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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2004
Commission File Number 1-8351
ROTO-ROOTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
Capital Stock 12,129,380 Shares April 30, 2004
$1 Par Value
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Page 1 of 26
ROTO-ROOTER, INC. AND
SUBSIDIARY COMPANIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2004 and
December 31, 2003 3
Consolidated Statement of Operations -
Three months ended
March 31, 2004 and 2003 4
Consolidated Statement of Cash Flows -
Three months ended
March 31, 2004 and 2003 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Page 2 of 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
March 31, December 31,
2004 2003*
--------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 43,036 $ 50,587
Accounts receivable, less allowances of $10,107 (2003-$2,919) 64,313 13,592
Inventories 8,157 8,256
Statutory deposits 8,914 9,358
Prepaid income taxes 18,780 3,625
Current deferred income taxes 27,805 10,056
Prepaid expenses and other current assets 16,451 6,611
---------- ----------
Total current assets 187,456 102,085
Investments of deferred compensation plans held in trust 19,354 17,743
Other investments 1,445 25,081
Note receivable 12,500 12,500
Properties and equipment, at cost less accumulated
depreciation of $62,441 (2003-$62,646) 61,417 41,004
Identifiable intangible assets less accumulated
amortization of $2,061 (2003-$1,704) 25,235 592
Goodwill 452,705 105,335
Other assets 31,619 24,729
---------- ----------
Total Assets $ 791,731 $ 329,069
========== ==========
LIABILITIES
Current liabilities
Accounts payable $ 38,632 $ 7,120
Current portion of long-term debt 5,806 448
Income taxes 163 26
Deferred contract revenue 13,845 14,362
Accrued insurance 19,692 16,013
Other current liabilities 57,682 21,123
---------- ----------
Total current liabilities 135,820 59,092
Convertible junior subordinated debentures 14,001 14,126
Other long-term debt 315,800 25,931
Deferred compensation liabilities 19,572 17,733
Other liabilities 19,880 19,494
---------- ----------
Total Liabilities 505,073 136,376
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock-authorized 15,000,000 shares $1 par;
issued 13,056,289 shares (2003-13,452,907 shares) 13,056 13,453
Paid-in capital 195,608 170,501
Retained earnings 111,428 119,746
Treasury stock - 969,039 shares (2003-3,508,663 shares),
at cost (32,741) (109,427)
Unearned compensation (2,480) (2,954)
Deferred compensation payable in company stock 2,324 2,308
Notes receivable for shares sold (537) (934)
---------- ----------
Total Stockholders' Equity 286,658 192,693
---------- ----------
Total Liabilities and Stockholders' Equity $ 791,731 $ 329,069
========== ==========
See accompanying notes to unaudited financial statements.
* Reclassified to conform to 2004 presentation.
Page 3 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share data)
Three Months Ended
March 31,
-------------------------------
2004 2003
-------- --------
Service revenues and sales $131,048 $ 77,645
-------- --------
Cost of services provided and goods sold
(excluding depreciation) 86,224 46,152
Selling, general and administrative expenses 31,023 26,057
Depreciation 3,589 3,052
Long-term incentive compensation 9,058 -
-------- --------
Total costs and expenses 129,894 75,261
-------- --------
Income from operations 1,154 2,384
Interest expense (2,905) (807)
Loss on extinguishment of debt (3,330) -
Other income - net 1,579 4,262
-------- --------
Income/(loss) before income taxes (3,502) 5,839
Income tax benefit/(expense) 497 (2,282)
Equity in loss of affiliate (4,105) -
-------- --------
Net income/(loss) $ (7,110) $ 3,557
======== ========
Earnings/(Loss) Per Share
Net income/(loss) $ .(65) $ .36
======== ========
Average number of shares outstanding 10,912 9,890
======== ========
Diluted Earnings/(Loss) Per Share
Net income/(loss) $ .(65) $ .36
======== ========
Average number of shares outstanding 10,912 9,903
======== ========
Cash Dividends Per Share $ .12 $ .12
======== ========
See accompanying notes to unaudited financial statements.
Page 4 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
-------------------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (7,110) 3,557
Adjustments to reconcile net income/(loss) to net
cash provided/(used) by operating activities:
Depreciation and amortization 4,265 3,236
Gains on sales of available-for-sale
investments - (3,544)
Provision for deferred income taxes (1,475) (376)
Provision for uncollectible accounts receivable 1,039 85
Noncash long-term incentive compensation 5,808 -
Changes in operating assets and liabilities,
excluding amounts acquired in business
combinations
Decrease/(increase) in accounts receivable (3,952) 1,455
Decrease in inventories 99 403
Decrease in statutory deposits 444 1,787
Decrease/(increase) in prepaid expenses and
other current assets 7,406 (266)
Decrease in accounts payable, deferred
contract revenue and other current
liabilities (22,081) (6,128)
Increase in income taxes 1,024 3,215
Decrease in other assets 45 7
Increase in other liabilities 1,516 1,335
Equity in loss of affiliate 4,105 -
Noncash expense of internally financed ESOPs 474 435
Other sources/(uses) 62 (16)
--------- ----------
Net cash provided/(used) by operating activities (8,331) 5,185
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Business combinations, net of cash acquired (324,075) (168)
Return of merger deposit 10,000 -
Capital expenditures (1,766) (2,062)
Net uses from discontinued operations (448) (524)
Proceeds from sales of property and equipment 166 133
Proceeds from sales of available-for-sale investments - 4,493
Other sources/(uses) 8 (133)
--------- ----------
Net cash provided/(used) by investing activities (316,115) 1,739
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 295,000 -
Issuance of capital stock, net of issuance costs 97,234 194
Repayment of long-term debt (92,261) (144)
Net increase in revolving credit facility 25,000 -
Debt issuance costs (13,095) -
Repayment of stock subscriptions note receivable 8,053 -
Dividends paid (1,209) (1,188)
Purchases of treasury stock (2,190) (58)
Other sources 363 166
--------- ----------
Net cash provided/(used) by financing activities 316,895 (1,030)
--------- ----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (7,551) 5,894
Cash and cash equivalents at beginning of year 50,587 37,731
--------- ----------
Cash and cash equivalents at end of period $ 43,036 $ 43,625
========= ==========
See accompanying notes to unaudited financial statements.
Page 5 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited consolidated financial
statements of Roto-Rooter, Inc. and Subsidiary Companies ("Company") in
accordance with Rule 10-01 of SEC Regulation S-X. Consequently, we have omitted
certain disclosures required under generally accepted accounting principles for
complete financial statements. However, in our opinion, the financial statements
presented herein contain all adjustments, consisting only of normal recurring
adjustments, except for the adoption of FASB Interpretation No. 46R discussed in
Notes 11 and 13, necessary to present fairly the financial position, results of
operations and cash flows of the Company. For further information regarding the
Company's accounting policies, refer to the consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
We use Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, to account for stock-based
compensation. Since the Company's stock options qualify as fixed options under
APB 25 and since the option price equals the market price on the date of grant,
there is no compensation expense for stock options. Stock awards are expensed
during the period the related services are provided.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair-value-recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation (as amended) (in thousands, except per share data):
For the Three Months
Ended March 31,
---------------------------
2004 2003
---------- ----------
Net income/(loss) as reported $ (7,110) $ 3,557
Add/(deduct):
Stock-based compensation
expense included in net
income/(loss) as reported,
net of income tax effects 3,800 34
Total stock-based employee
compensation determined
under a fair-value-based
method for all stock options
and awards, net of income
tax effects (4,019) (225)
--------- ---------
Pro forma net income/(loss) $ (7,329) $ 3,366
========= =========
Earnings/(loss) per share and
diluted earnings/(loss)
per share
As reported $ (.65) $ .36
========= =========
Pro forma $ (.67) $ .34
========= =========
We calculated the above data using the Black-Scholes option-valuation method to
value the Company's options granted in 2003 and prior years.
Page 6 of 26
2. SEGMENTS
Service revenues and sales and aftertax earnings by business segment
follow (in thousands):
For the Three Months
Ended March 31,
----------------------------
2004 2003
---------- ----------
Service Revenues
and Sales
---------
Vitas (a) $ 51,112 $ -
Plumbing and Drain Cleaning 69,228 64,725
Service America 10,708 12,920
---------- ---------
Total $ 131,048 $ 77,645
========== =========
Aftertax Earnings/(Loss)
------------------------
Vitas (a) $ 2,597 $ -
Plumbing and Drain Cleaning (1,843)(b) 1,025(c)
Service America 146(b) 40
--------- ---------
Total segment earnings 900 1,065
Unallocated Corporate Activity
Equity in Vitas loss/preferred
dividend income(d) (4,105) 629
Loss on extinguishment of debt (2,164) -
Gains on sales of available-for-
sale investments - 2,151
Other investing and financing
income and expense (1,741) (288)
--------- ---------
Net income/(loss) $ (7,110) $ 3,557
========= =========
---------------
(a) Amounts for 2004 include the consolidated operations of Vitas
Healthcare Corporation ("Vitas") beginning on February 24, 2004, the
date on which we acquired a controlling interest in Vitas.
(b) Amounts include the aftertax cost of the payout under the Company's
Executive Long-Term Incentive Plan ("LTIP") totaling $5,724,000 for
Plumbing and Drain Cleaning and $170,000 for Service America.
(c) Amount includes aftertax severance charges of $2,358,000.
(d) Amount for 2004 represents the Company's 37% equity in the loss of
Vitas through February 23, 2004. Amount for 2003 represents aftertax
dividend income from the Company's investment in Vitas' preferred
stock. The Company's 37% equity in the loss of Vitas in 2004
includes the following aftertax charges related to Vitas' sale of
its business to the Company (in thousands):
Accrual for severance costs $ 10,975
Legal, valuation and other expenses 6,665
Loss on write-off of Vitas' deferred debt costs 2,698
Other 592
--------
Total $ 20,930
========
These charges reduced our equity in the earnings/(loss) of
Vitas by approximately $4,621,000 during 2004.
Vitas provides palliative medical care and related services to
terminally ill patients through state-licensed and federally-certified hospice
programs. Vitas' corporate headquarters is located in Miami, Florida. It
currently operates hospice programs in eight states - Florida, California,
Illinois, Ohio, Pennsylvania, Wisconsin, New Jersey and Texas. Vitas is treated
as a separate reportable segment for reporting purposes.
Page 7 of 26
3. DILUTED EARNINGS PER SHARE
Earnings per common share are computed using the weighted average
number of shares of capital stock outstanding. Due to the Company's loss in the
first quarter of 2004, all potentially dilutive securities were anti-dilutive.
Therefore, the diluted loss per share was the same as the loss per share for
2004. Diluted earnings per share for the first quarter of 2003 are computed as
follows (in thousands, except per share data):
Income Shares Income
(numerator) (denominator) Per Share
----------- ------------- ---------
Net income $ 3,557 9,890 $ .36
========
Dilutive stock options - 13
---------- ------------
Diluted net income $ 3,557 9,903 $ .36
========== ============ ========
The Convertible Junior Subordinated Debentures were anti-dilutive in
2004 and 2003, and, therefore, were excluded from the computation of diluted
earnings per share. The debentures were convertible into an average of 381,000
shares of capital stock during the first quarter of 2004 (384,000 shares during
the first quarter of 2003). Due to the Company's net loss, the impact of stock
options was anti-dilutive during the first quarter of 2004. Had the Company
recorded net income, stock options would have increased the diluted average
shares outstanding by 260,000 in the 2004 quarter.
4. OTHER INCOME-NET
Other income-net comprises the following (in thousands):
For the Three Months
Ended March 31,
--------------------
2004 2003
------- -------
Market value gains/(losses) on
trading investments of employee
benefit trusts $ 996 $ (652)
Interest income 560 815
Gains on sales of available-for-
sale investments -- 3,544
Dividend income -- 616
Other-net 23 (61)
------- -------
Total other income-net $ 1,579 $ 4,262
======= =======
5. COMPREHENSIVE INCOME
We had total comprehensive income/(loss) of $(7,110,000) and $1,157,000
for the three months ended March 31, 2004 and 2003, respectively. The difference
between the Company's net income/(loss) and our comprehensive income/(loss) in
2003 relates to the cumulative unrealized appreciation/depreciation on
available-for-sale investments.
6. BUSINESS COMBINATIONS
On February 24, 2004, we completed the acquisition of the 63% of Vitas
Healthcare Corporation ("Vitas") common stock we did not previously own for cash
consideration of $321.1 million
Page 8 of 26
("Acquisition"). In addition, we paid the former chairman and chief executive
officer of Vitas $25.0 million pursuant to a noncompetition and consulting
agreement and made severance payments totaling $2.3 million to two other
officers of Vitas. The total purchase price, including $3.0 million of estimated
expenses and the Company's $16.8 million prior investment in Vitas, was $362.3
million.
The preliminary allocation of the purchase price to Vitas' assets and
liabilities is (in thousands):
Cash and cash equivalents $ 24,377
Other current assets 99,190
Property and equipment 22,332
Noncompetion agreement 18,000
Consulting agreement 7,000
Goodwill 344,515
Other assets 11,128
Current liabilities (including severance
of $18,291) (100,477)
Long-term debt (59,548)
Other liabilities (4,262)
---------
Subtotal 362,255
Less: investment in Vitas on
February 23, 2004 (16,794)
---------
Total purchase price 345,461
Less: cash and cash equivalents
acquired (24,377)
---------
Net cash outlay $ 321,084
=========
We began including the consolidated Vitas results of operations in the Company's
financial statements as of February 24, 2004.
Vitas is the nation's largest provider of 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.
Vitas provides a comprehensive range of hospice services through 26 operating
programs covering many of the large population areas in the U.S. including
Florida, California, Texas and Illinois. Vitas has over 6,000 employees,
including approximately 2,400 nurses and 1,500 home health aides.
To fund the Acquisition and retire Vitas' and the Company's long-term
debt, we completed the following transactions ("Financing") 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 4.50%. Principal payments of $1.25 million are due quarterly
under the term loan beginning June 2004. The credit agreement matures
in February 2009.
-We sold 2 million shares of the Company's capital stock in a private
placement at a price of $50 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%.
Page 9 of 26
-We issued $150 million principal amount of 8.75% senior notes due
February 2011.
-We incurred estimated financing and transaction fees and expenses of
approximately $15.9 million.
We are recording the Acquisition using the purchase method of
accounting using preliminary estimates of the fair values of Vitas' assets and
liabilities as of the date of the Acquisition. We recently engaged a
professional valuation firm to conduct a formal appraisal of Vitas' assets and
liabilities and to assist us in determining the fair values of Vitas' assets and
liabilities, including the identification and valuation of intangible assets
acquired. We may identify additional intangible assets, including customer
contracts and related customer relationships and other contract-based
intangibles such as lease agreements and service contracts. If we identify and
value other intangible assets, goodwill may be reduced. In addition, such
additional intangible assets may have finite lives and be subject to
amortization. The final allocation of the Acquisition consideration may result
in significant differences from the preliminary amounts reflected in the
Company's financial statements as of and for the three months ended March 31,
2004.
On a preliminary basis the noncompetition agreement and the consulting
agreement have been assigned lives equal to their contractual lives of eight
years and seven years, respectively. None of the goodwill associated with the
acquisition of Vitas is deductible for tax purposes. Goodwill is assumed to have
an indefinite life.
The unaudited pro forma operating data of the Company for the three
months ended March 31, 2004 and 2003, giving effect to the Acquisition and
Financing as if they had occurred on January 1 of the respective periods follow
(in thousands, except per share amounts):
For the Three Months
Ended March 31,
------------------------------
2004 2003
--------- ---------
Service revenues and sales $ 203,918 $ 177,827
--------- ---------
Cost of services provided and goods sold 145,072 127,071
Selling, general and administrative expenses 39,685 38,455(c)
Depreciation 4,717 4,980
Long-term incentive costs 9,058 (a) --
--------- ---------
Total costs and expenses 198,532 170,506
--------- ---------
Income from operations 5,386 7,321
Interest expense (6,307) (6,290)
Loss on extinguishment of debt (3,330)(b) (3,330)(b)
Other income- net 1,620 3,700 (d)
--------- ---------
Income/(loss) before income taxes` (2,631) 1,401
Income tax benefit/(expense) 99 (1,142)
--------- ---------
Net income/(loss) $ (2,532) $ 259
========= =========
Earnings/(Loss) Per Share
Net income/(loss) $ (.21)(a,b) $ .02(b,c,d)
========= =========
Average shares outstanding 12,099 11,890
========= =========
Diluted Earnings/(Loss) Per Share
Net income/(loss) $ (.21)(a,b) $ .02(b,c,d)
========= =========
Average shares outstanding 12,099 11,903
========= =========
Page 10 of 26
- -----------------
(a) Amounts represent payouts under the Company's 2002 Executive Long-term
Incentive Plan. The aftertax costs of these payouts was ($5,894,000 or
$.49 per share).
(b) Amount represents the prepayment penalty incurred on the early
extinguishment of the Company's debt ($2,164,000 aftertax or $.18 per
share).
(c) Amount includes pretax charges of $3,627,000 ($2,358,000 aftertax, or
$.20 per share) for severance charges.
(d) Amount includes a pretax gain of $3,544,000 ($2,151,000 aftertax, or
$.18 per share) from the sales of available for sale investments.
We acquired the 63% of Vitas we did not previously own to enhance our
minority investment in Vitas, the nation's largest provider of hospice services.
We believe the investment will be financially advantageous to our shareholders
because the hospice market is fragmented and Vitas has the infrastructure to
capitalize on the growing hospice services market.
During the first quarter of 2004, we completed two business combinations
within the Plumbing and Drain Cleaning segment for an aggregate purchase price
of $2,991,000 in cash. The acquired businesses provide drain cleaning and
plumbing services under the Roto-Rooter name. The results of operations of these
businesses are not material to the Company's results of operations.
We allocated the purchase price of these businesses as follows (in
thousands):
Goodwill $2,862
Other 129
------
Total $2,991
======
7. PAYOUT UNDER 2002 EXECUTIVE LONG-TERM INCENTIVE PLAN
During January 2004, the price of the Company's stock exceeded $50 per
share for more than 10 consecutive trading days, fulfilling one of the
performance targets of the 2002 Executive Long-Term Incentive Plan ("LTIP"). In
February the Compensation/Incentive Committee of the Board of Directors
("CIC")approved a payout under the LTIP in the aggregate amount of $7.8 million
($2.8 million in cash and 84,633 shares of capital stock). The pretax expense of
this award, including payroll taxes and benefit costs, was $9,058,000
($5,894,000 aftertax or $.54 per share).
8. PREPAID INCOME TAXES
Prepaid income taxes at March 31, 2004 totals $18,780,000, and includes
the estimated benefit on the loss that will be carried back to prior periods'
returns.
9. OTHER CURRENT LIABILITIES
Other current liabilities include the following (in thousands):
March 31, December 31,
2004 2003
--------- ------------
Accrued salaries and wages $18,916 $ 1,945
Accrued severance 17,345 1,462
Other 21,421 17,716
------- -------
Total $57,682 $21,123
======= =======
Page 11 of 26
Accrued severance includes $ 15,966,000 for potential costs under employment
contracts for twenty one employees of Vitas. Under the contracts these key
employees have the right, during the two-year period following the Company's
acquisition of Vitas, to terminate their employment and receive two years'
compensation as severance pay. As of April 30, 2004, three employees have
exercised their rights under the employment contracts and are entitled to
estimated payouts aggregating $2,000,000, none of which has been paid as of
March 31, 2004.
We are offering the remaining key employees replacement employment
contracts ("REC"). Under the REC's the key employees will receive stock awards
and stock options and may not be terminated without cause, but will forgo the
unilateral right to voluntarily terminate their employment and receive severance
pay. At the present time it is not possible to estimate how many additional
Vitas employees will elect to receive payments under their current employment
contracts.
10. 2003 SEVERANCE CHARGES
In March 2003, the Company and a corporate officer reached agreement
providing for termination of the officer's employment in exchange for payment
under her employment contract. The payments comprise a $1,000,000 lump sum
payment made in March 2003 and monthly payments of $52,788 beginning March 2003
and ending May 2007. The present value of these payments ($3,627,000) is include
in general and administrative expenses.
11. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
We adopted the provisions of FASB Interpretation No. 46R ("FIN 46R"),
Consolidation of Variable Interest Entities-an interpretation of Accounting
Research Bulletin No. 51 (revised), effective January 1, 2004. Under FIN 46R,
the Company is not the primary beneficiary of the Chemed Capital Trust ("CCT")
and is not permitted to consolidate the accounts of the CCT. As a result, we
deconsolidated the Mandatorily Redeemable Preferred Securities of the Chemed
Capital Trust ("Preferred Securities") and replaced them in the Company's
consolidated balance sheet with the Convertible Junior Subordinated Debentures
("CJSD"), which are the sole assets of the CCT. The CJSD mature March 15, 2030
and bear interest at the rate of $2.00 per annum per $27.00 principal amount,
the same rate as distributions on the Preferred Securities. Distributions on the
Preferred Securities have been reclassified as interest expense in the
consolidated statement of operations. Other than the change in account captions,
this change in accounting has no impact on the Company's financial statements.
On April 7, 2004, we announced we are calling all Preferred Securities
outstanding as of May 18, 2004, at face value ($27.00 per security) plus accrued
dividends ($.35 per security). Each Preferred Security is convertible into .73
share of capital stock. All securities which have not been converted as of May
17, 2004 will be redeemed for cash. Based on the current price of the Company's
capital stock, we anticipate the substantial majority, if not all, of the
Preferred Securities will be converted to capital stock.
Page 12 of 26
12. OTHER LONG-TERM DEBT
In conjunction with the Acquisition the Company retired its senior notes
due 2005 through 2009 and canceled its revolving credit agreement with Bank One,
N.A. ("Bank One"). To fund the Acquisition, the Company issued two million
shares of capital stock in a private placement and borrowed $335 million as
follows on the next page:
- $75 million drawn down under a $135 million secured revolving
credit/term loan facility ("New Credit Facility") with Bank
One. The facility comprises a $35 million term loan ("TL") and
$100 million revolving credit facility ("RCF"), including up
to $40 million in letters of credit. For the TL, principal
payments of $1,250,000 plus interest (LIBOR plus 3.50%) are
due quarterly beginning in June 2004. For the RCF, interest
payments (LIBOR plus 3.25%) are due at the end of the interest
period (30, 60 or 90 days as selected by the Company).
Payment of unpaid principal and interest is due February 2009.
At March 31, 2004, $5 million of the TL is included in current
liabilities.
- $110 million from the issuance of privately placed floating
rate senior secured notes ("Floating Rate Notes") due 2010.
Interest payments (LIBOR plus 3.75%) are due quarterly
beginning in May 2004 and payment of unpaid principal and
interest is due February 2010.
- $150 million from the issuance of privately placed 8.75%
senior notes ("Fixed Rate Notes") due 2011. Quarterly interest
payments are due beginning in May 2004 and payment of unpaid
principal and interest is due February 2011.
At March 31, 2004, long-term debt comprises the following (in thousands):
New Credit Facility:
Term Loan $ 35,000
Revolving Credit 25,000
Floating Rate Notes 110,000
Fixed Rate Notes 150,000
Other 1,606
---------
Subtotal 321,606
Less: current portion (5,806)
---------
Long-term debt $ 315,800
=========
At March 31, 2004, the Company has drawn down $31.4 million of letters of credit
("LOC") under the New Credit Facility. At March 31, 2004, the Company has $43.6
million of unused lines of credit under the New Credit Facility.
Bank One anticipates creating a borrowing syndicate to support the New
Credit Facility later in the second quarter. Should credit conditions change,
Bank One, after consultation with us, may change the terms of the New Credit
Facility, including the rates of interest payable and the required leverage and
other financial ratios.
Collectively, the New Credit Facility, the Floating Rate Notes and the
Fixed Rate Notes provide for significant affirmative and restrictive covenants
including, without limitation, requirements or restrictions (subject to
exceptions) related to the following:
Page 13 of 26
- use of proceeds of loans,
- restricted payments, including payments of dividends and
retirement of stock (permitting $.48 per share dividends so
long as the aggregate amount of dividends in any fiscal year
does not exceed $7.0 million and providing for additional
principal prepayments on the TL to the extent dividends exceed
$5.0 million in any fiscal year), with exceptions for existing
employee benefit plans and stock incentive plans,
- 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, and
- maximum annual capital expenditures of $20 million subject to
one-year carry-forwards on amounts not used during the
previous year.
In addition, the credit agreements provide that the Company will be
required to meet the following financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2004:
- a minimum net worth requirement, which requires a net worth of
at least (i) $232 million plus (ii) 50% of consolidated net
income (if positive) beginning with the quarter ending June
30, 2004, plus (iii) the net cash proceeds from issuance of
the Company's capital stock or capital stock of the Company's
subsidiaries;
- a maximum leverage ratio, calculated quarterly, based upon the
ratio of consolidated funded debt to consolidated EBITDA,
which will require maintenance of a ratio of 5.5 to 1.00
through December 31, 2004, a ratio of 4.75 to 1.00 from
January 1 through December 31, 2005, and 4.25 to 1.00
thereafter;
- a maximum senior leverage ratio, calculated quarterly, based
upon the ratio of senior consolidated funded debt to
consolidated EBITDA (which ratio excludes indebtedness in
respect of the Fixed Rate Notes), which will require
maintenance of a ratio of 3.375 to 1.00 through December 31,
2004, a ratio of 2.875 to 1.00 from January 1 through December
31, 2005, and 2.625 to 1.00 thereafter; and
- a minimum fixed charge coverage ratio, based upon the ratio of
consolidated EBITDA minus capital expenditures to consolidated
interest expense plus consolidated current maturities
(including capitalized lease obligations) plus cash dividends
paid on equity securities plus expenses for taxes, which will
require maintenance of a ratio of 1.15 to 1.00 through
December 31, 2004, a ratio of 1.375 to 1.00 from January 1
through December 31, 2005, and 1.50 to 1.00 thereafter.
Page 14 of 26
Our current estimates and projections indicate that we will be in
compliance with all financial and debt covenants as of June 30, 2004, and for
the foreseeable future.
All of the borrowings under the New Credit Facility and the Floating Rate
Notes are guaranteed by the assets of and secured by the securities of
substantially all of the Company's subsidiaries.
Under the terms of the Floating Rate Notes, we are obligated to file a
preliminary registration statement registering the Floating Rate Notes within 90
days of February 24, 2004 and to file an effective registration statement within
180 days of February 24, 2004. Should we fail to do so, the interest rate on the
Floating Rate Notes is increased .25% (up to a maximum of 1% per annum) for each
quarter the required registration statement remains unfiled. The terms of the
Fixed Rate Notes contain like registration and penalty provisions.
13. LOANS RECEIVABLE FROM INDEPENDENT CONTRACTORS
The Plumbing and Drain Cleaning segment subcontracts with independent
contractors to operate certain plumbing repair and drain cleaning businesses in
lesser-populated areas of the United States and Canada. At March 31, 2004, the
Company has notes receivable from its independent contractors totaling
$2,938,000 (December 31, 2003-$2,599,000). In most cases these loans are fully
or partially secured by equipment owned by the contractor. The interest rates on
the loans range from 5% to 8% per annum and the remaining terms of the loans
range from one month to 6.0 years at March 31, 2004. During the quarter ended
March 31, 2004, we recorded revenues of $4,091,000 (2003-$3,457,000) and pretax
profits of $1,552,000 (2003-$1,195,000) from its independent contractors.
Effective January 1, 2004, we adopted the provisions of FIN 46R relative
to the Company's contractual relationships with its independent contractors. FIN
46R requires the primary beneficiary of a Variable Interest Entity ("VIE") to
consolidate the accounts of the VIE. We have evaluated our relationships with
our independent contractors based upon guidance provided in FIN 46R and have
concluded that many of the contractors who have loans payable to us may be
VIE's. Due to the limited financial data available we have not been able to
perform the required analysis to determine which, if any, of these relationships
are VIE's or the primary beneficiary of these potential VIE relationships. We
are continuing to request appropriate information to enable us to evaluate this
VIE relationship. Furthermore, we believe consolidation, if required, of the
accounts of any VIE's for which the Company might be the primary beneficiary
would not materially impact the Company's financial position and results of
operations.
14. LITIGATION
The Company is party to a class action lawsuit filed in the Third
Judicial Circuit Court of Madison County, Illinois, in June of 2000 by Robert
Harris, alleging certain Roto-Rooter plumbing was performed by unlicensed
employees. The Company contests these allegations and believes them without
merit. Plaintiff moved for a certification of a class of customers in 32 states
who allegedly paid for plumbing work performed by unlicensed employees.
Plaintiff also moved for a partial
Page 15 of 26
summary judgment on grounds the licensed apprentice plumber who installed his
faucet did not work under the direct personal supervision of a licensed 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 yet ruled on certification
of a class in the remaining 31 states. Due to complex legal and other issues
involved, it is not presently possible to estimate the amount of liability, if
any, related to this matter.
On April 5, 2002, Michael Linn, an attorney, filed a class action
complaint against the Company in the Court of Common Pleas, Cuyahoga County,
Ohio. He alleged Roto-Rooter Services Company's miscellaneous parts charge,
ranging from $4.95 to $12.95 per job, violates the Ohio Consumer Sales Practices
Act. The Company contends that this charge, which is included within the
estimate approved by its customers, is a fully disclosed component of its
pricing. On February 25, 2003, the trial court certified a class of customers
who paid the charge from October 1999 to July 2002. The Company is appealing
this order and believes the ultimate disposition of this lawsuit will not have a
material effect on its financial position.
Nonetheless, management cannot provide assurance the Company will
ultimately prevail in either of the above two cases. Regardless of outcome, such
litigation can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The changes in most of the balance sheet accounts from
December 31, 2003 to March 31, 2004 are due primarily to the acquisition of
Vitas in February 2004. Explanations for other changes in the balance sheet
since December 31, 2003 include:
- The increase in prepaid income taxes from $3.6 million at
December 31, 2003 to $18.8 million at March 31, 2004 is
attributable to the tax benefits recorded by Vitas on
transaction costs of the merger and to tax benefit on the
Company's losses recorded in the first quarter of 2004.
- The decline in other investments from $25.1 million at
December 31, 2003 to $1.4 million at March 31, 2004, is
attributable to reclassifying our investment in Vitas from an
equity-method investment to an investment in a consolidated
subsidiary, which is now eliminated in consolidation.
- The current portion of long-term debt increased from $448,000
at December 31, 2003 to $5.8 million at March 31, 2004 due to
the Company's borrowing under the term loan provisions of its
New Credit Facility, under which principal payments of $1.25
million are payable quarterly.
Page 16 of 26
- Other long-term debt increased from $25.9 million at December
31, 2003 to $315.8 million at March 31, 2004 due to the
Company's borrowing under the New Credit Facility ($55.0
million), the Floating Rate Notes ($110.0 million) and the
Fixed Rate Notes ($150.0 million). Proceeds from these loans
were used to finance the purchase of Vitas, retire Vitas' debt
($67.0 million) and retire the Company's senior debt due 2005
to 2009 ($28.3 million including a prepayment penalty of $3.3
million).
- From December 31, 2003 to March 31, 2004, paid in capital
increased $25.1 million and treasury stock declined $76.7
million due to the issuance of 2 million shares of capital
stock from treasury at $50 per share to finance the purchase
of Vitas.
At March 31, 2004, we had approximately $43.6 million available borrowing
capacity under our revolving credit agreement with Bank One. Management believes
its liquidity and sources of capital are satisfactory for the Company's needs in
the foreseeable future.
COMMITMENTS AND CONTINGENCIES
- -----------------------------
Collectively, the terms of the credit agreements provide that the Company
will be required to meet various financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2004. In connection therewith, our
current estimates and projections indicate that we will be in compliance with
all financial and other debt covenants as of June 30, 2004.
Under the New Credit Facility we are limited to investing a maximum of $3
million on acquisitions of businesses during the term of the agreement. For the
period beginning February 24, 2004 and ending April 30, 2004, we have spent $1.4
million on a business combination in the Roto-Rooter segment, leaving $1.6
million available spending for the period ending February 24, 2007. Should we
desire to complete an acquisition whose purchase price exceeds this unused
allowance, we would request a waiver of this covenant from the lender. There can
be no assurance that such waiver would be granted.
Bank One, as administrative agent for the Company's New Credit Facility,
is entitled, after consultation with us, to change certain aspects of the New
Credit Facility, to ensure a successful syndication of the facility. Because the
syndication is not yet complete, it is possible that Bank One may request
changes in the terms of the New Credit Facility. We cannot presently estimate
the financial impact of possible changes, if any, on our financial statements.
At March 31, 2004, we have current accounts receivable from Patient
Care, a former subsidiary, aggregating $2,295,000. This amount comprises
$1,251,000 for the estimated post-closing balance sheet adjustment due us and
$1,044,000 for reimbursement for expenses we have paid on behalf of Patient
Care. In addition, we have an investment in a common stock warrant of Patient
Care ($1,445,000) and a long-term note receivable due in 2007 ($12.5 million).
Patient Care is current on its interest payments on the long-term note, but is
in arrears with respect to accounts receivable balances. Patient Care's business
has been adversely impacted by a difficult Medicaid
Page 17 of 26
reimbursement climate. Nonetheless, Patient Care has reduced its bank debt
and is in compliance with its debt covenants.
Should Patient Care's business deteriorate significantly during the
remainder of 2004, we may be required to record an impairment loss on our
investments in or receivables due from Patient Care. At the present time we
believe the balances are fully collectible and that valuation allowances on
these assets are not required.
RESULTS OF OPERATIONS
FIRST QUARTER 2004 VERSUS FIRST QUARTER 2003-CONSOLIDATED RESULTS
- -----------------------------------------------------------------
The Company's service revenues and sales for the first quarter of 2004
increased 69% versus revenues for the first quarter of 2003. This $53.4 million
increase was attributable to the following (dollar amounts in thousands):
Increase/(Decrease)
-------------------
Amount Percent
------ -------
Vitas $ 51,112 n.a.%
Plumbing and Drain Cleaning
Drain cleaning 1,625 6.0
Plumbing 1,420 5.7
Other 1,458 11.4
Service America
Service contracts (1,169) (12.1)
Demand services (1,043) (32.3)
--------
Total $ 53,403 68.8%
========
Vitas' revenues for the February 24, 2004 to March 31, 2004 period
included revenues from the following sources (in thousands):
Routine home care $ 34,395
Continuous home care 9,159
General inpatient care 7,502
Respite and custodial care 56
--------
Total $ 51,112
========
Approximately 96% of Vitas' service revenues for the period consisted of
payments from Medicare and Medicaid.
The increase in the drain cleaning revenues for the first quarter of
2004 versus 2003 comprises a .1% increase in the number of jobs performed and a
5.9% increase in the average price per job. The increase in plumbing revenues
for the first quarter of 2004 versus 2003 comprised a 3.2% increase in the
number of jobs and a 2.5% increase in the average price per job. The increase in
other revenues for the first quarter of 2004 versus 2003 is attributable to
increases in contractor operations, product sales and industrial and municipal
revenues.
The decline in Service America's service contract revenues is
attributable to selling insufficient new service contracts to replace contracts
canceled or not renewed. The average number of contracts in place during the
first quarter of 2004 was 20% lower than the 2003 quarter. As revenues from
demand services are largely dependent upon service contract customers, the
decline in service contracts in place was largely responsible for the decline in
demand services in 2004.
Page 18 of 26
The consolidated gross margin was 34.2% in the first quarter of 2004 as
compared with 40.6% in the first quarter of 2003, largely due to the acquisition
of Vitas in 2004. On a segment basis, Vitas' gross margin was 20.8%, the
Plumbing and Drain Cleaning segment's gross margin increased .9% point to 44.6%
largely due to favorable experience in the Company's health insurance plan in
the 2004 quarter. Service America's gross margin increased 6.3% points to 31.1%
due to reduced material costs as a percent of revenues and lower labor costs as
a result of recent reductions in service technician headcount in 2004. The lower
material costs, as a percent of revenues, is due primarily to lower inventory
shrinkage.
Selling, general and administrative expenses ("SG&A") for the first
quarter of 2004 were $31,023,000, an increase of $4,966,000 (19.1%) versus the
first quarter of 2003. The increase is attributable to the following (in
thousands):
Increase/
(Decrease)
----------
Vitas SG&A (acquired in 2004) $ 5,391
Severance charges for officer in 2003 (3,627)*
Higher yellow pages directory
advertising costs in 2004 1,880*
Unfavorable market adjustments to
deferred compensation liabilities in
2004 versus favorable adjustments in
2003 - related to gains and losses
on the assets held in benefit trusts 1,648*
All other (326)
-------
Total $ 4,966
=======
---------------------
*All or substantially all of increase occurred within the Pluming and
Drain Cleaning segment.
The yellow pages directory costs are due solely to the timing of directories
placed in service. Directories which typically had been distributed in the
fourth quarter of the prior year were not distributed until the first quarter of
2004. The increase in annual yellow pages advertising cost is expected to
moderate significantly throughout 2004. The market adjustments on deferred
compensation liabilities are entirely offset with equal and opposite
gains/(losses) on the assets securing those benefits included in other
income-net.
Depreciation expense for the first quarter of 2004 increased $537,000
(17.6%) from $3,052,000 in the first quarter of 2003 to $3,589,000 in the 2004
quarter. This increase arises from the following (in thousands):
Increase/
(Decrease)
----------
Vitas depreciation (acquired in 2004) $ 748
Lower depreciation for Service America due largely to lower asset
values in 2004 as a result of writing down assets in the fourth
quarter of 2003 (106)
Lower depreciation for the Plumbing and Drain Cleaning segment due to
lower depreciation on service vehicles due to recent declines
in capital outlays (105)
-----
Total $ 537
=====
Page 19 of 26
The payout of awards under the 2002 Executive Long-Term Incentive Plan
("LTIP") in the first quarter of 2004 is due to the attainment of the target
stock price under the LTIP during January 2004. In February the
Compensation/Incentive Committee of the Board of capital stock). The Directors
("CIC")approved a payout under the LTIP in the aggregate amount of $7.8 million
($2.8 million in cash and 84,633 shares of pretax expense of this award,
including payroll taxes and benefit costs was $275,000 for Service America and
$8,783,000 for the Plumbing and Drain Cleaning segment.
Income from operations declined $1,230,000 from $2,384,000 in the first
quarter of 2003 to $1,154,000 in the first quarter of 2004. The decline
comprises (in thousands):
Increase/
(Decrease)
----------
Cost of the LTIP in 2004 $(9,058)
Income from operations of Vitas (acquired in 2004) 4,487
Severance charges for officer in 2003 3,627
Higher gross profit of Plumbing and Drain
Cleaning segment due primarily to
increase in service revenues 2,579
Increase in yellow pages advertising costs
(primarily Plumbing and Drain Cleaning) (1,880)
Unfavorable market adjustments to
deferred compensation liabilities in
2004 versus favorable adjustments in
2003 - related to gains and losses
on the assets held in benefit trusts (1,648)
All other 663
-------
Total $(1,230)
=======
Interest expense, substantially all of which is incurred as Unallocated
Investing and Financing income/expense, increased from $807,000 in the first
quarter of 2003 to $2,905,000 in the 2004 quarter. This increase is primarily
due to higher debt levels in 2004 as the result of borrowing $335 million to
fund the acquisition of Vitas in February 2004.
The loss on extinguishment of debt represents the make-whole penalty on
the retirement of our previous senior debt due 2005 through 2009. We retired
this debt early, to facilitate obtaining financing for the Vitas acquisition.
Other income declined $2,683,000 in the first quarter of 2004 versus
the first quarter of 2003. The decline is attributable to (in thousands):
Increase/
(Decrease)
----------
Capital gains on the sales of available-
for-sale investments in 2003 $(3,544)
Favorable market adjustments in 2004
to assets held in employee benefit
trusts, versus losses in 2003 1,648
Lack of dividend income from Vitas preferred
stock in 2004 (redeemed August 2003) (712)
All other (75)
-------
Total $(2,683)
=======
Page 20 of 26
The above increase in market adjustments for assets held in employee benefit
trusts in the 2004 quarter is entirely offset by higher expenses in the SG&A
category of the statement of operations.
Our effective income tax rate declined from 39.1% in the first quarter
of 2003 to 14.2% in the first quarter of 2004. This decline is due largely to
the lack of a state and local tax benefit on corporate overhead, interest
expenses and the loss on extinguishment of debt in 2004.
Equity in the loss of Vitas for 2004 represents the Company's 37% share
of Vitas' loss for the period from January 1, 2004 through February 23, 2004,
prior to our acquiring a controlling interest in Vitas. Vitas incurred aftertax
expenses aggregating $20,930,000 related to the sale of its business to the
Company. The Company's aftertax share of these charges was $4,621,000.
The net loss for the first quarter of 2004 was $7,110,000 ($.65 per
share) as compared with net income of $3,557,000 ($.36 per share) in 2003. The
net loss for 2004 included aftertax charges for the cost of the LTIP payout
($5,894,000 or $.54 per share), the Company's share of Vitas' sale transaction
expenses ($4,621,000 or $.42 per share) and the loss on the retirement of the
Company's senior debt ($2,164,000 or $.20 per share. Net income in 2003 includes
the cost of corporate severance charges ($2,358,000 or $.24 per share) and gains
on the sales of available-for-sale investments ($2,151,000 or $.22 per share).
FIRST QUARTER 2004 VERSUS FIRST QUARTER 2003-SEGMENT RESULTS
- ------------------------------------------------------------
The change in aftertax earnings for the first quarter of 2004 versus
the first quarter of 2003 is due to (in thousands):
Increase/
(Decrease)
----------
Earnings of Vitas, acquired in 2004 $ 2,597
Decline in the Plumbing and Drain Cleaning
segment earnings/(loss) (2,868)
Increase in Service America's earnings 106
Equity in the loss of Vitas in 2004 versus
dividend income in 2003 (4,734)
Loss on extinguishment of debt in 2004 (2,164)
Capital gains on the sales of available-
for-sale investments in 2003 (2,151)
Increase in unallocated investing income/
(expense) (1,453)
--------
Decline in net income/(loss) $(10,667)
========
The aftertax earnings/(loss) of the Plumbing and Drain Cleaning segment
includes the cost of the LTIP in 2004 ($5,724,000 net of income taxes) and the
cost of corporate severance in 2003 ($2,358,000 net of income taxes). Service
America's earnings for 2004 includes the cost of the LTIP in 2004 ($170,000 net
of income taxes). Equity in the loss of Vitas (prior to February 24, 2004)
includes the Company's aftertax share of Vitas' sale transaction expenses in
2004 ($4,621,000 net of income taxes). The increase in aftertax unallocated
investing income and expense is attributable primarily to higher interest
expense in 2004, as a result of incurring additional debt to fund the Vitas
acquisition.
Page 21 of 26
' For March 2004, the first full month of operations under Roto-Rooter
ownership, Vitas' service revenues and operating profit increased 23% and 24%,
respectively, versus results for March 2003.
Driving these increases was an increase in average daily census ("ADC") in March
2004 to 8,273, an increase of 18% versus ADC for March 2003.
To provide background in analyzing the quarterly operation of the Vitas
segment during 2004, we are providing the following financial and operating data
of Vitas, prepared from Vitas' historical financial records, for each of the
five quarters in the 15-month period ended March 31, 2004 (in thousands, except
percentages, days and dollars per day):
2003
--------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS
Service revenues and sales $ 100,182 $ 106,245 $ 113,528 $ 121,062 $ 441,017
--------- --------- --------- --------- ---------
Cost of services provided and goods sold
(excluding depreciation) 80,919 82,684 88,373 93,214 345,190
Selling, general and administrative expenses 11,585 13,557 13,894 13,994 53,030
Costs related to sale of business -- -- -- 1,541(b) 1,541(b)
Depreciation 1,428 1,483 1,244 1,385 5,540
--------- --------- --------- --------- ---------
Total costs and expenses 93,932 97,724 103,511 110,134 405,301
--------- --------- --------- --------- ---------
Income/(loss) from operations 6,250 8,521 10,017 10,928 35,716
Interest expense (1,344) (1,322) (1,843) (1,744) (6,253)
Loss on extinguishment of debt -- -- (4,117)(c) -- (4,117)(c)
Other income--net 150 203 168 162 683
--------- --------- --------- --------- ---------
Income/(loss) before income taxes 5,056 7,402 4,225 9,346 26,029
Income taxes (2,015) (2,963) (1,644) (3,833) (10,455)
--------- --------- --------- --------- ---------
Net income/(loss) $ 3,041 $ 4,439 $ 2,581 $ 5,513 $ 15,574
========= ========= ========= ========= =========
EBITDA (e)
Net income/(loss) $ 3,041 $ 4,439 $ 2,581 $ 5,513 $ 15,574
Add/(deduct)
Interest expense 1,344 1,322 1,843 1,744 6,253
Income taxes 2,015 2,963 1,644 3,833 10,455
Depreciation 1,428 1,483 1,244 1,385 5,540
Amortization 6 7 6 7 26
--------- --------- --------- --------- ---------
EBITDA $ 7,834 $ 10,214 $ 7,318 $ 12,482 $ 37,848
========= ========= ========= ========= =========
First Quarter 2004 (a)
------------------------------
January 1 to February 24 to
February 23 March 31
------------ --------------
STATEMENT OF OPERATIONS
Service revenues and sales $ 72,870 $ 51,112
--------- ---------
Cost of services provided and goods sold
(excluding depreciation) 58,848 40,486
Selling, general and administrative expenses 8,186 5,391
Costs related to sale of business 24,956(d) --
Depreciation 836 748
--------- ---------
Total costs and expenses 92,826 46,625
--------- ---------
Income/(loss) from operations (19,956) 4,487
Interest expense (919) (28)
Loss on extinguishment of debt (4,497)(d) --
Other income--net 41 31
--------- ---------
Income/(loss) before income taxes (25,331) 4,490
Income taxes 6,996 (1,893)
--------- ---------
Net income/(loss) $ (18,335) $ 2,597
========= =========
EBITDA (e)
Net income/(loss) $ (18,335) $ 2,597
Add/(deduct)
Interest expense 919 28
Income taxes (6,996) 1,893
Depreciation 836 748
Amortization 4 323
--------- ---------
EBITDA $ (23,572) $ 5,589
========= =========
- --------------------------------------------------------
(a) We acquired Vitas on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of Vitas' assets as of that date.
Amounts for the first quarter of 2004 include the combined operations of
Vitas prior to and after acquisition by the Company on February 24, 2004.
Amortization of such adjustments for the February 24, 2004 to March 31,
2004 period totaled $202,000 for increased depreciation and $327,000 for
Amortization of purchase accounting adjustments for the February 24, 2004
to March 31, 2004 period totaled $202,000 for increased depreciation
increased amortization of identifiable intangible assets. and $327,000 for
increased amortization of intangible assets.
(b) Costs related to sale of business incurred in 2003 include legal and other
professional fees amounting to $1,541,000 pretax (or $925,000 aftertax).
(c) Loss on extinguishment of debt totaled $4,117,000 ($2,470,000 aftertax) and
represents the cost of writing off deferred issuance costs at the time
Vitas refinanced its debt in the third quarter of 2003.
(d) Costs related to the sale of Vitas totaled $29,453,000 pretax ($20,930,000
aftertax). Such costs include legal and professional fees, severance costs
and a loss on writing off deferred debt issuance costs.
(e) EBITDA is income before interest expense, income taxes, depreciation and
amortization. We use EBITDA, in addition to net income, income/(loss) from
operations and cash flow from operating activities, 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 that
EBITDA is an important supplemental measure of operating performance
because it provides investors with an indication of our ability to fund our
operating capital expenditures and debt service requirements through
earnings. We also believe that 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 as alternatives for net income, income from
operations net cash provided by operating activities or our other financial
information determined under GAAP, and should not be considered as measure
of our profitability or liquidity. We believe the line on our 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 and costs related to the
sale of Vitas to the Company as follows (in thousands):
2003 First Quarter 2004
----------------------------------------------------------- ------------------------------
First Second Third Fourth Total January 1 to February 24 to
Quarter Quarter Quarter Quarter Year February 23 March 31
------- ------- ------- ------- ------- ------------ --------------
Interest income $ 150 $ 203 $ 168 $ 162 $ 683 $ 41 $ 31
Loss on extinguishment of debt -- -- 4,117 -- 4,117 4,497 --
Costs related to sale of business -- -- -- 1,541 1,541 24,956 --
Page 22 of 26
2003
-------------------------------------------------------------------- 2004
First Second Third Fourth Total First
Quarter Quarter Quarter Quarter Year Quarter
----------- ----------- ----------- ----------- ----------- -----------
OPERATING STATISTICS
Net revenue
Homecare $ 67,489 $ 72,457 $ 77,807 $ 83,580 $ 301,333 $ 83,241
Inpatient 16,949 17,307 17,009 17,343 68,608 18,778
Continuous care 15,744 16,481 18,712 20,139 71,076 21,963
----------- ----------- ----------- ----------- ----------- -----------
Total $ 100,182 $ 106,245 $ 113,528 $ 121,062 $ 441,017 $ 123,982
=========== =========== =========== =========== =========== ===========
Net revenue as a percent of total
Homecare 67.4% 68.2% 68.5% 69.0% 68.3% 67.1%
Inpatient 16.9 16.3 15.0 14.3 15.6 15.1
Continuous care 15.7 15.5 16.5 16.7 16.1 17.8
----------- ----------- ----------- ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== =========== ===========
Average daily census ("ADC") (days)
Homecare 3,543 3,764 3,982 4,195 3,873 4,341
Nursing home 2,658 2,746 2,942 3,046 2,849 2,935
----------- ----------- ----------- ----------- ----------- -----------
Routine homecare 6,201 6,510 6,924 7,241 6,722 7,276
Inpatient 349 349 342 341 345 372
Continuous care 328 339 377 398 361 449
----------- ----------- ----------- ----------- ----------- -----------
Total 6,878 7,198 7,643 7,980 7,428 8,097
=========== =========== =========== =========== =========== ===========
Average length of stay (days)
Homecare 72.0 74.1 74.6 78.3 74.8 79.0
Nursing home 87.0 90.4 84.0 94.5 89.1 90.0
Inpatient 21.3 17.7 22.2 23.8 21.4 19.2
Continuous care 18.2 18.9 18.8 19.5 18.9 17.6
Total 54.1 55.4 54.7 59.0 55.8 55.7
Median length of stay (days) 11.0 12.0 12.0 12.0 12.0 11.0
ADC by major diagnosis
Neurological 28.5% 28.4% 29.1% 29.9% 29.0% 30.3%
Cancer 26.8 26.0 25.2 24.5 25.6 23.8
Cardio 14.2 14.4 13.9 13.8 14.0 14.3
Respiratory 7.2 7.5 7.4 7.3 7.4 7.5
Other 23.3 23.7 24.4 24.5 24.0 24.1
----------- ----------- ----------- ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== =========== ===========
Direct patent care margins (f)
Routine homecare 47.7% 50.1% 50.2% 49.8% 49.4% 48.8%
Inpatient 22.3 22.4 23.2 22.3 22.6 27.1
Continuous care 23.5 21.4 21.2 23.1 22.2 19.2
Homecare margin drivers
(dollars per patient day)
Labor costs $ 43.41 $ 39.92 $ 39.90 $ 42.71 $ 41.47 $ 44.03
Drug costs 8.86 8.93 8.74 8.74 8.81 8.64
Home medical equipment 5.75 5.64 5.60 5.75 5.69 5.72
Medical supplies 1.86 1.70 1.80 1.72 1.77 1.93
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 194.03 $ 188.47 $ 191.57 $ 209.54 $ 195.88 $ 198.24
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 391.51 $ 397.23 $ 402.75 $ 410.49 $ 401.09 $ 421.74
Bad debt expense as a percent of revenues 1.3% 1.3% 1.3% 1.2% 1.3% 1.2%
Accounts receivable --
days of revenue outstanding 40.2 37.4 34.2 36.8 36.8 36.4
- ------------------
(f) Amounts exclude indirect patient care costs.
Page 23 of 26
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. Variances in any or all of the risks,
uncertainties, contingencies, and other factors from the Company's assumptions
could cause actual results to differ materially from these forward-looking
statements and trends. The Company's ability to deal with the unknown outcomes
of these events, many of which are beyond the control of the Company, may affect
the reliability of its projections and other financial matters.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management to allow
timely decisions regarding required disclosure.
The Company recently carried out an evaluation, under the
supervision of the Company's President and Chief Executive Officer, and with the
participation of the Vice President and Chief Financial Officer and the Vice
President and Controller, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-14/15d-14(a). Based upon the foregoing, the Company's President and Chief
Executive Officer, Vice President and Chief Financial Officer and Vice President
and Controller concluded that as of the date of this report the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its consolidated subsidiaries
required to be included in the Company's Exchange Act reports. There have been
no significant changes in internal control over financial reporting during the
quarter ended March 31, 2004.
Page 24 of 26
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
31.1 Certification by Kevin J. McNamara pursuant to Rule 13A
- 14 of the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule 13A
- 14 of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13A - 14 of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by David P. Williams pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
- A Current Report on Form 8-K, dated February 5, 2004 was filed
February 6, 2004. The report includes the Company's earnings
announcement for the fourth quarter and the year ended
December 31, 2003.
- A Current Report on Form 8-K/A, October 14, 2003 was filed
February 23, 2004. The report amends the Company's Report on
Form 8-K/A, filed on December 19, 2003.
- A Current Report on Form 8-K, dated February 24, 2004 was
filed February 24, 2004. The report discloses that the Company
completed the acquisition of Vitas Healthcare Corporation.
- A Current Report on Form 8-K, dated April 7, 2004, was filed
April 7, 2004. The report includes the Company's announcement
to optionally redeem its Convertible Junior Subordinated
Debentures due 2030 and all shares of Convertible Preferred
Trust Securities and Common Securities of the Chemed Capital
Trust.
- A Current Report on Form 8-K, dated May 4, 2004, was filed
May 4, 2004. The report includes the Company's earnings
announcement for the first quarter.
Page 25 of 26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Roto-Rooter, Inc.
-----------------
(Registrant)
Dated: May 10, 2004 By Kevin J. McNamara
---------------- -----------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Dated: May 10, 2004 By David P. Williams
---------------- -----------------------
David P. Williams
(Vice President and Chief
Financial Officer)
Dated: May 10, 2004 By Arthur V. Tucker, Jr.
---------------- -----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
Page 26 of 26