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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0746929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8401 East Indian School Road, Scottsdale, Arizona 85251
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (480) 994-3886
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AS OF SEPTEMBER 20, 2002, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING
SALES PRICE OF SUCH STOCK AS OF SUCH DATE ON THE NASDAQ SMALLCAP MARKET, WAS
$40,369,375. SHARES OF COMMON STOCK HELD BY EACH OFFICER AND DIRECTOR AND BY
EACH PERSON WHO OWNED 5% OR MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN
EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS DETERMINATION
OF AFFILIATE STATUS IS NOT NECESSARILY CONCLUSIVE.
As of September 20, 2002, there were 15,990,903 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
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TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS.............. 1
PART I
ITEM 1. BUSINESS......................................................... 2
ITEM 2. PROPERTIES....................................................... 19
ITEM 3. LEGAL PROCEEDINGS................................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 101
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 102
ITEM 11. EXECUTIVE COMPENSATION........................................... 102
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................ 102
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 102
ITEM 14. CONTROLS AND PROCEDURES.......................................... 102
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 102
SIGNATURES ................................................................. 107
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
FORWARD LOOKING STATEMENTS. Statements in this Report that are not
historical facts are hereby identified as "forward looking statements" as that
term is used under the securities laws. We caution readers that such "forward
looking statements," including those relating to our future business prospects,
working capital, accounts receivable collection, liquidity, cash flow, capital
needs, operational results 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 Securities and
Exchange Commission.
These "forward looking statements" are found throughout this Report.
Additionally, the discussions herein under the captions "Business --
Introduction", "Business -- Market Reform and Changing Reimbursement
Regulations", "Business -- Other Governmental Regulation", "Business --
Management Information Systems", "Business -- Billings and Collections", "Legal
Proceedings", and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are susceptible to the risks and uncertainties
discussed under the caption "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations -- Risk Factors." Moreover, we may from time
to time make "forward looking statements" about matters described herein or
other matters concerning us. We disclaim any intent or obligation to update
"forward looking statements."
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, direct and indirect subsidiaries, and
affiliates. Rural/Metro Corporation, a Delaware corporation, is strictly a
holding company. All services, operations and management functions are provided
through its subsidiaries and affiliated entities.
For a discussion of certain risks associated with our business, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Report and, specifically, "Risk Factors" included
in such Item 7.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Founded in 1948, we are a leading provider of medical transportation and
related services, which include 911 emergency and non-emergency ambulance and
alternative transportation services to municipal, residential, commercial, and
industrial customers. We are organized as a Delaware corporation. We also
provide fire protection services and other safety and healthcare related
services, which include dispatch, fleet services, and home health services. We
believe we are the only multi-state provider of both ambulance and fire
protection services in the United States and that we rank among the largest
private-sector providers of ambulance and fire protection services in the world.
We currently serve approximately 400 communities in 26 states and the
District of Columbia. Revenues for these services are primarily derived from
fees charged for ambulance and fire protection services. Our domestic operations
generated revenues of approximately $471.6 million, $461.2 million, and $512.7
million in the fiscal years 2002, 2001 and 2000, respectively, and our
international operations generated revenues of approximately $25.4 million,
$43.1 million and $57.4 million for the same respective periods. See Note 16 to
our Consolidated Financial Statements for financial information regarding
revenues from our ambulance and fire protection services. Also, see a discussion
of the disposal of our foreign operations in our "Business - Urgent Home Medical
Care."
We provide ambulance services under contracts with governmental entities,
hospitals and other healthcare organizations. We primarily derive our revenue
under these contracts through reimbursements under private insurance programs
and government programs such as Medicare and Medicaid, as well as through fees
paid by patients utilizing our services. Fire protection services are provided
under contracts with municipalities, fire districts or other agencies or on a
subscription fee basis to individual homeowners or commercial property owners.
Medical transportation and related services and fire protection services
accounted for approximately 85% and 13%, respectively, of our revenue for the
fiscal year ended June 30, 2002, and 84% and 12%, respectively, of our revenue
for the fiscal year ended June 30, 2001.
We grew significantly from the late 1970s through the late 1990s through
internal growth and acquisitions. This growth, consisting mainly of acquisitions
in the 1990s as part of a consolidation of the domestic ambulance industry,
provided us with significant market presence throughout the United States and
parts of Latin America. To manage this growth, we invested in the development of
management and operational systems that have resulted in productivity gains.
While we believe that our prior growth strategy has created a strong platform of
core businesses, commencing in fiscal year 2000, we focused on strengthening
those core businesses and improving economies of scale. This focus included: (i)
sustaining and enhancing positive cash performance, (ii) improving the quality
and collection of revenue, (iii) selective growth through expansion in existing
service areas, and (iv) development of regional new-growth opportunities. Our
current business strategy includes continued emphasis on these focal points and
on delivering high-quality, efficient and effective services to our customers.
INDUSTRY OVERVIEW
MEDICAL TRANSPORTATION BUSINESS
Based on generally available industry data, it is estimated that annual
expenditures for ambulance services in the United States are between $7 billion
and $10 billion. The medical transportation industry in the United States is
segmented into two market types: emergency and non-emergency services.
Public-sector entities, private companies, hospitals, and volunteer
organizations provide ambulance services. Public-sector entities often serve as
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the first responder to requests for such emergency ambulance services and often
provide emergency medical transportation. When the public sector serves as first
responder, private sector companies often serve as the second responder and
support the first responder as needed. The private sector provides the majority
of non-emergency ambulance services. It is estimated that the ambulance service
industry includes approximately 12,000 service providers including approximately
1,500 private providers, 1,200 hospital-owned providers, 2,600 non-profit
entities, 2,700 government-owned providers, and 4,000 providers operated by fire
departments. Most commercial providers are small companies serving one or a
limited number of markets. Several multi-state providers, including us, have
emerged through the acquisition and consolidation of smaller ambulance service
providers in recent years.
FIRE PROTECTION BUSINESS
Municipal fire departments, tax-supported fire districts, and volunteer
fire departments constitute the principal providers of fire protection services
in the United States. In most of the communities served by municipal fire
departments and tax-supported fire districts, the fire department is the first
to respond to a call for emergency medical services. Approximately 27,000
volunteer fire departments operate throughout the United States. Volunteer fire
departments range from departments consisting entirely of volunteer personnel to
departments that utilize one or more paid personnel located at each station
supplemented by volunteers who proceed directly to the fire scene. In addition
to providing fire protection services to municipalities and tax-supported fire
districts, we and other members of the private sector provide fire protection
services to large industrial complexes, airports, petrochemical plants, power
plants and other self-contained facilities. We also provide wildland fire
fighting services on a seasonal basis as requested by various forestry and
governmental agencies.
Based on our experience, we believe that our ambulance and fire protection
services are complementary and benefit us by providing diversification, shared
resources, experience and competitive advantages in certain service areas.
HISTORICAL GROWTH IN MEDICAL TRANSPORTATION SERVICE EXPENDITURES; PRIMARY DEMAND
FACTORS
Medical transportation service expenditures in the United States have grown
as a result of an increase in the number of transports and an increase in the
average expenditures per transport. Several primary factors are cited for the
increase and continued demand of the emergency and non-emergency transportation
services we provide:
* The U.S. population is aging. Persons over the age of 65 years
generally require more frequent hospital and ambulance services. The
need for ambulance services is increasing with the aging of the Baby
Boom population; about 62 million Americans will be age 65 or older in
2025 compared to 35 million today. Such increase in demand affects all
of our operations and is more pronounced in operations such as Arizona
and Florida that serve higher concentrations of the elderly
population.
* Size, growth and geographic distribution of the population also impact
the medical transportation industry. Local population increases and
urban sprawl create added demand for medical transportation services
and a steady, corresponding growth rate. Moreover, there is an
increased incidence in the level of health and accident risks
associated with a growing population. In most cases, we believe that
the current assets and resources of our existing operations can
service the demand created by this growth, without need for
significant additional capital expenditures.
* The increased availability of 911 emergency service, the impact of
educational programs on its use, and the frequency by which some
members of the population utilize hospital emergency rooms for medical
care also have increased the number of ambulance transports.
* Increased patient travel between specialized treatment health care
facilities has increased the demand for emergency and non-emergency
medical transportation services.
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* The greater use of outpatient care facilities and home care in
response to health care cost containment efforts also has increased
medical transport usage.
* The continuing demand for highly responsive emergency services, driven
by regulatory and market forces, has further necessitated an increase
in expenditures to maintain and enhance emergency medical systems.
High-quality medical care and response time criteria require ambulance
service providers to acquire sophisticated emergency medical, dispatch
and related systems and equipment, recruit and retain highly trained
personnel, and create advanced emergency management protocols. Average
expenditures per transport have increased incrementally as a result of
the additional costs to meet these criteria and maintain
high-performance systems.
We believe that we are well situated to capitalize on the needs of the
industry due to our emphasis on providing an effective, quality-care, service
model, as enhanced by cost-efficiencies and centralized support functions from
both local and national economies of scale.
CONSOLIDATION OF THE MEDICAL TRANSPORT INDUSTRY
During the 1990s, the fragmented nature of the medical transportation
industry, combined with limited capital and management systems that typified
many smaller providers, offered an opportunity to consolidate the industry with
the goal of achieving improved productivity and enhanced levels of service. As a
result, we and several other entities began consolidating the ambulance industry
through mergers and acquisitions of smaller providers. Thereafter, as the
industry became less fragmented and acquisition opportunities diminished, the
number of acquisitions slowed. The larger consolidators, such as American
Medical Response (AMR) and, to a lesser extent, Rural/Metro Corporation,
incurred significant debt in order to compete for acquisition targets and
subsequently fund integration. Accordingly, we are a highly leveraged company
and face certain risk factors related to our debt structure. See Risk Factors -
"We have significant indebtedness." However, we believe that our timely
participation in the consolidation of the industry has provided us with a strong
domestic platform of core operations with a substantial revenue base and a
marketable reputation for quality service, which enables us to capitalize on our
position as a leader in the industry and build upon our business in existing
service areas.
COMPETITION
The medical transportation service industry continues to be highly
competitive, notwithstanding the consolidation of the 1990s. Principal
participants include governmental entities (including fire districts), other
national ambulance service providers, large regional ambulance service
providers, hospitals, and numerous local and volunteer private providers.
Counties, municipalities, fire districts, hospitals, or health care
organizations that presently contract for ambulance services may choose to
provide ambulance services directly in the future. In addition, many of our
contracts with governmental entities contain termination provisions for cause or
without cause. Some of our competitors may have greater capital and other
resources than we do and may not be subject to the same level of regulatory
oversight as we are. We are experiencing increased competition from municipal
fire departments in providing emergency ambulance service. However, we believe
that the non-emergency transport services market currently is unattractive to
municipal fire departments.
We believe that counties, fire districts, and municipalities consider
quality of care, historical response time performance, and cost to be among the
most important factors in awarding a contract, although other factors, such as
customer service, financial stability, and personnel policies and practices,
also may be considered. Although commercial providers often compete intensely
for business within a particular community, it is generally difficult to
displace a provider that has a history of satisfying the quality of care and
response time performance criteria established within the service area.
Moreover, significant start-up costs, together with the long-term nature of the
contracts under which services are provided and the relationships many providers
have within their communities, create barriers for entry into new markets other
than through acquisition. We further believe that our status as a 911 provider
in a service area increases our visibility and stature, and enhances our ability
to compete for non-emergency services within such areas. Because smaller
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ambulance providers typically do not have the infrastructure to provide 911
services, we believe we can compete favorably with such competitors for
non-emergency ambulance services contracts in areas where we also provide 911
services.
In the fire protection industry, services for residential and commercial
properties are provided primarily by tax-supported fire districts, municipal
fire departments, and volunteer departments. Private providers, like us,
represent a small portion of the total fire protection market and generally
provide fire protection services where a tax-supported fire district or
municipality has decided to contract for the provision of fire protection
services or has not assumed financial responsibility for fire protection. Fire
districts or municipalities may not continue to contract for fire protection
services. In certain areas where no governmental entity has assumed financial
responsibility for providing fire protection, we provide fire protection
services on a subscription basis. Municipalities may annex a subscription area
or that area may be converted to a fire district that provides service directly,
rather than through a master contract. As demonstrated by our attainment of new
contracts in the areas of industrial fire and airport rescue and fire fighting,
we believe there are growth opportunities within these markets. Additionally, we
believe our effort to grow this business has helped improve the overall
collectibility of our revenue due to the greater predictability of fees received
from fire protection service contracts.
MARKET REFORM AND CHANGING REIMBURSEMENT REGULATIONS
Market reform and the passage of the Balanced Budget Act of 1997, along
with other regulatory changes, have impacted and reshaped the health care
delivery system in the United States and, by extension, the medical
transportation industry. As with all other health care providers, emergency
medical service providers, like us, must comply with various requirements in
order to participate in Medicare and Medicaid. Medicare is a federal health
insurance program for the elderly and for chronically disabled individuals,
which, among other things, pays for ambulance services when medically necessary.
Medicare uses a charge-based reimbursement system for ambulance services and
reimburses 80% of charges determined to be reasonable, subject to the limits
fixed for the particular geographic area. The patient is responsible for co-pay
amounts, deductibles and the remaining balance, if we do not accept assignment,
and Medicare requires us to expend reasonable efforts to collect the balance. In
determining reasonable charges, Medicare considers and applies the lowest of
various charge factors, including the actual charge, the customary charge, the
prevailing charge in the same locality, the amount of reimbursement for
comparable services, or the inflation-indexed charge limit.
Medicaid is a combined federal-state program for medical assistance to
impoverished individuals who are aged, blind, or disabled or members of families
with dependent children. Medicaid programs or a state equivalent exist in all
states in which we operate. Although Medicaid programs differ in certain
respects from state to state, all are subject to federal requirements. State
Medicaid agencies have the authority to set levels of reimbursement within
federal guidelines. We receive only the reimbursement permitted by Medicaid and
are not permitted to collect from the patient any difference between our
customary charge and the amount reimbursed.
Like other Medicare and Medicaid providers, we are subject to governmental
audits of our Medicare and Medicaid reimbursement claims. We take our compliance
responsibilities very seriously. We have a national corporate compliance
department that works closely with senior management, local managers, billing
and collections personnel, and both the human resources and legal departments,
as well as governmental agencies to ensure substantial compliance with all
established regulations and procedures. Nevertheless, despite our best efforts,
there can be no assurance that we can achieve 100% compliance at all times,
particularly in light of the complicated and ever-changing nature of the
reimbursement regulations, and the high volume of daily transports we provide
nationwide. Failure to comply may lead to a significant penalty or lower levels
of reimbursement, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. From time to time, we
have taken corrective action to address billing inconsistencies, which we have
identified through our periodic, internal audits of billing procedures or which
have been brought to our attention through governmental examination of our
records and procedures. These matters cover periods prior to and after our
acquisition of operations. As part of our commitment to working with those
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governmental agencies responsible for enforcement of Medicare and Medicaid
compliance, we have voluntarily self-disclosed billing issues identified at some
of our operations. We self disclosed billing inconsistencies from 1997 and 1998
in our Scranton, Pennsylvania operations to the Office of Inspector General,
which had been instituted by the former owners of that operation and continued
by us until new billing practices were established and the inconsistencies were
discovered. We also entered into, and are currently in compliance with, a
corporate integrity agreement with the State of Ohio in connection with the
State's review of our Medicaid billing procedures and records. Due to the nature
of our business and our participation in the Medicare and Medicaid reimbursement
programs, we are involved in several pending regulatory reviews and/or inquiries
by governmental agencies. We expect these and other regulatory agencies to
continue their practice of performing periodic reviews related to our industry.
We fully cooperate with such federal and state agencies to provide requested
information and to incorporate any recommended modifications of our existing
compliance programs.
Government funding for health care programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
determinations by intermediaries and governmental funding restrictions, all of
which could materially impact program reimbursements for ambulance services. In
recent years, Congress has consistently attempted to curb federal spending on
such programs. In June 1997, the Health Care Financing Administration, now
renamed the Center for Medicare and Medicaid Services (CMS), issued proposed
rules that would revise Medicare policy on the coverage of ambulance services.
The proposed rules were the result of a mandate under the Balanced Budget Act of
1997 to establish a national fee schedule for payment of ambulance services that
would control increases in expenditures under Part B of the Medicare program,
establish definitions for ambulance services that link payments to the type of
services furnished, consider appropriate regional and operational differences,
and consider adjustments to account for inflation, among other provisions.
On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became
effective. The Final Rule categorizes seven levels of ground ambulance services,
ranging from basic life support to specialty care transport, and two categories
of air ambulance services. The base rate conversion factor for services to
Medicare patients was set at $170.54, plus separate mileage charges based on
specified relative value units for each level of ambulance service. Adjustments
also were included to recognize differences in relative practice costs among
geographic areas, and higher transportation costs that may be incurred by
ambulance providers in rural areas with low population density. The Final Rule
requires ambulance providers to accept the assigned reimbursement rate as full
payment, after patients have submitted their deductible and 20 percent of
Medicare's fee for service. In addition, the Final Rule calls for a five-year
phase-in period to allow time for providers to adjust to the new payment rates.
The fee schedule will be phased in at 20-percent increments each year, with
payments being made at 100 percent of the fee schedule in 2006 and thereafter.
We believe the Medicare Ambulance Fee Schedule will cause a neutral impact
on our medical transportation revenue at incremental and full phase-in periods,
primarily due to the geographic diversity of our U.S. operations. These rules
could, however, result in contract renegotiations or other actions by us to
offset any negative impact at the regional level that could have a material
adverse effect on our business, financial condition, cash flows and results of
operations. Changes in reimbursement policies, or other governmental action,
together with the financial challenges of some private, third-party payers and
budget pressures on other payer sources could influence the timing and,
potentially, the receipt of payments and reimbursements. A reduction in coverage
or reimbursement rates by third-party payers, or an increase in our cost
structure relative to the rate increase in the Consumer Price Index (CPI), or
costs incurred to implement the mandates of the fee schedule could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations.
OTHER GOVERNMENTAL REGULATIONS
Our business is also subject to other governmental regulations at the
federal, state, local, and foreign levels. At the federal level, we are subject
to regulations under the Occupational Safety and Health Administration (OSHA)
6
designed to protect our employees and regulations under the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) which protects the privacy of
patients' health information handled by health care providers. The federal
government also recommends standards for ambulance design and construction,
medical training curriculum, and designation of appropriate trauma facilities
and regulates our radio licenses. Various state agencies may modify these
standards or require additional standards.
Each state where we operate regulates various aspects of its ambulance and
fire business. These regulations may vary widely from state to state. State
requirements govern the licensing or certification of ambulance service
providers, training and certification of medical personnel, the scope of
services that may be provided by medical personnel, staffing requirements,
medical control, medical procedures, communication systems, vehicles, and
equipment. State or local government regulations or administrative policies
regulate rate structures in most states in which we conduct ambulance
operations. The process of determining rates includes cost reviews, analyses of
levels of reimbursement from all sources, and determination of reasonable
profits. In certain service areas in which we are the exclusive provider of
services, the municipality or fire district sets the rates for emergency
ambulance services pursuant to a master contract and establishes the rates for
general ambulance services that we are permitted to charge.
Applicable federal, state, local, and foreign laws and regulations are
subject to change. We believe that we currently are in substantial compliance
with applicable regulatory requirements. These regulatory requirements, however,
may require us in the future to increase our capital and operating expenditures
in order to maintain current operations or initiate new operations. See "Risk
Factors --Certain state and local governments regulate rate structures and limit
rates of return," "-- Numerous governmental entities regulate our business," and
"-- Health care reforms and cost containment may affect our business" contained
in Item 7 of this Report.
OUR CURRENT SERVICE AREAS
We currently provide our services in approximately 400 communities in the
following 26 states and the District of Columbia:
Alabama Iowa New York Tennessee
Arizona Kentucky North Dakota Texas
California Louisiana Ohio Virginia
Colorado Maryland Oregon Washington
Florida Mississippi Pennsylvania Wisconsin
Georgia Nebraska South Carolina
Indiana New Jersey South Dakota
We provide ambulance services in each of these states, including the
District of Columbia, primarily under the names Rural/Metro Ambulance or
Rural/Metro Medical Services and in certain areas of Arizona under the name
Southwest Ambulance, except in Oregon, North Dakota and Wisconsin where we
exclusively provide fire protection services. We also operate under other names
depending upon local statutes or contractual agreements. We provide fire
protection services under the name Rural/Metro Fire Department in 12 states, and
in Oregon also under the name Valley Fire Services.
We generally provide our ambulance services pursuant to a contract or
certificate of necessity on an exclusive or nonexclusive basis. We provide 911
emergency ambulance services primarily pursuant to contracts or as a result of
providing fire protection services. In certain service areas, we are the only
provider of both emergency ambulance and non-emergency ambulance services. In
other service areas, we compete for non-emergency ambulance contracts.
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MEDICAL TRANSPORTATION SERVICES
EMERGENCY AMBULANCE SERVICES
We generally provide emergency ambulance response and medical
transportation services pursuant to contracts with counties, fire districts, and
municipalities. These contracts typically appoint us as the exclusive provider
of 911 emergency ambulance services in designated service areas and require us
to respond to every 911 emergency medical call in those areas. The level of
response to the call is dependent upon the underlying contract. We typically
respond to virtually all 911 calls with Advanced Life Support (ALS) ambulance
units, unless otherwise specified by contract.
ALS ambulances are staffed with either two paramedics or one paramedic and
an emergency medical technician (EMT) and are equipped with ALS equipment (such
as cardiac monitors, defibrillators, advanced airway equipment and oxygen
delivery systems) as well as pharmaceuticals and medical supplies.
Upon arrival at an emergency, the ALS crew members deploy portable life
support equipment, ascertain the patient's medical condition, and, if required,
administer advanced life support techniques and procedures that may include
tracheal intubation, cardiac monitoring, defibrillation of cardiac arrhythmias,
and the administration of medications and intravenous solutions under the
direction of a physician. The crew also may perform Basic Life Support (BLS)
services, which include cardiopulmonary resuscitation (CPR), basic airway
management, and basic first aid including splinting, spinal immobilization,
recording of vital signs and other non-invasive procedures. As soon as medically
appropriate, the patient is placed on a portable gurney and transferred into the
ambulance. While one crew member monitors and treats the patient, the other crew
member drives the ambulance to a hospital designated either by the patient or
the applicable medical protocol. While on scene or en route, the ambulance crew
alerts the hospital regarding the patient's medical condition, and if necessary,
the attending ambulance crew member seeks advice from an emergency physician as
to treatment. Upon arrival at the hospital, the patient generally is taken to
the emergency department where care is transferred to the emergency department
staff.
NON-EMERGENCY AMBULANCE SERVICES
We also provide ambulance services to patients requiring either advanced or
basic levels of medical supervision and treatment during transfer to and from
residences, hospitals, long-term care centers, and other health care facilities.
These services may be provided when a home-bound patient requires examination or
treatment at a health care facility or when a hospital inpatient requires tests
or treatments (such as MRI testing, CAT scans, dialysis, or chemotherapy) at
another facility. We utilize ALS or BLS ambulance units to provide non-emergency
ambulance services, depending on the patient's needs and the proximity of
available units. We generally staff our BLS ambulance units with two EMTs and
equip these units with medical supplies and equipment necessary to administer
first aid and basic medical treatment.
We provide ambulance services, critical care transports, and non-medical
transportation services pursuant to contracts with governmental agencies, health
care facilities, or at the request of a patient. Such services may be scheduled
in advance or provided on an as-needed basis. Contracts with managed care
organizations provide for reimbursement on a per-transport basis or on a
capitated basis under which we receive a fixed fee, per person, per month.
CRITICAL CARE TRANSPORT SERVICES
We provide critical care transport services to medically unstable patients
(such as cardiac patients and neonatal patients) who require critical care while
being transported between health care facilities. Critical care services differ
from ALS services in that the ambulance may be equipped with additional medical
equipment and may be staffed by a medical specialist provided by us or by a
health care facility to attend to a patient's special medical needs. Typically,
8
staffing may include the use of critical case trained professional nurses,
respiratory therapists and/or neo-natal nurse specialists.
ALTERNATIVE TRANSPORT SERVICES
In addition to ambulance services, we provide non-medical transportation
for the handicapped and certain non-ambulatory persons in very limited service
areas. Such transportation generally takes place between residences or nursing
homes and hospitals or other health care facilities. In providing this service,
we typically utilize vans that contain hydraulic wheelchair lifts or ramps.
DISASTER RESPONSE TEAMS
Aside from our day-to-day operations, we maintain disaster response teams
that are occasionally called upon by the federal government, through the Federal
Emergency Management Agency (FEMA), and by state, county and local governments
to assist in responding to local or national fire and medical emergencies. For
example, at the request of FEMA and the New York State Emergency Management
Office, we provided assistance for the efforts in New York City following the
September 11, 2001 terrorist attacks. We staff these emergencies based upon
available resources from our existing pool of employees and equipment around the
country, committing resources in a manner that is designed to avoid any
interruption of service in our existing service areas. Such services are
typically paid for and provided on a fee-for-service basis pursuant to contracts
with the requesting agency or governmental entity.
URGENT HOME MEDICAL CARE
Due to the deteriorating economic conditions and continued devaluation of
the local currency, we reviewed our strategic alternatives with respect to the
continuation of operations in Latin America, including Argentina and Bolivia,
and determined that we would benefit from focusing on our domestic operations.
Effective September 27, 2002, we sold our Latin American operations to local
management. The following describes the type of revenue that is included in the
accompanying Consolidated Financial Statements related to our operations in
Latin America.
In Argentina, individual and business customers prepay monthly for urgent
home medical care and ambulance services. Personnel conduct telephone triage and
prioritize the dispatch of services to subscribers. Mobile services may include
the dispatch of physicians to the patient in an ambulance for serious,
life-threatening situations, or more frequently, in the physician's car, thus
covering a wider scope of service than the traditional U.S. ambulance service
model.
In Argentina, doctors and nurses perform urgent and primary care services
for our business customers. Argentine doctors are trained in medicine and are
licensed as such in Argentina at both the national and, in certain localities,
the local level. There are no continuing education requirements. Generally,
nurses are trained over periods ranging from six months to four years after high
school in accordance with local programs. Accordingly, as each nurse receives
additional training, his or her scope of practice increases.
MEDICAL PERSONNEL AND QUALITY ASSURANCE
Paramedics and EMTs must be state certified in order to transport patients
and to perform emergency care services. Certification as an EMT requires
completion of a minimum of 164 hours of training in a program designated by the
United States Department of Transportation and supervised by state authorities.
EMTs also may complete advanced training courses to become certified to provide
certain additional emergency care services, such as administration of
intravenous fluids and advanced airway management. In addition to completion of
the EMT training program, the certification as a paramedic requires the
completion of more than 800 hours of training in advanced patient care
assessment, pharmacology, cardiology, and clinical and field skills. Many of the
paramedics currently employed by us served as EMTs for us prior to their
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certification as paramedics. We are subject to nationwide and area-wide
shortages of qualified EMTs and paramedics. We compete with hospitals, municipal
fire departments and other health care providers for these valued individuals.
We have undertaken efforts to minimize the effect of these shortages and have
implemented a number of programs to retain and attract a quality workforce.
Local physician advisory boards and medical directors develop medical
protocols to be followed by paramedics and EMTs in a service area. In addition,
instructions are conveyed on a case-by-case basis through direct communications
between the ambulance crew and hospital emergency room physicians during the
administration of advanced life support procedures. Both paramedics and EMTs
must complete continuing education programs and, in some cases, state supervised
refresher training examinations to maintain their certifications. Certification
and continuing education requirements for paramedics and EMTs vary among states
and counties.
We maintain a commitment to provide high quality pre-hospital emergency
medical care. In each location in which we provide services, a medical director,
who usually is a physician associated with a hospital we serve, monitors
adherence to medical protocol and conducts periodic audits of the care provided.
In addition, we hold retrospective care audits with our employees to evaluate
compliance with medical and performance standards.
We are members of a number of other professional organizations, namely, the
American Ambulance Association, National Emergency Number (911) Association,
American College of Emergency Physicians and National Association of EMS
Physicians. In those states where we provide service, we are involved in the
state ambulance association, if one exists, and in many instances our
involvement includes holding elected positions. In addition, many of our
employees are members of the National Association of EMTs, National Association
of EMS Educators and other EMS organizations. We were one of the first ambulance
service providers to obtain accreditation for many of our larger ambulance
operations from the Commission on Accreditation of Ambulance Services, a joint
program between the American Ambulance Association and the American College of
Emergency Physicians. The process is voluntary and evaluates numerous
qualitative factors in the delivery of services. We believe municipalities and
managed care providers may consider accreditation as one of the criteria in
awarding contracts in the future.
FIRE PROTECTION SERVICES
Fire protection services consist primarily of fire prevention, fire
suppression, and first responder medical care. We provide various levels of fire
protection services, ranging from fire stations that are fully staffed 24 hours
per day to reserve stations. We generally provide our services to municipalities
and other governmental bodies pursuant to master contracts funded through the
tax base and to residences, commercial establishments, and industrial complexes
pursuant to subscription fee and other fee-for-service arrangements. Federal and
state governments contract with us from time to time to suppress wildfires on
government lands.
We have placed fire prevention and education in the forefront of our fire
protection services and have developed a comprehensive program to prevent and
minimize fires. We believe that effective fire protection requires the intensive
training of personnel, the effective utilization of fire equipment, the
establishment of effective communication centers for the receipt of emergency
calls and the dispatch of equipment and personnel, the establishment and
enforcement of strict fire codes, and community educational efforts. Based upon
generally available industry data, we believe that fire loss per capita in our
primary fire areas has been substantially less than the national average.
FIRE PROTECTION PERSONNEL
Our ability to provide our fire protection services at relatively low costs
results from our efficient use of personnel in addition to our fire prevention
efforts. Typically, personnel costs represent more than two-thirds of the cost
of providing fire protection services. We have been able to reduce our labor
costs through a system that utilizes full-time firefighters complemented by paid
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part-time reservists as well as a modified every other day shift schedule. By
using trained reservists on an as-needed basis, we have the ability to
supplement full-time firefighters on a cost-effective basis.
All full-time and reserve firefighters undergo extensive training, which
exceeds the standards recommended by the National Fire Protection Association
(NFPA), and must qualify for state certification before being eligible for
full-time employment by us. Because approximately 70% to 80% of our fire
response activity consists of emergency medical response, all of our
firefighters are trained EMTs or paramedics. Ongoing training includes
instruction in new fire service tactics and fire fighting techniques as well as
continual physical conditioning.
FIRE RESPONSE
An alarm typically results in the dispatch of one or more engine companies
(each of which consists of an engine and two to four firefighters, including a
captain), a fire chief, and such other personnel and equipment as circumstances
warrant. The amount of equipment and personnel depends upon the type, location,
and severity of the incident. We utilize our dispatch capabilities to reposition
equipment and firefighters to maximize the availability and use of resources in
a cost-effective manner.
FIRE PREVENTION
We believe that fire prevention programs result in both lower fire loss and
significant overall cost savings. Our fire prevention programs include
recommendations for and the encouragement of various fire prevention methods,
including fire code design, building design to inhibit the spread of fire, the
design of automatic fire suppression sprinklers, fire detector and smoke
detector installations, the design of monitoring and alarm systems, the
placement and inspection of fire hydrants, fire code inspection and enforcement,
and the determination of fire cause and origin in arson suspected fires. In
addition, our personnel perform community education programs designed to reduce
the risk of fire and increase our community profile.
We believe that our long-standing public/private relationship with the City
of Scottsdale provides an example of an effective, cost-efficient fire
protection program. The Scottsdale program emphasizes our philosophy of fire
prevention. With our cooperation and assistance, the City of Scottsdale has
designed comprehensive fire prevention measures, including fire codes,
inspections, and sprinkler and smoke detector ordinances. We believe that as a
result of strict fire codes, the enactment of a sprinkler ordinance, and the
effectiveness of the services we provide, Scottsdale's per capita cost for fire
protection is lower than for other cities of similar size.
WILDLAND FIRE PROTECTION SERVICES
We provide disaster response fire protection services when requested by the
federal government, through the U.S. Forest Service, and other governmental
entities to assist in responding to fire emergencies such as the multiple wild
land fires that occurred during the past year in the western United States. We
staff these emergencies based upon available resources from our existing pool of
employees and equipment around the country, committing resources in a manner
that is designed to avoid any interruption of service in our existing service
areas. Such services are typically paid for and provided on a fee-for-service
basis pursuant to contracts with the requesting agency or governmental entity.
INDUSTRIAL FIRE PROTECTION SERVICES
We provide fire protection services and, on a limited basis, unarmed
security services to large industrial complexes, petrochemical plants, power
plants, and other self-contained facilities. The combination of fire protection
services with security services in large industrial complexes has the potential
to provide for greater efficiency and utilization in the delivery of such
services and to result in reduced cost to our industrial customers for such
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services. We have contracts ranging up to five years in duration and expiring at
various dates up June 30, 2005 to provide firefighting and hazardous materials
response services at locations in several states. We intend to pursue similar
contracts in the future.
AIRCRAFT, RESCUE AND FIRE FIGHTING SERVICES (ARFF)
We also provide aircraft rescue and firefighting services at a variety of
airports throughout the United States, including the FedEx Express airport hub
in Memphis, Tennessee, and the international airport in Port Columbus, Ohio. In
addition to aircraft rescue and fire fighting services, we also provide
structural firefighting and emergency medical response for airport terminals.
Our ARFF firefighters, many of whom have extensive military and civilian ARFF
experience, have completed comprehensive professional training programs. Our
personnel are cross-trained as emergency medical technicians or paramedics, as
well as in hazardous materials response. Our capabilities include value-added
services such as first responder medical service in support of local fire
departments for in-terminal medical emergencies, safety training for fuel
handlers and other airport personnel, and fire prevention activities. We intend
to continue to grow this aspect of our business strategically through
competitive proposals and bidding processes.
CONTRACTS
We enter into contracts with counties, municipalities, fire districts, and
other governmental entities to provide 911 emergency ambulance services in
designated service areas. These contracts typically specify maximum fees that we
may charge and set forth required criteria, such as response times, staffing
levels, types of vehicles and equipment, quality assurance, indemnity and
insurance coverage. In certain instances, we are required by contract or by law
to post a surety bond or other assurance of financial or performance
responsibility. The rates that we may charge under a contract for emergency
ambulance services depends largely on patient mix; the nature of services
rendered; the local political climate; and the amount of subsidy, if any, that
will be considered by a governmental entity to cover costs of uncompensated
care. Our four largest ambulance contracts accounted for approximately 11% of
total revenue during fiscal year 2002, 10% of total revenue during fiscal year
2001, and 9% of total revenue during fiscal year 2000.
We provide fire protection services pursuant to master contracts or on a
subscription basis. Master contracts provide for negotiated rates with
governmental entities. Certain contracts are performance-based and require us to
meet certain dispatch and response times in a certain percentage of responses.
These contracts also set maximum thresholds for variances from the performance
criteria. These contracts establish the level of service required and may
encompass fire prevention and education activities as well as fire suppression.
Other contracts are level-of-effort based and require us to provide a certain
number of personnel for a certain time period for a particular function, such as
fire prevention or fire suppression. We provide fire protection services on a
subscription basis in areas where no governmental entity has assumed the
financial responsibility for providing fire protection. We derived approximately
46% of our fire protection service revenue from subscriptions in fiscal year
2002, 45% in fiscal year 2001, and 45% in fiscal year 2000. Fire subscription
rates are not currently regulated by any governmental agency in our service
areas.
Our contracts generally extend for terms of two to five years. We attempt
to renegotiate contracts in advance of the expiration date and generally have
been successful in these renegotiations. We monitor our performance under each
contract. From time to time, we may decide that certain contracts are no longer
favorable and may seek to modify or terminate these contracts. At any given
time, we estimate that we have approximately 125 agreements with counties, fire
districts, and municipalities for ambulance services and for fire protection
services. The following table sets forth certain information regarding our six
largest contracts, based on revenue, at June 30, 2002 with counties, fire
districts, and municipalities for ambulance services and for fire protection
services.
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TERM IN
YEARS EXPIRATION DATE TYPE OF SERVICE(1)
----- --------------- ------------------
Ambulance
Orange County, Florida (2)...... 4 October 2006 911/General
Rochester, New York (3)......... 4 September 2006 911/General
Knox County, Tennessee (4)...... 5 July 2007 911/General
Fort Worth, Texas (5)........... 5 August 2004 911/General
Community Fire
Scottsdale, Arizona (6)......... 3 June 2005 Fire Protection
Public/Private Alliance
San Diego, California (7)....... 5 June 2005 911/General
- ----------
(1) Type of service for ambulance contracts indicates whether 911 emergency or
general ambulance services or both are provided within the service area.
(2) The contract was first entered into in 1962 by a provider that was acquired
by us in July 1984.
(3) The contract was first entered into in 1988 by a provider that was acquired
by us in May 1994.
(4) The contract was first entered into in July 1985.
(5) The contract was first entered into in August 1999.
(6) The contract was first entered into in 1952 by us.
(7) The contract was first entered into in May 1997 and is effective through
June 2005. The contract has a three-year renewal option exercisable by our
customer.
In addition to the six largest contracts, based on revenue, listed above,
we were awarded several significant contracts during fiscal year 2002:
CSA-17, INCLUDING DEL MAR, RANCHO SANTA FE, ENCINITAS AND SOLANA BEACH IN
NORTHERN SAN DIEGO COUNTY, CALIFORNIA - San Diego Medical Services Enterprise,
L.L.C., our partnership with the City of San Diego, was awarded the exclusive,
911 ambulance transportation contract to provide emergency services to these
four communities, which comprise County Service Area 17. The contract is
estimated to generate approximately $2 million of annual revenue and includes
two, two-year renewal options at the discretion of the contracting authority.
Service began Sept. 1, 2001.
CORNING, NEW YORK - We were awarded a new, three-year contract in January 2002
to continue providing exclusive ambulance services to the City of Corning, New
York. The contract is estimated to generate approximately $1 million of annual
revenue and extends our 50-year history as an ambulance provider in the Corning
area.
YOUNGSTOWN, OHIO - We were awarded a two-year contract that began March 1, 2002
to continue as the exclusive provider of 911 emergency ambulance services in
Youngstown, Ohio. The contract is expected to generate approximately $1.3
million of annual revenue.
UNIVERSITY OF COLORADO HEALTH SCIENCES CENTER - We extended the services we
provide to the University of Colorado Health Sciences Center through two new
contracts that began July 1, 2001. Under a new, five-year contract we provide
critical care transport services to the hospital's campuses and treatment
facilities. We simultaneously renewed our contract to provide non-emergency
ambulance transportation to the Health Science Center and related facilities for
an additional five years. The contracts are expected to generate approximately
$1.3 million of annual revenue.
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CITGO PETROLEUM CORPORATION - Our specialty fire division continues to provide
industrial fire protection services to Citgo Petroleum's Lake Charles, Louisiana
refinery under a new, three-year contract that began July 1, 2002. The contract
is expected to generate approximately $1.2 million of annual revenue.
Additionally, we were awarded the following significant contract during
fiscal year 2002 under which we will begin to provide services in fiscal year
2003:
FORSYTH COUNTY, GEORGIA - We were awarded an exclusive, five-year contract to
provide 911 emergency ambulance services beginning July 1, 2002. The contract,
which is expected to generate approximately $2.4 million of annual revenue ,
provides for automatic annual renewals and includes a yearly subsidy paid by the
county to cover costs that arise due to uncompensated care.
We also enter into contracts with hospitals, nursing homes, and other
health care facilities to provide non-emergency and critical care ambulance
services. These contracts typically designate us as the preferred ambulance
service provider contacted to provide non-emergency ambulance services to those
facilities and typically permit us to charge a base fee, mileage reimbursement,
and additional fees for the use of particular medical equipment and supplies. We
provide a discount in rates charged to facilities that assume the responsibility
for payment of the charges to the persons receiving services. At any given time,
we have approximately 1,000 agreements with counties, fire districts,
municipalities, airports, hospitals, health care facilities, nursing homes, and
other contracting entities for ambulance services or for fire protection
services.
During fiscal years 2000 and 2001, in connection with our domestic EMS
restructuring initiative, we renegotiated a number of contracts where the rates,
services or market conditions were not conducive to operational profitability.
Additionally, we exited certain contracts in connection with the closure or
downsizing of financially under-performing service areas, the majority of which
solely provided non-emergency ambulance services and which could not meet our
financial performance criteria on a sustained basis. In each situation where we
have closed a service area, our operational teams have endeavored to ensure that
an orderly transition occurs with no service interruptions. In many areas, we
worked closely with the community, local governmental entities and alternative
providers until our departure date, which in some cases extended for a number of
months so that the transition could be properly effectuated. We believe that our
actions under these circumstances are consistent with our commitment and
reputation as a dependable, high-quality service provider. See "Risk Factors --
We depend on certain business relationships" contained in Item 7 of this Report.
Counties, fire districts, and municipalities generally award contracts to
provide 911 emergency services either through requests for competitive proposals
or bidding processes. In some instances in which we are the existing provider,
the county or municipality may elect to renegotiate our existing contract rather
than re-bid the contract. We will continue to seek to enter into public/private
alliances to compete for new business. For example, during fiscal year 2002, our
alliance with San Diego Fire & Life Safety Services allowed the partnership to
bid for and win multi-year contracts to provide 911 and ambulance services
throughout the City of San Diego and Northern San Diego County.
We market our non-emergency medical transportation services to hospitals,
health maintenance organizations, convalescent homes, and other health care
facilities that require a stable and reliable source of medical transportation
for their patients. We believe that our status as a 911 provider in a designated
service area increases our visibility and enhances our marketing efforts for
non-emergency services in that area. Contracts for non-emergency services
usually are based on criteria (such as quality of care, customer service,
response time, and cost) similar to those in contracts for emergency services.
We further believe that our strategy to expand and strengthen regional
operations will better position us to serve the developing managed care market.
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We market our fire protection services to subscribers in rural and suburban
areas, volunteer staffed fire departments, tax-supported fire districts, and
large industrial complexes, petrochemical plants, power plants, and other
self-contained facilities. Contract and/or subscription fees are collected
annually in advance. In the event that we provide service for a non-subscriber,
we directly bill the property owner for the cost of services rendered. We also
provide fire protection services to newly developed communities where the
subscription fee may be included in the homeowner's association assessment.
MANAGEMENT INFORMATION SYSTEMS
We utilize sophisticated management information systems, which we believe
enhance the productivity of our existing operations. These systems permit us to
achieve efficiencies in the areas of billings, collections, purchasing,
accounting, cash management, human resources, compliance, informational systems,
legal, risk management, and in the utilization of personnel and equipment.
Our centralized systems significantly augment local processes and permit
managers to direct their attention primarily to the performance and growth of
their operations. Centralized billing and collection procedures provide for more
efficient tracking and collection of accounts receivable. Centralized purchasing
permits us to achieve discounts in the purchase of medical equipment and
supplies. Other centralized infrastructure components such as accounts payable,
legal, compliance, human resources and risk management provide the capability to
purchase related products and services on a company-wide basis, identify and
respond to company-wide trends, and provide internal support and administrative
services in a more cost-effective, efficient and consistent manner across all
operations. We provide and allocate costs for these centralized systems and
services pursuant to administrative services agreements with each of Rural/Metro
Corporation's direct and indirect wholly-owned subsidiaries. Accordingly, each
subsidiary's operational management has the ultimate responsibility and
decision-making authority for the utilization and direction of these corporate
services, so as to best serve the needs of their individual markets.
We believe our investment in management information systems and our
effective use of these systems represent key components of our success. Process
and personnel improvements in these areas are continuing. We are committed to
further strengthening the productivity and efficiency of our business and
believe that our management systems have the capability to support future
growth.
DISPATCH AND COMMUNICATIONS
We use system status plans and flexible deployment systems to position our
ambulances within a designated service area because effective fleet deployment
represents a key factor in reducing response times and efficient use of
resources. We analyze data on traffic patterns, demographics, usage frequency,
and similar factors with the aid of computers to help us determine optimal
ambulance deployment and selection. The center that controls the deployment and
dispatch of ambulances in response to calls for ambulance service may be owned
and operated either by the applicable county or municipality or by us. Each
control center utilizes computer hardware and software and sophisticated
communications equipment and maintains responsibility for fleet deployment and
utilization 24 hours a day, seven days a week.
Depending on the emergency medical dispatch system used in a designated
service area, the public authority that receives 911 emergency medical calls
either dispatches our ambulances directly from the public control center or
communicates information regarding the location and type of medical emergency to
our control center, which in turn dispatches ambulances to the scene. In most
service areas, our control center receives the call from the police after the
police have determined the call is for emergency medical services. When we
receive a 911 call, we dispatch one or more ambulances directly from our control
center while the call taker communicates with the caller. All call takers and
dispatchers are trained EMTs or Emergency Medical Dispatchers (EMD) with
additional training that enables them to instruct a caller on pre-arrival
emergency medical procedures, if necessary. In our larger control centers, a
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computer assists the dispatcher by analyzing a number of factors, such as time
of day, ambulance location, and historical traffic patterns, in order to
recommend optimal ambulance selection. In all cases, a dispatcher selects and
dispatches the ambulance. While the ambulance is en route to the scene, the
emergency medical team receives information concerning the patient's condition
prior to arrival at the scene. Also, in various operations across the country,
we use AVL (auto vehicle locator) in the vehicles to enhance our dispatch
system.
In the delivery of emergency ambulance services, our communication systems
allow the ambulance crew to communicate directly with the destination hospital
to alert hospital medical personnel of the arrival of the patient and the
patient's condition, and to receive instructions directly from emergency
department personnel on specific pre-hospital medical treatment. These systems
also facilitate close and direct coordination with other emergency service
providers, such as the appropriate police and fire departments that also may be
responding to a call.
Deployment and dispatch also represent important factors in providing
non-emergency ambulance services. We implement system status plans for these
services designed to assure appropriate response times to non-emergency calls.
We have developed extensive customer service models that enable our
communications centers to meet these customer needs. We have established such
procedures based on patient condition, specialized equipment needed, and the
level of care that will be required by the patient.
We utilize communication centers in our community fire protection
activities for the receipt of fire alarms and the dispatch of equipment and
personnel that are the same as or similar to those maintained for our ambulance
services. Response time represents an important criteria in the effectiveness of
fire suppression, which is dependent on the level of protection sought by our
customers in terms of fire station spacing, the size of the service area
covered, and the amount of equipment and personnel dedicated to fire protection.
BILLINGS AND COLLECTIONS
We currently maintain 12 domestic regional billing and payment processing
centers and a centralized private pay collection system at our headquarters in
Arizona. Invoices are generated at the regional level, and the account is
processed by the centralized collection system for private-pay accounts only if
payment is not received in a timely manner. Customer service is directed from
each of the regional centers. Substantially all of our revenue is billed and
collected through our integrated billing and collection system, except for our
operations in Rochester, New York and the New Jersey/Metro New York City area.
We derive a substantial portion of our ambulance fee collections from
reimbursement by third-party payers, including payments under Medicare,
Medicaid, and private insurance programs, typically invoicing and collecting
payments directly to and from those third-party payers. We also collect payments
directly from patients, including payments under deductible and co-insurance
provisions and otherwise. The composition of our domestic net ambulance fee
collections is as follows:
2002 2001 2000
---- ---- ----
Medicare ............................... 26% 25% 23%
Medicaid ............................... 12% 11% 11%
Private insurers ....................... 49% 51% 47%
Patients ............................... 13% 13% 19%
---- ---- ----
100% 100% 100%
==== ==== ====
Companies in the ambulance service industry maintain significant provisions
for doubtful accounts compared to companies in other industries. Collection of
complete and accurate patient billing information during an emergency service
call is sometimes difficult, and incomplete information hinders post-service
collection efforts. In addition, it is not possible for us to evaluate the
creditworthiness of patients requiring emergency transport services. Our
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allowance for doubtful accounts generally is higher with respect to revenue
derived directly from patients than for revenue derived from third-party payers
and generally is higher for transports resulting from 911 emergency calls than
for non-emergency ambulance requests. See "Risk Factors -- We depend on
reimbursements by third-party payers and individuals" contained in Item 7 of
this Report.
We have substantial experience in processing claims to third-party payers
and employ a billing staff specifically trained in third-party coverage and
reimbursement procedures. Our integrated billing and collection system uses
proprietary software to specifically tailor the submission of claims to
Medicare, Medicaid, and certain other third-party payers and has the capability
to electronically submit claims to the extent third-party payers' systems
permit. Our integrated billing and collection system provides for accurate
tracking of accounts receivable and status pending payment, which facilitates
the effective utilization of personnel resources to resolve workload
distribution and problematic invoices. When billing individuals, we sometimes
use an automated dialer that pre-selects and dials accounts based on their
status within the billing and collection cycle, which we believe optimizes the
efficiency of the collection staff.
State licensing requirements as well as contracts with counties,
municipalities, and health care facilities typically require us to provide
ambulance services without regard to a patient's insurance coverage or ability
to pay. As a result, we often receive partial or no compensation for services
provided to patients who are not covered by Medicare, Medicaid, or private
insurance. The anticipated level of uncompensated care and uncollectible
accounts may be considered in determining our subsidy, if any, and permitted
rates under contracts with a county or municipality.
INSURANCE AND SURETY BONDING
Many of our contracts and certain provisions of local law require us to
carry specified amounts of insurance coverage. We carry a broad range of
comprehensive general liability, automobile, property damage, professional,
workers' compensation, and other liability insurance policies that typically are
renewed annually. As a result of the nature of our services and the day-to-day
operation of our vehicle fleet, we are subject to accident, injury and
professional claims in the ordinary course of business. We operate in some
states that adhere to a gross negligence standard for the delivery of emergency
medical care, which potentially lessens our exposure for tort judgments.
Based upon historical claim trends, we consider our insurance program
adequate for the protection of our assets and operations. Our insurance policies
are subject to certain deductibles and self-insured retention limits. The
coverage limits of our policies may not be sufficient, we may experience claims
within our deductibles or self-insured retentions in amounts greater than
anticipated, or our insurers may experience financial difficulties that would
require us to pay unanticipated claims. In addition, insurance may not continue
to be available on commercially reasonable terms. A successful claim or claims
against us in excess of our insurance coverage, or claims within our deductibles
or self insured retentions in amounts greater than anticipated, could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations. Claims against us, regardless of their merit or outcome,
also may have an adverse effect on our reputation. We have attempted to minimize
our claims exposure by instituting process improvements and increasing the
utilization of experts in connection with our legal, risk management and safety
programs. See "Management's Discussion And Analysis of Financial Condition and
Results of Operations" for additional information.
Counties, municipalities, and fire districts sometimes require us to
provide a surety bond or other assurance of financial and performance
responsibility. We may also be required by law to post a surety bond as a
prerequisite to obtaining and maintaining a license to operate. As a result, we
have a portfolio of surety bonds that is renewed annually.
17
EMPLOYEES
At September 20, 2002, we employed approximately 6,810 full-time and 3,640
part-time employees, including approximately 6,280 involved in ambulance
services, 940 in fire protection services, 430 in integrated ambulance and fire
protection services, 970 in urgent home medical care, and 1,830 in management,
administrative, clerical and billing activities. Of these employees, 2,420 are
paramedics and 3,230 are EMTs. We are party to collective bargaining agreements
relating to certain of our paramedics and EMTs in Rochester, New York; Buffalo,
New York; Corning, New York; Youngstown, Ohio; San Diego, California; Gadsden,
Alabama; and Knoxville, Tennessee. We also have collective bargaining agreements
in place for certain of our Maricopa County, Arizona, Integrated Fire employees;
and certain of our ambulance services employees in Arizona. We consider our
relations with employees to be good.
STRATEGY
Our strategy is to continue strengthening our existing core businesses and
to continue building upon our economies of scale, while providing the most
proficient levels of health and safety services possible for the customers and
communities we serve. Over the past year, our efforts to strengthen our business
have been primarily focused on (i) sustaining and enhancing positive cash
performance, (ii) improving the quality and collection of revenue, (iii)
selective growth through expansion in existing service areas, and (iv)
development of regional new-growth opportunities. Fiscal 2002 also was an
important year in the execution of our plan to return to profitability, which
included continuing implementation of programs designed to maximize and expedite
reimbursement for our medical transport services. Our business strategy for
fiscal year 2003 includes continued emphasis on these focal points and our
long-standing commitment to deliver high-quality, efficient and cost-effective
services to our existing and prospective customers in our established service
areas.
CASH PERFORMANCE
We focused extensively throughout fiscal 2002 on further enhancing cash
performance. Initiatives undertaken related specifically to maximizing and
accelerating reimbursement for our services, which drives positive cash-flow
trending. New and ongoing programs target improvements to our field
documentation procedures and pre-screening non-emergency medical transportation
requests to ensure patients' conditions meet medical necessity standards.
REVENUE QUALITY AND COLLECTION
Our objective to improve the quality of our revenue is related directly to
cash performance and effective collection efforts. Throughout fiscal year 2002,
we have continued to devote significant effort to negotiating enhanced rates on
continuing medical transportation contracts. We have also intensified and
refined our systems in order to maximize collection percentages and minimize the
number of days revenue is outstanding from the time we provide service to the
time we are paid. As a result, we have achieved a significant decline in days
sales' outstanding, achieving an average of 74 days, compared to 89 days in the
prior fiscal year.
SAME-SERVICE-AREA GROWTH
A key element of our internal growth strategy is to extend our reach in
existing service areas. We believe a variety of opportunities are available in
proven service areas with good payer mixes to create new growth. This type of
growth is primarily targeted to non-emergency medical transportation services
among hospitals, health-care centers, nursing homes, rehabilitation centers, and
other related health-care entities. As a result of our efforts in fiscal year
2002, we achieved 7.0% improvement in same-service area growth over fiscal year
2001 levels. We are encouraged by these results and will remain focused on
same-service-area opportunities in fiscal year 2003.
18
SELECTIVE NEW GROWTH
We also have pursued highly selective new growth opportunities in fiscal
year 2002. We evaluate new growth opportunities based on a number of criteria,
including geographic proximity to existing regional operations, payer mix,
medical transportation demands, competitive profiles, and demographic trends. We
believe that by targeting specific locations using precise data and analysis, we
can identify and pursue profitable new growth. An example of our achievements in
this regard during fiscal year 2002 was the award of the exclusive, five-year
emergency medical services contract for Forsyth County, Georgia, which is the
state's fastest-growing county. Because Forsyth County is contiguous to
Rural/Metro operations in nearby North and South Fulton counties, it represented
a logical and attractive extension of our regional operations within the state.
We will continue to evaluate selective opportunities for new growth in the
future.
We will market our emergency ambulance services through the pursuit of new
contracts and alliances with municipalities, other governmental entities,
hospital-based emergency providers, and fire districts. Based on our successful
public/private alliance with the City of San Diego, our ambulance service
contract in Aurora, Colorado, and contracts with numerous Arizona
municipalities, we believe that contracting and partnering may provide a
cost-effective approach to expansion into certain existing and new service
areas. We believe that our strategic public/private alliances can provide
operating economies, coordination of the delivery of services, efficiencies in
the use of personnel and equipment, and enhanced levels of service, while saving
taxpayer dollars. We will continue to seek such mutually beneficial
public/private alliances and municipal contracts in existing and, to a limited
extent, new service areas.
ITEM 2. PROPERTIES
FACILITIES AND EQUIPMENT
We lease our principal executive offices in Scottsdale, Arizona. In
addition, we lease administrative facilities and other facilities used
principally for ambulance and fire apparatus basing, garaging and maintenance in
those areas in which we provide ambulance and fire protection services. We also
own 20 facilities within our service areas. Aggregate rental expense was
approximately $11.5 million during fiscal year 2002, and approximately $12.1
million during fiscal year 2001. At September 20, 2002, our fleet included
approximately 1,490 owned and 270 leased ambulances and alternative
transportation vehicles, 115 owned and 27 leased fire vehicles, and 250 owned
and 26 leased other vehicles. We use a combination of in-house and outsourced
maintenance services to maintain our fleet, depending on the size of the market
and the availability of quality outside maintenance services.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to litigation and regulatory
investigations arising in the ordinary course of business. We believe that the
resolutions of currently pending claims or legal proceedings will not have a
material adverse effect on our business, financial condition, cash flows and
results of operations. However, we are unable to predict with certainty the
outcome of pending litigation and regulatory investigations. In some pending
cases, our insurance coverage may not be adequate to cover all liabilities
arising out of such claims. In addition, due to the nature of our business, CMS
and other regulatory agencies are expected to continue their practice of
performing periodic reviews and initiating investigations related to the
Company's compliance with billing regulations. Unfavorable resolutions of
pending or future litigation, regulatory reviews and/or investigations, either
individually or in the aggregate, could have a material adverse effect on our
business, financial condition, cash flows and results of operations.
We, Warren S. Rustand, our former Chairman of the Board and Chief Executive
Officer, James H. Bolin, our former Vice Chairman of the Board, and Robert E.
Ramsey, Jr., our former Executive Vice President and former
19
Director, were named as defendants in two purported class action lawsuits:
HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on
August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V. RURAL/METRO
CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United
States District Court for the District of Arizona. The two lawsuits, which
contain virtually identical allegations, were brought on behalf of a class of
persons who purchased our publicly traded securities including our common stock
between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro seeks
unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud
Act, and under Arizona common law fraud, and also seeks punitive damages, a
constructive trust, and other injunctive relief. Ruble v. Rural/Metro seeks
unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended. The complaints in both actions allege that between
April 28, 1997 and June 11, 1998 the defendants issued certain false and
misleading statements regarding certain aspects of our financial status and that
these statements allegedly caused our common stock to be traded at artificially
inflated prices. The complaints also allege that Mr. Bolin and Mr. Ramsey sold
stock during this period, allegedly taking advantage of inside information that
the stock prices were artificially inflated.
On May 25, 1999, the Arizona state court granted our request for a stay of
the Haskell action until the Ruble action is finally resolved. We and the
individual defendants moved to dismiss the Ruble action. On January 25, 2001,
the Court granted the motion to dismiss, but granted the plaintiffs leave to
replead. On March 31, 2001, the plaintiffs filed a second amended complaint. We
and the individual defendants moved to dismiss the second amended complaint. On
March 8, 2002, the Court granted the motions to dismiss of Mr. Ramsey and Mr.
Bolin with leave to replead and denied the motions to dismiss of Mr. Rustand and
us. The result is that Mr. Ramsey and Mr. Bolin have been dismissed from the
Ruble v. Rural/Metro case although the Court has permitted plaintiffs leave to
file another complaint against those individuals. We and Mr. Rustand remain
defendants.
The parties have commenced discovery in the Ruble v. Rural/Metro case.
During discovery, the parties conduct investigation through formal processes
such as depositions, subpoenas and requests for production of documents. This
phase is currently expected to run through early November 2003. In addition,
Plaintiffs have moved to certify the class in the Ruble v. Rural/Metro case. A
decision on class certification is not expected before February 2003.
We and the individual defendants are insured by primary and excess
insurance policies, which were in effect at the time the lawsuits were filed
(the "D&O Policies"). Our primary carrier has been funding the costs of the
litigation and attorney's fees over approximately the last four years. Recently,
however, our primary carrier notified all defendants that it is taking the
position that there is no coverage. The primary carrier purports to base this
decision on the actions of one of our former officers, whom the primary carrier
claims assisted the Plaintiffs in the Ruble v. Rural/Metro case in such a way as
to trigger an exclusion under the policy. We and the primary carrier are in the
process of negotiating an interim funding agreement under which the carriers
will continue to advance defense costs in the underlying litigations pending a
court determination of the coverage dispute. While we intend to vigorously
pursue our rights under the D&O Policies, we are unable to predict with
certainty the outcome of these matters. A final and binding adverse judgment on
the coverage dispute could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
LaSalle Ambulance, Inc., a New York subsidiary of Rural/Metro Corporation,
has been sued in the case of Ann Bogucki and Patrick Bogucki v. LaSalle
Ambulance Service, et al., Index No. I 1995 2128, pending in the Supreme Court
of the State of New York, Erie County. In 1995, Plaintiff Ann Bogucki sued
LaSalle Ambulance along with other defendants, primarily alleging that negligent
medical care caused her injuries. The incident occurred in 1992, which was prior
to our acquisition of LaSalle Ambulance, Inc. The prior owner's insurance
carrier is defending the case. Based on information obtained in the fourth
quarter of fiscal 2002, we do not believe that our primary insurance policy for
the post-acquisition period provides coverage for these claims; however, we
believe that we have meritorious claims against the prior owner and under the
pre-acquisition period insurance policy. Further, we do not believe that
Plaintiffs' claims have any merit and are cooperating with the insurance carrier
to vigorously defend the lawsuit. However, if the Plaintiffs are successful in
obtaining an adverse judgment, then the limits of the prior owner's insurance
policy may not be adequate to cover all damages that might arise out of this
lawsuit. As the current owner of LaSalle Ambulance, Inc., we have potential
liability for the uninsured portion of any such adverse judgment; which
liability, if occurring, could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock trades on the Nasdaq SmallCap Market pursuant to a
conditional listing under the symbol RURLC. We believe we will meet the
requirements associated with our conditional listing upon filing of this Report
on Form 10-K and will shortly thereafter resume trading on the Nasdaq SmallCap
Market under the symbol RURL. See "Risk Factors - We may be delisted from the
Nasdaq SmallCap Market."
The following table sets forth the high and low sale prices of the common
stock for the fiscal quarters indicated.
HIGH LOW
------ ------
YEAR ENDED JUNE 30, 2001
First quarter ................................ $ 2.31 $ 1.50
Second quarter ............................... $ 3.38 $ 1.25
Third quarter ................................ $ 2.16 $ 0.81
Fourth quarter ............................... $ 1.09 $ 0.87
YEAR ENDED JUNE 30, 2002
First quarter ................................ $ 0.97 $ 0.57
Second quarter ............................... $ 0.74 $ 0.35
Third quarter ................................ $ 1.13 $ 0.37
Fourth quarter ............................... $ 4.75 $ 0.80
On September 20, 2002, the closing sale price of our common stock was $2.50
per share. On September 20, 2002, there were approximately 973 holders of record
of our common stock.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
plan to retain earnings, if any, for use in our business rather than to pay cash
dividends. Payments of any cash dividends in the future will depend on the
financial condition, results of operations and capital requirements of us as
well as other factors deemed relevant by our Board of Directors. Our senior
notes and amended credit facility contain restrictions on our ability to pay
cash dividends, and future borrowings may contain similar restrictions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" contained in Item 7 of this
Report.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the fiscal years 1998
through 2002 has been derived from our audited Consolidated Financial Statements
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and notes appearing elsewhere in this Report.
The Consolidated Financial Statements for fiscal years 1998 through 2001
were audited by Arthur Andersen LLP (Andersen) who has ceased operations. A copy
of the report previously issued by Andersen on our financial statements as of
June 30, 2000 and 2001 and for each of the three years in the period ended June
30, 2001 is included elsewhere in this Report. Such report has not been reissued
by Andersen.
21
YEARS ENDED JUNE 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Net revenue (1) ....................................... $ 497,038 $ 504,316 $ 570,074 $ 561,366 $ 475,558
Operating expenses
Payroll and employee benefits ....................... 287,307 301,055 323,285 297,341 254,806
Provision for doubtful accounts ..................... 69,900 102,470 95,623 81,227 81,178
Provision for doubtful accounts-- change in
accounting estimate ................................ -- -- 65,000 -- --
Depreciation ........................................ 15,155 21,809 25,009 24,222 19,213
Amortization of intangibles (2) ..................... 1,055 7,352 8,687 9,166 7,780
Other operating expenses ............................ 97,640 142,009 127,743 98,739 80,216
Asset impairment charges ............................ -- 94,353 -- -- --
Loss on disposition of clinic operations ............ -- 9,374 -- -- --
Contract termination costs and related asset
impairment ......................................... (107) 9,256 -- -- --
Restructuring charge and other ...................... (718) 9,091 34,047 2,500 5,000
--------- --------- --------- --------- ---------
Operating income (loss) ............................... 26,806 (192,453) (109,320) 48,171 27,365
Interest expense, net ................................. (24,976) (30,001) (25,939) (21,406) (14,082)
Other income (expense), net ........................... 9 (2,402) 2,890 (70) 199
--------- --------- --------- --------- ---------
Income (loss) before income taxes, extraordinary
loss and cumulative effect of change in accounting
principle ............................................ 1,839 (224,856) (132,369) 26,695 13,482
Income tax (provision) benefit ........................ 2,050 (1,875) 32,837 (11,231) (5,977)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss and
cumulative effect of change in accounting principle .. 3,889 (226,731) (99,532) 15,464 7,505
Extraordinary loss on expropriation of Canadian
ambulance service licenses ........................... -- -- (1,200) -- --
Cumulative effect of change in accounting principle (2) (49,513) -- (541) -- --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (45,624) $(226,731) $(101,273) $ 15,464 $ 7,505
========= ========= ========= ========= =========
Basic earnings per share:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle ............. $ 0.26 $ (15.38) $ (6.82) $ 1.07 $ 0.55
Extraordinary loss on expropriation of Canadian
ambulance service licenses ........................... -- -- (0.08) -- --
Cumulative effect of change in accounting principle ... (3.26) -- (0.04) -- --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (3.00) $ (15.38) $ (6.94) $ 1.07 $ 0.55
========= ========= ========= ========= =========
Diluted earnings per share:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle ............. $ 0.25 $ (15.38) $ (6.82) $ 1.06 $ 0.54
Extraordinary loss on expropriation of Canadian
ambulance service licenses ........................... -- -- (0.08) -- --
Cumulative effect of change in accounting principle ... (3.14) -- (0.04) -- --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (2.89) $ (15.38) $ (6.94) $ 1.06 $ 0.54
========= ========= ========= ========= =========
Weighted average number of shares outstanding:
Basic ............................................... 15,190 14,744 14,592 14,447 13,529
Diluted ............................................. 15,773 14,744 14,592 14,638 14,002
22
YEARS ENDED JUNE 30,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficit) (3).......................... $ 28,038 $(285,566) $(192,512) $ 140,929 $ 110,529
Total assets........................................... 237,438 298,534 491,217 579,907 535,452
Current portion of long-term debt (3).................. 1,633 294,439 299,104 5,765 8,565
Long-term debt, net of current portion (3)............. 298,529 1,286 2,850 268,560 243,831
Stockholders' equity (deficit) (1) .................... (165,319) (130,526) 95,591 196,839 177,773
CASH FLOW DATA
Cash flow provided by (used in) operating
activities........................................... 9,328 7,859 (11,551) 16,247 2,720
Cash flow provided by (used in) financing
activities........................................... (2,669) (5,907) 28,258 21,491 68,284
Cash flow provided by (used in) investing
activities........................................... (5,832) (3,805) (13,640) (36,604) (67,891)
- ----------
(1) The Company acquired the operations of five companies during the year ended
June 30, 1999 for an aggregate purchase price of $20.6 million as well as
eleven companies during the year ended June 30, 1998 for an aggregate
purchase price of $77.1 million (including $9.0 million of the Company's
common stock). The increase in net revenue between 1998 and 1999 is
primarily a result of these acquisitions.
(2) Effective July 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS 142). In
connection with the adoption of SFAS 142, the Company discontinued
amortizing its goodwill effective July 1, 2001. Additionally, the Company
recognized an approximate $49.5 million transitional impairment charge
which has been reflected as the cumulative effect of change in accounting
principle in fiscal 2002. Note 5, Goodwill, in our Consolidated Financial
Statements appearing elsewhere in this report contains additional
information on our adoption of SFAS 142.
Additionally, effective July 1, 1999, the Company changed its method of
accounting for start-up costs, including organization costs. In connection
with that change, the Company wrote-off $0.9 million of previously
capitalized organization costs ($0.5 million after tax benefits) and
classified such charge as the cumulative effect of change in accounting
principle in 2000.
(3) Our current liabilities exceeded our current assets at June 30, 2001 and
2000 as a result of the classification of amounts outstanding under our
revolving credit facility and our 7 7/8% Senior Notes due 2008 (Senior
Notes) as current liabilities. Such classification resulted from the fact
that we were not in compliance with certain of the covenants contained in
our revolving credit agreement and because of the related provisions
contained in the agreement relating to our Senior Notes. Amounts
outstanding under our revolving credit facility and our Senior Notes were
classified as long-term liabilities as of June 30, 2002 as a result of
amendments to our credit facility which became effective September 30,
2002. Such amendments waived previous covenant violations and extended the
maturity date of the credit facility from March 16, 2003 to December 31,
2004.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our selected consolidated financial data and our Consolidated Financial
Statements and notes appearing elsewhere in this Report.
Effective September 30, 2002, we entered into an amended credit facility
with our bank lenders. Among other provisions, the amended agreement provides
for a permanent waiver of past noncompliance and an extended maturity date of
December 31, 2004. See "Liquidity and Capital Resources."
Due to the deteriorating economic conditions and continued devaluation of
the local currency, we reviewed our strategic alternatives with respect to the
continuation of operations in Latin America, including Argentina and Bolivia,
and determined that we would benefit from focusing on our domestic operations.
Effective September 27, 2002, we sold our Latin American operations to local
management for assumption of net liabilities. Revenues relating to our Latin
American operations totaled $25.4 million, $43.1 million and $57.4 million for
the years ended June 30, 2002, 2001 and 2000, respectively. Excluding asset
impairment and restructuring charges, operating expenses related to Latin
American operations totaled $23.8 million, $44.7 million and $56.2 million for
the years ended June
23
30, 2002, 2001 and 2000, respectively. Although we have not determined the final
accounting, we do not expect there to be a negative financial impact from this
transaction.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls (911 emergency ambulance services) and non-emergency transport
services (general transport services) to patients on both a fee-for-service and
nonrefundable subscription fee basis. Per transport revenue depends on various
factors, including the mix of rates between existing markets and new markets and
the mix of activity between 911 emergency ambulance services and non-emergency
transport services as well as other competitive factors. Fire protection
services are provided either under contracts with municipalities, fire districts
or other agencies or on a nonrefundable subscription fee basis to individual
homeowners or commercial property owners.
Medical transportation and related services revenue includes 911 emergency
and non-emergency ambulance and alternative transportation service fees as well
as municipal subsidies and subscription fees. Domestic ambulance and alternative
transportation service fees are recognized as the services are provided and are
recorded net of estimated Medicare, Medicaid and other contractual discounts.
Ambulance subscription fees, which are generally received in advance, are
deferred and recognized on a pro rata basis over the term of the subscription
agreement, which is generally one year.
Payments received from third-party payers represent a substantial portion
of our ambulance service fee receipts. We derived approximately 87% of our net
ambulance and alternative transportation fee collections during fiscal 2002 and
2001 from such third party payers. We maintain an allowance for Medicare,
Medicaid and contractual discounts and doubtful accounts based on credit risks
applicable to certain types of payers, historical collection trends and other
relevant information. This allowance is examined on a quarterly basis and is
revised for changes in circumstances surrounding the collectibility of
receivables. Provisions for Medicare, Medicaid and contractual reimbursement
limitations are included in the calculation of medical transportation services
revenue.
Because of the nature of our ambulance services, it is necessary to respond
to a number of calls, primarily 911 emergency ambulance service calls, which may
not result in transports. Results of operations are discussed below on the basis
of actual transports because transports are more directly related to revenue.
Expenses associated with calls that do not result in transports are included in
operating expenses. The percentage of calls not resulting in transports varies
substantially depending upon the mix of non-emergency ambulance and 911
emergency ambulance service calls in individual markets and is generally higher
in service areas in which the calls are primarily 911 emergency ambulance
service calls. Rates in our markets take into account the anticipated number of
calls that may not result in transports. We do not separately account for
expenses associated with calls that do not result in transports. Revenue
generated under our former capitated service arrangements in Argentina is
included in medical transportation and related services revenue.
Revenue generated under fire protection service contracts is recognized
over the life of the contract. Subscription fees received in advance are
deferred and recognized over the term of the subscription agreement, which is
generally one year.
Other revenue primarily consists of revenue generated from dispatch, fleet,
billing, training and home health care services and is recognized when the
services are provided.
Other operating expenses consist primarily of rent and related occupancy
expenses, vehicle and equipment maintenance and repairs, insurance, fuel and
supplies, travel and professional fees.
24
Our net income before the cumulative effect of a change in accounting
principle was $3.9 million or $0.25 per diluted share for the year ended June
30, 2002. The net loss after the cumulative effect of a change in accounting
principle was $45.6 million or $2.89 per diluted share. This compares to a net
loss of approximately $226.7 million or $15.38 per diluted share for the year
ended June 30, 2001, and a net loss of $101.3 million or $6.94 per diluted share
for the year ended June 30, 2000. Our operating results for the year ended June
30, 2001 were adversely affected by asset impairment charges, our operational
restructuring program involving the closure of certain service areas, the loss
of two exclusive 911 contracts, the disposition of clinic operations in Latin
America, changes in estimates that impacted our reserves for workers'
compensation and general liability matters, and additional provision for
doubtful accounts related to closed or closing service areas and non-transport
related receivables.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. In connection with the preparation of these financial statements, we
are required to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, allowance for Medicare, Medicaid
and other contractual discounts and doubtful accounts, general liability and
workers' compensation claim reserves. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances. The results form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified the accounting policies below as critical to our
business operations and the understanding of our results of operations. The
impact of these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. The discussion below is not intended to be a comprehensive list of our
accounting policies. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements, which contains accounting policies and other disclosures required by
accounting principles generally accepted in the United States of America.
MEDICAL TRANSPORTATION AND RELATED FEE REVENUE RECOGNITION - Domestic
ambulance and alternative transportation service fees are recognized when
services are provided and are recorded net of a provision for Medicare,
Medicaid, and other contractual reimbursement limitations. Because of the length
of the collection cycle with respect to ambulance and alternative transportation
service fees, it is necessary to estimate the amount of these reimbursement
limitations at the time revenue is recognized. Estimates of amounts
uncollectible due to the described reimbursement limitations are estimated based
on historical collection data, historical write-off activity and current
relationships with payers, and are computed separately for each service area.
The estimated uncollectibility is translated into a percentage of total revenue
which is applied to calculate the provision. If the historical data used to
calculate these estimates does not properly reflect the collectibility of the
current revenue stream, revenue could be overstated or understated. Provisions
made for reimbursement limitations on ambulance and alternative transportation
service fees are included in the calculation of medical transportation and
related service revenue and totaled $134.0 million, $135.4 million and $102.9
million for the years ended June 30, 2002, 2001 and 2000, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS FOR MEDICAL TRANSPORTATION AND RELATED FEES
- - Ambulance and alternative transportation service fees are billed to various
payer sources. As discussed above, provisions for uncollectibility due to
Medicare, Medicaid and contractual reimbursement limitations are recorded as
provisions against revenue. We estimate additional provisions related to the
potential uncollectibility of other payers. The estimates are based on
historical collection data and historical write-off activity and are computed
separately for each service area. The provision for doubtful accounts percentage
that is applied to ambulance and alternative transportation service fee revenue
is calculated as the difference between the total expected collection percentage
25
less provision percentages applied for Medicare, Medicaid and contractual
reimbursement limitations. If historical data used to calculate these estimates
does not properly reflect the collectibility of the current net revenue stream,
the provision for doubtful accounts may be overstated or understated. The
provision for doubtful accounts on ambulance and alternative transportation
service revenue totaled $69.7 million, $101.0 million and $158.0 million for the
fiscal years ended June 30, 2002, 2001 and 2000, respectively.
WORKERS' COMPENSATION RESERVES - Beginning May 1, 2002, we purchased a
corporate-wide "first-dollar" workers' compensation insurance policy, under
which we have no obligation to pay any deductible amounts on claims occurring
during the policy period. This policy covers all workers' compensation claims
made by employees of the Company and all of its domestic subsidiaries.
Accordingly, provisions for workers' compensation expense for claims arising on
and after May 1, 2002 are reflective of premium costs only. Prior to May 1,
2002, our workers' compensation policies included a deductible obligation of
$250,000 per claim, which was increased in recent years to $500,000 per claim,
with no aggregate limit. Claims relating to these prior policy years remain
outstanding. Claim provisions were estimated based on historical claims data and
the ultimate projected value of those claims. For claims occurring prior to May
1, 2002, our third-party administrator establishes initial estimates at the time
a claim is reported and periodically reviews the development of the claim to
confirm that the estimates are adequate. In fiscal year 2002, we engaged an
outside insurance expert to review the estimates set by our third-party
administrator on certain claims and to participate in our periodic internal
claim reviews. We also periodically engage actuaries to assist us in the
determination of our workers' compensation claims reserves. If the ultimate
development of these claims is significantly different than those that have been
estimated, the reserves for workers' compensation claims could be overstated or
understated. Reserves related to workers' compensation claims totaled $15.9
million and $14.9 million at June 30, 2002 and 2001, respectively.
GENERAL LIABILITY RESERVES - We are subject to litigation arising in the
ordinary course of our business. In order to minimize the risk of our exposure,
we maintain certain levels of coverage for comprehensive general liability,
automobile liability, professional liability. Internally and throughout this
report, we refer to these three types of policies collectively as "general
liability" policies. These policies currently are, and historically have been,
underwritten on a deductible basis. Provisions are made to record the cost of
premiums as well as that portion of the claims that is our responsibility. In
general, our deductible obligation for policies issued in fiscal years prior to
2001 ranges from $100,000 to $250,000 per claim (with no aggregate limit),
depending on the policy year and line of coverage. Beginning in fiscal 2001, our
deductible amount increased to $1,000,000 per claim; however, we also purchased
a liability ceiling for each of those policy years, which permanently caps our
maximum deductible obligation. Our third-party administrator establishes initial
estimates at the time a claim is reported and periodically reviews the
development of the claim to confirm that the estimates are adequate. In fiscal
year 2002, we engaged an outside insurance expert to review the estimates set by
our third-party administrator on certain claims and to participate in our
periodic internal reviews. We also periodically engage actuaries to assist us in
the determination of our general liability claim reserves. If the ultimate
development of these claims is significantly different than those that have been
estimated, the reserves for general liability claims could be overstated or
understated. Reserves related to general liability claims totaled $15.4 million
and $19.7 million at June 30, 2002 and 2001, respectively.
26
RESULTS OF OPERATIONS
The following table sets forth certain items from our Consolidated
Financial Statements expressed as a percentage of net revenue for the years
ended June 30, 2002, 2001, and 2000:
YEARS ENDED JUNE 30,
----------------------------
2002 2001 2000
------ ------ ------
Net revenue .................................................. 100.0% 100.0% 100.0%
Operating expenses
Payroll and employee benefits .............................. 57.8 59.7 56.7
Provision for doubtful accounts ............................ 14.1 20.3 16.8
Provision for doubtful accounts -- change in accounting
estimate ................................................. -- -- 11.4
Depreciation ............................................... 3.0 4.3 4.4
Amortization of intangibles ................................ 0.2 1.5 1.5
Other operating expenses ................................... 19.6 28.2 22.4
Asset impairment charges ................................... -- 18.7 --
Loss on disposition of clinic operations ................... -- 1.9 --
Contract termination costs and related asset impairment .... -- 1.8 --
Restructuring charge and other ............................. (0.1) 1.8 6.0
------ ------ ------
Operating income (loss) ...................................... 5.4 (38.2) (19.2)
Interest expense, net ...................................... (5.0) (5.9) (4.6)
Other income (expense), net ................................ -- (0.5) 0.5
------ ------ ------
Income (loss) before income taxes, extraordinary loss and
cumulative effect of change in accounting principle .......... 0.4 (44.6) (23.3)
Income tax (provision) benefit ............................. 0.4 (0.4) 5.8
------ ------ ------
Net income (loss) before extraordinary loss and cumulative
effect of change in accounting principle ................... 0.8 (45.0) (17.5)
Extraordinary loss ........................................... -- -- (0.2)
Cumulative effect of a change in accounting principle ........ (10.0) -- (0.1)
------ ------ ------
Net income (loss) ....................................... (9.2)% (45.0)% (17.8)%
====== ====== ======
YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
NET REVENUE
Net revenue decreased approximately $7.3 million, or 1.4%, from $504.3
million for the year ended June 30, 2001 to $497.0 million for the year ended
June 30, 2002.
MEDICAL TRANSPORTATION AND RELATED SERVICES - Medical transportation and
related service revenue decreased $4.8 million, or 1.1%, from $425.6 million for
the year ended June 30, 2001 to approximately $420.8 million for the year ended
June 30, 2002.
27
The decrease in medical transportation and related service revenue is
related to a $14.4 million decrease in revenue in our Latin American operations
primarily resulting from decreases in memberships under capitated service
arrangements and the devaluation of the Argentine peso. The decrease in
memberships was attributable to the impact of economic conditions in Argentina
combined with significant increases in local service taxes on all medical
services.
Domestic medical transportation and related service revenue increased
approximately $9.6 million, or 2.5% from $387.8 million for the year ended June
30, 2001 to $397.4 million for the year ended June 30, 2002. This increase is
comprised of a $25.2 million increase in same service area revenue attributable
to rate increases, call screening and other factors. Additionally, there was a
$2.6 million increase in revenue related to a 911 contract that began during the
second quarter of fiscal 2001 offset by an $8.5 million decrease related to the
loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska and a $9.6
million decrease related to the closure of service areas in fiscal 2000 and
fiscal 2001.
Total domestic transports, including alternative transportation, decreased
71,000, or 5.6%, from approximately 1,256,000 (approximately 1,100,000 ambulance
and approximately 156,000 alternative transportation) for the year ended June
30, 2001 to approximately 1,185,000 (approximately 1,046,000 ambulance and
approximately 139,000 alternative transportation) for the year ended June 30,
2002. The loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska
accounted for a decrease of approximately 19,000 transports. The closure of
service areas in fiscal 2000 and 2001 accounted for a decrease of approximately
32,000 transports. Transports in areas that we served in both the year ended
June 30, 2002 and 2001 decreased by approximately 23,000 transports. These
decreases were offset by an increase of approximately 3,000 transports related
to a 911 contract that began during the second quarter of fiscal 2001.
FIRE PROTECTION SERVICES - Fire protection services revenue increased by
approximately $3.3 million, or 5.4%, from approximately $61.6 million for the
year ended June 30, 2001 to approximately $64.9 million for the year ended June
30, 2002. Fire protection services revenue increased primarily due to rate and
utilization increases in our subscription fire programs of $2.1 million,
increased contracting activity by our specialty fire protection group of
$766,000 and a $620,000 increase in wildland fire services revenue. We
experienced a particularly active wildfire season in the latter part of the
fiscal year ended June 30, 2002. Increased activity in wildland fire services
revenue has continued into the first quarter of fiscal 2003.
OTHER REVENUE - Other revenue decreased by $5.9 million, or 34.3%, from
$17.2 million for the year ended June 30, 2001 to $11.3 million for the year
ended June 30, 2002. Other revenue decreases are primarily due to a decrease in
clinic revenue in our Latin American operations of $3.6 million as a result of
the disposition in the fourth quarter of fiscal 2001.
OPERATING EXPENSES
PAYROLL AND EMPLOYEE BENEFITS - Payroll and employee benefit expenses
decreased approximately $13.8 million, or 4.6%, from approximately $301.1
million for the year ended June 30, 2001 to approximately $287.3 million for the
year ended June 30, 2002. This decrease is primarily attributable to the net
impact of payroll and benefit increases resulting from contract renegotiations,
service area expansions and wage rate increases ($19.5 million) offset by
reductions attributable to the Argentine peso devaluation ($10.9 million), the
impact of prior year service area closures ($8.3 million), and the absence in
2002 of prior year increases in health insurance reserves ($5.0 million) and
accrued paid-time-off ($3.0 million). We expect that labor costs related to our
28
ongoing operations will continue to increase. Payroll and employee benefits
decreased from 59.7% of total revenue for the year ended June 30, 2001 to 57.8%
of net revenue for the year ended June 30, 2002. See Risk Factors - "We have
experienced material increases in the cost of our insurance and surety programs
and in related collateralization requirements;" "Claims against us could exceed
our insurance coverage;" and "Our reserves may prove inadequate."
PROVISION FOR DOUBTFUL ACCOUNTS - The provision for doubtful accounts
decreased $32.6 million, or 31.8%, from $102.5 million, or 20.3% of total
revenue, for the year ended June 30, 2001 to $69.9 million, or 14.1% of total
revenue, for the year ended June 30, 2002. The provision for the year ended June
30, 2001 included an additional $16.4 million provision related to
underperformance in collections in service areas closed during fiscal 2001 and
2000, a $4.8 million provision related to management's decision to reserve all
outstanding non-transport receivables in excess of 90 days and a $5.0 million
provision related to contractual transport receivables that were deemed
uncollectible.
The provision for doubtful accounts on domestic ambulance and alternative
transportation service revenue (excluding the additional provisions described in
the preceding paragraph) was 18.2% for the year ended June 30, 2002 and 19.9%
for the year ended June 30, 2001. The decrease is reflective of the closure of
underperforming operations and increases in collection rates in the remaining
service areas. During fiscal 2002, we continued to focus on improving the
quality of our revenue by reducing the amount of non-emergency ambulance and
alternative transportation transports in selected service areas as well as on
previously implemented initiatives to maximize the collection of our accounts
receivable.
A summary of activity in our allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts during the fiscal years ended June
30, 2002 and 2001 is as follows.
JUNE 30,
------------------------
2002 2001
--------- ---------
(in thousands)
Balance at beginning of year $ 65,229 $ 87,752
Provision for Medicare, Medicaid
and contractual discounts 134,039 135,435
Provision for doubtful accounts 69,900 102,470
Write-offs and other adjustments (236,500) (260,428)
--------- ---------
Balance at end of year $ 32,668 $ 65,229
========= =========
DEPRECIATION - Depreciation decreased approximately $6.6 million, or 30.3%,
from approximately $21.8 million for the year ended June 30, 2001 to
approximately $15.2 million for the year ended June 30, 2002, primarily due to
asset write-offs during the fourth quarter of fiscal 2001, the disposal of
certain assets related to closed operations and a decrease in capital
expenditures. Depreciation decreased from approximately 4.3% of net revenue for
the year ended June 30, 2001 to approximately 3.0% of total revenue for the year
ended June 30, 2002
AMORTIZATION - We discontinued amortizing goodwill in accordance with our
adoption of SFAS No. 142, effective July 1, 2001. As a result, amortization of
intangibles has decreased $6.3 million to $1.1 million for the year ended June
30, 2002. Approximately, $1.0 million of the amortization recorded in the year
ended June 30, 2002 relates to an adjustment in the estimated lives of for
29
certain other intangible assets acquired in previous business combinations.
Amortization is expected to decline as these assets reach the end of their
estimated lives. See related discussion of the effect of the adoption of SFAS
No. 142 below.
OTHER OPERATING EXPENSES - Other operating expenses consist primarily of
rent and related occupancy expenses, vehicle and equipment maintenance and
repairs, insurance, fuel and supplies, travel, and professional fees. Other
operating expenses decreased approximately $44.4 million, or 31.3%, from $142.0
million for the year ended June 30, 2001 to $97.6 million for the year ended
June 30, 2002. Approximately $22.3 million of the decrease relates to charges
taken in the fourth quarter of fiscal 2001, including $8.4 million of inventory
adjustments as described below, $1.3 million related to a Medicare audit
settlement, $1.0 million related to the write-off of amounts owed to us by a
former owner, $8.5 million related to asset write-offs and reserve adjustments
as a result of account reconciliations of our various Argentine subsidiaries and
$3.1 million for several adjustments to certain estimates for prepaid expenses,
accrued liabilities and other items, related to our domestic operations, that
were resolved in the fourth quarter of fiscal 2001. Additionally, the year ended
June 30, 2001 included a charge of $15.0 million recorded for additional general
liability reserves related to increases in reserves for reported claims as well
as to establish reserves for claims incurred but not reported as described
below. Decreases in other operating expenses in our Latin American operations
totaled $8.0 million, primarily due to the devaluation of the Argentine peso.
Closure of service areas in fiscal 2000 and 2001, as well as the loss of the 911
contracts in Arlington, Texas and Lincoln, Nebraska, account for $3.1 million of
the decrease. Other operating expenses decreased from 28.2% of total revenue for
the year ended June 30, 2001 to 19.6% of total revenue for the year ended June
30, 2002.
Effective January 1, 2001, we refined our methodology for determining
reserves related to general liability claims. The changing environment with
respect to the rising cost of claims as well as the cost of litigation prompted
a comprehensive review by management of detailed information from external
advisors, historical settlement information and analysis of open claims. The new
method more closely approximates the potential outcome of each open claim as
well as legal costs related to the administration of these claims. Additionally,
reserves were set up to cover potential unknown claims based on historical
occurrences of claims filed subsequent to the end of the policy year. For
financial reporting purposes, this change was treated as a change in accounting
estimate. See Risk Factors - "We have experienced material increases in the cost
of our insurance and surety programs and in related collateralization
requirements;" "Claims against us could exceed our insurance coverage;" and "Our
reserves may prove inadequate."
RESTRUCTURING AND OTHER CHARGES - During the fourth quarter of the fiscal
year ended June 30, 2001, we decided to close or downsize nine service areas and
in connection therewith, recorded restructuring and other charges totaling $9.1
million. For further discussion of these charges, see comparison of results for
the fiscal year ended June 30, 2001 and June 30, 2000, below.
A summary of activity in the restructuring reserve, which is included in
accrued liabilities in the consolidated balance sheets, is as follows:
LEASE WRITE-OFF OTHER
SEVERANCE TERMINATION OF INTANGIBLE EXIT
COSTS COSTS ASSETS COSTS TOTAL
------- ------- ------- ------- --------
Balance at June 30, 2000 $ 3,529 $ 3,247 $ -- $ 1,356 $ 8,132
Fiscal 2001 charge recorded 1,475 2,371 4,092 1,153 9,091
Fiscal 2001 usage (4,531) (1,071) (4,092) (1,360) (11,054)
Adjustments 1,361 (1,313) -- (48) --
------- ------- ------- ------- --------
Balance at June 30, 2001 1,834 3,234 -- 1,101 6,169
Fiscal 2002 usage (1,025) (1,172) -- (951) (3,148)
Adjustments (52) (548) -- (118) (718)
------- ------- ------- ------- --------
Balance at June 30, 2002 $ 757 $ 1,514 $ -- $ 32 $ 2,303
======= ======= ======= ======= ========
30
OTHER FISCAL 2001 CHARGES - Results of operations for the year ended June
30, 2001 include charges not applicable to the year ended June 30, 2002,
including asset impairment charges, disposition of clinic operations and
contract termination costs and related asset impairment. See comparison of
results for the fiscal year ended June 30, 2001 and June 30, 2000, below.
INTEREST EXPENSE - Interest expense decreased by approximately $5.0
million, or 16.7%, from approximately $30.0 million for the year ended June 30,
2001 to approximately $25.0 million for the year ended June 30, 2002. This
decrease was primarily caused by lower rates on the revolving credit facility as
well as lower average debt balances. Additionally, approximately $541,000 of
interest income received in conjunction with an income tax refund was netted
against interest expense for the year ended June 30, 2002. Interest expense is
expected to increase in the next fiscal year due to new rates to be incurred
under the amended credit facility. See further discussion on the amended credit
facility in "Liquidity and Capital Resources."
OTHER INCOME (EXPENSE), NET - Other income (expense), net expense decreased
$2.4 million from the year ended June 30, 2001 to the year ended June 30, 2002.
Other expense in fiscal 2001 included a $4.0 million charge relating to the
purchase of the minority interest of a joint venture partner in one of our
ambulance operations. Other income of $9,000 recorded in the year ended June 30,
2002 is related to the final settlement of amounts due under that joint venture
agreement. A description of the joint venture transaction is included in Note 6
to the Consolidated Financial Statements.
INCOME TAXES - We recognized an income tax benefit of $2.1 million in 2002
compared with an income tax provision of $1.9 million in 2001. The income tax
benefit in 2002 resulted from federal income tax refunds of $0.6 million
resulting from recently enacted legislation that allowed us to carryback a
portion of our net operating losses to prior years as well as refunds of $1.6
million applicable to prior years for which recognition was deferred until
receipt. We did not recognize the future income tax benefits attributable to our
2002 net loss as it is more likely than not that the related benefits will not
be realized.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - We adopted the new
rules on accounting for goodwill and other intangible assets effective July 1,
2001. Under the transitional provisions of Statement of Financial Accounting
Standards (SFAS) No. 142," Goodwill and Other Intangible Assets," we performed
impairment tests on the net goodwill and other intangible assets associated with
each of our reporting units with the assistance of independent valuation
experts, using a valuation date of July 1, 2001, and determined that a
transitional goodwill impairment charge of $49.5 million, net of $0 income
taxes, was required. This impairment primarily relates to our medical
transportation and related services segment. The impairment charge is non-cash
and non-operational in nature and is reflected as a cumulative effect of change
in accounting principle in the accompanying consolidated statement of
operations, retroactively applied to the quarter ended September 30, 2001, in
accordance with the provisions of SFAS No. 142. See Note 5 of the Consolidated
Financial Statements for further discussion of the effect of the adoption of
this accounting principle.
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
NET REVENUE
Net revenue decreased $65.8 million, or 11.5%, from $570.1 million for the
year ended June 30, 2000 to $504.3 million for the year ended June 30, 2001.
MEDICAL TRANSPORTATION AND RELATED SERVICES - Medical transportation and
related service revenue decreased approximately $66.6 million, or 13.5%, from
approximately $492.2 million for the year ended June 30, 2000 to approximately
$425.6 million for the year ended June 30, 2001.
The decrease in medical transportation and related service revenue is
related to a $6.6 million decrease in revenue in our Latin American operations
related to decreases in memberships under capitated service arrangements due to
the impact of the economic recession in Argentina as well as a $4.5 million
decrease in revenue generated from our former Canadian operations. Additionally,
there were significant decreases in domestic medical transportation and related
service revenue as described below.
31
Domestic medical transportation and related service revenue decreased $55.2
million, or 12.5%, from $443.0 million for the year ended June 30, 2000 to
$387.8 million for the year ended June 30, 2001. This decrease is comprised of a
$42.0 million decrease related to the closure of service areas in fiscal 2000
and 2001 and a $2.4 million decrease related to the loss of a contract in
Lincoln, Nebraska. Additionally, there was a decrease of $16.8 million related
to domestic medical transportation and related service revenue in areas we
served in both the year ended June 30, 2001 and 2000. These decreases were
offset by increases of $6.1 million related to a 911 contract that began in the
second quarter of fiscal 2000 and an additional 911 contract that began in the
second quarter of fiscal 2001.
Total domestic transports, including alternative transportation, decreased
275,000, or 21.9%, from approximately 1,531,000 (approximately 1,266,000
ambulance and approximately 265,000 alternative transportation) for the year
ended June 30, 2000 to 1,256,000 (approximately 1,100,000 ambulance and
approximately 156,000 alternative transportation) for the year ended June 30,
2001. The closure of service areas accounted for a decrease of approximately
197,000 transports. The loss of the 911 contract in Lincoln, Nebraska accounted
for a decrease of approximately 6,000 transports. Transports in areas that we
served in both the year ended June 30, 2002 and 2001 decreased by approximately
83,000 transports. The new 911 contracts described above accounted for
approximately 10,000 additional transports.
FIRE PROTECTION SERVICES - Fire protection services revenue increased by
approximately $4.1 million, or 7.1%, from approximately $57.5 million for the
year ended June 30, 2000 to approximately $61.6 million for the year ended June
30, 2001. Fire protection services revenue increased $1.8 million due to rate
and utilization increases for fire protection services, $1.1 million due to rate
increases under existing fire protection contracts, $0.6 million due to new
airport and industrial contracting activity and $0.6 million due to forestry
revenue increases.
OTHER REVENUE - Other revenue decreased by approximately $3.1 million, or
15.3%, from approximately $20.3 million for the year ended June 30, 2000 to
approximately $17.2 million for the year ended June 30, 2001. Decreases in
medical clinic revenue generated in Argentina totaled $2.9 million.
OPERATING EXPENSES
PAYROLL AND EMPLOYEE BENEFITS - Payroll and employee benefit expenses
decreased $22.2 million, or 6.9%, from $323.3 million for the year ended June
30, 2000 to $301.1 million for the year ended June 30, 2001. Certain
underperforming service areas that were closed in the third and fourth quarters
of fiscal 2000 accounted for $20.9 million of the decrease, and $4.1 million of
the decrease is related to the closure of our Canadian operations. Payroll and
employee benefit expenses for the fiscal year ended June 30, 2001 includes $5.0
million of additional workers' compensation insurance expense related to
increased claims experience, $3.0 million required to bring the paid-time-off
accrual for field personnel into line with the amount required under the related
policies and $5.4 million related to an increase in our employee health
insurance reserves as calculated by our third-party administrator. The remaining
decrease reflects reductions in payroll and employee benefit expenses in
existing service areas due to decreased transports as discussed above. Payroll
and employee benefit expenses increased from 56.7% of total revenue during the
year ended June 30, 2000 to 59.7% of total revenue during the year ended June
30, 2001. Increased service utilization in our Argentine operations also
contributed to the increase in payroll and employee benefit expenses as a
percentage of total revenue.
PROVISION FOR DOUBTFUL ACCOUNTS - The provision for doubtful accounts,
excluding the $65.0 million change in accounting estimate in fiscal 2000,
increased $6.9 million or 7.2% from $95.6 million for the year ended June 30,
2000 to $102.5 million for the year ended June 30, 2001.
During the year ended June 30, 2001, we recorded a $10.0 million provision
related to underperformance in collections in service areas closed during fiscal
2000. In addition, we recorded a $6.4 million provision related to estimated
32
underperformance in collections for service areas included in the fiscal 2001
restructuring. It has been our experience that once a service area has been
exited, it becomes more difficult to collect outstanding receivables. As a
result, management determined that any non-transport receivable in excess of 90
days outstanding will be fully reserved. This adjustment totaled $4.8 million at
June 30, 2001. An additional $5.0 million provision was also recorded for
contractual transport receivables that were deemed uncollectible. During the
year ended June 30, 2000, we experienced a decrease in collections in service
areas that were closed or downsized due to our lack of physical presence in the
service area. In fiscal 2000, we recorded charges of $3.0 million and $6.8
million recorded in the respective third and fourth quarters for uncollectible
accounts in those service areas that were identified for closure or downsizing
during those periods.
The provision for doubtful accounts on domestic ambulance and alternative
transportation service revenue (excluding the $26.2 million recorded in fiscal
2001 and the $9.8 million in fiscal 2000, described above) was 19.2% for the
year ended June 30, 2000 and 19.9% for the year ended June 30, 2001. The
increase in the provisioning rate for doubtful accounts is reflective of the new
methodology being used to calculate the provision for doubtful accounts as
described in the following paragraph regarding the change in estimate.
Based on the increasingly unpredictable nature of healthcare accounts
receivable and the increasing costs to collect those receivables, we concluded
that the implemented billing process changes had not brought about the benefits
anticipated. As a result, we changed our method of estimating our allowance for
doubtful accounts effective October 1, 1999. Under our new method of estimation,
we have chosen to fully reserve our accounts receivable earlier in the
collection cycle than had previously been our practice. We provide specific
allowances based upon the age of the accounts receivable within each payer class
and also provide for general allowances based upon historic collection rates
within each payer class. Payer classes include Medicare, Medicaid, and private
pay. Accordingly, the effect of this change was an additional $65.0 million
provision for doubtful accounts in fiscal 2000, which is stated separately in
the accompanying financial statements.
A summary of activity in our allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts during the fiscal years ended June
30, 2001 and 2000 is as follows:
JUNE 30,
------------------------
2001 2000
--------- ---------
(in thousands)
Balance at beginning of year $ 87,752 $ 43,392
Provision for Medicare, Medicaid
and contractual discounts 135,435 102,880
Provision charged to expense 102,470 160,623
Write-offs and other adjustments (260,428) (219,143)
--------- ---------
$ 65,229 $ 87,752
========= =========
DEPRECIATION - Depreciation decreased $3.2 million, or 12.8%, from $25.0
million for the year ended June 30, 2000 to $21.8 million for the year ended
June 30, 2001, primarily due to the disposal of certain assets related to closed
operations as well as a decrease in capital expenditures during the current
year. Depreciation decreased from 4.4% of total revenue for the year ended June
30, 2000 to approximately 4.3% of net revenue for the year ended June 30, 2001.
AMORTIZATION - Amortization of intangibles decreased by $1.3 million, or
14.9%, from $8.7 million for the year ended June 30, 2000 to $7.4 million for
the year ended June 30, 2001. This decrease was the result of the write-off of
$22.3 million of goodwill in conjunction with the closure or downsizing of
certain service areas during fiscal 2000. Amortization was 1.5% of net revenue
for both the year ended June 30, 2000 and 2001.
33
OTHER OPERATING EXPENSES - Other operating expenses increased $14.3
million, or 11.2%, from $127.7 million for the year ended June 30, 2000 to
$142.0 million for the year ended June 30, 2001. The increase is primarily due
to additional general liability insurance reserves of $15.0 million as explained
more fully in the following paragraph, $8.5 million related to asset write-offs
and reserve adjustments as a result of account reconciliations of our various
Argentine subsidiaries performed in the fourth quarter of fiscal 2001, the $8.4
million of inventory adjustments as discussed below, the accrual of $1.3 million
related to a Medicare audit settlement and $1.0 million related to the write-off
of amounts owed to us by a former owner. These amounts are offset by a decrease
of $6.4 million relating to closed service areas, as well as decreases in other
operating expenses in existing service areas related to decreased transports.
Other operating expenses increased from 22.4% of net revenue for the year ended
June 30, 2000 to 28.2% of total revenue for the year ended June 30, 2001.
Effective January 1, 2001, we refined our methodology of determining
reserves related to general liability claims. The changing environment with
respect to the rising cost of claims as well as the cost of litigation prompted
a comprehensive review by management of detailed information from external
advisors, historical settlement information and analysis of open claims. The new
method more closely approximates the potential outcome of each open claim as
well as the legal costs related to the administration of these claims.
Additionally, reserves were set up to cover potential unknown claims based on
historical occurrences of claims filed subsequent to the end of the policy year.
For financial reporting purposes, this change was treated as a change in
accounting estimate.
We have experienced a substantial rise in the costs associated with both
our insurance and surety bonding programs in comparison to prior years. A
significant factor is the overall hardening of the insurance, surety and
re-insurance markets, which has resulted in demands for larger premiums,
collateralization of payment obligations and increasingly rigorous underwriting
requirements. Our higher costs also result from our claims history and from
vendors' perception of our financial position due to our current debt structure
and cash position. Sustained and substantial annual increases in premiums and
requirements for collateral or pre-funded deductible obligations may have a
material adverse effect on our business, financial condition, cash flow and
results of operations. We have been able to self-fund these premium increases
out of operating cash flow and have adjusted our budgetary assumptions to
address anticipated future increases.
Medical, fleet, and fire supplies are maintained in a central warehouse,
numerous regional warehouses, and multiple stations, lockers, and vehicles. A
physical inventory of all locations at June 30, 2001 revealed a shortage from
recorded levels. Shrinkage, obsolescence, and supplies lost due to closures
account for most of the shortage. To reduce the recorded inventory to the actual
physical count, an adjustment of approximately $8.4 million was recorded as a
component of other operating expenses in the accompanying consolidated statement
of operations for the year ended June 30, 2001.
ASSET IMPAIRMENT CHARGES - In connection with the budgeting process for the
fiscal year ended June 30, 2002, which was completed in the fourth quarter of
fiscal 2001, we analyzed each cost center within our various service areas not
identified for closure or downsizing to determine whether the associated
long-lived assets (e.g., property, equipment and goodwill) would be recoverable
from future operations. Cost centers represent individual operating units within
a given service area for which separately identifiable cash flow information is
available. We performed this analysis as a result of our expectations of a
challenging health care reimbursement environment as well as anticipated
increases in labor and insurance costs with respect to our domestic ambulance
operations. This analysis considered the results of operations over the past
year as well as CMS's failure to implement the ambulance fee schedule as of
January 1, 2001. The analysis with respect to our Argentine operations included
the impact of the deteriorating economic and political environment as well as
information developed by a third party concerning the marketability of these
operations during fiscal 2001.
34
In order to assess recoverability, we estimated the related net future cash
flows for each cost center and then compared the resulting undiscounted amounts
to the carrying value of each cost center's long-lived assets (e.g., property
and equipment and goodwill). It should be noted that property and equipment
balances are specifically identified with each cost center. Additionally,
goodwill is specifically identified with each cost center at the time of
acquisition and, therefore, related allocations were not necessary for purposes
of performing the impairment analysis.
For those cost centers where estimated future net cash flows on an
undiscounted basis were less than the related carrying amounts of the long-lived
assets, an asset impairment was considered to exist. We measured the amount of
the asset impairment for each such cost center by discounting the estimated
future net cash flows using a discount rate of 18.5% and comparing the resulting
amount to the carrying value of its long-lived assets. Based upon this analysis,
the Company determined that asset impairment charges approximating $94.4 million
were required for cost centers within our domestic and Argentine ambulance
operations. The asset impairments were charged directly against the related
asset balances. A summary of the related charge is as follows:
PROPERTY,
EQUIPMENT
GOODWILL AND OTHER TOTAL
--------- --------- ---------
(in thousands)
Domestic ambulance operations $ 41,631 $ 6,419 $ 48,050
Argentine ambulance operations 44,327 1,976 46,303
--------- --------- ---------
Total $ 85,958 $ 8,395 $ 94,353
========= ========= =========
RESTRUCTURING CHARGE AND OTHER - During the fourth quarter of the fiscal
year ended June 30, 2001, we decided to close or downsize nine service areas and
in connection therewith, recorded restructuring and other charges totaling $9.1
million. These charges included $1.5 million to cover severance costs associated
with the termination of approximately 250 employees, lease termination and other
exit costs of $2.6 million, and asset impairment charges for goodwill and
property and equipment of $4.1 million and $0.9 million, respectively, related
to the impacted service areas. The service areas selected for closure or
downsizing generated revenue of $17.7 million, operating losses of $4.0 million
and negative cash flow of $3.2 million for the fiscal year ended June 30, 2001.
During the third and fourth quarters of the fiscal year ended June 30,
2000, we decided to close or downsize 26 service areas and in connection
therewith, recorded restructuring and other charges totaling $34.0 million.
These charges included $6.6 million to cover severance costs associated with the
termination of approximately 300 employees, all of whom had been terminated by
June 30, 2001, lease termination and other exit costs of $3.3 million, and asset
impairment charges for goodwill and property and equipment of $22.3 million and
$1.3 million, respectively. The service areas selected for closure generated
revenue of $38.7 million, operating losses of $3.7 million and negative cash
flow of $1.0 million for the fiscal year ended June 30, 2000.
A summary of activity in the restructuring reserve, which is included in
accrued liabilities in the consolidated balance sheets, is as follows:
35
LEASE WRITE-OFF OTHER
SEVERANCE TERMINATION OF INTANGIBLE EXIT
COSTS COSTS ASSETS COSTS TOTAL
-------- -------- -------- -------- --------
Balance at June 30, 1999 $ 1,328 $ -- $ -- $ -- $ 1,328
Fiscal 2000 charge recorded 6,621 3,299 22,250 1,877 34,047
Fiscal 2000 usage (4,420) (52) (22,250) (521) (27,243)
-------- -------- -------- -------- --------
Balance at June 30, 2000 3,529 3,427 -- 1,356 8,132
Fiscal 2001 charge recorded 1,475 2,371 4,092 1,153 9,091
Fiscal 2001 usage (4,531) (1,071) (4,092) (1,360) (11,054)
Adjustments 1,361 (1,313) -- (48) --
-------- -------- -------- -------- --------
Balance at June 30, 2001 $ 1,834 $ 3,234 $ -- $ 1,101 $ 6,169
======== ======== ======== ======== ========
DISPOSITION OF CLINIC OPERATIONS - During the fourth quarter of the fiscal
year ended June 30, 2001, we sold our Argentine clinic operations in exchange
for a $3.0 million non-interest bearing note receivable. The note, which is
included in other assets in the consolidated balance sheet, requires monthly
principal payments of $25,000 through April 2011. The sale resulted in a loss on
disposal of $9.4 million, including the write-off of $9.3 million of related
goodwill. The clinic operations generated revenue of $4.0 million, operating
losses of $1.5 million and negative cash flow of $0.9 million for the fiscal
year ended June 30, 2001.
CONTRACT TERMINATION COSTS AND RELATED ASSET IMPAIRMENT - In November 2000,
we learned that our exclusive 911 contract in Lincoln, Nebraska would not be
renewed effective December 31, 2000 and in connection therewith, recorded a
contract termination charge of $5.2 million. This charge included asset
impairments for related goodwill and equipment totaling $4.3 million (the
exclusive 911 contract was acquired in a purchase business combination in fiscal
1995), $0.8 million to cover severance costs associated with terminated
employees, and $0.1 million to cover lease terminations and other exit costs.
The Lincoln contract generated revenue of $4.7 million, operating income of $0.4
million and cash flow of $0.5 million in fiscal 2000, its last full year of
operations.
In May 2001, we learned that our exclusive 911 contract in Arlington, Texas
would not be renewed effective September 30, 2001 and in connection therewith,
recorded a contract termination charge of $4.1 million. This charge included
asset impairments for related goodwill and equipment of $3.9 million (the
exclusive 911 contract was acquired in a purchase business combination in fiscal
1997), $0.1 million to cover severance costs associated with terminated
employees, and $0.1 million to cover lease termination and other exit costs. The
Arlington contract generated revenue of $8.3 million, operating income of $0.1
million and cash flow of $0.5 million in fiscal 2001, its last full year of
operations.
INTEREST EXPENSE - Interest expense increased by $4.1 million, or 15.8%,
from $25.9 million for the year ended June 30, 2000 to $30.0 million for the
year ended June 30, 2001. This increase was caused by higher than average debt
balances during fiscal 2001, fees, and additional interest incurred in
conjunction with various waiver agreements.
OTHER INCOME (EXPENSE), NET - Other income (expense), net expense increased
by $5.3 million from other income of $2.9 million in fiscal 2000 to other
expense of $2.4 million in fiscal 2001. This increase was primarily attributable
to a charge of $4.0 million relating to the put provisions contained in the
joint venture agreement described in Note 6 to the Consolidated Financial
Statements.
INCOME TAXES - Our effective tax rate decreased from 24.8% for the year
ended June 30, 2000 to approximately (0.8)% for the year ended June 30, 2001.
The decrease in the effective tax rate is primarily due to the impact of the
valuation allowance and other permanent differences, consisting of goodwill
write-offs and amortization. The permanent differences and the valuation
allowance result in a reduction of the tax benefits which could otherwise be
available in a loss year, and thus a reduction in the effective tax rate. A
valuation allowance of approximately $46.4 million has been provided because we
believe that the realizability of the deferred tax asset does not meet the more
likely than not criteria under SFAS No. 109, "Accounting for Income Taxes."
36
EXTRAORDINARY LOSS - During the year ended June 30, 2000, we recorded an
extraordinary loss on the expropriation of Canadian ambulance service licenses
of approximately $1.2 million (net of $0 of income taxes). We received
approximately $2.2 million from the Ontario Ministry of Health as compensation
for the loss of license and incurred costs and wrote-off assets, mainly
goodwill, totaling $3.4 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - The cumulative effect
of change in accounting principle in the fiscal year ended June 30, 2000,
resulted in a $541,000 approximate charge (net of a tax benefit of approximately
$392,000) and was related to our expensing of previously capitalized
organization costs in accordance with Statement of Position 98-5, REPORTING ON
THE COSTS OF START-UP ACTIVITIES.
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly operating
results for each quarter of fiscal 2002 and 2001. The operating results of any
quarter are not necessarily indicative of results of any future period.
2002
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER(2) QUARTER(3) QUARTER(4)
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ........................................ $ 125,667 $ 123,759 $ 124,661 $ 122,951
Operating income ................................... 5,690 7,227 10,837 3,052
Net income (loss) before cumulative effect of
change in accounting principle ................... (1,190) 3,170 4,364 (2,453)
Net income (loss) .................................. (50,704) 3,170 4,364 (2,453)
Basic income (loss) per share before cumulative
effect of change in accounting principle ......... $ (0.08) $ 0.21 $ 0.28 $ (0.16)
Basic income (loss) per share ...................... $ (3.37) $ 0.21 $ 0.28 $ (0.16)
Diluted income (loss) per share before cumulative
effect of change in accounting principle ......... $ (0.08) $ 0.21 $ 0.28 $ (0.16)
Diluted income (loss) per share .................... $ (3.37) $ 0.21 $ 0.28 $ (0.16)
2001
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(5) QUARTER(6) QUARTER(7)
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ........................................ $ 128,238 $ 125,209 $ 126,722 $ 124,147
Operating income (loss) ............................ 3,213 (13,770) (16,034) (165,862)
Net loss ........................................... (4,085) (21,574) (23,646) (177,426)
Basic loss per share ............................... $ (0.28) $ (1.47) $ (1.60) $ (11.91)
Diluted loss per share ............................. $ (0.28) $ (1.47) $ (1.60) $ (11.91)
- ----------
(1) We changed our method of accounting for goodwill effective July 1, 2001 and
discontinued amortizing goodwill as of that date. During the fourth quarter
of fiscal 2002, we completed the transitional impairment test of our
goodwill and recorded a related $49.5 million charge ($3.14 per share) as
the cumulative effect of change in accounting principle in restated first
quarter results.
(2) In the second quarter of fiscal 2002, we recorded an income tax benefit of
$1.6 million related to an income tax refund received during the quarter.
37
(3) In the third quarter of fiscal 2002, we reversed $1.7 million of
discretionary employee benefits previously accrued for the calendar year
ended December 31, 2000.
(4) In the fourth quarter of fiscal 2002, we accrued $2.0 million of additional
workers' compensation claim reserves in conjunction with a review of
existing reserve levels. Additionally, we reversed an accrual for $1.3
million related to an audit settlement with a Medicare intermediary and
$1.3 million of our paid time off accrual as a result of changes to the
related policies.
(5) In the second quarter of fiscal 2001, we recorded a $10.0 million
additional provision for doubtful accounts related to the uncollectibility
of receivables in service areas closed in fiscal 2000. We also recorded a
$5.2 million charge related to the loss of an exclusive 911 contract in
Lincoln, Nebraska.
(6) In the third quarter of fiscal 2001, we recorded a $5.0 million charge
related to increased claims experience in workers' compensation.
Additionally, we recorded a $15.0 million charge for increases in reserves
for reported claims as well as to establish reserves for claims incurred
but not reported.
(7) In the fourth quarter of fiscal 2001, we recorded additional provisions for
doubtful accounts of $16.2 million, $94.4 million of asset impairment
charges, $9.4 million related to the disposition of clinic operations in
Argentina, $9.1 million of restructuring and other charges, a $4.1 million
charge related to the loss of an exclusive 911 contract in Arlington,
Texas, $5.4 million related to increased claim estimates on employee health
insurance, $3.0 million related to the accrual of paid time off for field
personnel, $8.4 million related to inventory write-offs, $1.3 million
related to Medicaid audit, $1.0 million related to write-off of amounts due
from a former seller, $8.5 million related to asset write-offs and reserve
adjustments at our various Argentine subsidiaries, $3.1 million of other
asset write-offs, and $4.0 million related to the put provisions contained
in a joint venture agreement.
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher second and third fiscal quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions.
Public health conditions affect our operations differently in different
regions. For example, greater utilization of services by customers under
capitated service arrangements decrease our operating income. The same
conditions domestically, where we operate under fee-for-service arrangements,
result in a greater number of transports, increasing our operating income.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2002, we incurred a net loss of $45.6 million compared with
net losses of $226.7 million in fiscal 2001 and $101.3 million in 2002. (The net
loss in fiscal 2002 included a charge of $49.5 million relating to the adoption
effective July 1, 2002 of SFAS 142. The net losses in fiscal 2001 and fiscal
2000 included asset impairment, restructuring and other similar charges totaling
$122.0 million and $34.0 million, respectively.) Cash provided by operating
activities totaled $9.3 million in fiscal 2002 and $7.9 million in 2001 and cash
used in operating activities totaled $11.6 million in fiscal 2000.
At June 30, 2002, we had cash of $9.8 million, total debt of $300.2 million
and a stockholders' deficit of $165.3 million. Our total debt at June 30, 2002
included $149.9 million of our 7 7/8% senior notes due 2008, $144.4 million
outstanding under our revolving credit facility, $4.6 million payable to a
former joint venture partner and $1.3 million of capital lease obligations.
As discussed below, we were not in compliance with certain of the covenants
contained in our revolving credit facility. On September 30, 2002, we entered
into an amended credit facility with our lenders which, among other things,
extended the maturity date of the facility from March 16, 2003 through December
31, 2004, waived previous non-compliance, and required the issuance to the
lenders of 211,549 shares of our Series B convertible preferred stock.
38
Our ability to service our long-term debt, to remain in compliance with the
various restrictions and covenants contained in our credit agreements and to
fund working capital, capital expenditures and business development efforts will
depend on our ability to generate cash from operating activities which is
subject to, among other things, our future operating performance as well as to
general economic, financial, competitive, legislative, regulatory and other
conditions, some of which may be beyond our control.
If we fail to generate sufficient cash from operations, we may need to
raise additional equity or borrow additional funds to achieve our longer term
business objectives. There can be no assurance that such equity or borrowings
will be available or, if available, will be at rates or prices acceptable to us.
Although there can be no assurances, management believes that cash flow from
operating activities coupled with existing cash balances will be adequate to
fund our operating and capital needs as well as enable us to maintain compliance
with our various debt agreements through June 30, 2003. To the extent that
actual results or events differ from our financial projections or business
plans, our liquidity may be adversely impacted.
Historically, we have financed our cash requirements principally through
cash flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of senior notes, the sale of common stock
through an initial public offering in July 1993 and subsequent public stock
offerings in May 1994 and April 1996, and the exercise of stock options.
During the year ended June 30, 2002, cash flow provided by operations was
approximately $9.3 million resulting primarily from a net loss of $45.6 million,
offset by the effect of a non-cash cumulative effect in a change in accounting
principle of $49.5 million, non-cash depreciation and amortization expense of
$16.2 million and provision for doubtful accounts of $69.9 million.
Additionally, cash flow from operating activities was negatively impacted by a
decrease in accrued liabilities of approximately $11.6 million and an increase
in accounts receivable of $67.3 million. Cash flow provided by operations was
approximately $7.9 million for the year ended June 30, 2001.
Cash used in financing activities was approximately $2.7 million for the
year ended June 30, 2002, primarily due to repayments on the revolving credit
facility and on other debt and capital lease obligations. Cash used in financing
activities was approximately $5.9 million for the year ended June 30, 2001.
Cash used in investing activities was approximately $5.8 million for the
year ended June 30, 2002 due primarily to capital expenditures of approximately
$6.9 million offset by proceeds from the sale of property and equipment of
approximately $1.0 million. Cash used in investing activities was approximately
$3.8 million for the year ended June 30, 2001, due to capital expenditures of
approximately $5.8 million net of proceeds from the sale of property and
equipment of $2.0 million.
Our accounts receivable, net of the allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts, were $99.1 million and $103.3
million as of June 30, 2002 and 2001, respectively. The decrease in net accounts
receivable is due to many factors, including the collection of outstanding
receivables related to closed service areas and overall improvement in
collections on existing operations.
The allowance for doubtful accounts decreased from approximately $65.2
million at June 30, 2001 to approximately $32.7 million at June 30, 2002. The
primary reason for this decrease is the write-off of uncollectible receivables
offset by the current period provision for doubtful accounts. We have instituted
several initiatives to improve our collection procedures. While management
believes that we have a predictable method of determining the realizable value
of our accounts receivable, based on continuing difficulties in the healthcare
reimbursement environment, there can be no assurance that there will not be
additional future write-offs. See Risk Factors - "We depend on reimbursements by
third-party payers and individuals."
39
With respect to our general liability insurance policy for the policy year
commencing in June 2000, we are required to set aside $100,000 per month into a
designated "loss fund" account, which cash is restricted to the payment of our
deductible obligations as required under such policy. A similar funding program
is in place with respect to our general liability policy for the policy year
commencing in June 2001. We expect to fund these deposits on a monthly basis in
subsequent years until such time as our total loss fund deposits equal the
contractual ceiling on our total deductible obligation under these policies. The
loss fund deposits are used as necessary to pay our deductible portion of claims
related to the applicable policy year. Accordingly, the loss fund balances vary
during the course of the year depending upon the frequency and severity of
claims payments; however, we typically maintain a minimum balance in each loss
fund of at least $250,000. An unanticipated increase in the frequency and
severity of claims payments at any one time could exceed the applicable loss
fund balance for that policy year, in which case, such claims payments could,
either individually or in the aggregate, have a material adverse effect on our
business, financial condition, cash flows and results of operations. See "Risk
Factors - We have experienced material increases in the cost of our insurance
and surety programs and in related collateralization requirements."
During fiscal years 1992 through 2001, we purchased certain portions of our
workers' compensation coverage from Reliance Insurance Company (Reliance). At
the time we purchased the coverage, Reliance was an "A" rated insurance company.
In connection with this coverage, we provided Reliance with various amounts and
forms of collateral (e.g., letters of credit, surety bonds and cash deposits) to
secure our performance under the respective policies as was customary and
required in the workers' compensation marketplace at the time. As of June 30,
2002, Reliance held $3.0 million of cash collateral under this coverage.
On May 29, 2001, Reliance was placed under rehabilitation by the
Pennsylvania Insurance Department (the Department) and on October 3, 2001 was
placed into liquidation by the Department. As mentioned previously, the cash on
deposit with Reliance serves to secure our performance under the related
policies; specifically, the payment by us of claims within our level of
retention in the various policy years. Consistent with past practice, we
periodically fund an imprest account maintained by our third-party administrator
who actually makes claim payments on our behalf. It is our understanding that
the cash collateral held by the Reliance liquidator will be returned to us once
all related claims have been satisfied so long as we have satisfied our claim
payment obligations under the related policies. To the extent that certain of
our workers' compensation claims have exceeded our level of retention under the
Reliance policies, the applicable state guaranty funds have provided such
coverage at no additional cost to us.
For fiscal 2002, we purchased certain portions of our workers' compensation
coverage from Legion Insurance Company (Legion). At the time we purchased the
coverage, Legion was an "A" rated insurance carrier. In connection with the
Legion policy, we deposited $6.2 million into a "cell-captive" insurance program
managed by Mutual Risk Management (MRM), an affiliate of Legion. This deposit
approximated the amount of claims within our level of retention for the policy
year May 1, 2001 through April 30, 2002. In contrast to the deposits placed with
Reliance, this deposit is not collateral to secure our performance under the
policy but rather represents funds to be used by MRM to pay claims within our
level of retention on our behalf. As of June 30, 2002, MRM held $5.7 million of
cash under this program.
On April 1, 2002, Legion was placed under rehabilitation by the Department.
MRM has continued to utilize the cash on deposit to make claim payments on our
behalf. Additionally, it is our understanding that these funds represent our
assets and are not general assets of Legion or MRM.
Based on the information currently available, we believe that the amounts
on deposit with Reliance and Legion/MRM are fully recoverable and will either be
returned to us or used to pay claims on our behalf. Our inability to access the
funds on deposit with either Reliance or Legion/MRM could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
40
We had working capital of $28.0 million at June 30, 2002, including cash of
$9.8 million. Including the classification of the entire outstanding balance
under the revolving credit facility and senior notes as a current liability at
June 30, 2001, we had a working capital deficiency of $286.5 million, including
cash of $8.7 million.
In March 1998, we entered into a $200.0 million revolving credit facility
originally scheduled to mature March 16, 2003. The credit facility is unsecured
and was unconditionally guaranteed on a joint and several basis by substantially
all of our domestic wholly owned current and future subsidiaries. Interest rates
and availability under the revolving credit facility depended on our meeting
certain financial covenants, including total debt leverage ratios, total debt to
capitalization ratios, and fixed charge ratios.
The revolving credit facility initially was priced at the greater of (i)
prime rate or Federal Funds rate plus 0.5% plus the applicable margin, or (ii) a
LIBOR-based rate. The LIBOR-based rates ranged from LIBOR plus 0.875% to LIBOR
plus 1.75%.
In December 1999, primarily as a result of additional provisions for
doubtful accounts, we entered into noncompliance with three financial covenants
under the revolving credit facility: total debt leverage ratio, total debt to
total capitalization ratio and fixed charge coverage ratio. We received a series
of compliance waivers regarding the financial covenants covering the periods
from December 31, 1999 through April 1, 2002. The waivers provided among other
things, for enhanced reporting and other requirements and that no additional
borrowings would be available to us.
Pursuant to the waivers, as LIBOR contracts expired in March 2000, all
borrowings were priced at prime rate plus 0.25 percentage points and interest
became payable monthly. Pursuant to the waivers, we also were required to accrue
additional interest expense at a rate of 2.0% per annum on the outstanding
balance on the revolving credit facility. We have recorded approximately $6.6
million related to this additional interest expense through June 30, 2002,
approximately $6.1 million of which remains in accrued liabilities at June 30,
2002. In connection with the waivers, we also made principal payments in an
aggregate amount of $5.2 million.
At June 30, 2002, the weighted average interest rate, including the
additional interest described above, was approximately 7.04% on the revolving
credit facility. A principal balance of approximately $144.4 million was
outstanding on the revolving credit facility at June 30, 2002. Also outstanding
at June 30, 2002 were $3.5 million in letters of credit issued under the
revolving credit facility.
Although we were not aware of any event of default under either the terms
of the revolving credit facility (as a result of the waivers) or our Senior
Notes, and although there was no acceleration of the repayment of the revolving
credit facility or the Senior Notes, the balances were classified as current
liabilities at June 30, 2001 and 2000 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 78 "Classification of Obligations that are
Callable by the Creditor."
Effective September 30, 2002, we entered into an amended credit facility
pursuant to which, among other things, the maturity date of the credit facility
was extended to December 31, 2004 and our prior noncompliance (including such
noncompliance as of June 30, 2002) was permanently waived.
The principal terms of the amended and restated credit agreement are as
follows:
* WAIVER. Prior noncompliance was permanently waived with respect to the
covenant violations described above and with respect to certain other
noncompliance items, including non-reimbursement of approximately $2.6
million recently drawn by beneficiaries under letters of credit issued
under the original facility.
41
* MATURITY DATE. The maturity date of the facility was extended to
December 31, 2004.
* PRINCIPAL BALANCE. Accrued interest (as described above),
non-reimbursed letters of credit and various fees and expenses
associated with the amended credit facility were added to the
principal amount of the loan, resulting in an outstanding principal
balance as of the effective date of the amendment equal to $152.4
million.
* NO REQUIRED AMORTIZATION. No principal payments are required until the
maturity date of the facility.
* INTEREST RATE. The interest rate was increased to LIBOR plus 7.0%
(8.8% as of the effective date of the amendment), payable monthly. (By
comparison, the effective interest rate (including the 2.0% accrued
interest described above) applicable to the original facility
immediately prior to the effective date of the amendment was 7.0%.)
* FINANCIAL COVENANTS. The amended facility includes the same financial
covenants as were included in the original credit facility, with
compliance levels under such covenants adjusted to levels consistent
with current business levels and outlook. The covenants include (i)
total debt leverage ratio (initially set at 7.48), (ii) minimum
tangible net worth (initially set at a $230.1 million deficit), (iii)
fixed charge coverage ratio (initially set at 0.99), (iv) limitation
on capital expenditures of $11 million per fiscal year; and (v)
limitation on operating leases during any period of four fiscal
quarters to 3.10% of consolidated net revenues. The compliance levels
for covenants (i) through (iii) above are set at varying levels on a
quarterly basis. Compliance is tested quarterly based on annualized or
year-to-date results as applicable.
* OTHER COVENANTS. The amended credit facility includes various
non-financial covenants equivalent in scope to those included in the
original facility. The covenants include restrictions on additional
indebtedness, liens, investments, mergers and acquisitions, asset
sales, and other matters. The amended credit facility includes
extensive financial reporting obligations and provides that an event
of default occurs should we lose customer contracts in any fiscal
quarter with EBITDA contribution of $5 million or more (net of
anticipated contribution from new contracts).
* EXISTING LETTERS OF CREDIT. Pursuant to the amended facility, letters
of credit issued pursuant to the original credit agreement will be
reissued or extended, to a maximum of $3.5 million, for letter of
credit fees aggregating 1 7/8% per annum. A third letter of credit, in
the amount of $2.6 million which previously was drawn by its
beneficiary, will be reissued subject to application of the funds
originally drawn in reduction of the principal balance of the facility
and payment of a letter of credit fee equal to 7% per annum.
* EQUITY INTEREST. In consideration of the amended facility, we issued
shares of our Series B convertible preferred stock to the participants
in the amended credit facility. The preferred stock is convertible
into 2,115,490 common shares (10% of the post-conversion common shares
outstanding on a diluted basis, as defined). Because sufficient common
shares are not currently available to permit conversion, we intend to
seek stockholder approval to amend our certificate of incorporation to
authorize additional common shares. Conversion of the preferred shares
occurs automatically upon approval by our stockholders of sufficient
common shares to permit conversion. Should our stockholders fail to
approve such a proposal by December 31, 2004, we will be required to
redeem the preferred stock for a price equal to the greater of $15
million or the value of the common shares into which the preferred
shares would otherwise have been convertible. In addition, should our
stockholders fail to approve such a proposal, the preferred stock
42
enjoys a preference upon a sale of our company, a sale of our assets
and in certain other circumstances; this preference equals the greater
of (i) the value of the common shares into which the preferred stock
would otherwise have been convertible or (ii) $10 million, $12.5
million or $15 million depending on whether the triggering event
occurs prior to January 31, 2003, December 31, 2003 or December 31,
2004, respectively. At the election of the holder, the preferred
shares carry voting rights as if such shares were converted into
common shares. The preferred shares do not bear a dividend. The
preferred shares (and common shares issuable upon conversion of the
preferred shares) are entitled to certain registration rights. The
terms of the preferred shares limit us from issuing senior or pari
passu preferred shares and from paying dividends on, or redeeming,
shares of junior stock.
Primarily because no principal amortization is required and because of the
long-term nature of this amendment, the outstanding balance on the credit
facility is classified as long-term debt in the consolidated balance sheet as of
June 30, 2002. Additionally, as we are now in compliance with the terms of the
credit facility, we have also classified the senior note balance to long-term
debt.
Due to the higher interest rate associated with the amended credit
facility, we anticipate that our cash interest expense will increase
approximately $5.6 million. Additionally, the fair value of the preferred stock,
and other deferred financing costs associated with the amended facility, will be
amortized to interest expense over the life of the agreement.
In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008
(the Notes) under Rule 144A under the Securities Act of 1933, as amended
(Securities Act). Interest under the Notes is payable semi-annually on September
15 and March 15, and the Notes are not callable until March 2003 subject to the
terms of the Indenture. We incurred expenses related to the offering of
approximately $5.3 million and will amortize these costs over the life of the
Notes. We recorded a $258,000 discount on the Notes and will amortize this
discount over the life of the Notes. Unamortized discount at June 30, 2002 was
approximately $148,000, and this amount is recorded as an offset to the
long-term debt, net of current portion in the Consolidated Financial Statements.
In April 1998, we filed a registration statement under the Securities Act
relating to an exchange offer for the Notes. The registration became effective
on May 14, 1998. The Notes are general unsecured obligations of our company and
are unconditionally guaranteed on a joint and several basis by substantially all
of our domestic wholly owned current and future subsidiaries. See Note 10 of
notes to our Consolidated Financial Statements. The Notes contain certain
covenants that, among other things, limit our ability to incur certain
indebtedness, sell assets, or enter into certain mergers or consolidations.
Since March 2000, we have satisfied all of our cash needs through cash flow
from operations and our cash reserves. Similarly, we expect that cash flow from
operations and our existing cash reserves will be sufficient to meet our
regularly scheduled debt service and our planned operating and capital needs for
the 12 months subsequent to June 30, 2002. Through our restructuring program we
have closed or downsized several locations that were negatively impacting our
cash flow. In addition, we have significantly reduced our corporate overhead. We
have improved the quality of our revenue and have experienced an upward trend in
daily cash collections.
There can be no assurance that we will meet our targeted levels of
operating cash flow or that we will not incur significant unanticipated
liabilities. Similarly, there can be no assurance that we will be able to obtain
additional debt or equity financing on terms satisfactory to us, or at all,
should cash flow from operations and our existing cash resources prove to be
inadequate. As discussed above, though we have recently successfully negotiated
an amendment and extension of our credit facility, we will not have access to
additional borrowings under such facility. If we are required to seek additional
financing, any such arrangement may involve material and substantial dilution to
43
existing stockholders resulting from, among other things, issuance of equity
securities or the conversion of all or a portion of our existing debt to equity.
In such event, the percentage ownership of our current stockholders will be
materially reduced, and such equity securities may have rights, preferences or
privileges senior to our current common stockholders. If we require additional
financing but are unable to obtain it, our business, financial condition, cash
flows and results of operations may be materially adversely affected.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Since 1991, the Argentine peso had been pegged to the U.S. dollar at an
exchange rate of 1 to 1. In December 2001, the Argentine government imposed
exchange restrictions which severely limited cash conversions and withdrawals.
When exchange houses reopened on January 11, 2002, the peso to dollar exchange
rate closed at 1.7 pesos to the dollar.
Our Argentine subsidiaries utilized the peso as their functional currency
as their business was primarily transacted in pesos. In order to prepare the
accompanying financial statements as of and for the year ended June 30, 2002, we
translated the balance sheets of our Argentine subsidiaries using the 3.9 to 1
exchange rate, the closing rate on June 30, 2002, while our statements of
operations and cash flows were translated using the weighted average rate in
effect during the period. As the liabilities of the Argentine subsidiaries
exceed their assets, the change in exchange rates resulted in a credit to
accumulated other comprehensive income in our consolidated balance sheet as of
June 30, 2002. Further fluctuations in the peso to dollar exchange rate will
impact the translation of the financial statements of the Argentine subsidiaries
for financial reporting purposes.
As a result of the sale of our Latin American operations in September 2002,
it is not anticipated that future fluctuations in the currency exchange rates
will have an adverse effect on us.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
We have certain cash contractual obligations related to our debt
instruments that come due at various times over the periods presented below. In
addition we have other commitments in the form of standby letters of credit and
surety bonds. The following table illustrates the expiration of our contractual
cash obligations as well as other commitments as of June 30, 2002.
The amounts related to the credit facility in the following table have been
adjusted to include the impact of accrued interest and costs ($8.1 million)
resulting from the September 30, 2002 amendment to the related agreement
described in Note 10 to the Consolidated Financial Statements. Additionally, the
potential preferred stock redemption obligation ($15.0 million) relating to that
amendment has been included in the table of other commitments.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------------------- -------- -------- --------- --------- --------
Credit facility $152,420 $ -- $152,420 $ -- $ --
Senior notes 150,000 -- -- -- 150,000
Capital leases and notes payable 5,941 1,633 2,683 1,484 141
Operating leases 38,476 7,878 12,511 7,851 10,236
-------- -------- -------- -------- --------
Total contractual cash obligations $346,837 $ 9,511 $167,614 $ 9,335 $160,377
======== ======== ======== ======== ========
OTHER COMMITMENTS AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
----------------- --------------------------------------------------------
Standby letters of credit $ 3,500 $ 3,500 $ -- $ -- $ --
======== ======== ======== ======== ========
Surety bonds $ 10,127 $ 8,763 $ 1,364 $ -- $ --
======== ======== ======== ======== ========
Preferred stock redemption $ 15,000 $ -- $ 15,000 $ -- $ --
======== ======== ======== ======== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). Under this
standard, asset retirement obligations will be recognized when incurred at their
estimated fair value. In addition, the cost of the asset retirement obligations
will be capitalized as a part of the asset's carrying value and depreciated over
the asset's remaining useful life. We will be required to adopt SFAS 143
effective July 1, 2002 and does not expect that it will have a material impact
on our financial condition or results of operations.
In October, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective as of July 1, 2002. We do not expect the implementation of SFAS 144 to
have a material effect on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002 (SFAS
145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. We are required to adopt SFAS 145 effective July 1, 2002 and we do
not expect that it will have a material impact on our financial condition of
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS 146
requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred. Under EITF 94-3, a liability for
exit costs, as defined in EITF No. 94-3 were recognized at the date of an
entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
44
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN
THIS REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS.
WE HAVE SIGNIFICANT INDEBTEDNESS.
We have significant indebtedness. As of June 30, 2002, we have
approximately $300.2 million of consolidated indebtedness, consisting primarily
of $150.0 million of 7 7/8% senior notes due in 2008 and approximately $144.4
million outstanding under a revolving credit facility which was subsequently
amended. The outstanding principal balance under the amended facility totals
$152.4 million.
Our ability to service our debt depends on our future operating
performance, which is affected by governmental regulations, the state of the
economy, financial factors, and other factors, certain of which are beyond our
control. We may not generate sufficient funds to enable us to make our periodic
debt payments. Failure to make our periodic debt payments could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
OUR LOAN AGREEMENTS REQUIRE US TO COMPLY WITH NUMEROUS COVENANTS AND
RESTRICTIONS.
The agreement governing the terms of the senior notes contains certain
covenants limiting our ability to:
* incur certain additional debt * create certain liens
* pay dividends * issue guarantees
* redeem capital stock * enter into transactions
* make certain investments with affiliates
* issue capital stock of * sell assets
subsidiaries * complete certain mergers
and consolidations
The amended credit facility contains other more restrictive covenants and
requires us to satisfy certain financial tests, including a total debt leverage
ratio, a total debt to total capitalization ratio, and a fixed charge ratio. Our
ability to satisfy those covenants can be affected by events both within and
beyond our control, and we may be unable to meet these covenants.
A breach of any of the covenants or other terms of our debt could result in
an event of default under the amended credit facility or the senior notes or
both, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT OPERATING CASH FLOW.
Despite significant net losses in fiscal 2001 and 2000, our restructuring
efforts have enabled us to self-fund our operations since March 2000 from
existing cash reserves and operating cash flow. However, we may be unable to
sustain our targeted levels of operating cash flow. Our ability to generate
operating cash flow will depend upon various factors, including industry
conditions, economic conditions, competitive conditions, and other factors, many
of which are beyond our control. Because of our significant indebtedness, a
substantial portion of our cash flow from operations is dedicated to debt
service and is not available for other purposes. The terms of our amended credit
facility do not permit additional borrowings thereunder. In addition, the
amended credit facility and the senior notes also restrict our ability to
provide collateral to any prospective lender.
If we are unable to meet our targeted levels of operating cash flow, or in
the event of an unanticipated cash requirement (such as an adverse litigation
outcome, reimbursement delays, or other matters) we will need to pursue
45
additional debt or equity financing. Any such financing may not be available on
terms acceptable to us, or at all. If we issue equity securities in connection
with any such arrangement, the percentage ownership of our current stockholders
will be materially reduced, and such equity securities may have rights,
preferences or privileges senior to our current common stockholders. Failure to
maintain adequate operating cash flow will have a material adverse effect on our
business, financial condition, results of operations and cash flows.
WE DEPEND ON REIMBURSEMENTS BY THIRD-PARTY PAYERS AND INDIVIDUALS.
We receive a substantial portion of our payments for ambulance services
from third-party payers, including Medicare, Medicaid, and private insurers. We
received approximately 87% of our ambulance fee collections from such
third-party payers during fiscal 2002, including approximately 26% from
Medicare. In fiscal 2001, we also received approximately 87% of ambulance fee
collections from these third parties, including approximately 25% from Medicare.
The reimbursement process is complex and can involve lengthy delays. From
time to time, we experience these delays. Third-party payers are continuing
their efforts to control expenditures for health care, including proposals to
revise reimbursement policies. We recognize revenue when we provide ambulance
services; however, there can be lengthy delays before we receive payment. In
addition, third-party payers may disallow, in whole or in part, requests for
reimbursement based on assertions that certain amounts are not reimbursable or
additional supporting documentation is necessary. Retroactive adjustments may
change amounts realized from third-party payers. We are subject to governmental
audits of our Medicare and Medicaid reimbursement claims and may be required to
repay these agencies if a finding is made that we were incorrectly reimbursed.
Delays and uncertainties in the reimbursement process adversely affect the level
of accounts receivable, increase the overall costs of collection, and may
adversely affect our working capital and cause us to incur additional borrowing
costs.
We also face the continuing risk of non-reimbursement to the extent that
uninsured individuals require emergency ambulance service in service areas where
an adequate subsidy is not provided. Amounts not covered by third-party payers
are the obligations of individual patients. We may not receive whole or partial
reimbursement from these uninsured individuals. We continually review the mix of
activity between emergency and general medical transport in view of the
reimbursement environment and evaluate methods of recovering these amounts
through the collection process.
We establish an allowance for Medicare, Medicaid and contractual discounts
and doubtful accounts based on credit risk applicable to certain types of
payers, historical trends, and other relevant information. We review our
allowance for doubtful accounts on an ongoing basis and may increase or decrease
such allowances from time to time, including in those instances when we
determine that the level of effort and cost of collection of certain accounts
receivable is unacceptable.
The risks associated with third-party payers and uninsured individuals and
the inability to monitor and manage accounts receivable successfully could have
a material adverse effect on our business, financial condition, cash flows, and
results of operations. Our collection policies or our allowance for Medicare,
Medicaid and contractual discounts and doubtful accounts receivable may not be
adequate.
WE HAVE EXPERIENCED MATERIAL INCREASES IN THE COST OF OUR INSURANCE AND SURETY
PROGRAMS AND IN RELATED COLLATERALIZATION REQUIREMENTS.
We have experienced a substantial rise in the costs associated with both
our insurance and surety bonding programs in comparison to prior years. We have
experienced significant increases both in the premiums we have had to pay, and
in the collateral or other advance funding required. We also have increased our
deductible and self-insurance retentions under several coverages. Many counties,
municipalities, and fire districts also require us to provide a surety bond or
other assurance of financial and performance responsibility, and the cost and
collateral requirements associated with obtaining such bonds have increased. A
46
significant factor is the overall hardening of the insurance, surety and
re-insurance markets, which has resulted in demands for larger premiums,
collateralization of payment obligations and increasingly rigorous underwriting
requirements. Our higher costs also result from our claims history and from
vendors' past perception of our financial position due to our current debt
structure and cash position, as well as the qualified opinion formerly issued
with respect to our audited financial statements. Sustained and substantial
annual increases in premiums and requirements for collateral or pre-funded
deductible obligations may have a material adverse effect on our business,
financial condition, cash flow and results of operations.
CLAIMS AGAINST US COULD EXCEED OUR INSURANCE COVERAGE.
We are subject to a significant number of accident, injury and malpractice
claims as a result of the nature of our business and the day-to-day operation of
our vehicle fleet. The coverage limits of our policies may not be adequate.
Liabilities in excess of our insurance coverage could have a material adverse
effect on our business, financial condition, cash flows, and results of
operations. Claims against us, regardless of their merit or outcome, also may
have an adverse effect on our reputation and business.
OUR RESERVES MAY PROVE INADEQUATE.
Under our general liability and employee medical insurance programs, and
under our workers' compensation programs prior to May 1, 2002, we are
responsible for deductibles in varying amounts. Our insurance coverages in prior
years generally did not include an aggregate limitation on our liability. We
have established reserves for losses and loss adjustment expenses under these
policies. Our reserves are estimates based on industry data and historical
experience, and include judgments of the effects that future economic and social
forces are likely to have on our experience with the type of risk involved,
circumstances surrounding individual claims and trends that may affect the
probable number and nature of claims arising from losses not yet reported.
Consequently, loss reserves are inherently uncertain and are subject to a number
of highly variable and difficult to predict circumstances. For these reasons,
there can be no assurance that our ultimate liability will not materially exceed
our reserves. If our reserves prove to be inadequate, we will be required to
increase our reserves with a corresponding reduction, which may be material, to
our operating results in the period in which the deficiency is identified. We
have engaged actuaries in recent years in order to verify the reasonableness of
our reserve estimates.
RECENTLY ENACTED RULES MAY ADVERSELY AFFECT OUR REIMBURSEMENT RATES OF COVERAGE.
On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became
effective. The Final Rule categorizes seven levels of ground ambulance services,
ranging from basic life support to specialty care transport, and two categories
of air ambulance services. The base rate conversion factor for services to
Medicare patients was set at $170.54, plus separate mileage payment based on
specified relative value units for each level of ambulance service. Adjustments
also were included to recognize differences in relative practice costs among
geographic areas, and higher transportation costs that may be incurred by
ambulance providers in rural areas with low population density. The Final Rule
requires ambulance providers to accept the assigned reimbursement rate as full
payment, after patients have submitted their deductible and 20 percent of
Medicare's fee for service. In addition, the Final Rule calls for a five-year
phase-in period to allow time for providers to adjust to the new payment rates.
The fee schedule will be phased in at 20-percent increments each year, with
payments being made at 100 percent of the fee schedule in 2006 and thereafter.
We believe the Medicare Ambulance Fee Schedule will cause a neutral net
impact on our medical transportation revenue at incremental and full phase-in
periods, primarily due to the geographic diversity of our U.S. operations. These
rules could, however, result in contract renegotiations or other actions by us
to offset any negative impact at the regional level that could have a material
adverse effect on our business, financial condition, cash flows, and results of
operations. Changes in reimbursement policies, or other governmental action,
together with the financial challenges of some private, third-party payers and
budget pressures on other payer sources could influence the timing and,
47
potentially, the receipt of payments and reimbursements. A reduction in coverage
or reimbursement rates by third-party payers, or an increase in our cost
structure relative to the rate increase in the Consumer Price Index (CPI), or
costs incurred to implement the mandates of the fee schedule could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations.
CERTAIN STATE AND LOCAL GOVERNMENTS REGULATE RATE STRUCTURES AND LIMIT RATES OF
RETURN.
State or local government regulations or administrative policies regulate
rate structures in most states in which we conduct ambulance operations. In
certain service areas in which we are the exclusive provider of services, the
municipality or fire district sets the rates for emergency ambulance services
pursuant to a master contract and establishes the rates for general ambulance
services that we are permitted to charge. Rates in most service areas are set at
the same amounts for emergency and general ambulance services. For example, the
State of Arizona establishes a rate of return on sales we are permitted to earn
in determining the ambulance service rates we may charge in that state.
Ambulance services revenue generated in Arizona accounted for approximately 18%
of total revenue for fiscal 2002 and approximately 15% of total revenue for
fiscal 2001. We may be unable to receive ambulance service rate increases on a
timely basis where rates are regulated or to establish or maintain satisfactory
rate structures where rates are not regulated.
Municipalities and fire districts negotiate the payments to be made to us
for fire protection services pursuant to master contracts. These master
contracts are based on a budget and on level of effort or performance criteria
desired by the municipalities and fire districts. We could be unsuccessful in
negotiating or maintaining profitable contracts with municipalities and fire
districts.
NUMEROUS GOVERNMENTAL ENTITIES REGULATE OUR BUSINESS.
Numerous federal, state, local, and foreign laws and regulations govern
various aspects of the business of ambulance service and fire fighting service
providers, covering matters such as licensing, rates, employee certification,
environmental matters, radio communications and other factors. Certificates of
necessity may be required from state or local governments to operate ambulance
services in a designated service area. Master contracts from governmental
authorities are subject to risks of cancellation or unenforceability as a result
of budgetary and other factors and may subject us to certain liabilities or
restrictions that traditionally have applied only to governmental bodies.
Federal, state, local, or foreign governments could:
* change existing laws or regulations,
* adopt new laws or regulations that increase our cost of doing
business,
* lower reimbursement levels,
* choose to provide services for themselves, or
* otherwise adversely affect our business, financial condition, cash
flows, and results of operations.
We could encounter difficulty in complying with all applicable laws and
regulations.
HEALTH CARE REFORMS AND COST CONTAINMENT MAY AFFECT OUR BUSINESS.
Numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system. We cannot predict which, if any,
health care reforms may be proposed or enacted or the effect that any such
legislation would have on our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA), which protects the privacy of patients'
health information handled by health care providers and establishes standards
for its electronic transmission, was enacted on August 21, 1996. The final rule,
which took effect on April 14, 2001, requires covered entities to comply with
the final rule's provisions by April 14, 2003, and covers all individually
identifiable health information used or disclosed by a covered entity. Our HIPAA
48
Subcommittee of the Corporate Compliance Committee is addressing the impact of
HIPAA and considering changes to or enactment of policies and/or procedures
which may need to be implemented to comply under the final rule. Because the
impact of HIPAA on the health care industry is not known at this time, we may
incur significant costs associated with implementation and continued compliance
with HIPAA or further legislation which may have a material adverse effect on
our business, financial condition, cash flows, or results of operations.
In addition, managed care providers are focusing on cost containment
measures while seeking to provide the most appropriate level of service at the
most appropriate treatment facility. Changing industry practices could have an
adverse effect on our business, financial condition, cash flows, and results of
operations.
WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
On July 30, 2001, the Nasdaq Stock Market notified us that we were not in
compliance with a Nasdaq SmallCap maintenance standard. This standard requires
that we maintain at least a $1.00 minimum bid price. Under the Nasdaq notice, we
had until October 29, 2001 to comply with the maintenance requirement. In order
to comply, our common stock had to trade above $1.00 for at least ten
consecutive trading days prior to such date.
On September 27, 2001, Nasdaq announced, effective immediately, it was
implementing an across-the-board moratorium on the minimum bid and public float
requirements for continued listing on Nasdaq. In particular, companies that were
under review for failure to maintain such requirements, as we were, had been
removed from the compliance process with respect to the bid price and public
float requirements. The suspension of these requirements remained effective
until January 2, 2002, and no deficiencies accrued during the suspension period.
On February 26, 2002, we announced that the company had received
notification from Nasdaq citing our inability to meet continued listing
standards for net tangible assets, stockholders' equity, market capitalization,
or net income, as set forth in Marketplace Rule 4310(c)(2)(B). We subsequently
submitted our request for a Nasdaq Qualifications Panel hearing to consider our
continued listing. A hearing was set for April 4, 2002, at which time we
presented our case for continued listing. On April 17, 2002, the company
announced that the Panel had determined our securities would continue to be
listed under the ticker symbol "RURLC" on the Nasdaq SmallCap Market via an
exception to the bid price and net income/shareholders' equity/market
capitalization requirements.
In its decision to grant an exception, the Panel determined that that our
securities would continue to be listed on the Nasdaq SmallCap Market pursuant to
the following exceptions:
Specifically, we were granted an exception to demonstrate full compliance
with the $500,000 net income standard for the fiscal year ending June 30, 2002,
excluding extraordinary or non-recurring items. As disclosed in this filing, we
reported net income of $3.9 million before the cumulative effect of a change in
accounting principle.
Nasdaq also required that we evidence year-to-date net income of at least
$500,000 at the close of its fiscal third quarter ended March 31, 2002. On May
17, 2002, we were notified by Nasdaq that we had evidenced compliance with the
necessary requirement.
Thirdly, Nasdaq required that we evidence on or before August 13, 2002 a
closing bid price of at least $1.00 per share and maintain that price for a
minimum of 10 consecutive trading days. On August 22, 2002, we were notified by
Nasdaq that we had met this requirement for continued listing and the exception
would be continued through September 30, 2002.
Upon the filing of this Form 10-K for the fiscal year ended June 30, 2002,
Nasdaq will review our financial statements in order to determine full
compliance with the exception. Nasdaq has informed us that the Listing
Qualifications Panel reserves the right to modify or extend the terms of this
exception. In order to fully comply with the terms of this exception, we
49
must demonstrate compliance with all requirements for continued listing on The
Nasdaq SmallCap Market as well as the ability to sustain compliance with those
requirements over the long term. We believe we will evidence compliance with the
requirements as set forth by Nasdaq and therefore will return to continued
listing on The Nasdaq SmallCap Market. In the event we are unable to do so, its
securities will be delisted from The Nasdaq Stock Market.
WE DEPEND ON CERTAIN BUSINESS RELATIONSHIPS.
We depend to a great extent on certain contracts with municipalities or
fire districts to provide 911 emergency ambulance services and fire protection
services. Our six largest contracts accounted for approximately 18.6% of total
revenue for the fiscal year ended June 30, 2002 and approximately 16.1% of total
revenue for the fiscal year ended June 30, 2001. One of these contracts
accounted for approximately 4.2% of total revenue for the fiscal year ended June
30, 2002 and approximately 4.0% of total revenue for the fiscal year ended 2001.
Contracts with municipalities or fire districts may have certain budgetary
approval constraints. Failure to allocate funds for a contract may adversely
affect our ability to continue to perform services without suffering significant
losses. The loss or cancellation of several of these contracts could have a
material adverse effect on our business, financial condition, cash flow, and
results of operations. We may not be successful in retaining our existing
contracts or in obtaining new contracts for emergency ambulance services or for
fire protection services.
Our contracts with municipalities and fire districts and with managed care
organizations and health care providers are short term or open-ended or for
periods ranging from two years to five years. During such periods, we may
determine that a contract is no longer favorable and may seek to modify or
terminate the contract. When making such a determination, we may consider
factors, such as weaker than expected transport volume, geographical issues
adversely affecting response times, and delays in implementing technology
upgrades. We face certain risks in attempting to terminate unfavorable contracts
prior to their expiration because of the possibility of forfeiting performance
bonds and the potential adverse political and public relations consequences. Our
inability to terminate or amend unfavorable contracts could have a material
adverse effect on our business, financial condition, cash flows, and results of
operations. We also face the risk that areas in which we provide fire protection
services through subscription arrangements with residents and businesses will be
converted to tax-supported fire districts or annexed by municipalities.
WE FACE RISKS ASSOCIATED WITH OUR PRIOR RAPID GROWTH, INTEGRATION, AND
ACQUISITIONS.
We must integrate and successfully operate the ambulance service providers
that we have acquired. The process of integrating management, operations,
facilities, and accounting and billing and collection systems and other
information systems requires continued investment of time and resources and can
involve difficulties, which could have a material adverse effect on our
business, financial condition, cash flows, and results of operations. Unforeseen
liabilities and other issues also could arise in connection with the operation
of businesses that we have previously acquired or may acquire in the future. For
example, we recently became aware of, and have taken corrective action with
respect to, various issues arising primarily from the transition to us from
various acquired operations of Federal Communications Commission (FCC) licenses
for public safety and private wireless radio frequencies used in the ordinary
course of our business. While we do not currently anticipate that action with
respect to these issues by the FCC's enforcement bureau will result in material
monetary fines or license forfeitures, there can be no assurance that this will
be the case. Our acquisition agreements contain purchase price adjustments,
rights of set-off, indemnification, and other remedies in the event that certain
unforeseen liabilities or issues arise in connection with an acquisition.
However, these purchase price adjustments, rights of set-off, indemnification,
and other remedies expire and may not be sufficient to compensate us in the
event that any liabilities or other issues arise.
50
WE FACE ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
Due to the deteriorating economic conditions and continued devaluation of
the local currency, we have reviewed our strategic alternatives with respect to
the continuation of operations in Latin America, including Argentina and
Bolivia. We have determined that we would benefit from focusing on our domestic
operations. Effective September 27, 2002, we sold our Latin American operations
to local management. While the accounting for this transaction has not been
finalized, we do not expect this transaction to have a negative impact. We
believe that both the structure of our pre-sale operations and of the sale
transaction itself shield us from liabilities associated with past or future
activities of our former Latin American operations. However, due to the nature
of local laws and regulatory requirements and the uncertain economic and
political environment, particularly in Argentina, there can be no assurance that
we will not be required to defend against future claims. Unanticipated claims
successfully asserted against us could have an adverse effect on our business,
financial condition, cash flows, and results of operations.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY.
The ambulance service industry is highly competitive. Ambulance and general
transport service providers compete primarily on the basis of quality of
service, performance, and cost. In order to compete successfully, we must make
continuing investments in our fleet, facilities, and operating systems. We
believe that counties, fire districts, and municipalities consider the following
factors in awarding a contract:
* quality of medical care,
* historical response time performance,
* customer service,
* financial stability, and
* personnel policies and practices.
We currently compete with the following entities to provide ambulance
services:
* governmental entities (including fire districts),
* hospitals,
* other national ambulance service providers,
* large regional ambulance service providers, and
* local and volunteer private providers.
Municipalities, fire districts, and health care organizations that
currently contract for ambulance services could choose to provide ambulance
services directly in the future. We are experiencing increased competition from
fire departments in providing emergency ambulance service. Some of our current
competitors and certain potential competitors have or have access to greater
capital and other resources than us.
Tax-supported fire districts, municipal fire departments, and volunteer
fire departments represent the principal providers of fire protection services
for residential and commercial properties. Private providers represent only a
small portion of the total fire protection market and generally provide services
where a tax-supported municipality or fire district has decided to contract for
these services or has not assumed the financial responsibility for fire
protection. In these situations, we provide services for a municipality or fire
district on a contract basis or provide fire protection services directly to
residences and businesses who subscribe for this service. We cannot provide
assurance that:
51
* we will be able continue to maintain current contracts or subscription
or to obtain additional fire protection business on a contractual or
subscription basis;
* fire districts or municipalities will not choose to provide fire
protection services directly in the future; or
* areas in which we provide services through subscriptions will not be
converted to tax-supported fire districts or annexed by
municipalities.
WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL.
Our success depends upon our ability to recruit and retain key personnel.
We could experience difficulty in retaining our current key personnel or in
attracting and retaining necessary additional key personnel. Low unemployment in
certain market areas currently makes the recruiting, training, and retention of
full-time and part-time personnel more difficult and costly, including the cost
of overtime wages. Our internal growth will further increase the demand on our
resources and require the addition of new personnel. We have entered into
employment agreements with certain of our executive officers and certain other
key personnel. Failure to retain or replace our key personnel may have an
adverse effect on our business.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Certain provisions of our certificate of incorporation, shareholders'
rights plan and Delaware law could make it more difficult for a third party to
acquire control of our company, even if a change in control might be beneficial
to stockholders. This could discourage potential takeover attempts and could
adversely affect the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our primary exposure to market risk consists of changes in interest rates
on our borrowing activities. We face the possibility of increased interest
expense in connection with our amended credit facility which bears interest at
LIBOR plus 7.0%. A 1% increase in the prime 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 continually monitor this risk and
review the potential benefits of entering into hedging transactions, such as
interest rate swap agreements, to mitigate the exposure to interest rate
fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements as of June 30, 2002 and for the
fiscal year then ended together with related notes and the report of
PricewaterhouseCoopers LLP are set forth herein.
Our Consolidated Financial Statements as of June 30, 2000 and 2001 and for
each of the three years in the period ended June 30, 2001 were audited by Arthur
Andersen LLP (Andersen) who has ceased operations. A copy of Andersen's
previously issued report on such financial statements is set forth herein. Such
report has not been reissued by Andersen.
52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Rural/Metro Corporation:
In our opinion, the accompanying consolidated balance sheet as of June 30, 2002
and the related consolidated statements of operations, of changes in
stockholders' equity (deficit), and of cash flows present fairly, in all
material respects, the financial position of Rural/Metro Corporation and its
subsidiaries (the Company) at June 30, 2002, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The Company's consolidated financial
statements as of June 30, 2001, and for each of the two years in the period
ended June 30, 2001, prior to the revisions described in Notes 5, 11 and 16 to
the consolidated financial statements, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements and included an explanatory
paragraph describing matters that raised substantial doubt about the Company's
ability to continue as a going concern in their report dated October 12, 2001.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its method of accounting for goodwill effective July 1, 2001.
As discussed above, the Company's consolidated financial statements as of June
30, 2001, and for each of the two years in the period ended June 30, 2001, were
audited by other independent accountants who have ceased operations. As
described in Note 5, those financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets", which was adopted by the
Company as of July 1, 2001. We audited the transitional disclosures for 2001 and
2000 included in Note 5. In our opinion, the transitional disclosures for 2001
and 2000 in Note 5 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 or 2000 financial
statements taken as a whole.
PricewaterhouseCoopers LLP
Phoenix, Arizona
September 30, 2002
53
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID
NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN
THIS FORM 10-K) INTO ANY OF THE COMPANY'S REGISTRATION STATEMENTS.
AS DISCUSSED IN NOTE 5, THE COMPANY HAS REVISED ITS FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 2001 AND 2000 TO INCLUDE THE TRANSITIONAL DISCLOSURES
REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND
INTANGIBLE ASSETS. THE ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES. THE
REVISIONS TO THE 2001 AND 2000 FINANCIAL STATEMENTS RELATED TO THESE
TRANSITIONAL DISCLOSURES WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS
STATED IN THEIR REPORT APPEARING HEREIN.
ADDITIONALLY, AS DISCUSSED IN NOTES 11 AND 16, THE COMPANY HAS REVISED ITS 2001
FINANCIAL STATEMENTS TO REFLECT CHANGES IN DISCLOSURES RELATING TO ITS NET
DEFERRED TAX LIABILITY AND HAS REVISED ITS 2001 AND 2000 FINANCIAL STATEMENTS TO
REFLECT CHANGES IN DISCLOSURES RELATING TO ITS SEGMENT INFORMATION. THE ANDERSEN
REPORT DOES NOT EXTEND TO THESE CHANGES TO THE 2001 AND 2000 FINANCIAL
STATEMENTS, AND THESE REVISIONS HAVE NOT BEEN AUDITED BY ANY INDEPENDENT
ACCOUNTANTS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rural/Metro Corporation:
We have audited the accompanying consolidated balance sheets of RURAL/METRO
CORPORATION (a Delaware corporation) and subsidiaries (collectively, the
Company) as of June 30, 2001 and 2000,* and the related consolidated statements
of operations, changes in stockholders' equity (deficit), cash flows, and
comprehensive income (loss)* for each of the three years in the period ended
June 30, 2001*. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rural/Metro Corporation and
subsidiaries as of June 30, 2001 and 2000,* and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001*, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1* to the
financial statements, the Company is operating under a waiver of certain
financial covenants contained in its revolving credit facility, has a
significant working capital deficiency, cannot borrow additional funds from its
revolving credit facility, and incurred significant losses for the years ended
June 30, 2000 and 2001. These as well as other matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1*. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.**
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
October 12, 2001
54
* The Company's consolidated balance sheet as of June 30, 2000 and the
consolidated statements of operations, changes in stockholder's equity
(deficit), cash flows and comprehensive income (loss) for the year ended June
30, 1999 are not included in this Form 10-K. Additionally, the information
contained in the consolidated statement of comprehensive income (loss) for the
years ended June 30, 2001 and 2000 has been integrated in the consolidated
statement of stockholders' equity (deficit) for those years and the consolidated
statement of comprehensive income (loss) has been deleted. Finally, the
discussion of the Company's revolving credit facility is included in Note 10.
** The schedule to which this paragraph refers has not been included in
this Form 10-K because the required information was already included in the
Notes to the Consolidated Financial Statements.
55
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 2002 AND 2001
2002 2001
--------- ---------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash .................................................................... $ 9,828 $ 8,699
Accounts receivable, net of allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts of $32,668 and $65,229
respectively .......................................................... 99,115 103,260
Inventories ............................................................. 12,220 13,173
Prepaid expenses and other .............................................. 9,597 6,753
--------- ---------
Total current assets .......................................... 130,760 131,885
PROPERTY AND EQUIPMENT, net ............................................. 48,532 57,999
GOODWILL ................................................................ 41,244 90,757
OTHER ASSETS ............................................................ 16,902 17,893
--------- ---------
$ 237,438 $ 298,534
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ........................................................ $ 11,961 $ 12,915
Accrued liabilities ..................................................... 73,719 95,390
Deferred subscription fees .............................................. 15,409 14,707
Current portion of long-term debt ....................................... 1,633 294,439
--------- ---------
Total current liabilities ..................................... 102,722 417,451
LONG-TERM DEBT, net of current portion .................................. 298,529 1,286
OTHER LIABILITIES ....................................................... 477 994
DEFERRED INCOME TAXES ................................................... 650 950
--------- ---------
Total liabilities ............................................. 402,378 420,681
--------- ---------
MINORITY INTERESTS ...................................................... 379 8,379
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued
at June 30, 2002 and 2001 ............................................. -- --
Common stock, $.01 par value, 23,000,000 shares authorized, 15,651,095
and 14,899,920 shares outstanding at June 30, 2002 and 2001,
respectively .......................................................... 159 152
Additional paid-in capital .............................................. 138,470 137,948
Accumulated deficit ..................................................... (313,025) (267,401)
Accumulated other comprehensive income (loss)............................ 10,316 14
Treasury stock, at cost, 149,456 shares at June 30, 2002 and 2001 ....... (1,239) (1,239)
--------- ---------
Total stockholders' equity (deficit) .......................... (165,319) (130,526)
--------- ---------
$ 237,438 $ 298,534
========= =========
See accompanying notes
56
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET REVENUE ................................................................ $ 497,038 $ 504,316 $ 570,074
--------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ............................................ 287,307 301,055 323,285
Provision for doubtful accounts .......................................... 69,900 102,470 95,623
Provision for doubtful accounts-- change in estimate ..................... -- -- 65,000
Depreciation ............................................................. 15,155 21,809 25,009
Amortization of intangibles .............................................. 1,055 7,352 8,687
Other operating expenses ................................................. 97,640 142,009 127,743
Asset impairment charges ................................................. -- 94,353 --
Loss on disposition of clinic operations ................................. -- 9,374 --
Contract termination costs and related asset impairment charges........... (107) 9,256 --
Restructuring charge and other ........................................... (718) 9,091 34,047
--------- --------- ---------
Total operating expenses ........................................... 470,232 696,769 679,394
--------- --------- ---------
OPERATING INCOME (LOSS) .................................................... 26,806 (192,453) (109,320)
Interest expense, net ...................................................... (24,976) (30,001) (25,939)
Other income (expense) net ................................................. 9 (2,402) 2,890
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ................................... 1,839 (224,856) (132,369)
INCOME TAX (PROVISION) BENEFIT ............................................. 2,050 (1,875) 32,837
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE .................................................... 3,889 (226,731) (99,532)
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE
LICENSES (NET OF TAX OF $0)................................................. -- -- (1,200)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX OF $0 IN
2002 AND BENEFIT OF $392 IN 2001) .......................................... (49,513) -- (541)
--------- --------- ---------
NET INCOME (LOSS) .......................................................... $ (45,624) $(226,731) $(101,273)
========= ========= =========
INCOME (LOSS) PER SHARE
Basic--
Income (loss) before extraordinary loss and cumulative effect of
change in accounting principle ....................................... $ 0.26 $ (15.38) $ (6.82)
Extraordinary loss on expropriation of Canadian ambulance service
licenses ............................................................. -- -- (0.08)
Cumulative effect of change in accounting principle .................... (3.26) -- (0.04)
--------- --------- ---------
Net income (loss) .......................................................... $ (3.00) $ (15.38) $ (6.94)
========= ========= =========
Diluted--
Income (loss) before extraordinary loss and cumulative effect of
change in accounting principle ....................................... $ 0.25 $ (15.38) $ (6.82)
Extraordinary loss on expropriation of Canadian ambulance service
licenses ............................................................. -- -- (0.08)
Cumulative effect of change in accounting principle .................... (3.14) -- (0.04)
--------- --------- ---------
Net income (loss) .......................................................... $ (2.89) $ (15.38) $ (6.94)
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC ................................ 15,190 14,744 14,592
========= ========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED .............................. 15,773 14,744 14,592
========= ========= =========
See accompanying notes
57
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK TOTAL
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE, June 30, 1999 .................. $ -- $ 148 $ 137,792 $ 60,603 $ (465) $ (1,239) $ 196,839
Issuance of 121,828 shares of
common stock ........................ -- 1 654 -- -- -- 655
Cancellation of 25,775 shares
previously issued in connection
acquisitions ........................ -- -- (843) -- -- -- (843)
Comprehensive loss:
Net loss ............................ -- -- -- (101,273) -- -- (101,273)
Cumulative translation adjustments .. -- -- -- 213 -- 213
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss .................. -- -- -- (101,273) 213 -- (101,060)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, June 30, 2000 .................. -- 149 137,603 (40,670) (252) (1,239) 95,591
Issuance of 273,584 shares of
common stock ......................... -- 3 345 -- -- -- 348
Comprehensive loss:
Net loss ............................ -- -- -- (226,731) -- -- (226,731)
Cumulative translation adjustments .. -- -- -- -- 266 -- 266
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss .................. -- -- -- (226,731) 266 -- (226,465)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, June 30, 2001 .................. -- 152 137,948 (267,401) 14 (1,239) (130,526)
Issuance of 751,175 shares of
common stock ........................ -- 7 449 -- -- -- 456
Fair value of options issued
to non-employee ..................... -- -- 73 -- -- -- 73
Comprehensive loss:
Net loss ............................ -- -- -- (45,624) -- -- (45,624)
Cumulative translation adjustments .. -- -- -- -- 10,302 -- 10,302
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss .................. -- -- -- (45,624) 10,302 -- (35,322)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, June 30, 2002 .................. $ -- $ 159 $ 138,470 $(313,025) $ 10,316 $ (1,239) $(165,319)
========= ========= ========= ========= ========= ========= =========
See accompanying notes
58
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ....................................................................... $ (45,624) $(226,731) $(101,273)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities--
Non-cash portion of restructuring charge and other ........................... -- 4,092 28,873
Non-cash portion of contract termination charges ............................. -- 8,086 --
Asset impairment charges ..................................................... -- 94,353 --
Loss on disposition of clinic operations ..................................... -- 9,374 --
Extraordinary loss on expropriation of Canadian ambulance service licenses ... -- -- 1,200
Cumulative effect of change in accounting principle .......................... 49,513 -- 541
Depreciation and amortization ................................................ 16,210 29,161 33,696
Gain on sale of property and equipment ....................................... (285) (427) (184)
Provision for doubtful accounts .............................................. 69,900 102,470 160,623
Deferred income taxes ........................................................ (300) 950 (9,438)
Equity earnings net of distributions received ................................ (249) 118 587
Undistributed earnings (losses) of minority shareholders ..................... (9) (1,026) (2,890)
Amortization of debt discount ................................................ 26 26 26
Non-cash charge related to joint venture ..................................... -- 4,045 --
Non-cash stock compensation expense .......................................... 73 -- --
Change in assets and liabilities--
Increase in accounts receivable .............................................. (67,322) (62,099) (119,219)
(Increase) decrease in inventories ........................................... 948 5,811 (3,370)
(Increase) decrease in prepaid expenses and other ............................ (3,018) 1,072 2,215
(Increase) decrease in other assets .......................................... (1,895) 2,463 (460)
Increase (decrease) in accounts payable ...................................... 1,337 (2,654) (1,669)
Increase (decrease) in accrued liabilities and other liabilities ............. (10,679) 39,057 (889)
Increase (decrease) in deferred subscription fees ............................ 702 (282) 80
--------- --------- ---------
Net cash provided by (used in) operating activities ...................... 9,328 7,859 (11,551)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ........................................................... (6,854) (5,774) (17,131)
Proceeds from the sale of property and equipment ............................... 1,022 1,969 1,300
Proceeds from the expropriation of Canadian ambulance services licenses ........ -- -- 2,191
--------- --------- ---------
Net cash used in investing activities .................................... (5,832) (3,805) (13,640)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Borrowings (repayments) on revolving credit facility ....................... (1,263) (3,765) 33,307
Repayment of debt and capital lease obligations ................................ (1,862) (2,773) (5,704)
Borrowings under capital lease obligations ..................................... -- 283 --
Issuance of common stock ....................................................... 456 348 655
--------- --------- ---------
Net cash provided by (used in) financing activities ...................... (2,669) (5,907) 28,258
--------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH ............................... 302 265 40
--------- --------- ---------
INCREASE (DECREASE) IN CASH .................................................... 1,129 (1,588) 3,107
CASH, beginning of year ........................................................ 8,699 10,287 7,180
--------- --------- ---------
CASH, end of year .............................................................. $ 9,828 $ 8,699 $ 10,287
========= ========= =========
See accompanying notes
59
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND OPERATIONS
Rural/Metro Corporation, a Delaware corporation, and its subsidiaries
(collectively, the Company) is a diversified emergency services company
providing medical transportation, fire protection and other related services in
26 states and the District of Columbia. In the United States, the Company
provides 911 emergency and non-emergency ambulance services to patients on both
a fee-for-service basis and a non-refundable subscription fee basis. Fire
protection services are provided either under contracts with municipalities or
fire districts, or on a subscription fee basis to individual homeowners or
commercial property owners. Through September 27, 2002, the Company provided
urgent home medical care and ambulance services under capitated service
arrangements in Latin America. As discussed in Note 17, the Company disposed of
its Latin American operations in a sale to local management on September 27,
2002.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Significant estimates have been used by management in
conjunction with the measurement of the allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts, the valuation allowance for
deferred tax assets, workers' compensation and general liability claim reserves,
fair values of reporting units for purposes of goodwill impairment testing and
future cash flows associated with long-lived assets. Actual results could differ
from these estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of
the Company, its wholly-owned subsidiaries and a majority-owned subsidiary which
it controls. All material intercompany accounts and transactions have been
eliminated. The Company's 50% interest in a public/private alliance with the
City of San Diego is accounted for on the equity method. Investments in
companies that represent less than 20% of the related voting stock are accounted
for on the cost basis.
REVENUE RECOGNITION
Medical transportation and related services revenue includes 911 emergency
and non-emergency ambulance and alternative transportation service fees as well
as municipal subsidies and subscription fees. Domestic ambulance and alternative
transportation service fees are recognized as services are provided and are
recorded net of estimated Medicare, Medicaid and other contractual discounts.
Ambulance subscription fees, which are generally received in advance, are
deferred and recognized on a pro rata basis over the term of the subscription
agreement, which is generally one year.
Revenue generated under fire protection service contracts is recognized
over the life of the contract. Subscription fees, which are generally received
in advance, are deferred and recognized on a pro rata basis over the term of the
subscription agreement, which is generally one year. Other revenue primarily
consists of dispatch, fleet, billing, training and home health care service fees
which are recognized when the services are provided.
60
An allowance for Medicare, Medicaid and contractual discounts as well as
for doubtful accounts is based on historical collection trends, credit risk
assessments applicable to certain types of payers and other relevant
information. A summary of activity in the Company's allowance for Medicare,
Medicaid and contractual discounts and doubtful accounts during the fiscal years
ended June 30, 2002, 2001 and 2000 is as follows:
JUNE 30,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Balance at beginning of year $ 65,229 $ 87,752 $ 43,392
Provision for Medicare, Medicaid
and contractual discounts 134,039 135,435 102,880
Provision for doubtful accounts 69,900 102,470 160,623
Write-offs and other adjustments (236,500) (260,428) (219,143)
--------- --------- ---------
Balance at end of year $ 32,668 $ 65,229 $ 87,752
========= ========= =========
The provision for doubtful accounts in fiscal 2000 included the $65.0
million charge relating to a change in the methodology used by the Company in
determining its allowance for doubtful accounts as the Company experienced a
decrease in collections in service areas that were closed or downsized due to
the Company's lack of physical presence in the service area. The Company also
recorded charges in fiscal 2000 for uncollectible accounts in those service
areas that were identified for closure or downsizing during the year. The
provision for doubtful accounts in fiscal 2001 included an additional $26.2
million relating to the determination of the ultimate uncollectibility of
accounts relating to service areas identified for closure or downsizing in
fiscal 2000 as well as for other collectibility issues.
INVENTORIES
Inventories, consisting primarily of ambulance and fleet supplies, are
stated at the lower of cost, on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation,
and is depreciated over the estimated useful lives using the straight-line
method. Equipment and vehicles are depreciated over three to ten years and
buildings are depreciated over fifteen to thirty years. Property and equipment
held under capital leases is stated at the present value of minimum lease
payments, net of accumulated amortization. These assets are amortized over the
shorter of the lease term or the estimated useful life of the underlying assets
using the straight-line method. Major additions and improvements are
capitalized; maintenance and repairs which do not improve or significantly
extend the life of assets are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the related carrying amounts may not be
recoverable, by comparing the carrying amount of such assets to the estimated
undiscounted future cash flows associated with them. In cases where the
estimated undiscounted cash flows are less than the related carrying amount, an
impairment loss is recognized for the amount by which the carrying amount
61
exceeds the fair value of the assets. The fair value is determined based on the
present value of estimated future cash flows using a discount rate commensurate
with the risks involved.
INCOME TAXES
Income taxes are accounted for using the asset and liability method. Under
this method, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for those deferred tax assets for which it is
more likely than not that the related benefits will not be realized.
STOCK COMPENSATION
The Company accounts for employee stock compensation using the intrinsic
value method specified by Accounting Principles Board (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations (APB 25). The pro
forma disclosures required by Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, (SFAS 123) are included in
Note 13. The Company accounts for stock-based compensation arrangements with
non-employees in accordance with Emerging Issues Task Force Issue No 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or Services. During the year
ended June 30, 2002, the Company recorded a non-cash charge to other operating
expenses of approximately $73,000 related to stock options issued to
non-employees.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted earnings per share
computations for the years ended June 30, 2002, 2001 and 2000 are as follows (in
thousands, except per share amounts):
2002 2001 2000
----------------------------------- ----------------------------------- -----------------------------------
INCOME* SHARES PER SHARE LOSS* SHARES PER SHARE LOSS* SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
Basic EPS ...... $ 3,889 15,190 $ (0.26) $(226,731) 14,744 $ (15.38) $ (99,532) 14,592 $ (6.82)
========= ========= =========
Effect of stock
options ........ -- 583 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Diluted EPS .... $ 3,889 15,773 $ (0.25) $(226,731) 14,744 $ (15.38) $ (99,532) 14,592 $ (6.82)
========= ========= ========= ========= ========= ========= ========= ========= =========
* Represents income (loss) before extraordinary loss and cumulative effect of
change in accounting principle.
As a result of the net loss before extraordinary loss and cumulative effect
of change in accounting principle in 2001 and 2000, stock options with exercise
prices below the applicable market prices have been excluded from the
calculation of diluted earnings per share as the impact was anti-dilutive. Such
options totaled 169,000 in 2001 and 39,000 in 2000.
FOREIGN CURRENCY TRANSLATION
Our Argentine subsidiaries utilized the peso as their functional currency
as their business is primarily transacted in pesos. Since 1991, the Argentine
peso had been pegged to the U.S. dollar at an exchange rate of 1 to 1. In
December 2001, the Argentine government imposed exchange restrictions which
severely limited cash conversions and withdrawals. When exchange houses reopened
on January 11, 2002, the peso to dollar exchange rate closed at 1.7 pesos to the
dollar.
In order to prepare the accompanying financial statements as of and for the
year ended June 30, 2002, we translated the balance sheet of our Argentine
subsidiaries using an exchange rate of 3.9 pesos to 1 US dollar, the closing
rate on June 30, 2002, while their statements of operations and cash flows were
translated using the weighted average rate in effect during the period. As the
liabilities of Argentine subsidiaries exceeded their assets, the change in
exchange rates resulted in a credit to accumulated other comprehensive income
62
(loss) in our consolidated balance sheet as of June 30, 2002. Further
fluctuations in the peso to dollar exchange rate will impact the translation of
the financial statements of the Argentine subsidiaries for financial reporting
purposes. As discussed in Note 17, the Company disposed of its Latin American
operations in a sale to local management on September 27, 2002.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with federally-insured institutions and
limits the amount of credit exposure to any one institution. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers and their geographical dispersion.
START-UP COSTS
In accordance with Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities," effective July 1, 1999, the Company was required to change
its method of accounting for organization costs. Previously, the Company
capitalized such costs and amortized them using the straight-line method over
five years. At June 30, 1999, such unamortized costs totaled $933,000. During
the fiscal year ended June 30, 2000, the Company wrote-off its capitalized
organization costs and will expense any future organization costs as incurred.
The write-off was $541,000 (net of a tax benefit of $392,000) and has been
reflected in the consolidated statements of operation as the cumulative effect
of change in accounting principle.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). Under this
standard, asset retirement obligations will be recognized when incurred at their
estimated fair value. In addition, the cost of the asset retirement obligations
will be capitalized as a part of the asset's carrying value and depreciated over
the asset's remaining useful life. The Company will be required to adopt SFAS
143 effective July 1, 2002 and does not expect that it will have a material
impact on its financial condition or results of operations.
In October, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for the Company as of July 1, 2002. The Company does not expect the
implementation of SFAS 144 to have a material effect on its financial condition
or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002 (SFAS
145). This standard rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company is required to adopt SFAS 145 effective July 1, 2002 and
does not expect that it will have a material impact on its financial condition
or results of operations.
63
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS 146
requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred. Under EITF 94-3, a liability for
exit costs, as defined in EITF No. 94-3 were recognized at the date of an
entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated by the Company after December
31, 2002.
RECLASSIFICATIONS OF 2001 AND 2000 FINANCIAL INFORMATION
Certain financial information relating to fiscal 2001 and 2000 has been
reclassified to conform with the 2002 presentation.
(2) LIQUIDITY
During fiscal 2002, the Company incurred a net loss of $45.6 million
compared with net losses of $226.7 million in fiscal 2001 and $101.3 million in
fiscal 2000. (The net loss in 2002 included a charge of $49.5 million relating
to the adoption effective July 1, 2002 of SFAS 142 as discussed in Note 5. The
net losses in fiscal 2001 and fiscal 2000 included asset impairment,
restructuring and other similar charges totaling $122.0 million and $34.0
million, respectively.) The Company's operating activities provided cash
totaling $9.3 million in 2002 and $7.9 million in 2001 and utilized cash
totaling $11.6 million in 2000.
At June 30, 2002, the Company had cash of $9.8 million, debt of $300.2
million and a stockholders' deficit of $165.3 million. The Company's debt
includes $149.9 million of 7 7/8% senior notes due 2008, $144.4 million
outstanding under its revolving credit facility, $4.6 million payable to a
former joint venture partner and $1.3 million of capital lease obligations.
As discussed in Note 10, the Company was not in compliance with certain of
the covenants contained in its revolving credit facility. On September 30, 2002,
the Company entered into an amended credit facility with its lenders which,
among other things, extended the maturity date of the facility from March 16,
2003 to December 31, 2004, waived previous non-compliance, and required the
issuance to the lenders of 211,549 shares of the Company's Series B convertible
preferred stock.
The Company's ability to service its long-term debt, to remain in
compliance with the various restrictions and covenants contained in its credit
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, its future operating
performance as well as to 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 from operations, it may
need to raise additional equity or borrow additional funds to achieve its longer
term business objectives. There can be no assurance that such equity or
borrowings will be available or, if available, will be at rates or prices
acceptable to the Company. Although there can be no assurances, management
believes that cash flow from operating activities coupled with existing cash
balances 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 June 30, 2003. To the extent that actual results or events differ from
the Company's financial projections or business plans, its liquidity may be
adversely impacted.
64
(3) ASSET IMPAIRMENTS, RESTRUCTURING AND OTHER CHARGES
ASSET IMPAIRMENTS
In connection with the budgeting process for the fiscal year ending June
30, 2002, which was completed in the fourth quarter of fiscal 2001, the Company
analyzed each cost center within its various service areas not identified for
closure or downsizing to determine whether the associated long-lived assets
(e.g., property, equipment and goodwill) would be recoverable from future
operations. Cost centers represent individual operating units within a given
service area for which separately identifiable cash flow information is
available. The Company performed this analysis as a result of its expectations
of a challenging health care reimbursement environment as well as anticipated
increases in labor and insurance costs with respect to its domestic ambulance
operations. This analysis considered the results of operations over the past
year. The analysis with respect to the Company's Argentine operations included
the impact of the deteriorating economic and political environment as well as
information developed by a third party concerning the marketability of these
operations during fiscal 2001.
In order to assess recoverability, the Company estimated the net future
cash flows for each cost center and then compared the resulting undiscounted
amounts to the carrying value of each cost center's long-lived assets. It should
be noted that property and equipment balances are specifically identified with
each cost center. Additionally, goodwill is specifically identified with each
cost center at the time of acquisition and, therefore, related allocations were
not necessary for purposes of performing the impairment analysis.
For those cost centers where estimated future net cash flows on an
undiscounted basis were less than the related carrying amounts of the long-lived
assets, an asset impairment was considered to exist. The Company measured the
amount of the asset impairment for each such cost center by discounting its
estimated future net cash flows using a discount rate of 18.5% and comparing the
resulting amount to the carrying value of its long-lived assets. Based upon this
analysis, the Company determined that asset impairment charges approximating
$94.4 million were required for cost centers within its domestic and Argentine
ambulance operations. The asset impairments were charged directly against the
related asset balances. A summary of the related charge is as follows:
PROPERTY,
EQUIPMENT
GOODWILL AND OTHER TOTAL
-------- --------- -------
(IN THOUSANDS)
Domestic ambulance operations $41,631 $ 6,419 $48,050
Argentine ambulance operations 44,327 1,976 46,303
------- ------- -------
Total $85,958 $ 8,395 $94,353
======= ======= =======
As discussed in Note 5, the Company changed its method of accounting for
goodwill effective July 1, 2001 including the manner in which goodwill
impairments are assessed.
RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of fiscal 2001, the Company decided to close or
downsize nine service areas and in connection therewith, recorded restructuring
charges in accordance with EITF 94-3 as well as other related charges totaling
$9.1 million. These charges included $1.5 million to cover severance costs
associated with the termination of approximately 250 employees, all of whom were
expected to leave by the end of fiscal 2002, lease termination and other exit
costs of $2.4 million, and asset impairment charges for goodwill and property
and equipment of $4.1 million and $1.1 million, respectively, related to the
impacted service areas. The service areas selected for closure or downsizing
generated revenue of $11.8 million, operating income of $1.0 million and cash
flow of $2.5 million for the year ended June 30, 2002. The service areas
selected for closure or downsizing generated revenue of $17.7 million, operating
losses of $4.0 million and negative cash flow of $3.2 million for the fiscal
year ended June 30, 2001. Approximately 88 of the impacted employees have been
terminated, as of June 30, 2002.
65
The previously mentioned charge included accrued severance, lease
termination and other costs totaling $1.5 million relating to an under
performing service area that the Company had planned to exit at the time of
contract expiration in December 2001. During fiscal 2002, the contract was
extended for a one-year period at the request of the municipality to enable it
to transition medical transportation service to a new provider. In connection
with the contract extension, the Company reversed $0.2 million of previously
accrued lease termination costs relating to the extension period. This reversal
is reflected as a credit to restructuring and other charges in the consolidated
statement of operations for fiscal 2002. The operating environment in this
service area has improved and the Company recently was awarded a multi-year
contract. As a result, the remaining reserve of $1.3 million originally recorded
in 2001 will be released to income when the related contract is finalized.
During fiscal 2000, the Company decided to close or downsize 26 service
areas and in connection therewith, recorded restructuring charges in accordance
with EITF 94-3 as well as other related charges totaling $34.0 million. These
restructuring charges included $6.6 million to cover severance costs associated
with the termination of approximately 300 employees, all of whom had left the
Company by June 30, 2001, lease termination and other exit costs of $3.3
million, and asset impairment charges for goodwill and property and equipment of
$22.2 million and $1.9 million, respectively. The service areas selected for
closure generated revenue of $38.7 million, operating losses of $3.7 million and
negative cash flow of $1.0 million for the fiscal year ended June 30, 2000.
A summary of activity in the Company's restructuring reserves is:
LEASE WRITE-OFF OF
SEVERANCE TERMINATION INTANGIBLE OTHER EXIT
COSTS COSTS ASSETS COSTS TOTAL
-------- -------- -------- -------- --------
Balance at June 30, 1999 $ 1,328 $ -- $ -- $ -- $ 1,328
Fiscal 2000 charge recorded 6,621 3,299 22,250 1,877 34,047
Fiscal 2000 usage (4,420) (52) (22,250) (521) (27,243)
-------- -------- -------- -------- --------
Balance at June 30, 2000 3,529 3,247 -- 1,356 8,132
Fiscal 2001 charge recorded 1,475 2,371 4,092 1,153 9,091
Fiscal 2001 usage (4,531) (1,071) (4,092) (1,360) (11,054)
Adjustments 1,361 (1,313) -- (48) --
-------- -------- -------- -------- --------
Balance at June 30, 2001 1,834 3,234 -- 1,101 6,169
Fiscal 2002 usage (1,025) (1,172) -- (951) (3,148)
Adjustments (52) (548) -- (118) (718)
-------- -------- -------- -------- --------
Balance at June 30, 2002 $ 757 $ 1,514 $ -- $ 32 $ 2,303
======== ======== ======== ======== ========
LOSS ON DISPOSITION OF CLINIC OPERATIONS
During fiscal 2001, the Company sold its Argentine clinic operations in
exchange for a $3.0 million non-interest bearing note receivable. The note,
which is included in other assets in the consolidated balance sheet, requires
monthly principal payments of $25,000 through April 2011. The sale resulted in a
loss on disposition of $9.4 million, including the write-off of $9.3 million of
related goodwill. The clinic operations generated revenue of $4.0 million,
operating losses of $1.5 million and negative cash flow of $0.9 million for the
fiscal year ended June 30, 2001.
CONTRACT TERMINATIONS AND RELATED ASSET IMPAIRMENTS
In November 2000, the Company learned that its exclusive 911 contract in
Lincoln, Nebraska would not be renewed effective December 31, 2000 and in
connection therewith, recorded a contract termination charge of $5.2 million.
This charge included asset impairments for related goodwill and equipment
totaling $4.3 million (the exclusive 911 contract was acquired in a purchase
66
business combination in fiscal 1995), $0.8 million to cover severance costs
associated with terminated employees, and $0.1 million to cover lease
terminations and other exit costs. The Lincoln contract generated revenue of
$4.7 million, operating income of $0.4 million and cash flow of $0.5 million in
fiscal 2000, its last full year of operations.
In May 2001, the Company learned that its exclusive 911 contract in
Arlington, Texas would not be renewed effective September 30, 2001 and in
connection therewith, recorded a contract termination charge of $4.1 million.
This charge included asset impairments for related goodwill and equipment of
$3.9 million (the exclusive 911 contract was acquired in a purchase business
combination in fiscal 1997), $0.1 million to cover severance costs associated
with terminated employees, and $0.1 million to cover lease termination and other
exit costs. The asset impairments were charged directly against the related
assets. The Arlington contract generated revenue of $8.3 million, operating
income of $0.1 million and cash flow of $0.5 million in fiscal 2001 its last
full year of operations.
EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES
During the fiscal year ended June 30, 2000, the Company recorded an
extraordinary loss on the expropriation of Canadian ambulance service licenses
of approximately $1.2 million (net of $0 tax). The Company received
approximately $2.2 million from the Ontario Ministry of Health as compensation
for the loss of licenses and incurred costs and wrote-off assets, mainly
goodwill, totaling $3.4 million.
(4) PROPERTY AND EQUIPMENT
Property and equipment, including equipment held under capital leases,
consisted of the following:
JUNE 30,
---------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Equipment $ 55,739 $ 57,840
Vehicles 73,908 71,628
Land and buildings 16,788 16,896
Leasehold improvements 7,270 8,373
--------- ---------
153,705 154,737
Less: Accumulated depreciation (105,173) (96,738)
--------- ---------
$ 48,532 $ 57,999
========= =========
The Company held vehicles and equipment with a gross carrying value of
approximately $14.2 and $16.9 million at June 30, 2002 and 2001, respectively,
under capital lease agreements. Accumulated depreciation on these assets totaled
approximately $12.3 and $14.3 million at June 30, 2002 and 2001, respectively.
The Company has pledged property and equipment, including land and a
building, leasehold improvements and equipment, with a net book value of
approximately $11.2 million to secure certain of its obligations under its
insurance and surety bonding programs including certain reimbursement
obligations with respect to the workers' compensation, performance bonds, appeal
bonds and other aspects of such insurance and surety bonding programs.
A summary of activity in the Company's property and equipment balance is as
follows:
67
JUNE 30,
--------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year $ 57,999 $ 85,919 $ 95,032
Depreciation expense (15,155) (21,809) (25,009)
Additions 6,854 5,774 17,131
Asset impairments -- (8,502) --
Asset disposals (737) (1,643) (1,220)
Effect of Argentine peso devaluation (429) -- --
Disposition of clinic operations -- (1,740) --
Expropriation of Canadian ambulance
service licenses -- -- (15)
-------- -------- --------
Balance at end of year $ 48,532 $ 57,999 $ 85,919
======== ======== ========
(5) GOODWILL
In June 2001, the FASB issued SFAS No. 141, Business Combinations (SFAS
141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142.) SFAS 141
superseded APB Opinion No. 16, Business Combinations. The provisions of SFAS 141
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001; provide specific criteria for the
initial recognition and measurement of intangible assets apart from goodwill;
and, require that unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142, certain intangible assets be
reclassified into or out of goodwill based on certain criteria. SFAS 142
supersedes APB Opinion No. 17, Intangible Assets, and is effective for fiscal
years beginning after December 15, 2001 although earlier adoption is encouraged.
SFAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. The provisions of SFAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets and require that
such assets be tested annually for impairment (and in interim periods if events
or circumstances indicate that the related carrying amount may be impaired),
require that reporting units be identified for purposes of assessing potential
impairments, and remove the forty-year limitation on the amortization period of
intangible assets that have finite lives.
SFAS 142 requires that goodwill be tested for impairment using a two-step
process. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not considered to
be impaired and the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test must be performed to measure the amount of
impairment loss, if any. The second step of the goodwill impairment test
compares the implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. If
the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess.
The Company adopted SFAS 142 effective July 1, 2001 and discontinued
amortization of goodwill as of that date. During the first quarter of fiscal
2002, the Company identified its various reporting units which consist of the
individual cost centers within its medical transportation and fire and other
operating segments for which separately identifiable cash flow information is
available. During the second quarter of fiscal 2002, the Company completed the
first step impairment test as of July 1, 2001. Potential goodwill impairments
68
were identified in certain of these reporting units. During the fourth quarter
of fiscal 2002, the Company completed the second step test and determined that
all or a portion of the goodwill applicable to certain of its reporting units
was impaired as of July 1, 2001 resulting in an aggregate charge of $49.5
million. The fair value of the reporting units was determined using the
discounted cash flow method and a discount rate of 15.0%. This charge has been
reflected in the accompanying consolidated statement of operations as the
cumulative effect of change in accounting principle. Additionally, the Company's
results for the first quarter of fiscal 2002 have been restated to reflect this
charge in that period as required by SFAS 142. The Company has selected June 30
as the date on which it will perform its annual goodwill impairment test.
The following table summarizes the Company's reported results along with
adjusted amounts as if the Company had adopted SFAS 142, and discontinued
goodwill amortization, as of July 1, 1999 (in thousands, except per share
amounts):
FOR THE YEAR ENDED JUNE 30,
----------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported net income (loss) before extraordinary loss and
cumulative effect of change in accounting principle $ 3,889 $ (226,731) $ (99,532)
Add back: Goodwill amortization -- 7,161 8,052
----------- ----------- -----------
Adjusted income (loss) before extraordinary loss
and cumulative effect of change in accounting
principle 3,889 (219,570) (91,480)
Extraordinary loss -- -- (1,200)
Cumulative effect of change in accounting principle (49,513) -- (541)
----------- ----------- -----------
Adjusted net income (loss) $ (45,624) $ (219,570) $ (93,221)
=========== =========== ===========
Basic income (loss) per share:
Reported income (loss) before extraordinary loss and
cumulative effect of change in accounting principle $ 0.26 $ (15.38) $ (6.82)
Goodwill amortization -- 0.49 0.55
----------- ----------- -----------
Adjusted income (loss) before extraordinary loss and
cumulative effect of change in accounting principle 0.26 (14.89) (6.27)
Extraordinary loss -- -- (0.08)
Cumulative effect of change in accounting principle
(3.26) -- (0.04)
----------- ----------- -----------
Adjusted net income (loss) $ (3.00) $ (14.89) $ (6.39)
=========== =========== ===========
Diluted income (loss) per share:
Reported income (loss) before extraordinary loss and
cumulative effect of change in accounting principle $ 0.25 $ (15.38) $ (6.82)
Goodwill amortization -- 0.49 0.55
----------- ----------- -----------
Adjusted income (loss) before extraordinary loss and
cumulative effect of change in accounting principle 0.25 (14.89) (6.27)
Extraordinary loss -- -- (0.08)
Cumulative effect of change in accounting principle
(3.14) -- (0.04)
----------- ----------- -----------
Adjusted net income (loss) $ (2.89) $ (14.89) $ (6.39)
=========== =========== ===========
69
The changes in the carrying amount of goodwill for the year ended June 30,
2002 is as follows (in thousands):
MEDICAL FIRE AND
TRANSPORTATION OTHER
SEGMENT SEGMENT TOTAL
--------- --------- ---------
Balance at beginning of year $ 89,598 $ 1,159 $ 90,757
Adoption of SFAS No. 142 (49,513) -- (49,513)
-------- -------- --------
Balance at end of year $ 40,085 $ 1,159 $ 41,244
======== ======== ========
(6) INVESTMENTS
PUBLIC/PRIVATE ALLIANCE
During fiscal 1998, the Company entered into a public/private alliance with
the City of San Diego to provide all emergency and non-emergency transport
services. As part of the alliance, a limited liability company (the LLC) was
created with a 50/50 ownership between the Company and the City. A wholly-owned
subsidiary of the Company contracts with the LLC to provide operational and
administrative support. In addition, the Company contracts with the LLC to
provide billing and collection services. Revenue generated under the operational
and administrative support contract totaled $14.7 million, $12.1 million and
$9.5 million for the years ended June 30, 2002, 2001 and 2000, respectively.
Revenue generated under the billing and collection services contract totaled
$1.3 million for each of the years ended June 30, 2002 and 2001 and $0.9 million
for the year ended June 30, 2000. The Company accounts for its investment in the
LLC using the equity method. At June 30, 2002 and 2001, the carrying value of
this investment was approximately $1.1 million and $0.9 million, respectively,
and is included in other assets in the accompanying consolidated balance sheet.
The Company's share of the LLC's earnings was approximately $0.8 million, $0.8
million and $1.2 million for the years ended June 30, 2002, 2001 and 2000,
respectively.
JOINT VENTURE
During fiscal 1998, the Company entered into a joint venture to provide
non-emergency transport services in the Maryland, Washington, D.C. and northern
Virginia areas. The Company obtained a majority interest in the joint venture in
exchange for a commitment to provide $8.0 million in funding for acquisitions by
the joint venture in the greater Baltimore, Maryland and Washington, D.C. areas
70
(which commitment was fulfilled by June 30, 1998). The other party to the joint
venture contributed the stock of two ambulance companies in exchange for his
minority stake in the joint venture. The Company consolidated the joint venture
for financial reporting purposes.
The joint venture agreement allowed the minority partner to "put" his
interest in the joint venture to the Company. The agreement also allowed the
Company the option to delay the purchase of the minority partner's interest for
a period of one year. During fiscal 2001, the minority partner elected to
exercise the "put" option and the Company exercised its right to delay
purchasing the minority partner's interest for one year. Based on the provisions
of the joint venture agreement, the purchase price for the minority partners
interest approximated $5.1 million. The Company recorded a charge of
approximately $4.0 million to other income (expense), net during fiscal 2001
relating to this agreement.
During the year ended June 30, 2002, the Company completed the purchase of
the minority partner's interest in exchange for a note payable of approximately
$5.1 million. The note bears interest at prime plus 2.25% (subject to a cap of
7.75%) and requires monthly principal and interest payments ranging from $70,000
to $125,000 through December 2006. Additionally, any outstanding accrued
interest is due at maturity. The Company reflected this transaction as an
increase in long-term debt of $5.1 million offset by reductions in minority
interest of $8.0 million and other assets of $2.9 million. The transaction also
resulted in other income of $9,000 in fiscal 2002.
(7) ACCRUED LIABILITIES
Accrued liabilities at June 30, 2002 and 2001 consisted of the following:
AT JUNE 30,
--------------------
2002 2001
------- -------
Workers' compensation claim reserves $15,924 $14,944
General liability claim reserves 15,433 19,715
Accrued salaries, wages and related payroll 10,678 11,397
Accrued interest 10,512 7,561
Other accrued liabilities 21,172 42,723
------- -------
Total accrued liabilities $73,719 $96,340
======= =======
The decrease in other accrued liabilities between 2002 and 2001 is
primarily due to the devaluation of the Argentine peso.
(8) GENERAL LIABILITY AND WORKERS' COMPENSATION PROGRAMS
The Company retains certain levels of exposure with respect to its general
liability and workers' compensation programs and purchases coverage from third
party insurers for exposures in excess of those levels. In addition to expensing
premiums and other costs relating to excess coverage, the Company establishes
reserves for both reported and incurred but not reported claims within its level
of retention based on currently available information as well as its historical
claims experience The Company adjusts its claim reserves with an associated
charge or credit to expense as new information on the underlying claims is
obtained.
71
A summary of activity in the Company's general liability claim reserves,
which are included in accrued liabilities in the consolidated balance sheet, is
as follows:
JUNE 30,
--------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Balance at beginning of year $ 19,715 $ 3,171 $ 2,081
Provision charged to other
operating expense 2,442 22,326 6,146
Claim payments charged
against the reserve (6,724) (5,782) (5,056)
-------- -------- --------
Balance at end of year $ 15,433 $ 19,715 $ 3,171
======== ======== ========
The rising cost of claims as well as the cost of related litigation
prompted the Company to perform a comprehensive review of information from
external advisors, historical settlement information and open claims during the
third quarter of fiscal 2001. As a result of this review, the Company recorded a
charge of $15.0 million for increases in its reserves for reported claims as
well as to establish reserves for claims incurred but not reported. The Company
engaged independent actuaries to assist with its evaluation of the adequacy of
its general liability claim reserves as of June 30, 2002 and 2001. The provision
charged to expense during fiscal 2000 included a charge of $3.8 million in the
fourth quarter for increases in estimated settlement amounts for reported
claims.
The Company has been required to provide collateral for certain of its
general liability policies. Such collateral, which consisted of cash on deposit
with the insurer or its agent totaled $1.9 million at June 30, 2002 and is
included in other assets in the consolidated balance sheet.
A summary of activity in the Company's workers' compensation claim
reserves, which are also included in accrued liabilities in the consolidated
balance sheet, is as follows:
JUNE 30,
--------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Balance at beginning of year $ 14,944 $ 11,315 $ 132
Provision charged to payroll
and employee benefits 7,318 11,832 18,941
Claim payments charged
against the claim reserve (6,338) (8,203) (7,758)
-------- -------- --------
Balance at end of year $ 15,924 $ 14,944 $ 11,315
======== ======== ========
In connection with the Company's restructuring activities, an increase in
the volume of workers' compensation claims was noted. Provisions charged to
expense during fiscal 2002 includes $2.0 million of additional workers
compensation claim reserves based on a review of claims experience during the
fourth quarter. Provisions charged to expense during fiscal 2001 included $5.0
million in the third quarter for increases in reserves for unreported claims
based on updated information received from the Company's third party claims
72
administrator. The Company engaged independent actuaries to assist with its
evaluation of the adequacy of its workers' compensation claim reserves as of
June 30, 2002 and 2001. Provisions charged to expense during fiscal 2000
included $12.2 million in the fourth quarter to establish reserves for both
reported and incurred but not reported claims. The Company had previously
expensed the cost of its workers' compensation program as related payments were
made, and the Company believes that this method approximated the accrual method.
The Company has also been required to provide deposits for certain of its
workers' compensation policies. Such amounts, which consisted of cash on deposit
with the insurer or its agent, totaled $9.2 million at June 30, 2002 and is
included in prepaid and other assets ($2.9 million) and other assets ($6.3
million) in the consolidated balance sheet.
During fiscal years 1992 through 2001, the Company purchased certain
portions of its workers' compensation coverage from Reliance Insurance Company
(Reliance). At the time the coverage was purchased, Reliance was an "A" rated
insurance company. In connection with this coverage, the Company provided
Reliance with various amounts and forms of collateral (e.g., letters of credit,
surety bonds and cash deposits) to secure its performance under the respective
policies as was customary and required in the workers' compensation marketplace
at the time. As of June 30, 2002, Reliance held $3.0 million of cash collateral
under this coverage.
On May 29, 2001, Reliance was placed under rehabilitation by the
Pennsylvania Insurance Department (the Department) and on October 3, 2001 was
placed into liquidation by the Department. As mentioned previously, the cash on
deposit with Reliance serves to secure the Company's performance under the
related policies; specifically, the payment of claims within the Company's level
of retention in the various policy years. Consistent with past practice, the
Company periodically funds an imprest account maintained by the Company's
third-party administrator who actually makes claim payments on its behalf. It is
the Company's understanding that the cash collateral held by the Reliance
liquidator will be returned once all related claims have been satisfied so long
as the Company has satisfied the claim payment obligations under the related
policies. To the extent that certain of the Company's workers' compensation
claims have exceeded the level of retention under the Reliance policies, the
applicable state guaranty funds have provided such coverage at no additional
cost to the Company.
For fiscal 2002, the Company purchased certain portions of workers'
compensation coverage from Legion Insurance Company (Legion). At the time the
coverage was purchased, Legion was an "A" rated insurance carrier. In connection
with the Legion policy, the Company deposited $6.2 million into a "cell-captive"
insurance program managed by Mutual Risk Management (MRM), an affiliate of
Legion. This deposit approximated the amount of claims within the level of
retention for the policy year May 1, 2001 through April 30, 2002. In contrast to
the deposits placed with Reliance, this deposit is not collateral to secure
performance under the policy but rather represents funds to be used by MRM to
pay claims within the Company's level of retention on the Company's behalf. As
of June 30, 2002, MRM held $5.7 million of cash under this program.
On April 1, 2002, Legion was placed under rehabilitation by the Department.
MRM has continued to utilize the cash on deposit to make claim payments on the
Company's behalf. Additionally, it is the Company's understanding that these
funds represent the Company's assets and are not general assets of Legion or
MRM.
Based on the information currently available, the Company believes that the
amounts on deposit with Reliance and Legion/MRM are fully recoverable and will
either be returned to the Company or used to pay claims on the Company's behalf.
The Company's inability to access the funds on deposit with either Reliance or
Legion/MRM could have a material adverse effect on its business, financial
condition, results of operations and cash flows.
(9) OTHER CHARGES AND CREDITS
During the fiscal years ended June 30, 2002, 2001 and 2000 the Company
recorded the following other charges or credits:
73
FISCAL YEAR ENDED JUNE 30,
-------------------------------
2002 2001 2000
------ ------ ------
Argentine Operations -- 8,512 $ --
Supply Inventory -- 8,442 --
Other Charges and Credits (1,712) 3,079 4,088
Paid Time Off for Field Personnel (1,300) 3,010 --
Employee Medical Benefits -- 5,429 2,596
Amount Due from Former Owner -- 962 --
Medicare/Medicaid Audits (1,298) 1,300 3,900
Restructuring Consultants -- -- 1,110
Investment Write-Offs -- -- 2,937
Write-Off of Disputed Refunds -- -- 1,796
ARGENTINE OPERATIONS
The Company recorded charges totaling $8.5 million related to asset
write-offs and reserve adjustments. The Company's Argentine subsidiaries had
been effected by escalating political and economic instability as well as
changes in local management during fiscal 2001. The charge was recorded in other
operating expenses in the consolidated statement of operations.
SUPPLY INVENTORY
Medical, fleet and fire supplies are maintained in a central warehouse,
numerous regional warehouses, and multiple stations, lockers and vehicles. A
physical inventory of all locations at June 30, 2001 revealed a shortage from
recorded levels. Shrinkage, obsolescence and losses due to service area closures
accounted for the shortage. The Company recorded a charge of $8.4 million to
write-down its inventory balances to amounts determined by the physical
inventory. The charge was recorded in other operating expenses in the
consolidated statement of operations.
OTHER CHARGES AND CREDITS
During the third quarter of fiscal 2002, the Company recorded the reversal
of $1.7 million of discretionary employee benefits accrued in calendar 2000 as a
result of the Company's decision not to pay such benefits. The original charge,
as well as the current year reversal, were reflected in payroll and employee
benefits in the consolidated statement of operations.
The Company recorded charges totaling $3.1 million in fiscal 2001 for a
number of items related to its domestic operations, the largest of which was a
$0.7 million charge relating to administrative costs paid on behalf of the
Company's employee benefit plans. These charges were a result of adjustments to
certain estimates for prepaid expenses, accrued liabilities and other items that
were resolved in the fourth quarter of fiscal 2001.
The Company recorded charges totaling $4.1 million in fiscal 2000 for a
number of estimates that were resolved related to its domestic operations. These
items included the write-off of capitalized acquisition costs for transactions
that were terminated ($0.9 million), write-off of costs related to unsuccessful
proposals ($0.6 million), write-off of costs capitalized in connection with the
re-branding of vehicles ($1.0 million), and capitalized costs related to the
74
Company's vehicle refurbishment center which was closed in the third quarter of
fiscal 2000 ($1.0 million). These charges were reflected in other operating
expenses in the consolidated statement of operations.
PAID-TIME-OFF FOR FIELD PERSONNEL
During the fourth quarter of fiscal 2002, the Company recorded a $1.3
million reduction in its paid-time-off accrual as a result of a change in the
related policies. The reduction was recorded as a reduction of payroll and
employee benefits in the consolidated statement of operations.
During the fourth quarter of fiscal 2001, the Company analyzed its
paid-time-off accruals and determined that its paid-time-off policy had been
inconsistently applied in certain service areas. As a result of this analysis,
the Company recorded a charge of $3.0 million to bring the liability into line
with the amount required under the related policies. This charge was recorded in
payroll and employee benefits in the consolidated statement of operations.
EMPLOYEE MEDICAL BENEFITS
The Company self-insures its employee medical coverage. Based upon
information obtained from its third party claims administrator in the fourth
quarter of fiscal 2001, the Company recorded a charge of $5.4 million to
increase its reserve for incurred but not reported employee medical claims. The
increased reserve was required as a result of continuing increases in healthcare
costs, including prescription drugs. The charge was reflected in payroll and
employee benefits in the consolidated statement of operations.
During the second half of fiscal 2000, the Company recorded charges of $2.6
million related to increased usage of employee medical benefits following the
announcement of its decision to close or downsize certain service areas. The
charges represent the incremental increase in claims submissions that occurred
during that period. These charges were reflected in payroll and employee
benefits in the consolidated statement of operations.
AMOUNT DUE FROM FORMER OWNER
In connection with a February 1998 acquisition, the seller indemnified the
collection of certain accounts receivable. In connection with the settlement of
litigation involving the seller during the fourth quarter of fiscal 2001, the
Company agreed to release the seller from his obligations under the
indemnification. The Company recorded a charge of $1.0 million, which was
reflected in other operating expenses in the consolidated statement of
operations, related to this settlement.
MEDICARE/MEDICAID AUDITS
The Company recorded a charge of $1.3 million during the fourth quarter of
fiscal 2001 for the expected settlement of a Medicare audit of an acquired
company for periods prior to the acquisition. This charge, which was reflected
in other operating expenses in the consolidated statement of operations, was
taken based upon information obtained during the fourth quarter of fiscal 2001,
which included correspondence with the Medicare intermediary. The $1.3 million
charge discussed above was reversed in the fourth quarter of fiscal 2002 after
the Company settled the audit for approximately $2,000.
The Company recorded charges totaling $3.9 million in the second quarter of
fiscal 2000 for the expected settlement of two specific Medicare/Medicaid
audits. These charges, which were reflected in other operating expenses in the
consolidated statement of operations, were taken based upon information obtained
from and negotiations with the intermediaries that occurred during the second
quarter of fiscal 2000.
RESTRUCTURING CONSULTANTS
During the second half of the fiscal year ended June 30, 2000, the Company
incurred costs totaling $1.1 million relating to restructuring consultants and
attorneys representing both the Company and its lenders in connection with
violations of certain financial covenants contained in the Company's revolving
75
credit agreement. These activities began in the third quarter of fiscal 2000.
These costs were reflected in other operating expenses in the consolidated
statement of operations.
INVESTMENT WRITE-OFFS
During the third quarter of the fiscal year ended June 30, 2000, the
Company wrote-off a $1.3 million investment in a domestic health care business
as a result of the settlement of related litigation which occurred during that
quarter. Additionally, the Company wrote-off a $1.6 million investment in a
domestic alternative transportation business during the fourth quarter on the
basis of financial information received from the entity during the quarter. Such
information indicated that the carrying value of the Company's related
investment would not be recoverable. These charges were recorded in other
operating expenses in the consolidated statement of operations.
WRITE-OFF OF DISPUTED REFUNDS
The Company wrote-off amounts totaling $1.8 million during the fourth
quarter of the fiscal year ended June 30, 2000 related to amounts refunded to
Medicare carriers that were expected to be returned to the Company after the
exhaustion of administrative and appeals processes. The determination was made,
based on information received through the appellate process during the fourth
quarter, that the Company was not reasonably assured of receiving the amounts
recorded. This charge was recorded in other operating expenses in the
consolidated statement of operations.
(10) LONG-TERM DEBT
Notes payable and capital lease obligations consisted of the following:
JUNE 30,
------------------------
2002 2001
--------- ---------
(IN THOUSANDS)
7 7/8% senior notes due 2008, net of
discount of $148 and $173, respectively ........ $ 149,852 $ 149,827
Revolving credit facility ........................ 144,369 143,042
Note payable to former joint venture
partner (See Note 6) 4,622 --
Capital lease obligations and other notes
payable, at varying rates, from 3.5%
to 12.75%, due through 2013 .................... 1,319 2,856
--------- ---------
300,162 295,725
Less: Current maturities ......................... (1,633) (294,439)
--------- ---------
$ 298,529 $ 1,286
========= =========
REVOLVING CREDIT FACILITY
In March 1998, the Company entered into a $200.0 million revolving credit
facility originally scheduled to mature March 16, 2003. The revolving credit
facility was unsecured and was unconditionally guaranteed on a joint and several
basis by substantially all of its domestic wholly-owned current and future
subsidiaries. Interest rates and availability under the revolving credit
facility depended on the Company meeting certain financial covenants, including
a total debt leverage ratio, a total debt to capitalization ratio, and a fixed
charge ratio. Revolving credit facility borrowings were initially priced at the
greater of (i) prime rate or Federal Funds rate plus 0.5% plus an applicable
margin, or (ii) a LIBOR-based rate. The LIBOR-based rates included a margin of
0.875% to 1.75%.
76
In December 1999, primarily as a result of additional provisions for
doubtful accounts, the Company entered into noncompliance with three financial
covenants under the revolving credit facility: total debt leverage ratio, total
debt to total capitalization ratio and fixed charge coverage ratio. We received
a series of compliance waivers regarding these covenant violations covering the
periods from December 31, 1999 through April 1, 2002. The waivers provided for,
among other things, enhanced reporting and other requirements and that no
additional borrowings would be available under the facility.
Pursuant to the waivers, as LIBOR contracts expired in March 2000, all
related borrowings were priced at prime plus 0.25 percentage points and interest
became payable monthly. Pursuant to the waivers, we also were required to accrue
additional interest expense at a rate of 2.0% per annum on the outstanding
balance. We have recognized approximately $6.6 million related to this
additional interest expense through June 30, 2002, approximately $6.1 million of
which is included in accrued liabilities at June 30, 2002. In connection with
the waivers, the Company also made unscheduled principal payments totaling $5.2
million.
At June 30, 2002, the weighted average interest rate on the revolving
credit facility, including the additional interest described above, was
approximately 7.0%. There was $144.4 million outstanding on the revolving credit
facility at June 30, 2002. Additionally, there were $3.5 million in letters of
credit issued under the revolving credit facility outstanding on that date.
Although the Company was not aware of any event of default under either the
terms of the revolving credit facility (as a result of the waivers) or the 7
7/8% Senior Notes due 2008 (the Senior Notes), and although there was no
acceleration of the repayment of the revolving credit facility or the Senior
Notes, the balances were classified as current liabilities at June 30, 2001 and
2000 in accordance with SFAS 78 "Classification of Obligations that are Callable
by the Creditor."
Effective September 30, 2002, the Company entered into an amended credit
facility pursuant to which, among other things, the maturity date of the credit
facility was extended to December 31, 2004 and any prior noncompliance
(including such non compliance as of June 30, 2002) was permanently waived.
The principal terms of the amended credit facility are as follows:
* WAIVER. Prior noncompliance was permanently waived with respect to the
covenant violations described above and with respect to certain other
noncompliance items, including non-reimbursement of approximately $2.6
million recently drawn by beneficiaries under letters of credit issued
under the original facility.
* MATURITY DATE. The maturity date of the facility was extended to
December 31, 2004.
* PRINCIPAL BALANCE. Accrued interest (as described above),
non-reimbursed letters of credit and various fees and expenses
associated with the amended credit facility were added to the
principal amount of the loan, resulting in an outstanding principal
balance as of the effective date of the amendment equal to $152.4
million.
* NO REQUIRED AMORTIZATION. No principal payments are required until the
maturity date of the facility.
* INTEREST RATE. The interest rate was increased to LIBOR plus 7.0%
(8.8% as of the effective date of the amendment), payable monthly. (By
comparison, the effective interest rate (including the 2.0% accrued
interest described above) applicable to the original facility
immediately prior to the effective date of the amendment was 7.0%.)
77
* FINANCIAL COVENANTS. The amended facility includes the same financial
covenants as were included in the original credit facility, with
compliance levels under such covenants adjusted to levels consistent
with the Company's current business levels and outlook. The covenants
include (i) total debt leverage ratio (initially set at 7.48), (ii)
minimum tangible net worth (initially set at a $230.1 million
deficit), (iii) fixed charge coverage ratio (initially set at 0.99),
(iv) limitation on capital expenditures of $11 million per fiscal
year; and (v) limitation on operating leases during any period of four
fiscal quarters to 3.10% of consolidated net revenues. The compliance
levels for covenants (i) through (iii) above are set at varying levels
on a quarterly basis. Compliance is tested quarterly based on
annualized or year-to-date results as applicable.
* OTHER COVENANTS. The amended credit facility includes various
non-financial covenants equivalent in scope to those included in the
original facility. The covenants include restrictions on additional
indebtedness, liens, investments, mergers and acquisitions, asset
sales, and other matters. The amended credit facility includes
extensive financial reporting obligations and provides that an event
of default occurs should we lose customer contracts in any fiscal
quarter with an aggregate EBITDA contribution of $5 million or more
(net of anticipated contribution from new contracts).
* EXISTING LETTERS OF CREDIT. Pursuant to the amended facility, letters
of credit issued pursuant to the original credit agreement will be
reissued or extended, to a maximum of $3.5 million, for letter of
credit fees aggregating 1 7/8% per annum. A third letter of credit, in
the amount of $2.6 million which previously was drawn by its
beneficiary, will be reissued subject to application of the funds
originally drawn in reduction of the principal balance of the facility
and payment of a letter of credit fee equal to 7% per annum.
* EQUITY INTEREST. In consideration of the amended facility, the Company
issued shares of its Series B Convertible Preferred Stock to the
participants in the credit facility. The preferred stock is
convertible into 2,115,490 common shares (10% of the sum of the common
shares outstanding on a diluted basis, as defined). Because sufficient
common shares are not currently available to permit conversion, the
Company intends to seek stockholder approval to amend its certificate
of incorporation to authorize additional common shares. Conversion of
the preferred shares occurs automatically upon approval by the
Company's stockholders of sufficient common shares to permit
conversion. Should the Company's stockholders fail to approve such a
proposal by December 31, 2004, the Company will be required to redeem
the preferred stock for a price equal to the greater of $15 million or
the value of the common shares into which the preferred shares would
otherwise have been convertible. In addition, should the Company's
stockholders fail to approve such a proposal, the preferred stock
enjoys a preference upon a sale of the Company, a sale of its assets
and in certain other circumstances; this preference equals the greater
of (i) the value of the common shares into which the preferred stock
would otherwise have been convertible or (ii) $10 million, $12.5
million or $15 million depending on whether the triggering event
occurs prior to January 31, 2003, December 31, 2003 or December 31,
2004, respectively. At the election of the holder, the preferred
shares carry voting rights as if such shares were converted into
common shares. The preferred shares do not bear a dividend. The
preferred shares (and common shares issuable upon conversion of the
preferred shares) are entitled to certain registration rights. The
terms of the preferred shares limit the Company from issuing senior or
pari passu preferred shares and from paying dividends on, or
redeeming, shares of junior stock.
Due to the lack of required principal amortization and long-term nature of
this amendment, the outstanding balance on the credit facility is classified as
long term debt in the consolidated balance sheet as of June 30, 2002.
Additionally, as we are now in compliance with the terms of the credit facility,
we have also classified the Senior Notes as long-term debt as of June 30, 2002.
78
7 7/8% SENIOR NOTES DUE 2008
In March 1998, the Company issued $150.0 million of its 7 7/8% Senior Notes
due 2008 (the Senior Notes) under Rule 144A under the Securities Act of 1933, as
amended (Securities Act). Interest under the Senior Notes is payable
semi-annually on September 15 and March 15, and the Senior Notes are not
callable until March 2003 subject to the terms of the Indenture. The Company
incurred expenses related to the offering of approximately $5.3 million and will
amortize these costs over the life of the Senior Notes. The Company recorded a
$258,000 discount on the Senior Notes and will amortize this discount over the
life of the Senior Notes. In April 1998, we filed a registration statement under
the Securities Act relating to an exchange offer for the Senior Notes. The
registration became effective on May 14, 1998. The Senior Notes are general
unsecured obligations of the Company and are fully and unconditionally
guaranteed on a joint and several basis by substantially all of its domestic
wholly-owned current and future subsidiaries (the Guarantors). The Senior Notes
contain certain covenants that, among other things, limit our ability to incur
certain indebtedness, sell assets, or enter into certain mergers or
consolidations.
The Company does not believe that the separate financial statements and
related footnote disclosures concerning the Guarantors provide any additional
information that would be material to investors making an investment decision.
Consolidating financial information for the Company (the Parent), the Guarantors
and the Company's remaining subsidiaries (the Non-Guarantors) is as follows:
79
RURAL/METRO CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
ASSETS
CURRENT ASSETS
Cash ............................................ $ -- $ 9,424 $ 404 $ -- $ 9,828
Accounts receivable, net ........................ -- 93,579 5,536 -- 99,115
Inventories ..................................... -- 12,178 42 -- 12,220
Prepaid expenses and other ...................... 582 8,864 151 -- 9,597
--------- --------- --------- --------- ---------
Total current assets ......................... 582 124,045 6,133 -- 130,760
PROPERTY AND EQUIPMENT, net ........................ -- 47,972 560 -- 48,532
GOODWILL ........................................... -- 41,167 77 -- 41,244
DUE FROM (TO) AFFILIATES ........................... 267,612 (215,164) (52,448) -- --
OTHER ASSETS ....................................... 2,449 12,163 2,290 -- 16,902
INVESTMENT IN SUBSIDIARIES ......................... (131,570) -- -- 131,570 --
--------- --------- --------- --------- ---------
$ 139,073 $ 10,183 $ (43,388) $ 131,570 $ 237,438
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ................................ $ -- $ 11,049 $ 912 $ -- $ 11,961
Accrued liabilities ............................. 10,171 61,280 2,268 -- 73,719
Deferred subscription fees ...................... -- 15,409 -- -- 15,409
Current portion of long-term debt ............... -- 1,620 13 -- 1,633
--------- --------- --------- --------- ---------
Total current liabilities .................... 10,171 89,358 3,193 -- 102,722
LONG-TERM DEBT, net of current portion ............. 294,221 4,308 -- -- 298,529
OTHER LIABILITIES .................................. -- 477 -- -- 477
DEFERRED INCOME TAXES .............................. -- 1,814 (1,164) -- 650
--------- --------- --------- --------- ---------
Total liabilities ............................ 304,392 95,957 2,029 -- 402,378
--------- --------- --------- --------- ---------
MINORITY INTEREST .................................. -- -- -- 379 379
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock .................................... 159 82 17 (99) 159
Additional paid-in capital ...................... 138,470 54,622 34,942 (89,564) 138,470
Retained earnings (accumulated deficit) ......... (313,025) (140,478) (90,692) 231,170 (313,025)
Accumulated other comprehensive income (loss).... 10,316 -- 10,316 (10,316) 10,316
Treasury stock .................................. (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ......... (165,319) (85,774) (45,417) 131,191 (165,319)
--------- --------- --------- --------- ---------
$ 139,073 $ 10,183 $ (43,388) $ 131,570 $ 237,438
========= ========= ========= ========= =========
80
RURAL/METRO CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
ASSETS
CURRENT ASSETS
Cash ........................................ $ -- $ 6,763 $ 1,936 $ -- $ 8,699
Accounts receivable, net .................... -- 93,471 9,789 -- 103,260
Inventories ................................. -- 13,093 80 -- 13,173
Prepaid expenses and other .................. 531 5,881 341 -- 6,753
--------- --------- --------- --------- ---------
Total current assets ..................... 531 119,208 12,146 -- 131,885
PROPERTY AND EQUIPMENT, net .................... -- 57,271 728 -- 57,999
GOODWILL ....................................... -- 90,680 77 -- 90,757
DUE FROM (TO) AFFILIATES ....................... 294,729 (240,105) (54,624) -- --
OTHER ASSETS ................................... 2,356 11,684 3,853 -- 17,893
INVESTMENT IN SUBSIDIARIES ..................... (127,702) -- -- 127,702 --
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ............................ $ -- $ 9,478 $ 3,437 $ -- $ 12,915
Accrued liabilities ......................... 7,571 72,119 15,700 -- 95,390
Deferred subscription fees income ........... -- 14,707 -- -- 14,707
Current portion of long-term debt ........... 292,869 1,315 255 -- 294,439
--------- --------- --------- --------- ---------
Total current liabilities ................ 300,440 97,619 19,392 -- 417,451
LONG-TERM DEBT, net of current portion ......... -- 1,272 14 -- 1,286
OTHER LIABILITIES .............................. -- 994 -- -- 994
DEFERRED INCOME TAXES .......................... -- 2,114 (1,164) -- 950
--------- --------- --------- --------- ---------
Total liabilities ........................ 300,440 101,999 18,242 -- 420,681
--------- --------- --------- --------- ---------
MINORITY INTEREST .............................. -- -- -- 8,379 8,379
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ................................ 152 82 17 (99) 152
Additional paid-in capital .................. 137,948 54,622 34,942 (89,564) 137,948
Retained earnings (accumulated deficit) ..... (267,401) (117,965) (91,035) 209,000 (267,401)
Accumulated other comprehensive income (loss) 14 -- 14 (14) 14
Treasury stock .............................. (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ..... (130,526) (63,261) (56,062) 119,323 (130,526)
--------- --------- --------- --------- ---------
$ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534
========= ========= ========= ========= =========
81
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
NET REVENUE ............................................... $ -- $ 460,698 $ 36,340 $ -- $ 497,038
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ............................. -- 261,686 25,621 -- 287,307
Provision for doubtful accounts ........................... -- 69,093 807 -- 69,900
Depreciation .............................................. -- 15,085 70 -- 15,155
Amortization of intangibles ............................... -- 43 1,012 -- 1,055
Other operating expenses .................................. -- 90,167 7,473 -- 97,640
Contract termination costs and related asset impairment ... -- (7) (100) -- (107)
Restructuring charge and other ............................ -- (718) -- -- (718)
--------- --------- --------- --------- ---------
Total expenses ...................................... -- 435,349 34,883 -- 470,232
--------- --------- --------- --------- ---------
OPERATING INCOME .......................................... -- 25,349 1,457 -- 26,806
Income from wholly-owned subsidiaries ..................... 27,352 -- -- (27,352) --
Interest expense, net ..................................... (23,463) (404) (1,109) -- (24,976)
Other income (expense), net ............................... -- -- -- 9 9
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ......................... 3,889 24,945 348 (27,343) 1,839
INCOME TAX (PROVISION) BENEFIT ............................ -- 2,055 (5) -- 2,050
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................... 3,889 27,000 343 (27,343) 3,889
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ....... (49,513) (49,513) -- 49,513 (49,513)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ......................................... $ (45,624) $ (22,513) $ 343 $ 9 $ (45,624)
========= ========= ========= ========= =========
82
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
NET REVENUE ....................................... $ -- $ 445,892 $ 58,424 $ -- $ 504,316
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits .............. -- 261,179 39,876 -- 301,055
Provision for doubtful accounts ............ -- 96,253 6,217 -- 102,470
Depreciation ............................... -- 19,043 2,766 -- 21,809
Amortization of intangibles ................ -- 5,073 2,279 -- 7,352
Other operating expenses ................... -- 117,644 24,365 -- 142,009
Asset impairment charges ................... -- 32,338 62,015 -- 94,353
Loss on disposition of clinic operations ... -- -- 9,374 -- 9,374
Contract termination costs and related asset
impairment ............................... -- 9,256 -- -- 9,256
Restructuring charge and other ............. -- 9,091 -- -- 9,091
--------- --------- --------- --------- ---------
Total expenses ....................... -- 549,877 146,892 -- 696,769
--------- --------- --------- --------- ---------
OPERATING LOSS ................................ -- (103,985) (88,468) -- (192,453)
Loss from wholly-owned subsidiaries ........... (197,769) -- -- 197,769 --
Interest expense, net ......................... (28,962) (17) (1,022) -- (30,001)
Other income (expense), net ................... -- (4,046) -- 1,644 (2,402)
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES ...................... (226,731) (108,048) (89,490) 199,413 (224,856)
INCOME TAX (PROVISION) BENEFIT ................ -- (3,282) 1,407 -- (1,875)
--------- --------- --------- --------- ---------
NET LOSS ...................................... $(226,731) $(111,330) $ (88,083) $ 199,413 $(226,731)
========= ========= ========= ========= =========
83
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
NET REVENUE ............................................... $ -- $ 485,376 $ 84,698 -- $ 570,074
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ............................. -- 272,944 50,341 -- 323,285
Provision for doubtful accounts ........................... -- 80,823 14,800 -- 95,623
Provision for doubtful accounts--change in accounting
estimate ................................................. -- 65,000 -- -- 65,000
Depreciation .............................................. -- 22,068 2,941 -- 25,009
Amortization of intangibles ............................... -- 6,220 2,467 -- 8,687
Other operating expenses .................................. -- 106,904 20,839 -- 127,743
Restructuring charge and other ............................ -- 32,182 1,865 -- 34,047
--------- --------- --------- --------- ---------
Total expenses ...................................... -- 586,141 93,253 -- 679,394
--------- --------- --------- --------- ---------
OPERATING LOSS ............................................ -- (100,765) (8,555) -- (109,320)
Loss from wholly-owned subsidiaries ....................... (80,698) -- -- 80,698 --
Interest expense, net ..................................... (25,045) 1,125 (2,019) -- (25,939)
Other income (expense), net ............................... -- -- -- 2,890 2,890
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .... (105,743) (99,640) (10,574) 83,588 (132,369)
INCOME TAX BENEFIT ........................................ 6,211 24,046 2,580 -- 32,837
--------- --------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ......................... (99,532) (75,594) (7,994) 83,588 (99,532)
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE
SERVICE LICENSES ....................................... (1,200) -- (1,200) 1,200 (1,200)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ....... (541) (541) -- 541 (541)
--------- --------- --------- --------- ---------
NET LOSS .................................................. $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273)
========= ========= ========= ========= =========
84
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ --------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ................................................ $(45,624) $(22,513) $ 343 $ 22,170 $(45,624)
Adjustments to reconcile net loss to cash provided
by (used in) operations--
Cumulative effect of a change in accounting
principle ........................................... -- 49,513 -- -- 49,513
Depreciation and amortization ......................... -- 15,128 1,082 -- 16,210
(Gain) loss on sale of property and equipment ......... -- 152 (437) -- (285)
Provision for doubtful accounts ....................... -- 69,093 807 -- 69,900
Deferred income taxes ................................. -- (300) -- -- (300)
Equity earnings net of distributions received.......... -- (249) -- -- (249)
Undistributed earnings of minority shareholder ........ -- -- -- (9) (9)
Amortization of discount on Senior Notes .............. 26 -- -- -- 26
Non-cash stock compensation expense 73 -- -- -- 73
Change in assets and liabilities--
(Increase) decrease in accounts receivable ............ -- (69,202) 1,880 -- (67,322)
Decrease in inventories ............................... -- 915 33 -- 948
(Increase) decrease in prepaid expenses and other ..... (51) (2,983) 16 -- (3,018)
Increase in other assets .............................. (93) (631) (1,171) -- (1,895)
(Increase) decrease in due to/from affiliates ......... 43,574 (19,540) (2,175) (21,859) --
Increase (decrease) in accounts payable ............... -- 1,571 (234) -- 1,337
Increase (decrease) in accrued liabilities and
other liabilities .................................... 2,600 (11,357) (1,922) -- (10,679)
Increase in non-refundable subscription
fee income ........................................... -- 702 -- -- 702
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities ...................................... 505 10,299 (1,778) 302 9,328
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility, net ............ (1,263) -- -- -- (1,263)
Repayment of debt and capital lease obligations ......... -- (1,700) (162) -- (1,862)
Issuance of common stock ................................ 456 -- -- -- 456
-------- -------- -------- -------- --------
Net cash used in financing activities ............ (807) (1,700) (162) -- (2,669)
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures .................................... -- (6,360) (494) -- (6,854)
Proceeds from the sale of property and equipment ........ -- 422 600 -- 1,022
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities ...................................... -- (5,938) 106 -- (5,832)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................... 302 -- 302 (302) 302
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH ............................... -- 2,661 (1,532) -- 1,129
CASH, beginning of year ................................... -- 6,763 1,936 -- 8,699
-------- -------- -------- -------- --------
CASH, end of year ......................................... $ -- $ 9,424 $ 404 $ -- $ 9,828
======== ======== ======== ======== ========
85
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ............................................... $(226,731) $(111,330) $ (88,083) $ 199,413 $(226,731)
Adjustments to reconcile net loss to cash
provided by (used in) operations--
Non-cash portion of restructuring charge .............. -- 4,092 -- -- 4,092
Non-cash portion of contract termination .............. -- 8,086 -- -- 8,086
Asset impairment charge ............................... -- 32,339 62,014 -- 94,353
Loss on disposition of clinic operations .............. -- -- 9,374 -- 9,374
Depreciation and amortization ......................... -- 24,116 5,045 -- 29,161
(Gain) loss on sale of property and equipment ......... -- (406) (21) -- (427)
Provision for doubtful accounts ....................... -- 96,253 6,217 -- 102,470
Deferred income taxes ................................. -- 2,839 (1,889) -- 950
Equity earnings net of distributions received ......... -- 118 -- -- 118
Undistributed earnings of minority shareholder ........ -- -- -- (1,026) 1,026
Amortization of discount on Senior Notes .............. 26 -- -- -- 26
Non-cash charge related to joint venture .............. -- -- -- 4,045 4,045
Change in assets and liabilities--
(Increase) decrease in accounts receivable ............ -- (62,936) 837 -- (62,099)
Decrease in inventories ............................... -- 4,925 886 -- 5,811
Decrease in prepaid expenses and other ................ -- 758 314 -- 1,072
(Increase) decrease in other assets ................... 1,030 (726) 2,159 -- 2,463
(Increase) decrease in due to/from affiliates ......... 227,185 (20,236) (4,782) (202,167) --
Decrease in accounts payable .......................... -- (2,445) (209) -- (2,654)
Increase in accrued liabilities and other
liabilities .......................................... 1,642 29,368 8,047 -- 39,057
Decrease in deferred subscription fees ................ -- (264) (18) -- (282)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ....................................... 3,152 4,551 (109) 265 7,859
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving credit facility,
net ................................................... (3,765) -- -- -- (3,765)
Repayment of debt and capital lease obligations ........ -- (2,244) (529) -- (2,773)
Borrowings under capital lease obligations ............. -- 283 -- -- 283
Issuance of common stock ............................... 348 -- -- -- 348
--------- --------- --------- --------- ---------
Net cash used in financing activities ............. (3,417) (1,961) (529) -- (5,907)
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures ................................... -- (6,771) 997 -- (5,774)
Proceeds from the sale of property and equipment ....... -- 1,909 60 -- 1,969
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ....................................... -- (4,862) 1,057 -- (3,805)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................... 265 -- 265 (265) 265
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ............................... -- (2,272) 684 -- (1,588)
CASH, beginning of year ................................... -- 9,035 1,252 -- 10,287
--------- --------- --------- --------- ---------
CASH, end of year ......................................... $ -- $ 6,763 $ 1,936 $ -- $ 8,699
========= ========= ========= ========= =========
86
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss ................................................ $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273)
Adjustments to reconcile net loss to cash provided
by (used in) operations--
non-cash portion of restructuring charge .............. -- 28,873 -- -- 28,873
Extraordinary loss on expropriation of Canadian
ambulance service licenses .......................... -- -- 1,200 -- 1,200
Cumulative effect of a change in accounting
principle ........................................... -- 541 -- -- 541
Depreciation and amortization ......................... -- 28,288 5,408 -- 33,696
(Gain) loss on sale of property and equipment ......... -- (175) (9) -- (184)
Provision for doubtful accounts ....................... -- 145,823 14,800 -- 160,623
Decrease in deferred income taxes ..................... -- (9,198) (240) -- (9,438)
Undistributed earnings of public/private
partnership ......................................... -- 587 -- -- 587
Undistributed earnings of minority shareholder ........ -- -- -- (2,890) (2,890)
Amortization of discount on Senior Notes .............. 26 -- -- -- 26
Change in assets and liabilities--
Increase in accounts receivable ....................... -- (107,911) (11,308) -- (119,219)
(Increase) decrease in inventories .................... -- (3,451) 81 -- (3,370)
Decrease in prepaid expenses and other ................ -- 1,791 424 -- 2,215
(Increase) decrease in other assets ................... 783 (1,052) (191) -- (460)
(Increase) decrease in due to/from affiliates ......... 64,300 10,932 7,167 (82,399) --
Increase (decrease) in accounts payable ............... -- 822 (2,491) -- (1,669)
Increase (decrease) in accrued liabilities and other
liabilities .......................................... 2,162 1,707 (4,758) -- (889)
Increase (decrease) in deferred subscription fees...... -- 81 (1) -- 80
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ...................................... (34,002) 21,523 888 40 (11,551)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net ............ 33,307 -- -- -- 33,307
Repayment of debt and capital lease obligations ......... -- (3,993) (1,711) -- (5,704)
Issuance of common stock ................................ 655 -- -- -- 655
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ...................................... 33,962 (3,993) (1,711) -- 28,258
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from expropriation of Canadian ambulance
service licenses ....................................... -- -- 2,191 -- 2,191
Capital expenditures .................................... -- (15,174) (1,957) -- (17,131)
Proceeds from the sale of property and equipment ........ -- 1,300 -- -- 1,300
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ...................................... -- (13,874) 234 -- (13,640)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................... 40 -- 40 (40) 40
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ............................... -- 3,656 (549) -- 3,107
CASH, beginning of year ................................... -- 5,379 1,801 -- 7,180
--------- --------- --------- --------- ---------
CASH, end of year ......................................... $ -- $ 9,035 $ 1,252 $ -- $ 10,287
========= ========= ========= ========= =========
87
DEBT MATURITIES
Aggregate maturities on long-term debt for each of the fiscal years ending
June 30 are as follows (in thousands):
2003............................................. $ 1,633
2004............................................. 1,255
2005............................................. 145,797
2006............................................. 1,473
2007............................................. 11
Thereafter....................................... 149,993
--------
$300,162
========
The Company incurred interest expense of approximately $25.6 million, $30.5
million and $26.5 million and paid interest of approximately $21.9 million,
$29.0 million and $24.2 million in the years ended June 30, 2002, 2001 and 2000,
respectively.
The Company had outstanding letters of credit totaling approximately $3.5
million and $6.5 million at June 30, 2002 and 2001 for insurance and guarantees
under contracts.
(11) INCOME TAXES
The geographic sources of income (loss) before income taxes, extraordinary
loss and cumulative effect of change in accounting principle were as follows:
YEAR ENDED JUNE 30,
------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
United States ......................... $ 395 $(177,571) $(131,508)
Foreign (primarily Argentina).......... 1,444 (47,285) (861)
--------- --------- ---------
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle ............................. $ 1,839 $(224,856) $(132,369)
========= ========= =========
88
The components of the income tax (provision) benefit were as follows:
YEAR ENDED JUNE 30,
-------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Current
U.S. Federal ............................. $ -- $ -- $ --
State .................................... (130) (637) (750)
Foreign (primarily Argentina)............. (470) (48) (1,560)
-------- -------- --------
Total current (provision) benefit ... (600) (685) (2,310)
-------- -------- --------
Deferred
U.S. Federal ............................. 2,650 (500) 32,787
Foreign (primarily Argentina)............. -- (690) 2,360
-------- -------- --------
Total deferred (provision) benefit .. 2,650 (1,190) 35,147
-------- -------- --------
Total (provision) benefit ........... $ 2,050 $ (1,875) $ 32,837
======== ======== ========
The income tax benefit in 2002 included federal income tax refunds of $0.6
million resulting from recently enacted legislation that allowed the Company to
carry back a portion of its net operating losses to prior years as well as
refunds of $1.6 million applicable to prior years for which recognition was
deferred until receipt.
The income tax (provision) benefit differs from the amount computed by
applying the statutory U.S. federal income tax rate of 35% to income before
income taxes, extraordinary loss and cumulative effect of change in accounting
principle as follows:
YEAR ENDED JUNE 30,
--------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
U.S. Federal income tax (provision) benefit
at statutory rate ............................... $ (644) $ 78,700 $ 46,329
State taxes, net of federal benefit ............... (85) 3,886 3,230
Amortization of nondeductible goodwill ............ -- (5,660) (3,792)
Change in valuation allowance ..................... 2,292 (77,853) (12,832)
Other, net ........................................ 487 (948) (98)
-------- -------- --------
(Provision for) benefit from income taxes ......... $ 2,050 $ (1,875) $ 32,837
======== ======== ========
89
The following table summarizes the components of the Company's net deferred
tax liability as of June 30, 2002 and 2001. The Company has revised the amounts
relating to certain of its deferred tax assets, deferred tax liabilities and
valuation allowance as of June 30, 2001; however, such revisions had no impact
on the net deferred tax liability as of that date. These revisions have not been
audited by any independent accountants.
JUNE 30,
----------------------
2002 2001
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ................ $ 57,326 $ 44,673
Restructuring charge ............................ 31,372 32,636
Insurance claim reserves ........................ 12,639 12,384
Foreign items ................................... 2,986 2,300
Compensation and benefits ....................... 2,480 1,671
Other ........................................... 1,291 1,638
-------- --------
Gross deferred tax assets ..................... 108,094 95,302
-------- --------
Deferred tax liabilities:
Partnership losses .............................. (23,978) (20,983)
Accelerated depreciation and amortization ....... (8,191) (3,703)
Accounts receivable valuation ................... (2,319) 3,783
Other ........................................... (1,441) (1,350)
-------- --------
Gross deferred tax liabilties ................. (35,929) (22,253)
-------- --------
Net deferred tax assets before valuation
allowance ......................................... 72,165 73,049
Less: Valuation allowance .......................... (72,815) (73,999)
-------- --------
Net deferred liability .............................. $ (650) $ (950)
======== ========
The Company maintains a valuation allowance for the portion of its net
deferred tax assets for which it is more likely than not that the related
benefits will not be realized. The valuation allowance, which totaled $72.8
million at June 30, 2002 and $74.0 at June 30, 2001, was based upon management's
analysis of available information including the net operating losses experienced
in recent years. The Company will begin to release the valuation allowance when
it is more likely than not that the deferred tax asset will be realized.
Cash payments (refunds) for income taxes were ($2.2) million, $1.9 million
and $2.4 million during the years ended June 30, 2002, 2001 and 2000,
respectively.
(12) STOCKHOLDERS' EQUITY
SHAREHOLDERS' RIGHTS PLAN
In August 1995, the Company's Board of Directors adopted a shareholders'
rights plan, which authorized the distribution of one right to purchase one
one-thousandth of a share of $0.01 par value Series A Junior Participating
Preferred Stock (a Right) for each share of common stock of the Company. Rights
will become exercisable following the tenth day (or such later date as may be
90
determined by the Board of Directors) after a person or group (a) acquires
beneficial ownership of 15% or more of the Company's common stock or (b)
announces a tender or exchange offer, the consummation of which would result in
ownership by a person or group of 15% or more of the Company's common stock.
Upon exercise, each Right will entitle the holder (other than the party
seeking to acquire control of the Company) to acquire shares of common stock of
the Company or, in certain circumstances, such acquiring person at a 50%
discount from market value. The Rights may be terminated by the Board of
Directors at any time prior to the date they become exercisable at a price of
$0.01 per Right; thereafter, they may be redeemed for a specified period of time
at $0.01 per Right.
(13) EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company established the ESOP in 1979 and makes contributions to the
ESOP at the discretion of the Board of Directors. No discretionary contributions
were approved for the years ended June 30, 2002, 2001 and 2000. The ESOP held
approximately 5% of the outstanding common stock of the Company for the benefit
of all participants, as of June 30, 2002 and 2001, 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. Due
to the decrease in the market value of the Company's common stock during fiscal
2000, the ESOP's assets were insufficient to cover participant balances. The
Company made an additional contribution of $250,000 to the ESOP to cover the
shortfall. The Company does not intend to make any contributions to the ESOP in
the future.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (ESPP) through which
eligible employees may purchase shares of the Company's common stock, at
semi-annual intervals, through periodic payroll deductions. The ESPP is a
qualified employee benefit plan under Section 423 of the Internal Revenue Code.
The Company has reserved 2,150,000 shares of stock for issuance under the ESPP.
The purchase price per share is the lower of 85% of the closing price of the
stock on the first day or the last day of the offering period or on the nearest
prior day on which trading occurred on the Nasdaq SmallCap Market.
Employees were issued 559,668, 273,584, and 120,949 shares of the Company's
common stock under the ESPP during fiscal years 2002, 2001 and 2000,
respectively, at average per share prices of $0.48, $1.27 and $5.43.
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan was adopted in November 1992 and
provides for the granting of options to acquire common stock of the Company,
direct granting of the common stock of the Company (Stock Awards), the granting
of stock appreciation rights (SARs), or the granting of other cash awards (Cash
Awards) (Stock Awards, SARs and Cash Awards are collectively referred to herein
as Awards). At June 30, 2002, the maximum number of shares of common stock
issuable under the 1992 Plan was 6.0 million of which approximately 845,000
options had been exercised. Options may be granted as incentive stock options or
non-qualified stock options.
91
Options and Awards may be granted only to persons who at the time of grant
are either (i) key personnel (including officers) of the Company or (ii)
consultants and independent contractors who provide valuable services to the
Company. Options that are incentive stock options may be granted only to key
personnel of the Company.
The 1992 Plan, as amended, provides for the automatic grant of options to
acquire the Company's common stock (the Automatic Grant Program), whereby each
non-employee member of the Board of Directors will be granted an option to
acquire 2,500 shares of common stock annually. Each non-employee member of the
Board of Directors also will receive an annual automatic grant of options to
acquire an additional number of shares equal to 1,000 shares for each $0.05
increase in the Company's earnings per share, subject to a maximum of 5,000
additional options. New non-employee members of the Board of Directors will
receive options to acquire 10,000 shares of common stock on the date of their
first appointment or election to the Board of Directors.
The expiration date, maximum number of shares purchasable and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the Plan
Administrator upon grant of the options. Options granted to date vest over
periods not exceeding five years. The exercise price of options will be
determined by the Plan Administrator, but may not be less than 100% of the fair
market value of the common stock at the date of the grant (110% if the option is
granted to a stockholder who at the date the option is granted owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of its subsidiaries).
Awards granted in the form of SARs would entitle the recipient to receive a
payment equal to the appreciation in market value of a stated number of shares
of common stock from the price stated in the award agreement to the market value
of the common stock on the date first exercised or surrendered. The Plan
Administrator may determine such terms, conditions, restrictions and/or
limitations, if any, on any SARs.
The 1992 Plan states that it is not intended to be the exclusive means by
which the Company may issue options or warrants to acquire its common stock,
Stock Awards or any other type of award. To the extent permitted by applicable
law, the Company may issue any other options, warrants or awards other than
pursuant to the 1992 Plan without shareholder approval. The 1992 Plan will
remain in force until November 5, 2002.
2000 NON-QUALIFIED STOCK OPTION PLAN
The Company's 2000 Non-Qualified Stock Option Plan was adopted in August
2000 and provides for the granting of options to acquire common stock of the
Company. At the time of adoption, the maximum number of shares of common stock
issuable under the Plan was 2.0 million of which approximately 116,500 options
have been exercised. Options may only be granted as non-qualified stock options.
The 2000 Plan will remain in force until August 11, 2010.
Options may be granted only to persons who at the time of grant are either
regular employees, excluding Directors and Officers, or persons who provide
consulting or other services as independent contractors to the Company.
The expiration date, maximum number of shares purchasable and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the Committee upon
grant of the options. Options granted to date vest over periods not exceeding
three years. The exercise price of options will be determined by the Committee,
but may not be less than the par value per share.
92
The following summarizes stock option activity in the 1992 Stock Option
Plan and the 2000 Non-Qualified Stock Option Plan:
YEAR ENDED JUNE 30, 2002
--------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- --------------
Options outstanding at beginning of year................... 4,441,668 $1.25 - $36.00 $ 11.77
Granted.................................................. 1,818,000 $0.39 - $0.86 $ 0.56
Canceled................................................. (869,183) $0.39 - $33.38 $ 14.48
Exercised................................................ (191,507) $0.39 - $1.50 $ 0.98
------------
Options outstanding at end of year......................... 5,198,978 $0.39 - $36.00 $ 7.79
============ ========
Options exercisable at end of year......................... 3,654,817 $0.39 - $36.00 $ 10.48
============ ========
Options available for grant at end of year................. 1,750,294
============
Weighted average fair value per share of options granted... $ 0.26
========
YEAR ENDED JUNE 30, 2001
--------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- --------------
Options outstanding at beginning of year................... 3,581,992 $1.25 - $36.00 $ 17.35
Granted.................................................. 1,582,750 $1.50 - $ 2.00 $ 1.57
Canceled................................................. (723,074) $1.25 - $32.25 $ 17.10
Exercised................................................ -- -- --
------------
Options outstanding at end of year......................... 4,441,668 $1.25 - $36.00 $ 11.77
============
Options exercisable at end of year......................... 3,190,462 $1.25 - $36.00 $ 14.79
============
Options available for grant at end of year................. 2,788,361
============
Weighted average fair value per share of options granted... $ 0.72
========
YEAR ENDED JUNE 30, 2000
--------------------------------------------------
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
------------ -------------- --------------
Options outstanding at beginning of year................... 3,575,170 $1.25 - $36.00 $ 20.99
Granted.................................................. 929,109 $1.38 - $8.00 $ 7.16
Canceled................................................. (921,408) $1.25 - $32.56 $ 21.20
Exercised................................................ (879) $1.25 $ 1.25
------------ --------
Options outstanding at end of year......................... 3,581,992 $1.25 - $36.00 $ 17.35
============
Options exercisable at end of year......................... 2,804,758 $1.25 - $36.00 $ 18.04
============
Options available for grant at end of year................. 1,648,037
============
Weighted average fair value per share of options granted... $ 3.01
========
93
The following table details the number of options outstanding and exercisable at
June 30, 2002 for options issued under the 1992 Stock Option Plan and the 2000
Non-qualified Stock Option Plan:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$0.39- $0.39 964,163 9.47 $ 0.39 274,520 $ 0.39
$0.44 - $0.86 694,000 9.29 $ 0.84 376,000 $ 0.85
$1.25 - $1.38 10,640 7.24 $ 1.34 10,640 $ 1.34
$1.50 - $1.50 961,583 8.14 $ 1.50 506,520 $ 1.50
$1.56 - $7.13 826,750 6.74 $ 5.21 776,750 $ 5.42
$7.56 - $8.00 673,440 7.02 $ 7.87 673,440 $ 7.87
$8.25 - $29.00 732,809 4.05 $ 23.88 701,354 $ 23.65
$32.25 - $34.00 303,093 4.47 $ 32.47 303,093 $ 32.47
$34.50 - $34.50 10,000 5.39 $ 34.50 10,000 $ 34.50
$36.00 - $36.00 22,500 4.39 $ 36.00 22,500 $ 36.00
--------- ------- ------- ----------- -------
$0.39 - $36.00 5,198,978 7.36 $ 7.79 3,654,817 $ 10.48
========= ======= ======= =========== =======
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS 123, defines a fair value based method of accounting for employee
stock options or similar equity instruments but also allows an entity to
continue to measure compensation cost related to stock options issued to
employees using the method of accounting prescribed by APB 25. Entities who
elected to continue following APB 25 must make pro forma disclosures of net
income (loss) and earnings (loss) per share, as if the fair value based method
of accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; therefore, no compensation cost is recognized in the accompanying
financial statements for stock-based employee awards. However, the Company has
computed, for pro forma disclosure purposes, the value of all options and ESPP
shares granted during 2002, 2001 and 2000, using the Black-Scholes option
pricing model with the following weighted average assumptions:
YEAR ENDED JUNE 30,
---------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
OPTIONS ESPP OPTIONS ESPP OPTIONS ESPP
------- ------- ------- ------- ------- -------
Risk-free interest rate..................... 2.27% 1.89% 3.74% 2.55% 6.03% 6.32%
Expected dividend yield..................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Expected lives in years (after vesting for
options).................................. 2.72 0.50 1.35 0.50 1.35 0.50
Expected volatility......................... 80.33% 119.3% 72.66% 96.75% 67.51% 99.78%
94
The total value of options granted and ESPP share discount was computed to
be the following approximate amounts, which would be amortized on the
straight-line basis over the vesting period:
OPTIONS ESPP
------- -------
For the year ended June 30, 2002.......................... $ 409 $ 77
For the year ended June 30, 2001.......................... $ 1,134 $ 188
For the year ended June 30, 2000.......................... $ 2,724 $ 137
If the Company had accounted for its stock-based compensation plans using a
fair value based method of accounting, the Company's year end net income (loss)
and diluted earnings (loss) per share would have been reported as follows:
YEAR ENDED JUNE 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Historical........................... $ (45,624) $(226,731) $(101,273)
Pro forma............................ $ (46,209) $(227,606) $(101,762)
Diluted earnings (loss) per share:
Historical........................... $ (2.89) $ (15.38) $ (6.94)
Pro forma............................ $ (2.93) $ (15.44) $ (6.97)
The effects of applying SFAS 123 for providing pro forma disclosures for
2002, 2001 and 2000 are not likely to be representative of the effects on
reported net income (loss) and diluted earnings (loss) per share for future
years, because options vest over several years and additional awards are made
each year.
401(K) PLAN
The Company has a contributory retirement plan (the 401(k) Plan) covering
eligible employees who are at least 18 years old. The 401(k) Plan is designed to
provide tax-deferred income to the Company's employees in accordance with the
provisions of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to 15% of
his or her respective salary, not to exceed the annual statutory limit. The
Company, at its discretion, may elect to make matching contributions in the form
of cash or the Company's common stock to each participant's account as
determined by the Board of Directors. Under the terms of the 401(k) Plan, the
Company may also make discretionary profit sharing contributions. Profit sharing
contributions are allocated among participants based on their annual
compensation. Each participant has the right to direct the investment of his or
her funds. The Company accrued a matching contribution of approximately $1.7
million for the 401(k) Plan year ended December 31, 2000. During fiscal 2002,
the Company made the decision not to make this discretionary contribution and
reversed the accrual of $1.7 million to income. The Company made a matching
contribution in fiscal 2002 totaling $1.6 million relating to the Plan year
ended December 31, 2001.
95
(14) COMMITMENTS AND CONTINGENCIES
MEDICARE FEE SCHEDULE
On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became
effective. The final rule categorizes seven levels of ground ambulance services,
ranging from basic life support to specialty care transport, and two categories
of air ambulance services. The base rate conversion factor for services to
Medicare patients was set at $170.54, plus separate mileage payments based on
specified relative value units for each level of ambulance service. Adjustments
also were included to recognize differences in relative practice costs among
geographic areas, and higher transportation costs that may be incurred by
ambulance providers in rural areas with low population density. The Final Rule
requires ambulance providers to accept the assigned reimbursement rate as full
payment, after patients have submitted their deductible and 20 percent of
Medicare's fee for service. In addition, the Final Rule calls for a five-year
phase-in period to allow time for providers to adjust to the new payment rates.
The fee schedule will be phased in at 20-percent increments each year, with
payments being made at 100 percent of the fee schedule in 2006 and thereafter.
The Company currently believes that the Medicare Ambulance Fee Schedule
will have a neutral net impact on its domestic medical transportation revenue at
incremental and full phase-in periods, primarily due to the geographic diversity
of its domestic operations. These rules could, however, result in contract
renegotiations or other actions to offset any negative impact at the regional
level that could have a material adverse effect on its business, financial
condition, cash flows, and results of operations. Changes in reimbursement
policies, or other governmental action, together with the financial challenges
of some private, third-party payers and budget pressures on other payer sources
could influence the timing and, potentially, the receipt of payments and
reimbursements. A reduction in coverage or reimbursement rates by third-party
payers, or an increase in the Company's cost structure relative to the rate
increase in the Consumer Price Index (CPI), or costs incurred to implement the
mandates of the fee schedule could have a material adverse effect on its
business, financial condition, cash flows, and results of operations.
SURETY BONDS
Counties, municipalities, and fire districts sometimes require the Company
to provide a surety bond or other assurance of financial or performance
responsibility. The Company may also be required by law to post a surety bond as
a prerequisite to obtaining and maintaining a license to operate. As a result,
the Company has a portfolio of surety bonds that is renewed annually. The
Company has outstanding $10.1 million of surety bonds as of June 30, 2002.
OPERATING LEASES
The Company leases various facilities and equipment under non-cancelable
operating lease agreements. Rental expense charged to operations under these
leases (including leases with terms of less than one year) was approximately
$11.5 million, $12.1 million and $13.2 million for the years ended June 30,
2002, 2001 and 2000, respectively.
Minimum rental commitments under non-cancelable operating leases for each
of the years ending June 30 are as follows (in thousands):
2003........................................................ $ 7,878
2004........................................................ 6,777
2005........................................................ 5,734
2006........................................................ 4,739
2007........................................................ 3,112
Thereafter.................................................. 10,236
-------
Total $38,476
=======
96
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, cash flows
and results of operations. 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 arising out of such claims. In addition, due to the nature of the
Company's business, CMS and other regulatory agencies are expected to continue
their practice of performing periodic reviews and initiating investigations
related to the Company's compliance with billing regulations. Unfavorable
resolutions of pending or future litigation, regulatory reviews and/or
investigations, either individually or in the aggregate, could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
The Company, Warren S. Rustand, the former Chairman of the Board and Chief
Executive Officer of the Company, James H. Bolin, the former Vice Chairman of
the Board, and Robert E. Ramsey, Jr., the former Executive Vice President and
former Director, were named as defendants in two purported class action
lawsuits: HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448
filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V.
RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998
in United States District Court for the District of Arizona. The two lawsuits,
which contain virtually identical allegations, were brought on behalf of a class
of persons who purchased the Company's publicly traded securities including its
common stock between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro
seeks unspecified damages under the Arizona Securities Act, the Arizona Consumer
Fraud Act, and under Arizona common law fraud, and also seeks punitive damages,
a constructive trust, and other injunctive relief. Ruble v. Rural/Metro seeks
unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended. The complaints in both actions allege that between
April 28, 1997 and June 11, 1998 the defendants issued certain false and
misleading statements regarding certain aspects of the Company's financial
status and that these statements allegedly caused the Company's common stock to
be traded at artificially inflated prices. The complaints also allege that Mr.
Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage
of inside information that the stock prices were artificially inflated.
On May 25, 1999, the Arizona State Court granted a request for a stay of
the Haskell action until the Ruble action is finally resolved. The Company and
the individual defendants moved to dismiss the Ruble action. On January 25,
2001, the Court granted the motion to dismiss, but granted the plaintiffs leave
to replead. On March 31, 2001, the plaintiffs filed a second amended complaint.
The Company and the individual defendants moved to dismiss the second amended
complaint. On March 8, 2002, the Court granted the motions to dismiss of Mr.
Ramsey and Mr. Bolin with leave to replead and denied the motions to dismiss of
the Company and Mr. Rustand. The result is that Mr. Ramsey and Mr. Bolin have
been dismissed from the Ruble v. Rural/Metro case although the Court has
permitted plaintiffs leave to file another complaint against those individuals.
Mr. Rustand and the Company remain defendants.
The parties have commenced discovery in the Ruble v. Rural/Metro case.
During discovery, the parties conduct investigation through formal processes
such as depositions, subpoenas and requests for production of documents. This
phase is currently expected to run through early November 2003. In addition,
Plaintiffs have moved to certify the class in the Ruble v. Rural/Metro case. A
decision on class certification is not expected before February 2003.
The Company and the individual defendants are insured by primary and excess
insurance policies, which were in effect at the time the lawsuits were filed
(the "D&O Policies"). The Company's primary carrier has been funding the costs
of the litigation and attorney's fees over approximately the last four years.
Recently, however, the Company's primary carrier notified all defendants that it
is taking the position that there is no coverage. The primary carrier purports
to base this decision on the actions of one of the Company's former officers,
whom the primary carrier claims assisted the Plaintiffs in the Ruble v.
Rural/Metro case in such a way as to trigger an exclusion under the policy. The
Company and the primary carrier are in the process of negotiating an interim
funding agreement under which the carriers will continue to advance defense
costs in the underlying
97
litigations pending a court determination of the coverage dispute. While the
Company intends to vigorously pursue its rights under the D&O Policies, the
Company is unable to predict with certainty the outcome of these matters. A
final and binding adverse judgment on the coverage dispute could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
LaSalle Ambulance, Inc., a New York subsidiary of Rural/Metro Corporation,
has been sued in the case of Ann Bogucki and Patrick Bogucki v. LaSalle
Ambulance Service, et al., Index No. I 1995 2128, pending in the Supreme Court
of the State of New York, Erie County. In 1995, Plaintiff Ann Bogucki sued
LaSalle Ambulance along with other defendants, primarily alleging that negligent
medical care caused her injuries. The incident occurred in 1992, which was prior
to our acquisition of LaSalle Ambulance, Inc. The prior owner's insurance
carrier is defending the case. Based on information obtained in the fourth
quarter of fiscal 2002, the Company does not believe that its primary insurance
policy for the post-acquisition period provides coverage for these claims;
however, the Company believes that it has meritorious claims against the prior
owner and under the pre-acquisition period insurance policy. Further, the
Company does not believe that Plaintiffs' claims have any merit and are
cooperating with the insurance carrier to vigorously defend the lawsuit.
However, if the Plaintiffs are successful in obtaining an adverse judgment, then
the limits of the prior owner's insurance policy may not be adequate to cover
all damages that might arise out of this lawsuit. As the current owner of
LaSalle Ambulance, Inc., the Company has potential liability for the uninsured
portion of any such adverse judgment; which liability, if occurring, could have
a material adverse effect on its business, financial condition, cash flows and
results of operations.
OTHER DISPUTES
In 1994, the Company entered into a management agreement with another
corporation to manage the operations of one of the Company's subsidiaries that
does not provide ambulance or fire protection services. The Company also entered
into an agreement whereby the corporation had the option to purchase the assets
of the subsidiary and the Company had the option to sell the assets of the
subsidiary. A dispute arose regarding the obligations under the management and
option agreements. The Company settled this dispute during the year ended June
30, 2000. Losses relating to this dispute totaled approximately $1.3 million and
are included in restructuring charges and other in the consolidated statement of
operations for the year ended June 30, 2000.
REGULATORY COMPLIANCE
The healthcare industry is subject to numerous laws and regulations of
federal, state, and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. The Company believes that it is substantially in
compliance with fraud and abuse statutes as well as their applicable government
review and interpretation as well as regulatory actions unknown or unasserted at
this time.
The Company has been subject to investigations in the past relating to
Medicare and Medicaid laws pertaining to its industry. The Company cooperated
fully with the government agencies that conducted these investigations. Those
reviews cover periods prior to the Company's acquisition of certain operations
as well as periods subsequent to acquisition. Management believes that the
remedies existing under specific purchase agreements along with reserves
established in the Consolidated Financial Statements are sufficient so that the
ultimate outcome of these matters should not have a material adverse effect on
its business, financial condition, cash flows and results of operations.
98
The Company recently became aware of, and has taken corrective action with
respect to, various issues arising primarily from the transition to the Company
from various acquired operations of Federal Communications Commission (FCC)
licenses for public safety and private wireless radio frequencies used in the
ordinary course of our business. While the Company does not currently anticipate
that action with respect to these issues by the FCC's enforcement bureau will
result in material monetary fines or license forfeitures, there can be no
assurance that this will be the case.
(15) FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value assumptions. The carrying values of cash,
accounts receivable, accounts payable, accrued liabilities and other liabilities
approximates the related fair values due to the short-term maturities of these
instruments. The carrying value of notes payable and capital lease obligations
approximate the related fair values as rates on these instruments approximate
market rates currently available for instruments with similar terms and
remaining maturities. The fair value of the Senior Notes was determined by the
market price as of June 30, 2002. The relationship between the fair value and
carrying value of the Senior Notes was then applied to the amount outstanding
under the revolving credit facility to arrive at its estimated fair value. A
comparison of the fair value and carrying value of the Senior Notes and
revolving credit facility is as follows.
FAIR VALUE RECORDED VALUE
---------- --------------
Revolving Credit Facility 93,840 144,369
Senior Notes 97,404 149,852
(16) 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 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 counties,
fire districts, and municipalities, as well as non-emergency ambulance services
provided to individuals requiring either advanced or basic levels of medical
supervision during transport. The Segment also includes alternative
transportation services, operational and administrative support services related
to the Company's public/private alliance with the City of San Diego and
ambulance and urgent care services provided under capitated service arrangements
in Argentina. As discussed in Note 17, the Company disposed of its Latin
American operations in a sale to local management on September 27, 2002.
The Fire and Other Segment includes a variety of fire protection services
including fire prevention, suppression, training, alarm monitoring, dispatch,
fleet and billing services.
The accounting policies described in Note 1 to 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) before interest, income taxes, depreciation and amortization.
Additionally, segment assets are defined as consisting solely of accounts
receivable.
The following tables summarize the information required to be presented by
SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
as of and for the years ended June 30, 2002, 2001 and 2000. The Company has
revised certain of the information presented below as of and for the years ended
June 30, 2001 and 2000. Such revisions consist of:
* The inclusion of alternative transportation services ($14.6 million,
$12.1 million and $9.5 million in the fiscal years ended June 30,
2002, 2001 and 2000, respectively) as well as operational and
administrative support services related to the Company's
public/private alliance with the City of San Diego ($9.7 million,
$10.6 million and $15.0 million in the fiscal years ended June 30,
2002, 2001 and 2000, respectively) within the Medical Transportation
and Related Services Segment (such services were previously included
in the Fire and Other Segment);
* The clarification of the measure of segment profitability as well as
the definition of segment assets to correspond with the manner in
which the Company has historically managed its operations; and
* The addition of a reconciliation of the segment financial information
to corresponding amounts contained in the Consolidated Financial
Statements.
These revisions, which had no impact on the Company's consolidated
financial position, results of operations or cash flows, have not been audited
by any independent accountants.
99
Information by operating segment is set forth below:
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER CORPORATE TOTAL
---------- -------------- ---------- ----------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 2002
Net revenues from external customers....... $ 420,802 $ 76,236 $ -- $ 497,038
Segment profit (loss)...................... 51,514 9,278 (17,776) 43,016
Segment assets............................. 97,521 1,594 -- 99,115
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER CORPORATE TOTAL
---------- -------------- ---------- ----------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 2001
Net revenues from external customers....... $ 425,582 $ 78,734 $ -- $ 504,316
Segment profit (loss)...................... (155,033) 11,643 (19,902) (163,292)
Segment assets............................. 102,136 1,124 -- 103,260
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER CORPORATE TOTAL
---------- -------------- ---------- ----------
(IN THOUSANDS)
YEAR ENDED JUNE 30, 2000
Net revenues from external customers....... $ 492,218 $ 77,856 $ -- $ 570,074
Segment profit (loss)...................... (59,913) 14,522 (30,233) (75,624)
Segment assets............................. 139,525 4,380 -- 143,905
A reconciliation of segment profit (loss) to income (loss) before income
taxes, extraordinary loss and cumulative effect of change in accounting
principle is as follows:
2002 2001 2000
--------- --------- ---------
Segment profit (loss) $ 43,016 $(163,292) $ (75,624)
Depreciation and amortization (16,210) (29,161) (33,696)
Interest expense, net (24,976) (30,001) (25,939)
Other income (expense), net 9 (2,402) 2,890
--------- --------- ---------
Income (loss) before income taxes,
extraordinary loss and
cumulative effect of change
in accounting principle $ 1,839 $(224,856) $(132,369)
========= ========= =========
A reconciliation of segment assets to total assets is as follows:
2002 2001 2000
--------- --------- ---------
Segment assets $ 99,115 $ 103,260 $ 143,905
Cash 9,828 8,699 10,287
Inventories 12,220 13,173 19,070
Prepaid expenses and other 9,597 6,753 6,552
Property and equipment, net 48,532 57,999 85,919
Goodwill 41,244 90,757 207,200
Other assets 16,902 17,893 18,284
--------- --------- ---------
$ 237,438 $ 298,534 $ 491,217
========= ========= =========
100
Information concerning principal geographic areas is set forth below:
2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
NET PROPERTY NET PROPERTY NET PROPERTY
REVENUE AND EQUIPMENT REVENUE AND EQUIPMENT REVENUE AND EQUIPMENT
------- ------------- ------- ------------- ------- -------------
(IN THOUSANDS)
United States ................ $ 471,644 $ 48,198 $ 461,227 $ 57,682 $ 517,315 $ 79,257
Latin America (primarily
Argentina).................. 25,394 334 43,089 317 52,759 6,662
---------- ---------- ---------- ---------- ---------- ----------
Total.................... $ 497,038 $ 48,532 $ 504,316 $ 57,999 $ 570,074 $ 85,919
========== ========== ========== ========== ========== ==========
(17) SUBSEQUENT EVENT
Due to the deteriorating economic conditions and continued devaluation of
the local currency, the Company reviewed its strategic alternatives with respect
to the continuation of operations in Latin America, including Argentina and
Bolivia, and determined that the Company would benefit from focusing on its
domestic operations. Effective September 27, 2002, the Company sold its Latin
American operations to local management for the assumption of net liabilities.
Revenues relating to its Latin American operations totaled $25.4 million, $43.1
million and $57.4 million for the years ended 2002, 2001 and 2000, respectively.
Excluding asset impairment and restructuring charges, operating expenses related
to the Latin American operations totaled $23.8 million, $44.7 million and $56.2
million for the years ended June 30, 2002, 2001 and 2000, repectively. Although
we have not determined the final accounting, we do not expect there to be a
negative financial impact from this transaction.
(18) RELATED PARTY TRANSACTIONS
The Company incurred legal fees of approximately $138,000, $130,000 and
$96,000 for the years ended June 30, 2002, 2001 and 2000, respectively, with a
law firm in which a member of the Board of Directors is a partner.
The Company incurred rental expense of approximately $46,000 for each of
the years ended June 30, 2002, 2001 and 2000 related to leases of fire and
ambulance facilities with a director of the Company.
The Company incurred consulting fees of approximately $89,000, $99,000 and
$85,000 in the years ended June 30, 2002, 2001 and 2000, respectively, with a
director of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
101
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the information contained under the headings "Proposal to Elect Directors -
Nominees" as set forth in the Company's definitive proxy statement for its 2002
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 relating to directors of the Company is
incorporated herein by reference to the information under the heading "Director
Compensation and Other Information" and the information relating to executive
officers of the Company is incorporated herein by reference to the information
under the heading "Executive Compensation" as set forth in the Company's
definitive proxy statement for its 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference to
the information under the heading "Security Ownership of Principal Stockholders,
Directors and Officers" as set forth in the Company's definitive proxy statement
for its 2002 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the information under the heading "Certain Relationships and Related
Transactions" as set forth in the Company's definitive proxy statement for its
2002 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
Not Applicable.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
PAGE
----
(i) Financial Statements
(1) Report of Independent Accountants............................. 53
Report of Independent Public Accountants...................... 54
(2) Consolidated Financial Statements Consolidated
Balance Sheet at June 30, 2002 and 2001..................... 56
Consolidated Statement of Operations for the Years
Ended June 30, 2002, 2001, and 2000......................... 57
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the Years Ended June 30, 2002, 2001,
and 2000.................................................... 58
Consolidated Statement of Cash Flows for the Years
Ended June 30, 2002, 2001, and 2000......................... 59
Notes to Consolidated Financial Statements.................... 60
(ii) Financial Statement Schedules
All schedules have been omitted on the basis that the
required information is included in the Notes to Consolidated
Financial Statements or because such schedules are not
otherwise applicable.
(iii) Exhibits
See index to exhibits below.
102
(b) Reports on Form 8-K:
We filed the following report on Form 8-K during the quarter ended June 30,
2002:
Report on Form 8-K filed with the Commission on April 18, 2002 relating to
a notice received from the Nasdaq Listing Qualifications Panel indicating
it had determined that the Company's securities will continue to be listed
on the Nasdaq SmallCap Market via an exception to the bid price and net
income/shareholders' equity/market capitalization requirements.
(c) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
2 Plan and Agreement of Merger and Reorganization, dated as of April 26,
1993(1)
3.1(a) Second Restated Certificate of Incorporation of the Registrant filed
with the Secretary of State of Delaware on January 18, 1995(6)
3.1(b) Rights Agreement dated as of August 23, 1995 between the Registrant
and American Securities Transfer, Inc., the Rights Agent(7)
3.2 Amended and Restated Bylaws of the Registrant(1)
4.1 Specimen Certificate representing shares of Common Stock, par value
$.01 per share(1)
4.2 Indenture dated as of March 16, 1998, by and among the Company, the
subsidiaries acting as Guarantors thereto, and the First National Bank
of Chicago, as Trustee(10)
4.3 Form of Global Note (included in Exhibit 4.2)(10)
4.4 Registration Rights Agreement dated March 11, 1998, by and among Bear
Stearns & Co. Inc., Salomon Brothers Inc, SBC Warburg Dillon Reed
Inc., First Union Capital Markets, the Company, and certain
subsidiaries of the Company, as Guarantors(10)
10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted August 10,
1989, as amended(1)
10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of Registrant,
dated February 4, 1994(2)
10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated August 25,
1994(3)
10.4 Form of Stock Option Agreement pursuant to 1989 Employee Stock Option
Plan of Registrant(1)
10.5 Amended and Restated 1992 Stock Option Plan of Registrant, amended
through October 15, 1998(13)
10.6 Forms of Stock Option Agreements pursuant to the Amended and Restated
1992 Stock Option Plan of Registrant(13)
103
10.7 2000 Non-Qualified Stock Option Plan, adopted August 11, 2000(22)
10.15 Forms of Conditional Stock Grant and Repurchase Agreements by and
between Registrant and each of its executive officers and directors,
dated May 14, 1993, November 1, 1994, and December 1, 1997(1)
10.16(d) Form of Change of Control Agreement by and between the Registrant and
the following executive officers: (i) Jack E. Brucker, dated November
24, 1997, (ii) R. Bruce Hillier, effective October 28, 1997, (iii) Dr.
Michel A. Sucher, effective December 1, 1995, and (iv) John S. Banas
III, effective March 10, 2000(12)
10.16(g) Employment Agreement by and between Registrant and John B. Furman
effective July 29, 1999(14)
10.16(h) Change of Control Agreement by and between Registrant and John B.
Furman, effective November 1, 1999(14)
10.16(l) Employment Agreement by and between the Registrant and Jack E.
Brucker, effective April 19, 2001(21)
10.16(m) Form of Employment Agreement by and between the Registrant and each of
the following executive officers: (i) Dr. Michel A. Sucher, effective
November 7, 1997, and (ii) R. Bruce Hillier, effective October 20,
1997(15)
10.16(n) Employment Agreement by and between the Registrant and John S. Banas
III, effective April 23, 2001(21)
10.17 Form of Indemnity Agreement by and between Registrant and each of its
officers and directors, dated in April, May, August and November 1993,
as of October 13, 1994, and as of September 25, 1998(1)
10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust of the
Registrant, effective July 1, 1997(13)
10.21 Retirement Savings Value Plan 401(k) of Registrant, as amended, dated
July 1, 1990(1)
10.22 Master Lease Agreement by and between Plazamerica, Inc. and the
Registrant, dated January 30, 1990(1)
10.36 Employee Stock Purchase Plan, as amended through November 20, 1997(12)
10.37(a) Loan and Security Agreement by and among the CIT Group/Equipment
Financing, Inc. and the Registrant, together with its subsidiaries,
dated December 28, 1994, and related Promissory Note and Guaranty
Agreement(3)
10.37(b) Form of Loan and Security Agreement by and among Registrant and CIT
Group/Equipment Financing, Inc. first dated February 25, 1998 and
related form of Guaranty and Schedule of Indebtedness and
Collateral(12)
10.45 Amended and Restated Credit Agreement dated as of March 16, 1998, by
and among the Company as borrower, certain of its subsidiaries as
Guarantors, the lenders referred to therein, and First Union National
Bank, as agent and as lender, and related Form of Amended and Restated
Revolving Credit Note, Form of Subsidiary Guarantee Agreement, and
Form of Intercompany Subordination Agreement(11)
10.54 Purchase Agreement dated January 16, 1998 and Complementary Agreement
dated March 26, 1998 between Rural/Metro Corporation and Messrs.
Horacio Artagaueytia, Jose Mateo Campomar, Alberto Fluerquin, Carlos
Mezzera, Renato Ribeiro, Gervasio Reyes, and Carlos Arturo Delmiro
Marfetan with respect to the stock of Peimu S.A., Recor S.A., Marlon
S.A., and Semercor S.A(9)
104
10.55 Provisional Waiver and Standstill Agreement dated as of March 14,
2000(16)
10.56 First Amendment to Provisional Waiver and Standstill Agreement dated
as of April 13, 2000(16)
10.57 Second Amendment to Provisional Waiver and Standstill Agreement dated
as of July 14, 2000(17)
10.59 Third Amendment to Provisional Waiver and Standstill Agreement dated
as of October 16, 2000(18)
10.60 Fourth Amendment to Provisional Waiver and Standstill Agreement dated
as of January 31, 2001(19)
10.61 Fifth Amendment to Provisional Waiver and Standstill Agreement dated
as of April 23, 2001(20)
10.62 Sixth Amendment to Provisional Waiver and Standstill Agreement dated
as of August 1, 2001 (23)
10.63 Seventh Amendment to Provisional Waiver and Standstill Agreement dated
as of December 4, 2001 (24)
21 Subsidiaries of Registrant*
23 Consent of PricewaterhouseCoopers LLP*
- ----------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-63448) filed May 27, 1993 and declared
effective July 15, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-76458) filed March 15, 1994 and declared
effective May 5, 1994.
(3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about May 12, 1995.
(4) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 7, 1995, as amended by the
Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and
August 1, 1995.
(5) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about May 19, 1995.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-88172) filed with the Commission on December
30, 1994 and declared effective January 19, 1995.
(7) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about August 28, 1995.
(8) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 17, 1998.
(9) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 1, 1998, as amended by the
Registrant's Form 8-K/A Current Report filed on or about June 5, 1998.
(10) Incorporated by reference to the Registration Statement on Form S-4 of the
Registrant (Registration No. 333-51455) filed April 30, 1998 and declared
effective on May 14, 1998.
(11) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 of the Registrant (Registration No. 333-51455) filed May
11,1998 and declared effective on May 14, 1998.
(12) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1998.
105
(13) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 10, 1998.
(14) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 15, 1999.
(15) Incorporated by reference to the Registrant's Form 10-K Annual Report for
the year ended June 30, 1996 filed with the Commission on or about
September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)).
(16) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on April 14, 2000.
(17) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on July 28, 2000.
(18) Incorporated by reference to the Registrant's Form 10-Q Current Report
filed with the Commission on October 16, 2000.
(19) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on February 2, 2001.
(20) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on May 2, 2001.
(21) Incorporated by reference to the Registrant's Form 10-Q filed with the
Commission on May 15, 2001.
(22) Incorporated by reference to the Registrant's Form S-8 Registration
Statement filed with the Commission on May 21, 2001.
(23) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on August 9, 2001.
(24) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on January 22, 2002.
106
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURAL/METRO CORPORATION
By: /s/ JACK E. BRUCKER
-------------------------------------
Jack E. Brucker
President and Chief Executive Officer
October 9, 2002
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ COR J. CLEMENT Chairman of the Board of Directors October 9, 2002
- -------------------------
Cor J. Clement
/s/ LOUIS G. JEKEL Vice Chairman of the October 9, 2002
- ------------------------- Board of Directors
Louis G. Jekel
/s/ JACK E. BRUCKER President, Chief Executive October 9, 2002
- ------------------------- Officer and Director
Jack E. Brucker (Principal Executive Officer)
/s/ RANDALL L. HARMSEN Vice President of Finance October 9, 2002
- ------------------------- (Principal Financial Officer and
Randall L. Harmsen Principal Accounting Officer)
Director October _, 2002
- -------------------------
Mary Anne Carpenter
/s/ WILLIAM C. TURNER Director October 9, 2002
- -------------------------
William C. Turner
/s/ HENRY G. WALKER Director October 9, 2002
- -------------------------
Henry G. Walker
/s/ LOUIS A. WITZEMAN Director October 9, 2002
- -------------------------
Louis A. Witzeman
107
CERTIFICATION
I, Jack E. Brucker, certify that:
1. I have reviewed this annual report on Form 10-K of Rural/Metro
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 9, 2002
/s/ JACK E. BRUCKER
----------------------------------------
President and Chief Executive Officer
Rural/Metro Corporation
108
CERTIFICATION
I, Randall L. Harmsen, certify that:
1. I have reviewed this annual report on Form 10-K of Rural/Metro
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 9, 2002
/s/ RANDALL L. HARMSEN
----------------------------------------
Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer)
Rural/Metro Corporation
109