RURAL METRO CORP /DE/ - 10-Q Quarterly Report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At February 6, 2004, there were 16,739,330 shares of Common Stock outstanding, exclusive of treasury shares held by the Registrant.

We identified certain accounting matters relating to our consolidated financial statements for fiscal years prior to 2003 that required restatement. The matters subject to the restatement, which are summarized below and discussed in Note 1 to the consolidated financial statements, increased our accumulated deficit by $37.9 million at June 30, 2002 after consideration of the related income tax effects. The restatement adjustments were necessary to (i) adjust the provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in prior years and to reduce our accounts receivable balance through March 31, 2003, (ii) defer enrollment fees charged to new subscribers under our fire protection service contracts and to recognize such fees over the estimated customer relationship period and (iii) expense professional fees incurred in the first quarter of fiscal 2003 in connection with the 2002 Amended Credit Facility rather than amortizing them over the term of the facility. These restatements resulted in a reduction of net income of $0.4 million and $3.8 million for the three and six months ended December 31, 2002, respectively.

We adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprises, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders’ deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46. The consolidation of SDMSE resulted in an increase in revenue of $5.8 million and $11.6 million for the three and six-months ended December 31, 2002, respectively.

In addition to the above, we ceased operating in certain of our medical transportation and related service areas in the first and second quarters of fiscal 2004. One medical transportation and related service area was also held for sale in the second quarter of fiscal 2004. The results of those service areas have been included in discontinued operations for the three and six-months ended December 31, 2003 and 2002.

As described in Note 1 to our consolidated financial statements, we have restated our earnings per share calculations for the six months ended December 31, 2002 to reflect earnings per share using the two-class method. The application of the two-class method had no impact on our earnings per share calculations for the three months ended December 31, 2002. The two-class method is required as a result of the issuance in September 2002 of our Series B redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date, (subject to approval by our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.

The Staff of the Securities and Exchange Commission is conducting an informal fact-finding inquiry that we believe is focused on the restatement of our financial statements described above in the first paragraph of this “Part I. Financial Information”. We are voluntarily providing information requested by the Staff and intend to cooperate fully with the Staff. As the inquiry is at an early stage, we are unable to predict the impact of any related outcome.

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.

The Company has restated its quarterly financial statements for the three and six-months ended December 31, 2002 for the following:

Accounts Receivable: The Company determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused the Company’s period-end allowance for doubtful accounts through March 31, 2003 to be understated and its accounts receivable overstated. The Company determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.

The Company determined that its consolidated financial statements of prior years required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers is reflected as a reduction of net revenue while the portion relating to uncollectible accounts is reflected as an adjustment to the provision for doubtful accounts. The after-tax effect of the related restatement adjustments increased the Company’s accumulated deficit as of June 30, 2002 by $36.6 million.

Enrollment Fees: The Company charges an enrollment fee for new subscribers under its fire protection service contracts. The Company previously recognized these enrollment fees at the time of billing but has subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.

The Company determined that its consolidated financial statements of prior years required restatement as a result of this matter. The after-tax effect of the related restatement adjustments increased the Company’s deferred revenue and accumulated deficit as of June 30, 2002 by $1.3 million. The effect of the restatement adjustments on the Company’s operating income in fiscal 2003 was immaterial.

Professional Fees: The Company determined that professional fees incurred in the first quarter of fiscal 2003 in connection with the September 2002 modification to its credit facility should have been expensed rather than amortized over the term of the facility. Accordingly, the results for the first quarter of fiscal 2003 have been restated for this matter.

San Diego Medical Services Enterprise LLC: During fiscal 1998, the Company entered into an agreement with the City of San Diego to provide all emergency and non-emergency medical transport services and in connection therewith, San Diego Medical Services Enterprises LLC (“SDMSE”) was formed. The Company owns 50% of SDMSE and appoints two of SDMSE’s five directors. The City owns the remaining 50% and appoints the remaining three directors. A wholly owned subsidiary of the Company contracts with SDMSE to provide operational and administrative support as well as billing and collection services.

The Company adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. The Company determined that its investment in SDMSE meets the definition of a VIE and that it is the primary beneficiary. Accordingly, the Company’s investment in SDMSE should be consolidated under FIN 46. The Company had previously accounted for its investment in SDMSE using the equity method. While the consolidation of SDMSE did not impact the Company’s previously reported net income (loss) or stockholders deficit, the consolidated financial statements of prior years have been restated for comparative purposes as allowed by FIN 46.

In the first and second quarters of fiscal 2004, the Company ceased operating in certain of its medical transportation and related service areas. Additionally, one medical transportation and related service area was held for sale in the second quarter of fiscal 2004. The results of those service areas have been included in discontinued operations for the three and six-months ended December 31, 2003 and 2002. Included in the reconciliation below is the effect of the reclassification of the discontinued operations on the results of amounts previously reported for the three and six-months ended December 31, 2002.

The Company has restated its earnings per share calculations for the six months ended December 31, 2002 to reflect earnings per share using the two-class method. The application of the two-class method had no effect on the Company’s earnings per share calculations for the three months ended December 31, 2002. The two-class method is required as a result of the Company’s issuance in September 2002 of its Series B redeemable nonconvertible participating preferred stock. The Series B shares, which the Company may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date, (subject to approval by our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.

A summary of the financial statement amounts for the three and six-months ended December 31, 2002 impacted by the restatement adjustments and the reclassifications relating to the adoption of FIN 46 and of discontinued operations is as follows. Net cash provided by operating activities as previously reported for fiscal 2003 was not impacted by the restatement adjustments.

The restatement adjustments relating to medical transportation accounts receivable outlined above caused the Company to violate the minimum tangible net worth covenant contained in its 2002 Amended Credit Facility. This situation also resulted in a delay in the Company’s filing of its Quarterly Report on Form 10-Q for the three months ended March 31, 2003. Such delay caused the Company to not be in compliance with the financial reporting covenants contained in its credit facility as amended on September 30, 2002 (2002 Amended Credit Facility) as well as the indenture relating to the Senior Notes described in Note 5. As described in Note 5, the Company negotiated a further amendment to its credit facility effective September 30, 2003 (2003 Amended Credit Facility). As a result of such amendment, all previous instances of identified non-compliance with respect to the credit facility were permanently waived.

In the opinion of management, the unaudited consolidated financial statements for the three and six-months ended December 31, 2003 and 2002 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated financial position and results of operations. The results of operations for the three and six-months ended December 31, 2003 and 2002 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, 2003. Certain financial information for prior periods has been reclassified to conform to the current presentation. The consolidated balance sheet as of June 30, 2003 has been derived from the consolidated balance sheet of the Company but does not include all of the disclosures required by generally accepted accounting principles.

During the three months ended December 31, 2003, the Company had net income of $2.2 million compared with a net loss of $0.3 million in the three months ended December 31, 2002. During the six months ended December 31, 2003, the Company had net income of $2.8 million compared with net income of $12.5 million in the six months ended December 31, 2002. Net income in the six months ended December 31, 2002 included a $12.5 million gain related to the disposition of the Company’s Latin American operations. The Company’s operating activities provided cash totaling $3.1 million in the six months ended December 31, 2003 and $ 5.6 million in the six months ended December 31, 2002.

At December 31, 2003, the Company had cash of $10.5 million, debt of $306.2 million and a stockholders’ deficit of $210.1 million. The Company’s long-term debt includes $149.9 million of 7⁷/8% Senior Notes due March 15, 2008, $152.6 million outstanding under its credit facility due December 31, 2006, $3.2 million payable to a former joint venture partner and $0.5 million of capital lease obligations.

As discussed in Note 5, the Company was not in compliance with certain of the covenants contained in its revolving credit facility at June 30, 2002. On September 30, 2002, the Company entered into the 2002 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 redeemable nonconvertible participating preferred stock. The Series B redeemable nonconvertible participating preferred stock includes a provision that the Company must redeem the shares for a price equal to the greater of $15.0 million or the value of the common shares into which the Series B shares would be converted, if the Series B shares are not converted by the Company to common shares by December 31, 2004. See further discussion on the Series B shares at Note 6.

As also discussed in Note 5, the Company violated certain financial covenants as a result of the restatement of its financial statements. Additionally, the restatement resulted in a delay in the filing of the Company’s Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes. Effective September 30, 2003, the Company entered into the 2003 Amended Credit Facility with its lenders, which, among other things, extended the maturity date of the facility from December 31, 2004 to December 31, 2006, waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of the Company’s Series C redeemable nonconvertible participating preferred stock. The Series C redeemable nonconvertible participating preferred stock includes a provision that the Company must redeem the shares for a price equal to the greater of $10.0 million or the value of the common shares into which the Series C shares would be converted, if the Series C shares are not converted by the Company to common shares by December 31, 2006. See further discussion on the Series C shares at Note 6.

The Company’s ability to service its long-term debt, to remain in compliance with the various restrictions and covenants contained in its debt agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.

If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. The Company currently has no common stock available with which to raise capital. 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 December 31, 2004. To the extent that actual results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.

At December 31, 2003, the Company had two stock compensation plans. One of those plans expired November 5, 2002 and therefore the Company is no longer issuing options under that plan. The plan that expired November 5, 2002 was the only plan with which the Company could provide stock compensation to its executive officers and Board of Directors. The other plan had 294,495 shares available for issuance at December 31, 2003. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Stock-based compensation expense has not been reflected in the consolidated statement of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No 123, Accounting for Stock-Based Compensation.

The Company’s long-term debt consists of the following at December 31, 2003 and June 30, 2003 (in thousands):

In March 1998, the Company entered into a $200 million revolving credit facility that was originally scheduled to mature on March 16, 2003. The credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of the Company’s domestic wholly-owned current and future subsidiaries. Interest rates and availability under the credit facility depended on the Company’s meeting certain financial covenants.

In December 1999, the Company was not in compliance with certain of the covenants contained in the original credit facility. The Company received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required the Company to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required the Company to make unscheduled principal payments totaling $5.2 million.

Effective September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7%, and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million. Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with the Company’s business levels and outlook at that time. In consideration for the amendment, the Company paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of the Company’s Series B redeemable nonconvertible participating preferred stock described in Note 6.

fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled $2.8 million at December 31, 2003.

As a result of the restatement discussed in Note 1 and the related increase in the Company’s stockholders’ deficit, the Company was not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of the Company’s Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q for the quarter ended March 31, 2003.

The Company entered into the 2003 Amended Credit Facility effective September 30, 2003 with its lenders pursuant to which, among other things, all prior identified covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 30, 2002 amendment were revised to levels consistent with the Company’s current business levels and outlook. The revised financial covenants and levels achieved by the Company as of December 31, 2003 are presented below. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.


Financial Covenant (A)	Period Covered By Covenant	Level Specified in Agreement (A)	Level Achieved for Specified Period (A)
Debt leverage ratio	Six months ended December 31, 2003	< 7.61	6.34
Minimum tangible net worth	At December 31, 2003	< $280.0 million deficit	$250.5 million deficit
Fixed charge coverage ratio	Six months ended December 31, 2003	> 1.01	1.21
Limitation on capital expenditures	Cumulative for fiscal year 2004	< $11.0 million	$3.4 million
Annual operating lease expense to consolidated net revenue	Last twelve months	< 3.1%	2.2%

The Company must achieve the following levels of compliance at March 31, 2004: a total debt leverage ratio of less than 7.49; a minimum tangible net deficit of less than $280.0 million; a fixed charge coverage ratio of at least 1.04; annual capital expenditures less than $11.0 million; and, an annual operating lease expense equivalent to less than 3.10% of consolidated net revenue for the last twelve months.

In consideration for the amendment, the Company paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 shares of the Company’s Series C redeemable preferred stock described in Note 6. The Company also made a $1.0 million principal payment related to asset sale proceeds as required under the 2002 Amended Credit Facility.

The 2003 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million amendment fee and the estimated fair value of the Series C shares at the time of issuance of $3.4 million were capitalized as debt issue costs and will be amortized to interest expense over the term of the amended agreement. Professional fees and other related costs totaling $0.3 million incurred in connection with the amendment were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totaled $3.6 million at December 31, 2003.

At December 31, 2003, the weighted average interest rate on credit facility borrowings was approximately 8.1%. At December 31, 2003 there was $152.6 million outstanding on the credit facility as well as $2.5 million in letters of credit issued under the credit facility at that date.

In March 1998, the Company issued $150.0 million of its 7⁷/8% Senior Notes due March 15, 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. 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, the Company filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration statement 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 would provide any additional information that would be material to investors in 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:

The Company’s restated certificate of incorporation includes authorization to issue 2,000,000 shares of the Company’s $.01 par value preferred stock. The preferred stock may be issued in one or more series as determined by the Company’s Board of Directors.

In connection with the 2002 Amended Credit Facility, the Company issued 211,549 shares of its Series B redeemable nonconvertible participating preferred stock (the “Series B Shares”) to the lenders in the credit facility. The Series B Shares are not convertible by the holder but the Company may elect to settle the Series B Shares by issuance of 2,115,490 common shares, which was equivalent to 10% of the Company’s common shares then outstanding on a diluted basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible into the Company’s common stock for consideration less than the fair market value of such securities at the time of such transaction. Conversion of the Series B Shares occurs upon notice from the Company; however, 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. Should the Company’s stockholders fail to approve such a proposal by December 31, 2004, the Company will be required to redeem the Series B Shares for a price equal to the greater of $15.0 million or the value of the common shares into which the Series B Shares would otherwise have been convertible. In addition, should the Company’s stockholders fail to approve such a proposal, the Series B Shares enjoy 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 Series B Shares would otherwise have been convertible or (ii) $15.0 million. At the election of the holder, the Series B Shares carry voting rights as if such shares were converted into common shares. The Series B Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is declared on the Company’s common stock, the holders of the Series B shares shall be entitled to receive at least the equivalent amount of dividends they would have received had their Series B shares been converted to common stock. The Series B shares (and the common shares issuable upon conversion) are entitled to certain registration rights. The terms of the Series B Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.

The Company recorded the Series B Shares at their estimated fair value at the date of issuance ($4.2 million) with an offsetting increase in debt issue costs, which are included in other assets in the consolidated balance sheet. As the Company may be required to redeem the Series B Shares for cash as outlined above, such shares have been classified outside of stockholders’ equity (deficit). Additionally, the original value of the Series B Shares is being accreted to its redemption value through December 31, 2004 with an offsetting charge to additional paid-in capital. Such accretion totaled $1.2 million for the three months ended December 31, 2003 and 2002, respectively. Accretion of the Series B shares totaled $2.4 million and $1.2 million for the six months ended December 31, 2003 and 2002, respectively.

In connection with the 2003 Amended Credit Facility, the Company issued 283,979 shares of its Series C redeemable nonconvertible participating preferred stock (the “Series C Shares”) to the lenders in the credit facility. The Series C Shares are not convertible by the holder but the Company may elect to settle the Series C Shares by issuance of 2,839,787 common shares, which was equivalent to 11%

of the Company’s common shares then outstanding on a diluted basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible into the Company’s common stock for consideration less than the fair market value of such securities at the time of such transaction. Conversion of the Series C Shares occurs upon notice from the Company; however, 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. Should the Company’s stockholders fail to approve such a proposal by December 31, 2006, the Company will be required to redeem the Series C Shares for a price equal to the greater of $10.0 million or the value of the common shares into which the Series C Shares would otherwise have been convertible. In addition, should the Company’s stockholders fail to approve such a proposal, the Series C Shares enjoy 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 Series C Shares would otherwise have been convertible or (ii) $13.75 million or $16.5 million depending on whether such sale or liquidation event occurs between January 31, 2004 and December 31, 2004 or after December 31, 2004, respectively. At the election of the holder, the Series C Shares carry voting rights as if such shares were converted into common shares. The Series C Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is declared on the Company’s common stock, the holders of the Series C shares shall be entitled to receive at least the equivalent amount of dividends they would have received had their Series C shares been converted to common stock. The Series C shares (and the common shares issueable upon conversion) are entitled to certain registration rights. The terms of the Series C Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.

The Company recorded the Series C Shares at their estimated fair value at the date of issuance ($3.4 million) with an offsetting increase in debt issue costs, which are included in other assets in the consolidated balance sheet. As the Company may be required to redeem the Series C Shares for cash as outlined above, such shares have been classified outside of stockholders’ equity (deficit). Additionally, the original value of the Series C Shares will be accreted to its redemption value through December 31, 2006 with an offsetting charge to additional paid-in capital. Such accretion totaled $0.5 million for the three and six-months ended December 31, 2003.

Due to deteriorating economic conditions and the continued devaluation of the local currency, the Company reviewed its strategic alternatives with respect to the continuation of operations in Latin America, primarily Argentina, and determined that it would benefit from focusing on its domestic operations. Effective September 27, 2002, the Company sold its Latin American operations to local management in exchange for the assumption of such operation’s net liabilities. The gain on the disposition of the Company’s Latin American operations totaled $12.5 million and is included in income from discontinued operations for the six months ended December 31, 2002. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including, among other things, 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.

Medical transportation and related service revenue relating to the Company’s Latin American operations totaled $2.1 million for the six months ended December 31, 2002. Fire and other revenue for these operations totaled $0.3 million for the six months ended December 31, 2002. The Company’s Latin American operations generated a loss of $156,000 for the six months ended December 31, 2002. The results of operations of the Company’s former Latin American operations have been classified as discontinued operations in the accompanying consolidated statement of operations for the six months ended December 31, 2002.

In addition to the disposal of the Company’s Latin American operations discussed above, during the first and second quarters of fiscal 2004, the Company ceased operating in certain of its medical transportation and related service areas. One service area was also held for sale during the second quarter of fiscal 2004. The results of those service areas have been included in discontinued operations for the three and six-months ended December 31, 2003 and 2002. Net revenue for these service areas totaled $2.2 million and $6.2 million for the three months ended December 31, 2003 and 2002, respectively. These service areas generated losses of $0.2 million in the three months ended December 31, 2003 and net income of $0.7 million in the three months ended December 31, 2002. Net revenue for these service areas totaled $6.0 million and $12.6 million for the six months ended December 31, 2003 and 2002, respectively. These service areas generated losses of $0.6 million in the six months ended December 31, 2003 and income of $1.6 million in the six months ended December 31, 2002.

During fiscal 2001, the Company decided to close or downsize nine service areas and in connection therewith, recorded restructuring charges as well as other related charges totaling $9.1 million. The remaining restructuring reserve decreased from $0.6 million at June 30, 2003 to $0.5 million at December 31, 2003 as a result of lease payments. Such payments will be made through December 2006.

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 and six-months ended December 31, 2003 and 2002 is as follows (in thousands, except per share amounts):

The Company calculates income (loss) per share using the two-class method. Under the two-class method, net income or loss for the period is allocated between common stock and the Company’s Series B and Series C redeemable nonconvertible participating preferred stock on the basis of the weighted average number of common shares and common share equivalents outstanding during the period. The per share amounts are also impacted by the accretion of the Series B and Series C shares to their respective redemption values as described in Note 6. Upon approval of the stockholders of an increase in authorized common shares and notice from the Company that results in the settlement of the Series B and Series C shares in exchange for a total of 4,955,277 common shares, accretion will cease and use of the two-class method will no longer be required. Should the Company settle the Series B and Series C shares with common stock, it will need to include a charge or credit to income applicable to common stock in the period of settlement for the difference between the carrying value of the Series B and Series C shares and the fair value of the common shares issued in settlement.

As a result of the losses from continuing operations in the three and six-months ended December 31, 2002, the anti-dilutive effects of approximately 1.9 million and 1.8 million option shares,

respectively, which had exercise prices below the applicable market prices, were not included in the computation of diluted loss per share. Stock options with exercise prices above the applicable market prices have been excluded from the calculation of diluted earnings per share. Such options totaled 4.8 million and 4.5 million for the three months ended December 31, 2003 and 2002, respectively. Such options totaled 4.9 million and 4.4 million for the six months ended December 31, 2003 and 2002, respectively.

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 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 used in the preparation of the consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For internal management purposes, the Company’s measure of segment profitability is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization and minority interest. 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 (in thousands):

A reconciliation of segment profit to income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle is as follows (in thousands):

A reconciliation of segment assets to total assets is as follows (in thousands):

Under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, certain minority interests in consolidated entities with finite lives may meet the standard’s definition of a mandatorily redeemable financial instrument, and thus require reclassification as liabilities and measurement at the amount of cash that would be paid under the conditions in the applicable entity organization agreement if settlement of the respective minority interests occurred at the reporting date. The Company’s consolidated financial statements include a minority interest that meets the standard’s definition of a mandatorily redeemable financial instrument. This mandatorily redeemable minority interest represents an interest held by a third party in San Diego Medical Services Enterprises, LLC (SDMSE), where the terms of the underlying agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are

to be distributed to the minority interest holder and the Company on a pro rata basis in accordance with the underlying agreement. The termination date of the Company’s mandatorily redeemable minority interest is currently June 30, 2005.

On November 7, 2003, the FASB issued FASB Staff Position (FSP) No. FAS 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The FSP indefinitely deferred the classification and measurement provisions of SFAS No. 150 related to the mandatorily redeemable minority interests associated with finite lived subsidiaries, but retained the related disclosure provisions. The settlement value of the Company’s mandatorily redeemable minority interest in SDMSE is estimated to be $2.4 million at December 31, 2003. This represents the estimated amount of cash that would be due and payable to settle the minority interest assuming an orderly liquidation of SDMSE on December 31, 2003, net of estimated liquidation costs. The corresponding carrying value of the minority interest in SDMSE at December 31, 2003 is $2.4 million, and is included in the balance sheet caption ‘Minority interest’.

The FASB plans to reconsider certain implementation issues and perhaps the classification or measurement guidance for mandatorily redeemable minority interests during the deferral period. The outcome of their deliberations cannot be determined at this point. Accordingly, it is possible that the FASB could require the recognition and measurement of our mandatorily redeemable minority interest at its settlement value at a later date.

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 (which is adjusted each year by the CPI – 1%) plus separate mileage charges based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on Medicare claims, which means a provider must accept Medicare’s allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. 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 actions, 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 increases in the Consumer Price Index (CPI), or costs incurred to implement any further mandates of the fee schedule could have a material adverse effect on its business, financial condition, cash flows, and results of operations.

Certain counties, municipalities, and fire districts require the Company to provide surety bonds or other assurance of financial or performance responsibility. The Company may also be required by law to post a surety bond as a prerequisite to obtaining and maintaining a license to operate. As a result, the Company has a portfolio of surety bonds that is renewed annually. The Company has $10.8 million of surety bonds outstanding as of December 31, 2003.

The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants.

Additionally, some of the Company’s agreements with customers require the Company to provide certain assurances related to the performance of its services. Such assurances, from time to time, obligate the Company to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of uncured material defaults or other certain circumstances, or (iii) provide surety bonds or letters of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default. With respect to such surety bonds, the Company is also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable it to recover a portion of any future amounts paid.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by the Company.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any

of these indemnities have not had a material effect on the Company’s business, financial condition, and cash flows or results of operations. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial condition, results of operations or cash flows.

From time to time, the Company is subject to litigation and regulatory investigations arising in the ordinary course of business. The Company believes that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the Company is unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of its deductible or self-insured retention arising out of such claims. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation: 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., its 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 contained 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 24, 1997 and June 11, 1998. The complaints alleged that 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 alleged 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 April 17, 2003, Rural/Metro and the individual defendants agreed to settle the Ruble v. Rural/Metro and Haskell v. Rural/Metro cases with plaintiffs, subject to notice to the class and final court approval. Rural/Metro’s primary and excess carriers funded the settlement on June 5, 2003 by depositing the funds in a designated escrow account and waived any claims for reimbursement of the funds subject to final court approval of the class action settlement. After a hearing on the final settlement agreement, the court entered an order approving the settlement and dismissing the Ruble action with prejudice on December 10, 2003. The Haskell case was dismissed with prejudice on January 13, 2004.

In the settlement agreement, the Company and the individual defendants expressly denied all charges of liability or wrongdoing and continued to assert that at all relevant times they acted in good faith and in a manner they reasonably believed to be in the best interests of the Company and its stockholders.

Springborn, et al. v. Rural/Metro Corporation, et al.: 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 employee firefighters in Maricopa County who participated in the Company’s Employee Stock Ownership Plan (“ESOP”), Employee Stock Purchase Plan (“ESPP”), and/or Retirement Savings Value Plan (“401(k) Plan”) (collectively, the “Plans”) from July 1, 1996 through June 30, 2001. The plaintiffs amended the Complaint on October 17, 2002, adding Barry Landon and Jane Doe Landon as defendants and making certain additional allegations and claims. The primary allegations of the complaint included violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Plans.

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 and the individual defendants consented to this removal. On February 21, 2003, the Company and its current directors and officers moved to dismiss the amended complaint, and its former directors and officers subsequently joined in this motion.

On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against the Company and its current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal from the court’s July 29, 2003 order to the Ninth Circuit. The appeal was dismissed as premature on October 27, 2003. The court dismissed plaintiffs’ remaining claims against Arthur Andersen on January 27, 2004, and entered final judgment.

Numerous federal, state, and local laws and regulations govern the healthcare industry. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. The Company believes that it is substantially in compliance with fraud and abuse statutes including their applicable government review and interpretation as well as regulatory actions unknown or unasserted at this time.

The Company has been subject to investigations in the past relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperated fully with the government agencies that conducted these investigations. Those reviews cover periods prior to the Company’s acquisition of certain operations as well as periods subsequent to acquisition. Management believes that the remedies existing under specific purchase agreements along with reserves established for specific contingencies are sufficient so that the ultimate outcome of these matters would not have a material adverse effect on its business, financial condition, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statements in this Report that are not historical facts are hereby identified as “forward-looking statements” as that term is used under the securities laws. We caution readers that such “forward-looking statements,” including those relating to our future business prospects, working capital, accounts receivable collection, liquidity, cash flow, insurance coverage and claim reserves, capital needs, operating results and compliance with debt facilities, wherever they appear in this Report or in other statements attributable to us, are necessarily estimates reflecting 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 for the fiscal year ended June 30, 2003, as amended.

The results of our fiscal 2004 second quarter reflected our continued focus on growing and strengthening our base of core operations throughout the country. We placed particular emphasis on expanding service areas that we have identified for future long-term growth, sought targeted new-contract opportunities, and continued to implement new programs designed to improve billing efficiencies.

In evaluating our business, we monitor a number of key operating and financial statistics. They include average patient charge, average daily deposits, days sales outstanding, and transport volume, among others. The results and trends indicated by these statistics provide us with important data that we use to analyze our performance and guide the business going forward.

An important component of our strategic plan is to reduce bad debt expenses through billing-oriented initiatives. We have assembled a team of internal billing and collections specialists to address this important issue. During the quarter ended December 31, 2003, we continued to work toward maximizing the percentage of medical transportation claims that we submit electronically.

In addition, contracting activities during the quarter included the award of new and renewal contracts among key customers in a variety of regional service areas. For example, renewal contracts included exclusive agreements to provide emergency ambulance transportation in Mesa and Gilbert, Arizona, as well as Loudon and Franklin counties in Tennessee.

During the period, we also initiated the planned exit in June 2005 from our exclusive contract to provide fire protection services in the City of Scottsdale, Arizona. As we regularly review our operations to assure they are aligned with our current business strategy, we determined that the subscription-service model is the preferred platform for our community fire protection efforts.

Industry trends for the medical transportation segment of our business remained consistent during the quarter, with one notable development stemming from Congressional passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Included in this legislation was a provision for additional reimbursement for ambulance services provided to Medicare patients. Among other relief, the Act provides for a 1% increase in reimbursement for urban transports and a 2% increase for rural transports for the remainder of the phase-in of the national ambulance fee schedule, which will

be complete in 2006. Although we expect this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will benefit the portion of Rural/Metro’s medical transportation revenue that is reimbursed through Medicare, we are currently unable to predict the total impact.

We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls (emergency ambulance services) and non-emergency transport requests (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 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.

Because of the nature of our ambulance services, it is necessary to respond to a number of calls, primarily 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 emergency ambulance service calls in individual markets and is generally higher in service areas in which the calls are primarily emergency ambulance service calls. Rates in our markets take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports.

See Note 1 to our consolidated financial statements included above for a discussion of the restatement of our financial statements for the three and six-months ended December 31, 2002.

Our discussion and analysis of financial condition and results of operations is based on our consolidated 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 our 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 doubtful accounts, general liability and workers’ compensation claim reserves. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following accounting policies 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.

Medical Transportation Revenue Recognition —Ambulance and alternative transportation service fees are recognized when services are provided and are recorded net of discounts applicable to Medicare, Medicaid, and other third-party payers. 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 discounts at the time revenue is recognized. Discounts are estimated based on historical collection data, historical write-off activity and current relationships with payers, within each service area. In addition, depending on the demographics of each service area, the mix between Medicare, Medicaid and other third-party payers can vary significantly. Estimated discounts are translated into a percentage of gross revenue, which is applied to calculate the provision. If the historical data used to calculate these estimates

does not properly reflect the ultimate collectibility of the current revenue stream, revenue could be overstated or understated. Discounts applicable to Medicare, Medicaid and other third-party payers, which are reflected as a reduction of medical transportation revenue, totaled $45.3 million and $37.4 million for the three months ended December 31, 2003 and 2002, respectively, and $88.3 million and $76.1 million for the six months ended December 31, 2003 and 2002, respectively.

Provision for Doubtful Accounts for Medical Transportation Revenue — Ambulance and alternative transportation service fees are billed to various payer sources. As discussed above, discounts applicable to Medicare, Medicaid and other third-party payers are recorded as reductions of gross revenue. We also estimate provisions related to the potential uncollectibility of amounts billed to other payers based on historical collection data and historical write-off activity within each service area. The provision for doubtful accounts percentage that is applied to ambulance and alternative transportation service fee revenue is calculated as the difference between the total expected uncollectible percentage less percentages applied for discounts applicable to Medicare, Medicaid and other third-party payers described above. If historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current 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 $22.5 million and $21.4 million for the three months ended December 31, 2003 and 2002, respectively, and $44.3 million and $42.9 million for the six months ended December 31, 2003 and 2002, respectively.

Workers’ Compensation Reserves — Beginning May 1, 2002, we began purchasing corporate-wide workers’ compensation insurance policies, for which we pay premiums that can be adjusted upward or downward at certain intervals based upon a retrospective review of incurred losses. A retrospective review of the policy year that began May 1, 2002 resulted in a refund of premiums of approximately $1.2 million. We do not currently expect any adverse findings on any subsequent policy year reviews. Each of these annual policies covers all workers’ compensation claims made by employees of our domestic subsidiaries. Under such policies, we have no obligation to pay any deductible amounts on claims occurring during the policy period. 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 with no aggregate limit. Claims relating to these 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 established initial estimates at the time a claim was reported and periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the determination of our workers’ compensation claims reserves. If the ultimate development of these claims is significantly different than has been estimated, the related reserves for workers’ compensation claims could be overstated or understated. Reserves related to workers’ compensation claims totaled $10.0 million and $11.3 million at December 31, 2003 and June 30, 2003, respectively.

General Liability Reserves — We are subject to litigation arising in the ordinary course of our business. In order to minimize the risk of our exposure, we maintain certain levels of coverage for comprehensive general liability, automobile liability, and professional liability. 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. 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. We engage independent actuaries to assist us in the determination of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $15.4 million and $13.9 million at December 31, 2003 and June 30, 2003, respectively.

Asset Impairment — We review our property and equipment for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable, by comparing the

carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted cash flows are less than the related carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved.

Our goodwill balances are reviewed annually (and in interim periods if events or circumstances indicate that the related carrying amount may be impaired). Goodwill impairment is reviewed using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

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. We have contractual obligations related to our credit facility after the September 30, 2003 amendment of $152.6 million and Senior Notes of $150.0 million, as well as other commitments related to standby letters of credit of $2.5 million and preferred stock redemption amounts totaling the greater of $25.0 million or the value of the common shares into which the Series B and Series C shares would otherwise have been convertible at their respective redemption dates. Other contractual obligations for capital leases and notes payable and operating leases as well as commitments related to surety bonds are consistent with those reported on our 2003 Form 10-K, as amended.

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

The following table sets forth a comparison of certain items from our statements of operations for the three months ended December 31, 2003 and 2002. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item. Additionally, a comparison of transport activity from continuing operations has been presented for the three months ended December 31, 2003 and 2002.

Medical Transportation and Related Services — Medical transportation and related service revenue increased $11.5 million, or 11.2%, from $103.1 million for the three months ended December 31, 2002 to $114.6 million for the three months ended December 31, 2003. This increase is primarily comprised of a $9.8 million increase in same service area revenue attributable to transport increases, rate increases, call screening and other factors. Additionally, there was a $1.6 million increase in revenue related to new contracts.

Transports in areas that we served in both the three months ended December 31, 2003 and 2002 increased by approximately 16,000 transports. Additionally there was an increase of approximately 4,000 transports related to new contracts. The net average patient charge for ambulance transports made in the three months ended December 31, 2003 was $390.18 compared to $370.92 for the three months ended December 31, 2002.

Fire and Other — Fire subscription revenue totaled $8.7 million for the three months ended December 31, 2003 as compared to $8.0 million for the three months ended December 31, 2002. The increase in fire subscription revenue is primarily due to rate increases. Forestry and fire fee revenue totaled $0.1 million for the three months ended December 31, 2003 as compared to $0.6 million for the three months ended December 31, 2002. The decrease in forestry and fire fee revenue is primarily related to the particularly active wildfire season in fiscal 2003 compared to fiscal 2004.

Payroll and Employee Benefits —The increase in payroll and employee benefits is primarily related to increased transport activity, general wage rate increases and increased health insurance costs offset by a $1.2 million refund received for premiums paid on a prior year workers compensation policy. Payroll and employee benefits as a percentage of net revenue, excluding the effect of the $1.2 million noted above, was 53.1% for the three months ended December 31, 2003. The decrease in the percentage of payroll and employee benefits to net revenue is primarily due to the disproportionate increase in net revenue as compared to payroll and employee benefits.

Provision for Doubtful Accounts —The increase in the provision for doubtful accounts is primarily related to the increase in medical transportation and related service revenue.

The provision for doubtful accounts as a percentage of net ambulance and alternative transportation service revenue was 19.2% for the three months ended December 31, 2003 and 20.0% for the three months ended December 31, 2002. The decrease in the provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue relates to the changes in the mix of the relationship between Medicare, Medicaid and other third party payer discounts and doubtful accounts. Provisions for Medicare, Medicaid and other third party payer discounts combined with provisions for doubtful accounts represented 44.6% (including 14.8% for doubtful accounts) of gross ambulance and alternative transportation transport revenue for the three months ended December 31, 2003 as compared to 43.4% (including 15.8% for doubtful accounts) for the three months ended December 31, 2002.

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. The increase in other operating expenses is primarily due to increases in general liability insurance expenses of $1.4 million due to increased premium rates in the new policy year as well as general increases in other operating expense categories.

Restructuring charge and other — Fiscal 2003 includes the reversal of restructuring charges of $1.4 million originally recorded in fiscal 2001. The restructuring charge recorded in fiscal 2001 included $1.5 million for severance, lease termination and other costs relating to an under performing service area that we 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 improved, and in November 2002 we were awarded a new multi-year contract. As a result, the remaining reserve, related to this service area, of $1.3 million was released to income during fiscal 2003. In addition to this reversal, several other individually insignificant adjustments were made to prior restructuring charges in fiscal 2003.

Interest Expense — The balance on our credit facility was $152.6 million at December 31, 2003 as compared to $152.4 million at December 31, 2002. The average rate charged on the credit facility was 8.3% for the three months ended December 31, 2003 compared to 8.9% for the three months ended December 31, 2002. The change in interest rate accounts for a decrease of approximately $0.2 million in interest expense. Amortization of deferred financing costs totaled $0.7 million for the three months ended December 31, 2003 as compared to $0.4 million for the three months ended December 31, 2002. Amortization of deferred financing costs in the three months ended December 31, 2003 includes amortization of costs incurred relating to both the 2002 and 2003 Amended Credit Facilities. Additionally, upon negotiation of the 2003 Amended Credit Facility, the amortization period of the costs associated with the 2002 Amended Credit Facility was extended through December 31, 2006. See further discussion of the 2003 Amended Credit Facility in “Liquidity and Capital Resources.”

Discontinued operations — In the first and second quarters of fiscal 2004, we ceased operating in certain of our medical transportation and related service areas. Additionally, we held one medical transportation and related service area for sale in the second quarter of fiscal 2004, the sale of which is expected to close in the third or fourth quarter of fiscal 2004. The results of operations for those service areas have been included in income (loss) from discontinued operations for the three months ended December 31, 2003 and 2002. Net revenue for these service areas totaled $6.0 million and $6.2 million for the three months ended December 31, 2003 and 2002, respectively. These service areas generated a loss of $0.2 million in the three months ended December 31, 2003 and net income of $0.7 million in the three months ended December 31, 2002.

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002

The following table sets forth a comparison of certain items from our statements of operations for the six months ended December 31, 2003 and 2002. The comparison includes the line items expressed as a percentage of net revenue as well as the dollar value and percentage change in each line item. Additionally, a comparison of transport activity from continuing operations has been presented for the six months ended December 31, 2003 and 2002.

Medical Transportation and Related Services — Medical transportation and related service revenue increased $20.0 million, or 9.7%, from $206.3 million for the six months ended December 31, 2002 to $226.2 million for the six months ended December 31, 2003. This increase is primarily comprised of a $17.7 million increase in same service area revenue attributable to transport increases, rate increases, call screening and other factors. Additionally, there was a $3.4 million increase in revenue related to new contracts offset by a $1.1 million decrease related to service areas that were closed in fiscal 2003.

Transports in areas that we served in both the six months ended December 31, 2003 and 2002 increased by approximately 19,000 transports. Additionally there was an increase of approximately 9,000 transports

related to new contracts as well as a decrease of 2,000 transports in a service area closed in fiscal 2003. The net average patient charge for ambulance transports made in the six months ended December 31, 2003 was $387.74 compared to $366.11 for the six months ended December 31, 2002.

Fire and Other — Fire subscription revenue totaled $17.1 million for the six months ended December 31, 2003 as compared to $15.8 million for the six months ended December 31, 2002 with the increase primarily due to rate increases. Forestry and fire fee revenue totaled $1.0 million for the six months ended December 31, 2003 as compared to $2.1 million for the six months ended December 31, 2002 with the decrease primarily related to the particularly active wildfire season in fiscal 2003 compared to fiscal 2004.

Payroll and Employee Benefits —The increase in payroll and employee benefits is primarily related to increased transport activity, increased health insurance costs and general wage rate increases offset by a $1.2 million refund received for premiums paid on a prior year workers compensation policy. Payroll and employee benefits as a percentage of net revenue, excluding the effect of the $1.2 million noted above, was 53.5% for the six months ended December 31, 2003. The decrease in the percentage of payroll and employee benefits to net revenue is primarily due to the disproportionate increase in net revenue as compared to payroll and employee benefits.

Provision for Doubtful Accounts —The increase in the provision for doubtful accounts is related to the increase in medical transportation and related service revenue.

The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue was 19.1% for the six months ended December 31, 2003 and 19.6% for the six months ended December 31, 2002. The decrease in the provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue relates to the changes in the mix of the relationship between Medicare, Medicaid and other third party payer discounts and doubtful accounts. Provisions for Medicare, Medicaid and other third party payer discounts combined with provisions for doubtful accounts represented 44.3% (including 14.8% for doubtful accounts) of gross ambulance and alternative transportation transport revenue for the six months ended December 31, 2003 as compared to 43.8% (including 15.8% for doubtful accounts) for the six months ended December 31, 2002.

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. The increase in other operating expenses is primarily due to increases in general liability insurance expenses of $2.9 million due to increased premium rates in the new policy year as well as general increases in other operating expense categories.

ended December 31, 2003 compared to 7.6% for the three months ended December 31, 2002. The change in interest rate accounts for an increase of approximately $1.4 million in interest expense. Amortization of deferred financing costs totaled $1.4 million for the six months ended December 31, 2003 as compared to $0.8 million for the three months ended December 31, 2002. Amortization of deferred financing costs in the six months ended December 31, 2003 includes amortization of costs incurred relating to both the 2002 and 2003 Amended Credit Facilities. Additionally, upon negotiation of the 2003 Amended Credit Facility, the amortization period of the costs associated with the 2002 Amended Credit Facility was extended through December 31, 2006.

See further discussion of the 2003 Amended Credit Facility in “Liquidity and Capital Resources.”

Income (loss) from discontinued operations — Due to deteriorating economic conditions and the continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, primarily Argentina, 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 such operation’s net liabilities. The gain on the disposition of our Latin American operations totaled $12.5 million for the six months ended December 31, 2002. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including, among other things, 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.

Medical transportation and related service revenue relating to our Latin American operations totaled $2.1 million for the six months ended December 31, 2002. Fire and other revenue for these operations totaled $0.3 million for the six months ended December 31, 2002. Our Latin American operations generated a loss of $156,000 for the six months ended December 31, 2002.

In addition to the disposal of our Latin American operations discussed above, in the first and second quarters of fiscal 2004, we ceased operating in certain of our medical transportation and related service areas. We also held one medical transportation and related service area for sale in the second quarter of fiscal 2004, the sale of which is expected to close in the third or fourth quarter of fiscal 2004. The results of these service areas for the six months ended December 31, 2003 and 2002 are included in income (loss) from discontinued operations. Net revenue for these service areas totaled $6.0 million and $12.6 million for the six months ended December 31, 2003 and 2002, respectively. These service areas generated a loss of $0.5 million in the six months ended December 31, 2003 and net income of $1.6 million in the six months ended December 31, 2002.

During the three months ended December 31, 2003, we recorded net income of $2.2 million compared with a net loss of $0.3 million for the three months ended December 31, 2002. During the six months ended December 31, 2003, we recorded net income of $2.8 million compared with net income of $12.5 million for the six months ended December 31, 2002. Net income for the six months ended December 31, 2002 included a gain on the disposal of our Latin American operations of $12.5 million and the $1.4 million non-cash reversal of restructuring charges. Cash provided by operating activities totaled $3.1 million for the six months ended December 31, 2003 and $5.6 million for the six months ended December 31, 2002. At December 31, 2003, we had cash of $10.5 million, total debt of $306.2 million and a stockholders’ deficit of $210.1 million. Our total debt at December 31, 2003 included $149.9 million of our 7⁷/8% Senior Notes due March 15, 2008, $152.6 million outstanding under our credit facility, $3.2 million payable to a former joint venture partner and $0.5 million of capital lease obligations.

As discussed in Note 5 to our consolidated financial statements, we were not in compliance with certain of the covenants contained in our credit facility at June 30, 2002. On September 30, 2002, we entered into the 2002 Amended Credit Facility with our 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 our Series B redeemable nonconvertible participating preferred stock. The Series B redeemable nonconvertible participating preferred stock includes a provision that we must redeem the shares for a price equal

to the greater of $15.0 million or the value of the common shares into which the Series B shares would be converted, if the Series B shares are not converted by us into common shares by December 31, 2004. See further discussion on the Series B shares at Note 6.

As also discussed in Note 5 to our consolidated financial statements, we violated certain financial covenants as a result of the restatement of our financial statements. Effective September 30, 2003, we entered into the 2003 Amended Credit Facility with our lenders, which, among other things, extended the maturity date of the facility from December 31, 2004 to December 31, 2006, waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of our Series C redeemable nonconvertible participating preferred stock. The Series C redeemable nonconvertible participating preferred stock includes a provision that we must redeem the shares for a price equal to the greater of $10.0 million or the value of the common shares into which the Series C shares would be converted, if the Series C shares are not converted by us into common shares by December 31, 2006. See further discussion on the Series C shares at Note 6.

Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which is subject to, among other things, our future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We currently have no common stock available with which to raise capital. Throughout the year, we experience periodic significant outflows of cash. These outflows include our $5.9 million, semi-annual interest payment on our Senior Notes, these payments are due March 15^th and September 15^th through March 2008, as well as interest on our credit facility of approximately $1.1 million per month. In addition, annual workers’ compensation and general liability insurance premium deposits are paid in the fourth quarter of the fiscal year. These deposits totaled $5.4 million in fiscal 2003. Historically we have also paid a discretionary employer 401(k) matching contribution and management incentive bonuses, generally in the second quarter of the fiscal year. These payments totaled $3.4 million in the second quarter of fiscal 2004. We believe 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 December 31, 2004. 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, the 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.

The table below summarizes cash flow information for the six months ended December 31, 2003 and 2002.

Operating activities - The decrease in cash provided by operating activities primarily relates to the growth in accounts receivable in the first six months of fiscal 2004 offset by an increase in accrued liabilities. The growth in receivables is primarily related to new service areas and transport growth in the second quarter of fiscal 2004 as compared to fiscal 2003. The increase in accrued liabilities in comparison to fiscal 2003 is related to the timing of payments on several accruals including the usage of general liability and workers compensation claims reserves. The volume of claims being settled has decreased as compared to fiscal 2003.

Investing activities – Cash used in investing activities primarily relates to capital expenditures. We had capital expenditures totaling $3.4 million in the six months ended December 31, 2003 as compared to $4.7 million for the six months ended December 31, 2002. We expect capital expenditures to total approximately $8.0 million for the fiscal year ending June 30, 2004.

Financing activities – Cash used in financing activities primarily relates to repayments on debt and capital lease obligations as well as cash paid for debt modification costs and distributions to minority shareholders. Cash used in financing activities for the six months ended December 31, 2003 includes a $1.0 million payment on our credit facility related to asset sale proceeds as required under the 2002 amendment to the credit facility. As the 2003 Amended Credit Facility does not require principal reduction, cash used in financing activities for the remainder of fiscal 2004 is expected to be comprised primarily of repayments on other debt and capital lease obligations.

Accounts receivable, net of the allowance for doubtful accounts, was $67.5 million and $60.4 million as of December 31, 2003 and June 30, 2003, respectively. The increase in net accounts receivable is primarily due to increased volume, billings on new contracts and the timing of billings and collections. Days sales outstanding, calculated on a year to date basis was 43 days at December 31, 2003 as compared to 44 days at June 30, 2003. The allowance for doubtful accounts increased from approximately $48.4 million at June 30, 2003 to approximately $53.3 million at December 31, 2003, primarily as a result of the increase in accounts receivable.

Average daily cash deposits totaled $1.8 million for each of the three and six months ended December 31, 2003 and 2002. We experience several variables regarding the timing and amount of cash collected during any period. See further discussion of those variables in “Risk Factors – We depend on reimbursement by third-party payers and individuals.” 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.

We had working capital of $8.4 million at December 31, 2003, including cash of $10.5 million compared to working capital of $1.6 million, including cash of $12.6 million at June 30, 2003. The increase in working capital is primarily related to the increase in accounts receivable.

In March 1998, we entered into a $200 million revolving credit facility that was originally scheduled to mature on March 16, 2003. The credit facility was 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 credit facility depended on us meeting certain financial covenants.

In December 1999, we were not in compliance with certain of the covenants contained in the original credit facility. We received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required us to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required us to make unscheduled principal payments totaling $5.2 million.

Effective September 30, 2002, we entered into the 2002 Amended Credit Facility with our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7%, and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million (the “2002 Amended Credit Facility”). Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with our business levels and outlook at that time. In consideration for the amendment, we paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of our Series B redeemable nonconvertible participating preferred stock. The Series B shares are not convertible by the holder but we may elect to settle the Series B shares by issuance of common shares equivalent to 10% of the common shares outstanding at the date of the amendment on a fully diluted basis, as defined in the related agreement. Conversion of the Series B shares occurs upon notice from us; however, 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. The Series B redeemable nonconvertible participating preferred stock includes a provision that we must redeem the shares for a price equal to the greater of $15.0 million or the value of the common shares into which the Series B shares would be converted, if the Series B shares are not converted by us to common shares by December 31, 2004. See further discussion on the Series B shares at Note 6.

The 2002 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being amortized to interest expense over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled $2.8 million at December 31, 2003.

As a result of the previously mentioned restatement of our consolidated financial statements and the related increase in our stockholders’ deficit, we were not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of our Form 10-Q for the quarter ended March 31, 2003, thereby causing us to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.

We entered into an amended credit facility, effective September 30, 2003, with our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 2002 amendment were revised to levels consistent with our current business levels and outlook (the “2003 Amended Credit Facility”). The revised financial covenants and levels achieved by us as of December 31, 2004, are presented below. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.

We must achieve the following levels of compliance at March 31, 2004: a total debt leverage ratio of less than 7.49; a minimum tangible net deficit of less than a $280.0 million; a fixed charge coverage ratio of at least 1.04; annual capital expenditures less than $11.0 million; and, an annual operating lease expense equivalent to less than 3.10% of consolidated net revenue for the last twelve months.

In consideration for the amendment, we paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 shares of our Series C redeemable nonconvertible participating preferred stock. The Series C shares are not convertible by the holder but we may elect to settle the Series C Shares by issuance of common shares equivalent to 11% of the common shares outstanding on a fully diluted basis, as defined in the related agreement. Conversion of the Series C shares occurs upon notice from us; however, 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. We also made a $1.0 million principal payment related to asset sale proceeds as required under the 2002 amendment to the credit facility. The Series C redeemable nonconvertible participating preferred stock includes a provision that we must redeem the shares for a price equal to the greater of $10.0 million or the value of the common shares into which the Series C shares would be converted, if the Series C shares are not converted by us to common shares by December 31, 2006. See further discussion on the Series C shares at Note 6.

The 2003 Amended Credit Facility was not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million amendment fee plus the estimated fair value of the Series C shares at the time of issuance of $3.4 million were capitalized as debt issue costs and will be amortized to interest expense over the term of the amended agreement. Professional fees and other related costs of $0.3 million incurred in connection with the amendment were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totaled $3.6 million at December 31, 2003.

At December 31, 2003, the weighted average interest rate on credit facility borrowings was approximately 8.1%. At December 31, 2003, there was $152.6 million outstanding on the credit facility as well as $2.5 million in letters of credit issued under the credit facility.

In March 1998, we issued $150.0 million of 7⁷/8% Senior Notes due March 15, 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. We incurred expenses related to the offering of approximately $5.3 million and are amortizing such costs over the term 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 unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. The Senior Notes contain certain covenants that, among other items, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.

If we fail to remain in compliance with financial and other covenants set forth in the 2003 Amended Credit Facility, we will also be in default under our Senior Notes. A default under the Senior Notes or

Amended Credit Facility may, among other things, cause all amounts owed by us under such facilities to become due immediately upon such default. Any inability to resolve a violation through waivers or other means could have a material adverse effect on our business, financial condition, results of operations and cash flows.

There can be no assurance 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, although we have 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, results of operations and cash flows may be materially adversely affected.

Many of our operational contracts as well as laws in certain of the areas where we operate, require that we carry specified amounts of insurance coverage. Additionally, in the ordinary course of our business, we are subject to accident, injury and professional liability claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize our risk of exposure, and to comply with such legal and contractual requirements, we carry a broad range of insurance policies, including comprehensive general liability, automobile, property damage, professional, workers’ compensation, and other lines of coverage. We typically renew each of these policies annually and purchase limits of coverage at levels we believe are appropriate, taking into account historical and projected claim trends, reasonable protection of our assets and operations, and the economic conditions in the insurance market. Depending upon the specific line of coverage, the total limits of insurance maintained by us may be achieved through a combination of primary policies, excess policies and self-insurance. See “Risk Factors — Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.”

We retain certain levels of exposure with respect to our general liability and workers’ compensation programs and purchase coverage from third party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, we establish reserves for claims, both reported and incurred but not reported, within our level of retention based on currently available information as well as our historical claims experience. See “Risk Factors — Our reserves may prove inadequate.”

We engage third-party administrators, or TPAs, to manage claims resulting from our general liability and workers’ compensation programs. The TPAs establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. We periodically review the claim reserves established by the TPAs and engage independent actuaries to assist with the evaluation of the adequacy of our reserves on an annual basis. We adjust our claim reserves with an associated charge or credit to expense as new information on the underlying claims is obtained.

Since fiscal year 2000, we have experienced a substantial rise in the costs associated with our insurance program, including total premium costs, fees for TPAs to process claims, brokerage costs and other risk management expenses. These increases have primarily resulted from the overall hardening of the insurance markets, our historical claim trends, and the general increase in costs of claims and related litigation. See “Risk Factors — We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.”

General Liability: We have historically maintained insurance policies for comprehensive general liability, automobile liability and professional liability. Throughout this report, these three types of policies are referred to collectively as the “general liability policies.” These policies are typically renewed annually. We engage independent actuaries to assist us with our evaluation of the adequacy of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $15.4 million and $13.9 million at December 31, 2003 and June 30, 2003, respectively. See “Risk Factors – Our reserves may prove inadequate.”

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Cash deposits relating to our general liability program totaled $3.9 million at December 31, 2003 of which $2.0 million is included in prepaid expenses and other and $1.9 million is included in insurance deposits. Cash deposits totaled $2.9 million at June 30, 2003 of which $1.7 million is included in prepaid expenses and other and $1.2 million is included in insurance deposits.

Our general liability policies corresponding with fiscal years 2001 and 2002 were issued by Legion Insurance Company (“Legion”). Legion’s obligations under such policies were reinsured by an unrelated insurance carrier that was identified and approved by us. At the time the coverage was purchased, Legion was an “A” rated insurance carrier while the reinsurer was an A++ rated carrier. Under these policies, Legion’s obligation (as well as that of its reinsurer) to pay covered losses commences once we satisfy our aggregate retention limits for the respective policy years. We have met our aggregate retention limit with respect to the policies corresponding to fiscal 2001 and anticipate that we will meet our aggregate retention limit for the policies corresponding to fiscal 2002. Pursuant to these policies, Legion (and its reinsurer) is obligated to fund all claim-related payments in excess of our retention limits.

On July 25, 2003, the Pennsylvania Insurance Department (the “Department”) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the “Court”). Legion’s liquidation could put our general liability insurance coverage for the previously mentioned policy years at risk; however, based upon information currently available, we believe that proceeds from Legion’s reinsurer will be directly available to pay claims in excess of our retention limits, notwithstanding the liquidation process. If the Court deems our reinsurance to be a general asset of Legion or if the reinsurer otherwise refuses to pay claims directly, then reinsurance proceeds to fund covered general liability losses in excess of our retention limits may be substantially reduced, delayed or unrecoverable. In such an event, we may be required to fund general liability losses applicable to these policy years in excess of our retention limits, to the extent that such losses are not covered by the applicable state guaranty funds. Our inability to timely obtain reinsurance or state guaranty fund coverage for general liability claims could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

Workers’ Compensation: We have historically maintained insurance policies for workers’ compensation and employer’s liability. We are required by law and by most of our operational contracts to maintain minimum statutory limits of workers’ compensation insurance. These policies are typically renewed annually. We also engage independent actuaries to assist with our evaluation of the adequacy of our workers’ compensation claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for workers’ compensation claims could be overstated or understated. Reserves related to workers’ compensation claims totaled $10.0 million and $11.3 million at December 31, 2003 and June 30, 2003, respectively. See “Risk Factors — Our reserves may prove inadequate.”

Effective May 1, 2002, we began fully insuring our workers’ compensation coverage and no longer retain any of the related obligations. We are, however, subject to retrospective premium adjustments should losses exceed previously established limits.

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Additionally, we have also been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to our workers’ compensation program totaled $6.6 million at December 31, 2003, which is included in insurance deposits. Cash deposits totaled $6.8 million at June 30, 2003, which are included in insurance deposits.

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 such coverage, Reliance was an “A” rated insurance company. In connection with this coverage, we provided Reliance with various amounts and forms of collateral to secure our performance under the respective policies as was customary at the time. As of December 31, 2003, we had $3.0 million of cash on deposit with Reliance which is included in insurance deposits. We also have provided Reliance with letters of credit and surety bonds totaling $6.4 million.

On October 3, 2003, the Department placed Reliance into liquidation. It is our understanding that cash on deposit with Reliance will be returned to us on or before the date that all related claims have been satisfied, so long as we have met our claim payment obligations within our retention limits under the related policies. Based on the information currently available, we believe that the cash on deposit with Reliance is fully recoverable and will either be returned to us or used by the liquidator, with our prior consent, to pay claims on our behalf. In the event that we are unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliance’s liquidation could put our workers’ compensation insurance coverage at risk for the related policy years; however, based upon information currently available, we believe that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent that such losses are not covered by either Reliance or the applicable state guaranty funds, we may be required to fund the related workers’ compensation claims for the applicable policy years. Our inability to access the funds on deposit with Reliance or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

During fiscal 2002, we purchased certain portions of our workers’ compensation coverage from Legion. Legion required assurances that we would be able to fund our related retention obligations, which were estimated by Legion to approximate $6.2 million. We provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual Indemnity), a Legion affiliate. That policy required us to deposit approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy our retention obligations under the Legion policy. We funded these deposits on a monthly basis during the policy term. As of December 31, 2003, we had net deposits with respect to this coverage totaling $3.0 million which is included in insurance deposits.

As mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion rehabilitator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as us. It is our understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. We are actively participating in the court proceedings to cause such a trust account or other mechanism to be created and to operate so as to fully cover all our deductible obligations as originally intended and to return to us any remaining deposit balance once all related claims have been closed. Based on the information currently available, we believe that the amounts on deposit with Mutual Indemnity are fully recoverable and will either be returned to us or used to pay claims on our behalf. In the event that we are unable to access the funds on deposit with Mutual Indemnity, we may be required to fund the related workers’ compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. Our inability to access the funds on deposit with Mutual Indemnity or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, our negligence or willful misconduct, or breach of representations and warranties and covenants.

Additionally, some of our agreements with customers require us to provide certain assurances related to the performance of our services. Such assurances, from time to time, obligate us to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of uncured material defaults or other certain circumstances, or (iii) provide surety bonds or letter of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default or transition to a new service provider. With respect to such surety bonds, we are also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.

We provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. We maintain directors’ and officers’ insurance which should enable us to recover a portion of any future amounts paid.

In addition to the above, from time to time we provide standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by us.

While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows. Additionally, we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows.

As a result of the sale of our Latin American operations in September 2002, we no longer have operations located outside the United States. Additionally, inflation has not had a significant impact on our business.

The following risk factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating us and our business.

We have significant indebtedness. As of December 31, 2003, we had approximately $306.2 million of consolidated indebtedness, consisting primarily of $149.9 million of 7 7/8% Senior Notes due in 2008 and $152.6 million outstanding under our 2003 Amended Credit Facility, which is due December 31, 2006.

Our ability to service our indebtedness depends on our future operating performance, which is affected by various factors including regulatory, industry, economic, and competitive conditions, and other factors, many of which are beyond our control. We may not generate sufficient funds to enable us to service our indebtedness and failure to do so 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:

Our 2003 Amended Credit Facility also contains restrictive covenants and requires us to meet certain financial tests, including a total debt leverage ratio, a minimum tangible net worth amount, and a fixed charge coverage 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 indebtedness could result in an event of default under our 2003 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.

Despite significant net losses in fiscal 2002, 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 regulatory, industry, economic, competitive and other factors, many of which are beyond our control. Because of our significant indebtedness, a substantial portion of our cash flow from operating activities is dedicated to debt service and is not available for other purposes. The terms of our 2003 Amended Credit Facility do not permit additional borrowings thereunder. In addition, the 2003 Amended Credit Facility and the Senior Notes restrict our ability to obtain additional debt from other sources or 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 could be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. Failure to generate adequate operating cash flow will have a material adverse effect on our business, financial condition and results of operations.

In conjunction with the 2002 Amended Credit Facility, we issued shares of our Series B redeemable nonconvertible participating preferred stock (the “Series B Shares”) to the participants in the 2002 Amended Credit Facility. The Series B Shares are not convertible by the holder but we may elect to settle the Series B Shares by issuance of 2,115,490 common shares, which equated to 10% of our common shares then outstanding on a diluted basis, as defined. Because sufficient common shares are not currently available to permit conversion, we intend to seek stockholder approval to authorize additional common shares. Until such time as the additional common shares are authorized, the carrying value of the Series B Shares will be accreted to the greater of $15.0 million or the value of the common shares into which the Series B Shares would have otherwise been converted which represents the redemption value of the Series B shares as of December 31, 2004. The accretion and allocation of earnings to the Series B Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed, will result in a reduction in income available to common stockholders for purposes of determining our earnings per share.

In conjunction with the 2003 Amended Credit Facility, we issued shares of our Series C redeemable nonconvertible participating preferred stock (the “Series C Shares”) to participants in the 2003 Amended Credit Facility. The Series C Shares are not convertible by the holder but we may elect to settle the Series C Shares by issuance of 2,839,787 common shares, which equated to 11% of our common shares then outstanding on a diluted basis, as defined. Because sufficient common shares are not currently available to permit conversion, we intend to seek stockholder approval to authorize additional common shares. Until such time as the additional common shares are authorized, the carrying value of the Series C Shares will be accreted to the greater of $10.0 million or the value of common shares into which the Series C Shares would have otherwise been converted which represents the redemption value of the Series C shares as of December 31, 2006. The accretion and allocation of earnings to the Series C Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed will result in a reduction in income available to common stockholders for purposes of determining our earnings per share.

We receive a substantial portion of payments for our medical transportation services from third-party payers, including Medicare, Medicaid, and private insurers. We received 90% of our medical transportation fee collections from such third party payers during the three months ended December 31, 2003 and 2002, including 27% from Medicare. We received 90% of our medical transportation fee collections from such third party payers during the six months ended December 31, 2003, including 27% from Medicare. In the six months ended December 31, 2002, we received 90% of medical transportation fee collections from these third parties, including 26% 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 medical transportation 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. Due to the nature of our business and our participation in the Medicare and Medicaid reimbursement programs, we are involved from time to time in regulatory reviews or investigations by governmental agencies of matters such as compliance with billing regulations. We 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 non-compliance. Delays and uncertainties in the reimbursement process adversely affect our 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. Unfavorable resolutions of pending or future regulatory reviews or investigations, either individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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 by the related municipality or governing authority. Amounts not covered by third-party payers are the obligations of individual patients and, we may not receive reimbursement by the related municipality or governing authority or 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 discounts applicable to Medicare, Medicaid and other third-party payers and for 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 allowance 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, results of operations and cash flows. Our collection policies or our allowance for doubtful accounts 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 insurers’ and sureties’ perception of our financial condition due to our current debt structure and cash position. Sustained and substantial annual increases in premiums and requirements for collateral or pre-funded deductible obligations may have a material adverse effect on our business, financial condition, results of operations and cash flow.

Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.

We are subject to a significant number of accident, injury and professional liability claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize the risk of our exposure, we maintain certain levels of insurance coverage for workers’ compensation, comprehensive general liability, automobile liability, and professional liability claims. In certain limited instances we may not have coverage for certain claims. In those instances for which we do have coverage, 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, results of operations and cash flows. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation and business.

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 and self-insured retentions 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 our historical experience as well as industry data, 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 circumstances that are difficult to predict. For these reasons, there can be no assurance that our ultimate liability will not materially exceed our reserves at any point. If our reserves prove to be inadequate, we will be required to increase our reserves with a corresponding charge to operations in the period in which the deficiency is identified and such charge could be material. We periodically engage independent actuaries in order to verify the adequacy of our claims reserves.

Two insurance companies with which we have previously done business are in financial distress.

Two previous insurers (Reliance Insurance Company and Legion Insurance Company) under our workers’ compensation and general liability programs are currently in liquidation proceedings in Pennsylvania. With respect to the affected policy years, these proceedings may result in the loss of all or part of the collateral and/or funds deposited by us for payment of claims within our deductible or self-insured retention relating to our workers’ compensation programs, and may result in restricted access to both insurance and reinsurance proceeds relating to our general liability program. Based upon the information currently available, we believe that the amounts on deposit are fully recoverable and will either be returned to us or used to pay claims on our behalf as originally intended. We further believe that reinsurance proceeds for our liability policies will be available to cover claims in excess of our retention as originally intended. It is also our understanding that state guaranty funds will provide coverage, subject to certain limitations, of such general liability and workers’ compensation claims. Our inability to access the funds on deposit, to access our liability reinsurance proceeds or to obtain coverage from state guaranty funds could have a material adverse effect on our business, financial condition, results of operations and cash flows. To the extent that claims exceed our deductible limits and our insurers or guaranty funds do not satisfy their coverage obligations, we may be required to satisfy a portion of those claims directly, which could have a material adverse effect on our business, financial condition, result of operations and cash flows.

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 (which is adjusted each year by the CPI – 1%), 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 assignment on Medicare claims, which means a provider, must accept Medicare’s allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. 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 have 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. However, changes in the related rules or regulations, or the interpretation or implementation thereof, could materially alter the impact of the fee schedule on our medical

transportation revenue and, therefore could have a material adverse effect on our business, financial condition, results of operations and cash flows. Changes in reimbursement policies, or other governmental actions, 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 any further mandates of the fee schedule could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition to the above, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Included in this legislation was a provision for additional reimbursement for ambulance services provided to Medicare patients. Among other relief, the Act provides for a 1% increase in reimbursement for urban transports and a 2% increase for rural transports for the remainder of the phase-in of the national ambulance fee schedule, which will be complete in 2006. Although we expect this provision under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 will benefit the portion of Rural/Metro’s medical transportation revenue that is reimbursed through Medicare, we are currently unable to predict the total impact.

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 medical transportation operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract and establishes the rates for general ambulance services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. For example, the State of Arizona establishes the rate of return 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 22.2% and 18.0% of net revenue for the three months ended December 31, 2003 and 2002, respectively. Ambulance services revenue generated in Arizona accounted for 21.1% and 18.6% of net revenue for the six months ended December 31, 2003 and 2002, respectively. 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 federal, state and local laws, rules and regulations govern various aspects of the ambulance and fire fighting service business covering matters such as licensing, rates, employee certification, environmental matters and radio communications. Certificates of necessity may be required from state or local governments to operate medical transportation 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 or local, governments could:

We could encounter difficulty in complying with all applicable laws, rules and regulations.

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, required covered entities to comply with the final rule’s provisions pertaining to privacy standards by April 14, 2003, and covers all individually identifiable health information used or disclosed by a covered entity. We have developed and implemented policies, training and procedures to comply with the final rule.

In addition to compliance with the privacy standards deadline, the HIPAA Electronic Transactions and Code Set Rule required us, if we submit claims electronically, to use the approved HIPAA format by October 16, 2003. On September 23, 2003, CMS announced that it would issue a contingency plan to accept Medicare noncompliant electronic transactions after the October 16, 2003 compliance deadline. The contingency plan permits CMS to continue to accept and process Medicare claims in legacy formats giving providers, like us, additional time to complete the testing process. We are filing in the approved HIPAA format with all of our Medicare plans except Nebraska, due to the carrier’s inability to accept ambulance claims in the approved HIPAA format. We submit Medicaid claims to twenty-seven states, of which eleven states allow electronic claim submissions and sixteen accept paper claim submissions. As of February 11, 2004, we received confirmation of at least one successful test filing from ten of the eleven states that accept electronic claim submissions. We have completed the testing process in nine states and are continuing to test our submissions in two states. These two states, New York and Pennsylvania, will allow legacy formats until testing is complete. In addition, we await announcements from the commercial insurers regarding compliance with the final rule. Thus, while we have worked diligently to both comply with HIPAA requirements and mitigate the impact of HIPAA on our business, we could experience a material adverse effect on our business, financial condition, cash flows or results of operations due to (i) significant costs associated with continued compliance under HIPAA or related legislative enactments, (ii) adverse affects on our collection cycle arising from non-compliance or delayed HIPAA compliance by our payers, customers and other constituents, or (iii) impacts to the health care industry as a whole that may directly or indirectly cause an adverse affect on our business.

On May 22, 2003, The Nasdaq Stock Market (Nasdaq) notified us that we were not in compliance with a Nasdaq SmallCap Market maintenance standard. This standard requires that we file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.

The notification followed our announcement on May 14, 2003 that we would delay filing our Form 10-Q for the quarter ended March 31, 2003 due to the need to restate our financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. We announced that we would file the applicable Form 10-Q upon finalization of the related restatement adjustments.

We subsequently submitted our request for a Nasdaq Listing Qualifications Panel (the “Panel”) hearing to consider our continued listing. The hearing was held June 19, 2003, where we presented our basis for a temporary exception to the filing requirement in order to complete our accounts receivable analysis.

On July 17, 2003, Nasdaq informed us that the Panel had made a determination to grant us an exception. In its decision the Panel determined that our securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing our Form 10-Q for the quarter ended March 31, 2003 and our Form 10-K for the fiscal year ended June 30, 2003.

In addition to granting the filing exception through September 30, 2003, the Panel specifically required us to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should we miss a filing deadline in accordance with the exception, we will not be entitled to a new hearing on the matter and our securities may be delisted from The Nasdaq SmallCap Market. In the event we fail to comply with any continued listing requirement during the exception period, we will be provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panel’s decision as to whether continued listing is appropriate.

On September 29, 2003, we issued a press release indicating that the filing of our Form 10-K for fiscal 2003 would be delayed. We also filed a Form 12b-25 request with the SEC for an extension to file our Form 10-K on or before October 14, 2003. Due to such delayed filing, we formally requested, on September 30, 2003, that the Panel permit us to comply with their July 17, 2003 decision by filing both our Form 10-K for fiscal 2003 and our Form 10-Q for the quarter ended March 31, 2003 on or before October 14, 2003. On October 7, 2003, the Panel informed us that our requested modification to their July 17, 2003 decision was granted.

On October 20, 2003, Nasdaq informed us that we had demonstrated compliance with the terms of the exception granted on July 17, 2003. Additionally, Nasdaq further noted that we do not meet the listing standard relating to net income from continuing operations or the alternative standards of stockholders’ equity or market value. We submitted a plan for compliance and on November 25, 2003, Nasdaq granted an exception to the listing requirements contingent on our filing all periodic reports with the SEC and Nasdaq for all reporting periods ending on or before June 30, 2004 on a timely basis. Additionally, Nasdaq indicated that should we fail to demonstrate year to date income from continuing operations of at least $500,000, measured at the end of each quarter of fiscal 2004, and fail to satisfy either the $2.5 million shareholders’ equity or $35.0 million market value of listed securities standard, our securities would be delisted from The Nasdaq Stock Market. For the six months ended December 31, 2003 we had income from continuing operations of $3.4 million.

On January 12, 2004, we received a letter from Nasdaq indicating that the Nasdaq Listing and Hearing Review Council (the “Council”) had called for a review of the Panel decision received by us on November 25, 2003. The letter indicated that the review will focus on the Panel’s decision to allow us to demonstrate compliance with the net income requirement on a prospective basis. The Council may affirm, modify, reverse, dismiss or remand the decision of the Panel.

We depend to a great extent on certain contracts with municipalities or fire districts to provide emergency ambulance services and fire protection services. Our six largest contracts accounted for 18.5% and 18.2% of net revenue for the three months ended December 31, 2003 and 2002, respectively. One of these contracts accounted for 8.5% and 8.7% of net revenue for the six months ended December 31, 2003 and 2002, respectively. Our six largest contracts accounted for 18.2% of net revenue for both the six months ended December 31, 2003 and 2002. One of these contracts accounted for 8.4% and 8.7% of net revenue for the six months ended December 31, 2003 and 2002, respectively. 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, results of operations and cash flows. 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 on average 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 as they occur, could, in the aggregate, 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. 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.

Due to 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, primarily in Argentina. We 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 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.

The ambulance service industry is highly competitive. Ambulance and general medical transportation 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 and health/care institutions consider the following factors in awarding a contract:

Counties, 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:

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. Medical personnel shortages in certain market areas currently make the recruiting, training, and retention of full-time and part-time personnel more difficult and costly, including the cost of overtime wages. Our internal growth will further increase the demand on our resources and require the addition of new personnel. We have entered into employment agreements with certain of our executive officers and certain other key personnel. Failure to retain or replace our key personnel may have an adverse effect on our business, financial condition, results of operations and cash flows.

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 Conditions.

Our primary exposure to market risk consists of changes in interest rates on our borrowing activities. Amounts outstanding under our 2003 Amended Credit Facility bear 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 monitor this risk associated with interest rate changes and may enter into hedging transactions, such as interest rate swap agreements, to mitigate the related exposure.

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 management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

During the second quarter of fiscal 2004, certain items relating to prior periods were called to our attention and evaluated by us for further reporting under the Exchange Act. As a result of this process, we have filed (or will file in the near future)

We carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective, except for the items outlined in the preceding paragraphs which have been addressed as set forth above. There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we are subject to litigation and regulatory investigations arising in the ordinary course of business. We believe that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on our business, financial condition, results of operations or cash flows. However, we are unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of our deductible or self-insured retention arising out of such claims. 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, results of operations or cash flows.

Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation

We, Warren S. Rustand, our former Chairman of the Board and Chief Executive Officer, James H. Bolin, our former Vice Chairman of the Board, and Robert E. Ramsey, Jr., our former Executive Vice President and former 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 contained virtually identical allegations, were brought on behalf of a class of persons who purchased our publicly traded securities including our common stock between April 24, 1997 and June 11, 1998. The complaints alleged that the defendants issued certain false and misleading statements regarding certain aspects of our financial status and that these statements allegedly caused our common stock to be traded at artificially inflated prices. The complaints also alleged that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated.

In the settlement agreement, we and the individual defendants expressly denied all charges of liability or wrongdoing and continued to assert that at all relevant times we and the individual defendants acted in good faith and in a manner we and the individual defendants reasonably believed to be in the best interests of us and our stockholders.

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 employee firefighters in Maricopa County who participated in our Employee Stock Ownership Plan (“ESOP”), Employee Stock Purchase

Plan (“ESPP”), and/or Retirement Savings Value Plan (“401(k) Plan”) 401(k) plan (collectively, the “Plans”) from July 1, 1996 through June 30, 2001. The plaintiffs amended the Complaint on October 17, 2002, adding Barry Landon and Jane Doe Landon as defendants and making certain additional allegations and claims. The primary allegations of the complaint included violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Plans.

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. We and the individual defendants consented to this removal. On February 21, 2003, we and our current directors and officers moved to dismiss the amended complaint, and our former directors and officers subsequently joined in this motion.

On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against us and our current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal from the court’s July 29, 2003 order to the Ninth Circuit. The appeal was dismissed as premature on October 27, 2003. The court dismissed plaintiffs’ remaining claims against Arthur Andersen on January 27, 2004, and entered final judgment.

With regard to certain issues relating to the liquidation of Legion Insurance Company (Legion) and Reliance Insurance Company (Reliance) that are being litigated before the Commonwealth Court of Pennsylvania, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.

The Staff of the Securities and Exchange Commission is conducting an informal fact-finding inquiry that we believe is focused on the restatement of our financial statements described in the first paragraph of “Part I. Financial Information” of this report. We are voluntarily providing information requested by the Staff and intend to cooperate fully with the Staff. As the inquiry is at an early stage, we are unable to predict the impact of any related outcome.

On May 22, 2003, The Nasdaq Stock Market (Nasdaq) notified the Company that it was not in compliance with a Nasdaq SmallCap Market maintenance standard. This standard requires that the Company file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.

The notification followed the Company’s announcement on May 14, 2003 that it would delay filing its Form 10-Q for the quarter ended March 31, 2003 due to the need to restate its consolidated financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. The Company announced that it would file the applicable Form 10-Q upon finalization of the related restatement adjustments.

The Company subsequently submitted its request for a Nasdaq Listing Qualifications Panel (the “Panel”) hearing to consider its continued listing. The hearing was held June 19, 2003, where the Company presented its basis for a temporary exception to the filing requirement in order to complete its related analysis.

On July 17, 2003, Nasdaq informed the Company that the Panel had made a determination. In its decision to grant an exception, the Panel determined that the Company’s securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing its Form 10-Q for the quarter ended March 31, 2003 and its Form 10-K for the fiscal year ended June 30, 2003.

In addition to granting the filing exception through September 30, 2003, the Panel specifically required the Company to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should the Company miss a filing deadline in accordance with the exception, it will not be entitled to a new hearing on the matter and its securities may be delisted from the Nasdaq SmallCap Market. In the event the Company fails to comply with any continued listing requirement during the exception period, it will be provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panel’s decision as to whether continued listing is appropriate.

On September 29, 2003, the Company issued a press release indicating that the filing of its Form 10-K for fiscal 2003 would be delayed. The Company also filed a Form 12b-25 request with the SEC for an extension to file its Form 10-K on or before October 14, 2003. Due to such delayed filing, the Company formally requested, on September 30, 2003, that the Panel permit it to comply with their July 17, 2003 decision by filing both the Form 10-K for fiscal 2003 and the Form 10-Q for the quarter ended March 31, 2003 on or before October 14, 2003. On October 7, 2003, the Panel informed the Company that its requested modification to their July 17, 2003 decision was granted.

On October 20, 2003, Nasdaq informed the Company that it had demonstrated compliance with the terms of the exception granted on July 17, 2003. Additionally, Nasdaq further noted that the Company does not meet the listing standard relating to net income from continuing operations or the alternative standards of stockholders’ equity or market value. The Company submitted a plan for compliance and on November 25, 2003, Nasdaq granted an exception to the filing requirements pursuant to the Company filing all periodic reports with the SEC and Nasdaq for all reporting periods ending on or before June 30, 2004 on a timely basis. Additionally, Nasdaq indicated that should the Company fail to demonstrate $500,000 in net income from continuing operations (on a cumulative basis) for any quarter end and fail to satisfy either the $2.5 million shareholders’ equity or $35.0 million market value of listed securities standard, its securities would be delisted from The Nasdaq Stock Market. For the six months ended December 31, 2003 the Company had income from continuing operations of $3.4 million.

Form 8-K filed October 3, 2003 relating to the Company entering into a Reaffirmation and First Amendment to Second Amended and Restated Credit Agreement dated as of September 26, 2003 with its bank lenders which, among other provisions, extended the maturity date of the facility from December 31, 2004 through December 31, 2006; required no principal payments until maturity; waived all previous non-compliance, and required the issuance to the lenders an 11% equity stake in the Company through a grant of 283,979 shares of Series C preferred that are convertible into the Company’s common shares, pending stockholder approval of an increase in the number of authorized common shares.

Form 8-K filed October 15, 2003 relating to the Company’s press release announcing the filing of its Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and the filing of its Quarterly Report on Form 10-Q for the three months ended March 31, 2003.

Form 8-K filed October 27, 2003 relating to the Company’s receipt of written notice from the Nasdaq Listing Qualifications Panel stating that although the Company filed its Form 10-Q for the third quarter ended March 31, 2003, and its Form 10-K for the fiscal year ended June 30, 2003, the Company no longer satisfies the $500,000 net income from continuing operations standard, or the alternative standards, for continued listing of the Company’s Common Stock on the Nasdaq SmallCap Market.

Form 8-K filed November 14, 2003 relating to the Company’s press release announcing its results for the three months ended September 30, 2003.

Form 8-K filed December 2, 2003 announcing the Company’s listing exception on the Nasdaq SmallCap Market had been modified and its trading symbol returned to RURL with the opening of the market on Friday, November 28, 2003.

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.


By:		/s/ Jack E. Brucker
		Jack E. Brucker, President & Chief Executive Officer (Principal Executive Officer)

By:		/s/ Michael S. Zarriello
		Michael S. Zarriello, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


			Page
Part I.	Financial Information

	Item 1.	Financial Statements (unaudited):

		Consolidated Balance Sheet	4

		Consolidated Statement of Operations	5

		Consolidated Statement of Cash Flows	6

	Notes to Consolidated Financial Statements		7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

	Item 4.	Controls and Procedures	62

Part II.	Other Information

	Item 1.	Legal Proceedings	63

	Item 5.	Other Information	64

	Item 6.	Exhibits and Reports on Form 8-K	65

	Signatures		67


	December 31, 2003			June 30, 2003
ASSETS
Current assets
Cash	$	10,506		$	12,561
Accounts receivable, net of allowance for doubtful accounts of $53,306 and $48,422 at December 31, 2003 and June 30, 2003, respectively		67,515			60,428
Inventories		11,998			11,504
Prepaid expenses and other		6,567			7,511

Total current assets		96,586			92,004
Property and equipment, net		40,646			43,010
Goodwill		41,167			41,167
Insurance deposits		8,495			7,937
Other assets		13,321			12,048

	$	200,215		$	196,166

LIABILITIES, MINORITY INTEREST, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	10,586		$	13,778
Accrued liabilities		58,010			57,698
Deferred revenue		18,198			17,603
Current portion of long-term debt		1,440			1,329

Total current liabilities		88,234			90,408
Long-term debt, net of current portion		304,800			305,310
Other liabilities		28			181
Deferred income taxes		650			650

Total liabilities		393,712			396,549

Minority interest		2,447			1,984

Series B redeemable nonconvertible participating preferred stock, $.01 par value, 634,647 shares authorized, 211,549 shares issued and outstanding at December 31, 2003 and June 30, 2003; including accretion of $6,006 and $3,604, respectively (redemption value of $15.0 million)		10,195			7,793

Series C redeemable nonconvertible participating preferred stock, $.01 par value, 283,979 shares authorized, 283,979 shares issued and outstanding at December 31, 2003; including accretion of $505 (redemption value of $10.0 million)		3,941			—

Commitments and contingencies		—			—

Stockholders’ equity (deficit)
Common stock, $.01 par value 23,000,000 shares authorized, 16,540,590 and 16,207,830 shares issued and outstanding at December 31, 2003 and June 30, 2003, respectively		168			166
Additional paid-in capital		132,702			135,405
Treasury stock		(1,239	)		(1,239	)
Accumulated deficit		(341,711	)		(344,492	)

Total stockholders’ equity (deficit)		(210,080	)		(210,160	)

	$	200,215		$	196,166


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
				*(As Restated)**						*(As Restated)**
Net revenue	$	134,124		$	122,695		$	265,862		$	246,435

Operating expenses:
Payroll and employee benefits		70,052			67,483			141,052			135,778
Provision for doubtful accounts		21,849			19,862			42,627			39,786
Depreciation and amortization		2,835			3,186			5,734			6,512
Other operating expenses		29,581			26,619			57,246			52,449
Restructuring and other		—			(1,421	)		—			(1,421	)

Total operating expenses		124,317			115,729			246,659			233,104

Operating income		9,807			6,966			19,203			13,331
Interest expense		(7,194	)		(7,330	)		(15,208	)		(13,241	)
Interest income		22			22			51			49

Income (loss) from continuing operations before income taxes and minority interest		2,635			(342	)		4,046			139
Income tax provision		(105	)		(55	)		(195	)		(110	)
Minority interest		(189	)		(600	)		(463	)		(1,478	)

Income (loss) from continuing operations		2,341			(997	)		3,388			(1,449	)
Income (loss) from discontinued operations (including gain on the disposition of Latin American operations of $12,488 in the six months ended December 31, 2002)		(166	)		745			(607	)		13,950

Net income (loss)		2,175			(252	)		2,781			12,501
Less: Net (income) loss allocated to redeemable nonconvertible participating preferred stock under the two-class method		(502	)		29			(498	)		(772	)
Less: Accretion of redeemable nonconvertible participating preferred stock		(1,706	)		(1,201	)		(2,907	)		(1,201	)

Net income (loss) applicable to common stock	$	(33	)	$	(1,424	)	$	(624	)	$	10,528

Income (loss) per share
Basic -
Income (loss) from continuing operations after accretion of redeemable nonconvertible participating preferred stock	$	0.01		$	(0.13	)	$	(0.01	)	$	(0.16	)
Income (loss) from discontinued operations		(0.01	)	$	0.04			(0.03	)		0.82

Net income (loss)	$	(0.00	)	$	(0.09	)	$	(0.04	)	$	0.66

Diluted -
Income (loss) from continuing operations after accretion of redeemable nonconvertible participating preferred stock	$	0.01		$	(0.13	)	$	(0.01	)	$	(0.16	)
Income (loss) from discontinued operations		(0.01	)		0.04			(0.03	)		0.82

Net income (loss)	$	(0.00	)	$	(0.09	)	$	(0.04	)	$	0.66

Average number of shares outstanding - Basic		16,521			16,142			16,460			16,068

Average number of shares outstanding - Diluted		17,617			16,142			16,460			16,068


	2003			2002
				*(As Restated)**
Cash flows from operating activities:
Net income	$	2,781		$	12,501
Adjustments to reconcile net income to cash provided by operating activities -
Non-cash portion of gain on disposition of Latin American operations		—			(13,732	)
Depreciation and amortization		6,223			6,773
(Gain) loss on sale of property and equipment		10			(359	)
Provision for doubtful accounts		44,556			42,952
Earnings of minority shareholder		463			1,478
Amortization of deferred financing costs		1,414			871
Amortization of debt discount		13			13
Change in assets and liabilities -
Increase in accounts receivable		(51,643	)		(40,098	)
(Increase) decrease in inventories		(494	)		85
Decrease in prepaid expenses and other		944			146
Increase in insurance deposits		(558	)		(12	)
Decrease in other assets		724			1,819
Decrease in accounts payable		(3,192	)		(2,545	)
Increase (decrease) in accrued liabilities and other liabilities		1,294			(4,425	)
Increase in deferred revenue		595			126

Net cash provided by operating activities		3,130			5,593

Cash flows from investing activities:
Capital expenditures		(3,410	)		(4,716	)
Proceeds from the sale of property and equipment		81			474

Net cash used in investing activities		(3,329	)		(4,242	)

Cash flows from financing activities:
Repayments on credit facility		(1,000	)		—
Repayment of debt and capital lease obligations		(547	)		(748	)
Distributions to minority shareholders		—			(357	)
Cash paid for debt modification costs		(515	)		(971	)
Issuance of common stock		206			186

Net cash used in financing activities		(1,856	)		(1,890	)

Effect of currency exchange rate changes on cash		—			(21	)

Decrease in cash		(2,055	)		(560	)
Cash, beginning of period		12,561			10,677

Cash, end of period	$	10,506		$	10,117


	As Previously Reported			Restatement Adjustments							As Restated			Accounting Change (E)	Discontinued Operations (F)		As Reported
	As Previously Reported			(A)		(B)		(C)	(D)		As Restated			Accounting Change (E)	Discontinued Operations (F)		As Reported
Three months ended December 31, 2002
Net revenue	$	123,464		(379	)	—		—	—		$	123,085		5,781	(6,171	)	$	122,695
Provision for doubtful accounts		19,017		199		—		—	—			19,216		2,198	(1,552	)		19,862
Operating income		7,694		(578	)	—		—	—			7,116		598	(748	)		6,966
Income (loss) from continuing operations		148		(578	)	178		—	—			(252	)	—	(745	)		(997	)
Net income (loss)		148		(578	)	178		—	—			(252	)	—	—			(252	)
Basic income (loss) per share from continuing operations after the accretion of redeemable nonconvertible participating preferred stock	$	(0.07	)	(0.03	)	0.01		—	—		$	(0.09	)	—	(0.04	)	$	(0.13	)
Basic loss per share	$	(0.07	)	(0.03	)	0.01		—	—		$	(0.09	)	—	—		$	(0.09	)
Diluted income (loss) per share from continuing operations after the accretion of redeemable nonconvertible participating preferred stock	$	(0.07	)	(0.03	)	0.01		—	—		$	(0.09	)	—	(0.04	)	$	(0.13	)
Diluted loss per share	$	(0.07	)	(0.03	)	0.01		—	—		$	(0.09	)	—	—		$	(0.09	)

Six months ended December 31, 2002
Net revenue	$	249,029		(1,553	)	—		—	—		$	247,476		11,568	(12,609	)	$	246,435
Provision for doubtful accounts		37,742		814		—		—	—			38,556		4,396	(3,166	)		39,786
Operating income		17,448		(2,367	)	(1,603	)	—	—			13,478		1,472	(1,619	)		13,331
Income (loss) from continuing operations		3,961		(2,367	)	(1,425	)	—	—			169		—	(1,618	)		(1,449	)
Net income		16,293		(2,367	)	(1,425	)	—	—			12,501		—	—			12,501
Basic income (loss) per share from continuing operations after the accretion of redeemable nonconvertible participating preferred stock	$	0.17		(0.15	)	(0.09	)	—	0.01		$	(0.06	)	—	(0.10	)	$	(0.16	)
Basic income (loss) per share	$	0.94		(0.15	)	(0.09	)	—	(0.04	)	$	0.66		—	—		$	0.66
Diluted income (loss) per share from continuing operations after the accretion of redeemable nonconvertible participating preferred stock	$	0.15		(0.13	)	(0.08	)	—	—		$	(0.06	)	—	(0.10	)	$	(0.16	)
Diluted income per share	$	0.84		(0.13	)	(0.08	)	0.07	(0.04	)	$	0.66		—	—		$	0.66


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
				*(As Restated)**						*(As Restated)**
Net income (loss) applicable to common stock	$	(33	)	$	(1,424	)	$	(624	)	$	10,528
Deduct: Stock based employee compensation determined under the fair value method for all awards applicable to common stock, net of tax effect		(127	)		(765	)		(401	)		(893	)

Pro forma net income (loss) applicable to common stock	$	(160	)	$	(2,189	)	$	(1,025	)	$	9,635

Income (loss) per share:
Basic - as reported	$	(0.00	)	$	(0.09	)	$	(0.04	)	$	0.66

Basic - pro forma	$	(0.01	)	$	(0.14	)	$	(0.06	)	$	0.60

Diluted - as reported	$	(0.00	)	$	(0.09	)	$	(0.04	)	$	0.66

Diluted - pro forma	$	(0.01	)	$	(0.14	)	$	(0.06	)	$	0.60


	December 31, 2003			June 30, 2003
7⁷/8% senior notes due 2008	$	149,891		$	149,877
Credit facility due December 2006 (LIBOR +7%)		152,555			152,420
Note payable to former joint venture partner, monthly payments through June 2006		3,242			3,722
Capital lease and other obligations, at varying rates from 6.0% to 12.75%, due through 2013		552			620

		306,240			306,639
Less: Current maturities		(1,440	)		(1,329	)

	$	304,800		$	305,310


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current assets
Cash	$	—		$	9,875		$	631		$	—		$	10,506
Accounts receivable, net		—			56,646			10,869			—			67,515
Inventories		—			11,901			97			—			11,998
Prepaid expenses and other		—			6,565			2			—			6,567

Total current assets		—			84,987			11,599			—			96,586

Property and equipment, net		—			40,523			123			—			40,646

Goodwill		—			41,167			—			—			41,167

Due from (to) affiliates		242,117			(215,232	)		(26,885	)		—			—

Insurance deposits		—			8,495			—			—			8,495

Other assets		8,714			4,398			209			—			13,321

Investment in subsidiaries		(139,799	)		—			—			139,799			—

	$	111,032		$	(35,662	)	$	(14,954	)	$	139,799		$	200,215

LIABILITIES, MINORITY INTEREST, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	—		$	9,582		$	1,004		$	—		$	10,586
Accrued liabilities		4,530			53,255			225			—			58,010
Deferred revenue		—			17,861			337			—			18,198
Current portion of long-term debt		—			1,440			—			—			1,440

Total current liabilities		4,530			82,138			1,566			—			88,234

Long-term debt, net of current portion		302,446			2,354			—			—			304,800

Other liabilities		—			28			—			—			28

Deferred income taxes		—			650			—			—			650

Total liabilities		306,976			85,170			1,566			—			393,712

Minority interest		—			—			—			2,447			2,447

Series B redeemable nonconvertible participating preferred stock		10,195			—			—			—			10,195

Series C redeemable nonconvertible participating preferred stock		3,941			—			—			—			3,941

Stockholders’ equity (deficit)
Common stock		168			82			8			(90	)		168
Additional paid-in capital		132,702			54,622			20,168			(74,790	)		132,702
Treasury stock		(1,239	)		—			—			—			(1,239	)
Accumulated deficit		(341,711	)		(175,536	)		(36,696	)		212,232			(341,711	)

Total stockholders’ equity (deficit)		(210,080	)		(120,832	)		(16,520	)		137,352			(210,080	)

	$	111,032		$	(35,662	)	$	(14,954	)	$	139,799		$	200,215


	Medical Transportation and Related Services		Fire and Other		Total
THREE MONTHS ENDED DECEMBER 31, 2003
Net revenues from external customers	$	114,555	$	19,569	$	134,124
Segment profit		14,914		2,749		17,663
Segment assets		66,815		700		67,515

THREE MONTHS ENDED DECEMBER 31, 2002 (As Restated*)
Net revenues from external customers	$	103,067	$	19,628	$	122,695
Segment profit		10,963		1,762		12,725
Segment assets		59,942		1,086		61,028

SIX MONTHS ENDED DECEMBER 31, 2003
Net revenues from external customers	$	226,239	$	39,623	$	265,862
Segment profit		28,996		5,372		34,368
Segment assets		66,815		700		67,515

SIX MONTHS ENDED DECEMBER 31, 2002 (As Restated*)
Net revenue from external customers	$	206,252	$	40,183	$	246,435
Segment profit		24,993		4,515		29,508
Segment assets		59,942		1,086		61,028


	As of December 31,
	2003		2002
			*(As Restated)**
Segment assets	$	67,515	$	61,028
Cash		10,506		10,117
Inventories		11,998		12,074
Prepaid expenses and other		6,567		6,890
Property and equipment, net		40,646		45,873
Goodwill		41,167		41,167
Insurance deposits		8,495		8,240
Other assets		13,321		11,254

	$	200,215	$	196,643


	Three Months Ended December 31,
	2003			% of Net Revenue		2002			% of Net Revenue		$ Change			% Change
						*(As Restated)**
Net revenue	$	134,124		100.0	%	$	122,695		100.0	%	$	11,429		9.3	%

Operating expenses:
Payroll and employee benefits		70,052		52.2	%		67,483		55.0	%		2,569		3.8	%
Provision for doubtful accounts		21,849		16.3	%		19,862		16.2	%		1,987		10.0	%
Depreciation and amortization		2,835		2.1	%		3,186		2.6	%		(351	)	-11.0	%
Other operating expenses		29,581		22.1	%		26,619		21.7	%		2,962		11.1	%
Restructuring and other		—		0.0	%		(1,421	)	-1.2	%		1,421		-100.0	%

Total operating expenses		124,317		92.7	%		115,729		94.3	%		8,588		7.4	%

Operating income		9,807		7.3	%		6,966		5.7	%		2,841		40.8	%
Interest expense		(7,194	)	-5.4	%		(7,330	)	-6.0	%		136		-1.9	%
Interest income		22		0.0	%		22		0.0	%		—		0.0	%

Income (loss) from continuing operations before income taxes and minority interest		2,635		1.9	%		(342	)	-0.3	%		2,977
Income tax provision		(105	)	-0.1	%		(55	)	0.0	%		(50	)
Minority interest		(189	)	-0.1	%		(600	)	-0.5	%		411

Income (loss) from continuing operations		2,341		1.7	%		(997	)	-0.8	%		3,338
Income (loss) from discontinued operations		(166	)	-0.1	%		745		0.6	%		(911	)

Net income (loss)	$	2,175		1.6	%	$	(252	)	-0.2	%		2,427


	Three Months Ended December 31,		Transport Change	% Change
	2003	2002	Transport Change	% Change
Transports from continuing operations
Ambulance transports	281,212	262,571	18,641	7.1	%
Alternative transportation transports	26,484	24,500	1,984	8.1	%

Total transports from continuing operations	307,696	287,071	20,625	7.2	%


	Six Months Ended December 31,
	2003			% of Net Revenue		2002			% of Net Revenue		$ Change			% Change
						*(As Restated)**
Net revenue	$	265,862		100.0	%	$	246,435		100.0	%	$	19,427		7.9	%

Operating expenses:
Payroll and employee benefits		141,052		53.1	%		135,778		55.1	%		5,274		3.9	%
Provision for doubtful accounts		42,627		16.0	%		39,786		16.1	%		2,841		7.1	%
Depreciation and amortization		5,734		2.2	%		6,512		2.6	%		(778	)	-11.9	%
Other operating expenses		57,246		21.5	%		52,449		21.3	%		4,797		9.1	%
Restructuring and other		—		0.0	%		(1,421	)	-0.6	%		1,421		-100.0	%

Total operating expenses		246,659		92.8	%		233,104		94.5	%		13,555		5.8	%

Operating income		19,203		7.2	%		13,331		5.5	%		5,872		44.0	%
Interest expense		(15,208	)	-5.7	%		(13,241	)	-5.4	%		(1,967	)	14.9	%
Interest income		51		0.0	%		49		0.0	%		2		4.1	%

Income (loss) from continuing operations before income taxes and minority interest		4,046		1.5	%		139		0.1	%		3,907
Income tax provision		(195	)	-0.1	%		(110	)	0.0	%		(85	)
Minority interest		(463	)	-0.2	%		(1,478	)	-0.6	%		1,015

Income (loss) from continuing operations		3,388		1.2	%		(1,449	)	-0.5	%		4,837
Income (loss) from discontinued operations		(607	)	-0.2	%		13,950		5.7	%		(14,557	)

Net income (loss)	$	2,781		1.0	%	$	12,501		5.2	%		(9,720	)


	Six Months Ended December 31,		Transport Change	% Change
	2003	2002	Transport Change	% Change
Transports from continuing operations
Ambulance transports	556,288	530,559	25,729	4.8	%
Alternative transportation transports	50,262	50,175	87	0.2	%

Total transports from continuing operations	606,550	580,734	25,816	4.4	%


· 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



31.1		Certification Pursuant to Rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*

31.2		Certification Pursuant to Rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002*

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002*