-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVoiuNY7h8xW3kySuaMWi8ON71fC4gV4+H4nvC/Jr0Ti+wunILOtMeBMXhsKFrWl aYwAdosCEQ3k4JA7T1QdRw== 0000950153-00-000768.txt : 20000516 0000950153-00-000768.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950153-00-000768 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22056 FILM NUMBER: 634200 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 4809943886 10-Q 1 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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 May 10, 2000 there were 14,626,336 shares of Common Stock outstanding, exclusive of treasury shares held by the Registrant. 2 RURAL/METRO CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page ---- Part I. Financial Statements Item 1. Consolidated Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 6 Consolidated Statements of Comprehensive Income (Loss) 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Part II. Other Information Item 1. Legal Proceedings 33 Item 5. Other Information 33 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 34
2 3 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND JUNE 30, 1999 (IN THOUSANDS)
MARCH 31, JUNE 30, 2000 1999 --------- --------- (UNAUDITED) ASSETS CURRENT ASSETS Cash $ 3,273 $ 7,180 Accounts receivable, net 154,558 185,454 Inventories 17,998 16,371 Prepaid expenses and other 6,533 13,630 --------- --------- Total current assets 182,362 222,635 --------- --------- PROPERTY AND EQUIPMENT, net 92,370 95,032 INTANGIBLE ASSETS, net 217,738 240,360 OTHER ASSETS 19,559 21,880 --------- --------- $ 512,029 $ 579,907 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 14,706 $ 17,782 Accrued liabilities 24,851 58,159 Current portion of long-term debt 299,870 5,765 --------- --------- Total current liabilities 339,427 81,706 --------- --------- LONG-TERM DEBT, net of current portion 3,123 268,560 NON-REFUNDABLE SUBSCRIPTION INCOME 14,893 14,909 DEFERRED INCOME TAXES 6,561 9,438 OTHER LIABILITIES 127 205 --------- --------- Total liabilities 364,131 374,818 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 8,154 8,250 --------- --------- STOCKHOLDERS' EQUITY Common stock 149 148 Additional paid-in capital 137,603 137,792 Retained earnings 3,486 60,603 Cumulative translation adjustment (255) (465) Treasury stock (1,239) (1,239) --------- --------- Total stockholders' equity 139,744 196,839 --------- --------- $ 512,029 $ 579,907 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 3 4 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31, ---------------------------- --------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- REVENUE Ambulance services $ 119,902 $ 119,751 $ 357,908 $ 351,775 Fire protection services 14,981 12,372 42,595 37,606 Other 11,515 10,810 34,202 31,936 --------- --------- --------- --------- Total revenue 146,398 142,933 434,705 421,317 --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits 79,078 74,966 235,331 222,084 Provision for doubtful accounts 25,266 20,886 66,923 61,048 Provision for doubtful accounts - change in accounting policy -- -- 65,000 -- Depreciation 6,140 6,096 18,542 17,981 Amortization of intangibles 2,263 2,134 6,725 6,922 Other operating expenses 26,555 25,109 83,485 73,152 Restructuring charge and other 25,098 -- 25,098 2,500 --------- --------- --------- --------- Total expenses 164,400 129,191 501,104 383,687 --------- --------- --------- --------- OPERATING INCOME (LOSS) (18,002) 13,742 (66,399) 37,630 Interest expense, net 6,401 5,519 17,649 15,992 Other (21) 61 (95) 138 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (24,382) 8,162 (83,953) 21,500 Provision (benefit) for income taxes (7,767) 3,451 (28,577) 9,088 --------- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (16,615) 4,711 (55,376) 12,412 EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES (NET OF $0 OF INCOME TAXES) -- -- (1,200) -- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET OF AN INCOME TAX BENEFIT OF $392) -- -- (541) -- --------- --------- --------- --------- NET INCOME (LOSS) $ (16,615) $ 4,711 $ (57,117) $ 12,412 ========= ========= ========= =========
4 5 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
Three months ended March 31, Nine months ended March 31, ---------------------------- --------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- INCOME (LOSS) PER SHARE: Basic - Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ (1.14) $ 0.32 $ (3.80) $ 0.86 Extraordinary loss on expropriation of Canadian ambulance service licenses -- -- (0.08) -- Cumulative effect of change in a accounting principle -- -- (0.04) -- ---------- ---------- ---------- ---------- Net income (loss) $ (1.14) $ 0.32 $ (3.92) $ 0.86 ========== ========== ========== ========== Diluted - Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ (1.14) $ 0.32 $ (3.80) $ 0.85 Extraordinary loss on expropriation of Canadian ambulance service licenses -- -- (0.08) -- Cumulative effect of change in a accounting principle -- -- (0.04) -- ---------- ---------- ---------- ---------- Net income (loss) $ (1.14) $ 0.32 $ (3.92) $ 0.85 ========== ========== ========== ========== AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 14,626 14,524 14,581 14,420 ========== ========== ========== ========== AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 14,626 14,710 14,581 14,632 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 5 6 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, --------------------------- 2000 1999 --------- --------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ (57,117) $ 12,412 Adjustments to reconcile net income (loss) to cash provided by (used in) operations-- Write-off of assets included in restructuring charge 19,503 -- Extraordinary loss 1,200 -- Cumulative effect of a change in accounting principle 541 -- Depreciation and amortization 25,267 24,903 Amortization of deferred compensation -- 80 Amortization of gain on sale of real estate (78) (78) Provision for doubtful accounts 66,923 61,048 Provision for doubtful accounts - change in accounting policy 65,000 -- Undistributed earnings of minority shareholder (95) 138 Amortization of discount on Senior Notes 19 19 Change in assets and liabilities, net of effect of businesses acquired --- Increase in accounts receivable (101,172) (90,074) Increase in inventories (2,060) (1,526) Decrease in prepaid expenses and other 2,615 3,824 Decrease in accounts payable (3,098) (4,071) Decrease in accrued liabilities and other liabilities (33,126) (4,851) Increase (decrease) in nonrefundable subscription income (16) 453 Increase (decrease) in deferred income taxes (2,877) 7,770 --------- --------- Net cash provided by (used in) operating activities (18,571) 10,047 --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 33,500 27,500 Repayment of debt and capital lease obligations (4,851) (5,994) Issuance of common stock 655 1,758 --------- --------- Net cash provided by financing activities 29,304 23,264 --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (12,665) Proceeds from expropriation of Canadian ambulance service licenses 2,191 -- Capital expenditures (15,895) (15,330) Increase in other assets (973) (6,300) --------- --------- Net cash used in investing activities (14,677) (34,295) --------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE 37 (263) --------- --------- DECREASE IN CASH (3,907) (1,247) CASH, beginning of period 7,180 6,511 --------- --------- CASH, end of period $ 3,273 $ 5,264 ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan $ -- $ 1,933 ========= =========
The accompanying notes are an integral part of these financial statements. 6 7 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31, ---------------------------- --------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NET INCOME (LOSS) $(16,615) $ 4,711 $(57,117) $ 12,412 Foreign currency translation adjustments 17 31 37 (263) -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS) $(16,598) $ 4,742 $(57,080) $ 12,149 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 8 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by generally accepted principles for complete financial statements. (1) INTERIM RESULTS In the opinion of management, the consolidated financial statements for the three and nine month periods ended March 31, 2000 and 1999 include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated financial position and results of operations. The results of operations for the three and nine month periods ended March 31, 2000 and 1999 are not necessarily indicative of the results of operations for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. (2) CREDIT AGREEMENTS AND BORROWINGS In February 2000, the Company received a compliance waiver regarding the financial covenants contained in its revolving credit facility which covered the period from December 31, 1999 through March 14, 2000. In March, the Company received an additional waiver, which was amended in April, regarding the financial covenants which covers the period from March 15, 2000 through July 14, 2000. The waiver covers the representations and warranties related to no material adverse changes as well as the following financial covenants: the total debt leverage ratio, the total debt to total capitalization ratio and the fixed charge coverage ratio. The waiver stipulates that no additional borrowings will be available to the Company during the period of March 15, 2000, through July 14, 2000. In addition, the waiver (as amended) requires the Company: (i) to engage certain financial advisors, (ii) to meet certain benchmarks for projected cash balances and expenditures, and (iii) to reduce the outstanding balance on the revolving credit facility upon the sale of certain assets, the collection of certain accounts receivable and upon the attainment of certain cash balance thresholds. As LIBOR contracts expired in March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest is payable monthly. During the period of April 13, 2000, through July 14, 2000, the Company will accrue additional interest expense at a rate of 2.0% per annum on the outstanding balance on the revolving credit facility unless certain pay down requirements are met during that period, which interest is payable on July 14, 2000. At May 11, 2000, the outstanding balance on the revolving credit facility was $147.0 million with no availability on the facility. Also outstanding are $6.5 million in letters of credit issued under the revolving credit facility. A condition of the waiver agreement requires the Company to negotiate in good faith with the banks participating in the revolving credit facility in order to amend the revolving credit facility prior to July 14, 2000. Management believes that an amendment to the revolving credit facility could substantially alter the terms and conditions of the revolving credit facility, including potentially higher interest rates, which could have a material adverse effect on the financial condition of the Company. Although no Event of Default is continuing under either the terms of the revolving credit facility (as a result of the waiver agreement) or the Company's $150 million 7 7/8% Senior Notes due 2008, and although there has been no acceleration of the repayment of the revolving credit facility or the 7 7/8% Senior Notes due 2008, the entire balance of these instruments has been reclassified as a current liability at 8 9 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 31, 2000 in the accompanying financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 78 "Classification of Obligations that are Callable by the Creditor". The Company's inability to successfully negotiate an amendment of the revolving credit facility could have a material adverse effect on the financial condition of the Company. The Company has been advised by its independent public accountants that, if the Company has not successfully renegotiated an amendment of the revolving credit facility prior to the completion of their audit of the Company's financial statements for the year ending June 30, 2000, their auditors' report on those financial statements will be modified for this contingency. In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes). The Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of the Company's domestic wholly owned current and future subsidiaries. The financial statements presented below include the Consolidating Balance Sheets as of March 31, 2000 and June 30, 1999, the Consolidating Statements of Operations for the three and nine months ended March 31, 2000 and 1999, and the Consolidating Statements of Cash Flows for the nine months ended March 31, 2000 and 1999 of Rural/Metro Corporation (Parent) and the guarantor subsidiaries (Guarantors) and the subsidiaries which are not guarantors (Non-guarantors). The Company has not presented separate financial statements and related disclosures for each of the Guarantor subsidiaries because management believes such information is inconsequential to the note holders. 9 10 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 2,691 $ 582 $ -- $ 3,273 Accounts receivable, net -- 136,713 17,845 -- 154,558 Inventories -- 16,908 1,090 -- 17,998 Prepaid expenses and other 531 4,847 1,155 -- 6,533 --------- --------- --------- --------- --------- Total current assets 531 161,159 20,672 -- 182,362 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT, net -- 81,461 10,909 -- 92,370 INTANGIBLE ASSETS, net -- 141,057 76,681 -- 217,738 DUE FROM (TO) AFFILIATES 321,894 (267,616) (54,278) -- -- OTHER ASSETS 3,643 13,855 2,061 -- 19,559 INVESTMENT IN SUBSIDIARIES 110,972 -- -- (110,972) -- --------- --------- --------- --------- --------- $ 437,040 $ 129,916 $ 56,045 $(110,972) $ 512,029 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 10,166 $ 4,540 $ -- $ 14,706 Accrued liabilities 502 14,815 9,534 -- 24,851 Current portion of long-term debt 296,794 2,601 475 -- 299,870 --------- --------- --------- --------- --------- Total current liabilities 297,296 27,582 14,549 -- 339,427 --------- --------- --------- --------- --------- LONG-TERM DEBT, net of current portion -- 2,717 406 -- 3,123 NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,823 70 -- 14,893 DEFERRED INCOME TAXES -- 5,596 965 -- 6,561 OTHER LIABILITIES -- 127 -- -- 127 --------- --------- --------- --------- --------- Total liabilities 297,296 50,845 15,990 -- 364,131 --------- --------- --------- --------- --------- MINORITY INTEREST -- -- -- 8,154 8,154 STOCKHOLDERS' EQUITY Common stock 149 82 17 (99) 149 Additional paid-in capital 137,603 54,622 34,942 (89,564) 137,603 Retained earnings 3,486 24,367 5,351 (29,718) 3,486 Cumulative translation adjustment (255) -- (255) 255 (255) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity 139,744 79,071 40,055 (119,126) 139,744 --------- --------- --------- --------- --------- $ 437,040 $ 129,916 $ 56,045 $(110,972) $ 512,029 ========= ========= ========= ========= =========
10 11 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1999 (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 5,379 $ 1,801 $ -- $ 7,180 Accounts receivable, net -- 164,700 20,754 -- 185,454 Inventories -- 15,238 1,133 -- 16,371 Prepaid expenses and other 531 11,648 1,451 -- 13,630 --------- --------- --------- --------- --------- Total current assets 531 196,965 25,139 -- 222,635 --------- --------- --------- --------- --------- PROPERTY AND EQUIPMENT, net -- 84,448 10,584 -- 95,032 INTANGIBLE ASSETS, net -- 159,159 81,201 -- 240,360 DUE FROM (TO) AFFILIATES 302,491 (245,964) (56,527) -- -- OTHER ASSETS 4,169 15,237 2,474 -- 21,880 INVESTMENT IN SUBSIDIARIES 156,690 -- -- (156,690) -- --------- --------- --------- --------- --------- $ 463,881 $ 209,845 $ 62,871 $(156,690) $ 579,907 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 11,101 $ 6,681 $ -- $ 17,782 Accrued liabilities 3,767 42,431 11,961 -- 58,159 Current portion of long-term debt -- 4,157 1,608 -- 5,765 --------- --------- --------- --------- --------- Total current liabilities 3,767 57,689 20,250 -- 81,706 --------- --------- --------- --------- --------- LONG-TERM DEBT, net of current portion 263,275 4,384 901 -- 268,560 NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,890 19 -- 14,909 DEFERRED INCOME TAXES -- 8,473 965 -- 9,438 OTHER LIABILITIES -- 205 -- -- 205 --------- --------- --------- --------- --------- Total liabilities 267,042 85,641 22,135 -- 374,818 --------- --------- --------- --------- --------- MINORITY INTEREST -- -- -- 8,250 8,250 STOCKHOLDERS' EQUITY Common stock 148 82 17 (99) 148 Additional paid-in capital 137,792 54,622 34,942 (89,564) 137,792 Retained earnings 60,603 69,500 6,242 (75,742) 60,603 Cumulative translation adjustment (465) -- (465) 465 (465) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity 196,839 124,204 40,736 (164,940) 196,839 --------- --------- --------- --------- --------- $ 463,881 $ 209,845 $ 62,871 $(156,690) $ 579,907 ========= ========= ========= ========= =========
11 12 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 102,112 $ 17,790 $ -- $ 119,902 Fire protection services -- 14,703 278 -- 14,981 Other -- 9,633 1,882 -- 11,515 --------- --------- --------- --------- --------- Total revenue -- 126,448 19,950 -- 146,398 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 68,107 10,971 -- 79,078 Provision for doubtful accounts -- 23,797 1,469 -- 25,266 Provision for doubtful accounts - change in accounting policy -- -- -- -- -- Depreciation -- 5,486 654 -- 6,140 Amortization of intangibles -- 1,660 603 -- 2,263 Other operating expenses -- 21,763 4,792 -- 26,555 Restructuring charge and other -- 23,915 1,183 -- 25,098 --------- --------- --------- --------- --------- Total expenses -- 144,728 19,672 -- 164,400 --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) -- (18,280) 278 -- (18,002) Interest expense, net 6,178 (276) 499 -- 6,401 Other -- -- -- (21) (21) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (6,178) (18,004) (221) 21 (24,382) BENEFIT FOR INCOME TAXES (1,993) (5,618) (156) -- (7,767) --------- --------- --------- --------- --------- NET INCOME (LOSS) (4,185) (12,386) (65) 21 (16,615) LOSS FROM WHOLLY-OWNED SUBSIDIARIES (12,430) -- -- 12,430 -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ (16,615) $ (12,386) $ (65) $ 12,451 $ (16,615) ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- 17 -- 17 Comprehensive income (loss) from wholly-owned subsidiaries 17 -- -- (17) -- --------- --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ (16,598) $ (12,386) $ (48) $ 12,434 $ (16,598) ========= ========= ========= ========= =========
12 13 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 97,894 $ 21,857 $ -- $ 119,751 Fire protection services -- 12,095 277 -- 12,372 Other -- 9,577 1,233 -- 10,810 --------- --------- --------- --------- --------- Total revenue -- 119,566 23,367 -- 142,933 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 60,702 14,264 -- 74,966 Provision for doubtful accounts -- 19,701 1,185 -- 20,886 Depreciation -- 5,586 510 -- 6,096 Amortization of intangibles -- 1,549 585 -- 2,134 Other operating expenses -- 21,050 4,059 -- 25,109 --------- --------- --------- --------- --------- Total expenses -- 108,588 20,603 -- 129,191 --------- --------- --------- --------- --------- OPERATING INCOME -- 10,978 2,764 -- 13,742 Interest expense, net 5,122 (88) 485 -- 5,519 Other -- -- -- 61 61 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (5,122) 11,066 2,279 (61) 8,162 PROVISION (BENEFIT) FOR INCOME TAXES (2,151) 4,627 975 -- 3,451 --------- --------- --------- --------- --------- NET INCOME (LOSS) (2,971) 6,439 1,304 (61) 4,711 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 7,682 -- -- (7,682) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 4,711 $ 6,439 $ 1,304 $ (7,743) $ 4,711 ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- 31 -- 31 Comprehensive income (loss) from wholly-owned subsidiaries 31 -- -- (31) -- --------- --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 4,742 $ 6,439 $ 1,335 $ (7,774) $ 4,742 ========= ========= ========= ========= =========
13 14 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 298,698 $ 59,210 $ -- $ 357,908 Fire protection services -- 41,761 834 -- 42,595 Other -- 28,157 6,045 -- 34,202 --------- --------- --------- --------- --------- Total revenue -- 368,616 66,089 -- 434,705 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 195,855 39,476 -- 235,331 Provision for doubtful accounts -- 62,740 4,183 -- 66,923 Provision for doubtful accounts - change in accounting policy -- 65,000 -- -- 65,000 Depreciation -- 16,635 1,907 -- 18,542 Amortization of intangibles -- 4,862 1,863 -- 6,725 Other operating expenses -- 68,064 15,421 -- 83,485 Restructuring charge and other -- 23,915 1,183 -- 25,098 --------- --------- --------- --------- --------- Total expenses -- 437,071 64,033 -- 501,104 --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) -- (68,455) 2,056 -- (66,399) Interest expense, net 16,951 (890) 1,588 -- 17,649 Other -- -- -- (95) (95) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (16,951) (67,565) 468 95 (83,953) PROVISION (BENEFIT) FOR INCOME TAXES (5,763) (22,973) 159 -- (28,577) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (11,188) (44,592) 309 95 (55,376) EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES -- -- (1,200) -- (1,200) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (541) -- -- (541) --------- --------- --------- --------- --------- NET INCOME (LOSS) (11,188) (45,133) (891) 95 (57,117) LOSS FROM WHOLLY-OWNED SUBSIDIARIES (45,929) -- -- 45,929 -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ (57,117) $ (45,133) $ (891) $ 46,024 $ (57,117) ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- 37 -- 37 Comprehensive income (loss) from wholly-owned subsidiaries 37 -- -- (37) -- --------- --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ (57,080) $ (45,133) $ (854) $ 45,987 $ (57,080) ========= ========= ========= ========= =========
14 15 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 285,074 $ 66,701 $ -- $ 351,775 Fire protection services -- 36,791 815 -- 37,606 Other -- 29,562 2,374 -- 31,936 --------- --------- --------- --------- --------- Total revenue -- 351,427 69,890 -- 421,317 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 179,958 42,126 -- 222,084 Provision for doubtful accounts -- 56,646 4,402 -- 61,048 Depreciation -- 16,587 1,394 -- 17,981 Amortization of intangibles 214 5,004 1,704 -- 6,922 Other operating expenses -- 60,646 12,506 -- 73,152 Restructuring charge -- 2,500 -- -- 2,500 --------- --------- --------- --------- --------- Total expenses 214 321,341 62,132 -- 383,687 --------- --------- --------- --------- --------- OPERATING INCOME (LOSS) (214) 30,086 7,758 -- 37,630 Interest expense, net 14,648 7 1,337 -- 15,992 Other -- -- -- 138 138 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (14,862) 30,079 6,421 (138) 21,500 PROVISION (BENEFIT) FOR INCOME TAXES (6,242) 12,630 2,700 -- 9,088 --------- --------- --------- --------- --------- NET INCOME (LOSS) (8,620) 17,449 3,721 (138) 12,412 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 21,032 -- -- (21,032) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 12,412 $ 17,449 $ 3,721 $ (21,170) $ 12,412 ========= ========= ========= ========= ========= Foreign currency translation adjustments -- -- (263) -- (263) Comprehensive income (loss) from wholly-owned subsidiaries (263) -- -- 263 -- --------- --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 12,149 $ 17,449 $ 3,458 $ (20,907) $ 12,149 ========= ========= ========= ========= =========
15 16 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ (57,117) $ (45,133) $ (891) $ 46,024 $ (57,117) Adjustments to reconcile net income (loss) to cash provided by (used in) operations-- Write-off of assets included in restructuring charge -- 19,503 -- -- 19,503 Extraordinary loss -- -- 1,200 -- 1,200 Cumulative effect of a change in accounting principle -- 541 -- -- 541 Depreciation and amortization -- 21,497 3,770 -- 25,267 Amortization of gain on sale of real estate -- (78) -- -- (78) Provision for doubtful accounts -- 62,740 4,183 -- 66,923 Provision for doubtful accounts - change in accounting policy -- 65,000 -- -- 65,000 Undistributed earnings of minority shareholder -- -- -- (95) (95) Amortization of discount on Senior Notes 19 -- -- -- 19 Change in assets and liabilities -- Increase in accounts receivable -- (99,753) (1,419) -- (101,172) (Increase) decrease in inventories -- (2,103) 43 -- (2,060) Decrease in prepaid expenses and other -- 2,448 167 -- 2,615 (Increase) decrease in due to/from affiliates 25,645 22,496 (2,249) (45,892) -- Decrease in accounts payable -- (934) (2,164) -- (3,098) Decrease in accrued liabilities and other liabilities (3,265) (27,225) (2,636) -- (33,126) Increase (decrease) in nonrefundable subscription income -- (67) 51 -- (16) Decrease in deferred income taxes -- (2,877) -- -- (2,877) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities (34,718) 16,055 55 37 (18,571) --------- --------- --------- --------- --------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 33,500 -- -- -- 33,500 Repayment of debt and capital lease obligations -- (3,223) (1,628) -- (4,851) Issuance of common stock 655 -- -- -- 655 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities 34,155 (3,223) (1,628) -- 29,304 --------- --------- --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES Proceeds from expropriation of Canadian ambulance service licenses -- -- 2,191 -- 2,191 Capital expenditures -- (13,648) (2,247) -- (15,895) Increase in other assets 526 (1,872) 373 -- (973) --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities 526 (15,520) 317 -- (14,677) --------- --------- --------- --------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE 37 -- 37 (37) 37 --------- --------- --------- --------- --------- DECREASE IN CASH -- (2,688) (1,219) -- (3,907) CASH, beginning of period -- 5,379 1,801 -- 7,180 --------- --------- --------- --------- --------- CASH, end of period $ -- $ 2,691 $ 582 $ -- $ 3,273 ========= ========= ========= ========= =========
16 17 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 12,412 $ 17,449 $ 3,721 $(21,170) $ 12,412 Adjustments to reconcile net income to cash provided by (used in) operations-- Depreciation and amortization 214 21,591 3,098 -- 24,903 Amortization of deferred compensation 80 -- -- -- 80 Amortization of gain on sale of real estate -- (78) -- -- (78) Provision for doubtful accounts -- 56,646 4,402 -- 61,048 Undistributed earnings of minority shareholder -- -- -- 138 138 Amortization of discount on Senior Notes 19 -- -- -- 19 Change in assets and liabilities, net of effect of businesses acquired --- Increase in accounts receivable -- (81,786) (8,288) -- (90,074) Increase in inventories -- (1,440) (86) -- (1,526) Decrease in prepaid expenses and other 136 3,132 556 -- 3,824 (Increase) decrease in due to/from affiliates (39,133) 2,172 11,763 25,198 -- Increase (decrease) in accounts payable -- (4,687) 616 -- (4,071) Increase (decrease) in accrued liabilities and other liabilities (2,723) (2,259) 131 -- (4,851) Increase (decrease) in nonrefundable subscription income -- 455 (2) -- 453 Increase (decrease) in deferred income taxes -- 7,991 (221) -- 7,770 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (28,995) 19,186 15,690 4,166 10,047 -------- -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 27,500 -- -- -- 27,500 Repayment of debt and capital lease obligations -- (5,310) (684) -- (5,994) Issuance of common stock 1,758 -- 4,429 (4,429) 1,758 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 29,258 (5,310) 3,745 (4,429) 23,264 -------- -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (445) (12,220) -- (12,665) Capital expenditures -- (12,580) (2,750) -- (15,330) Increase in other assets -- (3,754) (2,546) -- (6,300) -------- -------- -------- -------- -------- Net cash used in investing activities -- (16,779) (17,516) -- (34,295) -------- -------- -------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (263) -- (263) 263 (263) -------- -------- -------- -------- -------- INCREASE (DECREASE) IN CASH -- (2,903) 1,656 -- (1,247) CASH, beginning of period -- 2,917 3,594 -- 6,511 -------- -------- -------- -------- -------- CASH, end of period $ -- $ 14 $ 5,250 $ -- $ 5,264 ======== ======== ======== ======== ========
17 18 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) COMMITMENTS AND CONTINGENCIES During the year ended June 30, 1999, the Company entered into an option agreement whereby the Company may elect to be issued a debenture in the principal amount of up to $25.0 million by a company providing ambulance and other services in certain areas of Brazil. The Company has not exercised this option nor does it intend to exercise this option prior to June 30, 2000. The Company may elect to terminate this option agreement upon 30-day written notice or it may be terminated at the option of the Brazilian company. Included in accrued liabilities at March 31, 2000 in the accompanying balance sheets is $3.9 million attributable to the accrual of proposed settlements relating to a Medicare investigation and certain Medicaid audits. (4) CHANGE IN ACCOUNTING POLICY Effective October 1, 1999, the Company changed its accounting policy used in recording the provision for doubtful accounts. This change in policy is being treated as a change in accounting estimate. Because of the continuing difficulties encountered in the healthcare reimbursement environment, during fiscal 2000, management has continued to place increased emphasis on increasing the quality of the Company's revenue by exiting service areas or substantially reducing service where it had become unprofitable to perform non-emergency transports because of low reimbursement rates or a high risk of non-reimbursement by payors. The Company has shifted the focus of its billing personnel to place greater emphasis on the billing process as opposed to the collection process. The Company has instituted mandatory comprehensive training for its paramedics and Emergency Medical Technicians on new standards of documentation of ambulance run tickets. Management's analysis of the various payor classes within the Company's accounts receivable balance, the increasingly unpredictable nature of healthcare accounts receivable, the increasing costs to collect these receivables and management's conclusion that the aforementioned process changes had not brought about the benefits anticipated led to this accounting policy change during the second quarter of fiscal 2000. Under the new accounting policy, the Company has chosen to fully reserve its accounts receivable earlier in the collection cycle than had previously been the practice. The new accounting policy provides specific allowances based upon the age of accounts receivable within each payor class and also provides for general allowances based upon historic collection rates within each payor class. Payor classes include Medicare, Medicaid and private pay. Accordingly, the effect of this change is an additional $65.0 million provision for doubtful accounts, which was recorded separately in the three months ended December 31, 1999, and is reflected in the accompanying financial statements for the nine months ended March 31, 2000. (5) RESTRUCTURING CHARGE AND OTHER During the first quarter of fiscal 1999, the Company recorded a pre-tax charge of $2.5 million for severance payments related to certain members of senior management who have left the Company. During the years ended June 30, 1998 and 1997, the Company recorded pre-tax charges totaling $7.8 million related to severance payments. The charges related primarily to the cost of terminating approximately 400 administrative employees throughout the Company, all of which have been terminated as of September 30, 1999. As of June 30, 1999, the balance of the allowance for severance payments was $1.3 million. The allowance is included in accrued liabilities in the accompanying consolidated balance sheets at June 30, 1999. As of March 31, 2000, the allowance for severance payments related to the charges discussed above was completely utilized. 18 19 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the third quarter of fiscal 2000, the Company recorded a pre-tax charge of $25.1 million ($16.6 million after-tax) associated with its restructuring program related to the closing or downsizing of certain non-emergency service areas and reduction of corporate overhead. This charge primarily included severance, service area closing costs, and write-offs of goodwill and other impaired assets. Approximately $5.0 million of the restructuring charge was recorded in accrued liabilities. At March 31, 2000 $3.8 million remains accrued in the accompanying financial statements. The components of the restructuring charge and the remaining accrual at March 31, 2000, are as follows (in thousands):
Charge Recorded Usage Balance at March 31, 2000 --------------- --------- ------------------------- Severance costs $ 4,051 $ (1,218) $ 2,833 Lease termination costs 950 (1) 949 Write-off of intangible assets 13,646 (13,646) -- Write-off of impaired assets and other costs 6,451 (6,451) -- -------- -------- -------- $ 25,098 $(21,316) $ 3,782 ======== ======== ========
The $4.1 million of severance costs is calculated based upon the severance payments to be made to approximately 250 employees terminated under the restructuring plan. During the third quarter of fiscal 2000 the Company also recorded an additional provision for doubtful accounts of $3.0 million related to specific accounts deemed uncollectible in the certain service areas being closed or downsized as part of the restructuring program. In the Company's Form 10Q for the quarter ended December 31, 1999, the Company disclosed that the anticipated costs associated with the restructuring program would approximate up to $30.0 million on an after-tax basis. The restructuring charge of $25.1 million and the $3.0 million additional provision for doubtful accounts that were recorded during the third quarter of fiscal 2000 total $28.1 million on a pre-tax ($18.5 million on an after-tax) basis. In April 2000 the Company announced that part of the restructuring plan could not be implemented until the fourth quarter of fiscal 2000 and therefore, the Company anticipates further restructuring charges will be taken in the fourth quarter of fiscal 2000. The Company anticipates these fourth quarter charges related to the restructuring plan will approximate $17.0 million on a pre-tax ($11.0 million on an after-tax) basis. (6) EXTRAORDINARY ITEM During the second quarter of fiscal year 2000, the Company recorded an extraordinary loss on the expropriation of Canadian ambulance service licenses of $1.2 million. The Company received $2.2 million from the Ontario Ministry of Health as compensation for the loss of the licenses. These proceeds were offset by $0.2 million accrual for costs associated with the loss of the ambulance service licenses and the write-off of the following balance sheet items related to the Company's Canadian operations: $2.8 million of goodwill, $0.1 million of accounts receivable and $0.3 million of other assets. (7) CHANGE IN ACCOUNTING PRINCIPLE In accordance with Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", effective July 1, 1999, the Company was required to change its accounting principle for 19 20 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) organization costs. Previously, the Company capitalized such costs and amortized them using the straight-line method over five years. At June 30, 1999 such unamortized costs totaled $933,000. In the first quarter of fiscal year 2000, the Company wrote-off it's capitalized organization costs and will expense any future organization costs as incurred. The write-off was $541,000 (net of a tax benefit of $392,000) and has been reflected in the Consolidated Statements of Operations for the nine months ended March 31, 2000 as the "Cumulative Effect of a Change in Accounting Principle" in accordance with APB No. 20. (8) EARNINGS (LOSS) PER SHARE A reconciliation of the numerators and denominators (weighted average number of shares outstanding of the basic and diluted earnings per share (EPS) computation for the three and nine month periods ended March 31, 2000 and 1999 is a follows (in thousands, except per share amounts):
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999 --------------------------------------- ------------------------------------- Loss Shares Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic EPS $(16,615) 14,626 $ (1.14) $ 4,711 14,524 $ 0.32 ======= ======= Effect of stock options -- -- -- 186 -------- ------ ------- -------- ------ Diluted EPS $(16,615) 14,626 $ (1.14) $ 4,711 14,710 $ 0.32 ======== ====== ======= ======== ====== =======
Nine Months Ended March 31, 2000 Nine Months Ended March 31, 1999 --------------------------------------- ------------------------------------- Loss Shares Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic EPS $(57,117) 14,581 $ (3.92) $ 12,412 14,420 $ 0.86 ======== ======= Effect of stock options -- -- -- 212 -------- ------ -------- -------- Diluted EPS $(57,117) 14,581 $ (3.92) $ 12,412 14,632 $ 0.85 ======== ======== ======= ======== ======== =======
(9) SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of a business, for which separate financial information is available, that management regularly evaluates in deciding how to allocate resources and assess performance. The Company operates in two business segments: Ambulance and Fire and Other. The Company's reportable segments are strategic business units that offer different services. They are managed separately based on the fundamental differences in their operations. The Ambulance segment includes emergency medical and general medical transport ambulance services provided to patients on a fee-for-service basis, on a non-refundable subscription basis and through capitated contracts. The Ambulance segment also includes urgent home medical care and ambulance services provided under capitated service arrangements in Argentina. In addition, the Ambulance segment includes the portion of the $25.1 million restructuring charge attributable to that segment that was recorded in the three and nine month periods ended March 31, 2000. 20 21 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Fire and Other segment includes the following services: fire protection and training, alternative transportation, home health care services, urgent and primary care in clinics, dispatch, fleet and billing. The accounting policies of the operating segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements filed with the Form 10-K for the fiscal year ended June 30, 1999. The Company defines segment profit (loss) as total revenue less total operating expenses and interest expense associated with the segment. The Company defines segment assets as the sum of net accounts receivable, inventory and net property and equipment associated with the segments. Included in Corporate are general corporate expenses as well as the pre-tax charge of $2.5 million related to severance payments recorded during the nine months ended March 31, 1999. The Corporate segment also includes the portion of the $25.1 million restructuring charge and other attributable to the corporate office that was recorded in the three and nine-month periods ended March 31, 2000. Information by operating segment is set forth below (in thousands):
FIRE AND AMBULANCE OTHER CORPORATE TOTAL --------- --------- ----------- ------------ Three months ended March 31, 2000 Net revenues from external customers $ 119,902 $ 26,496 -- $ 146,398 Segment profit (loss) $ (21,822) $ 3,287 $ (5,868) $ (24,403) Segment assets $ 223,236 $ 39,466 $ 2,224 $ 264,926
FIRE AND AMBULANCE OTHER CORPORATE TOTAL --------- --------- ----------- ------------ Three months ended March 31, 1999 Net revenues from external customers $ 119,751 $ 23,182 -- $ 142,933 Segment profits (loss) $ 8,935 $ 3,286 $ (3,998) $ 8,223 Segment assets $ 247,480 $ 40,581 $ 2,935 $ 290,996
FIRE AND AMBULANCE OTHER CORPORATE TOTAL --------- --------- ----------- ------------ Nine months ended March 31, 2000 Net revenues from external customers $ 357,908 $ 76,797 -- $ 434,705 Segment profit (loss) $ (77,454) $ 7,002 $ (13,596) $ (84,048) Segment assets $ 223,236 $ 39,466 $ 2,224 $ 264,926
FIRE AND AMBULANCE OTHER CORPORATE TOTAL --------- --------- ----------- ------------ Nine months ended March 31, 1999 Net revenues from external customers $ 351,775 $ 69,542 -- $ 421,317 Segment profit (loss) $ 27,099 $ 9,114 $ (14,575) $ 21,638 Segment assets $ 247,480 $ 40,581 $ 2,935 $ 290,996
21 22 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS Except for the historical information contained herein, this Report contains forward looking statements that involve risks and uncertainties regarding future business prospects, the value of our common stock, our ability to renegotiate the terms of our revolving credit facility, revenue, working capital, accounts receivable collection, liquidity, cash flow, and capital needs that could cause actual results to differ materially. The health care industry in general and the ambulance industry in particular are in a state of significant change. This makes us susceptible to various factors that may affect future results such as the following: no assurance of successful integration and operation of acquired service providers; growth strategy and difficulty in maintaining growth; risks of leverage; revenue mix; dependence on certain business relationships; risks related to intangible assets; dependence on government and third party payors; risks related to fee-for-service contracts; possible adverse changes in reimbursement rates; impact of rate structures; possible negative effects of prospective health care reform; high utilization of services by customers under capitated service arrangements; competitive market forces; fluctuation in quarterly results; volatility of stock price; access to debt and equity capital; dependence on key personnel; and anti-takeover effect of certain of our charter provisions. All references to "we", "our", "us" or "Rural/Metro" refer to Rural/Metro Corporation, and its predecessors, operating divisions and subsidiaries. This Report should be read in conjunction with our Report on Form 10-K for the fiscal year ended June 30, 1999. INTRODUCTION We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls ("911" emergency ambulance services) and non-emergency transport services (general transport services) to patients on a fee-for-service basis, on a non-refundable subscription fee basis and through capitated contracts. Per transport revenue depends on various factors, including the mix of rates between existing service areas and new service areas and the mix of activity between "911" emergency ambulance services and general medical transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts or other agencies or on a non-refundable subscription fee basis to individual homeowners or commercial property owners. Domestic ambulance service fees are recorded net of Medicare, Medicaid and other reimbursement limitations and are recognized when services are provided. Payments received from third-party payors represent a substantial portion of our ambulance service fee receipts. We establish an allowance for doubtful accounts based on credit risk applicable to certain types of payors, historical trends and other relevant information. Provision for doubtful accounts is made for the expected difference between ambulance services fees charged and amounts actually collected. Our provision for doubtful accounts generally is higher with respect to collections to be derived from patients than for collections to be derived from third-party payors and generally is higher for "911" emergency ambulance services than for general ambulance transport services. We also have an ambulance service contract structured as a public utility model in which our services are paid on a monthly basis by the contracting agency. Because of the nature of our domestic ambulance services, it is necessary to respond to a number of calls, primarily "911" emergency ambulance service calls, which may not result in transports. Results of 22 23 operations are discussed below on the basis of actual transports since transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of domestic ambulance service calls not resulting in transports varies substantially depending upon the mix of general transport and "911" emergency ambulance service calls in our service areas and is generally higher in service areas in which the calls are primarily "911" emergency ambulance service calls. Rates in our service areas take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports. Revenue generated under our capitated service arrangements in Argentina and contractual agreements in Canada is included in ambulance services revenue. Revenue generated under fire protection service contracts is recognized over the term of the related contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, which is generally one year. Other revenue consists primarily of fees associated with alternative transportation, dispatch, fleet, billing, urgent and primary care services in clinics, and home health care services and is recognized when the services are provided. Other operating expenses consist primarily of rent and related occupancy expenses, maintenance and repairs, insurance, fuel and supplies, travel and professional fees. We have historically experienced, and expect to continue to experience, seasonality in quarterly operating results. This seasonality has resulted from a number of factors, including relatively higher second and third fiscal quarter demand for transport services in our Arizona and Florida regions resulting from the greater winter populations in those regions. Also, our Argentine operations experience greater utilization of services by customers under capitated service arrangements in the first and fourth fiscal quarters, as compared to the other two quarters, when South America is in its winter season. Public health conditions affect our operations differently in different regions. For example, greater utilization of services by customers under capitated service arrangements decreases our operating income. The same conditions domestically, where we operate under fee-for-service arrangements, result in a greater number of transports, increasing our operating income. Loss for the three months ended March 31, 2000 was $16.6 million, or $1.14 per diluted share as compared to net income of $4.7 million, or $0.32 per diluted share for the three months ended March 31, 1999. Loss before extraordinary loss and cumulative effect of a change in accounting principle for the nine months ended March 31, 2000 was $55.4 million, or $3.80 per diluted share as compared to net income of $12.4 million, or $0.85 per diluted share for the nine months ended March 31, 1999. The operating results for the three and nine months ended March 31, 2000 were adversely affected by the recording of a $25.1 million restructuring charge related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead and by the recording of an additional provision for doubtful accounts of $3.0 million related to uncollectible accounts in those service areas that are being closed or downsized. The fiscal year 2000 earnings were also adversely affected by the change in accounting policy used in recording our provision for doubtful accounts of $65.0 million on a pre-tax basis and by the expropriation of our Canadian ambulance service licenses of $1.2 million on both a before and after tax basis. The operating results for the three and nine months ended March 31, 2000 were also negatively impacted by reduced operating margins of our Argentine operations. These operating margins were reduced due to substantial increases in service utilization under our capitated service arrangements and due to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. 23 24 THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 REVENUE Total revenue increased $3.5 million, or 2.4%, from $142.9 million for the three months ended March 31, 1999 to $146.4 million for the three months ended March 31, 2000. Ambulance services revenue increased $0.1 million, or 0.1%, from $119.8 million for the three months ended March 31, 1999 to $119.9 million for the three months ended March 31, 2000. Domestic ambulance services revenue in areas served by us in both of the three-month periods ended March 31, 2000 and 1999 increased by $3.7 million, or 3.5%. The increase in domestic ambulance services revenue was offset by a $2.2 million decrease in revenue derived from our Canadian operations and $1.4 million decrease in ambulance services revenue in our Argentine operations resulting from decreases in memberships under capitated service arrangements. The decrease in memberships was attributable to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. Total domestic ambulance transports increased by 5,000, or 1.5%, from 330,000 for the three months ended March 31, 1999 to 335,000 for the three months ended March 31, 2000 due to increased transport from new contracting activity offset by decreased transports in certain service areas due to our efforts to reduce non-emergency transports in certain areas and improve the quality of our revenue. The effect on revenue caused by the reduction in transports was more than offset by transports generated through new contracting activity as well as increases in average patient charges in other areas. Fire protection services revenue increased by $2.6 million, or 21.0%, from $12.4 million for the three months ended March 31, 1999 to $15.0 million for the three months ended March 31, 2000. Fire protection services revenue increased due to new contracting activity of $1.6 million and due to rate increases for fire protection services of $1.0 million. Other revenue increased $0.7 million, or 6.5%, from $10.8 million for the three months ended March 31, 1999 to $11.5 million for the three months ended March 31, 2000. Other revenue increased due to revenue of $0.8 million associated with urgent and primary care services provided in Argentina by a company that we acquired in the third quarter of fiscal 1999. This increase was partially offset by a $0.2 million decrease in alternative transportation services revenue due to our efforts to reduce transports in certain areas and improve the quality of our revenue. OPERATING EXPENSES Payroll and employee benefit expenses increased $4.1 million, or 5.5%, from $75.0 million for the three months ended March 31, 1999 to $79.1 million for the three months ended March 31, 2000. Service areas with newly acquired contracts contributed $3.7 million to the increase and the remainder was attributable to higher average labor costs in certain service areas. We expect these higher average labor costs to continue in the future, including the increased costs associated with accounts receivable collection and with Health Care Financing Administration (HCFA) compliance. Payroll and employee benefits expense increased from 52.4% of total revenue for the three months ended March 31, 1999 to 54.0% of total revenue for the three months ended March 31, 2000. Increased service utilization in our Argentine operations also contributed to the increase in payroll and employee benefit expenses as a percentage of total revenue. Effective October 1, 1999, we changed our accounting policy used in recording our provision for doubtful accounts. Because of the continuing difficulties encountered in the healthcare reimbursement environment, during fiscal 2000, we have continued to place increased emphasis on increasing the quality of our revenue by exiting service areas or substantially reducing service, where it had become 24 25 unprofitable to perform non-emergency transports because of low reimbursement rates or a high risk of non-reimbursement by payors. We have shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We have instituted mandatory comprehensive training for our paramedics and Emergency Medical Technicians on new standards of documentation of ambulance run tickets. Management's analysis of the various payor classes within our accounts receivable balance, the increasingly unpredictable nature of healthcare accounts receivable, the increasing costs to collect these receivables and management's conclusion that the aforementioned process changes had not brought about the benefits anticipated led to this accounting policy change during the second quarter of fiscal 2000. Under our new accounting policy, we have chosen to fully reserve our accounts receivable earlier in the collection cycle than had previously been our practice. The new accounting policy provides specific allowances based upon the age of the accounts receivable within each payor class and also provides for general allowances based upon historic collection rates within each payor class. Payor classes include Medicare, Medicaid, and private pay. Accordingly, the effect of this change was an additional $65.0 million provision for doubtful accounts, which was recorded separately in the accompanying financial statements during the second quarter of fiscal 2000. Also, during the three months ended March 31, 2000, we recorded a $3.0 million additional provision for doubtful accounts related to specific accounts deemed uncollectible in certain service areas that are being closed or downsized as part of our restructuring program. Provision for doubtful accounts, using the new accounting policy and exclusive of the $3.0 million additional provision increased $1.4 million, or 6.7% from $20.9 million for the three months ended March 31, 1999 to $22.3 million for the three months ended March 31, 2000. Provision for doubtful accounts, using the new accounting policy but exclusive of the $3.0 million additional provision increased from 14.6% of total revenue for the three months ended March 31, 1999 to 15.2% of total revenue for the three months ended March 31, 2000 and was 19.5% of domestic ambulance service revenue for the three months ended March 31, 1999 and 19.7% of domestic ambulance service revenue for the three months ended March 31, 2000. We anticipate that this change in our accounting policy may result in increases in our provision for doubtful accounts in future periods. During fiscal 2000, we have continued to increase our focus on revenue of higher quality by reducing the amount of non-emergency ambulance transports in selected service areas and have continued previously implemented initiatives to maximize the collection of our accounts receivable. Net accounts receivable on non-integrated collection systems currently represent 6.6% of total net accounts receivable at March 31, 2000. We will continue to review the benefits and timing of integrating our two non-integrated billing centers. Depreciation was $6.1 million for both the three month periods ended March 31, 1999 and 2000. Depreciation was 4.3% and 4.2% of total revenue for the three months ended March 31, 1999 and 2000, respectively. Amortization of intangibles increased $0.2 million, or 9.5%, from $2.1 million for the three months ended March 31, 1999 to $2.3 million for the three months ended March 31, 2000. Amortization of intangibles was 1.5% of total revenue for the three months ended March 31, 1999 and 2000, respectively. Other operating expenses increased approximately $1.5 million, or 6.0%, from $25.1 million for the three months ended March 31, 1999 to $26.6 million for the three months ended March 31, 2000. Of the $1.5 million increase, $0.9 million was attributable to the operation of the company acquired in the third quarter of fiscal 1999 and $0.7 million was attributable to operations in service areas with newly acquired contracts. Other operating expenses increased from 17.6% of total revenue for the three months ended March 31, 1999 to 18.1% of total revenue for the three months ended March 31, 2000. The increased service utilization in our Argentine operations also attributed to the increase in operating expenses as a percentage of total revenue. 25 26 During the three months ended March 31, 2000, we recorded a $25.1 million restructuring charge related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead. The components of the charge were $4.1 million of severance costs, $1.0 million of lease termination costs, $13.6 million write-off of intangible assets and $6.4 million write-off of other impaired assets and other costs. We expect the severance and lease termination payments will be substantially completed during fiscal 2001. We anticipate further restructuring charges will be taken in the fourth quarter of fiscal 2000 and we anticipate these charges will approximate $17.0 million on a pre-tax ($11.0 million on an after-tax) basis. Interest expense increased $0.9 million from $5.5 million, or 16.4%, for the three months ended March 31, 1999 to $6.4 million for the three months ended March 31, 2000. This increase was caused by higher debt balances. We anticipate that increases in interest expense will continue in future periods as a result of amendments to our revolving credit facility. Our effective tax rate was 42.0% for the three months ended March 31, 1999 and 31.8% for the three months ended March 31, 2000. The decrease in the effective tax rate is due to the impact of permanent differences, primarily consisting of goodwill write-offs and amortization. These permanent differences reduce the tax benefits which would otherwise be available in a loss year, thus resulting in a reduction in the effective tax rate. NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 REVENUE Total revenue increased $13.4 million, or 3.2%, from $421.3 million for the nine months ended March 31, 1999 to $434.7 million for the nine months ended March 31, 2000. Ambulance services revenue increased $6.1 million, or 1.7%, from $351.8 million for the nine months ended March 31, 1999 to $357.9 million for the nine months ended March 31, 2000. Domestic ambulance services revenue in areas served by us in both of the nine month periods ended March 31, 2000 and 1999 increased by $11.9 million, or 3.9%. The increase in domestic ambulance services revenue was partially offset by a $1.2 million decrease in revenue derived from our Canadian operations and a $4.6 million decrease in ambulance services revenue in our Argentine operations resulting from decreases in memberships under capitated service arrangements. The decrease in memberships was attributable to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. Total domestic ambulance transports decreased by 23,000, or 2.3%, from 984,000 for the nine months ended March 31, 1999 to 961,000 for the nine months ended March 31, 2000 due to our efforts to reduce non-emergency transports in certain areas and improve the quality of our revenue. The effect on revenue caused by the reduction in transports was more than offset by transports generated through new contracting activity as well as increases in average patient charges in other areas. Fire protection services revenue increased by $5.0 million, or 13.3%, from $37.6 million for the nine months ended March 31, 1999 to $42.6 million for the nine months ended March 31, 2000. Fire protection services revenue increased due to new contracting activity of $2.7 million and due to rate increases for fire protection services of $2.3 million. Other revenue increased $2.3 million, or 7.2%, from $31.9 million for the nine months ended March 31, 1999 to $34.2 million for the nine months ended March 31, 2000. Other revenue increased due to revenue of $4.3 million associated with urgent and primary care services provided in Argentina by a company that we acquired in the third quarter of fiscal 1999. This increase was partially offset by a $1.5 million decrease in alternative transportation services revenue due to our efforts to reduce transports in 26 27 certain areas and improve the quality of our revenue and by a $0.8 million decrease in alarm monitoring revenue due to the sale of certain accounts during the nine months ended March 31, 1999. OPERATING EXPENSES Payroll and employee benefit expenses increased $13.2 million, or 5.9%, from $222.1 million for the nine months ended March 31, 1999 to $235.3 million for the nine months ended March 31, 2000. The acquisition completed during the third quarter of fiscal 1999 contributed $1.3 million to the increase, service areas with newly acquired contracts contributed $10.2 million to the increase and the remainder was attributable to higher average labor costs in certain service areas. We expect these higher average labor costs to continue in the future, including the increased costs associated with accounts receivable collection and with Health Care Financing Administration (HCFA) compliance. Payroll and employee benefits expense increased from 52.7% of total revenue for the nine months ended March 31, 1999 to 54.1% of total revenue for the nine months ended March 31, 2000. Increased service utilization in our Argentine operations also contributed to the increase in payroll and employee benefit expenses as a percentage of total revenue. Effective October 1, 1999, we changed our accounting policy used in recording our provision for doubtful accounts. Because of the continuing difficulties encountered in the healthcare reimbursement environment, during fiscal 2000, we have continued to place increased emphasis on increasing the quality of our revenue by exiting service areas or substantially reducing service, where it had become unprofitable to perform non-emergency transports because of low reimbursement rates or a high risk of non-reimbursement by payors. We have shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We have instituted mandatory comprehensive training for our paramedics and Emergency Medical Technicians on new standards of documentation of ambulance run tickets. Management's analysis of the various payor classes within our accounts receivable balance, the increasingly unpredictable nature of healthcare accounts receivable, the increasing costs to collect these receivables and management's conclusion that the aforementioned process changes had not brought about the benefits anticipated led to this accounting policy change during the second quarter of fiscal 2000. Under our new accounting policy, we have chosen to fully reserve our accounts receivable earlier in the collection cycle than had previously been our practice. The new accounting policy provides specific allowances based upon the age of the accounts receivable within each payor class and also provides for general allowances based upon historic collection rates within each payor class. Payor classes include Medicare, Medicaid and private pay. Accordingly, the effect of this change is an additional $65.0 million provision for doubtful accounts, which is recorded separately in the accompanying financial statements during the second quarter of fiscal 2000. Also during the nine months ended March 31, 2000, we recorded a $3.0 million additional provision for doubtful accounts related to specific accounts deemed uncollectible in the certain service areas that are being closed or downsized as part of our restructuring program. Provision for doubtful accounts, using the new accounting policy but exclusive of the third quarter $3.0 million additional provision and the second quarter $65.0 million additional provision, increased $2.9 million, or 4.8%, from $61.0 million for the nine months ended March 31, 1999 to $63.9 million for the nine months ended March 31, 2000. Provision for doubtful accounts, using the new accounting policy but exclusive of the $65.0 million additional provision and the $3.0 million additional provision was 14.5% of total revenue for the nine months ended March 31, 1999 and was 14.7% of total revenue for the nine months ended March 31, 2000 and was 19.5% of domestic ambulance service revenue for the nine months ended March 31, 1999 and 19.4% of domestic ambulance service revenue for the nine months ended March 31, 2000. We anticipate that this change in our accounting policy may result in increases in our provision for doubtful accounts in future periods. During fiscal 2000, we have continued to increase our focus on revenue of higher quality by reducing the amount of non-emergency ambulance transports in selected service areas and have continued previously implemented initiatives to maximize the collection of our accounts receivable. Net accounts 27 28 receivable on non-integrated collection systems currently represent 6.6% of total net accounts receivable at March 31, 2000. We will continue to review the benefits and timing of integrating our two non-integrated billing centers. Depreciation increased $0.5 million, or 2.8%, from $18.0 million for the nine months ended March 31, 1999 to $18.5 million for the nine months ended March 31, 2000, primarily as a result of increased property and equipment from the acquisition completed during the third quarter of fiscal 1999. Depreciation was 4.3% of total revenue for both the nine month periods ended March 31, 1999 and 2000, respectively. Amortization of intangibles decreased $0.2 million, or 2.9%, from $6.9 million for the nine months ended March 31, 1999 to $6.7 million for the nine months ended March 31, 2000. Amortization of intangibles was 1.6% and 1.5% of total revenue for the nine months ended March 31, 1999 and 2000, respectively. Other operating expenses increased approximately $10.3 million, or 14.1%, from $73.2 million for the nine months ended March 31, 1999 to $83.5 million for the nine months ended March 31, 2000. Of the $10.3 million increase, $3.9 million was attributable to the accrual of proposed settlements relating to a Medicare investigation and certain Medicaid audits, $3.3 million was attributable to the operation of the company acquired in the third quarter of fiscal 1999 and $2.7 million was attributable to operations in service areas with newly acquired contracts. Other operating expenses increased from 17.4% of total revenue for the nine months ended March 31, 1999 to 19.2% of total revenue for the nine months ended March 31, 2000. The increased service utilization in our Argentine operations also attributed to increase in operating expenses as a percentage of total revenue. During the nine months ended March 31, 2000, we recorded a $25.1 million restructuring charge related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead. The components of the charge were $4.1 million of severance costs, $1.0 million of lease termination costs, $13.6 million write-off of intangible assets and $6.4 million write-off of other impaired assets and other costs. We expect the severance and lease termination payments will be substantially completed during fiscal 2001. We anticipate further restructuring charges will be taken in the fourth quarter of fiscal 2000 and we anticipate these charges will approximate $17.0 million on a pre-tax ($11.0 million on an after-tax) basis. Interest expense increased $1.6 million, or 10.0%, from $16.0 million for the nine months ended March 31, 1999 to $17.6 million for the nine months ended March 31, 2000. This increase was caused by higher debt balances. We anticipate that increases in interest expense will continue in future periods as a result of amendments to our revolving credit facility. Our effective tax rate was 42.0% for the nine months ended March 31, 1999 and 34.1% for the nine months ended March 31, 2000. The decrease in the effective tax rate is due to the impact of permanent differences primarily consisting of goodwill write-offs and amortization. These permanent differences reduce the tax benefits which could otherwise be available in a loss year, thus resulting in a reduction in the effective tax rate. During the nine months ended March 31, 2000, we recorded an extraordinary loss on the expropriation of Canadian ambulance service licenses of $1.2 million (net of $0 of income taxes). We received $2.2 million from the Ontario Ministry of Health as compensation for the loss of license and incurred costs and wrote-off assets, mainly goodwill, totaling $3.4 million. 28 29 The cumulative effect of a change in accounting principle resulted in a $541,000 charge (net of a tax benefit of $392,000) and was related to our expensing of previously capitalized organization costs in accordance with Statement of Position 98-5, Reporting on the Costs of Start-Up Activities LIQUIDITY AND CAPITAL RESOURCES Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, issuance of senior notes, the sale of common stock through an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options. During the nine months ended March 31, 2000, our cash flow used in operating activities was $33.1 million, resulting primarily from an increase in accounts receivable of $101.2 million, a decrease in accounts payable of $3.1 million, a decrease in accrued liabilities and other liabilities of $13.6 million and a net loss of $57.1 million offset by non-cash expenses of the write-off of assets of $19.5 million, depreciation and amortization of $25.3 million and provision for doubtful accounts of $131.9 million. Cash flow provided by operating activities was $10.0 million for the nine months ended March 31, 1999. Cash provided by financing activities was $29.3 million for the nine months ended March 31, 2000, primarily due to borrowings on the revolving credit facility offset by repayments on other debt and capital lease obligations. Cash used in investing activities was $14.7 million for the nine months ended March 31, 2000, primarily because of capital expenditures and increases in other assets, offset by $2.2 million of proceeds received from the Ontario Ministry of Health for compensation of loss of ambulance service licenses. Our gross accounts receivable as of March 31, 2000 and June 30, 1999 was $248.3 million and $228.9 million, respectively. Our accounts receivable, net of the allowance for doubtful accounts, was $154.6 million and $185.5 million as of such dates, respectively. We believe that the increase in gross accounts receivable is due to many factors including revenue growth, delays in payments from certain third-party payors, particularly in certain of our regional billing centers, and a general industry trend toward a lengthening payment cycle of accounts receivable due from third-party payors. Delays in receiving payments also contributed to an increase in the age of our accounts receivable. The allowance for doubtful accounts increased from $43.3 million at June 30, 1999 to $93.7 million at March 31, 2000. The primary reason for this increase is the additional provision for doubtful accounts of $65.0 million recorded in the second quarter of fiscal 2000 to reflect the effect of the change in accounting policy used in recording our provision for doubtful accounts. Because of continuing difficulties in the healthcare reimbursement environment, during fiscal 2000, we have continued to place increased emphasis on increasing the quality of our revenue by exiting service areas or substantially reducing service, where it had become unprofitable to perform non-emergency transports because of low reimbursement rates or a high risk of non-reimbursement by payors. We have shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We have instituted mandatory comprehensive training for our paramedics and Emergency Medical Technicians on new standards of documentation of ambulance run tickets. We believe that these measures and many other billing initiatives will help to enhance the quality of our billings, which will assist in mitigating the risk of denials by payors and will help to increase collections of bills from our private pay customers and thus improve the overall quality of our revenue and accounts receivable. In addition to these procedures, our continuing analysis of our accounts receivable and analysis of the healthcare reimbursement environment led to the change in accounting policy during the second quarter of fiscal 2000. We concluded that, despite our efforts to improve the quality of our revenue, the speed of 29 30 payments from certain payors within our accounts receivable mix was not increasing. Because of this, we determined that it was prudent to change our accounting policy to fully reserve accounts receivable within certain payor classes earlier in the collection cycle than had previously been done. The new accounting policy provides specific allowances based upon the age of the accounts receivable within each payor class and also provides for general allowances based upon historic collection rates within each payor class. Payor classes include Medicare, Medicaid and private pay. We will continue to aggressively attempt to collect our accounts receivable, using both internal and external sources. With this accounting policy change, management believes that we have a more predictable method of determining the realizable value of our accounts receivable. Our $200 million revolving credit facility was priced at (a) the Base Rate (i.e. the greater of (i) the prime rate or (ii) the Federal Funds rate, plus .5 percentage points), plus the applicable margin, or (b) LIBOR, plus the applicable margin. The LIBOR-based rate ranged from LIBOR plus 0.875 percentage points to LIBOR plus 1.75 percentage points. As discussed below, during March 2000, all borrowings became priced at prime rate plus .25 percentage points. Interest rates and availability under the revolving credit facility depend upon our company meeting certain financial covenants, including total debt leverage ratios, total debt to capitalization ratios and fixed charge ratios. Approximately $147.0 million was outstanding on the revolving credit facility at March 31, 2000. In February 2000, we received a compliance waiver regarding the financial covenants contained in our revolving credit facility which covered the period from December 31, 1999 through March 14, 2000. In March, we received an additional waiver, which was amended in April, regarding the financial covenants, which covers the period from March 15, 2000, through July 14, 2000. The waiver covers the representations and warranties related to no material adverse changes as well as the following financial covenants: the total debt leverage ratio, the total debt to total capitalization ratio and the fixed charge coverage ratio. The waiver stipulates that no additional borrowings will be available to us during the period of March 15, 2000 through July 14, 2000. In addition, the wavier (as amended) requires us (i) to engage certain financial advisors, (ii) to meet certain benchmarks for projected cash balances and expenditures, and (iii) to reduce the outstanding balance on the revolving credit facility upon the sale of certain assets, the collection of certain accounts receivable and upon the attainment of certain cash balance thresholds. As LIBOR contracts expired in March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest is payable monthly. During the period of April 13, 2000 through July 14, 2000, we will accrue additional interest expense at a rate of 2.0% per annum on the outstanding balance on the revolving credit facility unless certain pay down requirements are met during that period, which interest is payable on July 14, 2000. At May 11, 2000, the outstanding balance on the revolving credit facility was $147.0 million with no availability on the facility. Also outstanding are $6.5 million in letters of credit issued under the revolving credit facility. A condition of the waiver agreement requires us to negotiate in good faith with the banks participating in the revolving credit facility in order to amend the revolving credit facility prior to July 14, 2000. We believe that an amendment to the revolving credit facility could substantially alter the terms and conditions of the revolving credit facility, including potentially higher interest rates, which could have a material adverse effect on our financial condition. Although no Event of Default is continuing under either the terms of the revolving credit facility (as a result of the waiver agreement) or our $150 million 7 7/8% Senior Notes (the Notes) due 2008, and although there has been no acceleration of the repayment of the revolving credit facility or the Notes, the entire balance of these instruments has been reclassified as a current liability at March 31, 2000 in the accompanying financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 78 "Classification of Obligations that are Callable by the Creditor". Our inability to successfully negotiate an amendment of our revolving credit facility could have a material adverse effect on our financial condition. We have been advised by our independent public accountants that, if we have not successfully renegotiated an amendment of the revolving credit facility prior to the completion of their audit of our financial statements for the year ending June 30, 2000, their auditors' report on those financial statements will be modified for this contingency. 30 31 Because of the classification of entire outstanding balance under the lending credit facility as a current liability at March 31, 2000, we had negative working capital of $157.1 million, including cash of $3.3 million, at March 31, 2000, compared to positive working capital of $140.9 million, including cash of $7.2 million, at June 30, 1999. In February 1998, we entered into a $5.0 million capital equipment lease line of credit. The lease line of credit matures at varying dates through July 2003. The lease line of credit is priced at the higher of LIBOR plus 1.7% or the commercial paper rate plus 1.7%. At March 31, 2000 the weighted average interest rate was 7.6% on the lease line of credit. Approximately $1.6 million was outstanding on this line of credit at March 31, 2000. In March 1998 we issued $150.0 million of Notes effected 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 will amortize these costs over the life of the Notes. We recorded a $258,000 discount on the Notes and will amortize this discount over the life of the Notes. Unamortized discount at March 31, 2000 was $205,000 and such amount is recorded as an offset to the current portion of long-term debt in the consolidated financial statements. 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. See Note 2 of Notes to our Consolidated Financial Statements included in this Form 10-Q. 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. Without additional borrowing capacity, existing working capital, together with cash flow from operations may not be sufficient to meet our operating and capital needs for existing operations for the twelve months subsequent to March 31, 2000. We have begun to restructure our corporate overhead and will continue to close or substantially reduce certain service areas in an effort to contain costs. We believe that these cost containment measures will, however, allow us to meet our operating and capital needs. Our business growth occurs primarily through new business contracts and acquisitions. Any business growth may be limited without additional credit availability. We may seek to raise additional capital through public or private debt or equity financings. The availability of these capital sources will depend upon the restrictions in our revolving credit facility and the Notes, prevailing market conditions, interest rates, our financial condition and the market price of our common stock. The market price of our common stock impacts our ability to complete acquisitions. We may be unwilling to utilize, or potential acquired companies or their owners may be unwilling to accept, our common stock in connection with acquisitions. In addition, the market price performance of our common stock may make raising funds more difficult and costly. As a result of the decline in the market price of our common stock and the failure of our stock price to increase since its decline, the pace of acquisitions utilizing our common stock has declined. Continued weakness in the market price of our common stock could adversely affect our ability or willingness to make additional acquisitions. Declines in the market price of our common stock could cause previously acquired companies to seek adjustments to purchase prices or other remedies to offset the decline in value. 31 32 MEDICARE REIMBURSEMENT In January 1999, HCFA announced its intention to form a negotiated rule-making committee to create a new fee schedule for Medicare reimbursement of ambulance services. The committee convened in February 1999. In August 1999, HCFA announced that the implementation of the new fee schedule as well as the mandatory acceptance of Medicare assignment will be postponed to January 2001. HCFA also announced rules which became effective in February 1999. These rules require, among other things, that a physician's certification be obtained for certain ambulance transports. We have implemented a program to comply with the new rules EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS Our results of operations for the periods discussed have not been affected significantly by inflation or foreign currency fluctuations. Our revenue from international operations is denominated primarily in the currency of the country in which it is operating. At March 31, 2000 our balance sheet reflects a $255,000 cumulative equity adjustment (decrease) from foreign currency translation, which resulted from the weakening of the currency of Brazil and the effect it had on our investment in certain property and equipment that we have deployed in Brazil. During the second quarter of fiscal 2000, we recognized $173,000 of translation adjustment as a component of the extraordinary loss on the expropriation of Canadian ambulance service licenses. Although we have not incurred any material exchange gains or losses to date, there can be no assurance that fluctuations in the currency exchange rates in the future will not have an adverse effect on our business, financial condition, cash flows and results of operations. We do not currently engage in foreign currency hedging transactions. However, as we continue to expand our international operations, exposure to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward exchange contracts or engaging in similar hedging strategies. 32 33 RURAL/METRO CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS We, Warren S. Rustand, our former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, our former Vice Chairman of the Board, and Robert E. Ramsey, Jr., our former Executive Vice President and former Director, have been 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. Reference is made to the Company's most recently filed Form 10-K for the fiscal year ended June 30, 1999 regarding these legal proceedings instituted during the quarter ended September 30, 1998. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (b) Reports on Form 8-K On January 27, 2000, the Company filed a Form 8-K disclosing its announcements of business process changes and restructuring plan and postponing release of second quarter results. On March 15, 2000, the Company filed a Form 8-K disclosing the extension of its waiver of covenant compliance under its revolving credit facility. On April 14, 2000, the Company filed a Form 8-K disclosing a 90 day extension of its wavier of covenant compliance under its revolving credit facility and the filing of its Provisional Waiver and Standstill Agreement dated March 14, 2000 and the First Amendment to the Provisional Waiver and Standstill Agreement dated April 13, 2000. 33 34 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 Date: May 12, 2000 By /s/ Jack E. Brucker ------------------------------------------------ Jack E. Brucker, President & Chief Executive Officer By /s/ Donna D. Berlinski ------------------------------------------------ Donna D. Berlinski, Director of Finance and Principal Accounting Officer 34 35 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27 Financial Data Schedule EX-27 2 EX-27
5 This exhibit contains summary financial information extracted from the Registrant's financial statements for the period ended March 31, 2000, and is qualified in its entirety by reference to such financial statements. This exhibit shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of such Sections, nor shall it be deemed a part of any other filing which incorporates this report by reference, unless such other filing expressly incorporates this Exhibit by reference. 1,000 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-2000 3,273 0 248,326 93,768 17,988 182,362 185,595 93,225 512,029 39,557 302,993 0 0 149 139,595 512,029 434,705 434,705 0 369,181 0 131,923 17,649 (83,953) (28,577) (55,376) 0 1,200 541 (57,117) ($3.92) ($3.92)
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