According to the Company’s FORM 10-Q For The Quarterly Period Ended September 30, 2006, on April 17, 2006, plaintiffs filed a Notice of Appeal to appeal the District Court’s decision to dismiss the complaint to the United States Court of Appeals for the Fifth Circuit. In September 2006, the plaintiffs decided not to proceed with the appeal. On September 27, 2006, the United States Court of Appeals for the Fifth Circuit dismissed the appeal.
In a press release dated April 6, 2006, Odyssey HealthCare, Inc. announced that the United States District Court for the Northern District of Texas has entered an order dismissing with prejudice all of the claims against the Company and certain current and former executive officers of the Company in the shareholder class action complaint filed in April 2004 and later consolidated with other similar federal lawsuits. The Court's opinion carefully examined each of the allegations in the amended and consolidated complaint and determined that they stated no viable claim against any defendant. The Court also denied plaintiffs' request to further amend their complaint.
As previously summarized by the Company’s Form 10-K for the fiscal year ended December 31, 2005, seven similar lawsuits were filed in the United States District Court for the Northern District of Texas, Dallas Division, making substantially similar allegations and seeking substantially similar damages. All of these lawsuits were transferred to a single judge and consolidated into a single action. Lead plaintiffs and lead counsel have been appointed and the consolidated complaint was filed on December 20, 2004, which, among other things, extended the class period to October 18, 2005. The Company filed a motion to dismiss the lawsuit. The District Court granted the Company’s motion to dismiss on September 30, 2005. The District Court also granted lead plaintiffs the right to amend their complaint. Lead plaintiffs filed an amended consolidated complaint on October 31, 2005. The Company has filed a motion to dismiss the amended consolidated complaint and is currently awaiting a decision on its motion to dismiss.
The original complaint charges that Odyssey and certain individuals violated sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between May 5, 2003 and February 23, 2004. More specifically, the complaint alleges that defendants' statements during the Class Period failed to disclose and misrepresented the following material adverse facts which were then known to defendants or recklessly disregarded by them: (1) that the Company's financial results were materially inflated because at least six of its Hospice programs exceeded the amounts they were entitled to receive in Medicare reimbursements; (2) that the Company admitted patients to its Hospice programs who were not eligible for Medicare yet claimed that such patients were; (3) the Company's financial results were a result of providing a level of care and services below the standards set forth under government guidelines because the Company's caseloads were heavier than industry norms; (4) that the Company could not keep up with its heady growth due to higher labor costs - especially in California, which represented 13 percent to 15 percent of Odyssey's revenues; (5) that higher drug costs were hurting the Company's margins; and (6) that Odyssey was suffering from negative cash-flows.
Further, the complaint alleges that on February 23, 2004, Odyssey announced that its first-quarter profits would be below analysts' estimates. According to the Company, it expected its 2004 earnings per share results to reflect a 23 to 25 percent increase over 2003, or $1.03 to $1.05 for the year. For the first quarter of 2004, Odyssey expected earnings per share of $0.20 to $0.22, (analysts' expected the Company to earn earnings per share of $0.25) compared to $0.19 for the first quarter of 2003. News of this shocked the market with shares of Odyssey falling $7.11 per share, or 26 percent, to close at $20.32 per share on February 24, 2004. In its April 12, 2004 edition, Barron's published an article highlighting the Company's operational issues. Therein, Barron's articulated that there are signs that the Company can't keep up with its heady growth. 'Higher labor costs -- especially in California, which represents 13%-15% of its revenues -- as well as higher drug costs hurt Odyssey's margins in last year's fourth quarter. In reporting those results on Feb. 23, the company forecast lower- than-expected earnings for this year. Another red flag: Odyssey disclosed that, in its most recent quarter, six of its programs exceeded the amounts they were entitled to receive in Medicare reimbursements, raising questions about whether patients admitted to its programs are truly eligible.' Additionally, the article pointed out: 'There are also suggestions that some of Odyssey's strong growth is the result of providing a level of care and services below the standards set forth under government guidelines, including providing adequate bereavement services for patients' families.'