SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At May 9, 2002, there were 15,459,588 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2002
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income (Loss) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Part II. Other Information
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND JUNE 30, 2001
(IN THOUSANDS)
MARCH 31, JUNE 30,
2002 2001
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 5,905 $ 8,699
Accounts receivable, net 99,862 103,260
Inventories 13,058 13,173
Prepaid expenses and other 4,818 5,248
--------- ---------
Total current assets 123,643 130,380
PROPERTY AND EQUIPMENT, net 49,787 57,999
INTANGIBLE ASSETS, net 92,355 92,424
OTHER ASSETS 16,952 17,787
--------- ---------
$ 282,737 $ 298,590
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 8,205 $ 12,915
Accrued liabilities 74,914 96,507
Current portion of long-term debt 293,397 294,439
--------- ---------
Total current liabilities 376,516 403,861
LONG-TERM DEBT, net of current portion 4,571 1,286
NON-REFUNDABLE SUBSCRIPTION INCOME 15,010 14,707
OTHER LIABILITIES 784 883
--------- ---------
Total liabilities 396,881 420,737
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 379 8,379
--------- ---------
STOCKHOLDERS' DEFICIT
Common stock 157 152
Additional paid-in capital 138,212 137,948
Accumulated deficit (261,057) (267,401)
Accumulated other comprehensive income 9,404 14
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' deficit (114,523) (130,526)
--------- ---------
$ 282,737 $ 298,590
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUE
Ambulance services $ 100,054 $ 101,923 $ 298,488 $ 303,867
Fire protection services 16,066 15,364 47,825 46,228
Other 8,541 9,435 27,774 30,074
--------- --------- --------- ---------
Total revenue 124,661 126,722 374,087 380,169
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits 68,266 76,080 216,073 220,056
Provision for doubtful accounts 18,147 19,089 51,662 67,526
Depreciation 3,936 5,336 12,181 16,463
Amortization of intangibles (10) 1,815 69 5,553
Other operating expenses 23,485 40,436 70,348 91,972
Contract loss costs and impairment -- -- -- 5,190
--------- --------- --------- ---------
Total expenses 113,824 142,756 350,333 406,760
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 10,837 (16,034) 23,754 (26,591)
Interest expense, net 6,273 7,592 18,819 23,295
Other -- (474) (9) (1,297)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 4,564 (23,152) 4,944 (48,589)
Income tax provision (benefit) 200 494 (1,400) 716
--------- --------- --------- ---------
NET INCOME (LOSS) $ 4,364 $ (23,646) $ 6,344 $ (49,305)
========= ========= ========= =========
INCOME (LOSS) PER SHARE
BASIC INCOME (LOSS) PER SHARE $ 0.29 $ (1.60) $ 0.42 $ (3.36)
========= ========= ========= =========
DILUTED INCOME (LOSS) PER SHARE $ 0.28 $ (1.60) $ 0.41 $ (3.36)
========= ========= ========= =========
AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 15,120 14,805 15,084 14,692
========= ========= ========= =========
AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 15,626 14,805 15,331 14,692
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2002 2001
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 6,344 $(49,305)
Adjustments to reconcile net income (loss) to cash
provided by operations--
Write-off of goodwill impaired with termination of contract -- 4,287
Depreciation and amortization 12,250 22,016
Amortization of gain on sale of real estate -- (78)
Gain on sale of property and equipment (294) (387)
Provision for doubtful accounts 51,662 67,526
Undistributed losses of minority shareholders (9) (1,297)
Amortization of discount on Senior Notes 19 19
Change in assets and liabilities ---
Increase in accounts receivable (50,313) (47,752)
(Increase) decrease in inventories 106 (2,522)
Decrease in prepaid expenses and other 142 776
(Increase) decrease in other assets (3,091) 2,441
Increase (decrease) in accounts payable (1,666) 894
Increase (decrease) in accrued liabilities and other liabilities (11,287) 5,041
Increase in nonrefundable subscription income 303 802
-------- --------
Net cash provided by operating activities 4,166 2,461
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (4,462) (4,551)
Proceeds from the sale of property and equipment 986 1,865
(Increase) decrease in other assets (614) 70
-------- --------
Net cash used in investing activities (4,090) (2,616)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (1,263) (2,471)
Repayments of other debt and capital lease obligations (1,470) (2,018)
Issuance of common stock 269 348
-------- --------
Net cash used in financing activities (2,464) (4,141)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH (406) 264
-------- --------
DECREASE IN CASH (2,794) (4,032)
CASH, beginning of period 8,699 10,287
-------- --------
CASH, end of period $ 5,905 $ 6,255
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET INCOME (LOSS) $ 4,364 $(23,646) $ 6,344 $(49,305)
Foreign currency translation adjustments 5,186 263 9,390 264
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 9,550 $(23,383) $ 15,734 $(49,041)
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for the
three and nine-month periods ended March 31, 2002 and 2001 include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the consolidated financial position and results of
operations. The results of operations for the three and nine-month periods
ended March 31, 2002 and 2001 are not necessarily indicative of the results
of operations for the full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2001. Certain financial information for prior periods has been
reclassified to conform to the current presentation.
(2) GOING CONCERN
Although the Company generated net income of approximately $6.3 million for
the nine months ended March 31, 2002, it incurred net losses of
approximately $226.7 million and $101.3 million for the fiscal years ended
June 30, 2001 and 2000, respectively. Additionally, at March 31, 2002, the
Company had a net working capital deficit of $252.9 million (primarily as a
result of the classification as current liabilities of amounts outstanding
under its revolving credit facility and 7 7/8% Senior Notes due 2008) as
well as a stockholders' deficit of $114.5 million. As described in Note 3,
the Company operated under a waiver of financial covenant compliance
relating to its revolving credit facility from December 31, 1999 through
April 1, 2002.
Despite the significant losses experienced in fiscal 2001 and 2000, the
Company has been able to fund its operating and capital needs internally
since March 2000. The Company believes that its current business model will
generate sufficient cash flows to provide a basis for a new long-term
financing agreement with its lenders or to restructure its debt. A new
long-term agreement would likely have terms different from those contained
in the Company's existing debt agreements, including potentially higher
interest rates, which could materially affect the Company's results of
operations and cash flows. Further, any new long-term agreement may involve
the conversion of all or a portion of the Company's debt to equity or
similar transactions that could result in material and substantial dilution
to existing stockholders.
The Company's ability to continue as a going concern depends on the
continued success of its current business model as well as its ability to
restructure its debt. Although there can be no assurance, the Company
believes that it will be successful in sustaining profitable operations and
restructuring its debt. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
7
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM DEBT
The Company's long-term debt consists of the following at March 31, 2002
and June 30, 2001 (in thousands):
MARCH 31, JUNE 30,
2002 2001
--------- ---------
7 7/8% Senior Notes due 2008, net of discount of
$154 and $173, respectively $ 149,846 $ 149,827
Revolving credit facility 141,779 143,042
Note payable (See Note 4) 4,832 --
Capital lease obligations and other notes payable, at varying rates
from 3.8% to 12.75%, due through 2006 1,511 2,856
--------- ---------
297,968 295,725
Less: Current portion (293,397) (294,439)
--------- ---------
$ 4,571 $ 1,286
========= =========
The Company is not in compliance with the financial covenants contained in
the agreement relating to its revolving credit facility, as amended. The
Company has received a compliance waiver, as amended, (the "waiver")
covering periods from December 31, 1999 through April 1, 2002. The Company
is in negotiation with its lenders to either extend the waiver or
restructure the revolving credit facility. The waiver covered the
representations and warranties relating to no material adverse changes as
well as the lack of compliance with the following financial covenants:
total debt leverage ratio, total debt to total capitalization ratio and
fixed charge coverage ratio. The waiver stipulated that no additional
borrowings would be available to the Company through the end of the waiver
period and required the Company to: (i) engage certain financial advisors;
(ii) meet certain benchmarks for projected cash balances and expenditures;
(iii) maintain positive consolidated operating income net of restructuring
charges; (iv) pay reasonable fees and expenses related to the professionals
employed on behalf of the Steering Committee, as defined in the waiver;
and, (v) reduce the outstanding balance on the revolving credit facility
upon the occurrence of certain events such as the sale of certain assets.
During certain periods covered by the waiver, the Company was not in
compliance with the requirement that it maintain positive consolidated net
operating income net of restructuring charges. As the Company's 7 7/8%
Senior Notes due 2008 (the "Senior Notes") contain a cross-default
provision, the balances outstanding on both the revolving credit facility
and Senior Notes have been classified as current liabilities in the
Company's consolidated balance sheets as of March 31, 2002 and June 30,
2001.
In connection with the waiver, the Company supported the formation of a
Steering Committee comprised of bank lenders and Senior Note holders to
further explore debt-restructuring opportunities. As part of this support,
the Company funded the Steering Committee's advisors for a period of time.
The obligation to fund these advisor fees has been satisfied and
discontinued. The Company intends to continue discussions and to negotiate
with its bank lenders and Senior Note holders in an effort to reduce the
Company's debt under both the revolving credit facility and the Senior
Notes, so as to further improve its liquidity and long-term financial
flexibility. The Company intends to consider all appropriate strategies to
achieve these objectives.
8
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Any restructuring or amendment may involve the conversion of all or a
portion of the Company's debt to equity or other similar transactions that
could result in material and substantial dilution to existing stockholders.
Such restructuring or amendment could also include material changes in the
underlying interest rates or other terms of the revolving credit facility
and Senior Notes. There can be no assurance that the Company can accomplish
a restructuring of its debt on terms acceptable to the Company, or at all.
The Company's inability to successfully negotiate a long-term agreement
with its lenders could have a material adverse effect on the business,
financial condition, cash flows, and results of operations of the Company.
Borrowings under the revolving credit facility bear interest at prime plus
.25% payable monthly. Additional interest accrued at an annual rate of 2.0%
during the waiver period. The Company continues to accrue the additional
interest.
Effective May 1, 2002 a letter of credit in the amount of $2.6 million was
drawn on the lender bank, increasing amounts outstanding under the
revolving credit facility to $144.4 million and reducing the letters of
credit issued on the Company's behalf to $3.6 million. The letters of
credit mature at various times during the year and are generally renewable
on an annual basis.
In March 1998, the Company issued $150.0 million of its Senior Notes which
are general unsecured obligations of the Company and are unconditionally
guaranteed on a joint and several basis by substantially all of the
Company's domestic wholly-owned subsidiaries. The consolidating financial
statements presented below include Rural/Metro Corporation (the Parent),
the guarantor subsidiaries (the Guarantors) and the subsidiaries which are
not guarantors (the Non-Guarantors). The Company has not presented separate
financial statements and related disclosures for each of the Guarantor
subsidiaries because the Company believes such information would not be
material to investors making an investment decision.
9
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 5,452 $ 453 $ -- $ 5,905
Accounts receivable, net -- 92,647 7,215 -- 99,862
Inventories -- 13,016 42 -- 13,058
Prepaid expenses and other 583 4,039 196 -- 4,818
--------- --------- --------- --------- ---------
Total current assets 583 115,154 7,906 -- 123,643
PROPERTY AND EQUIPMENT, net -- 49,436 351 -- 49,787
INTANGIBLE ASSETS, net -- 86,541 5,814 -- 92,355
DUE FROM (TO) AFFILIATES 267,371 (211,014) (56,357) -- --
OTHER ASSETS 2,675 13,341 936 -- 16,952
INVESTMENTS IN SUBSIDIARIES (87,007) -- -- 87,007 --
--------- --------- --------- --------- ---------
$ 183,622 $ 53,458 $ (41,350) $ 87,007 $ 282,737
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ -- $ 6,179 $ 2,026 $ -- $ 8,205
Accrued liabilities 6,520 65,362 3,032 -- 74,914
Current portion of long-term debt 291,625 1,712 60 -- 293,397
--------- --------- --------- --------- ---------
Total current liabilities 298,145 73,253 5,118 -- 376,516
LONG-TERM DEBT, net of current portion -- 4,571 -- -- 4,571
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,993 17 -- 15,010
OTHER LIABILITIES -- 784 -- -- 784
DEFERRED INCOME TAXES -- 1,164 (1,164) -- --
--------- --------- --------- --------- ---------
Total liabilities 298,145 94,765 3,971 -- 396,881
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 379 379
--------- --------- --------- --------- ---------
STOCKHOLDERS' DEFICIT
Common stock 157 82 17 (99) 157
Additional paid-in capital 138,212 54,622 34,942 (89,564) 138,212
Accumulated deficit (261,057) (96,011) (89,684) 185,695 (261,057)
Accumulated other comprehensive income 9,404 -- 9,404 (9,404) 9,404
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' deficit (114,523) (41,307) (45,321) 86,628 (114,523)
--------- --------- --------- --------- ---------
$ 183,622 $ 53,458 $ (41,350) $ 87,007 $ 282,737
========= ========= ========= ========= =========
10
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 6,763 $ 1,936 $ -- $ 8,699
Accounts receivable, net -- 93,471 9,789 -- 103,260
Inventories -- 13,093 80 -- 13,173
Prepaid expenses and other 531 4,376 341 -- 5,248
--------- --------- --------- --------- ---------
Total current assets 531 117,703 12,146 -- 130,380
PROPERTY AND EQUIPMENT, net -- 57,271 728 -- 57,999
INTANGIBLE ASSETS, net -- 86,573 5,851 -- 92,424
DUE FROM (TO) AFFILIATES 294,729 (235,817) (58,912) -- --
OTHER ASSETS 2,356 13,064 2,367 -- 17,787
INVESTMENTS IN SUBSIDIARIES (127,702) -- -- 127,702 --
--------- --------- --------- --------- ---------
$ 169,914 $ 38,794 $ (37,820) $ 127,702 $ 298,590
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ -- $ 9,478 $ 3,437 $ -- $ 12,915
Accrued liabilities 7,571 73,236 15,700 -- 96,507
Current portion of long-term debt 292,869 1,315 255 -- 294,439
--------- --------- --------- --------- ---------
Total current liabilities 300,440 84,029 19,392 -- 403,861
LONG-TERM DEBT, net of current portion -- 1,272 14 -- 1,286
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,707 -- -- 14,707
DEFERRED INCOME TAXES -- 1,164 (1,164) -- --
OTHER LIABILITIES -- 883 -- -- 883
--------- --------- --------- --------- ---------
Total liabilities 300,440 102,055 18,242 -- 420,737
--------- --------- --------- --------- ---------
MINORITY INTERESTS -- -- -- 8,379 8,379
--------- --------- --------- --------- ---------
STOCKHOLDERS' DEFICIT
Common stock 152 82 17 (99) 152
Additional paid-in capital 137,948 54,622 34,942 (89,564) 137,948
Accumulated deficit (267,401) (117,965) (91,035) 209,000 (267,401)
Accumulated other comprehensive income 14 -- 14 (14) 14
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' deficit (130,526) (63,261) (56,062) 119,323 (130,526)
--------- --------- --------- --------- ---------
$ 169,914 $ 38,794 $ (37,820) $ 127,702 $ 298,590
========= ========= ========= ========= =========
11
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 93,595 $ 6,459 $ -- $ 100,054
Fire protection services -- 15,761 305 -- 16,066
Other -- 8,469 72 -- 8,541
--------- --------- --------- --------- ---------
Total revenue -- 117,825 6,836 -- 124,661
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 63,557 4,709 -- 68,266
Provision for doubtful accounts -- 17,970 177 -- 18,147
Depreciation -- 3,753 183 -- 3,936
Amortization of intangibles -- (22) 12 -- (10)
Other operating expenses -- 22,059 1,426 -- 23,485
--------- --------- --------- --------- ---------
Total expenses -- 107,317 6,507 -- 113,824
--------- --------- --------- --------- ---------
OPERATING INCOME -- 10,508 329 -- 10,837
Interest expense, net 5,105 904 264 -- 6,273
Other -- -- -- -- --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EQUITY IN INCOME (5,105) 9,604 65 -- 4,564
Income tax provision -- 200 -- -- 200
--------- --------- --------- --------- ---------
(5,105) 9,404 65 -- 4,364
EQUITY IN INCOME OF SUBSIDIARIES 9,469 -- -- (9,469) --
--------- --------- --------- --------- ---------
NET INCOME $ 4,364 $ 9,404 $ 65 $ (9,469) $ 4,364
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 5,186 -- 5,186
Comprehensive income of
wholly-owned subsidiaries 5,186 -- -- (5,186) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME $ 9,550 $ 9,404 $ 5,251 $ (14,655) $ 9,550
========= ========= ========= ========= =========
12
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 89,072 $ 12,851 $ -- $ 101,923
Fire protection services -- 15,071 293 -- 15,364
Other -- 8,488 947 -- 9,435
--------- --------- --------- --------- ---------
Total revenue -- 112,631 14,091 -- 126,722
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 66,617 9,463 -- 76,080
Provision for doubtful accounts -- 18,008 1,081 -- 19,089
Depreciation -- 4,712 624 -- 5,336
Amortization of intangibles -- 1,269 546 -- 1,815
Other operating expenses -- 36,828 3,608 -- 40,436
--------- --------- --------- --------- ---------
Total expenses -- 127,434 15,322 -- 142,756
--------- --------- --------- --------- ---------
OPERATING LOSS -- (14,803) (1,231) -- (16,034)
Interest expense, net 7,164 344 84 -- 7,592
Other -- -- -- (474) (474)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EQUITY IN LOSSES (7,164) (15,147) (1,315) 474 (23,152)
Income tax provision -- 313 181 -- 494
--------- --------- --------- --------- ---------
(7,164) (15,460) (1,496) 474 (23,646)
EQUITY IN LOSSES OF SUBSIDIARIES (16,482) -- -- 16,482 --
--------- --------- --------- --------- ---------
NET LOSS $ (23,646) $ (15,460) $ (1,496) $ 16,956 $ (23,646)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 263 -- 263
Comprehensive income of
wholly-owned subsidiaries 263 -- -- (263) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS $ (23,383) $ (15,460) $ (1,233) $ 16,693 $ (23,383)
========= ========= ========= ========= =========
13
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 269,112 $ 29,376 $ -- $ 298,488
Fire protection services -- 46,679 1,146 -- 47,825
Other -- 27,044 730 -- 27,774
--------- --------- --------- --------- ---------
Total revenue -- 342,835 31,252 -- 374,087
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 193,850 22,223 -- 216,073
Provision for doubtful accounts -- 50,813 849 -- 51,662
Depreciation -- 11,500 681 -- 12,181
Amortization of intangibles -- 33 36 -- 69
Other operating expenses -- 65,108 5,240 -- 70,348
--------- --------- --------- --------- ---------
Total expenses -- 321,304 29,029 -- 350,333
--------- --------- --------- --------- ---------
OPERATING INCOME -- 21,531 2,223 -- 23,754
Interest expense, net 16,970 982 867 -- 18,819
Other -- -- -- (9) (9)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EQUITY IN INCOME (16,970) 20,549 1,356 9 4,944
Income tax provision (benefit) -- (1,405) 5 -- (1,400)
--------- --------- --------- --------- ---------
(16,970) 21,954 1,351 9 6,344
EQUITY IN INCOME OF SUBSIDIARIES 23,314 -- -- (23,314) --
--------- --------- --------- --------- ---------
NET INCOME $ 6,344 $ 21,954 $ 1,351 $ (23,305) $ 6,344
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 9,390 -- 9,390
Comprehensive income of
wholly-owned subsidiaries 9,390 -- -- (9,390) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME $ 15,734 $ 21,954 $ 10,741 $ (32,695) $ 15,734
========= ========= ========= ========= =========
14
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
REVENUE
Ambulance services $ -- $ 262,663 $ 41,204 $ -- $ 303,867
Fire protection services -- 45,371 857 -- 46,228
Other -- 26,474 3,600 -- 30,074
--------- --------- --------- --------- ---------
Total revenue -- 334,508 45,661 -- 380,169
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 189,316 30,740 -- 220,056
Provision for doubtful accounts -- 64,297 3,229 -- 67,526
Depreciation -- 14,548 1,915 -- 16,463
Amortization of intangibles -- 3,800 1,753 -- 5,553
Other operating expenses -- 80,014 11,958 -- 91,972
Contract termination costs
and related asset impairment -- 5,190 -- -- 5,190
--------- --------- --------- --------- ---------
Total expenses -- 357,165 49,595 -- 406,760
--------- --------- --------- --------- ---------
OPERATING LOSS -- (22,657) (3,934) -- (26,591)
Interest expense, net 22,283 262 750 -- 23,295
Other -- -- -- (1,297) (1,297)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EQUITY IN LOSSES (22,283) (22,919) (4,684) 1,297 (48,589)
Income tax provision (benefit) -- 810 (94) -- 716
--------- --------- --------- --------- ---------
(22,283) (23,729) (4,590) 1,297 (49,305)
EQUITY IN LOSSES OF SUBSIDIARIES (27,022) -- -- 27,022 --
--------- --------- --------- --------- ---------
NET LOSS $ (49,305) $ (23,729) $ (4,590) $ 28,319 $ (49,305)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 264 -- 264
Comprehensive income of
wholly-owned subsidiaries 264 -- -- (264) --
--------- --------- --------- --------- ---------
COMPREHENSIVE LOSS $ (49,041) $ (23,729) $ (4,326) $ 28,055 $ (49,041)
========= ========= ========= ========= =========
15
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 6,344 $ 21,954 $ 1,351 $ (23,305) $ 6,344
Adjustments to reconcile net income to cash
provided by (used in) operations--
Depreciation and amortization -- 11,533 717 -- 12,250
(Gain) loss on sale of property and equipment -- 141 (435) -- (294)
Provision for doubtful accounts -- 50,813 849 -- 51,662
Undistributed losses of minority shareholders -- -- -- (9) (9)
Amortization of discount on Senior Notes 19 -- -- -- 19
Change in assets and liabilities ---
Increase in accounts receivable -- (49,988) (325) -- (50,313)
Decrease in inventories -- 77 29 -- 106
(Increase) decrease in prepaid expenses and other (52) 337 (143) -- 142
Increase in other assets (319) (2,614) (158) -- (3,091)
Decrease in due to/from affiliates (3,541) (16,812) (2,555) 22,908 --
Increase (decrease) in accounts payable -- (3,299) 1,633 -- (1,666)
Decrease in accrued liabilities and other liabilities (1,051) (7,973) (2,263) -- (11,287)
Increase in nonrefundable subscription income -- 286 17 -- 303
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities 1,400 4,455 (1,283) (406) 4,166
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (4,192) (270) -- (4,462)
Proceeds from the sale of property and equipment -- 386 600 -- 986
Increase in other assets -- (614) -- -- (614)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities -- (4,420) 330 -- (4,090)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (1,263) -- -- -- (1,263)
Repayment of other debt and capital lease obligations -- (1,346) (124) -- (1,470)
Issuance of common stock 269 -- -- -- 269
--------- --------- --------- --------- ---------
Net cash used in financing activities (994) (1,346) (124) -- (2,464)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE
CHANGES ON CASH (406) -- (406) 406 (406)
--------- --------- --------- --------- ---------
DECREASE IN CASH -- (1,311) (1,483) -- (2,794)
CASH, beginning of period -- 6,763 1,936 -- 8,699
--------- --------- --------- --------- ---------
CASH, end of period $ -- $ 5,452 $ 453 $ -- $ 5,905
========= ========= ========= ========= =========
16
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminations Consolidated
--------- ---------- -------------- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (49,305) $ (23,729) $ (4,590) $ 28,319 $ (49,305)
Adjustments to reconcile net loss to cash
provided by (used in) operations--
Write-off of goodwill impaired with termination
of contract -- 4,287 -- -- 4,287
Depreciation and amortization -- 18,348 3,668 -- 22,016
Amortization of gain on sale of real estate -- (78) -- -- (78)
Gain on sale of property and equipment -- (374) (13) -- (387)
Provision for doubtful accounts -- 64,297 3,229 -- 67,526
Undistributed loss of minority shareholder -- -- -- (1,297) (1,297)
Amortization of discount on Senior Notes 19 -- -- -- 19
Change in assets and liabilities ---
(Increase) decrease in accounts receivable -- (47,764) 12 -- (47,752)
Increase in inventories -- (2,362) (160) -- (2,522)
Decrease in prepaid expenses and other -- 604 172 -- 776
(Increase) decrease in other assets 1,030 (616) 2,027 -- 2,441
(Increase) decrease in due to/from affiliates 51,947 (18,782) (6,407) (26,758) --
Increase (decrease) in accounts payable -- (3,830) 4,724 -- 894
Increase (decrease) in accrued liabilities and
other liabilities (1,832) 10,020 (3,147) -- 5,041
Increase in nonrefundable subscription income -- 790 12 -- 802
Increase (decrease) in deferred income taxes -- 525 (525) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities 1,859 1,336 (998) 264 2,461
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (4,667) 116 -- (4,551)
Proceeds from the sale of property and equipment -- 1,823 42 -- 1,865
Decrease in other assets -- 70 -- -- 70
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities -- (2,774) 158 -- (2,616)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (2,471) -- -- -- (2,471)
Repayment of debt and capital lease obligations -- (1,754) (264) -- (2,018)
Issuance of common stock 348 -- -- -- 348
--------- --------- --------- --------- ---------
Net cash used in financing activities (2,123) (1,754) (264) -- (4,141)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE
RATE CHANGES ON CASH 264 -- 264 (264) 264
--------- --------- --------- --------- ---------
DECREASE IN CASH -- (3,192) (840) -- (4,032)
CASH, beginning of period -- 9,035 1,252 -- 10,287
--------- --------- --------- --------- ---------
CASH, end of period $ -- $ 5,843 $ 412 $ -- $ 6,255
========= ========= ========= ========= =========
17
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) JOINT VENTURE
During the fiscal year ended June 30, 1998, the Company entered into a
joint venture to provide non-emergency ambulance service and medical
transportation in the Maryland, Washington, D.C. and northern Virginia
areas. The Company obtained a majority interest in the joint venture in
exchange for a commitment to provide $8.0 million for acquisitions by the
joint venture in the greater Baltimore, Maryland and Washington, D.C. areas
(which commitment was fulfilled by June 30, 1998) while the other party to
the joint venture contributed all of the issued and outstanding stock in
two ambulance service companies in exchange for his minority stake in the
joint venture. The Company consolidated the joint venture for financial
reporting purposes.
The joint venture agreement allowed the minority joint venture partner to
"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 fiscal year ended June 30, 2001, the
minority partner elected to exercise the "put" option and the Company
exercised the right to delay purchasing the minority partner's interest for
a year. Based on the provisions of the joint venture agreement, the
purchase price for the minority interest in the joint venture approximated
$5.1 million. The Company recorded a charge of approximately $4.0 million
during the fiscal year ended June 30, 2001 relating to this agreement.
During the nine months ended March 31, 2002, the Company agreed to purchase
the minority partner's interest in the joint venture in exchange for a note
payable of approximately $5.1 million. The note bears interest at prime
plus 2.25% (subject to a cap of 7.75%) and requires monthly principal and
interest payments ranging from $70,000 to $125,000 through December 2006.
Additionally, any outstanding accrued interest is due at maturity. The
Company has reflected this agreement in its consolidated balance sheet as
of March 31, 2002 as an increase in long-term debt of $5.1 million offset
by reductions in minority interest of $8.0 million and other assets of $2.9
million. The agreement also resulted in other income of $9,000 in the
consolidated statement of operations for the nine-month period ended March
31, 2002.
(5) ARGENTINE DEVALUATION
Since 1991, the Argentine peso had been pegged to the U.S. dollar at an
exchange rate of 1 to 1. In December 2001, the Argentine government imposed
exchange restrictions which severely limited cash conversions and
withdrawals. When exchange houses reopened on January 11, 2002, the peso to
dollar exchange rate closed at 1.7 pesos to the dollar.
The Company's Argentine subsidiaries utilize the peso as their functional
currency as their business is primarily transacted in pesos. In order to
prepare the accompanying financial statements as of and for the three and
nine months ended March 31, 2002, the Company translated the balance sheets
of its Argentine subsidiaries using the 3.0 to 1 exchange rate, the closing
rate on March 31, 2002, while its statements of operations and cash flows
were translated using the weighted average rate in effect during the
period. As the liabilities of the Argentine subsidiaries exceed their
assets, the change in exchange rates resulted in a credit to accumulated
other comprehensive income in the Company's consolidated balance sheet as
of March 31, 2002. Further fluctuations in the peso to dollar exchange rate
will impact the translation of the financial statements of the Argentine
subsidiaries for financial reporting purposes.
18
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) RESTRUCTURING CHARGE AND OTHER
During the fiscal year ended June 30, 2001, the Company recorded
restructuring and other charges totaling $9.1 million associated with its
program to close or downsize certain service areas. This charge primarily
included severance costs for approximately 250 employees, service area
closing costs, and the write-off of goodwill and other assets associated
with the service area reductions. Through March 31, 2002 approximately 88
of the impacted employees have been terminated.
The usage of the charge and the remaining accrual at March 31, 2002 is as
follows (in thousands):
Balance at Balance at
June 30, 2001 Usage Adjustments March 31, 2002
------------- ----- ----------- --------------
Severance costs $ 1,464 $ (542) $ (100) $ 822
Lease termination costs 2,357 (192) (100) 2,065
Write-off of impaired assets
and other costs 1,101 (957) (100) 44
------- ------- ------- -------
$ 4,922 $(1,691) $ (300) $ 2,931
======= ======= ======= =======
During the fiscal year ended June 30, 2000, the Company recorded
restructuring and other charges, of approximately $43.3 million associated
with its program to close or downsize certain non-emergency service areas
and reduce corporate overhead. This charge primarily included severance
costs for approximately 300 employees, service area closing costs (all of
who had left the Company by March 31, 2002), and the write-off of goodwill
and other assets associated with the service area reductions.
The usage of the charge and the remaining accrual at March 31, 2002 is as
follows (in thousands):
Balance at Balance at
June 30, 2001 Usage Adjustments March 31, 2002
------------- ----- ----------- --------------
Severance costs $ 370 $ (418) $ 66 $ 18
Lease termination costs 877 (914) 37 --
------- ------- ------- -------
$ 1,247 (1,332) $ 103 $ 18
======= ======= ======= =======
(7) NET INCOME (LOSS) PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted income (loss) per
share computations for the three and nine-month periods ended March 31,
2002 and 2001 is as follows (in thousands, except per share amounts):
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001
-------------------------------------- ---------------------------------------
Income Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- -------- ----------- ------------- --------
Basic income (loss) per share $ 4,364 15,120 $ 0.29 $(23,646) 14,805 $ (1.60)
======== ========
Effect of stock options -- 506 -- --
-------- -------- -------- --------
Diluted income (loss) per share $ 4,364 15,626 $ 0.28 $(23,646) 14,805 $ (1.60)
======== ======== ======== ======== ======== ========
Nine Months Ended March 31, 2002 Nine Months Ended March 31, 2001
-------------------------------------- ---------------------------------------
Income Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- -------- ----------- ------------- --------
Basic income (loss) per share $ 6,344 15,084 $ 0.42 $(49,305) 14,692 $ (3.36)
======== ========
Effect of stock options -- 247 -- --
-------- -------- -------- --------
Diluted income (loss) per share $ 6,344 15,331 $ 0.41 $(49,305) 14,692 $ (3.36)
======== ======== ======== ======== ======== ========
As a result of anti-dilutive effects, approximately 40,000 and 225,000
option shares were not included in the computation of diluted loss per
share for the three and nine-month periods ended March 31, 2001,
respectively.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), BUSINESS
COMBINATIONS, and No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS,
collectively referred to as the "Standards". SFAS 141 supersedes Accounting
19
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principles Board Opinion (APB) No. 16, BUSINESS COMBINATIONS. The
provisions of SFAS 141: require that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001; provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill; and require that unamortized negative goodwill
be written off immediately as an extraordinary gain instead of being
deferred and amortized. SFAS 142 supersedes APB 17, INTANGIBLE ASSETS, and
is effective for fiscal years beginning after December 15, 2001 although
earlier adoption is allowed in certain circumstances. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their initial recognition. The provisions of SFAS 142: prohibit the
amortization of goodwill and indefinite-lived intangible assets; require
that goodwill and indefinite-lived intangibles assets be tested annually
for impairment (and in interim periods if certain events occur indicating
that the carrying value of goodwill and/or indefinite-lived intangible
assets may be impaired); require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill; and remove
the forty-year limitation on the amortization period of intangible assets
that have finite lives. The provisions of the Standards also apply to
equity-method investments made both before and after June 30, 2001.
The Company elected to adopt the provisions of SFAS 142 in the first
quarter of its fiscal year that began July 1, 2001. In connection
therewith, the Company no longer records amortization of its existing
goodwill balances. The Company's goodwill, which primarily relates to its
ambulance segment, is included in intangible assets in the accompanying
consolidated balance sheets, totaled $91.3 million at July 1, 2001 while
related amortization expense for the fiscal year ended June 30, 2001
totaled $7.1 million. The following table summarizes the Company's net
income (loss) and related per share amounts as if the provisions of SFAS
142 had been adopted as of July 1, 2000:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income (loss) $ 4,364 $ (23,646) $ 6,344 $ (49,305)
Add back: Goodwill amortization -- 1,761 -- 5,397
--------- --------- --------- ---------
Adjusted net income (loss) $ 4,364 $ (21,885) $ 6,344 $ (43,908)
========= ========= ========= =========
BASIC INCOME (LOSS) PER SHARE
Reported net income (loss) $ 0.29 $ (1.60) $ 0.42 $ (3.36)
Goodwill amortization -- 0.12 -- 0.37
--------- --------- --------- ---------
Adjusted basic income (loss) per share $ 0.29 $ (1.48) $ 0.42 $ (2.99)
========= ========= ========= =========
DILUTED INCOME (LOSS) PER SHARE
Reported net income (loss) $ 0.28 $ (1.60) $ 0.41 $ (3.36)
Goodwill amortization -- 0.12 -- 0.37
--------- --------- --------- ---------
Adjusted diluted income (loss) per share $ 0.28 $ (1.48) $ 0.41 $ (2.99)
========= ========= ========= =========
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The Company has completed its first step goodwill
impairment test and has identified certain reporting units within its
ambulance segment where goodwill impairment, as defined under SFAS 142, may
exist. The second step of the goodwill impairment test, which measures the
20
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount of the impairment loss as of July 1, 2001, if any, must be completed
by June 30, 2002, the end of the Company's fiscal year. Any impairment loss
resulting from the transitional impairment test will be reflected as the
cumulative effect of a change in accounting principle in the first quarter
of fiscal 2002 requiring restatement of previously reported results for
that quarter. The Company has not yet determined what effect these
impairment tests will have on its financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
assets to be Disposed of" and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effect of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Company is required to adopt SFAS
144 during the fiscal year ending June 30, 2003. The Company does not
anticipate any material impact resulting from the adoption of SFAS No. 144.
(9) SEGMENT REPORTING
The Company operates in two business segments: (i) Ambulance and (ii) Fire
and Other. The Company's reportable segments are strategic business units
that offer different services. They are managed separately based on the
fundamental differences in their operations.
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a fee-for-service
basis, on a non-refundable subscription basis, and through capitated
contracts. The Ambulance segment also includes urgent home medical care and
ambulance services provided under capitated service arrangements in
Argentina.
The Fire and Other segment includes fire protection and training,
alternative transportation, services provided in conjunction with our
public/private alliance in San Diego, home health care services, urgent and
primary care in clinics, dispatch, fleet, and billing services.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements filed
with the Form 10-K, as amended, for the fiscal year ended June 30, 2001.
The Company defines segment profit (loss) as total revenue less total
operating expenses and interest expense associated with the segment. The
Company defines segment assets as the sum of net accounts receivable,
inventory and net property and equipment associated with the segments.
21
Information by operating segment is set forth below (in thousands):
FIRE AND
Three months ended March 31, 2002 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 100,054 $ 24,607 -- $ 124,661
Segment profit (loss) $ 4,521 $ 4,005 $ (3,962) $ 4,564
Segment assets $ 140,409 $ 21,269 $ 1,029 $ 162,707
FIRE AND
Three months ended March 31, 2001 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 101,923 $ 24,799 -- $ 126,722
Segment profits (loss) $ (21,657) $ 3,497 $ (5,466) $ (23,626)
Segment assets $ 179,454 $ 37,381 $ 1,417 $ 218,252
FIRE AND
Nine months ended March 31, 2002 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 298,488 $ 75,599 -- $ 374,087
Segment profit (loss) $ 5,048 $ 10,940 $ (11,053) $ 4,935
Segment assets $ 140,409 $ 21,269 $ 1,029 $ 162,707
FIRE AND
Nine months ended March 31, 2001 AMBULANCE OTHER CORPORATE TOTAL
--------- --------- --------- ---------
Net revenue from external customers $ 303,867 $ 76,302 -- $ 380,169
Segment profits (loss) $ (41,963) $ 9,862 $ (17,785) $ (49,886)
Segment assets $ 179,454 $ 37,381 $ 1,417 $ 218,252
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Statements in this Report that are not historical facts are hereby identified as
"forward-looking statements" as that term is used under the securities laws. We
caution readers that such "forward-looking statements," including those relating
to our future business prospects, working capital, accounts receivable
collection, liquidity, cash flow, capital needs, operational results, compliance
with debt facilities and debt restructuring prospects, wherever they appear in
this Report or in other statements attributable to us, are necessary estimates
reflecting our best judgment and involve a number of risks and uncertainties
that could cause actual results to differ materially from those suggested by the
"forward-looking statements." You should consider such "forward
looking-statements" in light of various important factors, including those set
forth below and others set forth from time to time in our reports and
registration statements filed with the Securities and Exchange Commission.
The health care industry in general and the ambulance industry in particular are
in a state of significant change. This makes us susceptible to various risks
that may affect future results such as the following: successful integration and
operation of acquired service providers; growth strategy and difficulty in
maintaining growth; leverage; revenue mix; dependence on certain business
relationships; recoverability of intangible assets; dependence on government and
third party payers; fee-for-service contracts; possible adverse changes in
reimbursement rates; impact of rate structures; possible negative effects of
prospective health care reform; high utilization of services by customers under
capitated service arrangements; competitive market forces; fluctuation in
quarterly results; volatility of stock price; access to debt and equity capital;
dependence on key personnel; and governmental rate regulation.
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions, direct and indirect
subsidiaries, and affiliates. Rural/Metro Corporation, a Delaware corporation,
is strictly a holding company. All services, operations, and management
functions are provided through its subsidiaries and affiliated entities.
This Report should be read in conjunction with our Annual Report on Form 10-K,
as amended, for the fiscal year ended June 30, 2001.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls (911 emergency ambulance services) and non-emergency transport
services (general transport services) to patients on a fee-for-service basis, on
a non-refundable subscription fee basis, and through capitated contracts. Per
transport revenue depends on various factors, including the mix of rates between
existing service areas and new service areas and the mix of activity between 911
emergency ambulance services and general medical transport services as well as
other competitive factors. Fire protection services are provided either under
contracts with municipalities, fire districts, or other agencies or on a
non-refundable subscription fee basis to individual homeowners or commercial
property owners.
GOING CONCERN
Although we generated net income of approximately $6.3 million for the nine
months ended March 31, 2002, we incurred net losses of approximately $226.7
million and $101.3 million for the fiscal years ended June 30, 2001 and 2000,
respectively. Additionally, at March 31, 2002, we had a net working capital
deficit of $252.8 million (primarily as a result of the classification as
current liabilities of amounts outstanding under our revolving credit facility
and 7 7/8% Senior Notes due 2008) as well as a stockholders' deficit of $114.5
million. We operated under a waiver of financial covenant compliance relating to
our revolving credit facility from December 31, 1999 through April 1, 2002. We
are currently in negotiations with our lenders to either extend the waiver or
restructure the revolving credit facility.
23
Despite the significant losses experienced in fiscal 2001 and 2000, we have been
able to fund our operating and capital needs internally since March 2000. We
believe that our current business model will generate sufficient cash flows to
provide a basis for a new long-term financing agreement with our lenders or to
restructure our debt. A new long-term agreement would likely have terms
different from those contained in our existing debt agreements, including
potentially higher interest rates, which could materially affect our results of
operations and cash flows. Further, any new long-term agreement may involve the
conversion of all or a portion of our debt to equity or similar transactions
that could result in material and substantial dilution to existing stockholders.
Our ability to continue as a going concern depends on the continued success of
our current business model as well as our ability to restructure our debt.
Although there can be no assurance, management believes that we will be
successful in sustaining profitable operations and restructuring our debt. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The audit report relating to our fiscal 2001 financial statements was qualified
for our ability to continue as a going concern. Management anticipates that the
audit report on our fiscal 2002 financial statements will contain a similar
qualification unless we are able to successfully restructure our debt.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States of America.
During the preparation of these financial statements, we are required to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, allowance for doubtful accounts, general
liability reserves, workers compensation reserves, fixed assets, income taxes,
and litigation. We base our estimates on historical experience and on various
other assumptions that we believe are reasonable under the circumstances. The
results form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
We have identified the accounting policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. The discussion below is not intended to be a comprehensive
list of our accounting policies. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K, as amended, for
the fiscal year ended June 30, 2001, which contains accounting policies and
other disclosures required by generally accepted accounting principles in the
United States of America.
REVENUE RECOGNITION - Domestic ambulance service fees are recognized when
services are provided and are recorded net of Medicare, Medicaid, and other
reimbursement limitations. Because of the nature of our domestic ambulance
services, it is necessary to respond to a number of calls, primarily 911
emergency ambulance service calls, which may not result in transports. Results
of operations are discussed below on the basis of actual transports since
transports are more directly related to revenue. Expenses associated with calls
that do not result in transports are included in operating expenses. The
percentage of calls not resulting in transports varies substantially depending
upon the mix of non-emergency ambulance and 911 emergency ambulance service
calls and is generally higher in service areas in which the calls are primarily
911 emergency ambulance service calls. Rates in our markets take into account
the anticipated number of calls that may not result in transports. We do not
separately account for expenses associated with calls that do not result in
transports. Revenue generated under our capitated service arrangements in
Argentina is included in ambulance services revenue.
24
Revenue generated under fire protection service contracts is recognized over the
life of the contract. Subscription fees received in advance are deferred and
recognized over the term of the subscription agreement, which is generally one
year.
Other revenue consists of revenue generated from our public/private alliance in
San Diego, fees associated with alternative transportation, dispatch, fleet,
billing, and home health care services and is recognized when the services are
provided.
PROVISION FOR DOUBTFUL ACCOUNTS - Payments received from third-party payers
represent a substantial portion of our ambulance service fee receipts. We
establish an allowance for doubtful accounts based on credit risks applicable to
certain types of payers, historical trends, and other relevant information. A
provision for doubtful accounts is made for the expected difference between
ambulance services fees recognized and amounts actually collected. Our provision
for doubtful accounts is generally higher with respect to collections to be
derived from patients than for collections to be derived directly from
third-party payers and generally is higher for 911 emergency ambulance services
than for general ambulance transport services. Actual results could differ from
these estimates.
GENERAL LIABILITY AND WORKERS' COMPENSATION PROGRAMS - We retain certain levels
of exposure with respect to our general liability and workers compensation
programs and purchase excess coverage from third party insurers for exposures in
excess of those levels. In addition to expensing premiums and other costs
relating to excess coverage, we establish reserves for both reported and
incurred but unreported claims within our level of retention based on currently
available information as well as our historical experience in settling such
claims. We adjust our claim reserves with an associated charge or credit to
expense as new information on the underlying claims is obtained. We engage
independent actuaries to periodically evaluate the adequacy of our claim
reserves.
SEASONALITY
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher fiscal second and third quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions.
OTHER CONSIDERATIONS
Public health conditions affect our operations differently in different regions.
For example, greater utilization of services by customers under capitated
service arrangements decreases our operating income. The same conditions
domestically, where we operate under fee-for-service arrangements, result in a
greater number of transports, increasing our operating income.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUE
Total revenue decreased $2.0 million, or 1.6%, from $126.7 million for the three
months ended March 31, 2001 to $124.7 million for the three months ended March
31, 2002.
Ambulance services revenue decreased $1.8 million, or 1.8%, from $101.9 million
for the three months ended March 31, 2001 to $100.1 million for the three months
ended March 31, 2002. The decrease in ambulance services revenue is related to a
$5.6 million decrease in revenue in our Latin American operations resulting from
decreases in memberships under capitated service arrangements and the
devaluation of the Argentine peso, offset by increases in domestic ambulance
service revenue. The decrease in memberships was attributable to the impact of
economic conditions in Argentina combined with significant increases in taxes on
all medical services.
25
Domestic ambulance service revenue increased approximately $3.7 million, or 4.0%
from $92.5 million for the three months ended March 31, 2001 to $96.2 for the
three months ended March 31, 2002. This increase is comprised of an approximate
$1.9 million decrease related to the loss of the 911 contract in Arlington,
Texas and an approximate $2.3 million decrease related to the closure of service
areas during the first and second quarters of fiscal 2002 offset by an
approximate $7.6 million increase related to domestic ambulance service revenue
in areas that we served in both the three-month periods ended March 31, 2002 and
2001. Total domestic ambulance transports decreased by 13,000, or 4.7%, from
278,000 for the three months ended March 31, 2001 to 265,000 for the three
months ended March 31, 2002. The decrease in transports is primarily due to the
closure of service areas during the first and second quarters of fiscal 2002 and
the loss of the Arlington contract noted above.
Fire protection services revenue increased by $700,000, or 4.5%, from $15.4
million for the three months ended March 31, 2001 to approximately $16.1 million
for the three months ended March 31, 2002. Fire protection services revenue
increased primarily due to rate and utilization increases of $742,000.
Other revenue decreased $900,000, or 9.6%, from $9.4 million for the three
months ended March 31, 2001 to $8.5 million for the three months ended March 31,
2002. This decrease was primarily due to the decrease in clinic revenue in our
Latin American operations of approximately $863,000 and a decrease in
alternative transportation services of $507,000 offset by an increase in revenue
related to our public/private alliance in San Diego of $783,000.
OPERATING EXPENSES
Payroll and employee benefits decreased $7.8 million, or 10.2%, from $76.1
million for the three months ended March 31, 2001 to $68.3 million for the three
months ended March 31, 2002. This decrease is attributable to a $4.1 million
decrease related to our Latin America operations due to the decreased membership
and the disposition of our clinic operations and the reversal of $1.7 million of
accrued discretionary employee benefits, offset by the effect of the
renegotiation of labor contracts in certain of our service areas. The closure of
service areas during the first and second quarters of fiscal 2002 accounted for
another $1.4 million of the decrease while the decrease related to the loss of
the contract in Arlington, Texas totaled approximately $683,000. Additionally,
the three months ended March 31, 2001 included a $5.0 million charge for
increases in reserves for unreported workers compensation claims based on
updated information received from our third party claims administrator. We
expect that labor costs related to our ongoing operations will continue to
increase, including increased costs associated with accounts receivable
collection and Medicare and Medicaid compliance. Payroll and employee benefits
decreased from 60.0% of total revenue for the three months ended March 31, 2001
to 54.8% of total revenue for the three months ended March 31, 2002.
The provision for doubtful accounts decreased $1.0 million, or 5.2% from $19.1
million for the three months ended March 31, 2001 to $18.1 million for the three
months ended March 31, 2002. This resulted in a decrease from 15.1% of total
revenue for the three months ended March 31, 2001 to 14.5% of total revenue for
the three months ended March 31, 2002.
The provision for doubtful accounts on domestic ambulance service revenue was
20.1% for the three months ended March 31, 2001 compared with 18.7% for the
three months ended March 31, 2002. During fiscal 2002, we continue to focus on
improving the quality of our revenue by reducing the number of non-emergency
ambulance transports in selected service areas as well as on previously
implemented initiatives to maximize the collection of our accounts receivable.
Depreciation decreased $1.4 million, or 26.4%, from $5.3 million for the three
months ended March 31, 2001 to $3.9 million for the three months ended March 31,
2002. The decrease is primarily due to asset write-offs during the fourth
quarter of fiscal 2001 as well as the disposal of assets related to closed
operations. Depreciation was 4.2% and 3.1% of total revenue for the three months
ended March 31, 2001 and 2002, respectively.
26
We stopped amortizing goodwill in accordance with our adoption of SFAS No. 142,
July 1, 2001. As a result, amortization of intangibles decreased $1.8 million.
The negative amortization recorded in the three months ended March 31, 2002
relates to the reversal of goodwill amortization incorrectly recorded in the six
months ended December 31, 2001. Amortization of intangibles was 1.4% of total
revenue for the three months ended March 31, 2001.
Other operating expenses consist primarily of rent and related occupancy
expenses, vehicle and equipment maintenance and repairs, insurance, fuel and
supplies, travel, and professional fees. Other operating expenses decreased
approximately $16.9 million, or 41.8%, from $40.4 million for the three months
ended March 31, 2001 to $23.5 million for the three months ended March 31, 2002.
The decrease is primarily due an approximate $2.1 million decrease related to
our Latin American operations due to the reduction in revenue as described
above. Additionally, the three months ended March 31, 2001 included a charge of
$15.0 million for additional general liability reserves related to increases in
reserves for reported claims as well as to establish reserves for claims
incurred but not reported as described below. Other operating expenses decreased
from 31.9% of total revenue for the three months ended March 31, 2001 to 18.8%
of total revenue for the three months ended March 31, 2002.
Effective January 1, 2001 we refined our methodology for 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 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.
Interest expense decreased $1.3 million, or 17.1%, from $7.6 million for the
three months ended March 31, 2001 to $6.3 million for the three months ended
March 31, 2002. This decrease was primarily caused by lower rates on the
revolving credit facility as well as lower average debt balances
We recorded a tax provision of $200,000 for the three months ended March 31,
2002 compared to $494,000 for the three months ended March 31, 2001. The
provision recorded in the three months ended March 31, 2002 primarily relates to
state and foreign income taxes.
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
REVENUE
Total revenue decreased $6.1 million, or 1.6%, from $380.2 million for the nine
months ended March 31, 2001 to $374.1 million for the nine months ended March
31, 2002.
Ambulance services revenue decreased $5.4 million, or 1.8%, from $303.9 million
for the nine months ended March 31, 2001 to $298.5 million for the nine months
ended March 31, 2002. The decrease in ambulance services revenue is primarily
related to a $8.0 million decrease in revenue in our Latin American operations
resulting from decreases in memberships under capitated service arrangements and
the devaluation of the Argentine peso, offset by increases in domestic ambulance
service revenue. The decrease in memberships was attributable to the impact of
economic conditions in Argentina combined with significant increases in service
taxes on all medical services.
Domestic ambulance service revenue increased approximately $2.6 million, or 0.9%
from approximately $274.8 million for the nine months ended March 31, 2001 to
approximately $277.4 million for the nine months ended March 31, 2002. This
increase is comprised of an approximate $6.5 million decrease related to the
loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska and an
approximate $7.5 million decrease related to the closure of service areas in
fiscal 2000 and 2001 offset by an approximate $14.2 million increase related to
domestic ambulance service revenue in areas that we served in both the
nine-month periods ended March 31, 2002 and 2001 and an approximate $2.4 million
27
increase in revenue related to a 911 contract that began during the second
quarter of fiscal 2001. Total domestic ambulance transports decreased by 46,000,
or 5.5%, from 833,000 for the nine months ended March 31, 2001 to 787,000 for
the nine months ended March 31, 2002. The decrease in transports is primarily
due to the closure of service areas during the first quarter of fiscal 2002 and
the loss of contracts noted above.
Fire protection services revenue increased by $1.6 million, or 3.5%, from $46.2
million for the nine months ended March 31, 2001 to approximately $47.8 million
for the nine months ended March 31, 2002. Fire protection services revenue
increased primarily due to rate and utilization increases of $1.5 million and
increased contracting activity by our industrial fire protection group of
$481,000. These increases were offset by a decrease in forestry revenue of
$246,000.
Other revenue decreased $2.3 million, or 7.6%, from $30.1 million for the nine
months ended March 31, 2001 to $27.8 million for the nine months ended March 31,
2002. Other revenue decreases are primarily due to the decrease in clinic
revenue in our Latin American operations of approximately $3.3 million offset by
increases in revenue related to our public/private alliance in San Diego of $2.2
million.
OPERATING EXPENSES
Payroll and employee benefits decreased $4.0 million, or 1.8%, from $220.1
million for the nine months ended March 31, 2001 to $216.1 million for the nine
months ended March 31, 2002. This decrease is primarily attributable to a $5.5
million decrease related our Latin America operations due to the decreased
membership and the disposition of clinic operations and the reversal of $1.7
million of accrued discretionary employee benefits, offset by the effect of the
renegotiation of labor contracts in certain of our service areas. The closure of
service areas during the first and second quarters of fiscal 2002 accounted for
$3.4 million of the decrease while the effect of the loss of the contracts in
Arlington, Texas and Lincoln, Nebraska totaled approximately $2.3 million. The
closure of service areas during fiscal 2001 accounted for $822,000 of the
decrease. Additionally, the nine months ended March 31, 2001 included a $5.0
million charge for increases in reserves for unreported workers compensation
claims based on updated information received from our third party claims
administrator. We expect that labor costs related to our ongoing operations will
continue to increase, including the increased costs associated with accounts
receivable collection and Medicare and Medicaid compliance. Payroll and employee
benefits decreased from 57.9% of total revenue for the nine months ended March
31, 2001 to 57.8% of total revenue for the nine months ended March 31, 2002.
The provision for doubtful accounts decreased $15.8 million, or 23.4% from $67.5
million for the nine months ended March 31, 2001 to $51.7 million for the nine
months ended March 31, 2002. This resulted in a decrease from 17.8% of total
revenue for the nine months ended March 31, 2001 to 13.8% of total revenue for
the nine months ended March 31, 2002. The provision for doubtful accounts for
the nine months ended March 31, 2001 included an additional provision of $10
million primarily related to receivables generated in certain under-performing
service areas identified and closed during our fiscal 2000 restructuring.
The provision for doubtful accounts on domestic ambulance service revenue
(excluding the $10 million discussed above) was 20.3% for the nine months ended
March 31, 2001 and 18.4% for the nine months ended March 31, 2002. During fiscal
2002, we continue to focus on improving the quality of our revenue by reducing
the amount of non-emergency ambulance transports in selected service areas as
well as on previously implemented initiatives to maximize the collection of our
accounts receivable.
Depreciation decreased $4.3 million, or 26.0%, from $16.5 million for the nine
months ended March 31, 2001 to $12.2 million for the nine months ended March 31,
2002. The decrease is primarily due to asset the write-offs during the fourth
quarter of fiscal 2001 as well as the disposal of assets related to closed
operations. Depreciation was 4.3% and 3.3% of total revenue for the nine months
ended March 31, 2001 and 2002, respectively.
We stopped amortizing goodwill in accordance with our adoption of SFAS No. 142,
effective July 1, 2001. As a result, amortization of intangibles has decreased
$5.5 million to $69,000 for the nine months ended March 31, 2002. Amortization
of intangibles was 1.5% of total revenue for the nine months ended March 31,
2001.
28
Other operating expenses consist primarily of rent and related occupancy
expenses, vehicle and equipment maintenance and repairs, insurance, fuel and
supplies, travel, and professional fees. Other operating expenses decreased
approximately $21.7 million, or 23.6%, from $92.0 million for the nine months
ended March 31, 2001 to $70.3 million for the nine months ended March 31, 2002.
The decrease is primarily due an approximate $5.7 million decrease related to
our Latin American operations due to the reduction in revenue as described
above. Approximately $2.2 million relates to the closure of operations and the
loss of contracts in Arlington, Texas and Lincoln, Nebraska. Additionally, the
nine months ended March 31, 2001 included a charge of $15.0 million recorded for
additional general liability reserves related to increases in reserves for
reported claims as well as to establish reserves for claims incurred but not
reported as described below. Other operating expenses decreased from 24.2% of
total revenue for the nine months ended March 31, 2001 to 18.8% of total revenue
for the nine months ended March 31, 2002.
Effective January 1, 2001 we refined our methodology for 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 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.
During the nine months ended March 31, 2001 we recorded a charge of $5.2 million
related to the loss of a 911 contract in Lincoln, Nebraska. The charge included
$4.3 million for the write-off of related goodwill as well as $900,000 for
employee severance and other exit costs.
Interest expense decreased $4.5 million, or 19.3%, from $23.3 million for the
nine months ended March 31, 2001 to $18.8 million for the nine months ended
March 31, 2002. This decrease was primarily caused by lower rates on the
revolving credit facility as well as lower average debt balances. Additionally,
approximately $541,000 of interest income received in conjunction with an income
tax refund was netted against interest expense for the nine months ended March
31, 2002.
We recorded a tax benefit of $1.4 million for the nine months ended March 31,
2002 compared to a tax provision of $716,000 for the nine months ended March 31,
2001. The benefit recorded in the nine months ended March 31, 2002 primarily
relates to a $1.6 million income tax refund received during that period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our cash requirements principally through cash
flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of our Senior Notes, the sale of common
stock through an initial public offering in July 1993 and subsequent public
stock offerings in May 1994 and April 1996, and proceeds from the exercise of
stock options.
During the nine months ended March 31, 2002, net cash provided by operating
activities was $4.2 million resulting primarily from net income of $6.3 million,
depreciation and amortization of $12.3 million, and provision for doubtful
accounts of $51.7 million offset by an increase in accounts receivable of $50.3
million, an increase in other assets of $3.1 million, a decrease in accrued
liabilities of $11.3 million and a decrease in accounts payable of $1.7 million.
Net cash provided by operating activities was $2.5 million for the nine months
ended March 31, 2001.
Cash used in investing activities was approximately $4.1 million for the nine
months ended March 31, 2002, primarily due to capital expenditures of $4.5
million offset by proceeds from the sale of property and equipment of $986,000.
Cash used in investing activities was $2.6 million for the nine months ended
March 31, 2001.
29
Cash used in financing activities was $2.5 million for the nine months ended
March 31, 2002, primarily due to $1.3 million of repayments on the revolving
credit facility and $1.5 million of payments on other debt and capital lease
obligations offset by proceeds from issuance of common stock. Cash used in
financing activities was $4.1 million for the nine months ended March 31, 2001.
The effect of currency exchange rate changes on cash of $406,000 for the nine
months ended March 31, 2002, was primarily due to the devaluation of the
Argentine peso.
Including the classification of the amounts outstanding under our revolving
credit facility and our Senior Notes as current liabilities at March 31, 2002,
we had a net working capital deficit of $252.8 million, including cash of $5.9
million, compared to a working capital deficiency of $273.4 million, including
cash of $8.7 million, at June 30, 2001.
Our gross accounts receivable as of March 31, 2002 and June 30, 2001 were
approximately $147.7 million and $168.5 million, respectively. Our accounts
receivable, net of the allowance for doubtful accounts, were $99.9 million and
$103.3 million as of such dates, respectively. The decrease in net accounts
receivable is due to many factors including collections on accounts related to
closed operations and overall improvement in collections related to ongoing
operations.
The allowance for doubtful accounts decreased from approximately $65.2 million
at June 30, 2001 to $47.8 million at March 31, 2002. The primary reason for this
decrease is the write-off of uncollectible receivables offset by the current
period provision for doubtful accounts. Because of continuing difficulties in
the healthcare reimbursement environment, we have continued to focus on
improving the quality of our revenue by exiting service areas or substantially
reducing service, where it had become unprofitable to perform non-emergency
transports because of low reimbursement rates or a higher risk of
non-reimbursement by payers. We also shifted the focus of our billing personnel
to place greater emphasis on the billing process as opposed to the collection
process and have instituted mandatory comprehensive training for our paramedics
and emergency medical technicians on new standards of documentation. We believe
that these measures coupled with other billing initiatives will help to enhance
the quality of our billings, which will assist in mitigating the risk of denials
by payers and will help to increase collections from our private pay customers.
We are not in compliance with the financial covenants contained in the agreement
relating to our revolving credit facility, as amended. We have received a
compliance waiver, as amended, (the "waiver") covering periods from December 31,
1999 through April 1, 2002. The Company is in negotiation with its lenders to
either extend the waiver or restructure the revolving credit facility. The
waiver covered the representations and warranties relating to no material
adverse changes as well as the lack of compliance with the following financial
covenants: total debt leverage ratio, total debt to total capitalization ratio
and fixed charge coverage ratio. The waiver stipulates that no additional
borrowings would be available to us through the end of the waiver period and
required us to: (i) engage certain financial advisors; (ii) meet certain
benchmarks for projected cash balances and expenditures; (iii) maintain positive
consolidated operating income net of restructuring charges; (iv) pay reasonable
fees and expenses related to the professionals employed on behalf of the
Steering Committee, as defined in the waiver; and, (v) reduce the outstanding
balance on the revolving credit facility upon the occurrence of certain events
such as the sale of certain assets. During certain periods covered by the
waiver, we were not in compliance with the requirement that we maintain positive
consolidated net operating income net of restructuring charges. As the Company's
7 7/8% Senior Notes due 2008 (the "Senior Notes") contain a cross-default
provision, the balances outstanding under both the revolving credit facility and
Senior Notes have been classified as current liabilities in our consolidated
balance sheets as of March 31, 2002 and June 30, 2001 as required by generally
accepted accounting principles.
30
In connection with the waiver of covenant compliance, we supported the formation
of a Steering Committee comprised of bank lenders and Senior Note holders to
further explore debt-restructuring opportunities. As part of this support, we
funded the Steering Committee's Advisor fees for a period of time. The
obligation to fund these advisor fees has been satisfied and discontinued. We
intend to continue discussions and to negotiate with our lenders and Senior Note
holders in an effort to reduce the Company's debt under both the revolving
credit facility and the Senior Notes, so as to further improve our liquidity and
long-term financial flexibility. We intend to consider all appropriate
strategies to achieve these objectives.
Any restructuring or amendment may involve the conversion of all or a portion of
our debt to equity or other similar transactions that could result in material
and substantial dilution to existing stockholders. Such restructuring or
amendment could also include material changes in the underlying interest rates
or other terms of the revolving credit facility and Senior Notes. There can be
no assurance that we can accomplish an arrangement with regard to our debt on
terms acceptable to us, or at all. Our inability to successfully negotiate a
long-term agreement with our lenders could have a material adverse effect on our
business, financial condition, cash flows, and results of operations.
Borrowings under the revolving credit facility bear interest at prime plus .25%
payable monthly. Additional interest accrued at an annual rate of 2.0% during
the waiver period. We continue to accrue the additional interest.
Effective May 1, 2002 a letter of credit in the amount of $2.6 million was drawn
on the lender bank, increasing amounts outstanding under the revolving credit
facility to $144.4 million and reducing the letters of credit issued on the
Company's behalf to $3.6 million. The letters of credit mature at various times
during the year and are generally renewable on an annual basis.
MEDICARE REIMBURSEMENT
In January 1999, the Center for Medicare and Medicaid Services (CMS) announced
its intention to form a negotiated rule-making committee to create a new fee
schedule for Medicare reimbursement of ambulance services. The committee
convened in February 1999. In August 1999, CMS announced that the implementation
of the prospective fee schedule as well as the mandatory acceptance of
assignment would be postponed to January 2001.
The proposed Medicare Ambulance Fee Schedule and related rules were published
September 12, 2000 in the FEDERAL REGISTER. On November 30, 2000, CMS notified
Medicare carriers that it would not implement the proposed fee schedule and
rules as scheduled on January 1, 2001. On February 27, 2002, the Medicare
Ambulance Fee Schedule Final Rule was published in the FEDERAL Register with an
effective date of April 1, 2002. The final rule utilizes seven levels of ground
ambulance services (ranging from basic life support to specialty care transport)
and two categories of air ambulance services recommended by the negotiated
rule-making committee. The base rate conversion factor for services to Medicare
patients was set at $170.54, plus separate mileage payment based on specified
relative value units for each level of ambulance service. Adjustments also were
included to recognize differences in relative practice costs among geographic
areas, and higher transportation costs that may be incurred by ambulance
suppliers in rural areas with low population density. The Final Rule requires
ambulance providers to accept the assigned reimbursement rate as full payment,
after patients have submitted their deductibe and 20 percent of Medicare's fee
for service. The Final Rule calls for a five-year phase-in period to all time
for providers to adjust to the new payment rates. The fee schedule will be
phased in at 20-percent increments each year, with payments being made at 100
percent of the fee schedule amount in 2006 and thereafter.
We believe the Medicare Ambulance Fee Schedule will cause a neutral net impact
on our domestic EMS revenue at full phase-in, primarily due to the geographic
diversity of our U.S. operations. These rules could, however, result in contract
renegotiations or other actions by us to offset any negative impact at the
regional level that could have a material adverse effect on our business,
financial condition, cash flows, and results of operations.
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
31
by third party payers, or an increase in our cost structure relative to the rate
increase in the CPI, or costs incurred to implement the mandates of the fee
schedule could have a material adverse effect on our business, financial
condition, cash flows, and results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), BUSINESS COMBINATIONS, and
No. 142 (SFAS 142), GOODWILL AND OTHER INTANGIBLE ASSETS, collectively referred
to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion
(APB) No. 16, BUSINESS COMBINATION. The provisions of SFAS 141: require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001; provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill; and, require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. SFAS 142 supersedes APB 17,
INTANGIBLE ASSETS, and is effective for fiscal years beginning after December
15, 2001 although earlier adoption is allowed in certain circumstances. SFAS 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS 142: prohibit the
amortization of goodwill and indefinite-lived intangible assets; require that
goodwill and indefinite-lived intangibles assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired); require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill; and, remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives. The provisions of the Standards also apply to equity-method investments
made both before and after June 30, 2001.
We elected to adopt the provisions of SFAS 142 in the first quarter of the
fiscal year that began July 1, 2001. In connection therewith, we no longer
record amortization of existing goodwill balances. Goodwill totaled $91.3
million, which primarily relates to our ambulance segment is included in
intangible assets in the accompanying balance sheets, at July 1, 2001 while
related amortization expense totaled $7.1 million for the fiscal year ended June
30, 2001. The following table summarizes our net income (loss) and related per
share amounts as if the provisions of SFAS 142 had been adopted as of July 1,
2000:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income (loss) $ 4,364 $ (23,646) $ 6,344 $ (49,305)
Add back: Goodwill amortization -- 1,761 -- 5,397
--------- --------- --------- ---------
Adjusted net income (loss) $ 4,364 $ (21,885) $ 6,344 $ (43,908)
========= ========= ========= =========
BASIC INCOME (LOSS) PER SHARE
Reported net income (loss) $ 0.29 $ (1.60) $ 0.42 $ (3.36)
Goodwill amortization -- 0.12 -- 0.37
--------- --------- --------- ---------
Adjusted basic income (loss) per share $ 0.29 $ (1.48) $ 0.42 $ (2.99)
========= ========= ========= =========
DILUTED INCOME (LOSS) PER SHARE
Reported net income (loss) $ 0.28 $ (1.60) $ 0.41 $ (3.36)
Goodwill amortization -- 0.12 -- 0.37
--------- --------- --------- ---------
Adjusted diluted income (loss) per share $ 0.28 $ (1.48) $ 0.41 $ (2.99)
========= ========= ========= =========
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. We have completed its first step goodwill impairment test and
have identified certain reporting units within our ambulance segment where
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goodwill impairment, as defined under SFAS 142, may exist. The second step of
the goodwill impairment test, which measures the amount of the impairment loss
as of July 1, 2001, if any, must be completed by June 30, 2002, the end of our
fiscal year. Any impairment loss resulting from the transitional impairment test
will be reflected as the cumulative effect of a change in accounting principle
in the first quarter 2002 requiring restatement of previously reported quarterly
results. We have not yet determined what effect these impairment tests will have
on its earnings or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived assets to be Disposed of"
and Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effect of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." We
are required to adopt SFAS 144 during the fiscal year ending June 30, 2003. We
do not anticipate any material impact resulting from the adoption of SFAS No.
144.
EFFECTS OF FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Since 1991, the Argentine peso had been pegged to the U.S. dollar at an exchange
rate of 1 to 1. In December 2001, the Argentine government imposed exchange
restrictions which severely limited cash conversions and withdrawals. When
exchange houses reopened on January 11, 2002, the peso to dollar exchange rate
closed at 1.7 pesos to the dollar.
Our Argentine subsidiaries utilize the peso as their functional currency as
their business is primarily transacted in pesos. In order to prepare the
accompanying financial statements as of and for the three and nine months ended
March 31, 2002, we translated the balance sheets of its Argentine subsidiaries
using the 3.0 to 1 exchange rate, the closing rate on March 31, 2002, while its
statements of operations and cash flows were translated using the weighted
average rate in effect during the period. As the liabilities of the Argentine
subsidiaries exceed their assets, the change in exchange rates resulted in a
credit to accumulated other comprehensive income in our consolidated balance
sheet as of March 31, 2002. Further fluctuations in the peso to dollar exchange
rate will impact the translation of the financial statements of the Argentine
subsidiaries for financial reporting purposes.
There can be no assurance that fluctuations in the currency exchange rates in
the future will not have an adverse effect on our business, financial condition,
cash flows, and results of operations. We do not currently engage in foreign
currency hedging transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION.
We face the possibility of increased interest expense associated with our
revolving credit facility which bears interest at the prime rate plus .25%. A 1%
increase in the prime rate would increase our interest expense on an annual
basis by approximately $1.4 million. The remainder of our debt is primarily at
fixed interest rates.
RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION.
ITEM 1 -- LEGAL PROCEEDINGS.
From time to time, we are subject to litigation and regulatory
investigations arising in the ordinary course of business. We believe that the
resolutions of currently pending claims or legal proceedings will not have a
material adverse effect on our business, financial condition, cash flows and
results of operations. However, we are unable to predict with certainty the
outcome of pending litigation and regulatory investigations. In some pending
cases, our insurance coverage may not be adequate to cover all liabilities
arising out of such claims. In addition, there can be no assurance that CMS or
33
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, were 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 moved to dismiss the second amended complaint. On
March 8, 2002, the Court granted the motions to dismiss of Mr. Ramsey and Mr.
Bolin with leave to replead and denied the motions to dismiss of the Company and
Mr. Rustand. The result is that Mr. Ramsey and Mr. Bolin have been dismissed
from the case although the Court has permitted plaintiffs leave to file another
complaint against those individuals. Mr. Rustand and the Company remain
defendants.
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 6 -- EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K filed January 9, 2002 relating to the dismissal of Arthur
Andersen LLP as the Company's certifying accountants.
34
Form 8-K filed January 22, 2002 relating to Press Release dated
January 18, 2002 and the Seventh Amendment to the Provisional Waiver
and Standstill Agreement dated as of December 4, 2001.
Form 8-K filed February 5, 2002 relating to the engagement of
PricewaterhouseCoopers LLP as the Company's certifying accountants.
Form 8-K filed February 26, 2002 relating to receipt of a Staff
Determination notice from the Nasdaq Listing Qualifications Department
indicating that the Company does not currently comply with the net
tangible assets or stockholders' equity, market capitalization, or net
income standards for continued listing on the Nasdaq SmallCap Market.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Dated: May 15, 2002 By: /s/ Jack E. Brucker
------------------------------------
Jack E. Brucker, President & Chief
Executive Officer (Principal
Executive Officer)
By: /s/ Randall L. Harmsen
------------------------------------
Randall L. Harmsen, Vice President
of Finance (Principal Financial
Officer and Principal Accounting
Officer)
35