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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2003
Commission File Number 1-8351
ROTO-ROOTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate 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 9,882,254 Shares October 31, 2003
$1 Par Value
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Page 1 of 26
ROTO-ROOTER, INC. AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2003 and
December 31, 2002 3
Consolidated Statement of Income -
Three months and nine months ended
September 30, 2003 and 2002 4
Consolidated Statement of Cash Flows -
Nine months ended
September 30, 2003 and 2002 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Page 2 of 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
September 30, December 31,
2003 2002*
------------- ------------
(restated-
see Note 2)
ASSETS
Current assets
Cash and cash equivalents $ 72,607 $ 37,731
Accounts receivable, less allowances of $2,681
(2002 - $3,309) 13,310 14,643
Inventories 8,548 9,493
Statutory deposits 9,852 12,323
Current deferred income taxes 9,167 9,894
Prepaid expenses and other current assets 8,616 7,716
---------- ----------
Total current assets 122,100 91,800
Investments of deferred compensation plans held in trust 16,832 15,176
Other investments 5,546 37,326
Note receivable 12,500 12,500
Properties and equipment, at cost less accumulated
depreciation of $62,917 (2002 - $62,370) 47,456 48,361
Identifiable intangible assets less accumulated
amortization of $7,609 (2002 - $7,167) 2,450 2,889
Goodwill less accumulated amortization 113,437 110,843
Other assets 16,907 17,034
---------- ----------
Total Assets $ 337,228 $ 335,929
========== ==========
LIABILITIES
Current liabilities
Accounts payable $ 5,033 $ 5,686
Current portion of long-term debt 463 409
Income taxes 7,294 7,348
Deferred contract revenue 16,053 17,321
Accrued insurance 16,844 17,448
Other current liabilities 20,347 23,513
---------- ----------
Total current liabilities 66,034 71,725
Long-term debt 25,635 25,603
Mandatorily redeemable convertible preferred securities of
the Chemed Capital Trust 14,146 -
Deferred compensation liabilities 16,824 15,196
Other liabilities 10,105 10,797
---------- ----------
Total Liabilities 132,744 123,321
========== ==========
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF THE
CHEMED CAPITAL TRUST - 14,186
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock-authorized 15,000,000 shares $1 par;
issued 13,452,358 (2002 - 13,448,475) shares 13,452 13,448
Paid-in capital 169,406 168,299
Retained earnings 134,143 127,938
Treasury stock - 3,573,604 (2002 - 3,630,689) shares, at cost (110,492) (111,582)
Unearned compensation (3,389) (4,694)
Deferred compensation payable in Company stock 2,294 2,280
Notes receivable for shares sold (930) (952)
Accumulated other comprehensive income - 3,685
---------- ----------
Total Stockholders' Equity 204,484 198,422
---------- ----------
Total Liabilities and Stockholders' Equity $ 337,228 $ 335,929
========== ==========
* Reclassified to conform to 2003 presentation
See accompanying notes to unaudited financial statements.
Page 3 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(restated- (restated-
see Note 2) see Note 2)
Continuing Operations
Service revenues and sales $ 75,172 $ 75,322 $230,088 $235,257
-------- -------- -------- --------
Cost of services provided and goods sold
(excluding depreciation) 44,215 44,314 135,978 139,446
General and administrative expenses 14,138 11,537 45,194 36,699
Selling and marketing expenses 11,469 10,677 31,560 31,441
Depreciation 2,983 3,424 9,025 10,402
-------- -------- -------- --------
Total costs and expenses 72,805 69,952 221,757 217,988
-------- -------- -------- --------
Income from operations 2,367 5,370 8,331 17,269
Interest expense (487) (709) (1,625) (2,245)
Distributions on preferred securities (268) (268) (804) (809)
Other income - net 3,049 268 9,766 3,810
-------- -------- -------- --------
Income before income taxes 4,661 4,661 15,668 18,025
Income taxes (1,748) (1,725) (5,898) (6,527)
Income from continuing operations 2,913 2,936 9,770 11,498
Discontinued operations - 3,929 - 5,920
-------- -------- -------- --------
Net Income $ 2,913 $ 6,865 $ 9,770 $ 17,418
======== ======== ======== ========
Earnings Per Share
Income from continuing operations $ .29 $ .30 $ .99 $ 1.17
======== ======== ======== ========
Net income $ .29 $ .70 $ .99 $ 1.77
======== ======== ======== ========
Average number of shares outstanding 9,941 9,861 9,913 9,854
======== ======== ======== ========
Diluted Earnings Per Share
Income from continuing operations $ .29 $ .30 $ .98 $ 1.16
======== ======== ======== ========
Net income $ .29 $ .70 $ .98 $ 1.76
======== ======== ======== ========
Average number of shares outstanding 9,988 9,867 9,940 9,882
======== ======== ======== ========
Cash Dividends Per Share $ .12 $ .11 $ .36 $ .33
======== ======== ======== ========
See accompanying notes to unaudited financial statements.
Page 4 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2003 2002*
--------- --------
(restated -
see Note 2)
Cash Flows From Operating Activities
Net income $ 9,770 $ 17,418
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,564 10,954
Gains on sales and redemption of available-for-sale
investments (5,390) (1,141)
Provision for deferred income taxes 1,403 971
Provision for uncollectible accounts receivable 129 1,335
Discontinued operations - (5,920)
Changes in operating assets and liabilities, excluding
amounts acquired in business combinations
Decrease/(increase) in accounts receivable 1,204 (688)
Decrease in inventories 945 313
Decrease in statutory deposits 2,471 1,027
Increase in prepaid expenses and other
current assets (1,077) (503)
Decrease in accounts payable, deferred contract
revenue and other current liabilities (5,449) (6,494)
Increase in income taxes 976 4,538
Increase in other assets (1,253) (583)
Increase/(decrease) in other liabilities 2,395 (784)
Noncash expense of internally financed ESOPs 1,305 2,349
Other sources/(uses) (18) 1,142
--------- --------
Net cash provided by continuing operations 16,975 23,934
Net cash provided by discontinued operations - 5,287
--------- --------
Net cash provided by operating activities 16,975 29,221
========= ========
Cash Flows From Investing Activities
Capital expenditures (8,520) (8,951)
Proceeds from sales of available-for-sale investments 31,763 1,917
Business combinations, net of cash acquired (2,229) (1,230)
Net proceeds/(uses) by discontinued operations (1,119) 569
Proceeds from sales of property and equipment 511 2,245
Investing activities from discontinued operations - (474)
Other uses (336) (443)
--------- --------
Net cash provided/(used) by investing activities 20,070 (6,367)
========= ========
Cash Flows From Financing Activities
Dividends paid (3,568) (3,252)
Issuance of capital stock 1,519 810
Purchases of treasury stock (274) (3,196)
Repayment of long-term debt (320) (15,296)
Proceeds from issuance of long-term debt - 5,000
Other sources/(uses) 474 (42)
--------- --------
Net cash used by financing activities (2,169) (15,976)
--------- --------
Increase In Cash and Cash Equivalents 34,876 6,878
Cash and cash equivalents at beginning of period 37,731 8,725
--------- --------
Cash and cash equivalents at end of period $ 72,607 $ 15,603
========= ========
* Reclassified for operations discontinued in 2002
See accompanying notes to unaudited financial statements.
Page 5 of 26
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. The accompanying unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, they do not include all the disclosures required
under generally accepted accounting principles for complete
financial statements. However, in the opinion of the management
of the Company, 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. For further information
regarding the Company' accounting policies, refer to the
consolidated financial statements and notes included in the
Company' Annual Report on Form 10-K/A or the year ended December
31, 2002, to be filed.
The Company uses Accounting Principles Board Opinion No. 25 ("APB
No. 25"), Accounting for Stock Issued to Employees, to account for
stock-based compensation. Since the Company' stock options
qualify as fixed options under APB No. 25 and since the option
price equals the market price on the date of grant, there is no
compensation expense for stock options. Stock awards are expensed
during the period the related services are provided.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value-
recognition provisions of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation (in
thousands, except per share data:)
Three Months Ended
September 30,
2003 2002
--------- ---------
Net Income $ 2,913 $ 6,865
Add: stock-based compensation expense
included in net income as reported,
net of income tax effects 28 30
Deduct: total stock-based employee
compensation determined under
a fair-value-based method for
all stock options and awards,
net of income tax effects (249) (220)
--------- ---------
Pro forma net income $ 2,692 $ 6,675
========= =========
Earnings Per Share
As restated $ .29 $ .70
========= =========
Pro forma $ .27 $ .68
========= =========
Diluted earnings per share
As restated $ .29 $ .70
========= =========
Pro forma $ .27 $ .68
========= =========
Page 6 of 26
Nine Months Ended
September 30,
2003 2002
--------- ---------
Net Income $ 9,770 $ 17,418
Add: stock-based compensation
expense included in net
income as reported, net of
income tax effects 73 90
Deduct: total stock-based employee
compensation determined
under a fair-value-based
method for all stock options
and awards, net of income
tax effects (708 (547)
--------- ---------
Pro forma net income $ 9,135 $ 16,961
========= =========
Earnings Per Share
As restated $ .99 $ 1.77
========= =========
Pro forma $ .92 $ 1.72
========= =========
Diluted earnings per share
As restated $ .98 $ 1.76
========= =========
Pro forma $ .92 $ 1.72
========= =========
2. In October 2003, the Company, in consultation with its independent
accountants, reevaluated its accounting for Yellow Pages costs and
concluded that these costs did not qualify for capitalization as
direct-response advertising under Statement of Position 93-7,
Reporting on Advertising Costs, which for the Company was
effective January 1, 1995. In its previously filed financial
statements the Company capitalized and amortized these costs over
the life of the directory, typically 12 months.
Accordingly, the Company's consolidated statement of operations,
consolidated balance sheet and consolidated statement of cash
flows for 2000, 2001, 2002 and the six months ended June 30, 2003
have been restated to recognize Yellow Pages advertising expenses
when the directories are placed in circulation rather than to
capitalize and amortize such costs.
The impact of the restatement on the restated components of the
Company's consolidated balance sheet is as follows (in thousands):
Reported Restated
--------- ---------
(unaudited)
December 31, 2002:
------------------
Current deferred income taxes $ 7,278 $ 9,894
Prepaid expenses and other current
assets 13,332 7,716
Total assets 338,929 335,929
Other current liabilities 21,657 23,513
Retained earnings 132,793 127,938
Total stockholders' equity 203,277 198,422
Total liabilities and stockholders'
equity 338,929 335,929
Page 7 of 26
The impact of the restatement on the restated components of the
Company's consolidated statement of income is as follows (in
thousands):
Reported Restated
---------- ----------
For the three months ended
March 31, 2003:
--------------------------
Selling and marketing expenses $ 11,078 $ 9,533
Income taxes (1,742) (2,282)
Income from continuing operations 2,553 3,557
Net income 2,553 3,557
Earnings per share-
Income from continuing operations .26 .36
Net income .26 .36
Diluted earnings per share-
Income from continuing operations .26 .36
Net income .26 .36
For the three months ended
June 30, 2003:
--------------------------
Selling and marketing expenses $ 11,339 $ 10,558
Income taxes (1,594) (1,868)
Income from continuing operations 2,792 3,300
Net income 2,792 3,300
Earnings per share-
Income from continuing operations .28 .33
Net income .28 .33
Diluted earnings per share-
Income from continuing operations .28 .33
Net income .28 .33
For the six months ended
June 30, 2003:
------------------------
Selling and marketing expenses $ 22,417 $ 20,091
Income taxes (3,336) (4,150)
Income from continuing operations 5,345 6,857
Net income 5,345 6,857
Earnings per share-
Income from continuing operations .54 .69
Net income .54 .69
Diluted earnings per share-
Income from continuing operations .54 .69
Net income .54 .69
For the three months ended
March 31, 2002:
--------------------------
Selling and marketing expenses $ 11,993 $ 10,606
Income taxes (1,947) (2,432)
Income from continuing operations 3,805 4,707
Net income 4,672 5,574
Earnings per share-
Income from continuing operations .39 .48
Net income .47 .57
Diluted earnings per share-
Income from continuing operations .39 .48
Net income .47 .56
Page 8 of 26
Reported Restated
---------- ----------
For the three months ended
June 30, 2002:
--------------------------
Selling and marketing expenses $ 11,788 $ 10,158
Income taxes (2,150) (2,370)
Income from continuing operations 3,445 3,855
Net income 4,569 4,979
Earnings per share-
Income from continuing operations .35 .39
Net income .46 .51
Diluted earnings per share-
Income from continuing operations .35 .39
Net income .46 .50
For the six months ended
June 30, 2002:
------------------------
Selling and marketing expenses $ 22,781 $ 20,764
Income taxes (4,097) (4,802)
Income from continuing operations 7,250 8,562
Net income 9,241 10,553
Earnings per share-
Income from continuing operations .74 .87
Net income .94 1.07
Diluted earnings per share-
Income from continuing operations .73 .87
Net income .93 1.07
For the three months ended
September 30, 2002:
--------------------------
Selling and marketing expenses $ 10,304 $ 10,677
Income taxes (1,856) (1,725)
Income from continuing operations 3,178 2,936
Net income 7,107 6,865
Earnings per share-
Income from continuing operations .32 .30
Net income .72 .70
Diluted earnings per share-
Income from continuing operations .32 .30
Net income .72 .70
For the nine months ended
September 30, 2002:
-------------------------
Selling and marketing expenses $ 33,085 $ 31,441
Income taxes (5,953) (6,527)
Income from continuing operations 10,428 11,498
Net income 16,348 17,418
Earnings per share-
Income from continuing operations 1.06 1.17
Net income 1.66 1.77
Diluted earnings per share-
Income from continuing operations 1.06 1.16
Net income 1.65 1.76
Page 9 of 26
3. During the second quarter of 2003, the administrative functions
for employee benefits, retirement services, risk management,
public relations, cash management and taxation of the corporate
office and the Plumbing and Drain Cleaning business were combined
to enable the Company to benefit from economies of scale. In May
2003 the shareholders of the Company approved changing the
corporation's name from Chemed Corporation to Roto-Rooter, Inc.
Due to these changes and the changing composition of businesses
comprising the Company over the past several years, management re-
evaluated the Company's segment reporting as it relates to
corporate office administrative expenses. The discontinuance of
businesses in 1997 (Omnia Group and National Sanitary Supply),
2001 (Cadre Computer) and 2002 (Patient Care), results in more
than 80% of the Company's revenues and aftertax earnings being
represented by Roto-Rooter's Plumbing and Drain Cleaning business.
To better reflect how executive management evaluates its
operations, the costs of the administrative functions of the
corporate office have been combined with the operating results of
the Plumbing and Drain Cleaning business (formerly the Roto-Rooter
Group) to form the Plumbing and Drain Cleaning segment. The
Service America segment remains essentially unchanged. Data for
the former Roto-Rooter Group and corporate office overhead for all
prior periods have been restated for comparability.
As in the past, unallocated investing and financing income and
expense-net includes interest income and expense, dividend income
and other nonoperating income and expense related to unallocated
corporate assets and liabilities.
Service revenues and sales and aftertax earnings by business
segment follow (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
2003 2002 2003 2002
-------- ------- -------- ---------
Service Revenues and Sales
- --------------------------
Plumbing and Drain Cleaning $ 63,342 $ 60,234 $ 192,659 $ 188,608
Service America 11,830 15,088 37,429 46,649
-------- -------- --------- ---------
Total $ 75,172 $ 75,322 $ 230,088 $ 235,257
======== ======== ========= =========
Aftertax Earnings
- -----------------
Plumbing and Drain Cleaning $ 1,610 $ 2,128(a) $ 5,589(b) $ 9,154(a)
Service America 50 166 125 552
-------- -------- --------- ---------
Total Segment Earnings 1,660 2,294 5,714 9,706
Unallocated Investing and Financing
Income and Expense-Net 1,253 (c) 642 4,057(d) 1,792(e)
-------- -------- --------- ---------
Income from Continuing
Operations 2,913 2,936 9,770 11,498
Discontinued Operations - 3,929 - 5,920
-------- -------- --------- --- -----
Net Income $ 2,913 $ 6,865 $ 9,770 $ 17,418
======== ======== ========= =========
- --------------------
(a) Amounts for 2002 include effect of restatements discussed in Note 2.
(b) Amount includes aftertax severance charges of $2,358,000 ($.24 per share).
(c) Amount includes aftertax gain of $1,200,000 ($.12 per share) on redemption of investment
in redeemable preferred stock.
(d) Amount includes aftertax capital gain on the sales and redemption of investments of
$3,351,000 ($.34 per share).
(e) Amount includes aftertax capital gain on sales of investments of $775,000 ($.08 per
share).
Page 10 of 26
4. Other income--net from continuing operations comprises the
following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2003 2002 2003 2002
------ -------- ------- --------
Gains on sales and redemption of
available-for-sale investments $ 1,846 $ - $ 5,390 $ 1,141
Interest income 648 1,281 2,166 2,538
Dividend income 317 614 1,540 1,845
Market value adjustments
on trading investments of
deferred compensation trusts 282 (1,239) 847 (1,324)
Other (44) (388) (177) (390)
------- -------- ------- -------
Total $ 3,049 $ 268 $ 9,766 $ 3,810
======= ======== ======= =======
5. In March 2003, the Company and a corporate officer reached
agreement providing for termination of the officer's employment in
exchange for payment provided under her employment contract. The
contractual payments comprise a $1,000,000 lump sum payment made
in March 2003 and monthly payments of $52,788 beginning March 2003
and ending May 2007. The present value of these payments
($3,627,000) is included in general and administrative expenses.
6. On August 18, 2003, Vitas Healthcare Corporation ("Vitas") retired
the Company's investment in the 9% Redeemable Preferred Stock Of
Vitas. Cash proceeds to the Company totaled $27.3 million and the
Company realized a pretax gain of $1,846,000 ($1,200,000 aftertax
or $.12 per share) in the third quarter of 2003. During 2003, the
dividends on this investment contributed $628,000 per quarter to
the aftertax earnings of the Company. Dividends ceased to accrue
on August 17, 2003.
On October 14, 2003, the Company exercised two of its three
warrants (Warrants A and B) to purchase 4,158,000 common shares of
Vitas for $18.0 million in cash. The Company's common stock
ownership in Vitas has a carrying value of $19.5 million and now
represents 37% of Vitas' outstanding common stock. The Company is
party to an Amended and Restated Investor Agreement with Vitas
that restricts in a number of ways its full ownership rights in
the shares purchased on exercise of Warrants A and B.
Page 11 of 26
The Company will account for its 37% common stock interest in
Vitas using the equity method of accounting including appropriate
provisions for deferred income taxes. For the fiscal year ended
September 30, 2002, Vitas reported net income of $13,789,000 and
net service revenues of $359,200,000. For the nine months ended
June 30, 2003, Vitas reported net income of $11,244,000 and net
service revenues of $306,546,000.
The Company's third warrant (Warrant C) provides for the purchase
of up to 1,636,000 shares of common stock at a price of $5.50 per
share. Warrant C or the shares acquired upon its exercise are
subject to repurchase by Vitas during the 90-day period following
Vitas' receipt of notice of exercise. The repurchase price is
their market value as determined in good faith by the Vitas Board
of Directors. Warrant C has a carrying value of $2.6 million and
expires in April 2005.
Vitas issued Warrant C to the Company in April 2001 in connection
with Vitas' refinancing its debt obligations. The carrying value
of Warrant C is its estimated fair market value as of April 2001.
Page 12 of 26
7. Earnings per common share are computed using the weighted average
number of shares of capital stock outstanding. Diluted earnings
per common share are computed below (in thousands except per share
data):
Income Shares Income
(Numerator) (Denominator) Per Share
----------- ------------- ---------
Income from Continuing Operations -
For the Three Months Ended September 30,
-------------------------------------------
2003
Earnings $ 2,913 9,941 $ .29
=======
Dilutive stock options - 47
---------- ----------
Diluted earnings $ 2,913 9,988 $ .29
========== ========== =======
2002
Earnings $ 2,936 9,861 $ .30
=======
Dilutive stock options - 6
---------- ----------
Diluted earnings $ 2,936 9,867 $ .30
========== ========== =======
Net Income -
For the Three Months Ended September 30,
-------------------------------------------
2003
Earnings $ 2,913 9,941 $ .29
=======
Dilutive stock options - 47
---------- ----------
Diluted earnings $ 2,913 9,988 $ .29
========== ========== =======
2002
Earnings $ 6,865 9,861 $ .70
=======
Dilutive stock options - 6
---------- ----------
Diluted earnings $ 6,865 9,867 $ .70
========== ========== ========
Income from Continuing Operations -
For the Nine Months Ended September 30,
-------------------------------------------
2003
Earnings $ 9,770 9,913 $ .99
=======
Dilutive stock options - 27
---------- ----------
Diluted earnings $ 9,770 9,940 $ .98
========== ========== =======
2002
Earnings $ 11,498 9,854 $ 1.17
=======
Dilutive stock options - 28
---------- ----------
Diluted earnings $ 11,498 9,882 $ 1.16
========== ========== =======
Net Income -
For the Nine Months Ended September 30,
-------------------------------------------
2003
Earnings $ 9,770 9,913 $ .99
=======
Dilutive stock options - 27
---------- ----------
Diluted earnings $ 9,770 9,940 $ .98
========== ========== =======
2002
Earnings $ 17,418 9,854 $ 1.77
========== ========== =======
Dilutive stock options - 28
---------- ----------
Diluted earnings $ 17,418 9,882 $ 1.76
========== ========== =======
The impact of the convertible preferred securities has been excluded from the above
computations because it is antidilutive on earnings per share from continuing operations
for all periods presented.
8. The Company's total comprehensive income was (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- -------- --------
Total Comprehensive
Income $ 1,696 $ 6,201 $ 6,085 $ 16,745
======= ======= ======== ========
The difference between the Company's net income and comprehensive
income is the unrealized appreciation or depreciation on its
available-for-sale securities.
Page 13 of 26
9. During 2003, four purchase business combinations were completed
within the Plumbing and Drain Cleaning segment for an aggregate
purchase price of $2,635,000 ($2,229,000 in cash and a note
payable for $406,000). The businesses acquired provide drain
cleaning and plumbing services under the Roto-Rooter name. The
results of operations of these businesses are not material to the
Company's results of operations.
The purchase prices were allocated as follows (in thousands):
Goodwill $ 2,369
Other 266
-------
Total purchase price 2,635
Less: Note payable (406)
-------
Cash outlay $ 2,229
=======
10. In the normal course of business the Company enters into various
guarantees and indemnifications in its relationships with
customers and others. Examples of these arrangements include
guarantees of service and product performance. The Company's
experience indicates guarantees and indemnifications do not
materially impact the Company's financial condition or results of
operations.
11. In August 2001, the Financial Accounting Standards Board ("FASB")
approved the issuance of Statement of Financial Accounting
Standards ("SFAS")No. 143, Accounting for Asset Retirement
Obligations. This statement became effective for fiscal years
beginning after June 15, 2002, and requires recognizing legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
or normal operation of a long-lived asset. Since the Company has
no material asset retirement obligations, the adoption of SFAS No.
143 in 2003 did not have a material impact on Roto-Rooter, Inc.'s
financial statements.
12. In July 2002, the FASB approved the issuance of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.
Generally, SFAS No. 146 stipulates that defined exit costs
(including restructuring and employee termination costs) are to be
recorded on an incurred basis rather than on a commitment basis,
as is presently required. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 in 2003 did not have a material impact on
Roto-Rooter, Inc.'s financial statements.
13. In November 2002, the FASB approved the issuance of FASB
Interpretation ("FIN") No. 45, Guarantor's Accounting and
Disclosure for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The initial recognition and initial
measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 in 2003 did not have a material impact on
Roto-Rooter, Inc.'s financial statements.
Page 14 of 26
14. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. It is
effective for annual periods ending, and for interim periods
beginning, after December 15, 2002. Because the Company uses
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, to account for stock-based compensation, the
adoption of SFAS No. 148 in 2003 did not have a material impact on
Roto-Rooter, Inc.'s financial statements.
15. In January 2003, the FASB approved the issuance of FIN No. 46,
("FIN 46"), Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin Number 51 ("ARB
51"), "Consolidated Financial Statements." This Interpretation
clarifies the application of the majority voting interest
requirement of ARB 51 to certain types of variable interest
entities ("VIE's") that do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. The
controlling financial interest may be achieved through
arrangements that do not involve voting interests. FIN 46 is
effective immediately for variable interests created or obtained
after January 31, 2003. As amended by FASB Staff Position
("FSP") Number 46-6, FIN 46 is effective for variable interests in
a VIE created before February 1,2003 at the end of the first
interim or annual period ending after December 15, 2003. The
Company adopted the disclosure provisions of this Interpretation
in the first quarter of 2003 and will adopt the remaining
provisions in the fourth quarter of 2003.
The FASB is currently proposing modifications and issuing FSP's
that change and clarify FIN 46. These modifications and FSP's,
when finalized, could impact the Company's analysis of the
applicability of FIN 46 to entities that are franchisees and
independent contractors to the Plumbing and Drain Cleaning
segment. The Company does not possess ownership interests in its
franchisees or independent contractors. While management will
continue to monitor and analyze its franchisee and independent
contractor relationships, at this time it does not believe that
implementation of the remaining provisions of FIN 46 will
materially impact the Company's financial statements.
16. In May 2003, the FASB approved the issuance of SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. As a result of the issuance of
this pronouncement, the Company now reports the mandatorily
redeemable convertible preferred securities of the Chemed Capital
Trust as a noncurrent liability rather than in the "mezzanine"
(i.e., between liabilities and equity) as reported previously.
This reclassification does not affect the Company's compliance
with its debt covenants. The adoption of this statement did not
impact the statement of income.
Page 15 of 26
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Condition
- -------------------
The increase in cash equivalents from $37,731,000 at
December 31, 2002 to $72,607,000 at September 30, 2003 is primarily
attributable to the sales and redemption of available-for-sale
investments in 2003. The decline in other investments from
$37,326,000 at December 31, 2002 to $5,546,000 at September 30, 2003
and the decline in accumulated other comprehensive income from
$3,685,000 at December 31, 2002 to nil at September 30, 2003 are due
to the sales of investments during the first quarter of 2003 and to
the redemption by Vitas of its preferred stock held by the Company.
There are no other significant changes in the balance sheet accounts
during the first nine months of 2003.
At September 30, 2003, Roto-Rooter, Inc. had approximately
$51.4 million of unused lines of credit with various banks.
Management believes its liquidity and sources of capital are
satisfactory for the Company's needs in the foreseeable future.
Results of Operations
- ---------------------
Third Quarter 2003 versus Third Quarter 2002-Consolidated Results
- -----------------------------------------------------------------
The Company's service revenues and sales for the third
quarter of 2003 declined slightly versus revenues for the third
quarter of 2002. This $150,000 decline comprised the following
(dollar amounts in thousands):
Increase/(Decrease)
-------------------
Amount Percent
------- -------
Service America
Service contracts $(2,356) (20.7)%
Demand services (902) (24.4)
Plumbing and Drain Cleaning
Plumbing 1,057 4.4
Drain cleaning 475 1.9
Other 1,576 13.7
-------
Total $ (150) (.2)%
=======
The decline in Service America's service contract revenues
is attributable to selling insufficient new service contracts to
replace contracts canceled or not renewed. The annualized value of
contracts in place during the third quarter of 2003 was 20.7% lower
than the 2002 quarter. As revenues from demand services are largely
dependent upon service contract customers, the decline in service
contracts was largely responsible for the decline in demand services
in 2003.
The increase in plumbing revenues for the third quarter of
2003 versus 2002 comprises a 3.3% increase in the number of jobs
performed, and a 1.1% increase in the average price per job. The
increase in drain cleaning revenues for the third quarter of 2003
versus 2002 comprised a 1.4% decrease in the number of jobs combined
with a 3.4% increase in the average price per job. The increase in
other revenues for the third quarter of 2003 versus 2002 is
attributable to increases in product sales, industrial and municipal
sales and license revenues from independent contractor operations.
Page 16 of 26
The consolidated gross margin was 41.2% in the third quarters of 2003
and 2002. On a segment basis, the Plumbing and Drain Cleaning
segment's gross margin declined 1.6% points, primarily due to
increased labor costs. Service America's gross margin increased
2.9% points due to reduced labor costs as a result of recent
reductions in service technician headcount and to lower material costs
(as a percent of revenues) in 2003.
General and administrative expenses for the third quarter of
2003 were $14,138,000, an increase of $2,601,000 (22.5%) versus the
third quarter of 2002. Of this increase, $1,521,000 was attributable
to market gains on assets of deferred compensation trusts in the third
quarter of 2003 versus a small loss in such assets in 2002 (all within
the Plumbing and Drain Cleaning segment). These gains and losses are
included in other income with an equivalent charge or credit to
general and administrative expenses for the change in the related
deferred compensation liability. Most of the remainder of the
increase is attributable to higher expenses in the Plumbing and Drain
cleaning segment as the result of higher legal expenses during the
2003 quarter.
Selling and marketing expenses for the third quarter of 2003
were $11,469,000, an increase of $792,000 (7.4%) versus the restated
third quarter of 2002. Selling and marketing expenses of the Plumbing
and Drain Cleaning segment increased $1,042,000 (11.2%) in the 2003
quarter, largely as the result of higher advertising expenses and
higher wages and benefits for centralized call centers. For Service
America, selling and marketing expenses declined $251,000 (18.0%) in
2003, primarily as the result of the reduction in the number of
employees.
Depreciation expense for the third quarter of 2003 declined
$441,000 (12.9%) from $3,424,000 in the third quarter of 2002 to
$2,983,000 in the 2003 quarter. Of this decline, $163,000 relates to
the Service America segment and $278,000 relates to the Plumbing and
Drain Cleaning segment. Both reductions were primarily attributable
to reduced depreciation on service vehicles, resulting from recent
declines in capital outlays.
Income from operations declined $3,003,000 (55.9%) from
$5,370,000 in the third quarter of 2002 to $2,367,000 in the third
quarter of 2003. Substantially all of this decline occurred within
the Plumbing and Drain Cleaning segment. Of this decline, $1,521,000
was attributable to the increase in deferred compensation expense
(which is completely offset in the "other income" line of the
statement of income). Higher advertising expenses, higher call center
expenses and higher legal fees in the 2003 quarter contributed
significantly to the decline in income from operations.
Interest expense, substantially all of which is incurred as
Unallocated Investing and Financing Income and Expense-net, declined
from $709,000 in the third quarter of 2002 to $487,000 in the 2003
quarter. This decline is primarily attributable to lower debt levels
in 2003 as the result of using cash proceeds from the sale of Patient
Care late in 2002 to pay down the Company's revolving line of credit.
Page 17 of 26
Other income, which includes a $1,846,000 gain on the
redemption of Vitas preferred stock in 2003, increased $2,781,000 in
the third quarter of 2003 versus the third quarter of 2002. Of this
increase, $1,521,000 is attributable to the increase in market
adjustments for assets held in deferred compensation trusts in the
2003 quarter (which is entirely offset in the "general and
administrative expense" category of the statement of income).
Interest income during the third quarter of 2003 declined $633,000
versus 2002 primarily due to the receipt of $816,000 interest on a tax
refund in 2002.
Income from continuing operations for the third quarter
declined $23,000 from $2,936,000 ($.30 per share) in 2002 to
$2,913,000 ($.29 per share) in 2003. Income for 2003 included
$1,200,000 ($.12 per share) aftertax gain on the redemption of Vitas
preferred stock and $328,000 ($.03 per share) aftertax dividend and
amortization income from Vitas. Income for 2002 included $629,000
($.06 per share) aftertax dividend and amortization income from Vitas.
Net income for the third quarter declined $3,952,000 from
$6,865,000 ($.70 per share) in 2002 to $2,913,000 ($.29 per share) in
2003. Discontinued operations for the 2002 quarter totaled $3,929,000
($.40 per share), comprising $2,861,000 ($.29 per share) from a tax
refund relating to operations discontinued in 1997 and $1,068,000
($.11 per share) from the operations of Patient Care sold in October
2002.
Third Quarter 2003 versus Third Quarter 2002-Segment Results
- ------------------------------------------------------------
Data relating to the increase or decrease in service0
revenues and sales and to aftertax earnings as a percent of sales for
each segment are set forth below:
Service Revenues Aftertax Earnings as a
and Sales Percent Percent of Revenues
Three Months Ended Increase/(Decrease) (Aftertax Margin)
September 30, 2003 vs. 2002 2003 2002
------------------------- ------------------ ------- -------
Plumbing and Drain Cleaning 5% 2.5% 3.5%
Service America (22) 0.4 1.1
Total - 2.2 3.0
The change in aftertax earnings for the third quarter of 2003
versus 2002 is summarized below (in thousands):
Increase/
(Decrease)
---------
Service America $ (116)
Plumbing and Drain Cleaning (518)
Unallocated Investing and Financing 611
---------
Income from continuing operations $ (23)
=========
Page 18 of 26
The decline in the aftertax earnings and the related decline in the
aftertax margin of the Plumbing and Drain Cleaning segment is
primarily attributable to higher labor costs, higher call center costs
and higher legal expenses during the 2003 quarter. The increase in
Unallocated Investing and Financing income/expense is attributable to
(in thousands):
Gain on the redemption of Vitas
preferred stock in August 2003 $ 1,200
Interest income on prior year's tax
refund in September 2002 (530)
Lower dividend income from Vitas
preferred stock in 2003 (315)
Interest income in 2003 on the note
receivable from the sale of
Patient Care in October 2002 176
Other 80
-------
Total $ 611
=======
Nine Months 2003 versus Nine Months 2002 - Consolidated Results
The Company's service revenues and sales for the first nine
months of 2003 declined 2% versus revenues for the first nine months
of 2002. This $5.2 million decline was attributable to the following
(dollar amounts in thousands):
Increase/(Decrease)
Amount Percent
------- -------
Service America
Service contracts $(6,669) (19.2)%
Demand services (2,551) (21.3)
Plumbing and Drain Cleaning
Plumbing 1,661 2.3
Drain cleaning (333) (0.4)
Other 2,723 7.5
-------
Total $(5,169) (2.2)%
=======
The decline in Service America's revenues is attributable to
selling insufficient new service contracts to replace contracts
canceled or not renewed. The annualized value of contracts in place
during the first nine months of 2003 was 20% lower than the 2002
period. The decline in service contracts in place was largely
responsible for the decline in demand services in 2003.
The increase in the plumbing revenues for the first nine
months of 2003 versus 2002 is entirely attributable to an increase in
the number of jobs performed. The decline in drain cleaning revenues
for the first nine months of 2003 versus 2002 comprise a 3.2% decrease
in the number of jobs partially offset by a 2.9% increase in the
average price per job. The increase in other revenues for the first
nine months of 2003 versus 2002 is attributable to increases in
industrial and municipal sales and contractor operations.
Page 19 of 26
The consolidated gross margin was 40.9% in the first nine
months of 2003 and 40.7% in the 2002 period. On a segment basis,
the Plumbing and Drain Cleaning segment's gross margin declined from
44.5% in the first nine months of 2002 to 43.8% in the first nine
months of 2003, primarily as the result of high wages in 2003.
Service America's gross margin increased slightly from 25.5% in the
2002 nine-month period to 25.7% in the 2003 nine-month period.
General and administrative expenses for the first nine
months of 2003 were $45,194,000, an increase of $8,495,000 (23.1%)
versus the first nine months of 2002. Expenses for the 2003 period
include a $3,627,000 charge from severance for a corporate officer in
March 2003. In addition, $2,171,000 of this increase was attributable
to recording market gains on assets of deferred compensation trusts in
the first nine months of 2003 versus a small loss in such assets in
2002 (all within the Plumbing and Drain Cleaning segment). These
gains and losses are included in other income with an equivalent
charge or credit to general and administrative expenses for the change
in the related deferred compensation liability. The remainder of the
increase is primarily attributable to higher expenses in the Plumbing
and Drain cleaning segment as the result of higher legal expenses
during the 2003 period and normal salary and wage increases during
2003.
Selling and marketing expenses for the first nine months of
2003 were $31,560,000, an increase of $119,000 (0.4%) versus the
restated expense for the first nine months of 2002. Selling and
marketing expenses of the Plumbing and Drain Cleaning segment
increased $1,256,000, 4.7% in the 2003 period, largely as the result
of higher call center expenses in 2003. Service America's selling
and marketing expenses declined $1,138,000 (24.0%) in 2003, primarily
as the result of the reduction in the number of employees.
Depreciation expense for the first nine months of 2003
declined $1,377,000 (13.2%) from $10,402,000 in the first nine months
of 2002 to $9,025,000 in the 2003 period. $621,000 of this decline
relates to the Service America segment and $756,000 relates to the
Plumbing and Drain Cleaning segment. Both reductions were primarily
attributable to reduced depreciation on service vehicles, resulting
from recent declines in capital outlays.
Income from operations declined $8,938,000 (51.8%) from
$17,269,000 in the first nine months of 2002 to $8,331,000 in the
first nine months of 2003. Most of this decline occurred within the
Plumbing and Drain Cleaning segment. The previously mentioned
severance charge in the first quarter of 2003 accounted for $3,627,000
of the decline while $2,171,000 of the decline was attributable to the
increase in deferred compensation expense (which is completely offset
in the "other income" line of the statement of income). Higher call
center expenses and higher legal fees in the 2003 period contributed
significantly to the decline in income from operations.
Interest expense, substantially all of which is included in
Unallocated Investing and Financing Income and Expense-net, declined
from $2,245,000 in the first nine months of 2002 to $1,625,000 in the
2003 period. This is primarily attributable to lower debt levels in
2003 as the result of using cash proceeds from the sale of Patient
Care in 2002 to pay down the Company's revolving line of credit.
Page 20 of 26
Other income increased $5,956,000 in the first nine months
of 2003 versus the first nine months of 2002. This increase is
primarily attributable to larger capital gains on the sales and
redemption of available-for-sale investments ($5,390,000 in the first
nine months of 2003 versus $1,141,000 in 2002) and the increase in
market adjustments for assets held in deferred compensation trusts
($2,171,000) in the 2003 period (which is entirely offset in the
"general and administrative expense" category of the statement of
income).
The Company's effective income tax rate increased from 36.2%
in the first nine months of 2002 to 37.6% in the first nine months of
2003. This is primarily attributable to the lack of a state income
tax benefit on the severance charges incurred in 2003.
Income from continuing operations for the first nine months
declined $1,728,000 from $11,498,000 ($1.17 per share and $1.16 per
diluted share) in 2002 to $9,770,000 ($.99 per share and $.98 per
diluted share) in 2003. Earnings for the first nine months of 2003
included an aftertax severance charge of $2,358,000 ($.24 per share),
aftertax capital gains on the sales and redemptions of investments of
$3,351,000 ($.34 per share) and aftertax dividend and amortization
income of $1,585,000 ($.16 per share). Earnings for 2002 included
aftertax dividend and amortization income of $1,886,000 ($.19 per
share) and aftertax capital gains on the sales of investments of
$775,000 ($.08 per share).
Net income for the first nine months declined $7,648,000
from $17,418,000 ($1.77 per share and $1.76 per diluted share) in 2002
to $9,770,000 ($.99 per share and $.98 per diluted share) in 2003.
Discontinued operations for the 2002 period totaled $5,920,000 ($.60
per share), comprising $2,861,000 ($.29 per share) from a tax refund
relating to operations discontinued in 1997 and $3,059,000 ($.31 per
share) from the operations of Patient Care sold in October 2002.
Nine Months 2003 versus Nine Months 2002 - Segment Results
- ----------------------------------------------------------
Data relating to the increase or decrease in service
revenues and sales and to aftertax earnings as a percent of sales for
each segment are set forth below:
Service Revenues Aftertax Earnings as a
and Sales Percent Percent of Revenues
Nine Months Ended Increase/(Decrease) (Aftertax Margin)
September 30, 2003 vs. 2002 2003 2002
------------------------ ------------------ ----- -----
Plumbing and Drain Cleaning 2 % 2.9% 4.9%
Service America (20) 0.3 1.2
Total (2) 2.5 4.1
The change in aftertax earnings for the first nine months of
2003 versus 2002 is summarized below (in thousands):
Increase/
(Decrease)
----------
Service America $ (427)
Plumbing and Drain Cleaning (3,566)
Unallocated Investing and Financing 2,265
---------
Income from continuing operations $ (1,728)
=========
Page 21 of 26
The decline in the aftertax earnings of Service America during the
first nine months of 2003 versus 2002 is attributable largely to the
negative impact of leverage (relatively fixed general and
administrative expenses during a period of declining revenues). The
decline in the aftertax earnings and the related decline in the
aftertax margin of the Plumbing and Drain Cleaning segment is
primarily attributable to a severance charge incurred in the first
quarter of 2003 for a corporate officer ($2,358,000). The remainder of
the decline in this segment's earnings is attributable to higher call
center costs and higher legal expenses during the 2003 period. The
increase in Unallocated Investing and Financing income/expense-net is
attributable to larger aftertax capital gains in the 2003 period
($3,351,000 in 2003 versus $775,000 in 2002).
Recent Accounting Statements
- ----------------------------
In August 2001, the Financial Accounting Standards Board
("FASB") approved the issuance of Statement of Financial Accounting
Standards ("SFAS")No. 143, Accounting for Asset Retirement
Obligations. This statement became effective for fiscal years
beginning after June 15, 2002, and requires recognizing legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
or normal operation of a long-lived asset. Since the Company has no
material asset retirement obligations, the adoption of SFAS No. 143 in
2003 did not have a material impact on Roto-Rooter, Inc.'s financial
statements.
In July 2002, the FASB approved the issuance of SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities.
Generally, SFAS No. 146 stipulates that defined exit costs (including
restructuring and employee termination costs) are to be recorded on an
incurred basis rather than on a commitment basis, as is presently
required. This statement is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 in
2003 did not have a material impact on Roto-Rooter, Inc.'s financial
statements.
In November 2002, the FASB approved the issuance of FASB
interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The initial recognition and initial measurement provisions of
the Interpretation are applicable to guarantees issued or modified
after December 31, 2002. The adoption of FIN No. 45 in 2003 did not
have a material impact on Roto-Rooter, Inc.'s financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation--Transition and Disclosure. It is
effective for annual periods ending, and for interim periods
beginning, after December 15, 2002. Because the Company uses
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, to account for stock-based compensation, the
adoption of SFAS No. 148 in 2003 did not have a material impact on
Roto-Rooter, Inc.'s financial statements.
Page 22 of 26
In January 2003, the FASB approved the issuance of FIN No.
46 ("FIN 46"), Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin Number 51 ("ARB 51"),
"Consolidated Financial Statements." This Interpretation clarifies
the application of the majority voting interest requirement of ARB 51
to certain types of variable interest entities ("VIE's") that do not
have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from
other parties. The controlling financial interest may be achieved
through arrangements that do not involve voting interests. FIN 46 is
effective immediately for variable interests created or obtained after
January 31, 2003. As amended by FASB Staff Position ("FSP") Number
46-6, FIN 46 is effective for variable interests in a VIE created
before February 1,2003 at the end of the first interim or annual
period ending after December 15, 2003. The Company adopted the
disclosure provisions of this Interpretation in the first quarter of
2003 and will adopt the remaining provisions in the fourth quarter of
2003.
The FASB is currently proposing modifications and issuing
FSP's that change and clarify FIN 46. These modifications and FSP's,
when finalized, could impact the Company's analysis of the
applicability of FIN 46 to entities that are franchisees and
independent contractors to the Plumbing and Drain Cleaning segment.
The Company does not possess ownership interests in its franchisees or
independent contractors. While management will continue to monitor
and analyze its franchisee and independent contractor relationships,
at this time it does not believe that implementation of the remaining
provisions of FIN 46 will materially impact the Company's financial
statements.
In May 2003, the FASB approved the issuance of SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. As a result of the issuance of this
pronouncement, the Company now reports the mandatorily redeemable
convertible preferred securities of the Chemed Capital Trust as a
noncurrent liability rather than in the "mezzanine" (i.e., between
liabilities and equity) as reported previously. This reclassification
does not affect the Company's compliance with its debt covenants. The
adoption of this statement did not impact the statement of income.
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.
Page 23 of 26
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 Executive Vice President and
Treasurer 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, Executive Vice President and Treasurer and Vice President and
Controller concluded that as of the date of this report the Company's
disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company and its
consolidated subsidiaries required to be included in the Company's
Exchange Act reports. There have been no significant changes in
internal control over financial reporting during the quarter ended
September 30, 2003.
Page 24 of 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
31.1 Certification by Kevin J. McNamara
pursuant to Rule 13A - 14 of the
Exchange Act of 1934.
31.2 Certification by Timothy S. O'Toole
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.
99.1 Certification by Kevin J. McNamara
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification by Timothy S. O'Toole
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification by Arthur V. Tucker, Jr.
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Page 25 of 26
(b) Reports on Form 8-K
-A Current Report on Form 8-K, dated August 29, 2003, was
filed August 29, 2003. The report includes the Company's
announcement of signing a letter of intent to acquire the
franchise operations in Orange County and San Diego,
California; Eugene, Portland, and Salem, Oregon; Salt Lake
City, Provo, and Park City, Utah; Phoenix and Tucson,
Arizona; and Dallas and El Paso, Texas.
-A Current Report on Form 8-K, dated October 16, 2003, was
filed October 21, 2003. The report includes the Company's
earnings announcement for the third quarter.
-A Current Report on Form 8-K, dated October 14, 2003, was
filed October 29, 2003. The report disclosed the Company's
exercise of Warrants A and B to purchase 4,158,000 shares of
Vitas for $18.0 million in cash.
-A Current Report on Form 8-K, dated October 31, 2003, was
filed November 3, 2003. The report includes the Company's
press release announcing its intent to restate earnings for
the period January 1, 1998 through September 30, 2003 to
recognize Yellow Pages advertising expense when the
directories are first placed in circulation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Roto-Rooter, Inc.
-----------------
(Registrant)
Dated: November 14, 2003 By /s/ Kevin J. McNamara
----------------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
Dated: November 14, 2003 By /s/ Timothy S. O'Toole
----------------- ----------------------
Timothy S. O'Toole
(Executive Vice President
and Treasurer)
Dated: November 14, 2003 By /s/ Arthur V. Tucker, Jr.
----------------- ------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
Page 26 of 26
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE
EXCHANGE ACT OF 1934
I, Kevin J. McNamara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Roto-Rooter, Inc. ("egistrant";
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations, and cash flows
of the registrant as of, and for, the periods presented in
this report;
4. The registrant' other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial
reporting, or caused such internal control over
financial report to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation
of financial statements for external purposes in
accordance with generally accepted accounting
principles;
E - 1
c) evaluated the effectiveness of the registrant'
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
d) disclosed in this report any change in the
registrant' internal control over financial reporting
that occurred during the registrant' most recent
fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the
registrant' internal control over financial reporting.
5. The registrant' other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant'
auditors and the audit committee of the registrant' board
of directors:
a) all significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 14, 2003 /s/ Kevin J. McNamara
----------------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E - 2
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE
EXCHANGE ACT OF 1934
I, Timothy S. O'Toole, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Roto-Rooter, Inc. ("registrant");
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations, and cash flows
of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial
reporting, or caused such internal control over
financial report to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation
of financial statements for external purposes in
accordance with generally accepted accounting
principles;
E - 3
c) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
d) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 14, 2003 /s/ Timothy S. O'Toole
----------------- ----------------------
Timothy S. O'Toole
(Executive Vice President
and Treasurer)
E - 4
EXHIBIT 31.3
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE
EXCHANGE ACT OF 1934
I, Arthur V. Tucker, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Roto-Rooter, Inc. ("registrant");
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations, and cash flows
of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures,
or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial
reporting, or caused such internal control over
financial report to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation
of financial statements for external purposes in
accordance with generally accepted accounting
principles;
E- 5
c) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
d) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material
weaknesses in the design or operation of internal
control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to
record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 14, 2003 /s/ Arthur V. Tucker, Jr.
----------------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
E - 6
EXHIBIT 99.1
CERTIFICATION BY KEVIN J. MCNAMARA
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as President and Chief Executive Officer of Roto-
Rooter, Inc. ("Company"), does hereby certify that:
1) the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 2003 ("Report"), fully
complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: November 14, 2003 /s/ Kevin J. McNamara
----------------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E - 7
EXHIBIT 99.2
CERTIFICATION BY TIMOTHY S. O'TOOLE
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Executive Vice President and Treasurer of Roto-
Rooter, Inc. ("Company"), does hereby certify that:
1) the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 2003 ("Report"), fully
complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: November 14, 2003 /s/ Timothy S. O'Toole
----------------- ----------------------
Timothy S. O'Toole
(Executive Vice President
and Treasurer)
E - 8
EXHIBIT 99.3
CERTIFICATION BY ARTHUR V. TUCKER, JR.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Vice President and Controller of Roto-Rooter,
Inc. ("Company"), does hereby certify that:
1) the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 2003 ("Report"), fully
complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: November 14, 2003 /s/ Arthur V. Tucker, Jr.
----------------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
E - 9