-----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, KuQKXiUv9bpHMf+N4W+7+Sk+/GLP5OuAgST56qKUaNVvNn8dVF+yEqziEw4+m7Iw 31ifnhu8ILh/qLoK7zKbdw== 0000950153-99-001418.txt : 19991117 0000950153-99-001418.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950153-99-001418 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22056 FILM NUMBER: 99753835 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 4809943886 10-Q 1 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-22056 RURAL/METRO CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 86-0746929 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8401 EAST INDIAN SCHOOL ROAD SCOTTSDALE, ARIZONA 85251 (Address of principal executive offices) (Zip Code) (480) 606-3886 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ At November 10, 1999 there were 14,577,439 shares of Common Stock outstanding, exclusive of treasury shares held by the Registrant. 2 RURAL/METRO CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page ---- Part I. Financial Statements Item 1. Consolidated Financial Statements: Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Consolidated Statements of Comprehensive Income 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risks 24 Part II. Other Information Item 1. Legal Proceedings 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 26
2 3 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND JUNE 30, 1999 (IN THOUSANDS)
September 30, 1999 June 30, 1999 ------------------ ------------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 4,721 $ 7,180 Accounts receivable, net 195,970 185,454 Inventories 17,461 16,371 Prepaid expenses and other 11,900 13,630 --------- --------- Total current assets 230,052 222,635 PROPERTY AND EQUIPMENT, net 95,668 95,032 INTANGIBLE ASSETS, net 238,288 240,360 OTHER ASSETS 22,865 21,880 --------- --------- $ 586,873 $ 579,907 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 16,441 $ 17,782 Accrued liabilities 56,758 58,159 Current portion of long-term debt 8,057 5,765 --------- --------- Total current liabilities 81,256 81,706 LONG-TERM DEBT, net of current portion 273,879 268,560 NON-REFUNDABLE SUBSCRIPTION INCOME 14,890 14,909 DEFERRED INCOME TAXES 9,376 9,438 OTHER LIABILITIES 179 205 --------- --------- Total liabilities 379,580 374,818 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 8,230 8,250 --------- --------- STOCKHOLDERS' EQUITY Common stock 149 148 Additional paid-in capital 138,177 137,792 Retained earnings 62,487 60,603 Cumulative translation adjustment (511) (465) Treasury stock (1,239) (1,239) --------- --------- Total stockholders' equity 199,063 196,839 --------- --------- $ 586,873 $ 579,907 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 3 4 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended September 30, -------------------------------- 1999 1998 --------- -------- REVENUE Ambulance services $ 116,897 $116,265 Fire protection services 13,063 12,643 Other 11,240 9,887 --------- -------- Total revenue 141,200 138,795 --------- -------- OPERATING EXPENSES Payroll and employee benefits 76,865 73,898 Provision for doubtful accounts 20,410 19,897 Depreciation 6,160 5,876 Amortization of intangibles 2,160 2,397 Other operating expenses 26,024 23,720 Restructuring charge -- 2,500 --------- -------- Total expenses 131,619 128,288 --------- -------- OPERATING INCOME 9,581 10,507 Interest expense, net 5,436 5,142 Other (20) 48 --------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 4,165 5,317 Provision for income taxes 1,740 2,255 --------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 2,425 3,062 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (541) -- --------- -------- NET INCOME $ 1,884 $ 3,062 ========= ======== INCOME PER SHARE: Basic -- Income before cumulative effect of a change in accounting principle $ 0.17 $ 0.21 Cumulative effect of a change in accounting principle (0.04) -- Net income $ 0.13 $ 0.21 ========= ======== Diluted -- Income before cumulative effect of a change in accounting principle $ 0.17 $ 0.21 Cumulative effect of a change in accounting principle (0.04) -- Net income $ 0.13 $ 0.21 ========= ======== AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 14,538 14,270 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 14,671 14,520
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 ((UNAUDITED) (IN THOUSANDS)
Three months ended September 30, -------------------------------- 1999 1998 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 1,884 $ 3,062 Adjustments to reconcile net income to cash provided by (used in) operating activities Cumulative effect of a change in accounting principle 541 -- Depreciation and amortization 8,320 8,273 Amortization of deferred compensation -- 58 Amortization of gain on sale of real estate (26) (26) Provision for doubtful accounts 20,410 19,897 Undistributed earnings of minority shareholder (20) 48 Amortization of discount on Senior Notes 6 6 Change in assets and liabilities, net of effect of businesses acquired Increase in accounts receivable (30,926) (29,555) Increase in inventories (1,090) (310) (Increase) decrease in prepaid expenses and other 709 (1,701) Increase (decrease) in accounts payable (1,341) 145 Increase (decrease) in accrued liabilities and other liabilities (1,009) 7,822 Increase (decrease) in nonrefundable subscription income (19) 166 Decrease in deferred income taxes (62) (3,223) -------- -------- Net cash provided by (used in) operating activities (2,623) 4,662 -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 9,102 9,500 Repayment of debt and capital lease obligations (1,497) (1,940) Issuance of common stock 386 -- -------- -------- Net cash provided by financing activities 7,991 7,560 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (4,678) Capital expenditures (6,796) (6,174) Increase in other assets (985) (957) -------- -------- Net cash used in investing activities (7,781) (11,809) -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (46) (266) -------- -------- INCREASE (DECREASE) IN CASH (2,459) 147 CASH, beginning of period 7,180 6,511 -------- -------- CASH, end of period $ 4,721 $ 6,658 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan $ -- $ 1,933 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (IN THOUSANDS)
Three months ended September 30, -------------------------------- 1999 1998 ------- ------- NET INCOME $ 1,884 $ 3,062 Foreign currency translation adjustments (46) (266) ------- ------- COMPREHENSIVE INCOME $ 1,838 $ 2,796 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 7 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by generally accepted principles for complete financial statements. (1) INTERIM RESULTS In the opinion of management, the consolidated financial statements for the three month periods ended September 30, 1999 and 1998 include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated financial position and results of operations. The results of operations for the three month periods ended September 30, 1999 and 1998 are not necessarily indicative of the results of operations for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. (2) CREDIT AGREEMENTS AND BORROWINGS In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes). The Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of the Company's domestic wholly-owned current and future subsidiaries. The financial statements presented below include the Consolidating Balance Sheets as of September 30, 1999 and June 30, 1999, the Consolidating Statements of Income for the three months ended September 30, 1999 and 1998, and the Statements of Cash Flows for the three months ended September 30, 1999 and 1998 of Rural/Metro Corporation (Parent) and the guarantor subsidiaries (Guarantors) and the subsidiaries which are not guarantors (Non-guarantors). The Company has not presented separate financial statements and related disclosures for each of the Guarantor subsidiaries because management believes such information is inconsequential to the note holders. 7 8 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 2,639 $ 2,082 $ -- $ 4,721 Accounts receivable, net -- 173,545 22,425 -- 195,970 Inventories -- 16,333 1,128 -- 17,461 Prepaid expenses and other 531 9,715 1,654 -- 11,900 --------- --------- -------- --------- --------- Total current assets 531 202,232 27,289 -- 230,052 PROPERTY AND EQUIPMENT, net -- 84,927 10,741 -- 95,668 INTANGIBLE ASSETS, net -- 157,665 80,623 -- 238,288 DUE FROM (TO) AFFILIATES 306,164 (245,983) (60,181) -- -- OTHER ASSETS 4,033 15,927 2,905 -- 22,865 INVESTMENT IN SUBSIDIARIES 161,523 -- -- (161,523) -- --------- --------- -------- --------- --------- Total assets $ 472,251 $ 214,768 $ 61,377 $(161,523) $ 586,873 ========= ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 9,916 $ 6,525 $ -- $ 16,441 Accrued liabilities 805 45,073 10,880 -- 56,758 Current portion of long-term debt 3,102 3,581 1,374 -- 8,057 --------- --------- -------- --------- --------- Total current liabilities 3,907 58,570 18,779 -- 81,256 LONG-TERM DEBT, net of current portion 269,281 3,758 840 -- 273,879 NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,732 158 -- 14,890 DEFERRED INCOME TAXES -- 8,411 965 -- 9,376 OTHER LIABILITIES -- 179 -- -- 179 --------- --------- -------- --------- --------- Total liabilities 273,188 85,650 20,742 -- 379,580 --------- --------- -------- --------- --------- MINORITY INTEREST -- -- -- 8,230 8,230 STOCKHOLDERS' EQUITY Common stock 149 82 17 (99) 149 Additional paid-in capital 138,177 54,622 34,942 (89,564) 138,177 Retained earnings 62,487 74,414 6,187 (80,601) 62,487 Cumulative translation adjustment (511) -- (511) 511 (511) Treasury stock (1,239) -- -- -- (1,239) --------- --------- -------- --------- --------- Total stockholders' equity 199,063 129,118 40,635 (169,753) 199,063 --------- --------- -------- --------- --------- Total liabilities and stockholders' equity $ 472,251 $ 214,768 $ 61,377 $(161,523) $ 586,873 ========= ========= ======== ========= =========
8 9 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1999 (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 5,379 $ 1,801 $ -- $ 7,180 Accounts receivable, net -- 164,700 20,754 -- 185,454 Inventories -- 15,238 1,133 -- 16,371 Prepaid expenses and other 531 11,648 1,451 -- 13,630 --------- --------- --------- --------- --------- Total current assets 531 196,965 25,139 -- 222,635 PROPERTY AND EQUIPMENT, net -- 84,448 10,584 -- 95,032 INTANGIBLE ASSETS, net -- 159,159 81,201 -- 240,360 DUE FROM (TO) AFFILIATES 302,491 (245,964) (56,527) -- -- OTHER ASSETS 4,169 15,237 2,474 -- 21,880 INVESTMENT IN SUBSIDIARIES 156,690 -- -- (156,690) -- --------- --------- --------- --------- --------- $ 463,881 $ 209,845 $ 62,871 $(156,690) $ 579,907 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 11,101 $ 6,681 $ -- $ 17,782 Accrued liabilities 3,767 42,431 11,961 -- 58,159 Current portion of long-term debt -- 4,157 1,608 -- 5,765 --------- --------- --------- --------- --------- Total current liabilities 3,767 57,689 20,250 -- 81,706 LONG-TERM DEBT, net of current portion 263,275 4,384 901 -- 268,560 NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,890 19 -- 14,909 DEFERRED INCOME TAXES -- 8,473 965 -- 9,438 OTHER LIABILITIES -- 205 -- -- 205 --------- --------- --------- --------- --------- Total liabilities 267,042 85,641 22,135 -- 374,818 --------- --------- --------- --------- --------- MINORITY INTEREST -- -- -- 8,250 8,250 STOCKHOLDERS' EQUITY Common stock 148 82 17 (99) 148 Additional paid-in capital 137,792 54,622 34,942 (89,564) 137,792 Retained earnings 60,603 69,500 6,242 (75,742) 60,603 Cumulative translation adjustment (465) -- (465) 465 (465) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity 196,839 124,204 40,736 (164,940) 196,839 --------- --------- --------- --------- --------- $ 463,881 $ 209,845 $ 62,871 $(156,690) $ 579,907 ========= ========= ========= ========= =========
9 10 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 96,147 $ 20,750 $ -- $ 116,897 Fire protection services -- 12,785 278 -- 13,063 Other -- 9,088 2,152 -- 11,240 ------- --------- -------- ------- --------- Total revenue -- 118,020 23,180 -- 141,200 ------- --------- -------- ------- --------- OPERATING EXPENSES Payroll and employee benefits -- 62,158 14,707 -- 76,865 Provision for doubtful accounts -- 19,089 1,321 -- 20,410 Depreciation -- 5,554 606 -- 6,160 Amortization of intangibles -- 1,526 634 -- 2,160 Other operating expenses -- 20,580 5,444 -- 26,024 ------- --------- -------- ------- --------- Total expenses -- 108,907 22,712 -- 131,619 ------- --------- -------- ------- --------- OPERATING INCOME -- 9,113 468 -- 9,581 Interest expense, net 5,164 (277) 549 -- 5,436 Other -- -- -- (20) (20) ------- --------- -------- ------- --------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (5,164) 9,390 (81) 20 4,165 PROVISION (BENEFIT) FOR INCOME TAXES (2,169) 3,935 (26) -- 1,740 ------- --------- -------- ------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (2,995) 5,455 (55) 20 2,425 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (541) -- -- (541) ------- --------- -------- ------- --------- (2,995) 4,914 (55) 20 1,884 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 4,879 -- -- (4,879) -- ------- --------- -------- ------- --------- NET INCOME (LOSS) $ 1,884 $ 4,914 $ (55) $(4,859) $ 1,884 ======= ========= ======== ======= ========= Foreign currency translation adjustments -- -- (46) -- (46) Comprehensive income (loss) from wholly-owned subsidiaries (46) -- -- 46 -- ------- --------- -------- ------- --------- COMPREHENSIVE INCOME (LOSS) $ 1,838 $ 4,914 $ (101) $(4,813) $ 1,838 ======= ========= ======== ======= =========
10 11 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 93,306 $ 22,959 $ -- $116,265 Fire protection services -- 12,387 256 -- 12,643 Other -- 9,791 96 -- 9,887 ------- -------- -------- ------- -------- Total revenue -- 115,484 23,311 -- 138,795 ------- -------- -------- ------- -------- OPERATING EXPENSES Payroll and employee benefits -- 60,090 13,808 -- 73,898 Provision for doubtful accounts -- 18,163 1,734 -- 19,897 Depreciation -- 5,442 434 -- 5,876 Amortization of intangibles 128 1,718 551 -- 2,397 Other operating expenses -- 19,166 4,554 -- 23,720 Restructuring charge -- 2,500 -- -- 2,500 ------- -------- -------- ------- -------- Total expenses 128 107,079 21,081 -- 128,288 ------- -------- -------- ------- -------- OPERATING INCOME (LOSS) (128) 8,405 2,230 -- 10,507 Interest expense, net 4,654 85 403 -- 5,142 Other -- -- -- 48 48 ------- -------- -------- ------- -------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (4,782) 8,320 1,827 (48) 5,317 PROVISION (BENEFIT) FOR INCOME TAXES (2,008) 3,423 840 -- 2,255 ------- -------- -------- ------- -------- (2,774) 4,897 987 (48) 3,062 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 5,836 -- -- (5,836) -- ------- -------- -------- ------- -------- NET INCOME (LOSS) $ 3,062 $ 4,897 $ 987 $(5,884) $ 3,062 ======= ======== ======== ======= ======== Foreign currency translation adjustments -- -- (266) -- (266) Comprehensive income (loss) from wholly-owned subsidiaries (266) -- -- 266 -- ------- -------- -------- ------- -------- $ 2,796 $ 4,897 $ 721 $(5,618) $ 2,796 ======= ======== ======== ======= ========
11 12 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------- -------- ------- ------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ 1,884 $ 4,914 $ (55) $(4,859) $ 1,884 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization -- 7,080 1,240 -- 8,320 Cumulative effect of a change in accounting principle -- 541 -- -- 541 Amortization of gain on sale of real estate -- (26) -- -- (26) Provision for doubtful accounts -- 19,089 1,321 -- 20,410 Undistributed earnings of minority shareholder -- -- -- (20) (20) Amortization of discount on Senior Notes 6 -- -- -- 6 Change in assets and liabilities -- Increase in accounts receivable -- (27,934) (2,992) -- (30,926) (Increase) decrease in inventories -- (1,095) 5 -- (1,090) (Increase) decrease in prepaid expenses and other -- 968 (259) -- 709 (Increase) decrease in due to/from affiliates (8,506) 19 3,654 4,833 -- Increase in accounts payable -- (1,185) (156) -- (1,341) Increase (decrease) in accrued liabilities and other liabilities (2,962) 3,034 (1,081) -- (1,009) Increase (decrease) in non-refundable subscription income -- (158) 139 -- (19) Decrease in deferred income taxes -- (62) -- -- (62) ------- -------- ------- ------- -------- Net cash provided by (used in) operating activities (9,578) 5,185 1,816 (46) (2,623) ------- -------- ------- ------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 9,102 -- -- -- 9,102 Repayment of debt and capital lease obligations -- (1,202) (295) -- (1,497) Issuance of common stock 386 -- -- -- 386 ------- -------- ------- ------- -------- Net cash provided by (used in) financing activities 9,488 (1,202) (295) -- 7,991 ------- -------- ------- ------- -------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures -- (6,033) (763) -- (6,796) (Increase) decrease in other assets 136 (690) (431) -- (985) ------- -------- ------- ------- -------- Net cash provided by (used in) investing activities 136 (6,723) (1,194) -- (7,781) ------- -------- ------- ------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (46) -- (46) 46 (46) ------- -------- ------- ------- -------- INCREASE (DECREASE) IN CASH -- (2,740) 281 -- (2,459) CASH, beginning of period -- 5,379 1,801 -- 7,180 ------- -------- ------- ------- -------- CASH, end of period $ -- $ 2,639 $ 2,082 $ -- $ 4,721 ======= ======== ======= ======= ========
12 13 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 3,062 $ 4,897 $ 987 $(5,884) $ 3,062 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 128 7,160 985 -- 8,273 Amortization of deferred compensation 58 -- -- -- 58 Amortization of gain on sale of real estate -- (26) -- -- (26) Provision for doubtful accounts -- 18,163 1,734 -- 19,897 Undistributed earnings of minority shareholder -- -- -- 48 48 Amortization of discount on Senior Notes 6 -- -- -- 6 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable -- (27,683) (1,872) -- (29,555) Increase in inventories -- (276) (34) -- (310) Increase in prepaid expenses and other -- (1,226) (475) -- (1,701) (Increase) decrease in due to/from affiliates (9,828) (1,286) 1,115 9,999 -- Increase (decrease) in accounts payable -- (2,096) 2,241 -- 145 Increase (decrease) in accrued liabilities and other liabilities (2,660) 11,955 (1,473) -- 7,822 Increase (decrease) in non-refundable subscription income -- 84 82 -- 166 Decrease in deferred income taxes -- (3,001) (222) -- (3,223) ------- -------- ------- ------- -------- Net cash provided by (used in) operating activities (9,234) 6,665 3,068 4,163 4,662 ------- -------- ------- ------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 9,500 -- -- -- 9,500 Repayment of debt and capital lease obligations -- (1,745) (195) -- (1,940) Issuance of common stock -- -- 4,429 (4,429) -- ------- -------- ------- ------- -------- Net cash provided by (used in) financing activities 9,500 (1,745) 4,234 (4,429) 7,560 ------- -------- ------- ------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (250) (4,428) -- (4,678) Capital expenditures -- (5,245) (929) -- (6,174) Increase in other assets -- 710 (1,667) -- (957) ------- -------- ------- ------- -------- Net cash used in investing activities -- (4,785) (7,024) -- (11,809) ------- -------- ------- ------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (266) -- (266) 266 (266) ------- -------- ------- ------- -------- INCREASE IN CASH -- 135 12 -- 147 CASH, beginning of period -- 2,917 3,594 -- 6,511 ------- -------- ------- ------- -------- CASH, end of period $ -- $ 3,052 $ 3,606 $ -- $ 6,658 ======= ======== ======= ======= ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan $ 1,933 $ -- $ -- $ -- $ 1,933 ======= ======== ======= ======= ========
13 14 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) FINANCIAL INSTRUMENTs The Company has entered into interest rate swap agreements to limit the effect of increases in the interest rates on floating rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. In November 1998, the Company entered into an interest rate swap agreement that originally expired in November 2003 with a provision for the lending party to terminate the agreement in November 2000. The interest rate swap agreement effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. The Company paid a fixed rate of 4.72% and received a LIBOR-based floating rate. In June 1999, the Company terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount is being amortized as a reduction of interest expense on a straight-line basis through November 2000. (4) RESTRUCTURING CHARGE During the three months ended September 30, 1998, the Company recorded a non-recurring pre-tax charge of $2.5 million for severance payments related to certain members of senior management who have left the Company. During the years ended June 30, 1998 and 1997, the Company recorded pre-tax charges totaling $7.8 million related to severance payments. The charges related primarily to the cost of terminating approximately 400 administrative employees throughout the Company, all of which have been terminated as of September 30, 1999. As of September 30, 1999 and June 30, 1999, the balance of the allowance for severance payments was $0.7 million and $1.3 million, respectively. The allowance is included in accrued liabilities in the accompanying consolidated balance sheets. (5) CHANGE IN ACCOUNTING PRINCIPLE In accordance with Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, effective July 1, 1999, the Company was required to change its accounting principle for organization costs. Previously, the Company capitalized such costs and amortized them using the straight-line method over five years. At June 30, 1999 such unamortized costs totaled $933,000. In the first quarter of fiscal year 2000, the Company wrote-off its capitalized organization costs and will expense any future organization costs as incurred. The write-off was $541,000 (net of a tax benefit of $392,000) and has been reflected in the Consolidated Statement of Income for the three months ended September 30, 1999 as the "Cumulative Effect of a Change in Accounting Principle" in accordance with APB No. 20. 14 15 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) EARNINGS PER SHARE A reconciliation of the numerators and denominators (weighted average number of shares outstanding) of the basic and diluted earnings per share (EPS) computation for the three months ended September 30, 1999 and 1998 is a follows (in thousands, except per share amounts):
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998 ------------------------------------- ------------------------------------- Income Share Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ------ ------ ------- ------ ------ ------- Basic EPS $1,884 14,538 $ 0.13 $3,062 14,270 $ 0.21 ======= ======= Effect of stock options -- 133 -- 250 ------ ------ ------ ------ Diluted EPS $1,884 14,671 $ 0.13 $3,062 14,520 $ 0.21 ====== ====== ======= ====== ====== =======
(7) SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of a business, for which separate financial information is available, that management regularly evaluates in deciding how to allocate resources and assess performance. The Company operates in two business segments: Ambulance and Fire and Other. The Company's reportable segments are strategic business units that offer different services. They are managed separately based on the fundamental differences in their operations. The Ambulance segment includes emergency medical and general medical transport ambulance services provided to patients on a fee-for-service basis, on a non-refundable subscription basis and through capitated contracts. The Ambulance segment also includes urgent home medical care and ambulance services provided under capitated service arrangements in Argentina. The Fire and Other segment includes the following services: fire protection and training, alternative transportation, home health care services, urgent and primary care in clinics, dispatch, fleet and billing. The accounting policies of the operating segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements filed with the Form 10-K for the fiscal year ended June 30, 1999. The Company defines segment profit (loss) as total revenue less total operating expenses and interest expense associated with the segment. The Company defines segment assets as the sum of net accounts receivable, inventory and net property and equipment associated with the segments. Included in Corporate are general corporate expenses as well as the pre-tax charge of $2.5 million related to severance payments recorded during the three months ended September 30, 1998. 15 16 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information by operating segment is set forth below (in thousands):
Three months ended September 30, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL --------- -------------- --------- ----- Net revenues from external customers $116,897 $24,303 $ --- $141,200 Segment profit (loss) $ 6,594 $ 1,626 $(4,075) $ 4,145 Segment assets $264,259 $42,184 $ 2,656 $309,099
Three months ended September 30, 1998 AMBULANCE FIRE AND OTHER CORPORATE TOTAL --------- -------------- --------- ----- Net revenues from external customers $116,265 $22,530 $ --- $138,795 Segment profit (loss) $ 8,819 $ 2,714 $(6,168) $ 5,365 Segment assets $227,640 $40,164 $ 3,153 $270,957
16 17 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS Except for the historical information contained herein, this Report contains forward looking statements that involve risks and uncertainties regarding future business prospects, the value of our common stock, revenue, working capital, accounts receivable collection, liquidity, cash flow, and capital needs that could cause actual results to differ materially. The health care industry in general and the ambulance industry in particular are in a state of significant change. This makes us susceptible to various factors that may affect future results such as the following: no assurance of successful integration and operation of acquired service providers; growth strategy and difficulty in maintaining growth; risks of leverage; revenue mix; dependence on certain business relationships; risks related to intangible assets; dependence on government and third party payors; risks related to fee-for-service contracts; possible adverse changes in reimbursement rates; impact of rate structures; possible negative effects of prospective health care reform; high utilization of services by customers under capitated service arrangements; competitive market forces; fluctuation in quarterly results; volatility of stock price; dependence on key personnel; and anti-takeover effect of certain of our charter provisions. All references to "we", "our", "us" or "Rural/Metro" refer to Rural/Metro Corporation, and its predecessors, operating divisions and subsidiaries. This Report should be read in conjunction with our Report on Form 10-K for the fiscal year ended June 30, 1999. INTRODUCTION We derive our revenue primarily from fees charged for ambulance and fire protection services. We provide ambulance services in response to emergency medical calls ("911" emergency ambulance services) and non-emergency transport services (general transport services) to patients on a fee-for-service basis, on a non-refundable subscription fee basis and through capitated contracts. Per transport revenue depends on various factors, including the mix of rates between existing service areas and new service areas and the mix of activity between "911" emergency ambulance services and general medical transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts or other agencies or on a non-refundable subscription fee basis to individual homeowners or commercial property owners. Domestic ambulance service fees are recorded net of Medicare, Medicaid and other reimbursement limitations and are recognized when services are provided. Payments received from third-party payors represent a substantial portion of our ambulance service fee receipts. We establish an allowance for doubtful accounts based on credit risk applicable to certain types of payors, historical trends and other relevant information. Provision for doubtful accounts is made for the expected difference between ambulance services fees charged and amounts actually collected. Our provision for doubtful accounts generally is higher with respect to collections to be derived from patients than for collections to be derived from third-party payors and generally is higher for "911" emergency ambulance services than for general ambulance transport services. We also have an ambulance service contract structured as a public utility model in which our services are paid on a monthly basis by the contracting agency. Because of the nature of our domestic ambulance services, it is necessary to respond to a number of calls, primarily "911" emergency ambulance service calls, which may not result in transports. Results of 17 18 operations are discussed below on the basis of actual transports since transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of domestic ambulance service calls not resulting in transports varies substantially depending upon the mix of general transport and "911" emergency ambulance service calls in our service areas and is generally higher in service areas in which the calls are primarily "911" emergency ambulance service calls. Rates in our service areas take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports. Revenue generated under our capitated service arrangements in Argentina and contractual agreements in Canada is included in ambulance services revenue. Revenue generated under fire protection service contracts is recognized over the term of the related contract. Subscription fees received in advance are deferred and recognized over the term of the subscription agreement, which is generally one year. Other revenue consists primarily of fees associated with alternative transportation, dispatch, fleet, billing, urgent and primary care services in clinics, and home health care services and is recognized when the services are provided. Other operating expenses consist primarily of rent and related occupancy expenses, maintenance and repairs, insurance, fuel and supplies, travel and professional fees. We have historically experienced, and expect to continue to experience, seasonality in quarterly operating results. This seasonality has resulted from a number of factors, including relatively higher second and third fiscal quarter demand for transport services in our Arizona and Florida regions resulting from the greater winter populations in those regions. Also, our Argentine operations experience greater utilization of services by customers under capitated service arrangements in the first and fourth fiscal quarters, as compared to the other two quarters, when South America is in its winter season. Public health conditions affect our operations differently in different regions. For example, greater utilization of services by customers under capitated service arrangements decreases our operating income. The same conditions domestically, where we operate under fee-for-service arrangements, result in a greater number of transports, increasing our operating income. Income before cumulative effect of a change in accounting principle for the three months ended September 30, 1999 was $2.4 million, or $0.17 per diluted share as compared to $3.1 million, or $0.21 per diluted share for the three months ended September 30, 1998. The operating results for the three months ended September 30, 1999 were adversely affected by the magnitude of our mobilization response to recent hurricanes and storms, which impacted our regional operations in Texas, the Southeast and North Mid-Atlantic states. Our disaster response teams as well as other fill-in personnel incurred significant overtime to meet the needs of our service areas, while at the same time we lost transport opportunities in those service areas due to reduced availability of vehicles and personnel. The operating results for the three months ended September 30, 1999 were also negatively impacted by reduced operating margins of our Argentine operations. These operating margins were reduced due to substantial increases in service utilization under our capitated service arrangements and due to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. 18 19 THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE Total revenue increased $2.4 million, or 1.7%, from $138.8 million for the three months ended September 30, 1998 to $141.2 million for the three months ended September 30, 1999. Ambulance services revenue increased $0.6 million, or 0.5%, from $116.3 million for the three months ended September 30, 1998 to $116.9 million for the three months ended September 30, 1999. Domestic ambulance services revenue in areas served by us in both of the three month periods ended September 30, 1999 and 1998 increased by 2.1%. The increase in domestic ambulance services revenue was partially offset by a decrease in ambulance services revenue in our Argentine operations resulting from decreases in memberships under capitated service arrangements. The decrease in memberships was attributable to the impact of the economic recession in Argentina combined with significant increases in service taxes on all medical services. Total domestic ambulance transports decreased by 23,000, or 7.0%, from 329,000 for the three months ended September 30, 1998 to 306,000 for the three months ended September 30, 1999 due to our efforts to reduce non-emergency transports in certain areas and improve the quality of our revenue. The effect on revenue caused by the reduction in transports was more than offset by transports generated through new contracting activity as well as increases in average patient charges in other areas. Fire protection services revenue increased by $0.5 million, or 4.0%, from $12.6 million for the three months ended September 30, 1998 to $13.1 million for the three months ended September 30, 1999. Fire protection services revenue increased due to rate increases for fire protection services and greater utilization of our services under fee-for-service arrangements. Other revenue increased $1.3 million, or 13.1%, from $9.9 million for the three months ended September 30, 1998 to $11.2 million for the three months ended September 30, 1999. Other revenue increased due to revenue associated with urgent and primary care services provided in Argentina by a company that we acquired in the third quarter of fiscal 1999. This increase was partially offset by a decrease in alternative transportation services revenue due to our efforts to reduce transports in certain areas and improve the quality of our revenue. OPERATING EXPENSES Payroll and employee benefit expenses increased $3.0 million, or 4.1%, from $73.9 million for the three months ended September 30, 1998 to $76.9 million for the three months ended September 30, 1999. This increase was primarily due to the acquisition completed during the third quarter of fiscal 1999 and due to higher average labor costs in certain service areas, partially attributable to our mobilization response to the recent hurricanes and storms. We expect these higher average labor costs to continue in the future, including the increased costs associated with accounts receivable collection and with Health Care Financing Administration (HCFA) compliance. Increased service utilization in our Argentine operations also contributed to the increase in payroll and employee benefit expenses. Payroll and employee benefits expense increased from 53.2% of total revenue for the three months ended September 30, 1998 to 54.4% of total revenue for the three months ended September 30, 1999. Provision for doubtful accounts increased $0.5 million, or 2.5%, from $19.9 million for the three months ended September 30, 1998 to $20.4 million for the three months ended September 30, 1999. Provision for doubtful accounts increased from 14.3% of total revenue for the three months ended September 30, 1998 to 14.5% of total revenue for the three months ended September 30, 1999 and was 19.2% of domestic ambulance service revenue for the three months ended September 30, 1998 and 1999. Net accounts receivable on non-integrated collection systems currently represent 9.2% of total net accounts 19 20 receivable at September 30, 1999. We will continue to review the benefits and timing of integrating our two non-integrated billing centers. Depreciation increased $0.3 million, or 5.1%, from $5.9 million for the three months ended September 30, 1998 to $6.2 million for the three months ended September 30, 1999, primarily as a result of increased property and equipment from the acquisition completed during the third quarter of fiscal 1999. Depreciation was 4.2% and 4.4% of total revenue for the three months ended September 30, 1998 and 1999, respectively. Amortization of intangibles decreased $0.2 million, or 8.3%, from $2.4 million for the three months ended September 30, 1998 to $2.2 million for the three months ended September 30, 1999. Amortization of intangibles was 1.7% and 1.5% of total revenue for the three months ended September 30, 1998 and 1999, respectively. Other operating expenses increased approximately $2.3 million, or 9.7%, from $23.7 million for the three months ended September 30, 1998 to $26.0 million for the three months ended September 30, 1999, primarily due to increased expenses associated with the operation of the company acquired in the third quarter of fiscal 1999, as well as increased service utilization in our Argentine operations. Other operating expenses increased from 17.1% of total revenue for the three months ended September 30, 1998 to 18.4% of total revenue for the three months ended September 30, 1999. Interest expense increased $0.3 million from $5.1 million for the three months ended September 30, 1998 to $5.4 million for the three months ended September 30, 1999. This increase was caused by higher debt balances. Our effective tax rate was 42.0% for both of the three month periods ended September 30, 1998 and 1999. The cumulative effect of a change in accounting principle resulted in a $541,000 charge (net of a tax benefit of $392,000) and was related to our expensing of previously capitalized organization costs in accordance with Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. LIQUIDITY AND CAPITAL RESOURCES Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, issuance of senior notes, the sale of common stock through an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options. At September 30, 1999, we had working capital of $148.8 million, including cash of $4.7 million, compared to working capital of $140.9 million, including cash of $7.2 million, at June 30, 1999. During the three months ended September 30, 1999, our cash flow used in operating activities was $2.6 million, resulting primarily from an increase in accounts receivable of $30.9 million and decreases in accounts payables, accrued liabilities and other liabilities totaling $2.3 million offset by net income for the three month period ending September 30, 1999 of $1.9 million plus non-cash expenses of depreciation and amortization of $8.3 million and provision for doubtful accounts of $20.4 million. Cash flow provided by operating activities was $4.7 million for the three months ended September 30, 1998. Cash provided by financing activities was $8.0 million for the three months ended September 30, 1999, primarily due to borrowings on the revolving credit facility offset by repayments on other debt and capital lease obligations. 20 21 Cash used in investing activities was $7.8 million for the three months ended September 30, 1999, primarily because of capital expenditures and increases in other assets. Our gross accounts receivable as of September 30, 1999 and June 30, 1999 was $230.8 million and $228.9 million, respectively. Our accounts receivable, net of the allowance for doubtful accounts, was $196.0 million and $185.5 million as of such dates, respectively. We believe that the increase in gross accounts receivable is due to many factors including recent revenue growth, delays in payments from certain third-party payors, particularly in certain of our regional billing centers, and a general industry trend toward a lengthening payment cycle of accounts receivable due from third-party payors. Delays in receiving payments also contributed to an increase in the age of our accounts receivable. Our $200.0 million revolving credit facility is priced at prime rate, Federal Funds rate plus 0.5%, or a LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.875% to LIBOR plus 1.75%. At September 30, 1999 the weighted average interest rate was 7.1% on the revolving credit facility. Interest rates and availability under the revolving credit facility depend upon our company meeting certain financial covenants, including total debt leverage ratios, total debt to capitalization ratios and fixed charge ratios. Approximately $122.6 million was outstanding on the revolving credit facility at September 30, 1999. Availability on the facility was approximately $8.3 million at September 30, 1999. We expect to have funds available under the revolving credit facility of approximately $28 million during the second quarter of fiscal 2000. In February 1998, we entered into a $5.0 million capital equipment lease line of credit. The lease line of credit matures at varying dates through July 2003. The lease line of credit is priced at the higher of LIBOR plus 1.7% or the commercial paper rate plus 1.7%. At September 30, 1999 the weighted average interest rate was 7.1% on the lease line of credit. Approximately $1.9 million was outstanding on this line of credit at September 30, 1999. In March 1998 we issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Notes) effected under Rule 144A under the Securities Act of 1933, as amended ("Securities Act"). Interest under the Notes is payable semi-annually on September 15 and March 15, and the Notes are not callable until March 2003 subject to the terms of the Indenture. We incurred expenses related to the offering of approximately $5.3 million and will amortize these costs over the life of the Notes. We recorded a $258,000 discount on the Notes and will amortize this discount over the life of the Notes. Unamortized discount at September 30, 1999 was $218,000 and this amount is recorded as an offset to long-term debt in the consolidated financial statements. In April 1998 we filed a registration statement under the Securities Act relating to an exchange offer for the Notes. The registration became effective on May 14, 1998. The Notes are general unsecured obligations of our company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly-owned current and future subsidiaries. See Note 2 of Notes to our Consolidated Financial Statements included in this Form 10-Q. The Notes contain certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations. We expect that existing working capital, together with cash flow from operations and additional borrowing capacity, will be sufficient to meet our operating and capital needs for existing operations for the twelve months subsequent to September 30, 1999. Our business growth occurs primarily through new business contracts and acquisitions. We intend to finance any contracts or acquisitions that we consummate through the use of cash from operations, credit facilities, seller notes payable and the issuance of common stock. In addition, we may seek to raise additional capital through public or private 21 22 debt or equity financings. The availability of these capital sources will depend upon prevailing market conditions, interest rates, our financial condition and the market price of our common stock. The market price of our common stock impacts our ability to complete acquisitions. We may be unwilling to utilize, or potential acquired companies or their owners may be unwilling to accept, our common stock in connection with acquisitions. In addition, the market price performance of our common stock may make raising funds more difficult and costly. As a result of the decline in the market price of our common stock in the fourth quarter of fiscal 1998 and the failure of our stock price to increase since that time, the pace of acquisitions utilizing our common stock has declined. Continued weakness in the market price of our common stock could adversely affect our ability or willingness to made additional acquisitions. Declines in the market price of our common stock could cause previously acquired companies to seek adjustments to purchase prices or other remedies to offset the decline in value. MEDICARE REIMBURSEMENT In January 1999, HCFA announced its intention to form a negotiated rule-making committee to create a new fee schedule for Medicare reimbursement of ambulance services. The committee convened in February 1999. In August 1999, HCFA announced that the implementation of the new fee schedule as well as the mandatory acceptance of Medicare assignment will be postponed to January 2001. HCFA also announced rules which became effective in February 1999. These rules require, among other things, that a physician's certification be obtained for certain ambulance transports. We have implemented a program to comply with the new rules EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS Our results of operations for the periods discussed have not been affected significantly by inflation or foreign currency fluctuations. Our revenue from international operations is denominated primarily in the currency of the country in which it is operating. At September 30, 1999 our balance sheet reflects a $511,000 cumulative equity adjustment (decrease) from foreign currency translation, which resulted from the weakening of the currencies of Canada and Brazil and the effect it had on our investments in our Canadian operations and our investment in certain property and equipment that we have deployed in Brazil. Although we have not incurred any material exchange gains or losses to date, there can be no assurance that fluctuations in the currency exchange rates in the future will not have an adverse effect on our business, financial condition, cash flows and results of operations. We do not currently engage in foreign currency hedging transactions. However, as we continue to expand our international operations, exposure to gains and losses on foreign currency transactions may increase. We may choose to limit such exposure by entering into forward exchange contracts or engaging in similar hedging strategies. YEAR 2000 COMPLIANCE We have implemented a Year 2000 compliance program, utilizing both internal and external resources, to ensure that our principal medical equipment, ambulance and fire dispatch systems, and computer systems and applications will function properly beyond 1999. Our assessment of this equipment and systems, both internally developed and purchased from third-party vendors, is complete. Included in this assessment is a formal communication program with our significant vendors to determine the extent to which we are vulnerable to those vendors who fail to remediate their own Year 2000 non-compliance. We are highly dependent on vendor remediation and testing of vendor systems. The results of the assessments and remediation efforts indicate that our principal medical equipment, ambulance and fire dispatch systems, and computer systems and applications are either Year 2000 compliant, have been upgraded, or in the case of certain ambulance and fire dispatch systems, have been replaced in order to obtain 22 23 compliance. We continue to upgrade and replace non-compliant equipment and systems and expect to complete such activities prior to January 1, 2000. We will continue to monitor new medical equipment, ambulance and fire dispatch systems, and computer systems and applications that the Company adds in its operations for Year 2000 compliance. If our medical equipment, ambulance and fire dispatch systems, and computer systems and applications are not Year 2000 compliant, we may not be able to respond to requests for ambulance and fire protection services in a timely manner. This situation could adversely affect our operations and we may incur unanticipated expenses to remedy any problems not addressed by these compliance efforts. We are dependent upon vendors who provide services such as electrical power, water, fuel for vehicles and other necessary commodities. We also depend upon the ability of telephone systems to be Year 2000 compliant in order for the Company to receive incoming calls for service to our ambulance and fire dispatch systems. The failure of telephone service providers to adequately provide service could impact our ability to dispatch and respond to requests for ambulance and fire protection services. The failure of third-party payors, such as private insurers, managed care providers, health care organizations, preferred provider organizations, and federal and state government agencies that administer Medicare and/or Medicaid, to adequately address their Year 2000 issues could impact their ability to reimburse us for services provided. The failure of any of these systems could adversely affect our business, financial condition, cash flows and results of operations. We do not control these systems and are dependent upon the service providers and third-party payors to remediate any Year 2000 non-compliance related to their own systems. We have completed our contingency plans in the event that our principal medical equipment, ambulance and fire dispatch systems, computer systems and applications, telephone systems, systems of third-party payors, or any other components of our business operations fail to operate in compliance with the Year 2000 date change. The cost of our Year 2000 compliance program has not had and is not expected to have a material impact on our results of operations, financial condition, or liquidity. There can be no assurance, however, that we will not experience material adverse consequences in the event that our Year 2000 compliance program is not successful or that our vendors or third-party payors are not able to resolve their Year 2000 compliance issues in a timely manner. 23 24 ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We have entered into interest rate swap agreements to limit the effect of increases in the interest rates on floating rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. In November 1998, we entered into an interest rate swap agreement that originally expired in November 2003 with a provision for the lending party to terminate the agreement in November 2000. The interest rate swap agreement effectively converted $50.0 million of variable rate borrowings to fixed rate borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating rate. In June 1999, we terminated the interest rate swap agreement and received a termination fee of $604,000. Such amount is being amortized as a reduction of interest expense on a straight-line basis through November 2000. 24 25 RURAL/METRO CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS We, Warren S. Rustand, our former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, our Vice Chairman of the Board, and Robert E. Ramsey, Jr., our Executive Vice President and Director, have been named as defendants in two purported class action lawsuits: Haskell v. Rural/Metro Corporation, et al., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and Ruble v. Rural/Metro Corporation, et al., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. Reference is made to the Company's most recently filed Form 10-K for the fiscal year ended June 30, 1999 regarding these legal proceedings instituted during the quarter ended September 30, 1998. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.16(g) Employment Agreement by and between Registrant and John B. Furman, effective July 29, 1999. 10.16(h) Change of Control Agreement by and between Registrant and John B. Furman, effective November 1, 1999. 10.16(i) Employment Agreement by and between Registrant and Jack Brucker, effective October 1, 1999. 27 Financial Data Schedules (b) Reports on Form 8-K On August 30, 1999 the Company filed a Form 8-K disclosing its operating results for the fiscal fourth quarter and the fiscal year ended June 30, 1999. 25 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RURAL/METRO CORPORATION Date: November 12, 1999 By /s/ Dean P. Hoffman --------------------- Dean P. Hoffman, Vice President, Financial Services and Principal Accounting Officer 26 27 EXHIBIT INDEX
Exhibit Description ------- ----------- 10.16(g) Employment Agreement by and between Registrant and John B. Furman, effective July 29, 1999. 10.16(h) Change of Control Agreement by and between Registrant and John B. Furman, effective November 1, 1999. 10.16(i) Employment Agreement by and between Registrant and Jack Brucker, effective October 1, 1999. 27 Financial Data Schedules
EX-10.16(G) 2 EX-10.16(G) 1 Exhibit 10.16(g) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into this November 1, 1999, by and between JOHN B. FURMAN ("Executive") and RURAL/METRO CORPORATION, its subsidiaries, affiliates, joint ventures and partnerships ("Rural/Metro"). The Effective Date of this Agreement is July 29, 1999. R E C I T A L S A. The Board of Directors of Rural/Metro believes it is in the best interests of Rural/Metro to continue to employ Executive as the President and Chief Executive Officer of Rural/Metro. 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 the President and Chief Executive Officer of Rural/Metro and shall report only to the Board of Directors of Rural/Metro (the "Board"). Executive shall perform the duties of his position, as determined by the Board, in accordance with the policies, practices and bylaws of Rural/Metro. Executive also shall serve as a member of the Board. 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. 1 2 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, at which time Executive may be entitled to terminate this Agreement for Good Reason as provided in paragraph 7. 2. COMPENSATION. Initially, Executive's bi-weekly salary will be based upon annual compensation of Three Hundred Ninety-Five Thousand Dollars ($395,000.00) ("Base Salary"). As of January 1, 2000, Executive's Base Salary shall be increased to Four Hundred Twenty Thousand Dollars ($420,000.00). Thereafter, Executive's Base Salary will be reviewed at least annually in accordance with Rural/Metro's executive compensation review policies and practices, all as determined by the Board, in its sole discretion. Executive's Base Salary may be increased upon any such review, but in no event shall the amount of Executive's Base Salary as set forth in this paragraph 2 be decreased. 3. MANAGEMENT INCENTIVE PROGRAM. Commencing with the incentive program for the fiscal year ending on June 30, 2000, and at all times thereafter, 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. STOCK OPTIONS. Pursuant to the provisions of his current Employment Agreement, Executive was granted options to purchase One Hundred Thousand (100,000) shares of Rural/Metro stock at the closing price of Rural/Metro stock on Executive's first day of employment hereunder, which was 3 July 29, 1999, with the terms and conditions of the options to be set forth in a separate Stock Option Agreement to be entered into by and between Executive and Rural/Metro. As provided in Executive's current Employment Agreement, the Stock Option Agreement shall provide that the options shall be fully vested and exercisable at the time of grant and the options will remain exercisable during the period of Executive's employment with Rural/Metro and for at least thirty-six (36) months following the termination of Executive's employment with Rural/Metro. In any event, notwithstanding the preceding sentence, the options will lapse and no longer be exercisable on or after the tenth (10th) anniversary of the date of grant. 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 "Initial Term" or any "Renewal Term". The "Initial Term" of this Agreement shall expire by its terms two (2) years from the Effective Date of this Agreement, unless sooner terminated in accordance with the provisions of this Agreement. This Agreement will be renewed at the end of the Initial Term for additional one-year periods (a "Renewal Term"), unless either party serves notice of its desire not to renew or of its desire to modify this Agreement on the other. Such notice must be given at least forty-five (45) days before the end of the Initial Term or the applicable Renewal Term. 4 If Rural/Metro notifies Executive of its desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Rural/Metro does not have "Cause" to terminate this Agreement pursuant to paragraph 6A, Executive shall receive the Severance Benefits pursuant to paragraph 9. If Executive notifies Rural/Metro of his desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Executive has Good Reason to terminate this Agreement pursuant to paragraph 7A, Executive shall receive the Severance Benefits pursuant to paragraph 9. Executive also shall receive the Severance Benefits pursuant to paragraph 9 if Rural/Metro proposes to modify this Agreement in a manner that gives rise to Good Reason pursuant to paragraph 7A for Executive's termination of employment and Executive rejects such proposed modifications. Severance Benefits will not be payable pursuant to the preceding sentence if Rural/Metro rescinds the proposed modifications and offers Executive a new Agreement that does not include any proposed modifications that give rise to Good Reason for Executive's termination of employment. 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 the Board that Executive: (a) has been convicted of a felony involving dishonesty, fraud, theft or embezzlement; (b) has repeatedly failed or refused, after 5 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 or failed to act, which, if he were prosecuted and convicted, would constitute a felony involving Five Thousand Dollars ($5,000) 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. The existence of "Cause" shall be determined by Rural/Metro's Board of Directors acting in good faith after prior notice to Executive and after providing Executive with an opportunity to be heard. 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 sixty (60) days prior written notice to Executive. In the event this Agreement and Executive's employment are terminated by Rural/Metro without Cause, Executive shall receive the Severance Benefits pursuant to paragraph 9. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive's access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice to Executive. 7. TERMINATION BY EXECUTIVE. 6 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 sixty (60) 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; (b) Executive is assigned duties inconsistent with the positions, duties, responsibility and status of the President and Chief Executive Officer of Rural/Metro; (c) Executive is required to relocate to an employment location that is more than twenty-five (25) miles from his current employment location (which the parties agree is Rural/Metro's present Scottsdale headquarters); (d) Executive's Base Salary rate is reduced to a level that is at least ten percent (10%) less than the salary paid to Executive during any prior calendar year, unless Executive has agreed to said reduction; (e) 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 any prior year; or (f) Executive is placed on an administrative leave or is barred or restricted access to Rural/Metro facilities for a period of more than sixty (60) days provided, however, that the terms of this clause (f) shall not apply in the event that Executive is placed on an administrative 7 leave pursuant to paragraphs 6B or 7C hereof or in the event that Executive is placed on an administrative leave because Rural/Metro has "Cause" to terminate Executive's employment with Rural/Metro. 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 ninety (90) days notice to Rural/Metro. If Executive terminates this Agreement and his employment without Good Reason, Executive shall not receive Severance Benefits pursuant to paragraph 9. C. ADMINISTRATIVE LEAVE. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive's access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice of termination by Executive pursuant to paragraph 7A or 7B. 8. DEATH OR DISABILITY. This Agreement will terminate automatically on Executive's death. Any compensation 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. 8 In the event Executive becomes "Disabled", Executive's employment hereunder and Rural/Metro's obligation to pay Executive's Base Salary (less any amounts payable to Executive pursuant to any long-term disability insurance policy paid for by Rural/Metro) shall continue for a period of twelve (12) months from the date of Executive's initial absence due to such Disability. If at the end of said twelve (12) month period Executive has not recovered from such Disability, 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 and confirmed by a licensed physician designated by Executive, and after any reasonable accommodations required by applicable law, he is unable to perform the essential functions of his position due to a physical or mental impairment, and such incapacity is expected to continue for a period of at least twelve (12) consecutive months from the date of the initial absence due to such incapacity. The determination by said physicians shall be binding and conclusive for all purposes. If the physician selected by the Board and the physician selected by Executive cannot agree, the two (2) physicians shall select a third (3rd) physician. The decision of the third (3rd) physician concerning Executive's Disability then shall be binding and conclusive on all interested parties. 9. SEVERANCE BENEFITS. If during the Initial Term or any Renewal Term, this Agreement and Executive's employment are terminated without Cause by Rural/Metro pursuant to paragraph 6B prior to the last day of the Initial Term or any Renewal Term, or if Executive elects to terminate this Agreement for Good Reason pursuant to paragraph 7A, Executive shall receive the "Severance 9 Benefits" provided by this paragraph. To the extent provided in paragraph 5, Executive also shall receive the Severance Benefits if this Agreement is not renewed. In addition, Executive also shall receive the Severance Benefits if his employment is terminated due to Disability pursuant to paragraph 8. The Severance Benefits shall begin immediately following the effective date of termination of employment and, except as otherwise provided herein, will continue to be payable for a period of twenty-four (24) months thereafter. The Executive's Severance Benefits shall consist of the continuation of the Executive's then Base Salary for a period of twenty-four (24) months. The Severance Benefits also shall consist of the continuation of any health, life, disability, or other insurance benefits that Executive was receiving as of his last day of active employment for a period of twenty-four (24) months. 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. The Executive's Severance Benefits shall also consist of the full and immediate vesting of all unvested stock options granted to the Executive and such stock options will be immediately exercisable and remain exercisable for twenty-four (24) months following the termination of the Executive's employment for any of the reasons set forth in the first section of this paragraph 9, notwithstanding any contrary terms in a Stock Option Agreement between the 10 Executive and Rural/Metro, whether entered into prior to or after the Effective Date of this Agreement. If Executive voluntarily terminates this Agreement and his employment without Good Reason prior to the end of the Initial Term or any Renewal 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 will cease if Executive elects to forego future Severance Benefits pursuant to paragraph 12F in order to avoid any further restrictions on his ability to engage in a competing business or to solicit employees or clients. If Executive makes an election pursuant to paragraph 12F, the Severance Benefits will cease as of the effective date of the election. As a general rule, notwithstanding any contrary provision in any Stock Option Agreement, Executive will not be allowed to exercise any options following the effective date of an election made pursuant to paragraph 12F. Such an election, however, shall have no effect on the vesting or exercisability of the stock options granted to Executive by Rural/Metro pursuant to paragraph 4 of his August 27, 1998 Employment Agreement, a portion of which are also referenced in paragraph 4 of this Agreement. Severance Benefits also 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 11 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. In the event that Rural/Metro ceases payment of Severance Benefits to Executive in accordance with the preceding paragraph due to Rural/Metro's good faith belief that Executive has committed 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, the confidentiality and non-disclosure requirements set forth in paragraph 11 and the Covenant-Not-To-Compete set forth in paragraph 12 shall remain in full force and effect. In the event that Rural/Metro ceases payment of Severance Benefits to Executive without a good faith belief the Executive has committed a material violation of such provisions, in addition to such other remedies as may be available to Executive in law or in equity, the confidentiality and non-disclosure requirements set forth in paragraph 11 and the Covenant-Not-To-Compete set forth in paragraph 12 shall lapse and be without force and effect unless Rural/Metro resumes the payments within sixty (60) days of its receipt of a demand to do so from Executive. The payment of Severance Benefits shall not be affected by whether Executive seeks or obtains other employment. Executive shall have no obligation to seek or obtain other employment and Executive's Severance Benefits shall not be impacted by Executive's failure to mitigate. 10. BENEFITS. A. BENEFIT PLANS, INSURANCE, OPTIONS, ETC. 12 Executive will be entitled to participate in any benefit plans, including, but not limited to, retirement plans, stock option plans, disability plans, life insurance plans and health and dental plans available to other Rural/Metro executive employees, subject to any restrictions (including waiting periods) specified in said plans. B. VACATION. Executive is entitled to four (4) weeks of paid vacation per calendar year, with such vacation to be scheduled and taken by Executive in his discretion, provided that such vacation shall not interfere with the performance of Executive's duties hereunder. If Executive does not take the full vacation available in any year, up to two (2) weeks may be carried over to the next calendar year. 11. CONFIDENTIALITY 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, operational budgets and strategies, methods of operation, customer lists, strategic plans, business plans, marketing plans and strategies, new business strategies, merger and acquisition strategies, management systems programs, computer systems, personnel and compensation information and payroll data, and other such reports, documents or information (collectively the "Confidential and Proprietary 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 Confidential and Proprietary Information in any form, format, or manner whatsoever (including computer print-outs, computer tapes, 13 floppy disks, CD roms, etc.) 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. 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. 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. 14 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 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. B. DEVOTION TO EMPLOYMENT. Executive shall devote substantially all his business time and 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. C. NON-SOLICITATION OF CLIENTS. 15 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 and for whatever reason, 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 client(s) of Rural/Metro with whom he has worked as an employee of Rural/Metro at any time prior to termination, or at the time of termination, for the purpose of soliciting or selling such customer the same, similar, or related services that he provided on behalf of Rural/Metro. 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 and for any reason, 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, seek to hire, and/or hire any of Rural/Metro's personnel or employees for the purpose of having such employee engage in services that are the same, similar or related to the services that such employee provided for Rural/Metro. 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 and for any reason, Executive shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or 16 governmental entity, in any manner whatsoever, engage in the same or similar business as Rural/Metro, which would be in direct competition with any Rural/Metro line of business, in any geographical service area where Rural/Metro is engaged in business, or was considering engaging in business at any time prior to the termination or at time of termination. For the purposes of this provision, the term "competition" shall mean directly or indirectly engaging in or having a substantial interest in a business or operation which has been, is, or will be, performing the same services provided by Rural/Metro. F. ELECTION TO SHORTEN PERIOD. Executive may elect to shorten the twenty-four (24) month period referred to in subparagraphs C, D and E to any period of at least twelve (12) months. In order to make this election, Executive must provide Rural/Metro with written notice at least sixty (60) days prior to the expiration of the shortened period. As provided in paragraph 9, if Executive makes this election, any Severance Benefits provided by paragraph 9 will be discontinued as of the effective date of the election. For example, assume that Executive's employment is terminated on November 1, 2000 under circumstances that entitle Executive to receive Severance Benefits. Executive will be precluded from soliciting Rural/Metro clients and employees and engaging in a competing business until November 1, 2002. Executive may elect to begin engaging in a competing business, and/or soliciting clients or employees, at any time on or after November 1, 2001 by making an election pursuant to this subparagraph F. If Executive chooses to solicit employees or clients, or engage in a competing business effective as of December 1, 2001, 17 Executive must file the notice called for by this subparagraph at least sixty (60) days before December 1, 2001. G. AUTOMATIC REDUCTION OF PERIOD. The twenty-four (24) month period referred to in subparagraphs C, D and E will be shortened to twelve (12) months if Executive is not entitled to receive Severance Benefits pursuant to paragraph 9 at the time of his termination or employment. H. 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. I. 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. 18 J. SURVIVAL. The provisions of this paragraph shall survive the termination of this Agreement. 13. DEFERRAL OF AMOUNTS PAYABLE UNDER THIS AGREEMENT. A payment due pursuant to this Agreement or the MIP may be deferred if and to the extent that the payment does not satisfy the requirements to be "qualified performance-based compensation" (as such term is defined by the regulations issued under Section 162(m) of the Internal Revenue Code of 1986 (the "Code")) and when combined with all other payments received during the year that are subject to the limitations on deductibility under Section 162(m) of the Code, the payment exceeds the limitations on deductibility under Section 162(m) of the Code. The deferral of payments shall be in the discretion of the Compensation Committee of Rural/Metro, and shall be made pursuant to a Deferred Compensation Agreement or Plan acceptable to Rural/Metro and Executive. Such deferred amounts shall be paid as soon as possible but in no event later than the sixtieth (60th) day after the end of the next succeeding calendar year, provided that such payment, when combined with any other payments subject to the Section 162(m) limitations received during the year, does not exceed the limitations on deductibility under Section 162(m) of the Code. If the payments in such succeeding calendar year exceed the limitations on deductibility under Section 162(m) of the Code, such payments shall continue to be deferred to the next succeeding year. The above procedure shall be repeated until such payments can be paid without exceeding the limitation on deductibility under Section 162(m) of the Code. 14. OTHER AGREEMENTS. 19 Rural/Metro and Executive will enter into one or more Stock Option Agreements and a Change of Control Agreement, which will provide the Executive with certain additional protections if his employment is terminated in certain instances following a "change of control." Nothing in this Agreement is intended to alter or modify the Stock Option Agreements or the Change of Control Agreement, which, once executed, shall continue in full force and effect. 15. BUSINESS EXPENSES. Rural/Metro will reimburse Executive for any and all necessary, customary, and usual expenses, properly receipted in accordance with Rural/Metro's policies, incurred by Executive on behalf of Rural/Metro. 16. AMENDMENTS. This Agreement, the Executive's Stock Option Agreement and the Executive's Change of Control Agreement constitute the entire agreement between the parties as to the subject matter hereof. Accordingly, there are no side agreements or verbal agreements other than those which are stated above. Any amendment, modification or change in this Agreement must be done so in writing and signed by both parties. 17. 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. 18. GOVERNING LAW. 20 The law of the State of Arizona shall govern the interpretation and application of all of the provisions of this Agreement. 19. INDEMNITY. Rural/Metro shall indemnify Executive to the fullest extent permitted or required by the laws of the State of Delaware of and from any "Expenses" incurred by Executive in any "Proceeding." For purposes of this paragraph 19, "Expenses" shall mean and include all expense, liability and loss including expenses of investigations, judicial or administrative proceedings or appeals, attorney, accountant and other professional fees and disbursements, judgments, fines, and amounts paid in settlement. For purposes of this paragraph 19, "Proceeding" shall mean and include any threatened, pending or completed action, suit or proceeding, whether brought in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which the Executive may be or may have been involved as a party, witness or otherwise, by reason of the fact that the Executive is or was an officer of Rural/Metro or is or was serving at the request of Rural/Metro as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification may be provided under this Agreement. Rural/Metro shall pay the Expenses incurred by Executive in any Proceeding in advance of the final disposition of the Proceeding at the written request of Executive, if Executive (a) furnishes Rural/Metro with a written affirmation of Executive's good faith belief 21 that he is entitled to indemnification by Rural/Metro; and (b) furnishes Rural/Metro with a written undertaking to repay the advance to the extent that it is ultimately determined that Executive is not entitled to be indemnified by Rural/Metro. Such undertaking shall be an unlimited general obligation of Executive, but need not be secured. Advances pursuant to this paragraph 19 shall be made no later than twenty (20) days after Rural/Metro's receipt of the affirmation and undertakings set forth above and shall be made without regard to the Executive's ability to repay the amount advanced and without regard to Executive's ultimate entitlement to indemnification under this Agreement. 20. DISPUTE RESOLUTION A. MEDIATION. Any and all disputes arising under, pertaining to or touching upon this Agreement 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 20D. Notwithstanding the foregoing, both Executive and Rural/Metro may seek preliminary judicial relief if such action is necessary to avoid irreparable damage during the pendency of the proceedings described in this paragraph 20. 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. 22 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 20D. The mediator shall not serve as arbitrator. TO THE EXTENT ALLOWABLE UNDER APPLICABLE LAW, ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, BREACH OF CONTRACT OR POLICY, OR 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 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 the National Rules for the Resolution of Employment Disputes of AAA in effect on the date of the first notice of demand for arbitration. 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. 23 In cases of breach of contract or policy, damages shall be limited to contract damages. In cases of discrimination claims prohibited by statute, the arbitrator may direct payment consistent with the applicable statute. In cases of employment tort, the arbitrator may award punitive damages if proved by clear and convincing evidence. 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 the AAA. 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 AAA. Executive shall have the first strike. IN WITNESS WHEREOF, Rural/Metro and Executive have executed this Agreement on this day of , 1999. -------- ----------- "EXECUTIVE" RURAL/METRO CORPORATION By: - --------------------------------- --------------------------------- John B. Furman Cor Clement, Chairman --------------------------------- Board of Directors --------------------------------- EX-10.16(H) 3 EX-10.16(H) 1 Exhibit 10.16(h) ________________, 1999 John B. Furman c/o Rural/Metro Corporation 8401 East Indian School Road Scottsdale, Arizona 85251 CHANGE OF CONTROL AGREEMENT Dear John: Our Board of Directors (the "Board") previously concluded that it is in the best interests of Rural/Metro Corporation ("Rural/Metro") and its shareholders to take appropriate steps to allay any concerns you may have about your future employment opportunities with Rural/Metro and its subsidiaries (Rural/Metro and its subsidiaries are collectively referred to as the "Company"). As a result, the Board previously offered to you the special package of benefits described in your September 17, 1998 Change of Control Agreement. The Board has now decided to modify our September 17, 1998 Change of Control Agreement to provide you with the enhanced benefits described below. Effective upon your execution of this Change of Control Agreement (the "Agreement"), this Agreement will replace the September 17, 1998 Change of Control Agreement. Please bear in mind that the enhanced benefits described below are being offered to you alone and we accordingly ask that you refrain from discussing this special program with others. Also, please note that the special benefits package described below will only be effective if you sign the extra copy of this Agreement which is enclosed, and return it to me on or before , 1999. 1. TERM OF AGREEMENT. This Agreement is effective immediately and will continue in effect as long as you are actively employed by Rural/Metro, unless you and Rural/Metro agree in writing to its termination. 2. ELIGIBILITY FOR SEVERANCE PAYMENT. 2 John B. Furman ______________, 1999 Page 2 You will receive the "Severance Payment," as defined in Section 3, if: (a) Your employment with the Company is terminated without "Cause" (as defined in Section 9) within two years following a Change of Control; or (b) You terminate your employment with the Company for "Good Reason" (as defined in Section 8) within two years following a Change of Control. Notwithstanding the foregoing, no Severance Payment will be payable if your employment is terminated for Cause, if you terminate your employment without Good Reason (other than during the 30-day period referred to above), or if your employment is terminated by reason of your "Disability" (as defined in Section 12(d)) or your death. In addition, the Severance Payment will not be payable if your employment is terminated by you or the Company for any or no reason before a Change of Control occurs or if your employment is terminated by you or the Company for any or no reason more than two years after a Change of Control has occurred. In order to receive the Severance Payment, you must execute any release reasonably requested by Rural/Metro of claims that you may have pursuant to this Agreement (but not any other claims). The Severance Payment will be payable without regard to whether you look for or obtain alternative employment following your termination of employment with the Company. 3. COMPUTATION OF SEVERANCE PAYMENT. The "Severance Payment" is a lump sum payment equal to the sum of: (a) the greater of 200% of your annualized base salary as of the day on which the Change of Control occurs or $700,000; plus (b) 200% of an amount equal to the incentive compensation paid or payable to you pursuant to our Management Incentive Program on account of performance during the calendar year immediately preceding the calendar year in which the Change of Control occurs plus any other bonuses or incentive compensation paid or payable to you for such year; less (c) the full amount of any payments to which you may be entitled due to your termination pursuant to the terms of your "Employment Agreement" (as defined in Section 22), any applicable law, or otherwise. 3 John B. Furman ______________, 1999 Page 3 The Severance Payment will be paid in one lump sum within five days following your termination of employment. 4. ACCELERATION OF OR PAYMENT FOR OPTIONS. Except as otherwise noted below, if an agreement is entered into that will result in a Change of Control, before the Change of Control occurs the Board will accelerate the vesting and exercisability of any options you hold to acquire Company stock that, pursuant to their terms, are not yet vested and exercisable (the "Existing Options"). In addition, the Existing Options and any other options that you hold will remain exercisable following the Change of Control until the options lapse in accordance with their terms. The Board will not be obligated to accelerate the exercisability of Existing Options (although it may if it so chooses) if any party to the agreement expressly indicates, in a writing addressed to the Board, that it intends to use pooling of interest accounting for all or any part of the transaction and the Board, based on the advice of its advisors, concludes (a) that pooling of interests accounting is available to such party for all or any portion of the transaction, and (b) that the availability of pooling of interests accounting will be jeopardized if the Committee accelerates the exercisability of the Existing Options. If you are employed by the Company on the day on which a Change of Control occurs and at that time you hold any Existing Options that are not accelerated pursuant to the preceding paragraph, you may be entitled to receive a special "Option Payment". The Option Payment will only be payable if all of the following conditions are met: (a) you are employed by the Company on the day on which the Change of Control occurs; (b) the vesting and exercisability of the Existing Options are not accelerated by action of the Board or otherwise on a basis that allows you to exercise your options prior to the Change of Control; (c) the Existing Options are not replaced by other options on the stock of the acquirer (the "Replacement Options"), which the Board, as constituted immediately prior to the Change of Control, in its discretion, determines to be comparable; and (d) Rural/Metro does not continue as a publicly held corporation required to be registered pursuant to the provisions of the Securities Exchange Act of 1934 following the Change of Control, or if Rural/Metro does continue as a registered publicly held corporation, the Board, as constituted immediately prior to the Change of Control, determines, in its discretion, that Rural/Metro has undergone a fundamental change such that the value of the Existing Options after the Change of Control is less than 75% of the value of the Existing Options prior to the Change of Control. 4 John B. Furman ______________, 1999 Page 4 While the Board has the discretion to determine whether Replacement Options are "comparable" to Existing Options for purposes of clause (c) of the preceding paragraph, it may not consider Replacement Options to be comparable to Existing Options unless, at a minimum, the Replacement Options are exercisable as rapidly as the Existing Options and the Replacement Options are structured to preserve the aggregate positive spread between the aggregate exercise price for the Existing Options and the aggregate "Deal Value" of the Rural/Metro stock subject to the Existing Options. For purposes of this Section, the "Deal Value" of the Rural/Metro stock is the value placed on the Rural/Metro stock by the parties for purposes of the transaction that results in the Change of Control. If no single transaction results in the Change of Control, or if the parties to such transaction do not expressly agree to a value to be assigned to the Rural/Metro stock for purposes of such transaction, the Deal Value of the Rural/Metro stock shall be the value that the Board determines to be the inherent value of the Rural/Metro stock as of the date on which the Change of Control occurs. For purposes of clause (d) of the fourth paragraph of this Section, the Board may use any option pricing model it chooses to compare the value of the Existing Options before and after the Change of Control. The Option Payment for each share of stock subject to an Existing Option will be an amount equal to the Deal Value of the Rural/Metro stock less the option price for such share as designated in the relevant option agreement. The Option Payment for all shares subject to an Existing Option shall be paid in one lump sum within 30 days following the occurrence of the last event that entitles you to receive the Option Payment. Any option for which an Option Payment is made will be automatically canceled upon payment of the Option Payment. The Option Payment will only be made for "Existing Options". As a result, no Option Payment will be made with respect to an option that is exercisable prior to the day on which the Change of Control occurs, since the term "Existing Option" does not include exercisable options. Any determinations made in good faith by the Board for purposes of this Agreement shall be final and binding on all parties. 5. BENEFITS CONTINUATION. 5 John B. Furman ______________, 1999 Page 5 If your employment is terminated by the Company without Cause, or if you terminate your employment for Good Reason, within two years following a Change of Control, you will continue to receive life, disability, accident and group health insurance benefits substantially similar to those which you were receiving immediately prior to your termination of employment for a period of twenty-four (24) months following your termination of employment. Such benefits shall be provided on substantially the same terms and conditions as they were provided prior to the Change of Control. The Company does not intend to provide duplicative benefits. As a result, benefits otherwise receivable pursuant to this Section shall be reduced or eliminated if and to the extent that you receive such benefits pursuant to your Employment Agreement. Benefits otherwise receivable pursuant to this Section also shall be reduced or eliminated if and to the extent that you receive comparable benefits from any other source (for example, another employer). 6. INCENTIVE COMPENSATION. If you are employed by the Company on the day on which a Change of Control occurs, the incentive compensation to which you will be entitled under the Management Incentive Program for the calendar year in which the Change of Control occurs will equal at least the "Minimum Incentive Compensation Amount". The "Minimum Incentive Compensation Amount" will equal the incentive compensation to which you would have been entitled if the year were to end on the day on which the Change of Control occurs, based upon performance up to that date. In measuring financial performance, financial results through the date of the Change of Control will be annualized. 7. CHANGE OF CONTROL DEFINED. For purposes of this Agreement, the term Change of Control shall mean any one or more of the following transactions or situations: (a) A sale, transfer, or other disposition by Rural/Metro through a single transaction or a series of transactions of securities of Rural/Metro representing 30% or more of the combined voting power of Rural/Metro's then outstanding securities to any "Unrelated Person" or "Unrelated Persons" acting in concert with one another. For purposes of this Section, the term "Person" shall mean and include any individual, partnership, joint venture, 6 John B. Furman ______________, 1999 Page 6 association, trust, corporation, or other entity (including a "group" as referred to in Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Act")). For purposes of this Section, the term "Unrelated Person" shall mean and include any Person other than: Rural/Metro, a wholly-owned subsidiary of Rural/Metro, or an employee benefit plan of Rural/Metro. (b) A sale, transfer, or other disposition through a single transaction or a series of transactions of all or substantially all of the assets of Rural/Metro to an Unrelated Person or Unrelated Persons acting in concert with one another. (c) A change in the ownership of Rural/Metro 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 Rural/Metro representing at least 30% of the combined voting power of Rural/Metro'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 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. (d) Any consolidation or merger of Rural/Metro with or into an Unrelated Person, unless immediately after the consolidation or merger the holders of the common stock of Rural/Metro immediately prior to the consolidation or merger are the Beneficial Owners of securities of the surviving corporation representing at least 50% of the combined voting power of the surviving corporation's then outstanding securities. (e) During any period of two (2) years, individuals who, at the beginning of such period, constituted the Board of Directors of Rural/Metro 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 (2/3rds) of the directors then still in office who were directors at the beginning of such period. (f) A change in control of Rural/Metro 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 Act, or any successor regulation of similar import, regardless of whether Rural/Metro is subject to such reporting requirement. Notwithstanding any provision herein to the contrary, the filing of a proceeding for the reorganization of Rural/Metro under Chapter 11 of the Federal Bankruptcy Code or any 7 John B. Furman ______________, 1999 Page 7 successor or other statute of similar import shall not be deemed to be a Change of Control for purpose of this Agreement. 8. GOOD REASON DEFINED. For purposes of this Agreement, "Good Reason" shall mean any one or more of the following: (a) The assignment to you of any duties which are inconsistent with, or the reduction of powers or functions associated with, your positions, duties, responsibilities and status with Rural/Metro, or a change in your reporting responsibilities, or in the conditions of your employment; provided that a single reduction by Rural/Metro of less than 10% (or aggregate reductions totaling less than 10%) in your base salary as in effect on the date hereof or as the same may be increased as provided in your Employment Agreement is permissible and shall not constitute "Good Reason". (b) The failure of Rural/Metro to cause any successor to expressly assume and agree to perform this Agreement pursuant to Section 13 hereof. (c) Any purported termination by Rural/Metro of your employment that is not effected by a Notice of Termination pursuant to Subsection 12 below and/or for grounds not constituting Cause. (d) Rural/Metro relieving you of your duties. (e) Rural/Metro requiring you to relocate, without your express written consent to an employment location which is more than 25 miles from your employment location on the date of the Change of Control. (f) Any other event which constitutes "Good Reason" under paragraph 7A of your Employment Agreement with Rural/Metro. If there is no such Agreement in effect at the time of your termination, this paragraph (f) shall be inapplicable. 9. CAUSE DEFINED. 8 John B. Furman ______________, 1999 Page 8 For purposes of this Agreement, the term "Cause" shall be given the meaning ascribed to such term in your Employment Agreement, as it may be amended from time to time. If no written Employment Agreement is in effect at the time of your termination of employment, "Cause" shall be given the meaning ascribed to it in the last written Employment Agreement that was in effect between you and the Company that included a definition of "Cause". 10. CEILING ON BENEFITS. The Internal Revenue Code (the "Code") places significant tax burdens on you and the Company if the total payments made to you due to a Change of Control exceed prescribed limits. For example, if your limit is $300,000 and the total payments exceed the limit by even $1.00, you are subject to an excise tax under Section 4999 of the Code of 20% of all amounts paid to you in excess of $100,000. If your limit is $300,000, you will not be subject to an excise tax if you receive exactly $300,000. If you receive $300,001, you will be subject to an excise tax of $40,000 (20% of $200,001). In order to avoid this excise tax and the related adverse tax consequences for the Company, by signing this Agreement, you will be agreeing that, subject to the exception noted below in the last paragraph of this Section 10, the present value of your "Total Payments" (as defined below) will not exceed an amount equal to two and ninety-nine hundredths (2.99) times your "Base Period Income" (as defined below). This is the maximum amount which you may receive without becoming subject to the excise tax imposed by Section 4999 of the Code or which the Company may pay without loss of deduction under Section 280G of the Code. "Base Period Income" is an amount equal to your "annualized includable compensation" for the "base period" as defined in Sections 280G(d)(1) and (2) of the Code and the regulations adopted thereunder. Generally, your "annualized includable compensation" is the average of your annual taxable income from the Company for the "base period", which is the five calendar years prior to the year in which the Change of Control occurs. These concepts are complicated and technical and all of the rules set forth in the applicable regulations apply for purposes of this Agreement. Your "Total Payments" include the sum of the Severance Payment and any other "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder), including the Option Payment, to or for your benefit, the receipt of which is contingent on a Change of Control and to which Section 280G of the Code applies. 9 John B. Furman ______________, 1999 Page 9 If Rural/Metro believes that these rules will result in a reduction of the payments to which you are entitled under this Agreement, it will so notify you within 60 days following delivery of the "Notice of Termination" described in Section 12. You and Rural/Metro will then, at Rural/Metro's expense, retain legal counsel, certified public accountants, and/or a firm of recognized executive compensation consultants to provide an opinion or opinions concerning whether your Total Payments exceed the limit discussed above. Rural/Metro will select the legal counsel, certified public accountants and executive compensation consultants. If you do not accept one or more of the parties selected by Rural/Metro, you may provide Rural/Metro with the names of legal counsel, certified public accountants and/or executive compensation consultants acceptable to you. If Rural/Metro does not accept the party or parties selected by you, the legal counsel, certified public accountants and/or executive compensation consultants selected by you and Rural/Metro, respectively, will select the legal counsel, certified public accountants and/or executive compensation consultants to provide the opinions required. At a minimum, the opinions required by this Section must set forth (a) the amount of your Base Period Income, (b) the present value of the Total Payments and (c) the amount and present value of any excess parachute payments. If the opinions state that there would be an excess parachute payment, your payments under this Agreement will be reduced to the extent necessary to eliminate the excess. You will be allowed to choose the payment (i.e., the Severance Payment or the Option Payment) that should be reduced or eliminated, but the payment you choose to reduce or eliminate must be a payment determined by such counsel to be includable in Total Payments. You will make your decision in writing and deliver it to Rural/Metro within 30 days of your receipt of such opinions. If you fail to so notify Rural/Metro, it will decide which payments to reduce or eliminate. If the legal counsel or certified public accountants selected to provide the opinions referred to above so requests in connection with the opinion required by this Section, a firm of recognized executive compensation consultants, selected by you and Rural/Metro pursuant to the procedures set forth above, shall provide an opinion, upon which such legal counsel or certified public accountants may rely, as to the reasonableness of any item of compensation as reasonable compensation for services rendered before or after the Change of Control. If Rural/Metro believes that your Total Payments will exceed the limitations of this Section, it will nonetheless make payments to you, at the times stated above, in the 10 John B. Furman ______________, 1999 Page 10 maximum amount that it believes may be paid without exceeding such limitations. The balance, if any, will then be paid after the opinions called for above have been received. If the amount paid to you by Rural/Metro is ultimately determined, pursuant to the opinion referred to above or by the Internal Revenue Service, to have exceeded the limitation of this Section, the excess will be treated as a loan to you by Rural/Metro and shall be repayable on the 90th day following demand by Rural/Metro, together with interest at the "applicable federal rate" provided in Section 1274(d) of the Code. In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this Section shall be of no further force or effect. The limitations of this Section 10 will not apply to you if your "Uncapped Benefit" is at least 120% of your "Capped Benefit." For this purpose, your "Uncapped Benefit" is the amount to which you will be entitled pursuant to Sections 2 and 5, as applicable, without regard to the limitations of this Section 10. Your "Capped Benefit" is the amount to which you will be entitled pursuant to Sections 2 and 5, as applicable, after the application of the limitations of this Section 10. The certified public accountant and/or executive compensation consultants selected pursuant to this Section 10 will calculate your Uncapped Benefit and your Capped Benefit. 11. TAX GROSS-UP. If the ceiling imposed by Section 10 does not apply to you because of the exception provided in the last paragraph of Section 10, Rural/Metro will provide you with a "Gross-Up Payment" if an excise tax is imposed on you pursuant to Section 4999 of the Code. Except as otherwise noted below, this Gross-Up Payment will consist of a single lump sum payment in an amount such that after payment by you of the "total presumed federal and state taxes" and the excise taxes imposed by Section 4999 of the Code on the Gross-Up Payment (and any interest or penalties actually imposed), you retain an amount of the Gross-Up Payment equal to the remaining excise taxes imposed by Section 4999 of the Code on your Total Payments (calculated before the Gross-Up Payment). For purposes of calculating your Gross-Up Payment, your actual federal and state income taxes will not be used. Instead, we will use your "total presumed federal and state taxes." For purposes of this Agreement, your "total presumed federal and state taxes" shall be conclusively calculated using a combined tax rate equal to the sum of the maximum marginal federal and applicable state income tax rates and the hospital insurance (or "HI") portion of F.I.C.A. Based on the rates in effect for 1996 for an Arizona resident, the "total presumed federal and state tax rate" is 46.65% (39.6% federal income tax rate plus 5.6% 11 John B. Furman ______________, 1999 Page 11 Arizona state income tax rate plus 1.45% HI tax rate). The state tax rate for your principal place of residence will be used and no adjustments will be made for the deduction of state taxes on the federal return, any deduction of federal taxes on a state return, the loss of itemized deductions or exemptions, or for any other purpose. All determinations concerning whether a Gross-Up Payment is required pursuant to this Section and the amount of any Gross-Up Payment (as well as any assumptions to be used in making such determinations) shall be made by the legal counsel, certified public accountants, and/or a firm of recognized executive compensation consultants (sometimes referred to collectively as "Consultant") selected pursuant to Section 10. The Consultant shall provide you and Rural/Metro with a written notice of the amount of the excise taxes that you are required to pay and the amount of the Gross-Up Payment. The notice from the Consultant shall include any necessary calculations in support of its conclusions. All fees and expenses of the Consultant shall be borne by Rural/Metro. Any Gross-Up Payment shall be made by Rural/Metro within 15 days after the mailing of such notice. As a general rule, the Consultant's determination shall be binding on you and Rural/Metro. The application of the excise tax rules of Section 4999, however, is complex and uncertain and, as a result, the Internal Revenue Service may disagree with the Consultant concerning the amount, if any, of the excise taxes that are due. If the Internal Revenue Service determines that excise taxes are due, or that the amount of the excise taxes that are due is greater than the amount determined by the Consultant, the Gross-Up Payment will be recalculated by the Consultant to reflect the actual excise taxes that you are required to pay (and any related interest and penalties). Any deficiency will then be paid to you by Rural/Metro within 15 days of the receipt of the revised calculations from the Consultant. If the Internal Revenue Service determines that the amount of excise taxes that you paid exceeds the amount due, you shall return the excess to Rural/Metro (along with any interest paid to you on the overpayment) immediately upon receipt from the Internal Revenue Service or other taxing authority. Rural/Metro has the right to challenge any excise tax determinations made by the Internal Revenue Service. If Rural/Metro agrees to indemnify you from any taxes, interest and penalties that may be imposed upon you (including any taxes, interest and penalties on the amounts paid pursuant to Rural/Metro's indemnification agreement), you must cooperate fully with Rural/Metro in connection with any such challenge. Rural/Metro shall bear all costs associated with the challenge of any determination made by the Internal Revenue Service and Rural/Metro shall control all such challenges. The additional Gross-Up Payments called for by the preceding paragraph shall not be made until Rural/Metro has either exhausted its (or your) 12 John B. Furman ______________, 1999 Page 12 rights to challenge the determination or indicated that it intends to concede or settle the excise tax determination. You must notify Rural/Metro in writing of any claim or determination by the Internal Revenue Service that, if upheld, would result in the payment of excise taxes in amounts different from the amount initially specified by the Consultant. Such notice shall be given as soon as possible but in no event later than 15 days following your receipt of notice of the Internal Revenue Service's position. 12. TERMINATION NOTICE AND PROCEDURE. Any termination by the Company or you of your employment shall be communicated by written Notice of Termination to you if such Notice of Termination is delivered by the Company and to the Company if such Notice of Termination is delivered by you, all in accordance with the following procedures: (a) The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination. (b) Any Notice of Termination by the Company shall be in writing signed by the Chairman of the Board of Rural/Metro, specifying in detail the basis for such termination. (c) If the Company shall furnish a Notice of Termination for Cause and you in good faith notify the Company that a dispute exists concerning such termination within the 15 day period following your receipt of such notice, you may elect to continue your employment during such dispute. If it is thereafter determined that (i) Cause did exist, your "Termination Date" shall be the earlier of (A) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to the alternative dispute resolution provisions of Section 19 or (B) the date of your death, or (ii) Cause did not exist, your employment shall continue as if the Company had not delivered its Notice of Termination and there shall be no Termination Date arising out of such notice. (d) If the Company shall furnish a Notice of Termination by reason of Disability and you in good faith notify the Company that a dispute exists concerning such termination within the 15-day period following your receipt of such notice, you may elect to continue your employment during such dispute. The dispute relating to the existence of a 13 John B. Furman ______________, 1999 Page 13 Disability shall be resolved by the opinion of the licensed physician selected by Rural/Metro; provided, however, that if you do not accept the opinion of the licensed physician selected by Rural/Metro, the dispute shall be resolved by the opinion of a licensed physician who shall be selected by you; provided further, however, that if Rural/Metro does not accept the opinion of the licensed physician selected by you, the dispute shall be finally resolved by the opinion of a licensed physician selected by the licensed physicians selected by Rural/Metro and you, respectively. If it is thereafter determined that (i) a Disability did exist, your Termination Date shall be the earlier of (A) the date on which the dispute is resolved or (B) the date of your death, or (ii) a Disability did not exist, your employment shall continue as if the Company had not delivered its Notice of Termination and there shall be no Termination Date arising out of such notice. For purposes of this Agreement, "Disability" shall be given the meaning ascribed to such term in your Employment Agreement at the time the Disability determination is being made. If there is no Employment Agreement that defines "Disability", "Disability" shall mean your inability to perform your customary duties for the Company due to a physical or mental condition that is considered to be of long-lasting or indefinite duration. (e) If you in good faith furnish a Notice of Termination for Good Reason and the Company notifies you that a dispute exists concerning the termination within the 15 day period following the Company's receipt of such notice, you may elect to continue your employment during such dispute. If it is thereafter determined that (i) Good Reason did exist, your Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to the alternative dispute resolution provisions of Section 19, (B) the date of your death or (C) one day prior to the second anniversary of a Change of Control, and your payments hereunder shall reflect events occurring after you delivered Notice of Termination; or (ii) Good Reason did not exist, your employment shall continue after such determination as if you had not delivered the Notice of Termination asserting Good Reason. (f) If you do not elect to continue employment pending resolution of a dispute regarding a Notice of Termination, and it is finally determined that the reason for termination set forth in such Notice of Termination did not exist, if such notice was delivered by you, you shall be deemed to have voluntarily terminated your employment other than for Good Reason and if delivered by the Company, the Company will be deemed to have terminated you other than by reason of Disability or Cause. (g) For purposes of this Agreement, a transfer from Rural/Metro to one of its subsidiaries or a transfer from a subsidiary to Rural/Metro or another subsidiary shall not be treated as a termination of employment. 14 John B. Furman ______________, 1999 Page 14 13. SUCCESSORS. Rural/Metro will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Rural/Metro or any of its subsidiaries to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Rural/Metro or any subsidiary would be required to perform it if no such succession had taken place. Failure of Rural/Metro to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, "Rural/Metro" shall mean Rural/Metro as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 14. BINDING AGREEMENT. This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 15. NOTICE. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to Rural/Metro shall be directed to the attention of the Chairman of the Board of Rural/Metro with a copy to the Secretary of Rural/Metro, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 16. MISCELLANEOUS. 15 John B. Furman ______________, 1999 Page 15 No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and the Chairman of the Board of Rural/Metro. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Arizona without regard to its conflicts of law principles. All references to sections of the Securities Exchange Act of 1934 or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company that arise prior to the expiration of this Agreement shall survive the expiration of the term of this Agreement. 17. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. ALTERNATIVE DISPUTE RESOLUTION. All claims, disputes and other matters in question between the parties arising under this Agreement shall, unless otherwise provided herein (such as in Sections 10 and 12(d)), be resolved in accordance with the arbitration or alternative dispute resolution provisions included in your Employment Agreement. If no written Employment Agreement is in effect at the time of your termination of employment, or, if the Employment Agreement in effect at the time of your termination of employment does not include arbitration or alternative dispute resolution provisions, all claims, disputes and other matters in question between the parties arising under this Agreement shall be decided by arbitration in Phoenix, Arizona, in accordance 16 John B. Furman ______________, 1999 Page 16 with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (including such procedures governing selection of the specific arbitrator or arbitrators), unless the parties mutually agree otherwise. The Company shall pay the costs of any such arbitration. The award by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any state or Federal court having jurisdiction thereof. 20. EXPENSES AND INTEREST. If a good faith dispute shall arise with respect to the enforcement of your rights under this Agreement or if any arbitration or legal proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof, and you are the prevailing party, you shall recover from the Company any reasonable attorneys' fees and necessary costs and disbursements incurred as a result of such dispute or legal proceeding, and prejudgment interest on any money judgment obtained by you calculated at the rate of interest announced by Bank One, Arizona, NA from time to time as its prime rate from the date that payments to you should have been made under this Agreement. It is expressly provided that the Company shall in no event recover from you any attorneys' fees, costs, disbursements or interest as a result of any dispute or legal proceeding involving the Company and you. 21. PAYMENT OBLIGATIONS ABSOLUTE. Rural/Metro's obligation to pay you the compensation and to make the arrangements in accordance with the provisions herein shall be absolute and unconditional and shall not be affected by any circumstances; provided, however, that Rural/Metro may apply amounts payable under this Agreement to any debts owed to the Rural/Metro by you on your Termination Date. All amounts payable by Rural/Metro in accordance with this Agreement shall be paid without notice or demand. If Rural/Metro has paid you more than the amount to which you are entitled under this Agreement, Rural/Metro shall have the right to recover all or any part of such overpayment from you or from whomsoever has received such amount. 22. EFFECT ON EMPLOYMENT AGREEMENT. This Agreement supplements, and does not replace, your Employment Agreement, as it may be amended or replaced from time to time (the "Employment Agreement"). You will be entitled to receive all amounts due to you pursuant to your Employment Agreement, but some payments under your Employment Agreement may reduce your Severance Payments as provided in Section 3, and benefits due pursuant to your Employment Agreement may reduce the 17 John B. Furman ______________, 1999 Page 17 benefits due pursuant to Section 5. In addition, payments under your Employment Agreement may, in some limited circumstances, be considered as part of your Total Payment and result in a reduction in payments as provided in Section 10. If there is any conflict between the provisions of this Agreement and your Employment Agreement, the provisions of this Agreement shall control. 23. ENTIRE AGREEMENT. This Agreement and your Employment Agreement set forth the entire agreement between you and the Company concerning the subject matter discussed in this Agreement and supersede all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether written or oral, by any officer, employee or representative of the Company. Any prior agreements or understandings with respect to the subject matter set forth in this Agreement are hereby terminated and canceled. 24. DEFERRAL OF PAYMENTS. To the extent that any payment under this Agreement, when combined with all other payments received during the year that are subject to the limitations on deductibility under Section 162(m) of the Code, exceeds the limitations on deductibility under Section 162(m) of the Code, such payment shall, in the discretion of Rural/Metro, be deferred to the next succeeding calendar year. Such deferred amounts shall be paid no later than the 60th day after the end of such next succeeding calendar year, provided that such payment, when combined with any other payments subject to the Section 162(m) limitations received during the year, does not exceed the limitations on deductibility under Section 162(m) of the Code. 25. PARTIES. This Agreement is an agreement between you and Rural/Metro. In certain cases, though, obligations imposed upon Rural/Metro may be satisfied by a Rural/Metro subsidiary. Any payment made or action taken by a Rural/Metro subsidiary shall be considered to be a payment made or action taken by Rural/Metro for purposes of determining whether Rural/Metro has satisfied its obligations under this Agreement. If you would like to participate in this special benefits program, please sign and return the extra copy of this letter which is enclosed. 18 John B. Furman ______________, 1999 Page 18 Sincerely, -------------------------------- Cor Clement Chairman, Board of Directors Enclosure 19 John B. Furman ______________, 1999 Page 19 ACCEPTANCE ---------- I hereby accept the offer to participate in this special benefit program and I agree to be bound by all of the provisions noted above. ---------------------------------- John B. Furman EX-10.16(I) 4 EX-10.16(I) 1 Exhibit 10.16(i) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the date set forth below, by and between Rural/Metro Corporation, its subsidiaries, affiliates, joint ventures and partnerships ("Rural/Metro") and Jack Brucker ("Executive"). The Effective Date of this Agreement is October 1, 1999. RECITALS A. The Board of Directors of Rural/Metro believes it is in the best interests of Rural/Metro to continue to employ Executive as Senior Vice President and Chief Operating Officer. 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 Senior Vice President and Chief Operating Officer 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. The duties may change from time to time but initially will include, but not be limited to, the following: - Oversee all operational functions corporate-wide, - Improve the efficiency and quality of the growing mix of services by providing oversight to current staff throughout the organization. 2 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. 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. From the Effective Date of this Agreement through December 31, 1999, Executive's semimonthly salary will continue to be based on his current annual compensation of Two Hundred Fifty Thousand Dollars ($250,000.00). Beginning January 1, 2000, Executive's semimonthly salary will be based on annual compensation of Two Hundred Eighty Thousand Dollars ($280,000.00). Thereafter, the salary will be reviewed at least annually in accordance with Rural/Metro's executive compensation review policies and practices, all as determined by Rural/Metro, in its sole discretion. 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. Nothing in this Agreement is intended to alter or modify the Stock Option Agreements or the Change of Control Agreement previously entered into by the parties, which shall continue in full force and effect following the execution of this Agreement. 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 "Initial Term" or any "Renewal Term." The "Initial Term" of this Agreement begins on the Effective Date and shall expire by its terms on September 30, 2001, unless sooner terminated in accordance with the provisions of this Agreement. This Agreement will be renewed at the end of the Initial Term for additional one-year periods commencing on each October 1 and ending on the following September 30 (a "Renewal Term"), unless either party serves notice of its desire not to renew or of its desire to modify this Agreement on the other. Such notice must be given at least thirty (30) days before the end of the Initial Term or the applicable Renewal Term. If Rural/Metro notifies Executive of its desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Rural/Metro does not have "Cause" to terminate this Agreement pursuant to paragraph 6A, Executive shall be entitled to receive Severance Benefits pursuant to paragraph 9. If Executive notifies Rural/Metro of his desire not to renew this Agreement pursuant to this paragraph 5 and at the time of such notification Executive has Good Reason to terminate this 3 4 Agreement pursuant to paragraph 7A, Executive shall be entitled to receive Severance Benefits pursuant to paragraph 9. Executive also shall be entitled to receive Severance Benefits pursuant to paragraph 9 if Rural/Metro proposes to modify this Agreement pursuant to this paragraph 5 in a manner that gives rise to Good Reason pursuant to paragraph 7A for Executive's termination of employment and Executive rejects such proposed modifications. Severance Benefits will not be payable pursuant to the preceding sentence if Rural/Metro rescinds the proposed modifications and offers Executive a new agreement that does not include any proposed modifications that give rise to Good Reason for Executive's termination of employment. 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 or failed to act, which, if he were prosecuted and convicted, would constitute a felony involving 4 5 $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. 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. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executives access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice to Executive. 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 mutually agreed to in writing by Executive and Rural/Metro, of Executive's receipt of notice of the occurrence of any event constituting "Good Reason," as described below. 5 6 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; (b) Executive is required to relocate to an employment location that is more than 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 ten percent (10%) less than the salary paid to Executive during any prior calendar year, unless Executive has agreed to said reduction or unless an equal or greater reduction applies to all executives of the same and higher level; or (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 any prior year. 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. C. Administrative Leave. Rural/Metro may place Executive on a paid administrative leave, and bar or restrict Executive's access to Rural/Metro facilities, contemporaneously with or at any time following the delivery of the written notice of termination by Executive pursuant to paragraph 7A or 7B. 6 7 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 six (6) months from the date as of which Executive is determined to have become Disabled, 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 Executive is unable, after any reasonable accommodations required by the Americans with Disabilities Act or any applicable state law, to perform the essential functions of his position because of a physical or mental impairment. In the absence of agreement between Rural/Metro and Executive, whether Executive is Disabled or is suffering from a Disability (and the date as of which Executive became Disabled) will be determined by a licensed physician selected by Rural/Metro. If a licensed physician selected by Executive disagrees with the determination of the physician selected by Rural/Metro, the two (2) physicians shall select a third (3rd) physician. The decision of the third (3rd) physician concerning Executive's Disability then shall be binding and conclusive on all interested parties. 7 8 9. SEVERANCE BENEFITS. If this Agreement and Executive's employment are terminated without Cause by Rural/Metro pursuant to paragraph 6B prior to the last day of the Initial Term or any Renewal Term, or if Executive elects to terminate this Agreement for Good Reason pursuant to paragraph 7A, Executive shall receive the "Severance Benefits" provided by this paragraph. To the limited extent provided in paragraph 5, Executive also shall be entitled to receive Severance Benefits if this Agreement is not renewed. In addition, Executive shall be entitled to receive Severance Benefits if his employment is terminated due to Disability pursuant to paragraph 8. The Severance Benefits shall begin immediately following termination of employment and will continue to be payable until the latest of (a) the last day of the Initial Term or the then current Renewal Term, as the case may be; or (b) for twelve (12) months. 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 Initial Term or any Renewal Term, or if Rural/Metro terminates the Agreement and Executive's employment for Cause, no Severance Benefits shall be paid to 8 9 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 alter receiving said notice. 10. BENEFITS; OPTIONS. 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 will be eligible to participate in the Company's Stock Option Plan. This plan entails the granting of options to buy Rural/Metro Common Stock at the fair market value at the date of grant (generally granted at the August Board of Director's meeting). The grant of options is made at the discretion of the Board of Directors. 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. 9 10 11. CONFIDENTIALITY 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, operational budgets and strategies, methods of operation, customer lists, strategic plans, business plans, marketing plans and strategies, new business strategies, merger and acquisition strategies, management systems programs, computer systems, personnel and compensation information and payroll data, and other such reports, documents or information (collectively the "Confidential and Proprietary Information"). Executive promises that he will not make or retain any copies of such Confidential and Proprietary Information in any form, format or manner whatsoever (including computer print-outs, computer tapes, floppy disks, CD-ROMs, etc.) nor will he use or 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. 12. COVENANT-NOT-TO-COMPETE. A. Interests to be Protected. The parties acknowledge that prior to and during the term of his employment, Executive has been and will continue to 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, 10 11 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. 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 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. 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 11 12 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. 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 and for whatever reason, 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 client(s) of Rural/Metro with whom he has worked as an employee of Rural/Metro at any time prior to termination, or at the time of termination, for the purpose of soliciting or selling such customer the same, similar, or related services that he provided on behalf of Rural/Metro. This non-solicitation provision applies even if Executive is terminated by Rural/Metro due to the cessation of operations in any geographical service area where he was employed prior to termination, or at the time of termination. 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 12 13 with Rural/Metro, regardless of who initiates the termination and for any reason, 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, seek to hire, and/or hire any of Rural/Metro's personnel or employees for the purpose of having such employee engage in services that are the same, similar or related to the services that such employee provided for Rural/Metro. 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 and for any reason, 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, engage in the same or similar business as Rural/Metro, which would be in direct competition with any Rural/Metro line of business, in any geographical service area where Rural/Metro is engaged in business, or was considering engaging in business at any time prior to the termination or at time of termination. For the purposes of this provision, the term "competition" shall mean directly or indirectly engaging in or having a substantial interest in a business or operation which has been, is, or will be, performing the same services provided by Rural/Metro. F. Judicial Amendment. If the scope of any provision of this Agreement is found by the Court or arbitrator 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 or arbitrator in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. 13 14 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. H. Survival. The provisions of this paragraph shall survive the termination of this Agreement. 13. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Change of Control Agreement and any Stock Option Agreements constitute the entire agreement between the parties as to the subject matters dealt with in such Agreements. Accordingly, there are no side agreements or verbal agreements other than those which are stated in this document or in the Change of Control Agreement or any Stock Option 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, 14 15 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. 17. DISPUTE RESOLUTION. A. Mediation. Any and all disputes arising under, pertaining to or touching upon this Agreement 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 17D. Notwithstanding the foregoing, both Executive and Rural/Metro may seek preliminary judicial relief if such action is necessary to avoid irreparable damage during the pendency of the proceedings described in this paragraph 17. 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. 15 16 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 17D. The mediator shall not serve as arbitrator. ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, BREACH OF CONTRACT OR POLICY, OR 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 the policy is consistent with this Agreement and the Federal Arbitration Act, 9 U.S.C. Section Section 1-16. If no such policy has been adopted, the arbitration shall be governed by the National Rules for the Resolution of Employment Disputes of AAA in effect on the date of the first notice of demand for arbitration. 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 discrimination claims prohibited by statute, the arbitrator may direct payment consistent with the applicable statute. In cases of employment tort, the arbitrator may award 16 17 punitive damages if proved by clear and convincing evidence. 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. Section Section 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 the AAA. 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 AAA. Executive shall have the first strike. IN WITNESS WHEREOF, Rural/Metro and Executive have executed this Agreement on this 20th day of October, 1999. RURAL/METRO CORPORATION By: /s/ JOHN B. FURMAN ----------------------------- Title: President --------------------------- JACK BRUCKER /s/ JACK BRUCKER ---------------------------------- 17 EX-27 5 EX-27
5 THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE. 1,000 US DOLLARS 3-MOS JUN-30-1999 JUL-01-1999 SEP-30-1999 1 4,721 0 230,764 34,794 17,461 230,052 178,211 82,543 586,873 73,199 281,936 0 0 149 198,914 586,873 141,200 141,200 0 111,209 0 20,410 5,436 4,165 1,740 2,425 0 0 541 1,884 0.13 0.13
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