CHEMED CORP - 10-Q Quarterly Report

Back to GetFilings.com

================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934

For Quarter Ended March 31, 2005

Commission File Number 1-8351

CHEMED CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 31-0791746
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)

(513) 762-6900
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Amount Date

Capital Stock 12,647,493 Shares March 31,2005
$1 Par Value

================================================================================

1

CHEMED CORPORATION AND
SUBSIDIARY COMPANIES

INDEX

PAGE NO.
--------

PART I. FINANCIAL INFORMATION:

Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2005 and
December 31, 2004 3

Consolidated Statement of Operations -
Three months ended
March 31, 2005 and 2004 4

Consolidated Statement of Cash Flows -
Three months ended
March 31, 2005 and 2004 5

Notes to Unaudited Financial Statements 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15

Item 3. Quantitative and Qualitative Disclosures
about Market Risk 23

Item 4. Controls and Procedures 23

PART II. OTHER INFORMATION

Item 5. Other Information 24

Item 6. Exhibits 24

2

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

MARCH 31, DECEMBER 31,
2005 2004
---------- ------------

ASSETS
Current assets
Cash and cash equivalents $ 8,557 $ 71,448
Accounts receivable less allowances of
$7,819 (2004 - $7,544) 81,880 64,663
Inventories 7,012 7,019
Current deferred income taxes 33,559 31,250
Current assets of discontinued operations 15,162 13,397
Prepaid expenses and other current assets 8,461 9,842
--------- ---------
Total current assets 154,631 197,619
Investments of deferred compensation plans held in trust 19,415 18,317
Other investments 1,445 1,445
Note receivable 12,500 12,500
Properties and equipment, at cost, less accumulated
depreciation of $56,841 (2004 - $53,496) 58,172 55,796

Identifiable intangible assets less accumulated
amortization of $6,195 (2004 - $5,174) 75,904 76,924

Goodwill 436,820 432,732
Noncurrent assets of discontinued operations 5,717 5,705
Other assets 22,519 24,528
--------- ---------
Total Assets $ 787,123 $ 825,566
========= =========
LIABILITIES
Current liabilities
Accounts payable $ 40,470 $ 37,777
Current portion of long-term debt 1,277 12,185
Income taxes 16,529 10,944
Accrued insurance 26,087 26,350
Accrued salaries and wages 22,656 17,030
Current liabilities of discontinued operations 21,929 22,117
Other current liabilities 32,253 42,777
--------- ---------
Total current liabilities 161,201 169,180
Deferred income taxes 17,395 16,814
Long-term debt 234,738 279,510
Deferred compensation liabilities 19,357 18,311
Noncurrent liabilities of discontinued operations 802 811
Other liabilities 8,062 8,848
--------- ---------
Total liabilities 441,555 493,474
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock - authorized 40,000,000 shares $1 par;
issued 13,662,050 shares (2004 - 13,491,341 shares) 13,662 13,491
Paid-in capital 222,062 212,691
Retained earnings 148,141 141,542
Treasury stock - 1,014,557 shares (2004 - 983,128 (36,241) (33,873)
shares), at cost
Unearned compensation (3,836) (3,590)
Deferred compensation payable in Company stock 2,318 2,375
Notes receivable for shares sold (538) (544)
--------- ---------
Total Stockholders' Equity 345,568 332,092
--------- ---------
Total Liabilities and Stockholders' Equity $ 787,123 $ 825,566
========= =========

See accompanying notes to unaudited financial statements.

3

CHEMED CORPORATION AND SUBSIDIARY COMPANIES UNAUDITED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
---------- ----------

Continuing operations
Service revenues and sales $ 218,637 $ 120,340
--------- ---------
Cost of services provided and goods sold
(excluding depreciation) 152,952 78,849
Selling, general and administrative expenses 36,595 28,212
Depreciation 3,920 3,061
Amortization 1,192 461
Other expenses 1,324 8,783
--------- ---------
Total costs and expenses 195,983 119,366
--------- ---------
Income from operations 22,654 974
Interest expense (5,835) (2,900)
Loss on extinguishment of debt (3,971) (3,330)
Other income--net 727 1,479
--------- ---------
Income/(loss) before income taxes 13,575 (3,777)
Income taxes (5,670) 626
Equity in loss of affiliate - (4,105)
--------- ---------
Income/(loss) from continuing operations 7,905 (7,256)
Discontinued operations, net of income taxes 211 146
--------- ---------
Net income/(loss) $ 8,116 $ (7,110)
========= =========
Earnings/(Loss) Per Share
Income/(loss) from continuing operations $ 0.63 $ (0.66)
========= =========
Net income/(loss) $ 0.65 $ (0.65)
========= =========
Average number of shares outstanding 12,576 10,912
========= =========
Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing operations $ 0.61 $ (0.66)
========= =========
Net income/(loss) $ 0.63 $ (0.65)
========= =========
Average number of shares outstanding 12,955 10,912
========= =========

Cash Dividends Per Share $ 0.12 $ 0.12
========= =========

See accompanying notes to unaudited financial statements.

4

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 8,116 $ (7,110)
Adjustments to reconcile net income/(loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 5,112 3,522
Write off unamortized debt issuance costs 2,871 -
Provision for deferred income taxes (1,892) (1,341)
Provision for uncollectible accounts receivable 1,530 883
Noncash long-term incentive compensation 948 4,988
Amortization of debt issuance costs 522 -
Discontinued operations (211) (146)
Equity in loss of affiliate - 4,105
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations
Increase in accounts receivable (18,747) (4,170)
Decrease/(increase) in inventories 7 (20)
Decrease in prepaid expenses and
other current assets 1,381 7,250
Decrease in accounts payable and other current liabilities (9,808) (24,248)
Increase in income taxes 7,484 848
Decrease/(increase) in other assets (882) 358
Increase in other liabilities 635 1,317
Noncash expense of internally financed ESOPs 286 474
Other uses (419) (991)
---------- ----------
Net cash used by continuing operations (3,067) (14,281)
Net cash provided/(used) by discontinued operations (1,081) 1,330
---------- ----------
Net cash used by operating activities (4,148) (12,951)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (6,201) (1,653)
Business combinations, net of cash acquired (4,401) (324,075)
Net uses from discontinued operations (817) (448)
Proceeds from sales of property and equipment 36 166
Return of merger deposit - 10,000
Other uses (136) (105)
---------- ----------
Net cash used by investing activities (11,519) (316,115)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (140,680) (92,178)
Proceeds from long-term debt 85,000 295,000
Increase in cash overdrafts payable 8,023 4,518
Issuance of capital stock, net of costs 4,208 97,234
Debt issuance costs (1,555) (13,095)
Dividends paid (1,517) (1,209)
Purchases of treasury stock (833) (2,202)
Net increase in revolving line of credit - 25,000
Repayment of stock subscription note receivable - 8,053
Other sources 130 293
---------- ----------
Net cash provided/(used) by financing activities (47,224) 321,414
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (62,891) (7,652)
Cash and cash equivalents at beginning of year 71,448 50,688
---------- ----------
Cash and cash equivalents at end of period $ 8,557 $ 43,036
========== ==========

See accompanying notes to unaudited financial statements.

5

CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements

1. BASIS OF PRESENTATION

As used herein, the terms "We," "Company" and "Chemed" refer to Chemed
Corporation or Chemed Corporation and its consolidated subsidiaries.

We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles for complete financial statements. However, in
our opinion, the financial statements presented herein contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows of the Company. These
financial statements should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004. Certain 2004 amounts have
been reclassified to conform with the current period presentation.

We use Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, to account for stock-based compensation. Since
the Company's stock options qualify as fixed options under APB 25 and since the
option price equals the market price on the date of a grant, there is no
compensation expense for stock options. Stock awards are expensed during the
period the related services are provided.

The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair-value-recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for
Stock-Based Compensation (as amended) (in thousands, except per share data):

Three Months Ended March 31,
-----------------------------
2005 2004
---------- ----------

Net income/(loss) as reported $ 8,116 $ (7,110)

Add: stock -based compensation expense
included in net income as reported,
net of income tax effects 1,139 3,703

Deduct: total stock-based
employee compensation determined under
a fair-value- based method for all
stock options and awards, net of
income tax effects (2,298) (3,916)
---------- ----------

Pro forma net income/(loss) $ 6,957 $ (7,323)
========== ==========

Earnings/(loss) per share
As reported $ 0.65 $ (0.65)
========== ==========
Pro forma $ 0.55 $ (0.67)
========== ==========

Diluted earnings/(loss) per share

As reported $ 0.63 $ (0.65)
========== ==========
Pro forma $ 0.54 $ (0.67)
========== ==========

We calculated the above data using the Black-Scholes option-valuation method to
value the Company's options granted in 2005 and prior years.

6

2. SEGMENTS

Service revenues and sales and aftertax earnings by business segment
follow (in thousands):

Three Months Ended March 31,
----------------------------
2005 2004
---------- -----------

Service Revenues and Sales
VITAS (a) $ 145,990 $ 51,112
Roto-Rooter 72,647 69,228
--------- ---------
Total 218,637 $ 120,340
========= =========

Aftertax Earnings
VITAS (a) $ 9,369(b) $ 2,597
Roto-Rooter 7,145(c) 4,237(c)
--------- ---------
Total Segment earnings/(loss) 16,514 6,834
Corporate (8,609)(d) (9,985)(d)
Equity in loss of affiliate (VITAS) - (4,105)(e)
Discontinued operations (f) 211 146
--------- ---------
Net income/(Loss) $ 8,116 $ (7,110)
========= =========

- ----------
(a) Amounts include consolidated operations of VITAS beginning on February 24,
2004, the date on which the Company acquired the controlling interest in
VITAS. Total service revenues for VITAS for the three months ended March
31, 2004 were $123,982,000.

(b) Amount for 2005 includes $182,000 aftertax cost of the long-term incentive
plan ("LTIP") in March 2005.

(c) Amount for 2005 includes $153,000 aftertax cost of the LTIP in March 2005
and a favorable adjustment to casualty insurance of $1,014,000 aftertax
related to prior quarters' favorable experience. Amount for 2004 includes
$982,000 aftertax cost of the LTIP in March 2004.

(d) Amount for 2005 includes $360,000 aftertax cost of the LTIP in March 2005,
a noncash aftertax charge of $137,000 for accelerating the vesting on
stock options and $2,523,000 aftertax loss on the extinguishment of debt.
Amount for 2004 includes $4,741,000 aftertax cost of the LTIP in March
2004 and $2,164,000 aftertax loss on the extinguishment of debt.

(e) Amount for 2004 represents the Company's 37% equity in the loss of VITAS
through February 23, 2004. During the period from January 1, 2004 through
February 23, 2004, VITAS incurred the following aftertax expenses related
to the sale of its business to the Company (in thousands):

Accrual for potential severance costs under key employee
employment agreements $ 10,975
Legal and valuation costs 6,665
Loss on write off of VITAS' deferred debt costs 2,698
Other 592
--------
Total $ 20,930
========

(f) Amounts represent the income from the operations of Service America,
discontinued in the fourth quarter of 2004

3. EARNINGS/(LOSS) PER SHARE

Earnings/(loss) per common share are computed using the weighted average
number of shares of capital stock outstanding. Earnings/(loss) and diluted
earnings/(loss) per share for 2005 and 2004 are computed follows (in thousands,
except per share data):

Income/(loss) from Continuing Operations - Income Shares Income
For the Three Months Ended March 31, (Numerator) (Denominator) Per Share
- ------------------------------------------ ----------- ------------- ---------

2005
Earnings $ 7,905 12,576 $ 0.63
=========
Dilutive stock options - 353
Nonvested stock awards - 26
--------- ------
Diluted earnings $ 7,905 12,955 $ 0.61
========= ====== =========

2004
Loss and diluted loss (a) $ (7,256) 10,912 $ (0.66)
========= ====== =========

7

Net Income/(loss) -
For the Three Months Ended March 31,
2005
Earnings $ 8,116 12,576 $ 0.65
=========
Dilutive stock options - 353
Nonvested stock awards - 26
--------- ------
Diluted earnings $ 8,116 12,955 $ 0.63
========= ====== =========
2004
Loss and diluted loss (a) $ (7,110) 10,912 $ (0.65)
========= ====== =========

- ----------
(a) Because the company recorded a loss from continuing operations in 2004,
all potentially dilutive securities are anti-dilutive on the loss per
share from continuing operations. As a result, all potentially dilutive
securities are excluded from all loss per share computations for 2004.

At March 31, 2005 there were 168,800 options outstanding that were
excluded from the computation of diluted average shares outstanding because
their exercise price of $76.26 exceeded the average stock price during the
period the options were outstanding. These options were granted on March 11,
2005.

4. OTHER EXPENSES

Other expenses from continuing operations for 2005 and 2004 include
following (in thousands):

Three Months Ended March 31,
----------------------------
2005 2004
--------- ---------

Long-term incentive compensation $ 1,109 $ 8,783
Cost of accelerating the vesting
of stock options 215 -
--------- ---------
Total other expenses (see Note 7) $ 1,324 $ 8,783
========= =========

8

5. OTHER INCOME-NET

Other income-net comprises the following (in thousands):

Three Months Ended March 31,
----------------------------
2005 2004
-------- --------

Interest income $ 650 $ 508
Market valuation gains on trading
investments of employee benefit
trust 87 996
Loss on disposal of property and
equipment (29) (51)
Other--net 19 26
-------- --------
Total other income--net $ 727 $ 1,479
======== ========

6. BUSINESS COMBINATIONS

During the first quarter of 2005, we completed one business combination in
the VITAS segment and one business combination in the Roto - Rooter segment. The
VITAS business acquired provides hospice services in the Pittsburgh, PA area
and the Roto-Rooter business acquired provides drain cleaning and plumbing
services using the Roto-Rooter name in Greensboro, NC. The results of operations
of the Roto-Rooter businesses acquired were not material to the Company's
results of operations. The unaudited pro forma results of operations, assuming
all VITAS segment business combinations completed in 2004 and 2005 were
completed on January 1, 2004, are presented below (in thousands, except per
share data):

Three Months Ended March 31,
--------------------------------
2005 2004
------------ ------------

Service revenues and sales $ 219,320 $ 196,046
Net income/(loss) 8,129 (1,958)
Earnings/(loss) per share 0.65 (0.16)
Diluted earnings/(loss) per share 0.63 (0.16)

The excess of the purchase price over the fair value of the net assets
acquired in purchase business combinations is classified as goodwill. On a
preliminary basis, the purchase price of all businesses acquired in the first
quarter of 2005 has been allocated as follows (in thousands):

Working capital $ 215
Property and equipment 147
Goodwill 4,039
-------
Total $ 4,401
=======

All of the goodwill acquired in 2005 is expected to be deductible for tax
purposes. Of the total goodwill acquired in 2005, $3,639,000 relates to the
VITAS segment and $400,000 to the Roto-Rooter segment.

7. 2002 EXECUTIVE LONG-TERM INCENTIVE PLAN

During the first quarter of 2005, the price of the Company's stock
exceeded $70 per share for 30 trading days, thus fulfilling one of the
performance targets set forth in the 2002 Executive Long-Term Incentive Plan
("LTIP"). On March 11, 2005, the

9

Compensation/Incentive Committee of the Board of Directors ("CIC") approved a
payout of 12,500 shares of capital stock under the LTIP. The pretax expense of
this award for continuing operations, including payroll taxes and benefit costs,
was $1,109,000 ($695,000 aftertax).

During January 2004, the price of the Company's stock exceeded $50 per
share for more than 10 consecutive trading days, fulfilling one of the
performance targets of the LTIP. In February 2004, the CIC approved a payout
under the LTIP in the aggregate amount of $7.8 million ($2.8 million in cash and
84,633 shares of capital stock). The pretax expense of this award for continuing
operations, including payroll taxes and benefit costs, was $8,783,000
($5,723,000 aftertax).

As of March 31, 2005, no accrual for awards under the remaining components
of the LTIP was made since it is not probable that any of the awards will be
earned and paid.

8. LONG-TERM DEBT AND EXTINGUISHMENT OF DEBT

In February 2005, we prepaid $110 million of the Floating Rate Notes due
2010. In addition, we amended our term loan and revolving credit facility with
JPMorgan Chase Bank to provide for a term loan of $85 million due August 2010
and a $175 million revolving credit facility expiring February 2010. In
connection with these transactions we recorded a loss on the extinguishment of
debt of $3,971,000 in the first quarter of 2005 that comprised a prepayment
penalty of $1,100,000 on the Floating Rate Notes and the write-off of $2,871,000
of unamortized debt issuance costs for the Floating Rate Notes and the previous
term loan.

The Company is in compliance with all debt covenants as of March 31, 2005
and projects that it will remain in compliance during the remainder of 2005. As
of March 31, 2005, the Company has approximately $151.1 million available lines
of credit eligible to be drawn down under its revolving credit facility.

9. LOANS RECEIVABLE FROM INDEPENDENT CONTRACTORS

The Roto-Rooter segment sublicenses with approximately sixty independent
contractors to operate certain plumbing repair and drain cleaning businesses in
lesser-populated areas of the United States and Canada. As of March 31, 2005,
the Company had notes receivable from its independent contractors totaling
$2,740,000 (December 31, 2004-$2,781,000). In most cases these loans are fully
or partially secured by equipment owned by the contractor. The interest rates on
the loans range from 5% to 8% per annum and the remaining terms of the loans
range from two months to 5.4 years at March 31, 2005. During the quarter ended
March 31, 2005, we recorded revenues of $4,608,000 (2004-$4,091,000) and pretax
profits of $1,683,000 (2004-$1,552,000) from our independent contractors.

Effective January 1, 2004, we adopted the provisions of Financial
Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of
Variable Interest Entities--an interpretation of Accounting Research Bulletin
No. 51 (revised)" ("FIN 46R") relative to the Company's contractual
relationships with its independent contractors. FIN 46R requires the primary
beneficiary of a Variable Interest Entity ("VIE") to consolidate the accounts of
the VIE. We have evaluated our relationships with our independent contractors
based upon guidance provided in FIN 46R and have concluded that many

10

of the contractors who have loans payable to us may be VIE's. Due to the limited
financial data available from these independent entities we have not been able
to perform the required analysis to determine which, if any, of these
relationships are VIE's or the primary beneficiary of these potential VIE
relationships. We are continuing to request appropriate information to enable us
to evaluate these potential VIE relationships. We believe consolidation, if
required, of the accounts of any VIE's for which the Company might be the
primary beneficiary would not materially impact the Company's financial position
or results of operations. Instead, consolidation of some, if any, of these
arrangements is more likely to result in a "grossing up" of amounts such as
revenues and expenses with no net change in the Company's net income or cash
flow.

10. PENSION AND RETIREMENT PLANS

All of the Company's plans that provide retirement and similar benefits
are defined contribution plans. Expenses for the Company's pension and
profit-sharing plans, ESOP's, excess benefit plans and other similar plans
comprise the following (in thousands):

For the three months ended March 31, 2005 $ 2,699
For the three months ended March 31, 2004 3,372

11. LITIGATION

The Company is party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. The
Company contests these allegations and believes them without merit. Plaintiff
moved for 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 in the fourth quarter of 2004 as the anticipated cost of
settling this litigation.

VITAS 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, Maria 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

11

management's time, and related publicity.

12. RELATED PARTY AGREEMENT

In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term. Under the agreement, VITAS made purchases of
$2,456,000 from OCR during the first quarter of 2005. Mr. E. L. Hutton is
non-executive Chairman and a director of the Company and OCR. Also, Mr. Joel F.
Gemunder, President and Chief Executive Officer of OCR, and Ms. Sandra Laney are
directors of both OCR and the Company. Nonetheless, we believe that the terms of
the Agreement are no less favorable to VITAS than we could negotiate with an
unrelated party.

13. DISCONTINUED OPERATIONS

Discontinued operations comprises the operating results of Service
America, discontinued in December 2004 (in thousands except per share data):

For the Three Months Ended
March 31,
---------------------------
2005 2004
---------- ----------

Income before income taxes $ 332 $ 275
Income taxes (121) (129)
---------- ----------
Net income $ 211 $ 146
========== ==========

Earnings per share and
diluted earnings per share $ .02 $ .01
========== ==========

Service revenues and sales $ 8,034 $ 10,708
========== ==========

The corporation that acquired Service America, Service America Enterprise,
Inc. ("Enterprise"), purchased the substantial majority of Service America's
assets in exchange for Enterprise's assuming substantially all of Service
America's liabilities. Included in the assets acquired is a receivable from the
Company for approximately $4.7 million. The Company paid $1 million of this
receivable upon closing and will pay the remainder over the following year in 11
equal installments. The disposition of Service America was completed on May 5,
2005.

14. CAPITAL STOCK SPLIT

On March 11, 2005, the Board of Directors of the Company approved a
2-for-1 stock split in the form of a 100% stock dividend to shareholders of
record at the close of business on April 22, 2005. This stock split is payable
May 11, 2005 and is not reflected in these financial statements.

When the stock split becomes effective in May 2005, there will be twice as
many shares of capital stock outstanding as there were prior to the split. Had
the stock split occurred on March 31, 2005, the book value of capital stock
would have increased $13,662,000 and the book value of paid-in capital would
have declined by the same amount,

12

with no net effect on shareholders' equity. Under Delaware law, the par value of
the capital stock remains $1 per share. Once the stock split is effective in the
second quarter of 2005, all prior per share data will be restated to
retroactively reflect the impact of the stock split on the average number of
shares outstanding. Accordingly, the share and per share data for the first
quarter of 2005 and 2004 giving effect to the stock split follows (in thousands,
except per share data):

Three Months Ended March 31,
--------------------------------
2005 2004
------------- -------------

Earnings/(Loss) Per Share
Income/(loss) from
operations $ 0.31 $ (0.33)
============= =============
Net Income/(loss) $ 0.32 $ (0.33)
============= =============

Diluted Earnings/(Loss) Per Share
Income/(loss) from continuing
operations $ 0.31 $ (0.33)
============= =============
Net Income/(loss) $ 0.31 $ (0.33)
============= =============

Average Number of Shares Outstanding
Earnings/(loss) per share $ 25,152 $ 21,824
============= =============
Diluted earnings/(loss) per share $ 25,910 $ 21,824
============= =============

15. RECENT ACCOUNTING STATEMENTS

In December 2004, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004) "Share-Based Payment" ("SFAS No. 123R"), which
requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock
options, but expresses no preference for a type of valuation model. This
statement supersedes APB No. 25, but does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS No. 123 as originally issued. Based on recent action by the Securities and
Exchange Commission ("SEC"), SFAS No. 123R will be effective as of the beginning
of the Company's next fiscal year (January 1, 2006). We are evaluating our stock
incentive programs and most likely will significantly reduce the number of stock
options granted after December 31, 2005. In March 2005, the Board of Directors
approved immediate vesting of all unvested stock options to avoid recognizing
approximately $951,000 of pretax expense that would have been charged to income
under SFAS No. 123R during the five quarters beginning on January 1, 2006. The
$215,000 cost of accelerating the vesting of these options is included in the
determination of income from continuing operations for the first quarter of
2005. As a result, we do not expect the implementation of SFAS No. 123R in the
first quarter of 2006 to have a significant impact on our financial condition,
results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material and requires that these items be recognized as current
period charges. SFAS No. 151 applies to inventory costs incurred only during
periods beginning after the effective date and also requires that the allocation
of

13

fixed production overhead to conversion costs be based on the normal capacity of
the production facilities. SFAS No. 151 is effective for the Company's fiscal
year beginning January 1, 2005. Implementation of this statement in 2005 did not
have a material impact on our financial condition, results of operations or cash
flows.

In December 2004, FASB issued SFAS Statement No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS
No. 153 eliminates the exception for exchange of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 is effective for nonmonetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005. As we
do not engage in exchanges of non-monetary assets, we do not anticipate
implementation of this statement will have significant impact on our financial
conditions, results of operations or cash flows.

NOTE 16. OIG INVESTIGATION

On April 7, 2005, the Company announced the Office of Inspector General
("OIG") for the Department of Health and Human Services has served VITAS with
civil subpoenas relating to VITAS' alleged failure to appropriately bill
Medicare and Medicaid for hospice services. As part of this investigation, the
OIG has selected medical records for 320 past and current patients from VITAS'
three largest programs for review. It also seeks policies and procedures from
1998 to present covering admissions, certifications, recertifications, and
discharges.

The OIG has not disclosed the origin of the subpoenas or investigation. We
are unable to predict the outcome of the investigation or the impact, if any,
that the investigation may have on the business, results of operations,
liquidity or capital resources. Regardless of outcome, responding to the
subpoenas can adversely affect the Company through defense costs, diversion of
management's time and related publicity.

NOTE 17. CASH OVERDRAFTS PAYABLE

Included in accounts payable at March 31, 2005 are cash overdrafts payable
of $9,288,000 (December 31, 2004 - $1,265,000).

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES
Significant changes in the balance sheet accounts from December 31, 2004
to March 31, 2005 include the following:

- The $62.8 million decline in cash and cash equivalents from $71.4
million at December 31, 2004 to $8.6 million at March 31, 2005 is
primarily attributable to the use of cash to reduce the Company's
total long-term debt by $55.7 million from $291.7 million at
December 31, 2004 to $236.0 million at March 31, 2005. The remainder
of the decline is due to the timing of the receipt of Medicare
payments by VITAS at the end of 2004 versus such timing at March 31,
2005.

- The increase in accounts receivable from $64.7 million at December
31, 2004 to $81.9 million at March 31, 2005 is due to the timing of
the receipt of Medicare payments at the end of 2004 versus such
timing at March 31, 2005 (a $19.6 million payment from Medicare was
received on April 1, 2005). Also, VITAS' higher revenues for the
first quarter of 2005 as compared with the fourth quarter of 2004
and the delay in the receipt of Medicare payments for recently
acquired operations and certain new start operations contributed to
this increase. The delay in the receipt of Medicare payments for
recent acquisitions and new starts is due to the timing of receipt
of Medicare program licenses. Payment of these amounts and receipt
of licenses is expected during the next several months.

- The increase in accrued salaries and wages from $17.0 million at
December 31, 2004 to $22.7 million at March 31, 2005 is due largely
to the difference in the timing of payroll disbursements.

- The $10.6 million decline in other current liabilities from $42.8
million at December 31, 2004 to $32.2 million at March 31, 2005 is
largely attributable to the payment of 2004 incentive compensation
and supplemental thrift plan contributions during 2005. The payment
of various severance and divestiture liabilities also contributed to
this decline.

Net cash used by continuing operations declined $11.2 million from $14.3
million for the first three months of 2004 to $3.1 million for the first three
months of 2005, due primarily to a higher level of cash generated by Roto-Rooter
operations in 2005 ($6.4 million), a lower cash LTIP payout in 2005 ($2.8
million) and a lower cash prepayment penalty on the early extinguishment of debt
in 2005 ($2.2 million).

At March 31, 2005, we had approximately $151.1 million available lines of
credit eligible to be drawn down under our amended credit agreement with
JPMorgan Chase. Management believes its liquidity and sources of capital are
satisfactory for the Company's needs in the foreseeable future.

15

COMMITMENTS AND CONTINGENCIES

Collectively, the terms of the credit agreements provide that the Company
is required to meet various financial covenants, to be tested quarterly,
beginning with the quarter ending June 30, 2005. In connection therewith, we are
in compliance with all financial and other debt covenants as of March 31, 2005
and anticipate remaining in compliance throughout 2005.

In connection with the sale of Patient Care in 2002, $5.0 million of the
cash purchase price was placed in escrow pending collection of third-party payer
receivables on Patient Care's balance sheet at the sale date. To date, $4.2
million has been returned and the remainder is being withheld pending the
settlement of certain third-party payer claims. Based on Patient Care's
collection history, we believe that the significant majority of the disputed
amounts will be resolved in Patient Care's favor and most of the withheld escrow
will be returned to the Company. We also have accounts receivable from Patient
Care for the post-closing balance sheet valuation ($1.3 million) and for
expenses paid by us after closing on Patient Care's behalf ($1.6 million). The
Company is in litigation with Patient Care over various issues, including the
collection of these amounts. We believe these balances represent valid claims,
are fairly stated and are fully collectible; nonetheless, an unfavorable
determination by the courts could result in the write-off of all or a portion of
these balances.

RESULTS OF OPERATIONS

FIRST QUARTER 2005 VERSUS FIRST QUARTER 2004-CONSOLIDATED RESULTS

The Company's service revenues and sales for the first quarter of 2005
increased 82% versus revenues for the first quarter of 2004. This $98.3 million
increase was attributable to the acquisition of VITAS on February 24, 2004 and
to the following (dollar amounts in thousands):

Increase/(Decrease)
-------------------
Amount Percent
------- -------

VITAS (acquired February 24, 2004) $94,878 185.6%
Roto-Rooter
Plumbing 2,120 8.1
Drain Cleaning 471 1.6
Other 828 5.8
-------
Total $98,297 81.7%
=======

VITAS' revenues for the first quarter of 2005 included revenues from the
following sources (in thousands):

Routine home care $100,872
Continuous home care 24,271
General inpatient care 20,678
Respite and custodial care 169
--------
Total $145,990
========

Approximately 97% of VITAS' revenues for the period was from Medicare and
Medicaid.

The increase in plumbing revenues for the first quarter of 2005 versus
2004 comprises a 4.4% increase in the number of jobs performed and a 3.7%
increase in the average price per job. The increase in drain cleaning revenues
for the first quarter of 2005 versus 2004 comprised a 3.3% decline in the number
of jobs offset by a 4.9% increase in the average price per job. The increase in
other

16

revenues for the first quarter of 2005 versus 2004 is attributable primarily to
increases in independent contractor operations and other services.

The consolidated gross margin was 30.0% in the first quarter of 2005 as
compared with 34.5% in the first quarter of 2004, largely due to the acquisition
of VITAS on February 24, 2004. In 2004 VITAS accounted for 42% of total revenues
and 26% of total gross profit. For the 2005 quarter these percentages were 67%
and 47%, respectively. Thus, VITAS' lower gross profit margin had a more
significant impact on overall margins in 2005. On a segment basis, VITAS' gross
margin was 21.1% in the first quarter of 2005 and 20.8% in the first quarter of
2004. The Roto-Rooter segment's gross margin increased 3.5% points to 48.1%,
largely due to a favorable adjustment to the casualty insurance accruals related
to prior periods' experience and to lower training wages as a percentage of
revenues, in the first quarter of 2005 versus 2004.

Selling, general and administrative expenses ("SG&A") for the first
quarter of 2005 were $36,595,000, an increase of $8,383,000 (29.7%) versus the
first quarter of 2004. Almost all of the increase was attributable to the
increased SG&A of the VITAS segment, acquired February 24, 2004. Similarly, the
$859,000 increase in depreciation expense and $731,000 increase in amortization
expense for the first quarter of 2005 versus the first quarter of 2004 are
primarily due to the VITAS segment.

Other expenses for the first quarter declined $7,459,000 from $8,783,000
in 2004 to $1,324,000 in 2005 due primarily to lower expenses of the long-term
incentive program ("LTIP") in 2005 versus 2004.

Income from operations increased $21,680,000 from $974,000 in the first
quarter of 2004 to $22,654,000 in the first quarter of 2005. The increase
comprises (in thousands):

Increase/
(Decrease)
---------

Higher income from operations of VITAS
(acquired February 24, 2004) $ 10,085
Lower other expenses in 2005 versus 2004, largely
due to lower LTIP expenses in 2005 versus 2004 7,459
Higher gross profit margin of the Roto-Rooter segment
in 2005 versus 2004 due to higher revenues, the
favorable adjustment to the casualty insurance
accruals and lower training wages 4,051
All other 85
---------
Total $ 21,680
=========

Interest expense, substantially all of which is incurred at Corporate,
increased from $2,900,000 in the first quarter of 2004 to $5,835,000 in the 2005
quarter. This increase is due primarily to the acquisition-related debt
outstanding for the entire quarter in 2005 versus only 37 days in 2004.

Other income-net declined $752,000 in the first quarter of 2005 versus the
first quarter of 2004. The decline is attributable primarily to lower market
valuation adjustments on trading investments of employee benefit trusts in 2005
versus 2004. These market valuation adjustments are entirely offset by expenses
in the SG&A category of the statement of income.

17

Our effective income tax rate increased from 16.6% in the first quarter of
2004 to 41.8% in the first quarter of 2005. The effective tax rate for 2004
reflects the impact of significant LTIP and debt extinguishment expenses at the
Corporate office that resulted in a consolidated net loss before income taxes in
the first quarter of 2004.

Equity in the loss of VITAS for 2004 represents the Company's 37% share of
VITAS' loss for the period from January 1, 2005 through February 23, 2005, prior
to our acquiring a controlling interest in VITAS. During the first one month and
23 days of 2004, VITAS recorded a net loss due to significant
transaction-related expenses on the sale of its business to Chemed.

Income/(loss) from continuing operations increased from a loss of
$7,256,000 ($.66 per share) for the first quarter of 2004 to income of
$7,905,000 ($.63 per share and $.61 per diluted share) for the first quarter of
2005. Net income/(loss) increased from a loss of $7,110,000 ($.65 per share) for
the first quarter of 2004 to income of $8,116,000 ($.65 per share and $.63 per
diluted share). Income/(loss) from continuing operations and net income/(loss)
for both periods included the following aftertax special items/adjustments that
increased/(reduced) aftertax earnings (in thousands, except per share data):

For the Three Months
Ended March 31,
----------------------
2005 2004
------- --------

Loss on extinguishment of debt $(2,523) $ (2,164)
Favorable adjustment to casualty
insurance accruals related to prior
years' experience 1,014 -
Compensation expense of the LTIP (695) (5,723)
Cost of accelerating vesting of
stock options (137) -
Equity in loss of VITAS in 2004 - (4,105)
------- --------
Total aftertax impact on earnings $(2,341) $(11,992)
======= ========
Impact on earnings per share $ (.19) $ (1.10)
Impact on diluted earnings per share $ (.18) $ (1.10)

18

FIRST QUARTER 2005 VERSUS FIRST QUARTER 2004-SEGMENT RESULTS

The change in aftertax earnings for the first quarter of 2005 versus the
first quarter of 2004 is due to (in thousands):

Increase/
(Decrease)
---------

Higher earnings of VITAS, acquired
February 24, 2004 $ 6,772
Inclusion of the equity in the loss of
VITAS in the results for 2004 4,105
Higher earnings of the Roto-Rooter
segment in 2005 2,908
Lower aftertax Corporate costs in 2005
versus the 2004 1,376
All other 65
---------

Increase in net income/(loss) in 2005 $ 15,226
=========

The higher aftertax earnings of VITAS is due to the inclusion of 100% of
VITAS' earnings for the entire first quarter of 2005 versus only 37 days'
earnings in the first quarter of 2004. The higher aftertax earnings of
Roto-Rooter in the first quarter of 2005 versus 2004 are primarily attributable
to higher gross profit in the first quarter of 2005. Roto-Rooter's higher gross
profit is due to higher revenues in 2005, the favorable adjustment to the
casualty insurance accruals in 2005 and to lower training wages in 2005.

Lower aftertax Corporate costs in the first quarter of 2005 versus 2004
are attributable to (in thousands):

Increase/
(Decrease)
---------

Lower aftertax other expenses (primarily
LTIP costs) in 2005 $ (4,245)
Higher aftertax interest expense in 2005 due to
having acquisition-related debt outstanding for
the entire quarter in 2005 1,716
Higher aftertax intercompany interest expense in 2005
due primarily to acquisition of VITAS and cash
generated by VITAS during the past four quarters 472
Higher aftertax loss in 2005 on the extinguishment 359
of debt
All other 322
---------
Decline in corporate costs in 2005 $ (1,376)
=========

For the three months ended March 31, 2005, VITAS' service revenues
increased 17.8% over revenues for the three months ended March 31, 2004. Driving
this increase was a 17.6% increase in average daily census ("ADC") of patients
from 8,097 in the 2004 period to 9,523 patients in the 2005 period.

The following charts update historical financial and operating data of
VITAS, acquired in February 2004 (dollars in thousands, except dollars per
patient day):

19

First Quarter
-----------------------------------
2004 2005
-------------- ------------

OPERATING STATISTICS
Net revenue
Homecare $ 82,982 $ 100,872
Inpatient 18,778 20,847
Continuous care 22,222 24,271
-------------- ------------
Total $ 123,982 $ 145,990
============== ============
Net revenue as a percent of total
Homecare 66.9% 69.1%
Inpatient 15.2 14.3
Continuous care 17.9 16.6
-------------- ------------
Total 100.0% 100.0%
============== ============
Average daily census ("ADC") (days)
Homecare 4,341 5,428
Nursing home 2,935 3,201
-------------- ------------
Routine homecare 7,276 8,629
Inpatient 372 402
Continuous care 449 492
-------------- ------------
Total 8,097 9,523
============== ============
Total Admissions 12,236 12,948
Average length of stay (days) 55.7 66.2(a)
Median length of stay (days) 11.0 11.0
ADC by major diagnosis
Neurological 30.3% 31.7%
Cancer 23.8 21.5
Cardio 14.3 15.3
Respiratory 7.5 7.1
Other 24.1 24.4
-------------- ------------
Total 100.0% 100.0%
============== ============
Admissions by major diagnosis
Neurological 19.6% 19.7%
Cancer 35.3 34.3
Cardio 13.4 14.0
Respiratory 8.1 8.4
Other 23.6 23.6
-------------- ------------
Total 100.0% 100.0%
============== ============
Direct patient care margins (b)
Routine homecare 48.8% 49.9%
Inpatient 27.1 22.9
Continuous care 19.2 17.5
Homecare margin drivers
(dollars per patient day)
Labor costs $ 44.03 $ 45.71
Drug costs 8.64 7.48
Home medical equipment 5.72 5.47
Medical supplies 1.93 2.15
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 198.24 $ 238.31
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 421.74 $ 433.18
Bad debt expense as a percent of revenues 1.2% 0.9%
Accounts receivable --
days of revenue outstanding 36.4 39.5

- ----------
(a) VITAS has six large (greater than 450 ADC), 14 medium (greater than 200
but less than 450 ADC) and 16 small (less than 200 ADC) hospice programs.
The average length of stay for all programs, in the aggregate, ranged from
a low of 16.9 days to a high of 144.6 days for the first quarter of 2005.

(b) Amounts exclude indirect patient care costs.

20

2004
------------------------------------------------------------------
First Quarter
----------------------------
January 1 February 24 2005
to to Second Third Fourth First
February 23 March 31 (a) Quarter Quarter Quarter Quarter
----------- ------------ ---------- ---------- ---------- ----------

STATEMENT OF OPERATIONS
Service revenues and sales $ 72,870 $ 51,112 $ 130,240 $ 135,101 $ 142,277 $ 145,990
--------- ------------ ---------- ---------- ---------- ----------
Cost of services provided
(excluding depreciation) 58,848 40,486 101,790 105,695 108,830 115,220
Selling, general and administrative expenses 8,182 5,060 12,227 12,653 13,006 13,124
Depreciation 836 748 1,861 469 2,634 1,785
Amortization 4 331 1,102 1,562 354 995
Other expense 24,956(b) - - - 1,680(b) 293
--------- ------------ ---------- ---------- ---------- ----------
Total costs and expenses 92,826 46,625 116,980 120,379 126,504 131,417
--------- ------------ ---------- ---------- ---------- ----------
Income/(loss) from operations (19,956) 4,487 13,260 14,722 15,773 14,573
Interest expense (919) (28) (30) (32) (38) (38)
Loss on extinguishment of debt (4,497)(b) - - - - -
Other income--net 41 31 176 382 466 617
--------- ------------ ---------- ---------- ---------- ----------
Income/(loss) before income taxes (25,331) 4,490 13,406 15,072 16,201 15,152
Income taxes 6,996 (1,893) (5,499) (6,097) (6,541) (5,783)
--------- ------------ ---------- ---------- ---------- ----------
Net income/(loss) $ (18,335) $ 2,597 $ 7,907 $ 8,975 $ 9,660 $ 9,369
========= ============ ========== ========== ========== ==========

EBITDA (c)
Net income/(loss) $ (18,335) $ 2,597 $ 7,907 $ 8,975 $ 9,660 $ 9,369
Add/(deduct)
Interest expense 919 28 30 32 38 38
Income taxes (6,996) 1,893 5,499 6,097 6,541 5,783
Depreciation 836 748 1,861 469 2,634 1,785
Amortization 4 331 1,102 1,562 354 995
--------- ------------ ---------- ---------- ---------- ----------
EBITDA $ (23,572) $ 5,597 $ 16,399 $ 17,135 $ 19,227 $ 17,970
========= ============ ========== ========== ========== ==========

- ----------
(a) We acquired VITAS on February 24, 2004 and recorded estimated purchase
accounting adjustments to the value of VITAS' assets as of that date.

(b) Costs related to the sale of VITAS totaled $29,453,000 pretax ($20,930,000
aftertax) for January 1 through February 23, 2004. Additional transaction
costs totaled $1,680,000 pretax ($1,008,000 aftertax) in the fourth
quarter of 2004. Such costs include legal and professional fees, severance
costs and a loss on writing off deferred debt issuance costs.

(c) EBITDA is income before interest expense, income taxes, depreciation and
amortization. We use EBITDA, in addition to net income, income/ (loss)
from operations and cash flow from operating activities, to assess our
performance and believe it is important for investors to be able to
evaluate us using the same measures used by management. We believe that
EBITDA is an important supplemental measure of operating performance
because it provides investors with an indication of our performance
independent of our debt and equity structure and related costs. We also
believe that EBITDA is a supplemental measurement tool used by analysts
and investors to help evaluate a company's overall operating performance
by including only transactions related to core cash operating business
activities. EBITDA as calculated by us is not necessarily comparable to
similarly titled measures reported by other companies. In addition, EBITDA
is not prepared in accordance with accounting principles generally
accepted in the United States ("GAAP"), and should not be considered an
alternative for net income, income from operations, net cash provided by
operating activities or other financial information determined under GAAP,
and should not be considered as a measure of profitability or liquidity.
We believe the line on the consolidated statement of operations entitled
net income/(loss) is the most directly comparable GAAP measure to EBITDA.
EBITDA, as calculated above, includes interest income, loss on
extinguishment of debt and costs related to the sale of VITAS to the
Company as follows (in thousands):

2004
--------------------------------------------------------------------
January 1 February 24 2005
to to Second Third Fourth First
February 23 March 31 Quarter Quarter Quarter Quarter
----------- ----------- --------- --------- --------- --------

Interest income $ 41 $ 31 $ 65 $ 94 $ 142 $ 126
Loss on extinguishment of debt 4,497 - - - - -
Costs related to sale of business 24,956 - - - 1,680 -

21

RECENT ACCOUNTING STATEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share -
Based Payment" ("SFAS No. 123R"), which requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the
intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes APB No. 25,
but does not change the accounting guidance for share-based payment transactions
with parties other than employees provided in SFAS No. 123 as originally issued.
Based on recent action by the SEC, SFAS No. 123R will be effective as of the
beginning of the Company's next fiscal year (January 1, 2006). We are evaluating
our stock incentive programs and most likely will significantly reduce the
number of stock options granted after December 31, 2005. In March 2005, the
Board of Directors approved immediate vesting of all unvested stock options to
avoid recognizing approximately $951,000 of pretax expense that would been
charged to income under SFAS No. 123R during the five quarters beginning on
January 1, 2006. The $215,000 cost of accelerating the vesting of these options
is included in the determination of income from continuing operations for first
quarter of 2005. As a result, we do not expect the implementation of SFAS No.
123R in the first quarter of 2006 to have a significant impact on our financial
condition, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, An
Amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material and requires that these items be recognized as current
period charges. SFAS No. 151 applies to inventory costs incurred only during
periods beginning after the effective date and also requires that the allocation
of fixed production overhead to conversion costs be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for the Company's fiscal
year beginning January 1, 2005. Implementation of this statement in 2005 did not
have a material impact on our financial condition, results of operations or cash
flows.

In December 2004, FASB issued SFAS Statement No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS
No. 153 eliminates the exception for exchange of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 is effective for nonmonetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005. As we
do not engage in exchanges of non-monetary assets, we do not anticipate
implementation of this statement will have significant impact on our financial
condition, results of operations or cash flows.

22

]
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
REGARDING FORWARD-LOOKING INFORMATION

In addition to historical information, this report contains
forward-looking statements and performance trends that are based upon
assumptions subject to certain known and unknown risks, uncertainties,
contingencies and other factors. Variances in any or all of the risks,
uncertainties, contingencies, and other factors from the Company's assumptions
could cause actual results to differ materially from these forward-looking
statements and trends. The Company's ability to deal with the unknown outcomes
of these events, many of which are beyond the control of the Company, may
affect the reliability of its projections and other financial matters.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Chemed's primary market risk exposure relates to interest rate risk
exposure through its variable interest rate borrowings. At March 2005, we have a
total of $84,150,00,000 of variable rate debt outstanding. Should the interest
rate on this debt increase 100 basis points, our annual interest expense would
increase $842,000. The quoted market value of our 8.75% fixed rate senior notes
on April 30, 2005 is $160,500,000 (carrying value is $150,000,000). We estimate
that the fair value of remainder of our debt approximates book value at March
31, 2005 ($86,015,000).

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.

The Company recently carried out an evaluation, under the supervision
of the Company's President and Chief Executive Officer, and with the
participation of the Vice President and Chief Financial Officer and the Vice
President and Controller, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-14/15d-14(a). Based upon the foregoing, the Company's President and Chief
Executive Officer, Vice President and Chief Financial Officer and Vice President
and Controller concluded that as of the date of this report the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its consolidated subsidiaries
required to be included the Company's Exchange Act reports. There have been no
significant changes in internal control over financial reporting during the
first three months of 2005.

23

PART II OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On May 5, 2005, we completed the sale of the substantial majority of the
assets of Service America to Service America Enterprise, Inc. ("Enterprise") in
exchange for Enterprise's assuming substantially all Service America's
liabilities. Included in the assets acquired by Enterprise was a receivable from
the Company for approximately $4.7 million. The Company paid $1 million of this
receivable upon closing and will pay the remainder over the following year in 11
equal monthly installments.

ITEM 6. EXHIBITS

Exhibit No. Description
- ----------- -----------

31.1 Certification by Kevin J. McNamara pursuant to Rule 13A - 14 of
the Exchange Act of 1934.

31.2 Certification by David P. Williams pursuant to Rule 13A - 14 of
the Exchange Act of 1934.

31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule 13A -
14 of the Exchange Act of 1934.

32.1 Certification by Kevin J. McNamara pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

32.2 Certification by David P. Williams pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act 1934, the
Registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.

Chemed Corporation
----------------------------
(Registrant)

Dated: May 10, 2005 By Kevin J. McNamara
--------------------------
Kevin J. McNamara
(President and Chief
Executive Officer)

Dated: May 10, 2005 By David P. Williams
--------------------------
David P. Williams
(Vice President and Chief
Financial Officer)

Dated: May 10, 2005 By Arthur V. Tucker, Jr.
--------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)

24