SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] For the fiscal year ended December 31, 2005
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
CHEMED CORPORATION
(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 if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes X No
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
----- -----
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 No X
----- -----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. Large accelerated filer X
-----
Accelerated filer _____ Non-accelerated filer ______
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 30, 2005 ($41.37
per share), was $1,046,013,477.
At March 8, 2006, 26,236,872 shares of Chemed Capital Stock (par value $1
per share) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
-------- ------------------
2005 Annual Report to Stockholders (specified portions) Parts I, II and IV
Proxy Statement for Annual Meeting to be held May 15, 2006 Part III
CHEMED CORPORATION
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business........................................................ 1
Item 1A. Risk Factors.................................................... 15
Item 1B. Unresolved Staff Comments....................................... 26
Item 2. Properties...................................................... 26
Item 3. Legal Proceedings............................................... 27
Item 4. Submission of Matters to a Vote of Security Holders............. 27
-- Executive Officers of the Registrant............................ 27
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities... 28
Item 6. Selected Financial Data......................................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 30
Item 8. Financial Statements and Supplementary Data..................... 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 30
Item 9A. Controls and Procedures......................................... 30
Item 9B. Other Information............................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 31
Item 11. Executive Compensation.......................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 31
Item 13. Certain Relationships and Related Transactions.................. 31
Item 14. Principal Accountant Fees and Services.......................... 31
PART IV
Item 15. Exhibits and Financial Statement Schedules...................... 33
ITEM 1. BUSINESS
GENERAL
The Company was incorporated in Delaware in 1970 as a subsidiary of W. R.
Grace & Co. and succeeded to the business of W. R. Grace & Co.'s Specialty
Products Group as of April 30, 1971 and remained a subsidiary of W. R. Grace &
Co. until March 10, 1982. As used herein, "Company" refers to Chemed
Corporation, and its subsidiaries and "Grace" refers to W. R. Grace & Co. and
its subsidiaries.
On March 10, 1982, the Company transferred to Dearborn Chemical Company, a
wholly owned subsidiary of the Company, the business and assets of the Company's
Dearborn Group, including the stock of certain subsidiaries within the Dearborn
Group, plus $185 million in cash, and Dearborn Chemical Company assumed the
Dearborn Group's liabilities. Thereafter, on March 10, 1982 the Company
transferred all of the stock of Dearborn Chemical Company to Grace in exchange
for 33,481,604 shares of the capital stock of the Company owned by Grace with
the result that Grace no longer has any ownership interest in the Company.
On December 31, 1986, the Company completed the sale of substantially all
of the business and assets of Vestal Laboratories, Inc., a wholly owned
subsidiary. The Company received cash payments aggregating approximately $67.4
million over the four-year period following the closing, the substantial portion
of which was received on December 31, 1986.
On April 2, 1991, the Company completed the sale of DuBois Chemicals, Inc.
("DuBois"), a wholly owned subsidiary, to the Diversey Corporation ("Diversey"),
then a subsidiary of The Molson Companies Ltd. Under the terms of the sale,
Diversey agreed to pay the Company net cash payments aggregating $223,386,000,
including deferred payments aggregating $32,432,000.
On December 21, 1992, the Company acquired The Veratex Corporation and
related businesses ("Veratex Group") from Omnicare, Inc. The purchase price was
$62,120,000 in cash paid at closing, plus a post-closing payment of $1,514,000
(paid in April 1993) based on the net assets of Veratex.
Effective January 1, 1994, the Company acquired all the capital stock of
Patient Care, Inc. ("Patient Care"), for cash payments aggregating $20,582,000,
plus 35,000 shares of the Company's Capital Stock. An additional cash payment of
$1,000,000 was made on March 31, 1996 and another payment of $1,000,000 was made
on March 31, 1997.
In July 1995, the Company's Omnia Group (formerly Veratex Group) completed
the sale of the business and assets of its Veratex Retail division to Henry
Schein, Inc. ("HSI") for $10 million in cash plus a $4.1 million note for which
payment was received in December 1995.
Effective September 17, 1996, the Company completed a merger of a
subsidiary of the Company, Chemed Acquisition Corp., and Roto-Rooter, Inc.
pursuant to a Tender Offer commenced on August 8, 1996 to acquire any and all of
the outstanding shares of Common Stock of Roto-Rooter, Inc. for $41.00 per share
in cash.
On September 24, 1997, the Company completed the sale of its wholly owned
businesses comprising the Omnia Group to Banta Corporation for $50 million in
cash and $2.3 million in deferred payments.
Effective September 30, 1997, the Company completed a merger between its
81-percent-owned subsidiary, National Sanitary Supply Company, and a wholly
owned subsidiary of Unisource Worldwide, Inc. for $21.00 per share, with total
payments of $138.3 million.
Effective October 11, 2002, the Company sold its Patient Care 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 cash proceeds to the Company totaled $57,500,000,
of which $5,000,000 was placed in escrow pending settlement of Patient Care's
receivables with third-party payers. Of this amount, $2,500,000 was distributed
as of October 2003 and the remainder, except for $769,042 was
1
distributed as of October 2004. The Company is also entitled to additional funds
based on the estimated balance sheet valuation. This claim is currently in
litigation. In addition, the Company received a senior subordinated note
receivable ("Note") for $12,500,000 and a common stock purchase warrant
("Warrant") for 2% of the outstanding stock of the purchasing company. The Note
is due October 11, 2007, and 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 Warrant has an estimated fair value of $1,445,000.
Effective February 24, 2004, The Company completed a merger of its wholly
owned indirect subsidiary, Marlin Merger Corp., and Vitas Healthcare
Corporation. Under the terms of the merger agreement, Vitas stockholders
received cash of $30.00 per share. The transaction, including the refinancing of
existing Vitas debt and other payments made in connection with the merger,
totaled approximately $415 million in cash. In order to complete the merger the
Company sold four million shares of its Capital Stock in a private placement at
a price of $25.00 per share, issued $110 million principal amount of floating
rate senior secured notes due 2010 ("Floating Rate Notes"), issued $150 million
principal amount of 8.75% Senior Notes due 2011 ("Fixed Rate Notes"), and
entered into new $135 million senior secured credit facilities. These
obligations were restated on February 24, 2005. More information with respect to
the Company's merger with Vitas is included within Note 7 of the Notes to
Consolidated Financial Statements appearing on pages 23-25 of the Annual Report
to Stockholders and incorporated herein by reference.
On December 22, 2004, the Board of Directors authorized the discontinuance
of the operations of the Company's Service America segment, through an asset
sale to employees of Service America. The acquiring corporation purchased a
substantial majority of Service America's assets in exchange for assuming
substantially all of Service America's liabilities in May 2005. Included in the
assets acquired was a receivable from the Company for approximately $4.7
million. The Company paid $1 million of the receivable upon closing and the
remainder is payable over the following year in 11 equal monthly installments.
During 2005 the Company conducted its business operations in two segments:
Vitas Group ("Vitas") and Roto-Rooter Group ("Roto-Rooter").
FORWARD LOOKING STATEMENTS
This Annual Report contains or incorporates by reference certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company intends such statements to be subject to the
safe harbors created by that legislation. Such statements involve risks and
uncertainties that could cause actual results of operations to differ materially
from these forward looking statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The required segment and geographic data for the Company's continuing
operations (as described below) for the three years ended December 31, 2003,
2004 and 2005 are shown in Note 2 of the Notes to Consolidated Financial
Statements on pages 17-19 of the 2005 Annual Report to Stockholders and are
incorporated herein by reference.
DESCRIPTION OF BUSINESS BY SEGMENT
The information called for by this item is included within Note 2 of the
Notes to Consolidated Financial Statements appearing on pages 17-19 of the 2005
Annual Report to Stockholders and is incorporated herein by reference.
PRODUCT AND MARKET DEVELOPMENT
Each segment of the Company's business engages in a continuing program for
the development and marketing of new services and products. While new products
and services and new market development are important factors for the growth of
each active segment of
2
the Company's business, the Company does not expect that any new products and
services or marketing effort, including those in the development stage, will
require the investment of a material amount of the Company's assets.
RAW MATERIALS
The principal raw materials needed for the Company's manufacturing
operations are purchased from United States sources. No segment of the Company
experienced any material raw material shortages during 2005, although such
shortages may occur in the future. Products manufactured and sold by the
Company's Roto-Rooter segment generally may be reformulated to avoid the adverse
impact of a specific raw material shortage.
PATENTS, SERVICE MARKS AND LICENSES
The Roto-Rooter(R) trademarks and service marks have been used and
advertised since 1935 by Roto-Rooter Corporation, a wholly owned indirect
subsidiary of the Company. The Roto-Rooter(R) marks are among the most highly
recognized trademarks and service marks in the United States. The Company
considers the Roto-Rooter(R) marks to be a valuable asset and a significant
factor in the marketing of Roto-Rooter's franchises, products and services and
the products and services provided by its franchisees.
"Vitas" and "Innovative Hospice Care" are trademarks and servicemarks of
Vitas Healthcare Corporation. The Company and its subsidiaries also own certain
trade secrets including training manuals, pricing information, customer
information and software source codes.
COMPETITION
ROTO-ROOTER
All aspects of the sewer, drain, and pipe cleaning, HVAC services and
plumbing repair businesses are highly competitive. Competition is, however,
fragmented in most markets with local and regional firms providing the primary
competition. The principal methods of competition are advertising, range of
services provided, name recognition, speed and quality of customer service,
service guarantees, and pricing.
No individual customer or market group is critical to the total sales of
this segment.
VITAS
Hospice care in the United States is competitive. Because payments for
hospice services are generally uniform, Vitas competes primarily on the basis of
its ability to deliver quality, responsive services. Vitas is the nation's
largest provider of hospice services in a market dominated by small, non-profit,
community-based hospices. Approximately 60% of all hospices are not-for-profit.
Because the hospice care market is highly fragmented, Vitas competes with a
large number of organizations.
Vitas also competes with a number of national and regional hospice
providers, including Odyssey Healthcare, Inc. and VistaCare, Inc., hospitals,
nursing homes, home health agencies and other health care providers. Many
providers offer home care to patients who are terminally ill, and some actively
market palliative care and hospice-like programs. In addition, various health
care companies have diversified into the hospice market. Some of these health
care companies may have greater financial resources than Vitas.
Relatively few barriers to entry exist in the markets served by Vitas.
Accordingly, other companies that are not currently providing hospice care may
enter these markets and expand the variety of services offered.
3
RESEARCH AND DEVELOPMENT
The Company engages in a continuous program directed toward the development
of new services, products and processes, the improvement of existing services,
products and processes, and the development of new and different uses of
existing products. The research and development expenditures from continuing
operations have not been nor are they expected to be material.
GOVERNMENT REGULATIONS
ROTO-ROOTER
Roto-Rooter's franchising activities are subject to various federal and
state franchising laws and regulations, including the rules and regulations of
the Federal Trade Commission (the "FTC") regarding the offering or sale of
franchises. The rules and regulations of the FTC require that Roto-Rooter
provide all prospective franchisees with specific information regarding the
franchise program and Roto-Rooter in the form of a detailed franchise offering
circular. In addition, a number of states require Roto-Rooter to register its
franchise offering prior to offering or selling franchises in the state. Various
state laws also provide for certain rights in favor of franchisees, including
(i) limitations on the franchisor's ability to terminate a franchise except for
good cause, (ii) restrictions on the franchisor's ability to deny renewal of a
franchise, (iii) circumstances under which the franchisor may be required to
purchase certain inventory of franchisees when a franchise is terminated or not
renewed in violation of such laws, and (iv) provisions relating to arbitration.
Roto-Rooter's ability to engage in the plumbing repair business is also subject
to certain limitations and restrictions imposed by state and local licensing
laws and regulations.
VITAS
General. The health care industry and Vitas' hospice programs are subject
to extensive federal and state regulation. Vitas' hospices are licensed as
required under state law as either hospices or home health agencies, or both,
depending on the regulatory requirements of each particular state. In addition,
Vitas' hospices are required to meet certain conditions of participation to be
eligible to receive payments as hospices under the Medicare and Medicaid
programs. All of Vitas' hospices, other than those currently in development, are
certified for participation as hospices in the Medicare program, and are also
eligible to receive payments as hospices from the Medicaid program in each of
the states in which Vitas operates. Vitas' hospices are subject to periodic
survey by governmental authorities or private accrediting entities to assure
compliance with state licensing, certification and accreditation requirements,
as the case may be.
Medicare Conditions of Participation. Federal regulations require that a
hospice program satisfy certain conditions of participation to be certified and
receive Medicare payment for the services it provides. Failure to comply with
the conditions of participation may result in sanctions, up to and including
decertification from the Medicare program. See "Surveys and Audits" below.
The Medicare conditions of participation for hospice programs include the
following:
Governing Body. Each hospice must have a governing body that assumes
full responsibility for the policies and the overall operation of the
hospice and for ensuring that all services are provided in a manner
consistent with accepted standards of practice. The governing body must
designate one individual who is responsible for the day-to-day management
of the hospice.
Medical Director. Each hospice must have a medical director who is a
physician and who assumes responsibility for overseeing the medical
component of the hospice's patient care program.
4
Direct Provision of Core Services. Medicare limits those services for
which the hospice may use individual independent contractors or contract
agencies to provide care to patients. Specifically, substantially all
nursing, social work, and counseling services must be provided directly by
hospice employees meeting specific educational and professional standards.
During periods of peak patient loads or under extraordinary circumstances,
the hospice may be permitted to use contract workers, but the hospice must
agree in writing to maintain professional, financial and administrative
responsibility for the services provided by those individuals or entities.
Professional Management of Non-Core Services. A hospice may arrange to
have non-core services such as therapy services, home health aide services,
medical supplies or drugs provided by a non-employee or outside entity. If
the hospice elects to use an independent contractor to provide non-core
services, however, the hospice must retain professional management
responsibility for the arranged services and ensure that the services are
furnished in a safe and effective manner by qualified personnel, and in
accordance with the patient's plan of care.
Plan of Care. The patient's attending physician, the medical director
or designated hospice physician, and the interdisciplinary team must
establish an individualized written plan of care prior to providing care to
any hospice patient. The plan must assess the patient's needs and identify
services to be provided to meet those needs and must be reviewed and
updated at specified intervals.
Continuation of Care. A hospice may not discontinue or reduce care
provided to a Medicare beneficiary if the individual becomes unable to pay
for that care.
Informed Consent. The hospice must obtain the informed consent of the
hospice patient, or the patient's legal representative, that specifies the
type of care services that may be provided as hospice care.
Training. A hospice must provide ongoing training for its employees.
Quality Assurance. A hospice must conduct ongoing and comprehensive
self-assessments of the quality and appropriateness of care it provides and
that its contractors provide under arrangements to hospice patients.
Interdisciplinary Team. A hospice must designate an interdisciplinary
team to provide or supervise hospice care services. The interdisciplinary
team develops and updates plans of care, and establishes policies governing
the day-to-day provision of hospice services. The team must include at
least a physician, registered nurse, social worker and spiritual or other
counselor. A registered nurse must be designated to coordinate the plan of
care.
Volunteers. Hospice programs are required to recruit and train
volunteers to provide patient care services or administrative services.
Volunteer services must be provided in an amount equal to at least five
percent of the total patient care hours provided by all paid hospice
employees and contract staff.
Licensure. Each hospice and all hospice personnel must be licensed,
certified or registered in accordance with applicable federal, state and
local laws and regulations.
Central Clinical Records. Hospice programs must maintain clinical
records for each hospice patient that are organized in such a way that they
may be easily retrieved. The clinical records must be complete and accurate
and protected against loss, destruction, and unauthorized use.
Surveys and Audits. Hospice programs are subject to periodic survey by
federal and state regulatory authorities and private accrediting entities to
ensure compliance with applicable licensing and certification requirements and
accreditation standards.
5
Regulators conduct periodic surveys of hospice programs and provide reports
containing statements of deficiencies for alleged failure to comply with various
regulatory requirements. Survey reports and statements of deficiencies are
common in the healthcare industry. In most cases, the hospice program and
regulatory authorities will agree upon any steps to be taken to bring the
hospice into compliance with applicable regulatory requirements. In some cases,
however, a state or federal regulatory authority may take a number of adverse
actions against a hospice program, including the imposition of fines, temporary
suspension of admission of new patients to the hospice's service or, in extreme
circumstances, de-certification from participation in the Medicare or Medicaid
programs or revocation of the hospice's license.
From time to time Vitas receives survey reports containing statements of
deficiencies. Vitas reviews such reports and takes appropriate corrective
action. Vitas believes that its hospices are in material compliance with
applicable licensure and certification requirements. If a Vitas hospice were
found to be out of compliance and actions were taken against a Vitas hospice,
they could materially adversely affect the hospice's ability to continue to
operate, to provide certain services and to participate in the Medicare and
Medicaid programs, which could materially adversely affect Vitas.
Billing Audits/ Claims Reviews. The Medicare program and its fiscal
intermediaries and other payors periodically conduct pre-payment or post-payment
reviews and other reviews and audits of health care claims, including hospice
claims. There is pressure from state and federal governments and other payors to
scrutinize health care claims to determine their validity and appropriateness.
In order to conduct these reviews, the payor requests documentation from Vitas
and then reviews that documentation to determine compliance with applicable
rules and regulations, including the eligibility of patients to receive hospice
benefits, the appropriateness of the care provided to those patients and the
documentation of that care. During the past several years, Vitas' claims have
been subject to review and audit.
Certificate of Need Laws and Other Restrictions. Some states, including
Florida, have certificate of need or similar health planning laws that apply to
hospice care providers. These states may require some form of state agency
review or approval prior to opening a new hospice program, to adding or
expanding hospice services, to undertaking significant capital expenditures or
under other specified circumstances. Approval under these certificate of need
laws is generally conditioned on the showing of a demonstrable need for services
in the community. Vitas may seek to develop, acquire or expand hospice programs
in states having certificate of need laws. To the extent that state agencies
require Vitas to obtain a certificate of need or other similar approvals to
expand services at existing hospice programs or to make acquisitions or develop
hospice programs in new or existing geographic markets, Vitas' plans could be
adversely affected by a failure to obtain such certificate or approval. In
addition, competitors may seek administratively or judicially to challenge such
an approval or proposed approval by the state agency, and Vitas has been
defending against such a challenge in connection with the development of its
Palm Beach County, Florida hospice program. Such a challenge, whether or not
ultimately successful, could adversely affect Vitas.
Limitations on For-Profit Ownership. A few states have laws that restrict
the development and expansion of for-profit hospice programs. For example,
Florida law does not permit the operation of a hospice by a for-profit
corporation unless it was operated in that capacity on or before July 1, 1978,
although under certain circumstances a for-profit corporation may be permitted
to purchase a grandfathered hospice program and continue to operate it. In New
York, a hospice generally cannot be owned by a corporation that has another
corporation as a stockholder. These types of restrictions could affect Vitas'
ability to expand in Florida or into New York, or in other jurisdictions with
similar restrictions.
Limits on the Acquisition or Conversion of Non-Profit Health Care
Organizations. An increasing number of states have enacted laws that restrict
the ability of for-profit entities to acquire or otherwise assume the operations
of a non-profit health care provider. Some states may require government review,
public hearings, and/or government approval of transactions in which a
for-profit entity proposes to purchase certain non-
6
profit healthcare organizations. Heightened scrutiny of these transactions may
significantly increase the costs associated with future acquisitions of
non-profit hospice programs in some states, otherwise increase the difficulty in
completing those acquisitions or prevent them entirely. Vitas cannot assure that
it will not encounter regulatory or governmental obstacles in connection with
any proposed acquisition of non-profit hospice programs in the future.
Professional Licensure and Participation Agreements. Many hospice employees
are subject to federal and state laws and regulations governing the ethics and
practice of their profession, including physicians, physical, speech and
occupational therapists, social workers, home health aides, pharmacists and
nurses. In addition, those professionals who are eligible to participate in the
Medicare, Medicaid or other federal health care programs as individuals must not
have been excluded from participation in those programs at any time.
State Licensure of Hospice. Each of Vitas' hospices must be licensed in the
state in which it operates. State licensure rules and regulations require that
Vitas' hospices maintain certain standards and meet certain requirements, which
may vary from state to state. Vitas believes that its hospices are in material
compliance with applicable licensure requirements. If a Vitas hospice were found
to be out of compliance and actions were taken against a Vitas hospice, they
could materially adversely affect the hospice's ability to continue to operate,
to provide certain services and to participate in the Medicare and Medicaid
programs, which could materially adversely affect Vitas.
Overview of Government Payments -- General. Over 90% of Vitas' revenue
consisted of payments from the Medicare and Medicaid programs. Such payments are
made primarily on a "per diem" basis. Under the per diem reimbursement
methodology, Vitas is essentially at risk for the cost of eligible services
provided to hospice patients. Profitability is therefore largely dependent upon
Vitas' ability to manage the costs of providing hospice services to patients.
Increases in operating costs, such as labor and supply costs that are subject to
inflation and other increases, without a compensating increase in Medicare and
Medicaid rates, could have a material adverse effect on Vitas' business in the
future. The Medicare and Medicaid programs are increasing pressure to control
health care costs and to decrease or limit increases in reimbursement rates for
health care services. As with most government programs, the Medicare and
Medicaid programs are subject to statutory and regulatory changes, possible
retroactive and prospective rate and payment adjustments, administrative
rulings, freezes and funding reductions, all of which may adversely affect the
level of program payments and could have a material adverse effect on Vitas'
business. Vitas' levels of revenues and profitability will be subject to the
effect of legislative and regulatory changes, including possible reductions in
coverage or payment rates, or changes in methods of payment, by the Medicare and
Medicaid programs.
Overview of Government Payments -- Medicare
Medicare Eligibility Criteria. To receive Medicare payment for hospice
services, the hospice medical director and, if the patient has one, the
patient's attending physician, must certify that the patient has a life
expectancy of six months or less if the illness runs its normal course. This
determination is made based on the physician's clinical judgment. Due to the
uncertainty of such prognoses, however, it is likely and expected that some
percentage of hospice patients will not die within six months of entering a
hospice program. The Medicare program (among other third-party payors)
recognizes that terminal illnesses often do not follow an entirely predictable
course, and therefore the hospice benefit remains available to beneficiaries so
long as the hospice physician or the patient's attending physician continues to
certify that the patient's life expectancy remains six months or less.
Specifically, the Medicare hospice benefit provides for two initial 90-day
benefit periods followed by an unlimited number of 60-day periods. In order to
qualify for hospice care, a Medicare beneficiary must elect hospice care and
waive any right to other Medicare benefits related to his or her terminal
illness. A Medicare beneficiary may revoke his or her election of the Medicare
hospice benefit at any time and resume receiving regular Medicare benefits. The
patient may elect the hospice benefit again at a later date so long as he or she
remains
7
eligible. Increased regulatory scrutiny of compliance with the Medicare
six-month eligibility rule has impacted the hospice industry. The Medicare
program, however, has reaffirmed that Medicare hospice beneficiaries are not
limited to six months of coverage and that there is no limit on how long a
Medicare beneficiary can continue to receive hospice benefits and services,
provided that the beneficiary continues to meet the eligibility criteria under
the Medicare hospice program. In addition, the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 requires HHS to conduct a study
to examine the appropriateness of the current physician certification
requirement required before a Medicare beneficiary is eligible to receive the
Medicare hospice benefit.
Levels of Care. Medicare pays for hospice services on a prospective payment
system basis under which Vitas receives an established payment rate for each day
that it provides hospice services to a Medicare beneficiary. These rates are
subject to annual adjustments for inflation and vary based upon the geographic
location where the services are provided. The rate Vitas receives depends on
which of the following four levels of care is being provided to the beneficiary:
Routine Home Care. The routine home care rate is paid for each day
that a patient is in a hospice program and is not receiving one of the
other categories of hospice care. The routine home care rate does not
vary based upon the volume or intensity of services provided by the
hospice program.
General Inpatient Care. The general inpatient care rate is paid when a
patient requires inpatient services for a short period for pain
control or symptom management which cannot be managed in other
settings. General inpatient care services must be provided in a
Medicare or Medicaid certified hospital or long-term care facility or
at a freestanding inpatient hospice facility with the required
registered nurse staffing.
Continuous Home Care. Continuous home care is provided to patients
while at home, during periods of crisis when intensive monitoring and
care, primarily nursing care, is required in order to achieve
palliation or management of acute medical symptoms. Continuous home
care requires a minimum of 8 hours of care within a 24-hour day, which
begins and ends at midnight. The care must be predominantly nursing
care provided by either a registered nurse or licensed practical
nurse. While the published Medicare continuous home care rates are
daily rates, Medicare actually pays for continuous home care services
on an hourly basis. This hourly rate is calculated by dividing the
daily rate by 24.
Respite Care. Respite care permits a hospice patient to receive
services on an inpatient basis for a short period of time in order to
provide relief for the patient's family or other caregivers from the
demands of caring for the patient. A hospice can receive payment for
respite care for a given patient for up to five consecutive days at a
time, after which respite care is reimbursed at the routine home care
rate.
Medicare Payment for Physician Services. Payment for direct patient care
physician services delivered by hospice physicians is billed separately by the
hospice to the Medicare intermediary and paid at the lesser of the actual charge
or the Medicare allowable charge for these services. This payment is in addition
to the daily rates Vitas receives for hospice care. Payment for hospice
physicians' administrative and general supervisory activities is included in the
daily rates discussed above. Payments for attending physician professional
services (other than services furnished by hospice physicians) are not paid to
the hospice, but rather are paid directly to the attending physician by the
Medicare carrier. For fiscal 2005, 1.7% of Vitas' net revenue was attributable
to physician services.
Medicare Limits on Hospice Care Payments. Medicare payments for hospice
services are subject to two additional limits or "caps." Each of Vitas' hospice
programs is separately subject to both of these "caps." Both of these "caps" are
determined on an annual basis for the period running from November 1 through
October 31 of each year.
8
First, under a Medicare rule known as the "80-20" rule applicable to
Medicare inpatient services, if the number of inpatient care days furnished by a
hospice to Medicare beneficiaries exceeds 20% of the total days of hospice care
furnished by such hospice to Medicare beneficiaries, Medicare payments to the
hospice for inpatient care days exceeding the inpatient cap are reduced to the
routine home care rate. Vitas has never exceeded the inpatient cap.
Second, Medicare payments to a hospice are also subject to a separate cap
based on overall average payments per admission. Any payments exceeding this
overall hospice cap must be refunded by the hospice. This cap was set at $19,778
per admission through the twelve-month period ended on October 31, 2005, and is
adjusted annually to account for inflation. There can be no assurance that
Vitas' hospices will not be subject to future payment reductions or recoupments
as the result of this cap. In 2005, we determined Vitas' Phoenix, AZ facility
has exceeded this cap for the period ended October 31, 2005.
Medicare Managed Care Programs. The Medicare program has entered into
contracts with managed care companies to provide a managed care benefit to
Medicare beneficiaries who elect to participate in managed care programs. These
managed care programs are commonly referred to as Medicare HMOs, Medicare +
Choice or Medicare risk products. Vitas provides hospice care to Medicare
beneficiaries who participate in these managed care programs, and Vitas is paid
for services provided to these beneficiaries in the same way and at the same
rates as those of other Medicare beneficiaries who are not in a Medicare managed
care program. Under current Medicare policy, Medicare pays the hospice directly
for services provided to these managed care program participants and then
reduces the standard per-member, per-month payment that the managed care program
otherwise receives.
Overview of Government Payments -- Medicaid
Medicaid Coverage and Reimbursement. State Medicaid programs are another
source of Vitas' net patient revenue. Medicaid is a state-administered program
financed by state funds and matching federal funds to provide medical assistance
to the indigent and certain other eligible persons. In 1986, hospice services
became an optional state Medicaid benefit. For those states that elect to
provide a hospice benefit, the Medicaid program is required to pay the hospice
at rates at least equal to the rates provided under Medicare and calculated
using the same methodology. States maintain flexibility to establish their own
hospice election procedures and to limit the number and duration of benefit
periods for which they will pay for hospice services.
Nursing Home Residents. For Vitas' patients who receive nursing home care
under a state Medicaid program and who elect hospice care under Medicare or
Medicaid, Vitas contracts with nursing homes for the nursing homes' provision of
room and board services. In addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, the state generally must pay Vitas an amount equal
to at least 95% of the Medicaid daily nursing home rate for room and board
services furnished to the patient by the nursing home. Under Vitas' standard
nursing home contracts, Vitas pays the nursing home for these room and board
services at the Medicaid daily nursing home rate.
Adjustments to Medicare and Medicaid Payment Rates. Payment rates under the
Medicare and Medicaid programs are adjusted annually based upon the Hospital
Market Basket Index; however, the adjustments have historically been less than
actual inflation. On October 1, 2003, the base Medicare payment rates for
hospice care increased by approximately 3.4% over the base rates in effect in
the prior year. On October 1, 2004 the rates increased by 3.3%. On October 1,
2005 the rates increased by 3.4%. These base rates are further modified by the
Hospice Wage Index to reflect local differences in wages according to the
revised wage index. It is possible that there will be further modifications to
the rate structure under which the Medicare or Medicaid programs pay for hospice
care services. Any future reductions in the rate of increase in Medicare and
Medicaid payments may have an adverse impact on Vitas' net patient service
revenue and profitability.
9
OTHER HEALTHCARE REGULATIONS
Federal and State Anti-Kickback Laws and Safe Harbor Provisions. The
federal Anti-Kickback Law makes it a felony to knowingly and willfully offer,
pay, solicit or receive any form of remuneration in exchange for referring,
recommending, arranging, purchasing, leasing or ordering items or services
covered by a federal health care program including Medicare or Medicaid. The
Anti-Kickback Law applies regardless of whether the remuneration is provided
directly or indirectly, in cash or in kind. Although the anti-kickback statute
does not prohibit all financial transactions or relationships that providers of
healthcare items or services may have with each other, interpretations of the
law have been very broad. Under current law, courts and federal regulatory
authorities have stated that this law is violated if even one purpose (as
opposed to the sole or primary purpose) of the arrangement is to induce
referrals.
Violations of the Anti-Kickback Law carry potentially severe penalties
including imprisonment of up to five years, criminal fines of up to $25,000 per
act, civil money penalties of up to $50,000 per act, and additional damages of
up to three times the amounts claimed or remuneration offered or paid. Federal
law also authorizes exclusion from the Medicare and Medicaid programs for
violations of the Anti-Kickback Law.
The Anti-Kickback Law contains several statutory exceptions to the broad
prohibition. In addition, Congress authorized the Office of Inspector General
("OIG") to publish numerous "safe harbors" that exempt some practices from
enforcement action under the Anti-Kickback Law and related laws. These statutory
exceptions and regulatory safe harbors protect various bona fide employment
relationships, contracts for the rental of space or equipment, personal service
arrangements, and management contracts, among other things, provided that
certain conditions set forth in the statute or regulations are satisfied. The
safe harbor regulations, however, do not comprehensively describe all lawful
relationships between healthcare providers and referral sources, and the failure
of an arrangement to satisfy all of the requirements of a particular safe harbor
does not mean that the arrangement is unlawful. Failure to comply with the safe
harbor provisions, however, may mean that the arrangement will be subject to
scrutiny. It is possible for healthcare providers to request an advisory opinion
from the OIG regarding an existing or proposed business arrangement and the
possible anti-kickback concerns raised by that arrangement.
Many states, including states where Vitas does business, have adopted
similar prohibitions against payments that are intended to induce referrals of
patients, regardless of the source of payment. Some of these state laws lack
explicit "safe harbors" that may be available under federal law. Sanctions under
these state anti-kickback laws may include civil money penalties, license
suspension or revocation, exclusion from the Medicare or Medicaid programs, and
criminal fines or imprisonment. Little precedent exists regarding the
interpretation or enforcement of these statutes.
Vitas is required under the Medicare conditions of participation and some
state licensing laws to contract with numerous healthcare providers and
practitioners, including physicians, hospitals and nursing homes, and to arrange
for these individuals or entities to provide services to Vitas' patients. In
addition, Vitas has contracts with other suppliers, including pharmacies,
ambulance services and medical equipment companies. Some of these individuals or
entities may refer, or be in a position to refer, patients to Vitas, and Vitas
may refer, or be in a position to refer, patients to these individuals or
entities. These arrangements may not qualify for a safe harbor. Vitas from time
to time seeks guidance from regulatory counsel as to the changing and evolving
interpretations and the potential applicability of these anti-kickback laws to
its programs, and in response thereto, takes such actions as it deems
appropriate. The Company generally believes that Vitas' contracts and
arrangements with providers, practitioners and suppliers do not violate
applicable anti-kickback laws. However, the Company cannot assure that such laws
will ultimately be interpreted in a manner consistent with Vitas' practices.
HIPAA Anti-Fraud Provisions. HIPAA includes several revisions to existing
health care fraud laws by permitting the imposition of civil monetary penalties
in cases involving violations of the anti-kickback statute or contracting with
excluded
10
providers. In addition, HIPAA created new statutes making it a federal felony to
engage in fraud, theft, embezzlement, or the making of false statements with
respect to healthcare benefit programs, which include private, as well as
government programs. In addition, for the first time, federal enforcement
officials have the ability to exclude from the Medicare and Medicaid programs
any investors, officers and managing employees associated with business entities
that have committed healthcare fraud, even if the investor, officer or employee
had no actual knowledge of the fraud.
OIG Fraud Alerts, Advisory Opinions and Other Program Guidance. In 1976,
Congress established the OIG to, among other things, identify and eliminate
fraud, abuse and waste in HHS programs. To identify and resolve such problems,
the OIG conducts audits, investigations and inspections across the country and
issues public pronouncements identifying practices that may be subject to
heightened scrutiny. In the last several years, there have been a number of
hospice related audits and reviews conducted. These reviews and recommendations
have included:
- better ensuring that Medicare hospice eligibility determinations
are made in accordance with the Medicare regulations; and
- revising the annual cap on hospice benefits to better reflect the
cost of care provided.
From time to time, various federal and state agencies, such as HHS and the
OIG, issue a variety of pronouncements, including fraud alerts, the OIG's Annual
Work Plan and other reports, identifying practices that may be subject to
heightened governmental scrutiny. The Company cannot predict what, if any
changes may be implemented in coverage, reimbursement, or enforcement policies
as a result of these OIG reviews and recommendations.
On April 7, 2005 the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services served Vitas with civil
subpoenas relating to Vitas' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from Vitas' three largest
programs for review. It also sought policies and procedures dating back to 1998
to present covering admissions, certifications, recertifications, and
discharges. During the third quarter of 2005, the OIG requested additional
information of the Company. The U.S. Attorney has since provided the Company
with a copy of a qui tam complaint filed under seal in U.S. District Court for
the Southern District of Florida. The complaint and all filings in the qui tam
action remain under seal. We are conferring with the U.S. Attorney regarding the
Company's defenses to the complaint allegations. The U.S. Attorney has not
decided whether to intervene in the qui tam action. The Company has recorded
pretax expense related to complying with OIG requests of $310,000 and $564,000
for the three and nine month periods ended September 30, 2005, respectively.
The government continues to investigate the complaint's allegations. We are
unable to predict the outcome of this matter or the impact, if any, that it may
have on the business, results of operations, liquidity or capital resources.
Regardless of outcome, responding to this matter can adversely affect the
Company through defense costs, diversion of management's time and related
publicity.
Federal False Claims Acts. The federal law includes several criminal and
civil false claims provisions, which provide that knowingly submitting claims
for items or services that were not provided as represented may result in the
imposition of multiple damages, administrative civil money penalties, criminal
fines, imprisonment, and/or exclusion from participation in federally funded
healthcare programs, including Medicare and Medicaid. In addition, the OIG may
impose extensive and costly corporate integrity requirements upon a healthcare
provider that is the subject of a false claims judgment or settlement. These
requirements may include the creation of a formal compliance program, the
appointment of a government monitor, and the imposition of annual reporting
requirements and audits conducted by an independent review organization to
monitor compliance with the terms of the agreement and relevant laws and
regulations.
11
The Civil False Claims Act prohibits the known filing of a false claim or
the known use of false statements to obtain payments. Penalties for violations
include fines ranging from $5,500 to $11,000, plus treble damages, for each
claim filed. Provisions in the Civil False Claims Act also permit individuals to
bring actions against individuals or businesses in the name of the government as
so called "qui tam" relators. If a qui tam relator's claim is successful, he or
she is entitled to share in the government's recovery.
Both direct enforcement activity by the government and qui tam actions have
increased significantly in recent years and have increased the risk that a
healthcare company may have to defend a false claims action, pay fines or be
excluded from the Medicare and/or Medicaid programs as a result of an
investigation arising out of this type of an action. Because of the complexity
of the government regulations applicable to the healthcare industry, the Company
cannot assure that Vitas will not be the subject of an action under the False
Claims Act.
State False Claims Laws. At least 10 states and the District of Columbia,
including states in which Vitas currently operates, have adopted state false
claims laws that mirror to some degree the federal false claims laws. While
these statutes vary in scope and effect, the penalties for violating these false
claims laws include administrative, civil and/or criminal fines and penalties,
imprisonment, and the imposition of multiple damages.
The Stark Law and State Physician Self-Referral Laws. Section 1877 of the
Social Security Act, commonly known as the "Stark Law," prohibits physicians
from referring Medicare or Medicaid patients for "designated health services" to
entities in which they hold an ownership or investment interest or with whom
they have a compensation arrangement, subject to a number of statutory and
regulatory exceptions. Penalties for violating the Stark Law are severe and
include:
- denial of payment;
- civil monetary penalties of $15,000 per referral or $1,000,000
for "circumvention schemes;"
- assessments equal to 200% of the dollar value of each such
service provided; and
- exclusion from the Medicare and Medicaid programs.
Hospice care itself is not specifically listed as a designated health
service; however, certain services that Vitas provides, or in the future may
provide, are among the services identified as designated health services for
purposes of the self-referral laws. The Company cannot assure that future
regulatory changes will not result in hospice services becoming subject to the
Stark Law's ownership, investment or compensation prohibitions in the future.
Many states where Vitas operates have laws similar to the Stark Law, but
with broader effect because they apply regardless of the source of payment for
care. Penalties similar to those listed above as well as the loss of state
licensure may be imposed in the event of a violation of these state
self-referral laws. Little precedent exists regarding the interpretation or
enforcement of these statutes.
Civil Monetary Penalties. The Civil Monetary Penalties Statute provides
that civil penalties ranging between $10,000 and $50,000 per claim or act may be
imposed on any person or entity that knowingly submits improperly filed claims
for federal health benefits or that offers or makes payments to induce a
beneficiary or provider to reduce or limit the use of health care services or to
use a particular provider or supplier. Civil monetary penalties may be imposed
for violations of the anti-kickback statute and for the failure to return known
overpayments, among other things.
12
Prohibition on Employing or Contracting with Excluded Providers. The Social
Security Act and federal regulations state that individuals or entities that
have been convicted of a criminal offense related to the delivery of an item or
service under the Medicare or Medicaid programs or that have been convicted,
under state or federal law, of a criminal offense relating to neglect or abuse
of residents in connection with the delivery of a healthcare item or service
cannot participate in any federal health care programs, including Medicare and
Medicaid. Additionally, individuals and entities convicted of fraud, that have
had their licenses revoked or suspended, or that have failed to provide services
of adequate quality also may be excluded from the Medicare and Medicaid
programs. Federal regulations prohibit Medicare providers, including hospice
programs, from submitting claims for items or services or their related costs if
an excluded provider furnished those items or services. The OIG maintains a list
of excluded persons and entities. Nonetheless, it is possible that Vitas might
unknowingly bill for services provided by an excluded person or entity with whom
it contracts. The penalty for contracting with an excluded provider may range
from civil monetary penalties of $50,000 and damages of up to three times the
amount of payment that was inappropriately received.
Corporate Practice of Medicine and Fee Splitting. Most states have laws
that restrict or prohibit anyone other than a licensed physician, including
business entities such as corporations, from employing physicians and/or
prohibit payments or fee-splitting arrangements between physicians and
corporations or unlicensed individuals. Penalties for violations of corporate
practice of medicine and fee-splitting laws vary from state to state, but may
include civil or criminal penalties, the restructuring or termination of the
business arrangements between the physician and unlicensed individual or
business entity, or even the loss of the physician's license to practice
medicine. These laws vary widely from state to state both in scope and origin
(e.g. statute, regulation, Attorney General opinion, court ruling, agency
policy) and in most instances have been subject to only limited interpretation
by the courts or regulatory bodies.
Vitas employs or contracts with physicians to provide medical direction and
patient care services to its patients. Vitas has made efforts in those states
where certain contracting or fee arrangements are restricted or prohibited to
structure those arrangements in compliance with the applicable laws and
regulations. Despite these efforts, however, the Company cannot assure that
agency officials charged with enforcing these laws will not interpret Vitas'
contracts with employed or independent contractor physicians as violating the
relevant laws or regulations. Future determinations or interpretations by
individual states with corporate practice of medicine or fee splitting
restrictions may force Vitas to restructure its arrangements with physicians in
those locations.
Health Information Practices. There currently are numerous legislative and
regulatory initiatives at both the state and federal levels that address patient
privacy concerns. In particular, federal regulations issued under the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") require Vitas to
protect the privacy and security of patients' individual health information. HHS
published final regulations addressing patient privacy on December 28, 2000,
which were modified on August 14, 2002 (the "Privacy Rule"). Vitas was required
to comply with the Privacy Rule by April 14, 2003, and Vitas believes that it is
in material compliance. Additionally, HIPAA does not automatically preempt
applicable state laws and regulations concerning Vitas' use, disclosure and
maintenance of patient health information, which means that Vitas is subject to
a complex regulatory scheme that, in many instances, requires Vitas to comply
with both federal and state laws and regulations.
In August 2000, HHS published final regulations establishing health care
transaction standards and code sets for the electronic transmission of health
care information in connection with certain transactions, such as billing or
health plan eligibility (the "Transactions Standard"). The official deadline for
compliance with the Transactions Standard for covered entities such as Vitas was
October 16, 2003. The Centers for Medicare and Medicaid Services ("CMS") is the
division of HHS that is responsible for interpreting and enforcing the
Transactions Standard. Failure to comply with the Transactions Standard may
subject covered entities, including Vitas, to civil monetary penalties and
possibly to criminal penalties. Vitas believes that it has made
13
significant and appropriate good faith efforts to comply with the Transactions
Standard and to develop an appropriate contingency plan as encouraged by CMS. It
is unclear, however, how CMS will regulate providers in general or Vitas in
particular with respect to compliance with the Transactions Standard.
Consequently, it also is unclear whether Vitas would be found to be in material
compliance with the Transactions Standard if CMS were to review Vitas'
electronic claims submissions and assess Vitas' electronic transactions, or
whether Vitas would be required to expend substantial sums on acquiring and
implementing new information systems, or would otherwise be affected in a manner
that would negatively impact its profitability.
On May 31, 2002, HHS published its final rule regarding the HIPAA Unique
Employer Identifier Standard, which establishes a standard for identifying
employers in healthcare transactions where information about the employer is
transmitted electronically, as well as requirements concerning its use by HIPAA
covered entities. The deadline for compliance with the Unique Employer
Identifier Standard rule was July 30, 2004. Additionally, HHS published final
regulations addressing the security of such health information on February 20,
2003 (the "Security Rule"), and Vitas was required to and did substantially,
comply with the Security Rule by April 21, 2005. Also, HHS published its final
rule adopting the HIPAA Standard Unique Health Identifier for health care
providers on January 23, 2004, and Vitas' compliance deadline for that rule is
May 23, 2007. Because compliance with the final rules regarding the HIPAA Unique
Employer Identifier Standard and the Standard Unique Health Identifier is not
yet required, the Company cannot predict the total financial or other impact of
any of these final regulations on Vitas' operations, including any need for
Vitas to expend financial resources on acquiring and implementing new
information systems or any other negative impact on Vitas' profitability.
Additional Federal and State Regulation. Federal and state governments also
regulate various aspects of the hospice industry. In particular, Vitas'
operations are subject to federal and state health regulatory laws covering
professional services, the dispensing of drugs and certain types of hospice
activities. Some of Vitas' employees are subject to state laws and regulations
governing the ethics and professional practice of medicine, respiratory therapy,
pharmacy and nursing.
Compliance with Health Regulatory Laws. Vitas maintains an internal
regulatory compliance review program and from time to time retains regulatory
counsel for guidance on compliance matters. The Company cannot assure, however,
that Vitas' practices, if reviewed, would be found to be in compliance with
applicable health regulatory laws, as such laws ultimately may be interpreted,
or that any non-compliance with such laws would not have a material adverse
effect on Vitas.
ENVIRONMENTAL MATTERS
Roto-Rooter's operations are subject to various federal, state, and local
laws and regulations regarding environmental matters and other aspects of the
operation of a sewer and drain cleaning, HVAC and plumbing services business.
For certain other activities, such as septic tank and grease trap pumping,
Roto-Rooter is subject to state and local environmental health and sanitation
regulations.
At December 31, 2005, 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 $3.0 million. Of this balance, $1.1
million is included in other liabilities and $1.9 million 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
$15,999,000. On the basis of a continuing evaluation of the Company's potential
liability, and in consultation with the Company's environmental attorney,
management believes that it is not probable this additional liability will be
paid. Accordingly, no provision for this contingent liability has been recorded.
Although it is not presently possible to reliably project the timing of payments
related to the Company's potential liability for environmental costs, management
believes that any adjustments to its recorded liability will not materially
adversely affect its financial position or results of operations.
14
The Company, to the best of its knowledge, is currently in compliance in
all material respects with the environmental laws and regulations affecting its
operations. Such environmental laws, regulations and enforcement proceedings
have not required the Company to make material increases in or modifications to
its capital expenditures and they have not had a material adverse effect on
sales or net income. Capital expenditures for the purposes of complying with
environmental laws and regulations during 2006 and 2007 with respect to
continuing operations are not expected to be material in amount; there can be no
assurance, however, that presently unforeseen legislative or enforcement actions
will not require additional expenditures.
SEASONALITY
Advertising costs for Roto-Rooter inordinately impact the Company's
fourth-quarter results. Roto-Rooter recognizes telephone directory costs
immediately upon distribution of a directory by its publisher into the
community. Since a large number of directories are distributed in the fourth
quarter, this direct expense accounting policy results in fourth-quarter
earnings including a disproportionately large share of Roto-Rooter's full-year
telephone directory advertising expense. In the fourth quarter 2005, Roto-Rooter
expensed $6.3 million of total advertising costs that represented 33.5% of the
aggregate advertising costs for the full-year 2005.
EMPLOYEES
On December 31, 2005, Chemed Corporation had a total of 10,881 employees.
AVAILABLE INFORMATION
The Company's Internet address is www.chemed.com. The Company's annual
report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act are electronically available through the SEC
(http://www.sec.gov) or the Company's website as soon as reasonably practicable
after such reports are filed with, or furnished to, the SEC.
Annual reports, press releases, Board Committee charters, Code of Ethics,
Corporate governance guidelines and other printed materials may be obtained from
the website or from Chemed Investor Relations without charge by writing to 2600
Chemed Center, 255 East Fifth Street, Cincinnati, Ohio 45202 or by calling
800-2CHEMED or 513-762-6429.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below. They are not the
only ones facing the Company. Other risks and uncertainties not currently known
to us or that we deem to be immaterial may also materially and adversely affect
our business, financial condition, or results of operations.
GENERAL
WE HAVE INCURRED DEBT TO FINANCE THE OPERATIONS OF THE COMPANY. OUR
LEVERAGE WILL LIMIT CASH FLOW AVAILABLE FOR OUR OPERATIONS, COULD ADVERSELY
AFFECT OUR ABILITY TO SERVICE OUR DEBT OR OBTAIN ADDITIONAL FINANCING AND COULD
ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO REACT TO CHANGES IN OUR
BUSINESS.
The Company has debt service obligations that may restrict our operating
flexibility. We cannot assure you that our cash flow from operations will be
sufficient to service our debt, which may require us to borrow additional funds,
or restructure or otherwise refinance our debt. In addition, the Company has the
ability to expand its debt and borrowing capacity subject to various
restrictions and covenants defined by its
15
creditors. The interest rate the Company pays will fluctuate from time to time
based upon a number of factors including current LIBOR rates and Company
operating performance. Significant changes in these factors could result in a
material change in the Company's interest expense.
Our indebtedness could have important consequences for our business. Among
other things, our indebtedness may:
- limit our ability to obtain additional financing;
- limit our flexibility in planning for, or reacting to, changes in
the markets in which we compete;
- place us at a competitive disadvantage relative to our
competitors with less indebtedness;
- increase our exposure to interest rate increases due to variable
interest rates on certain borrowings;
- limit our ability to complete future acquisitions;
- limit our ability to make capital expenditures;
- render us more vulnerable to general adverse economic and
industry conditions; and
- require us to dedicate a substantial portion of our cash flow to
service and repay our debt.
Servicing our indebtedness will require a significant amount of cash, and our
ability to generate cash depends on many factors beyond our control.
Our ability to repay or to refinance our indebtedness and to pay interest
on our indebtedness will depend on our operating performance, which may be
affected by factors beyond our control. These factors could include operating
difficulties, increased operating costs, our competitors' actions and regulatory
developments. Our ability to meet our debt service and other obligations may
depend in significant part on the extent to which we successfully implement our
business strategy. We cannot assure you that we will be able to implement our
strategy fully or that the anticipated results of our strategy will be realized.
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets, seek additional equity capital or restructure our debt. We cannot
assure you that our cash flows and capital resources will be sufficient to make
scheduled payments of principal and interest on our indebtedness in the future
or that alternative measures would successfully meet our debt service
obligations.
As certain of our obligations under our credit facilities and certain other
borrowings bear interest at floating rates, an increase in interest rates could
further increase our debt service costs and adversely affect our cash flows.
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR OUTSTANDING DEBT CONTAIN
RESTRICTIONS AND LIMITATIONS THAT COULD SIGNIFICANTLY IMPACT OUR ABILITY TO
OPERATE OUR BUSINESS AND ADVERSELY AFFECT THE PRICE OF OUR CAPITAL STOCK.
The operating and financial restrictions and covenants in our instruments
of indebtedness restrict our ability to:
- incur additional debt;
16
- pay dividends, make redemptions and purchases of Capital Stock
and make other restricted payments;
- issue and sell capital stock of subsidiaries;
- sell assets;
- engage in transactions with affiliates;
- restrict distributions from subsidiaries;
- incur liens;
- engage in businesses other than permitted businesses;
- engage in sale/leaseback transactions;
- engage in mergers or consolidations;
- make capital expenditures;
- make guarantees;
- make investments and acquisitions;
- enter into operating leases;
- hedge interest rates; and
- prepay other debt.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach any of these covenants, a default could result under one or more of
these agreements. A default, if not waived by our lenders, could accelerate
repayment of our outstanding indebtedness. If acceleration occurs, we may not be
able to repay our debt and it is unlikely that we would be able to borrow
sufficient additional funds to refinance such debt on acceptable terms. In the
event of any default under our credit facilities, the lenders thereunder could
elect to declare all outstanding borrowings, together with accrued and unpaid
interest and other fees, to be due and payable, to require us to apply all of
our available cash to repay these borrowings, any of which would be an event of
default.
WE DEPEND ON OUR MANAGEMENT TEAM AND THE LOSS OF THEIR SERVICE COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Our success depends to a large extent upon the continued services of our
executive management team. The loss of key personnel could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. Additionally, we cannot assure you that we will be able to attract
or retain other skilled personnel in the future.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD INCREASE OUR EXPENSES AND
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Our operations are subject to numerous environmental, health and safety
laws and regulations that prohibit or restrict the discharge of pollutants into
the environment and regulate employee exposure to hazardous substances in the
workplace. Failure to comply with these laws could subject us to material costs
and liabilities, including civil and criminal fines, costs to cleanup
contamination we cause and, in some circumstances, costs to cleanup
contamination we discover on our own property but did not cause.
17
Because we use and generate hazardous materials in some of our operations,
we are potentially subject to material liabilities relating to the cleanup of
contamination and personal injury claims. In addition, we have retained certain
environmental liabilities in connection with the sale of former businesses. We
are currently funding the cleanup of historical contamination at one of our
former properties and contributing to the cleanup of third-party sites as a
result of our sale of Dubois Chemicals Inc. Although we have established a
reserve for these liabilities, actual cleanup costs may exceed our current
estimates due to factors beyond our control, such as the discovery of additional
contamination or the enforcement of more stringent cleanup requirements. New
laws and regulations or their stricter enforcement, the discovery of presently
unknown conditions or the receipt of additional claims for indemnification could
require us to incur costs or become the basis for new or increased liabilities
that could have a material adverse effect on our business, financial condition
and results of operations.
WE ARE SUBJECT TO CERTAIN ANTI-TAKEOVER STATUES THAT MIGHT MAKE IT MORE
DIFFICULT TO EFFECT A CHANGE IN CONTROL OF THE COMPANY.
We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control that could be advantageous to stockholders.
AN ADVERSE RULING AGAINST US IN CERTAIN LITIGATION COULD HAVE AN ADVERSE EFFECT
ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are involved in litigation incidental to the conduct of our business
currently and from time to time. The damages claimed against us in some of these
cases are substantial.
See the "Legal Proceedings" section of this 10-K for discussion of
particular matters.
We cannot assure you that we will prevail in pending cases. Regardless of
the outcome, such litigation is costly to manage, investigate and defend, and
the related defense costs, diversion of management's time and related publicity
may adversely affect the conduct of our business and the results of our
operations.
ROTO-ROOTER
WE FACE INTENSE COMPETITION FROM NUMEROUS, FRAGMENTED COMPETITORS. IF WE DO NOT
COMPETE EFFECTIVELY, OUR BUSINESS MAY SUFFER.
We face intense competition from numerous competitors, many of whom have
less leverage than we do. The sewer, drain and pipe cleaning, and plumbing
repair businesses are highly fragmented, with the bulk of the industries
consisting of local and regional competitors. We compete primarily on the basis
of advertising, range of services provided, name recognition, speed and quality
of customer service, service guarantees and pricing. Our competitors may succeed
in developing new or enhanced products and services more successful than ours
and in marketing and selling existing and new products and services better than
us. In addition, new competitors may emerge. We cannot make any assurances that
we will continue to be able to compete successfully with any of these companies.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO
POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We are subject to federal, state and local laws and regulations relating to
franchising, insurance and other aspects of our business. These are discussed in
greater detail under "Government Regulations" in the Description of Business
section hereof. If we fail to comply with existing or future laws and
regulations, we may be
18
subject to governmental or judicial fines and sanctions. Our franchising
activities are subject to various federal and state franchising laws and
regulations, including the rules and regulations of the Federal Trade Commission
(the "FTC") regarding the offering or sale of franchises. The rules and
regulations of the FTC require us to provide all of our prospective franchisees
with specific information regarding us and our franchise program in the form of
a detailed franchise offering circular. In addition, a number of states require
us to register our franchise offering prior to offering or selling franchises in
such states. Various state laws also provide for certain rights in favor of
franchisees, including (i) limitations on the franchisor's ability to terminate
a franchise except for good cause, (ii) restrictions on the franchisor's ability
to deny renewal of a franchise; (iii) circumstances under which the franchisor
may be required to purchase certain inventory of franchisees when a franchise is
terminated or not renewed in violation of such laws and (iv) provisions relating
to arbitration. The ability to engage in the plumbing repair business is also
subject to certain limitations and restrictions imposed by state and local
licensing laws and regulations. We cannot predict what legislation or
regulations affecting our business will be enacted in the future, how existing
or future laws or regulations will be enforced, administered and interpreted, or
the amount of future expenditures that may be required to comply with these laws
or regulations. Compliance costs associated with governmental regulations could
have material adverse effect on our business, financial condition and results of
operations.
VITAS
VITAS IS HIGHLY DEPENDENT ON PAYMENTS FROM MEDICARE AND MEDICAID. IF THERE ARE
CHANGES IN THE RATES OR METHODS GOVERNING THESE PAYMENTS, VITAS' NET PATIENT
SERVICE REVENUE AND PROFITS COULD MATERIALLY DECLINE.
Approximately 95% of Vitas' net patient service revenue consists of
payments from the Medicare and Medicaid programs. Such payments are made
primarily on a "per diem" basis, subject to annual reimbursement caps. Because
Vitas receives a per diem fee to provide eligible services to all patients,
Vitas' profitability is largely dependent upon its ability to manage the costs
of providing hospice services to patients. Increases in operating costs, such as
labor and supply costs that are subject to inflation, without a compensating
increase in Medicare and Medicaid rates, could have a material adverse effect on
Vitas' business in the future. Medicare and Medicaid currently adjust the
various hospice payment rates annually based on the increase or decrease of the
hospital wage index basket, regionally adjusted. However, the increases may be
less than actual inflation. Vitas' profitability could be negatively impacted if
this adjustment were eliminated or reduced, or if Vitas' costs of providing
hospice services increased more than the annual adjustment. In addition, cost
pressures resulting from shorter patient lengths of stay and the use of more
expensive forms of palliative care, including drugs and drug delivery systems,
could negatively impact Vitas' profitability. Many payors are increasing
pressure to control health care costs. In addition, both public and private
payors are increasing pressure to decrease, or limit increases in, reimbursement
rates for health care services. Vitas' levels of revenues and profitability will
be subject to the effect of possible reductions in coverage or payment rates by
third-party payors, including payment rates from Medicare and Medicaid.
Each state that maintains a Medicaid program has the option to provide
reimbursement for hospice services at reimbursement rates generally required to
be at least as much as Medicare rates. All states in which Vitas operates cover
Medicaid hospice services; however, we cannot assure you that the states in
which Vitas is presently operating or states into which Vitas could expand
operations will continue to cover Medicaid hospice services. In addition, the
Medicare and Medicaid programs are subject to statutory and regulatory changes,
retroactive and prospective rate and payment adjustments, administrative
rulings, freezes and funding reductions, all of which may adversely affect the
level of program payments and could have a material adverse effect on Vitas'
business. We cannot assure you that Medicare and /or Medicaid payments to
hospices will not decrease. Reductions in amounts paid by government programs
for services or changes in methods or regulations governing payments could cause
Vitas' net patient service revenue and profits to materially decline.
19
APPROXIMATELY ONE-THIRD OF VITAS' HOSPICE PATIENTS RESIDE IN NURSING HOMES.
CHANGES IN THE LAWS AND REGULATIONS REGARDING PAYMENTS FOR HOSPICE SERVICES AND
"ROOM AND BOARD" PROVIDED TO VITAS' HOSPICE PATIENTS RESIDING IN NURSING HOMES
COULD REDUCE ITS NET PATIENT SERVICE REVENUE AND PROFITABILITY.
For Vitas' hospice patients receiving nursing home care under certain state
Medicaid programs who elect hospice care under Medicare and Medicaid, the state
generally must pay Vitas, in addition to the applicable Medicare or Medicaid
hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem
nursing home rate for "room and board" furnished to the patient by the nursing
home. Vitas contracts with various nursing homes for the nursing homes'
provision of certain "room and board" services that the nursing homes would
otherwise provide Medicaid nursing home patients. Vitas bills and collects from
the applicable state Medicaid program an amount equal to approximately 95% of
the amount that would otherwise have been paid directly to the nursing home
under the state's Medicaid plan. Under Vitas' standard nursing home contracts,
it pays the nursing home for these "room and board" services at approximately
100% of the Medicaid per diem nursing home rate.
The reduction or elimination of Medicare and Medicaid payments for hospice
patients residing in nursing homes would reduce Vitas' net patient service
revenue and profitability. In addition, changes in the way nursing homes are
reimbursed for "room and board" services provided to hospice patients residing
in nursing homes could effect Vitas' ability to serve patients in nursing homes.
IF VITAS IS UNABLE TO MAINTAIN RELATIONSHIPS WITH EXISTING PATIENT REFERRAL
SOURCES OR TO ESTABLISH NEW REFERRAL SOURCES, VITAS' GROWTH AND PROFITABILITY
COULD BE ADVERSELY AFFECTED.
Vitas' success is heavily dependent on referrals from physicians, long-term
care facilities, hospitals and other institutional health care providers,
managed care companies, insurance companies and other patient referral sources
in the communities that its hospice locations serve, as well as on its ability
to maintain good relations with these referral sources. Vitas' referral sources
may refer their patients to other hospice care providers or not to a hospice
provider at all. Vitas' growth and profitability depend significantly on its
ability to establish and maintain close working relationships with these patient
referral sources and to increase awareness and acceptance of hospice care by its
referral sources and their patients. We cannot assure you that Vitas will be
able to maintain its existing relationships or that it will be able to develop
and maintain new relationships in existing or new markets. Vitas' loss of
existing relationships or its failure to develop new relationships could
adversely affect its ability to expand or maintain its operations and operate
profitably. Moreover, we cannot assure you that awareness or acceptance of
hospice care will increase or remain at current levels.
VITAS OPERATES IN AN INDUSTRY THAT IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
AND CLAIMS REVIEWS, AND CHANGES IN LAW AND REGULATORY INTERPRETATIONS COULD
REDUCE ITS NET PATIENT SERVICE REVENUE AND PROFITABILITY AND ADVERSELY AFFECT
ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The health care industry is subject to extensive federal, state and local
laws, rules and regulations relating to, among others:
- payment for services;
- conduct of operations, including fraud and abuse, anti-kickback
prohibitions, self-referral prohibitions and false claims;
- privacy and security of medical records;
- employment practices; and
20
- various state approval requirements, such as facility and
professional licensure, certificate of need, compliance surveys
and other certification or recertification requirements.
Changes in these laws, rules and regulations or in interpretations thereof
could reduce Vitas' net patient service revenue and profitability. See the
"Government Regulations" section of this 10-K for a greater description of these
matters.
Fraud and Abuse Laws. Vitas contracts with a significant number of health
care providers and practitioners, including physicians, hospitals and nursing
homes and arranges for these entities to provide services to Vitas' patients.
Some of these health care providers and practitioners may refer, or be in a
position to refer, patients to Vitas (or Vitas may refer patients to them).
These arrangements may not qualify for a safe harbor. Vitas from time to time
seeks guidance from regulatory counsel as to the changing and evolving
interpretations and the potential applicability of the Anti-Kickback Law to its
programs, and in response thereto, takes such actions as it deems appropriate.
Vitas generally believes that its contracts and arrangements with providers,
practitioners and suppliers should not be found to violate the Anti-Kickback
Law. However, we cannot assure you that such laws will ultimately be interpreted
in a manner consistent with Vitas' practices.
Several health care reform proposals have included an expansion of the
Anti-Kickback Law to include referrals of any patients regardless of payor
source, which is similar to the scope of certain laws that have been enacted at
the state level. In addition, a number of states in which Vitas operates have
laws, which vary from state to state, prohibiting certain direct or indirect
remuneration or fee-splitting arrangements between health care providers,
regardless of payor source, for the referral of patients to a particular
provider.
The federal Ethics in Patient Referral Act, Section 1877 of the Social
Security Act (commonly know an the "Stark Law") prohibits physicians from
referring Medicare or Medicaid patients for "designated health services" to
entities in which they hold an ownership or investment interest or with whom
they have a compensation arrangement, subject to certain statutory or regulatory
exceptions. We cannot assure you that future statutory or regulatory changes
will not result in hospice services being subject to the Stark Law's ownership,
investment, compensation or referral prohibitions. Several states in which Vitas
operates have similar laws which likewise are subject to change. Any such
changes could adversely affect the business, financial condition and operating
results of Vitas.
Further, under separate statutes, submission of claims for items or
services that are "not provided as claimed" may lead to civil money penalties,
criminal fines and imprisonment and/or exclusion from participation in Medicare,
Medicaid and other federally funded state health care programs. These false
claims statutes include the federal False Claims Act, which allows any person to
bring suit on behalf of the federal government, known as a qui tam action,
alleging false or fraudulent Medicare or Medicaid claims or other violations of
the statute and to share in any amounts paid by the entity to the government in
fines or settlement. Any entity found to be violating the False Claims Act may
be liable for up to $11,000 per false claim and treble the amount of damages the
federal government is found to have sustained because of the false claims.
Certificate of Need Laws. Many states, including Florida, have certificate
of need laws or other similar health planning laws that apply to hospice care
providers. These states may require some form of state agency review or approval
prior to opening a new hospice program, to adding or expanding hospice services,
to undertaking significant capital expenditures or under other specified
circumstances. Approval under these certificate of need laws is generally
conditioned on the showing of a demonstrable need for services in the community.
Vitas may seek to develop, acquire or expand hospice programs in states having
certificate of need laws. To the extent that state agencies require Vitas to
obtain a certificate of need or other similar approvals to expand services at
existing hospice programs or to make acquisitions or develop hospice programs in
new or existing geographical markets, Vitas' plans could be adversely affected
by a failure to obtain a certificate or approval. In addition, competitors may
seek administratively or judicially to challenge such an approval or proposed
approval
21
by the state agency, and Vitas has been defending against such a challenge in
connection with the development of its Palm Beach County, Florida hospice
program. Such a challenge, whether or not ultimately successful, could adversely
affect Vitas.
Other Federal and State Regulations. The federal government and all states
regulate various aspects of the hospice industry and Vitas' business. In
particular, Vitas' operations are subject to federal and state health regulatory
laws, including those covering professional services, the dispensing of drugs
and certain types of hospice activities. Certain of Vitas' employees are subject
to state laws and regulations governing professional practice. Vitas' operations
are subject to periodic survey by governmental authorities and private
accrediting entities to assure compliance with applicable state licensing, and
Medicare and Medicaid certification and accreditation standards, as the case may
be. From time to time in the ordinary course of business, Vitas receives survey
reports noting deficiencies for alleged failure to comply with applicable
requirements. Vitas reviews such reports and takes appropriate corrective
action. The failure to effect such action could result in one of Vitas' hospice
programs being terminated from the Medicare hospice program. Any termination of
one or more of Vitas' hospice locations from the Medicare hospice program could
adversely affect Vitas' net patient service revenue and profitability and
adversely affect its financial condition and results of operations. The failure
to obtain, renew or maintain any of the required regulatory approvals,
certifications or licenses could materially adversely affect Vitas' business and
could prevent the programs involved from offering products and services to
patients. In addition, laws and regulations often are adopted to regulate new
products, services and industries. We cannot assure you that either the states
or the federal government will not impose additional regulations on Vitas'
activities, which might materially adversely affect Vitas.
Claims Review. The Medicare and Medicaid programs and their fiscal
intermediaries and other payors periodically conduct pre-payment or post-payment
reviews and other reviews and audits of health care claims, including hospice
claims. As a result of such reviews or audits, Vitas could be required to return
any amounts found to be overpaid, or amounts found to be overpaid could be
recouped through reductions in future payments. There is pressure from state and
federal governments and other payors to scrutinize health care claims to
determine their validity and appropriateness. During the past several years,
Vitas' claims have been subject to review and audit. We cannot assure you that
reviews and/or similar audits of Vitas' claims will not result in material
recoupments, denials or other actions that could have a material adverse effect
on Vitas' business, financial condition and results of operations. See the
discussion of OIG investigation pending against Vitas under Other Health Care
Regulations, above.
Regulation and Provision of Continuous Home Care. Vitas provides continuous
home care to patients requiring such care. Continuous home care is provided to
patients while at home, during periods of crisis when intensive monitoring and
care, primarily nursing care, is required in order to achieve palliation or
management of acute medical symptoms. Continuous home care requires a minimum of
8 hours of care within a 24-hour day, which begins and ends at midnight. The
care must be predominantly nursing care provided by either a registered nurse or
licensed practical nurse.
Continuous home care can be challenging for a hospice to provide for a
number of reasons, including the need to have available sufficient skilled and
trained staff to furnish such care, the need to manage the staffing and
provision of such care, and a shortage of nurses that can make it particularly
difficult to attract and retain nurses that are required to furnish a majority
of such care. Medicare reimbursement for continuous home care is calculated by
multiplying the applicable continuous home care hourly rate by the number of
hours of care provided.
Medicare reimbursement for continuous home care is subject to a number of
requirements posing further challenges for a hospice providing such care. For
example, if a patient requires skilled interventions for palliation or symptom
management that can be accomplished in less than 8 aggregate hours within the
24-hour period, if the majority of care can be accomplished by someone other
than a registered nurse or a licensed practical nurse (e.g., if a majority of
care is furnished by a home health aide or homemaker), or if for any reason less
than 8 hours of direct care are provided (such as when a patient dies before 8
AM even if 7 or more hours of care has been provided),
22
the care rendered cannot be reimbursed by Medicare at the continuous home care
rate (although the care instead may be eligible for Medicare reimbursement at
the reduced routine home care day rate). As a result of such requirements, Vitas
may incur the costs of providing services intended to be continuous home care
services yet be unable to bill or be reimbursed for such services at the
continuous home care rate. We cannot assure you that challenges in providing
continuous home care will not cause Vitas' net patient service revenue and
profits to materially decline or that reviews and/or similar audits of Vitas'
claims will not result in material recoupments, denials or other actions that
could have a material adverse effect on Vitas' business, financial condition and
results of operations.
Compliance. Vitas maintains an internal regulatory compliance review
program and from time to time retains regulatory counsel for guidance on
compliance matters. We cannot assure you, however, that Vitas' practices, if
reviewed, would be found to be in compliance with applicable health regulatory
laws, as such laws ultimately may be interpreted, or that any non-compliance
with such laws would not have a material adverse effect on Vitas.
FEDERAL AND STATE LEGISLATIVE AND REGULATORY INITIATIVES RELATING TO PATIENT
PRIVACY COULD REQUIRE VITAS TO EXPEND SUBSTANTIAL SUMS ON ACQUIRING,
IMPLEMENTING AND SUPPORTING NEW INFORMATION SYSTEMS, WHICH COULD NEGATIVELY
IMPACT ITS PROFITABILITY.
There are currently numerous legislative and regulatory initiatives at both
the state and federal levels that address patient privacy concerns. In
particular, regulations issued under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") require Vitas to protect the privacy and
security of patients' individual health information. We cannot predict the total
financial or other impact of the regulations on Vitas' operations. In addition,
although Vitas' management believes it is in compliance with the requirement of
patient privacy regulations, we cannot assure you that Vitas will not be found
to have violated state and federal laws, rules or guidelines surrounding patient
privacy. Compliance with current and future HIPAA requirements or any other
federal or state privacy initiatives could require Vitas to make substantial
investments, which could negatively impact its profitability and cash flows.
VITAS' GROWTH STRATEGIES MAY NOT BE SUCCESSFUL, WHICH COULD ADVERSELY AFFECT ITS
BUSINESS.
A significant element of Vitas' growth strategy is expected to include
expansion of its business by developing new hospice locations in new and
existing markets. This aspect of Vitas' growth strategy may not be successful,
which could adversely impact its growth and profitability. We cannot assure you
that Vitas will be able to:
- identify markets that meet its selection criteria for new hospice
locations;
- hire and retain qualified management teams to operate each of its
new hospice locations;
- manage a large and geographically diverse group of hospice
locations;
- become Medicare and Medicaid certified in new markets;
- generate sufficient hospice admissions in new markets to operate
profitably in these new markets;
- compete effectively with existing hospices in new markets; or
- obtain state licensure and/or a certificate of need from
appropriate state agencies in new markets.
In addition to growing existing locations and developing new hospice
locations, Vitas' growth strategy is expected to include expansion through
acquisition of other
23
hospices. We cannot assure you that Vitas' acquisition strategy will be
successful. The success of Vitas' acquisition strategy depends upon a number of
factors, including:
- its ability to identify suitable acquisition candidates;
- its ability to negotiate favorable acquisition terms, including
purchase price, which may be adversely affected due to increased
competition with other buyers;
- the availability of financing on favorable terms, or at all;
- its ability to integrate effectively the systems and operations
of acquired hospices;
- its ability to retain key personnel of acquired hospices; and
- its ability to obtain required regulatory approvals.
Acquisitions involve a number of other risks, including diversion of
management's attention from other business concerns and assuming known or
unknown liabilities of acquired hospices, including liabilities for failure to
comply with health care laws and regulations. Integrating acquired hospices may
place significant strains on Vitas' current operating and financial systems and
controls. Vitas may not successfully overcome these risks or any other problems
encountered in connection with its acquisition strategy.
In addition, since 1990, Vitas has acquired hospice programs, some of which
involved acquisitions of hospice programs from not-for-profit entities. Vitas
believes that acquisitions of not-for-profit programs are generally more complex
than acquisitions from for-profit entities and that a substantial number of
acquisition opportunities are likely to involve acquisitions from not-for-profit
entities. Such acquisitions are subject to provisions of the Internal Revenue
Code and, in certain states, state attorney general powers, which have been
interpreted to require that the consideration paid for the assets purchased be
at fair market value and, where applicable, that any fees paid for services be
reasonable. In many states there is no mechanism for state attorney general
pre-clearance of transactions to assure that applicable standards have been met.
Entities that acquire not-for-profit hospices could face potential liability if
the acquisition transaction is not structured to comply with Internal Revenue
Code and state law requirements, and in some cases the transaction could be
enjoined or subject to rescission. The acquisition of not-for-profit businesses,
including the fairness of the purchase price paid, has received increasing
regulatory scrutiny by state attorneys general and other regulatory authorities.
Although Vitas believes that reasonable actions have been taken to date to
establish the fair market value of assets purchased in prior acquisitions of
hospice operations from not-for-profit entities and the reasonableness of fees
paid for services, we cannot assure you that such transactions or any future
similar transactions will not be challenged or that, if challenged, the results
of such challenge would not have a material adverse effect on Vitas' business.
VITAS' LOSS OF KEY MANAGEMENT PERSONNEL OR ITS INABILITY TO HIRE AND RETAIN
SKILLED EMPLOYEES COULD ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Vitas' future success significantly depends upon the continued service of
its senior management personnel. The loss of one or more of Vitas' key senior
management personnel or its inability to hire and retain new skilled employees
could negatively impact Vitas' ability to maintain or increase patient
referrals, a key aspect of its growth strategy, and could adversely affect its
future operating results.
Competition for skilled employees is intense, and the process of locating
and recruiting skilled employees with the combination of qualifications and
attributes required to care effectively for terminally ill patients and their
families can be difficult and lengthy. We cannot assure you that Vitas will be
successful in
24
attracting, retaining or training highly skilled nursing, management, community
education, operations, admissions and other personnel. Vitas' business could be
disrupted and its growth and profitability negatively impacted if it is unable
to attract and retain skilled employees.
A NATIONWIDE SHORTAGE OF QUALIFIED NURSES COULD ADVERSELY AFFECT VITAS'
PROFITABILITY, GROWTH AND ABILITY TO CONTINUE TO PROVIDE QUALITY, RESPONSIVE
HOSPICE SERVICES TO ITS PATIENTS AS NURSING WAGES AND BENEFITS INCREASE.
The substantial majority of Vitas' workforce is nurses. Vitas depends on
qualified nurses to provide quality, responsive hospice services to its
patients. The current nationwide shortage of qualified nurses impacts some of
the markets in which Vitas provides hospice services. In response to this
shortage, Vitas has adjusted its wages and benefits to recruit and retain nurses
and to engage contract nurses. Vitas' inability to attract and retain qualified
nurses could adversely affect its ability to provide quality, responsive hospice
services to its patients and its ability to increase or maintain patient census
in those markets. Increases in the wages and benefits required to attract and
retain qualified nurses or an increase in reliance on contract nurses could
negatively impact profitability.
VITAS MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER HOSPICE PROVIDERS,
AND COMPETITIVE PRESSURES MAY LIMIT ITS ABILITY TO MAINTAIN OR INCREASE ITS
MARKET POSITION AND ADVERSELY AFFECT ITS PROFITABILITY, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Hospice care in the United States is highly competitive. In many areas in
which Vitas' hospices are located, they compete with a large number of
organizations, including:
- community-based hospice providers;
- national and regional companies;
- hospital-based hospice and palliative care programs;
- physician groups;
- nursing homes;
- home health agencies;
- infusion therapy companies; and
- nursing agencies
Various health care companies have diversified into the hospice market.
Other companies, including hospitals and health care organizations that are not
currently providing hospice care, may enter the markets Vitas serves and expand
the variety of services offered to include hospice care. We cannot assure you
that Vitas will not encounter increased competition in the future that could
limit its ability to maintain or increase its market position, including
competition from parties in a position to impact referrals to Vitas. Such
increased competition could have a material adverse effect on Vitas' business,
financial condition and results of operations.
CHANGES IN RATES OR METHODS OF PAYMENT FOR VITAS' SERVICES COULD ADVERSELY
AFFECT ITS REVENUES AND PROFITS.
Managed care organizations have grown substantially in terms of the
percentage of the population that is covered by such organizations and in terms
of their control over an increasing portion of the health care economy. Managed
care organizations have continued to consolidate to enhance their ability to
influence the delivery of health care services and to exert pressure to control
health care costs. Vitas has a number of contractual arrangements with managed
care organizations and other similar parties.
25
Vitas provides hospice care to many Medicare beneficiaries who receive
their non-hospice health care services from health maintenance organizations
("HMOs") under Medicare risk contracts. Under such contracts between HMOs and
the federal Department of Health and Human Services, the Medicare payments for
hospice services are excluded from the per-member, per-month payment from
Medicare to HMOs and instead are paid directly by Medicare to the hospices. As a
result, Vitas' payments for Medicare beneficiaries enrolled in Medicare risk
HMOs are processed in the same way with the same rates as other Medicare
beneficiaries. We cannot assure, however, that payment for hospice services will
continue to be excluded from HMO payment under Medicare risk contracts and
similar Medicare managed care plans or that if not excluded, managed care
organizations or other large third-party payors would not use their power to
influence and exert pressure on health care providers to reduce costs in a
manner that could have a material adverse effect on Vitas' business, financial
condition and results of operations.
LIABILITY CLAIMS MAY HAVE AN ADVERSE EFFECT ON VITAS, AND ITS INSURANCE COVERAGE
MAY BE INADEQUATE.
Participants in the hospice industry are subject to lawsuits alleging
negligence, product liability or other similar legal theories, many of which
involve large claims and significant defense costs. From time to time, Vitas is
subject to such and other types of lawsuits. See the description below under
Legal Proceedings. The ultimate liability for claims, if any, could have a
material adverse effect on its financial condition or operating results.
Although Vitas currently maintains liability insurance intended to cover the
claims, we cannot assure you that the coverage limits of such insurance policies
will be adequate or that all such claims will be covered by the insurance. In
addition, Vitas' insurance policies must be renewed annually and may be subject
to cancellation during the policy period. While Vitas has been able to obtain
liability insurance in the past, such insurance varies in cost, is difficult to
obtain and may not be available in the future on terms acceptable to Vitas, if
at all.
A successful claim in excess of the insurance coverage could have a
material adverse effect on Vitas. Claims, regardless of their merit or eventual
outcome, also may have a material adverse effect on Vitas' business and
reputation due to the costs of litigation, diversion of management's time and
related publicity.
Vitas procures professional liability coverage on a claims-made basis. The
insurance contracts specify that coverage is available only during the term of
each insurance contract. Vitas' management intends to renew or replace the
existing claims-made policy annually but such coverage is difficult to obtain,
may be subject to cancellation and may be written by carriers that are unable,
or unwilling to pay claims. During fiscal 2001, Vitas was notified that one of
its prior carriers was ordered into rehabilitation, and in early fiscal 2002,
into liquidation, creating the possibility that certain prior year claims could
be underinsured or uninsured. Certain claims have been asserted where the
coverage would be the responsibility of this prior carrier and/or other carriers
that may not have the financial wherewithal to satisfy the claims. Additionally,
some risks and liabilities, including claims for punitive damages, are not
covered by insurance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's corporate offices and the headquarters for the Roto-Rooter
Group are located in Cincinnati, Ohio. Roto-Rooter has manufacturing and
distribution center facilities in West Des Moines, Iowa and has 72 office and
service facilities in 26 states. Vitas, headquartered in Miami, operates 39
programs from 69 leased facilities in 15 states.
26
All "owned" property is held in fee and is subject to the security
interests of the holders of our debt instruments issued in connection with the
Company's merger with Vitas. The leased properties have lease terms ranging from
one year to fourteen years. Management does not foresee any difficulty in
renewing or replacing the remainder of its current leases. The Company considers
all of its major operating properties to be maintained in good operating
condition and to be generally adequate for present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. The
Company contests these allegations and believes them without merit. Plaintiff
moved for certification of a class of customers in 32 states who allegedly paid
for plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act, through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not ruled
on certification of a class in the remaining 31 states. In December 2004, the
Company reached a resolution of this matter with the plaintiff. This proposed
settlement has been preliminarily approved by the court. We expect the parties
to request final approval later in 2006. We have accrued $3.1 million as the
anticipated cost of settling this litigation.
Vitas Healthcare Corporation is party to a class action lawsuit filed in
the Superior Court of California, Los Angeles County, in April of 2004 by Ann
Marie Costa, Ana Jimenez, Mariea Ruteaya and Gracetta Wilson alleging failure to
pay overtime wages and to provide meal and break periods to California nurses,
home health aides and licensed clinical social workers. The Company contests
these allegations and believes them without merit. Plaintiffs moved for class
certification, and Vitas opposed this motion. We have reached an agreement,
subject to court approval, with the Plaintiff class to resolve this matter for
$19 million, inclusive of Plaintiffs' class attorneys' fees and the costs of
settlement administration.
Regardless of outcome, such litigation can adversely affect the Company
through defense costs, diversion of management's time, and related publicity.
See also the OIG investigation pending against Vitas under Other Health
Care Regulations, above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Office First Elected
- -------------------- --- ------------------------------------------ ------------------
Kevin J. McNamara 52 President and Chief Executive Officer August 2, 1994 (1)
Timothy S. O'Toole 50 Executive Vice President May 18, 1992 (2)
Spencer S. Lee 50 Executive Vice President May 15, 2000 (3)
David P. Williams 45 Vice President and Chief Financial Officer March 5, 2004 (4)
Arthur V. Tucker,Jr. 56 Vice President and Controller May 20, 1991 (5)
(1) Mr. K. J. McNamara is President and Chief Executive Officer of the Company
and has held these positions since August 1994 and May 2001, respectively.
Previously, he
27
served as an Executive Vice President, Secretary and General Counsel of the
Company, since November 1993, August 1986 and August 1986, respectively. He
previously held the position of Vice President of the Company, from August
1986 to May 1992.
(2) Mr. T. S. O'Toole is an Executive Vice President of the Company and has
held this position since May 1992. He is also Chief Executive Officer of
Vitas, a wholly owned subsidiary of the Company, and has held this position
since February 24, 2004. Previously, from May 1992 to February 24, 2004, he
also served the Company as Treasurer.
(3) Mr. S. S. Lee is an Executive Vice President of the Company and has held
this position since May 15, 2000. Mr. Lee is also Chairman and Chief
Executive Officer of Roto-Rooter Services Company, a wholly owned
subsidiary of the Company, and has held this position since January 1999.
Previously, he served as a Senior Vice President of Roto-Rooter Services
Company from May 1997 to January 1999.
(4) Mr. D. P. Williams is Vice President and Chief Financial Officer of the
Company and has held these positions since March 5, 2004. Mr. Williams is
also Senior Vice President and Chief Financial Officer of Roto-Rooter
Group, Inc. and has held these positions since January 1999.
(5) Mr. A. V. Tucker, Jr. is a Vice President and Controller of the Company and
has held these positions since February 1989. From May 1983 to February
1989, he held the position of Assistant Controller of the Company.
Each executive officer holds office until the annual election at the next
annual organizational meeting of the Board of Directors of the Company which is
scheduled to be held on May 15, 2006.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Capital Stock (par value $1 per share) is traded on the New
York Stock Exchange under the symbol CHE. The range of the high and low sale
prices on the New York Stock Exchange and dividends paid per share for each
quarter of 2004 and 2005 adjusted for a 2-for-1 stock split occurring May 11,
2005, are set forth below.
Closing
--------------------------------
Dividends Paid
High Low Per Share
------ ------ --------------
2004
First Quarter $33.48 $24.48 $.06
Second Quarter 27.65 21.55 .06
Third Quarter 28.13 21.36 .06
Fourth Quarter 33.72 27.56 .06
2005
First Quarter $38.63 $32.55 $.06
Second Quarter 43.83 34.57 .06
Third Quarter 44.90 39.32 .06
Fourth Quarter 54.00 40.13 .06
Future dividends are necessarily dependent upon the Company's earnings and
financial condition, compliance with certain debt covenants and other factors
not presently determinable.
28
As of March 1, 2006, there were approximately 3,158 stockholders of record
of the Company's Capital Stock. This number only includes stockholders of record
and does not include stockholders with shares beneficially held in nominee name
or within clearinghouse positions of brokers, banks or other institutions.
As of December 31, 2005, the number of stock options outstanding under the
Company's equity compensation plans, the weighted average exercise price of
outstanding options, and the number of securities remaining available for
issuance were as follows:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
future issuance under
Number of Securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans [excluding
of outstanding warrants outstanding options, securities reflected in
and rights warrants and rights column (a)]
Plan Category (a) (b) (c)
- ------------- ----------------------- -------------------- -------------------------------
Equity Compensation plans
approved by stockholders 1,671,462 $23.70 137,035
Equity Compensation plans not
approved by stockholders (1) 70,371 20.61 1,588
--------- ------ -------
TOTAL 1,741,833 23.57 138,623
--------- ------ -------
(1) In May 1999 the Board of Directors adopted the 1999 Long-Term Employee
Incentive Plan without stockholder approval. This plan permits the Company
to grant up to 500,000 shares of non-qualified options and stock awards to
a broad base of salaried and hourly employees (excluding officers and
directors) of the Company. Except for the exclusion of officers and
directors, this plan has the same general terms and provisions as the 2004
Stock Incentive Plan. In addition, pursuant to this plan no individual may
be granted more than 50,000 stock options in a calendar year, the aggregate
number of the shares of Capital Stock which may be issued pursuant to stock
incentives in the form of Stock Awards shall not be more than 270,000, and
no stock incentives shall be granted under the plan after May 17, 2009.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item for the five years ended December
31, 2005 is set forth on page 40 of the 2005 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
29
The information called for by this Item is set forth on pages 41 through 54
of the 2005 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to interest rate risk
exposure through its variable interest rate borrowings. At December 31, 2005 the
Company had a total of $84.4 million of variable rate debt outstanding. In
February 2005, the Company called its Floating Rate Notes, restructured its
revolving credit/ term loan agreement with JPMorgan Chase and reduced its
variable rate debt to $88.5 million at February 28, 2005. Should the interest
rate on this debt increase or decrease 100 basis points (1% point), the
Company's annual interest expense would increase or decrease $844,000.
The Company continually evaluates this interest rate exposure and
periodically weighs the cost versus the benefit of fixing the variable interest
rates through a variety of hedging techniques.
The market value of the Company's long-term debt at December 31, 2005 is
approximately $244.1 million versus a carrying value of $235.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated March 16, 2006, appearing on pages 5 through 37
of the 2005 Annual Report to Stockholders, along with the Supplementary Data
(Unaudited Summary of Quarterly Results) appearing on pages 38-39, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, under the supervision of and with the
participation of the Company's President and Chief Executive Officer, Vice
President and Chief Financial Officer and Vice President and Controller, has
evaluated the effectiveness of the Company's disclosure controls and procedures,
as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the
period covered by this report. Based on such evaluation, the Company's President
and Chief Executive Officer, Vice President and Chief Financial Officer and Vice
President and Controller have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective and are reasonably
designed to ensure that all material information relating to the Company
required to be included in the Company's reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to
management, including the President and Chief Executive Officer, Vice President
and Chief Financial Officer and Vice President and Controller, as appropriate,
to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Refer to Management's Report on Internal Control over Financial
Reporting and Report of Independent Registered Public Accounting Firm on pages 5
and 6 of the Company's 2005 Annual Report to Stockholders, which are
incorporated herein by reference.
30
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act during the Company's fiscal quarter ended December 31,
2005 that have materially affected, or are reasonable likely to materially
affect the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company are:
Edward L. Hutton
Kevin J. McNamara
Donald Breen, Jr.
Charles H. Erhart, Jr.
Joel F. Gemunder
Patrick P. Grace
Thomas C. Hutton
Walter L. Krebs
Sandra E. Laney
Timothy S. O'Toole
Donald E. Saunders
George J. Walsh III
Frank E. Wood
The additional information required under this Item with respect to the
directors and executive officers is set forth in the Company's 2006 Proxy
Statement and in Part I hereof under the caption "Executive Officers of the
Registrant" and is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, directors and employees. A copy of this Code of Ethics is incorporated
with this Report as Exhibit 14 and it is also posted on the Company's Web site,
www.chemed.com.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is set forth in the Company's 2006
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is set forth in the Company's 2006
Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is set forth in the Company's 2006
Proxy Statement, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
31
PricewaterhouseCoopers LLP billed the company $1,989,000 in 2004 and
$1,485,000 in 2005. These fees were for professional services rendered for the
integrated audit of the Company's annual financial statements and of its
internal control over financial reporting, review of the financial statements
included in the Company's Forms 10-Q and review of documents filed with the SEC.
AUDIT-RELATED FEES
PricewaterhouseCoopers LLP billed the company $1,446,000 and $189,000
in 2004 and 2005, respectively for audit-related services. In 2004, $1,115,000
of these fees related to audits of significant subsidiaries of the Company for
years 2001, 2002, and 2003 financial statements for the purpose of registering
the Company's floating rate notes, $205,000 for review of the Private Placement
Memorandum related to the acquisition of VITAS, $59,000 for consultation
concerning financial accounting and reporting standards and the remaining
$67,000 was related primarily to the audit of the Company's employee benefit
plans. In 2005, $75,000 was related to the audit of the employee benefit plans
and $114,000 was related to audits of Vitas' Florida subsidiaries.
TAX FEES
No such services were rendered in 2004 or 2005.
ALL OTHER FEES
PricewaterhouseCoopers LLP billed the Company $2,300 and $2,400,
respectively, in aggregate fees for services rendered by PricewaterhouseCoopers
LLP, other than the services described above, for the years 2004 and 2005.
The Audit Committee has adopted a policy which requires the Committee's
pre-approval of audit and non-audit services performed by the independent
auditor to assure that the provision of such services does not impair the
auditor's independence. The Audit Committee pre-approved all of the audit and
non-audit services rendered by PricewaterhouseCoopers LLP as listed above.
32
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
3.1 Certificate of Incorporation of Chemed Corporation.*
3.2 Certificate of Amendment to Certificate of Incorporation.*
3.3 By-Laws of Chemed Corporation.*
4.1 Indenture, dated as of February 24, 2004, between Roto-Rooter, Inc. and
LaSalle Bank National Association.*
4.2 Indenture, dated as of February 24, 2004, among Roto-Rooter, Inc., the
subsidiary guarantors listed on Schedule I thereto and Wells Fargo Bank,
N.A.*
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 Agreement and Plan of Merger among National Sanitary Supply Company,
Unisource Worldwide, Inc. and TFBD, Inc. dated as of August 11, 1997.*
10.3 Stock Purchase Agreement dated as of May 8, 2002 by and between PCI
Holding Corp. and Chemed Corporation. *
10.4 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. *
10.5 Senior Subordinated Promissory Note dated as of October 11, 2002 by and
among PCI Holding Corp. and Chemed Corporation. *
10.6 Common Stock Purchase Warrant dated as of October 11, 2002 by and between
PCI Holding Corp. and Chemed Corporation. *
10.7 1995 Stock Incentive Plan.*,**
10.8 1997 Stock Incentive Plan.*,**
10.9 1999 Stock Incentive Plan.*,**
10.10 1999 Long-Term Employee Incentive Plan as amended through May 20,
2002.*,**
10.11 2002 Stock Incentive Plan.*,**
10.12 2002 Executive Long-Term Incentive Plan, as amended May 18, 2004.*,**
10.13 2004 Stock Incentive Plan.*,**
10.14 Employment Contracts with Executives.*,**
10.15 Amendment to Employment Agreements with Kevin J. McNamara, Thomas C.
Hutton and Sandra E. Laney dated August 7, 2002.*,**
10.16 Amendment to Employment Agreements with Timothy S. O'Toole and Arthur V.
Tucker dated August 7, 2002.*,**
10.17 Amendment to Employment Agreement with Spencer S. Lee dated May 19,
2003.*,**
10.18 Amendment to Employment Agreements with Executives dated January 1,
2002.*,**
33
10.19 Amendment No. 16 to Employment Agreement with Sandra E. Laney dated March
1, 2003.*,**
10.20 Amendment No. 16 to Employment Agreement with Kevin J. McNamara dated May
18, 2004.*,**
10.21 Employment Agreement with David P. Williams dated May 16, 1994; Amendment
dated May 21, 2001, and Amendment dated May 19, 2003.*,**
10.22 Excess Benefits Plan, as restated and amended, effective June 1, 2001.*,**
10.23 Amendment No. 1 to Excess Benefits Plan, effective July 1, 2002.*,**
10.24 Amendment No. 2 to Excess Benefits Plan, effective November 7, 2003.*,**
10.25 Non-Employee Directors' Deferred Compensation Plan.*,**
10.26 Chemed/Roto-Rooter Savings & Retirement Plan, effective January 1,
1999.*,**
10.27 First Amendment to Chemed/Roto-Rooter Savings & Retirement Plan, effective
September 6, 2000.*,**
10.28 Second Amendment to Chemed/Roto-Rooter Savings & Retirement Plan,
effective January 1, 2001.*,**
10.29 Third Amendment to Chemed/Roto-Rooter Savings & Retirement Plan, effective
December 12, 2001.*,**
10.30 Directors Emeriti Plan.*,**
10.31 Second Amendment to Split Dollar Agreement with Executives.*,**
10.32 Split Dollar Agreement with Executives.*,**
10.33 Split Dollar Agreement with Edward L. Hutton.*,**
10.34 Promissory Note under the Executive Stock Purchase Plan with Kevin J.
McNamara.*,**
10.35 Schedule to Promissory Note under the Executive Stock Purchase Plan with
Kevin J. McNamara.**
10.36 Roto-Rooter Deferred Compensation Plan No. 1, as amended January
1,1998.*,**
10.37 Roto-Rooter Deferred Compensation Plan No. 2.*,**
10.38 Agreement and Plan of Merger, dated as of December 18, 2003, Among
Roto-Rooter, Inc., Marlin Merger Corp. and Vitas Healthcare Corporation.*
10.39 Credit Agreement, dated as of February 24, 2004, among Roto-Rooter, Inc.,
the lenders from time to time parties thereto and Bank One, NA, as
Administrative Agent.*
10.40 Amended and Restated Credit Agreement, dated as of February 24, 2005,
among Chemed Corporation, the lenders from time to time parties thereto
and JP Morgan Chase Bank, NA, as Administrative Agent.*
10.41 Pledge and Security Agreement, dated as of February 24, 2004, among
Roto-Rooter, Inc., the subsidiaries of Roto-Rooter, Inc. listed on the
signature pages thereto and Bank One, NA, as Collateral Agent.*
10.42 Guaranty Agreement, dated as of February 24, 2004, among the subsidiaries
of Roto-Rooter, Inc. listed on the signature pages thereto and Bank One,
NA, as Administrative Agent.*
34
10.43 Collateral Sharing Agreement, dated as of February 24, 2004, among Bank
One, NA, as Collateral Agent and Administrative Agent, Wells Fargo Bank,
NA, as Trustee, and Roto-Rooter, Inc.*
10.44 Form of Restricted Stock Award.*,**
10.45 Form of Stock Option Grant.*,**
10.46 Assets Purchase Agreement of April 1, 2005 between Service America
Network, Inc. and Service America Enterprise, Inc.*
12 Computation of Ratio of Earnings to Fixed Charges.
13 2005 Annual Report to Stockholders.
14 Policies on Business Ethics of Chemed Corporation.*
21 Subsidiaries of Chemed Corporation.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of Attorney.
31.1 Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a) of
the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a) of
the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13a-14(a)/15d-14(a) 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 David P. Williams 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
Annual Report on Form 10-K.
** Management contract or compensatory plan or arrangement.
FINANCIAL STATEMENT SCHEDULE
See Index to Financial Statements and Financial Statement Schedule on page S-1.
35
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.
CHEMED CORPORATION
March 13, 2006 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 ]
Kevin J. McNamara (Principal Executive Officer) ]
]
]
/s/ David P. Williams Vice President and Chief ]
- -------------------------- Financial Officer ]
David P. Williams (Principal Financial Officer) ]
]
]
/s/ Arthur V. Tucker, Jr. Vice President and ] March 13, 2006
- -------------------------- Controller (Principal ]
Arthur V. Tucker, Jr. Accounting Officer) ]
]
Edward L. Hutton* Walter L. Krebs* ] ]
Donald Breen, Jr.* Sandra E. Laney* ] ]
Charles H. Erhart, Jr.* Timothy S. O'Toole* ] --Directors ]
Joel F. Gemunder* Donald E. Saunders* ] ]
Patrick P. Grace* George J. Walsh III* ] ]
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.
March 13, 2006 /s/ Naomi C. Dallob
Date ----------------------------------------
Naomi C. Dallob
(Attorney-in-Fact)
36
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
2003, 2004 AND 2005
PAGE(s)
CHEMED CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm..................................... 6*
Consolidated Statement of Operations........................................................ 7*
Consolidated Balance Sheet.................................................................. 8*
Consolidated Statement of Cash Flows........................................................ 9*
Consolidated Statement of Changes in Stockholders' Equity................................... 10-11*
Consolidated Statement of Comprehensive Income/(Loss)....................................... 10*
Notes to Consolidated Financial Statements.................................................. 12*
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule..... S-2
Schedule II -- Valuation and Qualifying Accounts............................................ S-3
* Indicates page numbers in Chemed Corporation 2005 Annual Report to
Stockholders.
The consolidated financial statements of Chemed Corporation listed above,
appearing in the 2005 Annual Report to Stockholders, are incorporated herein by
reference. 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.
S-1
Report of Independent Registered Public Accounting
Firm on Financial Statement Schedule
To the Board of Directors
of Chemed Corporation
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 16, 2006 appearing in the 2005 Annual Report to Stockholders
of Chemed Corporation (which report, consolidated financial statements and
assessment are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 16, 2006
S-2
SCHEDULE II
CHEMED CORPORATION 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 (b) OF PERIOD
- ----------------------- ---------- --------- --------- ---------- ---------- ---------
Allowances for doubtful
accounts (c)
For the year 2005 $ (7,544) $ (7,224) $ - $ - $ 6,355 $ (8,413)
========== ======== ========= ========== ========== =========
For the year 2004 (a) $ (2,646) $ (5,983) $ - $ (4,946) $ 6,031 $ (7,544)
========== ======== ========= ========== ========== =========
For the year 2003 (a) $ (3,337) $ (1,497) $ - $ - $ 2,188 $ (2,646)
========== ======== ========= ========== ========== =========
Allowances for doubtful
accounts - notes
receivable (d)
For the year 2005 $ - $ - $ - $ - $ - $ -
========== ======== ========= ========== ========== =========
For the year 2004 $ (323) $ 323 $ - $ - $ - $ -
========== ======== ========= ========== ========== =========
For the year 2003 $ (422) $ 99 $ - $ - $ - $ (323)
========== ======== ========= ========== ========== =========
Valuation allowance for
available-for-sale
securities (e)
For the year 2005 $ - $ - $ - $ - $ - $ -
========== ======== ========= ========== ========== =========
For the year 2004 $ - $ - $ - $ - $ - $ -
========== ======== ========= ========== ========== =========
For the year 2003 $ 5,668 $ - $ (278) $ - $ (5,390) $ -
========== ======== ========= ========== ========== =========
(a) Amounts were reclassified for operations discontinued in 2004.
(b) 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.
(c) Classified in consolidated balance sheet as a reduction of accounts
receivable.
(d) Classified in consolidated balance sheet as a reduction of other assets.
(e) 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-3