SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
[ ] Definitive Proxy Statement by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
RURAL/METRO CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
________________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
________________________________________________________________________________
PRELIMINARY PROXY MATERIAL
RURAL/METRO CORPORATION
8401 E. INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA 85251
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 3, 2003
To Our Stockholders:
The Annual Meeting of Stockholders of RURAL/METRO CORPORATION, a Delaware
corporation ("we" or the "Company"), will be held at the Company's corporate
headquarters at 8401 East Indian School Road, Scottsdale, Arizona, on Monday,
March 3, 2003, at 3:00 p.m., Phoenix, Arizona time, for the following purposes:
1. To elect two (2) directors to serve for three-year terms or until
their successors are elected;
2. To consider and act upon a proposal to amend our certificate of
incorporation to increase the authorized number of shares of our
common stock from 23,000,000 to 29,000,000;
3. To consider and act upon a proposal to amend our Employee Stock
Purchase Plan to increase the number of shares of our common stock
that may be purchased pursuant to the plan from 2,150,000 shares to
3,950,000 shares; and
4. To transact such other business as may properly come before the
meeting or adjournment(s) thereof.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice. Only stockholders of record at the close of
business on January 14, 2003 are entitled to notice of and to vote at the
meeting.
All stockholders are cordially invited to attend the meeting in person. To
assure your representation at the meeting, however, you are urged to mark, sign,
date, and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose, or vote electronically
through the Internet or by telephone. Instructions for voting by the Internet or
the telephone are set forth on the enclosed proxy card. Any stockholder
attending the meeting may vote in person even if he or she previously has
returned a proxy.
By Order of the Board of Directors
Louis G. Jekel
Secretary
Scottsdale, Arizona
January __, 2003
IT IS IMPORTANT THAT YOUR STOCKHOLDINGS BE REPRESENTED AT THIS MEETING
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES, OR PROVIDE YOUR PROXY BY USING THE INTERNET OR THE TELEPHONE.
RURAL/METRO CORPORATION
8401 E. INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA 85251
PROXY STATEMENT
This proxy statement is being furnished to stockholders of RURAL/METRO
CORPORATION, a Delaware corporation ("we" or the "Company"), in connection with
the solicitation of proxies by the Board of Directors for use at the Annual
Meeting of Stockholders of the Company to be held on Monday, March 3, 2003, at
3:00 p.m., Phoenix, Arizona time, and any adjournment or postponement thereof
(the "Annual Meeting"). A copy of the Notice of the Meeting accompanies this
Proxy Statement.
VOTING AND OTHER MATTERS
GENERAL
The enclosed proxy is solicited on behalf of the Company by our board of
directors for use at the Annual Meeting for the purposes set forth in this proxy
statement and in the accompanying notice of Annual Meeting of Stockholders. The
meeting will be held at our corporate headquarters at 8401 East Indian School
Road, Scottsdale, Arizona.
These proxy solicitation materials were first mailed on or about January
20, 2003, to all stockholders entitled to vote at the meeting.
VOTING SECURITIES AND VOTING RIGHTS
Stockholders of record at the close of business on January 14, 2003, are
entitled to notice of and to vote at the meeting. At the close of business on
the record date, there were issued and outstanding 16,150,029 shares of our
common stock and 211,549 shares of our Series B Preferred Stock ("Series B
Shares"). Each share of common stock is entitled to one vote upon any proposal
submitted for a vote at the Annual Meeting. Each Series B Share is convertible
into 10 shares of our common stock (subject to availability of sufficient common
shares). The holders of the Series B Shares are entitled to a number of votes at
the Annual Meeting equal to the aggregate number of common shares into which the
Series B Shares would be convertible at the record date, or 2,115,490 votes.
Accordingly, as of the record date the outstanding common and preferred shares
represent an aggregate of 18,265,519 votes available to be cast at the Annual
Meeting.
QUORUM
The presence, in person or by proxy, of the holders of shares of stock
having a majority of the total number of the votes that could be cast by the
holders of all outstanding shares of stock entitled to vote at the Annual
Meeting constitutes a quorum for the transaction of business at the Annual
Meeting, except that the proposal to amend our certificate of incorporation to
increase the authorized number of shares of our common stock will also require a
majority of the total number of shares of common stock outstanding as a separate
class to constitute a quorum with respect to such action. Shares that are
entitled to vote but that are not voted at the direction of the beneficial owner
(called "abstentions") and votes withheld by brokers or other nominees in the
absence of instructions from beneficial owners (called "broker non-votes") will
be counted for purposes of determining whether there is a quorum for the
transaction of business at the meeting.
VOTE REQUIRED
ELECTION OF DIRECTORS. The two nominees for director receiving the highest
number of affirmative votes duly cast will be elected as directors for
three-year terms or until their successors are elected and qualified.
Accordingly, abstentions and broker non-votes are not counted in determining the
outcome of the election of directors.
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AMENDMENT OF CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED COMMON
SHARES. The affirmative vote of 66 2/3% of the outstanding combined voting power
of the common and preferred shares, and the affirmative vote of a majority of
the shares of our outstanding common stock (voting as a separate class), present
in person or represented by proxy at the Annual Meeting and entitled to vote is
required to amend our certificate of incorporation to increase the authorized
number of shares of our common stock. Because shares represented by abstentions
and broker non-votes are considered outstanding, as a practical matter,
abstentions and broker non-votes will have the same effect as a vote against the
proposed amendment. If the amendment to our certificate of incorporation is
approved, we will file an amendment with the Secretary of State of the State of
Delaware to our certificate of incorporation that reflects the amendment.
AMENDMENT OF EMPLOYEE STOCK PURCHASE PLAN. The affirmative vote of a
majority of the outstanding combined voting power of the common and preferred
shares present in person or represented by proxy at the Annual Meeting and
entitled to vote is required to amend our Employee Stock Purchase Plan, or ESPP,
to increase the number of shares of common stock that may be purchased pursuant
to the plan from 2,150,000 to 3,950,000 shares. Shares represented by
abstentions are considered present with respect to the proposal and thus will
have the same practical effect as a vote against the proposed amendment, while
shares represented by broker non-votes are not counted for purposes of
determining whether the proposed amendment has been approved. The proposal to
increase the number of shares under our ESPP is conditioned upon the approval of
the proposal to amend our certificate of incorporation.
VOTING; PROXIES
Votes may be cast by proxy or in person at the Annual Meeting and will be
tabulated by the election inspectors appointed for the Annual Meeting, who also
will determine whether a quorum is present.
The shares represented by the proxies received, properly marked, dated, and
signed, or submitted via the Internet or by the telephone by following the
instructions on the proxy card, and not revoted will be voted at the Annual
Meeting.
When a proxy is properly executed and returned, the shares it represents
will be voted at the Annual Meeting as directed. If no specification is
indicated, the shares will be voted (i) "for" the election of the nominees set
forth in this proxy statement, (ii) "for" the amendment to our certificate of
incorporation to increase the number of authorized shares of our common stock
from 23,000,000 shares to 29,000,000 shares, (iii) "for" the increase in the
number of shares of common stock that may be purchased pursuant to the ESPP from
2,150,000 to 3,950,000, and (iv) in accordance with the discretion of the proxy
holders as to all other matters that may properly come before the Annual
Meeting.
REVOCABILITY OF PROXIES
Any person giving a proxy may revoke the proxy at any time before its use
by delivering to our executive offices, to the attention of our corporate
secretary prior to the vote at the Annual Meeting, written notice of revocation
or a duly executed proxy bearing a later date (including a proxy by telephone or
over the Internet); or by attending the Annual Meeting and voting in person.
SOLICITATION
We will pay the costs of this solicitation. In addition, we may reimburse
brokerage firms and other persons representing beneficial owners of shares for
expenses incurred in forwarding solicitation materials to beneficial owners.
Certain of our directors and officers also may solicit proxies personally or by
mail, telephone or e-mail without additional compensation. In addition, we have
retained Morrow & Co., a proxy solicitation firm, to assist in the solicitation
of proxies. Morrow & Co. may solicit proxies by mail, telephone, e-mail and
personal solicitation, and will request brokerage houses and other persons
representing beneficial owners of shares to forward proxy soliciting material to
the beneficial owners of such shares. For these services, we will pay Morrow &
Co. a fee estimated not to exceed $12,500, plus reimbursement of reasonable
out-of-pocket expenses.
ANNUAL REPORT AND OTHER MATTERS
The 2002 Annual Report to Stockholders, which was mailed to stockholders
with or preceding this proxy statement, contains financial and other information
about our activities, but is not incorporated into this proxy statement and is
not to be considered a part of these proxy soliciting materials. The information
contained in the "Report of the Compensation Committee of the Board of
Directors," "Report of the Audit Committee of the Board of Directors," and
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"Company Performance Graph" below shall not be deemed "filed" with the
Securities and Exchange Commission or subject to Regulations 14A or 14C or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, and shall
not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Act of 1934.
WE WILL PROVIDE UPON WRITTEN REQUEST, WITHOUT CHARGE TO EACH STOCKHOLDER OF
RECORD AS OF THE RECORD DATE, A COPY OF OUR ANNUAL REPORT ON FORM 10-K, AS
AMENDED, FOR THE YEAR ENDED JUNE 30, 2002 AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. ANY EXHIBITS LISTED IN THE FORM 10-K REPORT, AS AMENDED,
ALSO WILL BE FURNISHED UPON WRITTEN REQUEST AT THE ACTUAL EXPENSES WE INCUR IN
FURNISHING SUCH EXHIBITS. ANY SUCH REQUESTS SHOULD BE DIRECTED TO OUR CORPORATE
SECRETARY AT OUR EXECUTIVE OFFICES SET FORTH IN THIS PROXY STATEMENT.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on December 3, 2002 by (i) each
director; (ii) the executive officers set forth in the Summary Compensation
Table under the section below entitled "Executive Compensation;" (iii) all of
our directors and executive officers as a group; and (iv) each person known by
us to be the beneficial owner of more than 5% of our common stock.
AMOUNT
BENEFICIALLY
OWNED
NAME OF BENEFICIAL OWNER (1)(2)(3) PERCENT (2)
- ------------------------ --------- -----------
Jack E. Brucker 381,000 (4) 2.3%
John S. Banas, III 268,647 (4) 1.6%
Mary Anne Carpenter 25,000 (4) *
Cor J. Clement, Sr. 43,250 (4) *
Randall L. Harmsen 151,720 (4) *
Louis G. Jekel 137,213 (5) *
Barry D. Landon 120,767 (4) *
Dr. Michel Sucher 58,546 (4) *
William C. Turner 40,500 (4) *
Henry G. Walker 27,500 (4) *
Louis A. Witzeman 157,356 (6) 1.0%
Executive officers and directors
as a group (10 persons) 1,352,953 7.9%
5% STOCKHOLDERS:
Banque Carnegie Luxembourg S.A. (7) 2,409,950 14.9%
5, Place de la Gare
L-1616 Luxembourg
Grand-Duchy of Luxembourg
* Less than 1%
- ----------
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) The percentages shown are calculated based upon 16,150,029 shares of common
stock outstanding on December 3, 2002. The number and percentages shown
include the shares of common stock actually owned as of December 3, 2002
and the shares of common stock that the identified person or group had a
right to acquire within 60 days after December 3, 2002. In calculating the
percentage ownership, shares that the identified person or group had the
right to acquire within 60 days after December 3, 2002 are deemed to be
outstanding for the purposes of computing the percentage of shares of
common stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of shares of common
stock owned by any other stockholder.
(3) Excludes the following fully vested shares of common stock held by the ESOP
for the benefit of the following individuals: 2,303 shares for Mr. Landon
and 1,097 shares for Dr. Sucher. These persons have sole voting power with
respect to the shares held in their account by the Employee Stock Ownership
Plan.
(4) Includes shares of common stock issuable upon exercise of stock options
with respect to the following persons: Mr. Brucker, 356,000 shares; Mr.
Banas, 254,168 shares; Ms. Carpenter, 25,000 shares; Mr. Clement, 31,250
shares; Mr. Harmsen, 83,334 shares; Mr. Landon, 120,767 shares; Dr. Sucher,
24,461 shares; Mr. Turner, 32,500 shares; and Mr. Walker, 27,500 shares.
(5) Includes 85,963 shares of common stock, of which 74,299 are held by the
Louis G. Jekel Trust dated July 25, 1996. Also includes 51,250 shares of
common stock issuable upon exercise of stock options.
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(6) Includes 106,106 shares, of which 36,062 shares are held by the Louis
Witzeman, Jr. Family Investments Limited Partnership, and 70,044 shares are
held by the Witzeman Family Trust. Also includes 51,250 shares of common
stock issuable upon exercise of stock options.
(7) Information is based solely on a Schedule 13G, filed December 3, 2002, that
was filed jointly by Banque Carnegie Luxembourg S.A., Carnegie Global
Healthcare Fund Management Company S.A., Carnegie Bank A/S, D Carnegie &
Co. AB and Carnegie Kapitalforvaltning AB, reporting their beneficial
ownership as a group.
PROPOSAL TO ELECT DIRECTORS
NOMINEES
Our certificate of incorporation provides that the number of directors
shall be fixed from time to time by resolution of the Board of Directors or
stockholders. Presently, the number of directors is fixed at seven and is
divided into three classes, with one class standing for election each year for
three-year terms and until successors of such class have been elected and
qualified.
As of the record date, the Board of Directors consisted of the following
persons:
NAME CLASS YEAR IN WHICH TERM WILL EXPIRE
---- ----- ------------------------------
Jack E. Brucker I 2004
Mary Anne Carpenter I 2004
Louis A. Witzeman I 2004
Louis G. Jekel II 2002
William C. Turner II 2002
Cor J. Clement, Sr. III 2003
Henry G. Walker III 2003
The Board of Directors has nominated Louis G. Jekel and William C. Turner
for re-election as Class II directors for three-year terms or until their
respective successors are elected and qualified.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for each of the nominees named above. In the event that any of
the nominees is unable or declines to serve as a director at the time of the
Annual Meeting, the proxies will be voted for a nominee, if any, designated by
the current Board of Directors to fill the vacancy. It is not expected that any
of the nominees will be unable or will decline to serve as a director.
The Board of Directors recommends a vote "FOR" the nominees named above.
The two nominees for director receiving the highest number of affirmative votes
duly cast will be elected as directors for three-year terms. Accordingly,
abstentions and broker non-votes are not counted in determining the outcome of
the election of directors.
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The following table sets forth information regarding our directors and
executive officers, including certain biographical information.
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Cor J. Clement, Sr. 54 Chairman of the Board and Director (3)
Jack E. Brucker 50 President, Chief Executive Officer and Director
John S. Banas III 40 Senior Vice President and General Counsel
Barry D. Landon 55 President of Southwest Ambulance and Senior Vice
President of National Billing and Collections
Randall L. Harmsen 51 Vice President of Finance, Chief Accounting Officer
Mary Anne Carpenter 57 Director (1) (2) (4)
Louis G. Jekel 61 Vice Chairman of the Board, Secretary and Director
William C. Turner 73 Director (1) (2) (3) (4)
Henry G. Walker 55 Director (1) (2) (3) (4)
Louis A. Witzeman 77 Director
(1) Member of the Compensation Committee.
(2) Member of the Corporate Governance Committee.
(3) Member of the Executive Committee.
(4) Member of the Audit Committee.
COR J. CLEMENT, SR. has served as Chairman of our Board of Directors since
August 1998 and as a member of our Board of Directors since May 1992. Mr.
Clement served as Vice Chairman of the Board of Directors from August 1994 to
August 1998. Mr. Clement served as the President and Chief Executive Officer of
NVD, an international provider of security and industrial fire protection
services headquartered in the Netherlands, from February 1980 until his
retirement in January 1997.
JACK E. BRUCKER has served as our President and Chief Executive Officer and
has been a member of our Board of Directors since February 2000. Mr. Brucker
served as our Senior Vice President and Chief Operating Officer from December
1997 until February 2000. Mr. Brucker founded and served as President of Pacific
Holdings, a strategic consulting firm, from July 1989 until December 1997. Mr.
Brucker served as President of Pacific Precision Metals, a consumer products
company, from September 1987 until June 1989.
JOHN S. BANAS III has served as our Senior Vice President and General
Counsel since April 2000. Mr. Banas served as our General Counsel from September
1999 through April 2000. Mr. Banas served as General Counsel at SpinCycle Inc.
in Scottsdale, Arizona from 1998 to September 1999. From 1995 to 1998, he was
Senior Corporate Counsel to Lam Research Corporation in Fremont, California; and
from 1992 to 1995 served as corporate, real estate, and environmental counsel at
the law firm of Wilson, Sonsini, Goodrich & Rosati in Palo Alto, California. Mr.
Banas served as litigation counsel from 1989 to 1992 at the law firm of Thelen,
Marrin, Johnson & Bridges (now Thelen, Reid & Priest) in San Francisco,
California.
BARRY D. LANDON has served as Senior Vice President of National Billing and
Collections since May 2002, and Vice President of National Billing and
Collections from May 2000 to May 2002. Mr. Landon also has served as the
President of Southwest Ambulance since November 1999. Mr. Landon served as
Director of National Billing from February 1998 to May 2000. Prior to joining
the Company, Mr. Landon served as President and Chief Financial Officer of SW
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General, Inc., d/b/a Southwest Ambulance, from June 1977 through February 1998,
which was acquired by the Company on June 30, 1997.
RANDALL L. HARMSEN has served as Vice President of Finance and Chief
Accounting Officer since July 2000. Mr. Harmsen served as Vice President of
Network Management and Chief Financial Officer for United Healthcare of Arizona
Inc. in Phoenix, Arizona, from 1997 until the time he joined our Company. From
1994 to 1997, he was Vice President of Finance for Carondelet Health Care
Corporation in Tucson, Arizona. From 1989 to 1994, Mr. Harmsen served as Chief
Financial Officer for Presbyterian Healthcare Services in Albuquerque, New
Mexico; and from 1977 to 1989, he was Chief Financial Officer for St. Luke's
Hospital in Davenport, Iowa.
MARY ANNE CARPENTER has been a member of our Board of Directors since
January 1998. Ms. Carpenter served as Executive Vice President and Executive
Committee member of First Health Group Corp., a publicly traded managed health
care company, from January 1993 until her retirement in May 2001. From October
1991 until January 1993, Ms. Carpenter served as Senior Vice President, and from
July 1986 through October 1991, as Vice President of First Health Group Corp.
Ms. Carpenter has served on panels for several other national health care
organizations.
LOUIS G. JEKEL has served as our Secretary and as a member of our Board of
Directors since 1968 and as Vice Chairman of our Board of Directors since August
1998. Mr. Jekel is a partner in the law firm of Jekel & Howard, Scottsdale,
Arizona.
WILLIAM C. TURNER has been a member of our Board of Directors since
November 1993. Mr. Turner is currently Chairman and Chief Executive Officer of
Argyle Atlantic Corporation, an international merchant banking and management
consulting firm; a trustee of the United States Council for International
Business; a trustee and past Chairman of the American Graduate School of
International Management (Thunderbird); and a Board member and former Chairman
of the Board of Directors of Mercy Ships International, Incorporated. Mr. Turner
is also a former United States Ambassador and permanent representative to the
Organisation for Economic Co-operation and Development.
HENRY G. WALKER has been a member of our Board of Directors since September
1997. Since April 1997, he has served as President and Chief Executive Officer
of the Sisters of Providence Health System, comprised of hospitals, long-term
care facilities, physician practices, managed care plans, and other health and
social services. From 1996 to March 1997, Mr. Walker served as President and
Chief Executive Officer of Health Partners of Arizona, a state-wide managed care
company. From 1992 to 1996, he served as President and Chief Executive Officer
of Health Partners of Southern Arizona, a healthcare delivery system. Mr. Walker
is a member of the National Advisory Council of the Healthcare Forum, and also
serves as a director of Consolidated Catholic Healthcare a private non-profit
company.
LOUIS A. WITZEMAN is the founder of our Company. Mr. Witzeman has served as
a member of our Board of Directors since our formation in 1948, currently
serving as Chairman of the Board Emeritus. Mr. Witzeman served as our Chief
Executive Officer and Chairman of the Board of Directors from 1948 until his
retirement in 1980.
Directors hold office until their successors have been elected and
qualified. All officers serve at the pleasure of the Board of Directors. There
are no family relationships among any of our directors or officers.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our bylaws authorize the Board of Directors to appoint among its members
one or more committees composed of one or more directors. The Board of Directors
has appointed the following standing committees: a Compensation Committee; a
Corporate Governance Committee; an Executive Committee; and an Audit Committee.
Membership in the committees is indicated in the table above.
THE COMPENSATION COMMITTEE. The Compensation Committee reviews and acts on
matters relating to compensation levels and benefit plans for our key
executives. The Compensation Committee also reviews the succession planning for
key executive personnel, monitors employee relations issues, and oversees senior
management structure. The Committee held two meetings during the fiscal year
ended June 30, 2002.
CORPORATE GOVERNANCE COMMITTEE. The Corporate Governance Committee reviews
credentials of existing and prospective directors and selects classes of
directors. The Committee will also consider individuals recommended by
stockholders for Board membership. For information concerning stockholder
nominations of candidates for election as directors, see "Deadline for Receipt
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of Stockholder Proposals; Discretionary Authority," below. The Corporate
Governance Committee is also responsible for developing and recommending to the
Board of Directors corporate governance guidelines applicable to our Company and
periodically reviewing such guidelines and recommending any changes to those
guidelines to the Board of Directors. The Corporate Governance Committee held
two meetings during the fiscal year ended June 30, 2002.
EXECUTIVE COMMITTEE. The Executive Committee acts as a liaison between
management and the Board of Directors. At times the Board of Directors empowers
the Executive Committee to take certain actions on behalf of the Board of
Directors between regularly scheduled meetings. The Executive Committee did not
meet during the fiscal year ended June 30, 2002.
AUDIT COMMITTEE. The Audit Committee reviews our annual and quarterly
financial statements and related SEC filings, significant accounting issues and
the scope of the audit with our independent accountants, and is available to
discuss other audit related matters with our independent accountants that may
arise during the year. The Audit Committee held 12 meetings during the fiscal
year ended June 30, 2002.
Our Board of Directors held a total of eight meetings during the fiscal
year ended June 30, 2002. All of the members of the Board of Directors, with the
exception of Ms. Carpenter, attended at least 75% of the aggregate of (i) the
total number of meetings of the Board of Directors, and (ii) the total number of
meetings held by all committees of the Board on which such director was a
member.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Officers who serve on the Board of Directors receive no additional
compensation. We paid a director's fee in fiscal 2002 to Mr. Clement, our
Chairman of the Board of Directors, of $45,000 plus reimbursement for expenses
for each Board or committee meeting he attended. We pay all other non-employee
Board members, with the exception of Mr. Witzeman, an annual retainer of
$15,000. Non-employee directors, with the exception of Mr. Jekel, also receive
$1,000 for each Board meeting attended, $500 for each Board meeting participated
in telephonically, $500 for each committee meeting attended, and $250 for each
committee meeting participated in telephonically. We also pay $2,500 annually to
any non-employee chairman of each of the committees of the Board of Directors.
Under the terms of our 1992 Stock Option Plan, which expired in November 2002,
non-employee directors received (i) stock options to purchase 10,000 shares upon
their first election to the Board of Directors and options to purchase 2,500
shares at the meeting of the Board of Directors held immediately after the
annual meeting of stockholders (except that the Chairman of the Board receives
stock options to acquire 5,000 shares), and (ii) each year each non-employee
Board member received stock options to acquire a number of shares equal to 1,000
shares for each $0.05 increase in our earnings per share over the previous
fiscal year, subject to a maximum of 5,000 shares of stock per non-employee
Board member. Messrs. Jekel and Witzeman receive compensation for consulting
services, which includes serving on the Board of Directors. See "Certain
Relationships and Related Transactions" and "Compensation Committee Interlocks
and Insider Participation." In fiscal 2002, we granted to the following
individuals options to purchase the following shares of common stock as
consideration to serve as a director: 5,000 to Mr. Clement, and 2,500 to each of
Messrs. Jekel, Turner, Walker, Witzeman, and Ms. Carpenter. The options have an
exercise price of $0.44 per share. In addition, in October 2002, we granted
options to purchase 5,000 shares of common stock to each of the following
non-employee Board members in connection with our earnings per share over the
previous fiscal year: Messrs. Clement, Jekel, Turner, Walker, Witzeman, and Ms.
Carpenter. The options have an exercise price of $2.24 per share.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee, which consists of Messrs. Turner and Walker and Ms.
Carpenter, adopted a charter on June 13, 2000. A copy of such charter has been
previously included with our proxy statement for the 2001 Annual Meeting of
Stockholders. Each member of the Audit Committee is "independent," as defined by
the listing rules of the Nasdaq Stock Market. The Audit Committee has reviewed
and discussed with management the audited financial statements for June 30, 2002
and discussed with our independent accountants the matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards, AU
ss.380). The Audit Committee has received the written disclosures and the letter
from PricewaterhouseCoopers, LLP ("PwC") required by Independence Standards
Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), and has discussed with PwC its independence.
Based on the foregoing, the Audit Committee recommended to the Board of
8
Directors that the Company include the audited financial statements in its
Annual Report on Form 10-K, as amended, for fiscal 2002 for filing with the
Securities and Exchange Commission.
The members of the Audit Committee are not professionally engaged in the
practice of auditing or accounting. Members of the Audit Committee rely, without
independent verification, on the information provided to them and on the
representations made by management and the independent accountants. Accordingly,
the Audit Committee's oversight does not provide an independent basis to
determine that management has maintained procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee's considerations and discussions referred to
above do not assure that the audit of the Company's financial statements has
been carried out in accordance with generally accepted auditing standards, that
the financial statements are presented in accordance with generally accepted
accounting principles or that the Company's independent accountants are in fact
"independent."
Audit Committee of the Board of Directors
Henry G. Walker, Chairman
Mary Anne Carpenter
William C. Turner
9
AUDIT FEES
The aggregate fees relating to the fiscal 2002 audit and review of our
quarterly financial information totaled $517,968, of which $246,936 was billed
during the fiscal year ended June 30, 2002.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
During fiscal year 2002, the Company did not engage its independent
accountants to perform financial information systems design and implementation.
ALL OTHER FEES
During fiscal year 2002, all other fees paid to PwC amounted to $35,650,
which primarily related to tax compliance and the review of other securities
filings during the year.
The Audit Committee of the Board of Directors considered whether the
provision of non-audit services is consistent with maintaining the accountant's
independence.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the total compensation received for services
rendered to us in all capacities for the fiscal years ended June 30, 2000, 2001,
and 2002 by our Chief Executive Officer and our three most highly compensated
executive officers who were in office at June 30, 2002. The table also sets
forth this information for one other executive officer who is no longer with our
Company at June 30, 2002, whose aggregate cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
AWARDS
----------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND PRINCIPAL ----------------------------------- UNDERLYING COMPENSATION
POSITION AT YEAR-END YEAR SALARY ($)(1) BONUS ($) OPTIONS (#) ($)(2)
- -------------------- ---- ------------- --------- ----------- ------
Jack E. Brucker 2002 $594,615 $307,000 125,000 $ 3,400
Chief Executive Officer 2001 $447,077 $ 43,600 200,000 $ 3,200
and President (3) 2000 $314,246 -- 21,000 $ 3,200
John S. Banas III 2002 $267,692 $ 84,000 80,000 $ 2,400
Senior Vice President 2001 $207,800 $ 18,020 150,000 --
and General Counsel 2000 $126,438 -- 17,500 --
Barry D. Landon 2002 $209,231 $ 87,500 70,000 --
Senior Vice President of 2001 $199,039 $ 87,500 30,000 --
National Billing and Collections 2000 $174,269 $ 45,750 15,000 --
Randall L. Harmsen 2002 $200,000 $ 64,750 60,000 $ 3,373
Vice President of Finance 2001 $182,577 -- 20,000 --
2000 -- -- -- --
Dr. Michel Sucher 2002 $210,000 (5) -- --
Former Senior Vice President and 2001 $201,923 $ 19,500 75,000 $ 3,200
Chief Medical Officer (4) 2000 $184,231 -- 12,500 $ 3,200
10
- ----------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any of the officers listed.
(2) Consists of company-matching contributions to our 401(k) plan paid in cash.
(3) Mr. Brucker became our President and Chief Executive Officer in February
2000. From December 1997 until February 2000, Mr. Brucker served as our
Senior Vice President and Chief Operating Officer.
(4) Dr. Sucher became an executive officer of our Company during February 2000.
Dr. Sucher's employment with the Company terminated in July 2001.
(5) Includes $193,846 paid to Dr. Sucher pursuant to his employment agreement.
OPTION GRANTS
The following table represents the options granted to the listed officers
in the last fiscal year and the value of the options.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE OR GRANT DATE
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
OPTIONS GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE ($)(2)
---------------------- ----------- --------- ---- ------
Jack E. Brucker 125,000 (3) 6.9% $0.84 7/2/2011 $36,725
John S. Banas III 80,000 4.4% $0.39 12/17/2011 $14,165
Barry D. Landon 70,000 3.9% $0.39 12/17/2011 $12,395
Randall L. Harmsen 60,000 3.3% $0.39 12/17/2011 $10,624
Dr. Michel Sucher (4) -- -- -- -- $ --
- ----------
(1) Except as otherwise indicated, all of the options vest and become
exercisable as follows: one-third at grant date in December 2001, one-third
in December 2002 and one-third in December 2003.
(2) The hypothetical present value of the options at the date of grant was
determined using the Black-Scholes option pricing model. The Black-Scholes
model estimates the present value of an option by considering a number of
factors, including the exercise price of the option, the volatility of our
common stock, the dividend rate, the term of the option, the time it is
expected to be outstanding, and interest rates. The Black-Scholes values
were calculated using the following assumptions: (a) risk-free interest
rate of 2.27%; (b) a dividend yield of 0.00%; (c) an expected life of the
option after vesting of 2.72 years; and (d) an expected volatility of
80.33%.
(3) Mr. Brucker's options vested and became exercisable immediately upon grant
in July 2001.
(4) Dr. Sucher's employment terminated in July 2001.
11
OPTION HOLDINGS
The following table represents certain information with respect to the
options held by the listed officers as of June 30, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED FISCAL YEAR-END(#) AT FISCAL YEAR-END (2)
ON EXERCISE OF VALUE ----------------------------- -----------------------------
STOCK OPTIONS(#) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------ ----------- ------------- ----------- -------------
Jack E. Brucker -- -- 356,000 50,000 $587,750 $ 80,500
John S. Banas III -- -- 144,167 103,333 $296,868 $277,232
Barry D. Landon -- -- 84,934 59,166 $117,335 $171,365
Randall L. Harmsen -- -- 40,000 40,000 $104,100 $128,800
Dr. Michel Sucher 25,000 $ 32,000 -- -- $ -- $ --
- ----------
(1) Calculated based on the market price at exercise multiplied by the number
of options exercised less the total exercise price of the options
exercised.
(2) Calculated based on $3.61, which was the closing sales price of our common
stock as quoted on the Nasdaq Small Cap Market on June 28, 2002, multiplied
by the number of applicable shares in-the-money less the total exercise
price.
EMPLOYMENT AGREEMENTS
Effective July 1, 2001, we entered into an employment agreement with Jack
E. Brucker, our President and Chief Executive Officer, for a five-year term
expiring July 1, 2006, which automatically renews for one-year periods
thereafter. Mr. Brucker receives a base salary of $600,000, and participates in
our stock option plans and other generally available benefit programs. Mr.
Brucker also received a signing bonus of $200,000, 50% of which was paid to him
on July 1, 2001, and 50% of which was paid on July 1, 2002. In addition, Mr.
Brucker participates in our management incentive program that provides bonuses
to executive officers and other members of management based upon our achieving
certain financial and operating goals as well as the achievement of individual
objectives established for each participant. Mr. Brucker's employment agreement
provides that should we terminate his employment agreement without cause, should
he terminate his employment agreement for good reason, should we not renew his
employment agreement without cause, should he not renew his employment agreement
for good reason, or should we propose to modify his employment agreement in a
manner which gives him good reason to terminate the employment agreement, he
will receive his then effective base salary and other benefits provided by the
employment agreement immediately following the effective date of termination of
employment for a period equal to the greater of (i) two years, or (ii) five
years minus the number of days between July 1, 2001, and the effective date of
termination of employment. If Mr. Brucker terminates his employment agreement
without good reason (and for reasons other than health considerations), he will
not receive any severance benefits and will pay us a sum equal to the net base
salary received by him during the period equal to the greater of (i) two years
preceding termination of employment, or (ii) five years minus the number of days
between July 1, 2001 and the effective date of the termination of employment.
Under the employment agreement, Mr. Brucker has agreed not to compete
against us after the termination of the employment agreement for a period equal
to the greater of (i) two years, or (ii) five years minus the number of days
between July 1, 2001 and the effective date of the termination of employment.
Mr. Brucker may elect to shorten such non-compete period to not less than 12
months. Upon such election we will no longer be required to pay Mr. Brucker any
severance benefits. In addition, if Mr. Brucker is receiving severance benefits
under the employment agreement and he elects to solicit clients, employees, or
12
otherwise competes with us at any time after his termination of employment or
discloses confidential information, we will no longer be obligated to pay Mr.
Brucker any severance benefits.
In April 2001, we entered into an employment agreement with Mr. John S.
Banas III to become our Senior Vice President and General Counsel for a two-year
term expiring April 23, 2003, which automatically renews for one-year periods
thereafter. Under Mr. Banas' employment agreement, he is to receive a base
salary of $240,000, and is entitled to participate in our stock option plans and
our other generally available benefit programs. Mr. Banas is also entitled to
participate in our management incentive program that provides bonuses to
executive officers and other members of management based upon our achieving
certain financial and operating goals as well as the achievement of individual
objectives established for each participant. Mr. Banas' employment agreement
provides that should we terminate his employment agreement without cause, should
he terminate his employment agreement for good reason, should we not renew his
employment agreement without cause, should he not renew his employment agreement
for good reason, or should we propose to modify his employment agreement in a
manner which gives him good reason to terminate the employment agreement, he
will receive his then effective base salary and other benefits provided by the
employment agreement immediately following the effective date of termination of
employment for a period of 24 months. If Mr. Banas terminates his employment
agreement without good reason, he will not receive any severance benefits.
Under the employment agreement, Mr. Banas has agreed not to compete against
us after the termination of the employment agreement for a period of 24 months
after the effective date of the termination of employment. Mr. Banas may elect
to shorten such non-compete period to 12 months. Upon such election we will no
longer be required to pay Mr. Banas any severance benefits. In addition, if Mr.
Banas is receiving severance benefits under the employment agreement and he
elects to solicit clients, employees, or otherwise competes with us at any time
after his termination of employment or discloses confidential information, we
will no longer be obligated to pay Mr. Brucker any severance benefits.
In June 2000, we entered into an employment agreement with Mr. Harmsen for
a term expiring December 31, 2000, which agreement automatically renews for
one-year periods thereafter. Mr. Harmsen receives a base salary of $185,000, and
is entitled to participate in our management incentive program, stock option
plans and other generally available benefit programs. Mr. Harmsen's employment
agreement provides that should his employment agreement terminate or fail to be
renewed without cause or for good reason, as defined, or should we propose to
modify his employment agreement in a manner which gives him good reason to
terminate the employment agreement, he will receive his base salary and other
benefits for 12 months. If Mr. Harmsen terminates his employment agreement
without good reason, he will not receive any severance benefits. Mr. Harmsen has
agreed not to compete against us for 24 months after the effective date of
termination.
An employment agreement with Dr. Sucher expired in December 2000. Due to
Dr. Sucher's termination on July 12, 2001, Dr. Sucher is entitled to receive
certain severance benefits, including base salary and other benefits provided by
the agreements for one year from the date of termination. In addition, his
employment agreement provides for us to indemnify him for certain liabilities
arising from actions taken within the scope of employment.
Change of control agreements entered into by Messrs. Brucker, Banas and
Harmsen provide that in the event of a change of control and the surviving
entity or individuals in control do not offer such persons employment, terminate
their employment without cause, or such persons terminate their employment for
good reason, such persons will receive a sum equal to (A) 200% (150% in the case
of Mr. Harmsen) of (i) their applicable annual base salary, and (ii) the amount
of incentive compensation paid or payable to them during the calendar year
preceding the calendar year in which the change of control occurs, plus (B) the
full amount of any payments due under such employee's employment agreement. In
addition, each executive would be entitled to receive certain benefits,
including the acceleration of exercisability of their stock options or the
payment of the value of such stock options in the event they are not accelerated
or replaced with comparable options. Pursuant to the terms of the change of
control agreements, the health and other benefits received under the change of
control agreement by such executive will be reduced or eliminated to the extent
such benefits are received under the executive's employment agreement. In
addition, the change of control agreements place a ceiling on the aggregate
amount of benefits any executive may receive under the agreement. Each executive
will receive an amount equal to 2.99 times the amount of annualized includable
compensation received by the executive as determined under the Internal Revenue
Code. Any payments received under the change of control agreement may be reduced
by amounts we pay such executive under their respective employment agreements.
For purposes of the change of control agreements, "good reason" includes a
reduction of their respective duties and/or salary or the surviving entity's
failure to assume their respective employment and change of control agreements.
For purposes of the change of control agreements, a "change of control" includes
13
(i) the acquisition of beneficial ownership by certain persons, acting alone or
in concert with others, of 30% or more of the combined voting power of our then
outstanding voting securities; (ii) during any two-year period, our Board
members at the beginning of such period cease to constitute at least a majority
thereof (except that any new Board member approved by at least two-thirds of the
Board members then still in office, who were directors at the beginning of such
period, is considered to be a member of the current Board); or (iii) approval by
our stockholders of certain reorganizations, mergers, consolidations,
liquidations, or sales of all or substantially all of our assets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 2002, our Compensation Committee
consisted of Messrs. Walker, and Turner and Ms. Carpenter, currently directors
of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our directors and officers, and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by Securities and Exchange Commission regulation to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us from
our executive officers and directors during the fiscal year ended June 30, 2002,
or written representations from such persons that no other reports were
required, except as set forth below, we believe that each person who, at any
time during such fiscal year, was a director, officer or beneficial owner of
more than 10% of our common stock complied with all Section 16(a) filing
requirements during such fiscal year. Based solely on our review of the copies
of the reports furnished to us by Carnegie Global Healthcare Fund Management
("Carnegie"), Carnegie did not timely file reports required under Section 16(a)
of the Exchange Act during the fiscal year ended June 30, 2002. Carnegie did not
timely file a Form 3 for June 2002 reporting its acquisition of over 10% of our
common stock. In addition, Carnegie failed to timely file a Form 4 for June 2002
reporting two transactions in which Carnegie acquired additional shares of our
common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We paid approximately $138,000 during the year ended June 30, 2002 for
legal services to Jekel & Howard, of which Lou Jekel, a member of our Board of
Directors, is a principal.
Louis A. Witzeman, a member of our Board of Directors, is our founder and
served as our Chief Executive Officer until 1980. Mr. Witzeman was paid
approximately $46,000 during the year ended June 30, 2002 under four leases for
fire and ambulance stations. These leases may be cancelled by us at any time.
Mr. Witzeman received $89,000 during the fiscal year ended June 30, 2002 for
fire protection and EMS advisory and consulting services and for serving on the
Board of Directors. We also provide Mr. Witzeman with an automobile for personal
use.
We believe that all of the related party transactions listed above were
provided on terms no less favorable to us than could have been obtained from
unrelated firms or third parties. All future transactions between us and our
officers, directors, and principal stockholders are expected to be on terms no
less favorable to us than could be obtained from unaffiliated persons and will
require the approval of our independent directors.
14
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
GENERAL
The Compensation Committee of the Board of Directors administers the
compensation programs for our executive officers. The committee is composed
exclusively of independent, non-employee directors who are not eligible to
participate in any of management's programs.
The committee presents the following report on the compensation for our
executive officers for fiscal 2002.
OVERVIEW AND PHILOSOPHY
Our executive compensation programs are based on the belief that the
interests of executive officers should be directly aligned with those of the
stockholders. The programs are strongly oriented toward a pay-for-performance
philosophy that includes a significant percentage of variable compensation, and
results in executives accumulating significant equity positions in our common
stock. The committee has established the following principles to guide
development of our compensation programs and to provide a framework for
compensation decisions:
- provide a total compensation package that will attract the best talent
to our Company, motivate individuals to perform at their highest
levels, reward outstanding performance, and retain executives whose
skills are critical for building long-term stockholder value;
- establish annual incentives for senior management that are directly
tied to the overall financial performance of our Company; and
- implement longer-term incentives that focus executive officers on
managing from the perspective of an owner with an equity stake in the
business, principally by the granting of stock options.
COMPENSATION PROGRAMS AND PRACTICES
The committee determines salary ranges and incentive award opportunities
for all corporate officers. Our management compensation program consists of cash
and equity based components.
Cash Component: Cash compensation is designed to fluctuate with our
performance. In the years that we exhibit superior performance, cash
compensation is designed to generally be above average levels; when
financial performance is below goal, cash compensation is designed to be
below average competitive levels. This is achieved through the Management
Incentive Plan, or MIP, which is paid out annually only if predetermined
quantitative and qualitative goals are attained.
Base Pay: Base pay guidelines are established for our officers and
managers based on their relative job content. Individual base pay
within the guidelines is based on sustained individual performance
toward achieving our goals. Annual modifications to base pay levels
are proposed by the President and approved by the committee each
August. Base pay modifications, excluding promotions, for executive
officers averaged approximately 18.6% in fiscal 2002.
Management Incentive Plan: The MIP is an annual cash incentive plan.
At the beginning of each fiscal year, performance goals are created
between us and the executive that document the executive's
accountabilities, and define levels of performance on those
accountabilities. A portion of the performance goal is weighted to our
overall financial performance of the Company, and a portion is
weighted to the executive's particular area of responsibility. MIP
opportunity for executive officers can be as high as 55% of the
executive's base pay. For fiscal 2002, we made the following payments:
Mr. Brucker, $330,000; Mr. Banas, $135,000; Mr. Landon, $100,000; and
Mr. Harmsen, $83,250.
Equity-based Component: We have a long history of encouraging
employees to become stockholders. In 1989, we implemented our first
stock option plan through which we could grant qualified and
non-qualified stock options to management employees. In 1994, we
15
implemented our ESPP, whereby shares of our common stock may be
purchased through payroll deductions at 85% of its market value. We
believe that equity-based compensation in the form of stock options
links the interests of management and stockholders by focusing
employees and management on increasing stockholder value. The actual
value of such equity-based compensation depends entirely on the future
appreciation of our stock. The Board grants stock options using
criteria consistent with the level of an executive's anticipated
impact on our goals and objectives. See "Executive Compensation --
Option Grants" for options granted to executive officers during fiscal
2002.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
We use the same factors and criteria described above in making compensation
decisions regarding our Chief Executive Officer. Mr. Brucker became our Chief
Executive Officer and President during February 2000. During the 2002 fiscal
year, Mr. Brucker was compensated pursuant to a five-year employment agreement
that was effective commencing July 1, 2001. Pursuant to the agreement Mr.
Brucker's base pay was $600,000 and he received a signing bonus of $200,000. As
noted above, in connection with the Management Incentive Plan for the 2002
fiscal year, Mr. Brucker also received a performance bonus of $330,000, which
was paid in July 2002. In determining Mr. Brucker's salary pursuant to the
employment agreement, we took into account publicly-available information
concerning executive compensation provided by comparably-sized companies in the
Phoenix, Arizona metropolitan area and by other companies in our industry. We
also took into account recent progress in achieving operational objectives and
the importance of retaining Mr. Brucker's services for the benefit of the
Company. See the table under "Executive Compensation -- Option Grants" for
information regarding the options granted to Mr. Brucker during fiscal 2002.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993 and effective
in 1994, generally disallows a tax deduction to public companies for
compensation in excess of $1 million paid to each of the corporation's chief
executive officer and four other most highly compensated executive officers.
Qualifying performance-based compensation is not subject to the deduction limit
if certain requirements are met.
We currently intend to structure the performance-based portion of the
compensation of our executive officers in a manner that complies with Section
162(m).
Members of the Compensation Committee
Henry G. Walker
William C. Turner
Mary Anne Carpenter
COMPANY PERFORMANCE GRAPH
The following line graph compares cumulative total stockholder return,
assuming reinvestment of dividends, for: (i) our common stock; (ii) the NASDAQ
Combined Composite Index; and (iii) the NASDAQ Health Services Index. Because we
did not pay dividends on our common stock during the measurement period, the
calculation of the cumulative total stockholder return on the common stock did
not include dividends. Because of the small number of publicly traded companies
in our peer group, we do not believe we can reasonably identify a group of peer
issuers. The graph assumes $100 was invested on July 1, 1997.
16
6/30/1997 6/30/1998 6/30/1999 6/30/2000 6/30/2001 6/30/2002
--------- --------- --------- --------- --------- ---------
Rural/Metro 100 45 33 6 3 12
NASDAQ Composite 100 131 186 275 150 101
NASDAQ Health Services 100 97 92 71 101 99
PROPOSAL TO APPROVE AMENDMENT TO OUR CERTIFICATE
OF INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK
INTRODUCTION
Our certificate of incorporation currently authorizes the issuance of up to
23,000,000 shares of our common stock. Of such 23,000,000 presently authorized
shares of common stock, 16,150,029 shares were issued and outstanding as of the
record date. In addition, an aggregate of 7,244,298 shares of common stock are
reserved as of the record date for issuance pursuant to our stock option plans
and our ESPP. Accordingly, no shares of our common stock currently are available
for issuance for any other corporate purpose.
Effective September 30, 2002, we entered into an amended credit facility
pursuant to which, among other things, the maturity date of the original credit
facility was extended to December 31, 2004 and our prior covenant noncompliance
was permanently waived. In consideration of the amendment of the original credit
facility, we issued 211,549 shares of our Series B Preferred Stock (the "Series
B Shares"). The Series B Shares currently are convertible into 2,115,490 shares
of our common stock (subject to approval of this proposal). As noted in the
preceding paragraph, no shares of our common stock currently are available to
permit the conversion of the Series B Shares.
THE PROPOSED AMENDMENT TO OUR CERTIFICATE OF INCORPORATION
Our Board of Directors has unanimously approved an amendment to our
certificate of incorporation that would increase the total authorized number of
common shares from 23,000,000 shares to 29,000,000 shares. The amendment to our
certificate of incorporation will increase the authorized common stock by
amending the first sentence of Article IV of our certificate of incorporation so
that, as amended, it will read as follows:
"The total number of shares of stock that the Corporation shall
have the authority to issue is thirty-one million (31,000,000),
consisting of twenty-nine million (29,000,000) shares of Common
Stock, par value $.01 per share ("COMMON STOCK") and two million
(2,000,000) shares of Preferred Stock, par value $.01 per share
("PREFERRED STOCK")."
17
SUMMARY OF REASONS FOR INCREASING THE AUTHORIZED COMMON STOCK
We are seeking stockholder approval to amend our certificate of
incorporation to increase the number of shares of authorized common stock from
23,000,000 to 29,000,000 for the following principal reasons:
* In connection with the amended credit facility, we agreed to present
to our common stockholders a proposal to increase our authorized
common stock to cause the full conversion of the Series B Shares.
* As a series of preferred stock, the Series B Shares currently enjoy
certain preferred terms and conditions. Approval of the authorization
of sufficient common shares automatically causes the Series B Shares
to be converted into common shares and will eliminate such
preferences. See "Potential Elimination of Preferences Currently Held
by Series B Shares."
* While no specific issuances are currently contemplated other than the
shares to be issued upon conversion of the Series B Shares and
pursuant to the ESPP, approval of the proposed amendment will make
shares of common stock available for issuance from time to time for
other appropriate corporate purposes. See "Potential Future Issuances"
and "Proposal to Approve Amendment to the Employee Stock Purchase
Plan."
POTENTIAL ELIMINATION OF PREFERENCES CURRENTLY HELD BY SERIES B SHARES
The Series B Shares are automatically converted into common shares upon
authorization of sufficient additional common shares to permit full conversion
of the Series B Shares. As a series of preferred stock, the Series B Shares
currently enjoy certain preferred terms and conditions, which preferences are
automatically eliminated upon conversion of the Series B Shares into common
shares. Key current preferences associated with the Series B Shares are as
follows:
* PREFERENCE UPON ACQUISITION OR LIQUIDATION. If the Series B Shares are
not converted into common shares, the Series B Shares enjoy a
preferred payment (the amount of which increases over time) upon the
occurrence of various transactions, including a sale of the Company or
its assets to a third party, an acquisition of a majority of the
voting control of the Company, or a liquidation or dissolution of the
Company. See "Terms of our Series B Shares - Liquidation Preference."
This preferred payment might have the effect of reducing any proceeds
otherwise available to the holders of our common shares.
* MANDATORY REDEMPTION OBLIGATION. If the Series B Shares are not
converted into common shares, we are required to redeem the Series B
Shares on December 31, 2004 (which is the maturity date of the amended
credit facility) for the greater of $15 million, plus accrued
dividends, if any, or the value of the common shares into which the
Series B Shares would then have been convertible. See "Terms of Series
B Shares - Mandatory Redemption." We do not know whether the Company
will then possess the capital resources to fund this redemption
obligation.
* RESTRICTIVE COVENANTS. So long as the Series B Shares are not
converted into common shares, the Series B Shares have special
approval rights regarding certain corporate transactions. See "Terms
of Series B Shares - Special Approval Rights." These special approval
rights may interfere with or prevent us from taking corporate actions
that might otherwise be in our best interests.
* EXPENSES AND POTENTIAL INCOME REDUCTION. Costs associated with the
amended credit facility, including the fair value of the Series B
Shares ($4.2 million) and fees and other costs ($2.6 million), will be
amortized as interest expense over the life of the amended credit
facility. Additionally, the difference between the fair value of the
Series B Shares and the greater of the $15.0 million redemption
payment to be made if conversion of the Series B Shares into common
stock does not occur ($10.8 million) or the market value equivalent of
the common stock will be accreted and recorded as a reduction in
income available to common stockholders for purposes of determining
our earnings per share. The accretion will end at the earlier of the
conversion of the Series B Shares to common stock or the end of the
amended credit facility.
18
POTENTIAL FUTURE ISSUANCES OF COMMON STOCK
We do not have any current plans or proposals to issue any portion of the
additional shares of common stock, other than the issuance of common stock upon
conversion of the Series B Shares and the reservation for issuance of an
additional 1,800,000 shares under our ESPP upon approval of our stockholders.
See "Proposal to Approve Amendment to the Employee Stock Purchase Plan."
In general, however, the increase in the authorized common shares is
intended to provide our board with authority under certain circumstances,
without further action of the stockholders, to issue additional common shares
from time to time as the board deems necessary. The board believes it is
desirable to have the ability to issue such additional common shares from time
to time to provide flexibility in addressing our financing needs and for general
corporate purposes. Potential uses of the additional authorized shares could
include equity financings, stock dividends or distributions, acquisitions of
businesses, and issuance of common shares upon the exercise of future warrants,
options or other convertible securities. Certain of these uses, generally
including new stock option or other stock compensation plans or certain
issuances of more than 20% of the outstanding stock, would require stockholder
approval pursuant to the applicable Nasdaq rules.
POTENTIAL ANTI-TAKEOVER EFFECT OF AUTHORIZED COMMON STOCK
The increase in our authorized common stock may facilitate certain
anti-takeover devices that may be advantageous to management if management
attempts to prevent or delay a change of control. The board could create
impediments to a takeover or transfer of control by causing such additional
authorized shares to be issued to a holder or holders who might side with the
board in opposing a takeover bid. In this connection, the board could issue
shares of common stock by private placement or pubic offering, or rights to
purchase such shares could be issued to create voting impediments to or to
frustrate persons seeking to effect a takeover or otherwise to gain control of
us. Furthermore, the existence of such shares might have the effect of
discouraging any attempt by a person or entity, through the acquisition of a
substantial number of shares of common stock, to acquire control of us, since
the issuance of such shares could dilute the common stock ownership of such
person or entity. Employing such devices may adversely impact stockholders who
desire a change in management or who desire to participate in a tender offer or
other sale transaction involving us. By use of such anti-takeover devices, the
board may thwart a merger or tender offer even though stockholders might be
offered a substantial premium over the then current market price of our common
stock. At the present time, we are not aware of any contemplated mergers, tender
offers or other plans by a third party to attempt to effect a change in control,
and this proposal is not being made in response to any such attempt.
Our certificate of incorporation authorizes the issuance of 2,000,000
shares of preferred stock, 1,350,353 of which remain undesignated. The board,
within the limitations and restrictions contained in our certificate of
incorporation and without further action by our stockholders, has the authority
to issue the undesignated preferred stock from time to time in one or more
series and to fix the number of shares and the relative rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and any other preferences, special rights and qualifications of any such series.
Any issuance of preferred stock with voting rights could, under certain
circumstances, have the effect of delaying or preventing a change in control of
us by increasing the number of outstanding shares entitled to vote and
increasing the number of votes required to approve a change in control.
While it may be deemed to have potential anti-takeover effects, the
proposed amendment to increase the authorized common stock is not prompted by
any specific takeover effort or threat currently perceived by the board.
Moreover, the board does not currently intend to propose additional
anti-takeover measures in the foreseeable future.
TERMS OF SERIES B SHARES
The following is a summary of the terms of the Series B Shares. For the
complete terms of the Series B Shares, please see the Certificate of
Designation, Preferences, and Rights of Series B Preferred Stock filed with the
Secretary of State of the State of Delaware on September 26, 2002, which is
attached as an exhibit to the Current Report on Form 8-K filed by us on October
16, 2002.
RANK. For dividends or distribution of assets, the Series B Shares rank
senior to all other classes or series of preferred stock, unless the terms of
any such class or series provide otherwise.
19
DIVIDENDS. The holders of the Series B Shares are not entitled to receive
dividends, except to the extent any dividends are declared by the board, and
such dividends, if any, will be noncumulative. In the event any dividends are
declared with respect to our common stock, the holders of Series B Shares shall
be entitled to receive as dividends an amount equal to or greater than the
amount of dividends that each such holder would have received had the Series B
Shares been converted into common stock as of the date immediately prior to the
record date of such dividend.
LIQUIDATION PREFERENCE. In the event of our liquidation, dissolution or
winding up, the holders of the Series B Shares shall be entitled to receive a
distribution equal to the greater of:
* the amount of money or consideration to which all the holders of the
Series B Shares would have been entitled had the Series B Shares been
converted into common stock immediately prior to such liquidation,
dissolution or winding up;
* $10,000,000, if any such distribution occurs prior to January 31,
2003;
* $12,500,000, if any such distribution occurs during the period from
January 31, 2003 to and including December 31, 2003; or
* $15,000,000, if any such distribution occurs any time thereafter.
In addition, to any such distribution, the holders of the Series B Shares
shall also be entitled to all accrued or declared but unpaid dividends on the
Series B Shares.
MANDATORY REDEMPTION. If the Series B Shares have not been previously
converted into common stock, on December 31, 2004, we are required to redeem all
outstanding Series B Shares. The redemption will occur by paying to the holders
of the Series B Shares an aggregate amount equal to the greater of:
* $15,000,000, plus accrued dividends, if any, on the Series B Shares;
or
* the value of our common stock that would be issuable upon conversion
of the Series B Shares, based on the average closing price of our
common stock for the twenty consecutive trading days prior to December
24, 2004.
CONVERSION. At any time prior to December 31, 2004, we may, upon at least
10 days but not more than 30 days prior written notice, convert all, but not
less than all, of the then issued and outstanding Series B Shares into shares of
our common stock. Each Series B Share is convertible into 10 shares of our
common stock (subject to availability of sufficient common shares). The
conversion ratio is subject to upward adjustment if we issue common stock or
securities convertible into our common stock for consideration less than the
fair market value of such securities at the time of such transaction or take
certain other actions that dilute our common stock. Upon the approval of the
amendment to our certificate of incorporation to increase the number of
authorized shares of common stock, we will convert all of the Series B Shares
into common shares, and no adjustment to the conversion ratio can thereafter
occur.
VOTING RIGHTS. Except as required by law, the holders of the Series B
Shares are entitled to vote together with the holders of our common stock on all
matters submitted for a vote of stockholders, including the election of our
directors. The Series B Shares may be converted into shares of Series B-2 Non
Voting Preferred Stock at the election of the holder, in which event the holders
of the Series B-2 Non Voting Preferred Stock are not entitled to vote on any
matter submitted to stockholders, except as required by law, with respect to any
amendment, repeal or modification of any provision of our certificate of
incorporation that adversely affects the powers, preferences or special rights
of the Series B-2 Non Voting Preferred Stock or with respect to any amendment to
Section 3 of the Certificate of Designations that established the Series B
Shares. The Series B Shares also may be converted into shares of Series B-3
Preferred Stock at the election of the holder, in which event the holders of the
Series B-3 Preferred Stock are entitled to vote on all matters submitted to a
vote of the stockholders; provided that such number of votes shall automatically
be voted, whether at a stockholder meeting or pursuant to an action by written
consent, in accordance with the majority of the stockholders of the company, or,
if no such majority is obtained, then such votes shall be voted in accordance
with the vote of the board of directors. No shares of Series B-2 Non Voting
Preferred Stock or Series B-3 Preferred Stock are currently outstanding.
20
SPECIAL APPROVAL RIGHTS. So long as any of the Series B Shares remain
outstanding, we may not take certain actions, including but not limited to the
issuance of securities which rank senior to or on a parity with the Series B
Shares, the amendment of our certificate of incorporation, bylaws or the
certificate of designations establishing the Series B Shares or, except under
limited circumstances, redeem shares of our capital stock that is junior to the
Series B Shares.
REGISTRATION RIGHTS. We granted certain registration rights to the holders
of the Series B Shares and the holders of the common stock issuable upon
conversion of the Series B Shares. We granted demand registrations in which we
are required to register the number of shares of common stock or Series B Shares
as requested by the holders of such shares. We are required to perform up to two
such demand registrations upon the request of the holders of at least 20% of the
common stock issuable upon conversion of the Series B Shares. In addition, we
granted such holders "piggy-back" registration rights under which such holders
are entitled to request to have their shares registered in connection with our
registration of any of our capital stock.
SUMMARY OF AMENDED AND RESTATED CREDIT AGREEMENT
The following is a summary of the principal terms of the amended and
restated credit agreement pursuant to which the Series B Shares were issued. For
the complete terms of the amended and restated credit agreement, please see the
Second Amended and Restated Credit Agreement, dated September 30, 2002, which is
attached as an exhibit to the Current Report on Form 8-K filed by us on October
16, 2002.
* WAIVER. Prior noncompliance was permanently waived with respect to the
total debt leverage ratio, the total debt to total capitalization
ratio and the fixed charge coverage ratio financial covenants, and
with respect to certain other noncompliance items, including
non-reimbursement of approximately $2.6 million recently drawn by
beneficiaries under letters of credit issued under the original
facility.
* MATURITY DATE. The maturity date of the amended credit facility was
extended to December 31, 2004.
* PRINCIPAL BALANCE. Accrued interest, non-reimbursed draws under
letters of credit and various fees and expenses associated with the
amended credit facility were added to the principal amount of the
loan, resulting in an outstanding principal balance as of the
effective date of the amendment equal to $152.4 million.
* NO REQUIRED AMORTIZATION. No principal payments are required until the
maturity date of the amended credit facility.
* INTEREST RATE. The interest rate was increased to LIBOR plus 7.0%,
payable monthly. As of November 2002, the interest rate was 8.39%. (By
comparison, the effective interest rate applicable to the original
credit facility immediately prior to the effective date of the
amendment was 7.0%.) Due to the higher interest rate associated with
the amended credit facility, we anticipate that our cash interest
expense will increase approximately $5.6 million for fiscal 2003.
* FINANCIAL COVENANTS. The amended credit facility includes similar
financial covenants as were included in the original credit facility,
with similar compliance levels under such covenants. The covenants
include (i) total debt leverage ratio (initially set at 7.48), (ii)
minimum tangible net worth (initially set at a $230.1 million
deficit), (iii) fixed charge coverage ratio (initially set at 0.99),
(iv) limitation on capital expenditures of $11 million per fiscal
year, and (v) limitation on payments made under operating leases
during any period of four fiscal quarters to 3.10% of consolidated net
revenues. The compliance levels for covenants (i) through (iii) above
are set at varying levels on a quarterly basis. Compliance is tested
quarterly based on annualized or year-to-date results as applicable.
* OTHER COVENANTS. The amended credit facility includes various
non-financial covenants similar in scope to those included in the
original credit facility. The covenants include restrictions on
additional indebtedness, liens, investments, mergers and acquisitions,
asset sales, and other matters. The amended credit facility includes
extensive financial reporting obligations and provides that an event
21
of default occurs should we lose customer contracts in any fiscal
quarter with EBITDA contribution of $5 million or more (net of
anticipated contribution from new contracts). In addition, the holders
of the Series B Shares agreed to vote their shares of Series B Shares
in favor of a proposal to amend our certificate of incorporation to
increase the authorized number of shares of our common stock.
* EXISTING LETTERS OF Credit. Pursuant to the amended credit facility,
two letters of credit issued pursuant to the original credit facility
will be reissued or extended, in aggregate face amount up to a maximum
of $3.5 million, for letter of credit fees aggregating 1 7/8% per
annum. A third letter of credit, in the amount of $2.6 million which
previously was drawn by its beneficiary, will be reissued subject to
application of the funds originally drawn in reduction of the
principal balance of the facility and payment of a letter of credit
fee equal to 7% per annum.
TRANSFERABILITY
The Series B Shares are not qualified for trading on the Nasdaq Stock
Market or any other exchange. In addition, because the Series B Shares were
issued in a transaction exempt from registration under the Securities Act of
1933, such shares are subject to transfer restrictions under applicable
securities laws. Conversion of the Series B Shares into shares of our common
stock will make it easier for their holders to sell such shares in the future.
In general, under Rule 144 of the Securities Act of 1933, as currently in
effect, a person (or persons whose shares are required to be aggregated) who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of common stock, or (ii) the average weekly
trading volume in the common stock during the four calendar weeks preceding the
date on which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been our affiliate at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations described
above.
VOTE REQUIRED
The affirmative vote of 66 2/3% of the outstanding combined voting power of
the common and preferred shares, and the affirmative vote of a majority of the
shares of our outstanding common stock (voting as a separate class), present in
person or represented by proxy at the Annual Meeting and entitled to vote is
required to amend our certificate of incorporation to increase the authorized
number of shares of our common stock. Because shares represented by abstentions
and broker non-votes are considered outstanding, as a practical matter,
abstentions and broker non-votes will have the same effect as a vote against the
proposed amendment. At the annual meeting, and any other meeting of our
stockholders prior to the conversion of the Series B Shares, the holders of the
Series B Shares have agreed to vote their shares for the proposal to amend our
certificate of incorporation to increase the authorized number of shares of our
common stock. If the amendment is approved, we will file an amendment with the
Secretary of State of the State of Delaware to our certificate of incorporation
that reflects the amendment.
RECOMMENDATION OF BOARD OF DIRECTORS
The Board of Directors recommends a vote "for" the approval of the
amendment to our certificate of incorporation to increase the number of shares
our common stock from 23,000,000 to 29,000,000.
22
PROPOSAL
TO APPROVE THE AMENDMENT
TO THE EMPLOYEE STOCK PURCHASE PLAN
We have adopted an Employee Stock Purchase Plan, or ESPP, which allows our
eligible employees to purchase shares of common stock at annual or semi-annual
intervals through periodic payroll deductions. The ESPP is intended to promote
superior levels of performance from, and to encourage stock ownership by, our
eligible employees by increasing their interest in our success. The ESPP is
designed to meet this goal by offering financial incentives for employees to
purchase our common stock, thereby increasing the interest of employees in
pursuing our long-term growth, profitability, and financial success. Currently,
we have reserved 2,150,000 shares of common stock for this purpose. As of
November 30, 2002, we had issued 1,640,096 shares of common stock under the
ESPP. The ESPP has been approved by the holders of our common stock.
On October 1, 2002, our board approved an amendment to the ESPP to increase
the number of shares reserved under the ESPP by 1,800,000 shares of common stock
to a total of 3,950,000 shares. The increase in the number of shares reserved
under the ESPP is conditioned upon the approval by our stockholders of the
proposal to amend our certificate of incorporation to increase the number of
authorized shares of common stock. If the proposal to amend our certificate of
incorporation is not approved by the stockholders, we will not increase the
number of shares reserved under the ESPP, regardless of whether the proposal to
increase the number of shares of common stock reserved under the ESPP is
approved.
The total number of shares of our common stock currently reserved for
issuance under the ESPP is 2,150,000, of which 509,904 are available for future
issuance. These are not enough shares to meet anticipated demand through
increased participation in the ESPP. Therefore, we are seeking stockholder
approval to increase the number of shares of common stock reserved for issuance
under the ESPP by 1,800,000. If the proposed amendment is approved, the total
number of shares of our common stock reserved for issuance under the ESPP will
be 3,950,000. The number of shares of our common stock reserved for issuance
under the ESPP, as amended by this proposal, is anticipated to be sufficient to
meet our requirements for at least the next 18 months.
SUMMARY OF THE ESPP
The essential features of the ESPP are outlined below.
PURPOSE. The purpose of the ESPP is to provide our employees who
participate in the ESPP with an opportunity to purchase our common stock at a
discount through payroll deductions.
ADMINISTRATION. The ESPP is currently being administered by a committee
appointed by our board. All questions of interpretation or application of the
ESPP are determined in the sole discretion of the committee, and its decisions
are final and binding upon all participants. Members of our board do not receive
additional compensation for their services in connection with the administration
of the ESPP.
ELIGIBILITY. Any person who is employed by us (or by any of our
majority-owned subsidiaries designated by our board) for at least 30 consecutive
days is eligible to participate in the ESPP. As of the record date,
approximately 8,343 employees were eligible to participate in the ESPP and
approximately 337 of those were participating.
OFFERING DATES. The ESPP is implemented through 10 annual offerings
beginning on the first day of July in each of the years 1994 through 2003, with
each offering terminating on June 30 of the following year, provided that the
annual offering may be divided into two six-month offerings commencing on July 1
and January 1, respectively, and terminating six months after such commencement
date. The ESPP is currently implemented by consecutive 6-month offering periods
beginning July 1 and January 1, and ending December 31 and June 30,
respectively, during each annual offering period.
Eligible employees become participants in the ESPP by completing and
delivering enrollment forms, including a purchase agreement and payroll
deduction authorization. An employee who becomes eligible to participate in the
ESPP after the commencement of an offering period may not participate in the
ESPP until the commencement of the next offering period.
23
PURCHASE PRICE. The purchase price per share at which shares are purchased
under the ESPP is the lower of (a) 85% of the closing price of a share of our
common stock on the enrollment date during an offering period or (b) 85% of the
closing price of a share of our common stock on the termination date of such
offering period.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS. ESPP shares are purchased
with funds that are accumulated through payroll deductions during the offering
period. The deductions may not exceed 10% of a participant's eligible
compensation, which is defined in the ESPP to include the salary or regular
straight time rate as of each payday during the offering period, but exclusive
of other compensation. A participant may increase or decrease the rate of
payroll deductions at any time in whole percentage point increments (but not
below 1%), and such increases or decreases become effective only at the start of
a subsequent offering period.
All payroll deductions are credited to the participant's account under the
ESPP; no interest accrues on the payroll deductions.
PURCHASE OF STOCK; EXERCISE OF OPTION. At the beginning of each offering
period, each participating employee is in effect granted an option to purchase
shares of our common stock. The maximum number of shares placed under option to
a participant in an offering period is determined by dividing the participant's
accumulated payroll deductions during the purchase period by 85% of the fair
market value of our common stock at the beginning of the offering period or on
the termination date of the offering period, whichever is lower. Under no
circumstances may an employee make aggregate purchases of our common stock under
the ESPP and any other employee stock purchase plans qualified as such under
Section 423(b) of the Internal Revenue Code in excess of $25,000 (determined
using the fair market value of the shares at the time the option is granted)
during any calendar year.
WITHDRAWAL. A participant may terminate his or her participation in the
ESPP at any time by signing and delivering to us a notice of withdrawal from the
ESPP, but no later than five days prior to the termination date of an offering
period. All of the participant's accumulated payroll deductions will be paid to
the participant promptly after receipt of his or her notice of withdrawal and
his or her participation in the current offering period will be automatically
terminated. No resumption of payroll deductions will occur on behalf of such
participant unless such participant re-enrolls in the ESPP by delivering to us a
new subscription agreement during the applicable open enrollment period
preceding the commencement of a subsequent offering period. A participant's
withdrawal from the ESPP during an offering period does not have any effect upon
such participant's eligibility to participate in subsequent offering periods
under the ESPP.
TERMINATION OF EMPLOYMENT. Termination of a participant's employment for
any reason, including retirement, cancels his or her participation in the ESPP
immediately. In such event, the payroll deductions credited to the participant's
account will be returned to such participant or, in the case of death subsequent
to termination of employment, to the person's designated beneficiary. In the
case of death of the former employee, the beneficiary may elect to have funds
remain in the participant's account until the next purchase date and the shares
purchased with the funds will be forwarded to the beneficiary.
CAPITAL CHANGES. If any change occurs with respect to our capitalization,
such as stock splits or stock dividends, which results in an increase or
decrease in the number of shares of our common stock outstanding without receipt
of consideration by us, we will make appropriate adjustments in the number of
shares subject to purchase and in the purchase price per share under the ESPP,
subject to any required action by our stockholders. In the event of our proposed
dissolution or liquidation, the offering period then in progress will terminate
immediately, unless otherwise provided by our board. In the event of the
proposed sale of all or substantially all of our assets or our merger with or
into another corporation, each outstanding option shall be assumed or an
equivalent option shall be substituted by the successor corporation, unless our
board determines, in its discretion, to accelerate the exercisability of all
outstanding options under the ESPP. Our board may also make provisions for
adjusting the number of shares subject to the ESPP and the purchase price per
share we effect one or more reorganizations, recapitalizations, rights offerings
or other increases or reduction of the shares of our outstanding common stock.
AMENDMENT AND TERMINATION OF THE ESPP. The ESPP provides for annual
offerings (which may be divided into semi-annual offerings as described above)
beginning on the first day of July in each of the years 1994 through 2003 and
ending on June 30 of the following year. Our board has power and authority to
terminate or amend the ESPP. Our board may not, without the approval of our
stockholders (i) increase the maximum number of shares of our common stock which
may be issued under the ESPP, or (ii) amend the requirements as to the class of
employees eligible to purchase our common stock under the ESPP. No termination,
24
modification, or amendment of the ESPP may, without the consent of any affected
employee, adversely affect the rights of such employee under such option.
CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION. The ESPP, and the
right of participants to make purchases thereunder, is intended to qualify under
the provisions of Sections 421 and 423 of the Internal Revenue Code. Under these
provisions, no income will be taxable to a participant at the time of grant of
the option or purchase of shares. Upon disposition of the shares, the
participant will generally be subject to tax and the amount of the tax will
depend upon the holding period. If the shares have been held by the participant
for more than two years after the offering date and more than one year after the
purchase date, the lesser of: (a) the excess of the fair market value of the
shares at the time of such disposition over the purchase price, or (b) the
excess of the fair market value of the shares at the time the option was granted
over the purchase price (which purchase price will be computed as of the grant
date) will be treated as ordinary income, and any further gain will be treated
as long-term capital gain. If the shares are disposed of before the expiration
of these holding periods, the excess of the fair market value of the shares on
the purchase date over the purchase price will be treated as ordinary income,
and any further gain or any loss on such disposition will be long-term or
short-term capital gain or loss, depending on the holding period. Different
rules may apply with respect to participants subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended. We are not entitled to a deduction
for amounts taxed as ordinary income or capital gain to a participant, except to
the extent of ordinary income reported by participants upon disposition of
shares prior to the expiration of the two holding periods described above.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and us with respect to the purchase of shares under the
ESPP, is not intended to be complete, and does not discuss the income tax laws
of any municipality, state or foreign country.
PARTICIPATION IN THE ESPP. Participation in the ESPP is voluntary and
dependent on each eligible employee's election to participate and his or her
determination as to the level of payroll deductions. Accordingly, future
purchases under the ESPP are not determinable. The following table sets forth
certain information regarding shares purchased under the ESPP during the last
fiscal year and the payroll deductions accumulated at the end of the last fiscal
year in accounts under the ESPP for each of the officers listed in the Summary
Compensation Table, for all current executive officers as a group and for all
other employees who participated in the ESPP as a group.
AMENDED PLAN BENEFITS
EMPLOYEE STOCK PURCHASE PLAN
Name of Individual or Number of Shares
Identity of Group and Position Purchased (#) Dollar Value ($)(1)
- ------------------------------ ------------- -------------------
Randall L. Harmsen
Vice President of Finance 57,725 $ 18,499.83
All current executive officers as a group 57,725 $ 18,499.83
All non-executive directors as a group(2) -- $ --
All other employees as a group 764,865 $ 247,051.39
- ----------
(1) Market value of shares on date of purchase, minus the purchase price under
the ESPP.
(2) Per the terms of the ESPP, non-executive directors are not eligible to
participate.
25
REASONS FOR AND EFFECT OF THE PROPOSED AMENDMENT
Our board believes that the approval of the proposed amendment to the ESPP
is necessary to achieve the purposes of the ESPP and to promote the welfare of
our Company and our stockholders generally. Our board believes that the proposed
amendment to the ESPP will aid our Company in attracting and retaining officers
and key employees and motivating such persons to exert their best efforts on
behalf of our Company. In addition, we expect that the proposed amendment will
further strengthen the identity of interests of the officers and key employees
with that of the stockholders.
APPROVAL BY STOCKHOLDERS OF THE AMENDMENT TO THE ESPP
Approval of the amendment to the ESPP will require the affirmative vote of
the holders of a majority of the outstanding combined voting power of the common
and preferred shares present in person or by proxy at the Annual Meeting and
entitled to vote. Shares represented by abstentions are considered present with
respect to the proposal and thus will have the same practical effect as a vote
against the proposed amendment, while shares represented by broker non-votes are
not counted for purposes of determining whether the proposed amendment has been
approved. The proposal to increase the number of shares under our ESPP is
conditioned upon the approval of the proposal to amend our certificate of
incorporation. If the amendment to the ESPP is not approved by the stockholders,
the ESPP will remain in effect as previously adopted.
The Board of Directors recommends that stockholders vote in favor of
increasing the number of shares of our common stock that may be purchased
pursuant to the ESPP from 2,150,000 shares to 3,950,000 shares.
INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed PwC, independent accountants, to audit
our consolidated financial statements for the fiscal year ending June 30, 2003.
PwC served as our independent accountants for the fiscal year ended June 30,
2002. Notwithstanding the appointment, the board, in its discretion, may direct
the appointment of a new independent accounting firm at any time during the year
if the board feels that such a change would be in the Company's best interest.
We believe a representative of PwC will be present at the Annual Meeting,
will have an opportunity to make a statement if he or she desires to do so and
will be available to respond to appropriate questions.
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 2, 2002, we dismissed Arthur Andersen LLP ("Andersen") as our
independent public accountants as reported on the Form 8-K dated January 2,
2002. The decision to change our accounting firm was recommended and approved by
the Audit Committee of our board and approved by our board.
During the two most recent fiscal years ended June 30, 2000 and 2001 and
the subsequent interim reporting period from the last audit date of June 30,
2001, through and including the termination date of January 2, 2002, there were
no disagreements between the Company and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or accounting scope or
procedure. Additionally, there were no reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K) during such periods, except that Andersen issued
a letter dated October 31, 2000 summarizing material weaknesses in certain
aspects of our internal controls that were noted during Andersen's audit of our
financial statements for the fiscal year ended June 30, 2000. The letter
recommended examination and augmentation, as appropriate, of certain aspects of
our internal control procedures, including the following: (1) our reserve
analysis for the allowance for doubtful accounts, including the quarterly
procedures to be performed in the reserve analysis and the involvement of
additional management personnel in such analysis; (2) our assessment of asset
realization, including our application of relevant accounting pronouncements,
and the involvement of additional field operational personnel in such assessment
on a quarterly basis; (3) our risk management function, including its analysis,
documentation, and procedures related to workers' compensation and general
liability reserves; and (4) our compliance with documentation and billing
procedures, including training, supervision, and internal audit functions
pertaining to such procedures. The Audit Committee of our board, the board, and
26
management discussed the recommendations with Andersen. We have taken steps to
address each internal control recommendation. Although Andersen provided us with
a summary of internal control recommendations developed in connection with the
audit of our financial statements for the fiscal year ended June 30, 2001, none
of the underlying conditions were determined by Andersen to represent material
weaknesses. We authorized Andersen to respond fully to any inquiries of PwC
concerning the internal control recommendations.
The report of Andersen on our financial statements for each of the fiscal
years ended June 30, 2000 and 2001 contained no adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles, except that the report of Andersen on our financial
statements for each of the fiscal years ended June 30, 2000 and 2001 was
modified as to the uncertainty related to our ability to continue as a going
concern.
On February 4, 2002, we formally engaged PwC as our independent public
accountants. The decision to change accounting firms was approved by the Audit
Committee of our board and approved by our board.
We did not consult with PwC during the last two fiscal years ended June 30,
2002 and 2001 or during the subsequent interim reporting period from the last
audit date of June 30, 2001, through and including the engagement date of
February 4, 2002, on either the application of accounting principles or the type
of opinion PwC might issue on our financial statements.
We requested Andersen to furnish a letter addressed to the SEC stating
whether Andersen agrees with our statements above. A copy of this letter
addressed to the SEC, dated January 9, 2002, is filed as an exhibit to the Form
8-K filed by us on January 9, 2002.
DEADLINE FOR RECEIPT OF STOCKHOLDER
PROPOSALS; DISCRETIONARY AUTHORITY
Any stockholder who intends to present a proposal at the annual meeting of
stockholders for the year ending June 30, 2003 and have it included in our proxy
materials for that meeting must deliver the proposal to us for our consideration
no later than September __, 2003 and must comply with Rule 14a-8 under the
Securities Exchange Act of 1934, as amended.
In addition, under our bylaws, certain procedures are provided that a
stockholder must follow to nominate persons for election as a director or to
introduce an item of business at the annual meeting of stockholders following
fiscal year 2003. Under these procedures, a notice setting forth information
specified in the bylaws must be received by us no later than (i) 60 days prior
to the annual meeting if such meeting is held between February 2, 2004 and March
3, 2004; (ii) 90 days prior to the annual meeting if such meeting is held on or
after March 3, 2004; or (iii) if the 2003 annual meeting is held on another
date, on or before the close of business on the 15th day following the date of
public disclosure of the date of such meeting.
Pursuant to Rule 14a-4 under the Securities Exchange Act of 1934, as
amended, we intend to retain discretionary authority to vote proxies with
respect to stockholder proposals properly presented at the Annual Meeting,
except in circumstances where (i) we receive notice of the proposed matter prior
to the deadline set forth in our Bylaws; and (ii) the proponent complies with
the other requirements set forth in Rule 14a-4. We did not receive notice of any
stockholder proposal prior to such deadline; therefore, no stockholder proposal
may be properly presented at the Annual Meeting.
HOUSEHOLDING OF PROXY MATERIALS
In December 2000, the Securities and Exchange Commission adopted new rules
that permit companies and intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements with respect to two or more security holders
sharing the same address by delivering a single proxy statement addressed to
those security holders. This process, which is commonly referred to as
"householding," potentially means extra convenience for security holders and
cost savings for companies.
If you are currently receiving multiple copies of our proxy statement and
Annual Report at your address and would like to request householding of your
communications, please contact your broker. Once you have elected householding
of your communications, householding will continue until you are notified
otherwise or until you revoke your consent. If, at any time, you no longer wish
27
to participate in householding, and would prefer to receive a separate proxy
statement and annual report, please notify your broker, direct your written
request to Rural/Metro Corporation, 8401 E. Indian School Road, Scottsdale, AZ
85251, Attn: General Counsel.
OTHER MATTERS
We know of no other matters to be submitted to the Annual Meeting. If any
other matters properly come before the Annual Meeting, it is the intention of
the persons named in the enclosed proxy card to vote the shares they represent
as the Board of Directors may recommend.
Scottsdale, Arizona
January __, 2003
28
COMPANY NUMBER:
CONTROL NUMBER:
RURAL/METRO CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
RURAL/METRO CORPORATION
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MARCH 3, 2003
AND ANY ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF
The undersigned stockholder of Rural/Metro Corporation, a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement of the Company and hereby appoints
Jack E. Brucker and John S. Banas, III, and each or either of them, proxies and
attorneys-in-fact, with full power of substitution, on behalf and in the name of
the undersigned to represent the undersigned at the Annual Meeting of
RURAL/METRO CORPORATION to be held at Company's corporate headquarters at 8401
East Indian School Road, Scottsdale, Arizona, on Monday, March 3, 2003, at 3:00
p.m., Phoenix, Arizona time, and at any adjournment(s) or postponement(s)
thereof, and to vote all shares of Common Stock and/or Preferred Stock that the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, FOR THE NOMINEES IN PROPOSAL 1; FOR THE PROPOSAL TO AMEND THE
CERTFICATE OF INCORPORATION; FOR THE INCREASE IN THE EMPLOYEE STOCK PURCHASE
PLAN; AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME
BEFORE THE MEETING.
THERE ARE THREE WAYS TO PROVIDE YOUR PROXY:
BY TELEPHONE BY INTERNET
* Quick * Quick
* Easy * Easy
* Immediate * Immediate
Call Toll-Free on any Touch-Tone Phone
Follow these easy steps: Follow these easy steps:
1. Read the accompanying Proxy Statement and Proxy 1. Read the accompanying Proxy Statement and Proxy
Card Card
2. Call the toll-free number 1-800-690-6903. Not 2. Go to the Website http://www.proxyvote.com
available to stockholders residing outside the
United States. Stockholders residing outside the
United States are urged to use the Internet.
3. Have your voting instruction card available when 3. Have your voting instruction card available when
you call. you access the Website.
4. You will be prompted to enter your Control Number 4. You will be prompted to enter your Control Number
(located above) (located above).
5. Follow the simple instructions of the automated 5. Follow the instructions provided.
attendant.
CALL 1-800-690-6903 ANYTIME GO TO HTTP://WWW.PROXYVOTE.COM
BY MAIL
Mark, sign and date your Proxy Card and return it in the postage-paid
envelope provided.
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET.
PLEASE DETACH HERE.
29
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below (except as indicated)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
If you wish to withhold authority to vote for any individual nominee,
strike a line through that nominee's name in the list below:
Louis G. Jekel William C. Turner
2. PROPOSAL TO APPROVE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE AN AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN
TO INCREASE THE NUMBER OF SHARES OF OUR COMMON STOCK THAT MAY BE
PURCHASED PURSUANT TO THE PLAN FROM 2,150,000 SHARES TO 3,950,000
SHARES.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
and upon such other matters that may properly come before the meeting or
any adjournment(s) or postponement(s) thereof.
30
A majority of such attorneys or substitutes as
shall be present and shall act at said meeting or
any adjournment or adjournments thereof (or if
only one shall be present and act, then that one)
shall have and may exercise all of the powers of
said attorneys-in-fact hereunder.
Dated: _____________________
SIGNATURES:
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
(This Proxy should be dated, signed by the
stockholder(s) exactly as his or her name appears
hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint
tenants or as community property, both
stockholders should sign.)
31
APPENDIX A
(Not Part of Proxy Statement)
RURAL/METRO CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
AS AMENDED THROUGH JANUARY 1, 2002
ARTICLE I
PURPOSE
1.1 NAME. This Stock Purchase Plan shall be known as the Rural/Metro
Employee Stock Purchase Plan (the "Plan").
1.2 PURPOSE. The Plan is intended to provide a method whereby employees of
Rural/Metro Corporation, a Delaware corporation (the "Company"), and one or more
of its Subsidiary Corporations will have an opportunity to acquire a proprietary
interest in the Company through the purchase of shares of the Common Stock of
the Company.
1.3 QUALIFICATION. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" under section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
ARTICLE II
DEFINITIONS
2.1 ADMINISTRATOR. "Administrator" shall mean the Company, which shall
administer the Plan in accordance with Article XI.
2.2 BASE PAY. "Base Pay" shall mean the actual salary and/or wages paid to
an Employee as of each pay date, excluding shift premiums, bonuses,
"skilled-based" pay, and other special payments, commissions (unless such
commissions represent the primary source of compensation, as determined by the
Administrator) and other marketing incentive payments.
2.3 EMPLOYEE. "Employee" shall mean any person who is customarily employed
on a full-time or part-time basis by the Company and is regularly scheduled to
work more than 20 hours per week.
2.4 PARTICIPATING COMPANY. "Participating Company" shall mean the Company
and such Subsidiary Corporation as may be designated from time to time by the
Board of Directors of the Company.
2.5 STOCK. "Stock" shall mean the Common Stock of the Company, par value
one cent ($.01).
2.6 SUBSIDIARY CORPORATION. "Subsidiary Corporation" shall mean any present
or future corporation which would be a "subsidiary corporation" of the Company,
as that term is defined in Code section 424.
32
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 INITIAL ELIGIBILITY. Any Employee who shall have completed 30 days of
continuous employment with a Participating Company and is employed by a
Participating Company on the date such Employee's participation in the Plan is
to become effective shall be eligible to participate in Offerings under the Plan
which commence on or after such 30 day employment period has concluded. Any
Corporation which becomes a Subsidiary Corporation after the initial Offering
Commencement Date shall become a Participating Company only upon the decision of
the Board of Directors of the Company to designate such Subsidiary Corporation
as a Participating Company and to extend the benefits of the Plan to its
eligible Employees. For any Subsidiary Corporation which becomes a Participating
Company in the Plan after July 1, 1994, a subsequent effective date shall be
designated with respect to its participation by the eligible Employees of such
Participating Company.
3.2 LEAVE OF ABSENCE. For purposes of participation in the Plan, a person
on leave of absence shall be deemed to be an Employee for the first 90 days of
such leave of absence and such Employee's employment shall be deemed to have
terminated at the close of business on the 90th day of such leave of absence
unless such Employee shall have returned to regular full-time or part-time
employment (as the case may be) prior to the close of business on such 90th day.
Termination by a Participating Company of any Employee's leave of absence, other
than termination of such leave of absence on return to full time or part time
employment, shall terminate as Employee's employment for all purposes of the
Plan and shall terminate such Employee's participation in the Plan and right to
exercise any option.
3.3 RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the
Plan to the contrary, no Employee shall be granted an option to participate in
the Plan:
(a) if, immediately after the grant, such Employee would own stock,
and/or hold outstanding options to purchase stock, possessing five percent or
more of the total combined voting power or value of all classes of stock of the
Company (for purposes of this paragraph, the rules of section 424(d) of the Code
shall apply in determining stock ownership of any Employee); or
(b) which permits such Employee's rights to purchase stock under all
Employee stock purchase plans of the Company and all Participating Companies to
accrue at a rate which exceeds $25,000 in fair market value of the stock
(determined at the time such option is granted) for each calendar year in which
such option is outstanding.
3.4 COMMENCEMENT OF PARTICIPATION. An eligible Employee may become a
participant by completing the enrollment forms prescribed by the Administrator
(including a purchase agreement and a payroll deduction authorization) and
filing such forms with the designated office of the Company prior to the
Offering Commencement Date for the next scheduled Offering (as such terms are
defined below). Payroll deductions for a participant shall commence on the next
scheduled Offering Commencement Date when such Employee's authorization for a
payroll deduction becomes effective and shall continue in effect for the term of
this Plan, except to the extent such payroll deduction becomes effective and
shall continue in effect for the term of this Plan, except to the extent such
payroll deduction is changed in accordance with this Section 3.4 or terminated
in accordance with Article VIII. The participant may, at any time, increase or
decrease the rate of the participant's payroll deduction by filing the
appropriate form with the designated office of the Company. The new rate shall
become effective as of the next applicable Offering Commencement Date.
ARTICLE IV
OFFERINGS
4.1 ANNUAL OFFERINGS. The Plan will be implemented by up to 10 annual
offerings of the Company's Common Stock (the "Offerings") beginning on the 1st
day of July in each of the years 1994 through 2003, with each Offering
terminating on June 30 of the following year, provided, however, that each
annual Offering may, in the discretion of the Administrator exercised prior to
the commencement thereof, be divided into two six-month Offerings commencing
respectively, on July 1 and January 1 and terminating six months thereafter. The
total number of shares issuable under the Plan shall be 2,150,000. As used in
the Plan, "Offering Commencement Date" means the January 1 or July 1, as the
case may be, on which the particular Offering begins and "Offering Termination
Date" means the June 30 or December 31 as the case may be, on which the
particular Offering terminates. The Administrator may, prior to the Offering
Commencement Date of an Offering, specify a number of shares to be made
available for that Offering.
33
ARTICLE V
PAYROLL DEDUCTIONS
5.1 PERCENTAGE OF PARTICIPATION. At the time an Employee files
authorization for payroll deduction and becomes a participant in the Plan, the
Employee shall elect to have deductions made from the Employee's pay on each pay
date occurring during the time the Employee is a participant in an Offering.
Such deductions shall be an amount equal to the rate of 1, 2, 3, 4, 5, 6, 7, 8,
9 or 10 percent (as elected by the Employee) times such Employee's Base Pay for
each pay date occurring during such Offering ("Participation Amount"); provided,
however, that prior to any Offering Commencement Date, the Administrator shall
have the discretion to limit deductions to less than 10 percent (but no less
than 5 percent) for any Offering.
5.2 PARTICIPANT'S ACCOUNT. All payroll deductions made for a participant
shall be credited to such Employee's account under the Plan. A participant may
not make any separate cash payment into such account except when on leave of
absence and then only as provided in Section 5.4.
5.3 CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue
participation in the Plan as provided in ARTICLE VIII, but no other change can
be made during an Offering and, specifically, a participant may not alter the
amount of such participant's payroll deductions for that Offering.
5.4 LEAVE OF ABSENCE. If a participant goes on a leave of absence, such
participant shall have the right to elect: (a) to withdraw the balance in such
participant's account pursuant to Section 8.1 hereof, or (b) to discontinue
contributions to the Plan but remain a participant in the Plan, or remain a
participant in the Plan during such leave of absence, authorizing deductions to
be made from payments by the Company to the participant during such leave of
absence and undertaking to make cash payment to the Plan at the end of each
payroll period to the extent that amount payable by the Participating Company to
such participant are insufficient to meet such participant's authorized Plan
deductions.
ARTICLE VI
GRANTING OF OPTION
6.1 NUMBER OF OPTION SHARES. On each Offering Commencement Date, a
participating Employee shall be deemed to have been granted an option to
purchase a maximum number of shares of the Stock of the Company equal to the
Participation Amount (as defined in Section 5.1 hereof) divided by the Option
Price of the stock of the Company on the applicable Offering Commencement Date,
determined as provided in Section 6.2 hereof.
6.2 OPTION PRICE. The Option Price of Stock purchased with payroll
deductions made during each Offering for a participant therein shall be 85
percent of the closing price of the Stock on the Offering Commencement Date or
the nearest prior business day on which trading occurred on the NASDAQ Nation
Market; provided, however, that for Offerings that commence on or after January
1, 1998, the Option Price shall be the lower of (a) 85 percent of the closing
price of the Stock on the Offering Commencement Date or the nearest prior
business day on which trading occurred on the NASDAQ Nation Market; or (b) 85
percent of the closing price of the Stock on the Offering Termination Date or
the nearest prior business day on which trading occurred on the NASDAQ National
Market.
ARTICLE VII
EXERCISE OF OPTION
7.1 AUTOMATIC EXERCISE. Unless a participant gives written notice to the
Company as hereinafter provided, such participant's option for the purchase of
stock granted under Section 6.1 hereof will be deemed to have been exercised
automatically on the Offering Termination Date applicable to such Offering for
the purchase of the number of full shares of Stock which the accumulated payroll
deduction in such Employee's account at that time will purchase at the
applicable Option Price (but not in excess of the number of shares for which
options have been granted to the Employee pursuant to Section 6.1 hereof), and
any excess in such Employee's account at that time will be returned to the
participant.
34
7.2 FRACTIONAL SHARES. Fractional shares will not be issued under the Plan
and any accumulated payroll deductions which would have been used to purchase
fractional shares will be, at the option of the Administrator, either (a)
returned (without interest) to any Employee promptly following the termination
of an Offering, or (b) added to the Participation Amount and held for the
purchase of Stock in connection with the next Offering; provided, however, that
such amount (without interest) shall be refunded to any Employee who provides
the Company with a written request for a refund prior to the use of such amount
to purchase Stock at the end of the next Offering.
7.3 TRANSFERABILITY OF OPTION. During a participant's lifetime, options
held by such participant shall be exercisable only by that participant.
7.4 DELIVERY OF STOCK. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each participant,
as appropriate, the Stock purchased upon exercise of such Employee's option. All
Stock delivered to each participant will contain a restriction stating that such
Stock is restricted from being transferred for a period of one year from the
date of issuance unless the Administrator otherwise consents. It is not the
intention of the Administrator to consent to transfers except in extraordinary
situations such as upon the death of a participant. The Administrator may
withhold its consent to any such transfer in its absolute and sole arbitrary
discretion. Any transfer in violation of the legend placed on each such stock
certificate shall be void ab initio. In no event, however, shall stock be
forfeited for violation of the transfer restriction.
ARTICLE VIII
WITHDRAWAL
8.1 IN GENERAL. At any time prior to the last five days of an Offering
period, a participant may withdraw payroll deductions credited to such
participant's account under the Plan by giving written notice to the designated
office of the Company, which withdrawal notice shall be in form and substance as
decided by the Administrator. All of the participant's payroll deductions
credited to the participant's account will be paid to the participant promptly
after receipt of such participant's notice of withdrawal, and no further payroll
deductions will be made from the participant's pay during such Offering or
during any subsequent Offering unless an Employee re-enrolls as provided in
Section 8.2 hereof. The Company may, at its option, treat any attempt by a
participant to borrow on the security of such participant's accumulated payroll
deductions as an election to withdraw such deductions.
8.2 EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal from any
Offering will not have any effect upon such Employee's eligibility to
participate in any succeeding Offering or in any similar plan which may
hereafter be adopted by the Company. In order to be eligible for a subsequent
Offering, however, a participant who has withdrawn from an Offering must satisfy
the requirements of Section 3.4 hereof prior to the Offering Commencement Date
of the next succeeding Offering.
8.3 TERMINATION OF EMPLOYMENT. Upon termination of the participant's
employment for any reason during an Offering period, including retirement (but
excluding death or permanent disablement while in the employ of the Company or
continuation of a leave of a absence for a period beyond 90 days), the payroll
deductions credited to such Employee's account for that Offering period will be
returned to the Employee, or, in the case of the Employee's death subsequent to
the termination of such Employee's employment, to the person or persons entitled
thereto under Section 12.1 hereof.
8.4 TERMINATION OF EMPLOYMENT DUE TO DEATH. Upon termination of the
participant's employment during an Offering period because of death or permanent
disablement, the participant or participant's beneficiary (as defined in Section
12.1 hereof) shall have the right to elect, by written notice given to the
designated office of the Company prior to the earlier of the Offering
Termination Date or the expiration of a period of 60 days commencing with the
termination of the participant's employment, either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) to exercise the participant's option on the next Offering
Termination Date and purchase the number of full shares of stock which the
accumulated payroll deductions in the participant's account at the date of the
participant's cessation of employment will purchase at the applicable option
price, and any excess in such account will be returned to said beneficiary,
without interest.
35
In the event that no such written notice of election shall be duly received by
the designated office of the Company, the beneficiary shall automatically be
deemed to have elected, pursuant to paragraph (b), to exercise the participant's
option.
8.5 LEAVE OF ABSENCE. A participant on leave of absence shall, subject to
the election made by such participant pursuant to Section 5.5 hereof, continue
to be a participant in the Plan so long as such participant in on continuous
leave of absence. A participant who has been on leave of absence for more than
90 days and who therefore is not an Employee for the purpose of the Plan shall
not be entitled to participate in any Offering commencing after the 90th day of
such leave of absence. Notwithstanding any other provisions of the Plan, unless
a participant on leave of absence returns to regular full time or part time
employment with the Company at the earlier of: (a) the termination of such leave
of absence or (b) three months from the 90th day of such leave of absence, such
participant's participation in the Plan shall terminate on whichever of such
dates first occurs.
ARTICLE IX
INTEREST
9.1 PAYMENT OF INTEREST. No interest will be paid or allowed on any money
paid into the Plan or credited to the account of any participant Employee
including any interest paid on any and all money which is distributed to an
Employee or such Employee's beneficiary pursuant to the provisions of Sections
8.1, 8.3, 8.4 and 10.1 hereof.
ARTICLE X
STOCK
10.1 MAXIMUM SHARES. The maximum number of shares which shall be issued
under the Plan, subject to adjustment upon changes in capitalization of the
Company as provided in Section 12.4 hereof, shall be 2,150,000 shares. If the
total number of share for which options are exercised on any Offering
Termination Date in accordance with Article VI exceeds the maximum number of
shares for the applicable Offering, the Company shall make a pro rata allocation
of the shares available for delivery and distribution in as nearly a uniform
manner as shall be practicable and as the Administrator shall determine to be
equitable, and the balance of payroll deductions credited to the account of each
participant under the Plan shall be returned to such participant as promptly as
possible.
10.2 PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have no
interest in stock covered by such Employee's option until such option has been
exercised.
10.3 REGISTRATION OF STOCK. Stock to be delivered to a participant under
the Plan will be registered in the name of the participant, or, if the
participant so directs by written notice to the designated office of the Company
prior to the Offering Termination Date applicable thereto, in the names of the
participant and one such other person as may be designated by the participant,
in the form and manner permitted by applicable law.
10.4 RESTRICTIONS ON EXERCISE. The Board of Directors may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved for issuance upon the exercise of the option shall have
been duly listed, upon official notice of issuance, upon a stock exchange or the
NASDAQ National Market, and that either:
(a) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of purchase, in
form and substance satisfactory to the Company, that it is such Employee's
intention to purchase the shares for investment and not for resale or
distribution.
ARTICLE XI
ADMINISTRATION
11.1 AUTHORITY OF ADMINISTRATOR. Subject to the express provisions of the
Plan, the Administrator shall have plenary authority in its discretion to
interpret and construe any and all provisions of the Plan, to adopt rules and
regulations for administering the Plan, and to make all other determinations
deemed necessary or advisable for administering the Plan. The Administrator's
36
determination on the foregoing matters shall be conclusive. The Administrator
may delegate its authority as it deems desirable and/or necessary.
ARTICLE XII
MISCELLANEOUS
12.1 DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any Stock and/or cash. Such
designation of beneficiary may be changed by the participant at any time by
written notice to the designated office of the Company. Upon the death of a
participant and upon receipt by the Company of proof of identity and existence
at the participant's death of a beneficiary validly designated by the
participant under the Plan, the Company shall deliver such Stock and/or cash to
such beneficiary. In the event of the death of a participant and in the absence
of a beneficiary validly designated under the Plan who is living at the time of
such participant's death, the Company shall deliver such Stock and/or cash to
the executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Stock and/or cash to the spouse
or to any one or more dependents of the participant as the Company may
designate. No beneficiary shall, prior to the death of the participant by who he
has been designated, acquire any interest in the Stock or cash credit to the
participant under the Plan.
12.2 TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive Stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Article VIII.
12.3 USE OF FUNDS. All payroll deductions received or held by the Company
under this Plan may be used by the Company for any corporate purpose and the
Company shall not be obligated to segregate such payroll deductions.
12.4 ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization, reclassification, stock split
(whether or not effected in the form of a stock dividend), reverse stock split
or similar transaction, appropriate and proportionate adjustments may be made by
the Administrator in the number and/or kind of shares which are subject to
purchase under outstanding options and on the option exercise price or prices
applicable to such outstanding options. In addition, in any such event, the
number and/or kind of share which may be offered in the Offerings described in
Article IV hereof shall also be proportionately adjusted.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporation as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the holder of each option then outstanding under the Plan
will thereafter be entitled to receive at the next Offering Termination Date
upon the exercise of such option for each share as to which such option shall be
exercised, as nearly as reasonably may be determined, the cash, securities
and/or property which a holder of one share of the Company's Common Stock was
entitled to receive upon and at the time of such transaction. The Board of
Directors shall take such steps in connection with such transactions as the
Board shall deem necessary to assure that the provisions of this Section 12.4
shall thereafter be applicable, as nearly as reasonably may be determined, in
relation to the said cash, securities and/or property as to which such holder of
such option might thereafter be entitled to receive.
12.5 AMENDMENT AND TERMINATION. The Board of Directors shall have complete
power and authority to terminate or amend the Plan; provided, however, that the
Board of Directors shall not, without the approval of the stockholders of the
Corporation (i) increase the maximum number of shares which may be issued under
the Plan (except pursuant to Section 12.4 hereof); or (ii) amend the
requirements as to the class of Employees eligible to purchase stock under the
Plan. No termination, modification, or amendment of the Plan may, without the
consent of an Employee then having an option under the Plan to purchase stock,
adversely affect the rights of such Employee under such option.
12.6 EFFECTIVE DATE. The original Plan was effective as of July 1, 1994 and
was thereafter approved by the holders of the majority of the Common Stock
present and represented at the annual meeting of the shareholders held on
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December 8, 1994. The Plan was subsequently amended (on several occasions) to
increase the number of shares issuable under the Plan. This most recent
amendment and restatement (which does not increase the number of shares issuable
under the Plan) is effective January 1, 2002.
12.7 NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly,
create any right for the benefit of any Employee or class of Employees to
purchase any shares under the Plan, or create in any Employee or class of
Employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an Employee's employment at any time.
12.8 EFFECT OF PLAN. The provisions of the Plan shall, in accordance with
its terms, be binding upon, and inure to the benefit of, all successors of each
Employee participating in the Plan, including, without limitation, such
Employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Employee.
12.9 GOVERNING LAW. The law of the State of Arizona will govern all matters
relating to the Plan except to the extent it is superceded by the laws of the
United States.
RURAL/METRO CORPORATION,
a Delaware corporation
By: ________________________________
Its: _______________________________
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