U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-24260
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AMEDISYS, INC.
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(Exact Name of Registrant as Specified in Charter)
Delaware 11-3131700
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11100 Mead Road, Suite 300, Baton Rouge, LA 70816
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(Address of principal executive offices including zip code)
(225) 292-2031
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(Registrant's telephone number, including area code)
Indicate by check mark whether the issuer (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[ ]
Number of shares of Common Stock outstanding as of November 8, 2002:
9,129,420 shares
1
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001....................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001...................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001...... 5
Notes to Consolidated Financial Statements....................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS...................................... 21
ITEM 4. CONTROLS AND PROCEDURES.......................................................................... 21
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES........................................................................... 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 22
ITEM 5. OTHER INFORMATION............................................................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 22
2
ITEM 1. FINANCIAL STATEMENTS
AMEDISYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED, DOLLAR AMOUNTS IN 000'S)
September 30, 2002 December 31, 2001
-------------------- --------------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 11,089 $ 3,515
Patient Accounts Receivable, Net of Allowance for Doubtful Accounts
of $1,793 in September 2002 and $3,125 in December 2001 14,879 23,682
Prepaid Expenses 2,168 244
Deferred Income Taxes 2,078 --
Inventory and Other Current Assets 941 822
-------------------- --------------------
Total Current Assets 31,155 28,263
Property and Equipment, net 9,006 10,290
Other Assets, net 25,543 22,301
-------------------- --------------------
Total Assets $ 65,704 $ 60,854
==================== ====================
CURRENT LIABILITIES:
Accounts Payable $ 1,945 $ 2,440
Accrued Expenses:
Payroll and Payroll Taxes 6,663 6,798
Insurance 1,561 1,881
Income Taxes 901 930
Legal Settlements 900 1,227
Other 2,026 3,082
Notes Payable 1,883 9,305
Current Portion of Long-term Debt 3,947 5,355
Current Portion of Obligations under Capital Leases 2,436 2,391
Current Portion of Medicare Liabilities 6,980 13,214
-------------------- --------------------
Total Current Liabilities 29,242 46,623
Long-term Debt 5,328 5,591
Obligations under Capital Leases 1,598 3,208
Long-term Medicare Liabilities 4,491 958
Deferred Income Taxes 1,723 --
Other Long-term Liabilities 961 1,099
-------------------- --------------------
Total Liabilities 43,343 57,479
Minority Interest in Consolidated Subsidiaries -- 66
STOCKHOLDER'S EQUITY:
Common Stock (9,086,952 Shares in September 2002 and
7,178,152 Shares in December 2001) 9 7
Additional Paid-in Capital 28,709 16,539
Treasury Stock (4,167 Shares of Common Stock in
September 2002 and December 2001) (25) (25)
Retained Earnings (Deficit) (6,332) (13,212)
-------------------- --------------------
Total Stockholder's Equity 22,361 3,309
-------------------- --------------------
Total Liabilities and Stockholder's Equity $ 65,704 $ 60,854
==================== ====================
The accompanying notes are an integral part of these consolidated
financial statements.
3
AMEDISYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, DOLLAR AMOUNTS IN 000'S, EXCEPT PER SHARE DATA)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Service revenue $ 33,066 $ 29,672 $ 97,770 $ 79,042
Cost of service revenue 15,079 13,053 43,521 34,977
------------ ------------ ------------ ------------
Gross margin 17,987 16,619 54,249 44,065
------------ ------------ ------------ ------------
General and administrative expenses:
Salaries and benefits 9,428 7,749 28,495 21,951
Other 6,157 6,308 17,394 17,621
------------ ------------ ------------ ------------
Total general and administrative expenses 15,585 14,057 45,889 39,572
------------ ------------ ------------ ------------
Operating income 2,402 2,562 8,360 4,493
Other income and expense:
Interest income 36 49 78 303
Interest expense (456) (704) (1,453) (2,214)
Other (expense) income, net (58) 71 148 167
------------ ------------ ------------ ------------
Total other expense, net (478) (584) (1,227) (1,744)
------------ ------------ ------------ ------------
Income before income taxes and discontinued
operations 1,924 1,978 7,133 2,749
Income tax expense 705 -- 253 --
------------ ------------ ------------ ------------
Income from continuing operations 1,219 1,978 6,880 2,749
Discontinued operations:
Loss from discontinued operations, net of
income taxes -- (456) -- (585)
Gain on sale of discontinued operations, net of
income taxes -- 1,056 -- 1,056
------------ ------------ ------------ ------------
Net income $ 1,219 $ 2,578 $ 6,880 $ 3,220
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,058 5,873 8,283 5,716
Basic income per common share:
Income from continuing operations $ 0.13 $ 0.34 $ 0.83 $ 0.47
Loss from discontinued operations, net of
income taxes -- (0.08) -- (0.10)
Gain on sale of discontinued operations, net of
income taxes -- 0.18 -- 0.19
------------ ------------ ------------ ------------
Net income $ 0.13 $ 0.44 $ 0.83 $ 0.56
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,594 7,934 8,843 7,812
Diluted income per common share:
Income from continuing operations $ 0.13 $ 0.25 $ 0.78 $ 0.35
Loss from discontinued operations, net of
income taxes -- (0.06) -- (0.07)
Gain on sale of discontinued operations, net
of income taxes -- 0.13 -- 0.14
------------ ------------ ------------ ------------
Net income $ 0.13 $ 0.32 $ 0.78 $ 0.42
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
AMEDISYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED, DOLLAR AMOUNTS IN 000'S)
Nine months ended
September 30, 2002 September 30, 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,880 $ 3,220
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 2,250 2,220
Provision for bad debts 2,078 1,584
Compensation expense -- 70
Gain on sale of discontinued operations -- (1,738)
Deferred income taxes (355) --
Minority interest -- 722
Deferred revenue -- (1,589)
Other (95) --
Changes in assets and liabilities:
Decrease in cash included in assets held for sale -- 20
Decrease (increase) in accounts receivable 6,724 (12,971)
(Increase) in inventory and other current assets (1,966) (510)
(Increase) in other assets (173) (49)
(Decrease) increase in accounts payable (495) 244
Increase in accrued expenses 257 3,312
(Decrease) increase in Medicare liabilities (2,701) 3,229
(Decrease) in long-term liabilities (137) --
-------------------- --------------------
Net cash provided by (used in) operating activities 12,267 (2,236)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 98 12
Purchase of property and equipment (1,005) (3,202)
Cash used in purchase acquisitions (1,875) (3,406)
Proceeds from sale of Company operations -- 1,684
Partnership distributions (66) (745)
Minority interest investment in subsidiary -- 101
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Net cash (used in) investing activities (2,848) (5,556)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on line of credit agreements (7,422) 6,503
Proceeds from issuance of notes payable and capital leases 916 624
Payments on notes payable and capital leases (5,312) (3,196)
Proceeds from private placement of stock, net 9,526 --
Proceeds from issuance of stock 447 239
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Net cash (used in) provided by financing activities (1,845) 4,170
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,574 (3,622)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,515 6,967
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,089 $ 3,345
==================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 1,351 $ 2,273
==================== ====================
Income taxes $ 817 $ 321
==================== ====================
The accompanying notes are an integral part of these
consolidated financial statements.
5
AMEDISYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Amedisys, Inc. ("Amedisys" or "the Company") is a multi-state provider
of home health care nursing services. At September 30, 2002, the Company
operated fifty-nine home care nursing offices and two corporate offices in the
southern and southeastern United States.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly the Company's
financial position at September 30, 2002, the results of operations for the
three and nine months ended September 30, 2002 and 2001, and cash flows for the
nine months ended September 30, 2002 and 2001. The results of operations for the
interim periods are not necessarily indicative of results of operations for the
entire year. These interim consolidated financial statements should be read in
conjunction with the Company's annual financial statements and related notes in
the Company's Form 10-K.
2. RECLASSIFICATION
The Company has reclassified Medicare liabilities due within one year
from a contra-asset account to a liability account in the accompanying
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.
Previously, Medicare liabilities due within one year were netted against
accounts receivable. In the accompanying balance sheets, these liabilities are
reflected as Current Portion of Medicare Liabilities.
3. REVENUE RECOGNITION
Before implementation of the Medicare Prospective Payment System
("PPS") on October 1, 2000, reimbursement for home health care services to
patients covered by the Medicare program was based on reimbursement of allowable
costs subject to certain limits. Final reimbursement was determined after
submission of annual cost reports and audits thereof by the fiscal
intermediaries.
Under PPS, the Company is paid by Medicare based on episodes of care.
An episode of care is defined as a length of care up to sixty days with multiple
continuous episodes allowed. A base episode payment is established by the
Medicare Program through federal legislation for all episodes of care ended on
or after the applicable time periods detailed below:
Period Base episode payment
------------------------------------------------ --------------------
Beginning October 1, 2000 through March 31, 2001 $2,115 per episode
April 1, 2001 through September 30, 2001 $2,264 per episode
October 1, 2001 through September 30, 2002 $2,274 per episode
October 1, 2002 through September 30, 2003 $2,159 per episode
With respect to Medicare reimbursement changes, the applicability of
the reimbursement change is dependent upon the completion date of the episode;
therefore, changes in reimbursement, both positive and negative, will impact the
financial results of the Company up to sixty days in advance of the effective
date.
The base episode payment is adjusted by applicable regulations
including, but not limited to, the following: a case mix adjuster consisting of
eighty (80) home health resource groups ("HHRG"), the applicable geographic wage
index, low utilization, intervening events and other factors. The episode
payment will be made to providers regardless of the cost to provide care. The
services covered by the episode payment include all disciplines of care, in
addition to medical supplies, within the scope of the home health benefit.
Revenue is recognized as services are provided based on the number of
patient visits performed during the reporting period and a historical weighted
average revenue per visit ("Rate"). This Rate is based on the historical average
final episode payment divided by the historical average number of visits per
episode. Episodes in progress at
6
the end of the reporting period are reviewed on a percentage of completion
basis using the historical average total number of visits per episode. The
Company further refined its Medicare revenue recognition process during this
quarter ended September 30, 2002 through an analysis of all episodes completed
from October 1, 2000 through September 30, 2002 with respect to the historical
average calculations referred to above, and intends to continue this analysis on
an ongoing basis.
4. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of
shares outstanding during the period. The following table sets forth the
computation of basic and diluted net income per common share for the three and
nine month periods ended September 30, 2002 and 2001, including the results of
discontinued operations:
In 000's, except per share amounts
-----------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Basic Net Income per Share:
Net Income $ 1,219 $ 2,578 $ 6,880 $ 3,220
============== ============== ============== ==============
Weighted Average Number of
Shares Outstanding 9,058 5,873 8,283 5,716
============== ============== ============== ==============
Net Income per Common
Share - Basic $ 0.13 $ 0.44 $ 0.83 $ 0.56
============== ============== ============== ==============
Diluted Net Income per Share:
Net Income $ 1,219 $ 2,578 $ 6,880 $ 3,220
============== ============== ============== ==============
Weighted Average Number of
Shares Outstanding 9,058 5,873 8,283 5,716
Effect of Dilutive Securities:
Stock Options 375 635 436 645
Warrants 161 260 124 250
Convertible Preferred Shares -- 1,166 -- 1,201
-------------- -------------- -------------- --------------
Average Shares - Diluted 9,594 7,934 8,843 7,812
============== ============== ============== ==============
Net Income per Common
Share - Diluted $ 0.13 $ 0.32 $ 0.78 $ 0.42
============== ============== ============== ==============
5. MEDICARE REIMBURSEMENT AND REFORM
The Company derived approximately 87% and 89% of its revenues from
continuing operations from the Medicare system for the three month periods ended
September 30, 2002 and 2001 and 88% of its revenues for both the nine month
periods ended September 30, 2002 and 2001.
On June 28, 2000, the Centers for Medicare & Medicaid Services ("CMS")
issued the final rules for PPS, in accordance with the parameters established in
the Balanced Budget Act of 1997 ("BBA"), which were effective for all
Medicare-certified home health agencies on October 1, 2000. The final
regulations establish payments based on episodes of care. An episode is defined
as a length of care up to sixty days with multiple continuous episodes allowed
under the rule. A standard episode payment was established beginning October 1,
2000 at $2,115 per episode to be adjusted by applicable regulations including,
but not limited to, the following: a case mix adjuster consisting of eighty (80)
home health resource groups ("HHRG"), the applicable geographic wage index, low
utilization, intervening events and other factors. Providers are allowed to make
a request for anticipated payment at the start of care equal to 60% of the
expected payment for the initial episode and 50% for each subsequent episode.
The remaining balance due to the provider is paid following the submission of
the final claim at the end of the episode. In contrast to the cost-based
reimbursement system whereby providers' reimbursement was limited, among other
things, to their actual costs, episode payments are made
7
to providers regardless of the cost to provide care, except with regard to
certain outlier provisions. As a result, home health agencies have the
opportunity to be profitable under this system.
In December 2000, Congress passed the Benefits Improvement and
Protection Act ("BIPA"), which provided additional funding to health care
providers. BIPA provided for the following: (i) a one-year delay in applying the
budgeted 15% reduction on payment limits, (ii) the restoration of a full home
health market basket update for episodes ended on or after April 1, 2001, and
before October 1, 2001 resulting in an expected increase in revenues of 2.2%,
(iii) a 10% increase, effective April 1, 2001 and extending for a period of
twenty four months, for home health services provided in a rural area, and (iv)
a one-time payment equal to two months of periodic interim payments ("PIP").
Effective October 1, 2001, the standard episode payment for federal
fiscal year 2002 was increased to $2,274 per episode.
The BBA legislation of 1997 called for a future reduction in home
health cost limits of 15% which was derived from projected future home health
spending at the same historical levels. This reduction has been delayed for
several years through legislation with the most recent legislative delay enacted
with BIPA as discussed above. The delay provision in BIPA expired on September
30, 2002 and the scheduled reduction was implemented for all Medicare-certified
agencies effective October 1, 2002. It was anticipated by CMS that with the
enactment of the BBA, providers would diversify their patient base by increasing
the number of low-cost beneficiaries served and thereby decreasing the effect of
the cost limits. With this assumption, CMS has estimated that a 15% reduction in
cost limits would equate to a 7% reduction in aggregate spending. Therefore, the
change to reimbursement effective October 1, 2002 will reflect a net decrease of
7%, offset by a net inflationary update of 2.1%, resulting in a decrease to
reimbursement of 5.05%. In addition to this reduction effective October 1, 2002,
the provision in BIPA whereby home health providers received a 10% increase in
reimbursement that began April, 2001 for serving patients in rural areas,
accounting for approximately 30% of the Company's patient population, is
scheduled to expire March 31, 2003.
Currently, there is legislation in various stages in both the U.S.
House of Representatives and the U.S. Senate addressing this reduction. On June
28, 2002, the House of Representatives passed H.R. 4954, the Medicare
Modernization and Prescription Drug Act of 2002, which, among other things,
called for i) the elimination of the 15% reduction scheduled for October 1,
2002, ii) the extension through January 1, 2005 of the 10% rural payment
increase currently scheduled to expire in April 2003, and iii) setting the home
health market basket update for calendar year 2003 at 2%, for calendar year 2004
at 1.1%, and for calendar year 2005 at 2.7%. On October 1, 2002, Senate Bill S.
3018, the Beneficiary Access to Care and Medicare Equity Act of 2002, was
introduced which includes the same basic provisions as H.R. 4954 detailed above.
If the payment reductions are not alleviated through federal
legislation, the Company could reflect a future decrease to service revenues
which could be material unless the Company is able to mitigate this with
increased patient admissions and/or increased episodes per patient. In the
quarter ended September 30, 2002, the Company did reflect a decrease to Medicare
revenues of approximately $422,000 for patients with 60-day episodes that
spanned past October 1, 2002 and were thus impacted by the payment reduction.
6. ACQUISITIONS
Effective March 1, 2001, the Company acquired, through its wholly owned
subsidiary Amedisys Home Health, Inc. of Alabama, certain assets and liabilities
of Seton Home Health Services, Inc. ("Seton") from Seton Health Corporation of
North Alabama associated with its operations in Mobile and Fairhope, Alabama. In
consideration for the acquired assets and liabilities, the Company paid $440,000
cash, which represents a purchase price of $475,000 less the estimated value of
accrued vacation obligations. In connection with this acquisition, the Company
recorded $448,000 of goodwill.
Effective April 6, 2001, the Company acquired, through its wholly-owned
subsidiary Amedisys Home Health, Inc. of Alabama, certain additional assets and
liabilities of Seton from Seton Health Corporation of North Alabama associated
with its operations in Birmingham, Tuscaloosa, Anniston, Greensboro, and Reform,
Alabama. In consideration for the acquired assets and liabilities, the Company
paid $2,216,000 cash, which represents a purchase price of $2,325,000 less the
value of accrued vacation obligations. In connection with this acquisition, the
Company recorded $2,235,000 of goodwill.
8
Effective June 11, 2001, the Company acquired from East Cooper
Community Hospital, Inc. certain assets and liabilities of HealthCalls
Professional Home Health Services. In consideration for the acquired assets and
liabilities, the Company paid $750,000 cash. In connection with this
acquisition, the Company recorded $726,000 in goodwill.
Effective April 1, 2002, the Company, through its wholly-owned
subsidiary Amedisys Texas, Ltd., acquired certain assets and liabilities of
Christus Spohn Home Health Services from Christus Spohn Health System
Corporation ("Christus Spohn") associated with its operations in Corpus Christi,
Texas. Of the $1,875,000 purchase price given in consideration for the acquired
assets and liabilities, the Company paid $875,000 cash at closing and executed a
promissory note in the amount of $1,000,000 bearing interest at 7% annually and
payable over a three-year term in quarterly principal and interest installments
of $93,000 beginning July 1, 2002. In connection with this acquisition, the
Company recorded $1,893,000 of goodwill in the second quarter of 2002.
Effective August 1, 2002, the Company, through its wholly-owned
subsidiary Amedisys Texas, Ltd., acquired certain assets and liabilities of
Baylor All Saints Medical Center ("Baylor") and All Care, Inc. associated with
their home health care operations in Fort Worth, Texas. The assets acquired
consisted of furniture, fixtures, and equipment; inventory; licenses and
permits, to the extent assignable, including the Medicare and Medicaid provider
numbers; and goodwill. The liabilities assigned consisted of the accrued, but
unused, paid time off of the employees as well as the obligations accruing on or
after August 1, 2002 relating to the assumed contracts and agreements. In
consideration for the acquired assets and liabilities, the Company paid
$1,000,000 cash at closing and executed a promissory note in the amount of
$200,000 for a total purchase price of $1,200,000. The promissory note, bearing
interest at 7% per annum, is payable in quarterly principal payments of $25,000,
plus accrued interest, beginning November 2002. In connection with this
acquisition, the Company recorded $1,191,000 of goodwill in the third quarter of
2002.
7. DISCONTINUED OPERATIONS
During 1999, the Company changed its strategy from providing a variety
of alternate site provider health care services to becoming a leader in home
health care nursing services. Pursuant to this strategy, the Company divested
its non-home health care nursing divisions. The Company sold its six surgery
centers and sold or closed its four infusion locations with the final sale
taking place (as described below) in September, 2001.
Effective September 7, 2001, the Company, its wholly-owned subsidiary
Amedisys Surgery Centers, L.C., its 56% owned subsidiary Hammond Surgical Care
Center, L.C. d/b/a St. Luke's SurgiCenter ("St. Luke's"), and Surgery Center of
Hammond, L.L.C. ("Surgery Center") entered into an agreement for the purchase
and sale of the operations and assets of St. Luke's, an outpatient surgery
center located in Hammond, Louisiana, to Surgery Center. The sales price of
$2,850,000 was paid at closing and distributed in the following manner:
$1,066,000 paid directly to creditors of St. Luke's relating to existing debt
obligations, $1,684,000 paid to St. Luke's, and $100,000 cash paid in September
2002 upon verification of the value of working capital transferred.
9
Summarized financial information for the discontinued operations is as
follows (in 000's):
Three Months ended Nine Months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Outpatient Surgery Division:
Service Revenue $ 564 $ 1,846
Loss from Discontinued
Operations Net of Income Taxes (456) (535)
Gain on Sale of Discontinued
Operations Net of Income Taxes 1,056 1,056
Infusion Therapy Division:
Service Revenue $ -- $ --
Loss from Discontinued Operations
Net of Income Taxes -- (50)
Total Discontinued Operations:
Service Revenue $ 564 $ 1,846
Loss from Discontinued Operations
Net of Income Taxes (456) (585)
Gain on Sale of Discontinued
Operations Net of Income Taxes 1,056 1,056
8. NOTES PAYABLE
Notes payable as of September 30, 2002 consists primarily of an
asset-based line of credit with availability, depending on collateral, of up to
$25 million with National Century Financial Enterprises, Inc. ("NCFE") and
borrowings under a revolving bank line of credit of up to $2.5 million. The $25
million asset-based line of credit, which matures June, 2005, is collateralized
by eligible accounts receivable and as of September 30, 2002 and December 31,
2001, had an outstanding balance of $1,883,000 and $8,593,000, respectively.
There was $2.9 million available under this line as of September 30, 2002 and no
amounts available as of December 31, 2001. Eligible receivables are defined as
receivables, exclusive of workers' compensation and self-pay, that are aged less
than 181 days. The effective interest rate on this line of credit was 12.37% and
11.00% for the nine months ended September 30, 2002 and the year ended December
31, 2001, respectively. Subsequent to September 30, 2002, the Company elected to
terminate this relationship with NCFE (refer to Note 17 - Subsequent Events, and
Financial Condition).
A revolving bank line of credit of $2.5 million bears interest at the
Bank One Prime Floating Rate, which was 4.75% at September 30, 2002 and December
31, 2001. At September 30, 2002, there were no amounts drawn on the bank line of
credit with $2,500,000 available. At December 31, 2001, there was $712,000 drawn
on the line of credit with $1,788,000 available.
9. LONG-TERM DEBT
Long-term debt as of September 30, 2002 consists primarily of a $6.4
million note payable to NPF Capital (an affiliate of NCFE), a $924,000 note
payable to Christus Spohn (See Note 6), a $479,000 note payable to CareSouth
Home Health Services, Inc. ("CareSouth"), a $404,000 note payable to Winter
Haven Hospital, and a $200,000 note payable to Baylor (See note 6).
The $6.4 million note to NPF Capital was restructured during June 2002
to extend the maturity to June 2005 with revised monthly principal and interest
payments of $211,000 at an interest rate equal to the prime rate, 4.75% at
10
September 30, 2002, plus 3.25%. This note is secured by substantially all of the
assets of the Company and its subsidiaries and is cross defaulted with the
asset-based facility with NCFE (See Note 8). The Company believes it is in
compliance with the terms of the note which has a balance of $6.1 million as of
November 8, 2002 (refer to Note 17 - Subsequent Events, and Financial
Condition).
The Company makes quarterly principal and interest payments of $93,000
on the $924,000 note to Christus Spohn due April 2005, monthly principal and
interest payments of $25,000 on the $479,000 note to CareSouth due May 2004,
monthly principal and interest payments of $30,000 on the $404,000 note to
Winter Haven Hospital due November 2003, and quarterly principal payments of
$25,000 plus accrued interest, beginning November 1, 2002, on the $200,000 note
to Baylor due August 2004.
10. CAPITAL LEASES
Capital leases consist primarily of a Software License Agreement with
CareSouth and an equipment lease agreement with Cisco Systems Capital
Corporation ("Cisco"). The CareSouth lease requires monthly payments of $178,000
and had an outstanding balance of $3,241,000 at September 30, 2002. This
agreement contains a bargain purchase option that the Company intends to
exercise upon expiration of the agreement in May 2004. The Cisco capital lease,
secured by equipment used currently in connection with the Company's wide-area
network, requires monthly payments of $21,000 and had a balance of $408,000 at
September 30, 2002. This lease expires July 2004.
11. AMOUNTS DUE TO MEDICARE
As of September 30, 2002, the Company estimates an aggregate payable to
Medicare of $11.5 million resulting from interim cash receipts in excess of
expected reimbursement. Included in this amount is $6.4 million, of which $4.4
million is reflected as long term, attributed to a provision in BIPA whereby a
lump-sum payment equal to two months of PIP was advanced to providers. The
fiscal year ending December 31, 2000 cost reports, which reflected the BIPA
payments, were filed in June 2002 and July 2002. In June 2002, CMS issued a
Program Memorandum granting automatic thirty-six month repayment plans for
providers who received the BIPA payment if five specific criteria are met. The
Company believes that it meets the criteria and has received formal
notifications of thirty-six month repayment plans for all of its agencies except
one, which we believe will commence no later than November 2002. Accordingly, in
the accompanying Consolidated Balance Sheet as of September 30, 2002, the
Company has classified the BIPA overpayments appropriately between Current
Portion of Medicare Liabilities and Long-term Medicare Liabilities. The amounts
due to Medicare within one year of $7.0 million are shown as Current Portion of
Medicare Liabilities and the amount payable to Medicare in excess of one year of
$4.5 million is shown as Long-term Medicare Liabilities. Included in the Current
Portion of Medicare Liabilities amount of $7.0 million is a $3.1 million
overpayment relating to Alliance Home Health, a wholly owned subsidiary of the
Company which filed for bankruptcy protection on September 29, 2000 and for
which no payments are currently being made.
During this quarter ended September 30, 2002, the Company was notified
by its Medicare fiscal intermediary of the re-opening of eight provider cost
reports for the fiscal year ending December 31, 1997 with respect to a specific
costing methodology used by the Company. The Company intends to defend its
position with respect to these cost reports for which all eight of these
provider numbers were sold or closed during the calendar year 1999. The Company
believes its reserves for Medicare settlements are adequate to cover the
possible liabilities for these re-opened cost reports and other cost reports
with no final settlement.
12. INCOME TAXES
The Company files a consolidated federal income tax return that
includes all subsidiaries that are more than 80% owned. State income tax returns
are filed individually by the subsidiaries in accordance with state statutes.
The Company uses the asset and liability approach to measuring deferred
tax assets and liabilities based on temporary differences existing at each
balance sheet date using currently enacted tax rates in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for
Income Taxes. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion of the
deferred tax assets will not be realized. As of December 31, 2001, the Company
had a recorded valuation allowance of $2,587,000. Management of the Company
determined, based on the first quarter 2002 operating results and projections
for fiscal year 2002, that it was more likely than not that the Company would be
able to use all of the previously unrecognized tax benefits. Accordingly, in the
quarter ended March 31, 2002, the Company recorded a tax benefit of $1,438,000
resulting primarily from elimination of all of the valuation allowance. For the
quarter ended June 30, 2002, the Company recorded income tax expense of
$986,000, an effective rate of 37%. For the quarter ended September 30, 2002,
the Company recorded income tax expense of $705,000, an effective rate of 37%.
11
Total income tax expense included in the accompanying Consolidated
Statements of Operations is as follows (in 000's):
Three Months ended Nine Months ended
September 30, September 30,
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Current income tax expense $ 229 $ -- $ 608 $ --
Deferred income tax expense
(benefit) 476 -- (355) --
---------- ---------- ---------- ----------
Total income tax $ 705 $ -- $ 253 $ --
========== ========== ========== ==========
Total tax expense on income before taxes resulted in effective tax
rates that differed from the federal statutory income tax rate. A reconciliation
of these rates is as follows as of September 30, 2002:
Three Months ended Nine Months ended
September 30, 2002 September 30, 2002
------------------ ------------------
Income taxes computed on federal statutory rate 35% 35%
State income taxes and other 4 2
Removal of valuation allowance -- (36)
Nondeductible expenses and other (2) 3
----------------- ------------------
Total 37% 4%
================= ==================
Net deferred tax assets consist of the following components as of
September 30, 2002 and December 31, 2001 (in 000's):
September 30, December 31,
2002 2001
------------------- ----------------
Deferred tax assets:
NOL carryforward $ - $ 1,066
Allowance for doubtful accounts 551 847
Property and equipment (20) 371
Self-insurance reserves 902 618
Losses of consolidated subsidiaries not
consolidated
for tax purposes, expiring beginning in 2010 143 144
Expenses not currently deductible for tax purposes 626 606
Other - 100
Deferred tax liabilities:
Amortization of intangible assets (1,847) (1,165)
Less: Valuation allowance - (2,587)
------------------- ----------------
$ 355 $ -
=================== ================
13. EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Statement No. 141, Business Combinations ("SFAS
141") and Financial Accounting Standards Statement No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. The purchase method of
accounting is required to be used for all business combinations initiated after
June 30, 2001. SFAS 141 also requires separate recognition of intangible assets
that meet certain criteria.
Under SFAS 142, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed for impairment annually, or more frequently if
circumstances indicate potential impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. For goodwill and indefinite-lived intangible assets acquired
prior to July 1, 2001, goodwill was amortized through 2001, at which time
12
amortization ceased and a transitional goodwill impairment test was performed.
The Company adopted SFAS 142 effective January 1, 2002. Management has evaluated
the impact of the new accounting standards on existing goodwill and other
intangible assets and has concluded that no impairment exists as of September
30, 2002. Included in general and administrative expenses in the accompanying
Consolidated Statements of Operations is goodwill amortization expense as
follows (in 000's):
Three Months ended Nine Months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- ------- ------- -------
Goodwill Amortization Expense $ -- $ 351 $ -- $ 993
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires recording the fair value of a liability
for an asset retirement obligation in the period incurred. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application permitted. Upon adoption of the standard, the Company will be
required to use a cumulative effect approach to recognize transition amounts for
any existing retirement obligation liabilities, asset retirement costs and
accumulated depreciation. The Company does not have any asset retirement
obligations; therefore, adoption of this statement will not have an effect on
the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This new statement also supersedes certain
aspects of APB 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred rather than as of the measurement date as presently required
by APB 40. Additionally, certain dispositions may now qualify for discontinued
operations treatment. The provisions of this statement are required to be
applied for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company adopted SFAS 144 effective January 1,
2002. The adoption of SFAS 144 did not have any effect on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statements No. 13 and Technical
Corrections" ("SFAS 145"). SFAS 145 provides guidance for income statement
classification of gains and losses on extinguishments of debt and accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 is effective for the Company in January
2003. The Company is evaluating the impact of SFAS 145 and believes it will not
have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant the guidance set forth in EITF Issue
No. 94-3, "Liability Recognition of Certain Employee Termination Benefits and
Other Costs to Exit an Activity". SFAS 146 is effective for the Company in
January 2003. The Company is evaluating the impact of SFAS No. 146 and believes
it will not have a material effect on the Company's financial statements.
13
14. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS 142, the Company discontinued the amortization
of goodwill effective January 1, 2002. A reconciliation of previously reported
net income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization, net of tax, follows (in 000s, except per share data):
Three Months ended Nine Months ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income, as reported $ 1,219 $ 2,578 $ 6,880 $ 3,220
Add: Goodwill amortization, net of tax -- 351 -- 993
------------- ------------- ------------- -------------
Adjusted net income $ 1,219 $ 2,929 $ 6,880 $ 4,213
============= ============= ============= =============
Basic income per share:
Reported net income $ 0.13 $ 0.44 $ 0.83 $ 0.56
Goodwill amortization -- 0.06 -- 0.18
------------- ------------- ------------- -------------
Adjusted net income $ 0.13 $ 0.50 $ 0.83 $ 0.74
============= ============= ============= =============
Diluted income per share:
Reported net income $ 0.13 $ 0.32 $ 0.78 $ 0.42
Goodwill amortization -- 0.05 -- 0.12
------------- ------------- ------------- -------------
Adjusted net income $ 0.13 $ 0.37 $ 0.78 $ 0.54
============= ============= ============= =============
Changes in the carrying amount of goodwill for the nine month period
ended September 30, 2002 are as follows (in 000s):
Balance as of December 31, 2001 $ 22,216
Goodwill acquired in the nine months ended
September 30, 2002 3,114
-------------
Balance as of September 30, 2002 $ 25,330
=============
15. PRIVATE PLACEMENT OF COMMON STOCK
On April 26, 2002, the Company completed a private placement of
1,460,000 shares of Common Stock with private investors at a price of $6.94 per
share. This placement provided net proceeds to the Company of approximately $9.5
million. The Company engaged Belle Haven Investments, L.P. ("BHI") and Sanders
Morris Harris ("Sanders") as placement agents for this transaction pursuant to
which BHI received $544,300 in cash and BHI and its principals received warrants
to purchase up to 64,500 shares of common stock exercisable at $8.12 per share
and Sanders received $15,615 in cash and warrants to purchase up to 4,500 shares
of common stock exercisable at $8.12 per share. Through September 30, 2002, the
Company has used the net proceeds i) to pay $1,560,000 of outstanding Medicare
liabilities for which the Company was paying interest at an average annual rate
of 13.75%, ii) in connection with acquisitions of $1,000,000, iii) to decrease
borrowings under its lines of credit agreements, and iv) to increase cash
balances.
14
16. STOCKHOLDERS' EQUITY
The following table summarizes the activity in Stockholders' Equity for
the nine months ended September 30, 2002 (in 000's, except share information):
Common Common Additional Retained Total
Stock Stock Paid-in Treasury Earnings Stockholders'
Shares Amount Capital Stock (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 7,178,152 $ 7 $ 16,539 $ (25) $ (13,212) $ 3,309
Issuance of stock for
Employee Stock Purchase
Plan 90,998 -- 531 -- -- 531
Issuance of stock for 401k
match 227,632 1 1,666 -- -- 1,667
Exercise of stock options 130,170 -- 447 -- -- 447
Issuance of stock relating
to private placement 1,460,000 1 9,526 -- -- 9,527
Net income -- -- -- -- 6,880 6,880
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 9,086,952 $ 9 $ 28,709 $ (25) $ (6,332) $ 22,361
============ ============ ============ ============ ============ ============
17. SUBSEQUENT EVENTS
Effective October 1, 2002, the Company, through its wholly-owned
subsidiary Amedisys Georgia, L.L.C., acquired certain assets and liabilities of
Hospital Authority of Valdosta and Lowndes County, Georgia associated with their
home health care operations in Valdosta, Georgia. The assets acquired consisted
of furniture, fixtures, and equipment; inventory; licenses and permits, to the
extent assignable, including the Medicare and Medicaid provider numbers; and
goodwill. The liabilities assumed consisted of the obligations accruing on or
after October 1, 2002 relating to the assumed contracts and agreements. In
consideration for the acquired assets and liabilities, the Company paid $250,000
cash at closing. In connection with this acquisition, the Company will record
approximately $258,000 of goodwill in the fourth quarter of 2002.
As discussed in Note 8, the Company has an asset-based borrowing
facility with NCFE who has been reported as suffering from financial
difficulties. This facility involves various subsidiaries of the Company which
sell receivables to NPF VI, Inc. ("NPF VI"), a subsidiary of NCFE, in return for
appropriate funding less any required reserves. Under this arrangement,
collections from payors are paid into 'lockbox' bank accounts and used to retire
amounts funded by NPF VI.
Due to the downgrade of bonds issued by NPF VI and the failure by NPF
VI to complete a normal funds transfer request to the Company for $3.3 million
on October 31, 2002, the Company elected to terminate the facility with NPF VI.
Amedisys, Inc. currently has no funds advanced by NPF VI through this
asset-based relationship. However, as a result of the failure by NPF VI to
forward the amount referred to above and to remit ongoing collections, including
amounts collected unrelated to receivables normally purchased by NPF VI, NPF VI
is retaining approximately $7.3 million, which is the property of Amedisys, Inc.
and its subsidiaries. Representatives of NPF VI have confirmed this amount.
The Company also has a secured Loan Agreement with NPF Capital, Inc., a
separate subsidiary of NCFE, under which the Company borrowed funds previously
for acquisition purposes. This loan currently has a balance of $6.1 million as
of November 8, 2002 with required monthly payments of principal and interest of
$211,000 through June 28, 2005 and is secured by substantially all of the assets
of the Company and its subsidiaries.
15
Amedisys, Inc. is working with legal advisors to expedite either the
return of all funds held by NPF VI, or to use those funds to prepay the $6.1
million note to NPF Capital and remit the remaining balance. The Company and its
legal advisors have been in constant communication with NCFE, NPF VI, the
Trustee for the bondholders of NPF VI, their representatives and legal advisors
since October 31, 2002. The Company is uncertain as to the ultimate resolution
of this matter and is taking appropriate action to protect its commercial
interests (see Financial Condition).
The Company believes that, due to the failure of NPF VI to comply with
the terms of the various agreements, the termination of the agreements with NPF
VI will not cause an event of default under the terms of the Promissory Note to
NPF Capital, although there is no assurance that such an event of default will
not be notified by the noteholder (see Financial Condition).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto and the related Management's Discussion and Analysis in the Company's
Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Service Revenues. Net revenues increased $3,394,000 or 11% for the
three months ended September 30, 2002 and $18,728,000 or 24% for the nine months
ended September 30, 2002, as compared to the same periods in 2001. For the three
months ended September 30, 2002 as compared to the same period in 2001, this
increase was attributed to an increase in patient admissions and the per episode
Medicare reimbursement increase effective October 1, 2001, offset by a decrease
to revenue relating to the reimbursement reduction recorded in the quarter ended
September 30, 2002 for patients seen during the quarter but with episodes ending
on or after October 1, 2002. Patient admissions increased 1,784 or 19% from
9,460 for the three months ended September 30, 2001 to 11,244 for the comparable
period of 2002. This quarter to quarter increase in admissions is comprised of
both internal growth of 15% and acquisitions with full operations during the
quarter ended September 30, 2002 of 4%. For the nine months ended September 30,
2002 as compared to the same period in 2001, the increase in service revenues
was attributed, as well, to an increase in patients admissions and the per
episode Medicare reimbursement increase effective October 1, 2001 and April 1,
2001, offset by the revenue reduction recorded relating to the decrease in
Medicare reimbursement. For the comparable nine month periods, patient
admissions increased by 5,436 or 20% from 26,980 for the nine months ended
September 30, 2001 to 32,416 for the same period of 2002. This increase in
patient admissions was comprised of both internal growth of 11% and acquisitions
completed during both the second and third quarters of 2001 and 2002 of 9%.
Cost of Revenues. Cost of revenues increased 16% and 24% for the three
and nine months ended September 30, 2002 as compared to the same periods in
2001. For the three months ended September 30, 2002 as compared to the same
period of 2001, this increase is attributable to increased expenses relating to
the clinical manager and program manager positions of $0.7 million as well as
increased field staff costs and mileage costs. For the nine month period ended
September 30, 2002, the increase in cost of revenues is attributable to an
increase in patient visits, increased salaries for the clinical manager and
program manager positions, and increased field staff costs and mileage costs.
Patient visits increased 79,617 or 11%, from 737,008 for the nine months ended
September 30, 2001 to 816,625 for the nine months ended September 30, 2002.
Salaries for the clinical manager and program manager positions for the nine
month period ended September 30, 2002, as compared to the prior year period,
increased $2.0 million. The clinical manager position was implemented
company-wide in the latter part of 2000, with full staffing completed during
2001, to provide a greater level of patient care oversight and coordination. The
program manager position was implemented company-wide during 2002 to provide a
greater level of specialty knowledge in conjunction with the Company's disease
statement management programs.
General and Administrative Expenses ("G&A"). G&A increased $1,528,000,
or 11%, for the three months ended September 30, 2002 and $6,317,000, or 16%,
for the nine months ended September 30, 2002 as compared to the same periods in
2001. As a percentage of net revenues, G&A remained constant at 47% for the
three months ended September 30, 2002 and 2001 and decreased 3% to 47% from 50%
for the nine months ended September 30, 2001, as compared to the same periods of
2002. This dollar increase from the three month period ended September 30, 2001
as
16
compared to the same period of 2002 is primarily attributed to increased G & A
for acquisitions of $470,000, increased health insurance costs of $238,000,
increased depreciation expense in connection with the installation of the
wide-area network during the latter part of 2001, and additional personnel costs
in several corporate departments including billing and information services,
offset by a decrease in goodwill amortization expense. For the nine month period
ended September 30, 2001 as compared to the same period of 2002, the increase is
primarily attributed to increased G & A for acquisitions of $1.7 million,
increased health insurance costs of $1.4 million, and the similar increases in
depreciation expense and personnel costs as noted above, offset by a decrease in
goodwill amortization expense.
Other Income and Expense. Other income and expense decreased $106,000
or 18% and $517,000 or 30% for the three and nine months ended September 30,
2002 as compared to the same periods in 2001. This decrease is primarily
attributed to lower interest expense incurred during both respective periods of
2002 attributable to lower interest-bearing Medicare cost report liabilities,
improved cash collections and corresponding decrease in funding through the
lines of credit, and a lower interest rate on the note to NPF Capital.
Income Tax Expense. Income tax expense of $705,000 and $253,000 was
recorded for the three months and nine months ended September 30, 2002. An
effective income tax rate of 37% was recorded on income before taxes during both
the three and nine month periods ended September 30, 2002. Additionally, an
income tax benefit of $2,587,000 was recorded primarily from the elimination of
all of the valuation allowance for net deferred tax assets at March 31, 2002 and
is reported in the nine month period ended September 30, 2002.
CRITICAL ACCOUNTING POLICIES
The financial statements are prepared in accordance with generally
accepted accounting principles and include amounts based on management's
judgements and estimates. These judgements and estimates are based on, among
other things, historical experience and information available from outside
sources. The critical accounting policies presented below have been discussed
with the Audit Committee as to the development and selection of the accounting
estimates used as well as the disclosures provided herein. Actual results could
differ materially from these estimates.
MEDICARE REVENUE RECOGNITION
Under PPS, the Company is paid by Medicare based on episodes of care.
An episode of care is defined as a length of care up to sixty days with multiple
continuous episodes allowed. A base episode payment is established by the
Medicare Program through federal legislation for all episodes of care ended on
or after the applicable time periods detailed below:
Period Base episode payment
------ --------------------
Beginning October 1, 2000 through March 31, 2001 $2,115 per episode
April 1, 2001 through September 30, 2001 $2,264 per episode
October 1, 2001 through September 30, 2002 $2,274 per episode
October 1, 2002 through September 30, 2003 $2,159 per episode
With respect to Medicare reimbursement changes, the applicability of
the reimbursement change is dependent upon the completion date of the episode;
therefore, changes in reimbursement, both positive and negative, will impact the
financial results of the Company up to sixty days in advance of the effective
date.
The base episode payment is adjusted by applicable regulations
including, but not limited to, the following: a case mix adjuster consisting of
eighty (80) home health resource groups ("HHRG"), the applicable geographic wage
index, low utilization, intervening events and other factors. The episode
payment will be made to providers regardless of the cost to provide care. The
services covered by the episode payment include all disciplines of care, in
addition to medical supplies, within the scope of the home health benefit.
Revenue is recognized as services are provided based on the number of
patient visits performed during the reporting period and a historical weighted
average revenue per visit ("Rate"). This Rate is based on the historical average
final episode payment divided by the historical average number of visits per
episode. Episodes in progress at the end of the reporting period are reviewed on
a percentage of completion basis using the historical average total number of
visits per episode. The Company further refined its Medicare revenue recognition
process during this quarter ended September
17
30, 2002 through an analysis of all episodes completed from October 1, 2000
through September 30, 2002 with respect to the historical average calculations
referred to above, and intends to continue this analysis on an ongoing basis.
Prior to the implementation of PPS on October 1, 2000, Medicare revenue
was based on allowable costs subject to certain limits. Final reimbursement was
determined after submission of annual cost reports and audits thereof by the
fiscal intermediaries. In 1997, Congress approved the Balanced Budget Act of
1997 (the "BBA"). The BBA established an interim payment system (the "IPS") that
provided for the lowering of reimbursement limits for home health visits until
PPS was implemented. For cost reporting periods beginning on or after October 1,
1997, Medicare-reimbursed home health agencies cost limits were determined as
the lesser of (i) their actual costs, (ii) per visit cost limits based on 105%
of median costs of freestanding home health agencies, or (iii) a per beneficiary
limit determined for each specific agency. The IPS cost limits applied to the
Company for the cost reporting period beginning January 1, 1998 and remained in
effect until October 1, 2000.
NON-MEDICARE REVENUE RECOGNITION
The Company derived approximately 12% of net service revenue from
non-Medicare payor sources for the nine months ended September 30, 2002.
Non-Medicare payor sources reimburse the Company for services provided under
both fee-for-service arrangements and capitated arrangements. Under
fee-for-service arrangements, net service revenues are recorded at the expected
realizable amount in the reporting period in which the service is provided. The
expected realizable amount is determined using the contractual reimbursement
rates on a per payor, per discipline basis if available, or historical
experience. Under capitated arrangements, net service revenues are recorded at
the predetermined monthly per member per month rate irrespective of the services
performed.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
The process for estimating the ultimate collectibility of accounts
receivable involves judgement, with the greatest subjectivity relating to
non-Medicare accounts receivable. The Company currently records an allowance for
uncollectible accounts on a percentage of revenues basis unless a specific issue
is noted, at which time an additional allowance may be recorded.
FINANCIAL CONDITION
The Company recorded operating losses and had negative cash flow for
the year ended December 31, 1999 and the first three quarters of 2000, during
which time its operations were primarily funded by the divestiture of certain
non-core assets. The significant losses and negative cash flow from operations
were largely attributable to the prior Medicare reimbursement system which was
effective from January 1, 1998 through October 1, 2000 for the Company.
Beginning in October 2000 through the end of the first quarter of 2001, the
Company reported positive cash flow and a decrease in operating losses primarily
as a result of the implementation of PPS on October 1, 2000. Beginning in the
second quarter of 2001 and through this quarter ending September 30, 2002, the
Company has reported profitability and positive cash flow due, in part, to per
episode Medicare reimbursement increases effective April 1, 2001 and October 1,
2001.
As described in Note 15, the Company completed a private placement of
common stock during April 2002 resulting in net proceeds to the Company of
approximately $9.5 million which the Company has used for both debt reduction
and acquisitions.
The Company also has certain contingencies recorded as current
liabilities in the accompanying Consolidated Balance Sheets (in accordance with
SFAS No. 5) that management does not believe will currently impact cash flow.
Also, as discussed in Note 8, the Company has available $2.5 million under the
bank line of credit which would be available to fund working capital needs.
18
The following table summarizes the Company's current contractual
obligations (in 000's):
Payments Due by Period
-------------------------------------------------------
Contractual
Obligations Total Less than 1 year 1-3 years 4-5 years
----------- ---------- ---------------- ---------- ----------
Notes Payable (Note 8) $ 1,883 $ 1,883 $ -- $ --
Long-Term Debt (Note 9) 9,275 3,947 5,328 --
Capital Lease
Obligations
(Note 10) 4,034 2,436 1,598 --
Medicare Liabilities
(Note 11) 11,471 6,980 4,491 --
---------- ---------- ---------- ----------
Total Contractual Cash
Obligations $ 26,663 $ 15,246 $ 11,417 $ --
========== ========== ========== ==========
The Company's operating activities provided $12,267,000 in cash during
the nine months ended September 30, 2002, whereas such activities used
$2,236,000 in cash during the nine months ended September 30, 2001. Cash
provided by operating activities in 2002 is primarily attributable to net income
of $6,880,000, net non-cash items such as depreciation and amortization of
$2,250,000, provision for bad debts of $2,078,000, a change in deferred tax
assets of ($355,000), other of ($95,000), and changes in assets and liabilities
of $1,509,000. Investing activities used $2,848,000 for the nine months ended
September 30, 2002, whereas such activities used $5,556,000 for the nine months
ended September 30, 2001. Cash used by investing activities in 2002 is
attributed to the purchase of property and equipment of $1,005,000, cash used in
acquisitions of $1,875,000, and partnership distributions of $66,000 offset by
proceeds from the sale of property and equipment of $98,000. Financing
activities used cash during the nine months ended September 30, 2002 of
$1,845,000, whereas such activities provided $4,170,000 during the same period
in 2001. Cash used by financing activities in 2002 is primarily attributed to
proceeds from a private placement of stock of $9,526,000, issuance of notes
payable and capital leases of $916,000, and proceeds from the issuance of stock
of $447,000, offset by repayments on line of credit agreements of $7,422,000 and
payments on notes payable and capital leases of $5,312,000.
The BBA legislation of 1997 called for a future reduction in home
health cost limits of 15% which was derived from projected future home health
spending at the same historical levels. This reduction has been delayed for
several years through legislation with the most recent legislative delay enacted
with BIPA as discussed above. The delay provision in BIPA expired on September
30, 2002 and the scheduled reduction was implemented for all Medicare-certified
agencies effective October 1, 2002. It was anticipated by CMS that with the
enactment of the BBA, providers would diversify their patient base by increasing
the number of low-cost beneficiaries served and thereby decreasing the effect of
the cost limits. With this assumption, CMS has estimated that a 15% reduction in
cost limits would equate to a 7% reduction in aggregate spending. Therefore, the
change to reimbursement effective October 1, 2002 will reflect a net decrease of
7%, offset by a net inflationary update of 2.1%, resulting in a decrease to
reimbursement of 5.05%. In addition to this reduction effective October 1, 2002,
the provision in BIPA whereby home health providers received a 10% increase in
reimbursement that began April, 2001 for serving patients in rural areas,
accounting for approximately 30% of the Company's patient population, is
scheduled to expire March 31, 2003.
Currently, there is legislation in various stages in both the U.S.
House of Representatives and the U.S. Senate addressing this reduction. On June
28, 2002, the House of Representatives passed H.R. 4954, the Medicare
Modernization and Prescription Drug Act of 2002, which, among other things,
called for i) the elimination of the 15% reduction scheduled for October 1,
2002, ii) the extension through January 1, 2005 of the 10% rural payment
increase currently scheduled to expire in April 2003, and iii) setting the home
health market basket update for calendar year 2003 at 2%, for calendar year 2004
at 1.1%, and for calendar year 2005 at 2.7%. On October 1, 2002, Senate Bill S.
3018, the Beneficiary Access to Care and Medicare Equity Act of 2002, was
introduced which includes the same basic provisions as H.R. 4954 detailed above.
If the payment reductions are not alleviated through federal
legislation, the Company could reflect a future decrease to service revenues
which could be material unless the Company is able to mitigate this with
increased patient admissions and/or increased episodes per patient. In the
quarter ended September 30, 2002, the Company did reflect a decrease to Medicare
revenues of approximately $422,000 for patients with 60-day episodes that
spanned past October 1, 2002 and were thus impacted by the payment reduction.
19
The Company has elected to terminate its asset financing facility with
NPF VI (see Note 17 - Subsequent Events) and has advised its payors that
remittances should be directed to the bank accounts of the Company rather than
bank accounts controlled by NPF VI. Provided that these remittances continue at
a level similar to that experienced over the previous nine months and that
operating income does not materially fall below the level experienced in the
most recent quarter, subject to the comments below, the Company believes that it
can continue to operate its business in a normal manner and meet its obligations
as they fall due until alternative financing can be obtained.
However, should the Company be unable to recover the $7.3 million held
by NPF VI within a reasonable timeframe or be unable to obtain alternative
financing in that time period, certain opportunities of the Company would be
constrained, such as prepayment of debt to reduce interest costs, taking
advantage of alternative financing arrangements relative to its insurance needs,
and pursuing attractive acquisition opportunities.
Further, if the scenario referred to above occurs and should there be
unexpected cash requirements, the Company may be required to obtain debt
financing, and/or sell equity securities on unfavorable terms, which could
impact the Company's reported earnings per share by either increasing interest
costs or by dilution to existing shareholders. There can be no assurance that
such action may not be necessary to ensure appropriate liquidity for the
operations of the Company (see Notes 8, 9, and 17).
During this quarter ended September 30, 2002, the Company was notified
by its Medicare fiscal intermediary of the re-opening of eight provider cost
reports for the fiscal year ending December 31, 1997 with respect to a specific
costing methodology used by the Company. The Company intends to defend its
position with respect to these cost reports for which all eight of these
provider numbers were sold or closed during the calendar year 1999. The Company
believes its reserves for Medicare settlements are adequate to cover the
possible liabilities for these re-opened cost reports and other cost reports
with no final settlement. There can be no assurance, however, that the Company
will be successful in defending its position, or that a material payment will
not be assessed by the intermediary.
Pursuant to the provisions of the federal Health Insurance Portability
and Accountability Act ("HIPAA"), covered health care providers were required to
comply with the statute's electronic Health Care Transactions and Code Sets
Requirements by October 16, 2002, or secure automatic one-year extensions to the
deadline. Prior to the regulatory deadline, the Company and its subsidiaries
secured the automatic one year extensions in accordance with the directives of
CMS. The extensions afford the Company and its subsidiaries until October 16,
2003 to attain compliance with these regulatory requirements.
In 1999, the Company discovered questionable conduct involving the
former owner of its Monroe, Louisiana, agency. The Company conducted an initial
audit (using an independent auditor) and voluntarily disclosed the
irregularities to the Department of Health and Human Services' Office of the
Inspector General. Since that time, the government has been examining the
disclosed activities and during the second quarter of 2002, a further audit of
relevant claims was initiated at the request of the government, which was
completed during the third quarter of 2002. Management believes the Company has
adequately reserved for the estimated liability associated therewith; but no
assurances can be provided that the ultimate resolution will not be materially
different than the current estimate.
From December 31, 1998 to November 9, 2000, the Company was covered by
Reliance Insurance Company of Illinois ("Reliance") for risks associated with
professional and general liability. The Company became aware of the
deteriorating stability and rating of Reliance during the latter part of 2000
and thus, secured coverage with another insurer on November 9, 2000 for
occurrences after that date. Reliance is currently in liquidation and may not be
in a position to pay or defend claims incurred by the Company during the period
stated above. The Company has several open claims relating to this period above
which it is now defending and does not believe that the ultimate resolution of
these claims will be materially different from reserves established for those
claims. The Company is unaware of, and does not expect, any material claims that
may be made based on occurrences during the period, but there is no assurance
that additional claims will not be brought against the Company relating to
incidents which occurred during the time period stated above or that any such
claims will not be material.
The Company does not believe that inflation has had a material effect
on its results of operations for the three and nine month periods ended
September 30, 2002.
20
ARTHUR ANDERSEN LLP
Our financial statements for the year ended December 31, 2001 were
audited by Arthur Andersen LLP ("Andersen"), our former independent accountants.
On June 15, 2002, a jury convicted Andersen on obstruction of justice charges
and Andersen was sentenced on October 16, 2002 to five years probation and fined
$500,000. Andersen ceased its public company audit practice at the end of August
2002. Should the Company seek access to the public capital markets in the
future, SEC rules will require us to include or incorporate by reference in any
prospectus three years of audited financial statements. Until our audited
financial statements for the fiscal year ending December 31, 2004 become
available in the first quarter of 2005, the SEC's current rules would require us
to present audited financial statements for one or more fiscal years audited by
Andersen. Before then, the SEC may cease accepting financial statements audited
by Andersen, in which case we would be unable to access the public capital
market unless KPMG LLP, our current independent accounting firm, or another
independent accounting firm, is able to audit the financial statements
originally audited by Andersen. Although the SEC has indicated that in the
interim it will continue to accept financial statements audited by Andersen,
there is no assurance that the SEC will continue to do so in the future.
FORWARD LOOKING STATEMENTS
When included in the Quarterly Report on Form 10-Q or in documents
incorporated herein by reference, the words "expects", "intends", "anticipates",
"believes", "estimates", and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, current cash flows and operating
deficits, debt service needs, adverse changes in federal and state laws relating
to the health care industry, competition, regulatory initiatives and compliance
with governmental regulations, customer preferences and various other matters,
many of which are beyond the Company's control. These forward-looking statements
speak only as of the date of the Quarterly Report on Form 10-Q. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or any changes in the Company's expectations with regard thereto or any
changes in events, conditions or circumstances on which any statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not engage in derivative financial instruments, other
financial instruments, or derivative commodity instruments for speculative or
trading/non-trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedure
(as is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act")) as of a date within 90 days before the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes
in the Company's internal controls or in other factors that could significantly
affect such controls.
PART II. OTHER INFORMATION
21
ITEM 2. CHANGES IN SECURITIES
On October 9, 2002, the Company's common stock began trading on the
Nasdaq National Market System. Previously, the Company's common stock was traded
on the Nasdaq SmallCap Market.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Identification of Exhibit
------- -------------------------
3.1(4) - Certificate of Incorporation
3.2(3) - Bylaws
4.2(1) - Common Stock Specimen
4.7(2) - Shareholder Rights Agreement
21.1(1) - List of Subsidiaries
99.1(5) - Certification of William F. Borne, Chief Executive Officer
99.2(5) - Certification of Gregory H. Browne, Chief Financial Officer
----------
(1) Previously filed as an exhibit to the Registration Statement on Form
S-3 dated March 11, 1998.
(2) Previously filed as an exhibit to the Current Report on Form 8-K dated
June 16, 2000 and the Registration Statement on Form 8-A dated June 16,
2000.
(3) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the period ended March 31, 2001.
(4) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for
the period ended March 31, 2002.
(5) Filed herewith.
----------
(b) Reports on Form 8-K
On July 18, 2002, the Company filed a Current Report on Form 8-K with
the SEC attaching a press release announcing that results for the quarter ended
June 30, 2002 will be released on August 7, 2002 with a conference call to be
held on August 8, 2002.
On August 2, 2002, the Company filed a Current Report on Form 8-K with
the SEC attaching a press release announcing that it has purchased a home care
agency in Fort Worth, Texas.
On August 6, 2002, the Company filed a Current Report on Form 8-K with
the SEC attaching a press release announcing that it has changed the previously
recorded income tax expense for the quarter ended March 31, 2002.
On August 13, 2002, the Company filed a Current Report on Form 8-K with
the SEC attaching a press release announcing operating results for the quarter
ended June 30, 2002 and announcing a conference call to be hosted.
22
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 hereunto duly authorized.
AMEDISYS, INC.
By: /s/ GREGORY H. BROWNE
-----------------------------
Gregory H. Browne
Chief Financial Officer
DATE: November 11, 2002
23
CERTIFICATION
I, William F. Borne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Amedisys, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
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 functions):
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 weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ WILLIAM F. BORNE
----------------------------
Chief Executive Officer
24
CERTIFICATION
I, Gregory H. Browne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Amedisys, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
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 functions):
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 weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ GREGORY H. BROWNE
----------------------------
Chief Financial Officer
25
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------- -------------------------
3.1(4) - Certificate of Incorporation
3.2(3) - Bylaws
4.2(1) - Common Stock Specimen
4.7(2) - Shareholder Rights Agreement
21.1(1) - List of Subsidiaries
99.1(5) - Certification of William F. Borne, Chief Executive Officer
99.2(5) - Certification of Gregory H. Browne, Chief Financial Officer