EXHIBIT 13
1
FRONT COVER
[CHEMED LOGO]
CHEMED CORPORATION 2005 ANNUAL REPORT
2
INSIDE FRONT COVER
LOGOS: CHEMED CORPORATION, VITAS, AND ROTO-ROOTER
PROFILE:
Publicly traded on the New York Stock Exchange under the symbol CHE,
Chemed Corporation operates through two wholly owned subsidiaries, VITAS
Healthcare Corporation and Roto-Rooter. VITAS is the nation's largest provider
of end-of-life hospice care, and Roto-Rooter is North America's largest provider
of plumbing and drain cleaning services.
VITAS focuses on noncurative hospice care that helps make terminally ill
patients' final days as comfortable and pain-free as possible. Through its teams
of nurses, home health aides, doctors, social workers, clergy, and volunteers,
VITAS provides direct medical services to patients, as well as spiritual and
emotional counseling to both patients and their families. At year-end 2005,
VITAS cared for more than 10,400 patients daily in 15 states, primarily in the
patients' own homes, but also in VITAS' inpatient units located in hospitals,
nursing homes, and assisted-living/residential-care facilities for the elderly.
Roto-Rooter operates through more than 110 company-owned branches and
independent contractors and approximately 500 franchisees. The total Roto-Rooter
system offers services to more than 91% of the U.S. population and approximately
43% of the Canadian population. Roto-Rooter also has licensed master franchisees
in China, including Hong Kong; the republics of Indonesia and Singapore; Japan;
Mexico; the Philippines; and the United Kingdom.
Founded in 1971, Chemed is headquartered in Cincinnati, Ohio.
3
FINE PRINT:
Roto-Rooter(R) is a registered trademark of Roto-Rooter Corporation.
VITAS(R) and Innovative Hospice Care(R) are registered trademarks of VITAS
Healthcare Corporation.
TABLE OF CONTENTS:
CONTENTS
Letter to Shareholders 1-4
Financial Review 5-54
Officers and Directors
Listing and Corporate
Information IBC
CHEMED LETTER TO SHAREHOLDERS
V3
03.02.06
To Our Fellow Shareholders
In last year's Letter to Shareholders we stated "The outlook for Chemed in terms
of future opportunity and financial performance has never looked better." We are
extremely pleased to report that our optimism has materialized into excellent
2005 financial results for both of our companies (VITAS Healthcare Corporation
and Roto-Rooter Group Inc.)
These robust operating results are derived from successfully executing our
business philosophy - strive to be the best, most efficient operator in our
industries. We have achieved best-in-class status by developing business models
around market leaders with significant investment in a scalable management
infrastructure.
This model provides opportunities for increased efficiencies and competitive
advantage in terms of cost and quality of service in existing markets as well as
new territories. Furthermore, this operating model provides increased
flexibility to manage changes, complications and paradigm shifts that
continually challenge every business.
FINANCIAL RESULTS*
In 2005, Chemed had net service revenue and sales from continuing operations, in
accordance with Generally Accepted Accounting Principles (GAAP), of $926 million
- - an increase of 26% over the previous year. Income from continuing operations
was $38 million, an increase of 97% compared to 2004. Diluted earnings per share
from continuing operations increased more than 83% to $1.43.
Our 2005 comparative financial results are enhanced by not owning 100% of VITAS
in the prior year. This is why we internally measure operating results on an
adjusted pro forma basis. Adjusted pro forma assumes we owned VITAS effective
January 1, 2004 and eliminates certain transaction expenses related to the VITAS
merger as well as other special items that we believe are not indicative of
ongoing operations (Adjusted Pro Forma). Although this
perspective is on a non-GAAP basis, we believe this two-year Adjusted Pro Forma
comparison appropriately reflects the fundamental performance of our operations.
All of the following comments are based upon this Adjusted Pro Forma
perspective.
On an Adjusted Pro Forma basis, service revenues and sales in 2005 increased 15%
to $926 million. Adjusted Pro Forma earnings before interest, taxes,
depreciation and amortization (Adjusted Pro Forma EBITDA) were $124 million, up
26%. Adjusted Pro Forma EBITDA margins increased 122 basis points to 13.3%, and
Adjusted Pro Forma net income was $51 million, up 56%.
VITAS HEALTHCARE CORPORATION*
VITAS produced record revenue and operating results in 2005. Adjusted Pro Forma
revenue was $629 million, an increase of 18% compared to 2004. Adjusted Pro
Forma EBITDA was $83 million, an increase of 28%. Net income was $46 million,
which increased 34% over the prior year. Over 50,000 patients were admitted into
VITAS' hospice programs during the year, we provided 3.8 million days of care,
95% of which was provided directly in patients' homes.
The VITAS growth strategy is focused on a three-pronged approach. First and
foremost is to garner increased market penetration in established programs. This
is accomplished by providing quality hospice care to all of our patients and
their families. We believe that market recognition of VITAS' high level of care
will positively impact our ability to attract referrals and admissions earlier
in a patient's terminal diagnosis.
Our second area of growth opportunity at VITAS is through our new-start
programs. This strategy begins by identifying communities with unmet hospice
needs. We enter the communities with hospice care teams and commence the process
of obtaining state and federal certification. This strategy generates operating
losses as the new programs are established. Over the long term, however, we
believe this will provide shareholders with significant return on capital once
the programs are established.
A third area of growth is acquisitions. We continue to search for hospice
providers who will complement our existing culture of compassion and deeply
committed approach to end-of-life care. Ideally, these acquisitions
will allow VITAS to enter new geographic regions that will provide stable
platforms for future organic and new-start growth. This type of growth results
in significant capital expenditures. At the same time, acquisitions provide the
opportunity to immediately penetrate markets with established work forces,
federal and state licensure, and established referral networks.
VITAS' future performance depends upon the successful execution of all three of
these expansion strategies. We believe VITAS is uniquely positioned to achieve
such success through our market leadership, highly dedicated and focused
personnel supported with an integrated management systems infrastructure.
ROTO-ROOTER*
Roto-Rooter completed 2005 with another record year. Service revenue and sales
were $297 million, an increase of 7% compared to the prior year. Adjusted pro
forma net income totaled $25 million, a 21% increase over 2004.
Roto-Rooter operates in a very mature, fragmented industry with relatively low
organic growth. The unusually strong earnings growth Roto-Rooter generated in
2005 was the result of efficiencies derived from re-engineering initiatives
completed in 2004. These changes included centralizing call and dispatch
locations, as well as instituting standardized procedures throughout the
organization. This centralization provided the opportunity for efficient
monitoring of technician scheduling and job backlog. It also removed significant
non value-added administrative work from Roto-Rooter branches.
In the future, Roto-Rooter will continue its focus on providing a high level of
service to our residential and commercial customers in existing territories. In
addition, we will continue to evaluate opportunities to acquire franchise
territories that are reasonably valued and can be leveraged into Roto-Rooter's
existing infrastructure.
Perpetuating leadership within our industry segments requires commitment, vision
and risk. Chemed eagerly accepts this challenge and is forging ahead with ideas
and solutions that will enhance our services and provide significant benefits to
our patients, customers and shareholders.
Kevin J. McNamara Edward L. Hutton
President and Chairman of the Board
Chief Executive Office
* A reconciliation of GAAP earnings to Adjusted Pro Forma earnings can be found
in Chemed Corporation's fourth-quarter 2005 earnings press release, dated
February 21, 2006, which is available on the Chemed web site at www.chemed.com.
FINANCIAL REVIEW
CONTENTS
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
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS) 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12
UNAUDITED SUMMARY OF QUARTERLY RESULTS 38
SELECTED FINANCIAL DATA 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 41
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as that term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management, including the President and Chief Executive
Officer, Vice President and Chief Financial Officer and Vice President and
Controller, has conducted an evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2005 based on the framework
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
evaluation, management concluded that internal control over financial reporting
was effective as of December 31, 2005 based on criteria in Internal
Control--Integrated Framework issued by COSO. Management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2005 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm.
5
(PRICEWATERHOUSECOOPERS LOGO)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Chemed Corporation:
We have completed integrated audits of Chemed Corporation's 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, cash flows, changes in stockholders'
equity and comprehensive income/(loss) present fairly, in all material respects,
the financial position of Chemed Corporation and its subsidiaries at December
31, 2005 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing on page 5, that the
Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005 based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 16, 2006
6
CONSOLIDATED STATEMENT OF OPERATIONS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share data)
For the Years Ended December 31, 2005 2004 2003
- ------------------------------------- -------- -------- --------
CONTINUING OPERATIONS
Service revenues and sales ........................... $926,477 $735,341 $260,776
-------- -------- --------
Cost of services provided and goods sold (excluding
depreciation) ..................................... 651,841 507,078 146,818
Selling, general and administrative expenses ......... 151,670 138,285 95,363
Depreciation ......................................... 16,179 14,542 9,519
Amortization ......................................... 5,322 3,779 302
Other expenses (Note 5) .............................. 22,081 13,551 --
-------- -------- --------
Total costs and expenses .......................... 847,093 677,235 252,002
-------- -------- --------
Income from operations ............................ 79,384 58,106 8,774
Interest expense ..................................... (21,264) (21,158) (3,177)
Loss on extinguishment of debt (Note 12) ............. (3,971) (3,330) --
Other income--net (Note 8) ........................... 3,134 3,469 10,849
-------- -------- --------
Income before income taxes ........................ 57,283 37,087 16,446
Income taxes (Note 9) ................................ (19,578) (13,796) (6,180)
Equity in earnings/(loss) of affiliate (Note 3) ...... -- (4,105) 922
-------- -------- --------
Income from continuing operations ................. 37,705 19,186 11,188
DISCONTINUED OPERATIONS, NET OF INCOME TAXES (NOTE 6) ... (1,888) 8,326 (14,623)
-------- -------- --------
NET INCOME/(LOSS) ....................................... $ 35,817 $ 27,512 $ (3,435)
======== ======== ========
EARNINGS/(LOSS) PER SHARE (NOTES 17 AND 25)
Income from continuing operations .................... $ 1.48 $ 0.80 $ 0.56
======== ======== ========
Net Income/(Loss) .................................... $ 1.40 $ 1.14 $ (0.17)
======== ======== ========
DILUTED EARNINGS/(LOSS) PER SHARE (NOTES 17 AND 25)
Income from continuing operations .................... $ 1.43 $ 0.78 $ 0.56
======== ======== ========
Net Income/(Loss) .................................... $ 1.36 $ 1.12 $ (0.17)
======== ======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING (NOTES 17 AND 25)
Earnings/(loss) per share ............................ 25,552 24,120 19,848
======== ======== ========
Diluted earnings/(loss) per share .................... 26,299 24,636 19,908
======== ======== ========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
7
CONSOLIDATED BALANCE SHEET
Chemed Corporation and Subsidiary Companies
(in thousands, except shares and per share data)
December 31, 2005 2004
- ------------------------------------------------ -------- --------
ASSETS
Current assets
Cash and cash equivalents (Note 10) ...................................... $ 57,133 $ 71,448
Accounts receivable less allowances of $8,413 (2004 - $7,544) ............ 95,063 64,663
Inventories .............................................................. 6,499 7,019
Prepaid income taxes ..................................................... 9,096 --
Current deferred income taxes (Note 9) ................................... 26,691 31,250
Current assets of discontinued operations (Note 6) ....................... -- 13,397
Prepaid expenses and other current assets ................................ 9,768 9,842
-------- --------
Total current assets .................................................. 204,250 197,619
Investments of deferred compensation plans held in trust (Note 14) .......... 21,105 18,317
Other investments (Notes 6 and 16) .......................................... 1,445 1,445
Note receivable (Notes 6 and 16) ............................................ 12,500 12,500
Properties and equipment, at cost, less accumulated depreciation (Note 11) .. 65,449 55,796
Identifiable intangible assets less accumulated amortization of $9,612
(2004 - $5,174) (Notes 4 and 7) .......................................... 75,358 76,924
Goodwill (Notes 4 and 7) .................................................... 433,756 432,732
Noncurrent assets of discontinued operations (Note 6) ....................... -- 5,705
Other assets ................................................................ 21,222 24,528
-------- --------
Total Assets ....................................................... $835,085 $825,566
======== ========
LIABILITIES
Current liabilities
Accounts payable ......................................................... $ 43,626 $ 37,777
Current portion of long-term debt (Note 12) .............................. 1,045 12,185
Income taxes payable ..................................................... 3,916 10,944
Accrued insurance ........................................................ 38,894 26,350
Accrued salaries and wages ............................................... 19,952 17,030
Current liabilities of discontinued operations (Note 6) .................. -- 22,117
Other current liabilities (Note 13) ...................................... 61,462 42,777
-------- --------
Total current liabilities ............................................. 168,895 169,180
Deferred income taxes (Note 9) .............................................. 22,304 16,814
Long-term debt (Note 12) .................................................... 234,058 279,510
Deferred compensation liabilities (Note 14) ................................. 21,275 18,311
Noncurrent liabilities of discontinued operations (Note 6) .................. -- 811
Other liabilities ........................................................... 4,378 8,848
Commitments and contingencies (Notes 13, 15, 19, 22, 23)
-------- --------
Total Liabilities .................................................. 450,910 493,474
-------- --------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par; issued 28,373,872
shares (2004 - 13,491,341 pre-split shares) .............................. 28,374 13,491
Paid-in capital ............................................................. 237,917 212,691
Retained earnings ........................................................... 171,188 141,542
Treasury stock - 2,394,272 shares (2004 - 983,128 pre-split shares), at
cost ..................................................................... (52,127) (33,873)
Unearned compensation (Note 14) ............................................. (3,007) (3,590)
Deferred compensation payable in Company stock (Note 14) .................... 2,379 2,375
Notes receivable for shares sold (Note 18) .................................. (549) (544)
-------- --------
Total Stockholders' Equity ......................................... 384,175 332,092
-------- --------
Total Liabilities and Stockholders' Equity ......................... $835,085 $825,566
======== ========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
8
CONSOLIDATED STATEMENT OF CASH FLOWS
Chemed Corporation and Subsidiary Companies
(in thousands) For the Years Ended December 31, 2005 2004 2003
- ----------------------------------------------- --------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) .............................................................. $ 35,817 $ 27,512 $ (3,435)
Adjustments to reconcile net income/(loss) to net cash provided by operations:
Depreciation and amortization ............................................... 21,501 18,321 9,821
Provision for uncollectible accounts receivable ............................. 7,224 6,155 1,497
Noncash portion of long-term incentive compensation ......................... 4,813 4,988 --
Provision for deferred income taxes (Note 9) ................................ (3,682) 5,002 1,214
Write-off of unamortized debt issuance costs ................................ 2,871 -- --
Amortization of debt issuance costs ......................................... 1,834 1,861 --
Discontinued operations (Note 6) ............................................ 1,888 (8,326) 14,623
Equity in loss/(earnings) of affiliate (Note 3) ............................. -- 4,105 (922)
Gains on redemption and sales of available-for-sale investments ............. -- -- (5,390)
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations:
Increase in accounts receivable .......................................... (37,753) (6,534) (1,843)
Decrease/(increase) in inventories ....................................... 520 (986) (618)
Decrease/(increase) in prepaid expenses and other current assets ......... 76 11,659 (801)
Increase/(decrease) in accounts payable and other current liabilities .... 33,036 (2,497) 502
Increase in income taxes ................................................. 14,112 21,374 2,972
Decrease/(increase) in other assets ...................................... (2,003) 5,607 (2,041)
Increase/(decrease) in other liabilities ................................. (1,142) (627) 2,842
Noncash expense of internally financed ESOPs ................................ 1,060 1,894 1,740
Other sources/(uses) ........................................................ 1,400 (1,044) 1,129
--------- --------- --------
Net cash provided by continuing operations ............................... 81,572 88,464 21,290
Net cash (used)/provided by discontinued operations (Note 6) (1,559) 4,426 2,487
--------- --------- --------
Net cash provided by operating activities ................................ 80,013 92,890 23,777
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................................... (25,956) (18,290) (10,381)
Net proceeds/(uses) from sale of discontinued operations (Note 6) .............. (9,367) (759) 1,091
Business combinations, net of cash acquired (Note 7) ........................... (6,207) (344,727) (3,850)
Proceeds from sales of property and equipment .................................. 157 772 555
Deposit to secure merger offer ................................................. -- 10,000 (10,000)
Proceeds from redemption of available-for-sale securities (Note 3) ............. -- -- 27,270
Proceeds from sales of investments ............................................. -- -- 4,493
Purchase of equity investment in affiliate (VITAS) (Note 3) .................... -- -- (17,999)
Investing activities of discontinued operations (Note 6) ....................... -- (98) 1,396
Other uses ..................................................................... (369) (107) (357)
--------- --------- --------
Net cash used by investing activities ....................................... (41,742) (353,209) (7,782)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (Note 12) .......................................... (141,592) (96,940) (92)
Proceeds from issuance of long-term debt (Note 12) ............................. 85,000 295,000 --
Proceeds from exercise of stock options (Note 18) .............................. 12,327 3,721 3,287
Purchases of treasury stock .................................................... (7,401) (2,654) (637)
Increase/(decrease) in cash overdraft payable .................................. 6,752 1,265 (925)
Dividends paid ................................................................. (6,172) (5,718) (4,761)
Debt issuance costs ............................................................ (1,755) (14,447) --
Issuance of capital stock, net of costs (Note 7) ............................... -- 95,102 --
Collection of stock subscription note receivable ............................... -- 8,053 --
Financing activities of discontinued operations (Note 6) ....................... -- (255) (317)
Redemption of convertible junior subordinated securities (Note 20) ............. -- (2,735) --
Other sources .................................................................. 255 687 568
--------- --------- --------
Net cash provided/(used) by financing activities ............................ (52,586) 281,079 (2,877)
--------- --------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ............................................. (14,315) 20,760 13,118
Cash and cash equivalents at beginning of year .................................... 71,448 50,688 37,570
--------- --------- --------
Cash and cash equivalents at end of year .......................................... $ 57,133 $ 71,448 $ 50,688
========= ========= ========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
9
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Chemed Corporation and Subsidiary Companies
(in thousands, Capital Paid-in Retained
except per share data) Stock Capital Earnings
- ---------------------- ------- -------- --------
Balance at December 31,
2002 ................... $13,448 $168,299 $127,938
Net loss ..................... -- -- (3,435)
Dividends paid ($0.48 per
share - pre-split) ........ -- -- (4,761)
Decrease in unearned
compensation (Note 14) .... -- -- --
Stock awards and exercise of
stock options (Note 18) ... 3 1,620 --
Other comprehensive loss ..... -- -- --
Decrease in notes receivable
(Note 18) ................. -- -- --
Purchases of treasury stock .. -- -- --
Distribution of assets to
settle deferred
compensation liabilities .. -- -- --
Other ........................ 2 582 4
------- -------- --------
Balance at December 31,
2003 ................... 13,453 170,501 119,746
Net income ................... -- -- 27,512
Dividends paid ($0.48 per
share - pre-split) ........ -- -- (5,718)
Stock awards and exercise of
stock options (Note 18) ... 130 10,650 --
Retirement of treasury
shares .................... (400) (12,076) --
Issuance of common shares
(Note 7) .................. -- 32,722 --
Decrease in notes receivable
(Note 18) ................. -- -- --
Purchases of treasury stock .. -- -- --
Conversion of convertible
preferred securities ...... 308 10,639 --
Other ........................ -- 255 2
------- -------- --------
BALANCE AT DECEMBER 31,
2004 ................... 13,491 212,691 141,542
NET INCOME ................... -- -- 35,817
DIVIDENDS PAID ($0.24 PER
SHARE) . .................. -- -- (6,172)
STOCK AWARDS AND EXERCISE OF
STOCK OPTIONS (NOTE 18) ... 1,028 38,860 --
DECREASE IN NOTES RECEIVABLE
(NOTE 18) ................. -- -- --
PURCHASES OF TREASURY STOCK .. -- -- --
IMPACT OF COMMON SHARE SPLIT
(NOTE 25) ................. 13,855 (13,855) --
OTHER ........................ -- 221 1
------- -------- --------
BALANCE AT DECEMBER 31,
2005 ................... $28,374 $237,917 $171,188
======= ======== ========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME/(LOSS)
Chemed Corporation and Subsidiary Companies
(in thousands) For the Years Ended December 31, 2005 2004 2003
- ----------------------------------------------- ------- ------- -------
Net income/(loss) .................................................. $35,817 $27,512 $(3,435)
------- ------- -------
Other comprehensive income/(loss), net of income tax:
Unrealized holding gains/(losses) on available-for-sale
investments arising during the period ........................ -- -- (334)
Less: Reclassification adjustment for gains on available-for-sale
investments arising during the period ........................ -- -- (3,351)
------- ------- -------
Total ........................................................ -- -- (3,685)
------- ------- -------
Comprehensive income/(loss) ........................................ $35,817 $27,512 $(7,120)
======= ======= =======
The Notes to Consolidated Financial Statements are integral parts of this
statement.
10
Deferred
Compensation Accumulated Notes
Treasury Payable in Other Receivable
Stock- Unearned Company Comprehensive for Shares
at Cost Compensation Stock Income Sold Total
- --------- ------------ ------------ ------------- ---------- --------
$(111,582) $(4,694) $2,280 $ 3,685 $ (952) $198,422
-- -- -- -- -- (3,435)
-- -- -- -- -- (4,761)
-- 1,740 -- -- -- 1,740
2,216 -- -- -- -- 3,839
-- -- -- (3,685) -- (3,685)
(23) -- -- -- 18 (5)
(69) -- -- -- -- (69)
31 -- (31) -- -- --
-- -- 59 -- -- 647
- --------- ------- ------ ------- ------- --------
(109,427) (2,954) 2,308 -- (934) 192,693
-- -- -- -- -- 27,512
-- -- -- -- -- (5,718)
771 (2,530) -- -- -- 9,021
12,476 -- -- -- -- --
62,380 -- -- -- -- 95,102
(10) -- -- -- 390 380
(63) 1,894 -- -- -- 1,831
-- -- -- -- -- 10,947
-- -- 67 -- -- 324
- --------- ------- ------ ------- ------- --------
(33,873) (3,590) 2,375 -- (544) 332,092
-- -- -- -- -- 35,817
-- -- -- -- -- (6,172)
(18,204) (477) -- -- -- 21,207
(9) -- -- -- (5) (14)
(41) 1,060 -- -- -- 1,019
-- -- -- -- -- --
-- -- 4 -- -- 226
- --------- ------- ------ ------- ------- --------
$ (52,127) $(3,007) $2,379 $ -- $ (549) $384,175
========= ======= ====== ======= ======= ========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chemed Corporation and Subsidiary Companies
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation ("VITAS") and Roto-Rooter Group, Inc. ("Roto-Rooter"). VITAS focuses
on hospice care that helps make terminally ill patients' final days as
comfortable as possible. Through its team of doctors, nurses, home health aides,
social workers, clergy and volunteers, VITAS provides direct medical services to
patients, as well as spiritual and emotional counseling to both patients and
their families. Roto-Rooter is focused on providing plumbing and drain cleaning
services to both residential and commercial customers. Through its network of
company-owned branches, independent contractors and franchisees, Roto-Rooter
offers plumbing and drain cleaning service to over 90% of the U.S. population.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Chemed
Corporation and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated. Long-term investments in affiliated companies
representing ownership interests of 20% to 50% were accounted for using the
equity method.
Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of
Variable Interest Entities--an interpretation of Accounting Research Bulletin
No. 51 (revised)" ("FIN 46R") relative to contractual relationships with our
independent contractors and franchisees. FIN 46R requires the primary
beneficiary of a Variable Interest Entity ("VIE") to consolidate the accounts of
the VIE. We have evaluated the relationships with our independent contractors
and franchisees based upon guidance provided in FIN 46R and have concluded that
certain of the independent contractors may be VIEs. Based on our evaluation, the
franchisees are not VIEs. We believe consolidation, if required, of the accounts
of any independent contractor for which we might be the primary beneficiary
would not materially impact our financial position or results of operations.
CASH EQUIVALENTS
Cash equivalents comprise short-term, highly liquid investments that have
been purchased within three months of their dates of maturity.
ACCOUNTS AND LOANS RECEIVABLE AND CONCENTRATION OF RISK
Accounts and loans receivable are recorded at the principal balance
outstanding less estimated allowances for uncollectible accounts. For the
Roto-Rooter segment, allowances for trade accounts receivable are generally
provided for accounts more than 90 days past due, although collection efforts
continue beyond that time. Due to the small number of loans receivable
outstanding, allowances for loan losses are determined on a case-by-case basis.
For the VITAS segment, allowances for patient accounts receivable are generally
provided on accounts more than 240 days old plus an appropriate percentage of
accounts not yet 240 days old. Final write-off of overdue accounts or loans
receivable is made when all reasonable collection efforts have been made and
payment is not forthcoming. We closely monitor our receivables and periodically
review procedures for granting credit to attempt to hold losses to a minimum.
As of December 31, 2005 and 2004, approximately 65% and 56%, respectively
of VITAS' total accounts receivable balance were due from Medicare and 27% and
32%, respectively of VITAS' total accounts receivable balance were due from
various state Medicaid programs. We closely monitor our programs to ensure
compliance with Medicare and Medicaid regulations.
INVENTORIES
Substantially all of the inventories are either general merchandise or
finished goods. Inventories are stated at the lower of cost or market. For
determining the value of inventories, cost methods that reasonably approximate
the first-in, first-out ("FIFO") method are used.
OTHER INVESTMENTS
At December 31, 2005 and 2004, other investments, which are classified as
available-for-sale, comprise a common stock purchase warrant in privately held
Patient Care Inc. ("Patient Care"), our former subsidiary. As further discussed
in Note 16, our investment in the Patient Care warrant is carried at cost,
subject to write-down for impairment.
All investments are reviewed periodically for impairment based on available
market and financial data. If the market value or net realizable value of the
investment is less than our cost and the decline is determined to be other than
temporary, a write-down to fair value is made, and a realized loss is recorded
in the statement of operations. In calculating realized gains and losses on the
sales of investments, the specific-identification method is used to determine
the cost of investments sold.
12
Chemed Corporation and Subsidiary Companies
DEPRECIATION AND PROPERTIES AND EQUIPMENT
Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease terms
(excluding option terms) or their useful lives. Expenditures for maintenance,
repairs, renewals and betterments that do not materially prolong the useful
lives of the assets are expensed as incurred. The cost of property retired or
sold and the related accumulated depreciation are removed from the accounts, and
the resulting gain or loss is reflected currently in income.
Expenditures for major software purchases and software developed for
internal use are capitalized and depreciated using the straight-line method over
the estimated useful lives of the assets. For software developed for internal
use, external direct costs for materials and services and certain internal
payroll and related fringe benefit costs are capitalized in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."
The weighted average lives of our property and equipment at December 31,
2005, were:
Buildings 17.1 yrs.
Transportation equipment 5.9
Machinery and equipment 6.1
Computer software 4.5
Furniture and fixtures 5.1
GOODWILL AND INTANGIBLE ASSETS
Identifiable, definite-lived intangible assets arise from purchase business
combinations and are amortized using either an accelerated method or the
straight-line method over the estimated useful lives of the assets. The
selection of an amortization method is based on which method best reflects the
economic pattern of usage of the asset. The VITAS trade name is considered to
have an indefinite life. Goodwill and the VITAS trade name are tested at least
annually for impairment.
The weighted average lives of our identifiable, definite-lived intangible
assets at December 31, 2005, were:
Covenants not to compete 6.3 yrs.
Referral networks 9.9
Customer lists 13.3
LONG-LIVED ASSETS
We periodically make an estimation and valuation of the future benefits of
our long-lived assets (other than goodwill and the VITAS trade name) based on
key financial indicators. If the projected undiscounted cash flows of a major
business unit indicate that property and equipment or identifiable,
definite-lived intangible assets have been impaired, a write-down to fair value
is made. No events occurred during the year ended December 31, 2005 that
indicated an impairment assessment was required.
OTHER ASSETS
Debt issuance costs are included in other assets and are amortized using
the effective interest method over the life of the debt.
REVENUE RECOGNITION
For both the Roto-Rooter and VITAS segments, service revenues and sales are
recognized when the earnings process has been completed. Generally, this occurs
when services are provided or products are delivered. VITAS recognizes revenue
at the estimated net realizable amount due from third-party payers, which are
primarily Medicare and Medicaid. Payers may deny payment for services in whole
or in part on the basis that such services are not eligible for coverage and do
not qualify for reimbursement. We estimate denials each period and make adequate
provision in the financial statements.
VITAS is subject to certain limitations on Medicare payments for services.
Specifically, if the number of inpatient care days any hospice program provides
to Medicare beneficiaries exceeds 20% of the total days of hospice care such
program provided to all Medicare patients for an annual period beginning
September 28, the days in excess of the 20% figure may be reimbursed only at the
routine homecare rate. None of VITAS' hospice programs exceeded the payment
limits on inpatient services in 2005 or 2004.
13
Chemed Corporation and Subsidiary Companies
VITAS is also subject to a Medicare annual per-beneficiary cap ("Medicare
Cap"). Compliance with the Medicare Cap is measured by comparing the total
Medicare payments received under a Medicare provider number with respect to
services provided to all Medicare hospice care beneficiaries in the program or
programs covered by that Medicare provider number between November 1 of each
year and October 31 of the following year with the product of the
per-beneficiary cap amount and the number of Medicare beneficiaries electing
hospice care for the first time from that hospice program or programs from
September 28 through September 27 of the following year.
We actively monitor each of our hospice programs, by provider number, for
their Medicare revenue, admissions, discharge rate and average length of stay
data in an attempt to determine whether they are likely to exceed the Medicare
Cap. Should we determine a provider number is likely to exceed the Medicare Cap
based on projected trends, we attempt to institute corrective action to
influence the patient mix or to increase patient admissions. However, should we
project our corrective action will not prevent that program from exceeding its
Medicare Cap, we estimate the amount we will be required to repay at the end of
the measurement year and accrue that amount, which is proportional to the number
of months elapsed in the Medicare Cap year, as a reduction of patient revenue.
As discussed in Note 7, during the second quarter of 2005, we determined
that the Phoenix, AZ facility, which was acquired in December 2004, had exceeded
the Medicare Cap for the measurement period ended October 31, 2005. An estimated
liability of $1.0 million was recorded at that time. We increased the liability
in the fourth quarter of 2005 to $2.4 million based on revised estimates. The
increase in the estimated liability from the second quarter to the fourth
quarter is the result of a change in the discharge trends for patients admitted
prior to our acquisition of the Phoenix facility. Because the estimated Medicare
Cap liability is related to patients being cared for at the time of acquisition,
this liability was recorded as an assumed liability. None of VITAS' other
programs exceeded the Medicare Cap in 2005 or 2004.
GUARANTEES
In the normal course of business, we enter into various guarantees and
indemnifications in our relationships with customers and others. Examples of
these arrangements include guarantees of services for periods ranging from one
day to one year and product satisfaction guarantees. Our experience indicates
guarantees and indemnifications do not materially impact our financial condition
or results of operations. Based on our experience, no liability for guarantees
has been recorded as of December 31, 2005 or 2004.
OPERATING EXPENSES
Cost of services provided and goods sold (excluding depreciation) includes
salaries, wages and benefits of service providers and field personnel, material
costs, medical supplies and equipment, pharmaceuticals, insurance costs, service
vehicle costs and other expenses directly related to providing service revenues
or generating sales. Selling, general and administrative expenses include
salaries, wages and benefits of selling, marketing and administrative employees,
advertising expenses, communications and branch telephone expenses, office rent
and operating costs, legal, banking and professional fees and other
administrative costs.
ADVERTISING
We expense the production costs of advertising the first time the
advertising takes place. Costs of yellow pages listings are expensed when the
directories are placed in circulation. These directories are generally in
circulation for approximately one year, at which point they are replaced by the
publisher with a new directory. We do not control the timing of when a new
directory is placed in circulation. Other advertising costs are expensed as
incurred. Advertising expense for continuing operations for the year ended
December 31, 2005, was $21.2 million (2004--$20.0 million; 2003--$16.4 million).
COMPUTATION OF EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares
of capital stock outstanding. Diluted earnings per share reflect the dilutive
impact of our outstanding stock options and nonvested stock awards. Diluted
earnings per share also assumed the conversion of the Convertible Junior
Subordinated Debentures ("CJSD") into capital stock prior to the redemption of
the CJSD in 2004, only when the impact was dilutive on earnings per share from
continuing operations. Stock options whose exercise price are greater than the
average market price of our stock are excluded from the computation of diluted
earnings per share.
EMPLOYEE STOCK OWNERSHIP PLANS
Contributions to our Employee Stock Ownership Plans ("ESOP") are based on
established debt repayment schedules. Shares are allocated to participants based
on the principal and interest payments made during the period. Our policy is to
record ESOP expense by applying the transition rule under the level-principal
amortization concept.
14
Chemed Corporation and Subsidiary Companies
STOCK-BASED COMPENSATION PLANS
We use Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees", to account for stock-based compensation. Since
our stock options qualify as fixed options under APB 25 and since the option
price equals the market price on the date of grant, there is no compensation
cost recorded for stock options. Restricted stock is recorded as compensation
cost over the requisite vesting periods on a straight-line basis, based on the
market value on the date of grant.
The following table illustrates the effect on net income/(loss) and
earnings/(loss) per share if we had applied the fair-value-recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation"
(in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------- -------
Net income/(loss), as reported $35,817 $27,512 $(3,435)
Add: stock-based compensation expense
included in the determination of net
income/(loss), net of income taxes 4,314 3,940 95
Deduct: total stock-based employee
compensation determined under
a fair-value-based method for all
stock options and awards, net of
related income taxes (8,519) (8,259) (952)
------- ------- -------
Pro forma net income/(loss) $31,612 $23,193 $(4,292)
======= ======= =======
Earnings/(loss) per share
As reported $ 1.40 $ 1.14 $ (0.17)
======= ======= =======
Pro forma $ 1.24 $ 0.96 $ (0.22)
======= ======= =======
Diluted earnings/(loss) per share
As reported $ 1.36 $ 1.12 $ (0.17)
======= ======= =======
Pro forma $ 1.20 $ 0.94 $ (0.22)
======= ======= =======
The above pro forma data were calculated using the Black-Scholes option
valuation method to value our stock options granted in 2005 and prior years. Key
assumptions include:
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------ ------ ------
Weighted average grant-date fair
value of options granted $12.43 $ 6.80 $ 5.07
Risk-free interest rate 4.0% 3.9% 3.2%
Expected volatility 30.9% 30.3% 27.8%
Expected life of options 5 yrs. 5 yrs. 6 yrs.
For options granted in 2003, it was assumed that we would increase the
annual dividend $0.005 per share per quarter biannually in the fourth quarter.
For options granted in 2005 and 2004, it was assumed that the annual dividend
would remain at $0.24 per share for the life of the options. These assumptions
were based on the facts and circumstances that existed at the time options were
granted and should not be construed to be an indication of any future dividend
amounts to be paid.
INSURANCE ACCRUALS
For our Roto-Rooter segment and Corporate Office, we self-insure for all
casualty insurance claims (workers' compensation, auto liability and general
liability). As a result, we closely monitor and frequently evaluate our
historical claims experience to estimate the appropriate level of accrual for
self-insured claims. Our third-party administrator ("TPA") processes and reviews
claims on a monthly basis. Currently, our exposure on any single claim is capped
at $500,000. For most of the prior years, the caps for general liability and
workers' compensation were between $250,000 and $500,000 per claim. In
developing our estimates, we accumulate historical claims data for the previous
10 years to calculate loss
15
Chemed Corporation and Subsidiary Companies
development factors ("LDF") by insurance coverage type. LDFs are applied to
known claims to estimate the ultimate potential liability for known and unknown
claims for each open policy year. LDFs are updated annually. Because this
methodology relies heavily on historical claims data, the key risk is whether
the historical claims are an accurate predictor of future claims exposure. The
risk also exists that certain claims have been incurred and not reported on a
timely basis. To mitigate these risks, in conjunction with our TPA, we closely
monitor claims to ensure timely accumulation of data and compare claims trends
with the industry experience of our TPA.
For the VITAS segment, we self-insure for workers' compensation exposures.
Currently, VITAS' exposure on any single claim is capped at $500,000. For most
of the prior years, the caps for workers' compensation were between $250,000 and
$500,000 per claim. For VITAS' self-insurance accruals for workers'
compensation, we obtained an actuarial valuation of the liability as of the date
of acquisition and as of November 30, 2005 and 2004. The valuation methods used
by the actuary are similar to those used internally for our other business
units.
TAXES ON INCOME
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amount of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in our opinion, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in laws and rates on the date of enactment.
We are subject to income taxes in Canada, the U.S. Federal and most state
jurisdictions. Significant judgment is required to determine our provision for
income taxes. We are periodically audited by various taxing authorities. We
establish liabilities for possible assessments by taxing authorities resulting
from exposures including, but not limited to, the deductibility of certain
expenses and the tax treatment of acquisitions and divestitures. While it is
often difficult to predict the final outcome or the timing of resolution of any
particular tax matter, we believe our tax reserves reflect the probable outcome
of known contingencies, including interest and penalties, if applicable.
On June 30, 2005, the State of Ohio enacted significant changes to its tax
system. The impact was required to be accounted for in all annual and interim
periods ending on or after June 30, 2005. Changes include the phasing out of the
Ohio income tax and the Ohio personal property tax. Additionally, a new
Commercial Activity Tax ("CAT"), which is based on gross receipts, was
introduced. Since the corporate income tax was replaced by the CAT, which is not
an income tax under generally accepted accounting principles, entities with
businesses in the State of Ohio must account for the phase-out of the corporate
income tax as a change in enacted tax rate as of June 30, 2005. We historically
recorded a valuation allowance on all significant deferred tax amounts in the
State of Ohio, primarily net operating loss carry-forwards, because we believed
it was more likely than not that the benefit would expire unutilized. As such,
there was no significant impact to us for the year ended December 31, 2005.
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Disclosures of aftertax expenses and adjustments are based on
estimates of the effective income tax rates for the applicable segments.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2005
presentation. As discussed in Note 25, prior period share and per share data has
been restated to retroactively reflect the impact of the capital stock split in
May 2005. The shares outstanding and in treasury reflected on the balance sheet
prior to May 11, 2005 have not been restated. Cash overdrafts payable have been
reclassified as a separate component of cash flow from financing activities in
the statement of cash flows for 2004 and 2003 to conform to the 2005
presentation.
RECENT ACCOUNTING STATEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004) "Share-Based Payment" ("FASB123R"), which
requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock
options, but expresses no preference for a type of valuation model. This
statement supersedes APB No. 25, but does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
FASB 123 as originally issued. FASB123R is effective as of January 1, 2006. In
March 2005, the Board of Directors approved immediate vesting of all unvested
stock options to avoid recognizing approximately $951,000 of pretax expense that
would have been charged to income under FASB123R beginning on January 1, 2006.
The pretax expense from continuing operations of accelerating the vesting of
these stock options, which were
16
Chemed Corporation and Subsidiary Companies
scheduled to vest in November 2005 and November 2006, was approximately $215,000
and was recorded in the first quarter of 2005. We adopted FASB 123R on January
1, 2006 using the modified prospective method. Therefore, historical financial
information will not be restated. There was no significant impact on our
financial condition, results of operations or cash flow as a result of adoption
of FASB 123R.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting for
Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB
Statement No. 3." FASB 154 changes the requirements with regard to the
accounting for and reporting of a change in an accounting principle. The
provisions of FASB 154 require, unless impracticable, retrospective application
to prior periods presented in financial statements for all voluntary changes in
an accounting principle and changes required by the adoption of a new accounting
pronouncement in the unusual instance that the new pronouncement does not
indicate a specific transition method. FASB 154 also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in an accounting estimate, which requires
prospective application of the new method. FASB 154 is effective for all changes
in an accounting principle made in fiscal years beginning after December 15,
2005. We adopted FASB 154 with our fiscal year beginning January 1, 2006. There
was no impact on our financial condition, results of operations or cash flows
upon adoption.
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments", which nullifies and amends various
accounting guidance relating to accounting for derivative instruments and
securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
2. SEGMENTS AND NATURE OF THE BUSINESS
Our segments comprise the VITAS segment and the Roto-Rooter segment
(formerly the Plumbing and Drain Cleaning segment). Service America has been
reclassified to discontinued operations for all periods presented. Relative
contributions of each segment to service revenues and sales were 68% and 32%,
respectively, in 2005. Relative contributions of each segment to service
revenues and sales were 62% and 38%, respectively, in 2004.
The reportable segments have been defined along service lines which is
consistent with the way the businesses are managed. In determining reportable
segments, the Roto-Rooter Services; and Roto-Rooter Franchising and Products
operating units of the Roto-Rooter segment have been aggregated on the basis of
possessing similar operating and financial characteristics. The characteristics
of these operating segments and the basis for aggregation are reviewed annually.
Accordingly, the reportable segments are defined as follows:
- The VITAS segment provides hospice services for patients with
severe, life-limiting illnesses. This type of care is aimed at
making the terminally ill patient's final days as comfortable and
pain-free as possible. Hospice care is typically available to
patients who have been initially certified as terminally ill
(i.e., a prognosis of six months or less) by their attending
physician, if any, and the hospice physician. VITAS offers all
levels of hospice care in a given market, including routine home
care, inpatient care and continuous care. Over 90% of VITAS'
revenues are derived through Medicare and Medicaid reimbursement
programs.
- The Roto-Rooter segment provides repair and maintenance services
to residential and commercial accounts using the Roto-Rooter
registered service mark. Such services include plumbing and
sewer, drain and pipe cleaning. They are delivered through
company-owned and operated territories, independent
contractor-operated territories and franchised locations. This
segment also manufactures and sells products and equipment used
to provide such services.
- We report corporate administrative expenses and unallocated
investing and financing income and expense not directly related
to either segment as "Corporate". Corporate administrative
expense includes the stewardship, accounting and reporting,
legal, tax and other costs of operating a publicly held
corporation. Corporate investing and financing income and
expenses include the costs and income associated with corporate
debt and investment arrangements.
The vast majority of our service revenues and sales from continuing
operations are generated from business within the United States.
17
Chemed Corporation and Subsidiary Companies
Segment data for our continuing operations are set forth below (in
thousands, except footnote data):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
-------- -------- --------
REVENUES BY TYPE OF SERVICE
VITAS
Routine homecare $436,596 $317,010 $ --
Continuous care 106,417 78,669 --
General inpatient 86,127 63,051 --
-------- -------- --------
Total segment 629,140 458,730 --
-------- -------- --------
Roto-Rooter
Sewer and drain cleaning 116,918 111,867 106,127
Plumbing repair and maintenance 118,625 107,642 101,590
Industrial and municipal sewer and drain cleaning 17,420 16,075 15,581
Contractors 18,070 16,360 14,125
HVAC repair and maintenance 3,624 3,111 3,044
Other products and services 22,680 21,556 20,309
-------- -------- --------
Total segment 297,337 276,611 260,776
-------- -------- --------
Total service revenues and sales $926,477 $735,341 $260,776
======== ======== ========
AFTERTAX SEGMENT EARNINGS/ (LOSS) (A) (B) (C)
VITAS $ 33,587 $ 29,139 $ --
Roto-Rooter 26,960 18,795 13,176
-------- -------- --------
Total segment earnings 60,547 47,934 13,176
Corporate (22,842) (24,643) (2,910)
Equity in VITAS earnings/(loss) -- (4,105) 922
Discontinued operations (1,888) 8,326 (14,623)
-------- -------- --------
Net income/ (loss) $ 35,817 $ 27,512 $ (3,435)
======== ======== ========
INTEREST INCOME
VITAS $ 2,804 $ 1,091 $ --
Roto-Rooter 2,391 1,180 863
-------- -------- --------
Subtotal 5,195 2,271 863
Corporate 1,809 1,403 2,155
Intercompany eliminations (4,794) (1,800) (595)
-------- -------- --------
Total interest income $ 2,210 $ 1,874 $ 2,423
======== ======== ========
(a) 2005 includes the estimated cost for the anticipated settlement of a
lawsuit of $10,757,000 aftertax (VITAS), payouts under our 2002 Executive
Long-term Incentive Plan ("LTIP") of $1,774,000 aftertax (Corporate),
$1,043,000 aftertax (VITAS) and $617,000 aftertax (Roto-Rooter), the
prepayment penalty incurred on the early extinguishment of debt of
$2,523,000 aftertax (Corporate), a favorable adjustment of $1,014,000
aftertax (Roto-Rooter) for casualty insurance related to prior periods'
experience, legal expenses of $397,000 aftertax (VITAS) incurred in
connection with the Office of Inspector General ("OIG") investigation,
additional favorable VITAS transaction adjustments of $961,000 aftertax
(Corporate), the cost of accelerating vesting of stock options of $137,000
aftertax (Corporate) and favorable tax adjustments and settlements from
prior year returns of $835,000 aftertax (Corporate) and $1,126,000
(Roto-Rooter).
(b) 2004 includes payouts under our LTIP of $4,455,000 aftertax (Corporate) and
$982,000 aftertax (Roto-Rooter), the prepayment penalty incurred on the
early extinguishment of debt of $2,030,000 aftertax (Corporate), the
estimated cost for the anticipated settlement of a lawsuit of $1,897,000
aftertax (Roto-Rooter), expenses related to debt registration of $727,000
aftertax (Corporate), our aftertax share of VITAS' charges related to the
acquisition of VITAS amounting to $4,621,000 (Equity in VITAS
earnings/(loss)), additional VITAS transaction costs and adjustments of a
charge of $1,008,000 aftertax (VITAS) and a credit of $786,000 aftertax
(Corporate), and favorable tax adjustments and settlements from prior year
returns of $990,000 aftertax (Corporate) and $630,000 (Roto-Rooter).
(c) 2003 includes severance charges of $2,358,000 aftertax (Corporate) and
aftertax capital gains on the sales and redemption of investments
(Corporate) amounting to $3,351,000.
18
Chemed Corporation and Subsidiary Companies
For the Years Ended December 31,
--------------------------------
2005 2004 2003
-------- -------- --------
INTEREST EXPENSE
VITAS $ 153 $ 128 $ --
Roto-Rooter 563 206 170
-------- -------- --------
Subtotal 716 334 170
Corporate 20,548 20,824 3,007
-------- -------- --------
Total interest expense $ 21,264 $ 21,158 $ 3,177
======== ======== ========
INCOME TAX PROVISION (D) (E)
VITAS $ 20,394 $ 20,030 $ --
Roto-Rooter 15,635 10,611 8,054
-------- -------- --------
Subtotal 36,029 30,641 8,054
Corporate (16,451) (16,845) (1,874)
-------- -------- --------
Total income tax provision $ 19,578 $ 13,796 $ 6,180
======== ======== ========
IDENTIFIABLE ASSETS
VITAS $532,299 $502,810 $ --
Roto-Rooter 179,063 174,310 172,257
-------- -------- --------
Total identifiable assets 711,362 677,120 172,257
Corporate (f) 123,723 129,344 129,664
Discontinued operations -- 19,102 26,537
-------- -------- --------
Total assets $835,085 $825,566 $328,458
======== ======== ========
ADDITIONS TO LONG-LIVED ASSETS (G)
VITAS $ 24,462 $434,509 $ --
Roto-Rooter 7,938 8,690 12,610
-------- -------- --------
Subtotal 32,400 443,199 12,610
Corporate (f) 443 785 1,621
-------- -------- --------
Total additions $ 32,843 $443,984 $ 14,231
======== ======== ========
DEPRECIATION AND AMORTIZATION (H)
VITAS $ 11,932 $ 9,061 $ --
Roto-Rooter 8,361 8,702 9,481
-------- -------- --------
Subtotal 20,293 17,763 9,481
Corporate 1,208 558 340
-------- -------- --------
Total depreciation and amortization $ 21,501 $ 18,321 $ 9,821
======== ======== ========
(d) 2005 includes favorable tax adjustments and settlements from prior year
returns of $835,000 (Corporate) and $1,126,000 (Roto-Rooter).
(e) 2004 includes favorable tax adjustments and settlements from prior year
returns of $990,000 (Corporate) and $630,000 (Roto-Rooter).
(f) Corporate assets consist primarily of cash and cash equivalents, marketable
securities, properties and equipment and other investments.
(g) Long-lived assets include goodwill, identifiable intangible assets and
property and equipment.
(h) Depreciation and amortization include amortization of identifiable,
definite-lived intangible assets and stock awards.
3. EQUITY INTEREST IN AFFILIATE (VITAS)
Until February 23, 2004, we held a 37% interest in privately held VITAS. On
August 18, 2003, VITAS retired our investment in the 9% Redeemable Preferred
Stock of VITAS. Cash proceeds to us totaled $27.3 million, and we realized a
pretax gain of $1.8 million ($1.2 million aftertax) on the redemption of
preferred stock in the third quarter of 2003. During 2003, the dividends and
amortization of preferred stock discount on this investment contributed $1.6
million to our aftertax earnings. On October 14, 2003, we exercised two of our
three warrants to purchase 4,158,000 common shares of VITAS, or 37%, for $18
million in cash. See Note 7 regarding the acquisition of the 63% of VITAS we did
not own in 2003.
19
Chemed Corporation and Subsidiary Companies
During the period January 1 through February 23, 2004, VITAS recognized a
net loss of $18.3 million due to the recognition of approximately $20.9 million
of aftertax costs related to VITAS' sale of its business to us. Our aftertax
share of VITAS' loss for this period was $ 4.1 million. Included in the aftertax
costs related to VITAS' sale of its business are the following (in thousands):
Accrual for potential severance costs under key employment agreements $10,975
Legal and valuation costs 6,665
Loss on write-off of VITAS' deferred debt issuance costs 2,698
Other 592
-------
Total $20,930
=======
4. GOODWILL AND INTANGIBLE ASSETS
Amortization of definite-lived intangible assets from continuing operations
was (in thousands):
For the Years Ended December 31,
- --------------------------------
2005 2004 2003
------ ------ ----
$4,438 $3,468 $130
The following is a schedule by year of projected amortization expense for
definite-lived intangible assets (in thousands):
2006 $4,412
2007 4,378
2008 4,371
2009 4,363
2010 3,788
The balance in identifiable intangible assets comprises the following (in
thousands):
Gross Accumulated Net Book
Asset Amortization Value
------- ------------ --------
DECEMBER 31, 2005
REFERRAL NETWORKS $23,772 $(5,510) $18,262
COVENANTS NOT TO COMPETE 8,676 (3,236) 5,440
CUSTOMER LISTS 1,222 (866) 356
------- ------- -------
SUBTOTAL - DEFINITE-LIVED INTANGIBLES 33,670 (9,612) 24,058
VITAS TRADE NAME 51,300 -- 51,300
------- ------- -------
TOTAL $84,970 $(9,612) $75,358
======= ======= =======
December 31, 2004
Referral network $20,900 $(2,348) $18,552
Covenants not to compete 8,676 (2,043) 6,633
Customer lists 1,222 (783) 439
------- ------- -------
Subtotal - definite-lived intangibles 30,798 (5,174) 25,624
VITAS trade name 51,300 -- 51,300
------- ------- -------
Total $82,098 $(5,174) $76,924
======= ======= =======
20
Chemed Corporation and Subsidiary Companies
The changes in the carrying amount of goodwill for the years ended December
31, 2004 and 2005 are as follows (in thousands):
Roto-
VITAS Rooter Total
-------- -------- --------
December 31, 2003 $ -- $105,335 $105,335
Acquired in business combinations 324,330 2,918 327,248
Other adjustments -- 149 149
-------- -------- --------
DECEMBER 31, 2004 324,330 108,402 432,732
ACQUIRED IN BUSINESS COMBINATIONS 414 498 912
OTHER ADJUSTMENTS -- 112 112
-------- -------- --------
DECEMBER 31, 2005 $324,744 $109,012 $433,756
======== ======== ========
We performed impairment tests of goodwill for all of our reporting units
and for the VITAS trade name as of December 31, 2005 and 2004. For all reporting
units included in continuing operations, these tests indicated that our goodwill
and VITAS trade name are not impaired. For the purpose of impairment testing, we
consider the reporting units to be VITAS, Roto-Rooter Services (plumbing and
drain cleaning services) and Roto-Rooter Franchising and Products (franchising
and manufacturing and sale of plumbing and drain cleaning products). Service
America, which was reclassified to discontinued operations in 2004, recognized a
goodwill impairment loss of $10.0 million in 2003 largely due to declining
revenues and poor operating results for several years.
5. OTHER EXPENSES
Other expenses from continuing operations include the following pretax
charges (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004
------- -------
Long-term incentive compensation (Note 19) $ 5,477 $ 8,783
Accrual for lawsuit settlement (Note 22) 17,350 3,135
VITAS transaction costs and adjustments (Note 7) (961) 442
Cost of accelerating the vesting of outstanding stock options (Note 1) 215 --
Professional fees incurred to register Floating Rate Notes (Note 12) -- 1,191
------- -------
Total other expenses $22,081 $13,551
======= =======
21
Chemed Corporation and Subsidiary Companies
6. DISCONTINUED OPERATIONS
Discontinued operations comprise (in thousands, except per share amounts):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------ --------
Service America (2004):
Income/(loss) before income taxes $ 576 $ (535) $(16,118)
Income taxes (241) 222 1,431
------- ------ --------
Income/(loss) from operations, net of income taxes 335 (313) (14,687)
(Loss)/gain on disposal, net of income tax benefit of $165
and $14,230, respectively (2,148) 8,872 --
------- ------ --------
Total Service America (1,813) 8,559 (14,687)
------- ------ --------
Adjustment to accruals of operations discontinued in prior years:
Legal accruals (2002) (120) -- --
Environmental and sublease accruals (1991) -- (700) --
Allowance for uncollectible notes receivable and other accruals (2001)
-- 383 99
------- ------ --------
Gain/(loss) before income taxes (120) (317) 99
All other income taxes 45 84 (35)
------- ------ --------
Total adjustments (75) (233) 64
------- ------ --------
Total discontinued operations $(1,888) $8,326 $(14,623)
======= ====== ========
Earnings/(loss) per share $ (0.08) $ 0.34 $ (0.73)
======= ====== ========
Diluted earnings/(loss) per share $ (0.07) $ 0.34 $ (0.73)
======= ====== ========
In December 2004, the Board of Directors authorized the discontinuance of
our Service America segment through an asset sale to employees of Service
America. The disposal was completed in May 2005. Our decision to dispose of
Service America, which provides major-appliance and heating/air conditioning
repair, maintenance and replacement services, was based on declining operating
results and projected operating losses. The acquiring corporation purchased the
substantial majority of Service America's assets in exchange for assuming
substantially all of Service America's liabilities. The loss on disposal of
Service America in 2005 arises from the finalization of asset and liability
values and related tax benefits resulting from the consummation of the sale
transaction. Included in the assets acquired is a receivable from us for
approximately $4.7 million. We paid $1 million of the amount upon closing and
the remainder is due over the following year in 11 equal installments. The
balance due Service America as of December 31, 2005 is $1.3 million. We
recognized a tax benefit of approximately $14.2 million on this disposal in
2004, primarily due to the recognition of non-deductible goodwill impairment
losses in prior years.
During 2004, we increased our accrual for environmental liabilities related
to the disposal of DuBois Chemicals, Inc. ("DuBois") in 1991 by $700,000. The
adjustment is based on an assessment by our environmental attorney and ongoing
discussions with the U.S. Environmental Protection Agency.
The $383,000 and $99,000 reductions to the allowance for uncollectible
notes receivable from Cadre Computer Resources Co. ("Cadre Computer") (sold in
2001) in 2004 and 2003, respectively, are attributable to Cadre Computer's
experiencing better-than-anticipated financial results and to the expiration of
$350,000 of Cadre Computer's line of credit with us.
We sold Patient Care to an investor group that included Schroder Ventures
Life Sciences Group, Oak Investment Partners, Prospect Partners and Salix
Ventures in 2002. We have a $12.5 million senior subordinated note receivable
from Patient Care ("Note") due October 11, 2007, that bears interest at the
annual rate of 7.5% through September 30, 2004, 8.5% from October 1, 2004
through September 30, 2005, and 9.5% thereafter. The Note is presented on a
separate line in the consolidated balance sheet. At the time of sale, $5 million
was placed in escrow and is subject to the collection of Patient Care's
receivables with third-party payers. Of this amount, $2.5 million was
distributed to us in October 2003 and $1.7 million was distributed to us in
2004. No amounts were distributed in 2005. The remaining $769,000 was withheld,
pending settlement of a pre-acquisition receivable. Based on the previous
collection experience of Patient Care, we expect to collect substantially all of
the funds remaining in escrow. We also received a common stock purchase warrant
that permits us to purchase up to 2% of Patient Care. The warrant was recorded
at its estimated fair value on the date acquired and is included in other
investments in the consolidated balance sheet. Patient Care has not provided us
with financial statements since the first quarter of 2004. When, and if, the
current Patient Care financial information is provided, it is
22
Chemed Corporation and Subsidiary Companies
possible that we may have to recognize an impairment loss on our investment in
Patient Care for all or a portion of the carrying value of the warrant. Our
current receivables from Patient Care (total of $3.2 million at December 31,
2005) are currently in litigation in which Patient Care alleges our acquisition
of VITAS violates a non-compete agreement. The sale and related non-compete
agreement specifically exempt our investment in VITAS. Therefore, we believe our
receivable is valid and their allegations have no merit.
Revenues generated by discontinued operations comprise (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------- -------
Service America $10,716 $38,986 $48,095
At December 31, 2005, other current liabilities include accruals of $5.5
million and other liabilities include accruals of $2.1 million for costs related
to discontinued operations. The estimated timing of payments of these
liabilities, relating primarily to sublease and environmental liabilities,
follows (in thousands):
2006 $5,533
2007 638
2008 522
2009 522
2010 337
AFTER 2010 59
------
TOTAL $7,611
======
Our Chairman of the Board, President and Chief Executive Officer and our
former Chief Administrative Officer (currently a director of our company) are
directors of Cadre Computer. In addition, our former Chief Administrative
Officer holds a 51% equity ownership interest in Cadre Computer at December 31,
2005 and is Chairman and Chief Executive Officer of Cadre Computer.
7. BUSINESS COMBINATIONS
During 2005, we completed one business combination within the Roto-Rooter
segment and two within the VITAS segment for an aggregate purchase price of $6.2
million in cash. The acquisitions were completed mainly to increase our market
penetration. The VITAS businesses acquired provide hospice services in the
Pittsburgh, PA and Philadelphia, PA areas and the Roto-Rooter business acquired
provides drain cleaning and plumbing services using the Roto-Rooter name in
Greensboro, NC. The results of operations of these businesses are included in
our results of operations from the date of acquisition. The purchase price
allocations for the 2005 business combinations are preliminary and will be
finalized during 2006.
On February 24, 2004, we completed the acquisition of the 63% of VITAS
common stock we did not previously own for cash consideration of $323.8 million.
The total investment in VITAS, including $3.1 million of acquisition expenses
and our $18.0 million prior investment in VITAS, was $366.2 million. We have
completed the purchase price allocation and the excess of the purchase price
over the fair value of the net assets acquired in purchase business combinations
is classified as goodwill.
23
Chemed Corporation and Subsidiary Companies
A summary of net assets acquired in the VITAS transaction follows (in
thousands):
Cash and cash equivalents $ 24,377
Accounts receivable, net 49,762
Current deferred income taxes 13,449
Prepaid income taxes 13,399
Other current assets 25,299
Property and equipment 19,073
VITAS trade name 51,300
Referral network 20,900
Covenants not to compete 7,600
Goodwill 306,298
Other assets 10,401
Accounts payable (40,554)
Current portion of long-term debt (7,940)
Accrued expenses (43,169)
Long-term debt (59,571)
Deferred income taxes (21,171)
Other liabilities (3,259)
--------
Total net assets 366,194
Less: prior investment in VITAS (18,032)
Less-cash and cash equivalents
acquired (24,377)
--------
Net cash used $323,785
========
We began including the consolidated VITAS results of operations in our
financial statements as of February 24, 2004.
To fund the acquisition and retire VITAS' and our long-term debt, we
completed the following transactions on February 24, 2004:
- We borrowed $75.0 million under a new $135 million revolving
credit/term loan agreement at an initial weighted average
interest rate of 4.5%.
- We sold 4 million shares of our capital stock in a private
placement at a price of $25 per share, before expenses.
- We issued $110 million principal amount of floating rate senior
secured notes due February 2010 at an initial interest rate of
4.88%.
- We issued $150 million principal amount of 8.75% fixed rate
senior notes due February 2011.
- We incurred estimated financing and transaction fees and expenses
of approximately $19.3 million.
During 2004, we completed two business combinations within the Roto-Rooter
segment and two within the VITAS segment for an aggregate purchase price of
$20.9 million in cash. The VITAS businesses acquired provide hospice services in
the Phoenix, AZ and the Atlanta, GA areas, and the Roto-Rooter businesses
acquired provide drain cleaning and plumbing services using the Roto-Rooter name
in Harrisburg, PA and Spokane, WA. The results of operations of all of these
businesses are included in our results of operations from the date of
acquisition.
The purchase price allocation for the Phoenix, AZ hospice business was
completed in the fourth quarter of 2005. In connection with the final purchase
price allocation, an identifiable, definite-lived intangible asset of $2.9
million for the referral network acquired was recorded. The referral network
acquired will be amortized on an accelerated basis over a nine year estimated
useful life. A liability of $2.4 million was recorded based on the most recent
estimate related to the Medicare cap liability for the 2005 measurement period,
as further described in Note 1.
The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. The
purchase price of all businesses (except VITAS) acquired during the year
indicated has been
24
Chemed Corporation and Subsidiary Companies
allocated as follows (in thousands)(2005 is preliminary):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------ ------- ------
Working capital $ -- $ -- $ (114)
Identifiable intangible assets 2,870 -- --
Goodwill 911 20,950 4,246
Other assets and liabilities-net 2,426 (8) (282)
------ ------- ------
Total net assets $6,207 $20,942 $3,850
====== ======= ======
Approximately $20.9 million of the goodwill related to the VITAS
acquisition and all of the goodwill related to business combinations completed
in 2005, 2004 and 2003 is expected to be deductible for income tax purposes.
The unaudited pro forma results of operations, assuming purchase business
combinations completed in 2005 and 2004 were completed on January 1, 2004 are
presented below (in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
2005 2004
-------- --------
Service revenues and sales $927,170 $820,315
Net income 35,854 34,508
Earnings per share 1.40 1.43
Diluted earnings per share 1.36 1.40
8. OTHER INCOME--NET
Other income--net from continuing operations comprises the following (in
thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------ ------ -------
Interest income $2,210 $1,874 $ 2,423
Market value gains on trading investments of
employee benefit trusts 863 1,859 1,580
Loss on disposal of property and equipment (131) (350) (253)
Dividend income -- -- 1,540
Gains on sales and redemption of investments -- -- 5,390
Other - net 192 86 169
------ ------ -------
Total other income - net $3,134 $3,469 $10,849
====== ====== =======
25
Chemed Corporation and Subsidiary Companies
9. INCOME TAXES
The provision for income taxes comprises the following (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
-------- -------- -------
Continuing Operations:
Current
U.S. federal $ 21,155 $ 7,065 $ 3,611
U.S. state and local 1,586 1,214 1,102
Foreign 519 515 253
Deferred
U.S. federal, state and local (3,578) 5,093 1,230
Foreign (104) (91) (16)
-------- -------- -------
Total $ 19,578 $ 13,796 $ 6,180
======== ======== =======
Discontinued Operations:
Current U.S. federal $(14,452) $ (2,373) $ (442)
Current U.S. state and local (1,036) (60) 77
Deferred U.S. federal, state and local 15,519 (12,104) (1,031)
-------- -------- -------
Total $ 31 $(14,537) $(1,396)
======== ======== =======
A summary of the significant temporary differences for continuing
operations that give rise to deferred income tax assets/(liabilities) follows
(in thousands):
December 31,
-------------------
2005 2004
-------- --------
Accrued liabilities $ 34,661 $ 40,683
Allowance for uncollectible accounts receivable 2,952 2,715
State net operating loss carryforwards 1,878 2,671
Deferred financing costs 856 1,225
Other 1,671 1,672
-------- --------
Deferred income tax assets 42,018 48,966
Valuation allowance -- (1,403)
-------- --------
Deferred income tax assets, net of valuation allowance 42,018 47,563
-------- --------
Amortization of intangible assets (26,357) (23,172)
Accelerated tax depreciation (8,425) (6,746)
Current assets (1,832) (1,906)
Other (518) (949)
-------- --------
Deferred income tax liabilities (37,132) (32,773)
-------- --------
Net deferred income tax assets $ 4,886 $ 14,790
======== ========
Included in other assets at December 31, 2005, are deferred income tax
assets of $499,000 (December 31, 2004--$354,000). At December 31, 2005 and 2004,
state net operating loss carryforwards were $39.6 million and $36.1 million,
respectively. These net operating losses will expire, in varying amounts,
between 2009 and 2025. Deferred income tax assets as of December 31, 2004 were
reduced by a valuation allowance comprising 100% of the potential deferred tax
benefits on net operating losses relating to the State of Ohio. As a result of
the enactment of the Ohio CAT, which will preclude us from utilizing State of
Ohio net operating losses, the deferred tax asset and related valuation
allowance for the State of Ohio net operating losses were reversed as of
December 31, 2005. Based on our history of operating earnings, we have
determined that our operating income will, more likely than not, be sufficient
to ensure realization of our deferred income tax assets, net of the valuation
allowance. We believe no net operating losses will be lost due to the continuity
of business requirement.
26
Chemed Corporation and Subsidiary Companies
The difference between the actual income tax provision for continuing
operations and the income tax provision calculated at the statutory U.S. federal
tax rate is explained as follows (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------- ------
Income tax provision calculated using the statutory rate of 35% $20,049 $12,980 $5,756
State and local income taxes, less federal income tax effect 2,139 2,511 717
Tax accrual adjustments (2,403) (2,009) 102
Domestic dividend exclusion -- -- (441)
Other--net (207) 314 46
------- ------- ------
Income tax provision $19,578 $13,796 $6,180
======= ======= ======
Effective tax rate 34.2% 37.2% 37.6%
======= ======= ======
Income tax benefits attributable to the exercise of non-qualified employee
stock options were $10.8 million during the year ended December 31, 2005
(2004--$1.9 million; 2003--$960,000) and were credited directly to additional
paid-in capital.
Income taxes included in the components of other comprehensive
income/(loss) are as follows (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
---- ---- -------
Unrealized holding losses $-- $-- $ (180)
Reclassification adjustment -- -- (2,039)
Summarized below are the total amounts of income taxes paid/(refunded)
during the years ended December 31 (in thousands):
2005 $ 9,923
2004 (13,131)
2003 2,715
Provision has not been made for additional taxes on $35.1 million of
undistributed earnings of our domestic subsidiaries. Should we elect to sell our
interest in all of these businesses rather than to effect a tax-free
liquidation, additional taxes amounting to approximately $12.8 million would be
incurred based on current income tax rates.
10. CASH OVERDRAFTS AND CASH EQUIVALENTS
Included in accounts payable are cash overdrafts of $8.0 million and $1.3
million as of December 31, 2005 and 2004, respectively.
Included in cash and cash equivalents at December 31, 2005, are cash
equivalents in the amount of $53.2 million (2004-$63.0 million). The cash
equivalents at both dates consist of investments in various money market funds
and repurchase agreements yielding interest at a weighted average rate of 4.1%
in 2005 and 2.0% in 2004.
From time to time throughout the year, we invest our excess cash in
repurchase agreements directly with major commercial banks. We do not physically
hold the collateral, but the term of such repurchase agreements is less than 10
days. Investments of significant amounts are spread among a number of banks, and
the amounts invested in each bank are varied constantly.
27
Chemed Corporation and Subsidiary Companies
11. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows (in thousands):
December 31,
-------------------
2005 2004
-------- --------
Land $ 1,713 $ 1,713
Buildings 22,997 20,803
Transportation equipment 12,696 13,114
Machinery and equipment 40,452 36,290
Computer software 19,568 17,050
Furniture and fixtures 26,407 17,201
Projects under development 8,271 3,122
-------- --------
Total properties and equipment 132,104 109,293
Less accumulated depreciation (66,655) (53,497)
-------- --------
Net properties and equipment $ 65,449 $ 55,796
======== ========
12. LONG-TERM DEBT AND LINES OF CREDIT
A summary of our long-term debt follows (in thousands):
December 31,
-------------------
2005 2004
-------- --------
Fixed rate notes due 2011 $150,000 $150,000
Floating rate notes due 2010 -- 110,000
Term loan due 2005 - 2009 84,363 30,487
Other 740 1,208
-------- --------
Subtotal 235,103 291,695
Less current portion (1,045) (12,185)
-------- --------
Long-term debt, less current portion $234,058 $279,510
======== ========
The average interest rate for our long-term debt was 7.5% and 7.0% for the
years ended December 31, 2005 and 2004, respectively.
2005 CREDIT FACILITY
In February 2005, we amended our bank credit facility with JPMorgan Chase
Bank. The Amended and Restated Credit Agreement ("ARCA") provides for an
increase in the term loan ("TL") from $35 million to $85 million at a current
rate of LIBOR plus 2.0% and an increase of the revolving credit facility ("RCF")
from $100 million to $175 million at a current rate of LIBOR plus 2.5%. The TL
has 21 quarterly principal payments of $212,500, beginning on June 30, 2005,
with the balance due August 24, 2010. The RCF has a termination date of February
24, 2010. Commitment fees include an annual fee of $100,000 plus a fee of .375%
per annum of the unused RCF, payable quarterly.
Loans under the ARCA are collateralized by substantially all of our assets.
Should we generate excess cash flow ("ECF") during a year, as defined in ARCA,
an additional principal payment must be made. Generally, ECF represents the
excess of Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") less net working capital requirements, less income taxes paid, less
capital expenditures, less interest expense, less principal payments on the TL,
less cash used for acquisitions and less cash dividends paid. Based on our
results as of and for the year ended December 31, 2005 and 2004, no additional
term loan payments have been required.
Also in February 2005, we used proceeds from borrowings under the ARCA ($85
million TL and $3.5 million RCF) plus $54.4 million of our cash balances to
retire our previous term loan ($30.5 million), to redeem the entire $110 million
aggregate principal amount of our Floating Rate Notes due 2010, to pay $1.1
million prepayment penalty for the Floating Rate Notes and to pay $1.4 million
of fees for the ARCA.
28
Chemed Corporation and Subsidiary Companies
2004 CREDIT AGREEMENTS
On February 24, 2004, in conjunction with our acquisition of the VITAS
shares not previously owned, we retired our senior notes due 2005 through 2009
and canceled our revolving credit agreement with Bank One, N.A. ("Bank One"). To
fund this acquisition and retire the Senior Notes, we issued 4 million shares of
capital stock in a private placement and borrowed $335 million as follows:
- $150 million from the issuance of privately placed 8.75% senior
notes ("Fixed Rate Notes") due 2011. Semiannual interest payments
began in August 2004 and payment of unpaid principal and interest
will be due February 2011. The Fixed Rate Notes are unsecured and
are effectively subordinated to our secured indebtedness. In the
second quarter of 2004, we filed a registration statement
covering up to $150 million principal amount of new 8.75% senior
notes due 2011 ("New Fixed Rate Notes"). Except for the lack of
transfer restrictions, the terms of the New Fixed Rate Notes are
substantially identical to those of the Fixed Rate Notes.
Pursuant to our exchange offer, all holders of the Fixed Rate
Notes exchanged their notes for like principal amounts of the New
Fixed Rate Notes.
Prior to February 24, 2007, up to a maximum of 35% of the
principal of the New Fixed Rate Notes may be redeemed under
specified circumstances at a price of 108.75% plus accrued
interest. After February 24, 2007, the New Fixed Rate Notes may
be redeemed, in whole or in part, at redemption prices ranging
from 104.375% (beginning on February 24, 2007) to 100% (beginning
on February 24, 2010) plus accrued interest.
- $110 million from the issuance of privately placed floating rate
senior secured notes ("Floating Rate Notes") due 2010 which were
redeemed in 2005.
- $75 million drawn down under a $135 million secured revolving
credit/term loan facility ("2004 Credit Facility") with JPMorgan
Chase Bank. The facility comprised a $35 million term loan and
$100 million revolving credit facility, including up to $40
million in letters of credit. This facility was replaced in 2005
with the ARCA.
OTHER
Other long-term debt has arisen from loans in connection with acquisitions
of various businesses and properties. Interest rates range from 5% to 8%, and
the obligations are due on various dates through December 2009.
The following is a schedule by year of required long-term debt payments as
of December 31, 2005 (in thousands):
2006 $ 1,045
2007 1,058
2008 1,009
2009 1,016
2010 862
AFTER 2010 230,113
--------
TOTAL LONG-TERM DEBT $235,103
========
Summarized below are the total amounts of interest paid during the years
ended December 31 (in thousands):
2005 $20,368
2004 17,255
2003 3,197
During 2005 and 2004, interest totaling $380,000 and $72,000, respectively,
was capitalized. No interest was capitalized during the year ended December 31,
2003.
DEBT COVENANTS
Collectively, the ARCA and the New Fixed Rate Notes provide for affirmative
and restrictive covenants including, without limitation, requirements or
restrictions (subject to exceptions) related to the following:
- use of proceeds of loans,
- restricted payments, including payments of dividends and retirement of
stock (permitting $.24 per share dividends so long as the aggregate
amount of dividends in any fiscal year does not exceed $7.0 million),
with exceptions for existing employee benefit plans and stock option
plans,
29
Chemed Corporation and Subsidiary Companies
- mergers and dissolutions,
- sales of assets,
- investments and acquisitions,
- liens,
- transactions with affiliates,
- hedging and other financial contracts,
- restrictions on subsidiaries,
- contingent obligations,
- operating leases,
- guarantors,
- collateral,
- sale and leaseback transactions,
- prepayments of indebtedness,
- maximum annual limit for acquisitions of $80 million (no single
acquisition to exceed $50 million),
- maximum annual expenditures for operating leases of $30 million, and
- maximum annual capital expenditures of $30 million.
In addition, the credit agreements provide that the Company will be
required to meet minimum net worth requirements, maximum leverage requirements,
maximum senior leverage requirements and minimum fixed charge requirements, to
be tested quarterly. The ARCA also contains cross-default provisions. We are in
compliance with all debt covenants as of December 31, 2005. As of December 31,
2005, we have approximately $147 million of unused lines of credit available and
eligible to be drawn down under the RCF.
In connection with the February 2005 transaction, we recorded a loss on the
extinguishment of debt of $4.0 million that comprised a prepayment penalty of
$1.1 million on the Floating Rate Notes and the write-off of $2.9 million of
unamortized debt issuance costs for the Floating Rate Notes and the previous
term loan. In connection with the February 2004 transaction, we incurred a
prepayment penalty of $3.3 million on the senior notes.
13. OTHER LIABILITIES
At December 31, 2005 and 2004, other current liabilities comprised the
following (in thousands):
December 31,
-----------------
2005 2004
------- -------
Accrued incentive compensation $ 9,719 $ 8,115
Accrued legal settlements 23,108 3,989
Accrued divestiture expenses 3,895 4,232
Accrued savings and retirement
contribution 3,243 2,639
Other 21,497 23,802
------- -------
Total other current liabilities $61,462 $42,777
======= =======
At December 31, 2005 and 2004, the accrual for our estimated liability for
potential environmental cleanup and related costs arising from the sale of
DuBois amounted to $3.0 million. Of the 2005 balance, $1.1 million is included
in other liabilities and $1.9 million is included in other current liabilities.
We are contingently liable for additional DuBois-related environmental cleanup
and related costs up to a maximum of $16 million. On the basis of a continuing
evaluation of the potential liability, we believe it is not probable this
additional liability will be paid. Accordingly, no provision for this contingent
liability has been recorded. The potential liability is not insured, and the
recorded liability does not assume the recovery of insurance proceeds. Also, the
environmental liability has not been discounted because it is not possible to
reliably project the timing of payments. We believe that any adjustments to our
recorded liability will not materially adversely affect our financial position
or results of operations.
At December 31, 2005, our accrual for losses on subleases of office space
formerly occupied by DuBois amounted to $388,000 (2004--$1.6 million), all of
which is included in other current liabilities. The accrual is based on the
expectation that space currently unoccupied will not be sublet during the
remainder of the lease term, which ends April 2006.
30
Chemed Corporation and Subsidiary Companies
14. PENSION AND RETIREMENT PLANS
Retirement obligations under various plans cover substantially all
full-time employees who meet age and/or service eligibility requirements. The
major plans providing retirement benefits to our employees are defined
contribution plans.
We established two employee stock ownership plans ("ESOPs") that purchased
a total of $56.0 million of our capital stock. In December 1997, we restructured
the ESOP loans and internally financed $16.2 million of the $21.8 million ESOP
loans outstanding at December 31, 1997. Substantially all eligible employees of
the Roto-Rooter segment and the Corporate Office participate in the ESOPs.
Eligible employees are also covered by other defined contribution plans.
Expenses charged to continuing operations for our retirement and
profit-sharing plans, ESOPs, excess benefit plans and other similar plans
comprise the following (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------ ------
Compensation cost of ESOPs $ 1,324 $1,811 $1,138
Pension, profit-sharing
and other similar plans 9,004 5,639 3,674
------- ------ ------
Total $10,328 $7,450 $4,812
======= ====== ======
Dividends on ESOP shares
used for debt service $ 122 $ 129 $ 138
======= ====== ======
At December 31, 2005, there were 502,036 allocated shares (2004--487,434
shares) and no unallocated shares (2004--37,216 shares) in the ESOP trusts. As
all shares have been allocated as of December 31, 2005, the ESOP trusts will be
terminated and participant balances transferred to the retirement plan in the
first quarter of 2006.
We have excess benefit plans for key employees whose participation in the
qualified plans is limited by U.S. Employee Retirement Income Security Act
requirements. Benefits are determined based on theoretical participation in the
qualified ESOPs. Prior to September 1, 1998, the value of these benefits was
invested in shares of our stock and in mutual funds, which were held by grantor
trusts. Currently, benefits are only invested in mutual funds, and participants
are not permitted to diversify accumulated benefits in shares of our stock.
Trust assets invested in shares of our stock are included in treasury stock, and
the corresponding liability is included in a separate component of shareholders'
equity. At December 31, 2005, these trusts held 133,870 shares or $2.4 million
of our stock (December 31, 2004--136,626 shares or $2.4 million). The
diversified assets of our excess benefit and deferred compensation plans, all of
which are invested in either company-owned life insurance or various mutual
funds, totaled $21.1 million at December 31, 2005 (December 31, 2004--$18.3
million).
15. LEASE ARRANGEMENTS
We have operating leases that cover our corporate office headquarters,
various warehouse and office facilities, office equipment and transportation
equipment. The remaining terms of these leases range from one year to 14 years,
and in most cases, we expect that these leases will be renewed or replaced by
other leases in the normal course of business. We have no significant capital
leases as of December 31, 2005 or 2004.
The following is a summary of future minimum rental payments and sublease
rentals to be received under operating leases that have initial or remaining
noncancelable terms in excess of one year at December 31, 2005 (in thousands):
2006 $17,360
2007 13,514
2008 10,426
2009 8,978
2010 4,702
AFTER 2010 9,447
-------
TOTAL MINIMUM RENTAL PAYMENTS 64,427
LESS: MINIMUM SUBLEASE RENTALS (351)
-------
NET MINIMUM RENTAL PAYMENTS $64,076
=======
31
Chemed Corporation and Subsidiary Companies
Total rental expense incurred under operating leases for continuing
operations follows (in thousands):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------- -------
Total rental payments $17,027 $13,569 $ 5,776
Less sublease rentals (1,659) (1,640) (1,603)
------- ------- -------
Net rental expense $15,368 $11,929 $ 4,173
======= ======= =======
16. FINANCIAL INSTRUMENTS
The following methods and assumptions are used in estimating the fair value
of each class of our financial instruments:
- For cash and cash equivalents, accounts receivable and accounts
payable, the carrying amount is a reasonable estimate of fair value
because of the liquidity and short-term nature of these instruments.
- The carrying values of our investment in the Patient Care warrant and
the Note receivable due from Patient Care are considered to be the
best indicator of fair value available at the present time. Patient
Care is privately held and we have been able to obtain only minimal
current financial data since February 2004. In addition, we are
currently in litigation with Patient Care over the collection of other
amounts due us. Patient Care is current on its payments of interest on
its note payable to us. Nonetheless, when additional information
becomes available such data could indicate the fair value of these
investments is less than their respective carrying values. It is also
possible that such decline could be considered other than temporary.
In those circumstances, a write down to fair value would be required.
- For long-term debt, we calculated the fair value based either on
market quotations received from financial institutions or discounted
cash flow analysis.
The estimated fair values of our financial instruments are as follows (in
thousands):
December 31,
-----------------------------------------
2005 2004
------------------- -------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- -------- -------- --------
Other investments--
Investment in Patient Care warrant $ 1,445 $ 1,445 $ 1,445 $ 1,445
Note receivable 12,500 12,500 12,500 12,500
-------- -------- -------- --------
Total other investments $ 13,945 $ 13,945 $ 13,945 $ 13,945
======== ======== ======== ========
Long-term debt $235,103 $244,091 $291,695 $306,328
The chart below summarizes information with respect to available-for-sale
securities sold during the year ended December 31, 2003 (in thousands):
Proceeds from redemption and sales $31,763
Gross realized gains 7,157
Gross realized losses 1,767
There were no available for sale securities sold during the years ended
December 31, 2005 or 2004.
32
Chemed Corporation and Subsidiary Companies
17. EARNINGS/(LOSS) PER SHARE
The computation of earnings/(loss) per share follows:
Income from Continuing Operations Net Income/(Loss)
--------------------------------- ----------------------------
Income Income
Income Shares Per Share Income Shares Per Share
------- ------ --------- ------- ------ ---------
2005
Earnings $37,705 25,552 $1.48 $35,817 25,552 $ 1.40
===== ======
Dilutive stock options -- 666 -- 666
Nonvested stock awards -- 81 -- 81
------- ------ ------- ------
Diluted earnings $37,705 26,299 $1.43 $35,817 26,299 $ 1.36
======= ====== ===== ======= ====== ======
2004
Earnings $19,186 24,120 $0.80 $27,512 24,120 $ 1.14
===== ======
Dilutive stock options -- 502 -- 502
Nonvested stock awards -- 14 -- 14
------- ------ ------- ------
Diluted earnings $19,186 24,636 $0.78 $27,512 24,636 $ 1.12
======= ====== ===== ======= ====== ======
2003
Earnings/(loss) $11,188 19,848 $0.56 $(3,435) 19,848 $(0.17)
===== ======
Dilutive stock options -- 60 -- 60
------- ------ ------- ------
Diluted earnings/(loss) $11,188 19,908 $0.56 $(3,435) 19,908 $(0.17)
======= ====== ===== ======= ====== ======
The impact of the CJSDs was excluded from the above computations in 2004
and 2003 because it was antidilutive to earnings per share for all periods. All
of the remaining CJSDs were either converted or retired as of May 18, 2004. The
debentures were convertible into an average of 274,000 shares for the year ended
December 31, 2004 (2003--766,000).
During 2003, certain stock options, whose exercise prices were greater than
the average market price during most of the year, were excluded from the
computation of diluted earnings per share. Those options comprise the following:
Exercise Number of
Grant Date Price Shares
- ---------- -------- ---------
May 2002 $18.45 513,600
March 1998 19.57 261,400
May 1996 19.38 235,250
April 1998 20.27 24,000
---------
Total 1,034,250
=========
During 2005 and 2004, there were no options outstanding whose exercise
price exceeded the average market price for the year.
18. STOCK INCENTIVE PLANS
We have eight Stock Incentive Plans under which 7,700,000 shares of our
stock are issued to key employees pursuant to the grant of stock awards and/or
options to purchase such shares. All options granted under these plans provide
for a purchase price equal to the market value of the stock at the date of
grant. The latest plan, covering a total of 1,400,000 shares, was adopted in May
2004.
The stock option plans are not qualified, restricted or incentive stock
option plans under the Internal Revenue Code. Options granted under these plans
prior to 2004 generally become exercisable in four annual installments
commencing six months after the date of grant. Options granted in 2004 generally
become exercisable in full six months after the date of grant. As discussed in
Note 1, options granted in 2005 became immediately exercisable along with any
other unvested options. Under one plan, originally adopted in 1999, up to
500,000 shares may be issued to employees who are not our officers or directors.
33
Chemed Corporation and Subsidiary Companies
Data relating to our stock issued to employees is as follows:
2005 2004 2003
--------------------- -------------------- --------------------
NUMBER WEIGHTED Number Weighted Number Weighted
OF AVERAGE of Average of Average
SHARES PRICE Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Stock options:
Outstanding at January 1 2,662,804 $19.34 2,345,730 $17.96 2,487,200 $17.75
Granted 346,600 38.11 803,068 22.32 482,200 17.93
Exercised (1,243,571) 18.67 (463,994) 17.63 (490,368) 16.55
Forfeited (24,000) 17.97 (22,000) 17.76 (600) 14.28
Expired -- -- -- -- (132,702) 19.12
---------- --------- ---------
Outstanding at December 31 1,741,833 23.57 2,662,804 19.34 2,345,730 17.96
========== ========= =========
Exercisable at December 31 1,741,833 23.57 2,295,322 19.53 1,720,374 17.90
========== ========= =========
Stock awards issued 147,619 43.27 296,712 26.38 9,212 17.36
========== ========= =========
Options outstanding at December 31, 2005, comprise the following:
Range of Exercise Prices
-----------------------------------
$16.10 to $21.78 $25.39 to $41.55
---------------- ----------------
Options outstanding 1,331,233 410,600
Average exercise price of options outstanding $ 19.63 $ 36.32
Average contractual life 6.2 yrs. 9.1 yrs.
Options exercisable 1,331,233 410,600
Average exercise price of options exercisable $ 19.63 $ 36.32
There were 138,623 shares available for granting of stock options and
awards at December 31, 2005.
In March 2005, the Board of Directors approved immediate vesting of all
unvested stock options to avoid recognizing approximately $951,000 of pretax
expense that would have been charged to income under SFAS No. 123R. The $215,000
pretax charge for accelerating the vesting of these options is included in
operating income for the year ended December 31, 2005.
Total compensation cost recognized for stock awards for continuing
operations was $5.7 million in 2005 (2004--$6.0 million; 2003--$147,000). The
shares of stock were issued to key employees and directors at no cost and
generally are restricted as to the transfer of ownership.
During 1999, we purchased 203,000 shares of our stock in open-market
transactions and sold these shares to certain employees at fair market value in
exchange for interest-bearing recourse notes secured by the shares. Interest
rates on these notes are set at the beginning of each year based on rates used
by the Internal Revenue Service for demand loans (2.81% for 2005; 1.70% for
2004; and 1.80% for 2003).
The notes receivable have no maturity date but become immediately due and
payable at our option upon the occurrence of any of the following: (a) we, as
noteholder, deem ourselves inadequately secured, (b) the death, insolvency,
assignment for the benefit of creditors, or the commencement of any bankruptcy
or insolvency proceedings of, or against, the employee, (c) any attempted
transfer by the employee of the shares of stock purchased by the employee with
the notes, or (d) termination of employment. The terms of the notes receivable
place restrictions upon the sale of the underlying shares of stock, but the
shares of stock are not physically restricted from sale. Should we demand
payment of the notes and the value of the underlying shares is insufficient to
satisfy the remaining liability, the employee would be required to pay us the
difference in cash.
34
Chemed Corporation and Subsidiary Companies
Activity in the notes receivable accounts, which are presented as a
reduction of stockholders' equity in the consolidated balance sheet, is
summarized below (in thousands):
Balance at December 31, 2002 $ 952
Accrual of interest 16
Cash payments (11)
Value of shares surrendered (23)
-----
Balance at December 31, 2003 934
Accrual of interest 10
Cash payments (391)
Value of shares surrendered (9)
-----
BALANCE AT DECEMBER 31, 2004 544
ACCRUAL OF INTEREST 15
VALUE OF SHARES SURRENDERED (10)
-----
BALANCE AT DECEMBER 31, 2005 $ 549
=====
Shares surrendered in payment of notes receivable are valued at their fair
market value on the date of surrender.
19. EXECUTIVE LONG-TERM INCENTIVE PLAN
In May 2002, our shareholders approved the adoption of the LTIP covering
our officers and key employees. The LTIP is administered by the
Compensation/Incentive Committee ("CIC") of the Board of Directors and was
adopted to replace the restricted stock program, which was terminated at the end
of 2001. Based on guidelines established by the CIC, the LTIP covers the
granting of cash and stock awards based on two independent elements: 1) a
totally discretionary award based on our operating performance covering a period
greater than one year and less than four years and 2) an award based on the
attainment of a target stock price of $25 per share during 10 consecutive
trading days prior to the fourth anniversary of the plan.
During January 2004, the price of our stock exceeded $25 per share for more
than 10 consecutive trading days. In February 2004, the CIC approved a payout
under the LTIP in the aggregate amount of $7.8 million ($2.8 million in cash and
169,266 shares of capital stock). The pretax expense of this award, including
payroll taxes and benefit costs, totaled $9.1 million. Of this amount, $8.8
million relates to continuing operations and is included in other expenses for
2004 ($5.4 million aftertax).
During June 2004, the CIC approved guidelines covering the establishment of
a pool of 250,000 capital shares ("2004 LTIP Pool") to be distributed to
eligible members of management upon attainment of the following hurdles during
the period January 1, 2004 through December 31, 2007:
- 88,000 shares will be awarded if our cumulative pro forma adjusted
EBITDA (including the results of VITAS beginning January 1, 2004)
reaches $365 million within the four-year period.
- 88,000 shares will be awarded if our stock price reaches the following
hurdles during any 30 trading days out of any 60-trading-day period
during the four-year period:
- 22,000 shares for a stock price of $35.00.
- an additional 33,000 shares for a stock price of $38.75.
- an additional 33,000 shares for a stock price of $42.50.
- 44,000 shares represent a retention element, subject to a four-year,
time-based vesting.
- 30,000 shares may be awarded at the discretion of the CIC.
On June 22, 2004, the CIC awarded 44,000 restricted shares of stock to key
employees under the retention component of the 2004 LTIP Pool. These shares vest
on December 31, 2007, for all participants still employed by us. The total cost
of these awards is $1.1 million, based on the fair value of the stock on June
22, 2004. Of this amount, $1.0 million relates to continuing operations and is
being amortized on a straight-line basis over the 42-month period ending
December 31, 2007.
During the first quarter of 2005, the price of our stock exceeded $35 per
share for 30 trading days, fulfilling one of the performance targets set forth
in the LTIP. On March 11, 2005, the CIC approved a payout of 25,000 shares of
capital stock under the LTIP. The pretax expense of this award from continuing
operations, including payroll taxes and benefit costs, was $1.1 million
($695,000 aftertax).
During the second quarter of 2005, the price of our stock exceeded $38.75
per share for 30 trading days, fulfilling one of the performance targets set
forth in the LTIP. On July 11, 2005, the CIC approved a payout of 37,500 shares
of
35
Chemed Corporation and Subsidiary Companies
capital stock under the LTIP. The pretax expense of this award from continuing
operations, including payroll taxes and benefit costs, was $1.8 million ($1.2
million aftertax).
During the fourth quarter of 2005, the price of our stock exceeded $42.50
per share for 30 trading days, fulfilling one of the performance requirements
set forth in the LTIP. On December 2, 2005, the CIC approved a payout of 43,500
shares of capital stock under the LTIP. The pretax expense of this award from
continuing operations, including payroll taxes and benefit costs, was $2.5
million ($1.6 million aftertax).
As of December 31, 2005, no accrual for the cost of possible awards under
the remaining components of the 2004 LTIP Pool was made since it was not
probable at that time any of the awards would be earned and paid. As of December
31, 2005, a total of 100,000 shares may be earned under the EBITDA and
contingent hurdles of the 2004 LTIP pool.
20. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
Effective February 1, 2000, we completed an Exchange Offer whereby
stockholders exchanged 1,151,006 shares of capital stock for shares of Preferred
Securities of the wholly owned Chemed Capital Trust ("CCT") on a one-for-one
basis.
On April 7, 2004, we announced the call of all Preferred Securities
outstanding as of May 18, 2004, at face value ($27.00 per security) plus accrued
dividends ($.35 per security). As a result, during the second quarter of 2004,
417,256 Preferred Securities were redeemed for 609,194 shares of stock and
101,282 Preferred Securities were redeemed for $2.7 million in cash. As a
result, at December 31, 2004, there are no CJSDs or Preferred Securities
outstanding.
The number of Preferred Securities purchased and converted and shares of
capital stock issued upon conversion are summarized below:
For the Years
Ended
December 31,
---------------
2004 2003
------- -----
Preferred Securities purchased 101,282 --
Preferred Securities converted 422,002 2,229
Shares of Capital Stock issued upon
conversion of Preferred Securities 615,958 3,252
21. LOANS RECEIVABLE FROM INDEPENDENT CONTRACTORS
At December 31, 2005, we had contractual arrangements with 59 independent
contractors to provide plumbing repair and drain cleaning services under
sublicensing agreements using the Roto-Rooter name in lesser-populated areas of
the United States and Canada. The arrangements give the independent contractors
the right to conduct a plumbing and drain cleaning business using the
Roto-Rooter name in a specified territory in exchange for a royalty based on a
percentage of cash labor sales, generally approximately 40%. We also pay for
yellow pages advertising in these areas, provide certain capital equipment and
provide operating manuals to be used as guidelines for operating a plumbing and
drain cleaning business. The contracts are generally cancelable upon 90 days'
written notice (without cause) or upon a few days' notice (with cause). The
independent contractors are responsible for running the businesses as they
believe best.
Our maximum exposure to loss from arrangements with our independent
contractors at December 31, 2005, is approximately $2.6 million ($2.8 million at
December 31, 2004). The exposure to loss is mainly the result of loans given to
the independent contractors. In most cases, these loans are partially secured by
equipment owned by the independent contractor. The interest rates on the loans
range from zero to 8% per annum, and the remaining terms of the loans range from
2.5 months to 5.5 years at December 31, 2005. During 2005, we recorded revenues
of $18.1 million (2004--$16.4 million; 2003--$14.1 million) and pretax profits
of $6.0 million (2004--$5.1 million; 2003--$4.4 million) from all of our
independent contractors.
22. LITIGATION
We are 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. We contest
these allegations and believe 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, we
reached a resolution of this matter
36
Chemed Corporation and Subsidiary Companies
with the Plaintiff. This proposed settlement has been preliminarily approved by
the court. We expect the parties to request final approval during 2006. We
accrued $3.1 million in 2004 as the anticipated cost of settling this
litigation.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It 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. This case alleges failure to pay overtime wages for hours
worked "off the clock" on administrative tasks, including voicemail retrieval,
time entry, travel to and from work, and pager response. This case also alleges
VITAS failed to provide meal and break periods to a purported class of
California nurses, home health aides and licensed clinical social workers. The
case also seeks payment of penalties, interest, and Plaintiffs' attorney fees.
VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion. We
have reached an agreement, which is subject to court approval, with the
Plaintiff class in order to avoid the uncertainty of litigation and the
diversion of resources and personnel resulting from the litigation. In
connection with our acquisition of VITAS in February 2004, we recorded a
liability of $2.3 million on VITAS' opening balance sheet for this case. At that
time, this represented our best estimate of our exposure in the matter. As a
result of the tentative resolution, we recorded a pretax charge of $17.4 million
($10.8 million aftertax), representing the portion of this settlement not
accounted for on Vitas' opening balance sheet. These amounts are inclusive of
Plaintiffs' class attorneys' fees and the costs of settlement administration.
In the normal course of business, we are a party to various claims and
legal proceedings. We record a reserve for these matters when an adverse outcome
is probable and the amount of the potential liability is reasonably estimable.
23. OIG INVESTIGATION
On April 7, 2005, we 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 covering
admissions, certifications, recertifications and discharges. During the third
quarter of 2005, the OIG requested additional information from us. The U.S.
Attorney General has since provided us 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 our defenses to the complaint
allegations. The U.S. Attorney has not decided whether to intervene in the qui
tam action. We have incurred pretax expense related to complying with OIG
requests of $637,000 for the year ended December 31, 2005.
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 the
investigation may have on the business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect us through defense costs, diversion of our time and related
publicity.
24. RELATED PARTY TRANSACTIONS
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of said term. Under the Agreement, VITAS made purchases
of $16.2 million and $344,000 from OCR during 2005 and 2004, respectively.
Mr. E. L. Hutton is nonexecutive Chairman of the Board and a director of
Chemed and of OCR. Mr. Joel F. Gemunder, President and Chief Executive Officer
of OCR, Mr. Charles H. Erhart and Ms. Sandra E. Laney are directors of both
Chemed and OCR. Mr. Kevin J. McNamara, our President, Chief Executive Officer
and director, is a director emeritus of OCR. Nonetheless, we believe that the
terms of the Agreement are no less favorable to VITAS than we could negotiate
with an unrelated party.
25. CAPITAL STOCK SPLIT
On March 11, 2005, the Board of Directors approved a 2-for-1 stock split in
the form of a 100% stock dividend to shareholders of record at the close of
business on April 22, 2005. The stock split was paid May 11, 2005. Under
Delaware law, the par value of the stock remained $1 per share. Prior period
share and per share data has been restated to retroactively reflect the impact
of the stock split. The shares outstanding and in treasury reflected on the
balance sheet prior to May 11, 2005 have not been restated.
37
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
FOR THE YEAR ENDED DECEMBER 31, 2005 QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------ -------- -------- -------- -------- --------
CONTINUING OPERATIONS
TOTAL SERVICE REVENUES AND SALES ........ $218,637 $226,309 $233,328 $248,203 $926,477
======== ======== ======== ======== ========
GROSS PROFIT ............................ $ 65,685 $ 65,189 $ 68,099 $ 75,663 $274,636
======== ======== ======== ======== ========
INCOME FROM OPERATIONS .................. $ 22,654 $ 22,062 $ 24,472 $ 10,196 $ 79,384
INTEREST EXPENSE ........................ (5,835) (5,039) (5,147) (5,243) (21,264)
LOSS ON EXTINGUISHMENT OF DEBT .......... (3,971) -- -- -- (3,971)
OTHER INCOME--NET ....................... 727 600 1,317 490 3,134
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES ........... 13,575 17,623 20,642 5,443 57,283
INCOME TAXES ............................ (5,670) (6,512) (6,010) (1,386) (19,578)
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS (A) ... 7,905 11,111 14,632 4,057 37,705
DISCONTINUED OPERATIONS .................... 211 (2,226) -- 127 (1,888)
-------- -------- -------- -------- --------
NET INCOME (A) ............................. $ 8,116 $ 8,885 $ 14,632 $ 4,184 $ 35,817
======== ======== ======== ======== ========
EARNINGS PER SHARE (A)
INCOME FROM CONTINUING OPERATIONS ....... $ 0.31 $ 0.44 $ 0.57 $ 0.16 $ 1.48
======== ======== ======== ======== ========
NET INCOME .............................. $ 0.32 $ 0.35 $ 0.57 $ 0.16 $ 1.40
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE (A)
INCOME FROM CONTINUING OPERATIONS ....... $ 0.31 $ 0.42 $ 0.55 $ 0.15 $ 1.43
======== ======== ======== ======== ========
NET INCOME .............................. $ 0.31 $ 0.34 $ 0.55 $ 0.16 $ 1.36
======== ======== ======== ======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING
EARNINGS PER SHARE ...................... 25,152 25,489 25,719 25,858 25,552
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE .............. 25,910 26,214 26,401 26,590 26,299
======== ======== ======== ======== ========
- ----------
(A) THE FOLLOWING AMOUNTS ARE INCLUDED IN INCOME FROM CONTINUING OPERATIONS
DURING THE RESPECTIVE QUARTER (IN THOUSANDS):
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
PRETAX COST/(BENEFIT):
LONG-TERM INCENTIVE PLAN PAYOUT $ 1,109 $1,837 $ -- $ 2,531 $ 5,477
PROPOSED SETTLEMENT OF LAWSUIT -- -- -- 17,350 17,350
LEGAL EXPENSES INCURRED IN CONNECTION WITH THE OFFICE
OF INSPECTOR GENERAL INVESTIGATION -- 254 310 73 637
ADJUSTMENT TO CASUALTY INSURANCE RELATED TO PRIOR PERIODS
EXPERIENCE (1,663) -- -- -- (1,663)
PREPAYMENT PENALTY AND WRITE-OFF OF DEBT ISSUANCE COSTS
RELATED TO EARLY EXTINGUISHMENT AND REFINANCING OF DEBT 3,971 -- -- -- 3,971
ADJUSTMENT OF TRANSACTION-RELATED EXPENSES
OF THE VITAS ACQUISITION -- (671) (130) (160) (961)
COST OF ACCELERATING VESTING OF STOCK OPTIONS 215 -- -- -- 215
------- ------ ------- ------- -------
TOTAL $ 3,632 $1,420 $ 180 $19,794 $25,026
======= ====== ======= ======= =======
AFTERTAX COST/(BENEFIT):
LONG-TERM INCENTIVE PLAN PAYOUT $ 695 $1,152 $ -- $ 1,587 $ 3,434
PROPOSED SETTLEMENT OF LAWSUIT -- -- -- 10,757 10,757
LEGAL EXPENSES INCURRED IN CONNECTION WITH THE OFFICE
OF INSPECTOR GENERAL INVESTIGATION -- 160 192 45 397
ADJUSTMENT TO CASUALTY INSURANCE RELATED TO PRIOR PERIODS
EXPERIENCE (1,014) -- -- -- (1,014)
PREPAYMENT PENALTY AND WRITE-OFF OF DEBT ISSUANCE COSTS
RELATED TO EARLY EXTINGUISHMENT AND REFINANCING OF DEBT 2,523 -- -- -- 2,523
TAX ADJUSTMENTS AND SETTLEMENTS FROM PRIOR YEAR RETURNS -- -- (1,787) (174) (1,961)
ADJUSTMENT OF TRANSACTION-RELATED EXPENSES
OF THE VITAS ACQUISITION -- (671) (130) (160) (961)
COST OF ACCELERATING VESTING OF STOCK OPTIONS 137 -- -- -- 137
------- ------ ------- ------- -------
TOTAL $ 2,341 $ 641 $(1,725) $12,055 $13,312
======= ====== ======= ======= =======
38
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
(in thousands, except per share data)
First Second Third Fourth Total
For the Year Ended December 31, 2004 Quarter Quarter Quarter Quarter Year
- ------------------------------------ -------- -------- -------- -------- --------
Continuing Operations
Total service revenues and sales ............... $120,340 $199,135 $201,885 $213,981 $735,341
======== ======== ======== ======== ========
Gross profit ................................... $ 41,491 $ 59,065 $ 59,755 $ 67,952 $228,263
======== ======== ======== ======== ========
Income from operations ......................... $ 974 $ 20,763 $ 20,289 $ 16,080 $ 58,106
Interest expense ............................... (2,900) (6,204) (6,083) (5,971) (21,158)
Loss on extinguishment of debt ................. (3,330) -- -- -- (3,330)
Other income--net .............................. 1,479 149 336 1,505 3,469
-------- -------- -------- -------- --------
Income/(loss) before income taxes ........... (3,777) 14,708 14,542 11,614 37,087
Income taxes ................................... 626 (6,381) (3,805) (4,236) (13,796)
Equity in loss of affiliate .................... (4,105) -- -- -- (4,105)
-------- -------- -------- -------- --------
Income/(loss) from continuing operations (a) ... (7,256) 8,327 10,737 7,378 19,186
Discontinued Operations ........................... 146 (9) (125) 8,314 8,326
-------- -------- -------- -------- --------
Net Income/(Loss) (a) ............................. $ (7,110) $ 8,318 $ 10,612 $ 15,692 $ 27,512
======== ======== ======== ======== ========
Earnings/(Loss) Per Share (a)
Income/(loss) from continuing operations ....... $ (0.33) $ 0.34 $ 0.43 $ 0.30 $ 0.80
======== ======== ======== ======== ========
Net income/(loss) .............................. $ (0.33) $ 0.34 $ 0.43 $ 0.63 $ 1.14
======== ======== ======== ======== ========
Diluted Earnings/(Loss) Per Share (a)
Income/(loss) from continuing operations ....... $ (0.33) $ 0.33 $ 0.42 $ 0.29 $ 0.78
======== ======== ======== ======== ========
Net income/(loss) .............................. $ (0.33) $ 0.33 $ 0.42 $ 0.61 $ 1.12
======== ======== ======== ======== ========
Average number of shares outstanding
Earnings/(loss) per share ...................... 21,824 24,650 24,940 24,994 24,120
======== ======== ======== ======== ========
Diluted earnings/(loss) per share .............. 21,824 25,354 25,402 25,672 24,636
======== ======== ======== ======== ========
- ----------
(a) The following amounts are included in income/(loss) from continuing
operations during the respective quarter (in thousands):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Pretax cost/(benefit):
Long-term incentive plan payout $ 8,783 $ -- $ -- $ -- $ 8,783
Proposed settlement of a lawsuit -- -- -- 3,135 3,135
Prepayment penalty and write-off of debt issuance costs
related to early extinguishment and refinancing of debt 3,330 -- -- -- 3,330
Expenses related to debt registration -- -- -- 1,191 1,191
Adjustment of transaction-related expenses
of the VITAS acquisition -- (1,368) (219) 2,029 442
------- ------- ------- ------ --------
Total $12,113 $(1,368) $ (219) $6,355 $ 16,881
======= ======= ======= ====== ========
Aftertax cost/(benefit):
Long-term incentive plan payout $ 5,723 $ -- $ (286) $ -- $ 5,437
Proposed settlement of a lawsuit -- -- 1,897 1,897
Prepayment penalty and write-off of debt issuance costs
related to early extinguishment and refinancing of debt 2,164 -- (134) -- 2,030
Expenses related to debt registration -- -- -- 727 727
Tax adjustments and settlements from prior year returns -- -- (1,020) (600) (1,620)
Equity in loss of VITAS prior to the acquistion 4,105 -- -- -- 4,105
Adjustment of transaction-related expenses
of the VITAS acquisition -- (821) (131) 1,174 222
------- ------- ------- ------ --------
Total $11,992 $ (821) $(1,571) $3,198 $ 12,798
======= ======= ======= ====== ========
39
SELECTED FINANCIAL DATA
Chemed Corporation and Subsidiary Companies
(in thousands, except per share and footnote data, ratios, percentages and
personnel)
2005 2004 (b) 2003 2002 2001
-------- -------- -------- -------- --------
SUMMARY OF OPERATIONS
Continuing operations (a)
Service revenues and sales ....................... $926,477 $735,341 $260,776 $253,687 $269,353
Gross profit (excluding depreciation) ............ 274,636 228,263 113,958 112,741 117,800
Depreciation ..................................... 16,179 14,542 9,519 10,424 10,750
Amortization ..................................... 5,322 3,779 302 152 3,737
Income/(loss) from operations .................... 79,384 58,106 8,774 17,141 (10,609)
Income/(loss) from continuing operations (c) ..... 37,705 19,186 11,188 11,107 (10,052)
Net income/(loss) (c) ............................ 35,817 27,512 (3,435) (2,545) (12,185)
Earnings/(loss) per share
Income/(loss) from continuing operations ......... $ 1.48 $ 0.80 $ 0.56 $ 0.57 $ (0.52)
Net income/(loss) ................................ 1.40 1.14 (0.17) (0.13) (0.63)
Average number of shares outstanding ............. 25,552 24,120 19,848 19,716 19,428
Diluted earnings/ (loss) per share
Income/ (loss) from continuing operations ........ $ 1.43 $ 0.78 $ 0.56 $ 0.56 $ (0.52)
Net income/ (loss) ............................... 1.36 1.12 (0.17) (0.13) (0.63)
Average number of shares outstanding ............. 26,299 24,636 19,908 19,770 19,428
Cash dividends per share ............................ $ 0.24 $ 0.24 $ 0.24 $ 0.23 $ 0.22
Net income/(loss) excluding goodwill amortization (d)
Net income/(loss) ................................ $ 35,817 $ 27,512 $ (3,435) $ (2,545) $ (7,564)
Earnings/(loss) per share ........................ 1.40 1.14 (0.17) (0.13) (0.39)
Diluted earnings/(loss) per share ................ 1.36 1.12 (0.17) (0.13) (0.39)
FINANCIAL POSITION--YEAR-END
Cash and cash equivalents ........................... $ 57,133 $ 71,448 $ 50,688 $ 37,570 $ 8,348
Working capital ..................................... 35,355 28,439 32,778 20,075 9,732
Current ratio ....................................... 1.21 1.17 1.48 1.28 1.11
Properties and equipment, at cost less
accumulated depreciation ......................... $ 65,449 $ 55,796 $ 31,440 $ 30,912 $ 36,728
Total assets ........................................ 835,085 825,566 328,458 337,822 399,560
Long-term debt ...................................... 234,058 279,510 25,931 25,348 60,439
Convertible junior subordinated debentures .......... -- -- 14,126 14,186 14,239
Stockholders' equity ................................ 384,175 332,092 192,693 198,422 204,160
OTHER STATISTICS--CONTINUING OPERATIONS
Capital expenditures ................................ $ 25,956 $ 18,290 $ 10,381 $ 8,440 $ 9,761
Number of employees ................................. 10,881 9,822 2,894 2,736 3,035
- ----------
(a) Continuing operations exclude Service America, discontinued in 2004,
Patient Care, discontinued in 2002, and Cadre Computer Resources,
discontinued in 2001.
(b) The financial results of VITAS are included in the consolidated results of
the Company beginning on February 24, 2004, the date the Company acquired
the remaining 63% of VITAS it did not own, bringing its ownership in VITAS
to 100%.
(c) The following amounts are included in income from continuing operations
during the respective year (in thousands):
2005 2004 2003 2002 2001
------ ------ ------ ---- ------
Aftertax cost/(benefit):
Long-term incentive plan payout 3,434 5,437 -- -- --
Legal expenses incurred in connection with the Office
of Inspector General investigation 397 -- -- -- --
Adjustment to casualty insurance related to prior periods
experience (1,014) -- -- -- --
Prepayment penalty and write-off of debt issuance costs
related to early extinguishment and refinancing of debt 2,523 2,030 -- -- 1,701
Tax adjustments and settlements from prior year returns (1,961) (1,620) -- -- --
Adjustment of transaction-related expenses
of the VITAS acquisition (961) 222 -- -- --
Cost of accelerating vesting of stock options 137 -- -- -- --
Proposed settlement of lawsuit 10,757 1,897 -- -- --
Equity in (earnings) loss of VITAS -- 4,105 (922) -- --
Expenses related to debt registration -- 727 -- -- --
Severance and restructuring costs -- -- 2,358 -- 15,271
Capital gains on sale of investments -- -- (3,351) (775) (703)
Amortization of goodwill (d) -- -- -- -- 3,081
------ ------ ------ ---- ------
Total 13,312 12,798 (1,915) (775) 19,350
====== ====== ====== ==== ======
(d) In accordance with FASB Statement No. 142, amortization of goodwill ceased
December 31, 2001. Aftertax amortization of goodwill for all operations for
2001, including discontinued operations, was $4,621,000.
40
Chemed Corporation and Subsidiary Companies
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXECUTIVE SUMMARY
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation ("VITAS") and Roto-Rooter Group, Inc. ("Roto-Rooter"). VITAS focuses
on hospice care that helps make terminally ill patients' final days as
comfortable as possible. Through its team of doctors, nurses, home health aides,
social workers, clergy and volunteers, VITAS provides direct medical services to
patients, as well as spiritual and emotional counseling to both patients and
their families. Roto-Rooter is focused on providing plumbing and drain cleaning
services to both residential and commercial customers. Through its network of
company-owned branches, independent contractors and franchisees, Roto-Rooter
offers plumbing and drain cleaning service to over 90% of the U.S. population.
The following is a summary of the key operating results for the years ended
December 31, 2005, 2004 and 2003 (in thousands except per share amounts):
2005 2004 2003
-------- -------- --------
Consolidated service revenues and sales $926,477 $735,341 $260,776
Consolidated income from continuing
operations 37,705 19,186 11,188
Diluted EPS from continuing operations 1.43 0.78 0.56
2005 VERSUS 2004
The increase in consolidated service revenues and sales from 2004 to 2005
was driven by a 37% increase at VITAS and a 7% increase at Roto-Rooter. The
increase at VITAS was the result of an increase in average daily census ("ADC")
of 15%, the annual Medicare price increase of approximately 3% and a full year
of revenue in 2005 versus a partial year in 2004 due to our acquisition of VITAS
in February 2004. The increase at Roto-Rooter was driven by an increase in
plumbing revenue of 15% and an increase in sewer and drain cleaning revenue of
6%. Consolidated income from continuing operations and diluted EPS from
continuing operations increased in 2005 as a result of the higher service
revenues and sales, which allowed us to further leverage our current cost
structure. The increase was partially offset by a $17.4 million pretax charge
($10.8 million aftertax) at VITAS for the anticipated settlement of a class
action lawsuit. Consolidated income from continuing operations as a percent of
service revenues and sales was 4.1% for 2005 versus 2.6% for 2004.
2004 VERSUS 2003
The increase in consolidated service revenues and sales from 2003 to 2004
was driven by the February 24, 2004 acquisition of VITAS and a 6% increase at
Roto-Rooter. The increase at Roto-Rooter was driven primarily by a 6% increase
in plumbing revenue and a 5% increase in sewer and drain cleaning revenue.
Consolidated income from continuing operations and diluted EPS from continuing
operations increased as a result of the VITAS acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Significant factors affecting our cash flows during 2005 and financial
position at December 31, 2005 include the following:
- Our continuing operations generated cash of $81.6 million;
- We spent net cash of $6.2 million on business combinations;
- We borrowed $85 million in long-term debt;
- We repaid $141.6 million to reduce long-term debt; and
- We spent $26.0 million on capital expenditures.
The ratio of total debt to total capital was 38.0% at December 31, 2005
compared with 46.8% at December 31, 2004. Our current ratio was 1.2 at both
December 31, 2005 and 2004.
Our current credit agreements restrict annual payments for dividends, stock
repurchases, acquisitions and capital expenditures. Should we generate excess
cash flow during a year, as defined in the credit agreements, an additional
principal payment may be required. No additional payment is required for the
year ended December 31, 2005. We had $147 million of unused eligible lines of
credit at December 31, 2005. We believe our cash flow from operating activities
and our unused eligible lines of credit are sufficient to fund our business in
the near term.
41
Chemed Corporation and Subsidiary Companies
CASH FLOW
Our cash flows for 2005, 2004 and 2003 are summarized as follows (in
millions):
For the Years Ended December 31,
--------------------------------
2005 2004 2003
------- ------- ------
Net cash provided by operating activities $ 80.0 $ 92.9 $ 23.8
Capital expenditures (26.0) (18.3) (10.4)
------- ------- ------
Operating cash excess after capital expenditures 54.0 74.6 13.4
Repayment of long-term debt (141.6) (96.9) --
Proceeds from issuance of long-term debt, net of costs 83.2 280.6 --
Issuance of capital stock, net of costs 12.3 98.8 3.3
Net proceeds/(uses) from sale of discontinued operations (9.4) (0.8) 1.1
Dividends paid (6.2) (5.7) (4.8)
Business combinations (6.2) (344.7) (3.9)
Return/(payment) of VITAS merger deposit -- 10.0 (10.0)
Proceeds from redemption of available-for-sale securities -- -- 27.3
Investment in VITAS equity interest -- -- (18.0)
Other--net (0.4) 4.9 4.7
------- ------- ------
(Decrease)/increase in cash and cash equivalents $ (14.3) $ 20.8 $ 13.1
======= ======= ======
For 2005, the operating cash excess after capital expenditures was $54.0
million as compared with $74.6 million in 2004 and $13.4 million in 2003. This
excess was used mainly to reduce long-term debt in 2005 and 2004. In 2003, this
excess, along with the proceeds from the redemption of VITAS preferred stock,
was used to purchase 37% of VITAS common stock, to place a deposit of $10.0
million to secure our merger offer for VITAS' remaining common stock, to pay
cash dividends and to increase our available cash and cash equivalents.
COMMITMENTS AND CONTINGENCIES
In connection with the sale of DuBois Chemicals, Inc. ("DuBois") in 1991,
we provided allowances and accruals relating to several long-term costs,
including income tax matters, lease commitments and environmental costs. Also,
in conjunction with the sales of The Omnia Group ("Omnia") and National Sanitary
Supply Company in 1997, the sale of Cadre Computer Resources, Inc. ("Cadre
Computer") in 2001 and the sale of Service America Network Inc. ("Service
America") in 2005, we provided long-term allowances and accruals relating to
costs of severance arrangements, lease commitments and income tax matters.
Additionally, we retained liability for Service America's casualty insurance
claims that were incurred prior to the disposal date. In the aggregate, we
believe these allowances and accruals are adequate as of December 31, 2005.
Based on reviews of our environmental-related liabilities under the DuBois sale
agreement, we have estimated our remaining liability to be $3.0 million. As of
December 31, 2005, we are contingently liable for additional cleanup and related
costs up to a maximum of $16.0 million, for which no provision has been recorded
in accordance with the applicable accounting guidance.
In connection with the sale of Patient Care in 2002, $5.0 million of the
cash purchase price was placed in escrow pending collection of third-party payer
receivables on Patient Care's balance sheet at the sale date. To date, $4.2
million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe that the significant majority of the disputed
amounts will be resolved in Patient Care's favor and most of the withheld escrow
will be returned to us. We have a long-term note receivable from Patient Care of
$12.5 million as of December 31, 2005. Patient Care is current with all payments
due related to the long-term note receivable. We also have current accounts
receivable from Patient Care for the post-closing balance sheet valuation ($1.3
million) and for expenses paid by us after closing on Patient Care's behalf
($1.9 million). We are in litigation with Patient Care over various issues,
including the collection of these amounts. We believe these balances represent
valid claims, are fairly stated and are fully collectible; nonetheless, an
unfavorable determination by the courts could result in the write-off of all or
a portion of these balances.
Our various loan agreements and guarantees of indebtedness as of December
31, 2005, contain certain restrictive covenants. In addition, certain agreements
contain cross-default provisions. We are in compliance with all of the covenants
at December 31, 2005 and anticipate continued compliance throughout 2006.
We are 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. We contest
these allegations and believe them without merit. Plaintiff moved for
certification of a class of customers in 32 states who
42
Chemed Corporation and Subsidiary Companies
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, we 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 during 2006. We accrued $3.1 million in 2004
as the anticipated cost of settling this litigation.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It 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. This case alleges failure to pay overtime wages for hours
worked "off the clock" on administrative tasks, including voicemail retrieval,
time entry, travel to and from work, and pager response. This case also alleges
VITAS failed to provide meal and break periods to a purported class of
California nurses, home health aides and licensed clinical social workers. The
case also seeks payment of penalties, interest, and Plaintiffs' attorney fees.
VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion. We
have reached an agreement, which is subject to court approval, with the
Plaintiff class in order to avoid the uncertainty of litigation and the
diversion of resources and personnel resulting from the litigation. In
connection with our acquisition of VITAS in February 2004, we recorded a
liability of $2.3 million on VITAS' opening balance sheet for this case. At that
time, this represented our best estimate of our exposure in the matter. As a
result of the tentative resolution, we recorded a pretax charge of $17.4 million
($10.8 million aftertax), representing the portion of this settlement not
accounted for on Vitas' opening balance sheet. These amounts are inclusive of
Plaintiffs' class attorneys' fees and the costs of settlement administration.
On April 7, 2005, we 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 covering
admissions, certifications, recertifications and discharges. During the third
quarter of 2005, the OIG requested additional information from us. The U.S.
Attorney General has since provided us 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 our defenses to the complaint
allegations. The U.S. Attorney has not decided whether to intervene in the qui
tam action. We have incurred pretax expense related to complying with OIG
requests of $637,000 for the year ended December 31, 2005.
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 the
investigation may have on the business, results of operations, liquidity or
capital resources. Regardless of outcome, responding to the subpoenas can
adversely affect us through defense costs, diversion of our time and related
publicity.
CONTRACTUAL OBLIGATIONS
The table below summarizes our debt and contractual obligations as of
December 31, 2005 (in thousands):
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
-------- --------- ----------- ----------- --------
Long-term debt obligations, excluding interest (a) $235,103 $ 1,045 $ 2,067 $ 1,878 $230,113
Operating lease obligations 64,427 17,360 23,940 13,680 9,447
Severance obligations 3,094 2,128 484 482 --
Purchase obligations (b) 43,626 43,626 -- -- --
Other current obligations (c) 19,952 19,952 -- -- --
Other long-term obligations (d) 24,687 -- 1,364 1,365 21,958
-------- ------- ------- ------- --------
Total contractual cash obligations $390,889 $84,111 $27,855 $17,405 $261,518
======== ======= ======= ======= ========
- ----------
(a) Estimated interest payments on long-term debt amount to $19.6 million in
less than 1 year, $38.9 million in years 1-3, $36.6 million in years 4-5
and $6.6 million after 5 years.
(b) Purchase obligations primarily consist of accounts payable at December 31,
2005.
(c) Other current obligations consist of accrued salaries and wages at December
31, 2005.
(d) Other long-term obligations comprise largely pension and excess benefit
obligations.
43
Chemed Corporation and Subsidiary Companies
RESULTS OF OPERATIONS
2005 VERSUS 2004 - CONSOLIDATED RESULTS
Set forth below are the year-to-year changes in the components of the
statement of operations relating to continuing operations for 2005 versus 2004
(in thousands, except percentages):
Increase/(Decrease)
-------------------
Amount Percent
-------- -------
Service revenues and sales
VITAS $170,410 37%
Roto-Rooter 20,726 7
--------
Total 191,136 26
Cost of services provided and goods sold 144,763 29
Selling, general and administrative expenses 13,385 10
Depreciation 1,637 11
Amortization 1,543 41
Other expenses 8,530 63
--------
Income from operations 21,278 37
Interest expense 106 1
Loss on extinguishment of debt 641 19
Other income--net (335) (10)
--------
Income before income taxes 20,196 54
Income taxes 5,782 42
Equity in loss of affiliate 4,105 100
--------
Income from continuing operations $ 18,519 97%
========
Our service revenues and sales for the year ended December 31, 2005
increased $191 million, or 26%, versus revenues for the year ended December 31,
2004. The VITAS segment, acquired in February 2004, accounted for $170 million
of this increase and Roto-Rooter accounted for the remaining $21 million of the
increase.
The increase in VITAS' revenues for 2005 versus 2004 is attributable to the
following (dollars in thousands):
Amount Percent
-------- -------
Routine Homecare $119,586 37.7%
Continuous Care 27,748 36.6
General Inpatient 23,076 35.3
--------
Total revenues $170,410 37.2%
========
The revenue increases for VITAS resulted from the annual price increase in
the Medicare reimbursement rate of approximately 3% and the impact of a full
year of revenue in 2005 versus a partial year in 2004 due to our acquisition of
VITAS in February 2004. In addition, the Average Daily Census ("ADC") for
routine homecare, continuous care and general inpatient increased 16%, 12% and
11% respectively from 2004. ADC is a key measure we use to monitor volume growth
in our hospice programs. Changes in total program admissions and average length
of stay for our patients are the main drivers of changes in ADC. A comparison of
VITAS' 2005 revenues to full year pro-forma revenues for 2004 indicates
increases of 20%, 16% and 15%, respectively, for routine homecare, continuous
care and general inpatient revenues.
The increase in Roto-Rooter's service revenues and sales for 2005 versus
2004 is attributable to the following (in thousands):
Amount Percent
------- -------
Plumbing $10,983 9.8%
Sewer and drain cleaning 5,051 4.5
Other 4,692 8.2
-------
Total revenues $20,726 7.5%
=======
44
Chemed Corporation and Subsidiary Companies
Plumbing revenues for 2005 increased from 2004 due to a 5% increase in the
number of jobs performed and a 5% increase in the average price per job. Sewer
and drain cleaning revenues for 2005 increased from 2004 due to a 1% decrease in
the number of jobs offset by a 6% increase in the average price per job. The
increase in the price per job for both plumbing and sewer and drain cleaning was
driven by a shift in job mix from residential to commercial. Generally,
commercial jobs produce more revenue on a per job basis. The increase in other
revenues is attributable primarily to increases in independent contractor
operations.
The consolidated gross margin was 29.6% in 2005 versus 31.0% in 2004. The
slight decrease is due to the acquisition of VITAS in February 2004. On a
segment basis, VITAS' gross margin was 22% in 2005 and 2004. Roto-Rooter's gross
margin was 46% in 2005 and 2004.
Selling, general and administrative expenses ("SG&A") for 2005 increased
$13.4 million (10%) versus 2004 mainly as a result of a full year of VITAS
expense and the impact of higher revenues on variable selling costs such as
commissions. The change in SG&A by segment is summarized below (in thousands):
Increase in VITAS expense $11,860
Increase in Roto-Rooter expense 2,410
Decrease in Corporate expense (885)
-------
Total increase $13,385
=======
Depreciation for 2005 increased $1.6 million, or 11%, versus 2004 primarily
as a result of the VITAS acquisition. Similarly, most of the $1.5 million
increase in amortization is attributable to the amortization of VITAS'
intangible assets, including the referral networks and the covenant not to
compete.
Income from operations for 2005 increased $21.3 million (37%) versus 2004
as summarized below (in thousands):
Increase in gross margin from VITAS $ 35,237
Increase in gross margin from Roto-Rooter 11,136
Increase in SG&A expenses, depreciation and amortization (16,565)
Anticipated cost in 2005 of settling VITAS class action litigation (17,350)
Favorable variance in compensation expense from the LTIP in 2005 versus 2004 3,306
Anticipated cost in 2004 of settling Roto-Rooter litigation 3,135
Favorable variance in VITAS transaction related costs and adjustments 1,403
Professional fees in 2004 incurred to register Floating Rate Notes 1,191
Cost of accelerating the vesting of outstanding stock options in 2005 (215)
--------
Total increase $ 21,278
========
Our effective income tax rate was 34.2% in 2005 versus 37.2% in 2004. The
decrease in our effective tax rate relates to certain state income tax planning
strategies implemented in 2005 and the impact of a full year of VITAS activity.
Income from continuing operations for 2005 increased $18.5 million (97%)
versus 2004 as summarized below (in thousands):
Increase in income from operations $21,278
Increase in income tax expense (5,782)
Equity in loss of VITAS prior to the February 2004 acquisition 4,105
Other (1,082)
-------
Total increase $18,519
=======
Income/(loss) from discontinued operations for 2005, 2004 and 2003 follows
(in thousands):
For the Years Ended
December 31,
---------------------------
2005 2004 2003
------- ------ --------
Service America $(1,813) $8,559 $(14,687)
Adjustment to accruals of operations
discontinued in prior years (75) (233) 64
------- ------ --------
Income/(loss) from discontinued operations $(1,888) $8,326 $(14,623)
======= ====== ========
45
Chemed Corporation and Subsidiary Companies
The disposal of Service America was completed in May 2005. The loss on
disposal of Service America in 2005 arises from the finalization of asset and
liability values and related tax benefits resulting from the consummation of the
sale transaction. For 2004, the gain for Service America includes an estimated
tax benefit on the disposal of approximately $14.2 million, primarily due to the
recognition of non-deductible goodwill impairment losses in prior years. For
2003, the loss from Service America includes aftertax impairment charges of
$14.4 million. Of this amount, $10.0 million was for goodwill impairment and the
remainder was for impairment of computer software and identifiable intangible
assets.
The adjustments to accruals related to operations discontinued in prior
years primarily include favorable adjustments to accruals for note receivable
losses on the sale of Cadre Computer (discontinued in 2001) and unfavorable
adjustments to accruals related to the sale of DuBois in 1991. Cadre Computer
has been operating profitably since 2001 and is current on all amounts due the
Company. As a result, we reduced our allowance to $323,000 at December 31, 2003
and to nil at December 31, 2004. Adjustments to the DuBois accruals relate to
environmental liabilities we retained upon the sale of DuBois in 1991. We
believe amounts accrued are reasonable under the circumstances, but due to the
nature of the liabilities, we could be required to increase the accrual in
future years to cover additional charges.
2005 VERSUS 2004 - SEGMENT RESULTS
During 2005, VITAS net income increased $4.4 million (15%) from $29.1
million during 2004 to $33.5 million during 2005, as summarized below (in
thousands):
Increase in gross margin in 2005 $ 35,237
Increase in SG&A, depreciation and amortization (14,731)
Anticipated cost in 2005 of settling VITAS litigation (17,350)
Increase in income tax expense (364)
Other 1,656
--------
Total increase $ 4,448
========
Roto-Rooter's net income increased $8.2 million (43%) from $18.8 million
during 2004 to $27.0 million during 2005 as summarized below (in thousands):
Increase in gross margin in 2005 $11,136
Increase in SG&A, depreciation and amortization (2,069)
Increase in income tax expense (5,024)
Anticipated cost in 2004 of settling Roto-Rooter litigation 3,135
Other 987
-------
Total increase $ 8,165
=======
Net Corporate aftertax expenses decreased $1.8 million (7%) from $24.6
million in 2004 to $22.9 million in 2005 as summarized below (in thousands):
Favorable variance in LTIP costs in 2005 versus 2004 $ 2,681
Unfavorable variance in intercompany interest expense in 2005 versus 2004 (2,013)
Favorable variance in Corporate overhead expenses in 2005 versus 2004 1,176
Professional fees in 2004 incurred to register Floating Rate Notes 727
Unfavorable variance on loss from extinguishment of debt in 2005 versus 2004 (493)
Favorable variance in VITAS transaction related costs and adjustments 175
Cost of accelerating the vesting of outstanding stock options in 2005 (137)
Other (315)
-------
Total decrease $ 1,801
=======
46
Chemed Corporation and Subsidiary Companies
2004 VERSUS 2003 - CONSOLIDATED RESULTS
Set forth below are the year-to-year changes in the components of the
statement of operations relating to continuing operations for 2004 versus 2003
(in thousands, except percentages):
Increase/(Decrease)
-------------------
Amount Percent
-------- --------
Service revenues and sales
VITAS $458,730 n.a.%
Roto-Rooter 15,835 6
--------
Total 474,565 182
Cost of services provided and goods sold 360,260 245
Selling, general and administrative expenses 42,922 45
Depreciation 5,023 53
Amortization 3,477 1,151
Other expenses 13,551 n.a.
--------
Income from operations 49,332 562
Interest expense 17,981 566
Loss on extinguishment of debt 3,330 n.a.
Other income--net (7,380) (68)
--------
Income before income taxes 20,641 126
Income taxes 7,616 123
Equity in loss of affiliate (5,027) n.a.
--------
Income from continuing operations $ 7,998 71%
========
Our service revenues and sales for the year ended December 31, 2004
increased $474.6 million, or 182%, versus revenues for the year ended December
31, 2003. The VITAS segment, acquired in February 2004, accounted for $458.7
million of this increase and Roto-Rooter accounted for the remaining $15.8
million of the increase. VITAS' revenues for 2004 comprised the following (in
thousands):
Routine homecare $316,374
Continuous care 78,669
General inpatient 63,051
Other 636
--------
Total revenues $458,730
========
The increase in Roto-Rooter's service revenues and sales for 2004 versus
2003 is attributable to the following (in thousands):
Plumbing $ 6,052
Sewer and drain cleaning 5,740
Other 4,043
-------
Total increase $15,835
=======
Plumbing revenues for 2004 increased $6.0 million, or 6.0%, versus revenues
for 2003 due to a 4.4% increase in the number of jobs performed and a 1.6%
increase in the average price per job. Sewer and drain cleaning revenues
increased $5.7 million or 5.4%, versus revenues for 2003 due to a .5% decline in
the number of jobs which was more than offset by a 5.9% increase in the average
price per job. On a same-store basis, the number of plumbing jobs increased 4.9%
and the number of sewer and drain cleaning jobs declined .7%. The increase in
other revenues is attributable primarily to increases in independent contractor
operations and other services.
The consolidated gross margin was 31.0% in 2004 as compared with 43.7% in
2003 largely due to the acquisition of VITAS in 2004. On a segment basis, VITAS'
gross margin was 22.2% and Roto-Rooter's gross margin increased from
47
Chemed Corporation and Subsidiary Companies
43.7% in 2003 to 45.7% in 2004. This increase is largely due to lower training
wages as a percent of revenues in 2004 versus 2003 and lower health insurance
costs as a percent of revenues in 2004.
Selling, general and administrative expenses ("SG&A") for 2004 increased
$42.9 million versus 2003 as summarized below (in thousands):
VITAS SG&A for 2004 $42,946
Corporate severance in 2003 (3,627)
Professional fees at the Corporate Office related
to complying with the internal controls
provisions of the Sarbanes-Oxley Act 2,301
Higher Roto-Rooter advertising costs in 2004 2,226
Other (924)
-------
Total increase $42,922
=======
Depreciation for 2004 increased $5.0 million, or 53%, versus 2003 primarily
as a result of the VITAS acquisition. Similarly, most of the increase in
amortization is attributable to the amortization of VITAS' intangible assets,
including the referral network and the covenant not to compete.
Income from operations for 2004 increased $49.3 million versus 2003 as
summarized below (in thousands):
VITAS income from operations for 2004 $48,242
Higher gross profit of the Roto-Rooter segment in 2004 12,377
Long-term incentive compensation in 2004 (8,783)
Corporate Office severance in 2003 3,627
Anticipated cost in 2004 of settling Roto-Rooter litigation (3,135)
Professional fees at the Corporate Office related to complying
with the internal controls provisions of the Sarbanes-Oxley Act (2,301)
Other (695)
-------
Total increase $49,332
=======
Our effective income tax rate was 37.2% in 2004 versus 37.6% in 2003.
Favorable income tax adjustments in 2004 related to prior-period tax issues
reduced our effective rate by 4.7 percentage points. Our effective state and
local income tax rate for 2004 was 6.1% as compared with 4.4% for 2003. This
increase is due largely to the higher effective state and local tax rate of
VITAS.
Income from continuing operations for 2004 increased $8.0 million versus
2003 as summarized below (in thousands):
Net income of VITAS in 2004 $ 29,139
Higher net income of Roto-Rooter 5,619
Higher interest costs in 2004 related to debt incurred to fund the acquisition of VITAS (11,314)
Long-term incentive compensation for the Corporate Office in 2004 (4,455)
Equity in the loss of VITAS prior to the merger in 2004 (4,105)
Capital gains on the sales and redemption of available-for-sale investments in 2003 (3,351)
Income from VITAS' preferred dividend and equity earnings in 2003 (2,507)
Corporate severance in 2003 2,358
Loss on extinguishment of debt in 2004 (2,030)
Professional fees at the Corporate Office related to complying with the internal controls
provisions of the Sarbanes-Oxley Act (1,461)
Favorable income tax adjustments in 2004 for the Corporate Office related to prior years' issues 990
Professional fees related to registering debt in 2004 (727)
Other (158)
--------
Total increase $ 7,998
========
48
Chemed Corporation and Subsidiary Companies
Income/(loss) from discontinued operations for 2004 and 2003 follows (in
thousands):
For the Years Ended
December 31,
-------------------
2004 2003
------- ---------
Service America 8,559 (14,687)
Adjustment to accruals of operations discontinued in prior years (233) 64
------ --------
Income/(loss) from discontinued operations $8,326 $(14,623)
====== ========
For 2004, the gain for Service America includes an estimated tax benefit on
the disposal of approximately $14.2 million, primarily due to the recognition of
non-deductible goodwill impairment losses in prior years. For 2003, the loss
from Service America includes aftertax impairment charges of $14.4 million. Of
this amount, $10.0 million was for goodwill impairment and the remainder was for
impairment of computer software and identifiable intangible assets.
The adjustments to accruals related to operations discontinued in prior
years primarily include favorable adjustments to accruals for note receivable
losses on the sale of Cadre Computer (discontinued in 2001) and unfavorable
adjustments to accruals related to the sale of DuBois in 1991. Cadre Computer
has been operating profitably since 2001 and is current on all amounts due the
Company. As a result, we reduced our allowances for losses on these notes
receivable from $422,000 at December 31, 2002 to $323,000 at December 31, 2003
and to nil at December 31, 2004. Adjustments to the DuBois accruals relate to
environmental liabilities we retained upon the sale of DuBois in 1991. We
believe amounts accrued are reasonable under the circumstances, but due to the
nature of the liabilities, we could be required to increase the accrual in
future years to cover additional charges.
2004 VERSUS 2003 - SEGMENT RESULTS
During 2004, VITAS generated net income of $29.1 million. These earnings
included aftertax transaction expenses totaling $1.0 million related to our
acquisition of VITAS in 2004. VITAS' average daily census ("ADC") during 2004
increased from 7,979 during the fourth quarter of 2003 to 9,134 during the
fourth quarter of 2004. During that same period, the quarterly average length of
stay increased from 59.0 days to 64.1 days, and the median length of stay was
12.0 days during the fourth quarters of both 2004 and 2003.
Roto-Rooter's net income increased $5.6 million (43%) from $13.2 million
during 2003 to $18.8 million during 2004 as summarized below (in thousands):
Aftertax impact of higher gross profit in 2004 $ 7,649
Anticipated cost in 2004 of settling litigation (1,897)
Roto-Rooter's share of long-term compensation in 2004 (982)
Favorable income tax adjustments in 2004 related to prior years' issues 630
Other 219
-------
Total increase $ 5,619
=======
Net Corporate aftertax expenses increased $21.7 million from $2.9 million
in 2003 to $24.6 million in 2004 as summarized below (in thousands):
Higher interest costs in 2004 related to debt incurred to fund the acquisition of VITAS $11,314
Corporate Office share of long-term compensation in 2004 4,455
Capital gains on the sales and redemption of available-for-sale investments in 2003 3,351
Corporate severance in 2003 (2,358)
Loss on extinguishment of debt in 2004 2,030
Income from VITAS preferred dividend in 2003 1,585
Professional fees at the Corporate Office related to complying with the
internal controls provisions of the Sarbanes-Oxley Act 1,461
Favorable income tax adjustments in 2004 for the Corporate Office related to prior years' issues (990)
Professional fees related to registering debt in 2004
727
Other 158
-------
Total increase $21,733
=======
49
Chemed Corporation and Subsidiary Companies
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
For both the Roto-Rooter and VITAS segments, service revenues and sales are
recognized when the earnings process has been completed. Generally, this occurs
when services are provided or products are delivered. VITAS recognizes revenue
at the estimated net realizable amount due from third-party payers, which are
primarily Medicare and Medicaid. Payers may deny payment for services in whole
or in part on the basis that such services are not eligible for coverage and do
not qualify for reimbursement. We estimate denials each period and make adequate
provision in the financial statements.
VITAS is subject to certain limitations on Medicare payments for services.
Specifically, if the number of inpatient care days any hospice program provides
to Medicare beneficiaries exceeds 20% of the total days of hospice care such
program provides to all patients for an annual period beginning September 28,
the days in excess of the 20% figure may be reimbursed only at the routine
homecare rate. None of VITAS' hospice programs exceeded the payment limits on
inpatient services in 2005 or 2004.
VITAS is also subject to a Medicare annual per-beneficiary cap ("Medicare
cap"). Compliance with the Medicare cap is measured by comparing the total
Medicare payments received under a Medicare provider number with respect to
services provided to all Medicare hospice care beneficiaries in the program or
programs covered by that Medicare provider number between November 1 of each
year and October 31 of the following year with the product of the
per-beneficiary cap amount and the number of Medicare beneficiaries electing
hospice care for the first time from that hospice program or programs during the
relevant period.
We actively monitor each of our hospice programs, by provider number, as to
their specific admissions, discharge rate and average length of stay data in an
attempt to determine whether they are likely to exceed the Medicare cap. Should
we determine that a provider number is likely to exceed the Medicare cap based
on projected trends, we attempt to institute corrective action to influence the
patient mix or to increase patient admissions. However, should we project our
corrective action will not prevent that program from exceeding its Medicare cap,
we estimate the amount we will be required to repay at the end of the
measurement year and accrue that amount, which is proportional to the number of
months elapsed in the Medicare cap year, as a reduction of patient revenue.
INSURANCE ACCRUALS
For the Roto-Rooter segment and Chemed's Corporate Office, we self-insure
for all casualty insurance claims (workers' compensation, auto liability and
general liability). As a result, we closely monitor and frequently evaluate our
historical claims experience to estimate the appropriate level of accrual for
self-insured claims. Our third-party administrator ("TPA") processes and reviews
claims on a monthly basis. Currently, our exposure on any single claim is capped
at $500,000. For most of the prior years, the caps for general liability and
workers' compensation were between $250,000 and $500,000 per claim. In
developing our estimates, we accumulate historical claims data for the previous
10 years to calculate loss development factors ("LDF") by insurance coverage
type. LDFs are applied to known claims to estimate the ultimate potential
liability for known and unknown claims for each open policy year. LDFs are
updated annually. Because this methodology relies heavily on historical claims
data, the key risk is whether the historical claims are an accurate predictor of
future claims exposure. The risk also exists that certain claims have been
incurred and not reported on a timely basis. To mitigate these risks, in
conjunction with our TPA, we closely monitor claims to ensure timely
accumulation of data and compare claims trends with the industry experience of
our TPA.
For the VITAS segment, we self insure for workers' compensation exposures.
Currently, VITAS' exposure on any single claim is capped at $500,000. For most
of the prior years, the caps for workers' compensation were between $250,000 and
$500,000 per claim. For VITAS' self-insurance accruals for workers'
compensation, we obtained an actuarial valuation of the liability as of the date
of acquisition and as of November 30, 2005 and 2004. The valuation methods used
by the actuary are similar to those used internally for our other business
units.
As an indication of the sensitivity of the accrued liability to reported
claims, our analysis indicates that a 1% across-the-board increase or decrease
in the amount of projected losses for all of our continuing operations would
increase or decrease the accrued insurance liability at December 31, 2005, by
$1,157,000 or 3%.
INCOME TAXES
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amount of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in our opinion, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in laws and rates on the date of enactment.
We are subject to income taxes in the U.S. Federal and most state
jurisdictions. Significant judgment is required to determine our provision for
income taxes. We are periodically audited by various taxing authorities. We
establish liabilities for possible assessments by taxing authorities resulting
from exposures including, but not limited to, the deductibility of
50
Chemed Corporation and Subsidiary Companies
certain expenses and the tax treatment of acquisitions and divestitures. While
it is often difficult to predict the final outcome or the timing of resolution
of any particular tax matter, we believe our tax reserves reflect the probable
outcome of known contingencies.
On June 30, 2005, significant changes to the tax system of the State of
Ohio were enacted. The impact was required to be accounted for in all annual and
interim periods ending on or after June 30, 2005. Changes in the Ohio tax
legislation include the phasing out of the Ohio income tax and the Ohio personal
property tax. Additionally, a new Commercial Activity Tax ("CAT"), which is
based on gross receipts, was introduced. Since the corporate income tax is being
replaced by the CAT, which is not an income tax under generally accepted
accounting principles, entities with businesses in the State of Ohio must
account for the phase-out of the corporate income tax as a change in enacted tax
rate as of June 30, 2005. We recorded a valuation allowance on all significant
deferred tax amounts in the State of Ohio, mainly net operating loss
carry-forwards, because management believed that it was more likely than not
that the benefit would expire unutilized. As such, there was no significant
impact to us for the year ended December 31, 2005.
GOODWILL AND INTANGIBLE ASSETS
Identifiable, definite-lived intangible assets arise from purchase business
combinations and are amortized using either an accelerated method or the
straight-line method over the estimated useful lives of the assets. The
selection of an amortization method is based on which method best reflects the
economic pattern of usage of the asset. The VITAS trade name is considered to
have an indefinite life. Goodwill and the VITAS trade name are tested at least
annually for impairment. The valuation of goodwill and the VITAS trade name is
dependent upon many factors, some of which are market-driven and beyond our
control. The valuation of goodwill and the VITAS trade name indicate that the
fair value exceeds the carrying value at December 31, 2005.
RECENT ACCOUNTING STATEMENTS
FASB NO. 123R
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)
"Share-Based Payment" ("FASB123R"), which requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the
intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes APB No. 25,
but does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in FASB 123 as originally issued.
FASB123R is effective as of January 1, 2006. In March 2005, the Board of
Directors approved immediate vesting of all unvested stock options to avoid
recognizing approximately $951,000 of pretax expense that would have been
charged to income under FASB123R beginning on January 1, 2006. The pretax
expense from continuing operations of accelerating the vesting of these stock
options, which were scheduled to vest in November 2005 and November 2006, was
approximately $215,000 and recorded in the first quarter of 2005.
We adopted FASB 123R on January 1, 2006 using the modified prospective
method. Therefore, historical financial information will not be restated. There
was no significant impact on our financial condition, results of operations or
cash flow as a result of adoption of FASB 123R.
FASB NO. 154
In May 2005, the FASB issued FASB Statement No. 154, "Accounting for
Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB
Statement No. 3" (FASB 154). FASB 154 changes the requirements with regard to
the accounting for and reporting of a change in an accounting principle. The
provisions of FASB 154 require, unless impracticable, retrospective application
to prior periods presented in financial statements for all voluntary changes in
an accounting principle and changes required by the adoption of a new accounting
pronouncement in the unusual instance that the new pronouncement does not
indicate a specific transition method. FASB 154 also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in an accounting estimate, which requires
prospective application of the new method. FASB 154 is effective for all changes
in an accounting principle made in fiscal years beginning after December 15,
2005. We adopted FASB 154 with our fiscal year beginning January 1, 2006. There
was no impact on our financial condition, results of operations or cash flows
upon adoption.
FASB NO. 155
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments" (FASB 155), which nullifies and amends
various accounting guidance relating to accounting for derivative instruments
and securitization transactions. In general, these changes will reduce the
operational complexity associated with bifurcating embedded derivatives, and
increase the number of beneficial interests in securitization transactions. This
statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15, 2006.
Because we do not have any material derivative instruments or securitization
transactions, we believe there will be no material impact on our financial
condition, results of operations or cash flows upon adoption.
51
UNAUDITED SUPPLEMENTARY DATA (VITAS)
To provide background in analyzing the quarterly operations of the VITAS
segment, we are providing the following financial and operating data (in
thousands, except percentages, days and dollars per day):
2004 2005
---------------------------------------- -----------------------
First Quarter
-----------------------------
January 1 February 24
to to Fourth Fourth Year-to-date
February 23 September 30(a) Quarter Quarter December
----------- --------------- -------- -------- ------------
STATEMENT OF OPERATIONS
Service revenues and sales $ 72,870 $316,453 $142,277 $168,994 $629,140
-------- -------- -------- -------- --------
Cost of services provided
(excluding depreciation) 58,848 247,971 108,830 130,271 491,974
Selling, general and administrative
expenses 8,182 29,940 13,006 14,097 54,806
Depreciation 836 3,078 2,634 2,108 7,585
Amortization 4 2,995 354 1,384 4,347
Other expense 24,956(b) -- 1,680 18,150 19,031
-------- -------- -------- -------- --------
Total costs and expenses 92,826 283,984 126,504 166,010 577,743
-------- -------- -------- -------- --------
Income/(loss) from operations (19,956) 32,469 15,773 2,984 51,397
Interest expense (919) (90) (38) (49) (153)
Loss on extinguishment of debt (4,497)(b) -- -- -- --
Other income--net 41 589 466 834 2,737
-------- -------- -------- -------- --------
Income/(loss) before income taxes (25,331) 32,968 16,201 3,769 53,981
Income taxes 6,996 (13,489) (6,541) (1,264) (20,394)
-------- -------- -------- -------- --------
Net income/(loss) $(18,335) $ 19,479 $ 9,660 $ 2,505 $ 33,587
======== ======== ======== ======== ========
EBITDA (c)
Net income/(loss) $(18,335) $ 19,479 $ 9,660 $ 2,505 $ 33,587
Add/(deduct)
Interest expense 919 90 38 49 153
Income taxes (6,996) 13,489 6,541 1,264 20,394
Depreciation 836 3,078 2,634 2,108 7,585
Amortization 4 2,995 354 1,384 4,347
-------- -------- -------- -------- --------
EBITDA $(23,572) $ 39,131 $ 19,227 $ 7,310 $ 66,066
======== ======== ======== ======== ========
- ----------
(a) We acquired VITAS on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of VITAS' assets as of that date.
(b) Costs related to the sale of VITAS totaled $29,453,000 pretax ($20,930,000
aftertax) for January 1 through February 23, 2004.
(c) EBITDA is income before interest expense, income taxes, depreciation and
amortization. We use EBITDA, in addition to net income and income/(loss)
from operations, to assess our performance and believe it is important for
investors to be able to evaluate us using the same measures used by
management. We believe EBITDA is an important supplemental measure of
operating performance because it provides investors with an indication of
our performance independent of our debt and equity structure and related
costs. We also believe EBITDA is a supplemental measurement tool used by
analysts and investors to help evaluate a company's overall operating
performance by including only transactions related to core cash operating
business activities. EBITDA as calculated by us is not necessarily
comparable to similarly titled measures reported by other companies. In
addition, EBITDA is not prepared in accordance with accounting principles
generally accepted in the United States ("GAAP"), and should not be
considered an alternative for net income, income from operations or other
financial information determined under GAAP, and should not be considered
as a measure of profitability or liquidity. We believe the line on the
consolidated statement of operations entitled net income/(loss) is the most
directly comparable GAAP measure to EBITDA. EBITDA, as calculated above,
includes interest income, loss on extinguishment of debt, costs related to
the sale of VITAS to the Company and costs related to the settlement of
class action litigation as follows (in thousands):
2004 2005
--------------------------------------- ----------------------
First Quarter
-----------------------------
January 1 February 24
to to Fourth Fourth Year-to-date
February 23 September 30(a) Quarter Quarter December
----------- --------------- ------- ------- ------------
Interest income $ 41 $610 $ 481 $ 842 $ 2,803
Loss on extinguishment of debt 4,497 -- -- -- --
Costs related to sale of business 24,956 -- 1,680 -- --
Settlement of class action litigation -- -- -- 17,350 17,350
52
2004 2005
----------------------- -------------------------
Fourth Year-to-Date Fourth Year-to-Date
Quarter December Quarter December
-------- ------------ -------- ------------
OPERATING STATISTICS
Net revenue
Homecare $ 98,746 $364,962 $117,154 $436,596
Inpatient 19,131 74,905 22,828 86,127
Continuous care 24,400 91,733 29,012 106,417
-------- -------- -------- --------
Total $142,277 $531,600 $168,994 $629,140
======== ======== ======== ========
Net revenue as a percent of total
Homecare 69.4% 68.7% 69.3% 69.4%
Inpatient 13.4 14.1 13.5 13.7
Continuous care 17.2 17.2 17.2 16.9
-------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
Average daily census ("ADC") (days)
Homecare 5,053 4,763 6,030 5,797
Nursing home 3,241 3,107 3,417 3,312
-------- -------- -------- --------
Routine homecare 8,294 7,870 9,447 9,109
Inpatient 366 367 421 408
Continuous care 474 457 544 513
-------- -------- -------- --------
Total 9,134 8,694 10,412 10,030
======== ======== ======== ========
Total Admissions 11,558 46,537 12,487 50,456
Average length of stay (days) 64.1 60.0 70.0(a) 67.4
Median length of stay (days) 12.0 12.0 13.0 12.0
ADC by major diagnosis
Neurological 31.4% 31.2% 32.5% 32.1%
Cancer 21.9 22.7 21.0 21.3
Cardio 15.0 14.6 14.9 15.0
Respiratory 7.1 7.3 7.0 7.1
Other 24.6 24.2 24.6 24.5
-------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
Admissions by major diagnosis
Neurological 18.3% 18.7% 19.3% 18.9%
Cancer 37.0 37.0 37.5 36.8
Cardio 13.2 13.2 12.4 13.2
Respiratory 6.6 7.2 6.7 7.1
Other 24.9 23.9 24.1 24.0
--------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
Direct patient care margins (b)
Routine homecare 51.2% 50.0% 50.8% 50.2%
Inpatient 23.9 24.4 23.7 22.7
Continuous care 18.6 18.8 20.4 18.9
Homecare margin drivers
(dollars per patient day)
Labor costs $ 44.08 $ 42.96 $ 47.13 $ 45.98
Drug costs 7.63 8.48 7.31 7.60
Home medical equipment 5.56 5.71 5.46 5.48
Medical supplies 1.98 1.98 2.14 2.17
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 235.01 $ 213.28 $ 238.26 $ 240.00
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 437.43 $ 426.46 $ 442.28 $ 441.95
Bad debt expense as a percent of revenues 0.9% 1.0% 0.9% 0.9%
Accounts receivable --
days of revenue outstanding 38.1 38.1 41.8 41.8
- ----------
(a) VITAS has five large (greater than 450 ADC), 16 medium (greater than 200
but less than 450 ADC) and 18 small (less than 200 ADC) hospice programs. 2
programs, including the Phoenix program, have estimated Medicare Cap
cushion of less than 10% for the 2006 measurement period.
(b) Amounts exclude indirect patient care and administrative costs.
53
Chemed Corporation and Subsidiary Companies
CORPORATE GOVERNANCE
We submitted our Annual Certification of the Chief Executive Officer to the
New York Stock Exchange ("NYSE") regarding the NYSE corporate governance listing
standards on May 18, 2005. We also filed our Certifications of the President and
Chief Executive Officer, the Vice President and Chief Financial Officer and the
Vice President and Controller pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 as Exhibits 31.1, 31.2 and 31.3, respectively, to our Annual Report on
Form 10-K for the year ended December 31, 2005.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
REGARDING FORWARD-LOOKING INFORMATION
In addition to historical information, this report contains forward-looking
statements and performance trends that are based upon assumptions subject to
certain known and unknown risks, uncertainties, contingencies and other factors.
Such forward-looking statements and trends include, but are not limited to, the
impact of laws and regulations on our operations, our estimate of future
effective income tax rates and the recoverability of deferred tax assets.
Variances in any or all of the risks, uncertainties, contingencies, and other
factors from our assumptions could cause actual results to differ materially
from these forward-looking statements and trends. Our ability to deal with the
unknown outcomes of these events, many of which are beyond our control, may
affect the reliability of our projections and other financial matters.
54
4
CORPORATE OFFICERS
EDWARD L. HUTTON
Chairman of the Board
KEVIN J. MCNAMARA
President & Chief Executive Officer
DAVID P. WILLIAMS
Vice President & Chief Financial Officer
TIMOTHY S. O'TOOLE
Executive Vice President
SPENCER S. LEE
Executive Vice President
ARTHUR V. TUCKER, JR.
Vice President & Controller
NAOMI C. DALLOB
Vice President & Secretary
THOMAS C. HUTTON
Vice President
THOMAS J. REILLY
Vice President
LISA A. DITTMAN
Assistant Secretary
DIRECTORS
EDWARD L. HUTTON
Chairman of the Board, Chemed Corporation
KEVIN J. MCNAMARA
President & Chief Executive Officer,
Chemed Corporation
DONALD BREEN, JR.(2)
President, Castle Hill Ventures LLC
(management consulting and investments)
5
CHARLES H. ERHART, JR. (1, 2*, 3*)
Former President, W.R. Grace & Co. (retired)
JOEL F. GEMUNDER (3)
President & Chief Executive Officer, Omnicare Inc.
PATRICK P. GRACE (1, 3)
President, MLP Capital Inc. (real estate and mining)
THOMAS C. HUTTON
Vice President, Chemed Corporation
WALTER L. KREBS (1)
Former Senior Vice President - Finance,
Chief Financial Officer and Treasurer,
Service America Systems Inc. (retired)
SANDRA E. LANEY
Chairman & Chief Executive Officer,
Cadre Computer Resources Co.
TIMOTHY S. O'TOOLE
Executive Vice President, Chemed Corporation;
President & Chief Executive Officer,
VITAS Healthcare Corporation
DONALD E. SAUNDERS (1*)
Markley Visiting Professor,
Farmer School of Business Administration,
Miami University (Ohio)
GEORGE J. WALSH III
Partner, Thompson Hine LLP
(law firm, New York, New York)
FRANK E. WOOD (2)
President and Chief Executive Officer,
Secret Communications LLC (radio stations);
Principal, The Darwin Group (venture capital);
and Chairman, 8e6 Technologies Corporation
(software development)
1) Audit Committee
2) Compensation/Incentive Committee
3) Nominating Committee
* Committee Chairman
6
INSIDE BACK COVER
TEXT:
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Chemed Corporation
Suite 2600
255 East Fifth Street
Cincinnati, Ohio 45202-4726
513-762-6900
www.chemed.com
TRANSFER AGENT & REGISTRAR
Individuals of record needing address changes, account balances, account
consolidations, replacement of lost certificates or lost checks, dividend
reinvestment plan statements or cost-basis data, 1099s, or assistance with other
administrative matters relating to their Chemed Capital Stock should direct
their inquiries to:
Wells Fargo Bank, N.A., Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 800-468-9716 (TOLL-FREE)
Web site: www.wellsfargo.com/shareownerservices
All questions relating to administration of Chemed stock must be handled by
Wells Fargo.
CORPORATE INQUIRIES
Annual reports, press releases, corporate governance guidelines, Board
committee charters, Policies on Business Ethics, the Annual Report on Form 10-K,
and other printed materials may be obtained from Chemed Investor Relations
without charge by writing or by calling 800-2CHEMED or 800-224-3633. Printed
materials may also be viewed and downloaded from Chemed's Web site at
www.chemed.com.
7
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Cincinnati, Ohio 45202
DIVIDEND REINVESTMENT PLAN FOR HOLDERS OF 25 OR MORE SHARES
The Chemed Automatic Dividend Reinvestment Plan is available to
shareholders of record owning a minimum of 25 shares of Chemed Capital Stock. A
plan brochure, including fee schedule, and enrollment information are available
from the Dividend Reinvestment Agent, Wells Fargo Bank, N.A., at the address
listed above.
ANNUAL MEETING
The Annual Meeting of Shareholders of Chemed Corporation, will be held on
Monday, May 15, 2006, at 11 a.m. in the Lower Level Conference Center of The
Queen City Club, 331 East Fourth Street, Cincinnati, Ohio.
NUMBER OF SHAREHOLDERS
The approximate number of shareholders of record of Chemed Capital Stock
was 3,174 on December 31, 2005. (This number does not include shareholders with
shares held under beneficial ownership or within clearinghouse positions of
brokerage firms and banks.)
STOCK EXCHANGE LISTINGS
Chemed Capital Stock is listed on the New York Stock Exchange under the
ticker symbol CHE.
CAPITAL STOCK & DIVIDEND DATA
8
The high and low closing prices for Chemed Capital Stock and dividends per
share paid by quarter, each adjusted for a 2-for-1 stock split occurring May 11,
2005, follow:
Closing
--------------------- Dividends
High Low Paid
------- -------- ---------
2005
FIRST QUARTER .......... $ 38.63 $ 32.55 $ 0.06
SECOND QUARTER ......... 43.83 34.57 0.06
THIRD QUARTER .......... 44.90 39.32 0.06
FOURTH QUARTER ......... 54.00 40.13 0.06
2004
First Quarter .......... $ 33.48 $ 24.48 $ 0.06
Second Quarter ......... 27.65 21.55 0.06
Third Quarter .......... 28.13 21.36 0.06
Fourth Quarter ......... 33.72 27.56 0.06
9
BACK COVER:
Chemed Corporation
2600 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-4726
Visit our Web sites at www.chemed.com, www.rotorooter.com, and www.vitas.com.
RECYCLED PAPER LOGO
Printed on recycled paper