<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>e-7714.txt
<DESCRIPTION>QUARTERLY REPORT FOR THE QTR ENDED 09/30/2001
<TEXT>
================================================================================
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.
================================================================================
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
2001 2000
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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)
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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)
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
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
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
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)
======= ======= ======= =======
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
FIRE AND
Three months ended September 30, 2001 AMBULANCE OTHER CORPORATE TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
18
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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.
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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
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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.
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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.
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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
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</DOCUMENT>