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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
__X__ For the Quarterly Period Ended March 31, 2007
_____ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-8351
CHEMED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-0791746
(State or other jurisdiction of (IRS Employer 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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer __X__ Accelerated filer ____ Non-accelerated filer ____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No __X__
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 25,300,310 Shares March 31, 2007
$1 Par Value
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1
CHEMED CORPORATION AND
SUBSIDIARY COMPANIES
Index
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet -
March 31, 2007 and December 31, 2006 3
Unaudited Consolidated Statement of Income -
Three months ended March 31, 2007 and 2006 4
Unaudited Consolidated Statement of Cash Flows -
Three months ended March 31, 2007 and 2006 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2(c). Purchases of Equity Securities by Issuer and Affiliated
Purchasers 18
Item 6. Exhibits 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
March 31, December 31,
2007 2006
---------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 30,137 $ 29,274
Accounts receivable less allowances of $ 10,392
(2006 - $ 10,180) 85,211 93,086
Inventories 6,752 6,578
Current deferred income taxes 21,595 17,789
Current assets of discontinued operations - 5,418
Prepaid expenses and other current assets 9,110 9,968
---------- ------------
Total current assets 152,805 162,113
Investments of deferred compensation plans held in
trust 27,736 25,713
Note receivable 14,701 14,701
Properties and equipment, at cost, less accumulated
depreciation of $ 80,233 (2006 - $ 77,107) 69,295 70,140
Identifiable intangible assets less accumulated
amortization of $ 14,211 (2006 - $ 13,201) 68,205 69,215
Goodwill 435,040 435,050
Noncurrent assets of discontinued operations - 287
Other assets 16,194 16,068
---------- ------------
Total Assets $ 783,976 $ 793,287
========== ============
LIABILITIES
Current liabilities
Accounts payable $ 55,272 $ 49,744
Current portion of long-term debt 164 209
Income taxes 9,410 6,765
Accrued insurance 39,889 38,457
Accrued compensation 29,110 35,990
Current liabilities of discontinued operations - 12,215
Other current liabilities 26,653 22,684
---------- ------------
Total current liabilities 160,498 166,064
Deferred income taxes 24,970 26,301
Long-term debt 150,235 150,331
Deferred compensation liabilities 27,157 25,514
Other liabilities 5,382 3,716
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Total liabilities 368,242 371,926
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STOCKHOLDERS' EQUITY
Capital stock - authorized 80,000,000 shares $1 par;
issued 29,035,918 shares (2006 - 28,849,918 shares) 29,036 28,850
Paid-in capital 260,641 252,639
Retained earnings 234,914 215,517
Treasury stock - 3,735,608 shares (2006 - 3,023,635
shares), at cost (111,293) (78,064)
Deferred compensation payable in Company stock 2,436 2,419
---------- ------------
Total Stockholders' Equity 415,734 421,361
---------- ------------
Total Liabilities and Stockholders' Equity $ 783,976 $ 793,287
========== ============
See accompanying notes to unaudited financial statements.
3
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Three Months Ended
March 31,
----------------------
2007 2006
---------- ----------
Continuing operations
Service revenues and sales $ 270,439 $ 243,921
---------- ----------
Cost of services provided and goods sold
(excluding depreciation) 188,247 176,035
Selling, general and administrative expenses 48,070 38,454
Depreciation 4,715 4,132
Amortization 1,315 1,296
Other operating income (1,138) -
---------- ----------
Total costs and expenses 241,209 219,917
---------- ----------
Income from operations 29,230 24,004
Interest expense (3,742) (5,345)
Loss on extinguishment of debt - (430)
Other income--net 869 1,495
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Income before income taxes 26,357 19,724
Income taxes (10,136) (7,686)
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Income from continuing operations 16,221 12,038
Discontinued operations, net of income taxes - 177
---------- ----------
Net income $ 16,221 $ 12,215
========== ==========
Earnings Per Share
Income from continuing operations $ 0.63 $ 0.46
========== ==========
Net income $ 0.63 $ 0.47
========== ==========
Average number of shares outstanding 25,716 26,044
========== ==========
Diluted Earnings Per Share
Income from continuing operations $ 0.62 $ 0.45
========== ==========
Net income $ 0.62 $ 0.46
========== ==========
Average number of shares outstanding 26,162 26,723
========== ==========
Cash Dividends Per Share $ 0.06 $ 0.06
========== ==========
See accompanying notes to unaudited financial statements.
4
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
----------------------
2007 2006
---------- ----------
Cash Flows from Operating Activities
Net income $ 16,221 $ 12,215
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization 6,030 5,428
Noncash long-term incentive compensation 4,719 -
Provision for uncollectible accounts receivable 2,084 2,012
Amortization of debt issuance costs 455 444
Provision for deferred income taxes (345) (1,292)
Write off of unamortized debt issuance costs - 430
Discontinued operations - (177)
Changes in operating assets and liabilities,
excluding amounts acquired in business combinations
Decrease in accounts receivable 5,275 19,638
Increase in inventories (174) (225)
Decrease in prepaid expenses and other current
assets 858 901
Decrease in accounts payable and other current
liabilities (9,091) (13,460)
Increase in income taxes 9,538 8,704
Increase in other assets (2,102) (1,917)
Increase in other liabilities 2,218 1,051
Excess tax benefit on share-based compensation (611) (3,289)
Other uses (375) (49)
---------- ----------
Net cash provided by continuing operations 34,700 30,414
Net cash provided by discontinued operations - 2,326
---------- ----------
Net cash provided by operating activities 34,700 32,740
---------- ----------
Cash Flows from Investing Activities
Capital expenditures (5,764) (3,852)
Net uses from the sale of discontinued operations (3,876) (1,684)
Proceeds from sales of property and equipment 2,975 65
Business combinations, net of cash acquired (62) (384)
Other uses (299) (305)
---------- ----------
Net cash used by investing activities (7,026) (6,160)
---------- ----------
Cash Flows from Financing Activities
Purchases of treasury stock (24,199) (2,318)
Increase in cash overdrafts payable (1,608) 786
Dividends paid (1,555) (1,572)
Excess tax benefit on share-based compensation 611 3,289
Repayment of long-term debt (141) (84,497)
Issuance of capital stock, net of costs 130 2,360
Net increase in revolving line of credit - 44,000
Debt issuance costs - (150)
Other sources/(uses) (49) 57
---------- ----------
Net cash used by financing activities (26,811) (38,045)
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Increase/(Decrease) in Cash and Cash Equivalents 863 (11,465)
Cash and cash equivalents at beginning of year 29,274 57,133
---------- ----------
Cash and cash equivalents at end of period $ 30,137 $ 45,668
========== ==========
See accompanying notes to unaudited financial statements.
5
CHEMED CORPORATION AND SUBSIDIARY COMPANIES
Notes to Unaudited Financial Statements
1. Basis of Presentation
As used herein, the terms "We," "Company" and "Chemed" refer to Chemed
Corporation or Chemed Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited consolidated financial
statements of Chemed in accordance with Rule 10-01 of SEC Regulation S-X.
Consequently, we have omitted certain disclosures required under generally
accepted accounting principles in the United States for complete financial
statements. However, in our opinion, the financial statements presented herein
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly our financial position, results of operations and
cash flows. These financial statements are prepared on the same basis as and
should be read in conjunction with the Consolidated Financial Statements and
related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2006. Certain 2006 amounts have been reclassified to conform with
current period presentation in the balance sheet and statement of income
primarily related to the presentation of the discontinued operations of our
Phoenix hospice program.
2. 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 three months ended March 31, 2007 we
repurchased 626,079 shares at a weighted average cost of $46.76 per share. There
were no shares repurchased during the three months ended March 31, 2006.
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.
3. 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
payments are subject to certain caps, as described further below.
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 they are likely to exceed the annual
per-beneficiary Medicare cap ("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 influence 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 patient revenue. The Medicare cap measurement period is from
September 29 through September 28 of the following year for admissions and from
November 1 through October 31 of the following year for revenue. As of the date
of this filing for the 2007 measurement period, no programs have a required
Medicare billing reduction. Our current estimates for the projected full year
2007 measurement period anticipate no programs with a Medicare cap billing
limitation. Therefore, no revenue reduction for Medicare cap has been recorded
for the quarter ended March 31, 2007. Additionally, we recorded approximately
$472,000 in November and December 2006 related to estimated billing limitations
for the 2007 measurement period. That amount was reversed during the first
quarter of 2007.
6
4. Segments
Service revenues and sales and aftertax earnings by business segment are as
follows (in thousands):
Three months ended
March 31,
-----------------------
2007 2006
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Service Revenues and Sales
--------------------------
VITAS $ 184,049 $ 166,057
Roto-Rooter 86,390 77,864
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Total $ 270,439 $ 243,921
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Aftertax Earnings
-----------------
VITAS $ 14,987 $ 10,680
Roto-Rooter 9,486 7,201
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Total 24,473 17,881
Corporate (8,252) (5,843)
Discontinued operations - 177
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Net income $ 16,221 $ 12,215
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5. Patient Care Notes Receivable
We have notes receivable of $14.7 million from Patient Care, Inc. related
to our sale of this subsidiary in 2002. In February 2007, the parties amended
the terms of the promissory notes receivable. The amended notes are due October
2009. The interest on the notes receivable is the higher of Patient Care's
current floating rate plus 2% or 11.5% per year. Interest payments are due
quarterly. As of March 31, 2007, Patient Care is current on all interest
payments related to these notes.
6. Earnings per Share
Earnings per share are computed using the weighted average number of shares
of capital stock outstanding. Earnings and diluted earnings per share for 2007
and 2006 are computed as follows (in thousands, except per share data):
Income from
Continuing Operations Net Income
------------------------------ ------------------------------
Earnings Earnings
For the Three Months per per
Ended March 31, Income Shares Share Income Shares Share
- ----------------------- --------- --------- ---------- --------- --------- ----------
2007
Earnings $ 16,221 25,716 $ 0.63 $ 16,221 25,716 $ 0.63
========== ==========
Dilutive stock options - 386 - 386
Nonvested stock awards - 60 - 60
--------- --------- --------- ---------
Diluted earnings $ 16,221 26,162 $ 0.62 $ 16,221 26,162 $ 0.62
========= ========= ========== ========= ========= ==========
2006
Earnings $ 12,038 26,044 $ 0.46 $ 12,215 26,044 $ 0.47
========== ==========
Dilutive stock options - 590 - 590
Nonvested stock awards - 89 - 89
--------- --------- --------- ---------
Diluted earnings $ 12,038 26,723 $ 0.45 $ 12,215 26,723 $ 0.46
========= ========= ========== ========= ========= ==========
7. Other Operating Income
During the first quarter of 2007, we completed the sale of Roto-Rooter's
call center in Florida. The proceeds from the sale were approximately $3.0
million, which resulted in a pretax gain of $1.1 million. The gain was recorded
in other income from operations in the accompanying consolidated statement of
income.
7
8. Other Income -- Net
Other income -- net comprises the following (in thousands):
Three Months Ended
March 31,
--------------------
2007 2006
--------- ---------
Interest income $ 767 $ 973
(Loss)/gain on trading investments of employee
benefit trust 212 493
Other - net (110) 29
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Total other income $ 869 $ 1,495
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9. Other Current Liabilities
Other current liabilities as of March 31, 2007 and December 31, 2006
consist of the following (in thousands):
2007 2006
--------- ---------
Accrued legal settlements $ 1,859 $ 1,889
Accrued divestiture expenses 2,618 2,612
Accrued Medicare cap estimate 9,503 3,373
Other 12,673 14,810
--------- ---------
Total other current liabilities $ 26,653 $ 22,684
========= =========
Accrued Medicare cap as of March 31, 2007 includes $6.6 million related to
our Phoenix program that was sold in November 2006. This amount was recorded in
current liabilities from discontinued operations as of December 31, 2006.
10. 2002 Executive Long-Term Incentive Plan
In February 2007, we met the cumulative earnings target specified in the
2002 Long-Term Incentive Plan (LTIP) and on March 9, 2007, the
Compensation/Incentive Committee of the Board of Directors approved a stock
grant of 100,000 shares and the related allocation to participants. The pre-tax
cost of the stock grant was $5.4 million and is included in selling, general and
administrative expenses in the accompanying consolidated statement of income. No
market price components of the LTIP were reached during the three months ended
March 31, 2007 or 2006.
11. Long-term Debt and Extinguishment of Debt
On March 31, 2006, we repaid in full our $84.4 million term loan with
JPMorgan Chase Bank. The term loan was paid with $40.4 million of cash on hand
and the remainder with a draw on our revolving credit facility. At that time, we
also amended the $175 million revolving credit facility 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
revolving credit agreement is LIBOR plus 1.25%. The amended revolving credit
facility also includes an "accordion" feature that allows us the opportunity to
expand the facility by $50 million. In connection with the repayment of the term
loan, we recorded a write-off of unamortized debt issuance costs of $430,000.
We are in compliance with all debt covenants as of March 31, 2007. We have
issued $33.3 million in standby letters of credit as of March 31, 2007 mainly
for insurance purposes. Issued letters of credit reduce our available credit
under the revolving credit agreement. As of March 31, 2007, the Company has
approximately $141.7 million of unused lines of credit available and eligible to
be drawn down under its revolving credit facility, excluding the accordion
feature.
See Note 19 for discussion of significant changes to our capitalization
structure subsequent to March 31, 2007.
12. Loans Receivable from Independent Contractors
The Roto-Rooter segment sublicenses with approximately sixty-one
independent contractors to operate certain plumbing repair and drain cleaning
businesses in lesser-populated areas of the United States and Canada. As of
March 31, 2007, we had notes receivable from its independent contractors
totaling $1.8 million (December 31, 2006-$1.9 million). In most cases these
loans are fully or partially secured by equipment owned by the contractor. The
interest rates on the loans range from 5% to 8% per annum and the remaining
terms of the loans range from two months to 5.4 years at March 31, 2007. During
the quarter ended March 31, 2007, we recorded revenues of $5.4 million
(2006-$5.0 million) and pretax profits of $2.5 million (2006-$2.0 million) from
our independent contractors.
8
We have adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities--an
interpretation of Accounting Research Bulletin No. 51 (revised)" ("FIN 46R")
relative to our contractual relationships with the independent contractors. FIN
46R requires the primary beneficiary of a Variable Interest Entity ("VIE") to
consolidate the accounts of the VIE. We have evaluated our relationships with
our independent contractors based upon guidance provided in FIN 46R and have
concluded that some of the contractors who have loans payable to us may be
VIE's. We believe consolidation, if required, of the accounts of any VIE's for
which we might be the primary beneficiary would not materially impact our
financial position, results of operations or cash flows.
13. Pension and Retirement Plans
All of the Company's plans that provide retirement and similar benefits are
defined contribution plans. Expenses for the Company's pension and
profit-sharing plans, ESOP's, excess benefit plans and other similar plans were
$3.6 million and $2.4 million for the three months ended March 31, 2007 and
2006, respectively.
14. Litigation
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. During 2006, we reached a tentative
settlement and 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.
15. 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 expense
related to complying with OIG requests and defending the litigation of $66,000
and $132,000 for the three months ended March 31, 2007 and 2006, 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.
9
16. Related Party Agreement
In October 2004, VITAS entered into a pharmacy services agreement
("Agreement") with Omnicare, Inc. ("OCR") whereby OCR will provide specified
pharmacy services for VITAS and its hospice patients in geographical areas
served by both VITAS and OCR. The Agreement has an initial term of three years
that renews automatically thereafter for one-year terms. Either party may cancel
the Agreement at the end of any term by giving written notice at least 90 days
prior to the end of said term. 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 $8.2 million and $6.7 for three months ended March 31,
2007 and 2006, respectively and has accounts payable of $3.6 million at March
31, 2007. 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.
17. Cash Overdrafts Payable
Included in accounts payable at March 31, 2007 are cash overdrafts payable
of $9.0 million (December 31, 2006 - $10.6 million).
18. Uncertain Tax Positions
On January 1, 2007, we adopted FASB Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109", which prescribes a comprehensive model for how to recognize,
measure, present and disclose in financial statements uncertain tax positions
taken or expected to be taken on a tax return. Upon adoption of FIN 48, the
financial statements 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.
The cumulative effect upon adoption of FIN 48 was to reduce our accrual for
uncertain tax positions by approximately $4.7 million, which has been recorded
in retained earnings as of January 1, 2007 in the accompanying consolidated
balance sheet. After adoption, we had approximately $1.2 million in unrecognized
tax benefits. The majority of this amount would affect our effective tax rate,
if recognized in a future period. The years ended December 31, 2003 and forward
remain open for review for Federal income tax purposes at Chemed and
Roto-Rooter. For VITAS, fiscal years beginning after February 24, 2004 (the date
of acquisition) remain open for review for Federal income tax purposes. The
earliest open year relating to any of our material state jurisdictions is the
fiscal year ended December 31, 2002. During the next twelve months, we
anticipate that the amount of unrecognized tax benefits will decrease by
approximately $150,000 to $200,000 in total due to normal quarterly provisions
and releases upon expiration of certain statutes of limitation.
As permitted by FIN 48, we reclassified interest related to our accrual for
uncertain tax positions to separate interest accounts. We believe this change in
accounting method is preferable as it more accurately classifies the impact of
interest in our consolidated balance sheet and consolidated statement of income.
As of March 31, 2007, we have approximately $166,000 accrued in interest related
to uncertain tax positions. These accruals are included in other current
liabilities in the accompanying consolidated balance sheet. For the three months
ended March 31, 2007, we have recorded approximately $14,000 for interest
related to uncertain tax positions in interest expense in the accompanying
consolidated statement of income.
19. Subsequent Events
On April 4, 2007, we issued a contingent bond redemption notice regarding
the $150 million, 8 3/4% senior notes due in 2011. The redemption is being made
pursuant to the terms of the indenture dated February 24, 2004 at a redemption
price of 104.375% of the principal amount plus accrued but unpaid interest. This
redemption notice was contingent upon the completion of the new credit facility
discussed in the next paragraph. The senior notes are redeemable on or after May
4, 2007. We expect to write-off approximately $4.8 million in deferred debt
costs related to the senior notes. We will also incur a $6.5 million charge
related to the 4.375% premium to be paid upon redemption. These amounts will be
recorded in the second quarter of 2007.
On May 2, 2007, we entered into a new senior secured credit facility with
JPMorgan Chase Bank (the "2007 Facility") to replace our existing credit
facility. The 2007 Facility includes a $100 million term loan, a $175 million
revolving credit facility and a $100 million expansion feature. The facility has
a 5-year maturity with principal payments on the term loan due quarterly and on
the revolving credit facility due at maturity. Interest is payable quarterly at
a floating rate equal to our choice of various indexes plus a specified margin
based on our leverage ratio. The interest rate at the inception of the agreement
is LIBOR plus 0.875%. In connection with replacing our existing credit facility,
we will write-off approximately $2.3 million in the second quarter of 2007
related to deferred debt costs.
10
On April 26, 2007, our Board of Directors authorized a $150 million stock
repurchase program. Our $50 million stock repurchase program, authorized in July
2006, has approximately $13.6 million remaining as of March 31, 2007.
20. Recent Accounting Statements
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS 159"), which permits an
entity to measure certain financial assets and financial liabilities at fair
value. Entities that elect the fair value option will report unrealized gains
and losses in earnings at each reporting date. The fair value option may be
elected on an instrument-by-instrument basis, with a few exceptions, as long as
it is applied to the entire instrument. The fair value election is irrevocable
unless a new election date occurs. SFAS 159 is effective as of the beginning of
the first fiscal year that begins after November 15, 2007. We are currently
evaluating the impact SFAS 159 will have on our financial condition and results
of operations, if any.
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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Summary
- -----------------
We operate through our two wholly owned subsidiaries, VITAS Healthcare
Corporation and Roto-Rooter Group, Inc. 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's services are 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.
The following is a summary of the key operating results for the three
months ended March 31, 2007 and 2006 (in thousands except per share amounts):
Three Months Ended
March 31,
----------------------
2007 2006
---------- ----------
Consolidated service revenues and sales $ 270,439 $ 243,921
Consolidated income from continuing operations $ 16,221 $ 12,038
Diluted EPS from continuing operations $ 0.62 $ 0.45
The increase in consolidated service revenues and sales was driven by an
11% increase at both VITAS and Roto-Rooter. The increase at VITAS was primarily
the result of a 10% increase in average daily census (ADC) from the first
quarter of 2006 and the October 1, 2006 Medicare reimbursement rate increase.
The increase at Roto-Rooter was driven primarily by a 2% increase in job count
combined with an approximate 9% price increase. Consolidated income from
continuing operations and diluted EPS from continuing operations increased as a
result of the higher service revenues and sales, which allowed us to further
leverage our current cost structure.
Starting in 2006, we merged several hospice programs and eliminated the
corresponding Medicare provider numbers in three states. We are in the process
of eliminating one additional Medicare provider number that does not currently
have an estimated Medicare cap liability. Due to these combinations, coupled
with improving admission and median length of stay metrics, no revenue reduction
for Medicare cap billing limitations has been recorded for the quarter ended
March 31, 2007. Additionally, we recorded approximately $472,000 in November and
December 2006 related to estimated billing limitations for the 2007 measurement
period. That amount was reversed during the first quarter of 2007. Therefore, as
of March 31, 2007, we have no estimated liability for Medicare cap related to
our programs for the 2007 measurement period.
Financial Condition
- -------------------
Liquidity and Capital Resources
- -------------------------------
Significant changes in the balance sheet accounts from December 31, 2006 to
March 31, 2007 include the following:
o The decrease in accounts receivable from $93.1 million at December 31,
2006 to $85.2 million at March 31, 2007 is due mainly to the timing of
payments received from Medicare.
o The increase in treasury stock of $33.2 million relates mainly to our
share repurchase program.
Net cash provided by continuing operations increased $4.3 million from a
source of cash by continuing operations of $30.4 million for the first three
months of 2006, to a source of cash of $34.7 million for the first three months
of 2007, due primarily to the increase in net income.
We have issued $33.3 million in standby letters of credit as of March 31,
2007 mainly for insurance purposes. Issued letters of credit reduce our
available credit under the revolving credit agreement. At March 31, 2007, we had
approximately $141.7 million available lines of credit eligible to be drawn down
under our amended credit agreement with JPMorgan Chase, excluding the $50
million accordion feature. Management believes its liquidity and sources of
capital are satisfactory for the Company's needs in the foreseeable future.
On April 4, 2007, we issued a contingent bond redemption notice regarding
the $150 million, 8 3/4% senior notes due in 2011. The redemption is being made
pursuant to the terms of the indenture dated February 24, 2004 at a redemption
price of 104.375% of the principal amount plus accrued but unpaid interest. This
redemption notice was contingent upon the completion of the new credit facility
discussed in the next paragraph. The senior notes are redeemable on or after May
4, 2007. We expect to write-off approximately $4.8 million in deferred debt
costs related to the senior notes. We will also incur a $6.5 million charge
related to the 4.375% premium to be paid upon redemption. These amounts will be
recorded in the second quarter of 2007.
12
On May 2, 2007, we entered into a new senior secured credit facility with
JPMorgan Chase Bank (the "2007 Facility") to replace our existing credit
facility. The 2007 Facility includes a $100 million term loan, a $175 million
revolving credit facility and a $100 million expansion feature. The facility has
a 5-year maturity with principal payments on the term loan due quarterly and on
the revolving credit facility due at maturity. Interest is payable quarterly at
a floating rate equal to our choice of various indexes plus a specified margin
based on our leverage ratio. The interest rate at the inception of the agreement
is LIBOR plus 0.875%. In connection with replacing our existing credit facility,
we will write-off approximately $2.3 million in the second quarter of 2007
related to deferred debt costs.
On April 26, 2007, our Board of Directors authorized a $150 million stock
repurchase program. Our $50 million stock repurchase program, authorized in July
2006, has approximately $13.6 million remaining as of March 31, 2007.
Commitments and Contingencies
- -----------------------------
Collectively, the terms of our credit agreements provide that we are
required to meet various financial covenants, to be tested quarterly. In
connection therewith, we are in compliance with all financial and other debt
covenants as of March 31, 2007 and anticipate remaining in compliance throughout
2007.
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. During 2006 we reached a tentative
settlement and 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.
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 expense
related to complying with OIG requests and defending the litigation of $66,000
and $132,000 for the three months ended March 31, 2007 and 2006, 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.
13
Results of Operations
First Quarter 2007 versus First Quarter 2006-Consolidated Results
- -----------------------------------------------------------------
Our service revenues and sales for the first quarter of 2007 increased
10.9% versus revenues for the first quarter of 2006. Of this increase, $18.0
million was attributable to VITAS and $8.5 million was attributable to
Roto-Rooter (dollar amounts in thousands):
Increase/(Decrease)
--------------------
Amount Percent
--------- ---------
VITAS
Routine homecare $ 18,316 16.2%
Continuous care (1,242) -4.2%
General inpatient 446 1.9%
Medicare cap 472 -
Roto-Rooter
Plumbing 5,543 18.9%
Drain cleaning 2,335 6.4%
Other 648 5.5%
---------
Total $ 26,518 10.9%
=========
The increase in VITAS' revenues for the first quarter of 2007 versus the
first quarter of 2006 is attributable to an increase in ADC of 11.5% for routine
homecare offset by a 8.4% and 1.0% decline in continuous care and general
inpatient, respectively. ADC is a key measure we use to monitor volume growth in
our hospice business. Changes in total program admissions and average length of
stay for our patients are the main drivers of changes in ADC. The remainder of
the revenue increases is due primarily to the annual increase in Medicare
reimbursement rates in the fourth quarter of 2006. In excess of 90% of VITAS'
revenues for the period were from Medicare and Medicaid.
The increase in the plumbing revenues for the first quarter of 2007 versus
2006 comprises a 9.9% increase in the number of jobs performed and a 9.0%
increase in the average price per job. The increase in drain cleaning revenues
for the first quarter of 2007 versus 2006 comprised a 0.8% decline in the number
of jobs offset by a 7.2% increase in the average price per job. The increase in
other revenues is attributable primarily to increased revenue from the
independent contractor operations.
The consolidated gross margin was 30.4% in the first quarter of 2007 as
compared with 27.8% in the first quarter of 2006. On a segment basis, VITAS'
gross margin was 22.8% in the first quarter of 2007 and 19.5% in the first
quarter of 2006. The increase in VITAS' gross margin in 2007 is primarily
attributable to an unusual increase in seasonal discharge rates in January and
February 2006 coupled with excess patient care capacity during the same period.
We corrected our excess staffing capacity during the second and third quarter of
2006. The unusually high seasonal variance experienced in 2006 was not repeated
in 2007. These factors combined to increase VITAS' gross margin during the first
quarter of 2007. The Roto-Rooter segment's gross margin was 46.6% in the first
quarter of 2007 and 45.5% in the first quarter of 2006. The increase in
Roto-Rooter's gross margin in 2007 is primarily attributable to better retention
of service technicians, which enhances overall productivity of our workforce.
Selling, general and administrative expenses ("SG&A") for the first quarter
of 2007 were $48.1 million, an increase of $9.6 million (25.0%) versus the first
quarter of 2006. The increase is largely due to 2007 stock-based compensation
expense of $6.0 million comprised of $5.4 million related to the LTIP and
$600,000 related to stock option grants made in June 2006. There was no such
stock-based compensation expense in the first quarter of 2006. The remaining
increase relates to increased variable expenses due to increases in revenues.
Income from operations increased $5.2 million from $24.0 million in the
first quarter of 2006 to $29.2 million in the first quarter of 2007. The
increase is primarily the result of the increase in gross margin discussed
above.
Interest expense, substantially all of which is incurred at Corporate,
declined from $5.3 million in the first quarter of 2006 to $3.7 million in the
first quarter of 2007. This decline is due primarily to the reduction in debt
outstanding that occurred in February 2006 when we refinanced and repaid a
significant portion of our debt.
14
Other income-net decreased from $1.5 million in the first quarter of 2006
to $869,000 in the first quarter of 2007. The decrease is attributable mainly to
the fact that we have used excess cash during the first quarter of 2007 to
repurchase our common stock. This has led to lower cash balances and thus, lower
interest income during the first quarter of 2007.
Our effective income tax rate decreased from 39.0% in the first quarter of
2006 to 38.5% in the first quarter of 2007. The decrease in our effective tax
rate relates mainly to the implementation of FIN 48.
Income from continuing operations increased $4.2 million or 34.7% in the
first quarter of 2007 as compared to the first quarter of 2006. Net income
increased $4.0 million or 32.8% in the first quarter of 2007 as compared to the
first quarter of 2006. The $177,000 income from discontinued operations in the
first quarter of 2006 relates to VITAS' Phoenix, AZ program that was sold in
November 2006. Income from continuing operations and net income for both periods
included the following aftertax special items/adjustments that
increased/(reduced) aftertax earnings (in thousands):
Three Months Ended
March 31,
---------------------
2007 2006
--------- ---------
Long-term incentive compensation award $ (3,414) $ -
Stock-option expense (371) -
Gain on sale of Florida call center 724 -
Loss on extinguishment of debt - (273)
Legal expenses of OIG investigation (41) (82)
Other 296 -
--------- ---------
$ (2,806) $ (355)
========= =========
First quarter 2007 versus First quarter 2006-Segment Results
- ------------------------------------------------------------
The change in aftertax earnings for the first quarter of 2007 versus the
first quarter of 2006 is due to (in thousands):
Net Income
Increase/(Decrease)
---------------------
Amount Percent
--------- ---------
VITAS $ 4,307 40.3%
Roto-Rooter 2,285 31.7%
Corporate (2,409) -41.2%
Discontinued operations (177) -100.0%
---------
$ 4,006 32.8%
=========
The following chart updates historical unaudited financial and operating
data of VITAS, acquired in February 2004 (dollars in thousands, except dollars
per patient day):
15
First Quarter
----------------------
2007 2006 (c)
---------- ----------
OPERATING STATISTICS
Net revenue ($000)(a)
Homecare $ 131,548 $ 113,232
Inpatient 23,462 23,016
Continuous care 28,567 29,809
---------- ----------
Total before Medicare cap allowance $ 183,577 $ 166,057
Medicare cap allowance 472 -
---------- ----------
Total $ 184,049 $ 166,057
========== ==========
Net revenue as a percent of total before
Medicare cap allowance
Homecare 71.6% 68.1%
Inpatient 12.8 13.9
Continuous care 15.6 18.0
---------- ----------
Total before Medicare cap allowance 100.0 100.0
Medicare cap allowance 0.3 -
---------- ----------
Total 100.3% 100.0%
========== ==========
Average daily census ("ADC") (days)
Homecare 6,786 5,931
Nursing home 3,574 3,359
---------- ----------
Routine homecare 10,360 9,290
Inpatient 426 430
Continuous care 523 571
---------- ----------
Total 11,309 10,291
========== ==========
Total Admissions 14,110 13,773
Total Discharges 14,051 13,298
Average length of stay (days) 76.9 72.4
Median length of stay (days) 13.0 12.0
ADC by major diagnosis
Neurological 33.3% 33.1%
Cancer 19.7 20.5
Cardio 14.6 14.8
Respiratory 7.0 7.1
Other 25.4 24.5
---------- ----------
Total 100.0% 100.0%
========== ==========
Admissions by major diagnosis
Neurological 18.9% 20.5%
Cancer 33.6 33.7
Cardio 13.3 13.8
Respiratory 7.8 7.9
Other 26.4 24.1
---------- ----------
Total 100.0% 100.0%
========== ==========
Direct patient care margins (b)
Routine homecare 50.8% 47.6%
Inpatient 20.1 23.1
Continuous care 20.0 18.3
Homecare margin drivers
(dollars per patient day)
Labor costs $ 49.12 $ 51.32
Drug costs 8.18 7.38
Home medical equipment 5.75 5.54
Medical supplies 2.17 2.09
Inpatient margin drivers
(dollars per patient day)
Labor costs $ 252.42 $ 247.69
Continuous care margin drivers
(dollars per patient day)
Labor costs $ 464.54 $ 454.53
Bad debt expense as a percent of revenues 0.9% 0.9%
Accounts receivable --
days of revenue outstanding 38.1 39.4
(a) VITAS has 6 large (greater than 450 ADC), 15 medium (greater than 200 but
less than 450 ADC) and 21 small (less than 200 ADC) hospice programs. As of
March 31, 2007, there were no programs with a Medicare cap liability for
the 2007 measurement period. There were two programs with less than 10% cap
cushion measured for the twelve month period ending March 31, 2007.
(b) Amounts exclude indirect patient care and administrative costs, as well as
Medicare cap billing limitation.
(c) Reclassified for operations discontinued in November 2006.
16
Recent Accounting Statements
- ----------------------------
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS 159"), which permits an
entity to measure certain financial assets and financial liabilities at fair
value. Entities that elect the fair value option will report unrealized gains
and losses in earnings at each reporting date. The fair value option may be
elected on an instrument-by-instrument basis, with a few exceptions, as long as
it is applied to the entire instrument. The fair value election is irrevocable
unless a new election date occurs. SFAS 159 is effective as of the beginning of
the first fiscal year that begins after November 15, 2007. We are currently
evaluating the impact SFAS 159 will have on our financial condition and results
of operations, if any.
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.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Regarding Forward-Looking Information
- -------------------------------------
In addition to historical information, this report contains forward-looking
statements and performance trends that are based upon assumptions subject to
certain known and unknown risks, uncertainties, contingencies and other factors.
Variances in any or all of the risks, uncertainties, contingencies, and other
factors from our assumptions could cause actual results to differ materially
from these forward-looking statements and trends. Our ability to deal with the
unknown outcomes of these events, many of which are beyond our control, may
affect the reliability of projections and other financial matters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to interest rate risk exposure
through variable interest rate borrowings. At March 31, 2007, we had no variable
rate debt outstanding. The quoted market value of our 8.75% fixed rate senior
notes on March 31, 2007 is $156 million (carrying value is $150 million). We
estimate that the fair value of the remainder of our long-term debt approximates
its book value at March 31, 2007.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision of our President and
Chief Executive Officer and with the participation of the Vice President and
Chief Financial Officer and the Vice President and Controller, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the President and Chief Executive Officer, Vice President and Chief
Financial Officer and Vice President and Controller have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. There has been no change in our internal control over
financial reporting that occurred during the quarter covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
17
PART II OTHER INFORMATION
Item 2(c). Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
The following table shows the repurchase activity related to our share
repurchase programs for the three months ended March 31, 2007:
Weighted
Total Number Average Cumulative Shares Dollar Amount
of Shares Price Paid Per Repurchased Under Remaining Under
Repurchased Share the Program The Program
-------------- --------------- ----------------- ---------------
July 2006 Program
- -----------------
January 1 through January 31, 2007 67,379 $ 36.41 260,777 $ 40,432,944
February 1 through February 28, 2007 111,900 $ 46.86 372,677 $ 35,189,260
March 1 through March 31, 2007 446,800 $ 48.29 819,477 $ 13,614,888
-------------- ================= ===============
First Quarter Total - July 2006 Program 626,079 $ 46.76
============== ===============
The amount authorized for repurchase under the July 2006 Program is $50 million.
On April 26, 2007, our Board of Directors authorized a $150 million share
repurchase plan.
Item 6. Exhibits
Exhibit No. Description
- ----------- -----------------------------------------------------------------
10.1 Amended and Restated Senior Subordinated Promissory Note -
$12,500,000, originally dated October 11, 2002, by and among PCI
Holding Corp. and Chemed Corporation as of February 23, 2007
10.2 Amended and Restated Senior Subordinated Promissory Note -
$2,201,378, originally dated October 10, 2006, by and among PCI
Holding Corp. and Chemed Corporation as of February 23, 2007
31.1 Certification by Kevin J. McNamara pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act of 1934.
31.2 Certification by David P. Williams pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act of 1934.
31.3 Certification by Arthur V. Tucker, Jr. pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act of 1934.
32.1 Certification by Kevin J. McNamara pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by David P. Williams pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification by Arthur V. Tucker, Jr. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
18
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.
Chemed Corporation
---------------------------------------
(Registrant)
Dated: May 2, 2007 By: Kevin J. McNamara
----------------- ---------------------------------------
Kevin J. McNamara
(President and Chief Executive Officer)
Dated: May 2, 2007 By: David P. Williams
----------------- ---------------------------------------
David P. Williams
(Vice President and Chief Financial
Officer)
Dated: May 2, 2007 By: Arthur V. Tucker, Jr.
----------------- ---------------------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
19
EXHIBIT 10.1
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS
OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM.
THIS PROMISSORY NOTE IS SUBJECT TO A SUBORDINATION AND INTERCREDITOR AGREEMENT
DATED AS OF OCTOBER 11, 2002 BY AND AMONG CHEMED CORPORATION, PCI-A HOLDING
CORP., PCI HOLDING CORP. AND PNC BANK, NATIONAL ASSOCIATION.
AMENDED AND RESTATED
--------------------
SENIOR SUBORDINATED PROMISSORY NOTE
-----------------------------------
$12,500,000 Original Date: October 11, 2002
Amended and Restated as of February 23, 2007
FOR VALUE RECEIVED, PCI HOLDING CORP., a Delaware corporation (the
"Borrower") promises to pay to the order of Chemed Corporation, a Delaware
corporation (hereinafter referred to as the "Lender") on or before October 31,
2009 (the "Maturity Date"), the principal sum of TWELVE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($12,500,000), or such part thereof as then remains unpaid, and
to pay interest from the date hereof on the whole amount of said principal sum
remaining from time to time unpaid at the rate of (i) seven and one-half percent
(7.5%) per annum for the period from October 11, 2002 through September 30,
2004; (ii) eight and one-half percent (8.5%) per annum for the period from
October 1, 2004 through September 30, 2005; (iii) nine and one-half percent
(9.5%) per annum for the period from October 1, 2005 through March 1, 2007; and
(iv) the greater of (1) the annual interest rate payable by the Borrower on its
senior credit facility with PNC Bank, National Association (or any successor
senior lender to the Borrower) plus 2.0% per annum or (2) eleven and one-half
percent (11.5%) per annum for the period from March 1, 2007 through the Maturity
Date. Such interest shall be payable quarterly in arrears on the last Business
Day of March, June, September and December in each year, the first such payment
to be due and payable on December 31, 2002. Principal, premium, if any, and
interest shall be payable in lawful money of the United States of America, in
immediately available funds, by wire transfer of funds to the account or
accounts designated in writing by the Lender or in such other manner as the
Lender may designate from time to time in writing to the Borrower.
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed. Nothing in this Note shall require the Borrower to pay
interest at a rate in excess of the maximum rate permitted by applicable law.
Notwithstanding any other provision of this Note, the Lender does not intend to
charge and Borrower shall not be required to pay any interest or other fees or
charges in excess of the maximum permitted by applicable law; any payments in
excess of such maximum shall be credited to reduce principal hereunder. All
payments received by the Lender hereunder will be applied first to costs of
collection, if any, then to interest and the balance to principal.
The Borrower also promises to pay all taxes levied or assessed upon said
advances againstany holder of this Note and to pay all costs, including
attorneys' fees, costs relating to the appraisal and/or valuation of assets and
all costs incurred in the collection, defense, preservation, administration,
enforcement or protection of this Note or in any guaranty or endorsement of this
Note, or in any litigation arising out of the transactions of which this Note or
any guaranty or endorsement of this Note is a part.
This Note amends and restates in its entirety that certain Senior
Subordinated Promissory Note of the Borrower in favor of the Lender dated
October 11, 2002 in the original principal amount of $12,500,000.
This Note is subject to the following terms and conditions:
1. Prepayment.
----------
(a) Required Liquidity Redemption. In the event and upon the closing
of a Qualified Public Offering or a Sale Event (as defined below) prior to the
Maturity Date, the Borrower shall redeem, without penalty or premium, except as
set forth in Section 1(c), this Note, together with all accrued and unpaid
interest then due thereon.
E-1
(b) Optional Redemption. In addition to the redemption of this Note
required under Section 1(a), the Borrower may, at any time and from time to
time, redeem, without penalty or premium except as set forth in Section 1(c),
this Note, in whole or in part, together with interest due on the amount so
redeemed through the date of redemption.
(c) Redemption Premium. Should the Borrower redeem this Note, in whole
or in part, pursuant to Section 1(a) or 1(b), at any time after October 11, 2007
and prior to the Maturity Date, the Borrower shall pay to the Lender at the time
of such redemption an additional amount equal to five percent (5%) of the total
principal amount of this Note redeemed at such time. No redemption premium shall
be payable by the Borrower should the Borrower redeem this Note, in whole or in
part, pursuant to Section 1(a) or 1(b), at any time on or prior to October 11,
2007.
(d) Notice of Redemption. Notice of any optional redemption pursuant
to Section 1(b) shall be given to the Lender at least five (5) Business Days
prior to the date of such redemption and notice of any required redemption
pursuant to Section 1(a) shall be given to the Lender at least five (5) Business
Days prior to the closing of a Qualified Public Offering or a Sale Event.
(e) Liquidation Payment. In the event that this Note is paid by the
Borrower on or after the Maturity Date without having been redeemed by the
Borrower prior thereto pursuant to Section 1(a) or 1(b), then upon the closing
of a Qualified Public Offering or a Sale Event after the Maturity Date, the
Borrower shall pay to the Lender at the time of such closing an additional
amount equal to ten percent (10%) of the total principal amount of this Note
paid by the Borrower on or after the Maturity Date.
2. Transfer and Exchange of this Note. The Lender may, prior to maturity or
prepayment thereof surrender this Note at the principal office of the Borrower
for transfer or exchange. The Lender shall first notify the Borrower in writing
at least five (5) Business Days in advance of such transfer or exchange. Within
a reasonable time after such notice to the Borrower from the Lender of its
intention to make such exchange and without expense (other than transfer taxes,
if any) to the Lender, the Borrower shall issue in exchange therefor another
note or notes, in such denominations as requested by the Lender, for the same
aggregate principal amount, as of the date of such issuance, as the unpaid
principal amount of this Note so surrendered and having the same maturity and
rate of interest, containing the same provisions and subject to the same terms
and conditions as this Note so surrendered provided that such proposed
transferees shall, prior to the issuance of the new note, execute and deliver an
instrument of accession to the Subordination Agreement (as defined below). Each
new note shall be made payable to such person or persons, or assigns, as the
Lender may designate, and such transfer or exchange shall be made in such a
manner that no gain or loss of principal or interest shall result therefrom.
3. Replacement of Notes. Upon receipt of evidence satisfactory to the
Borrower of the loss, theft, destruction or mutilation of this Note and, if
requested by the Borrower in the case of any such loss, theft or destruction,
upon delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Borrower, or, in the case of any such mutilation, upon
surrender and cancellation of such Note, the Borrower will issue a new Note, of
like tenor and amount and dated the date to which interest has been paid, in
lieu of such lost, stolen, destroyed or mutilated Note.
4. Subordination. The indebtedness evidenced by this Note shall be
subordinate and junior to certain indebtedness of the Borrower to PNC Bank,
National Association (the "Bank") and certain other lenders in the manner and to
the extent provided in the Subordination and Intercreditor Agreement entered as
of October 11, 2002 by and among the Lender, PCI-A Holding Corp., the Borrower
and the Bank (the "Subordination Agreement"). At the request of the Borrower's
current or future senior lender at any time or from time to time, the Lender and
the Borrower shall enter into (i) an amendment of the Subordination Agreement to
confirm that the terms of the Subordination Agreement apply to this Note as
amended and restated and/or (ii) a similar agreement on comparable terms with
any other senior lender of the Borrower.
5. Representations and Warranties of Borrower. The Borrower represents and
warrants to Lender as follows:
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5.1 Organization and Corporate Power. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has all necessary corporate power and authority to issue this
Note and to perform its obligations hereunder.
5.2 Authorization of Transaction. The execution, delivery and performance
of this Note has been duly and validly authorized by all requisite corporate
action on the part of the Borrower, and no other corporate proceedings on their
part are necessary to authorize the execution, delivery or performance of this
Note. This Note constitutes a valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
5.3 No Violation. The Borrower is not subject to or obligated under its
certificate of incorporation or by-laws or any applicable material law, rule or
regulation of any governmental authority, or any agreement or instrument, or any
license, franchise or permit, or any order, writ, injunction or decree, that
would be breached or violated by the Borrower's execution, delivery or
performance of this Note.
5.4 Governmental Authorities and Consents. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by the Borrower in connection with its
execution, delivery and performance of this Note.
5.5 Litigation. There are no material actions, suits, proceedings or orders
pending or, to the Borrower's knowledge, threatened against or affecting the
Borrower at law or in equity, or before or by any federal, state, municipal or
other governmental court, department, commission, board, bureau, agency or
instrumentality, domestic or foreign, that would adversely affect the Borrower's
ability to perform its obligations under this Note.
6. Covenants of Borrower. The Borrower covenants and agrees with the Lender
as follows for so long as this Note is outstanding:
6.1 Dividends and Distributions; Acquisitions. Except with the prior
written consent of the Lender, the Borrower will not (i) pay any cash dividend
on, or make any other cash distribution in respect of, any of its Capital Stock
or (ii) acquire all or substantially all of the voting capital stock or assets
of any business entity (other than any subsidiary of the Borrower).
6.2 Transactions with Affiliates. The Borrower will not enter into any
transaction with any officer, director or stockholder of the Borrower, or any
entity controlled by any such officer, director or stockholder, except for (i)
transactions between the Borrower and any direct or indirect wholly-owned
subsidiary of the Borrower, (ii) compensation to officers, directors, employees,
consultants or agents of the Borrower in connection with their employment by the
Borrower in the ordinary course of business and consistent with the Borrower's
past practices, and (iii) transactions that are in the ordinary course of the
Borrower's business, upon fair and reasonable terms that are no less favorable
to the Borrower than would be obtained in an arm's-length transaction with a
non-affiliated person or entity.
6.3 Payment of Subordinated Indebtedness. The Borrower will not make any
payment on any indebtedness for borrowed money that is pari passu with or
subordinated to this Note, except under the terms of the subordination,
intercreditor, or other similar agreement to which such other indebtedness is
subject.
6.4 Payment of Senior Indebtedness. For the avoidance of doubt, nothing in
this Note shall in any way restrict the Borrower's right or ability to make any
payment on any current or future indebtedness that is not by its express terms
pari passu with or subordinated to this Note.
7. Events of Default. If any of the following events "Events of Default")
shall occur and be continuing:
(a) The Borrower shall fail to pay any installment of principal of
this Note when due;
(b) The Borrower shall fail to pay any interest or premium, if any, on
this Note when due and such failure is not cured within fifteen (15) days;
(c) The Borrower shall default in the performance of any other
covenant or obligation contained in this Note for thirty (30) days after written
notice thereof shall have been given to the Borrower;
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(d) The Borrower shall be involved in financial difficulties evidenced
(1) by its admitting in writing its inability to pay its debts generally as they
become due; (ii) by its commencement of a voluntary case under Title 11 of the
United States Code as from time to time in effect, or by its 4 authorizing, by
appropriate proceedings of its board of directors or other governing body, the
commencement of such a voluntary case; (iii) by its filing an answer or other
pleading admitting or failing to deny the material allegations of a petition
filed against it commencing an involuntary case under said Title Ii, or seeking,
consenting to or acquiescing in the relief therein provided, or by its failing
to controvert timely the material allegations of any such petition; (iv) by the
entry of an order for relief in any involuntary case commenced under said Title
11 which is not dismissed within sixty (60) days; (v) by its seeking relief as a
debtor under any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors, or by its consenting to or acquiescing
in such relief; (vi) by the entry of an order by a court of competent
jurisdiction (a) finding it to be bankrupt or insolvent, (b) ordering or
approving its liquidation, reorganization or any modification or alteration of
the rights of its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property;
(e) Any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the property of
the Borrower and such judgment, writ, or similar process shall not be released,
vacated or fully bonded within thirty (30) days after its issuance or levy;
then, and in any such event listed in Sections 6(a) through (g), the Lender may,
by notice to the Borrower, declare the entire unpaid principal amount of this
Note, and all interest accrued and unpaid thereon to be forthwith due and
payable, whereupon this Note, and all such accrued interest shall become and be
forthwith due and payable (unless there shall have occurred an Event of Default
under Section 6(d) in which case all such amounts shall automatically become due
and payable), without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower, provided that,
if at any time after the principal of this Note shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due,
or any portion thereof, shall have been entered, then and in every such case the
Lender may, by written instrument filed with the Borrower, rescind and annul
such declaration and its consequences.
8. Definitions.
"Business Day" means any day other than a Saturday, Sunday or public
holiday or the equivalent for banks under the laws of the Commonwealth of
Massachusetts.
"Capital Stock" means all authorized capital stock of the Borrower.
"Common Stock" means the common stock of the Borrower, par value $0.01 per
share.
"Qualified Public Offering" means an initial underwritten public offering
by the Borrower of its Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended, for an offering price
resulting in net proceeds to the Borrower of at least Fifty Million Dollars
($50,000,000.00).
"Sale Event" means any (i) consolidation or merger of the Borrower into or
with any other entity or entities which results in the exchange of outstanding
shares of Capital Stock of the Borrower for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or any
affiliate thereof (other than (A) a merger or consolidation to reincorporate the
Borrower in a different jurisdiction, or (B) a merger or consolidation in which
the stockholders of the Borrower immediately prior to such consolidation or
merger shall own more than 50% of the outstanding shares of capital stock or
have sufficient voting power (by virtue of number of votes and/or special voting
rights) to elect a majority of the members of the board of directors of the
resulting or surviving Borrower immediately after such consolidation or merger
(a "Merger Acquisition"), (ii) the sale or transfer by the Borrower of all or
substantially all its assets, or the sale by the Borrower after February 23,
2007 of assets resulting in aggregate net cash proceeds to the Borrower in
excess of Twenty Five Million Dollars ($25,000,000.00) (an "Asset Sale"), or
(iii) the sale or transfer by the Borrower's stockholders of outstanding shares
of Capital Stock that have sufficient voting power (by virtue of number of votes
and/or special voting rights) to elect a majority of the members of the Board of
Directors, in a single transaction or series of related transactions, to a
person, entity or "group" (as such term is used in Section 13(d) of the U.S.
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder) (a "Change of Control").
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9. Waivers, Consent to Jurisdiction.
If this Note is not paid in accordance with its terms, Borrower shall pay
to Lender, in addition to principal and accrued interest thereon, all costs of
collection of the principal and accrued interest and any required liquidation
payment, including, but not limited to, reasonable attorneys' fees, court costs
and other costs for the enforcement of payment of this Note.
No waiver of any obligation of Borrower under this Note shall be effective
unless it is in a writing signed by Lender. A waiver by Lender of any right or
remedy under this Note on any occasion shall not be a bar to exercise of the
same right or remedy on any subsequent occasion or of any other right or remedy
at any time.
This Note is delivered in and shall be enforceable in accordance with the
internal domestic laws of the State of Delaware (without regard to the conflicts
of law provisions thereof), and shall be construed in accordance therewith, and
shall have the effect of a sealed instrument.
Borrower hereby expressly waives presentment, demand, and protest, notice
of demand, dishonor and nonpayment of this Note, and all other notices or
demands of any kind in connection with the delivery, acceptance, performance,
default or enforcement hereof and hereby consents to any delays, extensions of
time, renewals, waivers or modifications that may be granted or consented to by
the holder hereof with respect to the time of payment or any other provision
hereof.
IN WITNESS WHEREOF, the Borrower has executed this Note under seal as of
the date first written above.
PCI HOLDING CORP.
By: /s/ Robert J. Nixon
Name: Robert J. Nixon
---------------
Title: CEO
---
WITNESS: By: /s/ Larry Sussman
Name: Larry Sussman
-------------
Title: Director of Finance
-------------------
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EXHIBIT 10.2
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS
OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM.
THIS PROMISSORY NOTE IS SUBJECT TO A SUBORDINATION AND INTERCREDITOR AGREEMENT
DATED AS OF OCTOBER 11, 2002 BY AND AMONG CHEMED CORPORATION, PCI-A HOLDING
CORP., PCI HOLDING CORP. AND PNC BANK, NATIONAL ASSOCIATION.
AMENDED AND RESTATED
--------------------
SENIOR SUBORDINATED PROMISSORY NOTE
-----------------------------------
$2,201,378.70 Original Date: October 10, 2006
Amended and Restated as of February 23, 2007
FOR VALUE RECEIVED, PCI HOLDING CORP., a Delaware corporation (the
"Borrower") promises to pay to the order of Chemed Corporation, a Delaware
corporation (hereinafter referred to as the "Lender") on or before October 31,
2009 (the "Maturity Date"), the principal sum of two million, two hundred and
one thousand, three hundred and seventy eight dollars and seventy cents
($2,201,378.70), or such part thereof as then remains unpaid, and to pay
interest from September 1, 2006 on the whole amount of said principal sum
remaining from time to time unpaid at the rate of (i) nine and one-half percent
(9.5) per annum for the period from September 1, 2006 through March 1, 2007; and
(ii) the greater of (1) the annual interest rate payable by the Borrower on its
senior credit facility with PNC Bank, National Association (or any successor
senior lender to the Borrower) plus 2.0% per annum or (2) eleven and one-half
percent (11.5%) per annum for the period from March 1, 2007 through the Maturity
Date. Such interest shall be payable quarterly in arrears on the last Business
Day of March, June, September and December in each year, the first such payment
to be due and payable on December 31, 2006. Principal, premium, if any, and
interest shall be payable in lawful money of the United States of America, in
immediately available funds, by wire transfer of funds to the account or
accounts designated in writing by the Lender or in such other manner as the
Lender may designate from time to time in writing to the Borrower.
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed. Nothing in this Note shall require the Borrower to pay
interest at a rate in excess of the maximum rate permitted by applicable law.
Notwithstanding any other provision of this Note, the Lender does not intend to
charge and Borrower shall not be required to pay any interest or other fees or
charges in excess of the maximum permitted by applicable law; any payments in
excess of such maximum shall be credited to reduce principal hereunder. All
payments received by the Lender hereunder will be applied first to costs of
collection, if any, then to interest and the balance to principal.
The Borrower also promises to pay all taxes levied or assessed upon said
advances againstany holder of this Note and to pay all costs, including
attorneys' fees, costs relating to the appraisal and/or valuation of assets and
all costs incurred in the collection, defense, preservation, administration,
enforcement or protection of this Note or in any guaranty or endorsement of this
Note, or in any litigation arising out of the transactions of which this Note or
any guaranty or endorsement of this Note is a part.
This Note amends and restates in its entirety that certain Senior
Subordinated Promissory Note of the Borrower in favor of the Lender dated
October 10, 2006 in the original principal amount of $2,201,378.70.
This Note is subject to the following terms and conditions:
1. Prepayment.
(f) Required Liquidity Redemption. In the event and upon the closing
of a Qualified Public Offering or a Sale Event (as defined below) prior to the
Maturity Date, the Borrower shall redeem, without penalty or premium, except as
set forth in Section 1(c), this Note, together with all accrued and unpaid
interest then due thereon.
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(g) Optional Redemption. In addition to the redemption of this Note
required under Section 1(a), the Borrower may, at any time and from time to
time, redeem, without penalty or premium except as set forth in Section 1(c),
this Note, in whole or in part, together with interest due on the amount so
redeemed through the date of redemption.
(h) Redemption Premium. Should the Borrower redeem this Note, in whole
or in part, pursuant to Section 1(a) or 1(b), at any time after October 11, 2007
and prior to the Maturity Date, the Borrower shall pay to the Lender at the time
of such redemption an additional amount equal to five percent (5%) of the total
principal amount of this Note redeemed at such time. No redemption premium shall
be payable by the Borrower should the Borrower redeem this Note, in whole or in
part, pursuant to Section 1(a) or 1(b), at any time on or prior to October 11,
2007.
(i) Notice of Redemption. Notice of any optional redemption pursuant
to Section 1(b) shall be given to the Lender at least five (5) Business Days
prior to the date of such redemption and notice of any required redemption
pursuant to Section 1(a) shall be given to the Lender at least five (5) Business
Days prior to the closing of a Qualified Public Offering or a Sale Event.
(j) Liquidation Payment. In the event that this Note is paid by the
Borrower on or after the Maturity Date without having been redeemed by the
Borrower prior thereto pursuant to Section 1(a) or 1(b), then upon the closing
of a Qualified Public Offering or a Sale Event after the Maturity Date, the
Borrower shall pay to the Lender at the time of such closing an additional
amount equal to ten percent (10%) of the total principal amount of this Note
paid by the Borrower on or after the Maturity Date.
4. Transfer and Exchange of this Note. The Lender may, prior to maturity or
prepayment thereof surrender this Note at the principal office of the Borrower
for transfer or exchange. The Lender shall first notify the Borrower in writing
at least five (5) Business Days in advance of such transfer or exchange. Within
a reasonable time after such notice to the Borrower from the Lender of its
intention to make such exchange and without expense (other than transfer taxes,
if any) to the Lender, the Borrower shall issue in exchange therefor another
note or notes, in such denominations as requested by the Lender, for the same
aggregate principal amount, as of the date of such issuance, as the unpaid
principal amount of this Note so surrendered and having the same maturity and
rate of interest, containing the same provisions and subject to the same terms
and conditions as this Note so surrendered provided that such proposed
transferees shall, prior to the issuance of the new note, execute and deliver an
instrument of accession to the Subordination Agreement (as defined below). Each
new note shall be made payable to such person or persons, or assigns, as the
Lender may designate, and such transfer or exchange shall be made in such a
manner that no gain or loss of principal or interest shall result therefrom.
5. Replacement of Notes. Upon receipt of evidence satisfactory to the
Borrower of the loss, theft, destruction or mutilation of this Note and, if
requested by the Borrower in the case of any such loss, theft or destruction,
upon delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Borrower, or, in the case of any such mutilation, upon
surrender and cancellation of such Note, the Borrower will issue a new Note, of
like tenor and amount and dated the date to which interest has been paid, in
lieu of such lost, stolen, destroyed or mutilated Note.
7. Subordination. The indebtedness evidenced by this Note shall be
subordinate and junior to certain indebtedness of the Borrower to PNC Bank,
National Association (the "Bank") and certain other lenders in the manner and to
the extent provided in the Subordination and Intercreditor Agreement entered as
of October 11, 2002 by and among the Lender, PCI-A Holding Corp., the Borrower
and the Bank (the "Subordination Agreement"). At the request of the Borrower's
current or future senior lender at any time or from time to time, the Lender and
the Borrower shall enter into (i) an amendment of the Subordination Agreement to
confirm that the terms of the Subordination Agreement apply to this Note as
amended and restated and/or (ii) a similar agreement on comparable terms with
any other senior lender of the Borrower.
8. Representations and Warranties of Borrower. The Borrower represents and
warrants to Lender as follows:
5.1 Organization and Corporate Power. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has all necessary corporate power and authority to issue this
Note and to perform its obligations hereunder.
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5.2 Authorization of Transaction. The execution, delivery and performance
of this Note has been duly and validly authorized by all requisite corporate
action on the part of the Borrower, and no other corporate proceedings on their
part are necessary to authorize the execution, delivery or performance of this
Note. This Note constitutes a valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
5.3 No Violation. The Borrower is not subject to or obligated under its
certificate of incorporation or by-laws or any applicable material law, rule or
regulation of any governmental authority, or any agreement or instrument, or any
license, franchise or permit, or any order, writ, injunction or decree, that
would be breached or violated by the Borrower's execution, delivery or
performance of this Note.
5.4 Governmental Authorities and Consents. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by the Borrower in connection with its
execution, delivery and performance of this Note.
5.5 Litigation. There are no material actions, suits, proceedings or orders
pending or, to the Borrower's knowledge, threatened against or affecting the
Borrower at law or in equity, or before or by any federal, state, municipal or
other governmental court, department, commission, board, bureau, agency or
instrumentality, domestic or foreign, that would adversely affect the Borrower's
ability to perform its obligations under this Note.
9. Covenants of Borrower. The Borrower covenants and agrees with the Lender
as follows for so long as this Note is outstanding:
6.1 Dividends and Distributions; Acquisitions. Except with the prior
written consent of the Lender, the Borrower will not (i) pay any cash dividend
on, or make any other cash distribution in respect of, any of its Capital Stock
or (ii) acquire all or substantially all of the voting capital stock or assets
of any business entity (other than any subsidiary of the Borrower).
6.2 Transactions with Affiliates. The Borrower will not enter into any
transaction with any officer, director or stockholder of the Borrower, or any
entity controlled by any such officer, director or stockholder, except for (i)
transactions between the Borrower and any direct or indirect wholly-owned
subsidiary of the Borrower, (ii) compensation to officers, directors, employees,
consultants or agents of the Borrower in connection with their employment by the
Borrower in the ordinary course of business and consistent with the Borrower's
past practices, and (iii) transactions that are in the ordinary course of the
Borrower's business, upon fair and reasonable terms that are no less favorable
to the Borrower than would be obtained in an arm's-length transaction with a
non-affiliated person or entity.
6.3 Payment of Subordinated Indebtedness. The Borrower will not make any
payment on any indebtedness for borrowed money that is pari passu with or
subordinated to this Note, except under the terms of the subordination,
intercreditor, or other similar agreement to which such other indebtedness is
subject.
6.4 Payment of Senior Indebtedness. For the avoidance of doubt, nothing in
this Note shall in any way restrict the Borrower's right or ability to make any
payment on any current or future indebtedness that is not by its express terms
pari passu with or subordinated to this Note.
7. Events of Default. If any of the following events "Events of Default")
shall occur and be continuing:
(c) The Borrower shall fail to pay any installment of principal of
this Note when due;
(d) The Borrower shall fail to pay any interest or premium, if any, on
this Note when due and such failure is not cured within fifteen (15) days;
(f) The Borrower shall default in the performance of any other
covenant or obligation contained in this Note for thirty (30) days after written
notice thereof shall have been given to the Borrower;
(g) The Borrower shall be involved in financial difficulties evidenced
(1) by its admitting in writing its inability to pay its debts generally as they
become due; (ii) by its commencement of a voluntary case under Title 11 of the
United States Code as from time to time in effect, or by its 4 authorizing, by
appropriate proceedings of its board of directors or other governing body, the
commencement of such a voluntary case; (iii) by its filing an answer or other
pleading admitting or failing to deny the material allegations of a petition
filed against it commencing an involuntary case under said Title Ii, or seeking,
consenting to or acquiescing in the relief therein provided, or by its failing
to controvert timely the material allegations of any such petition; (iv) by the
entry of an order for relief in any involuntary case commenced under said Title
11 which is not dismissed within sixty (60) days; (v) by its seeking relief as a
debtor under any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors, or by its consenting to or acquiescing
in such relief; (vi) by the entry of an order by a court of competent
jurisdiction (a) finding it to be bankrupt or insolvent, (b) ordering or
approving its liquidation, reorganization or any modification or alteration of
the rights of its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property;
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(h) Any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the property of
the Borrower and such judgment, writ, or similar process shall not be released,
vacated or fully bonded within thirty (30) days after its issuance or levy;
(i) The Borrower and/or Patient Care, Inc. shall fail to pay any
Intercompany Claim (as that term is used in Paragraph 8 of the Settlement
Agreement dated as of October 2006 among the Lender, Vitas Healthcare
Corporation, the Borrower and Patient Care, Inc., hereinafter the "Settlement
Agreement"), as provided in Paragraph 8 of the Settlement Agreement, and such
failure is not cured within ten (10) days of notice of such from Lender to
Borrower; or
(j) The Borrower shall fail to deliver any Financials (as that term is
used in the Settlement Agreement) to Chemed as and when required by the
Financial Reporting Agreement (as that term is used in the Settlement
Agreement), and such failure is not cured within ten (10) days of notice of such
by the Lender to the Borrower;
then, and in any such event listed in Sections 6(a) through (g), the Lender may,
by notice to the Borrower, declare the entire unpaid principal amount of this
Note, and all interest accrued and unpaid thereon to be forthwith due and
payable, whereupon this Note, and all such accrued interest shall become and be
forthwith due and payable (unless there shall have occurred an Event of Default
under Section 6(d) in which case all such amounts shall automatically become due
and payable), without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower, provided that,
if at any time after the principal of this Note shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due,
or any portion thereof, shall have been entered, then and in every such case the
Lender may, by written instrument filed with the Borrower, rescind and annul
such declaration and its consequences.
10. Definitions.
"Business Day" means any day other than a Saturday, Sunday or public
holiday or the equivalent for banks under the laws of the Commonwealth of
Massachusetts.
"Capital Stock" means all authorized capital stock of the Borrower.
"Common Stock" means the common stock of the Borrower, par value $0.01 per
share.
"Qualified Public Offering" means an initial underwritten public offering
by the Borrower of its Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended, for an offering price
resulting in net proceeds to the Borrower of at least Fifty Million Dollars
($50,000,000.00).
"Sale Event" means any (i) consolidation or merger of the Borrower into or
with any other entity or entities which results in the exchange of outstanding
shares of Capital Stock of the Borrower for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or any
affiliate thereof (other than (A) a merger or consolidation to reincorporate the
Borrower in a different jurisdiction, or (B) a merger or consolidation in which
the stockholders of the Borrower immediately prior to such consolidation or
merger shall own more than 50% of the outstanding shares of capital stock or
have sufficient voting power (by virtue of number of votes and/or special voting
rights) to elect a majority of the members of the board of directors of the
resulting or surviving Borrower immediately after such consolidation or merger
(a "Merger Acquisition"), (ii) the sale or transfer by the Borrower of all or
substantially all its assets, or the sale by the Borrower after February 23,
2007 of assets resulting in aggregate net cash proceeds to the Borrower in
excess of Twenty Five Million Dollars ($25,000,000.00) (an "Asset Sale"), or
(iii) the sale or transfer by the Borrower's stockholders of outstanding shares
of Capital Stock that have sufficient voting power (by virtue of number of votes
and/or special voting rights) to elect a majority of the members of the Board of
Directors, in a single transaction or series of related transactions, to a
person, entity or "group" (as such term is used in Section 13(d) of the U.S.
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder) (a "Change of Control").
E-9
11. Waivers, Consent to Jurisdiction.
If this Note is not paid in accordance with its terms, Borrower shall pay
to Lender, in addition to principal and accrued interest thereon, all costs of
collection of the principal and accrued interest and any required liquidation
payment, including, but not limited to, reasonable attorneys' fees, court costs
and other costs for the enforcement of payment of this Note.
No waiver of any obligation of Borrower under this Note shall be effective
unless it is in a writing signed by Lender. A waiver by Lender of any right or
remedy under this Note on any occasion shall not be a bar to exercise of the
same right or remedy on any subsequent occasion or of any other right or remedy
at any time.
This Note is delivered in and shall be enforceable in accordance with the
internal domestic laws of the State of Delaware (without regard to the conflicts
of law provisions thereof), and shall be construed in accordance therewith, and
shall have the effect of a sealed instrument.
Borrower hereby expressly waives presentment, demand, and protest, notice
of demand, dishonor and nonpayment of this Note, and all other notices or
demands of any kind in connection with the delivery, acceptance, performance,
default or enforcement hereof and hereby consents to any delays, extensions of
time, renewals, waivers or modifications that may be granted or consented to by
the holder hereof with respect to the time of payment or any other provision
hereof.
IN WITNESS WHEREOF, the Borrower has executed this Note under seal as of
the date first written above.
PCI HOLDING CORP.
By: /s/ Robert J. Nixon
Name: Robert J. Nixon
---------------
Title: CEO
---
WITNESS: By: /s/ Larry Sussman
Name: Larry Sussman
Title: Director of Finance
E-10
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, Kevin J. McNamara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 2, 2007 /s/ Kevin J. McNamara
----------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-11
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, David P. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 2, 2007 /s/ David P. Williams
----------- ---------------------
David P. Williams
(Vice President and Chief Financial Officer)
E-12
EXHIBIT 31.3
CERTIFICATION PURSUANT TO RULES 13a-14(a)/15d-14(a) OF THE EXCHANGE ACT OF 1934
I, Arthur V. Tucker, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chemed Corporation
("registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial report to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles,
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 2, 2007 /s/ Arthur V. Tucker, Jr.
----------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and
Controller)
E-13
EXHIBIT 32.1
CERTIFICATION BY KEVIN J. MCNAMARA
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
President and Chief Executive Officer of Chemed Corporation ("Company"), does
hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
March 31, 2007 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 2, 2007 /s/ Kevin J. McNamara
----------- ---------------------
Kevin J. McNamara
(President and Chief
Executive Officer)
E-14
EXHIBIT 32.2
CERTIFICATION BY DAVID P. WILLIAMS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
Vice President and Chief Financial Officer of Chemed Corporation ("Company"),
does hereby certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
March 31, 2007 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 2, 2007 /s/ David P. Williams
----------- ---------------------
David P. Williams
(Vice President and Chief Financial Officer)
E-15
EXHIBIT 32.3
CERTIFICATION BY ARTHUR V. TUCKER, JR.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as
Vice President and Controller of Chemed Corporation ("Company"), does hereby
certify that:
1) the Company's Quarterly Report of Form 10-Q for the quarter ending
March 31, 2007 ("Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 2, 2007 /s/ Arthur V. Tucker, Jr.
----------- -------------------------
Arthur V. Tucker, Jr.
(Vice President and Controller)
E-16