SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from _______________ to ______________
Commission File Number: 1-8351
ROTO-ROOTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2600 Chemed Center, 255 East Fifth Street, Cincinnati, Ohio 45202-4726
(Address of principal executive offices) (Zip Code)
(513) 762-6900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Capital Stock - Par Value $1 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the average bid and asked price of said stock on the New
York Stock Exchange - Composite Transaction Listing on June 28, 2002 ($37.02 per
share), was $354,574,950.
At March 21, 2003, 9,901,179 shares of Roto-Rooter, Inc. Capital Stock (par
value $1 per share) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
----------------------------------------------------------- ------------------
Proxy Statement for Annual Meeting to be held May 19, 2003 Part III
EXPLANATORY NOTE
This annual report on Form 10-K/A ("Form 10-K/A") is being filed to
amend items 6, 7, 8, 14 and 15 of the Company's annual report on Form 10-K for
the year ended December 31, 2002, which was filed with the S.E.C. on March 28,
2003, ("Original Form 10-K"). Accordingly, pursuant to rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the Form 10-K/A contains the
complete text of items 6, 7, 8, 14 and 15, as amended, as well as certain
currently dated certifications.
In October 2003, Roto-Rooter, Inc. ("Company"), in consultation with
its independent accountants, reevaluated its accounting for Yellow Pages costs
and concluded these costs did not qualify for capitalization as direct-response
advertising under Statement of Position 93-7, Reporting on Advertising Costs,
which for the Company was effective January 1, 1995. In its previously-filed
financial statements, the Company capitalized and amortized these costs over the
lives of the directories, typically 12 months.
Accordingly, the Company's consolidated financial statements as of and
for the years ended December 31, 2002, 2001 and 2000 have been restated to
recognize Yellow Pages advertising expenses when the directories are placed in
circulation rather than to capitalize and amortize such costs. The details of
the restatement are presented in Note 2 of the Notes to Financial Statements
included in this Form 10-K/A. Summarized data for 1998 and 1999 included in
Selected Financial Data under Item 6 have also been restated to recognize Yellow
Pages advertising costs on this basis.
The amendments contained herein reflect changes resulting from the
foregoing adjustments with regard to deferred advertising and the related income
tax effect. The Company has not updated the information contained herein for
events and transactions occurring subsequent to March 28, 2003, the filing date
of the Original Form 10-K, except to reflect the restatement of the Company's
financial statements for the periods indicated above and except for the
following :
- On May 19, 2003, the shareholders of Chemed Corporation approved
changing the Company's name to Roto-Rooter, Inc.
- In the second quarter of 2003, the Company redefined its segments to
merge the Roto-Rooter Group and corporate office overhead into a single
segment now called the Plumbing and Drain Cleaning segment. All segment
data have been reclassified to reflect this change.
- Many disclosures throughout the financial statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations have been expanded.
Events have taken place that would have been reflected in the Original
Form 10-K if they had taken place prior to the date of the original filing. The
Company recommends this report be read in conjunction with the Company's reports
filed subsequent to March 28, 2003.
2
ROTO-ROOTER, INC.
2002 FORM 10-K/A ANNUAL REPORT
Table of Contents
PAGE
Item 6. Selected Financial Data......................................................................... 4
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 5
Item 8. Financial Statements and Supplementary Data..................................................... 17
Item 14. Controls & Procedures........................................................................... 17
Item 15. Exhibits, Financial Statements, Financial Statement Schedule and Reports on Form 8-K............ 18
3
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for Roto-Rooter, Inc. and subsidiary companies
("Company") as of and for each of the five years ended December 31, 1998 through
December 31, 2002 are presented below (in thousands, except per share and
footnote data, ratios and employee data):
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(AS RESTATED--SEE NOTE 2 OF NOTES (f) (f)
TO FINANCIAL STATEMENTS)
SUMMARY OF OPERATIONS
Continuing operations (a)
Service revenues and sales $ 314,176 $ 337,908 $ 355,307 $ 316,719 $ 263,001
Gross profit (excluding depreciation) 127,891 132,292 146,329 127,042 101,558
Depreciation 13,587 14,395 13,374 11,285 9,424
Amortization of goodwill - 4,102 4,090 3,770 3,544
Income/ (loss) from operations (b) (2,678) (11,561) 28,548 21,227 14,322
Income/ (loss) from continuing operations (c) (8,854) (9,037) 18,030 16,195 16,333
Net income/ (loss) (d) (2,545) (12,185) 19,971 19,481 19,765
Earnings/ (loss) per share
Income/ (loss) from continuing operations $ (0.90) $ (0.93) $ 1.83 $ 1.55 $ 1.62
Net income/ (loss) (0.26) (1.25) 2.03 1.86 1.97
Average number of shares outstanding 9,858 9,714 9,833 10,470 10,058
Diluted earnings/ (loss) per share
Income/ (loss) from continuing operations $ (0.90) $ (0.93) $ 1.82 $ 1.54 $ 1.62
Net income/ (loss) (0.26) (1.25) 2.01 1.85 1.96
Average number of shares outstanding 9,858 9,714 9,927 10,514 10,100
Cash dividends per share $ 0.45 $ 0.44 $ 0.40 $ 2.12 $ 2.12
FINANCIAL POSITION--YEAR END
Cash, cash equivalents and marketable securities $ 37,731 $ 8,725 $ 9,978 $ 17,043 $ 41,170
Working capital 20,075 9,732 (3,792) 11,674 32,048
Current ratio 1.28 1.11 0.96 1.12 1.35
Properties and equipment, at cost less
accumulated depreciation $ 48,361 $ 54,549 $ 60,343 $ 56,913 $ 50,693
Total assets 335,929 398,745 419,932 420,921 428,219
Long-term debt 25,603 61,037 58,391 78,580 80,407
Mandatorily redeemable convertible preferred
securities of the Chemed Capital Trust 14,186 14,239 14,641 - -
Stockholders' equity $ 198,422 $ 204,160 $ 211,451 210,344 $ 221,871
OTHER STATISTICS--CONTINUING OPERATIONS
Net cash provided by continuing operations $ 26,894 $ 27,123 $ 45,981 $ 28,582 $ 16,621
Capital expenditures 11,855 14,457 17,586 16,696 17,377
Number of employees (e) 3,335 3,764 3,784 3,949 3,867
Number of service and sales representatives 2,514 2,623 2,586 2,699 2,634
------------------------------------------
(a) Continuing operations exclude Patient Care, discontinued in 2002 and Cadre
Computer Resources, discontinued in 2001.
(b) Income/(loss) from operations includes a goodwill impairment charge of
$20,342,000 in 2002 and restructuring and similar expenses and other
charges of $27,211,000 in 2001.
(c) Income/(loss) from continuing operations includes an aftertax goodwill
impairment charge of $20,342,000 in 2002, aftertax restructuring and
similar expenses and other charges of $16,943,000 in 2001 and aftertax
acquisition expenses of $495,000 in 1998. Aftertax capital gains on the
sales of investments years 2002 through 1998 amounted to $775,000,
$703,000, $2,261,000, $2,960,000 and $7,945,000, respectively. In
accordance with FASB Statement No. 142, amortization of goodwill was ceased
January 1, 2002. Aftertax amortization of goodwill for continuing
operations for the years 2001 through 1998 was $3,888,000, $3,875,000,
$3,580,000 and $3,415,000, respectively.
(d) Net income/(loss) includes discontinued operations and an extraordinary loss
on the extinguishment of debt in 2001 ($1,701,000).
(e) Numbers reflect full-time-equivalent employees.
(f) Data as of and for the years ended December 31, 1999 and 1998 have been
restated to recognize Yellow Pages advertising expense when the directories
are placed in circulation rather than to capitalize and amortize such
costs. The pretax impact of this restatement was to increase expenses and
to reduce income by $330,000 ($215,000 aftertax) and $222,000 ($144,000
aftertax), in 1999 and 1998, respectively. The cumulative effect of this
adjustment prior to January 1, 1998 reduces retained earnings by
$1,341,000.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Significant factors affecting the Company's consolidated cash flows
during 2002 and financial position at December 31, 2002, include the following:
- Continuing operations generated cash of $26.9 million;
- Net cash proceeds from the sale of discontinued operations, primarily
the sale of Patient Care Inc. ("Patient Care"), totaled $50.7 million;
- The Company repaid $35.4 million of long-term debt; and
- Capital expenditures totaled $11.9 million.
As a result of the net decline in debt, the ratio of total debt
(excluding the Trust Securities) to total capital declined from 22% at December
31, 2001, to 11% at December 31, 2002. The Company's current ratio at December
31, 2002, was 1.3 as compared with 1.1 at December 31, 2001.
The Company had $53.4 million of unused lines of credit with various
banks at December 31, 2002.
CASH FLOW
The Company's cash flows for 2002 and 2001 are summarized as follows
(in millions):
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
2002 2001
------- -------
Net cash provided
by operating activities $ 29.5 $ 34.4
Capital expenditures (11.9) (14.5)
------- -------
Operating cash excess
after capital expenditures 17.6 19.9
Net proceeds/(uses) from sale
of discontinued operations 50.7 (6.3)
Net decrease in long-term debt (35.4) (11.4)
Cash dividends (4.4) (4.4)
Other--net .5 .9
------- -------
Increase/(decrease) in cash
and cash equivalents $ 29.0 $ (1.3)
======= =======
For 2002, the operating cash excess after capital expenditures was
$17.6 million as compared with $19.9 million in 2001. This excess, along with
the proceeds from the sale of Patient Care, was used to retire funded debt and
to increase the Company's available cash and cash equivalents.
COMMITMENTS AND CONTINGENCIES
In connection with the sale of DuBois Chemicals Inc. ("DuBois") in
1991, the Company provided allowances and accruals relating to several long-term
costs, including income tax matters, lease commitments and environmental costs.
Also, in conjunction with the sales of The Omnia Group and National Sanitary
Supply Company in 1997 and the sale of Cadre Computer Resources Inc. in 2001,
the Company provided long-term allowances and accruals relating to costs of
severance arrangements, lease commitments and income tax matters. In the
aggregate, the Company believes these allowances and accruals are adequate as of
December 31, 2002.
Based on reviews of the its environmental-related liabilities under the
DuBois sale agreement, the Company has estimated its remaining liability to be
$2.1 million. As of December 31, 2002, the Company is contingently liable for
additional cleanup and related costs up to a maximum of $18.0 million, for which
no provision has been recorded.
In connection with the sale of Patient Care in 2002, $5.0 million of
the cash purchase price was placed in escrow pending collection of third-party
payer receivables on Patient Care's balance sheet at the sale date. Based on
Patient Care's collection history, the Company believes that the specified
receivables will be collected and that the full balance of the escrow funds will
be paid to Roto-Rooter, Inc. Of this amount, $2.5 million will be evaluated and
distributed as of October 2003 and the remainder as of October 2004.
The Company's various loan agreements and guarantees of indebtedness
contain certain restrictive covenants; however, management believes that such
covenants will not adversely affect the operations of the Company. Under the
most restrictive of these covenants, the Company projects that it can incur
additional debt of approximately $83.4 million as of December 31, 2002.
The Company carries an investment in the mandatorily redeemable
preferred stock ($27.0 million par value; $27.2 million carrying and redemption
values) and common stock warrants (carrying value of $4.1 million) of Vitas
Healthcare Corporation
5
("Vitas"), a privately held provider of palliative and medical care and related
services to terminally ill patients. Vitas has increased its net income during
each of the past several fiscal years and has made timely payment of its
preferred dividends in 2001 and 2002.
During 2001, in a voluntary refinancing, Vitas, with the agreement of
the Company and Vitas' series B preferred stockholders (subordinate in
preference to the Company's investment in Vitas' preferred stock), restructured
its debt and preferred stock with the result that the series B preferred shares
were retired for cash and replaced with outside financing, and the series B
preferred holders received convertible subordinated notes due November 2006 in
the amount of $21.6 million as payment for the cumulative unpaid dividends on
the Series B preferred. Based on Vitas' steadily increasing net income since the
fiscal year ended 1998 and its ability to generate cash at the operating level,
management believes its investment in Vitas is fully recoverable and that no
impairment exists.
Summarized below are the combined required long-term debt payments and
minimum lease obligations for each of the five years subsequent to December 31,
2002 (in thousands):
LONG-TERM MINIMUM
DEBT LEASE
PAYMENTS PAYMENTS TOTAL
--------- -------- --------
2003 $ 409 $6,364 $ 6,773
2004 334 5,747 6,081
2005 5,070 5,189 10,259
2006 5,074 2,206 7,280
2007 5,077 580 5,657
Based on recent projections and historical cash flows, management anticipates
that the Company will satisfy these obligations from internally generated
resources and minimal additional outside borrowings.
Additionally, it is management's opinion that the Company has no
long-range commitments that would have a significant impact on its liquidity,
financial condition or the results of its operations. Due to the nature of the
environmental liabilities, it is not possible to forecast the timing of the cash
payments for these potential liabilities. Based on the Company's available
credit lines, sources of borrowing and cash and cash equivalents, management
believes its sources of capital and liquidity are satisfactory for the Company's
needs for the foreseeable future.
RESULTS OF OPERATIONS
Set forth below are the year-to-year changes in the components of the
statement of operations relating to continuing operations:
Percent
Increase/(Decrease)
---------------------
2002 vs. 2001 vs.
2001 2000
-------- --------
Service revenues and sales:
Plumbing and Drain Cleaning (6)% (4)%
Service America (12) (8)
Total (7) (5)
Cost of services provided and goods
sold (excluding depreciation) (9) (2)
General and administrative expenses (10) (4)
Selling and marketing expenses (5) 6
Depreciation (6) 8
Impairment, restructuring and similar expenses (18) n.a.
Income/(loss) from operations (77) n.a.
Interest expense (46) (25)
Distributions on preferred securities (3) (7)
Other income--net (14) (49)
Income/(loss) before income taxes (82) n.a.
Income taxes n.a. n.a.
Income/(loss) from continuing operations (2) n.a.
2002 VERSUS 2001 - CONSOLIDATED RESULTS
The Company's service revenues and sales for 2002 declined 7% versus
revenues for 2001. This $23.7 million decline was primarily attributable to
declines in the Plumbing and Drain Cleaning segment's plumbing repair and
maintenance business (7% or
6
$7.0 million), HVAC repair and maintenance business (62% or $6.1 million), and
sewer and drain cleaning business (3% or $3.1 million) and in Service America's
repair services under contracts (12% or $6.1 million).
The decline in plumbing revenues is almost entirely attributable to a
reduction in the number of jobs performed during the year, while the decline in
the sewer and drain cleaning business was attributable to a 7% decline in number
of jobs offset partially by an average price-per-job increase of 4%. The decline
in Plumbing and Drain Cleaning's HVAC repair and maintenance business was
attributable to the Company's decision in 2001 to exit this line of business.
During 2002, the Company decided to retain the largest and most profitable of
the HVAC and non-branded plumbing businesses because the Company believes this
business will generate more cash than could be obtained by selling it and
reinvesting the cash in passive investments. Despite a 7% decline in total job
count for 2002 versus 2001, Plumbing and Drain Cleaning was able to slightly
increase its overall gross margin (as a percent of revenues) in 2002 compared
with 2001.
The decline in Service America's service contract revenues is
attributable to insufficient sales of new service contracts to replace service
contracts that were not renewed either by Service America or the customer. The
year to year decline in service contract revenues is anticipated to continue
during 2003, as Service America in the fourth quarter of 2002 canceled
approximately 5% of its outstanding service contracts that were too costly to
service, as measured by the number of service calls during the year. These
canceled service contracts generated annual revenues of approximately $1.8
million.
Consolidated cost of services provided and goods sold (excluding
depreciation) for 2002 declined 9% versus such costs in 2001. The primary
components of cost of services provided and goods sold (excluding depreciation)
are salaries, wages and benefits of service technicians and field personnel,
material costs, insurance costs and service vehicle costs. Prior to 2002,
amortization of goodwill was also included in the cost of services provided and
goods sold. Effective December 31, 2001, the adoption of FAS No. 142 eliminated
the amortization of goodwill. This accounting change accounted for 2 percentage
points of the 9% decline in cost of services provided and goods sold in 2002
versus 2001. The remaining 7% decline in the cost of services provided and goods
sold is consistent with the decline in revenues for 2002 versus 2001.
General and administrative ("G & A") expenses for 2002 declined $5.5
million or 10% versus 2001 within the following operations (in millions):
Plumbing and Drain Cleaning $ 5.1
Service America .4
------
Total $ 5.5
======
The decline in Plumbing and Drain Cleaning G & A is largely attributable to
reductions in discretionary compensation and benefits, due to not achieving
profitability targets in 2002, as shown below (in thousands):
Elimination of restricted stock awards $1,800
Reduction in wages and discretionary benefits 1,000
Reduction in discretionary thrift plan contribution 1,000
Reduction in incentive compensation 900
Reduction in deferred compensation expense component
of G & A as the result of adjusting deferred liability
accruals for market losses on invested assets held
in benefit trusts 600
All other (200)
------
Total $5,100
======
The $400,000 reduction in G & A expenses at Service America is attributable to
that segment's reduction in the number of administrative employees, as a result
of the reduction in the number of service contracts sold and serviced during the
year.
Selling and marketing ("Selling") expenses for 2002 declined $2.6
million, or 5% versus 2001. This decline is attributable to Service America's
$1.2 million decline in Selling expenses in 2002 as a result of reduction in the
number of selling employees (primarily outbound telemarketing) throughout 2002.
Plumbing and Drain Cleaning's Selling expenses for 2002 declined $1.4 million
versus 2001. Approximately 30% of this reduction was due to lower spending on
non-Yellow Pages advertising and most of the remainder to lower salaries and
wages.
Depreciation expense for 2002 declined $808,000, or 6% versus 2002.
$500,000 of this decline was attributable to the decline in depreciation expense
at Service America, largely related to declining purchases of vans for service
technicians in recent years. Depreciation expense for Plumbing and Drain
Cleaning in 2002 increased slightly versus 2001.
7
Impairment, restructuring and similar expenses for 2002 included an
impairment charge of $20,342,000 for the write down of Service America's
goodwill to its fair value at December 31, 2002. For 2001, these expenses
included the following charges (in thousands):
Plumbing
and Drain Service
Cleaning America Total
--------- --------- ---------
Restructuring expenses:
Cost of exiting HVAC and non-Roto-
Rooter-branded plumbing business $ 11,205 $ - $ 11,205
Cost of closing Service America's
Tucson branch - 1,171 1,171
Expenses not expected to
recur (similar expenses):
Charges for accelerating the vesting of
restricted stock awards in connection
with the anticipated revision of the
Company's long-term incentive plans
in 2002 5,294 146 5,440
Severance charges for 10 individuals
incurred in connection with reducing
administrative expenses, largely at the
Plumbing and Drain Cleaning's headquarters 2,909 757 3,666
Resolution of overtime pay issues with
the U.S. Department of Labor, relating
primarily to Plumbing and Drain Cleaning's
prior years' compensation expense 2,749 - 2,749
Property and equipment impairment 337 166 503
--------- --------- ---------
Total restructuring and similar expenses $ 22,494 $ 2,240 $ 24,734
========= ========= =========
The Company's loss from operations declined from $11,561,000 in 2001 to
$2,678,000 in 2002. Operating expenses for 2002 included an impairment charge of
$20,342,000 for the write down of Service America's goodwill. Operating expenses
for 2001 include pretax restructuring and similar expenses of $24,734,000 and
the following other unusual charges (in thousands):
Plumbing
and Drain Service
Cleaning America Total
--------- --------- ---------
Amounts included in cost of services provided and
goods sold:
Additional casualty insurance expense recorded to
reflect increase in valuation of insurance claims
for prior years $ 1,411 $ - $ 1,411
Terminated lease obligations - 69 69
All other - 414 414
Amounts included in general and administrative
expenses:
Terminated lease obligations 166 - 166
All other 417 - 417
--------- --------- ---------
Total other unusual charges $ 1,994 $ 483 $ 2,477
========= ========= =========
During 2002, the HVAC and non-Roto-Rooter-branded businesses that were disposed
generated $403,000 in service revenues and sales and operating losses of
$106,000. During 2001, these businesses generated service revenues and sales of
$6.3 million and operating losses of $754,000. Also in 2001, Service America's
Tucson branch generated $1.7 million of service revenues and sales and recorded
an operating loss of $430,000.
The elimination of the restricted stock awards reduced general and
administrative expenses by approximately $1.9 million per year ($1.8 million in
the Plumbing and Drain Cleaning segment and $100,000 at Service America)
beginning in 2002. The cost of
8
a replacement long-term incentive plan is not estimable at this time. The
employee severance charges for Plumbing and Drain Cleaning provided
approximately $600,000 in annual savings starting in 2002.
Interest expense, substantially all of which is classified as
unallocated investing and financing income--net, declined from $5,423,000 in
2001 to $2,928,000 in 2002. This decline is attributable to lower debt levels
and lower interest rates in 2002.
Other income--net declined from $4,987,000 in 2001 to $4,282,000 in
2002, primarily as a result of an impairment charge of $1,200,000, partially
offset by a $441,000 increase in interest income in 2002. The impairment charge
arose from the decline in value of the Company's investment in the redeemable
preferred stock of Medic One, Inc. ("Medic One"), a privately held provider of
ambulance and wheelchair transportation services. During 2002, Medic One
violated certain of its debt covenants. As of December 31, 2002 Medic One had
not cured the violations or obtained a waiver for such violations. Despite the
fact that Medic One reported positive income from operations in 2002 and 2001,
it will apparently be unable to continue operations without the continued
forbearance of debt covenant violations. If Medic One's lender called its debt,
it is likely that Medic One would be forced into bankruptcy or forced
liquidation. In such circumstances, the possibility that the Company could
recover any significant portion of its investment is considered small. As a
result, the Company concluded that the decline in the value of its investment in
Medic One was other than temporary at December 31, 2002 and wrote down its
investment to its estimated net realizable value (nil).
Other income--net by segment and unallocated investing and financing --
net is summarized below (in thousands):
2002 2001
------- -------
Unallocated Investing and Financing--net $ 4,602 $ 6,011
Plumbing and Drain Cleaning (655) (1,907)
Service America 335 883
------- -------
Total $ 4,282 $ 4,987
======= =======
The decline in other income classified as unallocated investing and financing --
net is attributable to the previously-mentioned investment impairment charge.
The decline in the Plumbing and Drain Cleaning segment's net other expense for
2002 versus 2001 is attributable primarily to intercompany interest income of
$231,000 in 2002 versus expense of $414,000 in 2001. The decline in Service
America's net other income for 2002 versus 2001 is attributable to lower
interest income primarily as the result of lower interest rates in 2002.
The Company's effective income tax rate for continuing operations was
negative 268.5% in 2002 as compared with positive 31.1% in 2001. The negative
effective rate in 2002 is caused by the nondeductibility of Service America's
goodwill impairment charge in 2002.
9
The loss from continuing operations was $8,854,000 ($.90 per share) in
2002 as compared with $9,037,000 ($.93 per share) for 2001. Unusual items
impacting the loss from continuing operations for 2002 include Service America's
aftertax goodwill impairment charge of $20,342,000 ($2.06 per share), an
aftertax investment impairment charge of $780,000 ($.08 per share) and aftertax
capital gains on the sales of investments of $775,000 ($.08 per share). Unusual
items impacting the loss from continuing operations for 2001 include aftertax
restructuring and similar expenses and other unusual charges totaling
$16,943,000 ($1.74 per share) as summarized below (in thousands):
Plumbing
and Drain Service
Cleaning America Total
--------- --------- ---------
Restructuring expenses:
Cost of exiting HVAC and non-Roto-
Rooter-branded plumbing business $ 6,765 $ - $ 6,765
Cost of closing Service America's
Tucson branch - 707 707
Expenses not expected to
recur (similar expenses):
Charges for accelerating the vesting of
restricted stock awards in connection
with the anticipated revision of the
Company's long-term incentive plans
in 2002 3,417 87 3,504
Severance charges for 10 individuals
incurred in connection with reducing
administrative expenses 2,033 489 2,522
Resolution of overtime pay issues with
the U.S. Department of Labor, relating
primarily to prior years' compensation
expense 1,656 - 1,656
Property and equipment impairment 206 100 306
--------- --------- ---------
Total restructuring and
similar expenses 14,077 1,383 15,460
Other unusual charges:
Additional casualty insurance expense
recorded to reflect increase in valuation
of insurance claims for prior years 839 - 839
Terminated lease obligations 101 41 142
Other 254 248 502
--------- --------- ---------
Total restructuring and similar
expenses and other unusual
charges $ 15,271 $ 1,672 $ 16,943
========= ========= =========
Also affecting the results for 2001 are aftertax goodwill amortization of
$3,888,000 ($.40 per share)(amortization of goodwill ceased effective December
31, 2001) and aftertax gains on the sales of investments of $703,000 ($.07 per
share).
Discontinued operations for 2002 includes $3,395,000 from the
operations and gain on the sale of Patient Care (sold in 2002), $2,861,000
federal income tax refund related to the Omnia Group (sold in 1997), $744,000
additional expense ($1,145,000 before income taxes) for the sublease related to
the sale of DuBois Chemicals in 1991 and other adjustments aggregating $797,000.
The adjustments to the sublease accrual ($1,145,000 in 2002 and $1,700,000 in
2001) were made to cover rental charges for vacant space previously occupied by
the Company's former subsidiary, DuBois Chemicals ("DuBois"), sold in 1991.
Prior to December 31, 2002, the sublease accrual was calculated under the
assumption that all of the vacant space would be subleased at various dates and
at market rental rates. Although the Company was able to sublease varying
amounts of space during the past two years, it has been unable to sublease one
of the floors covered under its lease. The adjustments made in 2002 decreased
the amount of sublease rentals that were assumed to be received, to include only
rentals from current sublessees. As a result, the sublease accrual will now
cover the cost of all unoccupied space plus the shortfall of current subleased
rentals versus contract rental rates and operating costs. No further charges for
this liability are anticipated.
The net loss declined from $12,185,000 ($1.25 per share) in 2001 to a
loss of $2,545,000 ($.26 per share) in 2002. The net losses include income from
discontinued operations of $6,309,000 ($.64 per share) in 2002 and a loss from
discontinued operations of $1,447,000 ($.15 per share) in 2001. The net loss for
2001 also includes an extraordinary loss on the extinguishment of debt of
10
$1,701,000 ($.17 per share). Unusual items impacting the net loss for 2002
include Service America's aftertax goodwill impairment charge of $20,342,000
($2.06 per share), an aftertax investment impairment charge of $780,000 ($.08
per share) and aftertax capital gains on the sales of investments of $775,000
($.08 per share). Unusual items impacting the net loss for 2001 include aftertax
restructuring and similar expenses and other unusual charges totaling
$16,943,000 ($1.74 per share) as summarized above, aftertax goodwill
amortization of $3,888,000 ($.40 per share -- amortization of goodwill was
ceased effective December 31, 2001) and aftertax gains on the sales of
investments of $703,000 ($.07 per share).
2002 VERSUS 2001 - SEGMENT RESULTS
The aftertax earnings of the Plumbing and Drain Cleaning segment
increased $18,516,000 from a loss of $8,765,000 in 2001 to income of $9,796,000
in 2002. The earnings for 2001 included the following aftertax restructuring and
similar expenses and other unusual charges (in thousands):
Restructuring expenses:
Cost of exiting HVAC and non-Roto-Rooter-
branded plumbing business $ 6,765
Expenses not expected to recur (similar expenses):
Resolution of overtime pay issues with the U.S.
Department of Labor, relating primarily to
prior years' compensation expense 1,656
Charges for accelerating the vesting of restricted
awards in connection with the anticipated
revision of the Company's long-term
incentive plans 3,417
Property and equipment impairment charges 206
Severance charges for 9 individuals, incurred in
connection with reducing administrative
expenses 2,033
--------
Total restructuring and similar expenses 14,077
Other unusual charges:
Additional casualty insurance expense recorded
to reflect increase in valuation of insurance
claims for prior years 839
Terminated lease obligations 101
Other 254
--------
Total $ 15,271
========
In addition, aftertax amortization of goodwill, which ceased effective December
31, 2001, totaled $3,081,000 for 2001 versus nil for 2002.
The aftertax loss of the Service America segment increased from
$686,000 in 2001 to $19,961,000, primarily due to an aftertax impairment charge
of $20,342,000 in 2002. The impairment charge is based on an appraisal firm's
valuation of Service America's business as of December 31, 2002. The fair value
of Service America was calculated using an average of the enterprise values
determined under a capital markets valuation, and discounted cash flows using
updated income and cash flow projections for Service America's business. The
capital markets method calculates an enterprise value based on valuations that
comparable businesses sell for in the capital markets, and based on certain
financial ratios and statistics. The income and cash flow projections are
updated each year as a part of the Company's annual business plan process and
take into consideration the changing marketplace and changing operating
conditions. The decline in the overall valuation of Service America was directly
a result of lower revenue, earnings and cash flow projections as a result of the
continued decline in the contract base of the business (19% drop in 2002). These
projections were adjusted to reflect the fact that Service America missed
achieving their budgeted revenues for 2002 by 13% ($8.7 million) and missed
achieving their budgeted gross margin by 26% ($4.5 million).
11
Amounts for Service America for 2001 include the following
restructuring and similar expenses and other unusual charges (in thousands):
Restructuring expenses:
Cost of closing Service America's Tucson branch $ 707
Expenses not expected to recur (similar expenses):
Severance charges for one individual, incurred in
connection with reducing administrative
expenses 489
Property and equipment impairment charges 100
Charges for accelerating the vesting of restricted
awards in connection with the anticipated
revision of the Company's long-term
incentive plans 87
------
Total restructuring and similar expenses 1,383
Other unusual charges:
Terminated lease obligations 41
Other 248
------
Total $1,672
======
In addition, aftertax amortization of goodwill, which ceased effective December
31, 2001, totaled $807,000 for 2001 versus nil for 2002.
Unallocated Investing and Financing-net, which includes unallocated
financing costs and investment income, increased $897,000 from $414,000 aftertax
in 2001 to $1,311,000 aftertax in 2002. The increase is attributable to the
following (in thousands):
Lower interest expense in 2002 due to lower debt levels $ 1,742
Interest income on tax refund in 2002 530
Impairment charge on Medic One investment in 2002 (780)
Lower intercompany interest income in 2002 (primarily Plumbing
and Drain Cleaning segment) (657)
Other 62
-------
Total $ 897
=======
2001 VERSUS 2000 - RESTRUCTURING AND SIMILAR INITIATIVES
The Restructuring and Similar Initiatives comprise the following items
discussed below and significantly impact the comparisons of operations for 2001
versus 2000.
RESTRUCTURING INITIATIVES
In the third quarter of 2001, the Company made the decision to close
the Tucson branch of its Service America segment as the result of evaluating its
operating performance since the branch was acquired in 1999. The branch recorded
an operating loss of nearly $500,000 in 2000 and was projected to record an
operating loss in excess of $400,000 in 2001. By shutting down the branch, the
Company estimates it will save the pretax operating loss of $400,000 and free up
management's time to devote to other matters. The costs of Service America's
restructuring were largely non-cash and included the following charges (in
thousands):
Impairment of goodwill $ 833
Impairment of identifiable intangible assets 50
Impairment of other assets 288
-------
Pretax cost 1,171
Income tax benefit (464)
-------
Aftertax cost $ 707
=======
Since the Tucson closing involved mostly non-cash charges and
write-offs, and it was losing money at the operating level, its closing should
benefit the Company's operations by eliminating the operating loss, but will
have no material impact on the Company's financial position.
12
In the fourth quarter of 2001, the Company decided to exit the HVAC and
non-Roto-Rooter-branded plumbing businesses by selling, closing down or
transferring these operations to Roto-Rooter branches. The decision to dispose
of these operations was made because they had failed to improve profitability in
recent years, and the businesses were requiring the use of resources which
management believed could be better used elsewhere in the Plumbing and Drain
Cleaning segment. The restructuring cost for these businesses includes the
following (in thousands):
Impairment of goodwill $ 9,793
Impairment of identifiable intangible assets 477
Impairment of property and equipment 380
Impairment of inventory and other assets 555
--------
Pretax cost 11,205
Income tax benefit (4,440)
--------
Aftertax cost $ 6,765
========
As with the Tucson closing, most of the costs of closing the HVAC and
non-Roto-Rooter-branded plumbing businesses were non-cash charges or asset
write-offs. The Company will benefit by the lack of a small operating loss if
all operations are disposed or closed. The intangible benefit will be the
redeployment of management attention on the rest of Plumbing and Drain
Cleaning's businesses. The restructuring will have no material impact on the
Company's financial position.
SIMILAR INITIATIVES
Also during the fourth quarter of 2001, management obtained board
approval to terminate the restricted stock award program by accelerating the
vesting of all outstanding restricted awards. The program was originally adopted
with the goal of providing a long-term incentive to management to grow the
business and increase the value of the Company's stock. However, since the
awards vested automatically with the passage of time, the program's goal was not
achieved to the extent anticipated. By eliminating the program, the annual
charge to the statement of operations (approximately $1.9 million) was
eliminated. The Company subsequently adopted a replacement long-term incentive
plan in 2002 with rewards based on a combination of increase in its stock price
and multi-year profit growth.
The cost of accelerating the stock awards includes the following (in
thousands):
Charge for vesting awards (non-cash) $ 4,263
Payroll taxes and benefits on awards 1,177
-------
Pretax cost 5,440
Tax benefit (1,936)
-------
Aftertax cost $ 3,504
=======
Of these charges, $5,294,000 ($3,417,000 aftertax) was incurred by the Plumbing
and Drain Cleaning segment, and $146,000 ($87,000 aftertax) was incurred in the
Service America segment. The acceleration will not have a material impact on the
Company's financial position and is projected to reduce expenses by
approximately $1.9 million per year. The cost of the replacement long-term
incentive plan is not known at the present time.
Other unusual charges incurred in 2001 include the following charges
(in thousands):
Severance awards (10 individuals) --
Plumbing and Drain Cleaning segment $ 2,909
Service America segment 757 $ 3,666
-------
Cost of settling the Department of Labor overtime
claims (Plumbing and Drain Cleaning) 2,749
Impairment of property and equipment (primarily Plumbing
and Drain Cleaning) 503
-------
Pretax cost 6,918
Tax benefit (2,434)
-------
Aftertax cost $ 4,484
=======
2001 VERSUS 2000 - CONSOLIDATED RESULTS
The Company's service revenues and sales for 2001 declined 5% versus
revenues for 2000. This $17.4 million decline was primarily attributable to
declines in the Plumbing and Drain Cleaning segment's plumbing repair and
maintenance business (7% or $7.5 million) and HVAC repair and maintenance
business (26% or $3.5 million), and in Service America's repair services under
contracts (7% or $3.7 million).
13
The decline in plumbing revenues is attributable to a 12% reduction of
the number of jobs performed during the year, partially offset by a 6% increase
in the average price per job. Sewer and drain cleaning revenues for 2001 were
essentially even with 2000 revenues, the result of a 10% decline in the number
of jobs combined with a 10% increase in the average price per job. The decline
in Plumbing and Drain Cleaning's HVAC repair and maintenance business was
attributable to the Company's decision in 2001 to exit this line of business.
The 8% decline in Service America's revenues for 2001 versus 2000 was
due to a 10% decline in demand service revenues for 2001 and a 7% decline in
service contract revenue versus revenues for 2000. This latter decline was
largely the result of selling insufficient new service contracts to offset the
number of service contracts not renewed. The decline in demand service revenues
is due largely to the decline in service contracts because demand services are
largely dependent upon the service contract customer base.
Cost of services provided and goods sold (excluding depreciation) for
2001 declined 2% ($3.4 million) as a result of lower sales in both the Plumbing
and Drain Cleaning and Service America segments. Higher labor costs and higher
insurance costs (as a percentage of revenues) in the Plumbing and Drain Cleaning
segment resulted in an overall decline in the Company's gross profit margin for
2001 versus 2000.
G & A expenses for 2001 declined 4% ($2.4 million) versus 2000
primarily due to the reduction of the discretionary thrift plan contribution in
the Plumbing and Drain Cleaning segment. Service America's G & A expenses
contributed approximately $400,000 to this decline, primarily due to the
reduction of discretionary bonuses and thrift plan contributions in 2001.
Selling expenses for 2001 increased 6% ($2.7 million), primarily due to
higher advertising expense in 2001 by the Plumbing and Drain Cleaning segment.
This increase was due to an increased focus on Yellow Pages advertising during
2001. A moderate, but lower increase is expected for 2002.
Depreciation expenses for 2001 increased 7.6% ($1.0 million) versus
2000 primarily due to higher depreciation costs for service vans in the Plumbing
and Drain Cleaning segment ($300,000) and at Service America ($700,000). The
higher levels of depreciation are due to prior years' van replacements; the
increase in depreciation expense is not expected to continue in 2002.
Income from operations declined $40,109,000 from $28,548,000 in 2000 to
a loss of $11,561,000 in 2001. This decline is attributable to the following (in
thousands):
Restructuring and similar expenses incurred in 2001--
Plumbing and Drain Cleaning segment $22,494
Service America segment 2,240 $24,734
-------
Lower gross profit in 2001 (substantially all due to
Plumbing and Drain Cleaning) 14,037
Other 1,338
-------
Total $40,109
=======
Interest expense for 2001 totaled $5,423,000 versus expense of
$7,211,000 recorded in 2000. This decline is attributable primarily to lower
debt levels in 2001.
Other income declined from $9,846,000 in 2000 to $4,987,000 in 2001,
primarily as a result of lower gains on the sales of investments in 2001 (a
decline of $2,406,000). Market losses on trading investments held in deferred
compensation trusts in 2001 versus gains in 2000 also contributed to this
decline (a reduction of $1,208,000). A decline of $805,000 in interest income,
due largely to lower interest rates in 2001, contributed to this decline.
The Company's effective income tax rate for continuing operations was
31.1% in 2001 as compared with 39.9% in 2000. The lower effective rate in 2001
is due largely to the impact of nondeductible goodwill amortization on the
taxable income/(loss), as a percent of pretax income or loss.
Income/(loss) from continuing operations declined from income of
$18,030,000 ($1.83 per share or $1.82 per diluted share) in 2000 to a loss of
$9,037,000 ($.93 per share) in 2001, largely as a result of aftertax
restructuring and similar expenses and other charges of $16,943,000 ($1.74 per
share) and of lower income from operations from the Plumbing and Drain Cleaning
segment (before restructuring and similar expenses).
Net income/(loss) declined from income of $19,971,000 ($2.03 per share
and $2.01 per diluted share) in 2000 to a loss of $12,185,000 ($1.25 per share)
in 2001. The net loss for 2001 included restructuring and similar expenses of
$16,943,000 ($1.74 per share), amortization of goodwill of $3,888,000 ($.40 per
share), capital gains on the sales of investments of $703,000 ($.07 per share),
a loss from discontinued operations of $1,447,000 ($.15 per share) and an
extraordinary loss on extinguishment of debt of $1,701,000 ($.18 per share). Net
income for 2000 included capital gains on the sales of investments of $2,261,000
($.23 per share), amortization of goodwill of $3,875,000 ($.39 per share) and
income from discontinued operations of $1,941,000 ($.19 per share).
2001 VERSUS 2000 - SEGMENT RESULTS
The aftertax margin of the Plumbing and Drain Cleaning segment declined
8.4 percentage points from 5.1% in 2000 to minus 3.3% in 2001. Restructuring and
similar expenses and other charges incurred in 2001 ($15,271,000 aftertax)
accounted for 5.7 percentage points of this decline. The remaining decline in
the aftertax margin is attributable primarily to a lower gross profit margin
resulting from higher labor costs and higher insurance costs.
14
The aftertax margin of the Service America segment declined 2.4
percentage points from 1.4% in 2000 to negative 1.0% in 2001. Restructuring and
similar expenses and other charges ($1,672,000 aftertax) in 2001 accounted for
2.4 percentage points of this decline.
Unallocated investing and financing-net declined $2,267,000 from
$2,681,000 in 2000 to $414,000 in 2001. This decline is due to the following (in
thousands):
Lower capital gains on the sales of available-for-sale investments in 2001 $(1,558)
Lower intercompany interest income (primarily the Plumbing and Drain
Cleaning segment) (1,439)
Lower interest expense in 2001 due to lower debt levels 910
Other (180)
-------
Total $(2,267)
=======
CRITICAL ACCOUNTING POLICIES
INSURANCE ACCRUALS
As the Company self insures for casualty insurance claims (workers'
compensation, auto liability and general liability), management closely monitors
and frequently evaluates its historical claims experience to estimate the
appropriate level of accrual for insured claims. The Company's third-party
administrator ("TPA") processes claims on behalf of the Company and reviews
claims on a monthly basis. Currently the Company's exposure on any single claim
is capped at $250,000. For most of the years prior to 1999 the caps for general
liability and workers compensation were $500,000 per claim.
In developing its estimates, the Company accumulates historical claims
data for the previous 10 years to calculate loss development factors ("LDF") by
insurance coverage type. LDFs are applied to known claims to estimate the
ultimate potential liability for known and unknown claims for each open policy
year. The LDFs are updated every three years, and reviewed by the Company's
outside professional actuaries for reasonableness, in view of the Company's
claims experience and insurance industry trends. Current LDF's were last updated
as of March 2000 and will next be updated in March 2003. Because this
methodology relies heavily on historical claims data, the key risk is whether or
not the historical claims are an accurate predictor of future claims exposure.
The risk also exists that certain claims have been incurred and not reported on
a timely basis. To mitigate these risks, the Company, in conjunction with its
TPA, closely monitors claims to ensure timely accumulation of data and compares
its claims trends with the industry experience of its TPA. As an indication of
the sensitivity of the accrued liability to reported claims, the Company's
analysis indicates that a 1% across the board increase or decrease in the amount
of reported claims would increase or decrease the accrued insurance liability at
December 31, 2002 by 3.5% or $619,000.
For 2002, the fully developed and trended claims losses are down 31%
from 2001 and down 12% from 2000. The adverse claims losses in 2001 (which
increased 28% versus claims for 2000) resulted from larger auto liability claims
than had been historically experienced both in the Plumbing and Drain Cleaning
and Service America segments. For 2001, additional insurance expense of $1.4
million was recorded in the fourth quarter to address the impact of larger
projected losses for prior years, as the result of an increase in the projected
cost of settling existing claims.
INVESTMENTS
Equity investments with readily determinable fair values are recorded
at their fair values. Other equity investments are recorded at cost, subject to
write-down for impairment. The Company regularly reviews its investments for
impairment. As a result of this review, in the fourth quarter of 2002, the
Company reduced the carrying value of its investment in the redeemable preferred
stock of Medic One Inc. from its original cost of $1,200,000 to nil. Medic One,
a privately held company in the ambulance services and wheelchair transportation
business, is in violation of certain covenants under a line of credit that
expired in November 2002. The lender has not waived such violations and has the
right to call the debt. If the debt were called, Medic One could be forced into
bankruptcy.
GOODWILL
The Company annually tests the goodwill balances of its reporting units
for impairment using appraisals performed by a valuation firm. The valuation of
each reporting unit is dependent upon many factors, some of which are
market-driven and beyond the Company's control. The valuations of goodwill for
the Company's Roto-Rooter Services and Roto-Rooter Franchising and Products
reporting units indicate that the fair value of goodwill for each of these units
exceeds its respective book value by a significant amount. The valuation of
Service America indicated that its book value exceeded its fair value by $20.3
million. Accordingly, goodwill for this reporting unit was reduced from its book
value of $30.4 million to $10.1 million at December 31, 2002.
RECENT ACCOUNTING STATEMENTS
SFAS NO. 143
In June 2001, the Financial Accounting Standards Board ("FASB")
approved the issuance of SFAS No. 143, Accounting for Asset Retirement
Obligations. It is effective for fiscal years beginning after June 15, 2002, and
requires recognizing legal obligations
15
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction or development or normal operation of a long-lived
asset. Since the Company has no material asset retirement obligations, the
adoption of SFAS No.143 in 2003 will not have a material impact on the Company's
financial statements.
SFAS NO. 145
In April 2002, the FASB approved the issuance of SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections. It is generally effective for transactions
occurring after May 15, 2002. The Company's adoption of SFAS No.145 in 2002 did
not have a material impact on its financial statements.
SFAS NO. 146
In July 2002, the FASB approved the issuance of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. Generally,
SFAS No. 146 stipulates that defined exit costs (including restructuring and
employee termination costs) are to be recorded on an incurred basis rather than
on a commitment basis, as was previously required. This statement is effective
for exit or disposal activities initiated after December 31, 2002. The Company
anticipates the adoption of SFAS No. 146 in 2003 will not have a material impact
on its financial statements.
FIN NO. 45
In November 2002, the FASB approved the issuance of FASB Interpretation
("FIN") No. 45, Guarantor's Accounting and Disclosure for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. The initial recognition and
initial measurement provisions of this Interpretation are applicable to
guarantees issued or modified after December 31, 2002. The Company anticipates
the adoption of FIN No. 45 in 2003 will not have a material impact on its
financial statements.
SFAS NO. 148
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. It is effective for
annual periods ending, and for interim periods beginning, after December 15,
2002. Because the Company uses Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, to account for stock-based
compensation, this statement will not have a material impact on the Company's
financial statements.
FIN NO. 46
In January 2003, the FASB approved the issuance of FIN No. 46,
Consolidation of Variable Interest Entities. It is effective immediately for
variable interest entities created after January 31, 2003, and for variable
interest entities in which an enterprise obtains an interest after that date.
Because the Company has no such investments, this statement will not have a
material impact on the Company's financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
REGARDING FORWARD-LOOKING INFORMATION
In addition to historical information, this report contains
forward-looking statements and performance trends that are based upon
assumptions subject to certain known and unknown risks, uncertainties,
contingencies and other factors. Such forward-looking statements and trends
include, but are not limited to, those relating to the ability of Service
America to increase its gross profit margin, the impact of laws and regulations
on Company operations and the recoverability of deferred tax assets. Variances
in any or all of the risks, uncertainties, contingencies, and other factors from
the Company's assumptions could cause actual results to differ materially from
these forward-looking statements and trends. The Company's ability to deal with
the unknown outcomes of these events, many of which are beyond the control of
the Company, may affect the reliability of its projections and other financial
matters.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 15, which is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.
The Company recently carried out an evaluation, under the supervision
of the Company's President and Chief Executive Officer, with the participation
of its Executive Vice President and Treasurer and its Vice President and
Controller, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon this evaluation, the Company's President and Chief Executive Officer,
Executive Vice President and Treasurer and Vice President and Controller
concluded the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company and its
consolidated subsidiaries required to be included in the Company's Exchange Act
reports. There have been no significant changes in internal control over
financial reporting during the year ended December 31, 2002.
17
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
EXHIBITS
3.1 Certificate of Incorporation of Chemed Corporation.*
3.2 By-Laws of Chemed Corporation.*
4.1 Offer to Exchange Chemed Capital Trust Convertible Preferred
Securities for Shares of Capital Stock, dated as of December
23, 1999.*
4.2 Chemed Capital Trust, dated as of December 23, 1999.*
4.3 Amended and Restated Declaration of Trust of Chemed Capital
Trust, dated February 7, 2000.*
10.1 Agreement and Plan of Merger among Diversey U.S. Holdings,
Inc., D. C. Acquisition Inc., Chemed Corporation and DuBois
Chemicals, Inc., dated as of February 25, 1991.*
10.2 Stock Purchase Agreement between Omnicare, Inc. and Chemed
Corporation, dated as of August 5, 1992.*
10.3 Agreement and Plan of Merger among National Sanitary Supply
Company, Unisource Worldwide, Inc. and TFBD, Inc. dated as of
August 11, 1997.*
10.4 Stock Purchase Agreement dated as of May 8, 2002 by and
between PCI Holding Corp. and Chemed Corporation. *
10.5 Amendment No. 1 to Stock Purchase Agreement dated as of
October 11, 2002 by and among PCI Holding Corp., PCI-A Holding
Corp. and Chemed Corporation. *
10.6 Senior Subordinated Promissory Note dated as of October 11,
2002 by and among PCI Holding Corp. and Chemed Corporation. *
10.7 Common Stock Purchase Warrant dated as of October 11, 2002 by
and between PCI Holding Corp. and Chemed Corporation. *
10.8 1981 Stock Incentive Plan, as amended through May 20,
1991.*,**
10.9 1983 Incentive Stock Option Plan, as amended through May 20,
1991.*,**
10.10 1986 Stock Incentive Plan, as amended through May 20,
1991.*,**
10.11 1988 Stock Incentive Plan, as amended through May 20,
1991.*,**
10.12 1993 Stock Incentive Plan.*,**
10.13 1995 Stock Incentive Plan.*,**
10.14 1997 Stock Incentive Plan.*,**
10.15 1999 Stock Incentive Plan.*,**
10.16 1999 Long-Term Employee Incentive Plan as amended through May
20, 2002.*,**
10.17 2002 Stock Incentive Plan.*,**
10.18 2002 Executive Long-Term Incentive Plan.*,**
10.19 Employment Contracts with Executives.*,**
10.20 Amendment to Employment Agreements with Kevin J. McNamara,
Thomas C. Hutton and Sandra E. Laney dated August 7, 2002.*,**
10.21 Amendment to Employment Agreements with Timothy S. O'Toole and
Arthur V. Tucker dated August 7, 2002.*,**
18
10.22 Amendment to Employment Agreements with Spencer S. Lee and
Rick L. Arquilla dated August 7, 2002.*,**
10.23 Amendment No. 4 to Employment Agreement with John M. Mount
dated August 7, 2002.*,**
10.24 Amendment to Employment Agreements with Executives dated
January 1, 2002.*, **
10.25 Employment Contract with John M. Mount.*, **
10.26 Consulting Agreement between Timothy S. O'Toole and PCI
Holding Corp. effective October 11, 2002.*,**
10.27 Amendment No. 16 to Employment Agreement with Sandra E. Laney
dated March 1, 2003.*,**
10.28 Excess Benefits Plan, as restated and amended, effective April
1, 1997.*,**
10.29 Non-Employee Directors' Deferred Compensation Plan.*,**
10.30 Chemed/Roto-Rooter Savings & Retirement Plan, effective
January 1, 1999.*,**
10.31 First Amendment to Chemed/Roto-Rooter Savings & Retirement
Plan, effective September 6, 2000.*, **
10.32 Second Amendment to Chemed/Roto-Rooter Savings & Retirement
Plan, effective January 1, 2001.*, **
10.33 Third Amendment to Chemed/Roto-Rooter Savings & Retirement
Plan, effective December 12, 2001.*, **
10.34 Stock Purchase Agreement by and Among Banta Corporation,
Chemed Corporation and OCR Holding Company as of September 24,
1997.*
10.35 Directors Emeriti Plan.*,**
10.36 Second Amendment to Split Dollar Agreement with
Executives.*,**
10.37 Split Dollar Agreement with Sandra E. Laney.*,**
10.38 Split Dollar Agreement with Executives.*,**
10.39 Split Dollar Agreement with Edward L. Hutton.*,**
10.40 Split Dollar Agreement with John M. Mount.*,**
10.41 Split Dollar Agreement with Spencer S. Lee.*,**
10.42 Split Dollar Agreement with Rick L. Arquilla.*,**
10.43 Form of Promissory Note under the Executive Stock Purchase
Plan.*,**
10.44 Promissory Note under the Executive Stock Purchase Plan with
Kevin J. McNamara.*,**
10.45 Roto-Rooter Deferred Compensation Plan No. 1, as amended
January 1,1998.*,**
10.46 Roto-Rooter Deferred Compensation Plan No. 2.*,**
13. 2002 Annual Report to Stockholders.*
21. Subsidiaries of Chemed Corporation. *
23. Consent of Independent Accountants.
24. Powers of Attorney. *
31.1 Certification by Kevin J. McNamara pursuant to Rule 13A-14 of
the Exchange Act of 1934.
19
31.2 Certification by Timothy S. O'Toole pursuant to Rule 13A-14 of
the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule 13A-14
of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by Timothy S. O'Toole pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* This exhibit is being filed by means of incorporation by reference (see
Index to Exhibits on page E-1). Each other exhibit is being filed with this
Amendment No. 1 of Annual Report on Form 10-K/A.
** Management contract or compensatory plan or arrangement.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
See Index to Financial Statements and Financial Statement Schedule on
page F-1.
REPORTS ON FORM 8-K
The Company filed a Form 8-K dated October 18, 2002 with respect to its
October 11, 2002 sale of Patient Care, Inc. ("Patient Care"), formerly a wholly
owned subsidiary of the Company. Pro forma financial statements contained
therein present the financial position and results of operations of the Company
excluding Patient Care as of June 30, 2002, for the six months ended June 30,
2002 and 2001, and for the year ended December 31, 2001.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ROTO-ROOTER, INC.
December 17, 2003 By /s/ Kevin J. McNamara
----------------------------------
Kevin J. McNamara
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- ----------------------------------------------------------- -----------------
-----
/s/Kevin J. McNamara President and Chief Executive Officer |
-------------------------- and a Director (Principal Executive Officer) |
Kevin J. McNamara |
|
/s/Timothy S. O'Toole Executive Vice President and Treasurer |
-------------------------- and a Director |
Timothy S. O'Toole (Principal Financial Officer) |
|
/s/Arthur V. Tucker, Jr. Vice President and Controller | December 17, 2003
-------------------------- (Principal Accounting Officer) |
Arthur V. Tucker, Jr. |
|
Edward L. Hutton* ------------ |
Charles H. Erhart, Jr.* Sandra E. Laney* | |
Joel F. Gemunder* Donald E. Saunders* | |
Patrick P. Grace* George J. Walsh III* | -- Directors |
Thomas C. Hutton* Frank E. Wood* | |
------------ -----
------------
* Naomi C. Dallob by signing her name hereto signs this document on behalf of
each of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
December 17, 2003 /s/ Naomi C. Dallob
Date -----------------------------
Naomi C. Dallob
(Attorney-in-Fact)
21
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
2002, 2001 AND 2000
PAGE(S)
ROTO-ROOTER, INC. CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants............................................... F-2
Consolidated Statement of Operations............................................ F-3
Consolidated Balance Sheet...................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity....................... F-5 - F-6
Consolidated Statement of Comprehensive Income/(Loss)........................... F-5
Consolidated Statement of Cash Flows............................................ F-7
Notes to Financial Statements................................................... F-8 - F-29
Unaudited Summary of Quarterly Results.......................................... F-30 - F-33
Schedule II -- Valuation and Qualifying Accounts................................ S-1
The Financial Statement Schedule should be read in conjunction with the
consolidated financial statements listed above. Schedules not included have been
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto as listed above.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Roto-Rooter, Inc. (formerly Chemed
Corporation):
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows, changes in
stockholders' equity and comprehensive income/(loss) present fairly, in all
material respects, the financial position of Roto-Rooter, Inc. (formerly Chemed
Corporation) and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement Schedule II, Valuation and Qualifying Accounts, presents
fairly, in material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 4, effective January 1, 2002, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
As discussed in Note 2, the consolidated financial statements at
December 31, 2002 and 2001 and for the three years in the period ended December
31, 2002 have been restated.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 7, 2003, except for Notes 2 and 3, as to which the date is November 26,
2003
F-2
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---------- ---------- -------
(AS RESTATED - SEE NOTE 2)
CONTINUING OPERATIONS
Service revenues and sales............................................................. $ 314,176 $ 337,908 $ 355,307
--------- --------- ---------
Cost of services provided and goods sold (excluding depreciation)...................... 186,285 205,616 208,978
General and administrative expenses.................................................... 51,096 56,546 58,919
Selling and marketing expenses......................................................... 45,544 48,178 45,488
Depreciation........................................................................... 13,587 14,395 13,374
Impairment, restructuring and similar expenses (Notes 4 and 5)......................... 20,342 24,734 --
--------- --------- ---------
Total costs and expenses........................................................... 316,854 349,469 326,759
--------- --------- ---------
Income/(loss) from operations...................................................... (2,678) (11,561) 28,548
Interest expense....................................................................... (2,928) (5,423) (7,211)
Distributions on preferred securities.................................................. (1,079) (1,113) (1,197)
Other income--net (Note 8).............................................................. 4,282 4,987 9,846
--------- --------- ---------
Income/(loss) before income taxes.................................................. (2,403) (13,110) 29,986
Income taxes (Note 9).................................................................. (6,451) 4,073 (11,956)
--------- --------- ---------
Income/(loss) from continuing operations........................................... (8,854) (9,037) 18,030
DISCONTINUED OPERATIONS (Note 6)............................................................ 6,309 (1,447) 1,941
--------- --------- ---------
Income/(loss) before extraordinary loss..................................................... (2,545) (10,484) 19,971
Extraordinary loss on extinguishment of debt (Note 12)...................................... -- (1,701) --
--------- --------- ---------
NET INCOME/(LOSS)........................................................................... $ (2,545) $ (12,185) $ 19,971
========= ========= =========
EARNINGS/(LOSS) PER SHARE
Income/(loss) from continuing operations............................................... $ (.90) $ (.93) $ 1.83
========= ========= =========
Income/(loss) before extraordinary loss................................................ $ (.26) $ (1.08) $ 2.03
========= ========= =========
Net income/(loss)...................................................................... $ (.26) $ (1.25) $ 2.03
========= ========= =========
DILUTED EARNINGS/(LOSS) PER SHARE (Note 17)
Income/(loss) from continuing operations............................................... $ (.90) $ (.93) $ 1.82
========= ========= =========
Income/(loss) before extraordinary loss................................................ $ (.26) $ (1.08) $ 2.01
========= ========= =========
Net income/(loss)...................................................................... $ (.26) $ (1.25) $ 2.01
========= ========= =========
INCOME/(LOSS) BEFORE EXTRAORDINARY LOSS EXCLUDING GOODWILL AMORTIZATION
Income/(loss) before extraordinary loss................................................ $ (2,545) $ (5,863) $ 24,579
========= ========= =========
Earnings/(loss) per share.............................................................. $ (.26) $ (.60) $ 2.50
========= ========= =========
Diluted earnings/(loss) per share (Note 17)............................................ $ (.26) $ (.60) $ 2.48
========= ========= =========
NET INCOME/(LOSS) EXCLUDING GOODWILL AMORTIZATION
Net income/(loss)...................................................................... $ (2,545) $ (7,564) $ 24,579
========= ========= =========
Earnings/(loss) per share.............................................................. $ (.26) $ (.78) $ 2.50
========= ========= =========
Diluted earnings/(loss) per share (Note 17)............................................ $ (.26) $ (.78) $ 2.48
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING
Earnings/(loss) per share.............................................................. 9,858 9,714 9,833
========= ========= =========
Diluted earnings/(loss) per share (Note 17)............................................ 9,858 9,714 9,927
========= ========= =========
The Notes to Financial Statements are integral parts of this statement.
F-3
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
DECEMBER 31,
------------
2002 2001
---------- ----------
(AS RESTATED - SEE NOTE 2)
ASSETS
Current assets
Cash and cash equivalents (Note 10)............................................. $ 37,731 $ 8,725
Accounts receivable less allowances of $3,309 (2001--$4,091).................... 14,643 14,040
Inventories, primarily general merchandise and finished goods................... 9,493 10,424
Statutory deposits.............................................................. 12,323 13,331
Current deferred income taxes (Note 9).......................................... 9,894 10,470
Current assets of discontinued operations (Note 6).............................. -- 36,404
Prepaid expenses and other current assets....................................... 7,716 6,032
---------- ----------
Total current assets.......................................................... 91,800 99,426
Other investments (Note 16)....................................................... 37,326 38,273
Properties and equipment, at cost less accumulated depreciation (Note 11)......... 48,361 54,549
Identifiable intangible assets less accumulated amortization
of $7,167 (2001--$6,545) (Note 4)............................................... 2,889 3,461
Goodwill less accumulated amortization (Note 4)................................... 110,843 130,402
Noncurrent assets of discontinued operations(Note 6).............................. -- 44,905
Other assets...................................................................... 44,710 27,729
---------- ----------
Total Assets............................................................. $ 335,929 $ 398,745
========== ==========
LIABILITIES
Current liabilities
Accounts payable................................................................ $ 5,686 $ 9,126
Current portion of long-term debt (Note 12)..................................... 409 353
Income taxes (Note 9)........................................................... 7,348 6,896
Deferred contract revenue....................................................... 17,321 22,194
Current liabilities of discontinued operations(Note 6).......................... -- 10,422
Other current liabilities (Note 13)............................................. 40,961 40,703
---------- ----------
Total current liabilities..................................................... 71,725 89,694
Long-term debt (Note 12).......................................................... 25,603 61,037
Noncurrent liabilities of discontinued operations(Note 6)......................... -- 1,773
Other liabilities (Note 13)....................................................... 25,993 27,842
---------- ----------
Commitments and contingencies (Notes 13, 15 and 19)
Total Liabilities........................................................ 123,321 180,346
---------- ----------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF THE CHEMED CAPITAL TRUST (NOTE 20)............................................... 14,186 14,239
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock--authorized 15,000,000 shares $1 par;
issued 13,448,475 shares (2001--13,437,781 shares).............................. 13,448 13,438
Paid-in capital................................................................... 168,299 167,542
Retained earnings................................................................. 127,938 135,040
Treasury stock--3,630,689 shares (2001--3,606,085 shares), at cost................ (111,582) (110,424)
Unearned compensation (Note 14)................................................... (4,694) (7,436)
Deferred compensation payable in Company stock (Note 14).......................... 2,280 3,288
Accumulated other comprehensive income............................................ 3,685 4,214
Notes receivable for shares sold (Note 18)........................................ (952) (1,502)
---------- ----------
Total Stockholders' Equity............................................... 198,422 204,160
---------- ----------
Total Liabilities and Stockholders' Equity............................... $ 335,929 $ 398,745
========== ==========
The Notes to Financial Statements are integral parts of this statement.
F-4
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
CAPITAL PAID-IN
STOCK CAPITAL
--------- ----------
Balance at December 31, 1999
As reported............................................................................... $ 13,665 $ 164,549
Cumulative impact of restatement through December 31, 1999 (Note 2)....................... -- --
-------- ---------
As restated (Note 2)...................................................................... 13,665 164,549
Net income (as restated--see Note 2).................................................................. -- --
Dividends paid ($.40 per share)...................................................................... -- --
Exchange of capital stock for trust securities....................................................... (576) (7,971)
Purchases of treasury stock.......................................................................... -- --
Decrease in unearned compensation (Note 14).......................................................... -- --
Stock awards and exercise of stock options (Note 18)................................................. 226 6,266
Other comprehensive loss............................................................................. -- --
Other................................................................................................ 3 (226)
-------- ---------
Balance at December 31, 2000 (as restated--see Note 2)........................................... 13,318 162,618
Net loss (as restated--see Note 2)................................................................... -- --
Dividends paid ($.44 per share)...................................................................... -- --
Stock awards and exercise of stock options (Note 18)................................................. 119 5,055
Decrease in unearned compensation (Note 14).......................................................... -- --
Transfer of deferred compensation payable to other liabilities....................................... -- 14
Other comprehensive income........................................................................... -- --
Purchases of treasury stock.......................................................................... -- --
Payments on notes receivable (Note 18)............................................................... -- --
Other................................................................................................ 1 (145)
-------- ---------
Balance At December 31, 2001 (as restated--see Note 2)............................................ 13,438 167,542
Net loss (as restated--see Note 2).................................................................... -- --
Dividends paid ($.45 per share)...................................................................... -- --
Decrease in unearned compensation (Note 14).......................................................... -- --
Stock awards and exercise of stock options (Note 18)................................................. 23 974
Other comprehensive loss............................................................................. -- --
Payments on notes receivable (Note 18)............................................................... -- --
Purchases of treasury stock.......................................................................... -- --
Distribution of assets to settle deferred compensation liabilities................................... -- --
Other................................................................................................ (13) (217)
-------- ---------
BALANCE AT DECEMBER 31, 2002 (as restated--see Note 2)........................................... $ 13,448 $ 168,299
======== =========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
-------- --------- -------
Net income/(loss) (as restated--see Note 2)................................................. $ (2,545) $ (12,185) $ 19,971
-------- --------- --------
Other comprehensive income/(loss), net of income tax:
Unrealized holding gains/(losses) on available-for-sale investments arising during the
period................................................................................. 246 1,680 2,106
Less reclassification adjustment for gains on available-for-sale investments arising
during the period...................................................................... (775) (703) (2,261)
-------- --------- --------
Total................................................................................ (529) 977 (155)
-------- --------- --------
Comprehensive income/(loss)................................................................. $ (3,074) $ (11,208) $ 19,816
======== ========= ========
The Notes to Financial Statements are integral parts of these statements.
F-5
DEFERRED
COMPENSATION ACCUMULATED NOTES
TREASURY PAYABLE IN OTHER RECEIVABLE
RETAINED STOCK-- UNEARNED COMPANY COMPREHENSIVE FOR
EARNINGS AT COST COMPENSATION STOCK INCOME SHARES SOLD TOTAL
----------- ---------- ------------- ------------- ------------- ------------ ----------
$ 144,322 $ (99,437) $(17,056) $ 5,340 $ 3,392 $(2,731) $ 212,044
(1,700) -- -- -- -- -- (1,700)
--------- ---------- -------- ------- ------- ------- ---------
142,622 (99,437) (17,056) 5,340 3,392 (2,731) 210,344
19,971 -- -- -- -- -- 19,971
(4,022) -- -- -- -- -- (4,022)
(6,992) -- -- -- -- -- (15,539)
-- (5,320) -- -- -- -- (5,320)
-- -- 3,617 -- -- -- 3,617
-- (408) (3,244) -- -- -- 2,840
-- -- -- -- (155) -- (155)
17 (84) -- 160 -- (155) (285)
--------- ---------- -------- ------- ------- ------- ---------
151,596 (105,249) (16,683) 5,500 3,237 (2,886) 211,451
(12,185) -- -- -- -- -- (12,185)
(4,384) -- -- -- -- -- (4,384)
-- (3,654) 5,138 -- -- -- 6,658
-- -- 4,109 -- -- -- 4,109
-- (14) -- (2,293) -- -- (2,293)
-- -- -- -- 977 -- 977
-- (219) -- -- -- -- (219)
-- (1,288) -- -- -- 1,484 196
13 -- -- 81 -- (100) (150)
--------- ---------- -------- ------- ------- ------- ---------
135,040 (110,424) (7,436) 3,288 4,214 (1,502) 204,160
(2,545) -- -- -- -- -- (2,545)
(4,438) -- -- -- -- -- (4,438)
-- -- 2,742 -- -- -- 2,742
-- (2,114) -- -- -- -- (1,117)
-- -- -- -- (529) -- (529)
-- (338) -- -- -- 550 212
-- (51) -- -- -- -- (51)
-- 1,066 -- (1,066) -- -- --
(119) 279 -- 58 -- -- (12)
--------- ---------- -------- ------- ------- ------- ---------
$ 127,938 $ (111,582) $ (4,694) $ 2,280 $ 3,685 $ (952) $ 198,422
========= ========== ======== ======= ======= ======= =========
F-6
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ----------
(AS RESTATED--SEE NOTE 2)
CASH FLOWS FROM FINANCING ACTIVITIES
Net income/(loss) ............................................................ $ (2,545) $(12,185) $ 19,971
Adjustments to reconcile net income/(loss) to net cash provided by operations:
Depreciation and amortization ............................................. 14,356 21,273 20,314
Noncash restructuring and impairment charges .............................. 21,542 15,150 --
Provision for uncollectible accounts receivable ........................... 1,808 2,866 2,236
Provision for deferred income taxes ....................................... 459 (6,173) 139
Discontinued operations (Note 6) .......................................... (6,309) 1,447 (1,941)
Gains on sales of available-for-sale investments .......................... (1,141) (993) (3,399)
Changes in operating assets and liabilities, excluding\
amounts acquired in business combinations:
Increase in accounts receivable ..................................... (2,351) (411) (4)
Decrease in statutory reserve requirements .......................... 1,008 715 208
Decrease/(increase) in inventories .................................. 931 79 (706)
Decrease/(increase) in prepaid expenses and other current assets .... (666) 990 45
Increase/(decrease) in accounts payable, deferred contract
revenue and other current liabilities ............................ (6,724) 7,059 2,873
Increase/(decrease) in income taxes .................................... 4,096 (5,535) 5,282
Decrease/(increase) in other assets .................................... (1,253) 233 (3,711)
Increase/(decrease) in other liabilities ............................... (621) (96) 1,670
Noncash expense of internally financed ESOPs ........................... 2,742 4,109 3,049
Other sources/(uses) ................................................... 1,562 (1,405) (45)
-------- -------- --------
Net cash provided by continuing operations .......................... 26,894 27,123 45,981
Net cash provided by discontinued operations (Note 6) ............... 2,629 7,258 5,794
-------- -------- --------
Net cash provided by operating activities ........................ 29,523 34,381 51,775
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital expenditures ......................................................... (11,855) (14,457) (17,586)
Net proceeds/(uses) from sale of discontinued operations (Note 6) ............ 50,676 (6,332) (3,695)
Proceeds from sales of property and equipment ................................ 2,479 3,676 625
Business combinations, net of cash acquired (Note 7) ......................... (1,236) (1,555) (11,504)
Proceeds from sales of available-for-sale investments ........................ 1,917 1,377 4,290
Purchase of Roto-Rooter minority interest .................................... (83) (820) (1,236)
Investing activities of discontinued operations (Note 6) ..................... (469) (900) (1,911)
Other uses ................................................................... (413) (78) (303)
-------- -------- --------
Net cash provided (used) by investing activities ................. 41,016 (19,089) (31,320)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (Note 12) ........................................ (40,378) (46,377) (18,164)
Proceeds from issuance of long-term debt (Note 12) ........................... 5,000 35,000 1,200
Dividends paid ............................................................... (4,438) (4,384) (4,022)
Purchases of treasury stock ................................................... (3,214) (1,226) (5,728)
Issuance of capital stock .................................................... 1,547 735 97
Other uses ................................................................... (50) (293) (903)
-------- -------- --------
Net cash used by financing activities ............................ (41,533) (16,545) (27,520)
-------- -------- --------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 29,006 (1,253) (7,065)
Cash and cash equivalents at beginning of year .................................. 8,725 9,978 17,043
-------- -------- --------
Cash and cash equivalents at end of year ........................................ $ 37,731 $ 8,725 $ 9,978
======== ======== ========
The Notes to Financial Statements are integral parts of this statement.
F-7
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Roto-Rooter, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents comprise short-term highly liquid investments that
have been purchased within three months of their dates of maturity.
INVENTORIES
Inventories are stated at the lower of cost or market. For determining
the value of inventories, the first-in, first-out ("FIFO") method is used.
STATUTORY DEPOSITS
Statutory deposits are funds held in a segregated account in the
Company's name as security for revenue collected for prepaid home service
warranty contracts by Service America. A minimum of 10% of the required balance
must be deposited directly with the State of Florida. The amount of the deposits
is calculated quarterly and equals 25% of total service contract revenue
represented by service contracts in force at the end of the quarter. As the
amount of the required deposit increases or decreases, cash is transferred to or
from unrestricted cash to the segregated statutory deposit accounts on the
Consolidated Balance Sheet.
OTHER INVESTMENTS
Other investments, all of which are currently classified as
available-for-sale, include the redeemable preferred stock of privately held
Vitas Healthcare Corporation ("Vitas"), three stock purchase warrants of Vitas,
a stock purchase warrant in privately held Patient Care, Inc., a former
subsidiary of the Company, the redeemable preferred stock of privately held
Medic One, Inc. ("Medic One") and several publicly traded common stocks.
Equity investments that are publicly traded are recorded at their fair
value with unrealized gains and losses, net of taxes, included in other
comprehensive income on the balance sheet. The Company's investment in the
redeemable preferred stock of Vitas is carried at amortized cost and other
privately held investments are recorded at cost, subject to write down for
impairment. None of the equity investments are accounted for using the equity
method of accounting, as the Company's relative voting ownership interest in
each of its investments is less than 1%.
All investments are reviewed periodically for impairment based on
available market and financial data. For its investment in Vitas the Company
reviews Vitas' unaudited quarterly operating data and audited annual financial
statements on a timely basis. In addition, the Company's Treasurer sits on the
Vitas Board of Directors. If the market value or net realizable value of the
investment is less than the Company's cost and this decline is determined to be
other than temporary, a write down to fair value is made and a realized loss is
recorded in the statement of operations.
In calculating realized gains and losses on the sales of investments,
the specific-identification method is used to determine the cost of investments
sold.
DEPRECIATION AND PROPERTIES AND EQUIPMENT
Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Expenditures
for maintenance, repairs, renewals and betterments that do not materially
prolong the useful lives of the assets are expensed as incurred. The cost of
property retired or sold and the related accumulated depreciation are removed
from the accounts, and the resulting gain or loss is reflected currently in
income.
The weighted average lives of the Company's gross properties and
equipment at December 31, 2002, were:
LIFE
----
Machinery and equipment 4.5 yrs.
Furniture and fixtures 6.3
Transportation equipment 6.7
Computer software 7.5
Buildings 23.7
F-8
INTANGIBLE ASSETS
Identifiable intangible assets arise from purchase business
combinations and are amortized using the straight-line method over the estimated
useful lives of the assets. In accordance with Financial Accounting Standards
Board ("FASB") Statement No. 142, Goodwill and Other Intangible Assets,
amortization of goodwill ceased effective December 31, 2001. Beginning January
1, 2002, goodwill is tested at least annually for impairment. For 2001 and
earlier years, goodwill acquired prior to July 1, 2001, was amortized using the
straight-line method over the estimated useful life, but not in excess of 40
years. The weighted average lives of the Company's gross identifiable intangible
assets at December 31, 2002, were:
LIFE
----
Covenants not to compete 5.4 yrs.
Contracts 9.9
Customer lists 12.5
Trade names 20.4
LONG-LIVED ASSETS
The Company periodically makes an estimation and valuation of the
future benefits of its long-lived assets (other than goodwill) based on key
financial indicators. If the projected undiscounted cash flows of a major
business unit indicate that property and equipment or identifiable intangible
assets have been impaired, a write-down to fair value is made.
REVENUE RECOGNITION
Revenues received under prepaid contractual service agreements are
recognized on a straight-line basis over the life of the contract. All other
service revenues and sales are recognized when the services are provided or the
products are delivered.
OPERATING EXPENSES
Cost of services provided and goods sold (excluding depreciation)
includes salaries, wages and benefits of service technicians and field
personnel, material costs, insurance costs, service vehicle costs and other
expenses directly related to providing service revenues or generating sales.
General and administrative expenses include salaries, wages and benefits of
administrative employees, office rent and operating costs, legal, banking and
professional fees and other administrative costs. Selling and marketing expenses
include salaries, wages and benefits of selling and marketing employees,
advertising expenses, communications and branch telephone expenses and other
selling and customer-related expenses.
ADVERTISING
The Company expenses the production costs of advertising the first time
the advertising takes place. Costs of Yellow Pages listings are expensed when
the directories are placed in circulation. Other advertising costs are expensed
as incurred. Advertising expense (as restated--see Note 2) for the year ended
December 31, 2002 was $17,520,000 (2001--$18,362,000; 2000--$14,680,000).
DIVIDEND INCOME
Dividends on the Company's preferred stock investment in Vitas are
cumulative and are recorded during the quarter they are earned. All other
dividends are recognized when declared.
COMPUTATION OF EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of
shares of capital stock outstanding. Diluted earnings per share reflect the
dilutive impact of the Company's outstanding stock options and nonvested stock
awards. Diluted earnings per share also assume the conversion of the Convertible
Preferred Securities into capital stock only when the impact is dilutive on
earnings per share from continuing operations.
EMPLOYEE STOCK OWNERSHIP PLANS
Contributions to the Company's Employee Stock Ownership Plans ("ESOP")
are based on established debt repayment schedules. Shares are allocated to
participants based on the principal and interest payments made during the
period. The Company's policy is to record its ESOP expense by applying the
transition rule under the level-principal amortization concept.
F-9
STOCK-BASED COMPENSATION PLANS
The Company uses Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, to account for stock-based
compensation. Since the Company's stock options qualify as fixed options under
APB 25 and since the option price equals the market price on the date of grant,
there is no compensation cost recorded for stock options. Restricted stock was
recorded as compensation cost over the requisite vesting periods on a pro rata
basis, based on the market value on the date of grant.
The following table illustrates the effect on net income/(loss) and
earnings/(loss) per share if the Company had applied the fair-value-recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation
(in thousands, except per share data):
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Net income/(loss), as restated (Note 2) $(2,545) $(12,185) $19,971
Add: stock-based employee compensation included
in reported net income/(loss), net of related
income tax effects 120 4,113 1,106
Deduct: total stock-based employee compensation
determined under a fair-value-based method for
all stock options and awards, net of related
income tax effects (856) (4,444) (1,631)
------- -------- -------
Pro forma net income/(loss) $(3,281) $(12,516) $19,446
======= ======== =======
Earnings/(loss) per share:
As restated (Note 2) $ (.26) $ (1.25) $ 2.03
======= ======== =======
Pro forma $ (.33) $ (1.29) $ 1.98
======= ======== =======
Diluted earnings/(loss) per share:
As restated (Note 2) $ (.26) $ (1.25) $ 2.01
======= ======== =======
Pro forma $ (.33) $ (1.29) $ 1.96
======= ======== =======
The above pro forma data were calculated using the Black-Scholes
option-valuation method to value the Company's stock options granted in 2002 and
prior years. Key assumptions include:
Weighted average grant-date fair value of options granted $ 11.18
Risk-free interest rate 4.8%
Expected volatility 25.1
Expected life of options 6 yrs.
No options were granted in 2001 or 2000; however, for 2002, it was
assumed that the annual dividend would be increased $.01 per share per quarter
in the fourth quarter of every odd-numbered year. This assumption was based on
the facts and circumstances that existed at the time options were granted and
should not be construed to be an indication of future dividend amounts to be
paid.
INSURANCE ACCRUALS
The Company is self-insured for casualty insurance claims, subject to a
stop-loss policy with a maximum per-occurrence limit of $250,000. Management
consults with insurance professionals and closely monitors and evaluates its
historical claims experience to estimate the appropriate level of accrual for
incurred claims.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior years' financial statements have been
reclassified to conform to the 2002 presentation.
2. RESTATEMENTS
In October 2003, the Company, in consultation with its independent
accountants, reevaluated its accounting for Yellow Pages costs and concluded
these costs did not qualify for capitalization as direct-response advertising
under Statement of Position 93-7, Reporting on Advertising Costs, which for the
Company was effective January 1, 1995. In its previously-filed financial
statements, the Company capitalized and amortized these costs over the lives of
the directories, typically 12 months.
F-10
Accordingly, the Company's consolidated financial statements as of and
for the years ended December 31, 2002, 2001 and 2000 have been restated to
recognize Yellow Pages advertising expenses when the directories are placed in
circulation rather than to capitalize and amortize such costs.
The effects of these charges are to reduce net income or increase net
losses for the years ended December 31, 2002, 2001 and 2000 by $732,000,
$1,810,000 and $613,000, respectively. The restatements impact only the Plumbing
and Drain Cleaning segment.
The following tables set forth the impact of this change on line items of
the consolidated balance sheet and consolidated statement of operations (in
thousands, except per share amounts):
CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
----------------------------------------------------
2002 2001
------------------------- -------------------------
REPORTED RESTATED REPORTED RESTATED
------------ ----------- ----------- -----------
Current deferred income taxes $ 7,278 $ 9,894 $ 8,250 $ 10,470
Prepaid expenses and other current assets 13,332 7,716 12,375 6,032
Other current liabilities 39,105 40,961 40,703 40,703
Retained earnings
Balance at beginning of year $ 139,163 $ 135,040 $ 153,909 $ 151,596
Net loss (1,813) (2,545) (10,375) (12,185)
Cash dividends paid (4,438) (4,438) (4,384) (4,384)
Other movement (119) (119) 13 13
----------- ---------- ---------- ----------
Balance at end of year $ 132,793 $ 127,938 $ 139,163 $ 135,040
=========== ========== ========== ==========
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- --------- --------- ---------
Selling and marketing expenses $ 44,416 $ 45,544 $ 45,393 $ 48,178 $ 44,545 $ 45,488
Income/(loss) from operations (1,550) (2,678) (8,776) (11,561) 29,491 28,548
Income/(loss) before income taxes (1,275) (2,403) (10,325) (13,110) 30,929 29,986
Income taxes (expense)/benefit (6,847) (6,451) 3,098 4,073 (12,286) (11,956)
Income/(loss) from continuing operations (8,122) (8,854) (7,227) (9,037) 18,643 18,030
Income/(loss) before extraordinary loss (1,813) (2,545) (8,674) (10,484) 20,584 19,971
Net Income/(Loss) (1,813) (2,545) (10,375) (12,185) 20,584 19,971
Earnings/(Loss) Per Share
Income/(loss) from continuing operations $ (0.82) $ (0.90) $ (0.74) $ (0.93) $ 1.90 $ 1.83
Income/(loss) before extraordinary loss (0.18) (0.26) (0.89) (1.08) 2.09 2.03
Net income/(loss) (0.18) (0.26) (1.07) (1.25) 2.09 2.03
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing operations $ (0.82) $ (0.90) $ (0.74) $ (0.93) $ 1.88 $ 1.82
Income/(loss) before extraordinary loss (0.18) (0.26) (0.89) (1.08) 2.07 2.01
Net income/(loss) (0.18) (0.26) (1.07) (1.25) 2.07 2.01
Income/(Loss) Before Extraordinary Loss
Excluding Goodwill Amortization
Income/(loss) before extraordinary loss $ (1,813) $ (2,545) $ (4,053) $ (5,863) $ 25,192 $ 24,579
Earnings/(loss) per share (0.18) (0.26) (0.42) (0.60) 2.56 2.50
Diluted earnings/(loss) per share (0.18) (0.26) (0.42) (0.60) 2.52 2.48
Net Income/(Loss)
Excluding Goodwill Amortization
Income/(loss) before extraordinary loss $ (1,813) $ (2,545) $ (5,754) $ (7,564) $ 25,192 $ 24,579
Earnings/(loss) per share (0.18) (0.26) (0.59) (0.78) 2.56 2.50
Diluted earnings/(loss) per share (0.18) (0.26) (0.59) (0.78) 2.52 2.48
Average Number of Shares Outstanding
Earnings/(loss) per share 9,858 9,858 9,714 9,714 9,833 9,833
Diluted earnings/(loss) per share 9,858 9,858 9,714 9,714 10,305 9,927
F-11
3. SEGMENTS AND NATURE OF THE BUSINESS, INCLUDING SUBSEQUENT EVENT
During the second quarter of 2003, the administrative functions for
employee benefits, retirement services, risk management, public relations, cash
management and taxation of the corporate office and the Plumbing and Drain
Cleaning business were combined to enable the Company to benefit from economies
of scale. In May 2003 the shareholders of the Company approved changing the
corporation's name from Chemed Corporation to Roto-Rooter Inc. Due to these
changes and the changing composition of businesses comprising the Company over
the past several years, management re-evaluated the Company's segment reporting
as it relates to corporate office administrative expenses. The discontinuance of
businesses in 1997 (Omnia Group and National Sanitary Supply), 2001 (Cadre
Computer) and 2002 (Patient Care), results in more than 80% of the Company's
business represented by Roto-Rooter's Plumbing and Drain Cleaning business.
To better reflect how executive management evaluates its operations,
the costs of the administrative functions of the corporate office were combined
with the operating results of the Plumbing and Drain Cleaning business (formerly
the Roto-Rooter Group) to form the Plumbing and Drain Cleaning segment,
effective in the second quarter of 2003. The Service America segment remains
essentially unchanged. Data for the former Roto-Rooter Group and corporate
office overhead for all prior periods have been restated for comparability
purposes.
The Plumbing and Drain Cleaning segment provides plumbing and draining
cleaning services, and Service America Systems Inc. ("Service America") provides
major-appliance and heating/air-conditioning ("HVAC") repair, maintenance and
replacement services. Relative contributions to service revenues and sales were
81% and 19%, respectively, in 2002.
The reportable segments have been defined along service lines,
consistent with the way the businesses are managed. In determining reportable
segments, no operating segments have been aggregated. Accordingly, the
reportable segments are defined as follows:
- The Plumbing and Drain Cleaning segment provides repair and maintenance
services to residential and commercial accounts using the Roto-Rooter
service mark. Such services include plumbing and sewer, drain and pipe
cleaning. They are delivered through company-owned,
independent-contractor-operated and franchised locations. This segment
also manufactures and sells products and equipment used to provide such
services.
- The Service America segment provides HVAC repair, maintenance and
replacement services primarily to residential customers through service
contracts and retail sales (demand services). In addition, Service
America sells air conditioning equipment and duct cleaning services.
Substantially all of the Company's service revenues and sales from
continuing operations are generated from business within the United States.
Management closely monitors accounts receivable balances and has established
policies regarding the extension of credit and compliance therewith.
Segment data for the Company's continuing operations is set forth below
(in thousands, except footnote data):
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- ---------- ---------
REVENUES BY TYPE OF SERVICE
Plumbing and Drain Cleaning
Sewer and drain cleaning $ 106,125 $ 109,250 $ 109,933
Plumbing repair and maintenance 98,812 105,803 113,333
Industrial and municipal sewer and drain cleaning 14,660 14,526 14,234
Contractors 12,350 11,873 11,279
HVAC repair and maintenance 3,746 9,859 13,412
Other products and services 17,994 18,042 18,886
--------- --------- ---------
Total Plumbing and Drain Cleaning 253,687 269,353 281,077
--------- --------- ---------
Service America
Repair services under contracts 45,182 51,299 55,048
Demand repair services 15,307 17,256 19,182
--------- --------- ---------
Total Service America 60,489 68,555 74,230
--------- --------- ---------
Total service revenues and sales
$ 314,176 $ 337,908 $ 355,307
========= ========= =========
AFTERTAX SEGMENT EARNINGS/ (LOSS) (AS RESTATED--SEE NOTE 2)
Plumbing and Drain Cleaning (a) $ 9,796 $ (8,765) $ 14,291
Service America (a,b) (19,961) (686) 1,058
--------- --------- ---------
Total segment earnings/(loss) (10,165) (9,451) 15,349
Unallocated investing and financing--net (c) 1,311 414 2,681
Discontinued operations 6,309 (1,447) 1,941
Extraordinary loss - (1,701) -
--------- --------- ---------
Net income/ (loss) $ (2,545) $ (12,185) $ 19,971
========= ========= =========
F-12
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
INTEREST INCOME
Plumbing and Drain Cleaning $ 549 $ 243 $ 95
Service America 413 799 1,077
--------- --------- ---------
Subtotal 962 1,042 1,172
Unallocated investing and financing--net 2,644 2,005 2,717
Intercompany eliminations (298) (180) (217)
--------- --------- ---------
Total interest income $ 3,308 $ 2,867 $ 3,672
========= ========= =========
INTEREST EXPENSE
Plumbing and Drain Cleaning $ 153 $ 223 $ 1,992
Service America 59 -- --
--------- --------- ---------
Subtotal 212 223 1,992
Unallocated investing and financing--net 2,716 5,614 7,126
Intercompany eliminations -- (414) (1,907)
--------- --------- ---------
Total interest expense $ 2,928 $ 5,423 $ 7,211
========= ========= =========
INCOME TAX PROVISION (AS RESTATED--SEE NOTE 2)
Plumbing and Drain Cleaning $ 6,535 $ (3,380) $ 10,169
Service America 418 437 1,570
--------- --------- ---------
Subtotal 6,953 (2,943) 11,739
Unallocated investing and financing--net (502) (1,130) 217
--------- --------- ---------
Total income tax provision $ 6,451 $ (4,073) $ 11,956
========= ========= =========
IDENTIFIABLE ASSETS (AS RESTATED--SEE NOTE 2)
Plumbing and Drain Cleaning $ 164,217 $ 172,873 $ 188,037
Service America 49,580 71,350 72,364
--------- --------- ---------
Total identifiable assets 213,797 244,223 260,401
Unallocated investing and financing--net (d) 122,132 73,212 71,683
Discontinued operations -- 81,310 87,848
--------- --------- ---------
Total Assets $ 335,929 $ 398,745 $ 419,932
========= ========= =========
ADDITIONS TO LONG-LIVED ASSETS (e)
Plumbing and Drain Cleaning $ 9,433 $ 10,892 $ 20,811
Service America 3,414 4,696 7,706
--------- --------- ---------
Subtotal 12,847 15,588 28,517
Unallocated investing and financing--net (d) 184 424 207
--------- --------- ---------
Total additions $ 13,031 $ 16,012 $ 28,724
========= ========= =========
DEPRECIATION AND AMORTIZATION (f)
Plumbing and Drain Cleaning $ 10,214 $ 14,128 $ 13,765
Service America 3,633 4,951 4,273
--------- --------- ---------
Subtotal 13,847 19,079 18,038
Unallocated investing and financing--net (d) 509 2,248 2,276
--------- --------- ---------
Total depreciation and amortization $ 14,356 $ 21,327 $ 20,314
========= ========= =========
(a) Amounts for 2001 include aftertax restructuring and similar expenses and
other charges totaling $15,271,000 for Plumbing and Drain Cleaning and
$1,672,000 for Service America.
(b) Amounts for 2002 for Service America include an aftertax goodwill
impairment charge of $20,342,000.
(c) Amount for 2002 includes a $780,000 aftertax investment impairment charge.
Amounts for 2002, 2001 and 2000 include capital gains on the sales of
investments of $775,000, $703,000 and $2,261,000, respectively.
(d) Corporate assets consist primarily of cash and cash equivalents, marketable
securities, properties and equipment and other investments.
(e) Long-lived assets include goodwill, identifiable intangible assets and
property and equipment.
(f) Depreciation and amortization include amortization of goodwill,
identifiable intangible assets and other assets.
F-13
4. INTANGIBLE ASSETS
Amortization of intangible assets from continuing operations was (in
thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
------ ------ ------
Identifiable intangible assets $ 621 $ 680 $ 902
Goodwill -- 4,102 4,090
------ ------ ------
Total $ 621 $4,782 $4,992
====== ====== ======
The following is a schedule by year of projected amortization expense
for intangible assets (in thousands):
2003 $568
2004 310
2005 273
2006 259
2007 239
The changes in the carrying amount of goodwill for the years ended
December 31, 2001 and 2002 are as follows (in thousands):
PLUMBING
AND DRAIN SERVICE
CLEANING AMERICA TOTAL
--------- --------- ---------
December 31, 2000 $ 111,854 $ 31,982 $ 143,836
Impairment losses (9,793) (787) (10,580)
Amortization (3,286) (816) (4,102)
Acquired in
business combinations 1,428 -- 1,428
Other adjustments (180) -- (180)
--------- --------- ---------
December 31, 2001 100,023 30,379 130,402
Acquired in
Business combinations 1,110 -- 1,110
Impairment losses -- (20,342) (20,342)
Other adjustments (327) -- (327)
--------- --------- ---------
December 31, 2002 $ 100,806 $ 10,037 $ 110,843
========= ========= =========
In conjunction with the adoption of FASB Statement No. 142, the Company
performed its transition evaluation of goodwill as of January 1, 2002. For the
purpose of impairment testing, the Company determined its reporting components
to be Service America, Patient Care, Roto-Rooter Services (plumbing and drain
cleaning services), Roto-Rooter Franchising and Products (franchising and
manufacturing and sale of plumbing and drain cleaning products) and Roto-Rooter
HVAC/non-Roto-Rooter brands (heating, ventilating, and air-conditioning repair
services and non-Roto-Rooter-branded plumbing and drain cleaning services). The
Company's transition impairment tests, based on valuations by a professional
valuation firm, indicated that none of the goodwill for any of its reporting
components was impaired at January 1, 2002.
During the fourth quarter of 2002, the Company recognized a $20,342,000
impairment loss on the goodwill included in the Service America segment. The
loss was based on a valuation of the Service America business as of December 31,
2002, by a professional valuation firm. The valuation was based on an average of
a capital markets valuation for comparable businesses and discounted cash flows.
During 2001, the Company recognized a $10,580,000 impairment loss under
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. Most of this amount ($9,793,000)
relates to goodwill included on the books of Plumbing and Drain Cleaning's HVAC
and non-Roto-Rooter-branded plumbing operations. As the Company had committed to
exit these underperforming businesses in November 2001, the amount of the
impairment was based on the estimated selling price of the operations to be sold
or dissolved. The remaining $787,000 impairment loss relates to the closing of
Service America's Tucson branch. These charges are included in the
restructuring-and-similar-expenses account in the statement of operations.
F-14
Earnings/(loss) for 2001 and 2000 excluding the amortization of
goodwill are presented below (as restated -- see Note 2)(in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000
-------- --------
Restated income/(loss)
before extraordinary loss $(10,484) $ 19,971
Aftertax amortization of goodwill 4,621 4,608
-------- --------
Adjusted income/(loss) $ (5,863) $ 24,579
======== ========
Restated net income/(loss) $(12,185) $ 19,971
Aftertax amortization of goodwill 4,621 4,608
-------- --------
Adjusted net income/(loss) $ (7,564) $ 24,579
======== ========
5. RESTRUCTURING AND SIMILAR EXPENSES
In the third quarter of 2001, the Company made the decision to close
the Tucson branch of its Service America segment, as the result of evaluating
its operating performance since the branch was acquired in 1999. The branch
failed to achieve the level of profitability that had been anticipated upon
acquisition.
In the fourth quarter of 2001, the Company decided to exit the HVAC and
non-Roto-Rooter-branded plumbing businesses by selling, closing down or
transferring these operations to Roto-Rooter branches. The decision to dispose
of these operations was made because they failed to improve profitability in
recent years, and the businesses were requiring the use of resources which
management believed could be better used elsewhere in the Plumbing and Drain
Cleaning segment.
In the third quarter of 2002, management decided to retain the largest
of the HVAC and non-Roto-Rooter branded plumbing businesses, as it remained
profitable throughout the period and the majority of its revenue was from
plumbing operations. Additionally, management determined there was sufficient
synergism between this non-Roto-Rooter-branded operation and the nearby
Roto-Rooter branch to justify retaining it. The decision to retain this business
did not have a material impact on the results of operations for 2002 and would
not have materially changed the restructuring charges recorded in 2001 for the
cost of exiting HVAC and non-Roto-Rooter branded businesses.
The closing of Service America's Tucson branch was completed in 2001
and the restructuring of Roto-Rooter's HVAC and non-branded plumbing businesses
was completed in the third quarter of 2002. Since most of the restructuring
expenses arose from non-cash asset impairment charges, the restructuring plans
did not consume a significant amount of the Company's resources.
F-15
During 2001, the Company's continuing operations recorded pretax
restructuring and similar expenses and other nonrecurring and unusual charges as
follows (in thousands, except footnote):
Plumbing
and Drain Service
Cleaning America Total
--------- --------- ---------
Restructuring expenses:
Cost of exiting HVAC and non-Roto-Rooter-
branded plumbing businesses (a) $ 11,205 $ - $ 11,205
Cost of closing Service America's Tucson branch (b) - 1,171 1,171
Expenses not expected to recur (similar expenses):
Charges for accelerating the vesting of restricted
stock awards in connection with the anticipated
revision of the Company's long-term incentive
plans in 2002 (c) 5,294 146 5,440
Severance charges for 10 individuals incurred in
connection with reducing administrative
expenses, largely at the corporate office (d) 2,909 757 3,666
Resolution of overtime pay issues with the U.S.
Department of Labor ("DOL") , relating primarily
to prior years' compensation expense (e) 2,749 - 2,749
Property and equipment impairment charges (f) 337 166 503
--------- --------- ---------
Total restructuring and similar expenses 22,494 2,240 24,734
Other unusual charges:
Additional casualty insurance expense recorded
to reflect increase in valuation of insurance
claims for prior years 1,411 (g) - 1,411
Terminated lease obligations 166 (h) 69 (g) 235
All other 417 (h) 414 (g) 831
--------- --------- ---------
Total restructuring and similar expenses and
other unusual charges $ 24,488 $ 2,723 $ 27,211
========= ========= =========
----------
(a) Amount includes a charge of $9,793,000 for the reduction in the
carrying value of goodwill and $477,000 for the reduction in
the carrying value of identifiable intangible assets.
(b) Amount includes a charge of $833,000 for the reduction in the carrying
value of goodwill and $50,000 for the reduction in the
carrying value of identifiable intangible assets.
(c) In the fourth quarter of 2001, the Board of Directors of the Company
approved the acceleration of the vesting of all outstanding
restricted stock awards as a result of its decision to
terminate this long-term incentive program. In May 2002, the
shareholders of the Company approved the adoption of the 2002
Executive Long-Term Incentive Plan to replace the restricted
stock award program (see Note 19). Stock award expense is
typically classified as general and administrative expense in
the statement of operations. This charge is included in the
"restructuring and other similar expense" category because
this type of expense is not expected to recur in the
foreseeable future. The accrual balance related to these
charges was nil at December 31, 2002 ($1,177,000 at December
31, 2001).
(d) These charges are included in "restructuring and other similar expense"
category as the charges relate primarily to personnel who are
not expected to be replaced. Severance expense is typically
classified as general and administrative expense in the
statement of operations. The accrual balance related to these
charges totaled $3,489,000 at December 31, 2002 ($3,666,000 at
December 31, 2001).
(e) This charge represents cost of the nationwide settlement between
Roto-Rooter and the DOL for wages and benefits of prior
periods. These charges are included in the "restructuring and
other similar expense" category as they are not expected to
recur in the foreseeable future. Wages and related benefits
are typically classified as cost of services provided and
goods sold in the statement of operations. The accrual balance
related to these charges totaled nil at December 31, 2002
($250,000 at December 31, 2001).
(f) The cost of fixed asset impairment charges are included in the
"restructuring and other similar expense" category because
they are not expected to recur in the foreseeable future. The
depreciation of property and equipment is typically included
in a separate line (depreciation) in the statement of
operations.
(g) Amounts are included in cost of services provided and goods sold in the
consolidated statement of operations.
(h) Amounts are included in general and administrative expenses in the
consolidated statement of operations.
These costs were charged to the following accounts in the consolidated statement
of operations (in thousands):
Cost of services provided and goods sold $ 2,027
General and administrative expenses 450
Impairment, restructuring and similar
expenses 24,734
-------------
Total $ 27,211
=============
The combined aftertax impact of the restructuring and similar expenses
and other charges for 2001 was $16,943,000 ($1.74 per share).
F-16
During 2002, the Company decided to retain several of Plumbing and
Drain Cleaning's non-branded plumbing and HVAC businesses. In the aggregate, the
retained operations generated $16,162,000 of net revenues and $241,000 of
operating profit in 2002.
The operating results for businesses divested within the Plumbing and
Drain Cleaning and Service America segments as a part of the restructuring in
2001 were (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Service revenues and sales:
Non-Roto-Rooter-
branded businesses $ 403 $ 6,275 $ 9,298
Service America's
Tucson branch -- 1,664 2,342
Operating loss:
Non-Roto-Rooter-
branded businesses (106) (754) (112)
Service America's
Tucson branch -- (430) (487)
Accruals related to restructuring charges recorded in 2001 are summarized below
(in thousands):
Cost of exiting HVAC and non-Roto-Rooter-
branded plumbing businesses $ 11,205
Cost of closing Service America's Tucson branch 1,171
--------
Total restructuring expenses for 2001 12,376
Less: noncash charge for reduction in carrying value of goodwill (10,626)
Less: noncash charge for reduction in carrying value of identifiable intangible assets (527)
Less: noncash charge for property and equipment impairment (380)
Less: noncash charge for reduction in carrying value of other tangible assets (288)
--------
Accrual balance at December 31, 2001 555
Plus: Proceeds of HVAC operation disposed in 2002 in excess of adjusted
book value (400)
Less: Accrual of additional expenses and exposure on disposal of HVAC operation
in 2002 377
Less: Cash payments during the year (255)
--------
Accrual balance at December 31, 2002 $ 277
--------
Management believes that these accrual balances are adequate and
justifiable as of December 31, 2002.
6. DISCONTINUED OPERATIONS
During 2002, the Company sold its Patient Care Inc. subsidiary
("Patient Care") to an investor group that included Schroder Ventures Life
Sciences Group, Oak Investment Partners, Prospect Partners and Salix Ventures.
Patient Care provides home-healthcare services primarily in the New York-New
Jersey-Connecticut area.
The proceeds to the Company from the sale of Patient Care comprised the
following (in thousands):
Cash $52,500
Note receivable 12,500
Cash placed in escrow 5,000
Common stock purchase warrant 1,445
Purchase price adjustment
due to seller 1,251
-------
Total $72,696
=======
The note receivable is a senior subordinated note ("Note") due October
11, 2007 that bears interest at the annual rate of 7.5% through September 30,
2004, 8.5% from October 1, 2004 through September 30, 2005, and 9.5% thereafter.
The Note is included in other assets in the consolidated balance sheet. The
$5,000,000 cash placed in escrow is subject to the collection of Patient Care's
receivables with third party payers. Of this amount, $2,500,000 (included in
prepaid expenses and other current assets) is to be distributed as of October
2003 and $2,500,000 (included in other assets) as of October 2004. Based on the
collection history of
F-17
Patient Care, the Company expects to collect the funds held in escrow in full.
The common stock purchase warrant permits the Company to purchase up to 2% of
Patient Care. The warrant is recorded at its estimated fair value on the date
acquired and is included in other investments in the consolidated balance sheet.
The final value of the estimated balance sheet valuation is to be determined in
2003, based on Patient Care's closing balance sheet and could impact the amount
of the gain recorded on the sale of Patient Care.
During 2001, Chemed discontinued its Cadre Computer Resources Inc.
("Cadre Computer") segment and on August 31, 2001, completed the sale of the
business and assets of Cadre Computer to a company owned by the former Cadre
Computer employees for a note receivable that was fully reserved on the date of
sale. During 2002, Cadre borrowed an additional $150,000 from the Company and
made principal payments of $31,000 on the first note. As of December 31, 2002,
Chemed's notes receivable from Cadre Computer totaled $518,000, against which
the Company has an allowance for uncollectible notes totaling $422,000.
Discontinued operations comprise (in thousands, except per share amounts):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Patient Care (2002):
Income before income taxes $ 5,233 $ 262 $ 2,541
Income taxes (2,142) 264 (457)
-------- -------- --------
Income from operations, net of income taxes 3,091 526 2,084
Gain on disposal, net of income taxes of $594 304 -- --
-------- -------- --------
Total Patient Care 3,395 526 2,084
-------- -------- --------
Cadre Computer (2001):
Loss before income taxes -- (734) (240)
Income tax benefit -- 255 81
Minority interest -- 46 16
-------- -------- --------
Loss from operations, net of income taxes -- (433) (143)
Loss on disposal, net of income tax benefit of $829 -- (1,540) --
-------- -------- --------
Total Cadre Computer -- (1,973) (143)
-------- -------- --------
Adjustment to accruals of operations discontinued
in prior years:
Sublease accrual (1991) (1,145) (1,700) --
Allowance for uncollectible notes receivable (2001) 477 -- --
Severance and other accruals (1997) 180 (170) (275)
-------- -------- --------
Loss before income taxes (488) (1,870) (275)
Income tax refund (1997) 2,861 -- --
State income tax accrual (1997) -- 1,700 --
All other income taxes 541 170 275
-------- -------- --------
Total adjustments 2,914 -- --
-------- -------- --------
Total discontinued operations $ 6,309 $ (1,447) $ 1,941
======== ======== ========
Earnings/(loss) per share $ .64 $ (.15) $ .20
======== ======== ========
Diluted earnings/(loss) per share $ .64 $ (.15) $ .19
======== ======== ========
Revenues generated by discontinued operations comprise (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Patient Care $116,191 $139,208 $137,086
Cadre Computer -- 5,089 8,292
-------- -------- --------
Total $116,191 $144,297 $145,378
======== ======== ========
The adjustments to the sublease accrual ($1,145,000 in 2002 and
$1,700,000 in 2001) were made to cover rental charges for vacant space
previously occupied by the Company's former subsidiary, DuBois Chemicals
("DuBois"), sold in 1991. The adjustments made in 2001 moved the dates the floor
space was assumed to be sublet further into the future, but assumed all
unoccupied space would be sublet at market rental rates. Although the Company
was able to sublease varying amounts of space during the past two years, as of
December 31, 2002 the Company was unable to sublease one of the floors covered
under its lease. The adjustments made in 2002 decreased the amount of sublease
rentals that were assumed to be received, to include only rentals from current
sublessees. As a result, the sublease accrual will now cover the cost of all
unoccupied space plus the shortfall of current subleased rentals versus lease
rental rates and operating costs.
F-18
The $477,000 reduction to the allowance for uncollectible notes
receivable from Cadre (sold in 2001) is attributable to Cadre's experiencing
better than anticipated financial results and to the expiration and non-use of
$350,000 of Cadre's line of credit with the Company. In anticipation that Cadre
would draw down the full $500,000 line of credit to finance operating losses,
this line of credit had been fully reserved in 2001 when Cadre was sold to its
employees. The remainder of the adjustment in 2002 ($122,000) was recorded
because Cadre began making payments on its existing notes that previously were
fully reserved.
The $2,861,000 federal income tax refund received in 2002 related to
the tax provision recorded as a part of the sale of the Omnia Group ("Omnia") in
1997. As a result of a tax case settled in 2001, the Company filed an amended
1997 federal income tax return in August 2001 and claimed a tax benefit on its
loss on the sale of Omnia -- a loss that previously was treated as
nondeductible.
The $1,700,000 reduction of the state income tax accrual in 2001
relates to the tax provision recorded on the 1997 sale of National Sanitary
Supply Company ("National"). During 2001, the statutes of limitations on various
Company 1997 state returns expired, with the result being that the Company's
state income tax accrual exceeded its estimated exposures. The accrual was
reduced and credited to the income tax provision in 2001.
At December 31, 2002, other current liabilities include accruals of
$3,654,000 and other liabilities include accruals of $5,755,000 for costs
related to discontinued operations. The estimated timing of payments of these
liabilities, relating primarily to sublease and environmental liabilities,
follows (in thousands):
2003 $ 3,654
2004 2,236
2005 1,989
2006 562
2007 -
Later 968
--------
Total $ 9,409
========
The Company's Chairman, President and Chief Executive Officer and the
former Chief Administrative Officer (currently a director of the Company) are
directors of Cadre. In addition, the former Chief Administrative Officer holds a
28% equity ownership interest in Cadre.
7. BUSINESS COMBINATIONS
During 2002, one purchase business combination was completed within the
Plumbing and Drain Cleaning segment for a purchase price of $1.2 million in
cash. During 2001, two purchase business combinations were completed within the
Plumbing and Drain Cleaning segment for an aggregate purchase price of $1.6
million in cash. During 2000, three purchase business combinations were
completed within the Plumbing and Drain Cleaning segment for an aggregate
purchase price of $11.5 million in cash.
All of the aforementioned business combinations involved operations
primarily in the business of providing plumbing repair and drain cleaning
services. The results of operations of these business combinations are
immaterial to the consolidated operations of the Company.
The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. A summary
of net assets acquired in purchase business combinations follows (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Working capital $ 60 $ -- $ 89
Identifiable intangible assets 50 90 210
Goodwill 1,110 1,428 11,059
Other assets and liabilities--net 16 37 146
-------- -------- --------
Total net assets $ 1,236 $ 1,555 $ 11,504
======== ======== ========
All of the goodwill related to business combinations completed in 2002
and 2001 is expected to be deductible for income tax purposes. Since these
transactions occurred after June 30, 2001, the related goodwill is not being
amortized. The weighted average lives of the identifiable intangible assets
acquired in 2002 and 2001 are 7.0 years and 6.1 years, respectively.
F-19
8. OTHER INCOME--NET
Other income--net from continuing operations comprises the following
(in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Interest income $ 3,308 $ 2,867 $ 3,672
Dividend income 2,461 2,548 2,563
Market value gains/(losses)
to trading investments of
employee benefit trusts (1,401) (820) 388
Investment impairment charge (1,200) -- --
Gain on sales of investments 1,141 993 3,399
Other--net (27) (601) (176)
-------- -------- --------
Total other income
--net $ 4,282 $ 4,987 $ 9,846
======== ======== ========
9. INCOME TAXES
The provision for income taxes comprises the following (as
restated--see Note 2)(in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Continuing Operations:
Current
U.S. federal $ 3,938 $ 2,112 $ 9,736
U.S. state and local 1,913 59 1,977
Foreign 141 (71) 104
Deferred
U.S. federal 475 (6,139) 187
Foreign (16) (34) (48)
-------- -------- --------
Total $ 6,451 $ (4,073) $ 11,956
======== ======== ========
Discontinued Operations:
Current U.S. federal $ (2,954) $ (4,242) $ (2,551)
Current U.S. state and local 794 (1,454) 174
Deferred U.S. federal 1,494 2,478 2,478
-------- -------- --------
Total $ (666) $ (3,218) $ 101
======== ======== ========
A summary of the significant temporary differences for continuing
operations that give rise to deferred income tax assets/(liabilities) follows
(as restated--see Note 2)(in thousands):
DECEMBER 31,
--------------------
2002 2001
-------- --------
Deferred compensation $ 6,117 $ 6,411
Accrued insurance expense 5,987 5,934
Accruals related to discontinued operations 3,556 4,057
Severance payments 1,380 1,934
Allowances for uncollectible accounts receivable 1,184 1,481
Accrued state taxes 1,047 1,128
Amortization of intangibles 314 1,759
Other 3,514 3,684
-------- --------
Gross deferred income tax assets 23,099 26,388
-------- --------
Accelerated tax depreciation (4,388) (5,235)
Cash to accrual adjustments (3,331) (3,604)
Market valuation of investments (960) (2,126)
-------- --------
Gross deferred income tax liabilities (8,679) (10,965)
-------- --------
Net deferred income tax assets $ 14,420 $ 15,423
======== ========
Included in other assets at December 31, 2002, are deferred income tax
assets of $4,526,000 (December 31, 2001--$4,953,000). Based on the Company's
history of prior operating earnings and its expectations for future growth,
management has determined that the operating income of the Company will, more
likely than not, be sufficient to ensure the full realization of the deferred
income tax assets.
F-20
The difference between the actual income tax provision/(benefit) for
continuing operations and the income tax provision/(benefit) calculated at the
statutory U.S. federal tax rate is explained as follows (as restated--see Note
2)(in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Income tax provision/(benefit)
calculated using the
statutory rate of 35% $ (841) $ (4,589) $ 10,495
Nondeductible goodwill
impairment charge 7,120 -- --
State and local income taxes,
less federal income
tax effect 1,243 39 1,285
Domestic dividend exclusion (686) (706) (710)
Unfavorable/(favorable)
federal adjustments (314) 337 (367)
Foreign income taxes,
less federal income
tax effect (85) (277) 89
Nondeductible
amortization of goodwill -- 1,203 1,204
Other--net 14 (80) (40)
-------- -------- --------
Actual income tax
provision/(benefit) $ 6,451 $ (4,073) $ 11,956
======== ======== ========
Effective tax rate (268.5)% 31.1% 39.9%
======== ======== ========
Income taxes included in the components of other comprehensive
income/(loss) are as follows (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Unrealized holding gains/(losses) $ 132 $ 905 $ 1,134
Reclassification adjustment (366) (290) (1,138)
Summarized below are the total amounts of income taxes paid/(refunded)
during the years ended December 31 (in thousands):
2002 $ (910)
2001 5,772
2000 6,154
10. CASH EQUIVALENTS
Included in cash and cash equivalents at December 31, 2002, are cash
equivalents in the amount of $37,075,000 (2001--$6,549,000). The cash
equivalents at both dates consist of investments in various money market funds
and repurchase agreements yielding interest at a weighted average rate of 1.1%
in 2002 and 1.3% in 2001.
From time to time throughout the year, the Company invests its excess
cash in repurchase agreements directly with major commercial banks. The
collateral is not physically held by the Company, but the term of such
repurchase agreements is less than 10 days. Investments of significant amounts
are spread among a number of banks, and the amounts invested in each bank are
varied constantly.
11. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows (in thousands):
DECEMBER 31,
----------------------
2002 2001
--------- ---------
Land $ 2,538 $ 2,568
Buildings 18,310 18,230
Transportation equipment 26,185 35,201
Machinery and equipment 34,440 33,391
Computer software 4,327 4,254
Furniture and fixtures 18,354 17,483
F-21
Projects under construction 6,577 4,989
--------- ---------
Total properties
and equipment 110,731 116,116
Less: accumulated
depreciation (62,370) (61,567)
--------- ---------
Net properties
and equipment $ 48,361 $ 54,549
========= =========
12. LONG-TERM DEBT AND LINES OF CREDIT
A summary of the Company's long-term debt follows (in thousands):
DECEMBER 31,
--------------------
2002 2001
-------- --------
Senior notes, due 2005 - 2009 $ 25,000 $ 25,000
Revolving credit agreement,
due 2003 -- 35,000
Other 1,012 1,390
-------- --------
Subtotal 26,012 61,390
Less: current portion (409) (353)
-------- --------
Long-term debt, less
current portion $ 25,603 $ 61,037
======== ========
REVOLVING CREDIT AGREEMENT AND LINES OF CREDIT
In December 2001, the Company entered into a revolving credit agreement
("Credit Agreement") with Bank One, N.A., to borrow up to $40,000,000 at any
time during the two-year period ending December 21, 2003. At December 31, 2001,
the balance of the Credit Agreement totaled $35,000,000. The interest rate,
which is based on various stipulated market rates of interest, was 2.91% at
December 31, 2001.
In addition to the Credit Agreement, the Company had approximately
$13,377,000 of unused short-term lines of credit with various banks at December
31, 2002.
SENIOR NOTES
In March 1997, the Company borrowed $25,000,000 from several insurance
companies. Principal is repayable in five annual installments of $5,000,000
beginning on March 15, 2005, and bears interest at the rate of 7.31% per annum.
Interest is payable on March 15 and September 15 of each year.
On December 31, 2001, the Company prepaid the outstanding balances of
its 8.15% senior notes due 2002 through 2004 and its 10.67% senior notes due in
2002 and 2003. The principal balances outstanding at the time of prepayment were
$30,000,000 and $2,000,000, respectively. Penalties incurred on these
prepayments aggregated $1,701,000 or $.17 per share (net of income tax benefit
of $916,000) and are presented as extraordinary losses on extinguishment of debt
in the statement of operations.
F-22
OTHER
Other long-term debt has arisen from loans in connection with
acquisitions of various businesses and properties. Interest rates range from
7.3% to 8.0%, and the obligations are due on various dates through February
2009.
The following is a schedule by year of required long-term debt payments
as of December 31, 2002 (in thousands):
2003 $ 409
2004 334
2005 5,070
2006 5,074
2007 5,077
After 2007 10,048
---------
Total long-term debt $ 26,012
=========
There are no assets encumbered under either of the Company's debt
agreements. The Senior Notes and Credit agreements contain covenants that could
restrict the amount of transactions (such as cash dividend payments or treasury
stock purchases) that would reduce stockholders' equity below required levels .
In addition these covenants could restrict net rental payments and the amounts
of additional borrowings the Company could incur. Under the most restrictive
covenants of these agreements the Company must maintain the following as of
December 31, 2002:
- Stockholders' Equity must be no less than $157,269,000 versus
a balance of $198,422,000 at December 31, 2002;
- The Company must maintain an interest coverage ratio of at
least 2.50 versus a coverage ratio of 9.21 for the previous
four quarters;
- The ratio of funded debt to EBITDA (as defined in the debt
agreement) must not exceed 2.50 versus a ratio of .60 for the
previous four quarters; and,
- The ratio of rental payments to stockholders' equity cannot
exceed .075 versus a ratio of .033 for the past four quarters.
As of December 31, 2002, the Company had sufficient leeway under its debt
covenants to have:
- Increased its cash dividend payments and treasury stock by a
combined total of $47 million;
- Increased its funded (long-term) debt by $81 million;
- Increased its total annual interest expense by $7 million;
and/or,
- Increased its annual net rental payments by $8 million.
Should the Company violate any of the covenants or fail to make any
required principal or interest payment, the lender has the right to call the
debt immediately. In addition, both debt agreements have cross-default
provisions. The Company does not anticipate that the restrictions imposed by the
agreements will materially restrict its future operations or its ability to pay
dividends.
Summarized below are the total amounts of interest paid during
the years ended December 31 (in thousands):
2002 $ 3,979
2001 7,007
2000 7,345
No interest was capitalized during the years ended December 31, 2002
and 2001. The amount of interest capitalized during 2000 was $500,000.
13. OTHER LIABILITIES
At December 31, 2002, other current liabilities comprised the following
(as restated--see Note 2)(in thousands):
DECEMBER 31,
-------------------
2002 2001
-------- --------
Accrued insurance $ 17,448 $ 17,328
Accrued incentive compensation 3,738 2,833
Accrued divestiture expenses 3,661 4,176
Accrued savings and retirement
contribution 3,642 5,344
Other 12,472 11,022
-------- --------
Total other current liabilities $ 40,961 $ 40,703
======== ========
F-23
Other liabilities at December 31, 2002, included deferred compensation
liabilities totaling $15,196,000 (2001--$15,029,000).
At December 31, 2002, the Company's accrual for its estimated liability
for potential environmental cleanup and related costs arising from the sale of
DuBois Chemicals, Inc. ("DuBois") amounted to $2,093,000. Of this balance,
$1,043,000 is included in other liabilities and $1,050,000 is included in other
current liabilities. The Company is contingently liable for additional
DuBois-related environmental cleanup and related costs up to a maximum of
$18,013,000. On the basis of a continuing evaluation of the Company's potential
liability, management believes it is not probable this additional liability will
be paid. Accordingly, no provision for this contingent liability has been
recorded. The potential liability is not insured and the recorded liability does
not assume the recovery of insurance proceeds. Also, the environmental liability
has not been discounted because it is not possible to reliably project the
timing of payments. It is currently expected that approximately $1 million of
the liability will be paid out in 2003; the timing of the remainder of the
payments is not currently estimable. Management believes that any adjustments to
its recorded liability will not materially adversely affect its financial
position or results of operations.
At December 31, 2002, the Company's accrual for losses on subleases of
office space formerly occupied by DuBois amounted to $4,017,000
(2001--$4,703,000), of which, $1,200,000 (2001--$1,500,000) is included in other
current liabilities. The accrual is based on the expectation that space
currently unoccupied will not be sublet during the remainder of the lease term,
which ends April 2006.
Net proceeds/(uses) of cash for discontinued operations in the
statement of cash flows represent the net proceeds from the sale of Patient Care
in 2002 and the payment of severance, lease and other liabilities relating to
operations disposed of in 1991, 1997 and 2001.
14. PENSION AND RETIREMENT PLANS
Retirement obligations under various plans cover substantially all
full-time employees who meet age and/or service eligibility requirements. The
major plans providing retirement benefits to the Company's employees are defined
contribution plans.
The Company has established two ESOPs that purchased a total of
$56,000,000 of the Company's capital stock. In December 1997, the Company
restructured the ESOP loans and internally financed $16,201,000 of the
$21,766,000 ESOP loans outstanding at December 31, 1997.
Substantially all eligible employees of the Plumbing and Drain Cleaning
segment participate in the ESOPs. Eligible employees of the Company are also
covered by other defined contribution plans.
Expenses charged to continuing operations for the Company's pension and
profit-sharing plans, ESOPs, excess benefit plans and other similar plans
comprise the following (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2002 2001 2000
------ ------ ------
Compensation cost of ESOPs $1,746 $2,144 $1,649
Pension, profit-sharing
and other similar plans 2,827 3,671 4,250
------ ------ ------
Total $4,573 $5,815 $5,899
====== ====== ======
Dividends on ESOP shares
used for debt service $ 197 $ 280 $ 270
====== ====== ======
At December 31, 2002, there were 212,712 allocated shares
(2001--489,742 shares) and 83,653 unallocated shares (2001--135,457 shares) in
the ESOP trusts.
The Company has excess benefit plans for key employees whose
participation in the qualified plans is limited by ERISA rules. Benefits are
determined based on theoretical participation in the qualified ESOPs. Prior to
September 1, 1998, the value of these benefits was invested in shares of the
Company's stock and in mutual funds, which were held by grantor trusts.
Currently, benefits are invested in only mutual funds, and participants are not
permitted to diversify accumulated benefits invested in shares of the Company's
stock. Trust assets invested in shares of the Company's capital stock are
included in treasury stock, and the corresponding liability is included in a
separate component of shareholders' equity. At December 31, 2002, these trusts
held 66,141 shares or $2,290,000 of the Company's stock (December 31,
2001--94,742 shares or $3,300,000). The diversified assets of the Company's
excess benefit and deferred compensation plans, all of which are invested in
various mutual funds, totaled $15,176,000 at December 31, 2002 (December 31,
2001--$14,750,000), and are included in other assets. The corresponding
liabilities are included in other liabilities.
F-24
15. LEASE ARRANGEMENTS
The Company, as lessee, has operating leases that cover its corporate
office headquarters, various warehouse and office facilities, office equipment
and transportation equipment. The remaining terms of these leases range from one
year to 16 years, and in most cases, management expects that these leases will
be renewed or replaced by other leases in the normal course of business.
Substantially all equipment is owned by the Company.
The following is a summary of future minimum rental payments and
sublease rentals to be received under operating leases that have initial or
remaining noncancelable terms in excess of one year at December 31, 2002 (in
thousands):
2003 $ 6,364
2004 5,747
2005 5,189
2006 2,206
2007 580
After 2007 269
---------
Total minimum rental payments 20,355
Less: minimum sublease rentals (4,941)
---------
Net minimum rental payments $ 15,414
=========
Total rental expense incurred under operating leases for continuing
operations follows (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2002 2001 2000
------- ------- -------
Total rental payments $ 6,037 $ 6,716 $ 7,655
Less: sublease rentals (1,196) (929) (1,765)
------- ------- -------
Net rental expense $ 4,841 $ 5,787 $ 5,890
======= ======= =======
16. FINANCIAL INSTRUMENTS
The following methods and assumptions are used in estimating the fair
value of each class of the Company's financial instruments:
- For cash and cash equivalents, accounts receivable, statutory
deposits and accounts payable, the carrying amount is a
reasonable estimate of fair value because of the liquidity and
short-term nature of these instruments.
- For other investments and other assets, fair value is based
upon quoted market prices for these or similar securities, if
available. Included in other investments, below, is the
Company's investment in privately held Vitas Healthcare
Corporation ("Vitas"), which provides palliative and medical
care and related services to terminally ill patients. In
connection with Vitas' refinancing its debt obligations in
April 2001, the Company and Vitas agreed to extend the
maturity of the Vitas 9% Cumulative Preferred Stock
("Preferred") to April 1, 2007. In addition, Vitas issued a
Common Stock Purchase Warrant ("Warrant C") to the Company for
approximately 1,636,000 common shares and extended the
expiration dates of the Company's other Vitas Common Stock
Purchase Warrants ("Other Warrants") to December 31, 2007.
Warrant C was recorded at its estimated fair value of
$2,601,000, and at the same time, a discount of $2,601,000 to
the Preferred was recorded. The appraised value of the Other
Warrants was estimated to be $4,048,000 in 2001 (versus a
carrying value of $1,500,000). The value of the Preferred is
based on the present value of the mandatory redemption
payments, using an interest rate of 9.0%, a rate which
management believes is reasonable in view of risk factors
attendant to the investment.
- The fair value of the Company's long-term debt is estimated by
discounting the future cash outlays associated with each debt
instrument using interest rates currently available to the
Company for debt issues with similar terms and remaining
maturities.
- The fair value of the Mandatorily Redeemable Convertible
Preferred Securities of the Chemed Capital Trust ("Trust
Securities") is based on the quoted market value at the end of
the period.
F-25
The estimated fair values of the Company's financial instruments are as
follows (in thousands, except footnote):
CARRYING FAIR
AMOUNT VALUE
--------- ---------
December 31, 2002:
Other investments(a) $ 37,326 $ 39,874
Long-term debt 26,012 28,622
Trust securities 14,186 14,112
December 31, 2001:
Other investments(a) $ 38,273 $ 40,821
Long-term debt 61,390 61,891
Trust Securities 14,239 14,112
(a) Amounts include $27,243,000 invested in the Preferred, which is recorded in
other investments.
Disclosures regarding the Company's investments, all of which are
equity securities classified as available-for-sale, are summarized below (in
thousands):
DECEMBER 31,
--------------------
2002 2001
-------- --------
Aggregate fair value $ 39,874 $ 40,821
Gross unrealized holding gains 8,239 9,145
Gross unrealized holding losses (1,223) (114)
Amortized cost 32,858 31,790
The chart below summarizes information with respect to
available-for-sale securities sold during the period (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Proceeds from sales $ 1,917 $ 1,377 $ 4,290
Gross realized gains 1,223 1,112 3,496
Gross realized losses (82) (119) (97)
All of the Vitas warrants are classified as available-for sale. Since
the Warrants have no readily determinable market value, they are accounted for
at cost and periodically reviewed for impairment. Vitas has increased its net
income during each of the past several fiscal years and has made timely payment
of its preferred dividends in 2001 and 2002. Based on Vitas' steadily increasing
net income and its ability to generate cash at the operating level, management
believes all of its investments in Vitas are fully recoverable and that no
impairment exists.
17. DILUTED EARNINGS/(LOSS) PER SHARE
Due to the Company's losses from continuing operations in 2002 and
2001, all potentially dilutive securities were antidilutive for 2002 and 2001.
Therefore, the diluted losses per share were the same as the losses per share in
2002 and 2001. Also, the impact of the Convertible Trust securities on diluted
earnings per share was antidilutive for 2000 and is, therefore, excluded from
the computation of diluted earnings per share. Diluted earnings per share for
2000 were calculated as follows (as restated--see Note 2)(in thousands, except
per share data):
INCOME SHARES INCOME
(NUMERATOR) (DENOMINATOR) PER SHARE
------------- ------------- -------------
Income from continuing operations:
Earnings $ 18,030 9,833 $ 1.83
=============
Nonvested stock awards -- 93
Dilutive stock options -- 1
------------- -------------
Diluted earnings $ 18,030 9,927 $ 1.82
============= ============= =============
Income before extraordinary loss
and net income:
Earnings $ 19,971 9,833 $ 2.03
=============
Nonvested stock awards -- 93
Dilutive stock options -- 1
------------- -------------
Diluted earnings $ 19,971 9,927 $ 2.01
============= ============= =============
F-26
During all of 2002 and 2001, all options were excluded from the
computation of diluted loss per share since their impact on the loss per share
was antidilutive. Also, during most of 2000, options whose exercise prices were
greater than the average market price during most of the year were excluded from
the computation of diluted earnings per share. Those options comprise the
following:
NUMBER OF OPTIONS OUTSTANDING
AT DECEMBER 31,
EXERCISE -----------------------------
GRANT DATE PRICE 2002 2001 2000
------------- -------- ------- ------- -------
May 1999 $ 32.19 371,625 429,250 490,125
May 2002 36.90 265,600 -- --
May 1996 38.75 159,275 159,425 161,923
March 1998 39.13 153,250 155,550 160,462
May 1997 35.94 152,600 159,413 166,188
February 1995 33.63 67,250 68,000 68,000
May 1995 32.19 35,300 39,950 83,713
March 1994 32.13 24,825 24,825 34,925
April 1998 40.53 12,000 12,000 12,000
February 1993 28.56 1,875 -- --
May 1998 37.78 -- 750 1,000
18. STOCK INCENTIVE PLANS
The Company has nine Stock Incentive Plans under which 3,300,000 shares
of Chemed Capital Stock are issued to key employees pursuant to the grant of
stock awards and/or options to purchase such shares. All options granted under
these plans provide for a purchase price equal to the market value of the stock
at the date of grant. The latest plan, covering a total of 450,000 shares, was
adopted in May 2002.
Under the plan adopted in 1983, both nonstatutory and incentive
stock options have been granted. Incentive stock options granted under the 1983
plan become exercisable in full six months following the date of the grant;
nonstatutory options granted under the 1983 plan become exercisable in four
annual installments commencing six months after the date of grant. Under the
Long-Term Incentive Plan, adopted in 1999, up to 250,000 shares may be issued to
employees who are not officers or directors of the Company or its subsidiaries.
The other plans are not qualified, restricted or incentive stock option
plans under the Internal Revenue Code. Options generally become exercisable six
months following the date of grant in four equal annual installments.
Data relating to the Company's stock issued to employees follow:
2002 2001 2000
--------------------- --------------------- --------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------
Stock options:
Outstanding at January 1 1,059,088 $ 34.91 1,194,756 $ 34.62 1,226,756 $ 34.60
Granted 268,600 36.90 -- -- -- --
Exercised (66,738) 31.87 (103,538) 31.74 (6,000) 30.38
Forfeited (17,350) 34.76 (25,725) 34.43 (26,000) 34.78
Expired -- -- (6,405) 34.60 -- --
---------- --------- ---------
Outstanding at
December 31 1,243,600 35.50 1,059,088 34.91 1,194,756 34.62
========== ========= =========
Exercisable at
December 31 1,037,771 35.23 941,149 35.25 906,810 35.06
========== ========= =========
Stock awards issued 9,034 37.51 17,073 37.73 225,298 28.26
========== ========= =========
Options outstanding at December 31, 2002, comprise the following:
RANGE OF EXERCISE PRICES
-----------------------------------------------------
$25.38 - $28.56 $32.13 - $35.94 $36.90 - $40.53
--------------- --------------- ---------------
Options outstanding 1,875 651,600 590,125
Average exercise price of options outstanding $ 28.56 $ 33.21 $ 38.05
Average contractual life .1 yr. 5.1 yrs. 6.6 yrs.
Options exercisable 1,875 651,600 384,296
Average exercise price of options exercisable $ 28.56 $ 33.21 $ 38.67
There were 321,666 shares available for granting of stock options and awards at
December 31, 2002.
F-27
Total compensation cost recognized for stock awards for continuing
operations was $184,000 in 2002 (2001--$6,328,000; 2000--$1,702,000). The
expense for 2001 included $4,263,000 resulting from the acceleration of vesting
of restricted awards in connection with the restructuring of the Company's
long-term incentive plans, effective December 31, 2001. The shares of capital
stock were issued to key employees and directors at no cost and generally were
previously restricted as to the transfer of ownership. In 2000 and prior years,
restrictions covering between 7% and 33% of each holder's shares lapsed
annually.
During 1999, the Company purchased 101,500 shares of its capital stock
in open-market transactions and sold these shares to certain employees at fair
market value in exchange for interest-bearing notes secured by the shares.
Interest rates on these notes are set at the beginning of each year based on
rates used by the Internal Revenue Service for demand loans (2.73% for 2002;
5.88% for 2001 and 2000).
The notes receivable have no maturity date but become immediately due
and payable at the option of the Company upon the occurrence of any of the
following: (a) the Company, as note holder, deems itself insecure, (b) the
death, insolvency, assignment for the benefit of creditors, or the commencement
of any bankruptcy or insolvency proceedings of or against the employee, (c) any
attempted transfer by the employee of the shares of capital stock purchased by
the employee with the notes, or (d) termination of employment. The terms of the
notes receivable place restrictions upon the sale of the underlying shares of
stock, but the shares of stock are not physically restricted from sale. Should
the Company demand payment of the notes and the value of the underlying shares
be insufficient to satisfy the remaining note liability, the employee would be
required to pay the Company the difference in cash.
Activity in the notes receivable accounts, which are presented as a
reduction of stockholders' equity in the consolidated balance sheet, is
summarized below (in thousands):
December 31, 2000 $ 2,886
Accrual of interest 100
Cash payments (196)
Value of shares surrendered (1,288)
---------
December 31, 2001 1,502
Accrual of interest 26
Cash payments (239)
Value of shares surrendered (337)
---------
December 31, 2002 $ 952
=========
Shares surrendered in payment of notes receivable are valued at their fair
market value on the date of surrender.
19. EXECUTIVE LONG-TERM INCENTIVE PLAN
In May 2002, the shareholders of the Company approved the adoption of
the 2002 Executive Long-Term Incentive Plan ("LTIP") covering officers and key
employees of the Company. The LTIP is administered by the Incentive/Compensation
Committee ("ICC") of the Board of Directors and was adopted to replace the
restricted stock program, which was terminated at the end of 2001. Based on
guidelines established by the ICC, the LTIP covers the granting of cash awards
based on two independent elements: 1) a totally discretionary award based on
operating performance of the Company covering a period greater than one year and
less than four years and 2) an award based on the attainment of a target stock
price of $50 per share during 10 consecutive trading days prior to the fourth
anniversary of the plan.
As of December 31, 2002, no accrual for awards under the LTIP was made
since it is not possible to estimate the amount of such awards, if any, which
will be earned and paid.
F-28
20. TRUST SECURITIES
Effective February 1, 2000, the Company completed an Exchange Offer
whereby stockholders exchanged 575,503 shares of capital stock for shares of
Trust Securities of the wholly owned Chemed Capital Trust ("Trust") on a
one-for-one basis. The Trust Securities, which carry a redemption value of
$27.00 per security, pay an annual cash distribution of $2.00 per security
(payable at the quarterly rate of $.50 per security commencing March 2000) and
are convertible into capital stock at a price of $37.00 per security. The Trust
Securities mature 30 years from date of issuance and are callable beginning
March 15, 2003, at a price of $27.27 for each $27.00 principal amount. On March
15, 2004, and later, the Trust Securities are callable without premium. At
December 31, 2002, there were 525,401 shares of the Trust Securities outstanding
(December 31, 2001--527,366 shares). The number of Trust Securities purchased
and converted and shares of capital stock issued upon conversion are summarized
below:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2002 2001 2000
----- ------ ------
Trust Securities purchased 1,533 13,720 30,619
Trust Securities converted 432 1,200 2,598
Shares of capital stock
issued upon conversion
of Trust Securities 315 876 1,895
The sole assets of the Trust are Junior Subordinated Debentures
("Debentures") of the Company in the principal amount of $15,905,000. The
Debentures mature March 15, 2030, and the interest rate of the Debentures is
$2.00 per annum per $27.00 principal amount. In February 2000, the Company
executed an Indenture relating to the Debentures, an Amended and Restated
Declaration of Trust relating to the Trust Securities and a Guarantee Agreement
for the benefit of the holders of the Trust Securities (collectively "Back-up
Undertakings"). Considered together, the Back-up Undertakings constitute a full
and unconditional guarantee by the Company of the Trust's obligations under the
Trust Securities.
F-29
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED SUMMARY OF QUARTERLY RESULTS
In October 2003, the Company, in consultation with its independent
accountants, reevaluated its accounting for Yellow Pages costs and concluded
these costs did not qualify for capitalization as direct-response advertising
under Statement of Position 93-7, Reporting on Advertising Costs, which for the
Company was effective January 1, 1995. In its previously-filed financial
statements, the Company capitalized and amortized these costs over the lives of
the directories, typically 12 months.
Accordingly, the Company's consolidated financial statements as of and
for each of the quarters in the periods ended December 31, 2002 and 2001 have
been restated to recognize Yellow Pages advertising expenses when the
directories are placed in circulation rather than to capitalize and amortize
such costs. The restatements impact only the Plumbing and Drain Cleaning
segment.
The following tables set forth the impact of this change on line items
of the unaudited summary of quarterly results (in thousands, except per share
amounts):
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ---------
2002 -- AS REPORTED:
Income/(loss) from operations $ 4,206 $ 5,676 $ 5,743 $(17,175) $ (1,550)
Income/(loss) before income taxes 5,752 5,595 5,034 (17,656) (1,275)
Income taxes (1,947) (2,150) (1,856) (894) (6,847)
Income/(loss) from continuing operations 3,805 3,445 3,178 (18,550) (8,122)
Net income/(loss) 4,672 4,569 7,107 (18,161) (1,813)
Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.39 $ 0.35 $ 0.32 $ (1.88) $ (0.82)
Net income/(loss) 0.47 0.46 0.72 (1.84) (0.18)
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.39 $ 0.35 $ 0.32 $ (1.88) $ (0.82)
Net income/(loss) 0.47 0.46 0.72 (1.84) (0.18)
2002 -- AS RESTATED:
Income/(loss) from operations $ 5,593 $ 6,306 $ 5,370 $(19,947) $ (2,678)
Income/(loss) before income taxes 7,139 6,225 4,661 (20,428) (2,403)
Income taxes (2,432) (2,370) (1,725) 76 (6,451)
Income/(loss) from continuing operations 4,707 3,855 2,936 (20,352) (8,854)
Net income/(loss) 5,574 4,979 6,865 (19,963) (2,545)
Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.48 $ 0.39 $ 0.30 $ (2.06) $ (0.90)
Net income/(loss) 0.57 0.51 0.70 (2.02) (0.26)
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.48 $ 0.39 $ 0.30 $ (2.06) $ (0.90)
Net income/(loss) 0.56 0.50 0.70 (2.02) (0.26)
F-30
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- ----------
2001 -- AS REPORTED:
Income/(loss) from operations $ 6,500 $ 4,995 $ 488 $ (20,759) $ (8,776)
Income/(loss) before income taxes 6,871 4,429 (705) (20,920) (10,325)
Income taxes (2,837) (1,814) 193 7,556 3,098
Income/(loss) from continuing operations 4,034 2,615 (512) (13,364) (7,227)
Income/(loss) before extraordinary loss 4,510 1,461 92 (14,737) (8,674)
Net income/(loss) 4,510 1,461 92 (16,438) (10,375)
Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.41 $ 0.27 $ (0.05) $ (1.38) $ (0.74)
Income/(loss) before extraordinary
loss 0.46 0.15 0.01 (1.52) (0.89)
Net income/(loss) 0.46 0.15 0.01 (1.70) (1.07)
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.41 $ 0.27 $ (0.05) $ (1.38) $ (0.74)
Income/(loss) before extraordinary
loss 0.46 0.15 0.01 (1.52) (0.89)
Net income/(loss) 0.46 0.15 0.01 (1.70) (1.07)
Income/(Loss) Before Extraordinary Loss
Excluding Goodwill Amortization
Income/(loss) before
extraordinary loss $ 5,669 $ 2,616 $ 1,247 $ (13,585) $ (4,053)
Earnings/(loss) per share 0.58 0.27 0.13 (1.40) (0.42)
Diluted earnings/(loss) per share 0.57 0.27 0.13 (1.40) (0.42)
Net Income/(Loss)
Excluding Goodwill Amortization
Net income/(loss) $ 5,669 $ 2,616 $ 1,247 $ (15,286) $ (5,754)
Earnings/(loss) per share 0.58 0.27 0.13 (1.58) (0.59)
Diluted earnings/(loss) per share 0.57 0.27 0.13 (1.58) (0.59)
2001 -- AS RESTATED:
Income/(loss) from operations $ 5,838 $ 2,683 $ 2,671 $ (22,753) $ (11,561)
Income/(loss) before income taxes 6,209 2,117 1,478 (22,914) (13,110)
Income taxes (2,605) (1,005) (571) 8,254 4,073
Income/(loss) from continuing operations 3,604 1,112 907 (14,660) (9,037)
Income/(loss) before extraordinary loss 4,080 (42) 1,511 (16,033) (10,484)
Net income/(loss) 4,080 (42) 1,511 (17,734) (12,185)
Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.37 $ 0.11 $ 0.09 $ (1.51) $ (0.93)
Income/(loss) before extraordinary
loss 0.42 - 0.16 (1.65) (1.08)
Net income/(loss) 0.42 - 0.16 (1.83) (1.25)
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.36 $ 0.11 $ 0.09 $ (1.51) $ (0.93)
Income/(loss) before extraordinary
loss 0.41 - 0.15 (1.65) (1.08)
Net income/(loss) 0.41 - 0.15 (1.83) (1.25)
Income/(Loss) Before Extraordinary Loss
Excluding Goodwill Amortization
Income/(loss) before extraordinary
loss $ 5,239 $ 1,113 $ 2,666 $ (14,881) $ (5,863)
Earnings/(loss) per share 0.54 0.11 0.28 (1.54) (0.60)
Diluted earnings/(loss) per share 0.53 0.11 0.27 (1.54) (0.60)
Net Income/(Loss)
Excluding Goodwill Amortization
Net income/(loss) $ 5,239 $ 1,113 $ 2,666 $ (16,582) $ (7,564)
Earnings/(loss) per share 0.54 0.11 0.28 (1.71) (0.78)
Diluted earnings/(loss) per share 0.53 0.11 0.27 (1.71) (0.78)
F-31
ROTO-ROOTER INC AND SUBSIDIARY COMPANIES
UNAUDITED SUMMARY OF QUARTERLY RESULTS
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands, except per share and footnote data)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------ ------------ ------------ ------------ ------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
Continuing Operations
Total service revenues and sales $ 80,853 $ 79,082 $ 75,322 $ 78,919 $ 314,176
========= ========= ========= ========= =========
Gross profit $ 32,345 $ 32,458 $ 31,008 $ 32,080 $ 127,891
========= ========= ========= ========= =========
Income/Loss from operations (a) $ 5,593 $ 6,306 $ 5,370 $ (19,947) $ (2,678)
Interest expense (773) (763) (709) (683) (2,928)
Distributions on preferred securities (270) (271) (268) (270) (1,079)
Other income--net (b) 2,589 953 268 472 4,282
--------- --------- --------- --------- ---------
Income before income taxes (a,b) 7,139 6,225 4,661 (20,428) (2,403)
Income taxes (2,432) (2,370) (1,725) 76 (6,451)
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations
(a,b) 4,707 3,855 2,936 (20,352) (8,854)
Discontinued operations 867 1,124 3,929 389 6,309
--------- --------- --------- --------- ---------
Net Income/(Loss) (a,b) $ 5,574 $ 4,979 $ 6,865 $ (19,963) $ (2,545)
========= ========= ========= ========= =========
Earnings Per Share (a,b)
Income/(loss) from continuing operations $ 0.48 $ 0.39 $ 0.30 $ (2.06) $ (0.90)
========= ========= ========= ========= =========
Net income/(loss) $ 0.57 $ 0.51 $ 0.70 $ (2.02) $ (0.26)
========= ========= ========= ========= =========
Diluted Earnings Per Share (a,b)
Income/(loss) from continuing operations $ 0.48 $ 0.39 $ 0.30 $ (2.06) $ (0.90)
========= ========= ========= ========= =========
Net income/(loss) $ 0.56 $ 0.50 $ 0.70 $ (2.02) $ (0.26)
========= ========= ========= ========= =========
Average number of shares outstanding
Earnings/(loss) per share 9,843 9,857 9,861 9,872 9,858
========= ========= ========= ========= =========
Diluted earnings/(loss) per share 10,267 9,898 9,867 9,872 9,858
========= ========= ========= ========= =========
---------------------------------------
(a) Amounts for the fourth quarter and for the year include a pretax and
aftertax noncash goodwill impairment charge of $20,342,000 ($2.06 per share).
(b) Amounts for the first quarter and for the year include pretax gains from the
sales of investments of $1,141,000 ($775,000 aftertax or $.08 per share).
Amounts for the fourth quarter and year include pretax investment impairment
charges of $1,200,000 ($780,000 aftertax or $.08 per share).
F-32
ROTO-ROOTER INC AND SUBSIDIARY COMPANIES
UNAUDITED SUMMARY OF QUARTERLY RESULTS
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands, except per share and footnote data)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- --------------- ------------- ------------ ------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
Continuing Operations
Total service revenues and sales $ 86,259 $ 84,950 $ 82,604 $ 84,095 $ 337,908
======== =============== ========== ========= =========
Gross profit $ 35,164 $ 34,231 $ 33,149 $ 29,748 $ 132,292
======== =============== ========== ========= =========
Income/(loss) from operations (a) $ 5,838 $ 2,683 $ 2,671 $ (22,753) $ (11,561)
Interest expense (1,485) (1,466) (1,373) (1,099) (5,423)
Distributions on preferred securities (277) (278) (275) (283) (1,113)
Other income--net (b) 2,133 1,178 455 1,221 4,987
-------- --------------- ---------- --------- ---------
Income/(loss) before income taxes (a,b) 6,209 2,117 1,478 (22,914) (13,110)
Income taxes (2,605) (1,005) (571) 8,254 4,073
-------- --------------- ---------- --------- ---------
Income/(loss) from continuing operations
(a,c) 3,604 1,112 907 (14,660) (9,037)
Discontinued operations 476 (1,154) 604 (1,373) (1,447)
-------- --------------- ---------- --------- ---------
Income/(loss) before extraordinary loss (a,c) 4,080 (42) 1,511 (16,033) (10,484)
Extraordinary loss on extinguishment of debt - - - (1,701) (1,701)
-------- --------------- ---------- --------- ---------
Net Income/(Loss) (a,c) $ 4,080 $ (42) $ 1,511 $ (17,734) $ (12,185)
======== =============== ========== ========= =========
Earnings/(Loss) Per Share (a,c)
Income/(loss) from continuing operations $ 0.37 $ 0.11 $ 0.09 $ (1.51) $ (0.93)
======== =============== ========== ========= =========
Income/(loss) before extraordinary loss $ 0.42 $ - $ 0.16 $ (1.65) $ (1.08)
======== =============== ========== ========= =========
Net income/(loss) $ 0.42 $ - $ 0.16 $ (1.83) $ (1.25)
======== =============== ========== ========= =========
Diluted Earnings/(Loss) Per Share (a,c)
Income/(loss) from continuing operations $ 0.36 $ 0.11 $ 0.09 $ (1.51) $ (0.93)
======== =============== ========== ========= =========
Income/(loss) before extraordinary loss $ 0.41 $ - $ 0.15 $ (1.65) $ (1.08)
======== =============== ========== ========= =========
Net income/(loss) $ 0.41 $ - $ 0.15 $ (1.83) $ (1.25)
======== =============== ========== ========= =========
Income/(Loss) Before Extraordinary Loss Excluding
Goodwill Amortization (a,c)
Income/(loss) before extraordinary loss $ 5,239 $ 1,113 $ 2,666 $ (14,881) $ (5,863)
======== =============== ========== ========= =========
Earnings/(loss) per share $ 0.54 $ 0.11 $ 0.28 $ (1.54) $ (0.60)
======== =============== ========== ========= =========
Diluted earnings/(loss) per share $ 0.53 $ 0.11 $ 0.27 $ (1.54) $ (0.60)
======== =============== ========== ========= =========
Net Income/(Loss) Excluding Goodwill Amortization
(a,c)
Net income/(loss) $ 5,239 $ 1,113 $ 2,666 $ (16,582) $ (7,564)
======== =============== ========== ========= =========
Earnings/(loss) per share $ 0.54 $ 0.11 $ 0.28 $ (1.71) $ (0.78)
======== =============== ========== ========= =========
Diluted earnings/(loss) per share $ 0.53 $ 0.11 $ 0.27 $ (1.71) $ (0.78)
======== =============== ========== ========= =========
Average number of shares outstanding
Earnings/(loss) per share 9,746 9,728 9,690 9,690 9,714
======== =============== ========== ========= =========
Diluted earnings/(loss) per share 9,907 9,863 9,798 9,690 9,714
======== =============== ========== ========= =========
-----------------------------------------
(a) Amounts for the third quarter and fourth quarters and for the year include
pretax restructuring and similar expenses and other charges totaling $4,031,000
($2,420,000 aftertax or $.25 per share), $23,180,000 ($14,523,000 aftertax or
$1.50 per share) and $27,211,000 ($16,943,000 aftertax or $1.74 per share),
respectively.
(b) Amounts for the first and second quarters and for the year include pretax
gains/(losses) from the sales of investments totaling $1,112,000, $(119,000) and
$993,000, respectively.
(c) Amounts for the first quarter and for the year include aftertax gains from
the sales of investments totaling $703,000 ($.07 per share).
F-33
SCHEDULE II
ROTO-ROOTER, INC.AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
DR/(CR)
ADDITIONS
-------------------------
(CHARGED) APPLICABLE
CREDITED (CHARGED) TO
BALANCE AT TO COSTS CREDITED COMPANIES BALANCE
BEGINNING AND TO OTHER ACQUIRED DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS IN PERIOD (A) OF PERIOD
----------------------------------------------------------------------------------------------------------------------------------
Allowances for doubtful
accounts (b)
For the year 2002......... $(4,091) $ (1,808) $ - $ - $ 2,590 $(3,309)
======= ======== ======= ====== ======= =======
For the year 2001......... $(3,637) $ (2,866) $ - $ - $ 2,412 $(4,091)
======= ======== ======= ====== ======= =======
For the year 2000......... $(2,854) $ (2,236) $ - $ - $ 1,453 $(3,637)
======= ======== ======= ====== ======= =======
Allowances for doubtful
accounts - notes
receivable (c)
For the year 2002......... $ (900) $ 478 $ - $ - $ - $ (422)
======= ======== ======= ====== ======= =======
For the year 2001......... $ (23) $ (900) $ - $ - $ 23 $ (900)
======= ======== ======= ====== ======= =======
For the year 2000......... $ (23) $ - $ - $ - $ - $ (23)
======= ======== ======= ====== ======= =======
Valuation allowance for
available-for-sale securities
For the year 2002......... $ 6,483 $ - $ 326 $ - $(1,141) $ 5,668
======= ======== ======= ====== ======= =======
For the year 2001......... $ 4,980 $ - $ 2,496 $ - $ (993) $ 6,483
======= ======== ======= ====== ======= =======
For the year 2000......... $ 5,220 $ - $ 3,159 $ - $(3,399) $ 4,980
======= ======== ======= ====== ======= =======
(a) With respect to allowances for doubtful accounts, deductions include
accounts considered uncollectible or written off, payments, companies
divested, etc. with respect to valuation allowance for available-for-sale
securities, deductions comprise net realized gains on sales of investments.
(b) Classified in consolidated balance sheet as a reduction of accounts
receivable.
(c) Classified in consolidated balance sheet as a reduction of other assets.
(d) With respect to the valuation allowance for available-for-sale securities,
amounts charged or credited to other accounts comprise net unrealized
holding gains arising during the period.
S-1
INDEX TO EXHIBITS
PAGE NUMBER
OR
INCORPORATION BY REFERENCE
--------------------------
EXHIBIT FILE NO. AND PREVIOUS
NUMBER FILING DATE EXHIBIT NO.
------ ----------- -----------
3.1 Certificate of Incorporation of Form S-3 4.1
Chemed Corporation Reg. No. 33-44177
11/26/91
3.2 By-Laws of Chemed Corporation Form 10-K 2
3/28/89
4.1 Offer to Exchange Chemed Capital Form T-3 T3E.1
Trust Convertible Trust Preferred 12/23/99
Securities for Shares of Capital
Stock, dated as of 12/23/99
4.2 Chemed Capital Trust, dated Schedule 13E-4 (b)(1)
as of 12/23/99 12/23/99
4.3 Amended and Restated Schedule 13E-4A (b)(2)
Declaration of Trust of Chemed 2/7/00, Amendment
Capital Trust, dated February 7, 2000 No. 2
10.1 Agreement and Plan of Merger Form 8-K 1
among Diversey U.S. Holdings, 3/11/91
Inc., D.C. Acquisition Inc.,
Chemed Corporation and DuBois
Chemicals, Inc., dated as of
February 25, 1991
10.2 Stock Purchase Agreement between Form 10-K 5
Omnicare, Inc. and Chemed 3/25/93
Corporation dated as of August 5, 1992
10.3 Agreement and Plan of Merger Form 8-K 1
among National Sanitary 10/13/97
Supply Company, Unisource
Worldwide, Inc. and TFBD, Inc.
10.4 Stock Purchase Agreement dated Form 8-K 2.1
as of May 8, 2002 by and between 10/11/02
PCI Holding Corp. and Chemed
Corporation
10.5 Amendment No. 1 to Stock Purchase Form 8-K 2.2
Agreement dated as of October 11, 10/11/02
2002 by and among PCI Holding
Corp., PCI-A Holding Corp. and
Chemed Corporation
10.6 Senior Subordinated Promissory Form 8-K 2.3
Note dated as of October 11, 2002 10/11/02
by and among PCI Holding Corp.
and Chemed Corporation
10.7 Common Stock Purchase Warrant Form 8-K 2.4
dated as of October 11, 2002 by 10/11/02
and between PCI Holding Corp.
and Chemed Corporation
E-1
PAGE NUMBER
OR
INCORPORATION BY REFERENCE
--------------------------
EXHIBIT FILE NO. AND PREVIOUS
NUMBER FILING DATE EXHIBIT NO.
------ ----------- -----------
10.8 1981 Stock Incentive Plan, as Form 10- K 7
amended through May 20, 1991 3/27/92, **
10.9 1983 Incentive Stock Option Plan, Form 10-K 8
as amended through May 20, 1991 3/27/92, **
10.10 1986 Stock Incentive Plan, as Form 10-K 9
amended through May 20, 1991 3/27/92, **
10.11 1988 Stock Incentive Plan, as Form 10-K 10
amended through May 20, 1991 3/27/92, **
10.12 1993 Stock Incentive Plan Form 10-K 10.8
3/29/94, **
10.13 1995 Stock Incentive Plan Form 10-K 10.14
3/28/96, **
10.14 1997 Stock Incentive Plan Form 10-K 10.10
3/27/98, **
10.15 1999 Stock Incentive Plan Form 10-K 10.11
3/29/00, **
10.16 1999 Long-Term Employee
Incentive Plan as amended **, ***
through May 20, 2002
10.17 2002 Stock Incentive Plan **, ***
10.18 2002 Executive Long-Term Incentive Plan **, ***
10.19 Employment Contracts with Executives Form 10-K 10.12
3/28/89, **
10.20 Amendment to Employment **, ***
Agreements with Kevin J.
McNamara, Thomas C. Hutton
and Sandra E. Laney
dated August 7, 2002
10.21 Amendment to Employment **, ***
Agreements with Timothy
S. O'Toole and Arthur V.
Tucker dated August 7, 2002
10.22 Amendment to Employment **, ***
Agreements with Spencer S. Lee
and Rick L. Arquilla, dated
August 7, 2002
10.23 Amendment No. 4 to Employment **, ***
Agreement with John M. Mount
dated August 7, 2002
E-2
PAGE NUMBER
OR
INCORPORATION BY REFERENCE
--------------------------
EXHIBIT FILE NO. AND PREVIOUS
NUMBER FILING DATE EXHIBIT NO.
------ ----------- -----------
10.24 Amendment to Employment Form 10-K 10.16
Agreement with Executives dated 3/28/02, **
January 1, 2002
10.25 Employment Contract with John Form 10-K 10.23
M. Mount 3/27/98, **
10.26 Consulting Agreement between **, ***
Timothy S. O'Toole and PCI
Holding Corp.
10.27 Amendment No. 16 to Employment **, ***
Agreement with Sandra E. Laney
dated March 1, 2003
10.28 Excess Benefits Plan, as restated Form 10-K 10.9
and amended, effective April 1, 1997 3/27/98, **
10.29 Non-Employee Directors' Deferred Form 10-K 10.10
Compensation Plan 3/24/88, **
10.30 Chemed/Roto-Rooter Savings & Form 10-K 10.25
Retirement Plan, effective 3/25/99, **
January 1, 1999
10.31 First Amendment to Chemed/ Form 10-K 10.22
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective September 6, 2000
10.32 Second Amendment to Chemed/ Form 10-K 10.23
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective January 1, 2001
10.33 Third Amendment to Chemed/ Form 10-K 10.24
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective December 12, 2001
10.34 Stock Purchase Plan by and Form 8-K 10.21
among Banta Corporation, Chemed 10/13/97
Corporation and OCR Holding Company
10.35 Directors Emeriti Plan Form 10-Q 10.11
5/12/88, **
10.36 Second Amendment to Split Dollar Form 10-K 10.26
Agreement with Executives 3/29/00, **
10.37 Split Dollar Agreement with Form 10-K 10.27
Sandra E. Laney 3/25/99, **
10.38 Split Dollar Agreements Form 10-K 10.15
with Executives 3/28/96, **
10.39 Split Dollar Agreement with Form 10-K 10.16
Edward L. Hutton 3/28/96, **
10.40 Split Dollar Agreement with Form 10-K 10.32
John M. Mount 3/29/00, **
E-3
PAGE NUMBER
OR
INCORPORATION BY REFERENCE
--------------------------
EXHIBIT FILE NO. AND PREVIOUS
NUMBER FILING DATE EXHIBIT NO.
------ ----------- -----------
10.41 Split Dollar Agreement with Form 10-K 10.33
Spencer S. Lee 3/29/00, **
10.42 Split Dollar Agreement with Form 10-K 10.34
Rick L. Arquilla 3/29/00, **
10.43 Form of Promissory Note under **, ***
the Executive Stock Purchase Plan
10.44 Form of Promissory Note under
the Executive Stock Purchase Plan **, ***
with Kevin J. McNamara
10.45 Roto-Rooter Deferred Compensation Form 10-K 10.37
Plan No. 1, as amended January 1, 1998 3/28/01, **
10.46 Roto-Rooter Deferred Compensation Form 10-K 10.38
Plan No. 2 3/28/01, **
13 2002 Annual Report to Stockholders ***
21 Subsidiaries of Chemed Corporation ***
23 Consent of Independent Accountants *
24 Powers of Attorney ***
31.1 Certification by Kevin J. McNamara *
pursuant to RULE 13A-14 of the Exchange
Act of 1934
31.2 Certification by Timothy S. O'Toole *
pursuant to RULE 13A-14 of the Exchange
Act of 1934
31.3 Certification by Arthur V. Tucker, Jr. *
pursuant to RULE 13A-14 of the Exchange
Act of 1934
32.1 Certification by Kevin J. McNamara *
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by Timothy S. O'Toole *
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.3 Certification by Arthur V. Tucker, Jr. *
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed herewith.
** Management contract or compensatory plan or arrangement.
*** Filed as exhibit to Original Form 10-K.
E-4