<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
At February 10, 2000 there were 14,563,379 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
<PAGE> 2
RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Statements
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income (Loss) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Part II. Other Information
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
2
<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 8,271 $ 7,180
Accounts receivable, net 147,038 185,454
Inventories 18,429 16,371
Prepaid expenses and other 10,689 13,630
--------- ---------
Total current assets 184,427 222,635
PROPERTY AND EQUIPMENT, net 95,207 95,032
INTANGIBLE ASSETS, net 233,460 240,360
OTHER ASSETS 23,226 21,880
--------- ---------
$ 536,320 $ 579,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,897 $ 17,782
Accrued liabilities 34,416 58,159
Current portion of long-term debt 292,797 5,765
--------- ---------
Total current liabilities 343,110 81,706
LONG-TERM DEBT, net of current portion 3,952 268,560
NON-REFUNDABLE SUBSCRIPTION INCOME 14,637 14,909
DEFERRED INCOME TAXES 9,376 9,438
OTHER LIABILITIES 153 205
--------- ---------
Total liabilities 371,228 374,818
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 8,176 8,250
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 149 148
Additional paid-in capital 138,177 137,792
Retained earnings 20,101 60,603
Cumulative translation adjustment (272) (465)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 156,916 196,839
--------- ---------
$ 536,320 $ 579,907
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Ambulance services $ 121,109 $ 115,759 $ 238,006 $ 232,024
Fire protection services 14,551 12,591 27,614 25,234
Other 11,447 11,239 22,687 21,126
--------- --------- --------- ---------
Total revenue 147,107 139,589 288,307 278,384
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits 79,388 73,220 156,253 147,118
Provision for doubtful accounts 21,247 20,265 41,657 40,162
Provision for doubtful accounts - change in
accounting policy 65,000 -- 65,000 --
Depreciation 6,242 6,009 12,402 11,885
Amortization of intangibles 2,302 2,391 4,462 4,788
Other operating expenses 30,906 24,323 56,930 48,043
Restructuring charge -- -- -- 2,500
--------- --------- --------- ---------
Total expenses 205,085 126,208 336,704 254,496
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (57,978) 13,381 (48,397) 23,888
Interest expense, net 5,812 5,331 11,248 10,473
Other (54) 29 (74) 77
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (63,736) 8,021 (59,571) 13,338
Provision (benefit) for income taxes (22,550) 3,382 (20,810) 5,637
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (41,186) 4,639 (38,761) 7,701
EXTRAORDINARY LOSS ON
EXPROPRIATION OF CANADIAN
AMBULANCE SERVICE LICENSES (NET OF $0
OF INCOME TAXES) (1,200) -- (1,200) --
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NET OF AN INCOME
TAX BENEFIT OF $392) -- -- (541) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (42,386) $ 4,639 $ (40,502) $ 7,701
========= ========= ========= =========
</TABLE>
4
<PAGE> 5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER SHARE:
Basic --
Income (loss) before extraordinary loss and
cumulative effect of a change in accounting
principle $ (2.83) $ 0.32 $ (2.66) $ 0.54
Extraordinary loss on expropriation of
Canadian ambulance service licenses (0.08) -- (0.08) --
Cumulative effect of a change in accounting principle -- -- (0.04) --
---------- ---------- ---------- ----------
Net income (loss) $ (2.91) $ 0.32 $ (2.78) $ 0.54
========== ========== ========== ==========
Diluted --
Income (loss) before extraordinary loss
and cumulative effect of a change in
accounting principle $ (2.83) $ 0.32 $ (2.66) $ 0.53
Extraordinary loss on expropriation of
Canadian ambulance service licenses (0.08) -- (0.08) --
Cumulative effect of a change
in accounting principle -- -- (0.04) --
---------- ---------- ---------- ----------
Net income (loss) $ (2.91) $ 0.32 $ (2.78) $ 0.53
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 14,578 14,465 14,558 14,368
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,578 14,665 14,558 14,593
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended December 31,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(40,502) $ 7,701
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities --
Extraordinary loss 1,200 --
Cumulative effect of a change in accounting principle 541 --
Depreciation and amortization 16,864 16,673
Amortization of deferred compensation -- 80
Amortization of gain on sale of real estate (52) (52)
Provision for doubtful accounts 41,657 40,162
Provision for doubtful accounts - change in accounting policy 65,000 --
Undistributed earnings of minority shareholder (74) 77
Amortization of discount on Senior Notes 13 13
Change in assets and liabilities, net of effect
of businesses acquired --
Increase in accounts receivable (68,386) (59,312)
Increase in inventories (2,058) (596)
(Increase) decrease in prepaid expenses and other 1,660 (2,759)
Decrease in accounts payable (1,907) (1,154)
Increase (decrease) in accrued liabilities and other liabilities (23,561) 6,454
Increase (decrease) in nonrefundable subscription income (272) 17
Decrease in deferred income taxes (62) (3,223)
-------- --------
Net cash provided by (used in) operating activities (9,939) 4,081
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 25,500 16,100
Repayment of debt and capital lease obligations (3,089) (3,765)
Issuance of common stock 386 1,186
-------- --------
Net cash provided by financing activities 22,797 13,521
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (4,873)
Proceeds from expropriation of Canadian ambulance service licenses 2,191 --
Capital expenditures (12,592) (11,032)
Increase in other assets (1,386) (4,919)
-------- --------
Net cash used in investing activities (11,787) (20,824)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 20 (294)
-------- --------
INCREASE (DECREASE) IN CASH 1,091 (3,516)
CASH, beginning of period 7,180 6,511
-------- --------
CASH, end of period $ 8,271 $ 2,995
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit plan $ -- $ 1,933
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended December 31 Six months ended December 31,
------------------------------ -----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(42,386) $ 4,639 $(40,502) $ 7,701
Foreign currency translation adjustments 66 (28) 20 (294)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $(42,320) $ 4,611 $(40,482) $ 7,407
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements
for the three and six month periods ended December 31, 1999 and 1998
include all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of the consolidated
financial position and results of operations.
The results of operations for the three and six month periods ended
December 31, 1999 and 1998 are not necessarily indicative of the
results of operations for a full fiscal year. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1999.
(2) CREDIT AGREEMENTS AND BORROWINGS
The Company has received a compliance waiver regarding the financial
covenants contained in its revolving credit facility which covers the
period from December 31, 1999 through March 14, 2000. The waiver
covers the representations and warranties related to no material
adverse changes as well as the following financial covenants: the
total debt leverage ratio, the total debt to total capitalization
ratio and the fixed charge coverage ratio. The waiver stipulates the
Company may borrow up to $5.0 million during the period from January
31, 2000 through February 29, 2000. The Company may borrow an
additional $3.0 million during the period from March 1, 2000 through
March 14, 2000 upon written approval from the lenders. Additionally,
as current LIBOR contracts expire, those borrowings and any
additional borrowings will be priced at the prime rate. At February
11, 2000, the outstanding balance on the revolving credit facility
was $142.5 million and availability on the facility was $4.5 million,
excluding the $3.0 million additional borrowing capacity referred to
previously. A condition of this waiver agreement requires the Company
to negotiate in good faith with the banks participating in the
revolving credit facility in order to amend the revolving credit
facility prior to March 14, 2000. Management believes that an
amendment to the revolving credit facility could substantially alter
the terms and conditions of the revolving credit facility, including
potentially higher interest rates, which could have a material
adverse effect on the financial condition of the Company. Although no
Event of Default is continuing under the terms of the revolving
credit facility (as a result of the waiver agreement) or the
Company's $150 million 7 7/8% Senior Notes (the Notes) due 2008, nor
has either the repayment of the revolving credit facility or the
Notes been accelerated, the entire balance of these instruments has
been reclassified as a current liability at December 31, 1999 in the
accompanying financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 78, "Classification of
Obligations that are Callable by the Creditor". Approximately $139.0
million was outstanding on the revolving credit facility at December
31, 1999. The Company's inability to successfully negotiate an
amendment of the revolving credit facility could have a material
adverse effect on the financial condition of the Company. The Company
has been advised by its independent public accountants that, if the
Company has not successfully renegotiated an amendment of the
revolving credit facility prior to the completion of their audit of
the Company's financial statements for the year
8
<PAGE> 9
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ending June 30, 2000, their auditors' report on those financial
statements will be modified for this contingency.
In March 1998, the Company issued $150.0 million of 7-7/8% Senior
Notes due 2008 (the Notes). The Notes are general unsecured
obligations of the Company and are unconditionally guaranteed on a
joint and several basis by substantially all of the Company's
domestic wholly owned current and future subsidiaries. The financial
statements presented below include the Consolidating Balance Sheets
as of December 31, 1999 and June 30, 1999, the Consolidating
Statements of Operations for the three and six months ended December
31, 1999 and 1998, and the Statements of Cash Flows for the six
months ended December 31, 1999 and 1998 of Rural/Metro Corporation
(Parent) and the guarantor subsidiaries (Guarantors) and the
subsidiaries which are not guarantors (Non-guarantors). The Company
has not presented separate financial statements and related
disclosures for each of the Guarantor subsidiaries because management
believes such information is inconsequential to the note holders.
9
<PAGE> 10
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 3,809 $ 4,462 $ -- $ 8,271
Accounts receivable, net -- 122,358 24,680 -- 147,038
Inventories -- 17,308 1,121 -- 18,429
Prepaid expenses and other 531 8,981 1,177 -- 10,689
--------- ---------- -------------- ----------- ------------
Total current assets 531 152,456 31,440 -- 184,427
--------- ---------- -------------- ----------- ------------
PROPERTY AND EQUIPMENT, net -- 84,050 11,157 -- 95,207
INTANGIBLE ASSETS, net -- 156,175 77,285 -- 233,460
DUE FROM (TO) AFFILIATES 321,795 (258,706) (63,089) -- --
OTHER ASSETS 3,900 17,122 2,204 -- 23,226
INVESTMENT IN SUBSIDIARIES 123,384 -- -- (123,384) --
--------- ---------- -------------- ----------- ------------
$ 449,610 $ 151,097 $ 58,997 $ (123,384) $ 536,320
========= ========== ============== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 8,589 $ 7,308 $ -- $ 15,897
Accrued liabilities 3,906 21,624 8,886 -- 34,416
Current portion of long-term debt 288,788 2,948 1,061 -- 292,797
--------- ---------- -------------- ----------- ------------
Total current liabilities 292,694 33,161 17,255 -- 343,110
LONG-TERM DEBT, net of current portion -- 3,399 553 -- 3,952
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,516 121 -- 14,637
DEFERRED INCOME TAXES -- 8,411 965 -- 9,376
OTHER LIABILITIES -- 153 -- -- 153
--------- ---------- -------------- ----------- ------------
Total liabilities 292,694 59,640 18,894 -- 371,228
--------- ---------- -------------- ----------- ------------
MINORITY INTEREST -- -- -- 8,176 8,176
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 138,177 54,622 34,942 (89,564) 138,177
Retained earnings 20,101 36,753 5,416 (42,169) 20,101
Deferred compensation -- -- -- -- --
Cumulative translation adjustment (272) -- (272) 272 (272)
Treasury stock (1,239) -- -- -- (1,239)
--------- ---------- -------------- ----------- ------------
Total stockholders' equity 156,916 91,457 40,103 (131,560) 156,916
--------- ---------- -------------- ----------- ------------
Total liabilities and stockholders' equity $ 449,610 $ 151,097 $ 58,997 $ (123,384) $ 536,320
========= ========== ============== =========== ============
</TABLE>
10
<PAGE> 11
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 5,379 $ 1,801 $ -- $ 7,180
Accounts receivable, net -- 164,700 20,754 -- 185,454
Inventories -- 15,238 1,133 -- 16,371
Prepaid expenses and other 531 11,648 1,451 -- 13,630
--------- ---------- -------------- ----------- ------------
Total current assets 531 196,965 25,139 -- 222,635
PROPERTY AND EQUIPMENT, net -- 84,448 10,584 -- 95,032
INTANGIBLE ASSETS, net -- 159,159 81,201 -- 240,360
DUE FROM (TO) AFFILIATES 302,491 (245,964) (56,527) -- --
OTHER ASSETS 4,169 15,237 2,474 -- 21,880
INVESTMENT IN SUBSIDIARIES 156,690 -- -- (156,690) --
--------- ---------- -------------- ----------- ------------
$ 463,881 $ 209,845 $ 62,871 $ (156,690) $ 579,907
========= ========== ============== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 11,101 $ 6,681 $ -- $ 17,782
Accrued liabilities 3,767 42,431 11,961 -- 58,159
Current portion of long-term debt -- 4,157 1,608 -- 5,765
--------- ---------- -------------- ----------- ------------
Total current liabilities 3,767 57,689 20,250 -- 81,706
LONG-TERM DEBT, net of current portion 263,275 4,384 901 -- 268,560
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,890 19 -- 14,909
DEFERRED INCOME TAXES -- 8,473 965 -- 9,438
OTHER LIABILITIES -- 205 -- -- 205
--------- ---------- -------------- ----------- ------------
Total liabilities 267,042 85,641 22,135 -- 374,818
--------- ---------- -------------- ----------- ------------
MINORITY INTEREST -- -- -- 8,250 8,250
STOCKHOLDERS' EQUITY
Common stock 148 82 17 (99) 148
Additional paid-in capital 137,792 54,622 34,942 (89,564) 137,792
Retained earnings 60,603 69,500 6,242 (75,742) 60,603
Cumulative translation adjustment (465) -- (465) 465 (465)
Treasury stock (1,239) -- -- -- (1,239)
--------- ---------- -------------- ----------- ------------
Total stockholders' equity 196,839 124,204 40,736 (164,940) 196,839
--------- ---------- -------------- ----------- ------------
$ 463,881 $ 209,845 $ 62,871 $ (156,690) $ 579,907
========= ========== ============== =========== ============
</TABLE>
11
<PAGE> 12
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 93,874 $ 21,885 $ -- $ 115,759
Fire protection services -- 12,309 282 -- 12,591
Other -- 10,194 1,045 -- 11,239
--------- ---------- -------------- ----------- ------------
Total revenue -- 116,377 23,212 -- 139,589
--------- ---------- -------------- ----------- ------------
OPERATING EXPENSES
Payroll and employee benefits -- 59,166 14,054 -- 73,220
Provision for doubtful accounts -- 18,782 1,483 -- 20,265
Depreciation -- 5,559 450 -- 6,009
Amortization of intangibles 86 1,737 568 -- 2,391
Other operating expenses -- 20,430 3,893 -- 24,323
--------- ---------- -------------- ----------- ------------
Total expenses 86 105,674 20,448 -- 126,208
--------- ---------- -------------- ----------- ------------
OPERATING INCOME (LOSS) (86) 10,703 2,764 -- 13,381
Interest expense, net 4,872 10 449 -- 5,331
Other -- -- -- 29 29
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (4,958) 10,693 2,315 (29) 8,021
PROVISION (BENEFIT) FOR INCOME TAXES (2,083) 4,580 885 -- 3,382
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) (2,875) 6,113 1,430 (29) 4,639
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 7,514 -- -- (7,514) --
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) $ 4,639 $ 6,113 $ 1,430 $ (7,543) $ 4,639
========= ========== ============== =========== ============
Foreign currency translation adjustments -- -- (28) -- (28)
Comprehensive income (loss) from
wholly-owned subsidiaries (28) -- -- 28 --
--------- ---------- -------------- ----------- ------------
COMPREHENSIVE INCOME (LOSS) $ 4,611 $ 6,113 $ 1,402 $ (7,515) $ 4,611
========= ========== ============== =========== ============
</TABLE>
12
<PAGE> 13
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 100,439 $ 20,670 $ -- $ 121,109
Fire protection services -- 14,273 278 -- 14,551
Other -- 9,436 2,011 -- 11,447
--------- ---------- -------------- ----------- ------------
Total revenue -- 124,148 22,959 -- 147,107
--------- ---------- -------------- ----------- ------------
OPERATING EXPENSES
Payroll and employee benefits -- 65,590 13,798 -- 79,388
Provision for doubtful accounts -- 19,854 1,393 -- 21,247
Provision for doubtful accounts - change in
accounting policy -- 65,000 -- -- 65,000
Depreciation -- 5,595 647 -- 6,242
Amortization of intangibles -- 1,676 626 -- 2,302
Other operating expenses -- 25,721 5,185 -- 30,906
Restructuring charge -- -- -- -- --
--------- ---------- -------------- ----------- ------------
Total expenses -- 183,436 21,649 -- 205,085
--------- ---------- -------------- ----------- ------------
OPERATING INCOME (LOSS) -- (59,288) 1,310 -- (57,978)
Interest expense, net 5,609 (337) 540 -- 5,812
Other -- -- -- (54) (54)
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (5,609) (58,951) 770 54 (63,736)
PROVISION (BENEFIT) FOR INCOME TAXES (1,601) (21,290) 341 -- (22,550)
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS (4,008) (37,661) 429 54 (41,186)
EXTRAORDINARY LOSS ON EXPROPRIATION OF
CANADIAN AMBULANCE SERVICE LICENSES -- -- (1,200) -- (1,200)
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) (4,008) (37,661) (771) 54 (42,386)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (38,378) -- -- 38,378 --
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) $ (42,386) $ (37,661) $ (771) $ 38,432 $ (42,386)
========= ========== ============== =========== ============
Foreign currency translation adjustments -- -- 66 -- 66
Comprehensive income (loss) from
wholly-owned subsidiaries 66 -- -- (66) --
--------- ---------- -------------- ----------- ------------
COMPREHENSIVE INCOME (LOSS) $ (42,320) $ (37,661) $ (705) $ 38,366 $ (42,320)
========= ========== ============== =========== ============
</TABLE>
13
<PAGE> 14
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 187,180 $ 44,844 $ -- $ 232,024
Fire protection services -- 24,696 538 -- 25,234
Other -- 19,985 1,141 -- 21,126
--------- ---------- -------------- ----------- ------------
Total revenue -- 231,861 46,523 -- 278,384
--------- ---------- -------------- ----------- ------------
OPERATING EXPENSES
Payroll and employee benefits -- 119,256 27,862 -- 147,118
Provision for doubtful accounts -- 36,945 3,217 -- 40,162
Depreciation -- 11,001 884 -- 11,885
Amortization of intangibles 214 3,455 1,119 -- 4,788
Other operating expenses -- 39,596 8,447 -- 48,043
Restructuring charge -- 2,500 -- -- 2,500
--------- ---------- -------------- ----------- ------------
Total expenses 214 212,753 41,529 -- 254,496
--------- ---------- -------------- ----------- ------------
OPERATING INCOME (LOSS) (214) 19,108 4,994 -- 23,888
Interest expense, net 9,526 95 852 -- 10,473
Other -- -- -- 77 77
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (9,740) 19,013 4,142 (77) 13,338
PROVISION (BENEFIT) FOR INCOME TAXES (4,091) 8,003 1,725 -- 5,637
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) (5,649) 11,010 2,417 (77) 7,701
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 13,350 -- -- (13,350) --
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) $ 7,701 $ 11,010 $ 2,417 $ (13,427) $ 7,701
========= ========== ============== =========== ============
Foreign currency translation adjustments -- -- (294) -- (294)
Comprehensive income (loss) from
wholly-owned subsidiaries (294) -- -- 294 --
--------- ---------- -------------- ----------- ------------
COMPREHENSIVE INCOME (LOSS) $ 7,407 $ 11,010 $ 2,123 $ (13,133) $ 7,407
========= ========== ============== =========== ============
</TABLE>
14
<PAGE> 15
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 196,586 $ 41,420 $ -- $ 238,006
Fire protection services -- 27,058 556 -- 27,614
Other -- 18,524 4,163 -- 22,687
--------- ---------- -------------- ----------- ------------
Total revenue -- 242,168 46,139 -- 288,307
--------- ---------- -------------- ----------- ------------
OPERATING EXPENSES
Payroll and employee benefits -- 127,748 28,505 -- 156,253
Provision for doubtful accounts -- 38,943 2,714 -- 41,657
Provision for doubtful accounts - change in
accounting policy -- 65,000 -- -- 65,000
Depreciation -- 11,149 1,253 -- 12,402
Amortization of intangibles -- 3,202 1,260 -- 4,462
Other operating expenses -- 46,301 10,629 -- 56,930
Restructuring charge -- -- -- -- --
--------- ---------- -------------- ----------- ------------
Total expenses -- 292,343 44,361 -- 336,704
--------- ---------- -------------- ----------- ------------
OPERATING INCOME (LOSS) -- (50,175) 1,778 -- (48,397)
Interest expense, net 10,773 (614) 1,089 -- 11,248
Other -- -- -- (74) (74)
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (10,773) (49,561) 689 74 (59,571)
PROVISION (BENEFIT) FOR INCOME TAXES (3,770) (17,355) 315 -- (20,810)
--------- ---------- -------------- ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (7,003) (32,206) 374 74 (38,761)
EXTRAORDINARY LOSS ON EXPROPRIATION OF
CANADIAN AMBULANCE SERVICE
LICENSES -- -- (1,200) -- (1,200)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE -- (541) -- -- (541)
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) $ (7,003) $ (32,747) $ (826) $ 74 $ (40,502)
LOSS FROM WHOLLY OWNED SUBSIDIARIES (33,499) -- -- 33,499 --
--------- ---------- -------------- ----------- ------------
NET INCOME (LOSS) $ (40,502) $ (32,747) $ (826) $ 33,573 $ (40,502)
========= ========== ============== =========== ============
Foreign currency translation adjustments -- -- 20 -- 20
Comprehensive income (loss) from
wholly-owned subsidiaries 20 -- -- (20) --
--------- ---------- -------------- ----------- ------------
COMPREHENSIVE INCOME (LOSS) $ (40,482) $ (32,747) $ (806) $ 33,553 $ (40,482)
========= ========== ============== =========== ============
</TABLE>
15
<PAGE> 16
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
-------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 7,701 $ 11,010 $ 2,417 $ (13,427) $ 7,701
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities --
Depreciation and amortization 214 14,456 2,003 -- 16,673
Amortization of deferred compensation 80 -- -- -- 80
Amortization of gain on sale of real estate -- (52) -- -- (52)
Provision for doubtful accounts -- 36,945 3,217 -- 40,162
Undistributed earnings of minority shareholder -- -- -- 77 77
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities --
Increase in accounts receivable -- (54,315) (4,997) -- (59,312)
(Increase) decrease in inventories -- (520) (76) -- (596)
(Increase) decrease in prepaid expenses and other -- (1,377) (1,382) -- (2,759)
(Increase) decrease in due to/from affiliates (25,126) 6,774 867 17,485 --
Increase in accounts payable -- (2,440) 1,286 -- (1,154)
Increase (decrease) in accrued liabilities
and other liabilities 126 6,607 (279) -- 6,454
Increase (decrease) in non-refundable subscription income -- (39) 56 -- 17
Decrease in deferred income taxes -- (3,001) (222) -- (3,223)
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in) operating activities (16,992) 14,048 2,890 4,135 4,081
-------- ---------- -------------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 16,100 -- -- -- 16,100
Repayment of debt and capital lease obligations -- (3,392) (373) -- (3,765)
Issuance of common stock 1,186 -- 4,429 (4,429) 1,186
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in) financing activities 17,286 (3,392) 4,056 (4,429) 13,521
-------- ---------- -------------- ----------- ------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (445) (4,428) -- (4,873)
Capital expenditures -- (8,867) (2,165) -- (11,032)
(Increase) decrease in other assets -- (3,318) (1,601) -- (4,919)
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in) investing activities -- (12,630) (8,194) -- (20,824)
-------- ---------- -------------- ----------- ------------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (294) -- (294) 294 (294)
-------- ---------- -------------- ----------- ------------
DECREASE IN CASH -- (1,974) (1,542) -- (3,516)
CASH, beginning of period -- 2,917 3,594 -- 6,511
-------- ---------- -------------- ----------- ------------
CASH, end of period $ -- $ 943 $ 2,052 $ -- $ 2,995
======== ========== ============== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITY
Fair market value of stock issued to employee benefit plan $ 1,933 $ -- $ -- $ -- $ 1,993
======== ========== ============== =========== ============
</TABLE>
16
<PAGE> 17
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
-------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(40,502) $ (32,747) $ (826) $ 33,573 $ (40,502)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities --
Extraordinary loss -- -- 1,200 -- 1,200
Cumulative effect of a change in accounting principle -- 541 -- -- 541
Depreciation and amortization -- 14,351 2,513 -- 16,864
Amortization of deferred compensation -- -- -- -- --
Amortization of gain on sale of real estate -- (52) -- -- (52)
Provision for doubtful accounts -- 38,943 2,714 -- 41,657
Provision for doubtful accounts - change
in accounting policy -- 65,000 -- -- 65,000
Undistributed earnings of minority shareholder -- -- -- (74) (74)
Amortization of discount on Senior Notes 13 -- -- -- 13
Change in assets and liabilities --
Increase in accounts receivable -- (61,601) (6,785) -- (68,386)
(Increase) decrease in inventories -- (2,070) 12 -- (2,058)
(Increase) decrease in prepaid expenses and other -- 1,516 144 -- 1,660
(Increase) decrease in due to/from affiliates 14,175 12,742 6,562 (33,479) --
Increase (decrease) n accounts payable -- (2,512) 605 -- (1,907)
Increase (decrease) in accrued liabilities
and other liabilities 139 (20,415) (3,285) -- (23,561)
Increase (decrease) in non-refundable
subscription income -- (374) 102 -- (272)
Decrease in deferred income taxes -- (62) -- -- (62)
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in)
operating activities (26,175) 13,260 2,956 20 (9,939)
-------- ---------- -------------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 25,500 -- -- -- 25,500
Repayment of debt and capital lease obligations -- (2,194) (895) -- (3,089)
Issuance of common stock 386 -- -- -- 386
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in)
financing activities 25,886 (2,194) (895) -- 22,797
-------- ---------- -------------- ----------- ------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for business acquired -- -- -- -- --
Proceeds from the expropriation of Canadian ambulance
service licenses -- -- 2,191 -- 2,191
Capital expenditures -- (10,751) (1,841) -- (12,592)
(Increase) decrease in other assets 269 (1,885) 230 -- (1,386)
-------- ---------- -------------- ----------- ------------
Net cash provided by (used in)
investing activities 269 (12,636) 580 -- (11,787)
-------- ---------- -------------- ----------- ------------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 20 -- 20 (20) 20
-------- ---------- -------------- ----------- ------------
INCREASE (DECREASE) IN CASH -- (1,570) 2,661 -- 1,091
CASH, beginning of period -- 5,379 1,801 -- 7,180
-------- ---------- -------------- ----------- ------------
CASH, end of period $ -- $ 3,809 $ 4,462 $ -- $ 8,271
======== ========== ============== =========== ============
</TABLE>
17
<PAGE> 18
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) COMMITMENTS AND CONTINGENCIES
During the year ended June 30, 1999, the Company entered into an
option agreement whereby the Company may elect to be issued a
debenture in the principal amount of up to $25.0 million by a company
providing ambulance and other services in certain areas of Brazil.
The Company has not exercised this option nor does it intend to
exercise this option prior to June 30, 2000. The Company may elect to
terminate this option agreement upon 30-day written notice or it may
be terminated at the option of the Brazilian company.
Included in accrued liabilities at December 31, 1999 in the
accompanying balance sheets is $3.9 million attributable to the
accrual of proposed settlements relating to a Medicare investigation
and certain Medicaid audits.
(4) CHANGE IN ACCOUNTING POLICY
Effective October 1, 1999, the Company changed its accounting policy
used in recording the provision for doubtful accounts. This change in
policy is being treated as a change in accounting estimate. Because
of the continuing difficulties encountered in the healthcare
reimbursement environment, during fiscal 2000, Management has
continued to place increased emphasis on increasing the quality of
the Company's revenue by exiting service areas or substantially
reducing service where it had become unprofitable to perform
non-emergency transports because of low reimbursement rates or a high
risk of non-reimbursement by payors. The Company has shifted the
focus of its billing personnel to place greater emphasis on the
billing process as opposed to the collection process. The Company has
instituted mandatory comprehensive training for its paramedics and
Emergency Medical Technicians on new standards of documentation of
ambulance run tickets. Management's analysis of the various payor
classes within the Company's accounts receivable balance, the
increasingly unpredictable nature of healthcare accounts receivable,
the increasing costs to collect these receivables and management's
conclusion that the aforementioned process changes had not brought
about the benefits anticipated led to this accounting policy change
during the second quarter. Under the new accounting policy, the
Company has chosen to fully reserve its accounts receivable earlier
in the collection cycle than had previously been the practice.
Accordingly, the effect of this change is an additional $65.0 million
provision for doubtful accounts which is recorded separately in the
accompanying financial statements.
(5) RESTRUCTURING CHARGE
During the first quarter of fiscal 1999, the Company recorded a
pre-tax charge of $2.5 million for severance payments related to
certain members of senior management who have left the Company.
During the years ended June 30, 1998 and 1997, the Company recorded
pre-tax charges totaling $7.8 million related to severance payments.
The charges related primarily to the cost of terminating
approximately 400 administrative employees throughout the Company,
all of which have been terminated as of September 30, 1999. As of
December 31, 1999 and June 30, 1999, the balance of the allowance for
severance payments was $0.1 million and $1.3 million, respectively.
The allowance is included in accrued liabilities in the accompanying
consolidated balance sheets.
In January 2000, the Company announced its intention in the third
quarter of fiscal 2000 to restructure certain service areas and its
corporate office. The Company anticipates the costs of the
restructuring plan, which will include severance and costs of exiting
or reducing service in certain service areas, will approximate up to
$30.0 million on an after-tax basis.
(6) EXTRAORDINARY ITEM
During the second quarter of fiscal year 2000, the Company recorded
an extraordinary loss on the expropriation of Canadian ambulance
service licenses of $1.2 million. The Company received $2.2 million
from the Ontario Ministry of Health as compensation for the loss of
the licenses. These proceeds were offset by $0.2 million accrual for
costs associated with the loss of the ambulance service licenses and
the write-off of the following balance sheet items related to the
18
<PAGE> 19
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's Canadian operations: $2.8 million of goodwill, $0.1 million
of accounts receivable and $0.3 million of other assets.
(7) CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", effective July 1, 1999, the Company
was required to change its accounting principle for organization
costs. Previously, the Company capitalized such costs and amortized
them using the straight-line method over five years. At June 30, 1999
such unamortized costs totaled $933,000. In the first quarter of
fiscal year 2000, the Company wrote-off its capitalized organization
costs and will expense any future organization costs as incurred. The
write-off was $541,000 (net of a tax benefit of $392,000) and has
been reflected in the Consolidated Statements of Operations for the
six months ended December 31, 1999 as the "Cumulative Effect of a
Change in Accounting Principle" in accordance with APB No. 20.
(8) EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding of the basic and diluted earnings per
share (EPS) computation for the three and six month periods ended
December 31, 1999 and 1998 is a follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended December 31, 1999 Three Months Ended December 31, 1998
---------------------------------------- ---------------------------------------
Loss Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (42,386) 14,578 $ (2.91) $ 4,639 14,465 $ 0.32
========= =========
Effect of stock options -- -- -- 200
----------- -------- ----------- --------
Diluted EPS $ (42,386) 14,578 $ (2.91) $ 4,639 14,665 $ 0.32
=========== ======== ========= =========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31, 1999 Six Months Ended December 31, 1998
---------------------------------------- ---------------------------------------
Loss Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (40,502) 14,558 $ (2.78) $ 7,701 14,368 $ 0.54
========= =========
Effect of stock options -- -- -- 225
----------- -------- ----------- --------
Diluted EPS $ (40,502) 14,558 $ (2.78) $ 7,701 14,593 $ 0.53
=========== ======== ========= =========== ======== =========
</TABLE>
(9) SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards
for reporting information about operating segments in annual
financial statements and requires selected information about
operating segments in interim financial statements. It also
established standards for related disclosures about products and
services and geographic areas. Operating segments are defined as
components of a business, for which separate financial information is
available, that management regularly evaluates in deciding how to
allocate resources and assess performance.
The Company operates in two business segments: Ambulance and Fire and
Other. The Company's reportable segments are strategic business units
that offer different services. They are managed separately based on
the fundamental differences in their operations.
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a
fee-for-service basis, on a non-refundable subscription basis and
through capitated contracts. The Ambulance segment also includes
urgent home medical care and ambulance services provided under
capitated service arrangements in Argentina.
19
<PAGE> 20
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Fire and Other segment includes the following services: fire
protection and training, alternative transportation, home health care
services, urgent and primary care in clinics, dispatch, fleet and
billing.
The accounting policies of the operating segments are the same as
those described in Note 1 of Notes to Consolidated Financial
Statements filed with the Form 10-K for the fiscal year ended June
30, 1999. The Company defines segment profit (loss) as total revenue
less total operating expenses and interest expense associated with
the segment. The Company defines segment assets as the sum of net
accounts receivable, inventory and net property and equipment
associated with the segments.
Included in Corporate are general corporate expenses as well as the
pre-tax charge of $2.5 million related to severance payments recorded
during the six months ended December 31, 1998.
Information by operating segment is set forth below (in thousands):
<TABLE>
<CAPTION>
Three months ended December 31, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from external customers $121,109 $25,998 $ -- $147,107
Segment profit (loss) $(62,226) $ 2,089 $(3,653) $(63,790)
Segment assets $216,878 $41,357 $ 2,439 $260,674
</TABLE>
<TABLE>
<CAPTION>
Three months ended December 31, 1998 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from external customers $115,759 $23,830 $ -- $139,589
Segment profit (loss) $ 9,345 $ 3,114 $(4,409) $ 8,050
Segment assets $236,320 $40,317 $ 2,957 $279,594
</TABLE>
<TABLE>
<CAPTION>
Six months ended December 31, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from external customers $238,006 $50,301 $ -- $288,307
Segment profit (loss) $(55,632) $ 3,715 $(7,728) $(59,645)
Segment assets $216,878 $41,357 $ 2,439 $260,674
</TABLE>
<TABLE>
<CAPTION>
Six months ended December 31, 1998 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from external customers $232,024 $46,360 $ -- $278,384
Segment profit (loss) $ 18,164 $ 5,828 $(10,577) $ 13,415
Segment assets $236,320 $40,317 $ 2,957 $279,594
</TABLE>
20
<PAGE> 21
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Except for the historical information contained herein, this Report contains
forward looking statements that involve risks and uncertainties regarding future
business prospects, the value of our common stock, our ability to renegotiate
the terms of our revolving credit facility, revenue, working capital, accounts
receivable collection, liquidity, cash flow, and capital needs that could cause
actual results to differ materially.
The health care industry in general and the ambulance industry in particular are
in a state of significant change. This makes us susceptible to various factors
that may affect future results such as the following: no assurance of successful
integration and operation of acquired service providers; growth strategy and
difficulty in maintaining growth; risks of leverage; revenue mix; dependence on
certain business relationships; risks related to intangible assets; dependence
on government and third party payors; risks related to fee-for-service
contracts; possible adverse changes in reimbursement rates; impact of rate
structures; possible negative effects of prospective health care reform; high
utilization of services by customers under capitated service arrangements;
competitive market forces; fluctuation in quarterly results; volatility of stock
price; access to debt and equity capital; dependence on key personnel; and
anti-takeover effect of certain of our charter provisions.
All references to "we", "our", "us" or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions and subsidiaries.
This Report should be read in conjunction with our Report on Form 10-K for the
fiscal year ended June 30, 1999.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls ("911" emergency ambulance services) and non-emergency transport
services (general transport services) to patients on a fee-for-service basis, on
a non-refundable subscription fee basis and through capitated contracts. Per
transport revenue depends on various factors, including the mix of rates between
existing service areas and new service areas and the mix of activity between
"911" emergency ambulance services and general medical transport services as
well as other competitive factors. Fire protection services are provided either
under contracts with municipalities, fire districts or other agencies or on a
non-refundable subscription fee basis to individual homeowners or commercial
property owners.
Domestic ambulance service fees are recorded net of Medicare, Medicaid and other
reimbursement limitations and are recognized when services are provided.
Payments received from third-party payors represent a substantial portion of our
ambulance service fee receipts. We establish an allowance for doubtful accounts
based on credit risk applicable to certain types of payors, historical trends
and other relevant information. Provision for doubtful accounts is made for the
expected difference between ambulance services fees charged and amounts actually
collected. Our provision for doubtful accounts generally is higher with respect
to collections to be derived from patients than for collections to be derived
from third-party payors and generally is higher for "911" emergency ambulance
services than for general ambulance transport services. We also have an
ambulance service contract structured as a public utility model in which our
services are paid on a monthly basis by the contracting agency.
21
<PAGE> 22
Because of the nature of our domestic ambulance services, it is necessary to
respond to a number of calls, primarily "911" emergency ambulance service calls,
which may not result in transports. Results of operations are discussed below on
the basis of actual transports since transports are more directly related to
revenue. Expenses associated with calls that do not result in transports are
included in operating expenses. The percentage of domestic ambulance service
calls not resulting in transports varies substantially depending upon the mix of
general transport and "911" emergency ambulance service calls in our service
areas and is generally higher in service areas in which the calls are primarily
"911" emergency ambulance service calls. Rates in our service areas take into
account the anticipated number of calls that may not result in transports. We do
not separately account for expenses associated with calls that do not result in
transports. Revenue generated under our capitated service arrangements in
Argentina and contractual agreements in Canada is included in ambulance services
revenue.
Revenue generated under fire protection service contracts is recognized over the
term of the related contract. Subscription fees received in advance are deferred
and recognized over the term of the subscription agreement, which is generally
one year.
Other revenue consists primarily of fees associated with alternative
transportation, dispatch, fleet, billing, urgent and primary care services in
clinics, and home health care services and is recognized when the services are
provided.
Other operating expenses consist primarily of rent and related occupancy
expenses, maintenance and repairs, insurance, fuel and supplies, travel and
professional fees.
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher second and third fiscal quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions. Also, our Argentine operations
experience greater utilization of services by customers under capitated service
arrangements in the first and fourth fiscal quarters, as compared to the other
two quarters, when South America is in its winter season.
Public health conditions affect our operations differently in different regions.
For example, greater utilization of services by customers under capitated
service arrangements decreases our operating income. The same conditions
domestically, where we operate under fee-for-service arrangements, result in a
greater number of transports, increasing our operating income.
Loss before extraordinary loss and cumulative effect of a change in accounting
principle for the three months ended December 31, 1999 was $41.2 million, or
$2.83 per diluted share as compared to net income of $4.6 million, or $0.32 per
diluted share for the three months ended December 31, 1998. Loss before
extraordinary loss and cumulative effect of a change in accounting principle for
the six months ended December 31, 1999 was $38.8 million, or $2.66 per diluted
share as compared to net income of $7.7 million, or $0.53 per diluted share for
the six months ended December 31, 1998. The operating results for the three and
six months ended December 31, 1999 were adversely affected by the change in
accounting policy used in recording our provision for doubtful accounts of $65.0
million on a pre-tax basis. The fiscal year 2000 earnings were also adversely
affected by the expropriation of our Canadian ambulance service licenses of $1.2
million on both a before and after tax basis. The operating results for the
three and six months ended December 31, 1999 were also negatively impacted by
reduced operating margins of our Argentine operations. These operating margins
were reduced due to substantial increases in service utilization under our
capitated service arrangements and due to the impact of the economic recession
in Argentina combined with significant increases in service taxes on all medical
services.
22
<PAGE> 23
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
REVENUE
Total revenue increased $7.5 million, or 5.4%, from $139.6 million for the three
months ended December 31, 1998 to $147.1 million for the three months ended
December 31, 1999. Ambulance services revenue increased $5.4 million, or 4.7%,
from $115.7 million for the three months ended December 31, 1998 to $121.1
million for the three months ended December 31, 1999. Domestic ambulance
services revenue in areas served by us in both of the three month periods ended
December 31, 1999 and 1998 increased by $6.1 million, or 6.0%. The increase in
domestic ambulance services revenue was partially offset by a $1.7 million
decrease in ambulance services revenue in our Argentine operations resulting
from decreases in memberships under capitated service arrangements. The decrease
in memberships was attributable to the impact of the economic recession in
Argentina combined with significant increases in service taxes on all medical
services.
Total domestic ambulance transports decreased by 5,000, or 1.5%, from 325,000
for the three months ended December 31, 1998 to 320,000 for the three months
ended December 31, 1999 due to our efforts to reduce non-emergency transports in
certain areas and improve the quality of our revenue. The effect on revenue
caused by the reduction in transports was more than offset by transports
generated through new contracting activity as well as increases in average
patient charges in other areas.
Fire protection services revenue increased by $2.0 million, or 15.9%, from $12.6
million for the three months ended December 31, 1998 to $14.6 million for the
three months ended December 31, 1999. Fire protection services revenue increased
due to new contracting activity of $1.1 million and due to rate increases for
fire protection services of $0.9 million.
Other revenue increased $0.2 million, or 1.8%, from $11.2 million for the three
months ended December 31, 1998 to $11.4 million for the three months ended
December 31, 1999. Other revenue increased due to revenue of $1.7 million
associated with urgent and primary care services provided in Argentina by a
company that we acquired in the third quarter of fiscal 1999. This increase was
partially offset by a $0.5 million decrease in alternative transportation
services revenue due to our efforts to reduce transports in certain areas and
improve the quality of our revenue and by a $0.8 million decrease in alarm
monitoring revenue due to the sale of certain accounts during the three months
ended December 31, 1998.
OPERATING EXPENSES
Payroll and employee benefit expenses increased $6.2 million, or 8.5%, from
$73.2 million for the three months ended December 31, 1998 to $79.4 million for
the three months ended December 31, 1999. The acquisition completed during the
third quarter of fiscal 1999 contributed $0.6 million to the increase, service
areas with newly acquired contracts contributed $4.2 million to the increase and
the remainder was attributable to higher average labor costs in certain service
areas. We expect these higher average labor costs to continue in the future,
including the increased costs associated with accounts receivable collection and
with Health Care Financing Administration (HCFA) compliance. Payroll and
employee benefits expense increased from 52.5% of total revenue for the three
months ended December 31, 1998 to 54.0% of total revenue for the three months
ended December 31, 1999. Increased service utilization in our Argentine
operations also contributed to the increase in payroll and employee benefit
expenses as a percentage of total revenue.
Effective October 1, 1999, we changed our accounting policy used in recording
our provision for doubtful accounts. Because of the continuing difficulties
encountered in the healthcare reimbursement environment, during fiscal 2000, we
have continued to place increased emphasis on increasing the quality
23
<PAGE> 24
of our revenue by exiting service areas or substantially reducing service, where
it had become unprofitable to perform non-emergency transports because of low
reimbursement rates or a high risk of non-reimbursement by payors. We have
shifted the focus of our billing personnel to place greater emphasis on the
billing process as opposed to the collection process. We have instituted
mandatory comprehensive training for our paramedics and Emergency Medical
Technicians on new standards of documentation of ambulance run tickets.
Management's analysis of the various payor classes within our accounts
receivable balance, the increasingly unpredictable nature of healthcare accounts
receivable, the increasing costs to collect these receivables and management's
conclusion that the aforementioned process changes had not brought about the
benefits anticipated led to this accounting policy change during the second
quarter. Under our new accounting policy, we have chosen to fully reserve our
accounts receivable earlier in the collection cycle than had previously been our
practice. Accordingly, the effect of this change is an additional $65.0 million
provision for doubtful accounts, which is recorded separately in the
accompanying financial statements. Provision for doubtful accounts, using the
new accounting policy but exclusive of the $65.0 million additional provision,
increased $0.9 million, or 4.4%, from $20.3 million for the three months ended
December 31, 1998 to $21.2 million for the three months ended December 31, 1999.
Provision for doubtful accounts, using the new accounting policy but exclusive
of the $65.0 million additional provision, decreased from 14.5% of total revenue
for the three months ended December 31, 1998 to 14.4% of total revenue for the
three months ended December 31, 1999 and was 19.7% of domestic ambulance service
revenue for the three months ended December 31, 1998 and 19.2% of domestic
ambulance service revenue for the three months ended December 31, 1999. We
anticipate that this change in our accounting policy may result in increases in
our provision for doubtful accounts in future periods. During fiscal 2000, we
have continued to increase our focus on revenue of higher quality by reducing
the amount of non-emergency ambulance transports in selected service areas and
have continued previously implemented initiatives to maximize the collection of
our accounts receivable. Net accounts receivable on non-integrated collection
systems currently represent 7.7% of total net accounts receivable at December
31, 1999. We will continue to review the benefits and timing of integrating our
two non-integrated billing centers.
Depreciation increased $0.2 million, or 3.3%, from $6.0 million for the three
months ended December 31, 1998 to $6.2 million for the three months ended
December 31, 1999, primarily as a result of increased property and equipment
from the acquisition completed during the third quarter of fiscal 1999.
Depreciation was 4.3% and 4.2% of total revenue for the three months ended
December 31, 1998 and 1999, respectively.
Amortization of intangibles decreased $0.1 million, or 4.2%, from $2.4 million
for the three months ended December 31, 1998 to $2.3 million for the three
months ended December 31, 1999. Amortization of intangibles was 1.7% and 1.6% of
total revenue for the three months ended December 31, 1998 and 1999,
respectively.
Other operating expenses increased approximately $6.6 million, or 27.2%, from
$24.3 million for the three months ended December 31, 1998 to $30.9 million for
the three months ended December 31, 1999. Of the $6.6 million increase, $3.9
million was attributable to the accrual of proposed settlements relating to a
Medicare investigation and certain Medicaid audits, $1.2 million was
attributable to the operation of the company acquired in the third quarter of
fiscal 1999 and $1.3 million was attributable to operations in service areas
with newly acquired contracts. Other operating expenses increased from 17.4% of
total revenue for the three months ended December 31, 1998 to 21.0% of total
revenue for the three months ended December 31, 1999. The increased service
utilization in our Argentine operations also attributed to the increase in
operating expenses as a percentage of total revenue.
Interest expense increased $0.5 million, or 9.4%, from $5.3 million for the
three months ended December 31, 1998 to $5.8 million for the three months ended
December 31, 1999. This increase was caused by higher debt
24
<PAGE> 25
balances. We anticipate that increases in interest expense will continue in
future periods as a result of amendments to our revolving credit facility.
Our effective tax rate was 42.0% for the three months ended December 31, 1998
and 35.4% for the three months ended December 31, 1999.
During the three months ended December 31, 1999, we recorded an extraordinary
loss on the expropriation of Canadian ambulance service licenses of $1.2 million
(net of $0 of income taxes). We received $2.2 million from the Ontario Ministry
of Health as compensation for the loss of licenses and incurred costs and
wrote-off assets, mainly goodwill, totaling $3.4 million.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
REVENUE
Total revenue increased $9.9 million, or 3.6%, from $278.4 million for the six
months ended December 31, 1998 to $288.3 million for the six months ended
December 31, 1999. Ambulance services revenue increased $6.0 million, or 2.6%,
from $232.0 million for the six months ended December 31, 1998 to $238.0 million
for the six months ended December 31, 1999. Domestic ambulance services revenue
in areas served by us in both of the six month periods ended December 31, 1999
and 1998 increased by $8.2 million, or 4.0%. The increase in domestic ambulance
services revenue was partially offset by a $3.2 million decrease in ambulance
services revenue in our Argentine operations resulting from decreases in
memberships under capitated service arrangements. The decrease in memberships
was attributable to the impact of the economic recession in Argentina combined
with significant increases in service taxes on all medical services.
Total domestic ambulance transports decreased by 28,000, or 4.3%, from 654,000
for the six months ended December 31, 1998 to 626,000 for the six months ended
December 31, 1999 due to our efforts to reduce non-emergency transports in
certain areas and improve the quality of our revenue. The effect on revenue
caused by the reduction in transports was more than offset by transports
generated through new contracting activity as well as increases in average
patient charges in other areas.
Fire protection services revenue increased by $2.4 million, or 9.5%, from $25.2
million for the six months ended December 31, 1998 to $27.6 million for the six
months ended December 31, 1999. Fire protection services revenue increased due
to new contracting activity of $1.1 million and due to rate increases for fire
protection services of $1.3 million.
Other revenue increased $1.6 million, or 7.6%, from $21.1 million for the six
months ended December 31, 1998 to $22.7 million for the six months ended
December 31, 1999. Other revenue increased due to revenue of $3.5 million
associated with urgent and primary care services provided in Argentina by a
company that we acquired in the third quarter of fiscal 1999. This increase was
partially offset by a $1.3 million decrease in alternative transportation
services revenue due to our efforts to reduce transports in certain areas and
improve the quality of our revenue and by a $0.8 million decrease in alarm
monitoring revenue due to the sale of certain accounts during the three months
ended December 31, 1998.
OPERATING EXPENSES
Payroll and employee benefit expenses increased $9.2 million, or 6.3%, from
$147.1 million for the six months ended December 31, 1998 to $156.3 million for
the six months ended December 31, 1999. The acquisition completed during the
third quarter of fiscal 1999 contributed $1.3 million to the increase, service
areas with newly acquired contracts contributed $6.5 million to the increase and
the remainder
25
<PAGE> 26
was attributable to higher average labor costs in certain service areas. We
expect these higher average labor costs to continue in the future, including the
increased costs associated with accounts receivable collection and with Health
Care Financing Administration (HCFA) compliance. Payroll and employee benefits
expense increased from 52.8% of total revenue for the six months ended December
31, 1998 to 54.2% of total revenue for the six months ended December 31, 1999.
Increased service utilization in our Argentine operations also contributed to
the increase in payroll and employee benefit expenses as a percentage of total
revenue.
Effective October 1, 1999, we changed our accounting policy used in recording
our provision for doubtful accounts. Because of the continuing difficulties
encountered in the healthcare reimbursement environment, during fiscal 2000, we
have continued to place increased emphasis on increasing the quality of our
revenue by exiting service areas or substantially reducing service, where it had
become unprofitable to perform non-emergency transports because of low
reimbursement rates or a high risk of non-reimbursement by payors. We have
shifted the focus of our billing personnel to place greater emphasis on the
billing process as opposed to the collection process. We have instituted
mandatory comprehensive training for our paramedics and Emergency Medical
Technicians on new standards of documentation of ambulance run tickets.
Management's analysis of the various payor classes within our accounts
receivable balance, the increasingly unpredictable nature of healthcare accounts
receivable, the increasing costs to collect these receivables and management's
conclusion that the aforementioned process changes had not brought about the
benefits anticipated led to this accounting policy change during the second
quarter. Under our new accounting policy, we have chosen to fully reserve our
accounts receivable earlier in the collection cycle than had previously been our
practice. Accordingly, the effect of this change is an additional $65.0 million
provision for doubtful accounts, which is recorded separately in the
accompanying financial statements. Provision for doubtful accounts, using the
new accounting policy but exclusive of the $65.0 million additional provision,
increased $1.5 million, or 3.7%, from $40.2 million for the six months ended
December 31, 1998 to $41.7 million for the six months ended December 31, 1999.
Provision for doubtful accounts, using the new accounting policy but exclusive
of the $65.0 million additional provision , was 14.4% of total revenue for both
the six month periods ended December 31, 1998 and 1999 and was 19.5% of domestic
ambulance service revenue for the six months ended December 31, 1998 and 19.2%
of domestic ambulance service revenue for the six months ended December 31,
1999. We anticipate that this change in our accounting policy may result in
increases in our provision for doubtful accounts in future periods. During
fiscal 2000, we have continued to increase our focus on revenue of higher
quality by reducing the amount of non-emergency ambulance transports in selected
service areas and have continued previously implemented initiatives to maximize
the collection of our accounts receivable. Net accounts receivable on
non-integrated collection systems currently represent 7.7% of total net accounts
receivable at December 31, 1999. We will continue to review the benefits and
timing of integrating our two non-integrated billing centers.
Depreciation increased $0.5 million, or 4.2%, from $11.9 million for the six
months ended December 31, 1998 to $12.4 million for the six months ended
December 31, 1999, primarily as a result of increased property and equipment
from the acquisition completed during the third quarter of fiscal 1999.
Depreciation was 4.3% of total revenue for both the six month periods ended
December 31, 1998 and 1999, respectively.
Amortization of intangibles decreased $0.3 million, or 6.3%, from $4.8 million
for the six months ended December 31, 1998 to $4.5 million for the six months
ended December 31, 1999. Amortization of intangibles was 1.7% and 1.5% of total
revenue for the six months ended December 31, 1998 and 1999, respectively.
Other operating expenses increased approximately $8.9 million, or 18.5%, from
$48.0 million for the six months ended December 31, 1998 to $56.9 million for
the six months ended December 31, 1999. Of the
26
<PAGE> 27
$8.9 million increase, $3.9 million was attributable to the accrual of proposed
settlements relating to a Medicare investigation and certain Medicaid audits,
$2.4 million was attributable to the operation of the company acquired in the
third quarter of fiscal 1999 and $2.0 million was attributable to operations in
service areas with newly acquired contracts. Other operating expenses increased
from 17.3% of total revenue for the six months ended December 31, 1998 to 19.8%
of total revenue for the six months ended December 31, 1999. The increased
service utilization in our Argentine operations also attributed to increase in
operating expenses as a percentage of total revenue.
Interest expense increased $0.7 million, or 6.7%, from $10.5 million for the six
months ended December 31, 1998 to $11.2 million for the six months ended
December 31, 1999. This increase was caused by higher debt balances. We
anticipate that increases in interest expense will continue in future periods as
a result of amendments to our revolving credit facility.
Our effective tax rate was 42.0% for the six months ended December 31, 1998 and
35.0% for the six months ended December 31, 1999.
During the six months ended December 31, 1999, we recorded an extraordinary loss
on the expropriation of Canadian ambulance service licenses of $1.2 million (net
of $0 of income taxes). We received $2.2 million from the Ontario Ministry of
Health as compensation for the loss of license and incurred costs and wrote-off
assets, mainly goodwill, totaling $3.4 million.
The cumulative effect of a change in accounting principle resulted in a $541,000
charge (net of a tax benefit of $392,000) and was related to our expensing of
previously capitalized organization costs in accordance with Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our cash requirements principally through cash
flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of senior notes, the sale of common stock
through an initial public offering in July 1993 and subsequent public stock
offerings in May 1994 and April 1996, and the exercise of stock options.
During the six months ended December 31, 1999, our cash flow used in operating
activities was $9.9 million, resulting primarily from an increase in accounts
receivable of $68.4 million, a decrease in accrued liabilities and other
liabilities of $23.6 million and a net loss of $40.5 million offset by non-cash
expenses of depreciation and amortization of $16.9 million and provision for
doubtful accounts of $106.7 million. Cash flow provided by operating activities
was $4.1 million for the six months ended December 31, 1998.
Cash provided by financing activities was $22.8 million for the six months ended
December 31, 1999, primarily due to borrowings on the revolving credit facility
offset by repayments on other debt and capital lease obligations.
Cash used in investing activities was $11.8 million for the six months ended
December 31, 1999, primarily because of capital expenditures and increases in
other assets, offset by $2.2 million of proceeds received from the Ontario
Ministry of Health for compensation of loss of ambulance service licenses.
Our gross accounts receivable as of December 31, 1999 and June 30, 1999 was
$255.7 million and $228.9 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, was $147.0 million and $185.5 million as of
such dates, respectively. We believe that the increase in gross accounts
receivable is due to many factors including recent revenue growth, delays in
payments from certain third-party payors, particularly in certain of our
regional billing centers, and a general industry trend toward a
27
<PAGE> 28
lengthening payment cycle of accounts receivable due from third-party payors.
Delays in receiving payments also contributed to an increase in the age of our
accounts receivable.
The allowance for doubtful accounts increased from $43.4 million at June 30,
1999 to $108.7 million at December 31, 1999. The primary reason for this
increase is the additional provision for doubtful accounts of $65.0 million
recorded in the second quarter of fiscal 2000 to reflect the effect of the
change in accounting policy used in recording our provision for doubtful
accounts. Because of continuing difficulties in the healthcare reimbursement
environment, during fiscal 2000, we have continued to place increased emphasis
on increasing the quality of our revenue by exiting service areas or
substantially reducing service, where it had become unprofitable to perform
non-emergency transports because of low reimbursement rates or a high risk of
non-reimbursement by payors. We have shifted the focus of our billing personnel
to place greater emphasis on the billing process as opposed to the collection
process. We have instituted mandatory comprehensive training for our paramedics
and Emergency Medical Technicians on new standards of documentation of ambulance
run tickets. We believe that these measures and many other billing initiatives
will help to enhance the quality of our billings, which will assist in
mitigating the risk of denials by payors and will help to increase collections
of bills from our private pay customers and thus improve the overall quality of
our revenue and accounts receivable. In addition to these procedures, our
continuing analysis of our accounts receivable and analysis of the healthcare
reimbursement environment led to the change in accounting policy during the
second quarter of fiscal 2000. We concluded that, despite our efforts to improve
the quality of our revenue, the speed of payments from certain payors within our
accounts receivable mix was not increasing. Because of this, we determined that
it was prudent to change our accounting policy to fully-reserve accounts
receivable within certain payor classes earlier in the collection cycle than had
previously been done. We will continue to aggressively attempt to collect our
accounts receivable, using both internal and external sources. With this
accounting policy change, management believes that we have a more predictable
method of determining the realizable value of our accounts receivable.
Our $200 million revolving credit facility is priced at prime rate, Federal
Funds rate plus 0.5%, or a LIBOR-based rate. The LIBOR-based rates range from
LIBOR plus 0.875% to LIBOR plus 1.75%. At December 31, 1999 the weighted average
interest rate was 8.1% on the revolving credit facility. Interest rates and
availability under the revolving credit facility depend upon our company meeting
certain financial covenants, including total debt leverage ratios, total debt to
capitalization ratios and fixed charge ratios. Approximately $139.0 million was
outstanding on the revolving credit facility at December 31, 1999. We have
received a compliance waiver regarding the financial covenants contained in our
revolving credit facility which covers the period from December 31, 1999 through
March 14, 2000. The waiver covers the representations and warranties related to
no material adverse changes as well as the following financial covenants: the
total debt leverage ratio, the total debt to total capitalization ratio and the
fixed charge coverage ratio. The waiver stipulates we may borrow up to $5.0
million during the period from January 31, 2000 through February 29, 2000. We
may borrow an additional $3.0 million during the period from March 1, 2000
through March 14, 2000 upon written approval from the lenders. Additionally, as
current LIBOR contracts expire, those borrowings and any additional borrowings
will be priced at the prime rate. At February 11, 2000, the outstanding balance
on the revolving credit facility was $142.5 million and availability on the
facility was $4.5 million, excluding the $3.0 million additional borrowing
capacity referred to previously. A condition of this waiver agreement requires
us to negotiate in good faith with the banks participating in the revolving
credit facility in order to amend the revolving credit facility prior to March
14, 2000. We believe that an amendment to the revolving credit facility could
substantially alter the terms and conditions of the revolving credit facility,
including potentially higher interest rates, which could have a material adverse
effect on our financial condition. Although no Event of Default is continuing
under the terms of the revolving credit facility (as a result of the waiver
agreement) or our $150 million 7 7/8% Senior Notes (the Notes) due 2008, nor has
either the repayment of the revolving credit facility or the Notes been
accelerated, the entire balance of these instruments has been reclassified as a
current liability at December 31, 1999 in the
28
<PAGE> 29
accompanying financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 78, "Classification of Obligations that are
Callable by the Creditor". Our inability to successfully negotiate an amendment
of our revolving credit facility could have a material adverse effect on our
financial condition. We have been advised by our independent public accountants
that, if we have not successfully renegotiated an amendment of the revolving
credit facility prior to the completion of their audit of our financial
statements for the year ending June 30, 2000, their auditors' report on those
financial statements will be modified for this contingency.
Because of the classification of entire outstanding balance under the lending
credit facility as a current liability at December 31, 1999, we had negative
working capital of $158.7 million, including cash of $8.3 million, at December
31, 1999, compared to positive working capital of $140.9 million, including cash
of $7.2 million, at June 30, 1999.
In February 1998, we entered into a $5.0 million capital equipment lease line of
credit. The lease line of credit matures at varying dates through July 2003. The
lease line of credit is priced at the higher of LIBOR plus 1.7% or the
commercial paper rate plus 1.7%. At December 31, 1999 the weighted average
interest rate was 8.2% on the lease line of credit. Approximately $1.8 million
was outstanding on this line of credit at December 31, 1999.
In March 1998 we issued $150.0 million of 7-7/8% Senior Notes due 2008 (the
Notes) effected under Rule 144A under the Securities Act of 1933, as amended
("Securities Act"). Interest under the Notes is payable semi-annually on
September 15 and March 15, and the Notes are not callable until March 2003
subject to the terms of the Indenture. We incurred expenses related to the
offering of approximately $5.3 million and will amortize these costs over the
life of the Notes. We recorded a $258,000 discount on the Notes and will
amortize this discount over the life of the Notes. Unamortized discount at
December 31, 1999 was $212,000 and such amount is recorded as an offset to the
current portion of long-term debt in the consolidated financial statements. In
April 1998 we filed a registration statement under the Securities Act relating
to an exchange offer for the Notes. The registration became effective on May 14,
1998. The Notes are general unsecured obligations of our company and are
unconditionally guaranteed on a joint and several basis by substantially all of
our domestic wholly owned current and future subsidiaries. See Note 2 of Notes
to our Consolidated Financial Statements included in this Form 10-Q. The Notes
contain certain covenants that, among other things, limit our ability to incur
certain indebtedness, sell assets, or enter into certain mergers or
consolidations.
We expect that without additional borrowing capacity, existing working capital,
together with cash flow from operations may not be sufficient to meet our
operating and capital needs for existing operations for the twelve months
subsequent to December 31, 1999. We have begun to restructure our corporate
overhead and will continue to close or substantially reduce certain service
areas in an effort to contain costs. We believe that these cost containment
measures will, however, allow us to meet our operating and capital needs. Our
business growth occurs primarily through new business contracts and
acquisitions. Any business growth may be limited without additional credit
availability. We may seek to raise additional capital through public or private
debt or equity financings. The availability of these capital sources will depend
upon the restrictions in our revolving credit facility and the Senior Notes,
prevailing market conditions, interest rates, our financial condition and the
market price of our common stock.
The market price of our common stock impacts our ability to complete
acquisitions. We may be unwilling to utilize, or potential acquired companies or
their owners may be unwilling to accept, our common stock in connection with
acquisitions. In addition, the market price performance of our common stock may
make raising funds more difficult and costly. As a result of the decline in the
market price of our common stock and the failure of our stock price to increase
since its decline, the pace of acquisitions utilizing our common stock has
declined. Continued weakness in the market price of our common stock could
adversely affect our ability or willingness to make additional acquisitions.
Declines in the market
29
<PAGE> 30
price of our common stock could cause previously acquired companies to seek
adjustments to purchase prices or other remedies to offset the decline in value.
MEDICARE REIMBURSEMENT
In January 1999, HCFA announced its intention to form a negotiated rule-making
committee to create a new fee schedule for Medicare reimbursement of ambulance
services. The committee convened in February 1999. In August 1999, HCFA
announced that the implementation of the new fee schedule as well as the
mandatory acceptance of Medicare assignment will be postponed to January 2001.
HCFA also announced rules which became effective in February 1999. These rules
require, among other things, that a physician's certification be obtained for
certain ambulance transports. We have implemented a program to comply with the
new rules
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Our results of operations for the periods discussed have not been affected
significantly by inflation or foreign currency fluctuations. Our revenue from
international operations is denominated primarily in the currency of the country
in which it is operating. At December 31, 1999 our balance sheet reflects a
$272,000 cumulative equity adjustment (decrease) from foreign currency
translation, which resulted from the weakening of the currency of Brazil and the
effect it had on our investment in certain property and equipment that we have
deployed in Brazil. During the second quarter of fiscal 2000, we recognized
$173,000 of translation adjustment as a component of the extraordinary loss on
the expropriation of Canadian ambulance service licenses. Although we have not
incurred any material exchange gains or losses to date, there can be no
assurance that fluctuations in the currency exchange rates in the future will
not have an adverse effect on our business, financial condition, cash flows and
results of operations. We do not currently engage in foreign currency hedging
transactions. However, as we continue to expand our international operations,
exposure to gains and losses on foreign currency transactions may increase. We
may choose to limit such exposure by entering into forward exchange contracts or
engaging in similar hedging strategies.
YEAR 2000 COMPLIANCE
We have implemented a Year 2000 compliance program, utilizing both internal and
external resources, to ensure that our principal medical equipment, ambulance
and fire dispatch systems, and computer systems and applications will function
properly beyond 1999. Our assessment of this equipment and systems, both
internally developed and purchased from third-party vendors, is complete.
Included in this assessment is a formal communication program with our
significant vendors to determine the extent to which we are vulnerable to those
vendors who fail to remediate their own Year 2000 non-compliance.
We are highly dependent on vendor remediation and testing of vendor systems. The
results of the assessments and remediation efforts indicate that our principal
medical equipment, ambulance and fire dispatch systems, and computer systems and
applications are either Year 2000 compliant, have been upgraded, or in the case
of certain ambulance and fire dispatch systems, have been replaced in order to
obtain compliance. We continue to monitor new medical equipment, ambulance and
fire dispatch systems, and computer systems and applications that the Company
adds in its operations for Year 2000 compliance. If our medical equipment,
ambulance and fire dispatch systems, and computer systems and applications are
not Year 2000 compliant, we may not be able to respond to requests for ambulance
and fire protection services in a timely manner. This situation could adversely
affect our operations and we may incur unanticipated expenses to remedy any
problems not addressed by these compliance efforts.
30
<PAGE> 31
We are dependent upon vendors who provide services such as electrical power,
water, fuel for vehicles and other necessary commodities. We also depend upon
the ability of telephone systems to be Year 2000 compliant in order for the
Company to receive incoming calls for service to our ambulance and fire dispatch
systems. The failure of telephone service providers to adequately provide
service could impact our ability to dispatch and respond to requests for
ambulance and fire protection services. The failure of third-party payors, such
as private insurers, managed care providers, health care organizations,
preferred provider organizations, and federal and state government agencies that
administer Medicare and/or Medicaid, to adequately address their Year 2000
issues could impact their ability to reimburse us for services provided. The
failure of any of these systems could adversely affect our business, financial
condition, cash flows and results of operations. We do not control these systems
and are dependent upon the service providers and third-party payors to remediate
any Year 2000 non-compliance related to their own systems.
We have completed our contingency plans in the event that our principal medical
equipment, ambulance and fire dispatch systems, computer systems and
applications, telephone systems, systems of third-party payors, or any other
components of our business operations fail to operate in compliance with the
Year 2000 date change.
The cost of our Year 2000 compliance program has not had and is not expected to
have a material impact on our results of operations, financial condition, or
liquidity. There can be no assurance, however, that we will not experience
material adverse consequences in the event that our Year 2000 compliance program
is not successful or that our vendors or third-party payors are not able to
resolve their Year 2000 compliance issues in a timely manner.
As of February 11, 2000, our principal medical equipment, ambulance and fire
dispatch systems, and computer systems have operated without Year 2000 related
problems and appear to be Year 2000 compliant. We are not aware of any of our
vendors, telephone service providers or third-party payors experiencing any
significant Year 2000 related problems.
31
<PAGE> 32
RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
We, Warren S. Rustand, our former Chairman of the Board and Chief Executive
Officer of the Company, James H. Bolin, our former Vice Chairman of the Board,
and Robert E. Ramsey, Jr., our former Executive Vice President and former
Director, have been named as defendants in two purported class action lawsuits:
Haskell v. Rural/Metro Corporation, et al., Civil Action No. C-328448 filed on
August 25, 1998 in Pima County, Arizona Superior Court and Ruble v. Rural/Metro
Corporation, et al., CIV 98-413-TUC-JMR filed on September 2, 1998 in United
States District Court for the District of Arizona. Reference is made to the
Company's most recently filed Form 10-K for the fiscal year ended June 30, 1999
regarding these legal proceedings instituted during the quarter ended September
30, 1998.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Stockholders was held on November 18, 1999.
The following nominees were elected to the Company's Board of Directors to serve
as Class I directors for three-year terms or until their successors are elected
and qualified:
<TABLE>
<CAPTION>
Nominee Votes in Favor Withheld
----------------- -------------- --------
<S> <C> <C>
Louis G. Jekel 11,238,047 729,476
William C. Turner 11,221,066 746,457
</TABLE>
The following directors' terms of office continued after the 1999 Annual Meeting
of Stockholders:
Cor J. Clement Robert E. Ramsey
Mary Anne Carpenter Henry G. Walker
John B. Furman Louis A. Witzeman
The following additional item was voted upon by the Company's stockholders:
Proposal to ratify the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the fiscal year ending June
30, 2000.
<TABLE>
<CAPTION>
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
<S> <C> <C> <C>
11,687,803 239,631 40,089 -0-
</TABLE>
ITEM 5 -- OTHER INFORMATION
In January 2000, the resignations of John B. Furman as President and Chief
Executive Officer and Robert E. Ramsey as Executive Vice President and Director
were accepted. We anticipate Mr. Furman will be paid severance in accordance
with the provisions contained in his employment agreement
Also, in January 2000, Jack E. Brucker was promoted to President and Chief
Operating Officer and appointed to the Board of Directors.
32
<PAGE> 33
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedules
(b) Reports on Form 8-K
None
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Date: February 11, 2000 By /s/ Dean P. Hoffman
------------------------------------------
Dean P. Hoffman, Vice President, Financial
Services and Principal Accounting Officer
34
<PAGE> 35
EXHIBIT INDEX
Number Description
- ------ -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE SECURITIES
ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR OTHERWISE
SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A PART OF ANY
OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS SUCH OTHER
FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,271
<SECURITIES> 0
<RECEIVABLES> 255,722
<ALLOWANCES> 108,684
<INVENTORY> 18,429
<CURRENT-ASSETS> 184,427
<PP&E> 182,612
<DEPRECIATION> 87,405
<TOTAL-ASSETS> 536,320
<CURRENT-LIABILITIES> 50,313
<BONDS> 296,749
0
0
<COMMON> 149
<OTHER-SE> 156,767
<TOTAL-LIABILITY-AND-EQUITY> 536,230
<SALES> 288,307
<TOTAL-REVENUES> 288,307
<CGS> 0
<TOTAL-COSTS> 230,047
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 106,657
<INTEREST-EXPENSE> 11,248
<INCOME-PRETAX> (59,571)
<INCOME-TAX> (20,810)
<INCOME-CONTINUING> (38,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,200
<CHANGES> 541
<NET-INCOME> (40,502)
<EPS-BASIC> (2.78)
<EPS-DILUTED> (2.78)
</TABLE>
