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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
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
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ODYSSEY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1723043
(State or other jurisdiction (IRS Employer
of incorporation or organization) 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 ( ) The Registrant has only
been subject to filing requirements of the Securities Exchange Act of 1934 since
October 30, 2001.
The number of outstanding shares of the issuer's class of capital stock as
of October 31, 2002 was as follows: 15,540,185 shares of Common Stock, $.001 par
value.
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FORM 10-Q
ODYSSEY HEALTHCARE, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
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................................................. 19
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.......................... 19
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,
2001 2002
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 20,072 $ 3,766
Short-term investments .................................................. 21,419 27,806
Accounts receivable from patient services, net of
allowance for uncollectible accounts of $3,394
at December 31, 2001 and $2,482 at September 30, 2002 ................. 25,043 32,930
Deferred tax assets ..................................................... 903 1,105
Income taxes receivable ................................................. -- 617
Other current assets .................................................... 1,564 1,812
-------------- --------------
Total current assets ............................................. 69,001 68,036
Property and equipment, net ............................................... 2,451 3,384
Debt issue costs, net and other ........................................... 59 33
Intangibles, net .......................................................... 26,705 42,035
-------------- --------------
Total assets ..................................................... $ 98,216 $ 113,488
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,008 $ 2,406
Accrued compensation .................................................... 4,685 5,168
Accrued nursing home costs .............................................. 5,125 6,835
Accrued income taxes .................................................... 834 --
Other accrued expenses .................................................. 3,418 4,654
Current maturities of long-term debt and capital lease obligations ...... 2,568 274
-------------- --------------
Total current liabilities ........................................ 18,638 19,337
Long-term debt and capital lease obligations, less current
maturities .............................................................. 1,213 253
Deferred tax liabilities .................................................. 580 373
Other liabilities ......................................................... -- 327
Commitments and contingencies
Minority interest ......................................................... 150 --
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 75,000,000; issued and outstanding shares --
15,253,590 at December 31, 2001 and 15,535,680 at
September 30, 2002 .................................................... 15 16
Additional paid-in capital .............................................. 77,718 78,590
Deferred compensation ................................................... (1,411) (883)
Retained earnings ....................................................... 1,313 15,475
-------------- --------------
Total stockholders' equity ....................................... 77,635 93,198
-------------- --------------
Total liabilities and stockholders' equity ....................... $ 98,216 $ 113,488
============== ==============
See accompanying notes.
3
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
Net patient service revenue ................................ $ 34,875 $ 50,737 $ 91,896 $ 137,507
Operating expenses:
Direct hospice care ...................................... 16,294 25,190 44,112 67,145
General and administrative (exclusive
of $274 and $165 for the three months ended
September 30, 2001 and 2002, respectively, and
$839 and $528 for the nine months ended September
30, 2001 and 2002, respectively, reported below
as stock-based compensation charges) .................... 11,345 15,818 30,000 44,477
Stock-based compensation charges ......................... 274 165 839 528
Provision for uncollectible accounts ..................... 1,056 423 2,182 1,723
Depreciation and amortization ............................ 557 402 1,620 1,055
---------- ---------- ---------- ----------
29,526 41,998 78,753 114,928
---------- ---------- ---------- ----------
Income from operations ..................................... 5,349 8,739 13,143 22,579
Other income (expense):
Minority interest ........................................ (150) 50 (150) 50
Interest income .......................................... 4 112 20 437
Interest expense ......................................... (700) (71) (2,188) (225)
---------- ---------- ---------- ----------
(846) 91 (2,318) 262
---------- ---------- ---------- ----------
Income before provision for income taxes ................... 4,503 8,830 10,825 22,841
Provision for income taxes ................................. 962 3,425 2,341 8,679
---------- ---------- ---------- ----------
Net income ................................................. 3,541 5,405 8,484 14,162
Preferred stock dividends .................................. (329) -- (988) --
---------- ---------- ---------- ----------
Net income applicable to common stockholders ............... $ 3,212 $ 5,405 $ 7,496 $ 14,162
========== ========== ========== ==========
Net income per common share:
Basic .................................................... $ 1.59 $ 0.35 $ 3.73 $ 0.92
Diluted .................................................. 0.29 0.33 0.71 0.87
Weighted average shares outstanding:
Basic .................................................... 2,026 15,507 2,011 15,383
Diluted .................................................. 12,014 16,345 12,005 16,241
See accompanying notes.
4
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
(UNAUDITED)
Operating Activities
Net income .................................................... $ 8,484 $ 14,162
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............................ 1,620 1,055
Amortization of deferred charges and debt discount ....... 150 26
Stock-based compensation ................................. 839 528
Minority interest ........................................ 150 (50)
Deferred tax expense ..................................... -- (409)
Provision for uncollectible accounts ..................... 2,182 1,723
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable ................................. (8,184) (9,610)
Other current assets ................................ (1,985) (865)
Other assets ........................................ 8 --
Accounts payable, accrued nursing home costs and
other accrued expenses ............................. 8,599 3,022
---------- ----------
Net cash provided by operating activities .......... 11,863 9,582
Investing Activities
Cash paid for acquisitions .................................... (7,000) (15,392)
Increase in short-term investments ............................ -- (6,387)
Purchases of property and equipment, net ...................... (1,110) (1,926)
---------- ----------
Net cash used in investing activities .............. (8,110) (23,705)
Financing Activities
Proceeds from issuance of common stock ........................ 25 873
Distributions to minority partners ............................ -- (100)
Payments on debt .............................................. (102,596) (2,971)
Proceeds from issuance of debt ................................ 99,725 15
---------- ----------
Net cash used in financing activities .............. (2,846) (2,183)
---------- ----------
Net increase (decrease) in cash and cash equivalents ............ 907 (16,306)
Cash and cash equivalents, beginning of period .................. 98 20,072
---------- ----------
Cash and cash equivalents, end of period ........................ $ 1,005 $ 3,766
========== ==========
Supplemental Cash Flow Information:
Cash paid for interest ........................................ $ 1,453 $ 290
See accompanying notes.
5
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
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. (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, 2001 included in
the Company's Form 10-K filed with the Securities and Exchange Commission on
March 20, 2002.
The balance sheet at December 31, 2001 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 reclassed 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 financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective for 2002. Under the new rules, goodwill and intangible assets deemed
to have indefinite lives are no longer being amortized but are subject to
impairment tests, at least annually, in accordance with the new rules. Other
intangible assets continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 was effective
beginning in the first quarter of 2002. The Company has performed the required
impairment tests of goodwill and indefinite lived intangible assets and has
concluded that no basis for impairment of goodwill and indefinite lived
intangible assets exists at this time.
As required by SFAS 142, the results of operations for the three and nine
months ended September 30, 2001 have not been restated for the change in
goodwill amortization. The following table discloses the effect on net income
and earnings per share of excluding goodwill amortization, that was recognized
in the three and nine months ended September 30, 2001.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
Reported net income applicable to common
stockholders ........................................ $ 3,212 $ 5,405 $ 7,496 $ 14,162
Add back goodwill amortization, net of income tax ..... 248 -- 720 --
------------ ------------ ------------ ------------
Adjusted net income ................................... $ 3,460 $ 5,405 $ 8,216 $ 14,162
============ ============ ============ ============
Basic earnings per share:
As reported ......................................... $ 1.59 $ 0.35 $ 3.73 $ 0.92
Goodwill amortization ............................... 0.12 -- 0.36 --
------------ ------------ ------------ ------------
Adjusted basic earnings per share ................... $ 1.71 $ 0.35 $ 4.09 $ 0.92
============ ============ ============ ============
Diluted earnings per share:
As reported ......................................... $ 0.29 $ 0.33 $ 0.71 $ 0.87
Goodwill amortization ............................... 0.02 -- 0.06 --
------------ ------------ ------------ ------------
Adjusted diluted earnings per share ................. $ 0.31 $ 0.33 $ 0.77 $ 0.87
============ ============ ============ ============
6
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business." The Company
adopted SFAS No. 144 as of January 1, 2002 and the adoption of the statement did
not have a significant impact on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which eliminates the requirements under FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," to report gains and
losses from extinguishments of debt as extraordinary items in the income
statement. Similarly, FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements," has been rescinded. Accordingly, gains or
losses from extinguishments of debt for fiscal years beginning after May 15,
2002 shall not be reported as extraordinary items unless the extinguishment
qualifies as an extraordinary item under the provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The Company has not determined the impact on the
results of operations or financial position from the adoption of SFAS 145 but
does not expect the impact to be material.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002, with earlier application
encouraged. SFAS No. 146 addresses the accounting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in Restructuring)". The
Company does not anticipate a material impact on the results of operations or
financial position from the adoption of SFAS No. 146.
3. ACQUISITIONS
In July 2002, the Company purchased the business of Palliative Hospice
Center, LLC, a hospice located in Wichita, Kansas. The purchase price, including
transaction costs, totaled $0.1 million. Assets acquired include licenses and a
non-compete agreement of $0.1 million.
In August 2002, the Company purchased all of the assets and business of
HospiCare, Inc., a hospice located in Biloxi, Mississippi. The purchase price,
including transaction costs, totaled $1.1 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.1 million and goodwill
of $0.8 million.
In August 2002, the Company purchased all of the assets and business of
Delta Hospice, Inc., a hospice located in Albuquerque, New Mexico, including an
alternate delivery site located in Los Alamos, New Mexico. The purchase price,
including transaction costs, totaled $2.0 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.1 million and goodwill
of $1.7 million. The purchase agreement includes an earnout provision, whereby
the purchase price would increase by $0.3 million pending certain revenue
targets being met. The allocation is preliminary and the purchase price will be
adjusted at the time the calculated earnout amount is paid.
In September 2002, the Company purchased all of the assets and business of
The Lutheran Home, Inc., a hospice located in Omaha, Nebraska. The purchase
price, including transaction costs, totaled $0.1 million. Assets acquired
include licenses and a non-compete agreement of $0.1 million.
In October 2002, the Company purchased all of the assets and business of
Alternative Healthcare Systems, Inc., a hospice located in Lake Charles,
Louisiana. The purchase price, including transaction costs, totaled $3.2
million. Assets acquired include goodwill of $2.8 million, licenses of $0.2
million and a non-compete agreement and fixed assets of $0.2 million.
7
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, 2001 and 2002 are presented below. Such pro
forma presentation has been prepared assuming that the acquisitions described
above have been made as of January 1 of the year preceding the year of
acquisition:
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2002
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Pro forma net patient service
revenue ......................... $ 111,690 $ 143,100
Pro forma net income .............. 9,206 14,627
Pro forma net income per
common share:
Basic ........................... $ 4.58 $ 0.95
Diluted ......................... $ 0.85 $ 0.90
4. HOSPICE OF HOUSTON
The Company entered into an exchange agreement on September 30, 1998,
whereby Hospice Management Partners, Inc. (HMPI), and Hospice Associates of
America, Inc. (HAOA) conveyed their limited partnership (66%) and general
partnership (1%) interests in Hospice of Houston, L.P. (the Partnership), to the
Company. On September 30, 1998, a management services agreement was executed
between the Partnership and the Company whereby the Company receives a
management fee of 5% of net revenue of the Partnership in exchange for
assistance in the day-to-day management, administration, and marketing of the
Partnership. The Partnership has been consolidated with the Company and the
Company's Houston operations are considered part of the Partnership. San Jacinto
Methodist Hospital (San Jacinto) held the remaining 33% interest in the
Partnership. At December 31, 2001, the Company had recorded $0.2 million as a
liability on the balance sheet for amounts owed to San Jacinto. On August 20,
2002, the Company purchased the remaining 33% interest in the Partnership for
$1.1 million. Minority interest of $0.1 million was paid and the remaining
$50,000 was recorded as income for the quarter ended September 30, 2002 and is
included in Other Income (Expense) in the Statement of Income.
5. DEFERRED COMPENSATION
During the nine months ended September 30, 2001, the Company recorded
aggregate deferred compensation for employees of $1.6 million, representing the
difference between the exercise prices of stock options granted in fiscal year
2001 under the Stock Option Plan and the then deemed fair value of the common
stock. These amounts are being amortized as charges to operations, using the
graded method. Under the graded method, approximately 46%, 26%, 15%, 9% and 4%,
respectively, of each options compensation expense is recognized in each of the
five years following the date of the grant. For the three months ended September
30, 2001 and 2002, the Company amortized $0.3 million and $0.2 million of
deferred compensation, respectively. For the nine months ended September 30,
2001 and 2002, the Company amortized $0.8 million and $0.5 million of deferred
compensation, respectively.
6. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income less
the annual Series A, Series B and Series C Convertible Preferred Stock
dividends, where applicable, by the weighted average number of common shares
outstanding during the period. Diluted net income per common share is computed
by dividing the net income by the weighted average number of common shares
outstanding during the period plus the effect of dilutive securities, giving
effect to the conversion of the convertible preferred stock (using the
if-converted method), where applicable, and employee stock options and
outstanding warrants (using the treasury stock method and considering the effect
of unrecognized deferred compensation charges).
The following table presents the calculation of basic and diluted net income
per common share and pro forma basic and diluted net income per common share:
8
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
Numerator
Net income .................................................... $ 3,541 $ 5,405 $ 8,484 $ 14,162
Series A, B and C Preferred Stock dividends ................... (329) -- (988) --
------------ ------------ ------------ ------------
Numerator for basic earnings per share - income available
to common stockholders ...................................... 3,212 5,405 7,496 14,162
Effect of dilutive securities:
Series A, B and C Preferred Stock dividends ................. 329 -- 988 --
------------ ------------ ------------ ------------
Numerator for diluted net income per share - net income
available to common stockholders after
assumed conversions ......................................... $ 3,541 $ 5,405 $ 8,484 $ 14,162
============ ============ ============ ============
Denominator
Denominator for basic net income per
share - weighted average shares ............................. 2,026 15,507 2,011 15,383
Effect of dilutive securities:
Employee stock options ...................................... 820 826 827 845
Series A, B and C Preferred Stock ........................... 8,088 -- 8,088 --
Series B Preferred Stock Warrants
convertible to common stock ............................... 110 12 109 13
Common stock warrants ....................................... 970 -- 970 --
------------ ------------ ------------ ------------
Denominator for diluted net income per share - adjusted
weighted average shares and assumed conversions ............. 12,014 16,345 12,005 16,241
============ ============ ============ ============
Net income per common share:
Basic ....................................................... $ 1.59 $ 0.35 $ 3.73 $ 0.92
Diluted ..................................................... 0.29 0.33 0.71 0.87
7. INCOME TAXES
The Company expects that its effective tax rate will be approximately 38.0%
during 2002 as there are no remaining net operating loss carryforwards or
remaining valuation allowances.
Income taxes of $10.0 million were paid thus far in 2002.
8. 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. As of
September 30, 2002, the Company's reserves of $0.6 million included amounts 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
reserved is adequate to cover its potential losses, the Company cannot assure
that its losses will not exceed the amount reserved. The Company's profitability
will be negatively impacted to the extent its actual losses exceed the amount
reserved. The Company could potentially recover any losses through state funds
and/or bankruptcy rulings; however these amounts are undeterminable.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 in
terms of both average daily census and number of locations. As a hospice care
provider, our goal is to improve the quality of life of terminally ill patients
and their families. We believe that our overriding focus on the delivery of
quality, responsive service differentiates us from other hospice care providers.
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 55 hospice locations to serve patients and their
families in 25 states. We operate all of these hospice locations through our
operating subsidiaries. During the three months ended September 30, 2002, our
average daily census was 4,619 patients, which represents a 42.3% increase over
our average daily census for the three months ended September 30, 2001 of 3,246
patients. During the nine months ended September 30, 2002, our average daily
census was 4,203 patients, which represents a 45.3% increase over our average
daily census for the nine months ended September 30, 2001 of 2,892 patients. Our
net patient service revenue of $50.7 million for the three months ended
September 30, 2002 represents an increase of 45.5% over our net patient service
revenue of $34.9 million for the three months ended September 30, 2001. Our net
patient service revenue of $137.5 million for the nine months ended September
30, 2002 represents an increase of 49.6% over our net patient service revenue of
$91.9 million for the nine months ended September 30, 2001. We reported net
income of $5.4 million for the three months ended September 30, 2002, which
represents an increase of 52.6% over our net income of $3.5 million for the
three months ended September 30, 2001. We reported net income of $14.2 million
for the nine months ended September 30, 2002, which represents an increase of
66.9% over our net income of $8.5 million for the nine months ended September
30, 2001.
DEVELOPED HOSPICES AND ACQUISITIONS
DEVELOPED HOSPICES
During the third quarter of 2002, our Chicago (South), Illinois and Tulsa,
Oklahoma hospices received Medicare certification. Our St. Louis, Missouri
hospice received Medicare certification in the fourth quarter of 2002. We are
continuing development of the Cleveland, Ohio hospice.
ACQUISITIONS
During 2001, we acquired seven hospices for a combined purchase price of
$11.3 million. We financed our acquisitions in 2001 with $7.0 million in cash
obtained from borrowings under our credit agreement, $1.2 million in cash from
the proceeds of our initial public offering and $3.1 million in promissory notes
payable to the sellers.
During the second quarter of 2002, we acquired five hospices for a combined
purchase price of $11.0 million. We financed our acquisitions during the second
quarter 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 through November 14, 2002, we acquired one hospice
for a purchase price of $3.2 million. We financed our acquisition with $3.2
million in cash proceeds from our initial public offering.
We accounted for these acquisitions as purchases.
As part of our ongoing acquisition strategy, we are continually evaluating
other potential acquisition opportunities.
We have entered into two non-binding letters of intent to acquire two
hospices located in Texas, with an aggregate patient census of approximately 80,
and a hospice located in New Mexico, with a patient census of approximately 55.
Completion of these acquisitions is subject to various conditions, including our
ability to enter into a definitive agreement to acquire these hospices. We
cannot assure you that definitive agreements will be entered into or that these
acquisitions will be completed.
10
Goodwill from our hospice acquisitions, net of accumulated amortization, was
$26.7 million as of December 31, 2001 and $41.4 million as of September 30,
2002. Goodwill, net of accumulated amortization, was 34.4% of common
stockholders' equity and 27.2% of total assets as of December 31, 2001 and 44.4%
of common stockholders' equity and 36.5% of total assets as of September 30,
2002. During fiscal 2001 and prior years, we amortized our goodwill over 20
years for acquisitions completed through June 30, 2001 and did not amortize
goodwill for acquisitions subsequent to June 30, 2001. Under new rules issued by
the FASB, effective for fiscal year 2002, 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 with
definite lives continue to be amortized over their useful lives. We applied the
new rules on accounting for goodwill and other intangible assets beginning in
the first quarter of 2002. We have completed the required impairment tests of
goodwill and indefinite lived intangible assets and have concluded that no basis
for impairment of our goodwill and indefinite lived intangible assets exists at
this time.
NET PATIENT SERVICE REVENUE
Net patient service revenue is the estimated net realizable revenue from
patients, Medicare, Medicaid, commercial insurance, managed care payors and
others for services rendered. Payors may determine that the services provided
are not covered and do not qualify for a payment or, for commercial payors, that
the payments are subject to usual and customary rates. To determine net patient
service revenue, we adjust gross patient service revenue for estimated payment
denials and contractual adjustments based on historical experience. We recognize
net patient service revenue in the month in which our services are delivered.
Services provided under the Medicare program represented approximately 94.5% and
93.9% of our net patient service revenue for the three months ended September
30, 2001 and 2002, respectively, and 93.9% and 94.5% of our net patient service
revenue for the nine months ended September 30, 2001 and 2002, respectively.
Services provided under Medicaid programs represented approximately 2.9% and
3.8% of our net patient service revenue for the three months ended September 30,
2001 and 2002, respectively, and 3.1% and 3.2% of our net patient service
revenue for the nine months ended September 30, 2001 and 2002, respectively. The
payments we receive from the Medicare and Medicaid programs are calculated using
daily or hourly rates for each of the four levels of care we deliver and are
adjusted based on geographic location.
Routine home care is the largest component of our gross patient service
revenue, representing 89.0% and 90.0% of gross patient service revenue for the
three months ended September 30, 2001 and 2002, respectively, and 88.4% and
89.7% of gross patient service revenue for the nine months ended September 30,
2001 and 2002, respectively. Inpatient care represented 9.0% and 8.1% of gross
patient service revenue for the three months ended September 30, 2001 and 2002,
respectively, and 9.3% and 8.3% of gross patient service revenue for the nine
months ended September 30, 2001 and 2002, respectively. Continuous 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 58 days for the quarter ended
September 30, 2001 to 63 days for the quarter ended September 30, 2002 and has
increased from 57 days for the nine months ended September 30, 2001 to 63 days
for the nine months ended September 30, 2002.
Payment rates under the Medicare and Medicaid programs are currently indexed
for inflation annually; however, the increases have historically been less than
actual inflation. Effective April 1, 2001, however, the base Medicare daily
payment rates for hospice care increased by five percent over the base rates
then in effect, which has favorably impacted our profitability. The base
Medicare payment rates for hospice care increased by approximately 3.2% on
October 1, 2001 and by approximately 3.4% on October 1, 2002 over the base rates
previously in effect. These rates are further adjusted by the hospice wage
index. In the future, adjustments in the Medicare and Medicaid payment rates, or
lack thereof, may have an adverse impact on our net patient service revenue.
EXPENSES
Because 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
11
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
whom 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. We recently expanded our
corporate office space as a result of increased full-time employees and a need
for additional space.
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 (exclusive of $0.3 million and $0.2 million for the
three months ended September 30, 2001 and 2002, respectively, and exclusive of
$0.8 million and $0.5 million for the nine months ended September 30, 2001 and
2002, respectively, reported separately as stock-based compensation) for the
periods indicated:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
Direct hospice care expenses:
Salaries and payroll taxes ..................... 27.2% 28.5% 27.3% 28.1%
Pharmaceuticals ................................ 7.2 6.8 7.3 6.9
Medical equipment and supplies ................. 5.9 6.3 6.1 6.1
Inpatient costs ................................ 2.1 2.5 2.0 2.3
Other (including nursing home costs, net) ...... 4.3 5.5 5.3 5.4
---------- ---------- ---------- ----------
Total ....................................... 46.7% 49.6% 48.0% 48.8%
========== ========== ========== ==========
General and administrative expenses:
Salaries and benefits .......................... 19.1% 19.3% 19.7% 19.1%
Leases ......................................... 2.7 2.8 2.9 2.7
Other (including bad debts, travel, office
supplies, printing and equipment rental) ...... 13.8 9.9 12.4 11.8
---------- ---------- ---------- ----------
Total ....................................... 35.6% 32.0% 35.0% 33.6%
========== ========== ========== ==========
STOCK-BASED AND OTHER COMPENSATION CHARGES
Stock-based compensation charges represent the difference between the
exercise price of stock options granted and the deemed fair value of our common
stock on the date of grant determined in accordance with APB No. 25 and its
related interpretations. We recognize compensation charges over the vesting
periods of the stock options using a graded amortization methodology in
accordance with FASB Interpretation No. 28. For purposes of the period-to-period
comparisons included in our results of operations, general and administrative
expenses exclude these stock-based compensation charges, which are reflected as
a separate line item.
We have recorded deferred stock-based compensation charges related to stock
options granted to employees and directors during 2000 and 2001. Based on the
number of outstanding stock options granted during 2000 and 2001, we expect to
amortize approximately $1.4 million of deferred stock-based compensation during
2002 and in future periods. We expect to amortize this deferred stock-based
compensation in the following approximate amounts:
o $0.7 million during 2002 (of which $0.5 million has been amortized as of
September 30, 2002);
o $0.4 million during 2003;
o $0.2 million during 2004; and
12
o $0.1 million during 2005 and 2006.
PROVISION FOR INCOME TAXES
Our provision for income taxes consists of current and deferred federal and
state income tax expenses. We estimate that our effective tax rate will be
approximately 38.0% during 2002 as there are no remaining net operating loss
carryforwards or remaining valuation allowances. For fiscal 2001, we fully
utilized our net operating loss carryforwards of $9.5 million that existed at
December 31, 2000 and were fully reserved by a valuation allowance. Accordingly,
our effective tax rate was 19.0% during 2001, after considering the reversal of
the valuation allowance on our deferred tax assets.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2002 2001 2002
-------- -------- -------- --------
Net patient service revenue .................................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct hospice care .......................................................... 46.7 49.6 48.0 48.8
General and administrative (exclusive of $0.3 million
and $0.2 million for the three months ended September 30, 2001 and 2002,
respectively, and $0.8 million and $0.5 million for the nine months ended
September 30, 2001 and 2002, respectively, reported
separately as stock-based compensation charges) ............................. 32.6 31.2 32.6 32.3
Stock-based compensation charges ............................................. 0.8 0.3 0.9 0.4
Provision for uncollectible accounts ......................................... 3.0 0.9 2.4 1.3
Depreciation and amortization ................................................ 1.6 0.8 1.8 0.8
-------- -------- -------- --------
84.7 82.8 85.7 83.6
Income from operations ......................................................... 15.3 17.2 14.3 16.4
Other income (expense), net .................................................... (2.4) 0.2 (2.5) 0.2
-------- -------- -------- --------
Income before income taxes ..................................................... 12.9 17.4 11.8 16.6
Provision for income taxes ..................................................... 2.8 6.8 2.5 6.3
-------- -------- -------- --------
Net income ..................................................................... 10.1% 10.6% 9.3% 10.3%
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net Patient Service Revenue
Net patient service revenue increased $15.9 million, or 45.4%, from $34.9
million for the three months ended September 30, 2001 to $50.7 million for the
three months ended September 30, 2002 due primarily to an increase in average
daily census of 1,373, or 42.3%, from 3,246 in 2001 to 4,619 in 2002. 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 $9.6 million, or 60.4%, of this increase in net patient
service revenue. The remaining increase of $6.3 million, or 39.6%, in net
patient service revenue was due to the inclusion of net patient service revenue
from hospices acquired and developed in 2001 and 2002. Net patient service
revenue per day of care was $116.78 and $119.40 for the three months ended
September 30, 2001 and 2002, respectively. This increase was primarily due to
overall increases in Medicare payment rates for our hospice services. Medicare
and Medicaid payments represented 97.4% and 97.7% of our net patient service
revenue for the three months ended September 30, 2001 and 2002, respectively.
Direct Hospice Care Expenses
Direct hospice care expenses increased $8.9 million, or 54.6%, from $16.3
million for the three months ended September 30, 2001 to $25.2 million for the
three months ended September 30, 2002. This increase was primarily due to the
growth of our operations at our existing hospices and, to a lesser extent, to
direct hospice care expenses of hospices acquired in 2001 and 2002. As a
percentage of net patient service revenue, direct hospice care expenses
increased from 46.7% to 49.6% for the three months ended September 30, 2001 and
2002, respectively, primarily due to the growth of our operations through
developed hospices.
13
General and Administrative Expenses (Exclusive of Stock-Based Compensation)
General and administrative expenses increased $4.5 million, or 39.4%, from
$11.3 million for the three months ended September 30, 2001 to $15.8 million for
the three months ended September 30, 2002. This increase was due to the growth
of our operations at our hospice locations. As a percentage of net patient
service revenue, general and administrative expenses decreased from 32.6% to
31.2% for the three months ended September 30, 2001 and 2002, respectively, as
our hospice and corporate costs were spread over increased patient census volume
and as a result of a decrease in costs in the third quarter of 2002 compared to
the first and second quarters of 2002 due to the completion of our secondary
offering in the second quarter of 2002. The decrease was also due to higher
revenue resulting from payment rate increases.
Stock-Based Compensation Charges
Stock-based compensation charges were $0.3 million and $0.2 million for the
three months ended September 30, 2001 and 2002. These charges related to
amortization of deferred compensation for stock options granted to management
prior to our initial public offering with exercise prices below the deemed fair
value of our common stock.
Provision for Uncollectible Accounts
Our provision for uncollectible accounts decreased $0.6 million, or 59.9%,
from $1.1 million to $0.4 million for the three months ended September 30, 2001
and 2002, respectively, due primarily to improved collection efforts. As a
percentage of net patient service revenue, our provision for uncollectible
accounts decreased from 3.0% to 0.9% for the three months ended September 30,
2001 and 2002, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $0.2 million, or 27.8%, from
$0.6 million for the three months ended September 30, 2001 to $0.4 million for
the three months ended September 30, 2002. The decrease was due to the adoption
of SFAS No. 142 in which goodwill is no longer amortized but assessed for
impairment at least annually. As a percentage of net patient service revenue,
depreciation and amortization expense decreased from 1.6% to 0.8% for the three
months ended September 30, 2001 and 2002, respectively.
Other Income (Expense)
Other income (expense) increased $0.9 million from an expense of $0.8
million for the three months ended September 30, 2001 to income of $0.1 million
for the three months ended September 30, 2002, due primarily to a decrease in
interest expense as a result of paying off our line of credit and certain seller
notes with proceeds received from our initial public offering, and by an
increase in interest income received from investment of the proceeds of our
initial public offering. Also, the Hospice of Houston minority interest purchase
was closed 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 $1.0 million and $3.4 million for the
three months ended September 30, 2001 and 2002, respectively.
Net Income
Net income increased $1.9 million from a net income of $3.5 million for the
three months ended September 30, 2001 to a net income of $5.4 million for the
three months ended September 30, 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net Patient Service Revenue
Net patient service revenue increased $45.6 million, or 49.6%, from $91.9
million for the nine months ended September 30, 2001 to $137.5 million for the
nine months ended September 30, 2002 due primarily to an increase in average
daily census of 1,311, or 45.3%, from 2,892 in 2001 to 4,203 in 2002. Increases
in patient referrals from existing and new referral sources, resulting in
14
increased billable days, and, to a lesser extent, increases in payment rates,
provided approximately $32.0 million, or 70.1%, of this increase in net patient
service revenue. The remaining increase of $13.6 million, or 29.9%, in net
patient service revenue was due to the inclusion of net patient service revenue
from hospices acquired and developed in 2001 and 2002. Net patient service
revenue per day of care was $115.82 and $119.85 for the nine months ended
September 30, 2001 and 2002, respectively. This increase was primarily due to
overall increases in Medicare payment rates for our hospice services. Medicare
and Medicaid payments represented 97.0% and 97.7% of our net patient service
revenue for the nine months ended September 30, 2001 and 2002, respectively.
Direct Hospice Care Expenses
Direct hospice care expenses increased $23.0 million, or 52.2%, from $44.1
million for the nine months ended September 30, 2001 to $67.1 million for the
nine months ended September 30, 2002. This increase was primarily due to the
growth of our operations at our existing hospices. As a percentage of net
patient service revenue, direct hospice care expenses increased from 48.0% to
48.8% for the nine months ended September 30, 2001 and 2002, respectively, due
primarily to the growth of our operations through developed hospices.
General and Administrative Expenses (Exclusive of Stock-Based Compensation)
General and administrative expenses increased $14.5 million, or 48.3%, from
$30.0 million for the nine months ended September 30, 2001 to $44.5 million for
the nine months ended September 30, 2002. This increase was due to the growth of
our operations at our hospice locations. As a percentage of net patient service
revenue, general and administrative expenses decreased from 32.6% to 32.3% for
the nine months ended September 30, 2001 and 2002, respectively, as our hospice
and corporate costs were spread over increased patient census volume, and as a
result of a decrease in costs in the third quarter of 2002 compared to the first
and second quarters of 2002 due to the completion of our secondary offering in
the second quarter of 2002. The decrease was also due to higher revenue
resulting from payment rate increases.
Stock-Based Compensation Charges
Stock-based compensation charges were $0.8 million and $0.5 million for the
nine months ended September 30, 2001 and 2002, respectively. These charges
related to amortization of deferred compensation for stock options granted to
management prior to our initial public offering with exercise prices below the
deemed fair value of our common stock.
Provision for Uncollectible Accounts
Our provision for uncollectible accounts decreased $0.5 million, or 21.0%,
from $2.2 million to $1.7 million for the nine months ended September 30, 2001
and 2002, respectively, due primarily to improved collection efforts. As a
percentage of net patient service revenue, our provision for uncollectible
accounts decreased from 2.4% to 1.3% for the nine months ended September 30,
2001 and 2002, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $0.6 million, or 34.9%, from
$1.6 million for the nine months ended September 30, 2001 to $1.1 million for
the nine months ended September 30, 2002. The decrease was due to the adoption
of SFAS No. 142 in which goodwill is no longer amortized but assessed for
impairment at least annually. As a percentage of net patient service revenue,
depreciation and amortization expense decreased from 1.8% to 0.8% for the nine
months ended September 30, 2001 and 2002, respectively.
Other Income (Expense)
Other income (expense) increased $2.6 million from an expense of $2.3
million for the nine months ended September 30, 2001 to income of $0.3 million
for the nine months ended September 30, 2002, due primarily to a decrease in
interest expense as a result of paying off our line of credit and certain seller
notes with proceeds received from our initial public offering, and by an
increase in interest income received from investment of the proceeds of our
initial public offering. Also, the Hospice of Houston minority interest purchase
was closed in the third quarter of 2002, reversing $50,000 of previously
recorded minority interest expense.
15
Provision for Income Taxes
Our provision for income taxes was $2.3 million and $8.7 million for the
nine months ended September 30, 2001 and 2002, respectively. We had an effective
income tax rate of 21.6 % and 38.0% for the nine months ended September 30, 2001
and 2002, respectively. Our effective tax rate in 2001 was lower than the
statutory rate due to the application of our net operating loss carryforwards.
Net Income
Net income increased $5.7 million from a net income of $8.5 million for the
nine months ended September 30, 2001 to a net income of $14.2 million for the
nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements have historically been for debt
service, hospice acquisition and development plans, working capital and other
capital expenditures. Since our initial public offering, we have financed these
requirements primarily with proceeds from the issuance of common stock, seller
financing of hospice acquisitions, operating and capital leases, normal trade
credit terms, and cash flows from operations. At September 30, 2002, we had cash
and cash equivalents of $3.8 million and working capital of $48.7 million. We
also had short-term investments of $27.8 million and an available borrowing
capacity of $20.0 million under our credit agreement.
Cash provided by operating activities was $11.9 million and $9.6 million for
the nine months ended September 30, 2001 and 2002, respectively. The decrease in
cash provided by operating activities from the prior year was attributable to
timing differences on accrued salaries and accounts payable and decreases in
non-cash items, partially offset by an increase in net income.
Investing activities, consisting primarily of cash paid to purchase hospices
and purchase property and equipment and to acquire short-term investments, used
cash of $8.1 million and $23.7 million for the nine months ended September 30,
2001 and 2002, respectively.
Net cash used in financing activities was $2.8 million and $2.2 million for
the nine months ended September 30, 2001 and 2002, respectively, and represented
proceeds from the sale of capital stock, warrants and, in 2001, net borrowings
under our credit agreement and our 12% senior subordinated notes.
In connection with our acquisition of seven hospice programs in 2001, we
paid an aggregate of $8.2 million in cash and issued the following promissory
notes payable to the sellers:
o A promissory note in the principal amount of $0.2 million. We repaid in
full the principal balance of this note and all accrued and unpaid
interest in the aggregate amount of $0.3 million in February 2002;
o A promissory note in the principal amount of $0.3 million. We repaid in
full the principal balance of this note and all accrued and unpaid
interest in the aggregate amount of $0.3 million on April 1, 2002 and
August 27, 2002;
o A promissory note in the principal amount of $1.0 million. We repaid in
full the principal balance of this note and all accrued and unpaid
interest in the aggregate amount of $1.0 million on April 1, 2002 and
August 21, 2002;
o A promissory note in the principal amount of $0.5 million. We repaid in
full the principal balance of this note and all accrued and unpaid
interest in the aggregate amount of $0.5 million on May 31, 2002;
o A promissory note in the principal amount of $0.6 million. We repaid in
full the principal balance of this note and all accrued and unpaid
interest in the aggregate amount of $0.6 million on June 30, 2002 and
July 29, 2002; and
o A promissory note in the principal amount of $0.5 million. The
promissory note bears interest at the rate of 8% per annum and is
payable in two installments, with $0.3 million of the principal amount,
plus accrued and unpaid interest, due and payable on December 6, 2002
and the remaining principal amount, plus accrued and unpaid interest,
due and payable on December 6, 2003.
In connection with our acquisition of ten hospices thus far in 2002, and the
purchase of the minority interest in Hospice of Houston, L.P., we paid an
aggregate of $18.5 million in cash from the proceeds of our initial public
offering.
16
Our credit agreement with Heller Healthcare Finance, Inc. provides 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 bear 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 will mature on October 2, 2003. As of September 30, 2002, we had
no outstanding borrowings under our credit agreement or accrued and unpaid
interest. Our revolving line of credit is 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 are subject to affirmative and negative covenants,
including:
o limitations on indebtedness, mergers, acquisitions and dispositions of
assets, dividends, investments and liens;
o license maintenance covenants; and
o financial maintenance covenants.
We were in full compliance with our financial and other covenants as of
September 30, 2002. We may in the future refinance our credit agreement with a
new credit agreement with our existing lender or new lenders.
We expect that our principal liquidity requirements will be for working
capital, development plans, anticipated hospice acquisitions, debt service and
other anticipated capital expenditures. We expect that our existing funds, cash
flows from operations and borrowing capacity under our credit agreement will be
sufficient to fund our principal liquidity requirements for at least the next 12
months. 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 hospice locations 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.
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.
FORWARD-LOOKING STATEMENTS
Certain statements used in the preceding 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 the 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 and to integrate effectively the operations of
acquired hospices, (vi) our ability to attract and retain key personnel and
skilled employees, and (vii) our ability to obtain additional capital to finance
growth. Given these uncertainties, 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 any such 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
17
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 20, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates would affect the fair market value of our fixed
rate debt instruments but would not have an impact on our earnings or cash
flows. 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
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including our consolidated subsidiaries) required to be included in our
periodic filings with the Securities and Exchange Commission. There have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
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.
18
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.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2002, we utilized $4.3 million of the
proceeds received by us in our initial public offering to complete the
acquisitions of hospices located in Mississippi, New Mexico, Kansas and Nebraska
and to acquire the remaining 33% interest in Hospice of Houston, L.P. We have
utilized $3.2 million of the proceeds received by us in our initial public
offering to complete the acquisition of a hospice located in Louisiana on
October 1, 2002. The remainder of the net proceeds will be used to finance
potential acquisitions of hospices, for the development of new hospice locations
and for other general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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))
(b) Reports on Form 8-K:
On August 13, 2002, the Company filed a Current Report on Form 8-K
pursuant to Item 9 of Form 8-K, regarding the submission of certificates
to the Securities and Exchange Commission by Richard R. Burnham, Chief
Executive Officer, and Douglas B. Cannon, Chief Financial Officer,
relating to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
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, in the City of Dallas, State of Texas,
on the 14th day of November 2002.
ODYSSEY HEALTHCARE, INC.
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)
By: /s/ Douglas B. Cannon
---------------------
Douglas B. Cannon
Senior Vice President, Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
20
Certification
I, Richard R. Burnham, certify that:
1. I have reviewed this quarterly report on Form 10-Q
of Odyssey HealthCare, Inc.
2. Based on my knowledge, this quarterly report does
not contain any untrue statements 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 quarterly report;
3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I
are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) Designed such disclosure controls and
procedures 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 quarterly report is being
prepared;
b) Evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weakness in internal controls; and
b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: November 14, 2002 /s/ Richard R. Burnham
----------------------
Richard R. Burnham
Chief Executive Officer
21
Certification
I, Douglas B. Cannon, certify that:
1. I have reviewed this quarterly report on Form 10-Q
of Odyssey HealthCare, Inc.
2. Based on my knowledge, this quarterly report does
not contain any untrue statements 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 quarterly report;
3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I
are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) Designed such disclosure controls and
procedures 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 quarterly report is being
prepared;
b) Evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) Presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weakness in internal controls; and
b) Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: November 14, 2002 /s/ DOUGLAS B. CANNON
---------------------
Douglas B. Cannon
Chief Financial Officer
22
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))