SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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.)
9221 EAST VIA DE VENTURA
SCOTTSDALE, ARIZONA
85258
(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
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
At April 21, 2005, there were 23,142,790 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2005
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 43
Part II. Other Information
Item 6. Exhibits 44
Signatures 45
2
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands, except share data)
MARCH 31, JUNE 30,
2005 2004
------------------ -----------------
ASSETS
Current assets:
Cash $ 10,663 $ 16,372
Accounts receivable, net of allowance for doubtful accounts of $65,584 and $59,430
at March 31, 2005 and June 30, 2004, respectively 71,681 65,348
Accounts receivable from insurers 8,280 9,966
Inventories 11,858 11,738
Prepaid expenses and current other assets 6,271 8,512
------------------ -----------------
Total current assets 108,753 111,936
Property and equipment, net 44,237 40,283
Goodwill 40,850 41,100
Insurance deposits 6,356 9,244
Other assets 20,360 12,644
------------------ -----------------
$ 220,556 $ 215,207
================== =================
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,372 $ 13,833
Accrued liabilities 57,928 67,239
Deferred revenue 18,002 17,249
Current portion of long-term debt 2,520 1,495
------------------ -----------------
Total current liabilities 90,822 99,816
Long-term debt, net of current portion 310,235 304,057
Other liabilities 3,240 1,401
Deferred income taxes 650 650
------------------ -----------------
Total liabilities 404,947 405,924
------------------ -----------------
Minority interest 1,549 1,509
------------------ -----------------
Stockholders' equity (deficit):
Common stock, $.01 par value, 40,000,000 shares authorized, 23,135,290 and 21,890,816
shares issued and outstanding at March 31, 2005 and June 30, 2004, respectively 231 219
Additional paid-in capital 148,860 147,075
Accumulated deficit (333,792) (338,281)
Treasury stock (1,239) (1,239)
------------------ -----------------
Total stockholders' equity (deficit) (185,940) (192,226)
------------------ -----------------
$ 220,556 $ 215,207
================== =================
See accompanying notes
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net revenue $ 145,226 $ 134,252 $ 418,906 $ 393,811
----------- ----------- ----------- -----------
Operating expenses
Payroll and employee benefits 75,021 69,998 221,170 207,729
Provision for doubtful accounts 22,522 22,856 64,576 64,306
Depreciation and amortization 2,835 3,130 8,512 8,733
Other operating expenses 32,564 29,349 89,647 85,587
----------- ----------- ----------- -----------
Total operating expenses 132,942 125,333 383,905 366,355
----------- ----------- ----------- -----------
Operating income 12,284 8,919 35,001 27,456
Interest expense (7,205) (6,898) (22,039) (22,106)
Interest income 48 16 227 67
Loss on early extinguishment of debt (8,170) - (8,170) -
----------- ----------- ----------- -----------
Income (loss) from continuing operations before income taxes and minority
interest (3,043) 2,037 5,019 5,417
Income tax benefit (provision) 126 (88) (397) (277)
Minority interest (68) 65 (40) (398)
----------- ----------- ----------- -----------
Income (loss) from continuing operations (2,985) 2,014 4,582 4,742
Income (loss) from discontinued operations - 153 (93) 206
----------- ----------- ----------- -----------
Net income (loss) (2,985) 2,167 4,489 4,948
Less: Net income allocated to redeemable nonconvertible participating
preferred stock under the two-class method - (495) - (964)
Less: Accretion of redeemable nonconvertible participating preferred stock - (1,706) - (4,613)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock $ (2,985) $ (34) $ 4,489 $ (629)
=========== =========== =========== ===========
Income (loss) per share
Basic -
Income (loss) from continuing operations applicable to common stock $ (0.13) $ (0.01) $ 0.20 $ (0.05)
Income (loss) from discontinued operations applicable to common stock - 0.01 - 0.01
----------- ----------- ----------- -----------
Net income (loss) $ (0.13) $ - $ 0.20 $ (0.04)
=========== =========== =========== ===========
Diluted -
Income (loss) from continuing operations applicable to common stock $ (0.13) $ (0.01) $ 0.19 $ (0.05)
Income from discontinued operations applicable to common stock - 0.01 - 0.01
----------- ----------- ----------- -----------
Net income (loss) $ (0.13) $ - $ 0.19 $ (0.04)
=========== =========== =========== ===========
Average number of common shares outstanding - Basic 23,019 16,750 22,406 16,557
=========== =========== =========== ===========
Average number of common shares outstanding - Diluted 23,019 16,750 23,837 16,557
=========== =========== =========== ===========
See accompanying notes
5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)
NINE MONTHS ENDED
MARCH 31,
-----------------------------------------------------
2005 2004
------------------------- -------------------------
Cash flows from operating activities:
Net income $ 4,489 $ 4,948
Adjustments to reconcile net income to cash provided by
operating activities -
Provision for doubtful accounts 64,601 68,175
Depreciation and amortization 8,762 9,423
Non-cash portion of loss on early extinguishment of debt 5,668 -
Amortization of deferred financing costs 1,932 2,083
Accretion of 12.75% Senior Discount Notes 480 -
Tax benefit from the exercise of stock options 159 -
Loss on sale of property and equipment 126 104
Earnings of minority shareholder 40 398
Amortization of debt discount 17 19
Change in assets and liabilities -
Increase in accounts receivable (70,934) (75,047)
Decrease (increase) in accounts receivable from insurers 1,686 (5,001)
(Increase) decrease in inventories (120) 221
Decrease in prepaid expenses and other current assets 2,241 1,761
Decrease (increase) in insurance deposits 2,888 (362)
Increase in other assets (3,850) (797)
Decrease in accounts payable (1,461) (1,581)
Decrease in accrued liabilities (9,311) (393)
Increase in deferred revenue 753 732
Increase in other liabilities 11 83
------------------------- -------------------------
Net cash provided by operating activities 8,177 4,766
------------------------- -------------------------
Cash flows from investing activities:
Capital expenditures (10,327) (6,182)
Proceeds from the sale of property and equipment 14 92
------------------------- -------------------------
Net cash used in investing activities (10,313) (6,090)
------------------------- -------------------------
Cash flows from financing activities:
Repayment of credit facility due December 2006 (152,555) (1,000)
Repayment of 7.875% Senior Notes due March 2008 (150,000) -
Cash provided under Term Loan B 135,000 -
Cash provided by issuance of 9.875% Senior Subordinated Notes 125,000 -
Cash provided by issuance of 12.75% Senior Discount Notes 50,209 -
Repayment of debt and capital lease obligations (1,027) (931)
Cash paid for debt issuance costs (11,838) (515)
Proceeds from the issuance of common stock 1,638 462
------------------------- -------------------------
Net cash used in financing activities (3,573) (1,984)
------------------------- -------------------------
Decrease in cash (5,709) (3,308)
Cash, beginning of period 16,372 12,561
------------------------- -------------------------
Cash, end of period $ 10,663 $ 9,253
========================= =========================
Non-cash investing activities:
Landlord funded leasehold improvements for new corporate headquarters $ 1,828 $ -
========================= =========================
See accompanying notes
6
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rural/Metro Corporation (the Company) is a leading provider of medical
transportation services, which consist primarily of emergency and non-emergency
ambulance services. These medical transportation services are provided under
contracts with governmental entities, hospitals, nursing homes and other
healthcare facilities and organizations. The Company also provides private fire
protection and related services on a subscription fee basis to residential and
commercial property owners and under long-term contracts with fire districts,
industrial sites and airports. These services consist primarily of fire
suppression, fire prevention and first responder medical care.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, they do not include
all information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, the unaudited consolidated financial statements for
the three and nine months ended March 31, 2005 and 2004 include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the consolidated financial position and results of operations. The results of
operations for the three and nine months ended March 31, 2005 are not
necessarily indicative of the results of operations for the full fiscal year.
These consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes thereto included in
the Company's Report on Form 8-K filed on February 16, 2005. Certain financial
information for prior periods has been reclassified to conform to the current
presentation.
(1) LIQUIDITY
In March 2005, the Company completed a debt refinancing transaction which is
further described in Note 3. The Company's ability to service its long-term
debt, to remain in compliance with the various restrictions and covenants
contained in its debt agreements and to fund working capital, capital
expenditures and business development efforts will depend on its ability to
generate cash from operating activities which is subject to, among other things,
future operating performance as well as general economic, financial,
competitive, legislative, regulatory and other conditions, some of which may be
beyond its control.
If the Company fails to generate sufficient cash flow from operating activities,
it may need to borrow additional funds or issue additional debt or equity
securities to achieve its longer-term business objectives. There can be no
assurance that the Company can borrow such funds or issue such debt or equity
securities or, if it can, that it can do so at rates or prices acceptable to the
Company. Management believes that cash flow from operating activities coupled
with existing cash balances and amounts available under the Company's revolving
credit facility will be adequate to fund the Company's operating and capital
needs as well as enable it to maintain compliance with its various debt
agreements through March 31, 2006. To the extent that actual results or events
differ from the Company's financial projections or business plans, its liquidity
may be adversely impacted.
7
(2) ACCOUNTING FOR STOCK BASED COMPENSATION
At March 31, 2005, the Company had two stock compensation plans, the Amended and
Restated 1992 Stock Option Plan (the "1992 Plan") and the 2000 Non-Qualified
Stock Option Plan (the "2000 Plan"). The 1992 Plan expired November 5, 2002 and
therefore the Company is no longer issuing options under that plan. The 1992
Plan was the only plan under which the Company could provide stock compensation
to its executive officers and Board of Directors. The 2000 Plan had 477,329
shares available for issuance at March 31, 2005. The Company accounts for its
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. Consistent with APB 25, stock-based compensation
expense has not been reflected in the consolidated statement of operations as
all options granted under the Company's plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income (loss) and income (loss) per share as
if the Company had applied the fair value recognition provisions of the
Statement of Financial Accounting Standards Board ("SFAS") Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") (in thousands, except per
share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net income (loss) applicable to common stock $ (2,985) $ (34) $ 4,489 $ (629)
Deduct: Stock based employee compensation determined
under the fair value method for all awards applicable
to common stock, net of tax effect (9) 10 (98) (372)
--------------- --------------- --------------- ---------------
Pro forma net income (loss) applicable to common stock $ (2,994) $ (24) $ 4,391 $ (1,001)
=============== =============== =============== ===============
Income (loss) per share:
Basic - As reported $ (0.13) $ - $ 0.20 $ (0.04)
=============== =============== =============== ===============
Basic - Pro forma $ (0.13) $ - $ 0.20 $ (0.06)
=============== =============== =============== ===============
Diluted - As reported $ (0.13) $ - $ 0.19 $ (0.04)
=============== =============== =============== ===============
Diluted - Pro forma $ (0.13) $ - $ 0.18 $ (0.06)
=============== =============== =============== ===============
In December 2004, the Financial Accounting Standards Board issued SFAS Statement
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). The revised
standard addresses the accounting for share-based payment transactions in which
a company receives employee services in exchange for either equity instruments
of the company or liabilities that are based on the fair market value of the
company's equity instruments or that may be settled by the issuance of such
equity instruments. Under the new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in
accordance with APB 25. Instead, companies will be required to account for such
transactions using the fair-value method and to record that cost as compensation
expense over the period during which the employee is required to perform the
service in exchange for the award (generally over the vesting period of the
award). The pro-forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. The Company expects
to adopt SFAS 123R on July 1, 2005 and is currently evaluating the method of
adoption and impact that SFAS 123R will have on its financial condition and
results of operations.
8
(3) LONG-TERM DEBT AND REFINANCING TRANSACTION
On March 4, 2005, the Company effected a refinancing transaction whereby its
newly formed wholly owned subsidiary, Rural/Metro Operating Company, LLC
("Rural/Metro LLC"), entered into new senior secured credit facilities
(collectively, the "2005 Credit Facility") in an aggregate amount of up to
$190.0 million, comprised of a $135.0 million Term Loan B facility due March
2011 (the "Term Loan B"), a $20.0 million revolving credit facility due March
2010 (the "Revolving Credit Facility") and a $35.0 million prefunded letter of
credit facility (the "Letter of Credit Facility"). Indebtedness under the 2005
Credit Facility is guaranteed by the Company and each of Rural/Metro LLC's
current and future direct and indirect domestic subsidiaries (the "Guarantors")
and is secured by a lien on substantially all of Rural/Metro LLC's and the
Guarantors' current and future property, including all equity interests in
Rural/Metro LLC and its current subsidiaries. In addition, Rural/Metro LLC and
its newly formed wholly owned subsidiary, Rural/Metro (Delaware) Inc.
("Rural/Metro Inc.") issued $125.0 million aggregate principal amount 9.875%
senior subordinated notes due 2015 (the "Senior Subordinated Notes") and the
Company issued $93.5 million aggregate principal amount at maturity (gross
proceeds of $50.2 million) of 12.75% senior discount notes due 2016 (the "Senior
Discount Notes"). The Senior Subordinated Notes and the Senior Discount Notes
were sold in private placement transactions and have not been registered under
the Securities Act of 1933, as amended.
Due to certain covenant restrictions contained in the Company's 7.875% Senior
Notes due 2008 ("Senior Notes"), the Company could not effectively refinance its
prior senior credit facility without refinancing the Senior Notes. Therefore,
the Company used the borrowings under the 2005 Credit Facility and the net
proceeds from the offerings of the Senior Subordinated Notes and the Senior
Discount Notes, together with $13.3 million of cash on hand, to finance a tender
offer for and consent solicitation relating to the Company's Senior Notes for
which it received tenders and related consents from holders of 92% of the Senior
Notes. In addition, the Company used such funds to redeem any Senior Notes not
acquired in the tender offer, to repay amounts outstanding under the Company's
prior senior credit facility and to pay certain fees and expenses related to the
refinancing transaction.
In connection with these refinancing activities, the Company recorded $8.2
million of debt extinguishment costs during the three months ended March 31,
2005. These costs included non-cash charges of $5.6 million related to the
write-off of debt issuance costs associated with the retired debt and $0.1
million related to unamortized discounts as well as cash redemption premiums of
$2.5 million.
The following is a summary of the Company's outstanding long-term debt at March
31, 2005 and June 30, 2004 (in thousands):
MARCH 31, JUNE 30,
2005 2004
-------------------- ------------------
Senior Secured Term Loan B due March 2011 $ 135,000 $ -
9.875% Senior Subordinated Notes due March 2015 125,000 -
12.75% Senior Discount Notes due March 2016 50,689 -
Revolving Credit Facility, undrawn - -
Credit Facility due December 2006 - 152,555
7.875% Senior Notes due March 2008 - 149,904
Capital lease and other obligations, at varying rates
from 6.0% to 12.75%, due through 2013 2,066 3,093
-------------------- ------------------
Long-term debt 312,755 305,552
Less: Current maturities (2,520) (1,495)
-------------------- ------------------
Long-term debt, net of current maturities $ 310,235 $ 304,057
==================== ==================
9
2005 CREDIT FACILITY
In March 2005, Rural/Metro LLC entered into the 2005 Credit Facility, which
provides for a $135.0 million Term Loan B facility maturing in 2011, a $35.0
million Letter of Credit Facility maturing in 2011 and a $20.0 million Revolving
Credit Facility maturing in 2010, each of which is described below.
Term Loan B
The Term Loan B bears interest at LIBOR plus 2.50% per annum or, at Rural/Metro
LLC's option, the Alternate Base Rate (ABR), as defined in the 2005 Credit
Facility, plus 1.50% per annum. In the case of the LIBOR option, whereby the
contract period is equal to one, two, three or six months from the date of
initial borrowing at Rural/Metro LLC's option, interest on the Term Loan B is
payable on the last day of each contract period, subject to a maximum payment
term of three months. Interest is payable at the end of each quarter in the case
of the ABR option. As of March 31, 2005, the Company had chosen the LIBOR option
for a contract period of three months and is accruing interest at 5.25% per
annum.
The Term Loan B requires an annual principal payment of 1.0% of the original
loan amount, payable quarterly beginning on September 30, 2005. Additional
annual principal payments equal to 75% of the fiscal year-end Excess Cash Flow,
as defined in the 2005 Credit Facility, are due on September 30th of each year
with the first remeasurement period at June 30, 2006. Rural/Metro LLC
capitalized expenses associated with securing Term Loan B of approximately $4.5
million and is amortizing these costs to interest expense over the term of the
agreement.
Revolving Credit Facility
The Revolving Credit Facility includes a letter of credit sub-line whereby $10.0
million of the $20.0 million total facility can be utilized to issue letters of
credit. The Revolving Credit Facility bears interest at LIBOR plus 3.25% per
annum or, at Rural/Metro LLC's option, the ABR plus 2.25% per annum on all
amounts drawn against the line. In the case of the LIBOR option, whereby the
contract period is equal to one, two, three or six months from the date of
initial borrowing at Rural/Metro LLC's option, interest on the Revolving Credit
Facility is payable on the last day of each contract period, subject to a
maximum payment term of three months. Interest is payable at the end of each
quarter in the case of the ABR option. A commitment fee of 0.50% is payable on
the total undrawn revolving commitment, plus a fronting fee of 0.25% on any
letter of credit issued under the sub-line, payable at the end of each quarter.
Principal payments prior to maturity are not required. Expenses associated with
securing the Revolving Credit Facility of approximately $0.7 million were
capitalized and are being amortized to interest expense over the term of the
agreement. There were no amounts outstanding under the Revolving Credit Facility
at March 31, 2005.
Letter of Credit Facility
The Letter of Credit Facility is available primarily to support and/or replace
existing and future insurance deductible arrangements of the Company,
Rural/Metro LLC and the Guarantors. The Letter of Credit Facility can be
increased from $35.0 million to a maximum of $45.0 million. The Letter of Credit
Facility bears a participation fee of 2.50% plus an administrative fee of 0.15%
for a total of 2.65% per annum on the total facility payable quarterly beginning
March 31, 2005. In addition, Rural/Metro LLC will pay a fronting fee of 0.125%
per annum on issued letters of credit payable quarterly beginning March 31,
2005. Rural/Metro LLC capitalized expenses associated with securing the Letter
of Credit Facility of approximately $1.2 million and is amortizing these costs
to interest expense over the term of the agreement. At March 31, 2005,
approximately $15.3 million of the available Letter of Credit Facility balance
was utilized in support of insurance deductible arrangements.
10
Other Terms
The 2005 Credit Facility allows Rural/Metro LLC to prepay loans at its option at
any time without premium or penalty except breakage costs as defined in the 2005
Credit Facility. In addition to the repayment terms as discussed above, (a) 100%
of the net proceeds from the issuance of certain new debt, the issuance of
certain preferred stock and the sale of certain assets, and (b) 50% of the net
proceeds received from the issuance of new equity shall be applied first to
amounts outstanding under the Term Loan B, second to amounts outstanding under
the Revolving Credit Facility and third to amounts outstanding under the Letter
of Credit Facility within 5 business days of receipt of such funds.
The 2005 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet
certain financial tests, including a minimum interest coverage ratio, a maximum
total leverage ratio and a minimum fixed charge coverage ratio. The 2005 Credit
Facility also contains covenants which among other things limit the incurrence
of additional indebtedness, dividends, transactions with affiliates, asset
sales, acquisitions, mergers, prepayments of other indebtedness, liens and
encumbrances, capital expenditures, business activities limitations on the
Company, as a holding company, and other matters customarily restricted in such
agreements. Rural/Metro LLC and its subsidiaries were in compliance with these
covenants as of March 31, 2005.
NOTES
Senior Subordinated Notes
In March 2005, the Company's two newly formed wholly owned subsidiaries,
Rural/Metro LLC and Rural/Metro Inc. (collectively referred to as the "Senior
Subordinated Notes Issuers"), completed the private placement of the Senior
Subordinated Notes. Interest on the Senior Subordinated Notes is payable
semi-annually on September 15 and March 15.
The Senior Subordinated Notes are unsecured senior subordinated obligations of
the Senior Subordinated Notes Issuers. They rank junior in right of payment to
all of the Senior Subordinated Notes Issuers' existing and future senior
indebtedness, including the 2005 Credit Facility, rank pari passu in right of
payment with any of the Senior Subordinated Notes Issuers' future senior
subordinated debt and rank senior in right of payment to any of the Senior
Subordinated Notes Issuers' future subordinated debt. Each of the Guarantors,
other than Rural/Metro Inc., have guaranteed the Senior Subordinated Notes.
These guarantees are unsecured and will be subordinated to all existing and
future senior obligations of the Guarantors, including their guarantees of the
2005 Credit Facility.
At any time prior to March 15, 2008, the Senior Subordinated Notes Issuers may
redeem up to 35% of the aggregate principal amount of the Senior Subordinated
Notes with the net proceeds from certain equity offerings, subject to
application of the first 50% of any proceeds to the 2005 Credit Facility, at a
redemption price of 109.875% of the principal amount of the Senior Subordinated
Notes to be redeemed. At any time prior to March 15, 2010, the Senior
Subordinated Notes Issuers may redeem some of or all the Senior Subordinated
Notes at a price equal to 100% of the principal amount of the Senior
Subordinated Notes, plus a make-whole premium. After March 15, 2010, the Senior
Subordinated Notes Issuers may redeem all or part of the Senior Subordinated
Notes at various redemption prices given the date of redemption as set forth in
the indenture governing the Senior Subordinated Notes. If the Company
experiences a change of control, the Senior Subordinated Notes Issuers may be
required to offer to purchase the Senior Subordinated Notes at a purchase price
equal to 101% of the principal amount, plus accrued and unpaid interest.
Costs related to this issuance totaling approximately $5.0 million were
capitalized and are being amortized to interest expense over the term of the
Senior Subordinated Notes.
11
Senior Discount Notes
In March 2005, the Company completed a private placement of the Senior Discount
Notes and received gross proceeds of $50.2 million. While interest will accrue
prior to March 15, 2010, no cash interest payment will be due until September
15, 2010. The Senior Discount Notes had an initial accreted value of $536.99 per
$1,000 principal amount at maturity. The accreted value will increase from the
date of issuance until March 15, 2010 at a rate of 12.75% per annum compounded
semiannually such that the accreted value will equal the principal amount at
maturity of each Senior Discount Note on that date. The accreted value of the
Senior Discount Notes was $50.7 million at March 31, 2005.
The Senior Discount Notes are the Company's unsecured senior obligations. They
will rank equally in right of payment with all its existing and future unsecured
senior obligations and senior to its subordinated indebtedness. The Senior
Discount Notes will be subordinated to the Company's existing and future secured
indebtedness, including its guarantee of the 2005 Credit Facility, to the extent
of the assets securing that indebtedness. The Senior Discount Notes are not
guaranteed by any of the Company's subsidiaries and are subordinated to all
obligations of the Company's subsidiaries, including the Senior Subordinated
Notes, the 2005 Credit Facility and the guarantees of the Guarantors.
At any time prior to March 15, 2008, the Company may redeem up to 35% of the
Senior Discount Notes with the proceeds from certain equity offerings, subject
to application of the first 50% of any proceeds to the 2005 Credit Facility, at
a redemption price of 112.75% of the accreted value of the Senior Discount Notes
to be redeemed. Prior to March 15, 2010, the Company may redeem some of or all
the Senior Discount Notes at a price equal to 100% of the accreted value of the
Senior Discount Notes, plus a make-whole premium. After March 15, 2010, the
Company may redeem all or part of the Senior Discount Notes at various
redemption prices given the date of redemption as set forth in the Indenture
governing the Senior Discount Notes. If the Company experiences a change of
control, it may be required to offer to purchase the Senior Discount Notes at a
purchase price equal to 101% of their accreted value, plus accrued and unpaid
interest.
The Company capitalized costs totaling approximately $2.0 million related to
this issuance and is amortizing these costs to interest expense over the term of
the Senior Discount Notes.
Other Terms
The Company, the Senior Subordinated Note Issuers and the other guarantors of
the Senior Subordinated Notes (collectively referred to as the "Issuers") have
agreed to file a registration statement with respect to offers to exchange the
Senior Subordinated Notes and the Senior Discount Notes for new issues of
same-class notes registered under the Securities Act within 240 days following
the issue date of these notes, and have agreed to use their reasonable best
efforts to cause the registration statement to become effective on or prior to
300 days following the issue date of the notes. If the Issuers fail to comply
with these requirements, they may be required to pay additional interest at a
rate of 0.25% per annum, with that rate increasing by 0.25% per annum every
quarter, not to exceed 1.00% per annum until the default is cured.
The Senior Subordinated Notes and the Senior Discount Notes contain certain
covenants that, among other things, limit the Company's and its subsidiaries'
ability to incur additional debt, pay dividends on their capital stock or
repurchase their capital stock, make certain investments, enter into certain
types of transactions with affiliates, pay dividends or other payments by their
restricted subsidiaries, use assets as security in other transactions, sell
certain assets or merge with or into other companies, purchase fixed assets and
prepay certain other indebtedness. The Company was in compliance with these
covenants as of March 31, 2005.
12
(4) REVISION IN INSURANCE CLAIM RESERVE CLASSIFICATION
The Company retains certain levels of exposure with respect to its general
liability and workers compensation insurance programs and purchases excess
coverage from third party insurers for exposure above the insured levels. Until
December 31, 2004, the Company established reserves for claims, both reported
and incurred but not reported, within its level of retention based on currently
available information as well as historical claims experience. However, as the
Company is the primary obligor for payment of all claims, during the quarter
ended December 31, 2004, the Company determined that it should present claim
reserves on a gross basis along with a corresponding insurance receivable. As a
result of this revision in classification, the Company increased its general
liability claim reserves and workers compensation claim reserves as of June 30,
2004 by $9.7 million and $0.7 million, respectively, and recorded a
corresponding receivable from its insurers as a current asset. As of March 31,
2005, the general liability and workers compensation balances were $7.9 million
and $0.4 million, respectively. The Company will continue its past practice of
evaluating the financial capacity of its insurers to assess the recoverability
of the related insurer receivable. This revision in classification had no impact
on the Company's financial condition, results of operations, cash flows or
working capital.
(5) REDEEMABLE NONCONVERTIBLE PARTICIPATING PREFERRED STOCK
In connection with the 2002 Amended Credit Agreement and the 2003 Restated and
Amended Credit Agreement, the Company issued 211,549 Series B redeemable
nonconvertible participating preferred shares ("Series B Shares") and 283,979
Series C redeemable nonconvertible participating preferred shares ("Series C
Shares") to certain of its lenders.
The Company recorded the Series B and Series C Shares at their estimated fair
values at the date of issuance ($4.2 million and $3.4 million, respectively)
with an offsetting increase in debt issuance costs, the unamortized portion of
which was included in other assets in the consolidated balance sheet. At the
Company's option, the Series B and Series C Shares could be settled by either
the issuance of 2,115,490 and 2,839,790 common shares, respectively, or a cash
payment equivalent to the prescribed redemption values. Due to cash redemption
clauses, such shares were classified outside of stockholders' equity (deficit).
Additionally, the original value of the Series B and Series C Shares was being
accreted to their respective redemption values through December 31, 2004 and
December 31, 2006, respectively, with an offsetting charge to additional paid-in
capital. Series B and Series C Share accretion totaled $1.7 million for the
three months ended March 31, 2004 and $4.6 million for the nine months ended
March 31, 2004.
As a sufficient number of common shares were not available to permit settlement
of the Series B and Series C Shares, the Company sought and obtained stockholder
approval at its Annual Meeting of Stockholders held on June 10, 2004 to amend
its certificate of incorporation to authorize additional common shares. The
amendment increased the Company's authorized common shares from 23,000,000 to
40,000,000.
On June 30, 2004, the Company settled the Series B and Series C Shares by the
issuance of 4,955,278 common shares. Due to the settlement of the Series B and
Series C Shares, as of June 30, 2004 there were no Series B or Series C Shares
outstanding, and the related rights and privileges associated with the Series B
and Series C Shares expired upon the settlement.
On September 10, 2004, the Company received written notice from the holders of
at least 20% of the outstanding common stock issued upon settlement of the
Series B and Series C Shares requesting the registration of such common stock.
The Company filed a registration statement on Form S-3 on April 27, 2005 and is
waiting for the Securities and Exchange Commission ("SEC") to declare the
registration statement effective.
13
(6) DISCONTINUED OPERATIONS
During fiscal 2004, the Company ceased operating in ten medical transportation
service areas because such areas did not meet internal operational or
profitability measures. The Company also ceased operating in three fire and
other service areas, one of which was due to the customer filing for bankruptcy
protection under Chapter 11, another of which was sold as the Company continues
to dispose of non-core businesses and the last of which was due to the community
converting the service area to a self-managed fire district. In addition, one of
the Company's protection services businesses, which was included in the fire and
other segment, was classified as held for sale as of June 30, 2004 and such sale
was closed during the first quarter of fiscal 2005 at a loss of $24,000. The
results of these service areas for the three and nine months ended March 31,
2005 and 2004 are included in income (loss) from discontinued operations.
Results of discontinued operations for the three and nine months ended March 31,
2005 and 2004 are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Net revenue:
Medical transportation and related services $ - $ 2,427 $ (13) $ 12,211
Fire and other - 708 88 3,242
------------------ ------------------ ------------------ ------------------
$ - $ 3,135 $ 75 $ 15,453
================== ================== ================== ==================
Net income (loss):
Medical transportation and related services $ - $ 122 $ (118) $ (407)
Fire and other - 31 25 613
------------------ ------------------ ------------------ ------------------
$ - $ 153 $ (93) $ 206
================== ================== ================== ==================
Negative medical transportation and related services revenue in fiscal 2005 is
due to adjustments processed subsequent to the closure of the related operation.
See Note 14 for discussion of operations classified as discontinued subsequent
to March 31, 2005.
(7) NET INCOME (LOSS) PER SHARE
The Company calculates income (loss) per share following the guidance outlined
in SFAS Statement No. 128, "Earnings Per Share" ("SFAS 128"), as well as related
guidance issued by the Emerging Issues Task Force ("EITF") and the SEC. As a
result of the issuance of its Series B and Series C Shares, the Company began
calculating income (loss) per share using the "two-class" method whereby net
income (loss) for the period is allocated between common shares and other
participating securities on the basis of the weighted average number of common
shares and common share equivalents outstanding during a given period. This
allocation was also impacted by the accretion of the Series B and Series C
Shares to their respective cash redemption values as described in Note 5. As
also described in Note 5, the Company settled the Series B and Series C Shares
on June 30, 2004 by exchanging such shares for shares of its common stock. As a
result, use of the two-class method is no longer required.
A reconciliation of the numerators and denominators (weighted average number of
shares outstanding) utilized in the basic and diluted income (loss) per share
computations for the three and nine months ended March 31, 2005 and 2004 is as
follows (in thousands, except per share amounts):
14
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
-------------- ------------- -------------- --------------
Income (loss) from continuing operations $ (2,985) $ 2,014 $ 4,582 $ 4,742
Less: Income from continuing operations allocated
to redeemable nonconvertible participating
preferred stock under the two-class method - (495) - (964)
Less: Accretion of redeemable nonconvertible participating
preferred stock - (1,706) - (4,613)
-------------- ------------- -------------- --------------
Income (loss) from continuing operations applicable to common stock $ (2,985) $ (187) $ 4,582 $ (835)
============== ============= ============== ==============
Average number of shares outstanding - Basic 23,019 16,750 22,406 16,557
Add: Incremental shares for dilutive effect of stock options - - 1,431 -
-------------- ------------- -------------- --------------
Average number of shares outstanding - Diluted 23,019 16,750 23,837 16,557
============== ============= ============== ==============
Basic income (loss) from continuing operations applicable to
common stock per share $ (0.13) $ (0.01) $ 0.20 $ (0.05)
============== ============= ============== ==============
Diluted income (loss) from continuing operations applicable to
common stock per share $ (0.13) $ (0.01) $ 0.19 $ (0.05)
============== ============= ============== ==============
Approximately 1.8 million option shares were excluded from the computation of
diluted loss per share for the three months ended March 31, 2005 due to a net
loss during the period. For both the three and nine months ended March 31, 2004,
1.0 million option shares which had exercise prices below the average market
prices during the respective period were not included in the computation of
diluted loss per share due to anti-dilutive effects. Stock options with exercise
prices above the average market prices during the respective periods have also
been excluded from the calculation of diluted income (loss) per share. Such
options totaled 1.6 million and 4.4 million for the three months ended March 31,
2005 and 2004, respectively, and totaled 2.0 and 4.5 million for the nine months
ended March 31, 2005 and 2004, respectively.
(8) INCOME TAX (BENEFIT) PROVISION
The Company recognized an income tax benefit of $0.1 million for the three
months ended March 31, 2005 compared to an income tax provision of $0.1 million
for the comparable period in 2004. The income tax benefit recorded in the
current period is primarily attributable to the tax effect of the debt
extinguishment loss recognized during the period.
The Company's income tax provision was $0.4 million for the nine months ended
March 31, 2005 compared to $0.3 million for the nine months ended March 31,
2004. The Company's effective income tax rate for the nine months ended March
31, 2005 and 2004 totaled 7.9% and 5.1%, respectively. The Company's effective
income tax rate in both periods differed from the federal statutory tax rate of
35% as a result of the release of valuation allowances relating to the
utilization of a portion of the Company's net operating loss caryforwards
partially offset by federal alternative minimum taxes and state income taxes.
15
(9) SEGMENT REPORTING
For financial reporting purposes, the Company has classified its operations into
two reporting segments that correspond with the manner in which such operations
are managed: the Company's Medical Transportation and Related Services Segment
and the Fire and Other Segment. Each reporting segment consists of cost centers
(operating segments) representing the Company's various service areas that have
been aggregated on the basis of the type of services provided, customer type and
methods of service delivery.
The Medical Transportation and Related Services Segment includes emergency
ambulance services provided to individuals pursuant to contracts with
governmental entities, hospitals, nursing homes, and other healthcare facilities
and organizations, as well as non-emergency ambulance services provided to
individuals requiring either advanced or basic levels of medical supervision
during transport. The Fire and Other Segment includes a variety of fire
protection services including fire suppression, fire prevention, training and
first responder medical care.
The accounting policies used in the preparation of the consolidated financial
statements have also been followed in the preparation of the accompanying
financial information for each reporting segment. For internal management
purposes, the Company's measure of segment profitability is defined as income
(loss) from continuing operations before unallocated corporate overhead,
depreciation and amortization, interest, income taxes and minority interest.
Additionally, segment assets are defined as consisting solely of accounts
receivable. The following tables summarize the segment information for the three
and nine months ended March 31, 2005 and 2004:
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER TOTAL
------------------------ ----------------------- -----------------------
Three Months Ended March 31, 2005
Net revenues $ 125,077 $ 20,149 $ 145,226
Segment profit 16,220 4,042 20,262
Segment assets (accounts receivable) 70,349 1,332 71,681
Three Months Ended March 31, 2004
Net revenues $ 115,886 $ 18,366 $ 134,252
Segment profit 15,410 2,327 17,737
Segment assets (accounts receivable) 66,108 1,192 67,300
Nine Months Ended March 31, 2005
Net revenues $ 358,454 $ 60,452 $ 418,906
Segment profit 48,291 8,069 56,360
Segment assets (accounts receivable) 70,349 1,332 71,681
Nine Months Ended March 31, 2004
Net revenues $ 338,363 $ 55,448 $ 393,811
Segment profit 44,289 7,700 51,989
Segment assets (accounts receivable) 66,108 1,192 67,300
16
A reconciliation of segment profit to income from continuing operations before
interest, income taxes, depreciation and amortization and minority interest is
as follows (in thousands):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
2005 2004 2005 2004
------------------- ------------------ ------------------ -------------------
Segment profit $ 20,262 $ 17,737 $ 56,360 $ 51,989
Unallocated corporate overhead (13,313) (5,688) (21,017) (15,800)
Depreciation and amortization (2,835) (3,130) (8,512) (8,733)
Interest expense (7,205) (6,898) (22,039) (22,106)
Interest income 48 16 227 67
------------------- ------------------ ------------------ -------------------
Income (loss) from continuing operations
before income taxes and minority
interest $ (3,043) $ 2,037 $ 5,019 $ 5,417
=================== ================== ================== ===================
A reconciliation of segment assets to total assets is as follows (in thousands):
AS OF MARCH 31,
2005 2004
------------------------ -----------------------
Segment assets (accounts receivable) $ 71,681 $ 67,300
Cash 10,663 9,253
Accounts receivable from insurers 8,280 7,806
Inventories 11,858 11,283
Prepaid expenses and other 6,271 5,750
Property and equipment, net 44,237 40,564
Goodwill 40,850 41,167
Insurance deposits 6,356 8,299
Other assets 20,360 13,720
------------------------ -----------------------
Total assets $ 220,556 $ 205,142
======================== =======================
In October 2004, the EITF reached final consensus on Issue 04-10, "Determining
Whether to Aggregate Operating Segments That Do Not Meet the Quantitative
Thresholds" ("EITF 04-10"). EITF 04-10 requires that operating segments that do
not meet the quantitative threshold as defined in SFAS Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") be aggregated only if aggregation is consistent with the objectives and
basic principles of SFAS 131, the segments have similar economic characteristics
and the segments share a majority of the aggregation criteria as defined in
paragraph 17 of that statement. EITF 04-10 requires that prior periods be
restated unless it is impractical to do so. The effective date of EITF 04-10 is
currently pending and will coincide with the effective date of a Financial
Accounting Standards Board Staff Position that will provide further guidance in
determining whether two or more operating segments have similar economic
characteristics.
(10) DEFINED BENEFIT PLAN
Effective July 1, 2004, the Company established a defined benefit pension plan
(the "Plan") covering eligible employees of one of its subsidiaries, primarily
those employees covered by collective bargaining arrangements. Eligibility is
achieved upon the completion of one year of service. A participant becomes 100%
vested in his or her accrued benefit after the completion of five years of
service. The amount of benefit is determined using a two-part formula, one of
which is based upon compensation and the other of which is based upon a flat
dollar amount multiplied by the number of years of service. The Company
anticipates that its fiscal 2005 contributions will total approximately $0.8
million.
17
The net periodic benefit cost under the Plan for the three months ended March
31, 2005 was approximately $185,000 and consisted of $191,000 of service cost
offset by $6,000 relating to the expected return on plan assets. Net periodic
benefit cost under the Plan for the nine months ended March 31, 2005 was
approximately $603,000 and consisted of $622,000 of service cost offset by
$19,000 relating to the expected return on plan assets. Net periodic benefit
cost was determined using the following assumptions: discount rate of 6.25%,
annual pay increases of 4.0% and long-term rate of return on invested assets of
7.5%.
(11) EMPLOYEE STOCK OWNERSHIP PLAN
The Company established the Employee Stock Ownership Plan ("ESOP") in 1979 and
makes related contributions at the discretion of the Board of Directors. No
discretionary contributions were made during the three and nine months ended
March 31, 2005 and 2004. The ESOP held approximately 2.6% and 3.1% of the
outstanding common stock of the Company for the benefit of all participants as
of March 31, 2005 and June 30, 2004, respectively. The ESOP is administered by
the ESOP's Advisory Committee, consisting of certain officers of the Company.
In July 1999, the Company's Board of Directors approved an amendment to freeze
the ESOP, effective June 30, 1999 with respect to all employees other than
members of collective bargaining agreements that include participation in the
ESOP. All participants' accounts were fully vested as of June 30, 1999.
On March 11, 2005, the ESOP Advisory Committee approved the liquidation of the
ESOP and the distribution of the common stock and cash balances to the
participants. It is anticipated that the liquidation will be complete by June
30, 2005. The liquidation will not have a material effect of the Company's
results of operations, balance sheet or cash flows.
(12) WORKERS' COMPENSATION PROGRAM
On December 8, 2004, Reliance Insurance Company ("Reliance"), the Company's
workers' compensation excess carrier during fiscal years 1992 through 2001
released collateral totaling $4.3 million which included a surety bond in the
amount of $2.6 million and cash of $1.7 million. The surety bond was
collateralized by a $1.5 million letter of credit and cash of $0.6 million,
while the remaining balance was unsecured. In connection with the surety bond
release, the letter of credit and cash portion were returned to the Company.
Additionally, on December 10, 2004, Reliance returned excess collateral to the
Company in the form of cash deposits of approximately $1.7 million. At March 31,
2005, there is approximately $1.3 million of remaining cash on deposit with
Reliance, which is included in insurance deposits on the balance sheet, and $3.8
million on deposit in the form of letters of credit.
As a result of the resolution of certain workers' compensation claims during the
six month period ended December 31, 2004, the Company engaged independent
actuaries to perform an updated valuation of its related claim reserves. Based
on this analysis, the Company reduced its workers compensation claim reserves by
$0.6 million during the second quarter of fiscal 2005. The related reduction is
reflected as a credit to payroll and employee benefits for the nine months ended
March 31, 2005.
(13) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is subject to litigation and regulatory
investigations arising in the ordinary course of business. The Company believes
that the resolution of currently pending claims or legal proceedings will not
have a material adverse effect on its business, financial condition, results of
operations or cash flows. However, the Company is unable to predict with
certainty the outcome of pending litigation and regulatory investigations. In
some pending cases, insurance coverage may not be adequate to cover all
liabilities in excess of its deductible or self-insured retention arising out of
such claims. Unfavorable resolutions of pending or future litigation, regulatory
18
reviews and/or investigations, either individually or in the aggregate, could
have a material adverse effect on the Company's business, financial condition,
and results of operations or cash flows.
On March 5, 1999, the Company made a voluntary disclosure to the Office of the
Inspector General ("OIG") of the Department of Health and Human Services
concerning questionable billing practices by a subsidiary operating in
Pennsylvania. These practices evidently began prior to the January 1997
acquisition of that subsidiary by the Company and continued, to some extent,
until December 1998. On October 25, 1999, a lawsuit styled THE UNITED STATES OF
AMERICA ex rel. RICHARD S. BUCKMAN V. RURAL METRO CORPORATION AND DONLOCK, LTD.,
Civil Action No. 3:CV 99-1883, was filed under seal in United States District
Court for the Middle District of Pennsylvania. The lawsuit alleged various
improper billing practices under the Medicare program, including those practices
the Company self-disclosed to the OIG several months earlier. On November 15,
2002, the government elected to intervene in one count concerning the issue the
Company self-disclosed to the OIG and declined to intervene in the lawsuit's
remaining counts. The seal was lifted by court order on February 26, 2004.
During the three months ended December 31, 2004, the Company increased its
reserve for this matter by $0.5 million from $1.0 million to $1.5 million on the
basis of substantive negotiations with the OIG. The related expense is included
in other operating expenses in the consolidated statement of operations for the
nine months ended March 31, 2005 while the related reserve is included in
accrued liabilities in the consolidated balance sheet at March 31, 2005 and June
30, 2004, respectively. An unfavorable resolution of this lawsuit could have a
material adverse effect on the Company's business, financial condition, and
results of operations or cash flows.
Regulatory Compliance
The Company is subject to numerous laws and regulations of federal, state and
local governments. These laws and regulations include, but are not necessarily
limited to, matters such as licensure, accreditation, government healthcare
program participation requirements, reimbursement for patient services and
Medicare and Medicaid fraud and abuse. Government activity is ongoing with
respect to investigations and allegations concerning possible violations of
fraud and abuse statutes and regulations by healthcare providers. Violations of
these laws and regulations could result in exclusion from government healthcare
programs together with the imposition of significant fines and penalties, as
well as significant repayments for patient services previously billed. The
Company believes that it is substantially in compliance with fraud and abuse
statutes and their applicable governmental interpretation.
The Company is from time to time subject to investigations relating to Medicare
and Medicaid laws pertaining to its industry. The Company cooperates fully with
the government agencies that conduct these investigations. Those reviews cover
periods prior to and following the Company's acquisition of certain operations.
Management believes that reserves established for specific contingencies of $1.9
million and $1.4 million as of March 31, 2005 and June 30, 2004, respectively
(including the $1.5 million and $1.0 million, respectively, discussed in the
Legal Proceedings section above), are adequate based on information currently
available.
Nasdaq Listing
Dating back to May 22, 2003, the Company has had periodic correspondence with
the Nasdaq regarding its noncompliance with certain of the Nasdaq SmallCap
Market listing standards. On July 12, 2004, the Company received notice from the
Nasdaq Listing Qualifications Panel (the "Panel") that it did not meet the
market value of listed securities requirement for continued listing on the
Nasdaq SmallCap Market. Effective with the opening of business on July 13, 2004,
the Company's common stock was delisted from the Nasdaq SmallCap Market and
began trading on the OTC Bulletin Board.
On November 24, 2004, the Company was notified by the Nasdaq Listing and Hearing
Review Council that it had reversed the earlier decision by the Panel to delist
the Company's securities from the SmallCap Market based upon events subsequent
19
to the Panel's decision and remanded the matter to the Panel for further
consideration. On November 24, 2004, the Company submitted an application for
listing on the Nasdaq SmallCap Market.
On December 21, 2004, the Company was informed by the Panel that the Company's
listing application had been approved based on its compliance with all
requirements for initial listing on the Nasdaq SmallCap Market. On December 27,
2004, its common stock resumed trading under the symbol "RURL" on the Nasdaq
SmallCap Market.
Amended Employment Agreement
On December 8, 2004, the Board of Directors approved an amended and restated
employment agreement (the "Agreement") with the Company's President and Chief
Executive Officer ("CEO"). Under the Agreement, certain modifications were made
to the CEO's existing employment agreement, including, among other things, the
strengthening of the related non-compete provisions. In consideration for these
modifications, the Company made a one-time payment to the CEO of $1.5 million in
January 2005, as well as restored his ability to participate in the Company's
Management Incentive Plan (the "MIP"). The one-time payment was capitalized and
is being amortized to payroll and employee benefits on a straight-line basis
over the seven year term of the Agreement.
Management Incentive Plan
The final form of the 2005 Management Incentive Plan ("2005 MIP") was approved
by the Board of Directors (the "Board") on April 5, 2005. The 2005 MIP is an
annual cash incentive plan for key executives based upon performance goals. The
2005 MIP also included a separate bonus opportunity for certain key executives
based upon, among other things, the successful completion of a refinancing
transaction of either or both of the 2003 Amended Credit Facility and the
outstanding Senior Notes during fiscal 2005 or fiscal 2006 and the future
realization of certain related operating strategies. Such refinancing was
completed in March 2005. At its meeting held on March 28, 2005, the Company's
Compensation Committee (the "Committee") determined that several participants
satisfied the criteria for receipt of a bonus payment pursuant to the incentive
program and approved payment of approximately $1.8 million. This amount was
included in accrued liabilities at March 31, 2005. At its meeting held on April
5, 2005, the Board ratified the Committee's approval and payment was made in
April 2005.
SEC Investigation
On October 28, 2003, the SEC notified the Company that it was conducting an
informal fact-finding inquiry. The Company has voluntarily provided the
information requested by the Staff and the Company intends to cooperate fully.
In December 2003, the Company met with the Staff to discuss the materials that
had been submitted to the SEC. After the meeting, additional materials were
provided to the Staff. Since then, we have not received any additional requests
from the SEC with respect to their informal fact-finding inquiry.
(14) SUBSEQUENT EVENTS
Return of Insurance Deposits
Under the Company's general liability insurance programs, certain insurers
require the Company to provide collateral to fund claim payments within the
Company's retention limits. As a result of the debt refinancing discussed in
Note 3, the Company issued letters of credit to these insurers totaling $11.5
million and, on April 6, 2005, received $5.4 million in cash collateral
previously held by the insurers.
20
Discontinued Operations
Effective April 18, 2005, the Area Metropolitan Ambulance Authority dba MedStar
("MedStar") for Fort Worth, Texas and the Company mutually agreed that the
Company would discontinue its operations in Fort Worth. The Company continued to
provide service to the metropolitan Fort Worth, Texas area until April 30, 2005.
The results of operations for MedStar will be included in discontinued
operations in future filings for all comparative periods presented.
The Fort Worth service area generated net revenue of approximately $2.9 million
and $3.0 million for the three months ended March 31, 2005 and 2004,
respectively, and operating income of approximately $0.2 million and $0.5
million for the three months ended March 31, 2005 and 2004, respectively. This
service area generated net revenue of approximately $8.8 million and $8.9
million for the nine months ended March 31, 2005 and 2004, respectively, and
operating income of approximately $1.0 million and $1.3 million for the nine
months ended March 31, 2005 and 2004, respectively.
Unscheduled Debt Payment
On May 16, 2005, Rural/Metro LLC made a $7.0 million unscheduled principal
payment on its Term Loan B as allowed under the provisions of the 2005 Credit
Facility. The Company anticipates resulting interest savings of approximately
$0.4 million per year and expects to write-off approximately $0.2 million of
deferred financing costs during the fourth quarter of fiscal 2005. From time to
time, Rural/Metro LLC may make additional unscheduled payments at its
discretion.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Statements in this Report that are not historical facts are hereby identified as
"forward-looking statements" as that term is used under the securities laws. We
caution readers that such "forward-looking statements," including those relating
to our future business prospects, working capital, accounts receivable
collection, liquidity, cash flow, insurance coverage and claim reserves, capital
needs, operating results and compliance with debt facilities, wherever they
appear in this Report or in other statements attributable to us, are necessarily
estimates reflecting the best judgment of our senior management and involve a
number of risks and uncertainties that could cause actual results to differ
materially from those suggested by the "forward-looking statements." You should
consider such "forward-looking-statements" in light of various important
factors, including those set forth below and others set forth from time to time
in our reports and registration statements filed with the SEC.
These "forward-looking statements" are found throughout this Report.
Additionally, the discussions herein under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" are susceptible
to the risks and uncertainties discussed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2004. Moreover, we may from time to time make
"forward-looking statements" about matters described herein or other matters
concerning us. We disclaim any intent or obligation to update "forward-looking
statements."
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions, direct and indirect
subsidiaries and affiliates. Rural/Metro Corporation, a Delaware corporation, is
strictly a holding company. All services, operations and management functions
are provided through its subsidiaries and affiliated entities. The website for
Rural/Metro Corporation is located at www.ruralmetro.com.
This Report should be read in conjunction with our consolidated financial
statements and footnotes thereto included in our Current Report on Form 8-K
filed with the SEC on February 16, 2005.
INTRODUCTION
We provide medical transportation services which consist primarily of emergency
and non-emergency ambulance services. We provide these medical transportation
services under contracts with governmental entities, hospitals, nursing homes
and other healthcare facilities and organizations. Approximately half of our
medical transports are initiated by 911 calls, with the remainder primarily
consisting of a variety of non-emergency medical transports, such as medical
transports between hospitals, nursing homes and specialized healthcare
facilities. We believe that providing a mix of emergency and non-emergency
medical transportation services diversifies our revenue base and permits us to
utilize our medical transportation vehicles more efficiently. We derive revenue
from our medical transportation services through reimbursements we receive from
private insurance companies and government-funded healthcare programs such as
Medicare and Medicaid and, to a lesser extent, from fees paid to us directly by
our individual patients and from government subsidies paid to us under our 911
contracts.
Our medical transport revenue depends on various factors, including the mix of
payers, the mix of rates within existing markets and the mix of activity between
emergency medical transportation services and non-emergency transportation
services, as well as other competitive factors. Results of operations are
discussed below on the basis of actual transports because transports are more
directly related to revenue.
We are also a provider of private fire protection and related services, and
offer such services on a subscription-fee basis to residential and commercial
property owners in three states and under long-term contracts with fire
22
districts, industrial sites and airports at 12 sites located in 10 states. Our
fire protection services consist primarily of fire suppression, fire prevention
and first responder medical care.
In evaluating our business, we monitor a number of key operating and financial
statistics, including net/net EMS Average Patient Charge, or "net/net EMS APC"
(defined as gross medical transport revenue minus provisions for contractual
allowances and doubtful accounts divided by medical transports), average daily
deposits, days sales outstanding, Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA") and transport volume, among others.
The results of our fiscal 2005 third quarter reflected our continued focus on
growing and strengthening our base of core operations. We placed particular
emphasis on expanding service areas that we have identified for future long-term
growth, seeking targeted new contract opportunities and improving operating
efficiencies.
RECENT EVENTS
During the third quarter of 2005, we refinanced our former amended credit
facility and senior notes. We entered into a new senior secured credit facility
consisting of a $135.0 million Term Loan B due 2011, a $20.0 million, undrawn
revolving credit facility due 2010 and a $35.0 million letter of credit facility
due 2011. Concurrently, we issued $125.0 million of 9.875% Senior Subordinated
Notes due 2015 and $93.5 million aggregate principal amount at maturity (gross
proceeds of $50.2 million) of 12.75% Senior Discount Notes due 2016. See
Liquidity and Capital Resources - Refinancing Transaction for further discussion
of our new financing structures.
Contract activities during the third quarter included the award of a five-year
contract to continue providing emergency medical transportation services to the
City of Buffalo, New York. Although we and our predecessor company have served
the greater Buffalo area since the 1960s, the new contract now designates
Rural/Metro as the city's sole emergency ambulance provider. The new contract
commenced March 1, 2005 with an initial term of five years, followed by one
two-year optional renewal period. We estimate this contract will generate $8
million in net revenue from emergency medical transportation services annually.
As part of the agreement, we will pay a $0.4 million annual franchise fee to the
city on a quarterly basis to offset certain costs associated with the city's
emergency system, including dispatch, monitoring, evaluation, licensing and
first responder services.
During the third quarter we also were awarded a new, four-year contract to
become the exclusive provider of emergency medical transportation services in
San Miguel County and the City of Las Vegas, New Mexico. We were awarded the
contract following a competitive bidding process that included the incumbent
local provider as well as a national provider. Specific terms and the contract
start date are currently being negotiated.
Effective April 18, 2005, we and the Area Metropolitan Ambulance Authority dba
MedStar ("MedStar") for Fort Worth, Texas mutually agreed that we would
discontinue our operations in Fort Worth. We continued to provide service to the
metropolitan Fort Worth, Texas area until April 30, 2005. The results of
operations for MedStar will be included in discontinued operations in future
filings for all comparative periods presented.
The Fort Worth service area generated net revenue of approximately $2.9 million
and $3.0 million for the three months ended March 31, 2005 and 2004,
respectively, and operating income of approximately $0.2 million and $0.5
million for the three months ended March 31, 2005 and 2004, respectively. This
service area generated net revenue of approximately $8.8 million and $8.9
million for the nine months ended March 31, 2005 and 2004, respectively, and
operating income of approximately $1.0 million and $1.3 million for the nine
months ended March 31, 2005 and 2004, respectively.
23
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
The following table sets forth a comparison of certain items from our Statement
of Operations for the three months ended March 31, 2005 and 2004. The comparison
includes the line items expressed as a percentage of net revenue as well as the
dollar value and percentage change in each line item.
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS)
% OF % OF $ %
2005 NET REVENUE 2004 NET REVENUE CHANGE CHANGE
------------ ----------- ------------ ----------- -------------------------
Net revenue $ 145,226 100.0% $ 134,252 100.0% $ 10,974 8.2%
------------ ------------
Operating expenses:
Payroll and employee benefits 75,021 51.7% 69,998 52.1% 5,023 7.2%
Provision for doubtful accounts 22,522 15.5% 22,856 17.0% (334) -1.5%
Depreciation and amortization 2,835 2.0% 3,130 2.3% (295) -9.4%
Other operating expenses 32,564 22.4% 29,349 21.9% 3,215 11.0%
------------ ------------
Total operating expenses 132,942 91.5% 125,333 93.4% 7,609 6.1%
------------ ------------
Operating income 12,284 8.5% 8,919 6.6% 3,365 37.7%
Interest expense (7,205) -5.0% (6,898) -5.1% (307) 4.5%
Interest income 48 0.0% 16 0.0% 32 200.0%
Loss on early extinguishment of debt (8,170) -5.6% - 0.0% (8,170) 100.0%
------------ ------------
Income (loss) from continuing operations
before income taxes and minority interest (3,043) -2.1% 2,037 1.5% (5,080) -249.4%
Income tax (benefit) provision 126 0.1% (88) -0.1% 214 -243.5%
Minority interest (68) 0.0% 65 0.0% (133) -204.6%
------------ ------------
Income (loss) from continuing operations (2,985) -2.1% 2,014 1.5% (4,999) -248.2%
Income from discontinued operations - 0.0% 153 0.1% (153) -100.0%
------------ ------------
Net income (loss) $ (2,985) -2.1% $ 2,167 1.6% $ (5,152) -237.7%
============ ============
OVERVIEW
We generated net revenue of $145.2 million for the three months ended March 31,
2005 compared to $134.3 million for the three months ended March 31, 2004. The
increase of $11.0 million or 8.2%, in net revenue is primarily a result of a
$9.2 million increase in medical transportation and related service revenue.
Total operating expenses increased $ 7.6 million or 6.1%, for the three months
ended March 31, 2005 compared to the same period in 2004. However, as a
percentage of net revenue, operating expenses were 190 basis points lower for
the three months ended March 31, 2005 compared to the prior period. Provision
for doubtful accounts as a percentage of net revenue decreased 150 basis points
as a result of an increase in fire and other revenue for which a provision for
doubtful accounts is not required, a shift in the allocation between contractual
24
discounts and bad debt expense as a result of rate increases and historical
collection patterns and the termination of lower rate contracts. Payroll and
employee benefits as a percentage of net revenue decreased 40 basis points as a
result of increased operational efficiencies partially offset by higher
management incentives. These decreases were partially offset by a 50 basis point
increase in other operating expenses as a percentage of net revenue primarily as
a result of higher professional fees related to our efforts to comply with
Section 404 of the Sarbanes-Oxley Act as well as increased fuel expense.
During the quarter ended March 31, 2005, we refinanced our existing debt and
recognized an $8.2 million loss on early extinguishment of debt comprised of
non-cash charges of $5.6 million related to the write-off of debt issuance costs
associated with the retired debt and $0.1 million related to unamortized
discounts as well as $2.5 million of cash redemption premiums paid.
For the three months ended March 31, 2005, loss from continuing operations was
$3.0 million, or a loss of $0.13 per diluted share, compared to income from
continuing operations of $2.0 million, or a loss of $0.01 per diluted share for
the three months ended March 31, 2004. The loss per share for the three months
ended March 31, 2004 included the impact of allocating net income to our former
Series B and Series C preferred stock as well as a related accretion charge.
NET REVENUE
A comparison of net revenue by segment is included in the table below (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------------------------- $ %
2005 2004 CHANGE CHANGE
-------------------- -------------------- -------------------- ---------------
Medical transportation and related services $ 125,077 $ 115,886 $ 9,191 7.9%
Fire and other 20,149 18,366 1,783 9.7%
-------------------- -------------------- --------------------
Total net revenue $ 145,226 $ 134,252 $ 10,974 8.2%
==================== ==================== ====================
Medical Transportation and Related Services -- Medical transportation and
related service revenue increased $9.2 million, or 7.9% for the three months
ended March 31, 2005 compared to a year ago. Of this increase, $5.3 million is
due to an increase in transports and $3.9 million is due to an increase in
rates. Same service area revenue accounted for $8.4 million of the increase,
while the remaining $0.8 million was from revenues generated under a new
contract with the City of Tacoma, Washington.
A comparison of transports is included in table below:
THREE MONTHS ENDED
MARCH 31,
------------------------------------------- TRANSPORT %
2005 2004 CHANGE CHANGE
-------------------- -------------------- -------------------- -------------
Medical transports 295,180 281,359 13,821 4.9%
Alternative transportation transports (ATS) 24,910 24,847 63 0.3%
-------------------- -------------------- --------------------
Total transports from continuing operations 320,090 306,206 13,884 4.5%
==================== ==================== ====================
The increase in medical transports is a result of an overall aging population
and an increase in population density where we have significant operations. Of
the 13,821 increase in medical transports, approximately 2,000 transports were
related to a new contract with the City of Tacoma, Washington. The net/net EMS
25
APC for the three months ended March 31, 2005 was $330 compared to $312 for the
three months ended March 31, 2004. The increase in net/net EMS APC is primarily
a result of rate escalators and other general rate increases that are contained
or allowed in contracts to provide EMS services, the change in payor mix in
selected markets, the termination of lower rate contracts and operating
efficiencies associated with improvements to our billing and collection
procedures.
We estimate contractual allowances and the provision for doubtful accounts based
on subsequent receipts and historical collections patterns on a local market
basis. Medical transportation and related services fees are recognized as
services are provided and are recorded net of estimated contractual discounts
applicable to Medicare, Medicaid and other third-party payers.
Discounts applicable to Medicare, Medicaid and other third-party payers related
to continuing operations, which are reflected as a reduction of medical
transportation revenue, totaled $60.7 million and $46.0 million for the three
months ended March 31, 2005 and 2004, respectively. Such discounts represented
34.3% and 30.0% of gross ambulance and alternative service fees for the three
months ended March 31, 2005 and 2004, respectively. The increase of 430 basis
points is primarily a result of a shift in the allocation between contractual
discounts and bad debt expense as a result of an overall increase in rates as we
are unable to pass on these rates to Medicare, Medicaid and certain payers.
Fire and Other -- Fire and other revenue increased $1.8 million, or 9.7% for the
three months ended March 31, 2005 as compared to the same period in 2004. The
increase is primarily due to an increase in fire subscription revenue of $1.0
million, or 11.7%, as a result of increases in rates of $0.7 million and $0.3
million related to increases in subscribers.
OPERATING EXPENSES
Payroll and Employee Benefits -- Payroll and employee benefits increased $5.0
million, or 7.2% for the three months ended March 31, 2005 as compared to the
same period in 2004. The overall increase is related to higher management
incentive expense, increased medical transport activity, additional scheduled
overtime and general wage rate increases. Management incentives included a
one-time bonus of $1.8 million paid in conjunction with our debt refinancing
described below, $0.6 million related to an amendment to our CEO's employment
agreement which allows him to participate in the fiscal 2005 MIP and $1.3
million of higher incentive pay as a result of meeting certain fiscal 2005
operational and profitability goals.
Payroll and employee benefits as a percentage of net revenue was 51.7% and 52.1%
for the three months ended March 31, 2005 and 2004, respectively. This decrease
was primarily due to the disproportionate increase in net revenue as compared to
payroll and employee benefits partially offset by the increase in incentive pay
discussed above.
Provision for Doubtful Accounts -- Provision for doubtful accounts decreased
$0.3 million, or 1.5% for the three months ended March 31, 2005 as compared to
the same period in 2004. The provision for doubtful accounts as a percentage of
net medical transportation and alternative transportation service fees was 19.4%
and 21.9% for the three months ended March 31, 2005 and 2004. This decrease of
250 basis points is a result of a shift in the allocation between contractual
discounts and bad debt expense as a result of rate increases, as we are unable
to pass on these rate increases to Medicare, Medicaid and certain other
third-party payers, a change in historical collection patterns, and the
discontinuation of lower rate contracts.
Depreciation and Amortization -- Depreciation and amortization decreased $0.3
million, or 9.4% for the three months ended March 31, 2005 as compared to the
same period in 2004 primarily as a result of certain assets becoming fully
depreciated.
Other Operating Expenses -- Other operating expenses increased $3.2 million, or
10.9% for the three months ended March 31, 2005 as compared to the same period
in 2004. This increase was principally due to higher professional fees of $0.9
26
million primarily related to our efforts to comply with Section 404 of the
Sarbanes-Oxley Act and increases of $0.5 million and $0.4 million in fuel
expense and operating supplies, respectively, driven by an increase in the
number of transports. An overall increase in the cost of fuel also contributed
to the increase in fuel expense.
INTEREST EXPENSE
Interest expense increased $0.3 million, or 4.5% for the three months ended
March 31, 2005 as compared to the same period in 2004. The increase is primarily
due to higher interest costs on our new 9.875% Senior Subordinated Notes and
non-cash interest expense related to our new 12.75% Senior Discount Notes
partially offset by a lower average effective interest rate on our new revolving
credit facility. See Liquidity and Capital Resources - Refinancing Transaction
for further discussion of our new financing structure.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with the debt refinancing transaction, we recorded $8.2 million of
debt extinguishment costs in the quarter ended March 31, 2005. These costs
included non-cash charges of $5.6 million related to the write-off of debt
issuance costs associated with the retired debt and $0.1 million related to
unamortized discounts as well as cash redemption premiums of $2.5 million. See
Liquidity and Capital Resources - Refinancing Activities for further discussion.
MINORITY INTEREST
The change in minority interest is a result of net income in our joint venture
with the City of San Diego for the three months ended March 31, 2005 as compared
to a net loss generated for the three months ended March 31, 2004. The loss in
the prior year period is primarily a result of an increase in payroll and
payroll related costs and increases in general, auto and professional liability
insurance.
INCOME TAX (BENEFIT) PROVISION
We recognized an income tax benefit of $0.1 million for the three months ended
March 31, 2005 compared to an income tax provision of $0.1 million for the
comparable period in 2004. The income tax benefit recorded in the current
period is primarily attributable to the tax effect of the debt extinguishment
loss recognized during the period.
DISCONTINUED OPERATIONS
The results of operations for service areas where we have ceased operations have
been included in income (loss) from discontinued operations for the three months
ended March 31, 2004. Net revenue and net income for the medical transportation
and related service areas totaled $2.4 million and $124,000, respectively, for
the three months ended March 31, 2004. Net revenue and net income for fire and
other service areas totaled approximately $0.7 million and $31,000,
respectively, for the three months ended March 31, 2004.
27
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
The following table sets forth a comparison of certain items from our Statement
of Operations for the nine months ended March 31, 2005 and 2004. The comparison
includes the line items expressed as a percentage of net revenue as well as the
dollar value and percentage change in each line item.
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS)
% OF % OF $ %
2005 NET REVENUE 2004 NET REVENUE CHANGE CHANGE
-------------- ----------- ---------------------------- ------------------------
Net revenue $ 418,906 100.0% $ 393,811 100.0% $ 25,095 6.4%
-------------- -------------
Operating expenses:
Payroll and employee benefits 221,170 52.8% 207,729 52.7% 13,441 6.5%
Provision for doubtful accounts 64,576 15.4% 64,306 16.3% 270 0.4%
Depreciation and amortization 8,512 2.0% 8,733 2.2% (221) -2.5%
Other operating expenses 89,647 21.4% 85,587 21.7% 4,060 4.7%
-------------- -------------
Total operating expenses 383,905 91.6% 366,355 93.0% 17,550 4.8%
-------------- -------------
Operating income 35,001 8.4% 27,456 7.0% 7,545 27.5%
Interest expense (22,039) -5.3% (22,106) -5.6% 67 -0.3%
Interest income 227 0.1% 67 0.0% 160 238.8%
Loss on early extinguishment of debt (8,170) -2.0% - 0.0% (8,170) 100.0%
-------------- -------------
Income from continuing operations before
income taxes and minority interest 5,019 1.2% 5,417 1.4% (398) -7.3%
Income tax provision (397) -0.1% (277) -0.1% (120) 43.4%
Minority interest (40) 0.0% (398) -0.1% 358 -89.9%
-------------- -------------
Income from continuing operations 4,582 1.1% 4,742 1.2% (160) -3.4%
Income (loss) from discontinued operations (93) 0.0% 206 0.1% (299) -145.2%
-------------- -------------
Net income $ 4,489 1.1% $ 4,948 1.3% $ (459) -9.3%
============== =============
OVERVIEW
We generated net revenue of $418.9 million for the nine months ended March 31,
2005 compared to $393.8 million for the nine months ended March 31, 2004. The
increase of $25.1 million or 6.4% in net revenue is primarily a result of an
increase in medical transportation and related service revenue of $20.1 million.
Total operating expenses increased $17.5 million for the nine months ended
March 31, 2005 compared to the same period in 2004. However, as a percentage of
net revenue, operating expenses were 140 basis points lower for the nine months
ended March 31, 2005 compared to the prior period. The decrease is primarily a
result of a 90 basis point decline in the provision for doubtful accounts as a
percentage of net revenue driven by the increase in fire and other revenue for
which a provision for doubtful accounts is not required, a shift in the
allocation between contractual discounts and bad debt expense as a result of
rate increases and historical collection patterns, and the termination of
lower rate contracts. Additionally, other operating expenses as a percentage of
net revenue decreased 30 basis points due to a decrease in insurance expense as
28
a result of favorable loss claim history, a net decrease in professional fees
due to additional legal fees incurred in fiscal 2004 associated with the Amended
Credit Facility and financial statement restatements partially offset by higher
fees related to our efforts to comply with Section 404 of the Sarbanes-Oxley
Act. These declines were partially offset by an increase in fuel expense due to
an overall increase in the cost of fuel.
During the nine months ended March 31, 2005, we refinanced our existing debt and
recognized an $8.2 million loss on early extinguishment of debt comprised of a
$5.7 million non-cash charge related to the write-off of debt issuance costs and
unamortized discounts and $2.5 million of cash redemption premiums paid.
For the nine months ended March 31, 2005, income from continuing operations was
$4.6 million, or $0.19 per diluted share, compared to income from continuing
operations of $4.7 million, or a loss of $0.05 per diluted share for the nine
months ended March 31, 2004. The loss per share for the nine months ended March
31, 2004 included the impact of allocating net income to our former Series B and
Series C preferred stock as well as a related accretion charge. Current year
results also reflect the decrease in interest expense primarily related to
accrued penalty interest incurred during the first quarter of fiscal 2004
related to our noncompliance with certain covenants in our 2003 Amended Credit
Facility partially offset by a higher LIBOR rate, as well as the additional
items and factors discussed below.
NET REVENUE
A comparison of net revenue by segment is included in the table below (in
thousands):
NINE MONTHS ENDED
MARCH 31, $ %
2005 2004 CHANGE CHANGE
-------------------- --------------------- --------------------- ------------
Medical transportation and related services $ 358,454 $ 338,363 $ 20,091 5.9%
Fire and other 60,452 55,448 5,004 9.0%
-------------------- --------------------- ---------------------
Total net revenue $ 418,906 $ 393,811 $ 25,095 6.4%
==================== ===================== =====================
Medical Transportation and Related Services -- Medical transportation and
related service revenue increased $20.1 million, or 5.9% for the nine months
ended March 31, 2005 as compared to a year ago. Of this increase, $12.0 million
is due to an increase in billing rates and $8.1 million is due to an increase in
transports. Same service area revenue accounted for $18.8 million of the
increase while the remaining $1.3 million was from revenues generated under a
new contract with the City of Tacoma, Washington.
A comparison of transports is included in table below:
NINE MONTHS ENDED
MARCH 31, TRANSPORT %
2005 2004 CHANGE CHANGE
------------------- -------------------- -------------------- -------------
Medical transports 854,745 830,730 24,015 2.9%
Alternative transportation transports (ATS) 72,766 75,109 (2,343) -3.1%
------------------- -------------------- --------------------
Total transports from continuing operations 927,511 905,839 21,672 2.4%
=================== ==================== ====================
29
The increase in medical transports is a result of an overall aging population
and an increase in population density where we have significant operations. Of
the 21,672 increase in total transports, approximately 3,500 are related to a
new contract with the City of Tacoma, Washington. ATS transports have decreased
due to an overall shift in operational focus from our ATS business to our more
profitable EMS business. The net/net EMS APC for the nine months ended March 31,
2005 was $324 compared to $309 for the nine months ended March 31, 2004. The
increase in net/net EMS APC is primarily a result of rate escalators and other
general rate increases that are contained or allowed in contracts to provide EMS
services, changes in the payor mix in selected markets, the termination of lower
rate contracts, and operating efficiencies associated with improvements to our
billing and collection procedures.
We estimate contractual allowances and the provision for doubtful accounts based
on subsequent receipts and historical collections patterns on a local market
basis. Medical transportation and related services fees are recognized as
services are provided and are recorded net of estimated contractual discounts
applicable to Medicare, Medicaid and other third-party payers.
Discounts applicable to Medicare, Medicaid and other third-party payers related
to continuing operations, which are reflected as a reduction of medical
transportation revenue, totaled $170.3 million and $130.3 million for the nine
months ended March 31, 2005 and 2004, respectively. Such discounts represented
34.0% and 29.5% of gross ambulance and alternative service fees for the nine
months ended March 31, 2005 and 2004, respectively. The 450 basis point increase
is primarily a result of an overall increase in rates as we are unable to pass
on these rates to Medicare, Medicaid and certain payers, changes in historical
collection patterns and the termination of lower rate contracts.
Fire and Other -- Fire and other revenue increased $5.0 million for the nine
months ended March 31, 2005 as compared to the same period in 2004 primarily due
to $2.9 million, or 11.3%, growth in fire subscription revenue comprised of a
$2.0 million increase due to higher billing rates and a $0.9 million increase
due to a higher number of subscribers.
OPERATING EXPENSES
Payroll and Employee Benefits -- Payroll and employee benefits increased $13.4
million, or 6.5% for the nine months ended March 31, 2005 compared to the prior
year. The overall increase is related to higher management incentive expenses,
increased medical transport activity, additional scheduled overtime and general
wage rate increases. Management incentives include a one-time bonus of $1.8
million paid in conjunction with our debt refinancing, $1.1 million related to
an amendment to our CEO's employment agreement which allows him to participate
in the fiscal 2005 MIP and $1.6 million of increased incentive pay as a result
of meeting certain fiscal 2005 operational and profitability goals.
During the nine months ended March 31, 2005 we incurred a $0.2 million premium
adjustment related to a retrospective payroll audit for workers' compensation
insurance for the policy year ended April 30, 2004. During the nine months ended
March 31, 2004 we received a refund of $1.3 million related to a premium payroll
audit for workers compensation insurance for the policy year ended April 30,
2003. In addition, as a result of the resolution of certain workers'
compensation claims during the six months ended December 31, 2004, we engaged
our independent actuaries to perform an updated valuation of our related claim
reserves. Based on this analysis, we reduced our workers compensation claim
reserves by $0.6 million during the second quarter of fiscal 2005. The related
reduction is reflected as a credit to payroll and employee benefits for the nine
months ended March 31, 2005.
Provision for Doubtful Accounts -- Provision for doubtful accounts increased
$0.3 million, or 0.4% for the nine months ended March 31, 2005 as compared to
the same period in 2004. The provision for doubtful accounts as a percentage of
net medical transportation and alternative transportation service fees was 19.5%
and 20.7% for each the nine months ended March 31, 2005 and 2004. The decrease
of 120 basis points is a result of a shift in the allocation between contractual
discounts and bad debt expense as a result of billing rate increases and
historical collection patterns and the termination of lower rate contracts.
30
Depreciation and Amortization -- Depreciation and amortization decreased $0.2
million, or 2.5% for the nine months ended March 31, 2005 as compared to the
same period in the prior year. The decrease is related to the write-off of a
covenant not to compete in the amount of approximately $0.4 million in the first
quarter of fiscal 2005 due to the resolution of a contractual dispute, partially
offset by a decrease in depreciation expense as a result of certain assets
becoming fully depreciated.
Other Operating Expenses -- Other operating expenses increased $4.1 million, or
4.7% for the nine months ended March 31, 2005 as compared to the same period in
the 2004. The increase is attributable to general increases in miscellaneous
operating expenses of $1.9 million, increases in medical transports which has
resulted in an increase in operating supplies and vehicle maintenance of $1.4
million. In addition, the increase in medical transports as well as the increase
in the cost of fuel has resulted in an increase in fuel expense of approximately
$1.5 million. These increases were partially offset by a decrease of
approximately $0.7 million in insurance expense as a result of favorable loss
claim history.
INTEREST EXPENSE
Interest expense decreased $0.1 million, or 0.3% for the nine months ended March
31, 2005 as compared to the same period in the prior year as a result of $0.4
million of penalty interest accrued during the first quarter of fiscal 2004 due
to non-compliance with covenants contained in the old credit facility agreement
and a lower average effective interest rate on our new revolving credit facility
partially offset by higher interest costs on our new 9.875% Senior Subordinated
Notes and non-cash interest expense related to our new 12.75% Senior Discount
Notes. See Liquidity and Capital Resources - Refinancing Activities for further
discussion of our new financing structures.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with the debt refinancing transaction, we recorded $8.2 million of
debt extinguishment costs in the nine months ended March 31, 2005. These costs
included non-cash charges of $5.6 million related to the write-off of debt
issuance costs associated with retired debt and $0.1 million related to
unamortized discounts as well as cash redemption premiums of $2.5 million. See
Liquidity and Capital Resources - Refinancing Activities for further discussion.
MINORITY INTEREST
Minority interest decreased due to net income in our joint venture with the City
of San Diego for the nine months ended March 31, 2005 declining as compared to
net income generated for the same period in 2004 primarily due to higher payroll
related costs and increased provision for bad debts.
INCOME TAX PROVISION
Income tax provision was $0.4 million for the nine months ended March 31, 2005
compared to $0.3 million for the same period in 2004. Our effective income tax
rate for the nine months ending March 31, 2005 and 2004 totaled 7.9% and 5.1%,
respectively. Our effective income tax rate increased primarily as a result of
alternative minimum taxes and additional state income taxes. Our tax rate
differed from the federal statutory tax rate of 35% for the nine months ended
March 31, 2005 and 2004, primarily as a result of the release of valuation
allowances relating to the utilization of a portion of our net operating loss
carryforwards partially offset by previously mentioned alternative minimum taxes
and state taxes offset by the increase of valuation allowances relating to our
net operating loss carryforwards.
DISCONTINUED OPERATIONS
The results of operations for service areas where we have ceased operations have
been included in income (loss) from discontinued operations for the nine months
ended March 31, 2005 and 2004. Net revenue for the medical transportation and
related service areas totaled ($13,000) and $12.2 million for the nine months
ended March 31, 2005 and 2004, respectively. Net loss for these service
areas totaled $118,000 and $405,000 for the nine months ended March 31, 2005
and 2004, respectively. Net revenue for fire and other service areas totaled
approximately $88,000 and $3.2 million for the nine months ended March 31, 2005
and 2004, respectively. Net income for these service areas totaled approximately
31
$25,000 and $0.6 million for the nine months ended March 31, 2005 and 2004,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash flows generated from operating
activities as well as existing cash balances. Cash provided by operating
activities totaled $8.2 million and $4.8 million for the nine months ended March
31, 2005 and 2004, respectively. At March 31, 2005, we had cash of $10.7 million
after consideration of the impact of $13.3 million of net cash paid in
connection with our debt refinancing transaction described below under
Refinancing Activities.
Our liquidity needs are primarily to service long-term debt and fund working
capital requirements, capital expenditures and business development activities.
Our ability to generate cash from operating activities is subject to, among
other things, our operating performance as well as general economic, financial,
competitive, legislative, regulatory and other conditions, some of which may be
beyond our control.
We have focused on the following areas in order to increase our cash flow from
operating activities:
o Expand Within Existing and Contiguous Service Areas: We continue
to expand our services in existing and contiguous areas. We have
significantly improved our financial performance since fiscal 2002
by focusing on same service area growth. In areas where we are the
911 emergency medical transportation provider, we seek to leverage
our visibility and stature as the community's 911 emergency
medical transportation provider to compete for and win
non-emergency medical transportation business. This strategy
includes our utilization of ambulances through a balanced growth
of both emergency and non-emergency ambulance services. Our
strategy also enables us to gain operational efficiencies and
effectively manage our costs and assets by leveraging our fleet,
communications systems and management within our existing service
areas.
o Maximize Cash Collection: We continue to focus on maximizing cash
collections by improving billing practices, implementing or
negotiating rate increases to meet the escalating costs of
delivering high-quality services and seeking subsidies to offset
the cost of providing service to uninsured or economically
disadvantaged patients.
o Selectively Enter New Markets: We continue to pursue contracts and
alliances with municipalities, other government entities,
hospital-based emergency providers and fire districts in select
new markets. Among the criteria we set for entering a new markets
are whether we can provide both 911 emergency and non-emergency
medical transportation services, geographic proximity to our
existing operations, expected revenues and margins, payer mix,
medical transportation demands, competitive profiles and
demographic trends.
o Invest in Proprietary Technology to Improve Operating
Efficiencies: We have developed proprietary technological systems
to create operating efficiencies and improve the overall quality
of service offerings. For example, we developed proprietary
medical transportation billing and collections systems, which are
operated from a single, nationwide platform that allows for
standardized procedures and training, thereby minimizing
duplication and maximizing collections. This information
technology has resulted in a significant improvement in our
ability to collect outstanding claims on a timely basis. We expect
to continue to invest in and utilize technology to improve the
performance of operations and utilization of our fleet, including
the following specific initiatives:
o Electronic Patient Care Network ("R/M EPCR") system, a
hand-held data-entry system used by EMS workers to collect
billing and patient data in the field.
32
o Internet based scheduling software, which enables us to
reduce unscheduled overtime while producing schedules by
shift, department and location, has resulted in an overall
reduction of labor costs; and
o DriveCam technology, an on-board monitoring system that
measures operator performance against safe driving
standards. We expect the implementation of this technology
to result in the reduction of claims and vehicle
maintenance costs following implementation in selected
areas.
o Improve Workplace Safety and Reduce Insurance Costs: We have
consistently placed workplace health and safety among our highest
priorities due, in part, to escalating insurance costs, and our
management, risk management and quality assurance staffs
aggressively conduct risk management programs for quality
assurance, loss prevention and early intervention. We believe in
creating a culture among our workforce that encourages and
demonstrates a committed approach to workplace health and safety.
We believe that cash flow from operations coupled with existing cash balances
and funds available through the $20.0 million Revolving Credit Facility and the
$35.0 million Letter of Credit Facility will be adequate to fund our operating
and capital needs through March 31, 2006. To the extent that actual results or
events differ from our financial projections or business plans, our liquidity
may be adversely impacted.
If we fail to generate sufficient cash flow from operating activities, we will
need to borrow additional funds or issue additional debt or equity securities to
achieve our longer-term business objectives. There can be no assurance that such
borrowings, debt or equity securities will be available or, if available, will
be at rates or prices acceptable to us.
CASH FLOW
Throughout the year, we periodically experience significant outflows of cash for
debt service, insurance premiums, 401(k) matching contributions and management
bonuses. These outflows include $6.2 million in semi-annual interest payments on
our 9.875% Senior Subordinated Notes due March 2015 payable on September 15 and
March 15, as well as estimated quarterly interest payments and principal
payments on the Term Loan B in the amount of $1.8 million and $0.3 million,
respectively. Various fees under our Letter of Credit Facility totaling
approximately $0.3 million are also payable each quarter. In the third quarter
of fiscal 2005, we made a one-time payment of $1.5 million to our CEO under the
terms of his employment agreement. On March 8, 2005, the 401(k) Company match
was paid in the amount of $1.5 million with respect to the plan year ended
December 31, 2003.
Deposits on our annual workers' compensation and general liability insurance
premiums as well as self-insurance retention are paid in the fourth quarter of
the fiscal year. These deposits totaled $7.2 million and $5.4 million in fiscal
2004 and 2003, respectively. Management expects that, in the future, we will be
using letters of credit in place of cash deposits to fund anticipated
self-insurance retention.
In April 2005, we paid a one-time bonus to certain members of management of
approximately $1.8 million associated with the refinancing of our debt. In May
2005, we made a $7.0 million unscheduled principal payment on our Term Loan B as
allowed under the provisions of the 2005 Credit Facility.
The table below summarizes cash flow information for the nine months ended March
31, 2005 and 2004 (in thousands):
33
NINE MONTHS ENDED
MARCH 31,
2005 2004
---------------------------------
Net cash provided by operating activities $ 8,177 $ 4,766
Net cash used in investing activities (10,313) (6,090)
Net cash used in financing activities (3,573) (1,984)
Operating Activities - Cash provided by operating activities for the nine months
ended March 31, 2005 primarily relates to net income of $4.5 million,
depreciation and amortization of $8.8 million, non-cash portion of loss on early
extinguishment of debt of $5.7 million, a decrease in insurance deposits of $2.9
million, offset by the growth in net accounts receivables of $6.3 million, an
increase in other assets of $3.9 million and a decrease in accrued liabilities
of $9.0 million. The decrease in insurance deposits is primarily related to the
return of excess collateral of $1.7 million in December 2004. The growth in
receivables is primarily related to an increase in rates and the number of
medical transports during the nine months ended March 31, 2005. The increase in
other assets relates to the one-time payment to our CEO of $1.5 million and a
$1.0 million cash funded letter of credit. The decrease in accrued liabilities
is primarily a result of a decrease in accrued wages of $3.6 million as a result
of the timing of payroll distributions, a decrease in the general and workers'
compensation insurance accruals of $4.5 million primarily as a result of
payments on claims in excess of current fiscal year accruals for new claims.
Cash provided by operating activities for the nine months ended March 31, 2004
primarily relates to net income of $4.9 million and depreciation and
amortization of $9.4 million offset by the growth in net accounts receivables of
$6.9 million. The growth in accounts receivable is primarily related to the
addition of new service areas and transport growth in the nine months ended
March 31, 2004 as compared to the same period in 2003.
Accounts receivable, net of the allowance for doubtful accounts, was $71.7
million and $65.3 million as of March 31, 2005 and June 30, 2004, respectively.
The increase in net accounts receivable is primarily due to increased medical
transports, normal billing rate increases and new contract activities. Days'
sales outstanding, calculated on a quarter-to-date basis, was 43 days at March
31, 2005 and 45 days at June 30, 2004. The allowance for doubtful accounts
increased from approximately $59.4 million at June 30, 2004 to approximately
$65.6 million at March 31, 2005, primarily as a result of the increase in
revenue.
Average daily cash deposits totaled approximately $1.9 million for both the
three and nine months ended March 31, 2005, and $1.9 and $1.8 million for the
three and nine months ended March 31, 2004, respectively. We experience several
variables regarding the timing and amount of cash collected during any period.
While management believes that we have a predictable method of determining the
realizable value of our accounts receivable, based upon the complexities of
determining healthcare reimbursements, there can be no assurance that there will
not be additional future write-offs.
Investing Activities - Cash used in investing activities primarily relates to
capital expenditures. We had capital expenditures totaling $10.3 million and
$6.2 million for the nine month periods ended March 31, 2005 and 2004,
respectively. Of the $10.3 million, approximately $6.0 million relates to the
purchase of ambulances and related equipment and approximately $0.8 million
relates to the purchase of fire trucks and related equipment. Approximately $2.0
million of the increase in ambulances relates to ambulances purchased in order
to serve the new Tacoma, Washington and Salem, Oregon 911 contracts. We expect
capital expenditures to total approximately $12.1 million for fiscal 2005. In
addition to cash paid for capital expenditures, we capitalized $1.8 million in
non-cash leasehold improvements at our new corporate headquarters that were
funded by our landlord.
Financing Activities - During the nine months ended March 31, 2005, cash used in
financing activities included the repayment of our $150.0 million of 7.875%
Senior Notes due March 2008 (the "Senior Notes") and the repayment of $152.6
34
million under our prior credit facility due December 2006. In addition, we paid
approximately $11.8 million in costs associated with securing the new debt which
have been capitalized and will be amortized to interest expense over the term of
the debt. Sources of financing include net proceeds received in connection with
the refinancing transaction, which is comprised of $125.0 million from a 9.875%
Senior Subordinated Notes offering, $50.2 million from a 12.75% Senior Discount
Notes offering and $135.0 under a new Senior Secured Credit Facility. See
further discussion under Refinancing Activities below.
Cash used in financing activities for the nine months ended March 31, 2004
includes a $1.0 million payment on our 2003 Amended Credit Facility related to
asset sale proceeds as required under the 2003 Amended Credit Facility and $0.5
million in cash paid for debt modification costs related to the 2003 Amended
Credit Facility.
We had working capital of $17.9 million at March 31, 2005, including cash of
$10.7 million, compared to working capital of $12.1 million, including cash of
$16.4 million, at June 30, 2004. The increase in working capital as of March 31,
2005 is primarily related to the decrease in accrued liabilities partially
offset by lower cash balances driven by the use of $13.3 million in conjunction
with the debt refinancing transaction.
REFINANCING ACTIVITIES
On March 4, 2005, we effected a refinancing transaction whereby our newly formed
wholly owned subsidiary, Rural/Metro Operating Company, LLC ("Rural/Metro LLC"),
entered into new senior secured credit facilities (collectively, the "2005
Credit Facility") in an aggregate amount of up to $190.0 million, comprised of a
$135.0 million Term Loan B facility due March 2011 (the "Term Loan B"), a $20.0
million revolving credit facility due March 2010 (the "Revolving Credit
Facility") and a $35.0 million prefunded letter of credit facility (the "Letter
of Credit Facility"). Indebtedness under the 2005 Credit Facility is guaranteed
by the Parent Company and each of Rural/Metro LLC's current and future direct
and indirect domestic subsidiaries (the "Guarantors") and is secured by a lien
on substantially all of Rural/Metro LLC's and the Guarantors' current and future
property, including all equity interests in Rural/Metro LLC and its current
subsidiaries. In addition, Rural/Metro LLC and its newly formed wholly owned
subsidiary, Rural/Metro (Delaware) Inc. ("Rural/Metro Inc.") issued $125.0
million aggregate principal amount 9.875% senior subordinated notes due 2015
(the "Senior Subordinated Notes") and we issued $93.5 million aggregate
principal amount at maturity (gross proceeds of $50.2 million) 12.75% senior
discount notes due 2016 (the "Senior Discount Notes"). The Senior Subordinated
Notes and the Senior Discount Notes were sold in private placement transactions
and have not been registered under the Securities Act of 1933, as amended.
Due to certain covenant restrictions contained in our 7.875% Senior Notes due
2008 ("Senior Notes"), we could not effectively refinance our prior senior
credit facility without refinancing the Senior Notes. Therefore, we used the
borrowings under the 2005 Credit Facility and the net proceeds from the
offerings of the Senior Subordinated Notes and the Senior Discount Notes,
together with $13.3 million of cash on hand, to finance a tender offer for and
consent solicitation relating to our Senior Notes for which we received tenders
and related consents from holders of 92% of the Senior Notes. In addition, we
used such funds to redeem any Senior Notes not acquired in the tender offer to
repay amounts outstanding under our prior senior credit facility and to pay
certain fees and expenses related to the refinancing transaction.
In connection with these refinancing activities, we recorded $8.2 million of
debt extinguishment costs during the three months ended March 31, 2005. These
costs included non-cash charges of $5.6 million related to the write-off of debt
issuance costs associated with the retired debt and $0.1 million related to
unamortized discounts as well as cash redemption premiums of $2.5 million.
35
2005 CREDIT FACILITY
In March 2005, Rural/Metro LLC entered into the 2005 Credit Facility, which
provides for a $135.0 million Term Loan B facility maturing in 2011, a $35.0
million Letter of Credit Facility maturing in 2011 and a $20.0 million Revolving
Credit Facility maturing in 2010, each of which is described below.
Term Loan B
The Term Loan B bears interest at LIBOR plus 2.50% per annum or, at Rural/Metro
LLC's option, the Alternate Base Rate (ABR), as defined in the 2005 Credit
Facility, plus 1.50% per annum. In the case of the LIBOR option, which is equal
to one, two, three or six months from the date of initial borrowing at
Rural/Metro LLC's option, interest on the Term Loan B is payable on the last day
of each contract period, subject to a maximum payment term of three months.
Interest is payable at the end of each quarter in the case of the ABR option. As
of March 31, 2005, Rural/Metro LLC had chosen the LIBOR option for a contract
period of three months and is accruing interest at 5.25% per annum.
Term Loan B requires an annual principal payment of 1.0% of the original loan
amount, payable quarterly beginning on September 30, 2005. Additional annual
principal payments equal to 75% of the fiscal year-end Excess Cash Flow, as
defined in the 2005 Credit Facility, are due on September 30th of each year with
the first remeasurement period at June 30, 2006. Rural/Metro LLC capitalized
expenses associated with securing Term Loan B of approximately $4.5 million and
is amortizing these costs to interest expense over the term of the agreement.
Revolving Credit Facility
The Revolving Credit Facility includes a letter of credit sub-line whereby $10.0
million of the $20.0 million total facility can be utilized to issue letters of
credit. The Revolving Credit Facility bears interest at LIBOR plus 3.25% per
annum or, at Rural/Metro LLC's option, the ABR plus 2.25% per annum on all
amounts drawn against the line. In the case of the LIBOR option, which is equal
to one, two, three or six months from the date of initial borrowing at
Rural/Metro LLC's option, interest on the Revolving Credit Facility is payable
on the last day of each contract period, subject to a maximum payment term of
three months. Interest is payable at the end of each quarter in the case of the
ABR option. A commitment fee of 0.50% is payable on the total undrawn revolving
commitment, plus a fronting fee of 0.25% on any letter of credit issued under
the sub-line, payable at the end of each quarter. Principal payments prior to
maturity are not required. Expenses associated with securing the Revolving
Credit Facility of approximately $0.7 million were capitalized and are being
amortized to interest expense over the term of the agreement. There were no
amounts outstanding under the Revolving Credit Facility at March 31, 2005.
Letter of Credit Facility
The Letter of Credit Facility is available primarily to support and/or replace
existing and future insurance deductible arrangements of the Company,
Rural/Metro LLC and the Guarantors. The Letter of Credit Facility can be
increased from $35.0 million to a maximum of $45.0 million. The Letter of Credit
Facility bears a participation fee of 2.50% plus an administrative fee of 0.15%
for a total of 2.65% per annum on the total facility payable quarterly beginning
March 31, 2005. In addition, Rural/Metro LLC will pay a fronting fee of 0.125%
per annum on issued letters of credit payable quarterly beginning March 31,
2005. Rural/Metro LLC capitalized expenses associated with securing the Letter
of Credit Facility of approximately $1.2 million and is amortizing these costs
to interest expense over the term of the agreement. At March 31, 2005,
approximately $15.3 million of the available Letter of Credit Facility balance
was utilized in support of insurance deductible arrangements.
36
Other Terms
The 2005 Credit Facility allows Rural/Metro LLC to prepay loans at its option at
any time without premium or penalty except breakage costs as defined in the 2005
Credit Facility. In addition to the repayment terms as discussed above, (a) 100%
of the net proceeds from the issuance of certain new debt, the issuance of
certain preferred stock and the sale of certain assets, and (b) 50% of the net
proceeds received from the issuance of new equity shall be applied first to
amounts outstanding under the Term Loan B, second to amounts outstanding under
the Revolving Credit Facility and third to amounts outstanding under the Letter
of Credit Facility within 5 business days of receipt of such funds.
The 2005 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet
certain financial tests, including a minimum interest coverage ratio, a maximum
total leverage ratio and a minimum fixed charge coverage ratio. The 2005 Credit
Facility also contains covenants which among other things limit the incurrence
of additional indebtedness, dividends, transactions with affiliates, asset
sales, acquisitions, mergers, prepayments of other indebtedness, liens and
encumbrances, capital expenditures, business activities limitations on the
Company, as a holding company, and other matters customarily restricted in such
agreements. Rural/Metro LLC and its subsidiaries were in compliance with these
covenants as of March 31, 2005.
NOTES
Senior Subordinated Notes
In March 2005, our two newly formed wholly owned subsidiaries, Rural/Metro LLC
and Rural/Metro Inc. (collectively referred to as the "Senior Subordinated Notes
Issuers"), completed the private placement of the Senior Subordinated Notes.
Interest on the Senior Subordinated Notes is payable semi-annually on September
15 and March 15.
The Senior Subordinated Notes are unsecured senior subordinated obligations of
the Senior Subordinated Notes Issuers. They rank junior in right of payment to
all of the Senior Subordinated Notes Issuers' existing and future senior
indebtedness, including the 2005 Credit Facility, rank pari passu in right of
payment with any of the Senior Subordinated Notes Issuers' future senior
subordinated debt and rank senior in right of payment to any of the Senior
Subordinated Notes Issuers' future subordinated debt. Each of the Guarantors,
other than Rural/Metro Inc., has guaranteed the Senior Subordinated Notes. These
guarantees are unsecured and will be subordinated to all existing and future
senior obligations of the Guarantors, including their guarantees of the 2005
Credit Facility.
At any time prior to March 15, 2008, the Senior Subordinated Notes Issuers may
redeem up to 35% of the aggregate principal amount of the Senior Subordinated
Notes with the net proceeds from certain equity offerings, subject to
application of the first 50% of any proceeds to the 2005 Credit Facility, at a
redemption price of 109.875% of the principal amount of the Senior Subordinated
Notes to be redeemed. At any time prior to March 15, 2010, the Senior
Subordinated Notes Issuers may redeem some of or all the Senior Subordinated
Notes at a price equal to 100% of the principal amount of the Senior
Subordinated Notes, plus a make-whole premium. After March 15, 2010, the Senior
Subordinated Notes Issuers may redeem all or part of the Senior Subordinated
Notes at various redemption prices given the date of redemption as set forth in
the indenture governing the Senior Subordinated Notes. If we experience a change
of control, the Senior Subordinated Notes Issuers may be required to offer to
purchase the Senior Subordinated Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest.
Costs related to this issuance totaling approximately $5.0 million were
capitalized and are being amortized to interest expense over the term of the
Senior Subordinated Notes.
37
Senior Discount Notes
In March 2005, we completed a private placement of the Senior Discount Notes and
received gross proceeds of $50.2 million. While interest will accrue prior to
March 15, 2010, no cash interest payment will be due until September 15, 2010.
The Senior Discount Notes had an initial accreted value of $536.99 per $1,000
principal amount at maturity. The accreted value will increase from the date of
issuance until March 15, 2010 at a rate of 12.75% per annum compounded
semiannually such that the accreted value will equal the principal amount at
maturity of each Senior Discount Note on that date. The accreted value of the
Senior Discount Notes was $50.7 million at March 31, 2005.
The Senior Discount Notes are our unsecured senior obligations. They will rank
equally in right of payment with all existing and future unsecured senior
obligations and senior to our subordinated indebtedness. The Senior Discount
Notes will be subordinated to our existing and future secured indebtedness,
including our guarantee of the 2005 Credit Facility, to the extent of the assets
securing that indebtedness. The Senior Discount Notes are not guaranteed by any
of our subsidiaries and are subordinated to all obligations of our subsidiaries,
including the Senior Subordinated Notes, the 2005 Credit Facility and the
guarantees of the Guarantors.
At any time prior to March 15, 2008, we may redeem up to 35% of the Senior
Discount Notes with the proceeds from certain equity offerings, subject to
application of the first 50% of any proceeds to the 2005 Credit Facility, at a
redemption price of 112.75% of the accreted value of the Senior Discount Notes
to be redeemed. Prior to March 15, 2010, we may redeem some of or all the Senior
Discount Notes at a price equal to 100% of the accreted value of the Senior
Discount Notes, plus a make-whole premium. After March 15, 2010, we may redeem
all or part of the Senior Discount Notes at various redemption prices given the
date of redemption as set forth in the Indenture governing the Senior Discount
Notes. If we experience a change of control, we may be required to offer to
purchase the Senior Discount Notes at a purchase price equal to 101% of their
accreted value, plus accrued and unpaid interest.
We capitalized costs totaling approximately $2.0 million related to this
issuance and are amortizing these costs to interest expense over the term of the
Senior Discount Notes.
Other Terms
The Company, the Senior Subordinated Note Issuers and the other guarantors of
the Senior Subordinated Notes (collectively referred to as the "Issuers") have
agreed to file a registration statement with respect to offers to exchange the
Senior Subordinated Notes and the Senior Discount Notes for new issues of
same-class notes registered under the Securities Act within 240 days following
the issue date of these notes, and have agreed to use their reasonable best
efforts to cause the registration statement to become effective on or prior to
300 days following the issue date of the notes. If the Issuers fail to comply
with these requirements, they may be required to pay additional interest at a
rate of 0.25% per annum, with that rate increasing by 0.25% per annum every
quarter, not to exceed 1.00% per annum until the default is cured.
The Senior Subordinated Notes and the Senior Discount Notes contain certain
covenants that, among other things, limit our ability to incur additional debt,
pay dividends on their capital stock or repurchase their capital stock, make
certain investments, enter into certain types of transactions with affiliates,
pay dividends or other payments by their restricted subsidiaries, use assets as
security in other transactions, sell certain assets or merge with or into other
companies, purchase fixed assets and prepay certain other indebtedness. We were
in compliance with these covenants as of March 31, 2005.
38
Current Covenants - The 2005 Credit Facility includes various financial and
non-financial covenants applicable to Rural/Metro LLC as well as quarterly and
annual financial reporting obligations. The financial covenants and levels
achieved by Rural/Metro LLC are presented below:
FINANCIAL PERIOD COVERED LEVEL SPECIFIED LEVEL ACHIEVED FOR
COVENANT BY COVENANT IN AGREEMENT SPECIFIED PERIOD
- ------------------------------------- ----------------------------------------- ------------------ ---------------------
Interest expense ratio Last twelve months ended March 31, 2005 > 1.60 1.90
Debt leverage ratio Last twelve months ended March 31, 2005 < 6.00 4.80
Fixed charge coverage ratio Last twelve months ended March 31, 2005 > 1.10 1.26
Limitation on capital expenditures Cumulative for fiscal year 2005 < $12.25 million $12 million
At June 30, 2005, the required interest expense ratio must be greater than 1.70
while all other required levels of compliance remain the same as those described
above.
EBITDA
EBITDA is a key indicator that management uses to evaluate our operating
performance. While EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principles and should not be
considered as an indicator of operating performance or an alternative to cash
flow as a measure of liquidity, we believe this measure is useful to investors
in assessing our ability to meet our future debt service, capital expenditure
and working capital requirements. This calculation may differ in method of
calculation from similarly titled measures used by other companies. The
following table sets forth our EBITDA for the three and nine months ended March
31, 2005 and 2004, as well as a reconciliation to cash provided by operating
activities, the most directly comparable financial measure under generally
accepted accounting principles (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
--------------- ---------------- ---------------- ---------------
Net income (loss) $ (2,985) $ 2,167 $ 4,489 $ 4,948
Add back:
Depreciation and amortization 2,835 3,202 8,762 9,423
Interest expense 7,205 6,898 22,039 22,106
Interest income (48) (16) (227) (67)
Income tax (benefit) provision (126) 91 400 289
--------------- ---------------- ---------------- ---------------
EBITDA 6,881 12,342 35,463 36,699
Increase (decrease):
Interest expense (7,205) (6,898) (22,039) (22,106)
Interest income 48 16 227 67
Income tax benefit (provision) 126 (91) (400) (289)
Provision for doubtful accounts 22,522 23,619 64,601 68,175
Non-cash portion of loss on early extinguishment of debt 5,668 - 5,668 -
Amortization of deferred financing costs 593 669 1,932 2,083
Accretion of 12.75% Senior Discount Notes 480 - 480 -
Tax benefit related to the exercise of stock options 30 - 159 -
Loss on sale of property and equipment 49 94 126 104
Earnings (losses) of minority shareholder 68 (65) 40 398
Amortization of debt discount 4 6 17 19
Changes in operating assets and liabilities (21,253) (28,056) (78,097) (80,384)
--------------- ---------------- ---------------- ---------------
Net cash provided by operating activities $ 8,011 $ 1,636 $ 8,177 $ 4,766
=============== ================ ================ ===============
39
For the three and nine months ended March 31, 2005, EBITDA decreased by
approximately $5.5 and $1.2 million, respectively, compared to the same period
in the prior year. The decrease can be attributed to the loss on early
extinguishment of debt of $8.2 million, of which $5.7 million was non-cash.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
We have certain cash contractual obligations related to our debt instruments
that come due at various times over the next five years and beyond. In addition,
we have other commitments in the form of our Letter of Credit Facility, standby
letters of credit, surety bonds and self-insurance retention obligations. Due to
our recent refinancing activities described above, the principal payment dates
on our contractual debt obligations have been extended significantly. The
contractual cash obligations for our Senior Discount Notes, Senior Subordinated
Notes and Term Loan B Credit Facility and related interest payments as well as
commitments under our Letter of Credit Facility at March 31, 2005 are as
follows:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------
1 YEAR AFTER
CONTRACTUAL OBLIGATIONS TOTAL OR LESS 2-3 YEARS 4-5 YEARS 5 YEARS
- ----------------------- -------------- -------------- ------------- ------------- --------------
12.75% Senior Discount Notes due March 2016 $ 93,500 $ - $ - $ - $ 93,500
9.875% Senior Subordinated Notes due March 2015 125,000 - - - 125,000
Senior Secured Term Loan B due March 2011 135,000 1,013 2,700 2,700 128,587
Interest payments 242,824 20,478 40,956 40,956 140,434
-------------- -------------- ------------- ------------- --------------
Total contractual cash obligations $ 596,324 $ 21,491 $ 43,656 $ 43,656 $487,521
============== ============== ============= ============= ==============
OTHER COMMITMENTS AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
----------------------------------------------------------------------------
Letter of Credit Facility due March 2011 $ 17,820 $ 17,820 $ - $ - $ -
============== ============== ============= ============= ==============
On May 16, 2005, we made a $7.0 million unscheduled principal payment on our
Term Loan B as allowed under the provisions of the 2005 Credit Facility.
INSURANCE PROGRAMS
On December 8, 2004 Reliance Insurance Company ("Reliance"), our workers'
compensation excess carrier during fiscal years 1992 through 2001, released a
surety bond in the amount of $2.6 million. This surety bond was collateralized
by a $1.5 million letter of credit and cash of $0.6 million, while the remaining
balance was unsecured. In connection with the surety bond release, the letter of
credit and cash collateral were returned to us. Additionally, on December 10,
2004, Reliance returned excess collateral to us in the form of cash deposits of
approximately $1.7 million. At March 31, 2005, there is approximately $1.3
million of remaining cash on deposit with Reliance, which is included in
insurance deposits on the balance sheet, and $3.8 million on deposit in the form
of letters of credit.
As a result of the resolution of certain workers' compensation claims during the
six months ended December 31, 2004, we engaged our independent actuaries to
perform an updated valuation of our related claim reserves. Based on this
analysis, we reduced our workers compensation claim reserves by $0.6 million
during the second quarter of fiscal 2005. The related reduction is reflected as
a credit to payroll and employee benefits for the nine months ended March 31,
2005.
Return of Insurance Deposits
Under the Company's general liability insurance programs, certain insurers
require us to provide collateral to fund claim payments within our retention
limits. As a result of the debt refinancing discussed in Note 3 to the
consolidated financial statements, we issued letters of credit to these insurers
totaling $11.5 million and, on April 6, 2005, received a return of $5.4 million
in cash collateral previously held by the insurers.
40
INDEMNIFICATIONS
We are a party to a variety of agreements entered into in the ordinary course of
business pursuant to which we may be obligated to indemnify the other parties
for certain liabilities that arise out of or relate to the subject matter of the
agreements. Some of the agreements entered into by us require us to indemnify
the other party against losses due to property damage including environmental
contamination, personal injury, failure to comply with applicable laws, our
negligence or willful misconduct or breach of representations and warranties and
covenants.
Additionally, some of our agreements with customers require us to provide
certain assurances related to the performance of our services. Such assurances,
from time to time, obligate us to: (i) pay penalties for failure to meet
response times or other requirements, (ii) lease, sell or assign equipment or
facilities (either temporarily or permanently) in the event of uncured material
defaults or other certain circumstances or (iii) provide surety bonds or letters
of credit issued in favor of the customer to cover costs resulting, under
certain circumstances, from an uncured material default or transition to a new
service provider. With respect to such surety bonds, we are also required to
indemnify the surety company for losses paid as a result of any claims made
against such bonds.
We provide for indemnification of directors, officers and other persons in
accordance with limited liability agreements, certificates of incorporation,
bylaws, articles of association or similar organizational documents, as the case
may be. We maintain directors' and officers' insurance, which should enable us
to recover a portion of any future amounts paid.
In addition to the above, from time to time we provide standard representations
and warranties to counterparties in contracts in connection with sales of our
securities and the engagement of financial advisors and also provide indemnities
that protect the counterparties to these contracts in the event they suffer
damages as a result of a breach of such representations and warranties or in
certain other circumstances relating to the sale of securities or their
engagement by us.
While our future obligations under certain agreements may contain limitations on
liability for indemnification, other agreements do not contain such limitations
and under such agreements it is not possible to predict the maximum potential
amount of future payments due to the conditional nature of our obligations and
the unique facts and circumstances involved in each particular agreement.
Historically, payments made by us under any of these indemnities have not had a
material effect on our business, financial condition, results of operations or
cash flows. Additionally, we do not believe that any amounts that we may be
required to pay under these indemnities in the future will be material to our
business, financial condition, results of operations or cash flows.
NASDAQ LISTING
Dating back to May 22, 2003, we have had periodic correspondence with Nasdaq
regarding our noncompliance with certain of the Nasdaq SmallCap Market listing
standards. On July 12, 2004, we received notice from the Nasdaq Listing
Qualifications Panel (the "Panel") that we did not meet the market value of
listed securities requirement for continued listing on the Nasdaq SmallCap
Market. Effective with the opening of business on July 13, 2004, our common
stock was delisted from the Nasdaq SmallCap Market and began trading on the OTC
Bulletin Board.
On November 24, 2004, we were notified by the Nasdaq Listing and Hearing Review
Council that it had reversed the earlier decision by the Panel to delist our
securities from the SmallCap Market based upon events subsequent to the Panel's
decision and remanded the matter to the Panel for further consideration. On
November 24, 2004, we submitted an application for listing on the Nasdaq
SmallCap Market.
On December 21, 2004, we were informed by the Panel that our listing application
had been approved based on our compliance with all requirements for initial
listing on the Nasdaq SmallCap Market. On December 27, 2004, our common stock
41
resumed trading under the symbol "RURL" on the Nasdaq SmallCap Market.
AMENDED EMPLOYMENT AGREEMENT
On December 8, 2004, the Board of Directors approved an amended and restated
employment agreement (the "Agreement") with our President and Chief Executive
Officer ("CEO"). Under the Agreement, certain modifications were made to the
CEO's existing employment agreement, including, among other things, the
strengthening of the related non-compete provisions. In consideration for these
modifications, we made a one-time payment to the CEO of $1.5 million in January
2005, as well as restored his ability to participate in our Management Incentive
Plan (the "MIP"). The one-time payment was capitalized and is being amortized to
payroll and employee benefits on a straight-line basis over the seven year term
of the Agreement.
MANAGEMENT INCENTIVE PLAN
The final form of the 2005 Management Incentive Program (the "2005 MIP") was
approved by the Board of Directors (the "Board") on April 5, 2005. The 2005 MIP
is an annual cash incentive plan for key executives based upon performance
goals. The 2005 MIP also included a separate bonus opportunity for certain key
executives based upon, among other things, the successful completion of a
refinancing transaction of either or both of the 2003 Amended Credit Facility
and the outstanding Senior Notes during fiscal 2005 or fiscal 2006 and the
future realization of certain related operating benefits. Such refinancing was
completed in March 2005. At its meeting held on March 28, 2005, our Compensation
Committee (the "Committee") determined that several participants satisfied the
criteria for receipt of a bonus payment pursuant to the incentive program and
approved payment of approximately $1.8 million. This amount was included in
accrued liabilities at March 31, 2005. At its meeting held on April 5, 2005, the
Board ratified the Committee's approval and payment was made in April 2005.
SEC INVESTIGATION
On October 28, 2003, the SEC notified us that it was conducting an informal
fact-finding inquiry. We have voluntarily provided the information requested by
the Staff and we intend to cooperate fully. In December 2003, we met with the
Staff to discuss the materials that had been submitted to the SEC. After the
meeting, additional materials were provided to the Staff. Since then, we have
not received any additional requests from the SEC with respect to their informal
fact-finding inquiry.
SECTION 404 COMPLIANCE
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002
("Section 404") with our Annual Report on Form 10-K for fiscal 2005. The
requirements of Section 404 include that we furnish a report by our management
on our internal control over financial reporting, including an assessment of the
effectiveness of our internal control over financial reporting as of the end of
each fiscal year. The report will also contain a statement that our independent
registered public accounting firm has issued an audit opinion on management's
assessment of internal control over financial reporting.
We are currently undergoing a comprehensive effort which includes documenting,
evaluating the design and testing the effectiveness of our internal control over
financial reporting. During this process, we expect to make improvements in the
design and operation of our internal controls including further formalization of
policies and procedures, improved segregation of duties and additional
monitoring of controls. Although we believe that our efforts will enable us to
provide the required report, we can give no assurance that these efforts will be
completed in a timely manner or on a successful basis. If we are unable to
determine that our internal control is effective as of June 30, 2005, we will
not be able to provide the certification required by Section 404 which would
result in our non-compliance with our reporting requirements under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Any such
non-compliance could, among other things, indicate that our internal control
42
over financial reporting is not effective. In addition, any material unexpected
costs of complying with the requirements of Section 404 could have an adverse
effect on our results of operations.
UNSCHEDULED DEBT PAYMENT
On May 16, 2005, Rural/Metro LLC made a $7.0 million unscheduled principal
payment on its Term Loan B as allowed under the provisions of the 2005 Credit
Facility. The Company anticipates resulting interest savings of approximately
$0.4 million per year and expects to write-off approximately $0.2 million of
deferred financing costs during the fourth quarter of fiscal 2005. From time to
time, Rural/Metro LLC may make additional unscheduled payments at its
discretion.
ACCOUNTING DEVELOPMENTS
See Notes 2 and 9 to the consolidated financial statements for descriptions of
new accounting standards that affect us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our primary exposure to market risk consists of changes in interest rates on our
borrowing activities. Under our 2005 Credit Facility, amounts outstanding under
Term Loan B bear interest at LIBOR plus 2.50%, amounts drawn under our Revolving
Credit Facility bear interest at LIBOR plus 3.25% and amounts utilized under our
Letter of Credit Facility bear a participation fee of LIBOR plus 3.25%. Based on
current amounts outstanding, a 1% increase in the LIBOR rate would increase our
interest expense on an annual basis by approximately $1.5 million. The remainder
of our debt is primarily at fixed interest rates. We monitor the risk associated
with interest rate changes and may enter into hedging transactions, such as
interest rate swap agreements, to mitigate the related exposure.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applies its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
We carried out an evaluation as of the end of the period covered by this report,
under the supervision and participation of management, including the Chief
Executive Officer along with the Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures (as such term is defined in Exchange
Act Rule 13a-15(e)). Based upon that evaluation, the Chief Executive Officer
along with the Chief Financial Officer concluded that our disclosure controls
and procedures are effective in providing reasonable assurance regarding
management's control objectives. There have not been any changes in our internal
control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
43
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS
Exhibits
21.1 Subsidiaries of the Registrant*
31.1 Certification pursuant to Rule 13a -
14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended*
31.2 Certification pursuant to Rule 13a -
14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended*
32.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002+
32.2 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002+
-------------------------------
* Filed herewith.
+ Furnished but not filed.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Dated: May 16, 2005
By: /s/ Jack E. Brucker
----------------------------------------
Jack E. Brucker, President & Chief
Executive Officer (Principal
Executive Officer)
By: /s/ Michael S. Zarriello
----------------------------------------
Michael S. Zarriello, Senior Vice
President and Chief Financial
Officer (Principal Financial
Officer)
By: /s/ Matthew J. Majoros
----------------------------------------
Matthew J. Majoros, Managing
Director of Finance and Accounting
and Corporate Controller (Principal
Accounting Officer)
45