ITEM 1. BUSINESS.
GENERAL
Roto-Rooter, Inc. was incorporated in Delaware in 1983 as a wholly owned subsidiary of Chemed Corporation, a Delaware corporation, and on August 31, 1984 succeeded to the business of Chemed's Roto-Rooter Group, the substantial portion of which business Chemed acquired in 1980. As used herein, "Company" and "Roto-Rooter" refers to Roto-Rooter, Inc. and its subsidiaries and "Chemed" refers to Chemed Corporation and its subsidiaries.
In September 1984, the Company sold in a private placement 719,991 shares of its common stock, par value $1 per share (the "Common Stock"), and in June 1985, Chemed sold in a public offering 1,100,000 shares of Common Stock. Chemed owns 2,990,333 shares of Common Stock or approximately 59 percent of the outstanding shares of Common Stock.
Roto-Rooter conducts its business in one business segment. All significant revenues relate to providing repair and maintenance services to residential, commercial, industrial and municipal customers through both company-owned and franchised operations.
DESCRIPTION OF BUSINESS
Roto-Rooter is the nation's largest provider of sewer and drain cleaning services. The Company provides sewer and drain cleaning and plumbing repair and maintenance services through company-owned operations and franchised operations located in all 50 states, Canada and Japan. The Company also manufactures and purchases for resale sewer and drain cleaning equipment, cable, and other products and accessories for its company-owned operations and for sale to its independent franchisees. Roto-Rooter is one of the oldest franchising businesses in the United States, having established its first franchise in 1936. In August 1991, the Company and Chemed, respectively, purchased 70% and 30% of Convenient Home Services, Inc., which changed its name to Service America Systems, Inc. in July of 1994 ("Service America"). Service America is engaged primarily in the air conditioning and appliance maintenance and repair business in Florida primarily through the sale of service contracts which generally cover a one-year period. In July 1993, Service America completed the acquisition of all the outstanding shares of common stock of Encore Service Systems, Inc. ("Encore"), which is also principally engaged in the air conditioning and appliance maintenance and repair business through service contracts in Florida and Arizona. As a percent of total operating revenue, sewer and drain cleaning repair and maintenance services represent 31 percent, plumbing repair and maintenance services represent 22 percent, air conditioning and appliance repair and maintenance services represent 37 percent, and all other classes represent 10 percent. Other information called for by this item is included within Note 2 of the Notes to Consolidated Financial Statements appearing on page 14 of the 1994 Annual Report to Stockholders and is incorporated herein by reference.
PRODUCT AND MARKET DEVELOPMENT
Roto-Rooter engages in a continuing program for the development and marketing of new products and services under the Roto-Rooter name.
Since 1981, the Company has developed and introduced four drain-care products for residential and commercial use which are distributed principally through the Roto-Rooter service technicians directly to residential customers and commercial accounts.
Plumbing repair services were first introduced in a company-owned service location in 1981. These services are provided primarily to residential and commercial accounts
by licensed plumbers who are Company employees. The Company has been able to use its existing staff and facilities in the development of its plumbing repair businesses. All company-owned operations are providing plumbing repair and maintenance services to the markets they serve, except for some company-owned contractor operations. The Company does not presently plan to enter the plumbing contracting business for new construction.
Cleaning of large diameter pipes is an additional service provided to industrial and municipal customers by several company-owned operations. The types of pipes cleaned include sanitary and storm sewer pipes and pipes used for industrial processes. These pipes are cleaned by a variety of methods using mechanical equipment and high-pressure water jets. Although the drain pipes in homes generally are four to six inches in diameter, the diameters of pipes used in industrial and municipal systems are as large as six feet.
FRANCHISE AGREEMENTS
The Company maintains written franchise agreements with its independent franchisees. The form of franchise agreement in general use by the Company since early 1990 provides that the franchisee is licensed and franchised to perform and sell services relating to sewer and drain cleaning under the Roto-Rooter(R) and related trademarks and service marks in accordance with specified methods, techniques, and standards only within a designated geographic area. The franchisee is not permitted to use any of the Company's marks in connection with the sale of any products or the performance of other services except as expressly authorized by the Company. A franchisee is required to actively and continuously advertise, promote, and sell sewer and drain cleaning services under the Roto-Rooter(R) service mark; to maintain an office and service facility only within his territory; and to comply at all times with quality and service standards specified by the Company.
Generally, franchise agreements provide for a five-year term and, upon expiration, each franchisee has the right to enter into a new franchise agreement with Roto-Rooter upon the terms and conditions as are then being offered by Roto-Rooter to other renewing franchisees. Under Roto-Rooter's current franchising program, a new franchisee pays an initial franchise fee of $3,000. Thereafter, each franchisee pays a monthly fee to Roto-Rooter which is based upon the population within his territory.
The franchise agreement provides for a Base Monthly Franchise Fee according to Roto-Rooter's current fee schedule which (i) is determined by the current population in the territory, and (ii) is thereafter adjusted annually during the term of the agreement to reflect increases or decreases in the Consumer Price Index. This form of franchise agreement enables Roto-Rooter's franchise fee income from continuing franchisees to increase in proportion to inflation during the life of each agreement.
SERVICE MARKS AND TRADEMARKS
The Company regards its corporate name, service marks, and trademarks to be important to its identification and of significant value in the conduct of the business. The Company owns the following names, phrases, and designs which are registered on the Principal Register of the United States Patent and Trademark Office: "Roto-Rooter," the Roto-Rooter logo, and "And Away Go Troubles Down the Drain."
The Company vigorously polices the uses and practices associated with its service marks and trademarks. The Company is unaware of any ongoing infringements which may have a material adverse effect on its overall business or the validity of any such mark.
COMPETITION
All aspects of the sewer, drain, and pipe cleaning, and appliance and plumbing repair and maintenance businesses are highly competitive. Competition is, however, fragmented in most markets with local and regional firms providing the primary
competition. The principal methods of competition are advertising, range of services provided, speed and quality of customer service, service guarantees, and pricing.
SEASONALITY
Roto-Rooter's total operating revenues have minimal seasonality.
GOVERNMENT REGULATIONS
Roto-Rooter's franchising activities are subject to various federal and state franchising laws and regulations, including the rules and regulations of the Federal Trade Commission (the "FTC") regarding the offering or sale of franchises. The rules and regulations of the FTC require that Roto-Rooter provide all prospective franchisees with specific information regarding the franchise program and Roto-Rooter in the form of a detailed franchise offering circular. In addition, a number of states require Roto-Rooter to register its franchise offering prior to offering or selling franchises in the state. Various state laws also provide for certain rights in favor of franchisees, including (i) limitations on the franchisor's ability to terminate a franchise except for good cause, (ii) restrictions on the franchisor's ability to deny renewal of a franchise, (iii) circumstances under which the franchisor may be required to purchase certain inventory of franchisees when a franchise is terminated or not renewed in violation of such laws, and (iv) provisions relating to arbitration.
Roto-Rooter's operations are also subject to various federal, state, and local laws and regulations regarding environmental matters and other aspects of the operation of a sewer and drain cleaning and plumbing services business. For certain other activities, such as septic tank pumping, Roto-Rooter is subject to state and local environmental health and sanitation regulations. Compliance with federal, state and local laws governing discharge of materials into the environment have not had nor are expected to have a material effect upon the operations of the Company. Roto-Rooter's ability to engage in the plumbing repair business is also subject to certain limitations and restrictions imposed by state and local licensing laws and regulations.
Service America's operations are regulated by the Florida and Arizona Departments of Insurance. In accordance with certain Florida regulatory requirements, Service America maintains cash and certificates of deposit with the Department of Insurance and is also required to maintain additional unencumbered resources. In addition, Service America's air conditioning and appliance repair and maintenance business is also subject to certain limitations imposed by state and local business laws and regulations.
Roto-Rooter, to the best of its knowledge, is currently in compliance in all material respects with the laws and regulations affecting its operations. While Roto-Rooter cannot currently predict the effect which any future legislation, regulations, or interpretations may have upon its operations, it does not anticipate any changes that would have a material adverse impact on its operations.
EMPLOYEES
On December 31, 1994, Roto-Rooter had a total of 2,478 employees; 2,425 were located in the United States and 53 were located in Canada.
ITEM 2.
ITEM 2. PROPERTIES.
_________________________
All "owned" property is held in fee and is not subject to any major encumbrance. "Leased" properties are occupied under rental agreements having terms ranging up to eleven years and providing, in some instances, for payment by Roto-Rooter of insurance, property taxes, and building operating expenses. Roto-Rooter considers all of these facilities to be in good operating condition and generally adequate for its present and currently anticipated needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
__________________________
Each executive officer holds office until the annual election at the next annual organizational meeting of the Board of Directors of the Company which is scheduled to be held on May 15, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Future dividends are necessarily dependent upon Roto-Rooter's earnings and financial condition and other factors not presently determinable.
As of March 20, 1995, there were approximately 211 stockholders of record of the Company's Common Stock. This number only includes stockholders of record and does not include stockholders with shares beneficially held for those in nominee name or within clearinghouse positions of brokers, banks or other institutions. The Company believes its stockholders number more than 500.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item for the five years ended December 31, 1994 is set forth on pages 22 and 23 of the Company's 1994 Annual Report to Stockholders and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information called for by this Item is set forth on pages 19 through 21 of the Company's 1994 Annual Report to Stockholders and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated January 30, 1995, appearing on pages 9 through 18 of the Company's 1994 Annual Report to Stockholders and the Unaudited Quarterly Financial Data appearing on page 18 of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The additional information required under this Item with respect to directors and executive officers is set forth in the Company's 1995 Proxy Statement and in Part I hereof under the caption "Executive Officers of the Registrant" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is set forth in the Company's 1995 Proxy Statement which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENT SCHEDULE
See Index to Financial Statements and Financial Statement Schedule on page S-1.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROTO-ROOTER, INC.
March 28, 1995 By /s/ William R. Griffin ----------------------------------- William R. Griffin President and Chief Executive Officer
March 28, 1995 /s/ Naomi C. Dallob - ---------------------- --------------------------------- Date Naomi C. Dallob (Attorney-in-Fact and a Director)
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
1992, 1993 AND 1994
_________________________
The consolidated financial statements of Roto-Rooter, Inc. listed above, appearing in the accompanying Roto-Rooter, Inc. 1994 Annual Report to Stockholders, are incorporated herein by reference. The financial statement schedule should be read in conjunction with the consolidated financial statements listed above. Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto as listed above.
S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Roto-Rooter, Inc.
Our audits of the consolidated financial statements referred to in our report dated January 30, 1995 appearing on page 9 of the 1994 Annual Report to Stockholders of Roto-Rooter, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14 of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP
Cincinnati, Ohio January 30, 1995
S-2 SCHEDULE VIII
ROTO-ROOTER, INC. AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
S-3
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS