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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 0-22056
RURAL/METRO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD, SCOTTSDALE, ARIZONA 85251
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (480) 994-3886
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AS OF APRIL 22, 2002, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING SALES
PRICE OF SUCH STOCK AS OF SUCH DATE ON THE NASDAQ SMALLCAP MARKET, WAS
$13,278,038. SHARES OF COMMON STOCK HELD BY EACH OFFICER AND DIRECTOR AND BY
EACH PERSON WHO OWNED 5% OR MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN
EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS DETERMINATION
OF AFFILIATE STATUS IS NOT NECESSARILY CONCLUSIVE.
As of April 22, 2002, there were 15,459,588 shares of the registrant's
Common Stock outstanding.
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TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS.............. 1
PART I
ITEM 1. BUSINESS........................................................ 2
ITEM 2. PROPERTIES...................................................... 21
ITEM 3. LEGAL PROCEEDINGS............................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................ 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................ 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 99
ITEM 11. EXECUTIVE COMPENSATION.......................................... 101
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 106
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 107
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 108
SIGNATURES ................................................................. 114
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Forward Looking Statements. 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 necessarily estimates reflecting the best
judgment of our senior management 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.
These "forward looking statements" are found throughout this Report.
Additionally, the discussions herein under the captions "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Risk Factors",
"Business -- Introduction", "Business -- Management Systems", "Business --
Market Reform and Changing Reimbursement Regulations", "Business -- Governmental
Regulation", "Business -- Billings and Collections", "Legal Proceedings", and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are susceptible to the risks and uncertainties discussed under the
caption "Management's Discussion And Analysis Of Financial Condition And Results
Of Operations -- Risk Factors." Moreover, we may from time to time make "forward
looking statements" about matters described herein or other matters concerning
us. We disclaim any intent or obligation to update "forward looking statements."
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.
For a discussion of certain risks associated with our business, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Report and, specifically, "Risk Factors" included
in such Item 7.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Founded in 1948, we are a leading provider of health and safety services,
which include 911 emergency ambulance and general medical transport services to
municipal, residential, commercial, and industrial customers. We are organized
as a Delaware corporation. We also provide fire protection services and other
safety and health care related services, which include dispatch, billing, fleet
services, alternative transport services and home health services. We believe
that we are the only multi-state provider of both ambulance and fire protection
services in the United States and that we rank among the largest private-sector
providers of ambulance and fire protection services in the world.
We currently serve over 400 communities in 25 states, the District of
Columbia, and Latin America. Revenues for these services are primarily derived
from fees charged for ambulance and fire protection services. Our domestic
operations generated revenues of approximately $461.2 million, $512.7 million,
and $498.4 million in the fiscal years 2001, 2000 and 1999, respectively, and
our international operations generated revenues of approximately $43.1 million,
$57.4 million and $63.0 million for the same respective periods. We provide
ambulance services under contracts with municipal and county governments,
hospitals and other healthcare organizations. We primarily derive our revenue
under these contracts through reimbursements under private insurance programs
and government programs such as Medicare and Medicaid, as well as through fees
paid by patients utilizing our services. Fire protection services are provided
under contracts with municipalities, fire districts or other agencies or on a
subscription fee basis to individual homeowners or commercial property owners.
Ambulance services and fire protection services accounted for approximately 80%
and 12%, respectively, of our revenue for the fiscal year ended June 30, 2001,
and 82% and 10%, respectively, of our revenue for the fiscal year ended June 30,
2000.
We grew significantly from the late 1970s through the late 1990s through
internal growth and acquisitions. This growth, consisting mainly of acquisitions
in the 1990s as part of a consolidation of the domestic ambulance industry,
provided us with a significant market presence throughout the United States and
parts of Latin America. To manage this growth, we invested in the development of
management and operational systems that have resulted in productivity gains.
While we believe that our prior growth strategy has created a strong platform of
core businesses, commencing in fiscal 2000, we focused on strengthening those
core businesses and improving our economies of scale. This focus included: (i)
operational restructuring through the closure or downsizing of financially
under-performing operations, (ii) corporate restructuring and improvements,
(iii) improving the quality and collection of revenue, and (iv) selective growth
through expansion in existing service areas and development of strategic
alliances. Our current business strategy includes continued emphasis on these
focal points and on delivering high-quality, efficient and effective services to
our customers.
We incurred a net loss of approximately $226.7 million or a loss of $15.38
per share for the year ended June 30, 2001. The loss relates to the write-off of
impaired assets under SFAS No. 121 for certain domestic and Argentine assets,
our operational restructuring program involving the closure of certain service
areas, the loss of two exclusive 911 contracts, the disposition of clinic
operations in Latin America, changes in estimates that impacted our reserves for
workers compensation and general liability matters, and additional provision for
doubtful accounts related to closed or closing service areas and non-transport
related receivables.
Despite recent net losses, our restructuring efforts have enabled us to
self-fund our obligations from existing cash reserves and operating cash flow
since March 2000. During the last nineteen months, we have self-funded cash for
operations, capital expenditures, principal payments on our revolving credit
facility, regularly scheduled debt service, and capital lease payments. Our
current financial status has resulted from our continued focus on strengthening
operations, cash collection and other processes. We have been operating under a
waiver of financial covenant compliance related to our revolving credit facility
since February 2000 and have been actively working with our lenders since that
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time to obtain a long-term financing solution. We believe our current business
model and strategy can generate sufficient cash flow to provide a basis for a
new long-term agreement with our current lenders or to restructure our debt.
However, there can be no assurance that any such arrangement can be
accomplished. See Risk Factors - "We may not be able to restructure our existing
debt" and "We may not be able to sustain sufficient operating cash flow"
contained in Item 7 of this Report.
INDUSTRY OVERVIEW
AMBULANCE TRANSPORT BUSINESS
Based on generally available industry data, it is estimated that annual
expenditures for ambulance services in the United States are between $7 billion
and $11 billion. Public-sector entities, private companies, hospitals, and
volunteer organizations provide ambulance services. Public-sector entities often
serve as the first responder to requests for such emergency ambulance services
and often provide emergency ambulance transportation. When the public sector
serves as first responder, private sector companies often serve as the second
responder and support the first responder as needed. The private sector provides
the majority of non-emergency ambulance services. It is estimated that the
ambulance service industry includes approximately more than 12,000 providers of
service, 1,500 or more of which are private and 1,000 of which are
hospital-owned. Most commercial providers are small companies serving one or a
limited number of markets. Several multi-state providers, including us, have
emerged through the acquisition and consolidation of smaller ambulance service
providers in recent years.
FIRE PROTECTION BUSINESS
Municipal fire departments, tax-supported fire districts, and volunteer
fire departments constitute the principal providers of fire protection services
in the United States. In most of the communities served by municipal fire
departments and tax-supported fire districts, the fire department is the first
to respond to a call for emergency medical services. Approximately 27,000
volunteer fire departments operate throughout the United States. Volunteer fire
departments range from departments consisting entirely of volunteer personnel to
departments that utilize one or more paid personnel located at each station
supplemented by volunteers who proceed directly to the fire scene. In addition
to providing fire protection services to municipalities and tax-supported fire
districts, we and other members of the private sector provide fire protection
services to large industrial complexes, petrochemical plants, power plants and
other self-contained facilities.
Based on our experience, we believe that our ambulance and fire protection
services are complementary and benefit us through diversification, shared
resources, experience and competitive advantage in certain service areas.
HISTORICAL GROWTH IN AMBULANCE SERVICE EXPENDITURES; PRIMARY DEMAND FACTORS
Ambulance service expenditures in the United States have grown as a result
of an increase in the number of transports and an increase in the average
expenditures per transport. Several primary factors are cited for the increase
and continued demand of the emergency ambulance and non-emergency ambulance
services we provide:
* The U.S. population is aging. Persons over the age of 65 years tend to
require more frequent hospital and ambulance services. The need for
ambulance services is increasing with the aging of the Baby Boom
population; about 62 million Americans will be age 65 or older in 2025
compared to 35 million today. Such increase in demand affects all of
our operations and is more pronounced in operations such as Arizona
and Florida that serve higher concentrations of the elderly
populations.
* The size, growth and geographic distribution of the population are
also favorable demographics for the ambulance industry. Local
population increases and urban sprawl create an increased demand for
ambulance services and a steady, corresponding growth rate. Moreover,
there is an increased incidence in the level of health and accident
risks associated with a growing population. In most cases, the current
assets and resources of our existing operations can service the demand
created by this growth, without need for significant additional
capital expenditures.
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* The increased availability of 911 emergency service, the impact of
educational programs on its use, and the frequency by which some
members of the population utilize hospital emergency rooms for medical
care also have increased the number of ambulance transports.
* Increased patient travel between specialized treatment health care
facilities has increased the demand for emergency and non-emergency
ambulance services.
* The greater use of outpatient care facilities and home care in
response to health care cost containment efforts also has increased
ambulance transport usage.
* The continuing demand for highly responsive emergency services, driven
by regulatory and market forces, has further necessitated an increase
in expenditures to maintain and enhance emergency medical systems.
High-quality medical care and response time criteria require ambulance
service providers to acquire sophisticated emergency medical, dispatch
and related systems and equipment, recruit and retain highly trained
personnel, and create advanced emergency management protocols. Average
expenditures per transport have increased incrementally as a result of
the additional costs to meet these criteria and maintain
high-performance systems.
CONSOLIDATION OF THE AMBULANCE INDUSTRY
During the 1990s, the fragmented nature of the ambulance industry, combined
with limited capital and management systems that typified many smaller
providers, offered an opportunity to consolidate the industry with the goal of
achieving improved productivity and enhanced levels of service. As a result, we
and several other entities began consolidating the ambulance industry through
mergers and acquisitions of smaller providers. Thereafter, as the industry
became less fragmented and acquisition opportunities diminished, the number of
acquisitions slowed. The larger consolidators, such as American Medical Response
(AMR) and, to a lesser extent, Rural/Metro Corporation, incurred significant
debt in order to compete for acquisition targets and subsequently fund their
integration. Accordingly, we are a highly leveraged company and face certain
risk factors related to our debt structure. See Risk Factors - "We have
significant indebtedness," "- Lenders impose restrictive covenants on us. We are
operating under a temporary compliance waiver with respect to covenants under
our revolving credit facility" and "- "We may not be able to receive waivers of
financial covenants from our lenders" contained in Item 7 of this Report.
However, we believe that our timely participation in the consolidation of the
industry has provided us with a strong domestic platform of core operations with
a substantial revenue base and a marketable reputation for quality service,
which enables us to capitalize on our position as a leader in the industry and
build upon our business in existing service areas.
COMPETITION
The ambulance service industry continues to be highly competitive,
notwithstanding the consolidation of the 1990s. The principal participants
include governmental entities (including fire districts), other national
ambulance service providers, large regional ambulance service providers,
hospitals, and numerous local and volunteer private providers. Counties,
municipalities, fire districts, hospitals, or health care organizations that
presently contract for ambulance services may choose to provide ambulance
services directly in the future. Some of our competitors may have greater
capital and other resources than we do. We are experiencing increased
competition from municipal fire departments in providing emergency ambulance
service. However, we believe that the non-emergency transport services market
currently is unattractive to municipal fire departments.
We believe that counties, fire districts, and municipalities consider
quality of care, historical response time performance, and cost to be among the
most important factors in awarding a contract, although other factors, such as
customer service, financial stability, and personnel policies and practices,
also may be considered. Although commercial providers often compete intensely
for business within a particular community, it is generally difficult to
displace a provider that has a history of satisfying the quality of care and
response time performance criteria established within the service area.
Moreover, significant start-up costs, together with the long-term nature of the
contracts under which services are provided and the relationships many providers
have within their communities, create barriers for entry into new markets other
than through acquisition. We believe that our status as a 911 provider in a
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service area increases our visibility and stature, and enhances our ability to
compete for non-emergency services within that area. Because smaller ambulance
providers typically do not have the infrastructure to provide 911 services, we
believe we can compete favorably with such competitors for non-emergency
ambulance services contracts in areas where we also provide 911 services.
In the fire protection industry, services for residential and commercial
properties are provided primarily by tax-supported fire districts, municipal
fire departments, and volunteer departments. Private providers, like us,
represent a small portion of the total fire protection market and generally
provide fire protection services where a tax-supported fire district or
municipality has decided to contract for the provision of fire protection
services or has not assumed financial responsibility for fire protection. Fire
districts or municipalities may not continue to contract for fire protection
services. In certain areas where no governmental entity has assumed financial
responsibility for providing fire protection, we provide fire protection
services on a subscription basis. Municipalities may annex a subscription area
or that area may be converted to a fire district that provides service directly,
rather than through a master contract. As demonstrated by our recent attainment
of new contracts in the areas of industrial fire and airport rescue and fire
fighting, we believe there are growth opportunities for us within these markets.
Additionally, we believe our effort to grow this business has helped improve the
quality of our revenue due to the greater predictability of non-refundable,
subscription-based fees received from fire protection service contracts.
MARKET REFORM AND CHANGING REIMBURSEMENT REGULATIONS
Market reform and the passage of the Balanced Budget Act of 1997, along
with other regulatory changes, have impacted and reshaped the health care
delivery system in the United States and, by extension, the ambulance industry.
As with all other health care providers, emergency medical service providers,
like us, must comply with various requirements in order to participate in
Medicare and Medicaid. Medicare is a federal health insurance program for the
elderly and for chronically disabled individuals, which, among other things,
pays for ambulance services when medically necessary. Medicare uses a
charge-based reimbursement system for ambulance services and reimburses 80% of
charges determined to be reasonable by Medicare, subject to the limits fixed for
the particular geographic area. The patient is responsible for co-pay amounts,
deductibles and the remaining balance, if we do not accept assignment, and
Medicare requires us to expend reasonable efforts to collect the balance. In
determining reasonable charges, Medicare considers and applies the lowest of
various charge factors, including the actual charge, the customary charge, the
prevailing charge in the same locality, the amount of reimbursement for
comparable services, or the inflation-indexed charge limit.
Medicaid is a combined federal-state program for medical assistance to
impoverished individuals who are aged, blind, or disabled or members of families
with dependent children. Medicaid programs or a state equivalent exist in all
states in which we operate. Although Medicaid programs differ in certain
respects from state to state, all are subject to federal requirements. State
Medicaid agencies have the authority to set levels of reimbursement within
federal guidelines. We receive only the reimbursement permitted by Medicaid and
are not permitted to collect from the patient any difference between our
customary charge and the amount reimbursed.
Like other Medicare and Medicaid providers, we are subject to governmental
audits of our Medicare and Medicaid reimbursement claims. We take our compliance
responsibilities very seriously. To this end, we have established a national
corporate compliance department that works closely with senior management, local
managers, billing and collections personnel, and both the human resources and
legal departments, as well as governmental agencies to ensure substantial
compliance with all established regulations and procedures. Nevertheless,
despite our best efforts, there can be no assurance that we can achieve 100%
compliance at all times, particularly in light of the complicated and
ever-changing nature of the reimbursement regulations, and the high volume of
daily transports we provide nationwide. Failure to comply may lead to a
significant penalty or reimbursement, which could have a material adverse effect
on our business, financial condition, cash flows and results of operations. From
time to time, we have taken corrective action to address billing
inconsistencies, which we have identified through our periodic, internal audits
of billing procedures or which have been brought to our attention through
governmental examination of our records and procedures. These matters cover
periods prior to and after our acquisition of operations. As part of our
commitment to working with those governmental agencies responsible for
enforcement of Medicare and Medicaid compliance, we have voluntarily
self-disclosed billing issues identified at some of our operations. The Office
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of Inspector General ("OIG") has examined certain billing procedures and records
in Memphis, Tennessee and Cleveland, Ohio regarding compliance with Medicare
statutes. We also self-disclosed billing inconsistencies in our Scranton,
Pennsylvania operation to the OIG, which had been instituted by the former
owners and continued by us until new billing practices were established and the
inconsistencies were discovered. We identified and instituted corrective actions
for isolated billing issues at our Greenville, South Carolina operations, which
we also self-disclosed to the OIG. We fully cooperate with such federal and
state agencies to provide requested information and to incorporate any
recommended modifications of our existing compliance programs.
Government funding for health care programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
determinations by intermediaries and governmental funding restrictions, all of
which could materially increase or decrease program reimbursements for ambulance
services. In recent years, Congress has consistently attempted to curb federal
spending on such programs. In June of 1997, the Health Care Financing
Administration, now renamed the Center for Medicare and Medicaid Services
(HCFA/CMS), issued proposed rules that would revise Medicare policy on the
coverage of ambulance services.
In August of 1997, then President Clinton, signed the "Balanced Budget Act
of 1997" (BBA). The BBA provided for certain changes to the Medicare
reimbursement system, including the development and implementation of a
prospective fee schedule by January 2000 for ambulance services provided to
Medicare beneficiaries. The BBA mandated that this fee schedule be developed
through a negotiated rulemaking process between HCFA/CMS and ambulance service
providers and must consider the following: (i) data from industry and other
organizations involved in the delivery of ambulance services; (ii) mechanisms to
control increases in expenditures for ambulance services; (iii) appropriate
regional and operational differences; (iv) adjustments to payment rates to
account for inflation and other relevant factors; and (v) the phase-in of
payment rates under the fee schedule in an efficient and fair manner. Charges
for ambulance services provided during calendar years 1998, 1999, and 2000 were
increased by the Consumer Price Index less one percentage point. The BBA
required that ambulance service providers accept assignment of payment directly
from Medicare and accept such amount, along with the co-pay and deductible paid
by the patient, as payment in full. The BBA also stipulated that individual
states may now elect not to provide payment for cost sharing for coinsurance, or
co-payments, for dual-qualified (Medicare and Medicaid) beneficiaries.
Following the BBA, in January of 1999, HCFA/CMS announced its intention to
form a negotiated rule-making committee to create a new fee schedule for
Medicare reimbursement of ambulance services. In August 1999, HCFA/CMS announced
that the implementation of the prospective fee schedule as well as the mandatory
acceptance of assignment would be postponed to January 2001. The proposed
Medicare ambulance fee schedule and rule was published September 12, 2000 in the
Federal Register, followed by a 60-day comment period. On November 30, 2000,
HCFA/CMS notified Medicare carriers that it would not implement the proposed fee
schedule and rules as scheduled on January 1, 2001. As of this filing, HCFA/CMS
has not established an implementation date for the final fee schedule and rules.
However, we have implemented a program to comply with the new rules which
require that a physician's certification be obtained for certain ambulance
transports.
We face risks and uncertainties regarding the proposed HCFA/CMS rules or
other proposals involving various aspects of Medicare reimbursements including
the following:
* The proposed HCFA/CMS rules, or other proposals involving various
aspects of Medicare reimbursements may not be adopted or implemented;
* We are uncertain regarding the effect on us of any final rule;
* We are uncertain of the impact of a final prospective fee schedule,
however, based upon current indications, we believe that the impact
upon our cash flows will be neutral; and
* Future funding levels for Medicare and Medicaid programs may not be
comparable to present levels.
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.
6
In general, the increasing costs of providing health care and the
challenges associated with the reimbursement environment have caused health care
organizations to focus on cost containment measures while seeking to provide the
most appropriate level of service at the most appropriate treatment facility. To
institute and coordinate cost-efficient and effective health care delivery
programs, we believe health care organizations must contract with an ambulance
service provider that has the necessary mix of vehicles, staff expertise, call
center services, geographic scope and economies of scale to successfully
implement such programs. We believe that we are well situated to capitalize on
the needs of the industry due to our emphasis on providing an effective,
quality-care, service delivery model, as enhanced by cost-efficiencies and
centralized support functions from both local and national economies of scale.
OTHER GOVERNMENTAL REGULATIONS
Our business is also subject to other governmental regulations at the
federal, state, local, and foreign levels. At the federal level, we are subject
to regulations under the Occupational Safety and Health Administration (OSHA)
designed to protect our employees and regulations under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) which protects the privacy of
patients' health information handled by health care providers. The federal
government also recommends standards for ambulance design and construction,
medical training curriculum, and designation of appropriate trauma facilities.
Various state agencies may modify these standards or require additional
standards.
Each state where we operate regulates various aspects of its ambulance and
fire business that may vary widely from state to state. State requirements
govern the licensing or certification of ambulance service providers, training
and certification of medical personnel, the scope of services that may be
provided by medical personnel, staffing requirements, medical control, medical
procedures, communication systems, vehicles, and equipment. State or local
government regulations or administrative policies regulate rate structures in
most states in which we conduct ambulance operations. The process of determining
rates includes cost reviews, analyses of levels of reimbursement from all
sources, and determination of reasonable profits. In certain service areas in
which we are the exclusive provider of services, the municipality or fire
district sets the rates for emergency ambulance services pursuant to a master
contract and establishes the rates for general ambulance services that we are
permitted to charge.
Applicable federal, state, local, and foreign laws and regulations are
subject to change. We believe that we currently are in substantial compliance
with applicable regulatory requirements. These regulatory requirements, however,
may require us in the future to increase our capital and operating expenditures
in order to maintain current operations or initiate new operations. See "Risk
Factors -- "Proposed rules may adversely affect our reimbursement rates of
coverage," "-- Certain state and local governments regulate rate structures and
limit rates of return," "-- Numerous governmental entities regulate our
business," and "-- Health care reforms and cost containment may affect our
business" contained in Item 7 of this Report.
OUR CURRENT SERVICE AREAS
We currently provide our services in more than 400 communities in the
following 25 states, the District of Columbia, and Latin America:
Alabama Kentucky New York Texas
Arizona Oregon North Dakota Virginia
California Louisiana Ohio Washington
Colorado Maryland Pennsylvania Wisconsin
Florida Mississippi South Carolina Bolivia
Georgia Nebraska South Dakota Argentina
Indiana New Jersey Tennessee
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We provide ambulance services in each of these states, including the
District of Columbia, primarily under the names Rural/Metro Ambulance and
Rural/Metro Medical Services and in certain areas of Arizona under the name
Southwest Ambulance, except in Oregon, North Dakota and Wisconsin where we
exclusively provide fire protection services. We also operate under other names
depending upon local statutes or contractual agreements. We provide fire
protection services under the name Rural/Metro Fire Department in 11 states, and
in Oregon also under the name Valley Fire Services, and in Bolivia under the
name R/M Servicios de Salud e Incendios (Bolivia) S.A. In Argentina, we provide
urgent home medical care and ambulance transport services under the name
Emergencias Cardio Coronarias (ECCO).
We generally provide our ambulance services pursuant to a contract or
certificate of necessity on an exclusive or nonexclusive basis. We provide 911
emergency ambulance services primarily pursuant to contracts or as a result of
providing fire protection services. In certain service areas, we are the only
provider of both emergency ambulance and non-emergency ambulance services. In
other service areas, we compete for non-emergency ambulance contracts. In all
service areas, we respond to 911 emergency calls if requested by a municipality
or fire district, even in the absence of a contract.
MEDICAL TRANSPORT SERVICES
EMERGENCY AMBULANCE SERVICES
We generally provide emergency ambulance response and medical
transportation services pursuant to contracts with counties, fire districts, and
municipalities. These contracts typically appoint us as the exclusive provider
of 911 emergency ambulance services in designated service areas and require us
to respond to every 911 emergency medical call in those areas. The level of
response to the call is dependent upon the underlying contract. We typically
respond to virtually all 911 calls with ALS ambulance units.
ALS ambulances are staffed with either two paramedics or one paramedic and
an emergency medical technician (EMT) and are equipped with ALS equipment (such
as cardiac monitors, defibrillators, advanced airway equipment and oxygen
delivery systems) as well as pharmaceuticals and medical supplies.
Upon arrival at an emergency, the ALS crew members deploy portable life
support equipment, ascertain the patient's medical condition, and, if required,
administer advanced life support techniques and procedures that may include
tracheal intubation, cardiac monitoring, defibrillation of cardiac arrhythmias,
and the administration of medications and intravenous solutions under the
direction of a physician. The crew also may perform BLS services, which include
cardiopulmonary resuscitation (CPR), basic airway management, and basic first
aid including splinting, spinal immobilization, recording of vital signs and
other non-invasive procedures. As soon as medically appropriate, the patient is
placed on a portable gurney and transferred into the ambulance. While one crew
member monitors and treats the patient, the other crew member drives the
ambulance to a hospital designated either by the patient or the applicable
medical protocol. While on scene or en route, the ambulance crew alerts the
hospital regarding the patient's medical condition, and if necessary, the
attending ambulance crew member seeks advice from an emergency physician as to
treatment. Upon arrival at the hospital, the patient generally is taken to the
emergency department where care is transferred to the emergency department
staff.
NON-EMERGENCY AMBULANCE SERVICES
We also provide ambulance services to patients requiring either advanced or
basic levels of medical supervision and treatment during transfer to and from
residences and health care facilities. These services may be provided when a
home-bound patient requires examination or treatment at a health care facility
or when a hospital inpatient requires tests or treatments (such as MRI testing,
CAT scans, dialysis, or chemotherapy) at another facility. We utilize ALS or BLS
ambulance units to provide non-emergency ambulance services, depending on the
patient's needs and the proximity of available units. We generally staff our BLS
ambulance units with two EMTs and equip these units with medical supplies and
equipment necessary to administer first aid and basic medical treatment.
8
We provide ambulance services, critical care transports, and non-medical
transportation services pursuant to contracts with governmental agencies, health
care facilities, or at the request of a patient. Such services may be scheduled
in advance or provided on an as-needed basis. Contracts with managed care
organizations provide for reimbursement on a per transport basis or on a
capitated basis under which we receive a fixed fee, per person, per month.
CRITICAL CARE TRANSPORT SERVICES
We provide critical care transport services to medically unstable patients
(such as cardiac patients and neonatal patients) who require critical care while
being transported between health care facilities. Critical care services differ
from ALS services in that the ambulance may be equipped with additional medical
equipment and may be staffed by a medical specialist provided by us or by a
health care facility to attend to a patient's special medical needs. Typically,
staffing may include the use of critical case trained professional nurses,
respiratory therapists and/or neo-natal nurse specialists.
ALTERNATIVE TRANSPORT SERVICES
In addition to ambulance services, we provide non-medical transportation
for the handicapped and certain non-ambulatory persons in limited service areas.
Such transportation generally takes place between residences or nursing homes
and hospitals or other health care facilities. In providing this service, we
utilize vans that contain hydraulic wheelchair lifts or ramps.
DISASTER RESPONSE TEAMS
Aside from our day-to-day operations, we maintain disaster response teams
that are occasionally called upon by the federal government, through the Federal
Emergency Management Agency (FEMA), and by state, county and local governments
to assist in responding to local or national medical emergencies. For example,
we provided assistance for the efforts in New York City following the September
11, 2001 terrorist attacks, at the request of FEMA and the New York State
Emergency Management Office. We staff these emergencies based upon available
resources from our existing pool of employees and equipment around the country,
committing resources in a manner that is designed to avoid any interruption of
service in our existing service areas. Such services are typically paid for and
provided on a fee-for-service basis pursuant to contract with the requesting
agency or governmental entity.
URGENT HOME MEDICAL CARE
In Argentina, individual and business customers prepay monthly for urgent
home medical care and ambulance services. Personnel conduct telephone triage and
prioritize the dispatch of services to subscribers. Mobile services may include
the dispatch of physicians to the patient in an ambulance for serious,
life-threatening situations, or more frequently, in the physician's car, thus
covering a wider scope of service than the traditional U.S. ambulance service
model.
In Argentina, doctors and nurses perform urgent and primary care services
for our business customers. Argentine doctors are trained in medicine and are
licensed as such in Argentina at both the national and, in certain localities,
the local level. There are no continuing education requirements. Generally,
nurses are trained over periods ranging from six months to four years after high
school in accordance with local programs. Accordingly, as each nurse receives
additional training, his or her scope of practice increases.
MEDICAL PERSONNEL AND QUALITY ASSURANCE
Paramedics and EMTs must be state certified in order to transport patients
and to perform emergency care services. Certification as an EMT requires
completion of a minimum of 164 hours of training in a program designated by the
United States Department of Transportation and supervised by state authorities.
EMTs also may complete advanced training courses to become certified to provide
certain additional emergency care services, such as administration of
intravenous fluids and advanced airway management. In addition to completion of
9
the EMT training program, the certification as a paramedic requires the
completion of more than 800 hours of training in advanced patient care
assessment, pharmacology, cardiology, and clinical and field skills. Many of the
paramedics currently employed by us served as EMTs for us prior to their
certification as paramedics. We are subject to nationwide and area-wide
shortages of qualified EMTs and paramedics. We compete with hospitals, municipal
fire departments and other health care providers for these valued individuals.
We have undertaken efforts to minimize the affect of these shortages and have
implemented a number of programs to retain and attract a quality workforce.
Local physician advisory boards and medical directors develop medical
protocols to be followed by paramedics and EMTs in a service area. In addition,
instructions are conveyed on a case-by-case basis through direct communications
between the ambulance crew and hospital emergency room physicians during the
administration of advanced life support procedures. Both paramedics and EMTs
must complete continuing education programs and, in some cases, state supervised
refresher training examinations to maintain their certifications. Certification
and continuing education requirements for paramedics and EMTs vary among states
and counties.
We maintain a commitment to provide high quality pre-hospital emergency
medical care. In each location in which we provide services, a medical director,
who usually is a physician associated with a hospital we serve, monitors
adherence to medical protocol and conducts periodic audits of the care provided.
In addition, we hold retrospective care audits with our employees to evaluate
compliance with medical and performance standards.
We are members of a number of other professional organizations, namely, the
American Ambulance Association, National Emergency Number (911) Association,
American College of Emergency Physicians and National Association of EMS
Physicians. In those states where we provide service, we are involved in the
state ambulance association, if one exists, and in many instances our
involvement includes holding elected positions. In addition, many of our
employees are members of the National Association of EMTs, National Association
of EMS Educators and other EMS organizations. We were one of the first ambulance
service providers to obtain accreditation for many of our larger ambulance
operations from the Commission on Accreditation of Ambulance Services, a joint
program between the American Ambulance Association and the American College of
Emergency Physicians. The process is voluntary and evaluates numerous
qualitative factors in the delivery of services. We believe municipalities and
managed care providers may consider accreditation as one of the criteria in
awarding contracts in the future.
FIRE PROTECTION SERVICES
Fire protection services consist primarily of fire prevention, fire
suppression, and first responder medical care. Other fire protection related
activities include hazardous material containment, underwater search and
recovery, and mountain and confined space rescue. We provide various levels of
fire protection services, ranging from fire stations that are fully staffed 24
hours per day to reserve stations. We generally provide our services to
municipalities and other governmental bodies pursuant to master contracts funded
through the tax base and to residences, commercial establishments, and
industrial complexes pursuant to subscription fee and other fee-for-service
arrangements. Federal and state governments contract with us from time to time
to suppress wildfires on government lands.
We have placed fire prevention and education in the forefront of our fire
protection services and have developed a comprehensive program to prevent and
minimize fires. We believe that effective fire protection requires the intensive
training of personnel, the effective utilization of fire equipment, the
establishment of effective communication centers for the receipt of emergency
calls and the dispatch of equipment and personnel, the establishment and
enforcement of strict fire codes, and community educational efforts. We believe
that we provide fire protection services at a cost significantly lower than the
national average as a result of our emphasis on fire prevention, our advanced
systems, and our use of a combination of full-time firefighters and part-time
reservists. Based upon generally available industry data, we believe that fire
loss per capita in the areas we service has been substantially less than the
national average.
10
FIRE PROTECTION PERSONNEL
Our ability to provide our fire protection services at relatively low costs
results from our efficient use of personnel in addition to our fire prevention
efforts. Typically, personnel costs represent more than two-thirds of the cost
of providing fire protection services. We have been able to reduce our labor
costs through a system that utilizes full-time firefighters complemented by paid
part-time reservists as well as a modified every other day shift schedule. By
using trained reservists on an as-needed basis, we have the ability to
supplement full-time firefighters on a cost-effective basis.
All full-time and reserve firefighters undergo extensive training, which
exceeds the standards recommended by the National Fire Protection Association
(NFPA), and must qualify for state certification before being eligible for
full-time employment by us. Because approximately 70% to 80% of our fire
response activity consists of emergency medical response, all of our
firefighters are trained EMTs or paramedics. Ongoing training includes
instruction in new fire service tactics and fire fighting techniques as well as
continual physical conditioning.
FIRE RESPONSE
An alarm typically results in the dispatch of one or more engine companies
(each of which consists of an engine and two to four firefighters, including a
captain), a fire chief, and such other personnel and equipment as circumstances
warrant. The amount of equipment and personnel depends upon the type, location,
and severity of the incident. We utilize our dispatch capabilities to reposition
equipment and firefighters to maximize the availability and use of resources in
a cost-effective manner.
FIRE PREVENTION
We believe that fire prevention programs result in both lower fire loss and
significant overall cost savings. Our fire prevention programs include
recommendations for and the encouragement of various fire prevention methods,
including fire code design, building design to inhibit the spread of fire, the
design of automatic fire suppression sprinklers, fire detector and smoke
detector installations, the design of monitoring and alarm systems, the
placement and inspection of fire hydrants, fire code inspection and enforcement,
and the determination of fire cause and origin in arson suspected fires. In
addition, our personnel perform community education programs designed to reduce
the risk of fire and increase our community profile.
We believe that our long-standing public/private relationship with the City
of Scottsdale provides an example of an effective, cost-efficient fire
protection program. The Scottsdale program emphasizes our philosophy of fire
prevention. With our cooperation and assistance, the City of Scottsdale has
designed comprehensive fire prevention measures, including fire codes,
inspections, and sprinkler and smoke detector ordinances. We believe that as a
result of strict fire codes, the enactment of a sprinkler ordinance, and the
effectiveness of the services we provide, Scottsdale's per capita cost for fire
protection is as much as 37% lower than other cities of similar size.
INDUSTRIAL FIRE PROTECTION SERVICES
We provide fire protection services and, on a limited basis, unarmed
security services to large industrial complexes, petrochemical plants, power
plants, and other self-contained facilities. The combination of fire protection
services with security services in large industrial complexes has the potential
to provide for greater efficiency and utilization in the delivery of such
services and to result in reduced cost to our industrial customers for such
services. We have contracts ranging up to five years in duration and expiring at
various dates up to September 2, 2004 to provide firefighting and hazardous
materials response services at locations in several states. We intend to pursue
similar contracts domestically and internationally.
AIRCRAFT, RESCUE AND FIRE FIGHTING SERVICES (ARFF)
We also provide aircraft rescue and firefighting services for approximately
a dozen airports in the United States and Latin America, including the Federal
Express National Operations Center in Memphis, Tennessee, and the international
11
airport in Port Columbus, Ohio. In addition to aircraft rescue and fire fighting
services, we also provide structural firefighting and emergency medical response
for airport terminals. Our ARFF firefighters, many of whom have extensive
military and civilian ARFF experience, have completed comprehensive and
professional training programs. Our personnel are cross-trained as emergency
medical technicians or paramedics, as well as in hazardous materials response.
We are able to provide value-added services such as first responder medical
service in support of local fire departments for in-terminal medical
emergencies, safety training for fuel handlers and other airport personnel, and
fire prevention activities. We intend to continue to grow this aspect of our
business strategically through competitive proposals and bidding processes.
EMERGENCY MEASURES INQUIRY CENTER (EMIC)
The Aviation Disaster Family Assistance Act of 1996 requires commercial
airlines flying into and out of the United States to provide certain assistance
to the families of passengers involved in aircraft disasters. In response to the
need by airlines to comply with this federal requirement, we offer our
communications and emergency response expertise gained through our operations
experience to provide the airlines with the resources it will need to respond to
these disasters. We offer the first line of communications for airlines
worldwide to families of passengers and other individuals seeking information
following an airline disaster. Our communications and emergency response
expertise allows us to manage airlines' communications with family members and
other individuals seeking information following an airline disaster, and was put
into service during the recent events of September 11, 2001 in New York City and
Washington, D.C. Our call center, staffed with individuals specially trained in
critical incident stress and family assistance care, processes calls and
information pertaining to airline disasters. We currently provide these services
for approximately twenty airlines worldwide.
FIRE TRAINING SERVICES
TRAINING SERVICES
We have instituted industrial fire training services and provide
sophisticated training for industrial, professional, and specialized
firefighters using live burn training to simulate realistic firefighting
situations. We also provide shipboard fire training services to several cruise
lines. The training permits fire brigade, ship crew members, and emergency
response teams to meet increased federal training requirements, the OSHA
requirements, and other regulatory requirements for work place safety and
on-site response teams.
WILDLAND FIRE PROTECTION SERVICES
We provide disaster response fire protection services when requested by the
federal government, through the U.S. Forest Service, and other governmental
entities to assist in responding to fire emergencies such as the multiple
wildland fires that occurred during the past two years in northern and southern
parts of the United States. We staff these emergencies based upon available
resources from our existing pool of employees and equipment around the country,
committing resources in a manner that is designed to avoid any interruption of
service in our existing service areas. Such services are typically paid for and
provided on a fee-for-service basis pursuant to contracts with the requesting
agency or governmental entity.
CONTRACTS
We enter into contracts with counties, municipalities, fire districts, and
other governmental entities to provide 911 emergency ambulance services in
designated service areas. These contracts typically specify maximum fees that we
may charge and set forth required criteria, such as response times, staffing
levels, types of vehicles and equipment, quality assurance, indemnity, and
insurance and indemnity coverage. In certain instances, we also sometimes are
required by contract or by law to post a surety bond or other assurance of
financial or performance responsibility. The amount of subsidy, if any, that we
receive from a county, municipality, or fire district, and the rates that we may
charge for services under a contract for emergency ambulance services, depends
in large part on local political climate and patient mix as well as the nature
12
of services rendered. The four largest ambulance contracts accounted for
approximately 8% of total revenue during fiscal 1999, 9% of total revenue during
fiscal 2000, and 10% of total revenue during fiscal 2001.
We provide fire protection services pursuant to master contracts or on a
subscription basis. Master contracts provide for negotiated rates with
governmental entities. Certain contracts are performance-based and require us to
meet certain dispatch and response times in a certain percentage of responses.
These contracts also set maximum thresholds for variances from the performance
criteria. These contracts establish the level of service required and may
encompass fire prevention and education activities as well as fire suppression.
Other contracts are level-of-effort based and require us to provide a certain
number of personnel for a certain time period for a particular function, such as
fire prevention or fire suppression. We provide fire protection services on a
subscription basis in areas where no governmental entity has assumed the
financial responsibility for providing fire protection. We derived approximately
48% of our fire protection service revenue from subscriptions for fiscal 1999,
45% for fiscal 2000, and 45% for fiscal 2001. We experienced renewal rates of
approximately 88% during the prior three fiscal years. Fire subscription rates
are not currently regulated by any governmental agency in our service areas.
Our contracts generally extend for terms of two to five years. We attempt
to renegotiate contracts in advance of the expiration date and generally have
been successful in these renegotiations. We monitor our performance under each
contract. From time to time, we may decide that certain contracts are no longer
favorable and may seek to modify or terminate these contracts. At any given
time, we have approximately 125 contracts with counties, fire districts, and
municipalities for ambulance services and for fire protection services. The
following table sets forth certain information regarding our six primary
contracts at June 30, 2001 with counties, fire districts, and municipalities for
ambulance services and for fire protection services.
TERM IN YEARS EXPIRATION DATE TYPE OF SERVICE (1)
------------- --------------- -------------------
Ambulance
Orange County, Florida (2)......... 2 October 2002 911/General
Rochester, New York (3)............ 4 October 2001 911/General
Knox County, Tennessee (4)......... 4 June 2002 911/General
Fort Worth, Texas (5).............. 5 August 2004 911/General
Integrated Fire and Ambulance
Scottsdale, Arizona (6)............ 5 December 2001 911
Public/Private Alliance
San Diego, California (7).......... 5 June 2005 911/General
- ----------
(1) Type of service for ambulance contracts indicates whether 911 emergency or
general ambulance services or both are provided.
(2) The contract was first entered into in 1962 by a provider that was acquired
by us in July 1984. The current contract includes a one-year optional
renewal exercisable by our customer on or before October 1, 2002.
(3) The contract was first entered into in 1988 by a provider that was acquired
by us in May 1994. The current contract has been extended to October 31,
2001. As is the process in many services areas, the City of Rochester is
currently preparing a request for proposal to bid this contract.
(4) The contract was first entered into in July 1985.
(5) The contract was first entered into in August 1999.
(6) The contract was first entered into in 1952 by us. The contract had two
five-year renewal options exercisable by the City of Scottsdale. We are
currently working with the City of Scottsdale to negotiate a new contract.
(7) The contract was first entered into in May 1997 and is effective through
June 2005. The contract has a three-year renewal option exercisable by our
customer.
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In addition to the six primary contracts with counties, fire districts, and
municipalities for ambulance services and for fire protection services listed
above, we were awarded several significant contracts during fiscal 2001,
including the following contracts under which we provided services during fiscal
2001 to the following municipalities and facilities:
* NORTH FULTON COUNTY, GEORGIA -- Through a competitive bidding process,
we were awarded a ten-year contract by North Fulton County, Georgia
for 911 emergency medical services.
* SOUTH FULTON COUNTY, GEORGIA -- We were awarded a nine-year contract
to provide 911 emergency medical services for South Fulton County,
Georgia where the customer has with two optional two-year renewals.
* CITY OF SIOUX FALLS, SOUTH DAKOTA -- A five-year contract was awarded
to us by the City of Sioux Falls, South Dakota for 911 and
non-emergency medical services carrying an unlimited number of
two-year optional renewals by the customer.
* MERCY MEDICAL CENTER, CANTON, OHIO -- We were awarded a non-emergency
ambulance contract by Mercy Medical Center in Canton, Ohio for a
three-year term, which features two, one-year optional renewals by the
customer.
* BAPTIST MEMORIAL HEALTHCARE CORPORATION, MEMPHIS, TENNESSEE -- A
three-year exclusive non-emergency transportation services agreement
was awarded to us by Baptist Memorial Healthcare Corporation in
Memphis, Tennessee.
Additionally, we were awarded the following significant contracts during
fiscal 2001 under which we will begin to provide services in fiscal 2002:
* CSA 17, NORTHERN SAN DIEGO COUNTY, CALIFORNIA -- In connection with
our alliance with San Diego Fire & Life Safety Services, we were
awarded a two-year 911 emergency medical services contract with two,
two-year renewal terms by the customer in Northern San Diego County,
California (includes Del Mar, Rancho Santa Fe, Encinitas and Solana
Beach) through a competitive bidding process which included the
incumbent provider.
* CITGO PETROLEUM CORP., LAKE CHARLES, LOUISIANA -- We previously
provided services since 1999, and were awarded a new contract to
continue the provision of industrial fire services at Citgo Petroleum
Corp. in Lake Charles, Louisiana, the sixth-largest oil refinery in
the United States, for two one-year terms.
* UNIVERSITY OF COLORADO HEALTH SCIENCES CENTER -- We previously
provided services since 1999, and were awarded a new five-year
contract for non-emergency and critical care transports for the
University of Colorado Health Sciences Center.
We also enter into contracts with hospitals, nursing homes, and other
health care facilities to provide non-emergency and critical care ambulance
services. These contracts typically designate us as the first ambulance service
provider contacted to provide non-emergency ambulance services to those
facilities and typically permit us to charge a base fee, mileage reimbursement,
and additional fees for the use of particular medical equipment and supplies. We
provide a discount in rates charged to facilities that assume the responsibility
for payment of the charges to the persons receiving services. At any given time,
we have approximately 1,000 contracts with hospitals, nursing homes and other
health care facilities.
In connection with our restructuring program, we renegotiated a number of
contracts where the rates, services or market conditions were not conducive to
operational profitability. Additionally, we exited certain contracts in
connection with the closure or downsizing of financially under-performing
service areas, the majority of which solely provided non-emergency ambulance
services and which could not meet our financial performance criteria on a
sustained basis. Only two operational closures involved the loss of contracts
through a competitive bidding process. One such closure was in Lincoln, Nebraska
where we were unable to secure a new five-year exclusive 911 and general
transportation contract with the City of Lincoln. Also through a competitive
bidding process, we were unable to secure a new contract with the City of
14
Arlington, Texas. We bid that contract based on our historical knowledge and
experience as the incumbent provider and, accordingly, believe that a more
aggressive bid would have been unprofitable to us. In each situation where we
have closed a service area, our operational teams have endeavored to ensure that
an orderly transition occur with no service interruptions. In many areas, we
worked closely with the community, local governmental entities and alternative
providers until our departure date, which in some cases extended for a number of
months so that the transition could be properly effectuated. We believe that our
actions under these circumstances are consistent with our commitment and
reputation as a dependable, high-quality service provider. See "Risk Factors --
We depend on certain business relationships" contained in Item 7 of this Report.
Counties, fire districts, and municipalities generally award contracts to
provide 911 emergency services either through requests for competitive proposals
or bidding processes. In some instances in which we are the existing provider,
the county or municipality may elect to renegotiate our existing contract rather
than re-bid the contract. We will continue to seek to enter into public/private
alliances to compete for new business. Our alliance with San Diego Fire & Life
Safety Services allowed the entities to bid for and win multi-year contracts to
provide 911 and ambulance services throughout the City of San Diego and Northern
San Diego County.
We market our non-emergency ambulance services to hospitals, health
maintenance organizations, convalescent homes, and other health care facilities
that require a stable and reliable source of medical transportation for their
patients. We believe that our status as a 911 provider in a designated service
area increases our visibility and enhances our marketing efforts for
non-emergency services in that area. Contracts for non-emergency services
usually are based on criteria (such as quality of care, customer service,
response time, and cost) similar to those in contracts for emergency services.
We further believe that our strategy of building regional operations will better
position us to serve the developing managed care market.
We market our fire protection services to subscribers in rural and suburban
areas, volunteer staffed fire departments, tax-supported fire districts, and
large industrial complexes, petrochemical plants, power plants, and other
self-contained facilities. Contract and/or subscription fees are collected
annually in advance. In the event that we provide service for a non-subscriber,
we directly bill the property owner for the cost of services rendered. We also
provide fire protection services to newly developed communities where the
subscription fee may be included in the homeowner's association assessment.
MANAGEMENT SYSTEMS
We utilize sophisticated management systems, which we believe enhance the
productivity of our existing operations. These systems permit us to achieve
economies of scale at the local operational level through the proper utilization
of personnel and equipment and at the corporate level through centralized
systems for billings, collections, purchasing, accounting, cash management,
human resources, compliance, informational systems, legal and risk management.
We have developed measurement systems that permit management to monitor the
performance level of each operation on a continual basis. Our centralized
systems significantly augment local processes and permit managers to direct
their attention primarily to operations. The systems include centralized
billings and collections procedures that provide for more efficient tracking and
collection of accounts receivable. Centralized purchasing permits us to achieve
discounts in the purchase of medical equipment and supplies. Other centralized
infrastructure components such as accounts payable, legal, compliance, human
resources and risk management give us the capability to purchase related
products and services on a global-operations basis, identify and respond to
company-wide trends, and provide internal support and handling services in a
more cost-effective, efficient and consistent manner across all operations.
We strive to maximize operational autonomy of our managers. Managers
receive extensive training in the use of management systems, customer service
and supervisory practices. The human resources department participates in
training, career development, and succession planning of employees and assesses
our personnel needs.
15
We believe our investment in management systems and our effective use of
these systems represent key components in our success. Process and personnel
improvements in these areas are continuing, as part of our restructuring program
and our commitment to further strengthening local operations. We are committed
to an ongoing enhancement of our systems to provide productive, timely
information and effective controls and believe that our management systems have
the capability to support future growth, if any.
DISPATCH AND COMMUNICATIONS
We use system status plans and flexible deployment systems to position our
ambulances within a designated service area because effective fleet deployment
represents a key factor in reducing response times and efficient use of
resources. We analyze data on traffic patterns, demographics, usage frequency,
and similar factors with the aid of computers to help us determine optimal
ambulance deployment and selection. The center that controls the deployment and
dispatch of ambulances in response to calls for ambulance service may be owned
and operated either by the applicable county or municipality or by us. Each
control center utilizes computer hardware and software and sophisticated
communications equipment and maintains responsibility for fleet deployment and
utilization 24 hours a day, seven days a week.
Depending on the emergency medical dispatch system used in a designated
service area, the public authority that receives 911 emergency medical calls
either dispatches our ambulances directly from the public control center or
communicates information regarding the location and type of medical emergency to
our control center, which in turn dispatches ambulances to the scene. In most
service areas, our control center receives the call from the police after the
police have determined the call is for emergency medical services. When we
receive the 911 call, we dispatch one or more ambulances directly from our
control center while the call taker communicates with the caller. All call
takers and dispatchers are trained EMTs or Emergency Medical Dispatchers (EMD)
with additional training that enables them to instruct a caller on pre-arrival
emergency medical procedures, if necessary. In our larger control centers, a
computer assists the dispatcher by analyzing a number of factors, such as time
of day, ambulance location, and historical traffic patterns, in order to
recommend optimal ambulance selection. In all cases, a dispatcher selects and
dispatches the ambulance. While the ambulance is en route to the scene, the
ambulance receives information concerning the patient's condition prior to the
ambulance's arrival at the scene.
In the delivery of emergency ambulance services, our communication systems
allow the ambulance crew to communicate directly with the destination hospital
to alert hospital medical personnel of the arrival of the patient and the
patient's condition, and to receive instructions directly from emergency
department personnel on specific pre-hospital medical treatment. These systems
also facilitate close and direct coordination with other emergency service
providers, such as the appropriate police and fire departments that also may be
responding to a call.
Deployment and dispatch also represent important factors in providing
non-emergency ambulance services. We implement system status plans for these
services designed to assure appropriate response times to non-emergency calls.
In our Argentina operations, we combine telephone triage, medical transport
services, and urgent home medical care services in order to improve the
responsiveness and cost-effectiveness of health care delivery in a managed care
system. Each call center staff is supervised by physicians and uses medical
protocols to analyze and triage the medical situation and determine the best
mode of care.
We utilize communication centers in our community fire protection
activities for the receipt of fire alarms and the dispatch of equipment and
personnel that are the same as or similar to those maintained for our ambulance
services. Response time represents an important criteria in the effectiveness of
fire suppression, which are dependant on the level of protection sought by our
customers in terms of fire station spacing, the size of the service area
covered, and the amount of equipment and personnel dedicated to fire protection.
BILLINGS AND COLLECTIONS
We currently maintain 13 domestic regional billing and payment processing
centers and a centralized private pay collection system at our headquarters in
Arizona. Invoices are generated at the regional level, and the account is
16
processed by the centralized collection system for private-pay accounts only if
payment is not received in a timely manner. Customer service is directed from
each of the regional centers. Substantially all of our revenue is billed and
collected through our integrated billing and collection system, except for our
operations in Rochester, New York and the New Jersey/Metro New York City area.
We derive a substantial portion of our ambulance fee collections through
our regional billing centers from reimbursement by third-party payers, including
payments under Medicare, Medicaid, and private insurance programs, typically
invoicing and collecting payments directly to and from those third-party payers.
We also collect payments directly from patients, including payments under
deductible and co-insurance provisions and otherwise. We derived domestic net
ambulance fee collections from the following:
1999 2000 2001
---- ---- ----
Medicare .......................... 24% 23% 25%
Medicaid .......................... 10% 11% 11%
Private insurers .................. 41% 47% 51%
Patients .......................... 25% 19% 13%
--- --- ---
100% 100% 100%
=== === ===
Companies in the ambulance service industry maintain significant provisions
for doubtful accounts relative to companies in other industries. Collection of
complete and accurate patient billing information during an emergency service
call is sometimes difficult, and incomplete information hinders post-service
collection efforts. In addition, it is not possible for us to evaluate the
creditworthiness of patients requiring emergency transport services. Our
allowance for doubtful accounts generally is higher with respect to revenue
derived directly from patients than for revenue derived from third-party payers
and generally is higher for transports resulting from 911 emergency calls than
for non-emergency ambulance requests. See "Risk Factors -- We depend on
reimbursements by third-party payers and individuals," and "-- Proposed rules
may adversely affect our reimbursement rates of coverage" contained in Item 7 of
this Report.
We have substantial experience in processing claims to third-party payers
and employ a billing staff specifically trained in third-party coverage and
reimbursement procedures. Our integrated billing and collection system uses
proprietary software systems to specifically tailor the submission of claims to
Medicare, Medicaid, and certain other third-party payers and has the capability
to electronically submit claims to the extent third-party payers' systems
permit. Our integrated billing and collection system provides for accurate
tracking of accounts receivable and status pending payment, which facilitates
the effective utilization of personnel resources to resolve workload
distribution and problematic invoices. When billing individuals rather than
third-party payers, we use an automated dialer that pre-selects and dials
accounts based on their status within the billing and collection cycle, which we
believe optimizes the efficiency of the collection staff.
State licensing requirements as well as contracts with counties,
municipalities, and health care facilities typically require us to provide
ambulance services without regard to a patient's insurance coverage or ability
to pay. As a result, we often do not receive compensation for services provided
to patients who are not covered by Medicare, Medicaid, or private insurance. The
anticipated level of uncompensated care and allowance for uncollectible accounts
may be considered in determining our subsidy and permitted rates under contracts
with a county or municipality.
INSURANCE AND SURETY BONDING
Many of our contracts and certain statutes where we conduct business
require us to carry specified amounts of insurance coverage. We carry a broad
range of comprehensive general liability, automobile, property damage,
professional, workers' compensation, and other liability insurance policies
which typically are renewed annually. As a result of the nature of our services
and the day-to-day operation of our vehicle fleet, we are subject to accident,
injury and malpractice claims in the ordinary course of business. We operate in
some states that adhere to a gross negligence standard for the delivery of
17
emergency medical care, thereby subjecting us to less exposure for tort
judgments.
Based upon historical claim trends, we consider our insurance program
adequate for the protection of our assets and operations. Our insurance policies
are subject to certain deductibles and self-insured retention limits, up to and
including $1,000,000. The coverage limits of our policies may not be sufficient,
or we may experience claims within our deductibles or self insured retentions in
amounts greater than anticipated. In addition, insurance may not continue to be
available on commercially reasonable terms. A successful claim or claims against
us in excess of our insurance coverage, or claims within our deductibles or self
insured retentions in amounts greater than anticipated, could have a material
adverse effect on our business, financial condition, cash flows, and results of
operations. Claims against us, regardless of their merit or outcome, also may
have an adverse effect on our reputation. We have undertaken to minimize our
claims exposure through process improvements in our legal, risk management and
safety programs. We have also instituted changes to our accounting and cash
management practices in relation to funding and reserving for both workers
compensation and liability claims. These changes include, among other things:
posting reserves for unreported, potential claims related to automobile,
professional and general liability; the inclusion of a liability ceiling in some
of our insurance coverages; and setting aside operational cash flow into
restricted accounts specifically designated for the payment of current and
future liability claims.
In fiscal 2001 and fiscal 2002, we began including liability ceilings in
certain insurance policies, which limit our maximum liability for deductible
payments related to covered losses occurring in those years. The liability
ceiling on our comprehensive general, automobile and professional liability
policies is fixed at $4.25 million and $5 million for fiscal 2000 and 2001,
respectively. We have established our reserves for anticipated claims covered by
these policies at the ceiling amount. We have also included a cap in our fiscal
2002 workers compensation policy, which limits our maximum deductible liability
to $10 million for that policy year. Prior year policies did not include a
maximum liability cap; however, we believe that our reserves are adequate to
address our deductible obligations for those prior years.
We have set aside operational cash flow into designated "loss fund"
accounts, which cash is restricted to the payment of our deductible obligations
as required under certain insurance policies. In connection with our
comprehensive general, automobile and professional policies, we have set aside
$1.6 million and budgeted for an additional $800,000 of cash deposits into the
"loss fund" account to fund deductible payments related to fiscal 2001 policy
year claims; $3.0 million of cash deposits into the "loss fund" account have
been budgeted to fund deductible payments related to the fiscal 2002 policy year
claims. Additionally, during fiscal 2002, we will set aside approximately $6.3
million of operational cash flow, in order to fund, in advance, our anticipated
total deductible obligation for fiscal 2002 workers compensation claims.
Counties, municipalities, and fire districts sometimes require us to
provide a surety bond or other assurance of financial and performance
responsibility. We may also be required by law to post a surety bond as a
prerequisite to obtaining and maintaining a license to operate. As a result, we
have a portfolio of surety bonds that is renewed annually.
EMPLOYEES
At September 30, 2001, we employed approximately 7,000 full-time and 3,600
part-time employees, including approximately 6,290 involved in ambulance
services, 880 in fire protection services, 330 in integrated ambulance and fire
protection services, 1,060 in urgent home medical, and 2,040 in management,
administrative, clerical and billing activities. Of these employees, 2,300 are
paramedics and 3,120 are EMTs. We are a party to collective bargaining
agreements relating to our Rochester, New York; Buffalo, New York; Corning, New
York; Youngstown, Ohio; San Diego, California; Maricopa County, Arizona,
Integrated Fire employees; Gadsden, Alabama; and Arlington, Texas operations and
certain of our ambulance services employees in Arizona. We consider our
relations with employees to be good.
18
STRATEGY
Our strategy is to continue strengthening our existing core businesses, to
continue building upon our economies of scale, and to continue providing the
most proficient levels of health and safety services possible for the customers
and communities we serve. Over the past year, our efforts to strengthen our
business have been primarily focused on: (i) operational restructuring through
the closure or downsizing of financially under-performing operations, (ii)
corporate restructuring and improvements, (iii) improving the quality and
collection of revenue, and (iv) selective growth through expansion in existing
service areas and development of strategic alliances. Our current business
strategy for fiscal 2002 includes continued emphasis on these focal points and
our long-standing commitment to deliver high-quality, efficient and
cost-effective services to our existing and prospective customers in our
established service areas.
OPERATIONAL RESTRUCTURING -- DOMESTIC
In connection with our operational restructuring program, we closed or
downsized certain financially under-performing service areas. We decided to
close or downsize 26 operations in fiscal 2000 and nine operations in fiscal
2001. The majority of the closed operations provided solely non-emergency
ambulance services and could not meet our internal financial performance
criteria on a sustained basis. The restructuring efforts resulted in significant
cost savings. While we do plan to continue our restructuring efforts in terms of
an ongoing quality assurance and improvement program for existing operational
processes, at this time we do not anticipate closing additional operations other
than those that have been accounted for as of June 30, 2001. However, we will
continue to monitor each operation's compliance with the financial components of
our performance criteria and take appropriate future action as necessary, up to
and including closure.
OPERATIONAL RESTRUCTURING -- INTERNATIONAL
We also have and are continuing to implement an operational restructuring
program in our international service areas. Early on in the restructuring
program, we sold and closed our Canadian ambulance operations and, thereafter,
turned our attention to our Latin American operations. At the time of
acquisition, we intended to capitalize on the growth opportunities created by
the privatization of health and safety services in markets such as Argentina and
the expansion of health insurance companies and health maintenance organizations
into Latin America. We believed select Latin America markets represented a
growth opportunity and provided a model for a capitated health care environment
encompassing both ambulance transport and mobile health care utilizing call
centers, telephone triage, and house calls by physicians and nurses. While our
prior acquisition strategy resulted in our entering the Argentina market with an
established service area of significant size, the operations became a cash
burden on our domestic operations in fiscal 2000. In response, we began pursuing
two strategic alternatives for Argentina on parallel tracks. First, we made and
continue to make efforts to sell the Argentine operating subsidiaries, hiring
Banc of America Securities in Argentina to act as our brokering agent. However,
given the current declining state of the Argentine economy, no significant
market exists for the sale of the business. Second, we implemented an extensive
restructuring program in Argentina, consistent with our goals in the domestic
program, and disposed of our financially under-performing urgent care clinics
operating under the name GEA S.A. We continue to see positive results from our
restructuring program, including the establishment of strong new leadership and
an improved corporate infrastructure of systems and management talent. In the
absence of a sale, we are committed to implementation of our restructuring
program in Argentina in an effort to increase operating margins. However, given
the significant uncertainties of the economic and political climate, there can
be no assurance that the Argentine operation will continue to provide a benefit
to us, or that we will not be subject to significant financial or other
liabilities associated with its continued operation.
By contrast, we expanded upon our Bolivian airport rescue and fire fighting
operation by adding non-emergency transportation services to new and existing
customers. The complementary nature of the fire and ambulance services, and our
reputation for reliable, quality service in that area, enabled local management
to grow the ambulance service and contribute positive cash flow. The primary
growth in that business resulted from new contracts with commercial businesses,
embassies and other governmental entities with payment largely derived from
subscription fees. See "Risk Factors -- We face risks associated with our prior
rapid growth, integration, and acquisitions," and "-- We face additional risks
19
associated with our international operations" contained in Item 7 of this
Report.
CORPORATE RESTRUCTURING AND IMPROVEMENTS
In fiscal 2001, we also implemented restructuring programs at the
"corporate" level by increasing efficiencies and cost effectiveness in each of
the departments supporting field operations. While we experienced decreases in
overhead through staff reductions at the early stages of the program, the
majority of the cash flow benefit from those actions will not be recognized
until fiscal 2002 due to extended severance tails associated with employment
agreements held by former executives and other employees. More importantly, we
expect the most significant long-term benefits will result from our
implementation of improved cash management procedures, as well as greater
process efficiencies in areas that support local operations, such as the risk
management, human resources, compliance, finance and legal functions.
We continue to strengthen our existing infrastructure. We utilize our
management and operational systems to enhance productivity in our existing
operations and to enhance our opportunities with joint venture and business
alliance partners. The standardization of certain functions and the
centralization of certain key management and operating systems permit us to
achieve economies of scale at both the regional and corporate levels. See "Risk
Factors -- We face risks associated with our prior rapid growth, integration,
and acquisitions" contained in Item 7 of this Report.
IMPROVED QUALITY AND COLLECTION OF REVENUE
Our strategies and objectives for fiscal 2001 included a substantial focus
on creating further gains in billing and collection performance, building upon
the important steps already taken with respect to the balance sheet and our core
operational base.
We have leveraged opportunities throughout fiscal 2001 to diversify the
payer mix for ambulance services, as we have sought to strengthen our fixed-rate
contract portfolio with hospital systems and managed care organizations
designated as payers of first resort. We have successfully secured such
contracts in fiscal 2001 and will continue to seek innovative payer models
designed to enhance financial margins. Additionally, as we secured new specialty
fire contracts and subscription-based fire protection fees, it further reduces
its reliance on third-party payers for reimbursement. Revenue for fire
protection services in fiscal 2001 increased by approximately 7.1%. By
undertaking these actions, we believe that we are beginning to create a more
predictable, reliable revenue base.
Additionally, we have instituted a variety of enhancements to our
pre-billing process designed to maximize reimbursement from all payer classes,
including Medicare, Medicaid, private insurance companies and patients. Those
processes include the pre-screening of requests for non-emergency calls to
determine if the patient's medical condition warrants the necessity of ALS or
BLS ambulance transportation. If certain medical necessity criteria, as defined
by Medicare, are not met, we refer the requesting party and/or patient to a more
appropriate means of transportation. The objective of this program is to
maximize the utilization of our ambulance fleet for non-emergency transports
that will result in payment. Measures also have been initiated to enhance our
ability to receive reimbursement for transports provided in the course of 911
emergency incidents. These actions include intensified training and monitoring
in the preparation of pertinent field documentation and patient care reports,
which are a prerequisite to timely payment. Our heightened focus on patient care
documentation through our quality assurance training program and efforts to
write-off uncollectible receivables has resulted in improved cash collections.
This, along with additional provision for doubtful accounts, resulted in a
decrease in our days' sales outstanding (DSO) for fiscal 2001 to 89 at the end
of fiscal 2001 as compared to 105 and 111 in fiscal 2000 and fiscal 1999,
respectively.
We expect the ongoing effective management and pre-screening of all
categories of medical transports will result in more timely and appropriate
reimbursement for these services. We will continue to focus attention on our
payer mix and initiatives designed to reduce the risk of non-payment.
20
SELECTIVE GROWTH THROUGH EXPANSION IN EXISTING SERVICE AREAS AND
DEVELOPMENT OF STRATEGIC ALLIANCES
Our primary growth strategy for fiscal 2001 remained focused on the pursuit
of new business within existing service areas. We believe there is significant
opportunity for such expansion in nearly all of our current local and regional
business markets, particularly in the delivery of non-emergency ambulance
transportation services. We plan to continue our efforts to strategically expand
our non-emergency ambulance transportation services through pro-active marketing
efforts to hospitals, health maintenance organizations, and other health care
providers.
We will market our emergency ambulance services through the pursuit of new
contracts and alliances with municipalities, other governmental entities,
hospital-based emergency providers, and fire districts. Based on our successful
public/private alliance with San Diego Fire & Life Safety Services, our
ambulance service contract in Aurora, Colorado, and contracts with numerous
Arizona municipalities, we believe that contracting and partnering may provide a
cost-effective approach to expansion into certain existing and new service
areas. We believe that our strategic public/private alliances can provide
operating economies, coordination of the delivery of services, efficiencies in
the use of personnel and equipment, and enhanced levels of service, while saving
taxpayer dollars. We will continue to seek such mutually beneficial
public/private alliances and municipal contracts in existing and, to a limited
extent, new service areas.
We expect to pursue alliances with health care providers through the
establishment of service contracts, and through very limited strategic
acquisitions of health care and safety-related providers. We evaluate proposed
acquisitions on the potential to increase operating margins and returns on
investment and our ability to establish a strong strategic local relationship.
While we have halted aggressive, growth-oriented acquisition programs
originating from the consolidation of the ambulance industry in the 1990s, we
recognize certain opportunities may exist in the future. Our ability to complete
acquisitions depends upon the availability of cash from operations or additional
debt or equity financing, market price of our common stock and other restrictive
covenants under the revolving credit facility. The depressed market price of our
common stock and the limited availability of growth capital have resulted and
will continue to result in reduced acquisition activity, which consistent with
our strategy, will be characterized by highly selective targeted growth. See
"Risk Factors "We have significant indebtedness," and "We face risks associated
with our prior rapid growth, integration, and acquisitions" contained in Item 7
of this Report.
We plan to continue our efforts to offer our community safety services by
providing fire protection and other safety-related services. We emphasize the
benefits of our services in terms of lower per capita fire service costs,
reduced insurance rates, and lower loss of life and property resulting from our
experience, fire prevention initiatives, management and operational systems, and
utilization of full-time firefighters and part-time reservists. Our model offers
an alternative to the economic pressures faced by many public- and
private-sector entities to reduce or limit expenditures for emergency services.
We continue to pursue opportunities to provide fire protection and safety
services to large industrial complexes, petrochemical plants, power plants, and
other self-contained facilities. We also will continue to provide other
safety-related services on a very limited basis, including personal emergency
response systems and home health care services.
ITEM 2. PROPERTIES
FACILITIES AND EQUIPMENT
We lease our principal executive offices in Scottsdale, Arizona. In
addition, we lease administrative facilities and other facilities used
principally for ambulance and fire apparatus basing, garaging and maintenance in
those areas in which we provides ambulance and fire protection services. We also
own 21 facilities within our service areas. Aggregate rental expense was
approximately $13.2 million during fiscal 2000, and approximately $12.1 million
during fiscal 2001. At October 8, 2001, our fleet included 1,368 owned and 208
leased ambulances, 125 owned and 26 leased fire vehicles, and 473 owned and 57
leased other vehicles. We use a combination of in-house and outsourced
maintenance services to maintain our fleet, depending on the size of the market
and the availability of quality outside maintenance services.
21
ITEM 3. 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 HCFA/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 is currently scheduled to hear
oral argument on that motion in December 2001. 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
Not applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock traded on the Nasdaq National Market under the symbol RURL
since our initial public offering on July 16, 1993. On August 4, 2000, our
common stock began trading on the Nasdaq SmallCap Market. The following table
sets forth the high and low sale prices of the common stock for the fiscal
quarters indicated.
HIGH LOW
---- ---
YEAR ENDED JUNE 30, 2000
First quarter................................. $ 10.00 $ 6.13
Second quarter................................ $ 7.63 $ 3.94
Third quarter................................. $ 5.94 $ 1.13
Fourth quarter................................ $ 2.38 $ 1.13
YEAR ENDED JUNE 30, 2001
First quarter................................. $ 2.31 $ 1.50
Second quarter................................ $ 3.38 $ 1.25
Third quarter................................. $ 2.16 $ 0.81
Fourth quarter................................ $ 1.09 $ 0.87
YEAR ENDED JUNE 30, 2002
First quarter................................. $ 0.97 $ 0.57
Second quarter (through October 8, 2001)...... $ 0.74 $ 0.58
On October 8, 2001, the closing sale price of our common stock was $0.70
per share. On October 8, 2001, there were approximately 1,014 holders of record
of our common stock.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
plan to retain earnings, if any, for use in our business rather than to pay cash
dividends. Payments of any cash dividends in the future will depend on the
financial condition, results of operations and capital requirements of us as
well as other factors deemed relevant by our Board of Directors. Our senior
notes and revolving credit facility contain restrictions on our ability to pay
cash dividends, and future borrowings may contain similar restrictions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" contained in Item 7 of this
Report.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended June 30, 2001, 2000, 1999, 1998, and 1997 is derived from our consolidated
financial statements which have been audited by Arthur Andersen LLP, independent
public accountants. Their reports on the financial statements for June 30, 2001
and 2000 include a statement that certain matters raise doubt about the
Company's ability to continue as a going concern. The selected consolidated
financial data provided below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes appearing elsewhere in this
Report.
23
YEARS ENDED JUNE 30,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenue
Ambulance services .............................. $ 402,833 $ 467,741 $ 467,632 $ 387,041 $ 257,488
Fire protection services ........................ 61,573 57,549 50,490 45,971 42,163
Other ........................................... 39,910 44,784 43,244 42,546 20,154
--------- --------- --------- --------- ---------
Total revenue .............................. 504,316 570,074 561,366 475,558 319,805
Operating expense
Payroll and employee benefits ................... 301,055 323,285 297,341 254,806 170,833
Provision for doubtful accounts ................. 102,470 95,623 81,227 81,178 43,424
Provision for doubtful accounts-- change in
accounting estimate ............................ -- 65,000 -- -- --
Depreciation .................................... 21,809 25,009 24,222 19,213 12,136
Amortization of intangibles ..................... 7,352 8,687 9,166 7,780 4,660
Other operating expenses ........................ 142,009 127,743 98,739 80,216 54,922
Asset impairment charges ........................ 94,353 -- -- -- --
Loss on disposition of clinic operations ........ 9,374 -- -- -- --
Contract termination costs and related asset
impairment ..................................... 9,256 -- -- -- --
Restructuring charge and other .................. 9,091 34,047 2,500 5,000 6,026
--------- --------- --------- --------- ---------
Operating income (loss) ........................... (192,453) (109,320) 48,171 27,365 27,804
Interest expense, net ............................. 30,001 25,939 21,406 14,082 5,720
Other ............................................. 2,402 (2,890) 70 (199) --
--------- --------- --------- --------- ---------
Income (loss) before income taxes, extraordinary
loss and cumulative effect of a change in
accounting principle ............................. (224,856) (132,369) 26,695 13,482 22,084
Provision for (benefit from) income taxes ......... (1,875) 32,837 (11,231) (5,977) (9,364)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss and
cumulative effect of a change in accounting
principle ........................................ (226,731) (99,532) 15,464 7,505 12,720
Extraordinary loss on expropriation of Canadian
ambulance service licenses ....................... -- (1,200) -- -- --
Cumulative effect of a change in accounting
principle ........................................ -- (541) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) .......................... $(226,731) $(101,273) $ 15,464 $ 7,505 $ 12,720
========= ========= ========= ========= =========
Basic earnings per share (1)
Income (loss) before extraordinary item ........... $ (15.38) $ (6.82) $ 1.07 $ 0.55 $ 1.10
Extraordinary loss on expropriation of Canadian
ambulance service licenses ....................... -- (0.08) -- -- --
Cumulative effect of a change in accounting
principle ........................................ -- (0.04) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (15.38) $ (6.94) $ 1.07 $ 0.55 $ 1.10
========= ========= ========= ========= =========
Diluted earnings per share (1)
Income (loss) before extraordinary item ........... $ (15.38) $ (6.82) $ 1.06 $ 0.54 $ 1.04
Extraordinary item ................................ -- (0.08) -- -- --
Cumulative effect of change in accounting principle -- (0.04) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) .......................... $ (15.38) $ (6.94) $ 1.06 $ 0.54 $ 1.04
========= ========= ========= ========= =========
Weighted average number of shares outstanding (1)
Basic ........................................... 14,744 14,592 14,447 13,529 11,585
Diluted ......................................... 14,744 14,592 14,638 14,002 12,271
24
YEARS ENDED JUNE 30,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
Working capital (deficit) ................ $(273,370) $(192,512) $ 140,929 $ 110,529 $ 94,766
Total assets ............................. 298,534 491,217 579,907 535,452 364,066
Current portion of long-term debt (2) .... 294,439 299,104 5,765 8,565 9,814
Long-term debt, net of current portion (2) 1,286 2,850 268,560 243,831 144,643
Stockholders' equity (deficit) ........... (130,526) 95,591 196,839 177,773 159,908
- ----------
(1) Earnings per share for all periods presented has been stated or restated in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" effective as of October 1, 1997.
(2) Includes balances outstanding under our revolving credit facility of
approximately $143,042,000 at June 30, 2001, $146,807,000 at June 30, 2000,
$113,500,000 at June 30, 1999, $86,000,000 at June 30, 1998, and
$134,000,000 at June 30, 1997. At June 30, 2001 and 2000 the amounts
outstanding under our revolving credit facility and the senior notes have
been classified as a current liability.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our selected consolidated financial data and our consolidated financial
statements and notes appearing elsewhere in this Report.
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 both a fee-for-service
basis and nonrefundable subscription fee basis. Per transport revenue depends on
various factors, including the mix of rates between existing markets and new
markets and the mix of activity between 911 emergency ambulance services and
non-emergency 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 nonrefundable subscription fee basis to
individual homeowners or commercial property owners.
Domestic ambulance service fees are recorded net of Medicare, Medicaid and
other reimbursement limitations and are recognized when services are provided.
Payments received from third-party payers represent a substantial portion of our
ambulance service fee receipts. We derived approximately 87% of our net
ambulance fee collections during 2001 and 81% of our net ambulance fee
collections during 2000 from such third party payers. We establish an allowance
for doubtful accounts based on credit risks applicable to certain types of
payers, historical trends and other relevant information. This allowance is
examined on a quarterly basis and revised based on changes in circumstances
surrounding the collectibility of receivables. Provision for doubtful accounts
is made for the expected difference between ambulance services fees charged and
amounts actually collected. Our provision for doubtful accounts generally is
higher with respect to collections to be derived directly from patients than for
collections to be derived from third-party payers and generally is higher for
911 emergency ambulance services than for general ambulance transport services.
Because of the nature of our 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 because 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 in markets and is generally higher in service
areas in which the calls are primarily 911 emergency ambulance service calls.
25
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 primarily 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.
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.
We have pledged assets with a net book value of approximately $11.8 million
to secure certain of our obligations under our insurance and surety bonding
program, including certain reimbursement obligations with respect to the
workers' compensation, performance bonds, appeal bonds and other aspects of such
insurance and surety bonding program.
Our net loss for the year ended June 30, 2001 was $226.7 million or a loss
of $15.38 (diluted) per share. This compares to a net loss of approximately
$101.3 million or $6.94 per share (diluted) for the year ended June 30, 2000,
and net income of $15.5 million or $1.06 per share (diluted) for the year ended
June 30, 1999. The operating results for the year ended June 30, 2001 were
adversely affected by the write-off of impaired assets under SFAS No. 121, our
operational restructuring program involving the closure of certain service
areas, the loss of two exclusive 911 contracts, the disposition of clinic
operations in Latin America, changes in estimates that impacted our reserves for
workers compensation and general liability matters, and additional provision for
doubtful accounts related to closed or closing service areas and non-transport
related receivables.
26
RESULTS OF OPERATIONS
The following table sets forth the years ended June 30, 2001, 2000, and
1999, certain items from our consolidated financial statements expressed as a
percentage of total revenue:
YEARS ENDED JUNE 30,
--------------------------------
2001 2000 1999
------ ------ ------
Revenue
Ambulance services ........................................... 79.9% 82.0% 83.3%
Fire protection services ..................................... 12.2 10.1 9.0
Other ........................................................ 7.9 7.9 7.7
------ ------ ------
Total revenue .......................................... 100.0 100.0 100.0
Operating expenses
Payroll and employee benefits ................................. 59.7 56.7 53.0
Provision for doubtful accounts ............................... 20.3 16.8 14.5
Provision for doubtful accounts-- change in accounting
estimate ...................................................... -- 11.4 --
Depreciation .................................................. 4.3 4.4 4.3
Amortization of intangibles ................................... 1.5 1.5 1.6
Other operating expenses ...................................... 28.2 22.4 17.6
Asset impairment charges ...................................... 18.7 -- --
Loss on disposition of clinic operations ...................... 1.9 -- --
Contract termination costs and related asset impairment ....... 1.8 -- --
Restructuring charge and other ................................ 1.8 6.0 0.4
------ ------ ------
Operating income (loss) ......................................... (38.2) (19.2) 8.6
Interest expense, net ........................................ 5.9 4.6 3.8
Other ........................................................ 0.5 (0.5) --
------ ------ ------
Income (loss) before income taxes, extraordinary loss and
cumulative effect of a change in accounting principle ........... (44.6) (23.3) 4.8
Provision (benefit) for income taxes ......................... 0.4 (5.8) 2.0
------ ------ ------
Net income (loss) before extraordinary loss and cumulative
effect of a change in accounting principle .................... (45.0) (17.5) 2.8
Extraordinary loss .............................................. -- (0.2) --
Cumulative effect of a change in accounting principle ........... -- (0.1) --
------ ------ ------
Net income (loss) ....................................... (45.0)% (17.8)% 2.8%
====== ====== ======
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 2001
REVENUE
Total revenue decreased approximately $65.8 million, or 11.5%, from
approximately $570.1 million for the year ended June 30, 2000 to approximately
$504.3 million for the year ended June 30, 2001. Ambulance services revenue
decreased approximately $64.9 million, or 13.9%, from approximately $467.7
million for the year ended June 30, 2000 to approximately $402.8 million for the
year ended June 30, 2001. Fire protection services revenue increased by
approximately $4.1 million, or 7.1%, from approximately $57.5 million for the
year ended June 30, 2000 to approximately $61.6 million for the year ended June
30, 2001. Other revenue decreased by approximately $4.9 million, or 10.9%, from
27
approximately $44.8 million for the year ended June 30, 2000 to approximately
$39.9 million for the year ended June 30, 2001.
The decrease in ambulance services revenue is primarily related to
decreased volume in our domestic ambulance service areas. Domestic ambulance
service revenue decreased approximately $53.5 million, or 12.8%, from
approximately $418.6 million for the year ended June 30, 2000 to approximately
$365.1 million for the year ended June 30, 2001. Approximately $38.1 million of
the decrease is attributable to the closure of certain underperforming service
areas in the third and fourth quarters of fiscal 2000. Additionally, there was
an approximate $2.4 million decrease related to the loss of a contract in
Lincoln, Nebraska. Domestic ambulance services revenue in areas served by our
company in both fiscal 2001 and 2000 decreased by 4.6% or approximately $17.2
million. Total domestic ambulance transports decreased by approximately 166,000,
or 13.1%, from 1,266,000 for the year ended June 30, 2000 to 1,100,000 for the
year ended June 30, 2001. These decreases were a direct result of our efforts to
reduce non-emergency transports in certain areas and improve the quality of our
revenue. Ambulance services revenue was further affected by an approximate $6.6
million decrease in revenue in Argentina related to decreases in memberships
under capitated service arrangements due to the impact of the economic recession
in Argentina and an approximate $4.5 million decrease in revenue generated from
our former Canadian operations.
Fire protection services revenue increased approximately $0.6 million due
to new airport and industrial contracting activity, approximately $1.1 million
due to rate increases under existing fire protection contracts, approximately
$0.6 million due to forestry revenue increases and approximately $1.8 million
due to rate and utilization increases for fire protection services.
Approximately $4.3 million of the decrease in other revenue relates to
decreases in revenue generated from alternative transportation services. Revenue
generated from alternative transportation services has been a focus of our
efforts to reduce transports in certain areas and improve the quality of our
revenue. Additionally, approximately $2.9 million of the decrease in other
revenue is related to decreases in Argentina medical clinic revenue. These
decreases were offset by a $2.5 million increase in revenue related to our
public/private alliance with the City of San Diego.
OPERATING EXPENSES
Payroll and employee benefit expenses decreased approximately $22.2
million, or 6.9%, from approximately $323.3 million for the year ended June 30,
2000 to approximately $301.1 million for the year ended June 30, 2001.
Approximately $20.9 million of the decrease is attributable to the closure of
certain underperforming service areas that were closed in the third and fourth
quarters of fiscal 2000 and approximately $4.1 million of the decrease is
related to the closure of our Canadian operations. Payroll and employee benefit
expenses for the fiscal year ended June 30, 2001 includes approximately $5.0
million of additional workers compensation insurance expense related to
increased claims experience, approximately $3.0 million related to the accrual
of paid time off for field personnel due to changes in paid time off policies
from previous years and approximately $5.4 million related to an increase in our
employee health insurance reserves as calculated by our third-party
administrator. The remaining decrease reflects reductions in payroll and
employee benefit expenses in existing service areas due to decreased transports
as discussed above. Payroll and employee benefit expenses increased from
approximately 56.7% of total revenue during the year ended June 30, 2000 to
approximately 59.7% of total revenue during the year ended June 30, 2001.
Increased service utilization in our Argentine operations also contributed to
the increase in payroll and employee benefit expenses as a percentage of total
revenue. Exclusive of the effect of the specific fiscal 2001 expenses identified
earlier in this paragraph, we expect that payroll and employee benefit expenses
will increase as a percentage of total revenue in fiscal 2002.
During the year ended June 30, 2001 we recorded a $10.0 million provision
related to underperformance in collections on service areas closed during fiscal
2000. In addition, we recorded a $6.4 million provision related to estimated
underperformance in collections for service areas included in the fiscal 2001
restructuring. It has been our experience that once a service area has been
exited, it becomes more difficult to collect outstanding receivables. As a
result, management has now determined that any non-transport receivable in
excess of 90 days outstanding will be reserved. This adjustment totaled $4.8
28
million at June 30, 2001. An additional $5.0 million provision was also recorded
for contractual transport receivables that were deemed uncollectible.
A summary of activity in our allowance for doubtful accounts during the
fiscal years ended June 30, 2001 and 2000 is as follows. The provision charged
to expense during fiscal 2000 includes the $65.0 million charge recorded in the
second quarter relating to the change in methodology used by us in determining
our allowance for doubtful accounts as described in the following paragraph. We
experienced a decrease in collections in service areas that were closed or
downsized due to our lack of physical presence in the service area. In fiscal
2000, we recorded charges of $3.0 million and $6.8 million recorded in the
respective third and fourth quarters for uncollectible accounts in those service
areas that were identified for closure or downsizing during those periods.
Provisions charged to expense during fiscal 2001 include an additional $10.0
million charge recorded in the second quarter due to the determination of the
ultimate uncollectibility of accounts relating to service areas identified for
closure or downsizing in fiscal 2000. The fourth quarter of fiscal 2001 included
charges totaling $16.2 million related to service areas identified for closure
during that quarter as well as for other collectibility issues.
JUNE 30,
------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Balance at beginning of year $ 87,752 $ 43,392
Provision charged to expense 102,470 160,623
Write-offs (124,993) (116,263)
--------- ---------
Balance at end of year $ 65,229 $ 87,752
========= =========
Provision for doubtful accounts was approximately $160.6 million for the
year ended June 30, 2000 and approximately $102.5 million for the year ended
June 30, 2001. Provision for doubtful accounts decreased from approximately
28.2% of total revenue for the year ended June 30, 2000 to approximately 20.3%
of total revenue for the year ended June 30, 2001. Provision for doubtful
accounts, excluding a $65.0 million provision taken in fiscal 2000 due to a
change in method of estimation and $9.8 million of provisions taken in fiscal
2000 related to specific accounts deemed uncollectible in certain service areas
being closed or downsized as part of our restructuring program, was
approximately 15.1% of total revenue for the year ended June 30, 2000. Provision
for doubtful accounts, excluding charges totaling $26.2 million discussed in the
preceding paragraph , was approximately 15.1% of total revenue for the year
ended June 30, 2001. The provision for doubtful accounts increased from
approximately 19.6% of domestic ambulance service revenue for the year ended
June 30, 2000 to approximately 20.0% of domestic ambulance service revenue for
the year ended June 30, 2001, excluding the additional provisions discussed
above. Net accounts receivable on non-integrated collection systems currently
represent 13.3% of total net accounts receivable at June 30, 2001. We will
continue to review the benefits and timing of integrating the remaining
non-integrated billing centers.
Depreciation decreased approximately $3.2 million, or 12.8%, from
approximately $25.0 million for the year ended June 30, 2000 to approximately
$21.8 million for the year ended June 30, 2001, primarily due to the disposal of
certain assets related to closed operations as well as a decrease in capital
expenditures during the current year. Depreciation decreased from approximately
4.4% of total revenue for the year ended June 30, 2000 to approximately 4.3% of
total revenue for the year ended June 30, 2001.
Amortization of intangibles decreased by approximately $1.3 million, or
14.9%, from approximately $8.7 million for the year ended June 30, 2000 to
approximately $7.4 million for the year ended June 30, 2001. This decrease was
the result of the write-off of approximately $22.3 million of goodwill in
conjunction with the closure or downsizing of certain service areas during
fiscal 2000. Amortization was approximately 1.5% of total revenue for the year
ended June 30, 2000 and 2001, respectively. We anticipate that amortization
expense (and, to a lesser extent, depreciation expense) will be reduced in
29
fiscal 2002 as a result of the write-off of impaired assets in fiscal 2001 as
discussed below.
Other operating expenses increased approximately $14.3 million, or 11.2%,
from approximately $127.7 million for the year ended June 30, 2000 to
approximately $142.0 million for the year ended June 30, 2001. The increase is
primarily due to additional general liability insurance reserves of $15.0
million as explained more fully in the following paragraph, $8.5 million related
to asset write-offs and reserve adjustments as a result of account
reconciliations of our various Argentine subsidiaries performed in the fourth
quarter of fiscal 2001, the accrual of approximately $1.3 million related to a
Medicare audit settlement and $1.0 million related to the write-off of amounts
owed to us by a former owner. These amounts are offset by a decrease of
approximately $6.4 million relating to closed service areas, as well as
decreases in other operating expenses in existing service areas related to
decreased transports. Other operating expenses increased from approximately
22.4% of total revenue for the year ended June 30, 2000 to approximately 28.0%
of total revenue for the year ended June 30, 2001.
Effective January 1, 2001, we refined our methodology of determining
reserves related to general liability claims. The changing environment with
respect to the rising cost of claims as well as the cost of litigation prompted
a comprehensive review by management of detailed information from external
advisors, historical settlement information and analysis of open claims which
led to this change. The new method more closely approximates the potential
outcome of each open claim as well as the legal costs related to the
administration of these claims. Additionally, reserves were set up to cover
potential unknown claims based on historical occurrences of claims filed
subsequent to the end of the policy year. For financial reporting purposes, this
change was treated as a change in accounting estimate.
We have experienced a substantial rise in the costs associated with both
our insurance and surety bonding programs in comparison to prior years. A
significant factor is the overall hardening of the insurance, surety and
re-insurance markets, which has resulted in demands for larger premiums,
collateralization of payment obligations and increasingly rigorous underwriting
requirements. Our higher costs also result from our claims history and from
vendors' perception of our financial position due to our current debt structure
and cash position, as well as the qualified opinion currently issued with
respect to our audited financial statements. Sustained and substantial annual
increases in premiums and requirements for collateral or pre-funded deductible
obligations may have a material adverse effect on our business, financial
condition, cash flow and results of operations. Total premium cost for insurance
in fiscal 2001 was approximately $7.8 million as compared to total premium cost
of approximately $2.9 million in fiscal 2000. We have been able to self-fund
these premium increases out of operating cash flow and have adjusted our
budgetary assumptions to address anticipated future increases. We have budgeted
approximately $12.1 million for projected total premium costs in fiscal 2002.
Management does not believe that we will experience increases in future years at
similar incremental rates; however, external factors beyond our control, such as
the condition of the current insurance market and the potential market impact of
the terrorist attacks of September 11, 2001, may cause such increases.
Medical, fleet, and fire supplies are maintained in a central warehouse,
numerous regional warehouses, and multiple stations, lockers, and vehicles. A
physical inventory of all locations at June 30, 2001 revealed a shortage from
recorded levels. Shrinkage, obsolescence, and supplies lost due to closures
account for most of the shortage. To reduce the recorded inventory to the actual
physical count, an adjustment of approximately $8.4 million was recorded as a
component of other operating expenses in the accompanying consolidated statement
of operations for the year ended June 30, 2001. An estimated par level will be
used for all non-warehouse inventory. The par level is based on the physical
inventory counts taken at June 30, 2001, and will be adjusted based on periodic
counts.
In connection with the budgeting process for the fiscal year ending June
30, 2002, which was completed in the fourth quarter of fiscal 2001, we analyzed
each cost center within our various service areas not identified for closure or
downsizing to determine whether the associated long-lived assets (e.g.,
property, equipment and goodwill) would be recoverable from future operations.
Cost centers represent individual operating units within a given service area
for which separately identifiable cash flow information is available. We
performed this analysis as a result of our expectations of a challenging health
30
care reimbursement environment as well as anticipated increases in labor and
insurance costs with respect to our domestic ambulance operations. This analysis
considered the results of operations over the past year as well as HCFA's
failure to implement the ambulance fee schedule as of January 1, 2001. The
analysis with respect to our Argentine operations included the impact of the
deteriorating economic and political environment as well as information
developed by a third party concerning the marketability of these operations
during fiscal 2001.
In order to assess recoverability, we estimated the related net future cash
flows for each cost center and then compared the resulting undiscounted amounts
to the carrying value of each cost center's long-lived assets (e.g., property
and equipment and goodwill). It should be noted that property and equipment
balances are specifically identified with each cost center. Additionally,
goodwill is specifically identified with each cost center at the time of
acquisition and, therefore, related allocations were not necessary for purposes
of performing the impairment analysis.
For those cost centers where estimated future net cash flows on an
undiscounted basis were less than the related carrying amounts of the long-lived
assets, an asset impairment was considered to exist. We measured the amount of
the asset impairment for each such cost center by discounting the estimated
future net cash flows using a discount rate of 18.5% and comparing the resulting
amount to the carrying value of its long-lived assets. Based upon this analysis,
the Company determined that asset impairment charges approximating $94.4 million
were required for cost centers within our domestic and Argentine ambulance
operations. The asset impairments were charged directly against the related
asset balances. A summary of the related charge is as follows:
PROPERTY,
EQUIPMENT
GOODWILL AND OTHER TOTAL
-------- --------- -----
(IN THOUSANDS)
Domestic ambulance operations $41,631 $ 6,419 $48,050
Argentine ambulance operations 44,327 1,976 46,303
------- ------- -------
Total $85,958 $ 8,395 $94,353
======= ======= =======
During the fourth quarter of the fiscal year ended June 30, 2001, we
decided to close or downsize nine service areas and in connection therewith,
recorded restructuring and other charges totaling $9.1 million. These charges
included $1.5 million to cover severance costs associated with the termination
of approximately 250 employees, all of whom were expected to leave the Company
by the end of fiscal 2002, lease termination and other exit costs of $2.6
million, and asset impairment charges for goodwill and property and equipment of
$4.1 million and $0.9 million, respectively, related to the impacted service
areas. The asset impairments were charged directly against the related asset
balances. The service areas selected for closure or downsizing generated revenue
of $17.7 million, operating losses of $4.0 million and negative cash flow of
$3.2 million for the fiscal year ended June 30, 2001.
During the third and fourth quarters of fiscal year ended June 30, 2000, we
decided to close or downsize 26 service areas and in connection therewith,
recorded restructuring and other charges totaling $34.0 million. These charges
included $6.6 million to cover severance costs associated with the termination
of approximately 300 employees, all of whom had been terminated by June 30,
2001, lease termination and other exit costs of $3.3 million, and asset
impairment charges for goodwill and property and equipment of $22.3 million and
$1.3 million, respectively. The asset impairments were charged directly against
the related asset balances. The service areas selected for closure generated
revenue of $38.7 million, operating losses of $3.7 million and negative cash
flow of $1.0 million for the fiscal year ended June 30, 2000.
A summary of activity in the restructuring reserve, which is included in
accrued liabilities in the consolidated balance sheets, is as follows:
31
JUNE 30,
------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Balance at beginning of year $ 8,132 $ 1,328
Provision 9,091 34,047
Payments/usage (11,054) (27,243)
-------- --------
Balance at end of year $ 6,169 $ 8,132
======== ========
During the fourth quarter of the fiscal year ended June 30, 2001, we sold
our Argentine clinic operations in exchange for a $3.0 million non-interest
bearing note receivable. The note, which is included in other assets in the
consolidated balance sheet, requires monthly principal payments of $25,000
through April 2011. The sale resulted in a loss on disposal of $9.4 million,
including the write-off of $9.3 million of related goodwill. The clinic
operations generated revenue of $4.0 million, operating losses of $1.5 million
and negative cash flow of $0.9 million for the fiscal year ended June 30, 2001.
In November 2000, we learned that our exclusive 911 contract in Lincoln,
Nebraska would not be renewed effective December 31, 2000 and in connection
therewith, recorded a contract termination charge of $5.2 million. This charge
included asset impairments for related goodwill and equipment totaling $4.3
million (the exclusive 911 contract was acquired in a purchase business
combination in fiscal 1995), $0.8 million to cover severance costs associated
with terminated employees, and $0.1 million to cover lease terminations and
other exit costs. The asset impairments were charged directly against the
related assets. The Lincoln contract generated revenue of $4.7 million,
operating income of $0.4 million and cash flow of $0.5 million in fiscal 2000,
its last full year of operations.
In May 2001, we learned that our exclusive 911 contract in Arlington, Texas
would not be renewed effective September 30, 2001 and in connection therewith,
recorded a contract termination charge of $4.1 million. This charge included
asset impairments for related goodwill and equipment of $3.9 million (the
exclusive 911 contract was acquired in a purchase business combination in fiscal
1997), $0.1 million to cover severance costs associated with terminated
employees, and $0.1 million to cover lease termination and other exit costs. The
asset impairments were charged directly against the related assets. The
Arlington contract generated revenue of $8.3 million, operating income of $0.1
million and cash flow of $0.5 million in fiscal 2001, its last full year of
operations.
Interest expense increased by approximately $4.1 million, or 15.8%, from
approximately $25.9 million for the year ended June 30, 2000 to approximately
$30.0 million for the year ended June 30, 2001. This increase was caused by
higher than average debt balances during fiscal 2001, fees, and additional
interest incurred in conjunction with various waiver agreements.
Other expense increased by approximately $5.3 million from other income of
$2.9 million in fiscal 2000 to other expense of $2.4 million in fiscal 2001.
This increase was primarily attributable to a charge of $4.0 million relating to
the put provisions contained in the joint venture agreement described in Note 3
to the consolidated financial statements.
Our effective tax rate decreased from approximately 24.8% for the year
ended June 30, 2000 to approximately (0.8)% for the year ended June 30, 2001.
The decrease in the effective tax rate is primarily due to the impact of the
valuation allowance and other permanent differences, consisting of goodwill
write-offs and amortization. The permanent differences and the valuation
allowance result in a reduction of the tax benefits which could otherwise be
available in a loss year, and thus a reduction in the effective tax rate. A
valuation allowance of approximately $102 million has been provided because we
believe that the realizability of the deferred tax asset does not meet the more
likely than not criteria under SFAS No. 109, "Accounting for Income Taxes."
32
During the year ended June 30, 2000, we recorded an extraordinary loss on
the expropriation of Canadian ambulance service licenses of approximately $1.2
million (net of $0 of income taxes). We received approximately $2.2 million from
the Ontario Ministry of Health as compensation for the loss of license and
incurred costs and wrote-off assets, mainly goodwill, totaling $3.4 million.
The cumulative effect of a change in accounting principle resulted in a
$541,000 approximate charge (net of tax benefit of approximately $392,000) and
was related to our expensing of previously capitalized organization costs in
accordance with Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 2000
REVENUE
Total revenue increased approximately $8.7 million, or 1.5%, from
approximately $561.4 million for the year ended June 30, 1999 to approximately
$570.1 million for the year ended June 30, 2000. Ambulance services revenue
increased approximately $0.1 million, or 0.02%, from approximately $467.6
million for the year ended June 30, 1999 to approximately $467.7 million for the
year ended June 30, 2000. Domestic ambulance services revenue in areas served by
our company in both fiscal 2000 and 1999 increased by approximately 2.5%. Fire
protection services revenue increased by approximately $7.0 million, or 14.0%,
from approximately $50.5 million for the year ended June 30, 1999 to
approximately $57.5 million for the year ended June 30, 2000. Other revenue
increased by approximately $1.6 million, or 3.7%, from approximately $43.2
million for the year ended June 30, 1999 to approximately $44.8 million for the
year ended June 30, 2000.
Total domestic ambulance transports decreased by approximately 22,000, or
1.7%, from approximately 1,288,000 for the year ended June 30, 1999 to
approximately 1,266,000 for the year ended June 30, 2000 due to our efforts to
reduce non-emergency transports in certain areas and improve the quality of our
revenue. The effect on revenue caused by the reduction in transports was more
than offset by transports generated through new contracting activity as well as
increases in average patient charges in other areas.
Fire protection services revenue increased primarily due to revenue
generated from new fire protection contracts awarded to us through competitive
bidding as well as rate increases for fire protection services and greater
utilization of our services under fee-for-service arrangements.
Other revenue increased primarily due to revenue associated with urgent and
primary care services provided in Argentina by a company that we acquired in the
third quarter of fiscal 1999, partially offset by a decrease in alternative
transportation services revenue due to our efforts to reduce transports in
certain areas and improve the quality of our revenue.
OPERATING EXPENSES
Payroll and employee benefit expenses increased approximately $26.0
million, or 8.7%, from approximately $297.3 million for the year ended June 30,
1999 to approximately $323.3 million for the year ended June 30, 2000. Payroll
and employee benefit expenses for the fiscal year ended June 30, 2000 includes
approximately $14.8 million of additional health and workers compensation
insurance expense due to a significant increase in the utilization of insurance
benefits experienced during the closure of certain service areas as well as the
development of certain existing claims. Payroll expense related to our new
contracting activity during the fiscal year ended June 30, 2000 contributed
approximately $7.3 million to the increase, and the remainder was attributable
to higher average labor costs in certain service areas. We expect these higher
average labor costs to continue in the future, including the increased costs
associated with accounts receivable collection and with Health Care Financing
Administration (HCFA) compliance. Payroll and employee benefit expenses
increased from approximately 53.0% of total revenue during the year ended June
30, 1999 to approximately 56.7% of total revenue during the year ended June 30,
33
2000. Increased service utilization in our Argentine operations also contributed
to the increase in payroll and employee benefit expenses as a percentage of
total revenue.
Because of the continuing difficulties encountered in the healthcare
reimbursement environment, we accelerated our emphasis during fiscal 2000 on
increasing the quality of our revenue in exiting service areas or substantially
reducing service where it had become unprofitable to perform non-emergency
transports because of low reimbursement rates or a high risk of
non-reimbursement by payers. We shifted the focus of our billing personnel to
place greater emphasis on the billing process as opposed to the collection
process. We instituted mandatory comprehensive training for our paramedics and
emergency medical technicians on new standards of documentation of ambulance run
tickets. We analyzed the various payer classes within our accounts receivable
balance and the increasing costs to collect these receivables.
Based on the increasingly unpredictable nature of healthcare accounts
receivable and the increasing costs to collect those receivables, we concluded
that the process changes had not brought about the benefits anticipated. As a
result, we changed our method of estimating our allowance for doubtful accounts
effective October 1, 1999. Under our new method of estimation, we have chosen to
fully reserve our accounts receivable earlier in the collection cycle than had
previously been our practice. We provide specific allowances based upon the age
of the accounts receivable within each payer class and also provide for general
allowances based upon historic collection rates within each payer class. Payer
classes include Medicare, Medicaid, and private pay. Accordingly, the effect of
this change was an additional $65.0 million provision for doubtful accounts in
fiscal 2000, which is stated separately in the accompanying financial
statements. We anticipate that this change will result in increases in our
provision rate for doubtful accounts in future periods. During fiscal 2000, we
continued to increase our focus on higher quality revenue by reducing the amount
of non-emergency ambulance transports in selected service areas and continued
previously implemented initiatives to maximize the collection of our accounts
receivable. Also, during the fiscal year ended June 30, 2000, we recorded
additional provisions for doubtful accounts of $9.8 million related to specific
accounts deemed uncollectible in certain service areas that are being closed or
downsized as part of our restructuring program.
Provision for doubtful accounts was approximately $81.2 million for the
year ended June 30, 1999 and approximately $160.6 million for the year ended
June 30, 2000. Provision for doubtful accounts increased from approximately
14.5% of total revenue for the year ended June 30, 1999 to approximately 28.2%
of total revenue for the year ended June 30, 2000. Provision for doubtful
accounts, using the new method of estimation but excluding the $65.0 million
additional provision due to the change in method of estimation and the $9.8
million additional provision for doubtful accounts related to specific accounts
deemed uncollectible in certain service areas that are being closed or downsized
as part of our restructuring program, was approximately 14.5% of the total
revenue for the year ended June 30, 1999 and approximately 15.1% of total
revenue for the year ended June 30, 2000. The provision for doubtful accounts
increased from approximately 19.5% of domestic ambulance service revenue for the
year ended June 30, 1999 to approximately 19.6% of domestic ambulance service
revenue for the year ended June 30, 2000, excluding the additional provision of
$65.0 million described above and the $9.8 million additional provision. Net
accounts receivable on non-integrated collection systems represented
approximately 7.6% of total net accounts receivable at June 30, 2000.
Depreciation increased approximately $0.8 million, or 3.3%, from
approximately $24.2 million for the year ended June 30, 1999 to approximately
$25.0 million for the year ended June 30, 2000, primarily due to increased
property and equipment from recent new contracting activity. Depreciation
increased from approximately 4.3% of total revenue for the year ended June 30,
1999 to approximately 4.4% of total revenue for the year ended June 30, 2000.
Amortization of intangibles decreased by approximately $0.5 million, or
5.4%, from approximately $9.2 million for the year ended June 30, 1999 to
approximately $8.7 million for the year ended June 30, 2000. This decrease was
the result of the write-off of approximately $22.3 million of goodwill in
conjunction with closure or downsizing of certain service areas during fiscal
2000. Amortization decreased from approximately 1.6% of total revenue for the
year ended June 30, 1999 to approximately 1.5% of total revenue for the year
ended June 30, 2000.
34
Other operating expenses increased approximately $29.0 million, or 29.4%,
from $98.7 million for the year ended June 30, 1999 to approximately $127.7
million for the year ended June 30, 2000. Of the approximate $29.0 million
increase, approximately $3.9 million was attributable to the accrual of proposed
settlements relating to a Medicare investigation and certain Medicaid audits,
approximately $4.1 million related to the write-off capitalized acquisition
costs, costs relating to the closure of the vehicle refurbishment center and
other asset write-offs, approximately $1.1 million related to restructuring
consultants and attorneys representing both us and our lenders in connection
with resolving the violation of certain financial covenants contained in the
Company's revolving credit agreement, approximately $2.9 million related to the
write-off of two investments, approximately $2.0 million was attributable to
operations in services areas with newly acquired contracts, approximately $4.2
million was attributable to the operation of a company that was acquired in the
third quarter of fiscal 1999, approximately $3.8 million was attributable to
additional insurance expense related primarily to general liability claims,
approximately $1.8 million was attributable to the write-off of impaired assets,
and approximately $1.7 million was attributable to an increase in domestic fuel
costs. Other operating expenses increased from approximately 17.6% of total
revenue for the year ended June 30, 1999 to approximately 22.4% of total revenue
for the year ended June 30, 2000. The increased service utilization in our
Argentine operations also contributed to the increase in operating expenses as a
percentage of total revenue.
During the third and fourth quarters of fiscal year ended June 30, 2000, we
decided to close or downsize 26 service areas and in connection therewith,
recorded restructuring and other charges totaling $34.0 million. These charges
included $6.6 million to cover severance costs associated with the termination
of approximately 300 employees, all of whom had been terminated by June 30,
2001, lease termination and other exit costs of $3.3 million, and asset
impairment charges for goodwill and property and equipment of $22.3 million and
$1.3 million, respectively. The asset impairments were charged directly against
the related asset balances. The service areas selected for closure generated
revenue of $38.7 million, operating losses of $3.7 million and negative cash
flow of $1.0 million for the fiscal year ended June 30, 2000.
During the first quarter of the fiscal year ended June 30, 1999, we
recorded a $2.5 million charge to cover severance payments to certain members of
senior management all of whom had been terminated by June 30, 1999.
A summary of activity in the Company's restructuring reserve, which is
included in accrued liabilities in the consolidated balance sheets, is as
follows:
JUNE 30,
------------------------
2000 1999
-------- --------
(IN THOUSANDS)
Balance at beginning of year $ 1,328 $ 5,407
Provision 34,047 2,500
Payments/usage (27,243) (6,579)
-------- --------
Balance at end of year $ 8,132 $ 1,328
======== ========
Interest expense increased by $4.5 million, or 21.0%, from $21.4 million
for the year ended June 30, 1999 to $25.9 million for the year ended June 30,
2000. This increase was caused by higher debt balances, fees, and additional
interest incurred in conjunction with various waiver agreements and higher
interest rates than historically incurred.
Our effective tax rate decreased from 42.1% for the year ended June 30,
1999 to 24.8% for the year ended June 30, 2000. The decrease in the effective
tax rate is due to the impact of permanent differences, primarily consisting of
goodwill write-offs and amortization and a valuation allowance. The permanent
differences and the valuation allowance result in a reduction of the tax
benefits which could otherwise be available in a loss year, and thus a reduction
35
in the effective tax rate. A valuation allowance of approximately $12.8 million
has been provided because the company believes that the realizability of the
deferred tax asset does not meet the more likely than not criteria under SFAS
No. 109, "Accounting for Income Taxes."
During the year ended June 30, 2000, we recorded an extraordinary loss on
the expropriation of Canadian ambulance service licenses of approximately $1.2
million (net of $0 of income taxes). We received approximately $2.2 million from
the Ontario Ministry of Health as compensation for the loss of license and
incurred costs and wrote-off assets, mainly goodwill, totaling approximately
$3.4 million.
The cumulative effect of a change in accounting principle resulted in a
$541,000 approximate charge (net of tax benefit of approximately $392,000) and
was related to our expensing of previously capitalized organization costs in
accordance with Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities".
36
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly operating
results for each quarter of fiscal 2001 and 2000. The operating results of any
quarter are not necessarily indicative of results of any future period.
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999(1) 2000(2) 2000(3) 2000 2000(4) 2001(5) 2001(6)
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenue:
Ambulance service ....... $ 116,897 $ 121,109 $ 119,902 $ 109,833 $ 101,742 $ 100,202 $ 101,923 $ 98,966
Fire protection ......... 13,063 14,551 14,981 14,954 15,724 15,140 15,364 15,345
Other revenue ........... 11,240 11,447 11,515 10,582 10,772 9,867 9,435 9,836
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue ........... 141,200 147,107 146,398 135,369 128,238 125,209 126,722 124,147
Operating income (loss) . 9,581 (57,978) (18,002) (42,921) 3,213 (13,770) (16,034) (165,862)
Net income (loss) ....... 1,884 (42,386) (16,615) (44,156) (4,085) (21,574) (23,646) (177,426)
Diluted earnings (loss) per
share ................... $ 0.13 $ (2.91) $ (1.14) $ (3.02) $ (0.28) $ (1.47) $ (1.60) $ (11.91)
========= ========= ========= ========= ========= ========= ========= =========
- ----------
(1) In the second quarter of fiscal 2000, we recorded a $65.0 million
additional provision for doubtful accounts related to a change in our
method of estimating doubtful accounts.
(2) In the third quarter of fiscal 2000, we recorded restructuring and other
charges of approximately $25.1 million related to the closure or downsizing
of certain non-emergency service areas and the reduction of corporate
overhead and a $3.0 million additional provision for doubtful accounts
related to uncollectible accounts in those service areas that are being
closed or downsized.
(3) In the fourth quarter fiscal 2000, we recorded restructuring and other
charges of approximately $18.2 million related to the closure or downsizing
of certain non-emergency service areas and the reduction of corporate
overhead, a $12.2 million charge to establish reserves for both reported
and unreported workers compensation claims and a $6.8 million additional
provision for doubtful accounts related to uncollectible accounts in those
service areas that are being closed or downsized.
(4) In the second quarter of fiscal 2001, we recorded a $10.0 million
additional provision for doubtful accounts related to the uncollectibility
of receivables in service areas closed in fiscal 2000. We also recorded a
$5.2 million approximate charge related to the loss of an exclusive 911
contract in Lincoln Nebraska.
(5) In the third quarter of the fiscal 2001, we recorded a $5.0 million charge
related to increased claims experience in workers compensation.
Additionally we recorded a $15.0 million charge for increases in reserves
for reported claims as well as to establish reserves for claims incurred
but not reported.
(6) In the fourth quarter of fiscal 2001, we recorded additional provisions for
doubtful accounts of $16.2 million, $94.4 million of asset impairment
charges, $9.4 million related to the disposition of clinic operations in
Argentina, $9.1 million of restructuring and other charges, a $4.1 million
charge related to the loss of an exclusive 911 contract in Arlington Texas,
$5.4 million related to increased claim estimates on employee health
insurance, $3.0 million related to the accrual of paid time off for field
personnel, $8.4 million related to inventory write-offs, $1.3 million
related to Medicare audit, $1.0 million related to write-off of amounts due
from former seller, $8.5 million related to asset write-offs and reserve
adjustments at our various Argentine subsidiaries, $3.1 million of other
asset write-offs, and $4.0 million related to the put provisions contained
in a joint venture agreement.
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. Also, our Argentine operations
37
experience greater utilization of services by customers under capitated service
arrangements in the fourth quarter, as compared to the other three quarters, as
South America enters into its winter season.
Public health conditions affect our operations differently in different
regions. For example, greater utilization of services by customers under
capitated service arrangements decrease 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.
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 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 the exercise of stock options.
During the year ended June 30, 2001, cash flow provided by operations was
approximately $5.4 million resulting primarily from net losses of approximately
$226.7 million, offset by non-cash expenses of depreciation and amortization of
approximately $29.2 million, provision for doubtful accounts of approximately
$102.5 million, and write-offs of assets of approximately $114.8 million.
Additionally, we experienced an increase in accrued liabilities of approximately
$39.1 million and an increase in accounts receivable of approximately $62.1
million. Cash flow used in operations was approximately $11.4 million for the
year ended June 30, 2000.
Cash used in financing activities was approximately $5.9 million for the
year ended June 30, 2001, primarily due to repayments on the revolving credit
facility and on other debt and capital lease obligations. Cash provided by
financing activities was approximately $28.3 million for the year ended June 30,
2000.
Cash used in investing activities was approximately $1.3 million for the
year ended June 30, 2001 due primarily to capital expenditures of approximately
$5.8 million offset by proceeds from the sale of property and equipment of
approximately $2.0 million and decreases in other assets of approximately $2.5
million. Cash used in investing activities was approximately $13.8 million for
the year ended June 30, 2000, due in part to capital expenditures of
approximately $15.9 million.
Our gross accounts receivable as of June 30, 2001 and June 30, 2000 were
approximately $168.5 million and approximately $231.7 million, respectively. Our
accounts receivable, net of the allowance for doubtful accounts, were $103.3
million and $143.9 million as of such dates, respectively. We believe that the
decrease in net accounts receivable is due to many factors, including additional
provision for doubtful accounts and overall improvement in collections on
existing operations.
The allowance for doubtful accounts decreased from approximately $87.8
million at June 30, 2000 to approximately $65.2 million at June 30, 2001. The
primary reason for this decrease is the write-off of uncollectible receivables
offset by the current period provision for doubtful accounts. As discussed
above, we have instituted initiatives to improve our collection procedures, and
we have changed our method of estimating our allowance for doubtful accounts
effective in the second quarter of fiscal 2000. While management believes that
we now have a more predictable method of determining the realizable value of our
accounts receivable, based on continuing difficulties in the healthcare
reimbursement environment, there can be no assurance that there will not be
additional future write-offs.
We have set aside operational cash flow into designated "loss fund"
accounts, which cash is restricted to the payment of our deductible obligations
as required under certain insurance policies. In connection with our
comprehensive general, automobile and professional policies, we have set aside
$1.6 million and budgeted for an additional $800,000 of cash deposits into the
"loss fund" account to fund deductible payments related to fiscal 2001 policy
year claims; approximately $3.0 million of cash deposits into the "loss fund"
account have been budgeted to fund deductible payments related to the fiscal
2002 policy year claims. Additionally, during fiscal 2002, we will set aside
38
approximately $6.3 million of operational cash flow, in order to fund, in
advance, our anticipated total deductible obligation for fiscal 2002 workers
compensation claims.
Under the terms of a joint venture agreement between a minority joint
venture partner and us, the partner was entitled to "put" the minority interest
to us on October 20, 2000 for a payment anticipated to be a net payment of
approximately $5.1 million. We then had the option to delay the "put" for a
period of one year. The minority joint venture partner indicated his intention
to exercise the "put" option and we indicated our intention to delay the "put"
for a year. We have commenced negotiations with the partner. Our liquidity and
financial position may be materially adversely affected if the exercise of the
put is valid and we are unable to negotiate satisfactory payment terms with the
partner.
We have a $143.0 million revolving credit facility, as amended, that
matures March 16, 2003. The credit facility is unsecured and is unconditionally
guaranteed on a joint and several basis by substantially all of our domestic
wholly owned current and future subsidiaries. Interest rates and availability
under the revolving credit facility depend on our meeting certain financial
covenants, including total debt leverage ratios, total debt to capitalization
ratios, and fixed charge ratios.
The revolving credit facility initially was priced at the greater of (i)
prime rate, (ii) Federal Funds rate plus 0.5% plus the applicable margin, or
(iii) a LIBOR-based rate. The LIBOR-based rates ranged from LIBOR plus 0.875% to
LIBOR plus 1.75%. As discussed below, during March 2000, all borrowings became
priced at prime rate plus 0.25%. At June 30, 2001, the weighted average interest
rate was approximately 7.0% on the revolving credit facility. Approximately
$143.0 million was outstanding on the revolving credit facility at June 30,
2001. We have received a compliance waiver, as amended, regarding the financial
covenants contained in our revolving credit facility, which covers the periods
from December 31, 1999 through December 3, 2001. The waiver, as amended, covers
the representations and warranties related to no material adverse changes as
well as the following financial covenants: total debt leverage ratio, the total
debt to total capitalization ratio, and the fixed charge coverage ratio. The
waiver, as amended, provides , among other things, that no additional borrowings
will be available to us through the end of the waiver period, December 3, 2001.
There is no assurance that we are in compliance with all of the technical
conditions of the waiver, as amended.
As LIBOR contracts expired in March 2000, all borrowings were priced at
prime rate plus 0.25 percentage points and interest is payable monthly. During
the period covered by the waiver, as amended, we are accruing additional
interest expense at a rate of 2.0% per annum on the outstanding balance on the
revolving credit facility unless certain pay down requirements are met during
that period. We have recorded approximately $3.8 million related to this
additional interest expense through June 30, 2001, approximately $3.3 million of
which remains in accrued liabilities at June 30, 2001. Also outstanding are $6.5
million in letters of credit issued under the revolving credit facility.
Management believes that an amendment to the revolving credit facility could
substantially alter the terms and conditions of the revolving credit facility,
including potentially higher interest rates, which could have a material adverse
effect on our financial condition. There can be no assurance that an amendment
or restructuring of the revolving credit facility can be negotiated on
satisfactory terms, or at all.
Although we are not aware of any event of default under either the terms of
the revolving credit facility (as a result of the waiver agreement) or our
$150.0 million 7 7/8% Senior Notes due 2008, and although there has been no
acceleration of the repayment of the revolving credit facility or the 7 7/8%
Senior Notes due 2008, the entire balance of these instruments has been
reclassified as a current liability at June 30, 2001 in the accompanying
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 78 "Classification of Obligations that are Callable by the
Creditor". This reclassification, together with significant losses incurred in
fiscal 2000 and 2001, has resulted in our independent accountants modifying
their fiscal year end audit report to include a statement that these
uncertainties create substantial doubt about our ability to continue as a going
concern. The existence of a going concern statement may make it more difficult
to pursue additional capital through public or private debt or equity
financings. Our inability to successfully negotiate an amendment to our
revolving credit facility could have a material adverse effect on our ability to
continue as a going concern.
39
Including the classification of entire outstanding balance under the
revolving credit facility as a current liability at June 30, 2001, we had a
working capital deficiency of approximately $273.4 million, including cash of
approximately $8.7 million, compared to a working capital deficiency of
approximately $192.5 million, including cash of approximately $10.3 million, at
June 30, 2000.
In November 1998, we entered into an interest rate swap agreement that
originally expired in November 2003 with a provision for the lending party to
terminate the agreement in November 2000. The interest rate swap agreement
effectively converted $50.0 million of variable rate borrowings to fixed rate
borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating
rate. The weighted average floating rate for the year ended June 30, 1999 was
approximately 5.2%. As a result of this swap agreement interest expense was
reduced by approximately $106,000 during the year ended June 30, 1999. In June
1999, we terminated the interest rate swap agreement and received a termination
fee of approximately $604,000. Such amount was amortized as a reduction of
interest expense on a straight-line basis through November 2003.
In February 1998, we entered into a $5.0 million capital equipment lease
line of credit. The lease line of credit matures at varying dates through July
2003. The lease line of credit is priced at the higher of LIBOR plus 1.7% or the
commercial paper rate plus 1.7%. At June 30, 2001 the interest rate was 5.7% on
the lease line of credit. Approximately $0.9 million was outstanding on this
line of credit at June 30, 2001.
In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008
(the Notes) under Rule 144A under the Securities Act of 1933, as amended
(Securities Act). Interest under the Notes is payable semi-annually on September
15 and March 15, and the Notes are not callable until March 2003 subject to the
terms of the Indenture. We incurred expenses related to the offering of
approximately $5.3 million and will amortize these costs over the life of the
Notes. We recorded a $258,000 discount on the Notes and will amortize this
discount over the life of the Notes. Unamortized discount at June 30, 2001 was
approximately $173,000, and this amount is recorded as an offset to the current
portion of long-term debt in the consolidated financial statements. In April
1998, we filed a registration statement under the Securities Act relating to an
exchange offer for the Notes. The registration became effective on May 14, 1998.
The Notes are general unsecured obligations of our company and are
unconditionally guaranteed on a joint and several basis by substantially all of
our domestic wholly owned current and future subsidiaries. See Note 4 of notes
to our consolidated financial statements. The Notes contain certain covenants
that, among other things, limit our ability to incur certain indebtedness, sell
assets, or enter into certain mergers or consolidations.
Assuming that we receive continued waivers under our revolving credit
facility (of which there can be no assurance), we expect that cash flow from
operations and our existing cash reserves will be sufficient to meet our
regularly scheduled debt service and our planned operating and capital needs for
the twelve months subsequent to June 30, 2001. Through our restructuring program
we have closed or downsized several locations that were negatively impacting our
cash flow. In addition, we have significantly reduced our corporate overhead. We
have improved the quality of revenue and have experienced an upward trend in
daily cash collections.
As noted above, we have received a series of waivers since February 2000 in
relation to our noncompliance with financial covenants under our revolving
credit facility. We are currently operating under a waiver that will expire on
December 3, 2001. We will not be in compliance with these financial covenants on
December 3, 2001, and there can be no assurance that we will continue to receive
waivers from our lenders. If we fail to receive additional waivers from our
lenders we will be in default under our revolving credit facility or the
agreement for the senior notes or both. A default under the senior notes or our
revolving credit facility may, among other things, cause all amounts owed by us
under such facilities to become due immediately upon such default. Any inability
to obtain additional waivers could have a material adverse effect on our ability
to continue as a going concern.
We have been actively working with the lenders under our revolving credit
facility during the term of the covenant waivers to structure a long-term
financing solution. In connection with these efforts, we have retained an
investment banking firm to assist us in evaluating available alternatives. We
believe our current business model and strategy can generate sufficient cash
flow to provide a basis for a new long-term agreement with our current lenders
or to restructure our debt. However, there can be no assurance we will sustain
our targeted levels of operating cash flow or that we can accomplish an
40
arrangement with regard to our debt on terms acceptable to us, or at all. Any
such arrangement 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. If we issue equity securities in
connection with any such arrangement, the percentage ownership of our current
stockholders will be materially reduced, and such equity securities may have
rights, preferences or privileges senior to our current stockholders. If we are
unable to reach a long-term agreement with our lenders, our business, operating
results, financial condition and ability to continue as a going concern will be
materially adversely affected.
During the year ended June 30, 1999, we made investments in companies
offering ambulance services, ambulance billing services, and alternative
transportation services. We contributed cash, accounts receivable, and fixed
assets totaling approximately $1.9 million at June 30, 1999 to these businesses.
During the year ended June 30, 2000, one of these investments was determined to
be impaired and amounts totaling $1.6 million were written-off. These amounts
represent the initial investment plus other amounts loaned to the company. These
investments have been recorded using the cost method of accounting.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Our results of operations for the periods discussed have not been affected
significantly by inflation or foreign currency fluctuations. Our revenue from
international operations is denominated primarily in the currency of the country
in which it is operating. At June 30, 2001, our balance sheet reflects a $14,000
cumulative equity adjustment (increase) from foreign currency translation.
During the year ended June 30, 2000, we recognized a $173,000 translation
adjustment as a component of the extraordinary loss on the expropriation of
Canadian ambulance service licenses. Although we have not incurred any material
exchange gains or losses to date, 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. However, as we
continue to expand our international operations, exposure to gains and losses on
foreign currency transactions may increase. We may choose to limit such exposure
by entering into forward exchange contracts or engaging in similar hedging
strategies. See "Risk Factors -- We face additional risks associated with our
international operations contained in Item 7 of this Report.
41
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN
THIS REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS.
WE HAVE SIGNIFICANT INDEBTEDNESS.
We have significant indebtedness. As of June 30, 2001, we have
approximately $295.7 million of consolidated indebtedness, consisting primarily
of $150.0 million of 7 7/8% senior notes due in 2008 and approximately $143.0
million outstanding under our revolving credit facility maturing March 2003. We
currently are operating under a waiver relating to noncompliance with certain
technical financial covenants imposed by the revolving credit facility. We have
complied with all payment obligations arising under our revolving credit
facility and the senior notes.
Our ability to service our debt depends on our future operating
performance, which is affected by governmental regulations, the state of the
economy, financial factors, and other factors, certain of which are beyond our
control. We may not generate sufficient funds to enable us to make our periodic
debt payments. Failure to make our periodic debt payments could have a material
adverse effect on our ability to continue as a going concern.
WE ARE OPERATING UNDER A TEMPORARY COMPLIANCE WAIVER WITH RESPECT TO CERTAIN
TECHNICAL FINANCIAL COVENANTS UNDER OUR REVOLVING CREDIT FACILITY.
The agreement governing the terms of the senior notes contains certain
covenants limiting our ability to:
* incur certain additional debt * create certain liens
* pay dividends * issue guarantees
* redeem capital stock * enter into transactions with affiliates
* make certain investments * sell assets
* issue capital stock of subsidiaries * complete certain mergers and consolidations
The revolving credit facility contains other more restrictive covenants and
requires us to satisfy certain financial tests, including a total debt leverage
ratio, a total debt to total capitalization ratio, and a fixed charge ratio.
Currently, we are not in compliance under our revolving credit facility with
respect to certain technical financial covenants, including a total debt
leverage ratio, a total debt to total capitalization ratio, and a fixed charge
ratio. Our ability to satisfy those covenants can be affected by events both
within and beyond our control, and we may be unable to meet these covenants.
We have received waivers of covenant compliance under our revolving credit
facility covering periods from February 2000 through December 3, 2001, as we
were not in compliance with the technical financial covenants as described
above. In accordance with the waiver, we are accruing an additional 2% annual
deferred interest on the amounts we owe under our revolving credit facility. To
date, we have paid approximately $4.0 million in principal on our revolving
credit facility in connection with the covenant waivers.
A breach of the waiver or any of the covenants or other terms of our debt
could result in an event of default under the credit facility or the senior
notes or both, which could have a material adverse effect on our ability to
continue as a going concern. We may not be in compliance with certain of the
technical financial conditions of the waiver; however, the lenders have not
asserted that we have failed to comply with any such requirements.
WE MAY NOT CONTINUE TO RECEIVE WAIVERS OF FINANCIAL COVENANTS FROM OUR LENDERS.
As noted above, we have received a series of waivers since February 2000 in
relation to our noncompliance with certain technical financial covenants under
our revolving credit facility. We are currently operating under a waiver that
will expire on December 3, 2001. We will not be in compliance with these
financial covenants on December 3, 2001, and we may not continue to receive
42
waivers from our lenders. If we fail to receive additional waivers from our
lenders we may be in default under our revolving credit facility or the
agreement for the senior notes or both. A default under the senior notes or our
revolving credit facility may, among other things, cause all amounts owed by us
under such facilities to become due immediately upon such default. Any inability
to obtain additional waivers could have a material adverse effect on our ability
to continue as a going concern.
OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE RENDERED A REPORT THAT INCLUDES A GOING
CONCERN STATEMENT.
The senior notes and the credit facility have been reclassified as a
current liability under accounting rules relating to debt that is callable by
the creditor since we are operating under a waiver under our credit facility.
This, in addition to the significant operating losses incurred in fiscal 2000
and 2001, as well as those items discussed in Note 1 of the Notes to
Consolidated Financial Statements, have resulted in our independent public
accountants modifying their report to include a statement that these
uncertainties create substantial doubt about our ability to continue as a going
concern. The existence of a going concern statement generally makes it more
difficult to obtain trade credit, insurance and surety bonding, or additional
capital through public or private debt or equity financings. The going concern
statement also may make it more difficult to maintain existing customer
relationships and to initiate new customer relationships.
WE MAY NOT BE ABLE TO RESTRUCTURE OUR EXISTING DEBT.
We have been actively working with the lenders under our revolving credit
facility during the term of the covenant waivers to structure a long-term
financing solution. In connection with these efforts, we have retained an
investment banking firm to assist us in evaluating available alternatives. We
believe our current business model and strategy can generate sufficient cash
flow to provide a basis for a new long-term agreement with our current lenders
or to restructure our debt. However, we may be unable to sustain our targeted
levels of operating cash flow, and we may be unable to accomplish an arrangement
with regard to our debt on terms acceptable to us, or at all. If we are able to
reach an arrangement with our lenders, the agreement 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. If
we issue equity securities in connection with any such arrangement, the
percentage ownership of our current stockholders will be materially reduced, and
such equity securities may have rights, preferences, or privileges senior to our
current stockholders. If we are unable to reach a long-term agreement with our
lenders, our business, operating results, financial condition and ability to
continue as a going concern will be materially adversely affected.
WE MAY NOT BE ABLE TO SUSTAIN SUFFICIENT OPERATING CASH FLOW.
Despite significant net losses in fiscal 2001 and 2000, our restructuring
efforts have enabled us to self-fund our obligations since March 2000 from
existing cash reserves and operating cash flow. However, we may be unable to
sustain our targeted levels of operating cash flow. Our ability to sustain our
operating cash flow will depend upon various factors, including industry
conditions, economic conditions, competitive conditions, and other factors, many
of which are beyond our control. If we are unable to sustain our targeted levels
of operating cash flow, or in the event of an unanticipated cash requirement
(such as an adverse litigation outcome, reimbursement delays, or other matters)
we will need to pursue additional debt or equity financing. Any such financing
may not be available on terms acceptable to us, or at all. The terms of our
waiver agreement currently restrict us from borrowing under the revolving credit
facility. The revolving credit facility and the senior notes also restrict our
ability to provide collateral to any prospective lender. Failure to maintain
adequate operating cash flow will have a material adverse effect on our
business, operating results, financial condition, and ability to continue as a
going concern.
WE OPERATE THROUGH OUR SUBSIDIARIES.
We are a holding company and conduct substantially all of our operations
through our direct and indirect subsidiaries. To make our periodic debt
payments, we must have access to the cash flow of our subsidiaries, whether
through loans, dividends, distributions, or otherwise. While our subsidiaries
are separate and distinct legal entities, we have always operated on a
consolidated basis for cash management purposes. In addition, substantially all
43
of our subsidiaries have guaranteed the senior notes and the revolving credit
facility. Nonetheless, our ability to make our debt payments could be subject to
legal, contractual, and other restrictions that could hinder or prevent us from
gaining access to the cash flow of our subsidiaries. With respect to any
obligation not specifically guaranteed by the subsidiaries, those separate and
distinct legal entities have no obligation, contingent or otherwise, to pay any
amounts. Accordingly, the holders of any debt of our subsidiaries will be
entitled to payment from the assets of such subsidiaries prior to the holders of
any of our general, unsecured obligations. As of June 30, 2001, our subsidiaries
had $2.9 million of debt in addition to their guarantees of the senior notes and
the revolving credit facility.
WE DEPEND ON REIMBURSEMENTS BY THIRD-PARTY PAYERS AND INDIVIDUALS.
We receive a substantial portion of our payments for ambulance services
from third-party payers, including Medicare, Medicaid, and private insurers. We
received approximately 81% of our ambulance fee collections from such
third-party payers during fiscal 2000, including approximately 23% from
Medicare. In fiscal 2001, we received approximately 87% of ambulance fee
collections from these third parties, including approximately 25% from Medicare.
The reimbursement process is complex and can involve lengthy delays.
From time to time, we experience these delays. Third-party payers are continuing
their efforts to control expenditures for health care, including proposals to
revise reimbursement policies. We recognize revenue when we provide ambulance
services; however, there can be lengthy delays before we receive payment. In
addition, third-party payers may disallow, in whole or in part, requests for
reimbursement based on assertions that certain amounts are not reimbursable or
additional supporting documentation is necessary. Retroactive adjustments may
change amounts realized from third-party payers. We are subject to governmental
audits of our Medicare and Medicaid reimbursement claims and may be required to
repay these agencies if a finding is made that we were incorrectly reimbursed.
Delays and uncertainties in the reimbursement process adversely affect the level
of accounts receivable, increase the overall costs of collection, and may
adversely affect our working capital and cause us to incur additional borrowing
costs.
We also face the continuing risk of non-reimbursement to the extent that
uninsured individuals require emergency ambulance service in service areas where
an adequate subsidy is not provided. Amounts not covered by third-party payers
are the obligations of individual patients. We may not receive whole or partial
reimbursement from these uninsured individuals. We continually review the mix of
activity between emergency and general medical transport in view of the
reimbursement environment and evaluate methods of recovering these amounts
through the collection process.
We establish an allowance for doubtful accounts based on credit risk
applicable to certain types of payers, historical trends, and other relevant
information. We review our allowance for doubtful accounts on an ongoing basis
and may increase or decrease such allowances from time to time, including in
those instances when we determine that the level of effort and cost of
collection of certain accounts receivable is unacceptable.
The risks associated with third-party payers and uninsured individuals and
the inability to monitor and manage accounts receivable successfully could have
a material adverse effect on our business, financial condition, cash flows, and
results of operations. Our collection policies or our allowance for doubtful
accounts receivable may not be adequate.
PROPOSED RULES MAY ADVERSELY AFFECT OUR REIMBURSEMENT RATES OF COVERAGE.
During June 1997, the Health Care Financing Administration issued proposed
rules that would revise Medicare policy on the coverage of ambulance services.
These proposed rules have been subject to public comment and, despite the
passage of new laws addressing changes to the reimbursement of ambulance
services by Medicare (as discussed below), have not yet been withdrawn. The
proposed rules have not been finalized.
In addition, the "Balanced Budget Act of 1997" became law in August 1997.
This law in part provides for the development, negotiation, and implementation
of prospective fee schedule for Medicare reimbursement of ambulance services.
44
The new law also reduces the annual rate adjustment for Medicare reimbursements
from the Consumer Price Index, or CPI, to CPI less one percentage point.
Upon implementation, the new law will require that ambulance service
providers accept assignment whereby we receive payment directly from Medicare
and accept such amount, along with the co-pay and deductible paid by the
patient, as payment in full. The new law also stipulates that individual states
may now elect not to provide payment for cost-sharing for coinsurance, or
copayments, for dual-qualified (Medicare and Medicaid) beneficiaries.
In January 1999, HCFA/CMMS 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,
HCFA/CMMS announced that the implementation of the prospective fee schedule as
well as the mandatory acceptance of assignment would be postponed to January
2001. HCFA/CMMS 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.
The proposed Medicare ambulance fee schedule and rule was published
September 12, 2000 in the Federal Register, to be followed by a 60-day comment
period. On November 30, 2000, HCFA/CMMS notified Medicare carriers that it would
not implement the proposed fee schedule and rules as scheduled on January 1,
2001. As of this filing, HCFA/CMMS has not established an implementation date
for the final fee schedule and rules. The final outcome of the proposed rules
and the effect of the prospective fee schedule is 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 of
increase in the CPI, could have a material adverse effect on our business,
financial condition, cash flows, and results of operations.
CERTAIN STATE AND LOCAL GOVERNMENTS REGULATE RATE STRUCTURES AND LIMIT RATES OF
RETURN.
State or local government regulations or administrative policies regulate
rate structures in most states in which we conduct ambulance operations. In
certain service areas in which we are the exclusive provider of services, the
municipality or fire district sets the rates for emergency ambulance services
pursuant to a master contract and establishes the rates for general ambulance
services that we are permitted to charge. Rates in most service areas are set at
the same amounts for emergency and general ambulance services. For example, the
State of Arizona establishes a rate of return on sales we are permitted to earn
in determining the ambulance service rates we may charge in that state.
Ambulance services revenue generated in Arizona accounted for approximately 13%
of total revenue for fiscal 2000 and approximately 15% of total revenue for
fiscal 2001. We may be unable to receive ambulance service rate increases on a
timely basis where rates are regulated or to establish or maintain satisfactory
rate structures where rates are not regulated.
Municipalities and fire districts negotiate the payments to be made to us
for fire protection services pursuant to master contracts. These master
contracts are based on a budget and on level of effort or performance criteria
desired by the municipalities and fire districts. We could be unsuccessful in
negotiating or maintaining profitable contracts with municipalities and fire
districts.
NUMEROUS GOVERNMENTAL ENTITIES REGULATE OUR BUSINESS
Numerous federal, state, local, and foreign laws and regulations govern
various aspects of the business of ambulance service and fire fighting service
providers, covering matters such as licensing, rates, employee certification,
environmental matters, and other factors. Certificates of necessity may be
required from state or local governments to operate ambulance services in a
designated service area. Master contracts from governmental authorities are
45
subject to risks of cancellation or unenforceability as a result of budgetary
and other factors and may subject us to certain liabilities or restrictions that
traditionally have applied only to governmental bodies. Federal, state, local,
or foreign governments could:
* change existing laws or regulations,
* adopt new laws or regulations that increase our cost of doing
business,
* lower reimbursement levels,
* choose to provide services for themselves, or
* otherwise adversely affect our business, financial condition, cash
flows, and results of operations.
We could encounter difficulty in complying with all applicable laws and
regulations.
HEALTH CARE REFORMS AND COST CONTAINMENT MAY AFFECT OUR BUSINESS.
Numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system. We cannot predict which, if any,
health care reforms may be proposed or enacted or the effect that any such
legislation would have on our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA), which protects the privacy of patients'
health information handled by health care providers and establishes standards
for its electronic transmission, was enacted on August 21, 1996. The final rule,
which took effect on April 14, 2001, requires covered entities to comply with
the final rule's provisions by April 14, 2003, and covers all individually
identifiable health information used or disclosed by a covered entity. Our
Corporate Compliance Committee has formed a HIPAA Subcommittee to address the
impact of HIPAA and to consider changes to or enactment of policies and/or
procedures which may need to be implemented to comply under the final rule.
Because the impact of HIPAA on the health care industry is not known at this
time, we may incur significant costs associated with implementation and
continued compliance with HIPAA or further legislation which may have a material
adverse effect on our business, financial condition, cash flows, or results of
operations.
In addition, managed care providers are focusing on cost containment
measures while seeking to provide the most appropriate level of service at the
most appropriate treatment facility. Changing industry practices could have an
adverse effect on our business, financial condition, cash flows, and results of
operations.
CLAIMS AGAINST US COULD EXCEED OUR INSURANCE COVERAGE. WE HAVE EXPERIENCED
MATERIAL INCREASES IN THE COST OF OUR INSURANCE COVERAGE.
We are subject to a significant number of accident, injury and malpractice
claims as a result of the nature of our business and the day-to-day operation of
our vehicle fleet. The coverage limits of our policies may not be adequate. In
addition, we may experience claims within our deductibles and self-insured
retentions in amounts greater than expected. Such increased costs and potential
liabilities in excess of our insurance coverage could have a material adverse
effect on our business, financial condition, cash flows, and results of
operations. Claims against us, regardless of their merit or outcome, also may
have an adverse effect on our reputation and business.
In fiscal 2000 and 2001, we experienced significant increases in the
premiums we have had to pay, and in the collateral or other advance funding
required. We also have increased our deductible and self-insurance retentions
under several coverages.
Many counties, municipalities, and fire districts also require us to
provide a surety bond or other assurance of financial and performance
responsibility, and the cost and collateral requirements associated with
obtaining such bonds have increased. Sustained and substantial annual increases
in premiums and requirements for collateral and/or restricted funds could have a
material adverse effect on our business, financial condition, cash flow, and
results of operations.
46
WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
On July 30, 2001, the Nasdaq Stock Market notified us that we were not in
compliance with a Nasdaq SmallCap maintenance standard. This standard requires
that we maintain at least a $1.00 minimum bid price. Under the Nasdaq notice, we
had until October 29, 2001 to comply with the maintenance requirement. In order
to comply, our common stock had to trade above $1.00 for at least ten
consecutive trading days prior to such date.
On September 27, 2001, Nasdaq announced, effective immediately, it was
implementing an across-the-board moratorium on the minimum bid and public float
requirements for continued listing on Nasdaq. In particular, companies currently
under review for failure to maintain such requirements, as we are, have been
removed from the compliance process with respect to the bid price and public
float requirements. The suspension of these requirements will remain effective
until January 2, 2002, and no deficiencies will accrue during the suspension
period.
On such date Nasdaq reinstates these requirements, which currently is
January 2, 2002, we will again become subject to such requirements. In addition,
if our time period to comply is tolled during Nasdaq's suspension period and not
reset, we will have approximately 30 days from such date to comply with the
requirement that our common stock trade above $1.00 for at least 10 consecutive
trading days. As of September 21, 2001, our common stock has not traded in
excess of $1.00 on any day since the date we received notice from Nasdaq.
In addition, we must continue to meet other maintenance requirements
including either stockholders' equity, market capitalization or net income.
Nasdaq has amended the old net tangible asset test and replaced it with a
stockholders' equity test. Companies will have until November 2002 to achieve
compliance with the stockholders' equity test if that is the alternative
maintenance standard with which they are complying.
If we do not satisfy the maintenance requirements, we may decide to appeal
the decision by Nasdaq to delist our common stock, or we may decide to apply for
quotation on the OTC Bulletin Board or any other organized market on which our
shares may be eligible for trading.
As a result of delisting from the Nasdaq SmallCap Market, investors would
have significantly less liquidity, limited availability of quotations, and more
difficulty purchasing and selling our common stock, even if our common stock
continues to trade on the OTC Bulletin Board. Further, delisting could reduce
the ability of holders of our common stock to purchase or sell shares as quickly
and as inexpensively as they have done historically. All of these factors could
have a material adverse effect on the market price of our common stock.
WE DEPEND ON CERTAIN BUSINESS RELATIONSHIPS.
We depend to a great extent on certain contracts with municipalities or
fire districts to provide 911 emergency ambulance services and fire protection
services. Our six largest contracts accounted for approximately 13.9% of total
revenue for the fiscal year ended June 30, 2000 and approximately 16.1% of total
revenue for the fiscal year ended June 30, 2001. One of these contracts
accounted for approximately 3% of total revenue for the fiscal year ended June
30, 2000 and approximately 4% of total revenue for the fiscal year ended 2001.
Contracts with municipalities or fire districts may have certain budgetary
approval constraints. Failure to allocate funds for a contract may adversely
affect our ability to continue to perform services without suffering significant
losses. The loss or cancellation of several of these contracts could have a
material adverse effect on our business, financial condition, cash flow, and
results of operations. We may not be successful in retaining our existing
contracts or in obtaining new contracts for emergency ambulance services or for
fire protection services.
Our contracts with municipalities and fire districts and with managed care
organizations and health care providers are short term or open-ended or for
periods ranging from two years to five years. During such periods, we may
determine that a contract is no longer favorable and may seek to modify or
terminate the contract. When making such a determination, we may consider
factors, such as weaker than expected transport volume, geographical issues
adversely affecting response times, and delays in implementing technology
upgrades. We face certain risks in attempting to terminate unfavorable contracts
prior to their expiration because of the possibility of forfeiting performance
bonds and the potential adverse political and public relations consequences. Our
inability to terminate or amend unfavorable contracts could have a material
47
adverse effect on our business, financial condition, cash flows, and results of
operations. We also face the risk that areas in which we provide fire protection
services through subscription arrangements with residents and businesses will be
converted to tax-supported fire districts or annexed by municipalities.
WE FACE RISKS ASSOCIATED WITH OUR PRIOR RAPID GROWTH, INTEGRATION, AND
ACQUISITIONS.
We must integrate and successfully operate the ambulance service providers
that we have acquired. The process of integrating management, operations,
facilities, and accounting and billing and collection systems and other
information systems requires continued investment of time and resources and can
involve difficulties, which could have a material adverse effect on our
business, financial condition, cash flows, and results of operations. Unforeseen
liabilities and other issues also could arise in connection with the operation
of businesses that we have previously acquired or may acquire in the future. Our
acquisition agreements contain purchase price adjustments, rights of set-off,
indemnification, and other remedies in the event that certain unforeseen
liabilities or issues arise in connection with an acquisition. However, these
purchase price adjustments, rights of set-off, indemnification, and other
remedies expire and may not be sufficient to compensate us in the event that any
liabilities or other issues arise.
WE FACE ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We currently maintain operations in Latin America, with ambulance and
healthcare services provided in Argentina, as well as aircraft rescue and fire
fighting services to several airports in Bolivia. In addition to other business
risks discussed herein, we are subject to various risks associated with
international operations, including the following:
* management of a multi-national organization,
* fluctuations in currency exchange rates,
* compliance with local laws and other regulatory requirements and
changes in such laws and requirements,
* restrictions on the repatriation of funds,
* inflationary conditions,
* employment and severance issues,
* political and economic instability, including economic recessions,
* war or other hostilities,
* expropriation or nationalization of assets,
* overlap of tax structures and imposition of new taxes, and
* renegotiation or nullification of contracts.
The inability to effectively manage these and other risks could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations.
Certain of our international customers receive services under capitated
service arrangements. During periods of high utilization, as we have experienced
in Argentina particularly during the winter months, our operations experience
greater utilization of services under these capitated service arrangements.
During these periods, our operations incur increased expenses without a
corresponding increase in revenue.
Our revenue from international operations is denominated primarily in the
currencies of the countries in which we operate. A decrease in the value of such
foreign currencies relative to the U.S. dollar could result in losses from
currency exchange rate fluctuations. We do not currently engage in foreign
currency hedging transactions. In the future, we may seek to limit such exposure
by entering into forward-foreign exchange contracts or engaging in similar
hedging strategies. Any currency exchange strategy may be unsuccessful in
avoiding exchange-related losses, and the failure to manage currency risks
effectively may have a material adverse effect on our business, financial
48
condition, cash flows, and results of operations. In addition, revenue we earn
in foreign countries may be subject to taxation by more than one jurisdiction,
thereby adversely affecting our earnings.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY.
The ambulance service industry is highly competitive. Ambulance and general
transport service providers compete primarily on the basis of quality of
service, performance, and cost. In order to compete successfully, we must make
continuing investments in our fleet, facilities, and operating systems. We
believe that counties, fire districts, and municipalities consider the following
factors in awarding a contract:
* quality of medical care,
* historical response time performance,
* customer service,
* financial stability, and
* personnel policies and practices.
* We currently compete with the following entities to provide ambulance
services:
* governmental entities (including fire districts),
* hospitals,
* other national ambulance service providers,
* large regional ambulance service providers, and
* local and volunteer private providers.
Municipalities, fire districts, and health care organizations that
currently contract for ambulance services could choose to provide ambulance
services directly in the future. We are experiencing increased competition from
fire departments in providing emergency ambulance service. Some of our current
competitors and certain potential competitors have or have access to greater
capital and other resources than us.
Tax-supported fire districts, municipal fire departments, and volunteer
fire departments represent the principal providers of fire protection services
for residential and commercial properties. Private providers represent only a
small portion of the total fire protection market and generally provide services
where a tax-supported municipality or fire district has decided to contract for
these services or has not assumed the financial responsibility for fire
protection. In these situations, we provide services for a municipality or fire
district on a contract basis or provide fire protection services directly to
residences and businesses who subscribe for this service. We cannot provide
assurance that:
* we will be able continue to maintain current contracts or subscription
or to obtain additional fire protection business on a contractual or
subscription basis;
* fire districts or municipalities will not choose to provide fire
protection services directly in the future; or
* areas in which we provide services through subscriptions will not be
converted to tax-supported fire districts or annexed by
municipalities.
WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL.
Our success depends upon our ability to recruit and retain key personnel.
We could experience difficulty in retaining our current key personnel or in
attracting and retaining necessary additional key personnel. Low unemployment in
certain market areas currently makes the recruiting, training, and retention of
full-time and part-time personnel more difficult and costly, including the cost
of overtime wages. Our internal growth will further increase the demand on our
resources and require the addition of new personnel. We have entered into
employment agreements with certain of our executive officers and certain other
key personnel. Failure to retain or replace our key personnel may have an
adverse effect on our business.
49
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Certain provisions of our certificate of incorporation, shareholders'
rights plan and Delaware law could make it more difficult for a third party to
acquire control of our company, even if a change in control might be beneficial
to stockholders. This could discourage potential takeover attempts and could
adversely affect the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We face increased interest expenses associated with interest rate under
certain debt. We have entered into interest rate swap agreements to limit the
effect of increases in the interest rates on our floating rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate agreements
are used to measure interest to be paid or received and do not represent the
amount of exposure to credit loss. The net cash amounts paid or received on the
agreements are accrued and recognized as an adjustment to interest expense.
In November 1998, we entered into an interest rate swap agreement that
originally expired in November 2003 with a provision for the lending party to
terminate the agreement in November 2000. The interest rate swap agreement
effectively converted $50.0 million of variable rate borrowings to fixed rate
borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating
rate. The weighted average floating rate for the year ended June 30, 1999 was
5.2%. As a result of this swap agreement interest expense was reduced by
approximately $106,000 during the year ended June 30, 1999. In June 1999, we
terminated the interest rate swap agreement and received a termination fee of
$604,000. Such amount was amortized as a reduction of interest expense on a
straight-line basis through November 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of June 30, 2001 and for each of
the fiscal years in the three-year period ended June 30, 2001 together with
related notes and the report of Arthur Andersen LLP are set forth on the
following pages.
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rural/Metro Corporation:
We have audited the accompanying consolidated balance sheets of RURAL/METRO
CORPORATION (a Delaware corporation) and subsidiaries (collectively, the
Company) as of June 30, 2001 and 2000, and the related consolidated statements
of operations, changes in stockholders' equity (deficit), cash flows, and
comprehensive income (loss) for each of the three years in the period ended June
30, 2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rural/Metro Corporation and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is operating under a waiver of certain
financial covenants contained in its revolving credit facility, has a
significant working capital deficiency, cannot borrow additional funds from its
revolving credit facility, and incurred significant losses for the years ended
June 30, 2000 and 2001. These as well as other matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
October 12, 2001
51
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
2001 2000
--------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash .................................................................... $ 8,699 $ 10,287
Accounts receivable, net of allowance for doubtful accounts of $65,229
and $87,752 respectively .............................................. 103,260 143,905
Inventories ............................................................. 13,173 19,070
Prepaid expenses and other .............................................. 5,192 6,552
--------- ---------
Total current assets .......................................... 130,324 179,814
PROPERTY AND EQUIPMENT, net ............................................. 57,999 85,919
INTANGIBLE ASSETS, net .................................................. 92,424 207,200
OTHER ASSETS ............................................................ 17,787 18,284
--------- ---------
$ 298,534 $ 491,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ........................................................ $ 12,915 $ 16,135
Accrued liabilities ..................................................... 96,340 57,087
Current portion of long-term debt ....................................... 294,439 299,104
--------- ---------
Total current liabilities ..................................... 403,694 372,326
LONG-TERM DEBT, net of current portion .................................. 1,286 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME ...................................... 15,701 14,989
OTHER LIABILITIES ....................................................... -- 101
--------- ---------
Total liabilities ............................................. 420,681 390,266
--------- ---------
MINORITY INTEREST ....................................................... 8,379 5,360
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued at June 30, 2001 and 2000.......................................
Common stock, $.01 par value, 23,000,000 shares authorized,
14,899,920 and 14,626,336 shares outstanding at June 30, 2001 and
2000, respectively .................................................... 152 149
Additional paid-in capital .............................................. 137,948 137,603
Accumulated deficit ..................................................... (267,401) (40,670)
Cumulative translation adjustment ....................................... 14 (252)
Treasury stock, at cost, 149,456 shares at June 30, 2001 and 2000 ....... (1,239) (1,239)
--------- ---------
Total stockholders' equity (deficit) .......................... (130,526) 95,591
--------- ---------
$ 298,534 $ 491,217
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
52
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REVENUE
Ambulance services ....................................................... $ 402,833 $ 467,741 $ 467,632
Fire protection services ................................................. 61,573 57,549 50,490
Other .................................................................... 39,910 44,784 43,244
--------- --------- ---------
Total net revenue .................................................. 504,316 570,074 561,366
--------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ............................................ 301,055 323,285 297,341
Provision for doubtful accounts .......................................... 102,470 95,623 81,227
Provision for doubtful accounts-- change in accounting estimate .......... -- 65,000 --
Depreciation ............................................................. 21,809 25,009 24,222
Amortization of intangibles .............................................. 7,352 8,687 9,166
Other operating expenses ................................................. 142,009 127,743 98,739
Asset impairment charges ................................................. 94,353 -- --
Loss on disposition of clinic operations ................................. 9,374 -- --
Contract termination costs and related asset impairment .................. 9,256 -- --
Restructuring charge and other ........................................... 9,091 34,047 2,500
--------- --------- ---------
Total expenses ..................................................... 696,769 679,394 513,195
--------- --------- ---------
OPERATING INCOME (LOSS) ..................................................... (192,453) (109,320) 48,171
Interest expense, net ....................................................... 30,001 25,939 21,406
Other ....................................................................... 2,402 (2,890) 70
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE .................................. (224,856) (132,369) 26,695
PROVISION FOR (BENEFIT FROM) INCOME TAXES ................................... 1,875 (32,837) 11,231
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE .............................................. (226,731) (99,532) 15,464
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE
LICENSES (NET OF INCOME TAXES) .............................................. -- (1,200) --
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET OF AN
INCOME TAX BENEFIT OF $392) ................................................. -- (541) --
--------- --------- ---------
NET INCOME (LOSS) ........................................................... $(226,731) $(101,273) $ 15,464
========= ========= =========
INCOME (LOSS) PER SHARE
Basic--
Income (loss) before extraordinary loss and cumulative effect of
a change in accounting principle ...................................... $ (15.38) $ (6.82) $ 1.07
Extraordinary loss on expropriation of Canadian ambulance service
licenses .............................................................. -- (0.08 --
Cumulative effect of a change in accounting principle .................. -- (0.04) --
--------- --------- ---------
Net income (loss) ........................................................... $ (15.38) $ (6.94) $ 1.07
========= ========= =========
Diluted--
Income (loss) before extraordinary loss and cumulative effect of
a change in accounting principle ...................................... $ (15.38) $ (6.82) $ 1.06
Extraordinary loss on expropriation of Canadian ambulance service
licenses .............................................................. -- (0.08 --
Cumulative effect of a change in accounting principle .................. -- (0.04) --
--------- --------- ---------
Net income (loss) ........................................................... $ (15.38) $ (6.94) $ 1.06
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC ................................. 14,744 14,592 14,447
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED ............................... 14,744 14,592 14,638
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
53
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR
THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
RETAINED
ADDITIONAL EARNINGS CUMULATIVE
PREFERRED COMMON PAID-IN (ACCUMULATED DEFERRED TRANSLATION TREASURY
STOCK STOCK CAPITAL DEFICIT) COMPENSATION ADJUSTMENT STOCK TOTAL
----- ----- ------- -------- ------------ ---------- ----- -----
(IN THOUSANDS)
BALANCE, June 30, 1998 ............. $144 $ 134,078 $ 45,139 $(349) $ -- $(1,239) $ 177,773
Issuance of 430,829 shares of
common stock .................... -- 4 3,706 -- -- -- -- 3,710
Tax benefit related to the
exercise of nonqualified stock
options and vesting of stock
grants .......................... -- -- 8 -- -- -- -- 8
Amortization of deferred
compensation .................... -- -- -- -- 349 -- -- 349
Cumulative translation
adjustment ..................... -- -- -- -- (465) -- (465)
Net income ......................... -- -- -- 15,464 -- -- -- 15,464
-------- ---- --------- --------- ----- ----- ------- ---------
BALANCE, June 30, 1999 ............. -- 148 137,792 60,603 -- (465) (1,239) 196,839
Issuance of 121,828 shares of
common stock .................... -- 1 654 -- -- -- -- 655
Cancellation of shares
previously issued in acquisitions -- -- (843) -- -- -- -- (843)
Change in cumulative
translation adjustment due to
expropriation of Canadian
ambulance service licenses ...... -- -- -- -- -- 173 -- 173
Cumulative translation
adjustment ..................... -- -- -- -- -- 40 -- 40
Net loss ........................... -- -- -- (101,273) -- -- -- (101,273)
-------- ---- --------- --------- ----- ----- ------- ---------
BALANCE, June 30, 2000 ............. -- 149 137,603 (40,670) -- (252) (1,239) 95,591
Issuance of 273,584 shares of
common stock .................... -- 3 345 -- -- -- -- 348
Cumulative translation
adjustment ...................... -- -- -- -- -- 266 -- 266
Net loss ........................... -- -- -- (226,731) -- -- -- (226,731)
-------- ---- --------- --------- ----- ----- ------- ---------
BALANCE, June 30, 2001 ............. $ -- $152 $ 137,948 $(267,401) $ -- $ 14 $(1,239) $(130,526)
======== ==== ========= ========= ===== ===== ======= =========
The accompanying notes are an integral part of these
consolidated financial statements.
54
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ......................................................... $(226,731) $(101,273) $ 15,464
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities--
Write-off of assets included in restructuring charge .................... 4,092 28,873 --
Write-off of assets included in contract termination .................... 8,086 -- --
Write-off of other impaired assets ...................................... 94,353 -- --
Loss on disposition of clinic operations ................................ 9,374 -- --
Extraordinary loss ...................................................... -- 1,200 --
Cumulative effect of a change in accounting principle ................... -- 541 --
Depreciation and amortization ........................................... 29,161 33,696 33,388
Amortization of deferred compensation ................................... -- -- 80
Amortization of gain on sale of real estate ............................. (101) (104) (103)
(Gain) loss on sale of property and equipment ........................... (326) (80) 143
Provision for doubtful accounts ......................................... 102,470 160,623 81,227
Undistributed earnings (loss) of minority shareholder ................... 3,019 (2,890) 70
Amortization of discount on Senior Notes ................................ 26 26 26
Change in assets and liabilities, net of effect of businesses acquired--
Increase in accounts receivable ......................................... (62,099) (119,219) (112,030)
(Increase) decrease in inventories ...................................... 5,811 (3,370) (3,244)
Decrease in prepaid expenses and other .................................. 1,147 2,501 2,335
Increase (decrease) in accounts payable ................................. (2,654) (1,669) 2,692
Increase (decrease) in accrued liabilities and other liabilities ........ 39,013 (889) (3,030)
Increase in nonrefundable subscription income ........................... 712 80 1,227
Increase (decrease) in deferred income taxes ............................ -- (9,438) 3,702
--------- --------- ---------
Net cash provided by (used in) operating activities ................. 5,353 (11,392) 21,947
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving credit facility, net ................. (3,765) 33,307 27,500
Repayment of debt and capital lease obligations ........................... (2,773) (5,704) (7,794)
Borrowings under capital lease obligations ................................ 283 -- --
Issuance of common stock .................................................. 348 655 1,785
--------- --------- ---------
Net cash provided by (used in) financing activities ................ (5,907) 28,258 21,491
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for businesses acquired ......................................... -- -- (12,665)
Proceeds from the expropriation of Canadian ambulance services licenses ... -- 2,191 --
Net proceeds from the disposition of clinic operations .................... 28 -- --
Capital expenditures ...................................................... (5,774) (17,131) (24,485)
Proceeds from the sale of property and equipment .......................... 1,969 1,300 403
(Increase) decrease in other assets ....................................... 2,477 (159) (5,557)
--------- --------- ---------
Net cash used in investing activities .............................. (1,300) (13,799) (42,304)
--------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................................... 266 40 (465)
--------- --------- ---------
INCREASE (DECREASE) IN CASH ............................................... (1,588) 3,107 669
CASH, beginning of year ................................................... 10,287 7,180 6,511
--------- --------- ---------
CASH, end of year ......................................................... $ 8,699 $ 10,287 $ 7,180
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit plan ................ $ -- $ -- $ 1,933
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
55
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
NET INCOME (LOSS) .............................. $(226,731) $(101,273) $ 15,464
Foreign currency translation adjustments .... 266 40 (465)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) .................... $(226,465) $(101,233) $ 14,999
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
56
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND OPERATIONS
Rural/Metro Corporation, a Delaware corporation, and its subsidiaries
(collectively, the Company) is a diversified emergency services company
providing ambulance transport services, fire protection services, alternative
transportation services, home health care services and urgent home medical care,
in 25 states, the District of Columbia and Latin America. In the United States,
the Company provides 911 emergency and non-emergency ambulance services to
patients on both a fee-for-service basis and a non-refundable subscription fee
basis. In Latin America, the Company provides urgent home medical care and
ambulance services under capitated service arrangements. Fire protection
services are provided either under contracts with municipalities or fire
districts, or on a subscription fee basis to individual homeowners or commercial
property owners.
The Company depends on certain contracts with municipalities or fire
districts to provide 911 emergency ambulance services and fire protection
services. The six largest contracts accounted for 16%, 14% and 13% of total
revenue for the fiscal years ended June 30, 2001, 2000 and 1999, respectively,
with the largest of the six contracts accounting for 4%, 3% and 3%,
respectively, of total revenue for the same periods. These contracts are subject
to requests for proposals, competitive bid processes or renegotiation upon
expiration and may be subject to termination for failure to meet performance
criteria.
RESTRUCTURING, REVOLVING CREDIT FACILITY DEFAULT AND MANAGEMENT'S PLANS
UPDATE
The Company has incurred net losses of approximately $226.7 and $101.3
million for the years ended June 30, 2001 and 2000, and as a result, is
operating under a waiver of covenant compliance of financial covenants under the
Company's revolving credit facility (See note 4). In addition, no further
amounts can be borrowed under the revolving credit facility through the end of
the waiver period, December 3, 2001. The losses incurred in fiscal year 2001
relate to the write-off of impaired assets, the Company's operational
restructuring program involving the closure of certain service areas, the loss
of two exclusive 911 contracts, the disposition of clinic operations in Latin
America, changes in the estimates impacting our reserves for workers
compensation and general liability matters, and additional provision for
doubtful accounts related to closed or closing service areas and non-transport
related receivables. The losses incurred in fiscal year 2000 primarily relate to
the Company's restructuring program aimed at closing or downsizing certain
underperforming non-emergency service areas, the reduction of corporate overhead
and additional provision for doubtful accounts due to the continuing
difficulties experienced in the healthcare reimbursement environment. See Note 1
for information about the Company's restructuring charges and method for
providing for doubtful accounts.
The Company has been in discussions with the revolving credit facility
lenders ("Lenders") and has obtained waivers of covenant compliance through
December 3, 2001. The waiver covers the representations and warranties related
to no material adverse changes as well as the following financial covenants: the
total debt leverage ratio, the total debt to total capitalization ratio and the
fixed charge coverage ratio. The waiver stipulates that no additional borrowings
will be available through the end of the waiver period. In addition, the waiver
(as amended through December 3, 2001) requires the Company (i) to engage certain
financial advisors, (ii) to meet certain benchmarks for projected cash balances
and expenditures, (iii) maintain positive consolidated operating income net of
restructuring charges, (iv) to reduce the outstanding balance on the revolving
credit facility by $1,250,000 no later than October 31, 2001 and (v) to reduce
the outstanding balance on the revolving credit facility upon the attainment of
certain cash balance thresholds. There is no assurance that the Company is in
compliance with all of the conditions of the waiver. The Company has discussed
with the Lenders its failure to maintain positive operating income (net of
restructuring charges), at June 30, 2001, as required under the waiver and the
Lenders have not asserted that the Company has failed to comply with any
requirements under the waiver. Although the Company believes no Event of Default
57
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is continuing either under the terms of the revolving credit facility (as a
result of the waiver agreement) or the Company's $150 million 7 7/8% Senior
Notes due 2008 (the Notes), and although there has been no acceleration of the
repayment of the revolving credit facility or the Notes, the entire balance of
these instruments has been reclassified as a current liability in the
accompanying financial statements at June 30, 2001 and 2000.
Under the waiver of covenant compliance, the Company has agreed to restrict
its access to additional funds under the revolving credit facility through
December 3, 2001. Although no further amounts may be borrowed, the Company has
been self-sufficient and has not needed to borrow any funds for the last
nineteen months, since March 2000.
Despite recent net losses, the Company's restructuring efforts have enabled
it to self-fund its obligations from existing cash reserves and operating cash
flow since March 2000. During the last nineteen months, the Company has
self-funded cash for operations, capital expenditures, principal payments on its
revolving credit facility, regularly scheduled debt service, and capital lease
payments. The Company has been operating under a waiver of financial covenant
compliance related to its revolving credit facility since February 2000 and has
been actively working with its lenders since that time to obtain a long-term
financing solution. The Company believes that its current business model and
strategy can generate sufficient cash flow to provide a basis for a new
long-term agreement with its current lenders or to restructure its debt.
There can be no assurance that the Company's restructuring efforts will be
successful. In addition, an amendment to the revolving credit facility, could
substantially alter the terms and conditions of the credit facility, including
potentially higher interest rates, which could have a further adverse effect on
the Company. Under current circumstances, the Company's ability to continue as a
going concern depends upon the successful restructuring of the revolving credit
facility as well as the success of its restructuring program and the ability to
return to profitability. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Rural/Metro Corporation
and its greater than 50% owned subsidiaries. Investments in affiliates, in which
the Company owns 20% to 50%, are carried on the equity method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Ambulance service fees are recorded net of Medicare, Medicaid and other
reimbursement limitations and recognized when services are provided. During the
years ended June 30, 2001, 2000 and 1999, the Company derived approximately 25%,
23% and 24%, respectively, of its net ambulance fee collections from Medicare
and 11%, 11% and 10%, respectively, from Medicaid. The reimbursement process is
complex and can involve lengthy delays. Third-party payers are continuing their
efforts to control expenditures for health care, including proposals to revise
reimbursement policies. Although the Company recognizes revenue when the
services are provided, there can be lengthy delays before reimbursement is
received. The Company has from time to time experienced delays in receiving
reimbursements from third-party payers. In addition, third-party payers may
disallow, in whole or in part, requests for reimbursement based on
determinations that certain amounts are not reimbursable or because additional
supporting documentation is necessary. Retroactive adjustments can change
amounts realized from third-party payers. Delays and uncertainties in the
reimbursement process adversely affect the Company's level of accounts
receivable and may adversely affect the Company's working capital. The Company
establishes an allowance for doubtful accounts based on credit risk applicable
to certain types of payers, historical trends and other relevant information.
This allowance is examined on a quarterly basis and revised based on changes in
circumstances surrounding the collectibility of receivables.
58
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision for doubtful accounts is recorded for the expected difference
between net ambulance service fees and amounts actually collected. The
continuing efforts of third-party payers to control expenditures for health care
could affect the revenue, cash flows, accounts receivable realization and
profitability of the Company.
A summary of activity in the Company's allowance for doubtful accounts
during the fiscal years ended June 30, 2001, 2000 and 1999 is as follows. The
provision charged to expense during fiscal 2000 includes the $65.0 million
charge recorded in the second quarter relating to the change in methodology used
by the Company in determining its allowance for doubtful accounts as described
in the following paragraph. The Company experienced a decrease in collections in
service areas that were closed or downsized due to the Company's lack of
physical presence in the service area. In fiscal 2000, the Company recorded
charges of $3.0 million and $6.8 million recorded in the respective third and
fourth quarters for uncollectible accounts in those service areas that were
identified for closure or downsizing during those periods. Provisions charged to
expense during fiscal 2001 include an additional $10.0 million charge recorded
in the second quarter due to the determination of the ultimate uncollectibility
of accounts relating to service areas identified for closure or downsizing in
fiscal 2000. The fourth quarter of fiscal 2001 included charges totaling $16.2
million related to service areas identified for closure during that quarter as
well as for other collectibility issues.
JUNE 30,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Balance at beginning of year $ 87,752 $ 43,392 $ 69,552
Provision charged to expense 102,470 160,623 81,227
Write-offs (124,993) (116,263) (107,387)
--------- --------- ---------
Balance at end of year $ 65,229 $ 87,752 $ 43,392
========= ========= =========
Effective October 1, 1999, the Company changed its methodology of
determining its provision for doubtful accounts. This change is being treated as
a change in accounting estimate. During the fiscal year ended June 30, 2000,
management's analysis of the various payer classes within our accounts
receivable balance, the increasingly unpredictable nature of healthcare accounts
receivable, the increasing costs to collect these receivables and management's
conclusion that process changes have not brought about the benefits anticipated,
led to this change. Under the Company's new method of estimating its allowance
for doubtful accounts, the Company has chosen to fully reserve its accounts
receivable earlier in the collection cycle than had previously been the
practice. The new method provides specific allowances based upon the age of
accounts receivable within each payer class and also provides for general
allowances based upon historic collection rates within each payer class. Payer
classes include Medicare, Medicaid and private pay. Accordingly, the effect of
this change was an additional $65.0 million provision for doubtful accounts,
which was recorded separately and is reflected in the accompanying statement of
operations for the fiscal year ended June 30, 2000.
In August of 1997, then President Clinton signed the "Balanced Budget Act
of 1997" (BBA). The BBA provided for certain changes to the Medicare
reimbursement system, including the development and implementation of a
prospective fee schedule by January 2000 for ambulance services provided to
Medicare beneficiaries. The BBA mandated that this fee schedule be developed
through a negotiated rulemaking process between HCFA/CMS and ambulance service
providers and must consider the following: (i) data from industry and other
organizations involved in the delivery of ambulance services; (ii) mechanisms to
control increases in expenditures for ambulance services; (iii) appropriate
regional and operational differences; (iv) adjustments to payment rates to
account for inflation and other relevant factors; and (v) the phase-in of
payment rates under the fee schedule in an efficient and fair manner. Charges
for ambulance services provided during calendar years 1998, 1999, and 2000 were
increased by the Consumer Price Index less one percentage point. The BBA
59
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required that ambulance service providers accept assignment of payment directly
from Medicare and accept such amount, along with the co-pay and deductible paid
by the patient, as payment in full. The BBA also stipulated that individual
states may now elect not to provide payment for cost sharing for coinsurance, or
co-payments, for dual-qualified (Medicare and Medicaid) beneficiaries.
Following the BBA, in January of 1999, HCFA/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, HCFA/CMS announced that the implementation of the
prospective fee schedule as well as the mandatory acceptance of assignment would
be postponed to January 2001. The proposed Medicare ambulance fee schedule and
rule was published September 12, 2000 in the Federal Register, to be followed by
a 60-day comment period. On November 30, 2000, HCFA/CMS notified Medicare
carriers that it would not implement the proposed fee schedule and rules as
scheduled on January 1, 2001. As of this filing, HCFA/CMS has not established an
implementation date for the final fee schedule and rules. However, the Company
has implemented a program to comply with the new rules which require that a
physician's certification be obtained for certain ambulance transports. 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 the Company
business, financial condition, cash flows and results of operations.
The Company could take certain actions to partially mitigate any adverse
effect of these changes. These actions could include renegotiation of rates and
contract subsidies provided in our 911 ambulance service contracts and changes
in staffing of ambulance crews based upon the negotiation for longer response
times under ambulance service contracts to reduce operating costs.
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, generally
one year.
Other revenue is comprised primarily of revenue generated from our
public/private alliance in San Diego, fees associated with alternative
transportation, dispatch, fleet, billing, urgent and primary care services in
clinics and home health care services and is recognized when the services are
provided.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted EPS computations for the
years ended June 30, 2001, 2000 and 1999 are as follows (in thousands, except
per share amounts):
2001 2000 1999
----------------------------------- ----------------------------------- ------------------------------------
LOSS SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
Basic EPS ..... $(226,731) 14,744 $ (15.38) $(101,273) 14,592 $ (6.94) $ 15,464 14,447 $ 1.07
========= ========= =========
Effect of stock
options ....... -- -- -- -- -- 191 --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Diluted EPS ... $(226,731) 14,744 $ (15.38) $(101,273) 14,592 $ (6.94) $ 15,464 14,638 $ 1.06
========= ========= ========= ========= ========= ========= ========= ========= =========
As a result of anti-dilutive effects, approximately 169,000 and 39,000
common stock equivalents were not included in the computation of diluted loss
per share for the years ended June 30, 2001 and 2000, respectively.
FOREIGN CURRENCY TRANSLATION
Financial information relating to the Company's foreign subsidiaries is
reported in accordance with SFAS No. 52, "Foreign Currency Translation." The
financial statements of non-U.S. subsidiaries are measured using the local
60
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currency as the functional currency. Assets and liabilities of these non-U.S.
subsidiaries are translated at exchange rates in effect as of the end of each
balance sheet date, and related revenues and expenses are translated at average
exchange rates in effect during the period. During the year ended June 30, 2000,
the Company recognized a $173,000 translation adjustment as a component of the
extraordinary loss on the expropriation of Canadian ambulance service licenses.
INVENTORIES
Inventories, consisting of ambulance and fire supplies, are stated at the
lower of cost, on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation,
and is depreciated over the estimated useful lives using the straight-line
method. Equipment and vehicles are depreciated over three to ten years and
buildings are depreciated over fifteen to thirty years. Property and equipment
held under capital leases is stated at the present value of minimum lease
payments, net of accumulated amortization. These assets are amortized over the
lesser of the lease term or the estimated useful life of the underlying assets
using the straight-line method. Major additions and improvements are
capitalized; maintenance and repairs which do not improve or significantly
extend the life of assets are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets include costs in excess of the fair value of net assets
of businesses acquired (goodwill) of approximately $91,298,000 and $205,913,000
and covenants not to compete of approximately $1,026,000 and $1,117,000 at June
30, 2001 and 2000, respectively. Costs in excess of the fair value of net assets
acquired are amortized over twenty-five to thirty-five years using the
straight-line method. Covenants not to compete are amortized using the
straight-line method over the term of the related agreements, generally three to
five years. Accumulated amortization of these intangible assets was
approximately $20,292,000 and $28,577,000 at June 30, 2001 and 2000,
respectively.
61
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the Company's intangible asset balance is as
follows:
JUNE 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Balance at beginning of year $ 207,200 $ 240,360
Amortization expense (7,352) (8,687)
Asset impairments (See Note 2) (85,958) --
Write-offs related to:
Restructuring of operations (See Note 2) (4,092) (22,250)
Contract terminations (See Note 2) (8,086) --
Disposition of Argentine clinic operations (See Note 2) (9,313) --
Expropriation of Canadian ambulance service licenses (See Note 2) -- (2,752)
Other 25 529
--------- ---------
Balance at end of year $ 92,424 $ 207,200
========= =========
LONG-LIVED ASSETS
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or circumstances indicate that the related carrying
value may not be fully recoverable from future operations. These reviews are
generally performed at the cost center level; cost centers represent the
individual operating units within a given service area for which separately
identifiable cash flow information is available. In performing its impairment
analysis, the Company compares the carrying value of the long-lived assets for
each applicable cost center to the estimated, undiscounted future cash flows
associated with the cost center. In cases where the estimated, undiscounted
future cash flows are less than the related carrying value of the cost center's
long-lived assets, an impairment loss is recognized for the amount by which such
carrying value exceeds the estimated fair value of such assets. The estimated
fair value is determined based on the present value of the cost center's
estimated future cash flows discounted at a rate commensurate with the risks
involved.
ACCRUED LIABILITIES
Included in accrued liabilities is approximately $11,397,000 and
$11,264,000 for salaries, wages and related payroll expenses, approximately
$19,715,000 and $3,171,000 for general liability claims and approximately
$14,944,000 and $11,315,000 for workers compensation claims at June 30, 2001 and
2000, respectively.
GENERAL LIABILITY AND WORKERS' COMPENSATION PROGRAMS
The Company retains certain levels of exposure with respect to its general
liability and workers' compensation programs and purchases 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, the Company
establishes reserves for both reported and incurred but not reported claims
within its level of retention based on currently available information as well
as its historical experience in settling claims. The Company adjusts its claim
reserves with an associated charge or credit to expense as new information on
the underlying claims is obtained.
62
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the Company's general liability claim reserves,
which are included in accrued liabilities in the consolidated balance sheets, is
as follows:
JUNE 30,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year $ 3,171 $ 2,081 $ 2,530
Provision charged to expense 22,326 6,146 3,218
Claim payments charged
against the claim reserve (5,782) (5,056) (3,667)
-------- -------- --------
Balance at end of year $ 19,715 $ 3,171 $ 2,081
======== ======== ========
Provisions charged to expense during fiscal 2000 included a charge of $3.8
million in the fourth quarter for increases in estimated settlement amounts for
reported claims. The rising cost of claims as well as the cost of related
litigation prompted the Company to perform a comprehensive review of detailed
information from external advisors, historical settlement information and open
claims during the third quarter of fiscal 2001. As a result of this review, the
Company recorded a charge of $15.0 million for increases in its reserves for
reported claims as well as to establish reserves for claims incurred but not
reported. The Company engaged independent actuaries to assist with its
evaluation of the adequacy of its general liability claim reserves as of June
30, 2001.
A summary of activity in the Company's workers' compensation claim
reserves, which are included in accrued liabilities in the consolidated balance
sheets, is as follows:
JUNE 30,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year $ 11,315 $ 132 $ 570
Provision charged to expense 11,832 18,941 4,929
Claim payments charged
against the claim reserve (8,203) (7,758) (5,367)
-------- -------- --------
Balance at end of year $ 14,944 $ 11,315 $ 132
======== ======== ========
In connection with the Company's restructuring activities, an increase in
the volume of workers compensation claims was noted. Provisions charged to
expense during fiscal 2000 included a charge of $12.2 million in the fourth
quarter to establish reserves for both reported and incurred but not reported
claims. The Company had previously expensed the cost of its workers'
compensation program as related payments were made, and the Company believes
that this method approximates the accrual method. Provisions charged to expense
during fiscal 2001 included a charge of $5.0 million in the third quarter for
increases in reserves for unreported claims based on updated information
received from the Company's third party claims administrator, which indicated
that larger loss development factors were necessary for purposes of estimating
the related exposure. The Company engaged independent actuaries to assist with
its evaluation of the adequacy of its workers' compensation claim reserves as of
June 30, 2001.
63
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with federally-insured institutions and
limits the amount of credit exposure to any one institution. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's credit base and the geographical
dispersion of the customers.
USE OF ESTIMATES
In the preparation of financial statements in conformity with accounting
principles generally accepted in the United States, management of the Company
has made estimates and assumptions that affect the reported amounts of assets
and liabilities, particularly accounts receivable and its effect on revenue,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value assumptions. The carrying values of cash,
accounts receivable, accounts payable, accrued liabilities and other liabilities
approximate fair value due to the short-term maturities of these instruments.
The revolving line of credit approximates fair value as it bears interest at a
rate indexed to LIBOR. The senior note, note payable and capital lease
obligations approximate fair value as rates on these instruments, in the
aggregate, approximate market rates currently available for instruments with
similar terms and remaining maturities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001, and eliminates the
pooling-of-interest method. The Company believes that the adoption of SFAS No.
141 will not have a significant impact on our financial statements.
SFAS No. 142, among other things, prohibits the amortization of goodwill
and instead requires an annual assessment of goodwill impairment by applying a
fair value based test. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing recognized intangibles and
reclassification of certain intangibles out of previously reported goodwill
balances. SFAS No. 142 requires that any goodwill recorded in connection with an
acquisition consummated on or after July 1, 2001 not be amortized, even if the
statement is not adopted in its entirety at that time. The effective date for
SFAS No. 142 is fiscal years beginning after December 15, 2001. In conjunction
with early adoption provisions, the Company has chosen to adopt this standard
effective July 1, 2001. Any adjustments as a result of the initial
implementation of SFAS No. 142 impairment tests will be recorded as the
cumulative effect of a change in accounting principle effective July 1, 2001.
The Company has not yet determined the amount of such adjustment, if any. Net
unamortized goodwill at June 30, 2001 is approximately $ 91.3 million and annual
amortization expense under prior reporting rules would be approximately
$3,573,000 for fiscal 2002.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121 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
64
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company is required to adopt SFAS No. 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.
CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities," effective July 1, 1999, the Company was required to change
its accounting principle for organization costs. Previously, the Company
capitalized such costs and amortized them using the straight-line method over
five years. At June 30, 1999 such unamortized costs totaled $933,000. During the
fiscal year ended June 30, 2000, the Company wrote-off its capitalized
organization costs and will expense any future organization costs incurred. The
write-off was $541,000 (net of a tax benefit of $392,000) and has been reflected
in the consolidated statements of operation as the "Cumulative Effect of a
Change in Accounting Principle" in accordance with APB No. 2.
(2) ASSET IMPAIRMENTS, RESTRUCTURING AND OTHER CHARGES
ASSET IMPAIRMENTS
In connection with the budgeting process for the fiscal year ending June
30, 2002, which was completed in the fourth quarter of fiscal 2001, the Company
analyzed each cost center within its various service areas not identified for
closure or downsizing to determine whether the associated long-lived assets
(e.g., property, equipment and goodwill) would be recoverable from future
operations. Cost centers represent individual operating units within a given
service area for which separately identifiable cash flow information is
available. The Company performed this analysis as a result of its expectations
of a challenging health care reimbursement environment as well as anticipated
increases in labor and insurance costs with respect to its domestic ambulance
operations. This analysis considered the results of operations over the past
year as well as HCFA's failure to implement the ambulance fee schedule as of
January 1, 2001. The analysis with respect to the Company's Argentine operations
included the impact of the deteriorating economic and political environment as
well as information developed by a third party concerning the marketability of
these operations during fiscal 2001.
In order to assess recoverability, the Company estimated the related net
future cash flows for each cost center and then compared the resulting
undiscounted amounts to the carrying value of each cost center's long-lived
assets (e.g., property and equipment and goodwill). It should be noted that
property and equipment balances are specifically identified with each cost
center. Additionally, goodwill is specifically identified with each cost center
at the time of acquisition and, therefore, related allocations are not necessary
for purposes of performing the impairment analysis.
For those cost centers where estimated future net cash flows on an
undiscounted basis were less than the related carrying amounts of the long-lived
assets, an asset impairment was considered to exist. The Company measured the
amount of the asset impairment for each such cost center by discounting its
estimated future net cash flows using a discount rate of 18.5% and comparing the
resulting amount to the carrying value of its long-lived assets. Based upon this
analysis, the Company determined that asset impairment charges approximating
$94.4 million were required for cost centers within its domestic and Argentine
ambulance operations. The asset impairments were charged directly against the
related asset balances. A summary of the related charge is as follows:
65
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY,
EQUIPMENT
GOODWILL AND OTHER TOTAL
-------- --------- -------
(IN THOUSANDS)
Domestic ambulance operations $41,631 $ 6,419 $48,050
Argentine ambulance operations 44,327 1,976 46,303
------- ------- -------
Total $85,958 $ 8,395 $94,353
======= ======= =======
RESTRUCTURING AND OTHER CHARGES
Restructuring and Other Charges - During the fourth quarter of the fiscal
year ended June 30, 2001, the Company decided to close or downsize nine service
areas and in connection therewith, recorded restructuring charges in accordance
with EITF 94-3 and other related charges totaling $9.1 million. These charges
included $1.5 million to cover severance costs associated with the termination
of approximately 250 employees, all of whom were expected to leave by the end of
fiscal 2002, lease termination and other exit costs of $2.4 million, and asset
impairment charges for goodwill and property and equipment of $4.1 million and
$1.1 million, respectively, related to the impacted service areas. The asset
impairments were charged directly against the related asset balances. The
service areas selected for closure or downsizing generated revenue of $17.7
million, operating losses of $4.0 million and negative cash flow of $3.2 million
for the fiscal year ended June 30, 2001.
The components of the charge and the remaining accrual at June 30, 2001,
are as follows:
CHARGE BALANCE AT
RECORDED USAGE JUNE 30, 2001
-------- ------- -------------
Severance costs $ 1,475 $ (11) $ 1,464
Lease termination costs 2,371 (14) 2,357
Write-off of intangible assets 4,092 (4,092) --
Write-off of impaired assets
and other costs 1,153 (52) 1,101
------- ------- -------
$ 9,091 $(4,169) $ 4,922
======= ======= =======
During the third and fourth quarters of fiscal year ended June 30, 2000,
the Company decided to close or downsize 26 service areas and in connection
therewith, recorded restructuring charges in accordance with EITF 94-3 and other
related charges totaling $34.0 million. These restructuring charges included
$6.6 million to cover severance costs associated with the termination of
approximately 300 employees, all of whom had left the Company by June 30, 2001,
lease termination and other exit costs of $3.3 million, and asset impairment
charges for goodwill and property and equipment of $22.3 million and $1.9
million, respectively. The asset impairments were charged directly against the
related asset balances. The service areas selected for closure generated revenue
of $38.7 million, operating losses of $3.7 million and negative cash flow of
$1.0 million for the fiscal year ended June 30, 2000.
66
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the charge and the remaining accrual at June 30, 2001,
are as follows:
CHARGE FISCAL 2000 BALANCE AT FISCAL 2001 BALANCE AT
RECORDED USAGE JUNE 30, 2000 USAGE OTHER JUNE 30, 2001
-------- -------- ------------- -------- -------- -------------
Severance costs $ 6,621 $ (3,092) $ 3,529 $ (4,520) $ 1,361 $ 370
Lease termination costs 3,299 (52) 3,247 (1,057) (1,313) 877
Write-off of intangible
assets 22,250 (22,250) -- -- --
Write-off of impaired
assets and other costs 1,877 (521) 1,356 (1,308) (48) --
-------- -------- -------- -------- -------- --------
$ 34,047 $(25,915) $ 8,132 $ (6,885) $ -- $ 1,247
======== ======== ======== ======== ======== ========
During the first quarter of the fiscal year ended June 30, 1999, the
Company recorded a $2.5 million charge to cover severance payments to certain
members of senior management all of whom had left the Company by June 30, 1999.
LOSS ON DISPOSAL OF CLINIC OPERATIONS - During the fourth quarter of the
fiscal year ended June 30, 2001, the Company sold its Argentine clinic
operations in exchange for a $3.0 million non-interest bearing note receivable.
The note, which is included in other assets in the consolidated balance sheet,
requires monthly principal payments of $25,000 through April 2011. The sale
resulted in a loss on disposal of $9.4 million, including the write-off of $9.3
million of related goodwill. The clinic operations generated revenue of $4.0
million, operating losses of $1.5 million and negative cash flow of $0.9 million
for the fiscal year ended June 30, 2001.
CONTRACT TERMINATIONS AND RELATED ASSET IMPAIRMENTS - In November 2000, the
Company learned that its exclusive 911 contract in Lincoln, Nebraska would not
be renewed effective December 31, 2000 and in connection therewith, recorded a
contract termination charge of $5.2 million. This charge included asset
impairments for related goodwill and equipment totaling $4.3 million (the
exclusive 911 contract was acquired in a purchase business combination in fiscal
1995), $0.8 million to cover severance costs associated with terminated
employees, and $0.1 million to cover lease terminations and other exit costs.
The asset impairments were charged directly against the related assets. The
Lincoln contract generated revenue of $4.7 million, operating income of $0.4
million and cash flow of $0.5 million in fiscal 2000, its last full year of
operations.
In May 2001, the Company learned that its exclusive 911 contract in
Arlington, Texas would not be renewed effective September 30, 2001 and in
connection therewith, recorded a contract termination charge of $4.1 million.
This charge included asset impairments for related goodwill and equipment of
$3.9 million (the exclusive 911 contract was acquired in a purchase business
combination in fiscal 1997), $0.1 million to cover severance costs associated
with terminated employees, and $0.1 million to cover lease termination and other
exit costs. The asset impairments were charged directly against the related
assets. The Arlington contract generated revenue of $8.3 million, operating
income of $0.1 million and cash flow of $0.5 million in fiscal 2001 its last
full year of operations.
EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES - During the fiscal
year ended June 30, 2000, the Company recorded an extraordinary loss on the
expropriation of Canadian ambulance service licenses of approximately $1.2
million (net of $0 of income taxes). The Company received approximately $2.2
million from the Ontario Ministry of Health as compensation for the loss of
license and incurred costs and wrote-off assets, mainly goodwill, totaling $3.4
million.
67
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) BUSINESS DEVELOPMENT ACTIVITIES
ACQUISITIONS
The Company completed no acquisitions during the years ended June 30, 2001
and 2000 other than the purchase of capital items and equipment in the ordinary
course of business.
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 partner to "put" his
interest in the joint venture to the Company. The Company then had the option to
delay its purchase of the minority partner's interest for a period of one year.
During the second quarter of the fiscal year ended June 30, 2001, the minority
partner elected to exercise the put option and the Company exercised its right
to delay purchasing the minority partner's interest until the second quarter of
the fiscal year ending June 30, 2002. During the remainder of the fiscal year
ended June 30, 2001, the Company negotiated with its minority partner regarding
the purchase price of the minority partner's interest. During the fourth quarter
of the fiscal year ended June 30, 2001, the Company determined that, based on
the provisions of the joint venture agreement and negotiations with the minority
partner, the anticipated purchase price for the minority interest would
approximate $5.1 million. The Company included the goodwill of the joint venture
in the asset impairment charge described in Note 2. The Company had recorded a
net liability to the minority partner totaling $1.1 million and, therefore, a
charge of approximately $4.0 million was recorded in the fourth quarter of the
fiscal year ended June 30, 2001 relating to the anticipated purchase price. This
amount is included in other expense in the consolidated statement of operations
for the year ended June 30, 2001.
PUBLIC/PRIVATE ALLIANCE
During the year ended June 30, 1998, the Company entered into a
public/private alliance with the San Diego Fire and Life Safety Services to
provide all emergency and non-emergency transport services for the City of San
Diego. As part of the alliance, a limited liability corporation (the LLC) was
created with a 50/50 ownership between the Company and the City of San Diego. A
wholly-owned subsidiary of the Company contracts with the LLC to provide
operational and administrative support. In addition, the Company contracts with
the LLC to provide billing and collection services. Revenue generated under
these contracts totaled approximately $13.4 million, $10.4 million and $7.3
million for the years ended June 30, 2001, 2000 and 1999, respectively. Such
revenue is included in other revenue in the accompanying consolidated financial
statements. San Diego Fire and Life Safety Services also contracts with the LLC
to provide emergency response and transportation services. The Company accounts
for the activities of the LLC using the equity method. At June 30, 2001 and
2000, the Company's investment in the LLC was approximately $893,000 and
$1,011,000, respectively and such amounts are included in other assets in the
accompanying consolidated financial statements. The Company's share of the
earnings of the LLC was approximately $780,000, $1,151,000 and $863,000 for the
years ended June 30, 2001, 2000 and 1999, respectively. The Company's share of
such undistributed earnings is included in other revenue in the accompanying
consolidated financial statements.
68
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INVESTMENTS
During the year ended June 30, 1999, the Company made investments in
companies offering ambulance services, ambulance billing services, and
alternative transportation services. The Company contributed cash, accounts
receivable, and fixed assets totaling approximately $1.9 million at June 30,
1999 to these businesses. These investments have been recorded using the cost
method of accounting and are included in other assets in the accompanying
consolidated financial statements. The Company has determined that one of these
investments was impaired as of June 30, 2000 and therefore has written off this
investment and related amounts loaned to the business. The amount written off
totaled approximately $1.6 million and is included in restructuring and other
charges in the accompanying consolidated statement of operations for the fiscal
year ended June 30, 2000.
(4) PROPERTY AND EQUIPMENT
Property and equipment, including equipment held under capital leases,
consisted of the following:
JUNE 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Equipment ............................ $ 57,840 $ 64,085
Vehicles ............................. 71,628 90,511
Land and buildings ................... 16,896 19,707
Leasehold improvements ............... 8,373 8,923
--------- ---------
154,737 183,226
Less: Accumulated depreciation ....... (96,738) (97,307)
--------- ---------
$ 57,999 $ 85,919
========= =========
Equipment totaling $275,000 was acquired under capital leases during the
year ended June 30, 2001. No equipment was acquired under capital lease or other
financing agreements during the year ended June 30, 2000.
The Company held vehicles and equipment with a net carrying value of
approximately $16,938,000 and $19,120,000 at June 30, 2001 and 2000,
respectively, under capital lease agreements. Accumulated depreciation on these
assets totaled approximately $14,283,000 and $13,663,000 at June 30, 2001 and
2000, respectively.
The Company has pledged assets with a net book value of approximately
$11,754,000 to secure certain of its obligations under its insurance and surety
bonding program including certain reimbursement obligations with respect to the
workers' compensation, performance bonds, appeal bonds and other aspects of such
insurance and surety bonding programs.
69
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the Company's property and equipment balance is as
follows:
JUNE 30,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Balance at beginning of year $ 85,934 $ 95,032
Depreciation expense (21,809) (25,009)
Additions 5,774 17,131
Asset impairments (See Note 2) (8,502) --
Asset disposals (1,643) (1,220)
Write-offs related to:
Disposition of Argentine clinic
operations (See Note 2) (1,740) --
Expropriation of Canadian ambulance
service licenses (See Note 2) -- (15)
-------- --------
Balance at end of year $ 58,014 $ 85,934
======== ========
70
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CREDIT AGREEMENTS AND BORROWINGS
Notes payable and capital lease obligations consisted of the following:
JUNE 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
7 7/8% senior notes due 2008, net of discount of $173,000 and
$199,000, respectively ............................................... $ 149,827 $ 149,801
Revolving credit facility ............................................... 143,042 146,807
Capital lease obligations and other notes payable, collateralized by
property and equipment, at varying rates, from 6.89% to 21.01%, due
through 2003 ......................................................... 2,175 3,808
Unsecured promissory notes payable from acquisitions at varying rates,
from 6.0% to 9.0%, due through 2006 .................................. 681 1,538
--------- ---------
295,725 301,954
Less: Current maturities ................................................ (294,439) (299,104)
--------- ---------
$ 1,286 $ 2,850
========= =========
7 7/8% SENIOR NOTES DUE 2008
In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due
2008 effected under Rule 144A under the Securities Act of 1933 as amended
(Securities Act). The net proceeds of the offering, sold through private
placement transactions, was used to repay certain indebtedness. Interest under
the Notes is payable semi-annually September 15, and March 15, and the Notes are
not callable until March 2003 subject to the terms of the Note Agreement. The
Company incurred expenses related to the offering of approximately $5.3 million
and will amortize such costs over the life of the Notes. The Company recorded a
$258,000 discount on the Notes and will amortize such discount over the life of
the Notes. Unamortized discount at June 30, 2001 and 2000 was approximately
$173,000 and $199,000, respectively, and such amounts are recorded as an offset
to long-term debt in the accompanying consolidated financial statements. In
April 1998, the Company filed a registration statement under the Securities Act
relating to an exchange offer for the Notes. Such registration became effective
on May 14, 1998. The Notes 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
Notes contain certain covenants which, among other things, limit the Company's
ability to incur certain indebtedness, sell assets, or enter into certain
mergers or consolidations.
The financial statements presented below include the separate or combined
financial position for the years ended June 30, 2001 and 2000, results of
operations and cash flows for the three years ended June 30, 2001, 2000 and 1999
of Rural/Metro Corporation (Parent) and the guarantor subsidiaries (Guarantors)
and the subsidiaries which are not guarantors (Non-guarantors).
71
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING 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
INVESTMENT IN SUBSIDIARIES ................... (127,702) -- -- 127,702 --
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
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
--------- --------- --------- --------- ---------
MINORITY INTEREST ............................ -- -- -- 8,379 8,379
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock .............................. 152 82 17 (99) 152
Additional paid-in capital ................ 137,948 54,622 34,942 (89,564) 137,948
Retained earnings (accumulated deficit) ... (267,401) (117,965) (91,035) 209,000 (267,401)
Cumulative translation adjustment ......... 14 -- 14 (14) 14
Treasury stock ............................ (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity ............. (130,526) (63,261) (56,062) 119,323 (130,526)
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
72
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash ....................................... $ -- $ 9,035 $ 1,252 $ -- $ 10,287
Accounts receivable, net ................... -- 126,788 17,117 -- 143,905
Inventories ................................ -- 18,018 1,052 -- 19,070
Prepaid expenses and other ................. 531 5,129 892 -- 6,552
--------- --------- --------- --------- ---------
Total current assets ................... 531 158,970 20,313 -- 179,814
PROPERTY AND EQUIPMENT, net ................... -- 76,325 9,594 -- 85,919
INTANGIBLE ASSETS, net ........................ -- 131,117 76,083 -- 207,200
DUE FROM (TO) AFFILIATES ...................... 319,747 (256,053) (63,694) -- --
OTHER ASSETS .................................. 3,386 12,273 2,625 -- 18,284
INVESTMENT IN SUBSIDIARIES .................... 74,464 -- -- (74,464) --
--------- --------- --------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................... $ -- $ 11,922 $ 4,213 $ -- $ 16,135
Accrued liabilities ........................ 5,929 43,746 7,412 -- 57,087
Current portion of long-term debt .......... 296,608 2,164 332 -- 299,104
--------- --------- --------- --------- ---------
Total current liabilities .............. 302,537 57,832 11,957 -- 372,326
LONG-TERM DEBT, net of current portion ........ -- 2,384 466 -- 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME ............ -- 14,971 18 -- 14,989
DEFERRED INCOME TAXES ......................... -- (725) 725 -- --
OTHER LIABILITIES ............................. -- 101 -- -- 101
--------- --------- --------- --------- ---------
Total liabilities ...................... 302,537 74,563 13,166 -- 390,266
--------- --------- --------- --------- ---------
MINORITY INTEREST ............................. -- -- -- 5,360 5,360
STOCKHOLDERS' EQUITY
Common stock ............................... 149 82 17 (99) 149
Additional paid-in capital ................. 137,603 54,622 34,942 (89,564) 137,603
Retained earnings (accumulated deficit) .... (40,670) (6,635) (2,952) 9,587 (40,670)
Cumulative translation adjustment .......... (252) -- (252) 252 (252)
Treasury stock ............................. (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity ............. 95,591 48,069 31,755 (79,824) 95,591
--------- --------- --------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ========= ========= =========
73
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
REVENUE
Ambulance services ......................... $ -- $ 349,977 $ 52,856 $ -- $ 402,833
Fire protection services ................... -- 60,422 1,151 -- 61,573
Other ...................................... -- 35,493 4,417 -- 39,910
--------- --------- --------- --------- ---------
Total revenue ........................ -- 445,892 58,424 -- 504,316
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits .............. -- 261,179 39,876 -- 301,055
Provision for doubtful accounts ............ -- 96,253 6,217 -- 102,470
Depreciation ............................... -- 19,043 2,766 -- 21,809
Amortization of intangibles ................ -- 5,073 2,279 -- 7,352
Other operating expenses ................... -- 117,644 24,365 -- 142,009
Asset impairment charges ................... -- 32,338 62,015 -- 94,353
Loss on disposition of clinic operations ... -- -- 9,374 -- 9,374
Contract termination costs and related
asset impairment ......................... -- 9,256 -- -- 9,256
Restructuring charge and other ............. -- 9,091 -- -- 9,091
--------- --------- --------- --------- ---------
Total expenses ....................... -- 549,877 146,892 -- 696,769
--------- --------- --------- --------- ---------
OPERATING LOSS ................................ -- (103,985) (88,468) -- (192,453)
Interest expense, net ...................... 28,962 17 1,022 -- 30,001
Other ...................................... -- 4,046 -- (1,644) 2,402
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES ...................... (28,962) (108,048) (89,490) 1,644 (224,856)
PROVISION FOR (BENEFIT FROM) INCOME TAXES ..... -- 3,282 (1,407) -- 1,875
--------- --------- --------- --------- ---------
NET LOSS ...................................... (28,962) (111,330) (88,083) 1,644 (226,731)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES ........... (197,769) -- -- 197,769 --
--------- --------- --------- --------- ---------
NET LOSS ...................................... $(226,731) $(111,330) $ (88,083) $ 199,413 $(226,731)
========= ========= ========= ========= =========
Foreign currency translation adjustments ...... -- -- 266 -- 266
Comprehensive income (loss) from wholly-owned
subsidiaries ................................ 266 -- -- (266) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS ............................ $(226,465) $(111,330) $ (87,817) $ 199,147 $(226,465)
========= ========= ========= ========= =========
74
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
REVENUE
Ambulance services ..................................... $ -- $ 391,898 $ 75,843 $ -- $ 467,741
Fire protection services ............................... -- 56,437 1,112 -- 57,549
Other .................................................. -- 37,041 7,743 -- 44,784
--------- --------- --------- --------- ---------
Total revenue .................................... -- 485,376 84,698 -- 570,074
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits .......................... -- 272,944 50,341 -- 323,285
Provision for doubtful accounts ........................ -- 80,823 14,800 -- 95,623
Provision for doubtful accounts--change in accounting
estimate .............................................. -- 65,000 -- -- 65,000
Depreciation ........................................... -- 22,068 2,941 -- 25,009
Amortization of intangibles ............................ -- 6,220 2,467 -- 8,687
Other operating expenses ............................... -- 106,904 20,839 -- 127,743
Restructuring charge and other ......................... -- 32,162 1,865 -- 34,027
--------- --------- --------- --------- ---------
Total expenses ................................... -- 586,141 93,253 -- 679,394
--------- --------- --------- --------- ---------
OPERATING LOSS ............................................ -- (100,765) (8,555) -- (109,320)
Interest expense, net .................................. 25,045 (1,125) 2,019 -- 25,939
Other .................................................. -- -- -- (2,890) (2,890)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ............. (25,045) (99,640) (10,574) 2,890 (132,369)
BENEFIT FOR INCOME TAXES .................................. (6,211) (24,046) (2,580) -- (32,837)
--------- --------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ......................... (18,834) (75,594) (7,994) 2,890 (99,532)
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE
SERVICE LICENSES ....................................... -- -- (1,200) -- (1,200)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ..... -- (541) -- -- (541)
--------- --------- --------- --------- ---------
NET LOSS .................................................. (18,834) (76,135) (9,194) 2,890 (101,273)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES ....................... (82,439) -- -- 82,439 --
--------- --------- --------- --------- ---------
NET LOSS .................................................. $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273)
========= ========= ========= ========= =========
Foreign currency translation adjustments ............... -- -- 40 -- 40
Comprehensive income from wholly-owned subsidiaries .... 40 -- -- (40) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS ........................................ $(101,233) $ (76,135) $ (9,154) $ 85,289 $(101,233)
========= ========= ========= ========= =========
75
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
REVENUE
Ambulance services .............................. $ -- $ 379,653 $ 87,979 $ -- $ 467,632
Fire protection services ........................ -- 49,397 1,093 -- 50,490
Other ........................................... -- 38,813 4,431 -- 43,244
--------- --------- --------- --------- ---------
Total revenue .............................. -- 467,863 93,503 -- 561,366
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ................... -- 240,341 57,000 -- 297,341
Provision for doubtful accounts ................. -- 75,743 5,484 -- 81,227
Depreciation .................................... -- 22,230 1,992 -- 24,222
Amortization of intangibles ..................... 214 6,601 2,351 -- 9,166
Other operating expenses ........................ -- 81,633 17,106 -- 98,739
Restructuring charge and other .................. -- 2,500 -- -- 2,500
--------- --------- --------- --------- ---------
Total expenses ............................. 214 429,048 83,933 -- 513,195
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) ............................ (214) 38,815 9,570 -- 48,171
Interest expense, net ........................... 19,675 (139) 1,870 -- 21,406
Other ........................................... -- -- -- 70 70
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES ........................................... (19,889) 38,954 7,700 (70) 26,695
PROVISION (BENEFIT) FOR INCOME TAXES ............... (8,353) 16,332 3,252 -- 11,231
--------- --------- --------- --------- ---------
(11,536) 22,622 4,448 (70) 15,464
INCOME FROM WHOLLY-OWNED SUBSIDIARIES .............. 27,000 -- -- (27,000) --
--------- --------- --------- --------- ---------
NET INCOME ......................................... $ 15,464 $ 22,622 $ 4,448 $ (27,070) $ 15,464
========= ========= ========= ========= =========
Foreign currency translation adjustments ........ -- -- (465) -- (465)
Comprehensive loss from wholly-owned subsidiaries (465) -- -- 465 --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME ............................... $ 14,999 $ 22,622 $ 3,983 $ (26,605) $ 14,999
========= ========= ========= ========= =========
76
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ............................................. $(226,731) $(111,330) $ (88,083) $ 199,413 $(226,731)
Adjustments to reconcile net loss to cash provided by
(used in) operations--
Write-off of assets included in restructuring charge -- 4,092 -- -- 4,092
Write-off of assets included in contract termination -- 8,086 -- -- 8,086
Write-off of other impaired assets .................. -- 32,339 62,014 -- 94,353
Loss on disposition of clinic operations ............ -- -- 9,374 -- 9,374
Depreciation and amortization ....................... -- 24,116 5,045 -- 29,161
Amortization of gain on sale of real estate ......... -- (101) -- -- (101)
(Gain) loss on sale of property and equipment ....... -- (305) (21) -- (326)
Provision for doubtful accounts ..................... -- 96,253 6,217 -- 102,470
Undistributed earnings of minority shareholder ...... -- -- -- 3,019 3,019
Amortization of discount on Senior Notes ............ 26 -- -- -- 26
Change in assets and liabilities--
(Increase) decrease in accounts receivable .......... -- (62,936) 837 -- (62,099)
Decrease in inventories ............................. -- 4,925 886 -- 5,811
Decrease in prepaid expenses and other .............. -- 833 314 -- 1,147
(Increase) decrease in due to/from affiliates ....... 227,184 (20,236) (4,782) (202,166) --
Decrease in accounts payable ........................ -- (2,445) (209) -- (2,654)
Increase (decrease) in accrued liabilities and other
liabilities ........................................ 1,642 29,324 8,047 -- 39,013
Increase (decrease) in nonrefundable subscription
income ............................................. -- 730 (18) -- 712
Decrease in deferred income taxes ................... -- 1,889 (1,889) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ..................................... 2,121 5,234 (2,268) 266 5,353
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving credit facility,
net ................................................. (3,765) -- -- -- (3,765)
Repayment of debt and capital lease obligations ...... -- (2,244) (529) -- (2,773)
Borrowings under capital lease obligations ........... -- 283 -- -- 283
Issuance of common stock ............................. 348 -- -- -- 348
--------- --------- --------- --------- ---------
Net cash used in financing activities ........... (3,417) (1,961) (529) -- (5,907)
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Net proceeds from the disposition of clinic operations -- -- 28 -- 28
Capital expenditures ................................. -- (6,771) 997 -- (5,774)
Proceeds from the sale of property and equipment ..... -- 1,909 60 -- 1,969
Increase (decrease) in other assets .................. 1,030 (683) 2,130 -- 2,477
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ..................................... 1,030 (5,545) 3,215 -- (1,300)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................. 266 -- 266 (266) 266
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ............................. -- (2,272) 684 -- (1,588)
CASH, beginning of year ................................. -- 9,035 1,252 -- 10,287
--------- --------- --------- --------- ---------
CASH, end of year ....................................... $ -- $ 6,763 $ 1,936 $ -- $ 8,699
========= ========= ========= ========= =========
77
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss .......................................... $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273)
Adjustments to reconcile net loss to cash provided
by (used in) operations--
Write-off of assets included in restructuring
charge ........................................ -- 28,873 -- -- 28,873
Extraordinary loss .............................. -- -- 1,200 -- 1,200
Cumulative effect of a change in accounting
principle ..................................... -- 541 -- -- 541
Depreciation and amortization ................... -- 28,288 5,408 -- 33,696
Amortization of gain on sale of real estate ..... -- (104) -- -- (104)
(Gain) loss on sale of property and equipment ... -- (71) (9) -- (80)
Provision for doubtful accounts ................. -- 145,823 14,800 -- 160,623
Undistributed earnings of minority shareholder .. -- -- -- (2,890) (2,890)
Amortization of discount on Senior Notes ........ 26 -- -- -- 26
Change in assets and liabilities--
Increase in accounts receivable ................. -- (107,911) (11,308) -- (119,219)
(Increase) decrease in inventories .............. -- (3,451) 81 -- (3,370)
Decrease in prepaid expenses and other .......... -- 2,077 424 -- 2,501
(Increase) decrease in due to/from affiliates ... 64,300 10,932 7,167 (82,399) --
Decrease in accounts payable .................... -- 822 (2,491) -- (1,669)
Decrease in accrued liabilities and other
liabilities .................................... 2,162 1,707 (4,758) -- (889)
Increase (decrease) in nonrefundable subscription
income ......................................... -- 81 (1) -- 80
Decrease in deferred income taxes ............... -- (9,198) (240) -- (9,438)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ................................ (34,785) 22,274 1,079 40 (11,392)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net ...... 33,307 -- -- -- 33,307
Repayment of debt and capital lease obligations ... -- (3,993) (1,711) -- (5,704)
Issuance of common stock .......................... 655 -- -- -- 655
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................ 33,962 (3,993) (1,711) -- 28,258
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from expropriation of Canadian ambulance
service licenses ................................. -- -- 2,191 -- 2,191
Capital expenditures .............................. -- (15,174) (1,957) -- (17,131)
Proceeds from the sale of property and equipment .. -- 1,300 -- -- 1,300
Increase in other assets .......................... 783 (751) (191) -- (159)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................ 783 (14,625) 43 -- (13,799)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ............. 40 -- 40 (40) 40
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ......................... -- 3,656 (549) -- 3,107
CASH, beginning of year ............................. -- 5,379 1,801 -- 7,180
--------- --------- --------- --------- ---------
CASH, end of year ................................... $ -- $ 9,035 $ 1,252 $ -- $ 10,287
========= ========= ========= ========= =========
78
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income .............................................. $ 15,464 $ 22,622 $ 4,448 $ (27,070) $ 15,464
Adjustments to reconcile net income to cash provided by
(used in) operations--
Depreciation and amortization .......................... 214 28,831 4,343 -- 33,388
Amortization of deferred compensation .................. 80 -- -- -- 80
Amortization of gain on sale of real estate ............ -- (103) -- -- (103)
(Gain) lose on sale of property and equipment .......... -- 281 (138) -- 143
Provision for doubtful accounts ........................ -- 75,743 5,484 -- 81,227
Undistributed earnings of minority shareholder ......... -- -- -- 70 70
Amortization of discount on Senior Notes ............... 26 -- -- -- 26
Change in assets and liabilities, net of effect of
businesses acquired--
Increase in accounts receivable ........................ -- (100,770) (11,260) -- (112,030)
Increase in inventories ................................ -- (3,089) (155) -- (3,244)
Decrease in prepaid expenses and other ................. -- 1,328 1,007 -- 2,335
(Increase) decrease in due to/from affiliates .......... (45,103) (948) 15,087 30,964 --
Increase in accounts payable ........................... -- 2,273 419 -- 2,692
Increase (decrease) in accrued liabilities and other
liabilities ............................................ 228 2,509 (5,767) -- (3,030)
Increase (decrease) in non-refundable
subscription income .................................... -- 1,286 (59) -- 1,227
Increase in deferred income taxes ...................... -- 3,198 504 -- 3,702
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ....................................... (29,091) 33,161 13,913 3,964 21,947
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net ............ 27,500 -- -- -- 27,500
Repayment of debt and capital lease obligations ......... -- (6,573) (1,221) -- (7,794)
Issuance of common stock ................................ 1,785 -- 4,429 (4,429) 1,785
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ....................................... 29,285 (6,573) 3,208 (4,429) 21,491
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired ....................... -- (445) (12,220) -- (12,665)
Capital expenditures .................................... -- (20,219) (4,266) -- (24,485)
Proceeds from the sale of property and equipment ........ -- 401 2 -- 403
Increase in other assets ................................ 271 (3,863) (1,965) -- (5,557)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ....................................... 271 (24,126) (18,449) -- (42,304)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................... (465) -- (465) 465 (465)
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ............................... -- 2,462 (1,793) -- 669
CASH, beginning of year ................................... -- 2,917 3,594 -- 6,511
--------- --------- --------- --------- ---------
CASH, end of year ......................................... $ -- $ 5,379 $ 1,801 $ -- $ 7,180
========= ========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
Fair market value of stock issued to employee
benefit plan ............................................ $ 1,933 $ -- $ -- $ -- $ 1,933
========= ========= ========= ========= =========
79
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVOLVING CREDIT FACILITY
The Company has a fully underwritten credit agreement for a revolving
credit facility of $143.0 million as of June 30, 2001, which was previously
amended by extending the maturity date to March 16, 2003 and converting it to an
unsecured credit facility. The revolving credit facility is priced at prime
rate, Federal Funds Rate plus 0.5% or a LIBOR-based rate. The LIBOR-based rates
range from LIBOR plus 0.875% to LIBOR plus 1.7%. Interest rates and availability
under the revolving credit facility are dependent upon the Company meeting
certain financial covenants including total debt leverage ratios, total debt to
capitalization ratios and fixed charge ratios.
The Company has received a compliance waiver, as amended, regarding the
financial covenants contained in its revolving credit facility which covered the
period December 31, 1999 through December 3, 2001. The waiver, as amended,
covers the representations and warranties related to no material adverse changes
as well as the following financial covenants: total debt leverage ratio, the
total debt to capitalization ratio and the fixed charge coverage ratio. The
waiver, as amended, covers, among other things, that no additional borrowings
will be available through the end of the waiver period, December 3, 2001. There
is no assurance that the Company is in compliance with all of the conditions of
the waiver. The Company has discussed with the Lenders its failure to maintain
positive operating income (net of restructuring charges), at June 30, 2001, as
required under the waiver and the Lenders have not asserted that the Company has
failed to comply with any requirements under the waiver. Although the Company
believes no Event of Default is continuing either under the terms of the
revolving credit facility (as a result of the waiver agreement) or the Company's
$150 million 7 7/8% Senior Notes due 2008, and although there has been no
acceleration of the repayment of the revolving credit facility or the Notes, the
entire balance of these instruments has been reclassified as a current liability
in the accompanying financial statements at June 30, 2001.
As LIBOR contracts expired in March 2000, all outstanding borrowings at
June 30, 2001 and 2000 were priced at prime rate plus 0.25 percentage points and
interest is payable monthly. During the period covered by the waiver, as
amended, the Company will accrue additional interest expense at a rate of 2.0%
per annum on the outstanding balance on the revolving credit facility.
Approximately $143.0 million was outstanding on the revolving credit facility at
June 30, 2001. The weighted average interest rate, including the additional 2.0%
on the revolving credit facility, was 9.0% and 11.75% at June 30, 2001 and 2000,
respectively.
DEBT MATURITIES
Aggregate debt maturities for each of the years ending June 30 are as
follows:
NOTES PAYABLE CAPITAL LEASES
------------- --------------
(IN THOUSANDS)
2002 .................................. $ 293,417 $ 1,191
2003 .................................. 343 515
2004 .................................. 143 21
2005 .................................. 150 20
2006 .................................. 82 10
Thereafter ............................ 112 --
--------- ---------
$ 294,247 $ 1,757
=========
Less: Amounts representing interest ... (279)
---------
$ 1,478
=========
The Company incurred interest expense of approximately $30,537,000,
$26,474,000 and $21,498,000 and paid interest of approximately $29,001,000,
$24,169,000 and $21,669,000 in the years ended June 30, 2001, 2000 and 1999,
respectively.
80
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had outstanding letters of credit totaling approximately
$6,515,000 at June 30, 2001 and 2000 for insurance and guarantees under
contracts.
(6) OTHER CHARGES
During the fiscal years ended June 30, 2001 and 2000 the Company recorded
the following non-recurring or unusual charges:
FISCAL YEAR ENDED JUNE 30,
--------------------------
2001 2000
------- -------
Argentine Operations 8,512 $ --
Supply Inventory 8,442 --
Joint Venture Put Obligation 4,045 --
Other Charges 3,079 4,088
Paid Time Off for Field Personnel 3,010 --
Employee Medical Benefits 5,429 2,596
Amount Due from Former Owner 962 --
Medicare/Medicaid Audits 1,300 3,900
Restructuring Consultants -- 1,110
Investment Write-Offs -- 2,937
Write-Off of Disputed Refunds -- 1,796
------- -------
$34,779 $16,427
======= =======
ARGENTINE OPERATIONS
The Company recorded charges totaling $8.5 million related to asset
write-offs and reserve adjustments. The Company's Argentine subsidiaries had
been effected by escalating political and economic instability as well as
changes in local management during fiscal 2001. The charge was recorded in other
operating expenses in the consolidated statement of operations.
SUPPLY INVENTORY
Medical, fleet and fire supplies are maintained in a central warehouse,
numerous regional warehouses, and multiple stations, lockers and vehicles. A
physical inventory of all locations at June 30, 2001 revealed a shortage from
recorded levels. Shrinkage, obsolescence and losses due to service area closures
accounted for the shortage. The Company recorded a charge of $8.4 million to
write-down its inventory balances to amounts determined by the physical
inventory. The charge was recorded in other operating expenses in the
consolidated statement of operations.
81
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JOINT VENTURE PUT OBLIGATION
As described in Note 3, pursuant to the provisions of the underlying joint
venture agreement, the Company is obligated to purchase the minority interest in
the joint venture from the minority shareholder. In connection with negotiations
with the minority shareholder during the fourth quarter of fiscal 2001, the
Company recorded a $4.0 million charge for the estimated amount necessary to
satisfy its obligations under the agreement. The Company reflected this charge
as an increase in other expense in the consolidated statement of operations and
as an increase in minority interest in the consolidated balance sheet.
OTHER CHARGES
The Company recorded charges totaling $3.1 million in fiscal 2001 for a
number of items related to its domestic operations, the largest of which was a
$0.7 million charge relating to administrative costs paid on behalf of the
Company's employee benefit plans. These charges were a result of adjustments to
certain estimates for prepaid expenses, accrued liabilities and other items that
were resolved in the fourth quarter of fiscal 2001.
The Company recorded charges totaling $4.1 million in fiscal 2000 for a
number of estimates that were resolved related to its domestic operations. These
items included the write-off of capitalized acquisition costs for transactions
that were terminated ($0.9 million), write-off of costs related to unsuccessful
proposals ($0.6 million), write-off of costs capitalized in connection with the
re-branding of vehicles ($1.0 million), and capitalized costs related to the
Company's vehicle refurbishment center which was closed in the third quarter of
fiscal 2000 ($1.0 million). These charges were reflected in other operating
expenses in the consolidated statement of operations.
PAID-TIME-OFF FOR FIELD PERSONNEL
During the fourth quarter of fiscal 2001, the Company analyzed its
paid-time-off liabilities and determined that its paid-time-off policy had been
inconsistently applied in certain service areas. As a result of this analysis,
the Company recorded a charge of $3.0 million to bring the liability into line
with the amount required under the policy. This charge was recorded in payroll
and employee benefits in the consolidated statement of operations.
EMPLOYEE MEDICAL BENEFITS
The Company self-insures its employee medical coverage. Based upon
information obtained from its third party claims administrator in the fourth
quarter of fiscal 2001, the Company recorded a charge of $5.4 million to
increase its reserve for incurred but not reported employee medical claims. The
increased reserve was required as a result of continuing increases in healthcare
costs, including prescription drugs. The charge was reflected in payroll and
employee benefits in the consolidated statement of operations.
During the second half of fiscal 2000, the Company recorded charges of $2.6
million related to increased usage of employee medical benefits following the
announcement of its decision to close or downsize certain service areas. The
charges represent the incremental increase in claims submissions that occurred
during that period. These charges were reflected in payroll and employee
benefits in the consolidated statement of operations.
AMOUNT DUE FROM FORMER OWNER
In connection with a February 1998 ambulance company acquisition, the
seller indemnified the collection of certain accounts receivable. In connection
with the settlement of litigation involving the seller during the fourth quarter
of fiscal 2001, the Company agreed to release the seller from his obligations
under the indemnification. The Company recorded a charge of $1.0 million, which
was reflected in other operating expenses in the consolidated statement of
operations, related to this settlement.
82
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MEDICARE/MEDICAID AUDITS
The Company recorded a charge of $1.3 million for the expected settlement
of a Medicare audit of an acquired ambulance company for periods prior to the
Company's acquisition. This charge, which was reflected in other operating
expenses in the consolidated statement of operations, was taken based upon
information obtained during the fourth quarter of fiscal 2001, which included
correspondence with the Medicare intermediary.
The Company recorded charges totaling $3.9 million in the second quarter of
fiscal 2000 for the expected settlement of two specific Medicare/Medicaid
audits. This charge, which was reflected in other operating expenses in the
consolidated statement of operations, was taken based upon information obtained
from and negotiations with the intermediaries that occurred during the second
quarter of fiscal 2000.
RESTRUCTURING CONSULTANTS
During the second half of the fiscal year ended June 30, 2000, the Company
incurred costs totaling $1.1 million relating to restructuring consultants and
attorneys representing both the Company and its lenders in connection with
resolving violations of certain financial covenants contained in the Company's
revolving credit agreement. These activities began in the third quarter of
fiscal 2000. These costs were reflected in other operating expenses in the
consolidated statement of operations.
INVESTMENT WRITE-OFFS
During the third quarter of the fiscal year ended June 30, 2000, the
Company wrote-off a $1.3 million investment in a domestic health care business
as a result of the settlement of related litigation which occurred during that
quarter. Additionally, the Company wrote-off a $1.6 million investment in a
domestic alternative transportation business during the fourth quarter on the
basis of financial information received from the entity during the quarter. Such
information indicated that the carrying value of the Company's related
investment would not be recoverable.
WRITE-OFF OF DISPUTED REFUNDS
The Company wrote-off amounts totaling $1.8 million during the fourth
quarter of the fiscal year ended June 30, 2000 related to amounts refunded to
Medicare carriers that were expected to be returned to the Company after the
exhaustion of administrative and appeals processes. The determination was made,
based on information received through the appellate process during the fourth
quarter, that the Company was not reasonably assured of receiving the amounts
recorded. This charge was recorded in other operating expenses in the
consolidated statement of operations.
(7) FINANCIAL INSTRUMENTS
The Company entered into interest rate swap agreements to limit the effect
of increases in the interest rates on floating rate debt. The swap agreements
were contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate agreements
are used to measure interest to be paid or received and do not represent the
amount of exposure to credit loss. The net cash amounts paid or received on the
agreements were accrued and recognized as an adjustment to interest expense.
In November 1998, the Company entered into an interest rate swap agreement
that originally expired in November 2003 and effectively converted $50.0 million
of variable rate borrowings to fixed rate borrowings. The Company paid a fixed
rate of 4.72% and received a LIBOR-based floating rate. The weighted average
floating rate for the year ended June 30, 1999 was 5.2%. As a result of this
swap agreement interest expense was reduced during the year ended June 30, 1999
by approximately $106,000. In June 1999, the Company terminated the interest
83
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate swap agreement and received a termination fee of $604,000. Such amount was
amortized against interest on a straight-line basis beginning in July 1999
through November 2000.
(8) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases various facilities and equipment under non-cancelable
operating lease agreements. Rental expense charged to operations under these
leases was approximately $12,077,000 $13,160,000 and $12,769,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
Minimum rental commitments under non-cancelable operating leases for each
of the years ending June 30 are as follows (in thousands):
2002............................... $ 7,120
2003............................... 5,932
2004............................... 5,219
2005............................... 4,578
2006............................... 3,812
Thereafter......................... 7,641
LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation and regulatory
investigations arising in the ordinary course of business. There can be no
assurance that our insurance coverage will be adequate to cover all such
liabilities arising out of such claims and could potentially have a material
adverse effect on the consolidated financial statements.
On August 25, 1998 and September 2, 1998, the Company was named as a
defendant in two purported class action lawsuits (Haskell and Ruble,
respectively). The two lawsuits contain virtually identical allegations and are
brought on behalf of a class of those who purchased the Company's publicly
traded securities including its common stock between April 28, 1997 and June 11,
1998. Both complaints allege that between April 28, 1997 and June 11, 1998 the
Company, 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 of
Directors, and Robert E. Ramsey, Jr., our former Executive Vice President and
former director issued certain false and misleading statements regarding certain
aspects of the financial status of the Company and that these statements
allegedly caused the Company's common stock to be traded at an artificially
inflated price. 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. The
Company and the individual defendants have 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. The Company and the individual defendants have moved to
dismiss the second amended complaint. The Court is currently scheduled to hear
oral argument on that motion in December 2001. If the lawsuits were ultimately
determined adversely to the Company, it could have a material adverse effect on
its business, financial condition, cash flows and results of operations.
OTHER DISPUTES
In 1994, the Company entered into a management agreement with another
corporation to manage the operations of one of the Company's subsidiaries that
does not provide ambulance or fire protection services. The Company also entered
into an option agreement whereby the corporation had the option to purchase the
assets of the subsidiary and the Company had the option to sell the assets of
this subsidiary. The Company settled this dispute during the year ended June 30,
84
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000. Losses relating to this dispute totaled approximately $1.3 million and are
included in restructuring charges and other in the consolidated statement of
operations for the year ended June 30, 2000.
OPTION AGREEMENT
During the year ended June 30, 1999, the Company entered into an option
agreement whereby the Company may elect to be issued a debenture in the
principal amount of $25.0 million by a company providing ambulance and other
services in certain areas of Brazil. In June 2000, the Company terminated this
option.
HEALTHCARE COMPLIANCE
The healthcare industry is subject to numerous laws and regulations of
federal, state, and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. The Company believes that it is substantially in
compliance with fraud and abuse statutes as well as their applicable government
review and interpretation as well as regulatory actions unknown or unasserted at
this time.
The Company is currently undergoing two investigations by certain
government agencies regarding compliance with Medicare fraud and abuse statutes.
The Company is cooperating with the government agencies conducting these
investigations and is providing requested information to the governmental
agencies. These reviews are covering periods prior to the Company's acquisition
of the operations and periods after acquisition. Management believes that the
remedies existing under specific purchase agreement and reserves established in
the consolidated financial statements are sufficient so that the ultimate
outcome of these matters should not have a material adverse effect on our
business, financial condition, cash flows and results of operations.
85
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company established the ESOP in 1979 and makes contributions to the
ESOP at the discretion of the Board of Directors. No discretionary contributions
were approved for the years ended June 30, 2001, 2000 and 1999. The ESOP held,
for the benefit of all participants, approximately 5% and 6% as of June 30, 2001
and 2000, respectively, of the outstanding common stock of the Company. The ESOP
is administered by the ESOP's Advisory Committee, consisting of certain officers
of the Company.
In July 1999, the Company's Board of Directors approved an amendment to
"freeze" the ESOP, effective June 30, 1999 with respect to all employees other
than members of collective bargaining agreements that include participation in
the ESOP. All participants' accounts were fully vested as of June 30, 1999. The
Company does not intend to make any contributions to the ESOP in the future.
Due to the decrease in stock price in the year ended June 30, 2000, the
ESOP assets were insufficient to cover participant balances, therefore the
Company made an additional contribution of $250,000.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (ESPP) through which
eligible employees may purchase shares of the Company's common stock, at
semi-annual intervals, through periodic payroll deductions. The ESPP is a
qualified employee benefit plan under Section 423 of the Internal Revenue Code.
The Company has reserved 1,150,000 shares of stock for issuance under the ESPP.
The purchase price per share is the lower of 85% of the closing price of the
stock on the first day or the last day of the offering period or on the nearest
prior day on which trading occurred on the NASDAQ Small Cap Market.
As of June 30, 2001, 617,164 shares of common stock have been issued under
the ESPP.
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan was adopted in November 1992 and
provides for the granting of options to acquire common stock of the Company,
direct granting of the common stock of the Company (Stock Awards), the granting
of stock appreciation rights (SARs), or the granting of other cash awards (Cash
Awards) (Stock Awards, SARs and Cash Awards are collectively referred to herein
as Awards). At June 30, 2001, the maximum number of shares of common stock
issuable under the 1992 Plan was 6.0 million of which approximately 800,000
options had been exercised. Options may be granted as incentive stock options or
non-qualified stock options.
Options and Awards may be granted only to persons who at the time of grant
are either (i) key personnel (including officers) of the Company or (ii)
consultants and independent contractors who provide valuable services to the
Company. Options that are incentive stock options may be granted only to key
personnel of the Company.
The 1992 Plan, as amended, provides for the automatic grant of options to
acquire the Company's common stock (the Automatic Grant Program), whereby each
non-employee member of the Board of Directors will be granted an option to
acquire 2,500 shares of common stock annually. Each non-employee member of the
Board of Directors also will receive an annual automatic grant of options to
acquire an additional number of shares equal to 1,000 shares for each $0.05
increase in the Company's earnings per share, subject to a maximum of 5,000
additional options. New non-employee members of the Board of Directors will
receive options to acquire 10,000 shares of common stock on the date of their
first appointment or election to the Board of Directors.
86
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The expiration date, maximum number of shares purchasable and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the Plan
Administrator upon grant of the options. Options granted to date vest over
periods not exceeding five years. The exercise price of options will be
determined by the Plan Administrator, but may not be less than 100% (110% if the
option is granted to a stockholder who at the date the option is granted owns
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its subsidiaries) of the fair market value of the
common stock at the date of the grant.
Awards granted in the form of SARs would entitle the recipient to receive a
payment equal to the appreciation in market value of a stated number of shares
of common stock from the price stated in the award agreement to the market value
of the common stock on the date first exercised or surrendered. The Plan
Administrator may determine such terms, conditions, restrictions and/or
limitations, if any, on any SARs.
The 1992 Plan states that it is not intended to be the exclusive means by
which the Company may issue options or warrants to acquire its common stock,
Awards or any other type of award. To the extent permitted by applicable law,
the Company may issue any other options, warrants or awards other than pursuant
to the 1992 Plan without shareholder approval. The 1992 Plan will remain in
force until November 5, 2002.
2000 NON-QUALIFIED STOCK OPTION PLAN
The Company's 2000 Non-Qualified Stock Option Plan was adopted in August
2000 and provides for the granting of options to acquire common stock of the
Company. At the time of adoption, the maximum number of shares of common stock
issuable under the Plan was 2.0 million. Options may only be granted as
non-qualified stock options. The 2000 Plan will remain in force until August 11,
2010.
Options may be granted only to persons who at the time of grant are either
regular employees, not including Directors and Officers who are regular
employees or Directors who are not employees, or persons who provide consulting
or other services as independent contractors to the Company.
The expiration date, maximum number of shares purchasable and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the Committee upon
grant of the options. Options granted to date vest over periods not exceeding
three years. The exercise price of options will be determined by the Committee,
but may not be less than the par value per share.
87
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes stock option activity:
YEAR ENDED JUNE 30, 2001
----------------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- ----------------
Options outstanding at beginning of year................... 3,581,992 $1.25 - $36.00 $ 17.35
Granted................................................. 1,582,750 $1.50 - $ 2.00 $ 1.57
Canceled................................................ (723,074) $1.25 - $32.25 $ 17.10
Exercised............................................... -- -- --
------------ --------
Options outstanding at end of year......................... 4,441,668 $1.25 - $36.00 $ 11.77
============ ========
Options exercisable at end of year......................... 3,190,462 $ 14.79
============ ========
Options available for grant at end of year................. 2,788,361
============
Weighted average fair value per share of options granted.. $ 0.72
========
YEAR ENDED JUNE 30, 2000
----------------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- ----------------
Options outstanding at beginning of year.................. 3,575,170 $1.25 - $36.00 $ 20.99
Granted................................................ 929,109 $1.38 - $ 8.00 $ 7.16
Canceled............................................... (921,408) $1.25 - $32.56 $ 21.20
Exercised.............................................. (879) $1.25 $ 1.25
------------ --------
Options outstanding at end of year........................ 3,581,992 $1.25 - $36.00 $ 17.35
============
Options exercisable at end of year........................ 2,804,758 $1.25 - $36.00 $ 18.04
============
Options available for grant at end of year................ 1,648,037
============
Weighted average fair value per share of options granted.. $ 3.01
========
YEAR ENDED JUNE 30, 1999
----------------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- ----------------
Options outstanding at beginning of year.................. 3,093,905 $1.25 - $36.00 $ 26.26
Granted................................................ 1,004,497 $6.63 - $11.81 $ 7.45
Canceled............................................... (513,590) $7.13 - $35.00 $ 26.90
Exercised.............................................. (9,642) $1.25 - $ 7.13 $ 6.64
------------ --------
Options outstanding at end of year........................ 3,575,170 $1.25 - $36.00 $ 20.99
============
Options exercisable at end of year........................ 2,520,828 $1.25 - $36.00 $ 21.46
============
Options available for grant at end of year................ 1,655,738
============
Weighted average fair value per share of options granted.. $ 2.55
========
88
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -----------------------------------------------------
WEIGHTED AVERAGE
RANGE OF OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 1.25 - $1.375 12,760 7.91 $ 1.33 12,760 $ 1.33
$ 1.50 1,221,250 9.14 $ 1.50 312,108 $ 1.50
$ 1.53 - $ 6.63 496,750 7.63 $ 3.68 368,418 $ 4.28
$ 6.92 - $ 7.56 451,334 6.86 $ 7.12 451,334 $ 7.12
$ 7.69 17,500 8.22 $ 7.69 13,333 $ 7.69
$ 7.81 484,336 8.08 $ 7.81 372,352 $ 7.81
$ 8.00 - $17.25 489,939 5.64 $ 11.44 473,273 $ 11.47
$18.25 - $24.25 464,709 4.20 $ 23.57 464,709 $ 23.57
$29.00 - $32.25 679,517 5.70 $ 30.51 598,602 $ 30.64
$32.50 - $36.00 123,573 6.32 $ 33.82 123,573 $ 33.82
---------- ----- ------- ---------- -------
$ 1.25 - $36.00 4,441,668 7.11 $ 11.77 3,190,462 $ 14.79
========== ===== ======= ========== =======
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for employee stock options or similar
equity instruments. SFAS No. 123 also allows an entity to continue to measure
compensation cost related to stock options issued to employees under these plans
using the method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Entities electing to remain with the accounting in
APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share, as if the fair value based method of accounting defined in SFAS No.
123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25; therefore, no compensation cost is recognized in the
accompanying financial statements for stock-based employee awards. However, the
Company has computed, for pro forma disclosure purposes, the value of all
options and ESPP shares granted during 2001, 2000 and 1999, using the
Black-Scholes option pricing model with the following weighted average
assumptions:
YEAR ENDED JUNE 30,
------------------------------------------------------------------
2001 2000 1999
----------------- ----------------- ----------------
OPTIONS ESPP OPTIONS ESPP OPTIONS ESPP
------- ---- ------- ---- ------- ----
Risk-free interest rate..................... 3.74% 2.55% 6.03% 6.32% 5.92% 5.43%
Expected dividend yield..................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Expected lives in years (after vesting for
options)................................... 1.35 0.50 1.35 0.50 1.33 0.50
Expected volatility......................... 72.66% 96.75% 67.51% 99.78% 57.66% 85.20%
89
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total value of options and ESPP shares granted was computed to be the
following approximate amounts, which would be amortized on the straight-line
basis over the vesting period:
OPTIONS ESPP
------- ----
For the year ended June 30, 2001 ......... $ 1,134 $188
For the year ended June 30, 2000 ......... $ 2,724 $137
For the year ended June 30, 1999 ......... $ 2,564 $340
If the Company had accounted for its stock-based compensation plans using a
fair value based method of accounting, the Company's year end net income and
diluted earnings per share would have been reported as follows:
YEAR ENDED JUNE 30,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Historical ..................... $(226,781) $(101,273) $ 15,464
Pro forma ...................... $(227,606) $(101,762) $ 11,939
Diluted earnings per share:
Historical ..................... $ (15.38) $ (6.94) $ 1.06
Pro forma ...................... $ (15.44) $ (6.97) $ 0.82
The effects of applying SFAS 123 for providing pro forma disclosures for
2001, 2000 and 1999 are not likely to be representative of the effects on
reported net income and diluted earnings per share for future years, because
options vest over several years and additional awards are made each year.
During March 2000, the FASB issued Interpretation 44, "Accounting for
Certain Transactions Involving Stock Compensation-an Interpretation of APB
Opinion No. 25 (FIN 44), which among other issues, addresses repricing and other
modifications made to previously issued stock options. The Company adopted FIN
44 in the first quarter of its fiscal year end June 30, 2001. The Company has
not experienced any material impact resulting from the adoption of FIN 44.
401(K) PLAN
The Company has a contributory retirement plan (the 401(k) Plan) covering
eligible employees who are at least 18 years old. The 401(k) Plan is designed to
provide tax-deferred income to the Company's employees in accordance with the
provisions of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to 15% of
his or her respective salary, not to exceed the statutory limit. The Company, at
its discretion, may elect to make a matching contribution in the form of cash or
the Company's common stock to each participant's account as determined by the
Board of Directors. Under the terms of the 401(k) Plan, the Company may also
make discretionary profit sharing contributions. Profit sharing contributions
are allocated among participants based on their annual compensation. Each
participant has the right to direct the investment of his or her funds. The
Company has accrued a matching contribution of approximately $1,712,000 for the
401(k) Plan year ended December 31, 2000. The Company made a matching
contribution to the 401(k) Plan of approximately $1,906,000 for the 401(k) Plan
year ended December 31, 1999.
90
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) STOCKHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
In August 1995, the Company's Board of Directors adopted a shareholder
rights plan, which authorized the distribution of one right to purchase one
one-thousandth of a share of $0.01 par value Series A Junior Participating
Preferred Stock (a Right) for each share of common stock of the Company. Rights
will become exercisable following the tenth day (or such later date as may be
determined by the Board of Directors) after a person or group (a) acquires
beneficial ownership of 15% or more of the Company's common stock or (b)
announces a tender or exchange offer, the consummation of which would result in
ownership by a person or group of 15% or more of the Company's common stock.
Upon exercise, each Right will entitle the holder (other than the party
seeking to acquire control of the Company) to acquire shares of the common stock
of the Company or, in certain circumstances, such acquiring person at a 50%
discount from market value. The Rights may be terminated by the Board of
Directors at any time prior to the date they become exercisable at a price of
$0.01 per Right; thereafter, they may be redeemed for a specified period of time
at $0.01 per Right.
(11) RELATED PARTY TRANSACTIONS
The Company incurred legal fees of approximately $130,000, $96,000 and
$113,000 for the years ended June 30, 2001, 2000 and 1999, respectively, with a
law firm in which a member of the Board of Directors is a partner.
The Company incurred rental expense of approximately $89,000 and $114,000
in the years ended June 30, 2001 and 2000, respectively, related to leases of
fire and ambulance facilities with a director of the Company and with employees
that were previously owners of businesses acquired by the Company. The Company
incurred rental expense of approximately $1,895,000 in the year ended June 30,
1999, related to leases of fire and ambulance facilities with two directors of
the Company and with employees that were previously owners of businesses
acquired by the Company.
The Company incurred consulting fees of approximately $99,000 and $85,000
in the years ended June 30, 2001 and 2000, respectively, with a director of the
Company. The Company incurred consulting fees of $213,000 in the year ended June
30, 1999, with two directors of the Company.
(12) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred income taxes are provided for
differences between results of operations for financial reporting purposes and
income tax purposes.
No provision is made for U.S. income taxes applicable to undistributed
foreign earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations.
91
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of income (loss) before income taxes were as follows:
YEAR ENDED JUNE 30,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
United States ...................... $(177,571) $(133,641) $ 19,189
Foreign ............................ (47,285) (861) 7,506
--------- --------- ---------
Income (loss) before income taxes .. $(224,856) $(134,502) $ 26,695
========= ========= =========
The components of the provision for (benefit from) income taxes were as
follows:
YEAR ENDED JUNE 30,
-------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Current
U.S. Federal ............................. $ -- $ -- $ 58
State .................................... 637 750 128
Foreign .................................. 48 1,560 1,532
-------- -------- --------
Total current provision ............. 685 2,310 1,718
-------- -------- --------
Deferred
U.S. Federal ............................. 500 (33,179) 9,064
Foreign .................................. 690 (2,360) 449
-------- -------- --------
Total deferred provision (benefit) .. 1,190 (35,539) 9,513
-------- -------- --------
Total provision (benefit) ........... $ 1,875 $(33,229) $ 11,231
======== ======== ========
Deferred tax assets and liabilities are recorded based on differences
between the financial statement and tax bases of amounts of assets and
liabilities and the tax rates in effect when those differences are expected to
reverse.
92
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred taxes were as follows:
JUNE 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Deferred tax liabilities
Amortization and accelerated depreciation ..... $ (1,024) $ (19,157)
Accounts receivable valuation ................. (15,093) (16,273)
Accounting method changes ..................... (1,350) (1,350)
Other ......................................... -- (1,421)
--------- ---------
(17,467) (38,201)
Deferred tax assets
Restructuring charge .......................... 11,882 6,634
Compensation accruals ......................... 1,671 828
Insurance reserves ............................ 14,157 6,314
Net operating loss benefits ..................... 86,398 35,108
Alternative minimum tax credit carryforwards .... 1,115 1,115
Business tax credits .......................... 505 505
Foreign reserves .............................. 2,300 690
Other ........................................... 625 79
Valuation allowance ............................. (102,136) (12,832)
--------- ---------
16,517 38,441
Net deferred asset/(liability)tax liability ..... (950) 240
Less current portion ............................ -- (240)
--------- ---------
Net long term deferred tax liability ............ $ (950) $ --
========= =========
For the year ended June 30, 1999 income tax benefits of approximately
$8,000 were allocated to additional paid-in capital for tax benefits associated
with the exercise of nonqualified stock options and vesting of stock grants. No
income tax benefits were provided for the years ended June 30, 2001 and 2000,
respectively.
93
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the differences were as follows:
JUNE 30,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Federal income tax provision at statutory rate ... $(78,700) $(47,076) $ 9,343
State taxes, net of federal benefit .............. (3,886) (3,230) 568
Amortization of nondeductible goodwill ........... 5,660 3,792 1,590
Change in valuation allowance .................... 77,853 12,832 --
Other, net ....................................... 948 453 (270)
-------- -------- --------
Provision for (benefit from) income taxes ........ $ 1,875 $(33,229) $ 11,231
======== ======== ========
The Company has provided a valuation allowance because it believes that the
realizability of the deferred tax asset does not meet the more likely than not
criteria under SFAS No. 109. The Company has net operating losses of
approximately $220 million which expire in varying amounts between 2002 and
2021.
Cash payments for income taxes (net of refunds) were approximately
$1,927,000 and $2,397,000 during the years ended June 30, 2001 and 2000,
respectively. The Company received income tax refunds (net of payments) of
approximately $2,050,000 during the year ended June 30, 1999.
(13) SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of fiscal 1999.
SFAS No. 131 established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial statements. It also established
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of a business, for which
separate financial information is available, that management regularly evaluates
in deciding how to allocate resources and assess performance.
The Company operates in two business segments: Emergency Medical Services
(EMS) and 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.
The EMS segment includes emergency medical ambulance services provided
pursuant to contracts with counties, fire districts and municipalities, as well
as non-emergency ambulance services provided to patients requiring either
advanced or basic levels of medical supervision during the transfer to and from
residences and health care facilities. The EMS segment also includes critical
care transport services for medically unstable patients who require critical
care while being transported between health care facilities, as well as urgent
home medical care and ambulance services provided under capitated service
arrangements in Argentina.
The Fire and Other segment includes fire protection services consisting of
fire prevention and fire suppression, as well as hazardous material containment,
underwater search and recovery, mountain and confined space rescue and public
education. This segment also includes the following services: industrial fire
training, alarm monitoring, non-medical transportation for the handicapped and
certain non-ambulatory persons, dispatch, fleet and billing.
94
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements.
Information by operating segment is set forth below:
FIRE
AMBULANCE AND OTHER CORPORATE TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 2001
Net revenues from external customers .......... $ 402,833 $ 101,483 $ -- $ 504,316
Depreciation and amortization ................. 21,298 5,981 1,882 29,161
Interest expense, net ......................... 25,622 4,322 57 30,001
Equity in net income of equity method investees 780 -- -- 780
Segment profit (loss) ......................... (178,906) 11,301 (24,848) (192,453)
Segment assets ................................ 151,396 21,769 1,267 174,432
Capital expenditures .......................... 2,938 1,725 1,111 5,774
Investment in equity-method investees ......... $ 893 $ -- $ -- $ 893
FIRE
AMBULANCE AND OTHER CORPORATE TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 2000
Net revenues from external customers .......... $ 467,741 $ 102,333 $ -- $ 570,074
Depreciation and amortization ................. 22,247 10,087 1,362 33,696
Interest expense, net ......................... 21,057 4,595 286 25,938
Equity in net income of equity method investees 988 (8) -- 980
Segment profit (loss) ......................... (128,455) 11,122 (17,926) (135,259)
Segment assets ................................ 209,810 37,069 2,015 248,894
Capital expenditures .......................... 6,831 8,599 481 15,911
Investment in equity-method investees ......... $ 1,011 $ 1,100 $ -- $ 2,111
FIRE
AMBULANCE AND OTHER CORPORATE TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 1999
Net revenues from external customers .......... $ 467,632 $ 93,734 $ -- $ 561,366
Depreciation and amortization ................. 23,851 7,824 1,713 33,388
Interest expense, net ......................... 16,088 4,928 390 21,406
Equity in net income of equity method investees 725 17 -- 742
Segment profit (loss) ......................... 33,239 11,905 (18,379) 26,765
Segment assets ................................ 253,269 40,693 2,895 296,857
Capital expenditures .......................... 19,467 4,390 82 23,939
Investment in equity-method investees ......... $ 1,142 $ 1,671 $ -- $ 2,813
95
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning principal geographic areas is set forth below:
2001 2000 1999
----------------------- ----------------------- -----------------------
REVENUE NET PROPERTY REVENUE NET PROPERTY REVENUE NET PROPERTY
-------- ------------ -------- ------------ -------- ------------
(IN THOUSANDS)
United States and Canada ...... $461,227 $ 57,682 $517,315 $ 79,257 $506,817 $ 87,441
Latin America ................. 43,089 317 52,759 6,662 54,549 7,591
-------- -------- -------- -------- -------- --------
Total .................. $504,316 $ 57,999 $570,074 $ 85,919 $561,366 $ 95,032
======== ======== ======== ======== ======== ========
96
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended June 30, 2001
and 2000 is as follows:
2001
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER(2) QUARTER(3)
--------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue .................... $ 128,238 $ 125,209 $ 126,722 $ 124,147
Operating income (loss) .... 3,213 (13,770) (16,034) (165,862)
Net income (loss) .......... (4,085) (21,574) (23,646) (177,426)
Loss per share ............. $ (0.28) $ (1.47) $ (1.60) $ (11.91)
2000
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(4) QUARTER(5) QUARTER(6)
--------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue .................... $ 141,200 $ 147,107 $ 146,398 $ 135,369
Operating income (loss) .... 9,581 (57,978) (18,002) (42,921)
Net income (loss) .......... 1,884 (42,386) (16,615) (44,156)
Earnings (loss) per share .. $ 0.13 $ (2.91) $ (1.14) $ (3.02)
- ----------
(1) In the second quarter of fiscal 2001, the Company recorded a $10 million
additional provision for doubtful accounts related to the uncollectibility
of receivables in service areas closed in fiscal 2000. The Company also
recorded a $5.2 million charge related to the loss of an exclusive 911
contract in Lincoln, Nebraska.
(2) In the third quarter of fiscal 2001, the Company recorded a $5.0 million
charge related to increased claims experience in workers compensation.
Additionally, the Company recorded a $15.0 million charge for increases in
reserves for reported claims as well as to establish reserves for claims
incurred but not reported.
(3) In the fourth quarter of fiscal 2001, the Company recorded additional
provisions for doubtful accounts of $16.2 million, $94.4 million of asset
impairment charges, $9.4 million related to the disposition of clinic
operations in Argentina, $9.1 million of restructuring and other charges, a
$4.1 million charge related to the loss of an exclusive 911 contract in
Arlington Texas, $5.4 million related to increased claim estimates on
employee health insurance, $3.0 million related to the accrual of paid time
off for field personnel, $8.4 million related to inventory write-offs, $1.3
million related to Medicaid audit, $1.0 million related to write-off of
amounts due from a former seller, $8.5 million related to asset write-offs
and reserve adjustments at its various Argentine subsidiaries, $3.1 million
of other asset write-offs, and $4.0 million related to the put provisions
contained in a joint venture agreement.
(4) In the second quarter of fiscal 2000, the Company recorded a $65.0 million
additional provision for doubtful accounts related to a change in its
methodology of determining its allowance for doubtful accounts.
(5) In the third quarter of fiscal 2000, the Company recorded restructuring and
other charges of $25.1 million related to the closure or downsizing of
certain non-emergency service areas and the reduction of corporate overhead
and a $3.0 million additional provision for doubtful accounts related to
uncollectible accounts in those service areas that are being closed or
downsized.
(6) In the fourth quarter of fiscal 2000, the Company recorded restructuring
and other charges of $18.2 million related to the closure or downsizing of
certain non-emergency service areas and the reduction of corporate
overhead, a $12.2 million charge to establish reserves for both reported
and unreported workers compensation claims, and a $6.8 million additional
provision for doubtful accounts related to uncollectible accounts in those
service areas that are being closed or downsized.
97
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SCHEDULE II
RURAL/METRO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
JUNE 30,
-------------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Allowance for doubtful accounts
Balance at beginning of year ........ $ 87,752 $ 43,392 $ 69,552
Provision charged to expense ........ 102,470 160,623 81,227
Write-offs .......................... (124,993) (116,263) (107,387)
--------- --------- ---------
Balance at end of year .............. $ 65,229 $ 87,752 $ 43,392
========= ========= =========
JUNE 30,
-------------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Restructuring allowances
Balance at beginning of year ........ $ 8,132 $ 1,328 $ 5,407
Provision ........................... 9,091 34,047 2,500
Payments/usage ...................... (11,054) (27,243) (6,579)
--------- --------- ---------
Balance at end of year .............. $ 6,169 $ 8,132 $ 1,328
========= ========= =========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Cor J. Clement, Sr. 53 Chairman of the Board and Director (3)
Jack E. Brucker 49 President, Chief Executive Officer and
Director
John S. Banas III 39 Senior Vice President and General Counsel
Randall L. Harmsen 50 Vice President - Finance, Chief Accounting
Officer
Mary Anne Carpenter 56 Director (1) (4)
Louis G. Jekel 60 Vice Chairman of the Board, Secretary and
Director (3)
William C. Turner 72 Director (1) (2) (3) (4)
Henry G. Walker 54 Director (1) (3) (4)
Louis A. Witzeman 76 Director (2)
(1) Member of the Human Resource/Compensation/Organization Committee.
(2) Member of the Nominating Committee.
(3) Member of the Executive Committee.
(4) Member of the Audit Committee.
COR J. CLEMENT, SR. has served as Chairman of our Board of Directors since
August 1998 and as a member of our Board of Directors since May 1992. Mr.
Clement served as Vice Chairman of the Board of Directors from August 1994 to
August 1998. Mr. Clement served as the President and Chief Executive Officer of
NVD, an international provider of security and industrial fire protection
services headquartered in the Netherlands, from February 1980 until his
retirement in January 1997.
JACK E. BRUCKER has served as our President and Chief Executive Officer
since February 2000 and has been a member of our Board of Directors since
February 2000. Mr. Brucker served as our Senior Vice President and Chief
Operating Officer from December 1997 until February 2000. Mr. Brucker founded
and served as President of Pacific Holdings, a strategic consulting firm, from
July 1989 until December 1997. Mr. Brucker served as President of Pacific
Precision Metals, a consumer products company, from September 1987 until June
1989.
JOHN S. BANAS III has served as our Senior Vice President and General
Counsel since September 1999. Mr. Banas served as General Counsel at SpinCycle
Inc., a nationwide chain of branded coin-operated laundromats, from 1998 to
September 1999. From 1995 to 1998, he was Senior Corporate Counsel to Lam
Research Corporation in Fremont, California; and from 1992 to 1995 served as
corporate, real estate, and environmental counsel at the law firm of Wilson,
Sonsini, Goodrich & Rosati in Palo Alto, California. Mr. Banas served as
litigation counsel from 1989 to 1992 at the law firm of Thelen, Marrin, Johnson
& Bridges (now Thelen, Reid & Priest) in San Francisco, California.
99
RANDALL L. HARMSEN has served as Vice President of Finance, Chief
Accounting Officer, and Corporate Controller since July 2000. Mr. Harmsen served
as Vice President of Network Management and Chief Financial Officer for United
Healthcare of Arizona Inc. in Phoenix, Arizona, from 1997 until the time he
joined our company. From 1994 to 1997, he was Vice President of Finance for
Carondelet Health Care Corporation in Tucson, Arizona. From 1989 to 1994, Mr.
Harmsen served as Chief Financial Officer for Presbyterian Healthcare Services
in Albuquerque, New Mexico; and from 1977 to 1989, he was Chief Financial
Officer for St. Luke's Hospital in Davenport, Iowa.
MARY ANNE CARPENTER has been a member of our Board of Directors since
January 1998. Ms. Carpenter served as Executive Vice President and Executive
Committee member of First Health Group Corp., a publicly traded managed health
care company, from January 1993 until her retirement in May 2001. From October
1991 until January 1993, Ms. Carpenter served as Senior Vice President, and from
July 1986 through October 1991, as Vice President of First Health Group Corp.
Ms. Carpenter has served on panels for several other national health care
organizations.
LOUIS G. JEKEL has served as our Secretary and as a member of our Board of
Directors since 1968 and as Vice Chairman of our Board of Directors since August
1998. Mr. Jekel directs our Wildland Fire Protection Operations with the State
of Arizona and the federal government. Mr. Jekel is a partner in the law firm of
Jekel & Howard, Scottsdale, Arizona.
WILLIAM C. TURNER has been a member of our Board of Directors since
November 1993. Mr. Turner is currently Chairman and Chief Executive of Argyle
Atlantic Corporation, an international merchant banking and management
consulting firm; a trustee of the United States Council for International
Business; a trustee and past Chairman of the American Graduate School of
International Management (Thunderbird); a Board member and former Chairman of
the Board of Directors of Mercy Ships International, Incorporated; and Chairman
of the Board of Directors of WorldWide Talk. Mr. Turner is also a former United
States Ambassador and permanent representative to the Organization for Economic
Cooperation and Development.
HENRY G. WALKER has been a member of our Board of Directors since September
1997. Since April 1997, he has served as President and Chief Executive Officer
of the Sisters of Providence Health System, comprised of hospitals, long-term
care facilities, physician practices, managed care plans, and other health and
social services. From 1996 to March 1997, Mr. Walker served as President and
Chief Executive Officer of Health Partners of Arizona, a state-wide managed care
company. From 1992 to 1996, he served as President and Chief Executive Officer
of Health Partners of, a healthcare delivery system. Mr. Walker is a member of
the National Advisory Council of the Healthcare Forum, and also serves as a
director of Consolidated Catholic Healthcare a private non-profit company.
LOUIS A. WITZEMAN is the founder of our company. Mr. Witzeman has served as
a member of our Board of Directors since our formation in 1948, currently
serving as Chairman of the Board Emeritus. Mr. Witzeman served as our Chief
Executive Officer until his retirement in 1980.
100
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and officers, and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by Securities and Exchange Commission regulation to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us
during the fiscal year ended June 30, 2001, and written representations that no
other reports were required, except as set forth below, we believe that each
person who, at any time during such fiscal year, was a director, officer or
beneficial owner of more than 10% of our common stock complied with all Section
16(a) filing requirements during such fiscal year. Cor Clement, Louis Jekel,
Mary Anne Carpenter, William Turner, Henry Walker and Louis Witzeman did not
timely file Forms 5 for the fiscal year ended June 30, 2000 reporting annual
option grants under the 1992 Stock Option Plan. The late reportings were made on
Forms 5 for the fiscal year ended June 30, 2001. In addition, (i) amended Forms
5 for the fiscal years ended June 30, 1999 and June 30, 2001 were filed by Cor
Clement to correct the reported annual option grant and to disclose the
disposition of shares of common stock, respectively; and (ii) an amended Form 5
for the fiscal year ended June 30, 2001 was filed by Louis Jekel to disclose
disposition of shares of common stock. We attribute these late and amended
filings to an oversight due to errors in our internal procedures which have been
rectified. In making these disclosures, we have relied solely on written
representations of our directors and executive officers, and copies of the
reports that they have filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the total compensation received for services
rendered to us in all capacities for the fiscal years ended June 30, 1999, 2000,
and 2001 by our Chief Executive Officer and our three most highly compensated
executive officers who were in office at June 30, 2001. The table also sets
forth this information for one other executive officer who is no longer with our
company at June 30, 2001, whose aggregate cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL --------------------------------- STOCK UNDERLYING COMPENSATION
POSITION AT YEAR-END YEAR SALARY($)(1) BONUS($) AWARD(S)($) OPTIONS(#) ($)(2)
- -------------------- ---- ------------ -------- ----------- ---------- ------
Jack E. Brucker 2001 $ 447,077 $ 43,600 $ -- 200,000 $ 3,200
Chief Executive Officer 2000 $ 314,246 $ -- $ -- 21,000 $ 3,200
and President(3) 1999 $ 250,000 $ 25,000 $ 45,000(4) 39,000 $ 65,559(5)
Dr. Michel Sucher 2001 $ 201,923 $ 19,500 $ -- 75,000 $ 3,200
Former Senior Vice President and 2000 $ 184,231 $ -- $ -- 12,500 $ 3,200
Chief Medical Officer(6) 1999 $ 175,000 $ -- $ -- 21,600 $ 3,200
Robert B. Hillier 2001 $ 215,385 $ 20,000 $ -- 75,000 $ 2,008
Former Senior Vice President and 2000 $ 170,385 $ -- $ -- 12,500 $ 2,008
Chief Administrative Officer(6) 1999 $ 137,500 $ -- $ -- 21,600 $ 2,600
John S. Banas III 2001 $ 207,800 $ 18,020 $ -- 150,000 $ --
Senior Vice President and General 2000 $ 126,438 $ -- $ -- 17,500 $ --
Counsel(6)
Randall L. Harmsen (6) 2001 $ 182,577 $ -- $ -- -- $ --
Vice President of Finance 2000 $ -- $ -- $ -- 20,000 $ --
1999 $ -- $ -- $ -- -- $ --
101
- ----------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any of the officers listed.
(2) Unless otherwise indicated, consists of company-matching contributions to
our 401(k) plan paid in cash.
(3) Mr. Brucker became our President and Chief Executive Officer in February
2000. From December 1997 until February 2000, Mr. Brucker served as our
Senior Vice President and Chief Operating Officer.
(4) Represents fair market value of restricted stock grants that vested in
December 1998.
(5) We paid Mr. Brucker $62,359 in fiscal 1999 for relocation costs, including
moving expenses and closing costs on the sale of his former residence.
(6) Dr. Sucher and Mr. Hillier became executive officers of our Company during
February 2000. Mr. Hillier joined our company during October 1997. Mr.
Hillier's employment terminated in January 2001 and Dr. Sucher's employment
terminated in July 2001. Mr. Banas joined our Company in September 1999 and
Mr. Harmsen joined our Company in July 2000.
OPTION GRANTS
The following table represents the options granted to the listed officers
in the last fiscal year and the value of the options.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
GRANTED(#)(1) FISCAL YEAR ($/SH) DATE $(2)
------------- ----------- ------ ---- ----
John S. Banas III 150,000(3) 9.5% $ 1.50 8/21/10 $ 97,155
Jack E. Brucker 200,000(4) 12.6% $ 2.00 4/20/10 $ 187,995
Randall L. Harmsen 0 --% $ -- -- $ --
Robert B. Hillier 75,000(5) 4.7% $ 1.50 8/21/10 $ 48,578
Dr. Michel Sucher 75,000(6) 4.7% $ 1.50 8/21/10 $ 48,578
- ----------
(1) Except as otherwise indicated, all of the options vest and become
exercisable as follows: one-third at grant date in August 2000, one-third
in August 2001, and one-third in August 2002.
(2) The hypothetical present value of the options at the date of grant was
determined using the Black-Scholes option pricing model. The Black-Scholes
model estimates the present value of an option by considering a number of
factors, including the exercise price of the option, the volatility of our
common stock, the dividend rate, the term of the option, the time it is
expected to be outstanding, and interest rates. The Black-Scholes values
were calculated using the following assumptions: (a) a risk-free interest
rate of 4.74%; (b) a dividend yield of 0.00%; (c) an expected life of the
option after vesting of 2.35 years; and (d) an expected volatility of
72.66%.
(3) Mr. Banas' options vest and become exercisable as follows: one-third at
grant date in August 2000, one-third in August 2001, and one-third in
August 2002.
(4) Mr. Brucker's options vest and become exercisable as follows: one-fourth at
grant date in April 2000, one-fourth in April 2001, one-fourth in April
2002, and one-fourth in April 2003.
(5) Mr. Hillier resigned in January 2001, at which time 50,000 of these options
were canceled pursuant to the terms of the options.
(6) Dr. Sucher was terminated in July 2001, and all of the unvested options
will expire October 8, 2002 pursuant to the terms of his severance
agreement.
102
OPTION HOLDINGS
The following table represents certain information respecting the options
held by the listed officers as of June 30, 2001. None of the officers listed
exercised options during fiscal 2001.
FISCAL YEAR-END OPTIONS HELD
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT
FISCAL YEAR-END(#)(1)
---------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
Jack E. Brucker 174,000 107,000
John S. Banas III 63,333 104,167
Randall L. Harmsen 13,334 6,666
Robert B. Hillier 72,934 --
Dr. Michel Sucher 118,920 54,166
- ----------
(1) None of the unexercised options listed had any value at fiscal year-end,
because the exercise price of all of the options held by the listed
officers was greater than $0.90, which was the closing sales price of our
common stock as quoted on the Nasdaq SmallCap Market on June 29, 2001.
EMPLOYMENT AGREEMENTS
In February 2000, Jack E. Brucker became our President and Chief Executive
Officer. In April 2001, we entered into an employment agreement with Mr. Brucker
for a two-year term expiring April 19, 2003, renewable for one-year periods
thereafter. Under this employment agreement, he received a base salary of
$460,000. Effective July 1, 2001, we entered into a new employment agreement for
a five-year term expiring July 1, 2006, which automatically renews for one-year
periods thereafter. Under Mr. Brucker's current employment agreement, he
receives a base salary of $600,000, and participates in our stock option plans
and other generally available benefit programs. Mr. Brucker also received a
signing bonus of $200,000, 50% of which was payable to him on July 1, 2001, and
50% of which is payable by July 1, 2002. In addition, Mr. Brucker participates
in our management incentive program that provides bonuses to executive officers
and other members of management based upon our achieving certain financial and
operating goals as well as the achievement of individual objectives established
for each participant. Mr. Brucker's current employment agreement provides that
should we terminate his employment agreement without cause, should he terminate
his employment agreement for good reason, should we not renew his employment
agreement without cause, should he not renew his employment agreement for good
reason, or should we propose to modify his employment agreement in a manner
which gives him good reason to terminate the employment agreement, he will
receive his then effective base salary and other benefits provided by the
employment agreement immediately following the effective date of termination of
employment for a period equal to the greater of (i) two years, or (ii) five
years minus the number of days between July 1, 2001, and the effective date of
termination of employment. If Mr. Brucker terminates his employment agreement
without good reason (and for reasons other than health considerations), he will
not receive any severance benefits and will pay us a sum equal to the net base
salary received by him during the period equal to the greater of (i) two years
preceding termination of employment, or (ii) five years minus the number of days
between July 1, 2001 and the effective date of the termination of employment.
Under the employment agreement, Mr. Brucker has agreed not to compete
against us after the termination of the employment agreement for a period equal
to the greater of (i) two years, or (ii) five years minus the number of days
between July 1, 2001 and the effective date of the termination of employment.
Mr. Brucker may elect to shorten such non-compete period to not less than 12
months. Upon such election we will no longer be required to pay Mr. Brucker any
severance benefits. In addition, if Mr. Brucker is receiving severance benefits
under the employment agreement and he elects to solicit clients, employees, or
103
otherwise competes with us at any time after his termination of employment or
discloses confidential information, we will no longer be obligated to pay Mr.
Brucker any severance benefits.
In April 2001, we entered into an employment agreement with Mr. John Banas
to become our Senior Vice President and General Counsel for a two-year term
expiring April 23, 2003, which automatically renews for one-year periods
thereafter. Under Mr. Banas' employment agreement, he is to receive a base
salary of $240,000, and is entitled to participate in our stock option plans and
our other generally available benefit programs. Mr. Banas is also entitled to
participate in our management incentive program that provides bonuses to
executive officers and other members of management based upon our achieving
certain financial and operating goals as well as the achievement of individual
objectives established for each participant. Mr. Banas' employment agreement
provides that should we terminate his employment agreement without cause, should
he terminate his employment agreement for good reason, should we not renew his
employment agreement without cause, should he not renew his employment agreement
for good reason, or should we propose to modify his employment agreement in a
manner which gives him good reason to terminate the employment agreement, he
will receive his then effective base salary and other benefits provided by the
employment agreement immediately following the effective date of termination of
employment for a period of twenty-four months. If Mr. Banas terminates his
employment agreement without good reason, he will not receive any severance
benefits.
Under the employment agreement, Mr. Banas has agreed not to compete against
us after the termination of the employment agreement for a period of 24 months
after the effective date of the termination of employment. Mr. Banas may elect
to shorten such non-compete period to 12 months. Upon such election we will no
longer be required to pay Mr. Banas any severance benefits. In addition, if Mr.
Banas is receiving severance benefits under the employment agreement and he
elects to solicit clients, employees, or otherwise competes with us at any time
after his termination of employment or discloses confidential information, we
will no longer be obligated to pay Mr. Brucker any severance benefits.
Employment agreements with Mr. Hillier and Dr. Sucher expired in December
2000. Due to Mr. Hillier's termination on January 13, 2001 and Dr. Sucher
termination on July 12, 2001, Mr. Hillier and Dr. Sucher are entitled to receive
certain severance benefits, including base salary and other benefits provided by
the agreements for one year from the date of termination.
In addition, each of the employment agreements provides for us to indemnify
each executive for certain liabilities arising from actions taken within the
scope of employment.
Change of control agreements entered into by Messrs. Brucker, Sucher,
Hillier, and Banas provide that in the event of a change of control and the
surviving entity or individuals in control do not offer such persons employment,
terminate their employment without cause, or such persons terminate their
employment for good reason, such persons will receive a lump sum equal to (A)
150% (200% in the case of Mr. Brucker) of (i) their applicable annual base
salary, and (ii) the amount of incentive compensation paid or payable to them
during the calendar year preceding the calendar year in which the change of
control occurs, plus (B) the full amount of any payments due under such
employees employment agreement. In addition, each executive would be entitled to
receive certain benefits, including the acceleration of exercisability of their
stock options or the payment of the value of such stock options in the event
they are not accelerated or replaced with comparable options. Pursuant to the
terms of the change of control agreements, the health and other benefits
received under the change of control agreement by such executive will be reduced
or eliminated to the extent such benefits are received under the executive's
employment agreement. In addition, the change of control agreements place a
ceiling on the aggregate amount of benefits any executive may receive under the
agreement. Each executive will receive an amount equal to 2.99 times the amount
of annualized includable compensation received by the executive as determined
under the Internal Revenue Code. Any payments received under the change of
control agreement may be reduced by amounts we pay such executive under their
respective employment agreements.
For purposes of the change of control agreements, "good reason" includes a
reduction of their respective duties and/or salary or the surviving entity's
failure to assume their respective employment and change of control agreements.
For purposes of the change of control agreements, a "change of control" includes
(i) the acquisition of beneficial ownership by certain persons, acting alone or
104
in concert with others, of 30% or more of the combined voting power of our then
outstanding voting securities; (ii) during any two-year period, our Board
members at the beginning of such period cease to constitute at least a majority
thereof (except that any new Board member approved by at least two-thirds of the
Board members then still in office, who were directors at the beginning of such
period, is considered to be a member of the current Board); or (iii) approval by
our stockholders of certain reorganizations, mergers, consolidations,
liquidations, or sales of all or substantially all of our assets. Mr. Hillier's
and Dr. Sucher's change of control agreements terminated upon their termination.
During January 2000, John Furman resigned as our President and Chief
Executive Officer. Pursuant to the terms of his employment agreement, Mr. Furman
will receive a severance benefit equivalent to his then existing annual base
salary of $420,000 through January 2002. In connection with the employment
agreement, during July 1999 we granted Mr. Furman stock options to purchase
100,000 shares of our common stock. These stock options were fully vested and
exercisable on the date of grant, and will remain exercisable through January
2003. In addition, all unvested options held by Mr. Furman upon his resignation
immediately vested and will remain exercisable through January 2002.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Officers who serve on the Board of Directors receive no additional
compensation. We paid a director's fee in fiscal 2001 to Mr. Clement, our
Chairman of the Board of Directors, of $45,000 plus reimbursement for expenses
for each Board or committee meeting he attended. We pay all other non-employee
Board members, with the exception of Mr. Witzeman, an annual retainer of
$15,000. Non-employee directors, with the exception of Mr. Jekel, also receive
$1,000 for each Board meeting attended, $500 for each Board meeting participated
in telephonically, $500 for each committee meeting attended, and $250 for each
committee meeting participated in telephonically. We also pay $2,500 annually to
any non-employee chairman of each of the committees of the Board of Directors.
Under the terms of our 1992 Stock Option Plan, non-employee directors receive
(i) stock options to purchase 10,000 shares upon their first election to the
Board of Directors and options to purchase 2,500 shares at the meeting of the
Board of Directors held immediately after the annual meeting of stockholders
(except that the Chairman of the Board receives stock options to acquire 5,000
shares), and (ii) each year each non-employee Board member receives stock
options to acquire a number of shares equal to 1,000 shares for each $0.05
increase in our earnings per share over the previous fiscal year, subject to a
maximum of 5,000 shares of stock per non-employee Board member. Messrs. Jekel
and Witzeman receive compensation for consulting services, which includes
serving on the Board of Directors. See "Certain Relationships and Related
Transactions." In fiscal 2001, we granted to the following individuals options
to purchase the following shares of common stock as consideration to serve as a
director: 5,000 to Mr. Clement, and 2,500 to each of Messrs. Jekel, Turner,
Walker, Witzeman, and Ms. Carpenter. The options have an exercise price of $2.00
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 2001, our Human
Resource/Compensation/Organization Committee consisted of Messrs. Walker,
Turner, and Witzeman and Ms. Carpenter, currently directors of the Company. The
heading "Certain Relationships and Related Transactions" below also describes
certain other relationships and transactions with current or former board
members.
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND OFFICERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on October 29, 2001 by (i) each
director; (ii) the executive officers set forth in the Summary Compensation
Table under the section entitled "Executive Compensation;" (iii) all of our
directors and executive officers as a group; and (iv) each person known by us to
be the beneficial owner of more than 5% of our common stock.
105
AMOUNT
BENEFICIALLY
OWNED
NAME OF BENEFICIAL OWNER (1)(2)(3) PERCENT(2)
- ------------------------ ----------- ----------
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Jack E. Brucker 306,000 (4) 2.0
John S. Banas III 131,979 (4) *
Mary Anne Carpenter 22,500 (4) *
Cor J. Clement, Sr. 38,250 (4) *
Randall L. Harmsen. 24,445 (4) *
Robert B. Hillier 72,934 (4) *
Louis G. Jekel 134,963 (5) *
Dr. Michel Sucher 153,005 (4) 1.0
William C. Turner 38,000 (4) *
Henry G. Walker 25,500 (4) *
Louis A. Witzeman 140,273 (6) *
Executive officers and directors as a group (9
persons) 861,410 5.5
5% STOCKHOLDERS:
ESOP 816,617 (7) 5.4
Ernst Matthijs Hendrik Van der Lee, Ernst-Willem
Van der Lee, Nicolaas P. Monteban, Mark J.
Rosman, Mark S. Howells and Bruce W. Derrick 2,057,923 (8) 13.6
- ----------
* Less than 1%
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) The percentages shown are calculated based upon 15,100,180 shares of common
stock outstanding on October 29, 2001. The number and percentages shown
include the shares of common stock actually owned as of October 29, 2001
and the shares of common stock that the identified person or group had a
right to acquire within 60 days after October 29, 2001. In calculating the
percentage of ownership, shares are deemed to be outstanding for the
purpose of computing the percentage of shares of common stock owned by such
person, but are not deemed to be outstanding for the purpose of computing
the percentage of shares of common stock owned by any other stockholders.
(3) Excludes the following fully vested shares of common stock held by the ESOP
for the benefit of the following individuals: four shares for Mr. Brucker
and 1,097 shares for Dr. Sucher. These persons have sole voting power with
respect to the shares held in their account by the ESOP.
(4) Represents shares of common stock issuable upon exercise of stock options
with respect to the following persons: Mr. Brucker, 306,000 shares; Mr.
Banas, 117,500 shares; Ms. Carpenter, 20,000 shares; Mr. Clement, 21,250
shares; Mr. Harmsen, 13,334 shares; Mr. Hillier, 72,934 shares; Dr. Sucher,
118,920 shares; Mr. Turner, 27,500 shares; and Mr. Walker, 22,500 shares.
(5) Includes 52,500 shares of common stock issuable upon exercise of stock
options; 3,175 shares held by the Louis G. Jekel Charitable Remainder Trust
UA dated March 1, 1996; 5,664 shares held by an IRA for the benefit of Mr.
Jekel; and 71,124 shares held by a partnership of which Mr. Jekel is the
beneficial owner.
(6) Includes 85,273 shares held by the Louis A. Witzeman, Jr. Family Investment
Limited Partnership, of which 6,650 shares are held for the benefit of
other family members. Also includes 52,500 shares of common stock issuable
upon the exercise of stock options.
106
(7) Represents 816,617 shares of common stock owned by the Rural/Metro
Corporation Employee Stock Ownership Plan. Participants under the ESOP have
voting power as to shares allocated to their account and the ESOP trustee
has voting power as to unallocated shares and as to any shares for which
participants have chosen not to vote. The ESOP has sole dispositive power
over all of these shares of common stock. The address of the Rural/Metro
Corporation Employee Stock Ownership Plan is c/o Rural/Metro Corporation,
8401 East Indian School Road, Scottsdale, Arizona 85251.
(8) Represents 2,057,923 shares of common stock beneficially owned by a group
consisting of Ernst Matthijs Hendrik Van der Lee, Ernst-Willem Van der Lee,
Nicolaas P. Monteban, Mark J. Rosman, Mark S. Howells and Bruce W. Derrick.
Messrs. Van der Lee, Van der Lee, Monteban, Rosman, Howells and Derrick
have sole voting and dispositive power of all of such shares. The address
of Messrs. Van der Lee, Van der Lee, Monteban, Rosman, Howells and Derrick
is c/o P. Robert Moya, Esq., Quarles & Brady Streich Lang, Two North
Central Avenue, Phoenix, Arizona 85004. Information is based solely on the
group's Schedule 13D/A filed with the Securities and Exchange Commission
dated August 24, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We paid approximately $130,000 during the year ended June 30, 2001 for
legal services to Jekel & Howard, of which Mr. Jekel, a member of our Board of
Directors, is a principal. Mr. Jekel is a participant in our ESOP. We paid Mr.
Jekel $30,000 during the year ended June 30, 2001 for additional services
rendered in connection with our forestry fire fighting services.
We paid approximately $46,000 during the year ended June 30, 2001 to Louis
A. Witzeman, a member of our Board of Directors, under leases for five fire and
ambulance stations. These leases may be cancelled by us at any time. Mr.
Witzeman received $98,000 during the fiscal year ended June 30, 2001 for fire
protection and EMS advisory and consulting services and for serving on the Board
of Directors. We also provide Mr. Witzeman with an automobile for personal use.
We believe that all of the related party transactions listed above were
provided on terms no less favorable to us than could have been obtained from
unrelated firms or third parties. All future transactions between us and our
officers, directors, and principal stockholders are expected to be on terms no
less favorable to us than could be obtained from unaffiliated persons and will
require the approval of our independent directors.
107
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
PAGE
----
(i) Financial Statements
(1) Report of Independent Public Accountants..................48
(2) Consolidated Financial Statements Consolidated Balance
Sheets at June 30, 2001 and 2000..........................49
Consolidated Statements of Operations for the Years
Ended June 30, 2001, 2000, and 1999.......................50
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 2001, 2000, and 1999..51
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2001, 2000, and 1999.......................52
Consolidated Statements of Comprehensive Income (Loss)
for the Years Ended June 30, 2001, 2000 and 1999..........53
Notes to Consolidated Financial Statements................54
(ii) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts.............87
All other schedules have been omitted on the basis of
immateriality or because such schedules are not
otherwise applicable
(iii) Exhibits
See index to exhibits below.
(b) Reports on Form 8-K:
We filed the following report on Form 8-K during the quarter ended
June 30, 2001:
Report on Form 8-K filed with the Commission on April 16, 2001
relating to the Fifth Amendment to the Provisional Waiver and
Standstill Agreement dated as of April 23, 2001.
(c) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
2 Plan and Agreement of Merger and Reorganization, dated as of April 26,
1993(1)
3.1(a) Second Restated Certificate of Incorporation of the Registrant filed
with the Secretary of State of Delaware on January 18, 1995(6)
3.1(b) Rights Agreement dated as of August 23, 1995 between the Registrant and
American Securities Transfer, Inc., the Rights Agent(7)
3.2 Amended and Restated Bylaws of the Registrant(1)
108
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
4.1 Specimen Certificate representing shares of Common Stock, par value
$.01 per share(1)
4.2 Indenture dated as of March 16, 1998, by and among the Company, the
subsidiaries acting as Guarantors thereto, and the First National Bank
of Chicago, as Trustee(12)
4.3 Form of Global Note (included in Exhibit 4.2)(12)
4.4 Registration Rights Agreement dated March 11, 1998, by and among Bear
Stearns & Co. Inc., Salomon Brothers Inc, SBC Warburg Dillon Reed Inc.,
First Union Capital Markets, the Company, and certain subsidiaries of
the Company, as Guarantors(12)
10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted August 10, 1989,
as amended(1)
10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of Registrant,
dated February 4, 1994(2)
10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated August 25,
1994(3)
10.4 Form of Stock Option Agreement pursuant to 1989 Employee Stock Option
Plan of Registrant(1)
10.5 Amended and Restated 1992 Stock Option Plan of Registrant, amended
through October 15, 1998(15)
10.6 Forms of Stock Option Agreements pursuant to the Amended and Restated
1992 Stock Option Plan of Registrant(15)
10.7 2000 Non-Qualified Stock Option Plan, adopted August 11, 2000(25)
10.15 Forms of Conditional Stock Grant and Repurchase Agreements by and
between Registrant and each of its executive officers and directors,
dated May 14, 1993, November 1, 1994, and December 1, 1997(1)
10.16(a) Form of Employment Agreement by and between Registrant and Mark E.
Liebner, effective January 1, 1998(14)
10.16(c) Form of Change of Control Agreement by and between Mark E. Liebner
dated March 4, 1998(14)
10.16(d) Form of Change of Control Agreement by and between the Registrant and
the following executive officers: (i) Jack E. Brucker, dated November
24, 1997, (ii) R. Bruce Hillier, effective October 28, 1997, (iii) Dr.
Michel A. Sucher, effective December 1, 1995, and (iv) John S. Banas
III, effective March 10, 2000(14)
10.16(f) Employment Agreement by and between Registrant and Robert E. Ramsey
Jr., dated June 30, 1997(9)
10.16(g) Employment Agreement by and between Registrant and John B. Furman
effective July 29, 1999(17)
10.16(h) Change of Control Agreement by and between Registrant and John B.
Furman, effective November 1, 1999(17)
10.16(i) Severance Agreement by and between Warren S. Rustand and Registrant
effective August 24, 1998(14)
109
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
10.16(j) Consulting Agreement by and between James H. Bolin and Registrant
effective January 1, 1998(14)
10.16(k) Separation Agreement and Release by and between Registrant and Robert
T. Edwards effective December 31, 1998(16)
10.16(l) Employment Agreement by and between the Registrant and Jack E. Brucker,
effective April 19, 2001(24)
10.16(m) Form of Employment Agreement by and between the Registrant and each of
the following executive officers: (i) Dr. Michel A. Sucher, effective
November 7, 1997, and (ii) R. Bruce Hillier, effective October 20,
1997(18)
10.16(n) Employment Agreement by and between the Registrant and John S. Banas
III, effective April 23, 2001(24)
10.17 Form of Indemnity Agreement by and between Registrant and each of its
officers and directors, dated in April, May, August and November 1993,
as of October 13, 1994, and as of September 25, 1998(1)
10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust of the
Registrant, effective July 1, 1997(15)
10.21 Retirement Savings Value Plan 401(k) of Registrant, as amended, dated
July 1, 1990(1)
10.22 Master Lease Agreement by and between Plazamerica, Inc. and the
Registrant, dated January 30, 1990(1)
10.36 Employee Stock Purchase Plan, as amended through November 20, 1997(14)
10.37(a) Loan and Security Agreement by and among the CIT Group/Equipment
Financing, Inc. and the Registrant, together with its subsidiaries,
dated December 28, 1994, and related Promissory Note and Guaranty
Agreement(3)
10.37(b) Form of Loan and Security Agreement by and among Registrant and CIT
Group/Equipment Financing, Inc. first dated February 25, 1998 and
related form of Guaranty and Schedule of Indebtedness and
Collateral(14)
10.45 Amended and Restated Credit Agreement dated as of March 16, 1998, by
and among the Company as borrower, certain of its subsidiaries as
Guarantors, the lenders referred to therein, and First Union National
Bank, as agent and as lender, and related Form of Amended and Restated
Revolving Credit Note, Form of Subsidiary Guarantee Agreement, and Form
of Intercompany Subordination Agreement(13)
10.49 Agreement of Purchase and Sale between Rural/Metro Corporation and
Robert E. Ramsey, Jr. and Barry Landon, as trustee of the Employee
Stock Ownership Plan for the benefit of the Company's employees, with
respect to the stock of SW General, Inc., as amended(8)
10.50 Agreement of Purchase and Sale between Rural/Metro Corporation and
Robert E. Ramsey, Jr. with respect to the stock of Southwest Ambulance
of Casa Grande, Inc., as amended(8)
10.51 Agreement of Purchase and Sale between Rural/Metro Corporation and
Robert E. Ramsey, Jr., Patrick McGroder, Barry Landon and Gary Ramsey,
the vendors, with respect to the stock of Southwest General Services,
Inc., as amended(8)
110
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
10.52 Agreement of Purchase and Sale between Rural/Metro Corporation and
Robert E. Ramsey, Jr., with respect to Medical Emergency Devices and
Services, Inc., as amended(8)
10.54 Purchase Agreement dated January 16, 1998 and Complementary Agreement
dated March 26, 1998 between Rural/Metro Corporation and Messrs.
Horacio Artagaueytia, Jose Mateo Campomar, Alberto Fluerquin, Carlos
Mezzera, Renato Ribeiro, Gervasio Reyes, and Carlos Arturo Delmiro
Marfetan with respect to the stock of Peimu S.A., Recor S.A., Marlon
S.A., and Semercor S.A(11)
10.55 Provisional Waiver and Standstill Agreement dated as of March 14,
2000(19)
10.56 First Amendment to Provisional Waiver and Standstill Agreement dated as
of April 13, 2000(19)
10.57 Second Amendment to Provisional Waiver and Standstill Agreement dated
as of July 14, 2000(20)
10.58 Press Release dated as of October 18, 2000(21)
10.59 Third Amendment to Provisional Waiver and Standstill Agreement dated as
of October 16, 2000(21)
10.60 Fourth Amendment to Provisional Waiver and Standstill Agreement dated
as of January 31, 2001(22)
10.61 Fifth Amendment to Provisional Waiver and Standstill Agreement dated as
of April 23, 2001(23)
10.62 Sixth Amendment to Provisional Waiver and Standstill Agreement dated as
of August 1, 2001 (26)
21 Subsidiaries of Registrant*
23 Consent of Arthur Andersen LLP*
- ----------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-63448) filed May 27, 1993 and declared
effective July 15, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-76458) filed March 15, 1994 and declared
effective May 5, 1994.
(3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about May 12, 1995.
(4) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 7, 1995, as amended by the
Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and
August 1, 1995.
(5) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about May 19, 1995.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-88172) filed with the Commission on December
30, 1994 and declared effective January 19, 1995.
(7) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about August 28, 1995.
111
(8) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about July 15, 1997, as amended by the
Registrant's Form 8-K/A Current Report filed with Commission on or about
August 12, 1997.
(9) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1997.
(10) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 17, 1998.
(11) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 1, 1998, as amended by the
Registrant's Form 8-K/A Current Report filed on or about June 5, 1998.
(12) Incorporated by reference to the Registration Statement on Form S-4 of the
Registrant (Registration No. 333-51455) filed April 30, 1998 and declared
effective on May 14, 1998.
(13) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 of the Registrant (Registration No. 333-51455) filed May
11,1998 and declared effective on May 14, 1998.
(14) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1998.
(15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 10, 1998.
(16) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 11, 1999.
(17) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 15, 1999.
(18) Incorporated by reference to the Registrant's Form 10-K Annual Report for
the year ended June 30, 1996 filed with the Commission on or about
September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)).
(19) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on April 14, 2000.
(20) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on July 28, 2000.
(21) Incorporated by reference to the Registrant's Form 10-Q Current Report
filed with the Commission on October 16, 2000.
(22) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on February 2, 2001.
(23) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on May 2, 2001.
(24) Incorporated by reference to the Registrant's Form 10-Q filed with the
Commission on May 15, 2001.
(25) Incorporated by reference to the Registrant's Form S-8 Registration
Statement filed with the Commission on May 21, 2001.
(26) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on August 9, 2001.
112
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURAL/METRO CORPORATION
April 30, 2002 By: /s/ JACK E. BRUCKER
-------------------------------------
Jack E. Brucker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ COR J. CLEMENT Chairman of the Board of Directors April 30, 2002
- ------------------------
Cor J. Clement
/s/ LOUIS G. JEKEL Vice Chairman of the April 30, 2002
- ------------------------ Board of Directors
Louis G. Jekel
/s/ JACK E. BRUCKER President, Chief Executive April 30, 2002
- ------------------------ Officer and Director
Jack E. Brucker (Principal Executive Officer)
/s/ RANDALL L. HARMSEN Vice President of Finance April 30, 2002
- ------------------------ (Principal Financial Officer and
Randall L. Harmsen Principal Accounting Officer)
/s/ MARY ANNE CARPENTER Director April 30, 2002
- ------------------------
Mary Anne Carpenter
/s/ WILLIAM C. TURNER Director April 30, 2002
- ------------------------
William C. Turner
/s/ HENRY G. WALKER Director April 30, 2002
- ------------------------
Henry G. Walker
/s/ LOUIS A. WITZEMAN Director April 30, 2002
- ------------------------
Louis A. Witzeman
113