10-Q 1 e-9200.txt QUARTERLY REPORT FOR THE QTR ENDED 9/30/02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-22056 RURAL/METRO CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 86-0746929 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8401 EAST INDIAN SCHOOL ROAD SCOTTSDALE, ARIZONA 85251 (Address of principal executive offices) (Zip Code) (480) 606-3886 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [ ] At November 8, 2002, there were 16,140,861 shares of Common Stock outstanding, exclusive of treasury shares held by the Registrant. RURAL/METRO CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 Page ---- Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheet 4 Consolidated Statement of Operations and Comprehensive Income (Loss) 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 25 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 42 Item 4. Controls and Procedures 42 Part II. Other Information Item 1. Legal Proceedings 42 Item 2. Changes in Securities and Use of Proceeds 43 Item 6. Exhibits and Reports on Form 8-K 43 Signatures 44 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002 AND JUNE 30, 2002 (IN THOUSANDS) SEPTEMBER 30, JUNE 30, 2002 2002 --------- --------- (UNAUDITED) ASSETS CURRENT ASSETS Cash ............................................... $ 4,417 $ 9,828 Accounts receivable, net ........................... 97,736 99,115 Inventories ........................................ 11,666 12,220 Prepaid expenses and other ......................... 8,750 9,015 --------- --------- Total current assets ..................... 122,569 130,178 PROPERTY AND EQUIPMENT, net ........................ 46,524 48,532 GOODWILL ........................................... 41,167 41,244 OTHER ASSETS ....................................... 23,703 17,484 --------- --------- $ 233,963 $ 237,438 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable ................................... $ 10,135 $ 11,961 Accrued liabilities ................................ 53,934 73,719 Deferred subscription fees ......................... 15,632 15,409 Current portion of long-term debt .................. 1,543 1,633 --------- --------- Total current liabilities ................ 81,244 102,722 LONG-TERM DEBT, net of current portion ............. 306,288 298,529 OTHER LIABILITIES .................................. 408 477 DEFERRED INCOME TAXES .............................. 650 650 --------- --------- Total liabilities ........................ 388,590 402,378 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST .................................. 379 379 --------- --------- REDEEMABLE PREFERRED STOCK ......................... 4,189 -- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock ....................................... 164 159 Additional paid-in capital ......................... 138,760 138,470 Accumulated deficit ................................ (296,880) (313,025) Accumulated other comprehensive income (loss) ...... -- 10,316 Treasury stock ..................................... (1,239) (1,239) --------- --------- Total stockholders' equity (deficit) ..... (159,195) (165,319) --------- --------- $ 233,963 $ 237,438 ========= ========= See accompanying notes 3 RURAL/METRO CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 --------- --------- NET REVENUE .......................................................... $ 125,565 $ 116,474 --------- --------- OPERATING EXPENSES Payroll and employee benefits ...................................... 71,112 68,321 Provision for doubtful accounts .................................... 18,725 16,738 Depreciation and amortization ...................................... 3,440 4,031 Other operating expenses ........................................... 22,534 21,530 --------- --------- Total operating expenses ..................................... 115,811 110,620 --------- --------- OPERATING INCOME ..................................................... 9,754 5,854 Interest expense, net ................................................ (5,886) (6,824) --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................................ 3,868 (970) INCOME TAX PROVISION ................................................. (55) (20) --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ................ 3,813 (990) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Includes gain on the disposition of Latin American operations of $12,488 in 2002) ................................................ 12,332 (200) --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................................ 16,145 (1,190) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................... -- (49,513) --------- --------- NET INCOME (LOSS) .................................................... $ 16,145 $ (50,703) ========= ========= Cumulative translation adjustments ................................... (242) (40) Recognition of cumulative translation adjustment in connection with the disposition of Latin American operations .................. (10,074) -- --------- --------- COMPREHENSIVE INCOME (LOSS) .......................................... $ 5,829 $ (50,743) ========= ========= INCOME (LOSS) PER SHARE Basic -- Income (loss) from continuing operations before cumulative effect of change in accounting principle ............ $ 0.24 $ (0.07) Income (loss) from discontinued operations ....................... 0.77 (0.01) --------- --------- Income (loss) before cumulative effect of change in accounting principle ........................................ 1.01 (0.08) Cumulative effect of change in accounting principle .............. -- (3.29) --------- --------- Net income (loss) .................................................... $ 1.01 $ (3.37) ========= ========= Diluted -- Income (loss) from continuing operations before cumulative effect of change in accounting principle ............ $ 0.21 $ (0.07) Income (loss) from discontinued operations ....................... 0.70 (0.01) --------- --------- Income (loss) before cumulative effect of change in accounting principle ........................................... 0.91 (0.08) Cumulative effect of change in accounting principle .............. -- (3.29) --------- --------- Net income (loss) .................................................... $ 0.91 $ (3.37) ========= ========= AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC ........................ 15,994 15,031 ========= ========= AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED ...................... 17,778 15,031 ========= =========
See accompanying notes 4 RURAL/METRO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (IN THOUSANDS)
2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ......................................................... $ 16,145 $(50,703) Adjustments to reconcile net income (loss) to cash used in operating activities -- Non-cash portion of gain on disposition of Latin American operations .... (13,732) -- Cumulative effect of change in accounting principle ..................... -- 49,513 Depreciation and amortization ........................................... 3,448 4,331 (Gain) loss on sale of property and equipment ........................... (172) 57 Provision for doubtful accounts ......................................... 18,725 16,886 Equity earnings net of distributions received ........................... (877) (104) Amortization of debt discount ........................................... 6 6 Change in assets and liabilities -- Increase in accounts receivable ......................................... (17,926) (19,045) Decrease in inventories ................................................. 493 23 Decrease in prepaid expenses and other .................................. 71 88 (Increase) decrease in other assets ..................................... (708) (965) Increase (decrease) in accounts payable ................................. (1,791) 2,490 Decrease in accrued liabilities and other liabilities ................... (8,324) (7,856) Increase (decrease) in deferred subscription fees ....................... 224 (49) -------- -------- Net cash used in operating activities ............................... (3,002) (5,328) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ...................................................... (2,011) (1,501) Proceeds from the sale of property and equipment .......................... 214 332 -------- -------- Net cash used in investing activities ............................... (1,797) (1,169) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments on revolving credit facility ................................... -- (13) Repayment of debt and capital lease obligations ........................... (356) (443) Cash paid for debt issuance costs ......................................... (391) -- Issuance of common stock .................................................. 156 153 -------- -------- Net cash used in financing activities ............................... (591) (303) -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH .......................... (21) (40) -------- -------- DECREASE IN CASH .......................................................... (5,411) (6,840) CASH, beginning of period ................................................. 9,828 8,699 -------- -------- CASH, end of period ....................................................... $ 4,417 $ 1,859 ======== ========
See accompanying notes 5 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. (1) INTERIM RESULTS In the opinion of management, the consolidated financial statements for the three month periods ended September 30, 2002 and 2001 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated financial position and results of operations. The results of operations for the three-month periods ended September 30, 2002 and 2001 are not necessarily indicative of the results of operations for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2002. Certain financial information for prior periods has been reclassified to conform to the current presentation. The consolidated balance sheet as of June 30, 2002 has been derived from the audited consolidated balance sheet included in the Company's annual report on Form 10-K, as amended, for the year ended June 30, 2002 but does not include all of the disclosures required by generally accepted accounting principles. (2) LIQUIDITY During the three months ended September 30, 2002, the Company had net income of $16.1 million compared with a net loss of $50.7 million in the three months ended September 30, 2001. Net income in the three months ended September 30, 2002 included a $12.5 million gain related to the disposition of the Company's Latin American operations while the three months ended September 30, 2001 included a charge of $49.5 million relating to the adoption effective July 1, 2001 of the new goodwill accounting standard as discussed in Note 7. The Company's operating activities utilized cash totaling $3.0 million in the three months ended September 30, 2002 and $5.3 million in the three months ended September 30, 2001. Cash flow from operating activities in each of the three month periods ended September 30, 2002 and 2001 included the cash flow effect of the Company's semi-annual interest payment of $5.9 million related to the Senior Notes. At September 30, 2002, the Company had cash of $4.4 million, debt of $307.8 million and a stockholders' deficit of $159.2 million. The Company's debt includes $149.9 million of 7 7/8% senior notes due 2008, $152.4 million outstanding under its credit facility, $4.4 million payable to a former joint venture partner and $1.1 million of capital lease obligations. As discussed in Note 3, the Company was not in compliance with certain of the covenants contained in its revolving credit facility. On September 30, 2002, the Company entered into an amended credit facility with its lenders which, among other things, extended the maturity date of the facility from March 16, 2003 to December 31, 2004, waived previous non-compliance, and required the issuance to the lenders of 211,549 shares of the Company's Series B convertible preferred stock. The Company's ability to service its long-term debt, to remain in compliance with the various restrictions and covenants contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control. 6 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. Although there can be no assurances, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company's operating and capital needs as well as enable it to maintain compliance with its various debt agreements through September 30, 2003. To the extent that actual results or events differ from the Company's financial projections or business plans, its liquidity may be adversely impacted. (3) LONG-TERM DEBT The Company's long-term debt consists of the following at September 30, 2002 and June 30, 2002 (in thousands): SEPTEMBER 30, JUNE 30, 2002 2002 --------- --------- 7 7/8% senior notes due 2008 .................. $ 149,859 $ 149,852 Credit facility due December 31, 2004 ......... 152,420 144,369 Note payable to former joint venture partner, monthly payments through June 2006 .......... 4,412 4,622 Capital lease obligations and other notes payable, at varying rates, from 3.5% to 12.75%, due through 2013 ................. 1,140 1,319 --------- --------- 307,831 300,162 Less: Current maturities ...................... (1,543) (1,633) --------- --------- $ 306,288 $ 298,529 ========= ========= In March 1998, the Company entered into a $200.0 million revolving credit facility originally scheduled to mature March 16, 2003. The revolving credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of its domestic wholly-owned current and future subsidiaries. Interest rates and availability under the revolving credit facility depended on the Company meeting certain financial covenants, including a total debt leverage ratio, a total debt to capitalization ratio, and a fixed charge ratio. Revolving credit facility borrowings were initially priced at the greater of (i) prime rate or Federal Funds rate plus 0.5% plus an applicable margin, or (ii) a LIBOR-based rate. The LIBOR-based rates included a margin of 0.875% to 1.75%. In December 1999, primarily as a result of additional provisions for doubtful accounts, the Company entered into noncompliance with three financial covenants under the revolving credit facility: total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio. The Company received a series of compliance waivers regarding these covenant violations covering the periods from December 31, 1999 through April 1, 2002. The waivers provided for, among other things, enhanced reporting and other requirements and that no additional borrowings would be available under the facility. Pursuant to the waivers, as LIBOR contracts expired in March 2000, all related borrowings were priced at prime plus 0.25 percentage points and interest became payable monthly. Pursuant to the waivers, we also were required to accrue additional interest expense at a rate of 2.0% per annum 7 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS on the outstanding balance. We recorded approximately $7.4 million related to this additional interest expense through September 30, 2002. In connection with the waivers, the Company also made unscheduled principal payments totaling $5.2 million. Effective September 30, 2002, the Company entered into an amended credit facility pursuant to which, among other things, the maturity date of the credit facility was extended to December 31, 2004 and any prior noncompliance was permanently waived. The principal terms of the amended credit facility are as follows: * WAIVER. Prior noncompliance was permanently waived with respect to the covenant violations described above and with respect to certain other noncompliance items, including non-reimbursement of approximately $2.6 million drawn by beneficiaries under letters of credit issued under the original facility. * MATURITY DATE. The maturity date of the facility was extended to December 31, 2004. * PRINCIPAL BALANCE. Accrued interest (approximately $6.9 million), non-reimbursed letters of credit and various fees and expenses associated with the amended credit facility (approximately $1.2 million) were added to the principal amount of the loan, resulting in an outstanding principal balance as of the effective date of the amendment equal to $152.4 million. * NO REQUIRED AMORTIZATION. No principal payments are required until the maturity date of the facility. * INTEREST RATE. The interest rate was increased to LIBOR plus 7.0% (8.8% as of the effective date of the amendment), payable monthly. By comparison, the effective interest rate (including the 2.0% accrued interest described above) applicable to the original facility immediately prior to the effective date of the amendment was 7.0%. * FINANCIAL COVENANTS. The amended facility includes the same financial covenants as were included in the original credit facility, with compliance levels under such covenants adjusted to levels consistent with the Company's current business levels and outlook. The covenants include (i) total debt leverage ratio (initially set at 7.48), (ii) minimum tangible net worth (initially set at a $230.1 million deficit), (iii) fixed charge coverage ratio (initially set at 0.99), (iv) limitation on capital expenditures of $11 million per fiscal year; and (v) limitation on operating leases during any period of four fiscal quarters to 3.10% of consolidated net revenues. The compliance levels for covenants (i) through (iii) above are set at varying levels on a quarterly basis. Compliance is tested quarterly based on annualized or year-to-date results as applicable. * OTHER COVENANTS. The amended credit facility includes various non-financial covenants equivalent in scope to those included in the original facility. The covenants include restrictions on additional indebtedness, liens, investments, mergers and acquisitions, asset sales, and other matters. The amended credit facility includes extensive financial reporting obligations and provides that an event of default occurs should we lose customer contracts in any fiscal quarter with an aggregate EBITDA contribution of $5 million or more (net of anticipated contributions from new contracts). * EXISTING LETTERS OF CREDIT. Pursuant to the amended facility, letters of credit issued pursuant to the original credit agreement will be reissued or extended, to a maximum of $3.5 million, for letter of 8 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS credit fees aggregating 1 7/8% per annum. A third letter of credit, in the amount of $2.6 million which previously was drawn by its beneficiary, will be reissued subject to application of the funds originally drawn in reduction of the principal balance of the facility and payment of a letter of credit fee equal to 7% per annum. * EQUITY INTEREST. In consideration of the amended facility, the Company issued shares of its Series B Convertible Preferred Stock to the participants in the credit facility. See discussion of the preferred stock in Note 4. The Company recorded approximately $6.8 million of deferred debt issuance costs related to the amended credit facility ($4.2 million related to the fair value of the preferred stock, $1.2 million of lender fees which were added to the balance of the amended facility and $1.4 million of related professional fees). These costs are included in other assets in the accompanying consolidated balance sheet as of September 30, 2002. These costs will be amortized to interest expense over the life of the agreement. The fair value of the preferred stock was estimated to be the market value of the common stock to be issued upon conversion of the preferred stock, measured at the date of the amendment. The preferred stock balance will be accreted to the greater of $15.0 million or the value of the common shares into which the preferred shares would otherwise be converted, over the life of the agreement or until the preferred shares are converted to common shares. In March 1998, the Company issued $150.0 million of its 7 7/8% Senior Notes due 2008 (the Senior Notes) under Rule 144A under the Securities Act of 1933, as amended (Securities Act). Interest under the Senior Notes is payable semi-annually on September 15 and March 15, and the Senior Notes are not callable until March 2003 subject to the terms of the Indenture. The Company incurred expenses related to the offering of approximately $5.3 million and is amortizing these costs to interest expense over the life of the Senior Notes. In April 1998, we filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration became effective on May 14, 1998. The Senior Notes are general unsecured obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by substantially all of its domestic wholly-owned current and future subsidiaries (the Guarantors). The Senior Notes contain certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations. The Company does not believe that the separate financial statements and related footnote disclosures concerning the Guarantors provide any additional information that would be material to investors making an investment decision. Consolidating financial information for the Company (the Parent), the Guarantors and the Company's remaining subsidiaries (the Non-Guarantors) is as follows: 9 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL --------- ---------- -------------- ------------ --------- ASSETS CURRENT ASSETS Cash .......................................... $ -- $ 4,410 $ 7 $ -- $ 4,417 Accounts receivable, net ...................... -- 93,183 4,553 -- 97,736 Inventories ................................... -- 11,666 -- -- 11,666 Prepaid expenses and other .................... -- 8,724 26 -- 8,750 --------- --------- --------- --------- --------- Total current assets ....................... -- 117,983 4,586 -- 122,569 PROPERTY AND EQUIPMENT, net ...................... -- 46,311 213 -- 46,524 GOODWILL ......................................... -- 41,167 -- -- 41,167 DUE FROM (TO) AFFILIATES ......................... 272,767 (244,046) (28,721) -- -- OTHER ASSETS ..................................... 9,813 13,426 464 -- 23,703 INVESTMENT IN SUBSIDIARIES ....................... (134,822) -- -- 134,822 -- --------- --------- --------- --------- --------- $ 147,758 $ (25,159) $ (23,458) $ 134,822 $ 233,963 ========= ========= ========= ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable .............................. $ -- $ 10,025 $ 110 $ -- $ 10,135 Accrued liabilities ........................... 485 56,099 (2,650) -- 53,934 Deferred subscription fees .................... -- 15,632 -- -- 15,632 Current portion of long-term debt ............. -- 1,535 8 -- 1,543 --------- --------- --------- --------- --------- Total current liabilities .................. 485 83,291 (2,532) -- 81,244 LONG-TERM DEBT, net of current portion ........... 302,279 4,009 -- -- 306,288 OTHER LIABILITIES ................................ -- 408 -- -- 408 DEFERRED INCOME TAXES ............................ -- 1,814 (1,164) -- 650 --------- --------- --------- --------- --------- Total liabilities .......................... 302,764 89,522 (3,696) -- 388,590 --------- --------- --------- --------- --------- MINORITY INTEREST ................................ -- -- -- 379 379 --------- --------- --------- --------- --------- REDEEMABLE PREFERRED STOCK ....................... 4,189 -- -- -- 4,189 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock .................................. 164 82 8 (90) 164 Additional paid-in capital .................... 138,760 54,622 20,148 (74,770) 138,760 Retained earnings (accumulated deficit) ....... (296,880) (169,385) (39,918) 209,303 (296,880) Treasury stock ................................ (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity (deficit) ....... (159,195) (114,681) (19,762) 134,443 (159,195) --------- --------- --------- --------- --------- $ 147,758 $ (25,159) $ (23,458) $ 134,822 $ 233,963 ========= ========= ========= ========= =========
10 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2002 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL --------- ---------- -------------- ------------ --------- ASSETS CURRENT ASSETS Cash ............................................ $ -- $ 9,424 $ 404 $ -- $ 9,828 Accounts receivable, net ........................ -- 93,579 5,536 -- 99,115 Inventories ..................................... -- 12,178 42 -- 12,220 Prepaid expenses and other ...................... -- 8,864 151 -- 9,015 --------- --------- --------- --------- --------- Total current assets ......................... -- 124,045 6,133 -- 130,178 PROPERTY AND EQUIPMENT, net ........................ -- 47,972 560 -- 48,532 GOODWILL ........................................... -- 41,167 77 -- 41,244 DUE FROM (TO) AFFILIATES ........................... 267,612 (215,164) (52,448) -- -- OTHER ASSETS ....................................... 3,031 12,163 2,290 -- 17,484 INVESTMENT IN SUBSIDIARIES ......................... (131,570) -- -- 131,570 -- --------- --------- --------- --------- --------- $ 139,073 $ 10,183 $ (43,388) $ 131,570 $ 237,438 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable ................................ $ -- $ 11,049 $ 912 $ -- $ 11,961 Accrued liabilities ............................. 10,171 61,280 2,268 -- 73,719 Deferred subscription fees ...................... -- 15,409 -- -- 15,409 Current portion of long-term debt ............... -- 1,620 13 -- 1,633 --------- --------- --------- --------- --------- Total current liabilities .................... 10,171 89,358 3,193 -- 102,722 LONG-TERM DEBT, net of current portion ............. 294,221 4,308 -- -- 298,529 OTHER LIABILITIES .................................. -- 477 -- -- 477 DEFERRED INCOME TAXES .............................. -- 1,814 (1,164) -- 650 --------- --------- --------- --------- --------- Total liabilities ............................ 304,392 95,957 2,029 -- 402,378 --------- --------- --------- --------- --------- MINORITY INTEREST .................................. -- -- -- 379 379 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock .................................... 159 82 17 (99) 159 Additional paid-in capital ...................... 138,470 54,622 34,942 (89,564) 138,470 Retained earnings (accumulated deficit) ......... (313,025) (140,478) (90,692) 231,170 (313,025) Accumulated other comprehensive income (loss) ... 10,316 -- 10,316 (10,316) 10,316 Treasury stock .................................. (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity (deficit) ......... (165,319) (85,774) (45,417) 131,191 (165,319) --------- --------- --------- --------- --------- $ 139,073 $ 10,183 $ (43,388) $ 131,570 $ 237,438 ========= ========= ========= ========= =========
11 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL --------- ---------- -------------- ------------ --------- NET REVENUE ....................................... $ -- $ 122,954 $ 2,611 $ -- $ 125,565 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits ..................... -- 69,457 1,655 -- 71,112 Provision for doubtful accounts ................... -- 18,500 225 -- 18,725 Depreciation and amortization ..................... -- 3,396 44 -- 3,440 Other operating expenses .......................... -- 21,966 568 -- 22,534 --------- --------- --------- --------- --------- Total expenses .............................. -- 113,319 2,492 -- 115,811 --------- --------- --------- --------- --------- OPERATING INCOME .................................. -- 9,635 119 -- 9,754 Income from wholly-owned subsidiaries ............. 9,534 -- -- (9,534) -- Interest expense, net ............................. (5,721) 14 (179) -- (5,886) --------- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......................... 3,813 9,649 (60) (9,534) 3,868 INCOME TAX (PROVISION) BENEFIT .................... -- (55) -- -- (55) --------- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ....................................... 3,813 9,594 (60) (9,534) 3,813 INCOME (LOSS) FROM DISCONTINUED OPERATIONS ........ 12,332 12,488 (156) (12,332) 12,332 --------- --------- --------- --------- --------- NET INCOME (LOSS) ................................. $ 16,145 $ 22,082 $ (216) $ (21,866) $ 16,145 ========= ========= ========= ========= =========
12 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL --------- ---------- -------------- ------------ --------- NET REVENUE ........................................ $ -- $ 113,593 $ 2,881 $ -- $ 116,474 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits ...................... -- 66,268 2,053 -- 68,321 Provision for doubtful accounts .................... -- 16,461 277 -- 16,738 Depreciation and amortization ...................... -- 3,940 91 -- 4,031 Other operating expenses ........................... -- 21,093 437 -- 21,530 --------- --------- --------- --------- --------- Total expenses ............................... -- 107,762 2,858 -- 110,620 --------- --------- --------- --------- --------- OPERATING INCOME ................................... -- 5,831 23 -- 5,854 Income from wholly-owned subsidiaries .............. 5,483 -- -- (5,483) -- Interest expense, net .............................. (6,473) (63) (288) -- (6,824) --------- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .......................... (990) 5,768 (265) (5,483) (970) INCOME TAX (PROVISION) BENEFIT ..................... -- (20) -- -- (20) --------- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........................................ (990) 5,748 (265) (5,483) (990) LOSS FROM DISCONTINUED OPERATIONS .................. (200) -- (200) 200 (200) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .......................... (1,190) 5,748 (465) (5,283) (1,190) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................. (49,513) (49,513) -- 49,513 (49,513) --------- --------- --------- --------- --------- NET INCOME (LOSS) .................................. $ (50,703) $ (43,765) $ (465) $ 44,230 $ (50,703) ========= ========= ========= ========= =========
13 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL -------- ---------- -------------- ------------ --------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) ..................................... $ 16,145 $ 22,082 $ (216) $(21,866) $ 16,145 Adjustments to reconcile net income (loss) to cash used in operations -- Non-cash portion of gain on disposition of Latin American operations ................................ 139 -- (13,871) -- (13,732) Depreciation and amortization ....................... -- 3,396 52 -- 3,448 (Gain) loss on sale of property and equipment ....... -- (36) (136) -- (172) Provision for doubtful accounts ..................... -- 18,500 225 -- 18,725 Equity earnings net of distributions received ....... -- (877) -- -- (877) Amortization of discount on Senior Notes ............ 6 -- -- -- 6 Change in assets and liabilities -- (Increase) decrease in accounts receivable .......... -- (18,104) 178 -- (17,926) (Increase) decrease in inventories .................. -- 512 (19) -- 493 (Increase) decrease in prepaid expenses and other ... -- 140 (69) -- 71 Increase in other assets ............................ 46 (395) 1,057 -- 708 (Increase) decrease in due to/from affiliates ....... (13,252) (21,053) 12,460 21,845 -- Increase (decrease) in accounts payable ............. -- (2,079) 288 -- (1,791) Decrease in accrued liabilities and other liabilities .................................. (2,828) (5,250) (246) -- (8,324) Increase in non-refundable subscription fee income ......................................... -- 224 -- -- 224 -------- -------- -------- -------- -------- Net cash used in operating activities ................................... 256 (2,940) (297) (21) (3,002) -------- -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures .................................. -- (1,866) (145) -- (2,011) Proceeds from the sale of property and equipment ...... -- 176 38 -- 214 -------- -------- -------- -------- -------- Net cash used in investing activities ................................... -- (1,690) (107) -- (1,797) -------- -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Repayment of debt and capital lease obligations ....... -- (384) 28 -- (356) Cash paid for debt issuance costs ..................... (391) -- -- -- (391) Issuance of common stock .............................. 156 -- -- -- 156 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities ................................... (235) (384) 28 -- (591) -------- -------- -------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................. (21) -- (21) 21 (21) -------- -------- -------- -------- -------- DECREASE IN CASH ........................................ -- (5,014) (397) -- (5,411) CASH, beginning of period ............................... -- 9,424 404 -- 9,828 -------- -------- -------- -------- -------- CASH, end of period ..................................... $ -- $ 4,410 $ 7 $ -- $ 4,417 ======== ======== ======== ======== ========
14 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL --------- ---------- -------------- ------------ --------- CASH FLOW FROM OPERATING ACTIVITIES Net loss .............................................. $(50,703) $(43,765) $ (465) $ 44,230 $(50,703) Adjustments to reconcile net loss to cash used in operations -- Cumulative effect of a change in accounting principle ......................................... -- 49,513 -- -- 49,513 Depreciation and amortization ....................... -- 3,940 391 -- 4,331 (Gain) loss on sale of property and equipment ....... -- 58 (1) -- 57 Provision for doubtful accounts ..................... -- 16,461 425 -- 16,886 Equity earnings net of distributions received ....... -- (104) -- -- (104) Amortization of discount on Senior Notes ............ 6 -- -- -- 6 Change in assets and liabilities-- (Increase) decrease in accounts receivable .......... -- (19,307) 262 -- (19,045) (Increase) decrease in inventories .................. -- 24 (1) -- 23 (Increase) decrease in prepaid expenses and other ... -- 443 (355) -- 88 (Increase) decrease in other assets ................. 257 (1,994) 772 -- (965) (Increase) decrease in due to/from affiliates ....... 52,684 (7,482) (932) (44,270) -- Increase in accounts payable ........................ -- 809 1,681 -- 2,490 Decrease in accrued liabilities and other liabilities .................................. (2,344) (3,462) (2,050) -- (7,856) Increase (decrease) in non-refundable subscription fee income ............................ -- (65) 16 -- (49) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities .................................... (100) (4,931) (257) (40) (5,328) -------- -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures .................................. -- (1,638) 137 -- (1,501) Proceeds from the sale of property and equipment ...... -- 331 1 -- 332 -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities .................................... -- (1,307) 138 -- (1,169) -------- -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Repayments on revolving credit facility, net .......... (13) -- -- -- (13) Repayment of debt and capital lease obligations ....... -- (435) (8) -- (443) Issuance of common stock .............................. 153 -- -- -- 153 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities .................................... 140 (435) (8) -- (303) -------- -------- -------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE ................. (40) -- (40) 40 (40) -------- -------- -------- -------- -------- DECREASE IN CASH ........................................ -- (6,673) (167) -- (6,840) CASH, beginning of period ............................... -- 6,763 1,936 -- 8,699 -------- -------- -------- -------- -------- CASH, end of period ..................................... $ -- $ 90 $ 1,769 $ -- $ 1,859 ======== ======== ======== ======== ========
15 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (4) REDEEMABLE PREFERRED STOCK In consideration of the amended facility, the Company issued shares of its Series B Convertible Preferred Stock to the participants in the credit facility. The preferred stock is convertible into 2,115,490 common shares (10% of the sum of the common shares outstanding on a diluted basis, as defined). The conversion ratio is subject to upward adjustment if we issue common stock or securities convertible into our common stock for consideration less than the fair market value of such securities at the time of the transaction. Because a sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to amend its certificate of incorporation to authorize additional common shares. Conversion of the preferred shares occurs automatically upon approval by the Company's stockholders of sufficient common shares to permit conversion. Should the Company's stockholders fail to approve such a proposal by December 31, 2004, the Company will be required to redeem the preferred stock for a price equal to the greater of $15 million or the value of the common shares into which the preferred shares would otherwise have been convertible. In addition, should the Company's stockholders fail to approve such a proposal, the preferred stock enjoys a preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the preferred stock would otherwise have been convertible or (ii) $10 million, $12.5 million or $15 million depending on whether the triggering event occurs prior to January 31, 2003, December 31, 2003 or December 31, 2004, respectively. At the election of the holder, the preferred shares carry voting rights as if such shares were converted into common shares. The preferred shares do not bear a dividend. The preferred shares (and common shares issuable upon conversion of the preferred shares) are entitled to certain registration rights. The terms of the preferred shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock. (5) DISPOSITION OF LATIN AMERICAN OPERATIONS Due to the deteriorating economic conditions and continued devaluation of the local currency, the Company reviewed its strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that the Company would benefit from focusing on its domestic operations. Effective September 27, 2002, the Company sold its Latin American operations to local management for the assumption of net liabilities. The gain resulting from the disposition of the Latin American operations totaled $12.5 million and is included in the income from discontinued operations for the three months ended September 30, 2002. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including accounts receivable of $0.6 million and accrued liabilities of $4.8 million) as well as the recognition of related cumulative translation adjustments of $10.1 million. Revenue related to the Company's Latin American operations totaled $2.4 million and $9.2 million for the three months ended September 30, 2002 and 2001, respectively. Pre-tax net losses related to the Company's Latin American operations totaled $156,000 and $195,000 for the three months ended September 30, 2002 and 2001, respectively. The Argentine operations and Bolivian medical transportation operations were included in the Company's medical transportation and related service segment. The Bolivian fire operations were included in the Company's Fire and Other segment. (6) RESTRUCTURING CHARGE AND OTHER During fiscal 2001, the Company decided to close or downsize nine service areas and in connection therewith, recorded restructuring charges in accordance with Emerging Issues Task Force 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3) as well as other related charges totaling $9.1 million. These charges included $1.5 million to cover severance costs associated with the termination of approximately 250 employees, all of whom were expected to leave by the end of fiscal 2002, lease termination and other exit costs of $2.4 million, and asset impairment 16 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS charges for goodwill and property and equipment of $4.1 million and $1.1 million, respectively, related to the impacted service areas. Approximately 108 of the impacted employees have been terminated, as of September 30, 2002. The previously mentioned charge included accrued severance, lease termination and other costs totaling $1.5 million relating to an under performing service area that the Company had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. The operating environment in this service area has improved and the Company was recently awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million originally recorded in 2001 will be released to income when the related contract is finalized which is currently expected in the second quarter of fiscal 2003. This service area generated revenue of $1.6 million, operating income of $0.1 million and cash flow of $0.2 million for the three months ended September 30, 2002 and revenue of $1.6 million, operating income of $0.1 million and breakeven cash flow for the three months ended September 30, 2001. A summary of activity in the Company's restructuring reserves is as follows (in thousands): LEASE OTHER SEVERANCE TERMINATION EXIT COSTS COSTS COSTS TOTAL ------- ------- ------- ------- Balance at June 30, 2002 ....... $ 757 $ 1,514 $ 32 $ 2,303 Fiscal 2003 Usage ............ (3) (65) 9 (59) ------- ------- ------- ------- Balance at September 30, 2002 .. $ 754 $ 1,449 $ 41 $ 2,244 ======= ======= ======= ======= 17 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (7) GOODWILL The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) effective July 1, 2001 and discontinued amortization of goodwill as of that date. During the first quarter of fiscal 2002, the Company identified its various reporting units which consist of the individual cost centers within its medical transportation and fire and other operating segments for which separately identifiable cash flow information is available. During the second quarter of fiscal 2002, the Company completed the first step impairment test as of July 1, 2001. Potential goodwill impairments were identified in certain of these reporting units. During the fourth quarter of fiscal 2002, the Company completed the second step test and determined that all or a portion of the goodwill applicable to certain of its reporting units was impaired as of July 1, 2001 resulting in an aggregate charge of $49.5 million. The fair value of the reporting units was determined using the discounted cash flow method and a discount rate of 15.0%. This charge has been reflected in the accompanying consolidated statement of operations as the cumulative effect of change in accounting principle. Additionally, the Company's results for the first quarter of fiscal 2002 have been restated to reflect this charge in that period as required by SFAS 142. The Company has selected June 30 as the date on which it will perform its annual goodwill impairment test. (8) NET INCOME (LOSS) PER SHARE A reconciliation of the numerators and denominators (weighted average number of shares outstanding) of the basic and diluted income (loss) per share computations for the three-month periods ended September 30, 2002 and 2001 is as follows (in thousands, except per share amounts):
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001 ------------------------------------- ------------------------------------- Income* Shares Per Share Loss* Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic income (loss) per share $3,813 15,994 $0.24 $ (990) 15,031 $(0.07) ===== ====== Effect of stock options -- 1,784 -- -- ------ ------ ------ ------ Diluted income (loss) per share $3,813 17,778 $0.21 $ (990) 15,031 $(0.07) ====== ====== ===== ====== ====== ======
*Represents income (loss) from continuing operations before cumulative effect of change in accounting principle. Stock options with exercise prices below the applicable market prices have been excluded from the calculation of diluted earnings per share. Such options totaled 2.2 million for the three months ended September 30, 2002 and 4.7 million for the three months ended September 30, 2001. In periods subsequent to September 30, 2002, earnings per share will be affected by the accretion of the redeemable preferred stock of approximately $1.2 million per quarter. Additionally, upon approval of the stockholders of additional common shares, 2,115,490 common shares will be included in the denominator of the earnings per share calculation. 18 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (9) SEGMENT REPORTING For financial reporting purposes, the Company has classified its operations into two reporting segments that correspond with the manner in which such operations are managed: the Medical Transportation and Related Services Segment and the Fire and Other Segment. Each reporting segment consists of cost centers (operating segments) representing the Company's various service areas that have been aggregated on the basis of the type of services provided, customer type and methods of service delivery. The Medical Transportation and Related Services Segment includes emergency ambulance services provided to individuals pursuant to contracts with counties, fire districts, and municipalities, as well as non-emergency ambulance services provided to individuals requiring either advanced or basic levels of medical supervision during transport. The Segment also includes alternative transportation services, operational and administrative support services related to the Company's public/private alliance with the City of San Diego and ambulance and urgent care services provided under capitated service arrangements in Argentina. As discussed in Note 4, the Company disposed of its Latin American operations in a sale to local management on September 27, 2002. The Fire and Other Segment includes a variety of fire protection services including fire prevention, suppression, training, alarm monitoring, dispatch, fleet and billing services. The accounting policies as described in the Company's Annual Report on Form 10-K, as amended, have also been followed in the preparation of the accompanying financial information for each reporting segment. For internal management purposes, the Company's measure of segment profitability is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization. Additionally, segment assets are defined as consisting solely of accounts receivable. The following tables summarize the information required to be presented by SFAS 131, Disclosures about Segments of an Enterprise and Related Information, as of and for the three months ended September 30, 2002 and 2001. The Company has revised certain of the information presented below as of and for the three months ended September 30, 2001. Such revisions consist of: * The inclusion of alternative transportation services ($2.8 million in the three months ended September 30, 2001) as well as operational and administrative support services related to the Company's public/private alliance with the City of San Diego ($3.5 million in the three months ended September 30, 2001) within the Medical Transportation and Related Services Segment (such services were previously included in the Fire and Other Segment); * The clarification of the measure of segment profitability as well as the definition of segment assets to correspond with the manner in which the Company has historically managed its operations; and * The addition of a reconciliation of the segment financial information to corresponding amounts contained in the Consolidated Financial Statements. These revisions had no impact on the Company's consolidated financial position, results of operations or cash flows 19 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Information by operating segment is set forth below:
MEDICAL TRANSPORTATION AND RELATED SERVICES FIRE AND OTHER CORPORATE TOTAL -------- -------------- --------- ----- (IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, 2002 Net revenues from external customers ... $103,794 $ 21,771 $ -- $125,565 Segment profit (loss) .................. 12,697 4,011 (3,514) 13,194 Segment assets ......................... 95,982 1,754 -- 97,736 MEDICAL TRANSPORTATION AND RELATED SERVICES FIRE AND OTHER CORPORATE TOTAL -------- -------------- --------- ----- (IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, 2001 Net revenues from external customers ... $ 97,816 $ 18,658 $ -- $116,474 Segment profit (loss) .................. 10,293 2,989 (3,397) 9,885 Segment assets ......................... 104,042 1,377 -- 105,419
A reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle is as follows: THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2002 2001 -------- -------- Segment profit (loss) ................................ $ 13,194 $ 9,885 Depreciation and amortization ........................ (3,440) (4,031) Interest expense, net ................................ (5,886) (6,824) -------- -------- Income (loss) from continuing operations before income taxes, and cumulative effect of change in accounting principle ............................... $ 3,868 $ (970) ======== ======== 20 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of segment assets to total assets is as follows: AS OF SEPTEMBER 30, ----------------------- 2002 2001 -------- -------- Segment assets ......................... $ 97,736 $105,419 Cash ................................... 4,417 1,859 Inventories ............................ 11,666 13,150 Prepaid expenses and other ............. 8,750 5,104 Property and equipment, net ............ 46,524 54,815 Goodwill ............................... 41,167 41,244 Other assets ........................... 23,703 20,488 -------- -------- $233,963 $242,079 ======== ======== (10) COMMITMENTS AND CONTINGENCIES MEDICARE FEE SCHEDULE On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The final rule categorizes seven levels of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54, plus separate mileage payments based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept the assigned reimbursement rate as full payment, after patients have submitted their deductible and 20 percent of Medicare's fee for service. In addition, the Final Rule calls for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter. The Company currently believes that the Medicare Ambulance Fee Schedule will have a neutral net impact on its medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of its operations. These rules could, however, result in contract renegotiations or other actions to offset any negative impact at the regional level that could have a material adverse effect on its business, financial condition, cash flows, and results of operations. Changes in reimbursement policies, or other governmental action, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in the Company's cost structure relative to the rate increase in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on its business, financial condition, cash flows, and results of operations. LEGAL PROCEEDINGS From time to time, the Company is subject to litigation and regulatory investigations arising in the ordinary course of business. The Company believes that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on its business, financial condition, cash flows and results of operations. However, the Company is unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities arising out of such claims. In addition, due to the nature of the 21 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Company's business, Center for Medicare and Medicaid Services (CMS) and other regulatory agencies are expected to continue their practice of performing periodic reviews and initiating investigations related to the Company's compliance with billing regulations. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. The Company, Warren S. Rustand, the former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, the former Vice Chairman of the Board, and Robert E. Ramsey, Jr., the former Executive Vice President and former Director, were named as defendants in two purported class action lawsuits: HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V. RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. The two lawsuits, which contain virtually identical allegations, were brought on behalf of a class of persons who purchased the Company's publicly traded securities including its common stock between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro seeks unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud Act, and under Arizona common law fraud, and also seeks punitive damages, a constructive trust, and other injunctive relief. Ruble v. Rural/Metro seeks unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints in both actions allege that between April 28, 1997 and June 11, 1998 the defendants issued certain false and misleading statements regarding certain aspects of the Company's financial status and that these statements allegedly caused the Company's common stock to be traded at artificially inflated prices. The complaints also allege that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated. On May 25, 1999, the Arizona State Court granted a request for a stay of the Haskell action until the Ruble action is finally resolved. The Company and the individual defendants moved to dismiss the Ruble action. On January 25, 2001, the Court granted the motion to dismiss, but granted the plaintiffs leave to replead. On March 31, 2001, the plaintiffs filed a second amended complaint. The Company and the individual defendants moved to dismiss the second amended complaint. On March 8, 2002, the Court granted the motions to dismiss of Mr. Ramsey and Mr. Bolin with leave to replead and denied the motions to dismiss of the Company and Mr. Rustand. The result is that Mr. Ramsey and Mr. Bolin have been dismissed from the Ruble v. Rural/Metro case although the Court has permitted plaintiffs leave to file another complaint against those individuals. Mr. Rustand and the Company remain defendants. The parties have commenced discovery in the Ruble v. Rural/Metro case. During discovery, the parties conduct investigation through formal processes such as depositions, subpoenas and requests for production of documents. This phase is currently expected to run through November 2003. In addition, Plaintiffs have moved to certify the class in the Ruble v. Rural/Metro case. The Company and the individual defendants are insured by primary and excess insurance policies, which were in effect at the time the lawsuits were filed (the "D&O Policies"). The Company's primary carrier had been funding the costs of the litigation and attorney's fees over approximately the last four years. Recently, however, the Company's primary carrier notified all defendants that it is taking the position that there is no coverage. The primary carrier purports to base this decision on the actions of one of the Company's former officers, whom the primary carrier claims assisted the Plaintiffs in the Ruble v. Rural/Metro case in such a way as to trigger an exclusion under the policy. The Company and the primary carrier are in the process of negotiating an interim funding agreement under which the carriers would advance defense costs in the underlying litigations 22 RURAL/METRO CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS pending a court determination of the coverage dispute. While the Company intends to vigorously pursue its rights under the D&O Policies, the Company is unable to predict with certainty the outcome of these matters. A final and binding adverse judgment on the coverage dispute could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. The Company recently became aware that, the Company, Arthur Andersen LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and Jane Doe Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO CORPORATION, ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa County, Arizona Superior Court. The lawsuit was brought on behalf of a class of persons who purchased our publicly traded securities including our common stock between July 1, 1996 through June 30, 2001. The primary allegations of the complaint include violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Company's 401(k) plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan. The Plaintiffs seek unspecified compensatory and punitive damages. On October 30, 2002, Defendant Arthur Andersen LLP removed the action to the United States District Court, District of Arizona, CIV-02-2183-PHX-JWS. The Company has not yet been served with this complaint. LaSalle Ambulance, Inc., a New York corporation which is a subsidiary of Rural/Metro Corporation, has been sued in the case of Ann Bogucki and Patrick Bogucki v. LaSalle Ambulance Service, et al., Index No. I 1995 2128, pending in the Supreme Court of the State of New York, Erie County. In 1995, Plaintiff Ann Bogucki sued LaSalle Ambulance along with other defendants, primarily alleging that negligent medical care caused her injuries. The incident occurred in 1992, which was prior to our acquisition of LaSalle Ambulance, Inc. The prior owner's insurance carrier is defending the case. Based on information obtained in the fourth quarter of fiscal 2002, the Company does not believe that its primary insurance policy for the post-acquisition period provides coverage for these claims; however, the Company believes that it has meritorious claims against the prior owner and under the pre-acquisition period insurance policy. Further, the Company does not believe that Plaintiffs' claims have any merit and are cooperating with the insurance carrier to vigorously defend the lawsuit. However, if the Plaintiffs are successful in obtaining an adverse judgment, then the limits of the prior owner's insurance policy may not be adequate to cover all damages that might arise out of this lawsuit. LaSalle Ambulance, Inc. has potential liability for the uninsured portion of any such adverse judgment; which liability, if occurring, could have a material adverse effect on its and the Company's business, financial condition, cash flows and results of operations. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS Statements in this Report that are not historical facts are hereby identified as "forward-looking statements" as that term is used under the securities laws. We caution readers that such "forward-looking statements," including those relating to our future business prospects, working capital, accounts receivable collection, liquidity, cash flow, capital needs, operating results and compliance with debt facilities, wherever they appear in this Report or in other statements attributable to us, are necessarily estimates reflecting our best judgment and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the "forward-looking statements." You should consider such "forward looking-statements" in light of various important factors, including those set forth below and others set forth from time to time in our reports and registration statements filed with the Securities and Exchange Commission. All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro Corporation, and its predecessors, operating divisions, direct and indirect subsidiaries, and affiliates. Rural/Metro Corporation, a Delaware corporation, is strictly a holding company. All services, operations, and management functions are provided through its subsidiaries and affiliated entities. This Report should be read in conjunction with our Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2002. INTRODUCTION We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls (911 emergency ambulance services) and non-emergency transport services (general transport services) to patients on both a fee-for-service and nonrefundable subscription fee basis. Per transport revenue depends on various factors, including the mix of rates between existing markets and new markets and the mix of activity between 911 emergency ambulance services and non-emergency transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts or other agencies or on a nonrefundable subscription fee basis to individual homeowners or commercial property owners. Medical transportation and related services revenue includes 911 emergency and non-emergency ambulance and alternative transportation service fees as well as municipal subsidies and subscription fees. Domestic ambulance and alternative transportation service fees are recognized as the services are provided and are recorded net of estimated Medicare, Medicaid and other contractual discounts. Ambulance subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year. Payments received from third-party payers represent a substantial portion of our ambulance service fee receipts. We maintain an allowance for Medicare, Medicaid and contractual discounts and doubtful accounts based on credit risks applicable to certain types of payers, historical collection trends and other relevant information. This allowance is examined on a quarterly basis and is revised for changes in circumstances surrounding the collectibility of receivables. Provisions for Medicare, Medicaid and contractual reimbursement limitations are included in the calculation of medical transportation services revenue. Because of the nature of our ambulance services, it is necessary to respond to a number of calls, primarily 911 emergency ambulance service calls, which may not result in transports. Results of operations are discussed below on the basis of actual transports because transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of calls not resulting in transports varies substantially depending upon the mix of non-emergency ambulance and 911 emergency ambulance service calls in individual markets and is generally higher in service areas in which the calls are primarily 911 emergency ambulance 24 service calls. Rates in our markets take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports. Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, which is generally one year. Other revenue primarily consists of revenue generated from dispatch, fleet, billing, training and home health care services and is recognized when the services are provided. Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel and professional fees. On February 26, 2002, we announced that the company had received notification from Nasdaq citing our inability to meet continued listing standards for net tangible assets, stockholders' equity, market capitalization, or net income, as set forth in Marketplace Rule 4310(c)(2)(B). We subsequently submitted our request for a Nasdaq Qualifications Panel hearing to consider our continued listing and were granted an exception to the listing standards subject to meeting specified conditions. On October 17, 2002 we received notification from the Nasdaq Listing Qualifications Panel indicating we evidenced compliance with the requirements necessary for continued listing on the Nasdaq SmallCap Market. Our securities returned to being listed under the ticker symbol "RURL". CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for Medicare, Medicaid and other contractual discounts and doubtful accounts, and general liability and workers' compensation claim reserves. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under 25 the circumstances. Such historical experience and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations. The impact of these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. The discussion below is not intended to be a comprehensive list of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements, which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States of America. MEDICAL TRANSPORTATION AND RELATED FEE REVENUE RECOGNITION -- Ambulance and alternative transportation service fees are recognized when services are provided and are recorded net of a provision for Medicare, Medicaid, and other contractual reimbursement limitations. Because of the length of the collection cycle with respect to ambulance and alternative transportation service fees, it is necessary to estimate the amount of these reimbursement limitations at the time revenue is recognized. Estimates of amounts uncollectible due to such reimbursement limitations are estimated based on historical collection data, historical write-off activity and current relationships with payers, and are computed separately for each service area. The estimated uncollectibility is translated into a percentage of total revenue which is applied to calculate the provision. If the historical data used to calculate these estimates does not properly reflect the collectibility of the current revenue stream, revenue could be overstated or understated. Provisions made for reimbursement limitations on ambulance and alternative transportation service fees are included in the calculation of medical transportation and related service revenue and totaled $33.5 million and $33.9 million for the three months ended September 30, 2002 and 2001, respectively. PROVISION FOR DOUBTFUL ACCOUNTS FOR MEDICAL TRANSPORTATION AND RELATED FEES -- Ambulance and alternative transportation service fees are billed to various payer sources. As discussed above, provisions for uncollectibility due to Medicare, Medicaid and contractual reimbursement limitations are recorded as provisions against revenue. We estimate additional provisions related to the potential uncollectibility of other payers based on historical collection data and historical write-off activity. The provision for doubtful accounts percentage that is applied to ambulance and alternative transportation service fee revenue is calculated as the difference between the total expected collection percentage less provision percentages applied for Medicare, Medicaid and contractual reimbursement limitations. If historical data used to calculate these estimates do not properly reflect the collectibility of the current net revenue stream, the provision for doubtful accounts may be overstated or understated. The provision for doubtful accounts on ambulance and alternative transportation service revenue totaled $18.7 million and $16.7 million for the three months ended September 30, 2002 and 2001, respectively. WORKERS' COMPENSATION RESERVES -- Beginning May 1, 2002, we purchased a corporate-wide "first-dollar" workers' compensation insurance policy, under which we have no obligation to pay any deductible amounts on claims occurring during the policy period. This policy covers all workers' compensation claims made by our employees. Accordingly, provisions for workers' compensation expense for claims arising on and after May 1, 2002 are reflective of premium costs only. Prior to May 1, 2002, our workers' compensation policies included a deductible obligation of $250,000 per claim, which was increased in recent years to $500,000 per claim, with no aggregate limit. Claims relating to these prior policy years remain outstanding. Claim provisions were estimated based on historical claims data and the ultimate projected value of those claims. For claims occurring prior to May 1, 2002, our third-party administrator establishes initial estimates at the time a claim is reported and periodically reviews the development of the claim to confirm that the estimates are adequate. In fiscal 2002, we engaged an outside insurance expert to review the estimates set by our third-party administrator on certain claims and to participate in our periodic internal claim reviews. We also periodically engage actuaries to assist us in the determination of our workers' compensation claims reserves. If the ultimate development of these claims is significantly different than those that have been estimated, the reserves for workers' compensation claims could be overstated or understated. Reserves related to workers' compensation claims totaled $14.3 million and $15.9 million at September 30, 2002 and June 30, 2002, respectively. 26 GENERAL LIABILITY RESERVES -- We are subject to litigation arising in the ordinary course of our business. In order to minimize the risk of our exposure, we maintain certain levels of coverage for comprehensive general liability, automobile liability, and professional liability. Internally and throughout this report, we refer to these three types of policies collectively as "general liability" policies. These policies currently are, and historically have been, underwritten on a deductible basis. Provisions are made to record the cost of premiums as well as that portion of the claims that is our responsibility. In general, our deductible obligation for policies issued in fiscal years prior to 2001 ranges from $100,000 to $250,000 per claim (with no aggregate limit), depending on the policy year and line of coverage. Beginning in fiscal 2001, our deductible amount increased to $1,000,000 per claim; however, we also purchased a liability ceiling for each of those policy years, which permanently caps our maximum deductible obligation. Our third-party administrator establishes initial estimates at the time a claim is reported and periodically reviews the development of the claim to confirm that the estimates are adequate. In fiscal 2002, we engaged an outside insurance expert to review the estimates set by our third-party administrator on certain claims and to participate in our periodic internal reviews. We also periodically engage actuaries to assist us in the determination of our general liability claim reserves. If the ultimate development of these claims is significantly different than those that have been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $14.4 million and $15.4 million at September 30, 2002 and June 30, 2002, respectively. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS We have certain cash contractual obligations related to our debt instruments that come due at various times. In addition, we have other commitments in the form of standby letters of credit and surety bonds. As reported in our Form 10-K, as amended, we have contractual obligations related to our credit facility of $152.4 million and Senior Notes of $150.0 million, as well as other commitments related to standby letters of credit of $3.5 million and preferred stock redemption amounts totaling $15.0 million. Other contractual obligations for capital leases and notes payable and operating leases as well as commitments related to surety bonds have not changed substantially since year-end. SEASONALITY We have historically experienced, and expect to continue to experience, seasonality in quarterly operating results. This seasonality has resulted from a number of factors, including relatively higher fiscal second and third quarter demand for transport services in our Arizona and Florida regions resulting from the greater winter populations in those regions. THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 REVENUE Net revenue increased approximately $9.1 million, or 7.8%, from $116.5 million for the three months ended September 30, 2001 to $125.6 million for the three months ended September 30, 2002. MEDICAL TRANSPORTATION AND RELATED SERVICES -- Medical transportation and related service revenue increased $6.0 million, or 6.1%, from $97.8 million for the three months ended September 30, 2001 to $103.8 million for the three months ended September 30, 2002. This increase is comprised of an $8.5 million increase in same service area revenue attributable to rate increases, call screening and 27 other factors. Additionally, there was a $0.7 million increase in revenue related to a new 911 contract that went into effect during the three months ended September 30, 2002 offset by a $2.0 million decrease related to the loss of the 911 contract in Arlington, Texas and a $1.2 million decrease related to the closure of service areas in fiscal 2001. Total transports, including alternative transportation, decreased 16,000, or 5.3%, from approximately 304,000 (approximately 265,000 ambulance and approximately 39,000 alternative transportation) for the three months ended September 30, 2001 to approximately 288,000 (approximately 263,000 ambulance and approximately 25,000 alternative transportation) for the three months ended September 30, 2002. The loss of the 911 contract in Arlington, Texas accounted for a decrease of approximately 4,000 transports. Service areas identified for closure in fiscal 2001 accounted for a decrease of approximately 4,000 transports. Transports in areas that we served in both the three months ended September 30, 2002 and 2001 decreased by approximately 8,000 transports. These decreases were offset by an increase of approximately 1,000 transports related to a new 911 contract that went into effect during the three months ended September 30, 2002. FIRE AND OTHER -- Fire protection services revenue increased by approximately $2.3 million, or 14.7%, from approximately $15.6 million for the three months ended September 30, 2001 to approximately $17.9 million for the three months ended September 30, 2002. Fire protection services revenue increased primarily due to increases in forestry revenue of $0.9 million due to a particularly active wildfire season and to rate and utilization increases in our subscription fire programs of $0.8 million. We do not expect the increases in forestry revenue to continue into the remainder of fiscal 2003. Other revenue increased by $0.8 million, or 25.8%, from $3.1 million for the three months ended September 30, 2001 to $3.9 million for the three months ended September 30, 2002. Other revenue increases are primarily related to increased revenue related to our equity in the earnings of the public/private alliance with the City of San Diego of $0.5 million. OPERATING EXPENSES PAYROLL AND EMPLOYEE BENEFITS -- Payroll and employee benefit expenses increased approximately $2.8 million, or 4.1%, from approximately $68.3 million for the three months ended September 30, 2001 to $71.1 million for the three months ended September 30, 2002. The increase is primarily related to general wage increases offset by decreases in payroll in closure areas ($1.4 million). Payroll and employee benefits as a percentage of net revenue was 56.6% for the three months ended September 30, 2002 compared to 61.0% for the three months ended September 30, 2001. Payroll and employee benefits as a percentage of net revenue benefited from increased rates on medical transportation revenue. PROVISION FOR DOUBTFUL ACCOUNTS -- The provision for doubtful accounts increased $2.0 million, or 12.0%, from $16.7 million, or 14.4% of total revenue, for the three months ended September 30, 2001 to $18.7 million, or 14.9% of total revenue, for the three months ended September 30, 2002. The provision for doubtful accounts on ambulance and alternative transportation service revenue was 18.7% for the three months ended September 30, 2002 and 17.8% for the three months ended September 30, 2001. The increase primarily reflects the mix between ambulance and alternative transportation services as well as slightly increased bad debt rates on ambulance services. The bad debt rate on alternative transportation services is significantly lower than that on ambulance services. Revenue relating to alternative transportation services is becoming a smaller percentage of our overall medical transportation revenue. Ambulance services bad debt as a percentage of ambulance service revenue was 19.0% for the three months ended September 30, 2002 and 18.1% for the three months ended September 30, 2001. DEPRECIATION - Depreciation decreased $0.6 million, or 15.0%, from $4.0 million for the three months ended September 30, 2001 to $3.4 million for the three months ended September 30, 2002. The decrease is primarily due to decreased capital expenditures. Depreciation was 3.4% and 2.7% of net revenue for the three months ended September 30, 2001 and 2002, respectively. OTHER OPERATING EXPENSES -- Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel, and professional fees. Other operating expenses increased approximately $1.0 million, or 4.7%, from $21.5 million for 28 the three months ended September 30, 2001 to $22.5 million for the three months ended September 30, 2002. The increase in other operating expenses is primarily due to increases in general liability expenses of $0.8 million due to increased premium rates in the new policy year. Other operating expenses decreased from 18.5% of net revenue for the three months ended September 30, 2001 to 17.9% of net revenue for the three months ended September 30, 2002. INTEREST EXPENSE -- Interest expense decreased by approximately $0.9 million, or 13.2%, from $6.8 million for the three months ended September 30, 2001 to $5.9 million for the three months ended September 30, 2002. This decrease was primarily caused by lower rates on the revolving credit facility. Interest expense is expected to increase in the next quarter due to new rates to be incurred under the amended credit facility. See further discussion on the amended credit facility, which became effective September 30, 2002, in "Liquidity and Capital Resources." INCOME TAXES -- We recorded income taxes of $55,000 for the three months ended September 30, 2002 as compared to $20,000 for the three months ended September 30, 2001 primarily related to provisions for state income taxes. INCOME (LOSS) FROM DISCONTINUED OPERATIONS - Due to the deteriorating economic conditions and continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net liabilities. The gain on the disposal of our Latin American operations totaled $12.5 million and is included in the income from discontinued operations for the three months ended September 30, 2002. The loss from our Latin American operations totaled $156,000 and $200,000 for the three months ended September 30, 2002 and 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES During the three months ended September 30, 2002, we recorded net income of $16.1 million compared with a net loss of $50.7 million for the three months ended September 30, 2001. Net income for the three months ended September 30, 2002 includes a gain on the disposal of our Latin American operations of $12.5 million while the net loss for the three months ended September 30, 2001 includes a charge of $49.5 million relating to the adoption effective July 1, 2001 of the new goodwill standard. Cash used in operating activities totaled $3.0 million for the three months ended September 30, 2002 and $5.3 million for the three months ended September 30, 2001. Cash flow used in operating activities in each of the three month periods ended September 30, 2002 and 2001 included the cash flow effect of our semi-annual interest payment of $5.9 million related to our Senior Notes. At September 30, 2002, we had cash of $4.4 million, total debt of $307.8 million and a stockholders' deficit of $159.2 million. Our total debt at September 30, 2002 included $149.9 million of our 7 7/8% senior notes due 2008, $152.4 million outstanding under our revolving credit facility, $4.4 million payable to a former joint venture partner and $1.1 million of capital lease obligations. On September 30, 2002, we entered into an amended credit facility with our lenders which, among other things, extended the maturity date of the facility from March 16, 2003 through December 31, 2004, waived previous non-compliance, and required the issuance to the lenders of 211,549 shares of our Series B convertible preferred stock. Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our credit agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which is subject to, among other things, our future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control. 29 If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. Although there can be no assurances, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through September 30, 2003. To the extent that actual results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, issuance of senior notes, the sale of common stock through an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options. During the three months ended September 30, 2002, cash flow used in operations was approximately $3.0 million resulting primarily from net income of $16.1 million, offset by the non-cash effect of the disposal of our Latin American operations of $13.7 million, non-cash depreciation and amortization expense of $3.4 million and provision for doubtful accounts of $18.7 million. Additionally, cash flow from operating activities was negatively impacted by a decrease in accrued liabilities of $8.3 million and an increase in accounts receivable of $17.9 million. Cash flow used in operations was $5.3 million for the three months ended September 30, 2001. Cash used in investing activities was approximately $1.8 million for the three months ended September 30, 2002 due primarily to capital expenditures of approximately $2.0 million offset by proceeds from the sale of property and equipment of approximately $0.2 million. Cash used in investing activities was approximately $1.2 million for the three months ended September 30, 2001, due to capital expenditures of approximately $1.5 million net of proceeds from the sale of property and equipment of $0.3 million. Cash used in financing activities was approximately $0.6 million for the three months ended September 30, 2002, primarily due to repayments on capital lease obligations and other debt and cash paid for debt issuance costs. Cash used in financing activities was approximately $0.3 million for the three months ended September 30, 2001. Our accounts receivable, net of the allowance for Medicare, Medicaid and contractual discounts and doubtful accounts, were $97.7 million and $99.1 million as of September 30, 2002 and June 30, 2002, respectively. The decrease in net accounts receivable is due to many factors, including the disposal of the Latin American operations, collection of outstanding receivables related to closed service areas and overall improvement in collections on existing operations. The allowance for Medicare, Medicaid, contractual discounts and doubtful accounts was $32.7 million at June 30, 2002 compared to $32.6 million at September 30, 2002. The change in the allowance for Medicare, Medicaid, contractual discounts and doubtful accounts is due to the write-off of uncollectible receivables offset by the current period provision for doubtful accounts. We have instituted several initiatives to improve our collection procedures. While management believes that we have a predictable method of determining the realizable value of our accounts receivable, based on continuing difficulties in the healthcare reimbursement environment, there can be no assurance that there will not be additional future write-offs. See Risk Factors -- "We depend on reimbursements by third-party payers and individuals." With respect to our general liability insurance policy for the policy year commencing in June 2000, we are required to set aside $100,000 per month into a designated "loss fund" account, which cash is restricted to the payment of our deductible obligations as required under such policy. A similar funding program is in place with respect to our general liability policy for the policy year commencing in June 2001. We expect to fund these deposits on a monthly basis in subsequent years until such time as our total loss fund deposits equal the contractual ceiling on our total deductible obligation under these policies. The loss fund deposits are used as necessary to pay our deductible portion of claims related to the applicable policy year. Accordingly, the loss fund balances vary during the course of the year depending upon the frequency and severity of claims payments; however, we typically maintain a minimum balance in each loss 30 fund of at least $250,000. An unanticipated increase in the frequency and severity of claims payments at any one time could exceed the applicable loss fund balance for that policy year, in which case, such claims payments could, either individually or in the aggregate, have a material adverse effect on our business, financial condition, cash flows and results of operations. See "Risk Factors -- We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements." During fiscal years 1992 through 2001, we purchased certain portions of our workers' compensation coverage from Reliance Insurance Company (Reliance). At the time we purchased the coverage, Reliance was an "A" rated insurance company. In connection with this coverage, we provided Reliance with various amounts and forms of collateral (e.g., letters of credit, surety bonds and cash deposits) to secure our performance under the respective policies as was customary and required in the workers' compensation marketplace at the time. As of September 30, 2002, Reliance held $3.0 million of cash collateral under this coverage. On May 29, 2001, Reliance was placed under rehabilitation by the Pennsylvania Insurance Department (the Department) and on October 3, 2001 was placed into liquidation by the Department. As mentioned previously, the cash on deposit with Reliance serves to secure our performance under the related policies; specifically, the payment by us of claims within our level of retention in the various policy years. Consistent with past practice, we periodically fund an imprest account maintained by our third-party administrator who actually makes claim payments on our behalf. It is our understanding that the cash collateral held by the Reliance liquidator will be returned to us once all related claims have been satisfied so long as we have satisfied our claim payment obligations under the related policies. To the extent that certain of our workers' compensation claims have exceeded our level of retention under the Reliance policies, the applicable state guaranty funds have provided such coverage at no additional cost to us. For fiscal 2002, we purchased certain portions of our workers' compensation coverage from Legion Insurance Company (Legion). At the time we purchased the coverage, Legion was an "A" rated insurance carrier. In connection with the Legion policy, we deposited $6.2 million into a captive insurance program managed by Mutual Risk Management (MRM), an affiliate of Legion. This deposit approximated the amount of claims within our level of retention for the policy year May 1, 2001 through April 30, 2002. In contrast to the deposits placed with Reliance, this deposit is not collateral to secure our performance under the policy but rather represents funds to be used by MRM to pay claims within our level of retention on our behalf. As of September 30, 2002, MRM held $4.3 million of cash under this program. On April 1, 2002, the Department placed Legion under rehabilitation. MRM has continued to utilize the cash on deposit to make claim payments on our behalf. Additionally, it is our understanding that these funds represent our assets and are not general assets of Legion or MRM. Based on the information currently available, we believe that the amounts on deposit with Reliance and Legion/MRM are fully recoverable and will either be returned to us or used to pay claims on our behalf. Our inability to access the funds on deposit with either Reliance or Legion/MRM could have a material adverse effect on our business, financial condition, results of operations and cash flows. We had working capital of $41.3 million at September 30, 2002, including cash of $4.4 million compared with working capital of $27.5 million, including cash of $9.8 million at June 30, 2002. The increase in working capital is primarily due to the $19.8 million decrease in accrued liabilities which is related to a decrease in accrued interest due to the conversion of accrued interest to principal in the amended credit facility as well as the assumption of the Argentine liabilities by the buyer in the disposition of our Latin American operations. 31 In March 1998, we entered into a $200.0 million revolving credit facility originally scheduled to mature March 16, 2003. The credit facility is unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. Interest rates and availability under the revolving credit facility depended on our meeting certain financial covenants, including total debt leverage ratios, total debt to capitalization ratios, and fixed charge ratios. The revolving credit facility initially was priced at the greater of (i) prime rate or Federal Funds rate plus 0.5% plus the applicable margin, or (ii) a LIBOR-based rate. The LIBOR-based rates ranged from LIBOR plus 0.875% to LIBOR plus 1.75%. In December 1999, primarily as a result of additional provisions for doubtful accounts, we entered into noncompliance with three financial covenants under the revolving credit facility: total debt leverage ratio, total debt to total capitalization ratio and fixed charge coverage ratio. We received a series of compliance waivers regarding the financial covenants covering the periods from December 31, 1999 through April 1, 2002. The waivers provided among other things, for enhanced reporting and other requirements and that no additional borrowings would be available to us. Pursuant to the waivers, as LIBOR contracts expired in March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest became payable monthly. Pursuant to the waivers, we also were required to accrue additional interest expense at a rate of 2.0% per annum on the outstanding balance on the revolving credit facility. We recorded approximately $7.4 million related to this additional interest expense through September 30, 2002. In connection with the waivers, we also made principal payments in an aggregate amount of $5.2 million. Effective September 30, 2002, we entered into an amended credit facility pursuant to which, among other things, the maturity date of the credit facility was extended to December 31, 2004 and our prior noncompliance was permanently waived. The principal terms of the amended and restated credit agreement are as follows: * WAIVER. Prior noncompliance was permanently waived with respect to the covenant violations described above and with respect to certain other noncompliance items, including non-reimbursement of approximately $2.6 million drawn by beneficiaries under letters of credit issued under the original facility. * MATURITY DATE. The maturity date of the facility was extended to December 31, 2004. * PRINCIPAL BALANCE. Accrued interest (approximately $6.9 million), non-reimbursed letters of credit and various fees and expenses associated with the amended credit facility (approximately $1.2 million) were added to the principal amount of the loan, resulting in an outstanding principal balance as of the effective date of the amendment equal to $152.4 million. * NO REQUIRED AMORTIZATION. No principal payments are required until the maturity date of the facility. * INTEREST RATE. The interest rate was increased to LIBOR plus 7.0% (8.8% as of the effective date of the amendment), payable monthly. By comparison, the effective interest rate (including the 2.0% accrued interest described above) applicable to the original facility immediately prior to the effective date of the amendment was 7.0%. * FINANCIAL COVENANTS. The amended facility includes the same financial covenants as were included in the original credit facility, with compliance levels under such covenants adjusted to levels consistent with current business levels and outlook. The covenants include (i) total debt leverage ratio (initially set at 7.48), (ii) minimum tangible net worth (initially set at a $230.1 million deficit), (iii) 32 fixed charge coverage ratio (initially set at 0.99), (iv) limitation on capital expenditures of $11 million per fiscal year; and (v) limitation on operating leases during any period of four fiscal quarters to 3.10% of consolidated net revenues. The compliance levels for covenants (i) through (iii) above are set at varying levels on a quarterly basis. Compliance is tested quarterly based on annualized or year-to-date results as applicable. * OTHER COVENANTS. The amended credit facility includes various non-financial covenants equivalent in scope to those included in the original facility. The covenants include restrictions on additional indebtedness, liens, investments, mergers and acquisitions, asset sales, and other matters. The amended credit facility includes extensive financial reporting obligations and provides that an event of default occurs should we lose customer contracts in any fiscal quarter with EBITDA contribution of $5 million or more (net of anticipated contributions from new contracts). * EXISTING LETTERS OF CREDIT. Pursuant to the amended facility, letters of credit issued pursuant to the original credit agreement will be reissued or extended, to a maximum of $3.5 million, for letter of credit fees aggregating 1 7/8% per annum. A third letter of credit, in the amount of $2.6 million which previously was drawn by its beneficiary, will be reissued subject to application of the funds originally drawn in reduction of the principal balance of the facility and payment of a letter of credit fee equal to 7% per annum. * EQUITY INTEREST. As additional consideration for entering into the amended credit facility, we issued shares of our Series B convertible preferred stock to the participants in the amended credit facility. The preferred stock is convertible into 2,115,490 common shares (10% of the post-conversion common shares outstanding on a diluted basis, as defined). The conversion ratio is subject to upward adjustment if we issue common stock or securities convertible into our common stock for consideration less than fair market value of such securities at the time of such transaction. Because a sufficient number of common shares are not currently available to permit conversion, we intend to seek stockholder approval to amend our certificate of incorporation to authorize additional common shares. Conversion of the preferred shares occurs automatically upon approval by our stockholders of sufficient common shares to permit conversion. Should our stockholders fail to approve such a proposal by December 31, 2004, we will be required to redeem the preferred stock for a price equal to the greater of $15 million or the value of the common shares into which the preferred shares would otherwise have been convertible. In addition, should our stockholders fail to approve such a proposal, the preferred stock enjoys a preference upon a sale of our company, a sale of our assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the preferred stock would otherwise have been convertible or (ii) $10 million, $12.5 million or $15 million depending on whether the triggering event occurs prior to January 31, 2003, December 31, 2003 or December 31, 2004, respectively. At the election of the holder, the preferred shares carry voting rights as if such shares were converted into common shares. The preferred shares do not bear a dividend. The preferred shares (and common shares issuable upon conversion of the preferred shares) are entitled to certain registration rights. The terms of the preferred shares limit us from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock. We recorded approximately $6.8 million of deferred debt issuance costs related to the amended credit facility ($4.2 million related to the fair value of the preferred stock, $1.2 million of lender fees which were added to the principal balance of the facility and $1.4 million of related professional fees). These costs are included in other assets in the accompanying consolidated balance sheet as of September 30, 2002. These costs will be amortized to interest expense over the life of the agreement. The fair value of the preferred stock was estimated to be the market value of the common stock to be acquired upon conversion of the preferred stock, measured at the date of the amendment. The preferred stock balance will be accreted to the greater of $15.0 million or the value of the common shares into which the preferred shares would otherwise be converted over the life of the agreement or until the preferred shares are converted to common shares. Due to the higher interest rate associated with the amended credit facility, we anticipate that our cash interest expense will increase approximately $5.6 million annually. In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes) under Rule 144A under the Securities Act of 1933, as amended (Securities Act). Interest under the Notes is payable semi-annually on September 15 and March 15, and the Notes are not callable until March 2003 subject to the terms of the Indenture. We incurred expenses related to the offering of approximately $5.3 million and are amortizing these costs to interest expense over the life of 33 the Notes. In April 1998, we filed a registration statement under the Securities Act relating to an exchange offer for the Notes. The registration became effective on May 14, 1998. The Notes are general unsecured obligations of our company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. The Notes contain certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations. Since March 2000, we have satisfied all of our cash needs through cash flow from operations and our cash reserves. Similarly, we expect that cash flow from operations and our existing cash reserves will be sufficient to meet our regularly scheduled debt service and our planned operating and capital needs for the 12 months subsequent to September 30, 2002. Through our restructuring program we have closed or downsized several locations that were negatively impacting our cash flow. In addition, we have significantly reduced our corporate overhead. We have improved the quality of our revenue and have experienced an upward trend in daily cash collections. There can be no assurance that we will meet our targeted levels of operating cash flow or that we will not incur significant unanticipated liabilities. Similarly, there can be no assurance that we will be able to obtain additional debt or equity financing on terms satisfactory to us, or at all, should cash flow from operations and our existing cash resources prove to be inadequate. As discussed above, though we have recently successfully negotiated an amendment and extension of our credit facility, we will not have access to additional borrowings under such facility. If we are required to seek additional financing, any such arrangement may involve material and substantial dilution to existing stockholders resulting from, among other things, issuance of equity securities or the conversion of all or a portion of our existing debt to equity. In such event, the percentage ownership of our current stockholders will be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. If we require additional financing but are unable to obtain it, our business, financial condition, cash flows and results of operations may be materially adversely affected. EFFECTS OF FOREIGN CURRENCY EXCHANGE FLUCTUATIONS As a result of the sale of our Latin American operations in September 2002, it is not anticipated that future fluctuations in the currency exchange rates will have an adverse effect on us. RISK FACTORS The following risk factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating us and our business. 34 WE HAVE SIGNIFICANT INDEBTEDNESS. We have significant indebtedness. As of September 30, 2002, we have approximately $307.8 million of consolidated indebtedness, consisting primarily of $150.0 million of 7 7/8% senior notes due in 2008 and approximately $152.4 million outstanding under our credit facility. Our ability to service our debt depends on our future operating performance, which is affected by governmental regulations, the state of the economy, financial factors, and other factors, certain of which are beyond our control. We may not generate sufficient funds to enable us to make our periodic debt payments. Failure to make our periodic debt payments could have a material adverse effect on our business, financial condition, results of operations and cash flows. OUR LOAN AGREEMENTS REQUIRE US TO COMPLY WITH NUMEROUS COVENANTS AND RESTRICTIONS. The agreement governing the terms of the senior notes contains certain covenants limiting our ability to: * incur certain additional debt * create certain liens * pay dividends * issue guarantees * redeem capital stock * enter into transactions with affiliates * make certain investments * sell assets * issue capital stock of subsidiaries * complete certain mergers and consolidations
The amended credit facility contains other more restrictive covenants and requires us to satisfy certain financial tests, including a total debt leverage ratio, a total debt to total capitalization ratio, and a fixed charge ratio. Our ability to satisfy those covenants can be affected by events both within and beyond our control, and we may be unable to meet these covenants. A breach of any of the covenants or other terms of our debt could result in an event of default under the amended credit facility or the senior notes or both, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. WE MAY NOT BE ABLE TO GENERATE SUFFICIENT OPERATING CASH FLOW. Despite significant net losses in fiscal 2001 and 2000, our restructuring efforts have enabled us to self-fund our operations since March 2000 from existing cash reserves and operating cash flow. However, we may be unable to sustain our targeted levels of operating cash flow. Our ability to generate operating cash flow will depend upon various factors, including industry conditions, economic conditions, competitive conditions, and other factors, many of which are beyond our control. Because of our significant indebtedness, a substantial portion of our cash flow from operations is dedicated to debt service and is not available for other purposes. The terms of our amended credit facility do not permit additional borrowings thereunder. In addition, the amended credit facility and the senior notes also restrict our ability to provide collateral to any prospective lender. If we are unable to meet our targeted levels of operating cash flow, or in the event of an unanticipated cash requirement (such as an adverse litigation outcome, reimbursement delays, significantly increased costs of insurance or other matters) we will need to pursue additional debt or equity financing. Any such financing may not be available on terms acceptable to us, or at all. If we issue equity securities in connection with any such arrangement, the percentage ownership of our current stockholders will be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. Failure to maintain adequate operating cash flow will have a material adverse effect on our business, financial condition, results of operations and cash flows. WE FACE SIGNIFICANT DILUTION OF OUR COMMON STOCK In conjunction with amended credit facility we issued shares of our Series B convertible preferred stock to the participants in the amended credit facility. The preferred stock is convertible into 2,115,490 common shares. Because sufficient common shares are not currently available to permit conversion, we intend to seek stockholder approval to authorize additional common shares. Conversion of the preferred stock to common shares will result in dilution of approximately 12%. Until such time as the additional common shares are authorized, the fair value of the redeemable preferred stock will be accreted to the greater of $150 million or the value of which the preferred stock would have otherwise been convertible to. This accretion will be a reduction in income available to common stockholders. 35 WE DEPEND ON REIMBURSEMENTS BY THIRD-PARTY PAYERS AND INDIVIDUALS. We receive a substantial portion of our payments for ambulance services from third-party payers, including Medicare, Medicaid, and private insurers. We received approximately 89.8% of our ambulance fee collections from such third-party payers during the three months ended September 30, 2002, including approximately 25.7% from Medicare. In the three months ended September 30, 2001, we also received approximately 86.7% of ambulance fee collections from these third parties, including approximately 24.9% from Medicare. The reimbursement process is complex and can involve lengthy delays. From time to time, we experience these delays. Third-party payers are continuing their efforts to control expenditures for health care, including proposals to revise reimbursement policies. We recognize revenue when we provide ambulance services; however, there can be lengthy delays before we receive payment. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on assertions that certain amounts are not reimbursable or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. We are subject to governmental audits of our Medicare and Medicaid reimbursement claims and may be required to repay these agencies if a finding is made that we were incorrectly reimbursed, or we may lose eligibility for certain programs in the event of certain types of noncompliance. Delays and uncertainties in the reimbursement process adversely affect the level of accounts receivable, increase the overall costs of collection, and may adversely affect our working capital and cause us to incur additional borrowing costs. We also face the continuing risk of non-reimbursement to the extent that uninsured individuals require emergency ambulance service in service areas where an adequate subsidy is not provided. Amounts not covered by third-party payers are the obligations of individual patients. We may not receive whole or partial reimbursement from these uninsured individuals. We continually review the mix of activity between emergency and general medical transport in view of the reimbursement environment and evaluate methods of recovering these amounts through the collection process. We establish an allowance for Medicare, Medicaid and contractual discounts and doubtful accounts based on credit risk applicable to certain types of payers, historical trends, and other relevant information. We review our allowance for doubtful accounts on an ongoing basis and may increase or decrease such allowances from time to time, including in those instances when we determine that the level of effort and cost of collection of certain accounts receivable is unacceptable. The risks associated with third-party payers and uninsured individuals and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Our collection policies or our allowance for Medicare, Medicaid and contractual discounts and doubtful accounts receivable may not be adequate. WE HAVE EXPERIENCED MATERIAL INCREASES IN THE COST OF OUR INSURANCE AND SURETY PROGRAMS AND IN RELATED COLLATERALIZATION REQUIREMENTS. We have experienced a substantial rise in the costs associated with both our insurance and surety bonding programs in comparison to prior years. We have experienced significant increases both in the premiums we have had to pay, and in the collateral or other advance funding required. We also have increased our deductible and self-insurance retentions under several coverages. Many counties, municipalities, and fire districts also require us to provide a surety bond or other assurance of financial and performance responsibility, and the cost and collateral requirements associated with obtaining such bonds have increased. A significant factor is the overall hardening of the insurance, surety and re-insurance markets, which has resulted in demands for larger premiums, collateralization of payment obligations and increasingly rigorous underwriting requirements. Our higher costs also result from our claims history and from vendors' past perception of our financial position due to our current debt structure and cash position, as well as the qualified opinion formerly issued with respect to our audited financial statements. Sustained and substantial annual increases in premiums and requirements for collateral or pre-funded deductible obligations may have a material adverse effect on our business, financial condition, cash flow and results of operations. 36 CLAIMS AGAINST US COULD EXCEED OUR INSURANCE COVERAGE. We are subject to a significant number of accident, injury and malpractice claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. The coverage limits of our policies may not be adequate. Liabilities in excess of our insurance coverage could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation and business. OUR RESERVES MAY PROVE INADEQUATE. Under our general liability and employee medical insurance programs, and under our workers' compensation programs prior to May 1, 2002, we are responsible for deductibles in varying amounts. Our insurance coverages in prior years generally did not include an aggregate limitation on our liability. We have established reserves for losses and loss adjustment expenses under these policies. Our reserves are estimates based on industry data and historical experience, and include judgments of the effects that future economic and social forces are likely to have on our experience with the type of risk involved, circumstances surrounding individual claims and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently uncertain and are subject to a number of highly variable and difficult to predict circumstances. For these reasons, there can be no assurance that our ultimate liability will not materially exceed our reserves. If our reserves prove to be inadequate, we will be required to increase our reserves with a corresponding reduction, which may be material, to our operating results in the period in which the deficiency is identified. We periodically have engaged actuaries in recent years in order to verify the reasonableness of our reserve estimates. RECENTLY ENACTED RULES MAY ADVERSELY AFFECT OUR REIMBURSEMENT RATES OF COVERAGE. On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54, plus separate mileage payment based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept the assigned reimbursement rate as full payment, after patients have submitted their deductible and 20 percent of Medicare's fee for service. In addition, the Final Rule calls for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter. We believe the Medicare Ambulance Fee Schedule will cause a neutral net impact on our medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of our U.S. operations. These rules could, however, result in contract renegotiations or other actions by us to offset any negative impact at the regional level that could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Changes in reimbursement policies, or other governmental action, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in our cost structure relative to the rate increase in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on our business, financial condition, cash flows, and results of operations. CERTAIN STATE AND LOCAL GOVERNMENTS REGULATE RATE STRUCTURES AND LIMIT RATES OF RETURN. State or local government regulations or administrative policies regulate rate structures in most states in which we conduct ambulance operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services 37 pursuant to a master contract and establishes the rates for general ambulance services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. For example, the State of Arizona establishes a rate of return on sales we are permitted to earn in determining the ambulance service rates we may charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 18.9% of net revenue for the three months ended September 30, 2002 and approximately 16.4% of net revenue for the three months ended September 30, 2001. We may be unable to receive ambulance service rate increases on a timely basis where rates are regulated or to establish or maintain satisfactory rate structures where rates are not regulated. Municipalities and fire districts negotiate the payments to be made to us for fire protection services pursuant to master contracts. These master contracts are based on a budget and on level of effort or performance criteria desired by the municipalities and fire districts. We could be unsuccessful in negotiating or maintaining profitable contracts with municipalities and fire districts. NUMEROUS GOVERNMENTAL ENTITIES REGULATE OUR BUSINESS. Numerous federal, state, local, and foreign laws and regulations govern various aspects of the business of ambulance service and fire fighting service providers, covering matters such as licensing, rates, employee certification, environmental matters, radio communications and other factors. Certificates of necessity may be required from state or local governments to operate ambulance services in a designated service area. Master contracts from governmental authorities are subject to risks of cancellation or unenforceability as a result of budgetary and other factors and may subject us to certain liabilities or restrictions that traditionally have applied only to governmental bodies. Federal, state, local, or foreign governments could: * change existing laws or regulations, * adopt new laws or regulations that increase our cost of doing business, * lower reimbursement levels, * choose to provide services for themselves, or * otherwise adversely affect our business, financial condition, cash flows, and results of operations. We could encounter difficulty in complying with all applicable laws and regulations. HEALTH CARE REFORMS AND COST CONTAINMENT MAY AFFECT OUR BUSINESS. Numerous legislative proposals have been considered that would result in major reforms in the U.S. health care system. We cannot predict which, if any, health care reforms may be proposed or enacted or the effect that any such legislation would have on our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which protects the privacy of patients' health information handled by health care providers and establishes standards for its electronic transmission, was enacted on August 21, 1996. The final rule, which took effect on April 14, 2001, requires covered entities to comply with the final rule's provisions by April 14, 2003, and covers all individually identifiable health information used or disclosed by a covered entity. Our HIPAA Subcommittee of the Corporate Compliance Committee is addressing the impact of HIPAA and considering changes to or enactment of policies and/or procedures which may need to be implemented to comply under the final rule. Because the impact of HIPAA on the health care industry is not known at this time, we may incur significant costs associated with implementation and continued compliance with HIPAA or further legislation which may have a material adverse effect on our business, financial condition, cash flows, or results of operations. In addition, managed care providers are focusing on cost containment measures while seeking to provide the most appropriate level of service at the most appropriate treatment facility. Changing industry practices could have an adverse effect on our business, financial condition, cash flows, and results of operations. 38 WE DEPEND ON CERTAIN BUSINESS RELATIONSHIPS. We depend to a great extent on certain contracts with municipalities or fire districts to provide 911 emergency ambulance services and fire protection services. Our six largest contracts accounted for approximately 19.3% of net revenue for the three months ended September 30, 2002 and approximately 19.5% of net revenue for the three months ended September 30, 2001. One of these contracts accounted for approximately 4.3% of net revenue for the three months ended September 30, 2002 and approximately 4.5% of net revenue for the three months ended September 30, 2001. Contracts with municipalities or fire districts may have certain budgetary approval constraints. Failure to allocate funds for a contract may adversely affect our ability to continue to perform services without suffering significant losses. The loss or cancellation of several of these contracts could have a material adverse effect on our business, financial condition, cash flow, and results of operations. We may not be successful in retaining our existing contracts or in obtaining new contracts for emergency ambulance services or for fire protection services. Our contracts with municipalities and fire districts and with managed care organizations and health care providers are short term or open-ended or for periods ranging from two years to five years. During such periods, we may determine that a contract is no longer favorable and may seek to modify or terminate the contract. When making such a determination, we may consider factors, such as weaker than expected transport volume, geographical issues adversely affecting response times, and delays in implementing technology upgrades. We face certain risks in attempting to terminate unfavorable contracts prior to their expiration because of the possibility of forfeiting performance bonds and the potential adverse political and public relations consequences. Our inability to terminate or amend unfavorable contracts could have a material adverse effect on our business, financial condition, cash flows, and results of operations. We also face the risk that areas in which we provide fire protection services through subscription arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities. WE FACE RISKS ASSOCIATED WITH OUR PRIOR RAPID GROWTH, INTEGRATION, AND ACQUISITIONS. We must integrate and successfully operate the ambulance service providers that we have acquired. The process of integrating management, operations, facilities, and accounting and billing and collection systems and other information systems requires continued investment of time and resources and can involve difficulties, which could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Unforeseen liabilities and other issues also could arise in connection with the operation of businesses that we have previously acquired or may acquire in the future. For example, we recently became aware of, and have taken corrective action with respect to, various issues arising primarily from the transition to us from various acquired operations of Federal Communications Commission (FCC) licenses for public safety and private wireless radio frequencies used in the ordinary course of our business. While we do not currently anticipate that action with respect to these issues by the FCC's enforcement bureau will result in material monetary fines or license forfeitures, there can be no assurance that this will be the case. Our acquisition agreements contain purchase price adjustments, rights of set-off, indemnification, and other remedies in the event that certain unforeseen liabilities or issues arise in connection with an acquisition. However, these purchase price adjustments, rights of set-off, indemnification, and other remedies expire and may not be sufficient to compensate us in the event that any liabilities or other issues arise. WE FACE ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS. Due to the deteriorating economic conditions and continued devaluation of the local currency, we have reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia. We have determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management. We believe that both the structure of our pre-sale operations and of 39 the sale transaction itself shield us from liabilities associated with past or future activities of our former Latin American operations. However, due to the nature of local laws and regulatory requirements and the uncertain economic and political environment, particularly in Argentina, there can be no assurance that we will not be required to defend against future claims. Unanticipated claims successfully asserted against us could have an adverse effect on our business, financial condition, cash flows, and results of operations. WE ARE IN A HIGHLY COMPETITIVE INDUSTRY. The ambulance service industry is highly competitive. Ambulance and general transport service providers compete primarily on the basis of quality of service, performance, and cost. In order to compete successfully, we must make continuing investments in our fleet, facilities, and operating systems. We believe that counties, fire districts, and municipalities consider the following factors in awarding a contract: * quality of medical care, * historical response time performance, * customer service, * financial stability, and * personnel policies and practices. We currently compete with the following entities to provide ambulance services: * governmental entities (including fire districts), * hospitals, * other national ambulance service providers, * large regional ambulance service providers, and * local and volunteer private providers. Municipalities, fire districts, and health care organizations that currently contract for ambulance services could choose to provide ambulance services directly in the future. We are experiencing increased competition from fire departments in providing emergency ambulance service. Some of our current competitors and certain potential competitors have or have access to greater capital and other resources than us. Tax-supported fire districts, municipal fire departments, and volunteer fire departments represent the principal providers of fire protection services for residential and commercial properties. Private providers represent only a small portion of the total fire protection market and generally provide services where a tax-supported municipality or fire district has decided to contract for these services or has not assumed the financial responsibility for fire protection. In these situations, we provide services for a municipality or fire district on a contract basis or provide fire protection services directly to residences and businesses who subscribe for this service. We cannot provide assurance that: * we will be able continue to maintain current contracts or subscription or to obtain additional fire protection business on a contractual or subscription basis; * fire districts or municipalities will not choose to provide fire protection services directly in the future; or * areas in which we provide services through subscriptions will not be converted to tax-supported fire districts or annexed by municipalities. WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL. Our success depends upon our ability to recruit and retain key personnel. We could experience difficulty in retaining our current key personnel or in attracting and retaining necessary additional key personnel. Low unemployment in certain market areas currently makes the recruiting, training, and retention of full-time and part-time personnel more difficult and costly, including the cost 40 of overtime wages. Our internal growth will further increase the demand on our resources and require the addition of new personnel. We have entered into employment agreements with certain of our executive officers and certain other key personnel. Failure to retain or replace our key personnel may have an adverse effect on our business. IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Certain provisions of our certificate of incorporation, shareholders' rights plan and Delaware law could make it more difficult for a third party to acquire control of our company, even if a change in control might be beneficial to stockholders. This could discourage potential takeover attempts and could adversely affect the market price of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONDITION. Our primary exposure to market risk consists of changes in interest rates on our borrowing activities. We face the possibility of increased interest expense in connection with our amended credit facility which bears interest at LIBOR plus 7.0%. A 1% increase in the LIBOR rate would increase our interest expense on an annual basis by approximately $1.5 million. The remainder of our debt is primarily at fixed interest rates. We continually monitor this risk and review the potential benefits of entering into hedging transactions, such as interest rate swap agreements, to mitigate the exposure to interest rate fluctuations. ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management, including the Chief Executive Officer and Vice President of Finance, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Within 90 days prior to the date of filing of this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, the Chief Executive Officer along with the Vice President of Finance concluded that our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the applicable time periods. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation. RURAL/METRO CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION. ITEM 1 -- LEGAL PROCEEDINGS. From time to time, we are subject to litigation and regulatory investigations arising in the ordinary course of business. We believe that the resolutions of currently pending claims or legal proceedings will not have a material adverse effect on our business, financial condition, cash flows and results of operations. However, we are unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, our insurance coverage may not be adequate to cover all liabilities arising out of 41 such claims. In addition, due to the nature of our business, Center for Medicare and Medicaid Services (CMS) and other regulatory agencies are expected to continue their practice of performing periodic reviews and initiating investigations related to the Company's compliance with billing regulations. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on our business, financial condition, cash flows and results of operations. We recently became aware that, we, Arthur Andersen LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and Jane Doe Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO CORPORATION, ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa County, Arizona Superior Court. The lawsuit was brought on behalf of a class of persons who purchased our publicly traded securities including our common stock between July 1, 1996 through June 30, 2001. The primary allegations of the complaint include violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Company's 401(k) plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan. The Plaintiffs seek unspecified compensatory and punitive damages. On October 30, 2002, Defendant Arthur Andersen LLP removed the action to the United States District Court of Arizona, CIV-02-2183-PHX-JWS. We have not yet been served with this complaint. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS (c) In consideration of entering into the amended credit facility, the Company issued shares of its Series B Convertible Preferred Stock on September 30, 2002 to the participants in the credit facility. The shares were issued in reliance on the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended. The preferred stock is convertible into 2,115,490 common shares (10% of the sum of the common shares outstanding on a diluted basis, as defined). The conversion ratio is subject to upward adjustment if we issue common stock or securities convertible into our common stock for consideration less than the fair market value of such securities at the time of such transaction. Because a sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to amend its certificate of incorporation to authorize additional common shares. Conversion of the preferred shares occurs automatically upon approval by the Company's stockholders of sufficient common shares to permit conversion. Should the Company's stockholders fail to approve such a proposal by December 31, 2004, the Company will be required to redeem the preferred stock for a price equal to the greater of $15 million or the value of the common shares into which the preferred shares would otherwise have been convertible. In addition, should the Company's stockholders fail to approve such a proposal, the preferred stock enjoys a preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the preferred stock would otherwise have been convertible or (ii) $10 million, $12.5 million or $15 million depending on whether the triggering event occurs prior to January 31, 2003, December 31, 2003 or December 31, 2004, respectively. At the election of the holder, the preferred shares carry voting rights as if such shares were converted into common shares. The preferred shares do not bear a dividend. The preferred shares (and common shares issuable upon conversion of the preferred shares) are entitled to certain registration rights. The terms of the preferred shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock (including the Company's Common Stock). 42 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RURAL/METRO CORPORATION Dated: November 14, 2002 By: /s/ Jack E. Brucker ------------------------------------ Jack E. Brucker, President & Chief Executive Officer (Principal Executive Officer) By: /s/ Randall L. Harmsen ------------------------------------ Randall L. Harmsen, Vice President of Finance (Principal Financial Officer and Principal Accounting Officer) 43 CERTIFICATION I, Jack E. Brucker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rural/Metro Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Jack E. Brucker ---------------------------------------- President and Chief Executive Officer Rural/Metro Corporation 44 CERTIFICATION I, Randall L. Harmsen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rural/Metro Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Randall L. Harmsen ---------------------------------------- Vice President of Finance (Principal Financial Officer and Principal Accounting Officer) Rural/Metro Corporation 45