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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003, for Roto-Rooter, Inc. (formerly Chemed Corporation). The Company operates in two primary segments: Plumbing and Drain Cleaning (including Roto-Rooter services) and Service America (HVAC and appliance repair). During 2003, the Company held a 37% equity interest in Vitas Healthcare Corporation, the nation's largest hospice provider, and completed the acquisition of Vitas on February 24, 2004, shortly after the reporting period.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 2% to $308.9 million. This was driven by a 20% decline in Service America revenues ($12.4 million drop), partially offset by a 3% increase in Plumbing and Drain Cleaning revenues ($7.1 million gain).
• Impairment Charges: The Company recorded significant non-cash impairment charges totaling $15.8 million in 2003, primarily related to the Service America segment (goodwill, property/equipment, and intangible assets). This compares to $20.3 million in goodwill impairment in 2002.
• Segment Performance:
  • Plumbing and Drain Cleaning: After-tax earnings declined $3.3 million to $6.5 million, impacted by $2.4 million in after-tax severance charges.
  • Service America: After-tax loss improved to $14.7 million from $20.0 million in 2002, largely due to lower impairment charges year-over-year.
• Investment Income: "Other income--net" increased significantly to $11.3 million (from $4.3 million in 2002) due to higher gains on the sale and redemption of investments and favorable market-value adjustments on trading assets.

Outlook, Risks, and Unusual Items

• Vitas Acquisition: On February 24, 2004, the Company completed the acquisition of Vitas Healthcare Corporation for approximately $406 million. To fund this, the Company issued $260 million in new debt (floating and fixed rate notes) and $135 million in credit facilities, significantly increasing leverage.
• Debt Covenants: Post-acquisition, the Company is subject to strict financial covenants, including a maximum leverage ratio of 5.5 to 1.00 through December 31, 2004, and a minimum fixed charge coverage ratio of 1.15 to 1.00.
• Regulatory Risks (Vitas): Vitas derives ~95% of its revenue from Medicare and Medicaid. The Company faces risks related to reimbursement rate adjustments, regulatory audits, and compliance with federal anti-kickback and false claims laws.
• Legal Proceedings: The Company is defending class action lawsuits regarding unlicensed plumbing work (Illinois) and miscellaneous parts charges (Ohio). Management believes these will not have a material effect on financial position.
• Environmental Contingency: The Company has an accrued liability of $2.1 million for environmental cleanup related to the 1991 sale of DuBois Chemicals, with a potential contingent liability of up to $18.0 million.

Investor Verification Checklist

• Service America Viability: Verify the sustainability of the Service America segment, which has seen continuous revenue declines and repeated goodwill impairments.
• Vitas Integration: Assess the impact of the Vitas acquisition on the Company's debt load and ability to meet new leverage covenants.
• Medicare/Medicaid Exposure: Review Vitas' compliance status and exposure to potential reimbursement rate cuts or audit recoupments.
• Legal Exposure: Monitor the status of the Illinois and Ohio class action lawsuits for potential liability estimates.
• Environmental Liability: Confirm the status of the DuBois Chemicals environmental cleanup costs and the probability of the $18 million contingent liability.