certain limitations on Medicare payments for services.
Specifically, if the number of inpatient care days of care any hospice program
provides to Medicare beneficiaries exceeds 20% of the total days of hospice care
such program provides to all patients for an annual period beginning on
approximately September 28, the days in excess of the 20% figure may be
reimbursed only at the routine home care rate. None of our hospice programs
exceeded the payment limits on inpatient services for the nine months ended
September 30, 2002 and 2003.
12
We are also subject to a Medicare cap that is calculated and administered
for each of our provider numbers, independently. We currently have 64 provider
numbers. The maximum amount of payments to a provider during the Medicare fiscal
year, which ends on October 31, is calculated by multiplying the number of
beneficiaries electing hospice care during the period by a statutory amount,
annually indexed for inflation, which for the November 1, 2002 to October 31,
2003 year is $18,661. Payments in excess of the cap amount must be returned to
Medicare. Cap calculations are based on data available at the end of the
Medicare fiscal year, however, we monitor the performance of our programs
throughout the year and accrue for any potential cap assessments as appropriate.
At September 30, 2003, we accrued $0.6 million as a result of three of our
hospice programs exceeding the Medicare cap.
EXPENSES
Since we generally receive fixed payments for our hospice services, our
profitability is largely dependent on our ability to manage the expenses of
providing hospice services. We recognize expenses as incurred and classify
expenses as either direct hospice care expenses or general and administrative
expenses. Direct hospice care expenses primarily include direct patient care
salaries and payroll taxes, pharmaceuticals, medical equipment and supplies, and
inpatient costs. Length of stay impacts our direct hospice care expenses as a
percentage of net patient service revenue because, if lengths of stay decline,
direct hospice care expenses, which are often highest during the latter days of
care for a patient, are spread against fewer days of care. Expenses are normally
higher during the latter days of care because patients generally require greater
hospice services, including drugs, medical equipment and nursing care at that
time due to their deteriorating medical condition. These increased expenses
reduce our profitability because we generally receive fixed payments for our
hospice services. In addition, cost pressures resulting from the use of more
expensive forms of palliative care, including drugs and drug delivery systems,
could negatively impact our profitability.
For our patients receiving nursing home care under a state Medicaid
program who elect hospice care under Medicare or Medicaid, we contract with
nursing homes for the nursing homes' provision to patients of room and board
services. The state must pay us, in addition to the applicable Medicare or
Medicaid hospice daily or hourly rate, an amount equal to at least 95% of the
Medicaid daily nursing home rate for room and board furnished to the patient by
the nursing home. Under our standard nursing home contracts, we pay the nursing
home for these room and board services at the Medicaid daily nursing home rate.
We refer to these costs, net of Medicaid payments, as "nursing home costs, net."
General and administrative expenses primarily include non-patient care
salaries, employee benefits and office leases.
The following table sets forth the percentage of net patient service
revenue represented by the items included in direct hospice care expenses and
general and administrative expenses for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2002 2003 2002 2003
------ ------ ------ ------
Direct hospice care expenses:
Salaries and payroll taxes ............... 28.5% 28.6% 28.1% 28.3%
Pharmaceuticals .......................... 6.8 6.7 6.9 6.7
Medical equipment and supplies ........... 6.3 5.8 6.1 5.9
Inpatient costs .......................... 2.5 3.1 2.3 3.0
Other (including nursing home costs, net) 5.5 5.2 5.4 5.3
------ ------ ------ ------
Total ................................. 49.6% 49.4% 48.8% 49.2%
====== ====== ====== ======
General and administrative expenses:
Salaries and benefits .................... 19.3% 18.9% 19.1% 18.2%
Leases ................................... 2.8 2.5 2.7 2.5
Other (including bad debts, travel, office
supplies, printing and equipment rental) 10.3 10.1 12.2 10.4
------ ------ ------ ------
Total ................................. 32.4% 31.5% 34.0% 31.1%
====== ====== ====== ======
13
PROVISION FOR INCOME TAXES
Our provision for income taxes consists of current and deferred federal
and state income tax expenses. Our effective tax rate in 2002 was approximately
38%. We estimate that our effective tax rate will be approximately 39% during
2003.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information
as a percentage of net patient service revenue for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2002 2003 2002 2003
------ ------ ------ ------
Net patient service revenue .......... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct hospice care ................ 49.6 49.4 48.8 49.2
General and administrative ......... 31.5 29.8 32.7 29.5
Provision for uncollectible accounts 0.9 1.7 1.3 1.6
Depreciation and amortization ...... 0.8 1.0 0.8 0.9
------ ------ ------ ------
82.8 81.9 83.6 81.2
------ ------ ------ ------
Income from operations ............... 17.2 18.1 16.4 18.8
Other income (expense), net .......... 0.2 0.1 0.2 0.1
------ ------ ------ ------
Income before income taxes ........... 17.4 18.2 16.6 18.9
Provision for income taxes ........... 6.8 7.2 6.3 7.4
------ ------ ------ ------
Net income ........................... 10.6% 11.0% 10.3% 11.5%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net Patient Service Revenue
Net patient service revenue increased $20.3 million, or 40.0%, from $50.7
million for the three months ended September 30, 2002 to $71.0 million for the
three months ended September 30, 2003, due primarily to an increase in average
daily census of 1,579, or 34.2%, from 4,619 in 2002 to 6,198 in 2003. Increases
in patient referrals from existing and new referral sources, resulting in
increased billable days, and, to a lesser extent, increases in payment rates,
provided approximately $13.6 million, or 67.0%, of this increase in net patient
service revenue. The remaining increase of $6.7 million, or 33.0%, in net
patient service revenue was due to the inclusion of net patient service revenue
from hospices acquired and developed in 2002 and 2003. Net patient service
revenue per day of care was $119.40 and $124.60 for the three months ended
September 30, 2002 and 2003, respectively. This increase was primarily due to
overall increases in Medicare payment rates for our hospice services, as well as
a shift in the mix of level of care from routine home care to inpatient
services. Medicare and Medicaid payments represented 97.7% and 95.6% of our net
patient service revenue for the three months ended September 30, 2002 and 2003,
respectively.
Direct Hospice Care Expenses
Direct hospice care expenses increased $9.9 million, or 39.3%, from $25.2
million for the three months ended September 30, 2002 to $35.1 million for the
three months ended September 30, 2003. This increase was primarily due to the
growth of our operations at our existing hospices and, to a lesser extent, to
hospices acquired in 2002 and 2003. As a percentage of net patient service
revenue, direct hospice care expenses slightly decreased from 49.6% to 49.4% for
the three months ended September 30, 2002 and 2003, respectively.
General and Administrative Expenses
General and administrative expenses increased $5.2 million, or 32.3%, from
$16.0 million for the three months ended September 30, 2002 to $21.1 million for
the three months ended September 30, 2003. This increase was due to the growth
of our operations at our hospices. As a percentage of net patient service
revenue, general and administrative expenses decreased from 31.5% to 29.8% for
the three months ended September 30, 2002 and 2003, respectively, due primarily
to our hospice and corporate costs being spread over our increased net patient
service revenue.
14
Provision for Uncollectible Accounts
Our provision for uncollectible accounts increased $0.8 million, or
192.2%, from $0.4 million to $1.2 million for the three months ended September
30, 2002 and 2003, respectively, due primarily to our increased net patient
service revenue and to additional reserves for estimated payment denials from
Medicare. As a percentage of net patient service revenue, our provision for
uncollectible accounts increased from 0.9% to 1.7% for the three months ended
September 30, 2002 and 2003, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.3 million, or 69.2%,
from $0.4 million to $0.7 million for the three months ended September 30, 2002
and 2003, respectively. The increase was due to the amortization of non-compete
agreements associated with our recent acquisitions and depreciation of acquired
fixed assets in the latter part of 2002 and 2003. As a percentage of net patient
service revenue, depreciation and amortization expense increased from 0.8% to
1.0% for the three months ended September 30, 2002 and 2003, respectively.
Other Income (Expense)
Other income (expense) decreased $38,000, or 41.8%, from income of $91,000
to income of $53,000 for the three months ended September 30, 2002 and 2003,
respectively. The decrease was primarily due to the purchase of the Hospice of
Houston minority interest in third quarter of 2002, resulting in a reversal of
$50,000 for previously recorded minority interest expense. The decrease was also
due to a decrease in interest income related to proceeds from our initial public
offering being invested in new acquisitions and from a decrease in interest
rates on our short-term investments, offset by a decrease in interest expense as
a result of paying off our acquisition notes in the latter part of 2002 and
beginning of 2003.
Provision for Income Taxes
Our provision for income taxes was $3.4 million and $5.1 million for the
three months ended September 30, 2002 and 2003, respectively. We had an
effective income tax rate of approximately 39% for both the three months ended
September 30, 2002 and 2003.
Net Income
Net income increased $2.4 million, from $5.4 million to $7.8 million for
the three months ended September 30, 2002 and 2003, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net Patient Service Revenue
Net patient service revenue increased $58.5 million, or 42.5%, from $137.5
million for the nine months ended September 30, 2002 to $196.0 million for the
nine months ended September 30, 2003, due primarily to an increase in average
daily census of 1,573, or 37.4%, from 4,203 in 2002 to 5,776 in 2003. Increases
in patient referrals from existing and new referral sources, resulting in
increased billable days, and, to a lesser extent, increases in payment rates,
provided approximately $38.2 million, or 65.3%, of this increase in net patient
service revenue. The remaining increase of $20.3 million, or 34.7%, in net
patient service revenue was due to the inclusion of net patient service revenue
from hospices acquired and developed in 2002 and 2003. Net patient service
revenue per day of care was $119.85 and $124.30 for the nine months ended
September 30, 2002 and 2003, respectively. This increase was primarily due to
overall increases in Medicare payment rates for our hospice services, as well as
a shift in the mix of level of care from routine home care to inpatient
services. Medicare and Medicaid payments represented 97.7% and 96.8% of our net
patient service revenue for the nine months ended September 30, 2002 and 2003,
respectively.
Direct Hospice Care Expenses
Direct hospice care expenses increased $29.3 million, or 43.6%, from $67.1
million for the nine months ended September 30, 2002 to $96.4 million for the
nine months ended September 30, 2003. This increase was primarily due to the
growth of our operations at our existing hospices and, to a lesser extent, to
hospices acquired in 2003. As a percentage of net patient service revenue,
direct hospice care expenses increased from 48.8% to 49.2% for the nine months
ended September 30, 2002 and 2003, respectively, primarily due to the increased
number of developed hospice operations incurring costs in advance of accepting
patients.
15
General and Administrative Expenses
General and administrative expenses increased $12.9 million, or 28.6%,
from $45.0 million for the nine months ended September 30, 2002 to $57.9 million
for the nine months ended September 30, 2003. This increase was due to the
growth of our operations at our hospices. As a percentage of net patient service
revenue, general and administrative expenses decreased from 32.7% to 29.5% for
the nine months ended September 30, 2002 and 2003, respectively, due primarily
to our hospice and corporate costs being spread over our increased net patient
service revenue.
Provision for Uncollectible Accounts
Our provision for uncollectible accounts increased $1.4 million, or 78.4%,
from $1.7 million to $3.1 million for the nine months ended September 30, 2002
and 2003, respectively, due primarily to our increased net patient service
revenue and to additional reserves for estimated payment denials from Medicare.
As a percentage of net patient service revenue, our provision for uncollectible
accounts increased from 1.3% to 1.6% for the nine months ended September 30,
2002 and 2003, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.7 million, or 66.1%,
from $1.1 million to $1.8 million for the nine months ended September 30, 2002
and 2003, respectively. The increase was due to the amortization of non-compete
agreements associated with our recent acquisitions and depreciation of acquired
fixed assets in the latter part of 2002 and 2003. As a percentage of net patient
service revenue, depreciation and amortization expense increased from 0.8% to
0.9% for the nine months ended September 30, 2002 and 2003, respectively.
Other Income (Expense)
Other income (expense) decreased $0.1 million, or 38.5%, from income of
$0.3 million to income of $0.2 million for the nine months ended September 30,
2002 and 2003, respectively, due primarily to a decrease in interest income
related to proceeds from our initial public offering being invested in new
acquisitions, the decrease in interest rates on our short-term investments and
the purchase of the Hospice of Houston minority interest in the third quarter
of 2002, reversing $50,000 of previously recorded minority interest expense.
Provision for Income Taxes
Our provision for income taxes was $8.7 million and $14.5 million for the
nine months ended September 30, 2002 and 2003, respectively. We had an effective
income tax rate of approximately 38% and 39% for the nine months ended September
30, 2002 and 2003, respectively.
Net Income
Net income increased $8.5 million, from $14.2 million to $22.6 million for
the nine months ended September 30, 2002 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements have historically been for debt
service, hospice acquisitions and development plans, working capital and other
capital expenditures. We have, in the past, financed these requirements
primarily with borrowings under our credit facility, proceeds from the issuance
of convertible preferred and common stock, warrants and debt, seller financing
of hospice acquisitions, operating and capital leases, normal trade credit
terms, and cash flows from operations. At September 30, 2003, we had cash and
cash equivalents of $1.2 million and working capital of $60.6 million. At such
date, we also had short-term investments of $43.7 million.
Cash provided by operating activities was $10.1 million and $28.9 million
for the nine months ended September 30, 2002 and 2003, respectively. The
increase in cash provided by operating activities from the prior year was
primarily attributable to the increase in net income and timing differences on
accrued salaries, accounts payable and room and board expenses.
16
Investing activities, consisting primarily of cash paid to purchase
hospices and property and equipment and to establish short-term investments,
used cash of $23.7 million and $39.9 million for the nine months ended September
30, 2002 and 2003, respectively.
Net cash provided by (used in) financing activities was ($2.7) million and
$4.5 million for the nine months ended September 30, 2002 and 2003,
respectively, and represented proceeds from the sale of common stock, offset by
payments on acquisition notes.
In connection with our acquisition of seven hospice programs in 2001, we
paid an aggregate of $8.2 million in cash and issued promissory notes payable to
the sellers in the aggregate principal amount of $3.1 million. During the first
quarter of 2002, we repaid in full the principal balance of one note and all
accrued and unpaid interest in the aggregate amount of $0.3 million. During the
second quarter of 2002, we repaid in full the principal balance and all accrued
and unpaid interest relating to one note in the aggregate amount of $0.5 million
and also repaid principal and accrued and unpaid interest relating to three
notes in the aggregate amount of $1.1 million. During the third quarter of 2002,
we repaid in full the principal balance and all accrued and unpaid interest
relating to three notes in the aggregate amount of $1.0 million. During the
first quarter of 2003, we repaid in full the principal balance and all accrued
and unpaid interest relating to one note in the aggregate amount of $0.3
million.
Our credit agreement with GE Capital Healthcare Financial Services
provided us with a $20 million revolving line of credit for working capital,
acquisitions and general corporate purposes. Borrowings outstanding under our
revolving line of credit bore interest at fluctuating rates equal to 1.0% above
the prime rate of interest designated by Citibank, with a floor of 10% per
annum. Our revolving line of credit matured on October 2, 2003. At that time, we
let our line of credit expire and do not foresee any additional credit needs in
the next twelve to eighteen months. As of September 30, 2003, we had no
outstanding borrowings under our credit agreement or accrued and unpaid
interest. Our revolving line of credit was secured by all of our accounts
receivable and any other right to payment for goods sold or leased or services
rendered by us and all other property in our possession or under our control. We
and our subsidiaries were subject to affirmative and negative covenants under
our credit agreement.
We were in full compliance with our financial and other covenants as of
September 30, 2003.
We have purchased a new accounting system during 2003 and plan to
capitalize a total of $0.8 million related to this implementation, including
software and equipment. To date, $0.6 million has been capitalized.
We have various commitments that could impact our liquidity as summarized
below:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
----- ---- --------- --------- -----
(IN THOUSANDS)
Accounting System ....... $ 200 $ 200 $ -- $ -- $ --
Long-Term Debt .......... 19 19 -- -- --
Capital Lease Obligations 3 3 -- -- --
Operating Leases ........ 24,480 6,089 10,011 5,817 2,563
------- ------- ------- ------- -------
Total Contractual
Obligations ........... $24,702 $ 6,311 $10,011 $ 5,817 $ 2,563
======= ======= ======= ======= =======
We expect that our principal liquidity requirements will be for working
capital, development plans, anticipated hospice acquisitions and other
anticipated capital expenditures. We expect that our existing funds and cash
flows from operations will be sufficient to fund our principal liquidity
requirements for at least 12 months following the date of this Quarterly Report
on Form 10-Q. Our future liquidity requirements and the adequacy of our
available funds will depend on many factors, including payment for our services,
regulatory changes and compliance with new regulations, expense levels, capital
expenditures and future development of new hospices and acquisitions.
PAYMENT, LEGISLATIVE AND REGULATORY CHANGES
We are highly dependent on payments from the Medicare and Medicaid
programs. These programs are subject to statutory and regulatory changes,
possible retroactive and prospective rate adjustments, administrative rulings,
rate freezes and funding reductions. Reductions in amounts paid by these
programs for our services or changes in methods or regulations governing
payments for our services could materially adversely affect our net patient
service revenue and profits. For the nine months ended September 30, 2003,
Medicare and Medicaid services constituted 92.8% and 4.0% of our net patient
service revenue, respectively.
17
INFLATION
The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures designed to curb
increases in operating expenses. We have, to date, offset increases in operating
costs by increasing patient census. However, we cannot predict our ability to
cover or offset future cost increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates would affect the fair market value of any future
fixed rate debt instruments but would not have an impact on our earnings or cash
flow. Fluctuations in interest rates on any future variable rate debt
instruments, which are tied to the prime rate, would affect our earnings and
cash flows but would not affect the fair market value of the variable rate debt.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 240.13a-15(e) and
240.15d-15(e)) as of September 30, 2003 and concluded that such disclosure
controls and procedures are effective in timely alerting them to material
information that is required to be disclosed in the periodic reports we file or
submit under the Securities Exchange Act of 1934 (as amended, the "Exchange
Act"). There have not been any significant changes in our internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of the evaluation.
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
During the three month period ended September 30, 2003, there were no
changes in our internal control over financial reporting that materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of our business. We are not
aware of any legal proceedings pending or threatened that we expect would have a
material adverse effect on us.
Our current general and professional liability policy does not provide
coverage for claims that arise from acts that occurred prior to the policy's
start date of April 12, 2000. From March 12, 1999 to April 12, 2000, Reliance
National Insurance Company provided our insurance coverage. Since April 12,
2000, Lexington Insurance Company, a subsidiary of American International Group,
Inc., has provided our insurance coverage. During the fourth quarter of 2001,
the Insurance Commissioner of the Commonwealth of Pennsylvania placed Reliance
National Insurance Company in liquidation. For the three months ended September
30, 2003, we paid $0.5 million in connection with a lawsuit settlement and
related legal expenses and reversed $0.3 million to operations. Based on our
estimation of open claims, we are maintaining our legal reserve of $0.2 million
at September 30, 2003, to cover potential losses resulting from current and
future litigation claims covered by Reliance National Insurance Company to the
extent that its assets are not sufficient to pay such claims. Although we
believe that the amount recorded is adequate to cover our potential losses,
there can be no assurance that our losses will not exceed the amount recorded.
Our profitability will be negatively impacted to the extent our actual losses
exceed the amount recorded.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter of 2003, we utilized the remaining $2.7 million
of the proceeds of our initial public offering to complete the acquisition of
three hospices located in Brownsville, Texas; Wilmington, Delaware; and Salt
Lake City, Utah.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Fifth Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1
to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-51522) as
filed with the Commission on September 13, 2001)
3.2 -- Second Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-51522) as
filed with the Commission on December 8, 2000)
4.1 -- Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No.
1 to Registration Statement on Form S-1 (Registration
No. 333-51522) as filed with the Commission on August 2,
2001)
4.2 -- Second Amended and Restated Registration Rights
Agreement, dated July 1, 1998, by and among Odyssey
HealthCare, Inc. and the security holders named therein
(incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the
Commission on December 8, 2000)
4.3 -- Rights Agreement (the "Rights Agreement") dated
November 5, 2001, between Odyssey HealthCare, Inc. and
Rights Agent (incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form 8-A as
filed with the Commission on December 8, 2001)
4.4 -- Form of Certificate of Designation of Series A Junior
Participating Preferred Stock (included as Exhibit A to
the Rights Agreement (Exhibit 4.3 hereto))
31.1 -- Certification required by Rule 13a-14(a), dated
November 13, 2003, by Richard R. Burnham, Chief
Executive Officer**
31.2 -- Certification required by Rule 13a-14(a), dated
November 13, 2003, by Douglas B. Cannon, Chief Financial
Officer**
32 -- Certification required by Rule 13a-14(b), dated
November 13, 2003, by Richard R. Burnham, Chief
Executive Officer, and Douglas B. Cannon, Chief
Financial Officer**
** Filed herewith.
(b) Reports on Form 8-K:
(1) Current report on Form 8-K (Item 5), filed July 18, 2003, announcing
that on July 17, 2003, the Board of Directors of the Company
authorized a three-for-two stock split payable in the form of a
fifty percent stock dividend to be distributed on August 12, 2003,
to stockholders of record at the close of business on July 28, 2003.
(2) Current report on Form 8-K (Item 12), filed August 5, 2003,
announcing the quarterly consolidated financial results of the
Company for the second quarter and the six months ended June 30,
2003, and updating the Company's earnings guidance for the year
ending December 31, 2003.
(3) Current report on Form 8-K (Item 9), filed September 16, 2003,
announcing that Richard R. Burnham, the chairman and CEO of the
Company, had appeared on Bloomberg television's Morning Call program
and had, among other things, confirmed the Company's prior guidance
for net income growth in 2003.
(4) Current report on Form 8-K (Item 5), filed September 22, 2003,
announcing the promotion of Deborah A. Hoffpauir, formerly Senior
Vice President of Operations, to Senior Vice President and Chief
Operating Officer effective October 1, 2003.
19
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.
ODYSSEY HEALTHCARE, INC.
Date: November 13, 2003 By: /s/ Richard R. Burnham
------------------------------------
Richard R. Burnham
Chief Executive Officer and Chairman
of the Board (Duly authorized to sign
this report on behalf of Registrant)
Date: November 13, 2003 By: /s/ Douglas B. Cannon
-------------------------------------
Douglas B. Cannon
Senior Vice President, Chief
Financial Officer, Secretary and
Treasurer (Principal Financial and
Chief Accounting Officer)
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Fifth Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1
to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Registration No. 333-51522) as
filed with the Commission on September 13, 2001)
3.2 -- Second Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-51522) as
filed with the Commission on December 8, 2000)
4.1 -- Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No.
1 to Registration Statement on Form S-1 (Registration
No. 333-51522) as filed with the Commission on August 2,
2001)
4.2 -- Second Amended and Restated Registration Rights
Agreement, dated July 1, 1998, by and among Odyssey
HealthCare, Inc. and the security holders named therein
(incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the
Commission on December 8, 2000)
4.3 -- Rights Agreement (the "Rights Agreement") dated
November 5, 2001, between Odyssey HealthCare, Inc. and
Rights Agent (incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form 8-A as
filed with the Commission on December 8, 2001)
4.4 -- Form of Certificate of Designation of Series A Junior
Participating Preferred Stock (included as Exhibit A to
the Rights Agreement (Exhibit 4.3 hereto))
31.1 -- Certification required by Rule 13a-14(a), dated
November 13, 2003, by Richard R. Burnham, Chief
Executive Officer**
31.2 -- Certification required by Rule 13a-14(a), dated
November 13, 2003, by Douglas B. Cannon, Chief Financial
Officer**
32 -- Certification required by Rule 13a-14(b), dated
November 13, 2003, by Richard R. Burnham, Chief
Executive Officer, and Douglas B. Cannon, Chief
Financial Officer**
** FILED HEREWITH.