-----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, B7y1J8q1YVBicy1kv+GIVmN7oEg3JV+2TgqJ9uXrTGzFSEdqsM9sN93Ey/zS+xfl PVSl1JpH9FaS3bZASePs/g== 0000950153-97-000962.txt : 19970930 0000950153-97-000962.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950153-97-000962 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22056 FILM NUMBER: 97687909 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 6029443886 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 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: (602) 994-3886 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE TITLE OF EACH CLASS 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. [ ] AS OF SEPTEMBER 26, 1997, 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 NATIONAL MARKET, WAS $334,880,384. 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 September 26, 1997, there were 13,157,348 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the registrant's 1997 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. ================================================================================ 2 TABLE OF CONTENTS PART I................................................................................ 1 1 ITEM 1. BUSINESS.......................................................... 23 ITEM 2. PROPERTIES........................................................ 23 ITEM 3. LEGAL PROCEEDINGS................................................. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. PART II............................................................................... 23 23 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................... 24 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.............................. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................................. PART III.............................................................................. 30 30 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 30 ITEM 11. EXECUTIVE COMPENSATION............................................ 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................................ 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. PART IV............................................................................... 31 31 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................... SIGNATURES............................................................................ 35 FINANCIAL STATEMENTS.................................................................. F-1
3 PART I ITEM 1. BUSINESS INTRODUCTION The Company provides "911" emergency and general transport ambulance services, fire protection services, and other safety and health care related services to municipal, residential, commercial, and industrial customers. The Company believes that it is the only multi-state provider of both ambulance and fire protection services in the United States and that it ranks as one of the largest private-sector providers of ambulance services and fire protection services in the world. The Company currently serves over 350 communities in 21 states, Canada, and Latin America. Ambulance services and fire protection services accounted for approximately 81% and 13%, respectively, of the Company's revenue for the fiscal year ended June 30, 1997. Founded in 1948, the Company has been instrumental in the development of protocols and policies applicable to the emergency services industry. The Company has grown significantly since the late 1970s both through internal growth and through acquisitions. To manage this growth, the Company invested in the development of management and operational systems that have resulted in productivity gains and increased profitability. The Company believes its current systems and controls position it to continue its growth internally as well as through acquisitions and enable it to operate profitably in both large and small communities. The Company completed eight acquisitions in the fiscal year ended June 30, 1994, 11 acquisitions in the fiscal year ended June 30, 1995, 18 acquisitions in the fiscal year ended June 30, 1996, and 19 acquisitions in the fiscal year ended June 30, 1997. 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. Various factors, including the growth and aging of the population, and trends towards the use of outpatient services and specialized treatment facilities in an effort to contain health care costs have increased the demand for ambulance services. At the same time, industry factors have increased the standards of pre-hospital emergency care and have required faster ambulance response times, increasing the capital and technological resources necessary to provide higher levels of service. These factors, combined with the historically fragmented nature of the ambulance service industry, are contributing to consolidation within the industry. Market-driven forces changing the health care industry are impacting the ambulance industry as well. The Company believes the trend toward managed care and away from fee-for-service arrangements is furthering industry consolidation. The move to managed care benefits larger ambulance services providers, which can service a larger portion of a managed care provider's needs. This allows the managed care provider to reduce its number of suppliers, cutting administrative costs and allowing them to negotiate more favorable rates. Volunteer fire departments, tax-supported fire districts, and municipal fire departments constitute the primary providers of fire protection services in the United States. Because emergency medical response represents a significant portion of fire response activity within many fire departments, the Company believes that its ambulance and fire protection services operations are complementary. The Company believes that its integration of such services can provide operating economies, optimal coordination of the delivery of services, efficiencies in the use of personnel and equipment, and enhanced levels of service, especially in lower-utilization communities. Additionally, a variety of economic pressures on the public sector may increase opportunities for privatization and public/private partnerships in fire protection services. The Company pursues a strategy designed to enable it to expand its business in existing service areas, establish additional service areas both domestically and internationally, respond to the needs of the public sector and health care providers, expand fire protection services, integrate existing services, and improve productivity. This strategy includes plans to (i) acquire additional ambulance service providers operating in metropolitan areas and in communities surrounding the metropolitan areas that the Company currently serves or plans to serve; (ii) expand its emergency ambulance services through the pursuit of new contracts with municipalities and fire districts and its general ambulance services through increased marketing efforts to, and 1 4 pursuit of other alliances with, managed care providers and other health care providers; (iii) expand its fire protection services into selected additional service areas through the pursuit of opportunities to supplant or enhance services provided by volunteer fire departments, expand its services to newly developed communities, and to develop public/private partnerships with tax supported fire districts and municipal fire departments; (iv) continue the integration of its fire protection and ambulance services to maximize operational efficiencies and synergies; and (v) improve its productivity through the more efficient utilization of equipment and personnel. The Company was incorporated in Arizona in 1948 and reincorporated in Delaware in May 1993. Unless the context indicates otherwise, all references to the "Company" refer to Rural/Metro Corporation and its subsidiaries. The Company maintains its principal executive offices at 8401 East Indian School Road, Scottsdale, Arizona 85251, and its telephone number is (602) 994-3886. INDUSTRY CONSIDERATIONS 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 ambulance 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. Most commercial providers are small companies serving one or a limited number of markets. Several multi-state providers, including the Company, have emerged through the acquisition and consolidation of smaller ambulance service providers in recent years. The growth in ambulance service expenditures 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 ambulance 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. These requirements, combined with the fragmented nature of the industry, are contributing to consolidation within the industry. Service providers that do not have the financial or management resources to meet the requirements for higher levels of service are candidates for acquisition. Market reform continues to reshape the health care delivery system, with a shift from fee-for-service providers to managed care providers. Managed care providers are focusing on cost containment measures while seeking to provide the most appropriate level of service at the most appropriate treatment facility. While ambulances typically transport patients to the nearest treatment facility, managed care providers 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 where plan members are encouraged to call the provider. Under this program, a nurse will answer the call, analyze the medical situation, and determine the best course of action and mode of transport. In an emergency situation, an advanced life support ambulance will be dispatched. In certain cases, patients could receive the required treatment level with a less costly basic life support ambulance. However, to manage such a system, the managed care provider 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 can provide call center services. 2 5 Based on the Company's experience, the Company believes that its 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 comprised 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 The Company's strategy is to enhance its position as a leading provider of emergency services in the United States and in other countries. Key elements of this strategy include the acquisition of ambulance service providers, increased marketing efforts aimed at the needs of the public sector and health care providers, expansion of fire protection services, integration of ambulance and fire protection operations, and improved productivity. The Company seeks to utilize key business competencies in communications and in logistics management to expand service offerings to customers and to seek new potential customers through key business alliances, joint ventures, or other strategic business arrangements. Acquisition of Ambulance Service Providers The Company seeks acquisitions that enable it to establish new service areas both domestically and internationally and acquisitions that enable it to expand its operations within its existing service areas. The Company believes that the fragmented nature of the industry, combined with the lack of capital and limited management systems that characterize many providers, continues to provide an opportunity for the Company to acquire additional ambulance service providers, including not-for-profit hospital-owned providers, that would benefit from its management and operational systems, resulting in productivity gains and enhanced levels of service. The Company considers a number of factors in evaluating a proposed acquisition candidate, including the quality of its management and medical personnel, its historical operating results and future earnings potential, the size and anticipated growth of its market, its relative position within that market, and the competition to be encountered in such market. The Company pays special attention to those potential service areas in which it can achieve maximum productivity by achieving market leadership over a regional area, by utilizing its ambulances to provide both "911" emergency and general ambulance services, and by integrating ambulance services with fire protection services. The Company continues to build its regional operations, which better position the Company to serve the developing managed care customer base. Increased Marketing Efforts Aimed at the Needs of the Public Sector and Health Care Providers In addition to expansion through acquisitions, the Company plans to expand its general ambulance services through increased marketing efforts to hospitals, health maintenance organizations, and other health care providers and its emergency ambulance services through the pursuit of new contracts and alliances with municipalities and fire districts. These efforts will focus on the increased demand for emergency ambulance services caused by various factors, including the growth and aging of the population, as well as on the increased use of general ambulance services caused in part by increases in home health care, patient travel between specialized health care facilities, and increased requirements for transport to specific facilities operated by managed care providers. The Company intends to respond to the needs of managed care providers by delivering high quality, efficient, cost-effective services and the ability to transport patients to the most appropriate treatment facility, particularly in those geographic areas in which it has been able to achieve market leadership. The Company intends to develop and offer innovative value-added services to health care providers, such as access to a medical call center, to better serve the demand management, telephone triage, 3 6 and medical transport needs of the managed care market. The Company believes that its communications and logistics expertise will enable it to offer services that will improve the responsiveness and cost-effectiveness of health care services in a managed care environment. The Company expects to pursue alliances with health care providers through the pursuit of service contracts, the development of relationships, and through acquisitions of health care and safety related providers, which would provide opportunities for the Company to integrate its services with such other service providers. In addition, the Company will continue to seek to enter into public/private alliances to compete for new business. Expansion of Fire Protection Services The Company plans to continue its efforts to expand its fire protection services into areas not currently served. In seeking to expand its fire protection services, the Company plans to emphasize the benefits of its services in terms of lower per capita fire service costs, reduced insurance rates, and lower loss of life and property resulting from its extensive experience, its fire prevention initiatives, its management and operational systems, and its system utilizing full-time fire fighters and part-time reservists. The Company's strategy includes efforts to provide service to businesses and residences in newly developed communities that have not yet arranged for fire protection services as well as in areas served by volunteer fire departments and tax- supported fire districts. The Company plans to respond to the economic pressures on the public sector to reduce taxes and expenditures for emergency services by offering the opportunity for the establishment of public/private alliances with fire districts and municipalities. The Company also intends to pursue opportunities to provide fire protection services to large industrial complexes, including airports, large industrial and petrochemical plants, power plants, and other self-contained facilities. Integration of Ambulance and Fire Protection Services Building upon the Company's successful integration of ambulance and fire services under its contract with the City of Scottsdale, the Company plans to continue the integration of its fire and ambulance services in certain of its service areas and to pursue opportunities to provide integrated services in new service areas. The Company believes that its integration of such services can provide operating economies, optimal coordination of the delivery of services, efficiencies in the use of personnel and equipment, and enhanced levels of service, especially in lower-utilization communities. Productivity Improvement and Enhancement The Company intends to utilize its management and operational systems to achieve enhanced productivity and profitability in its existing operations and in acquired operations. The centralization of key management and operating systems permits the Company to achieve economies of scale at both the operational and corporate levels. The Company believes that the achievement of its goal of establishing market leadership in its various service areas (through initial acquisitions, follow-on acquisitions, alliances, and internal growth) will enable it to continue to improve its productivity in those areas by enabling it to more efficiently utilize its equipment and personnel, to better serve large regional health care providers, and to more effectively market its services. In certain cases, follow-on acquisitions in existing service areas enable the Company to enhance its productivity in that service area to an extent greater than the size of the acquisition itself. 4 7 CURRENT SERVICE AREAS The Company provides its services in over 350 communities in the following 21 states, Canada, and Latin America: Alabama Iowa Ohio Arizona Kentucky Oregon Arkansas Louisiana Pennsylvania California Mississippi South Carolina Florida Nebraska South Dakota Georgia New Jersey Tennessee Indiana New York Texas
The Company provides ambulance services in 19 states and Canada primarily under the names Rural/Metro Ambulance and Rural/Metro Medical Services and under the name Southwest Ambulance in some areas of Arizona. The Company may operate under other names depending upon local statutes or contractual agreements. The Company generally provides its ambulance services pursuant to a contract or certificate of necessity on an exclusive or nonexclusive basis. It provides "911" emergency ambulance services primarily pursuant to contracts or as a result of providing fire protection services. Ambulance service contracts in some service areas provide for the payment of a subsidy to the Company. In some service areas, the Company is the only provider of both emergency and general ambulance services. In other service areas, the Company competes for general ambulance services. In all service areas, the Company responds to "911" emergency calls if requested by a municipality or fire district, even in the absence of a contract. The Company provides fire protection services under the name Rural/Metro Fire Department in six states and in Latin America. Fire protection services are provided pursuant to master contracts or on a subscription basis. AMBULANCE SERVICES Emergency Medical Services The Company generally provides emergency medical ambulance services pursuant to contracts with counties, fire districts, and municipalities. These contracts typically appoint the Company as the exclusive provider of "911" emergency ambulance services in designated service areas and require the Company to respond to every "911" emergency medical call in those areas. The Company responds to virtually all "911" calls with advanced life support ("ALS") ambulance units. The Company staffs its ALS ambulance units with two paramedics or one paramedic and an emergency medical technician ("EMT") and equips such 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. 5 8 General Ambulance Services The Company provides general 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. The Company utilizes ALS or BLS ambulance units to provide general ambulance services depending on the patient's needs and the proximity of available units. The Company staffs its BLS ambulance units with two EMTs and equips such units with medical supplies and equipment necessary to administer first aid and basic medical treatment. The Company also provides 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 the Company or by a health care facility to attend to a patient's special medical needs. In addition to ambulance services, the Company provides non-medical transportation for the handicapped and certain non-ambulatory persons in certain service areas. Such transportation generally takes place between residences or nursing homes and hospitals or other health care facilities. In providing this service, the Company utilizes vans that contain hydraulic wheelchair lifts or ramps operated by drivers who generally are trained in cardiopulmonary resuscitation ("CPR"). The Company provides general 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 providers provide for reimbursement on a per transport basis or on a "capitated" basis under which the Company receives a fixed fee per person per month. The Company currently has a contract to provide non-emergency ambulance transportation for Aetna Health Plan of Ohio's 550,000 managed care plan members on a fee-for-service basis. The contract may evolve into a capitated format after the service utilization patterns are firmly established. 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 the Company served as EMTs for the Company prior to their certification as paramedics. 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. The Company maintains a commitment to provide high quality pre-hospital emergency medical care. In each location in which the Company provides services, a medical director, who usually is a physician associated with a hospital the Company serves, monitors adherence to medical protocol and conducts periodic audits of the care provided. In addition, the Company holds retrospective care audits with its employees to evaluate compliance with medical and performance standards. 6 9 The Company was one of the first ambulance service providers to obtain accreditation for many of its 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. The Company believes 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. The Company provides various levels of fire protection services ranging from fire stations that are fully staffed 24 hours per day to reserve stations. The Company generally provides its 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 the Company from time to time to suppress forest fires or wildfires on government lands. The Company has placed fire prevention and education in the forefront of its fire protection services and has developed a comprehensive program to prevent and minimize fires rather than emphasizing a standing army to respond to fires that occur. The Company believes 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. The Company seeks to provide quality fire protection services at reduced costs. The Company believes that it provides fire protection services at a cost significantly lower than the national average as a result of its emphasis on fire prevention, its advanced systems, and its use of a combination of full-time fire fighters and part-time reservists. Based upon generally available industry data, the Company believes that fire loss per capita in the areas serviced by the Company has been substantially less than the national average. Fire Protection Personnel The Company's ability to provide its fire protection services at relatively low costs results from its efficient use of personnel in addition to its fire prevention efforts. Typically, personnel costs represent more than two-thirds of the cost of providing fire protection services. The Company has been able to reduce its 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, the Company has the ability to supplement full-time fire fighters on a cost-effective basis. Reservists comprise approximately 45% of the Company's operational work force. All full-time and reservist firefighters undergo extensive training, which exceed the standards recommended by the National Fire Protection Association ("NFPA"), and must qualify for state certification before being eligible for full-time employment by the Company. Since approximately 70% to 80% of the Company's fire response activity consists of emergency medical response, all of the Company's firefighters are trained EMTs and an increasing number of its 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. The Company generally responds to emergency medical calls and small fires (such as grass or dumpster fires not involving the risk of spreading) with a single engine staffed by two firefighters. The 7 10 Company utilizes its dispatch capabilities to reposition equipment and firefighters to maximize the availability and use of resources in a cost-effective manner. Fire Prevention The Company believes that fire prevention programs result in both lower fire loss and significant overall cost savings. The Company's 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, the Company's personnel perform community education programs designed to reduce the risk of fire and increase the Company's community profile. The Company believes that its 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 the Company's philosophy of fire prevention. With the cooperation and assistance of the Company, the City of Scottsdale has designed comprehensive fire prevention measures, including fire codes, inspections, and sprinkler and smoke detector ordinances. The Company believes that as a result of strict fire codes, the enactment of a sprinkler ordinance, and the effectiveness of the services provided by the Company, Scottsdale's per capita cost for fire protection is 46% lower than the national average and that its per capita fire loss is more than 200% less than the national average. INDUSTRIAL FIRE PROTECTION SERVICES The Company continues to seek opportunities to provide fire protection services to large industrial complexes, such as airports, large industrial and petrochemical plants, power plants, and other self-contained facilities. During 1996, the Company signed a three-year contract to provide firefighting and hazardous materials response services to the Heath-Newark-Licking County Airport Authority, located outside Columbus, Ohio and a four-year contract to provide crash/rescue firefighting services at the Lafayette Regional Airport in Lafayette, Louisiana. In 1997, the Company entered into a five-year contract to provide crash/rescue firefighting services to three airports in Bolivia. The Company intends to pursue similar contracts domestically and internationally. FIRE TRAINING SERVICES AND PROTECTION SERVICES The Company has instituted industrial fire training services and protection services and provides sophisticated training for industrial, professional, and specialized firefighters using live burn training to simulate realistic firefighting situations. The training permits fire brigade and emergency response teams to meet increased federal training requirements, the Occupational Safety and Health Act ("OSHA"), and other regulatory requirements for work place safety and on-site response teams. The Company anticipates that its training services to industrial, petrochemical, and other large private concerns will enhance its ability to enter into contractual relationships to provide fire protection, security, and other safety related services to these concerns and permit the complexes to replace their fire brigades with professional firefighters and emergency response teams. These activities have not resulted in significant revenue to date. 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 greatly reduced cost to the industrial complexes for such services. The Company utilizes its communications centers for home security, home fire alarm monitoring and personal emergency response systems monitoring to complement the emergency services it offers. The Company believes protection services can be integrated with fire protection and ambulance services for optimal efficiency and maximum cost-effectiveness. In August 1997, the Company commenced a five-year contract to monitor global positioning satellite tracking systems in vehicles. 8 11 MANAGEMENT SYSTEMS The Company utilizes sophisticated management systems, which it believes enhance the productivity and profitability of the Company's existing operations and enable it to enhance the productivity and profitability of acquired operations. These systems permit the Company 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, risk management, and third-party reimbursement. The Company has developed measurement systems that permit management to monitor the performance level of each operation on a continual basis. The Company's 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 the Company to achieve significant discounts in the purchase of equipment and supplies through a Company-developed catalogue from which managers select items needed for their operations. Centralized third-party reimbursement allows the Company to maximize the utilization of its expertise in Medicare, Medicaid, and other third-party payor reimbursement programs and to ensure the most favorable classification for all of the Company's operations under such programs. The Company believes its investment in management systems and its effective use of such systems represent key components in its success. The Company's financial reporting system facilitates the Company's successful integration of acquired companies. The Company is committed to an ongoing enhancement of its systems to provide productive, timely information, and effective controls and believes that its management systems have the capability to support sustained long-term growth. HUMAN RESOURCES The Company strives to maximize the operational autonomy of its managers. Managers receive extensive training in the use of management systems, customer service, and supervisory practices. The Company's centralized human resources division increases the Company's 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 all areas of training, career development, and succession planning of employees and assesses the Company's personnel needs. DISPATCH AND COMMUNICATIONS The Company uses system status plans and flexible deployment systems to position its 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, the Company analyzes data on traffic patterns, demographics, usage frequency, and similar factors with the aid of computers to help it 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 the Company itself. 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 the Company's ambulances directly from the public control center or communicates information regarding the location and type of medical emergency to the Company's control center which in turn dispatches ambulances to the scene. In most service areas, the Company's control center receives the calls from the police after the police have determined the call is for emergency medical services. When the Company receives the "911" call, it dispatches one or more ambulances directly from its 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 the Company's larger control centers, a computer assists the dispatcher by analyzing a number of factors, such as time of day, ambulance location, and 9 12 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. The Company's 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. The Company implements system status plans for these services designed to assure appropriate response times to non-emergency calls. The Company intends to establish call centers that will enable it to implement demand management strategies for health care providers. Through its strategic alliance with National Health Enhancement Systems, Inc., the Company is working to develop a demand management system that integrates medical protocols with the Company's logistics and "911" based communications expertise. By combining telephone triage and medical transport services, the Company can improve the responsiveness and cost-effectiveness of health care delivery in a managed care system. Managed care providers could encourage their plan members to contact a call center in non-life threatening emergencies. The call centers are staffed by nurses who use medical protocols to analyze and triage the medical situation and determine the best mode of transport. In non-emergency situations, the call centers could dispatch a BLS ambulance rather than a more expensive ALS ambulance. The call center can also direct the ambulance to transport the patient to an affiliated facility specified by the managed care center rather than to a non-member facility or a hospital emergency room, thereby further reducing costs for the provider. The Company utilizes communication centers in its 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 its ambulance services. Response time represents an important criteria in the effectiveness of fire suppression. Depending upon the area served, the Company's response time from the receipt of a call to the arrival on the scene generally varies from 4 to 15 minutes. Response times depend on the level of protection sought by the Company's 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 The Company currently maintains 13 billing and payment processing centers and a centralized billing and collection system at its headquarters in Arizona. Invoices are generated at the regional level, and the account is processed by the centralized system only if payment is not received in a timely manner. Customer service is directed from each of the regional centers. The Company derives a substantial portion of its ambulance fee collections 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. The Company also collects payments directly from patients, including payments under deductible and co-insurance provisions and otherwise. During fiscal 1995, 1996, and 1997, the Company derived approximately 33%, 27%, and 26%, respectively, of its net ambulance fee collections from Medicare, 12%, 11%, and 10%, respectively, from Medicaid, 40%, 41%, and 38%, respectively, from private insurers (including prepaid health plans and other non-government sources), and 15%, 21%, and 26%, respectively, directly from patients. 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 the Company to evaluate the creditworthiness of patients requiring emergency transport services. The Company's 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. 10 13 The Company has substantial experience in processing claims to third-party payors and employs a collection staff specifically trained in third-party coverage and reimbursement procedures. The Company 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. The Company's systems provide 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. The Company uses 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. The Company believes that its experience in processing third-party claims reduces the collection time of its receivables and results in fewer rejected claims based on incomplete or inaccurate information. State licensing requirements as well as contracts with counties, municipalities, and health care facilities typically require the Company to provide ambulance services without regard to a patient's insurance coverage or ability to pay. As a result, the Company often does 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 the Company's 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 the Company is the existing provider, the county or municipality may elect to renegotiate the Company's existing contract rather than re-bid the contract. The Company believes 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 the most important factors in awarding contracts. In addition, the Company will continue to seek to enter into public/private alliances to compete for new business. The Company's alliance with San Diego Fire & Life Safety Services allowed the entities to bid for and win a contract to provide "911" and ambulance services throughout the city of San Diego. The Company markets its 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. The Company believes that its status as a "911" provider in a designated service area increases its visibility and enhances its 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. The Company further believes that its strategy of building regional operations will better position it to serve the developing managed care market. The Company has implemented customer service training for all its personnel in recognition of the increasing awareness of managed care providers to the importance of customer service. The Company markets its fire protection services to subscribers in rural and suburban areas, volunteer fire departments, tax-supported fire districts and municipalities, newly developed communities, and industrial complexes, including airports, large industrial and petrochemical plants, power plants, and other large self-contained facilities. The Company also provides fire protection services to newly developed communities where the subscription fee is included in the homeowner's association assessment. CONTRACTS The Company enters 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 the Company may charge and set forth required criteria, such as response times, staffing levels, types of vehicles and equipment, quality assurance, and insurance coverage. Counties, municipalities, and fire districts also may require the Company to provide a performance bond or other assurances of financial responsibility. The amount of the subsidy, if any, that the Company receives from a county, municipality, or fire district, and the rates that the Company may charge for services under a contract for emergency ambulance services, 11 14 depend in large part on the nature of the services rendered and performance requirements. The four largest ambulance contracts accounted for 24%, 16%, and 13% of total revenue for the fiscal years ended June 30, 1995, 1996, and 1997, respectively, with the contract with Orange County, Florida accounting for 9%, 7%, and 5%, respectively, of total revenue for the same periods. Rates to be charged under the Orange County contract are agreed upon between the Company and the county. The Company does not receive any subsidy from the county under this contract. The Company provides 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 the Company 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 the Company 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 6%, 4%, and 3% of total revenue for the fiscal years ended June 30, 1995, 1996, and 1997, respectively. The Company provides fire protection services on a subscription basis in areas where no governmental entity has assumed the financial responsibility for providing fire protection. The Company derived approximately 56% of its fire protection service revenue from subscriptions for fiscal 1995, 51% for fiscal 1996, and 50% for fiscal 1997. The Company had subscription contracts with approximately 107,000 and 109,000 subscribing households as of June 30, 1996 and 1997, respectively, and approximately 3,000 commercial subscribers as of June 30, 1996 and 1997, primarily in Arizona, Knox County, Tennessee and Grants Pass, Oregon. Subscription fees are collected annually in advance. Subscribers also pay a membership fee upon subscribing for service. In the event that the Company provides service for a nonsubscriber, the Company directly bills the property owner for the cost of services rendered. The Company has developed a computerized fire subscription billing system that allows the Company to monitor accounts. The Company experienced renewal rates of approximately 88% during the prior three fiscal years. Fire subscription rates are not currently regulated by any government agency in the Company's service areas. The Company's contracts generally extend for terms of three to five years, with several contracts having terms of up to 10 years. The Company attempts to renegotiate contracts substantially in advance of the expiration date and generally has been successful in such renegotiations. The following table sets forth certain information regarding the Company's five primary contracts at June 30, 1997 with counties, fire districts, and municipalities for ambulance services and for fire protection services.
EXPIRATION TERM IN YEARS DATE TYPE OF SERVICE(1) ------------- --------------- ------------------ Ambulance Orange County, Florida(2).............. 2 September 1998 911/General Rochester, New York(3)..... 4 October 2000 911 Knox County, Tennessee(4)............ 4 June 2002 911 Tucson, Arizona(5)......... 3 July 1997 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 the Company in July 1984. (3) The contract was first entered into in 1988 by a provider that was acquired by the Company in May 1994. (4) The contract was first entered into in July 1985 by the Company. (5) The contract was first entered into in July 1993 by the Company. This contract has been awarded to an ambulance service provider that is subject to a pending acquisition by the Company. 12 15 (6) The contract was first entered into in 1952 by the Company. The contract has two five-year renewal options exercisable by the City of Scottsdale. The Company also enters into contracts with hospitals, nursing homes, and other health care facilities to provide non-emergency and critical care ambulance services. These contracts typically designate the Company as the first ambulance service provider contacted to provide non-emergency ambulance services to those facilities and permit the Company to charge a base fee, mileage reimbursement, and additional fees for the use of particular medical equipment and supplies. The Company provides a discount in rates charged to facilities that assume the responsibility for payment of the charges to the persons receiving services. 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. In addition, there can be no assurance that counties, municipalities, fire districts, hospitals, or health care facilities that presently contract for ambulance services will not choose to provide ambulance services directly in the future. The Company is experiencing increased competition from fire departments to provide ambulance service. Several of the Company's current and potential competitors have greater capital and other resources than the Company. Ambulance service providers compete primarily on the basis of quality of service, performance, and cost. The Company believes that counties, fire districts, and municipalities consider quality of care, historical response time performance, and cost to be 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 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. Fire protection services for residential and commercial properties are provided primarily by tax-supported fire districts or municipalities, and volunteer departments. Private providers represent a small portion of the total fire protection market. The private sector provides fire protection services primarily where a tax-supported fire district or municipality has decided to contract for the provision of fire protection services. No assurance can be given that fire districts or municipalities will continue to contract for fire protection services. In areas where no governmental entity has assumed financial responsibility for providing fire protection, the Company provides fire protection services on a subscription basis. No assurance can be given that a subscription area will not be annexed by a municipality or be converted to a fire district that provides service directly rather than through a master contract. GOVERNMENTAL REGULATION The Company's business is subject to governmental regulation at the federal, state, and local levels. At the federal level, the Company is subject to regulations under OSHA designed to protect employees of the Company. 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 the Company operates 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. The Company's contracts in its current service areas typically prescribe maximum rates that the Company 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 13 16 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, and local laws and regulations are subject to change. The Company believes that it currently is in substantial compliance with applicable regulatory requirements. These regulatory requirements, however, may require the Company in the future to increase its capital and operating expenditures in order to maintain current operations or initiate new operations. REIMBURSEMENT The Company must comply with various requirements in connection with its 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 the balance of the bill, and Medicare requires the Company 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. 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 the Company operates. 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. The Company receives only the reimbursement permitted by Medicaid and is not permitted to collect from the patient any difference between its customary charge and the amount reimbursed. Like other Medicare and Medicaid providers, the Company is subject to governmental audits of its Medicare and Medicaid reimbursement claims. The Company has not experienced significant losses as a result of any such audit. 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 rules have not been finalized. If implemented, such rules could result in contract renegotiations or other action by the Company to offset any negative impact of the proposed change in reimbursement policies. During August 1997, President Clinton signed the "Balanced Budget Act of 1997" (the "Budget Act"). The Budget Act 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. The Budget Act mandates that this fee schedule be developed through a negotiated rulemaking process between HFCA 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 14 17 under the fee schedule in an efficient and fair manner. Charges for ambulance services provided during calendar years 1998 and 1999 will be increased by the Consumer Price Index (CPI) less one percentage point. The Budget Act also stipulates that individual states may now elect to no longer provide payment for Medicare cost-sharing for coinsurance, or copayments, for Medicaid beneficiaries. Medicare coverage has been extended for certain paramedic services provided in rural areas. 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. There can be no assurance whether the proposed HCFA rules, a prospective fee schedule, or other proposals involving various aspects of Medicare reimbursements will be adopted or the effect on the Company of any such adoption. No assurance can be given that future funding levels for Medicare and Medicaid programs will be comparable to present levels. Changes in the reimbursement policies, or other government action, could adversely affect the Company's business, results of operations, and financial condition. INSURANCE The Company carries a broad range of automobile and general liability, comprehensive property damage, malpractice, workers' compensation, and other insurance coverages that the Company considers adequate for the protection of its assets and operations. The Company operates 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. The Company is subject to accident claims as a result of the normal operation of its fleet of ambulances and fire vehicles. There can be no assurance, however, that the coverage limits of the Company's policies will be adequate. A successful claim against the Company in excess of its insurance coverage could have a material adverse effect on the Company and its financial condition. Claims against the Company, regardless of their merit or outcome, also may have an adverse effect on the Company's reputation and business. The Company has undertaken to minimize its exposure through an active risk management program. EMPLOYEES At September 26, 1997, the Company employed approximately 5,500 full-time and 3,700 part-time employees, including approximately 6,500 involved in ambulance services, 600 in fire protection services, 550 in integrated ambulance and fire protection services, and 1,550 in management, administrative, clerical, and billing activities. Of these employees, 2,700 are paramedics and 3,900 are EMTs. The Company is a party to a collective bargaining agreement relating to its Rochester, New York operations and to certain of its ambulance services employees in Arizona. The Company considers its relations with employees to be good. 15 18 EXECUTIVE OFFICERS AND KEY EMPLOYEES
NAME AGE POSITION - ------------------------- --- ----------------------------------------------------- Warren S. Rustand........ 54 Chairman of the Board, Chief Executive Officer, and Director James H. Bolin........... 45 President and Director Robert T. Edwards........ 57 Executive Vice President and Director William R. Crowell....... 38 Senior Vice President -- Finance and Acquisitions William F. Gillis........ 49 Senior Vice President -- Enterprise Services & Chief Information officer Mark E. Liebner.......... 45 Senior Vice President -- Chief Financial Officer & Treasurer Robert E. Ramsey, Jr..... 51 Senior Vice President and Director James E. Stenger......... 54 Senior Vice President -- Executive Assistant to the President John E. Stuart........... 56 Senior Vice President -- Marketing & New Business Development Kurt R. Davis............ 35 Vice President -- Public Affairs & Corporate Communications Dean P. Hoffman.......... 37 Vice President -- Financial Services Michel A. Sucher, M.D.... 50 Vice President -- Medical Affairs Atul Vashistha........... 31 Vice President -- Marketing and Business Development Louis G. Jekel........... 56 Secretary and Director
In March 1995, the Board of Directors established an Office of Chief Executive; it is currently comprised of three members, Mr. Rustand, Mr. Bolin and Mr. Edwards. The Office of Chief Executive oversees the operation and management of the Company and develops and implements strategic and long-range planning for the Company. WARREN S. RUSTAND has served as Chief Executive Officer of the Company since August 1996, Chairman of the Board of Directors since May 1994, and a member of the Board of Directors since August 1993. He also is a member of the Office of Chief Executive. Mr. Rustand has been Chairman and Chief Executive Officer of The Cambridge Company, Ltd., a merchant banking and management consulting firm, since 1987. He has served as Chairman of Health Partners of Arizona, a managed care provider, since February 1996. Mr. Rustand is also Chairman of an additional company and director of four companies, including LucasVarity PLC, a New York Stock Exchange listed company. Mr. Rustand served as appointments secretary to President Ford from 1974 to 1976, and as special assistant to Mr. Ford while he was Vice President in 1973 and 1974. JAMES H. BOLIN has served as the President of the Company since March 1995 and a member of its Board of Directors since February 1981. He also is a member of the Office of Chief Executive. Mr. Bolin served as Senior Vice President -- Ambulance Services of the Company from October 1991 until March 1995, Chief Financial Officer from October 1988 through September 1991, Senior Vice President -- Finance from August 1986 through September 1988, and Vice President -- Finance from April 1981 through July 1986. Mr. Bolin also is the Chairman and Treasurer of the Rural/Metro ESOP Administrative Committee. Mr. Bolin is a certified public accountant. Mr. Bolin will retire from his full-time duties as President effective January 1, 1998. He will remain with the Company in a part-time capacity and as a member of the Company's Board of Directors. ROBERT T. EDWARDS has served as Executive Vice President of the Company since October 1995 and a member of its Board of Directors since May 1993. He is also a member of the Office of Chief Executive. He served as Senior Vice President -- Fire Protection Services of the Company from August 1991 until October 1995. He served as Vice President and General Manager of the Company's Maricopa County operations from February 1989 to August 1991 and as Vice President from July 1986 until August 1991. From 1978 to July 1986, Mr. Edwards served in various capacities with the Company. 16 19 WILLIAM R. CROWELL has served as Senior Vice President -- Finance and Acquisitions of the Company since July, 1997 after having served as Vice President -- Financial Services of the Company since January 1993. Mr. Crowell served as Director of Financial Services from July 1992 through December 1992. Mr. Crowell served as Vice President -- Finance of Peter Piper, Inc., an international franchisor and food-service retailer, from January 1990 through June 1992 and as Assistant Corporate Controller of W.A. Krueger Co., a publicly held printing company, from April 1988 through December 1989. Mr. Crowell is a certified public accountant. WILLIAM F. GILLIS has served as Senior Vice President -- Enterprise Services and Chief Information Officer since July 1997. Mr. Gillis served as President of Motorola's INFO Enterprises subsidiary from July 1992 through July 1996. From July 1996 until July 1997, he served as Interim Chief Information Officer for the American Graduate School of International Management (Thunderbird), where he has served on the Board of Trustees since 1992. Concurrently, he formed ParentCare Corporation, an information service for the progeny of elder Americans. MARK E. LIEBNER has served as Senior Vice President of the Company since August 1994 and as Chief Financial Officer of the Company since October 1991. From October 1991 to August 1994, Mr. Liebner served as Vice President of the Company. From July 1988 until September 1991, he was a Vice President of Van Kampen Merritt, having served in a consulting capacity to the Company in connection with its 1990 debt restructurings. From March 1982 until June 1988, Mr. Liebner served as Vice President of Lloyds International Corporation, a merchant banking affiliate of Lloyds Bank PLC. ROBERT E. RAMSEY, JR. has served as Senior Vice President of the Company and as a member of its Board of Directors since June 1997. Mr. Ramsey is President and Chief Executive Officer of SW General, Inc. and affiliated companies, which he founded in 1982. He is currently President of the Arizona Ambulance Association. SW General, Inc. and affiliated companies were purchased by the Company in June 1997. JAMES E. STENGER has served as Senior Vice President -- Executive Assistant to the President of the Company since July 1997. Mr. Stenger served as Vice President -- Executive Assistant to the President of the Company from February 1989 through July 1997. He served as Vice President and General Manager of the Company's Pima and Yuma Counties operations from February 1989 through June 1991 and as Vice President and General Manager of the Company's Maricopa County operations from July 1987 through January 1989. He served in various capacities with the Company from 1966 to June 1987. JOHN E. STUART has served as Senior Vice President -- Marketing and New Business Development of the Company since January 1996 after having served as Senior Vice President -- Marketing of the Company from May 1993 through January 1996. Mr. Stuart served as Senior Vice President -- Service Establishments for American Express Travel Related Services, Inc. in London from January 1990 until joining the Company in May 1993 and as Senior Vice President -- Marketing and Sales of that company from January 1988 through December 1989. KURT R. DAVIS has served as Vice President -- Public Affairs and Corporate Communications since August 1995. Mr. Davis joined the Company in February 1992 as Director of Governmental Relations. After an eighteen-month sabbatical in the Arizona Governor's office, Mr. Davis returned to the Company in January 1995 as National Director of Public Affairs. Mr. Davis served as Executive Director of the Arizona Republican Party from 1987 through 1991, and as Director of Intergovernmental Affairs and Issues Analysis in the Arizona Attorney General's Office from 1991 until joining the Company. DEAN P. HOFFMAN has served as Vice President -- Financial Services since July 1997 after having served as Director of Finance from June 1994 to June 1997. Mr. Hoffman served as Director of Accounting and Budgets of Pinnacle West Capital Corporation, a public utility and real estate holding company from June 1987 until October 1992. From October 1992 until June 1994, he was a business consultant in private practice. Mr. Hoffman is a certified public accountant. MICHEL A. SUCHER, M.D., has served as Vice President -- Medical Affairs of the Company since January 1995. He served as National Medical Director for the Company from 1984 to 1995. From 1974 to 1995, Dr. Sucher engaged in the private practice of emergency medicine and held several positions at Scottsdale 17 20 Memorial Hospital, 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. ATUL VASHISTHA has served as Vice President -- Marketing and Business Development since September 1996. He served as Regional President of the Company's Southern Arizona Operations from July 1994 through September 1996. From December 1991 through July 1994, Mr. Vashistha served as the Company's Director of Marketing and Sales. LOUIS G. JEKEL has served as Secretary of the Company and as a member of its Board of Directors since 1968. Mr. Jekel directs the Company's Wildland Fire Protection Operations with the State of Arizona and the federal government. Mr. Jekel is also the Secretary of the Rural/Metro ESOP Administrative Committee. Mr. Jekel is a partner in the law firm of Jekel & Howard, Scottsdale, Arizona. SPECIAL CONSIDERATIONS Dependence on Certain Business Relationships The Company depends to a great extent on certain contracts with municipalities or fire districts to provide "911" emergency ambulance services and fire protection services. The Company's five largest contracts accounted for approximately 22% and 18% of total revenue for the fiscal years ended June 30, 1996 and 1997 respectively, with one contract accounting for approximately 7% and 5% of total revenue for the same periods. The loss or cancellation of any one or more of these contracts could have a material adverse effect on the Company and its operations. No assurance can be given that the Company will be successful in retaining its existing contracts or in obtaining new contracts for ambulance services or for fire protection services. The Company also faces the risk that areas in which it provides fire protection services through subscription arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities. See "Business -- Marketing and Sales," "Business -- Contracts" and "Business -- Competition" contained in Item 1 of this Report. Acquisition Strategy The Company's strategy with respect to ambulance services depends in large part on its continued ability to acquire and to operate successfully additional ambulance service providers. The Company completed eight acquisitions in fiscal 1994, 11 acquisitions in fiscal 1995, 16 acquisitions in fiscal 1996, and 18 acquisitions of ambulance service providers in 1997. There can be no assurance that the Company will be able to identify additional suitable acquisition candidates, that it will be able to consummate any such acquisitions, or that it will be able to integrate any such acquisitions successfully into its operations. The Company expects to use cash and securities, including Common Stock, as the principal consideration for future acquisitions. The Company's acquisition program could be adversely affected if the Company does not generate sufficient cash for future acquisitions from existing operations or through external financings. There can be no assurance that the Company's operations will generate sufficient cash for acquisitions, that any additional financings for acquisitions will be available if and when needed or on terms acceptable to the Company, or that financing that is obtained will be able to be deployed on a prompt basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this Report. Possible Adverse Changes in Reimbursement Rates of Coverage Payments received from third-party payors (including Medicare, Medicaid, and private insurers represent a substantial portion of the Company's ambulance receipts. The Company derived approximately 79% and 74% of its net ambulance fee collections from such third-party payors during 1996 and 1997; including 27% and 26% from Medicare, respectively. There are continuing efforts of third-party payors to control expenditures for health care, including proposals to revise reimbursement policies. During June 1997 HCFA 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 law addressing changes to the reimbursement of ambulance services by Medicare (discussed below), 18 21 have not yet been withdrawn. The proposed new HCFA rules have not been finalized. See "Business -- Reimbursement" contained in Item 1 of this Report. In addition, in August 1997, the Budget Act became law. The Budget Act provides for the development, negotiation, and implementation of a prospective fee schedule for ambulance services between HCFA and ambulance service providers by January 2000. The Budget Act also reduces the annual rate adjustment for Medicare reimbursements from the Consumer Price Index (CPI) to CPI less one percentage point. If the proposed HCFA rules were to be finalized prior to the negotiation of a prospective fee schedule as stipulated in the Budget Act, and the Company were unable to mitigate the effect of the new rules, the Company's results of operations could be adversely effected. 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 reimbursements. A reduction in coverage or reimbursement rates by third-party payors could have a material adverse effect on the Company's results of operations. See "Business -- Billings and Collections," "Business -- Government Regulation," and "Business -- Reimbursement" contained in Item 1 of this Report. Impact of Rate Structures and Limitations on Rates of Return State or local government regulations or administrative policies regulate rate structures in most states in which the Company conducts ambulance operations. In certain service areas in which the Company is the exclusive provider of services, the municipality or fire district sets the rates for emergency service pursuant to a master contract and establishes the rates for general ambulance services that the Company is 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 the Company is permitted to earn in determining the ambulance service rates the Company may charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 11% and 9% of total revenue for the fiscal years ended June 30, 1996 and 1997, respectively. No assurance can be given that the Company 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. Under present coverage programs with third-party payors, the Company faces the continuing risk of nonreimbursement to the extent that uninsured individuals require ambulance service. Changes in demographics in the Company's markets could increase the Company's risk of doubtful accounts which, in turn, could have a material adverse effect on the Company's operating results. See "Business -- Billings and Collections" and "Business -- Governmental Regulation" contained in item 1 of this Report. Municipalities and fire districts negotiate the payments to be made to the Company for fire protection services pursuant to master contracts. These master contracts are based on a budget and on level of effort or performance criteria desired by the municipalities and fire districts. No assurance can be given that the Company will be successful in negotiating or maintaining profitable contracts with municipalities and fire districts. See "Business -- Contracts" contained in Item 1 of this Report. Governmental Regulation Numerous federal, state, and local 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 the Company to certain liabilities or restrictions which traditionally have applied only to governmental bodies or to which they are otherwise immune. There can be no assurance that federal, state, or local governments will not adopt laws or regulations that would increase the Company's cost of doing business, lower reimbursement levels, or otherwise have a material adverse effect on the Company's business. See "Business -- Governmental Regulation" and "Business -- Reimbursement" contained in Item 1 of this Report. 19 22 Industry Considerations Numerous legislative proposals have been considered that would result in major reforms in the United States health care system. The Company cannot predict which, if any, health care reforms may be proposed or enacted or the effect that any such legislation would have on the Company's business. In addition, managed care providers are attempting to contain health care costs through the use of outpatient services and specialized treatment facilities. No assurance can be given that changing industry practices will not have an adverse effect on the Company. Competition The ambulance service industry is highly competitive. The Company currently encounters competition in providing ambulance services from governmental entities (including fire districts), hospitals, other national ambulance service providers, large regional ambulance service providers, and numerous local and volunteer private providers. In addition, there can be no assurance that municipalities, fire districts, or health care organizations that currently contract for ambulance services will not choose to provide ambulance services directly in the future. The Company is experiencing increased competition from fire departments to provide emergency ambulance service. Some of the Company's current competitors and certain potential competitors have greater capital and other resources than the Company. 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 the provision of fire protection services or has not assumed the financial responsibility for fire protection. In these situations, the Company provides services for a municipality or fire district on a contract basis or provides fire protection services directly to residences and businesses on a subscription basis. There can be no assurance that the Company will be able to obtain additional fire protection businesses on a contractual or subscription basis, that fire districts or municipalities will not choose to provide fire protection services directly in the future, or that areas in which the Company provides services through subscriptions will not be converted to tax-supported fire districts or annexed by municipalities. See "Business -- Competition" contained in Item 1 of this Report. Dependence on Management and Other Key Personnel The Company's success depends upon the retention of principal key personnel and the recruitment and retention of additional key personnel. The loss of existing key personnel or the failure to recruit and retain necessary additional personnel would adversely affect the Company's business prospects. There can be no assurance that the Company will be able to retain its current personnel or attract and retain necessary additional personnel. The Company's internal growth and its expansion into new geographic areas will require additional expertise, such as marketing and operational management. These growth and expansion activities will further increase the demand on the Company's resources and require the addition of new personnel and the development of additional expertise by existing personnel. The failure of the Company to attract and retain personnel with the requisite expertise or to develop internally such expertise could adversely affect the prospects for the Company's success. The Company entered into three-year employment agreements with its executive officers in May 1993, which were renewed in December 1995, and has entered into similar agreements with certain other executive officers as they have joined the Company. The Company maintains "key person" insurance on several of its key executive officers. See "Business -- Executive Officers and Key Employees" contained in Item 1 of this Report. Control by Current Stockholders The directors, executive officers, and their affiliates currently own beneficially approximately 10%, and the Company's Employee Stock Ownership Plan (the "ESOP") currently holds approximately 8%, of the outstanding shares of Common Stock. Accordingly, these persons, if they act as a group, likely will be able to significantly influence the election of the Company's directors and the outcome of matters requiring approval by the stockholders of the Company. 20 23 Change in Control Provisions The Company's Second Restated Certificate of Incorporation (the "Restated Certificate") and the Delaware General Corporation Law (the "General Corporation Law") contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of the Company, even when these attempts may be in the best interests of stockholders. The Restated Certificate also authorizes the Board of Directors, without stockholder approval, to issue one or more series of preferred stock which could have voting and conversion rights that adversely affect the voting power of the holders of Common Stock and provides for a classified board of directors. The General Corporation Law also imposes conditions on certain business combination transactions with "interested stockholders" (as defined therein). The Company has also adopted a Rights Plan whereby, if and when the Rights become exercisable, holders of shares of Common Stock will be entitled to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $145 (subject to certain antidilution adjustments). The Rights will expire 10 years after issuance, and will be exercisable only if a person or group becomes the beneficial owner of 15% or more of the Common Stock (such person or group, a "15% holder") or commences a tender or exchange offer which would result in the offeror beneficially owning 15% or more of the Common Stock. If the Rights become exercisable, each Right, unless redeemed by the Company, entitles the holder to purchase for $145 an amount of Common Stock of the Company, or in certain circumstances a combination of securities and/or assets or the common stock of the acquiror, having a market value of twice the purchase price. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at $.01 per Right prior to 10 days (as such period may be extended) after the public announcement of the existence of a 15% holder. Possible Volatility of Stock The market price of the Company's Common Stock has increased since the Company's initial public offering in July 1993. See "Market for the Registrant's Common Equity and Related Stockholder Matters" contained in Item 5 of this Report. The period was marked by generally rising stock prices, favorable industry conditions, and improved operating results by the Company. The trading price of the Company's Common Stock in the future could be subject to wide fluctuations in response to quarterly variations in operating results of the Company and others in its industry, actual or anticipated announcements concerning the Company or its competitors, including government regulations and reimbursement changes, the announcement and implementation of health care reform proposals, changes in analysts' estimates of the Company's financial performance, general conditions in the health care industry, general economic and financial conditions, 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 may adversely affect the market price of the Company's Common Stock. See "Business -- Competition" and "Business -- Governmental Regulation" contained in Item 1 of this Report. Shares Eligible for Future Sale Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. As of September 26, 1997, there were 13,157,348 shares of Common Stock outstanding, 9,874,095 shares of which were freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless held by an "affiliate" of the Company, as that term is defined under the Securities Act. The Company also has outstanding 136,313 restricted shares, as that term is defined under Rule 144 (the "Restricted Shares") under the Securities Act, 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 21 24 addition, the Company has registered 3,200,000 shares of Common Stock for issuance in connection with acquisitions (of which 3,146,940 shares have been issued), which shares are generally freely tradeable after their issuance under Rule 145 of the Securities Act, 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. The Company has registered for offer and sale up to 3,965,625 shares of Common Stock that are reserved for issuance pursuant to the Company's stock option plans. Shares issued after the effective date of such registration statement upon the exercise of stock options issued under the Company's stock option plans generally will be eligible for sale in the public market, except that affiliates of the Company will continue to be subject to volume limitations. The Company also has 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 have a dilutive effect on earnings per share, and the sale of such shares could depress the market price of the Company's Common Stock. ITEM 2. PROPERTIES FACILITIES AND EQUIPMENT The Company leases its principal executive offices in Scottsdale, Arizona. The Company leases administrative facilities and other facilities used principally for ambulance and fire apparatus basing, garaging and maintenance in those areas in which it provides ambulance and fire protection services. The Company also owns six administrative facilities and 11 other facilities within its service areas. Aggregate rental expense was approximately $5.3 million and $6.6 million during fiscal 1996 and 1997, respectively. At September 26, 1997, the Company's fleet included 1,363 owned and 198 leased ambulances, 120 owned and 15 leased fire vehicles and 250 owned and 15 leased other vehicles. ITEM 3. LEGAL PROCEEDINGS The Company from time to time is subject to litigation arising in the ordinary course of business. There can be no assurance that the Company's insurance coverage will be adequate to cover all liabilities occurring out of such claims. In the opinion of management, the Company is not engaged in any legal proceedings expected to have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on the Nasdaq National Market under the symbol RURL since its initial public offering on July 16, 1993 at $12.50 per share. The following table sets forth the high and low sale prices of the Common Stock for the fiscal quarters indicated as reported on the Nasdaq National Market.
HIGH LOW ------ ------ YEAR ENDED JUNE 30, 1996 First quarter.............................................. $26.50 $21.75 Second quarter............................................. 25.25 22.50 Third quarter.............................................. 28.75 22.00 Fourth quarter............................................. 35.75 26.75
22 25
HIGH LOW ------ ------ YEAR ENDED JUNE 30, 1997 First quarter.............................................. $37.13 $29.25 Second quarter............................................. 39.00 32.00 Third quarter.............................................. 35.88 30.50 Fourth quarter............................................. 32.75 26.50
On September 26, 1997, the closing sale price of the Company's Common Stock was $30.50 per share. On September 26, 1997, there were approximately 1,005 holders of record of the Company's Common Stock. Pursuant to a private placement under Section 4(2) of the Securities Act, in May 1997, the Company issued 11,751 shares at $30.63 per share to the former shareholder of Response Medical Transport Service, Inc. ("Response") in connection with the Company's acquisition of Response. In June 1997, pursuant to Section 4(2), the Company issued 3,414 shares at $29.63 per share to the two former shareholders of Lindsay and District Ambulance Service Ltd., 3,414 shares at $29.63 per share to the two former shareholders of Owen Sound Emergency Services Inc., 3,414 shares at $29.63 per share to the former shareholder of Port Colborne and District Ambulance Service Ltd., and 3,414 shares at $29.63 per share to the two former shareholders of Noel Ambulance Service Limited in connection with the Company's acquisition of such companies. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock. The Company currently plans to retain earnings to finance the growth of the Company's 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 the Company as well as other factors deemed relevant by the Board of Directors. The Company's term notes and revolving credit facility contain restrictions on the Company's 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. 23 26 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the fiscal years ended June 30, 1997, 1996, 1995, 1994 and 1993 is derived from the consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes thereto appearing elsewhere in this Report on Form 10-K.
YEARS ENDED JUNE 30, ---------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATE) STATEMENT OF INCOME DATA Revenue Ambulance services............................ $257,488 $197,201 $127,461 $68,942 $52,539 Fire protection services...................... 42,163 38,770 32,274 30,502 28,165 Other......................................... 20,154 14,292 11,848 4,920 3,377 -------- -------- -------- ------- ------- Total revenue.......................... 319,805 250,263 171,583 104,364 84,081 Operating expenses Payroll and employee benefits................. 170,833 135,464 90,843 54,750 44,178 Provision for doubtful accounts............... 43,424 31,036 22,263 13,658 11,083 Depreciation.................................. 12,136 9,778 6,654 4,369 3,522 Amortization of intangibles................... 4,660 3,569 2,074 584 448 Other operating expenses...................... 54,922 45,752 33,809 21,613 17,798 Loss contract/restructuring charge............ 6,026 -- -- -- -- -------- -------- -------- ------- ------- Operating income................................ 27,804 24,664 15,940 9,390 7,052 Interest expense, net........................... 5,720 5,108 3,059 1,780 2,896 -------- -------- -------- ------- ------- Income before income taxes and.................. 22,084 19,556 12,881 7,610 4,156 Provision for income taxes...................... (9,364) (8,044) (5,288) (2,884) (1,471) -------- -------- -------- ------- ------- Income before extraordinary item................ 12,720 11,512 7,593 4,726 2,685 Extraordinary item.............................. -- -- (693) -- -- -------- -------- -------- ------- ------- Net income.................................... $ 12,720 $ 11,512 $ 6,900 $ 4,726 $ 2,685 ======== ======== ======== ======= ======= Net income available for common stock........... $ 12,720 $ 11,512 $ 6,900 $ 4,726 $ 2,685 ======== ======== ======== ======= ======= Earnings per common stock and common stock equivalent(1) Income before extraordinary item.............. $ 1.04 $ 1.14 $ .92 $ .71 $ .63 Extraordinary item............................ -- -- (.08) -- -- -------- -------- -------- ------- ------- Net income............................. $ 1.04 $ 1.14 $ .84 $ .71 $ .63 ======== ======== ======== ======= ======= Earnings per common stock equivalent assuming full dilution(1).............................. $ .61 ======= Weighted average number of common stock and common stock equivalents outstanding.......... Primary....................................... 12,271 10,075 8,249 6,668 4,171 Fully diluted................................. 4,414
24 27
JUNE 30, ---------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATE) BALANCE SHEET DATA Working capital............................... $ 94,766 $ 55,402 $ 26,358 $23,915 $ 4,784 Total assets.................................. 364,066 230,114 159,430 88,247 45,816 Current portion of long-term debt(2).......... 9,814 6,610 8,377 3,590 9,827 Long-term debt, net of current portion........ 144,643 60,731 53,282 13,339 15,382 Stockholders' equity.......................... 159,808 119,966 65,648 47,349 4,093
- --------------- (1) Primary and fully diluted earnings per share are considered to be the same in all periods presented except for the year ended June 30, 1993. (2) Includes balances outstanding under the Company's revolving credit facility of $6,690,000 at June 30, 1993. (3) Includes balances outstanding under the Company's revolving credit facility of $134,000,000, $49,500,000 and $34,900,000 at June 30, 1997, 1996 and 1995, respectively. 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 the Selected Consolidated Financial Data and the Consolidated Financial Statements of the Company and related notes appearing elsewhere in this report on Form 10-K. INTRODUCTION The Company derives its revenue primarily from fees charged for ambulance and fire protection services. The Company provides 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 transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities or fire districts or on a nonrefundable subscription fee basis to individual homeowners or commercial property owners. 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 the Company's ambulance service fee receipts. Provision for doubtful accounts is made for the expected difference between ambulance services fees charged and amounts actually collected. The Company's 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 the Company's 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 the Company's markets and is generally higher in markets in which the calls are primarily "911" emergency ambulance service calls. Rates in the Company's markets take into account the anticipated number of calls that may not result in transports. The Company does not separately account for expenses associated with calls that do not result in transports. Revenue generated under fire protection services 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 generally is one year. 25 28 Other revenue primarily consists of fees associated with alternative transportation services and home health care services and are recognized when the services are provided. Other operating expenses primarily consist of rent and related occupancy expenses, maintenance and repairs, insurance, fuel and supplies, travel and professional fees. The Company's net income for the year ended June 30, 1997 was $12.7 million or $1.04 per share. This compares to net income of $11.5 million and $6.9 million, or $1.14 and $0.84 per share for the years ended June 30, 1996 and 1995, respectively. Included in 1995 net income is an extraordinary charge to earnings of $0.7 million, net of a $0.5 million tax benefit, or $0.08 per share, to reflect the loss on early extinguishment of debt. During fiscal 1997, the Company completed the acquisition of eighteen ambulance service providers operating in Arizona, Arkansas, Georgia, Indiana, Kentucky, New York, Ohio, Pennsylvania and Ontario, Canada. The following discussion provides greater detail of the Company's results of operations and liquidity and capital resources. RESULTS OF OPERATIONS The following table sets forth for the years ended June 30, 1997, 1996 and 1995, certain items from the Company's consolidated financial statements expressed as a percentage of total revenue:
YEARS ENDED JUNE 30, ------------------------- 1997 1996 1995 ----- ----- ----- Revenue Ambulance services................................ 80.5% 78.8% 74.3% Fire protection services.......................... 13.2 15.5 18.8 Other............................................. 6.3 5.7 6.9 ----- ----- ----- Total revenue............................. 100.0 100.0 100.0 Operating expenses Payroll and employee benefits..................... 53.4 54.1 52.9 Provision for doubtful accounts................... 13.6 12.4 13.0 Depreciation...................................... 3.8 3.9 3.9 Amortization of intangibles....................... 1.5 1.4 1.2 Other operating expenses.......................... 17.1 18.3 19.7 Loss contract/restructuring charge................ 1.9 -- -- ----- ----- ----- Operating income.................................... 8.7 9.9 9.3 Interest expense, net............................. 1.8 2.1 1.8 ----- ----- ----- Income before income taxes and extraordinary item... 6.9 7.8 7.5 Provision for income taxes........................ 2.9 3.2 3.1 ----- ----- ----- Income before extraordinary item.................... 4.0% 4.6% 4.4% ===== ===== =====
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1997 Revenue Total revenue increased $69.5 million, or 27.8%, from $250.3 million for the year ended June 30, 1996 to $319.8 million for the year ended June 30, 1997. Approximately $43.6 million of this increase resulted from the acquisition of ambulance service providers during fiscal 1997. Fire protection services revenue increased by $3.4 million, and other revenue increased by $5.9 million. Total ambulance transports increased by 205,000, or 28.9%, from 710,000 for the year ended June 30, 1996 to 915,000 for the year ended June 30, 1997. The acquisition of eighteen ambulance service companies during fiscal 1997 accounted for 154,000 of these additional transports. 26 29 Fire protection services revenue increased due to rate increases for fire protection services and greater utilization of the Company's services under fee-for-service arrangements. The increase also resulted from the revenue generated from new fire protection contracts awarded to the Company through competitive bidding. Operating Expenses Payroll and employee benefit expenses increased $35.4 million, or 26.1%, from $135.4 million for the year ended June 30, 1996 to $170.8 million for the year ended June 30, 1997. This increase was primarily due to the acquisition of nineteen companies during fiscal 1997. Payroll and employee benefits decreased from 54.1% of total revenue for the year ended June 30, 1996 to 53.4% of total revenue for the year ended June 30, 1997 as a result of operational efficiencies. Provision for doubtful accounts increased $12.4 million, or 40.0%, from $31.0 million for the year ended June 30, 1996 to $43.4 million for the year ended June 30, 1997. Provision for doubtful accounts increased from 12.4% of total revenue for the year ended June 30, 1996 to 13.6% of total revenue for the year ended June 30, 1997, reflecting the effect of the acquisition of ambulance service providers operating in markets with a greater mix of "911" emergency activity. Depreciation increased $2.3 million, or 23.5%, from $9.8 million for the year ended June 30, 1996 to $12.1 million for the year ended June 30, 1997, primarily due to increased property and equipment from recent acquisition activity. Amortization of intangibles increased by $1.1 million, or 30.6%, from $3.6 million for the year ended June 30, 1996 to $4.7 million for the year ended June 30, 1997. This increase was the result of increased intangible assets caused by recent acquisition activity. Amortization of intangibles increased from 1.4% of total revenue for the year ended June 30, 1996 to 1.5% for the year ended June 30, 1997. Other operating expenses increased $9.2 million, or 20.1%, from $45.7 million for the year ended June 30, 1996 to $54.9 million for the year ended June 30, 1997, primarily as a result of increased expenses associated with the operation of the nineteen companies acquired during fiscal 1997. Other operating expenses decreased from 18.3% of total revenue for the year ended June 30, 1996 to 17.1% of total revenue for the year ended June 30, 1997 as a result of operational efficiencies. The Company recorded a $6.0 million non-recurring pre-tax charge for the year ended June 30, 1997. Included in this amount was an allowance of $3.2 million related to an unprofitable ambulance service contract. Also included was a restructuring charge of $2.8 million relating to the integration of ambulance company acquisitions. The charge consists primarily of severance costs and other costs related to the elimination of redundant functions. Management expects the integration to be completed during fiscal 1998. Interest expense increased by $0.6 million, or 11.8%, from $5.1 million for the year ended June 30, 1996 to $5.7 million for the year ended June 30, 1997. This increase was caused by higher debt balances, reflecting increased borrowings on the Company's revolving credit facility. The Company's effective tax rate increased from 41.1% for the year ended June 30, 1996 to 42.4% for the year ended June 30, 1997, primarily the result of a higher percentage of the Company's taxable income being generated in higher tax rate states and the effect of nondeductible goodwill generated in connection with the acquisition of certain ambulance service providers. YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1996 Revenue Total revenue increased $78.7 million, or 45.9%, from $171.6 million for the year ended June 30, 1995 to $250.3 million for the year ended June 30, 1996. Approximately $56.1 million of this increase resulted from the acquisition of ambulance service providers during fiscal 1996. Fire protection services revenue increased by $6.5 million, and other revenue increased by $2.4 million. 27 30 Total ambulance transports increased by 241,000, or 51.4%, from 469,000 for the year ended June 30, 1995 to 710,000 for the year ended June 30, 1996. The acquisition of sixteen ambulance service companies during fiscal 1996 accounted for 227,000 of these additional transports. Fire protection services revenue increased due to rate increases for fire protection services and greater utilization of the Company's services under fee-for-service arrangements. The increase also resulted from the acquisition of a fire protection service company during the first quarter of fiscal 1996 and revenue generated from new fire protection contracts awarded to the Company through competitive bidding. Operating Expenses Payroll and employee benefit expenses increased $44.6 million, or 49.1%, from $90.8 million for the year ended June 30, 1995 to $135.4 million for the year ended June 30, 1996. This increase was primarily due to the acquisition of eighteen companies during fiscal 1996. Provision for doubtful accounts increased $8.7 million, or 39.0%, from $22.3 million for the year ended June 30, 1995 to $31.0 million for the year ended June 30, 1996. Provision for doubtful accounts decreased from 13.0% of total revenue for the year ended June 30, 1995 to 12.4% of total revenue for the year ended June 30, 1996, reflecting the effect of the acquisition of ambulance service providers operating in markets with higher receivable collections as a result of a greater mix of general transport activity. Depreciation increased $3.1 million, or 46.3%, from $6.7 million for the year ended June 30, 1995 to $9.8 million for the year ended June 30, 1996, primarily due to increased property and equipment from recent acquisition activity. Amortization of intangibles increased by $1.5 million, or 71.4%, from $2.1 million for the year ended June 30, 1995 to $3.6 million for the year ended June 30, 1996. This increase was the result of increased intangible assets caused by recent acquisition activity. Amortization of intangibles increased from 1.2% of total revenue for the year ended June 30, 1995 to 1.4% for the year ended June 30, 1996. Other operating expenses increased $11.9 million, or 35.2%, from $33.8 million for the year ended June 30, 1995 to $45.7 million for the year ended June 30, 1996, primarily as a result of increased expenses associated with the operation of the eighteen companies acquired during fiscal 1996. Other operating expenses decreased from 19.7% of total revenue for the year ended June 30, 1995 to 18.3% of total revenue for the year ended June 30, 1996 as a result of operational efficiencies. Interest expense increased by $2.0 million, or 64.5%, from $3.1 million for the year ended June 30, 1995 to $5.1 million for the year ended June 30, 1996. This increase was caused by higher debt balances, reflecting increased borrowings on the Company's revolving credit facility. The Company's effective tax rate increased from 41.0% for the year ended June 30, 1995 to 41.1% for the year ended June 30, 1996, primarily the result of a higher percentage of the Company's taxable income being generated in higher tax rate states and the effect of nondeductible goodwill generated in connection with the acquisition of certain ambulance service providers. This increase was partially offset by tax planning strategies implemented by the Company during fiscal 1996. 28 31 SEASONALITY AND QUARTERLY RESULTS The following table reflects certain selected unaudited quarterly operating results for each quarter of fiscal 1997 and 1996. 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, 1995 1995 1996 1996 1996 1996 1997 1997 --------- -------- --------- --------- --------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Ambulance service.................. $43,404 $48,053 $51,789 $53,955 $59,028 $62,465 $69,161 $66,834 Fire protection.................... 9,255 9,435 9,813 10,267 10,305 10,349 10,551 10,958 Other revenue...................... 3,104 3,351 3,382 4,455 4,661 4,716 5,209 5,568 ------- ------- ------- ------- ------- ------- ------- ------- Total revenue...................... 55,763 60,839 64,984 68,677 73,994 77,530 84,921 83,360 Operating Income................... 4,814 5,339 6,775 7,736 6,592 7,474 9,500 4,238 Net Income......................... 2,102 2,396 2,989 4,025 3,299 3,771 4,675 975 Earnings per common stock and common stock equivalent: $ 0.23 $ 0.25 $ 0.31 $ 0.35 $ 0.28 $ 0.31 $ 0.38 $ 0.08 ======= ======= ======= ======= ======= ======= ======= =======
The Company has historically experienced, and expects to continue to experience, moderate 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 the Company's Arizona and Florida regions resulting from the greater winter populations in those regions. The effect of the acquisition of ambulance service providers in the northeastern and midwestern regions of the United States has reduced, and will continue to reduce, the overall seasonality in operating results. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, and the sale of stock through an initial public offering in July 1993, generating net proceeds of approximately $19.5 million, and subsequent public stock offering in May 1994 and April 1996, generating net proceeds of approximately $17.4 million and $34.8 million, respectively. During the year ended June 30, 1997, the Company used $11.1 million in cash flow from operations compared with $1.4 million provided by operations in the preceding year, due primarily to increases in accounts receivable, inventories and prepaid expenses and decreases in accounts payable and accrued liabilities. During September 1995, the Company funded a fully underwritten credit agreement for a $125.0 million revolving credit facility. The Company used the proceeds from the facility to repay the Company's then existing revolving credit facility and its notes payable. Costs previously deferred related to certain indebtedness resulted in an extraordinary charge to earnings of $693,000, net of a $480,000 tax benefit, or $.08 per share in the year ended June 30, 1995. In May 1997, the credit agreement was increased from $125.0 million to $175.0 million. Approximately $134.0 million was outstanding on the credit facility at June 30, 1997. This six-year revolving credit facility is priced at the prime rate or a LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.75% to LIBOR plus 1.75% depending upon the Company meeting certain financial covenants. Beginning September 30, 1999, the amount available under the facility begins to reduce at three-month intervals until the termination date at September 30, 2001. The facility is collateralized by the Company's accounts and notes receivable, common stock of its subsidiaries and partnership interests. At September 26, 1997, borrowings on the revolving credit facility were approximately $150.0 million. At June 30, 1997, the Company had availability of approximately $37.0 million under the revolving credit facility. Exclusive of payments on the revolving credit facility, the Company repaid $21.3 million of notes payable and capital lease obligations during the year ended June 30, 1997 and $20.3 million during the year ended June 30, 1996. Capital expenditures were $23.9 million during the year ended June 30, 1997 compared to 29 32 $18.2 million during the prior year, of which $2.0 million was financed through capital lease obligations in the year ended June 30, 1996. During the year ended June 30, 1997, the Company purchased either all of the issued and outstanding stock or certain of the assets of nineteen companies operating in Arizona, Arkansas, Georgia, Indiana, Kentucky, New York, Ohio, Pennsylvania and Ontario, Canada. The combined purchase price was $82.6 million. The Company paid cash of $35.5 million, issued notes payable to sellers totaling $4.5 million, issued 1.2 million shares of common stock to sellers (361,970 shares were related to pooling-of-interests transactions and the remaining shares were valued at $18.7 million), and assumed $23.9 million of liabilities. The Company funded the cash portion of the acquisitions through operating cash flow and from the Company's revolving credit facility. Subsequent to June 30, 1997 the Company purchased either all the issued and outstanding stock or certain assets of four ambulance service providers with operations in Alabama, Georgia, Mississippi, New Jersey, New York and Tennessee. The combined purchase price was $6.1 million. The Company paid cash of $3.7 million, issued notes payable to sellers of $1.2 million and assumed $1.2 million of liabilities. The Company issued 641,009 shares related to two of the acquisitions which were recorded as pooling-of-interests transactions. The Company expects that existing working capital, together with cash flow from operations and additional borrowing capacity, will be sufficient to meet its operating and capital needs for existing operations for the twelve months subsequent to June 30, 1997. The Company is engaged in an active acquisition program. The Company intends to fund any acquisitions that it consummates through the use of cash from operations, credit facilities, seller notes payable and the issuance of common stock. In addition, the Company may seek to raise additional capital through public or private debt or equity financings. The availability of these capital sources will depend upon prevailing market conditions, interest rates and the financial condition of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Consolidated Financial Statements, the Notes thereto and Report of Independent Public Accountants thereon commencing at page F-1 of this Report, which Consolidated Financial Statements, Notes and Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to the information contained under the headings "Proposal to Elect Directors -- Nominees" as set forth in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. The information required by this Item relating to executive officers of the Company is included in "Business -- Executive Officers and Key Employees" contained in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 relating to directors of the Company is incorporated herein by reference to the information under the heading "Director Compensation and Other Information" and the information relating to executive officers of the Company is incorporated herein by reference to the information under the heading "Executive Compensation" as set forth in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. 30 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the information under the heading "Security Ownership of Principal Stockholders, Directors and Officers" as set forth in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the information under the heading "Certain Relationships and Related Transactions" as set forth in the Company's definitive proxy statement for its 1997 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 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(12) 3.1(b) Rights Agreement dated as of August 23, 1995 between the Registrant and American Securities Transfer, Inc., the Rights Agent(13) 3.2 Amended and Restated Bylaws of the Registrant(1) 4 Specimen Certificate representing shares of Common Stock, par value $.01 per share(1) 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.(5) 10.4 Form of Stock Option Agreement pursuant to 1989 Employee Stock Option Plan of Registrant(1) 10.5(a) Amended and Restated 1992 Stock Option Plan of Registrant, amended through October 1995(14) 10.5(b) Amended and Restated 1992 Stock Option Plan of Registrant, amended through September 6, 1996 10.6 Forms of Stock Option Agreements pursuant to the Amended and Restated 1992 Stock Option Plan of Registrant(1) 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 and November 1, 1994(1) 10.16(a) Form of Employment Agreement by and between Registrant and each of the following executive officers: James H. Bolin, Robert T. Edwards, Mark E. Liebner, John E. Stuart, William R. Crowell, and James E. Stenger, each dated October 27, 1995, and William F. Gillis, dated July 1, 1997.(19) 10.16(c) Form of Change of Control Agreement by and between the Registrant and the following executive officers: (i) Warren S. Rustand, dated November 3, 1995 and (ii) James H. Bolin, Robert T. Edwards, Mark E. Liebner, William R. Crowell, James E. Stenger, and John E. Stuart, each dated December 1, 1995(18)
31 34
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ---------- --------------------------------------------------------------------------------- 10.16(d) Employment Agreement by and between Registrant and Warren S. Rustand, dated November 3, 1995.(18) 10.16(e) Employment Agreement by and between Registrant and Robert E. Ramsey Jr., dated June 30, 1997. 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 and as of October 13, 1994(1) 10.18(a) Employee Stock Ownership Plan and Trust of the Registrant, effective July 1, 1989(1) 10.18(b) Amendment No. 1 to the Employee Stock Ownership Plan of the Registrant, dated February 4, 1994(12) 10.18(c) Amendment No. 2 to the Employee Stock Ownership Plan of the Registrant, dated April 14, 1994(13) 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) 10.29 Stock Purchase Agreement by and among Rural/Metro Corporation of New Mexico-Texas and John A. Suess with respect to the stock of Allied Ambulance, Inc., dated as of May 26, 1994(3) 10.30 Stock Purchase Agreement by and among Rural/Metro Corporation of New Mexico-Texas and Michael S. Harris and Stephanie J. Harris with respect to the stock of M.T.S. Ambulance, Inc., dated as of May 21, 1994(3) 10.31 Stock Purchase Agreement by and among Rural/Metro Corporation of New Mexico-Texas and Randy J. Cohen with respect to the stock of Medical Transportation Services, Inc., dated as of May 21, 1994(3) 10.33 Bill of Sale and Asset Purchase Agreement by and between Patient Transfer System, Inc., Charles B. Brockette, Sr., and Apollo Ambulance Service, Inc., dated August 13, 1994(3) 10.34 Stock Purchase Agreement by and among Rural/Metro of Nebraska, Inc. and Marty J. Miller, Michael G. Dodge, Russel J. Bayer, Mike Stuhr, Rick Sheehy, and Doug Wyatt, with respect to the stock of Eastern Ambulance Service, Inc., dated July 22, 1994(3) 10.35 Asset Purchase Agreement by and among PHAS, Inc., an indirect, wholly owned subsidiary of the Company, Physicians Ambulance Service, Incorporated, PhysiciansLifeline, Inc., Physmed, Inc., Physicians/Medic Transport, Incorporated, and Hess Ambulance Service, Inc., and Ronald C. Hess and Robert Hess, Jr., dated September 11, 1994(4) 10.36 Employee Stock Purchase Plan of Registrant, as amended through September 6, 1996(11) 10.37 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(5) 10.38 Loan Agreement by and between the Registrant, together with its subsidiaries, and Bank One, Arizona, NA, with respect to the Registrant's existing revolving credit facility, dated January 20, 1995(5) 10.39 Stock Purchase Agreement by and among Rural/Metro of Georgia, Inc., Barbara Gallagher and Derek Fowkes with respect to the stock of E.M.S. Ventures, Inc. and Professional Convalescent Ambulance Service, Inc., dated January 19, 1995(6) 10.40 Agreement of Merger and Plan of Reorganization by and among American Amco, Inc., Rural/Metro Corporation, American Ambulance Company and Donald P. Doepping, Sr., dated February 24, 1995(7) 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(8)
32 35
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ---------- --------------------------------------------------------------------------------- 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(9) 10.43 Stock Purchase Agreement by and among Rural/Metro of New York, Inc., Joseph H. Oddo and Lillian E. Oddo with respect to the stock of Towns Ambulance Service, Inc., dated May 10, 1995(9) 10.44 Agreement and Plan of Reorganization by and between the Registrant and Daniel H. Becker, dated May 19, 1995(10) 10.45 Credit Agreement, as amended, dated as of December 30, 1996, by and among Registrant as guarantor, certain of its subsidiaries as borrowers, First Union National Banking Association, as agent and as lender, and various other lenders, and related Form of Note, Form of Security Agreement and Form of Pledge Agreement(15) 10.46 Stock Purchase Agreement by and among Rural/Metro of New York, Inc. and Alan D. Lewis, Sr. and Pamela A. Lewis with respect to the stock of Corning Ambulance Service, Inc., dated June 15, 1995(16) 10.47 Agreement of Merger and Plan of Reorganization by and among Aid Acquisition, Inc., Rural/Metro Corporation and The Aid Company, Inc., Stanley I. Guilkey, Jack H. Herider, and Nancy C. Herider, dated October 10, 1995(17) 10.48 Agreement of Merger and Plan of Reorganization by and among Vigo Acquisition, Inc., Rural/Metro Corporation, and Aid Ambulance at Vigo County, Inc., Stanley I. Guilkey, Jack H. Herider and Nancy C. Herider, Jean M. Yoho and Gregory A. Yoho, dated October 10, 1995(17) 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.(20) 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.(20) 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.(20) 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.(20) 10.53 Second Amendment to Credit Agreement by and among Rural/Metro Corporation, certain subsidiaries of Rural/Metro Corporation, and First Union National Bank, as Agent for the Lenders, dated May 29, 1997. 21 Subsidiaries of Registrant 23.2 Consent of Arthur Andersen LLP 27 Financial Data Schedule
- --------------- (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-K Annual Report filed with the Commission on or about September 28, 1994. (4) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about September 26, 1994, as amended by the Registrant's Form 8-K/A Current Reports filed on or about November 25, 1994 and August 1, 1995. 33 36 (5) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about May 12, 1995. (6) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about February 2, 1995. (7) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about March 10, 1995. (8) 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. (9) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about May 19, 1995. (10) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about June 2, 1995. (11) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 14, 1997. (12) 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. (13) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about August 28, 1995. (14) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 14, 1996. (15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about February 14, 1997. (16) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about August 18, 1995, as amended by the Registrant's Form 8-K/A Current Report filed on or about August 28, 1995. (17) Incorporated by reference to the Registrant's Form 8-K Current Report filed with the Commission on or about November 10, 1995. (18) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report filed with the Commission on or about May 15, 1996. (19) Incorporated by reference to the Registrant's Form 10-K filed with the Commission on or about September 27, 1996. (20) 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 on or about August 12, 1997. (b) Financial Statements filed as part of this report: Consolidated Financial Statements and Supplemental Schedules as listed in the Index to Consolidated Financial Statements on page F-1 of this report. (c) Reports on Form 8-K: None. (d) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts All other schedules have been omitted on the basis of immateriality or because such schedules are not otherwise applicable. 34 37 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/ DEAN P. HOFFMAN ------------------------------------ Dean P. Hoffman Vice President, Financial Services 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 - ---------------------------------------- -------------------------------- ------------------- By: /s/ WARREN S. RUSTAND Chairman of the Board of September 29, 1997 - ---------------------------------------- Directors Warren S. Rustand and Chief Executive Officer (Principal Executive Officer) By: /s/ JAMES H. BOLIN President and Director September 29, 1997 - ---------------------------------------- (Principal Executive Officer) James H. Bolin By: /s/ ROBERT T. EDWARDS Executive Vice President and September 29, 1997 - ---------------------------------------- Director (Principal Executive Robert T. Edwards Officer) By: /s/ MARK E. LIEBNER Senior Vice President, Chief September 29, 1997 - ---------------------------------------- Financial Officer and Mark E. Liebner Treasurer (Principal Financial Officer) By: /s/ ROBERT E. RAMSEY Senior Vice President and September 29, 1997 - ---------------------------------------- Director Robert E. Ramsey By: /s/ DEAN P. HOFFMAN Vice President, Financial September 29, 1997 - ---------------------------------------- Services Dean P. Hoffman (Principal Accounting Officer) By: /s/ COR J. CLEMENT Director September 29, 1997 - ---------------------------------------- Cor J. Clement By: /s/ LOUIS G. JEKEL Director September 29, 1997 - ---------------------------------------- Louis G. Jekel By: /s/ WILLIAM C. TURNER Director September 29, 1997 - ---------------------------------------- William C. Turner By: /s/ HENRY G. WALKER Director September 29, 1997 - ---------------------------------------- Henry G. Walker By: /s/ LOUIS A. WITZEMAN Director September 29, 1997 - ---------------------------------------- Louis A. Witzeman
35 38 RURAL/METRO CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.............................................. F-2 Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1997 and 1996............................ F-3 Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995............................................................................. F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995.......................................................... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995............................................................................. F-6 Notes to Consolidated Financial Statements.......................................... F-7 Supplemental Schedule Schedule II -- Valuation and Qualifiying Accounts................................... F-20
F-1 39 ARTHUR ANDERSEN LLP 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 as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. 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. ARTHUR ANDERSEN LLP Phoenix, Arizona, August 21, 1997. F-2 40 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS)
1997 1996 -------- -------- ASSETS CURRENT ASSETS Cash................................................................. $ 3,398 $ 1,388 Accounts receivable, net of allowance for doubtful accounts of $35,814 and $26,571, respectively (Notes 1 and 4)................. 106,978 68,642 Inventories (Note 1)................................................. 8,645 5,170 Prepaid expenses and other........................................... 7,162 5,710 -------- -------- Total current assets......................................... 126,183 80,910 PROPERTY AND EQUIPMENT, net (Notes 1 and 3)............................ 70,645 48,401 INTANGIBLE ASSETS, net (Notes 1 and 2)................................. 160,282 96,373 OTHER ASSETS........................................................... 6,956 4,430 -------- -------- $364,066 $230,114 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable..................................................... $ 4,359 $ 4,092 Accrued liabilities (Note 1)......................................... 17,244 14,806 Current portion of long-term debt (Notes 3 and 4).................... 9,814 6,610 -------- -------- Total current liabilities.................................... 31,417 25,508 LONG-TERM DEBT, net of current portion (Notes 3 and 4)................. 144,643 60,731 NON-REFUNDABLE SUBSCRIPTION INCOME..................................... 13,367 12,582 DEFERRED INCOME TAXES (Note 9)......................................... 10,772 9,060 OTHER LIABILITIES...................................................... 4,059 2,267 -------- -------- Total liabilities............................................ 204,258 110,148 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY (Notes 2, 6 and 7) Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued at June 30, 1997 and 1996.................................. -- -- Common stock, $.01 par value, 23,000,000 shares authorized; 12,770,147 and 11,092,736 shares outstanding at June 30, 1997 and 1996, respectively................................................ 130 113 Additional paid-in capital........................................... 121,355 92,359 Retained earnings.................................................... 40,334 30,181 Deferred compensation................................................ (772) (1,448) Treasury stock, at cost, 149,456 shares at June 30, 1997 and 1996.... (1,239) (1,239) -------- -------- Total stockholders' equity................................... 159,808 119,966 -------- -------- $364,066 $230,114 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 41 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 -------- -------- -------- REVENUE Ambulance services....................................... $257,488 $197,201 $127,461 Fire protection services................................. 42,163 38,770 32,274 Other.................................................... 20,154 14,292 11,848 -------- -------- -------- Total revenue.................................... 319,805 250,263 171,583 -------- -------- -------- OPERATING EXPENSES Payroll and employee benefits............................ 170,833 135,464 90,843 Provision for doubtful accounts.......................... 43,424 31,036 22,263 Depreciation............................................. 12,136 9,778 6,654 Amortization of intangible assets........................ 4,660 3,569 2,074 Other operating expenses................................. 54,922 45,752 33,809 Loss contract/restructuring charge (Note 1).............. 6,026 -- -- -------- -------- -------- Total expenses................................... 292,001 225,599 155,643 -------- -------- -------- OPERATING INCOME........................................... 27,804 24,664 15,940 INTEREST EXPENSE, net (Note 4)............................. 5,720 5,108 3,059 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.......... 22,084 19,556 12,881 PROVISION FOR INCOME TAXES (Note 9)........................ 9,364 8,044 5,288 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM........................... 12,720 11,512 7,593 EXTRAORDINARY ITEM (Note 4) Loss on early extinguishment of debt (net of tax effect of $480).............................................. -- -- 693 -------- -------- -------- NET INCOME................................................. $ 12,720 $ 11,512 $ 6,900 ======== ======== ======== EARNINGS PER COMMON STOCK AND COMMON STOCK EQUIVALENT (Note 1) Income before extraordinary item......................... $ 1.04 $ 1.14 $ .92 Extraordinary item....................................... -- -- (.08) -------- -------- -------- Net income....................................... $ 1.04 $ 1.14 $ .84 ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON STOCK AND COMMON STOCK EQUIVALENTS OUTSTANDING.................................. 12,271 10,075 8,249
The accompanying notes are an integral part of these consolidated financial statements. F-4 42 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
ADDITIONAL PREFERRED COMMON PAID-IN RETAINED DEFERRED TREASURY STOCK STOCK CAPITAL EARNINGS COMPENSATION STOCK TOTAL --------- ------ ---------- --------- ------------ -------- -------- BALANCE, June 30, 1994.................. $ -- $ 78 $ 43,415 $ 6,885 $ (1,790) $(1,239) $ 47,349 Issuance of 507,692 shares of common stock for pooling-of-interests (Note 2).................................. -- 5 27 2,127 -- -- 2,159 ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1994 as restated for effect of pooling-of-interests........ -- 83 43,442 9,012 (1,790) (1,239) 49,508 Issuance of 682,331 shares of common stock............................... -- 7 8,613 -- (205) -- 8,415 Tax benefit related to the exercise and vesting of nonqualified stock options and stock grants............ -- -- 376 -- -- -- 376 Amortization of deferred compensation........................ -- -- -- -- 449 -- 449 Net income............................ -- -- -- 6,900 -- -- 6,900 ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1995.................. -- 90 52,431 15,912 (1,546) (1,239) 65,648 Issuance of 657,329 shares of common stock for pooling-of-interests (Note 2).................................. -- 7 151 2,757 -- -- 2,915 ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1995 as restated for effect of pooling-of-interests........ -- 97 52,582 18,669 (1,546) (1,239) 68,563 Issuance of 1,657,512 shares of common stock net of offering costs of $2,506.............................. -- 16 38,795 -- (535) -- 38,276 Tax benefit related to the exercise and vesting of nonqualified stock options and stock grants............ -- -- 982 -- -- -- 982 Amortization of deferred compensation........................ -- -- -- -- 633 -- 633 Net income............................ -- -- -- 11,512 -- -- 11,512 ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1996.................. -- 113 92,359 30,181 (1,448) (1,239) 119,966 Issuance of 361,970 shares of common stock for pooling-of-interests (Note 2).................................. -- 4 -- (2,567) -- -- (2,563) ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1996 as restated for effect of pooling-of-interests........ -- 117 92,359 27,614 (1,448) (1,239) 117,403 Issuance of 1,315,441 shares of common stock............................... -- 13 24,129 -- -- -- 24,142 Tax benefit related to the exercise and vesting of nonqualified stock options and stock grants............ -- -- 4,867 -- -- -- 4,867 Amortization of deferred compensation........................ -- -- -- -- 676 -- 676 Net income............................ -- -- -- 12,720 -- -- 12,720 ---- ---- -------- ------- ------- ------- -------- BALANCE, June 30, 1997.................. $ -- $130 $121,355 $40,334 $ (772) $(1,239) $159,808 ==== ==== ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 43 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 12,720 $ 11,512 $ 6,900 Adjustments to reconcile net income to net cash provided by (used in) operating activities Extraordinary item.................................... -- -- 693 Depreciation and amortization......................... 16,796 13,347 8,728 Amortization of deferred compensation................. 676 633 449 Amortization of gain on sale of real estate........... (103) (103) (103) Provision for doubtful accounts....................... 43,424 31,036 22,263 Changes in assets and liabilities, net of effect of businesses acquired Increase in accounts receivable....................... (75,352) (52,474) (31,369) Increase in inventories............................... (2,651) (1,684) (996) Increase in prepaid expenses and other................ (1,867) (2,937) (273) Increase (decrease) in accounts payable............... (1,255) (1,653) 1,946 Increase (decrease) in accrued liabilities............ (4,380) 1,334 (1,586) Increase in non-refundable subscription income........ 124 788 931 Increase in deferred income taxes..................... 806 1,580 966 -------- -------- -------- Net cash provided by (used in) operating activities..................................... (11,062) 1,379 8,549 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net............. 86,000 15,100 34,900 Repayment of debt and capital lease obligations.......... (21,328) (20,346) (10,784) Borrowings of debt....................................... -- 2,016 2,702 Issuance of common stock................................. 10,310 38,048 998 -------- -------- -------- Net cash provided by financing activities........ 74,982 34,818 27,816 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for businesses acquired (Note 2)............... (35,512) (17,164) (32,914) Capital expenditures..................................... (23,872) (18,237) (11,474) Increase in other assets................................. (2,526) (308) (926) -------- -------- -------- Net cash used in investing activities............ (61,910) (35,709) (45,314) -------- -------- -------- INCREASE (DECREASE) IN CASH................................ 2,010 488 (8,949) CASH, beginning of year.................................... 1,388 900 9,849 -------- -------- -------- CASH, end of year.......................................... $ 3,398 $ 1,388 $ 900 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 44 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, fire protection and training services, and home health care services and equipment in 21 states, Canada and Latin America. 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. 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 18%, 22%, and 30% of total revenue for the fiscal years ended June 30, 1997, 1996 and 1995, respectively, with the largest of the five contracts accounting for 5%, 7%, and 9%, 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. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Rural/Metro Corporation and its subsidiaries. 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 1997, 1996 and 1995, the Company derived approximately 26%, 27% and 33%, respectively, of its net ambulance fee collections from Medicare and 10%, 11% and 12%, respectively, from Medicaid. 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 and profitability of the Company. 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 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. Medicare reimbursement for ambulance services provided during calendar years 1998 and 1999 will be increased by the Consumer Price Index (CPI) less one percentage point. The Act also stipulates that individual states may now elect to no longer provide payment for Medicare cost-sharing for coinsurance, or copayments, for Medicaid beneficiaries. The Act also extended Medicare coverage for certain paramedic services provided in rural areas. F-7 45 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Due to the uncertainty associated with the negotiation and subsequent outcome of the prospective fee schedule, the Company is unable to predict the ultimate impact of the Act. However, future impact of the Act, together with the financial instability of private third-party payors, budget pressures on payor sources and cost shifting by government, could influence the timing and, potentially, the ultimate receipt of reimbursements. 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 services and home health care services and is recognized when the services are provided. EARNINGS PER SHARE Earnings per share is computed by dividing net income available for common stock by the weighted average number of shares of common stock and common stock equivalents assumed outstanding during the period. Primary and fully diluted earnings per share are considered to be the same in all periods presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which supersedes Accounting Principles Board (APB) Opinion No. 15, the existing authoritative guidance. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and requires restatement of all prior period earnings per share (EPS) data presented. The new statement modifies the calculation of primary and fully diluted EPS and replaces them with basic and diluted EPS. Pro forma EPS, assuming implementation of SFAS No. 128 at the beginning of the years ended June 30, 1997, 1996 and 1995, is as follows:
1997 1996 1995 ----- ----- ------ Basic: Income before extraordinary income............... $1.10 $1.20 $ 0.96 Extraordinary item............................... -- -- (0.09) ----- ----- ------ Net income............................... $1.10 $1.20 $ 0.87 ===== ===== ====== Diluted: Income before extraordinary income............... $1.04 $1.14 $ 0.92 Extraordinary item............................... -- -- (0.08) ----- ----- ------ Net income............................... $1.04 $1.14 $ 0.84 ===== ===== ======
INVENTORIES Inventories, consisting of ambulance, fire and home health care 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. F-8 46 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTANGIBLE ASSETS Intangible assets include costs in excess of the fair value of net assets of businesses acquired of $159,949,000 and $95,827,000 and covenants not to compete of $333,000 and $546,000 at June 30, 1997 and 1996, 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 $10,318,000 and $6,092,000 at June 30, 1997 and 1996, respectively. ACCRUED LIABILITIES Included in accrued liabilities is $7,556,000 and $6,450,000 for salaries, wages and related payroll expenses and $1,679,000 and $1,618,000 for accrued insurance premiums at June 30, 1997 and 1996, respectively. LOSS CONTRACT/RESTRUCTURING CHARGE During the year ended June 30, 1997 the Company recorded a pre-tax charge of $6.0 million. Included in this amount was an allowance of $3.2 million related to an unprofitable ambulance service contract of which $2.0 million of the allowance remains at June 30, 1997. Also included was a pre-tax restructuring charge of $2.8 million relating to the integration of ambulance company acquisitions. The charge consists primarily of severance costs and other costs related to the elimination of redundant functions. Management expects the integration to be completed during fiscal 1998. The entire $2.8 million allowance remains at June 30, 1997. Both allowances are included in accrued liabilities on the accompanying consolidated balance sheets. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company places its cash equivalents 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 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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, 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 note payable and capital lease obligations F-9 47 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximate fair value as rates on these instruments, in the aggregate, approximate market rates currently available for instruments with similar terms and remaining maturities. (2) ACQUISITIONS The Company acquired the operations of nineteen companies during the year ended June 30, 1997 and the operations of eighteen companies during the year ended June 30, 1996. Seventeen of the acquisitions completed during the year ended June 30, 1997 were accounted for as purchases in accordance with APB Opinion No. 16 and, accordingly, the purchased assets and assumed liabilities were recorded at their estimated fair values at each respective acquisition date. Two acquisitions were accounted for as a poolings-of-interests in accordance with APB Opinion No. 16. The acquisitions accounted for as poolings-of-interests were not considered significant; accordingly, prior year financial statements have not been restated. Fifteen of the acquisitions completed in the year ended June 30, 1996 were accounted for as purchases in accordance with APB Opinion No. 16. Three acquisitions were accounted for as poolings-of-interests and were not considered significant; accordingly, prior year financial statements have not been restated. Adjustments, if any, to the purchase price allocations are not expected to have a material impact on the accompanying consolidated financial statements. The aggregate purchase price of the operations accounted for as purchases in each year ended June 30 consisted of the following:
1997 1996 ------- ------- (IN THOUSANDS) Cash..................................................... $35,512 $17,164 Common stock............................................. 18,699 1,212 Notes payable to sellers................................. 4,477 4,673 Assumption of liabilities................................ 23,915 8,221 ------- ------- Total.......................................... $82,603 $31,270 ======= =======
The Company issued 361,970 and 657,329 shares of its common stock in connection with the pooling-of-interests transactions completed during the years ended June 30, 1997 and 1996, respectively. The fair value of the assets purchased has been allocated as follows:
1997 1996 ------- ------- (IN THOUSANDS) Property and equipment................................... $ 8,629 $ 3,330 Intangible assets........................................ 67,423 25,752 Other assets............................................. 6,551 2,188 ------- ------- Total.......................................... $82,603 $31,270 ======= =======
The following consolidated pro forma financial information was prepared assuming that each acquisition had occurred as of the beginning of each fiscal year. This pro forma information does not necessarily reflect F-10 48 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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):
YEAR ENDED JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue................................................ $375,511 $348,539 Net income............................................. $ 15,070 $ 16,164 Earnings per share..................................... $ 1.13 $ 1.38
Subsequent to June 30, 1997 the Company purchased either all the issued and outstanding stock or certain assets of four ambulance service providers with operations in Alabama, Georgia, Mississippi, New Jersey, New York and Tennessee. The combined purchase price of the operations accounted for as purchases was $6.1 million. The Company paid cash of $3.7 million, issued notes payable to sellers of $1.2 million and assumed $1.2 million of liabilities. The Company issued 641,009 shares related to two of the acquisitions which were recorded as pooling-of-interests transactions. (3) PROPERTY AND EQUIPMENT Property and equipment, including equipment held under capital leases, consisted of the following:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Equipment.............................................. $ 37,040 $ 30,455 Vehicles............................................... 57,312 42,596 Land and buildings..................................... 13,736 9,786 Leasehold improvements................................. 5,546 2,612 -------- -------- 113,634 85,449 Less: Accumulated depreciation......................... (42,989) (37,048) -------- -------- $ 70,645 $ 48,401 ======== ========
The Company acquired equipment of $2,698,000 and $3,603,000 under capital lease and other financing agreements during the years ended June 30, 1996 and 1995, respectively. No equipment was acquired under capital lease or other financing agreements during the year ended June 30, 1997. The Company held vehicles and equipment with a net carrying value of $7,748,000 and $7,528,000 at June 30, 1997 and 1996, respectively, under capital lease agreements. Accumulated depreciation on these assets totaled 8,367,000 and 6,823,000 at June 30, 1997 and 1996, respectively. F-11 49 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, -------------------- 1997 1996 -------- ------- (IN THOUSANDS) Revolving credit facility............................... $134,000 $49,500 Unsecured promissory notes payable from acquisitions at varying rates, from 7.0% to 9.0%, due through 2000.... 6,518 9,821 Capital lease obligations and other notes payable, collateralized by property and equipment, at varying rates, from 5.94% to 20.0%, due through 2001.......... 13,939 8,020 -------- -------- 154,457 67,341 Less: Current maturities................................ (9,814) (6,610) -------- -------- $144,643 $60,731 ======== ========
REVOLVING CREDIT FACILITY During September 1995, the Company funded a fully underwritten credit agreement for a $125.0 million revolving credit facility. The Company used the proceeds from the facility to repay the Company's then existing revolving credit facility and its notes payable. Costs previously deferred related to certain indebtedness resulted in an extraordinary charge to earnings of $693,000, net of a $480,000 tax benefit, or $.08 per share in the year ended June 30, 1995. In May 1997, the credit agreement was increased form $125.0 million to $175.0 million. This six-year revolving credit facility is priced at the prime rate or a LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.75% to LIBOR plus 1.75% depending upon the Company meeting certain financial covenants. Beginning September 30, 1999, the amount available under the facility begins to reduce at three-month intervals until the termination date at September 30, 2001. The facility is collateralized by the Company's accounts and notes receivable, common stock of its subsidiaries and partnership interests. The Company is required to meet certain financial covenants as defined in the credit agreement. At June 30, 1997, the Company had approximately $37.0 million available under the revolving credit facility. At June 30, 1997, the revolving credit facility was priced at LIBOR plus 1.125%. The weighted average interest rate on the revolving credit facility was 6.81% and 6.96% at June 30, 1997 and 1996, respectively. Aggregate debt maturities for each of the years ending June 30 are as follows:
NOTES PAYABLE CAPITAL LEASES ------------- -------------- (IN THOUSANDS) 1998.............................................. $ 7,260 $ 3,179 1999.............................................. 4,712 2,366 2000.............................................. 1,062 1,368 2001.............................................. 19,877 220 2002.............................................. 115,006 28 Thereafter........................................ 383 128 -------- ------- $ 148,300 7,289 ======== Less: Amounts representing interest............. (1,132) ------- $ 6,157 =======
F-12 50 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company incurred interest expense of $5,739,000, $5,205,000 and $3,167,000 and paid interest of $6,223,000, $5,324,000 and $2,863,000 in the years ended June 30, 1997, 1996 and 1995, respectively. The Company had outstanding letters of credit totaling $3,980,000 and $3,787,000 at June 30, 1997 and 1996, respectively. (5) 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 $6,625,000, $5,345,000 and $4,002,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Minimum rental commitments under non-cancelable operating leases for each of the years ending June 30 are as follows (in thousands): 1998................................................ $ 4,367 1999................................................ 3,797 2000................................................ 3,123 2001................................................ 2,453 2002................................................ 1,589 Thereafter.......................................... 4,585
OTHER 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. (6) 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. The Board of Directors approved voluntary contributions of $300,000, $100,000 and $290,000 for the years ended June 30, 1997, 1996 and 1995, respectively. The ESOP held, for the benefit of all participants, approximately 8% and 10% as of June 30, 1997 and 1996, respectively, of the outstanding common stock of the Company. The ESOP is administered by the ESOP's Administrative Committee, consisting of certain members of the Board of Directors of the Company. Most full and part-time employees of the Company who have completed 200 work hours per year and have reached age 21 are eligible for admission to the ESOP. Each participant's account vests 20% after three years of service and an additional 20% each year thereafter. 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 150,000 shares of stock for issuance under the ESPP. The purchase price per share will be 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 National Market System. As of June 30, 1997, 84,891 shares of common stock have been issued under the ESPP. F-13 51 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1997, the maximum number of shares of common stock issuable under the 1992 Plan was 3,390,750. 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. F-14 52 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the activity for the stock options:
YEAR ENDED JUNE 30, 1997 ------------------------------------------------ NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE SHARES PER SHARE EXERCISE PRICE --------- --------------- ---------------- Options outstanding at beginning of year.................................... 1,826,375 $ 5.60 - $24.25 $18.37 Granted................................. 944,489 $31.25 - $36.00 $32.27 Canceled................................ (137,875) $ 8.04 - $32.25 $24.48 Exercised............................... (331,592) $ 5.60 - $24.00 $13.97 --------- Options outstanding at end of year........ 2,301,397 $ 5.60 - $36.00 $24.45 ========= Options exercisable at end of year........ 899,572 $ 5.60 - $32.25 $21.42 ========= Options available for grant at end of year.................................... 767,206 ========= Weighted average fair value per share of options granted......................... $10.25 ===========
YEAR ENDED JUNE 30, 1996 ------------------------------------------------ NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE SHARES PER SHARE EXERCISE PRICE --------- --------------- ---------------- Options outstanding at beginning of year.................................... 1,145,955 $ 5.60 - $19.50 $12.74 Granted................................. 841,750 $22.50 - $24.25 $24.00 Canceled................................ (6,000) $24.00 $24.00 Exercised............................... (155,330) $ 5.60 - $17.25 $11.50 --------- Options outstanding at end of year........ 1,826,375 $ 5.60 - $24.25 $18.37 ========= Options exercisable at end of year........ 495,205 $ 5.60 - $19.50 $12.05 ========= Options available for grant at end of year.................................... 1,573,820 ========= Weighted average fair value per share of options granted......................... $9.80 ==========
YEAR ENDED JUNE 30, 1995 ---------------------------------------------- WEIGHTED NUMBER OF EXERCISE PRICE AVERAGE SHARES PER SHARE EXERCISE PRICE --------- --------------- -------------- Options outstanding at beginning of year..... 842,880 $ 5.60 - $19.50 $10.52 Granted.................................... 425,825 $17.25 - $18.75 $17.45 Canceled................................... (49,750) $ 8.04 - $17.25 $ 8.32 Exercised.................................. (73,000) $ 5.60 - $ 8.04 $ 5.95 --------- Options outstanding at end of year........... 1,145,955 $ 5.60 - $19.50 $12.74 ========= Options exercisable at end of year........... 421,255 $ 5.60 - $19.50 $ 8.97 ========= Options available for grant at end of year... 1,196,050 =========
F-15 53 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING ---------------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE ------------------------------ REMAINING WEIGHTED WEIGHTED RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ---------------- ----------- ----------- -------------- ----------- -------------- $ 5.60 - $ 8.04........ 116,783 5.00 $ 6.77 102,755 $ 6.59 $13.00 - $18.75........ 564,875 6.72 16.61 271,203 16.42 $24.00 - $24.50........ 744,625 8.19 23.99 331,875 23.98 $31.25 - $36.00........ 875,114 9.16 32.27 193,739 31.89 --------- ---- ------ ------- ------ 2,301,397 8.04 $24.45 899,572 $21.42 ========= ==== ====== ======= ======
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which defines a fair value based method of accounting for an employee stock option or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it 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 1997 and 1996, using the Black-Scholes option pricing model with the following weighted average assumptions:
YEAR ENDED JUNE 30, --------------------------------------------- 1997 1996 ------------------- ------------------- OPTIONS ESPP OPTIONS ESPP ------- ----- ------- ----- Risk free interest rate............. 6.23% 5.90% 6.14% 5.68% Expected dividend yield............. 0.00% 0.00% 0.00% 0.00% Expected lives in years (after vesting for options).............. 1.59 0.5 1.59 0.5 Expected volatility................. 36.50% 43.60% 33.41% 32.59%
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 year ended June 30, 1997............... $16,500 $306 For year ended June 30, 1996............... $ 8,250 $212
F-16 54 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 earnings per common stock and common stock equivalent would have been reported as follows:
YEAR ENDED JUNE 30, ------------------- 1997 1996 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income: Historical............................................. $12,720 $11,512 Pro forma.............................................. 8,013 8,352 Earnings per common stock and common stock equivalent: Historical............................................. $ 1.04 $ 1.14 Pro forma.............................................. $ 0.65 $ 0.85
The effects of applying SFAS 123 for providing pro forma disclosures for 1997 and 1996 are not likely to be representative of the effects on reported net income and earnings per common stock and common stock equivalent for future years, because options vest over several years and additional awards are made each year. 401(K) PLAN The Company has a contributory retirement plan (the 401(k) Plan) covering eligible employees with at least one month of service. 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 12% of their respective salary, not to exceed the statutory limit. The Company may elect to make a fixed-matching contribution to each participant's account of up to 2% of total annual cash compensation received by respective participants and/or a discretionary-matching contribution in an amount equal to a percentage of the contribution made by participants 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 among certain named plans. The Company made fixed-matching contributions to the 401(k) Plan aggregating approximately $1,515,000 and $995,000 for the 401(k) Plan years ended December 31, 1996 and 1995, respectively. (7) STOCKHOLDERS' EQUITY PREFERRED STOCK 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 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. F-17 55 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK In April 1996, the Company issued 1,367,500 shares of common stock at $27.25 per share, generating $34.8 million. The proceeds were used to reduce the outstanding balance on the Company's revolving credit facility. (8) RELATED PARTY TRANSACTIONS The Company incurred legal fees of approximately $139,000, $122,000 and $158,000 for the years ended June 30, 1997, 1996 and 1995, respectively, with a law firm in which a member of the Board of Directors is a partner. The Company incurred rental expense of $600,000, $592,000 and $635,000 in each of the years ended June 30, 1997, 1996 and 1995, respectively, 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. At June 30, 1997 and 1996, the Company had notes payable to employees that were previously owners of businesses acquired by the Company totaling $1,770,000 and $4,617,000, respectively. (9) 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. The components of the provision for income taxes were as follows:
YEAR ENDED JUNE 30, ---------------------------- 1997 1996 1995 ------ ------ ------ (IN THOUSANDS) Current Federal........................................ $2,761 $4,219 $3,188 State.......................................... 618 796 1,115 ------ ------ ------ 3,379 5,015 4,303 Deferred......................................... 5,985 3,029 985 ------ ------ ------ $9,364 $8,044 $5,288 ====== ====== ======
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. F-18 56 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net deferred taxes were as follows:
JUNE 30, --------------------- 1997 1996 -------- -------- (IN THOUSANDS) Deferred tax liabilities Amortization and accelerated depreciation............ $ (9,379) $ (9,340) Allowance for doubtful accounts...................... (5,663) (2,274) Cash to accrual adjustment........................... (944) (895) -------- -------- (15,986) (12,509) -------- -------- Deferred tax assets Writedown of investment in real estate............... -- 608 Installment gain from sale of real estate and property and equipment............................ 158 196 Compensation related deferrals....................... 499 794 Self insurance reserve............................... 471 351 Restructuring charge................................. 1,912 -- -------- -------- 3,040 1,949 -------- -------- Net deferred tax liability............................. (12,946) (10,560) Less current portion................................... 2,174 1,500 -------- -------- Net long-term deferred tax liability................... $(10,772) $ (9,060) ======== ========
For the years ended June 30, 1997 and 1996 income tax benefits of $4,867,000 and $982,000, respectively, were allocated to additional paid-in capital for tax benefits associated with the exercise and vesting of nonqualified stock options and stock grants. The provision 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:
YEAR ENDED JUNE 30, ---------------------------- 1997 1996 1995 ------ ------ ------ (IN THOUSANDS) Federal income tax provision at statutory rate... $7,729 $6,845 $4,508 State taxes, net of federal benefit.............. 967 491 606 Amortization of nondeductible goodwill........... 663 646 331 Utilization of tax credits....................... -- -- (116) Other, net....................................... 5 62 (41) ------ ------ ------ Provision for income taxes....................... $9,364 $8,044 $5,288 ====== ====== ======
Cash payments for income taxes were approximately $8,197,000, $2,848,000 and $3,381,000 during the years ended June 30, 1997, 1996 and 1995, respectively. F-19 57 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended June 30, 1997 and 1996 is as follows:
1997 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue............................. $ 73,994 $ 77,530 $ 84,921 $ 83,360 Operating income.................... 6,592 7,474 9,500 4,238 Net income.......................... 3,299 3,771 4,675 975 Earnings per share.................. $ .28 $ .31 $ .38 $ .08
1996 -------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenue............................. $ 55,763 $ 60,893 $ 64,984 $ 68,677 Operating income.................... 4,814 5,339 6,775 7,736 Net income.......................... 2,102 2,396 2,989 4,025 Earnings per share.................. $ .23 $ .25 $ .31 $ .35
F-20 58 SCHEDULE II RURAL/METRO CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
JUNE 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- Allowance for doubtful accounts: Balance at beginning of period........................... $ 26,571 $ 10,412 $ 3,754 Provision charged to expense............................. 43,424 31,036 22,263 Write-offs............................................... (34,181) (14,877) (15,605) ------- ------- ------- Balance at end of period................................. $ 35,814 $ 26,571 $ 10,412 ======= ======= =======
F-21 EX-10.5.B 2 AMENDED & RESTATED 1992 STOCK OPTION PLAN 1 Exhibit 10.5(b) RURAL/METRO CORPORATION 1992 STOCK OPTION PLAN (AS AMENDED THROUGH SEPTEMBER 1996) ARTICLE I GENERAL 1.1 PURPOSE OF PLAN; TERM (a) BACKGROUND. On November 6, 1992, the predecessor to Rural/Metro Corporation, a Delaware corporation (the "Company"), adopted the Rural/Metro Corporation Senior Management Stock Option Plan (the "Original Plan"). Thereafter, the Original Plan was amended and restated (the "Amended and Restated Plan") and the stockholders approved the Amended and Restated Plan. The Amended and Restated Plan was subsequently assumed by the Company upon a merger with the predecessor. On September 21, 1994, the Company's Board of Directors (the "Board") adopted an Amended and Restated 1992 Stock Option Plan (as amended through August 1994) whereby an Automatic Grant Program was added, additional shares of Stock were authorized to be issued under the Plan, and certain other technical changes were made. The Amended and Restated 1992 Stock Option Plan (as amended through August 1994) was approved by the stockholders of the Company on December 8, 1994 and shall be referred to herein as the "Revised 1994 Plan." On October 17, 1995, the Board adopted an Amended and Restated 1992 Stock Option Plan (as amended through October 1995) (referred to herein as the "Revised 1995 Plan") whereby the Automatic Grant Program was amended, additional shares of stock were authorized to be issued under the Plan, and certain other technical changes were made. The Revised 1995 Plan was approved by the stockholders of the Company on December 8, 1995. On September 6, 1996, the Board adopted a newly Amended and Restated 1992 Stock Option Plan (the "Revised 1996 Plan") whereby certain technical changes were made. The Revised 1996 Plan must be approved by the stockholders of the Company within one year of the date of its adoption by the Board. If not approved by the stockholders, the Revised 1995 Plan shall continue in effect. If the Revised 1996 Plan is not timely approved by the stockholders, any Options or Awards issued after the date of the adoption of the Revised 1995 Plan shall remain valid and unchanged to the extent that such Options or Awards contain terms such that they could have been issued under the Revised 1995 Plan. This Amended and Restated Stock Option Plan shall be known as the Rural/Metro Corporation 1992 Stock Option Plan (the "Plan"). Any Options or Awards outstanding prior to the adoption by the Board of the Revised 1996 Plan shall remain valid and unchanged. (b) DEFINED TERMS. All initially capitalized terms used hereby shall have the meaning set forth in Article V hereto. (c) GENERAL PURPOSE. The Plan shall be divided into two programs: the Discretionary Grant Program and the Automatic Grant Program. (i) DISCRETIONARY GRANT PROGRAM. The purpose of the Discretionary Grant Program is to further the interests of the Company and its stockholders by encouraging key persons associated with the Company (or Parent or Subsidiary Corporations) to acquire shares of the 1 2 Company's Stock, thereby acquiring a proprietary interest in its business and an increased personal interest in its continued success and progress. Such purpose shall be accomplished by providing for the discretionary granting of options to acquire the Company's Stock ("Discretionary Options"), the direct granting of the Company's Stock ("Stock Awards"), the granting of stock appreciation rights ("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards, SARs and Cash Awards shall be collectively referred to herein as "Awards"). (ii) AUTOMATIC GRANT PROGRAM. The purpose of the Automatic Grant Program is to promote the interests of the Company by providing non-employee members of the Board the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company and to thereby have an increased personal interest in its continued success and progress. Such purpose shall be accomplished by providing for the automatic grant of options to acquire the Company's Stock ("Automatic Options"). (d) CHARACTER OF OPTIONS. Discretionary Options granted under this Plan to employees of the Company (or Parent or Subsidiary Corporations) that are intended to qualify as "incentive stock options" as defined in Code section 422 ("Incentive Stock Options") will be specified in the applicable stock option agreement. All other Options granted under this Plan will be nonqualified options. (e) RULE 16B-3 PLAN. With respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), the Plan is intended to comply with all applicable conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated under the 1934 Act. To the extent any provision of the Plan or action by a Plan Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by such Plan Administrator. In addition, the Board may amend the Plan from time to time as it deems necessary in order to meet the requirements of any amendments to Rule 16b-3 without the consent of the stockholders of the Company. (f) DURATION OF PLAN. The term of the Plan is 10 years commencing on the date of adoption of the Original Plan by the Board as specified in Section 1.1(a) hereof. No Option or Award shall be granted under the Plan unless granted within 10 years of the adoption of the Plan by the Board, but Options or Awards outstanding on that date shall not be terminated or otherwise affected by virtue of the Plan's expiration. 1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN. (a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The stock subject to the provisions of the Plan and issuable upon the grant of Stock Awards or upon the exercise of SARs or Options granted under the Plan is shares of the Company's common stock, $.01 par value per share (the "Stock"), which may be either unissued or treasury shares, as the Board may from time to time determine. Subject to adjustment as provided in Section 4.1 hereof, the aggregate number of shares of Stock covered by the Plan and issuable thereunder shall be 3,390,750 shares of Stock, which includes 65,750 shares of Stock previously authorized under the Company's 1989 Stock Option Plan. Upon the adoption of the Revised 1995 Plan by the Company's stockholders, the Company's 1989 Stock Option Plan was terminated such that no more options may be granted under that plan. 2 3 (b) CALCULATION OF AVAILABLE SHARES. For purposes of calculating the maximum number of shares of Stock which may be issued under the Plan: (i) the shares issued (including the shares, if any, withheld for tax withholding requirements) upon exercise of an Option shall be counted and (ii) the shares issued (including the shares, if any, withheld for tax withholding requirements) as a result of a grant of a Stock Award or an exercise of an SAR shall be counted. (c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR expires or terminates for any reason prior to its exercise in full and before the term of the Plan expires, the shares of Stock subject to, but not issued under, such Option or SAR shall, without further action or by or on behalf of the Company, again be available under the Plan. 1.3 APPROVAL; AMENDMENTS. (a) APPROVAL BY STOCKHOLDERS. The Revised 1996 Plan shall be submitted to the stockholders of the Company for their approval at a regular or special meeting to be held within 12 months after the adoption of the Revised 1996 Plan by the Board. Stockholder approval shall be evidenced by the affirmative vote of the holders of a majority of the shares of the Company's Common Stock present in person or by proxy and voting at the meeting. The date such stockholder approval has been obtained shall be referred to herein as the "Effective Date." (b) COMMENCEMENT OF PROGRAMS. The Automatic Grant Program herein, shall commence immediately. The Discretionary Grant Program, as revised herein, shall commence immediately subject to the terms set forth in Section 1.1(a). (c) AMENDMENTS TO PLAN. The Board may, without action on the part of the Company's stockholders, make such amendments to, changes in and additions to the Plan as it may, from time to time, deem necessary or appropriate and in the best interests of the Company; provided, the Board may not, without the consent of the applicable Optionholder, take any action which disqualifies any Discretionary Option previously granted under the Plan for treatment as an Incentive Stock Option or which adversely affects or impairs the rights of the Optionholder of any Discretionary Option outstanding under the Plan, and further provided that, except as provided in Article IV hereof, the Board may not, without the approval of the Company's stockholders, (i) increase the aggregate number of shares of Stock subject to the Plan, (ii) reduce the exercise price at which Discretionary Options may be granted or the exercise price at which any outstanding Discretionary Option may be exercised, (iii) extend the term of the Plan, (iv) change the class of persons eligible to receive Discretionary Options or Awards under the Plan, or (v) materially increase the benefits accruing to participants under the Plan. Notwithstanding the foregoing, Discretionary Options or Awards may be granted under this Plan to purchase shares of Stock in excess of the number of shares then available for issuance under the Plan if (A) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such Option or Award and within one year thereafter such amendment is approved by the Company's stockholders and (B) each such Discretionary Option or Award granted is not to become exercisable or vested, in whole or in part, at any time prior to the obtaining of such stockholder approval. 3 4 ARTICLE II DISCRETIONARY GRANT PROGRAM 2.1 PARTICIPANTS; ADMINISTRATION. (a) ELIGIBILITY AND PARTICIPATION. Discretionary Options and Awards may be granted only to persons ("Eligible Persons") who at the time of grant are (i) key personnel (including officers and directors) of the Company or Parent or Subsidiary Corporations, or (ii) consultants or independent contractors who provide valuable services to the Company or Parent or Subsidiary Corporations; provided that (1) Incentive Stock Options may only be granted to key personnel of the Company (and its Parent or Subsidiary Corporations) who are also employees of the Company (or its Parent or Subsidiary Corporations), and (2) the maximum number of shares of stock with respect to which Options or SARs may be granted to any employee during the term of the Plan shall not exceed 25 percent of the shares of stock covered by the Plan. A Plan Administrator shall have full authority to determine which Eligible Persons in its administered group are to receive Discretionary Option grants under the Plan, the number of shares to be covered by each such grant, whether or not the granted Discretionary Option is to be an Incentive Stock Option, the time or times at which each such Discretionary Option is to become exercisable, and the maximum term for which the Discretionary Option is to be outstanding. A Plan Administrator shall also have full authority to determine which Eligible Persons in such group are to receive Awards under the Discretionary Grant Program and the conditions relating to such Award. (b) GENERAL ADMINISTRATION. The Eligible Persons under the Discretionary Grant Program shall be divided into two groups and there shall be a separate administrator for each group. One group will be comprised of Eligible Persons that are Affiliates. For purposes of this Plan, the term "Affiliates" shall mean all "officers" (as that term is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the Company and all persons who own ten percent or more of the Company's issued and outstanding equity securities. Initially, the power to administer the Discretionary Grant Program with respect to Eligible Persons that are Affiliates shall be vested with the Board. At any time, however, the Board may vest the power to administer the Discretionary Grant Program with respect to Persons that are Affiliates exclusively with a committee (the "Senior Committee") comprised of two or more Non-Employee Directors which are appointed by the Board. The Senior Committee, in its sole discretion, may require approval of the Board for specific grants of Discretionary Options or Awards under the Discretionary Grant Program. The administration of all Eligible Persons that are not Affiliates ("Non-Affiliates") shall be vested exclusively with the Board. The Board, however, may at any time appoint a committee (the "Employee Committee") of two or more persons who are members of the Board and delegate to such Employee Committee the power to administer the Discretionary Grant Program with respect to the Non-Affiliates. In addition, the Board may establish an additional committee or committees of persons who are members of the Board and delegate to such other committee or committees the power to administer all or a portion of the Discretionary Grant program with respect to all or a portion of the Eligible Persons. Members of the Senior Committee, Employee Committee or any other committee allowed hereunder shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may at any time terminate all or a portion of the functions of the Senior Committee, the Employee Committee, or any other committee allowed hereunder and reassume all or a portion of powers and authority previously delegated to such committee. The Board in its discretion may also require the members of the Senior Committee, the Employee 4 5 Committee or any other committee allowed hereunder to be "outside directors" as that term is defined in any applicable regulations promulgated under Code section 162(m). (c) PLAN ADMINISTRATORS. The Board, the Employee Committee, Senior Committee, and/or any other committee allowed hereunder, whichever is applicable, shall be each referred to herein as a "Plan Administrator." Each Plan Administrator shall have the authority and discretion, with respect to its administered group, to select which Eligible Persons shall participate in the Discretionary Grant Program, to grant Discretionary Options or Awards under the Discretionary Grant Program, to establish such rules and regulations as they may deem appropriate with respect to the proper administration of the Discretionary Grant Program and to make such determinations under, and issue such interpretations of, the Discretionary Grant Program and any outstanding Discretionary Option or Award as they may deem necessary or advisable. Unless otherwise required by law or specified by the Board with respect to any committee, decisions among the members of a Plan Administrator shall be by majority vote. Decisions of a Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Grant Program or any outstanding Discretionary Option or Award. (d) GUIDELINES FOR PARTICIPATION. In designating and selecting Eligible Persons for participation in the Discretionary Grant Program, a Plan Administrator shall consult with and give consideration to the recommendations and criticisms submitted by appropriate managerial and executive officers of the Company. A Plan Administrator also shall take into account the duties and responsibilities of the Eligible Persons, their past, present and potential contributions to the success of the Company and such other factors as a Plan Administrator shall deem relevant in connection with accomplishing the purpose of the Plan. 2.2 TERMS AND CONDITIONS OF OPTIONS (a) ALLOTMENT OF SHARES. A Plan Administrator shall determine the number of shares of Stock to be optioned from time to time and the number of shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant of a Discretionary Option to a person shall neither entitle such person to, nor disqualify such person from, participation in any other grant of Options or Stock Awards under this Plan or any other stock option plan of the Company. (b) EXERCISE PRICE. Upon the grant of any Discretionary Option, a Plan Administrator shall specify the option price per share. If the Discretionary Option is intended to qualify as an Incentive Stock Option under the Code, the option price per share may not be less than 100 percent of the fair market value per share of the stock on the date the Discretionary Option is granted (110 percent if the Discretionary Option is granted to a stockholder who at the time the Discretionary Option is granted owns or is deemed to own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary Corporation). The determination of the fair market value of the Stock shall be made in accordance with the valuation provisions of Section 4.5 hereof. (c) INDIVIDUAL STOCK OPTION AGREEMENTS. Discretionary Options granted under the Plan shall be evidenced by option agreements in such form and content as a Plan Administrator from time to time approves, which agreements shall substantially comply with and be subject to the terms of the Plan, including the terms and conditions of this Section 2.2. As determined by a Plan Administrator, each option agreement shall state (i) the total number of shares to which it pertains, 5 6 (ii) the exercise price for the shares covered by the Option, (iii) the time at which the Options vest and become exercisable and (iv) the Option's scheduled expiration date. The option agreements may contain such other provisions or conditions as a Plan Administrator deems necessary or appropriate to effectuate the sense and purpose of the Plan, including covenants by the Optionholder not to compete and remedies for the Company in the event of the breach of any such covenant. (d) OPTION PERIOD. No Discretionary Option granted under the Plan that is intended to be an Incentive Stock Option shall be exercisable for a period in excess of 10 years from the date of its grant (five years if the Discretionary Option is granted to a stockholder who at the time the Discretionary Option is granted owns or is deemed to own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary Corporation), subject to earlier termination in the event of termination of employment, retirement or death of the Optionholder. A Discretionary Option may be exercised in full or in part at any time or from time to time during the term of the Discretionary Option or provide for its exercise in stated installments at stated times during the Option's term. (e) VESTING; LIMITATIONS. The time at which the Optioned Shares vest with respect to an Optionholder shall be in the discretion of that Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent a Discretionary Option is intended to qualify as an Incentive Stock Option, the aggregate fair market value (determined as of the respective date or dates of grant) of the Stock for which one or more Options granted to any person under this Plan (or any other option plan of the Company or any Parent or Subsidiary Corporation) may for the first time become exercisable as Incentive Stock Options during any one calendar year shall not exceed the sum of $100,000 (referred to herein as the "$100,000 Limitation"). To the extent that any person holds two or more Options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability as an Incentive Stock Option shall be applied on the basis of the order in which such Options are granted. (f) NO FRACTIONAL SHARES. Options shall be exercisable only for whole shares; no fractional shares will be issuable upon exercise of any Discretionary Option granted under the Plan. (g) METHOD OF EXERCISE. In order to exercise a Discretionary Option with respect to any vested Optioned Shares, an Optionholder (or in the case of an exercise after an Optionholder's death, such Optionholder's executor, administrator, heir or legatee, as the case may be) must take the following action: (i) execute and deliver to the Company a written notice of exercise signed in writing by the person exercising the Discretionary Option specifying the number of shares of Stock with respect to which the Discretionary Option is being exercised; (ii) pay the aggregate Option Price in one of the alternate forms as set forth in Section 2.2(h) below; and (iii) furnish appropriate documentation that the person or persons exercising the Discretionary Option (if other than the Optionholder) has the right to exercise such Option. 6 7 As soon as practicable after the Exercise Date, the Company shall mail or deliver to or on behalf of the Optionholder (or any other person or persons exercising this Discretionary Option in accordance herewith) a certificate or certificates representing the Stock for which the Discretionary Option has been exercised in accordance with the provisions of this Plan. In no event may any Discretionary Option be exercised for any fractional shares. (h) PAYMENT OF OPTION PRICE. The aggregate Option Price shall be payable in one of the alternative forms specified below: (i) Full payment in cash or check made payable to the Company's order; or (ii) Full payment in shares of Stock held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at fair market value on the Exercise Date (as determined in accordance with Section 4.5 hereof); or (iii) If a cashless exercise program has been implemented by the Board, full payment through a sale and remittance procedure pursuant to which the Optionholder (A) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the Optioned Shares to be purchased and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the Optioned Shares to be purchased and (B) shall concurrently provide written directives to the Company to deliver the certificates for the Optioned Shares to be purchased directly to such brokerage firm in order to complete the sale transaction. (i) REPURCHASE RIGHT. The Plan Administrator may, in its sole discretion, set forth other terms and conditions upon which the Company (or its assigns) shall have the right to repurchase shares of Stock acquired by an Optionholder pursuant to a Discretionary Option. Any repurchase right of the Company shall be exercisable by the Company (or its assignees) upon such terms and conditions as the Plan Administrator may specify in the Stock Repurchase Agreement evidencing such right. The Plan Administrator may also in its discretion establish as a term and condition of one or more Discretionary Options granted under the Plan that the Company shall have a right of first refusal with respect to any proposed sale or other disposition by the Optionholder of any shares of Stock issued upon the exercise of such Discretionary Options. Any such right of first refusal shall be exercisable by the Company (or its assigns) in accordance with the terms and conditions set forth in the Stock Repurchase Agreement. (j) TERMINATION OF INCENTIVE STOCK OPTIONS. (i) TERMINATION OF SERVICE. If any Optionholder ceases to be in Service to the Company for a reason other than death, such Optionholder (or such Optionholder's successors in the case of the Optionholder's death) may, within three months after the date of termination of such Service, but in no event after the Incentive Stock Option's stated expiration date, exercise some or all of the Incentive Stock Options that the Optionholder was entitled to exercise on the date the Optionholder's Service terminated; provided, that if Optionholder is discharged for cause, then the Incentive Stock Option shall thereafter be void for all purposes. "Cause" shall be limited to a termination of Service based upon a finding by the Plan Administrator that the Optionholder (a) has been convicted of a felony involving dishonesty, fraud, theft or embezzlement; (b) has repeatedly 7 8 failed or refused, after written notice from the Company, in a material respect to follow reasonable policies or directives established by the Company; (c) has willfully and persistently failed, after written notice from the Company, to attend to material duties or obligations imposed upon him; (d) has performed an act or failed to act, which, if he were prosecuted and convicted, would constitute a felony involving $1,000 or more of money or property of the Company; or (e) has misrepresented or concealed a material fact for purposes of securing employment with the Company. Notwithstanding the foregoing, if any Optionholder ceases to be in Service to the Company by reason of permanent disability within the meaning of section 22(e)(3) of the Code (as determined by the applicable Plan Administrator), the Optionholder shall have 12 months after the date of termination of Service, but in no event after the stated expiration date of the Optionholder's Incentive Stock Options, to exercise Incentive Stock Options that the Optionholder was entitled to exercise on the date the Optionholder's Service terminated as a result of disability. (ii) DEATH OF OPTIONHOLDER. If an Optionholder dies while in the Company's Service, the Optionholder's vested Incentive Stock Options on the date of death shall be exercisable within three months of such death or until the stated expiration date of the Optionholder's Incentive Stock Option, whichever occurs first, by the person or persons ("successors") to whom the Optionholder's rights pass under a will or by the laws of descent and distribution. As soon as practicable after receipt by the Company of the notice of exercise and of payment in full of the Option Price as specified in Sections 2.2(g) and (h) hereof, a certificate or certificates representing the Optioned Shares shall be registered in the name or names specified by the successors in the written notice of exercise and shall be delivered to the successors. (k) TERMINATION OF NONQUALIFIED OPTIONS. Any Options which are not Incentive Stock Options and which are outstanding at the time an Optionholder dies while in Service to the Company or otherwise ceases to be in Service to the Company shall remain exercisable for such period of time thereafter as determined by the Plan Administrator at the time of grant and set forth in the documents evidencing such Options; provided, that no Option shall be exercisable after the Option's stated expiration date, and provided further, that if the Optionholder is discharged for Cause (as defined in Section 2.2(j)(i)), then the Option will thereafter be void for all purposes. (l) OTHER PLAN PROVISIONS STILL APPLICABLE. If a Discretionary Option is exercised upon the termination of Service or death of an Optionholder under this Section 2.2, the other provisions of the Plan shall still be applicable to such exercise, including the requirement that the Optionholder or its successor may be required to enter into a Stock Repurchase Agreement. (m) DEFINITION OF "SERVICE". For purposes of this Plan, unless it is evidenced otherwise in the option agreement with the Optionholder, the Optionholder shall be deemed to be in "Service" to the Company so long as such individual renders continuous services on a periodic basis to the Company (or to any Parent or Subsidiary Corporation) in the capacity of an employee, director, or an independent consultant or advisor. In the discretion of a Plan Administrator, an Optionholder shall be considered to be rendering continuous services to the Company even if the type of services change, e.g., from employee to independent consultant. The Optionholder shall be considered to be an employee for so long as such individual remains in the employ of the Company or one or more of its Parent or Subsidiary Corporations. 8 9 2.3 TERMS AND CONDITIONS OF STOCK AWARDS (a) ELIGIBILITY. All Eligible Persons shall be eligible to receive Stock Awards. The Plan Administrator of each administered group shall determine the number of shares of Stock to be awarded from time to time to any Eligible Person in such group. The grant of a Stock Award to a person shall neither entitle such person to, nor disqualify such person from participation in, any other grant of options or awards by the Company, whether under this Plan or under any other stock option or award plan of the Company. (b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted in recognition of an Eligible Person's services to the Company. The grantee of any such Stock Award shall not be required to pay any consideration to the Company upon receipt of such Stock Award, except as may be required to satisfy any applicable Delaware corporate law, employment tax, and/or income tax withholding requirements. (c) CONDITIONS TO AWARD. All Stock Awards shall be subject to such terms, conditions, restrictions, or limitations as the applicable Plan Administrator deems appropriate, including, by way of illustration but not by way of limitation, restrictions on transferability, requirements of continued employment, individual performance or the financial performance of the Company, or payment by the recipient of any applicable employment or withholding taxes. Such Plan Administrator may modify or accelerate the termination of the restrictions applicable to any Stock Award under the circumstances as it deems appropriate. (d) AWARD AGREEMENTS. A Plan Administrator may require as a condition to a Stock Award that the recipient of such Stock Award enter into an award agreement in such form and content as that Plan Administrator from time to time approves. 2.4 TERMS AND CONDITIONS OF SARS (a) ELIGIBILITY. All Eligible Persons shall be eligible to receive SARs. The Plan Administrator of each administered group shall determine the SARs to be awarded from time to time to any Eligible Person in such group. The grant of a SAR to a person shall neither entitle such person to, nor disqualify such person from participation in, any other grant of options or awards by the Company, whether under this Plan or under any other stock option or award plan of the Company. (b) AWARD OF SARS. Concurrently with or subsequent to the grant of any Discretionary Option to purchase one or more shares of Stock, a Plan Administrator may award to the Optionholder with respect to each share of Stock underlying the Option, a related SAR permitting the Optionholder to be paid the appreciation on the Stock underlying the Discretionary Option in lieu of exercising the Option. In addition, a Plan Administrator may award to any Eligible Person an SAR permitting the Eligible Person to be paid the appreciation on a designated number of shares of the Stock, whether or not such Shares are actually issued. (c) CONDITIONS TO SAR. All SARs shall be subject to such terms, conditions, restrictions or limitations as the applicable Plan Administrator deems appropriate, including, by way of illustration but not by way of limitation, restrictions on transferability, requirements of continued employment, individual performance, financial performance of the Company, or payment by the 9 10 recipient of any applicable employment or withholding taxes. Such Plan Administrator may modify or accelerate the termination of the restrictions applicable to any SAR under the circumstances as it deems appropriate. (d) SAR AGREEMENTS. A Plan Administrator may require as a condition to the grant of a SAR that the recipient of such SAR enter into a SAR agreement in such form and content as that Plan Administrator from time to time approves. (e) EXERCISE. An Eligible Person who has been granted a SAR may exercise such SAR subject to the conditions specified by the Plan Administrator in the SAR agreement. (f) AMOUNT OF PAYMENT. The amount of payment to which the grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal to the amount, if any, by which the fair market value of the specified shares of Stock on the exercise date exceeds the fair market value of the specified shares of Stock on the date the Discretionary Option related to the SAR was granted or became effective, or, if the SAR is not related to any Option, on the date the SAR was granted or became effective. (g) FORM OF PAYMENT. The SAR may be paid in either cash or Stock, as determined in the discretion of the applicable Plan Administrator and set forth in the SAR agreement. If the payment is in Stock, the number of shares to be paid to the participant shall be determined by dividing the amount of the payment determined pursuant to Section 2.4(f) by the fair market value of a share of Stock on the exercise date of such SAR. As soon as practical after exercise, the Company shall deliver to the SAR grantee a certificate or certificates for such shares of Stock. (h) TERMINATION OF EMPLOYMENT; DEATH. Section 2.2(j), applicable to Incentive Stock Options, and Section 2.2(k), applicable to nonqualified options, shall apply equally to the tandem SARs and if not issued in tandem, Section 2.2(k) shall apply to the SARs. 2.5 OTHER CASH AWARDS (a) IN GENERAL. The Plan Administrator of each administered group shall have the discretion to make other awards of cash to Eligible Persons in such group ("Cash Awards"). Such Cash Awards may relate to existing Options or to the appreciation in the value of the Stock or other Company securities. (b) CONDITIONS TO AWARD. All Cash Awards shall be subject to such terms, conditions, restrictions or limitations as the applicable Plan Administrator deems appropriate, and such Plan Administrator may require as a condition to such Cash Award that the recipient of such Cash Award enter into an award agreement in such form and content as the Plan Administrator from time to time approves. ARTICLE III AUTOMATIC GRANT PROGRAM 3.1 ELIGIBLE PERSONS UNDER THE AUTOMATIC GRANT PROGRAM. The persons eligible to participate in the Automatic Grant Program shall be limited to Board members who are not employed by the Company, whether or not such persons qualify as Non-Employee directors as 10 11 defined herein ("Eligible Directors"). Persons who are eligible under the Automatic Grant Program may also be eligible to receive Discretionary Options or Awards under the Discretionary Grant Program or option grants or direct stock issuances under other plans of the Company. 3.2 TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS. (a) AMOUNT AND DATE OF GRANT. During the term of this Plan, Automatic Grants shall be made to each Eligible Director ("Optionholder") as follows: (i) ANNUAL GRANTS. Each year on the Annual Grant Date an Automatic Option to acquire 2,500 shares of Stock shall be granted to each Eligible Director (except that an Automatic Option to acquire 5,000 shares of Stock shall be granted to the Chairman of the Board, assuming the Chairman of the Board is an Eligible Director) for so long as there are shares of Stock available under Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's annual stockholders meeting. Notwithstanding the foregoing, (i) any Eligible Director whose term ended on the Annual Grant Date and who was not re-elected on that date shall not be eligible to receive any automatic option grants on that Annual Grant Date, and (ii) any Eligible Director that was granted an Automatic Option under Section 3.2(a)(ii) hereof within 30 days of an Annual Grant Date shall be ineligible to receive an Automatic Option grant pursuant to this Section 3.2(a)(i) on such Annual Grant Date. (ii) INITIAL NEW DIRECTOR GRANTS. On the Initial Grant Date, every new member of the Board who is an Eligible Director and has not previously received an Automatic Option grant under this Section 3.2(a)(ii) shall be granted an Automatic Option to acquire 10,000 shares of Stock for so long as there are shares of Stock available under Section 1.2 hereof. The "Initial Grant Date" shall be the date that an Eligible Director is first appointed or elected to the Board. (iii) FORMULA GRANT. Each year on the Formula Grant Date, an Automatic Option to acquire shares of Stock shall be granted to each Eligible Director for so long as there are shares of Stock available under Section 1.2 hereof. Each year, the number of shares of Stock that may be acquired under the Automatic Option granted pursuant to this Section 3.2(a)(iii) shall be an amount equal to 1,000 shares of Stock for each $.05 EPS Increase, subject to a maximum of 5,000 shares of Stock to each Eligible Director. For purposes of the foregoing, "EPS Increase" means the amount by which the earnings per share, as reported in the audited financial statements of the Company for the most recent fiscal year exceeds the earnings per share for the Company, as calculated under its audited financial statements, for the previous fiscal year. The "Formula Grant Date" shall be the later of the last day of the second calendar month occurring after the close of any fiscal year or the seventh day after the earnings of the Company have been publicly announced for any such fiscal year. Any Eligible Director that was granted an Automatic Option under Section 3.2(a)(ii) hereof within 30 days of a Formula Grant Date shall be ineligible to receive an Automatic Option pursuant to this Section 3.2(a)(iii) on such Formula Grant Date. (b) EXERCISE PRICE. The exercise price per share of Stock subject to each Automatic Option Grant shall be equal to 100 percent of the fair market value per share of the Stock on the date the Automatic Option was granted as determined in accordance with the valuation provisions of Section 4.5 hereof (the "Option Price"). 11 12 (c) VESTING. Each Automatic Option Grant (other than the Formula Grant) shall become exercisable and vest one day before the next succeeding stockholders' meeting that occurs after the applicable grant date unless the next succeeding annual meeting occurs less than six months after the applicable grant date, in which case the Automatic Grant shall become exercisable and vest on the first anniversary of the applicable grant date. Each Automatic Option Grant that is a Formula Grant shall become exercisable and vest on the first anniversary of the applicable grant date. Each Automatic Option shall only vest and become exercisable if the Optionholder has not ceased serving as a Board member as of such vesting date. (d) METHOD OF EXERCISE. In order to exercise an Automatic Option with respect to any vested Optioned Shares, an Optionholder (or in the case of an exercise after an Optionholder's death, such Optionholder's executor, administrator, heir or legatee, as the case may be) must take the following action: (i) execute and deliver to the Company a written notice of exercise signed in writing by the person exercising the Automatic Option specifying the number of shares of Stock with respect to which the Automatic Option is being exercised; (ii) pay the aggregate Option Price in one of the alternate forms as set forth in Section 3.2(e) below; and (iii) furnish appropriate documentation that the person or persons exercising the Automatic Option (if other than the Optionholder) has the right to exercise such Option. As soon as practicable after the Exercise Date, the Company shall mail or deliver to or on behalf of the Optionholder (or any other person or persons exercising the Automatic Option in accordance herewith) a certificate or certificates representing the Stock for which the Automatic Option has been exercised in accordance with the provisions of this Plan. In no event may any Automatic Option be exercised for any fractional shares. (e) PAYMENT OF OPTION PRICE. The aggregate Option Price shall be payable in one of the alternative forms specified below: (i) full payment in cash or check made payable to the Company's order; or (ii) full payment in shares of Stock held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at fair market value on the Exercise Date (as determined in accordance with Section 4.5 hereof); or (iii) if a cashless exercise program has been implemented by the Board, full payment through a sale and remittance procedure pursuant to which the Optionholder (A) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the Optioned Shares to be purchased and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the Optioned Shares to be purchased and (B) shall concurrently provide written directives to the 12 13 Company to deliver the certificates for the Optioned Shares to be purchased directly to such brokerage firm in order to complete the sale transaction. (f) TERM OF OPTION. Each Automatic Option shall expire on the tenth anniversary of the date on which an Automatic Option Grant was made ("Expiration Date"). Except as provided in Article IV hereof, should an Optionholder's service as a Board member cease prior to the Expiration Date for any reason while an Automatic Option remains outstanding and unexercised, then the Automatic Option term shall immediately end and the Automatic Option shall cease to be outstanding in accordance with the following provisions: (i) The Automatic Option shall immediately terminate and cease to be outstanding for any Optioned Shares of Stock which were not vested at the time of Optionholder's cessation of Board service. (ii) Should an Optionholder cease, for any reason other than death, to serve as a member of the Board, then the Optionholder shall have a six month period measured from the date of such cessation of Board service in which to exercise the Automatic Options which vested prior to the time of such cessation of Board service. In no event, however, may any Automatic Option be exercised after the Expiration Date of such Automatic Option. (iii) Should an Optionholder die while serving as a Board member or within six months after cessation of Board service, then the personal representative of the Optionholder's estate (or the person or persons to whom the Automatic Option is transferred pursuant to the Optionholder's will or in accordance with the laws of descent and distribution) shall have a one year period measured from the date of the Optionholder's cessation of Board service in which to exercise the Automatic Options which vested prior to the time of such cessation of Board service. In no event, however, may any Automatic Option be exercised after the Expiration Date of such Automatic Option. ARTICLE IV MISCELLANEOUS 4.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock subject to the Plan, the number of shares covered by outstanding Options and Awards and the price per share stated in such Options and Awards, and the number of Automatic Options to be granted pursuant to the Automatic Program, shall be proportionately adjusted for any increase or decrease in the number of outstanding shares of Stock of the Company resulting from a subdivision or consolidation of shares or any other capital adjustment or the payment of a stock dividend or any other increase or decrease in the number of such shares effected without the Company's receipt of consideration therefor in money, services or property. 4.2 MERGERS, ETC. If the Company is the surviving corporation in any merger or consolidation (not including a Corporate Transaction), any Option or Award granted under the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option or Award would have been entitled prior to the merger or consolidation. Except as provided in Section 4.3 hereof, a dissolution or liquidation of the Company shall cause every Option or Award outstanding hereunder to terminate. 13 14 4.3 CORPORATE TRANSACTION. In the event of stockholder approval of a Corporate Transaction, (a) all unvested Automatic Options shall automatically accelerate and immediately vest so that each outstanding Automatic Option shall, one week prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Optioned Shares and (b) the Plan Administrator shall have the discretion and authority, exercisable at any time, to provide for the automatic acceleration of one or more of the outstanding Discretionary Options or Awards granted by it under the Plan. Upon the consummation of the Corporate Transaction, all Options shall, to the extent not previously exercised, terminate and cease to be outstanding. 4.4 CHANGE IN CONTROL. (a) AUTOMATIC GRANT PROGRAM. In the event of a Change in Control, all unvested Automatic Options shall automatically accelerate and immediately vest so that each outstanding Automatic Option shall, immediately prior to the effective date of such Change in Control, become fully exercisable for all of the Optioned Shares. Thereafter, each Automatic Option shall remain exercisable until the Expiration Date of such Automatic Option. (b) DISCRETIONARY GRANT PROGRAM. In the event of a Change in Control, a Plan Administrator shall have the discretion and authority, exercisable at any time, whether before or after the Change in Control, to provide for the automatic acceleration of one or more outstanding Discretionary Options or Awards granted by it under the Plan upon the occurrence of such Change in Control. A Plan Administrator may also impose limitations upon the automatic acceleration of such Options or Awards to the extent it deems appropriate. Any Options or Awards accelerated upon a Change in Control will remain fully exercisable until the expiration or sooner termination of the Option term. (c) INCENTIVE STOCK OPTION LIMITS. The exercisability of any Discretionary Options which are intended to qualify as Incentive Stock Options and which are accelerated by the Plan Administrator in connection with a pending Corporation Transaction or Change in Control shall, except as otherwise provided in the discretion of the Plan Administrator and the Optionholder, remain subject to the $100,000 Limitation and vest as quickly as possible without violating the $100,000 Limitation. 4.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value of a share of Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the fair market value shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) per share of Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its Nasdaq system or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Stock on the date in question, then the mean between the highest bid price and lowest asked price (or the closing selling price) on the last preceding date for which such quotations exist shall be determinative of fair market value. (ii) If the Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Stock on the date 14 15 in question on the stock exchange determined by the Board to be the primary market for the Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, then the fair market value shall be determined by the Board after taking into account such factors as the Board shall deem appropriate, including one or more independent professional appraisals. 4.6 USE OF PROCEEDS. The proceeds received by the Company from the sale of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall be used for general corporate purposes. 4.7 CANCELLATION OF OPTIONS. Each Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionholders, the cancellation of any or all outstanding Discretionary Options granted under the Plan by that Plan Administrator and to grant in substitution therefore new Discretionary Options under the Plan covering the same or different numbers of shares of Stock as long as such new Discretionary Options have an exercise price per share of Stock no less than the minimum exercise price as set forth in Section 2.2(b) hereof on the new grant date. 4.8 REGULATORY APPROVALS. The implementation of the Plan, the granting of any Option or Award hereunder, and the issuance of Stock upon the exercise of any such Option or Award shall be subject to the procurement by the Company of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the Options or Awards granted under it and the Stock issued pursuant to it. 4.9 INDEMNIFICATION. In addition to such other rights of indemnification as they may have, the members of a Plan Administrator shall be indemnified and held harmless by the Company, to the extent permitted under applicable law, for, from and against all costs and expenses reasonably incurred by them in connection with any action, suit, legal proceeding to which any member thereof may be a party by reason of any action taken, failure to act under or in connection with the Plan or any rights granted thereunder and against all amounts paid by them in settlement thereof or paid by them in satisfaction of a judgment of any such action, suit or proceeding, except a judgment based upon a finding of bad faith. 4.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the exclusive means by which the Company may issue options or warrants to acquire its Stock, stock awards or any other type of award. To the extent permitted by applicable law, any such other option, warrants or awards may be issued by the Company other than pursuant to this Plan without stockholder approval. 4.11 COMPANY RIGHTS. The grants of Options shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 15 16 4.12 PRIVILEGE OF STOCK OWNERSHIP. An Optionholder shall not have any of the rights of a stockholder with respect to Optioned Shares until such individual shall have exercised the Option and paid the Option Price for the Optioned Shares. No adjustment will be made for dividends or other rights for which the record date is prior to the date of such exercise and full payment for such Optioned Shares. 4.13 ASSIGNMENT. The right to acquire Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionholder except as specifically provided herein. Except as may be specifically allowed by the Plan Administrator at the time of grant and set forth in the documents evidencing a Discretionary Option or Award, no Option or Award granted under the Plan or any of the rights and privileges conferred thereby shall be assignable or transferable by an Optionholder or grantee other than by will or the laws of descent and distribution, and such Option or Award shall be exercisable during the Optionholder's or grantee's lifetime only by the Optionholder or grantee. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Company and its successors or assigns, and the Optionholders, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 4.14 SECURITIES RESTRICTIONS (a) LEGEND ON CERTIFICATES. All certificates representing shares of Stock issued upon exercise of Options or Awards granted under the Plan shall be endorsed with a legend reading as follows: The shares of Common Stock evidenced by this certificate have been issued to the registered owner in reliance upon written representations that these shares have been purchased solely for investment. These shares may not be sold, transferred or assigned unless in the opinion of the Company and its legal counsel such sale, transfer or assignment will not be in violation of the Securities Act of 1933, as amended, and the rules and regulations thereunder. (b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and Awards are and shall be made available only to a limited number of present and future key personnel who have knowledge of the Company's financial condition, management and its affairs. The Plan is not intended to provide additional capital for the Company, but to encourage ownership of Stock among the Company's key personnel. By the act of accepting an Option or Award, each grantee agrees (i) that, any shares of Stock acquired will be solely for investment and not with any intention to resell or redistribute those shares and (ii) such intention will be confirmed by an appropriate certificate at the time the Stock is acquired if requested by the Company. The neglect or failure to execute such a certificate, however, shall not limit or negate the foregoing agreement. (c) REGISTRATION STATEMENT. If a Registration Statement covering the shares of Stock issuable upon exercise of Options granted under the Plan is filed under the Securities Act of 1933, as amended, and is declared effective by the Securities Exchange Commission, the provisions of Sections 4.14(a) and (b) shall terminate during the period of time that such Registration Statement, as periodically amended, remains effective. 16 17 4.15 TAX WITHHOLDING. (a) GENERAL. The Company's obligation to deliver Stock upon the exercise of Options under the Plan shall be subject to the satisfaction of all applicable federal, state and local income tax withholding requirements. (b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its discretion and in accordance with the provisions of this Section 4.15(b) and such supplemental rules as it may from time to time adopt, provide any or all Optionholders with the right to use shares of Stock in satisfaction of all or part of the federal, state and local income tax liabilities incurred by such Optionholders in connection with the exercise of their Options ("Taxes"). Such right may be provided to any such Optionholder in either or both of the following formats: (i) STOCK WITHHOLDING. The Optionholder of an Option may be provided with the election, which may be subject to approval by the Plan Administrator, to have the Company withhold, from the Stock otherwise issuable upon the exercise of such Option, a portion of those shares of Stock with an aggregate fair market value equal to the percentage (not to exceed 100 percent) of the applicable Taxes designated by the Optionholder. (ii) STOCK DELIVERY. The Board may, in its discretion, provide the Optionholder with the election to deliver to the Company, at the time the Option is exercised, one or more shares of Stock previously acquired by such individual (other than pursuant to the transaction triggering the Taxes) with an aggregate fair market value equal to the percentage (not to exceed 100 percent) of the taxes incurred in connection with such Option exercise designated by the Optionholder. 4.16 GOVERNING LAW. The Plan shall be governed by and all questions hereunder shall be determined in accordance with the laws of the State of Arizona. ARTICLE V DEFINITIONS The following capitalized terms used in this Plan shall have the meaning described below: "AFFILIATES" shall mean all "executive officers" (as that term is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the Company and all persons who own ten percent or more of the Company's issued and outstanding Stock. "ANNUAL GRANT DATE" shall mean the date of the Company's annual stockholder meeting. "AUTOMATIC GRANT PROGRAM" shall mean that program set forth in Article III of this Agreement pursuant to which Eligible Directors, as defined herein, are automatically granted Options upon certain events. "AUTOMATIC OPTION GRANT" shall mean those automatic option grants made on the Annual Grant Date, on the Initial Grant Date, and on the Formula Grant Date. 17 18 "AUTOMATIC OPTIONS" shall mean those Options granted pursuant to the Automatic Grant Program. "AWARD" shall mean a Stock Award, SAR or Cash Award. "BOARD" shall mean the Board of Directors of the Company. "CASH AWARD" shall mean an award to be paid in cash and granted under Section 2.5 hereunder. "CHANGE IN CONTROL" shall mean and include the following transactions or situation: (i) A sale, transfer, or other disposition by the Company through a single transaction or a series of transactions of securities of the Company representing 30 percent or more of the combined voting power of the Company's then outstanding securities to any "Unrelated Person" or "Unrelated Persons" acting in concert with one another. For purposes of this definition, the term "Person" shall mean and include any individual, partnership, joint venture, association, trust corporation, or other entity (including a "group" as referred to in Section 13(d)(3) of the 1934 Act. For purposes of this definition, the term "Unrelated Person" shall mean and include any Person other than the Company, a wholly-owned subsidiary of the Company, or an employee benefit plan of the Company. (ii) A sale, transfer, or other disposition through a single transaction or a series of transactions of all or substantially all of the assets of the Company to an Unrelated Person or Unrelated Persons acting in concert with one another. (iii) A change in the ownership of the Company through a single transaction or a series of transactions such that any unrelated Person or Unrelated Persons acting in concert with one another become the "Beneficial Owner," directly or indirectly, of securities of the Company representing at least 30 percent of the combined voting power of the Company's then outstanding securities. For purposes of this Section, the term "Beneficial Owner" shall have the same meaning as given to that term in Rule 13d-3 promulgated under the 1934 Act, provided that any pledgee of voting securities shall not be deemed to be the Beneficial Owner thereof prior to its acquisition of voting rights with respect to such securities. (iv) Any consolidation or merger of the Company with or into an Unrelated Person, unless immediately after the consolidation or merger the holders of the common stock of the Company immediately prior to the consolidation or merger are the Beneficial Owners of securities of the surviving corporation representing at least 50 percent of the combined voting power of the surviving corporation's then outstanding securities. (v) During any period of two years, individuals who, at the beginning of such period, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 18 19 (vi) A change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the 1934 Act, or any successor regulation of similar import, regardless of whether the Company is subject to such reporting requirement. Notwithstanding any provision hereof to the contrary, the filing of a proceeding for the reorganization of the Company under Chapter 11 of the General Bankruptcy Code or any successor or other statute of similar import shall not be deemed to be a Change of Control for purposes of this Plan. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMPANY" shall mean Rural/Metro Corporation, a Delaware corporation. "CORPORATE TRANSACTION" shall mean (a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purposes of which is to change the state in which the Company is incorporated; (b) the sale, transfer of or other disposition of all or substantially all of the assets of the Company and complete liquidation or dissolution of the Company, or (c) any reverse merger in which the Company is the surviving entity but in which the securities possessing more than 50 percent of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. "DISCRETIONARY GRANT PROGRAM" shall mean the program described in Article II of this Plan pursuant to which certain Eligible Directors are granted Options or Awards in the discretion of the Plan Administrator. "DISCRETIONARY OPTIONS" shall mean options granted under the Discretionary Grant Program. "EFFECTIVE DATE" shall mean the date that the Plan has been approved by the stockholders as required by Section 1.3(a) hereof. "ELIGIBLE DIRECTOR" shall mean, with respect to the Automatic Grant Program, those Board members who are not employed by the Company, whether or not such members are Non-Employee Directors as defined herein. "ELIGIBLE PERSONS" shall mean (a) with respect to the Discretionary Grant Program, those persons who, at the time that the Discretionary Option or Award is granted, are (i) key personnel (including officers and directors) of the Company or Parent or Subsidiary Corporations, or (ii) consultants or independent contractors who provide valuable services to the Company or Parent or Subsidiary Corporations; and (b) with respect to the Automatic Grant Program, the Eligible Directors. "EMPLOYEE COMMITTEE" shall mean that committee appointed by the Board to administer the Plan with respect to the Non-Affiliates and comprised of two or more persons who are members of the Board. "EPS INCREASE" shall have the meaning set forth in Section 3.2(a)(iii) hereof. 19 20 "EXERCISE DATE" shall be the date on which written notice of the exercise of an Option is delivered to the Company in accordance with the requirements of the Plan. "EXPIRATION DATE" shall be the 10-year anniversary of the date on which an Automatic Option Grant was made. "FORMULA GRANT DATE" shall have the meaning as set forth in Section 3.2(a)(iii) hereof. "INCENTIVE STOCK OPTION" shall mean a Discretionary Option that is intended to qualify as an "incentive stock option" under Code section 422. "INITIAL GRANT DATE" shall mean the date that an Eligible Director is first appointed or elected to the Board. "NON-AFFILIATES" shall mean all persons who are not Affiliates. "NON-EMPLOYEE DIRECTORS" shall mean those Directors who satisfy the definition of "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated under the 1934 Act. "$100,000 LIMITATION" shall mean the limitation pursuant to which the aggregate fair market value (determined as of the respective date or dates of grant) of the Stock for which one or more Options granted to any person under this Plan (or any other option plan of the Company or any Parent or Subsidiary Corporation) may for the first time be exercisable as Incentive Stock Options during any one calendar year shall not exceed the sum of $100,000. "OPTIONHOLDER" shall mean an Eligible Person or Eligible Director to whom Options have been granted. "OPTIONED SHARES" shall be those shares of Stock to be optioned from time to time to any Eligible Director. "OPTION PRICE" shall mean (i) with respect to Discretionary Options, the exercise price per share as specified by the Plan Administrator pursuant to Section 2.2(b) hereof, and (ii) with respect to Automatic Options, the exercise price per share as specified by Section 3.2(b) hereof. "OPTIONS" shall mean options to acquire Stock granted under the Plan. "PARENT CORPORATION" shall mean any corporation in the unbroken chain of corporations ending with the employer corporation, where, at each link of the chain, the corporation and the link above owns at least 50 percent of the combined total voting power of all classes of the stock in the corporation in the link below. "PLAN" shall mean this stock option plan for Rural/Metro Corporation. "PLAN ADMINISTRATOR" shall mean (a) either the Board, the Senior Committee, or any other committee, whichever is applicable, with respect to the administration of the Discretionary Grant Program as it relates to Affiliates and (b) either the Board, the Employee Committee, or any other 20 21 committee, whichever is applicable, with respect to the administration of the Discretionary Grant Program as it relates to Non-Affiliates and with respect to the Automatic Grant Program. "SAR" shall mean stock appreciation rights granted pursuant to Section 2.4 hereunder. "SENIOR COMMITTEE" shall mean that committee appointed by the Board to administer the Discretionary Grant Program with respect to the Affiliates and comprised of two or more Non- Employee Directors. "SERVICE" shall have the meaning set forth in Section 2.2(n) hereof. "STOCK" shall mean shares of the Company's common stock, $.01 par value per share, which may be unissued or treasury shares, as the Board may from time to time determine. "STOCK AWARDS" shall mean Stock directly granted under the Discretionary Grant Program. "SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken chain of corporations starting with the employer corporation, where, at each link of the chain, the corporation and the link above owns at least 50 percent of the combined voting power of all classes of stock in the corporation below. EXECUTED as of the 6th day of September, 1996. RURAL/METRO CORPORATION By: /s/ Warren S. Rustand --------------------------------- Name: Warren S. Rustand -------------------------------- Its: Chief Executive Officer --------------------------------- ATTESTED BY: /s/ Louis G. Jekel - ------------------------------ Secretary 21 EX-10.16.E 3 EMPLOYEE AGREEMENT FOR ROBERT E. RAMSEY JR. 1 Exhibit 10.16(e) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made this 30th day of June, 1997, by and between ROBERT E. RAMSEY, JR. ("Executive") and RURAL/METRO CORPORATION, a Delaware corporation ("Rural/Metro"), effective June 30, 1997 ("Effective Date"). R E C I T A L S A. Executive desires to be employed by Rural/Metro in the position as a senior executive. B. Rural/Metro has decided to offer Executive an employment agreement, the terms and provisions of which are set forth below. NOW, THEREFORE, IT IS HEREBY MUTUALLY AGREED AS FOLLOWS: 1. POSITION AND DUTIES. Executive will be employed as a senior executive of Rural/Metro and shall perform the duties of his position, as determined by the Board of Directors and Chief Executive Officer of Rural/Metro, in accordance with the policies, practices and bylaws of Rural/Metro. Executive shall report directly to Robert T. Edwards and Warren S. Rustand, or their successors, and not to any regional president of Rural/Metro. Executive shall have direct management authority over all of Rural/Metro's ambulance and fire service operations in Arizona. Executive shall serve Rural/Metro faithfully, loyally, honestly and to the best of his ability. Executive will devote his best efforts to the performance of his duties for, and in the business and affairs of, Rural/Metro. 2 Executive agrees that during the Term (as defined in paragraph 5), Executive shall serve as the President and Chief Executive Officer of SW General, Inc., Southwest Ambulance of Casa Grande, Inc., Medical Emergency Devices and Services (MEDS), Inc., and Southwest General Services, Inc., each of which are Arizona corporations (collectively referred to herein as the "Southwest Companies") or any successor corporation of such companies and as Vice-President of Rural/Metro, and Executive agrees to serve as a member of the Board of Directors of Rural/Metro. The Board of Directors of Rural/Metro reserves the right, in its sole discretion, to change or modify Executive's position, title and duties during the term of this Agreement. 2. SALARY. During the first year of this Agreement, Executive's semimonthly salary will be based upon annual compensation of Two Hundred Thousand and 00/100 Dollars ($200,000.00). Thereafter, the salary will be reviewed annually in accordance with Rural/Metro's compensation review policies and practices, all as determined by Rural/Metro, in its sole discretion; provided that Rural/Metro may not reduce the salary set forth above during the first three (3) years of the Term. 3. MANAGEMENT INCENTIVE PROGRAM. Executive shall be eligible to participate in the Rural/Metro Management Incentive Program ("MIP") (or any other plan that is designated by the Board as replacing the MIP) and to receive such additional compensation as may be provided by the MIP from time to time. 4. OTHER AGREEMENTS. Rural/Metro and Executive may enter into one or more agreements from time-to-time relating to specific programs (such as a stock option program). Nothing in this Agreement is intended to alter or modify said agreements, which are referred to below as "Ancillary Agreements." -2- 3 5. TERM AND TERMINATION. This Agreement will continue in full force and effect until it is terminated by the parties. This Agreement may be terminated in any of the following ways: (a) it may be renegotiated and replaced by a written agreement signed by both parties; (b) Rural/Metro may elect to terminate this Agreement with or without "Cause", as defined below; (c) Executive may elect to terminate this Agreement with or without "Good Reason," as defined below; or (d) either party may serve notice on the other of its desire to terminate this Agreement at the end of the Term, which notice shall be given to the other party at least forty-five (45) days before the end of the Term. The "Term" of this Agreement shall begin on the date hereof and shall expire by its terms on March 31, 2002, unless sooner terminated in accordance with the provisions of this Agreement. 6. TERMINATION BY RURAL/METRO. A. Termination For Cause. Rural/Metro may terminate this Agreement and Executive's employment for Cause at any time upon written notice. This means that Rural/Metro has the right to terminate the employment relationship for Cause at any time should there be Cause to do so. For purposes of this Agreement, "Cause" shall be limited to discharge resulting from a determination by Rural/Metro that Executive: (a) has been convicted of a felony involving dishonesty, fraud, theft or embezzlement; (b) has repeatedly failed or refused, after written notice from Rural/Metro, in a material respect to follow reasonable policies or directives established by Rural/Metro; (c) has willfully and persistently failed, after written notice from Rural/Metro, to attend to material duties or obligations imposed upon him under this Agreement; (d) has performed an act -3- 4 or failed to act, which, if he were prosecuted and convicted, would constitute a felony involving $1,000 or more of money or property of Rural/Metro; or (e) has misrepresented or concealed a material fact for purposes of securing employment with Rural/Metro or this Employment Agreement. Because Executive is in a position which involves great responsibilities, Rural/Metro is not required to utilize its progressive discipline policy. If this Agreement and Executive's employment is terminated for Cause, Executive shall receive no Severance Benefits. B. Termination Without Cause. Rural/Metro also may terminate this Agreement and Executive's employment without Cause at any time by giving thirty (30) days written notice to Executive. In the event this Agreement and Executive's employment are terminated by Rural/Metro without Cause, Executive shall be entitled to receive Severance Benefits pursuant to paragraph 9. 7. TERMINATION BY EXECUTIVE. Executive may terminate this Agreement and his employment with or without "Good Reason" in accordance with the provisions of this paragraph 7. A. Termination For Good Reason. Executive may terminate this Agreement and his employment for "Good Reason" by giving written notice to Rural/Metro within thirty (30) days, or such longer period as may be agreed to in writing by Rural/Metro, of Executive's receipt of notice of the occurrence of any event constituting "Good Reason," as described below. Executive shall have "Good Reason" to terminate this Agreement and his employment upon the occurrence of any of the following events: (a) Executive is demoted to a position of less stature or importance within Rural/Metro than the position described in paragraph 1, it being agreed -4- 5 that "Good Reason" shall not exist hereunder by reason of Executive's failure to be elected to the Board of Directors of Rural/Metro as a result of the shareholders of Rural/Metro voting not to elect Executive to the Board of Directors of Rural/Metro (provided, however, that, unless circumstances constituting Cause exist, Rural/Metro shall have taken all action within its power and authority to nominate Executive for election to the Board of Directors); (b) Executive is required to relocate to an employment location that is more than fifty (50) miles from his employment location on the date of the execution of this Agreement; (c) Executive's annualized salary rate is reduced to a level that is at least twenty percent (20%) less than the salary paid to Executive during any prior calendar year, unless Executive has agreed to said reduction; (d) the potential incentive compensation (or bonus) to which Executive may become entitled under the MIP at any level of performance by the Executive or Rural/Metro is reduced by seventy-five percent (75%) or more as compared to the prior year; or (e) a sale by Rural/Metro of more than fifty percent (50%) of the capital stock of all of the Southwest Companies or their successors, to an entity not a subsidiary (direct or indirect) or an affiliate of Rural/Metro (except for a consolidation of some or all of the Southwest Companies, a change in the ownership of Rural/Metro or a sale of Rural/Metro's ambulance business in general). If Executive terminates this Agreement and his employment for Good Reason, Executive shall be entitled to receive Severance Benefits pursuant to paragraph 9. B. Termination Without Good Reason. Executive also may terminate this Agreement and his employment without Good Reason at any time by giving thirty (30) days notice to Rural/Metro. If Executive terminates this Agreement and his employment without Good Reason, Executive shall not be entitled to receive Severance Benefits pursuant to paragraph 9. -5- 6 8. DEATH OR DISABILITY. This Agreement will terminate automatically on Executive's death. Any salary or other amounts due to Executive for services rendered prior to his death shall be paid to Executive's surviving spouse, or if Executive does not leave a surviving spouse, to Executive's estate. No other benefits shall be payable to Executive's heirs pursuant to this Agreement, but amounts may be payable pursuant to any life insurance or other benefit plans maintained by Rural/Metro. In the event Executive becomes "Disabled," and as a result is unable to continue the proper performance of his duties hereunder, Executive's employment hereunder and Rural/Metro's obligation to pay Executive's salary shall continue for a period of three (3) months from the date of such Disability, at which point Executive's employment hereunder shall automatically cease and terminate. Executive shall be considered "Disabled" or to be suffering from a "Disability" for purposes of this paragraph 8 if, in the judgment of a licensed physician selected by the Board of Directors of Rural/Metro, Executive is unable to perform the essential functions of his position required under this Agreement, with or without reasonable accommodations, because of a physical or mental impairment. The determination by said physician shall be binding and conclusive for all purposes. 9. SEVERANCE BENEFITS. If this Agreement and Executive's employment are terminated without Cause by Rural/Metro pursuant to paragraph 6(B) prior to June 30, 2000, [three years after the date hereof] or if Executive elects to terminate this Agreement for Good Reason pursuant to paragraph 7(A), Executive shall receive the "Severance Benefits" as provided by this paragraph. Executive also shall receive Severance Benefits, subject to this paragraph, if his employment is terminated due to -6- 7 Disability pursuant to paragraph 8. The Severance Benefits shall begin immediately following termination of employment and will continue to be payable until June 30, 2000 [three years after the date hereof], unless the termination of Executive's employment hereunder is terminated for any reason after such date, in which case Executive shall not be entitled to any Severance Benefits. The Executive's "Severance Benefits" shall consist of the continuation of the Executive's salary pursuant to paragraph 2 and the continuation of any health, life, disability, or other insurance benefits that Executive was receiving as of his last day of active employment. If a particular insurance benefit may not be continued for any reason, Rural/Metro shall pay the cash equivalent to the Executive on a monthly basis or in a single lump sum. The amount of the cash equivalent of the benefit and whether the cash equivalent will be paid in monthly installments or in a lump sum will be determined by Rural/Metro in the exercise of its discretion. If Executive voluntarily terminates this Agreement and his employment without Good Reason prior to the end of the Term, or if Rural/Metro terminates the Agreement and Executive's employment for Cause, no Severance Benefits shall be paid to Executive. No Severance Benefits are payable in the event of Executive's death while in the active employ of Rural/Metro. Severance Benefits shall immediately cease if Executive commits a material violation of any of the terms of this Agreement relating to confidentiality and non-disclosure, as set forth in paragraph 11, or the Covenant-Not-To-Compete, as set forth in paragraph 12. Only material violations will result in the loss of Severance Benefits. In addition, if a violation, even if material, is one that may be cured, the violation will not be considered to be material unless Executive fails to cure said violation within thirty (30) days after receiving written notice of said violation from Rural/Metro or unless Executive repeats said violation at any time after receiving said notice. -7- 8 10. BENEFITS. Executive will be entitled to participate in any benefit plans, including, but not limited to, retirement plans, stock option plans, life insurance plans and health and dental plans available to other Rural/Metro employees, subject to any restrictions (including waiting periods) specified in said plans. Executive is entitled to four (4) weeks of paid vacation per calendar year, with such vacation to be scheduled and taken in accordance with Rural/Metro's standard vacation policies. 11. CONFIDENTIALLY AND NON-DISCLOSURE. During the course of his employment, Executive will become exposed to a substantial amount of confidential and proprietary information, including, but not limited to financial information, annual reports, audited and unaudited financial reports, strategic plans, business plans, marketing strategies, new business strategies, personnel and compensation information, and other such reports, documents or information. In the event his employment is terminated by either party for any reason, Executive promises that he will not take with him any copies of such documents, computer print-outs, computer tapes, floppy disks, CD roms, etc., in any form, format or manner whatsoever, nor will he disclose the same in whole or in part to any person or entity, in any manner either directly or indirectly. Excluded from this Agreement is information that is already disclosed to third parties and is in the public domain or that Rural/Metro consents to be disclosed, with such consent to be in writing. The provisions of this paragraph shall survive the termination of this Agreement. -8- 9 12. COVENANT-NOT-TO-COMPETE. A. Interests to be Protected. The parties acknowledge that during the term of his employment, Executive will perform essential services for Rural/Metro, its employees and shareholders, and for clients of Rural/Metro. Therefore, Executive will be given an opportunity to meet, work with and develop close working relationships with Rural/Metro's clients on a first-hand basis and will gain valuable insight as to the clients' operations, personnel and need for services. In addition, Executive will be exposed to, have access to, and be required to work with, a considerable amount of Rural/Metro's confidential and proprietary information, including but not limited to: information concerning Rural/Metro's methods of operation, financial information, strategic planning, operational budgets and strategies, payroll data, management systems programs, computer systems, marketing plans and strategies, merger and acquisition strategies and customer lists. The parties also expressly recognize and acknowledge that the personnel of Rural/Metro have been trained by, and are valuable to Rural/Metro, and that if Rural/Metro must hire new personnel or retrain existing personnel to fill vacancies it will incur substantial expense in recruiting and training such personnel. The parties expressly recognize that should Executive compete with Rural/Metro in any manner whatsoever, it could seriously impair the goodwill and diminish the value of Rural/Metro's business. The parties acknowledge that this covenant has an extended duration; however, they agree that this covenant is reasonable and it is necessary for the protection of Rural/Metro, its shareholders and employees. For these and other reasons, and the fact that there are many other employment opportunities available to Executive if he should terminate, the parties are in full and complete -9- 10 agreement that the following restrictive covenants (which together are referred to as the "Covenant-Not-To-Compete") are fair and reasonable and are freely, voluntarily and knowingly entered into. Further, each party has been given the opportunity to consult with independent legal counsel before entering into this Agreement. Notwithstanding any provisions set forth below, Rural Metro agrees that no breach of the Covenant-Not-To-Compete will occur as a result of Executive's formation of and activities with respect to any 501(c)(3) foundation and his participation therein (so long as such participation does not interfere with Executive's duties hereunder), his continued association with the International Association of Firefighters, his continued ownership and operation of an ambulance service company in Pima County, Arizona, under the name Kords Southwest, or his continued service as President of the Arizona Ambulance Association. B. Devotion to Employment. Executive shall devote substantially all his business time and best efforts to the performance of his duties on behalf of Rural/Metro. During his term of employment, Executive shall not at any time or place or to any extent whatsoever, either directly or indirectly, without the express written consent of Rural/Metro, engage in any outside employment, or in any activity competitive with or adverse to Rural/Metro's business, practice or affairs, whether alone or as partner, officer, director, employee, shareholder of any corporation or as a trustee, fiduciary, consultant or other representative. This is not intended to prohibit Executive from engaging in nonprofessional activities such as personal investments or conducting to a reasonable extent private business affairs which may include other boards of directors' activity, as long as they do not conflict with Rural/Metro. Participation to a reasonable extent in civic, social or community activities is encouraged. -10- 11 C. Non-Solicitation of Clients. During the term of Executive's employment with Rural/Metro and for a period of twenty-four (24) months after the termination of employment with Rural/Metro, regardless of who initiates the termination, Executive shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, call upon, contact, encourage, handle or solicit, or cause others to solicit, any person or other entity that is, or was within the twelve (12) month period immediately prior to the date of Executive's termination, a client or supplier of Rural/Metro or any of its subsidiaries or affiliates (including, without limitation, the Southwest Companies), for the purpose of soliciting, selling or purchasing from such client or supplier the same, similar, or related services or products that are provided by, or purchased by, Rural/Metro or any of its subsidiaries or affiliates (including, without limitation, the Southwest Companies). Notwithstanding the foregoing, the obligations of Executive under this paragraph 12(C) shall terminate only if Executive is terminated by Rural/Metro without Cause. If Executive violates his obligations under this paragraph 12(C), then the time periods hereunder shall be extended by the period of time equal to that period beginning when the activities constituting such violation commenced and ending when the activities constituting such violation terminated. D. Non-Solicitation of Employees. During the term of Executive's employment with Rural/Metro and for a period of twenty-four (24) months after the termination of employment with Rural/Metro, regardless of who initiates the termination, Executive shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, seek to hire, and/or hire any person who, on the date hereof, or on the date of Executive's termination, is an employee of -11- 12 Rural/Metro or any of its subsidiaries or affiliates (including, without limitation, the Southwest Companies), and that receives annual compensation in excess of $25,000, for employment as an independent contractor with any person or entity (other than Rural/Metro or any of its subsidiaries or affiliates), unless first authorized in writing by Rural/Metro, which authorization may be withheld in the sole and absolute discretion of Rural/Metro. Notwithstanding the foregoing, the obligations of Executive under this paragraph 12(D) shall terminate only if Executive is terminated by Rural/Metro without Cause. If Executive violates his obligations under this paragraph 12(D), then the time periods hereunder shall be extended by the period of time equal to that period beginning when the activities constituting such violation commenced and ending when the activities constituting such violation terminated. E. Competing Business. During the term of this Agreement and for a period of twenty-four (24) months after the termination of employment with Rural/Metro, regardless of who initiates the termination, Executive shall not, directly or indirectly, (including, without limitation, as a partner, shareholder, director, officer or employee of, or lender or consultant to, any other personal entity), for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, or in any other capacity, within, into or from the Restricted Territory (as defined below) engage or cause others to engage in the same or similar business as Rural/Metro and its subsidiaries, or any aspect thereof, unless first authorized in writing by Rural/Metro, which authorization may be withheld in the sole and absolute discretion of Rural/Metro. For purposes of this paragraph 12(E), the term "Restricted Territory" shall mean any geographical service area where Rural/Metro or any of its subsidiaries and affiliates, including, without limitation, the Southwest Companies, is engaged in business, or was considering -12- 13 engaging in business at any time prior to the termination or at time of termination. Notwithstanding the foregoing, the obligations of Executive under this paragraph 12(E) shall terminate only if Executive is terminated by Rural/Metro without Cause or if Executive terminates his employment hereunder for Good Reason. If Executive violates his obligations under this paragraph 12(E), then the time periods hereunder shall be extended by the period of time equal to that period beginning when the activities constituting such violation commenced and ending when the activities constituting such violation terminated. F. Judicial Amendment. If the scope of any provision of this Agreement is found by the Court to be too broad to permit enforcement to its full extent, then such provision shall be enforced to the maximum extent permitted by law. The parties agree that the scope of any provision of this Agreement may be modified by a judge in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. If any provision of this Agreement is found to be invalid or unenforceable for any reason, it shall not affect the validity of the remaining provisions of this Agreement. G. Injunctive Relief, Damages and Forfeiture. Due to the nature of Executive's position with Rural/Metro, and with full realization that a violation of this Agreement will cause immediate and irreparable injury and damage, which is not readily measurable, and to protect Rural/Metro's interests, Executive understands and agrees that in addition to instituting legal proceedings to recover damages resulting from a breach of this Agreement, Rural/Metro may seek to enforce this Agreement with an action for injunctive relief, to cease or prevent any actual or threatened violation of this Agreement on the part of Executive. -13- 14 H. Survival. The provisions of this paragraph shall survive the termination of this Agreement. 13. AMENDMENTS. This Agreement and the Ancillary Agreements constitute the entire agreement between the parties as to the subject mater hereof. Accordingly, there are no side agreements or verbal agreements other than those which are stated in this document or in the Ancillary Agreements. Any amendment, modification or change in said Agreements must be done so in writing and signed by both parties. 14. SEVERABILITY. In the event a court or arbitrator declares that any provision of this Agreement is invalid or unenforceable, it shall not affect or invalidate any of the remaining provisions. Further, the court shall have the authority to re-write that portion of the Agreement it deems unenforceable, to make it enforceable. 15. GOVERNING LAW. The law of the State of Arizona shall govern the interpretation and application of all of the provisions of this Agreement. 16. INDEMNITY. Executive shall be indemnified in his position to the fullest extent permitted or required by the laws of the State of Delaware and the State of Arizona, as applicable. 17. DISPUTE RESOLUTION. A. Mediation. Any and all disputes arising under, pertaining to or touching upon this Agreement (excepting the confidentiality and non-disclosure provisions of paragraph 11 and the -14- 15 Covenant-Not-To-Compete provisions of paragraph 12), or the statutory rights or obligations of either party hereto, shall, if not settled by negotiation, be subject to non-binding mediation before an independent mediator selected by the parties pursuant to paragraph 17(D). Any demand for mediation shall be made in writing and served upon the other party to the dispute, by certified mail, return receipt requested, at the business address of Rural/Metro, or at the last known residence address of Executive, respectively. The demand shall set forth with reasonable specificity the basis of the dispute and the relief sought. The mediation hearing will occur at a time and place convenient to the parties in Maricopa County, Arizona, within thirty (30) days of the date of selection or appointment of the mediator. B. Arbitration. In the event that the dispute is not settled through mediation, the parties shall then proceed to binding arbitration before a single independent arbitrator selected pursuant to paragraph 17(D). The mediator shall not serve as arbitrator. ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, TERMINATION BY ALLEGED BREACH OF CONTRACT OR POLICY, OR ALLEGED EMPLOYMENT TORT COMMITTED BY RURAL/METRO OR A REPRESENTATIVE OF RURAL/METRO, INCLUDING CLAIMS OF VIOLATIONS OF FEDERAL OR STATE DISCRIMINATION STATUTES OR PUBLIC POLICY, SHALL BE RESOLVED PURSUANT TO THIS POLICY AND THERE SHALL BE NO RECOURSE TO COURT, WITH OR WITHOUT A JURY TRIAL. The arbitration hearing shall occur at a time and place convenient to the parties in Maricopa County, Arizona, within thirty (30) days of selection or appointment of the arbitrator. If Rural/Metro has adopted a policy that is applicable to arbitrations with executives, the arbitration shall be conducted in accordance with said policy to the extent that -15- 16 the policy is consistent with this Agreement and the Federal Arbitration Act, 9 U.S.C. Sections 1-16. If no such policy has been adopted, the arbitration shall be governed by such procedures as the parties may agree upon. The arbitrator shall issue written findings of fact and conclusions of law, and an award, within fifteen (15) days of the date of the hearing unless the parties otherwise agree. C. Damages. In cases of breach of contract or policy, damages shall be limited to contract damages. In cases of intentional discrimination claims prohibited by statute, the arbitrator may direct payment consistent with 42 U.S.C. Section 1981(a) and the Civil Rights Act of 1991. In cases of employment tort, the arbitrator may award punitive damages if proved by clear and convincing evidence. Any award of punitive damages shall not exceed two times (2x) any compensatory award and, in any event, shall not exceed Two Hundred Fifty Thousand Dollars ($250,000). The arbitrator may award fees to the prevailing party and assess costs of the arbitration to the non-prevailing party. Issues of procedure, arbitrability, or confirmation of award shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16, except that Court review of the arbitrator's award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury. D. Selection of Mediators or Arbitrators. The parties shall select the mediator or arbitrator from a panel list made available by Arizona Litigation Alternatives ("ALA"). If the parties are unable to agree to a mediator or arbitrator within ten (10) days of receipt of a demand for mediation or arbitration, the mediator or arbitrator will be chosen by alternatively striking from a list of five (5) mediators or arbitrators obtained by Rural/Metro from ALA. Executive shall have the first strike. -16- 17 IN WITNESS WHEREOF, Rural Metro and Executive have executed this Agreement effective on the date set forth above. RURAL/METRO CORPORATION By /s/ William R. Crowell __________________________ Name: WILLIAM R. CROWELL _______________________ Its: Vice President ________________________ "EXECUTIVE" /s/ Robert E. Ramsey, Jr. ____________________________ ROBERT E. RAMSEY, JR. -17- EX-10.53 4 SECOND AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.50 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") is made and entered into as of this 29th day of May, 1997 by and among RURAL/METRO CORPORATION, a corporation organized under the laws of Delaware ("Rural/Metro" or the "Guarantor"), certain Subsidiaries of Rural/Metro designated on the signature pages hereto (collectively, the "Borrowers" and, together with Rural/Metro, the "Credit Parties"), the financial institutions who are or may become party hereto (collectively, the "Lenders"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association ("First Union"), as Agent for the Lenders (the "Agent"). Statement of Purpose The Lenders have previously agreed to extend certain credit facilities to the Borrowers pursuant to the Credit Agreement dated as of September 29, 1995, by and among Rural/Metro, as Guarantor, the Borrowers, the Lenders, and the Agent as amended by the First Amendment to Credit Agreement dated as of December 20, 1996 and as supplemented by various joinder agreements executed by the Credit Parties (as so amended and supplemented and as may be further amended, restated or otherwise modified, the "Credit Agreement"). The parties now desire to amend the Credit Agreement in order to increase the Aggregate Commitment from $125,000,000 to $175,000,000) and to reflect the revised Commitments of the Lenders on the terms and conditions set forth below. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Effect of Amendment. Except as expressly amended hereby, the Credit Agreement and Loan Documents shall be and remain in full force and effect. 2. Capitalized Terms. All capitalized undefined terms used in this Second Amendment shall have the meanings assigned thereto in the Credit Agreement. 3. Modification of Credit Agreement. The Credit Agreement is hereby modified as follows: (a) Section 1.1 is hereby modified as follows: (i) to delete the definition of Aggregate Commitment therein and to insert the following in lieu thereof: "Aggregate Commitment" means the aggregate amount of the Lenders' Commitments hereunder, as such amount may be reduced 2 at any time or from time to time pursuant to Section 2.5. The Aggregate Commitment as of May 28, 1997 shall be One Hundred Seventy-Five Million Dollars ($175,000,000)." (ii) to add in appropriate alphabetical order the following defined term: "'Second Amendment' means the Second Amendment to the Credit Agreement dated as of May 28, 1997 by and among the Credit Parties, the Lenders and the Agent." (iii) to add in appropriate alphabetical order the following defined term: "'Latin American Investments' means investments in Persons organized or operating in any Latin American country; provided, that Latin America for purposes of this definition shall include Mexico, Central America, South America and the Caribbean." (b) Section 10.4(f)(v)(B) and (C) are deleted in their entirety and the following shall be inserted in lieu thereof: "(B) for the Fiscal Year ending June 30, 1998, 25% of Consolidated Net Revenues of Rural/Metro and its Subsidiaries for the previous Fiscal Year and (C) for each Fiscal Year thereafter, 20% of Consolidated Net Revenues of Rural/Metro and its Subsidiaries for the previous Fiscal Year." (c) The chart reflecting mandatory reductions in the Aggregate Commitment in Section 2.5(b) is deleted in its entirety and the following shall be inserted in lieu thereof: "Date Reduction to Aggregate Commitment ----- --------------------------------- September 30, 1999 $6,250,000 December 31, 1999 $6,250,000 March 31, 2000 $6,250,000 June 30, 2000 $6,250,000 September 30, 2000 $7,812,500 December 31, 2000 $7,812,500 March 31, 2001 $7,812,500 June 30, 2001 $7,812,500" (d) (i) Section 9.1 is deleted in its entirety and replaced by the following: " SECTION 9.1. Total Debt Leverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) the Consolidated Debt of Rural/Metro and its Subsidiaries as of such fiscal quarter end to (b) the product of (i) 2 3 Consolidated EBITDA for the period of two (2) consecutive fiscal quarters ending on such fiscal quarter end multiplied by (ii) two (2), to exceed 4.00 to 1.00." (ii) Section 9.2 is deleted in its entirety and replaced by the following: " SECTION 9.2. Senior Debt Leverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) the difference between (i) the Consolidated Debt of Rural/Metro and its Subsidiaries less (ii) the Consolidated Subordinated Debt of Rural/Metro and its Subsidiaries as of such fiscal quarter end to (b) the product of (i) Consolidated EBITDA for the period of two (2) consecutive fiscal quarters ending on such fiscal quarter end multiplied by (ii) two (2), to exceed 3.25 to 1.00." (iii) Section 9.3 is deleted in its entirety and replaced by the following: " SECTION 9.3 Total Debt to Total Capitalization. As of the end of any fiscal quarter, permit the ratio of (a) the Consolidated Debt of Rural/Metro and its Subsidiaries as of such fiscal quarter end to (b) the sum of (i) Consolidated Net Worth plus (ii) the Consolidated Debt of Rural/Metro and its Subsidiaries, each as of such fiscal quarter end, to exceed .60 to 1.00." (iv) Section 9.4 is deleted in its entirety and replaced by the following: " SECTION 9.4 Fixed Charge Coverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) the product of (i) Consolidated EBIRTA for the period of two (2) consecutive fiscal quarters ending on such fiscal quarter end multiplied by (ii) two (2) to (b) the product of (i) Consolidated Fixed Charges for such period of two (2) consecutive fiscal quarters multiplied by (ii) two (2), to be less than (A) 2.00 to 1.00 from and after the Closing Date through and including June 30, 1999 and (B) 2.50 to 1.00 thereafter." (v) The first sentence of Section 9.5 is deleted in its entirety and replaced by the following: "As of the end of any fiscal quarter, permit the ratio of (a) the product of (i) Consolidated EBIRTA for the period of two (2) consecutive fiscal quarters ending on such fiscal quarter end multiplied by (ii) two (2) to (b) Consolidated Debt Service to be less than (i) 1.50 to 1.00 from and after the Closing Date through and 3 4 including June 30, 1999 and (ii) 1.75 to 1.00 thereafter." (vi) The first sentence of Section 9.7 shall be deleted in its entirety and the following inserted in lieu thereof: "Make or incur Capital Expenditures during the following periods in an aggregate amount in excess of the following amounts: (a) for the Fiscal Year ending June 30, 1997, $22,000,000; (b) for the Fiscal Year ending June 30, 1998, $24,000,000; (c) for the Fiscal Year ending June 30, 1999, $25,000,000; (d) for the Fiscal Year ending June 30, 2000, $30,000,000; (e) for the Fiscal Year ending June 30, 2001, $35,000,000; and (f) $40,000,000 thereafter." (e) Exhibit M shall be deleted in its entirety and Exhibit M attached hereto shall be inserted in lieu thereof. (f) Schedule 1 shall be deleted in its entirety and Schedule 1 attached hereto shall be substituted in lieu thereof. 4. Conditions. The effectiveness of the amendments set forth herein shall be conditioned upon delivery to the Agent of the following items: (a) Notes. The Borrowers shall issue and deliver to the Agent, in exchange for the Notes outstanding, new Notes, payable to each Lender in the amount of such Lender's respective Commitment. (b) Officer's Certificate. The Agent shall have received a certificate from the chief executive officer or chief financial officer of Rural/Metro, on behalf of the Credit Parties, in form and substance reasonably satisfactory to the Agent, to the effect that all representations and warranties of the Credit Parties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects; that the Credit Parties are not in violation of any of the covenants contained in the Credit Agreement and the other Loan Documents; that, after giving effect to the transactions contemplated by this Second Amendment, no Default or Event of Default has occurred and is continuing; and that the Credit Parties have satisfied each of the closing conditions to be satisfied thereby. (c) Closing Certificate of each Credit Party. The Agent shall have received a certificate of the secretary or assistant secretary of each Credit Party certifying, as applicable, that (i) (A) the articles of incorporation and bylaws of such Credit Party (or applicable documentation in the case of any Credit Party organized as a partnership or a 4 5 limited liability company) delivered to the Agent on September 29, 1995 (or, with respect to any Credit Party who joined the Credit Agreement after the Closing Date, the date of the applicable Joinder Agreement executed by such Credit Party) have not been repealed, revoked, rescinded or amended in any respect or (B) that, if such documents have not previously been provided to the Agent, such documents are attached thereto and have not been repealed, revoked, rescinded or amended in any respect; (ii) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Credit Party or the general partner or member of such Credit Party, as applicable, authorizing the transactions contemplated herein, the additional borrowings by the Borrowers contemplated hereunder and the execution, delivery and performance of this Second Amendment and the other documents related thereto (collectively, the "Second Amendment Documents") to which it is a party; and (iii) as to the incumbency and genuineness of the signature of each officer of such Credit Party or the general partner or member of such Credit Party, as applicable executing Loan Documents to which such Credit Party is a party. (d) Certificates of Good Standing. The Agent shall have received short-form certificates as of a recent date of the good standing of each Credit Party under the laws of their respective jurisdictions of organization and such other jurisdictions requested by the Agents. (e) Opinions of Counsel. The Agent shall have received favorable opinions of counsel to the Credit Parties addressed to the Agent and the Lenders with respect to such Persons and the Loan Documents, as modified by this Second Amendment, reasonably satisfactory in form and substance to the Agent and the Lenders. (f) Fees. In order to compensate the Agent for its obligations hereunder, the Borrowers agree to pay (i) to the Agent, for its own account, the arrangement fee and (ii) to the Agent, for the account of the Lenders, the amendment fee and the upfront fee, all as set forth in that certain letter agreement between the Agent and Rural/Metro dated April 30, 1997. 5. Representations and Warranties/No Default. By their execution hereof, the Credit Parties hereby certify that each of the representations and warranties set forth in the Credit Agreement and the other Loan Documents is true and correct as of the date hereof as if fully set forth herein and that, as of the date hereof, no Default or Event of Default has occurred and is continuing. 5 6 6. Expenses. The Credit Parties shall pay all reasonable out-of-pocket expenses of the Agent in connection with the preparation, execution and delivery of this Second Amendment and the other Second Amendment Documents, including without limitation, the reasonable fees and disbursements of counsel for the Agent. 7. Governing Law. This Second Amendment shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina without reference to the conflicts or choice of law principles thereof. 8. Counterparts. This Second Amendment may be executed in separate counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the date and year first above written. BORROWERS: THE AID AMBULANCE COMPANY, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ AID AMBULANCE AT VIGO COUNTY, INC., an Indiana corporation By:________________________________ Name:___________________________ Title:__________________________ THE AID COMPANY, INC., an Indiana corporation By:________________________________ Name:___________________________ Title:__________________________ AMERICAN LIMOUSINE SERVICE, INC., an Ohio corporation By:________________________________ Name:___________________________ Title:__________________________ BEACON TRANSPORTATION, INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ CITY WIDE AMBULANCE SERVICE, INC., an Ohio corporation By:________________________________ Name:___________________________ Title:__________________________ 8 CORNING AMBULANCE SERVICE INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ DONLOCK, LTD., a Pennsylvania corporation By:________________________________ Name:___________________________ Title:__________________________ E.M.S. VENTURES, INC., a Georgia corporation By:________________________________ Name:___________________________ Title:__________________________ EMS VENTURES OF SOUTH CAROLINA, INC., a South Carolina corporation By:________________________________ Name:___________________________ Title:__________________________ EASTERN AMBULANCE SERVICE, INC., a Nebraska corporation By:________________________________ Name:___________________________ Title:__________________________ EASTERN PARAMEDICS, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ GOLD CROSS AMBULANCE SERVICES, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 9 GOLD CROSS AMBULANCE SERVICE OF PA., INC., an Ohio corporation By:________________________________ Name:___________________________ Title:__________________________ LASALLE AMBULANCE INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ MEDICAL TRANSPORTATION SERVICES, INC., a South Dakota corporation By:________________________________ Name:___________________________ Title:__________________________ MEDSTAR EMERGENCY MEDICAL SERVICES, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ MERCURY AMBULANCE SERVICE, INC., a Kentucky corporation By:________________________________ Name:___________________________ Title:__________________________ METRO CARE CORP., an Ohio corporation By:________________________________ Name:___________________________ Title:__________________________ METROPOLITAN FIRE DEPT., INC., an Arizona corporation By:________________________________ Name:___________________________ Title:__________________________ 10 MYERS AMBULANCE SERVICE, INC., an Indiana corporation By:________________________________ Name:___________________________ Title:__________________________ NATIONAL AMBULANCE & OXYGEN SERVICE, INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ PHYSICIANS AMBULANCE SERVICE, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ PROFESSIONAL MEDICAL SERVICES, INC., an Arkansas corporation By:________________________________ Name:___________________________ Title:__________________________ REGIONAL ACQUISITION, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RMC CORPORATE CENTER, L.L.C., an Arizona limited liability company By: RURAL/METRO CORPORATION, an Arizona corporation, Its Member By:________________________________ Name:___________________________ Title:__________________________ 11 RMC INSURANCE, LTD., a Barbados corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO COMMUNICATIONS SERVICES, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO INTERNATIONAL, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ R/M MANAGEMENT CO., INC., an Arizona corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO TEXAS HOLDINGS, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO CORPORATION, an Arizona corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO CORPORATION OF FLORIDA, a Florida corporation By:________________________________ Name:___________________________ Title:__________________________ 12 RURAL/METRO CORPORATION OF TENNESSEE, a Tennessee corporation By:________________________________ Name:___________________________ Title:__________________________ R/M OF TENNESSEE G.P., INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ R/M OF TENNESSEE L.P., INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF TENNESSEE L.P., a Delaware limited partnership By: R/M OF TENNESSEE G.P., INC., a Delaware corporation, Its General Partner By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO FIRE DEPT., INC., an Arizona corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF ALABAMA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 13 RURAL/METRO OF ARKANSAS, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF ARLINGTON, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF ATLANTA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF CALIFORNIA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO CANADIAN HOLDINGS, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF CENTRAL ALABAMA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF CENTRAL OHIO, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 14 RURAL/METRO OF GEORGIA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF INDIANA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF INDIANA, L.P., a Delaware limited partnership By: THE AID AMBULANCE COMPANY, INC., a Delaware corporation, Its General Partner By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF INDIANA II, L.P., a Delaware limited partnership By: THE AID AMBULANCE COMPANY, INC., a Delaware corporation, Its General Partner By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF KENTUCKY, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF NEBRASKA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 15 RURAL/METRO OF NEW YORK, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF NORTH FLORIDA, INC., a Florida corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF OHIO, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF OREGON, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF ROCHESTER, INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF SOUTH CAROLINA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF SOUTH DAKOTA, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 16 RURAL/METRO OF TEXAS, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ RURAL/METRO OF TEXAS, L.P., a Delaware limited partnership By: R/M OF TEXAS G.P., INC., a Delaware corporation, Its General Partner By:________________________________ Name:___________________________ Title:__________________________ R/M OF TEXAS G.P., INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ SIOUX FALLS AMBULANCE, INC., a South Dakota corporation By:________________________________ Name:___________________________ Title:__________________________ TOWNS AMBULANCE SERVICE, INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ VALLEY FIRE SERVICE, INC., a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ 17 W & W LEASING COMPANY, INC., an Arizona corporation By:________________________________ Name:___________________________ Title:__________________________ THE WESTERN NEW YORK EMERGENCY MEDICAL SERVICES TRAINING INSTITUTE INC., a New York corporation By:________________________________ Name:___________________________ Title:__________________________ GUARANTOR: RURAL/METRO CORPORATION, a Delaware corporation By:________________________________ Name:___________________________ Title:__________________________ AGENT: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Agent By:_______________________________ Name:_____________________________ Title:____________________________ 18 LENDERS: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Lender By:________________________________ Name:___________________________ Title:__________________________ FLEET BANK, N.A. (formerly known as Natwest Bank N.A.) By:________________________________ Name:___________________________ Title:__________________________ THE FIRST NATIONAL BANK OF CHICAGO By:________________________________ Name:___________________________ Title:__________________________ ABN AMRO BANK N.V. By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ WELLS FARGO BANK, N.A. (formerly known as First Interstate Bank of Arizona, N.A. By:________________________________ Name:___________________________ Title:__________________________ 19 THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED By:________________________________ Name:___________________________ Title:__________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By:________________________________ Name:___________________________ Title:__________________________ BANQUE PARIBAS By:________________________________ Name:___________________________ Title:__________________________ By:________________________________ Name:___________________________ Title:__________________________ 20 Confirmation of Subsidiary Guaranty By execution of this Second Amendment, the undersigned hereby expressly consents to the modifications and amendments set forth herein, and hereby acknowledges, represents and agrees that its guaranty obligations set forth in Article XI of the Credit Agreement remain in full force and effect. RURAL/METRO CORPORATION, A DELAWARE CORPORATION By:________________________________ Name:___________________________ Title:__________________________ EX-21 5 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 LIST OF SUBSIDIARIES
STATE OR OTHER JURISDICTION NAME OF INCORPORATION - ---- ---------------- Subsidiaries of Rural/Metro Corporation (Delaware): Aid Ambulance at Vigo County, Inc. Indiana Ambulance Transport Systems, Inc. New Jersey City Wide Ambulance Service, Inc. Ohio Donlock, Ltd. Pennsylvania Medical Emergency Devices and Services (MEDS), Inc. Arizona Metro Care Corp. Ohio Multi-Care Medical Car Service, Inc. New Jersey Multi-Health Corp. Florida Myers Ambulance Service, Inc. Indiana North Miss. Ambulance Service, Inc. Mississippi Professional Medical Services, Inc. Arkansas Rural/Metro Communications Services, Inc. Delaware Rural/Metro Corporation Arizona Rural/Metro International, Inc. Delaware Rural/Metro Mid-Atlantic, Inc. Delaware SW General, Inc. Arizona South Georgia Emergency Medical Services, Inc. Georgia Southwest Ambulance of Casa Grande, Inc. Arizona Southwest General Services, Inc. Arizona The Aid Company, Inc. Indiana Subsidiaries of Rural/Metro Corporation (Arizona): Coronado Health Services, Inc. Arizona Metropolitan Fire Department, Inc. Arizona R/M Management Co., Inc. Arizona R/M Servicios de Salud e Incendios (Bolivia) S.A. (2%) Bolivia RMC Insurance Ltd. Barbados Rural/Metro Corporation of Florida Florida Rural/Metro Corporation of Tennessee Tennessee Rural/Metro Fire Dept., Inc. Arizona Rural/Metro Texas Holdings, Inc. Delaware Rural/Metro of Alabama, Inc. Delaware Rural/Metro of Arkansas, Inc. Delaware Rural/Metro of California, Inc. Delaware Rural/Metro of Georgia, Inc. Delaware Rural/Metro of Indiana, Inc. Delaware Rural/Metro of Kentucky, Inc. Delaware Rural/Metro of Nebraska, Inc. Delaware Rural/Metro of New York, Inc. Delaware Rural/Metro of Ohio, Inc. Delaware Rural/Metro of Oregon, Inc. Delaware Rural/Metro of South Carolina, Inc. Delaware Rural/Metro of South Dakota, Inc. Delaware W & W Leasing Company, Inc. Arizona Subsidiaries of Rural/Metro Texas Holdings, Inc.: R/M of Texas G.P., Inc. Delaware Rural/Metro of Arlington, Inc. Delaware Rural/Metro of Texas, Inc. Delaware
1 2 Subsidiaries of Rural/Metro Corporation of Florida: Rural/Metro of North Florida, Inc. Florida Subsidiaries of Rural/Metro of New York, Inc.: Corning Ambulance Service Inc. New York Eastern Paramedics, Inc. Delaware LaSalle Ambulance, Inc. New York Rural/Metro of Rochester, Inc. New York Towns Ambulance Service, Inc. New York The Western New York Emergency Medical Services Training Institute Inc. New York Subsidiaries of Rural/Metro of Rochester, Inc.: Beacon Transportation, Inc. New York National Ambulance & Oxygen Service, Inc. New York Subsidiaries of Rural/Metro of Nebraska, Inc.: Eastern Ambulance Service, Inc. Nebraska Subsidiaries of Eastern Ambulance Service, Inc.: Eastern Ambulance Service, Inc. - Lincoln (50% owned) Nebraska Subsidiaries of Rural/Metro of Ohio, Inc.: Gold Cross Ambulance Services, Inc. Delaware Physicians Ambulance Service, Inc. Delaware Rural/Metro of Central Ohio, Inc. Delaware Subsidiaries of Rural/Metro of Georgia, Inc.: E.M.S. Ventures, Inc. Georgia Rural/Metro of Atlanta, Inc. Delaware Subsidiaries of Rural/Metro of South Carolina, Inc.: EMS Ventures of South Carolina, Inc. South Carolina Subsidiaries of Rural/Metro of Central Ohio, Inc.: American Limousine Service, Inc. Ohio
2 3 Subsidiaries of Gold Cross Ambulance Services, Inc.: Gold Cross Ambulance Service of Pa., Inc. Ohio Subsidiaries of Rural/Metro Corporation of Tennessee: R/M of Tennessee G.P., Inc. Delaware R/M of Tennessee L.P., Inc. Delaware Subsidiaries of Rural/Metro of Indiana, Inc.: The Aid Ambulance Company, Inc. Delaware Subsidiaries of Rural/Metro of Alabama, Inc.: Medstar Emergency Medical Services, Inc. Delaware Rural/Metro of Central Alabama, Inc. Delaware Subsidiaries of Rural/Metro of South Dakota, Inc.: Medical Transportation Services, Inc. South Dakota Subsidiaries of Medical Transportation Services, Inc.: Sioux Falls Ambulance, Inc. South Dakota Subsidiaries of Rural/Metro of Oregon, Inc.: Valley Fire Service, Inc. Delaware Subsidiaries of Rural/Metro International, Inc.: R/M Servicios de Salud e Incendios (Bolivia) S.A. (96%) Bolivia Rural/Metro Canadian Holdings, Inc. Delaware Subsidiaries of Rural/Metro of Kentucky, Inc.: Mercury Ambulance Service, Inc. Kentucky Subsidiaries of Rural/Metro of California, Inc.: Rural/Metro of San Diego, Inc. California Subsidiaries of Rural/Metro Canadian Holdings, Inc.: Rural/Metro of Canada, Inc. Province of Ontario Subsidiaries of Rural/Metro of Canada, Inc.: Rural/Metro of Ontario, Inc. Province of Ontario Subsidiaries of R/M Management Co., Inc.: R/M Servicios de Salud e Incendios (Bolivia) S.A. (2%) Bolivia Subsidiaries of Rural/Metro of Ontario, Inc.: 520212 Ontario Limited Province of Ontario Lakeshore Emergency Service Inc. Province of Ontario Lindsay and District Ambulance Service Ltd. Province of Ontario Noel Ambulance Service Limited Province of Ontario Owen Sound Emergency Services Inc. Province of Ontario Port Colborne & District Ambulance Service Limited Province of Ontario
3 EX-23.2 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 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, into the Company's previously filed Registration Statements File Nos. 33-76526, 33-80454, 33-88302, 333-2818 and 333-07457. ARTHUR ANDERSEN LLP Phoenix, Arizona, September 29, 1997. EX-27 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 U.S. DOLLARS YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 3,398 0 142,792 35,814 8,645 126,183 113,634 42,989 364,066 31,417 154,457 0 0 130 159,678 364,066 319,805 319,805 0 248,577 0 43,424 5,720 22,084 9,364 12,720 0 0 0 12,720 1.04 1.04
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