UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
August 8, 2007
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-8351 31-0791746
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification
incorporation) Number)
2600 Chemed Center, 255 East 5th Street, Cincinnati, OH 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(513) 762-6900
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2 below):
[_] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 230.425)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under
Exchange Act (17 CFR 230.425)
[_] Pre-commencement communications pursuant to Rule 13e-4 (c) under
Exchange Act (17 CFR 230.425)
Page 1 of 2
Item 8.01 Other Items
Chemed Corporation ("We" or "Chemed") intends to file a registration
statement covering our 1.875% Convertible Senior Notes ("Notes") issued on May
14, 2007. Certain of our 100% owned subsidiaries fully and unconditionally
guarantee the Notes on an unsecured, joint and severally liable basis. In
accordance with Rule 3-10 of Regulation S-X, we are amending Item 8 of Part II
(Financial Statements and Supplementary Data) of our Form 10-K for the year
ended December 31, 2006 (filed February 28, 2007) to provide condensed,
consolidating financial data of the parent company (Chemed), the guarantor
subsidiaries and the non-guarantor subsidiaries as of December 31, 2006 and
December 31, 2005 and for the years ended December 31, 2006, 2005 and 2004. Such
information is presented as Note 25 in the Notes to Consolidated Financial
Statements. This does not represent a restatement of previously filed Financial
Statements.
A copy of the amended Item 8 for our Form 10-K for the year ended December
31, 2006 is filed herewith as Exhibit 99.
Item 9.01 Financial Statements and Exhibits
d) Exhibit
(99) Registrant's Amended Item 8 to Form 10-K
for the year ended December 31, 2006
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
CHEMED CORPORATION
Dated: August 8, 2007 By: /s/ Arthur V. Tucker, Jr.
---------------- --------------------------
Arthur V. Tucker, Jr.
Vice President and Controller
Page 2 of 2
EXHIBIT 99
Financial Review
Contents
Report of Independent Registered Public
Accounting Firm 2
Consolidated Statement of Income 3
Consolidated Balance Sheet 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in
Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Unaudited Summary of Quarterly Results 37
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as that term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). A company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and disposition of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorization of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management, including the President and Chief Executive
Officer, Vice President and Chief Financial Officer and Vice President and
Controller, has conducted an evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2006 based on the framework
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
evaluation, management concluded that internal control over financial reporting
was effective as of December 31, 2006 based on criteria in Internal
Control--Integrated Framework issued by COSO. Management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2006 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm.
1
EXHIBIT 99
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Chemed Corporation:
We have completed integrated audits of Chemed Corporation's consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2006 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
- ---------------------------------
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, cash flows, and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Chemed Corporation and its subsidiaries at December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2006 the Company changed its method of accounting for share-based
compensation.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing on page 1, that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2006 based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 28, 2007,
except for Note 25, as to which the date is August 7, 2007
2
EXHIBIT 99
CONSOLIDATED STATEMENT OF INCOME
Chemed Corporation and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
For the Years Ended December 31, 2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Continuing Operations
Service revenues and sales $1,018,587 $ 915,970 $ 734,877
------------ ------------- ----------------
Cost of services provided and goods sold (excluding depreciation) 730,123 644,476 506,770
Selling, general and administrative expenses 161,183 157,262 147,064
Depreciation 16,775 16,150 14,542
Amortization 5,255 4,922 3,779
Other expenses (Note 6) 272 16,391 4,768
------------ ------------- ----------------
Total costs and expenses 913,608 839,201 676,923
------------ ------------- ----------------
Income from operations 104,979 76,769 57,954
Interest expense (17,468) (21,264) (21,158)
Loss from impairment of investment (Note 7) (1,445) - -
Loss on extinguishment of debt (Note 13) (430) (3,971) (3,330)
Other income--net (Note 9) 4,648 3,122 3,470
------------ ------------- ----------------
Income before income taxes 90,284 54,656 36,936
Income taxes (Note 10) (32,562) (18,428) (13,736)
Equity in loss of affiliate (Note 4) - - (4,105)
------------ ------------- ----------------
Income from continuing operations 57,722 36,228 19,095
Discontinued Operations, Net of Income Taxes (Note 7) (7,071) (411) 8,417
------------ ------------- ----------------
Net Income $ 50,651 $ 35,817 $ 27,512
============ ============= ================
Earnings Per Share (Note 18)
Income from continuing operations $ 2.21 $ 1.42 $ 0.79
============ ============= ================
Net Income $ 1.94 $ 1.40 $ 1.14
============ ============= ================
Diluted Earnings Per Share (Note 18)
Income from continuing operations $ 2.16 $ 1.38 $ 0.78
============ ============= ================
Net Income $ 1.90 $ 1.36 $ 1.12
============ ============= ================
Average Number of Shares Outstanding (Note 18)
Earnings per share 26,118 25,552 24,120
============ ============= ================
Diluted earnings per share 26,669 26,299 24,636
============ ============= ================
The Notes to Consolidated Financial Statements are integral parts of this
statement.
3
EXHIBIT 99
CONSOLIDATED BALANCE SHEET
Chemed Corporation and Subsidiary Companies
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except shares and per share data)
December 31, 2006 2005
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (Note 11) $ 29,274 $ 57,133
Accounts receivable less allowances of $10,180 (2005 - $8,311) 93,086 91,094
Inventories 6,578 6,499
Prepaid income taxes (Note 10) - 8,151
Current deferred income taxes (Note 10) 17,789 26,727
Current assets of discontinued operations (Note 7) 5,418 5,189
Prepaid expenses and other current assets 9,968 9,767
----------- -------------------
Total current assets 162,113 204,560
Investments of deferred compensation plans held in trust (Note 15) 25,713 21,105
Other investments (Notes 7 and 17) - 1,445
Note receivable (Notes 7 and 17) 14,701 12,500
Properties and equipment, at cost, less accumulated depreciation (Note 12) 70,140 65,155
Identifiable intangible assets less accumulated amortization of $13,201
(2005 - $9,212) (Note 5) 69,215 72,888
Goodwill (Note 5) 435,050 432,596
Noncurrent assets of discontinued operations (Note 7) 287 7,632
Other assets 16,068 21,222
----------- -------------------
Total Assets $ 793,287 $ 839,103
=========== ===================
Liabilities
Current liabilities
Accounts payable $ 49,744 $ 43,437
Current portion of long-term debt (Note 13) 209 1,045
Income taxes (Note 10) 6,765 4,189
Accrued insurance 38,457 38,409
Accrued salaries and wages 35,990 32,963
Current liabilities of discontinued operations (Note 7) 12,215 3,339
Other current liabilities (Note 14) 22,684 45,823
----------- -------------------
Total current liabilities 166,064 169,205
Deferred income taxes (Note 10) 26,301 26,012
Long-term debt (Note 13) 150,331 234,058
Deferred compensation liabilities (Note 15) 25,514 21,275
Noncurrent liabilities of discontinued operations (Note 7) - 4
Other liabilities 3,716 4,374
Commitments and contingencies (Notes 16, 20 and 21)
----------- -------------------
Total Liabilities 371,926 454,928
----------- -------------------
Stockholders' Equity
Capital stock - authorized 80,000,000 shares $1 par; issued 28,849,918
shares (2005 - 28,373,872 shares) 28,850 28,374
Paid-in capital 252,639 234,910
Retained earnings 215,517 171,188
Treasury stock - 3,023,635 shares (2005 - 2,394,272 shares), at cost (78,064) (52,127)
Deferred compensation payable in Company stock (Note 15) 2,419 2,379
Notes receivable for shares sold - (549)
----------- -------------------
Total Stockholders' Equity 421,361 384,175
----------- -------------------
Total Liabilities and Stockholders' Equity $ 793,287 $ 839,103
=========== ===================
The Notes to Consolidated Financial Statements are integral parts of this
statement.
4
EXHIBIT 99
CONSOLIDATED STATEMENT OF CASH FLOWS
Chemed Corporation and Subsidiary Companies
- ---------------------------------------------------------------------------------------------
(in thousands)
For the Years Ended December 31, 2006 2005 2004
- ---------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 50,651 $ 35,817 $ 27,512
Adjustments to reconcile net income/(loss) to net
cash provided by operations:
Depreciation and amortization 22,030 21,072 18,321
Provision for uncollectible accounts receivable 8,169 7,126 6,150
Provision for deferred income taxes (Note 10) 7,408 (5,055) 4,969
Discontinued operations (Note 7) 7,071 411 (8,417)
Amortization of debt issuance costs 1,774 1,834 1,861
Noncash portion of long-term incentive
compensation - 4,813 4,988
Loss on impairment of investment 1,445 - -
Write-off unamortized debt issuance costs 430 2,871 -
Equity in loss of affiliate (Note 4) - - 4,105
Changes in operating assets and liabilities,
excluding
amounts acquired in business combinations:
Increase in accounts receivable (12,527) (34,145) (6,070)
Decrease/(increase) in inventories (78) 520 (986)
Decrease/(increase) in prepaid
expenses and other current assets (2,188) 76 11,659
Increase/(decrease) in accounts
payable and other current liabilities (13,017) 32,431 (2,785)
Increase in income taxes 18,726 15,359 21,346
Decrease/(increase) in other assets (722) (2,003) 5,607
Increase/(decrease) in other
liabilities 3,788 (1,146) (627)
Excess tax benefit on share-based compensation (5,600) - -
Noncash expense of internally financed ESOPs - 1,060 1,894
Other sources/(uses) 2,109 912 (1,043)
---------- ----------- -----------
Net cash provided by continuing operations 89,469 81,953 88,484
Net cash provided/(used) by discontinued
operations (Note 7) 9,120 (1,940) 4,406
---------- ----------- -----------
Net cash provided by operating activities 98,589 80,013 92,890
---------- ----------- -----------
Cash Flows from Investing Activities
Capital expenditures (21,987) (25,734) (18,290)
Business combinations, net of cash acquired (Note 8) (4,145) (6,165) (343,051)
Net uses from sale of discontinued operations (Note
7) (922) (9,367) (759)
Proceeds from sales of property and equipment 347 157 772
Investing activities of discontinued operations (Note
7) (260) (239) (1,774)
Return of deposit to secure merger offer - - 10,000
Other uses (765) (394) (107)
---------- ----------- -----------
Net cash used by investing activities (27,732) (41,742) (353,209)
---------- ----------- -----------
Cash Flows from Financing Activities
Repayment of long-term debt (Note 13) (84,563) (141,592) (96,940)
Purchases of treasury stock (19,885) (7,401) (2,654)
Dividends paid (6,322) (6,172) (5,718)
Excess tax benefit on share-based compensation 5,600 - -
Proceeds from exercise of stock options (Note 2) 3,861 12,327 3,721
Increase/(decrease) in cash overdraft payable 2,571 6,752 1,265
Debt issuance costs (154) (1,755) (14,447)
Proceeds from issuance of long-term debt (Note 13) - 85,000 295,000
Issuance of capital stock, net of costs - - 95,102
Collection of stock subscription note receivable - - 8,053
Redemption of convertible junior subordinated
securities (Note 1) - - (2,735)
Financing activities of discontinued operations (Note
7) - - (255)
Other sources/(uses) 176 255 687
---------- ----------- -----------
Net cash provided/(used) by financing
activities (98,716) (52,586) 281,079
---------- ----------- -----------
Increase/(decrease) in cash and cash equivalents (27,859) (14,315) 20,760
Cash and cash equivalents at beginning of year 57,133 71,448 50,688
---------- ----------- -----------
Cash and cash equivalents at end of year $ 29,274 $ 57,133 $ 71,448
========== =========== ===========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
5
EXHIBIT 99
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Chemed Corporation and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Deferred
Compensation Notes
Treasury Payable in Receivable
Capital Paid-in Retained Stock- Company for
Stock Capital Earnings at Cost Stock Shares Total
Sold
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $13,453 $167,547 $119,746 $(109,427) $2,308 $(934) $192,693
Net income - - 27,512 - - - 27,512
Dividends paid ($0.48 per share - pre-split) - - (5,718) - - - (5,718)
Stock awards and exercise of stock options (Note 2) 130 8,120 - 771 - - 9,021
Retirement of treasury shares (400) (12,076) - 12,476 - - -
Issuance of common shares - 32,722 - 62,380 - - 95,102
Decrease in notes receivable - - - (10) - 390 380
Purchases of treasury stock - 1,894 - (63) - - 1,831
Conversion of convertible preferred securities 308 10,639 - - - - 10,947
Other - 255 2 - 67 - 324
-------- --------- --------- ---------- ----------- ------ ---------
Balance at December 31, 2004 13,491 209,101 141,542 (33,873) 2,375 (544) 332,092
Net income - - 35,817 - - - 35,817
Dividends paid ($0.24 per share) - - (6,172) - - - (6,172)
Stock awards and exercise of stock options (Note 2) 1,028 38,383 - (18,204) - - 21,207
Decrease in notes receivable - - - (9) - (5) (14)
Purchases of treasury stock - 1,060 - (41) - - 1,019
Impact of common share split (Note 23) 13,855 (13,855) - - - - -
Other - 221 1 - 4 - 226
-------- --------- --------- ---------- ----------- ------ ---------
Balance at December 31, 2005 28,374 234,910 171,188 (52,127) 2,379 (549) 384,175
Net income - - 50,651 - - - 50,651
Dividends paid ($0.24 per share) - - (6,322) - - - (6,322)
Stock awards and exercise of stock options (Note 2) 476 17,663 - (9,840) - - 8,299
Decrease in notes receivable - - - (485) - 549 64
Purchases of treasury stock (Notes 2 and 23) - - - (15,612) - - (15,612)
Other - 66 - - 40 - 106
-------- --------- --------- ---------- ----------- ------ ---------
Balance at December 31, 2006 $28,850 $252,639 $215,517 $ (78,064) $2,419 $ - $421,361
======== ========= ========= ========== =========== ====== =========
The Notes to Consolidated Financial Statements are integral parts of this
statement.
6
EXHIBIT 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation ("VITAS") and Roto-Rooter Group, Inc. ("Roto-Rooter"). VITAS focuses
on hospice care that helps make terminally ill patients' final days as
comfortable as possible. Through its team of doctors, nurses, home health aides,
social workers, clergy and volunteers, VITAS provides direct medical services to
patients, as well as spiritual and emotional counseling to both patients and
their families. Roto-Rooter is focused on providing plumbing and drain cleaning
services to both residential and commercial customers. Through its network of
company-owned branches, independent contractors and franchisees, Roto-Rooter
offers plumbing and drain cleaning service to over 90% of the U.S. population.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Chemed
Corporation and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
We have analyzed the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities--an
interpretation of Accounting Research Bulletin No. 51 (revised)" ("FIN 46R")
relative to contractual relationships with our Roto-Rooter independent
contractors and franchisees. FIN 46R requires the primary beneficiary of a
Variable Interest Entity ("VIE") to consolidate the accounts of the VIE. We have
evaluated the relationships with our independent contractors and franchisees
based upon guidance provided in FIN 46R and have concluded that certain of the
independent contractors may be VIEs. Based on our evaluation, the franchisees
are not VIEs. We believe consolidation, if required, of the accounts of any
independent contractor for which we might be the primary beneficiary would not
materially impact our financial position or results of operations.
CASH EQUIVALENTS
Cash equivalents comprise short-term, highly liquid investments that
have been purchased within three months of their dates of maturity.
ACCOUNTS AND LOANS RECEIVABLE AND CONCENTRATION OF RISK
Accounts and loans receivable are recorded at the principal balance
outstanding less estimated allowances for uncollectible accounts. For the
Roto-Rooter segment, allowances for trade accounts receivable are generally
provided for accounts more than 90 days past due, although collection efforts
continue beyond that time. Due to the small number of loans receivable
outstanding, allowances for loan losses are determined on a case-by-case basis.
For the VITAS segment, allowances for patient accounts receivable are generally
provided on accounts more than 240 days old plus an appropriate percentage of
accounts not yet 240 days old. Final write-off of overdue accounts or loans
receivable is made when all reasonable collection efforts have been made and
payment is not forthcoming. We closely monitor our receivables and periodically
review procedures for granting credit to attempt to hold losses to a minimum.
As of December 31, 2006 and 2005, approximately 62% and 65%,
respectively of VITAS' total accounts receivable balance were due from Medicare
and 30% and 27%, respectively of VITAS' total accounts receivable balance were
due from various state Medicaid programs. Combined accounts receivable from
Medicare and Medicaid represent 81% of the net accounts receivable in the
accompanying consolidated balance sheet as of December 31, 2006. We closely
monitor our programs to ensure compliance with Medicare and Medicaid
regulations.
INVENTORIES
Substantially all of the inventories are either general merchandise or
finished goods. Inventories are stated at the lower of cost or market. For
determining the value of inventories, cost methods that reasonably approximate
the first-in, first-out ("FIFO") method are used.
OTHER INVESTMENTS
At December 31, 2005, other investments, which were classified as
available-for-sale, comprised a common stock purchase warrant in privately held
Patient Care Inc. ("Patient Care"), our former subsidiary. As further discussed
in Note 7, our investment in the Patient Care warrant, which was carried at
cost, was written-off in fiscal 2006.
All investments are reviewed periodically for impairment based on
available market and financial data. If the market value or net realizable value
of the investment is less than our cost and the decline is determined to be
other than temporary, a write-down to fair value is made, and a realized loss is
recorded in the statement of income. In calculating realized gains and losses on
the sales of investments, the specific-identification method is used to
determine the cost of investments sold.
7
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
DEPRECIATION AND PROPERTIES AND EQUIPMENT
Depreciation of properties and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease terms
(excluding option terms) or their useful lives. Expenditures for maintenance,
repairs, renewals and betterments that do not materially prolong the useful
lives of the assets are expensed as incurred. The cost of property retired or
sold and the related accumulated depreciation are removed from the accounts, and
the resulting gain or loss is reflected currently in income.
Expenditures for major software purchases and software developed for
internal use are capitalized and depreciated using the straight-line method over
the estimated useful lives of the assets. For software developed for internal
use, external direct costs for materials and services and certain internal
payroll and related fringe benefit costs are capitalized in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."
The weighted average lives of our property and equipment at December
31, 2006, were:
Buildings 16.2 yrs.
Transportation equipment 5.9
Machinery and equipment 5.9
Computer software 4.3
Furniture and fixtures 5.0
GOODWILL AND INTANGIBLE ASSETS
Identifiable, definite-lived intangible assets arise from purchase
business combinations and are amortized using either an accelerated method or
the straight-line method over the estimated useful lives of the assets. The
selection of an amortization method is based on which method best reflects the
economic pattern of usage of the asset. The VITAS trade name is considered to
have an indefinite life. Goodwill and the VITAS trade name are tested at least
annually for impairment.
The weighted average lives of our identifiable, definite-lived
intangible assets at December 31, 2006, were:
Covenants not to compete 6.3 yrs.
Referral networks 10.0
Customer lists 13.3
LONG-LIVED ASSETS
If we believe a triggering event may have occurred that indicates a
possible impairment of our long-lived assets, we perform an estimation and
valuation of the future benefits of our long-lived assets (other than goodwill
and the VITAS trade name) based on key financial indicators. If the projected
undiscounted cash flows of a major business unit indicate that property and
equipment or identifiable, definite-lived intangible assets have been impaired,
a write-down to fair value is made. As further discussed in Note 7, VITAS sold
its Phoenix program in 2006. Prior to that sale, we determined that property and
equipment of this program with a carrying value of $216,000 was impaired and
recorded an impairment charge in September 2006. No other events occurred during
2006 or 2005 that indicated an impairment assessment was required.
OTHER ASSETS
Debt issuance costs are included in other assets and are amortized
using the effective interest method over the life of the debt.
REVENUE RECOGNITION
Both the VITAS segment and Roto-Rooter segment recognize service
revenues and sales when the earnings process has been completed. Generally, this
occurs when services are provided or products are delivered. VITAS recognizes
revenue at the estimated realizable amount due from third-party payers. Medicare
billings are subject to certain limitations, as described further below.
VITAS is subject to certain limitations on Medicare payments for
services. Specifically, if the number of inpatient care days any hospice program
provides to Medicare beneficiaries exceeds 20% of the total days of hospice care
such program provided to all Medicare patients for an annual period beginning
September 28, the days in excess of the 20% figure may be reimbursed only at the
routine homecare rate. None of VITAS' hospice programs exceeded the payment
limits on inpatient services in 2006, 2005 or 2004.
VITAS is also subject to a Medicare annual per-beneficiary cap
("Medicare Cap"). Compliance with the Medicare Cap is measured by comparing the
total Medicare payments received under a Medicare provider number with respect
8
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
to services provided to all Medicare hospice care beneficiaries in the program
or programs covered by that Medicare provider number between November 1 of each
year and October 31 of the following year with the product of the
per-beneficiary cap amount and the number of Medicare beneficiaries electing
hospice care for the first time from that hospice program or programs from
September 28 through September 27 of the following year.
We actively monitor each of our hospice programs, by provider number,
as to their specific admission, discharge rate and median length of stay data in
an attempt to determine whether revenues are likely to exceed the annual
per-beneficiary Medicare cap. Should we determine that revenues for a program
are likely to exceed the Medicare Cap based on projected trends, we attempt to
institute corrective action to change the patient mix or to increase patient
admissions. However, should we project our corrective action will not prevent
that program from exceeding its Medicare Cap, we estimate the amount of revenue
recognized during the period that will require repayment to the Federal
government under the Medicare Cap and record the amount as a reduction to
service revenue.
During the year ended December 31, 2006, we recorded a pretax charge in
continuing operations of $3.9 million for the estimated Medicare cap liability.
Medicare cap charges related to our Phoenix operation were $7.9 million and are
included in discontinued operations, as further discussed in Note 7. The
components of the pretax charges are as follows (in thousands):
All
Phoenix Other Total
---------- ----------- ------------
2007 measurement period $ - $ 470 $ 470
2006 measurement period 7,260 2,903 10,163
2005 measurement period 671 525 1,196
---------- ----------- ------------
Total $ 7,931 $ 3,898 $ 11,829
========== =========== ============
Charges for the 2005 measurement period relate to prior year billing
limitations resulting from the fiscal intermediary reallocating admissions for
deceased Medicare patients who received hospice care from multiple providers.
The amounts for the 2006 and 2007 measurement periods are estimates made by
management based upon Medicare admissions and Medicare revenue in each program.
SALES TAX
The Roto-Rooter segment collects sales tax from customers when required
by state and federal laws. We record the amount of sales tax collected net in
the accompanying consolidated statement of income.
GUARANTEES
In the normal course of business, we enter into various guarantees and
indemnifications in our relationships with customers and others. Examples of
these arrangements include guarantees of services for periods ranging from one
day to one year and product satisfaction guarantees. Our experience indicates
guarantees and indemnifications do not materially impact our financial condition
or results of operations. Based on our experience, no liability for guarantees
has been recorded as of December 31, 2006 or 2005.
OPERATING EXPENSES
Cost of services provided and goods sold (excluding depreciation)
includes salaries, wages and benefits of service providers and field personnel,
material costs, medical supplies and equipment, pharmaceuticals, insurance
costs, service vehicle costs and other expenses directly related to providing
service revenues or generating sales. Selling, general and administrative
expenses include salaries, wages and benefits of selling, marketing and
administrative employees, advertising expenses, communications and branch
telephone expenses, office rent and operating costs, legal, banking and
professional fees and other administrative costs.
ADVERTISING
We expense the production costs of advertising the first time the
advertising takes place. The costs of yellow page listings are expensed when the
directories are placed in circulation. These directories are generally in
circulation for approximately one year, at which point they are replaced by the
publisher with a new directory. We generally pay for directory placement
assuming it is in circulation for one year. If the directory is in circulation
for less than or greater than one year, we receive a credit or additional
billing, as necessary. We do not control the timing of when a new directory is
placed in circulation. Other advertising costs are expensed as incurred.
Advertising expense for continuing operations for the year ended December 31,
2006 was $23.3 million (2005 - $21.2 million; 2004-$20.0 million).
9
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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COMPUTATION OF EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of
shares of capital stock outstanding. Diluted earnings per share reflect the
dilutive impact of our outstanding stock options and nonvested stock awards.
Diluted earnings per share also assumed the conversion of the Convertible Junior
Subordinated Debentures ("CJSD") into capital stock prior to the redemption of
the CJSD in 2004, only when the impact was dilutive on earnings per share from
continuing operations. Stock options whose exercise price is greater than the
average market price of our stock are excluded from the computation of diluted
earnings per share.
STOCK-BASED COMPENSATION PLANS
Effective January 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards No. 123, revised ("SFAS 123(R)") which
establishes accounting for stock-based compensation for employees. Under SFAS
123(R), stock-based compensation cost is measured at the grant date, based on
the fair value of the award and recognized as expense over the employee's
requisite service period on a straight-line basis. We previously applied
Accounting Principles Board Opinion No. 25 and provided the pro-forma
disclosures required by Statement of Financial Accounting Standards No. 123. We
elected to adopt the modified prospective transition method as provided by SFAS
123(R). Accordingly, we have not restated previously reported financial
statement amounts. Other than certain reclassifications, there was no material
impact on our financial position, results of operations or cash flows as a
result of the adoption of SFAS 123(R).
INSURANCE ACCRUALS
For our Roto-Rooter segment and Corporate Office, we self-insure for
all casualty insurance claims (workers' compensation, auto liability and general
liability). As a result, we closely monitor and frequently evaluate our
historical claims experience to estimate the appropriate level of accrual for
self-insured claims. Our third-party administrator ("TPA") processes and reviews
claims on a monthly basis. Currently, our exposure on any single claim is capped
at $500,000. For most of the prior years, the caps for general liability and
workers' compensation were between $250,000 and $500,000 per claim. In
developing our estimates, we accumulate historical claims data for the previous
10 years to calculate loss development factors ("LDF") by insurance coverage
type. LDFs are applied to known claims to estimate the ultimate potential
liability for known and unknown claims for each open policy year. LDFs are
updated annually. Because this methodology relies heavily on historical claims
data, the key risk is whether the historical claims are an accurate predictor of
future claims exposure. The risk also exists that certain claims have been
incurred and not reported on a timely basis. To mitigate these risks, in
conjunction with our TPA, we closely monitor claims to ensure timely
accumulation of data and compare claims trends with the industry experience of
our TPA.
For the VITAS segment, we self-insure for workers' compensation claims.
Currently, VITAS' exposure on any single claim is capped at $500,000. For most
of the prior years, the caps for workers' compensation were between $250,000 and
$500,000 per claim. For VITAS' self-insurance accruals for workers'
compensation, we obtained an actuarial valuation of the liability as of February
24, 2004 (the date of acquisition) and as of November 30, 2006 and 2005. The
valuation methods used by the actuary are similar to those used internally for
our other business units.
TAXES ON INCOME
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amount of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in our opinion, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in laws and rates on the date of enactment.
We are subject to income taxes in Canada, the Federal and most state
jurisdictions. Significant judgment is required to determine our provision for
income taxes. We are periodically audited by various taxing authorities. We
establish liabilities for possible assessments by taxing authorities resulting
from exposures including, the deductibility of certain expenses and the tax
treatment related to acquisitions and divestitures. While it is often difficult
to predict the final outcome or the timing of resolution of any particular tax
matter, we believe our tax reserves reflect the probable outcome of known
contingencies, including interest and penalties, if applicable.
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Disclosures of aftertax expenses and adjustments are based on
estimates of the effective income tax rates for the applicable segments.
10
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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RECLASSIFICATIONS
Prior year amounts have been reclassified to conform with current
period presentation in the balance sheet, statement of income and statement of
cash flows primarily related to operations discontinued in 2006.
RECENT ACCOUNTING STATEMENTS
In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements" ("SAB 108").
Traditionally, there have been two widely recognized methods for quantifying the
effects of financial statement misstatements. The first, called the "rollover"
method, focuses primarily on the income statement effect of a misstatement but
its use can lead to the accumulation of misstatements on the balance sheet. The
other method, the "iron curtain" method, focuses primarily on the balance sheet
effect of a misstatement but its use can cause out-of-period adjustments in the
income statement.
SAB 108 requires companies to evaluate financial statement
misstatements using both methods, referred to as the "dual approach." An issuer
may either restate all periods presented as if the dual approach had always been
used or record the cumulative effect of using the dual approach to assets and
liabilities with an offsetting adjustment to the opening balance of retained
earnings as of January 1, 2006. There was no impact on our financial statements
for the adoption of SAB 108.
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS
158"). The new standard requires employers to recognize fully the obligations
associated with single-employer defined benefit pension, retiree healthcare and
other postretirement plans in their financial statements. Under past accounting
standards, the funded status of an employer's postretirement benefit plan (i.e.,
the difference between the plan assets and obligations) was not always
completely reported in the balance sheet. Employers reported an asset or
liability that almost always differed from the plan's funded status because
previous accounting standards allowed employers to delay recognition of certain
changes in plan assets and obligations that affected the costs of providing such
benefits. The requirement to recognize the funded status of a benefit plan and
the disclosure requirements are effective as of the end of the fiscal year
ending after December 15, 2006. There was no impact on our financial statements
for the adoption of SFAS 158.
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"), which addresses how companies should measure fair
value when they are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting principles (GAAP). It
sets a common definition of fair value to be used throughout GAAP. The new
standard is designed to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact SFAS 157 will have on
our financial condition and results of operations.
In September 2006, the FASB issued a staff position related to the
accounting for planned major maintenance activities. The staff position sets
forth four alternative methods of accounting for planned major maintenance
activities but disallowed the accrue-in-advance method. The accrue-in-advance
method provides for estimating the cost of major maintenance activities and
accruing that cost in advance of the maintenance being performed. The guidance
is effective for the first fiscal year beginning after December 15, 2006. There
will be no material impact on our financial statements as a result of adopting
this staff position.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109", which prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that it has taken or expects to take on a tax return. Upon
adoption of FIN 48, the financial statements will reflect expected future tax
consequences of such uncertain positions assuming the taxing authorities' full
knowledge of the position and all relevant facts. FIN 48 also revises disclosure
requirements and introduces an annual, tabular roll-forward of the unrecognized
tax benefits. This interpretation is effective as of the beginning of fiscal
years starting after December 15, 2006. We believe that the cumulative effect
upon adoption of FIN 48, as of January 1, 2007, will reduce our accrual for
uncertain tax positions by approximately $3 million to $5 million. We do not
anticipate the adoption of FIN 48 will have a material impact on our 2007
effective tax rate.
2. Stock Based Compensation Plans
We provide employees the opportunity to acquire our stock through a
number of plans, as follows:
o We have nine stock incentive plans under which 10,700,000 shares
can be issued to key employees through a grant of stock awards
and/or options to purchase shares. The Compensation/Incentive
Committee ("CIC") of the Board of Directors administers these
plans. All options granted under these plans provide for a
purchase price equal to the market value of the stock at the date
of grant. The latest plan, covering a total of 3,000,000 shares,
was adopted in May 2006 and revised in August 2006. The plans are
not qualified, restricted or incentive plans under the U.S.
Internal Revenue Code. The terms of each plan differ slightly,
however, stock options issued under the plans generally have a
maximum term of 10 years. Under one plan, adopted in 1999, up to
500,000 shares may be issued to employees who are not our
officers or directors.
11
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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o In May 2002, our shareholders approved the adoption of the
Executive Long-Term Incentive Plan ("LTIP") covering our officers
and key employees. The LTIP is administered by the CIC. During
June 2004, the CIC approved guidelines covering the establishment
of a pool of 250,000 shares ("2004 LTIP Pool") to be distributed
to eligible members of management upon attainment of the
following hurdles during the period January 1, 2004 through
December 31, 2007:
o 88,000 shares if our cumulative pro forma adjusted EBITDA
(including the results of VITAS beginning January 1, 2004)
reaches $365 million within the four-year period.
o 44,000 shares represent a retention element, subject to a
four-year, time-based vesting.
o 30,000 shares may be awarded at the discretion of the CIC.
Through December 31, 2006, 18,000 shares have been issued
from the discretionary pool.
o 88,000 shares if our stock price reaches the following
hurdles during any 30 trading days out of any 60 trading day
period during the four-year period:
Stock Price Shares to be
Hurdle Issued
------------- -------------
$ 35.00 22,000
$ 38.75 33,000
$ 42.50 33,000
--------------
88,000
==============
On June 22, 2004, the CIC awarded 44,000 restricted shares of
stock to key employees under the retention component of the 2004
LTIP Pool. These shares vest on December 31, 2007, for all
participants still employed by us. The total cost of these
awards is $1.1 million, based on the fair value of the stock on
the date of the award. Of this amount, $1.0 million relates to
continuing operations and is being amortized on a straight-line
basis over the 42-month period ending December 31, 2007.
During the first quarter of 2005, the price of our stock
exceeded $35 per share for 30 trading days, fulfilling one of
the stock price hurdles. On March 11, 2005, the CIC approved a
payout of 25,000 shares of capital stock under the LTIP. The
pretax expense of this award from continuing operations,
including payroll taxes and benefit costs, was $1.1 million
($695,000 aftertax).
During the second quarter of 2005, the price of our stock
exceeded $38.75 per share for 30 trading days, fulfilling one of
the stock price hurdles. On July 11, 2005, the CIC approved a
payout of 37,500 shares of capital stock under the LTIP. The
pretax expense of this award from continuing operations,
including payroll taxes and benefit costs, was $1.8 million
($1.2 million aftertax).
During the fourth quarter of 2005, the price of our stock
exceeded $42.50 per share for 30 trading days, fulfilling one of
the stock price hurdles. On December 2, 2005, the CIC approved a
payout of 43,500 shares of capital stock under the LTIP. The
pretax expense of this award from continuing operations,
including payroll taxes and benefit costs, was $2.5 million
($1.6 million aftertax).
As of December 31, 2006, no accrual for the cost of possible
awards under the remaining components of the 2004 LTIP Pool was
made since the targets have not been attained and no individual
participant's share of a possible award has been identified or
approved by the CIC.
As of December 31, 2006, a total of 100,000 shares may be
earned under the EBITDA and contingent hurdles of the 2004 LTIP
pool. On May 15, 2006, the CIC approved additional price hurdles
and associated shares to be issued under the LTIP pursuant to
the 2006 Stock Incentive Plan, as follows:
Stock Price Shares to be
Hurdle Issued
------------- -------------
$ 62.00 20,000
$ 68.00 30,000
$ 75.00 30,000
--------------
80,000
==============
The stock price hurdles must be achieved during 30 trading
days out of any 60 trading day period during the three years
ending May 15, 2009.
o We maintain an Employee Stock Purchase Plan ("ESPP"). The ESPP
allows eligible participants to purchase our shares through
payroll deductions at current market value. We pay administrative
12
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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and broker fees associated with the ESPP. Shares purchased for
the ESPP are purchased on the open market and credited directly
to participants' accounts. In accordance with the provisions of
SFAS 123(R), the ESPP is non-compensatory.
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 upon adoption of SFAS 123R. The
$215,000 pretax charge for accelerating the vesting of these options is included
in operating income for the year ended December 31, 2005. For the year ended
December 31, 2006, we recorded $1.3 million in amortization expense in the
accompanying statement of income for stock-based compensation related to the
amortization of restricted stock awards granted. For the year ended December 31,
2006, we recorded $1.2 million in selling, general and administrative expenses
for stock-based compensation related to stock options granted. There were no
capitalized stock-based compensation costs as of December 31, 2006. The
pro-forma disclosure as required by SFAS No. 123 is as follows (in thousands):
For the Years Ended
December 31,
2005 2004
----------------- ------------------
Net income, as reported $ 35,817 $ 27,512
Add: stock-based compensation expense included
in net income as reported, net of income taxes 4,314 3,940
Deduct: total stock-based compensation determined
under a fair value method, net of income taxes (8,519) (8,259)
----------------- ------------------
Pro-forma net income $ 31,612 $ 23,193
================= ==================
Earnings per share:
As reported $ 1.40 $ 1.14
================= ==================
Pro-forma $ 1.24 $ 0.96
================= ==================
Diluted earnings per share:
As reported $ 1.36 $ 1.12
================= ==================
Pro-forma $ 1.20 $ 0.94
================= ==================
The above pro forma data were calculated using the Black-Scholes option
valuation method to value our stock options granted. Key assumptions include:
For the Years Ended
December 31,
2005 2004
---------------- ----------------
Weighted average grant-date
fair value of options granted $ 12.43 $ 6.80
Risk-free interest rate 4.0 % 3.9 %
Expected volatility 30.9 % 30.3 %
Expected life of options 5 yrs. 5 yrs.
Annual dividend rate $ 0.24 $ 0.24
As of December 31, 2006, approximately $2.6 million of total
unrecognized compensation costs related to non-vested stock awards are expected
to be recognized over a weighted average period of 2.5 years. As of December 31,
2006, approximately $5.4 million of total unrecognized compensation costs
related to non-vested stock options are expected to be recognized over a
weighted average period of 2.5 years.
13
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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The following table summarizes stock option and award activity:
Stock Options Stock Awards
---------------------------------- --------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Grant-Date
Shares Price Shares Price
---------------------------------- --------------------------------
Stock-based compensation shares:
Outstanding at January 1, 2006 1,741,833 $ 23.57 142,445 $ 27.10
Granted 370,450 51.76 29,600 53.17
Exercised/Vested (449,161) 21.06 (34,456) 36.62
Forfeited (2,600) 31.48 (3,049) 29.78
---------------- ----------------
Outstanding at December 31, 2006 1,660,522 $ 30.53 134,540 $ 30.33
================ ================= ================ =================
Vested at December 31, 2006 1,290,672 $ 24.44
================ =================
The weighted average contractual life of outstanding and exercisable
options was 6.5 years at December 31, 2006. Options outstanding at December 31,
2006, were in the following exercise price ranges:
Weighted
Average Aggregate
Number of Exercise Intrinsic
Exercise Price Range Options Price Value
---------------------------------------- -------------- -------------- --------------------
$16.10 to $30.53 981,272 $ 20.14 $ 17,008,000
$30.54 to $51.76 679,250 $ 45.54 $ -
The total intrinsic value of stock options exercised during the years
ended December 31, 2006, 2005 and 2004 was $14.7 million, $28.3 million and $5.3
million, respectively. The total intrinsic value of stock options that were
vested as of December 31, 2006, 2005 and 2004 was $16.8 million, $45.4 million
and $31.3 million, respectively. The total intrinsic value of stock awards
vested during the years ended December 31, 2006, 2005 and 2004 was $1.7 million,
$5.6 million and $5.0 million, respectively. The total cash received from
employees as a result of employee stock option exercises for the years ended
December 31, 2006, 2005 and 2004 was $3.9 million, $12.3 million and $3.7
million, respectively. In connection with these exercises, the excess tax
benefits realized for the years ended December 31, 2006, 2005 and 2004 were $5.6
million, $10.8 million and $1.9 million, respectively. We settle employee stock
options with newly issued shares.
We estimate the fair value of stock options using the Black-Scholes
valuation model, consistent with the provisions of SFAS 123(R), the Securities
and Exchange Commission (SEC) Staff Accounting Bulletin No. 107 and our prior
period pro forma disclosure of net income including stock-based compensation
expense. We determine expected term, volatility, dividend yield and forfeiture
rate based on our historical experience. We believe that historical experience
is the best indicator of these factors. We granted 370,450 stock options on June
28, 2006 pursuant to the 2006 Stock Incentive Plan. For purposes of determining
the key assumptions and the related fair value of the options granted, we
analyzed the participants of the LTIP separately from the other stock option
recipients. The assumptions we used to value the June 28, 2006 grant are as
follows:
LTIP
Participants All Others
----------------- -----------------
Stock price on date of issuance $ 51.76 $ 51.76
Grant date fair value per share $ 18.95 $ 16.47
Number of options granted 262,750 107,700
Expected term (years) 6.0 4.5
Risk free rate of return 5.21 % 5.19 %
Volatility 28.0 % 28.9 %
Dividend yield 0.5 % 0.5 %
Forfeiture rate - % 10.0 %
14
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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3. Segments and Nature of the Business
Our segments comprise the VITAS segment and the Roto-Rooter segment.
Service America, which was sold in 2005, has been reclassified to discontinued
operations for all periods presented. Relative contributions of each segment to
service revenues and sales were 69% and 31%, respectively, in 2006. Relative
contributions of each segment to service revenues and sales were 68% and 32%,
respectively, in 2005. The vast majority of our service revenues and sales from
continuing operations are generated from business within the United States.
The reportable segments have been defined along service lines which is
consistent with the way the businesses are managed. In determining reportable
segments, the Roto-Rooter Services; and Roto-Rooter Franchising and Products
operating units of the Roto-Rooter segment have been aggregated on the basis of
possessing similar operating and economic characteristics. The characteristics
of these operating segments and the basis for aggregation are reviewed annually.
Accordingly, the reportable segments are defined as follows:
o The VITAS segment provides hospice services for patients with
severe, life-limiting illnesses. This type of care is aimed at
making the terminally ill patient's final days as comfortable and
pain-free as possible. Hospice care is typically available to
patients who have been initially certified as terminally ill
(i.e., a prognosis of six months or less) by their attending
physician, if any, and the hospice physician. VITAS offers all
levels of hospice care in a given market, including routine home
care, inpatient care and continuous care. Over 90% of VITAS'
revenues are derived through Medicare and Medicaid reimbursement
programs.
o The Roto-Rooter segment provides repair and maintenance services
to residential and commercial accounts using the Roto-Rooter
registered service mark. Such services include plumbing and
sewer, drain and pipe cleaning. They are delivered through
company-owned and operated territories, independent
contractor-operated territories and franchised locations. This
segment also manufactures and sells products and equipment used
to provide such services.
o We report corporate administrative expenses and unallocated
investing and financing income and expense not directly related
to either segment as "Corporate". Corporate administrative
expense includes the stewardship, accounting and reporting,
legal, tax and other costs of operating a publicly held
corporation. Corporate investing and financing income and
expenses include the costs and income associated with corporate
debt and investment arrangements. Historically, we allocated
stock-based compensation expense to the segment that employs its
recipient. In connection with our adoption of SFAS 123(R), we
re-assessed the classification within our business segments of
stock-based compensation expense and determined that our chief
decision maker analyzes stock-based compensation as a corporate
expense. Accordingly, all stock-based compensation expense for
2006, 2005 and 2004 has been included as a corporate expense in
the chart below.
Segment data for our continuing operations are set forth below (in
thousands):
For the Years Ended December 31,
--------------------------------------------------------
2006 2005 2004
------------------ ------------------- -----------------
Revenues by Type of Service
---------------------------
VITAS
Routine homecare $ 492,012 $ 426,380 $ 315,925
Continuous care 121,096 106,417 78,669
General inpatient 89,882 85,836 63,673
Medicare cap (3,898) - -
------------------ ------------------- -----------------
Total segment 699,092 618,633 458,267
------------------ ------------------- -----------------
Roto-Rooter
Sewer and drain cleaning 144,758 134,338 127,942
Plumbing repair and maintenance 128,732 118,625 107,642
Independent contractors 19,169 18,070 16,360
HVAC repair and maintenance 2,821 3,624 3,111
Other products and services 24,015 22,680 21,555
------------------ ------------------- -----------------
Total segment 319,495 297,337 276,610
------------------ ------------------- -----------------
Total service revenues and sales $ 1,018,587 $ 915,970 $ 734,877
================== =================== =================
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EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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For the Years Ended December 31,
--------------------------------------------------------
2006 2005 2004
------------------ ------------------- -----------------
After tax Segment Earnings/(Loss)
---------------------------------
VITAS $ 48,418 $ 33,505 $ 29,160
Roto-Rooter 32,454 27,626 19,801
------------------ ------------------- -----------------
Total 80,872 61,131 48,961
Corporate (23,150) (24,903) (25,761)
Equity in VITAS loss - - (4,105)
Discontinued operations (7,071) (411) 8,417
------------------ ------------------- -----------------
Net income $ 50,651 $ 35,817 $ 27,512
================== =================== =================
Interest Income
---------------
VITAS $ 5,443 $ 2,792 $ 1,091
Roto-Rooter 4,082 2,391 1,180
------------------ ------------------- -----------------
Total 9,525 5,183 2,271
Corporate 2,492 1,805 1,403
Intercompany eliminations (9,326) (4,790) (1,800)
------------------ ------------------- -----------------
Total interest
income $ 2,691 $ 2,198 $ 1,874
================== =================== =================
Interest Expense
----------------
VITAS $ 191 $ 153 $ 128
Roto-Rooter 368 563 206
------------------ ------------------- -----------------
Total 559 716 334
Corporate 16,909 20,548 20,824
------------------ ------------------- -----------------
Total interest
expense $ 17,468 $ 21,264 $ 21,158
================== =================== =================
Income Tax Provision
--------------------
VITAS $ 28,705 $ 20,097 $ 20,037
Roto-Rooter 18,748 16,048 11,202
------------------ ------------------- -----------------
Total 47,453 36,145 31,239
Corporate (14,891) (17,717) (17,503)
------------------ ------------------- -----------------
Total income
tax provision $ 32,562 $ 18,428 $ 13,736
================== =================== =================
Identifiable Assets
-------------------
VITAS $ 517,112 $ 523,494 $ 500,670
Roto-Rooter 185,580 179,063 174,310
------------------ ------------------- -----------------
Total 702,692 702,557 674,980
Corporate 84,890 123,725 129,344
Discontinued Operations 5,705 12,821 21,242
------------------ ------------------- -----------------
Total identifiable
assets $ 793,287 $ 839,103 $ 825,566
================== =================== =================
Additions to Long-Lived Assets
------------------------------
VITAS $ 14,419 $ 24,462 $ 434,509
Roto-Rooter 10,268 7,938 8,690
------------------ ------------------- -----------------
Total 24,687 32,400 443,199
Corporate 137 443 785
------------------ ------------------- -----------------
Total additions
to long-lived
assets $ 24,824 $ 32,843 $ 443,984
================== =================== =================
Depreciation and Amortization
-----------------------------
VITAS $ 12,669 $ 11,504 $ 9,061
Roto-Rooter 7,737 8,361 8,702
------------------ ------------------- -----------------
Total 20,406 19,865 17,763
Corporate 1,624 1,207 558
------------------ ------------------- -----------------
Total depreciation
and amortization $ 22,030 $ 21,072 $ 18,321
================== =================== =================
16
EXHIBIT 99
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4. Equity Interest in Affiliate (VITAS)
Until February 23, 2004, we held a 37% interest in privately held
VITAS. During the period January 1 through February 23, 2004, VITAS recognized a
net loss of $18.3 million due to the recognition of approximately $20.9 million
of aftertax costs related to VITAS' sale of its business to us. Our aftertax
share of VITAS' loss for this period was $ 4.1 million.
Included in the aftertax costs related to VITAS' sale of its business
are the following (in thousands):
Accrual for potential severance costs under key employment agreements $ 10,975
Legal and valuation costs 6,665
Loss on write-off of VITAS' deferred debt issuance costs 2,698
Other 592
------------
Total $ 20,930
============
5. Goodwill and Intangible Assets
Amortization of definite-lived intangible assets from continuing
operations was $4.0 million, $4.0 million and $3.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The following is a schedule by
year of projected amortization expense for definite-lived intangible assets (in
thousands):
2007 $ 4,038
2008 4,032
2009 4,002
2010 1,995
2011 1,197
Thereafter 2,651
The balance in identifiable intangible assets comprises the following
(in thousands):
Gross Accumulated Net Book
Asset Amortization Value
----------------- -------------------- ------------------
December 31, 2006
----------------------------------------------
Referral networks $ 21,142 $ (7,858) $ 13,284
Covenants not to compete 8,751 (4,433) 4,318
Customer lists 1,223 (910) 313
----------------- -------------------- ------------------
Subtotal - definite-lived intangibles 31,116 (13,201) 17,915
VITAS trade name 51,300 - 51,300
----------------- -------------------- ------------------
Total $ 82,416 $ (13,201) $ 69,215
================= ==================== ==================
December 31, 2005
----------------------------------------------
Referral networks $ 20,900 $ (5,108) $ 15,792
Covenants not to compete 8,678 (3,238) 5,440
Customer lists 1,222 (866) 356
----------------- -------------------- ------------------
Subtotal - definite-lived intangibles 30,800 (9,212) 21,588
VITAS trade name 51,300 - 51,300
----------------- -------------------- ------------------
Total $ 82,100 $ (9,212) $ 72,888
================= ==================== ==================
17
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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The changes in the carrying amount of goodwill for the years ended
December 31, 2005 and 2006 are as follows (in thousands):
Roto-
VITAS Rooter Total
---------------- ------------------ ------------------
December 31, 2004 $ 323,170 $ 108,402 $ 431,572
Acquired in business combinations,
net of purchase accounting adjustments 414 498 912
Other adjustments - 112 112
---------------- ------------------ ------------------
December 31, 2005 323,584 109,012 432,596
Acquired in business combinations,
net of purchase accounting adjustments (311) 2,727 2,416
Other adjustments - 38 38
---------------- ------------------ ------------------
December 31, 2006 $ 323,273 $ 111,777 $ 435,050
================ ================== ==================
We performed impairment tests of goodwill for all of our reporting
units and for the VITAS trade name as of December 31, 2005. As further discussed
in Note 24, in 2006, we changed the date of our annual goodwill impairment
analysis to October 1.
For all reporting units included in continuing operations, the
impairment tests indicated that our goodwill and VITAS trade name are not
impaired. For the purpose of impairment testing, we consider the reporting units
to be VITAS, Roto-Rooter Services (plumbing and drain cleaning services) and
Roto-Rooter Franchising and Products (franchising and manufacturing and sale of
plumbing and drain cleaning products). As further discussed in Note 7, VITAS
sold its Phoenix program in November 2006. Prior to that sale, we determined
that the acquired referral network was impaired and recorded a pretax impairment
loss of $2.2 million during September 2006.
6. Other Expenses
Other expenses from continuing operations include the following pretax
charges (in thousands):
For the Year Ended
December 31,
------------------------------------------
2006 2005 2004
------------ -------------- --------------
Costs related to class action litigation $ 272 $ 17,350 $ 3,135
Adjustments to transaction-related costs
of the VITAS acquisition - (959) 442
Expenses related to debt registration - - 1,191
------------ -------------- --------------
Total other expenses $ 272 $ 16,391 $ 4,768
============ ============== ==============
18
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
7. Discontinued Operations
Discontinued operations comprise (in thousands, except per share
amounts):
For the Years Ended December 31,
------------------------------------------
2006 2005 2004
------------ -------------- --------------
VITAS Phoenix (2006):
Income/(loss) before income taxes $ (9,117) $ 2,627 $ 152
Income taxes 3,645 (1,150) (61)
------------ -------------- --------------
Income/(loss) from operations,
net of income taxes (5,472) 1,477 91
Gain on disposal, net of income
tax expense of $391 600 - -
------------ -------------- --------------
(4,872) 1,477 91
------------ -------------- --------------
Service America (2004):
Income/(loss) before income taxes (141) 576 (535)
Income taxes 109 (241) 222
------------ -------------- --------------
Income/(loss) from operations,
net of income taxes (32) 335 (313)
(Loss)/gain on disposal, net of income
tax benefit of $165 and $14,232 respectively - (2,148) 8,872
------------ -------------- --------------
(32) (1,813) 8,559
------------ -------------- --------------
Adjustment to accruals of operations
discontinued in prior years:
Settlement costs and other accruals (2002) (2,246) (120) -
Environmental accruals (1991) (1,194) - (700)
Allowance for uncollectible notes receivable
and other accruals (2001) 28 - 383
------------ -------------- --------------
Loss before income taxes (3,412) (120) (317)
All other income taxes 1,245 45 84
------------ -------------- --------------
Total adjustments (2,167) (75) (233)
------------ -------------- --------------
Total discontinued operations $ (7,071) $ (411) $ 8,417
============ ============== ==============
Earnings/(loss) per share $ (0.27) $ (0.02) $ 0.35
============ ============== ==============
Diluted earnings/(loss) per share $ (0.26) $ (0.02) $ 0.34
============ ============== ==============
In September 2006, our Board of Directors approved and we announced our
intention to exit the hospice market in Phoenix, Arizona. Although we were
successful in growing admissions of terminally ill patients, our growth was
primarily patients who reside in assisted living settings. Patients residing in
these types of facilities tend to exit curative care and enter into hospice care
relatively early in their terminal diagnosis. The Medicare Cap limits payment
for hospice care when a significant portion of the patient census enters into
hospice early in their terminal diagnosis. Although we have, on average,
relatively short average and median lengths of stay in the majority of our
programs, all programs are measured separately and cannot be considered in the
aggregate of programs under common control. Due to these billing limitations, we
experienced significant operating losses at this program. As a result of our
announcement, we performed impairment tests of our long-lived assets of the
Phoenix operation as of September 30, 2006 in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." An impairment charge of $2.4 million was
recorded for the referral network intangible asset and fixed assets during the
third quarter of 2006. The sale was completed in November 2006. The acquiring
corporation purchased the substantial majority of assets of the Phoenix program
for $2.5 million.
On September 28, 2006, we announced a preliminary settlement in regard
to litigation related to the 2002 divestiture of our Patient Care business
segment. 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. As of the
settlement date, $4.2 million had been returned and the remainder was being
withheld pending the settlement of certain third-party payer claims. Prior to
the settlement, we had a long-term receivable from Patient Care of $12.5
million. We also had current accounts receivable from Patient Care for the
post-closing balance sheet valuation and for expenses paid by us after closing
on Patient Care's behalf of $3.4 million. We were in litigation with Patient
Care over the collection of these current amounts and their allegations that our
acquisition of VITAS violated a non-compete covenant in the sales agreement. We
also have a warrant to purchase 2% of Patient Care's common stock that we
recorded as a $1.4 million investment.
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EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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We settled this case in October 2006. We agreed to forgive $1.2 million
of the current receivable related to the post-closing balance sheet valuation
and convert the remaining amount into debt secured by a promissory note with the
same terms as the $12.5 million long-term receivable. We have incurred
additional costs related to the settlement of $1.1 million for additional
insurance and legal costs related to workers' compensation claims incurred prior
to the sale. The after tax charge related to these amounts of $1.5 million has
been recorded as discontinued operations. As a result of financial information
received during the negotiations, we determined that the value of the warrants
has been permanently impaired and have recorded a pretax impairment charge of
$1.4 million. This charge is included in income from continuing operations on
the consolidated statement of income.
In December 2004, the Board of Directors authorized the discontinuance
of our Service America segment through an asset sale to employees of Service
America. The disposal was completed in May 2005. Our decision to dispose of
Service America, which provides major-appliance and heating/air conditioning
repair, maintenance and replacement services, was based on declining operating
results and projected operating losses. The acquiring corporation purchased the
substantial majority of Service America's assets in exchange for assuming
substantially all of Service America's liabilities. The loss on disposal of
Service America in 2005 arises from the finalization of asset and liability
values and related tax benefits resulting from the consummation of the sale
transaction. Included in the assets acquired was a receivable from us for
approximately $4.7 million. We paid $1 million of the amount upon closing and
the remainder was due over the following year in 11 equal installments. No
balances are due Service America as of December 31, 2006. The balance due
Service America as of December 31, 2005 was $1.3 million. We recognized a tax
benefit of approximately $14.2 million on this disposal in 2004, primarily due
to the recognition of non-deductible goodwill impairment losses in prior years.
During 2004, we increased our accrual for environmental liabilities
related to the disposal of DuBois Chemicals, Inc. ("DuBois") in 1991 by
$700,000. During 2006, we again increased our accrual for environmental
liabilities related to the disposal of DuBois by $1.2 million. The adjustment
made by us is based on an assessment by our environmental attorney, a
preliminary settlement agreement with respect to one site and ongoing
discussions with the U.S. Environmental Protection Agency. At December 31, 2006
and 2005, the accrual for our estimated liability for potential environmental
cleanup and related costs arising from the sale of DuBois amounted to $3.5
million and $3.0 million, respectively. Of the 2006 balance, $2.6 million is
included in other current liabilities and $900,000 is included in other
liabilities (long-term). We are contingently liable for additional
DuBois-related environmental cleanup and related costs up to a maximum of $14.9
million. On the basis of a continuing evaluation of the potential liability, we
believe it is not probable this additional liability will be paid. Accordingly,
no provision for this contingent liability has been recorded. The potential
liability is not insured, and the recorded liability does not assume the
recovery of insurance proceeds. Also, the environmental liability has not been
discounted because it is not possible to reliably project the timing of
payments. We believe that any adjustments to our recorded liability will not
materially adversely affect our financial position or results of operations.
The $383,000 reduction to the allowance for uncollectible notes
receivable from Cadre Computer Resources Co. ("Cadre Computer") (sold in 2001)
in 2004 is attributable to Cadre Computer's experiencing better than
anticipated financial results and to the expiration of $350,000 of Cadre
Computer's line of credit with us.
Revenues generated by discontinued operations comprise (in thousands):
For the Years Ended December 31,
-------------------------------------------
2006 2005 2004
-------------------------------------------
Service America $ - $ 10,716 $ 38,986
Phoenix (98) 10,506 464
-------------------------------------------
$ (98) $ 21,222 $ 39,450
===========================================
At December 31, 2006, other current liabilities include accruals of
$13.7 million and other liabilities (long-term) include accruals of $2.6 million
for costs related to discontinued operations. The estimated timing of payments
of these liabilities follows (in thousands):
2007 $ 13,735
2008 932
2009 963
2010 454
2011 264
After 2011 -
--------------------
$ 16,348
====================
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EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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Our Chairman of the Board, President and Chief Executive Officer and
our former Chief Administrative Officer (currently a director of our company)
are directors of Cadre Computer. In addition, our former Chief Administrative
Officer holds a 51% equity ownership interest in Cadre Computer at December 31,
2006 and is Chairman and Chief Executive Officer of Cadre Computer.
8. Business Combinations
During 2006, we completed three business combinations within the
Roto-Rooter segment for an aggregate purchase price of $4.1 million in cash. We
made no acquisitions within the VITAS segment during 2006. The Roto-Rooter
acquisitions were completed mainly to increase our market penetration in Erie,
Pennsylvania, Tyler, Texas and Lexington, Kentucky. The results of operations of
these businesses are included in our results of operations from the date of
acquisition. The purchase price allocations for the 2006 business combinations
are preliminary and will be finalized during 2007.
During 2005, we completed one business combination within the
Roto-Rooter segment and two within the VITAS segment for an aggregate purchase
price of $6.2 million in cash. The acquisitions were completed mainly to
increase our market penetration. The VITAS businesses acquired provide hospice
services in the Pittsburgh, PA and Philadelphia, PA areas and the Roto-Rooter
business acquired provides drain cleaning and plumbing services using the
Roto-Rooter name in Greensboro, NC. The results of operations of these
businesses are included in our results of operations from the date of
acquisition.
During 2004, we completed two business combinations within the
Roto-Rooter segment and two within the VITAS segment for an aggregate purchase
price of $19.3 million in cash. The VITAS businesses acquired provide hospice
services in the Phoenix, AZ and the Atlanta, GA areas, and the Roto-Rooter
businesses acquired provide drain cleaning and plumbing services using the
Roto-Rooter name in Harrisburg, PA and Spokane, WA. The results of operations of
all of these businesses are included in our results of operations from the date
of acquisition.
On February 24, 2004, we completed the acquisition of the 63% of VITAS
common stock we did not previously own for cash consideration of $323.8 million.
The total investment in VITAS, including $3.1 million of acquisition expenses
and our $18.0 million prior investment in VITAS, was $366.2 million. We have
completed the purchase price allocation and the excess of the purchase price
over the fair value of the net assets acquired in purchase business combinations
is classified as goodwill.
Total net assets acquired $ 366,194
Less: prior investment in VITAS (18,032)
Less-cash and cash equivalents
acquired (24,377)
-----------------
Net cash used $ 323,785
=================
The purchase price of all businesses acquired during the year
indicated, except the VITAS acquisition, has been allocated as follows (in
thousands):
For the Years Ended December 31,
---------------------------------------------
2006 2005 2004
-------------- --------------- --------------
Identifiable intangible
assets $ 315 $ - $ -
Goodwill 2,416 1,429 19,274
Other assets and
liabilities-net 1,414 4,736 (8)
-------------- --------------- --------------
Total net assets $ 4,145 $ 6,165 $ 19,266
============== =============== ==============
Approximately $20.9 million of the goodwill related to the VITAS
acquisition and all of the goodwill related to business combinations completed
in 2006, 2005 and 2004 is expected to be deductible for income tax purposes.
21
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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The unaudited pro forma results of operations, assuming purchase
business combinations completed in 2006 and 2005 were completed on January 1,
2005 are presented below (in thousands, except per share data):
For the Years Ended
December 31,
--------------------------------
2006 2005
--------------- ----------------
Service revenues and sales $ 1,019,530 $ 917,615
Net Income 50,988 36,196
Earnings per share 1.95 1.42
Diluted Earnings per share 1.91 1.38
9. Other Income--Net
Other income--net from continuing operations comprises the following
(in thousands):
For the Years Ended December 31,
----------- --------------- --------------
2006 2005 2004
----------- --------------- --------------
Interest income $ 2,691 $ 2,198 $ 1,874
Market value gains on trading
investments of employee benefit trusts 2,030 863 1,859
Loss on disposal of property and equipment (161) (131) (350)
Other - net 88 192 87
----------- --------------- --------------
Total other income $ 4,648 $ 3,122 $ 3,470
=========== =============== ==============
10. Income Taxes
The provision for income taxes comprises the following (in thousands):
For the Years Ended December 31,
------------------------------------------
Continuing Operations: 2006 2005 2004
----------- --------------- --------------
Current
U.S. federal $ 21,955 $ 21,201 $ 7,042
U.S. state and local 2,808 1,763 1,209
Foreign 391 519 516
Deferred
U.S. federal, state and local 7,474 (4,951) 5,060
Foreign (66) (104) (91)
----------- --------------- --------------
Total $ 32,562 $ 18,428 $ 13,736
=========== =============== ==============
Discontinued Operations:
Current U.S. federal $ (4,175) $ (14,497) $ (2,351)
Current U.S. state and local (440) (1,214) (55)
Deferred U.S. federal, state and local 7 16,892 (12,071)
----------- --------------- --------------
Total $ (4,608) $ 1,181 $ (14,477)
=========== =============== ==============
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EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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A summary of the significant temporary differences for continuing
operations that give rise to deferred income tax assets/(liabilities) follows
(in thousands):
December 31,
-------------- ---------------
2006 2005
-------------- ---------------
Accrued liabilities $ 27,248 $ 34,646
Allowance for uncollectible
accounts receivable 2,692 2,765
State net operating loss carryforwards 1,427 1,878
Other 3,556 2,527
-------------- ---------------
Deferred income tax assets 34,923 41,816
-------------- ---------------
Amortization of intangible assets (32,162) (30,064)
Accelerated tax depreciation (8,222) (8,426)
Currents assets (1,776) (1,690)
Other (701) (422)
-------------- ---------------
Deferred income tax liabilities (42,861) (40,602)
-------------- ---------------
Net deferred income tax assets $ (7,938) $ 1,214
============== ===============
Included in other assets at December 31, 2006, are deferred income tax
assets of $574,000 (December 31, 2005--$499,000). At December 31, 2006 and 2005,
state net operating loss carryforwards were $29.0 million and $39.6 million,
respectively. These net operating losses will expire, in varying amounts,
between 2009 and 2026. Based on our history of operating earnings, we have
determined that our operating income will, more likely than not, be sufficient
to ensure realization of our deferred income tax assets. We believe no net
operating losses will be lost due to the continuity of business requirement.
The difference between the actual income tax provision for continuing
operations and the income tax provision calculated at the statutory U.S. federal
tax rate is explained as follows (in thousands):
For the Years Ended December 31,
-------------------------------------------
2006 2005 2004
-------------------------------------------
Income tax provision calculated using the statutory rate of 35% $ 31,599 $ 19,130 $ 12,928
State and local income taxes, less federal income tax effect 3,112 1,994 2,500
Tax accrual adjustments (1,758) (2,387) (2,025)
Other --net (391) (309) 333
-------------------------------------------
Income tax provision $ 32,562 $ 18,428 $ 13,736
===========================================
Effective tax rate 36.1% 33.7% 37.2%
===========================================
Summarized below are the total amounts of income taxes paid/(refunded)
during the years ended December 31 (in thousands):
2006 $ 3,823
2005 9,923
2004 (13,131)
Provision has not been made for additional taxes on $35.1 million of
undistributed earnings of our domestic subsidiaries. Should we elect to sell our
interest in all of these businesses rather than to effect a tax-free
liquidation, additional taxes amounting to approximately $12.8 million would be
incurred based on current income tax rates.
11. Cash Overdrafts and Cash Equivalents
Included in accounts payable are cash overdrafts of $10.6 million and
$8.0 million as of December 31, 2006 and 2005, respectively.
From time to time throughout the year, we invest our excess cash in
repurchase agreements directly with major commercial banks. We do not physically
hold the collateral, but the term of such repurchase agreements is less than 10
days. Investments of significant amounts are spread among a number of banks and
the amounts invested in each bank are varied constantly. Included in cash and
cash equivalents at December 31, 2006, are cash equivalents in the amount of
23
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
$22.5 million (2005-$53.2 million). The cash equivalents at both dates consist
of investments in various money market funds and repurchase agreements yielding
interest at a weighted average rate of 5.2% in 2006 and 4.1% in 2005.
12. Properties and Equipment
A summary of properties and equipment follows (in thousands):
December 31,
---------------------------
2006 2005
------------- -------------
Land $ 1,713 $ 1,713
Buildings 24,349 22,941
Transportation equipment 12,270 12,696
Machinery and equipment 42,474 40,451
Computer software 21,223 19,568
Furniture and fixtures 31,017 26,142
Projects under development 14,201 8,271
------------- -------------
Total properties and equipment 147,247 131,782
Less accumulated depreciation (77,107) (66,627)
------------- -------------
Net properties and equipment $ 70,140 $ 65,155
============= =============
13. Long-Term Debt and Lines of Credit
A summary of our long-term debt follows (in thousands):
December 31,
---------------------------
2006 2005
------------- -------------
Fixed rate notes due 2011 $ 150,000 $ 150,000
Term loan due 2005-2009 - 84,363
Other 540 740
------------- -------------
Subtotal 150,540 235,103
Less current portion (209) (1,045)
------------- -------------
Long-term debt, less current portion $ 150,331 $ 234,058
============= =============
The average interest rate for our long-term debt was 8.3% and 7.5% for
the years ended December 31, 2006 and 2005, respectively.
2006 AMENDMENTS
On March 31, 2006, we repaid in full our $84.4 million term loan with
JPMorgan Chase Bank ("TL"). The TL was paid with a combination of cash on hand
and a draw on our revolving credit facility. At that time, we also amended the
$175 million revolving credit facility ("RCF") with JPMorgan Chase Bank to
reduce the commitment and annual fees and to reduce the floating interest rate
by approximately 50 basis points. The interest rate of the amended RCF is LIBOR
plus 1.25%. There were no borrowings under the RCF as of December 31, 2006. The
amended RCF also includes an "accordion" feature that allows us the opportunity
to expand the facility by $50 million. The RCF terminates in February 2010. In
connection with the repayment of the TL, we recorded a write-off of unamortized
debt issuance costs of $430,000.
2005 CREDIT FACILITY
In February 2005, we amended our bank credit facility with JPMorgan
Chase Bank. The Amended and Restated Credit Agreement ("ARCA") provided for a TL
of $85 million at a rate of LIBOR plus 2.0% and a RCF of $175 million at a rate
of LIBOR plus 2.5%. Commitment fees included an annual fee of $100,000 plus a
fee of .375% per annum of the unused RCF, payable quarterly.
Loans under the ARCA are collateralized by substantially all of our
assets. Should we generate excess cash flow ("ECF") during a year, as defined in
ARCA, an additional principal payment must be made. Based on our results as of
and for the year ended December 31, 2005 and 2004, no additional term loan
payments have been required.
Also in February 2005, we used proceeds from borrowings under the ARCA
($85 million TL and $3.5 million RCF) plus $54.4 million of our cash balances to
retire our previous term loan ($30.5 million), to redeem the entire $110 million
aggregate principal amount of our Floating Rate Notes due 2010, to pay $1.1
million prepayment penalty for the Floating Rate Notes and to pay $1.4 million
of fees for the ARCA.
24
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
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2004 CREDIT AGREEMENTS
On February 24, 2004, in conjunction with our acquisition of the VITAS
shares not previously owned and to retire our senior notes due 2005 through 2009
, we issued 4 million shares of capital stock in a private placement and
borrowed $335 million as follows:
o $150 million from the issuance of privately placed 8.75% senior
notes ("Fixed Rate Notes") due 2011. Semiannual interest payments
began in August 2004 and payment of unpaid principal and interest
will be due February 2011. The Fixed Rate Notes are unsecured and
are effectively subordinated to our secured indebtedness. In the
second quarter of 2004, we filed a registration statement
covering up to $150 million principal amount of new 8.75% senior
notes due 2011 ("New Fixed Rate Notes"). Except for the lack of
transfer restrictions, the terms of the New Fixed Rate Notes are
substantially identical to those of the Fixed Rate Notes.
Pursuant to our exchange offer, all holders of the Fixed Rate
Notes exchanged their notes for like principal amounts of the New
Fixed Rate Notes.
Prior to February 24, 2007, up to a maximum of 35% of the
principal of the New Fixed Rate Notes may be redeemed under
specified circumstances at a price of 108.75% plus accrued
interest.After February 24, 2007, the New Fixed Rate Notes may be
redeemed, in whole or in part, at redemption prices ranging from
104.375% (beginning on February 24, 2007) to 100% (beginning on
February 24, 2010) plus accrued interest.
o $110 million from the issuance of privately placed floating rate
senior secured notes ("Floating Rate Notes") due 2010 which were
redeemed in 2005.
o $75 million drawn down under a $135 million secured revolving
credit/term loan facility ("2004 Credit Facility") with JPMorgan
Chase Bank. The facility comprised a $35 million term loan and
$100 million revolving credit facility, including up to $40
million in letters of credit. This facility was replaced in 2005
with the ARCA.
OTHER
Other long-term debt has arisen from loans in connection with
acquisitions of various businesses and properties. Interest rates range from 5%
to 8%, and the obligations are due on various dates through December 2009.
The following is a schedule by year of required long-term debt payments
as of December 31, 2006 (in thousands):
2007 $ 209
2008 162
2009 169
2010 -
2011 150,000
------------
Total long-term debt $ 150,540
============
During 2006 and 2005, interest totaling $751,000 and $380,000,
respectively, was capitalized. Summarized below are the total amounts of
interest paid during the years ended December 31 (in thousands):
2006 $ 16,462
2005 20,368
2004 17,255
DEBT COVENANTS
Collectively, the ARCA and the New Fixed Rate Notes provide for
affirmative and restrictive covenants including, without limitation,
requirements or restrictions (subject to exceptions) related to the following:
o use of proceeds of loans,
o restricted payments, including payments of dividends and
retirement of stock (permitting $.24 per share dividends so long
as the aggregate amount of dividends in any fiscal year does not
exceed $7.0 million), with exceptions for existing employee
benefit plans and stock option plans,
o mergers and dissolutions,
o sales of assets,
o investments and acquisitions,
o liens,
o transactions with affiliates,
25
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
o hedging and other financial contracts,
o restrictions on subsidiaries,
o contingent obligations,
o operating leases,
o guarantors,
o collateral,
o sale and leaseback transactions,
o prepayments of indebtedness,
o maximum annual limit for acquisitions of $80 million (no single
acquisition to exceed $50 million),
o maximum annual expenditures for operating leases of $30 million,
and
o maximum annual capital expenditures of $30 million.
In addition, the credit agreements provide that the Company will be
required to meet minimum net worth requirements, maximum leverage requirements,
maximum senior leverage requirements and minimum fixed charge requirements, to
be tested quarterly. The ARCA also contains cross-default provisions. We are in
compliance with all debt covenants as of December 31, 2006. As of December 31,
2006, we have approximately $141.7 million of unused lines of credit available
and eligible to be drawn down under the RCF.
In connection with the February 2005 amendment, we recorded a loss on
the extinguishment of debt of $4.0 million that comprised a prepayment penalty
of $1.1 million on the Floating Rate Notes and the write-off of $2.9 million of
unamortized debt issuance costs for the Floating Rate Notes and the previous
term loan. In connection with the February 2004 transaction, we incurred a
prepayment penalty of $3.3 million on the senior notes.
14. Other Current Liabilities
At December 31, 2006 and 2005, other current liabilities comprised the
following (in thousands):
December 31,
---------------------------
2006 2005
------------- -------------
Accrued legal settlements $ 1,889 $ 23,108
Accrued divestiture expenses 2,612 3,895
Accrued Medicare Cap estimate 3,373 -
Other 14,810 18,820
------------- -------------
Total other current liabilities $ 22,684 $ 45,823
============= =============
15. Pension and Retirement Plans
Retirement obligations under various plans cover substantially all
full-time employees who meet age and/or service eligibility requirements. The
major plans providing retirement benefits to our employees are defined
contribution plans. Expenses charged to continuing operations for our retirement
and profit-sharing plans, ESOPs, excess benefit plans and other similar plans
comprise the following (in thousands):
For the Years Ended December 31,
---------------------------------------
2006 2005 2004
---------------------------------------
Compensation cost of ESOPs $ - $ 1,324 $ 1,811
Pension, profit-sharing
and other similar plans 11,117 9,004 5,639
---------------------------------------
Total $ 11,117 $ 10,328 $ 7,450
=======================================
Dividends on ESOP shares
used for debt service $ - $ 122 $ 129
=======================================
We previously established two employee stock ownership plans ("ESOPs")
that purchased a total of $56.0 million of our capital stock. Substantially all
eligible employees of the Roto-Rooter segment and the Corporate Office
participated in the ESOPs. All shares in the ESOP trust were allocated as of
December 31, 2005. The ESOP trusts were terminated and participant balances
transferred to the retirement plan in the first quarter of 2006.
We have excess benefit plans for key employees whose participation in
the qualified plans is limited by U.S. Employee Retirement Income Security Act
requirements. Benefits are determined based on theoretical participation in the
qualified plans. Prior to September 1, 1998, the value of these benefits was
invested in shares of our stock and in mutual funds, which were held by grantor
26
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
trusts. Currently, benefits are only invested in mutual funds, and participants
are not permitted to diversify accumulated benefits in shares of our stock.
Trust assets invested in shares of our stock are included in treasury stock, and
the corresponding liability is included in a separate component of shareholders'
equity. At December 31, 2006, these trusts held 133,315 shares or $2.4 million
of our stock (December 31, 2005--133,870 shares or $2.4 million). The
diversified assets of our excess benefit and deferred compensation plans, all of
which are invested in either company-owned life insurance or various mutual
funds, totaled $25.7 million at December 31, 2006 (December 31, 2005--$21.1
million).
16. Lease Arrangements
We have operating leases that cover our corporate office headquarters,
various warehouse and office facilities, office equipment and transportation
equipment. The remaining terms of these leases range from one year to nine
years, and in most cases, we expect that these leases will be renewed or
replaced by other leases in the normal course of business. We have no
significant capital leases as of December 31, 2006 or 2005.
The following is a summary of future minimum rental payments and
sublease rentals to be received under operating leases that have initial or
remaining noncancelable terms in excess of one year at December 31, 2006 (in
thousands):
2007 $ 16,761
2008 14,261
2009 12,473
2010 8,299
2011 6,062
After 2011 9,590
---------------
Total minimum rental payments 67,446
Less: minimum sublease rentals (572)
---------------
Net minimum rental payments $ 66,874
===============
Total rental expense incurred under operating leases for continuing
operations follows (in thousands):
For the Years Ended December 31,
------------------------------------------
2006 2005 2004
------------ -------------- --------------
Total rental payments $ 16,859 $ 17,027 $ 13,569
Less sublease rentals (687) (1,659) (1,640)
------------ -------------- --------------
Net rental expense $ 16,172 $ 15,368 $ 11,929
============ ============== ==============
17. Financial Instruments
The following methods and assumptions are used in estimating the fair
value of each class of our financial instruments:
o For cash and cash equivalents, accounts receivable and accounts
payable, the carrying amount is a reasonable estimate of fair
value because of the liquidity and short-term nature of these
instruments.
o The carrying values of our investment in the Patient Care warrant
in 2005 and the Note receivable due from Patient Care are
considered to be the best indicator of fair value available. As
mentioned in Note 7 above, we recorded an impairment charge of
$1.4 million with respect to the Patient Care warrant in
September 2006.
o For long-term debt, we calculated the fair value based either on
market quotations received from financial institutions or
discounted cash flow analysis.
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- --------------------------------------------------------------------------------
The estimated fair values of our financial instruments are as follows
(in thousands):
December 31,
-------------------------------------------------------------
2006 2005
--------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ----------- --------------- -----------------
Other investments--
Investment in Patient Care warrant $ - $ - $ 1,445 $ 1,445
Note receivable 14,701 14,701 12,500 12,500
--------------- ----------- --------------- -----------------
Total other investments $ 14,701 $ 14,701 $ 13,945 $ 13,945
============== =========== =============== =================
Long-term debt $ 150,540 $ 155,040 $ 235,103 $ 244,091
18. Earnings Per Share
The computation of earnings per share follows (in thousands, except per
share data):
Income from Continuing Operations Net Income
--------------------------------- --------------------------------
Income Per Income Per
Income Shares Share Income Shares Share
- ------------------------- --------- ---------- ------------ -------- ------------ ----------
2006
Earnings $57,722 26,118 $ 2.21 $50,651 26,118 $ 1.94
============ ==========
Dilutive stock options - 496 - 496
Nonvested stock awards - 55 - 55
--------- ---------- -------- ------------
Diluted earnings $57,722 26,669 $ 2.16 $50,651 26,669 $ 1.90
========= ========== ============ ======== ============ ==========
2005
Earnings $36,228 25,552 $ 1.42 $35,817 25,552 $ 1.40
============ ==========
Dilutive stock options - 666 - 666
Nonvested stock awards - 81 - 81
--------- ---------- -------- ------------
Diluted earnings $36,228 26,299 $ 1.38 $35,817 26,299 $ 1.36
========= ========== ============ ======== ============ ==========
2004
Earnings $19,095 24,120 $ 0.79 $27,512 24,120 $ 1.14
============ ==========
Dilutive stock options - 502 - 502
Nonvested stock awards - 14 - 14
--------- ---------- -------- ------------
Diluted earnings $19,095 24,636 $0.78 $27,512 24,636 $ 1.12
========= ========== ============ ======== ============ ==========
The impact of the CJSDs was excluded from the above computations in
2004 because it was antidilutive to earnings per share for all periods. All of
the remaining CJSDs were either converted or retired as of May 18, 2004. The
debentures were convertible into an average of 274,000 shares for the year ended
December 31, 2004.
During 2006, 369,850 stock options granted in June 2006 at an exercise
price of $51.76 were excluded from the computation of diluted earnings per share
as their exercise prices were greater than the average market price during most
of the year. During 2005 and 2004, there were no options outstanding whose
exercise price exceeded the average market price for the year.
19. Loans Receivable from Independent Contractors
At December 31, 2006, we had contractual arrangements with 61
independent contractors to provide plumbing repair and drain cleaning services
under sublicensing agreements using the Roto-Rooter name in lesser-populated
areas of the United States and Canada. The arrangements give the independent
contractors the right to conduct a plumbing and drain cleaning business using
the Roto-Rooter name in a specified territory in exchange for a royalty based on
a percentage of labor sales, generally approximately 40%. We also pay for yellow
pages advertising in these areas, provide certain capital equipment and provide
operating manuals to serve as resources for operating a plumbing and drain
28
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
cleaning business. The contracts are generally cancelable upon 90 days' written
notice (without cause) or upon a few days' notice (with cause). The independent
contractors are responsible for running the businesses as they believe best.
Our maximum exposure to loss from arrangements with our independent
contractors at December 31, 2006, is approximately $1.9 million ($2.6 million at
December 31, 2005). The exposure to loss is mainly the result of loans given to
the independent contractors. In most cases, these loans are partially secured by
receivables and equipment owned by the independent contractor. The interest
rates on the loans range from zero to 8% per annum, and the remaining terms of
the loans range from 2.5 months to 5.4 years at December 31, 2006. During 2006,
we recorded revenues of $19.2 million (2005--$18.1 million; 2004--$16.4 million)
and pretax profits of $6.9 million (2005--$6.0 million; 2004--$5.1 million) from
all of our independent contractors.
20. Litigation
We are party to a class action lawsuit filed in the Third Judicial
Circuit Court of Madison County, Illinois in June of 2000 by Robert Harris,
alleging certain Roto-Rooter plumbing was performed by unlicensed employees. We
contested these allegations and believe them without merit. Plaintiff moved for
certification of a class of customers in 32 states who allegedly paid for
plumbing work performed by unlicensed employees. Plaintiff also moved for
partial summary judgment on grounds the licensed apprentice plumber who
installed his faucet did not work under the direct personal supervision of a
licensed master plumber. On June 19, 2002, the trial judge certified an
Illinois-only plaintiffs class and granted summary judgment for the named party
Plaintiff on the issue of liability, finding violation of the Illinois Plumbing
License Act and the Illinois Consumer Fraud Act through Roto-Rooter's
representation of the licensed apprentice as a plumber. The court did not rule
on certification of a class in the remaining 31 states. In December 2004, we
reached a resolution of this matter with the Plaintiff and accrued $3.1 million
as the anticipated cost of settling this litigation. The court approved this
settlement in July 2006.
Like other large California employers, our VITAS subsidiary faces
allegations of purported class-wide wage and hour violations. It was party to a
class action lawsuit filed in the Superior Court of California, Los Angeles
County, in April of 2004 by Ann Marie Costa, Ana Jimenez, Mariea Ruteaya and
Gracetta Wilson ("Costa"). This case alleged failure to pay overtime wages for
hours worked "off the clock" on administrative tasks, including voicemail
retrieval, time entry, travel to and from work, and pager response. This case
also alleged VITAS failed to provide meal and break periods to a purported class
of California nurses, home health aides and licensed clinical social workers.
The case also sought payment of penalties, interest, and Plaintiffs' attorney
fees. VITAS contested these allegations.
Plaintiff moved for class certification, and VITAS opposed this motion.
We reached an agreement with the Plaintiff class in order to avoid the
uncertainty of litigation and the diversion of resources and personnel resulting
from the litigation. In connection with our acquisition of VITAS in February
2004, we recorded a liability of $2.3 million on VITAS' opening balance sheet
for this case. At that time, this represented our best estimate of our exposure
in the matter. As a result of the tentative resolution, we recorded a pretax
charge of $17.4 million ($10.8 million aftertax) in the fourth quarter of 2005,
representing the portion of this settlement not accounted for on VITAS' opening
balance sheet. These amounts are inclusive of Plaintiffs' class attorneys' fees
and the costs of settlement administration. On June 26, 2006, the court granted
final approval of the settlement ($19.9 million).
VITAS is party to a class action lawsuit filed in the Superior Court of
California, Los Angeles County, in September 2006 by Bernadette Santos, Keith
Knoche and Joyce White ("Santos"). This case, filed by the Costa case
Plaintiffs' counsel, makes similar allegations of failure to pay overtime and
failure to provide meal and rest periods to a purported class of California
admissions nurses, chaplains and sales representatives. The case likewise seeks
payment of penalties, interest and Plaintiffs' attorney fees. VITAS contests
these allegations. The lawsuit is in its early stage and we are unable to
estimate our potential liability, if any, with respect to these allegations.
Regardless of outcome, defense of litigation adversely affects us
through defense costs, diversion of our time and related publicity. In the
normal course of business, we are a party to various claims and legal
proceedings. We record a reserve for these matters when an adverse outcome is
probable and the amount of the potential liability is reasonably estimable.
21. OIG Investigation
On April 7, 2005, we announced the Office of Inspector General ("OIG")
for the Department of Health and Human Services served VITAS with civil
subpoenas relating to VITAS' alleged failure to appropriately bill Medicare and
Medicaid for hospice services. As part of this investigation, the OIG selected
medical records for 320 past and current patients from VITAS' three largest
programs for review. It also sought policies and procedures dating back to 1998
covering admissions, certifications, recertifications and discharges. During the
third quarter of 2005 and again in May 2006, the OIG requested additional
information from us. A qui tam complaint has been filed in U.S. District Court
for the Southern District of Florida. We are conferring with the U.S. Attorney
regarding our defenses to the complaint allegations. The U.S. Attorney has not
decided whether to intervene in the qui tam action. We have incurred pretax
29
EXHIBIT 99
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expense related to complying with OIG requests and defending the litigation of
$1.1 million and $637,000 for the years ended December 31, 2006 and 2005,
respectively.
The government continues to investigate the complaint's allegations,
against which VITAS is presently defending. We are unable to predict the outcome
of this matter or the impact, if any, that the investigation may have on the
business, results of operations, liquidity or capital resources. Regardless of
outcome, responding to the subpoenas and defending the litigation can adversely
affect us through defense costs, diversion of our time and related publicity.
22. Related Party Transactions
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term. In June 2004, VITAS entered into a pharmacy
services agreement with excelleRx. The agreement has a one-year term and
automatically renews unless either party provides a 90-day written termination
notice. Subsequent to June 2004, OCR acquired excelleRx. Under both agreements,
VITAS made purchases of $30.4 million , $16.2 million and $344,000 for the years
ended December 31, 2006, 2005 and 2004, respectively and has accounts payable of
$4.0 million at December 31, 2006. Mr. E. L. Hutton is non-executive Chairman of
the Board and a director of the Company and OCR. Mr. Joel F. Gemunder, President
and Chief Executive Officer of OCR, Mr. Charles H. Erhart, Jr. and Ms. Sandra
Laney are directors of both OCR and the Company. Mr. Kevin J. McNamara,
President, Chief Executive Officer and a director of the Company, is a director
emeritus of OCR. We believe that the terms of these agreements are no less
favorable to VITAS than we could negotiate with an unrelated party.
23. Capital Stock Transactions
In July 2006, we announced a $50 million on-going stock repurchase
program. Our previous stock repurchase program approved in February 2000 had
remaining authorization of $8 million. For the year ended December 31, 2006, we
repurchased 433,580 shares at a weighted average cost per share of $36.01 under
the July 2006 and February 2000 programs.
On May 15, 2006, our shareholders approved an amendment to our
Certificate of Incorporation increasing the number of authorized shares of
capital stock from 40 million shares to 80 million shares.
On March 11, 2005, our Board of Directors approved a 2-for-1 stock
split in the form of a 100% stock dividend to shareholders of record at the
close of business on April 22, 2005. This stock split was paid May 11, 2005.
Under Delaware law, the par value of the capital stock remains $1 per share.
24. Change in Accounting Principle
Effective September 30, 2006, we changed the date of our annual
goodwill impairment analysis to October 1. Previously, we performed this annual
goodwill impairment test on December 31. We believe this change in accounting
principle is preferable because the new date coincides with the Federal
government's fiscal year end of September 30 and therefore allows for a better
estimation of the Medicare related cash flows of our VITAS business. Medicare
pays in excess of 90% of VITAS' revenue. Of the total goodwill recorded as of
September 30, 2006, approximately 75% is related to VITAS. Due to the Medicare
Cap discussed above, October 1 is the date when cash flows from our hospice
programs are most predictable. The change in accounting principle will have no
effect on our consolidated financial statements.
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25. Guarantor Subsidiaries -Subsequent Event
Our 1.875% Senior Convertible Notes issued on May 14, 2007, as more
fully described in our Form 10-Q filing for the quarter ended June 30, 2007, are
fully and unconditionally guaranteed on an unsecured, joint and severally liable
basis by certain of our 100% owned subsidiaries. The equity method has been used
with respect to the parent company's (Chemed) investment in subsidiaries. No
consolidating adjustment column is presented for the condensed consolidating
statement of cash flow since there were no significant consolidating entries for
the periods presented. The following condensed, consolidating financial data
presents the composition of the parent company, the guarantor subsidiaries and
the non-guarantor subsidiaries as of December 31, 2006 and 2005 and for the
periods ended December 31, 2006, 2005 and 2004 (in thousands):
Condensed Consolidating Balance Sheet
-------------------------------------
December 31, 2006
- -----------------
Guarantor Non-Guarantor Consolidating
Parent Subsidiaries Subsidiaries Adjustments Consolidated
---------- ------------ ------------- ------------- ------------
ASSETS
Cash and cash equivalents $ 25,258 $(1,314) $ 5,330 $ - $ 29,274
Accounts receivable, less allowances 1,547 91,065 474 - 93,086
Intercompany receivables 84,784 - - (84,784) -
Inventories - 6,169 409 - 6,578
Current deferred income taxes (117) 17,591 315 - 17,789
Current assets of discontinued operations - 5,418 - - 5,418
Prepaid expenses and other current assets 809 9,087 72 - 9,968
---------- ------------ ------------- ------------- ------------
Total current assets 112,281 128,016 6,600 (84,784) 162,113
---------- ------------ ------------- ------------- ------------
Investments of deferred compensation plans held
in trust 12,214 13,499 - - 25,713
Note receivable 14,701 - - - 14,701
Properties and equipment, at cost, less
accumulated depreciation 6,412 62,023 1,705 - 70,140
Identifiable intangible assets less accumulated
amortization - 69,213 2 - 69,215
Goodwill - 430,671 4,379 - 435,050
Noncurrent assets of discontinued operations - 287 - - 287
Other assets 12,845 2,514 709 - 16,068
Investments in subsidiaries 430,399 8,628 - (439,027) -
---------- ------------ ------------- ------------- ------------
Total assets $588,852 $714,851 $13,395 $(523,811) $793,287
========== ============ ============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ (189) $ 49,502 $ 431 $ - $ 49,744
Intercompany payables - 84,036 748 (84,784) -
Current portion of long-term debt - 209 - - 209
Income taxes (5,906) 11,680 991 - 6,765
Accrued insurance 2,938 35,519 - - 38,457
Accrued salaries and wages 2,530 32,731 729 - 35,990
Current liabilities of discontinued operations - 12,215 - - 12,215
Other current liabilities 9,568 11,715 1,401 - 22,684
---------- ------------ ------------- ------------- ------------
Total current liabilities 8,941 237,607 4,300 (84,784) 166,064
---------- ------------ ------------- ------------- ------------
Deferred income taxes (6,946) 32,780 467 - 26,301
Long-term debt 150,000 331 - - 150,331
Deferred compensation liabilities 12,247 13,267 - - 25,514
Other liabilities 3,249 467 - - 3,716
Stockholders' equity 421,361 430,399 8,628 (439,027) 421,361
---------- ------------ ------------- ------------- ------------
Total liabilities and stockholders' equity $588,852 $714,851 $13,395 $(523,811) $793,287
========== ============ ============= ============= ============
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- --------------------------------------------------------------------------------
December 31, 2005
- ----------------- Guarantor Non-Guarantor Consolidating
Parent Subsidiaries Subsidiaries Adjustments Consolidated
----------- ------------- ------------- -------------- ------------
ASSETS
Cash and cash equivalents $ 54,871 $ (1,419) $ 3,681 $ - $ 57,133
Accounts receivable, less allowances 4,912 85,501 681 - 91,094
Intercompany receivables 154,355 - - (154,355) -
Inventories - 6,124 375 - 6,499
Prepaid income taxes 8,931 (845) 65 - 8,151
Current deferred income taxes 548 25,967 212 - 26,727
Current assets of discontinued operations - 5,189 - - 5,189
Prepaid expenses and other current assets 2,479 7,224 64 - 9,767
----------- ------------- ------------- -------------- ------------
Total current assets 226,096 127,741 5,078 (154,355) 204,560
----------- ------------- ------------- -------------- ------------
Investments of deferred compensation plans held
in trust 10,223 10,882 - - 21,105
Other investments 1,445 - - - 1,445
Note receivable 12,500 - - - 12,500
Properties and equipment, at cost, less
accumulated depreciation 6,756 56,867 1,532 - 65,155
Identifiable intangible assets less accumulated
amortization - 72,883 5 - 72,888
Goodwill - 428,255 4,341 - 432,596
Noncurrent assets of discontinued operations - 7,632 - - 7,632
Other assets 13,372 7,187 663 - 21,222
Investments in subsidiaries 371,274 5,888 - (377,162) -
----------- ------------- ------------- -------------- ------------
Total assets $641,666 $717,335 $11,619 $ (531,517) $839,103
=========== ============= ============= ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ (701) $ 43,889 $ 249 $ - $ 43,437
Intercompany payables - 152,171 2,184 (154,355) -
Current portion of long-term debt 850 195 - - 1,045
Income taxes (4,184) 7,267 1,106 - 4,189
Accrued insurance 4,503 33,906 - - 38,409
Accrued salaries and wages 2,375 29,946 642 - 32,963
Current liabilities of discontinued operations - 3,339 - - 3,339
Other current liabilities 13,211 31,369 1,243 - 45,823
----------- ------------- ------------- -------------- ------------
Total current liabilities 16,054 302,082 5,424 (154,355) 169,205
----------- ------------- ------------- -------------- ------------
Deferred income taxes (6,149) 31,854 307 - 26,012
Long-term debt 233,513 545 - - 234,058
Deferred compensation liabilities 10,258 11,017 - - 21,275
Noncurrent liabilities of discontinued
operations - 4 - - 4
Other liabilities 3,815 559 - - 4,374
Stockholders' equity 384,175 371,274 5,888 (377,162) 384,175
----------- ------------- ------------- -------------- ------------
Total liabilities and stockholders' equity $641,666 $717,335 $11,619 $ (531,517) $839,103
=========== ============= ============= ============== ============
32
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- --------------------------------------------------------------------------------
Condensed Consolidating Income Statement
----------------------------------------
For the year ended December 31, 2006
- ------------------------------------ Guarantor Non-Guarantor Consolidating
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------------ -------------- -------------- -------------- -------------
Continuing Operations
Net sales and service revenues $ - $ 996,714 $ 21,873 $ - $1,018,587
------------ -------------- -------------- -------------- -------------
Cost of services provided and goods sold - 719,074 11,049 - 730,123
Selling, general and administrative expenses 11,239 144,276 5,668 - 161,183
Depreciation 479 15,710 586 - 16,775
Amortization 1,267 3,985 3 - 5,255
Other expenses - net - 272 - - 272
------------ -------------- -------------- -------------- -------------
Total costs and expenses 12,985 883,317 17,306 - 913,608
------------ -------------- -------------- -------------- -------------
Income/ (loss) from operations (12,985) 113,397 4,567 - 104,979
Interest expense (16,909) (541) (18) - (17,468)
Loss on extinguishment of debt (430) - - - (430)
Investment impairment charge (1,445) - - - (1,445)
Other income - net 21,742 (17,107) 13 - 4,648
------------ -------------- -------------- -------------- -------------
Income/ (loss) before income taxes (10,027) 95,749 4,562 - 90,284
Income tax (provision)/ benefit 3,818 (34,491) (1,889) - (32,562)
Equity in net income of subsidiaries 59,059 2,673 - (61,732) -
------------ -------------- -------------- -------------- -------------
Income from continuing operations 52,850 63,931 2,673 (61,732) 57,722
Discontinued Operations (2,199) (4,872) - - (7,071)
------------ -------------- -------------- -------------- -------------
Net income $ 50,651 $ 59,059 $ 2,673 $ (61,732) $ 50,651
============ ============== ============== ============== =============
For the year ended December 31, 2005
- ------------------------------------ Guarantor Non-Guarantor Consolidating
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------------ -------------- -------------- -------------- --------------
Continuing Operations
Net sales and service revenues $ - $ 896,085 $ 19,885 $ - $ 915,970
------------ -------------- -------------- -------------- --------------
Cost of services provided and goods sold - 634,670 9,806 - 644,476
Selling, general and administrative expenses 13,132 138,828 5,302 - 157,262
Depreciation 442 15,189 519 - 16,150
Amortization 886 4,027 9 - 4,922
Other (income)/expenses - net (959) 17,350 - - 16,391
------------ -------------- -------------- -------------- --------------
Total costs and expenses 13,501 810,064 15,636 - 839,201
------------ -------------- -------------- -------------- --------------
Income/ (loss) from operations (13,501) 86,021 4,249 - 76,769
Interest expense (20,548) (695) (21) - (21,264)
Loss on extinguishment of debt (3,971) - - - (3,971)
Other income - net 22,362 (19,224) (16) - 3,122
------------ -------------- -------------- -------------- --------------
Income/ (loss) before income taxes (15,658) 66,102 4,212 - 54,656
Income tax (provision)/ benefit 6,935 (23,259) (2,104) - (18,428)
Equity in net income of subsidiaries 42,936 2,108 - (45,044) -
------------ -------------- -------------- -------------- --------------
Income from continuing operations 34,213 44,951 2,108 (45,044) 36,228
Discontinued Operations 1,604 (2,015) - - (411)
------------ -------------- -------------- -------------- --------------
Net income $ 35,817 $ 42,936 $ 2,108 $ (45,044) $ 35,817
============ ============== ============== ============== ==============
33
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- --------------------------------------------------------------------------------
For the year ended December 31, 2004
- ------------------------------------ Guarantor Non-Guarantor Consolidating
Parent Subsidiaries Subsidiaries Adjustments Consolidated
------------ -------------- -------------- -------------- --------------
Continuing Operations
Net sales and service revenues $ - $ 717,091 $ 17,786 $ - $ 734,877
------------ -------------- -------------- -------------- --------------
Cost of services provided and goods sold - 497,867 8,903 - 506,770
Selling, general and administrative expenses 18,944 123,022 5,098 - 147,064
Depreciation 354 13,684 504 - 14,542
Amortization 311 3,453 15 - 3,779
Other (income)/expenses - net (47) 4,815 - - 4,768
------------ -------------- -------------- -------------- --------------
Total costs and expenses 19,562 642,841 14,520 - 676,923
------------ -------------- -------------- -------------- --------------
Income/ (loss) from operations (19,562) 74,250 3,266 - 57,954
Interest expense (20,824) (334) - - (21,158)
Loss on extinguishment of debt (3,330) - - - (3,330)
Other income - net 7,344 (3,863) (11) - 3,470
------------ -------------- -------------- -------------- --------------
Income/ (loss) before income taxes (36,372) 70,053 3,255 - 36,936
Income tax (provision)/ benefit 15,073 (27,491) (1,318) - (13,736)
Equity in loss of affiliate - (4,105) - - (4,105)
Equity in net income of subsidiaries 37,273 1,937 - (39,210) -
------------ -------------- -------------- -------------- --------------
Income from continuing operations 15,974 40,394 1,937 (39,210) 19,095
Discontinued Operations 11,538 (3,121) - - 8,417
------------ -------------- -------------- -------------- --------------
Net income $ 27,512 $ 37,273 $ 1,937 $ (39,210) $ 27,512
============ ============== ============== ============== ==============
Condensed Consolidating Statement of Cash Flow
----------------------------------------------
For the year ended December 31, 2006 Guarantor Non-Guarantor
- ------------------------------------
Parent Subsidiaries Subsidiaries Consolidated
------------- --------------- --------------- ---------------
Cash Flow from Operating Activities:
- -------------------------------------
Net cash provided by operating activities $ 6,326 $ 88,434 $ 3,829 $ 98,589
------------- --------------- --------------- ---------------
Cash Flow from Investing Activities:
- -------------------------------------
Capital expenditures (138) (21,073) (776) (21,987)
Business combinations, net of cash acquired - (4,145) - (4,145)
Net payments from sale of discontinued operations (922) - - (922)
Proceeds from sale of property and equipment 43 271 33 347
Investing activities of discontinued operations - (260) - (260)
Other sources and uses - net (781) 16 - (765)
------------- --------------- --------------- ---------------
Net cash used by investing activities (1,798) (25,191) (743) (27,732)
------------- --------------- --------------- ---------------
Cash Flow from Financing Activities:
- -------------------------------------
Increase/(decrease) in cash overdrafts payable (489) 3,060 - 2,571
Change in intercompany accounts 67,502 (66,065) (1,437) -
Dividends paid to shareholders (6,322) - - (6,322)
Purchases of treasury stock (19,885) - - (19,885)
Proceeds from exercise of stock options 3,861 - - 3,861
Excess tax benefit on share-based compensation 5,600 - - 5,600
Debt issuance costs (154) - - (154)
Repayment of long-term debt (84,363) (200) - (84,563)
Financing activities of discontinued operations 109 67 - 176
------------- --------------- --------------- ---------------
Net cash used by financing activities (34,141) (63,138) (1,437) (98,716)
------------- --------------- --------------- ---------------
Net increase/(decrease) in cash and cash equivalents (29,613) 105 1,649 (27,859)
Cash and cash equivalents at beginning of year 54,871 (1,419) 3,681 57,133
------------- --------------- --------------- ---------------
Cash and cash equivalents at end of year $ 25,258 $ (1,314) $ 5,330 $ 29,274
============= =============== =============== ===============
34
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
For the year ended December 31, 2005 Guarantor Non-Guarantor
- ------------------------------------
Parent Subsidiaries Subsidiaries Consolidated
------------- --------------- --------------- ---------------
Cash Flow from Operating Activities:
- -------------------------------------
Net cash provided by operating activities $ 16,337 $ 59,702 $ 3,974 $ 80,013
------------- --------------- --------------- ---------------
Cash Flow from Investing Activities:
- -------------------------------------
Capital expenditures (443) (24,588) (703) (25,734)
Business combinations, net of cash acquired - (6,165) - (6,165)
Net payments from sale of discontinued operations (9,367) - - (9,367)
Proceeds from sale of property and equipment 1 153 3 157
Investing activities of discontinued operations - (239) - (239)
Other uses - net (379) (15) - (394)
------------- --------------- --------------- ---------------
Net cash used by investing activities (10,188) (30,854) (700) (41,742)
------------- --------------- --------------- ---------------
Cash Flow from Financing Activities:
- -------------------------------------
Increase in cash overdrafts payable 963 5,789 - 6,752
Change in intercompany accounts 45,051 (42,322) (2,729) -
Dividends paid to shareholders (6,172) - - (6,172)
Purchases of treasury stock (7,401) - - (7,401)
Proceeds from exercise of stock options 12,327 - - 12,327
Proceeds from issuance of long-term debt 85,000 - - 85,000
Debt issuance costs (1,755) - - (1,755)
Repayment of long-term debt (141,125) (467) - (141,592)
Other sources - net 34 221 - 255
------------- --------------- --------------- ---------------
Net cash used by financing activities (13,078) (36,779) (2,729) (52,586)
------------- --------------- --------------- ---------------
Net increase/(decrease) in cash and cash equivalents (6,929) (7,931) 545 (14,315)
Cash and cash equivalents at beginning of year 61,800 6,512 3,136 71,448
------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 54,871 $ (1,419) $ 3,681 $ 57,133
============= =============== =============== ===============
35
EXHIBIT 99
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------
For the year ended December 31, 2004 Guarantor Non-Guarantor
- ------------------------------------
Parent Subsidiaries Subsidiaries Consolidated
------------- --------------- --------------- ---------------
Cash Flow from Operating Activities:
- -------------------------------------
Net cash provided by operating activities $ 1,256 $ 88,006 $ 3,628 $ 92,890
------------- --------------- --------------- ---------------
Cash Flow from Investing Activities:
- -------------------------------------
Capital expenditures (785) (17,117) (388) (18,290)
Business combinations, net of cash acquired - (343,051) - (343,051)
Net payments from sale of discontinued operations (759) - - (759)
Vitas escrow deposit - 10,000 - 10,000
Proceeds from sale of property and equipment - 772 - 772
Investing activities of discontinued operations - (1,774) - (1,774)
Other uses - net (78) (29) - (107)
------------- --------------- --------------- ---------------
Net cash used by investing activities (1,622) (351,199) (388) (353,209)
------------- --------------- --------------- ---------------
Cash Flow from Financing Activities:
- -------------------------------------
Increase/(decrease) in cash overdrafts payable (1,730) 2,995 - 1,265
Change in intercompany accounts (260,346) 262,268 (1,922) -
Dividends paid to shareholders (5,718) - - (5,718)
Purchases of treasury stock (2,654) - - (2,654)
Issuance of capital stock, net of costs 95,102 - - 95,102
Proceeds from exercise of stock options 3,721 - - 3,721
Collection of stock subscription receivable - 8,053 - 8,053
Proceeds from issuance of long-term debt 295,000 - - 295,000
Debt issuance costs (14,447) - - (14,447)
Repayment of long-term debt (96,560) (380) - (96,940)
Redemption of junior subordinated securities (2,735) - - (2,735)
Financing activities of discontinued operations - (255) - (255)
Other sources - net 423 264 - 687
------------- --------------- --------------- ---------------
Net cash provided/ (used) by financing activities 10,056 272,945 (1,922) 281,079
------------- --------------- --------------- ---------------
Net increase in cash and cash equivalents 9,690 9,752 1,318 20,760
Cash and cash equivalents at beginning of year 52,110 (3,240) 1,818 50,688
------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 61,800 $ 6,512 $ 3,136 $ 71,448
============= =============== =============== ===============
36
EXHIBIT 99
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
First Second Third Fourth Total
For the Year Ended December 31, 2006 Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------------------------------
Continuing Operations
Total service revenues and sales $243,921 $249,068 $253,695 $ 271,903 $1,018,587
========= ========== ========= ========== =============
Gross profit $ 67,886 $ 69,965 $ 68,296 $ 82,317 $ 288,464
========= ========== ========= ========== =============
Income from operations $ 24,004 $ 25,945 $ 23,359 $ 31,671 $ 104,979
Interest expense (5,345) (4,300) (4,081) (3,742) (17,468)
Loss from impairment of investment - - (1,445) - (1,445)
Loss on extinguishment of debt (430) - - - (430)
Other income--net 1,495 524 715 1,914 4,648
--------- ---------- --------- ---------- -------------
Income before income taxes 19,724 22,169 18,548 29,843 90,284
Income taxes (7,686) (8,619) (5,673) (10,584) (32,562)
--------- ---------- --------- ---------- -------------
Income from continuing operations (a) 12,038 13,550 12,875 19,259 57,722
Discontinued Operations 177 (708) (4,914) (1,626) (7,071)
--------- ---------- --------- ---------- -------------
Net Income (a) $ 12,215 $ 12,842 $ 7,961 $ 17,633 $ 50,651
========= ========== ========= ========== =============
Earnings Per Share (a)
Income from continuing operations $ 0.46 $ 0.52 $ 0.49 $ 0.74 $ 2.21
========= ========== ========= ========== =============
Net income $ 0.47 $ 0.49 $ 0.30 $ 0.68 $ 1.94
========= ========== ========= ========== =============
Diluted Earnings Per Share (a)
Income from continuing operations $ 0.45 $ 0.50 $ 0.48 $ 0.73 $ 2.16
========= ========== ========= ========== =============
Net income $ 0.46 $ 0.48 $ 0.30 $ 0.67 $ 1.90
========= ========== ========= ========== =============
Average number of shares outstanding
Earnings per share 26,044 26,201 26,190 26,030 26,118
========= ========== ========= ========== =============
Diluted earnings per share 26,723 26,846 26,633 26,411 26,669
========= ========== ========= ========== =============
- -----------------------------------------------
(a) The following amounts are included in income from continuing operations during the respective
quarter (in thousands):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------
Pretax (cost)/benefit:
Legal expenses incurred in connection
with the Office of Inspector General
investigation $ (132) $ (342) $ (344) $ (250) $ (1,068)
Prepayment penalty and write-off of debt
issuance costs related to early
extinguishment and refinancing of debt (430) - - - (430)
Stock option expense - (18) (597) (596) (1,211)
Costs related to class action litigation - - (272) - (272)
Loss from impairment of investment - - (1,445) - (1,445)
Other - - - 467 467
--------- ---------- --------- ---------- -------------
Total $ (562) $ (360) $ (2,658) $ (379) $ (3,959)
========= ========== ========= ========== =============
Aftertax (cost)/benefit:
Legal expenses incurred in connection
with the Office of Inspector General
investigation: $ (82) $ (212) $ (213) $ (155) $ (662)
Prepayment penalty and write-off of debt
issuance costs related to early
extinguishment and refinancing of debt (273) - - - (273)
Tax adjustments and settlements from prior
year returns - - 1,791 324 2,115
Stock option expense - (12) (379) (378) (769)
Costs related to class action litigation - - (169) - (169)
Loss from impairment of investment - - (918) - (918)
Other - - - 296 296
--------- ---------- --------- ---------- -------------
Total $ (355) $ (224) $ 112 $ 87 $ (380)
========= ========== ========= ========== =============
37
EXHIBIT 99
UNAUDITED SUMMARY OF QUARTERLY RESULTS
Chemed Corporation and Subsidiary Companies
- -------------------------------------------------------------------------------------------------
(in thousands, except per share data)
First Second Third Fourth Total
For the Year Ended December 31, 2005 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------
Continuing Operations
Total service revenues and sales $216,068 $223,271 $230,892 $ 245,739 $ 915,970
========== ========== ========== ========== ==========
Gross profit $ 64,842 $ 64,035 $ 67,476 $ 75,141 $ 271,494
========== ========== ========== ========== ==========
Income from operations $ 21,837 $ 20,941 $ 23,880 $ 10,111 $ 76,769
Interest expense (5,835) (5,039) (5,147) (5,243) (21,264)
Loss on extinguishment of debt (3,971) - - - (3,971)
Other income--net 727 601 1,315 479 3,122
---------- ---------- ---------- ---------- ----------
Income before income taxes 12,758 16,503 20,048 5,347 54,656
Income taxes (5,312) (6,016) (5,753) (1,347) (18,428)
---------- ---------- ---------- ---------- ----------
Income from continuing operations (a) 7,446 10,487 14,295 4,000 36,228
Discontinued Operations 670 (1,602) 337 184 (411)
---------- ---------- ---------- ---------- ----------
Net Income (a) $ 8,116 $ 8,885 $ 14,632 $ 4,184 $ 35,817
========== ========== ========== ========== ==========
Earnings Per Share (a)
Income from continuing operations $ 0.30 $ 0.41 $ 0.56 $ 0.15 $ 1.42
========== ========== ========== ========== ==========
Net income $ 0.32 $ 0.35 $ 0.57 $ 0.16 $ 1.40
========== ========== ========== ========== ==========
Diluted Earnings Per Share (a)
Income from continuing operations $ 0.29 $ 0.40 $ 0.54 $ 0.15 $ 1.38
========== ========== ========== ========== ==========
Net income $ 0.31 $ 0.34 $ 0.55 $ 0.16 $ 1.36
========== ========== ========== ========== ==========
Average number of shares outstanding
Earnings per share 25,152 25,489 25,719 25,858 25,552
========== ========== ========== ========== ==========
Diluted earnings per share 25,910 26,214 26,401 26,590 26,299
========== ========== ========== ========== ==========
- -----------------------------------------
(a) The following amounts are included in income from continuing operations during the
respective quarter (in thousands):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------------------------------------------------
Pretax (cost)/benefit:
Long-term incentive plan payout $ (1,109) $ (1,837) $ - $ (2,531) $ (5,477)
Legal expenses incurred in
connection with the Office of
Inspector General investigation - (254) (310) (73) (637)
Adjustment to casualty insurance
related to prior periods
experience 1,663 - - - 1,663
Prepayment penalty and write-off of
debt issuance costs related to
early extinguishment and
refinancing of debt
(3,971) - - - (3,971)
Adjustment of transaction-related
expenses of the VITAS acquisition - 671 130 158 959
Costs related to class action
litigation - - - (17,350) (17,350)
Cost of accelerating vesting of
stock options (215) - - - (215)
---------- ---------- ---------- ---------- ----------
Total $ (3,632) $ (1,420) $ (180) $ (19,796) $ (25,028)
========== ========== ========== ========== ==========
Aftertax (cost)/benefit:
Long-term incentive plan payout $ (695) $ (1,152) $ - $ (1,587) $ (3,434)
Legal expenses incurred in
connection with the Office of
Inspector General investigation: - (160) (192) (45) (397)
Adjustment to casualty insurance
related to prior periods
experience 1,014 - - - 1,014
Prepayment penalty and write-off of
debt issuance costs related to
early extinguishment and
refinancing of debt (2,523) - - - (2,523)
Tax adjustments and settlements
from prior year returns - - 1,787 174 1,961
Adjustment of transaction-related
expenses of the VITAS acquisition - 671 130 158 959
Costs related to class action
litigation - - - (10,757) (10,757)
Cost of accelerating vesting of
stock options (137) - - - (137)
---------- ---------- ---------- ---------- ----------
Total $ (2,341) $ (641) $ 1,725 $ (12,057) $ (13,314)
========== ========== ========== ========== ==========
38