1
DRAFT dated February 12, 2001
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
At February 12, 2001, there were 14,760,248 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
2
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Consolidated Statements of Comprehensive Income (Loss) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Part II. Other Information
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
4
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND JUNE 30, 2000
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
2000 2000
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 5,931 $ 10,287
Accounts receivable, net 127,939 143,905
Inventories 20,820 19,070
Prepaid expenses and other 6,119 6,552
--------- ---------
Total current assets 160,809 179,814
--------- ---------
PROPERTY AND EQUIPMENT, net 76,001 85,919
INTANGIBLE ASSETS, net 199,206 207,200
OTHER ASSETS 15,901 18,284
--------- ---------
$ 451,917 $ 491,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,989 $ 16,135
Accrued liabilities 51,948 57,087
Current portion of long-term debt 296,629 299,104
--------- ---------
Total current liabilities 359,566 372,326
--------- ---------
LONG-TERM DEBT, net of current portion 1,968 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME 15,680 14,989
OTHER LIABILITIES 49 101
--------- ---------
Total liabilities 377,263 390,266
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 4,537 5,360
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 150 149
Additional paid-in capital 137,786 137,603
Accumulated deficit (66,329) (40,670)
Cumulative translation adjustment (251) (252)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 70,117 95,591
--------- ---------
$ 451,917 $ 491,217
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
4
5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUE
Ambulance services $ 100,202 $ 121,109 $ 201,944 $ 238,006
Fire protection services 15,140 14,551 30,864 27,614
Other 9,867 11,447 20,639 22,687
--------- --------- --------- ---------
Total revenue 125,209 147,107 253,447 288,307
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits 71,334 79,388 143,976 156,253
Provision for doubtful accounts 29,045 21,247 48,437 41,657
Provision for doubtful accounts - change in
accounting estimate -- 65,000 -- 65,000
Depreciation 5,419 6,242 11,127 12,402
Amortization of intangibles 1,869 2,302 3,738 4,462
Other operating expenses 26,122 30,906 51,536 56,930
Contract termination costs and
related asset impairment 5,190 -- 5,190 --
--------- --------- --------- ---------
Total expenses 138,979 205,085 264,004 336,704
--------- --------- --------- ---------
OPERATING LOSS (13,770) (57,978) (10,557) (48,397)
Interest expense, net 7,827 5,812 15,703 11,248
Other (334) (54) (823) (74)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (21,263) (63,736) (25,437) (59,571)
Provision for (benefit from) income taxes 311 (22,550) 222 (20,810)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (21,574) (41,186) (25,659) (38,761)
EXTRAORDINARY LOSS ON
EXPROPRIATION OF CANADIAN
AMBULANCE SERVICE LICENSES (NET OF $0
OF INCOME TAXES) -- (1,200) -- (1,200)
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NET OF AN
INCOME TAX BENEFIT OF $392) -- -- -- (541)
--------- --------- --------- ---------
NET LOSS $ (21,574) $ (42,386) $ (25,659) $ (40,502)
========= ========= ========= =========
5
6
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
LOSS PER SHARE:
Basic -
Loss before extraordinary loss and
cumulative effect of a change in accounting principle $ (1.47) $ (2.83) $ (1.75) $ (2.66)
Extraordinary loss on expropriation of
Canadian ambulance service licenses -- (0.08) -- (0.08)
Cumulative effect of change in a accounting principle -- -- -- (0.04)
---------- ---------- ---------- ----------
Net loss $ (1.47) $ (2.91) $ (1.75) $ (2.78)
========== ========== ========== ==========
Diluted --
Loss before extraordinary loss and
cumulative effect of a change in accounting principle $ (1.47) $ (2.83) $ (1.75) $ (2.66)
Extraordinary loss on expropriation of
Canadian ambulance service licenses -- (0.08) -- (0.08)
Cumulative effect of change in a accounting principle -- -- -- (0.04)
---------- ---------- ---------- ----------
Net loss $ (1.47) $ (2.91) $ (1.75) $ (2.78)
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 14,645 14,578 14,636 14,558
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,645 14,578 14,636 14,558
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
6
7
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
-------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(25,659) $ (40,502)
Adjustments to reconcile net loss to cash
used in operations--
Write-off of goodwill impaired with termination of contract 4,287 --
Extraordinary loss -- 1,200
Cumulative effect of a change in accounting principle -- 541
Depreciation and amortization 14,865 16,864
Amortization of gain on sale of real estate (52) (52)
(Gain) loss on sale of property and equipment (426) 33
Provision for doubtful accounts 48,437 106,657
Undistributed loss of minority shareholder (823) (74)
Amortization of discount on Senior Notes 13 13
Change in assets and liabilities ---
Increase in accounts receivable (32,471) (68,386)
Increase in inventories (1,750) (2,058)
Decrease in prepaid expenses and other 402 1,660
Decrease in accounts payable (5,146) (1,907)
Decrease in accrued liabilities and other liabilities (5,139) (23,561)
Increase (decrease) in nonrefundable subscription income 691 (272)
Decrease in deferred income taxes -- (62)
-------- ---------
Net cash used in operating activities (2,771) (9,906)
-------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving credit facility, net (2,095) 25,500
Repayment of debt and capital lease obligations (1,275) (3,089)
Issuance of common stock 184 386
-------- ---------
Net cash provided by (used in) financing activities (3,186) 22,797
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the expropriation of Canadian ambulance service licenses -- 2,191
Capital expenditures (2,566) (12,887)
Proceeds from the sale of property and equipment 1,783 262
(Increase) decrease in other assets 2,383 (1,386)
-------- ---------
Net cash provided by (used in) investing activities 1,600 (11,820)
-------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 1 20
-------- ---------
INCREASE (DECREASE) IN CASH (4,356) 1,091
CASH, beginning of period 10,287 7,180
-------- ---------
CASH, end of period $ 5,931 $ 8,271
======== =========
The accompanying notes are an integral part of these financial statements.
7
8
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET LOSS $(21,574) $(42,386) $(25,659) $(40,502)
Foreign currency translation adjustments -- 66 1 20
-------- -------- -------- --------
COMPREHENSIVE LOSS $(21,574) $(42,320) $(25,658) $(40,482)
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
8
9
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for
the three and six month periods ended December 31, 2000 and 1999 include
all adjustments, consisting only of normal recurring adjustments necessary
for a fair statement of the consolidated financial position and results of
operations.
The results of operations for the three and six month periods ended
December 31, 2000 and 1999 are not necessarily indicative of the results
of operations for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended June
30, 2000.
(2) CREDIT AGREEMENTS AND BORROWINGS
The Company has received a compliance waiver, as amended, regarding the
financial covenants contained in its revolving credit facility covering
the periods from December 31, 1999 through April 15, 2001. The waiver, as
amended, covers the representations and warranties related to no material
adverse changes as well as the following financial covenants: the total
debt leverage ratio, the total debt to total capitalization ratio and the
fixed charge coverage ratio. The waiver, as amended, covers, among other
things, that no additional borrowings will be available to the Company
through the end of the waiver period in April 2001. There is no assurance
that the Company is in compliance with all of the technical conditions of
the waiver.
As LIBOR contracts expired in March 2000, all borrowings were priced at
prime rate plus 0.25 percentage points and interest is payable monthly.
During the periods covered by the waiver, as amended, the Company will
accrue additional interest expense at a rate of 2.0% per annum on the
outstanding balance on the revolving credit facility unless certain pay
down requirements are met during that period. An amendment to the waiver
required that $500,000 of the additional interest be paid to the lenders.
This payment was made in February 2001. At February 12, 2001, the
outstanding balance on the revolving credit facility was $144.3 million
with no availability on the facility. Also outstanding are $6.5 million in
letters of credit issued under the revolving credit facility. A condition
of the waiver agreement requires the Company to execute a definitive term
sheet providing for the repayment and/or restructuring of the revolving
credit facility by February 20, 2001. Management believes that an
amendment to the revolving credit facility could substantially alter the
terms and conditions of the revolving credit facility, including
potentially higher interest rates, which could have a material adverse
effect on the financial condition of the Company. Although the Company is
not aware of any Event of Default under either the terms of the revolving
credit facility (as a result of the waiver agreement) or the Company's
$150 million 7 7/8% Senior Notes due 2008, and although there has been no
acceleration of the repayment of the revolving credit facility or the
7 7/8% Senior Notes due 2008, the entire balance of these instruments has
been reclassified as a current liability at December 31, 2000 in the
accompanying
9
10
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 78 "Classification of Obligations that
are Callable by the Creditor."
The Company's inability to successfully negotiate an amendment of the
revolving credit facility could have a material adverse effect on the
financial condition of the Company.
In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes
due 2008 (the Notes). The Notes are general unsecured obligations of the
Company and are unconditionally guaranteed on a joint and several basis by
substantially all of the Company's domestic wholly owned current and
future subsidiaries. The financial statements presented below include the
Consolidating Balance Sheets as of December 31, 2000 and June 30, 2000,
the Consolidating Statements of Operations for the three and six months
ended December 31, 2000 and 1999, and the Consolidating Statements of Cash
Flows for the six months ended December 31, 2000 and 1999 of Rural/Metro
Corporation (the Parent) and the guarantor subsidiaries (the Guarantors)
and the subsidiaries which are not guarantors (the Non-guarantors). The
Company has not presented separate financial statements and related
disclosures for each of the Guarantor subsidiaries because management
believes such information is inconsequential to the note holders.
10
11
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 6,166 $ (235) $ -- $ 5,931
Accounts receivable, net -- 112,602 15,337 -- 127,939
Inventories -- 19,631 1,189 -- 20,820
Prepaid expenses and other 531 4,848 740 -- 6,119
--------- --------- -------- --------- ---------
Total current assets 531 143,247 17,031 -- 160,809
--------- --------- -------- --------- ---------
PROPERTY AND EQUIPMENT, net -- 67,740 8,261 -- 76,001
INTANGIBLE ASSETS, net -- 124,329 74,877 -- 199,206
DUE FROM (TO) AFFILIATES 304,569 (243,308) (61,261) -- --
OTHER ASSETS 2,357 13,023 521 -- 15,901
INVESTMENT IN SUBSIDIARIES 63,924 -- -- (63,924) --
--------- --------- -------- --------- ---------
$ 371,381 $ 105,031 $ 39,429 $ (63,924) $ 451,917
========= ========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 7,217 $ 3,772 $ -- $ 10,989
Accrued liabilities 6,738 39,701 5,509 -- 51,948
Current portion of long-term debt 294,526 1,541 562 -- 296,629
--------- --------- -------- --------- ---------
Total current liabilities 301,264 48,459 9,843 -- 359,566
--------- --------- -------- --------- ---------
LONG-TERM DEBT, net of current portion -- 1,844 124 -- 1,968
NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,560 120 -- 15,680
DEFERRED INCOME TAXES -- (680) 680 -- --
OTHER LIABILITIES -- 49 -- -- 49
--------- --------- -------- --------- ---------
Total liabilities 301,264 65,232 10,767 -- 377,263
--------- --------- -------- --------- ---------
MINORITY INTEREST -- -- -- 4,537 4,537
STOCKHOLDERS' EQUITY
Common stock 150 82 17 (99) 150
Additional paid-in capital 137,786 54,622 34,942 (89,564) 137,786
Accumulated deficit (66,329) (14,905) (6,046) 20,951 (66,329)
Cumulative translation adjustment (251) -- (251) 251 (251)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- -------- --------- ---------
Total stockholders' equity 70,117 39,799 28,662 (68,461) 70,117
--------- --------- -------- --------- ---------
$ 371,381 $ 105,031 $ 39,429 $ (63,924) $ 451,917
========= ========= ======== ========= =========
11
12
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 9,035 $ 1,252 $ -- $ 10,287
Accounts receivable, net -- 126,788 17,117 -- 143,905
Inventories -- 18,018 1,052 -- 19,070
Prepaid expenses and other 531 5,129 892 -- 6,552
--------- --------- -------- --------- ---------
Total current assets 531 158,970 20,313 -- 179,814
--------- --------- -------- --------- ---------
PROPERTY AND EQUIPMENT, net -- 76,325 9,594 -- 85,919
INTANGIBLE ASSETS, net -- 131,117 76,083 -- 207,200
DUE FROM (TO) AFFILIATES 319,747 (256,053) (63,694) -- --
OTHER ASSETS 3,386 12,273 2,625 -- 18,284
INVESTMENT IN SUBSIDIARIES 74,464 -- -- (74,464) --
--------- --------- -------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 11,922 $ 4,213 $ -- $ 16,135
Accrued liabilities 5,929 43,746 7,412 -- 57,087
Current portion of long-term debt 296,608 2,164 332 -- 299,104
--------- --------- -------- --------- ---------
Total current liabilities 302,537 57,832 11,957 -- 372,326
--------- --------- -------- --------- ---------
LONG-TERM DEBT, net of current portion -- 2,384 466 -- 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,971 18 -- 14,989
DEFERRED INCOME TAXES -- (725) 725 -- --
OTHER LIABILITIES -- 101 -- -- 101
--------- --------- -------- --------- ---------
Total liabilities 302,537 74,563 13,166 -- 390,266
--------- --------- -------- --------- ---------
MINORITY INTEREST -- -- -- 5,360 5,360
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 137,603 54,622 34,942 (89,564) 137,603
Accumulated deficit (40,670) (6,635) (2,952) 9,587 (40,670)
Cumulative translation adjustment (252) -- (252) 252 (252)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- -------- --------- ---------
Total stockholders' equity 95,591 48,069 31,755 (79,824) 95,591
--------- --------- -------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ======== ========= =========
12
13
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
REVENUE
Ambulance services $ -- $ 86,329 $ 13,873 $ -- $ 100,202
Fire protection services -- 14,856 284 -- 15,140
Other -- 8,738 1,129 -- 9,867
-------- --------- -------- ------- ---------
Total revenue -- 109,923 15,286 -- 125,209
-------- --------- -------- ------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 60,907 10,427 -- 71,334
Provision for doubtful accounts -- 28,044 1,001 -- 29,045
Depreciation -- 4,791 628 -- 5,419
Amortization of intangibles -- 1,266 603 -- 1,869
Other operating expenses -- 22,185 3,937 -- 26,122
Contract termination costs
and related asset impairment -- 5,190 -- -- 5,190
-------- --------- -------- ------- ---------
Total expenses -- 122,383 16,596 -- 138,979
-------- --------- -------- ------- ---------
OPERATING LOSS -- (12,460) (1,310) -- (13,770)
Interest expense, net 7,551 (53) 329 -- 7,827
Other -- -- -- (334) (334)
-------- --------- -------- ------- ---------
LOSS BEFORE TAXES (7,551) (12,407) (1,639) 334 (21,263)
Provision for (benefit from) income taxes -- 497 (186) -- 311
-------- --------- -------- ------- ---------
NET LOSS (7,551) (12,904) (1,453) 334 (21,574)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (14,023) -- -- 14,023 --
-------- --------- -------- ------- ---------
NET LOSS $(21,574) $ (12,904) $ (1,453) $14,357 $ (21,574)
======== ========= ======== ======= =========
Foreign currency translation adjustments -- -- 1 -- 1
Comprehensive income from
wholly-owned subsidiaries 1 -- -- (1) --
-------- --------- -------- ------- ---------
COMPREHENSIVE LOSS $(21,573) $ (12,904) $ (1,452) $14,356 $ (21,573)
======== ========= ======== ======= =========
13
14
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
REVENUE
Ambulance services $ -- $ 100,439 $ 20,670 $ -- $ 121,109
Fire protection services -- 14,273 278 -- 14,551
Other -- 9,436 2,011 -- 11,447
-------- --------- -------- -------- ---------
Total revenue -- 124,148 22,959 -- 147,107
-------- --------- -------- -------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 65,590 13,798 -- 79,388
Provision for doubtful accounts -- 84,854 1,393 -- 86,247
Depreciation -- 5,595 647 -- 6,242
Amortization of intangibles -- 1,676 626 -- 2,302
Other operating expenses -- 25,721 5,185 -- 30,906
-------- --------- -------- -------- ---------
Total expenses -- 183,436 21,649 -- 205,085
-------- --------- -------- -------- ---------
OPERATING INCOME (LOSS) -- (59,288) 1,310 -- (57,978)
Interest expense, net 5,609 (337) 540 -- 5,812
Other -- -- -- (54) (54)
-------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES
AND EXTRAORDINARY LOSS (5,609) (58,951) 770 54 (63,736)
PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,601) (21,290) 341 -- (22,550)
-------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (4,008) (37,661) 429 54 (41,186)
EXTRAORDINARY LOSS ON EXPROPRIATION OF
CANADIAN AMBULANCE SERVICE LICENSES -- -- (1,200) -- (1,200)
-------- --------- -------- -------- ---------
NET LOSS (4,008) (37,661) (771) 54 (42,386)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (38,378) -- -- 38,378 --
-------- --------- -------- -------- ---------
NET LOSS $(42,386) $ (37,661) $ (771) $ 38,432 $ (42,386)
======== ========= ======== ======== =========
Foreign currency translation adjustments -- -- 66 -- 66
Comprehensive loss from
wholly-owned subsidiaries 66 -- -- (66) --
-------- --------- -------- -------- ---------
COMPREHENSIVE LOSS $(42,320) $ (37,661) $ (705) $ 38,366 $ (42,320)
======== ========= ======== ======== =========
14
15
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
REVENUE
Ambulance services $ -- $ 173,591 $ 28,353 $ -- $ 201,944
Fire protection services -- 30,300 564 -- 30,864
Other -- 17,986 2,653 -- 20,639
-------- --------- -------- ------- ---------
Total revenue -- 221,877 31,570 -- 253,447
-------- --------- -------- ------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 122,699 21,277 -- 143,976
Provision for doubtful accounts -- 46,289 2,148 -- 48,437
Depreciation -- 9,836 1,291 -- 11,127
Amortization of intangibles -- 2,531 1,207 -- 3,738
Other operating expenses -- 43,186 8,350 -- 51,536
Contract termination costs
and related asset impairment -- 5,190 -- -- 5,190
-------- --------- -------- ------- ---------
Total expenses -- 229,731 34,273 -- 264,004
-------- --------- -------- ------- ---------
OPERATING LOSS -- (7,854) (2,703) -- (10,557)
Interest expense, net 15,119 (82) 666 -- 15,703
Other -- -- -- (823) (823)
-------- --------- -------- ------- ---------
LOSS BEFORE TAXES (15,119) (7,772) (3,369) 823 (25,437)
Provision for (benefit from) income taxes -- 497 (275) -- 222
-------- --------- -------- ------- ---------
NET LOSS (15,119) (8,269) (3,094) 823 (25,659)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (10,540) -- -- 10,540 --
-------- --------- -------- ------- ---------
NET LOSS $(25,659) $ (8,269) $ (3,094) $11,363 $ (25,659)
======== ========= ======== ======= =========
Foreign currency translation adjustments -- -- 1 -- 1
Comprehensive income from
wholly-owned subsidiaries 1 -- -- (1) --
-------- --------- -------- ------- ---------
COMPREHENSIVE LOSS $(25,658) $ (8,269) $ (3,093) $11,362 $ (25,658)
======== ========= ======== ======= =========
15
16
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
REVENUE
Ambulance services $ -- $ 196,586 $ 41,420 $ -- $ 238,006
Fire protection services -- 27,058 556 -- 27,614
Other -- 18,524 4,163 -- 22,687
-------- --------- -------- -------- ---------
Total revenue -- 242,168 46,139 -- 288,307
-------- --------- -------- -------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 127,748 28,505 -- 156,253
Provision for doubtful accounts -- 103,943 2,714 -- 106,657
Depreciation -- 11,149 1,253 -- 12,402
Amortization of intangibles -- 3,202 1,260 -- 4,462
Other operating expenses -- 46,301 10,629 -- 56,930
-------- --------- -------- -------- ---------
Total expenses -- 292,343 44,361 -- 336,704
-------- --------- -------- -------- ---------
OPERATING INCOME (LOSS) -- (50,175) 1,778 -- (48,397)
Interest expense, net 10,773 (614) 1,089 -- 11,248
Other -- -- -- (74) (74)
-------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (10,773) (49,561) 689 74 (59,571)
PROVISION FOR (BENEFIT FROM) INCOME TAXES (3,770) (17,355) 315 -- (20,810)
-------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (7,003) (32,206) 374 74 (38,761)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE -- (541) -- -- (541)
EXTRAORDINARY LOSS ON EXPROPRIATION OF
CANADIAN AMBULANCE SERVICE LICENSES -- -- (1,200) -- (1,200)
-------- --------- -------- -------- ---------
NET LOSS (7,003) (32,747) (826) 74 (40,502)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (33,499) -- -- 33,499 --
-------- --------- -------- -------- ---------
NET LOSS $(40,502) $ (32,747) $ (826) $ 33,573 $ (40,502)
======== ========= ======== ======== =========
Foreign currency translation adjustments -- -- 20 -- 20
Comprehensive loss from
wholly-owned subsidiaries 20 -- -- (20) --
-------- --------- -------- -------- ---------
COMPREHENSIVE LOSS $(40,482) $ (32,747) $ (806) $ 33,553 $ (40,482)
======== ========= ======== ======== =========
16
17
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(25,659) $ (8,269) $(3,094) $ 11,363 $(25,659)
Adjustments to reconcile net loss to cash
provided by (used in) operations--
Write-off of goodwill impaired with termination
of contract -- 4,287 -- -- 4,287
Depreciation and amortization -- 12,367 2,498 -- 14,865
Amortization of gain on sale of real estate -- (52) -- -- (52)
Gain on the sale of property and equipment -- (420) (6) -- (426)
Provision for doubtful accounts -- 46,289 2,148 -- 48,437
Undistributed loss of minority shareholder -- -- -- (823) (823)
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities ---
Increase in accounts receivable -- (32,103) (368) -- (32,471)
Increase in inventories -- (1,613) (137) -- (1,750)
Decrease in prepaid expenses and other -- 251 151 -- 402
(Increase) decrease in due to/from affiliates 25,718 (12,746) (2,433) (10,539) --
Decrease in accounts payable -- (4,705) (441) -- (5,146)
Increase (decrease) in accrued liabilities and
other liabilities 809 (4,045) (1,903) -- (5,139)
Increase in nonrefundable subscription income -- 589 102 -- 691
Increase (decrease) in deferred income taxes -- 45 (45) -- --
-------- -------- ------- -------- --------
Net cash provided by (used in) operating
activities 881 (125) (3,528) 1 (2,771)
-------- -------- ------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility, net (2,095) -- -- -- (2,095)
Repayment of debt and capital lease obligations -- (1,163) (112) -- (1,275)
Issuance of common stock 184 -- -- -- 184
-------- -------- ------- -------- --------
Net cash used in financing activities (1,911) (1,163) (112) -- (3,186)
-------- -------- ------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (2,558) (8) -- (2,566)
Proceeds from the sale of property and equipment -- 1,727 56 -- 1,783
(Increase) decrease in other assets 1,029 (750) 2,104 -- 2,383
-------- -------- ------- -------- --------
Net cash provided by (used in) investing
activities 1,029 (1,581) 2,152 -- 1,600
-------- -------- ------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 1 -- 1 (1) 1
-------- -------- ------- -------- --------
DECREASE IN CASH -- (2,869) (1,487) -- (4,356)
CASH, beginning of period -- 9,035 1,252 -- 10,287
-------- -------- ------- -------- --------
CASH, end of period $ -- $ 6,166 $ (235) $ -- $ 5,931
======== ======== ======= ======== ========
17
18
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(40,502) $ (32,747) $ (826) $ 33,573 $ (40,502)
Adjustments to reconcile net loss to cash
provided by (used in) operations--
Extraordinary loss -- -- 1,200 -- 1,200
Cumulative effect of a change in accounting
principle -- 541 -- -- 541
Depreciation and amortization -- 14,351 2,513 -- 16,864
Amortization of gain on sale of real estate -- (52) -- -- (52)
(Gain) loss on the sale of property and equipment -- 41 (8) -- 33
Provision for doubtful accounts -- 103,943 2,714 -- 106,657
Undistributed loss of minority shareholder -- -- -- (74) (74)
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities ---
Increase in accounts receivable -- (61,601) (6,785) -- (68,386)
(Increase) decrease in inventories -- (2,070) 12 -- (2,058)
Decrease in prepaid expenses and other -- 1,516 144 -- 1,660
Increase in due to/from affiliates 14,175 12,742 6,562 (33,479) --
Increase (decrease) in accounts payable -- (2,512) 605 -- (1,907)
Increase (decrease) in accrued liabilities and
other liabilities 139 (20,415) (3,285) -- (23,561)
Increase (decrease) in nonrefundable
subscription income -- (374) 102 -- (272)
Decrease in deferred income taxes -- (62) -- -- (62)
-------- --------- ------- -------- ---------
Net cash provided by (used in) operating
activities (26,175) 13,301 2,948 20 (9,906)
-------- --------- ------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 25,500 -- -- -- 25,500
Repayment of debt and capital lease obligations -- (2,194) (895) -- (3,089)
Issuance of common stock 386 -- -- -- 386
-------- --------- ------- -------- ---------
Net cash provided by (used in) financing
activities 25,886 (2,194) (895) -- 22,797
-------- --------- ------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the expropriation of Canadian
ambulance service licenses -- -- 2,191 -- 2,191
Capital expenditures -- (11,046) (1,841) -- (12,887)
Proceeds from the sale of property and equipment -- 254 8 -- 262
(Increase) decrease in other assets 269 (1,885) 230 -- (1,386)
-------- --------- ------- -------- ---------
Net cash provided by (used in) investing
activities 269 (12,677) 588 -- (11,820)
-------- --------- ------- -------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 20 -- 20 (20) 20
-------- --------- ------- -------- ---------
INCREASE (DECREASE) IN CASH -- (1,570) 2,661 -- 1,091
CASH, beginning of period -- 5,379 1,801 -- 7,180
-------- --------- ------- -------- ---------
CASH, end of period $ -- $ 3,809 $ 4,462 $ -- $ 8,271
======== ========= ======= ======== =========
18
19
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) COMMITMENTS AND CONTINGENCIES
Included in accrued liabilities at December 31, 2000 in the accompanying
balance sheets is $3.1 million attributable to the settlement of a
Medicaid audit and the accrual of a proposed settlement of a Medicare
investigation.
(4) GOING CONCERN
The Company incurred net losses of $101.3 million and $25.7 million for
the fiscal year ended June 30, 2000 and the six months ended December 31,
2000, respectively, and as a result is operating under a waiver of
covenant compliance of financial covenants under the Company's revolving
credit facility. In addition, no further amounts can be borrowed under the
revolving credit facility through the end of the waiver period, which is
April 15, 2001. The losses incurred in fiscal year 2000 primarily relate
to the Company's restructuring program aimed at closing or downsizing
certain underperforming non-emergency service areas, the reduction of
corporate overhead and additional provision for doubtful accounts due to
the continuing difficulties experienced in the healthcare reimbursement
environment.
As no further amounts may be borrowed, the Company will have to fund all
operations, capital expenditures, regularly scheduled interest payments on
the revolving credit facility and Notes and principal payments on other
debt and capital lease obligations from existing cash reserves and net
cash flows from operations.
The Company has self-funded all obligations, including regularly scheduled
interest payments on the revolving credit facility and the Notes from
operating cash flow since February 2000. The Company believes that its
existing cash reserves and operating cash flow will provide sufficient
cash for its operations, capital expenditures and regularly scheduled debt
service payments through the second quarter of fiscal 2002. Management is
actively working with its lenders in order to obtain a long-term amendment
to the credit facility. The Company believes that its current business
model and strategy will generate sufficient cash flow to provide a basis
for a new long- term agreement with its current lenders or to restructure
the debt through public or private debt or equity financings. The
availability of these financing alternatives is dependent upon prevailing
market conditions, interest rates, covenants associated with the Notes and
the market price of the Company's common stock.
There can be no assurance that the Company's restructuring efforts (See
Note 5) will be successful. In addition, an amendment to the revolving
credit facility could substantially alter the terms and conditions of the
credit facility, including potentially higher interest rates, which could
have a further adverse effect on the Company. Under current circumstances,
the Company's ability to continue as a going concern depends upon the
successful restructuring of the revolving credit facility as well as
success of its restructuring program. The financial statements do not
include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going
concern.
The Company has been advised by its independent public accountants that,
if the Company has not successfully renegotiated an amendment of the
revolving credit facility prior to the completion of their audit of the
Company's financial statements for the fiscal year ended June 30, 2001,
their auditor's report on those financial statements will be qualified for
this contingency.
19
20
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) RESTRUCTURING CHARGE AND OTHER
During the fiscal year ended June 30, 2000, the Company recorded pre-tax
charges of $43.3 million associated with its restructuring program related
to the closing or downsizing of certain non-emergency service areas and
reduction of corporate overhead. This charge primarily included severance
of approximately 300 employees, service area closing costs, and write-offs
of goodwill and other impaired assets. At December 31, 2000, $4.5 million
remains in accrued liabilities in the accompanying financial statements.
The usage of the restructuring charge and the remaining accrual at
December 31, 2000, are as follows (in thousands):
Balance at June 30, 2000 $ 8,523
Severance costs (2,572)
Lease termination costs (561)
Write-off of impaired assets and other costs (875)
-------
Balance at December 31, 2000 $ 4,515
=======
(6) CONTRACT TERMINATION COSTS AND RELATED ASSET IMPAIRMENT
During the second quarter of fiscal year 2001, the Company recorded costs
and impairment of assets totaling $5.2 million associated with the loss of
an exclusive 911 contract in Lincoln, Nebraska. The Company recorded
impairment of goodwill of $4.3 million. The remainder of the charge
related primarily to severance amounts incurred for employees in this
operation.
(7) EXTRAORDINARY ITEM
During the second quarter of fiscal year 2000, the Company recorded an
extraordinary loss on the expropriation of Canadian ambulance service
licenses of $1.2 million. The Company received $2.2 million from the
Ontario Ministry of Health as compensation for the loss of the licenses.
These proceeds were offset by $0.2 million accrual for costs associated
with the loss of the ambulance service licenses and the write-off of the
following balance sheet items related to the Company's Canadian
operations: $2.8 million of goodwill, $0.1 million of accounts receivable
and $0.3 million of other assets.
(8) CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities," effective July 1, 1999, the Company was required to
change its accounting principle for organization costs. Previously, the
Company capitalized such costs and amortized them using the straight-line
method over five years. The write-off was $541,000 (net of a tax benefit
of $392,000) and has been reflected in the Consolidated Statements of
Operations for the three and six months ended December 31, 1999, as the
"Cumulative Effect of a Change in Accounting Principle" in accordance with
APB No. 20. The Company has since expensed any further amounts incurred
for these purposes.
(9) CHANGE IN ACCOUNTING POLICY
Effective October 1, 1999, the Company changed its methodology of
determining its provision for doubtful accounts. This change was treated
as a change in accounting estimate. During the second quarter of fiscal
year 2000, management's analysis of the various payor classes within the
20
21
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's accounts receivable balance, the increasingly unpredictable
nature of the healthcare accounts receivable, the increasing costs to
collect these receivables and management's conclusion that process changes
have not brought about the benefits anticipated, led to this change. Under
the Company's new method of estimating its allowance for doubtful
accounts, the Company has chosen to fully reserve its accounts receivable
earlier in the collection cycle than had previously been the practice. The
new method provides specific allowances based upon the age of accounts
receivable within each payor class and also provides for general
allowances based upon historic collection rates within each payor class.
Payor classes include Medicare, Medicaid and private pay. Accordingly, the
effect of this change was an additional $65.0 million provision for
doubtful accounts, which was recorded in the second quarter of fiscal
2000.
(10) LOSS PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted loss per share
computation for the three and six month periods ended December 31, 2000
and 1999 is as follows (in thousands, except per share amounts):
Three Months Ended December 31, 2000 Three Months Ended December 31, 1999
------------------------------------------- ---------------------------------------------
Loss Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------- ------ -------- -------- ------ -------
Basic loss per share $(21,574) 14,645 $ (1.47) $(42,386) 14,578 $ (2.91)
-------- -------
Effect of stock options -- -- -- --
-------- ------ -------- ------
Diluted loss per share $(21,574) 14,645 $ (1.47) $(42,386) 14,578 $ (2.91)
======== ====== ======== ======== ====== =======
Six Months Ended December 31, 2000 Six Months Ended December 31, 1999
------------------------------------------- ---------------------------------------------
Loss Shares Per Share Loss Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------- ------ -------- -------- ------ -------
Basic loss per share $(25,659) 14,636 $(1.75) $(40,502) 14,558 $ (2.78)
-------- -------
Effect of stock options -- -- -- --
-------- ------ -------- ------
Diluted loss per share $(25,569) 14,636 $(1.75) $(40,502) 14,558 $ (2.78)
======== ====== ======== ======== ====== =======
As a result of anti-dilutive effects, approximately 293 and 7 common stock
equivalents were not included in the computation of diluted loss per share
for the three months ended December 31, 2000 and 1999, respectively.
Additionally, approximately 317 and 70 common stock equivalents were not
included in the computation of diluted loss per share for the six months
ended December 31, 2000 and 1999, respectively.
(11) SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for
reporting information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial statements. It also established standards for related
disclosures about products and services and geographic areas. Operating
segments are defined as components of a business, for which separate
financial information is available, that management regularly evaluates in
deciding how to allocate resources and assess performance.
The Company operates in two business segments: Ambulance and Fire and
Other. The Company's reportable segments are strategic business units that
offer different services. They are managed separately based on the
fundamental differences in their operations.
21
22
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a fee-for-service
basis, on a non-refundable subscription basis and through capitated
contracts. The Ambulance segment also includes urgent home medical care
and ambulance services provided under capitated service arrangements in
Argentina.
The Fire and Other segment includes the following services: fire
protection and training, alternative transportation, home health care
services, urgent and primary care in clinics, dispatch, fleet and billing.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements filed
with the Form 10-K/A for the fiscal year ended June 30, 2000. The Company
defines segment profit (loss) as total revenue less total operating
expenses and interest expense associated with the segment. The Company
defines segment assets as the sum of net accounts receivable, inventory
and net property and equipment associated with the segments.
Information by operating segment is set forth below (in thousands):
Three months ended December 31, 2000 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $ 100,202 $25,007 $ -- $ 125,209
Segment profit (loss) $ (17,708) $ 3,270 $(7,159) $ (21,597)
Segment assets $ 186,213 $36,965 $ 1,582 $ 224,760
Three months ended December 31, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $ 121,109 $25,998 -- $ 147,107
Segment profits (loss) $ (62,226) $ 2,089 $(3,653) $ (63,790)
Segment assets $ 216,878 $41,357 $ 2,439 $ 260,674
Six months ended December 31, 2000 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $ 201,944 $51,503 $ -- $ 253,447
Segment profit (loss) $ (20,306) $ 6,365 $(12,319) $ (26,260)
Segment assets $ 186,213 $36,965 $ 1,582 $ 224,760
Six months ended December 31, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $ 238,006 $50,301 $ -- $ 288,307
Segment profit (loss) $ (55,632) $ 3,715 $(7,728) $ (59,645)
Segment assets $ 216,878 $41,357 $ 2,439 $ 260,674
22
23
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Except for the historical information contained herein, this Report contains
forward looking statements that involve risks and uncertainties regarding future
business prospects, the value of our common stock, our ability to renegotiate
the terms of our revolving credit facility, revenue, working capital, accounts
receivable collection, liquidity, cash flow, and capital needs that could cause
actual results to differ materially.
The health care industry in general and the ambulance industry in particular are
in a state of significant change. This makes us susceptible to various factors
that may affect future results such as the following: no assurance of successful
integration and operation of acquired service providers; growth strategy and
difficulty in maintaining growth; risks of leverage; revenue mix; dependence on
certain business relationships; risks related to intangible assets; dependence
on government and third party payors; risks related to fee-for-service
contracts; possible adverse changes in reimbursement rates; impact of rate
structures; possible negative effects of prospective health care reform; high
utilization of services by customers under capitated service arrangements;
competitive market forces; fluctuation in quarterly results; volatility of stock
price; access to debt and equity capital; dependence on key personnel; and
anti-takeover effect of certain of our charter provisions.
All references to "we", "our", "us" or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions and subsidiaries.
This Report should be read in conjunction with our Report on Form 10-K/A for the
fiscal year ended June 30, 2000.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls ("911" emergency ambulance services) and non-emergency transport
services (general transport services) to patients on a fee-for-service basis, on
a non-refundable subscription fee basis and through capitated contracts. Per
transport revenue depends on various factors, including the mix of rates between
existing service areas and new service areas and the mix of activity between
"911" emergency ambulance services and general medical transport services as
well as other competitive factors. Fire protection services are provided either
under contracts with municipalities, fire districts or other agencies or on a
non-refundable subscription fee basis to individual homeowners or commercial
property owners.
Domestic ambulance service fees are recorded net of Medicare, Medicaid and other
reimbursement limitations and are recognized when services are provided.
Payments received from third-party payors represent a substantial portion of our
ambulance service fee receipts. We establish an allowance for doubtful accounts
based on credit risk applicable to certain types of payors, historical trends
and other relevant information. Provision for doubtful accounts is made for the
expected difference between ambulance services fees charged and amounts actually
collected. Our provision for doubtful accounts generally is higher with respect
to collections to be derived from patients than for collections to be derived
from third-party payors and generally is higher for "911" emergency ambulance
services than for general ambulance transport services. We also have an
ambulance service contract structured as a public utility model in which our
services are paid on a monthly basis by the contracting agency.
Because of the nature of our domestic ambulance services, it is necessary to
respond to a number of calls, primarily "911" emergency ambulance service calls,
which may not result in transports. Results of
23
24
operations are discussed below on the basis of actual transports since
transports are more directly related to revenue. Expenses associated with calls
that do not result in transports are included in operating expenses. The
percentage of domestic ambulance service calls not resulting in transports
varies substantially depending upon the mix of general transport and "911"
emergency ambulance service calls in our service areas and is generally higher
in service areas in which the calls are primarily "911" emergency ambulance
service calls. Rates in our service areas take into account the anticipated
number of calls that may not result in transports. We do not separately account
for expenses associated with calls that do not result in transports. Revenue
generated under our capitated service arrangements in Argentina and contractual
agreements in Canada is included in ambulance services revenue.
Revenue generated under fire protection service contracts is recognized over the
term of the related contract. Subscription fees received in advance are deferred
and recognized over the term of the subscription agreement, which is generally
one year.
Other revenue consists primarily of fees associated with alternative
transportation, dispatch, fleet, billing, urgent and primary care services in
clinics, and home health care services and is recognized when the services are
provided.
Other operating expenses consist primarily of rent and related occupancy
expenses, maintenance and repairs, insurance, fuel and supplies, travel and
professional fees.
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher second and third fiscal quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions. Also, our Argentine operations
experience greater utilization of services by customers under capitated service
arrangements in the first and fourth fiscal quarters, as compared to the other
two quarters, when South America is in its winter season.
Public health conditions affect our operations differently in different regions.
For example, greater utilization of services by customers under capitated
service arrangements decreases our operating income. The same conditions
domestically, where we operate under fee-for-service arrangements, result in a
greater number of transports, increasing our operating income.
The loss for the three months ended December 31, 2000 was $21.6 million, or
$1.47 per diluted share as compared to loss before extraordinary loss of $41.2
million, or $2.83 per diluted share for the three months ended December 31,
1999. Loss for the six months ended December 31, 2000 was $25.7 million or $1.75
per diluted share as compared to a loss before extraordinary loss and cumulative
effect of a change in accounting principle of $38.8 million or $2.66 per diluted
share for the six months ended December 31, 1999. The operating results for the
three and six months ended December 31, 2000 were negatively impacted by the
loss of an exclusive 911 contract in Lincoln, Nebraska and additional bad debt
expense for receivables related to the closure of certain under-performing
service areas as well as negative operating margins in our Argentine operations
due to the impact of the economic recession in Argentina combined with
significant increases in service taxes on all medical services, relative
increases in payroll due to labor shortages and increased interest expense due
additional interest and waiver fees as stipulated in our current waiver
agreement.
24
25
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1999
REVENUE
Total revenue decreased $21.9 million, or 14.9%, from $147.1 million for the
three months ended December 31, 1999 to $125.2 million for the three months
ended December 31, 2000. Ambulance services revenue decreased $20.9 million, or
17.3%, from $121.1 million for the three months ended December 31, 1999 to
$100.2 million for the three months ended December 31, 2000. Domestic ambulance
services revenue in areas served by us in both of the three-month periods ended
December 31, 2000 and 1999 decreased by $6.2 million, or 6.5%. The decreases in
those service areas were due to a greater focus on the quality of revenue and
the generation of more collectible transports. Approximately $11.4 million of
the decrease in revenue is attributable to the closure of certain
underperforming service areas that were closed in the fourth quarter of fiscal
2000. Additionally, there was a $2.5 million decrease in revenue derived from
our Canadian operations and $1.5 million decrease in ambulance services revenue
in our Argentine operations resulting from decreases in memberships under
capitated service arrangements. The decrease in memberships was attributable to
the impact of the economic recession in Argentina combined with significant
increases in service taxes on all medical services.
Total domestic ambulance transports decreased by 42,000, or 13.1%, from 320,000
for the three months ended December 31, 1999 to 278,000 for the three months
ended December 31, 2000 primarily due to decreases in those areas affected by
our restructuring program and a focus on the quality of revenue.
Fire protection services revenue increased by $0.5 million, or 3.4%, from $14.6
million for the three months ended December 31, 1999 to $15.1 million for the
three months ended December 31, 2000. Fire protection services revenue increased
due to new airport and industrial contracting activity of $0.1 million and rate
and utilization increases for fire protection services of $0.4 million.
Other revenue decreased $1.5 million, or 13.2%, from $11.4 million for the three
months ended December 31, 1999 to $9.9 million for the three months ended
December 31, 2000. The decrease was due to a $1.4 million decrease in
alternative transportation services due to our efforts to reduce transports in
certain areas and improve the quality of our revenue and a decrease of $0.8
million in Argentina related to decreased medical clinic revenue. These
decreases were offset by a $0.9 million increase in revenue related to our
public/private alliance with the City of San Diego.
OPERATING EXPENSES
Payroll and employee benefit expenses decreased $8.1 million, or 10.2%, from
$79.4 million for the three months ended December 31, 1999 to $71.3 million for
the three months ended December 31, 2000. Decreases in service areas that were
affected by closures as well as the reduction in corporate overhead totaled $6.3
million. The decrease was offset by increases in payroll and employee benefit
expenses in our remaining operations due to increases in payroll rates due to a
labor shortage. We expect these higher average labor costs to continue in the
future, including the increased costs associated with accounts receivable
collection and with Health Care Financing Administration ("HCFA") compliance.
Payroll and employee benefits expense increased from 54.0% of total revenue for
the three months ended December 31, 1999 to 57.0% of total revenue for the three
months ended December 31, 2000. Increased service utilization in our Argentine
operations also contributed to the increase in payroll and employee benefit
expenses as a percentage of total revenue.
Effective October 1, 1999, we changed our method of estimating our provision for
doubtful accounts. Because of the continuing difficulties encountered in the
healthcare reimbursement environment, during fiscal 2000, we have continued to
place increased emphasis on increasing the quality of our revenue by exiting
service areas or substantially reducing service, where it had become
unprofitable to perform non-
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emergency transports because of low reimbursement rates or a high risk of
non-reimbursement by payors. We have shifted the focus of our billing personnel
to place greater emphasis on the billing process as opposed to the collection
process. We have instituted mandatory comprehensive training for our paramedics
and emergency medical technicians on new standards of documentation of ambulance
run tickets. Management's analysis of the various payor classes within our
accounts receivable balance, the increasingly unpredictable nature of healthcare
accounts receivable, the increasing costs to collect these receivables and
management's conclusion that the aforementioned process changes had not brought
about the benefits anticipated led to this method change during the second
quarter of fiscal 2000. Under our method, we have chosen to fully reserve our
accounts receivable earlier in the collection cycle than had previously been our
practice. The new method provides specific allowances based upon the age of the
accounts receivable within each payor class and also provides for general
allowances based upon historic collection rates within each payor class. Payor
classes include Medicare, Medicaid, and private pay.
During the three months ended December 31, 2000, we recorded an additional $10
million of bad debt expense above our normal provision rate. The majority of
this amount relates to receivables generated in certain under-performing
services areas identified and closed during our fiscal 2000 restructuring. A
significant amount of effort and resources have been expended attempting to
collect these receivables. Because of the difficulties encountered during the
collection process, an additional provision to bad debt expense has been
recorded in the three months ended December 31, 2000.
The provision for doubtful accounts decreased $2.2 million, or 10.3% from $21.2
million for the three months ended December 31, 1999 to $19.0 million (excluding
the $10 million discussed above) for the three months ended December 31, 2000.
This resulted in an increase from 14.4% of total revenue for the three months
ended December 31, 1999 to 15.2% of total revenue for the three months ended
December 31, 2000 and was 19.2% of domestic ambulance service revenue for the
three months ended December 31, 1999 and 20.4% of domestic ambulance service
revenue for the three months ended December 31, 2000. During fiscal 2001, we
have continued to increase our focus on revenue of higher quality by reducing
the amount of non-emergency ambulance transports in selected service areas and
have continued previously implemented initiatives to maximize the collection of
our accounts receivable. Net accounts receivable on non-integrated collection
systems currently represent 10.1% of total net accounts receivable at December
31, 2000. We will continue to review the benefits and timing of integrating our
two non-integrated billing centers.
Depreciation decreased $0.8 million, or 12.9%, from $6.2 million for the three
months ended December 31, 1999 to $5.4 million for the three months ended
December 31, 2000. The decrease is primarily due to the disposal of certain
assets related to closed operations as well as a decrease in capital
expenditures during the current period. Depreciation was 4.2% and 4.3% of total
revenue for the three months ended December 31, 1999 and 2000, respectively.
Amortization of intangibles decreased $0.4 million, or 17.4%, from $2.3 million
for the three months ended December 31, 1999 to $1.9 million for the three
months ended December 31, 2000, primarily due to the write-off of goodwill
associated with the closure of underperforming operations in the third and
fourth quarters of fiscal 2000. Amortization of intangibles was 1.6% and 1.5% of
total revenue for the three months ended December 31, 1999 and 2000,
respectively.
Other operating expenses decreased approximately $4.8 million, or 15.5%, from
$30.9 million for the three months ended December 31, 1999 to $26.1 million for
the three months ended December 31, 2000. The decrease is due to a decrease in
other operating expenses related to closed operations of approximately $1.6
million, as well as $3.9 million attributable to the accrual of proposed
settlements relating to a Medicare investigation and certain Medicaid audits
which was recorded in the three months ended December 31, 1999. Other operating
expenses decreased from 21.0% of total revenue for the three
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months ended December 31, 1999 to 20.8% of total revenue for the three months
ended December 31, 2000.
During the three months ended December 31, 2000 we recorded a charge of $5.2
million related to the loss of a 911 contract in Lincoln, Nebraska. This charge
included impairment of goodwill, related to our operations in Nebraska, of $4.3
million. The remainder of the charge related primarily to severance amounts
incurred for employees in this operation.
Interest expense increased $2.0 million or 34.4% from $5.8 million for the three
months ended December 31, 1999 to $7.8 million for the three months ended
December 31, 2000. This increase was caused by higher debt balances, fees and
additional interest incurred in conjunction with the waiver agreements and
higher interest rates than historically incurred.
Our effective tax rate was 35.4% for the three months ended December 31, 1999
and (1.4)% for the three months ended December 31, 2000. The decrease in the
effective tax rate is due to the impact of permanent differences, primarily
consisting of goodwill write-offs and amortization and a valuation allowance.
The permanent differences and the valuation allowance result in a reduction of
the tax benefits which could otherwise be available in a loss year, and thus a
reduction in the effective tax rate. A valuation allowance has been provided
because we believe that the realizability of the net deferred tax asset does not
meet the more likely than not criteria under SFAS No. 109 "Accounting for Income
Taxes."
During the three months ended December 31, 1999, we recorded an extraordinary
loss on the expropriation of Canadian ambulance service licenses of $1.2 million
(net of $0 income taxes). We received $2.2 million from the Ontario Ministry of
Health as compensation for the loss of licenses and incurred costs and wrote-off
assets, mainly goodwill, totaling $3.4 million.
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUE
Total revenue decreased $34.9 million, or 12.1%, from $288.3 million for the six
months ended December 31, 1999 to $253.4 million for the six months ended
December 31, 2000. Ambulance services revenue decreased $36.0 million, or 15.1%,
from $238.0 million for the six months ended December 31, 1999 to $201.9 million
for the six months ended December 31, 2000. Domestic ambulance services revenue
in areas served by us in both of the six months periods ended December 31, 1999
and December 31, 2000 decreased by $8.0 million, or 4.2 %. The decreases in
those service areas were due to a greater focus on the quality of revenue and
the generation of more collectible transports. Approximately $21.0 million of
the decrease in revenue is attributable to the closure of certain
under-performing service areas that were closed in the fourth quarter of fiscal
2000. Additionally, there was a $4.7 million decrease in revenue derived from
our Canadian operations and $3.0 million decrease in ambulance services revenue
in our Argentine operations resulting from decreases in memberships under
capitated service arrangements. The decrease in memberships was attributable to
the impact of the economic recession in Argentina combined with significant
increases in service taxes on all medical services.
Total domestic ambulance transports decreased by 71,000, or 11.3 %, from 626,000
for the six months ended December 31, 1999 to 555,000 for the six months ended
December 31, 2000 primarily due to decreases in those areas affected by our
restructuring program and a focus on the quality of revenue.
Fire protection services revenue increased $3.3 million, or 12.0% from $27.6
million for the six months ended December 31, 1999 to $30.9 million for the six
months ended December 31, 2000. Fire protection
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services revenue increased due to new airport and industrial contracting
activity of $1.7 million, forestry revenue increases of $0.6 million and rate
and utilization increases for fire protection services of $0.9 million.
Other revenue decreased $2.1 million, or 9.3%, from $22.7 million for the six
months ended December 31, 1999 to $20.6 million for the six months ended
December 31, 2000. The decrease was due to a $2.7 million decrease in
alternative transportation services due to our efforts to reduce transports in
certain areas and improve the quality of our revenue and a decrease of $1.2
million in Argentina related to decreased medical clinic revenue. These
decreases were offset by a $1.8 million increase in revenue related to our
public/private alliance with the City of San Diego.
OPERATING EXPENSES
Payroll and employee benefit expenses decreased $12.3 million, or 7.9%, from
$156.3 million for the six months ended December 31, 1999 to $144.0 million for
the six months ended December 31, 2000. Decreases in service areas that were
affected by closures as well as the reduction in corporate overhead totaled
$11.7 million. The decrease was offset by increases in payroll and employee
benefit expenses in our remaining operations due to increases in payroll rates
due to a labor shortage. We expect these higher average labor costs to continue
in the future, including the increased costs associated with accounts receivable
collection and with Health Care Financing Administration ("HCFA") compliance.
Payroll and employee benefits expense increased from 54.2% of total revenue for
the six months ended December 31, 1999 to 56.8% of total revenue for the six
months ended December 31, 2000. Increased service utilization in our Argentine
operations also contributed to the increase in payroll and employee benefit
expenses as a percentage of total revenue.
Effective October 1, 1999, we changed our method of estimating our provision for
doubtful accounts. Because of the continuing difficulties encountered in the
healthcare reimbursement environment, during fiscal 2000, we have continued to
place increased emphasis on increasing the quality of our revenue by exiting
service areas or substantially reducing service, where it had become
unprofitable to perform non-emergency transports because of low reimbursement
rates or a high risk of non-reimbursement by payors. We have shifted the focus
of our billing personnel to place greater emphasis on the billing process as
opposed to the collection process. We have instituted mandatory comprehensive
training for our paramedics and emergency medical technicians on new standards
of documentation of ambulance run tickets. Management's analysis of the various
payor classes within our accounts receivable balance, the increasingly
unpredictable nature of healthcare accounts receivable, the increasing costs to
collect these receivables and management's conclusion that the aforementioned
process changes had not brought about the benefits anticipated led to this
method change during the second quarter of fiscal 2000. Under our method, we
have chosen to fully reserve our accounts receivable earlier in the collection
cycle than had previously been our practice. The new method provides specific
allowances based upon the age of the accounts receivable within each payor class
and also provides for general allowances based upon historic collection rates
within each payor class. Payor classes include Medicare, Medicaid, and private
pay.
During the six months ended December 31, 2000, we recorded an additional $10
million of bad debt expense above our normal provision rate. The majority of
this amount relates to receivables generated in certain under-performing
services areas identified during our fiscal 2000 restructuring. A significant
amount of effort and resources have been expended attempting to collect these
receivables. Because of the difficulties encountered during the collection
process, an additional provision to bad debt expense has been recorded in the
six months ended December 31, 2000.
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The provision for doubtful accounts decreased $3.3 million, or 7.9% from $41.7
million for the six months ended December 31, 1999 to $38.4 million (excluding
the $10 million discussed above) for the six months ended December 31, 2000.
This resulted in an increase from 14.5% of total revenue for the six months
ended December 31, 1999 to 15.2% of total revenue for the six months ended
December 31, 2000 and was 19.2% of domestic ambulance service revenue for the
six months ended December 31, 1999 and 20.4% of domestic ambulance service
revenue for the six months ended December 31, 2000. During fiscal 2001, we have
continued to increase our focus on revenue of higher quality by reducing the
amount of non-emergency ambulance transports in selected service areas and have
continued previously implemented initiatives to maximize the collection of our
accounts receivable. Net accounts receivable on non-integrated collection
systems currently represent 10.1% of total net accounts receivable at December
31, 2000. We will continue to review the benefits and timing of integrating our
two non-integrated billing centers.
Depreciation decreased $1.3 million, or 10.5%, from $12.4 million for the six
months ended December 31, 1999 to $11.1 million for the six months ended
December 31, 2000. The decrease is primarily due to the disposal of certain
assets related to closed operations as well as a decrease in capital
expenditures during the current period. Depreciation was 4.3% and 4.4% of total
revenue for the six months ended December 31, 1999 and 2000, respectively.
Amortization of intangibles decreased $0.8 million, or 17.8%, from $4.5 million
for the six months ended December 31, 1999 to $3.7 million for the three months
ended December 31, 2000, primarily due to the write-off of goodwill associated
with the closure of under-performing operations in the third and fourth quarters
of fiscal 2000. Amortization of intangibles was 1.6% and 1.5% of total revenue
for the six months ended December 31, 1999 and 2000, respectively.
Other operating expenses decreased approximately $5.4 million, or 9.5%, from
$56.9 million for the six months ended December 31, 1999 to $51.5 million for
the six months ended December 31, 2000. The decrease is due to a decrease in
other operating expenses related to closed operations of approximately $3.1
million as well as $3.9 million attributable to the accrual of proposed
settlements relating to a Medicare investigation and certain Medicaid audits
which was recorded in the three months ended December 31, 1999. These decreases
were offset by increased insurance and fuel costs.
During the six months ended December 31, 2000 we recorded a charge of $5.2
million related to the loss of a 911 contract in Lincoln, Nebraska. This charge
included impairment of goodwill, related to our operations in Nebraska, of $4.3
million. The remainder of the charge related primarily to severance amounts
incurred for employees in this operation.
Interest expense increased $4.5 million or 40.2% from $11.2 million for the six
months ended December 31, 1999 to $15.7 million for the six months ended
December 31, 2000. This increase was caused by higher debt balances, fees and
additional interest incurred in conjunction with the waiver agreements and
higher interest rates than historically incurred.
Our effective tax rate was 35.0% for the six months ended December 31, 1999 and
(0.8)% for the six months ended December 31, 2000. The decrease in the effective
tax rate is due to the impact of permanent differences, primarily consisting of
goodwill write-offs and amortization and a valuation allowance. The permanent
differences and the valuation allowance result in a reduction of the tax
benefits which could otherwise be available in a loss year, and thus a reduction
in the effective tax rate. A valuation allowance has been provided because we
believe that the realizability of the deferred tax asset does not meet the more
likely than not criteria under SFAS No. 109 "Accounting for Income Taxes."
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During the six months ended December 31, 1999, we recorded an extraordinary loss
on the expropriation of Canadian ambulance service licenses of $1.2 million (net
of $0 of income taxes). We received $2.2 million from the Ontario Ministry of
Health as compensation for the loss of license and incurred costs and wrote-off
assets, mainly goodwill, totaling $3.4 million.
The cumulative effect of a change in accounting principle resulted in $541,000
charge (net of a tax benefit of $392,000) and was related to our expensing of
previously capitalized organization costs in accordance with Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our cash requirements principally through cash
flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of senior notes, the sale of common stock
through an initial public offering in July 1993 and subsequent public stock
offerings in May 1994 and April 1996, and the exercise of stock options.
During the six months ended December 31, 2000, our cash flow used in operating
activities was $2.8 million, resulting primarily from an increase in accounts
receivable of $32.5 million, a decrease in accounts payable of $5.1 million, a
decrease in accrued liabilities and other liabilities of $5.1 million and a net
loss of $25.7 million offset by depreciation and amortization of $14.9 million
and provision for doubtful accounts of $48.4 million. Cash flow used in
operating activities was $9.9 million for the six months ended December 31,
1999.
Cash used in financing activities was $3.2 million for the six months ended
December 31, 2000, primarily due to repayments on the revolving credit facility
and on other debt and capital lease obligations. Cash provided by financing
activities was $22.8 million for the six months ended December 31, 1999.
Cash provided by investing activities was $1.6 million for the six months ended
December 31, 2000, primarily due to the proceeds from the sale of property and
equipment of $1.8 million. Cash used in investing activities was $11.8 million
for the six months ended December 31, 1999.
Our gross accounts receivable as of December 31, 2000 and June 30, 2000 was
$203.1 million and $231.7 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, was $127.9 million and $143.9 million as of
such dates, respectively. We believe that the decrease in net accounts
receivable is due to many factors including additional bad debt expense recorded
related to closed operations, collections on closed operations and overall
improvement in collections on existing operations.
The allowance for doubtful accounts decreased from $87.8 million at June 30,
2000 to $75.2 million at December 31, 2000. The primary reason for this decrease
is the write-off of uncollectible receivables offset by the current period
provision for doubtful accounts. Because of continuing difficulties in the
healthcare reimbursement environment, during fiscal 2001, we have continued to
place increased emphasis on increasing the quality of our revenue by exiting
service areas or substantially reducing service, where it had become
unprofitable to perform non-emergency transports because of low reimbursement
rates or a high risk of non-reimbursement by payors. We have shifted the focus
of our billing personnel to place greater emphasis on the billing process as
opposed to the collection process. We have instituted mandatory comprehensive
training for our paramedics and emergency medical technicians on new standards
of documentation of ambulance run tickets. We believe that these measures and
many other billing initiatives will help to enhance the quality of our billings,
which will assist in mitigating the risk of denials by payors and will help to
increase collections of bills from our private pay customers and thus improve
the overall quality of our revenue and accounts receivable. In addition to these
procedures,
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our continuing analysis of our accounts receivable and analysis of the
healthcare reimbursement environment led to the change in method during the
second quarter of fiscal 2000. We concluded that, despite our efforts to improve
the quality of our revenue, the speed of payments from certain payors within our
accounts receivable mix was not increasing. Because of this, we determined that
it was prudent to change our method to fully reserve accounts receivable within
certain payor classes earlier in the collection cycle than had previously been
done. The new method provides specific allowances based upon the age of the
accounts receivable within each payor class and also provides for general
allowances based upon historic collection rates within each payor class. Payor
classes include Medicare, Medicaid and private pay. We will continue to
aggressively attempt to collect our accounts receivable, using both internal and
external sources. With this method change, management believes that we have a
more predictable method of determining the realizable value of our accounts
receivable.
We have a $200 million revolving credit facility that matures March 16, 2003.
The credit facility is unsecured and is unconditionally guaranteed on a joint
and several basis by substantially all of our domestic wholly owned current and
future subsidiaries. Interest rates and availability under the revolving credit
facility depend upon our Company meeting certain financial covenants, including
total debt leverage ratios, total debt to capitalization ratios, and fixed
charge ratios.
Our $200 million revolving credit facility was priced at (a) the Base Rate (i.e.
the greater of (i) the prime rate (ii) the Federal Funds rate, .5 percentage
points), plus the applicable margin, or (b) LIBOR, plus the applicable margin.
The LIBOR-based rate ranged from LIBOR plus 0.875 percentage points to LIBOR
plus 1.75 percentage points. As discussed below, during March 2000, all
borrowings become priced at prime rate plus 0.25 percentage points. At December
31, 2000, the weighted average interest rate on the revolving credit facility
was 9.75%. Approximately $144.7 million was outstanding on the revolving credit
facility at December 31, 2000. We have received a compliance waiver, as amended,
regarding the financial covenants contained in our revolving credit facility,
which covers the periods from December 31, 1999 through April 15, 2001. The
waiver, as amended, covers the representations and warranties related to no
material adverse changes as well as the following financial covenants: the total
debt leverage ratio, the total debt to total capitalization ratio, and the fixed
charge coverage ratio. The waiver, as amended, covers, among other things, that
no additional borrowings will be available to us through the end of the waiver
period in April 2001. There is no assurance that we are in compliance with all
of the technical conditions of the waiver, as amended.
As LIBOR contracts expired in March 2000, all borrowings were priced at prime
rate plus 0.25 percentage points and interest is payable monthly. During the
period covered by the waiver, as amended, we will accrue additional interest
expense at a rate of 2.0% per annum on the outstanding balance on the revolving
credit facility unless certain pay down requirements are met during that period.
An amendment to the waiver required that $500,000 of the additional interest be
paid to the lenders. This payment was made in February 2001. At February 12,
2001, the outstanding balance on the revolving credit facility was $144.3
million with no availability on the facility. Also outstanding are $6.5 million
in letters of credit issued under the revolving credit facility. A condition of
the waiver agreement requires us to execute a definitive term sheet providing
for the repayment and/or restructuring of the revolving credit facility by
February 20, 2001. Management believes that an amendment to the revolving credit
facility could substantially alter the terms and conditions of the revolving
credit facility, including potentially higher interest rates, which could have a
material adverse effect on our financial condition. Although the Company is not
aware of any Event of Default under either the terms of the revolving credit
facility (as a result of the waiver agreement) or our $150 million 7 7/8% Senior
Notes due 2008, and although there has been no acceleration of the repayment of
the revolving credit facility or the 7 7/8% Senior Notes due 2008, the entire
balance of these instruments has been reclassified as a current liability at
December 31, 2000 in the accompanying financial statements in accordance with
Statement of Financial Accounting Standards (SFAS) No. 78 "Classification of
Obligations that are Callable by the Creditor".
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Our inability to successfully negotiate an amendment of the revolving credit
facility could have a material adverse effect on our financial condition.
The Senior Notes and the revolving credit facility have been reclassified as a
current liability under accounting rules relating to debt that is callable by
the creditor since we are operating under a waiver under the credit facility.
This, in addition to significant operating losses incurred in fiscal 2000, has
resulted in our independent accountants modifying their fiscal year end audit
report to include a statement that these uncertainties create substantial doubt
about our ability to continue as a going concern. The existence of a going
concern statement may make it more difficult to pursue additional capital
through public or private debt or equity financings. Our inability to
successfully negotiate an amendment to our revolving credit facility could have
a material adverse effect on our ability to continue as a going concern.
Because of the classification of entire outstanding balance under the revolving
credit facility as a current liability at December 31, 2000, we had negative
working capital of $198.8 million, including cash of $5.9 million, compared to
negative working capital of $192.5 million, including cash of $10.3 million, at
June 30, 2000.
In February 1998, we entered into a $5.0 million capital equipment lease line of
credit. The lease line of credit matures at varying dates through July 2003. The
lease line of credit is priced at the higher of LIBOR plus 1.7% or the
commercial paper rate plus 1.7%. At December 31, 2000 the weighted average
interest rate was 8.5% on the lease line of credit. Approximately $1.2 million
was outstanding on this line of credit at December 31, 2000.
In March 1998, we issued $150.0 million of Notes effected under Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act"). Interest under
the Notes is payable semi-annually on September 15 and March 15, and the Notes
are not callable until March 2003 subject to the terms of the Indenture. We
incurred expenses related to the offering of approximately $5.3 million and will
amortize these costs over the life of the Notes. We recorded a $258,000 discount
on the Notes and will amortize this discount over the life of the Notes.
Unamortized discount at December 31, 2000 was $186,000 and such amount is
recorded as an offset to the current portion of long-term debt in the
consolidated financial statements. In April 1998, we filed a registration
statement under the Securities Act relating to an exchange offer for the Notes.
The registration became effective on May 14, 1998. The Notes are general
unsecured obligations of our company and are unconditionally guaranteed on a
joint and several basis by substantially all of our domestic wholly owned
current and future subsidiaries. See Note 2 of Notes to our Consolidated
Financial Statements included in this Form 10-Q. The Notes contain certain
covenants that, among other things, limit our ability to incur certain
indebtedness, sell assets, or enter into certain mergers or consolidations.
Without additional borrowing capacity, existing working capital, together with
cash flow from operations may not be sufficient to meet our operating and
capital needs for existing operations for the twelve months subsequent to
December 31, 2000. We expect that cash flow from operations and our existing
cash reserves will be sufficient to meet our regularly scheduled debt service
and our operating capital needs for operations for the 12 months subsequent to
December 31, 2000. Through our restructuring program we have closed or downsized
several locations that were negatively impacting our cash flow. In addition, we
have significantly reduced our corporate overhead. We have improved the quality
of revenue and have experienced an upward trend in daily cash collections. We
are actively working with our lenders in order to obtain a long-term amendment
to the credit facility. We believe that our current business model and strategy
will generate sufficient cash flow to provide a basis for a new long-term
agreement with our current lenders or to restructure the debt through public or
private debt or equity financings. The availability of these financing
alternatives will depend upon prevailing market
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conditions, interest rates, our financial condition, covenants in our debt
agreements, and the market price of our common stock.
The market price of our common stock impacts our ability to complete
acquisitions. We may be unwilling to utilize, or potential acquired companies or
their owners may be unwilling to accept, our common stock in connection with
acquisitions. In addition, the market price performance of our common stock may
make raising funds more difficult and costly. As a result of the decline in the
market price of our common stock and the failure of our stock price to increase
since its decline, the pace of acquisitions utilizing our common stock has
declined. Continued weakness in the market price of our common stock could
adversely affect our ability or willingness to make additional acquisitions.
Declines in the market price of our common stock could cause previously acquired
companies to seek adjustments to purchase prices or other remedies to offset the
decline in value.
MEDICARE REIMBURSEMENT
In January 1999, HCFA announced its intention to form a negotiated rule-making
committee to create a new fee schedule for Medicare reimbursement of ambulance
services. The committee convened in February 1999. In August 1999, HCFA
announced that the implementation of the new fee schedule as well as the
mandatory acceptance of Medicare assignment would be postponed to January 2001.
HCFA also announced rules that became effective in February 1999. These rules
require, among other things, that a physician's certification statement be
obtained for certain ambulance transports. We have implemented a program to
comply with the new rules.
The proposed Medicare ambulance fee schedule and rule was published September
12, 2000 in the Federal Register, to be followed by a 60-day comment period. On
November 30, 2000, HCFA notified Medicare carriers that it would not implement
the proposed fee schedule and rules as scheduled on January 1, 2001. As of this
filing, HCFA has not established an implementation date for the final fee
schedule and rules. If implemented, these rules could result in contract
renegotiations or other action by us to offset any negative impact of the
proposed change in reimbursement policies that could have a material adverse
effect.
Although the final fee schedule and rules have been delayed, two requirements
took effect January 1, 2001. Providers must use new HCFA Common Procedure Coding
System (HCPCS) codes on all Medicare claims, with the exception of billing for
mileage. Secondly, all Medicare claims must include the ZIP code of the point of
patient pickup. Rural/Metro has implemented these two requirements into its
Medicare billing protocol.
The final outcome of the proposed rules and the effect of the prospective fee
schedule are uncertain. However, changes in reimbursement policies, or other
government action, together with the financial instability of private
third-party payors and budget pressures on payor sources could influence the
timing and, potentially, the ultimate receipt of payments and reimbursements. A
reduction in coverage or reimbursement rates by third party payors, or an
increase in our cost structure relative to the rate increase in the CPI, or
costs incurred to implement the mandates of the fee schedule could have a
material adverse effect on our business, financial condition, cash flows and
results of operations.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Our results of operations for the periods discussed have not been affected
significantly by inflation or foreign currency fluctuations. Our revenue from
international operations is denominated primarily in the currency of the country
in which it is operating. At December 31, 2000, our balance sheet reflects a
$251,000 cumulative equity adjustment (decrease) from foreign currency
translation. Although we have not incurred any material exchange gains or losses
to date, there can be no assurance that fluctuations in
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the currency exchange rates in the future will not have an adverse effect on our
business, financial condition, cash flows and results of operations. We do not
currently engage in foreign currency hedging transactions. However, if we choose
to expand our international operations, exposure to gains and losses on foreign
currency transactions may increase. We may choose to limit such exposure by
entering into forward exchange contracts or engaging in similar hedging
strategies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION.
We entered into interest rate swap agreements to limit the effect of
increases in the interest rates on floating rate debt. The swap agreements are
contracts to exchange floating rate for fixed interest payments periodically
over the life of the agreements without the exchange of the underlying notional
amounts. The notional amounts of interest rate agreements are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. The net cash amounts paid or received on the agreements are accrued
and recognized as an adjustment to interest expense.
In November 1998, we entered into an interest rate swap agreement that
originally expired in November 2003 with a provision for the lending party to
terminate the agreement in November 2000. The interest rate swap agreement
effectively converted $50.0 million of variable rate borrowings to fixed rate
borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating
rate. The weighted average floating rate for the year ended June 30, 1999 was
5.2%. As a result of this swap agreement interest expense was reduced by
approximately $106,000 during the year ended June 30, 1999. In June 1999, we
terminated the interest rate swap agreement and received a termination fee of
$604,000. Such amount was amortized as a reduction of interest expense on a
straight-line basis through November 2000.
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RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION.
ITEM 1 -- LEGAL PROCEEDINGS.
From time to time, we are subject to litigation arising in the ordinary
course of business. Our insurance coverage may not be adequate to cover all
liabilities arising out of such claims. We are not engaged in any legal
proceedings in the ordinary course of business that are expected to have a
material adverse effect on our financial condition or results of operations.
We, Warren S. Rustand, our former Chairman of the Board and Chief
Executive Officer of the Company, James H. Bolin, our former Vice Chairman of
the Board, and Robert E. Ramsey, Jr., our former Executive Vice President and
former Director, have been named as defendants in two purported class action
lawsuits: Haskell v. Rural/Metro Corporation, et al., Civil Action No. C-328448
filed on August 25, 1998 in Pima County, Arizona Superior Court and Ruble v.
Rural/Metro Corporation, et al., CIV 98-413-TUC-JMR filed on September 2, 1998
in United States District Court for the District of Arizona. The two lawsuits,
which contain virtually identical allegations, were brought on behalf of a class
of persons who purchased our publicly traded securities including its common
stock between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro seeks
unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud
Act, and under Arizona common law fraud, and also seeks punitive damages, a
constructive trust, and other injunctive relief. Ruble v. Rural/Metro seeks
unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended. The complaints in both actions allege that between
April 28, 1997 and June 11, 1998 the defendants issued certain false and
misleading statements regarding certain aspects of our financial status and that
these statements allegedly caused our common stock to be traded at artificially
inflated prices. The complaints also allege that Mr. Bolin and Mr. Ramsey sold
stock during this period, allegedly taking advantage of inside information that
the stock prices were artificially inflated. On May 25, 1999, the Arizona state
court granted our request for a stay of the Haskell action until the Ruble
action is finally resolved. We and the individual defendants have moved to
dismiss the Ruble action. On January 25, 2001, the Court granted the motion to
dismiss, but granted the plaintiffs leave to replead. We intend to defend the
actions vigorously. We are unable to predict the ultimate outcome of this
litigation. If the lawsuits were ultimately determined adversely to us, it could
have a material effect on our results of operations and financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 2000 Annual Meeting of Stockholders was held on December 13,
2000. The following nominees were elected to the Company's Board of Directors to
serve as Class III directors for three-year terms or until their successors are
elected and qualified:
Nominee Votes in Favor Votes Opposed Abstained Broker Non-Vote
- ------- -------------- ------------- --------- ---------------
Henry G. Walker 11,968,433 419,016 -0- -0-
Cor J. Clement 11,688,367 699,082 -0- -0-
The following directors' terms of office continued after the 2000 Annual
Meeting of Stockholders:
Louis G. Jekel
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36
Jack E. Brucker
Mary Anne Carpenter
William C. Turner
Louis A. Witzeman
The second item voted upon was the approval of an amendment to the
Company's Employee Stock Purchase Plan to increase the number of shares of
common stock that may be purchased pursuant to such plan from 450,000 shares to
1,150,000 shares.
Votes in Favor Votes Opposed Abstained Broker Non-Vote
-------------- ------------- --------- ---------------
11,878,239 454,133 55,077 -0-
The final item voted upon was ratification of the appointment of Arthur
Andersen LLP as the independent auditors for the Company for the fiscal year
ending June 30, 2001.
Votes in Favor Votes Opposed Abstained Broker Non-Vote
-------------- ------------- --------- ---------------
12,225,009 98,465 33,975 -0-
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K filed February 2, 2001 relating to Press Release
dated January 31, 2001 and the Fourth Amendment to Provisional
Waiver and Standstill Agreement dated as of January 31,
2001.(1)
- --------------
(1) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about February 2, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Date: February 14, 2001 By: /s/ Jack E. Brucker
---------------------------
Jack E. Brucker, President
& Chief Executive Officer
By: /s/ Randall L. Harmsen
--------------------------------
Randall L. Harmsen, Vice
President of Finance and Principal
Accounting Officer
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