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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2003
Commission File Number 1-8351
ROTO-ROOTER, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2600 Chemed Center, 255 E. Fifth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip code)
(513) 762-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Amount Date
Capital Stock 9,824,542 Shares April 30, 2003
$1 Par Value
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Page 1 of 20
EXPLANATORY NOTE
This quarterly report on Form 10-Q/A ("Form 10-Q/A") is being filed to
amend and restate in its entirety the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2003, which was filed with the SEC on May 9,
2003 ("Original Form 10-Q"). Accordingly, pursuant to rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the Form 10-Q/A contains the
complete text of items 1, 2, 4 and 6, as amended, as well as certain currently
dated certifications.
In October 2003, Roto-Rooter, Inc. ("Company"), in consultation with its
independent accountants, reevaluated its accounting for Yellow Pages costs and
concluded these costs did not qualify for capitalization as direct-response
advertising under Statement of Position 93-7, Reporting on Advertising Costs,
which for the Company was effective January 1, 1995. In its previously-filed
financial statements, the Company capitalized and amortized these costs over the
lives of the directories, typically 12 months.
Accordingly, the Company's consolidated financial statements as of and
for the three months ended March 31, 2003 and 2002 and as of December 31, 2002
have been restated to recognize Yellow Pages advertising expenses when the
directories are placed in circulation rather than to capitalize and amortize
such costs.
The amendments contained herein reflect changes resulting from the
foregoing adjustments with regard to deferred advertising and the related income
tax effect. The Company has not updated the information contained herein for
events and transactions occurring subsequent to May 9, 2003, the filing date of
the Original Form 10-Q, except to reflect the restatement of the Company's
financial statements for the periods indicated above and except for the
following:
- On May 19, 2003, the shareholders of Chemed Corporation approved
changing the Company's name to Roto-Rooter, Inc.
- In the second quarter of 2003, the Company redefined its segments to
merge the Roto-Rooter Group and corporate office overhead into a single
segment now called the Plumbing and Drain Cleaning segment. All segment
data have been reclassified to reflect this change.
- Disclosures in Management's Discussion and Analysis of Financial
Condition and Results of Operations have been expanded.
Events have taken place that would have been reflected
Page 2 of 20
in the Original Form 10-Q if they had taken place prior to the date of the
original filing. The Company recommends this report be read in conjunction with
the Company's reports filed subsequent to May 9, 2003.
Page 3 of 20
ROTO-ROOTER, INC. AND
SUBSIDIARY COMPANIES
Index
Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2003 and
December 31, 2002 5
Consolidated Statement of Income -
Three months ended
March 31, 2003 and 2002 6
Consolidated Statement of Cash Flows -
Three months ended
March 31, 2003 and 2002 7
Notes to Unaudited Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Page 4 of 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
March 31, December 31,
2003 2002*
--------- ----------
(RESTATED-SEE NOTE 2)
ASSETS
Current assets
Cash and cash equivalents $ 43,625 $ 37,731
Accounts receivable, less allowances of $3,392
(2002-$3,309) 13,103 14,643
Inventories 9,090 9,493
Statutory deposits 10,536 12,323
Current deferred income taxes 9,705 9.894
Prepaid expenses and other current assets 6,130 7,716
---------- ----------
Total current assets 92,189 91,800
Investments of deferred compensation plans held in trust 15,000 15,176
Other investments 32,789 37,326
Note receivable 12,500 12,500
Properties and equipment, at cost less accumulated
depreciation of $63,496 (2002-$62,370) 47,297 48,361
Identifiable intangible assets less accumulated
amortization of $7,319 (2002-$7,167) 2,739 2,889
Goodwill less accumulated amortization 111,403 110,843
Other assets 18,814 17,034
---------- ----------
Total Assets$ 332,731 $ 335,929
========== ==========
LIABILITIES
Current liabilities
Accounts payable $ 4,261 $ 5,686
Current portion of long-term debt 472 409
Income taxes 8,506 7,348
Deferred contract revenue 17,323 17,321
Accrued insurance 17,631 17,448
Other current liabilities 18,515 23,513
---------- ----------
Total current liabilities 66,708 71,725
Long-term debt 25,802 25,603
Deferred compensation liabilities 14,925 15,196
Other liabilities 11,872 10,797
---------- ----------
Total Liabilities 119,307 123,321
---------- ----------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF THE CHEMED CAPITAL TRUST 14,186 14,186
---------- ----------
STOCKHOLDERS' EQUITY
Capital stock-authorized 15,000,000 shares $1 par;
issued 13,451,281 shares (2002-13,448,475 shares) 13,451 13,448
Paid-in capital 168,568 168,299
Retained earnings 130,308 127,938
Treasury stock - 3,626,739 shares (2002-3,630,689 shares),
at cost (111,476) (111,582)
Unearned compensation (4,259) (4,694)
Deferred compensation payable in company stock 2,294 2,280
Notes receivable for shares sold (933) (952)
Accumulated other comprehensive income 1,285 3,685
---------- ----------
Total Stockholders' Equity 199,238 198,422
---------- ----------
Total Liabilities and Stockholders' Equity $ 332,731 $ 335,929
========== ==========
*Reclassified to conform with 2003 presentation.
See accompanying notes to unaudited financial statements.
Page 5 of 20
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share data)
Three Months Ended
March 31,
-----------------------
2003 2002
-------- --------
(RESTATED-SEE NOTE 2)
Continuing Operations
Service revenues and sales $ 77,645 $ 80,853
-------- --------
Cost of services provided and goods sold
(excluding depreciation) 46,152 48,508
General and administrative expenses 16,524 12,654
Selling and marketing expenses 9,533 10,606
Depreciation 3,052 3,492
-------- --------
Total costs and expenses 75,261 75,260
-------- --------
Income from operations 2,384 5,593
Interest expense (539) (773)
Distributions on preferred securities (268) (270)
Other income - net 4,262 2,589
-------- --------
Income before income taxes 5,839 7,139
Income taxes (2,282) (2,432)
-------- --------
Income from continuing operations 3,557 4,707
Discontinued operations - 867
-------- --------
Net income $ 3,557 $ 5,574
======== =======
Earnings Per Share
Income from continuing operations $ .36 $ .48
======== ========
Net income $ .36 $ .57
======== ========
Average number of shares outstanding 9,890 9,843
======== ========
Diluted Earnings Per Share
Income from continuing operations $ .36 $ .48
======== ========
Net income $ .36 $ .56
======== ========
Average number of shares outstanding 9,903 10,267
======== ========
Cash Dividends Per Share $ .12 $ .11
======== ========
See accompanying notes to unaudited financial statements.
Page 6 of 20
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
(RESTATED-SEE NOTE 2)
Cash Flows From Operating Activities
Net income $ 3,557 $ 5,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sales of available-for-sale
investments (3,544) (1,141)
Depreciation and amortization 3,236 3,696
Provision for deferred income taxes (376) 308
Provision for uncollectible accounts receivable 85 691
Discontinued operations - (867)
Changes in operating assets and liabilities,
excluding amounts acquired in business
combinations
Decrease/(increase) in accounts receivable 1,455 (139)
Decrease in inventories 403 391
Decrease in statutory deposits 1,787 773
Increase in prepaid expenses and other
current assets (266) (49)
Decrease in accounts payable, deferred
contract revenue and other current
liabilities (6,128) (8,872)
Increase in income taxes 3,215 4,793
Decrease/(increase) in other assets 7 (1,103)
Increase in other liabilities 1,335 888
Noncash expense of internally financed ESOPs 435 1,008
Other sources/(uses) (16) 804
--------- ----------
Net cash provided by continuing operations 5,185 6,755
Net cash used by discontinued operations - (116)
--------- ----------
Net cash provided by operating activities 5,185 6,639
--------- ----------
Cash Flows From Investing Activities
Proceeds from sales of available-for-sale investments 4,493 1,917
Capital expenditures (2,062) (2,530)
Net uses by discontinued operations (524) (816)
Business combinations--net of cash acquired (168) (1,229)
Proceeds from sales of property and equipment 133 1,605
Investing activities of discontinued operations - (140)
Other uses (133) (237)
--------- ----------
Net cash provided/(used) by investing activities 1,739 (1,430)
--------- ----------
Cash Flows From Financing Activities
Dividends paid (1,188) (1,083)
Issuance of capital stock 194 523
Proceeds from issuance of long-term debt - 5,000
Purchases of treasury stock (58) (3,141)
Repayment of long-term debt (144) (133)
Other sources/(uses) 166 (35)
--------- ----------
Net cash provided/(used) by financing activities (1,030) 1,131
--------- ----------
Increase in Cash and Cash Equivalents 5,894 6,340
Cash and Cash Equivalents at Beginning of Period 37,731 8,725
--------- ----------
Cash and Cash Equivalents at End of Period $ 43,625 $ 15,065
========= ==========
See accompanying notes to unaudited financial statements.
Page 7 of 20
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. On May 19, 2003, shareholders of Chemed Corporation approved changing
the company's name to Roto-Rooter, Inc. As used herein, the term Company
refers to Roto-Rooter, Inc. or Roto-Rooter, Inc. and its subsidiaries.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, they do not include all the disclosures required under
generally accepted accounting principles for complete financial
statements. However, in the opinion of the management of the Company,
the financial statements presented herein contain all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position, results of operations and cash flows of
the Company. For further information regarding the Company's accounting
policies, refer to the consolidated financial statements and notes
included in the Company's Amendment No. 1 to Form 10-K/A for the year
ended December 31, 2002.
The Company uses Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, to account for stock-based
compensation. Since the Company's stock options qualify as fixed options
under APB 25 and since the option price equals the market price on the
date of grant, there is no compensation expense for stock options. Stock
awards are expensed during the period the related services are provided.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair-value-recognition
provisions of Financial Accountings Standards Board Statement No. 123,
Accounting for Stock-Based Compensation (in thousands, except per share
date):
Three Months Ended March 31,
----------------------------
2003 2002
--------- ---------
Net income as restated $ 3,557 $ 5,574
Add: stock-based compensation
expense included in net
income as reported, net of
income tax effects 34 30
Deduct: total stock-based employee
compensation determined
under a fair-value-based
method for all stock options
and awards, net of income
tax effects (225) (105)
---------- ----------
Pro forma net income $ 3,366 $ 5,499
========== ==========
Earnings per share
As restated $ .36 $ .57
========== ==========
Pro forma $ .34 $ .56
========== ==========
Diluted earnings per share
As restated $ .36 $ .56
========== ==========
Pro forma $ .34 $ .54
========== ==========
Page 8 of 20
2. In October 2003, the Company, in consultation with its independent
accountants, reevaluated its accounting for Yellow Pages costs and
concluded these costs did not qualify for capitalization as
direct-response advertising under Statement of Position 93-7, Reporting
on Advertising Costs, which for the Company was effective January 1,
1995. In its previously filed financial statements the Company
capitalized and amortized these costs over the life of the directories,
typically 12 months.
Accordingly, the Company's consolidated financial statements as of and
for three months ended March 31, 2003 and 2002 and as of December 31,
2002 have been restated to recognize Yellow Pages advertising expenses
when the directories are placed in circulation rather than to capitalize
and amortize such costs.
The impact of the restatement on the restated components of the
Company's consolidated balance sheet is as follows (in thousands):
Reported Restated
-------- --------
December 31, 2002:
------------------
Current deferred income taxes $ 7,278 $ 9,894
Prepaid expenses and other current
assets 13,332 7,716
Total assets 338,929 335,929
Other current liabilities 22,127 23,513
Retained earnings 132,793 127,938
Total stockholders' equity 203,277 198,422
Total liabilities and stockholders'
equity 338,929 335,929
March 31, 2003:
---------------
Current deferred income taxes $ 7,631 $ 9,705
Prepaid expenses and other current
assets 12,056 6,130
Total assets 336,583 332,731
Retained earnings 134,160 130,308
Total stockholders' equity 203,090 199,238
Total liabilities and stockholders'
equity 336,583 332,731
The impact of the restatement on the restated components of the
Company's consolidated statement of income is as follows (in thousands):
Reported Restated
-------- --------
For the three months ended
March 31, 2003:
---------------
Selling and marketing expenses $ 11,078 $ 9,533
Income taxes (1,742) (2,282)
Income from continuing operations 2,553 3,557
Net income 2,553 3,557
Earnings per share-
Income from continuing operations .26 .36
Net income .26 .36
Diluted earnings per share-
Income from continuing operations .26 .36
Net income .26 .36
Page 9 of 20
Reported Restated
-------- --------
For the three months ended
March 31, 2002:
---------------
Selling and marketing expenses $ 11,993 $ 10,606
Income taxes (1,947) (2,432)
Income from continuing operations 3,805 4,707
Net income 4,672 5,574
Earnings per share-
Income from continuing operations .39 .48
Net income .47 .57
Diluted earnings per share-
Income from continuing operations .39 .48
Net income .47 .56
3. During the second quarter of 2003, the administrative functions for
employee benefits, retirement services, risk management, public
relations, cash management and taxation of the corporate office and the
Plumbing and Drain Cleaning business were combined to enable the Company
to benefit from economies of scale. In May 2003 the shareholders of the
Company approved changing the corporation's name from Chemed Corporation
to Roto-Rooter Inc. Due to this administrative function combination and
the changing composition of businesses comprising the Company over the
past several years, management re-evaluated the Company's segment
reporting as it relates to corporate office administrative expenses. The
discontinuance of businesses in 1997 (Omnia Group and National Sanitary
Supply), 2001 (Cadre Computer) and 2002 (Patient Care), results in more
than 80% of the Company's business represented by Roto-Rooter's Plumbing
and Drain Cleaning business.
To better reflect how executive management evaluates its operations, the
costs of the administrative functions of the corporate office have been
combined with the operating results of the Plumbing and Drain Cleaning
business (formerly the Roto-Rooter Group) to form the Plumbing and Drain
Cleaning segment. The Service America segment remains essentially
unchanged. Data for the former Roto-Rooter Group and corporate office
overhead for all prior periods have been restated for comparability
purposes.
As in the past, unallocated investing and financing income and expense
includes interest income and expense, dividend income and other
nonoperating income and expense related to unallocated corporate assets
and liabilities.
Page 10 of 20
Service revenues and sales and aftertax earnings by business segment follow (in
thousands):
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Service Revenues
and Sales
-----------------
Plumbing and Drain Cleaning $ 64,725 $ 65,279
Service America 12,920 15,574
-------- --------
Total $ 77,645 $ 80,853
======== ========
Aftertax Earnings
-----------------
(as restated -- see Note 2)
Plumbing and Drain Cleaning(a) $ 1,025 $ 3,409
Service America 40 327
-------- --------
Total segment earnings 1,065 3,736
Unallocated investing and
financing -- net (b) 2,492 971
Discontinued operations - 867
-------- --------
Net income $ 3,557 $ 5,574
======== ========
--------------
(a) Amount for 2003 includes aftertax severance charges of
$2,358,000.
(b) Amounts for 2003 and 2002 include aftertax gains on the sales of
available-for-sale investments of $2,151,000 and $775,000,
respectively.
4. Earnings per common share are computed using the weighted average number
of share of capital stock outstanding. Diluted earnings per share are
computed as follows (as restated -- see Note 2)(in thousands, except per
share data):
Income Shares Income
(Numerator) (Denominator) Per Share
----------- ------------- ----------
Income from Continuing Operations -
For the Three Months Ended March 31,
---------------------------------------
2003
Earnings $ 3,557 9,890 $ .36
=======
Dilutive stock options - 13
---------- -----------
Diluted earnings $ 3,557 9,903 $ .36
========== =========== =======
2002
Earnings $ 4,707 9,843 $ .48
=======
Conversion of Trust Securities 176 384
Dilutive stock options - 40
---------- -----------
Diluted earnings $ 4,883 10,267 $ .48
========== =========== =======
Net Income -
For the Three Months Ended March 31,
---------------------------------------
2003
Earnings $ 3,557 9,890 $ .36
=======
Dilutive stock options - 13
---------- -----------
Diluted earnings $ 3,557 9,903 $ .36
========== =========== =======
2002
Earnings $ 5,574 9,843 $ .57
=======
Conversion of Trust Securities 176 384
Dilutive stock options - 40
---------- -----------
Diluted earnings $ 5,750 10,267 $ .56
========== =========== =======
Page 11 of 20
The impact of the convertible preferred securities has been excluded from
the computations for 2003 because it is antidilutive on earnings per share
from continuing operations.
5. Other income--net from continuing operations comprises the following (in
thousands):
Three Months Ended
March 31,
----------------------------
2003 2002
------------ ------------
Gains on sales of available-for-
sale investments $ 3,544 $ 1,141
Interest income 815 636
Market value adjustments on
trading investments of deferred
compensation trusts (652) (71)
Dividend income 616 615
Other--net (61) 268
---------- ----------
Total other income--net $ 4,262 $ 2,589
========== ==========
6. In March 2003, the Company and a corporate officer reached agreement
providing for termination of the officer's employment in exchange for
payment under her employment contract. The payments comprise a
$1,000,000 lump sum payment made in March 2003 and monthly payments of
$52,788 beginning March 2003 and ending May 2007. The present value of
these payments ($3,627,000) is included in general and administrative
expenses.
7. The Company had total comprehensive income of $1,157,000 and $5,662,000
for the three months ended March 31, 2003 and 2002, respectively. The
difference between the Company's net income and comprehensive income
relates to the cumulative unrealized appreciation/depreciation on its
available-for-sale securities.
8. During 2003, one purchase business combination was completed within the
Roto-Rooter segment for a purchase price of $574,000 ($168,000 in cash
and a note payable for $406,000). The business acquired provides drain
cleaning and plumbing services under the Roto-Rooter name. The results
of operations of this business are not material to the consolidated
operations of the Company.
The purchase price was allocated as follows (in thousands):
Goodwill $ 474
Other assets 100
-------
Total $ 574
=======
9. In the normal course of business the Company enters into various
guarantees and indemnifications in its relationships with customers and
others. Examples of these arrangements would include guarantees of
service and product performance. These guarantees and indemnifications
would not materially impact the Company's financial condition or results
of operations.
Page 12 of 20
10. In August 2001, the Financial Accounting Standards Board ("FASB")
approved the issuance of Statement of Financial Accounting Standards
("SFAS")No. 143, Accounting for Asset Retirement Obligations. This
statement became effective for fiscal years beginning after June 15,
2002, and requires recognizing legal obligations associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a
long-lived asset. Since the Company has no material asset retirement
obligations, the adoption of SFAS No. 143 in 2003 did not have a
material impact on the Company's financial statements.
11. In July 2002, the FASB approved the issuance of SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. Generally, SFAS
No. 146 stipulates that defined exit costs (including restructuring and
employee termination costs) are to be recorded on an incurred basis
rather than on a commitment basis as previously required. This statement
is effective for exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 in 2003 did not have a material
impact on the Company's financial statements.
12. In November 2002, the FASB approved the issuance of FASB Interpretation
("FIN") No. 45, Guarantor's Accounting and Disclosure for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. The initial
recognition and initial measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 in 2003 did not have a material impact on the
Company's financial statements.
13. In January 2003, the FASB approved the issuance of FIN No. 46,
Consolidation of Variable Interest Entities. It is effective for
variable interest entities created after January 31, 2003, and for
variable interest entities in which an enterprise obtains an interest
after that date. Because the Company has no such investments, the
adoption of this statement did not have a material impact on the
Company's financial statements.
Page 13 of 20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
FINANCIAL CONDITION
-------------------
The decline in other investments from $37,326,000 at December 31, 2002
to $32,789,000 is due to the sale of various available-for-sale securities in
the first quarter of 2003. The decline in other current liabilities from
$23,513,000 at December 31, 2002 to $18,515,000 is primarily due to the payment
of incentive compensation, discretionary thrift plan contributions for 2002 and
accrued advertising expenses in the first quarter of 2003. There are no other
significant changes in the balance sheet accounts during the first three months
of 2003.
At March 31, 2003, the Company had cash and cash equivalents of $43.6
million and approximately $53.4 million of unused lines of credit with various
banks. Management believes its liquidity and sources of capital are satisfactory
for the Company's needs in the foreseeable future.
RESULTS OF OPERATIONS
---------------------
FIRST QUARTER 2003 VERSUS FIRST QUARTER 2002-CONSOLIDATED RESULTS
-----------------------------------------------------------------
The Company's service revenues and sales for the first quarter of 2003
declined 4% versus revenues for the first quarter of 2002. This $3,208,000
decline comprised the following (dollar amounts in thousands):
Increase/(Decrease)
-----------------------
Amount Percent
------- ---------
Service America
Service contracts $(2,001) (17.1)%
Demand services (653) (16.8)
Plumbing and Drain Cleaning
Plumbing (203) (.8)
Drain cleaning (419) (1.5)
Other 68 .5
--------
Total $(3,208) (4.0)
========
The decline in Service America's service contract revenues is
attributable to selling insufficient new service contracts to replace contracts
canceled or not renewed. The annualized value of contracts in place during the
first quarter of 2003 was 17.1% lower than the 2002 quarter. As revenues from
demand services are largely dependent upon service contract customers, the
decline in service contracts was largely responsible for the decline in demand
services in 2003.
The decline in plumbing revenues for the first quarter of 2003 versus
2002 comprises a 1.9% increase in the number of jobs performed and a 2.7%
decline in the average price per job. The decrease in drain cleaning revenues
for the first quarter of 2003 versus 2002 comprised a 4.1% decrease in the
number of jobs combined with a 2.6% increase in the average price per job.
The consolidated gross margin was 40.6% in the first quarter of 2003 and
40.0% in the first quarter of 2002. On a segment basis, the Plumbing and Drain
Cleaning segment's gross margin increased .8%
Page 14 of 20
points and Service America's gross margin declined 3.2% points. Of this decline,
approximately 70% is due to higher liability insurance costs (as a percent of
sales) in 2003 and 20% is due to higher labor costs (as a percent of sales) in
the 2003 first quarter.
General and administrative expense for the first quarter of 2003
increased $3,870,000 (30.6%) versus first quarter of 2002. This increase is
primarily due to higher costs in the Plumbing and Drain Cleaning segment in 2003
as the cost of a severance arrangement with a corporate officer ($3,627,000) was
recorded in March 2003.
Selling and marketing expense ("Selling")for the first quarter of 2003
declined $1,073,000 (10.1%) versus the first quarter of 2002 (in thousands):
Plumbing and Drain Cleaning $ 574
Service America 499
-------
Total $ 1,073
=======
The decline in Plumbing and Drain Cleaning Selling is due primarily to lower
advertising costs in 2003. The decline in Service America's Selling is due
primarily to a reduction in employees in 2003.
Depreciation expense declined $440,000 (12.6%) in the first quarter of
2002 as compared with the first quarter of 2003. Of this decline $230,000
relates to the Plumbing and Drain Cleaning segment and $210,000 relates to the
Service America segment. Both declines are attributable to lower depreciation on
service vans in 2003.
Income from operations declined $3,209,000 from $5,593,000 in the first
quarter of 2002 to $2,384,000 in the first quarter of 2003. This decline is
largely attributable to charges incurred for the settlement of an employment
contract with a corporate officer in March 2003 ($3,627,000). The amount of the
charge represents the present value of payments beginning in March 2003 and
ending in May 2007.
Interest expense declined from $773,000 in the first quarter of 2002 to
$539,000 in 2003, as the result of lower debt levels during 2003.
Otherincome-net increased from $2,589,000 in the first quarter of 2002
to $4,262,000 in the first quarter of 2003 primarily due to higher capital
gains on the sales of investments in the 2003 quarter. These gains totaled
$3,544,000 in the 2003 first quarter versus $1,141,000 in 2002.
Income before income taxes declined $1,300,000 from $7,139,000 in the
first quarter of 2002 to $5,839,000 in the first quarter of 2003 due to the
following (in thousands):
Severance charges in March 2003 $ 3,627
Larger gains on the sales of
investments in 2003 (2,403)
Other 76
-------
Total $ 1,300
=======
The effective income tax rate during the first quarter of 2003 was 39.1%
as compared with 34.1% in the first quarter of 2002. The higher
Page 15 of 20
effective rate in 2003 versus the rate for 2002 is primarily attributable to a
higher effective state income tax rate in 2003 related to gains on the sales of
investments and to favorable tax adjustments in the first quarter of 2002.
Income from continuing operations declined from $4,707,000 ($.48 per
share) in the first quarter of 2002 to $3,557,000 ($.36 per share) in 2003.
Income for 2003 included aftertax severance charges of $2,358,000 ($.24 per
share) and aftertax gains on the sales of investments of $2,151,000 ($.22 per
share). Income for 2002 included aftertax gains on the sales of investments of
$775,000 ($.08 per share).
Net income declined from $5,574,000 ($.57 per share and $.56 per diluted
share) in the first quarter of 2002 to $3,557,000 ($.36 per share) in 2003.
Income for 2003 included aftertax severance charges of $2,358,000 ($.24 per
share) and aftertax gains on the sales of investments of $2,151,000 ($.22 per
share). Income for 2002 included aftertax gains on the sales of investments of
$775,000 ($.08 per share) and discontinued operations of $867,000 ($.09 per
share and $.08 per diluted share).
FIRST QUARTER 2003 VERSUS FIRST QUARTER 2002-SEGMENT RESULTS
------------------------------------------------------------
Data relating to (a) the decrease in service revenues and sales and (b)
aftertax earnings as a percent of service revenues and sales for each segment
are set forth below:
SERVICE REVENUES
AND SALES - AFTERTAX EARNINGS AS A PERCENT
PERCENT DECREASE OF REVENUES (AFTERTAX MARGIN)
-----------------------------
2003 VS. 2002 2003 2002
--------------- ------------ ------------
THREE MONTHS ENDED
MARCH 31,
------------------
Plumbing and Drain Cleaning ( 1)% 1.6% 5.2%
Service America (17) 0.3 2.1
Total (4) 1.4 4.6
The aftertax margin of the Plumbing and Drain Cleaning segment during
the first quarter of 2003 was 1.6% as compared with 5.2% in the first quarter of
2002. This decline is attributable to severance charges ($2,358,000 or 3.6% of
revenues) incurred in the 2003 quarter.
The aftertax margin of the Service America segment was .3% in the first
quarter of 2003 as compared with 2.1% in the first quarter of 2002. This decline
is attributable to a decline in the gross profit margin (3.2 percentage points)
in the 2003 quarter, partially offset by lower operating expenses as a percent
of sales (.6 percentage points). The lower gross margin is primarily due to
higher casualty insurance costs and higher labor costs (as a percent of
revenues) in 2003.
Unallocated Investing and Financing+net, which includes financing
expense and investment income, increased $1,521,000 from $971,000 during the
first quarter of 2002 to $2,492,000 in the first quarter of 2003. The increase
is due to higher capital gains ($1,376,000 aftertax) and lower interest expense
($164,000 aftertax) during the 2003 quarter as compared to the 2002 quarter.
Page 16 of 20
RECENT ACCOUNTING STATEMENTS
----------------------------
In August 2001, the Financial Accounting Standards Board ("FASB")
approved the issuance of Statement of Financial Accounting Standards ("SFAS")No.
143, Accounting for Asset Retirement Obligations. This statement became
effective for fiscal years beginning after June 15, 2002, and requires
recognizing legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development or
normal operation of a long-lived asset. Since the Company has no material asset
retirement obligations, the adoption of SFAS No. 143 in 2003 did not have a
material impact on the Company's financial statements.
In July 2002, the FASB approved the issuance of SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. Generally, SFAS No. 146
stipulates that defined exit costs (including restructuring and employee
termination costs) are to be recorded on an incurred basis rather than on a
commitment basis as previously required. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS No.
146 in 2003 did not have a material impact on the Company's financial
statements.
In November 2002, the FASB approved the issuance of FASB Interpretation
("FIN") No. 45, Guarantor's Accounting and Disclosure for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. The initial recognition and
initial measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002. The adoption of FIN No.
45 in 2003 did not have a material impact on the Company's financial statements.
In January 2003, the FASB approved the issuance of FIN No. 46,
Consolidation of Variable Interest Entities. It is effective for variable
interest entities created after January 31, 2003, and for variable interest
entities in which an enterprise obtains an interest after that date. Because the
Company has no such investments, the adoption of this statement did not have a
material impact on the Company's financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 2095 REGARDING FORWARD-LOOKING INFORMATION
-------------------------------------------------------------
In addition to historical information, this report contains
forward-looking statements and performance trends that are based upon
assumptions subject to certain known and unknown risks, uncertainties,
contingencies and other factors. Variances in any or all of the risks,
uncertainties, contingencies, and other factors from the Company's assumptions
could cause actual results to differ materially from these forward-looking
statements and trends. The Company's ability to deal with the unknown outcomes
of these events, many of which are beyond the control of the Company, may affect
the reliability of its projections and other financial matters.
Page 17 of 20
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.
The Company recently carried out an evaluation, under the supervision of
the Company's President and Chief Executive Officer, and with the participation
of the Executive Vice President and Treasurer and the Vice President and
Controller, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon the foregoing, the Company's President and Chief Executive Officer,
Executive Vice President and Treasurer and Vice President and Controller
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company and its
consolidated subsidiaries required to be included in the Company's Exchange Act
reports. There have been no significant changes in internal control over
financial reporting during the quarter ended March 31, 2003.
Page 18 of 20
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
31.1 Certification by Kevin J. McNamara pursuant to Rule
13A-14 of the Exchange Act of 1934
31.2 Certification by Timothy S. O'Toole pursuant to Rule
13A-14 of the Exchange Act of 1934
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13A-14 of the Exchange Act of 1934
32.1 Certification by Kevin J. McNamara pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Timothy S. O'Toole pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
-A current Report on Form 8-K, dated April 17, 2003, was
filed April 18, 2003. The report includes the Company's
first quarter 2003 earnings release dated April 17,
2003.
-A current Report on Form 8-K, dated April 23, 2003, was
filed April 24, 2003. The report includes the Company's
First Quarter Report for the period ending March 31,
2003.
Page 19 of 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Roto-Rooter, Inc.
-----------------
(Registrant)
Dated: December 17, 2003 By Kevin J. McNamara
----------------- -----------------------
Kevin J. McNamara
(President and Chief and
Executive Officer)
Dated: December 17, 2003 By Timothy S. O'Toole
----------------- -----------------------
Timothy S. O'Toole
(Executive Vice President
and Treasurer)
Dated: December 17, 2003 By Arthur V. Tucker, Jr.
----------------- -----------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
Page 20 of 20