SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.Yes [X] No [ ]
At November 8, 2002, there were 16,140,861 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2002
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet 4
Consolidated Statement of Operations and
Comprehensive Income (Loss) 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 25
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
Item 4. Controls and Procedures 42
Part II. Other Information
Item 1. Legal Proceedings 42
Item 2. Changes in Securities and Use of Proceeds 43
Item 6. Exhibits and Reports on Form 8-K 43
Signatures 44
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002 AND JUNE 30, 2002
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
2002 2002
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash ............................................... $ 4,417 $ 9,828
Accounts receivable, net ........................... 97,736 99,115
Inventories ........................................ 11,666 12,220
Prepaid expenses and other ......................... 8,750 9,015
--------- ---------
Total current assets ..................... 122,569 130,178
PROPERTY AND EQUIPMENT, net ........................ 46,524 48,532
GOODWILL ........................................... 41,167 41,244
OTHER ASSETS ....................................... 23,703 17,484
--------- ---------
$ 233,963 $ 237,438
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ................................... $ 10,135 $ 11,961
Accrued liabilities ................................ 53,934 73,719
Deferred subscription fees ......................... 15,632 15,409
Current portion of long-term debt .................. 1,543 1,633
--------- ---------
Total current liabilities ................ 81,244 102,722
LONG-TERM DEBT, net of current portion ............. 306,288 298,529
OTHER LIABILITIES .................................. 408 477
DEFERRED INCOME TAXES .............................. 650 650
--------- ---------
Total liabilities ........................ 388,590 402,378
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST .................................. 379 379
--------- ---------
REDEEMABLE PREFERRED STOCK ......................... 4,189 --
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ....................................... 164 159
Additional paid-in capital ......................... 138,760 138,470
Accumulated deficit ................................ (296,880) (313,025)
Accumulated other comprehensive income (loss) ...... -- 10,316
Treasury stock ..................................... (1,239) (1,239)
--------- ---------
Total stockholders' equity (deficit) ..... (159,195) (165,319)
--------- ---------
$ 233,963 $ 237,438
========= =========
See accompanying notes
3
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001
--------- ---------
NET REVENUE .......................................................... $ 125,565 $ 116,474
--------- ---------
OPERATING EXPENSES
Payroll and employee benefits ...................................... 71,112 68,321
Provision for doubtful accounts .................................... 18,725 16,738
Depreciation and amortization ...................................... 3,440 4,031
Other operating expenses ........................................... 22,534 21,530
--------- ---------
Total operating expenses ..................................... 115,811 110,620
--------- ---------
OPERATING INCOME ..................................................... 9,754 5,854
Interest expense, net ................................................ (5,886) (6,824)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ............................................ 3,868 (970)
INCOME TAX PROVISION ................................................. (55) (20)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ................ 3,813 (990)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Includes
gain on the disposition of Latin American operations
of $12,488 in 2002) ................................................ 12,332 (200)
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ............................................ 16,145 (1,190)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................... -- (49,513)
--------- ---------
NET INCOME (LOSS) .................................................... $ 16,145 $ (50,703)
========= =========
Cumulative translation adjustments ................................... (242) (40)
Recognition of cumulative translation adjustment in connection
with the disposition of Latin American operations .................. (10,074) --
--------- ---------
COMPREHENSIVE INCOME (LOSS) .......................................... $ 5,829 $ (50,743)
========= =========
INCOME (LOSS) PER SHARE
Basic --
Income (loss) from continuing operations before
cumulative effect of change in accounting principle ............ $ 0.24 $ (0.07)
Income (loss) from discontinued operations ....................... 0.77 (0.01)
--------- ---------
Income (loss) before cumulative effect of change
in accounting principle ........................................ 1.01 (0.08)
Cumulative effect of change in accounting principle .............. -- (3.29)
--------- ---------
Net income (loss) .................................................... $ 1.01 $ (3.37)
========= =========
Diluted --
Income (loss) from continuing operations before
cumulative effect of change in accounting principle ............ $ 0.21 $ (0.07)
Income (loss) from discontinued operations ....................... 0.70 (0.01)
--------- ---------
Income (loss) before cumulative effect of change in
accounting principle ........................................... 0.91 (0.08)
Cumulative effect of change in accounting principle .............. -- (3.29)
--------- ---------
Net income (loss) .................................................... $ 0.91 $ (3.37)
========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC ........................ 15,994 15,031
========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED ...................... 17,778 15,031
========= =========
See accompanying notes
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ......................................................... $ 16,145 $(50,703)
Adjustments to reconcile net income (loss) to cash used in operating
activities --
Non-cash portion of gain on disposition of Latin American operations .... (13,732) --
Cumulative effect of change in accounting principle ..................... -- 49,513
Depreciation and amortization ........................................... 3,448 4,331
(Gain) loss on sale of property and equipment ........................... (172) 57
Provision for doubtful accounts ......................................... 18,725 16,886
Equity earnings net of distributions received ........................... (877) (104)
Amortization of debt discount ........................................... 6 6
Change in assets and liabilities --
Increase in accounts receivable ......................................... (17,926) (19,045)
Decrease in inventories ................................................. 493 23
Decrease in prepaid expenses and other .................................. 71 88
(Increase) decrease in other assets ..................................... (708) (965)
Increase (decrease) in accounts payable ................................. (1,791) 2,490
Decrease in accrued liabilities and other liabilities ................... (8,324) (7,856)
Increase (decrease) in deferred subscription fees ....................... 224 (49)
-------- --------
Net cash used in operating activities ............................... (3,002) (5,328)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ...................................................... (2,011) (1,501)
Proceeds from the sale of property and equipment .......................... 214 332
-------- --------
Net cash used in investing activities ............................... (1,797) (1,169)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on revolving credit facility ................................... -- (13)
Repayment of debt and capital lease obligations ........................... (356) (443)
Cash paid for debt issuance costs ......................................... (391) --
Issuance of common stock .................................................. 156 153
-------- --------
Net cash used in financing activities ............................... (591) (303)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH .......................... (21) (40)
-------- --------
DECREASE IN CASH .......................................................... (5,411) (6,840)
CASH, beginning of period ................................................. 9,828 8,699
-------- --------
CASH, end of period ....................................................... $ 4,417 $ 1,859
======== ========
See accompanying notes
5
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for the
three month periods ended September 30, 2002 and 2001 include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the consolidated financial position and results of
operations. The results of operations for the three-month periods ended
September 30, 2002 and 2001 are not necessarily indicative of the results
of operations for the full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2002. Certain financial information for prior periods has been
reclassified to conform to the current presentation. The consolidated
balance sheet as of June 30, 2002 has been derived from the audited
consolidated balance sheet included in the Company's annual report on Form
10-K, as amended, for the year ended June 30, 2002 but does not include all
of the disclosures required by generally accepted accounting principles.
(2) LIQUIDITY
During the three months ended September 30, 2002, the Company had net
income of $16.1 million compared with a net loss of $50.7 million in the
three months ended September 30, 2001. Net income in the three months ended
September 30, 2002 included a $12.5 million gain related to the disposition
of the Company's Latin American operations while the three months ended
September 30, 2001 included a charge of $49.5 million relating to the
adoption effective July 1, 2001 of the new goodwill accounting standard as
discussed in Note 7. The Company's operating activities utilized cash
totaling $3.0 million in the three months ended September 30, 2002 and $5.3
million in the three months ended September 30, 2001. Cash flow from
operating activities in each of the three month periods ended September 30,
2002 and 2001 included the cash flow effect of the Company's semi-annual
interest payment of $5.9 million related to the Senior Notes.
At September 30, 2002, the Company had cash of $4.4 million, debt of $307.8
million and a stockholders' deficit of $159.2 million. The Company's debt
includes $149.9 million of 7 7/8% senior notes due 2008, $152.4 million
outstanding under its credit facility, $4.4 million payable to a former
joint venture partner and $1.1 million of capital lease obligations.
As discussed in Note 3, 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.
6
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 September 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.
(3) LONG-TERM DEBT
The Company's long-term debt consists of the following at September 30,
2002 and June 30, 2002 (in thousands):
SEPTEMBER 30, JUNE 30,
2002 2002
--------- ---------
7 7/8% senior notes due 2008 .................. $ 149,859 $ 149,852
Credit facility due December 31, 2004 ......... 152,420 144,369
Note payable to former joint venture partner,
monthly payments through June 2006 .......... 4,412 4,622
Capital lease obligations and other notes
payable, at varying rates, from 3.5%
to 12.75%, due through 2013 ................. 1,140 1,319
--------- ---------
307,831 300,162
Less: Current maturities ...................... (1,543) (1,633)
--------- ---------
$ 306,288 $ 298,529
========= =========
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%.
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. The Company 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
7
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
on the outstanding balance. We recorded approximately $7.4 million related
to this additional interest expense through September 30, 2002. In
connection with the waivers, the Company also made unscheduled principal
payments totaling $5.2 million.
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 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 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 (approximately $6.9 million),
non-reimbursed letters of credit and various fees and expenses
associated with the amended credit facility (approximately $1.2
million) 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 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 contributions 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
8
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. See discussion of the preferred
stock in Note 4.
The Company recorded approximately $6.8 million of deferred debt issuance
costs related to the amended credit facility ($4.2 million related to the
fair value of the preferred stock, $1.2 million of lender fees which were
added to the balance of the amended facility and $1.4 million of related
professional fees). These costs are included in other assets in the
accompanying consolidated balance sheet as of September 30, 2002. These
costs will be amortized to interest expense over the life of the agreement.
The fair value of the preferred stock was estimated to be the market value
of the common stock to be issued upon conversion of the preferred stock,
measured at the date of the amendment. The preferred stock balance will be
accreted to the greater of $15.0 million or the value of the common shares
into which the preferred shares would otherwise be converted, over the life
of the agreement or until the preferred shares are converted to common
shares.
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 is amortizing these costs to interest expense 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:
9
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
ASSETS
CURRENT ASSETS
Cash .......................................... $ -- $ 4,410 $ 7 $ -- $ 4,417
Accounts receivable, net ...................... -- 93,183 4,553 -- 97,736
Inventories ................................... -- 11,666 -- -- 11,666
Prepaid expenses and other .................... -- 8,724 26 -- 8,750
--------- --------- --------- --------- ---------
Total current assets ....................... -- 117,983 4,586 -- 122,569
PROPERTY AND EQUIPMENT, net ...................... -- 46,311 213 -- 46,524
GOODWILL ......................................... -- 41,167 -- -- 41,167
DUE FROM (TO) AFFILIATES ......................... 272,767 (244,046) (28,721) -- --
OTHER ASSETS ..................................... 9,813 13,426 464 -- 23,703
INVESTMENT IN SUBSIDIARIES ....................... (134,822) -- -- 134,822 --
--------- --------- --------- --------- ---------
$ 147,758 $ (25,159) $ (23,458) $ 134,822 $ 233,963
========= ========= ========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable .............................. $ -- $ 10,025 $ 110 $ -- $ 10,135
Accrued liabilities ........................... 485 56,099 (2,650) -- 53,934
Deferred subscription fees .................... -- 15,632 -- -- 15,632
Current portion of long-term debt ............. -- 1,535 8 -- 1,543
--------- --------- --------- --------- ---------
Total current liabilities .................. 485 83,291 (2,532) -- 81,244
LONG-TERM DEBT, net of current portion ........... 302,279 4,009 -- -- 306,288
OTHER LIABILITIES ................................ -- 408 -- -- 408
DEFERRED INCOME TAXES ............................ -- 1,814 (1,164) -- 650
--------- --------- --------- --------- ---------
Total liabilities .......................... 302,764 89,522 (3,696) -- 388,590
--------- --------- --------- --------- ---------
MINORITY INTEREST ................................ -- -- -- 379 379
--------- --------- --------- --------- ---------
REDEEMABLE PREFERRED STOCK ....................... 4,189 -- -- -- 4,189
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock .................................. 164 82 8 (90) 164
Additional paid-in capital .................... 138,760 54,622 20,148 (74,770) 138,760
Retained earnings (accumulated deficit) ....... (296,880) (169,385) (39,918) 209,303 (296,880)
Treasury stock ................................ (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ....... (159,195) (114,681) (19,762) 134,443 (159,195)
--------- --------- --------- --------- ---------
$ 147,758 $ (25,159) $ (23,458) $ 134,822 $ 233,963
========= ========= ========= ========= =========
10
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 ...................... -- 8,864 151 -- 9,015
--------- --------- --------- --------- ---------
Total current assets ......................... -- 124,045 6,133 -- 130,178
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 ....................................... 3,031 12,163 2,290 -- 17,484
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
========= ========= ========= ========= =========
11
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
NET REVENUE ....................................... $ -- $ 122,954 $ 2,611 $ -- $ 125,565
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ..................... -- 69,457 1,655 -- 71,112
Provision for doubtful accounts ................... -- 18,500 225 -- 18,725
Depreciation and amortization ..................... -- 3,396 44 -- 3,440
Other operating expenses .......................... -- 21,966 568 -- 22,534
--------- --------- --------- --------- ---------
Total expenses .............................. -- 113,319 2,492 -- 115,811
--------- --------- --------- --------- ---------
OPERATING INCOME .................................. -- 9,635 119 -- 9,754
Income from wholly-owned subsidiaries ............. 9,534 -- -- (9,534) --
Interest expense, net ............................. (5,721) 14 (179) -- (5,886)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ......................... 3,813 9,649 (60) (9,534) 3,868
INCOME TAX (PROVISION) BENEFIT .................... -- (55) -- -- (55)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ....................................... 3,813 9,594 (60) (9,534) 3,813
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ........ 12,332 12,488 (156) (12,332) 12,332
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ................................. $ 16,145 $ 22,082 $ (216) $ (21,866) $ 16,145
========= ========= ========= ========= =========
12
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
NET REVENUE ........................................ $ -- $ 113,593 $ 2,881 $ -- $ 116,474
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits ...................... -- 66,268 2,053 -- 68,321
Provision for doubtful accounts .................... -- 16,461 277 -- 16,738
Depreciation and amortization ...................... -- 3,940 91 -- 4,031
Other operating expenses ........................... -- 21,093 437 -- 21,530
--------- --------- --------- --------- ---------
Total expenses ............................... -- 107,762 2,858 -- 110,620
--------- --------- --------- --------- ---------
OPERATING INCOME ................................... -- 5,831 23 -- 5,854
Income from wholly-owned subsidiaries .............. 5,483 -- -- (5,483) --
Interest expense, net .............................. (6,473) (63) (288) -- (6,824)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE .......................... (990) 5,768 (265) (5,483) (970)
INCOME TAX (PROVISION) BENEFIT ..................... -- (20) -- -- (20)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ........................................ (990) 5,748 (265) (5,483) (990)
LOSS FROM DISCONTINUED OPERATIONS .................. (200) -- (200) 200 (200)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE .......................... (1,190) 5,748 (465) (5,283) (1,190)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ............................. (49,513) (49,513) -- 49,513 (49,513)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) .................................. $ (50,703) $ (43,765) $ (465) $ 44,230 $ (50,703)
========= ========= ========= ========= =========
13
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
-------- ---------- -------------- ------------ ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) ..................................... $ 16,145 $ 22,082 $ (216) $(21,866) $ 16,145
Adjustments to reconcile net income (loss) to cash
used in operations --
Non-cash portion of gain on disposition of Latin
American operations ................................ 139 -- (13,871) -- (13,732)
Depreciation and amortization ....................... -- 3,396 52 -- 3,448
(Gain) loss on sale of property and equipment ....... -- (36) (136) -- (172)
Provision for doubtful accounts ..................... -- 18,500 225 -- 18,725
Equity earnings net of distributions received ....... -- (877) -- -- (877)
Amortization of discount on Senior Notes ............ 6 -- -- -- 6
Change in assets and liabilities --
(Increase) decrease in accounts receivable .......... -- (18,104) 178 -- (17,926)
(Increase) decrease in inventories .................. -- 512 (19) -- 493
(Increase) decrease in prepaid expenses and other ... -- 140 (69) -- 71
Increase in other assets ............................ 46 (395) 1,057 -- 708
(Increase) decrease in due to/from affiliates ....... (13,252) (21,053) 12,460 21,845 --
Increase (decrease) in accounts payable ............. -- (2,079) 288 -- (1,791)
Decrease in accrued liabilities and
other liabilities .................................. (2,828) (5,250) (246) -- (8,324)
Increase in non-refundable subscription
fee income ......................................... -- 224 -- -- 224
-------- -------- -------- -------- --------
Net cash used in operating
activities ................................... 256 (2,940) (297) (21) (3,002)
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures .................................. -- (1,866) (145) -- (2,011)
Proceeds from the sale of property and equipment ...... -- 176 38 -- 214
-------- -------- -------- -------- --------
Net cash used in investing
activities ................................... -- (1,690) (107) -- (1,797)
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations ....... -- (384) 28 -- (356)
Cash paid for debt issuance costs ..................... (391) -- -- -- (391)
Issuance of common stock .............................. 156 -- -- -- 156
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................... (235) (384) 28 -- (591)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................. (21) -- (21) 21 (21)
-------- -------- -------- -------- --------
DECREASE IN CASH ........................................ -- (5,014) (397) -- (5,411)
CASH, beginning of period ............................... -- 9,424 404 -- 9,828
-------- -------- -------- -------- --------
CASH, end of period ..................................... $ -- $ 4,410 $ 7 $ -- $ 4,417
======== ======== ======== ======== ========
14
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
--------- ---------- -------------- ------------ ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss .............................................. $(50,703) $(43,765) $ (465) $ 44,230 $(50,703)
Adjustments to reconcile net loss to cash used in
operations --
Cumulative effect of a change in accounting
principle ......................................... -- 49,513 -- -- 49,513
Depreciation and amortization ....................... -- 3,940 391 -- 4,331
(Gain) loss on sale of property and equipment ....... -- 58 (1) -- 57
Provision for doubtful accounts ..................... -- 16,461 425 -- 16,886
Equity earnings net of distributions received ....... -- (104) -- -- (104)
Amortization of discount on Senior Notes ............ 6 -- -- -- 6
Change in assets and liabilities--
(Increase) decrease in accounts receivable .......... -- (19,307) 262 -- (19,045)
(Increase) decrease in inventories .................. -- 24 (1) -- 23
(Increase) decrease in prepaid expenses and other ... -- 443 (355) -- 88
(Increase) decrease in other assets ................. 257 (1,994) 772 -- (965)
(Increase) decrease in due to/from affiliates ....... 52,684 (7,482) (932) (44,270) --
Increase in accounts payable ........................ -- 809 1,681 -- 2,490
Decrease in accrued liabilities and
other liabilities .................................. (2,344) (3,462) (2,050) -- (7,856)
Increase (decrease) in non-refundable
subscription fee income ............................ -- (65) 16 -- (49)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .................................... (100) (4,931) (257) (40) (5,328)
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures .................................. -- (1,638) 137 -- (1,501)
Proceeds from the sale of property and equipment ...... -- 331 1 -- 332
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................... -- (1,307) 138 -- (1,169)
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility, net .......... (13) -- -- -- (13)
Repayment of debt and capital lease obligations ....... -- (435) (8) -- (443)
Issuance of common stock .............................. 153 -- -- -- 153
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities .................................... 140 (435) (8) -- (303)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................. (40) -- (40) 40 (40)
-------- -------- -------- -------- --------
DECREASE IN CASH ........................................ -- (6,673) (167) -- (6,840)
CASH, beginning of period ............................... -- 6,763 1,936 -- 8,699
-------- -------- -------- -------- --------
CASH, end of period ..................................... $ -- $ 90 $ 1,769 $ -- $ 1,859
======== ======== ======== ======== ========
15
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(4) REDEEMABLE PREFERRED STOCK
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). The conversion ratio is subject to upward
adjustment if we issue common stock or securities convertible into our
common stock for consideration less than the fair market value of such
securities at the time of the transaction. Because a sufficient number
of 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.
(5) DISPOSITION OF LATIN AMERICAN OPERATIONS
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. The gain resulting
from the disposition of the Latin American operations totaled $12.5
million and is included in the income from discontinued operations for
the three months ended September 30, 2002. The gain includes the
assumption by the buyer of net liabilities of $3.3 million (including
accounts receivable of $0.6 million and accrued liabilities of $4.8
million) as well as the recognition of related cumulative translation
adjustments of $10.1 million.
Revenue related to the Company's Latin American operations totaled
$2.4 million and $9.2 million for the three months ended September 30,
2002 and 2001, respectively. Pre-tax net losses related to the
Company's Latin American operations totaled $156,000 and $195,000 for
the three months ended September 30, 2002 and 2001, respectively. The
Argentine operations and Bolivian medical transportation operations
were included in the Company's medical transportation and related
service segment. The Bolivian fire operations were included in the
Company's Fire and Other segment.
(6) RESTRUCTURING CHARGE AND OTHER
During fiscal 2001, the Company decided to close or downsize nine
service areas and in connection therewith, recorded restructuring
charges in accordance with Emerging Issues Task Force 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) 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
16
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
charges for goodwill and property and equipment of $4.1 million and
$1.1 million, respectively, related to the impacted service areas.
Approximately 108 of the impacted employees have been terminated, as
of September 30, 2002.
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. The operating environment in this service area has
improved and the Company was recently awarded a new 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 which is currently expected in the
second quarter of fiscal 2003. This service area generated revenue of
$1.6 million, operating income of $0.1 million and cash flow of $0.2
million for the three months ended September 30, 2002 and revenue of
$1.6 million, operating income of $0.1 million and breakeven cash flow
for the three months ended September 30, 2001.
A summary of activity in the Company's restructuring reserves is as
follows (in thousands):
LEASE OTHER
SEVERANCE TERMINATION EXIT
COSTS COSTS COSTS TOTAL
------- ------- ------- -------
Balance at June 30, 2002 ....... $ 757 $ 1,514 $ 32 $ 2,303
Fiscal 2003 Usage ............ (3) (65) 9 (59)
------- ------- ------- -------
Balance at September 30, 2002 .. $ 754 $ 1,449 $ 41 $ 2,244
======= ======= ======= =======
17
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(7) GOODWILL
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
(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 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.
(8) NET INCOME (LOSS) PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted income (loss)
per share computations for the three-month periods ended September 30,
2002 and 2001 is as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
------------------------------------- -------------------------------------
Income* Shares Per Share Loss* Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic income (loss) per share $3,813 15,994 $0.24 $ (990) 15,031 $(0.07)
===== ======
Effect of stock options -- 1,784 -- --
------ ------ ------ ------
Diluted income (loss) per share $3,813 17,778 $0.21 $ (990) 15,031 $(0.07)
====== ====== ===== ====== ====== ======
*Represents income (loss) from continuing operations before cumulative
effect of change in accounting principle.
Stock options with exercise prices below the applicable market prices
have been excluded from the calculation of diluted earnings per share.
Such options totaled 2.2 million for the three months ended September
30, 2002 and 4.7 million for the three months ended September 30,
2001.
In periods subsequent to September 30, 2002, earnings per share will
be affected by the accretion of the redeemable preferred stock of
approximately $1.2 million per quarter. Additionally, upon approval of
the stockholders of additional common shares, 2,115,490 common shares
will be included in the denominator of the earnings per share
calculation.
18
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(9) SEGMENT REPORTING
For financial reporting purposes, the Company has classified its
operations into two reporting segments that correspond with the manner
in which such operations are managed: the 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 4, 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 as described in the Company's Annual Report on
Form 10-K, as amended, have also been followed in the preparation of
the accompanying financial information for each reporting segment. For
internal management purposes, the Company's measure of segment
profitability is defined as income (loss) from continuing operations
before 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 three months ended September
30, 2002 and 2001. The Company has revised certain of the information
presented below as of and for the three months ended September 30,
2001. Such revisions consist of:
* The inclusion of alternative transportation services ($2.8
million in the three months ended September 30, 2001) as well as
operational and administrative support services related to the
Company's public/private alliance with the City of San Diego
($3.5 million in the three months ended September 30, 2001)
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 had no impact on the Company's consolidated financial
position, results of operations or cash flows
19
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Information by operating segment is set forth below:
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER CORPORATE TOTAL
-------- -------------- --------- -----
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2002
Net revenues from external customers ... $103,794 $ 21,771 $ -- $125,565
Segment profit (loss) .................. 12,697 4,011 (3,514) 13,194
Segment assets ......................... 95,982 1,754 -- 97,736
MEDICAL
TRANSPORTATION
AND RELATED
SERVICES FIRE AND OTHER CORPORATE TOTAL
-------- -------------- --------- -----
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2001
Net revenues from external customers ... $ 97,816 $ 18,658 $ -- $116,474
Segment profit (loss) .................. 10,293 2,989 (3,397) 9,885
Segment assets ......................... 104,042 1,377 -- 105,419
A reconciliation of segment profit (loss) to income (loss) from
continuing operations before income taxes and cumulative effect of
change in accounting principle is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
-------- --------
Segment profit (loss) ................................ $ 13,194 $ 9,885
Depreciation and amortization ........................ (3,440) (4,031)
Interest expense, net ................................ (5,886) (6,824)
-------- --------
Income (loss) from continuing operations before
income taxes, and cumulative effect of change in
accounting principle ............................... $ 3,868 $ (970)
======== ========
20
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of segment assets to total assets is as follows:
AS OF SEPTEMBER 30,
-----------------------
2002 2001
-------- --------
Segment assets ......................... $ 97,736 $105,419
Cash ................................... 4,417 1,859
Inventories ............................ 11,666 13,150
Prepaid expenses and other ............. 8,750 5,104
Property and equipment, net ............ 46,524 54,815
Goodwill ............................... 41,167 41,244
Other assets ........................... 23,703 20,488
-------- --------
$233,963 $242,079
======== ========
(10) 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 medical transportation
revenue at incremental and full phase-in periods, primarily due to the
geographic diversity of its 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.
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
21
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company's business, Center for Medicare and Medicaid Services (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 November
2003. In addition, Plaintiffs have moved to certify the class in the
Ruble v. Rural/Metro case.
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 had 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 would advance defense costs in the underlying litigations
22
RURAL/METRO CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company recently became aware that, the Company, Arthur Andersen
LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe
Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and
Jane Doe Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B.
Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas,
Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe
Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and
Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman
and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named
as defendants in a purported class action lawsuit: STEVEN A.
SPRINGBORN V. RURAL/METRO CORPORATION, ET AL., Civil Action No. CV
2002-019020 filed on September 30, 2002 in Maricopa County, Arizona
Superior Court. The lawsuit was brought on behalf of a class of
persons who purchased our publicly traded securities including our
common stock between July 1, 1996 through June 30, 2001. The primary
allegations of the complaint include violations of various state and
federal securities laws, breach of contract, common law fraud, and
mismanagement of the Company's 401(k) plan, Employee Stock Purchase
Plan and Employee Stock Ownership Plan. The Plaintiffs seek
unspecified compensatory and punitive damages. On October 30, 2002,
Defendant Arthur Andersen LLP removed the action to the United States
District Court, District of Arizona, CIV-02-2183-PHX-JWS. The Company
has not yet been served with this complaint.
LaSalle Ambulance, Inc., a New York corporation which is a 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.
LaSalle Ambulance, Inc. has potential liability for the uninsured
portion of any such adverse judgment; which liability, if occurring,
could have a material adverse effect on its and the Company's
business, financial condition, cash flows and results of operations.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Statements in this Report that are not historical facts are hereby identified as
"forward-looking statements" as that term is used under the securities laws. We
caution readers that such "forward-looking statements," including those relating
to our future business prospects, working capital, accounts receivable
collection, liquidity, cash flow, capital needs, operating results and
compliance with debt facilities, wherever they appear in this Report or in other
statements attributable to us, are necessarily estimates reflecting our best
judgment and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the "forward-looking
statements." You should consider such "forward looking-statements" in light of
various important factors, including those set forth below and others set forth
from time to time in our reports and registration statements filed with the
Securities and Exchange Commission.
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions, direct and indirect
subsidiaries, and affiliates. Rural/Metro Corporation, a Delaware corporation,
is strictly a holding company. All services, operations, and management
functions are provided through its subsidiaries and affiliated entities.
This Report should be read in conjunction with our Annual Report on Form 10-K,
as amended, for the fiscal year ended June 30, 2002.
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 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
24
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 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.
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 and were granted an exception to the listing standards subject to
meeting specified conditions.
On October 17, 2002 we received notification from the Nasdaq Listing
Qualifications Panel indicating we evidenced compliance with the requirements
necessary for continued listing on the Nasdaq SmallCap Market. Our securities
returned to being listed under the ticker symbol "RURL".
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and results of operations
is 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, and 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
25
the circumstances. Such historical experience and assumptions 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 -- 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 such
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
$33.5 million and $33.9 million for the three months ended September 30, 2002
and 2001, 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 based on historical collection data
and historical write-off activity. 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 less provision percentages applied for Medicare, Medicaid
and contractual reimbursement limitations. If historical data used to calculate
these estimates do 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 $18.7 million and $16.7 million for the
three months ended September 30, 2002 and 2001, 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 our employees. 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
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 $14.3
million and $15.9 million at September 30, 2002 and June 30, 2002, respectively.
26
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, and 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
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 $14.4 million
and $15.4 million at September 30, 2002 and June 30, 2002, respectively.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
We have certain cash contractual obligations related to our debt instruments
that come due at various times. In addition, we have other commitments in the
form of standby letters of credit and surety bonds. As reported in our Form
10-K, as amended, we have contractual obligations related to our credit facility
of $152.4 million and Senior Notes of $150.0 million, as well as other
commitments related to standby letters of credit of $3.5 million and preferred
stock redemption amounts totaling $15.0 million. Other contractual obligations
for capital leases and notes payable and operating leases as well as commitments
related to surety bonds have not changed substantially since year-end.
SEASONALITY
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher fiscal second and third quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
REVENUE
Net revenue increased approximately $9.1 million, or 7.8%, from $116.5 million
for the three months ended September 30, 2001 to $125.6 million for the three
months ended September 30, 2002.
MEDICAL TRANSPORTATION AND RELATED SERVICES -- Medical transportation and
related service revenue increased $6.0 million, or 6.1%, from $97.8 million for
the three months ended September 30, 2001 to $103.8 million for the three months
ended September 30, 2002. This increase is comprised of an $8.5 million increase
in same service area revenue attributable to rate increases, call screening and
27
other factors. Additionally, there was a $0.7 million increase in revenue
related to a new 911 contract that went into effect during the three months
ended September 30, 2002 offset by a $2.0 million decrease related to the loss
of the 911 contract in Arlington, Texas and a $1.2 million decrease related to
the closure of service areas in fiscal 2001.
Total transports, including alternative transportation, decreased 16,000, or
5.3%, from approximately 304,000 (approximately 265,000 ambulance and
approximately 39,000 alternative transportation) for the three months ended
September 30, 2001 to approximately 288,000 (approximately 263,000 ambulance and
approximately 25,000 alternative transportation) for the three months ended
September 30, 2002. The loss of the 911 contract in Arlington, Texas accounted
for a decrease of approximately 4,000 transports. Service areas identified for
closure in fiscal 2001 accounted for a decrease of approximately 4,000
transports. Transports in areas that we served in both the three months ended
September 30, 2002 and 2001 decreased by approximately 8,000 transports. These
decreases were offset by an increase of approximately 1,000 transports related
to a new 911 contract that went into effect during the three months ended
September 30, 2002.
FIRE AND OTHER -- Fire protection services revenue increased by approximately
$2.3 million, or 14.7%, from approximately $15.6 million for the three months
ended September 30, 2001 to approximately $17.9 million for the three months
ended September 30, 2002. Fire protection services revenue increased primarily
due to increases in forestry revenue of $0.9 million due to a particularly
active wildfire season and to rate and utilization increases in our subscription
fire programs of $0.8 million. We do not expect the increases in forestry
revenue to continue into the remainder of fiscal 2003.
Other revenue increased by $0.8 million, or 25.8%, from $3.1 million for the
three months ended September 30, 2001 to $3.9 million for the three months ended
September 30, 2002. Other revenue increases are primarily related to increased
revenue related to our equity in the earnings of the public/private alliance
with the City of San Diego of $0.5 million.
OPERATING EXPENSES
PAYROLL AND EMPLOYEE BENEFITS -- Payroll and employee benefit expenses increased
approximately $2.8 million, or 4.1%, from approximately $68.3 million for the
three months ended September 30, 2001 to $71.1 million for the three months
ended September 30, 2002. The increase is primarily related to general wage
increases offset by decreases in payroll in closure areas ($1.4 million).
Payroll and employee benefits as a percentage of net revenue was 56.6% for the
three months ended September 30, 2002 compared to 61.0% for the three months
ended September 30, 2001. Payroll and employee benefits as a percentage of net
revenue benefited from increased rates on medical transportation revenue.
PROVISION FOR DOUBTFUL ACCOUNTS -- The provision for doubtful accounts increased
$2.0 million, or 12.0%, from $16.7 million, or 14.4% of total revenue, for the
three months ended September 30, 2001 to $18.7 million, or 14.9% of total
revenue, for the three months ended September 30, 2002.
The provision for doubtful accounts on ambulance and alternative transportation
service revenue was 18.7% for the three months ended September 30, 2002 and
17.8% for the three months ended September 30, 2001. The increase primarily
reflects the mix between ambulance and alternative transportation services as
well as slightly increased bad debt rates on ambulance services. The bad debt
rate on alternative transportation services is significantly lower than that on
ambulance services. Revenue relating to alternative transportation services is
becoming a smaller percentage of our overall medical transportation revenue.
Ambulance services bad debt as a percentage of ambulance service revenue was
19.0% for the three months ended September 30, 2002 and 18.1% for the three
months ended September 30, 2001.
DEPRECIATION - Depreciation decreased $0.6 million, or 15.0%, from $4.0 million
for the three months ended September 30, 2001 to $3.4 million for the three
months ended September 30, 2002. The decrease is primarily due to decreased
capital expenditures. Depreciation was 3.4% and 2.7% of net revenue for the
three months ended September 30, 2001 and 2002, respectively.
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 increased approximately $1.0 million, or 4.7%, from $21.5 million for
28
the three months ended September 30, 2001 to $22.5 million for the three months
ended September 30, 2002. The increase in other operating expenses is primarily
due to increases in general liability expenses of $0.8 million due to increased
premium rates in the new policy year. Other operating expenses decreased from
18.5% of net revenue for the three months ended September 30, 2001 to 17.9% of
net revenue for the three months ended September 30, 2002.
INTEREST EXPENSE -- Interest expense decreased by approximately $0.9 million, or
13.2%, from $6.8 million for the three months ended September 30, 2001 to $5.9
million for the three months ended September 30, 2002. This decrease was
primarily caused by lower rates on the revolving credit facility. Interest
expense is expected to increase in the next quarter due to new rates to be
incurred under the amended credit facility. See further discussion on the
amended credit facility, which became effective September 30, 2002, in
"Liquidity and Capital Resources."
INCOME TAXES -- We recorded income taxes of $55,000 for the three months ended
September 30, 2002 as compared to $20,000 for the three months ended September
30, 2001 primarily related to provisions for state income taxes.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - 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 in exchange for the assumption
of net liabilities. The gain on the disposal of our Latin American operations
totaled $12.5 million and is included in the income from discontinued operations
for the three months ended September 30, 2002. The loss from our Latin American
operations totaled $156,000 and $200,000 for the three months ended September
30, 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 2002, we recorded net income of
$16.1 million compared with a net loss of $50.7 million for the three months
ended September 30, 2001. Net income for the three months ended September 30,
2002 includes a gain on the disposal of our Latin American operations of $12.5
million while the net loss for the three months ended September 30, 2001
includes a charge of $49.5 million relating to the adoption effective July 1,
2001 of the new goodwill standard. Cash used in operating activities totaled
$3.0 million for the three months ended September 30, 2002 and $5.3 million for
the three months ended September 30, 2001. Cash flow used in operating
activities in each of the three month periods ended September 30, 2002 and 2001
included the cash flow effect of our semi-annual interest payment of $5.9
million related to our Senior Notes.
At September 30, 2002, we had cash of $4.4 million, total debt of $307.8 million
and a stockholders' deficit of $159.2 million. Our total debt at September 30,
2002 included $149.9 million of our 7 7/8% senior notes due 2008, $152.4 million
outstanding under our revolving credit facility, $4.4 million payable to a
former joint venture partner and $1.1 million of capital lease obligations.
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.
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.
29
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 September 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 three months ended September 30, 2002, cash flow used in operations
was approximately $3.0 million resulting primarily from net income of $16.1
million, offset by the non-cash effect of the disposal of our Latin American
operations of $13.7 million, non-cash depreciation and amortization expense of
$3.4 million and provision for doubtful accounts of $18.7 million. Additionally,
cash flow from operating activities was negatively impacted by a decrease in
accrued liabilities of $8.3 million and an increase in accounts receivable of
$17.9 million. Cash flow used in operations was $5.3 million for the three
months ended September 30, 2001.
Cash used in investing activities was approximately $1.8 million for the three
months ended September 30, 2002 due primarily to capital expenditures of
approximately $2.0 million offset by proceeds from the sale of property and
equipment of approximately $0.2 million. Cash used in investing activities was
approximately $1.2 million for the three months ended September 30, 2001, due to
capital expenditures of approximately $1.5 million net of proceeds from the sale
of property and equipment of $0.3 million.
Cash used in financing activities was approximately $0.6 million for the three
months ended September 30, 2002, primarily due to repayments on capital lease
obligations and other debt and cash paid for debt issuance costs. Cash used in
financing activities was approximately $0.3 million for the three months ended
September 30, 2001.
Our accounts receivable, net of the allowance for Medicare, Medicaid and
contractual discounts and doubtful accounts, were $97.7 million and $99.1
million as of September 30, 2002 and June 30, 2002, respectively. The decrease
in net accounts receivable is due to many factors, including the disposal of the
Latin American operations, collection of outstanding receivables related to
closed service areas and overall improvement in collections on existing
operations.
The allowance for Medicare, Medicaid, contractual discounts and doubtful
accounts was $32.7 million at June 30, 2002 compared to $32.6 million at
September 30, 2002. The change in the allowance for Medicare, Medicaid,
contractual discounts and doubtful accounts is due to 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."
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
30
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 September
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 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 September 30, 2002, MRM held $4.3
million of cash under this program.
On April 1, 2002, the Department placed Legion under rehabilitation. 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.
We had working capital of $41.3 million at September 30, 2002, including cash of
$4.4 million compared with working capital of $27.5 million, including cash of
$9.8 million at June 30, 2002. The increase in working capital is primarily due
to the $19.8 million decrease in accrued liabilities which is related to a
decrease in accrued interest due to the conversion of accrued interest to
principal in the amended credit facility as well as the assumption of the
Argentine liabilities by the buyer in the disposition of our Latin American
operations.
31
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 recorded approximately $7.4 million
related to this additional interest expense through September 30, 2002. In
connection with the waivers, we also made principal payments in an aggregate
amount of $5.2 million.
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 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 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 (approximately $6.9 million),
non-reimbursed letters of credit and various fees and expenses
associated with the amended credit facility (approximately $1.2
million) 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)
32
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 contributions 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. As additional consideration for entering into the
amended credit 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). The conversion ratio is subject to upward adjustment if
we issue common stock or securities convertible into our common stock
for consideration less than fair market value of such securities at
the time of such transaction. Because a sufficient number of 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
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.
We recorded approximately $6.8 million of deferred debt issuance costs related
to the amended credit facility ($4.2 million related to the fair value of the
preferred stock, $1.2 million of lender fees which were added to the principal
balance of the facility and $1.4 million of related professional fees). These
costs are included in other assets in the accompanying consolidated balance
sheet as of September 30, 2002. These costs will be amortized to interest
expense over the life of the agreement. The fair value of the preferred stock
was estimated to be the market value of the common stock to be acquired upon
conversion of the preferred stock, measured at the date of the amendment. The
preferred stock balance will be accreted to the greater of $15.0 million or the
value of the common shares into which the preferred shares would otherwise be
converted over the life of the agreement or until the preferred shares are
converted to common shares. 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 annually.
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 are amortizing these costs to interest expense over the life of
33
the Notes. 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.
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 September 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 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 FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
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.
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.
34
WE HAVE SIGNIFICANT INDEBTEDNESS.
We have significant indebtedness. As of September 30, 2002, we have
approximately $307.8 million of consolidated indebtedness, consisting primarily
of $150.0 million of 7 7/8% senior notes due in 2008 and approximately $152.4
million outstanding under our credit facility.
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 with affiliates
* make certain investments * sell assets
* issue capital stock of 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, significantly increased costs of insurance or
other matters) we will need to pursue 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 FACE SIGNIFICANT DILUTION OF OUR COMMON STOCK
In conjunction with amended credit 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. Because
sufficient common shares are not currently available to permit conversion, we
intend to seek stockholder approval to authorize additional common shares.
Conversion of the preferred stock to common shares will result in dilution of
approximately 12%. Until such time as the additional common shares are
authorized, the fair value of the redeemable preferred stock will be accreted to
the greater of $150 million or the value of which the preferred stock would have
otherwise been convertible to. This accretion will be a reduction in income
available to common stockholders.
35
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 89.8% of our ambulance fee collections from such
third-party payers during the three months ended September 30, 2002, including
approximately 25.7% from Medicare. In the three months ended September 30, 2001,
we also received approximately 86.7% of ambulance fee collections from these
third parties, including approximately 24.9% 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, or we
may lose eligibility for certain programs in the event of certain types of
noncompliance. 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
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.
36
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 periodically
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,
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
37
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
18.9% of net revenue for the three months ended September 30, 2002 and
approximately 16.4% of net revenue for the three months ended September 30,
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 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.
38
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 19.3% of net
revenue for the three months ended September 30, 2002 and approximately 19.5% of
net revenue for the three months ended September 30, 2001. One of these
contracts accounted for approximately 4.3% of net revenue for the three months
ended September 30, 2002 and approximately 4.5% of net revenue for the three
months ended September 30, 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.
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. We believe that both the structure of our pre-sale operations and of
39
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:
* 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
40
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION.
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 LIBOR rate would increase our interest expense on an
annual basis by approximately $1.5 million. The remainder of our debt is
primarily at fixed interest rates. We 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 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
management, including the Chief Executive Officer and Vice President of Finance,
as appropriate, to allow timely decisions regarding required disclosure.
Management necessarily applies its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
Within 90 days prior to the date of filing of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer along with the Vice President of Finance,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the
Chief Executive Officer along with the Vice President of Finance concluded that
our disclosure controls and procedures are designed to ensure that the
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed, summarized and reported within
the applicable time periods. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to the date we carried out the evaluation.
RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION.
ITEM 1 -- LEGAL PROCEEDINGS.
From time to time, we are subject to litigation and regulatory investigations
arising in the ordinary course of business. We believe that the resolutions of
currently pending claims or legal proceedings will not have a material adverse
effect on our business, financial condition, cash flows and results of
operations. However, we are unable to predict with certainty the outcome of
pending litigation and regulatory investigations. In some pending cases, our
insurance coverage may not be adequate to cover all liabilities arising out of
41
such claims. In addition, due to the nature of our business, Center for Medicare
and Medicaid Services (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 recently became aware that, we, Arthur Andersen LLP, Cor Clement and Jane Doe
Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe
Rustand, James H. Bolin and Jane Doe Bolin, Jack E. Brucker and Jane Doe
Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe
Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe
Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and Jane Doe
Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman and Jane Doe
Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a
purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO CORPORATION,
ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa
County, Arizona Superior Court. The lawsuit was brought on behalf of a class of
persons who purchased our publicly traded securities including our common stock
between July 1, 1996 through June 30, 2001. The primary allegations of the
complaint include violations of various state and federal securities laws,
breach of contract, common law fraud, and mismanagement of the Company's 401(k)
plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan. The
Plaintiffs seek unspecified compensatory and punitive damages. On October 30,
2002, Defendant Arthur Andersen LLP removed the action to the United States
District Court of Arizona, CIV-02-2183-PHX-JWS. We have not yet been served with
this complaint.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In consideration of entering into the amended credit facility, the
Company issued shares of its Series B Convertible Preferred Stock on September
30, 2002 to the participants in the credit facility. The shares were issued in
reliance on the exemption from registration in Section 4(2) of the Securities
Act of 1933, as amended. 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). The conversion ratio is subject to upward adjustment if we
issue common stock or securities convertible into our common stock for
consideration less than the fair market value of such securities at the time of
such transaction. Because a sufficient number of 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 (including the Company's Common Stock).
42
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Dated: November 14, 2002 By: /s/ Jack E. Brucker
------------------------------------
Jack E. Brucker, President & Chief
Executive Officer (Principal
Executive Officer)
By: /s/ Randall L. Harmsen
------------------------------------
Randall L. Harmsen, Vice President
of Finance (Principal Financial
Officer and Principal Accounting
Officer)
43
CERTIFICATION
I, Jack E. Brucker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rural/Metro
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Jack E. Brucker
----------------------------------------
President and Chief Executive Officer
Rural/Metro Corporation
44
CERTIFICATION
I, Randall L. Harmsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rural/Metro
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Randall L. Harmsen
----------------------------------------
Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer)
Rural/Metro Corporation
45