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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] For the fiscal year ended December 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from _______________ to ______________
Commission File Number: 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-0791746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2600 Chemed Center, 255 East Fifth Street, Cincinnati, Ohio 45202-4726
(Address of principal executive offices) (Zip Code)
(513) 762-6900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------------- -----------------------
Capital Stock - Par Value $1 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes[ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average bid and asked price of said stock on the
New York Stock Exchange - Composite Transaction Listing on June 30, 2004 ($48.48
per share), was $581,870,609.
At March 8, 2005, 12,640,349 shares of Chemed Capital Stock (par value $1
per share) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
-------- ------------------
2004 Annual Report to Stockholders (specified portions) Parts I, II and IV
Proxy Statement for Annual Meeting to be held May 16, 2005 Part III
CHEMED CORPORATION
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 18
Item 3. Legal Proceedings...................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................... 19
-- Executive Officers of the Registrant................................... 19
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.......... 20
Item 6. Selected Financial Data................................................ 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............. 22
Item 8. Financial Statements and Supplementary Data............................ 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................... 22
Item 9A. Controls and Procedures................................................ 22
-- Status of Management's Report on Internal Control Over Financial
Reporting.............................................................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 23
Item 11. Executive Compensation................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............................. 23
Item 13. Certain Relationships and Related Transactions......................... 24
Item 14. Principal Accountant Fees and Services................................. 24
PART IV
Item 15. Exhibits and Financial Statement Schedules............................. 25
ITEM 1. BUSINESS
GENERAL
The Company was incorporated in Delaware in 1970 as a subsidiary of W. R.
Grace & Co. and succeeded to the business of W. R. Grace & Co.'s Specialty
Products Group as of April 30, 1971 and remained a subsidiary of W. R. Grace &
Co. until March 10, 1982. As used herein, "Company" refers to Chemed
Corporation, and its subsidiaries and "Grace" refers to W. R. Grace & Co. and
its subsidiaries.
On March 10, 1982, the Company transferred to Dearborn Chemical Company,
a wholly owned subsidiary of the Company, the business and assets of the
Company's Dearborn Group, including the stock of certain subsidiaries within the
Dearborn Group, plus $185 million in cash, and Dearborn Chemical Company assumed
the Dearborn Group's liabilities. Thereafter, on March 10, 1982 the Company
transferred all of the stock of Dearborn Chemical Company to Grace in exchange
for 16,740,802 shares of the capital stock of the Company owned by Grace with
the result that Grace no longer has any ownership interest in the Company.
On December 31, 1986, the Company completed the sale of substantially all
of the business and assets of Vestal Laboratories, Inc., a wholly owned
subsidiary. The Company received cash payments aggregating approximately $67.4
million over the four-year period following the closing, the substantial portion
of which was received on December 31, 1986.
On April 2, 1991, the Company completed the sale of DuBois Chemicals, Inc.
("DuBois"), a wholly owned subsidiary, to the Diversey Corporation ("Diversey"),
then a subsidiary of The Molson Companies Ltd. Under the terms of the sale,
Diversey agreed to pay the Company net cash payments aggregating $223,386,000,
including deferred payments aggregating $32,432,000.
On December 21, 1992, the Company acquired The Veratex Corporation and
related businesses ("Veratex Group") from Omnicare, Inc. The purchase price was
$62,120,000 in cash paid at closing, plus a post-closing payment of $1,514,000
(paid in April 1993) based on the net assets of Veratex.
Effective January 1, 1994, the Company acquired all the capital stock of
Patient Care, Inc. ("Patient Care"), for cash payments aggregating $20,582,000,
plus 17,500 shares of the Company's Capital Stock. An additional cash payment of
$1,000,000 was made on March 31, 1996 and another payment of $1,000,000 was made
on March 31, 1997.
In July 1995, the Company's Omnia Group (formerly Veratex Group) completed
the sale of the business and assets of its Veratex Retail division to Henry
Schein, Inc. ("HSI") for $10 million in cash plus a $4.1 million note for which
payment was received in December 1995.
Effective September 17, 1996, the Company completed a merger of a
subsidiary of the Company, Chemed Acquisition Corp., and Roto-Rooter, Inc.
pursuant to a Tender Offer commenced on August 8, 1996 to acquire any and all of
the outstanding shares of Common Stock of Roto-Rooter, Inc. for $41.00 per share
in cash.
On September 24, 1997, the Company completed the sale of its wholly owned
businesses comprising the Omnia Group to Banta Corporation for $50 million in
cash and $2.3 million in deferred payments.
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Effective September 30, 1997, the Company completed a merger between its
81-percent-owned subsidiary, National Sanitary Supply Company, and a wholly
owned subsidiary of Unisource Worldwide, Inc. for $21.00 per share, with total
payments of $138.3 million.
Effective October 11, 2002, the Company sold its Patient Care subsidiary
("Patient Care") to an investor group that included Schroder Ventures Life
Sciences Group, Oak Investment Partners, Prospect Partners and Salix Ventures.
Patient Care provides home-healthcare services primarily in the New York-New
Jersey-Connecticut area. The cash proceeds to the Company totaled $57,500,000,
of which $5,000,000 was placed in escrow pending settlement of Patient Care's
receivables with third-party payers. Of this amount, $2,500,000 was distributed
as of October 2003 and the remainder, except for $769,042 was distributed as of
October 2004. The Company may also be entitled to additional funds based on the
final value of the estimated balance sheet valuation. This claim is currently in
litigation. In addition, the Company received a senior subordinated note
receivable ("Note") for $12,500,000 and a common stock purchase warrant
("Warrant") for 2% of the outstanding stock of the purchasing company. The Note
is due October 11, 2007, and bears interest at the annual rate of 7.5% through
September 30, 2004, 8.5% from October 1, 2004, through September 30, 2005, and
9.5% thereafter. The Warrant has an estimated fair value of $1,445,000.
Effective February 24, 2004, The Company completed a merger of its wholly
owned indirect subsidiary, Marlin Merger Corp., and Vitas Healthcare
Corporation. Under the terms of the merger agreement, Vitas stockholders
received cash of $30.00 per share. The transaction, including the refinancing of
existing Vitas debt and other payments made in connection with the merger,
totaled approximately $415 million in cash. In order to complete the merger the
Company sold two million shares of its Capital Stock in a private placement at a
price of $50.00 per share, issued $110 million principal amount of floating rate
senior secured notes due 2010 ("Floating Rate Notes"), issued $150 million
principal amount of 8.75% Senior Notes due 2011 ("Fixed Rate Notes"), and
entered into new $135 million senior secured credit facilities. More information
with respect to the Company's merger with Vitas is included within Note 7 of the
Notes to Consolidated Financial Statements appearing on pages 24-25 of the
Annual Report to Stockholders and incorporated herein by reference.
During 2004 the Company conducted its business operations in three
segments: Vitas Group ("Vitas"), Roto-Rooter Group ("Roto-Rooter") and Service
America Network, Inc. ("Service America").
On December 22, 2004, the Board of Directors authorized the discontinuance
of the operations of the Company's Service America segment, through an asset
sale to employees of Service America. The acquiring corporation will purchase a
substantial majority of Service America's assets in exchange for assuming
substantially all of Service America's liabilities. Included in the assets to be
acquired is a receivable from the Company for approximately $4.7 million. The
Company will pay $1 million of the receivable upon closing and the remainder
over the following year in 11 equal monthly installments. The amount of this
receivable is subject to adjustment for changes in Service America's balance
sheet through the date of closing. The disposal is subject to certain regulatory
and other approvals and is expected to be completed during the first half of
2005.
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FORWARD LOOKING STATEMENTS
This Annual Report contains or incorporates by reference certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company intends such statements to be subject to the
safe harbors created by that legislation. Such statements involve risks and
uncertainties that could cause actual results of operations to differ materially
from these forward looking statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The required segment and geographic data for the Company's continuing
operations (as described below) for the three years ended December 31, 2002,
2003 and 2004 are shown in Note 2 of the Notes to Consolidated Financial
Statements on pages 15-18 of the 2004 Annual Report to Stockholders and are
incorporated herein by reference.
DESCRIPTION OF BUSINESS BY SEGMENT
The information called for by this item is included within Note 2 of the
Notes to Consolidated Financial Statements appearing on pages 15-18 of the 2004
Annual Report to Stockholders and is incorporated herein by reference.
PRODUCT AND MARKET DEVELOPMENT
Each segment of the Company's business engages in a continuing program for
the development and marketing of new services and products. While new products
and services and new market development are important factors for the growth of
each active segment of the Company's business, the Company does not expect that
any new products and services or marketing effort, including those in the
development stage, will require the investment of a material amount of the
Company's assets.
RAW MATERIALS
The principal raw materials needed for the Company's manufacturing
operations are purchased from United States sources. No segment of the Company
experienced any material raw material shortages during 2004, although such
shortages may occur in the future. Products manufactured and sold by the
Company's active business segments generally may be reformulated to avoid the
adverse impact of a specific raw material shortage.
PATENTS, SERVICE MARKS AND LICENSES
The Roto-Rooter(R) trademarks and service marks have been used and
advertised since 1935 by Roto-Rooter Corporation, a wholly owned indirect
subsidiary of the Company. The Roto-Rooter(R) marks are among the most highly
recognized trademarks and service marks in the United States. The Company
considers the Roto-Rooter(R) marks to be a valuable asset and a significant
factor in the marketing of Roto-Rooter's franchises, products and services and
the products and services provided by its franchisees. "Vitas" and "Innovative
Hospice Care" are trademarks and servicemarks of Vitas Healthcare Corporation.
The Company and
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its subsidiaries also own certain trade secrets including training manuals,
pricing information, customer information and software source codes.
COMPETITION
ROTO-ROOTER
All aspects of the sewer, drain, and pipe cleaning, HVAC services and
plumbing repair businesses are highly competitive. Competition is, however,
fragmented in most markets with local and regional firms providing the primary
competition. The principal methods of competition are advertising, range of
services provided, name recognition, speed and quality of customer service,
service guarantees, and pricing.
No individual customer or market group is critical to the total sales of
this segment.
VITAS
Hospice care in the United States is competitive. Because payments for
hospice services are generally fixed, Vitas competes primarily on the basis of
its ability to deliver quality, responsive services. Vitas is the nation's
largest provider of hospice services in a market dominated by small, non-profit,
community-based hospices. Approximately 70% of all hospices are not-for-profit.
Because the hospice care market is highly fragmented, Vitas competes with a
large number of organizations.
Vitas also competes with a number of national and regional hospice
providers, including Odyssey Healthcare, Inc. and VistaCare, Inc., hospitals,
nursing homes, home health agencies and other health care providers. Many
providers offer home care to patients who are terminally ill, and some actively
market palliative care and hospice-like programs. In addition, various health
care companies have diversified into the hospice market. Some of these health
care companies may have greater financial resources than Vitas.
Relatively few barriers to entry exist in the markets served by Vitas.
Accordingly, other companies that are not currently providing hospice care may
enter these markets and expand the variety of services offered.
RESEARCH AND DEVELOPMENT
The Company engages in a continuous program directed toward the
development of new services, products and processes, the improvement of existing
services, products and processes, and the development of new and different uses
of existing products. The research and development expenditures from continuing
operations have not been nor are they expected to be material.
GOVERNMENT REGULATIONS
ROTO-ROOTER
Roto-Rooter's franchising activities are subject to various federal and
state franchising laws and regulations, including the rules and regulations of
the Federal Trade Commission (the "FTC") regarding the offering or sale of
franchises. The rules and
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regulations of the FTC require that Roto-Rooter provide all prospective
franchisees with specific information regarding the franchise program and
Roto-Rooter in the form of a detailed franchise offering circular. In addition,
a number of states require Roto-Rooter to register its franchise offering prior
to offering or selling franchises in the state. Various state laws also provide
for certain rights in favor of franchisees, including (i) limitations on the
franchisor's ability to terminate a franchise except for good cause, (ii)
restrictions on the franchisor's ability to deny renewal of a franchise, (iii)
circumstances under which the franchisor may be required to purchase certain
inventory of franchisees when a franchise is terminated or not renewed in
violation of such laws, and (iv) provisions relating to arbitration.
Roto-Rooter's ability to engage in the plumbing repair business is also subject
to certain limitations and restrictions imposed by state and local licensing
laws and regulations.
VITAS
General. The health care industry and Vitas' hospice programs are subject
to extensive federal and state regulation. Vitas' hospices are licensed as
required under state law as either hospices or home health agencies, or both,
depending on the regulatory requirements of each particular state. In addition,
Vitas' hospices are required to meet certain conditions of participation to be
eligible to receive payments as hospices under the Medicare and Medicaid
programs. All of Vitas' hospices, other than those currently in development, are
certified for participation as hospices in the Medicare program, and are also
eligible to receive payments as hospices from the Medicaid program in each of
the states in which Vitas operates. Vitas' hospices are subject to periodic
survey by governmental authorities or private accrediting entities to assure
compliance with state licensing, certification and accreditation requirements,
as the case may be.
Medicare Conditions of Participation. Federal regulations require that a
hospice program satisfy certain conditions of participation to be certified and
receive Medicare payment for the services it provides. Failure to comply with
the conditions of participation may result in sanctions, up to and including
decertification from the Medicare program. See "Surveys and Audits" below.
The Medicare conditions of participation for hospice programs include the
following:
Governing Body. Each hospice must have a governing body that assumes
full responsibility for the policies and the overall operation of the
hospice and for ensuring that all services are provided in a manner
consistent with accepted standards of practice. The governing body must
designate one individual who is responsible for the day-to-day management
of the hospice.
Medical Director. Each hospice must have a medical director who is a
physician and who assumes responsibility for overseeing the medical
component of the hospice's patient care program.
Direct Provision of Core Services. Medicare limits those services
for which the hospice may use individual independent contractors or
contract agencies to provide care to patients. Specifically, substantially
all nursing, social work, and counseling services must be provided
directly by hospice employees meeting specific educational and
professional standards. During periods of peak patient loads or under
extraordinary circumstances, the hospice may be permitted to use
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contract workers, but the hospice must agree in writing to maintain
professional, financial and administrative responsibility for the services
provided by those individuals or entities.
Professional Management of Non-Core Services. A hospice may arrange
to have non-core services such as therapy services, home health aide
services, medical supplies or drugs provided by a non-employee or outside
entity. If the hospice elects to use an independent contractor to provide
non-core services, however, the hospice must retain professional
management responsibility for the arranged services and ensure that the
services are furnished in a safe and effective manner by qualified
personnel, and in accordance with the patient's plan of care.
Plan of Care. The patient's attending physician, the medical
director or designated hospice physician, and the interdisciplinary team
must establish an individualized written plan of care prior to providing
care to any hospice patient. The plan must assess the patient's needs and
identify services to be provided to meet those needs and must be reviewed
and updated at specified intervals.
Continuation of Care. A hospice may not discontinue or reduce care
provided to a Medicare beneficiary if the individual becomes unable to pay
for that care.
Informed Consent. The hospice must obtain the informed consent of
the hospice patient, or the patient's legal representative, that specifies
the type of care services that may be provided as hospice care.
Training. A hospice must provide ongoing training for its employees.
Quality Assurance. A hospice must conduct ongoing and comprehensive
self-assessments of the quality and appropriateness of care it provides
and that its contractors provide under arrangements to hospice patients.
Interdisciplinary Team. A hospice must designate an
interdisciplinary team to provide or supervise hospice care services. The
interdisciplinary team develops and updates plans of care, and establishes
policies governing the day-to-day provision of hospice services. The team
must include at least a physician, registered nurse, social worker and
spiritual or other counselor. A registered nurse must be designated to
coordinate the plan of care.
Volunteers. Hospice programs are required to recruit and train
volunteers to provide patient care services or administrative services.
Volunteer services must be provided in an amount equal to at least five
percent of the total patient care hours provided by all paid hospice
employees and contract staff.
Licensure. Each hospice and all hospice personnel must be licensed,
certified or registered in accordance with applicable federal, state and
local laws and regulations.
Central Clinical Records. Hospice programs must maintain clinical
records for each hospice patient that are organized in such a way that
they may be easily retrieved. The clinical records must be complete and
accurate and protected against loss, destruction, and unauthorized use.
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Surveys and Audits. Hospice programs are subject to periodic survey by
federal and state regulatory authorities and private accrediting entities to
ensure compliance with applicable licensing and certification requirements and
accreditation standards. Regulators conduct periodic surveys of hospice programs
and provide reports containing statements of deficiencies for alleged failure to
comply with various regulatory requirements. Survey reports and statements of
deficiencies are common in the healthcare industry. In most cases, the hospice
program and regulatory authorities will agree upon any steps to be taken to
bring the hospice into compliance with applicable regulatory requirements. In
some cases, however, a state or federal regulatory authority may take a number
of adverse actions against a hospice program, including the imposition of fines,
temporary suspension of admission of new patients to the hospice's service or,
in extreme circumstances, de-certification from participation in the Medicare or
Medicaid programs or revocation of the hospice's license.
From time to time Vitas receives survey reports containing statements of
deficiencies. Vitas reviews such reports and takes appropriate corrective
action. Vitas believes that its hospices are in material compliance with
applicable licensure and certification requirements. If a Vitas hospice were
found to be out of compliance and actions were taken against a Vitas hospice,
they could materially adversely affect the hospice's ability to continue to
operate, to provide certain services and to participate in the Medicare and
Medicaid programs, which could materially adversely affect Vitas.
Billing Audits/ Claims Reviews. The Medicare program and its fiscal
intermediaries and other payors periodically conduct pre-payment or post-payment
reviews and other reviews and audits of health care claims, including hospice
claims. There is pressure from state and federal governments and other payors to
scrutinize health care claims to determine their validity and appropriateness.
In order to conduct these reviews, the payor requests documentation from Vitas
and then reviews that documentation to determine compliance with applicable
rules and regulations, including the eligibility of patients to receive hospice
benefits, the appropriateness of the care provided to those patients and the
documentation of that care. During the past several years, Vitas' claims have
been subject to review and audit.
Certificate of Need Laws and Other Restrictions. Some states, including
Florida, have certificate of need or similar health planning laws that apply to
hospice care providers. These states may require some form of state agency
review or approval prior to opening a new hospice program, to adding or
expanding hospice services, to undertaking significant capital expenditures or
under other specified circumstances. Approval under these certificate of need
laws is generally conditioned on the showing of a demonstrable need for services
in the community. Vitas may seek to develop, acquire or expand hospice programs
in states having certificate of need laws. To the extent that state agencies
require Vitas to obtain a certificate of need or other similar approvals to
expand services at existing hospice programs or to make acquisitions or develop
hospice programs in new or existing geographic markets, Vitas' plans could be
adversely affected by a failure to obtain such certificate or approval. In
addition, competitors may seek administratively or judicially to challenge such
an approval or proposed approval by the state agency, and Vitas has been
defending against such a challenge in connection with the development of its
Palm Beach County, Florida hospice program. Such a challenge, whether or not
ultimately successful, could adversely affect Vitas.
Limitations on For-Profit Ownership. A few states have laws that restrict
the development and expansion of for-profit hospice programs. For example,
Florida law does
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not permit the operation of a hospice by a for-profit corporation unless it was
operated in that capacity on or before July 1, 1978, although under certain
circumstances a for-profit corporation may be permitted to purchase a
grandfathered hospice program and continue to operate it. In New York, a hospice
generally cannot be owned by a corporation that has another corporation as a
stockholder. These types of restrictions could affect Vitas' ability to expand
in Florida or into New York, or in other jurisdictions with similar
restrictions.
Limits on the Acquisition or Conversion of Non-Profit Health Care
Organizations. An increasing number of states have enacted laws that restrict
the ability of for-profit entities to acquire or otherwise assume the operations
of a non-profit health care provider. Some states may require government review,
public hearings, and/or government approval of transactions in which a
for-profit entity proposes to purchase certain non-profit healthcare
organizations. Heightened scrutiny of these transactions may significantly
increase the costs associated with future acquisitions of non-profit hospice
programs in some states, otherwise increase the difficulty in completing those
acquisitions or prevent them entirely. Vitas cannot assure that it will not
encounter regulatory or governmental obstacles in connection with any proposed
acquisition of non-profit hospice programs in the future.
Professional Licensure and Participation Agreements. Many hospice
employees are subject to federal and state laws and regulations governing the
ethics and practice of their profession, including physicians, physical, speech
and occupational therapists, social workers, home health aides, pharmacists and
nurses. In addition, those professionals who are eligible to participate in the
Medicare, Medicaid or other federal health care programs as individuals must not
have been excluded from participation in those programs at any time.
State Licensure of Hospice. Each of Vitas' hospices must be licensed in
the state in which it operates. State licensure rules and regulations require
that Vitas' hospices maintain certain standards and meet certain requirements,
which may vary from state to state. Vitas believes that its hospices are in
material compliance with applicable licensure requirements. If a Vitas hospice
were found to be out of compliance and actions were taken against a Vitas
hospice, they could materially adversely affect the hospice's ability to
continue to operate, to provide certain services and to participate in the
Medicare and Medicaid programs, which could materially adversely affect Vitas.
Overview of Government Payments -- General. A substantial portion of
Vitas' revenues are derived from payments received from the Medicare and
Medicaid programs. 95.4% of Vitas' net patient service revenue for the years
ended September 30, 2002 and 2003, respectively, and 96% of Vitas' net patient
service revenue for the ten months ended December 31, 2004, consisted of
payments from the Medicare and Medicaid programs. Such payments are made
primarily on a "per diem" basis. Under the per diem reimbursement methodology,
Vitas is essentially at risk for the cost of eligible services provided to
hospice patients. Profitability is therefore largely dependent upon Vitas'
ability to manage the costs of providing hospice services to patients. Increases
in operating costs, such as labor and supply costs that are subject to inflation
and other increases, without a compensating increase in Medicare and Medicaid
rates, could have a material adverse effect on Vitas' business in the future.
The Medicare and Medicaid programs are increasing pressure to control health
care costs and to decrease or limit increases in reimbursement rates for health
care services. As with most government programs, the Medicare and Medicaid
programs are subject to statutory
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and regulatory changes, possible retroactive and prospective rate and payment
adjustments, administrative rulings, freezes and funding reductions, all of
which may adversely affect the level of program payments and could have a
material adverse effect on Vitas' business. Vitas' levels of revenues and
profitability will be subject to the effect of legislative and regulatory
changes, including possible reductions in coverage or payment rates, or changes
in methods of payment, by the Medicare and Medicaid programs.
Overview of Government Payments -- Medicare
Medicare Eligibility Criteria. To receive Medicare payment for hospice
services, the hospice medical director and, if the patient has one, the
patient's attending physician, must certify that the patient has a life
expectancy of six months or less if the illness runs its normal course. This
determination is made based on the physician's clinical judgment. Due to the
uncertainty of such prognoses, however, it is likely and expected that some
percentage of hospice patients will not die within six months of entering a
hospice program. The Medicare program (among other third-party payors)
recognizes that terminal illnesses often do not follow an entirely predictable
course, and therefore the hospice benefit remains available to beneficiaries so
long as the hospice physician or the patient's attending physician continues to
certify that the patient's life expectancy remains six months or less.
Specifically, the Medicare hospice benefit provides for two initial 90-day
benefit periods followed by an unlimited number of 60-day periods. In order to
qualify for hospice care, a Medicare beneficiary also must elect hospice care
and waive any right to other Medicare benefits related to his or her terminal
illness. A Medicare beneficiary may revoke his or her election of the Medicare
hospice benefit at any time and resume receiving regular Medicare benefits. The
patient may elect the hospice benefit again at a later date so long as he or she
remains eligible. Increased regulatory scrutiny of compliance with the Medicare
six-month eligibility rule has impacted the hospice industry. The Medicare
program, however, has recently reaffirmed that Medicare hospice beneficiaries
are not limited to six months of coverage and that there is no limit on how long
a Medicare beneficiary can continue to receive hospice benefits and services,
provided that the beneficiary continues to meet the eligibility criteria under
the Medicare hospice program. In addition, the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 requires HHS to conduct a study
to examine the appropriateness of the current physician certification
requirement required before a Medicare beneficiary is eligible to receive the
Medicare hospice benefit.
Levels of Care. Medicare pays for hospice services on a prospective
payment system basis under which Vitas receives an established payment rate for
each day that it provides hospice services to a Medicare beneficiary. These
rates are subject to annual adjustments for inflation and may also be adjusted
based upon the geographic location where the services are provided. The rate
Vitas receives will vary depending on which of the following four levels of care
is being provided to the beneficiary:
Routine Home Care. The routine home care rate is paid for each day that a
patient is in a hospice program and is not receiving one of the other
categories of hospice care. The routine home care rate does not vary based
upon the volume or intensity of services provided by the hospice program.
General Inpatient Care. The general inpatient care rate is paid when a
patient requires inpatient services for a short period for pain control or
symptom management which cannot be managed in other settings. General
inpatient care
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services must be provided in a Medicare or Medicaid certified hospital or
long-term care facility or at a freestanding inpatient hospice facility
with the required registered nurse staffing.
Continuous Home Care. Continuous home care is provided to patients while
at home, during periods of crisis when intensive monitoring and care,
primarily nursing care, is required in order to achieve palliation or
management of acute medical symptoms. Continuous home care requires a
minimum of 8 hours of care within a 24-hour day, which begins and ends at
midnight. The care must be predominantly nursing care provided by either a
registered nurse or licensed practical nurse. While the published Medicare
continuous home care rates are daily rates, Medicare actually pays for
continuous home care services on an hourly basis. This hourly rate is
calculated by dividing the daily rate by 24.
Respite Care. Respite care permits a hospice patient to receive services
on an inpatient basis for a short period of time in order to provide
relief for the patient's family or other caregivers from the demands of
caring for the patient. A hospice can receive payment for respite care for
a given patient for up to five consecutive days at a time, after which
respite care is reimbursed at the routine home care rate.
Medicare Payment for Physician Services. Payment for direct patient care
physician services delivered by hospice physicians is billed separately by the
hospice to the Medicare intermediary and paid at the lesser of the actual charge
or the Medicare allowable charge for these services. This payment is in addition
to the daily rates Vitas receives for hospice care. Payment for hospice
physicians' administrative and general supervisory activities is included in the
daily rates discussed above. Payments for attending physician professional
services (other than services furnished by hospice physicians) are not paid to
the hospice, but rather are paid directly to the attending physician by the
Medicare carrier. For fiscal 2004, 1.6% of Vitas' net revenue was attributable
to physician services.
Medicare Limits on Hospice Care Payments. Medicare payments for hospice
services are subject to two additional limits or "caps." Each of Vitas' hospice
programs is separately subject to both of these "caps." Both of these "caps" are
determined on an annual basis for the period running from November 1 through
October 31 of each year.
First, under a Medicare rule known as the "80-20" rule applicable to
Medicare inpatient services, if the number of inpatient care days furnished by a
hospice to Medicare beneficiaries exceeds 20% of the total days of hospice care
furnished by such hospice to Medicare beneficiaries, Medicare payments to the
hospice for inpatient care days exceeding the inpatient cap are reduced to the
routine home care rate. During its history, Vitas has never exceeded the
inpatient cap.
Second, overall Medicare payments to a hospice are also subject to a
separate cap based on overall average payments per admission. Any payments
exceeding this overall hospice cap must be refunded by the hospice. This cap was
set at $19,635.67 per admission through the twelve-month period ended on October
31, 2004, and is adjusted annually to account for inflation. While historically
Vitas' revenues per admission generally have not exceeded the applicable cap,
there can be no assurance that Vitas' hospices will not be subject to future
payment reductions or recoupments as the result of this cap.
10
Medicare Managed Care Programs. The Medicare program has entered into
contracts with managed care companies to provide a managed care benefit to
Medicare beneficiaries who elect to participate in managed care programs. These
managed care programs are commonly referred to as Medicare HMOs, Medicare +
Choice or Medicare risk products. Vitas provides hospice care to Medicare
beneficiaries who participate in these managed care programs, and Vitas is paid
for services provided to these beneficiaries in the same way and at the same
rates as those of other Medicare beneficiaries who are not in a Medicare managed
care program. Under current Medicare policy, Medicare pays the hospice directly
for services provided to these managed care program participants and then
reduces the standard per-member, per-month payment that the managed care program
otherwise receives.
Overview of Government Payments -- Medicaid
Medicaid Coverage and Reimbursement. State Medicaid programs are another
source of Vitas' net patient revenue. Medicaid is a state-administered program
financed by state funds and matching federal funds to provide medical assistance
to the indigent and certain other eligible persons. In 1986, hospice services
became an optional state Medicaid benefit. For those states that elect to
provide a hospice benefit, the Medicaid program is required to pay the hospice
at rates at least equal to the rates provided under Medicare and calculated
using the same methodology. States maintain flexibility to establish their own
hospice election procedures and to limit the number and duration of benefit
periods for which they will pay for hospice services.
Nursing Home Residents. For Vitas' patients who receive nursing home care
under a state Medicaid program and who elect hospice care under Medicare or
Medicaid, Vitas generally contracts with nursing homes for the nursing homes'
provision to patients of room and board services. In addition to the applicable
Medicare or Medicaid hospice daily or hourly rate, the state generally must pay
Vitas an amount equal to at least 95% of the Medicaid daily nursing home rate
for room and board services furnished to the patient by the nursing home. Under
Vitas' standard nursing home contracts, Vitas pays the nursing home for these
room and board services at the Medicaid daily nursing home rate.
Adjustments to Medicare and Medicaid Payment Rates. Payment rates under
the Medicare and Medicaid programs are adjusted annually based upon the Hospital
Market Basket Index; however, the adjustments have historically been less than
actual inflation. On October 1, 2001, the base Medicare payment rates for
hospice care increased by approximately 3.2% over the base rates previously in
effect. On October 1, 2002 and on October 1, 2003, the base Medicare payment
rates for hospice care increased by approximately 3.4% each year over the base
rates in effect in the prior year. On October 1, 2004 the rates increased by
3.3%. These base rates are further modified by the Hospice Wage Index to reflect
local differences in wages according to the revised wage index. It is possible
that there will be further modifications to the rate structure under which the
Medicare or Medicaid programs pay for hospice care services. Any future
reductions in the rate of increase in Medicare and Medicaid payments may have an
adverse impact on Vitas' net patient service revenue and profitability.
OTHER HEALTHCARE REGULATIONS
Federal and State Anti-Kickback Laws and Safe Harbor Provisions. The
federal Anti-Kickback Law makes it a felony to knowingly and willfully offer,
pay, solicit or receive any form of remuneration in exchange for referring,
recommending, arranging, purchasing, leasing or ordering items or services
covered by a federal health care program including
11
Medicare or Medicaid. The Anti-Kickback Law applies regardless of whether the
remuneration is provided directly or indirectly, in cash or in kind. Although
the anti-kickback statute does not prohibit all financial transactions or
relationships that providers of healthcare items or services may have with each
other, interpretations of the law have been very broad. Under current law,
courts and federal regulatory authorities have stated that this law is violated
if even one purpose (as opposed to the sole or primary purpose) of the
arrangement is to induce referrals.
Violations of the Anti-Kickback Law carry potentially severe penalties
including imprisonment of up to five years, criminal fines of up to $25,000 per
act, civil money penalties of up to $50,000 per act, and additional damages of
up to three times the amounts claimed or remuneration offered or paid. Federal
law also authorizes exclusion from the Medicare and Medicaid programs for
violations of the Anti-Kickback Law.
The Anti-Kickback Law contains several statutory exceptions to the broad
prohibition. In addition, Congress authorized the Office of Inspector General
("OIG") to publish numerous "safe harbors" that exempt some practices from
enforcement action under the Anti-Kickback Law and related laws. These statutory
exceptions and regulatory safe harbors protect various bona fide employment
relationships, contracts for the rental of space or equipment, personal service
arrangements, and management contracts, among other things, provided that
certain conditions set forth in the statute or regulations are satisfied. The
safe harbor regulations, however, do not comprehensively describe all lawful
relationships between healthcare providers and referral sources, and the failure
of an arrangement to satisfy all of the requirements of a particular safe harbor
does not mean that the arrangement is unlawful. Failure to comply with the safe
harbor provisions, however, may mean that the arrangement will be subject to
scrutiny. It is possible for healthcare providers to request an advisory opinion
from the OIG regarding an existing or proposed business arrangement and the
possible anti-kickback concerns raised by that arrangement.
Many states, including states where Vitas does business, have adopted
similar prohibitions against payments that are intended to induce referrals of
patients, regardless of the source of payment. Some of these state laws lack
explicit "safe harbors" that may be available under federal law. Sanctions under
these state anti-kickback laws may include civil money penalties, license
suspension or revocation, exclusion from Medicare or Medicaid, and criminal
fines or imprisonment. Little precedent exists regarding the interpretation or
enforcement of these statutes.
Vitas is required under the Medicare conditions of participation and some
state licensing laws to contract with numerous healthcare providers and
practitioners, including physicians, hospitals and nursing homes, and to arrange
for these individuals or entities to provide services to Vitas' patients. In
addition, Vitas has contracts with other suppliers, including pharmacies,
ambulance services and medical equipment companies. Some of these individuals or
entities may refer, or be in a position to refer, patients to Vitas, and Vitas
may refer, or be in a position to refer, patients to these individuals or
entities. These arrangements may not qualify for a safe harbor. Vitas from time
to time seeks guidance from regulatory counsel as to the changing and evolving
interpretations and the potential applicability of these anti-kickback laws to
its programs, and in response thereto, takes such actions as it deems
appropriate. The Company generally believes that Vitas' contracts and
arrangements with providers, practitioners and suppliers do not violate
applicable anti-kickback laws. However, the Company cannot assure that such laws
will ultimately be interpreted in a manner consistent with Vitas' practices.
12
HIPAA Anti-Fraud Provisions. HIPAA includes several revisions to existing
health care fraud laws by permitting the imposition of civil monetary penalties
in cases involving violations of the anti-kickback statute or contracting with
excluded providers. In addition, HIPAA created new statutes making it a federal
felony to engage in fraud, theft, embezzlement, or the making of false
statements with respect to healthcare benefit programs, which include private,
as well as government programs. In addition, for the first time, federal
enforcement officials have the ability to exclude from the Medicare and Medicaid
programs any investors, officers and managing employees associated with business
entities that have committed healthcare fraud, even if the investor, officer or
employee had no actual knowledge of the fraud.
OIG Fraud Alerts, Advisory Opinions and Other Program Guidance. In 1976,
Congress established the OIG to, among other things, identify and eliminate
fraud, abuse and waste in HHS programs. To identify and resolve such problems,
the OIG conducts audits, investigations and inspections across the country and
issues public pronouncements identifying practices that may be subject to
heightened scrutiny. In the last several years, there have been a number of
hospice related audits and reviews conducted. These reviews and recommendations
have included:
- better ensuring that Medicare hospice eligibility determinations are
made in accordance with the Medicare regulations; and
- revising the annual cap on hospice benefits to better reflect the
cost of care provided.
From time to time, various federal and state agencies, such as HHS and the
OIG, issue a variety of pronouncements, including fraud alerts, the OIG's Annual
Work Plan and other reports, identifying practices that may be subject to
heightened governmental scrutiny. For example, the OIG in 2002 specifically
called for a review of hospice plans of care to examine the variance among
hospice plans of care and the extent to which services are provided in
accordance with plans of care, and to determine whether there should be uniform
standards or minimum requirements for their completion. In addition, the OIG
called for a review of payments for the care of hospice patients residing in
nursing homes and the level of services they receive. The Company cannot predict
what, if any changes may be implemented in coverage, reimbursement, or
enforcement policies as a result of these OIG reviews and recommendations.
Additionally, in March 1998, the OIG issued a special fraud alert titled
"Fraud and Abuse in Nursing Home Arrangements with Hospices." This special fraud
alert focused on payments received by nursing homes from hospices.
Federal False Claims Acts. The federal law includes several criminal and
civil false claims provisions, which provide that knowingly submitting claims
for items or services that were not provided as represented may result in the
imposition of multiple damages, administrative civil money penalties, criminal
fines, imprisonment, and/or exclusion from participation in federally funded
healthcare programs, including Medicare and Medicaid. In addition, the OIG may
impose extensive and costly corporate integrity requirements upon a healthcare
provider that is the subject of a false claims judgment or settlement. These
requirements may include the creation of a formal compliance program, the
appointment of a government monitor, and the imposition of annual reporting
requirements and audits conducted by an independent review organization to
monitor compliance with the terms of the agreement and relevant laws and
regulations.
13
The Civil False Claims Act prohibits the known filing of a false claim or
the known use of false statements to obtain payments. Penalties for violations
include fines ranging from $5,500 to $11,000, plus treble damages, for each
claim filed. Provisions in the Civil False Claims Act also permit individuals to
bring actions against individuals or businesses in the name of the government as
so called "qui tam" relators. If a qui tam relator's claim is successful, he or
she is entitled to share in the government's recovery.
Both direct enforcement activity by the government and qui tam actions
have increased significantly in recent years and have increased the risk that a
healthcare company may have to defend a false claims action, pay fines or be
excluded from the Medicare and/or Medicaid programs as a result of an
investigation arising out of this type of an action. Because of the complexity
of the government regulations applicable to the healthcare industry, the Company
cannot assure that Vitas will not be the subject of an action under the False
Claims Act.
State False Claims Laws. At least 10 states and the District of Columbia,
including states in which Vitas currently operates, have adopted state false
claims laws that mirror to some degree the federal false claims laws. While
these statutes vary in scope and effect, the penalties for violating these false
claims laws include administrative, civil and/or criminal fines and penalties,
imprisonment, and the imposition of multiple damages.
The Stark Law and State Physician Self-Referral Laws. Section 1877 of the
Social Security Act, commonly known as the "Stark Law," prohibits physicians
from referring Medicare or Medicaid patients for "designated health services" to
entities in which they hold an ownership or investment interest or with whom
they have a compensation arrangement, subject to a number of statutory and
regulatory exceptions. Penalties for violating the Stark Law are severe and
include:
- denial of payment;
- civil monetary penalties of $15,000 per referral or $1,000,000 for
"circumvention schemes;"
- assessments equal to 200% of the dollar value of each such service
provided; and
- exclusion from the Medicare and Medicaid programs.
Hospice care itself is not specifically listed as a designated health
service; however, certain services that Vitas provides, or in the future may
provide, are among the services identified as designated health services for
purposes of the self-referral laws. The Company cannot assure that future
regulatory changes will not result in hospice services becoming subject to the
Stark Law's ownership, investment or compensation prohibitions in the future.
Many states where Vitas operates have laws similar to the Stark Law, but
with broader effect because they apply regardless of the source of payment for
care. Penalties similar to those listed above as well as the loss of state
licensure may be imposed in the event of a violation of these state
self-referral laws. Little precedent exists regarding the interpretation or
enforcement of these statutes.
14
Civil Monetary Penalties. The Civil Monetary Penalties Statute provides
that civil penalties ranging between $10,000 and $50,000 per claim or act may be
imposed on any person or entity that knowingly submits improperly filed claims
for federal health benefits or that offers or makes payments to induce a
beneficiary or provider to reduce or limit the use of health care services or to
use a particular provider or supplier. Civil monetary penalties may be imposed
for violations of the anti-kickback statute and for the failure to return known
overpayments, among other things.
Prohibition on Employing or Contracting with Excluded Providers. The
Social Security Act and federal regulations state that individuals or entities
that have been convicted of a criminal offense related to the delivery of an
item or service under the Medicare or Medicaid programs or that have been
convicted, under state or federal law, of a criminal offense relating to neglect
or abuse of residents in connection with the delivery of a healthcare item or
service cannot participate in any federal health care programs, including
Medicare and Medicaid. Additionally, individuals and entities convicted of
fraud, that have had their licenses revoked or suspended, or that have failed to
provide services of adequate quality also may be excluded from the Medicare and
Medicaid programs. Federal regulations prohibit Medicare providers, including
hospice programs, from submitting claims for items or services or their related
costs if an excluded provider furnished those items or services. The OIG
maintains a list of excluded persons and entities. Nonetheless, it is possible
that Vitas might unknowingly bill for services provided by an excluded person or
entity with whom it contracts. The penalty for contracting with an excluded
provider may range from civil monetary penalties of $50,000 and damages of up to
three times the amount of payment that was inappropriately received.
Corporate Practice of Medicine and Fee Splitting. Most states have laws
that restrict or prohibit anyone other than a licensed physician, including
business entities such as corporations, from employing physicians and/or
prohibit payments or fee-splitting arrangements between physicians and
corporations or unlicensed individuals. Penalties for violations of corporate
practice of medicine and fee-splitting laws vary from state to state, but may
include civil or criminal penalties, the restructuring or termination of the
business arrangements between the physician and unlicensed individual or
business entity, or even the loss of the physician's license to practice
medicine. These laws vary widely from state to state both in scope and origin
(e.g. statute, regulation, Attorney General opinion, court ruling, agency
policy) and in most instances have been subject to only limited interpretation
by the courts or regulatory bodies.
Vitas employs or contracts with physicians to provide medical direction
and patient care services to its patients. Vitas has made efforts in those
states where certain contracting or fee arrangements are restricted or
prohibited to structure those arrangements in compliance with the applicable
laws and regulations. Despite these efforts, however, the Company cannot assure
that agency officials charged with enforcing these laws will not interpret
Vitas' contracts with employed or independent contractor physicians as violating
the relevant laws or regulations. Future determinations or interpretations by
individual states with corporate practice of medicine or fee splitting
restrictions may force Vitas to restructure its arrangements with physicians in
those locations.
Health Information Practices. There currently are numerous legislative and
regulatory initiatives at both the state and federal levels that address patient
privacy concerns. In particular, federal regulations issued under the HIPAA Act
of 1996 ("HIPAA") require Vitas to protect the privacy and security of patients'
individual
15
health information. HHS published final regulations addressing patient privacy
on December 28, 2000, which were modified on August 14, 2002 (the "Privacy
Rule"). Vitas was required to comply with the Privacy Rule by April 14, 2003,
and Vitas believes that it is in material compliance. Additionally, HIPAA does
not automatically preempt applicable state laws and regulations concerning
Vitas' use, disclosure and maintenance of patient health information, which
means that Vitas is subject to a complex regulatory scheme that, in many
instances, requires Vitas to comply with both federal and state laws and
regulations.
In August 2000, HHS published final regulations establishing health care
transaction standards and code sets for the electronic transmission of health
care information in connection with certain transactions, such as billing or
health plan eligibility (the "Transactions Standard"). The official deadline for
compliance with the Transactions Standard for covered entities such as Vitas was
October 16, 2003. The Centers for Medicare and Medicaid Services ("CMS") is the
division of HHS that is responsible for interpreting and enforcing the
Transactions Standard. Failure to comply with the Transactions Standard may
subject covered entities, including Vitas, to civil monetary penalties and
possibly to criminal penalties. Vitas believes that it has made significant and
appropriate good faith efforts to comply with the Transactions Standard and to
develop an appropriate contingency plan as encouraged by CMS. It is unclear,
however, how CMS will regulate providers in general or Vitas in particular with
respect to compliance with the Transactions Standard. Consequently, it also is
unclear whether Vitas would be found to be in material compliance with the
Transactions Standard if CMS were to review Vitas' electronic claims submissions
and assess Vitas' electronic transactions, or whether Vitas would be required to
expend substantial sums on acquiring and implementing new information systems,
or would otherwise be affected in a manner that would negatively impact its
profitability.
On May 31, 2002, HHS published its final rule regarding the HIPAA Unique
Employer Identifier Standard, which establishes a standard for identifying
employers in healthcare transactions where information about the employer is
transmitted electronically, as well as requirements concerning its use by HIPAA
covered entities. The deadline for compliance with the Unique Employer
Identifier Standard rule was July 30, 2004. Additionally, HHS published final
regulations addressing the security of such health information on February 20,
2003 (the "Security Rule"), and Vitas will be required to comply with the
Security Rule by April 21, 2005. Also, HHS published its final rule adopting the
HIPAA Standard Unique Health Identifier for health care providers on January 23,
2004, and Vitas' compliance deadline for that rule is May 23, 2007. Because
compliance with the final rules regarding the HIPAA Unique Employer Identifier
Standard and the Standard Unique Health Identifier, and the Security Rule is not
yet required, the Company cannot predict the total financial or other impact of
any of these final regulations on Vitas' operations, including any need for
Vitas to expend financial resources on acquiring and implementing new
information systems or any other negative impact on Vitas' profitability.
Additional Federal and State Regulation. Federal and state governments
also regulate various aspects of the hospice industry. In particular, Vitas'
operations are subject to federal and state health regulatory laws covering
professional services, the dispensing of drugs and certain types of hospice
activities. Some of Vitas' employees are subject to state laws and regulations
governing the ethics and professional practice of medicine, respiratory therapy,
pharmacy and nursing.
16
Compliance with Health Regulatory Laws. Vitas maintains an internal
regulatory compliance review program and from time to time retains regulatory
counsel for guidance on compliance matters. The Company cannot assure, however,
that Vitas' practices, if reviewed, would be found to be in compliance with
applicable health regulatory laws, as such laws ultimately may be interpreted,
or that any non-compliance with such laws would not have a material adverse
effect on Vitas.
ENVIRONMENTAL MATTERS
Roto-Rooter's operations are subject to various federal, state, and local
laws and regulations regarding environmental matters and other aspects of the
operation of a sewer and drain cleaning, HVAC and plumbing services business.
For certain other activities, such as septic tank and grease trap pumping,
Roto-Rooter is subject to state and local environmental health and sanitation
regulations. Service America's operations are also subject to various federal,
state and local laws and regulations regarding environmental matters and other
aspects of the operation of a HVAC and appliance repair and maintenance service
industry.
At December 31, 2004, the Company's accrual for its estimated liability
for potential environmental cleanup and related costs arising from the sale of
DuBois Chemicals Inc. ("DuBois") amounted to $2,951,000. Of this balance,
$1,900,000 is included in other liabilities and $1,051,000 is included in other
current liabilities. The Company is contingently liable for additional
DuBois-related environmental cleanup and related costs up to a maximum of
$15,999,000. On the basis of a continuing evaluation of the Company's potential
liability, and in consultation with the Company's environmental attorney,
management believes that it is not probable this additional liability will be
paid. Accordingly, no provision for this contingent liability has been recorded.
Although it is not presently possible to reliably project the timing of payments
related to the Company's potential liability for environmental costs, management
believes that any adjustments to its recorded liability will not materially
adversely affect its financial position or results of operations.
The Company, to the best of its knowledge, is currently in compliance in
all material respects with the environmental laws and regulations affecting its
operations. Such environmental laws, regulations and enforcement proceedings
have not required the Company to make material increases in or modifications to
its capital expenditures and they have not had a material adverse effect on
sales or net income. Capital expenditures for the purposes of complying with
environmental laws and regulations during 2005 and 2006 with respect to
continuing operations are not expected to be material in amount; there can be no
assurance, however, that presently unforeseen legislative or enforcement actions
will not require additional expenditures.
SEASONALITY
Advertising costs for Roto-Rooter inordinately impact the Company's
fourth-quarter results. Roto-Rooter recognizes telephone directory costs
immediately upon distribution of a directory by its publisher into the
community. Since a large number of directories are distributed in the fourth
quarter, this direct expense accounting policy results in fourth-quarter
earnings including a disproportionately large share of Roto-Rooter's full-year
telephone directory advertising expense. In the fourth quarter 2004, Roto-Rooter
expensed $6.4 million of total advertising costs that represented 35% of the
aggregate advertising costs for the full-year 2004.
17
EMPLOYEES
On December 31, 2004, Chemed Corporation had a total of 9,822 employees.
AVAILABLE INFORMATION
The Company's Internet address is www.chemed.com. The Company's annual
report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act are electronically available through the SEC
(http://www.sec.gov) or the Company's website as soon as reasonably
practicable after such reports are filed with, or furnished to, the SEC.
Annual reports, press releases, and other printed materials may also be
obtained from Chemed Investor Relations without charge by writing or by calling
800-2CHEMED or 513-762-6429.
ITEM 2. PROPERTIES
The Company's corporate offices and the headquarters for the Roto-Rooter
Group are located in Cincinnati, Ohio. Roto-Rooter has manufacturing and
distribution center facilities in West Des Moines, Iowa and has 72 office and
service facilities in 26 states. Vitas, headquartered in Miami, operates 35
programs from 61 leased facilities in 12 states, including Florida, California,
Texas and Illinois.
All "owned" property is held in fee and is subject to the security
interests of the holders of the Notes issued in connection with the Company's
merger with Vitas. The leased properties have lease terms ranging from one year
to sixteen years. Management does not foresee any difficulty in renewing or
replacing the remainder of its current leases. The Company considers all of its
major operating properties to be maintained in good operating condition and to
be generally adequate for present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. The
Company contests these allegations and believes them without merit. Plaintiff
moved for certification of a class of customers in 32 states who allegedly paid
for plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act, through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court has not yet
ruled on certification of a class in the remaining 31 states. In December 2004,
the Company reached a tentative resolution of this matter with the plaintiff.
This proposed settlement has not yet been finalized by the parties nor approved
by the court. Nonetheless, the Company, in anticipation of such approval,
accrued $3.1 million as the anticipated cost of settling this litigation.
18
Vitas Healthcare Corporation is party to a class action lawsuit filed in
the Superior Court of California, Los Angeles County, in April of 2004 by Ann
Marie Costa, Ana Jimenez, Mariea Ruteaya and Gracetta Wilson alleging failure to
pay overtime wages and to provide meal and break periods to California nurses,
home health aides and licensed clinical social workers. The Company contests
these allegations and believes them without merit. Due to the complex legal and
other issues involved, it is not presently possible to estimate the amount of
liability, if any, related to this case. Management cannot provide assurance the
Company will ultimately prevail in it. Regardless of outcome, such litigation
can adversely affect the Company through defense costs, diversion of
management's time, and related publicity.
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, violated the Ohio Consumer Sales Practices Act. The
Company contended that the charge, which is included within the estimate
approved by its customers, is a fully disclosed component of its pricing.
Plaintiff dismissed the case without payment and with prejudice following the
Ohio Supreme Court's denial of review of the Eighth District Court of Appeals
decertification of this class action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Name Age Office First Elected
---- --- ------ -------------
Kevin J. McNamara 51 President and Chief Executive Officer August 2, 1994 (1)
Timothy S. O'Toole 49 Executive Vice President May 18, 1992 (2)
Spencer S. Lee 49 Executive Vice President May 15, 2000 (3)
David P. Williams 44 Vice President and Chief Financial March 5, 2004 (4)
Officer
Arthur V. Tucker, 55 Vice President and Controller May 20, 1991 (5)
Jr.
(1) Mr. K. J. McNamara is President and Chief Executive Officer of the Company
and has held these positions since August 1994 and May 2001, respectively.
Previously, he served as an Executive Vice President, Secretary and
General Counsel of the Company, since November 1993, August 1986 and
August 1986, respectively. He previously held the position of Vice
President of the Company, from August 1986 to May 1992.
(2) Mr. T. S. O'Toole is an Executive Vice President of the Company and has
held this position since May 1992. He is also Chief Executive Officer of
Vitas, a wholly owned subsidiary of the Company, and has held this
position since February 24, 2004. Previously, from May 1992 to February
24, 2004, he also served the Company as Treasurer.
19
(3) Mr. S. S. Lee is an Executive Vice President of the Company and has held
this position since May 15, 2000. Mr. Lee is also Chairman and Chief
Executive Officer of Roto-Rooter Services Company, a wholly owned
subsidiary of the Company, and has held this position since January 1999.
Previously, he served as a Senior Vice President of Roto-Rooter Services
Company from May 1997 to January 1999.
(4) Mr. D. P. Williams is Vice President and Chief Financial Officer of the
Company and has held these positions since March 5, 2004. Mr. Williams is
also Senior Vice President and Chief Financial Officer of Roto-Rooter
Group, Inc. and has held these positions since January 1999.
(5) Mr. A. V. Tucker, Jr. is a Vice President and Controller of the Company
and has held these positions since February 1989. From May 1983 to
February 1989, he held the position of Assistant Controller of the
Company.
Each executive officer holds office until the annual election at the next
annual organizational meeting of the Board of Directors of the Company which is
scheduled to be held on May 16, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Capital Stock (par value $1 per share) is traded on the New
York Stock Exchange under the symbol CHE. The range of the high and low sale
prices on the New York Stock Exchange and dividends paid per share for each
quarter of 2003 and 2004 are set forth below.
Closing
Dividends Paid
High Low Per Share
---- --- ---------
2004
First Quarter $66.95 $48.95 $.12
Second Quarter 55.30 43.10 .12
Third Quarter 56.25 42.71 .12
Fourth Quarter 67.44 55.11 .12
2003
First Quarter $36.51 $31.55 $.12
Second Quarter 40.20 32.98 .12
Third Quarter 40.35 34.42 .12
Fourth Quarter 51.78 33.69 .12
Future dividends are necessarily dependent upon the Company's earnings and
financial condition, compliance with certain debt covenants and other factors
not presently determinable.
20
As of March 1, 2005, there were approximately 3,321 stockholders of record
of the Company's Capital Stock. This number only includes stockholders of record
and does not include stockholders with shares beneficially held in nominee name
or within clearinghouse positions of brokers, banks or other institutions.
As of December 31, 2004, the number of stock options outstanding under the
Company's equity compensation plans, the weighted average exercise price of
outstanding options, and the number of securities remaining available for
issuance were as follows:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of Securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans [excluding
outstanding warrants and price of outstanding options, securities reflected in
Plan Category rights warrants and rights column (a)]
- ----------------------------- -------------------------- ----------------------------- -----------------------------
(a) (b) (c)
Equity Compensation plans
approved by stockholders 1,221,590 $38.95 302,877
Equity Compensation plans not
approved by stockholders (1) 109,812 35.52 1,044
TOTAL 1,331,402 38.67 303,921
(1) In May 1999 the Board of Directors adopted the 1999 Long-Term Employee
Incentive Plan without stockholder approval. This plan permits the Company
to grant up to 250,000 shares of non-qualified options and stock awards to
a broad base of salaried and hourly employees (excluding officers and
directors) of the Company. Except for the exclusion of officers and
directors, this plan has the same general terms and provisions as the 2004
Stock Incentive Plan. In addition, pursuant to this plan no individual may
be granted more than 25,000 stock options in a calendar year, the
aggregate number of the shares of Capital Stock which may be issued
pursuant to stock incentives in the form of Stock Awards shall not be more
than 135,000, and no stock incentives shall be granted under the plan
after May 17, 2009.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item for the five years ended December
31, 2004 is set forth on page 41 of the 2004 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this Item is set forth on pages 44 through
57 of the 2004 Annual Report to Stockholders and is incorporated herein by
reference.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to interest rate risk
exposure through its variable interest rate borrowings. At December 31, 2004 the
Company had a total of $140.5 million of variable rate debt outstanding. In
February 2005, the Company called its Floating Rate Notes, restructured its
revolving credit/ term loan agreement with JPMorgan Chase and reduced its
variable rate debt to $88.5 million at February 28, 2005. Should the interest
rate on this debt increase or decrease 100 basis points (1% point), the
Company's annual interest expense would increase or decrease $885,000.
The Company continually evaluates this interest rate exposure and
periodically weighs the cost versus the benefit of fixing the variable interest
rates through a variety of hedging techniques. Currently, the Company has an
interest rate cap with BNP Paribas covering $43.4 million of notional principal
at December 31, 2004, decreasing to $35.5 million at September 29, 2006. The cap
expires September 29, 2006 and reimburses the Company for interest on the
notional principal to the extent that LIBOR exceeds 6.00%. At December 31, 2004,
both the market value and carrying value of the cap were approximately $6,000
and the 30-day LIBOR rate was 2.40%.
The market value of the Company's long-term debt at December 31, 2004 is
approximately $306.2 million versus a carrying value of $291.7 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated March 22, 2005, appearing on pages 5 through 40
of the 2004 Annual Report to Stockholders, along with the Supplementary Data
(Unaudited Summary of Quarterly Results) appearing on pages 42-43, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on an evaluation,
as of the end of the period covered by this Annual Report on Form 10-K, our
President and Chief Executive Officer, Vice President and Chief Financial
Officer and Vice President and Controller have concluded that our disclosure
controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) are
effective to ensure that information required to be disclosed in the reports
that the company files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms and are also effective to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is accumulated and communicated to the Company's
management, including its President and Chief Executive Officer, Vice President
and Chief Financial Officer and Vice President and Controller, to allow timely
decisions regarding required disclosure.
STATUS OF MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Pursuant to Securities and Exchange Commission Release No. 34-50754,
which, subject to certain conditions, provides up to 45 additional days beyond
the original due date of this Form 10-K for the filing of management's annual
report on internal control over financial reporting required by Item 308(a) of
Regulation S-K, and the related attestation report of the independent registered
public accounting firm, as required by Item 308(b) of Regulation S-K,
management's report on internal control over financial reporting and the
associated report on the audit of management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004, are not filed herein and are expected to be filed no later than April 30,
2005.
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). Under the supervision and with the
participation of the Company's management, including the principal executive
officer and principal financial officer, the Company is in the process of
conducting an evaluation of its internal control over financial reporting based
on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
22
The Company's evaluation of its internal control over financial reporting
has not yet been completed. In connection with this ongoing process, the Company
has identified certain significant deficiencies and other control deficiencies.
As a result of the ongoing evaluation of internal control over financial
reporting, additional control deficiencies may be identified. Additionally, once
we have completed our evaluation of all deficiencies (those identified to date
and those which may be identified as we complete our evaluation) we may
determine that the deficiencies, either alone or in combination with others,
constitute one or more material weaknesses. The existence of one or more
material weaknesses as of December 31, 2004 would preclude a conclusion that the
Company's internal control over financial reporting was effective as of that
date.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company are:
Edward L. Hutton Thomas C. Hutton
Kevin J. McNamara Sandra E. Laney
Donald Breen, Jr. Timothy S. O'Toole
Charles H. Erhart, Jr. Donald E. Saunders
Joel F. Gemunder George J. Walsh III
Patrick P. Grace Frank E. Wood
The additional information required under this Item with respect to the
directors and executive officers is set forth in the Company's 2005 Proxy
Statement and in Part I hereof under the caption "Executive Officers of the
Registrant" and is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, directors and employees. A copy of this Code of Ethics is incorporated
with this Report as Exhibit 14 and it is also posted on the Company's Web site,
www.chemed.com.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is set forth in the Company's 2005
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item is set forth in the Company's 2005
Proxy Statement, which is incorporated herein by reference.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is set forth in the Company's 2005
Proxy Statement, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
PricewaterhouseCoopers LLP billed the company $614,000 and
$1,189,000 in 2003 and 2004, respectively. These fees were for professional
services rendered for the integrated audit of the Company's annual financial
statements and of its internal control over financial reporting, review of the
financial statements included in the Company's Forms 10-Q and review of
documents filed with the SEC.
AUDIT-RELATED FEES
PricewaterhouseCoopers LLP billed the company $122,400 and
$1,446,000 in 2003 and 2004, respectively for audit-related services. In 2003,
these fees related primarily to the audit of the Company's employee benefit
plans. In 2004, $1,115,000 of these fees related to audits of significant
subsidiaries of the Company for years 2001, 2002, and 2003 financial statements
for the purpose of registering the Company's floating rate notes, $205,000 for
review of the Private Placement Memorandum related to the acquisition of VITAS,
$59,000 for consultation concerning financial accounting and reporting standards
and the remaining $67,000 was related primarily to the audit of the Company's
employee benefit plans.
TAX FEES
No such services were rendered in 2003 or 2004.
ALL OTHER FEES
PricewaterhouseCoopers LLP billed the Company $2,200 and $2,300,
respectively, in aggregate fees for services rendered by PricewaterhouseCoopers
LLP, other than the services described above, for the years 2003 and 2004.
The Audit Committee has adopted a policy which requires the
Committee's pre-approval of audit and non-audit services performed by the
independent auditor to assure that the provision of such services does not
impair the auditor's independence. The Audit Committee pre-approved all of the
audit and non-audit services rendered by PricewaterhouseCoopers LLP as listed
above.
24
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
3.1 Certificate of Incorporation of Chemed Corporation.*
3.2 Certificate of Amendment to Certificate of Incorporation.*
3.3 By-Laws of Chemed Corporation.*
4.1 Offer to Exchange Chemed Capital Trust Convertible Preferred
Securities for Shares of Capital Stock, dated as of December 23,
1999.*
4.2 Chemed Capital Trust, dated as of December 23, 1999.*
4.3 Amended and Restated Declaration of Trust of Chemed Capital Trust,
dated February 7, 2000.*
4.4 Indenture, dated as of February 24, 2004, between Roto-Rooter, Inc.
and LaSalle Bank National Association.*
4.5 Indenture, dated as of February 24, 2004, among Roto-Rooter, Inc.,
the subsidiary guarantors listed on Schedule I thereto and Wells
Fargo Bank, N.A.*
10.1 Agreement and Plan of Merger among Diversey U.S. Holdings, Inc., D.
C. Acquisition Inc., Chemed Corporation and DuBois Chemicals, Inc.,
dated as of February 25, 1991.*
10.2 Stock Purchase Agreement between Omnicare, Inc. and Chemed
Corporation, dated as of August 5, 1992.*
10.3 Agreement and Plan of Merger among National Sanitary Supply Company,
Unisource Worldwide, Inc. and TFBD, Inc. dated as of August 11,
1997.*
10.4 Stock Purchase Agreement dated as of May 8, 2002 by and between PCI
Holding Corp. and Chemed Corporation. *
10.5 Amendment No. 1 to Stock Purchase Agreement dated as of October 11,
2002 by and among PCI Holding Corp., PCI-A Holding Corp. and Chemed
Corporation. *
10.6 Senior Subordinated Promissory Note dated as of October 11, 2002 by
and among PCI Holding Corp. and Chemed Corporation. *
10.7 Common Stock Purchase Warrant dated as of October 11, 2002 by and
between PCI Holding Corp. and Chemed Corporation. *
10.8 1986 Stock Incentive Plan, as amended through May 20, 1991.*,**
10.9 1988 Stock Incentive Plan, as amended through May 20, 1991.*,**
25
10.10 1993 Stock Incentive Plan.*,**
10.11 1995 Stock Incentive Plan.*,**
10.12 1997 Stock Incentive Plan.*,**
10.13 1999 Stock Incentive Plan.*,**
10.14 1999 Long-Term Employee Incentive Plan as amended through May 20,
2002.*,**
10.15 2002 Stock Incentive Plan.*,**
10.16 2002 Executive Long-Term Incentive Plan, as amended May 18, 2004.*,**
10.17 2004 Stock Incentive Plan.*,**
10.18 Employment Contracts with Executives.*,**
10.19 Amendment to Employment Agreements with Kevin J. McNamara, Thomas C.
Hutton and Sandra E. Laney dated August 7, 2002.*,**
10.20 Amendment to Employment Agreements with Timothy S. O'Toole and Arthur V.
Tucker dated August 7, 2002.*,**
10.21 Amendment to Employment Agreement with Spencer S. Lee dated May 19,
2003.*,**
10.22 Amendment to Employment Agreements with Executives dated January 1,
2002.*,**
10.23 Consulting Agreement between Timothy S. O'Toole and PCI Holding Corp.
effective October 11, 2002.*,**
10.24 Amendment No. 16 to Employment Agreement with Sandra E. Laney dated
March 1, 2003.*,**
10.25 Amendment No. 16 to Employment Agreement with Kevin J. McNamara dated
May 18, 2004.**
10.26 Employment Agreement with David P. Williams dated May 16, 1994;
Amendment dated May 21, 2001, and Amendment dated May 19, 2003.**
10.27 Excess Benefits Plan, as restated and amended, effective June 1,
2001.*,**
10.28 Amendment No. 1 to Excess Benefits Plan, effective July 1, 2002.*,**
10.29 Amendment No. 2 to Excess Benefits Plan, effective November 7, 2003.*,**
10.30 Non-Employee Directors' Deferred Compensation Plan.*,**
10.31 Chemed/Roto-Rooter Savings & Retirement Plan, effective January 1,
1999.*,**
10.32 First Amendment to Chemed/Roto-Rooter Savings & Retirement Plan,
effective September 6, 2000.*,**
26
10.33 Second Amendment to Chemed/Roto-Rooter Savings & Retirement Plan,
effective January 1, 2001.*,**
10.34 Third Amendment to Chemed/Roto-Rooter Savings & Retirement Plan,
effective December 12, 2001.*,**
10.35 Stock Purchase Agreement by and Among Banta Corporation, Chemed
Corporation and OCR Holding Company as of September 24, 1997.*
10.36 Directors Emeriti Plan.*,**
10.37 Second Amendment to Split Dollar Agreement with Executives.*,**
10.38 Split Dollar Agreement with Executives.*,**
10.39 Split Dollar Agreement with Edward L. Hutton.*,**
10.40 Promissory Note under the Executive Stock Purchase Plan with Kevin J.
McNamara.*,**
10.41 Schedule to Promissory Note under the Executive Stock Purchase Plan with
Kevin J. McNamara.**
10.42 Roto-Rooter Deferred Compensation Plan No. 1, as amended January
1,1998.*,**
10.43 Roto-Rooter Deferred Compensation Plan No. 2.*,**
10.44 Agreement and Plan of Merger, dated as of December 18, 2003, Among
Roto-Rooter, Inc., Marlin Merger Corp. and Vitas Healthcare Corporation.*
10.45 Credit Agreement, dated as of February 24, 2004, among Roto-Rooter, Inc.,
the lenders from time to time parties thereto and Bank One, NA, as
Administrative Agent.*
10.46 Amended and Restated Credit Agreement, dated as of February 24, 2005,
among Chemed Corporation, the lenders from time to time parties thereto
and JP Morgan Chase Bank, NA, as Administrative Agent.
10.47 Pledge and Security Agreement, dated as of February 24, 2004, among
Roto-Rooter, Inc., the subsidiaries of Roto-Rooter, Inc. listed on the
signature pages thereto and Bank One, NA, as Collateral Agent.*
10.48 Guaranty Agreement, dated as of February 24, 2004, among the subsidiaries
of Roto-Rooter, Inc. listed on the signature pages thereto and Bank One,
NA, as Administrative Agent.*
10.49 Collateral Sharing Agreement, dated as of February 24, 2004, among Bank
One, NA, as Collateral Agent and Administrative Agent, Wells Fargo Bank,
NA, as Trustee, and Roto-Rooter, Inc.*
10.50 Form of Restricted Stock Award.**
10.51 Form of Stock Option Grant.**
27
12 Computation of Ratio of Earnings to Fixed Charges.
13 2004 Annual Report to Stockholders.
14 Policies on Business Ethics of Chemed Corporation.*
21 Subsidiaries of Chemed Corporation.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of Attorney.
31.1 Certification by Kevin J. McNamara pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by David P. Williams pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* This exhibit is being filed by means of incorporation by reference (see
Index to Exhibits on page E-1). Each other exhibit is being filed with
this Annual Report on Form 10-K.
** Management contract or compensatory plan or arrangement.
FINANCIAL STATEMENT SCHEDULE
See Index to Financial Statements and Financial Statement Schedule on page
S-1.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHEMED CORPORATION
March 23, 2005 By /s/ Kevin J. McNamara
--------------------------
Kevin J. McNamara
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kevin J. McNamara President and Chief
- ---------------------- Executive Officer and a
Kevin J. McNamara Director (Principal
Executive Officer)
/s/ David P. Williams Vice President and Chief
- ---------------------- Financial Officer
David P. Williams (Principal Financial
Officer)
/s/ Arthur V. Tucker, Jr. Vice President and March 23, 2005
- ------------------------ Controller
Arthur V. Tucker, Jr. (Principal Accounting
Officer)
Edward L. Hutton* Sandra E. Laney*
Donald Breen, Jr.* Timothy S. O'Toole*
Charles H. Erhart, Jr.* Donald E. Saunders* --Directors
Joel F. Gemunder* George J. Walsh III*
Patrick P. Grace* Frank E. Wood*
Thomas C. Hutton*
- ----------------------------
* Naomi C. Dallob by signing her name hereto signs this document on behalf
of each of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
March 23, 2005 /s/ Naomi C. Dallob
- -------------------- ------------------------------
Date Naomi C. Dallob
(Attorney-in-Fact)
29
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
2002, 2003 AND 2004
CHEMED CORPORATION CONSOLIDATED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE(S)
Report of Independent Registered Public Accounting Firm on
Financial Statements.............................................. 5*
Consolidated Statement of Operations................................ 6*
Consolidated Balance Sheet.......................................... 7*
Consolidated Statement of Changes in Stockholders' Equity........... 8*
Consolidated Statement of Comprehensive Income/(Loss)............... 8-9*
Consolidated Statement of Cash Flows................................ 10*
Notes to Consolidated Financial Statements.......................... 11-40*
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule...................................... S-2
Schedule II -- Valuation and Qualifying Accounts.................... S-3-S-4
* Indicates page numbers in Chemed Corporation 2004 Annual Report to
Stockholders.
The consolidated financial statements of Chemed Corporation listed above,
appearing in the 2004 Annual Report to Stockholders, are incorporated herein by
reference. The Financial Statement Schedule should be read in conjunction with
the consolidated financial statements listed above. Schedules not included have
been omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto as listed above.
S-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENT SCHEDULE
TO THE BOARD OF DIRECTORS
OF CHEMED CORPORATION
OUR AUDITS OF THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO IN OUR REPORT
DATED MARCH 22, 2005 APPEARING ON PAGE 5 OF THE 2004 ANNUAL REPORT TO
STOCKHOLDERS OF CHEMED CORPORATION (WHICH REPORT AND CONSOLIDATED FINANCIAL
STATEMENTS ARE INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K)
ALSO INCLUDED AN AUDIT OF THE FINANCIAL STATEMENT SCHEDULE LISTED IN THE INDEX
TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ON PAGE S-1. IN OUR
OPINION, THE FINANCIAL STATEMENT SCHEDULE PRESENTS FAIRLY, IN ALL MATERIAL
RESPECTS, THE INFORMATION SET FORTH THEREIN WHEN READ IN CONJUNCTION WITH THE
RELATED CONSOLIDATED FINANCIAL STATEMENTS.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
CINCINNATI, OHIO
MARCH 22, 2005
S-2
SCHEDULE II
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
DR/(CR)
ADDITIONS
(CHARGED) APPLICABLE
CREDITED (CHARGED) TO
BALANCE AT TO COSTS CREDITED COMPANIES BALANCE
BEGINNING AND TO OTHER ACQUIRED DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS IN PERIOD (b) OF PERIOD
- ---------------------------- ----------- --------- --------- ---------- ---------- ---------
ALLOWANCES FOR DOUBTFUL
ACCOUNTS (c)
FOR THE YEAR 2004......... $ (2,646) $(5,983) $ - $ (4,946) $ 6,031 $ (7,544)
======== ======= ======= ======== ======= ========
FOR THE YEAR 2003 (a)..... $ (3,337) $(1,497) $ - $ - $ 2,188 $ (2,646)
======== ======= ======= ======== ======= ========
FOR THE YEAR 2002 (a)..... $ (3,950) $(1,866) $ - $ - $ 2,479 $ (3,337)
======== ======= ======= ======== ======= ========
ALLOWANCES FOR DOUBTFUL
ACCOUNTS - NOTES
RECEIVABLE (d)
FOR THE YEAR 2004......... $ (323) $ 323 $ - $ - $ - $ -
======== ======= ======= ======== ======= ========
FOR THE YEAR 2003......... $ (422) $ 99 $ - $ - $ - $ (323)
======== ======= ======= ======== ======= ========
FOR THE YEAR 2002......... $ (900) $ 478 $ - $ - $ - $ (422)
======== ======= ======= ======== ======= ========
S-3
(CHARGED) APPLICABLE
CREDITED (CHARGED) TO
BALANCE AT TO COSTS CREDITED COMPANIES BALANCE
BEGINNING AND TO OTHER ACQUIRED DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS IN PERIOD (b) OF PERIOD
- --------------------------------- ----------- --------- --------- ---------- ---------- ---------
VALUATION ALLOWANCE FOR
AVAILABLE-FOR-SALE SECURITIES (e)
FOR THE YEAR 2004......... $ - $ - $ - $ - $ - $ -
======== ======= ======= ======== ======= ========
FOR THE YEAR 2003......... $ 5,668 $ - $ (278) $ - $(5,390) $ -
======== ======= ======= ======== ======= ========
FOR THE YEAR 2002......... $ 6,483 $ - $ 326 $ - $(1,141) $ 5,668
======== ======= ======= ======== ======= ========
- -------------------------
(a) AMOUNTS WERE RECLASSIFIED FOR OPERATIONS DISCONTINUED IN 2004.
(b) WITH RESPECT TO ALLOWANCES FOR DOUBTFUL ACCOUNTS, DEDUCTIONS INCLUDE
ACCOUNTS CONSIDERED UNCOLLECTIBLE OR WRITTEN OFF, PAYMENTS, COMPANIES
DIVESTED, ETC. WITH RESPECT TO VALUATION ALLOWANCE FOR AVAILABLE-FOR-SALE
SECURITIES, DEDUCTIONS COMPRISE NET REALIZED GAINS ON SALES OF
INVESTMENTS.
(c) CLASSIFIED IN CONSOLIDATED BALANCE SHEET AS A REDUCTION OF ACCOUNTS
RECEIVABLE.
(d) CLASSIFIED IN CONSOLIDATED BALANCE SHEET AS A REDUCTION OF OTHER ASSETS.
(e) WITH RESPECT TO THE VALUATION ALLOWANCE FOR AVAILABLE - FOR - SALE
SECURITIES, AMOUNTS CHARGED OR CREDITED TO OTHER ACCOUNTS COMPRISE NET
UNREALIZED HOLDING LOSSES OR GAINS ARISING DURING THE PERIOD.
S-4
INDEX TO EXHIBITS
Page Number
or
Incorporation by Reference
--------------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
3.1 Certificate of Incorporation of Form S-3 4.1
Chemed Corporation Reg. No. 33-44177
11/26/91
3.2 Certificate of Amendment to Form S-4 3.3
Certificate of Incorporation Reg. No. 333-115668
5/20/04
3.3 By-Laws of Chemed Corporation Form 8-K 1
as amended November 5, 2004 11/5/04
4.1 Offer to Exchange Chemed Capital Form T-3 T3E.1
Trust Convertible Trust Preferred 12/23/99
Securities for Shares of Capital
Stock, dated as of 12/23/99
4.2 Chemed Capital Trust, dated Schedule 13E-4 (b)(1)
as of 12/23/99 12/23/99
4.3 Amended and Restated Schedule 13E-4A (b)(2)
Declaration of Trust of Chemed 2/7/00, Amendment
Capital Trust, dated February No. 2
7, 2000
4.4 Indenture, dated as of February Form 10-K 4.4
24, 2004 between Roto-Rooter, Inc. 3/12/04
and LaSalle Bank National
Association
4.5 Indenture, dated as of February Form 10-K 4.5
24, 2004 among Roto-Rooter, Inc., 3/12/04
the subsidiary guarantors listed
on Schedule I thereto and Wells
Fargo Bank, N.A.
10.1 Agreement and Plan of Merger Form 8-K 1
among Diversey U.S. Holdings, 3/11/91
Inc., D.C. Acquisition Inc.,
Chemed Corporation and DuBois
Chemicals, Inc., dated as of
February 25, 1991
1
Page Number
or
Incorporation by Reference
--------------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
10.2 Stock Purchase Agreement between Form 10-K 5
Omnicare, Inc. and Chemed 3/25/93
Corporation dated as of August 5,
1992
10.3 Agreement and Plan of Merger Form 8-K 1
among National Sanitary 10/13/97
Supply Company, Unisource
Worldwide, Inc. and TFBD, Inc.
10.4 Stock Purchase Agreement dated Form 8-K 2.1
as of May 8, 2002 by and between 10/11/02
PCI Holding Corp. and Chemed
Corporation
10.5 Amendment No. 1 to Stock Purchase Form 8-K 2.2
Agreement dated as of October 11, 10/11/02
2002 by and among PCI Holding
Corp., PCI-A Holding Corp. and
Chemed Corporation
10.6 Senior Subordinated Promissory Form 8-K 2.3
Note dated as of October 11, 2002 10/11/02
by and among PCI Holding Corp.
and Chemed Corporation
10.7 Common Stock Purchase Warrant Form 8-K 2.4
dated as of October 11, 2002 by 10/11/02
and between PCI Holding Corp.
and Chemed Corporation
10.8 1986 Stock Incentive Plan, as Form 10- K 9
amended through May 20, 1991 3/27/92, **
10.9 1988 Stock Incentive Plan, Form 10-K 10
as amended through May 20, 1991 3/27/92, **
10.10 1993 Stock Incentive Plan Form 10-K 10.8
3/29/94, **
10.11 1995 Stock Incentive Plan Form 10-K 10.14
3/28/96, **
10.12 1997 Stock Incentive Plan Form 10-K 10.10
3/27/98, **
2
Page Number
or
Incorporation by Reference
---------------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
10.13 1999 Stock Incentive Plan Form 10-K 10.11
3/29/00, **
10.14 1999 Long Term Employee Form 10-K 10.16
Incentive Plan as amended 3/28/03, **
through May 20, 2002
10.15 2002 Stock Incentive Plan Form 10-K 10.17
3/28/03, **
10.16 2002 Executive Long-Term Form 10-Q 10.16
Incentive Plan, as amended 8/19/04, **
May 18, 2004
10.17 2004 Stock Incentive Plan Proxy Statement A
3/25/04
10.18 Employment Contracts with Form 10-K 10.12
Executives 3/28/89, **
10.19 Amendment to Employment Form 10-K 10.20
Agreements with Kevin J. 3/28/03, **
McNamara, Thomas C. Hutton
and Sandra E. Laney
dated August 7, 2002
10.20 Amendment to Employment Form 10-K 10.21
Agreements with Timothy 3/28/03, **
S. O'Toole and Arthur V.
Tucker dated August 7, 2002
10.21 Amendment to Employment Form 10-K 10.20
Agreement with Spencer S. Lee 3/12/04, **
dated May 19, 2003
10.22 Amendment to Employment Form 10-K 10.16
Agreement with Executives dated 3/28/02, **
January 1, 2002
10.23 Consulting Agreement between Form 10-K 10.26
Timothy S. O'Toole and PCI 3/28/03, **
Holding Corp effective October
11, 2002.
3
Page Number
or
Incorporation by Reference
-----------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
10.24 Amendment No. 16 to Employment Form 10-K 10.27
Agreement with Sandra E. Laney 3/28/03, **
dated March 1, 2003
10.25 Amendment No. 16 to Employment *, **
Agreement with Kevin J. McNamara
dated May 18, 2004.
10.26 Employment Agreement with David *, **
P. Williams dated May 16, 1994;
Amendment dated May 21, 2001, and
Amendment dated May 19, 2003.
10.27 Excess Benefits Plan, as restated Form 10-K 10.24
and amended, effective June 1, 3/12/04, **
2001
10.28 Amendment No. 1 to Excess Benefits Form 10-K 10.25
Plan, effective July 1, 2002 3/12/04, **
10.29 Amendment No. 2 to Excess Benefits Form 10-K 10.26
Plan, effective November 7, 2003 3/12/04, **
10.30 Non-Employee Directors' Deferred Form 10-K 10.10
Compensation Plan 3/24/88, **
10.31 Chemed/Roto-Rooter Savings & Form 10-K 10.25
Retirement Plan, effective 3/25/99, **
January 1, 1999
10.32 First Amendment to Chemed/ Form 10-K 10.22
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective September 6, 2000
10.33 Second Amendment to Chemed/ Form 10-K 10.23
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective January 1, 2001
10.34 Third Amendment to Chemed/ Form 10-K 10.24
Roto-Rooter Savings & Retirement 3/28/02, **
Plan effective December 12, 2001
4
Page Number
or
Incorporation by Reference
-------------------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
10.35 Stock Purchase Agreement by and Form 8-K 10.21
among Banta Corporation, Chemed 10/13/97
Corporation and OCR Holding
Company
10.36 Directors Emeriti Plan Form 10-Q 10.11
5/12/88, **
10.37 Second Amendment to Split Dollar Form 10-K 10.26
Agreement with Executives 3/29/00, **
10.38 Split Dollar Agreements Form 10-K 10.15
with Executives 3/28/96, **
10.39 Split Dollar Agreement with Form 10-K 10.16
Edward L. Hutton 3/28/96, **
10.40 Promissory Note under the Form 10-K 10.41
Executive Stock Purchase Plan 3/28/01, **
with Kevin J. McNamara
10.41 Schedule to Promissory Note under *, **
the Executive Stock Purchase Plan
with Kevin J. McNamara
10.42 Roto-Rooter Deferred Compensation Form 10-K 10.37
Plan No. 1, as amended January 1, 3/28/01, **
1998
10.43 Roto-Rooter Deferred Compensation Form 10-K 10.38
Plan No. 2 3/28/01, **
10.44 Agreement and Plan of Merger, Form 8-K 99.2
dated as of December 18, 2003, 12/19/03
among Roto-Rooter, Inc., Marlin
Merger Corp. and Vitas Healthcare
Corporation
5
Page Number
or
Incorporation by Reference
----------------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------------- -----------
10.45 Credit Agreement, dated as of Form 10-K 10.46
February 24, 2004, among 3/12/04
Roto-Rooter, Inc., the lenders
from time to time parties thereto
and Bank One, NA, as Administrative
Agent.
10.46 Amended and Restated Credit *
Agreement dated as of February 24,
2005 among Chemed Corporation, the
lenders from time to time, parties
thereto and JP Morgan Chase Bank
NA, as Administrative Agent.
10.47 Pledge and Security Agreement, Form 10-K 10.47
dated as of February 24, 2004, 3/12/04
among Roto-Rooter, Inc., the
subsidiaries of Roto-Rooter, Inc.
listed on the signature pages thereto
and Bank One, NA, as Collateral Agent.
10.48 Guaranty Agreement, dated as of Form 10-K 10.48
February 24, 2004, among the 3/12/04
subsidiaries of Roto-Rooter, Inc.
listed on the signature pages thereto
and Bank One, NA, as Administrative
Agent.
10.49 Collateral Sharing Agreement, Form S-2 10.49
dated as of February 24, 2004 Reg. No. 333-115668
among Bank One, NA, as Collateral 5/20/04
Agent and Administrative Agent,
Wells Fargo Bank, NA as Trustee,
and Roto-Rooter, Inc.
10.50 Form of Restricted Stock Award *, **
10.51 Form of Stock Option Grant. *, **
12 Computation of Ratio of Earnings to
Fixed Charges *
13 2004 Annual Report to Stockholders *
14 Policies on Business Ethics of Form 10-K 14
Chemed Corporation 3/12/04
21 Subsidiaries of Chemed Corporation *
6
Page Number
or
Incorporation by Reference
-----------------------------
Exhibit File No. and Previous
Number Filing Date Exhibit No.
- ------- ------------ -----------
23 Consent of Independent Registered Public
Accounting Firm *
24 Powers of Attorney *
31.1 Certification by Kevin J. McNamara *
Pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.2 Certification by David P. Williams *
Pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. *
Pursuant to Rule 13a-14(a)/15d-14(a)
of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara *
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by David P. Williams *
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.3 Certification by Arthur V. Tucker, *
Jr. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
- --------------------
* Filed herewith.
**Management contract or compensatory plan or arrangement.
7