SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At February 11, 2002, there were 15,100,180 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Comprehensive Income (Loss) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND JUNE 30, 2001
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
2001 2001
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 11,319 $ 8,699
Accounts receivable, net 98,457 103,260
Inventories 13,241 13,173
Prepaid expenses and other 5,027 5,192
--------- ---------
Total current assets 128,044 130,324
PROPERTY AND EQUIPMENT, net 51,989 57,999
INTANGIBLE ASSETS, net 92,345 92,424
OTHER ASSETS 14,365 17,787
--------- ---------
$ 286,743 $ 298,534
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 9,840 $ 12,915
Accrued liabilities 86,113 96,340
Current portion of long-term debt 293,653 294,439
--------- ---------
Total current liabilities 389,606 403,694
LONG-TERM DEBT, net of current portion 5,111 1,286
NON-REFUNDABLE SUBSCRIPTION INCOME 15,836 15,701
--------- ---------
Total liabilities 410,553 420,681
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 379 8,379
--------- ---------
STOCKHOLDERS' DEFICIT
Common stock 154 152
Additional paid-in capital 138,099 137,948
Accumulated deficit (265,421) (267,401)
Accumulated other comprehensive income 4,218 14
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' deficit (124,189) (130,526)
--------- ---------
$ 286,743 $ 298,534
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE
Ambulance services $ 98,173 $ 100,202 $ 198,434 $ 201,944
Fire protection services 15,802 15,140 31,759 30,864
Other 9,784 9,867 19,233 20,639
--------- --------- --------- ---------
Total revenue 123,759 125,209 249,426 253,447
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits 72,081 71,334 147,807 143,976
Provision for doubtful accounts 16,629 29,045 33,515 48,437
Depreciation 3,949 5,419 8,245 11,127
Amortization of intangibles 44 1,869 79 3,738
Other operating expenses 23,829 26,122 46,863 51,536
Contract loss costs and impairment -- 5,190 -- 5,190
--------- --------- --------- ---------
Total expenses 116,532 138,979 236,509 264,004
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 7,227 (13,770) 12,917 (10,557)
Interest expense, net 5,691 7,827 12,546 15,703
Other (9) (334) (9) (823)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, 1,545 (21,263) 380 (25,437)
Income tax provision (benefit) (1,625) 311 (1,600) 222
--------- --------- --------- ---------
NET INCOME (LOSS) $ 3,170 $ (21,574) $ 1,980 $ (25,659)
========= ========= ========= =========
INCOME (LOSS) PER SHARE
BASIC INCOME (LOSS) PER SHARE $ 0.21 $ (1.47) $ 0.13 $ (1.75)
========= ========= ========= =========
DILUTED INCOME (LOSS) PER SHARE $ 0.21 $ (1.47) $ 0.13 $ (1.75)
========= ========= ========= =========
AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 15,100 14,645 15,065 14,636
========= ========= ========= =========
AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 15,336 14,645 15,183 14,636
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
2001 2000
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 1,980 $(25,659)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations--
Write-off of goodwill impaired with termination of contract -- 4,287
Depreciation and amortization 8,324 14,865
Amortization of gain on sale of real estate -- (52)
Gain on sale of property and equipment (311) (426)
Provision for doubtful accounts 33,515 48,437
Undistributed losses of minority shareholders (9) (823)
Amortization of discount on Senior Notes 13 13
Change in assets and liabilities ---
Increase in accounts receivable (29,980) (32,471)
Increase in inventories (77) (1,750)
(Increase) decrease in prepaid expenses and other (16) 402
Decrease in accounts payable (1,331) (5,146)
Decrease in accrued liabilities (3,609) (5,139)
Increase in nonrefundable subscription income 135 691
-------- --------
Net cash provided by (used in) operating activities 8,634 (2,771)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (2,864) (2,566)
Proceeds from the sale of property and equipment 965 1,783
(Increase) decrease in other assets (1,993) 2,383
-------- --------
Net cash provided by (used in) investing activities (3,892) 1,600
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (1,263) (2,095)
Repayments of other debt and capital lease obligations (702) (1,275)
Issuance of common stock 153 184
-------- --------
Net cash used in financing activities (1,812) (3,186)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH (310) 1
-------- --------
INCREASE (DECREASE) IN CASH 2,620 (4,356)
CASH, beginning of period 8,699 10,287
-------- --------
CASH, end of period $ 11,319 $ 5,931
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
NET INCOME (LOSS) $ 3,170 $(21,574) $ 1,980 $(25,659)
Foreign currency translation adjustments 4,244 -- 4,204 1
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 7,414 $(21,574) $ 6,184 $(25,658)
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for the
three and six-month periods ended December 31, 2001 and 2000 include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the consolidated financial position and results of
operations. The results of operations for the three and six-month periods
ended December 31, 2001 and 2000 are not necessarily indicative of the
results of operations for a full fiscal year. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended June 30, 2001.
(2) GOING CONCERN
Although the Company generated net income of approximately $2.0 million for
the six months ended December 31, 2001, it incurred net losses of
approximately $226.7 million and $101.3 million for the fiscal years ended
June 30, 2001 and 2000, respectively. Additionally, at December 31, 2001,
the Company had a net working capital deficit of $261.6 million (primarily
as a result of the classification as current liabilities of amounts
outstanding under its revolving credit facility and 7 7/8% Senior Notes due
2008) as well as a stockholders' deficit of $124.2 million. As described in
Note 3, the Company has been operating under a waiver of financial covenant
compliance relating to its revolving credit facility since December 31,
1999.
Despite the significant losses experienced in fiscal 2001 and 2000, the
Company has been able to fund its operating and capital needs internally
since March 2000. The Company believes that its current business model will
generate sufficient cash flows to provide a basis for a new long-term
financing agreement with its lenders or to restructure its debt. A new
long-term agreement would likely have terms different from those contained
in the Company's existing debt agreements, including potentially higher
interest rates, which could materially affect the Company's results of
operations and cash flows. Further, any new long-term agreement may involve
the conversion of all or a portion of the Company's debt to equity or
similar transactions that could result in material and substantial dilution
to existing stockholders.
The Company's ability to continue as a going concern depends on the
continued success of its current business model as well as its ability to
restructure its debt. Although there can be no assurance, management
believes that the Company will be successful in sustaining profitable
operations and restructuring its debt. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
7
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM DEBT
The Company's long-term debt consists of the following at December 31, 2001
and June 30, 2001 (in thousands):
DECEMBER 31, JUNE 30,
2001 2001
--------- ---------
7 7/8% Senior Notes due 2008, net of discount of
$160 and $173, respectively $ 149,840 $ 149,827
Revolving credit facility 141,779 143,042
Note payable (See note 4) 4,972 --
Capital lease obligations and other notes payable,
at varying rates from 3.8% to 12.75%,
due through 2006 2,173 2,856
--------- ---------
298,764 295,725
Less: Current portion (293,653) (294,439)
--------- ---------
$ 5,111 $ 1,286
========= =========
The Company is not in compliance with the financial covenants contained in
the agreement relating to its revolving credit facility, as amended. The
Company has received a compliance waiver, as amended, (the "waiver")
covering periods from December 31, 1999 through April 1, 2002. The waiver
covers the representations and warranties relating to no material adverse
changes as well as the following financial covenants: total debt leverage
ratio, total debt to total capitalization ratio and fixed charge coverage
ratio. The waiver stipulates that no additional borrowings will be
available to the Company through the end of the waiver period and requires
the Company to: (i) engage certain financial advisors; (ii) meet certain
benchmarks for projected cash balances and expenditures; (iii) maintain
positive consolidated operating income net of restructuring charges; (iv)
pay reasonable fees and expenses related to the professionals employed on
behalf of the Steering Committee, as defined in the waiver; and, (v) reduce
the outstanding balance on the revolving credit facility upon the
occurrence of certain events such as the sale of certain assets. During
certain periods covered by the waiver, the Company was not in compliance
with the requirement that it maintain positive consolidated net operating
income net of restructuring charges. There can be no assurance that the
Company will be able to comply with the requirements of the waiver in the
future. As the waiver period currently extends through April 1, 2002 and
the Company's 7 7/8% Senior Notes due 2008 (the "Senior Notes") contain a
cross-default provision, the related balances have been classified as
current liabilities in the Company's consolidated balance sheets as of
December 31, 2001 and June 30, 2001 as required by generally accepted
accounting principles.
In connection with the waiver, the Company has supported the formation of a
Steering Committee comprised of bank lenders and Senior Note holders to
further explore debt-restructuring opportunities. The Company intends to
negotiate with the Steering Committee in an effort to reduce the Company's
debt under both the revolving credit facility and the Senior Notes, so as
to further improve its liquidity and long-term financial flexibility. The
Company intends to consider all appropriate strategies to achieve these
objectives.
Any restructuring or amendment may involve the conversion of all or a
portion of the Company's debt to equity or other similar transactions that
could result in material and substantial dilution to existing stockholders.
Such restructuring or amendment could also include material changes in the
underlying interest rates or other terms of the revolving credit facility
and Senior Notes. There can be no assurance that the Company can accomplish
a restructuring of its debt on terms acceptable to the Company, or at all.
8
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's inability to successfully negotiate a long-term agreement
with its lenders could have a material adverse effect on the business,
financial condition, cash flows, and results of operations of the Company.
Borrowings under the revolving credit facility bear interest at prime plus
.25% payable monthly. Additional interest accrues at an annual rate of 2.0%
during the waiver period. In addition to the amounts currently outstanding
under the revolving credit facility, the lenders have issued letters of
credit on the Company's behalf in the amount of $6.2 million. The letters
of credit mature at various times during the year and are generally
renewable on an annual basis.
In March 1998, the Company issued $150.0 million of its Senior Notes which
are general unsecured obligations of the Company and are unconditionally
guaranteed on a joint and several basis by substantially all of the
Company's domestic wholly-owned current and future subsidiaries. The
consolidating financial statements presented below include Rural/Metro
Corporation (the Parent), the guarantor subsidiaries (the Guarantors) and
the subsidiaries which are not guarantors (the Non-Guarantors). The Company
has not presented separate financial statements and related disclosures for
each of the Guarantor subsidiaries because the Company believes such
information would not be material to investors making an investment
decision.
9
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 10,609 $ 710 $ -- $ 11,319
Accounts receivable, net -- 90,425 8,032 -- 98,457
Inventories -- 13,192 49 -- 13,241
Prepaid expenses and other 582 4,075 370 -- 5,027
--------- --------- --------- --------- ---------
Total current assets 582 118,301 9,161 -- 128,044
PROPERTY AND EQUIPMENT, net -- 51,535 454 -- 51,989
INTANGIBLE ASSETS, net -- 86,519 5,826 -- 92,345
DUE FROM (TO) AFFILIATES 274,492 (215,864) (58,628) -- --
OTHER ASSETS 2,811 9,322 2,232 -- 14,365
INVESTMENTS IN SUBSIDIARIES (101,662) -- -- 101,662 --
--------- --------- --------- --------- ---------
$ 176,223 $ 49,813 $ (40,955) $ 101,662 $ 286,743
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ -- $ 7,055 $ 2,785 $ -- $ 9,840
Accrued liabilities 8,793 69,551 7,769 -- 86,113
Current portion of long-term debt 291,619 1,837 197 -- 293,653
--------- --------- --------- --------- ---------
Total current liabilities 300,412 78,443 10,751 -- 389,606
LONG-TERM DEBT, net of current portion -- 5,108 3 -- 5,111
NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,809 27 -- 15,836
DEFERRED INCOME TAXES -- 1,164 (1,164) -- --
--------- --------- --------- --------- ---------
Total liabilities 300,412 100,524 9,617 -- 410,553
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST -- -- -- 379 379
--------- --------- --------- --------- ---------
STOCKHOLDERS' DEFICIT
Common stock 154 82 17 (99) 154
Additional paid-in capital 138,099 54,622 34,942 (89,564) 138,099
Accumulated deficit (265,421) (105,415) (89,749) 195,164 (265,421)
Accmulatated other comprehensive income 4,218 -- 4,218 (4,218) 4,218
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' deficit (124,189) (50,711) (50,572) 101,283 (124,189)
--------- --------- --------- --------- ---------
$ 176,223 $ 49,813 $ (40,955) $ 101,662 $ 286,743
========= ========= ========= ========= =========
10
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- --------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 6,763 $ 1,936 $ -- $ 8,699
Accounts receivable, net -- 93,471 9,789 -- 103,260
Inventories -- 13,093 80 -- 13,173
Prepaid expenses and other 531 4,320 341 -- 5,192
--------- --------- --------- --------- ---------
Total current assets 531 117,647 12,146 -- 130,324
PROPERTY AND EQUIPMENT, net -- 57,271 728 -- 57,999
INTANGIBLE ASSETS, net -- 86,573 5,851 -- 92,424
DUE FROM (TO) AFFILIATES 294,729 (235,817) (58,912) -- --
OTHER ASSETS 2,356 13,064 2,367 -- 17,787
INVESTMENTS IN SUBSIDIARIES (127,702) -- -- 127,702 --
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ -- $ 9,478 $ 3,437 $ -- $ 12,915
Accrued liabilities 7,571 73,069 15,700 -- 96,340
Current portion of long-term debt 292,869 1,315 255 -- 294,439
--------- --------- --------- --------- ---------
Total current liabilities 300,440 83,862 19,392 -- 403,694
LONG-TERM DEBT, net of current portion -- 1,272 14 -- 1,286
NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,701 -- -- 15,701
DEFERRED INCOME TAXES -- 1,164 (1,164) -- --
OTHER LIABILITIES -- -- -- -- --
--------- --------- --------- --------- ---------
Total liabilities 300,440 101,999 18,242 -- 420,681
--------- --------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS -- -- -- 8,379 8,379
--------- --------- --------- --------- ---------
STOCKHOLDERS' DEFICIT
Common stock 152 82 17 (99) 152
Additional paid-in capital 137,948 54,622 34,942 (89,564) 137,948
Accumulated deficit (267,401) (117,965) (91,035) 209,000 (267,401)
Accumulated other comprehensive income 14 -- 14 (14) 14
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' deficit (130,526) (63,261) (56,062) 119,323 (130,526)
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
11
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 86,861 $ 11,312 $ -- $ 98,173
Fire protection services -- 15,344 458 -- 15,802
Other -- 9,212 572 -- 9,784
--------- --------- --------- --------- ---------
Total revenue -- 111,417 12,342 -- 123,759
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 64,025 8,056 -- 72,081
Provision for doubtful accounts -- 16,382 247 -- 16,629
Depreciation -- 3,834 115 -- 3,949
Amortization of intangibles -- 28 16 -- 44
Other operating expenses -- 21,956 1,873 -- 23,829
--------- --------- --------- --------- ---------
Total expenses -- 106,225 10,307 -- 116,532
--------- --------- --------- --------- ---------
OPERATING INCOME -- 5,192 2,035 -- 7,227
Interest expense, net 5,392 15 284 -- 5,691
Other -- -- -- (9) (9)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN INCOME (5,392) 5,177 1,751 9 1,545
Income tax provision (benefit) -- (1,625) -- -- (1,625)
--------- --------- --------- --------- ---------
(5,392) 6,802 1,751 9 3,170
EQUITY IN INCOME OF WHOLLY-OWNED SUBSIDIARIES 8,562 -- -- (8,562) --
--------- --------- --------- --------- ---------
NET INCOME $ 3,170 $ 6,802 $ 1,751 $ (8,553) $ 3,170
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 4,244 -- 4,244
Comprehensive income of
wholly-owned subsidiaries 4,244 -- -- (4,244) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME $ 7,414 $ 6,802 $ 5,995 $ (12,797) $ 7,414
========= ========= ========= ========= =========
12
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 86,329 $ 13,873 $ -- $ 100,202
Fire protection services -- 14,856 284 -- 15,140
Other -- 8,738 1,129 -- 9,867
--------- --------- --------- --------- ---------
Total revenue -- 109,923 15,286 -- 125,209
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 60,907 10,427 -- 71,334
Provision for doubtful accounts -- 28,044 1,001 -- 29,045
Depreciation -- 4,791 628 -- 5,419
Amortization of intangibles -- 1,266 603 -- 1,869
Other operating expenses -- 22,185 3,937 -- 26,122
Contract termination costs
and related asset impairment -- 5,190 -- -- 5,190
--------- --------- --------- --------- ---------
Total expenses -- 122,383 16,596 -- 138,979
--------- --------- --------- --------- ---------
OPERATING LOSS -- (12,460) (1,310) -- (13,770)
Interest expense, net 7,551 (53) 329 -- 7,827
Other -- -- -- (334) (334)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND EQUITY IN LOSSES (7,551) (12,407) (1,639) 334 (21,263)
Income tax provision (benefit) -- 497 (186) -- 311
--------- --------- --------- --------- ---------
(7,551) (12,904) (1,453) 334 (21,574)
EQUITY IN LOSSES OF WHOLLY-OWNED SUBSIDIARIES (14,023) -- -- 14,023 --
--------- --------- --------- --------- ---------
NET LOSS $ (21,574) $ (12,904) $ (1,453) $ 14,357 $ (21,574)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 1 -- 1
Comprehensive income of
wholly-owned subsidiaries 1 -- -- (1) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS $ (21,573) $ (12,904) $ (1,452) $ 14,356 $ (21,573)
========= ========= ========= ========= =========
13
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 175,517 $ 22,917 $ -- $ 198,434
Fire protection services -- 30,918 841 -- 31,759
Other -- 18,575 658 -- 19,233
--------- --------- --------- --------- ---------
Total revenue -- 225,010 24,416 -- 249,426
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 130,293 17,514 -- 147,807
Provision for doubtful accounts -- 32,843 672 -- 33,515
Depreciation -- 7,747 498 -- 8,245
Amortization of intangibles -- 55 24 -- 79
Other operating expenses -- 43,049 3,814 -- 46,863
--------- --------- --------- --------- ---------
Total expenses -- 213,987 22,522 -- 236,509
--------- --------- --------- --------- ---------
OPERATING INCOME -- 11,023 1,894 -- 12,917
Interest expense, net 11,865 78 603 -- 12,546
Other -- -- -- (9) (9)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN INCOME (11,865) 10,945 1,291 9 380
Income tax provision (benefit) -- (1,605) 5 -- (1,600)
--------- --------- --------- --------- ---------
(11,865) 12,550 1,286 9 1,980
EQUITY IN INCOME OF WHOLLY-OWNED SUBSIDIARIES 13,845 -- -- (13,845) --
--------- --------- --------- --------- ---------
NET INCOME $ 1,980 $ 12,550 $ 1,286 $ (13,836) $ 1,980
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 4,204 -- 4,204
Comprehensive income of
wholly-owned subsidiaries 4,204 -- -- (4,204) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME $ 6,184 $ 12,550 $ 5,490 $ (18,040) $ 6,184
========= ========= ========= ========= =========
14
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 173,591 $ 28,353 $ -- $ 201,944
Fire protection services -- 30,300 564 -- 30,864
Other -- 17,986 2,653 -- 20,639
--------- --------- --------- --------- ---------
Total revenue -- 221,877 31,570 -- 253,447
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 122,699 21,277 -- 143,976
Provision for doubtful accounts -- 46,289 2,148 -- 48,437
Depreciation -- 9,836 1,291 -- 11,127
Amortization of intangibles -- 2,531 1,207 -- 3,738
Other operating expenses -- 43,186 8,350 -- 51,536
Contract termination costs
and related asset impairment -- 5,190 -- -- 5,190
--------- --------- --------- --------- ---------
Total expenses -- 229,731 34,273 -- 264,004
--------- --------- --------- --------- ---------
OPERATING LOSS -- (7,854) (2,703) -- (10,557)
Interest expense, net 15,119 (82) 666 -- 15,703
Other -- -- -- (823) (823)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND EQUITY IN LOSSES (15,119) (7,772) (3,369) 823 (25,437)
Income tax provision (benefit) -- 497 (275) -- 222
--------- --------- --------- --------- ---------
(15,119) (8,269) (3,094) 823 (25,659)
EQUITY IN LOSSES OF WHOLLY-OWNED SUBSIDIARIES (10,540) -- -- 10,540 --
--------- --------- --------- --------- ---------
NET LOSS $ (25,659) $ (8,269) $ (3,094) $ 11,363 $ (25,659)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 1 -- 1
Comprehensive income of
wholly-owned subsidiaries 1 -- -- (1) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS $ (25,658) $ (8,269) $ (3,093) $ 11,362 $ (25,658)
========= ========= ========= ========= =========
15
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 1,980 $ 12,550 $ 1,286 $(13,836) $ 1,980
Adjustments to reconcile net income to cash
provided by operations--
Depreciation and amortization -- 7,802 522 -- 8,324
(Gain) loss on sale of property and equipment -- 122 (433) -- (311)
Provision for doubtful accounts -- 32,843 672 -- 33,515
Undistributed losses of minority shareholders -- -- -- (9) (9)
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities ---
Increase in accounts receivable -- (29,797) (183) -- (29,980)
(Increase) decrease in inventories -- (99) 22 -- (77)
(Increase) decrease in prepaid expenses and other (51) 244 (209) -- (16)
(Increase) decrease in due to/from affiliates (1,289) (11,960) (286) 13,535 --
Increase in accounts payable -- (2,423) 1,092 -- (1,331)
Increase (decrease) in accrued liabilities and
other liabilities 1,222 (3,518) (1,313) -- (3,609)
Increase in nonrefundable subscription income -- 108 27 -- 135
-------- -------- -------- -------- --------
Net cash operating activities 1,875 5,872 1,197 (310) 8,634
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (2,498) (366) -- (2,864)
Proceeds from the sale of property and equipment -- 365 600 -- 965
(Increase) decrease in other assets (455) 791 (2,329) -- (1,993)
-------- -------- -------- -------- --------
Net cash (used in) investing activities (455) (1,342) (2,095) -- (3,892)
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (1,263) -- -- -- (1,263)
Repayment of other debt and capital lease obligations -- (684) (18) -- (702)
Issuance of common stock 153 -- -- -- 153
-------- -------- -------- -------- --------
Net cash (used in) financing activities (1,110) (684) (18) -- (1,812)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH (310) -- (310) 310 (310)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH -- 3,846 (1,226) -- 2,620
CASH, beginning of period -- 6,763 1,936 -- 8,699
-------- -------- -------- -------- --------
CASH, end of period $ -- $ 10,609 $ 710 $ -- $ 11,319
======== ======== ======== ======== ========
16
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(25,659) $ (8,269) $ (3,094) $ 11,363 $(25,659)
Adjustments to reconcile net loss to cash
provided by (used in) operations--
Write-off of goodwill impaired with termination of contract -- 4,287 -- -- 4,287
Depreciation and amortization -- 12,367 2,498 -- 14,865
Amortization of gain on sale of real estate -- (52) -- -- (52)
Gain on sale of property and equipment -- (420) (6) -- (426)
Provision for doubtful accounts -- 46,289 2,148 -- 48,437
Undistributed losses of minority shareholders -- -- -- (823) (823)
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities ---
Increase in accounts receivable -- (32,103) (368) -- (32,471)
Increase in inventories -- (1,613) (137) -- (1,750)
Decrease in prepaid expenses and other -- 251 151 -- 402
(Increase) decrease in due to/from affiliates 25,718 (12,746) (2,433) (10,539) --
Decrease in accounts payable -- (4,705) (441) -- (5,146)
Increase (decrease) in accrued liabilities 809 (4,045) (1,903) -- (5,139)
Increase in nonrefundable subscription income -- 589 102 -- 691
Increase (decrease) in deferred income taxes -- 45 (45) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 881 (125) (3,528) 1 (2,771)
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (2,558) (8) -- (2,566)
Proceeds from the sale of property and equipment -- 1,727 56 -- 1,783
(Increase) decrease in other assets 1,029 (750) 2,104 -- 2,383
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities 1,029 (1,581) 2,152 -- 1,600
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (2,095) -- -- -- (2,095)
Repayment of debt and capital lease obligations -- (1,163) (112) -- (1,275)
Issuance of common stock 184 -- -- -- 184
-------- -------- -------- -------- --------
Net cash used in financing activities (1,911) (1,163) (112) -- (3,186)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH 1 -- 1 (1) 1
-------- -------- -------- -------- --------
DECREASE IN CASH -- (2,869) (1,487) -- (4,356)
CASH, beginning of period -- 9,035 1,252 -- 10,287
-------- -------- -------- -------- --------
CASH, end of period $ -- $ 6,166 $ (235) $ -- $ 5,931
======== ======== ======== ======== ========
17
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) JOINT VENTURE
During the fiscal year ended June 30, 1998, the Company entered into a
joint venture to provide non-emergency ambulance service and medical
transportation in the Maryland, Washington, D.C. and northern Virginia
areas. The Company obtained a majority interest in the joint venture in
exchange for a commitment to provide $8.0 million for acquisitions by the
joint venture in the greater Baltimore, Maryland and Washington, D.C. areas
(which commitment was fulfilled by June 30, 1998) while the other party to
the joint venture contributed all of the issued and outstanding stock in
two ambulance service companies in exchange for his minority stake in the
joint venture. The Company consolidated the joint venture for financial
reporting purposes.
The joint venture agreement allowed the minority joint venture partner to
exercise an option to repurchase one share of common stock in the joint
venture from the Company thereby increasing the minority partner's interest
to 50%. The agreement also allowed the minority partner to "put" its 50%
interest in the joint venture to the Company. The Company then had the
option to delay the "put" for a period of one year. During the fiscal year
ended June 30, 2001, the minority partner elected to exercise the "put"
option and the Company exercised the right to delay its "put" for a year.
Based on the provisions of the joint venture agreement, the purchase price
for the minority interest in the joint venture approximated $5.1 million.
The Company recorded a charge of approximately $4.0 million during the
fiscal year ended June 30, 2001 relating to this agreement.
During the three months ended December 31, 2001, the Company agreed to
purchase the minority partner's interest in the joint venture in exchange
for note payable of approximately $5.1 million. The note bears interest at
prime plus 2.25% (subject to a cap of 7.75%) and requires monthly principal
and interest payments ranging from $70,000 to $125,000 through December
2006. Additionally, any outstanding accrued interest is due at maturity.
The Company has reflected this agreement in its consolidated balance sheet
as of December 31, 2001 as an increase in long-term debt of $5.1 million
offset by reductions in minority interest of $8.0 million and other assets
of $2.9 million. The agreement also resulted in other income of $9,000 in
the consolidated statement of operations for the three and six-month
periods ended December 31, 2001.
(5) ARGENTINE DEVALUATION
Since 1991, the Argentine peso had been pegged to the U.S. dollar at an
exchange rate of 1 to 1. In December 2001, the Argentine government imposed
exchange restrictions which severely limited cash conversions and
withdrawals. When exchange houses reopened on January 11, 2002, the peso to
dollar exchange rate closed at 1.7 pesos to the dollar.
The Company's Argentine subsidiaries utilize the peso as their functional
currency as their business is primarily transacted in pesos. In order to
prepare the accompanying financial statements as of and for the three and
six months ended December 31, 2001, the Company translated the balance
sheets of its Argentine subsidiaries using the 1.7 to 1 exchange rate (the
closing rate on that date on which pesos were first exchangeable into
dollars subsequent to December 31, 2001) while its statements of operations
and cash flows were translated using the 1 to 1 exchange rate which was the
rate actually in effect during the three and six month periods ended
December 31, 2001. As the liabilities of the Argentine subsidiaries exceed
their assets, the change in exchange rates resulted in a credit to
accumulated other comprehensive income in the Company's consolidated
balance sheet as of December 31, 2001. Further fluctuations in the peso to
dollar exchange rate will impact the translation of the financial
statements of the Argentine subsidiaries for financial reporting purposes.
18
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) RESTRUCTURING CHARGE AND OTHER
During the fiscal year ended June 30, 2001, the Company recorded
restructuring and other charges totaling $9.1 million associated with its
program to close or downsize certain service areas. This charge primarily
included severance costs for approximately 250 employees, service area
closing costs, and the write-off of goodwill and other assets associated
with the service area reductions. Through December 31, 2001 approximately
seventy three of the impacted employees have left the Company.
During the fiscal year ended June 30, 2000, the Company recorded
restructuring and other charges, of approximately $43.3 million associated
with its program to close or downsize certain non-emergency service areas
and reduce corporate overhead. This charge primarily included severance
costs for approximately 300 employees (all of who had left the Company by
December 31, 2001), service area closing costs, and the write-off of
goodwill and other assets associated with the service area reductions.
The Company's restructuring reserve, which is included in accrued
liabilities in the consolidated balance sheet totaled $3.3 million at
December 31, 2001 and $5.9 million at June 30, 2001.
(7) NET INCOME (LOSS) PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted income (loss) per
share computations for the three and six-month periods ended December 31,
2001 and 2000 is as follows (in thousands, except per share amounts):
Three Months Ended December 31, 2001 Three Months Ended December 31, 2000
----------------------------------- ------------------------------------
Income Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------- -------- -------- -------- -------- --------
Basic income (loss) per share $ 3,170 15,100 $ 0.21 $(21,574) 14,645 $ (1.47)
======== ========
Effect of stock options -- 236 -- --
-------- -------- -------- --------
Diluted income (loss) per share $ 3,170 15,336 $ 0.21 $(21,574) 14,645 $ (1.47)
======== ======== ======== ======== ======== ========
Six Months Ended December 31, 2001 Six Months Ended December 31, 2000
----------------------------------- ------------------------------------
Income Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------- -------- -------- -------- -------- --------
Basic income (loss) per share $ 1,980 15,065 $ 0.13 $(25,659) 14,636 $ (1.75)
======== ========
Effect of stock options -- 118 -- --
-------- -------- -------- --------
Diluted income (loss) per share $ 1,980 15,183 $ 0.13 $(25,659) 14,636 $ (1.75)
======== ======== ======== ======== ======== ========
As a result of anti-dilutive effects, approximately 293,000 and 317,000
common stock equivalents were not included in the computation of diluted
loss per share for the three and six- month periods ended December 31,
2000, respectively.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), BUSINESS
COMBINATIONS, and No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS,
19
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
collectively referred to as the "Standards". SFAS 141 supersedes Accounting
Principles Board Opinion (APB) No. 16, BUSINESS COMBINATION. The provisions
of SFAS 141: require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001; provide specific
criteria for the initial recognition and measurement of intangible assets
apart from goodwill; and require that unamortized negative goodwill be
written off immediately as an extraordinary gain instead of being deferred
and amortized. SFAS 142 supersedes APB 17, INTANGIBLE ASSETS, and is
effective for fiscal years beginning after December 15, 2001 although
earlier adoption is allowed in certain circumstances. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their initial recognition. The provisions of SFAS 142: prohibit the
amortization of goodwill and indefinite-lived intangible assets; require
that goodwill and indefinite-lived intangibles assets be tested annually
for impairment (and in interim periods if certain events occur indicating
that the carrying value of goodwill and/or indefinite-lived intangible
assets may be impaired); require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill; and remove
the forty-year limitation on the amortization period of intangible assets
that have finite lives. The provisions of the Standards also apply to
equity-method investments made both before and after June 30, 2001.
The Company elected to adopt the provisions of SFAS 142 in the first
quarter of its fiscal year that began July 1, 2001. In connection
therewith, the Company no longer records amortization of its existing
goodwill balances. The Company's goodwill, which primarily relates to its
ambulance segment is included in intangible assets in the accompanying
consolidated balance sheets, totaled $91.3 million at July 1, 2001 while
related amortization expense totaled $7.1 million for the fiscal year ended
June 30, 2001. The following table summarizes the Company's net income
(loss) and related per share amounts as if the provisions of SFAS 142 had
been adopted as of July 1, 2000:
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Reported net income (loss) $ 3,170 $ (21,574) $ 1,980 $ (25,659)
Add back: Goodwill amortization -- 1,818 -- 3,637
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 3,170 $ (19,756) $ 1,980 $ (22,022)
========== ========== ========== ==========
Basic income (loss) per share
Reported net income (loss) $ 0.21 $ (1.47) $ 0.13 $ (1.75)
Goodwill amortization -- 0.12 -- 0.25
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share $ 0.21 $ (1.35) $ 0.13 $ (1.50)
========== ========== ========== ==========
Diluted income (loss) per share
Reported net income (loss) $ 0.21 $ (1.47) $ 0.13 $ (1.75)
Goodwill amortization -- 0.12 -- 0.25
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share $ 0.21 $ (1.35) $ 0.13 $ (1.50)
========== ========== ========== ==========
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The Company has completed its first step goodwill
impairment test and has identified certain reporting units within its
ambulance segment where goodwill impairment, as defined under SFAS 142, may
exist. The second step of the goodwill impairment test, which measures the
amount of the impairment loss as of July 1, 2001, if any, must be completed
by June 30, 2002, the end of the Company's fiscal year. Any impairment loss
resulting from the transitional impairment test will be reflected as the
cumulative effect of a change in accounting principle in the first quarter
of fiscal 2002 requiring restatement of previously reported quarterly
results. The Company has not yet determined what effect these impairment
tests will have on its earnings or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
assets to be Disposed of" and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effect of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Company is required to adopt SFAS
144 during the fiscal year ending June 30, 2003. The Company does not
anticipate any material impact resulting from the adoption of SFAS No. 144.
(9) COMMITMENTS AND CONTINGENCIES
Accrued liabilities in the accompanying consolidated balance sheets
includes $2.0 million at December 31, 2001 and $2.6 million at June 30,
2001 which is attributable to settlement of a Medicaid audit and the
accrual of a proposed settlement of a Medicare investigation.
(10) SEGMENT REPORTING
The Company operates in two business segments: (i) Ambulance and (ii) Fire
and Other. The Company's reportable segments are strategic business units
that offer different services. They are managed separately based on the
fundamental differences in their operations.
20
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a fee-for-service
basis, on a non-refundable subscription basis, and through capitated
contracts. The Ambulance segment also includes urgent home medical care and
ambulance services provided under capitated service arrangements in
Argentina.
The Fire and Other segment includes fire protection and training,
alternative transportation, services provided in conjunction with our
public/private alliance in San Diego, home health care services, urgent and
primary care in clinics, dispatch, fleet, and billing services.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements filed
with the Form 10-K, as amended, for the fiscal year ended June 30, 2001.
The Company defines segment profit (loss) as total revenue less total
operating expenses and interest expense associated with the segment. The
Company defines segment assets as the sum of net accounts receivable,
inventory and net property and equipment associated with the segments.
Information by operating segment is set forth below (in thousands):
FIRE AND
Three months ended December 31, 2001 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 98,173 $ 25,586 -- $ 123,759
Segment profit (loss) $ 1,413 $ 3,792 $ (3,669) $ 1,536
Segment assets $ 141,882 $ 20,648 $ 1,157 $ 163,687
FIRE AND
Three months ended December 31, 2000 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 100,202 $ 25,007 -- $ 125,209
Segment profits (loss) $ (17,708) $ 3,270 $ (7,159) $ (21,597)
Segment assets $ 186,213 $ 36,965 $ 1,582 $ 224,760
FIRE AND
Six months ended December 31, 2001 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 198,434 $ 50,992 -- $ 249,426
Segment profit (loss) $ 526 $ 6,936 $ (7,091) $ 371
Segment assets $ 141,882 $ 20,648 $ 1,157 $ 163,687
FIRE AND
Six months ended December 31, 2000 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 201,944 $ 51,503 -- $ 253,447
Segment profits (loss) $ (20,306) $ 6,365 $ (12,319) $ (26,260)
Segment assets $ 186,213 $ 36,965 $ 1,582 $ 224,760
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Statements in this Report that are not historical facts are hereby identified as
"forward-looking statements" as that term is used under the securities laws. We
caution readers that such "forward-looking statements," including those relating
to our future business prospects, working capital, accounts receivable
collection, liquidity, cash flow, capital needs, operational results, compliance
with debt facilities and debt restructuring prospects, wherever they appear in
this Report or in other statements attributable to us, are necessary estimates
reflecting our best judgment and involve a number of risks and uncertainties
that could cause actual results to differ materially from those suggested by the
"forward-looking statements." You should consider such "forward
looking-statements" in light of various important factors, including those set
forth below and others set forth from time to time in our reports and
registration statements filed with the Securities and Exchange Commission.
The health care industry in general and the ambulance industry in particular are
in a state of significant change. This makes us susceptible to various risks
that may affect future results such as the following: successful integration and
operation of acquired service providers; growth strategy and difficulty in
maintaining growth; leverage; revenue mix; dependence on certain business
relationships; recoverability of intangible assets; dependence on government
and third party payers; fee-for-service contracts; possible adverse changes in
reimbursement rates; impact of rate structures; possible negative effects of
prospective health care reform; high utilization of services by customers under
capitated service arrangements; competitive market forces; fluctuation in
quarterly results; volatility of stock price; access to debt and equity capital;
dependence on key personnel; and governmental rate regulation.
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions, direct and indirect
subsidiaries, and affiliates. Rural/Metro Corporation, a Delaware corporation,
is strictly a holding company. All services, operations, and management
functions are provided through its subsidiaries and affiliated entities.
This Report should be read in conjunction with our Annual Report on Form 10-K,
as amended, for the fiscal year ended June 30, 2001.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls (911 emergency ambulance services) and non-emergency transport
services (general transport services) to patients on a fee-for-service basis, on
a non-refundable subscription fee basis, and through capitated contracts. Per
transport revenue depends on various factors, including the mix of rates between
existing service areas and new service areas and the mix of activity between 911
emergency ambulance services and general medical transport services as well as
other competitive factors. Fire protection services are provided either under
contracts with municipalities, fire districts, or other agencies or on a
non-refundable subscription fee basis to individual homeowners or commercial
property owners.
GOING CONCERN
Although we generated net income of approximately $2.0 million for the six
months ended December 31, 2001, we incurred net losses of approximately $226.7
million and $101.3 million for the fiscal years ended June 30, 2001 and 2000,
respectively. Additionally, at December 31, 2001, we had a net working capital
deficit of $261.6 million (primarily as a result of the classification as
current liabilities of amounts outstanding under our revolving credit facility
and 7 7/8% Senior Notes due 2008) as well as a stockholders' deficit of $124.2
million. We have been operating under a waiver of financial covenant compliance
relating to our revolving credit facility since December 31, 1999.
22
Despite the significant losses experienced in fiscal 2001 and 2000, we have been
able to fund our operating and capital needs internally since March 2000. We
believe that our current business model will generate sufficient cash flows to
provide a basis for a new long-term financing agreement with our lenders or to
restructure our debt. A new long-term agreement would likely have terms
different from those contained in our existing debt agreements, including
potentially higher interest rates, which could materially affect our results of
operations and cash flows. Further, any new long-term agreement may involve the
conversion of all or a portion of our debt to equity or similar transactions
that could result in material and substantial dilution to existing stockholders.
Our ability to continue as a going concern depends on the continued success of
our current business model as well as our ability to restructure our debt.
Although there can be no assurance, management believes that we will be
successful in achieving profitable operations and restructuring our debt. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The audit report relating to our fiscal 2001 financial statements was qualified
for our ability to continue as a going concern. Management anticipates that the
audit report on our fiscal 2002 financial statements will contain a similar
qualification unless we are able to successfully restructure our debt.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION -Domestic ambulance service fees are recognized when
services are provided and are recorded net of Medicare, Medicaid, and other
reimbursement limitations. Because of the nature of our domestic ambulance
services, it is necessary to respond to a number of calls, primarily 911
emergency ambulance service calls, which may not result in transports. Results
of operations are discussed below on the basis of actual transports since
transports are more directly related to revenue. Expenses associated with calls
that do not result in transports are included in operating expenses. The
percentage of calls not resulting in transports varies substantially depending
upon the mix of non-emergency ambulance and 911 emergency ambulance service
calls and is generally higher in service areas in which the calls are primarily
911 emergency ambulance service calls. Rates in our markets take into account
the anticipated number of calls that may not result in transports. We do not
separately account for expenses associated with calls that do not result in
transports. Revenue generated under our capitated service arrangements in
Argentina is included in ambulance services revenue.
Revenue generated under fire protection service contracts is recognized over the
life of the contract. Subscription fees received in advance are deferred and
recognized over the term of the subscription agreement, which is generally one
year.
Other revenue consists of revenue generated from our public/private alliance in
San Diego, fees associated with alternative transportation, dispatch, fleet,
billing, and home health care services and is recognized when the services are
provided.
PROVISION FOR DOUBTFUL ACCOUNTS - Payments received from third-party payers
represent a substantial portion of our ambulance service fee receipts. We
establish an allowance for doubtful accounts based on credit risks applicable to
certain types of payers, historical trends, and other relevant information. A
provision for doubtful accounts is made for the expected difference between
ambulance services fees recognized and amounts actually collected. Our provision
for doubtful accounts generally is higher with respect to collections to be
derived from patients than for collections to be derived directly from
third-party payers and generally is higher for 911 emergency ambulance services
than for general ambulance transport services. Actual results could differ from
these estimates.
GENERAL LIABILITY AND WORKERS' COMPENSATION PROGRAMS -We retain certain levels
of exposure with respect to our general liability and workers compensation
programs and purchase excess coverage from third party insurers for exposures in
excess of those levels. In addition to expensing premiums and other costs
relating to excess coverage, we establish reserves for both reported and
incurred but unreported claims within our level of retention based on currently
available information as well as our historical experience in settling such
23
claims. We adjust our claim reserves with an associated charge or credit to
expense as new information on the underlying claims is obtained. We engage
independent actuaries to periodically evaluate the adequacy of our claim
reserves.
SEASONALITY
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher second and third fiscal quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions.
OTHER CONSIDERATIONS
Public health conditions affect our operations differently in different regions.
For example, greater utilization of services by customers under capitated
service arrangements decreases our operating income. The same conditions
domestically, where we operate under fee-for-service arrangements, result in a
greater number of transports, increasing our operating income.
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
REVENUE
Total revenue decreased $1.4 million, or 1.1%, from $125.2 million for the three
months ended December 31, 2000 to $123.8 million for the three months ended
December 31, 2001.
Ambulance services revenue decreased $2.0 million, or 2.0%, from $100.2 million
for the three months ended December 31, 2000 to $98.2 million for the three
months ended December 31, 2001. The decrease in ambulance services revenue is
primarily related to a $1.3 million decrease in revenue in our Latin American
operations resulting from decreases in memberships under capitated service
arrangements. The decrease in memberships was attributable to the impact of
economic conditions in Argentina combined with significant increases in taxes on
all medical services.
Domestic ambulance service revenue decreased approximately $800,000, or 0.9%
from approximately $90.5 million for the three months ended December 31, 2000 to
approximately $89.7 for the three months ended December 31, 2001. This decrease
is comprised of an approximate $3.1 million decrease related to the loss of 911
contracts in Arlington, Texas and Lincoln, Nebraska and an approximate $1.6
million decrease related to the closure of service areas during the first
quarter of fiscal 2002 offset by an approximate $3.4 million increase related to
domestic ambulance service revenue in areas that we served in both the
three-month periods ended December 31, 2001 and 2000 and an approximate $500,000
increase in revenue related to a 911 contract that began during the second
quarter of fiscal 2001. Total domestic ambulance transports decreased by 22,000,
or 7.9%, from 278,000 for the three months ended December 31, 2000 to 256,000
for the three months ended December 31, 2001. The decrease in transports is
primarily due to the closure of service areas during the first quarter of fiscal
2002 and the loss of contracts noted above.
Fire protection services revenue increased by $700,000, or 4.6%, from $15.1
million for the three months ended December 31, 2000 to approximately $15.8
million for the three months ended December 31, 2001. Fire protection services
revenue increased primarily due to rate and utilization increases of $400,000
and increased contracting activity by our industrial fire protection group of
$200,000.
Other revenue decreased $100,000, or 1.0%, from $9.9 million for the three
months ended December 31, 2000 to $9.8 million for the three months ended
December 31, 2001. This decrease was primarily due to the decrease in clinic
24
revenue in our Latin American operations of approximately $900,000 offset by an
increase in revenue related to our public/private alliance in San Diego of
$800,000.
OPERATING EXPENSES
Payroll and employee benefits increased $800,000, or 1.1%, from $71.3 million
for the three months ended December 31, 2000 to $72.1 million for the three
months ended December 31, 2001. This increase is attributable to the
renegotiation of labor contracts in certain of our service areas offset by a
$1.6 million decrease related to our Latin America operations due to the
decreased membership and the disposition of our clinic operations. The closure
of service areas during the first quarter of fiscal 2002 accounted for another
$1.0 million of the decrease while the decrease related to the loss of the
contracts in Arlington, Texas and Lincoln, Nebraska totaled approximately $1.2
million. We expect that our labor costs will continue to increase, including
increased costs associated with accounts receivable collection and Medicare and
Medicaid compliance. Payroll and employee benefits increased from 56.9% of total
revenue for the three months ended December 31, 2000 to 58.2% of total revenue
for the three months ended December 31, 2001.
The provision for doubtful accounts decreased $12.4 million, or 42.8% from $29.0
million for the three months ended December 31, 2000 to $16.6 million for the
three months ended December 31, 2001. This resulted in a decrease from 23.1% of
total revenue for the three months ended December 31, 2000 to 13.4% of total
revenue for the three months ended December 31, 2001. The provision for doubtful
accounts for the three months ended December 31, 2000 included an additional
provision of $10 million primarily related to receivables generated in certain
under-performing service areas identified and closed during our fiscal 2000
restructuring.
The provision for doubtful accounts on domestic ambulance service revenue
(excluding the $10 million discussed above) was 20.4% of domestic ambulance
service revenue for the three months ended December 31, 2000 and 18.3% of
domestic ambulance service revenue for the three months ended December 31, 2001.
During fiscal 2002, we continued to focus on improving the quality of our
revenue by reducing the number of non-emergency ambulance transports in selected
service areas as well as previously implemented initiatives to maximize the
collection of our accounts receivable.
Depreciation decreased $1.5 million, or 27.8%, from $5.4 million for the three
months ended December 31, 2000 to $3.9 million for the three months ended
December 31, 2001. The decrease is primarily due to asset write-offs during the
fourth quarter of fiscal 2001 as well as the disposal of assets related to
closed operations. Depreciation was 4.3% and 3.2% of total revenue for the three
months ended December 31, 2000 and 2001, respectively.
We stopped amortizing goodwill in accordance with our adoption of SFAS No. 142,
effective July 1, 2001. As a result, amortization of intangibles decreased $1.9
million to $44,000 for the three months ended December 31, 2001. Amortization of
intangibles was 1.5% of total revenue for the three months ended December 31,
2000.
Other operating expenses consist primarily of rent and related occupancy
expenses, vehicle and equipment maintenance and repairs, insurance, fuel and
supplies, travel, and professional fees. Other operating expenses decreased
approximately $2.3 million, or 8.8%, from $26.1 million for the three months
ended December 31, 2000 to $23.8 million for the three months ended December 31,
2001. The decrease is primarily due an approximate $1.7 million decrease related
to our Latin American operations due to the reduction in revenue as described
above. Other operating expenses decreased from 20.8% of total revenue for the
three months ended December 31, 2000 to 19.2% of total revenue for the three
months ended December 31, 2001.
During the three months ended December 31, 2000 we recorded a charge of $5.2
million related to the loss of a 911 contract in Lincoln, Nebraska. The charge
included $4.3 million for the write-off of related goodwill as well as $900,000
for employee severance and other exit costs.
Interest expense decreased $2.1 million, or 26.9%, from $7.8 million for the
three months ended December 31, 2000 to $5.7 million for the three months ended
December 31, 2001. This decrease was primarily caused by lower rates on the
25
revolving credit facility as well as lower average debt balances. Additionally,
approximately $541,000 of interest income received in conjunction with an income
tax refund was netted against interest expense for the three months ended
December 31, 2001.
We recorded a tax benefit of $1.6 million for the three months ended December
31, 2001 compared to a tax provision of $311,000 for the three months ended
December 31 2000. The benefit recorded in the three months ended December 31,
2001 primarily relates to a $1.6 million income tax refund received during that
period.
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2000
REVENUE
Total revenue decreased $4.0 million, or 1.6%, from $253.4 million for the six
months ended December 31, 2000 to $249.4 million for the six months ended
December 31, 2001.
Ambulance services revenue decreased $3.5 million, or 1.7%, from $201.9 million
for the six months ended December 31, 2000 to $198.4 million for the six months
ended December 31, 2001.The decrease in ambulance services revenue is primarily
related to a $2.4 million decrease in revenue in our Latin American operations
resulting from decreases in memberships under capitated service arrangements.
The decrease in memberships was attributable to the impact of economic
conditions in Argentina combined with significant increases in taxes on all
medical services.
Domestic ambulance service revenue decreased approximately $1.1 million, or 0.6%
from approximately $182.3 million for the six months ended December 31, 2000 to
approximately $181.2 for the six months ended December 31, 2001. This decrease
is comprised of an approximate $4.5 million related to the loss of 911 contracts
in Arlington, Texas and Lincoln, Nebraska and an approximate $5.2 million
decrease related to the closure of service areas in fiscal 2000 and 2001 offset
by an approximate $6.7 million increase related to domestic ambulance service
revenue in areas that we served in both the six-month periods ended December 31,
2001 and 2000 and an approximate $2.0 million increase in revenue related to a
911 contract that began during the second quarter of fiscal 2001. Total domestic
ambulance transports decreased by 34,000, or 6.1%, from 555,000 for the six
months ended December 31, 2000 to 521,000 for the six months ended December 31,
2001. The decrease in transports is primarily due to the closure of service
areas during the first quarter of fiscal 2002 and the loss of contracts noted
above.
Fire protection services revenue increased by $900,000, or 2.9%, from $30.9
million for the six months ended December 31, 2000 to approximately $31.8
million for the six months ended December 31, 2001. Fire protection services
revenue increased primarily due to rate and utilization increases of $800,000
and increased contracting activity by our industrial fire protection group of
$300,000. These increases were offset by a decrease in forestry revenue of
$300,000.
Other revenue decreased $1.4 million, or 6.8%, from $20.6 million for the six
months ended December 31, 2000 to $19.2 million for the six months ended
December 31, 2001. Other revenue decreases are primarily due to the decrease in
clinic revenue in our Latin American operations of approximately $2.4 million
offset by increases in revenue related to our public/private alliance in San
Diego of $1.4 million.
OPERATING EXPENSES
Payroll and employee benefits increased $3.8 million, or 2.6%, from $144.0
million for the six months ended December 31, 2000 to $147.8 million for the six
months ended December 31, 2001. This increase is primarily attributable to the
renegotiation of labor contracts in certain of our service areas offset by a
$1.4 million decrease related to our Latin America operations due to the
decreased membership and the disposition of clinic operations. The closure of
service areas during the first quarter of fiscal 2002 accounted for $2.1 million
26
of the decrease while the effect of the loss of the contracts in Arlington,
Texas and Lincoln, Nebraska totaled approximately $1.6 million. The closure of
service areas during fiscal 2001 accounted for $0.8 million of the decrease.
These decreases were offset by increases of $9.8 million in our remaining
operations. We expect that our labor costs will continue to increase, including
the increased costs associated with accounts receivable collection and Medicare
and Medicaid compliance. Payroll and employee benefits increased from 56.8% of
total revenue for the six months ended December 31, 2000 to 59.3% of total
revenue for the six months ended December 31, 2001.
The provision for doubtful accounts decreased $14.9 million, or 30.8% from $48.4
million for the six months ended December 31, 2000 to $33.5 million for the six
months ended December 31, 2001. This resulted in a decrease from 19.1% of total
revenue for the six months ended December 31, 2000 to 13.4% of total revenue for
the six months ended December 31, 2001. The provision for doubtful accounts for
the six months ended December 31, 2000 included an additional provision of $10
million primarily related to receivables generated in certain under-performing
service areas identified and closed during our fiscal 2000 restructuring.
The provision for doubtful accounts on domestic ambulance service revenue
(excluding the $10 million discussed above) was 20.4% of domestic ambulance
service revenue for the six months ended December 31, 2000 and 18.2% of domestic
ambulance service revenue for the six months ended December 31, 2001. During
fiscal 2002, we continued to focus on improving the quality of our revenue by
reducing the amount of non-emergency ambulance transports in selected service
areas as well as previously implemented initiatives to maximize the collection
of our accounts receivable.
Depreciation decreased $2.9 million, or 26.1%, from $11.1 million for the six
months ended December 31, 2000 to $8.2 million for the six months ended December
31, 2001. The decrease is primarily due to asset the write-offs during the
fourth quarter of fiscal 2001 as well as the disposal of assets related to
closed operations. Depreciation was 4.4% and 3.3% of total revenue for the six
months ended December 31, 2000 and 2001, respectively.
We stopped amortizing goodwill in accordance with our adoption of SFAS No. 142,
effective July 1, 2001. As a result, amortization of intangibles has decreased
$3.7 million to $79,000 for the six months ended December 31, 2001. Amortization
of intangibles was 1.5% of total revenue for the three months ended December 31,
2000.
Other operating expenses consist primarily of rent and related occupancy
expenses, vehicle and equipment maintenance and repairs, insurance, fuel and
supplies, travel, and professional fees. Other operating expenses decreased
approximately $4.6 million, or 8.9%, from $51.5 million for the six months ended
December 31, 2000 to $46.9 million for the six months ended December 31, 2001.
The decrease is primarily due an approximate $4.0 million decrease related to
our Latin American operations due to the reduction in revenue as described
above. Approximately $1.4 million relates to the closure of operations and the
loss of contracts in Arlington, Texas and Lincoln, Nebraska. Other operating
expenses decreased from 20.3% of total revenue for the six months ended December
31, 2000 to 18.8% of total revenue for the six months ended December 31, 2001.
During the six months ended December 31, 2000 we recorded a charge of $5.2
million related to the loss of a 911 contract in Lincoln, Nebraska. The charge
included $4.3 million for the write-off of related goodwill as well as $900,000
for employee severance and other exit costs.
Interest expense decreased $3.2 million, or 20.4%, from $15.7 million for the
six months ended December 31, 2000 to $12.5 million for the six months ended
December 31, 2001. This decrease was primarily caused by lower rates on the
revolving credit facility as well as lower average debt balances. Additionally,
approximately $541,000 of interest income received in conjunction with an income
tax refund was netted against interest expense for the three months ended
December 31, 2001.
We recorded a tax benefit of $1.6 million for the six months ended December 31,
2001 compared to a tax provision of $222,000 for the six months ended December
31 2000. The benefit recorded in the six months ended December 31, 2001
primarily relates to a $1.6 million income tax refund received during that
period.
27
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our cash requirements principally through cash
flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of our Senior Notes, the sale of common
stock through an initial public offering in July 1993 and subsequent public
stock offerings in May 1994 and April 1996, and proceeds from the exercise of
stock options.
During the six months ended December 31, 2001, net cash provided by operating
activities was $8.6 million resulting primarily from net income of $2.0 million,
depreciation and amortization of $8.3 million, and provision for doubtful
accounts of $33.5 million offset by an increase in accounts receivable of $30.0
million, a decrease in accrued liabilities and other liabilities of $3.6
million. Net cash used in operating activities was $2.8 million for the six
months ended December 31, 2000.
Cash used in investing activities was approximately $3.9 million for the six
months ended December 31, 2001, primarily due to capital expenditures of $2.9
million and increases in other assets of $2.0 million offset by proceeds from
the sale of property and equipment of $1.0 million. Cash provided by investing
activities was $1.6 million for the six months ended December 31, 2000.
Cash used in financing activities was $1.8 million for the six months ended
December 31, 2001, primarily due to $1.3 million of repayments on the revolving
credit facility and $702,000 of payments on other debt and capital lease
obligations offset by proceeds from issuance of common stock. Cash used in
financing activities was $3.2 million for the six months ended December 31,
2000.
The effect of currency exchange rate changes on cash of $310,000 for the six
months ended December 31, 2001, was due to the devaluation of the Argentine
peso.
Including the classification of the amounts outstanding under our revolving
credit facility and our Senior Notes as current liabilities at December 31,
2001, we had a net working capital deficiency of $261.6 million, including cash
of $11.3 million, compared to a working capital deficit of $273.4 million,
including cash of $8.7 million, at June 30, 2001.
Our gross accounts receivable as of December 31, 2001 and June 30, 2001 were
approximately $150.9 million and $168.5 million, respectively. Our accounts
receivable, net of the allowance for doubtful accounts, was $98.5 million and
$103.3 million as of such dates, respectively. The decrease in net accounts
receivable is due to many factors including collections on accounts related to
closed operations and overall improvement in collections related to ongoing
operations.
The allowance for doubtful accounts decreased from approximately $65.2 million
at June 30, 2001 to $52.4 million at December 31, 2001. The primary reason for
this decrease is the write-off of uncollectible receivables offset by the
current period provision for doubtful accounts. Because of continuing
difficulties in the healthcare reimbursement environment, we have continued to
focus on improving the quality of our revenue by exiting service areas or
substantially reducing service, where it had become unprofitable to perform
non-emergency transports because of low reimbursement rates or a higher risk of
non-reimbursement by payers. We also shifted the focus of our billing personnel
to place greater emphasis on the billing process as opposed to the collection
process and have instituted mandatory comprehensive training for our paramedics
and emergency medical technicians on new standards of documentation. We believe
that these measures coupled with other billing initiatives will help to enhance
the quality of our billings, which will assist in mitigating the risk of denials
by payers and will help to increase collections from our private pay customers.
28
We are not in compliance with the financial covenants contained in the agreement
relating to our revolving credit facility, as amended. We have received a
compliance waiver, as amended, (the "waiver") covering periods from December 31,
1999 through April 1, 2002. The waiver covers the representations and warranties
relating to no material adverse changes as well as the following financial
covenants: total debt leverage ratio, total debt to total capitalization ratio
and fixed charge coverage ratio. The waiver stipulates that no additional
borrowings will be available to us through the end of the waiver period and
requires us to: (i) engage certain financial advisors; (ii) meet certain
benchmarks for projected cash balances and expenditures; (iii) maintain positive
consolidated operating income net of restructuring charges; (iv) pay reasonable
fees and expenses related to the professionals employed on behalf of the
Steering Committee, as defined in the waiver; and, (v) reduce the outstanding
balance on the revolving credit facility upon the occurrence of certain events
such as the sale of certain assets. During certain periods covered by the
waiver, we were not in compliance with the requirement that we maintain positive
consolidated net operating income net of restructuring charges. There can be no
assurance that we will be able to comply with the requirements of the waiver in
the future. As the waiver period currently extends through April 1, 2002 and the
Company's 7 7/8% Senior Notes due 2008 (the "Senior Notes") contain a
cross-default provision, the related balances have been classified as current
liabilities in our consolidated balance sheets as of December 31, 2001 and June
30, 2001 as required by generally accepted accounting principles.
In connection with our current waiver of covenant compliance, we have supported
the formation of a Steering Committee comprised of bank lenders and Senior Note
holders to further explore debt- restructuring opportunities. We intend to
negotiate with the Steering Committee in an effort to reduce the Company's debt
under both the revolving credit facility and the Senior Notes, so as to further
improve our liquidity and long-term financial flexibility. We intend to consider
all appropriate strategies to achieve these objectives.
Any restructuring or amendment may involve the conversion of all or a portion of
our debt to equity or other similar transactions that could result in material
and substantial dilution to existing stockholders. Such restructuring or
amendment could also include material changes in the underlying interest rates
or other terms of the revolving credit facility and Senior Notes. There can be
no assurance that we can accomplish an arrangement with regard to our debt on
terms acceptable to us, or at all. Our inability to successfully negotiate a
long-term agreement with our lenders could have a material adverse effect on our
business, financial condition, cash flows, and results of operations.
Borrowings under the revolving credit facility bear interest at prime plus .25%
payable monthly. Additional interest accrues at an annual rate of 2.0% during
the waiver period. In addition to the amounts currently outstanding under the
revolving credit facility, the lenders have issued letters of credit on our
behalf in the amount of $6.2 million. The letters of credit mature at various
times during the year and are generally renewable on an annual basis.
MEDICARE REIMBURSEMENT
In January 1999, the Center for Medicare and Medicaid Services (CMS) announced
its intention to form a negotiated rule-making committee to create a new fee
schedule for Medicare reimbursement of ambulance services. The committee
convened in February 1999. In August 1999, CMS announced that the implementation
of the prospective fee schedule as well as the mandatory acceptance of
assignment would be postponed to January 2001. CMS also announced rules that
became effective in February 1999, which require, among other things, that a
physician's certification be obtained for certain ambulance transports. We have
implemented a program to comply with these new rules.
29
The proposed Medicare ambulance fee schedule and related rules were published
September 12, 2000 in the Federal Register. On November 30, 2000, CMS notified
Medicare carriers that it would not implement the proposed fee schedule and
rules as scheduled on January 1, 2001. As of the date of this filing, CMS has
not established an implementation date for the final fee schedule and rules. If
implemented, these rules could result in contract renegotiations or other
actions by us to offset any negative impact of the proposed change in
reimbursement policies that could have a material adverse effect on our
business, financial condition, cash flows, and results of operations.
Although the final fee schedule and rules have been delayed, two requirements
took effect January 1, 2001. Providers must use new Center for Medicare and
Medicaid Services Healthcare Common Procedure Coding System (HCPCS) codes on all
Medicare claims, with the exception of billing for mileage. Secondly, all
Medicare claims must include the ZIP code of the point of patient pickup. We
have incorporated these two requirements into our Medicare billing protocol.
The final outcome of the proposed rules and the effect of the prospective fee
schedule are uncertain. However, changes in reimbursement policies, or other
government action, together with the financial instability of private
third-party payers and budget pressures on payer sources could influence the
timing and, potentially, the ultimate receipt of payments and reimbursements. A
reduction in coverage or reimbursement rates by third party payers, or an
increase in our cost structure relative to the rate increase in the CPI, or
costs incurred to implement the mandates of the fee schedule could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), BUSINESS COMBINATIONS, and
No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS, collectively referred
to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion
(APB) No. 16, BUSINESS COMBINATION. The provisions of SFAS 141: require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001; provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill; and, require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. SFAS 142 supersedes APB 17,
INTANGIBLE ASSETS, and is effective for fiscal years beginning after December
15, 2001 although earlier adoption is allowed in certain circumstances. SFAS 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS 142: prohibit the
amortization of goodwill and indefinite-lived intangible assets; require that
goodwill and indefinite-lived intangibles assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired); require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill; and, remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives. The provisions of the Standards also apply to equity-method investments
made both before and after June 30, 2001.
We elected to adopt the provisions of SFAS 142 in the first quarter of the
fiscal year that began July 1, 2001. In connection therewith, we no longer
record amortization of existing goodwill balances. Goodwill totaled $91.3
million, which primarily relates to our ambulance segment is included in the
intangible assets in the accompanying consolidated balance sheets, at July 1,
2001 while related amortization expense totaled $7.1 million for the fiscal year
ended June 30, 2001. The following table summarizes the Company's net income
(loss) and related per share amounts as if the provisions of SFAS 142 had been
adopted as of July 1, 2000:
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Reported net income (loss) $ 3,170 $ (21,574) $ 1,980 $ (25,659)
Add back: Goodwill amortization -- 1,818 -- 3,637
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 3,170 $ (19,756) $ 1,980 $ (22,022)
========== ========== ========== ==========
Basic income (loss) per share
Reported net income (loss) $ 0.21 $ (1.47) $ 0.13 $ (1.75)
Goodwill amortization -- 0.12 -- 0.25
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share $ 0.21 $ (1.35) $ 0.13 $ (1.50)
========== ========== ========== ==========
Diluted income (loss) per share
Reported net income (loss) $ 0.21 $ (1.47) $ 0.13 $ (1.75)
Goodwill amortization -- 0.12 -- 0.25
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share $ 0.21 $ (1.35) $ 0.13 $ (1.50)
========== ========== ========== ==========
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. We have completed its first step goodwill impairment test and
has identified certain reporting units within our ambulance segment where
goodwill impairment, as defined under SFAS 142, may exist. The second step of
the goodwill impairment test, which measures the amount of the impairment loss
as of July 1, 2001, if any, must be completed by June 30, 2002, the end of our
fiscal year. Any impairment loss resulting from the transitional impairment test
will be reflected as the cumulative effect of a change in accounting principle
in the first quarter 2002 requiring restatement of previously reported quarterly
results. We have not yet determined what effect these impairment tests will have
on its earnings or financial position.
30
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived assets to be Disposed of"
and Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effect of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We
are required to adopt SFAS 144 during the fiscal year ending June 30, 2003. We
do not anticipate any material impact resulting from the adoption of SFAS No.
144.
EFFECTS OF FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Since 1991, the Argentine peso had been pegged to the U.S. dollar at an exchange
rate of 1 to 1. In December 2001, the Argentine government imposed exchange
restrictions which severely limited cash conversions and withdrawals. When
exchange houses reopened on January 11, 2002, the peso to dollar exchange rate
closed at 1.7 pesos to the dollar.
Our Argentine subsidiaries utilize the peso as their functional currency as
their business is primarily transacted in pesos. In order to prepare the
accompanying financial statements as of and for the three and six months ended
December 31, 2001, we translated the balance sheets of our Argentine
subsidiaries using the 1.7 to 1 exchange rate (the closing rate on that date on
which pesos were first exchangeable into dollars subsequent to December 31,
2001) while the statements of operations and cash flows were translated using
the 1 to 1 exchange rate which was the rate actually in effect for the three and
six month periods ended December 31, 2001. As the liabilities of our Argentine
subsidiaries exceed their assets, the change in exchange rates resulted in a
credit to accumulated other comprehensive income in our consolidated balance
sheet. Further fluctuations in the peso to dollar exchange rate will impact the
translation of the financial statements of our Argentine subsidiaries for
financial reporting purposes.
There can be no assurance that fluctuations in the currency exchange rates in
the future will not have an adverse effect on our business, financial condition,
cash flows, and results of operations. We do not currently engage in foreign
currency hedging transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION.
We face the possibility of increased interest expense associated with our
revolving credit facility which bears interest at the prime rate plus .25%. A 1%
increase in the prime rate would increase our interest expense by approximately
$1.4 million on an annual basis. The remainder of our debt is primarily at fixed
interest rates.
31
RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION.
ITEM 1 -- LEGAL PROCEEDINGS.
From time to time, we are subject to litigation and regulatory
investigations arising in the ordinary course of business. We believe that the
resolutions of currently pending claims or legal proceedings will not have a
material adverse effect on our business, financial condition, cash flows and
results of operations. However, we are unable to predict with certainty the
outcome of pending litigation and regulatory investigations. In some pending
cases, our insurance coverage may not be adequate to cover all liabilities
arising out of such claims. In addition, there can be no assurance that CMS or
other regulatory agencies will not initiate additional investigations related to
the Company's business in the future. There can be no assurance that the
resolution of any future litigation, either individually or in the aggregate,
would not have a material adverse effect on our business, financial condition,
cash flows and results of operations.
We, Warren S. Rustand, our former Chairman of the Board and Chief Executive
Officer of the Company, James H. Bolin, our former Vice Chairman of the Board,
and Robert E. Ramsey, Jr., our former Executive Vice President and former
Director, have been named as defendants in two purported class action lawsuits:
HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on
August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V. RURAL/METRO
CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United
States District Court for the District of Arizona. The two lawsuits, which
contain virtually identical allegations, were brought on behalf of a class of
persons who purchased our publicly traded securities including its common stock
between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro seeks
unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud
Act, and under Arizona common law fraud, and also seeks punitive damages, a
constructive trust, and other injunctive relief. Ruble v. Rural/Metro seeks
unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended. The complaints in both actions allege that between
April 28, 1997 and June 11, 1998 the defendants issued certain false and
misleading statements regarding certain aspects of our financial status and that
these statements allegedly caused our common stock to be traded at artificially
inflated prices. The complaints also allege that Mr. Bolin and Mr. Ramsey sold
stock during this period, allegedly taking advantage of inside information that
the stock prices were artificially inflated. On May 25, 1999, the Arizona state
court granted our request for a stay of the Haskell action until the Ruble
action is finally resolved. We and the individual defendants moved to dismiss
the Ruble action. On January 25, 2001, the Court granted the motion to dismiss,
but granted the plaintiffs leave to replead. On March 31, 2001, the plaintiffs
filed a second amended complaint. We and the individual defendants have moved to
dismiss the second amended complaint. The Court heard oral argument on that
motion to dismiss on January 25, 2002 but did not rule on the motion at the
hearing. A ruling on that motion is still pending. If the lawsuits were
ultimately determined adversely to us, it could have a material adverse effect
on our business, financial condition, cash flows and results of operations.
Item 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 2001 Annual Meeting of Stockholders was held on December 18,
2001. The following nominees were elected to the Company's Board of Directors to
serve as Class I directors for three-year terms or until their successors are
elected and qualified:
BROKER
NOMINEE VOTES IN FAVOR VOTES OPPOSED ABSTAINED NON-VOTE
------- -------------- ------------- --------- --------
Jack E. Brucker 10,356,737 3,017,179 -0- -0-
Mary Anne Carpenter 10,205,237 3,168,679 -0- -0-
Louis A. Witzeman 10,408,136 2,965,780 -0- -0-
32
The following directors' terms of office continued after the 2001 Annual
Meeting of Stockholders:
Cor J. Clement, Sr.
Louis G. Jekel
William C. Turner
Henry G. Walker
The second item voted upon was the approval of an amendment to the
Company's Employee Stock Purchase Plan to increase the number of shares of
common stock that may be purchased pursuant to such plan from 1,150,000 shares
to 2,150,000 shares.
VOTES IN FAVOR VOTES OPPOSED ABSTAINED BROKER NON-VOTES
- -------------- ------------- --------- ----------------
3,594,535 2,687,384 36,285 7,055,712
The final item voted upon was the amendment to extend the 1992 Stock Option
Plan by ten years to November 5, 2012.
VOTES IN FAVOR VOTES OPPOSED ABSTAINED BROKER NON-VOTES
- -------------- ------------- --------- ----------------
2,719,463 3,490,714 52,725 7,111,014
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
33
SIGNATURES
Pursuant to the requirements 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.
RURAL/METRO CORPORATION
Dated: February 19, 2002 By: /s/ Jack E. Brucker
------------------------------------
Jack E. Brucker, President & Chief
Executive Officer (Principal
Executive Officer)
By: /s/ Randall L. Harmsen
------------------------------------
Randall L. Harmsen, Vice President
of Finance (Principal Financial
Officer and Principal Accounting
Officer)
34