Amendment #2 to Form 10-K

10-K/A 1 d10ka.htm AMENDMENT #2 TO FORM 10-K Amendment #2 to Form 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 2)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2003

Commission file number 0-22056

Rural/Metro Corporation

(Exact name of registrant as specified in its charter)

Delaware

86-0746929

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8401 East Indian School Road, Scottsdale, Arizona 85251

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (480) 606-3886

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

Preferred Stock Purchase Rights

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

As of December 31, 2002, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sales price of such stock as of such date on the Nasdaq SmallCap Market, was $33,247,400. Shares of Common Stock held by each officer and director and by each person who owned 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive.

As of February 6, 2004, there were 16,739,330 shares of the registrant’s Common Stock outstanding.

Rural/Metro Corporation hereby amends Items 6-8 of Part II to its Annual Report on Form 10-K for the year ended June 30, 2003. In addition to amending Items 6-8 in regard to the earnings per share calculation matter described below under the heading “Restatement of Consolidated Financial Statements,” this Report on Form 10-K/A (this “amendment”) also amends Items 9 and 9A. This amendment does not provide updating information with respect to Items 6-8 except as to the earnings per share calculation matter described below. We provide regular updating information through our normal periodic reporting process under the Securities Exchange Act of 1934, as amended.

Restatement of Consolidated Financial Statements

We identified certain accounting matters relating to our consolidated financial statements for years prior to 2003 that required restatement. The matters subject to the restatement, which are summarized below and discussed in Note 2 to the consolidated financial statements, increased our accumulated deficit by $59.3 million at June 30, 2000 after consideration of the related income tax effects. The restatement adjustments were necessary to (i) adjust the provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in prior years and to reduce our accounts receivable balance through March 31, 2003, and (ii) to defer enrollment fees charged to new subscribers under our fire protection service contracts and to recognize such fees over the estimated customer relationship period.

During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.

In addition to the above, effective September 27, 2002 we sold our Latin American operations to local management. The results of our Latin American operations have been included in discontinued operations for the periods presented.

As described in Note 2 to our consolidated financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date (subject to approval by our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.

ITEM 6.

Selected Financial Data

The following selected financial data for fiscal years 2003, 2002 and 2001 has been derived from our audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes appearing elsewhere in this Report. The selected financial data set forth for fiscal years 1999 and 2000 has been derived from our unaudited consolidated financial statements.


	Years Ended June 30,
	2003			2002			2001			2000			1999
	As Restated ⁽¹⁾
	(in thousands, except per share data)
Statement of Operations Data
Net revenue	$	520,477		$	488,980		$	479,414		$	509,057		$	497,705

Operating expenses
Payroll and employee benefits		284,021			269,123			271,976			293,161			264,409
Provision for doubtful accounts		85,046			77,725			86,876			103,311			101,482
Depreciation and amortization		13,289			16,267			25,741			30,299			30,971
Other operating expenses		113,535			103,280			131,889			118,173			92,592
Asset impairment charges⁽²⁾		—			—			48,050			—			—
Contract termination costs and related asset impairment⁽²⁾		—			(107	)		9,256			—			—
Restructuring charge and other⁽²⁾		(1,421	)		(718	)		9,091			32,864			2,500

Operating income (loss)		26,007			23,410			(103,465	)		(68,751	)		5,751
Interest expense		(28,012	)		(25,462	)		(30,624	)		(25,938	)		(21,054	)
Interest income		197			644			642			596			92
Other income (expense), net		146			8			(4,053	)		—			—

Loss from continuing operations before income taxes, minority interest, extraordinary loss and cumulative effect of change in accounting principle		(1,662	)		(1,400	)		(137,500	)		(94,093	)		(15,211	)
Income tax (provision) benefit		(197	)		2,520			(1,137	)		33,756			(8,225	)
Minority interest		(1,507	)		(750	)		705			1,907			(2,298	)

Income (loss) from continuing operations before extraordinary loss and cumulative effect of change in accounting principle		(3,366	)		370			(137,932	)		(58,430	)		(25,734	)
Income (loss) from discontinued operations ⁽²⁾ ⁽³⁾		12,332			979			(67,358	)		(2,066	)		4,143

Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		8,966			1,349			(205,290	)		(60,496	)		(21,591	)
Extraordinary loss on expropriation of Canadian ambulance service licenses⁽⁴⁾		—			—			—			(1,200	)		—
Cumulative effect of change in accounting principle ⁽⁵⁾		—			(49,513	)		—			(541	)		—

Net income (loss)		8,966			(48,164	)		(205,290	)		(62,237	)		(21,591	)
Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method ⁽⁶⁾		(804	)		—			—			—			—
Less: Accretion of redeemable nonconvertible participating preferred stock		(3,604	)		—			—			—			—

Net income (loss) applicable to common stock	$	4,558		$	(48,164	)	$	(205,290	)	$	(62,237	)	$	(21,591	)


	Years Ended June 30,
	2003			2002			2001			2000			1999
	As Restated ⁽¹⁾
	(in thousands, except per share data)
Basic earnings per share:
Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting principle	$	(0.42	)	$	0.02		$	(9.35	)	$	(4.00	)	$	(1.78	)
Income (loss) from discontinued operations applicable to common stock ⁽³⁾		0.70			0.07			(4.57	)		(0.15	)		0.29

Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		0.28			0.09			(13.92	)		(4.15	)		(1.49	)
Extraordinary loss on expropriation of Canadian ambulance service licenses ⁽⁴⁾		—			—			—			(0.08	)		—
Cumulative effect of change in accounting principle ⁽⁵⁾		—			(3.26	)		—			(0.04	)		—

Net income (loss)	$	0.28		$	(3.17	)	$	(13.92	)	$	(4.27	)	$	(1.49	)

Diluted earnings per share:
Income (loss) from continuing operations applicable to common stock before extraordinary loss and cumulative effect of change in accounting principle	$	(0.42	)	$	0.02		$	(9.35	)	$	(4.00	)	$	(1.78	)
Income (loss) from discontinued operations applicable to common stock ⁽³⁾		0.70			0.07			(4.57	)		(0.15	)		0.29

Income (loss) before extraordinary loss and cumulative effect of change in accounting principle		0.28			0.09			(13.92	)		(4.15	)		(1.49	)
Extraordinary loss on expropriation of Canadian ambulance service licenses ⁽⁴⁾		—			—			—			(0.08	)		—
Cumulative effect of change in accounting principle ⁽⁵⁾		—			(3.14	)		—			(0.04	)		—

Net income (loss)	$	0.28		$	(3.05	)	$	(13.92	)	$	(4.27	)	$	(1.49	)

Weighted average number of common shares outstanding:
Basic		16,116			15,190			14,744			14,592			14,447

Diluted		16,116			15,773			14,744			14,592			14,447


	Years Ended June 30,
	2003			2002			2001			2000			1999
	As Restated ⁽¹⁾
	(in thousands)
Balance Sheet Data
Total assets	$	196,166		$	200,708		$	264,006		$	435,414		$	485,847
Current portion of long-term debt ⁽⁷⁾		1,329			1,633			294,439			299,104			5,765
Long-term debt, net of current portion ⁽⁷⁾		305,310			298,529			1,286			2,850			268,560
Series B redeemable nonconvertible participating preferred stock		7,793			—			—			—			—
Stockholders’ equity (deficit)		(208,874	)		(205,752	)		(168,419	)		36,257			98,469
Cash Flow Data
Cash flow provided by (used in) operating activities		13,146			9,634			6,710			(8,537	)		18,670
Cash flow provided by (used in) investing activities		(7,582	)		(5,832	)		(3,805	)		(13,640	)		(36,647	)
Cash flow provided by (used in) financing activities		(3,659	)		(3,170	)		(6,339	)		25,996			20,807

⁽¹⁾	We have restated our consolidated financial statements for the following:

Accounts Receivable: As described in Note 2 to our consolidated financial statements, we determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the aggregate amounts of provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused our period-end allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable to be overstated. We determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.

We determined that our consolidated financial statements for years prior to 2003 required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers has been reflected as a reduction of net revenue in the respective periods while the portion relating to uncollectible accounts has been reflected as an adjustment to the provision for doubtful accounts in the respective periods. The after-tax effect of the related restatement adjustments increased our accumulated deficit as of June 30, 1998 by $60.0 million.

Enrollment Fees: We charge an enrollment fee for new subscribers under our fire protection service contracts. We previously recognized these enrollment fees at the time of billing but have subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.

We determined that our consolidated financial statements for years prior to 2003 required restatement as a result of this matter. The after-tax effect of the related restatement adjustments increased our deferred revenue and accumulated deficit as of June 30, 1998 by $1.3 million. The effect of the restatement adjustments on our operating income (loss) in fiscal 2002, 2001, 2000 and 1999 was immaterial.

San Diego Medical Services Enterprises, LLC: During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC (SDMSE), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE

should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.

Earnings Per Share: As described in Note 2 to our consolidated financial statements, we have restated our earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of our Series B redeemable nonconvertible participating preferred stock. The Series B shares, which we may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date, (subject to approval by our shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.

A summary of the statement of operations and balance sheet data impacted by the restatement adjustments, the accounting change and the reclassification of discontinued operations is provided on the following page. Our historical cash flow data was not impacted by the restatements. See Note 2, Restatement of consolidated financial statements in our Consolidated Financial Statements included elsewhere in this report.


	As Previously Reported			Restatement Adjustments									As Restated			Accounting Change (D)		Less Latin American Operations			As Reported
	As Previously Reported			A			B			C			As Restated			Accounting Change (D)		Less Latin American Operations			As Reported
Year ended June 30, 2003:	(in thousands, except per share amounts)
Loss from continuing operations	$	(3,366	)	$	—		$	—		$	—		$	(3,366	)	$	—	$	—		$	(3,366	)
Net income		8,966			—			—			—			8,966			—		—			8,966
Basic loss from continuing operations applicable to common stock per share	$	(0.44	)		—			—		$	0.02		$	(0.42	)		—		—		$	(0.42	)
Basic income per share	$	0.33			—			—		$	(0.05	)	$	0.28			—		—		$	0.28
Diluted loss from continuing operations applicable to common stock per share	$	(0.44	)		—			—		$	0.02		$	(0.42	)		—		—		$	(0.42	)
Diluted income per share	$	0.33			—			—		$	(0.05	)	$	0.28			—		—		$	0.28
Year ended June 30, 2002:
Net revenue	$	497,038		$	(1,669	)	$	—		$	—		$	495,369		$	19,005	$	(25,394	)	$	488,980
Provision for doubtful accounts		69,900			871			—			—			70,771			7,109		(155	)		77,725
Operating income		26,806			(2,540	)		—			—			24,266			732		(1,588	)		23,410
Income from continuing operations before cumulative effect of change in accounting principle		3,889			(2,540	)		—			—			1,349			—		(979	)		370
Net loss		(45,624	)		(2,540	)		—			—			(48,164	)		—		—			(48,164	)
Basic income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per share	$	0.26		$	(0.17	)	$	—		$	—		$	0.09		$	—	$	(0.07	)	$	0.02
Basic loss per share	$	(3.00	)	$	(0.17	)	$	—		$	—		$	(3.17	)	$	—	$	—		$	(3.17	)
Diluted income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per share	$	0.25		$	(0.17	)	$	—		$	—		$	0.08		$	—	$	(0.06	)	$	0.02
Diluted loss per share	$	(2.89	)	$	(0.16	)	$	—		$	—		$	(3.05	)	$	—	$	—		$	(3.05	)
At June 30, 2002:
Total assets	$	237,438		$	(39,147	)	$	—		$	—		$	198,291		$	2,417	$	—		$	200,708
Deferred revenue		15,409			—			1,286			—			16,695			—		—			16,695
Accumulated deficit		(313,025	)		(39,147	)		(1,286	)		—			(353,458	)		—		—			(353,458	)
Year ended June 30, 2001:
Net revenue	$	504,316		$	—		$	—		$	—		$	504,316		$	18,187	$	(43,089	)	$	479,414
Provision for doubtful accounts		102,470			(21,441	)		—			—			81,029			7,274		(1,427	)		86,876
Operating loss		(192,453	)		21,441			—			—			(171,012	)		840		66,707			(103,465	)
Loss from continuing operations		(226,731	)		21,441			—			—			(205,290	)		—		67,358			(137,932	)
Net loss		(226,731	)		21,441			—			—			(205,290	)		—		—			(205,290	)
Basic loss from continuing operations applicable to common stock per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	4.57		$	(9.35	)
Basic loss per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	—		$	(13.92	)
Diluted loss from continuing operations applicable to common stock per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	4.57		$	(9.35	)
Diluted loss per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	—		$	(13.92	)
At June 30, 2001:
Total assets	$	298,534		$	(36,607	)	$	—		$	—		$	261,927		$	2,079	$	—		$	264,006
Deferred revenue		14,707			—			1,286			—			15,993			—		—			15,993
Accumulated deficit		(267,401	)		(36,607	)		(1,286	)		—			(305,294	)		—		—			(305,294	)
Year ended June 30, 2000:
Net revenue	$	570,074		$	(22,621	)	$	—		$	—		$	547,453		$	14,211	$	(52,607	)	$	509,057
Provision for doubtful accounts		160,623			(61,657	)		—			—			98,966			6,942		(2,597	)		103,311
Operating loss		(109,320	)		39,036			—			—			(70,284	)		922		611			(68,751	)
Loss from continuing operations		(99,532	)		39,036			—			—			(60,496	)		—		2,066			(58,430	)
Net loss		(101,273	)		39,036			—			—			(62,237	)		—		—			(62,237	)
Basic loss from continuing operations applicable to common stock per share	$	(6.82	)	$	2.67		$	—		$	—		$	(4.15	)	$	—	$	0.15		$	(4.00	)
Basic loss per share	$	(6.94	)	$	2.67		$	—		$	—		$	(4.27	)	$	—	$	—		$	(4.27	)
Diluted loss from continuing operations applicable to common stock per share	$	(6.94	)	$	2.67		$	—		$	—		$	(4.27	)	$	—	$	0.15		$	(4.00	)
Diluted loss per share	$	(6.94	)	$	2.67		$	—		$	—		$	(4.27	)	$	—	$	—		$	(4.27	)
At June 30, 2000:
Total assets	$	491,217		$	(58,048	)	$	—		$	—		$	433,169		$	2,245	$	—		$	435,414
Deferred revenue		14,989			—			1,286			—			16,275			—		—			16,275
Accumulated deficit		(40,670	)		(58,048	)		(1,286	)		—			(100,004	)		—		—			(100,004	)
Year ended June 30, 1999:
Net revenue	$	561,366		$	(23,336	)	$	—		$	—		$	538,030		$	14,164	$	(63,018	)	$	489,176
Provision for doubtful accounts		81,227			13,719			—			—			94,946			7,001		(465	)		101,482
Operating income		48,171			(37,055	)		—			—			11,116			2,240		(7,595	)		5,761
Income (loss) from continuing operations		15,464			(37,055	)		—			—			(21,591	)		—		(4,143	)		(25,734	)
Net income (loss)		15,464			(37,055	)		—			—			(21,591	)		—		—			(21,591	)
Basic income (loss) from continuing operations applicable to common stock per share	$	1.07		$	(2.56	)	$	—		$	—		$	(1.49	)	$	—	$	(0.29	)	$	(1.78	)
Basic income (loss) per share	$	1.07		$	(2.56	)	$	—		$	—		$	(1.49	)	$	—	$	—		$	(1.49	)
Diluted income (loss) from continuing operations applicable to common stock per share	$	1.07		$	(2.56	)	$	—		$	—		$	(1.49	)	$	—	$	(0.29	)	$	(1.78	)
Diluted income (loss) per share	$	1.07		$	(2.56	)	$	—		$	—		$	(1.49	)	$	—	$	—		$	(1.49	)
At June 30, 1999:
Total assets	$	579,907		$	(97,084	)	$	—		$	—		$	482,823		$	3,024	$	—		$	485,847
Deferred revenue		14,909			—			1,286			—			16,195			—		—			16,195
Retained earnings (accumulated deficit)		60,603			(97,084	)		(1,286	)		—			(37,767	)		—		—			(37,767	)

Restatement Adjustments:

A	To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payers and doubtful accounts.

B	To defer enrollment fees relating to new fire protection service contracts.

C	To calculate earnings per share using the two-class method.

D	Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.

(2)

During the year ended June 30, 2001, the Company recorded asset impairments, restructuring and other charges totaling $122.1 million, including $46.3 million relating to its Latin American operations which were disposed of in September 2002. See Note 5, Asset Impairments, Restructuring and Other Charges (Credits), in our consolidated financial statements. During the year ended June 30, 2000, the Company recorded restructuring charges totaling $32.9 million relating to its decision to exit certain underperforming service areas.

(3)

Effective September 27, 2002, the Company sold its Latin American operations to local management in exchange for the assumption of such operations’ net liabilities. The gain on the disposition totaled $12.5 million. For financial reporting purposes, the Company’s former Latin American operations have been classified as discontinued operations. See Note 4, Disposition of Latin American Operations in our consolidated financial statements.

(4)

During the year ended June 30, 2000, we recorded an extraordinary loss on the expropriation of Canadian ambulance service licenses of approximately $1.2 million (net of $0 of income taxes). We received approximately $2.2 million from the Ontario Ministry of Health as compensation for the loss of license and incurred costs and wrote-off assets, mainly goodwill, totaling $3.4 million.

(5)

Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS 142). In connection with the adoption of SFAS 142, the Company discontinued amortizing its goodwill effective July 1, 2001. Additionally, the Company recognized an approximate $49.5 million transitional impairment charge (both before and after tax), which has been reflected as the cumulative effect of change in accounting principle in fiscal 2002. See Note 7, Goodwill, in our consolidated financial statements.

Effective July 1, 1999, the Company changed its method of accounting for start-up costs, including organization costs. In connection with that change, the Company wrote-off $0.9 million of previously capitalized organization costs ($0.5 million after tax benefits) and classified such charge as the cumulative effect of change in accounting principle in 2000.

(6)

(7)

Our current liabilities exceeded our current assets at June 30, 2001 and 2000 as a result of the classification of amounts outstanding under our revolving credit facility and our 7 7/8% Senior Notes due 2008 (Senior Notes) as current liabilities. Such classification resulted from the fact that we were not in compliance with certain of the covenants contained in our revolving credit agreement and because of the related provisions contained in the agreement relating to our Senior Notes. Amounts outstanding under our revolving credit facility and our Senior Notes were classified as long-term liabilities as of June 30, 2003 and 2002 as a result of amendments to our credit facility the most recent of which became effective September 26, 2003. Such amendments waived previous covenant violations and extended the maturity date of the credit facility from March 16, 2003 to December 31, 2006. See Note 12, Long-Term Debt, in our consolidated financial statements.

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Selected Financial Data and our Consolidated Financial Statements and notes appearing elsewhere in this Report.

Restatement of Consolidated Financial Statements

We have restated our consolidated financial statements for the following:

Accounts Receivable

As described in Note 2 to our consolidated financial statement, we determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the aggregate amount of provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused our period-end allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable to be overstated. We determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.

We determined that our consolidated financial statements of prior years required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers has been reflected as a reduction of net revenue in the respective periods while the portion relating to uncollectible accounts has been reflected as an adjustment to the provision for doubtful accounts in the respective periods. The after-tax effect of the related restatement adjustments increased our accumulated deficit as of June 30, 2000 by $58.0 million.

The restatement adjustments relating to medical transportation accounts receivable outlined above caused us to violate the minimum tangible net worth covenant contained in our 2002 Amended Credit Facility. This situation also resulted in a delay in the filing of our Quarterly Report on Form 10-Q for the three months ended March 31, 2003. Such delay caused us to not be in compliance with the financial reporting covenants contained in our 2002 Amended Credit Facility as well as the indenture relating to the Senior Notes. As described in Note 12 to our consolidated financial statements, we negotiated a further amendment to our credit facility effective September 30, 2003. As a result of that amendment, all previous instances of non-compliance were permanently waived. See “Liquidity and Capital Resources”.

Enrollment Fees

We charge an enrollment fee for new subscribers under our fire protection service contracts. We previously recognized these fees at the time of billing but have subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.

We determined that our consolidated financial statements of prior years required restatement as a result of this matter. The after-tax effect of the related restatement adjustments increased our deferred revenue and accumulated deficit as of June 30, 2000 by $1.3 million. The effect of the restatement adjustments on our operating income (loss) in fiscal 2002 and 2001 was immaterial.

San Diego Medical Services Enterprise LLC

During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.

Disposal of Latin American Operations

Due to deteriorating economic conditions and the continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of such operation’s net liabilities. The gain on the disposition of our Latin American operations totaled $12.5 million and is included in income from discontinued operations for the year ended June 30, 2003. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including accounts receivable of $0.6 million and accrued liabilities of $4.8 million) as well as the recognition of related cumulative translation adjustments of $10.1 million.

Earnings Per Share

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 (emergency ambulance services) and non-emergency transport services (general transport services) to patients on both a fee-for-service and nonrefundable subscription fee basis. Per transport revenue depends on various factors, including the mix of rates between existing markets and new markets and the mix of activity between emergency ambulance services and non-emergency transport services as well as other competitive factors. Fire protection services are provided either under contracts with municipalities, fire districts or other agencies or on a nonrefundable subscription fee basis to individual homeowners or commercial property owners.

Because of the nature of our ambulance services, it is necessary to respond to a number of calls, primarily emergency ambulance service calls, which may not result in transports. Results of operations are discussed below on the basis of actual transports because transports are more directly related to revenue. Expenses associated with calls that do not result in transports are included in operating expenses. The percentage of calls not resulting in transports varies substantially depending upon the mix of non-emergency ambulance and emergency ambulance service calls in individual markets and is generally higher in service areas in which the calls are primarily emergency ambulance service calls. Rates in our markets take into account the anticipated number of calls that may not result in transports. We do not separately account for expenses associated with calls that do not result in transports.

Critical Accounting Estimates and Judgments

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of our financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, general liability and workers’ compensation claim reserves. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the

circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following accounting policies as critical to our business operations and the understanding of our results of operations. The impact of these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. The discussion below is not intended to be a comprehensive list of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 to our consolidated financial statements, which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.

Medical Transportation and Revenue Recognition — Ambulance and alternative transportation service fees are recognized when services are provided and are recorded net of discounts applicable to Medicare, Medicaid, and other third-party payers. Because of the length of the collection cycle with respect to ambulance and alternative transportation service fees, it is necessary to estimate the amount of these discounts at the time revenue is recognized. Discounts are estimated based on historical collection data, historical write-off activity and current relationships with payers, within each service area. Estimated discounts are translated into a percentage of gross revenue, which is applied to calculate the provision. If the historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, revenue could be overstated or understated. Discounts applicable to Medicare, Medicaid and other third-party payers, which are reflected as a reduction of medical transportation revenue, totaled $160.0 million, $148.2 million and $145.9 million for the years ended June 30, 2003, 2002 and 2001, respectively.

Provision for Doubtful Accounts for Medical Transportation Revenue — Ambulance and alternative transportation service fees are billed to various payer sources. As discussed above, discounts applicable to Medicare, Medicaid and other third-party payers are recorded as reductions of gross revenue. We also estimate provisions related to the potential uncollectibility of amounts billed to other payers based on historical collection data and historical write-off activity within each service area. The provision for doubtful accounts percentage that is applied to ambulance and alternative transportation service fee revenue is calculated as the difference between the total expected collection percentage less percentages applied for discounts applicable to Medicare, Medicaid and other third-party payers described above. If historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, the provision for doubtful accounts may be overstated or understated. The provision for doubtful accounts on ambulance and alternative transportation service revenue totaled $84.9 million, $77.7 million and $82.1 million for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.

Workers’ Compensation Reserves — Beginning May 1, 2002, we purchased corporate-wide workers’ compensation insurance policies, for which we pay premiums that can be adjusted upward or downward at certain intervals based upon a retrospective review of incurred losses. Each of these annual policies covers all workers’ compensation claims made by employees of our domestic subsidiaries. Under such policies, we have no obligation to pay any deductible amounts on claims occurring during the policy period. Accordingly, provisions for workers’ compensation expense for claims arising on and after May 1, 2002 are reflective of premium costs only. Prior to May 1, 2002, our workers’ compensation policies included a deductible obligation with no aggregate limit. Claims relating to these policy years remain outstanding. Claim provisions were estimated based on historical claims data and the ultimate projected value of those claims. For claims occurring prior to May 1, 2002, our third-party administrator established initial estimates at the time a claim was reported and periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the determination of our workers’ compensation claims reserves. If the ultimate development of these claims is significantly different than has been estimated, the related reserves for workers’ compensation claims could be overstated or understated. Reserves related to workers’ compensation claims totaled $11.3 million and $15.9 million at June 30, 2003 and 2002, respectively.

General Liability Reserves — We are subject to litigation arising in the ordinary course of our business. In order to minimize the risk of our exposure, we maintain certain levels of coverage for comprehensive general liability, automobile liability, and professional liability. These policies currently are, and historically have been, underwritten on a deductible basis. Provisions are made to record the cost of premiums as well as that portion of the claims that is our responsibility. Our third-party administrator establishes initial estimates at the time a claim is reported and

periodically reviews the development of the claim to confirm that the estimates are adequate. We engage independent actuaries to assist us in the determination of our general liability claim reserves. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $13.9 million and $15.4 million at June 30, 2003 and 2002, respectively.

Asset Impairment — We review our property and equipment for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable, by comparing the carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted cash flows are less than the related carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved.

Our goodwill balances are reviewed annually (and interim periods if events or circumstances indicate that the related carrying amount may be impaired). Goodwill impairment is reviewed using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

Results of Operations

The following table sets forth certain items from our consolidated statement of operations expressed as a percentage of net revenue for fiscal years 2003, 2002, and 2001:


	Years Ended June 30,
	2003		2002		2001
			*(As Restated)**
Net revenue	100.0	%	100.0	%	100.0	%
Operating expenses:
Payroll and employee benefits	54.6		55.0		56.7
Provision for doubtful accounts	16.3		15.9		18.1
Depreciation and amortization	2.5		3.3		5.4
Other operating expenses	21.8		21.1		27.5
Asset impairment charges	—		—		10.0
Contract termination costs and related asset impairment charges	—		—		1.9
Restructuring and other	(0.2	)	(0.1	)	1.9

Operating income (loss)	5.0		4.8		(21.5	)
Interest expense	(5.4	)	(5.2	)	(6.4	)
Interest income	0.0		0.1		0.1
Other income (expense), net	0.0		0.0		(0.8	)

Loss from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle	(0.4	)	(0.3	)	(28.6	)
Income tax (provision) benefit	0.0		0.5		(0.2	)
Minority interest	(0.3	)	(0.1	)	(0.1	)

Loss from continuing operations before cumulative effect of change in accounting principle	(0.7	)	0.1		(28.7	)
Income (loss) from discontinued operations	2.4		0.2		(14.1	)

Income (loss) before cumulative effect of change in accounting principle	1.7		0.3		(42.8	)
Cumulative effect of a change in accounting principle	—		(10.1	)	—

Net income (loss)	1.7	%	(9.8	)%	(42.8	)%

* - Refer to Note 2 of our consolidated financial statements.

Year Ended June 30, 2003 Compared To Year Ended June 30, 2002

Net Revenue

Net revenue increased approximately $31.5 million, or 6.4%, from $489.0 million for the year ended June 30, 2002 to $520.5 million for the year ended June 30, 2003.

Medical Transportation and Related Services — Medical transportation and related service revenue increased $25.2 million, or 6.0% from $416.9 million for the year ended June 30, 2002 to $442.1 million for the year ended June 30, 2003. This increase is primarily comprised of a $28.0 million increase in same service area revenue attributable to rate increases, call screening and other factors. Additionally, there was a $3.3 million increase in revenue related to two new 911 contracts that began during fiscal 2003 offset by an $2.0 million decrease related to the loss of the 911 contract in Arlington, Texas and a $4.2 million decrease related to service areas which were closed in fiscal 2002.

Total transports, including alternative transportation, decreased 45,000 or 3.6% from 1,267,000 (1,122,000 ambulance and 145,000 alternative transportation) for the year ended June 30, 2002 to 1,222,000 (1,122,000

ambulance and 100,000 alternative transportation) for the year ended June 30, 2003. Transports in areas that we served in both fiscal 2003 and 2002 decreased by approximately 34,000 transports. Additionally, there was an increase of 6,000 transports related to two 911 contracts that began during the fiscal 2003 offset by a 4,000 transport decrease related to the loss of the 911 contract in Arlington and a 13,000 transport decrease related to service areas which were closed in fiscal 2002.

Fire and Other — Fire protection services revenue increased by $5.0 million, or 7.9%, from $63.4 million for the year ended June 30, 2002 to $68.4 million for the year ended June 30, 2003. Fire protection services revenue increased primarily due to rate and utilization increases in our subscription fire programs of $2.6 million, rate increases on existing contracts and additional fire contracts of $1.5 million and a $0.7 million increase in wild land fire services revenue. We experienced a particularly active wildfire season in the fiscal year ended June 30, 2003.

Other revenue increased by $1.3 million, or 14.9%, from $8.7 million for the year ended June 30, 2002 to $10.0 million for the year ended June 30, 2003. Other revenue changes relate to changes in revenues from dispatch, fleet, billing, training and home health care services.

Operating Expenses

Payroll and Employee Benefits — Payroll and employee benefits expenses increased $14.9 million, or 5.2%, from $269.1 million for the year ended June 30, 2002 to $284.0 million for the year ended June 30, 2003 but remained consistent as a percentage of net revenue between years. The increase is primarily related to increased health insurance costs of $2.5 million primarily due to increased health insurance claims, increased workers compensation expense of $2.4 million related to increased insurance rates and general wage increases. We expect that our labor costs will continue to increase.

The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue has remained relatively consistent with the prior year. The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue was 19.2% for the year ended June 30, 2003 and 18.6% for the year ended June 30, 2002. The increase in the provision for doubtful accounts as a percentage of ambulance and alternative transportation revenue relates to the changes in the mix of the relationship between Medicare, Medicaid and other third-party payer discounts and doubtful accounts.

A summary of activity in our allowance for doubtful accounts during the fiscal years ended June 30, 2003 and 2002 is as follows (in thousands):


	June 30,
	2003			2002
				*(As Restated)**
Balance at beginning of year	$	37,966		$	60,812
Provision for doubtful accounts – Domestic		85,046			77,725
Provision for doubtful accounts - Latin America		—			155
Write-offs related to doubtful accounts		(74,590	)		(100,726	)

Balance at end of year	$	48,422		$	37,966

*	Refer to Note 2, of our consolidated financial statements.

Depreciation and Amortization — Depreciation and amortization decreased $3.0 million, or 18.4%, from $16.3 million for the year ended June 30, 2002 to $13.3 million for the year ended June 30, 2003, primarily due to assets

becoming fully depreciated. Depreciation and amortization decreased from 3.3% of net revenue for the year ended June 30, 2002 to approximately 2.5% of total revenue for the year ended June 30, 2003.

Restructuring and Other — Fiscal 2003 includes the reversal of restructuring charges of $1.4 million originally recorded in fiscal 2001. The restructuring charge recorded in fiscal 2001 included $1.5 million for severance, lease termination and other costs relating to an under performing service area that we had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, we reversed $0.2 million of previously accrued lease termination costs relating to the extension period, which was reflected as a credit to restructuring and other in the consolidated statement of operations for fiscal 2002. The operating environment in this service area improved, and in November 2002 we were awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million was released to income during fiscal 2003. In addition to this reversal, several other individually insignificant adjustments were made to prior restructuring charges in fiscal 2003.

A summary of activity in the restructuring reserve, which is included in accrued liabilities in the consolidated balance sheet, is as follows:


	Severance Costs			Lease Termination Costs			Other Exit Costs			Total
Balance at June 30, 2001	$	1,834		$	3,234		$	1,101		$	6,169
Fiscal 2002 usage		(1,025	)		(1,172	)		(951	)		(3,148	)
Adjustments		(52	)		(548	)		(118	)		(718	)

Balance at June 30, 2002		757			1,514			32			2,303
Fiscal 2003 usage		(29	)		(207	)		(71	)		(307	)
Adjustments		(718	)		(732	)		39			(1,421	)

Balance at June 30, 2003	$	—		$	575		$	—		$	575

The restructuring reserve as of June 30, 2003 relates to lease termination costs for which payments will be made through December 2006.

Interest Expense — Interest expense increased by approximately $2.5 million, or 9.8%, from $25.5 million for the year ended June 30, 2002 to $28.0 million for the year ended June 30, 2003. This increase was primarily due to increased interest rates resulting from the renegotiation of our credit facility in September 2002. Amortization of deferred financing costs totaled $2.0 million for the year ended June 30, 2003 compared to $0.7 million for the year ended June 30, 2002. See further discussion of the 2002 Amended Credit Facility in “Liquidity and Capital Resources.”

Interest Income — Interest income decreased $0.4 million or 66.7% from $0.6 million for the year end June 30, 2002 to $0.2 million for the year ended June 30, 2003. The year ended June 30, 2002 included $0.5 million of income received in conjunction with an income tax refund.

Income Taxes — We recorded an income tax provision of $0.2 million in 2003 compared to an income tax benefit of $2.5 million in 2002. The income tax benefit in 2002 resulted from federal income tax refunds of $0.6 million resulting from legislation that allowed us to carry back a portion of our net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition had been deferred until receipt. We did

not recognize the future income tax benefits attributable to our domestic net operating losses in either 2003 or 2002 as it is more likely than not that the related benefits will not be realized.

Income (Loss) From Discontinued Operations — Due to deteriorating economic conditions and the continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net liabilities. The gain on the disposition of our Latin American operations totaled $12.5 million and is included in income from discontinued operations for the year ended June 30, 2003. Medical transportation and related service revenue related to our Latin American operations totaled $2.1 million and $23.9 million for the years ended June 30, 2003 and 2002, respectively. Fire and Other revenue related to our Latin American operations totaled $0.3 million and $1.5 million for the years ended June 30, 2003, and 2002 respectively. Our Latin American operations generated a net loss of $156,000 through September 27, 2002 and net income of $1.0 million for the year ended June 30, 2002.

Cumulative Effect of Change in Accounting Principle — We adopted the new rules on accounting for goodwill and other intangible assets effective July 1, 2001. Under the transitional provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we performed impairment tests on the net goodwill and other intangible assets associated with each of our reporting units with the assistance of independent valuation experts and determined that a transitional goodwill impairment charge of $49.5 million, both before and after tax, was required. The impairment charge primarily related to our domestic medical transportation and related services segment. See Note 7 of our consolidated financial statements for further discussion of the effect of the adoption of this accounting principle.

Year Ended June 30, 2002 Compared To Year Ended June 30, 2001

Net Revenue

Net revenue increased $9.6 million, or 2.0%, from $479.4 million for the year ended June 30, 2001 to $489.0 million for the year ended June 30, 2002.

Medical Transportation and Related Services — Medical transportation and related service revenue increased $8.7 million, or 2.1%, from $408.2 million for the year ended June 30, 2001 to $416.9 million for the year ended June 30, 2002. This increase is comprised of a $23.5 million increase in same service area revenue attributable to rate increases, call screening and other factors. Additionally, there was a $2.6 million increase in revenue related to a 911 contract that began during the second quarter of fiscal 2001 offset by an $8.5 million decrease related to the loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska and a $9.6 million decrease related to the closure of service areas in fiscal 2000 and fiscal 2001.

Total domestic transports, including alternative transportation, decreased 66,000, or 5.0%, from 1,333,000 (1,172,000 ambulance and 161,000 alternative transportation) for the year ended June 30, 2001 to 1,267,000 (1,222,000 ambulance and 145,000 alternative transportation) for the year ended June 30, 2002. The loss of 911 contracts in Arlington, Texas and Lincoln, Nebraska accounted for a decrease of approximately 19,000 transports. The closure of service areas in fiscal 2000 and 2001 accounted for a decrease of approximately 32,000 transports. Transports in areas that we served in both the year ended June 30, 2002 and 2001 decreased by approximately 18,000 transports. These decreases were offset by an increase of approximately 3,000 transports related to a 911 contract that began during the second quarter of fiscal 2001.

Fire and Other — Fire protection services revenue increased by $3.0 million, or 5.0%, from $60.4 million for the year ended June 30, 2001 to $63.4 million for the year ended June 30, 2002. Fire protection services revenue increased primarily due to rate and utilization increases in our subscription fire programs of $2.1 million, increased contracting activity by our specialty fire protection group of $766,000 and a $620,000 increase in wild land fire services revenue. We experienced a particularly active wildfire season in the latter part of fiscal 2002.

Other Revenue — Other revenue decreased by $2.1 million, or 19.4%, from $10.8 million for the year ended June 30, 2001 to $8.7 million for the year ended June 30, 2002. The decrease in other revenue results from changes in the composition of revenues from dispatch, fleet, billing, training and home health care services between years.

Operating Expenses

Payroll and Employee Benefits — Payroll and employee benefits expenses decreased $2.9 million, or 1.1%, from $272.0 million for the year ended June 30, 2001 to $269.1 million for the year ended June 30, 2002. Payroll and employee benefits decreased from 56.7% of net revenue for the year ended June 30, 2001 to 55.0% of net revenue for the year ended June 30, 2002. This decrease is primarily attributable to the net impact of payroll and benefit increases resulting from contract renegotiations, service area expansions and wage rate increases ($19.5 million) offset by the impact of prior-year service area closures ($8.3 million), and the absence in 2002 of prior-year increases in health insurance reserves ($5.4 million) and accrued paid-time-off ($3.0 million).

Provision for Doubtful Accounts — The provision for doubtful accounts includes provision for ambulance and alternative transportation service revenue as well as non-transport related revenue. The provision for doubtful accounts decreased $9.2 million, or 10.6%, from $86.9 million, or 18.1% of net revenue, for the year ended June 30, 2001 to $77.7 million, or 15.9% of net revenue, for the year ended June 30, 2002. The provision for the year ended June 30, 2001 included an additional $4.8 million provision related to management’s decision to reserve all outstanding non-transport receivables in excess of 90 days.

The provision for doubtful accounts as a percentage of ambulance and alternative transportation service revenue was 18.6% for the year ended June 30, 2002 and 20.1% for the year ended June 30, 2001. The decrease is reflective of the closure of underperforming operations and increases in collection rates in the remaining service areas. During fiscal 2002, we continued to focus on improving the quality of our revenue by reducing the amount of un-reimbursed non-emergency ambulance and alternative transportation transports in selected service areas as well as on previously implemented initiatives to maximize the collection of our accounts receivable.

A summary of activity in our allowance for doubtful accounts during the fiscal years ended June 30, 2002 and 2001 is as follows (in thousands):


	June 30,
	2002			2001
	*(As Restated)**
Balance at beginning of year	$	60,812		$	88,120
Provision for doubtful accounts - Domestic		77,725			86,876
Provision for doubtful accounts - Latin America		155			1,427
Write-offs related to doubtful accounts		(100,726	)		(115,611	)

Balance at end of year	$	37,966		$	60,812

*	Refer to Note 2, of our consolidated financial statements.

Depreciation and Amortization — Depreciation and amortization decreased $9.4 million, or 36.6%, from $25.7 million for the year ended June 30, 2001 to $16.3 million for the year ended June 30, 2002. We discontinued amortizing goodwill in accordance with our adoption of SFAS No. 142, effective July 1, 2001. As a result, amortization of intangibles decreased $4.6 million to $1.1 million for the year ended June 30, 2002. Approximately, $1.0 million of the amortization recorded in the year ended June 30, 2002 relates to an adjustment in the estimated lives of certain other intangible assets acquired in previous business combinations. Amortization is expected to decline as these assets reach the end of their estimated lives. See related discussion of the effect of the adoption of SFAS No. 142 below. In addition, there was a decrease in depreciation expense of $4.8 million primarily due to asset write-offs during the fourth quarter of fiscal 2001, the disposal of certain assets related to closed operations and a decrease in capital expenditures. Depreciation and amortization decreased from 5.4% of net revenue for the year ended June 30, 2001 to 3.3% of net revenue for the year ended June 30, 2002.

Other Operating Expenses — Other operating expenses consist primarily of rent and related occupancy expenses, vehicle and equipment maintenance and repairs, insurance, fuel and supplies, travel, and professional fees. Other operating expenses decreased $28.6 million, or 21.7%, from $131.9 million for the year ended June 30, 2001 to $103.3 million for the year ended June 30, 2002. Approximately $13.8 million of the decrease relates to charges taken in the fourth quarter of fiscal 2001, including $8.4 million of inventory adjustments as described below, $1.3 million related to a Medicare audit settlement, $1.0 million related to the write-off of amounts owed to us by a former owner and $3.1 million for several adjustments to certain estimates for prepaid expenses, accrued liabilities and other items that were resolved in the fourth quarter of fiscal 2001. Additionally, the year ended June 30, 2001 included a charge of $15.0 million recorded for additional general liability reserves related to increases in reserves for reported claims as well as to establish reserves for claims incurred but not reported as described below. Closure of service areas in fiscal 2000 and 2001, as well as the loss of the 911 contracts in Arlington, Texas and Lincoln, Nebraska, account for $3.1 million of the decrease. Other operating expenses decreased from 27.5% of net revenue for the year ended June 30, 2001 to 21.1% for fiscal 2002.

Effective January 1, 2001, we refined our methodology for determining reserves related to general liability claims. The changing environment with respect to the rising cost of claims as well as the cost of litigation prompted a comprehensive review by management of detailed information from external advisors, historical settlement information and analysis of open claims. The new method more closely approximates the potential outcome of each open claim as well as costs related to the administration of these claims. Additionally, reserves were established for unreported claims based on historical occurrences of claims filed subsequent to the end of the policy year. For financial reporting purposes, this change was treated as a change in accounting estimate.

Medical, fleet, and fire supplies are maintained in a central warehouse, numerous regional warehouses, and multiple stations, lockers, and vehicles. A physical inventory of all locations at June 30, 2001 revealed a shortage from recorded levels. Shrinkage, obsolescence, and supplies lost due to closures accounted for most of the shortage. To reduce the recorded inventory to the actual physical count, an adjustment of approximately $8.4 million was recorded as a component of other operating expenses in fiscal 2001.

Asset Impairment Charges — In connection with the budgeting process for the fiscal year ended June 30, 2002, which was completed in the fourth quarter of fiscal 2001, we analyzed each cost center within our various service areas not identified for closure or downsizing to determine whether the associated long-lived assets (e.g., property, equipment and goodwill) would be recoverable from future operating cash flows. Cost centers represent individual operating units within a given service area for which separately identifiable cash flow information is available. We performed this analysis as a result of our expectations of a challenging health care reimbursement environment as well as anticipated increases in labor and insurance costs with respect to our ambulance operations. This analysis considered the results of operations over the past year as well as the Centers for Medicare and Medicaid Services’ (CMS) failure to implement the ambulance fee schedule as of January 1, 2001. The analysis with respect to our Argentine operations included the impact of the deteriorating economic and political environment as well as information developed by a third party concerning the marketability of these operations during fiscal 2001.

In order to assess recoverability, we estimated the related net future cash flows for each cost center and then compared the resulting undiscounted amounts to the carrying value of each cost center’s long-lived assets (e.g., property and equipment and goodwill). It should be noted that property and equipment balances are specifically identified with each cost center. Additionally, goodwill is specifically identified with each cost center at the time of acquisition and, therefore, related allocations were not necessary for purposes of performing the impairment analysis.

For those cost centers where estimated future net cash flows on an undiscounted basis were less than the related carrying amounts of the long-lived assets, an asset impairment was considered to exist. We measured the amount of the asset impairment for each such cost center by discounting the estimated future net cash flows using a discount rate of 18.5% and comparing the resulting amount to the carrying value of its long-lived assets. Based upon this analysis, we determined that asset impairment charges approximating $94.4 million were required for cost centers within our domestic and Argentine ambulance operations. The asset impairments were charged directly against the related asset balances. A summary of the related charge is as follows:


	Goodwill		Property, Equipment and Other		Total
	(in thousands)
Domestic ambulance operations	$	41,631	$	6,419	$	48,050
Argentine ambulance operations		44,327		1,976		46,303

Total	$	85,958	$	8,395	$	94,353

As a result of the sale of our Latin American operations in September 2002, the asset impairment charge related to our Argentine ambulance operations is included in the loss from discontinued operations for the year ended June 30, 2001. Effective July 1, 2001 we changed our method of accounting for goodwill including the manner in which goodwill impairments are assessed. See discussion of Cumulative Effect of Change in Accounting Principle.

Contract Termination Costs and Related Asset Impairment — In November 2000, we learned that our exclusive 911 contract in Lincoln, Nebraska would not be renewed effective December 31, 2000 and in connection therewith, we recorded a contract termination charge of $5.2 million. This charge included asset impairments for related goodwill and equipment totaling $4.3 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1995), $0.8 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease terminations and other exit costs. The Lincoln contract generated net revenue of $4.7 million, operating income of $0.4 million and cash flow of $0.5 million in fiscal 2000, its last full year of operations.

In May 2001, we learned that our exclusive 911 contract in Arlington, Texas would not be renewed effective September 30, 2001 and in connection therewith, we recorded a contract termination charge of $4.1 million. This charge included asset impairments for related goodwill and equipment of $3.9 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1997), $0.1 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease termination and other exit costs. The Arlington contract generated revenue of $8.3 million, operating income of $0.1 million and cash flow of $0.5 million in fiscal 2001, its last full year of operations.

Restructuring and Other — During the fourth quarter of the fiscal year ended June 30, 2001, we decided to close or downsize nine service areas and in connection therewith, recorded restructuring and other charges totaling $9.1 million. These charges included $1.5 million to cover severance costs associated with the termination of approximately 250 employees, lease termination costs of $2.4 million, asset impairment charges for goodwill of $4.1 million and other exit costs of $1.1 million, respectively, related to the impacted service areas. The service areas selected for closure or downsizing generated net revenue of $17.7 million, operating losses of $4.0 million and negative cash flow of $3.2 million for the fiscal year ended June 30, 2001.

The previously mentioned charge included accrued severance, lease termination and other costs totaling $1.5 million relating to an under performing service area that we had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, we reversed $0.2 million of previously accrued lease termination costs relating to the extension period to income in fiscal 2002. In addition to this reversal, several other individually insignificant adjustments were made to the restructuring charges of prior years.

A summary of activity in the restructuring reserve, which is included in accrued liabilities in the consolidated balance sheets, is as follows (in thousands):


	Severance Costs			Lease Termination Costs			Write-Off of Intangible Assets			Other Exit Costs			Total
Balance at June 30, 2000	$	3,529		$	3,247		$	—		$	1,356		$	8,132
Fiscal 2001 charge		1,475			2,371			4,092			1,153			9,091
Fiscal 2001 usage		(4,531	)		(1,071	)		(4,092	)		(1,360	)		(11,054	)
Adjustments		1,361			(1,313	)		—			(48	)		—

Balance at June 30, 2001		1,834			3,234			—			1,101			6,169
Fiscal 2002 usage		(1,025	)		(1,172	)		—			(951	)		(3,148	)
Adjustments		(52	)		(548	)		—			(118	)		(718	)

Balance at June 30, 2002	$	757		$	1,514		$	—		$	32		$	2,303

Interest Expense — Interest expense decreased by $5.1 million, or 16.7%, from $30.6 million for the year ended June 30, 2001 to $25.5 million for the year ended June 30, 2002. This decrease was primarily caused by lower rates on the revolving credit facility as well as lower average debt balances.

Other Income (Expense), Net — Other income (expense), net increased $4.0 million from the year ended June 30, 2001 to the year ended June 30, 2002. Other expense in fiscal 2001 included a $4.0 million charge relating to the purchase of the minority interest of a joint venture partner in one of our ambulance operations. A description of this transaction is included in Note 8 to our consolidated financial statements.

Income Taxes — We recognized an income tax benefit of $2.5 million in 2002 compared with an income tax provision of $1.1 million in 2001. The income tax benefit in 2002 resulted from federal income tax refunds of $0.6 million resulting from recently enacted legislation that allowed us to carry back a portion of our net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition was deferred until receipt. We did not recognize the future income tax benefits attributable to our domestic net operating losses in 2002 and 2001 as it is more likely than not that the related benefits will not be realized.

Income (Loss) From Discontinued Operations — Due to deteriorating economic conditions and continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management in exchange for the assumption of net liabilities. Medical transportation and related service revenue related to our Latin American operations totaled $23.9 million and $41.9 million for the years ended June 30, 2002 and 2001, respectively. Fire and other revenue related to our Latin American operations totaled $1.5 million and $1.2 million for the years ended June 30, 2002 and 2001, respectively. Our Latin American operations generated net income of $1.0 million for the year ended June 30, 2002 and a net loss of $67.4 million for the year ended June 30, 2001. The net loss in 2001 included $46.3 million of asset impairment charges and $8.5 million of other operating expenses related to asset write-offs and reserve adjustments as a result of account reconciliations of our various Argentine subsidiaries. Additionally, we sold our Argentine clinic operations in fiscal 2001 in exchange for a $3.0 million in non-interest bearing note receivable. The note, which required monthly principal payments of $25,000 through April 2011, was included in the disposition of our Latin American operations effective September 27, 2002. The sale resulted in a loss on disposal of $9.4 million, including the write-off of $9.3 million of related goodwill. The clinic operations generated revenue of $4.0 million, operating losses of $1.5 million, and negative cash flow of $0.9 million during fiscal 2001.

Cumulative Effect of Change in Accounting Principle — We adopted new rules on accounting for goodwill and other intangible assets effective July 1, 2001. Under the transitional provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we performed impairment tests on the net goodwill and other intangible assets associated with each of our reporting units with the assistance of independent valuation experts and determined that a transitional goodwill impairment charge of $49.5 million both before and after taxes, was required. The impairment charge primarily related to our medical transportation and related services segment. See Note 7 of our consolidated financial statements for further discussion of the effect of the adoption of this accounting principle.

Liquidity and Capital Resources

During fiscal 2003, we reported net income of $9.0 million compared with net losses of $48.2 million in fiscal 2002 and $205.3 million in 2001. Net income for the year ended June 30, 2003 included a $12.5 million gain on the disposal of our Latin American operations. The net loss in fiscal 2002 included a charge of $49.5 million relating to our adoption of SFAS 142 effective July 1, 2002. The net loss in fiscal 2001 included asset impairment, restructuring and other similar charges totaling $122.0 million. Cash provided by operating activities totaled $13.1 million in fiscal 2003, $9.6 million in 2002 and $6.7 million in fiscal 2001.

At June 30, 2003, we had cash of $12.6 million, total debt of $306.6 million and a stockholders’ deficit of $208.9 million. Our total debt at June 30, 2003 included $149.9 million of our 7 7/8% Senior Notes due 2008, $152.4 million outstanding under our 2002 Amended Credit Facility due December 31, 2004, $3.7 million payable to a former joint venture partner and $0.6 million of capital lease obligations.

As discussed in Note 12 to our consolidated financial statements, we were not in compliance with certain of the covenants contained in our credit facility at June 30, 2002. On September 30, 2002, we entered into the 2002 Amended Credit Facility with our lenders which, among other things, extended the maturity date of the facility from March 16, 2003 to December 31, 2004, waived previous non-compliance, and required the issuance to the lenders of 211,549 shares of our Series B redeemable nonconvertible participating preferred stock.

As also discussed in Note 12 to our consolidated financial statements, we violated certain financial and reporting covenants as a result of the restatement of our financial statements. On September 26, 2003, we entered into the 2003 Amended Credit Facility with our lenders which, among other things, extended the maturity date of the facility from December 31, 2004 to December 31, 2006, waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of our Series C redeemable nonconvertible participating preferred stock.

Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which is subject to, among other things, our future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash balances will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through June 30, 2004. To the extent that actual results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.

Historically, we have financed our cash requirements principally through cash flow from operating activities, term and revolving indebtedness, capital equipment lease financing, the issuance of Senior Notes, the sale of common stock through an initial public offering in July 1993 and subsequent public stock offerings in May 1994 and April 1996, and the exercise of stock options.

During the year ended June 30, 2003, cash flow provided by operating activities was $13.1 million and resulted primarily from net income of $9.0 million, the provision for doubtful accounts of $85.0 million and non-cash depreciation and amortization expense of $13.3 million offset by an increase in accounts receivable of $81.6 million, and a non-cash gain on the disposition of our Latin American operations of $13.7 million. Cash flow provided by operating activities was $9.6 million for the year ended June 30, 2002.

Cash used in investing activities was $7.6 million for the year ended June 30, 2003 due primarily to capital expenditures of $9.4 million offset by proceeds from the sale of property and equipment of $1.8 million. Cash used in investing activities was $5.8 million for the year ended June 30, 2002, due to capital expenditures of $6.9 million offset by proceeds from the sale of property and equipment of $1.0 million.

Cash used in financing activities was $3.7 million for the year ended June 30, 2003, primarily due to repayments of debt and capital lease obligations and cash paid for debt issuance costs. Cash used in financing activities was $3.2 million for the year ended June 30, 2002.

Accounts receivable, net of the allowance for doubtful accounts, was $60.4 million and $64.5 million as of June 30, 2003 and 2002, respectively with the decrease in net accounts receivable is primarily due to improved billing and collections processes.

The allowance for doubtful accounts increased from approximately $38.0 million at June 30, 2002 to approximately $48.4 million at June 30, 2003. The primary reason for this increase is the current period provision for doubtful accounts offset by the write-off of uncollectible receivables. The increase is also reflective of the mix of receivables outstanding at the end of the period. We have instituted several initiatives to improve our collection procedures. While management believes that we have a predictable method of determining the realizable value of our accounts receivable, based on continuing difficulties in the healthcare reimbursement environment, there can be no assurance that there will not be additional future write-offs.

We had working capital of $2.6 million at June 30, 2003, including cash of $12.6 million compared to a working capital deficiency of $10.7 million, including cash of $10.7 million at June 30, 2002. The improvement in working capital is primarily due to the $16.0 million decrease in accrued liabilities which is related to a decrease in accrued interest due to the conversion of accrued interest to amounts outstanding under our credit facility as a result of the September 30, 2002 amendment described below as well as assumption of $6.0 million of liabilities by the buyer of our Latin American operations.

In March 1998, we entered into a $200 million revolving credit facility that was originally scheduled to mature on March 16, 2003. The credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly-owned current and future subsidiaries. Interest rates and availability under the credit facility depended on us meeting certain financial covenants.

In December 1999, we were not in compliance with certain of the covenants contained in the original credit facility. We received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required us to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required us to make unscheduled principal payments totaling $5.2 million.

Effective September 30, 2002, we entered into an amended credit facility with our lenders pursuant to which, among other things, prior identified covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7%, and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million (the “2002 Amended Credit Facility”). Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with our business levels and outlook at that time. In consideration for the amendment, we paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of our Series B redeemable nonconvertible participating preferred stock. The Series B shares are not convertible by the holder but we may elect to settle the Series B shares by issuance of common shares equivalent to 10% of the common shares outstanding at the date of the amendment on a fully diluted basis, as defined in the related agreement. Conversion of the Series B shares occurs upon notice from us; however, because a sufficient number of common shares are not currently available to permit conversion, we intend to seek stockholder approval to amend our certificate of incorporation to authorize additional common shares.

The 2002 Amended Credit Facility was not considered to represent a significant modification for financial reporting purposes. As a result, the $1.2 million amendment fee plus the estimated fair value of the Series B shares at the time of issuance of $4.2 million were capitalized as debt issue costs and are being amortized over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment totalling $1.6 million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled $3.6 million at June 30, 2003.

As a result of the previously mentioned restatement of our consolidated financial statements and the related increase in our stockholders’ deficit, we were not in compliance with the minimum tangible net worth covenant

contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of our Form 10-Q for the quarter ended March 31, 2003, thereby causing us to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.

We entered into an amended credit facility, dated September 26, 2003, with our lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 2002 amendment were revised to levels consistent with our current business levels and outlook (the “2003 Amended Credit Facility”). The revised financial covenants include: total debt leverage ratio (initially set at 6.88); minimum tangible net worth (initially set at $280.0 million deficit); fixed charge coverage ratio (initially set at 1.10); a limitation on annual capital expenditures (initially set at $11.0 million per fiscal year); and, a limitation on annual operating lease expense equivalent to 3.10% of consolidated net revenue. The compliance levels for the first four covenants outlined above are set at varying levels as specified in the related agreement. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.

In consideration for the amendment, we paid certain of the lenders amendment fees totalling $0.5 million and issued certain of the lenders 283,979 shares of our Series C redeemable nonconvertible participating preferred stock. The Series C shares are not convertible by the holder but we may elect to settle the Series C shares by issuance of common shares equivalent to 11% of the common shares outstanding on a fully diluted basis, as defined in the related agreement. Conversion of the Series C shares occurs upon notice from us; however, because a sufficient number of common shares are not currently available to permit conversion, we intend to seek stockholder approval to amend our certificate of incorporation to authorize additional common shares. We also made a $1.0 million principal payment related to asset sale proceeds as required under the September 30, 2002 amendment to the credit facility.

The 2003 Amended Credit Facility is not considered to represent a substantial modification for financial reporting purposes. As a result, the $0.5 million amendment fee and the estimated fair value of the Series C shares will be capitalized as debt issue costs and amortized to interest expense over the term of the amended agreement. Professional fees and other related costs incurred in connection with the amendment will be expensed.

At June 30, 2003, the weighted average interest rate on credit facility borrowings was approximately 8.4%. At June 30, 2003, there was $152.4 million outstanding on the credit facility as well as $3.5 million in letters of credit issued under the credit facility.

In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008 (the Senior Notes) under Rule 144A under the Securities Act of 1933, as amended (Securities Act). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. We incurred expenses related to the offering of approximately $5.3 million and are amortizing such costs over the term of the Senior Notes. In April 1998, we filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration became effective on May 14, 1998. The Senior Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of our domestic wholly owned current and future subsidiaries. The Senior Notes contain certain covenants that, among other items, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.

As noted above, we have amended our credit facility effective September 30, 2003 through December 31, 2006. If we fail to remain in compliance with financial and other covenants set forth in the agreement, we will be in default under our revolving credit facility or the agreement for the Senior Notes or both. A default under the Senior Notes or our revolving credit facility may, among other things, cause all amounts owed by us under such facilities to become due immediately upon such default. Any inability to resolve a violation through waivers or other means could have a material adverse effect on our business, financial condition, results of operations and cash flows.

There can be no assurance that we will not incur significant unanticipated liabilities. Similarly, there can be no assurance that we will be able to obtain additional debt or equity financing on terms satisfactory to us, or at all, should cash flow from operations and our existing cash resources prove to be inadequate. As discussed above, although we have negotiated an amendment and extension of our credit facility, we will not have access to additional

borrowings under such facility. If we are required to seek additional financing, any such arrangement may involve material and substantial dilution to existing stockholders resulting from, among other things, issuance of equity securities or the conversion of all or a portion of our existing debt to equity. In such event, the percentage ownership of our current stockholders will be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. If we require additional financing but are unable to obtain it, our business, financial condition, results of operations and cash flows may be materially adversely affected.

Insurance Programs

Many of our operational contracts as well as laws in certain of the areas where we operate, require that we carry specified amounts of insurance coverage. Additionally, in the ordinary course of our business, we are subject to accident, injury and professional liability claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize our risk of exposure, and to comply with such legal and contractual requirements, we carry a broad range of insurance policies, including comprehensive general liability, automobile, property damage, professional, workers’ compensation, and other lines of coverage. We typically renew each of these policies annually and purchase limits of coverage at levels we believe are appropriate, taking into account historical and projected claim trends, reasonable protection of our assets and operations, and the economic conditions in the insurance market. Depending upon the specific line of coverage, the total limits of insurance maintained by us may be achieved through a combination of primary policies, excess policies and self-insurance. See “Risk Factors — Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.”

We retain certain levels of exposure with respect to our general liability and workers compensation programs and purchase coverage from third party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, we establish reserves for claims, both reported and incurred but not reported, within our level of retention based on currently available information as well as our historical claims experience. See “Risk Factors – Our reserves may prove inadequate.”

We engage third-party administrators, or TPAs, to manage claims resulting from our general liability and workers compensation programs. The TPAs establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. We periodically review the claim reserves established by the TPAs and engage independent actuaries to assist with the evaluation of the adequacy of our reserves on an annual basis. We adjust our claim reserves with an associated charge or credit to expense as new information on the underlying claims is obtained.

Since fiscal year 2000, we have experienced a substantial rise in the costs associated with our insurance program, including total premium costs, fees for TPAs to process claims, brokerage costs, risk management expenses and costs related to assurances that we can satisfy our retention obligations. These increases have primarily resulted from the overall hardening of the insurance markets, our historical claim trends, and the general increase in costs of claims and related litigation. See “Risk Factors — We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.”

General Liability: We have historically maintained insurance policies for comprehensive general liability, automobile liability and professional liability. Throughout this report, these three types of policies are referred to collectively as the “general liability policies.” These policies are typically renewed annually. If the ultimate development of these claims is significantly different than has been estimated, the reserves for general liability claims could be overstated or understated. Reserves related to general liability claims totaled $13.9 million, $15.4 million, and $19.7 million at June 30, 2003, 2002 and 2001, respectively. See “Risk Factors – Our reserves may prove inadequate.”

A summary of activity in our general liability claim reserves, which are included in accrued liabilities in the consolidated balance sheet, is as follows:


	June 30,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	15,433		$	19,715		$	3,171
Provision charged to other operating expense		4,506			2,442			22,326
Claim payments charged against the reserve		(6,004	)		(6,724	)		(5,782	)

Balance at end of year	$	13,935		$	15,433		$	19,715

We performed a comprehensive review of information related to our historical settlement information and open claims during the third quarter of fiscal 2001. As a result of this review, we recorded a charge of $15.0 million for increases in our reserves for reported claims as well as to establish reserves for claims incurred but not reported.

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Cash deposits relating to our general liability program totaled $2.9 million at June 30, 2003 of which $1.8 million is included in prepaid expenses and other and $1.1 million is included in insurance deposits. Cash deposits totaled $1.9 million at June 30, 2002 which is included in insurance deposits.

Our general liability policies corresponding with fiscal years 2001 and 2002 were issued by Legion Insurance Company (“Legion”). Legion’s obligations under such policies were reinsured by an unrelated insurance carrier that was identified and approved by us. At the time the coverage was purchased, Legion was an “A” rated insurance carrier while the reinsurer was an A++ rated carrier. Under these policies, Legion’s obligation (as well as that of its reinsurer) to pay covered losses commences once we satisfy our aggregate retention limits for the respective policy years. As of June 30, 2003, we have met our aggregate retention limit with respect to the policies corresponding to fiscal 2001 and anticipate that we will meet our aggregate retention limit for the policies corresponding to fiscal 2002. Pursuant to these policies, Legion (and its reinsurer) is obligated to fund all claim-related payments in excess of our retention limits.

On July 25, 2003, the Pennsylvania Insurance Department (the “Department”) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the “Court”). Legion’s liquidation could put our general liability insurance coverage for the previously mentioned policy years at risk; however, based upon information currently available, we believe that proceeds from Legion’s reinsurer will be directly available to pay claims in excess of our retention limits, notwithstanding the liquidation process. If the Court deems our reinsurance to be a general asset of Legion or if the reinsurer otherwise refuses to pay claims directly, then reinsurance proceeds to fund covered general liability losses in excess of our retention limits may be substantially reduced, delayed or unrecoverable. In such an event, we may be required to fund general liability losses applicable to these policy years in excess of our retention limits, to the extent that such losses are not covered by the applicable state guaranty funds. Our inability to timely obtain reinsurance or state guaranty fund coverage for general liability claims could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

Workers Compensation: We have historically maintained insurance policies for workers compensation and employer’s liability. We are required by law and by most of our operational contracts to maintain minimum statutory limits of workers compensation insurance. These policies are typically renewed annually. If the ultimate development of these claims is significantly different than has been estimated, the reserves for workers’ compensation claims could be overstated or understated. Reserves related to workers’ compensation claims totaled $11.3 million, $15.9 million and $14.9 million at June 30, 2003, 2002 and 2001, respectively. See “Risk Factors – Our reserves may prove inadequate.”

A summary of activity in our workers’ compensation claim reserves, which are also included in accrued liabilities in the consolidated balance sheet, is as follows:


	June 30,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	15,924		$	14,944		$	11,315
Provision charged to payroll and employee benefits		—			7,318			11,832
Claim payments charged against the claim reserve		(4,669	)		(6,338	)		(8,203	)

Balance at end of year	$	11,255		$	15,924		$	14,944

Effective May 1, 2002, we began fully insuring our workers compensation coverage and no longer retain any of the related obligations. We are, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a result of this change in coverage, we no longer establish reserves for claims incurred subsequent to May 1, 2002.

In connection with our restructuring activities, an increase in the volume of workers’ compensation claims was noted. Provisions charged to expense during fiscal 2002 included $2.0 million recorded in the fourth quarter to increase our claim reserves based on a review of claims experience. Provisions charged to expense during fiscal 2001 included $5.0 million in the third quarter for increases in reserves for unreported claims based on updated information received from our TPA.

Certain insurers require us to deposit cash into designated loss funds in order to fund claim payments within our retention limits. Additionally, we have also been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to our workers compensation program totaled $6.8 million at June 30, 2003 which is included in insurance deposits. Cash deposits totaled $9.2 million at June 30, 2002 of which $2.9 million is included in prepaid expenses and other and $6.3 million is included in insurance deposits.

During fiscal years 1992 through 2001, we purchased certain portions of our workers’ compensation coverage from Reliance Insurance Company (Reliance). At the time we purchased such coverage, Reliance was an “A” rated insurance company. In connection with this coverage, we provided Reliance with various amounts and forms of collateral to secure our performance under the respective policies as was customary at the time. As of June 30, 2003, we had $3.0 million of cash on deposit with Reliance which is included in insurance deposits. We also have provided Reliance with letters of credit and surety bonds totaling $6.4 million.

On October 3, 2003, the Department placed Reliance into liquidation. It is our understanding that cash on deposit with Reliance will be returned to us on or before the date that all related claims have been satisfied, so long as we have met our claim payment obligations within our retention limits under the related policies. Based on the information currently available, we believe that the cash on deposit with Reliance is fully recoverable and will either be returned to us or used by the liquidator, with our prior consent, to pay claims on our behalf. In the event that we are unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliance’s liquidation could put our workers compensation insurance coverage at risk for the related policy years; however, based upon information currently available, we believe that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent that such losses are not covered by either Reliance or the applicable state guaranty funds, we may be required to fund the related workers compensation claims for the applicable policy years. Our inability to access the funds on deposit with Reliance or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

During fiscal 2002, we purchased certain portions of our workers compensation coverage from Legion. Legion required assurances that we would be able to fund our related retention obligations, which were estimated by Legion to approximate $6.2 million. We provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual Indemnity), a Legion affiliate. That policy required us to deposit

approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy the our retention obligations under the Legion policy. We funded these deposits on a monthly basis during the policy term. As of June 30, 2003, we had net deposits with respect to this coverage totaling $3.3 million which are included in insurance deposits.

As mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion rehabilitator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as us. It is our understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. We are actively participating in the Court proceedings to cause such a trust account or other mechanism to be created and to operate so as to fully cover all our deductible obligations as originally intended and to return to us any remaining deposit balance once all related claims have been closed. Based on the information currently available, we believe that the amounts on deposit with Mutual Indemnity are fully recoverable and will either be returned to us or used to pay claims on our behalf. In the event that we are unable to access the funds on deposit with Mutual Indemnity, we may be required to fund the related workers compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds. Our inability to access the funds on deposit with Mutual Indemnity or obtain state guaranty fund coverage could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Risk Factors — Two insurance companies with which we have previously done business are in financial distress.”

Indemnifications

We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, our negligence or willful misconduct, or breach of representations and warranties and covenants.

Additionally, some of our agreements with customers require us to provide certain assurances related to the performance of our services. Such assurances, from time to time, obligate us to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of material defaults or other certain circumstances, or (iii) provide surety bonds or letter of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default. With respect to such surety bonds, we are also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.

We provide for indemnification of directors, officers and other persons in accordance with contracts, limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. We maintain directors’ and officers’ insurance which may enable us to recover a portion of any future amounts paid.

In addition to the above, from time to time we provide standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by us.

While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, and cash flows or results of operations. Additionally, we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, cash flows or results of operations.

Nasdaq Listing

On May 22, 2003, the Nasdaq Stock Market (Nasdaq) notified us that we were not in compliance with a Nasdaq SmallCap Market maintenance standard. This standard requires that we file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.

The notification followed our announcement on May 14, 2003 that we would delay filing our Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate our consolidated financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. We announced that we would file the applicable form 10-Q upon finalization of the related restatement adjustments.

We subsequently submitted our request for a Nasdaq Listing Qualifications Panel (the “Panel”) hearing to consider our continued listing. The hearing was held June 19, 2003, where we presented our basis for a temporary exception to the filing requirement in order to complete our related analysis.

On July 17, 2003, Nasdaq informed us that the Panel had made a determination. In its decision to grant an exception, the Panel determined that our securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing our Form 10-Q for the third quarter ended March 31, 2003 and our Form 10-K for the fiscal year ended June 30, 2003.

In addition to granting the filing exception through September 30, 2003, the Panel specifically required us to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should we miss a filing deadline in accordance with the exception, we will not be entitled to a new hearing on the matter and our securities may be delisted from The Nasdaq SmallCap Market. In the event we fail to comply with any continued listing requirement during the exception period, we will be provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panel’s decision as to whether continued listing is appropriate.

The Panel reserves the right to terminate or modify the terms of this exception upon a review of the Company’s reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There can be no assurance we will evidence compliance with the requirements as set forth by Nasdaq or that we will return to continued listing on The Nasdaq SmallCap Market.

On September 29, 2003, we issued a press release indicating that the filing of our Form 10-K for fiscal 2003 would be delayed. We also filed a Form 12b-25 request with the SEC for an extension to file our Form 10-K on or before October 14, 2003. Due to such delayed filing, we formally requested, on September 30, 2003, that the Panel permit us to comply with their July 17, 2003 decision by filing both our Form 10-K for fiscal 2003 and our Form 10-Q for the period ended March 31, 2003 on or before October 14, 2003. On October 7, 2003 the Panel informed us that our requested modification to their July 17, 2003 decision was granted.

Quarterly Results

The following table summarizes our unaudited quarterly operating results for each quarter of fiscal 2003 and 2002. Net revenue and operating income included in the table relate to our continuing operations and exclude amounts applicable to our Latin American operations that were disposed of in September 2002. Such unaudited quarterly operating information has been restated, as applicable, to reflect adjustments relating to provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts; the adoption of FIN 46 and the related consolidation on a retroactive basis our investment in San Diego Medical Services Enterprise LLC; to expense professional fees relating to the September 30, 2002 amendment to our credit facility that were previously capitalized and being amortized over the amended term of the facility; and to apply the two-class method of computing basic and diluted earnings per share subsequent to the issuance of our Series B redeemable nonconvertible participating preferred stock on September 30, 2002.


	2003
	First Quarter ⁽¹⁾			Second Quarter ⁽¹⁾			Third Quarter ⁽¹⁾			Fourth Quarter ⁽¹⁾
	(in thousands, except per share data)
Net revenue	$	130,178		$	128,866		$	130,064		$	131,369
Operating income ⁽²⁾		7,238			7,714			8,370			2,685
Income (loss) from continuing operations		421			(252	)		535			(4,070	)
Net income (loss) ⁽³⁾		12,753			(252	)		535			(4,070	)
Basic income (loss) from continuing operations applicable to common stock per share	$	0.03		$	(0.09	)	$	(0.05	)	$	(0.30	)
Basic income (loss) per share	$	0.80		$	(0.09	)	$	(0.05	)	$	(0.30	)
Diluted income (loss) from continuing operations applicable to common stock per share	$	0.03		$	(0.09	)	$	(0.05	)	$	(0.30	)
Diluted income (loss) per share	$	0.72		$	(0.09	)	$	(0.05	)	$	(0.30	)

	2002
	First Quarter⁽¹⁾			Second Quarter⁽¹⁾			Third Quarter⁽¹⁾			Fourth Quarter⁽¹⁾
	(in thousands, except per share data)
Net revenue	$	120,390		$	118,661		$	124,818		$	125,111
Operating income ⁽⁴⁾		5,337			5,554			9,787			2,732
Income (loss) from continuing operations before cumulative effect of change in accounting principle		(1,849	)		1,250			3,485			(2,516	)
Net income (loss) ^{(5) (6)}		(51,565	)		2,911			3,356			(2,866	)
Basic income (loss) from continuing operations per share	$	(0.12	)	$	0.08		$	0.23		$	(0.16	)
Basic income (loss) per share	$	(3.43	)	$	0.19		$	0.22		$	(0.18	)
Diluted income (loss) from continuing operations per share	$	(0.12	)	$	0.08		$	0.22		$	(0.16	)
Diluted income (loss) per share	$	(3.43	)	$	0.19		$	0.21		$	(0.18	)

⁽¹⁾	We have restated our consolidated financial statements for the following:

Accounts Receivable: We determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused our period-end allowance for doubtful accounts through March 31, 2003 to be understated and our accounts receivable overstated. We determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.

Professional Fees: We determined that professional fees incurred in the first quarter of fiscal 2003 in connection with the September 2002 modification to our credit facility should have been expensed rather than amortized over the term of the facility. Accordingly, the results for the first two quarters of fiscal 2003 have been restated for this matter.

San Diego Medical Services Enterprise LLC: During the fourth quarter of fiscal 2003, we adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46.

A summary of our unaudited quarterly operating results impacted by the restatement adjustments, accounting change and discontinued operations reclassifications is as follows:


	As Previously Reported		Restatement Adjustments						As Restated		Accounting Change (D)		Less Latin American Operations		As Reported
	As Previously Reported		A		B		C		As Restated		Accounting Change (D)		Less Latin American Operations		As Reported
Quarter ended September 30, 2002:
Net revenue	$	125,565	$	(1,174)	$	—	$	—	$	124,391	$	5,787	$	—	$	130,178
Operating income		9,754		(1,789)		(1,603)		—		6,362		876		—		7,238
Income from continuing operations		3,813		(1,789)		(1,603)		—		421		—		—		421
Net income		16,145		(1,789)		(1,603)		—		12,753		—		—		12,753
Basic income from continuing operations applicable to common stock per share	$	0.24	$	(0.11)	$	(0.10)	$	—	$	0.03	$	—	$	—	$	0.03
Basic income per share	$	1.01	$	(0.11)	$	(0.10)	$	—	$	0.80	$	—	$	—	$	0.80
Diluted income from continuing operations applicable to common stock per share	$	0.21	$	(0.09)	$	(0.09)	$	—	$	0.03	$	—	$	—	$	0.03
Diluted income per share	$	0.91	$	(0.10)	$	(0.09)	$	—	$	0.72	$	—	$	—	$	0.72
Quarter ended December 31, 2002:
Net revenue	$	123,464	$	(379)	$	—	$	—	$	123,085	$	5,781	$	—	$	128,866
Operating income		7,694		(578)		—		—		7,116		598		—		7,714
Income (loss) from continuing operations		148		(578)		178		—		(252)		—		—		(252)
Net income (loss)		148		(578)		178		—		(252)		—		—		(252)
Basic loss from continuing operations applicable to common stock per share	$	(0.07)	$	(0.03)	$	0.01	$	—	$	(0.09)	$	—	$	—	$	(0.09)
Basic loss per share	$	(0.07)	$	(0.03)	$	0.01	$	—	$	(0.09)	$	—	$	—	$	(0.09)
Diluted loss from continuing operations applicable to common stock per share	$	(0.07)	$	(0.03)	$	0.01	$	—	$	(0.09)	$	—	$	—	$	(0.09)
Diluted loss per share	$	(0.07)	$	(0.03)	$	0.01	$	—	$	(0.09)	$	—	$	—	$	(0.09)
Quarter ended March 31, 2003:
Income from continuing operations	$	535		—		—		—	$	535		—		—	$	535
Net income		535		—		—		—		535		—		—		535
Basic loss from continuing operations applicable to common stock per share	$	(0.04)		—		—	$	(0.01)	$	(0.05)		—		—	$	(0.05)
Basic loss per share	$	(0.04)		—		—	$	(0.01)	$	(0.05)		—		—	$	(0.05)
Diluted loss from continuing operations applicable to common stock per share	$	(0.04)		—		—	$	(0.01)	$	(0.05)		—		—	$	(0.05)
Diluted loss per share	$	(0.04)		—		—	$	(0.01)	$	(0.05)		—		—	$	(0.05)
Quarter ended June 30, 2003:
Loss from continuing operations	$	(4,070)		—		—		—	$	(4,070)		—		—	$	(4,070)
Net loss		(4,070)		—		—		—		(4,070)		—		—		(4,070)
Basic loss from continuing operations applicable to common stock per share	$	(0.33)		—		—	$	0.03	$	(0.30)		—		—	$	(0.30)
Basic loss per share	$	(0.33)		—		—	$	0.03	$	(0.30)		—		—	$	(0.30)
Diluted loss from continuing operations applicable to common stock per share	$	(0.33)		—		—	$	0.03	$	(0.30)		—		—	$	(0.30)
Diluted loss per share	$	(0.33)		—		—	$	0.03	$	(0.30)		—		—	$	(0.30)
Quarter ended September 30, 2001:
Net revenue	$	116,474	$	(564)	$	—	$	—	$	115,910	$	4,480	$	—	$	120,390
Operating loss		5,853		(860)		—		—		4,993		344		—		5,337
Loss from continuing operations		(989)		(860)		—		—		(1,849)		—		—		(1,849)
Net loss		(50,705)		(860)		—		—		(51,565)		—		—		(51,565)
Basic loss from continuing operations applicable to common stock per share	$	(0.06)	$	(0.06)	$	—	$	—	$	(0.12)	$	—	$	—	$	(0.12)
Basic loss per share	$	(3.37)	$	(0.06)	$	—	$	—	$	(3.43)	$	—	$	—	$	(3.43)
Diluted loss from continuing operations applicable to common stock per share	$	(0.06)	$	(0.06)	$	—	$	—	$	(0.12)	$	—	$	—	$	(0.12)
Diluted loss per share before	$	(3.37)	$	(0.06)	$	—	$	—	$	(3.43)	$	—	$	—	$	(3.43)
Quarter ended December 31, 2001:
Net revenue	$	114,333	$	(170)	$	—	$	—	$	114,163	$	4,498	$	—	$	118,661
Operating income		5,526		(259)		—		—		5,267		287				5,554
Income from continuing operations		1,509		(259)		—		—		1,250		—		—		1,250
Net income		3,170		(259)		—		—		2,911		—		—		2,911
Basic income from continuing operations applicable to common stock per share	$	0.10	$	(0.02)	$	—	$	—	$	0.08	$	—	$	—	$	0.08
Basic income per share	$	0.21	$	(0.02)	$	—	$	—	$	0.19	$	—	$	—	$	0.19
Diluted income from continuing operations applicable to common stock per share	$	0.10	$	(0.02)	$	—	$	—	$	0.08	$	—	$	—	$	0.08
Diluted income per share	$	0.21	$	(0.02)	$	—	$	—	$	0.19	$	—	$	—	$	0.19
Quarter ended March 31, 2002:
Net revenue	$	124,661	$	(663)	$	—	$	—	$	123,998	$	4,973	$	(4,153)	$	124,818
Operating income		10,837		(1,008)		—		—		9,829		223		(265)		9,787
Income from continuing operations		4,363		(1,008)		—		—		3,355		—		130		3,485
Net income		4,364		(1,008)		—		—		3,356		—		—		3,356
Basic income from continuing operations applicable to common stock per share	$	0.29	$	(0.07)	$	—	$	—	$	0.22	$	—	$	0.01	$	0.23
Basic income per share	$	0.29	$	(0.07)	$	—	$	—	$	0.22	$	—	$	—	$	0.22
Diluted income from continuing operations applicable to common stock per share	$	0.28	$	(0.07)	$	—	$	—	$	0.21	$	—	$	0.01	$	0.22
Diluted income per share	$	0.28	$	(0.07)	$	—	$	—	$	0.21	$	—	$	—	$	0.21
Quarter ended June 30, 2002:
Net revenue	$	122,951	$	(272)	$	—	$	—	$	122,679	$	5,054	$	(2,622)	$	125,111
Operating income		3,052		(413)	$	—	$	—		2,639		(122)		215		2,732
Loss from continuing operations		(2,452)		(413)		—		—		(2,865)		—		349		(2,516)
Net loss		(2,453)		(413)		—		—		(2,866)		—		—		(2,866)
Basic loss from continuing operations applicable to common stock per share	$	(0.16)	$	(0.02)	$	—	$	—	$	(0.18)	$	—	$	0.02	$	(0.16)
Basic loss per share	$	(0.16)	$	(0.02)	$	—	$	—	$	(0.18)	$	—	$	—	$	(0.18)
Diluted loss from continuing operations applicable to common stock per share	$	(0.16)	$	(0.02)	$	—	$	—	$	(0.18)	$	—	$	0.02	$	(0.16)
Diluted loss per share	$	(0.16)	$	(0.02)	$	—	$	—	$	(0.18)	$	—	$	—	$	(0.18)

Restatement Adjustments

(A)	– To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payers and doubtful accounts.

(B)	– To expense professional fees incurred in connection with the September 2002 credit facility amendment which were being amortized over the term of the related agreement.

(C)	– To calculate income (loss) per share using the two-class method.

(D)	– Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.

(2)

In fiscal 2001, we recorded a $1.5 million restructuring charge relating to an under performing service area that we had planned to exit at the time of contract termination in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the related municipality to enable it to transition its medical transportation service to a new provider. In connection with the contract extension, we reversed $0.2 million of previously accrued lease termination costs relating to the extension period. The operating environment in the service area subsequently improved, and we were awarded a new multi-year contract during the second quarter of fiscal 2003. We reversed the remaining restructuring reserve of $1.3 million to income during the second quarter of 2003.

(3)

During the first quarter of fiscal 2003, we sold our Latin American operations to local management in exchange for the assumption of the related net liabilities resulting in a gain of $12.5 million. The sale of the Latin American operations has been treated as a discontinued operation for financial reporting purposes.

(4)

During the third quarter of fiscal 2002, we reversed $1.7 million of discretionary employee benefits previously accrued for the calendar year ended December 31, 2000. During the fourth quarter of fiscal 2002, we recorded a $2.0 million provision for additional workers’ compensation claims in connection with a review of existing reserve levels; reversed a $1.3 million reserve related to the settlement of an audit with a Medicare intermediary; and, reversed $1.3 million of our paid-time-off accrual as a result of changes to the related policies.

(5)

During the second quarter of fiscal 2002, we recorded a $1.6 million tax benefit for refunds applicable to prior years for which recognition was deferred until receipt. In the fourth quarter of fiscal 2002, we recognized an income tax benefit of $0.6 million as a result of recently enacted legislation that allowed us to carry a portion of our net operating losses back to prior years.

(6)	The net loss for the first quarter of fiscal 2002 included a $49.5 million cumulative effect charge, both before and after taxes, relating to the implementation of a new accounting standard relating to goodwill and other intangible assets.

Effects of Inflation and Foreign Currency Exchange Fluctuations

As a result of the sale of our Latin American operations in September 2002, we no longer have operations located outside the United States. Additionally, inflation has not had a significant impact on our business.

Contractual Obligations and Other Commitments

We have certain contractual obligations related to our debt instruments that come due at various times over the periods presented below. In addition we have other commitments in the form of standby letters of credit and surety bonds. The following table illustrates the expiration of our contractual obligations as well as other commitments including the effect of the 2003 amended credit facility:


	Payments Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
Credit facility	$	152,555	$	—	$		$	152,555	$	—
Senior Notes		150,000		—		—		150,000		—
Capital leases and notes payable		4,368		1,329		2,901		50		88
Operating leases		35,344		7,760		12,084		6,667		8,833

Total contractual cash obligations	$	342,267	$	9,089	$	14,985	$	309,272	$	8,921


Other Commitments	Amount of Commitment Expiration By Period
Standby letters of credit	$	3,500	$	3,500	$	—	$	—	$	—

Surety bonds	$	10,136	$	10,129	$	7	$	—	$	—

Preferred stock redemption	$	25,000	$	—	$	15,000	$	10,000	$	—

Recently Issued Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies”, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 is to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial condition or results of operations. Note 17, to our consolidated financial statements contains additional information with respect to our guarantees and indemnifications.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46) to clarify when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity or VIE. FIN 46 provides general guidance as to the definition of a VIE and requires that such VIEs be consolidated if a company absorbs the majority of the VIEs expected losses, or is entitled to receive a majority of the VIEs residual returns, or both. FIN 46 is effective immediately for all new VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the consolidation provisions of FIN 46 must be applied for the first interim or annual reporting period beginning after June 15, 2003 on either a retroactive or prospective basis.

We determined that our investment in San Diego Medical Services Enterprise, LLC, (SDMSE) the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that we are the primary beneficiary. Accordingly, our investment in SDMSE should be consolidated under FIN 46. We had previously accounted for our investment in SDMSE using the equity method. While consolidation of SDMSE did not impact our previously reported net income (loss) or stockholders deficit, our consolidated financial statements of prior periods have been restated for comparative purposes as allowed by FIN 46. We do not believe that we have any other investments or contractual obligations that would require consolidation under FIN 46.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include certain mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective July 1, 2003. We are in the process of evaluating the impact of FAS No. 150 on our consolidated financial statements.

RISK FACTORS

The following risk factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating us and our business.

We have significant indebtedness.

We have significant indebtedness. As of June 30, 2003, we had approximately $306.6 million of consolidated indebtedness, consisting primarily of $149.9 million of 7 7/8% Senior Notes due in 2008 and $152.4 million outstanding under our credit facility. As a result of the September 30, 2003 amendment, we have $152.6 million outstanding under our 2003 Amended Credit Facility, which is now due December 31, 2006.

Our ability to service our indebtedness depends on our future operating performance, which is affected by various factors including regulatory, industry, economic, and competitive conditions, and other factors, many of which are beyond our control. We may not generate sufficient funds to enable us to service our indebtedness and failure to do so could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our loan agreements require us to comply with numerous covenants and restrictions.

The agreement governing the terms of the Senior Notes contains certain covenants limiting our ability to:

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incur certain additional debt

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create certain liens

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pay dividends

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issue guarantees

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redeem capital stock

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enter into transactions with affiliates

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make certain investments

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sell assets

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issue capital stock of subsidiaries

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complete certain mergers and consolidations

Our 2003 Amended Credit Facility also contains restrictive covenants and requires us to meet certain financial tests, including a total debt leverage ratio, a minimum tangible net worth amount, and a fixed charge coverage ratio. Our ability to satisfy those covenants can be affected by events both within and beyond our control, and we may be unable to meet these covenants.

A breach of any of the covenants or other terms of our indebtedness could result in an event of default under our 2003 Amended Credit Facility or the Senior Notes or both, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may not be able to generate sufficient operating cash flow.

Despite significant net losses in fiscal 2002, 2001 and 2000, our restructuring efforts have enabled us to self-fund our operations since March 2000 from existing cash reserves and operating cash flow. However, we may be unable to sustain our targeted levels of operating cash flow. Our ability to generate operating cash flow will depend upon various factors, including regulatory, industry, economic, competitive and other factors, many of which are beyond our control. Because of our significant indebtedness, a substantial portion of our cash flow from operating activities is dedicated to debt service and is not available for other purposes. The terms of our 2003 Amended Credit Facility do not permit additional borrowings thereunder. In addition, the 2003 Amended Credit Facility and the Senior Notes restrict our ability to obtain additional debt from other sources or provide collateral to any prospective lender.

If we are unable to meet our targeted levels of operating cash flow, or in the event of an unanticipated cash requirement (such as an adverse litigation outcome, reimbursement delays, significantly increased costs of insurance or other matters) we will need to pursue additional debt or equity financing. Any such financing may not be available on terms acceptable to us, or at all. If we issue equity securities in connection with any such arrangement, the percentage ownership of our current stockholders could be materially reduced, and such equity securities may have rights, preferences or privileges senior to our current common stockholders. Failure to generate adequate operating cash flow will have a material adverse effect on our business, financial condition and results of operations.

We face significant dilution of our common stock.

In conjunction with the 2002 Amended Credit Facility, we issued shares of our Series B redeemable nonconvertible participating preferred stock (the “Series B Shares”) to the participants in the 2002 Amended Credit Facility. The Series B Shares are not convertible by the holder but we may elect (subject to approval by our shareholders of an increase in the number of authorized common shares) to settle the Series B Shares by issuance of 2,115,490 common shares which equates to 10% of our common shares then outstanding on a diluted basis, as defined. Because sufficient common shares are not currently available to permit conversion, we have agreed to use our best efforts to obtain stockholder approval to authorize additional common shares. Until such time as the additional common shares are authorized, the carrying value of the Series B Shares will be accreted to the greater of $15.0 million or the value of the commons shares into which the Series B Shares would have otherwise been converted which represents the redemption value of the Series B shares as of December 31, 2004. Additionally, holders of the Series B Shares are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. The accretion and allocation of earnings to the Series B Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed, will result in a reduction in income available to common stockholders for purposes of determining our earnings per share.

In conjunction with the 2003 Amended Credit Facility, we issued shares of our Series C redeemable nonconvertible participating preferred stock (the “Series C Shares”) to certain of the participants in the 2003 Amended Credit Facility. The Series C Shares are not convertible by the holder but we may elect (subject to approval by our shareholders of an increase in the number of authorized common shares) to settle the Series C Shares by issuance of 2,839,787 common shares which equates to 11% of our common shares then outstanding on a diluted basis, as defined. Because sufficient common shares are not currently available to permit conversion, we have agreed to use our best efforts to obtain stockholder approval to authorize additional common shares. Until such time as the additional common shares are authorized, the carrying value of the Series C Shares will be accreted to the greater of $10.0 million or the value of common shares into which the Series C Shares would have otherwise been converted which represents the redemption value of the Series C shares as of December 31, 2006. Additionally, holders of the Series C Shares are entitled to participate in any common dividends declared by the Board of Directors as if the Series C holders had been issued common stock. The accretion and allocation of earnings to the Series C Shares, to the extent that this participating security may share in earnings as if such earnings for the period had been distributed, will result in a reduction in income available to common stockholders for purposes of determining our earnings per share.

We depend on reimbursements by third-party payers and individuals.

We receive a substantial portion of payments for our medical transportation services from third-party payers, including Medicare, Medicaid, and private insurers. We received approximately 90% of our medical transportation fee collections from such third party payers during the year ended June 30, 2003, including approximately 27% from Medicare. In the year ended June 30, 2002, we received 88% of medical transportation fee collections from these third parties, including 25% from Medicare.

The reimbursement process is complex and can involve lengthy delays. From time to time, we experience these delays. Third-party payers are continuing their efforts to control expenditures for health care, including proposals to revise reimbursement policies. We recognize revenue when we provide medical transportation services; however, there can be lengthy delays before we receive payment. In addition, third-party payers may disallow, in whole or in part, requests for reimbursement based on assertions that certain amounts are not reimbursable or additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third-party payers. Due to the nature of our business and our participation in the Medicare and Medicaid reimbursement programs, we are involved from time to time in regulatory reviews or investigations by governmental agencies of matters such as compliance with billing regulations. We may be required to repay these agencies if a finding is made that we were incorrectly reimbursed, or we may lose eligibility for certain programs in the event of certain types of non-compliance. Delays and uncertainties in the reimbursement process adversely affect our level of accounts receivable, increase the overall costs of collection, and may adversely affect our working capital and cause us to incur additional borrowing costs. Unfavorable resolutions of pending or future regulatory reviews or investigations, either individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We also face the continuing risk of non-reimbursement to the extent that uninsured individuals require emergency ambulance service in service areas where an adequate subsidy is not provided by the related municipality or governing authority. Amounts not covered by third-party payers are the obligations of individual patients and, we may not receive reimbursement by the related municipality or governing authority or reimbursement from these uninsured individuals. We continually review the mix of activity between emergency and general medical transport in view of the reimbursement environment and evaluate methods of recovering these amounts through the collection process.

We establish an allowance for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts based on credit risk applicable to certain types of payers, historical trends, and other relevant information. We review our allowance for doubtful accounts on an ongoing basis and may increase or decrease such allowance from time to time, including in those instances when we determine that the level of effort and cost of collection of certain accounts receivable is unacceptable.

The risks associated with third-party payers and uninsured individuals and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Our collection policies or our allowance for doubtful accounts may not be adequate.

We have experienced material increases in the cost of our insurance and surety programs and in related collateralization requirements.

We have experienced a substantial rise in the costs associated with both our insurance and surety bonding programs in comparison to prior years. We have experienced significant increases both in the premiums we have had to pay, and in the collateral or other advance funding required. We also have increased our deductible and self-insurance retentions under several coverages. Many counties, municipalities, and fire districts also require us to provide a surety bond or other assurance of financial and performance responsibility, and the cost and collateral requirements associated with obtaining such bonds have increased. A significant factor is the overall hardening of the insurance, surety and re-insurance markets, which has resulted in demands for larger premiums, collateralization of payment obligations and increasingly rigorous underwriting requirements. Our higher costs also result from our claims history and from insurers’ and sureties’ perception of our financial condition due to our current debt structure and cash position. Sustained and substantial annual increases in premiums and requirements for collateral or pre-funded deductible obligations may have a material adverse effect on our business, financial condition, cash flow and results of operations.

Claims against us could exceed our insurance coverage and we may not have coverage for certain claims.

We are subject to a significant number of accident, injury and professional liability claims as a result of the nature of our business and the day-to-day operation of our vehicle fleet. In order to minimize the risk of our exposure, we maintain certain levels of insurance coverage for workers compensation, comprehensive general liability, automobile liability, and professional liability claims. In certain limited instances we may not have coverage for certain claims. In those instances for which we do have coverage, the coverage limits of our policies may not be adequate. Liabilities in excess of our insurance coverage could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Claims against us, regardless of their merit or outcome, also may have an adverse effect on our reputation and business.

Our claim reserves may prove inadequate.

Under our general liability and employee medical insurance programs, and under our workers’ compensation programs prior to May 1, 2002, we are responsible for deductibles and self-insured retentions in varying amounts. Our insurance coverages in prior years generally did not include an aggregate limitation on our liability. We have established reserves for losses and loss adjustment expenses under these policies. Our reserves are estimates based on our historical experience as well as industry data, and include judgments of the effects that future economic and social forces are likely to have on our experience with the type of risk involved, circumstances surrounding individual claims and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently uncertain and are subject to a number of circumstances that are difficult to predict. For these reasons, there can be no assurance that our ultimate liability will not materially exceed

our reserves at any point. If our reserves prove to be inadequate, we will be required to increase our reserves with a corresponding charge to operations in the period in which the deficiency is identified and such charge could be material. We periodically engage independent actuaries in order to verify the adequacy of our claim reserves.

Two insurance companies with which we have previously done business are in financial distress.

Two previous insurers (Reliance Insurance Company and Legion Insurance Company) under our workers’ compensation and general liability programs are currently in liquidation proceedings in Pennsylvania. With respect to the affected policy years, these proceedings may result in the loss of all or part of the collateral and/or funds deposited by us for payment of claims within our deductible or self-insured retention relating to our workers’ compensation programs, and may result in restricted access to both insurance and reinsurance proceeds relating to our general liability program. Based upon the information currently available, we believe that the amounts on deposit are fully recoverable and will either be returned to us or used to pay claims on our behalf as originally intended. We further believe that reinsurance proceeds for our liability policies will be available to cover claims in excess of our retention as originally intended. It is also our understanding that state guaranty funds will provide coverage, subject to certain limitations, of such general liability and workers compensation. Our inability to access the funds on deposit, to access our liability reinsurance proceeds or to obtain coverage from state guaranty funds could have a material adverse effect on our business, financial condition, results of operations and cash flows. To the extent that claims exceed our deductible limits and our insurers or guaranty funds do not satisfy their coverage obligations, we may be required to satisfy a portion of those claims directly, which could have a material adverse effect on our business, financial condition, result of operations and cash flows.

Recently enacted rules may adversely affect our reimbursement rates of coverage.

On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54 (which is adjusted each year by the CPI – 1%), plus separate mileage payment based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on Medicare claims, which means a provider, must accept Medicare’s allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. In addition, the Final Rule calls for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter.

We believe the Medicare Ambulance Fee Schedule will have a neutral net impact on our medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of our U.S. operations. However, changes in the related rules or regulations, or the interpretation or implementation thereof, could materially alter the impact of the fee schedule on our medical transportation revenue and, therefore could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Changes in reimbursement policies, or other governmental actions, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in our cost structure relative to the rate increase in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on our business, financial condition, cash flows, and results of operations.

Certain state and local governments regulate rate structures and limit rates of return.

State or local government regulations or administrative policies regulate rate structures in most states in which we conduct medical transportation operations. In certain service areas in which we are the exclusive provider of services, the municipality or fire district sets the rates for emergency ambulance services pursuant to a master contract and establishes the rates for general ambulance services that we are permitted to charge. Rates in most service areas are set at the same amounts for emergency and general ambulance services. For example, the State of Arizona establishes the rate of return we are permitted to earn in determining the ambulance service rates we may

charge in that state. Ambulance services revenue generated in Arizona accounted for approximately 19.0% and 17.9% of net revenue for the year ended June 30, 2003 and 2002, respectively. We may be unable to receive ambulance service rate increases on a timely basis where rates are regulated or to establish or maintain satisfactory rate structures where rates are not regulated.

Municipalities and fire districts negotiate the payments to be made to us for fire protection services pursuant to master contracts. These master contracts are based on a budget and on level of effort or performance criteria desired by the municipalities and fire districts. We could be unsuccessful in negotiating or maintaining profitable contracts with municipalities and fire districts.

Numerous governmental entities regulate our business.

Numerous federal, state and local laws, rules and regulations govern various aspects of the ambulance and fire fighting service business covering matters such as licensing, rates, employee certification, environmental matters and radio communications. Certificates of necessity may be required from state or local governments to operate medical transportation services in a designated service area. Master contracts from governmental authorities are subject to risks of cancellation or unenforceability as a result of budgetary and other factors and may subject us to certain liabilities or restrictions that traditionally have applied only to governmental bodies. Federal, state or local, governments could:

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change existing laws, rules or regulations,

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adopt new laws, rules or regulations that increase our cost of doing business,

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lower reimbursement levels,

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choose to provide services for themselves, or

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otherwise adversely affect our business, financial condition, cash flows, and results of operations.

We could encounter difficulty in complying with all applicable laws, rules and regulations.

Health care reforms and cost containment may affect our business.

Numerous legislative proposals have been considered that would result in major reforms in the U.S. health care system. We cannot predict which, if any, health care reforms may be proposed or enacted or the effect that any such legislation would have on our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which protects the privacy of patients’ health information handled by health care providers and establishes standards for its electronic transmission, was enacted on August 21, 1996. The final rule, which took effect on April 14, 2001, requires covered entities to comply with the final rule’s provisions pertaining to privacy standards by April 14, 2003, and covers all individually identifiable health information used or disclosed by a covered entity. We have addressed the impact of HIPAA and developed policies, training and procedures to comply with the final rule.

In addition to compliance with the privacy standards deadline, the HIPAA Electronic Transactions and Code Set Rule requires us, if we submit claims electronically, to use the approved HIPAA format by October 16, 2003. On September 23, 2003, CMS announced that it will issue a contingency plan to accept Medicare noncompliant electronic transactions after the October 16, 2003 compliance deadline. The contingency plan permits CMS to continue to accept and process Medicare claims in the electronic formats now in use, giving providers, like us, additional time to complete the testing process. Although CMS announced a contingency plan, as of this filing, a Medicaid contingency plan has not been announced. We submit Medicaid claims to the twenty-seven states, of which eleven states require electronic claim submissions and sixteen require paper claim submissions. As of September 24, 2003, we received confirmation of successful test filings for electronic claims from four of the eleven states which require electronic claim submissions. New York Medicaid has announced that it will not be ready to accept electronic claim submissions in the approved HIPAA format. Although we will submit our test filings to the remaining six states in advance of the October 16, 2003 deadline, those states may not have the resources and/or funding to meet the regulatory requirements for electronic claims submissions and may not be able to respond to all of the test submissions by us and other providers before the deadline. As a result, we may be required to submit our claims by paper (rather than electronically), which may extend the payment cycle an additional thirty days or more. In addition, we await announcements from the commercial insurers regarding compliance with the Rule. Thus, while we have worked diligently to both comply with HIPAA requirements and mitigate the impact of HIPAA on our business, we could experience a material adverse effect on our business, financial condition, cash flows or results of operations due to (i) significant costs associated with continued compliance under HIPAA or related legislative enactments, (ii) adverse affects on our collection cycle arising from non-compliance or delayed HIPAA compliance by our payers, customers and other constituents, or (iii) impacts to the health care industry as a whole that may directly or indirectly cause an adverse affect on our business.

We may be delisted from the Nasdaq SmallCap Market.

The notification followed our announcement on May 14, 2003 that we would delay filing our Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate our financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. We announced that we would file the applicable Form 10-Q upon finalization of the related restatement adjustments.

On July 17, 2003, Nasdaq informed us that the Panel had made a determination to grant us an exception. In its decision the Panel determined that our securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing our Form 10-Q for the third quarter ended March 31, 2003 and our Form 10-K for the fiscal year ended June 30, 2003.

The Panel reserved the right to terminate or modify the terms of this exception upon a review of the Company’s reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There is no assurance that we will evidence compliance with the requirements as set forth by Nasdaq or that we will return to continued listing on The Nasdaq SmallCap Market.

On September 29, 2003, we issued a press release indicating that the filing of our Form 10-K for fiscal 2003 would be delayed. We also filed a Form 12b-25 request with the SEC for an extension to file our Form 10-K on or before October 14, 2003. Due to such delayed filing, we formally requested, on September 30, 2003, that the Panel permit us to comply with their July 17, 2003 decision by filing both our Form 10-K for fiscal 2003 and our Form 10-Q for the period ended March 31, 2003 on or before October 14, 2003. On October 7, 2003, the Panel informed us that our requested modification to their July 17, 2003 decision was granted.

We depend on certain business relationships.

We depend to a great extent on certain contracts with municipalities or fire districts to provide emergency ambulance services and fire protection services. Our six largest contracts accounted for approximately 22.9% and 21.9% of net revenue for the year ended June 30, 2003 and 2002, respectively. One of these contracts accounted for approximately 8.2% and 7.3% of net revenue for the years ended June 30, 2003 and 2002, respectively. Contracts with municipalities or fire districts may have certain budgetary approval constraints. Failure to allocate funds for a contract may adversely affect our ability to continue to perform services without suffering significant losses. The loss or cancellation of several of these contracts could have a material adverse effect on our business, financial condition, cash flow, and results of operations. We may not be successful in retaining our existing contracts or in obtaining new contracts for emergency ambulance services or for fire protection services.

Our contracts with municipalities and fire districts and with managed care organizations and health care providers are short term or open-ended or for periods ranging on average from two years to five years. During such periods, we may determine that a contract is no longer favorable and may seek to modify or terminate the contract. When making such a determination, we may consider factors, such as weaker than expected transport volume,

geographical issues adversely affecting response times, and delays in implementing technology upgrades. We face certain risks in attempting to terminate unfavorable contracts prior to their expiration because of the possibility of forfeiting performance bonds and the potential adverse political and public relations consequences. Our inability to terminate or amend unfavorable contracts as they occur, could, in the aggregate, have a material adverse effect on our business, financial condition, cash flows, and results of operations. We also face the risk that areas in which we provide fire protection services through subscription arrangements with residents and businesses will be converted to tax-supported fire districts or annexed by municipalities.

We face risks associated with our prior rapid growth, integration, and acquisitions.

We must integrate and successfully operate the ambulance service providers that we have acquired. The process of integrating management, operations, facilities, and accounting and billing and collection systems and other information systems requires continued investment of time and resources and can involve difficulties, which could have a material adverse effect on our business, financial condition, cash flows, and results of operations. Unforeseen liabilities and other issues also could arise in connection with the operation of businesses that we have previously acquired or may acquire in the future. For example, we became aware of, and have taken corrective action with respect to, various issues arising primarily from the transition to us from various acquired operations of Federal Communications Commission (FCC) licenses for public safety and private wireless radio frequencies used in the ordinary course of our business. While we do not currently anticipate that action with respect to these issues by the FCC’s enforcement bureau will result in material monetary fines or license forfeitures, there can be no assurance that this will be the case. Our acquisition agreements contain purchase price adjustments, rights of set-off, indemnification, and other remedies in the event that certain unforeseen liabilities or issues arise in connection with an acquisition. However, these purchase price adjustments, rights of set-off, indemnification, and other remedies expire and may not be sufficient to compensate us in the event that any liabilities or other issues arise.

We face additional risks associated with our international operations.

Due to the deteriorating economic conditions and continued devaluation of the local currency, we reviewed our strategic alternatives with respect to the continuation of operations in Latin America, primarily in Argentina. We determined that we would benefit from focusing on our domestic operations. Effective September 27, 2002, we sold our Latin American operations to local management. We believe that both the structure of our pre-sale operations and of the sale transaction itself shield us from liabilities associated with past or future activities of our former Latin American operations. However, due to the nature of local laws and regulatory requirements and the uncertain economic and political environment, particularly in Argentina, there can be no assurance that we will not be required to defend against future claims. Unanticipated claims successfully asserted against us could have an adverse effect on our business, financial condition, cash flows, and results of operations.

We are in a highly competitive industry.

The ambulance service industry is highly competitive. Ambulance and general medical transportation service providers compete primarily on the basis of quality of service, performance, and cost. In order to compete successfully, we must make continuing investments in our fleet, facilities, and operating systems. We believe that counties, fire districts, and municipalities and health/care institutions consider the following factors in awarding a contract:

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quality of medical care,

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historical response time performance,

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customer service,

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financial stability, and

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personnel policies and practices.

We currently compete with the following entities to provide ambulance services:

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governmental entities (including fire districts),

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hospitals,

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other national ambulance service providers,

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large regional ambulance service providers, and

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local and volunteer private providers.

Counties, municipalities, fire districts, and health care organizations that currently contract for ambulance services could choose to provide ambulance services directly in the future. We are experiencing increased competition from fire departments in providing emergency ambulance service. Some of our current competitors and certain potential competitors have or have access to greater capital and other resources than us.

Tax-supported fire districts, municipal fire departments, and volunteer fire departments represent the principal providers of fire protection services for residential and commercial properties. Private providers represent only a small portion of the total fire protection market and generally provide services where a tax-supported municipality or fire district has decided to contract for these services or has not assumed the financial responsibility for fire protection. In these situations, we provide services for a municipality or fire district on a contract basis or provide fire protection services directly to residences and businesses who subscribe for this service. We cannot provide assurance that:

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we will be able continue to maintain current contracts or subscriptions or to obtain additional fire protection business on a contractual or subscription basis;

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fire districts or municipalities will not choose to provide fire protection services directly in the future; or

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areas in which we provide services through subscriptions will not be converted to tax-supported fire districts or annexed by municipalities.

We depend on our management and other key personnel.

Our success depends upon our ability to recruit and retain key personnel. We could experience difficulty in retaining our current key personnel or in attracting and retaining necessary additional key personnel. Medical personnel shortages in certain market areas currently makes the recruiting, training, and retention of full-time and part-time personnel more difficult and costly, including the cost of overtime wages. Our internal growth will further increase the demand on our resources and require the addition of new personnel. We have entered into employment agreements with certain of our executive officers and certain other key personnel. Failure to retain or replace our key personnel may have an adverse effect on our business, financial condition, cash flows and results of operations.

It may be difficult for a third party to acquire us.

Certain provisions of our certificate of incorporation, shareholders’ rights plan and Delaware law could make it more difficult for a third party to acquire control of our company, even if a change in control might be beneficial to stockholders. This could discourage potential takeover attempts and could adversely affect the market price of our common stock.

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risks

Our primary exposure to market risk consists of changes in interest rates on our borrowing activities. Amounts outstanding under our 2003 Amended Credit Facility bear interest at LIBOR plus 7.0%. A 1% increase in the LIBOR rate would increase our interest expense on an annual basis by approximately $1.5 million. The remainder of our debt is primarily at fixed interest rates. We monitor this risk associated with interest rate changes and may enter into hedging transactions, such as interest rate swap agreements, to mitigate the related exposure.

ITEM 8.

Financial Statements and Supplementary Data

Our Consolidated Financial Statements for the fiscal year ended June 30, 2001 and the related report of Singer Lewak Greenbaum and Goldstein LLP and our Consolidated Financial Statements as of June 30, 2003 and 2002 and for each of the fiscal years then ended together with related notes and the report of PricewaterhouseCoopers LLP are set forth herein.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Rural/Metro Corporation:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders’ equity (deficit), and of cash flows present fairly, in all material respects, the financial position of Rural/Metro Corporation and its subsidiaries (the “Company”) at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Company restated its consolidated financial statements as of and for the year ended June 30, 2002, to adjust its accounts receivable and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers

and for doubtful accounts as well as to defer enrollment fees relating to its fire protection service contracts.

As discussed in Note 2, the Company restated its consolidated financial statements for the year ended June 30, 2003 to reflect earnings per share using the two-class method.

As discussed in Note 2, the Company changed its method of accounting for variable interest entities. Additionally, as discussed in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001.

PricewaterhouseCoopers LLP

Phoenix, Arizona

October 13, 2003, except as to the matter referred to

in the section of Note 2 entitled “Earnings Per Share”

as to which the date is February 17, 2004

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Rural/Metro Corporation

Scottsdale, Arizona

We have audited the accompanying restated, consolidated statements of operations, changes in stockholders’ equity (deficit) stockholders’ deficit, and cash flows of Rural/Metro Corporation and subsidiaries for the year ended June 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the restated, consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Rural/Metro Corporation and subsidiaries for the year ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2 to the consolidated financial statements, the Company restated its consolidated financial statements to reflect the consolidation of its investments in San Diego Medical Services Enterprises LLC upon adoption of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” an Interpretation of ARB No. 51.

As described in Note 2 to the consolidated financial statements, the June 30, 2001 consolidated financial statements have been restated due to the understatement of Medicare, Medicaid and contractual discounts and doubtful accounts related to the Company’s accounts receivables allowances.

As described in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

October 13, 2003

RURAL/METRO CORPORATION

CONSOLIDATED BALANCE SHEET

June 30, 2003 and 2002


	2003			2002
	(in thousands)
				*(As Restated )**
ASSETS
Current assets:
Cash	$	12,561		$	10,677
Accounts receivable, net of allowance for doubtful accounts of $48,422 million and $37,966 million respectively		60,428			64,461
Inventories		11,504			12,220
Prepaid expenses and other		7,511			7,231

Total current assets		92,004			94,589
Property and equipment, net		43,010			48,532
Goodwill		41,167			41,244
Insurance deposits		7,937			8,228
Other assets		12,048			8,115

	$	196,166		$	200,708

LIABILITIES, MINORITY INTERESTS, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	13,778		$	13,262
Accrued liabilities		57,698			73,694
Deferred revenue		17,603			16,695
Current portion of long-term debt		1,329			1,633

Total current liabilities		90,408			105,284
Long-term debt, net of current portion		305,310			298,529
Other liabilities		181			477
Deferred income taxes		650			650

Total liabilities		396,549			404,940

Minority interests		1,984			1,520

Series B redeemable nonconvertible participating preferred stock, $.01 par value 634,647 shares authorized, 211,549 shares issued and outstanding at June 30, 2003; including accumulated accretion of $3,604 (redemption value of $15.0 million)		7,793			—

Commitments and contingencies		—			—
Stockholders’ equity (deficit):
Common stock, $.01 par value, 23,000,000 shares authorized, 16,207,830 and 15,651,095 shares issued and outstanding at June 30, 2003 and 2002, respectively		166			159
Additional paid-in capital		135,405			138,470
Treasury stock, at cost, 149,456 shares at June 30, 2003 and 2002		(1,239	)		(1,239	)
Accumulated deficit		(344,492	)		(353,458	)
Accumulated other comprehensive income		—			10,316

Total stockholders’ equity (deficit)		(210,160	)		(205,752	)

	$	196,166		$	200,708

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

For The Years Ended June 30, 2003, 2002 and 2001


	2003			2002			2001
	(in thousands except per share amounts)
				*(As Restated )**
Net revenue	$	520,477		$	488,980		$	479,414

Operating expenses:
Payroll and employee benefits		284,021			269,123			271,976
Provision for doubtful accounts		85,046			77,725			86,876
Depreciation and amortization		13,289			16,267			25,741
Other operating expenses		113,535			103,280			131,889
Asset impairment charges		—			—			48,050
Contract termination costs and related asset impairment charges		—			(107	)		9,256
Restructuring and other		(1,421	)		(718	)		9,091

Total operating expenses		494,470			465,570			582,879

Operating income (loss)		26,007			23,410			(103,465	)
Interest expense		(28,012	)		(25,462	)		(30,624	)
Interest income		197			644			642
Other income (expense) net		146			8			(4,053	)

Loss from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		(1,662	)		(1,400	)		(137,500	)
Income tax (provision) benefit		(197	)		2,520			(1,137	)
Minority interest		(1,507	)		(750	)		705

Income (loss) from continuing operations before cumulative effect of change in accounting principle		(3,366	)		370			(137,932	)
Income (loss) from discontinued Latin American operations (including gain on disposal of $12,488 in fiscal 2003 and loss on disposition of clinic operations of $9,374 in fiscal 2001), net of tax of $0 in 2003, $101 in 2002 and $364 in 2001		12,332			979			(67,358	)

Income (loss) before cumulative effect of change in accounting principle		8,966			1,349			(205,290	)
Cumulative effect of change in accounting principle, net of tax of $0		—			(49,513	)		—

Net income (loss)		8,966			(48,164	)		(205,290	)
Less: Net income allocated to redeemable nonconvertible participating preferred stock under the two-class method		(804	)		—			—
Less: Accretion of redeemable nonconvertible participating preferred stock		(3,604	)		—			—

Net income (loss) applicable to common stock	$	4,558		$	(48,164	)	$	(205,290	)

Income (loss) per share
Basic —
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	(0.42	)	$	0.02		$	(9.35	)
Income (loss) from discontinued operations applicable to common stock		0.70			0.07			(4.57	)

Income (loss) before cumulative effect of change in accounting principle		0.28		$	0.09			(13.92	)
Cumulative effect of change in accounting principle		—			(3.26	)		—

Net income (loss)	$	0.28		$	(3.17	)	$	(13.92	)

Diluted —
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	(0.42	)	$	0.02		$	(9.35	)
Income (loss) from discontinued operations applicable to common stock		0.70			0.07			(4.57	)

Income (loss) before cumulative effect of change in accounting principle		0.28			0.09			(13.92	)
Cumulative effect of change in accounting principle		—			(3.14	)		—

Net income (loss)	$	0.28		$	(3.05	)	$	(13.92	)

Average number of common shares outstanding — Basic		16,116			15,190			14,744

Average number of common shares outstanding — Diluted		16,116			15,773			14,744

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For The Years Ended June 30, 2003, 2002 and 2001


	Common Stock		Additional Paid-in Capital			Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
	(in thousands)
Balance, June 30, 2000 (As Restated *)	$	149	$	137,603		$	(1,239	)	$	(100,004	)	$	(252	)	$	36,257
Issuance of 273,584 shares of common stock		3		345			—			—			—			348
Comprehensive loss, net of tax:
Net loss (As Restated *)		—		—			—			(205,290	)		—			(205,290	)
Foreign currency translation adjustments		—		—			—			—			266			266

Comprehensive loss (As Restated*)																(205,024	)

Balance, June 30, 2001 (As Restated *)		152		137,948			(1,239	)		(305,294	)		14			(168,419	)
Issuance of 751,175 shares of common stock		7		449			—			—			—			456
Fair value of options issued to non-employee		—		73			—			—			—			73
Comprehensive loss, net of tax:
Net loss (As Restated *)		—		—			—			(48,164	)		—			(48,164	)
Foreign currency translation adjustments													10,302			10,302

Comprehensive loss (As Restated*)		—		—			—			—						(37,862	)

Balance, June 30, 2002 (As restated *)		159		138,470			(1,239	)		(353,458	)		10,316			(205,752	)
Issuance of 664,272 shares of common stock		7		400			—			—			—			407
Non-cash stock compensation expense relating to stock option modification		—		139			—			—			—			139
Accretion of redeemable nonconvertible participating preferred stock		—		(3,604	)		—			—			—			(3,604	)
Comprehensive income, net of tax:
Net income		—		—			—			8,966			—			8,966
Foreign currency translation adjustments		—		—			—			—			(242	)		(242	)
Recognition of foreign currency translation adjustments in conjunction with the disposition of Latin American operations													(10,074	)		(10,074	)

Comprehensive loss																(1,350	)

Balance at June 30, 2003	$	166	$	135,405		$	(1,239	)	$	(344,492	)	$	—		$	(210,160	)

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

For The Years Ended June 30, 2003, 2002 and 2001


	2003			2002			2001
	(in thousands)
				*(As Restated )**
Cash flows from operating activities:
Net income (loss)	$	8,966		$	(48,164	)	$	(205,290	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities —
Non-cash portion of restructuring and other		(1,421	)		(718	)		4,092
Non-cash portion of contract termination charges		—			(107	)		8,086
Non-cash asset impairment charges		—			—			94,353
Non-cash portion of gain on disposal of Latin American operations		(13,732	)		—			—
Non-cash portion of loss on disposition of clinic operations		—			—			9,374
Cumulative effect of change in accounting principle		—			49,513			—
Depreciation and amortization		13,313			16,210			29,161
Gain on sale of property and equipment		(540	)		(285	)		(427	)
Provision for doubtful accounts		85,046			77,880			88,303
Deferred income taxes		—			(300	)		950
Earnings (losses) of minority shareholders		1,507			750			(705	)
Amortization of deferred financing costs		2,038			726			946
Amortization of debt discount		26			26			26
Non-cash charge related to joint venture		—			—			4,045
Non-cash stock compensation expense		—			73			—
Other		(176	)		(8	)		7
Change in assets and liabilities —
Increase in accounts receivable		(81,589	)		(73,771	)		(70,707	)
Decrease in inventories		656			948			5,811
(Increase) decrease in prepaid expenses and other		(476	)		(2,792	)		1,505
(Increase) decrease in insurance deposits		291			(4,492	)		(2,966	)
Decrease in other assets		126			1,871			4,080
Increase (decrease) in accounts payable		1,545			1,453			(2,714	)
Increase (decrease) in accrued liabilities and other liabilities		(3,342	)		(9,881	)		39,062
Increase (decrease) in deferred revenue		908			702			(282	)

Net cash provided by operating activities		13,146			9,634			6,710

Cash flows from investing activities:
Capital expenditures		(9,400	)		(6,854	)		(5,774	)
Proceeds from the sale of property and equipment		1,818			1,022			1,969

Net cash used in investing activities		(7,582	)		(5,832	)		(3,805	)

Cash flows from financing activities:
Repayments on credit facility		—			(1,263	)		(3,765	)
Repayment of debt and capital lease obligations		(1,569	)		(1,862	)		(2,773	)
Cash paid for debt modification costs		(1,583	)		—			—
Borrowings under capital lease obligations		—			—			283
Distributions to minority shareholders		(914	)		(501	)		(432	)
Issuance of common stock		407			456			348

Net cash used in financing activities		(3,659	)		(3,170	)		(6,339	)

Effect of currency exchange rate changes on cash		(21	)		302			265

Increase (decrease) in cash		1,884			934			(3,169	)
Cash, beginning of year		10,677			9,743			12,912

Cash, end of year	$	12,561		$	10,677		$	9,743

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

See accompanying notes

(1)

The Company and its Significant Accounting Policies

Nature of Business and Operations

Rural/Metro Corporation, a Delaware corporation, and its subsidiaries (collectively, the Company) is a diversified emergency services company providing medical transportation, fire protection and other related services in 26 states. In the United States, the Company provides emergency and non-emergency ambulance services to patients on both a fee-for-service basis and a non-refundable subscription fee basis. Fire protection services are provided either under contracts with municipalities or fire districts, or on a subscription fee basis to individual homeowners or commercial property owners. Through September 27, 2002, the Company provided urgent home medical care and ambulance services under capitated service arrangements in Latin America.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of discounts applicable to Medicare, Medicaid and other third-party payers, the allowance for doubtful accounts, the valuation allowance for deferred tax assets, workers’ compensation and general liability claim reserves, fair values of reporting units for purposes of goodwill impairment testing and future cash flows associated with long-lived assets. Actual results could differ from these estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned subsidiary which it controls. All material intercompany accounts and transactions have been eliminated. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis.

Revenue Recognition

Medical transportation and related services revenue includes emergency and non-emergency ambulance and alternative transportation service fees as well as municipal subsidies and subscription fees. Domestic ambulance and alternative transportation service fees are recognized as services are provided and are recorded net of estimated discounts applicable to Medicare, Medicaid and other third-party payers. Such discounts, which totaled $160.0 million in fiscal 2003, $148.2 million in fiscal 2002 and $145.9 million in fiscal 2001, are reflected as a reduction of gross revenues in the accompanying consolidated statement of operations. Ambulance subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year.

Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees, which are generally received in advance, are deferred and recognized on a pro rata basis over the term of the subscription agreement, which is generally one year.

The Company charges an enrollment fee for new subscribers under its fire protection service contracts. Such fees are deferred and recognized over the estimated customer relationship period of nine years. Other revenue primarily consists of dispatch, fleet, billing, training and home health care service fees which are recognized when the services are provided.

An allowance for doubtful accounts is based on historical collection trends, credit risk assessments applicable to certain types of payers and other relevant information. A summary of activity in the Company’s allowance for doubtful accounts during the fiscal years ended June 30, 2003, 2002 and 2001 is as follows (in thousands):


	June 30,
	2003			2002			2001
				*(As Restated )**
Balance at beginning of year		37,966		$	60,812		$	88,120
Provision for doubtful accounts - Domestic		85,046			77,725			86,876
Provision for doubtful accounts - Latin America		—			155			1,427
Write-offs related to doubtful accounts		(74,590	)		(100,726	)		(115,611	)

Balance at end of year	$	48,422		$	37,966		$	60,812

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

Inventories

Inventories, consisting primarily of ambulance and fleet supplies, are stated at the lower of cost or market with cost determined on a first-in, first-out basis.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation, and is depreciated over the estimated useful lives using the straight-line method. Equipment and vehicles are depreciated over three to ten years and buildings are depreciated over fifteen to thirty years. Property and equipment held under capital leases is stated at the present value of minimum lease payments, net of accumulated amortization. These assets are amortized over the shorter of the lease term or the estimated useful life of the underlying assets using the straight-line method. Major additions and improvements are capitalized; maintenance and repairs which do not improve or significantly extend the life of assets are expensed as incurred.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable, by comparing the carrying amount of such assets to the estimated undiscounted future cash flows associated with them. In cases where the estimated undiscounted cash flows are less than the related carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the assets. The fair value is determined based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.

Stock Compensation

The Company accounts for employee stock compensation using the intrinsic value method specified by Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations (APB 25). The Company accounts for stock-based compensation arrangements with non-employees in accordance with Emerging

Issues Task Force Issue No 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services.

Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation” defines a fair value based method of accounting for employee stock options or similar equity instruments but also allows an entity to continue to measure compensation cost related to stock options issued to employees using the method of accounting prescribed by APB 25. Entities who elected to continue following APB 25 must make pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value based method of accounting defined in SFAS 123 had been applied.

The Company has elected to continue to account for its stock-based compensation plans under APB 25. As exercise prices have equaled the market price of the Company’s common stock on the date of grant, stock compensation expense has not been reflected in the accompanying consolidated statement of operations at the date of grant. Stock compensation expense has been recognized for certain modifications made to existing stock options at the time of such modifications. The Company has computed, for pro forma disclosure purposes, the value of all option shares and Employee Stock Purchase Program (ESPP) discounts granted during fiscal years 2003, 2002 and 2001, using the Black-Scholes option pricing model with the following weighted average assumptions:


	Year ended June 30,
	2003				2002				2001
	Options		ESPP		Options		ESPP		Options		ESPP
Risk-free interest rate	1.61	%	1.38	%	2.27	%	1.89	%	3.74	%	2.55	%
Expected dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Expected lives in years (after vesting for options)	1.21		.50		2.72		0.50		1.35		0.50
Expected volatility	143.51	%	100.00	%	80.33	%	119.3	%	72.66	%	96.75	%

The total value of options granted and the ESPP share discount were estimated to be the following amounts, which would be amortized on the straight-line basis over the vesting period (in thousands):


	Options		ESPP
For the year ended June 30, 2003	$	2,554	$	102
For the year ended June 30, 2002	$	409	$	77
For the year ended June 30, 2001	$	1,134	$	188

If the Company had accounted for its stock-based compensation plans using a fair value based method of accounting, the Company’s pro forma net income (loss) and diluted earnings (loss) per share would have been as follows (in thousands, except per share amounts):


	Year ended June 30,
	2003			2002			2001
	*(As Restated )**
Net income (loss) applicable to common stock	$	4,558		$	(48,164	)	$	(205,290	)
Deduct: Stock based employee compensation determined under the fair value method for all awards applicable to common stock, net of tax		(1,605	)		(585	)		(875	)

Pro forma net income (loss) applicable to common stock	$	2,953		$	(48,749	)	$	(206,165	)

Income (loss) per share:
Basic – As reported	$	0.28		$	(3.17	)	$	(13.92	)

Basic – pro forma	$	0.18		$	(3.19	)	$	(13.98	)

Diluted – As reported	$	0.28		$	(3.17	)	$	(13.92	)

Diluted – pro forma	$	0.18		$	(3.19	)	$	(13.98	)

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

The effects of applying SFAS 123 for providing pro forma disclosures for fiscal years 2003, 2002 and 2001 are not likely to be representative of the effects on reported net income (loss) and diluted income (loss) per share for future years, because options vest over several years and additional awards are made each year.

Earnings Per Share

The Company calculates income (loss) per share using the two-class method. Under the two-class method, net income or loss for the period is allocated between common stock and the Company’s Series B redeemable nonconvertible participating preferred stock on the basis of the weighted average number of common shares and common share equivalents outstanding during the period. The per share amounts are also impacted by the accretion of the Series B shares to their redemption value as described in Note 14. Upon approval of the stockholders of an increase in authorized common shares and notice from the Company that results in the settlement of the Series B shares in exchange for a total of 2,115,490 common shares, accretion will cease and use of the two-class method will no longer be required. Should the Company settle the Series B shares with common stock, it will need to include a charge or a credit to income applicable to common stock in the period of settlement for the difference between the carrying value of the Series B shares and the fair value of the common shares issued in settlement.

A reconciliation of the numerators and denominators (weighted average number of shares outstanding) utilized in the basic and diluted income (loss) per share computations for the years ended June 30, 2003, 2002 and 2001 are as follows (in thousands, except per share amounts):


	Year ended June 30,
	2003			2002		2001
	*(As Restated )**
Income (loss) from continuing operations before cumulative effect of change in accounting principle	$	(3,366	)	$	370	$	(137,932	)
Less: (Income) loss from continuing operations before cumulative effect of change in accounting principle allocated to redeemable nonconvertible participating preferred stock under the two-class method		302			—		—
Less: Accretion of redeemable nonconvertible participating preferred stock		(3,604	)		—		—

Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	(6,668	)	$	370	$	(137,932	)

Average number of common shares outstanding – Basic		16,116			15,190		14,744
Add: Incremental common shares for stock options		—			583		—

Average number of common shares outstanding - Diluted		16,116			15,773		14,744

Income (loss) per share – Basic
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	(0.42	)	$	0.02	$	(9.35	)

Income (loss) per share – Diluted
Income (loss) from continuing operations applicable to common stock before cumulative effect of change in accounting principle	$	(0.42	)	$	0.02	$	(9.35	)

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

As a result of losses from continuing operations, approximately 1.4 million and 0.2 million option shares for the years ended June 30, 2003 and 2001, respectively, which had exercise prices below the applicable market prices, were not included in the computation of diluted loss per share. Stock options with exercise prices above the applicable market prices have also been excluded from the calculation of diluted loss per share. Such options totaled 4.8 million, 4.4 million and 4.4 million for the years ended June 30, 2003, 2002 and 2001, respectively.

Foreign Currency Translation

Prior to the disposition on September 27, 2002, the Company’s Argentine subsidiaries utilized the peso as their functional currency as their business was primarily transacted in pesos. Since 1991, the Argentine peso had been pegged to the U.S. dollar at an exchange rate of 1 to 1. In December 2001, the Argentine government imposed exchange restrictions which severely limited cash conversions and withdrawals. When exchange houses reopened on January 11, 2002, the peso to dollar exchange rate closed at 1.7 pesos to the dollar.

In order to prepare the accompanying financial statements as of and for the year ended June 30, 2002, the Company translated the balance sheet of its Argentine subsidiaries using an exchange rate of 3.9 pesos to 1 US dollar, the closing rate on June 30, 2002, while their statements of operations and cash flows through September 27, 2002 were translated using the weighted average rate in effect during the respective period. As the liabilities of the Argentine subsidiaries exceeded their assets, the change in exchange rates resulted in a credit to accumulated other comprehensive income (loss) in the consolidated balance sheet as of June 30, 2002.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with federally-insured institutions and limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and their geographical dispersion.

Recently Issued Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 clarifies the requirements of FASB Statement No. 5, “Accounting for Contingencies”, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 is to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial condition or results of operations. Note 17, Commitments and Contingencies, contains additional information with respect to the Company’s guarantees and indemnifications.

The Company determined that its investment in San Diego Medical Services Enterprise, LLC, (SDMSE), the entity formed with respect to its public/private alliance with the City of San Diego, meets the definition of a VIE as its economic interest in SDMSE is proportionately greater than its ownership interest and therefore, its investment in SDMSE should be consolidated under FIN 46. The Company had previously accounted for its investment in SDMSE using the equity method. While consolidation of SDMSE did not impact the Company’s previously reported net income (loss) or stockholders deficit, its consolidated financial statements of prior periods have been restated for comparative

purposes as allowed by FIN 46. The Company does not believe that it has any other investments or contractual obligations that would require consolidation under FIN 46.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 specifies that freestanding financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities. Such freestanding financial instruments include certain mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS No. 150 is effective July 1, 2003. The Company is in the process of evaluating the impact of SFAS No. 150 on its consolidated financial statements.

Reclassifications of 2001 and 2000 Financial Information

Certain financial information relating to fiscal 2002 and 2001 has been reclassified to conform with the 2003 presentation. The results of the Company’s Latin American operations for the years ended June 30, 2002 and 2001 have been reclassified and are included in income (loss) from discontinued operations.

(2)

Restatement of Consolidated Financial Statements

The Company has restated its consolidated financial statements for the following:

Accounts Receivable: The Company determined that collections on accounts receivable relating to medical transportation revenue, primarily revenue recognized prior to fiscal 2001, were substantially less than originally anticipated and the related provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in such prior years were inadequate. The inadequacy of such provisions caused the Company’s period-end allowance for doubtful accounts through March 31, 2003 to be understated and its accounts receivable overstated. The Company determined that this situation was primarily attributable to inaccurate assumptions utilized in the provision estimation process in use prior to fiscal 2001 as well as in the process utilized to assess the adequacy of the allowance for doubtful accounts through March 31, 2003.

The Company determined that its consolidated financial statements of prior years required restatement as a result of this matter. The portion of the restatement adjustments relating to discounts applicable to Medicare, Medicaid and other third-party payers is reflected as a reduction of net revenue while the portion relating to uncollectible accounts is reflected as an adjustment to the provision for doubtful accounts. The after-tax effect of the related restatement adjustments increased the Company’s accumulated deficit as of June 30, 2000 by $58.0 million.

Enrollment Fees: The Company charges an enrollment fee for new subscribers under its fire protection service contracts. The Company previously recognized these enrollment fees at the time of billing but has subsequently determined that such fees should be deferred and recognized over the estimated customer relationship period of nine years.

The Company determined that its consolidated financial statements of prior years required restatement as a result of this matter. The after-tax effect of the related restatement adjustments increased the Company’s deferred revenue and accumulated deficit as of June 30, 2000 by $1.3 million. The effect of the restatement adjustments on the Company’s operating income (loss) in fiscal 2002 and 2001 was immaterial.

San Diego Medical Services Enterprise LLC: During fiscal 1998, the Company entered into an agreement with the City of San Diego to provide all emergency and non-emergency medical transport services and in connection therewith, San Diego Medical Services Enterprise LLC (“SDMSE”) was formed. The Company owns 50% of SDMSE and appoints two of SDMSE’s five directors. The City owns the remaining 50% and appoints the remaining three directors. A wholly owned subsidiary of the Company contracts with SDMSE to provide operational and administrative support as well as billing and collection services.

During the fourth quarter of fiscal 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires that variable interest entities or VIEs be consolidated by the primary beneficiary, as that term is defined in FIN 46. The Company determined that its investment in SDMSE meets the definition of a VIE as its economic interest in SDMSE is proportionately greater than its ownership interest and therefore, its investment in SDMSE should be consolidated under FIN 46. The Company had previously accounted for its investment in SDMSE using the equity method. While the consolidation of SDMSE did not impact the Company’s previously reported net income (loss) or stockholders deficit, the consolidated financial statements of prior years have been restated for comparative purposes as allowed by FIN 46.

Earnings Per Share: The Company has restated its earnings per share calculations for fiscal 2003 to reflect earnings per share using the two-class method. The two-class method is required as a result of the issuance in September 2002 of the Company’s Series B redeemable nonconvertible participating preferred stock. The Series B shares, which the Company may elect to settle by issuance of common shares before the December 31, 2004 mandatory redemption date (subject to approval by its shareholders of an increase in the number of authorized common shares), are not convertible by the holder but are entitled to participate in any common dividends declared by the Board of Directors as if the Series B holders had been issued common stock. Under the two-class method, earnings or losses are allocated to common stock and participating securities to the extent that each security may share in earnings or losses as if such earnings or losses for the period had been distributed.

A summary of the financial statement amounts impacted by the restatement adjustments, accounting change and reclassification of discontinued operations is as follows. Net cash provided by operating activities as previously reported was not impacted by the restatement adjustments.


	As Previously Reported			Restatement Adjustments									As Restated			Accounting Change (D)		Less Latin American Operations			As Reported
	As Previously Reported			A			B			C			As Restated			Accounting Change (D)		Less Latin American Operations			As Reported
	(in thousands)
Year ended June 30, 2003:
Loss from continuing operations	$	(3,366	)	$	—		$	—		$	—		$	(3,366	)	$	—	$	—		$	(3,366	)
Net income		8,966			—			—			—			8,966			—		—			8,966
Basic loss from continuing operations applicable to common stock per share	$	(0.44	)		—			—		$	0.02		$	(0.42	)		—		—		$	(0.42	)
Basic income per share	$	0.33			—			—		$	(0.05	)	$	0.28			—		—		$	0.28
Diluted loss from continuing operations applicable to common stock per share	$	(0.44	)		—			—		$	0.02		$	(0.42	)		—		—		$	(0.42	)
Diluted income per share	$	0.33			—			—		$	(0.05	)	$	0.28			—		—		$	0.28

Year ended June 30, 2002:
Net revenue	$	497,038		$	(1,669	)	$	—		$	—		$	495,369		$	19,005	$	(25,394	)	$	488,980
Provision for doubtful accounts		69,900			871			—			—			70,771			7,109		(155	)		77,725
Operating income		26,806			(2,540	)		—			—			24,266			732		(1,588	)		23,410
Income from continuing operations before cumulative effect of change in accounting principle		3,889			(2,540	)		—			—			1,349			—		(979	)		370
Net loss		(45,624	)		(2,540	)		—			—			(48,164	)		—		—			(48,164	)
Basic income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per share	$	0.26		$	(0.17	)	$	—		$	—		$	0.09		$	—	$	(0.07	)	$	0.02
Basic loss per share	$	(3.00	)	$	(0.17	)	$	—		$	—		$	(3.17	)	$	—	$	—		$	(3.17	)
Diluted income from continuing operations applicable to common stock before cumulative effect of change in accounting principle per share	$	0.25		$	(0.17	)	$	—		$	—		$	0.08		$	—	$	(0.06	)	$	0.02
Diluted loss per share	$	(2.89	)	$	(0.16	)	$	—		$	—		$	(3.05	)	$	—	$	—		$	(3.05	)

At June 30, 2002:
Total assets	$	237,438		$	(39,147	)	$	—		$	—		$	198,291		$	2,417	$	—		$	200,708
Deferred revenue		15,409			—			1,286			—			16,695			—		—			16,695
Accumulated deficit		(313,025	)		(39,147	)		(1,286	)		—			(353,458	)		—		—			(353,458	)

Year ended June 30, 2001:
Net revenue	$	504,316		$	—		$	—		$	—		$	504,316		$	18,187	$	(43,089	)	$	479,414
Provision for doubtful accounts		102,470			(21,441	)		—			—			81,029			7,274		(1,427	)		86,876
Operating loss		(192,453	)		21,441			—			—			(171,012	)		840		66,707			(103,465	)
Loss from continuing operations		(226,731	)		21,441			—			—			(205,290	)		—		67,358			(137,932	)
Net loss		(226,731	)		21,441			—			—			(205,290	)		—		—			(205,290	)
Basic loss from continuing operations applicable to common stock per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	4.57		$	(9.35	)
Basic loss per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	—		$	(13.92	)
Diluted loss from continuing operations applicable to common stock per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	4.57			(9.35	)
Diluted loss per share	$	(15.38	)	$	1.46		$	—		$	—		$	(13.92	)	$	—	$	—		$	(13.92	)

At June 30, 2001:
Total assets	$	298,534		$	(36,607	)	$	—		$	—		$	261,927		$	2,079	$	—		$	264,006
Deferred revenue		14,707			—			1,286			—			15,993			—		—			15,993
Accumulated deficit		(267,401	)		(36,607	)		(1,286	)		—			(305,294	)		—		—			(305,294	)

At June 30, 2000:
Accumulated deficit	$	(40,670	)	$	(58,048	)	$	(1,286	)	$	—		$	(100,004	)	$	—	$	—		$	(100,004	)

Restatement Adjustments:

A	To adjust provisions for discounts applicable to Medicare, Medicaid and other third-party payers and doubtful accounts.

B	To defer enrollment fees relating to new fire protection service contracts.

C	To calculate income (loss) per share using the two-class method.

D	Adoption of FIN 46 and related consolidation of investment in San Diego Medical Services Enterprises LLC.

The restatement adjustments relating to medical transportation accounts receivable outlined above caused the Company to violate the minimum tangible net worth covenant contained in its 2002 Amended Credit Facility. This situation also resulted in a delay in the Company’s filing of its Quarterly Report on Form 10-Q for the three months ended March 31, 2003. Such delay caused the Company to not be in compliance with the financial reporting covenants contained in the 2002 Amended Credit Facility as well as the indenture relating to the Senior Notes described in Note 12. As also described in Note 12, the Company negotiated a further amendment to its credit facility effective September 30, 2003. As a result of such amendment, all previous instances of identified non-compliance with respect to the credit facility were permanently waived.

(3)

Liquidity

During fiscal 2003, the Company generated net income of $9.0 million compared with net losses of $48.2 million in fiscal 2002 and $205.3 million in fiscal 2001. The net income for the year ended June 30, 2003 included a gain of $12.5 million relating to the disposal of the Company’s Latin American operations as discussed in Note 4. The net loss in 2002 included a charge of $49.5 million relating to the adoption effective July 1, 2002 of SFAS 142 as discussed in Note 7. The net loss in fiscal 2001 included asset impairment, restructuring and other similar charges totaling $122.0 million. The Company’s operating activities provided cash totaling $13.1 million in 2003, $9.6 million in 2002 and $6.7 million in 2001.

At June 30, 2003, the Company had cash of $12.6 million, debt of $306.6 million and a stockholders’ deficit of $208.9 million. The Company’s long-term debt includes $149.9 million of 7 7/8% Senior Notes due 2008, $152.4 million outstanding under its credit facility due December 31, 2004, $3.7 million payable to a former joint venture partner and $0.6 million of capital lease obligations.

As discussed in Note 12, the Company was not in compliance with certain of the covenants contained in its revolving credit facility at June 30, 2002. On September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders which, among other things, extended the maturity date of the facility from March 16, 2003 to December 31, 2004, waived previous non-compliance, and required the issuance to the lenders of 211,549 shares of the Company’s Series B redeemable nonconvertible participating preferred stock.

As also discussed in Note 12, the Company violated certain financial covenants as a result of the restatement of its financial statements. Additionally, the restatement resulted in a delay in the filing of the Company’s Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes. On September 26, 2003, the Company entered into the 2003 Amended Credit Facility with its lenders which, among other things, extended the maturity date of the facility from December 31, 2004 to December 31, 2006, waived previous non-compliance, and required the issuance to the lenders of 283,979 shares of the Company’s Series C redeemable nonconvertible participating preferred stock.

The Company’s ability to service its long-term debt, to remain in compliance with the various restrictions and covenants contained in its debt agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.

If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer-term business objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. Management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through June 30, 2004. To the extent that actual results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.

(4)

Disposition of Latin American Operations

Due to the deteriorating economic conditions and the continued devaluation of the local currency, the Company reviewed its strategic alternatives with respect to the continuation of operations in Latin America, including Argentina and Bolivia, and determined that it would benefit from focusing on its domestic operations. Effective September 27, 2002, the Company sold its Latin American operations to local management in exchange for the assumption of such operation’s net liabilities. The gain on the disposition of the Company’s Latin American operations totaled $12.5 million and is included in income from discontinued operations for the year ended June 30, 2003. The gain includes the assumption by the buyer of net liabilities of $3.3 million (including, among other things, accounts receivable of $0.6

million and accrued liabilities of $4.8 million) as well as the recognition of related cumulative translation adjustments of $10.1 million.

Medical transportation and related service revenue relating to the Company’s Latin American operations totaled $2.1 million, $23.9 million and $41.9 million for fiscal years 2003, 2002 and 2001, respectively. Fire and other revenue for these operations totaled $0.3 million, $1.5 million and $1.2 million for fiscal years 2003, 2002 and 2001, respectively. The Company’s Latin American operations generated a loss of $156,000, income of $1.0 million and a loss of $67.4 million for fiscal years 2003, 2002, and 2001 respectively. The loss in fiscal 2001 included $46.3 million of asset impairment charges and $9.4 million related to the loss on disposition of clinic operations described in Note 5. The results of operations of the Company’s former Latin American operations have been classified as discontinued operation in the accompanying consolidated statement of operations for fiscal years ended 2003, 2002 and 2001.

(5)

Asset Impairments, Restructuring and Other Charges (Credits)

Asset Impairments

In connection with the budgeting process for fiscal 2002, which was completed in the fourth quarter of fiscal 2001, the Company analyzed each cost center within its various service areas not identified for closure or downsizing to determine whether the associated long-lived assets (e.g., property, equipment and goodwill) would be recoverable from future operating cash flow. Cost centers represent individual operating units within a given service area for which separately identifiable cash flow information is available. The Company performed this analysis as a result of its expectations of a challenging health care reimbursement environment as well as anticipated increases in labor and insurance costs with respect to its domestic ambulance operations. The analysis with respect to the Company’s Argentine operations included the impact of the deteriorating economic and political environment as well as information developed by a third party concerning the marketability of these operations during fiscal 2001.

In order to assess recoverability, the Company estimated the net future cash flows for each cost center and then compared the resulting undiscounted amounts to the carrying value of each cost center’s long-lived assets. It should be noted that property and equipment balances are specifically identified with each cost center. Additionally, goodwill is specifically identified with each cost center at the time of acquisition and, therefore, related allocations were not necessary for purposes of performing the impairment analysis.

For those cost centers where estimated future net cash flows on an undiscounted basis were less than the related carrying amounts of the long-lived assets, an asset impairment was considered to exist. The Company measured the amount of the asset impairment for each such cost center by discounting its estimated future net cash flows using a discount rate of 18.5% and comparing the resulting amount to the carrying value of its long-lived assets. Based upon this analysis, the Company determined that asset impairment charges approximating $94.4 million were required for cost centers within its domestic and Argentine ambulance operations. The asset impairments were charged directly against the related asset balances. A summary of the related charge is as follows:


	Goodwill		Property, Equipment and Other		Total
	(in thousands)
Domestic ambulance operations	$	41,631	$	6,419	$	48,050
Argentine ambulance operations		44,327		1,976		46,303

Total	$	85,958	$	8,395	$	94,353

As a result of the sale of the Company’s Latin American operations in September 2002, the asset impairment charge with respect to the Company’s Argentine ambulance operations is included in the loss from discontinued operations for the year ended June 30, 2001.

As discussed in Note 7, the Company changed its method of accounting for goodwill effective July 1, 2001 including the manner in which goodwill impairments are assessed.

Restructuring and Other

During the fourth quarter of fiscal 2001, the Company decided to close or downsize nine service areas and in connection therewith, recorded restructuring charges as well as other related charges totaling $9.1 million. These charges included $1.5 million to cover severance costs associated with the termination of approximately 250 employees, lease termination costs of $2.4 million, asset impairment charges for goodwill of $4.1 million and other exit costs of $1.1 million, respectively, related to the impacted service areas. The service areas selected for closure or downsizing generated revenue of $11.8 million, operating income of $1.0 million and cash flow of $2.5 million in fiscal 2002. and revenue of $17.7 million, operating losses of $4.0 million and negative cash flow of $3.2 million in fiscal 2001.

The previously mentioned charge included accrued severance, lease termination and other costs totaling $1.5 million relating to an under performing service area that the Company had planned to exit at the time of contract expiration in December 2001. During fiscal 2002, the contract was extended for a one-year period at the request of the municipality to enable it to transition medical transportation service to a new provider. In connection with the contract extension, the Company released $0.2 million of previously accrued lease termination costs relating to the extension period to income. The operating environment in this service area improved and in November 2002, the Company was awarded a new multi-year contract. As a result, the remaining reserve of $1.3 million originally recorded in 2001 was released to income during fiscal 2003.

A summary of activity in the Company’s restructuring reserves is (in thousands):


	Severance Costs			Lease Termination Costs			Write-off of Intangible Assets			Other Exit Costs			Total
Balance at June 30, 2000	$	3,529		$	3,247		$	—		$	1,356		$	8,132
Fiscal 2001 charges		1,475			2,371			4,092			1,153			9,091
Fiscal 2001 usage		(4,531	)		(1,071	)		(4,092	)		(1,360	)		(11,054	)
Adjustments		1,361			(1,313	)		—			(48	)		—

Balance at June 30, 2001	$	1,834		$	3,234		$	—		$	1,101		$	6,169
Fiscal 2002 usage		(1,025	)		(1,172	)		—			(951	)		(3,148	)
Adjustments		(52	)		(548	)		—			(118	)		(718	)

Balance at June 30, 2002		757			1,514			—			32			2,303
Fiscal 2003 usage		(29	)		(207	)		—			(71	)		(307	)
Adjustments		(728	)		(732	)		—			39			(1,421	)

Balance at June 30, 2003	$	—		$	575		$	—		$	—		$	575

The restructuring reserve as of June 30, 2003 relates to lease termination costs for which payments will be made through December 2006.

Loss on Disposition of Clinic Operations

During fiscal 2001, the Company sold its Argentine clinic operations in exchange for a $3.0 million non-interest bearing note receivable. The note, which required monthly principal payments of $25,000 through April 2011, was included in the disposition of the Latin American operations in September 2002. The sale resulted in a loss on disposition of $9.4 million, including the write-off of $9.3 million of related goodwill. The clinic operations generated revenue of $4.0 million, operating losses of $1.5 million and negative cash flow of $0.9 million in fiscal 2001. Results relating to the clinic operations are included in income ((loss) from discontinued Latin American operations for the year ended June 30, 2001.

Contract Terminations and Related Asset Impairments

In November 2000, the Company learned that its exclusive 911 contract in Lincoln, Nebraska would not be renewed effective December 31, 2000 and in connection therewith, recorded a contract termination charge of $5.2 million. This charge included asset impairments for related goodwill and equipment totaling $4.3 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1995), $0.8 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease terminations and other exit costs. The Lincoln contract generated revenue of $4.7 million, operating income of $0.4 million and cash flow of $0.5 million in fiscal 2000, its last full year of operations.

In May 2001, the Company learned that its exclusive 911 contract in Arlington, Texas would not be renewed effective September 30, 2001 and in connection therewith, recorded a contract termination charge of $4.1 million. This charge included asset impairments for related goodwill and equipment of $3.9 million (the exclusive 911 contract was acquired in a purchase business combination in fiscal 1997), $0.1 million to cover severance costs associated with terminated employees, and $0.1 million to cover lease termination and other exit costs. The asset impairments were charged directly against the related assets. The Arlington contract generated revenue of $8.3 million, operating income of $0.1 million and cash flow of $0.5 million in fiscal 2001 its last full year of operations.

(6)

Property And Equipment

Property and equipment, including equipment held under capital leases, consisted of the following:


	June 30,
	2003			2002
	(in thousands)
Equipment	$	55,641		$	55,739
Vehicles		74,715			73,908
Land and buildings		16,715			16,788
Leasehold improvements		6,632			7,270

		153,703			153,705
Less: Accumulated depreciation		(110,693	)		(105,173	)

	$	43,010		$	48,532

The Company had vehicles and equipment with a gross carrying value of approximately $12.9 and $14.2 million at June 30, 2003 and 2002, respectively, under capital lease agreements. Accumulated depreciation on these assets totaled approximately $11.5 and $12.3 million at June 30, 2003 and 2002, respectively.

The Company has pledged land, a building, leasehold improvements and equipment with a net book value of approximately $10.7 million, to secure certain of its obligations under its insurance and surety bonding programs. A summary of activity in the Company’s property and equipment balance is as follows:


	June 30,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	48,532		$	57,999		$	85,919
Depreciation expense		(13,110	)		(15,155	)		(21,809	)
Additions		9,400			6,854			5,774
Asset impairments		—			—			(8,502	)
Asset disposals		(1,278	)		(737	)		(1,643	)
Effect of Argentine peso devaluation		—			(429	)		—
Disposition of Latin American operations		(534	)		—			—
Disposition of Argentine clinic operations		—			—			(1,740	)

Balance at end of year	$	43,010		$	48,532		$	57,999

(7)

Goodwill and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 141, “Business Combinations” (SFAS 141) and No. 142, “Goodwill and Other Intangible Assets” (SFAS 142.) SFAS 141 superseded APB Opinion No. 16, “Business Combinations.” The provisions of SFAS 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill; and, require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires that upon adoption of SFAS 142, certain intangible assets be reclassified into or out of goodwill based on certain criteria. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if events or circumstances indicate that the related carrying amount may be impaired), require that reporting units be identified for purposes of assessing potential impairments, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company adopted SFAS 142 effective July 1, 2001 and discontinued amortization of goodwill as of that date. During the first quarter of fiscal 2002, the Company identified its various reporting units which consist of the individual cost centers within its Medical Transportation and Fire and Other operating segments for which separately identifiable cash flow information is available. During the second quarter of fiscal 2002, the Company completed the first step impairment test as of July 1, 2001. Potential goodwill impairments were identified in certain of these reporting units. During the fourth quarter of fiscal 2002, the Company completed the second step test and determined that all or a portion of the goodwill applicable to certain of its reporting units was impaired as of July 1, 2001 resulting in an aggregate charge of $49.5 million. The fair value of the reporting units was determined using the discounted cash flow method and a discount rate of 15.0%. This charge has been reflected in the accompanying consolidated statement of operations as the cumulative effect of change in accounting principle. The Company has selected June 30 as the date on which it will perform its annual goodwill impairment test.

The following table summarizes the Company’s reported results along with adjusted amounts as if the Company had adopted SFAS 142, and discontinued goodwill amortization, as of July 1, 2000 (in thousands, except per share amounts):


	For the Year Ended June 30,
	2003		2002			2001
	As Restated *
Reported net income (loss) applicable to common stock before cumulative effect of change in accounting principle	$	4,558	$	1,349		$	(205,290	)
Add back: Goodwill amortization		—		—			7,161

Adjusted net income (loss) applicable to common stock before the cumulative effect of change in accounting principle		4,558		1,349			(198,129	)
Cumulative effect of change in accounting principle		—		(49,513	)		—

Adjusted net income (loss) applicable to common stock	$	4,558	$	(48,164	)	$	(198,129	)

Basic income (loss) per share:
Reported income (loss) before the cumulative effect of change in accounting principle	$	0.28	$	0.09		$	(13.92	)
Goodwill amortization		—		—			0.49

Adjusted income (loss) before the cumulative effect of change in accounting principle	$	0.28		0.09			(13.43	)
Cumulative effect of change in accounting principle		—		(3.26	)		—

Adjusted net income (loss)	$	0.28	$	(3.17	)	$	(13.43	)

Diluted income (loss) per share:
Reported income (loss) before the cumulative effect of change in accounting principle	$	0.28	$	0.09		$	(13.92	)
Goodwill amortization		—		—			0.49

Adjusted income (loss) before the cumulative effect of change in accounting principle		0.28		0.09			(13.43	)
Cumulative effect of change in accounting principle		—		(3.26	)		—

Adjusted net income (loss)	$	0.28	$	(3.17	)	$	(13.43	)

*	Refer to Note 2, Restatement of Consolidated Financial Statements.

The changes in the carrying amount of goodwill for the year ended June 30, 2003 is as follows (in thousands):


	Medical Transportation Segment			Fire and Other Segment		Total
Balance at June 30, 2001	$	89,598		$	1,159	$	90,757
Adoption of SFAS No. 142		(49,513	)		—		(49,513	)

Balance at June 30, 2002		40,085			1,159		41,244
Disposition of Latin American operations		(77	)		—		(77	)

Balance at June 30, 2003	$	40,008		$	1,159	$	41,167

The changes in the carrying amount of other intangible assets, primarily non-compete agreements relating to prior business combinations which are included in other assets on the consolidated balance sheet, during fiscal 2003 and 2002 are as follows (in thousands):


	June 30,
	2003			2002
Balance at beginning of year	$	600		$	1,654
Additions		1,065			—
Amortization		(203	)		(1,054	)

Balance at end of year	$	1,462		$	600

Amortization of other intangible assets for each of the fiscal years ending June 30, are as follows (in thousands):


2004	$	310
2005		302
2006		277
2007		277
2008		168
Thereafter		128

	$	1,462

(8)

Joint Venture

During fiscal 1998, the Company entered into a joint venture to provide non-emergency transport services in the Maryland, Washington, D.C. and northern Virginia areas. The Company obtained a majority interest in the joint venture in exchange for a commitment to provide $8.0 million in funding for acquisitions by the joint venture in the greater Baltimore, Maryland and Washington, D.C. areas (which commitment was fulfilled by June 30, 1998). The other party to the joint venture contributed the stock of two ambulance companies in exchange for his minority stake in the joint venture. The Company consolidated the joint venture for financial reporting purposes.

The joint venture agreement allowed the minority partner to put his interest in the joint venture to the Company. The agreement also allowed the Company the option to delay the purchase of the minority partner’s interest for a period of one year. During fiscal 2001, the minority partner elected to exercise the put option and the Company exercised its right to delay purchasing the minority partner’s interest for one year. Based on the provisions of the joint venture agreement, the purchase price for the minority partner’s interest approximated $5.1 million. The Company recorded a charge of approximately $4.0 million to other income (expense), net during fiscal 2001 relating to this agreement.

During the year ended June 30, 2002, the Company completed the purchase of the minority partner’s interest in exchange for a note payable of approximately $5.1 million. The note bears interest at prime plus 2.25% (subject to a cap of 7.75%) and requires monthly principal and interest payments ranging from $70,000 to $125,000 through December 2006. Additionally, any outstanding accrued interest is due at maturity. The Company reflected this transaction as an increase in long-term debt of $5.1 million offset by reductions in minority interest of $8.0 million and other assets of $2.9 million.

(9)

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	At June 30,
	2003		2002
Workers’ compensation claim reserves	$	11,255	$	15,924
General liability claim reserves		13,935		15,433
Accrued salaries, wages and related payroll		11,433		10,678
Accrued interest		4,370		10,512
Other accrued liabilities		16,705		21,147

Total accrued liabilities	$	57,698	$	73,694

The decrease in other accrued liabilities between 2003 and 2002 is primarily due to the disposal of the Company’s Latin American operations. Additionally, the decrease in accrued interest is primarily related to approximately $6.8 million in accrued interest being added to the balance of the credit facility in conjunction with the September 30, 2002 amendment to the credit facility described in Note 12.

(10)

General Liability and Workers’ Compensation Programs

The Company retains certain levels of exposure with respect to its general liability and workers compensation programs and purchases coverage from third party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, the Company establishes reserves for claims, both reported and incurred but not reported, within its level of retention based on currently available information as well as its historical claims experience.

The Company engages third-party administrators or TPAs to manage claims resulting from its general liability and workers compensation programs. The TPAs establish initial loss reserve estimates at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. The Company periodically reviews the claim reserves established by the TPAs and engages independent actuaries to assist with the evaluation of the adequacy of its reserves on an annual basis. The Company adjusts its claim reserves with an associated charge or credit to expense as new information on the underlying claims is obtained.

General Liability: A summary of activity in the Company’s general liability claim reserves, which are included in accrued liabilities in the consolidated balance sheet, is as follows:


	June 30,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	15,433		$	19,715		$	3,171
Provision charged to other operating expense		4,506			2,442			22,326
Claim payments charged Against the reserve		(6,004	)		(6,724	)		(5,782	)

Balance at end of year	$	13,935		$	15,433		$	19,715

The Company performed a comprehensive review of information related to its historical settlement information and open claims during the third quarter of fiscal 2001. As a result of this review, the Company recorded a charge of $15.0 million for increases in its reserves for reported claims as well as to establish reserves for claims incurred but not reported.

Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Company’s retention limits. Cash deposits relating to the Company’s general liability program totaled $2.9

million at June 30, 2003 of which $1.7 million is included in prepaid expenses and other and $1.2 million is included in insurance deposits. Cash deposits totaled $1.9 million at June 30, 2002 which are included in insurance deposits.

The Company’s general liability policies corresponding with fiscal years 2001 and 2002 were issued by Legion Insurance Company (“Legion”). Legion’s obligations under such policies were reinsured by an unrelated insurance carrier that was identified and approved by the Company. At the time the coverage was purchased, Legion was an “A” rated insurance carrier while the reinsurer was an A++ rated carrier. Under these policies, Legion’s obligation (as well as that of its reinsurer) to pay covered losses commences once the Company satisfies its aggregate retention limits for the respective policy years. As of June 30, 2003, the Company had met its aggregate retention limit with respect to the policies corresponding to fiscal 2001 and anticipates that it will meet its aggregate retention limit for the policies corresponding to fiscal 2002. Pursuant to these policies, Legion (and its reinsurer) is obligated to fund all claim related payments in excess of the Company’s retention limits.

On July 25, 2003, the Pennsylvania Insurance Department (the “Department”) placed Legion into liquidation. The Department is conducting the liquidation process, subject to judicial review by the Commonwealth Court of Pennsylvania (the “Court”). Legion’s liquidation could put the Company’s general liability insurance coverage for the previously mentioned policy years at risk; however, based upon information currently available, the Company believes that proceeds from Legion’s reinsurer will be directly available to pay claims in excess of the Company’s retention limits, notwithstanding the liquidation process. If the Court deems the Company’s reinsurance to be a general asset of Legion or if the reinsurer otherwise refuses to pay claims directly, then reinsurance proceeds to fund covered general liability losses in excess of the Company’s retention limits may be substantially reduced, delayed or unrecoverable. In such an event, the Company may be required to fund general liability losses applicable to these policy years in excess of its retention limits, to the extent that such losses are not covered by the applicable state guaranty funds.

Workers Compensation: A summary of activity in the Company’s workers’ compensation claim reserves, which are also included in accrued liabilities in the consolidated balance sheet, is as follows:


	June 30,
	2003			2002			2001
	(in thousands)
Balance at beginning of year	$	15,924		$	14,944		$	11,315
Provision charged to payroll and employee benefits		—			7,318			11,832
Claim payments charged against the claim reserve		(4,669	)		(6,338	)		(8,203	)

Balance at end of year	$	11,255		$	15,924		$	14,944

Effective May 1, 2002, the Company began fully insuring its workers compensation coverage and no longer retains any of the related obligations. The Company is, however, subject to retrospective premium adjustments should losses exceed previously established limits. As a result of this change in coverage, the Company no longer establishes reserves for claims incurred subsequent to May 1, 2003.

In connection with the Company’s restructuring activities, an increase in the volume of workers’ compensation claims was noted. Provisions charged to expense during fiscal 2002 included $2.0 million recorded in the fourth quarter to increase its claim reserves based on a review of claims experience. Provisions charged to expense during fiscal 2001 included $5.0 million in the third quarter for increases in reserves for unreported claims based on updated information received from the Company’s TPA.

Certain insurers require the Company to deposit cash into designated loss funds in order to fund claim payments within the Company’s retention limits. Additionally, the Company has also been required to provide other forms of financial assurance including letters of credit and surety bonds. Cash deposits relating to the Company’s workers compensation program totaled $6.8 million at June 30, 2003 which are included in insurance deposits. Cash deposits totaled $9.2 million at June 30, 2002 of which $2.9 million is included in prepaid expenses and other and $6.3 million is included in insurance deposits.

During fiscal years 1992 through 2001, the Company purchased certain portions of its workers’ compensation coverage from Reliance Insurance Company (Reliance). At the time the Company purchased such coverage, Reliance was an “A” rated insurance company. In connection with this coverage, the Company provided Reliance with various amounts and forms of collateral to secure its performance under the respective policies as was customary at the time. As of June 30, 2003, the Company had $3.0 million of cash on deposit with Reliance which is included in insurance deposits. The Company has also provided Reliance with letters of credit and surety bonds totaling $6.4 million.

On October 3, 2003, the Department placed Reliance into liquidation. It is the Company’s understanding that cash on deposit with Reliance will be returned to the Company on or before the date that all related claims have been satisfied, so long as the Company has met its claim payment obligations within its retention limits under the related policies. Based on the information currently available, the Company believes that the cash on deposit with Reliance is fully recoverable and will either be returned to the Company or used by the liquidator, with the Company’s prior consent, to pay claims on its behalf. In the event that the Company is unable to access the funds on deposit with Reliance or the Reliance liquidator refuses to refund such deposits, such deposits may become impaired. Additionally, Reliance’s liquidation could put the Company’s workers compensation insurance coverage at risk for the related policy years; however, based upon information currently available, the Company believes that either Reliance or the applicable state guaranty funds will continue to pay claims. To the extent that such losses are not covered by either Reliance or the applicable state guaranty funds, the Company may be required to fund the related workers compensation claims for the applicable policy years.

During fiscal 2002, the Company purchased certain portions of its workers compensation coverage from Legion. Legion required assurances that the Company would be able to fund its related retention obligations, which were estimated by Legion to approximate $6.2 million. The Company provided this assurance by purchasing a deductible reimbursement policy from Mutual Indemnity (Bermuda), Ltd. (Mutual Indemnity), a Legion affiliate. That policy required the Company to deposit approximately $6.2 million with Mutual Indemnity and required Mutual Indemnity to utilize such funds to satisfy the Company’s retention obligations under the Legion policy. The Company funded these deposits on a monthly basis during the policy term. As of June 30, 2003, the Company had net deposits with respect to this coverage totaling $3.3 million which are included in insurance deposits.

As mentioned previously, the Department placed Legion into liquidation on July 25, 2003. In January 2003, the Court ordered the Legion rehabilitator and Mutual Indemnity to establish segregated trust accounts to be funded by cash deposits held by Mutual Indemnity for the benefit of individual insureds such as the Company. It is the Company’s understanding that the Legion liquidator and Mutual Indemnity continue to negotiate the legal framework for the form and administration of these trust accounts and that no final agreement has yet been reached. The Company is actively participating in the Court proceedings to cause such a trust account mechanism to be created and to operate so as to fully cover all its deductible obligations as originally intended and to return to the Company any remaining deposit balance once all related claims have been closed. Based on the information currently available, the Company believes that the amounts on deposit with Mutual Indemnity are fully recoverable and will either be returned to the Company or used to pay claims on the Company’s behalf. In the event that the Company is unable to access the funds on deposit with Mutual Indemnity, it may be required to fund the related workers compensation claims for the applicable policy years, to the extent that such losses are not covered by the applicable state guaranty funds.

(11)

Other Charges and Credits

During the fiscal 2002 and 2001 the Company recorded the following other charges or credits (in thousands):


	Fiscal Year Ended June 30,
	2002			2001
Argentine Operations	$	—		$	8,512
Supply Inventory		—			8,442
Other Charges and Credits		(1,712	)		3,079
Paid Time Off for Field Personnel		(1,300	)		3,010
Employee Medical Benefits		—			5,429
Amount Due from Former Owner		—			962
Medicare/Medicaid Audits		(1,298	)		1,300

Argentine Operations

The Company recorded charges totaling $8.5 million related to asset write-offs and reserve adjustments. The Company’s Argentine subsidiaries had been effected by escalating political and economic instability as well as changes in local management during fiscal 2001. The charge was recorded in other operating expenses in the consolidated statement of operations.

Supply Inventory

Medical, fleet and fire supplies are maintained in a central warehouse, numerous regional warehouses, and multiple stations, lockers and vehicles. A physical inventory of all locations at June 30, 2001 revealed a shortage from recorded levels. Shrinkage, obsolescence and losses due to service area closures accounted for the shortage. The Company recorded a charge of $8.4 million to write-down its inventory balances to amounts determined by the physical inventory. The charge was recorded in other operating expenses in the consolidated statement of operations.

Other Charges and Credits

During the third quarter of fiscal 2002, the Company recorded the reversal of $1.7 million of discretionary employee benefits accrued in calendar 2000 as a result of the Company’s decision not to pay such benefits. The original charge, as well as the current year reversal, were reflected in payroll and employee benefits in the consolidated statement of operations.

The Company recorded charges totaling $3.1 million in fiscal 2001 for a number of items related to its domestic operations, the largest of which was a $0.7 million charge relating to administrative costs paid on behalf of the Company’s employee benefit plans. These charges were a result of adjustments to certain estimates for prepaid expenses, accrued liabilities and other items that were resolved in the fourth quarter of fiscal 2001.

Paid-Time-Off For Field Personnel

During the fourth quarter of fiscal 2002, the Company recorded a $1.3 million reduction in its paid-time-off accrual as a result of a change in the related policies. The reduction was recorded as a reduction of payroll and employee benefits in the consolidated statement of operations.

During the fourth quarter of fiscal 2001, the Company analyzed its paid-time-off accruals and determined that its paid-time-off policy had been inconsistently applied in certain service areas. As a result of this analysis, the Company recorded a charge of $3.0 million to bring the liability into line with the amount required under the related policies. This charge was recorded in payroll and employee benefits in the consolidated statement of operations.

Employee Medical Benefits

The Company self-insures its employee medical coverage. Based upon information obtained from its third party claims administrator in the fourth quarter of fiscal 2001, the Company recorded a charge of $5.4 million to increase its reserve for incurred but not reported employee medical claims. The increased reserve was required as a result of continuing increases in healthcare costs, including prescription drugs. The charge was reflected in payroll and employee benefits in the consolidated statement of operations.

Amount Due From Former Owner

In connection with a February 1998 acquisition, the seller indemnified the collection of certain accounts receivable. In connection with the settlement of litigation involving the seller during the fourth quarter of fiscal 2001, the Company agreed to release the seller from his obligations under the indemnification. The Company recorded a charge of $1.0 million, which was reflected in other operating expenses in the consolidated statement of operations, related to this settlement.

Medicare/Medicaid Audits

The Company recorded a charge of $1.3 million during the fourth quarter of fiscal 2001 for the expected settlement of a Medicare audit of an acquired company for periods prior to the acquisition. This charge, which was reflected in other operating expenses in the consolidated statement of operations, was taken based upon information obtained during the fourth quarter of fiscal 2001, which included correspondence with the Medicare intermediary. The $1.3 million charge was reversed in the fourth quarter of fiscal 2002 after the Company settled the audit for approximately $2,000.

(12)

Long-Term Debt

Notes payable and capital lease obligations consisted of the following:


	June 30,
	2003			2002
	(in thousands)
Credit facility due December 2004	$	152,420		$	144,369
7 7/8% Senior Notes due 2008, net of discount of $122 and $148, respectively		149,877			149,852
Note payable to former joint venture partner (See Note 8)		3,722			4,622
Capital lease obligations and other notes payable, at varying rates, from 6.0% to 12.75%, due through 2013		620			1,319

		306,639			300,162
Less: Current maturities		(1,329	)		(1,633	)

	$	305,310		$	298,529

Credit Facility

In March 1998, the Company entered into a $200 million revolving credit facility that was originally scheduled to mature on March 16, 2003. The credit facility was unsecured and was unconditionally guaranteed on a joint and several basis by substantially all of the Company’s domestic wholly-owned current and future subsidiaries. Interest rates and availability under the credit facility depended on the Company’s meeting certain financial covenants.

In December 1999, the Company was not in compliance with certain of the covenants contained in the original credit facility. The Company received a series of compliance waivers regarding these covenants through April 1, 2002. The waivers precluded additional borrowings under the credit facility, required the Company to accrue additional interest expense at a rate of 2.0% per annum on the amount outstanding under the credit facility, and required the Company to make unscheduled principal payments totaling $5.2 million.

Effective September 30, 2002, the Company entered into the 2002 Amended Credit Facility with its lenders pursuant to which, among other things, all prior covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2004, the interest rate was increased to LIBOR + 7% (8.8% at the date of the amendment), and unpaid additional interest and various fees and expenses associated with the amendment were added to the amount outstanding under the credit facility, resulting in an outstanding balance of $152.4 million. Additionally, the financial covenants contained in the original agreement were revised to levels that were consistent with the Company’s business levels and outlook at that time. In consideration for the amendment, the Company paid the lenders an amendment fee of $1.2 million as well as issued 211,549 shares of the Company’s Series B redeemable nonconvertible participating preferred stock described in Note 14.

million were expensed. Unamortized debt issue costs related to this amendment, which are included in other assets in the consolidated balance sheet, totalled $3.6 million at June 30, 2003.

As a result of the restatement discussed in Note 2 and the related increase in the Company’s stockholders’ deficit, the Company was not in compliance with the minimum tangible net worth covenant contained in the 2002 Amended Credit Facility. Additionally, the restatement also resulted in a delay in the filing of the Company’s Form 10-Q for the quarter ended March 31, 2003, thereby causing the Company to not be in compliance with the reporting requirements contained in both the 2002 Amended Credit Facility and the indenture relating to the Senior Notes described below. The lack of compliance with these covenants triggered the accrual of additional interest at the rate of 2.0% per annum on the amount outstanding under the credit facility from May 15, 2003, the original required filing date for the Form 10-Q.

The Company entered into the 2003 Amended Credit Facility dated September 26, 2003 with its lenders pursuant to which, among other things, all prior identified covenant violations were permanently waived, the maturity date of the facility was extended to December 31, 2006, and the financial covenants contained in the September 30, 2002 amendment were revised to levels consistent with the Company’s current business levels and outlook. The revised financial covenants include: total debt leverage ratio (initially set at 6.88); minimum tangible net worth (initially set at $280.0 million deficit); fixed charge coverage ratio (initially set at 1.10); a limitation on annual capital expenditures (initially set at $11.0 million per fiscal year); and, a limitation on annual operating lease expense equivalent to 3.10% of consolidated net revenue. The compliance levels for the first four covenants outlined above are set at varying levels as specified in the related agreement. The interest rate applicable to borrowings under the credit facility remained unchanged at LIBOR +7%.

In consideration for the amendment, the Company paid certain of the lenders amendment fees totaling $0.5 million and issued certain of the lenders 283,979 shares of the Company’s Series C redeemable nonconvertible participating preferred stock described in Note 14. The Company also made a $1.0 million principal payment related to asset sale proceeds as required under the September 2002 amendment to the credit facility.

The 2003 Amended Credit Facility is not considered to represent a substantial modification for financial reporting purposes as a result, the $0.5 million amendment fee and the estimated fair value of the Series C shares will be capitalized as debt issue costs and amortized to interest expense over the term of the amended agreement. Professional fees and other related costs incurred in connection with the amendment will be expensed.

At June 30, 2003, the weighted average interest rate on credit facility borrowings was approximately 8.4%. At June 30, 2003 there was $152.4 million outstanding on the credit facility as well as $3.5 million in letters of credit issued under the credit facility at that date.

7 7/8% Senior Notes Due 2008

In March 1998, the Company issued $150.0 million of its 7 7/8% Senior Notes due 2008 (the Senior Notes) under Rule 144A under the Securities Act of 1933, as amended (Securities Act). Interest under the Senior Notes is payable semi-annually on September 15 and March 15. The Company incurred expenses related to the offering of approximately $5.3 million and is amortizing these costs to interest expense over the life of the Senior Notes. In April 1998, the Company filed a registration statement under the Securities Act relating to an exchange offer for the Senior Notes. The registration statement became effective on May 14, 1998. The Senior Notes are general unsecured obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by substantially all of its domestic wholly-owned current and future subsidiaries (the Guarantors). The Senior Notes contain certain covenants that, among other things, limit our ability to incur certain indebtedness, sell assets, or enter into certain mergers or consolidations.

The Company does not believe that the separate financial statements and related footnote disclosures concerning the Guarantors provide any additional information that would be material to investors in making an investment decision. Consolidating financial information for the Company (the Parent), the Guarantors and the Company’s remaining subsidiaries (the Non-Guarantors) is as follows:

RURAL/METRO CORPORATION

CONSOLIDATING BALANCE SHEET

As of June 30, 2003

(in thousands)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current assets:
Cash	$	—		$	11,362		$	1,199		$			$	12,561
Accounts receivable, net		—			49,502			10,926			—			60,428
Inventories		—			11,504			—			—			11,504
Prepaid expenses and other					7,467			44			—			7,511

Total current assets		—			79,835			12,169			—			92,004
Property and equipment, net		—			42,862			148			—			43,010
Goodwill		—			41,167			—			—			41,167
Insurance deposits		—			7,937			—			—			7,937
Due from (to) affiliates		255,078			(228,366	)		(26,712	)		—			—
Other assets		6,177			5,453			418			—			12,048
Investment in subsidiaries		(157,533	)		—			—			157,533			—

Total assets	$	103,722		$	(51,112	)	$	(13,977	)	$	157,533		$	196,166

LIABILITIES, MINORITY INTERESTS, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	—		$	12,087		$	1,691		$	—		$	13,778
Accrued liabilities		3,791			53,643			264			—			57,698
Deferred revenue		—			17,603			—			—			17,603
Current portion of long-term debt		—			1,329						—			1,329

Total current liabilities		3,791			84,662			1,955			—			90,408
Long-term debt, net of current portion		302,298			3,012			—			—			305,310
Other liabilities		—			181			—			—			181
Deferred income taxes		—			650						—			650

Total liabilities		306,089			88,505			1,955			—			396,549

Minority interests		—			—						1,984			1,984

Series B redeemable nonconvertible participating preferred stock		7,793			—			—			—			7,793

Stockholders’ equity (deficit):
Common stock		166			82			8			(90	)		166
Additional paid-in capital		135,405			54,622			20,168			(74,790	)		135,405
Treasury stock		(1,239	)		—			—			—			(1,239	)
Accumulated deficit		(344,492	)		(194,321	)		(36,108	)		230,429			(344,492	)

Total stockholders’ equity (deficit)		(210,160	)		(139,617	)		(15,932	)		155,549			(210,160	)

	$	103,722		$	(51,112	)	$	(13,977	)	$	157,533		$	196,166

RURAL/METRO CORPORATION

CONSOLIDATING BALANCE SHEET

As of June 30, 2002

(in thousands)

(As Restated *)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current assets:
Cash	$	—		$	9,424		$	1,253		$	—		$	10,677
Accounts receivable, net		—			54,432			10,029			—			64,461
Inventories		—			12,178			42			—			12,220
Prepaid expenses and other		—			7,077			154			—			7,231

Total current assets		—			83,111			11,478			—			94,589
Property and equipment, net		—			47,972			560			—			48,532
Goodwill		—			41,167			77			—			41,244
Insurance deposits		—			8,228			—			—			8,228
Due from (to) affiliates		266,471			(212,236	)		(54,235	)		—			—
Other assets		3,031			2,794			2,290			—			8,115
Investment in subsidiaries		(170,862	)		—			—			170,862			—

	$	98,640		$	(28,964	)	$	(39,830	)	$	170,862		$	200,708

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	—		$	11,049		$	2,213			—		$	13,262
Accrued liabilities		10,171			61,280			2,243			—			73,694
Deferred revenue		—			16,695			—			—			16,695
Current portion of long-term debt		—			1,620			13			—			1,633

Total current liabilities		10,171			90,644			4,469			—			105,284
Long-term debt, net of current portion		294,221			4,308			—			—			298,529
Other liabilities		—			477			—			—			477
Deferred income taxes		—			1,814			(1,164	)		—			650

Total liabilities		304,392			97,243			3,305			—			404,940

Minority interests		—			—			—			1,520			1,520

Stockholders’ equity (deficit):
Common stock		159			82			17			(99	)		159
Additional paid-in capital		138,470			54,622			34,962			(89,584	)		138,470
Treasury stock		(1,239	)		—			—			—			(1,239	)
Accumulated deficit		(353,458	)		(180,911	)		(88,430	)		269,341			(353,458	)
Accumulated other comprehensive income (loss)		10,316			—			10,316			(10,316	)		10,316

Total stockholders’ equity (deficit)		(205,752	)		(126,207	)		(43,135	)		169,342			(205,752	)

	$	98,640		$	(28,964	)	$	(39,830	)	$	170,862		$	200,708

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2003

(in thousands)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net revenue	$	—		$	485,052		$	54,070		$	(18,645	)	$	520,477

Operating expenses:
Payroll and employee benefits		—			277,458			6,563			—			284,021
Provision for doubtful accounts		—			74,320			10,726			—			85,046
Depreciation and amortization		—			13,121			168			—			13,289
Other operating expenses		1,603			97,301			33,276			(18,645	)		113,535
Restructuring and other		—			(1,401	)		(20	)		—			(1,421	)

Total operating expenses		1,603			460,799			50,713			(18,645	)		494,470

Operating income (loss)		(1,603	)		24,253			3,357			—			26,007
Income from wholly-owned subsidiaries		37,224			12,488			—			(49,712	)		—
Interest expense		(26,655	)		(690	)		(667	)		—			(28,012	)
Interest income		—			192			5			—			197
Other income (expense), net		—			24			122			—			146

Income (loss) from continuing operations before income taxes and minority interest		8,966			36,267			2,817			(49,712	)		(1,662	)
Income tax provision		—			(197	)		—			—			(197	)
Minority interests		—			—			—			(1,507	)		(1,507	)

Income (loss) from continuing operations		8,966			36,070			2,817			(51,219	)		(3,366	)
Income (loss) from discontinued operations		—			—			(156	)		12,488			12,332

Net income (loss)	$	8,966		$	36,070		$	2,661		$	(38,731	)	$	8,966

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2002

(in thousands)

(As Restated*)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net revenue	$	—		$	458,281		$	46,672		$	(15,973	)	$	488,980

Operating expenses:
Payroll and employee benefits		—			261,686			7,437			—			269,123
Provision for doubtful accounts		—			69,964			7,761			—			77,725
Depreciation and amortization		—			15,128			1,139			—			16,267
Other operating expenses		—			90,167			29,086			(15,973	)		103,280
Contract termination costs and related asset impairment					(7	)		(100	)					(107	)
Restructuring and other		—			(718	)		—			—			(718	)

Total operating expenses		—			436,220			45,323			(15,973	)		465,570

Operating income		—			22,061			1,349			—			23,410
Income from wholly-owned subsidiaries		24,812			—			—			(24,812	)		—
Interest expense		(23,463	)		(1,029	)		(970	)		—			(25,462	)
Interest income		—			625			19			—			644
Other income (expense), net		—			8			—			—			8

Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		1,349			21,665			398			(24,812	)		(1,400	)
Income tax benefit		—			2,520			—			—			2,520
Minority interests		—			—			—			(750	)		(750	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		1,349			24,185			398			(25,562	)		370
Income from discontinued operations		—			—			979			—			979

Net income before cumulative effect of change in accounting principle		1,349			24,185			1,377			(25,562	)		1,349
Cumulative effect of change in accounting principle		(49,513	)		(49,513	)		—			49,513			(49,513	)

Net income (loss)	$	(48,164	)	$	(25,328	)	$	1,377		$	23,951		$	(48,164	)

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended June 30, 2001

(in thousands)

(As Restated *)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net revenue	$	—		$	444,960		$	47,825		$	(13,371	)	$	479,414

Operating expenses:
Payroll and employee benefits		—			261,179			10,797			—			271,976
Provision for doubtful accounts		—			74,812			12,064			—			86,876
Depreciation and amortization		—			24,116			1,625			—			25,741
Other operating expenses		—			117,644			27,616			(13,371	)		131,889
Asset impairment charges		—			32,338			15,712			—			48,050
Contract termination costs and related asset Impairment charges		—			9,256			—			—			9,256
Restructuring and other		—			9,091			—			—			9,091

Total operating expenses		—			528,436			67,814			(13,371	)		582,879

Operating loss		—			(83,476	)		(19,989	)		—			(103,465	)
Loss from wholly-owned subsidiaries		(176,328	)		—			—			176,328			—
Interest expense		(28,962	)		(535	)		(1,127	)		—			(30,624	)
Interest income		—			518			124			—			642
Other income (expense), net		—			(4,053	)		—			—			(4,053	)

Loss from continuing operations before income taxes		(205,290	)		(87,546	)		(20,992	)		176,328			(137,500	)
Income tax provision		—			(1,136	)		(1	)		—			(1,137	)
Minority interests		—			—			—			705			705

Income (loss) from continuing operations		(205,290	)		(88,682	)		(20,993	)		177,033			(137,932	)
Loss from discontinued operations		—			—			(67,358	)		—			(67,358	)

Net loss	$	(205,290	)	$	(88,682	)	$	(88,351	)	$	177,033		$	(205,290	)

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2003

(in thousands)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Cash flows from operating activities:
Net income	$	8,966		$	36,070		$	2,661		$	(38,731	)	$	8,966
Adjustments to reconcile net income to cash provided by operations —
Non-cash portion of restructuring and other		—			(1,401	)		(20	)		—			(1,421	)
Depreciation and amortization		—			13,131			182			—			13,313
Gain on sale of property and equipment		—			(406	)		(134	)		—			(540	)
Non-cash portion of gain on disposition of Latin American operations		139			—			(13,871	)					(13,732	)
Provision for doubtful accounts		—			74,320			10,726			—			85,046
Deferred income taxes		—			(1,164	)		1,164			—			—
Earnings of minority shareholder		—			—			—			1,507			1,507
Amortization of deferred financing costs		2,038						—			—			2,038
Amortization of debt discount		26			—			—			—			26
Other		—			(176	)		—			—			(176	)
Change in assets and liabilities —
(Increase) decrease in accounts receivable		—			(69,386	)		(12,203	)		—			(81,589	)
(Increase) decrease in inventories		—			674			(18	)		—			656
Increase in prepaid expenses and other		—			(391	)		(85	)		—			(476	)
Decrease in insurance deposits		—			291			—			—			291
(Increase) decrease in other assets		1,842			(2,757	)		1,041			—			126
(Increase) decrease in due to/from affiliates		(12,290	)		(33,194	)		8,281			37,203			—
Increase in accounts payable		—			977			568			—			1,545
Increase (decrease) in accrued liabilities and other liabilities		476			(6,532	)		2,714			—			(3,342	)
Increase in deferred revenue		—			908			—			—			908

Net cash provided by operating activities		1,197			10,964			1,006			(21	)		13,146

Cash flows from investing activities:
Capital expenditures		—			(9,251	)		(149	)		—			(9,400	)
Proceeds from the sale of property and equipment		—			1,780			38			—			1,818

Net cash used in investing activities		—			(7,471	)		(111	)		—			(7,582	)

Cash flows from financing activities:
Repayment of debt and capital lease obligations		—			(1,555	)		(14	)		—			(1,569	)
Cash paid for debt issuance costs		(1,583	)		—			—			—			(1,583	)
Distributions to minority shareholders		—			—			(914	)		—			(914	)

Issuance of common stock		407			—			—			—			407

Net cash used in financing activities		(1,176	)		(1,555	)		(928	)		—			(3,659	)

Effect of currency exchange rate changes on cash		(21	)		—			(21	)		21			(21	)

Increase (decrease) in cash		—			1,938			(54	)		—			1,884
Cash, beginning of year		—			9,424			1,253			—			10,677

Cash, end of year	$	—		$	11,362		$	1,199		$	—		$	12,561

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2002

(in thousands)

(As Restated*)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Cash flows from operating activities:
Net income (loss)	$	(48,164	)	$	(25,338	)	$	1,377		$	23,961		$	(48,164	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operations —
Non-cash portion of restructuring and other		—			(725	)		(100	)		—			(825	)
Cumulative effect of change in accounting principle		—			49,513			—			—			49,513
Depreciation and amortization		—			15,128			1,082			—			16,210
(Gain) loss on sale of property and equipment		—			152			(437	)		—			(285	)
Provision for doubtful accounts		—			69,964			7,916			—			77,880
Deferred income taxes		—			(300	)		—			—			(300	)
Equity earnings net of distributions received		—			1			—			—			1
Earnings of minority shareholder		—			—			—			750			750
Amortization of deferred financing costs		726			—			—			—			726
Amortization of discount on Senior Notes		26			—			—			—			26
Non-cash stock compensation expense		73			—			—			—			73
Other		—			(8	)		—			—			(8	)
Change in assets and liabilities —
(Increase) decrease in accounts receivable		—			(67,533	)		(6,238	)		—			(73,771	)
Decrease in inventories		—			915			33			—			948
(Increase) decrease in prepaid expenses and other		(51	)		(2,756	)		15			—			(2,792	)
Increase in insurance deposits		—			(4,492	)		—			—			(4,492	)
Increase in other assets		(819	)		3,861			(1,171	)		—			1,871
(Increase) decrease in due to/from affiliates		46,114			(19,723	)		(1,982	)		(24,409	)		—
Increase (decrease) in accounts payable		—			1,571			(118	)		—			1,453
Increase (decrease) in accrued liabilities and other liabilities		2,600			(10,632	)		(1,849	)		—			(9,881	)
Increase in deferred revenue		—			702			—			—			702

Net cash provided by (used in) operating activities		505			10,299			(1,472	)		302			9,634

Cash flows from investing activities:
Capital expenditures		—			(6,360	)		(494	)		—			(6,854	)
Proceeds from the sale of property and equipment		—			422			600			—			1,022

Net cash provided by (used in) investing activities		—			(5,938	)		106			—			(5,832	)

Cash flows from financing activities:
Repayments on credit facility		(1,263	)		—			—			—			(1,263	)
Repayment of debt and capital lease obligations		—			(1,700	)		(162	)		—			(1,862	)
Distributions to minority shareholders		—			—			(501	)		—			(501	)

Issuance of common stock		456			—			—			—			456

Net cash used in financing activities		(807	)		(1,700	)		(663	)		—			(3,170	)

Effect of currency exchange rate changes on cash		302			—			302			(302	)		302

Increase (decrease) in cash		—			2,661			(1,727	)		—			934
Cash, beginning of year		—			6,763			2,980			—			9,743

Cash, end of year	$	—		$	9,424		$	1,253		$	—		$	10,677

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

RURAL/METRO CORPORATION

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended June 30, 2001

(in thousands)

(As Restated *)


	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Cash flows from operating activities
Net loss	$	(205,290	)	$	(88,682	)	$	(88,351	)	$	177,033		$	(205,290	)
Adjustments to reconcile net loss to cash provided by (used in) operations —
Non-cash portion of restructuring and other		—			4,092			—			—			4,092
Non-cash portion of contract termination charges		—			8,086			—			—			8,086
Non-cash asset impairment charge		—			32,339			62,014			—			94,353
Non-cash portion of loss on disposition of clinic operations		—			—			9,374			—			9,374
Depreciation and amortization		—			24,116			5,045			—			29,161
Gain on sale of property and equipment		—			(406	)		(21	)		—			(427	)
Provision for doubtful accounts		—			74,812			13,491			—			88,303
Deferred income taxes		—			2,839			(1,889	)		—			950
Losses of minority shareholder		—			—			—			(705	)		(705	)
Amortization of deferred financing costs		946			—			—			—			946
Amortization of debt discount		26			—			—			—			26
Non-cash charge related to joint venture		—			—			—			4,045			4,045
Other		—			7			—			—			7
Change in assets and liabilities —
(Increase) decrease in accounts receivable		—			(62,936	)		(7,771	)		—			(70,707	)
Decrease in inventories		—			4,925			886			—			5,811
Decrease in prepaid expenses and other		403			782			320			—			1,505
(Increase) decrease in other assets		(319	)		2,240			2,159			—			4,080
Increase in insurance deposits		—			(2,966	)		—			—			(2,966	)
(Increase) decrease in due to/from affiliates		205,744			(21,356	)		(4,280	)		(180,108	)		—
Decrease in accounts payable		—			(2,445	)		(269	)		—			(2,714	)
Increase in accrued liabilities and other liabilities		1,642			29,368			8,052			—			39,062
Decrease in deferred revenue		—			(264	)		(18	)		—			(282	)

Net cash provided by (used in) operating activities		3,152			4,551			(1,258	)		265			6,710

Cash flows from investing activities
Capital expenditures		—			(6,771	)		997			—			(5,774	)
Proceeds from the sale of property and equipment		—			1,909			60			—			1,969

Net cash provided by (used in) investing activities		—			(4,862	)		1,057			—			(3,805	)

Cash flows from financing activities
Repayments on credit facility, net		(3,765	)		—			—			—			(3,765	)
Repayment of debt and capital lease obligations		—			(2,244	)		(529	)		—			(2,773	)
Borrowings under capital lease obligations		—			283			—			—			283
Distributions to minority shareholders		—			—			(432	)		—			(432	)

Issuance of common stock		348			—			—			—			348

Net cash used in financing activities		(3,417	)		(1,961	)		(961	)		—			(6,339	)

Effect of currency exchange rate changes on cash		265			—			265			(265	)		265

Increase (decrease) in cash		—			(2,272	)		(897	)		—			(3,169	)
Cash, beginning of year		—			9,035			3,877			—			12,912

Cash, end of year	$	—		$	6,763		$	2,980		$	—		$	9,743

*	- Refer to Note 2, Restatement of Consolidated Financial Statements.

Debt Maturities

Aggregate maturities on long-term debt for each of the fiscal years ending June 30, including the effect of the 2003 amendment to the credit facility discussed above, are as follows (in thousands):


2004	$	1,329
2005		1,428
2006		1,473
2007		152,566
2008		149,891
Thereafter		87

	$	306,774

The Company incurred interest expense of approximately $28.1 million, $25.5 million and $30.6 million and paid interest of approximately $25.4 million, $21.9 million and $29.0 million in the years ended June 30, 2003, 2002 and 2001, respectively.

The Company had outstanding letters of credit totaling approximately $3.5 million at June 30, 2003 and 2002 for insurance and guarantees under contracts.

(13)

Income Taxes

The components of the income tax (provision) benefit applicable to continuing operations were as follows (in thousands):


	Year ended June 30,
	2003			2002			2001
Current
State	$	(340	)	$	(130	)	$	(637	)
Total current (provision) benefit		(340	)		(130	)		(637	)

Deferred
Federal		—			2,650			(500	)
State		143			—

Total deferred (provision) benefit		143			2,650			(500	)

Total (provision) benefit	$	(197	)	$	2,520		$	(1,137	)

The income tax benefit in 2002 included federal income tax refunds of $0.6 million resulting from legislation that allowed the Company to carry back a portion of its net operating losses to prior years as well as refunds of $1.6 million applicable to prior years for which recognition was deferred until receipt.

The income tax (provision) benefit differs from the amount computed by applying the statutory U.S. federal income tax rate of 35% to loss from continuing operations before income taxes and cumulative effect of change in accounting principle as follows (in thousands):


	Year ended June 30,
	2003			2002			2001
	(in thousands)
Federal income tax (provision) benefit at statutory rate	$	1,109		$	753		$	48,276
State taxes, net of federal benefit		(221	)		(85	)		(414	)
Amortization of nondeductible goodwill		—			—			(698	)
Change in valuation allowance		(994	)		(1,951	)		(47,321	)
Other, net		(91	)		(99	)		(980	)

(Provision for) benefit from income taxes	$	(197	)	$	2,520		$	(1,137	)

The following table summarizes the components of the Company’s net deferred tax liability as of June 30, 2003 and 2002.


	June 30,
	2003			2002
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	77,389		$	57,326
Capital loss carryforwards		21,045			—
Accounts receivable valuation		9,463			12,849
Restructuring and other reserves		770			31,372
Insurance claim reserves		9,692			12,639
Other		1,013			4,277
Compensation and benefits		2,395			2,480

Gross deferred tax assets		121,767			120,943

Deferred tax liabilities:
Partnership losses		(25,623	)		(23,978	)
Accelerated depreciation and amortization		(12,983	)		(8,191	)
Other		(921	)		(1,441	)

Gross deferred tax liabilities		(39,527	)		(33,610	)

Net deferred tax assets before valuation allowance		82,240			87,333
Less: Valuation allowance		(82,890	)		(87,983	)

Net deferred liability	$	(650	)	$	(650	)

As of June 30, 2003, the Company had net operating loss carry forwards for federal income tax purposes of approximately $200 million which begin to expire in 2008. The Company also had capital loss carryforwards for federal income tax purposes of approximately $54 million, which begin to expire in 2006. If the Company experiences an ownership change as defined by the Internal Revenue Code, its ability to utilize its carryforwards may be limited.

The Company maintains a valuation allowance for the portion of its net deferred tax assets for which it is more likely than not that the related benefits will not be realized. The valuation allowance, which totaled $82.9 million at June 30, 2003 and $88.0 at June 30, 2002, was based upon management’s analysis of available information including the net operating losses experienced in recent years. The Company will begin to release the valuation allowance when it is more likely than not that the deferred tax asset will be realized.

Cash payments (refunds) for income taxes were $0.3 million, $(2.2) million and $1.9 million during the years ended June 30, 2003, 2002 and 2001, respectively.

(14)

Redeemable Nonconvertible Participating Preferred Stock

The Company’s restated certificate of incorporation includes authorization to issue 2,000,000 shares of the Company’s $.01 par value preferred stock. The preferred stock may be issued in one or more series as determined by the Company’s Board of Directors.

Series B Redeemable Nonconvertible Participating Preferred Stock

In connection with the 2002 Amended Credit Facility, the Company issued 211,549 shares of its Series B Redeemable Nonconvertible Participating Preferred Stock (the “Series B Shares”) to the lenders in the credit facility. The Series B Shares are not convertible by the holder but the Company may elect (subject to approval by the Company’s shareholders of an increase in the number of authorized common shares discussed below) to settle the Series B Shares by issuance of 2,115,490 common shares which was equivalent to 10% of the Company’s common shares then outstanding on a diluted basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible into the Company’s common stock for consideration less than the fair market value of such securities at the time of such transaction. Conversion of the Series B Shares occurs upon notice from the Company; however, because a sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to amend its certificate of incorporation to authorize additional common shares. Should the Company’s stockholders fail to approve such a proposal by December 31, 2004, the Company will be required to redeem the Series B Shares for a price equal to the greater of $15.0 million or the value of the common shares into which the Series B Shares would otherwise have been convertible. In addition, should the Company’s stockholders fail to approve such a proposal, the Series B Shares enjoy a preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the Series B Shares would otherwise have been convertible or (ii) $12.5 million or $15.0 million depending on whether such sale or liquidation event occurs prior to December 31, 2003 or December 31, 2004, respectively. At the election of the holder, the Series B Shares carry voting rights as if such shares were converted into common shares. The Series B Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is declared on the Company’s common stock, the holders of the Series B shares shall be entitled to receive at least the equivalent amount of dividends they would have received had their Series B shares been converted to common stock. The Series B shares (and the common shares issueable upon conversion) are entitled to certain registration rights. The terms of the Series B Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.

The Company recorded the Series B Shares at their estimated fair value at the date of issuance ($4.2 million) with an offsetting increase in debt issue costs, which are included in other assets in the consolidated balance sheet. As the Company may be required to redeem the Series B Shares for cash as outlined above, such shares have been classified outside of stockholders’ equity (deficit). Additionally, the original value of the Series B Shares is being accreted to its redemption value through December 31, 2004 with an offsetting charge to additional paid-in capital. Such accretion totaled $3.6 million during the fiscal 2003.

Series C Redeemable Nonconvertible Participating Preferred Stock

In connection with the 2003 Amended Credit Facility, the Company issued 283,979 shares of its Series C Redeemable Nonconvertible Participating Preferred Stock (the “Series C Shares”) to certain of the lenders in the credit facility. The Series C Shares are not convertible by the holder but the Company may elect (subject to approval by the Company’s shareholders of an increase in the number of authorized common shares discussed below) to settle the Series C Shares by issuance of 2,839,787 common shares which was equivalent to 11% of the Company’s common shares then outstanding on a diluted basis, as defined. The conversion ratio is subject to adjustment if the Company issues common stock or securities convertible into the Company’s common stock for consideration less than the fair market value of such securities at the time of such transaction. Conversion of the Series C Shares occurs automatically upon notice from the Company; however, because a sufficient number of common shares are not currently available to permit conversion, the Company intends to seek stockholder approval to amend its certificate of incorporation to authorize additional common shares. Should the Company’s stockholders fail to approve such a proposal by December 31, 2006, the Company will be required to redeem the Series C Shares for a price equal to the greater of $10.0 million or the value of the common

shares into which the Series C Shares would otherwise have been convertible. In addition, should the Company’s stockholders fail to approve such a proposal, the Series C Shares enjoy a preference upon a sale of the Company, a sale of its assets and in certain other circumstances; this preference equals the greater of (i) the value of the common shares into which the Series C Shares would otherwise have been convertible or (ii) $11.0 million, $13.75 million or $16.5 million depending on whether such sale or liquidation event occurs prior to January 31, 2004, between January 31, 2004 and December 31, 2004 or December 31, 2004, respectively. At the election of the holder, the Series C Shares carry voting rights as if such shares were converted into common shares. The Series C Shares are not entitled to a dividend except if declared by the Board. In the event a dividend is declared on the Company’s common stock, the holders of the Series C shares shall be entitled to receive at least the equivalent amount of dividends they would have received had their Series C shares been converted to common stock. The Series C shares (and the common shares issueable upon conversion) are entitled to certain registration rights. The terms of the Series C Shares limit the Company from issuing senior or pari passu preferred shares and from paying dividends on, or redeeming, shares of junior stock.

The Company will record the Series C Shares at their estimated fair value at the date of issuance with an offsetting increase in debt issue costs. As the Company may be required to redeem the Series C Shares for cash as outlined above, such shares will be classified outside of stockholders’ equity (deficit). Additionally, the original value of the Series C Shares will be accreted to its redemption value through December 31, 2006 with an offsetting charge to additional paid-in capital.

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Stockholders’ Equity

In August 1995, the Company adopted a shareholders’ rights plan, which authorized the distribution of one right to purchase one one-thousandth of a share of $0.01 par value Series A Junior Participating Preferred Stock (a Right) for each share of common stock of the Company. Rights will become exercisable following the tenth day (or such later date as may be determined by the Board of Directors) after a person or group (a) acquires beneficial ownership of 15% or more of the Company’s common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company’s common stock. In connection with the 2003 Amended Credit Facility, the Company adopted an amendment providing that ownership solely of Series B Shares or Series C Shares (or common stock issued or issuable upon conversion thereof) does not constitute a triggering event under the plan.

Upon exercise, each Right will entitle the holder (other than the party seeking to acquire control of the Company) to acquire shares of common stock of the Company or, in certain circumstances, such acquiring person at a 50% discount from market value. The Rights may be terminated by the Board of Directors at any time prior to the date they become exercisable at a price of $0.01 per Right; thereafter, they may be redeemed for a specified period of time at $0.01 per Right.

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Employee Benefit Plans

Employee Stock Purchase Plan

The Company established the Employee Stock Purchase Plan (the “ESPP”) through which eligible employees may purchase shares of the Company’s common stock, at semi-annual intervals, through periodic payroll deductions. The ESPP is a qualified employee benefit plan under Section 423 of the Internal Revenue Code. The Company has reserved 2,150,000 shares of stock for issuance under the ESPP. The purchase price per share is the lower of 85% of the closing price of the stock on the first day or the last day of the offering period or on the nearest prior day on which trading occurred on the Nasdaq SmallCap Market. Employees purchased 570,801, 559,668, and 273,584 shares of the Company’s common stock under the ESPP during fiscal years 2003, 2002 and 2001, respectively, at average per share prices of $0.60, $0.48 and $1.27.

1992 Stock Option Plan

The Company’s 1992 Stock Option Plan (the “1992 Plan”) was adopted in November 1992 and expired November 5, 2002. The 1992 Plan provided for the granting of options to acquire common stock of the Company, direct granting of the common stock of the Company (“Stock Awards”), the granting of stock appreciation rights (“SARs”), or the

granting of other cash awards (“Cash Awards”) (Stock Awards, SARs and Cash Awards are collectively referred to herein as “Awards”). At June 30, 2003, the maximum number of shares of common stock issuable under the 1992 Plan was 6.0 million of which approximately 875,000 options had been exercised. Approximately 4.6 million options remain outstanding under the 1992 Plan at June 30, 2003. Options were granted as incentive stock options or non-qualified stock options.

Options and Awards were granted only to persons who at the time of grant are either key personnel of the Company or consultants and independent contractors who provide valuable services to the Company. Options that are incentive stock options may be granted only to key personnel of the Company.

The 1992 Plan, as amended, provided for the automatic grant of options whereby each non-employee member of the Board of Directors was granted an option to acquire 2,500 shares of common stock annually. Each non-employee member of the Board of Directors also received an annual automatic grant of options to acquire an additional 1,000 shares for each $0.05 increase in the Company’s earnings per share, subject to a maximum of 5,000 additional options. New non-employee members of the Board of Directors received options to acquire 10,000 shares of common stock on the date of their first appointment or election to the Board of Directors.

The terms of each Award were established by the Board of Directors at the time of grant. Options granted under the 1992 Plan vest over periods not exceeding five years.

Awards granted in the form of SARs entitled the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of common stock from the price stated in the award agreement to the market value of the common stock on the date first exercised or surrendered. The Board of Directors determined such terms, conditions, restrictions and/or limitations, if any, on any SARs.

2000 Non-Qualified Stock Option Plan

The Company’s 2000 Non-Qualified Stock Option Plan (the “2000 Plan”) was adopted in August 2000 and provides for the granting of options to acquire common stock of the Company. At the time of adoption, the maximum number of shares of common stock issuable under the 2000 Plan was 2.0 million of which approximately 180,000 options have been exercised. Approximately 1.6 million of options remain outstanding under the 2002 Plan as of June 30, 2003.

Options may be granted only to persons who at the time of grant are either regular employees, excluding Directors and Officers, or persons who provide consulting or other services as independent contractors to the Company.

The terms of each Award were established by the Board of Directors at the time of grant. Options granted to date vest over periods not exceeding three years.

The following summarizes stock option activity in the 1992 Plan and the 2000 Plan:


	Year ended June 30, 2003
	Number of Shares		Exercise Price Per share				Weighted Average Exercise price
Options outstanding at beginning of year	5,198,978		$0.39	-	$	36.00	$	7.79
Granted	1,697,000		$2.00	-	$	2.24	$	2.00
Canceled	(672,216	)	$0.39	-	$	32.88	$	15.60
Exercised	(93,471	)	$0.39	-	$	1.50	$	0.69

Options outstanding at end of year	6,130,291		$0.39	-	$	36.00	$	5.25

Options exercisable at end of year	4,173,976		$0.39	-	$	36.00	$	7.00
Options available for grant at end of year	265,246
Weighted average fair value per share of options granted							$	1.43

	Year ended June 30, 2002
	Number of Shares		Exercise Price Per share				Weighted Average Exercise price
Options outstanding at beginning of year	4,441,668		$1.25	-	$	36.00	$	11.77
Granted	1,818,000		$0.39	-	$	0.86	$	0.56
Canceled	(869,183	)	$0.39	-	$	33.38	$	14.48
Exercised	(191,507	)	$0.39	-	$	1.50	$	0.98

Options outstanding at end of year	5,198,978		$0.39	-	$	36.00	$	7.79

Options exercisable at end of year	3,654,817		$0.39	-	$	36.00	$	10.48
Options available for grant at end of year	1,750,294
Weighted average fair value per share of options granted							$	0.26

	Year ended June 30, 2001
	Number of Shares		Exercise Price Per share				Weighted Average Exercise price
Options outstanding at beginning of year	3,581,992		$1.25	-	$	36.00	$	17.35
Granted	1,582,750		$1.50	-	$	2.00	$	1.57
Canceled	(723,074	)	$1.25	-	$	32.25	$	17.10
Exercised	—					—		—

Options outstanding at end of year	4,441,668		$1.25	-	$	36.00	$	11.77

Options exercisable at end of year	3,190,462		$1.25	-	$	36.00	$	14.79
Options available for grant at end of year	2,788,361
Weighted average fair value per share of options granted							$	0.72

The following table summarizes options outstanding and exercisable at June 30, 2003 for options issued under the 1992 Plan and the 2000 Plan:


	Options Outstanding				Options Exercisable
Range of Exercise prices	Options Outstanding	Weighted Average Remaining Contractual life	Weighted Average Exercise price		Options Exercisable	Weighted Average Exercise price
$0.39 – $0.39	884,193	8.47	$	0.39	559,045	$	0.39
$0.44 – $ 0.86	694,000	8.29	$	0.84	394,000	$	0.83
$1.25 – $ 1.38	10,560	6.25	$	1.34	10,560	$	1.34
$1.50 – $1.50	899,082	7.14	$	1.50	774,082	$	1.50
$1.56 – $ 1.63	37,500	7.00	$	1.60	37,500	$	1.60
$2.00 – $ 2.00	1,869,965	9.01	$	2.00	693,798	$	2.00
$2.24 – $ 7.81	840,000	5.73	$	7.01	810,000	$	7.18
$8.00 – $29.00	620,648	4.42	$	18.09	620,648	$	18.09
$32.25 – $34.50	251,843	3.46	$	32.56	251,843	$	32.56
$36.00 – $36.00	22,500	3.39	$	36.00	22,500	$	36.00

$ 0.39 – $36.00	6,130,291	7.39	$	5.25	4,173,976	$	7.00

During fiscal 2003, the Company recorded non-cash stock compensation expense totaling $139,000 relating to the modification of stock options for certain executives of the Company’s former Latin American operations. The related charges are included in income (loss) from discontinued operations in the accompanying consolidated statement of operations. During 2002, the Company recorded a non-cash charge of $73,000 in other operating expenses relating to stock options issued to non-employees in exchange for services rendered.

401(k) Plan

The Company has a contributory retirement plan (the “401(k) Plan”) covering eligible employees who are at least 18 years old. The 401(k) Plan is designed to provide tax-deferred income to the Company’s employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code.

The 401(k) Plan provides that each participant may contribute up to 17% of his or her respective salary, not to exceed the annual statutory limit. The Company, at its discretion, may elect to make matching contributions in the form of cash or the Company’s common stock to each participant’s account as determined by the Board of Directors. Under the terms of the 401(k) Plan, the Company may also make discretionary profit sharing contributions. Profit sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of his or her funds.

The Company accrued a matching contribution of approximately $1.7 million for the 401(k) Plan year ended December 31, 2000. During fiscal 2002, the Company made the decision not to make this discretionary contribution and reversed the accrual of $1.7 million to income.

Employee Stock Ownership Plan

The Company established the Employee Stock Ownership Plan (the “ESOP”) in 1979 and makes related contributions at the discretion of the Board of Directors. No discretionary contributions were made during fiscal 2003, 2002 and 2001. The ESOP held approximately 4.5% and 5.0% of the outstanding common stock of the Company for the benefit of all participants, as of June 30, 2003 and 2002, respectively. The ESOP is administered by the ESOP’s Advisory Committee, consisting of certain officers of the Company.

In July 1999, the Company’s Board of Directors approved an amendment to “freeze” the ESOP, effective June 30, 1999 with respect to all employees other than members of collective bargaining agreements that include participation in the ESOP. All participants’ accounts were fully vested as of June 30, 1999. The Company does not intend to make any contributions to the ESOP in the future.

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Commitments And Contingencies

Medicare Fee Schedule

On April 1, 2002, the Medicare Ambulance Fee Schedule Final Rule became effective. The Final Rule categorizes seven levels of ground ambulance services, ranging from basic life support to specialty care transport, and two categories of air ambulance services. The base rate conversion factor for services to Medicare patients was set at $170.54 (which is adjusted each year by the CPI – 1%) plus separate mileage charges based on specified relative value units for each level of ambulance service. Adjustments also were included to recognize differences in relative practice costs among geographic areas, and higher transportation costs that may be incurred by ambulance providers in rural areas with low population density. The Final Rule requires ambulance providers to accept assignment on Medicare claims, which means a provider must accept Medicare’s allowed reimbursement rate as full payment. Medicare typically reimburses 80% of that rate and the remaining 20% is collectible from a secondary insurance or the patient. In addition, the Final Rule calls for a five-year phase-in period to allow time for providers to adjust to the new payment rates. The fee schedule will be phased in at 20-percent increments each year, with payments being made at 100 percent of the fee schedule in 2006 and thereafter.

The Company currently believes that the Medicare Ambulance Fee Schedule will have a neutral net impact on its medical transportation revenue at incremental and full phase-in periods, primarily due to the geographic diversity of its operations. These rules could, however, result in contract renegotiations or other actions to offset any negative impact at the regional level that could have a material adverse effect on its business, financial condition, cash flows, and results of operations. Changes in reimbursement policies, or other governmental actions, together with the financial challenges of some private, third-party payers and budget pressures on other payer sources could influence the timing and, potentially, the receipt of payments and reimbursements. A reduction in coverage or reimbursement rates by third-party payers, or an increase in the Company’s cost structure relative to increases in the Consumer Price Index (CPI), or costs incurred to implement the mandates of the fee schedule could have a material adverse effect on its business, financial condition, cash flows, and results of operations.

Surety Bonds

Certain counties, municipalities, and fire districts require the Company to provide a surety bond or other assurance of financial or performance responsibility. The Company may also be required by law to post a surety bond as a prerequisite to obtaining and maintaining a license to operate. As a result, the Company has a portfolio of surety bonds that is renewed annually. The Company has $10.1 million of surety bonds outstanding as of June 30, 2003.

Operating Leases

The Company leases various facilities and equipment under non-cancelable operating lease agreements. Rental expense charged to operations under these leases (including leases with terms of less than one year) was approximately $11.5 million in fiscal 2003 and 2002 and $12.1 million in fiscal 2001.

Minimum rental commitments under non-cancelable operating leases for each of the years ending June 30 are as follows (in thousands):


2004	$	7,760
2005		6,638
2006		5,446
2007		3,835
2008		2,832
Thereafter		8,833

Total	$	35,344

Indemnifications

The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants.

Additionally, some of the Company’s agreements with customers require the Company to provide certain assurances related to the performance of its services. Such assurances, from time to time, obligate the Company to (i) pay penalties for failure to meet response times or other requirements, (ii) lease, sell or assign equipment or facilities (either temporarily or permanently) in the event of material defaults or other certain circumstances, or (iii) provide surety bonds or letters of credit issued in favor of the customer to cover costs resulting, under certain circumstances, from an uncured material default . With respect to such surety bonds, the Company is also required to indemnify the surety company for losses paid as a result of any claims made against such bonds.

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable it to recover a portion of any future amounts paid.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by the Company.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, and cash flows or results of operations. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial condition, cash flows or results of operations.

Legal Proceedings

From time to time, the Company is subject to litigation and regulatory investigations arising in the ordinary course of business. The Company believes that the resolution of currently pending claims or legal proceedings will not have a material adverse effect on its business, financial condition, results of operations or cash flows. However, the Company is unable to predict with certainty the outcome of pending litigation and regulatory investigations. In some pending cases, insurance coverage may not be adequate to cover all liabilities in excess of its deductible or self insured retention arising out of such claims. In addition, due to the nature of the Company’s business, CMS and other regulatory agencies are expected to continue their practice of performing periodic reviews and initiating investigations related to the Company’s compliance with billing regulations. Unfavorable resolutions of pending or future litigation, regulatory reviews and/or investigations, either individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Haskell v. Rural/Metro Corporation, et al. and Ruble v. Rural/Metro Corporation: The Company, Warren S. Rustand, the former Chairman of the Board and Chief Executive Officer of the Company, James H. Bolin, the former Vice Chairman of the Board, and Robert E. Ramsey, Jr., its former Executive Vice President and former Director, were named as defendants in two purported class action lawsuits: HASKELL V. RURAL/METRO CORPORATION, ET AL., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona Superior Court and RUBLE V.

RURAL/METRO CORPORATION, ET AL., CIV 98-413-TUC-JMR filed on September 2, 1998 in United States District Court for the District of Arizona. The two lawsuits, which contained virtually identical allegations, were brought on behalf of a class of persons who purchased the Company’s publicly traded securities including its common stock between April 24, 1997 and June 11, 1998. Haskell v. Rural/Metro sought unspecified damages under the Arizona Securities Act, the Arizona Consumer Fraud Act, and under Arizona common law fraud, and also sought punitive damages, a constructive trust, and other injunctive relief. Ruble v. Rural/Metro sought unspecified damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaints in both actions alleged that between April 24, 1997 and June 11, 1998 the defendants issued certain false and misleading statements regarding certain aspects of the Company’s financial status and that these statements allegedly caused the Company’s common stock to be traded at artificially inflated prices. The complaints also alleged that Mr. Bolin and Mr. Ramsey sold stock during this period, allegedly taking advantage of inside information that the stock prices were artificially inflated.

On April 17, 2003, Rural/Metro and the individual defendants agreed to settle the Ruble v. Rural/Metro and Haskell v. Rural/Metro cases with plaintiffs, subject to notice to the class and final court approval. Rural/Metro’s primary and excess carriers funded the settlement on June 5, 2003 by depositing the funds in a designated escrow account and waived any claims for reimbursement of the funds subject to final court approval of the class action settlement. On August 20, 2003, the plaintiffs submitted an application for preliminary approval of the class action settlement. On September 3, 2003, the court signed an order granting preliminary approval of the stipulated settlement and set forth a schedule for the events required for final settlement approval, including notice to the class, requests for exclusion, written objections and responses. The hearing for consideration of the final settlement agreement is scheduled for December 9, 2003.

In the settlement agreement, the Company and the individual defendants expressly denied all charges of liability or wrongdoing and continued to assert that at all relevant times they acted in good faith and in a manner they reasonably believed to be in the best interests of the Company and its stockholders.

Springborn, et al. v. Rural/Metro Corporation, et al.: The Company, Arthur Andersen LLP, Cor Clement and Jane Doe Clement, Randall L. Harmsen and Jane Doe Harmsen, Warren S. Rustand and Jane Doe Rustand, James H. Bolin and Jane Doe Bolin, Jack E. Brucker and Jane Doe Brucker, Robert B. Hillier and Jane Doe Hillier, John S. Banas III and Jane Doe Banas, Louis G. Jekel and Karen Whitmer, Mary Anne Carpenter and John Doe Carpenter, William C. Turner and Jane Doe Turner, Henry G. Walker and Jane Doe Walker, Louis A. Witzeman and Jane Doe Witzeman, John Furman and Jane Doe Furman, and Mark Liebner and Jane Doe Liebner were named as defendants in a purported class action lawsuit: STEVEN A. SPRINGBORN V. RURAL/METRO CORPORATION, ET AL., Civil Action No. CV 2002-019020 filed on September 30, 2002 in Maricopa County, Arizona Superior Court. The lawsuit was brought on behalf of employee firefighters in Maricopa County who participated in the Company’s Employee Stock Ownership Plan (“ESOP”), Employee Stock Purchase Plan (“ESPP”) and/or Retirement Savings Value Plan (“401(k) Plan”) 401(k) plan. Collectively, the “Plans.”. The action purports to cover a class period of July 1, 1996 through June 30, 2001. The plaintiffs amended the Complaint on October 17, 2002 adding Barry Landon and Jane Doe Landon as defendants and making certain additional allegations and claims. The primary allegations of the complaint included violations of various state and federal securities laws, breach of contract, common law fraud, and mismanagement of the Plans. The plaintiffs sought unspecified compensatory and punitive damages.

On October 30, 2002, defendant Arthur Andersen LLP removed the action to the United States District Court, District of Arizona, CIV-02-2183-PHX-JWS. The Company and the individual defendants consented to this removal. On February 21, 2003, the Company and its current directors and officers moved to dismiss the amended complaint, and its former directors and officers subsequently joined in this motion.

On July 29, 2003, the court granted the motion to dismiss, which disposed of all claims against the Company and its current and former officers and directors. On August 28, 2003, plaintiffs filed a notice of appeal from the court’s July 29, 2003 order to the Ninth Circuit. The court has yet to consider and rule upon defendant Arthur Andersen’s motion to dismiss.

Regulatory Compliance

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. The Company believes that it is substantially in compliance with fraud and abuse statutes as well as their applicable government review and interpretation as well as regulatory actions unknown or unasserted at this time.

The Company has been subject to investigations in the past relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperated fully with the government agencies that conducted these investigations. Those reviews cover periods prior to the Company’s acquisition of certain operations as well as periods subsequent to acquisition. Management believes that the remedies existing under specific purchase agreements along with reserves established in the consolidated financial statements are sufficient so that the ultimate outcome of these matters would not have a material adverse effect on its business, financial condition, results of operations or cash flows.

The Company became aware of, and has taken corrective action with respect to, various issues arising primarily from the transition to the Company from various acquired operations of Federal Communications Commission (FCC) licenses for public safety and private wireless radio frequencies used in the ordinary course of its business. While the Company does not currently anticipate that action with respect to these issues by the FCC’s enforcement bureau will result in material monetary fines or license forfeitures, there can be no assurance that this will be the case.

Nasdaq Listing

On May 22, 2003, the Nasdaq Stock Market (Nasdaq) notified the Company that it was not in compliance with a Nasdaq SmallCap Market maintenance standard. This standard requires that the Company file with Nasdaq copies of all reports and other documents filed or required to be filed with the Securities and Exchange Commission on a timely basis.

The notification followed the Company’s announcement on May 14, 2003 that it would delay filing its Form 10-Q for the third quarter ended March 31, 2003 due to the need to restate its consolidated financial statements for inadequate provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recorded in prior years. The Company announced that it would file the applicable Form 10-Q upon finalization of the related restatement adjustments.

The Company subsequently submitted its request for a Nasdaq Listing Qualifications Panel (the “Panel”) hearing to consider its continued listing. The hearing was held June 19, 2003, where the Company presented its basis for a temporary exception to the filing requirement in order to complete its related analysis.

On July 17, 2003, Nasdaq informed the Company that the Panel had made a determination. In its decision to grant an exception, the Panel determined that the Company’s securities would continue to be listed on the Nasdaq SmallCap Market subject to satisfying a September 30, 2003 deadline for filing its Form 10-Q for the third quarter ended March 31, 2003 and its Form 10-K for the fiscal year ended June 30, 2003.

In addition to granting the filing exception through September 30, 2003, the Panel specifically required the Company to timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before March 31, 2004. Should the Company miss a filing deadline in accordance with the exception, it will not be entitled to a new hearing on the matter and its securities may be delisted from The Nasdaq SmallCap Market. In the event the Company fails to comply with any continued listing requirement during the exception period, it will be provided with written notice of the deficiency and an opportunity to present a definitive plan to address the issue prior to the Panel’s decision as to whether continued listing is appropriate.

The Panel reserved the right to terminate or modify the terms of this exception upon a review of the Company’s reported financial results for the quarter ended March 31, 2003 and the fiscal year ended June 30, 2003. There can be no assurance the Company will evidence compliance with the requirements as set forth by Nasdaq or that it will return to continued listing on The Nasdaq SmallCap Market.

On September 29, 2003, the Company issued a press release indicating that the filing of its Form 10-K for fiscal 2003 would be delayed. The Company also filed a Form 12b-25 request with the SEC for an extension to file its Form 10-K on or before October 14, 2003. Due to such delayed filing, the Company formally requested, on September 30, 2003, that the Panel permit it to comply with their July 17, 2003 decision by filing both the Form 10-K for fiscal 2003 and the Form 10-Q for the period ended March 31, 2003 on or before October 14, 2003. On October 7, 2003 the Panel informed the Company that its requested modification to their July 17, 2003 decision was granted.

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Financial Instruments

The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value assumptions.

The carrying values of cash, accounts receivable, accounts payable, accrued liabilities and other liabilities approximates the related fair values due to the short-term maturities of these instruments. The carrying value of notes payable and capital lease obligations approximate the related fair values as rates on these instruments approximate market rates currently available for instruments with similar terms and remaining maturities. The fair value of the Senior Notes was determined by the market price as of June 30, 2003. The relationship between the fair value and carrying value of the Senior Notes was then applied to the amount outstanding under the 2002 Amended Credit Facility to arrive at its estimated fair value. The fair value of the Company’s Series B Redeemable Nonconvertible Participating Preferred Stock was determined by reference to the market price for the Company’s common stock at June 30, 2003. A comparison of the fair value and carrying value of the Senior Notes and 2002 Amended Credit Facility is as follows (in thousands):


	As of June 30,
	2003				2002
	Fair value		Recorded value		Fair value		Recorded value
Credit Facility	$	121,936	$	152,420	$	93,840	$	144,369
Senior Notes	$	119,902	$	149,878	$	97,404	$	149,852
Series B Redeemable Nonconvertible Participating Preferred Stock	$	2,433	$	7,793		N/A		N/A

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Segment Reporting

For financial reporting purposes, the Company has classified its operations into two reporting segments that correspond with the manner in which such operations are managed: the Medical Transportation and Related Services Segment and the Fire and Other Segment. Each reporting segment consists of cost centers (operating segments) representing the Company’s various service areas that have been aggregated on the basis of the type of services provided, customer type and methods of service delivery.

The Medical Transportation and Related Services Segment includes emergency ambulance services provided to individuals pursuant to contracts with counties, fire districts, and municipalities, as well as non-emergency ambulance services provided to individuals requiring either advanced or basic levels of medical supervision during transport. The Fire and Other Segment includes a variety of fire protection services including fire prevention, suppression, training, alarm monitoring, dispatch, fleet and billing services.

The accounting policies described in Note 1 to the consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For internal management purposes, the Company’s measure of segment profitability is defined as income (loss) before interest, income taxes, depreciation and amortization. Additionally, segment assets are defined as consisting solely of accounts receivable. The following tables summarize the information required to be presented by SFAS 131, Disclosures about Segments of an Enterprise and Related Information (in thousands):


	Medical Transportation and Related Services		Fire and Other		Total
Year ended June 30, 2003
Net revenues from external customers	$	442,076	$	78,401	$	520,477
Segment profit (loss)	$	48,723	$	8,206	$	56,929
Segment assets	$	58,782	$	1,646	$	60,428


	Medical Transportation And related Services		Fire and Other		Total
Year ended June 30, 2002
Net revenues from external customers	$	416,813	$	72,167	$	488,980
Segment profit (loss)	$	50,828	$	6,633	$	57,651
Segment assets	$	62,867	$	1,594	$	64,461


	Medical Transportation and Related Services			Fire and Other		Total
Year ended June 30, 2001
Net revenues from external customers	$	408,205		$	71,209	$	479,414
Segment profit (loss)	$	(71,099	)	$	9,224	$	(61,875	)
Segment assets	$	69,013		$	1,124	$	70,137

A reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle is as follows (in thousands):


	2003			2002			2001
				*(As Restated)**
Segment profit (loss)	$	56,929		$	57,461		$	(61,875	)
Unallocated corporate overhead		(17,487	)		(17,776	)		(19,902	)
Depreciation and amortization		(13,289	)		(16,267	)		(25,741	)
Interest expense		(28,012	)		(25,462	)		(30,624	)
Interest income		197			644			642

Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting	$	(1,662	)	$	(1,400	)	$	(137,500	)

A reconciliation of segment assets to total assets is as follows (in thousands):


	2003		2002		2001
			*(As Restated)**
Segment assets	$	60,428	$	64,461	$	70,137
Cash		12,561		10,677		9,743
Inventories		11,504		12,220		13,173
Prepaid expenses and other		8,498		7,231		4,430
Property and equipment, net		43,010		48,532		57,999
Goodwill		41,167		41,244		90,757
Other assets		12,048		8,115		14,031
Insurance deposits		6,950		8,228		3,736

	$	196,166	$	200,708	$	264,006

*	Refer to Note 2 Restatement of Consolidated Financial Statements.

(20)

Related Party Transactions

The Company incurred legal fees of approximately $16,000, $138,000 and $130,000 in fiscal 2003, 2002 and 2001, respectively, with a law firm in which a member of the Board of Directors is a partner.

The Company incurred rental expense of approximately $69,000 in fiscal 2003, 2002 and 2001 related to leases of fire and ambulance facilities with a director of the Company.

The Company incurred consulting fees of approximately $89,000, $89,000 and $99,000 in fiscal 2003, 2002 and 2001, respectively, with a director of the Company.

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

On July 7, 2003, Rural/Metro Corporation, a Delaware corporation (the “Company”) engaged Singer Lewak Greenbaum and Goldstein LLP (“SLGG”) as its independent accountants solely to re-audit the Company’s financial statements for fiscal 2001. Those financial statements were previously audited by the Company’s prior independent accountants, Arthur Andersen LLP, who have ceased operations and were, therefore, unable to perform any procedures with respect to those financial statements. As reported in the Company’s Current Report on Form 8-K dated January 2, 2002, the Company’s relationship with Arthur Andersen LLP was terminated as of January 2, 2002. The Company’s financial statements for fiscal 2001 required re-audit as a result of restatement adjustments related to (i) the provisions for discounts applicable to Medicare, Medicaid and other third-party payers and for doubtful accounts recognized in prior years, (ii) the deferral of enrollment fees charged to new subscribers under our fire protection service contracts and to recognize such fees over the estimated customer relationship period, (iii) the consolidation of the Company’s investment in San Diego Medical Services Enterprise, LLC in connection with the Company’s adoption of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” and (iv) the disposal of the Company’s Latin American operations, the results of which were reclassified to discontinued operations for all periods presented. As Arthur Andersen LLP had ceased operations, the Company engaged SLGG to perform the re-audit of the fiscal 2001 financial statements. The engagement of SLGG for this project was approved by the Audit Committee of the Company’s Board of Directors.

The Company did not consult with SLGG during the fiscal years ended June 30, 2002 and 2001 or during the subsequent interim period from July 1, 2002 through and including the engagement date of July 7, 2003, on (i) either the application of accounting principles or the type of opinion SLGG might issue on the Company’s financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) or a reportable event as defined in Item 304(a)(1)(v) of Regulation S-K.

The engagement of SLGG to perform the fiscal 2001 re-audit does not affect the Company’s ongoing engagement of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent accountant. PwC has served as the Company’s independent accountants for the fiscal years ended June 30, 2002 and June 30, 2003.

ITEM 9A.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

During the third quarter of fiscal 2003, we determined that our accounts receivable balance was materially overstated and that our net revenue and provision for doubtful accounts applicable to prior periods also required adjustment. The fact that our internal controls did not identify the related financial statement errors prior to that time is considered to represent a material weakness as defined under standards established by the American Institute of Certified Public Accountants. As a result of these matters, we determined that our consolidated financial statements for years prior to fiscal 2003 required restatement. See Note 2 to our Consolidated Financial Statements.

We have taken the steps necessary to strengthen our internal controls to address this situation. We have completed extensive analyses and have instituted new procedures relating to the evaluation of the adequacy of our allowance for doubtful accounts, including the enhanced utilization of historical collection experience within each of our service areas, as well as the involvement of representatives of the accounting, finance and billing departments in the evaluation process. As of the date of this report, we believe the actions implemented have corrected the material weakness in the internal controls discussed in the preceding paragraphs.

During the second quarter of fiscal 2004, certain items relating to prior periods were called to our attention and evaluated by us for further reporting under the Exchange Act. As a result of this process, we have filed (or will file in the near future)

(i)

Current Reports on Form 8-K reporting under Item 4 the engagement in July 2003 of Singer Lewak Greenbaum and Goldstein LLP (“SLGG”) as the Company’s independent accountants to re-audit the Company’s financial statements for fiscal 2001, and the completion of such engagement in October 2003. The Company’s financial statements for fiscal 2001 were previously audited by the Company’s prior independent accountants, Arthur Andersen LLP, who have ceased operations, and therefore, were unable to perform any procedures with respect to those financial statements. SLGG’s report and consent were included in our Annual Report on Form 10-K for fiscal 2003.

(ii)

A Current Report on Form 8-K reporting under Item 2 the cessation of operations in certain of the Company’s medical transportation and related service areas effective September 30, 2003. The results of the closed service areas referred to above were classified as discontinued operations in the financial statements included in the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2003.

(iii)

This amendment to our Annual Report on Form 10-K for fiscal 2003 restating our earnings per share calculations and related disclosures for fiscal 2003. The Company initially concluded that it had calculated its earnings per share amounts for fiscal 2003 in the appropriate manner. However, the Company subsequently determined that such calculations should have been made using the two-class method whereby net income or loss for each period is allocated between common stock and the Company’s Series B redeemable nonconvertible participating preferred stock on the basis of the weighted average number of common shares and share equivalents outstanding during the period. The need to restate our fiscal 2003 earnings per share calculations and related disclosures is considered to represent a material weakness under standards established by the American Institute of Certified Public Accountants. The Company has added resources in the accounting and reporting area to prevent this type of situation from recurring.

We carried out an evaluation as of June 30, 2003, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective, except for the items outlined in the preceding paragraphs which were subsequently identified and have been addressed as set forth above. Other than the internal control matters discussed in the preceding paragraphs, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out the evaluation.

ITEM 15.

Exhibits

(c)

Exhibits



23.1		Consent of PricewaterhouseCoopers LLP*

23.2		Consent of Singer Lewak Greenbaum & Goldstein, LLP*

31.1		Certification Pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*

31.2		Certification Pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended*

32.1		Certification Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification Pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith.

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


RURAL/METRO CORPORATION

By:		/s/ JACK E. BRUCKER

		Jack E. Brucker President and Chief Executive Officer

March 4, 2004