ODYSSEY HEALTHCARE INC - 10-Q Quarterly Report

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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 MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION FROM TO

COMMISSION FILE NUMBER 000-33267

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ODYSSEY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of 43-1723043
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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE

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 May 9, 2003 was as follows: 23,711,114 shares of Common Stock, $.001 par
value.

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FORM 10-Q

ODYSSEY HEALTHCARE, INC.
FOR THE QUARTER ENDED MARCH 31, 2003

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 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 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 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
145"), which is required to be applied in fiscal years beginning after May 15,
2002, with early application encouraged. SFAS 145 rescinds Statement of
Financial Accounting Standards No. 4 "Reporting Gains and Losses From
Extinguishment of Debt." SFAS 145 requires any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that do
not meet the criteria in APB 30 for classification as an extraordinary item be
reclassified into income from operations. The Company adopted the provisions of
SFAS 145 on January 1, 2003 and if the Company incurs any gain or loss on
retirement of debt, those gains or losses would be recorded in income from
operations.

In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS 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 a Restructuring)." The adoption of SFAS 146 did not
have a material impact on the results of operations or financial position of the
Company.

3. ACQUISITIONS

In February 2003, the Company purchased all the assets and business of Good
Shepherd Hospice and Palliative Care Center, LLC, a hospice located in
Waxahachie, Texas, with an average daily census of 104. The purchase price,
including transaction costs, totaled $3.0 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.1 million, furniture and
fixtures and goodwill of $2.7 million.

In May 2003, the Company purchased all the assets and business of Mahogany
Hospice Care, Inc., a hospice located in Memphis, Tennessee, with a patient
census of 8. The purchase price, including transaction costs, totaled $1.3
million.

Also in May 2003, the Company purchased all the assets and business of
Homecare Hospice, Inc., a hospice located in Valdosta, Georgia, with a patient
census of 15. The purchase price, including transaction costs, totaled $0.5
million.

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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 three months ended March 31, 2002 and 2003 are presented below. Such pro
forma presentation has been prepared assuming that the acquisition described in
the first quarter of 2003 has been made as of January 1 of the year preceding
the year of acquisition:

4. COMMON STOCK

On February 24, 2003, the Company completed a three-for-two stock split
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 the stock dividend.

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.

Prior to 2001, the Company had two stock-based compensation plans. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. APB 25 uses the intrinsic value method
to account for options granted to employees. Stock-based compensation is
generally not recognized since the option price is typically equal to the market
value of the underlying common stock on the date of grant. During the years
ended December 31, 2000 and 2001, the Company recorded aggregate deferred
compensation for employees of $2.1 million and $1.5 million, respectively,
representing the difference between the exercise prices of the stock options
granted in fiscal year 2000 and 2001 under the Odyssey HealthCare, Inc. Stock
Option Plan and 2001 Equity-Based Compensation Plan and the then deemed fair
value of the common stock prior to the Company's initial public offering in
November 2001. These amounts are being amortized to operations using the graded
method. Under the graded method, approximately 46%, 26%, 15%, 9% and 4%,
respectively, of each option's compensation expense is recognized in each of the
five years following the date of the grant. For the three months ended March 31,
2002 and 2003, the Company amortized deferred compensation in the amount of $0.2
million and $0.1 million, respectively. 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.

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The deemed fair value for options granted after the initial public offering
was estimated at the date of grant using the Black-Scholes Model, which
considers volatility. The following table illustrates the weighted average
assumptions for the three months ended March 31, 2002 and 2003:

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6. NET INCOME PER COMMON SHARE

The following table presents the calculation of basic and diluted net income
per common share:

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. As of
March 31, 2003, the Company reserved $1.0 million 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.

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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 ended March 31, 2002 amounts have been restated to
reflect the change in operating segments.

The Company's chief operating decision maker 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.

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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 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 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 in
terms of both average daily census and number of locations. 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
67 hospice locations to serve patients and their families in 26 states. We
operate all of our hospice locations through our operating subsidiaries. During
the three months ended March 31, 2003, our average daily census was 5,363
patients, which represents a 45.3% increase over our average daily census for
the three months ended March 31, 2002 of 3,690 patients. Our net patient service
revenue of $60.1 million for the three months ended March 31, 2003 represents an
increase of 49.7% over our net patient service revenue of $40.1 million for the
three months ended March 31, 2002. We reported net income of $7.2 million for
the three months ended March 31, 2003, which represents an increase of 79.2%
over our net income of $4.0 million for the three months ended March 31, 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.

DEVELOPED HOSPICES

In the first quarter of 2002, our Norfolk, Virginia hospice became Medicare
and Medicaid certified. We continued development of the Chicago (South),
Illinois, Tulsa, Oklahoma and Austin, Texas hospices and began development of
new hospices in Montgomery, Alabama, Cleveland, Ohio and St. Louis, Missouri.
These hospices have all since been Medicare and 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 hospice became
Medicare certified. We have started development of hospices in Philadelphia,
Pennsylvania, Richmond, Virginia, Cincinnati, Ohio, Portland, Oregon, Santa Fe,
New Mexico, Toledo, Ohio, and Mobile, Alabama.

ACQUISITIONS

During 2002, we acquired twelve hospices for a combined purchase price of
$19.9 million, and also acquired the remaining 33% interest in Hospice of
Houston, L.P. for $1.1 million. We financed our acquisitions in 2002, including
the interest in Hospice of Houston, with $21.3 million in cash from the proceeds
of our initial public offering. These acquisitions occurred in the second, third
and fourth quarters of 2002.

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In February 2003, we acquired one hospice for a purchase price of $3.0
million, with a patient census of 104. We financed our acquisition in 2003 with
$3.0 million in cash from the proceeds of our initial public offering.

In May 2003, we acquired two hospices for a combined purchase price of $1.8
million, with a combined patient census of 23. We financed these acquisitions
with $1.8 million in cash from the proceeds of our initial public offering.

We accounted for these acquisitions as purchases.

Our strategy includes internal growth and expansion through developments and
acquisitions. We continue to evaluate other potential acquisition opportunities.

Goodwill from our hospice acquisitions was $49.2 million as of March 31,
2003. Goodwill was 45.3% of common stockholders' equity and 34.9% of total
assets as of March 31, 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. During 2002, we adopted
the new rules on accounting for goodwill and other intangible assets.

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
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 94.6% and
94.0% of our net patient service revenue for the three months ended March 31,
2002 and 2003, respectively. Services provided under Medicaid programs
represented approximately 3.0% and 3.4% of our net patient service revenue for
the three months ended March 31, 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 89.0% and 88.9% of gross patient service revenue for the
three months ended March 31, 2002 and 2003, respectively. Inpatient care
represented 8.9% and 9.1% of gross patient service revenue for the three months
ended March 31, 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 quarter ended
March 31, 2002 to 69 days for the quarter ended March 31, 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, 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. We are not
aware of any planned reductions for the annual inflation index to be applied in
2003. However, any future reductions in the rate of increase in Medicare and
Medicaid payments may have an adverse impact on our net patient service revenue
and profitability.

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

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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:

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 Accounting Principles
Board Opinion 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 Financial Accounting Standards Board
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
unvested 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 $0.7 million of deferred stock-based
compensation during 2003 and in future periods. We expect to amortize this
deferred stock-based compensation in the following approximate amounts:

o $0.4 million during 2003 (of which $0.1 million has been amortized as of
March 31, 2003);

o $0.2 million during 2004; and

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. Our effective tax rate in 2002 was 38%. We estimate
that our effective tax rate will be approximately 39.0% during 2003 as there are
no remaining net operating loss carryforwards or remaining valuation allowances.

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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 MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Net Patient Service Revenue

Net patient service revenue increased $19.9 million, or 49.7%, from $40.1
million for the three months ended March 31, 2002 to $60.1 million for the three
months ended March 31, 2003 due primarily to an increase in average daily census
of 1,673, or 45.3%, from 3,690 in 2002 to 5,363 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 $12.1 million, or 60.9%, of this increase in net patient service
revenue. The remaining increase of $7.8 million, or 39.1%, 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 $120.86 and $124.44 for the three months ended March 31,
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 97.6% and 97.4% of our net patient
service revenue for the three months ended March 31, 2002 and 2003,
respectively.

Direct Hospice Care Expenses

Direct hospice care expenses increased $10.0 million, or 51.8%, from $19.3
million for the three months ended March 31, 2002 to $29.3 million for the three
months ended March 31, 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 increased from 48.1% to 48.8% for the three months
ended March 31, 2002 and 2003, respectively, primarily due to the growth of our
operations through developed hospices as development costs are being generated
prior to the acceptance of patients.

General and Administrative Expenses (Exclusive of Stock-Based Compensation)

General and administrative expenses increased $4.1 million, or 30.8%, from
$13.4 million for the three months ended March 31, 2002 to $17.5 million for the
three months ended March 31, 2003. 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 33.3% to 29.1% for
the three months ended March 31, 2002 and 2003, respectively, due primarily to
our hospice and corporate costs being spread over our increased patient census
volume and, to a lesser extent, overall increases in Medicare payment rates.

Stock-Based Compensation Charges

Stock-based compensation charges decreased $0.1 million, or 41.0%, from $0.2
million to $0.1 million for the three months ended March 31, 2002 and 2003,
respectively. These charges related to stock options granted to management prior
to our initial public offering with exercise prices below the deemed fair value
of our common stock.

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Provision for Uncollectible Accounts

Our provision for uncollectible accounts increased $0.2 million, or 29.2%,
from $0.6 million to $0.8 million for the three months ended March 31, 2002 and
2003, respectively, due primarily to our increased net patient service revenue.
As a percentage of net patient service revenue, our provision for uncollectible
accounts decreased from 1.6% to 1.4% for the three months ended March 31, 2002
and 2003, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.2 million, or 63.1%, from
$0.3 million to $0.5 million for the three months ended March 31, 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. As a percentage of net patient service
revenue, depreciation and amortization expense remained at 0.8% for the three
months ended March 31, 2002 and 2003.

Other Income (Expense)

Other income (expense) decreased $65,000, or 73.0%, from income of $89,000
to income of $24,000 for the three months ended March 31, 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 and from a
decrease in interest rates.

Provision for Income Taxes

Our provision for income taxes was $2.4 million and $4.6 million for the
three months ended March 31, 2002 and 2003, respectively. We had an effective
income tax rate of 37% and 39% for the three months ended March 31, 2002 and
2003, respectively.

Net Income

Net income increased $3.2 million, from $4.0 million to $7.2 million for the
three months ended March 31, 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 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 March 31, 2003, we had cash and cash equivalents of
$3.6 million and working capital of $55.9 million. At such date, we also had
short-term investments of $39.0 million and an available borrowing capacity of
$20.0 million under our credit agreement.

Cash provided by operating activities was $6.5 million and $12.3 million for
the three months ended March 31, 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 by timing differences on accrued
expenses.

Investing activities, consisting primarily of cash paid to purchase hospices
and property and equipment and to establish short-term investments, used cash of
$12.2 million and $16.6 million for the three months ended March 31, 2002 and
2003, respectively.

Net cash provided by (used in) financing activities was ($0.1) million and
$0.2 million for the three months ended March 31, 2002 and 2003, respectively,
and represented proceeds from the sale of capital stock and warrants, offset by
payments on acquisition notes.

In connection with our acquisition of seven hospice programs in 2001, we had
issued promissory notes payable to the sellers. 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 first
quarter of 2003, we repaid in full the principal balance of one note and all
accrued and unpaid interest in the aggregate amount of $0.3 million.

Our credit agreement with GE Capital Healthcare Financial Services 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 March 31, 2003, 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 under our
credit agreement, including:

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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
March 31, 2003. We expect to let our line of credit expire in October of 2003.
We do not foresee any additional credit needs in the next twelve to eighteen
months.

We have entered into an agreement to purchase a new accounting system during
2003. We plan to capitalize $0.5 million in 2003 related to this implementation.

We have various commitments that could impact our liquidity as summarized
below:

CONTRACTUAL OBLIGATIONS

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 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. For the three months ended March 31, 2003, Medicare and Medicaid
services constitute 94.0% and 3.4% of our net patient service revenue,
respectively.

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 our 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-14(c) and
15d-14(c)) as of a date within 90 days before the filing date of this Quarterly
Report on Form 10-Q and concluded that such disclosure controls and procedures
are effective

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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. 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 Securities Exchange Act of 1934 are
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.

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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. As of March 31, 2003, we reserved
$1.0 million 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 we believe that the
amount reserved is adequate to cover our potential losses, we cannot assure that
our losses will not exceed the amount reserved. Our profitability will be
negatively impacted to the extent our actual losses exceed the amount reserved.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

During the quarter ended March 31, 2003, we utilized $3.0 million of the
proceeds received by us in our initial public offering to complete the
acquisition of a hospice located in Waxahachie, Texas. In May 2003, we utilized
$1.8 million of the proceeds to complete the acquisition of two hospices located
in Memphis, Tennessee and Valdosta, Georgia. The remaining $2.7 million 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:

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(b) Reports on Form 8-K:

(1) Current report on Form 8-K (Item 9), dated January 27, 2003,
announcing that on January 24, 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 February 21, 2003, to stockholders of record at the close
of business on February 6, 2003.

(2) Current report on Form 8-K, dated February 26, 2003,
disclosing a transcript of the fourth quarter and year end
2002 earnings conference call on February 25, 2003.

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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 May 2003.

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)

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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 officer 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 officer 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 officer 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: May 14, 2003 /s/ RICHARD R. BURNHAM
-----------------------
Richard R. Burnham
Chief Executive Officer

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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 officer 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 officer 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: May 14, 2003 /s/ DOUGLAS B. CANNON
-----------------------
Douglas B. Cannon
Chief Financial Officer

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