-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UB++vkSuEzUpj08whKQWq65aj+3q0lMEbpBBghyyY7aBLX4EvlXJjATfNBCVgjzP dvUIIe687Wqfw2VYsyVzBw== 0000950147-01-501869.txt : 20020410 0000950147-01-501869.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950147-01-501869 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22056 FILM NUMBER: 1787489 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 4809943886 10-Q 1 e-7714.txt QUARTERLY REPORT FOR THE QTR ENDED 09/30/2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-22056 RURAL/METRO CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 86-0746929 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8401 EAST INDIAN SCHOOL ROAD SCOTTSDALE, ARIZONA 85251 (Address of principal executive offices) (Zip Code) (480) 606-3886 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 12, 2001, there were 15,100,180 shares of Common Stock outstanding, exclusive of treasury shares held by the Registrant. ================================================================================ RURAL/METRO CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q Page ---- Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Comprehensive Loss 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Part II. Other Information Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND JUNE 30, 2001 (IN THOUSANDS) September 30, June 30, 2001 2001 --------- --------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 1,859 $ 8,699 Accounts receivable, net 105,419 103,260 Inventories 13,150 13,173 Prepaid expenses and other 5,104 5,192 --------- --------- Total current assets 125,532 130,324 --------- --------- PROPERTY AND EQUIPMENT, net 54,815 57,999 INTANGIBLE ASSETS, net 92,389 92,424 OTHER ASSETS 18,856 17,787 --------- --------- $ 291,592 $ 298,534 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 15,405 $ 12,915 Accrued liabilities 88,484 96,340 Current portion of long-term debt 293,892 294,439 --------- --------- Total current liabilities 397,781 403,694 --------- --------- LONG-TERM DEBT, net of current portion 1,383 1,286 NON-REFUNDABLE SUBSCRIPTION INCOME 15,652 15,701 --------- --------- Total liabilities 414,816 420,681 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 8,379 8,379 --------- --------- STOCKHOLDERS' DEFICIT Common stock 154 152 Additional paid-in capital 138,099 137,948 Accumulated deficit (268,591) (267,401) Cumulative translation adjustment (26) 14 Treasury stock (1,239) (1,239) --------- --------- Total stockholders' deficit (131,603) (130,526) --------- --------- $ 291,592 $ 298,534 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 3 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) Three Months ended September 30, -------------------------------- 2001 2000 --------- --------- REVENUE Ambulance services $ 100,261 $ 101,742 Fire protection services 15,957 15,724 Other 9,449 10,772 --------- --------- Total revenue 125,667 128,238 --------- --------- OPERATING EXPENSES Payroll and employee benefits 75,726 72,642 Provision for doubtful accounts 16,886 19,392 Depreciation 4,296 5,708 Amortization of intangibles 35 1,869 Other operating expenses 23,034 25,414 --------- --------- Total expenses 119,977 125,025 --------- --------- OPERATING INCOME 5,690 3,213 Interest expense, net 6,855 7,876 Other -- (489) --------- --------- LOSS BEFORE INCOME TAXES (1,165) (4,174) Provision for (benefit from) income taxes 25 (89) --------- --------- NET LOSS $ (1,190) $ (4,085) ========= ========= LOSS PER SHARE BASIC LOSS PER SHARE $ (0.08) $ (0.28) ========= ========= DILUTED LOSS PER SHARE $ (0.08) $ (0.28) ========= ========= AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 15,031 14,626 ========= ========= AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 15,031 14,626 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 4 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
2001 2000 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (1,190) $ (4,085) Adjustments to reconcile net loss to cash used in operations-- Depreciation and amortization 4,331 7,577 Amortization of gain on sale of real estate -- (26) (Gain) loss on sale of property and equipment 57 (270) Provision for doubtful accounts 16,886 19,392 Undistributed loss of minority shareholder -- (489) Amortization of discount on Senior Notes 6 6 Change in assets and liabilities --- Increase in accounts receivable (19,045) (14,441) (Increase) decrease in inventories 23 (805) (Increase) decrease in prepaid expenses and other 88 (587) Increase (decrease) in accounts payable 2,490 (825) Decrease in accrued liabilities and other liabilities (7,856) (8,743) Increase (decrease) in nonrefundable subscription income (49) 446 -------- -------- Net cash used in operating activities (4,259) (2,850) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Repayments on revolving credit facility, net (13) (500) Repayment of debt and capital lease obligations (443) (698) Issuance of common stock 153 -- -------- -------- Net cash used in financing activities (303) (1,198) -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Net proceeds from the disposition of clinic operations 75 -- Capital expenditures (1,501) (517) Proceeds from the sale of property and equipment 332 1,035 (Increase) decrease in other assets (1,144) 610 -------- -------- Net cash provided by (used in) investing activities (2,238) 1,128 -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (40) 1 -------- -------- DECREASE IN CASH (6,840) (2,919) CASH, beginning of period 8,699 10,287 -------- -------- CASH, end of period $ 1,859 $ 7,368 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (IN THOUSANDS) Three months ended September 30, -------------------------------- 2001 2000 -------- -------- NET LOSS $ (1,190) $ (4,085) Foreign currency translation adjustments (40) 1 -------- -------- COMPREHENSIVE LOSS $ (1,230) $ (4,084) ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 6 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 for complete financial statements. (1) INTERIM RESULTS In the opinion of management, the consolidated financial statements for the three-month periods ended September 30, 2001 and 2000 include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated financial position and results of operations. The results of operations for the three-month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results of operations for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2001. (2) CREDIT AGREEMENTS AND BORROWINGS The Company has received a compliance waiver, as amended, regarding the financial covenants contained in its revolving credit facility covering the periods from December 31, 1999 through December 3, 2001. The waiver, as amended, covers the representations and warranties related to no material adverse changes as well as the following financial covenants: the total debt leverage ratio, the total debt to total capitalization ratio and the fixed charge coverage ratio. The waiver (as amended through December 3, 2001) stipulates that no additional borrowings will be available to the Company through the end of the waiver period. In addition, the waiver (as amended through December 3, 2001) requires the Company (i) to engage certain financial advisors; (ii) to meet certain benchmarks for projected cash balances and expenditures; (iii) maintain positive consolidated operating income net of restructuring charges; (iv) to reduce the outstanding balance on the revolving credit facility by $1,250,000 no later than October 31, 2001; and (v) to reduce the outstanding balance on the revolving credit facility upon the attainment of certain cash balance thresholds. There is no assurance that the Company is in compliance with all of the conditions of the waiver. The Company has discussed with the lenders its failure to maintain positive operating income (net of restructuring charges), at June 30, 2001, as required under the waiver and the lenders have not asserted that the Company has failed to comply with any requirements under the waiver. Although the Company is not aware of any event of default under either the terms of the revolving credit facility (as a result of the waiver agreement) or the Company's $150 million 7 7/8% Senior Notes due 2008, and although there has been no acceleration of the repayment of the revolving credit facility or the 7 7/8% Senior Notes due 2008, the entire balance of these instruments has been reclassified as a current liability as of June 30, 2001 and September 30, 2001 in the accompanying financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 78 "Classification of Obligations that are Callable by the Creditor." As LIBOR contracts expired during March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest is payable monthly. During the periods covered by the waiver, as amended, the Company will accrue additional interest expense at a rate of 2.0% per annum on the 7 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) outstanding balance on the revolving credit facility unless certain pay down requirements are met during that period. The Company has recorded $4.5 million related to this additional interest expense for the period March 14, 2000 to September 30, 2001, $4.0 million of which remains in accrued liabilities at September 30, 2001. The most recent amendment to the waiver required that $1.25 million of principal be paid to the lenders. This payment was made on October 31, 2001. As of November 12, 2001, the outstanding balance on the revolving credit facility was $141.8 million with no availability on the facility. Also outstanding are $6.5 million in letters of credit issued under the revolving credit facility. The Company believes that an amendment to the revolving credit facility could substantially alter the terms and conditions of the revolving credit facility, including potentially higher interest rates, which could have a material adverse effect on the business, financial condition, cash flows, and results of operations of the Company. The Company's inability to successfully negotiate an amendment to the revolving credit facility could have a material adverse effect on the business, financial condition, cash flows, and results of operations of the Company (See Note 4). During March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes). The Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of the Company's domestic wholly-owned current and future subsidiaries. The financial statements presented below include the Consolidating Balance Sheets as of September 30, 2001 and June 30, 2001, the Consolidating Statements of Operations for the three months ended September 30, 2001 and 2000, and the Consolidating Statements of Cash Flows for the three months ended September 30, 2001 and 2000 of Rural/Metro Corporation (the Parent) and the guarantor subsidiaries (the Guarantors) and the subsidiaries which are not guarantors (the Non-guarantors). The Company has not presented separate financial statements and related disclosures for each of the Guarantor subsidiaries because the Company believes such information is inconsequential to the note holders. 8 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2001 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 90 $ 1,769 $ -- $ 1,859 Accounts receivable, net -- 96,317 9,102 -- 105,419 Inventories -- 13,069 81 -- 13,150 Prepaid expenses and other 531 3,877 696 -- 5,104 --------- --------- --------- --------- --------- Total current assets 531 113,353 11,648 -- 125,532 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT, net -- 54,607 208 -- 54,815 INTANGIBLE ASSETS, net -- 86,546 5,843 -- 92,389 DUE FROM (TO) AFFILIATES 286,314 (228,334) (57,980) -- -- OTHER ASSETS 2,099 15,161 1,596 -- 18,856 INVESTMENT IN SUBSIDIARIES (122,458) -- -- 122,458 -- --------- --------- --------- --------- --------- $ 166,486 $ 41,333 $ (38,685) $ 122,458 $ 291,592 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ -- $ 10,287 $ 5,118 $ -- $ 15,405 Accrued liabilities 5,227 69,607 13,650 -- 88,484 Current portion of long-term debt 292,862 778 252 -- 293,892 --------- --------- --------- --------- --------- Total current liabilities 298,089 80,672 19,020 -- 397,781 --------- --------- --------- --------- --------- LONG-TERM DEBT, net of current portion -- 1,374 9 -- 1,383 NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,636 16 -- 15,652 DEFERRED INCOME TAXES -- 1,164 (1,164) -- -- --------- --------- --------- --------- --------- Total liabilities 298,089 98,846 17,881 -- 414,816 --------- --------- --------- --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST -- -- -- 8,379 8,379 STOCKHOLDERS' DEFICIT Common stock 154 82 17 (99) 154 Additional paid-in capital 138,099 54,622 34,942 (89,564) 138,099 Accumulated deficit (268,591) (112,217) (91,499) 203,716 (268,591) Cumulative translation adjustment (26) -- (26) 26 (26) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' deficit (131,603) (57,513) (56,566) 114,079 (131,603) --------- --------- --------- --------- --------- $ 166,486 $ 41,333 $ (38,685) $ 122,458 $ 291,592 ========= ========= ========= ========= =========
9 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2001 (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated --------- --------- --------- --------- --------- ASSETS CURRENT ASSETS Cash $ -- $ 6,763 $ 1,936 $ -- $ 8,699 Accounts receivable, net -- 93,471 9,789 -- 103,260 Inventories -- 13,093 80 -- 13,173 Prepaid expenses and other 531 4,320 341 -- 5,192 --------- --------- --------- --------- --------- Total current assets 531 117,647 12,146 -- 130,324 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT, net -- 57,271 728 -- 57,999 INTANGIBLE ASSETS, net -- 86,573 5,851 -- 92,424 DUE FROM (TO) AFFILIATES 294,729 (235,817) (58,912) -- -- OTHER ASSETS 2,356 13,064 2,367 -- 17,787 INVESTMENT IN SUBSIDIARIES (127,702) -- -- 127,702 -- --------- --------- --------- --------- --------- $ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ -- $ 9,478 $ 3,437 $ -- $ 12,915 Accrued liabilities 7,571 73,069 15,700 -- 96,340 Current portion of long-term debt 292,869 1,315 255 -- 294,439 --------- --------- --------- --------- --------- Total current liabilities 300,440 83,862 19,392 -- 403,694 --------- --------- --------- --------- --------- LONG-TERM DEBT, net of current portion -- 1,272 14 -- 1,286 NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,701 -- -- 15,701 DEFERRED INCOME TAXES -- 1,164 (1,164) -- -- OTHER LIABILITIES -- -- -- -- -- --------- --------- --------- --------- --------- Total liabilities 300,440 101,999 18,242 -- 420,681 --------- --------- --------- --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST -- -- -- 8,379 8,379 --------- --------- --------- --------- --------- STOCKHOLDERS' DEFICIT Common stock 152 82 17 (99) 152 Additional paid-in capital 137,948 54,622 34,942 (89,564) 137,948 Accumulated deficit (267,401) (117,965) (91,035) 209,000 (267,401) Cumulative translation adjustment 14 -- 14 (14) 14 Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' deficit (130,526) (63,261) (56,062) 119,323 (130,526) --------- --------- --------- --------- --------- $ 169,914 $ 38,738 $ (37,820) $ 127,702 $ 298,534 ========= ========= ========= ========= =========
10 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 88,656 $ 11,605 $ -- $ 100,261 Fire protection services -- 15,574 383 -- 15,957 Other -- 9,363 86 -- 9,449 --------- --------- --------- --------- --------- Total revenue -- 113,593 12,074 -- 125,667 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 66,268 9,458 -- 75,726 Provision for doubtful accounts -- 16,461 425 -- 16,886 Depreciation -- 3,913 383 -- 4,296 Amortization of intangibles -- 27 8 -- 35 Other operating expenses -- 21,093 1,941 -- 23,034 --------- --------- --------- --------- --------- Total expenses -- 107,762 12,215 -- 119,977 --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) -- 5,831 (141) -- 5,690 Interest expense, net 6,473 63 319 -- 6,855 Other -- -- -- -- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (6,473) 5,768 (460) -- (1,165) Provision for income taxes -- 20 5 -- 25 --------- --------- --------- --------- --------- NET INCOME (LOSS) (6,473) 5,748 (465) -- (1,190) INCOME FROM WHOLLY-OWNED SUBSIDIARIES 5,283 -- -- (5,283) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ (1,190) $ 5,748 $ (465) $ (5,283) $ (1,190) ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- (40) -- (40) Comprehensive income from wholly-owned subsidiaries (40) -- -- 40 -- --------- --------- --------- --------- --------- COMPREHENSIVE LOSS $ (1,230) $ 5,748 $ (505) $ (5,243) $ (1,230) ========= ========= ========= ========= =========
11 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated --------- --------- --------- --------- --------- REVENUE Ambulance services $ -- $ 87,262 $ 14,480 $ -- $ 101,742 Fire protection services -- 15,444 280 -- 15,724 Other -- 9,248 1,524 -- 10,772 --------- --------- --------- --------- --------- Total revenue -- 111,954 16,284 -- 128,238 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 61,792 10,850 -- 72,642 Provision for doubtful accounts -- 18,245 1,147 -- 19,392 Depreciation -- 5,045 663 -- 5,708 Amortization of intangibles -- 1,265 604 -- 1,869 Other operating expenses -- 21,001 4,413 -- 25,414 --------- --------- --------- --------- --------- Total expenses -- 107,348 17,677 -- 125,025 --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) -- 4,606 (1,393) -- 3,213 Interest expense, net 7,568 (29) 337 -- 7,876 Other -- -- -- (489) (489) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (7,568) 4,635 (1,730) 489 (4,174) Benefit from income taxes -- -- (89) -- (89) --------- --------- --------- --------- --------- NET INCOME (LOSS) (7,568) 4,635 (1,641) 489 (4,085) INCOME FROM WHOLLY-OWNED SUBSIDIARIES 3,483 -- -- (3,483) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ (4,085) $ 4,635 $ (1,641) $ (2,994) $ (4,085) ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- 1 -- 1 Comprehensive income from wholly-owned subsidiaries 1 -- -- (1) -- --------- --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ (4,084) $ 4,635 $ (1,640) $ (2,995) $ (4,084) ========= ========= ========= ========= =========
12 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ (1,190) $ 5,748 $ (465) $ (5,283) $ (1,190) Adjustments to reconcile net income (loss) to cash provided by (used in) operations-- Depreciation and amortization -- 3,940 391 -- 4,331 (Gain) loss on sale of property and equipment -- 58 (1) -- 57 Provision for doubtful accounts -- 16,461 425 -- 16,886 Amortization of discount on Senior Notes 6 -- -- -- 6 Change in assets and liabilities --- (Increase) decrease in accounts receivable -- (19,307) 262 -- (19,045) (Increase) decrease in inventories -- 24 (1) -- 23 (Increase) decrease in prepaid expenses and other -- 443 (355) -- 88 (Increase) decrease in due to/from affiliates 3,171 (7,482) (932) 5,243 -- Increase in accounts payable -- 809 1,681 -- 2,490 Decrease in accrued liabilities and other liabilities (2,344) (3,462) (2,050) -- (7,856) Increase (decrease) in nonrefundable subscription income -- (65) 16 -- (49) -------- -------- -------- -------- -------- Net cash used in operating activities (357) (2,833) (1,029) (40) (4,259) -------- -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Repayments on revolving credit facility, net (13) -- -- -- (13) Repayment of debt and capital lease obligations -- (435) (8) -- (443) Issuance of common stock 153 -- -- -- 153 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 140 (435) (8) -- (303) -------- -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Net proceeds from the disposition of clinic operations -- -- 75 -- 75 Capital expenditures -- (1,638) 137 -- (1,501) Proceeds from the sale of property and equipment -- 331 1 -- 332 (Increase) decrease in other assets 257 (2,098) 697 -- (1,144) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities 257 (3,405) 910 -- (2,238) -------- -------- -------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (40) -- (40) 40 (40) -------- -------- -------- -------- -------- INCREASE (DECREASE) IN CASH -- (6,673) (167) -- (6,840) CASH, beginning of period -- 6,763 1,936 -- 8,699 -------- -------- -------- -------- -------- CASH, end of period $ -- $ 90 $ 1,769 $ -- $ 1,859 ======== ======== ======== ======== ========
13 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated --------- --------- --------- --------- --------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ (4,085) $ 4,635 $ (1,641) $ (2,994) $ (4,085) Adjustments to reconcile net income (loss) to cash provided by (used in) operations-- Depreciation and amortization -- 6,310 1,267 -- 7,577 Amortization of gain on sale of real estate -- (26) -- -- (26) (Gain) loss on sale of property and equipment -- (272) 2 -- (270) Provision for doubtful accounts -- 18,245 1,147 -- 19,392 Undistributed loss of minority shareholder -- -- -- (489) (489) Amortization of discount on Senior Notes 6 -- -- -- 6 Change in assets and liabilities --- (Increase) decrease in accounts receivable -- (14,469) 28 -- (14,441) (Increase) in inventories -- (717) (88) -- (805) (Increase) in prepaid expenses and other -- (527) (60) -- (587) (Increase) decrease in due to/from affiliates 7,010 (9,763) (731) 3,484 -- (Increase) decrease in accounts payable -- (1,082) 257 -- (825) Increase in accrued liabilities and other liabilities (2,689) (4,588) (1,466) -- (8,743) Increase (decrease) in nonrefundable subscription income -- 464 (18) -- 446 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities 242 (1,790) (1,303) 1 (2,850) --------- --------- --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Repayments on revolving credit facility, net (500) -- -- -- (500) Repayment of debt and capital lease obligations -- (636) (62) -- (698) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities (500) (636) (62) -- (1,198) --------- --------- --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures -- (555) 38 -- (517) Proceeds from the sale of property and equipment -- 1,035 -- -- 1,035 (Increase) decrease in other assets 257 (1,030) 1,383 -- 610 --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities 257 (550) 1,421 -- 1,128 --------- --------- --------- --------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE 1 -- 1 (1) 1 --------- --------- --------- --------- --------- (DECREASE) INCREASE IN CASH -- (2,976) 57 -- (2,919) CASH, beginning of period -- 9,035 1,252 -- 10,287 --------- --------- --------- --------- --------- CASH, end of period $ -- $ 6,059 $ 1,309 $ -- $ 7,368 ========= ========= ========= ========= =========
14 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) COMMITMENTS AND CONTINGENCIES Included in accrued liabilities in the accompanying consolidated balance sheets is $2.3 million at September 30, 2001 and $2.6 million at June 30, 2001 which is attributable to the settlement of a Medicaid audit and the accrual of a proposed settlement of a Medicare investigation. (4) GOING CONCERN The Company has incurred net losses of approximately $226.7 million and $1.2 million for the fiscal year ended June 30, 2001 and the three months ended September 30, 2001, respectively, and as a result is operating under a waiver of covenant compliance of financial covenants under the Company's revolving credit facility. The operating losses incurred during fiscal year 2001 include among other things, the write-off of impaired assets under SFAS No. 121 for certain domestic and Argentine assets, the Company's operational restructuring program involving the closure of certain service areas, the loss of two exclusive 911 contracts, the disposition of clinic operations in Latin America, changes in the estimates impacting our reserves for workers compensation and general liability matters, and additional provisions for doubtful accounts related to the closed or closing service areas and non-transport related receivables. Under the waiver of covenant compliance, the Company has agreed to restrict its access to additional funds under the revolving credit facility through December 3, 2001. Although no further amounts may be borrowed, the Company has been self-sufficient and has not needed to borrow any funds for the last 21 months, since February 2000. Despite recent net losses, the Company's restructuring efforts have enabled it to self-fund its obligations from existing cash reserves and operating cash flow since March 2000. During the last 21 months, the Company has self-funded cash for operations, capital expenditures, principal payments on its revolving credit facility, and regularly scheduled debt service and capital lease payments. The Company has been operating under a waiver of financial covenant compliance related to its revolving credit facility since February 2000 and has been actively working with its lenders since that time to obtain a long-term financing solution. The Company believes that its current business model and strategy can generate sufficient cash flow to provide a basis for a new long-term agreement with its current lenders or to restructure its debt. There can be no assurance that the Company's restructuring efforts will be successful. In addition, an amendment to the revolving credit facility could substantially alter the terms and conditions of the credit facility, including potentially higher interest rates, which could have a further adverse effect on the Company. Under current circumstances, the Company's ability to continue as a going concern depends upon the successful restructuring of the revolving credit facility as well as success of its restructuring program and the ability to return to profitability. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The Company has been advised by its independent public accountants that, if the Company has not successfully renegotiated an amendment of the revolving credit facility prior to the completion of their audit of the Company's financial statements for the fiscal year ending June 30, 2002, their auditor's report on those financial statements will continue to be qualified for this contingency. 15 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) RESTRUCTURING CHARGE AND OTHER During the fiscal year ended June 30, 2001, the Company recorded a pre-tax restructuring charge of $9.1 million associated with its restructuring program related to the closing or downsizing of certain service areas. This charge primarily included severance costs for approximately 250 employees, service area closing costs, and the write-off of goodwill and other impaired assets associated with service area reduction. At September 30, 2001, $4.3 million remains in accrued liabilities in the accompanying financial statements. The Company anticipates the remaining charges to be primarily comprised of severance and lease terminations through fiscal 2007. The usage of the restructuring reserves and the remaining accrual at September 30, 2001, are as follows (in thousands): Balance, June 30, 2001 $ 4,922 Severance costs (263) Lease termination costs (56) Write-off of impaired assets and other costs (317) ------- Balance, September 30, 2001 $ 4,286 ======= During the fiscal year ended June 30, 2000, the Company recorded pre-tax restructuring and other charges, exclusive of the additional provision for doubtful accounts, of approximately $43.3 million associated with its restructuring program related to the closing or downsizing of certain non-emergency service areas and reduction of corporate overhead. This charge primarily included severance costs for approximately 300 employees, service area closing costs, and the write-off of goodwill and other impaired assets associated with service area reduction. At September 30, 2001, approximately $484,000 remains in accrued liabilities in the accompanying consolidated financial statements. The Company anticipates the remaining charges to be primarily comprised of severance and lease terminations through fiscal 2002. The usage of the restructuring reserves and the remaining accrual at September 30, 2001, are as follows (in thousands): Balance, June 30, 2001 $ 1,002 Severance costs (207) Lease termination costs (311) ------- Balance, September 30, 2001 $ 484 ======= (6) CHANGE IN ACCOUNTING POLICY Effective January 1, 2001, the Company changed its methodology of determining the reserves related to general liability claims. This change was treated as a change in accounting estimate. The changing environment with respect to the rising cost of claims as well as the cost of litigation prompted a comprehensive review by management of detailed information from external advisors, historical settlement information and analysis of open claims which led to this change. Management believes the new method more closely approximates the potential outcome of each open claim as well as legal costs related to 16 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the administration of these claims. Additionally, reserves were set up to cover potential unknown claims based on historical occurrences of claims filed subsequent to the end of the policy year. The effect of this change was an additional $15.0 million of general liability expense, which was recorded in the three and nine-month periods ended March 31, 2001. (7) LOSS PER SHARE A reconciliation of the numerators and denominators (weighted average number of shares outstanding) of the basic and diluted loss per share computation for the three-month periods ended September 30, 2001 and 2000 is as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2001 Three Months Ended September 30, 2000 ------------------------------------- ------------------------------------- Loss Shares Per Share Loss Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ------- ------- ------- ------- ------- ------- Basic loss per share $(1,190) 15,031 $ (0.08) $(4,085) 14,626 $ (0.28) ======= ======= Effect of stock options -- -- -- -- ------- ------- ------- ------- Diluted loss per share $(1,190) 15,031 $ (0.08) $(4,085) 14,626 $ (0.28) ======= ======= ======= =======
As a result of anti-dilutive effects, approximately 342,000 common stock equivalents were not included in the computation of diluted loss per share for the three months ended September 30, 2000. (8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142, among other things, prohibits the amortization of goodwill and instead requires an annual assessment of goodwill impairment by applying a fair value based test. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles and reclassification of certain intangibles out of previously reported goodwill balances. SFAS No. 142 requires that any goodwill recorded in connection with an acquisition consummated on or after July 1, 2001 not be amortized, even if the statement is not adopted in its entirety at that time. In conjunction with early adoption provisions, the Company has chosen to adopt this standard effective July 1, 2001. The Company has until December 31, 2001 to complete the impairment tests. Any adjustments as a result of the initial implementation of SFAS No. 142 impairment tests will be recorded as a cumulative effect of a change in accounting principle and would result in a restatement of the quarterly results through September 30, 2001. The Company has not yet determined the amount of such adjustment, if any. The Company discontinued amortization of goodwill on July 1, 2001. The Company has net goodwill of approximately $91.3 million on its balance sheet at September 30, 2001. The Company recorded goodwill amortization of $1.8 million for the three months ended September 30, 2000. In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121 and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-- Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions." The Company is required to adopt SFAS No. 144 during the fiscal year ending June 30, 2003. The Company does not anticipate any material impact resulting from the adoption of SFAS No. 144. (9) SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of a business, for which separate financial information is available, that management regularly evaluates in deciding how to allocate resources and assess performance. The Company operates in two business segments: Ambulance and Fire and Other. The Company's reportable segments are strategic business units that offer different services. They are managed separately based on the fundamental differences in their operations. 17 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Ambulance segment includes emergency medical and general medical transport ambulance services provided to patients on a fee-for-service basis, on a non-refundable subscription basis, and through capitated contracts. The Ambulance segment also includes urgent home medical care and ambulance services provided under capitated service arrangements in Argentina. The Fire and Other segment includes the following services: fire protection and training, alternative transportation, home health care services, urgent and primary care in clinics, dispatch, fleet, and billing. The accounting policies of the operating segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements filed with the Form 10-K, as amended, for the fiscal year ended June 30, 2001. The Company defines segment profit (loss) as total revenue less total operating expenses and interest expense associated with the segment. The Company defines segment assets as the sum of net accounts receivable, inventory and net property and equipment associated with the segments. Information by operating segment is set forth below (in thousands):
FIRE AND Three months ended September 30, 2001 AMBULANCE OTHER CORPORATE TOTAL -------- -------- -------- -------- Net revenues from external customers $100,261 $ 25,406 $ -- $125,667 Segment profit (loss) $ (887) $ 3,144 $ (3,422) $ (1,165) Segment assets $149,978 $ 22,243 $ 1,163 $173,384 FIRE AND Three months ended September 30, 2000 AMBULANCE OTHER CORPORATE TOTAL -------- -------- -------- -------- Net revenues from external customers $101,742 $ 26,496 $ -- $128,238 Segment profits (loss) $ (2,598) $ 3,095 $ (5,160) $ (4,663) Segment assets $200,590 $ 36,411 $ 1,791 $238,792
18 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS Statements in this Report that are not historical facts are hereby identified as "forward looking statements" as that term is used under the securities laws. We caution readers that such "forward looking statements," including those relating to our future business prospects, working capital, accounts receivable collection, liquidity, cash flow, capital needs, operational results, compliance with debt facilities and debt restructuring prospects, wherever they appear in this Report or in other statements attributable to us, are necessary estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the "forward looking statements." You should consider such "forward looking statements" in light of various important factors, including those set forth below and others set forth from time to time in our reports and registration statements filed with the Securities and Exchange Commission. The health care industry in general and the ambulance industry in particular are in a state of significant change. This makes us susceptible to various factors that may affect future results such as the following: no assurance of successful integration and operation of acquired service providers; growth strategy and difficulty in maintaining growth; risks of leverage; revenue mix; dependence on certain business relationships; risks related to intangible assets; dependence on government and third party payers; risks related to fee-for-service contracts; possible adverse changes in reimbursement rates; impact of rate structures; possible negative effects of prospective health care reform; high utilization of services by customers under capitated service arrangements; competitive market forces; fluctuation in quarterly results; volatility of stock price; access to debt and equity capital; dependence on key personnel; and governmental rate regulation. 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 Report on Form 10-K, as amended, for the fiscal year ended June 30, 2001. INTRODUCTION We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls (911 emergency ambulance services) and non-emergency transport services (general transport services) to patients on a fee-for-service basis, on a non-refundable subscription fee basis and through capitated contracts. Per transport revenue depends on various factors, including the mix of rates between existing service areas and new service areas and the mix of activity between 911 emergency ambulance services and general medical transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts, or other agencies or on a non-refundable subscription fee basis to individual homeowners or commercial property owners. Domestic ambulance service fees are recorded net of Medicare, Medicaid, and other reimbursement limitations and are recognized when services are provided. Payments received from third-party payers represent a substantial portion of our ambulance service fee receipts. We establish an allowance for doubtful accounts based on credit risks applicable to certain types of payers, historical trends, and other relevant information. Provision for doubtful accounts is made for the expected difference between ambulance services fees charged and amounts actually collected. Our provision for doubtful accounts generally is higher with respect to collections to be derived from patients than for collections to be derived from third-party payers and generally is higher for 911 emergency ambulance services than for general ambulance transport services. 19 Because of the nature of our domestic ambulance services, it is necessary to respond to a number of calls, primarily 911 emergency ambulance service calls, which may not result in transports. Results of operations are discussed below on the basis of actual transports since transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of calls not resulting in transports varies substantially depending upon the mix of non-emergency ambulance and 911 emergency ambulance service calls in markets and is generally higher in service areas in which the calls are primarily 911 emergency ambulance service calls. Rates in our markets take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports. Revenue generated under our capitated service arrangements in Argentina is included in ambulance services revenue. Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, which is generally one year. Other revenue consists of revenue generated from our public/private alliance in San Diego, fees associated with alternative transportation, dispatch, fleet, billing, and home health care services and is recognized when the services are provided. Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel, and professional fees. We have historically experienced, and expect to continue to experience, seasonality in quarterly operating results. This seasonality has resulted from a number of factors, including relatively higher second and third fiscal quarter demand for transport services in our Arizona and Florida regions resulting from the greater winter populations in those regions. Also, our Argentine operations experience greater utilization of services by customers under capitated service arrangements in the fourth quarter, as compared to the other three quarters, when South America is in its winter season. Public health conditions affect our operations differently in different regions. For example, greater utilization of services by customers under capitated service arrangements decreases our operating income. The same conditions domestically, where we operate under fee-for-service arrangements, result in a greater number of transports, increasing our operating income. The loss for the three months ended September 30, 2001 was $1.2 million, or $0.08 per share as compared to a loss of $4.1 million, or $0.28 per share for the three months ended September 30, 2000. 20 THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 REVENUE Total revenue decreased $2.5 million, or 2.0%, from approximately $128.2 million for the three months ended September 30, 2000 to approximately $125.7 million for the three months ended September 30, 2001. Ambulance services revenue decreased approximately $1.4 million, or 1.5%, from approximately $101.7 million for the three months ended September 30, 2000 to $100.3 million for the three months ended September 30, 2001. Fire protection services revenue increased by approximately $0.3 million, or 1.9%, from approximately $15.7 million for the three months ended September 30, 2000 to approximately $16.0 million for the three months ended September 30, 2001. Other revenue decreased approximately $1.4 million, or 13.0%, from approximately $10.8 million for the three months ended September 30, 2000 to approximately $9.4 million for the three months ended September 30, 2001. The decrease in ambulance services revenue is primarily related to the approximate $1.1 million decrease in ambulance service revenue in our Latin American operations resulting from decreases in memberships under capitated service arrangements. The decrease in memberships was attributable to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. Domestic ambulance service revenue decreased approximately $0.3 million, or 0.3% from approximately $91.8 million for the three months ended September 30, 2000 to approximately $91.5 for the three months ended September 30, 2001. Approximately $2.0 million of the decrease is attributable to the closure of service areas during the first quarter of fiscal 2002. Approximately $1.6 million relates to the timing of fiscal 2001 closures. Additionally, there was a $1.2 million approximate decrease related to the loss of a contract in Lincoln, Nebraska. Offsetting these decreases was an approximate $1.5 million increase in revenue related to a 911 contract that began during the second quarter of fiscal 2001, as well as increases in service areas served by us during both periods. Domestic ambulance services revenue in areas served by us in both of the three-month periods ended September 30, 2001 and 2000 increased by approximately $3.0 million, or 3.4%. Total domestic ambulance transports decreased by 17,000, or 6.0%, from 282,000 for the three months ended September 30, 2000 to 265,000 for the three months ended September 30, 2001. These decreases are primarily due to the closures described above as well as the loss of the contract in Lincoln, Nebraska. Fire protection services revenue increased primarily due to rate and utilization increases for fire protection services of $0.3 million. Other revenue decreases are primarily due to the decrease in clinic operations revenue in our Latin American operations of approximately $1.4 million. OPERATING EXPENSES Payroll and employee benefit expenses increased $3.1 million, or 4.3%, from $72.6 million for the three months ended September 30, 2000 to $75.7 million for the three months ended September 30, 2001. Approximately $1.3 million of the increase relates to increased workers compensation costs including premiums and claims. Additionally, the increase is attributable to increases in wages in certain service areas due to the renegotiation of labor contracts. We expect these higher average labor costs to continue in the future, including the increased costs associated with accounts receivable collection and with Health Care Financing Administration, now renamed the Center for Medicare and Medicaid Services (HCFA/CMS) compliance. Payroll and employee benefits expense increased from 56.6% of total revenue for the three months ended September 30, 2000 to 60.2% of total revenue for the three months ended September 30, 2001. The provision for doubtful accounts decreased $2.5 million, or 12.9% from $19.4 million for the three months ended September 30, 2000 to $16.9 million for the three months ended September 30, 2001. This resulted in a decrease from 15.1% of total revenue for the three months ended September 30, 2000 to 13.4% of total 21 revenue for the three months ended September 30, 2001. The provision for doubtful accounts was 20.3% of domestic ambulance service revenue for the three months ended September 30, 2000 and 18.1% of domestic ambulance service revenue for the three months ended September 30, 2001. During fiscal 2002, we continue to increase our focus on revenue of higher quality by reducing the amount of non-emergency ambulance transports in selected service areas and have continued previously implemented initiatives to maximize the collection of our accounts receivable. Net accounts receivable on non-integrated collection systems currently represents 13.2% of total net accounts receivable at September 30, 2001. We will continue to review the benefits and timing of integrating our two non-integrated billing centers. Depreciation decreased $1.4 million, or 24.6%, from $5.7 million for the three months ended September 30, 2000 to $4.3 million for the three months ended September 30, 2001. The decrease is primarily due to the write-off of impaired assets during the fourth quarter of fiscal 2001 as well as the disposal of certain assets related to closed operations and a decrease in capital expenditures during the current period. Depreciation was 4.4% and 3.4% of total revenue for the three months ended September 30, 2000 and 2001, respectively. We have ceased amortizing goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Therefore, amortization of intangibles has decreased $1.9 million from $1.9 million for the three months ended September 30, 2000 to $35,000 for the three months ended September 30, 2001. Amortization of intangibles was 1.5% and 0.0% of total revenue for the three months ended September 30, 2000 and 2001, respectively. Other operating expenses decreased approximately $2.4 million, or 9.4%, from $25.4 million for the three months ended September 30, 2000 to $23.0 million for the three months ended September 30, 2001. The decrease is primarily due to an approximate $2.1 million decrease in other operating expenses related to our Latin American operations due to the reduction in revenue as described above. Other operating expenses decreased from 19.8% of total revenue for the three months ended September 30, 2000 to 18.3% of total revenue for the three months ended September 30, 2001. Effective January 1, 2001 we changed our methodology of determining reserves related to general liability claims. This change was treated as a change in accounting estimate. The changing environment with respect to the rising cost of claims as well as the cost of litigation prompted a comprehensive review by management of detailed information from external advisors, historical settlement information, and analysis of open claims which led to this change. Management believes the new method more closely approximates the potential outcome of each open claim as well as legal costs related to the administration of these claims. Additionally, reserves were set up to cover potential unknown claims based on historical occurrences of claims filed subsequent to the end of the policy year. Interest expense decreased $1.0 million, or 12.7%, from $7.9 million for the three months ended September 30, 2000 to $6.9 million for the three months ended September 30, 2001. This decrease was primarily caused by lower rates on the revolving credit facility as well as lower average debt balances. We recorded a tax provision of $25,000 for the three months ended September 30, 2001 compared to a tax benefit of $89,000 for the three months ended September 30, 2000. The effective tax rate is due to the impact of the valuation allowance and other permanent differences, consisting of goodwill write-offs and amortization. The permanent differences and the valuation allowance result in a reduction of the tax benefits which could otherwise be available in a loss year, and thus a reduction in the effective tax rate. A valuation allowance has been provided because we believe that the realizability of the net deferred tax asset does not meet the more likely than not criteria under SFAS No. 109 "Accounting for Income Taxes." 22 LIQUIDITY AND CAPITAL RESOURCES Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, issuance of senior notes, the sale of common stock through an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options. During the three months ended September 30, 2001, net cash used in operating activities was approximately $4.3 million resulting primarily from an increase in accounts receivable of $19.0 million, a decrease in accrued liabilities and other liabilities of $7.9 million and a net loss of $1.2 million offset by depreciation and amortization of $4.3 million and provision for doubtful accounts of $16.9 million. Net cash used in operating activities was $2.9 million for the three months ended September 30, 2000. Cash used in financing activities was approximately $0.3 million for the three months ended September 30, 2001, primarily due to repayments on the revolving credit facility and on other debt and capital lease obligations offset by proceeds from issuance of common stock. Cash used in financing activities was $1.2 million for the three months ended September 30, 2000. Cash used in investing activities was approximately $2.2 million for the three months ended September 30, 2001, primarily due to capital expenditures of $1.5 million and increases in other assets of $1.1 million offset by proceeds from the sale of property and equipment of $0.3 million. Cash provided by investing activities was $1.1 million for the three months ended September 30, 2000. Our gross accounts receivable as of September 30, 2001 and June 30, 2001 were approximately $164.5 million and $168.5 million, respectively. Our accounts receivable, net of the allowance for doubtful accounts, was $105.4 million and $103.3 million as of such dates, respectively. We believe that the increase in net accounts receivable is due to many factors including increased transport activity in certain service areas. The allowance for doubtful accounts decreased from approximately $65.2 million at June 30, 2001 to $59.1 million at September 30, 2001. The primary reason for this decrease is the write-off of uncollectible receivables offset by the current period provision for doubtful accounts. Because of continuing difficulties in the healthcare reimbursement environment, we have continued to place increased emphasis on increasing the quality of our revenue by exiting service areas or substantially reducing service, where it had become unprofitable to perform non-emergency transports because of low reimbursement rates or a high risk of non-reimbursement by payers. We have shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We have instituted mandatory comprehensive training for our paramedics and emergency medical technicians on new standards of documentation of ambulance run tickets. We believe that these measures and many other billing initiatives will help to enhance the quality of our billings, which will assist in mitigating the risk of denials by payers and will help to increase collections of bills from our private pay customers and thus improve the overall quality of our revenue and accounts receivable. We have a $143.0 million revolving credit facility that matures March 16, 2003. The credit facility is unsecured and is unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. Interest rates and availability under the revolving credit facility depend upon our company meeting certain financial covenants, including total debt leverage ratios, total debt to capitalization ratios, and fixed charge ratios. The revolving credit facility initially was priced at the greater of (a) the Base Rate (i.e. the greater of (i) the prime rate, (ii) the Federal Funds rate plus .5 percentage points plus the applicable margin, or (iii) a LIBOR-based rate. The LIBOR-based rate ranged from LIBOR plus 0.875 percentage points to LIBOR plus 1.75 percentage points. As discussed below, during March 2000, all borrowings become priced at prime rate plus 0.25 percentage points. At September 30, 2001, the weighted average interest rate on the revolving credit facility was 6.25%. Approximately $143.0 million was outstanding on the revolving credit facility at September 30, 2001. We have received a compliance waiver, as amended, regarding the financial covenants contained in our revolving credit 23 facility, which covers the periods from December 31, 1999 through December 3, 2001. The waiver, as amended, covers the representations and warranties related to no material adverse changes as well as the following financial covenants: the total debt leverage ratio, the total debt to total capitalization ratio, and the fixed charge coverage ratio. The waiver, as amended, provides, among other things, that no additional borrowings will be available to us through the end of the waiver period, December 3, 2001. There is no assurance that we are in compliance with all of the technical conditions of the waiver, as amended. As LIBOR contracts expired in March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest is payable monthly. During the period covered by the waiver, as amended, we are accruing additional interest expense at a rate of 2.0% per annum on the outstanding balance on the revolving credit facility unless certain pay down requirements are met during that period. We have recorded $4.5 million related to this additional interest expense for the period March 14, 2000 to September 30, 2001, $4.0 million of which remains in accrued liabilities at September 30, 2001. Also outstanding are $6.5 million in letters of credit issued under the revolving credit facility. We believe that an amendment to the revolving credit facility could substantially alter the terms and conditions of the revolving credit facility, including potentially higher interest rates, which could have a material adverse effect on our business, financial condition, cash flows, and results of operations. There can be no assurance that an amendment or restructuring of the revolving credit facility can be negotiated on satisfactory terms, or not at all. Although we are not aware of any event of default under either the terms of the revolving credit facility (as a result of the waiver agreement) or our $150 million 7 7/8% Senior Notes due 2008, and although there has been no acceleration of the repayment of the revolving credit facility or the 7 7/8% Senior Notes due 2008, the entire balance of these instruments has been reclassified as a current liability at September 30, 2001 and June 30, 2001 in the accompanying financial statements in accordance with SFAS No. 78 "Classification of Obligations that are Callable by the Creditor". This reclassification, together with significant losses incurred during fiscal 2000 and 2001, has resulted in our independent accountants modifying their fiscal year end audit report to include a statement that these uncertainties create substantial doubt about our ability to continue as a going concern. The existence of a going concern statement may make it more difficult to pursue additional capital through public or private debt or equity financings. Our inability to successfully negotiate an amendment to our revolving credit facility could have a material adverse effect on our ability to continue as a going concern. Our inability to successfully negotiate an amendment of the revolving credit facility could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Including the classification of entire outstanding balance under the revolving credit facility as a current liability at September 30, 2001, we had a working capital deficiency of $272.2 million, including cash of $1.9 million, compared to a working capital deficiency of $273.4 million, including cash of $8.7 million, at June 30, 2001. In February 1998, we entered into a $5.0 million capital equipment lease line of credit. The lease line of credit matures at varying dates through July 2003. The lease line of credit is priced at the higher of LIBOR plus 1.7% or the commercial paper rate plus 1.7%. At September 30, 2001 the weighted average interest rate was 5.3% on the lease line of credit. Approximately $790,000 was outstanding on this line of credit at September 30, 2001. In March 1998, we issued $150.0 million of notes. Interest under the notes is payable semi-annually on September 15 and March 15, and the notes are not callable until March 2003 subject to the terms of the indenture. We incurred expenses related to the offering of approximately $5.3 million and will amortize these costs over the life of the notes. We recorded a $258,000 discount on the notes and will amortize this discount over the life of the notes. Unamortized discount at September 30, 2001 was $165,000 and such amount is recorded as an offset to the current portion of long-term debt in the consolidated financial statements. 24 The notes are general unsecured obligations of our Company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. See Note 2 of notes to our Consolidated Financial Statements included in this Report. The notes contain certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations. Assuming that we receive continued waivers under our revolving credit facility (of which there can be no assurance), we expect that cash flow from operations and our existing cash reserves will be sufficient to meet our regularly scheduled debt service and our planned operating and capital needs for the twelve months subsequent to September 30, 2001. Through our restructuring program we have closed or downsized several locations that were negatively impacting our cash flow. In addition, we have significantly reduced our corporate overhead. We have improved the quality of revenue and have experienced an upward trend in daily cash collections. As noted above, we have received a series of waivers since February 2000 in relation to our noncompliance with financial covenants under our revolving credit facility. We are currently operating under a waiver that will expire on December 3, 2001. We will not be in compliance with these financial covenants on December 3, 2001, and there can be no assurance that we will continue to receive waivers from our lenders. If we fail to receive additional waivers from our lenders we will be in default under our revolving credit facility or the agreement for the senior notes or both. A default under the senior notes or our revolving 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 obtain additional waivers could have a material adverse effect on our ability to continue as a going concern. We have been actively working with the lenders under our revolving credit facility during the term of the covenant waivers to structure a long-term financing solution. In connection with these efforts, we have retained an investment-banking firm to assist us in evaluating available alternatives. We believe our current business model and strategy can generate sufficient cash flow to provide a basis for a new long-term agreement with our current lenders or to restructure our debt. However, there can be no assurance we will sustain our targeted levels of operating cash flow or that we can accomplish an arrangement with regard to our debt on terms acceptable to us, or at all. Any such arrangement may involve the conversion of all or a portion of our debt to equity or other similar transactions that could result in material and substantial dilution to existing stockholders. If we issue equity securities in connection with any such arrangement, the percentage ownership of our current stockholders will be materially reduced, and such equity securities may have rights, preferences, or privileges senior to our current stockholders. If we are unable to reach a long-term agreement with our lenders, our business, operating results, financial condition, and ability to continue as a going concern will be materially adversely affected. MEDICARE REIMBURSEMENT In January 1999, HCFA/CMS announced its intention to form a negotiated rule-making committee to create a new fee schedule for Medicare reimbursement of ambulance services. The committee convened in February 1999. In August 1999, HCFA/CMS announced that the implementation of the prospective fee schedule as well as the mandatory acceptance of assignment would be postponed to January 2001. HCFA/CMS also announced rules that became effective in February 1999, which require, among other things, that a physician's certification be obtained for certain ambulance transports. We have implemented a program to comply with these new rules. The proposed Medicare ambulance fee schedule and rule was published September 12, 2000 in the Federal Register, to be followed by a 60-day comment period. On November 30, 2000, HCFA/CMS notified Medicare carriers that it would not implement the proposed fee schedule and rules as scheduled on January 1, 2001. As of this filing, HCFA/CMS has not established an implementation date for the final fee schedule and rules. However, we have implemented a program to comply with the new rules which require that a physician's certification be obtained for certain ambulance transports. If implemented, these rules could result in contract renegotiations or other actions by us to offset any negative impact of 25 the proposed change in reimbursement policies that could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Although the final fee schedule and rules have been delayed, two requirements took effect January 1, 2001. Providers must use new HCFA/CMS Common Procedure Coding System (HCPCS) codes on all Medicare claims, with the exception of billing for mileage. Secondly, all Medicare claims must include the ZIP code of the point of patient pickup. Rural/Metro has implemented these two requirements into its Medicare billing protocol. The final outcome of the proposed rules and the effect of the prospective fee schedule are uncertain. However, changes in reimbursement policies, or other government action, together with the financial instability of private third-party payers and budget pressures on payer sources could influence the timing and, potentially, the ultimate 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 CPI, or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on our business, financial condition, cash flows, and results of operations. EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS Our results of operations for the periods discussed have not been affected significantly by inflation or foreign currency fluctuations. Our revenue from international operations is denominated primarily in the currency of the countries in which we operate. At September 30, 2001, our balance sheet reflects a $26,000 cumulative equity adjustment increase from foreign currency translation. Although we have not incurred any material exchange gains or losses to date, there can be no assurance that fluctuations in the currency exchange rates in the future will not have an adverse effect on our business, financial condition, cash flows, and results of operations. We do not currently engage in foreign currency hedging transactions. However, if we choose to expand our international operations, exposure to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward exchange contracts or engaging in similar hedging strategies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION. We face increased interest expenses associated with interest rate under certain debt. We entered into interest rate swap agreements to limit the effect of increases in the interest rates on floating rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The net cash amounts paid or received on the agreements were accrued and recognized as an adjustment to interest expense. In November 1998, we entered into an interest rate swap agreement that originally expired in November 2003 with a provision for the lending party to terminate the agreement in November 2000. The interest rate swap agreement effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating rate. The weighted average floating rate for the year ended June 30, 1999 was 5.2%. As a result of this swap agreement interest expense was reduced by approximately $106,000 during the year ended June 30, 1999. In June 1999, we terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount was amortized as a reduction of interest expense on a straight-line basis through November 2000. 26 RURAL/METRO CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION. ITEM 1 -- LEGAL PROCEEDINGS. From time to time, we are subject to litigation and regulatory investigations arising in the ordinary course of business. We believe that the resolutions of currently pending claims or legal proceedings are not expected to have a material adverse effect on our business, financial condition, cash flows and results of operations. However, we are unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, our insurance coverage may not be adequate to cover all liabilities arising out of such claims. In addition, there can be no assurance that HCFA/CMS or other regulatory agencies will not initiate additional investigations related to our business in the future. There can be no assurance that the resolution of any future litigation, either individually or in the aggregate, would not have a material adverse effect on our business, financial condition, cash flows, and results of operations. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.16(l) Employment Agreement by and between Jack Brucker and Rural/Metro Corporation, effective July 1, 2001 (b) Reports on Form 8-K Form 8-K filed August 9, 2001 relating to Press Release dated August 2, 2001 and the Sixth Amendment to the Provisional Waiver and Standstill Agreement dated as of August 1, 2001. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RURAL/METRO CORPORATION Dated: November 14, 2001 By: /s/ Jack E. Brucker ------------------------------------ Jack E. Brucker, President and Chief Executive Officer By: /s/ Randall L. Harmsen ------------------------------------ Randall L. Harmsen, Vice President of Finance and Principal Accounting Officer 28 EX-10.16.L 3 ex10-16l.txt JACK BRUCKER EMPLOYMENT AGREEMENT Exhibit 10.16(l) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into by and between JACK BRUCKER ("Executive") and RURAL/METRO CORPORATION, its subsidiaries, affiliates, joint ventures and partnerships ("Rural/Metro"). The Effective Date of this Agreement is July 1, 2001. RECITALS A. The Board of Directors of Rural/Metro believes it is in the best interests of Rural/Metro to employ Executive as the President and Chief Executive Officer of Rural/Metro. The Board of Directors believes that Executive has been, is and is expected to continue to be a key contributor to the success of the Company. Due to Executive's experience as the Chief Executive Officer, President and the former Chief Operating Officer of the Company, Executive has particular skills and knowledge that the Board of Directors believe is imperative to retain for the benefit of the Company, its customers and all of its financial stakeholders. B. Rural/Metro has decided to offer Executive an employment agreement, the terms and provisions of which are set forth below. Rural/Metro and Executive each desire to enter into this Agreement and, by doing so, mutually establish a meaningful commitment to each other based upon the terms and provisions herein. C. The parties desire that the employment relations in B's terms be comparable at all times to those in comparable situations and will review the terms from time to time for such purpose. -1- NOW, THEREFORE, IT IS HEREBY MUTUALLY AGREED AS FOLLOWS: 1. POSITION AND DUTIES. Executive will be employed as the President and Chief Executive Officer of Rural/Metro and shall report only to the Board of Directors of Rural/Metro (the "Board"). Executive shall perform the duties of his position, as determined by the Board, in accordance with the policies, practices and bylaws of Rural/Metro. Executive shall serve Rural/Metro faithfully, loyally, honestly and to the best of his ability. Executive will devote his best efforts to the performance of his duties for, and in the business and affairs of, Rural/Metro. Rural/Metro reserves the right, in its sole discretion, to change or modify Executive's position, title and duties during the term of this Agreement, subject to Executive's rights under Section 7. 2. COMPENSATION. As of the Effective Date, Executive's annual compensation will be $600,000 ("Base Salary"). Executive's Base Salary shall, subject to the discretion of the Board, be frozen at the Base Salary level above for the first two years, from the Effective Date until June 30, 2003. Executive's Base Salary will be paid in substantially equal periodic installments, as determined by Rural/Metro, and will be reviewed at least annually thereafter in accordance with Rural/Metro's executive compensation review policies and practices, all as determined by the Board, in its sole discretion. Rural/Metro shall also make a special payment to Executive as a signing bonus equal to $200,000, payable 50% by July 1, 2001, and 50% by July 1, 2002. -2- 3. MANAGEMENT INCENTIVE PROGRAM. Executive shall be eligible to participate each year in the Rural/Metro Management Incentive Program ("MIP") (or any other plan that is designated by the Board as replacing the MIP); provided that, for the year ending June 30, 2002, Executive shall receive no less than the maximum level permitted under the MIP for the year ended June 30, 2001. 4. STOCK OPTIONS; OTHER AGREEMENTS. Executive will be granted options to purchase 100,000 shares of Rural/Metro stock at its closing price on July 2, 2001 (the date on which the Board granted the options), with the terms and conditions of the options to be set forth in a separate Stock Option Agreement to be entered into by and between Executive and Rural/Metro. The Stock Option Agreement shall provide that the options are fully vested and exercisable. Subsequent awards of options to Executive will be considered at least annually by the Board, in its sole discretion. Nothing in this Agreement is intended to alter or modify any Stock Option Agreements previously entered into by the parties, which shall continue in full force and effect following the execution of this Agreement. 5. TERM AND TERMINATION. This Agreement will continue in full force and effect until it is terminated by the parties. This Agreement may be terminated in any of the following ways: (a) it may be renegotiated and replaced by a written agreement signed by both parties; (b) Rural/Metro may elect to terminate this Agreement with or without "Cause", as defined below; (c) Executive may elect to terminate this Agreement with or without "Good Reason", as defined below; or (d) either party may serve notice on the other of its desire to terminate this Agreement at the end of the "Initial Term" or any "Renewal Term". -3- The "Initial Term" of this Agreement shall expire by its terms 5 years from the Effective Date of this Agreement, unless sooner terminated in accordance with the provisions of this Agreement. This Agreement will be renewed at the end of the Initial Term for additional one-year periods (a "Renewal Term"), unless either party serves notice of its desire not to renew or of its desire to modify this Agreement on the other. Such notice must be given at least forty-five (45) days before the end of the Initial Term or the applicable Renewal Term. If Rural/Metro notifies Executive of its desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Rural/Metro does not have "Cause" to terminate this Agreement pursuant to paragraph 6A, Executive shall receive the Severance Benefits pursuant to paragraph 9. If Executive notifies Rural/Metro of his desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Executive has Good Reason to terminate this Agreement pursuant to paragraph 7A, Executive shall receive the Severance Benefits pursuant to paragraph 9. Executive also shall receive the Severance Benefits pursuant to paragraph 9 if Rural/Metro proposes to modify this Agreement in a manner that gives rise to Good Reason pursuant to paragraph 7A for Executive's termination of employment and Executive rejects such proposed modifications. Severance Benefits will not be payable pursuant to the preceding sentence if Rural/Metro rescinds the proposed modifications and offers Executive a new Agreement that does not include any proposed modifications that give rise to Good Reason for Executive's termination of employment. -4- 6. TERMINATION BY RURAL/METRO. A. TERMINATION FOR CAUSE. Rural/Metro may terminate this Agreement and Executive's employment for Cause at any time upon written notice. This means that Rural/Metro has the right to terminate the employment relationship for Cause at any time should there be Cause to do so. For purposes of this Agreement, "Cause" shall be limited to discharge resulting from a determination by the Board that Executive: (a) has been convicted of (or has pleaded guilty or no contest to) a felony involving dishonesty, fraud, theft or embezzlement; (b) has repeatedly failed or refused, after written notice from Rural/Metro, in a material respect to follow reasonable policies or directives established by Rural/Metro; (c) has willfully and persistently failed, after written notice from Rural/Metro, to attend to material duties or obligations imposed upon him under this Agreement; (d) has performed an act or failed to act, which, if he were prosecuted and convicted, would constitute a felony involving One Thousand Dollars ($1,000) or more of money or property of Rural/Metro; or (e) has misrepresented or concealed a material fact for purposes of securing employment with Rural/Metro or this Employment Agreement. The existence of "Cause" shall be determined by Rural/Metro's Board of Directors acting in good faith after prior notice to Executive and after providing Executive with an opportunity to be heard. Because Executive is in a position which involves great responsibilities, Rural/Metro is not required to utilize its progressive discipline policy. In addition, no generally applicable grievance policy shall apply to grievances by Executive regarding his employment relationship with Rural/Metro. -5- If this Agreement and Executive's employment is terminated for Cause, Executive shall receive no Severance Benefits. B. TERMINATION WITHOUT CAUSE. Rural/Metro also may terminate this Agreement and Executive's employment without Cause at any time. In the event this Agreement and Executive's employment are terminated by Rural/Metro without Cause, Executive shall receive the Severance Benefits pursuant to paragraph 9. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive's access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice to Executive. 7. TERMINATION BY EXECUTIVE. Executive may terminate this Agreement and his employment with or without "Good Reason" in accordance with the provisions of this paragraph 7. A. TERMINATION FOR GOOD REASON. Executive may terminate this Agreement and his employment for "Good Reason" by giving written notice to Rural/Metro within sixty (60) days, or such longer period as may be agreed to in writing by Rural/Metro, of Executive's receipt of notice of the occurrence of any event constituting "Good Reason", as described below. Executive shall have "Good Reason" to terminate this Agreement and his employment upon the occurrence of any of the following events: (a) Executive is assigned duties inconsistent with the positions, duties, -6- responsibility and status of the President and Chief Executive Officer of Rural/Metro; (b) Executive is required to relocate to an employment location that is more than fifty (50) miles from his current employment location (which the parties agree is Rural/Metro's present Scottsdale headquarters); (c) Executive's Base Salary rate is reduced to a level that is at least ten percent (10%) less than the salary paid to Executive during any prior calendar year, unless Executive has agreed to said reduction or unless Rural/Metro makes an across-the-board reduction that applies to all executives; or (d) the potential incentive compensation (or bonus) to which Executive may become entitled under the MIP at any level of performance by the Executive or Rural/Metro is reduced by seventy-five percent (75%) or more as compared to any prior year. Notwithstanding the above provisions, Executive shall not have "Good Reason" to terminate this Agreement and his employment if, within thirty (30) days of the written notice of Good Reason provided to Rural/Metro by Executive, Rural/Metro corrects, remedies or reverses any event which resulted in Good Reason. If Executive terminates this Agreement and his employment for Good Reason, Executive shall be entitled to receive Severance Benefits pursuant to paragraph 9. B. TERMINATION WITHOUT GOOD REASON. Executive also may terminate this Agreement and his employment without Good Reason at any time by giving sixty (60) days notice to Rural/Metro. If Executive terminates this Agreement and his employment without Good Reason, Executive shall not receive Severance Benefits pursuant to paragraph 9. If Executive terminates this Agreement and his employment without Good Reason and -7- for reasons other than health considerations, Executive shall pay Rural/Metro in equal monthly installments a sum equal to the net Base Salary (after withholdings and deductions) received by Executive during the period equal to the greater of (i) 2 years preceding termination of employment or (ii) 5 years minus the number of days between the Effective Date and the effective date of termination of employment. C. ADMINISTRATIVE LEAVE. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive's access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice of termination by Executive pursuant to paragraph 7A or 7B. 8. DEATH OR DISABILITY. This Agreement will terminate automatically on Executive's death. Any compensation or other amounts due to Executive for services rendered prior to his death shall be paid to Executive's surviving spouse, or if Executive does not leave a surviving spouse, to Executive's estate. No other benefits shall be payable to Executive's heirs pursuant to this Agreement, but amounts may be payable pursuant to any life insurance or other benefit plans maintained by Rural/Metro. In the event Executive becomes "Disabled", Executive's employment hereunder and Rural/Metro's obligation to pay Executive's Base Salary (less any amounts payable to Executive pursuant to any long-term disability insurance policy paid for by Rural/Metro) shall continue for a period of six (6) months from the date as of which Executive is determined to have become Disabled, at -8- which point, Executive's employment hereunder shall automatically cease and terminate. Executive shall be considered "Disabled" or to be suffering from a "Disability" for purposes of this paragraph 8 if Executive is unable, after any reasonable accommodations required by the Americans with Disabilities Act or other applicable law, to perform the essential functions of his position because of a physical or mental impairment. In the absence of agreement between Rural/Metro and Executive as to whether Executive is Disabled or suffering from a Disability (and the date as of which Executive became Disabled) will be determined by a licensed physician selected by Rural/Metro. If a licensed physician selected by Executive disagrees with the determination of the physician selected by Rural/Metro, the two (2) physicians shall select a third (3rd) physician. The decision of the third (3rd) physician concerning Executive's Disability then shall be binding and conclusive on all interested parties. 9. SEVERANCE BENEFITS. If during the Initial Term or any Renewal Term, this Agreement and Executive's employment are terminated without Cause by Rural/Metro pursuant to paragraph 6B prior to the last day of the Initial Term or any Renewal Term, or if Executive elects to terminate this Agreement for Good Reason pursuant to paragraph 7A, Executive shall receive the "Severance Benefits" provided by this paragraph. To the extent provided in paragraph 5, Executive also shall receive the Severance Benefits if this Agreement is not renewed. In addition, Executive also shall receive the Severance Benefits if his employment is terminated due to Disability pursuant to paragraph 8. The Severance Benefits shall begin immediately following the effective date of termination of employment and, except as otherwise provided herein, will -9- continue to be payable for a period (the "Benefit Period") equal to the greater of (i) 2 years or (ii) 5 years minus the number of days between the Effective Date and the effective date of termination of employment. The Executive's Severance Benefits shall consist of the continuation of the Executive's then Base Salary for the Benefit Period, which shall be paid in lieu of any accrued sick leave, vacation, etc. The Severance Benefits also shall consist of the continuation, for the Benefit Period, of any health, life, disability, or other insurance benefits that Executive was receiving as of his last day of active employment. If a particular insurance benefit may not be continued for any reason, Rural/Metro shall pay a "Benefit Allowance" to the Executive. The "Benefit Allowance" will equal 145% of the cost to Rural/Metro of providing the unavailable insurance benefit to a similarly situated employee. The Benefit Allowance shall be paid on a monthly basis or in a single lump sum. The cost of providing the unavailable benefit to a similarly situated employee and whether the Benefit Allowance will be paid in monthly installments or in a lump sum will be determined by Rural/Metro in the exercise of its discretion. If Executive voluntarily terminates this Agreement and his employment without Good Reason prior to the end of the Initial Term or any Renewal Term, or if Rural/Metro terminates the Agreement and Executive's employment for Cause, no Severance Benefits shall be paid to Executive. No Severance Benefits are payable in the event of Executive's death while in the active employ of Rural/Metro. Severance Benefits will cease if Executive elects to forgo future Severance Benefits pursuant to paragraph 12F in order to avoid any further restrictions on his ability to engage in a competing business or to solicit -10- employees or clients. If Executive makes an election pursuant to paragraph 12F, the Severance Benefits will cease as of the effective date of the election. As a general rule, notwithstanding any contrary provision in any Stock Option Agreement, Executive will not be allowed to exercise any options following the effective date of an election made pursuant to paragraph 12F. Severance Benefits also shall immediately cease if Executive commits a material violation of any of the terms of this Agreement relating to confidentiality and non-disclosure, as set forth in paragraph 11, or the Covenant-Not-To-Compete, as set forth in paragraph 12. Only material violations will result in the loss of Severance Benefits. In addition, if a violation, even if material, is one that may be cured, the violation will not be considered to be material unless Executive fails to cure said violation within thirty (30) days after receiving written notice of said violation from Rural/Metro or unless Executive repeats said violation at any time after receiving said notice. The payment of Severance Benefits shall not be affected by whether Executive seeks or obtains other employment. Executive shall have no obligation to seek or obtain other employment and Executive's Severance Benefits shall not be impacted by Executive's failure to "mitigate." In order to receive the Severance Benefits, Executive must execute any release reasonably requested by Rural/Metro of claims that Executive may have in connection with his employment with Rural/Metro. -11- 10. BENEFITS. A. BENEFIT PLANS, INSURANCE, OPTIONS, ETC. Executive will be entitled to participate in any benefit plans, including, but not limited to, retirement plans, stock option plans, disability plans, life insurance plans and health and dental plans available to other Rural/Metro executive employees, subject to any restrictions (including waiting periods) specified in said plans. B. VACATION. Executive is entitled to four (4) weeks of paid vacation per calendar year, with such vacation to be scheduled and taken in accordance with Rural/Metro's standard vacation policies. If Executive does not take the full vacation available in any year, the unused vacation may not be carried over to the next calendar year, and Executive will not be compensated for it. 11. CONFIDENTIALITY AND NON-DISCLOSURE. During the course of his employment, Executive will become exposed to a substantial amount of confidential and proprietary information, including, but not limited to financial information, annual reports, audited and unaudited financial reports, operational budgets and strategies, methods of operation, customer lists, strategic plans, business plans, marketing plans and strategies, new business strategies, merger and acquisition strategies, management systems programs, computer systems, personnel and compensation information and payroll data, and other such reports, documents or information (collectively the "Confidential and Proprietary Information"). In the event his employment is terminated by either party for any reason, Executive promises that he will not take with him any copies of such Confidential and Proprietary Information in any -12- form, format, or manner whatsoever (including computer print-outs, computer tapes, floppy disks, CD-ROMs, etc.) nor will he disclose the same in whole or in part to any person or entity, in any manner either directly or indirectly. Excluded from this Agreement is information that is already disclosed to third parties and is in the public domain or that Rural/Metro consents to be disclosed, with such consent to be in writing. The provisions of this paragraph shall survive the termination of this Agreement. 12. COVENANT-NOT-TO-COMPETE. A. INTERESTS TO BE PROTECTED. The parties acknowledge that during the term of his employment, Executive will perform essential services for Rural/Metro, its employees and shareholders, and for clients of Rural/Metro. Therefore, Executive will be given an opportunity to meet, work with and develop close working relationships with Rural/Metro's clients on a first-hand basis and will gain valuable insight as to the clients' operations, personnel and need for services. In addition, Executive will be exposed to, have access to, and be required to work with, a considerable amount of Rural/Metro's Confidential and Proprietary Information. The parties also expressly recognize and acknowledge that the personnel of Rural/Metro have been trained by, and are valuable to Rural/Metro, and that if Rural/Metro must hire new personnel or retrain existing personnel to fill vacancies it will incur substantial expense in recruiting and training such personnel. The parties expressly recognize that should Executive compete with Rural/Metro in any manner whatsoever, it could seriously impair the goodwill and diminish the value of Rural/Metro's business. -13- The parties acknowledge that this covenant has an extended duration; however, they agree that this covenant is reasonable and it is necessary for the protection of Rural/Metro, its shareholders and employees. For these and other reasons, and the fact that there are many other employment opportunities available to Executive if he should terminate, the parties are in full and complete agreement that the following restrictive covenants (which together are referred to as the "Covenant-Not-To-Compete") are fair and reasonable and are freely, voluntarily and knowingly entered into. Further, each party has been given the opportunity to consult with independent legal counsel before entering into this Agreement. B. DEVOTION TO EMPLOYMENT. Executive shall devote substantially all his business time and efforts to the performance of his duties on behalf of Rural/Metro. During his term of employment, Executive shall not at any time or place or to any extent whatsoever, either directly or indirectly, without the express written consent of Rural/Metro, engage in any outside employment, or in any activity competitive with or adverse to Rural/Metro's business, practice or affairs, whether alone or as partner, officer, director, employee, shareholder of any corporation or as a trustee, fiduciary, consultant or other representative. This is not intended to prohibit Executive from engaging in nonprofessional activities such as personal investments or conducting to a reasonable extent private business affairs which may include other boards of directors' activity, as long as they do not conflict with Rural/Metro. Participation to a reasonable extent in civic, social or community activities is encouraged. -14- C. NON-SOLICITATION OF CLIENTS. During the term of Executive's employment with Rural/Metro and for a period, after the termination of employment with Rural/Metro, equal to the greater of (i) 2 years or (ii) 5 years minus the number of days between the Effective Date and the effective date of termination of employment (the "Non-Compete Period"), regardless of who initiates the termination and for whatever reason, Executive shall not directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, call upon, contact, encourage, handle or solicit client(s) of Rural/Metro with whom he has worked as an employee of Rural/Metro at any time prior to termination, or at the time of termination, for the purpose of soliciting or selling such customer the same, similar, or related services that he provided on behalf of Rural/Metro. D. NON-SOLICITATION OF EMPLOYEES. During the term of Executive's employment with Rural/Metro and for the Non-Compete Period, regardless of who initiates the termination and for any reason, Executive shall not knowingly, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, seek to hire, and/or hire any of Rural/Metro's personnel or employees for the purpose of having such employee engage in services that are the same, similar or related to the services that such employee provided for Rural/Metro. E. COMPETING BUSINESS. During the term of this Agreement and for the Non-Compete Period, -15- regardless of who initiates the termination and for any reason, Executive shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, engage in the same or similar business as Rural/Metro, which would be in direct competition with any Rural/Metro line of business, in any geographical service area where Rural/Metro is engaged in business, or was considering engaging in business at any time prior to the termination or at time of termination. For the purposes of this provision, the term "competition" shall mean directly or indirectly engaging in or having a substantial interest in a business or operation which is, or will be, performing the same services provided by Rural/Metro. F. ELECTION TO SHORTEN PERIOD. Executive may elect to shorten the Non-Compete Period referred to in subparagraphs C, D and E to any period of at least twelve (12) months. In order to make this election, Executive must provide Rural/Metro with written notice at least sixty (60) days prior to the expiration of the shortened period. As provided in paragraph 9, if Executive makes this election, any Severance Benefits provided by paragraph 9 will be discontinued as of the effective date of the election. G. AUTOMATIC REDUCTION OF PERIOD. The Non-Compete Period referred to in subparagraphs C, D and E will be shortened to twelve (12) months if Executive is not entitled to receive Severance Benefits pursuant to paragraph 9 at the time of his termination or employment. -16- H. JUDICIAL AMENDMENT. If the scope of any provision of this Agreement is found by the Court to be too broad to permit enforcement to its full extent, then such provision shall be enforced to the maximum extent permitted by law. The parties agree that the scope of any provision of this Agreement may be modified by a judge in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. If any provision of this Agreement is found to be invalid or unenforceable for any reason, it shall not affect the validity of the remaining provisions of this Agreement. I. INJUNCTIVE RELIEF, DAMAGES AND FORFEITURE. Due to the nature of Executive's position with Rural/Metro, and with full realization that a violation of this Agreement will cause immediate and irreparable injury and damage, which is not readily measurable, and to protect Rural/Metro's interests, Executive understands and agrees that in addition to instituting legal proceedings to recover damages resulting from a breach of this Agreement, Rural/Metro may seek to enforce this Agreement with an action for injunctive relief, to cease or prevent any actual or threatened violation of this Agreement on the part of Executive. J. SURVIVAL. The provisions of this paragraph 12 shall survive the termination of this Agreement. 13. DEFERRAL OF AMOUNTS PAYABLE UNDER THIS AGREEMENT. A payment due pursuant to this Agreement or the MIP may be deferred if and to the extent that the payment does not satisfy the requirements to be "qualified performance-based compensation" (as such term is defined by the -17- regulations issued under Section 162(m) of the Internal Revenue Code of 1986 (the "Code")) and when combined with all other payments received during the year that are subject to the limitations on deductibility under Section 162(m) of the Code, the payment exceeds the limitations on deductibility under Section 162(m) of the Code. The deferral of payments shall be in the discretion of the Compensation Committee of Rural/Metro, and shall be made pursuant to a Deferred Compensation Agreement or Plan acceptable to Rural/Metro and Executive. Such deferred amounts, with interest at the rate of 8% per annum, shall be paid as soon as possible but in no event later than the sixtieth (60th) day after the end of the next succeeding calendar year, provided that such payment, when combined with any other payments subject to the Section 162(m) limitations received during the year, does not exceed the limitations on deductibility under Section 162(m) of the Code. If the payments in such succeeding calendar year exceed the limitations on deductibility under Section 162(m) of the Code, such payments shall continue to be deferred to the next succeeding year. The above procedure shall be repeated until such payments can be paid without exceeding the limitation on deductibility under Section 162(m) of the Code. 14. BUSINESS EXPENSES. Rural/Metro will reimburse Executive for any and all necessary, customary, and usual expenses, properly receipted in accordance with Rural/Metro's policies, incurred by Executive on behalf of Rural/Metro. 15. AMENDMENTS. This Agreement, the Executive's Stock Option Agreements and the Executive's Change of Control Agreement constitute the entire agreement between -18- the parties as to the subject matter hereof. Accordingly, there are no side agreements or verbal agreements other than those which are stated above. Any amendment, modification or change in this Agreement must be done so in writing and signed by both parties. 16. SEVERABILITY. In the event a court or arbitrator declares that any provision of this Agreement is invalid or unenforceable, it shall not affect or invalidate any of the remaining provisions. Further, the court shall have the authority to re-write that portion of the Agreement it deems unenforceable, to make it enforceable. 17. GOVERNING LAW. The law of the State of Arizona shall govern the interpretation and application of all of the provisions of this Agreement. 18. INDEMNITY. Executive shall be indemnified in his position to the fullest extent permitted or required by the laws of the State of Delaware. 19. DISPUTE RESOLUTION. A. MEDIATION. Any and all disputes arising under, pertaining to or touching upon this Agreement or the statutory rights or obligations of either party hereto, shall, if not settled by negotiation, be subject to non-binding mediation before an independent mediator selected by the parties pursuant to paragraph 19D. Notwithstanding the foregoing, both Executive and Rural/Metro may -19- seek preliminary judicial relief if such action is necessary to avoid irreparable damage during the pendency of the proceedings described in this paragraph 19. Any demand for mediation shall be made in writing and served upon the other party to the dispute, by certified mail, return receipt requested, at the business address of Rural/Metro, or at the last known residence address of Executive, respectively. The demand shall set forth with reasonable specificity the basis of the dispute and the relief sought. The mediation hearing will occur at a time and place convenient to the parties in Maricopa County, Arizona, within thirty (30) days of the date of selection or appointment of the mediator. B. ARBITRATION. In the event that the dispute is not settled through mediation, the parties shall then proceed to binding arbitration before a single independent arbitrator selected pursuant to paragraph 19D. The mediator shall not serve as arbitrator. TO THE EXTENT ALLOWABLE UNDER APPLICABLE LAW, ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, BREACH OF CONTRACT OR POLICY, OR EMPLOYMENT TORT COMMITTED BY RURAL/METRO OR A REPRESENTATIVE OF RURAL/METRO, INCLUDING CLAIMS OF VIOLATIONS OF FEDERAL OR STATE DISCRIMINATION STATUTES OR PUBLIC POLICY, SHALL BE RESOLVED PURSUANT TO THIS POLICY AND THERE SHALL BE NO RECOURSE TO COURT, WITH OR WITHOUT A JURY TRIAL. The arbitration hearing shall occur at a time and place convenient to the parties in Maricopa County, Arizona, within thirty (30) days of selection or appointment of the arbitrator. If Rural/Metro has adopted a policy that is applicable to arbitrations with executives, the arbitration shall be conducted -20- in accordance with said policy to the extent that the policy is consistent with this Agreement and the Federal Arbitration Act, 9 U.S.C. "" 1-16. If no such policy has been adopted, the arbitration shall be governed by the National Rules for the Resolution of Employment Disputes of AAA in effect on the date of the first notice of demand for arbitration. The arbitrator shall issue written findings of fact and conclusions of law, and an award, within fifteen (15) days of the date of the hearing unless the parties otherwise agree. C. DAMAGES. In cases of breach of contract or policy, damages shall be limited to contract damages. In cases of discrimination claims prohibited by statute, the arbitrator may direct payment consistent with the applicable statute. In cases of employment tort, the arbitrator may award punitive damages if proved by clear and convincing evidence. The arbitrator may award fees to the prevailing party and assess costs of the arbitration to the non-prevailing party. Issues of procedure, arbitrability, or confirmation of award shall be governed by the Federal Arbitration Act, 9 U.S.C. "" 1-16, except that Court review of the arbitrator's award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury. D. SELECTION OF MEDIATORS OR ARBITRATORS. The parties shall select the mediator or arbitrator from a panel list made available by the AAA. If the parties are unable to agree to a mediator or arbitrator within ten (10) days of receipt of a demand for mediation or arbitration, the mediator or arbitrator will be chosen by alternatively striking from a list of five (5) mediators or arbitrators obtained by Rural/Metro from AAA. Executive shall have the first strike. -21- IN WITNESS WHEREOF, Rural/Metro and Executive have executed this Agreement on this ninth day of July, 2001. EXECUTIVE RURAL/METRO CORPORATION /s/ Jack Brucker By: /s/ Cor Clement - ------------------------------------ ------------------------------------ Jack Brucker Cor Clement Chairman, Board of Directors -22- -----END PRIVACY-ENHANCED MESSAGE-----