<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 March 31, 2000
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 May 10, 2000 there were 14,626,336 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 22
Part II. Other Information
Item 1. Legal Proceedings 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
2
<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,273 $ 7,180
Accounts receivable, net 154,558 185,454
Inventories 17,998 16,371
Prepaid expenses and other 6,533 13,630
--------- ---------
Total current assets 182,362 222,635
--------- ---------
PROPERTY AND EQUIPMENT, net 92,370 95,032
INTANGIBLE ASSETS, net 217,738 240,360
OTHER ASSETS 19,559 21,880
--------- ---------
$ 512,029 $ 579,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,706 $ 17,782
Accrued liabilities 24,851 58,159
Current portion of long-term debt 299,870 5,765
--------- ---------
Total current liabilities 339,427 81,706
--------- ---------
LONG-TERM DEBT, net of current portion 3,123 268,560
NON-REFUNDABLE SUBSCRIPTION INCOME 14,893 14,909
DEFERRED INCOME TAXES 6,561 9,438
OTHER LIABILITIES 127 205
--------- ---------
Total liabilities 364,131 374,818
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 8,154 8,250
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 149 148
Additional paid-in capital 137,603 137,792
Retained earnings 3,486 60,603
Cumulative translation adjustment (255) (465)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 139,744 196,839
--------- ---------
$ 512,029 $ 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 NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Ambulance services $ 119,902 $ 119,751 $ 357,908 $ 351,775
Fire protection services 14,981 12,372 42,595 37,606
Other 11,515 10,810 34,202 31,936
--------- --------- --------- ---------
Total revenue 146,398 142,933 434,705 421,317
--------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits 79,078 74,966 235,331 222,084
Provision for doubtful accounts 25,266 20,886 66,923 61,048
Provision for doubtful accounts - change in
accounting policy -- -- 65,000 --
Depreciation 6,140 6,096 18,542 17,981
Amortization of intangibles 2,263 2,134 6,725 6,922
Other operating expenses 26,555 25,109 83,485 73,152
Restructuring charge and other 25,098 -- 25,098 2,500
--------- --------- --------- ---------
Total expenses 164,400 129,191 501,104 383,687
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (18,002) 13,742 (66,399) 37,630
Interest expense, net 6,401 5,519 17,649 15,992
Other (21) 61 (95) 138
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (24,382) 8,162 (83,953) 21,500
Provision (benefit) for income taxes (7,767) 3,451 (28,577) 9,088
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (16,615) 4,711 (55,376) 12,412
EXTRAORDINARY LOSS ON
EXPROPRIATION OF CANADIAN
AMBULANCE SERVICE LICENSES (NET OF $0
OF INCOME TAXES) -- -- (1,200) --
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NET OF AN INCOME
TAX BENEFIT OF $392) -- -- (541) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (16,615) $ 4,711 $ (57,117) $ 12,412
========= ========= ========= =========
</TABLE>
4
<PAGE> 5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER SHARE:
Basic -
Income (loss) before extraordinary loss and
cumulative effect of a change in accounting
principle $ (1.14) $ 0.32 $ (3.80) $ 0.86
Extraordinary loss on expropriation of
Canadian ambulance service licenses -- -- (0.08) --
Cumulative effect of change in a accounting principle -- -- (0.04) --
---------- ---------- ---------- ----------
Net income (loss) $ (1.14) $ 0.32 $ (3.92) $ 0.86
========== ========== ========== ==========
Diluted -
Income (loss) before extraordinary loss and
cumulative effect of a change in accounting
principle $ (1.14) $ 0.32 $ (3.80) $ 0.85
Extraordinary loss on expropriation of
Canadian ambulance service licenses -- -- (0.08) --
Cumulative effect of change in a accounting principle -- -- (0.04) --
---------- ---------- ---------- ----------
Net income (loss) $ (1.14) $ 0.32 $ (3.92) $ 0.85
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 14,626 14,524 14,581 14,420
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,626 14,710 14,581 14,632
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
5
<PAGE> 6
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (57,117) $ 12,412
Adjustments to reconcile net income (loss) to cash provided by
(used in) operations--
Write-off of assets included in restructuring charge 19,503 --
Extraordinary loss 1,200 --
Cumulative effect of a change in accounting principle 541 --
Depreciation and amortization 25,267 24,903
Amortization of deferred compensation -- 80
Amortization of gain on sale of real estate (78) (78)
Provision for doubtful accounts 66,923 61,048
Provision for doubtful accounts - change in accounting policy 65,000 --
Undistributed earnings of minority shareholder (95) 138
Amortization of discount on Senior Notes 19 19
Change in assets and liabilities, net of effect
of businesses acquired ---
Increase in accounts receivable (101,172) (90,074)
Increase in inventories (2,060) (1,526)
Decrease in prepaid expenses and other 2,615 3,824
Decrease in accounts payable (3,098) (4,071)
Decrease in accrued liabilities and other liabilities (33,126) (4,851)
Increase (decrease) in nonrefundable subscription income (16) 453
Increase (decrease) in deferred income taxes (2,877) 7,770
--------- ---------
Net cash provided by (used in) operating activities (18,571) 10,047
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 33,500 27,500
Repayment of debt and capital lease obligations (4,851) (5,994)
Issuance of common stock 655 1,758
--------- ---------
Net cash provided by financing activities 29,304 23,264
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (12,665)
Proceeds from expropriation of Canadian ambulance service licenses 2,191 --
Capital expenditures (15,895) (15,330)
Increase in other assets (973) (6,300)
--------- ---------
Net cash used in investing activities (14,677) (34,295)
--------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 37 (263)
--------- ---------
DECREASE IN CASH (3,907) (1,247)
CASH, beginning of period 7,180 6,511
--------- ---------
CASH, end of period $ 3,273 $ 5,264
========= =========
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 financial statements.
6
<PAGE> 7
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(16,615) $ 4,711 $(57,117) $ 12,412
Foreign currency translation adjustments 17 31 37 (263)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $(16,598) $ 4,742 $(57,080) $ 12,149
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE> 8
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
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 nine month periods ended March 31, 2000 and 1999 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 nine month periods ended
March 31, 2000 and 1999 are not necessarily indicative of the results
of operations for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1999.
(2) CREDIT AGREEMENTS AND BORROWINGS
In February 2000, the Company received a compliance waiver regarding
the financial covenants contained in its revolving credit facility
which covered the period from December 31, 1999 through March 14, 2000.
In March, the Company received an additional waiver, which was amended
in April, regarding the financial covenants which covers the period
from March 15, 2000 through July 14, 2000. The waiver covers the
representations and warranties related to no material adverse changes
as well as the following financial covenants: the total debt leverage
ratio, the total debt to total capitalization ratio and the fixed
charge coverage ratio. The waiver stipulates that no additional
borrowings will be available to the Company during the period of March
15, 2000, through July 14, 2000. In addition, the waiver (as amended)
requires the Company: (i) to engage certain financial advisors, (ii) to
meet certain benchmarks for projected cash balances and expenditures,
and (iii) to reduce the outstanding balance on the revolving credit
facility upon the sale of certain assets, the collection of certain
accounts receivable and upon the attainment of certain cash balance
thresholds. As LIBOR contracts expired in March 2000, all borrowings
were priced at prime rate plus 0.25 percentage points and interest is
payable monthly. During the period of April 13, 2000, through July 14,
2000, the Company will accrue additional interest expense at a rate of
2.0% per annum on the outstanding balance on the revolving credit
facility unless certain pay down requirements are met during that
period, which interest is payable on July 14, 2000. At May 11, 2000,
the outstanding balance on the revolving credit facility was $147.0
million with no availability on the facility. Also outstanding are $6.5
million in letters of credit issued under the revolving credit
facility. A condition of the 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 July 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 either the terms of the revolving credit facility (as
a result of the waiver agreement) or the Company's $150 million 7 7/8%
Senior Notes due 2008, and although there has been no acceleration of
the repayment of the revolving credit facility or the 7 7/8% Senior
Notes due 2008, the entire balance of these instruments has been
reclassified as a current liability at
8
<PAGE> 9
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2000 in the accompanying financial statements in accordance
with Statement of Financial Accounting Standards (SFAS) No. 78
"Classification of Obligations that are Callable by the Creditor".
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 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 March 31, 2000 and
June 30, 1999, the Consolidating Statements of Operations for the three
and nine months ended March 31, 2000 and 1999, and the Consolidating
Statements of Cash Flows for the nine months ended March 31, 2000 and
1999 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 MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 2,691 $ 582 $ -- $ 3,273
Accounts receivable, net -- 136,713 17,845 -- 154,558
Inventories -- 16,908 1,090 -- 17,998
Prepaid expenses and other 531 4,847 1,155 -- 6,533
--------- --------- --------- --------- ---------
Total current assets 531 161,159 20,672 -- 182,362
--------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, net -- 81,461 10,909 -- 92,370
INTANGIBLE ASSETS, net -- 141,057 76,681 -- 217,738
DUE FROM (TO) AFFILIATES 321,894 (267,616) (54,278) -- --
OTHER ASSETS 3,643 13,855 2,061 -- 19,559
INVESTMENT IN SUBSIDIARIES 110,972 -- -- (110,972) --
--------- --------- --------- --------- ---------
$ 437,040 $ 129,916 $ 56,045 $(110,972) $ 512,029
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 10,166 $ 4,540 $ -- $ 14,706
Accrued liabilities 502 14,815 9,534 -- 24,851
Current portion of long-term debt 296,794 2,601 475 -- 299,870
--------- --------- --------- --------- ---------
Total current liabilities 297,296 27,582 14,549 -- 339,427
--------- --------- --------- --------- ---------
LONG-TERM DEBT, net of current portion -- 2,717 406 -- 3,123
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,823 70 -- 14,893
DEFERRED INCOME TAXES -- 5,596 965 -- 6,561
OTHER LIABILITIES -- 127 -- -- 127
--------- --------- --------- --------- ---------
Total liabilities 297,296 50,845 15,990 -- 364,131
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 8,154 8,154
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 137,603 54,622 34,942 (89,564) 137,603
Retained earnings 3,486 24,367 5,351 (29,718) 3,486
Cumulative translation adjustment (255) -- (255) 255 (255)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity 139,744 79,071 40,055 (119,126) 139,744
--------- --------- --------- --------- ---------
$ 437,040 $ 129,916 $ 56,045 $(110,972) $ 512,029
========= ========= ========= ========= =========
</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 MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 102,112 $ 17,790 $ -- $ 119,902
Fire protection services -- 14,703 278 -- 14,981
Other -- 9,633 1,882 -- 11,515
--------- --------- --------- --------- ---------
Total revenue -- 126,448 19,950 -- 146,398
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 68,107 10,971 -- 79,078
Provision for doubtful accounts -- 23,797 1,469 -- 25,266
Provision for doubtful accounts - change in
accounting policy -- -- -- -- --
Depreciation -- 5,486 654 -- 6,140
Amortization of intangibles -- 1,660 603 -- 2,263
Other operating expenses -- 21,763 4,792 -- 26,555
Restructuring charge and other -- 23,915 1,183 -- 25,098
--------- --------- --------- --------- ---------
Total expenses -- 144,728 19,672 -- 164,400
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) -- (18,280) 278 -- (18,002)
Interest expense, net 6,178 (276) 499 -- 6,401
Other -- -- -- (21) (21)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (6,178) (18,004) (221) 21 (24,382)
BENEFIT FOR INCOME TAXES (1,993) (5,618) (156) -- (7,767)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (4,185) (12,386) (65) 21 (16,615)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (12,430) -- -- 12,430 --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (16,615) $ (12,386) $ (65) $ 12,451 $ (16,615)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 17 -- 17
Comprehensive income (loss) from
wholly-owned subsidiaries 17 -- -- (17) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (16,598) $ (12,386) $ (48) $ 12,434 $ (16,598)
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 97,894 $ 21,857 $ -- $ 119,751
Fire protection services -- 12,095 277 -- 12,372
Other -- 9,577 1,233 -- 10,810
--------- --------- --------- --------- ---------
Total revenue -- 119,566 23,367 -- 142,933
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 60,702 14,264 -- 74,966
Provision for doubtful accounts -- 19,701 1,185 -- 20,886
Depreciation -- 5,586 510 -- 6,096
Amortization of intangibles -- 1,549 585 -- 2,134
Other operating expenses -- 21,050 4,059 -- 25,109
--------- --------- --------- --------- ---------
Total expenses -- 108,588 20,603 -- 129,191
--------- --------- --------- --------- ---------
OPERATING INCOME -- 10,978 2,764 -- 13,742
Interest expense, net 5,122 (88) 485 -- 5,519
Other -- -- -- 61 61
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (5,122) 11,066 2,279 (61) 8,162
PROVISION (BENEFIT) FOR INCOME TAXES (2,151) 4,627 975 -- 3,451
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (2,971) 6,439 1,304 (61) 4,711
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 7,682 -- -- (7,682) --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 4,711 $ 6,439 $ 1,304 $ (7,743) $ 4,711
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 31 -- 31
Comprehensive income (loss) from
wholly-owned subsidiaries 31 -- -- (31) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 4,742 $ 6,439 $ 1,335 $ (7,774) $ 4,742
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 298,698 $ 59,210 $ -- $ 357,908
Fire protection services -- 41,761 834 -- 42,595
Other -- 28,157 6,045 -- 34,202
--------- --------- --------- --------- ---------
Total revenue -- 368,616 66,089 -- 434,705
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 195,855 39,476 -- 235,331
Provision for doubtful accounts -- 62,740 4,183 -- 66,923
Provision for doubtful accounts - change in
accounting policy -- 65,000 -- -- 65,000
Depreciation -- 16,635 1,907 -- 18,542
Amortization of intangibles -- 4,862 1,863 -- 6,725
Other operating expenses -- 68,064 15,421 -- 83,485
Restructuring charge and other -- 23,915 1,183 -- 25,098
--------- --------- --------- --------- ---------
Total expenses -- 437,071 64,033 -- 501,104
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) -- (68,455) 2,056 -- (66,399)
Interest expense, net 16,951 (890) 1,588 -- 17,649
Other -- -- -- (95) (95)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (16,951) (67,565) 468 95 (83,953)
PROVISION (BENEFIT) FOR INCOME TAXES (5,763) (22,973) 159 -- (28,577)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (11,188) (44,592) 309 95 (55,376)
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) (11,188) (45,133) (891) 95 (57,117)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES (45,929) -- -- 45,929 --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (57,117) $ (45,133) $ (891) $ 46,024 $ (57,117)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 37 -- 37
Comprehensive income (loss) from
wholly-owned subsidiaries 37 -- -- (37) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (57,080) $ (45,133) $ (854) $ 45,987 $ (57,080)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 285,074 $ 66,701 $ -- $ 351,775
Fire protection services -- 36,791 815 -- 37,606
Other -- 29,562 2,374 -- 31,936
--------- --------- --------- --------- ---------
Total revenue -- 351,427 69,890 -- 421,317
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 179,958 42,126 -- 222,084
Provision for doubtful accounts -- 56,646 4,402 -- 61,048
Depreciation -- 16,587 1,394 -- 17,981
Amortization of intangibles 214 5,004 1,704 -- 6,922
Other operating expenses -- 60,646 12,506 -- 73,152
Restructuring charge -- 2,500 -- -- 2,500
--------- --------- --------- --------- ---------
Total expenses 214 321,341 62,132 -- 383,687
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (214) 30,086 7,758 -- 37,630
Interest expense, net 14,648 7 1,337 -- 15,992
Other -- -- -- 138 138
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (14,862) 30,079 6,421 (138) 21,500
PROVISION (BENEFIT) FOR INCOME TAXES (6,242) 12,630 2,700 -- 9,088
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (8,620) 17,449 3,721 (138) 12,412
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 21,032 -- -- (21,032) --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 12,412 $ 17,449 $ 3,721 $ (21,170) $ 12,412
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- (263) -- (263)
Comprehensive income (loss) from
wholly-owned subsidiaries (263) -- -- 263 --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 12,149 $ 17,449 $ 3,458 $ (20,907) $ 12,149
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(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) $ (57,117) $ (45,133) $ (891) $ 46,024 $ (57,117)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations--
Write-off of assets included in
restructuring charge -- 19,503 -- -- 19,503
Extraordinary loss -- -- 1,200 -- 1,200
Cumulative effect of a change in
accounting principle -- 541 -- -- 541
Depreciation and amortization -- 21,497 3,770 -- 25,267
Amortization of gain on sale of real estate -- (78) -- -- (78)
Provision for doubtful accounts -- 62,740 4,183 -- 66,923
Provision for doubtful accounts -
change in accounting policy -- 65,000 -- -- 65,000
Undistributed earnings of minority shareholder -- -- -- (95) (95)
Amortization of discount on Senior Notes 19 -- -- -- 19
Change in assets and liabilities --
Increase in accounts receivable -- (99,753) (1,419) -- (101,172)
(Increase) decrease in inventories -- (2,103) 43 -- (2,060)
Decrease in prepaid expenses and other -- 2,448 167 -- 2,615
(Increase) decrease in due to/from affiliates 25,645 22,496 (2,249) (45,892) --
Decrease in accounts payable -- (934) (2,164) -- (3,098)
Decrease in accrued liabilities and
other liabilities (3,265) (27,225) (2,636) -- (33,126)
Increase (decrease) in nonrefundable
subscription income -- (67) 51 -- (16)
Decrease in deferred income taxes -- (2,877) -- -- (2,877)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (34,718) 16,055 55 37 (18,571)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 33,500 -- -- -- 33,500
Repayment of debt and capital lease obligations -- (3,223) (1,628) -- (4,851)
Issuance of common stock 655 -- -- -- 655
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 34,155 (3,223) (1,628) -- 29,304
--------- --------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from expropriation of Canadian
ambulance service licenses -- -- 2,191 -- 2,191
Capital expenditures -- (13,648) (2,247) -- (15,895)
Increase in other assets 526 (1,872) 373 -- (973)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities 526 (15,520) 317 -- (14,677)
--------- --------- --------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 37 -- 37 (37) 37
--------- --------- --------- --------- ---------
DECREASE IN CASH -- (2,688) (1,219) -- (3,907)
CASH, beginning of period -- 5,379 1,801 -- 7,180
--------- --------- --------- --------- ---------
CASH, end of period $ -- $ 2,691 $ 582 $ -- $ 3,273
========= ========= ========= ========= =========
</TABLE>
16
<PAGE> 17
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 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 $ 12,412 $ 17,449 $ 3,721 $(21,170) $ 12,412
Adjustments to reconcile net income to cash
provided by (used in) operations--
Depreciation and amortization 214 21,591 3,098 -- 24,903
Amortization of deferred compensation 80 -- -- -- 80
Amortization of gain on sale of real estate -- (78) -- -- (78)
Provision for doubtful accounts -- 56,646 4,402 -- 61,048
Undistributed earnings of minority shareholder -- -- -- 138 138
Amortization of discount on Senior Notes 19 -- -- -- 19
Change in assets and liabilities, net of effect
of businesses acquired ---
Increase in accounts receivable -- (81,786) (8,288) -- (90,074)
Increase in inventories -- (1,440) (86) -- (1,526)
Decrease in prepaid expenses and other 136 3,132 556 -- 3,824
(Increase) decrease in due to/from affiliates (39,133) 2,172 11,763 25,198 --
Increase (decrease) in accounts payable -- (4,687) 616 -- (4,071)
Increase (decrease) in accrued liabilities and
other liabilities (2,723) (2,259) 131 -- (4,851)
Increase (decrease) in nonrefundable
subscription income -- 455 (2) -- 453
Increase (decrease) in deferred income taxes -- 7,991 (221) -- 7,770
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities (28,995) 19,186 15,690 4,166 10,047
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 27,500 -- -- -- 27,500
Repayment of debt and capital lease obligations -- (5,310) (684) -- (5,994)
Issuance of common stock 1,758 -- 4,429 (4,429) 1,758
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 29,258 (5,310) 3,745 (4,429) 23,264
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (445) (12,220) -- (12,665)
Capital expenditures -- (12,580) (2,750) -- (15,330)
Increase in other assets -- (3,754) (2,546) -- (6,300)
-------- -------- -------- -------- --------
Net cash used in investing activities -- (16,779) (17,516) -- (34,295)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (263) -- (263) 263 (263)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH -- (2,903) 1,656 -- (1,247)
CASH, beginning of period -- 2,917 3,594 -- 6,511
-------- -------- -------- -------- --------
CASH, end of period $ -- $ 14 $ 5,250 $ -- $ 5,264
======== ======== ======== ======== ========
</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 March 31, 2000 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 of fiscal 2000. 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. The new accounting policy provides specific allowances based
upon the age of accounts receivable within each payor class and also
provides for general allowances based upon historic collection rates
within each payor class. Payor classes include Medicare, Medicaid and
private pay. Accordingly, the effect of this change is an additional
$65.0 million provision for doubtful accounts, which was recorded
separately in the three months ended December 31, 1999, and is
reflected in the accompanying financial statements for the nine months
ended March 31, 2000.
(5) RESTRUCTURING CHARGE AND OTHER
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 June 30, 1999, the balance
of the allowance for severance payments was $1.3 million. The allowance
is included in accrued liabilities in the accompanying consolidated
balance sheets at June 30, 1999. As of March 31, 2000, the allowance
for severance payments related to the charges discussed above was
completely utilized.
18
<PAGE> 19
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the third quarter of fiscal 2000, the Company recorded a pre-tax
charge of $25.1 million ($16.6 million after-tax) associated with its
restructuring program related to the closing or downsizing of certain
non-emergency service areas and reduction of corporate overhead. This
charge primarily included severance, service area closing costs, and
write-offs of goodwill and other impaired assets. Approximately $5.0
million of the restructuring charge was recorded in accrued
liabilities. At March 31, 2000 $3.8 million remains accrued in the
accompanying financial statements. The components of the restructuring
charge and the remaining accrual at March 31, 2000, are as follows (in
thousands):
<TABLE>
<CAPTION>
Charge Recorded Usage Balance at March 31, 2000
--------------- --------- -------------------------
<S> <C> <C> <C>
Severance costs $ 4,051 $ (1,218) $ 2,833
Lease termination costs 950 (1) 949
Write-off of intangible assets 13,646 (13,646) --
Write-off of impaired assets and other costs 6,451 (6,451) --
-------- -------- --------
$ 25,098 $(21,316) $ 3,782
======== ======== ========
</TABLE>
The $4.1 million of severance costs is calculated based upon the
severance payments to be made to approximately 250 employees terminated
under the restructuring plan.
During the third quarter of fiscal 2000 the Company also recorded an
additional provision for doubtful accounts of $3.0 million related to
specific accounts deemed uncollectible in the certain service areas
being closed or downsized as part of the restructuring program.
In the Company's Form 10Q for the quarter ended December 31, 1999, the
Company disclosed that the anticipated costs associated with the
restructuring program would approximate up to $30.0 million on an
after-tax basis. The restructuring charge of $25.1 million and the $3.0
million additional provision for doubtful accounts that were recorded
during the third quarter of fiscal 2000 total $28.1 million on a
pre-tax ($18.5 million on an after-tax) basis. In April 2000 the
Company announced that part of the restructuring plan could not be
implemented until the fourth quarter of fiscal 2000 and therefore, the
Company anticipates further restructuring charges will be taken in the
fourth quarter of fiscal 2000. The Company anticipates these fourth
quarter charges related to the restructuring plan will approximate
$17.0 million on a pre-tax ($11.0 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 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
19
<PAGE> 20
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 it's 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 nine months ended March 31, 2000 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 nine month periods ended
March 31, 2000 and 1999 is a follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999
--------------------------------------- -------------------------------------
Loss Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(16,615) 14,626 $ (1.14) $ 4,711 14,524 $ 0.32
======= =======
Effect of stock options -- -- -- 186
-------- ------ ------- -------- ------
Diluted EPS $(16,615) 14,626 $ (1.14) $ 4,711 14,710 $ 0.32
======== ====== ======= ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000 Nine Months Ended March 31, 1999
--------------------------------------- -------------------------------------
Loss Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(57,117) 14,581 $ (3.92) $ 12,412 14,420 $ 0.86
======== =======
Effect of stock options -- -- -- 212
-------- ------ -------- --------
Diluted EPS $(57,117) 14,581 $ (3.92) $ 12,412 14,632 $ 0.85
======== ======== ======= ======== ======== =======
</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. In addition, the Ambulance segment includes the portion of
the $25.1 million restructuring charge attributable to that segment
that was recorded in the three and nine month periods ended March 31,
2000.
20
<PAGE> 21
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 nine months ended March 31, 1999. The Corporate segment also
includes the portion of the $25.1 million restructuring charge and
other attributable to the corporate office that was recorded in the
three and nine-month periods ended March 31, 2000.
Information by operating segment is set forth below (in thousands):
<TABLE>
<CAPTION>
FIRE AND
AMBULANCE OTHER CORPORATE TOTAL
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Three months ended March 31, 2000
Net revenues from external customers $ 119,902 $ 26,496 -- $ 146,398
Segment profit (loss) $ (21,822) $ 3,287 $ (5,868) $ (24,403)
Segment assets $ 223,236 $ 39,466 $ 2,224 $ 264,926
</TABLE>
<TABLE>
<CAPTION>
FIRE AND
AMBULANCE OTHER CORPORATE TOTAL
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Net revenues from external customers $ 119,751 $ 23,182 -- $ 142,933
Segment profits (loss) $ 8,935 $ 3,286 $ (3,998) $ 8,223
Segment assets $ 247,480 $ 40,581 $ 2,935 $ 290,996
</TABLE>
<TABLE>
<CAPTION>
FIRE AND
AMBULANCE OTHER CORPORATE TOTAL
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Nine months ended March 31, 2000
Net revenues from external customers $ 357,908 $ 76,797 -- $ 434,705
Segment profit (loss) $ (77,454) $ 7,002 $ (13,596) $ (84,048)
Segment assets $ 223,236 $ 39,466 $ 2,224 $ 264,926
</TABLE>
<TABLE>
<CAPTION>
FIRE AND
AMBULANCE OTHER CORPORATE TOTAL
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Nine months ended March 31, 1999
Net revenues from external customers $ 351,775 $ 69,542 -- $ 421,317
Segment profit (loss) $ 27,099 $ 9,114 $ (14,575) $ 21,638
Segment assets $ 247,480 $ 40,581 $ 2,935 $ 290,996
</TABLE>
21
<PAGE> 22
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.
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
22
<PAGE> 23
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 for the three months ended March 31, 2000 was $16.6 million, or $1.14 per
diluted share as compared to net income of $4.7 million, or $0.32 per diluted
share for the three months ended March 31, 1999. Loss before extraordinary loss
and cumulative effect of a change in accounting principle for the nine months
ended March 31, 2000 was $55.4 million, or $3.80 per diluted share as compared
to net income of $12.4 million, or $0.85 per diluted share for the nine months
ended March 31, 1999. The operating results for the three and nine months ended
March 31, 2000 were adversely affected by the recording of a $25.1 million
restructuring charge related to the closure or downsizing of certain
non-emergency service areas and the reduction of corporate overhead and by the
recording of an additional provision for doubtful accounts of $3.0 million
related to uncollectible accounts in those service areas that are being closed
or downsized. The fiscal year 2000 earnings were also adversely affected by the
change in accounting policy used in recording our provision for doubtful
accounts of $65.0 million on a pre-tax basis and by the expropriation of our
Canadian ambulance service licenses of $1.2 million on both a before and after
tax basis. The operating results for the three and nine months ended March 31,
2000 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.
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE
Total revenue increased $3.5 million, or 2.4%, from $142.9 million for the three
months ended March 31, 1999 to $146.4 million for the three months ended March
31, 2000. Ambulance services revenue increased $0.1 million, or 0.1%, from
$119.8 million for the three months ended March 31, 1999 to $119.9 million for
the three months ended March 31, 2000. Domestic ambulance services revenue in
areas served by us in both of the three-month periods ended March 31, 2000 and
1999 increased by $3.7 million, or 3.5%. The increase in domestic ambulance
services revenue was offset by a $2.2 million decrease in revenue derived from
our Canadian operations and $1.4 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 increased by 5,000, or 1.5%, from 330,000
for the three months ended March 31, 1999 to 335,000 for the three months ended
March 31, 2000 due to increased transport from new contracting activity offset
by decreased transports in certain service areas 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 $2.6 million, or 21.0%, from $12.4
million for the three months ended March 31, 1999 to $15.0 million for the three
months ended March 31, 2000. Fire protection services revenue increased due to
new contracting activity of $1.6 million and due to rate increases for fire
protection services of $1.0 million.
Other revenue increased $0.7 million, or 6.5%, from $10.8 million for the three
months ended March 31, 1999 to $11.5 million for the three months ended March
31, 2000. Other revenue increased due to revenue of $0.8 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 $0.2 million decrease in alternative transportation services revenue due to
our efforts to reduce transports in certain areas and improve the quality of our
revenue.
OPERATING EXPENSES
Payroll and employee benefit expenses increased $4.1 million, or 5.5%, from
$75.0 million for the three months ended March 31, 1999 to $79.1 million for the
three months ended March 31, 2000. Service areas with newly acquired contracts
contributed $3.7 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 52.4% of total revenue for the three months ended March 31, 1999
to 54.0% of total revenue for the three months ended March 31, 2000. Increased
service utilization in our Argentine operations also contributed to the increase
in payroll and employee benefit expenses as a percentage of total revenue.
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
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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 of fiscal 2000. 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. The new
accounting policy provides specific allowances based upon the age of the
accounts receivable within each payor class and also provides for general
allowances based upon historic collection rates within each payor class. Payor
classes include Medicare, Medicaid, and private pay. Accordingly, the effect of
this change was an additional $65.0 million provision for doubtful accounts,
which was recorded separately in the accompanying financial statements during
the second quarter of fiscal 2000. Also, during the three months ended March 31,
2000, we recorded a $3.0 million additional provision for doubtful accounts
related to specific accounts deemed uncollectible in certain service areas that
are being closed or downsized as part of our restructuring program. Provision
for doubtful accounts, using the new accounting policy and exclusive of the $3.0
million additional provision increased $1.4 million, or 6.7% from $20.9 million
for the three months ended March 31, 1999 to $22.3 million for the three months
ended March 31, 2000. Provision for doubtful accounts, using the new accounting
policy but exclusive of the $3.0 million additional provision increased from
14.6% of total revenue for the three months ended March 31, 1999 to 15.2% of
total revenue for the three months ended March 31, 2000 and was 19.5% of
domestic ambulance service revenue for the three months ended March 31, 1999 and
19.7% of domestic ambulance service revenue for the three months ended March 31,
2000. 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 6.6% of total net accounts
receivable at March 31, 2000. We will continue to review the benefits and timing
of integrating our two non-integrated billing centers.
Depreciation was $6.1 million for both the three month periods ended March 31,
1999 and 2000. Depreciation was 4.3% and 4.2% of total revenue for the three
months ended March 31, 1999 and 2000, respectively.
Amortization of intangibles increased $0.2 million, or 9.5%, from $2.1 million
for the three months ended March 31, 1999 to $2.3 million for the three months
ended March 31, 2000. Amortization of intangibles was 1.5% of total revenue for
the three months ended March 31, 1999 and 2000, respectively.
Other operating expenses increased approximately $1.5 million, or 6.0%, from
$25.1 million for the three months ended March 31, 1999 to $26.6 million for the
three months ended March 31, 2000. Of the $1.5 million increase, $0.9 million
was attributable to the operation of the company acquired in the third quarter
of fiscal 1999 and $0.7 million was attributable to operations in service areas
with newly acquired contracts. Other operating expenses increased from 17.6% of
total revenue for the three months ended March 31, 1999 to 18.1% of total
revenue for the three months ended March 31, 2000. The increased service
utilization in our Argentine operations also attributed to the increase in
operating expenses as a percentage of total revenue.
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During the three months ended March 31, 2000, we recorded a $25.1 million
restructuring charge related to the closure or downsizing of certain
non-emergency service areas and the reduction of corporate overhead. The
components of the charge were $4.1 million of severance costs, $1.0 million of
lease termination costs, $13.6 million write-off of intangible assets and $6.4
million write-off of other impaired assets and other costs. We expect the
severance and lease termination payments will be substantially completed during
fiscal 2001. We anticipate further restructuring charges will be taken in the
fourth quarter of fiscal 2000 and we anticipate these charges will approximate
$17.0 million on a pre-tax ($11.0 million on an after-tax) basis.
Interest expense increased $0.9 million from $5.5 million, or 16.4%, for the
three months ended March 31, 1999 to $6.4 million for the three months ended
March 31, 2000. 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 three months ended March 31, 1999 and
31.8% for the three months ended March 31, 2000. The decrease in the effective
tax rate is due to the impact of permanent differences, primarily consisting of
goodwill write-offs and amortization. These permanent differences reduce the tax
benefits which would otherwise be available in a loss year, thus resulting in a
reduction in the effective tax rate.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
REVENUE
Total revenue increased $13.4 million, or 3.2%, from $421.3 million for the nine
months ended March 31, 1999 to $434.7 million for the nine months ended March
31, 2000. Ambulance services revenue increased $6.1 million, or 1.7%, from
$351.8 million for the nine months ended March 31, 1999 to $357.9 million for
the nine months ended March 31, 2000. Domestic ambulance services revenue in
areas served by us in both of the nine month periods ended March 31, 2000 and
1999 increased by $11.9 million, or 3.9%. The increase in domestic ambulance
services revenue was partially offset by a $1.2 million decrease in revenue
derived from our Canadian operations and a $4.6 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 23,000, or 2.3%, from 984,000
for the nine months ended March 31, 1999 to 961,000 for the nine months ended
March 31, 2000 due to our efforts to reduce non-emergency transports in certain
areas and improve the quality of our revenue. The effect on revenue caused by
the reduction in transports was more than offset by transports generated through
new contracting activity as well as increases in average patient charges in
other areas.
Fire protection services revenue increased by $5.0 million, or 13.3%, from $37.6
million for the nine months ended March 31, 1999 to $42.6 million for the nine
months ended March 31, 2000. Fire protection services revenue increased due to
new contracting activity of $2.7 million and due to rate increases for fire
protection services of $2.3 million.
Other revenue increased $2.3 million, or 7.2%, from $31.9 million for the nine
months ended March 31, 1999 to $34.2 million for the nine months ended March 31,
2000. Other revenue increased due to revenue of $4.3 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 $1.5 million decrease in alternative transportation services revenue due to
our efforts to reduce transports in
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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 nine months ended March 31, 1999.
OPERATING EXPENSES
Payroll and employee benefit expenses increased $13.2 million, or 5.9%, from
$222.1 million for the nine months ended March 31, 1999 to $235.3 million for
the nine months ended March 31, 2000. The acquisition completed during the third
quarter of fiscal 1999 contributed $1.3 million to the increase, service areas
with newly acquired contracts contributed $10.2 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 52.7% of total revenue for the nine
months ended March 31, 1999 to 54.1% of total revenue for the nine months ended
March 31, 2000. Increased service utilization in our Argentine operations also
contributed to the increase in payroll and employee benefit expenses as a
percentage of total revenue.
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 of fiscal 2000. 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. The new accounting policy provides specific
allowances based upon the age of the accounts receivable within each payor class
and also provides for general allowances based upon historic collection rates
within each payor class. Payor classes include Medicare, Medicaid and private
pay. 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 during the second quarter of fiscal 2000. Also
during the nine months ended March 31, 2000, we recorded a $3.0 million
additional provision for doubtful accounts related to specific accounts deemed
uncollectible in the certain service areas that are being closed or downsized as
part of our restructuring program. Provision for doubtful accounts, using the
new accounting policy but exclusive of the third quarter $3.0 million additional
provision and the second quarter $65.0 million additional provision, increased
$2.9 million, or 4.8%, from $61.0 million for the nine months ended
March 31, 1999 to $63.9 million for the nine months ended March 31,
2000. Provision for doubtful accounts, using the new accounting policy but
exclusive of the $65.0 million additional provision and the $3.0 million
additional provision was 14.5% of total revenue for the nine months ended March
31, 1999 and was 14.7% of total revenue for the nine months ended March 31, 2000
and was 19.5% of domestic ambulance service revenue for the nine months ended
March 31, 1999 and 19.4% of domestic ambulance service revenue for the nine
months ended March 31, 2000. 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
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receivable on non-integrated collection systems currently represent 6.6% of
total net accounts receivable at March 31, 2000. We will continue to review the
benefits and timing of integrating our two non-integrated billing centers.
Depreciation increased $0.5 million, or 2.8%, from $18.0 million for the nine
months ended March 31, 1999 to $18.5 million for the nine months ended March 31,
2000, 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 nine month periods ended March 31, 1999 and
2000, respectively.
Amortization of intangibles decreased $0.2 million, or 2.9%, from $6.9 million
for the nine months ended March 31, 1999 to $6.7 million for the nine months
ended March 31, 2000. Amortization of intangibles was 1.6% and 1.5% of total
revenue for the nine months ended March 31, 1999 and 2000, respectively.
Other operating expenses increased approximately $10.3 million, or 14.1%, from
$73.2 million for the nine months ended March 31, 1999 to $83.5 million for the
nine months ended March 31, 2000. Of the $10.3 million increase, $3.9 million
was attributable to the accrual of proposed settlements relating to a Medicare
investigation and certain Medicaid audits, $3.3 million was attributable to the
operation of the company acquired in the third quarter of fiscal 1999 and $2.7
million was attributable to operations in service areas with newly acquired
contracts. Other operating expenses increased from 17.4% of total revenue for
the nine months ended March 31, 1999 to 19.2% of total revenue for the nine
months ended March 31, 2000. The increased service utilization in our Argentine
operations also attributed to increase in operating expenses as a percentage of
total revenue.
During the nine months ended March 31, 2000, we recorded a $25.1 million
restructuring charge related to the closure or downsizing of certain
non-emergency service areas and the reduction of corporate overhead. The
components of the charge were $4.1 million of severance costs, $1.0 million of
lease termination costs, $13.6 million write-off of intangible assets and $6.4
million write-off of other impaired assets and other costs. We expect the
severance and lease termination payments will be substantially completed during
fiscal 2001. We anticipate further restructuring charges will be taken in the
fourth quarter of fiscal 2000 and we anticipate these charges will approximate
$17.0 million on a pre-tax ($11.0 million on an after-tax) basis.
Interest expense increased $1.6 million, or 10.0%, from $16.0 million for the
nine months ended March 31, 1999 to $17.6 million for the nine months ended
March 31, 2000. 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 nine months ended March 31, 1999 and
34.1% for the nine months ended March 31, 2000. The decrease in the effective
tax rate is due to the impact of permanent differences primarily consisting of
goodwill write-offs and amortization. These permanent differences reduce the tax
benefits which could otherwise be available in a loss year, thus resulting in a
reduction in the effective tax rate.
During the nine months ended March 31, 2000, we recorded an extraordinary loss
on the expropriation of Canadian ambulance service licenses of $1.2 million (net
of $0 of income taxes). We received $2.2 million 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.
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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 nine months ended March 31, 2000, our cash flow used in operating
activities was $33.1 million, resulting primarily from an increase in accounts
receivable of $101.2 million, a decrease in accounts payable of $3.1 million, a
decrease in accrued liabilities and other liabilities of $13.6 million and a net
loss of $57.1 million offset by non-cash expenses of the write-off of assets of
$19.5 million, depreciation and amortization of $25.3 million and provision for
doubtful accounts of $131.9 million. Cash flow provided by operating activities
was $10.0 million for the nine months ended March 31, 1999.
Cash provided by financing activities was $29.3 million for the nine months
ended March 31, 2000, 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 $14.7 million for the nine months ended
March 31, 2000, 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 March 31, 2000 and June 30, 1999 was $248.3
million and $228.9 million, respectively. Our accounts receivable, net of the
allowance for doubtful accounts, was $154.6 million and $185.5 million as of
such dates, respectively. We believe that the increase in gross accounts
receivable is due to many factors including revenue growth, delays in payments
from certain third-party payors, particularly in certain of our regional billing
centers, and a general industry trend toward a lengthening payment cycle of
accounts receivable due from third-party payors. Delays in receiving payments
also contributed to an increase in the age of our accounts receivable.
The allowance for doubtful accounts increased from $43.3 million at June 30,
1999 to $93.7 million at March 31, 2000. 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
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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. The new
accounting policy provides specific allowances based upon the age of the
accounts receivable within each payor class and also provides for general
allowances based upon historic collection rates within each payor class. Payor
classes include Medicare, Medicaid and private pay. We will continue to
aggressively attempt to collect our accounts receivable, using both internal and
external sources. 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 was priced at (a) the Base Rate (i.e.
the greater of (i) the prime rate or (ii) the Federal Funds rate, plus .5
percentage points), plus the applicable margin, or (b) LIBOR, plus the
applicable margin. The LIBOR-based rate ranged from LIBOR plus 0.875 percentage
points to LIBOR plus 1.75 percentage points. As discussed below, during March
2000, all borrowings became priced at prime rate plus .25 percentage points.
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 $147.0 million was outstanding on the revolving credit facility at
March 31, 2000. In February 2000, we received a compliance waiver regarding the
financial covenants contained in our revolving credit facility which covered the
period from December 31, 1999 through March 14, 2000. In March, we received an
additional waiver, which was amended in April, regarding the financial
covenants, which covers the period from March 15, 2000, through July 14, 2000.
The waiver covers the representations and warranties related to no material
adverse changes as well as the following financial covenants: the total debt
leverage ratio, the total debt to total capitalization ratio and the fixed
charge coverage ratio. The waiver stipulates that no additional borrowings will
be available to us during the period of March 15, 2000 through July 14, 2000. In
addition, the wavier (as amended) requires us (i) to engage certain financial
advisors, (ii) to meet certain benchmarks for projected cash balances and
expenditures, and (iii) to reduce the outstanding balance on the revolving
credit facility upon the sale of certain assets, the collection of certain
accounts receivable and upon the attainment of certain cash balance thresholds.
As LIBOR contracts expired in March 2000, all borrowings were priced at prime
rate plus 0.25 percentage points and interest is payable monthly. During the
period of April 13, 2000 through July 14, 2000, we will accrue additional
interest expense at a rate of 2.0% per annum on the outstanding balance on the
revolving credit facility unless certain pay down requirements are met during
that period, which interest is payable on July 14, 2000. At May 11, 2000, the
outstanding balance on the revolving credit facility was $147.0 million with no
availability on the facility. Also outstanding are $6.5 million in letters of
credit issued under the revolving credit facility. A condition of the waiver
agreement requires us to negotiate in good faith with the banks participating in
the revolving credit facility in order to amend the revolving credit facility
prior to July 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 either the terms of the revolving credit facility (as a
result of the waiver agreement) or our $150 million 7 7/8% Senior Notes (the
Notes) due 2008, and although there has been no acceleration of the repayment of
the revolving credit facility or the Notes, the entire balance of these
instruments has been reclassified as a current liability at March 31, 2000 in
the accompanying financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 78 "Classification of Obligations that are
Callable by the Creditor". Our inability to successfully negotiate an amendment
of our revolving credit facility could have a material adverse effect on our
financial condition. 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.
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Because of the classification of entire outstanding balance under the lending
credit facility as a current liability at March 31, 2000, we had negative
working capital of $157.1 million, including cash of $3.3 million, at March 31,
2000, 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 March 31, 2000 the weighted average interest
rate was 7.6% on the lease line of credit. Approximately $1.6 million was
outstanding on this line of credit at March 31, 2000.
In March 1998 we issued $150.0 million of 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 March 31, 2000 was $205,000 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.
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 March
31, 2000. 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 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 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.
31
<PAGE> 32
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 March 31, 2000 our balance sheet reflects a
$255,000 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.
32
<PAGE> 33
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 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedules
(b) Reports on Form 8-K
On January 27, 2000, the Company filed a Form 8-K
disclosing its announcements of business process
changes and restructuring plan and postponing release
of second quarter results.
On March 15, 2000, the Company filed a Form 8-K
disclosing the extension of its waiver of covenant
compliance under its revolving credit facility.
On April 14, 2000, the Company filed a Form 8-K
disclosing a 90 day extension of its wavier of
covenant compliance under its revolving credit
facility and the filing of its Provisional Waiver and
Standstill Agreement dated March 14, 2000 and the
First Amendment to the Provisional Waiver and
Standstill Agreement dated April 13, 2000.
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: May 12, 2000 By /s/ Jack E. Brucker
------------------------------------------------
Jack E. Brucker, President & Chief Executive
Officer
By /s/ Donna D. Berlinski
------------------------------------------------
Donna D. Berlinski, Director of Finance and
Principal Accounting Officer
34
<PAGE> 35
EXHIBIT INDEX
Exhibit
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 March 31, 2000, 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,273
<SECURITIES> 0
<RECEIVABLES> 248,326
<ALLOWANCES> 93,768
<INVENTORY> 17,988
<CURRENT-ASSETS> 182,362
<PP&E> 185,595
<DEPRECIATION> 93,225
<TOTAL-ASSETS> 512,029
<CURRENT-LIABILITIES> 39,557
<BONDS> 302,993
0
0
<COMMON> 149
<OTHER-SE> 139,595
<TOTAL-LIABILITY-AND-EQUITY> 512,029
<SALES> 434,705
<TOTAL-REVENUES> 434,705
<CGS> 0
<TOTAL-COSTS> 369,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 131,923
<INTEREST-EXPENSE> 17,649
<INCOME-PRETAX> (83,953)
<INCOME-TAX> (28,577)
<INCOME-CONTINUING> (55,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,200
<CHANGES> 541
<NET-INCOME> (57,117)
<EPS-BASIC> ($3.92)
<EPS-DILUTED> ($3.92)
</TABLE>
