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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-33267
---------------
ODYSSEY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1723043
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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)
N/A
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant 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 August 8, 2003 was as follows: 35,881,230 shares (23,920,820 shares
pre-split) of Common Stock, $.001 par value.
FORM 10-Q
ODYSSEY HEALTHCARE, INC.
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................................ 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 11
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2002 2003
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 7,732 $ 534
Short-term investments ........................................... 25,898 43,579
Accounts receivable from patient services, net of
allowance for uncollectible accounts of $2,962 and
$3,186 at December 31, 2002 and June 30, 2003, respectively ... 35,652 40,261
Deferred tax assets .............................................. 1,752 368
Income taxes receivable .......................................... 667 986
Other current assets ............................................. 2,172 3,209
------------ ------------
Total current assets ........................................ 73,873 88,937
Property and equipment, net ........................................ 3,670 4,103
Debt issue costs, net .............................................. 25 8
Goodwill ........................................................... 46,527 50,252
Intangibles, net ................................................... 1,319 2,192
------------ ------------
Total assets ................................................ $ 125,414 $ 145,492
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 2,158 $ 3,546
Accrued compensation ............................................. 7,277 7,323
Accrued nursing home costs ....................................... 7,377 9,444
Other accrued expenses ........................................... 5,289 4,886
Current maturities of long-term debt and capital lease
obligations ................................................... 274 18
------------ ------------
Total current liabilities ................................... 22,375 25,217
Deferred tax liability ............................................. 1,779 2,607
Other liabilities .................................................. 327 --
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares -- 75,000,000
Issued and outstanding shares -- 35,067,136 at
December 31, 2002 and 35,881,230 at June 30, 2003 ............. 35 36
Additional paid-in capital ....................................... 79,191 80,934
Deferred compensation ............................................ (726) (510)
Retained earnings ................................................ 22,433 37,208
------------ ------------
Total stockholders' equity .................................. 100,933 117,668
------------ ------------
Total liabilities and stockholders' equity .................. $ 125,414 $ 145,492
============ ============
The accompanying notes are an integral part of these financial statements.
3
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
Net patient service revenue ................ $ 46,636 $ 64,896 $ 86,770 $ 124,956
Operating expenses:
Direct hospice care ...................... 22,649 31,985 41,955 61,295
General and administrative ............... 15,454 19,112 29,022 36,720
Provision for uncollectible accounts ..... 647 994 1,300 1,838
Depreciation and amortization ............ 344 567 653 1,071
------------ ------------ ------------ ------------
39,094 52,658 72,930 100,924
------------ ------------ ------------ ------------
Income from operations ..................... 7,542 12,238 13,840 24,032
Other income (expense):
Interest income .......................... 140 117 325 212
Interest expense ......................... (59) (33) (155) (104)
------------ ------------ ------------ ------------
81 84 170 108
------------ ------------ ------------ ------------
Income before provision for income taxes ... 7,623 12,322 14,010 24,140
Provision for income taxes ................. 2,891 4,755 5,254 9,365
------------ ------------ ------------ ------------
Net income ................................. $ 4,732 $ 7,567 $ 8,756 $ 14,775
============ ============ ============ ============
Net income per common share:
Basic net income per common share ........ $ 0.14 $ 0.21 $ 0.25 $ 0.42
============ ============ ============ ============
Diluted net income per common share ...... $ 0.13 $ 0.20 $ 0.24 $ 0.40
============ ============ ============ ============
Weighted average shares outstanding:
Basic .................................... 34,739 35,643 34,618 35,533
Diluted .................................. 36,815 37,194 36,631 36,972
The accompanying notes are an integral part of these financial statements.
4
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2003
----------- -----------
(IN THOUSANDS)
(UNAUDITED)
Operating Activities
Net income ................................................ $ 8,756 $ 14,775
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................... 653 1,071
Amortization of deferred charges and debt discount ..... 17 17
Stock-based compensation ............................... 363 216
Deferred tax (benefit) expense ......................... (306) 2,212
Provision for uncollectible accounts ................... 1,300 1,838
Tax benefit realized for stock option exercises ........ 440 48
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable .................................. (4,031) (6,774)
Other current assets ................................. (1,243) (1,356)
Accounts payable, accrued nursing home costs and
other accrued expenses ............................ 1,338 3,098
----------- -----------
Net cash provided by operating activities ............ 7,287 15,145
Investing Activities
Cash paid for acquisitions ................................ (11,080) (4,753)
Increase in short-term investments ........................ (5,791) (17,681)
Purchases of property and equipment ....................... (1,091) (1,349)
----------- -----------
Net cash used in investing activities ................ (17,962) (23,783)
Financing Activities
Proceeds from issuance of common stock .................... 155 1,696
Proceeds from issuance of debt ............................ 15 --
Payments on debt .......................................... (1,716) (256)
----------- -----------
Net cash provided by (used in) financing
activities ........................................ (1,546) 1,440
----------- -----------
Net decrease in cash and cash equivalents ................... (12,221) (7,198)
Cash and cash equivalents, beginning of period .............. 20,072 7,732
----------- -----------
Cash and cash equivalents, end of period .................... $ 7,851 $ 534
=========== ===========
Supplemental Cash Flow Information
Cash interest paid ........................................ $ 227 $ 89
Income taxes paid ......................................... $ 2,116 $ 7,804
The accompanying notes are an integral part of these financial statements.
5
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2003
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements of Odyssey
HealthCare, Inc. and its subsidiaries (the "Company"). In the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 2002 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 27, 2003.
The consolidated balance sheet at December 31, 2002 has been derived from
the audited financial statements at that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.
Certain amounts have been reclassified to conform to the current presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 "Amendment of SFAS 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does not
expect SFAS 149 to have a material impact on the results of operations or
financial position of the Company.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective beginning after July 1, 2003. The Company
does not expect SFAS 150 to have a material impact on the results of operations
or financial position of the Company.
3. ACQUISITIONS
In February 2003, the Company purchased substantially all the assets and
business of Good Shepherd Hospice and Palliative Care Center, LLC, a hospice
located in Waxahachie, Texas, with a patient census of approximately 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, and furniture and fixtures and goodwill of $2.7 million.
In May 2003, the Company purchased substantially all the assets and business
of Mahogany Hospice Care, Inc., a hospice located in Memphis, Tennessee, with a
patient census of approximately 8. The purchase price, including transaction
costs, totaled $1.3 million. Assets acquired include licenses of $0.3 million, a
non-compete agreement of $0.2 million, and furniture and fixtures and goodwill
of $0.8 million.
6
Also in May 2003, the Company purchased substantially all the assets and
business of Homecare Hospice, Inc., a hospice located in Valdosta, Georgia, with
a patient census of approximately 15. The purchase price, including transaction
costs, totaled $0.5 million. Assets acquired include licenses of $0.1 million, a
non-compete agreement of $0.1 million, and furniture and fixtures and goodwill
of $0.3 million.
In August 2003, the Company purchased substantially all the assets and
business of Omega Hospice, Ltd., a hospice located in Brownsville, Texas, with a
patient census of approximately 60. The purchase price, including transaction
costs, totaled $1.7 million.
Also in August 2003, the Company purchased substantially all the assets and
business of First State Hospice, LLC, a hospice located in Wilmington, Delaware,
with a patient census of approximately 15. The purchase price, including
transaction costs, totaled $0.5 million.
On August 1, 2003, the Company entered into an agreement to purchase
substantially all the assets of a hospice located in the Western United States
for a purchase price of $11.8 million payable in cash. We expect to complete
this acquisition during the third quarter of 2003 by utilizing a portion of the
proceeds received by us in our initial public offering and from cash generated
through our operations. Completion of this acquisition is subject to various
conditions, including the accuracy of certain representations and warranties and
the absence of any material change to the business and operations of the
hospices to be acquired, and we cannot assure that these closing conditions will
be satisfied or that the acquisition will be completed.
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 six months ended June 30, 2002 and 2003 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions acquired through
June 30, 2003, described above, have been made as of January 1 of the year
preceding the year of acquisition:
SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2003
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Pro forma net patient service revenue........ $ 97,872 $ 125,638
Pro forma net income......................... 9,849 14,845
Pro forma net income per common share:
Basic...................................... $ 0.28 $ 0.42
========== ==========
Diluted.................................... $ 0.27 $ 0.40
========== ==========
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.
On July 18, 2003, the Company announced that the Board of Directors of the
Company had authorized a three-for-two stock split payable in the form of a
fifty percent stock dividend to be distributed on August 12, 2003, to
stockholders of record at the close of business on July 28, 2003. 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.
7
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 June 30,
2002 and 2003, the Company amortized deferred compensation in the amount of $0.2
million and $0.1 million, respectively. For the six months ended June 30, 2002
and 2003, the Company amortized $0.4 million and $0.2 million of deferred
compensation, 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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
2002 2003 2002 2003
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) SHARE AMOUNTS)
Net income, as reported................................... $ 4,732 $ 7,567 $ 8,756 $ 14,775
Add: Stock-based employee compensation expense
recorded, net of tax.................................... 109 64 227 132
Deduct: Fair value stock-based employee compensation
expense, net of tax..................................... (221) (443) (476) (931)
-------- -------- -------- --------
Pro forma net income...................................... $ 4,620 $ 7,188 $ 8,507 $ 13,976
======== ======== ======== ========
Earnings per share:
Basic - as reported....................................... $ 0.14 $ 0.21 $ 0.25 $ 0.42
Add: Stock-based employee compensation expense
recorded, net of tax.................................... 0.00 0.00 0.01 0.00
Deduct: Fair value stock-based employee compensation
expense, net of tax..................................... (0.01) (0.01) (0.01) (0.03)
-------- -------- -------- --------
Basic - pro forma......................................... $ 0.13 $ 0.20 $ 0.25 $ 0.39
======== ======== ======== ========
Diluted - as reported..................................... $ 0.13 $ 0.20 $ 0.24 $ 0.40
Add: Stock-based employee compensation expense
recorded, net of tax.................................... 0.00 0.00 0.00 0.00
Deduct: Fair value stock-based employee compensation
expense, net of tax..................................... (0.01) (0.01) (0.01) (0.02)
-------- -------- -------- --------
Diluted - pro forma....................................... $ 0.12 $ 0.19 $ 0.23 $ 0.38
======== ======== ======== ========
6. NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted net income
per common share:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER (IN THOUSANDS, EXCEPT
SHARE AMOUNTS) PER SHARE AMOUNTS)
Numerator
Numerator for diluted net income per share -
net income.......................................$ 4,732 $ 7,567 $ 8,756 $ 14,775
========== ========== ========== ==========
Denominator
Denominator for basic net income per
share - weighted average shares.................. 34,739 35,643 34,618 35,533
Effect of dilutive securities:
Employee stock options........................... 1,981 1,522 1,918 1,410
Series B Preferred Stock Warrants
convertible to common stock.................... 95 29 95 29
--------- ---------- ---------- ----------
Denominator for diluted net income per
share - adjusted weighted average shares
and assumed or actual conversions................ 36,815 37,194 36,631 36,972
========= ========== ========== ==========
Net income per common share:
Basic net income per common share..................$ 0.14 $ 0.21 $ 0.25 $ 0.42
========== ========== ========== ==========
Diluted net income per common share................$ 0.13 $ 0.20 $ 0.24 $ 0.40
========== ========== ========== ==========
8
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
June 30, 2003, the Company recorded $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 recorded is adequate to
cover its potential losses, the Company cannot assure that its losses will not
exceed the amount recorded. The Company's profitability will be negatively
impacted to the extent its actual losses exceed the amount recorded.
8. SEGMENT REPORTING
Prior to 2002, the Company evaluated the performance of, and allocated
resources to, its hospice locations based on current operations and market
assessments on a hospice-by-hospice basis. The Company's continued growth in
2002 reshaped these bases for evaluation and the Company now has geographically
defined operating segments upon which to perform analysis and evaluate
performance. The three months and six months ended June 30, 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2003 2002 2003
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Net patient service revenue:
Northeast...................... $ 2,860 $ 3,793 $ 5,384 $ 7,706
Southeast...................... 9,195 12,727 15,315 24,696
Central........................ 4,360 5,464 8,466 10,058
South.......................... 9,518 13,631 17,730 26,123
Midwest........................ 5,114 6,149 9,748 11,881
Mountain....................... 9,232 13,901 17,970 26,777
West........................... 6,357 9,231 12,157 17,715
Corporate...................... -- -- -- --
--------- --------- --------- ---------
$ 46,636 $ 64,896 $ 86,770 $ 124,956
========= ========= ========= =========
Direct hospice care expenses:
Northeast...................... $ 1,299 $ 1,804 $ 2,427 $ 3,526
Southeast...................... 4,414 6,229 7,375 11,975
Central........................ 1,875 2,519 3,531 4,716
South.......................... 5,261 7,231 9,826 13,912
Midwest........................ 2,228 2,949 4,074 5,680
Mountain....................... 4,501 6,657 8,802 12,848
West........................... 3,045 4,590 5,860 8,624
Corporate...................... 26 6 60 14
--------- --------- --------- ---------
$ 22,649 $ 31,985 $ 41,955 $ 61,295
========= ========= ========= =========
Income (loss) from operations:
Northeast...................... $ 922 $ 1,008 $ 1,806 $ 2,567
Southeast...................... 3,092 3,891 4,995 7,780
Central........................ 1,802 1,913 3,575 3,247
South.......................... 2,666 3,846 4,676 7,456
Midwest........................ 1,828 1,892 3,778 3,236
Mountain....................... 2,827 4,969 5,305 9,446
West........................... 1,945 2,887 3,512 5,629
Corporate...................... (7,540) (8,168) (13,807) (15,329)
--------- --------- --------- ---------
$ 7,542 $ 12,238 $ 13,840 $ 24,032
========= ========= ========= =========
9
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2002 2003 2002 2003
------ ------ ------ ------
Average Daily Census:
Northeast.............. 267 337 251 343
Southeast.............. 921 1,237 763 1,204
Central................ 454 539 444 501
South.................. 915 1,293 855 1,237
Midwest................ 474 541 453 530
Mountain............... 729 1,088 717 1,046
West................... 529 723 508 700
------ ------ ------ ------
4,289 5,758 3,991 5,561
====== ====== ====== ======
10
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
73 hospice locations to serve patients and their families in 29 states. We
operate all of our hospice locations through our operating subsidiaries. During
the three months ended June 30, 2003, our average daily census was 5,758
patients, which represents a 34.3% increase over our average daily census for
the three months ended June 30, 2002 of 4,289 patients. During the six months
ended June 30, 2003, our average daily census was 5,561 patients, which
represents a 39.3% increase over our average daily census for the six months
ended June 30, 2002 of 3,991 patients. Our net patient service revenue of $64.9
million for the three months ended June 30, 2003 represents an increase of 39.2%
over our net patient service revenue of $46.6 million for the three months ended
June 30, 2002. Our net patient service revenue of $125.0 million for the six
months ended June 30, 2003 represents an increase of 44.0% over our net patient
service revenue of $86.8 million for the six months ended June 30, 2002. We
reported net income of $7.6 million for the three months ended June 30, 2003,
which represents an increase of 59.9% over our net income of $4.7 million for
the three months ended June 30, 2002. We reported net income of $14.8 million
for the six months ended June 30, 2003, which represents an increase of 68.7%
over our net income of $8.8 million for the six months ended June 30, 2003.
On January 27, 2003, we announced that our Board of Directors had authorized
a three-for-two stock split payable in the form of a fifty percent stock
dividend that was distributed on February 24, 2003, to stockholders of record at
the close of business on February 6, 2003. We had approximately 15.8 million
shares of common stock outstanding at the close of business on February 6, 2003
and issued approximately 7.9 million shares of common stock to the stockholders
of record.
On July 18, 2003, we announced that our Board of Directors had authorized a
three-for-two stock split payable in the form of a fifty percent stock dividend
to be distributed on August 12, 2003, to stockholders of record at the close of
business on July 28, 2003. We had approximately 23.9 million shares of common
stock outstanding at the close of business on July 28, 2003 and issued
approximately 12.0 million shares of common stock to the stockholders of record.
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.
11
During the second quarter of 2002, our Austin, Texas; and Montgomery,
Alabama hospices received Medicare certification. We continued development of
the Chicago (South), Illinois; Tulsa, Oklahoma; Cleveland, Ohio; and St. Louis,
Missouri hospices.
In the first quarter of 2003, our Cleveland, Ohio hospice became Medicare
certified.
In the second quarter of 2003, our Big Spring, Texas; Portland, Oregon; and
Philadelphia, Pennsylvania hospices received Medicare certification. We have
started development of hospices in Richmond, Virginia; Cincinnati, Ohio; Santa
Fe, New Mexico; Toledo, Ohio; Mobile, Alabama; Fargo, North Dakota; Athens,
Georgia; and Arlington, Virginia.
In the third quarter of 2003, we have started development of a hospice in
Warwick, Rhode Island.
ACQUISITIONS
During the second quarter of 2002, we acquired five hospices for a combined
purchase price of $11.0 million. We financed these acquisitions with $11.0
million in cash proceeds from our initial public offering.
During the remainder of 2002, we acquired seven hospices for a combined
purchase price of $8.9 million, and also acquired the remaining 33% interest in
Hospice of Houston, L.P. for $1.1 million. We financed these acquisitions,
including the interest in Hospice of Houston, with $10.3 million in cash from
the proceeds of our initial public offering. These acquisitions occurred in the
third and fourth quarters of 2002.
During the first quarter of 2003, we acquired one hospice for a purchase
price of $3.0 million, with a patient census of 104. We financed our acquisition
with $3.0 million in cash from the proceeds of our initial public offering.
During the second quarter of 2003, we acquired two hospices for a combined
purchase price of $1.8 million, 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.
In August 2003, we acquired two hospices for a combined purchase price of
$2.2 million, with a combined patient census of approximately 75. We financed
these acquisitions with $2.2 million in cash from the proceeds of our initial
public offering.
We accounted for these acquisitions as purchases.
On August 1, 2003, we entered into an agreement to purchase substantially
all the assets of a hospice located in the Western United States for a purchase
price of $11.8 million payable in cash. We expect to complete this acquisition
during the third quarter of 2003 by utilizing a portion of the proceeds received
by us in our initial public offering and from cash generated through our
operations. Completion of this acquisition is subject to various conditions,
including the accuracy of certain representations and warranties and the absence
of any material change to the business and operations of the hospices to be
acquired, and we cannot assure that these closing conditions will be satisfied
or that the acquisition will be completed.
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 $50.3 million as of June 30,
2003. Goodwill was 42.7% of common stockholders' equity and 34.5% of total
assets as of June 30, 2003. Under new rules issued by the Financial Accounting
Standards Board, effective for fiscal 2002 and beyond, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with the new rules. Other intangible
assets continue to be amortized over their useful lives. We adopted the new
rules on accounting for goodwill and other intangible assets during 2002.
NET PATIENT SERVICE REVENUE
Net patient service revenue is the amount we believe we are entitled to
collect for our services, adjusted as described below. The amount we believe we
are entitled to collect for our services varies depending on the level of care
provided, the payor and the geographic area where services are rendered. Net
patient service revenue includes adjustments for charity care and estimated
payment denials (which we experience from time to time for reasons such as our
failure to submit complete and accurate claim documentation, our failure to
provide timely written physician certifications as to patient eligibility, or
the payor deems the patient ineligible for insurance coverage), contractual
adjustments, amounts we estimate we could be required to repay to Medicare, such
as payments that we would be required to make in the event that any of our
programs exceed the annual per-beneficiary cap, and subsequent changes to
initial level of care determinations. We adjust our estimates from time to time
based on our billing and collection experience. We believe that we can
12
reasonably estimate such adjustments to net patient service revenue because we
have significant historical experience and because we have a centralized billing
and collection department that continually monitors the factors that could
potentially result in a change in estimates. There were no material changes in
estimates to net patient service revenue for the six months ended June 30, 2002
and 2003. We recognize net patient service revenue once the patient's hospice
eligibility has been certified, the patent's coverage from a payment source has
been verified and services have been provided to that patient.
We operate under arrangements with Medicare, Medicaid and other third-party
payors pursuant to which these payors reimburse us for services we provide to
hospice-eligible patients these payors cover, subject to our submission of
adequate and timely claim documentation. We have a patient intake process that
screens patients for hospice eligibility and identifies whether their care will
be covered by Medicare, Medicaid, private insurance, managed care or self-pay.
Whether Medicare or Medicaid will continue to provide reimbursement for hospice
care is dependent upon governmental policies.
Services provided under the Medicare program represented approximately 94.7%
and 93.3% of our net patient service revenue for the three months ended June 30,
2002 and 2003, respectively, and 94.6% and 93.6% of our net patient service
revenue for the six months ended June 30, 2002 and 2003, respectively. Services
provided under Medicaid programs represented approximately 2.8% and 4.2% of our
net patient service revenue for the three months ended June 30, 2002 and 2003,
respectively, and 2.9% and 3.8% of our net patient service revenue for the six
months ended June 30, 2002 and 2003, respectively. The payments we receive from
the Medicare and Medicaid programs are calculated using daily or hourly rates
for each of the four main levels of care we deliver (routine home care, general
inpatient care, continuous home care and respite care) and are adjusted based on
geographic location.
Routine home care is the largest component of our gross patient service
revenue, representing 89.9% and 89.5% of gross patient service revenue for the
three months ended June 30, 2002 and 2003, respectively, and 89.5% and 89.2% of
gross patient service revenue for the six months ended June 30, 2002 and 2003.
Inpatient care represented 8.1% and 8.6% of gross patient service revenue for
the three months ended June 30, 2002 and 2003, respectively, and 8.5% and 8.8%
of gross patient service revenue for the six months ended June 30, 2002 and
2003. 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
June 30, 2002 to 74 days for the quarter ended June 30, 2003 and has increased
from 63 days for the six months ended June 30, 2002 to 71 days for the six
months ended June 30, 2003.
Payment rates under the Medicare and Medicaid programs are indexed for
inflation annually; however, the increases have historically been less than
actual inflation. On October 1, 2002, 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. The Centers
for Medicare and Medicaid Services recently announced a net 3.4% increase in
Medicare hospice reimbursement rates effective October 1, 2003. These rates will
be further adjusted by the hospice wage index. In the future, any decreases in
or reductions in the rate of increase in Medicare and Medicaid payments will
likely have an adverse impact on our net patient service revenue and
profitability.
MEDICARE AND MEDICAID REGULATION
We are subject to certain limitations on Medicare payments for services.
Specifically, if the number of inpatient care days of care any hospice program
provides to Medicare beneficiaries exceeds 20% of the total days of hospice care
such program provides to all patients for an annual period beginning September
28, the days in excess of the 20% figure may be reimbursed only at the routine
home care rate. None of our hospice programs exceeded the payment limits on
inpatient services for the six months ended June 30, 2002 and 2003.
We are also subject to a Medicare annual per-beneficiary cap. Compliance
with the Medicare per-beneficiary cap is measured by comparing the cost of
services provided to each Medicare beneficiary by each hospice program during
the Medicare fiscal year ending October 31 to the per-beneficiary cap amount for
each Medicare beneficiary in such program who elects to receive the Medicare
hospice benefit for the first time during such fiscal year.
13
EXPENSES
Since we generally receive fixed payments for our hospice services, our
profitability is largely dependent on our ability to manage the expenses of
providing hospice services. We recognize expenses as incurred and classify
expenses as either direct hospice care expenses or general and administrative
expenses. Direct hospice care expenses primarily include direct patient care
salaries and payroll taxes, pharmaceuticals, medical equipment and supplies, and
inpatient costs. Length of stay impacts our direct hospice care expenses as a
percentage of net patient service revenue because, if lengths of stay decline,
direct hospice care expenses, which are often highest during the latter days of
care for a patient, are spread against fewer days of care. Expenses are normally
higher during the latter days of care because patients generally require greater
hospice services, including drugs, medical equipment and nursing care at that
time due to their deteriorating medical condition. These increased expenses
reduce our profitability because we generally receive fixed payments for our
hospice services. In addition, cost pressures resulting from the use of more
expensive forms of palliative care, including drugs and drug delivery systems,
could negatively impact our profitability.
For our patients receiving nursing home care under a state Medicaid program
who elect hospice care under Medicare or Medicaid, we contract with nursing
homes for the nursing homes' provision to patients of room and board services.
The state must pay us, in addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, an amount equal to at least 95% of the Medicaid
daily nursing home rate for room and board furnished to the patient by the
nursing home. Under our standard nursing home contracts, we pay the nursing home
for these room and board services at the Medicaid daily nursing home rate. We
refer to these costs, net of Medicaid payments, as "nursing home costs, net."
General and administrative expenses primarily include non-patient care
salaries, employee benefits and office leases.
The following table sets forth the percentage of net patient service revenue
represented by the items included in direct hospice care expenses and general
and administrative expenses for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2002 2003 2002 2003
----- ----- ----- -----
Direct hospice care expenses:
Salaries and payroll taxes.................... 28.0% 28.4% 27.9% 28.2%
Pharmaceuticals............................... 7.2 6.6 6.9 6.6
Medical equipment and supplies................ 5.9 6.0 6.0 5.9
Inpatient costs............................... 2.1 2.7 2.2 2.9
Other (including nursing home costs, net) .... 5.3 5.6 5.4 5.4
----- ----- ----- -----
Total...................................... 48.5% 49.3% 48.4% 49.0%
===== ===== ===== =====
General and administrative expenses:
Salaries and benefits......................... 19.8% 18.8% 20.3% 18.3%
Leases........................................ 2.5 2.6 2.7 2.6
Other (including bad debts, travel, office
supplies, printing and equipment rental).... 12.3 9.5 11.9 10.0
----- ----- ----- -----
Total...................................... 34.6% 30.9% 34.9% 30.9%
===== ===== ===== =====
PROVISION FOR INCOME TAXES
Our provision for income taxes consists of current and deferred federal and
state income tax expenses. Our effective tax rate in 2002 was approximately 38%.
We estimate that our effective tax rate will be approximately 39% during 2003.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial information
as a percentage of net patient service revenue for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2003 2002 2003
------ ------ ------ ------
Net patient service revenue............. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct hospice care................... 48.5 49.3 48.4 49.0
General and administrative............ 33.2 29.4 33.4 29.4
Provision for uncollectible accounts 1.4 1.5 1.5 1.5
Depreciation and amortization......... 0.7 0.9 0.7 0.9
------ ------ ------ ------
83.8 81.1 84.0 80.8
------ ------ ------ ------
Income from operations.................. 16.2 18.9 16.0 19.2
Other income (expense), net............. 0.1 0.1 0.2 0.1
------ ------ ------ ------
Income before income taxes.............. 16.3 19.0 16.2 19.3
Provision for income taxes.............. 6.2 7.3 6.1 7.5
------ ------ ------ ------
Net income.............................. 10.1% 11.7% 10.1% 11.8%
====== ====== ====== ======
14
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Patient Service Revenue
Net patient service revenue increased $18.3 million, or 39.2%, from $46.6
million for the three months ended June 30, 2002 to $64.9 million for the three
months ended June 30, 2003 due primarily to an increase in average daily census
of 1,469, or 34.3%, from 4,289 in 2002 to 5,758 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 $12.5 million, or 68.3%, of this increase in net patient service
revenue. The remaining increase of $5.8 million, or 31.7%, in net patient
service revenue was due to the inclusion of net patient service revenue from
hospices acquired and developed in 2002 and 2003. Net patient service revenue
per day of care was $119.48 and $123.86 for the three months ended June 30, 2002
and 2003, respectively. This increase was primarily due to overall increases in
Medicare payment rates for our hospice services, as well as a shift in the mix
of level of care from routine home care to inpatient services. Medicare and
Medicaid payments represented 97.5% of our net patient service revenue for both
the three months ended June 30, 2002 and 2003.
Direct Hospice Care Expenses
Direct hospice care expenses increased $9.3 million, or 41.2%, from $22.6
million for the three months ended June 30, 2002 to $32.0 million for the three
months ended June 30, 2003. This increase was primarily due to the growth of our
operations at our existing hospices and, to a lesser extent, to hospices
acquired in 2002 and 2003. As a percentage of net patient service revenue,
direct hospice care expenses increased from 48.5% to 49.3% for the three months
ended June 30, 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
General and administrative expenses increased $3.7 million, or 23.7%, from
$15.5 million for the three months ended June 30, 2002 to $19.1 million for the
three months ended June 30, 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 33.2% to 29.4% for
the three months ended June 30, 2002 and 2003, respectively, due primarily to
our hospice and corporate costs being spread over our increased net patient
service revenue.
Provision for Uncollectible Accounts
Our provision for uncollectible accounts increased $0.3 million, or 53.6%,
from $0.6 million to $1.0 million for the three months ended June 30, 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 increased from 1.4% to 1.5% for the three months ended June 30, 2002
and 2003, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.2 million, or 64.8%, from
$0.3 million to $0.6 million for the three months ended June 30, 2002 and 2003,
respectively. The increase was due to the amortization of non-compete agreements
associated with our recent acquisitions and depreciation of acquired fixed
assets in the latter part of 2002 and 2003. As a percentage of net patient
service revenue, depreciation and amortization expense increased from 0.7% to
0.9% for the three months ended June 30, 2002 and 2003, respectively.
Other Income (Expense)
Other income (expense) increased $3,000, or 3.7%, from income of $81,000 to
income of $84,000 for the three months ended June 30, 2002 and 2003,
respectively, due primarily to a decrease in interest expense due to paying off
our acquisition notes in the latter part of 2002 and beginning of 2003, offset
by a decrease in interest income related to proceeds from our initial public
offering being invested in new acquisitions and from a decrease in interest
rates on our short-term investments.
15
Provision for Income Taxes
Our provision for income taxes was $2.9 million and $4.8 million for the
three months ended June 30, 2002 and 2003, respectively. We had an effective
income tax rate of approximately 38% and 39% for the three months ended June 30,
2002 and 2003, respectively.
Net Income
Net income increased $2.8 million, from $4.7 million to $7.6 million for the
three months ended June 30, 2002 and 2003, respectively.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net Patient Service Revenue
Net patient service revenue increased $38.2 million, or 44.0%, from $86.8
million for the six months ended June 30, 2002 to $125.0 million for the six
months ended June 30, 2003 due primarily to an increase in average daily census
of 1,570, or 39.3%, from 3,991 in 2002 to 5,561 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 $24.6 million, or 64.4%, of this increase in net patient service
revenue. The remaining increase of $13.6 million, or 35.6%, 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 $120.12 and $124.13 for the six months ended June 30, 2002
and 2003, respectively. This increase was primarily due to overall increases in
Medicare payment rates for our hospice services, as well as a shift in the mix
of level of care from routine home care to inpatient services. Medicare and
Medicaid payments represented 97.5% and 97.4% of our net patient service revenue
for the six months ended June 30, 2002 and 2003, respectively.
Direct Hospice Care Expenses
Direct hospice care expenses increased $19.3 million, or 46.1%, from $42.0
million for the six months ended June 30, 2002 to $61.3 million for the six
months ended June 30, 2003. This increase was primarily due to the growth of our
operations at our existing hospices and, to a lesser extent, to hospices
acquired in 2002 and 2003. As a percentage of net patient service revenue,
direct hospice care expenses increased from 48.4% to 49.0% for the six months
ended June 30, 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
General and administrative expenses increased $7.7 million, or 26.5%, from
$29.0 million for the six months ended June 30, 2002 to $36.7 million for the
six months ended June 30, 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 33.4% to 29.4% for
the six months ended June 30, 2002 and 2003, respectively, due primarily to our
hospice and corporate costs being spread over our increased net patient service
revenue.
Provision for Uncollectible Accounts
Our provision for uncollectible accounts increased $0.5 million, or 41.4%,
from $1.3 million to $1.8 million for the six months ended June 30, 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 remained at 1.5% for the six months ended June 30, 2002 and 2003.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.4 million, or 64.0%, from
$0.7 million to $1.1 million for the six months ended June 30, 2002 and 2003,
respectively. The increase was due to the amortization of non-compete agreements
associated with our recent acquisitions and depreciation of acquired fixed
assets in the latter part of 2002 and 2003. As a percentage of net patient
service revenue, depreciation and amortization expense increased from 0.7% to
0.9% for the six months ended June 30, 2002 and 2003, respectively.
16
Other Income (Expense)
Other income (expense) decreased $0.1 million, or 36.5%, from income of $0.2
million to income of $0.1 million for the six months ended June 30, 2002 and
2003, respectively, due primarily to a decrease in interest income related to
proceeds from our initial public offering being invested in new acquisitions and
from a decrease in interest rates on our short-term investments.
Provision for Income Taxes
Our provision for income taxes was $5.3 million and $9.4 million for the six
months ended June 30, 2002 and 2003, respectively. We had an effective income
tax rate of approximately 38% and 39% for the six months ended June 30, 2002 and
2003, respectively.
Net Income
Net income increased $6.0 million, from $8.8 million to $14.8 million for
the six months ended June 30, 2002 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity requirements have historically been for debt
service, hospice acquisitions and development plans, working capital and other
capital expenditures. We have 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 June 30, 2003, we had cash and cash equivalents of
$0.5 million and working capital of $63.7 million. At such date, we also had
short-term investments of $43.6 million and an available borrowing capacity of
$20.0 million under our credit agreement.
Cash provided by operating activities was $7.3 million and $15.1 million for
the six months ended June 30, 2002 and 2003, respectively. The increase in cash
provided by operating activities from the prior year was primarily attributable
to the increase in net income and corresponding cash collections.
Investing activities, consisting primarily of cash paid to purchase hospices
and property and equipment and to establish short-term investments, used cash of
$18.0 million and $23.8 million for the six months ended June 30, 2002 and 2003,
respectively.
Net cash provided by (used in) financing activities was ($1.5) million and
$1.4 million for the six months ended June 30, 2002 and 2003, respectively, and
represented proceeds from the sale of common 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 second
quarter of 2002, we repaid principal and accrued and unpaid interest relating to
five notes in the aggregate amount of $1.6 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 June 30, 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:
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 June
30, 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.
17
We have entered into an agreement to purchase a new accounting system during
2003. We plan to capitalize a total of $0.8 million in 2003 related to this
implementation, including software and equipment, of which $0.4 million has been
capitalized to date.
We have various commitments that could impact our liquidity as summarized
below:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Accounting System ........... $ 400 $ 400 $ -- $ -- $ --
Long-Term Debt .............. 11 11 -- -- --
Capital Lease Obligations ... 7 7 -- -- --
Operating Leases ............ 19,594 984 12,100 4,070 2,440
----------- ----------- ----------- ----------- -----------
Total Contractual
Obligations ............... $ 20,012 $ 1,402 $ 12,100 $ 4,070 $ 2,440
=========== =========== =========== =========== ===========
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 six months ended June 30, 2003, Medicare and Medicaid services
constitute 93.6% and 3.8% 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-15(e) and
15d-15(e)) as of June 30, 2003 and concluded that such disclosure controls and
procedures are effective in timely alerting them to material information that is
required to be disclosed in the periodic reports we file or submit under the
Securities Exchange Act of 1934 (as amended, the "Exchange Act"). There have not
been any significant changes in our internal controls or in other factors that
could significantly affect these internal controls subsequent to the date of the
evaluation.
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in the reports that we file under the 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.
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.
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 June 30, 2003, we recorded $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
recorded is adequate to cover our potential losses, we cannot assure that our
losses will not exceed the amount recorded. Our profitability will be negatively
impacted to the extent our actual losses exceed the amount recorded.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the second quarter ended June 30, 2003, we utilized $1.8 million of
the proceeds of our initial public offering to complete the acquisition of two
hospices located in Memphis, Tennessee and Valdosta, Georgia. During the third
quarter of 2003, we utilized $2.2 million of the proceeds of our initial public
offering to complete the acquisition of two hospices located in Brownsville,
Texas and Wilmington, Delaware. The remaining $0.5 million of the net proceeds
of our initial public offering will be used to finance potential acquisitions of
hospices, for the development of new hospice locations and for other general
corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 27, 2003, the following
proposals were submitted to stockholders with the following results:
1. Election of John K. Carlyle, David W. Cross and David L. Steffy to serve as
our Class II Directors until our Annual Meeting of Stockholders in 2006 and
until their respective successors are elected and qualified or until their
earlier death, resignation or removal from office.
Number of Shares
For Against Abstain
------------------------------------
John K. Carlyle 20,670,693 -- 189,515
David W. Cross 20,670,693 -- 189,515
David L. Steffy 20,670,693 -- 189,515
The following individuals are our Class I Directors, whose terms expire at
our Annual Meeting of Stockholders in 2005: Paul Feldstein and Shawn S.
Schabel. The following individuals are our Class III Directors, whose terms
expire at our Annual Meeting of Stockholders in 2004: Martin S. Rash,
Richard R. Burnham and David C. Gasmire.
2. Ratification of the selection of Ernst & Young, LLP as independent
accountants of the Company for the fiscal year ending December 31, 2003.
Number of Shares
----------------
For................... 20,438,272
Against............... 415,027
Abstain............... 6,909
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Fifth Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on
September 13, 2001)
3.2 -- Second Amended and Restated Bylaws (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (Registration No. 333-51522) as filed with the Commission on
December 8, 2000)
4.1 -- Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with
the Commission on August 2, 2001)
4.2 -- Second Amended and Restated Registration Rights Agreement,
dated July 1, 1998, by and among Odyssey HealthCare, Inc. and
the security holders named therein (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on
December 8, 2000)
4.3 -- Rights Agreement (the "Rights Agreement") dated November 5,
2001, between Odyssey HealthCare, Inc. and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A as filed with the Commission
on December 8, 2001)
4.4 -- Form of Certificate of Designation of Series A Junior
Participating Preferred Stock (included as Exhibit A to the
Rights Agreement (Exhibit 4.3 hereto))
31(a) -- Certification required by Rule 13a-14(a), dated August 13,
2003, by Richard R. Burnham, Chief Executive Officer**
31(b) -- Certification required by Rule 13a-14(a), dated August 13,
2003, by Douglas B. Cannon, Chief Financial Officer**
32 -- Certification required by Rule 13a-14(b), dated August 13,
2003, by Richard R. Burnham, Chief Executive Officer, and
Douglas B. Cannon, Chief Financial Officer**
** Filed herewith.
(b) Reports on Form 8-K:
(1) Current report on Form 8-K (Item 9), filed May 7, 2003, regarding the
issuance of a press release dated May 5, 2003, announcing the consolidated
financial condition of the Company as of March 31, 2003, the quarterly
consolidated financial results of the Company for the three months ended March
31, 2003 and updating the Company's earnings guidance for the year ending
December 31, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ODYSSEY HEALTHCARE, INC.
Date: August 13, 2003 By: /s/ Richard R. Burnham
---------------------------------------
Richard R. Burnham
Chief Executive Officer and Chairman of the Board
(Duly authorized to sign this report on
behalf of Registrant)
Date: August 13, 2003 By: /s/ Douglas B. Cannon
---------------------------------------
Douglas B. Cannon
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Chief Accounting Officer)
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Fifth Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Amendment No. 2 to Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on
September 13, 2001)
3.2 -- Second Amended and Restated Bylaws (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (Registration No. 333-51522) as filed with the Commission on
December 8, 2000)
4.1 -- Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Registration No. 333-51522) as filed with
the Commission on August 2, 2001)
4.2 -- Second Amended and Restated Registration Rights Agreement,
dated July 1, 1998, by and among Odyssey HealthCare, Inc. and
the security holders named therein (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-51522) as filed with the Commission on
December 8, 2000)
4.3 -- Rights Agreement (the "Rights Agreement") dated November 5,
2001, between Odyssey HealthCare, Inc. and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A as filed with the Commission
on December 8, 2001)
4.4 -- Form of Certificate of Designation of Series A Junior
Participating Preferred Stock (included as Exhibit A to the
Rights Agreement (Exhibit 4.3 hereto))
31(a) -- Certification required by Rule 13a-14(a), dated August 13,
2003, by Richard R. Burnham, Chief Executive Officer**
31(b) -- Certification required by Rule 13a-14(a), dated August 13,
2003, by Douglas B. Cannon, Chief Financial Officer**
32 -- Certification required by Rule 13a-14(b), dated August 13,
2003, by Richard R. Burnham, Chief Executive Officer, and
Douglas B. Cannon, Chief Financial Officer**
** FILED HEREWITH.
22