-----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, JvCRTaeiftolUedK5SNvcVP1RTEp9ug3cBs5685g90WOL47226F0lel148jDzatS TDYfuQEwcVL7To75wbMVhg== /in/edgar/work/0000950153-00-001433/0000950153-00-001433.txt : 20001031 0000950153-00-001433.hdr.sgml : 20001031 ACCESSION NUMBER: 0000950153-00-001433 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: [4100 ] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-22056 FILM NUMBER: 748808 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 4809943886 10-K/A 1 p64100e10-ka.txt 10-K/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-22056 RURAL/METRO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0746929 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8401 EAST INDIAN SCHOOL ROAD, SCOTTSDALE, ARIZONA 85251 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (480) 994-3886 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE PREFERRED STOCK PURCHASE RIGHTS (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] AS OF OCTOBER 25, 2000 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE AVERAGE SALES PRICE OF SUCH STOCK AS OF SUCH DATE ON THE NASDAQ SMALLCAP MARKET, WAS $22,862,292. SHARES OF COMMON STOCK HELD BY EACH OFFICER AND DIRECTOR AND BY EACH PERSON WHO OWNED 5% OR MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY CONCLUSIVE. As of October 25, 2000, there were 14,626,336 shares of the registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS.......... 2 PART I ITEM 1. BUSINESS.................................................... 3 ITEM 2. PROPERTIES.................................................. 27 ITEM 3. LEGAL PROCEEDINGS........................................... 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 29 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 79 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 80 ITEM 11. EXECUTIVE COMPENSATION...................................... 82 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 91 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 93 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 94 SIGNATURES.............................................................. 98
i 3 FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS Forward Looking Statements. Statements in this Report that are not historical facts are hereby identified as "forward looking statements" as that term is used under the securities laws. We caution readers that such "forward looking statements," including those relating to our future business prospects, the value of our common stock, revenue, working capital, accounts receivable collection, liquidity, cash flow, and capital needs, wherever they appear in this Report or in other statements attributable to us, are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the "forward looking statements." You should consider such "forward looking statements" in light of various important factors, including those set forth below and others set forth from time to time in our reports and registration statements filed with the Securities and Exchange Commission. These "forward looking statements" are found at various places throughout this Report. Additionally, the discussions herein under the captions "Business - -- Strategy", "Business -- Management Systems", "Business -- Billings and Collections", "Business -- Governmental Regulation", "Business -- Reimbursement", "Legal Proceedings", and "Management's Discussion and Analysis of Financial Condition and Results of Operations" are susceptible to the risks and uncertainties discussed below and under the caption "Business -- Risk Factors." Moreover, we may from time to time make "forward looking statements" about matters described herein or other matters concerning us. We disclaim any intent or obligation to update "forward looking statements." Factors That May Affect Future Results. 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; dependence on key personnel; and anti-takeover effect of certain of our charter provisions. For a more detailed discussion of these factors and their potential impact on future results, see the applicable discussions herein. All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro Corporation, and its predecessors, operating divisions, and direct and indirect subsidiaries. 2 4 PART I ITEM 1. BUSINESS INTRODUCTION We are a leading provider of health and safety services, which include "911" emergency ambulance and general medical transport services, fire protection services, and other safety and health care related services, to municipal, residential, commercial, and industrial customers. We believe that we are the only multi-state provider of both ambulance and fire protection services in the United States and that we rank as one of the largest private-sector providers of ambulance and fire protection services in the world. We currently serve over 400 communities in 25 states, the District of Columbia, and Latin America. Ambulance services and fire protection services accounted for approximately 82% and 10%, respectively, of our revenue for the fiscal year ended June 30, 2000, and 83% and 9%, respectively, of our revenue for the fiscal year ended June 30, 1999. Founded in 1948, we have been instrumental in the development of protocols and policies applicable to the emergency services industry. We have grown significantly since the late 1970s both through internal growth and through acquisitions. To manage this growth, we invested in the development of management and operational systems that have resulted in productivity gains and increased profitability. We believe our business competencies in communications and logistics management position us to continue our growth internally as well as through business alliances, select acquisitions, and joint ventures and enable us to operate successfully in both large and small communities. Our current focus is on building economies of scale and strengthening our existing business. This includes (i) operational restructuring through the closure or downsizing of financially non-performing operations, (ii) origination of new contracts in established service areas, and (iii) highly selective growth through acquisitions or strategic alliances. We incurred a net loss of $101.3 million for the year ended June 30, 2000 and are currently operating under a waiver of financial covenant compliance under our revolving credit facility. The loss primarily relates to our restructuring program aimed at closing or downsizing certain underperforming non-emergency service areas, the reduction of corporate overhead, and an additional provision for doubtful accounts due to the continuing difficulties experienced in the healthcare reimbursement environment. As a result of such restructuring, we believe that our existing cash reserves and operating cash flow will provide sufficient cash for our operations, capital expenditures, and regularly scheduled debt service payments through fiscal 2001. We are actively working with the lenders in order to obtain a long-term amendment to the credit facility. We believe our current business model and strategy will generate sufficient cash flow to provide a basis for a new long-term agreement with our current lenders or to restructure the debt through public or private debt or equity financings. The availability of these financing alternatives will depend upon prevailing market conditions, interest rates, covenants associated with our senior notes, and the market price of our common stock. For a discussion of certain risks associated with our business, including potential limitations on the future growth of our business, see "Risk Factors" contained in Item 1 of this Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Report. INDUSTRY OVERVIEW Based on generally available industry data, it is estimated that annual expenditures for ambulance services in the United States are between $4 billion and $7 billion. Public-sector entities, private companies, hospitals, and volunteer organizations provide ambulance services. Public-sector entities often serve as the first responder to requests for such emergency ambulance services and often provide emergency ambulance transport. When the public sector serves as first responder, private companies often serve as the second responder and support the first responder as needed. The private sector provides the majority of general transport services. It is estimated that the ambulance service industry includes more than 10,000 providers of service, 2,000 or more of which are private and approximately 1,000 of which are hospital-owned. Most commercial providers are small companies serving one or a limited number of markets. Several multi-state 3 5 providers, including us, have emerged through the acquisition and consolidation of smaller ambulance service providers in recent years. The growth in ambulance service expenditures in the United States has resulted from both an increase in the number of transports and an increase in the average expenditures per transport. The growth and aging of the population, the greater use of outpatient care facilities and home care in response to health care cost containment efforts, and increased patient travel between specialized treatment health care facilities have increased the demand for emergency medical services and general transport services. The increased availability of "911" emergency service, the impact of educational programs on its use, and the practice of some members of the population of utilizing a hospital's emergency room as the source of their primary medical care also have increased the number of ambulance transports. Industry considerations require ambulance service providers to acquire more sophisticated emergency medical, dispatch, and communications equipment, hire more highly trained personnel, and develop more sophisticated dispatch and management systems to satisfy the faster response time and higher quality of medical care assurance criteria required by municipalities and fire districts for emergency ambulance services. Average expenditures per ambulance transport have increased as a result of the additional costs to meet these requirements. Market reform continues to reshape the health care delivery system, with a shift from fee-for-service relationships to managed care organizations. Managed care organizations are focusing on cost containment measures while seeking to provide the most appropriate level of service at the most appropriate treatment facility. While ambulances typically transport patients to the nearest treatment facility or to the facility designated by the applicable medical protocol, managed care organizations are attempting to manage hospital utilization by working with ambulance service providers to ensure transport of patients to affiliated facilities and avoid unnecessary inter-facility transports. For non-life threatening medical emergencies, managed care providers are beginning to explore programs that encourage plan members to call the provider. Under this program, a nurse answers the call, analyzes the medical situation, and determines the best course of action and mode of transport. In an emergency situation, an advanced life support ambulance will generally be dispatched. In certain cases, patients could receive the required treatment level with a less costly basic life support ambulance or other transportation alternative. In Latin America, the current business model utilizes mobile health care, call centers, telephone triage, urgent and primary care clinics, and house calls by physicians and nurses. To coordinate these programs, the managed care organization must contract with an ambulance service provider that has the mix of vehicles and geographic scope to cover the entire region served by the managed care provider and that can provide call center services. We believe the trend toward managed care benefits larger ambulance service providers, which can service a larger portion of a managed care organization's needs. This allows the managed care provider to reduce its number of suppliers, cutting administrative costs and allowing it to negotiate more favorable rates. Based on our experience, we believe that our ambulance and fire protection services are complementary. Municipal fire departments, tax-supported fire districts, and volunteer fire departments constitute the principal providers of fire protection services in the United States. In most of the communities served by municipal fire departments and tax-supported fire districts, the fire department is the first to respond to a call for emergency medical services. Approximately 27,000 volunteer fire departments, covering approximately 40% of the United States population, operate throughout the United States. Volunteer fire departments range from departments consisting entirely of volunteer personnel to departments that utilize one or more paid personnel located at each station supplemented by volunteers who proceed directly to the fire scene. In addition to providing fire protection services to municipalities and tax-supported fire districts, the private sector also provides fire protection services to industrial complexes, including airports, large industrial and petrochemical plants, power plants, and other large self-contained facilities. STRATEGY Our strategy is to leverage our experience and competencies in communications and logistics management to enhance our position as a leading provider of health and safety services in the United States and in other countries. Key elements of this strategy include originating new contracts with health care providers and 4 6 municipalities in established service areas, highly selective targeting of potential acquisitions, and developing strategic alliances. Having established a regional presence in many geographic locations, we currently are focusing on increased and selective marketing efforts in these areas to serve the health and safety needs of the public and private sector, including services for health care providers, expansion of fire protection and community safety services, integration of health and safety operations, public/private partnering, and outsourcing of other health and safety related services. We seek to improve productivity, expand service offerings to customers, and attract new customers through business alliances, joint ventures, or other cooperative business arrangements, both domestically and internationally. Expansion of Services to Meet the Evolving Needs of the Public Sector and Health Care Providers We plan to expand our general transport services through marketing efforts to hospitals, health maintenance organizations, and other health care providers and our emergency ambulance services through the pursuit of new contracts and alliances with municipalities and fire districts. Based on our public/private alliance with San Diego Fire & Life Safety Services, our ambulance service contract in Aurora, Colorado, and our contracts with numerous Arizona municipalities, we believe that, in certain circumstances, contracting and partnering may provide a cost-effective approach to expanding into certain service areas. We will continue to seek mutually beneficial public/private alliances and municipal contracts. We intend to respond to the needs of health care and managed care providers by delivering high-quality, efficient, and cost-effective services and by transporting patients to the most appropriate treatment facility, particularly in those geographic areas in which we have been able to achieve market leadership. We believe that our communications and logistics skills will allow us to offer services that will improve the responsiveness and cost-effectiveness of health care services in a managed care environment. We expect to pursue alliances with health care providers through the establishment of service contracts, through the development of business relationships, and through selective, strategic acquisitions of health care and safety-related providers, which would provide opportunities for us to integrate our services with such other service providers. In Latin America our business utilizes mobile health care services, call centers, telephone triage, and house calls by physicians and nurses. We intend to expand this business model in Latin America by marketing these services directly to individuals and large employers in government and private industry. Expansion and Integration of Health and Safety Services We plan to continue our efforts to offer our community safety services by providing fire protection and other safety-related services. We emphasize the benefits of our services in terms of lower per capita fire service costs, reduced insurance rates, and lower loss of life and property resulting from our experience, fire prevention initiatives, management and operational systems, and utilization of full-time fire fighters and part-time reservists. We respond to the economic pressures on the public sector to reduce taxes and expenditures for emergency services, including fire protection and other safety-related services, by establishing public/private alliances with fire districts and municipalities. We are also pursuing opportunities to provide fire protection and safety services to large industrial complexes, including airports, industrial and petrochemical plants, power plants, and other large self-contained facilities. We currently offer other safety-related services on a very limited basis, including our personal emergency response systems. We plan to continue to leverage our communications and logistics skills to develop and offer safety-related services. We also intend to leverage our sophisticated systems and substantial experience with third-party payors to provide fire districts and municipalities with business services, such as billing and collection services. Because emergency medical response represents a significant portion of fire response activity within many fire departments, we believe that our ambulance and fire protection services operations are complementary. Building upon our successful delivery of integrated ambulance and fire services under our contracts with the City of Scottsdale, Arizona, and with Knox County, Tennessee, and through our public/private alliance with San Diego Fire & Life Safety Services, we plan to continue the integration of our fire and ambulance services in certain of our service areas and to pursue opportunities to provide integrated services in new geographic areas. We believe that our integration of health and safety services can provide operating economies, 5 7 coordination of the delivery of services, efficiencies in the use of personnel and equipment, and enhanced levels of service, especially in lower-utilization communities. Acquisition of Ambulance Service Providers Our acquisition program focuses on very selective targeted strategic acquisitions. We evaluate proposed acquisitions on the potential to increase operating margins and returns on investment and our ability to establish a strong strategic local relationship. We believe that the fragmented nature of the industry, combined with the lack of capital and limited management systems that characterize many providers, provides us with the opportunity to acquire additional ambulance service providers, including hospital-owned providers, that would benefit from our management and operational systems, resulting in productivity gains and enhanced levels of service. Our ability to complete acquisitions depends upon the availability of cash from operations or additional debt or equity financing, our capitalization, and the market price of our common stock. A continuation of the depressed market price of our common stock has resulted and may continue to result in a slower pace of acquisitions in the future. See "Risk Factors -- We have significant indebtedness," "-- We face risks associated with our prior rapid growth, integration, and acquisitions," and "-- The market price of our common stock may be volatile" contained in Item 1 of this Report. Productivity Improvement and Enhancement We continue to strengthen our existing infrastructure. We utilize our management and operational systems to enhance productivity and profitability in our existing operations and in acquired operations and to enhance our opportunities with joint venture and business alliance partners. The standardization of certain functions and the centralization of certain key management and operating systems development permit us to achieve economies of scale at both the regional and corporate levels. We believe that establishing market leadership in our various service areas enables us to more efficiently utilize our equipment and personnel, to better serve large regional health care providers, and to more effectively market our services and improve our productivity. See "Risk Factors -- We face risks associated with our prior rapid growth, integration, and acquisitions" contained in Item 1 of this Report. Entrance into International Markets We have capitalized on the growth opportunities created by the privatization of health and safety services in markets such as Argentina and the expansion of health insurance companies and health maintenance organizations into Latin America. We believe select Latin America markets, including the nations of the MERCOSUR, represent a growth opportunity and provide a model for a capitated health care environment encompassing both ambulance transport and mobile health care utilizing call centers, telephone triage, and house calls by physicians and nurses. We evaluate opportunities to enter into international markets through alliances based on factors such as the economic and political climate, the availability of capital, our ability to establish a strong strategic local relationship and a solid corporate infrastructure of systems and management talent, the potential to increase operating margins and returns on capital, and the opportunity to offer value-added services that broaden our participation in the health care market. See "Risk Factors -- We face risks associated with our prior rapid growth, integration, and acquisitions," and "-- We face additional risks associated with our international operations" contained in Item 1 of this Report. 6 8 CURRENT SERVICE AREAS We provide our services in more than 400 communities in the following 25 states, the District of Columbia, and Latin America: Alabama Kentucky Oregon Arizona Louisiana Pennsylvania California Maryland South Carolina Colorado Mississippi South Dakota Florida Nebraska Tennessee Georgia New Jersey Texas Indiana New York Virginia Iowa Ohio Washington Wisconsin
We provide ambulance services in these states and the District of Columbia primarily under the names Rural/Metro Ambulance and Rural/Metro Medical Services and in certain areas of Arizona under the name Southwest Ambulance. In Latin America, we provide urgent home medical care and ambulance transport services under the name Emergencias Cardio Coronarias ("ECCO") and provide urgent and primary care services in clinics under the name GEA. We may operate under other names depending upon local statutes or contractual agreements. We generally provide our ambulance services pursuant to a contract or certificate of necessity on an exclusive or nonexclusive basis. We provide "911" emergency ambulance services primarily pursuant to contracts or as a result of providing fire protection services. In certain service areas, we are the only provider of both emergency ambulance and general transport services. In other service areas, we compete for general transport services. In all service areas, we respond to "911" emergency calls if requested by a municipality or fire district, even in the absence of a contract. We provide fire protection services under the name Rural/Metro Fire Department in 10 states and in Latin America. AMBULANCE TRANSPORT SERVICES AND URGENT HOME MEDICAL CARE Emergency Medical Services We generally provide emergency medical ambulance services pursuant to contracts with counties, fire districts, and municipalities. These contracts typically appoint us as the exclusive provider of "911" emergency ambulance services in designated service areas and require us to respond to every "911" emergency medical call in those areas. We respond to virtually all "911" calls with advanced life support ("ALS") ambulance units. We staff our ALS ambulance units with two paramedics or one paramedic and an emergency medical technician ("EMT") and equip these units with ALS equipment (such as cardiac monitors, defibrillators, and oxygen delivery systems) as well as pharmaceuticals and medical supplies. Upon arrival at an emergency, the ALS crew members deploy portable life support equipment, ascertain the patient's medical condition, and, if required, begin life support techniques and procedures that may include airway intubation, cardiac monitoring, defibrillation of cardiac arrhythmias, and the administration of medications and intravenous solutions. The crew also may perform basic life support ("BLS") services, which include basic airway management, hemorrhage control, stabilization of fractures, emergency childbirth, and basic vehicle extrication. As soon as medically appropriate, the patient is placed on a portable gurney and carried into the ambulance. While a paramedic monitors and treats the patient, the other crew member drives the ambulance to a hospital designated either by the patient or the applicable medical protocol. En route, the ALS crew alerts the hospital regarding the patient's medical condition, and if necessary, the attending paramedic seeks advice from a hospital emergency room physician as to treatment. Upon arrival at the hospital, the patient generally is taken to the emergency room. 7 9 General Medical Transport Services We also provide ambulance services to patients requiring either advanced or basic levels of medical supervision during transfer to and from residences and health care facilities. These services may be provided when a home-bound patient requires examination or treatment at a health care facility or when a hospital inpatient requires tests or treatments (such as MRI testing, CAT scans, dialysis, or chemotherapy treatment) available at another facility. We utilize ALS or BLS ambulance units to provide general ambulance services depending on the patient's needs and the proximity of available units. We staff our BLS ambulance units with two EMTs and equip these units with medical supplies and equipment necessary to administer first aid and basic medical treatment. We also provide critical care transport services to medically unstable patients (such as cardiac patients and neonatal patients) who require critical care while being transported between health care facilities. Critical care services differ from ALS services in that the ambulance may be equipped with additional medical equipment and may be staffed by a medical specialist provided by us or by a health care facility to attend to a patient's special medical needs. In addition to ambulance services, we provide non-medical transportation for the handicapped and certain non-ambulatory persons in some service areas. Such transportation generally takes place between residences or nursing homes and hospitals or other health care facilities. In providing this service, we utilize vans that contain hydraulic wheelchair lifts or ramps operated by drivers who generally are trained in cardiopulmonary resuscitation ("CPR"). We provide ambulance services, critical care transports, and nonmedical transportation services pursuant to contracts with governmental agencies, health care facilities, or at the request of a patient. Such services may be scheduled in advance or provided on an as needed basis. Contracts with managed care organizations provide for reimbursement on a per transport basis or on a capitated basis under which we receive a fixed fee per person per month. Urgent Home Medical Care and Urgent and Primary Care in Clinics In Argentina, we have approximately 650,000 individual and business customers that prepay monthly for urgent home medical care and ambulance services under a capitated service arrangement. Personnel conduct telephone triage and prioritize the dispatch of services to subscribers. Mobile services may include the dispatch of physicians to the patient in an ambulance for serious life threatening situations, or more frequently, in the physician's car, thus covering a wider scope of service than the traditional U.S. ambulance service model. In Cordoba, Argentina, we also have approximately 60,000 individual and business customers that pay monthly for urgent and primary care services in three clinics under a capitated service arrangement. In Argentina, doctors and nurses perform urgent and primary care services for our business customers. Argentine doctors are trained in medicine and are licensed as such in Argentina at both the national and, in certain localities, the local level. There are no continuing education requirements. Generally, nurses are trained over periods ranging from six months to four years after high school in accordance with local programs. Accordingly, as each nurse receives additional training, his or her scope of practice increases. Medical Personnel and Quality Assurance Paramedics and EMTs must be state certified in order to transport patients and to perform emergency care services. Certification as an EMT requires completion of a minimum of 164 hours of training in a program designated by the United States Department of Transportation and supervised by state authorities. EMTs also may complete advanced training courses to become certified to provide certain additional emergency care services, such as administration of intravenous fluids and advanced airway management. In addition to completion of the EMT training program, the certification as a paramedic requires the completion of more than 800 hours of training in advanced patient care assessment, pharmacology, cardiology, and clinical and field skills. Many of the paramedics currently employed by us served as EMTs for us prior to their certification as paramedics. 8 10 Local physician advisory boards develop medical protocols to be followed by paramedics and EMTs in a service area. In addition, instructions are conveyed on a case-by-case basis through direct communications between the ambulance crew and hospital emergency room physicians during the administration of advanced life support procedures. Both paramedics and EMTs must complete continuing education programs and, in some cases, state supervised refresher training examinations to maintain their certifications. Certification and continuing education requirements for paramedics and EMTs vary among states and counties. We maintain a commitment to provide high quality pre-hospital emergency medical care. In each location in which we provide services, a medical director, who usually is a physician associated with a hospital we serve, monitors adherence to medical protocol and conducts periodic audits of the care provided. In addition, we hold retrospective care audits with our employees to evaluate compliance with medical and performance standards. We were one of the first ambulance service providers to obtain accreditation for many of our larger ambulance operations from the Commission on Accreditation of Ambulance Services, a joint program between the American Ambulance Association and the American College of Emergency Physicians. The process is voluntary and evaluates numerous qualitative factors in the delivery of services. We believe municipalities and managed care providers will consider accreditation as one of the criteria in awarding contracts in the future. FIRE PROTECTION SERVICES Fire protection services consist primarily of fire prevention and fire suppression. Other fire protection related activities include hazardous material containment, underwater search and recovery, mountain and confined space rescue, and public education. We provide various levels of fire protection services, ranging from fire stations that are fully staffed 24 hours per day to reserve stations. We generally provide our services to municipalities and other governmental bodies pursuant to master contracts and to residences, commercial establishments, and industrial complexes pursuant to subscription fee and other fee-for-service arrangements. Federal and state governments contract with us from time to time to suppress forest fires or wildfires on government lands. We have placed fire prevention and education in the forefront of our fire protection services and have developed a comprehensive program to prevent and minimize fires rather than emphasizing a standing army to respond to fires that occur. We believe that effective fire protection requires the intensive training of personnel, the effective utilization of fire equipment, the establishment of effective communication centers for the receipt of emergency calls and the dispatch of equipment and personnel, the establishment and enforcement of strict fire codes, and community educational efforts. We believe that we provide fire protection services at a cost significantly lower than the national average as a result of our emphasis on fire prevention, our advanced systems, and our use of a combination of full-time fire fighters and part-time reservists. Based upon generally available industry data, we believe that fire loss per capita in the areas we service has been substantially less than the national average. Fire Protection Personnel Our ability to provide our fire protection services at relatively low costs results from our efficient use of personnel in addition to our fire prevention efforts. Typically, personnel costs represent more than two-thirds of the cost of providing fire protection services. We have been able to reduce our labor costs through a system that utilizes full-time firefighters complemented by paid part-time reservists as well as a modified every other day shift schedule. By using trained reservists on an as needed basis, we have the ability to supplement full-time fire fighters on a cost-effective basis. All full-time and reservist firefighters undergo extensive training, which exceeds the standards recommended by the National Fire Protection Association ("NFPA"), and must qualify for state certification before being eligible for full-time employment by us. Because approximately 70% to 80% of our fire response activity consists of emergency medical response, all of our firefighters are trained EMTs and an increasing 9 11 number of our firefighters are paramedics. Ongoing training includes instruction in new fire service tactics and fire fighting techniques as well as continual physical conditioning. Fire Response An alarm typically results in the dispatch of one or more engine companies (each of which consists of an engine and two to four firefighters, including a captain), a fire chief, and such other equipment as circumstances warrant. The amount of equipment and personnel depends upon the type, location, and severity of the incident. We utilize our dispatch capabilities to reposition equipment and firefighters to maximize the availability and use of resources in a cost-effective manner. Fire Prevention We believe that fire prevention programs result in both lower fire loss and significant overall cost savings. Our fire prevention programs include advice and recommendations for and the encouragement of various fire prevention methods, including fire code design, building design to inhibit the spread of fire, the design of automatic fire suppression sprinklers, fire detector and smoke detector installations, the design of monitoring and alarm systems, the placement and inspection of fire hydrants, fire code inspection and enforcement, and the determination of fire cause and origin in arson suspected fires. In addition, our personnel perform community education programs designed to reduce the risk of fire and increase our community profile. We believe that our long-standing public/private relationship with the City of Scottsdale provides an example of an effective, cost-efficient fire protection program. The Scottsdale program emphasizes our philosophy of fire prevention. With our cooperation and assistance, the City of Scottsdale has designed comprehensive fire prevention measures, including fire codes, inspections, and sprinkler and smoke detector ordinances. We believe that as a result of strict fire codes, the enactment of a sprinkler ordinance, and the effectiveness of the services we provide, Scottsdale's per capita cost for fire protection is 40% lower than the national average and that its per capita fire loss is approximately one-third of the national average. INDUSTRIAL FIRE PROTECTION SERVICES We provide fire protection services and, on a limited basis, unarmed security services to large industrial complexes, such as airports, large industrial and petrochemical plants, power plants, and other self-contained facilities. The combination of fire protection services with security services in large industrial complexes has the potential to provide for greater efficiency and utilization in the delivery of such services and to result in reduced cost to our industrial customers for such services. We have contracts ranging up to five years in duration and expiring at various dates up to October 1, 2005 to provide crash/rescue firefighting and hazardous materials response services at locations in several states and at three airports in Bolivia. We intend to pursue similar contracts domestically and internationally. FIRE TRAINING SERVICES AND PROTECTION SERVICES We have instituted industrial fire training services and provide sophisticated training for industrial, professional, and specialized firefighters using live burn training to simulate realistic firefighting situations. We also provide shipboard fire training services to several cruise lines from our training site in St. Thomas, Virgin Islands. The training permits fire brigade, ship crew members, and emergency response teams to meet increased federal training requirements, the Occupational Safety and Health Act ("OSHA") requirements, and other regulatory requirements for work place safety and on-site response teams. We utilize certain of our communications centers for personal medical emergency response systems monitoring to complement our regional emergency services. We believe protection services can be integrated with fire protection and ambulance services for optimal efficiency and maximum cost effectiveness. 10 12 MANAGEMENT SYSTEMS We utilize sophisticated management systems, which we believe enhance the productivity and profitability of our existing operations and enable us to enhance the productivity and profitability of acquired operations. These systems permit us to achieve economies of scale at the local operational level through the proper utilization of personnel and equipment and at the corporate level through centralized systems for billings, collections, purchasing, accounting, cash management, human resources, and risk management. We have developed measurement systems that permit management to monitor the performance level of each operation on a continual basis. Our centralized management and information systems permit managers to direct their attention primarily to operations. The systems include centralized billings and collections procedures that provide for more efficient tracking and collection of accounts receivable. Centralized purchasing permits us to achieve discounts in the purchase of equipment and supplies through a company-developed catalogue from which managers select items needed for their operations. We believe our investment in management systems and our effective use of these systems represent key components in our success. Our financial reporting system facilitates our successful integration of acquired companies. We place a high priority on evaluating the management and reporting systems of acquired operations and subsequently integrating or transitioning these systems to improve operating efficiencies. Upon completion of an acquisition, we establish critical success factors, including number of transports, ratio of transports to calls, resource utilization, and pricing statistics, which are monitored daily. We focus on converting acquired businesses onto our technology to promote consistent and timely reporting, taking over cash management functions, and integrating acquired businesses into our LAN/WAN communications infrastructure. We are committed to an ongoing enhancement of our systems to provide productive, timely information and effective controls and believe that our management systems have the capability to support sustained long-term growth. For additional information regarding our ability to successfully integrate acquired companies into our existing management systems, see "Risk Factors -- We face risks associated with our prior rapid growth, integration, and acquisitions" contained in Item 1 of this Report. HUMAN RESOURCES We strive to maximize operational autonomy of our managers. Managers receive extensive training in the use of management systems, customer service, and supervisory practices. Our human resources division is involved in the training and integration of managers from acquired operations. Our centralized human resources division increases our ability to assign the most appropriate personnel for a position within any given operation and to reassign personnel as necessary to meet operational needs. The human resources department participates in training, career development, and succession planning of employees and assesses our personnel needs. DISPATCH AND COMMUNICATIONS We use system status plans and flexible deployment systems to position our ambulances within a designated service area because effective fleet deployment represents a key factor in reducing response time and increasing efficient use of resources. In certain service areas with a large volume of calls, we analyze data on traffic patterns, demographics, usage frequency, and similar factors with the aid of computers to help us determine optimal ambulance deployment and selection. The center that controls the deployment and dispatch of ambulances in response to calls for ambulance service may be owned and operated either by the applicable county or municipality or by us. Each control center utilizes computer hardware and software and sophisticated communications equipment and maintains responsibility for fleet deployment and utilization 24 hours a day, seven days a week. Depending on the emergency medical dispatch system used in a designated service area, the public authority that receives "911" emergency medical calls either dispatches our ambulances directly from the public control center or communicates information regarding the location and type of medical emergency to our control center, which in turn dispatches ambulances to the scene. In most service areas, our control center receives the calls from the police after the police have determined the call is for emergency medical services. 11 13 When we receive the "911" call, we dispatch one or more ambulances directly from our control center while the call taker communicates with the caller. All call takers and dispatchers are trained EMTs with additional training that enables them to instruct a caller about applicable pre-arrival emergency medical procedures, if necessary. In our larger control centers, a computer assists the dispatcher by analyzing a number of factors, such as time of day, ambulance location, and historical traffic patterns, in order to recommend optimal ambulance selection. In all cases, a dispatcher selects and dispatches the ambulance. While the ambulance is en route to the scene, the ambulance receives information concerning the patient's condition prior to the ambulance's arrival at the scene. Our communication systems allow the ambulance crew to communicate directly with the destination hospital to alert hospital medical personnel of the arrival of the patient and the patient's condition and to receive instructions directly from emergency room personnel on specific pre-hospital medical treatment. These systems also facilitate close and direct coordination with other emergency service providers, such as the appropriate police and fire departments that also may be responding to a call. Deployment and dispatch also represent important factors in providing non-emergency ambulance services. We implement system status plans for these services designed to assure appropriate response times to non-emergency calls. We are working to develop a demand management system that integrates medical protocols with our logistics and "911" based communications expertise. In our Argentina operations, we combine telephone triage, medical transport services, and urgent home medical care services in order to improve the responsiveness and cost-effectiveness of health care delivery in a managed care system. Each call center staff is supervised by physicians and uses medical protocols to analyze and triage the medical situation and determine the best mode of care. We utilize communication centers in our community fire protection activities for the receipt of fire alarms and the dispatch of equipment and personnel that are the same as or similar to those maintained for our ambulance services. Response time represents an important criteria in the effectiveness of fire suppression. Depending upon the area served, our response time from the receipt of a call to the arrival on the scene generally varies from four to fifteen minutes. Response times depend on the level of protection sought by our customers in terms of fire station spacing, the size of the service area covered, and the amount of equipment and personnel dedicated to fire protection. BILLINGS AND COLLECTIONS We currently maintain 15 domestic regional billing and payment processing centers and a centralized private pay collection system at our headquarters in Arizona. Invoices are generated at the regional level, and the account is processed by the centralized collection system for private-pay accounts only if payment is not received in a timely manner. Customer service is directed from each of the regional centers. Substantially all of our revenue is billed and collected through our integrated billing and collection system, except for our operations in Rochester, New York; and the Metro New York City/ New Jersey area. We will continue to review the benefits and timing of integrating the remaining two non-integrated billing centers. We derive a substantial portion of our ambulance fee collections through our regional billing centers from reimbursement by third-party payors, including payments under Medicare, Medicaid, and private insurance programs, typically invoicing and collecting payments directly to and from those third-party payors. We also collect payments directly from patients, including payments under deductible and co-insurance provisions and otherwise. We derived domestic net ambulance fee collections from the following:
1998 1999 2000 ---- ---- ---- Medicare................................................ 29% 24% 23% Medicaid................................................ 11% 10% 11% Private insurers........................................ 39% 41% 47% Patients................................................ 21% 25% 19% --- --- --- 100% 100% 100% === === ===
12 14 Companies in the ambulance service industry maintain high provisions for doubtful accounts relative to companies in other industries. Collection of complete and accurate patient billing information during an emergency service call is sometimes difficult, and incomplete information hinders post-service collection efforts. In addition, it is not possible for us to evaluate the creditworthiness of patients requiring emergency transport services. Our allowance for doubtful accounts generally is higher with respect to revenue derived directly from patients than for revenue derived from third-party payors and generally is higher for transports resulting from "911" emergency calls than for general transport requests. See "Risk Factors -- We depend on reimbursements by third-party payors and individuals," and "-- Proposed rules may adversely affect our reimbursement rates of coverage" contained in Item 1 of this Report. We have substantial experience in processing claims to third-party payors and employ a collection staff specifically trained in third-party coverage and reimbursement procedures. Our integrated billing and collection system uses specialized proprietary software systems to specifically tailor the submission of claims to Medicare, Medicaid, and certain other third-party payors and has the capability to electronically submit claims to the extent third-party payors' systems permit. Our integrated billing and collection system provides for accurate tracking of accounts receivable and status pending payment, which facilitates the effective utilization of personnel resources to resolve workload distribution and problem invoices. When billing individuals rather than third-party payors, we use an automated dialer that preselects and dials accounts based on their status within the billing and collection cycle, which optimizes the efficiency of the collection staff. State licensing requirements as well as contracts with counties, municipalities, and health care facilities typically require us to provide ambulance services without regard to a patient's insurance coverage or ability to pay. As a result, we often do not receive compensation for services provided to patients who are not covered by Medicare, Medicaid, or private insurance. The anticipated level of uncompensated care and allowance for uncollectible accounts may be considered in determining our subsidy and permitted rates under contracts with a county or municipality. MARKETING AND SALES Counties, fire districts, and municipalities generally award contracts to provide "911" emergency services either through requests for competitive proposals or bidding processes. In some instances in which we are the existing provider, the county or municipality may elect to renegotiate our existing contract rather than re-bid the contract. We believe that counties, fire districts, and municipalities consider the quality of care, historical response time performance, and total cost, both to the municipality or county and to the public, to be among the most important factors in awarding contracts. In addition, we will continue to seek to enter into public/ private alliances to compete for new business. Our alliance with San Diego Fire & Life Safety Services allowed the entities to bid for and win a five-year contract to provide "911" and ambulance services throughout the City of San Diego. We market our non-emergency ambulance services to hospitals, health maintenance organizations, convalescent homes, and other health care facilities that require a stable and reliable source of medical transportation for their patients. We believe that our status as a "911" provider in a designated service area increases our visibility and enhances our marketing efforts for non-emergency services in that area. Contracts for non-emergency services usually are based on criteria (such as quality of care, customer service, response time, and cost) similar to those in contracts for emergency services. We further believe that our strategy of building regional operations will better position us to serve the developing managed care market. We market our fire protection services to subscribers in rural and suburban areas, volunteer fire departments, tax-supported fire districts, newly developed communities, and industrial complexes, including airports, large industrial and petrochemical plants, power plants, and other large self-contained facilities. Contract and/or subscription fees are collected annually in advance. In the event that we provide service for a nonsubscriber, we directly bill the property owner for the cost of services rendered. We also provide fire protection services to newly developed communities where the subscription fee may be included in the homeowner's association assessment. 13 15 CONTRACTS We enter into contracts with counties, municipalities, and fire districts to provide "911" emergency ambulance services in designated service areas. These contracts typically specify maximum fees that we may charge and set forth required criteria, such as response times, staffing levels, types of vehicles and equipment, quality assurance, and insurance and indemnity coverage. Counties, municipalities, and fire districts also may require us to provide a performance bond or other assurances of financial responsibility. The amount of the subsidy, if any, that we receive from a county, municipality, or fire district, and the rates that we may charge for services under a contract for emergency ambulance services, depend in large part on the nature of the services rendered and performance requirements. The four largest ambulance contracts accounted for 9% of total revenue during fiscal 1998, 8% of total revenue during fiscal 1999, and 9% of total revenue during fiscal 2000. The largest of these contracts was Orange County, Florida, which accounted for 4% of total revenue during fiscal 1998, 3% of total revenue during fiscal 1999, and 3% of total revenue during fiscal 2000. Rates charged under the Orange County contract are agreed upon between us and the County. We do not receive any subsidy from the county under this contract. The Orange County contract was first entered into in 1962 by a provider acquired by us in 1984 and was once again awarded to Rural/Metro for a two-year term beginning October 1, 2000 with one optional one-year renewal. We provide fire protection services pursuant to master contracts or on a subscription basis. Master contracts provide for negotiated rates with governmental entities. Certain contracts are performance-based and require us to meet certain dispatch and response times in a certain percentage of responses. These contracts also set maximum thresholds for variances from the performance criteria. These contracts establish the level of service required and may encompass fire prevention and education activities as well as fire suppression. Other contracts are level-of-effort based and require us to provide a certain number of personnel for a certain time period for a particular function, such as fire prevention or fire suppression. The largest of these contracts accounted for 2% of total revenue during the fiscal years ended June 30, 1998, 1999 and 2000. We provide fire protection services on a subscription basis in areas where no governmental entity has assumed the financial responsibility for providing fire protection. We derived approximately 49% of our fire protection service revenue from subscriptions for fiscal 1998, 48% for fiscal 1999, and 45% for fiscal 2000. We experienced renewal rates of approximately 88% during the prior three fiscal years. Fire subscription rates are not currently regulated by any government agency in our service areas. Our contracts generally extend for terms of two to five years, with several contracts having terms of up to 10 years. We attempt to renegotiate contracts in advance of the expiration date and generally have been successful in these renegotiations. We monitor our performance under each contract. From time to time, we may decide that certain contracts are no longer favorable and may seek to modify or terminate these contracts. At June 30, 2000, we had approximately 130 contracts with counties, fire districts, and municipalities for ambulance services and for fire protection services. The following table sets forth certain information regarding our five primary contracts at June 30, 2000 with counties, fire districts, and municipalities for ambulance services and for fire protection services. 14 16
EXPIRATION TERM IN YEARS DATE TYPE OF SERVICE(1) ------------- ------------ ------------------ Ambulance Orange County, Florida(2).................... 2 October 2002 911/General Rochester, New York(3)....................... 4 October 2000 911 Knox County, Tennessee(4).................... 4 June 2002 911 Fort Worth, Texas(5)......................... 5 August 2004 911 Integrated Fire and Ambulance Scottsdale, Arizona(6)................................... 5 July 2001 911
- --------------- (1) Type of service for ambulance contracts indicates whether "911" emergency or general ambulance services or both are provided pursuant to the contract. (2) The contract was first entered into in 1962 by a provider that was acquired by us in July 1984. The current contract includes a 1-year optional renewal exercisable on or before October 1, 2002. (3) The contract was first entered into in 1988 by a provider that was acquired by us in May 1994. (4) The contract was first entered into in July 1985 by us. (5) The contract was first entered into in August 1999 by us. (6) The contract was first entered into in 1952 by us. The contract has two five-year renewal options exercisable by the City of Scottsdale. We also enter into contracts with hospitals, nursing homes, and other health care facilities to provide non-emergency and critical care ambulance services. These contracts typically designate us as the first ambulance service provider contacted to provide non-emergency ambulance services to those facilities and permit us to charge a base fee, mileage reimbursement, and additional fees for the use of particular medical equipment and supplies. We provide a discount in rates charged to facilities that assume the responsibility for payment of the charges to the persons receiving services. At June 30, 2000, we had approximately 1,100 contracts with hospitals, nursing homes and other health care facilities. No significant contracts, individually or collectively, were obtained or lost during the year ended June 30, 2000. See "Risk Factors -- We depend on certain business relationships" contained in Item 1 of this Report. On August 1, 1999, we began operation of a five year contract in Fort Worth, Texas and 12 surrounding communities. We are the sole provider of "911" emergency and non-emergency ambulance services pursuant to our contract with the Fort Worth Area Metropolitan Ambulance Authority. The contract provides for our services to be paid on a monthly basis. We believe our costs of collection under this contract will be substantially less than those historically incurred by us. COMPETITION The ambulance service industry is highly competitive. The principal participants include governmental entities (including fire districts), other national ambulance service providers, large regional ambulance service providers, hospitals, and numerous local and volunteer private providers. Counties, municipalities, fire districts, hospitals, or health care organizations that presently contract for ambulance services may choose to provide ambulance services directly in the future. We are experiencing increased competition from fire departments in providing emergency ambulance service. However, we believe that the general transport services market currently is not attractive to fire departments. Some of our current competitors and certain potential competitors have greater capital and other resources than we do. Ambulance and general transport service providers compete primarily on the basis of quality of service, performance, and cost. We believe that counties, fire districts, and municipalities consider quality of care, historical response time performance, and cost to be among the most important factors in awarding a contract, although other factors, such as customer service, financial stability, and personnel policies and practices, also may be considered. Although commercial providers often compete intensely for business within a particular community, it is generally difficult to displace a provider that has a history of satisfying the quality of care and response time performance criteria established within the service area. Moreover, significant start-up costs together with the long-term nature of 15 17 the contracts under which services are provided and the relationships many providers have within their communities create barriers to providers seeking to enter new markets other than through acquisition. We believe that our status as a "911" provider in a service area increases our visibility and stature and enhances our ability to compete for non-emergency services within that area. Because smaller ambulance providers do not have the infrastructure to provide "911" services, we believe we can compete favorably with such competitors for general transport services contracts. Fire protection services for residential and commercial properties are provided primarily by tax-supported fire districts, municipal fire departments, and volunteer departments. Private providers represent a small portion of the total fire protection market and generally provide fire protection services where a tax-supported fire district or municipality has decided to contract for the provision of fire protection services or has not assumed financial responsibility for fire protection. Fire districts or municipalities may not continue to contract for fire protection services. In areas where no governmental entity has assumed financial responsibility for providing fire protection, we provide fire protection services on a subscription basis. Municipalities may annex a subscription area or that area may be converted to a fire district that provides service directly rather than through a master contract. See "Risk Factors -- We are in a highly competitive industry" contained in Item 1 of this Report. GOVERNMENTAL REGULATION Our business is subject to governmental regulation at the federal, state, local, and foreign levels. At the federal level, we are subject to regulations under OSHA designed to protect our employees. The federal government also recommends standards for ambulance design and construction, medical training curriculum, and designation of appropriate trauma facilities. Various state agencies may modify these standards. Each state in which we operate regulates various aspects of its ambulance and fire business. State requirements govern the licensing or certification of ambulance service providers, training and certification of medical personnel, the scope of services that may be provided by medical personnel, staffing requirements, medical control, medical procedures, communication systems, vehicles, and equipment. Our contracts in our current service areas typically prescribe maximum rates that we may charge for services. The process of determining rates includes cost reviews, analyses of levels of reimbursement from all sources, and determination of reasonable profits. Rate setting agencies may set rates to compensate service providers by requiring paying customers to subsidize those who do not or cannot pay. Regulations applicable to ambulance services may vary widely from state to state. Applicable federal, state, local, and foreign laws and regulations are subject to change. We believe that we currently are in substantial compliance with applicable regulatory requirements. These regulatory requirements, however, may require us in the future to increase our capital and operating expenditures in order to maintain current operations or initiate new operations. See "Risk Factors -- Proposed rules may adversely affect our reimbursement rates of coverage," "-- Certain state and local governments regulate rate structures and limit rates of return," "-- Numerous governmental entities regulate our business," and "-- Health care reforms and cost containment may affect our business" contained in Item 1 of this Report. REIMBURSEMENT We must comply with various requirements in connection with our participation in Medicare and Medicaid. Medicare is a federal health insurance program for the elderly and for chronically disabled individuals, which pays for ambulance services when medically necessary. Medicare uses a charge-based reimbursement system for ambulance services and reimburses 80% of charges determined to be reasonable by Medicare, subject to the limits fixed for the particular geographic area. The patient is responsible for paying co-pays, deductibles and the remaining balance, if we do not accept assignment, and Medicare requires us to expend reasonable efforts to collect the balance. In determining reasonable charges, Medicare considers and applies the lowest of various charge factors, including the actual charge, the customary charge, the prevailing charge in the same locality, the amount of reimbursement for comparable services, or the inflation-indexed charge limit. 16 18 Medicaid is a combined federal-state program for medical assistance to impoverished individuals who are aged, blind, or disabled or members of families with dependent children. Medicaid programs or a state equivalent exist in all states in which we operate. Although Medicaid programs differ in certain respects from state to state, all are subject to federal requirements. State Medicaid agencies have the authority to set levels of reimbursement within federal guidelines. We receive only the reimbursement permitted by Medicaid and are not permitted to collect from the patient any difference between our customary charge and the amount reimbursed. Like other Medicare and Medicaid providers, we are subject to governmental audits of our Medicare and Medicaid reimbursement claims. We have not experienced significant losses as a result of any such audit. The Office of Inspector General is currently investigating our operations in the Memphis, Tennessee, and in the Scranton, Pennsylvania areas regarding compliance with Medicare fraud and abuse statutes. We are cooperating with the federal agencies conducting the investigations and are providing requested information to these agencies. These investigations cover periods prior to and after our acquisition of these operations. We believe that the remedies existing under specific purchase agreements and reserves existing in the consolidated financial statements are sufficient so that the ultimate outcome of these matters should not have a material adverse effect on our financial condition. Government funding for health care programs is subject to statutory and regulatory changes, administrative rulings, interpretations of policy, determinations by intermediaries and governmental funding restrictions, all of which could materially increase or decrease program reimbursements for ambulance services. In recent years, Congress has consistently attempted to curb federal spending on such programs. During June 1997, the Health Care Financing Administration ("HCFA") issued proposed rules that would revise Medicare policy on the coverage of ambulance services. Reimbursement is currently permitted if, based on an assessment of the patient's condition, it is determined that ALS service is medically necessary or if ALS response is required under "911" contracts or state or local law. The new proposal would reimburse at ALS rates only if ALS services were medically necessary. The proposed HCFA rules would also require, among other things, that a physician's certification be obtained prior to furnishing non-emergency ambulance service to patients, that certain ambulance staffing requirements be maintained, that certain equipment be present in each ambulance, and that certain additional information and documentation be provided in order to qualify for reimbursement under the Medicare program. The proposed Medicare ambulance fee schedule and rule was published September 12, 2000 in the Federal Register, to be followed by a 60-day comment period. The proposed rules have not been finalized. If implemented, these rules could result in contract renegotiations or other action by us to offset any negative impact of the proposed change in reimbursement policies that could have a material adverse effect. During August 1997, President Clinton signed the "Balanced Budget Act of 1997", or BBA. The BBA provides for certain changes to the Medicare reimbursement system, including the development and implementation of a prospective fee schedule by January 2000 for ambulance services provided to Medicare beneficiaries. The BBA mandates that this fee schedule be developed through a negotiated rulemaking process between HCFA and ambulance service providers and must consider the following: (i) data from industry and other organizations involved in the delivery of ambulance services; (ii) mechanisms to control increases in expenditures for ambulance services; (iii) appropriate regional and operational differences; (iv) adjustments to payment rates to account for inflation and other relevant factors; and (v) the phase-in of payment rates under the fee schedule in an efficient and fair manner. Charges for ambulance services provided during calendar years 1998, 1999, and 2000 will be increased by the Consumer Price Index less one percentage point. The BBA requires that ambulance service providers accept assignment of payment directly from Medicare and accept such amount, along with the co-pay and deductible paid by the patient, as payment in full. The BBA also applies the Skilled Nursing Facility Prospective Payment System ("SNFPPS") to a limited number of ambulance trips to and from nursing homes. The application of SNFPPS could require us to negotiate new contracts or arrangements with skilled nursing facilities to provide ambulance services. The BBA also stipulates that individual states may now elect not to provide payment for cost sharing for coinsurance, or co-payments, for dual-qualified (Medicare and Medicaid) beneficiaries. 17 19 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 prospective fee schedule as well as the mandatory acceptance of assignment would be postponed to January 2001. HCFA also announced rules that became effective in February 1999, which require, among other things, that a physician's certification be obtained for certain ambulance transports. We have implemented a program to comply with these new rules. We could take certain actions to partially mitigate any adverse effect of these changes. These actions could include renegotiation of rates and contract subsidies provided in our "911" ambulance service contracts and changes in staffing of ambulance crews based upon the negotiation for longer response times under ambulance service contracts to reduce operating costs. We face risks and uncertainties regarding the proposed HCFA rules or other proposals involving various aspects of Medicare reimbursements including the following: - the proposed HCFA rules, or other proposals involving various aspects of Medicare reimbursements may not be adopted or implemented; - we are uncertain regarding the effect on us of any final rule; - we are uncertain of the impact of a final prospective fee schedule; and - future funding levels for Medicare and Medicaid programs may not be comparable to present levels. Changes in the reimbursement policies, or other government action, could adversely affect our business, financial condition, cash flows, and results of operations. INSURANCE We carry a broad range of automobile and general liability, comprehensive property damage, malpractice, workers' compensation, and other insurance coverage that we consider adequate for the protection of our assets and operations, subject to certain self insurance retentions up to $1,000,000. We operate in some states that adhere to legal standards that hold emergency service providers to a gross negligence standard in the delivery of emergency medical care, thereby subjecting them to less exposure for tort judgments. We are subject to accident claims as a result of the normal operation of our fleet of ambulances and fire vehicles. The coverage limits of our policies may not be adequate or such insurance may not continue to be available on commercially reasonable terms. A successful claim against us in excess of our insurance coverage could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation and business. We have undertaken to minimize our exposure through our risk management program. EMPLOYEES At September 25, 2000, we employed approximately 7,200 full-time and 3,700 part-time employees, including approximately 6,150 involved in ambulance services, 850 in fire protection services, 330 in integrated ambulance and fire protection services, 1,040 in urgent home medical and clinical care services, and 2,530 in management, administrative, clerical, and billing activities. Of these employees, 2,560 are paramedics and 3,250 are EMTs. We are a party to collective bargaining agreements relating to our Rochester, New York; Buffalo, New York; Corning, New York; San Diego, California; Maricopa County, Arizona, Integrated Fire employees; Gadsden, Alabama and Arlington, Texas operations and to certain of our ambulance services employees in Arizona. We are currently negotiating collective bargaining agreements in other service areas. We consider our relations with employees to be good. 18 20 RISK FACTORS The following risk factors, in addition to those discussed elsewhere in this Report, should be carefully considered in evaluating us and our business. WE HAVE SIGNIFICANT INDEBTEDNESS. We have significant indebtedness. As of June 30, 2000, we owed lenders 3.2 times our total stockholders' equity, based on $302.0 million of consolidated indebtedness and $95.6 million of stockholders' equity. In March 1998, we sold $150 million of 7 7/8% senior notes due in 2008. At the same time as this debt offering, we renegotiated our then existing $200 million bank revolving credit facility to create a parity loan with the senior notes and to extend the maturity of the credit facility to March 2003. We used the proceeds from the senior notes to repay the then current outstanding bank revolving credit facility. The senior notes were issued under an agreement among us, certain of our subsidiaries as guarantors, and the First National Bank of Chicago as trustee. The agreement permits us to incur additional debt under certain conditions, and we expect to incur such additional debt by obtaining advances on the bank revolving credit facility. Our ability to repay the senior notes and other debt depends on our future operating performance, which is affected by governmental regulations, the state of the economy, financial factors, and other factors, certain of which are beyond our control. We cannot provide assurance that we will generate sufficient funds to enable us to make our periodic debt payments. Our leverage and related covenants could materially and adversely affect our competitive position and our ability to withstand adverse economic conditions. Furthermore, our debt and related covenants could make it more difficult for us to make material acquisitions, obtain future financing, or take advantage of business opportunities that may arise. If we are unable to service our debt, we will be required to pursue alternative means of repayment, which could include restructuring or refinancing some or all of our debt, raising additional equity, or selling all or a portion of our tangible and/or intangible assets. We cannot provide assurance that we could implement any of these strategies on satisfactory terms. The amount of our debt could also have important consequences, including the following: - impairing our ability to obtain additional financing in the future for operating expenses, acquisitions, or general corporate purposes; - dedicating our cash flow from operations to making periodic principal and interest payments on debt, instead of using these funds for operations; - requiring continuous monitoring of our financial condition to ensure that we comply with all of the required debt covenants; - limiting our ability to incur additional debt, create other liens, pay dividends, or sell assets; and - making us vulnerable to industry changes, including new laws and changing economic conditions. LENDERS IMPOSE RESTRICTIVE COVENANTS ON US. As stated above, the agreement governing the terms of the senior notes contains certain covenants limiting our ability to - - incur certain additional debt - create certain liens - - pay dividends - issue guarantees - - redeem capital stock - enter into transactions with affiliates - - make certain investments - sell assets - - issue capital stock of subsidiaries - complete certain mergers and consolidations.
The revolving credit facility contains other more restrictive covenants and requires us to satisfy certain financial tests, including a total debt leverage ratio, a total debt to total capitalization ratio, and a fixed charge ratio. Our ability to satisfy those tests can be affected by events both within and beyond our control, and we 19 21 cannot provide assurance that we will be able to meet these tests. Our breach of any of these covenants could cause a default under the revolving credit facility or the agreement for the senior notes, resulting in possible difficulties with customers, personnel, or others. In February 2000, we were granted a waiver of covenant compliance under our revolving credit facility, through March 14, 2000. We have received additional waivers covering periods ending October 16, 2000. In accordance with the waiver as amended, we will accrue an additional 2% annual interest expense. We continue to work toward a long-term agreement on our revolving credit facility. A breach of the waiver and any of the covenants could result in an event of default under the credit facility. There is no assurance that we are in compliance with all of the technical conditions of the waiver; however, the lenders have not asserted that we have failed to comply with any such requirements. OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE RENDERED A REPORT THAT INCLUDES A GOING CONCERN STATEMENT. The senior notes and the credit facility have been reclassified as a current liability under accounting rules relating to debt that is callable by the creditor since we are operating under a waiver under the credit facility. This in addition to the significant operating loss incurred in fiscal 2000 as well as those items discussed in Note 1 in the company's Notes to Consolidated Financial Statements have resulted in our independent public accountants modifying their report to include a statement that these uncertainties create substantial doubt about our company's ability to continue as a going concern. The existence of a going concern statement may make it more difficult to pursue additional capital through public or private debt or equity financings. Our inability to successfully negotiate an amendment to our revolving credit facility could have a material adverse effect on our ability to continue as a going concern. WE OPERATE THROUGH OUR SUBSIDIARIES. We are a holding company and conduct substantially all of our operations through our direct and indirect subsidiaries. In order for us to make our periodic debt payments, we must have access to the cash flow of our subsidiaries, whether through loans, dividends, distributions, or otherwise. Our ability to make our debt payments could be subject to legal, contractual, and other restrictions that could hinder or prevent us from gaining access to this cash flow. Each subsidiary is a separate and distinct legal entity from us and, unless it is acting as a guarantor of the senior notes, has no obligation, contingent or otherwise, to pay any amounts due in respect of the senior notes or to make any amounts available for payment. The holders of any debt of our subsidiaries will be entitled to payment from the assets of such subsidiaries prior to the holders of any of our general, unsecured obligations, including the senior notes and the guarantees of certain of our subsidiaries. As of June 30, 2000, our subsidiaries had $5.3 million of debt. WE DEPEND ON CERTAIN BUSINESS RELATIONSHIPS. We depend to a great extent on certain contracts with municipalities or fire districts to provide "911" emergency ambulance services and fire protection services. Our five largest contracts accounted for approximately 11% of total revenue for the fiscal year ended June 30, 1999 and 12.0% of total revenue for the fiscal year ended June 30, 2000. One of these contracts accounted for approximately 3% of total revenue for the fiscal years ended June 30, 1999 and 2000. The loss or cancellation of any one or more of these contracts could have a material adverse effect on our business, financial condition, cash flow, and results of operations. We cannot provide assurance that we will be successful in retaining our existing contracts or in obtaining new contracts for emergency ambulance services or for fire protection services. Our contracts with municipalities and fire districts and with managed care organizations and health care providers are short term or open-ended or for periods ranging from two years to five years. During such periods, we may determine that a contract is no longer favorable and may seek to modify or terminate the contract. When making such a determination, we could consider factors, such as weaker than expected transport volume, geographical issues adversely affecting response times, and delays in implementing technology upgrades. We face certain risks in attempting to terminate unfavorable contracts prior to their expiration because of the possibility of forfeiting performance bonds and the potential adverse political and 20 22 public relations consequences. Our inability to terminate or amend unfavorable contracts could have a material adverse effect on our business, financial condition, cash flows, and results of operations. We also face the risk that areas in which we provide fire protection services through subscription arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities. NEW CONTRACTS REQUIRE SIGNIFICANT INVESTMENTS IN CAPITAL AND RESOURCES THAT WE MAY NOT RECOVER. We face risks and uncertainties associated with origination of contracts to provide emergency ambulance services or fire protection services in new geographic regions. Entering new markets to provide services where we have never provided services requires us to expend a significant amount of capital to begin operations, and to employ sufficient personnel to service the contract. We may not recover our capital investments in these areas in the event of the loss or cancellation of one or more of these contracts. The loss or cancellation of any one or more of these contracts may have a material adverse effect on our business. WE FACE RISKS ASSOCIATED WITH OUR PRIOR RAPID GROWTH, INTEGRATION, AND ACQUISITIONS. In order for our strategy with respect to ambulance services to succeed, we must integrate and successfully operate the ambulance service providers that we have previously acquired or may acquire in the future. The process of integrating management, operations, facilities, and accounting and billing and collection systems and other information systems requires continued investment of time and resources and can involve difficulties, which could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Unforeseen liabilities and other issues also could arise in connection with the operation of businesses that we have previously acquired or may acquire in the future. Our acquisition agreements contain purchase price adjustments, rights of set-off, and other remedies in the event that certain unforeseen liabilities or issues arise in connection with an acquisition. However, these purchase price adjustments, rights of set-off, and other remedies may not be sufficient to compensate us in the event that any liabilities or other issues arise. We seek selective, strategic acquisition opportunities on a limited basis. We cannot provide assurance that we will be able to identify additional suitable companies to acquire, that we will be able to complete these acquisitions, or that we will be able to integrate any such acquired companies successfully into our operations. Consolidation in the ambulance industry has resulted in fewer acquisition candidates, and our strategy prescribes highly selective targeting of those potential candidates. Acquiring companies involves numerous short-term and long-term risks, including the following: - diversion of management's attention, - failure to retain key personnel of the acquired company, - adverse consequences to cash flow until accounts receivable of the acquired company are fully integrated, - incompatibility of acquired systems, - loss of net revenue of the acquired company, - possible regulatory issues of the acquired company, - subjecting our company to regulatory reviews regarding compliance with Medicare or Medicaid fraud and abuse statutes covering periods prior to our acquisition of those companies or integration of those companies into our billing and collection system, - compliance with laws and regulations of new jurisdictions, and - facing competitors with greater knowledge of local markets. We expect to use primarily cash and our common stock to acquire companies in the future. Our acquisition activity could be adversely affected if we do not generate sufficient cash for future acquisitions from existing operations or through additional debt or equity financings. We cannot provide assurance that our 21 23 operations will generate sufficient cash for acquisitions or that any additional financings will be available if and when needed or on terms acceptable to us. The market price of our common stock impacts our ability to complete acquisitions. The market price of our common stock may affect our willingness to use our common stock to acquire other companies and the willingness of potential acquired companies or their owners to accept our common stock. In addition, the market price performance of our common stock may make raising funds more difficult and costly. As a result of a decline in the market price of our common stock, 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. WE DEPEND ON REIMBURSEMENTS BY THIRD-PARTY PAYORS AND INDIVIDUALS. We receive a substantial portion of our payments for ambulance services from third-party payors, including Medicare, Medicaid, and private insurers. We received approximately 75% of our ambulance fee collections from such third-party payors during fiscal 1999, including 24% from Medicare. In fiscal 2000, we received approximately 81% of ambulance fee collections from these third parties, including 23% from Medicare. The reimbursement process is complex and involves lengthy delays. From time to time, we experience such delays. Third-party payors are continuing their efforts to control expenditures for health care, including proposals to revise reimbursement policies. We recognize revenue when we provide ambulance services; however, there can be lengthy delays before we receive payment. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on assertions that certain amounts are not reimbursable or additional supporting documentation is necessary. Retroactive adjustments can change amounts realized from third-party payors. We are subject to governmental audits of our Medicare and Medicaid reimbursement claims and can be required to repay these agencies if a finding is made that we were incorrectly reimbursed. Delays and uncertainties in the reimbursement process adversely affect the level of accounts receivable, increase the overall costs of collection, and may adversely affect our working capital and cause us to incur additional borrowing costs. We also face the continuing risk of nonreimbursement to the extent that uninsured individuals require emergency ambulance service in service areas where an adequate subsidy is not provided. Amounts not covered by third-party payors are the obligations of individual patients. We continually review the mix of activity between emergency and general medical transport in view of the reimbursement environment. We establish an allowance for doubtful accounts based on credit risk applicable to certain types of payors, historical trends, and other relevant information. We review our allowance for doubtful accounts on an ongoing basis and may increase or decrease such allowances from time to time, including in those instances when we determine that the level of effort and cost of collection of certain accounts receivable is unacceptable. Our gross accounts receivable as of June 30, 1999 and June 30, 2000, were $228.8 million and $231.7 million, respectively. Our accounts receivable, net of the allowance for doubtful accounts, were $185.5 million and $143.9 million as of June 30, 1999 and 2000, respectively. The provision for doubtful accounts at June 30, 2000 includes $65.0 million recorded in the second quarter of fiscal 2000 as a change in accounting estimate, as well as a $9.8 million additional provision related to specific accounts deemed uncollectible in certain service areas that have been closed. Gross accounts receivable are affected by revenue growth, delays in payments from certain third-party payors in certain service areas, general industry trends of third-party payors taking more time to reimburse claims and other factors, offset by the effect of write-offs. The risks associated with third-party payors and uninsured individuals and our failure to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition, cash flows, and results of operations. We cannot provide assurance that our collection policies and allowances for doubtful accounts receivable will be adequate. 22 24 PROPOSED RULES MAY ADVERSELY AFFECT OUR REIMBURSEMENT RATES OF COVERAGE. During June 1997, the Health Care Financing Administration issued proposed rules that would revise Medicare policy on the coverage of ambulance services. These proposed rules have been subject to public comment and, despite the passage of new laws addressing changes to the reimbursement of ambulance services by Medicare (as discussed below), have not yet been withdrawn. The proposed rules have not been finalized. In addition, the "Balanced Budget Act of 1997" became law in August 1997. This new law in part provides for the development, negotiation, and implementation of prospective fee schedule for Medicare reimbursement of ambulance services by January 2000. The new law also reduces the annual rate adjustment for Medicare reimbursements from the Consumer Price Index, or CPI, to CPI less one percentage point. The new law requires that, beginning January 1, 2000, ambulance service providers accept assignment whereby we receive payment directly from Medicare and accept such amount, along with the co-pay and deductible paid by the patient, as payment in full. The new law also applies the Skilled Nursing Facility Prospective Payment System to a limited number of ambulance trips to and from nursing homes. This application could require us to negotiate new contracts or arrangements with skilled nursing facilities to provide ambulance services. The new law also stipulates that individual states may now elect not to provide payment for cost-sharing for coinsurance, or copayments, for dual-qualified (Medicare and Medicaid) beneficiaries. 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 prospective fee schedule as well as the mandatory acceptance of assignment will be postponed to January 2001. HCFA also announced rules that became effective in February 1999, which require, among other things, that a physician's certification be obtained for certain ambulance transports. We have implemented a program to comply with these new rules. The proposed Medicare ambulance fee schedule and rule was published September 12, 2000 in the Federal Register, to be followed by a 60-day comment period. The proposed rules have not been finalized. If implemented, these rules could result in contract renegotiations or other action by us to offset any negative impact of the proposed change in reimbursement policies that could have a material adverse effect. The final outcome of the proposed rules and the effect of the prospective fee schedule is uncertain. However, changes in reimbursement policies, or other government action, together with the financial instability of private third-party payors and budget pressures on payor sources could influence the timing and, potentially, the ultimate receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payors, or an increase in our cost structure relative to the rate of increase in the CPI, could have a material adverse effect on our business, financial condition, cash flows, and results of operations. CERTAIN STATE AND LOCAL GOVERNMENTS REGULATE RATE STRUCTURES AND LIMIT RATES OF RETURN. State or local government regulations or administrative policies regulate rate structures in most states in which we conduct ambulance operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract and establishes the rates for general ambulance services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. The state of Arizona establishes a rate of return on sales we are permitted to earn in determining the ambulance service rates we may charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 12% of total revenue for fiscal 1999 and 13% of total revenue for fiscal 2000. We cannot provide assurance that we will be able to receive ambulance service rate increases on a timely basis where rates are regulated or to establish or maintain satisfactory rate structures where rates are not regulated. Municipalities and fire districts negotiate the payments to be made to us for fire protection services pursuant to master contracts. These master contracts are based on a budget and on level of effort or 23 25 performance criteria desired by the municipalities and fire districts. We could be unsuccessful in negotiating or maintaining profitable contracts with municipalities and fire districts. CLAIMS AGAINST US COULD EXCEED OUR INSURANCE COVERAGE. We are subject to accident claims as a result of the normal operation of our fleet of ambulances and fire vehicles. The coverage limits of our policies may not be adequate or such insurance may not continue to be available on commercially reasonable terms. A successful claim against us in excess of our insurance coverage could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation and business. WE FACE ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS. We currently maintain operations in Latin America, with ambulance and healthcare services provided in Argentina, as well as aircraft rescue and fire fighting services to several airports in Bolivia. In addition to other business risks discussed herein, we are subject to various risks associated with international operations, including the following: - management of a multi-national organization, - fluctuations in currency exchange rates, - compliance with local laws and other regulatory requirements and changes in such laws and requirements, - restrictions on the repatriation of funds, - inflationary conditions, - employment and severance issues, - political and economic instability, including economic recessions, - war or other hostilities, - expropriation or nationalization of assets, - overlap of tax structures and imposition of new taxes, and - renegotiation or nullification of contracts. The inability to effectively manage these and other risks could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Internationally, certain of our customers receive services under capitated service arrangements. As a result, during periods of high utilization, as we have experienced in Argentina particularly during the winter months, our operations experience greater utilization of services under these capitated service arrangements. During these periods, our operations incur increased expenses without a corresponding increase in revenue. Our revenue from international operations is denominated primarily in the currencies of the countries in which we operate. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in losses from currency exchange rate fluctuations. As we continue to expand our international operations, exposures to gains and losses on foreign currency transactions may increase. We do not currently engage in foreign currency hedging transactions. In the future, we may seek to limit such exposure by entering into forward-foreign exchange contracts or engaging in similar hedging strategies. Any currency exchange strategy may be unsuccessful in avoiding exchange-related losses, and the failure to manage currency risks effectively may have a material adverse effect on our business, financial condition, cash flows, and results of operations. In addition, revenue we earn in foreign countries may be subject to taxation by more than one jurisdiction, thereby adversely affecting our earnings. 24 26 NUMEROUS GOVERNMENTAL ENTITIES REGULATE OUR BUSINESS Numerous federal, state, local, and foreign laws and regulations govern various aspects of the business of ambulance service providers, covering matters such as licensing, rates, employee certification, environmental matters, and other factors. Certificates of necessity may be required from state or local governments to operate ambulance services in a designated service area. Master contracts from governmental authorities are subject to risks of cancellation or unenforceability as a result of budgetary and other factors and may subject us to certain liabilities or restrictions that traditionally have applied only to governmental bodies. Federal, state, local, or foreign governments could - change existing laws or regulations, - adopt new laws or regulations that increase our cost of doing business, - lower reimbursement levels, or - otherwise adversely affect our business, financial condition, cash flows, and results of operations. We and businesses acquired by us could encounter difficulty in complying with all applicable laws and regulations. HEALTH CARE REFORMS AND COST CONTAINMENT MAY AFFECT OUR BUSINESS. Numerous legislative proposals have been considered that would result in major reforms in the U.S. health care system. We cannot predict which, if any, health care reforms may be proposed or enacted or the effect that any such legislation would have on our business. In addition, managed care providers are attempting to contain health care costs through the use of outpatient services and specialized treatment facilities. Changing industry practices could have an adverse effect on our business, financial condition, cash flows, accounts receivable realization, and results of operations. WE ARE IN A HIGHLY COMPETITIVE INDUSTRY. The ambulance service industry is highly competitive. Ambulance and general transport service providers compete primarily on the basis of quality of service, performance, and cost. In order to compete successfully, we must make continuing investments in our fleet, facilities, and operating systems. We believe that counties, fire districts, and municipalities consider the following factors in awarding a contract: - quality of medical care, - historical response time performance, - customer service, - financial stability, and - personnel policies and practices. We currently compete with the following entities to provide ambulance services: - governmental entities (including fire districts), - hospitals, - other national ambulance service providers, - large regional ambulance service providers, and - local and volunteer private providers. Municipalities, fire districts, and health care organizations that currently contract for ambulance services could choose to provide ambulance services directly in the future. We are experiencing increased competition from fire departments in providing emergency ambulance service. Some of our current competitors and certain potential competitors have or have access to greater capital and other resources than us. 25 27 Tax-supported fire districts, municipal fire departments, and volunteer fire departments represent the principal providers of fire protection services for residential and commercial properties. Private providers represent only a small portion of the total fire protection market and generally provide services where a tax-supported municipality or fire district has decided to contract for these services or has not assumed the financial responsibility for fire protection. In these situations, we provide services for a municipality or fire district on a contract basis or provide fire protection services directly to residences and businesses who subscribe for this service. We cannot provide assurance that - we will be able to obtain additional fire protection business on a contractual or subscription basis; - fire districts or municipalities will not choose to provide fire protection services directly in the future; or - areas in which we provide services through subscriptions will not be converted to tax-supported fire districts or annexed by municipalities. WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL. Our success depends upon our ability to recruit and retain key personnel. We could experience difficulty in retaining our current key personnel or in attracting and retaining necessary additional key personnel. Low unemployment in certain market areas currently makes the recruiting, training, and retention of full-time and part-time personnel more difficult and costly, including the cost of overtime wages. Our internal growth and our expansion into new geographic areas will further increase the demand on our resources and require the addition of new personnel. We have entered into employment agreements with certain of our executive officers and certain other key personnel. IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Certain provisions of our certificate of incorporation and Delaware law could make it more difficult for a third party to acquire control of our company, even if a change in control might be beneficial to stockholders. This could discourage potential takeover attempts and could adversely affect the market price of our common stock. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE. The market price of our common stock has been volatile since our initial public offering in July 1993. The period was initially marked by generally rising stock prices, favorable industry conditions, and improved operating results by us. We experienced a significant decline in our stock price commencing in the fourth quarter of fiscal 1998 as a result of various factors, including the following: - less favorable industry trends, - an increase in our provision for doubtful accounts, - an increase in our operating expenses, - general stock market conditions, and - the previously identified risk factors. The trading price of our common stock in the future could be subject to various factors, including the following: - wide fluctuations in response to quarterly variations in our operating results and others in our industry, - actual or anticipated announcements concerning us or our competitors, including government regulations and reimbursement changes, - the announcement and implementation of health care reform proposals, - changes in analysts' estimates of our financial performance, 26 28 - general conditions in the health care industry, - general economic and financial conditions, - the inability of us to make any acquisitions, and - other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have affected the market prices for many companies involved in health care and related industries and which often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors could adversely affect the market price of our common stock. The market price and volatility of our common stock could increase the risk of litigation, including from owners of companies previously acquired by us. SHARES ELIGIBLE FOR SALE IN THE PUBLIC MARKETS AND RIGHTS TO ACQUIRE SHARES OF COMMON STOCK CAN IMPACT THE MARKET PRICE OF OUR COMMON STOCK. Sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. As of September 25, 2000, there were 14,626,336 shares of common stock outstanding, 10,889,252 shares of which were freely transferable without restriction under the securities laws, unless held by an "affiliate" of us, as that term is defined under the securities laws. We also have outstanding 187,896 restricted shares, as that term is defined under Rule 144 under the securities laws, that are eligible for sale in the public market, subject to compliance with the holding period, volume limitations, and other requirements of Rule 144. In addition, we have registered 6,700,000 shares of common stock for issuance in connection with acquisitions (of which 3,549,188 shares have been issued and are outstanding), which are generally freely tradable after their issuance under Rule 145 of the securities laws, unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions under Rule 144. We have registered or will register up to 8,000,000 shares of common stock for issuance pursuant to our stock option plans. As of September 25, 2000, approximately 800,000 stock options had been exercised and options to purchase approximately 5,100,000 shares were outstanding. Shares issued after the effective date of such registration statement upon the exercise of stock options issued under our stock option plans generally will be eligible for sale in the public market, except that affiliates of us will continue to be subject to volume limitations. We also have the authority to issue additional shares of common stock and shares of one or more series of preferred stock. The issuance of such shares could dilute earnings per share, and the sale of such shares could depress the market price of our common stock. ITEM 2. PROPERTIES FACILITIES AND EQUIPMENT We lease our principal executive offices in Scottsdale, Arizona. We lease administrative facilities and other facilities used principally for ambulance and fire apparatus basing, garaging and maintenance in those areas in which we provides ambulance and fire protection services. We also own six administrative facilities and 20 other facilities within our service areas. Aggregate rental expense was approximately $12.8 million during fiscal 1999, and approximately $13.2 million during fiscal 2000. At September 25, 2000, our fleet included 1,642 owned and 282 leased ambulances, 119 owned and 26 leased fire vehicles, and 537 owned and 72 leased other vehicles. We use a combination of in-house and outsourced maintenance services to maintain our fleet, depending on the size of the market and the availability of quality outside maintenance services. ITEM 3. LEGAL PROCEEDINGS From time to time, we are subject to litigation arising in the ordinary course of business. Our insurance coverage may not be adequate to cover all liabilities arising out of such claims. We are not engaged in any 27 29 legal proceedings in the ordinary course of business that are expected to have a material adverse effect on our financial condition or results of operations. We, Warren S. Rustand, our former Chairman of the Board and Chief Executive Officer, James H. Bolin, our Vice Chairman of the Board, and Robert E. Ramsey, Jr., our Executive Vice President and 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. The two lawsuits, which contain virtually identical allegations, were brought on behalf of a class of persons who purchased our publicly traded securities including its common stock between April 28, 1997 and June 11, 1998. Haskell v. Rural/Metro seeks unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud Act, and under Arizona common law fraud, and also seeks punitive damages, a constructive trust, and other injunctive relief. Ruble v. Rural/ Metro seeks unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints in both actions allege that between April 28, 1997 and June 11, 1998 the defendants issued certain false and misleading statements regarding certain aspects of our financial status and that these statements allegedly caused our common stock to be traded at artificially inflated prices. The complaints also allege that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated. On May 25, 1999 the Arizona state court granted our request for a stay of the Haskell action until the Ruble action is finally resolved. We and the individual defendants have moved to dismiss the Ruble action. This motion is currently pending. We intend to defend the actions vigorously. We are unable to predict the ultimate outcome of this litigation. If the lawsuits were ultimately determined adversely to us, it could have a material effect on our results of operations and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 28 30 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been traded on the Nasdaq National Market under the symbol RURL since our initial public offering on July 16, 1993. On August 4, 2000, our common stock began trading on the Nasdaq SmallCap Market. The following table sets forth the high and low sale prices of the common stock for the fiscal quarters indicated.
HIGH LOW ------ ----- YEAR ENDED JUNE 30, 1999 First quarter............................................. $13.50 $6.13 Second quarter............................................ $12.50 $6.13 Third quarter............................................. $12.00 $7.75 Fourth quarter............................................ $10.63 $7.00 YEAR ENDED JUNE 30, 2000 First quarter............................................. $10.00 $6.13 Second quarter............................................ $ 7.63 $3.94 Third quarter............................................. $ 5.94 $1.13 Fourth quarter............................................ $ 2.38 $1.13 YEAR ENDED JUNE 30, 2001 First quarter............................................. $ 2.31 $1.50 Second quarter (through October 25, 2000)................. $ 2.00 $1.63
On October 25, 2000, the closing sale price of our common stock was $1.63 per share. On October 25, 2000, there were approximately 965 holders of record of our common stock. DIVIDEND POLICY We have never paid any cash dividends on our common stock. We currently plan to retain earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on the financial condition, results of operations and capital requirements of us as well as other factors deemed relevant by our board of directors. Our senior subordinated notes, term notes and revolving credit facility contain restrictions on our ability to pay cash dividends, and future borrowings may contain similar restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" contained in Item 7 of this Report. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the fiscal years ended June 30, 2000, 1999, 1998, 1997, and 1996 is derived from our consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants. Their opinion on the financial statements for June 30, 2000 includes a going concern statement. The selected consolidated financial data provided below should be read in 29 31 conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes appearing elsewhere in this Report.
YEARS ENDED JUNE 30, ----------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA Revenue Ambulance services....................... $ 467,741 $467,632 $387,041 $257,488 $197,201 Fire protection services................. 57,549 50,490 45,971 42,163 38,770 Other.................................... 44,784 43,244 42,546 20,154 14,292 --------- -------- -------- -------- -------- Total revenue.................... 570,074 561,366 475,558 319,805 250,263 Operating expense Payroll and employee benefits............ 323,285 297,341 254,806 170,833 135,464 Provision for doubtful accounts.......... 95,623 81,227 81,178 43,424 31,036 Provision for doubtful accounts -- change in estimate........................... 65,000 -- -- -- -- Depreciation............................. 25,009 24,222 19,213 12,136 9,778 Amortization of intangibles.............. 8,687 9,166 7,780 4,660 3,569 Other operating expenses................. 118,516 98,739 80,216 54,922 45,752 Loss contract/restructuring charge....... 43,274 2,500 5,000 6,026 -- --------- -------- -------- -------- -------- Operating income (loss).................... (109,320) 48,171 27,365 27,804 24,664 Interest expense, net.................... 25,939 21,406 14,082 5,720 5,108 Other.................................... (2,890) 70 (199) -- -- --------- -------- -------- -------- -------- Income (loss) before income taxes, extraordinary loss and cumulative effect of a change in accounting principle...... (132,369) 26,695 13,482 22,084 19,556 (Provision for) benefit from income taxes.................................... 32,837 (11,231) (5,977) (9,364) (8,044) --------- -------- -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle..................... (99,532) 15,464 7,505 12,720 11,512 Extraordinary loss on expropriation of Canadian ambulance service licenses...... (1,200) -- -- -- -- Cumulative effect of a change in accounting principle................................ (541) -- -- -- -- --------- -------- -------- -------- -------- Net income (loss).......................... $(101,273) $ 15,464 $ 7,505 $ 12,720 $ 11,512 ========= ======== ======== ======== ======== Basic earnings per share(1) Income (loss) before extraordinary item.................................. $ (6.82) $ 1.07 $ .55 $ 1.10 $ 1.20 Extraordinary loss....................... (0.08) -- -- -- -- Cumulative effect........................ (0.04) Net income (loss)................ $ (6.94) $ 1.07 $ .55 $ 1.10 $ 1.20 ========= ======== ======== ======== ======== Diluted earnings per share(1) Income (loss) before extraordinary item.................................. $ (6.82) $ 1.06 $ .54 $ 1.04 $ 1.14 Extraordinary item....................... (0.08) -- -- -- -- Cumulative effect of change in accounting principle............................. (0.04) -- -- -- -- --------- -------- -------- -------- -------- Net income (loss)................ $ (6.94) $ 1.06 $ .54 $ 1.04 $ 1.14 ========= ======== ======== ======== ======== Weighted average number of shares outstanding(1) Basic.................................... 14,592 14,447 13,529 11,585 9,570 Diluted.................................. 14,592 14,638 14,002 12,271 10,075
30 32
JUNE 30, --------------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA Working capital.................... $(192,512) $140,929 $110,529 $ 94,766 $ 55,402 Total assets....................... 491,217 579,907 535,452 364,066 230,114 Current portion of long-term debt(2).......................... 299,104 5,765 8,565 9,814 6,610 Long-term debt, net of current portion(2)....................... 2,850 268,560 243,831 144,643 60,731 Stockholders' equity............... 95,591 196,839 177,773 159,808 119,966
- --------------- (1) Earnings per share for all periods presented has been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". (2) Includes balances outstanding under our revolving credit facility of $146,807,000 at June 30, 2000, $113,500,000 at June 30, 1999, $86,000,000 at June 30, 1998, $134,000,000 at June 30, 1997, and $49,500,000 at June 30, 1996. At June 30, 2000 the amounts outstanding under our revolving credit facility and the senior notes have been classified as a current liability. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our selected consolidated financial data and our consolidated financial statements and notes appearing elsewhere in this Report. INTRODUCTION We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls ("911" emergency ambulance services) and non-emergency transport services (general transport services) to patients on both a fee-for-service basis and nonrefundable subscription fee basis. Per transport revenue depends on various factors, including the mix of rates between existing markets and new markets and the mix of activity between "911" emergency ambulance services and 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 nonrefundable 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 derived approximately 75% of our net ambulance fee collections during 1999 and 81% of our net ambulance fee collections during 2000 from such third party payors. We establish an allowance for doubtful accounts based on credit risks 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 directly 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. Because of the nature of our ambulance services, it is necessary to respond to a number of calls, primarily "911" emergency ambulance service calls, which may not result in transports. Results of operations are discussed below on the basis of actual transports since transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of calls not resulting in transports varies substantially depending upon the mix of general transport and "911" emergency ambulance service calls in markets and is generally higher in service areas in which the calls are primarily "911" emergency ambulance service calls. Rates in our markets take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses 31 33 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 life of the contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, which is generally one year. Other revenue primarily consists of 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 pledged assets with a net book value of $12,260,000 to secure certain of our obligations under our insurance and bonding program, including certain reimbursement obligations with respect to the workers' compensation, performance bonds, appeal bonds and other aspects of such insurance and bonding program. Our net loss for the year ended June 30, 2000 was $101.3 million or a loss of $6.94 per share. This compares to net income of $15.5 million or $1.06 per share (diluted) for the year ended June 30, 1999, and $7.5 million or $.54 per share (diluted) for the year ended June 30, 1998. The operating results for the year ended June 30, 2000 were adversely affected by the recording of a $43.3 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 additional provision for doubtful accounts of $9.8 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 estimate related to our provision of 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 were also negatively impacted by reduced operating margins in our Argentine operations. These operations 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. 32 34 RESULTS OF OPERATIONS The following table sets forth the years ended June 30, 2000, 1999, and 1998, certain items from our consolidated financial statements expressed as a percentage of total revenue:
YEARS ENDED JUNE 30, ----------------------- 2000 1999 1998 ----- ----- ----- Revenue Ambulance services........................................ 82.0% 83.3% 81.4% Fire protection services.................................. 10.1 9.0 9.7 Other..................................................... 7.9 7.7 8.9 ----- ----- ----- Total revenue..................................... 100.0 100.0 100.0 Operating expenses Payroll and employee benefits............................. 56.7 53.0 53.6 Provision for doubtful accounts........................... 16.8 14.5 17.1 Provision for doubtful accounts -- change in estimate..... 11.4 -- -- Depreciation.............................................. 4.4 4.3 4.0 Amortization of intangibles............................... 1.5 1.6 1.6 Other operating expenses.................................. 20.8 17.6 16.9 Restructuring charge...................................... 7.6 0.4 1.0 ----- ----- ----- Operating income (loss)..................................... (19.2) 8.6 5.8 Interest expense, net..................................... 4.6 3.8 3.0 Other..................................................... (0.5) 0.0 0.0 ----- ----- ----- Income (loss) before income taxes, extraordinary loss and cumulative effect of a change in accounting principle..... (23.3) 4.8 2.8 Provision (benefit) for income taxes...................... (5.8) 2.0 1.2 ----- ----- ----- Net income (loss) before extraordinary loss and cumulative effect of a change in accounting principle................ (17.5) 2.8 1.6 Extraordinary loss.......................................... (0.2) -- -- Cumulative effect of a change in accounting principle....... (0.1) -- -- ----- ----- ----- Net income (loss)........................................... (17.8)% 2.8% 1.6% ===== ===== =====
Year Ended June 30, 1999 Compared to Year Ended June 30, 2000 Revenue Total revenue increased $8.7 million, or 1.5%, from $561.4 million for the year ended June 30, 1999 to $570.1 million for the year ended June 30, 2000. Ambulance services revenue increased $0.1 million, or 0.02%, from $467.6 million for the year ended June 30, 1999 to $467.7 million for the year ended June 30, 2000. Domestic ambulance services revenue in areas served by our company in both fiscal 2000 and 1999 increased by 2.5%. Fire protection services revenue increased by $7.0 million, or 14.0%, from $50.5 million for the year ended June 30, 1999 to $57.5 million for the year ended June 30, 2000. Other revenue increased by $1.6 million, or 3.7%, from $43.2 million for the year ended June 30, 1999 to $44.8 million for the year ended June 30, 2000. Total domestic ambulance transports decreased by approximately 22,000, or 1.7%, from 1,288,000 for the year ended June 30, 1999 to 1,266,000 for the year ended June 30, 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. 33 35 Fire protection services revenue increased primarily due to revenue generated from new fire protection contracts awarded to us through competitive bidding as well as rate increases for fire protection services and greater utilization of our services under fee-for-service arrangements. Other revenue increased primarily due to revenue associated with urgent and primary care services provided in Argentina by a company that we acquired in the third quarter of fiscal 1999, partially offset by a 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 $26.0 million, or 8.7%, from $297.3 million for the year ended June 30, 1999 to $323.3 million for the year ended June 30, 2000. Payroll and employee benefit expenses for the fiscal year ended June 30, 2000 includes $14.8 million of additional health and workers compensation insurance expense due to a significant increase in the utilization of insurance benefits experienced during the closure of certain service areas as well as the development of certain existing claims. Payroll expense related to our new contracting activity during the fiscal year ended June 30, 2000 contributed $7.3 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 benefit expenses increased from 53.0% of total revenue during the year ended June 30, 1999 to 56.7 % of total revenue during the year ended June 30, 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. Because of the continuing difficulties encountered in the healthcare reimbursement environment, we accelerated our emphasis during fiscal 2000 on increasing the quality of our revenue in 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 shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We instituted mandatory comprehensive training for our paramedics and emergency medical technicians on new standards of documentation of ambulance run tickets. We analyzed the various payor classes within our accounts receivable balance and the increasing costs to collect these receivables. Based on the increasingly unpredictable nature of healthcare accounts receivable and the increasing costs to collect those receivables, we concluded that the process changes had not brought about the benefits anticipated. As a result, we changed our method of estimating our allowance for doubtful accounts effective October 1, 1999. Under our new method of estimation, we have chosen to fully reserve our accounts receivable earlier in the collection cycle than had previously been our practice. We provide specific allowances based upon the age of the accounts receivable within each payor class and also provide 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 is stated separately in the accompanying financial statements. We anticipate that this change will result in increases in our provision rate for doubtful accounts in future periods. During fiscal 2000, we continued to increase our focus on revenue of higher quality by reducing the amount of non-emergency ambulance transports in selected service areas and continued previously implemented initiatives to maximize the collection of our accounts receivable. Also, during the fiscal year ended June 30, 2000, we recorded a $9.8 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 was $81.2 million for the year ended June 30, 1999 and $160.6 million for the year ended June 30, 2000. Provision for doubtful accounts increased from 14.5% of total revenue for the year ended June 30, 1999 to 28.2% of total revenue for the year ended June 30, 2000. Provision for doubtful accounts, using the new method of estimation but excluding the $65.0 million additional provision due to the change in method of estimation and the $9.8 million additional provision for doubtful accounts related to 34 36 specific accounts deemed uncollectible in certain service areas that are being closed or downsized as part of our restructuring program, was 14.5% of the total revenue for the year ended June 30, 1999 and 15.1% of total revenue for the year ended June 30, 2000. The provision for doubtful accounts increased from 19.5% of domestic ambulance service revenue for the year ended June 30, 1999 to 19.6% of domestic ambulance service revenue for the year ended June 30, 2000, excluding the additional provision of $65.0 million described above and the $9.8 million additional provision. Net accounts receivable on non-integrated collection systems currently represent 7.6% of total net accounts receivable at June 30, 2000. We will continue to review the benefits and timing of integrating the remaining non-integrated billing centers. Depreciation increased $0.8 million, or 3.3%, from $24.2 million for the year ended June 30, 1999 to $25.0 million for the year ended June 30, 2000, primarily due to increased property and equipment from recent new contracting activity. Depreciation increased from 4.3% of total revenue for the year ended June 30, 1999 to 4.4% of total revenue for the year ended June 30, 2000. Amortization of intangibles decreased by $0.5 million, or 5.4%, from $9.2 million for the year ended June 30, 1999 to $8.7 million for the year ended June 30, 2000. This decrease was the result of the write-off of approximately $22.3 million of goodwill in conjunction with the restructuring charges recorded in the year ended June 30, 2000. Amortization decreased from 1.6% of total revenue for the year ended June 30, 1999 to 1.5% of total revenue for the year ended June 30, 2000. Other operating expenses increased $19.8 million, or 20.1%, from $98.7 million for the year ended June 30, 1999 to $118.5 million for the year ended June 30, 2000. Of the $19.8 million increase, $3.9 million was attributable to the accrual of proposed settlements relating to a Medicare investigation and certain Medicaid audits, $2.0 million was attributable to operations in services areas with newly acquired contracts, $4.2 million was attributable to the operation of a company that was acquired in the third quarter of fiscal 1999, $3.8 million was attributable to additional insurance expense related primarily to general liability claims, $1.8 million was attributable to the write-off of impaired assets, and $1.7 million was attributable to an increase in domestic fuel costs. Other operating expenses increased from 17.6% of total revenue for the year ended June 30, 1999 to 20.8% of total revenue for the year ended June 30, 2000. The increased service utilization in our Argentine operations also attributed to the increase in operating expenses as a percentage of total revenue. During the year ended June 30, 2000, we recorded a $43.3 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 $6.6 million of severance costs, $3.3 million of lease termination costs, $22.3 million write-off of goodwill, and $11.1 million write-off of other impaired assets and other costs. During the year ended June 30, 1999, we recorded a non-recurring pre-tax charge of $2.5 million for severance payments related to certain members of senior management who have left our company. Interest expense increased by $4.5 million, or 21.0%, from $21.4 million for the year ended June 30, 1999 to $25.9 million for the year ended June 30, 2000. This increase was caused by higher debt balances, fees, and additional interest incurred in conjunction with various waiver agreements and higher interest rates than historically incurred. Our effective tax rate decreased from 42.0% for the year ended June 30, 1999 to 24.7% for the year ended June 30, 2000. The decrease in the effective tax rate is due to the impact of permanent differences, primarily consisting of goodwill write-offs and amortization and a valuation allowance. The permanent differences and the valuation allowance result in a reduction of the tax benefits which could otherwise be available in a loss year, and thus a reduction in the effective tax rate. A valuation allowance of $12.8 million has been provided because the company believes that the realizability of the deferred tax asset does not meet the more likely than not criteria under SFAS No. 109, "Accounting for Income Taxes." During the year ended June 30, 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 form 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. 35 37 The cumulative effect of a change in accounting principle resulted in a $541,000 charge (net of 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. Year Ended June 30, 1998 Compared to Year Ended June 30, 1999 Revenue Total revenue increased $85.8 million, or 18.0%, from $475.6 million for the year ended June 30, 1998 to $561.4 million for the year ended June 30, 1999. Ambulance services revenue increased $80.6 million, or 20.8%, from $387.0 million for the year ended June 30, 1998 to $467.6 million for the year ended June 30, 1999, primarily the result of the acquisition of four ambulance service providers in fiscal 1999 as well as a full year of activity from the eleven acquisitions completed in fiscal 1998. Domestic ambulance services revenue in areas served by our company in both fiscal 1999 and 1998 increased by 5.3%. Fire protection services revenue increased by $4.5 million, or 9.8%, from $46.0 million for the year ended June 30, 1998 to $50.5 million for the year ended June 30, 1999. Other revenue increased by $0.7 million, or 1.6%, from $42.5 million for the year ended June 30, 1998 to $43.2 million for the year ended June 30, 1999. Total domestic ambulance transports increased by approximately 73,000, or 6.0%, from 1,215,000 for the year ended June 30, 1998 to 1,288,000 for the year ended June 30, 1999. The acquisition of two domestic ambulance service companies during fiscal 1999, as well as a full year of transport activity from the acquisitions completed in fiscal 1998, accounted for these additional transports. Domestic ambulance transports in areas serviced by our company in both fiscal 1999 and 1998 decreased by 6.0%, due to our concerted effort to reduce the number of 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 due to rate increases for fire protection services and greater utilization of our services under fee-for-service arrangements. The increase also resulted from revenue generated from new fire protection contracts awarded to us through competitive bidding. Operating Expenses Payroll and employee benefit expenses increased $42.5 million, or 16.7%, from $254.8 million for the year ended June 30, 1998 to $297.3 million for the year ended June 30, 1999. This increase was primarily due to the acquisition of four ambulance service companies during fiscal 1999 as well as a full year of activity from the acquisitions completed in fiscal 1998 and 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 benefit expenses decreased slightly from 53.6% of total revenue during the year ended June 30, 1998 to 53.0% of total revenue during the year ended June 30, 1999. Provision for doubtful accounts was $81.2 million for the year ended June 30, 1998 and for the year ended June 30, 1999. Provision for doubtful accounts decreased from 17.1% of total revenue for the year ended June 30, 1998 to 14.5% of total revenue for the year ended June 30, 1999, and decreased from 22.3% of domestic ambulance service revenue for the year ended June 30, 1998 to 19.5% of domestic ambulance service revenue for the year ended June 30, 1999. In comparison, provision for doubtful accounts was 13.6% of total revenue and 16.9% of domestic ambulance service revenue for the year ended June 30, 1997. Comparison of the provision for doubtful accounts for the year ended June 30, 1999 to the year ended June 30, 1998, is skewed by the effect of a $17.9 million additional provision for doubtful accounts that was recorded in the fourth quarter of fiscal 1998. In view of the continuing difficult reimbursement environment and the potential for future write-offs of accounts receivable to continue to be higher than pre-fiscal 1998 levels, we continued to add to the provision for doubtful accounts during the fiscal year ended June 30, 1999. Additionally during fiscal 1999, we increased our focus on revenue of higher quality by reducing the amount of non-emergency ambulance transports in selected service areas. We also implemented initiatives to maximize the collection of our accounts receivable. We believe that because of these activities, our provision for doubtful accounts 36 38 remained constant with fiscal 1998 levels. Net accounts receivable on non-integrated collection systems currently represented 11.1% of total net accounts receivable at June 30, 1999. Depreciation increased $5.0 million, or 26.0%, from $19.2 million for the year ended June 30, 1998 to $24.2 million for the year ended June 30, 1999, primarily due to increased property and equipment from recent acquisition activity. Depreciation increased from 4.0% of total revenue for the year ended June 30, 1998 to 4.3% of total revenue for the year ended June 30, 1999. Amortization of intangibles increased by $1.4 million, or 17.9%, from $7.8 million for the year ended June 30, 1998 to $9.2 million for the year ended June 30, 1999. This increase was the result of increased intangible assets resulting from recent acquisition activity. Amortization of intangibles was 1.6% of total revenue for both of the years ended June 30, 1998 and 1999. Other operating expenses increased $18.5 million, or 23.1%, from $80.2 million for the year ended June 30, 1998 to $98.7 million for the year ended June 30, 1999, primarily as a result of increased expenses associated with the operation of the four ambulance service companies acquired during fiscal 1999 and the eleven ambulance service companies acquired during fiscal 1998. Other operating expenses increased from 16.9% of total revenue for the year ended June 30, 1998 to 17.6% of total revenue for the year ended June 30, 1999. During the year ended June 30, 1999, we recorded a non-recurring pre-tax charge of $2.5 million for severance payments related to certain members of senior management who have left our company. We expect these severance payments will be completed during fiscal 2001. During the year ended June 30, 1998, we recorded a non-recurring pre-tax charge of $5.0 million primarily for severance payments. This charge related to our reduction of certain administrative personnel at corporate headquarters and regional offices. These severance payments were substantially completed during fiscal 1999. Interest expense increased by $7.3 million, or 51.8%, from $14.1 million for the year ended June 30, 1998 to $21.4 million for the year ended June 30, 1999. This increase was caused by higher debt balances and higher interest rates than historically incurred, primarily because of the issuance of $150.0 million of 7 7/8% Senior Notes due 2008 that occurred near the end of the third quarter of fiscal 1998. Our effective tax rate decreased from 45.0% for the year ended June 30, 1998 to 42.0% for the year ended June 30, 1999, primarily the result of the effect of nondeductible goodwill amortization applied against reduced earnings in the year ended June 30, 1998 compared to earnings in the year ended June 30, 1999. 37 39 SEASONALITY AND QUARTERLY RESULTS The following table reflects certain selected unaudited quarterly operating results for each quarter of fiscal 2000 and 1999. The operating results of any quarter are not necessarily indicative of results of any future period.
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1998(1) 1998 1999 1999 1999 1999(2) 2000(3) 2000(4) --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Ambulance service........ $116,265 $115,759 $119,751 $115,857 $116,897 $121,109 $119,902 $109,833 Fire protection.......... 12,643 12,591 12,372 12,884 13,063 14,551 14,981 14,954 Other revenue............ 9,887 11,239 10,810 11,308 11,240 11,447 11,515 10,582 -------- -------- -------- -------- -------- -------- -------- -------- Total revenue............ 138,795 139,589 142,933 140,049 141,200 147,107 146,398 135,369 Operating income (loss)................. 10,507 13,381 13,742 10,541 9,581 (57,978) (18,002) (42,921) Net income (loss)........ 3,602 4,639 4,711 3,052 1,884 (42,386) (16,615) (44,156) Diluted earnings (loss) per share.................... $ 0.21 $ 0.32 $ 0.32 $ 0.21 $ 0.13 $ (2.91) $ (1.14) $ (3.02) ======== ======== ======== ======== ======== ======== ======== ========
- --------------- (1) In the first quarter of the year ended June 30, 1999, we recorded a pre-tax charge of $2.5 million related to severance payments. (2) In the second quarter of the year ended June 30, 2000, we recorded a $65.0 million additional provision for doubtful accounts related to a change in our method of estimating doubtful accounts. (3) In the third quarter of the year ended June 30, 2000, we recorded a pre-tax restructuring charge of $25.1 million related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead and $3.0 million additional provision for doubtful accounts related to uncollectible accounts in those service areas that are being closed or downsized. (4) In the fourth quarter of the year ended June 30, 2000, we recorded a pre-tax restructuring charge of $18.2 million related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead and $6.8 million additional provision for doubtful accounts related to uncollectible accounts in those service areas that are being closed or downsized. We have historically experienced, and expect to continue to experience, seasonality in quarterly operating results. This seasonality has resulted from a number of factors, including relatively higher second and third fiscal quarter demand for transport services in our Arizona and Florida regions resulting from the greater winter populations in those regions. Also, our Argentine operations experience greater utilization of services by customers under capitated service arrangements in the fourth quarter, as compared to the other three quarters, as South America enters into 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 decrease 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. 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. At June 30, 2000, we had negative working capital of $192.5 million, including cash of $10.3 million, compared to working capital of $140.9 million, including cash of $7.2 million, at June 30, 1999. During the year ended June 30, 2000, our cash flow used in operations was $11.5 million resulting primarily from net losses of $101.3 million, offset by non-cash expenses of depreciation and amortization of $33.7 million, 38 40 provision for doubtful accounts of $160.6 million, and write-offs of assets included in restructuring charge of $28.9 million. Additionally, we experienced a decrease in deferred income taxes of $9.4 million and an increase in accounts receivable of $119.2 million. Cash flow provided by operations was $21.8 million for the year ended June 30, 1999. Cash provided by financing activities was $28.3 million for the year ended June 30, 2000, primarily because of the increased borrowings on our revolving credit facility, offset by the repayments on other debt and capital lease obligations. Cash used in investing activities was $13.9 million for the year ended June 30, 2000 due primarily to 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 June 30, 2000 and June 30, 1999 were $231.7 million and $228.9 million, respectively. Our accounts receivable, net of the allowance for doubtful accounts, were $143.9 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 provision for doubtful accounts increased from $81.2 million at June 30, 1999 to $160.6 million at June 30, 2000. The primary reason for this increase is the additional provision for doubtful accounts of $65.0 million recorded in the year ended June 30, 2000 to reflect the effect of the change in our method of estimating our provision for doubtful accounts. Because of continuing difficulties in the healthcare reimbursement environment, during fiscal 2000, we accelerated 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 shifted the focus of our billing personnel to place greater emphasis on the billing process as opposed to the collection process. We 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 our method of estimating our allowance for doubtful accounts. We concluded that, despite our efforts to improve the quality of our revenue, the speed of payments from certain payors within our accounts receivable mix was not increasing. Because of this, we determined that it was prudent to change our estimation methodology to fully reserve accounts receivable within certain payor classes earlier in the collection cycle than had previously been done. The new method 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. Management believes that we now have a more predictable method of determining the realizable value of our accounts receivable. During the year ended June 30, 1998, we increased the amount of our revolving credit facility from $175.0 million to $200.0 million. The revolving credit facility was also amended by extending the maturity date to March 16, 2003 and converting it to an unsecured credit facility that is unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly-owned current and future subsidiaries. The revolving credit facility is priced at prime rate, Federal Funds Rate plus 0.5%, or a LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.875% to LIBOR plus 1.75%. At June 30, 1999 the interest rate was 6.7% on the revolving credit facility. 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. 39 41 Our $200 million revolving credit facility was priced at the greater of (i) prime rate, (ii) Federal Funds rate plus 0.5% plus the applicable margin, or (iii) a LIBOR-based rate. The LIBOR-based rates ranged from LIBOR plus 0.875% to LIBOR plus 1.75%. As discussed below, during March 2000, all borrowings become priced at prime rate plus 0.25%. At June 30, 2000, the weighted average interest rate was 9.75% on the revolving credit facility. 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 $146.8 million was outstanding on the revolving credit facility at June 30, 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. Additional waivers were obtained in July covering the period from July 14, 2000 to October 16, 2000 and in October covering the period from October 16, 2000 to January 31, 2001. The waivers cover 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 waivers stipulate that no additional borrowings will be available to us during the period of March 15, 2000 through January 31, 2001. 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, (iii) maintain positive consolidated operating income net of restructuring charges, and (iv) 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. There is no assurance that we are in compliance with all of the technical conditions of the waiver. We have discussed with our lenders our failure to maintain positive consolidated operating income net of restructuring charges at June 30, 2000, and the lenders have not asserted that we have failed to comply with any requirements under the waiver. 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 January 31, 2001, 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 January 31, 2001. 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. 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 we believe 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 June 30, 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. As a result of the unresolved status of our credit facility and other factors, our independent public accountants have modified their report to include a statement that these uncertainties create substantial doubt about our company's ability to continue as a going concern. In November 1998, we entered into an interest rate swap agreement that originally expired in November 2003 with a provision for the lending party to terminate the agreement in November 2000. The interest rate swap agreement effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating rate. The weighted average floating rate for the year ended June 30, 1999 was 5.2%. As a result of this swap agreement interest expense was reduced by approximately $106,000 during the year ended June 30, 1999. In June 1999, we terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount will be amortized as a reduction of interest expense on a straight-line basis through November 2000. 40 42 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 June 30, 2000 the interest rate was 9.75% on the lease line of credit. Approximately $1.5 million was outstanding on this line of credit at June 30, 2000. In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008 (the 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 June 30, 2000 was $199,000, and this amount is recorded as an offset to 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 4 of notes to our consolidated financial statements. 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. During the year ended June 30, 1999, we made investments in companies offering ambulance services, ambulance billing services, and alternative transportation services. We contributed cash, accounts receivable, and fixed assets totaling $1.9 million at June 30, 1999 to these businesses. During the year ended June 30, 2000, one of these investments was determined to be impaired and amounts totaling $1.6 million were written-off. These amounts represent the initial investment plus other amounts loaned to the company. These investments have been recorded using the cost method of accounting. We expect that cash flow from operations and our existing cash reserves will be sufficient to meet our regularly scheduled debt service and our operating and capital needs for operations for the 12 months subsequent to June 30, 2000. Through our restructuring program we have closed or downsized several locations that were negatively impacting our cash flow. In addition, we have significantly reduced our corporate overhead. We have improved the quality of revenue and have experienced an upward trend in daily cash collections. We are actively working with the lenders in order to obtain a long-term amendment to the credit facility. We believe that our current business model and strategy will generate sufficient cash flow to provide a basis for a new long-term agreement with our current lenders or to restructure the debt through public or private debt or equity financings. The availability of these financing alternatives will depend upon prevailing market conditions, interest rates, our financial condition, covenants in our debt agreements, and the market price of our common stock. There can be no assurance that our restructuring efforts will be successful. Under current circumstances, our ability to continue as a going concern depends upon the successful restructuring of the revolving credit facility as well as the success of our restructuring program. 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 41 43 currency of the country in which it is operating. At June 30, 2000 our balance sheet reflects a $252,000 cumulative equity adjustment (decrease) from foreign currency translation. During the year ended June 30, 2000, we recognized $173,000 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. See "Risk Factors -- We face risks associated with international operations and foreign currency fluctuations". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We have entered into interest rate swap agreements to limit the effect of increases in the interest rates on floating rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. In November 1998, we entered into an interest rate swap agreement that originally expired in November 2003 with a provision for the lending party to terminate the agreement in November 2000. The interest rate swap agreement effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating rate. The weighted average floating rate for the year ended June 30, 1999 was 5.2%. As a result of this swap agreement interest expense was reduced by approximately $106,000 during the year ended June 30, 1999. In June 1999, we terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount will be amortized as a reduction of interest expense on a straight-line basis through November 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements as of June 30, 2000 and for each of the fiscal years in the three-year period ended June 30, 2000 together with related notes and the report of Arthur Andersen LLP are set forth on the following pages. 42 44 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rural/Metro Corporation: We have audited the accompanying consolidated balance sheets of RURAL/METRO CORPORATION (a Delaware corporation) and subsidiaries (collectively, the Company) as of June 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity, cash flows, and comprehensive income (loss) for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rural/Metro Corporation and subsidiaries as of June 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is operating under a waiver of certain financial covenants contained in its revolving credit facility and had a significant operating loss for the year ended June 30, 2000. These as well as other matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and supplementary data is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona September 20, 2000 43 45 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999
2000 1999 -------- -------- (IN THOUSANDS) ASSETS CURRENT ASSETS Cash........................................................ $ 10,287 $ 7,180 Accounts receivable, net of allowance for doubtful accounts of $87,752 and $43,392 respectively (Note 1).............. 143,905 185,454 Inventories................................................. 19,070 16,371 Prepaid expenses and other.................................. 6,552 13,630 -------- -------- Total current assets.............................. 179,814 222,635 Property and equipment, net (Notes 1, 2 and 3).............. 85,919 95,032 Intangible assets, net (Notes 1 and 2)...................... 207,200 240,360 Other assets................................................ 18,284 21,880 -------- -------- $491,217 $579,907 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................ $ 16,135 $ 17,782 Accrued liabilities (Note 1)................................ 57,087 58,159 Current portion of long-term debt (Notes 1, 4 and 5)........ 299,104 5,765 -------- -------- Total current liabilities......................... 372,326 81,706 Long-term debt, net of current portion (Notes 1, 4 and 5)... 2,850 268,560 Non-refundable subscription income.......................... 14,989 14,909 Deferred income taxes....................................... -- 9,438 Other liabilities........................................... 101 205 -------- -------- Total liabilities................................. 390,266 374,818 -------- -------- MINORITY INTEREST........................................... 5,360 8,250 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY (Notes 7 and 8) Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued at June 30, 2000 and 1999......... -- -- Common stock, $.01 par value, 23,000,000 shares authorized, 14,626,336 and 14,530,312 shares outstanding at June 30, 2000 and 1999, respectively............................... 149 148 Additional paid-in capital.................................. 137,603 137,792 Retained earnings (accumulated deficit)..................... (40,670) 60,603 Cumulative translation adjustment........................... (252) (465) Treasury stock, at cost, 149,456 shares at June 30, 2000 and 1999...................................................... (1,239) (1,239) -------- -------- Total stockholders' equity........................ 95,591 196,839 -------- -------- $491,217 $579,907 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 44 46 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 ----------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) REVENUE Ambulance services........................................ $ 467,741 $467,632 $387,041 Fire protection services.................................. 57,549 50,490 45,971 Other..................................................... 44,784 43,244 42,546 --------- -------- -------- Total revenue...................................... 570,074 561,366 475,558 --------- -------- -------- OPERATING EXPENSES Payroll and employee benefits............................. 323,285 297,341 254,806 Provision for doubtful accounts........................... 95,623 81,227 81,178 Provision for doubtful accounts -- change in accounting estimate (Note 1)....................................... 65,000 -- -- Depreciation.............................................. 25,009 24,222 19,213 Amortization of intangibles............................... 8,687 9,166 7,780 Other operating expenses.................................. 118,516 98,739 80,216 Restructuring charge and other (Note 1)................... 43,274 2,500 5,000 --------- -------- -------- Total expenses..................................... 679,394 513,195 448,193 --------- -------- -------- OPERATING INCOME (LOSS)..................................... (109,320) 48,171 27,365 Interest expense, net (Note 4 and 5)...................... 25,939 21,406 14,082 Other..................................................... (2,890) 70 (199) --------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... (132,369) 26,695 13,482 PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 10)......... (32,837) 11,231 5,977 --------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................ (99,532) 15,464 7,505 EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES (NET 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)........................................... $(101,273) $ 15,464 $ 7,505 ========= ======== ========
INCOME (LOSS) PER SHARE Basic -- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle............ $ (6.82) $ 1.07 $ 0.55 Extraordinary loss on expropriation of Canadian ambulance service licenses............................ (0.08) -- -- Cumulative effect of change in accounting principle..... (0.04) -- -- --------- -------- -------- Net income (loss)......................................... $ (6.94) $ 1.07 $ 0.55 ========= ======== ======== Diluted -- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle............ $ (6.82) $ 1.06 $ 0.54 Extraordinary loss on expropriation of Canadian ambulance service licenses............................ (0.08) -- -- Cumulative effect of change in accounting principle..... (0.04) -- -- --------- -------- -------- Net income (loss)......................................... $ (6.94) $ 1.06 $ 0.54 ========= ======== ======== AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC............... 14,592 14,447 13,529 ========= ======== ======== AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED............. 14,592 14,638 14,002 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 45 47 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
RETAINED ADDITIONAL EARNINGS CUMULATIVE PREFERRED COMMON PAID-IN (ACCUMULATED DEFERRED TRANSLATION TREASURY STOCK STOCK CAPITAL DEFICIT) COMPENSATION ADJUSTMENT STOCK TOTAL --------- ------ ---------- ------------ ------------ ----------- ----------- --------- (IN THOUSANDS) BALANCE, JUNE 30, 1997.... $-- $130 $121,355 $ 40,334 $(772) $ -- $(1,239) $ 159,808 Issuance of 803,565 shares of common stock for pooling-of-interests (Note 2).............. -- 8 946 (2,700) -- -- -- (1,746) -- ---- -------- --------- ----- ----- ------- --------- BALANCE, JUNE 30, 1997 AS RESTATED FOR EFFECT OF POOLING-OF-INTERESTS.... -- 138 122,301 37,634 (772) -- (1,239) 158,062 Issuance of 525,771 shares of common stock................. -- 6 10,765 -- (135) -- -- 10,636 Tax benefit related to the exercise of nonqualified stock options and vesting of stock grants.......... -- -- 1,012 -- -- -- -- 1,012 Amortization of deferred compensation.......... -- -- -- -- 558 -- -- 558 Net income................ -- -- -- 7,505 -- -- -- 7,505 -- ---- -------- --------- ----- ----- ------- --------- BALANCE, JUNE 30, 1998.... -- 144 134,078 45,139 (349) -- (1,239) 177,773 Issuance of 430,829 shares of common stock................. -- 4 3,706 -- -- -- -- 3,710 Tax benefit related to the exercise of nonqualified stock options and vesting of stock grants.......... -- -- 8 -- -- -- -- 8 Amortization of deferred compensation.......... -- -- -- -- 349 -- -- 349 Cumulative translation adjustment............ -- -- -- -- -- (465) -- (465) Net income................ -- -- -- 15,464 -- -- -- 15,464 -- ---- -------- --------- ----- ----- ------- --------- BALANCE, JUNE 30, 1999.... -- 148 137,792 60,603 -- (465) (1,239) 196,839 Issuance of 121,828 shares of common stock................. -- 1 654 -- -- -- -- 655 Cancellation of shares previously issued in acquisitions.......... -- -- (843) -- -- -- -- (843) Change in cumulative translation adjustment due to expropriation of Canadian ambulance service licenses...... -- -- -- -- -- 173 -- 173 Cumulative translation adjustment............ -- -- -- -- -- 40 -- 40 Net loss.................. -- -- -- (101,273) -- -- -- (101,273) -- ---- -------- --------- ----- ----- ------- --------- BALANCE, June 30, 2000.... $-- $149 $137,603 $ (40,670) $ -- $(252) $(1,239) $ 95,591 == ==== ======== ========= ===== ===== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. 46 48 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $(101,273) $ 15,464 $ 7,505 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities -- Write-off of assets....................................... 28,873 -- -- Extraordinary loss........................................ 1,200 -- -- Cumulative effect of a change in accounting principle..... 541 -- -- Depreciation and amortization............................. 33,696 33,388 26,993 Amortization of deferred compensation..................... -- 80 558 Amortization of gain on sale of real estate............... (104) (103) (103) Provision for doubtful accounts........................... 160,623 81,227 81,178 Undistributed earnings (loss) of minority shareholder..... (2,890) 70 (199) Amortization of discount on Senior Notes.................. 26 26 7 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable........................... (119,219) (112,030) (116,481) Increase in inventories................................... (3,370) (3,244) (4,260) (Increase) decrease in prepaid expenses and other......... 2,501 2,335 (2,285) Increase (decrease) in accounts payable................... (1,669) 2,692 1,167 Increase (decrease) in accrued liabilities and other liabilities............................................. (889) (3,030) 23,120 Increase in nonrefundable subscription income............. 80 1,227 305 Increase (decrease) in deferred income taxes.............. (9,438) 3,702 (4,934) --------- --------- --------- Net cash provided by (used in) operating activities....................................... (11,312) 21,804 12,571 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes...................... -- -- 145,805 Borrowings (repayments) on revolving credit facility, net... 33,307 27,500 (50,000) Repayment of debt and capital lease obligations............. (5,704) (7,794) (31,887) Borrowings under capital lease obligations.................. -- -- 2,701 Issuance of common stock.................................... 655 1,785 1,665 --------- --------- --------- Net cash provided by financing activities.......... 28,258 21,491 68,284 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for businesses acquired (Note 2).................. -- (12,665) (36,848) Proceeds from the expropriation of Canadian ambulance services licenses......................................... 2,191 -- -- Capital expenditures........................................ (15,911) (23,939) (31,043) Increase in other assets.................................... (159) (5,557) (9,851) --------- --------- --------- Net cash used in investing activities.............. (13,879) (42,161) (77,742) --------- --------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE..................... 40 (465) -- --------- --------- --------- INCREASE IN CASH............................................ 3,107 669 3,113 CASH, beginning of year..................................... 7,180 6,511 3,398 --------- --------- --------- CASH, end of year........................................... $ 10,287 $ 7,180 $ 6,511 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan...................................................... $ -- $ 1,933 $ -- ========= ========= ========= Foreign currency translation adjustments.................. 40 (465) -- --------- --------- --------- COMPREHENSIVE INCOME (LOSS)................................. $(101,233) $ 14,999 $ 7,505 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 47 49 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Nature of Business and Operations Rural/Metro Corporation, a Delaware corporation, and its subsidiaries (collectively, the Company) is a diversified emergency services company providing ambulance transport services, urgent home medical care, fire protection and training services, alternative transportation services and home health care services in 25 states, the District of Columbia and Latin America. In the United States, the Company provides "911" emergency and general transport ambulance services to patients on both a fee-for-service basis and a non-refundable subscription fee basis. In Latin America, the Company provides urgent home medical care and ambulance services under capitated service arrangements. Fire protection services are provided either under contracts with municipalities or fire districts, or on a non-refundable subscription fee basis to individual homeowners or commercial property owners. The Company depends on certain contracts with municipalities or fire districts to provide "911" emergency ambulance services and fire protection services. The five largest contracts accounted for 12%, 11% and 12% of total revenue for the fiscal years ended June 30, 2000, 1999 and 1998, respectively, with the largest of the five contracts accounting for 3%, 3% and 4%, respectively, of total revenue for the same periods. These contracts are subject to requests for proposals, competitive bid processes or renegotiation upon expiration and may be subject to termination for failure to meet performance criteria. Restructuring, Revolving Credit Facility Default and Management's Plans The Company has incurred a net loss of $101.3 million for the year ended June 30, 2000 and as a result, is operating under a waiver of covenant compliance of financial covenants under the Company's revolving credit facility (See note 5). In addition, no further amounts can be borrowed under the revolving credit facility through the end of the waiver period, January 31, 2001. The losses incurred in fiscal year 2000 primarily relate to the Company's restructuring program aimed at closing or downsizing certain underperforming non-emergency service areas, the reduction of corporate overhead and additional provision for doubtful accounts due to the continuing difficulties experienced in the healthcare reimbursement environment. See Note 1 for information about the Company's restructuring charges and method for providing for doubtful accounts. The Company has been in discussions with the revolving credit facility lenders ("Lenders") and has obtained waivers of covenant compliance through January 31, 2001. 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 through the end of the waiver period. In addition, the waiver (as amended through January 31, 2001) requires us (i) to engage certain financial advisors, (ii) to meet certain benchmarks for projected cash balances and expenditures, (iii) maintain positive consolidated operating income net of restructuring charges, and (iv) 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. There is no assurance that the Company is in compliance with all of the conditions of the waiver. The Company has discussed with the Lenders its failure to maintain positive operating income (net of restructuring charges), at June 30, 2000, as required under the waiver and the Lenders have not asserted that the Company has failed to comply with any requirements under the waiver. Although the Company believes no Event of Default is continuing either under 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 ("Notes"), 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 in the accompanying financial statements at June 30, 2000. As no further amounts may be borrowed, the Company will have to fund all operations, capital expenditures, regularly scheduled interest payments on the revolving credit facility and Notes and principal payments on other debt and capital lease obligations from existing cash reserves and net cash flows from operations. The Company has self funded all obligations, including regularly scheduled interest payments on the revolving credit facility and the Notes from operating cash flow. The Company believes that its existing cash reserves and operating cash flow will provide sufficient cash for its operations, capital expenditures and regularly scheduled debt service payments 48 50 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through fiscal 2001. Management is actively working with the Lenders in order to obtain a long-term amendment to the credit facility. The Company believes that its current business model and strategy will generate sufficient cash flow to provide a basis for a new long-term agreement with its current lenders or to restructure the debt through public or private debt or equity financings. The availability of these financing alternatives is dependent upon prevailing market conditions, interest rates, covenants associated with the Notes and the market price of the Company's common stock. There can be no assurance that the Company's restructuring efforts will be successful. In addition, an amendment to the revolving credit facility, could substantially alter the terms and conditions of the credit facility, including potentially higher interest rates, which could have a further adverse effect on the Company. Under current circumstances, the Company's ability to continue as a going concern depends upon the successful restructuring of the revolving credit facility as well as the success of its restructuring program. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Principles of Consolidation The financial statements include the accounts of Rural/Metro Corporation and its greater than 50% owned subsidiaries. Investments in affiliates, in which the Company owns 20% to 50%, are carried on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Ambulance service fees are recorded net of Medicare, Medicaid and other reimbursement limitations and recognized when services are provided. During the years ended June 30, 2000, 1999 and 1998, the Company derived approximately 23%, 24% and 29%, respectively, of its net ambulance fee collections from Medicare and 11%, 10% and 11%, respectively, from Medicaid. The reimbursement process is complex and can involve lengthy delays. Third-party payors are continuing their efforts to control expenditures for health care, including proposals to revise reimbursement policies. Although the Company recognizes revenue when the services are provided, there can be lengthy delays before reimbursement is received. The Company has from time to time experienced delays in receiving reimbursements from third-party payors. In addition, third-party payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable or because additional supporting documentation is necessary. Retroactive adjustments can change amounts realized from third-party payors. Delays and uncertainties in the reimbursement process adversely affect the Company's level of accounts receivable and may adversely affect the Company's working capital. The Company establishes 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 recorded for the expected difference between net ambulance service fees and amounts actually collected. The continuing efforts of third-party payors to control expenditures for health care could affect the revenue, cash flows, accounts receivable realization and profitability of the Company. Effective October 1, 1999 the Company changed its methodology of determining its provision for doubtful accounts. This change is being treated as a change in accounting estimate. During the fiscal year ended June 30, 2000, 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 process changes have not brought about the benefits anticipated, led to this change. Under the Company's new method of estimating its allowance for doubtful accounts, the Company has chosen to fully reserve its accounts receivable earlier in the collection cycle than had previously been the practice. The new method 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 was an additional $65.0 million provision for doubtful accounts, which was recorded separately and is reflected in the accompanying statement of operations for the fiscal year ended June 30, 2000. During August 1997, President Clinton signed the "Balanced Budget Act of 1997" (the Act). The Act provides for certain changes to the Medicare reimbursement system. These changes include, among other things, the creation of a 49 51 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Medicare Payment Advisory Commission to review payment policies and health care delivery, and make recommendations to Congress concerning such payment policies. In addition, the Act provides for the development and implementation of a prospective fee schedule, by January 2000, for ambulance services. The Act mandates that this fee schedule be developed through a negotiated rulemaking process and must consider the following: (i) data from industry and other organizations involved in the delivery of ambulance services, (ii) mechanisms to control increases in expenditures for ambulance services, (iii) appropriate regional and operational differences, (iv) adjustments to payment rates to account for inflation and other relevant factors, and (v) the phase-in of payment rates under the fee schedule in an efficient and fair manner. The Act requires that, beginning January 1, 2001, ambulance service providers accept assignment whereby the Company receives payment directly from Medicare and accepts such amount, along with the co-pay and deductible paid by the patient, as payment in full. The Act also applies the Skilled Nursing Facility Prospective Payment System (SNFPPS) to a limited number of ambulance trips to and from nursing homes. The application of SNFPPS could require the Company to negotiate new contracts or arrangements with skilled nursing facilities to provide ambulance services. The Act also stipulates that individual states may now elect to no longer provide payment for cost-sharing for coinsurance, or copayments, for dual-qualified (Medicare and Medicaid) beneficiaries. 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 prospective fee schedule as well as the mandatory acceptance of assignment would be postponed to January 2001. HCFA also announced rules that became effective in February 1999, which require, among other things, that a physician's certification be obtained for certain ambulance transports. Certain actions to partially mitigate any adverse effect of these changes could be taken by the Company. These actions could include renegotiation of rates and contract subsidies provided in the Company's "911" ambulance service contracts and changes in staffing of ambulance crews based upon the negotiation for longer response times under ambulance service contracts to reduce operating costs. The proposed Medicare ambulance fee schedule and rule was published September 12, 2000 in the Federal Register, to be followed by a 60-day comment period. The proposed rules have not been finalized. If implemented, these rules could result in contract renegotiations or other actions by the Company to offset any negative impact of the proposed change in reimbursement policies that could have a material adverse effect. Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, generally one year. Other revenue is comprised primarily of fees associated with alternative transportation, dispatch, fleet, billing and home health care services and is recognized when the services are provided. Earnings Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The statement modifies the calculation of primary and fully diluted earnings per share (EPS) as previously required and replaces them with basic and diluted EPS. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and as a result, all prior period EPS data presented has been restated in the consolidated financial statements. 50 52 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the numerators and denominators (weighted average number of shares outstanding) of the basic and diluted EPS computations for the years ended June 30, 2000, 1999 and 1998 is as follows (in thousands, except per share amounts):
2000 1999 1998 --------------------------------------- --------------------------------------- ----------- LOSS SHARES PER SHARE INCOME SHARES PER SHARE INCOME (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) ----------- ------------- --------- ----------- ------------- --------- ----------- Basic EPS................. $(101,273) 14,592 $(6.94) $15,464 14,447 $1.07 $7,505 ====== ===== Effect of stock options... -- -- -- 191 -- --------- ------ ------- ------ ------ Diluted EPS............... $(101,273) 14,592 $(6.94) $15,464 14,638 $1.06 $7,505 ========= ====== ====== ======= ====== ===== ====== 1998 ------------------------- SHARES PER SHARE (DENOMINATOR) AMOUNT ------------- --------- Basic EPS................. 13,529 $0.55 ===== Effect of stock options... 473 ------ Diluted EPS............... 14,002 $0.54 ====== =====
As a result of anti-dilutive effects, approximately 39 common stock equivalents were not included in the computation of diluted earnings per share for the year ended June 30, 2000. Foreign Currency Translation Financial information relating to the Company's foreign subsidiaries is reported in accordance with SFAS No. 52, "Foreign Currency Translation." The financial statements of non-U.S. subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these non-U.S. subsidiaries are translated at exchange rates in effect as of the end of each balance sheet date, and related revenues and expenses are translated at average exchange rates in effect during the period. During the year ended June 30, 2000, the Company recognized $173,000 translation adjustment as a component of the extraordinary loss on the expropriation of Canadian ambulance service licenses. Inventories Inventories, consisting of ambulance and fire supplies, are stated at the lower of cost, on a first-in, first-out basis, or market. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation, and is depreciated over the estimated useful lives using the straight-line method. Equipment and vehicles are depreciated over three to ten years and buildings are depreciated over fifteen to thirty years. Property and equipment held under capital leases is stated at the present value of minimum lease payments, net of accumulated amortization. These assets are amortized over the lesser of the lease term or the estimated useful life of the underlying assets using the straight-line method. Major additions and improvements are capitalized; maintenance and repairs which do not improve or significantly extend the life of assets are expensed as incurred. Intangible Assets Intangible assets include costs in excess of the fair value of net assets of businesses acquired of $206,137,000 and $239,243,000 and covenants not to compete of $1,063,000 and $1,117,000 at June 30, 2000 and 1999, respectively. Costs in excess of the fair value of net assets acquired are amortized over twenty-five to thirty-five years using the straight-line method. Covenants not to compete are amortized using the straight-line method over the term of the related agreements, generally three to five years. Accumulated amortization of these intangible assets was $28,577,000 and $25,713,000 at June 30, 2000 and 1999, respectively. Long-Lived Assets The Company periodically evaluates the carrying value of long-lived assets in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Under SFAS No. 121, long-lived assets and certain identifiable intangible assets to be held and used in operations are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized if the sum of the expected long-term undiscounted cash flows is less than the carrying amount of the long-lived assets being evaluated. See restructuring charge below and Note 2. 51 53 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accrued Liabilities Included in accrued liabilities is $11,264,000 and $14,780,000 for salaries, wages and related payroll expenses and $0 and $2,657,000 for accrued insurance premiums at June 30, 2000 and 1999, respectively. Restructuring Charge During the year ended June 30, 2000, the Company recorded pre-tax restructuring and other charges, exclusive of the additional provision for doubtful accounts, totaling $43.3 million associated with it's restructuring program related to the closing or downsizing of certain non-emergency service areas and reduction of corporate overhead. These charges primarily include severance, service area closing costs, and the write-off of goodwill and other impaired assets associated with the service area reduction. The components of the amounts included in restructuring charges and other and the remaining accrual at June 30, 2000, are as follows (in thousands):
BALANCE AT CHARGE JUNE 30, RECORDED USAGE 2000 -------- -------- ---------- Severance costs....................................... $ 6,621 $ (3,028) $3,593 Lease termination costs............................... 3,299 (52) 3,247 Write off of intangible assets........................ 22,250 (22,250) -- Write-off of impaired assets and other costs.......... 11,104 (9,421) 1,683 ------- -------- ------ $43,274 $(34,751) $8,523 ======= ======== ======
The $6.6 million of severance costs is calculated based upon the severance payments to be made to approximately 300 employees terminated under the restructuring plan. During the year ended June 30, 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 year ended June 30, 1998, the Company recorded a charge of $5.0 million related to severance payments. The $5.0 million charge related to the cost of terminating approximately 300 administrative employees throughout the Company. As of June 30, 1999 and June 30, 1998, the balance of the allowance for restructuring costs and severance payments was $1.3 million and $5.4 million, respectively. The allowance is included in accrued liabilities in the accompanying consolidated balance sheets. There are no allowances remaining related to the restructuring charges recorded in the years ended June 30, 1999 and June 30, 1998. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with federally-insured institutions and limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company's credit base and the geographical dispersion of the customers. Use of Estimates In the preparation of financial statements in conformity with accounting principles generally accepted in the United States, management of the Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, particularly accounts receivable and its effect on revenue, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value assumptions. The carrying values of cash, accounts receivable, accounts payable, 52 54 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accrued liabilities and other liabilities approximate fair value due to the short-term maturities of these instruments. The revolving line of credit approximates fair value as it bears interest at a rate indexed to LIBOR. The senior note, note payable and capital lease obligations approximate fair value as rates on these instruments, in the aggregate, approximate market rates currently available for instruments with similar terms and remaining maturities. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 (as amended by SFAS No. 138), "Accounting for Derivative Instruments and Hedging Activities," which requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133. The Company will be required to adopt SFAS No 133, as amended, during the fiscal year ending June 30, 2001. The Company does not anticipate any material impact resulting from the adoption of SFAS No. 133, as amended. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which was subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize certain of the SEC's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company is required to adopt SAB 101 no later than the fourth quarter of its fiscal year ending June 30, 2001. The Company does not anticipate any material impact resulting from the adoption of SAB 101. 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 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. During the fiscal year ended June 30, 2000, the Company wrote-off its capitalized organization costs and will expense any future organization costs incurred. The write-off was $541,000 (net of a tax benefit of $392,000) and has been reflected in the Consolidated Statement of Operations as the "Cumulative Effect of a Change in Accounting Principle" in accordance with APB No. 20. (2) BUSINESS DEVELOPMENT ACTIVITIES Acquisitions The Company completed no acquisitions during the year ended June 30, 2000. All five of the acquisitions completed during the year ended June 30, 1999 were accounted for as purchases in accordance with Accounting Principles Board (APB) Opinion No. 16, "Business Combinations" and, accordingly, the purchased assets and assumed liabilities were recorded at their estimated fair values at each respective acquisition date. Eight of the acquisitions completed during the year ended June 30, 1998 were accounted for as purchases in accordance with APB No. 16 and three of the acquisitions were accounted for as poolings-of-interest in accordance with APB No. 16. The aggregate purchase price of the operations accounted for as purchases in the year ended June 30, 1999 consisted of the following: Cash........................................................ $12,665 Notes payable to sellers.................................... 872 Assumption of liabilities................................... 7,104 ------- Total.................................................. $20,641 =======
53 55 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of the assets purchased in the year ended June 30, 1999 was allocated as follows (in thousands): Property and equipment...................................... $17,511 Intangible assets........................................... 2,770 Other assets................................................ 360 ------- Total.................................................. $20,641 =======
The following consolidated pro forma financial information was prepared assuming that each acquisition completed during the fiscal year ended June 30, 1999 had occurred as of the beginning of the fiscal year. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of each fiscal year and is not necessarily indicative of results that may be obtained in the future (unaudited): Revenue..................................................... $565,435 Net income.................................................. $ 15,126 Earnings per share -- basic................................. $ 1.05 Earnings per share -- diluted............................... $ 1.03
Joint Venture During the fiscal year ended June 30, 1998, the Company entered into a joint venture to provide non-emergency ambulance service and medical transportation in Maryland, Washington D.C. and northern Virginia. The Company is the majority shareholder and, therefore, the results of operations and the assets and liabilities of the joint venture are consolidated and included in the accompanying consolidated financial statements. Minority interest is recorded for the results of operations and the equity interest attributable to the minority joint venture partner. The minority joint venture partner contributed to the joint venture all of the issued and outstanding stock of two ambulance service companies. The Company contributed to the joint venture a commitment to fund $8.0 million for additional acquisitions in the greater Baltimore, Maryland and Washington D.C. area. As of June 30, 1998, the Company had completely fulfilled the $8.0 million commitment. The joint venture agreement allows the minority joint venture partner to exercise an option to repurchase one share of stock of the joint venture, thereby increasing the minority joint venture partner's interest to 50%. Should such option be exercised, the Company would no longer be able to consolidate the joint venture into its consolidated financial statements and the equity method of accounting would be applied. The Company believes that the exercise of the option is not probable due to the mutually beneficial ongoing relationship wherein the parties are on good terms and enjoy a collaborative and participatory working relationship. The Company has received no indication of interest to exercise the option. The repurchase option provides for the repurchase at the price paid at the time of the creation of the joint venture, which is $80,000. Public/Private Alliance During the year ended June 30, 1998, the Company entered into a public/private alliance with the San Diego Fire and Life Safety Services to provide all emergency and non-emergency transport services for the City of San Diego. As part of the alliance, a limited liability corporation (the LLC) was created with a 50/50 ownership between the Company and the City of San Diego. A wholly-owned subsidiary of the Company contracts with the LLC to provide operational and administrative support. Revenue generated under this contract totaled $10.4 million and $7.3 million for the years ended June 30, 2000 and 1999, respectively. Such revenue is included in other revenue in the accompanying consolidated financial statements. San Diego Fire and Life Safety Services also contracts with the LLC to provide emergency response and transportation services. The Company accounts for the activities of the LLC using the equity method. At June 30, 2000 and 1999, the Company's investment in the LLC was $1,011,000 and $1,598,000, respectively and such amounts are included in other assets in the accompanying consolidated financial statements. The Company's share of the undistributed earnings of the LLC was $988,000 and $861,000 for the years ended June 30, 2000 and 1999, respectively. The Company's share of such undistributed earnings is included in other revenue in the accompanying consolidated financial statements. 54 56 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other Investments During the year ended June 30, 1999, the Company made investments in companies offering ambulance services, ambulance billing services, and alternative transportation services. The Company contributed cash, accounts receivable, and fixed assets totaling $1.9 million at June 30, 1999 to these businesses. These investments have been recorded using the cost method of accounting and are included in other assets in the accompanying consolidated financial statements. The Company has determined that one of these investments is impaired as of June 30, 2000 and therefore has written off this investment and related amounts loaned to the business. The amount written off totaled $1.6 million and is included in restructuring and other charges in the accompanying consolidated statement of operations for the fiscal year ended June 30, 2000. (3) PROPERTY AND EQUIPMENT Property and equipment, including equipment held under capital leases, consisted of the following (in thousands):
JUNE 30, -------------------- 2000 1999 -------- -------- (IN THOUSANDS) Equipment................................................... $ 64,085 $ 58,317 Vehicles.................................................... 90,511 87,359 Land and buildings.......................................... 19,707 19,819 Leasehold improvements...................................... 8,923 8,735 -------- -------- 183,226 174,230 Less: Accumulated depreciation.............................. (97,307) (79,198) -------- -------- $ 85,919 $ 95,032 ======== ========
No equipment was acquired under capital lease or other financing agreements during the years ended June 30, 2000 and 1999. The Company held vehicles and equipment with a net carrying value of $19,120,000 and $19,889,000 at June 30, 2000 and 1999, respectively, under capital lease agreements. Accumulated depreciation on these assets totaled $13,663,000 and $12,404,000 June 30, 2000 and 1999, respectively. The Company has pledged assets with a net book value of $12,260,000 to secure certain of its obligations under its insurance and bonding program including certain reimbursement obligations with respect to the workers' compensation, performance bonds, appeal bonds and other aspects of such insurance and bonding programs. 55 57 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) CREDIT AGREEMENTS AND BORROWINGS Notes payable and capital lease obligations consisted of the following:
JUNE 30, --------------------- 2000 1999 --------- -------- (IN THOUSANDS) 7 7/8% senior notes due 2008, net of discount of $199,000 and $225,000, respectively................................ $ 149,801 $149,775 Revolving credit facility................................... 146,807 113,500 Capital lease obligations and other notes payable, collateralized by property and equipment, at varying rates, from 6.89% to 21.01%, due through 2003............. 3,808 7,802 Unsecured promissory notes payable from acquisitions at varying rates, from 6.0% to 9.0%, due through 2006........ 1,538 3,248 --------- -------- 301,954 274,325 Less: Current maturities.................................... (299,104) (5,765) --------- -------- $ 2,850 $268,560 ========= ========
7 7/8% Senior Notes Due 2008 In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes) effected under Rule 144A under the Securities Act of 1933 as amended (Securities Act). The net proceeds of the offering, sold through private placement transactions, was used to repay certain indebtedness. Interest under the Notes is payable semi-annually September 15, and March 15, and the Notes are not callable until March 2003 subject to the terms of the Note Agreement. The Company incurred expenses related to the offering of approximately $5.3 million and will amortize such costs over the life of the Notes. The Company recorded a $258,000 discount on the Notes and will amortize such discount over the life of the Notes. Unamortized discount at June 30, 2000 and 1999 was $199,000 and $225,000, respectively, and such amounts are recorded as an offset to long-term debt in the accompanying consolidated financial statements. In April 1998, the Company filed a registration statement under the Securities Act relating to an exchange offer for the Notes. Such registration became effective on May 14, 1998. 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 Notes contain certain covenants which, among other things, limit the Company's ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations. The financial statements presented below include the separate or combined financial position for the years ended June 30, 2000 and 1999, results of operations and cash flows for the three years ended June 30, 2000, 1999 and 1998 of Rural/Metro Corporation (Parent) and the guarantor subsidiaries (Guarantors) and the subsidiaries which are not guarantors (Non-guarantors). 56 58 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2000 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED -------- ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash..................................... $ -- $ 9,035 $ 1,252 $ -- $ 10,287 Accounts receivable, net................. -- 126,788 17,117 -- 143,905 Inventories.............................. -- 18,018 1,052 -- 19,070 Prepaid expenses and other............... 531 5,129 892 -- 6,552 -------- --------- -------- -------- -------- Total current assets........... 531 158,970 20,313 -- 179,814 PROPERTY AND EQUIPMENT, net.............. -- 76,325 9,594 -- 85,919 INTANGIBLE ASSETS, net................... -- 131,117 76,083 -- 207,200 DUE FROM (TO) AFFILIATES................. 319,747 (256,053) (63,694) -- -- OTHER ASSETS............................. 3,386 12,273 2,625 -- 18,284 INVESTMENT IN SUBSIDIARIES............... 74,464 -- -- (74,464) -- -------- --------- -------- -------- -------- $398,128 $ 122,632 $ 44,921 $(74,464) $491,217 ======== ========= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable....................... $ -- $ 11,922 $ 4,213 $ -- $ 16,135 Accrued liabilities.................... 5,929 43,746 7,412 -- 57,087 Current portion of long-term debt...... 296,608 2,164 332 -- 299,104 -------- --------- -------- -------- -------- Total current liabilities...... 302,537 57,832 11,957 -- 372,326 LONG-TERM DEBT, net of current portion... -- 2,384 466 -- 2,850 NON-REFUNDABLE SUBSCRIPTION INCOME....... -- 14,971 18 -- 14,989 DEFERRED INCOME TAXES.................... -- (725) 725 -- -- OTHER LIABILITIES........................ -- 101 -- -- 101 -------- --------- -------- -------- -------- Total liabilities.............. 302,537 74,563 13,166 -- 390,266 -------- --------- -------- -------- -------- MINORITY INTEREST........................ -- -- -- 5,360 5,360 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 (accumulated deficit)............................ (40,670) (6,635) (2,952) 9,587 (40,670) Cumulative translation adjustment...... (252) -- (252) 252 (252) Treasury stock......................... (1,239) -- -- -- (1,239) -------- --------- -------- -------- -------- Total stockholders' equity..... 95,591 48,069 31,755 (79,824) 95,591 -------- --------- -------- -------- -------- $398,128 $ 122,632 $ 44,921 $(74,464) $491,217 ======== ========= ======== ======== ========
57 59 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION 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 ======== ========= ======== ========= ========
58 60 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2000 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED --------- ---------- -------------- ----------- ------------ REVENUE Ambulance services................................ $ -- $ 391,898 $ 75,843 $ -- $ 467,741 Fire protection services.......................... -- 56,437 1,112 -- 57,549 Other............................................. -- 37,041 7,743 -- 44,784 --------- --------- -------- ------- --------- Total revenue.............................. -- 485,376 84,698 -- 570,074 --------- --------- -------- ------- --------- OPERATING EXPENSES Payroll and employee benefits..................... -- 272,944 50,341 -- 323,285 Provision for doubtful accounts................... -- 80,823 14,800 -- 95,623 Provision for doubtful accounts -- change in accounting estimate............................. -- 65,000 -- -- 65,000 Depreciation...................................... -- 22,068 2,941 -- 25,009 Amortization of intangibles....................... -- 6,220 2,467 -- 8,687 Other operating expenses.......................... -- 97,967 20,549 -- 118,516 Restructuring charge and other.................... -- 41,119 2,155 -- 43,274 --------- --------- -------- ------- --------- Total expenses............................. -- 586,141 93,253 -- 679,394 --------- --------- -------- ------- --------- OPERATING LOSS...................................... -- (100,765) (8,555) -- (109,320) Interest expense, net............................. 25,045 (1,125) 2,019 -- 25,939 Other............................................. -- -- -- (2,890) (2,890) --------- --------- -------- ------- --------- LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE......................................... (25,045) (99,640) (10,574) 2,890 (132,369) BENEFIT FOR INCOME TAXES............................ (6,211) (24,046) (2,580) -- (32,837) --------- --------- -------- ------- --------- LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............... (18,834) (75,594) (7,994) 2,890 (99,532) EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE SERVICE LICENSES........................ -- -- (1,200) -- (1,200) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE......................................... -- (541) -- -- (541) --------- --------- -------- ------- --------- NET LOSS............................................ (18,834) (76,135) (9,194) 2,890 (101,273) LOSS FROM WHOLLY-OWNED SUBSIDIARIES................. (82,439) -- -- 82,439 -- --------- --------- -------- ------- --------- NET LOSS............................................ $(101,273) $ (76,135) $ (9,194) $85,329 $(101,273) ========= ========= ======== ======= ========= Foreign currency translation adjustments.......... -- -- 40 -- 40 Comprehensive income (loss) from wholly-owned subsidiaries.................................... 40 -- -- (40) -- --------- --------- -------- ------- --------- COMPREHENSIVE LOSS.................................. $(101,233) $ (76,135) $ (9,154) $85,289 $(101,233) ========= ========= ======== ======= =========
59 61 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED -------- ---------- -------------- ----------- ------------ REVENUE Ambulance services.................................. $ -- $379,653 $87,979 $ -- $467,632 Fire protection services............................ -- 49,397 1,093 -- 50,490 Other............................................... -- 38,813 4,431 -- 43,244 -------- -------- ------- -------- -------- Total revenue................................ -- 467,863 93,503 -- 561,366 -------- -------- ------- -------- -------- OPERATING EXPENSES Payroll and employee benefits....................... -- 240,341 57,000 -- 297,341 Provision for doubtful accounts..................... -- 75,743 5,484 -- 81,227 Depreciation........................................ -- 22,230 1,992 -- 24,222 Amortization of intangibles......................... 214 6,601 2,351 -- 9,166 Other operating expenses............................ -- 81,633 17,106 -- 98,739 Restructuring charge and other...................... -- 2,500 -- -- 2,500 -------- -------- ------- -------- -------- Total expenses............................... 214 429,048 83,933 -- 513,195 -------- -------- ------- -------- -------- OPERATING INCOME (LOSS)............................... (214) 38,815 9,570 -- 48,171 Interest expense, net............................... 19,675 (139) 1,870 -- 21,406 Other............................................... -- -- -- 70 70 -------- -------- ------- -------- -------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES............................................... (19,889) 38,954 7,700 (70) 26,695 PROVISION (BENEFIT) FOR INCOME TAXES.................. (8,353) 16,332 3,252 -- 11,231 -------- -------- ------- -------- -------- (11,536) 22,622 4,448 (70) 15,464 INCOME FROM WHOLLY-OWNED SUBSIDIARIES................. 27,000 -- -- (27,000) -- -------- -------- ------- -------- -------- NET INCOME............................................ $ 15,464 $ 22,622 $ 4,448 $(27,070) $ 15,464 ======== ======== ======= ======== ======== Other comprehensive income (loss), net of tax Foreign currency translation adjustments............ -- -- (465) -- (465) Comprehensive income (loss) from wholly-owned subsidiaries...................................... (465) -- -- 465 -- -------- -------- ------- -------- -------- COMPREHENSIVE INCOME.................................. $ 14,999 $ 22,622 $ 3,983 $(26,605) $ 14,999 ======== ======== ======= ======== ========
60 62 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED ------- ---------- -------------- ----------- ------------ REVENUE Ambulance services................................... $ -- $341,668 $45,373 $ -- $387,041 Fire protection services............................. -- 44,985 986 -- 45,971 Other................................................ -- 42,184 362 -- 42,546 ------- -------- ------- -------- -------- Total revenue................................. -- 428,837 46,721 -- 475,558 ------- -------- ------- -------- -------- OPERATING EXPENSES Payroll and employee benefits........................ -- 225,102 29,704 -- 254,806 Provision for doubtful accounts...................... -- 76,872 4,306 -- 81,178 Depreciation......................................... -- 18,329 884 -- 19,213 Amortization of intangibles.......................... 124 6,690 966 -- 7,780 Other operating expenses............................. -- 70,804 9,412 -- 80,216 Restructuring charge and other....................... -- 5,000 -- -- 5,000 ------- -------- ------- -------- -------- Total expenses................................ 124 402,797 45,272 -- 448,193 ------- -------- ------- -------- -------- OPERATING INCOME (LOSS)................................ (124) 26,040 1,449 -- 27,365 Interest expense, net................................ 5,630 7,900 552 -- 14,082 Other................................................ -- -- -- (199) (199) ------- -------- ------- -------- -------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES................................................ (5,754) 18,140 897 199 13,482 PROVISION (BENEFIT) FOR INCOME TAXES................... (2,589) 8,146 420 -- 5,977 ------- -------- ------- -------- -------- (3,165) 9,994 477 199 7,505 INCOME FROM WHOLLY-OWNED SUBSIDIARIES.................. 10,670 -- -- (10,670) -- ------- -------- ------- -------- -------- NET INCOME............................................. $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505 ======= ======== ======= ======== ======== COMPREHENSIVE INCOME................................... $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505 ======= ======== ======= ======== ========
61 63 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2000 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED --------- ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income (loss)................................... $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273) Adjustments to reconcile net income (loss) to cash provided by (used in) operations -- Write-off of assets............................... -- 28,873 -- -- 28,873 Extraordinary loss................................ -- -- 1,200 -- 1,200 Cumulative effect of a change in accounting principle....................................... -- 541 -- -- 541 Depreciation and amortization..................... -- 28,288 5,408 -- 33,696 Amortization of gain on sale of real estate....... -- (104) -- -- (104) Provision for doubtful accounts................... -- 145,823 14,800 -- 160,623 Undistributed earnings of minority shareholder.... -- -- -- (2,890) (2,890) Amortization of discount on Senior Notes.......... 26 -- -- -- 26 Change in assets and liabilities -- Increase in accounts receivable................... -- (107,911) (11,308) -- (119,219) (Increase) decrease in inventories................ -- (3,451) 81 -- (3,370) Decrease in prepaid expenses and other............ -- 2,077 424 -- 2,501 (Increase) decrease in due to/from affiliates..... 64,300 10,932 7,167 (82,399) -- Decrease in accounts payable...................... -- 822 (2,491) -- (1,669) Decrease in accrued liabilities and other liabilities..................................... 2,162 1,707 (4,758) -- (889) Increase (decrease) in nonrefundable subscription income.......................................... -- 81 (1) -- 80 Decrease in deferred income taxes................. -- (9,198) (240) -- (9,438) --------- --------- -------- -------- --------- Net cash provided by (used in) operating activities............................... (34,785) 22,345 1,088 40 (11,312) --------- --------- -------- -------- --------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net........ 33,307 -- -- -- 33,307 Repayment of debt and capital lease obligations..... -- (3,993) (1,711) -- (5,704) Issuance of common stock............................ 655 -- -- -- 655 --------- --------- -------- -------- --------- Net cash provided by (used in) financing activities............................... 33,962 (3,993) (1,711) -- 28,258 --------- --------- -------- -------- --------- CASH FLOW FROM INVESTING ACTIVITIES Proceeds from expropriation of Canadian ambulance service licenses.................................. -- -- 2,191 -- 2,191 Capital expenditures................................ -- (13,945) (1,966) -- (15,911) Increase in other assets............................ 783 (751) (191) -- (159) --------- --------- -------- -------- --------- Net cash provided by (used in) investing activities............................... 783 (14,696) 34 -- (13,879) --------- --------- -------- -------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE............. 40 -- 40 (40) 40 --------- --------- -------- -------- --------- INCREASE (DECREASE) IN CASH......................... -- 3,656 (549) -- 3,107 CASH, BEGINNING OF PERIOD........................... -- 5,379 1,801 -- 7,180 --------- --------- -------- -------- --------- CASH, END OF PERIOD................................. $ -- $ 9,035 $ 1,252 $ -- $ 10,287 ========= ========= ======== ======== =========
62 64 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED -------- ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income........................................... $ 15,464 $ 22,622 $ 4,448 $(27,070) $ 15,464 Adjustments to reconcile net income to cash provided by (used in) operations -- Depreciation and amortization...................... 214 28,831 4,343 -- 33,388 Amortization of deferred compensation.............. 80 -- -- -- 80 Amortization of gain on sale of real estate........ -- (103) -- -- (103) Provision for doubtful accounts.................... -- 75,743 5,484 -- 81,227 Undistributed earnings of minority shareholder..... -- -- -- 70 70 Amortization of discount on Senior Notes........... 26 -- -- -- 26 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable.................... -- (100,770) (11,260) -- (112,030) Increase in inventories............................ -- (3,089) (155) -- (3,244) Decrease in prepaid expenses and other............. -- 1,328 1,007 -- 2,335 (Increase) decrease in due to/from affiliates...... (45,103) (948) 15,087 30,964 -- Increase in accounts payable....................... -- 2,273 419 -- 2,692 Increase (decrease) in accrued liabilities and other liabilities................................ 228 2,509 (5,767) -- (3,030) Increase (decrease) in non-refundable subscription income........................................... -- 1,286 (59) -- 1,227 Increase in deferred income taxes.................. -- 3,198 504 -- 3,702 -------- --------- -------- -------- --------- Net cash provided by (used in) operating activities................................ (29,091) 32,880 14,051 3,964 21,804 -------- --------- -------- -------- --------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net......... 27,500 -- -- -- 27,500 Repayment of debt and capital lease obligations...... -- (6,573) (1,221) -- (7,794) Issuance of common stock............................. 1,785 -- 4,429 (4,429) 1,785 -------- --------- -------- -------- --------- Net cash provided by (used in) financing activities................................ 29,285 (6,573) 3,208 (4,429) 21,491 -------- --------- -------- -------- --------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired.................... -- (445) (12,220) -- (12,665) Capital expenditures................................. -- (19,537) (4,402) -- (23,939) Increase in other assets............................. 271 (3,863) (1,965) -- (5,557) -------- --------- -------- -------- --------- Net cash used in investing activities....... 271 (23,845) (18,587) -- (42,161) -------- --------- -------- -------- --------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE.............. (465) -- (465) 465 (465) -------- --------- -------- -------- --------- INCREASE (DECREASE) IN CASH.......................... -- 2,462 (1,793) -- 669 CASH, BEGINNING OF YEAR.............................. -- 2,917 3,594 -- 6,511 -------- --------- -------- -------- --------- CASH, END OF YEAR.................................... $ -- $ 5,379 $ 1,801 $ -- $ 7,180 ======== ========= ======== ======== ========= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan............................................... $ 1,933 $ -- $ -- $ -- $ 1,933 ======== ========= ======== ======== =========
63 65 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RURAL/METRO CORPORATION CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1998 (IN THOUSANDS)
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED --------- ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income........................................ $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505 Adjustments to reconcile net income to cash provided by (used in) operations -- Depreciation and amortization................... 131 25,012 1,850 -- 26,993 Amortization of deferred compensation........... 558 -- -- -- 558 Amortization of gain on sale of real estate..... -- (103) -- -- (103) Provision for doubtful accounts................. -- 76,872 4,306 -- 81,178 Undistributed earnings of minority shareholder................................... -- -- -- (199) (199) Amortization of discount on Senior Notes........ 7 -- -- -- 7 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable................. -- (104,836) (11,645) -- (116,481) Increase in inventories......................... -- (3,722) (538) -- (4,260) (Increase) decrease in prepaid expenses and other......................................... (1,371) (2,923) 2,009 -- (2,285) (Increase) decrease in due to/from affiliates... (244,101) 186,613 46,818 10,670 -- Increase (decrease) in accounts payable......... -- 1,696 (529) -- 1,167 Increase (decrease) in accrued liabilities and other liabilities............................. 3,801 19,898 (579) -- 23,120 Increase (decrease) in nonrefundable subscription income........................... -- 288 17 -- 305 Increase (decrease) in deferred income taxes.... -- (4,935) 1 -- (4,934) --------- --------- -------- -------- --------- Net cash provided by (used in) operating activities............................. (233,470) 203,854 42,187 -- 12,571 --------- --------- -------- -------- --------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes............ 145,805 -- -- -- 145,805 Borrowings (repayments) on revolving credit facility, net................................... 86,000 (136,000) -- -- (50,000) Repayment of debt and capital lease obligations... -- (25,389) (6,498) -- (31,887) Borrowings of debt................................ -- 2,701 -- -- 2,701 Issuance of common stock.......................... 1,665 -- -- -- 1,665 --------- --------- -------- -------- --------- Net cash provided by (used in) financing activities............................. 233,470 (158,688) (6,498) -- 68,284 --------- --------- -------- -------- --------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired................. -- (6,644) (30,204) -- (36,848) Capital expenditures.............................. -- (29,767) (1,276) -- (31,043) Increase in other assets.......................... -- (8,858) (993) -- (9,851) --------- --------- -------- -------- --------- Net cash used in investing activities.... -- (45,269) (32,473) -- (77,742) --------- --------- -------- -------- --------- INCREASE (DECREASE) IN CASH....................... -- (103) 3,216 -- 3,113 CASH, BEGINNING OF YEAR........................... -- 3,020 378 -- 3,398 --------- --------- -------- -------- --------- CASH, END OF YEAR................................. $ -- $ 2,917 $ 3,594 $ -- $ 6,511 ========= ========= ======== ======== =========
64 66 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revolving Credit Facility The Company has a fully underwritten credit agreement for a revolving credit facility. The amount of the facility was increased from $125.0 million to $175.0 million during the fiscal year ended June 30, 1997 and increased to $200.0 million during the fiscal year ended June 30, 1998. The revolving credit facility was also amended by extending the maturity date to March 16, 2003 and converting it to an unsecured credit facility. The revolving credit facility is priced at prime rate, Federal Funds Rate plus 0.5% or a LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.875% to LIBOR plus 1.7%. Interest rates and availability under the revolving credit facility are dependent upon the Company meeting certain financial covenants including total debt leverage ratios, total debt to capitalization ratios and fixed charge ratios. In February 2000, the Company received a compliance waiver regarding the financial covenants contained in its revolving credit facility which covered the period December 31, 1999 through March 14, 2000. The Company has negotiated amendments to the original waiver covering periods through January 31, 2001. The waiver covers the representations and warranties related to no material adverse changes as well as the following financial covenants: total debt leverage ratio, the total debt to capitalization ratio and the fixed charge coverage ratio. There is no assurance that the Company is in compliance with all of the conditions of the waiver. The Company has discussed with the Lenders its failure to maintain positive operating income (net of restructuring charges), at June 30, 2000, as required under the waiver and the Lenders have not asserted that the Company has failed to comply with any requirements under the waiver. Although the Company believes no Event of Default is continuing either under 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 ("Notes"), 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 in the accompanying financial statements at June 30, 2000. The waiver stipulates that no additional borrowings will be available to the Company during the period covered by the waiver. As LIBOR contracts expired in March 2000, all borrowings were priced at prime rate plus 0.25 percentage points and interest is payable monthly. During the period covered by the waiver (as amended), the Company will accrue additional interest expense at a rate of 2.0% per annum on the outstanding balance on the revolving credit facility. Approximately $146.8 million was outstanding on the revolving credit facility at June 30, 2000. At June 30, 2000, the revolving credit facility was priced at prime rate plus 0.25 percentage points plus 2.0% as specified under the waiver agreement. The weighted average interest rate on the revolving credit facility was 11.75% and 6.66% at June 30, 2000 and 1999, respectively. Debt Maturities Aggregate debt maturities for each of the years ending June 30 are as follows:
NOTES PAYABLE CAPITAL LEASES ------------- -------------- (IN THOUSANDS) 2001....................................................... $297,571 $1,777 2002....................................................... 414 1,027 2003....................................................... 344 513 2004....................................................... 144 1 2005....................................................... 150 -- Thereafter................................................. 513 -- -------- ------ $299,136 $3,318 Less: Amounts representing interest........................ (500) ------ $2,818 ======
The Company incurred interest expense of $26,474,000, $21,498,000 and $14,259,000 and paid interest of $24,169,000, $21,669,000 and $11,519,000 in the years ended June 30, 2000, 1999 and 1998, respectively. 65 67 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company had outstanding letters of credit totaling $6,515,000 and $2,055,000 at June 30, 2000 and 1999, respectively. (5) FINANCIAL INSTRUMENTS The Company entered into interest rate swap agreements to limit the effect of increases in the interest rates on floating rate debt. The swap agreements were contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. In November 1998, the Company entered into an interest rate swap agreement that originally expired in November 2003 and effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. The Company paid a fixed rate of 4.72% and received a LIBOR-based floating rate. The weighted average floating rate for the year ended June 30, 1999 was 5.2%. As a result of this swap agreement interest expense was reduced during the year ended June 30, 1999 by approximately $106,000. In June 1999, the Company terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount is being amortized against interest on a straight-line basis beginning in July 1999 through November 2003. (6) COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases various facilities and equipment under non-cancelable operating lease agreements. Rental expense charged to operations under these leases was $13,160,000 $12,769,000 and $10,193,000 for the years ended June 30, 2000, 1999 and 1998, respectively. Minimum rental commitments under non-cancelable operating leases for each of the years ending June 30 are as follows (in thousands): 2001........................................................ $8,594 2002........................................................ 6,922 2003........................................................ 5,635 2004........................................................ 4,855 2005........................................................ 4,241 Thereafter.................................................. 7,512
Legal Proceedings The Company is a party to various lawsuits arising in the ordinary course of business. Management believes, based upon discussions with legal counsel, that losses, if any, will be substantially covered under insurance policies and will not have a material adverse effect on the consolidated financial statements. On August 25, 1998, the Company was named as a defendant in two purported class action lawsuits (Haskell and Ruble). The two lawsuits contain virtually identical allegations and are brought on behalf of a class of those who purchased the Company's publicly traded securities including its common stock between April 28, 1997 and June 11, 1998. Both complaints allege that between April 28, 1997 and June 11, 1998 the Company issued certain false and misleading statements regarding certain aspects of the financial status of the Company and that these statements allegedly caused the Company's common stock to be traded at an artificially inflated price. On May 25, 1999 the Arizona state court granted our request for a stay of the Haskell action until the Ruble action is finally resolved. The Company and the individual defendants have moved to dismiss the Ruble action. This motion is currently pending and therefore, no 66 68 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discovery has taken place since our motion to dismiss was filed. As a result the Company is unable to predict the ultimate outcome of this litigation. The Company intends to defend the actions vigorously. Other Disputes In 1994, the Company entered into a Management Agreement with another Corporation to manage the operations of one of the Company's subsidiaries that does not provide ambulance or fire protection services. The Company also entered into an option agreement whereby the Corporation had the option to purchase the assets of the subsidiary and the Company had the option to sell the assets of this subsidiary. The Company settled this dispute during the year ended June 30, 2000. Losses relating to this dispute totaled $1.3 million and are included in restructuring charges and other in the consolidated statement of operations for the year ended June 30, 2000. Option Agreement 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 $25.0 million by a company providing ambulance and other services in certain areas of Brazil. In June 2000, the Company terminated this option. Healthcare Compliance The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. The Company believes that it is substantially in compliance with fraud and abuse statutes as well as their applicable government review and interpretation as well as regulatory actions unknown or unasserted at this time. The Company is currently undergoing two investigations by certain government agencies regarding compliance with Medicare fraud and abuse statutes. The Company is cooperating with the government agencies conducting these investigations and is providing requested information to the governmental agencies. These reviews are covering periods prior to the Company's acquisition of the operations and periods after acquisition. Management believes that the remedies existing under specific purchase agreement and reserves established in the consolidated financial statements are sufficient so that the ultimate outcome of these matters should not have a material adverse effect on the Company's financial condition. (7) EMPLOYEE BENEFIT PLANS Employee Stock Ownership Plan (ESOP) The Company established the ESOP in 1979 and makes contributions to the ESOP at the discretion of the Board of Directors. No discretionary contributions were approved for the years ended June 30, 2000, 1999 and 1998. The ESOP held, for the benefit of all participants, approximately 6% as of June 30, 2000 and 1999, of the outstanding common stock of the Company. The ESOP is administered by the ESOP's Advisory Committee, consisting of certain officers of the Company. In July 1999, the Company's Board of Directors approved an amendment to "freeze" the ESOP, effective June 30, 1999 with respect to all employees other than members of collective bargaining agreements that include participation in the ESOP. All participants' accounts were fully vested as of June 30, 1999. The Company does not intend to make any contributions to the ESOP in the future. 67 69 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Due to the decrease in stock price in the year ended June 30, 2000, the ESOP assets were insufficient to cover participant balances, therefore the Company made an additional contribution of $250,000. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (ESPP) through which eligible employees may purchase shares of the Company's common stock, at semi-annual intervals, through periodic payroll deductions. The ESPP is a qualified employee benefit plan under Section 423 of the Internal Revenue Code. The Company has reserved 450,000 shares of stock for issuance under the ESPP. The purchase price per share is the lower of 85% of the closing price of the stock on the first day or the last day of the offering period or on the nearest prior day on which trading occurred on the NASDAQ Small Cap Market. As of June 30, 2000, 353,580 shares of common stock have been issued under the ESPP. 1992 Stock Option Plan The Company's 1992 Stock Option Plan was adopted in November 1992 and provides for the granting of options to acquire common stock of the Company, direct granting of the common stock of the Company (Stock Awards), the granting of stock appreciation rights (SARs), or the granting of other cash awards (Cash Awards) (Stock Awards, SARs and Cash Awards are collectively referred to herein as Awards). At June 30, 2000, the maximum number of shares of common stock issuable under the 1992 Plan was 6.0 million of which approximately 800,000 options had been exercised. Options may be granted as incentive stock options or non-qualified stock options. Options and Awards may be granted only to persons who at the time of grant are either (i) key personnel (including officers) of the Company or (ii) consultants and independent contractors who provide valuable services to the Company. Options that are incentive stock options may be granted only to key personnel of the Company. The 1992 Plan, as amended, provides for the automatic grant of options to acquire the Company's common stock (the Automatic Grant Program), whereby each non-employee member of the Board of Directors will be granted an option to acquire 2,500 shares of common stock annually. Each non-employee member of the Board of Directors also will receive an annual automatic grant of options to acquire an additional number of shares equal to 1,000 shares for each $0.05 increase in the Company's earnings per share, subject to a maximum of 5,000 additional options. New non-employee members of the Board of Directors will receive options to acquire 10,000 shares of common stock on the date of their first appointment or election to the Board of Directors. The expiration date, maximum number of shares purchasable and the other provisions of the options will be established at the time of grant. Options may be granted for terms of up to ten years and become exercisable in whole or in one or more installments at such time as may be determined by the Plan Administrator upon grant of the options. Options granted to date vest over periods not exceeding five years. The exercise price of options will be determined by the Plan Administrator, but may not be less than 100% (110% if the option is granted to a stockholder who at the date the option is granted owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its subsidiaries) of the fair market value of the common stock at the date of the grant. Awards granted in the form of SARs would entitle the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of common stock from the price stated in the award agreement to the market value of the common stock on the date first exercised or surrendered. The Plan Administrator may determine such terms, conditions, restrictions and/or limitations, if any, on any SARs. The 1992 Plan states that it is not intended to be the exclusive means by which the Company may issue options or warrants to acquire its common stock, Awards or any other type of award. To the extent permitted by applicable law, the Company may issue any other options, warrants or awards other than pursuant to the 1992 Plan without shareholder approval. The 1992 Plan will remain in force until November 5, 2002. 68 70 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes stock option activity:
YEAR ENDED JUNE 30, 2000 --------------------------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE EXERCISE SHARES PER SHARE PRICE --------- -------------- -------- Options outstanding at beginning of year......... 3,575,170 $1.25 - $36.00 $20.99 Granted........................................ 929,109 $1.38 - $ 8.00 $ 7.16 Canceled....................................... (921,408) $1.25 - $32.56 $21.20 Exercised...................................... (879) $1.25 $ 1.25 --------- Options outstanding at end of year............... 3,581,992 $1.25 - $36.00 $17.35 ========= Options exercisable at end of year............... 2,804,758 $1.25 - $36.00 $18.04 ========= Options available for grant at end of year....... 1,648,037 ========= Weighted average fair value per share of options granted........................................ $ 3.01 ======
YEAR ENDED JUNE 30, 1999 --------------------------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE EXERCISE SHARES PER SHARE PRICE --------- -------------- -------- Options outstanding at beginning of year......... 3,093,905 $1.25 - $36.00 $26.26 Granted........................................ 1,004,497 $6.63 - $11.81 $ 7.45 Canceled....................................... (513,590) $7.13 - $35.00 $26.90 Exercised...................................... (9,642) $1.25 - $ 7.13 $ 6.64 --------- Options outstanding at end of year............... 3,575,170 $1.25 - $36.00 $20.99 ========= Options exercisable at end of year............... 2,520,828 $1.25 - $36.00 $21.46 ========= Options available for grant at end of year....... 1,655,738 ========= Weighted average fair value per share of options granted........................................ $ 2.55 ======
YEAR ENDED JUNE 30, 1998 ---------------------------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE EXERCISE SHARES PER SHARE PRICE --------- --------------- -------- Options outstanding at beginning of year........ 2,301,397 $ 5.60 - $36.00 $24.45 Granted....................................... 1,031,343 $ 1.25 - $34.50 $29.10 Canceled...................................... (89,927) $16.25 - $36.00 $27.50 Exercised..................................... (148,908) $ 1.25 - $29.00 $14.40 --------- Options outstanding at end of year.............. 3,093,905 $ 1.25 - $36.00 $26.26 ========= Options exercisable at end of year.............. 1,875,149 $25.73 ========= Options available for grant at end of year...... 2,146,645 ========= Weighted average fair value per share of options granted....................................... $11.04 ======
69 71 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------ WEIGHTED AVERAGE RANGE OF OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------ ----------- ----------------- ---------------- ----------- ---------------- $1.25 - $6.92 317,250 7.30 $ 4.99 248,085 $ 5.01 $7.13 486,168 8.17 $ 7.13 391,683 $ 7.13 $7.56 - $7.69 27,500 9.11 $ 7.64 15,831 $ 7.64 $7.81 572,835 9.08 $ 7.81 274,016 $ 7.81 $8.00 - $16.25 450,022 6.72 $10.48 425,022 $10.61 $17.25 - $22.50 177,167 4.30 $17.80 177,167 $17.80 $24.00 473,627 5.23 $24.00 407,797 $24.00 $24.25 22,500 5.44 $24.25 22,500 $24.25 $29.00 463,100 7.20 $29.00 307,500 $29.00 $31.25 - $36.00 591,823 6.36 $32.46 535,157 $32.48 --------- ---- ------ --------- ------ $1.25 - $36.00 3,581,992 7.04 $17.35 2,804,758 $18.04 ========= ==== ====== ========= ======
2000 Non-qualified Stock Option Plan The Company's 2000 Non-Qualified Stock Option Plan was adopted in August 2000 and provides for the granting of options to acquire common stock of the Company. At the time of adoption, the maximum number of shares of common stock issuable under the Plan was 2.0 million. Options may only be granted as non-qualified stock options. Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for employee stock options or similar equity instruments. SFAS No. 123 also allows an entity to continue to measure compensation cost related to stock options issued to employees under these plans using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB Opinion No. 25; therefore, no compensation cost is recognized in the accompanying financial statements for stock-based employee awards. However, the Company has computed, for pro forma disclosure purposes, the value of all options and ESPP shares granted during 2000, 1999 and 1998, using the Black-Scholes option pricing model with the following weighted average assumptions:
YEAR ENDED JUNE 30, -------------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ---------------- OPTIONS ESPP OPTIONS ESPP OPTIONS ESPP ------- ----- ------- ----- ------- ----- Risk-free interest rate................... 6.03% 6.32% 5.92% 5.43% 5.01% 4.95% Expected dividend yield................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Expected lives in years (after vesting for options)................................ 1.35 0.50 1.33 0.50 1.32 0.50 Expected volatility....................... 67.51% 99.78% 57.66% 85.20% 46.65% 63.42%
70 72 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The total value of options and ESPP shares granted was computed to be the following approximate amounts, which would be amortized on the straight-line basis over the vesting period (in thousands):
OPTIONS ESPP ------- ---- For the year ended June 30, 2000 ........................... $ 2,724 $137 For the year ended June 30, 1999 ........................... $ 2,564 $340 For the year ended June 30, 1998 ........................... $11,386 $397
If the Company had accounted for its stock-based compensation plans using a fair value based method of accounting, the Company's year end net income and diluted earnings per share would have been reported as follows (in thousands):
YEAR ENDED JUNE 30, ----------------------------------------- 2000 1999 1998 ------------ ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss): Historical................................................ $(101,273) $15,464 $7,505 Pro forma................................................. $(101,762) $11,939 $2,090 Diluted earnings per share: Historical................................................ $ (6.94) $ 1.06 $ 0.54 Pro forma................................................. $ (6.97) $ 0.82 $ 0.15
The effects of applying SFAS 123 for providing pro forma disclosures for 2000, 1999 and 1998 are not likely to be representative of the effects on reported net income and diluted earnings per share for future years, because options vest over several years and additional awards are made each year. During March 2000, the FASB issued Interpretation 44, "Accounting for Certain Transactions Involving Stock Compensation-an Interpretation of APB Opinion No. 25'("FIN 44"), which among other issues, addresses repricing and other modifications made to previously issued stock options. The Company will be required to adopt FIN 44 in the first quarter of its fiscal year ending June 30, 2001. The Company does not anticipate any material impact resulting from the adoption of FIN 44. 401(k) Plan The Company has a contributory retirement plan (the 401(k) Plan) covering eligible employees who are at least 18 years old. The 401(k) Plan is designed to provide tax-deferred income to the Company's employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The 401(k) Plan provides that each participant may contribute up to 15% of his or her respective salary, not to exceed the statutory limit. The Company, at its discretion, may elect to make a matching contribution in the form of cash or the Company's common stock to each participant's account as determined by the Board of Directors. Under the terms of the 401(k) Plan, the Company may also make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of his or her funds. The Company has accrued a matching contribution of approximately $1,906,000 for the 401(k) Plan year ended December 31, 1999. The Company made a matching contribution to the 401(k) Plan of approximately $2,206,000 for the 401(k) Plan year ended December 31, 1998. (8) STOCKHOLDERS' EQUITY Shareholder Rights Plan In August 1995, the Company's Board of Directors adopted a shareholder rights plan, which authorized the distribution of one right to purchase one one-thousandth of a share of $0.01 par value Series A Junior Participating Preferred Stock (a Right) for each share of common stock of the Company. Rights will become exercisable following the 71 73 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tenth day (or such later date as may be determined by the Board of Directors) after a person or group (a) acquires beneficial ownership of 15% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's common stock. Upon exercise, each Right will entitle the holder (other than the party seeking to acquire control of the Company) to acquire shares of the common stock of the Company or, in certain circumstances, such acquiring person at a 50% discount from market value. The Rights may be terminated by the Board of Directors at any time prior to the date they become exercisable at a price of $0.01 per Right; thereafter, they may be redeemed for a specified period of time at $0.01 per Right. (9) RELATED PARTY TRANSACTIONS The Company incurred legal fees of approximately $96,000, $113,000 and $148,000 for the years ended June 30, 2000, 1999 and 1998, respectively, with a law firm in which a member of the Board of Directors is a partner. The Company incurred rental expense of $114,000 in the year ended June 30, 2000 related to leases of fire and ambulance facilities with a director of the Company and with employees that were previously owners of businesses acquired by the Company. The Company incurred rental expense of $1,895,000 and $1,490,000, in each of the years ended June 30, 1999 and 1998, respectively, related to leases of fire and ambulance facilities with two directors of the Company and with employees that were previously owners of businesses acquired by the Company. At June 30, 1999, the Company had notes payable to employees that were previously owners of businesses acquired by the $138,000. The Company incurred consulting fees of $85,000 in the year ended June 30, 2000 with a director of the Company. The Company incurred consulting fees of $213,000 in the year ended June 30, 1999, with two directors of the Company. (10) INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes are provided for differences between results of operations for financial reporting purposes and income tax purposes. No provision is made for U.S. income taxes applicable to undistributed foreign earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. The sources of income (loss) before income taxes were as follows (in thousands):
YEAR ENDED JUNE 30, ------------------------------- 2000 1999 1998 --------- ------- ------- United States......................................... $(133,641) $19,189 $11,791 Foreign............................................... (861) 7,506 1,691 --------- ------- ------- Income (loss) before income taxes..................... $(134,502) $26,695 $13,482 ========= ======= =======
72 74 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the provision for (benefit from) income taxes were as follows (in thousands):
YEAR ENDED JUNE 30, ----------------------------- 2000 1999 1998 -------- ------- ------ Current U.S. federal and state................................ $ -- $ 58 $ 790 State................................................. 750 128 68 Foreign............................................... 1,560 1,532 762 -------- ------- ------ Total current provision....................... 2,310 1,718 1,620 -------- ------- ------ Deferred U.S. federal.......................................... (33,179) 9,064 4,576 Foreign............................................... (2,360) 449 (219) -------- ------- ------ Total deferred provision (benefit)............ (35,539) 9,513 4,357 -------- ------- ------ Total provision (benefit)..................... $(33,229) $11,231 $5,977 ======== ======= ======
Deferred tax assets and liabilities are recorded based on differences between the financial statement and tax bases of amounts of assets and liabilities and the tax rates in effect when those differences are expected to reverse. The components of net deferred taxes were as follows (in thousands):
JUNE 30, -------------------- 2000 1999 -------- -------- Deferred tax liabilities Amortization and accelerated depreciation................. $(19,157) $(15,730) Accounts receivable valuation............................. (16,273) (30,820) Accounting method changes................................. (1,350) (1,910) Other..................................................... (1,421) (751) -------- -------- (38,201) (49,211) -------- -------- Deferred tax assets Restructuring charge...................................... 6,634 2,997 Compensation accruals.................................. 828 974 Insurance reserves..................................... 6,314 1,758 Net operating loss benefits............................... 35,108 7,898 Alternative minimum tax credit carryforwards.............. 1,115 1,115 Business tax credits................................... 505 505 Foreign reserves....................................... 690 -- Other.................................................. 79 78 Valuation allowance.................................... (12,832) -- -------- -------- 38,441 15,325 -------- -------- Net deferred tax liability.................................. 240 (33,886) Less current portion........................................ (240) 24,448 -------- -------- Net long term deferred tax liability........................ $ -- $ (9,438) ======== ========
For the years ended June 30, 1999 and 1998 income tax benefits of $8,000 and $1,012,000, respectively, were allocated to additional paid-in capital for tax benefits associated with the exercise of nonqualified stock options and vesting of stock grants. No income tax benefits were provided for the year ended June 30, 2000. 73 75 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences were as follows (in thousands):
JUNE 30, ----------------------------- 2000 1999 1998 -------- ------- ------ Federal income tax provision at statutory rate.......... $(47,076) $ 9,343 $4,719 State taxes, net of federal benefit..................... (3,230) 568 293 Amortization of nondeductible goodwill.................. 3,792 1,590 900 Change in valuation allowance........................... 12,832 -- -- Other, net.............................................. 453 (270) 65 -------- ------- ------ Provision for (benefit from) income taxes............... $(33,229) $11,231 $5,977 ======== ======= ======
The Company has provided a valuation allowance because it believes that the realizability of the deferred tax asset does not meet the more likely than not criteria under SFAS No. 109. The Company has net operating losses of approximately $85 million which expire in varying amounts between 2001 and 2020. Cash payments for income taxes (net of refunds) were approximately $2,397,000 during the year ended June 30, 2000. The Company received income tax refunds (net of payments) of approximately $2,050,000 and $3,323,000 during the years ended June 30, 1999 and 1998, respectively. (11) SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", during the fourth quarter of fiscal 1999. SFAS No. 131 established 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: Emergency Medical Services ("EMS") 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 EMS segment includes emergency medical ambulance services provided pursuant to contracts with counties, fire districts and municipalities, as well as general transport ambulance services provided to patients requiring either advanced or basic levels of medical supervision during the transfer to and from residences and health care facilities. The EMS segment also includes critical care transport services for medically unstable patients who require critical care while being transported between health care facilities, as well as urgent home medical care and ambulance services provided under capitated service arrangements in Argentina. The Fire and Other segment includes fire protection services consisting of fire prevention and fire suppression, as well as hazardous material containment, underwater search and recovery, mountain and confined space rescue and public education. This segment also includes the following services: industrial fire training, alarm monitoring, non-medical transportation for the handicapped and certain non-ambulatory persons, 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. 74 76 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information by operating segment is set forth below (in thousands):
AMBULANCE FIRE AND OTHER CORPORATE TOTAL --------- -------------- --------- --------- YEAR ENDED JUNE 30, 2000 Net revenues from external customers..... $ 467,741 $102,333 $ -- $ 570,074 Depreciation and amortization............ 22,247 10,087 1,362 33,696 Interest expense, net.................... 21,057 4,595 286 25,938 Equity in net income of equity method investees............................. 988 (8) -- 980 Segment profit (loss).................... (128,455) 11,122 (17,926) (135,259) Segment assets........................... 209,810 37,069 2,015 248,894 Capital expenditures..................... 6,831 8,599 481 15,911 Investment in equity-method investees.... $ 1,011 $ 1,100 $ -- $ 2,111
AMBULANCE FIRE AND OTHER CORPORATE TOTAL --------- -------------- --------- --------- YEAR ENDED JUNE 30, 1999 Net revenues from external customers...... $467,632 $93,734 $ -- $ 561,366 Depreciation and amortization............. 23,851 7,824 1,713 33,388 Interest expense, net..................... 16,088 4,928 390 21,406 Equity in net income of equity method investees.............................. 725 17 -- 742 Segment profit (loss)..................... 33,239 11,905 (18,379) 26,765 Segment assets............................ 253,269 40,693 2,895 296,857 Capital expenditures...................... 19,467 4,390 82 23,939 Investment in equity-method investees..... $ 1,142 $ 1,671 $ -- $ 2,813
AMBULANCE FIRE AND OTHER CORPORATE TOTAL --------- -------------- --------- --------- YEAR ENDED JUNE 30, 1998 Net revenues from external customers..... $ 387,041 $ 88,517 $ -- $ 475,558 Depreciation and amortization............ 18,608 6,952 1,433 26,993 Interest expense, net.................... 9,731 4,085 266 14,082 Equity in net income of equity method investees............................. 727 43 -- 770 Segment profit (loss).................... 23,407 12,917 (23,041) 13,283 Segment assets........................... 218,620 38,311 3,345 260,276 Capital expenditures..................... 22,988 5,638 2,417 31,043 Investment in equity-method investees.... $ 737 $ 1,160 $ -- $ 1,897
Information concerning principal geographic areas is set forth below (in thousands):
2000 1999 1998 ----------------------- ----------------------- ----------------------- REVENUE NET PROPERTY REVENUE NET PROPERTY REVENUE NET PROPERTY -------- ------------ -------- ------------ -------- ------------ United States and Canada........ $517,315 $79,257 $506,817 $87,441 $462,179 $90,003 Latin America................... 52,759 6,662 54,549 7,591 13,379 2,542 -------- ------- -------- ------- -------- ------- Total................. $570,074 $85,919 $561,366 $95,032 $475,558 $92,545 ======== ======= ======== ======= ======== =======
75 77 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended June 30, 2000 and 1999 is as follows (in thousands):
2000 -------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER(1) QUARTER(2) QUARTER(3) -------- ---------- ---------- ---------- Revenue.................................. $141,200 $147,107 $146,398 $135,369 Operating income (loss).................. 9,581 (57,978) (18,002) (42,921) Net income (loss)........................ 1,884 (42,386) (16,615) (44,156) Earnings (loss) per share................ $ 0.13 $ (2.91) $ (1.14) $ (3.02)
1999 ---------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER(4) QUARTER QUARTER QUARTER ---------- -------- -------- -------- Revenue.................................. $138,795 $139,589 $142,933 $140,049 Operating income......................... 10,507 13,381 13,742 10,541 Net income............................... 3,062 4,639 4,711 3,052 Earnings per share....................... $ 0.21 $ 0.32 $ 0.32 $ 0.21
- --------------- (1) In the second quarter of the year ended June 30, 2000, the Company recorded a $65.0 million additional provision for doubtful accounts related to a change in its methodology of determining its allowance for doubtful accounts. (2) In the third quarter of the year ended June 30, 2000, the Company recorded a pre-tax restructuring charge of $25.1 million related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead and $3.0 million additional provision for doubtful accounts related to uncollectible accounts in those service areas that are being closed or downsized. (3) In the fourth quarter of the year ended June 30, 2000, the Company recorded a pre-tax restructuring charge of $18.2 million related to the closure or downsizing of certain non-emergency service areas and the reduction of corporate overhead and $6.8 million additional provision for doubtful accounts related to uncollectible accounts in those service areas that are being closed or downsized. (4) In the first quarter of the year ended June 30, 1999, the Company recorded a pre-tax charge of $2.5 million related to severance payments. 76 78 SCHEDULE II RURAL/METRO CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
JUNE 30, ---------------------------------- 2000 1999 1998 --------- --------- -------- Allowance for doubtful accounts Balance at beginning of year.............................. $ 43,392 $ 69,552 $ 35,814 Provision charged to expense.............................. 160,623 81,227 81,178 Write-offs................................................ (116,263) (107,387) (47,440) --------- --------- -------- Balance at end of year.................................... $ 87,752 $ 43,392 $ 69,552 ========= ========= ========
JUNE 30, ---------------------------------- 2000 1999 1998 -------- ------- ------- Restructuring allowance Balance at beginning of year.............................. $ 1,328 $ 5,407 $ 4,815 Provision................................................. 43,274 2,500 5,000 Payments/usage............................................ (36,079) (6,579) (4,408) -------- ------- ------- Balance at end of year.................................... $ 8,523 $ 1,328 $ 5,407 ======== ======= =======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 77 79 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding our directors and executive officers.
NAME AGE POSITION - ---- --- -------- Cor J. Clement....................... 51 Chairman of the Board and Director(1)(3) Jack E. Brucker...................... 48 President, Chief Executive Officer, and Director Robert B. Hillier.................... 52 Senior Vice President, Human Resources, and Chief Administrative Officer John S. Banas III.................... 37 Senior Vice President and General Counsel Michel A. Sucher, M.D................ 54 Senior Vice President, Medical Affairs and Chief Medical Officer Randall L. Harmsen................... 49 Vice President of Finance, Chief Accounting Officer Louis G. Jekel....................... 58 Vice Chairman of the Board, Secretary, and Director Mary Anne Carpenter.................. 54 Director(1)(4) William C. Turner.................... 70 Director(1)(2)(3)(4) Henry G. Walker...................... 52 Director Louis A. Witzeman.................... 74 Director(1)(2)
- --------------- (1) Member of the Human Resource/Compensation/Organization Committee. (2) Member of the Nominating Committee. (3) Member of the Executive Committee. (4) Member of the Audit Committee. COR J. CLEMENT has served as Chairman of our Board of Directors since August 1998 and as a member of our Board of Directors since May 1992. Mr. Clement served as Vice Chairman of the Board of Directors from August 1994 to August 1998. Mr. Clement served as the President and Chief Executive Officer of NVD, an international provider of security and industrial fire protection services headquartered in the Netherlands, from February 1980 until his retirement in January 1997. JACK E. BRUCKER has served as our President and Chief Executive Officer since February 2000 and has been a member of our Board of Directors since February 2000. Mr. Brucker served as our Senior Vice President and Chief Operating Officer from December 1997 until February 2000. Mr. Brucker founded and served as President of Pacific Holdings, a strategic consulting firm, from July 1989 until December 1997. Mr. Brucker served as President of Pacific Precision Metals, a consumer products company, from September 1987 until June 1989. ROBERT B. HILLIER has served as our Senior Vice President -- Human Resources and Chief Administrative Officer since February 2000 and as Vice President -- Human Resources since October 1997. Mr. Hillier served as Account Manager and Human Resources Consultant of Watson Wyatt Worldwide from January 1995 to October 1997. From November 1992 to December 1994, he contracted with Bank of America to organize Caliber Bank of Arizona and later served as Director of Human Resources of Caliber Bank of Arizona. JOHN S. BANAS III has served as our Senior Vice President and General Counsel since September 1999. Mr. Banas served as General Counsel at SpinCycle Inc., a nationwide chain of branded coin-operated laundromats, from 1998 to September 1999. From 1995 to 1998, he was Senior Corporate Counsel to Lam Research Corporation in Fremont, California; and from 1992 to 1995 served as corporate, real estate, and environmental counsel at the law firm of Wilson, Sonsini, Goodrich & Rosati in Palo Alto, California. Mr. Banas served as litigation counsel from 1989 to 1992 at the law firm of Thelen, Marrin, Johnson & Bridges (now Thelen, Reid & Priest) in San Francisco, California. MICHEL A. SUCHER, M.D., has served as Senior Vice President and Medical Affairs Director since February 2000. Dr. Sucher served as Vice President for Medical Affairs from January 1995 until February 2000. He served as our National Medical Director from 1984 to 1995. From 1974 to 1995, Dr. Sucher engaged in the private practice of 78 80 emergency medicine and held several positions at Scottsdale Healthcare, including the most recent position as President of the Medical Staff. Dr. Sucher is board certified by the American Board of Emergency Medicine and is a member of the American College of Emergency Physicians. RANDALL L. HARMSEN has served as Vice President of Finance, Chief Accounting Officer, and Corporate Controller since July 2000. Mr. Harmsen served as Vice President of Network Management and Chief Financial Officer for United Healthcare of Arizona Inc. in Phoenix, Arizona, from 1997 until the time he joined our company. From 1994 to 1997, he was Vice President of Finance for Carondelet Health Care Corporation in Tucson, Arizona. From 1989 to 1994, Mr. Harmsen served as Chief Financial Officer for Presbyterian Healthcare Services in Albuquerque, New Mexico; and from 1977 to 1989, he was Chief Financial Officer for St. Luke's Hospital in Davenport, Iowa. LOUIS G. JEKEL has served as our Secretary and as a member of our Board of Directors since 1968 and as Vice Chairman of our Board of Directors since August 1998. Mr. Jekel directs our Wildland Fire Protection Operations with the State of Arizona and the federal government. Mr. Jekel is a partner in the law firm of Jekel & Howard, Scottsdale, Arizona. MARY ANNE CARPENTER has been a member of our Board of Directors since January 1998. Since January 1993, Ms. Carpenter has served as Executive Vice President and Executive Committee member of First Health Group Corp., a publicly traded managed health care company. From October 1991 until January 1993, Ms. Carpenter served as Senior Vice President, and from July 1986 through October 1991, as Vice President of First Health Group Corp. Ms. Carpenter is a board member of the American Association of Health Plans and has served on panels for several other national health care organizations. WILLIAM C. TURNER has been a member of our Board of Directors since November 1993. Mr. Turner is currently Chairman and Chief Executive of Argyle Atlantic Corporation, an international merchant banking and management consulting firm; a director of the Goodyear Tire & Rubber Company; a director of Microtest, Inc.; a trustee and executive committee member of the United States Council for International Business; and a Trustee and past Chairman of the American Graduate School of International Management (Thunderbird). Mr. Turner is also a former United States Ambassador and permanent representative to the Organization for Economic Cooperation and Development. HENRY G. WALKER has been a member of our Board of Directors since September 1997. Since April 1997, he has served as President and Chief Executive Officer of the Sisters of Providence Health System, comprised of hospitals, long-term care facilities, physician practices, managed care plans, and other health and social services. From 1996 to March 1997, Mr. Walker served as President and Chief Executive Officer of Health Partners of Arizona, a state-wide managed care company. From 1992 to 1996, he served as President and Chief Executive Officer of Health Partners of, a healthcare delivery system. Mr. Walker is a member of the National Advisory Council of the Healthcare Forum, and also serves as a director of Consolidated Catholic Healthcare a private non-profit company. LOUIS A. WITZEMAN is the founder of our company. Mr. Witzeman has served as a member of our Board of Directors since our formation in 1948, currently serving as Chairman of the Board Emeritus. Mr. Witzeman served as our Chief Executive Officer until his retirement in 1980. Directors hold office until their successors have been elected and qualified. All officers serve at the pleasure of the Board of Directors. There are no family relationships among any of our directors or officers. COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% stockholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us during the fiscal year ended June 30, 2000, and written representations that no other reports were required, we believe that each person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of our common stock complied with all Section 16(a) filing requirements during such fiscal year or prior fiscal years. 79 81 ITEM 11. EXECUTIVE COMPENSATION SUMMARY OF CASH AND OTHER COMPENSATION The following table sets forth the total compensation received for services rendered to us in all capacities for the fiscal years ended June 30, 1998, 1999, and 2000 by our Chief Executive Officer and our three most highly compensated executive officers who were in office at June 30, 2000. The table also sets forth this information for our former Chief Executive Officer and two other executive officers who were no longer with our company at June 30, 2000, whose aggregate cash compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------------------ ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER NAME AND PRINCIPAL ------------------------------- STOCK UNDERLYING COMPENSATION POSITION AT YEAR-END YEAR SALARY($)(1) BONUS($) AWARD(S)($) OPTIONS(#) ($)(2) - -------------------- ---- ------------ -------- ----------- ---------- ------------ Jack E. Brucker................................ 2000 $314,246 $ -- $ -- 21,000 $ 3,200 Chief Executive Officer 1999 $250,000 $25,000 $45,000(4) 39,000 $ 65,559(5) and President(3) 1998 $139,423 -- $ -- 21,000 $ 10,109(5) Dr. Michel Sucher.............................. 2000 $184,231 $ -- $ -- 12,500 $ 3,200 Senior Vice President and 1999 $175,000 $ -- $ -- 21,600 $ 3,200 Chief Medical Officer(6) 1998 $171,595 $29,837 $ -- 18,000 $ 3,200 Robert B. Hillier.............................. 2000 $170,385 $ -- $ -- 12,500 $ 2,008 Senior Vice President and 1999 $137,500 $ -- $ -- 21,600 $ 2,600 Chief Administrative Officer(6) 1998 $ 87,500 $ -- $ -- 18,000 $ -- John S. Banas III.............................. 2000 $126,438 $ -- $ -- 17,500 $ -- Senior Vice President and General Counsel(6) John B. Furman................................. 2000 $392,500 $ -- $ -- 122,500 $ -- Former Chief Executive Officer 1999 $239,270 $ -- $ -- 148,005 $ 80,769(8) and President(7) Robert E. Ramsey............................... 2000 $150,714 $ -- $ -- 21,000 $ 2,374 Former Executive 1999 $238,460 $ -- $ -- 41,250 $ -- Vice President(9) 1998 $201,154 $ -- $ -- 20,000 $ -- Mark E. Liebner................................ 2000 $262,154(11) $ -- $ -- 20,000 $106,282(12) Former Senior Vice President, 1999 $239,461 $ -- $ -- 33,600 $ 3,200 Chief Financial Officer and 1998 $192,706 $ -- $ -- 20,000 $ 3,200(13) Treasurer(10)
- --------------- (1) Other annual compensation did not exceed the lesser of $50,000 or 10% of the total salary and bonus for any of the officers listed. (2) Unless otherwise indicated, consists of company-matching contributions to our 401(k) plan paid in cash. (3) Mr. Brucker became our President and Chief Executive Officer in February 2000. From December 1997 until February 2000, Mr. Brucker served as our Senior Vice President and Chief Operating Officer. (4) Represents fair market value of restricted stock grants that vested in December 1998. (5) We paid Mr. Brucker $10,109 in fiscal 1998 and $62,359 in fiscal 1999 for relocation costs, including moving expenses and closing costs on the sale of his former residence. (6) Dr. Sucher and Mr. Hillier became executive officers of our company during February 2000. Mr. Hillier joined our company during October 1997, and Mr. Banas joined our company in September 1999. (7) Mr. Furman served as our Chief Executive Officer and President from August 1998 until his resignation in January 2000. We will continue to compensate Mr. Furman pursuant to the terms of his employment agreement through January 2002. 80 82 (8) Represents additional compensation pursuant to an employment agreement with Mr. Furman. (9) Mr. Ramsey resigned as our Executive Vice President and Director during January 2000. (10) Mr. Liebner resigned as our Senior Vice President -- Chief Financial Officer & Treasurer during March 2000. (11) Includes $73,846 paid to Mr. Liebner pursuant to his severance agreement. (12) Represents forgiveness of a note receivable from Mr. Liebner in connection with his resignation. (13) Includes 449 shares of common stock contributed to our 401(k) plan on September 1, 1998 as our matching contribution. OPTION GRANTS The following table represents the options granted to the listed officers in the last fiscal year and the value of the options. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ---------------------------------------------------------------------------- NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE OR GRANT DATE OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE GRANTED(#)(1) FISCAL YEAR ($/SH) DATE $(2) ------------- ------------- ----------- ---------- ------------- Jack E. Brucker....................... 21,000 3.1% $7.813 7/29/09 $ 70,546.70 Dr. Michael Sucher.................... 12,500 1.9% $7.813 7/29/09 $ 41,991.40 Robert B. Hillier..................... 12,500 1.9% $7.813 7/29/09 $ 41,991.40 John S. Banas III..................... 17,500 2.6% $7.688 9/20/09 $ 54,163.65 John B. Furman........................ 22,500 3.4% $7.813 7/29/09 $ 75,585.75 100,000(3) 15.0% $7.813 7/29/09 $261,030.00 Robert E. Ramsey...................... 21,000(4) 3.1% $7.813 7/29/09 $ 70,546.70 Mark E. Liebner....................... 20,000(5) 3.0% $7.813 7/29/09 $ 67,186.65
- --------------- (1) Except as otherwise indicated, all of the options vest and become exercisable as follows: one-third at grant date in July 1999, one-third in July 2000, and one-third in July 2001. (2) The hypothetical present value of the options at the date of grant was determined using the Black-Scholes option pricing model. The Black-Scholes model estimates the present value of an option by considering a number of factors, including the exercise price of the option, the volatility of our common stock, the dividend rate, the term of the option, the time it is expected to be outstanding, and interest rates. The Black-Scholes values were calculated using the following assumptions: (a) a risk-free interest rate of 6.26%; (b) a dividend yield of 0.00%; (c) an expected life of the option after vesting of 2.35 years; and (d) an expected volatility of 67.51%. (3) Mr. Furman resigned in January 2000. The options became exercisable upon their grant in July 1999, and will remain exercisable through January 2003 pursuant to the terms of the options. (4) Mr. Ramsey resigned in January 2000, and all of these options have expired pursuant to the terms of the options. (5) Mr. Liebner resigned in March 2000, and 13,333 of such options which were unvested expired pursuant to the terms of the options. The remaining 6,667 options will remain exercisable through June 2001 unless previously exercised. 81 83 OPTION HOLDINGS The following table represents certain information respecting the options held by the listed officers as of June 30, 2000. None of the officers listed exercised options during fiscal 2000. FISCAL YEAR-END OPTIONS HELD
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FISCAL YEAR-END(#)(1) ---------------------------- NAME EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- Jack E. Brucker............................................. 62,334 18,666 Dr. Michel Sucher........................................... 86,420 11,666 Robert B. Hillier........................................... 40,434 11,666 John S. Banas III........................................... 9,166 8,334 John B. Furman.............................................. 250,339 20,166 Robert E. Ramsey............................................ 26,250 -- Mark E. Liebner............................................. 185,780 --
- --------------- (1) None of the unexercised options listed had any value at fiscal year-end, because the exercise price of all of the options held by the listed officers were greater than $1.63, which was the closing sales price of our common stock as quoted on the Nasdaq National Market on June 30, 2000. EMPLOYMENT AGREEMENTS In February 2000, Jack E. Brucker became our President and Chief Executive Officer. We entered into an employment agreement with Mr. Brucker for a two-year term expiring February 2002, renewable for one-year periods thereafter. Under Mr. Brucker's employment agreement, he is to receive a base salary of $436,000. In connection with the agreement, during August 2000 we granted Mr. Brucker stock options to purchase 200,000 shares of our common stock. The agreement provides that 50,000 of the options will vest upon grant, and the remaining options shall vest ratably each April 20 beginning 2001. Mr. Brucker's employment agreement provides that should we terminate his employment agreement without cause, or should he terminate his employment agreement for good reason, he will receive his base salary and other benefits provided by the agreement for two years. In the event of such termination, if Mr. Brucker elects to solicit clients, employees, or otherwise competes with us at any time following the anniversary of his termination of employment, we will no longer be obligated to pay Mr. Brucker any severance benefits. Employment agreements with Dr. Sucher and Messrs. Hillier and Banas expire in December 2000. Subject to annual review of the Human Resources/Compensation/Organization Committee of the Board of Directors, each agreement provides for a base salary (which currently are as follows: Dr. Sucher $195,000; Mr. Hillier $200,000; and Mr. Banas, $180,000), and entitles the executive to participate in stock option plans and other generally available benefit programs. Each executive participates in our management incentive program that provides bonuses to executive officers and other members of management based upon our achieving certain financial and operating goals as well as the achievement of individual objectives established for each participant. Each employment agreement generally provides for each executive to receive certain severance benefits if (i) we decide not to renew the agreement for an additional term; (ii) we terminate the executive without cause; (iii) the executive terminates the agreement for good reason; or (iv) the executive becomes disabled and is unable to perform his duties. Each of the employment agreements generally provides that if we decide not to renew the employment agreement, the executive will receive his base salary plus certain benefits for one year. Should we terminate the executive without cause, the executive will receive his base salary plus certain benefits for the greater of (i) the remainder of the contract term or (ii) one year. If the executive terminates the agreement for good reason, the agreement provides that the executive will receive his base salary plus certain benefits for one year. Should the executive become disabled and unable to perform his duties, we will continue to pay the executive's salary for a period of six months. 82 84 In addition, each agreement provides for us to indemnify the executive for certain liabilities arising from actions taken within the scope of employment. Each employment agreement contains restrictive covenants pursuant to which the executive has agreed not to compete with us or to solicit any of our clients or employees of for a period of two years after the executive's employment ceases. Change of control agreements entered into by Messrs. Brucker, Sucher, Hillier, and Banas provide that in the event of a change of control and the surviving entity or individuals in control do not offer such persons employment, terminate their employment, or such persons terminate their employment for good reason, such persons will receive one and one-half years' severance pay (two years in the case of Mr. Brucker), plus certain benefits, including the acceleration of exercisability of their stock options or the payment of the value of such stock options in the event they are not accelerated or replaced with comparable options. For purposes of the change of control agreements, "good reason" includes a reduction of their respective duties and/or salary or the surviving entity's failure to assume their respective employment and change of control agreements. For purposes of the change of control agreements, a "change of control" includes (i) the acquisition of beneficial ownership by certain persons, acting alone or in concert with others, of 30% or more of the combined voting power of our then outstanding voting securities; (ii) during any two-year period, our Board members at the beginning of such period cease to constitute at least a majority thereof (except that any new Board member approved by at least two-thirds of the Board members then still in office, who were directors at the beginning of such period, is considered to be a member of the current Board); or (iii) approval by our stockholders of certain reorganizations, mergers, consolidations, liquidations, or sales of all or substantially all of our assets. Mr. Furman's and Mr. Liebner's change of control agreements terminated upon their resignation. During January 2000, John Furman resigned as our President and Chief Executive Officer. Pursuant to the terms of his employment agreement, we will continue to compensate Mr. Furman his base salary of $420,000 through January 2002. In connection with the agreement, during July 1999 we granted Mr. Furman stock options to purchase 100,000 shares of our common stock. These stock options were fully vested and exercisable on the date of grant, and will remain exercisable through January 2003. In addition, any unvested options held by Mr. Furman upon his resignation immediately vested and will remain exercisable through January 2002. Mr. Liebner resigned as our Senior Vice President, Chief Financial Officer, and Treasurer in March 2000. We entered into a release and settlement agreement with Mr. Liebner upon his resignation under which we will pay Mr. Liebner $240,000 through March 2001. In connection with the agreement, Mr. Liebner released our company from all claims that he may have against our company. In conjunction with his employment with our company, Mr. Liebner entered into a Conditional Stock Grant Agreement. The stock grant agreement provided for the issuance of shares of common stock, subject to certain transfer and forfeiture restrictions. The release and settlement agreement did not effect the terms of the stock grant agreement. We compensated Mr. Ramsey under an employment agreement with substantially similar terms as those described above. Mr. Ramsey's base salary during fiscal 2000 was $257,800. Because this agreement was entered into as part of our acquisition of his companies, the Southwest companies, the agreement did not provide for a renewal term or severance benefits upon termination after June 2000. Mr. Ramsey resigned as our Executive Vice President in January 2000, and pursuant to his employment agreement, we paid Mr. Ramsey his base salary through June 2000. EMPLOYEE STOCK OWNERSHIP PLAN The ESOP is a tax-qualified employee stock ownership trust for the benefit of our current and former employees age 21 or over. The ESOP was established in 1978 through the purchase from Louis A. Witzeman, our founder, of approximately 63% of our then outstanding common stock in exchange for real estate and a note in the principal amount of $728,000, with interest at 10% per annum, which note has been paid in full. From time to time since the establishment of the ESOP, we have contributed newly issued shares and treasury shares of common stock and cash as employer contributions. The ESOP has used these cash contributions to pay the note to Mr. Witzeman and to repurchase shares of common stock distributed from the ESOP. No contributions were made for the fiscal years ended June 30, 1998 and 1999. We contributed $250,000 to the ESOP during fiscal year ended 2000. As of September 30, 2000, there were approximately 5,300 participants in the ESOP. David Stevens and Barry Landon are the Trustees of the ESOP. Our ESOP Advisory Committee is responsible for directing the Trustee in the general administration of the ESOP. With respect to the shares of our common stock held by 83 85 the ESOP, the participants in the ESOP are authorized to control how votes are cast by giving instructions to the Trustee; however, if and to the extent that the Trustee does not receive participant instructions, the Trustee will vote the shares in accordance with instructions from our Advisory Committee. Each participant may control the voting of such shares in the proportion that the value of that participant's benefit in the ESOP fund bears to the total value of all benefits therein. The ESOP permits any fully vested employee to receive an in-service distribution of up to 50% of his or her account balance while employed by us. An in-service distribution results in deferment of the receipt of the balance of such employee's account until three years after the employee's termination of employment other than as a result of the employee's retirement at the ESOP's normal retirement age, disability, or death. Participants in the ESOP otherwise may only request distribution of their ESOP account balance in shares of common stock under certain circumstances including termination of employment, early retirement, retirement, death, or disability. In fiscal 2000, 56,266 shares were so distributed. In addition, upon completion of 10 plan years of service and attainment of age 55, participants have the right to direct the investment of 25% of their accounts into other diversified investments. In July 1999, our board of directors approved an amendment to "freeze" the ESOP, effective June 30, 1999, with respect to all employees other than members of collective bargaining agreements that include participation in the ESOP. All participants' accounts were fully vested as of June 30, 1999. We do not intend to make any contributions to the ESOP in the future. 1989 STOCK OPTION PLAN The 1989 Stock Option Plan provides for the granting of nonqualified stock options. Options may be issued to our key employees and directors. There are currently outstanding options to acquire 139,000 shares of our common stock under the 1989 Plan. No additional options will be granted under the 1989 Plan. The expiration date, maximum number of shares purchasable, and the other provisions of the options, including vesting provisions, were established at the time of grant. Options were granted for terms of up to 10 years and become exercisable in whole or in one or more installments at such time as was determined by the plan administrator upon the grant of the options. Exercise prices of options are equal to the fair market value of our common stock at the time of the grant. In the event of a change of control of our company, all options will be terminated and the optionholder must be paid in cash the difference between the fair market value of his or her options and their exercise price. 1992 STOCK OPTION PLAN General The 1992 Plan, as amended, is divided into two programs: the Discretionary Grant Program and the Automatic Option Program. The Discretionary Grant Program provides for the granting of options to acquire our common stock, the direct granting of our common stock, the granting of stock appreciation rights, or SARs, and the granting of other cash awards. Options and awards under the 1992 Plan may be issued to executives, key employees, and others providing valuable services to us. The options issued may be incentive stock options or nonqualified stock options. We believe that the Discretionary Grant Program represents an important factor in attracting and retaining executives and other key employees and constitutes a significant part of the compensation program for employees. The Automatic Option Program provides for the automatic grant of options to acquire our common stock. Automatic options are granted to members of our Board of Directors who are not employed by us. We believe that the Automatic Option Program promotes our interests by providing such directors the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in our company and an increased personal interest in our continued success and progress. If any change is made in the stock subject to the 1992 Plan, or subject to any option or SAR granted under the 1992 Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, split-up, combination of shares, exchange of shares, change in corporate structure, or otherwise), the 1992 Plan provides that appropriate adjustments will be made as to the maximum number of shares subject to the 1992 Plan and the number of shares and exercise price per share of stock subject to outstanding options. An optionholder will not have any of the rights of a stockholder with respect to optioned shares until the holder exercises the option. 84 86 Eligibility and Administration Options and awards may be granted only to persons who at the time of grant are either (i) our key personnel (including officers and directors), or (ii) consultants and independent contractors who provide valuable services to us. Options that are incentive stock options may be granted only to our key personnel who are also our employees. The eligible persons under the Discretionary Grant Program are divided into two groups, and there will be a separate administrator for each group. One group consists of eligible persons who are our executive officers and directors and all persons who own 10% or more of our issued and outstanding stock. The power to administer the Discretionary Grant Program with respect to those persons may be vested either with the Board of Directors or with the Senior Committee, a committee comprised of two or more "Non-Employee Directors" (as that term is defined in Rule 16(b)(3)(i) under the 1934 Act) who are appointed by the Board. The Senior Committee, in its sole discretion, may require approval of the Board of Directors for specific grants of options or awards under the Discretionary Grant Program. Members of the Senior Committee may participate in the Discretionary Grant Program as permitted by the rules. The second group consists of eligible persons who are not our executive officers or directors and those who do not own 10% or more of our issued and outstanding stock. The power to administer the Discretionary Grant Program with respect to the second group of eligible persons may be vested exclusively with our Board of Directors or with a committee of two or more directors. Each plan administrator will determine (a) which of the eligible persons in its group will be granted options and awards, (b) the amount and timing of such grant, and (c) such other terms and conditions as may be imposed by the plan administrator consistent with the 1992 Plan. To the extent that granted options are incentive stock options, the terms and conditions of those options must be consistent with the qualification requirements set forth in the Internal Revenue Code. The maximum number of shares of stock with respect to which options or awards may be granted to any employee during the term of the 1992 Plan may not exceed 25% of the shares of stock covered by the 1992 Plan. Exercise of Options The expiration date, maximum number of shares purchasable, and other provisions of the options, including vesting provisions, are established at the time of grant. Options may be granted for terms of up to 10 years. Options vest and thereby become exercisable in whole or in one or more installments at such time as may be determined by the plan administrator upon the grant of the options. However, a plan administrator has the discretion to provide for the automatic acceleration of the vesting of any options or awards granted under the Discretionary Grant Program in the event of a "change in control" as defined in the 1992 Plan. The exercise prices of options are determined by the plan administrator, but if the option is intended to be an incentive stock option, it may not be less than 100% (110% if the option is granted to a stockholder who at the time the option is granted owns stock possessing more than 10% of the total combined voting power of all classes of our stock) of the fair market value of our common stock at the time of the grant. Options or awards granted under the Discretionary Grant Program may be assigned, encumbered, or otherwise transferred by the optionholder or grantee if specifically allowed by the plan administrator upon the grant of the option or award. If any optionholder ceases to be employed by us for a reason other than disability or death, the optionholder or the optionholder's successor may, within three months after the termination of employment, exercise some or all of the vested incentive stock options held by the employee. If the optionholder ceases to be employed due to disability, the three-month period is extended to 12 months. However, termination for cause terminates all options held by the employee. Under the 1992 Plan, options that are not incentive stock options and which are outstanding at the time an optionholder's service to our company will terminate three months after the date of termination of service, unless otherwise determined by the plan administrator. If the service to our company terminates by reason of the optionholder's permanent disability, however, the options will terminate 12 months after the date of termination of service, unless otherwise determined by the plan administrator. However, if the optionholder is discharged for cause, all options held by the optionholder will terminate immediately. 85 87 Awards The plan administrators also may grant awards to eligible persons under the 1992 Plan. Awards may be granted in the form of SARs, stock awards, or cash awards. Through June 30, 2000, stock awards in the amount of 35,916 shares have been granted under the 1992 Plan. Awards granted in the form of SARs entitle the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of common stock from the price stated in the award agreement to the market value of the common stock on the date first exercised or surrendered. The plan administrators may determine, consistent with the 1992 Plan, such terms, conditions, restrictions, and limitations, if any, on any SARs. Awards granted in the form of stock awards entitle the recipient to receive common stock directly. Awards granted in the form of cash entitle the recipient to receive direct payments of cash depending on the market value or the appreciation of the common stock or our other securities. The plan administrators may determine such other terms, conditions, and limitations, if any, on any awards. The 1992 Plan provides that it is not intended to be the exclusive means by which we may issue options or warrants to acquire our common stock, stock awards, or any other type of award. To the extent permitted by applicable law, we may issue any other options, warrants, or awards other than under the 1992 Plan without stockholder approval. Terms and Conditions of Automatic Options The 1992 Plan provides that (i) each year at the meeting of the Board of Directors held immediately after the annual meeting of stockholders, each eligible director will be granted an automatic option to acquire 2,500 shares of common stock (except that the Chairman of the Board will receive an automatic option to acquire 5,000 shares if the chairman is an eligible director), and (ii) each year each eligible director will receive an automatic option, or Formula Option, to acquire a number of shares equal to 1,000 shares for each $0.05 increase of earnings per share from the prior fiscal year, subject to a maximum of 5,000 shares of stock per eligible director. Automatic options (other than the Formula Options) will vest one day prior to the next annual meeting of stockholders after the applicable grant date unless the next annual meeting of stockholders occurs less than six months after the applicable grant date, in which case the automatic option will vest on the first anniversary of the applicable grant date. Each Formula Option will vest on the first anniversary of the applicable grant date. The 1992 Plan provides for the grant to new eligible directors of automatic options to acquire 10,000 shares of common stock on the date of their first appointment or election to the Board. The automatic options granted to new eligible directors vest one day prior to the next annual meeting of stockholders that occurs after the applicable grant date unless the next annual meeting of stockholders occurs less than six months after the applicable grant date, in which case the automatic options become exercisable and vest on the first anniversary of the applicable grant date. An eligible director is not eligible to receive the 2,500 share automatic option or the Formula Option if that grant date is within 30 days of such eligible director receiving the 10,000 share automatic option. The 1992 Plan provides that, in the event of a change in control, all unvested automatic options will automatically accelerate and immediately vest so that each outstanding automatic option will become fully exercisable, immediately prior to the effective date of such change in control. The exercise price per share of stock subject to each automatic option is equal to the 100% of the fair market value per share on the date of the grant of the automatic option. Each automatic option expires on the tenth anniversary of the date of grant. Eligible directors also may be eligible to receive options or awards under the Discretionary Grant Program or option grants or direct stock issuances under any four other plans. Cessation of service on the Board terminates any automatic options for shares that were not vested at the time of such cessation. Automatic options are nontransferable other than by will or the laws of descent and distribution on the death of the optionholder and, during the lifetime of the optionholder, are exercisable only by such optionholder. Duration and Modification The 1992 Plan will remain in force until November 5, 2002. Our Board of Directors at any time may amend the 1992 Plan except that, without the approval by the affirmative vote of the holders of a majority of the outstanding shares of our 86 88 common stock, the Board of Directors may not (i) increase, except in the case of certain organic changes to our company, the maximum number of shares of common stock subject to the 1992 Plan, (ii) reduce the exercise price at which options may be granted or the exercise price for which any outstanding option may be exercised, (iii) extend the term of the 1992 Plan, (iv) change the class of persons eligible to receive options or awards under the 1992 Plan, or (v) materially increase the benefits accruing to participants under the 1992 Plan. In addition, the Board may not, without the consent of the optionholder, take any action that disqualifies any option previously granted under the 1992 Plan for treatment as an incentive stock option or which adversely affects or impairs the rights of the optionholder of any outstanding option. Despite the foregoing, the Board of Directors may amend the 1992 Plan from time to time as it deems necessary in order to meet the requirements of any amendments to Rule 16b-3 under the 1934 Act without the consent of our stockholders. Federal Income Tax Consequences for Stock Options Certain options granted under the 1992 Plan will be intended to qualify as incentive stock options under Code Section 422. Accordingly, there will be no taxable income to an employee when an incentive stock option is granted to him or her when that option is exercised. The amount by which the fair market value of the shares at the time of exercise exceeds the option price generally will be treated as an item of preference in computing the alternate minimum taxable income of the optionholder. If an optionholder exercises an incentive stock option and does not dispose of the shares within either two years after the date of the grant of the option or one year after the date the shares were transferred to the optionholder, any gain realized upon disposition will be taxable to the optionholder as a capital gain. If the optionholder does not satisfy the applicable holding periods, however, the difference between the option price and the fair market value of the shares on the date of exercise of the option will be taxed as ordinary income, and the balance of the gain, if any, will be taxed as capital gain. If the shares are disposed of before the expiration of the one-year or two-year periods and the amount realized is less than the fair market value of the shares at the date of exercise, the employee's ordinary income is limited to the amount realized less the option exercise price paid. We will be entitled to a tax deduction only to the extent the optionholder has ordinary income upon the sale or other disposition of the shares received when the option was exercised. Certain other options issued under the 1992 Plan, including options issued automatically to the non-employee members of the Board of Directors, will be nonqualified options. The income tax consequences of nonqualified options will be governed by Code Section 83. Under Code Section 83, the excess of the fair market value of the shares of the common stock acquired pursuant to the exercise of any option over the amount paid for such stock, or Excess Value, must be included in the gross income of the optionholder in the first taxable year in which the common stock acquired by the optionholder is not subject to a substantial risk of forfeiture. In calculating Excess Value, fair market value will be determined on the date that the substantial risk of forfeiture expires, unless a Section 83(b) election is made to include the Excess Value in income immediately after the acquisition, in which case fair market value will be determined on the date of the acquisition. Generally, we will be entitled to a federal income tax deduction in the same taxable year that the optionholder recognizes income. We will be required to withhold income tax with respect to income reportable pursuant to Code Section 83 by an optionholder. The basis of the shares acquired by an optionholder will be equal to the option price of those shares plus any income recognized pursuant to Code Section 83. Subsequent sales of the acquired shares will produce capital gain or loss. Such capital gain or loss will be long term if the stock has been held for one year from the date of the substantial risk of forfeiture lapsed, or, if a Section 83(b) election is made, one year from the date the shares were acquired. 2000 NON-QUALIFIED STOCK OPTION PLAN Under our 2000 Non-Qualified Stock Option Plan, which was approved by our board of directors and was effective on August 11, 2000, 2,000,000 shares of Common Stock are reserved for issuance upon exercise of stock options granted under the plan. The plan is designed as a means to retain and motivate qualified and competent persons who provide services to our company. Our board of directors or a committee of outside directors appointed by our board will administer and interpret the plan. The board of directors and the committee each are authorized to grant options to all eligible employees, consultants, and independent contractors of our company; provided, however, that our directors and officers will not be eligible to receive options under the plan. In the event of a change in the common stock due to a stock dividend or recapitalization, the plan provides for appropriate adjustment in the number of shares available for grant under the plan and the number of shares and the exercise price per share under any option then outstanding under the plan, so that the 87 89 same percentage of our issued and outstanding shares shall remain subject to being optioned under the plan or subject to purchase at the same aggregate exercise price under any such outstanding option, as applicable. Unless otherwise provided in any option, the committee or the board of directors may change the option price and/or number of shares under any outstanding option when, in their discretion, such adjustment becomes appropriate so as to preserve but not increase benefits under the plan. The aggregate number of shares subject to options granted to any one optionee under the plan may not exceed 2,000,000 subject to adjustment as described above. The plan provides for the granting of only nonqualified stock options. Options may generally be granted under the plan on such terms and at such prices as determined by the committee or the board of directors. Each option is exercisable after the period or periods specified in the option agreement, but no option may become exercisable after the expiration of ten years from the date of grant. The board of directors or committee may accelerate the exercisability or vesting of any option or shares previously acquired by the exercise of any options, and, in the event of a change in control (as defined in the plan), unless otherwise provided in the option, each outstanding option will become immediately exercisable in full. Nonqualified stock options granted under the plan are not transferable unless the prior written consent of the committee or the board of directors is obtained and such transfer does not violate Rule 16b-3 under the Securities Exchange Act of 1934. The committee or the board of directors may permit the option price to be paid by - cash, - certified or official bank check, - personal check if accepted by the committee or the board of directors, - money order, - shares of common stock that have been held for at least 6 months (or such other shares as we determine will not cause us to recognize for financial accounting purposes, a charge for compensation expense), - withholding of shares of common stock, - any cashless exercise procedure approved by the committee or the board of directors, - other consideration deemed appropriate by the committee or the board of directors, or - a combination of the above. The plan also authorizes us to make or guarantee loans to optionees to enable them to exercise their options. Such loans must - provide for recourse to the optionee, - bear interest at the prime rate of our principal lender, - be secured by the shares of common stock purchased, and - contain such other terms as the committee or the board of directors in its sole discretion shall reasonably require. The board of directors or the committee has the authority to amend or terminate the plan or any options, provided that no such action may substantially impair the rights or benefits of the holder of any outstanding option without the consent of such holder, and provided further that certain amendments to the plan are subject to stockholder approval. Unless terminated sooner, the plan will continue in effect until all options granted thereunder have expired or been exercised. EMPLOYEE STOCK PURCHASE PLAN We have adopted an Employee Stock Purchase Plan, or ESPP, which allows our eligible employees to purchase shares of common stock at semi-annual intervals through periodic payroll deductions. The ESPP is intended to promote superior levels of performance from, and to encourage stock ownership by, our eligible employees by increasing their interest in our success. The ESPP is designed to meet this goal by offering financial incentives for employees to purchase our common stock, thereby increasing the interest of employees in pursuing our long-term growth, profitability, and financial success. The Board of Directors has reserved 450,000 shares of common stock for this purpose. The purchase 88 90 price per share is the lower of (i) 85% of the closing price of our common stock on the offering commencement date, or (ii) 85% of the closing price of our common stock on the offering termination date. The purchase price is to be paid through periodic payroll deductions not to exceed 10% of the participant's earnings due each semi-annual period of participation within the offering period. However, no participant may purchase more than $25,000 worth of common stock annually. As of October 25, 2000, we had issued 353,580 shares of common stock under the ESPP. The purchase right of a participant will terminate automatically in the event the participant ceases to be an employee of ours, and any payroll deductions collected from such individual during the semi-annual period in which such termination occurs will be refunded. However, in the event of the participant's disability or death, such payroll deduction may be applied to the purchase of the common stock on the next semi-annual purchase date. The ESPP provides for annual offerings through the end of July 2003. 401(K) PLAN We have a 401(k) contributory retirement plan for the majority of our employees. The 401(k) plan is designed to provide tax-deferred income to our employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The 401(k) plan provides that each participant may contribute up to 15% of his or her salary, not to exceed the statutory limit. Matching contributions may be made at the discretion of the Board of Directors. We have historically elected to make a fixed matching contribution to each participant's account of up to 2% of total annual cash compensation received by respective participants. An additional discretionary matching contribution may also be made in an amount equal to a percentage determined by the Board of Directors of the contribution made by participants. Discretionary matching contributions vest over a period of seven years. All contributions by participants and our fixed matching contributions vest immediately. Under the terms of the 401(k) plan, we also may make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of his or her funds among certain named plans. Our contributions may be made in shares of our common stock. Upon death, disability, retirement, or the termination of employment, participants may elect to receive periodic or lump sum payments. Additionally, amounts may be withdrawn in cases of demonstrated hardship. Amounts contributed by us to the 401(k) plan for certain executive officers are set forth in the Summary Compensation Table under the caption "Executive Compensation." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended June 30, 2000, our Human Resource/Compensation/Organization Committee consisted of Messrs. Walker, Turner, and Witzeman and Ms. Carpenter, currently directors of the company. 89 91 ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND OFFICERS The following table sets forth certain information with respect to beneficial ownership of our common stock on October 25, 2000 by (i) each director; (ii) the executive officers set forth in the Summary Compensation Table under the section entitled "Executive Compensation;" (iii) all of our directors and executive officers as a group; and (iv) each person known by us to be the beneficial owner of more than 5% of our common stock.
AMOUNT BENEFICIALLY OWNED NAME OF BENEFICIAL OWNER (1)(2)(3) PERCENT(2) - ------------------------ ------------ ---------- DIRECTORS AND NAMED EXECUTIVE OFFICERS: Jack E. Brucker............................................. 124,000(4) * Dr. Michel Sucher........................................... 153,005(5) 1.0 Robert B. Hillier........................................... 72,934(6) * John S. Banas III........................................... 63,333(7) * Cor J. Clement.............................................. 33,250(8) * Louis G. Jekel.............................................. 149,299(9) 1.0 William C. Turner........................................... 35,500(10) * Henry G. Walker............................................. 22,500(11) * Mary Anne Carpenter......................................... 20,000(12) * Louis A. Witzeman........................................... 154,648(13) 1.0 John B. Furman.............................................. 265,005(14) 1.8 Robert E. Ramsey............................................ 519,773(15) 3.5 Mark E. Liebner............................................. 247,499(16) 1.7 Executive officers and directors as a group (10 persons).... 828,469 5.4 5% STOCKHOLDERS: ESOP........................................................ 848,330(17) 5.4 Mark S. Howells............................................. 1,000,000(18) 6.8
- --------------- * Less than 1% (1) Except as indicated, and subject to community property laws when applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. (2) The percentages shown are calculated based upon 14,626,336 shares of common stock outstanding on October 25, 2000. The number and percentages shown include the shares of common stock actually owned as of October 25, 2000 and the shares of common stock that the identified person or group had a right to acquire within 60 days after October 25, 2000. In calculating the percentage of ownership, shares are deemed to be outstanding for the purpose of computing the percentage of shares of common stock owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of shares of common stock owned by any other stockholders. (3) Excludes the following fully vested shares of common stock held by the ESOP for the benefit of the following individuals: four shares for Mr. Brucker, 1,097 shares for Dr. Sucher, two shares for Mr. Hillier, 5,664 shares for Mr. Jekel, 1,035 shares for Mr. Liebner, and four shares for Mr. Ramsey. These persons have sole voting power with respect to the shares held in their account by the ESOP. (4) Represents shares of common stock issuable upon exercise of stock options. (5) Includes 118,920 shares of common stock issuable upon exercise of stock options. (6) Represents shares of common stock issuable upon exercise of stock options. (7) Represents shares of common stock issuable upon exercise of stock options. (8) Includes 21,250 shares of common stock issuable upon exercise of stock options. 90 92 (9) Includes 75,000 shares of common stock issuable upon exercise of stock options; 3,175 shares held by the Louis G. Jekel Charitable Remainder Trust UA dated March 1, 1996; and 71,124 shares held by a partnership of which Mr. Jekel is the beneficial owner. (10) Includes 27,500 shares of common stock issuable upon exercise of stock options. (11) Represents shares of common stock issuable upon exercise of stock options. (12) Represents shares of common stock issuable upon exercise of stock options. (13) Includes 36,062 shares held by the Louis A. Witzeman, Jr. Family Investment Limited Partnership, of which 6,650 shares are held for the benefit of other family members. Also includes 69,375 shares of common stock issuable upon the exercise of stock options. (14) Includes 263,005 shares of common stock issuable upon exercise of stock options. (15) Includes 26,250 shares of common stock issuable upon exercise of stock options. Does not include 315,253 shares held by the Ramsey SW Revocable Trust dated August 31, 1999, Robert L'Ecuyer, Trustee, for which Mr. Ramsey disclaims beneficial ownership. (16) Includes 185,780 shares of common stock issuable upon exercise of stock options. (17) Represents 848,330 shares of common stock owned by the Rural/Metro Corporation Employee Stock Ownership Plan. Participants under the ESOP have voting power as to shares allocated to their account and the ESOP trustee has voting power as to unallocated shares and as to any shares for which participants have chosen not to vote. The ESOP has sole dispositive power over all of these shares of common stock. The address of the Rural/Metro Corporation Employee Stock Ownership Plan is c/o Rural/Metro Corporation, 8401 East Indian School Road, Scottsdale, Arizona 85251. (18) Represents 1,000,000 shares of common stock beneficially owned by Mark S. Howells. Mr. Howells has sole voting and dispositive power of all of such shares. The address of Mr. Howells is c/o Arizona Securities Group, 2390 East Camelback Road, Suite 203, Phoenix, Arizona 85016. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We paid approximately $96,000 during the year ended June 30, 2000 for legal services to Jekel & Howard, of which Mr. Jekel is a principal. Mr. Jekel is a participant in our ESOP. We paid Mr. Jekel $32,000 during the year ended June 30, 2000 for additional services rendered in connection with our forestry fire fighting services. We paid approximately $46,000 during the year ended June 30, 2000 to Louis A. Witzeman under leases for five fire and ambulance stations. These leases can be cancelled by us at any time. Mr. Witzeman received $85,000 during the fiscal year ended June 30, 2000 for fire protection and EMS advisory and consulting services and for serving on the Board of Directors. We also provide Mr. Witzeman with an automobile for personal use. We engaged Mr. Bolin, our former President, as a special consultant to our company through January 2002. The consulting agreement entitles Mr. Bolin to participate in any benefit plans that we maintain for our employees. We paid Mr. Bolin approximately $118,000 under this consulting agreement. We engaged William R. Crowell, our former Senior Vice President, as a consultant to our company through February 2001. Under the consulting agreement, we will pay Mr. Crowell consulting fees of $75,000 in three equal monthly installments on June 1, July 1, and August 1, 2000. Pursuant to the consulting agreement, we also granted Mr. Crowell options to purchase 8,000 shares of common stock. We paid approximately $1,143,000 during the year ended June 30, 2000 to companies owned by Robert E. Ramsey under leases for various offices, ambulance stations, furniture, and equipment acquired in connection with the acquisition of his companies. In connection with Mr. Liebner's resignation from our company in March 2000, we forgave a note receivable from Mr. Liebner in the amount of approximately $123,500. We issued this note to Mr. Liebner in July 1998 in connection with his income tax liability incurred from his stock grant agreement. We believe that all of the related party transactions listed above were provided on terms no less favorable to us than could have been obtained from unrelated firms or third parties. All future transactions between us and our officers, directors, and principal stockholders are expected to be on terms no less favorable to us than could be obtained from unaffiliated persons and will require the approval of our independent directors. 91 93 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules
PAGE ---- (i) Financial Statements (1) Report of Independent Public Accountants.................... 45 (2) Consolidated Financial Statements Consolidated Balance Sheets at June 30, 2000 and 1999............................ 46 Consolidated Statements of Income for the Years Ended June 30, 2000, 1999, and 1998.................................... 47 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2000, 1999, and 1998........... 48 Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999, and 1998............................... 49 Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2000 and 1999.......................... 50 Notes to Consolidated Financial Statements.................. 51 (ii) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts............... 77 All other schedules have been omitted on the basis of immateriality or because such schedules are not otherwise applicable
(b) Reports on Form 8-K: Form 8-K filed April 14, 2000 relating to Provisional Wavier and Standstill Agreement dated as of March 14, 2000 and the First Amendment to Provisional Waiver and Standstill Agreement dated as of April 13, 2000 (c) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 2 Plan and Agreement of Merger and Reorganization, dated as of April 26, 1993(1) 3.1(a) Second Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on January 18, 1995(6) 3.1(b) Rights Agreement dated as of August 23, 1995 between the Registrant and American Securities Transfer, Inc., the Rights Agent(7) 3.2 Amended and Restated Bylaws of the Registrant(1) 4.1 Specimen Certificate representing shares of Common Stock, par value $.01 per share(1) 4.2 Indenture dated as of March 16, 1998, by and among the Company, the subsidiaries acting as Guarantors thereto, and the First National Bank of Chicago, as Trustee(12) 4.3 Form of Global Note (included in Exhibit 4.2)(12) 4.4 Registration Rights Agreement dated March 11, 1998, by and among Bear Stearns & Co. Inc., Salomon Brothers Inc, SBC Warburg Dillon Reed Inc., First Union Capital Markets, the Company, and certain subsidiaries of the Company, as Guarantors(12) 10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted August 10, 1989, as amended(1) 10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of Registrant, dated February 4, 1994(2) 10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated August 25, 1994(3)
92 94
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.4 Form of Stock Option Agreement pursuant to 1989 Employee Stock Option Plan of Registrant(1) 10.5 Amended and Restated 1992 Stock Option Plan of Registrant, amended through October 15, 1998(15) 10.6 Forms of Stock Option Agreements pursuant to the Amended and Restated 1992 Stock Option Plan of Registrant(15) 10.15 Forms of Conditional Stock Grant and Repurchase Agreements by and between Registrant and each of its executive officers and directors, dated May 14, 1993, November 1, 1994, and December 1, 1997(1) 10.16(a) Form of Employment Agreement by and between Registrant and Mark E. Liebner, effective January 1, 1998(14) 10.16(c) Form of Change of Control Agreement by and between Mark E. Liebner dated March 4, 1998(14) 10.16(d) Form of Change of Control Agreement by and between the Registrant and the following executive officers: (i) Jack E. Brucker, dated November 24, 1997, (ii) R. Bruce Hillier, effective October 28, 1997, (iii) Dr. Michel A. Sucher, effective December 1, 1995, and (iv) John S. Banas III, effective March 10, 2000(14) 10.16(f) Employment Agreement by and between Registrant and Robert E. Ramsey Jr., dated June 30, 1997(9) 10.16(g) Employment Agreement by and between Registrant and John B. Furman effective July 29, 1999(17) 10.16(h) Change of Control Agreement by and between Registrant and John B. Furman, effective November 1, 1999(17) 10.16(i) Severance Agreement by and between Warren S. Rustand and Registrant effective August 24, 1998(14) 10.16(j) Consulting Agreement by and between James H. Bolin and Registrant effective January 1, 1998(14) 10.16(k) Separation Agreement and Release by and between Registrant and Robert T. Edwards effective December 31, 1998(16) 10.16(l) Employment Agreement by and between the Registrant and Jack E. Brucker, effective February 22, 2000* 10.16(m) Form of Employment Agreement by and between the Registrant and each of the following executive officers: (i) Dr. Michel A. Sucher, effective November 7, 1997, (ii) R. Bruce Hillier, effective October 20, 1997, and (iii) John S. Banas III, effective March 10, 2000(18) 10.17 Form of Indemnity Agreement by and between Registrant and each of its officers and directors, dated in April, May, August and November 1993, as of October 13, 1994, and as of September 25, 1998(1) 10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust of the Registrant, effective July 1, 1997(15) 10.21 Retirement Savings Value Plan 401(k) of Registrant, as amended, dated July 1, 1990(1) 10.22 Master Lease Agreement by and between Plazamerica, Inc. and the Registrant, dated January 30, 1990(1) 10.36 Employee Stock Purchase Plan, as amended through November 20, 1997(14) 10.37(a) Loan and Security Agreement by and among the CIT Group/Equipment Financing, Inc. and the Registrant, together with its subsidiaries, dated December 28, 1994, and related Promissory Note and Guaranty Agreement(3) 10.37(b) Form of Loan and Security Agreement by and among Registrant and CIT Group/Equipment Financing, Inc. first dated February 25, 1998 and related form of Guaranty and Schedule of Indebtedness and Collateral(14) 10.41 Stock Purchase Agreement by and among Rural/Metro of New York, Inc., and Douglas H. Baker with respect to the stock of LaSalle Ambulance, Inc., and The Western New York Emergency Medical Services Training Institute, Inc., dated January 26, 1995(4) 10.42 Asset Purchase Agreement by and among EMS Ventures of South Carolina, Inc., Midlands Ambulance Corp. and Jane L. East, dated May 4, 1995(5)
93 95
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.45 Amended and Restated Credit Agreement dated as of March 16, 1998, by and among the Company as borrower, certain of its subsidiaries as Guarantors, the lenders referred to therein, and First Union National Bank, as agent and as lender, and related Form of Amended and Restated Revolving Credit Note, Form of Subsidiary Guarantee Agreement, and Form of Intercompany Subordination Agreement(13) 10.49 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr. and Barry Landon, as trustee of the Employee Stock Ownership Plan for the benefit of the Company's employees, with respect to the stock of SW General, Inc., as amended(8) 10.50 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr. with respect to the stock of Southwest Ambulance of Casa Grande, Inc., as amended(8) 10.51 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr., Patrick McGroder, Barry Landon and Gary Ramsey, the vendors, with respect to the stock of Southwest General Services, Inc., as amended(8) 10.52 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr., with respect to Medical Emergency Devices and Services, Inc., as amended(8) 10.54 Purchase Agreement dated January 16, 1998 and Complementary Agreement dated March 26, 1998 between Rural/Metro Corporation and Messrs. Horacio Artagaueytia, Jose Mateo Campomar, Alberto Fluerquin, Carlos Mezzera, Renato Ribeiro, Gervasio Reyes, and Carlos Arturo Delmiro Marfetan with respect to the stock of Peimu S.A., Recor S.A., Marlon S.A., and Semercor S.A(11) 10.55 Provisional Waiver and Standstill Agreement dated as of March 14, 2000(19) 10.56 First Amendment to Provisional Waiver and Standstill Agreement dated as of April 13, 2000(19) 10.57 Second Amendment to Provisional Waiver and Standstill Agreement dated as of July 14, 2000(20) 21 Subsidiaries of Registrant* 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule*
- --------------- * Previously filed with the Registrant's Form 10-K filed with the Commission on September 28, 2000. (1) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-63448) filed May 27, 1993 and declared effective July 15, 1993. (2) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-76458) filed March 15, 1994 and declared effective May 5, 1994. (3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about May 12, 1995. (4) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about April 7, 1995, as amended by the Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and August 1, 1995. (5) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about May 19, 1995. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 33-88172) filed with the Commission on December 30, 1994 and declared effective January 19, 1995. (7) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about August 28, 1995. (8) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about July 15, 1997, as amended by the Registrant's Form 8-K/A Current Report filed with Commission on or about August 12, 1997. 94 96 (9) Incorporated by reference to the Registrant's Form 10-K filed with the Commission on or about September 29, 1997. (10) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 17, 1998. (11) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about April 1, 1998, as amended by the Registrant's Form 8-K/A Current Report filed on or about June 5, 1998. (12) Incorporated by reference to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed April 30, 1998 and declared effective on May 14, 1998. (13) Incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed May 11,1998 and declared effective on May 14, 1998. (14) Incorporated by reference to the Registrant's Form 10-K filed with the Commission on or about September 29, 1998. (15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about November 10, 1998. (16) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 11, 1999. (17) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about November 15, 1999. (18) Incorporated by reference to the Registrant's Form 10-K Annual Report for the year ended June 30, 1996 filed with the Commission on or about September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)). (19) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on April 14, 2000. (20) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on July 28, 2000. 95 97 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) 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 By: /s/ JACK E. BRUCKER ---------------------------------------- Jack E. Brucker President and Chief Executive Officer October 30, 2000 Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ COR J. CLEMENT Chairman of the Board of Directors October 30, 2000 - --------------------------------------------------- Cor J. Clement /s/ LOUIS G. JEKEL Vice Chairman of the Board of Directors October 30, 2000 - --------------------------------------------------- Louis G. Jekel /s/ JACK E. BRUCKER President, Chief Executive Officer and October 30, 2000 - --------------------------------------------------- Director (Principal Executive Officer) Jack E. Brucker /s/ RANDALL L. HARMSEN Vice President of Finance (Principal October 30, 2000 - --------------------------------------------------- Financial Officer and Principal Randall L. Harmsen Accounting Officer) /s/ MARY ANNE CARPENTER Director October 30, 2000 - --------------------------------------------------- Mary Anne Carpenter Director October , 2000 - --------------------------------------------------- William C. Turner /s/ HENRY G. WALKER Director October 30, 2000 - --------------------------------------------------- Henry G. Walker /s/ LOUIS A. WITZEMAN Director October 30, 2000 - --------------------------------------------------- Louis A. Witzeman
96 98 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 2 Plan and Agreement of Merger and Reorganization, dated as of April 26, 1993(1) 3.1(a) Second Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on January 18, 1995(6) 3.1(b) Rights Agreement dated as of August 23, 1995 between the Registrant and American Securities Transfer, Inc., the Rights Agent(7) 3.2 Amended and Restated Bylaws of the Registrant(1) 4.1 Specimen Certificate representing shares of Common Stock, par value $.01 per share(1) 4.2 Indenture dated as of March 16, 1998, by and among the Company, the subsidiaries acting as Guarantors thereto, and the First National Bank of Chicago, as Trustee(12) 4.3 Form of Global Note (included in Exhibit 4.2)(12) 4.4 Registration Rights Agreement dated March 11, 1998, by and among Bear Stearns & Co. Inc., Salomon Brothers Inc, SBC Warburg Dillon Reed Inc., First Union Capital Markets, the Company, and certain subsidiaries of the Company, as Guarantors(12) 10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted August 10, 1989, as amended(1) 10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of Registrant, dated February 4, 1994(2) 10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated August 25, 1994(3) 10.4 Form of Stock Option Agreement pursuant to 1989 Employee Stock Option Plan of Registrant(1) 10.5 Amended and Restated 1992 Stock Option Plan of Registrant, amended through October 15, 1998(15) 10.6 Forms of Stock Option Agreements pursuant to the Amended and Restated 1992 Stock Option Plan of Registrant(15) 10.15 Forms of Conditional Stock Grant and Repurchase Agreements by and between Registrant and each of its executive officers and directors, dated May 14, 1993, November 1, 1994, and December 1, 1997(1) 10.16(a) Form of Employment Agreement by and between Registrant and Mark E. Liebner, effective January 1, 1998(14) 10.16(c) Form of Change of Control Agreement by and between Mark E. Liebner dated March 4, 1998(14) 10.16(d) Form of Change of Control Agreement by and between the Registrant and the following executive officers: (i) Jack E. Brucker, dated November 24, 1997, (ii) R. Bruce Hillier, effective October 28, 1997, (iii) Dr. Michel A. Sucher, effective December 1, 1995, and (iv) John S. Banas III, effective March 10, 2000(14) 10.16(f) Employment Agreement by and between Registrant and Robert E. Ramsey Jr., dated June 30, 1997(9) 10.16(g) Employment Agreement by and between Registrant and John B. Furman effective July 29, 1999(17) 10.16(h) Change of Control Agreement by and between Registrant and John B. Furman, effective November 1, 1999(17) 10.16(i) Severance Agreement by and between Warren S. Rustand and Registrant effective August 24, 1998(14) 10.16(j) Consulting Agreement by and between James H. Bolin and Registrant effective January 1, 1998(14) 10.16(k) Separation Agreement and Release by and between Registrant and Robert T. Edwards effective December 31, 1998(16) 10.16(l) Employment Agreement by and between the Registrant and Jack E. Brucker, effective February 22, 2000* 10.16(m) Form of Employment Agreement by and between the Registrant and each of the following executive officers: (i) Dr. Michel A. Sucher, effective November 7, 1997, (ii) R. Bruce Hillier, effective October 20, 1997, and (iii) John S. Banas III, effective March 10, 2000 (18) 10.17 Form of Indemnity Agreement by and between Registrant and each of its officers and directors, dated in April, May, August and November 1993, as of October 13, 1994, and as of September 25, 1998(1)
99
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust of the Registrant, effective July 1, 1997(15) 10.21 Retirement Savings Value Plan 401(k) of Registrant, as amended, dated July 1, 1990(1) 10.22 Master Lease Agreement by and between Plazamerica, Inc. and the Registrant, dated January 30, 1990(1) 10.36 Employee Stock Purchase Plan, as amended through November 20, 1997(14) 10.37(a) Loan and Security Agreement by and among the CIT Group/Equipment Financing, Inc. and the Registrant, together with its subsidiaries, dated December 28, 1994, and related Promissory Note and Guaranty Agreement(3) 10.37(b) Form of Loan and Security Agreement by and among Registrant and CIT Group/Equipment Financing, Inc. first dated February 25, 1998 and related form of Guaranty and Schedule of Indebtedness and Collateral(14) 10.41 Stock Purchase Agreement by and among Rural/Metro of New York, Inc., and Douglas H. Baker with respect to the stock of LaSalle Ambulance, Inc., and The Western New York Emergency Medical Services Training Institute, Inc., dated January 26, 1995(4) 10.42 Asset Purchase Agreement by and among EMS Ventures of South Carolina, Inc., Midlands Ambulance Corp. and Jane L. East, dated May 4, 1995(5) 10.45 Amended and Restated Credit Agreement dated as of March 16, 1998, by and among the Company as borrower, certain of its subsidiaries as Guarantors, the lenders referred to therein, and First Union National Bank, as agent and as lender, and related Form of Amended and Restated Revolving Credit Note, Form of Subsidiary Guarantee Agreement, and Form of Intercompany Subordination Agreement(13) 10.49 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr. and Barry Landon, as trustee of the Employee Stock Ownership Plan for the benefit of the Company's employees, with respect to the stock of SW General, Inc., as amended(8) 10.50 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr. with respect to the stock of Southwest Ambulance of Casa Grande, Inc., as amended(8) 10.51 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr., Patrick McGroder, Barry Landon and Gary Ramsey, the vendors, with respect to the stock of Southwest General Services, Inc., as amended(8) 10.52 Agreement of Purchase and Sale between Rural/Metro Corporation and Robert E. Ramsey, Jr., with respect to Medical Emergency Devices and Services, Inc., as amended(8) 10.54 Purchase Agreement dated January 16, 1998 and Complementary Agreement dated March 26, 1998 between Rural/Metro Corporation and Messrs. Horacio Artagaueytia, Jose Mateo Campomar, Alberto Fluerquin, Carlos Mezzera, Renato Ribeiro, Gervasio Reyes, and Carlos Arturo Delmiro Marfetan with respect to the stock of Peimu S.A., Recor S.A., Marlon S.A., and Semercor S.A(11) 10.55 Provisional Waiver and Standstill Agreement dated as of March 14, 2000(19) 10.56 First Amendment to Provisional Waiver and Standstill Agreement dated as of April 13, 2000(19) 10.57 Second Amendment to Provisional Waiver and Standstill Agreement dated as of July 14, 2000(20) 21 Subsidiaries of Registrant* 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule*
- --------------- * Previously filed with the Registrant's Form 10-K filed with the Commission on September 28, 2000. (1) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-63448) filed May 27, 1993 and declared effective July 15, 1993. 100 (2) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant (Registration No. 33-76458) filed March 15, 1994 and declared effective May 5, 1994. (3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about May 12, 1995. (4) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about April 7, 1995, as amended by the Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and August 1, 1995. (5) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about May 19, 1995. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 33-88172) filed with the Commission on December 30, 1994 and declared effective January 19, 1995. (7) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about August 28, 1995. (8) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about July 15, 1997, as amended by the Registrant's Form 8-K/A Current Report filed with Commission on or about August 12, 1997. (9) Incorporated by reference to the Registrant's Form 10-K filed with the Commission on or about September 29, 1997. (10) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 17, 1998. (11) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about April 1, 1998, as amended by the Registrant's Form 8-K/A Current Report filed on or about June 5, 1998. (12) Incorporated by reference to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed April 30, 1998 and declared effective on May 14, 1998. (13) Incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-4 of the Registrant (Registration No. 333-51455) filed May 11,1998 and declared effective on May 14, 1998. (14) Incorporated by reference to the Registrant's Form 10-K filed with the Commission on or about September 29, 1998. (15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about November 10, 1998. (16) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 11, 1999. (17) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about November 15, 1999. (18) Incorporated by reference to the Registrant's Form 10-K Annual Report for the year ended June 30, 1996 filed with the Commission on or about September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)). (19) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on April 14, 2000. (20) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on July 28, 2000. EX-23.1 2 p64100ex23-1.txt EX-23.1 1 [ARTHUR ANDERSEN LOGO] Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included in this Form 10-K/A into Rural/Metro Corporation's previously filed Registration Statements File No.'s 33-76526; 33-80454; 33-88302; 333-2818; 333-37393; 333-39453; 333-51455; 333-62517; 333-62983; 333-64139; and 333-68161. Phoenix, Arizona October 30, 2000 -----END PRIVACY-ENHANCED MESSAGE-----