e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended June 30, 2007
OR
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| o |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-50118
VistaCare, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware
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06-1521534 |
| (State or other jurisdiction of
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|
(I.R.S. Employer Identification No.) |
| incorporation or organization) |
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4800 North Scottsdale Road,
Suite 5000
Scottsdale, Arizona
(Address of principal executive offices)
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85251
(Zip code) |
(480) 648-4545
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As
of August 6, 2007, there were outstanding 16,855,042 shares of the issuer’s Class A Common
Stock, $0.01 par value per share.
VistaCare, Inc.
Table of Contents
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
VISTACARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
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June 30, |
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September 30, |
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2007 |
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|
2006 |
|
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|
(unaudited) |
|
|
(note 1) |
|
ASSETS
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,573 |
|
|
$ |
21,583 |
|
Short-term investments |
|
|
11,550 |
|
|
|
19,148 |
|
Patient accounts receivable (net of allowance
for denials of $2,581 and $1,502 at June 30,
2007 and September 30, 2006, respectively) |
|
|
35,758 |
|
|
|
27,600 |
|
Patient accounts receivable — room & board
(net of allowance for denials of $1,013 and
$692 at June 30, 2007 and September 30, 2006,
respectively) |
|
|
7,833 |
|
|
|
9,662 |
|
Prepaid expenses and other current assets |
|
|
5,695 |
|
|
|
4,653 |
|
Tax receivable |
|
|
1,395 |
|
|
|
1,375 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
79,804 |
|
|
|
84,021 |
|
Fixed assets, net |
|
|
6,109 |
|
|
|
6,409 |
|
Goodwill |
|
|
24,002 |
|
|
|
24,002 |
|
Other assets |
|
|
2,850 |
|
|
|
5,360 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
112,765 |
|
|
$ |
119,792 |
|
|
|
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|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities: |
|
|
|
|
|
|
|
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Accounts payable |
|
$ |
834 |
|
|
$ |
2,591 |
|
Accrued expenses and other current liabilities |
|
|
24,215 |
|
|
|
28,116 |
|
Accrued Medicare Cap |
|
|
12,047 |
|
|
|
9,849 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
37,096 |
|
|
|
40,556 |
|
Deferred tax liability-non-current |
|
|
1,338 |
|
|
|
1,144 |
|
Stockholders’ equity: |
|
|
|
|
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|
Class A Common Stock, $0.01 par value;
authorized 33,000,000 shares; 16,855,043 and
16,610,500 shares issued and outstanding at
June 30, 2007 and September 30, 2006,
respectively. |
|
|
168 |
|
|
|
166 |
|
Additional paid-in capital |
|
|
112,244 |
|
|
|
110,378 |
|
Accumulated deficit |
|
|
(38,081 |
) |
|
|
(32,452 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
74,331 |
|
|
|
78,092 |
|
|
|
|
|
|
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Total liabilities and stockholders’ equity |
|
$ |
112,765 |
|
|
$ |
119,792 |
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
3
VISTACARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share information)
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Three Months Ended |
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Nine Months Ended |
|
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June 30, |
|
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June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net patient revenue |
|
$ |
59,888 |
|
|
$ |
59,914 |
|
|
$ |
179,847 |
|
|
$ |
175,475 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Patient care expenses |
|
|
41,563 |
|
|
|
38,215 |
|
|
|
121,759 |
|
|
|
111,453 |
|
Sales, general and administrative
expenses |
|
|
20,285 |
|
|
|
20,623 |
|
|
|
62,501 |
|
|
|
61,675 |
|
Depreciation |
|
|
576 |
|
|
|
636 |
|
|
|
1,783 |
|
|
|
1,875 |
|
Amortization |
|
|
275 |
|
|
|
636 |
|
|
|
904 |
|
|
|
1,935 |
|
Loss on
disposal of assets |
|
|
388 |
|
|
|
38 |
|
|
|
530 |
|
|
|
185 |
|
Gain on sale of hospice program assets |
|
|
— |
|
|
|
— |
|
|
|
(1,105 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
63,087 |
|
|
|
60,148 |
|
|
|
186,372 |
|
|
|
177,123 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating loss |
|
|
(3,199 |
) |
|
|
(234 |
) |
|
|
(6,525 |
) |
|
|
(1,648 |
) |
Non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
371 |
|
|
|
338 |
|
|
|
1,211 |
|
|
|
1,017 |
|
Other expense |
|
|
(45 |
) |
|
|
(39 |
) |
|
|
(127 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
|
|
|
|
|
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| |
Total
non-operating income, net |
|
|
326 |
|
|
|
299 |
|
|
|
1,084 |
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes |
|
|
(2,873 |
) |
|
|
65 |
|
|
|
(5,441 |
) |
|
|
(763 |
) |
Income tax (benefit) expense |
|
|
(61 |
) |
|
|
258 |
|
|
|
188 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,812 |
) |
|
$ |
(193 |
) |
|
$ |
(5,629 |
) |
|
$ |
(742 |
) |
|
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Net loss per share: |
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
Basic net loss per share |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.05 |
) |
|
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|
|
|
|
|
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|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,544 |
|
|
|
16,408 |
|
|
|
16,514 |
|
|
|
16,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
16,544 |
|
|
|
16,408 |
|
|
|
16,514 |
|
|
|
16,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
VISTACARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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|
Nine Months Ended |
|
| |
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,629 |
) |
|
$ |
(742 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,783 |
|
|
|
1,875 |
|
Amortization |
|
|
904 |
|
|
|
1,935 |
|
Share-based compensation |
|
|
1,163 |
|
|
|
1,773 |
|
Deferred income tax expense (benefit) |
|
|
194 |
|
|
|
(475 |
) |
Gain on sale of hospice program assets |
|
|
(1,105 |
) |
|
|
— |
|
Loss on disposal of assets |
|
|
530 |
|
|
|
185 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Patient accounts receivable, net |
|
|
(6,392 |
) |
|
|
(2,830 |
) |
Prepaid expenses and other |
|
|
(731 |
) |
|
|
582 |
|
Payment of Medicare Cap assessments — decrease in
accrued Medicare Cap |
|
|
(1,453 |
) |
|
|
(6,211 |
) |
Increase in accrual for Medicare Cap |
|
|
3,651 |
|
|
|
3,546 |
|
Accounts payable and accrued expenses |
|
|
(5,659 |
) |
|
|
(5,730 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(12,744 |
) |
|
|
(6,092 |
) |
Investing activities |
|
|
|
|
|
|
|
|
Short-term investments purchased |
|
|
(14,012 |
) |
|
|
(4,225 |
) |
Short-term investments sold |
|
|
21,610 |
|
|
|
3,677 |
|
Purchases of equipment |
|
|
(2,110 |
) |
|
|
(2,679 |
) |
Internally developed software expenditures |
|
|
— |
|
|
|
(357 |
) |
Proceeds from sale of hospice program assets |
|
|
1,200 |
|
|
|
— |
|
Decrease in other assets |
|
|
1,341 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
8,029 |
|
|
|
(3,577 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock from exercise of
stock options and employee stock purchase plan |
|
|
705 |
|
|
|
364 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
705 |
|
|
|
364 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(4,010 |
) |
|
|
(9,305 |
) |
Cash and cash equivalents, beginning of period |
|
|
21,583 |
|
|
|
25,962 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
17,573 |
|
|
$ |
16,657 |
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments,
end of period |
|
$ |
29,123 |
|
|
$ |
44,618 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
VistaCare, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2007
Description of Business
VistaCare, Inc. (VistaCare, Company or “we” or similar pronoun), is a Delaware corporation
providing medical care designed to address the physical, emotional, and spiritual needs of patients
with a terminal illness and the support of their family members. Hospice services are provided
predominately in the patient’s home or other residence of choice, such as a nursing home or
assisted living facility, or in a hospital or inpatient unit. VistaCare provides inpatient services
at its inpatient units and through leased beds at unrelated hospitals and skilled nursing
facilities on a per diem basis. VistaCare provides services in Alabama, Arizona, Colorado, Georgia,
Indiana, Massachusetts, New Mexico, Nevada, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas and
Utah.
The accompanying interim consolidated financial statements of VistaCare have been prepared in
conformity with U.S. generally accepted accounting principles, consistent in all material respects
with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended September
30, 2006 (“fiscal 2006”).
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include accounts of VistaCare and
its wholly owned subsidiaries: VistaCare USA, Inc., Vista Hospice Care, Inc., and FHI Health
Systems, Inc. (including its wholly-owned subsidiaries). Intercompany transactions and balances
have been eliminated in consolidation.
The balance sheet at September 30, 2006 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in VistaCare, Inc.’s Annual
Report on Form 10-K for the year ended September 30, 2006.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles 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 footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended June 30, 2007 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2007.
Certain
amounts in the prior year’s financial statements have been
reclassified to conform to the current year presentation. This has no
impact on previously reported results of operations or cash flow.
During the period, the Company experienced employee turnover in billing that has led to
deterioration in the patient accounts receivable aging and increased allowance for denials. The
Company supplemented its process for evaluating the allowance for denials by performing expanded
reviews of older aging patient accounts receivable categories than had historically been the case.
As the Company is implementing enhanced collection efforts, the Company believes the allowance for
denials is adequate in relation to the patient accounts receivable.
2. Share-Based Compensation
The Company accounts for share-based compensation transactions according to the provisions of
Statement of Financial Accounting Standards (“SFAS”) Statement No. 123(R), “Share-Based Payment”
(“SFAS No. 123(R)”), which requires companies to measure and recognize compensation expense for all
share-based payments at fair value. At June 30, 2007, the Company had two active stock option
plans, an employee plan and a non-employee director plan. Employee stock option awards are granted
at prices equal to the market value of the stock on the date of grant, and vest over a period
determined at the time the options are granted, ranging from three to seven years, and generally
have a maximum term of ten years. Non-employee director stock option awards are granted at prices
equal to the market value of the stock on the date of grant. Market value under both plans means
the closing price on the date of the grant as reported by the Nasdaq Stock Market. Each option
granted under the director’s stock plan is immediately exercisable in full and generally has a
maximum term of ten years. When options are exercised, new shares of the Company’s Class A common
stock are issued.
6
VistaCare, Inc.
Notes
to Consolidated Financial Statements (unaudited) — continued
During the current fiscal year, the Company has issued more restricted share grants than stock
options. The restricted shares are recorded as outstanding shares on the date the shares are
granted. The employee or director who is given the grant is required to perform future service in
order to receive the shares. The shares vest equally over a period determined at the time the
restricted shares are granted, ranging from one to five years, with most grants vesting over five
years. The fair value of the restricted stock grant is equal to the market value of the stock on
the date of the grant.
The fair value of each option or restricted share granted is amortized into compensation
expense on a straight-line basis between the grant date of the award and the final vesting date of
the award with 10% recorded as patient care expenses and 90% recorded as selling, general &
administrative expenses in the accompanying Consolidated Statements of Operations.
The Company estimates the fair value of all stock option awards as of the date of the grant by
applying the Black-Scholes option pricing model. The application of this valuation model involves
estimates and management judgment that impacts the calculation of compensation expense related to
the stock option awards. The key assumptions used in determining the fair value of options granted
during the nine months ended June 30, 2007 and 2006 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
Nine Months Ended |
| |
|
June 30, 2007 |
|
June 30, 2006 |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected stock price volatility |
|
|
48 |
% |
|
|
50 |
% |
Risk-free interest rate range |
|
|
4.4 |
% |
|
3.9% to 5.2% |
Expected term (in years) |
|
|
7.5 |
|
|
|
7.5 |
|
The Company historically has not paid dividends and does not anticipate paying any dividends
in the future. The expected stock price volatility is based on historical trading of the Company’s
stock. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the
date of grant. The expected term of options has been an average of the contractual terms and vesting
periods, and historical data, respectively.
A summary of stock options within the Company’s share-based compensation plans and changes for
the nine months ended June 30, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
Number of |
|
|
Average |
|
| |
|
Shares Under |
|
|
Exercise |
|
| |
|
Option |
|
|
Price |
|
Outstanding at September 30, 2006 |
|
|
2,360,977 |
|
|
$ |
15.60 |
|
Granted |
|
|
20,000 |
|
|
|
12.23 |
|
Exercised |
|
|
(102,482 |
) |
|
|
5.96 |
|
Terminated/expired |
|
|
(540,356 |
) |
|
|
19.59 |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
1,738,139 |
|
|
$ |
14.86 |
|
|
|
|
|
|
|
|
A summary of restricted stock activity within the Company’s share-based compensation plans and
changes for the nine months ended June 30, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Grant Date |
|
| Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at September 30, 2006 |
|
|
166,600 |
|
|
$ |
13.37 |
|
Granted |
|
|
168,820 |
|
|
|
10.34 |
|
Vested |
|
|
(31,600 |
) |
|
|
13.53 |
|
Forfeited |
|
|
(41,200 |
) |
|
|
12.36 |
|
|
|
|
|
|
|
|
Nonvested at June 30, 2007 |
|
|
262,620 |
|
|
$ |
11.56 |
|
|
|
|
|
|
|
|
Total compensation
costs for share-based awards for the nine months ended June 30, 2007 and
2006 were approximately $1.2 million and $1.9 million, respectively. As of June 30, 2007,
there
was $4.8 million of total unrecognized compensation cost related to
7
VistaCare, Inc.
Notes
to Consolidated Financial Statements (unaudited) — continued
nonvested share-based compensation arrangements granted under all Company plans. That cost is
expected to be recognized over a weighted-average period of 3.6 years.
SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing cash flows in the
Consolidated Statements of Cash Flow. During the nine months ended June 30, 2007 and 2006, the
Company had no excess tax benefit related to stock option exercises.
3. Accrued Expenses and Other Current Liabilities
A summary of accrued expenses and other current liabilities follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
September 30, |
|
| |
|
2007 |
|
|
2006 |
|
Patient care expenses |
|
$ |
10,335 |
|
|
$ |
10,674 |
|
Accrued administrative expenses and other current liabilities |
|
|
4,293 |
|
|
|
4,412 |
|
Salaries and payroll taxes |
|
|
2,910 |
|
|
|
5,723 |
|
Accrued workers’ compensation |
|
|
2,715 |
|
|
|
3,133 |
|
Accrued paid time-off |
|
|
2,020 |
|
|
|
2,080 |
|
Self-insured health expenses |
|
|
1,701 |
|
|
|
1,749 |
|
Accrued taxes |
|
|
241 |
|
|
|
345 |
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities |
|
$ |
24,215 |
|
|
$ |
28,116 |
|
|
|
|
|
|
|
|
4. Dilutive Securities
Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number
of shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares outstanding during the period plus the effect of
potentially dilutive securities, including outstanding warrants and employee stock options (using
the treasury stock method). The effect of potentially dilutive securities amounting to
approximately 2.0 million shares and 2.8 million shares were not included in the diluted earnings
per share calculations for the periods ended June 30, 2007 and 2006, respectively, because
inclusion of the securities are either anti-dilutive due to the Company’s loss, or do not result in
common stock equivalents based upon their strike price in relation to the market value of the
Company’s stock plus unrecognized compensation.
The following table presents the calculation of basic and diluted net loss per share (in
thousands, except per share information):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,812 |
) |
|
$ |
(193 |
) |
|
$ |
(5,629 |
) |
|
$ |
(742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net loss per share — weighted average shares |
|
|
16,544 |
|
|
|
16,408 |
|
|
|
16,514 |
|
|
|
16,387 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net loss per share — adjusted weighted
average shares and assumed conversion |
|
|
16,544 |
|
|
|
16,408 |
|
|
|
16,514 |
|
|
|
16,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss to stockholders |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.05 |
) |
Diluted net loss to stockholders |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.05 |
) |
5. Program Closures/Restructuring
During the second quarter, the Company announced restructuring plans that include
rationalization of sites, cost reductions, process improvements and organizational streamlining.
The Company’s restructuring plans call for the remaining restructuring
8
VistaCare, Inc.
Notes
to Consolidated Financial Statements (unaudited) — continued
initiatives to be phased in over an 18 month period with all initiatives implemented by
December 31, 2008, the end of the first quarter of our fiscal
year 2009. When completed, the restructuring will include the
consolidation, closure or sale of 13 sites and 2 inpatient units and reductions in force at both the Corporate Headquarters and site
locations. The Company estimates the cost of implementing these restructuring plans to
include approximately $2.3 million for lease termination payments, $1.9 million
for severance payments, $0.4 million for payment of miscellaneous site relocation expenses and $0.8
million of non-cash expense for the write off of fixed assets at
closed locations, for a total cost of $5.4 million.
The Company accounts for the costs of the restructuring in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS No. 146, a liability
for a cost associated with an exit or disposal activity is recognized at its fair value in
the period in which the liability is incurred. Generally, restructuring costs consist of
severance, lease termination payments, moving expenses and fixed asset write offs. Severance is
accrued when the amount by employee is determined, communication with the employee has occurred and
no future service is required. If future service is required, the cost of the related severance is
accrued over the future service period. Lease termination expense is accrued when an agreement has
been reached with the landlord and the site terminates operations. A
site is considered closed when patients are no longer serviced from a
particular location. Severance, early lease
termination and other restructuring costs are recorded in sales, general and administrative
expenses on the accompanying Consolidated Statements of Operations. Fixed asset write offs are
recorded in Loss on Disposal of Assets on the accompanying Consolidated Statements of
Operations. Any unpaid amounts are recorded in accrued expenses and other current liabilities on
the accompanying Consolidated Balance Sheets. The number of programs closed through June 30, 2007
follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
Nine months |
| |
|
ended June 30, |
|
ended June 30, |
| |
|
2007 |
|
2007 |
Hospice programs closed |
|
|
1 |
|
|
|
5 |
|
Inpatient units closed |
|
|
0 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total closures |
|
|
1 |
|
|
|
6 |
|
The following table summarizes total costs expensed for the restructuring program (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Nine months |
|
| |
|
ended June 30, |
|
|
ended June 30, |
|
| |
|
2007 |
|
|
2007 |
|
Severance |
|
$ |
645 |
|
|
$ |
1,164 |
|
Lease termination |
|
|
62 |
|
|
|
474 |
|
Other |
|
|
8 |
|
|
|
113 |
|
|
|
|
|
|
|
|
Total
restructuring
costs |
|
$ |
715 |
|
|
$ |
1,751 |
|
|
|
|
|
|
|
|
The following table summarizes activity related to the restructuring program accrual included
in accrued expenses and other current liabilities (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Nine months |
|
| |
|
ended June 30, |
|
|
ended June 30, |
|
| |
|
2007 |
|
|
2007 |
|
Balance at beginning of period |
|
$ |
430 |
|
|
$ |
0 |
|
Charged to sales, general &
administrative expenses |
|
|
715 |
|
|
|
1,751 |
|
Deductions |
|
|
(692 |
) |
|
|
(1,298 |
) |
|
|
|
|
|
|
|
Balance at
end of period |
|
$ |
453 |
|
|
$ |
453 |
|
|
|
|
|
|
|
|
9
VistaCare, Inc.
Notes
to Consolidated Financial Statements (unaudited) — continued
The Company closed two additional hospice programs during the fourth quarter of fiscal year
2007. The estimated cost of closing these programs, which will be charged to expense in the fourth
quarter of fiscal 2007, is expected to be approximately $0.2 million for
severance, lease termination costs and fixed asset write offs.
6. Sale of Program Assets
During October 2006, the Company completed the sale of certain operating assets of its hospice
program in the Cincinnati, Ohio market. Operating liabilities and accounts receivable were
retained as of the sale date. The sale included the Medicare provider number and current patient
census. The Company received $1.2 million in cash and recorded a gain of approximately $1.1
million from the sale, which is shown on the accompanying Consolidated Statement of Operations as a
component of operating income.
7. Debt
The Company has a $30.0 million revolving line of credit and a $20.0 million term loan
agreement (this total of $50.0 million is collectively referred to herein as the “credit
facility”). The credit facility is collateralized by a lien on substantially all of the Company’s assets. The
maturity date of the credit facility is December 22, 2009. As of June 30, 2007, there was no
balance outstanding on the revolving line of credit or on the term loan. Because of recent
operating losses, the Company is not in compliance with the credit facility’s debt service coverage
ratio covenant and would have to receive a lender waiver, which has not been requested, and
complete certain administrative procedures in order to borrow under the current terms of the credit
facility.
8. Income Tax
At the end of each interim period, the Company makes its best estimate of the effective tax
rate expected to be applicable for the full fiscal year and adjusts the quarterly rate, as
necessary. The Company had a net loss through the third quarter of fiscal 2007 and is also
expected to have a taxable loss for fiscal year 2007. Significant items affecting the difference
between the Company’s net loss for financial reporting purposes and the taxable loss include the Medicare Cap accrual, stock
option expense, amortization expense, and bad debt expense. The Company has established a full
valuation allowance on its net deferred tax asset, excluding tax deductible goodwill.
The
Company had an income tax benefit during the three months ended
June 30, 2007 and had income tax expense for the nine months
ended June 30, 2007 due to the cumulative effect of a change in
the estimated effective tax rate for the year. Certain separate
return basis state income tax expenses are no longer expected to be
incurred in 2007 which reduced the related state income tax provision
from the estimated income tax rate for the year.
9. Litigation
The Company is subject to a variety of claims and suits that arise from time to time in the
ordinary course of its business. While management currently believes that resolving all of these
matters, individually or in aggregate, will not have a material adverse impact on the Company’s
financial position or its results of operations, the litigation and other claims that the Company
faces are subject to inherent uncertainties and management’s view of these matters may change in
the future. Should an unfavorable final outcome occur, there exists the possibility of a materially
adverse impact on the Company’s financial position, results of operations and cash flows for the
period in which the effect becomes probable and reasonably estimable.
10. Recent Accounting Pronouncements
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”).
Under SFAS 159, a company may elect to measure eligible financial assets and financial liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting date. If elected, SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company is currently assessing
whether fair value accounting is appropriate for any of the Company’s eligible items and have not
yet determined the impact, if any, on its consolidated financial statements.
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We currently operate 50 hospice programs (“programs”) under 35 Medicare provider numbers
including five inpatient units, serving approximately 5,100 patients in 14 states. Hospice services
are provided predominately in the patient’s home or other residence of choice, such as a nursing
home or assisted living community, or in a hospital or inpatient unit. Inpatient services are
provided by us at our inpatient units and through leased beds at unrelated hospitals and skilled
nursing facilities on a per diem basis.
We
are in the process of developing new inpatient units in Columbus,
Georgia and San Antonio, Texas which should be opened prior to the
end of December 2007.
In order to monitor our financial performance, we prepare operating statements for each
program, inpatient unit and Sales, General & Administrative
(“SG&A”) department for each fiscal period. Management
uses the information in these
operating statements to improve the profitability of our operating units and control the cost of
our support functions. To assess performance, management monitors the following, as well as other
financial and operating statistics at the entity level and down to the individual operating unit
when applicable:
| |
• |
|
Increases or decreases in total net patient revenue compared to the same period(s) in
the prior fiscal year; |
| |
| |
• |
|
Increases or decreases in net patient revenue compared to the same period(s) in the
prior fiscal year at “comparable” programs – that is programs that have been open 12
months or longer; |
| |
| |
• |
|
Expenses, particularly payroll, as a percent of net patient revenue; |
| |
| |
• |
|
Income prior to interest, taxes, depreciation and amortization; |
| |
| |
• |
|
Medicare Cap liability; |
| |
| |
• |
|
Payment denials; |
| |
| |
• |
|
Average daily census; |
| |
| |
• |
|
Patient days; and |
| |
| |
• |
|
Admissions. |
Net patient revenue is primarily the amount we are entitled to collect for our services, which
is determined by the number of billable patient days, the level of care provided, the contracted
reimbursement rate by payor which can vary by geographic area, adjusted for estimated Medicare Cap
and estimated payment denials. Medicare reimbursements accounted for approximately 92% of our net
patient revenue during the three and nine months ended June 30, 2007. We actively monitor each of
our programs to determine when the programs have the potential to exceed the annual Medicare Cap
and attempt to institute corrective actions to avoid a Medicare Cap charge. However, when we
believe our corrective actions will not avoid a Medicare Cap charge, an estimate of the amount that
could be repaid to Medicare is booked as a reduction to net patient revenue.
Since payment for hospice services is primarily on a per diem basis, our profitability is
largely dependent on our ability to manage the expenses of providing hospice services. Expenses
are primarily categorized as patient care expenses or sales, general and administrative expenses.
Patient care expenses consist primarily of salaries, benefits, payroll taxes, contract labor and
mileage costs associated with patient care and direct patient care expenses for pharmaceuticals,
durable medical equipment, medical supplies, in-patient facilities, nursing home costs and
purchased services such as ambulance, infusion and radiology. SG&A expenses primarily include
salaries, payroll taxes, benefits and travel expenses associated with our staff not directly
involved with patient care, bonuses for all employees, marketing, office leases, professional
services and use taxes. Expenses are controlled through a budgeting process by which managers are
expected to meet the established benchmarks. Approved budgets may be adjusted as changes in net
patient revenue or other circumstances warrant.
Because
we were not meeting our profit objectives, we announced restructuring plans that
include rationalization of sites, cost reductions, process improvements and organizational
streamlining. We began our restructuring efforts in the second quarter of fiscal year 2007 and our
plans call for the remaining restructuring initiatives to be phased in over an 18 month period with
all initiatives implemented by December 31, 2008, the end of the first quarter of our 2009 fiscal year. When
completed, the restructuring plans will include the consolidation,
closure or sale of 13 sites and
2 inpatient units and reductions in force at both the Corporate Headquarters and site locations. We
anticipate the benefit from these cost cutting measures to result in approximately $45.0 million in
annualized gross cost savings which will be partially offset by reductions in revenue of
approximately $16.0 million due to site consolidations,
11
closures
or sales resulting in annual net savings of approximately $29.0 million. We estimate the cost of implementing these restructuring plans to be approximately $5.4 million
including $2.3 million for lease termination payments, $1.9 million for severance payments, $0.4
million for payment of miscellaneous site relocation expenses and $0.8 million of non-cash expense
for the write off of fixed assets at closed locations. The number of programs closed through June
30, 2007 follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
Nine months |
| |
|
ended June 30, |
|
ended June 30, |
| |
|
2007 |
|
2007 |
Hospice programs closed |
|
|
1 |
|
|
|
5 |
|
Inpatient units closed |
|
|
0 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total closures |
|
|
1 |
|
|
|
6 |
|
The following table summarizes total costs expensed for the restructuring program (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Nine months |
|
| |
|
ended June 30, |
|
|
ended June 30, |
|
| |
|
2007 |
|
|
2007 |
|
Severance |
|
$ |
645 |
|
|
$ |
1,164 |
|
Lease termination |
|
|
62 |
|
|
|
474 |
|
Other |
|
|
8 |
|
|
|
113 |
|
|
|
|
|
|
|
|
Total restructuring costs |
|
$ |
715 |
|
|
$ |
1,751 |
|
|
|
|
|
|
|
|
The following table summarizes activity related to the restructuring program accrual included
in accrued expenses and other current liabilities (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Nine months |
|
| |
|
ended June 30, |
|
|
ended June 30, |
|
| |
|
2007 |
|
|
2007 |
|
Balance at beginning of period |
|
$ |
430 |
|
|
$ |
0 |
|
Charged to sales, general &
administrative expenses |
|
|
715 |
|
|
|
1,751 |
|
Deductions |
|
|
(692 |
) |
|
|
(1,298 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
453 |
|
|
$ |
453 |
|
|
|
|
|
|
|
|
The Company closed two additional hospice programs during the fourth quarter of fiscal year
2007. The estimated cost of closing these programs, which will be charged to expense in the fourth
quarter of fiscal 2007, is expected to be approximately $0.2 million for severance, lease
termination costs and fixed asset write offs.
12
Definition of Terms
As used in this report, the terms listed below have the meanings as indicated.
Admissions: New admissions including re-admissions.
Average daily census (“ADC”): Total patient days for all patients divided by the number of days
during the period.
Average length of stay: Total days of care for patients discharged during the period divided by the
total patients discharged.
Discharges: Total patients deceased or discharged from service.
Ending census: All patients served on last day of period.
Inpatient days: Total patient days in an acute care facility (hospital based or company owned) at
general inpatient level of care.
Inpatient unit: Patient care provided in a hospital or other facility when pain and other symptoms
cannot be managed effectively in a home setting. In the inpatient units we operate, we care for our
own patients and a limited number of other hospice providers’ patients. In some of our programs we
contract with other inpatient units to provide care for our patients.
Median
length of stay: The midpoint of the total days of service
provided to patients that were discharged
during the period.
Medicare Cap: The limitation on overall aggregate payments made to a hospice for services provided
to Medicare beneficiaries during a Cap period that begins November 1 and ends October 31 each year,
assessed on an individual provider number basis.
Medicare Cap calculation: A calculation made by our Medicare fiscal intermediary pursuant to
applicable Medicare regulations to determine whether a hospice provider received any payment in
excess of the Medicare Cap. The total Medicare payments received under a given provider number for
services provided to all Medicare hospice care beneficiaries served within the provider number
between each November 1 and October 31 is determined (“Total Payments”). The number of Medicare
beneficiaries admitted (adjusted for the portion of time served by another provider “pro-ration”)
at each hospice provider between September 28 of each year and September 27 of the following year
is determined (“Beneficiaries”). The number of Beneficiaries is multiplied by the per beneficiary
Cap amount for the applicable Cap period (“Cap Amount”). If the Total Payments are greater than the
Cap Amount, the provider must refund the difference.
Patient day: A day we provide service to a patient.
Program: A separate hospice location operated under the same management as other company hospices.
Provider number: Unique identifiers assigned by Medicare and Medicaid to their providers. Multiple
locations can share the same Medicare provider number.
13
VISTACARE, INC.
HIGHLIGHTS
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Twelve Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
| |
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
September 30, 2006 |
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
Patient Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Census (ADC) |
|
|
5,089 |
|
|
|
5,213 |
|
|
|
5,218 |
|
|
|
5,109 |
|
|
|
5,206 |
|
Ending census on last day of period |
|
|
5,137 |
|
|
|
5,265 |
|
|
|
5,256 |
|
|
|
5,137 |
|
|
|
5,265 |
|
Patient days |
|
|
463,060 |
|
|
|
474,408 |
|
|
|
1,904,667 |
|
|
|
1,394,834 |
|
|
|
1,421,375 |
|
In-patient days (general in-patient) |
|
|
7,533 |
|
|
|
5,681 |
|
|
|
21,753 |
|
|
|
20,217 |
|
|
|
15,638 |
|
Admissions |
|
|
4,252 |
|
|
|
4,368 |
|
|
|
17,006 |
|
|
|
12,628 |
|
|
|
12,932 |
|
Diagnosis mix of admitted patients: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancer |
|
|
32 |
% |
|
|
32 |
% |
|
|
32 |
% |
|
|
32 |
% |
|
|
31 |
% |
Alzheimers/Dementia |
|
|
12 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
13 |
% |
|
|
13 |
% |
Heart disease |
|
|
17 |
% |
|
|
19 |
% |
|
|
19 |
% |
|
|
17 |
% |
|
|
19 |
% |
Respiratory |
|
|
8 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
Failure to thrive/Rapid decline |
|
|
23 |
% |
|
|
22 |
% |
|
|
21 |
% |
|
|
22 |
% |
|
|
21 |
% |
All other |
|
|
8 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
Discharges |
|
|
4,233 |
|
|
|
4,289 |
|
|
|
17,233 |
|
|
|
12,732 |
|
|
|
13,150 |
|
Average length of stay on discharged patients |
|
|
110 |
|
|
|
109 |
|
|
|
110 |
|
|
|
111 |
|
|
|
112 |
|
Median length of stay on discharged patients |
|
|
27 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program site Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programs |
|
|
50 |
|
|
|
57 |
|
|
|
56 |
|
|
|
50 |
|
|
|
57 |
|
In-patient units (included within a program) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Medicare provider numbers |
|
|
35 |
|
|
|
37 |
|
|
|
37 |
|
|
|
35 |
|
|
|
37 |
|
Programs by ADC size |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-60 ADC |
|
|
15 |
|
|
|
22 |
|
|
|
23 |
|
|
|
15 |
|
|
|
22 |
|
61-100 ADC |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
15 |
|
|
|
16 |
|
101-200 ADC |
|
|
14 |
|
|
|
14 |
|
|
|
13 |
|
|
|
15 |
|
|
|
14 |
|
201+ ADC |
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
Net patient revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue (in millions) |
|
$ |
59.9 |
|
|
$ |
59.9 |
|
|
$ |
236.0 |
|
|
$ |
179.9 |
|
|
$ |
175.5 |
|
Net patient revenue per day of care |
|
$ |
129 |
|
|
$ |
126 |
|
|
$ |
124 |
|
|
$ |
129 |
|
|
$ |
123 |
|
Patient revenue payor % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
92.3 |
% |
|
|
92.5 |
% |
|
|
92.2 |
% |
|
|
92.3 |
% |
|
|
92.5 |
% |
Medicaid |
|
|
4.1 |
% |
|
|
4.5 |
% |
|
|
4.4 |
% |
|
|
4.2 |
% |
|
|
4.5 |
% |
Private insurers and managed care |
|
|
3.6 |
% |
|
|
3.0 |
% |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
3.0 |
% |
Level of care % of patient revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care |
|
|
92.2 |
% |
|
|
93.9 |
% |
|
|
94.1 |
% |
|
|
93.1 |
% |
|
|
94.7 |
% |
General in-patient care |
|
|
6.8 |
% |
|
|
5.0 |
% |
|
|
4.9 |
% |
|
|
6.0 |
% |
|
|
4.3 |
% |
Continuous home care |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
0.8 |
% |
|
|
0.7 |
% |
|
|
0.8 |
% |
Respite in-patient care |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Level of care base Medicare per diem
reimbursement rates in effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care |
|
$ |
130.79 |
|
|
$ |
126.49 |
|
|
$ |
126.49 |
|
|
$ |
130.79 |
|
|
$ |
126.49 |
|
General in-patient care |
|
$ |
581.82 |
|
|
$ |
562.69 |
|
|
$ |
562.69 |
|
|
$ |
581.82 |
|
|
$ |
562.69 |
|
Continuous home care |
|
$ |
763.36 |
|
|
$ |
738.26 |
|
|
$ |
738.26 |
|
|
$ |
763.36 |
|
|
$ |
738.26 |
|
Respite in-patient care |
|
$ |
135.30 |
|
|
$ |
130.85 |
|
|
$ |
130.85 |
|
|
$ |
135.30 |
|
|
$ |
130.85 |
|
Increase in base rates |
|
|
3.4 |
% |
|
|
3.7 |
% |
|
|
3.7 |
% |
|
|
3.4 |
% |
|
|
3.7 |
% |
Hospice Medicare Cap per beneficiary |
|
$ |
21,410 |
|
|
$ |
20,585 |
|
|
$ |
20,585 |
|
|
$ |
21,410 |
|
|
$ |
20,585 |
|
Accrued Medicare Cap liability (in millions) |
|
$ |
12.0 |
|
|
$ |
15.4 |
|
|
$ |
9.8 |
|
|
$ |
12.0 |
|
|
$ |
15.4 |
|
Est. Med Cap reduct to patient rev. (in millions) |
|
$ |
1.0 |
|
|
$ |
1.2 |
|
|
$ |
6.8 |
|
|
$ |
3.7 |
|
|
$ |
3.5 |
|
Medicare Cap paid (in millions) |
|
$ |
1.3 |
|
|
$ |
0.1 |
|
|
$ |
15.0 |
|
|
$ |
1.5 |
|
|
$ |
6.2 |
|
Allowance for denials reserve (in millions) |
|
$ |
3.6 |
|
|
$ |
2.7 |
|
|
$ |
2.2 |
|
|
$ |
3.6 |
|
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing home expenses |
|
$ |
12.6 |
|
|
$ |
12.0 |
|
|
$ |
48.8 |
|
|
$ |
36.8 |
|
|
$ |
35.6 |
|
Nursing home revenues |
|
$ |
(10.8 |
) |
|
$ |
(11.0 |
) |
|
$ |
(44.4 |
) |
|
$ |
(32.1 |
) |
|
$ |
(33.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing home costs, net |
|
$ |
1.8 |
|
|
$ |
1.0 |
|
|
$ |
4.4 |
|
|
$ |
4.7 |
|
|
$ |
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table sets forth selected consolidated financial information as a percentage of
net patient revenue for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Nine Months Ended |
| |
|
June 30, |
|
June 30, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net patient revenue |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient care expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and payroll taxes |
|
|
45.7 |
% |
|
|
42.4 |
% |
|
|
44.6 |
% |
|
|
41.3 |
% |
Pharmaceuticals |
|
|
5.2 |
% |
|
|
5.0 |
% |
|
|
5.3 |
% |
|
|
4.9 |
% |
Durable medical equipment |
|
|
4.7 |
% |
|
|
4.7 |
% |
|
|
4.6 |
% |
|
|
4.8 |
% |
Other (including in-patient arrangements, nursing home
costs, net, purchased services, travel and supplies) |
|
|
13.8 |
% |
|
|
11.7 |
% |
|
|
13.2 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total patient care expenses |
|
|
69.4 |
% |
|
|
63.8 |
% |
|
|
67.7 |
% |
|
|
63.5 |
% |
Sales, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and payroll taxes |
|
|
19.9 |
% |
|
|
21.1 |
% |
|
|
20.4 |
% |
|
|
20.5 |
% |
Office leases |
|
|
2.8 |
% |
|
|
2.8 |
% |
|
|
3.0 |
% |
|
|
2.9 |
% |
Other (including severance, travel, marketing and charitable
contributions) |
|
|
11.2 |
% |
|
|
10.5 |
% |
|
|
11.4 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales, general and administrative expenses |
|
|
33.9 |
% |
|
|
34.4 |
% |
|
|
34.8 |
% |
|
|
35.1 |
% |
Depreciation and amortization |
|
|
1.4 |
% |
|
|
2.1 |
% |
|
|
1.4 |
% |
|
|
2.2 |
% |
Loss on
disposal of assets |
|
|
0.6 |
% |
|
|
0.1 |
% |
|
|
0.3 |
% |
|
|
0.1 |
% |
Gain on sale of hospice program assets |
|
|
— |
|
|
|
— |
|
|
|
0.6 |
% |
|
|
— |
|
Operating loss |
|
|
(5.3 |
)% |
|
|
(0.4 |
)% |
|
|
(3.6 |
)% |
|
|
(0.9 |
)% |
Non-operating income |
|
|
0.5 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
0.5 |
% |
Income tax (benefit) expense |
|
|
(0.1 |
)% |
|
|
0.4 |
% |
|
|
0.1 |
% |
|
|
(0.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(4.7 |
)% |
|
|
(0.3 |
)% |
|
|
(3.1 |
)% |
|
|
(0.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007, Compared to Three Months Ended June 30, 2006
Net Patient Revenue
Net patient revenue was unchanged at $59.9 million for the three months ended June 30, 2007
and 2006, respectively. Net patient revenue per day of care increased to approximately $129 per
day for the three months ended June 30, 2007 from approximately $126 per day for the three months
ended June 30, 2006. Net patient revenue was positively impacted by:
| |
• |
|
Medicare reimbursement rate increase of 3.4% effective October 1, 2006; and |
| |
| |
• |
|
an increase in inpatient days, which have a high per diem rate, to 7,533 days for the three months ended June 30,
2007, from 5,681 days for the three months ended June 30, 2006.
|
| |
| Net patient revenue was negatively impacted by: |
| |
• |
|
A $1.3 million increase in our allowance for denials. The allowance increase was due to an increase in our
accounts receivable and the age of our billed and unbilled accounts receivable. Although we review all accounts
receivable to determine if they can be collected, our methodology tends to increase the allowance as the accounts
receivable age; |
| |
• |
|
a reduction in the number of hospice programs to 50 as of June 30, 2007 from 57 as of June 30, 2006; and |
| |
• |
|
a decrease in ADC of 124 for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. |
We are subject to Medicare Cap limits based on the total amount of Medicare payments that will
be made to each of our provider numbers. We actively monitor each of our programs, by provider
number, as to their program specific admission, discharge rate and average length of stay data in
an attempt to determine whether they have the potential to exceed the annual Medicare Cap. When we
determine that a provider number has the potential to exceed the annual Medicare Cap based upon
trends, we attempt to institute corrective action, such as a change in patient mix or increase in
patient admissions. However, to the extent we believe our corrective action will not avoid a
Medicare Cap charge, we estimate the amount that we could be required to repay Medicare following
the end
15
of the Medicare Cap year, and accrue that amount in proportion to the number of months that
have elapsed in the Medicare Cap year as a reduction to net patient revenue.
We recorded reductions to net patient revenue of $1.0 million and $1.2 million for the three
months ended June 30, 2007 and 2006, respectively, for the estimated cost of exceeding the annual
Medicare Cap. The $1.0 million reduction to net patient revenue for Medicare Cap for the three
months ended June 30, 2007 adjusts our year to date Medicare Cap expense to $3.7 million or 75% of
the total estimated accrual for patient service dates during 2007, including pro-ration for
estimated services that these 2007 patients may receive from other hospice programs. Our Medicare
Cap liability accrual as of June 30, 2007 and September 30, 2006, was $12.0 million and $9.8
million, respectively.
We also record reductions to net patient revenue for estimated payment denials, contractual
adjustments (such as differences in payments by commercial payors) and subsequent changes to
initial level of care determinations (made retroactively by VistaCare staff after initial
admission). We recorded reductions to net patient revenue for these types of adjustments of $1.1
million for the three months ended June 30, 2007 and an increase to net patient revenue of $0.2
million for these types of adjustments in the three months ended June 30, 2006. The allowance
increase was due to an increase in our accounts receivable and the age of our billed and unbilled
accounts receivable. Although we review all accounts receivables to determine if they can be
collected, our methodology tends to increase the allowance as the accounts receivable age. Our
allowance for denials on patient accounts receivable and room and board as of June 30, 2007 and
September 30, 2006 is $3.6 million and $2.2 million, respectively.
Patient Care Expenses
Patient care expenses increased $3.4 million, or 8.9%, to $41.6 million for the three months
ended June 30, 2007 from $38.2 million for the three months ended June 30, 2006. As a percentage of
net patient revenue, patient care expenses increased to 69.4% for the three months ended June 30,
2007 from 63.8% for the three months ended June 30, 2006.
Patient care salary expense increased $1.3 million for the three months ended June 30, 2007 as
compared to the three months ended June 30, 2006 due mainly to wage increases and hiring additional
patient care staff to enable us to continue providing high quality patient care. Health insurance
costs increased $0.4 million and worker’s compensation costs increased $0.3 million when compared
to the same quarter in the prior year primarily due to increasing claims. Pharmaceutical expense
increased $0.1 million when compared to the three months ended June 30, 2006 mainly due to price
increases. Mileage increased $0.2 million when compared to the quarter ended June 30, 2006 mainly
due to an increase in the mileage reimbursement rate.
Another factor affecting patient care expenses was an increase in net room and board expenses
of $0.8 million for the three months ended June 30, 2007 as compared to the three months ended June
30, 2006. Nursing home revenue decreased by approximately $0.2 million to $10.8 million for the
three months ended June 30, 2007 from $11.0 million for the three months ended June 30, 2006.
Nursing home expenses totaled approximately $12.6 million and $12.0 million for the three months
ended June 30, 2007 and 2006, respectively. Nursing home costs, net were $1.8 million and $1.0
million for the three months ended June 30, 2007 and 2006, respectively.
Sales, General and Administrative Expenses
Sales, general and administrative (“SG&A”) expenses decreased $0.3 million, or 1.5%, to $20.3
million for the three months ended June 30, 2007 from $20.6 million for the three months ended June
30, 2006. As a percentage of net patient revenue, SG&A expenses decreased to 33.9% for the three
months ended June 30, 2007 from 34.4% for the three months ended June 30, 2006.
SG&A expense was impacted during the quarter by implementation of our restructuring plans.
Salary expense decreased $0.5 million when compared to the quarter ended June 30, 2006 primarily
due to reductions in force implemented as part of our restructuring. Severance expense for the
period increased $0.3 million over the same quarter last year also due to our reductions in force.
In the quarter ended June 30, 2007, stock compensation expense decreased $0.6 million when compared
to the same quarter last year due to reductions in force and the change in our compensation
philosophy to reduce stock grants. Expense for outside consultants increased $0.4 million over the
quarter ended June 30, 2006 primarily due to our need for temporary help. Worker’s compensation
costs increased $0.2 million when compared to the same quarter in the prior year primarily due to
increasing claims.
Loss on Disposal of Assets
In the quarter ended June 30, 2007 we wrote off $0.4 million of internally developed software that had become obsolete.
Income Tax
We record income taxes under the liability method as required by Financial Accounting
Standards Board Statement No. 109,
16
Accounting for Income Taxes. Due to our recent operating losses, we recorded a full valuation
allowance which was equal to our deferred tax assets, less the deferred tax liabilities expected to
reverse and become taxable income, excluding tax deductible goodwill.
For the three months ended June 30, 2007, we had an income tax benefit of $0.1 million as
compared to an income tax expense of $0.3 million for the three months ended June 30, 2006. Since
we have a full valuation allowance established on our net deferred tax assets, with the exception
of indefinite life tax deductible goodwill, our fiscal 2007 tax provision consists of state taxes
where loss carry forwards do not exist, a benefit from a state net operating loss carry back and
increases to our tax deductible goodwill deferred tax liability. In
the quarter ended June 30, 2006 we had not established a
valuation allowance.
Nine months ended June 30, 2007, Compared to Nine months ended June 30, 2006
Net Patient Revenue
Net patient revenue increased $4.4 million, or 2.5%, to $179.9 million for the nine months
ended June 30, 2007, as compared to $175.5 million for the nine months ended June 30, 2006. Net
patient revenue per day of care increased to approximately $129 per day for the nine months ended
June 30, 2007 from approximately $123 per day for the nine months ended June 30, 2006. Overall
increases in net patient revenue were due to:
| |
• |
|
Medicare reimbursement rate increase of 3.4% effective October 1, 2006; and |
| |
| |
• |
|
an increase in inpatient days, which have a high per diem rate, to 20,217 days for the nine months ended June 30, 2007,
from 15,638 days for the nine months ended June 30, 2006. |
These increases were partially offset by:
| |
• |
|
A $0.8 million increase in our allowance for denials. The allowance increase was due to
an increase in our accounts receivable and the age of our billed and unbilled accounts
receivable. Although we review all accounts receivable to determine if they can be
collected, our methodology tends to increase the allowance as the accounts receivable age; |
| |
| |
• |
|
a reduction in the number of hospice programs to 50 as of June 30, 2007 from 57 as of June 30, 2006; and |
| |
| |
• |
|
a decrease in ADC of 97 for the nine months ended June 30, 2007 compared to the nine months ended June 30, 2006. |
We recorded reductions to net patient revenue of approximately $3.7 million and $3.5 million
for the nine months ended June 30, 2007 and 2006, respectively, for the estimated cost of exceeding
the annual Medicare Cap limit. The $3.7 million reduction to net patient revenue for Medicare Cap
for the nine months ended June 30, 2007 represents 75% of the total estimated accrual for patient
service dates during 2007, including pro-ration for estimated services that these 2007 patients may
receive from other hospice programs. Our Medicare Cap liability accrual as of June 30, 2007 and
September 30, 2006, was $12.0 million and $9.8 million, respectively.
We also record reductions to net patient revenue for estimated payment denials, contractual
adjustments (such as differences in payments by commercial payors) and subsequent changes to
initial level of care determinations (made retroactively by VistaCare staff after initial
admission). We recorded reductions to net patient revenue for these types of adjustments of $2.4
million and $1.5 million for the nine months ended June 30, 2007 and 2006, respectively. The
allowance increase was due to an increase in our accounts receivable and the age of our billed and
unbilled accounts receivable. Although we review all accounts receivable to determine if they can
be collected, our methodology tends to increase the allowance as the accounts receivable age. Our
allowance for denials on patient accounts receivable and room and board as of June 30, 2007 and
September 30, 2006 is $3.6 million and $2.2 million, respectively.
Patient Care Expenses
Patient care expenses increased $10.3 million, or 9.2%, to $121.8 million for the nine months
ended June 30, 2007 from $111.5 million for the nine months ended June 30, 2006. As a percentage of
net patient revenue, patient care expenses increased to 67.7% for the nine months ended June 30,
2007 from 63.5% for the nine months ended June 30, 2006.
Patient care salary expense increased $5.0 million for the nine months ended June 30, 2007 as
compared to the nine months ended
17
June 30, 2006 due in part to wage increases and hiring additional patient care staff to enable
us to continue providing high quality patient care. Salary expense was negatively affected by
excess costs associated with revamping the Indiana programs following last year’s decertification
and the operation of three new inpatient units for the entire nine month period. Inpatient units
have higher salary expense than hospice home care programs. Health insurance costs increased $2.0
million as compared to the same nine month period in the prior year primarily due to increasing
claims. Pharmaceutical expense increased $0.9 million in the nine months ended June 30, 2007 when
compared to the nine months ended June 30, 2006 mainly due to price increases and an increase in
GIP days which have a higher pharmacy cost per day.
Another
factor impacting patient care expenses was an increase in net room and board expenses
of $2.2 million for the nine months ended June 30, 2007 as compared to the nine months ended June
30, 2006. Nursing home revenue decreased by approximately $1.0 million to $32.1 million for the
nine months ended June 30, 2007 from $33.1 million for the nine months ended June 30, 2006.
Nursing home expenses totaled approximately $36.8 million for the nine months ended June 30, 2007
as compared to $35.6 million for the nine months ended June 30, 2006. Nursing home costs, net were
$4.7 million and $2.5 million for the nine months ended June 30, 2007 and 2006, respectively.
Sales, General and Administrative Expenses
SG&A expenses increased $0.8 million, or 1.3%, to $62.5 million for the nine months ended June
30, 2007 from $61.7 million for the nine months ended June 30, 2006. As a percentage of net
patient revenue, SG&A expenses decreased to 34.8% for the nine months ended June 30, 2007 from
35.1% for the nine months ended June 30, 2006.
Salary expense increased $0.3 million when compared to the nine month period ended June 30,
2006 primarily due to cost increases however the increase over last year has declined and should
continue to decline due to the reductions in force that we have instituted as part of our
restructuring efforts. Severance expense related to our restructuring was $0.7 million for the
nine month period ended June 30, 2007 while lease buyout expense for programs closed in the
restructuring totaled $0.4 million. These increases were offset by a reduction of $0.7 million for
stock compensation expense, due in part to our reductions in force and the change in our
compensation philosophy to reduce stock grants, a $0.2 million reduction in relocation expense and
a $0.4 million reduction in bonus expense due to lower anticipated bonus payouts.
Loss on Disposal of Assets
In the nine months ended June 30,2007 we wrote off $0.4 million of internally developed software that had become obsolete.
Gain on Sale of Program Assets
We recorded a $1.1 million gain on the sale of certain operating assets of our Cincinnati,
Ohio program during the nine months ended June 30, 2007. No such asset sales occurred in the nine
months ended June 30, 2006.
Income Tax
For the nine months ended June 30, 2007, our income tax expense was $0.2 million as compared
to a tax benefit of $21,000 for the nine months ended June 30, 2006. Since we have a full
valuation allowance established on our net deferred tax assets, excluding tax deductible goodwill,
our fiscal 2007 tax provision consists of state taxes where loss carry forwards do not exist, a
benefit from a state net operating loss carry back and increases to our tax deductible goodwill
deferred tax liability.
Liquidity and Capital Resources
We expect that our principal liquidity requirements will be for working capital, the
development of new hospice programs, the development of new inpatient units, the acquisition of
other hospice programs and capital expenditures. Other than working capital needs, these
expenditures are at our election and we do not currently have material commitments for expenditures
in these areas. Based on our current working capital requirements and existing capital
commitments, we expect that our existing funds and cash flows from operations will be sufficient to
fund our principal liquidity requirements for at least the next twelve months. Our future liquidity
requirements and the adequacy of our available funds will depend on many factors, including payment
for our services, regulatory changes and compliance with new regulations, expense levels, future
development of new hospice programs, future development of new inpatient units, acquisitions of
other hospice programs and capital expenditures.
Because
we were not meeting our profit objectives, we began a restructuring effort in the
second quarter of fiscal year 2007 that will be phased in over an 18 month period with all
restructuring initiatives implemented by December 31, 2008, the
end of the first quarter of our 2009 fiscal
year. We anticipate the benefit from this restructuring effort to result in approximately $45.0
million in annualized gross cost savings which will be partially offset by reductions in revenue of
approximately $16.0 million due to site consolidations,
18
closures or sales resulting in annual net savings of approximately $29.0 million. Currently,
we estimate our future cash outlays to be approximately $3.4 million to implement these
initiatives. We anticipate all costs to be paid by June 30,
2008, the end of the third quarter of our fiscal
year 2008.
Our accounts receivable have increased and our cash has decreased when compared to the
balances at year end September 30, 2006 due mainly to the timing of payments from Medicare. We
have received Medicare Additional Development Requests (ADR) from our third party intermediary
Palmetto GBA. These periodic standard requests for additional information on selected claims
delay payment on the listed claims and all subsequent claims. After Palmetto GBA reviews the
additional information provided, these claims and future claims will be paid under normal payment
terms. We estimate the delay in accounts receivable payments to be approximately $8.2 million at
June 30, 2007. This amount may increase in the future because the review process is continuing at
between 8 to 13 programs. Any denials will be appealed.
As of June 30, 2007, we had cash and cash equivalents and short-term investments of $29.1
million, working capital of approximately $42.7 million and the potential ability to borrow up to
$50.0 million under our revolving credit and term loan facility based on borrowing base
calculations, subject to lender approval and certain other restrictions as described in more detail
below in “Debt”.
Nine months ended June 30, 2007 compared to nine months ended June 30, 2006.
Net cash used in operating activities was $12.7 million and $6.1 million for the nine months
ended June 30, 2007 and 2006, respectively. The increase in net cash used in operating activities
occurred because the net loss for the nine months ended June 30, 2007 was $5.6 million compared to
a net loss of $0.7 million in the nine months ended June 30, 2006. Also, a $1.1 million gain on
sale of a hospice program occurred during the nine months ended June 30, 2007. No such gain
occurred during the nine months ended June 30, 2006. Increases in accounts receivable during the
nine months ended June 30, 2007 were $3.6 million more than in the nine months ended June 30, 2006.
These increases in cash used in operating activities were partially offset because payments for
Medicare Cap assessments were $4.8 million lower in the period ended June 30, 2007 than in the
period ended June 30, 2006 due to the timing of annual payments.
Net cash provided by investing activities was $8.0 million for the nine months ended June 30,
2007 compared to $3.6 million of cash used in investing activities for the nine months ended June
30, 2006. Cash provided by net investment sales was $7.6 million during the nine months ended June
30, 2007 while $0.5 million was used to purchase investments in the nine months ended June 30,
2006. Cash provided by other assets was $1.3 million higher in the nine months ended June 30, 2007
than in the same period last year. Also, $1.2 million of cash was received from the sale of the
Cincinnati hospice program during the nine months ended June 30, 2007. No program sales occurred
during the nine months ended June 30, 2006.
Net cash provided by financing activities was $0.7 million and $0.4 million for the nine months
ended June 30, 2007 and 2006, respectively. Cash provided by financing activities in both periods
principally resulted from the exercise of employee stock options and employee stock purchases.
Debt
In December 2004, we renewed our $30.0 million revolving line of credit and entered into a
$20.0 million term loan agreement (this total of $50.0 million is collectively referred to herein
as the “credit facility”). The credit facility is collateralized by substantially all of our
assets, including cash, accounts receivable and equipment. Loans under the credit facility bear
interest at an annual rate equal to the one-month London Interbank Borrowing Rate in effect from
time to time plus 3.0% — 5.0%, depending upon our achieving certain financial ratios as described
in the credit agreement. Accrued interest under the revolving line of credit and the term loan is
due monthly.
Under the revolving line of credit, we may (upon satisfaction of certain conditions and
lender’s waiver of a covenant default) borrow, repay and re-borrow an amount equal to the lesser
of: (i) $30.0 million or (ii) 85% of the net value of eligible accounts receivable. The revolving
line of credit can be used for working capital and general corporate purposes, including
acquisitions. Under the $20.0 million term loan, borrowings are used for “permitted acquisitions”
as defined in the credit agreement. The lender will permit term loans provided our pro forma Debt
Service Coverage Ratio, as defined in the credit agreement, does not fall below the specified ratio
(at June 30, 2007, we failed to meet the specified ratio). The maturity date of the credit
facility is December 22, 2009. As of June 30, 2007, there was no balance outstanding on the
revolving line of credit or on the term loan.
19
The credit facility contains certain customary covenants including those that restrict our
ability to incur additional indebtedness, pay dividends under certain circumstances, permit liens
on property or assets, make capital expenditures, make certain investments and prepay or redeem
debt or amend certain agreements relating to outstanding indebtedness. Because of recent operating
losses, we are not in compliance with the credit facility’s debt service coverage ratio covenant
and we would have to receive a lender waiver, which we have not requested, and complete certain
administrative procedures in order to borrow under the current terms of the credit facility.
Interest Rate Risk
We do not expect our cash flow to be affected, to any significant degree, by a sudden change
in market interest rates. We have not implemented a strategy to manage interest rate market risk
because we do not believe that our exposure to this risk is material at this time. We invest excess
cash balances in money market accounts with average maturities of less than 90 days.
Payment, Legislative and Regulatory Changes
We are almost exclusively 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 have a material adverse affect on our net patient revenue, cash flow from
operations and profitability.
Inflation
The healthcare industry is labor intensive. Historically, wages and other expenses increased
during periods of inflation and labor shortages in the marketplace. In addition, suppliers pass
along rising costs to us in the form of higher prices for the goods and services that we purchase.
We have implemented control measures designed to curb increases in operating expenses; however, we
cannot predict our ability to cover or offset future cost increases.
Critical Accounting Policies
There have been no changes to our critical accounting policies during the nine months ended
June 30, 2007. Refer to our Annual Report on Form 10-K for the fiscal year ended September 30,
2006 for a summary of our critical accounting policies.
Recent Accounting Pronouncements
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”).
Under SFAS 159, a company may elect to measure eligible financial assets and financial liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting date. If elected, SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We are currently assessing whether
fair value accounting is appropriate for any of our eligible items and have not yet determined the
impact, if any, on our consolidated financial statements.
Contractual Obligations
The following table summarizes our significant contractual obligations at June 30, 2007, and
the effect such obligations are expected to have on our liquidity and cash flows in future periods.
The total excludes amounts already recorded on our balance sheet as current liabilities as of June
30, 2007 (in thousands):
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Payments Due by Fiscal Year |
| Contractual Obligation |
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Total |
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2007 (1) |
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2008 - 2009 |
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2010 - 2011 |
|
Thereafter |
Operating lease obligations(2) |
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$ |
23,537 |
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$ |
1,813 |
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$ |
13,440 |
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$ |
7,178 |
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$ |
1,106 |
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| 1. |
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Represents payments to be made during the period of July 2007 through September
2007. |
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| 2. |
|
Changes from our 2006 Annual Report are due to leases for new inpatient units,
certain lease extensions and lease terminations due to site closures. |
20
The expected timing and amount of payment of the obligations discussed above are
estimated based on current information. Timing of payments and actual amounts may be different
depending on changes to agreed-upon amounts for some obligations.
For the purpose of this table, contracted obligations are defined as agreements that are
enforceable and legally binding on VistaCare and that specify all significant terms, including
fixed or minimum quantities to purchase and approximate timing of the transaction.
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q and the accompanying
tables, including statements with respect to VistaCare’s anticipated growth in net patient revenue,
organic patient census and diluted earnings per share, are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,”
“hope,” “anticipate,” “plan,” “expectations,” “forecast,” “goal,” “targeted” and similar
expressions identify forward-looking statements, which speak only as of the date the statement was
made. VistaCare does not undertake and specifically disclaims any obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or
otherwise. These statements are based on current expectations and assumptions and involve various
risks and uncertainties, which could cause VistaCare’s actual results to differ from those
expressed in such forward-looking statements. These risks and uncertainties arise from, among other
things, possible changes in regulations governing the hospice care industry, periodic changes in
reimbursement levels and procedures under Medicare and Medicaid programs, difficulties predicting
patient length of stay and estimating potential Medicare reimbursement obligations, patient
discharge rate, challenges inherent in VistaCare’s growth strategy, the current shortage of
qualified nurses and other healthcare professionals, VistaCare’s dependence on patient referral
sources and other factors detailed under the caption “Factors that May Affect Future Results” or
“Risk Factors” in VistaCare’s most recent report on Form 10-K and its other filings with the
Securities and Exchange Commission. You are cautioned not to place undue reliance on such
forward-looking statements and there are no assurances that the matters contained in such
statements will be achieved.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may affect us due to adverse changes in financial
market prices and rates. We have not entered into derivative or hedging transactions to manage any
market risk. We do not believe that our exposure to market risk is material at this time.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 30, 2007. In
designing and evaluating our disclosure controls and procedures, our management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives, and our management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on this
evaluation, our CEO and CFO concluded that, as of June 30, 2007, our disclosure controls and
procedures were (1) designed to ensure that information required to be disclosed by us is
accumulated and communicated to management, including our CEO and CFO, by others within our
organization to allow timely decisions regarding required disclosure and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange Commission’s rules and forms.
(b) Changes in Internal Controls.
There have been no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
21
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to a variety of claims and suits that arise from time to time in the ordinary
course of our business. While management currently believes that resolving all of these matters,
individually or in aggregate, will not have a material adverse impact on our financial position or
results of operations, the litigation and other claims that we face are subject to inherent
uncertainties and management’s view of these matters may change in the future. Should an
unfavorable final outcome occur, there exists the possibility of a materially adverse impact on our
financial position, results of operations and cash flows for the period in which the effect becomes
probable and reasonably estimable.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the
year ended September 30, 2006, which could materially affect our financial condition, results of
operations or future results. The risks described in our Annual Report on Form 10-K are not the
only risks we face. Additional risks and uncertainties not currently known or that are currently
deemed to be immaterial may also have a material adverse affect on our financial condition, results
of operations and future results. There have been no material changes
from the risk factors disclosed in the 2006 Form 10-k.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities. Not applicable.
(b) Use of Proceeds from Registered Securities. Not applicable.
(c) Repurchases of Securities. We did not repurchase any of our securities during the nine
months ended June 30, 2007.
(d) Restrictions Upon the Payment of Dividends. We are prohibited under our credit facility
from paying any cash dividends if there is a default under the facility or if the payment of any
cash dividends would result in default.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibits: The exhibits are listed in the Exhibit Index to this report and are incorporated
herein.
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 thereunto duly authorized.
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VISTACARE, INC. |
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Date: August 8, 2007
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By: /s/ Richard R. Slager |
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Richard R. Slager |
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President and Chief Executive Officer |
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Date: August 8, 2007
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By: /s/ Henry L. Hirvela |
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Henry L. Hirvela |
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Chief Financial Officer |
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23
EXHIBIT INDEX
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| Exhibit |
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| No. |
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Exhibit |
31.1
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Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14. |
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31.2
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Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14. |
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32.1
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
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32.2
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
24