<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 September 30, 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 November 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 19
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
2
<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 7,368 $ 10,287
Accounts receivable, net 138,954 143,905
Inventories 19,875 19,070
Prepaid expenses and other 7,128 6,552
--------- ---------
Total current assets 173,325 179,814
--------- ---------
PROPERTY AND EQUIPMENT, net 79,963 85,919
INTANGIBLE ASSETS, net 205,342 207,200
OTHER ASSETS 17,674 18,284
--------- ---------
$ 476,304 $ 491,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,310 $ 16,135
Accrued liabilities 48,344 57,087
Current portion of long-term debt 298,610 299,104
--------- ---------
Total current liabilities 362,264 372,326
--------- ---------
LONG-TERM DEBT, net of current portion 2,152 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME 15,435 14,989
OTHER LIABILITIES 75 101
--------- ---------
Total liabilities 379,926 390,266
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 4,871 5,360
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 149 149
Additional paid-in capital 137,603 137,603
Accumulated deficit (44,755) (40,670)
Cumulative translation adjustment (251) (252)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 91,507 95,591
--------- ---------
$ 476,304 $ 491,217
========= =========
</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 MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUE
Ambulance services $ 101,742 $ 116,897
Fire protection services 15,724 13,063
Other 10,772 11,240
--------- ---------
Total revenue 128,238 141,200
--------- ---------
OPERATING EXPENSES
Payroll and employee benefits 72,642 76,865
Provision for doubtful accounts 19,392 20,410
Depreciation 5,708 6,160
Amortization of intangibles 1,869 2,160
Other operating expenses 25,414 26,024
--------- ---------
Total expenses 125,025 131,619
--------- ---------
OPERATING INCOME 3,213 9,581
Interest expense, net 7,876 5,436
Other (489) (20)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (4,174) 4,165
Provision (benefit) for income taxes (89) 1,740
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (4,085) 2,425
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NET OF AN INCOME
TAX BENEFIT OF $392) -- (541)
--------- ---------
NET INCOME (LOSS) $ (4,085) $ 1,884
========= =========
</TABLE>
4
<PAGE> 5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C>
INCOME (LOSS) PER SHARE:
Basic -
Income (loss) before cumulative effect of
a change in accounting principle $ (0.28) $ 0.17
Cumulative effect of change in a accounting principle -- (0.04)
---------- ----------
Net income (loss) $ (0.28) $ 0.13
========== ==========
Diluted -
Income (loss) before cumulative effect of
a change in accounting principle $ (0.28) $ 0.17
Cumulative effect of change in a accounting principle -- (0.04)
---------- ----------
Net income (loss) $ (0.28) $ 0.13
========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 14,626 14,538
========== ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,626 14,671
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (4,085) $ 1,884
Adjustments to reconcile net income (loss) to cash
used in operations--
Cumulative effect of a change in accounting principle -- 541
Depreciation and amortization 7,577 8,320
Amortization of gain on sale of real estate (26) (26)
(Gain) loss on sale of property and equipment (270) 3
Provision for doubtful accounts 19,392 20,410
Undistributed loss of minority shareholder (489) (20)
Amortization of discount on Senior Notes 6 6
Change in assets and liabilities ---
Increase in accounts receivable (14,441) (30,926)
Increase in inventories (805) (1,090)
(Increase) decrease in prepaid expenses and other (587) 709
Decrease in accounts payable (825) (1,341)
Decrease in accrued liabilities and other liabilities (8,743) (1,009)
Increase (decrease) in nonrefundable subscription income 446 (19)
Decrease in deferred income taxes -- (62)
-------- --------
Net cash used in operating activities (2,850) (2,620)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings (repayments) on revolving credit facility, net (500) 9,102
Repayment of debt and capital lease obligations (698) (1,497)
Issuance of common stock -- 386
-------- --------
Net cash provided by (used in) financing activities (1,198) 7,991
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (517) (6,965)
Proceeds from the sale of property and equipment 1,035 166
(Increase) decrease in other assets 610 (985)
-------- --------
Net cash provided by (used in) investing activities 1,128 (7,784)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 1 (46)
-------- --------
DECREASE IN CASH (2,919) (2,459)
CASH, beginning of period 10,287 7,180
-------- --------
CASH, end of period $ 7,368 $ 4,721
======== ========
</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 MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------- -------
<S> <C> <C>
NET INCOME (LOSS) $(4,085) $ 1,884
Foreign currency translation adjustments 1 (46)
------- -------
COMPREHENSIVE INCOME (LOSS) $(4,084) $ 1,838
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 month periods ended September 30, 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 month period ended September 30,
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/A for the fiscal year ended June 30, 2000.
(2) CREDIT AGREEMENTS AND BORROWINGS
The Company has received a compliance waiver (as amended) regarding the
financial covenants contained in its revolving credit facility covering
the periods from December 31, 1999 through January 31, 2001. The waiver
(as amended) 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 (as amended) stipulates
that no additional borrowings will be available to the Company through the
end of the waiver period in January 2001. 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, (iii) maintain positive consolidated operating income, net
of restructuring charges, and (iv) 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. There is no assurance that the Company is
in compliance with all of the technical conditions of the waiver.
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 periods covered by the waiver (as amended), 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. At November 10, 2000 the
outstanding balance on the revolving credit facility was $146.2 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 January 31, 2001. 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 September 30,
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".
8
<PAGE> 9
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes
due 2008 (the Notes). The Notes are general unsecured obligations of the
Company and are unconditionally guaranteed on a joint and several basis by
substantially all of the Company's domestic wholly owned current and
future subsidiaries. The financial statements presented below include the
Consolidating Balance Sheets as of September 30, 2000 and June 30, 2000,
the Consolidating Statements of Operations for the three months ended
September 30, 2000 and 1999, and the Consolidating Statements of Cash
Flows for the three months ended September 30, 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 SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 6,059 $ 1,309 $ -- $ 7,368
Accounts receivable, net -- 123,012 15,942 -- 138,954
Inventories -- 18,735 1,140 -- 19,875
Prepaid expenses and other 531 5,645 952 -- 7,128
--------- --------- --------- --------- ---------
Total current assets 531 153,451 19,343 -- 173,325
--------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, net -- 71,072 8,891 -- 79,963
INTANGIBLE ASSETS, net -- 129,863 75,479 -- 205,342
DUE FROM (TO) AFFILIATES 309,253 (246,290) (62,963) -- --
OTHER ASSETS 3,129 13,303 1,242 -- 17,674
INVESTMENT IN SUBSIDIARIES 77,948 -- -- (77,948) --
--------- --------- --------- --------- ---------
$ 390,861 $ 121,399 $ 41,992 $ (77,948) $ 476,304
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 10,840 $ 4,470 $ -- $ 15,310
Accrued liabilities 3,240 39,158 5,946 -- 48,344
Current portion of long-term debt 296,114 1,894 602 -- 298,610
--------- --------- --------- --------- ---------
Total current liabilities 299,354 51,892 11,018 -- 362,264
--------- --------- --------- --------- ---------
LONG-TERM DEBT, net of current portion -- 2,018 134 -- 2,152
NON-REFUNDABLE SUBSCRIPTION INCOME -- 15,435 -- -- 15,435
DEFERRED INCOME TAXES -- (725) 725 -- --
OTHER LIABILITIES -- 75 -- -- 75
--------- --------- --------- --------- ---------
Total liabilities 299,354 68,695 11,877 -- 379,926
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 4,871 4,871
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 137,603 54,622 34,942 (89,564) 137,603
Accumulated deficit (44,755) (2,000) (4,593) 6,593 (44,755)
Cumulative translation adjustment (251) -- (251) 251 (251)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity 91,507 52,704 30,115 (82,819) 91,507
--------- --------- --------- --------- ---------
$ 390,861 $ 121,399 $ 41,992 $ (77,948) $ 476,304
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 11
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 9,035 $ 1,252 $ -- $ 10,287
Accounts receivable, net -- 126,788 17,117 -- 143,905
Inventories -- 18,018 1,052 -- 19,070
Prepaid expenses and other 531 5,129 892 -- 6,552
--------- --------- --------- --------- ---------
Total current assets 531 158,970 20,313 -- 179,814
--------- --------- --------- --------- ---------
PROPERTY AND EQUIPMENT, net -- 76,325 9,594 -- 85,919
INTANGIBLE ASSETS, net -- 131,117 76,083 -- 207,200
DUE FROM (TO) AFFILIATES 319,747 (256,053) (63,694) -- --
OTHER ASSETS 3,386 12,273 2,625 -- 18,284
INVESTMENT IN SUBSIDIARIES 74,464 -- -- (74,464) --
--------- --------- --------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 11,922 $ 4,213 $ -- $ 16,135
Accrued liabilities 5,929 43,746 7,412 -- 57,087
Current portion of long-term debt 296,608 2,164 332 -- 299,104
--------- --------- --------- --------- ---------
Total current liabilities 302,537 57,832 11,957 -- 372,326
--------- --------- --------- --------- ---------
LONG-TERM DEBT, net of current portion -- 2,384 466 -- 2,850
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,971 18 -- 14,989
DEFERRED INCOME TAXES -- (725) 725 -- --
OTHER LIABILITIES -- 101 -- -- 101
--------- --------- --------- --------- ---------
Total liabilities 302,537 74,563 13,166 -- 390,266
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 5,360 5,360
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 137,603 54,622 34,942 (89,564) 137,603
Accumulated deficit (40,670) (6,635) (2,952) 9,587 (40,670)
Cumulative translation adjustment (252) -- (252) 252 (252)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity 95,591 48,069 31,755 (79,824) 95,591
--------- --------- --------- --------- ---------
$ 398,128 $ 122,632 $ 44,921 $ (74,464) $ 491,217
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 87,262 $ 14,480 $ -- $ 101,742
Fire protection services -- 15,444 280 -- 15,724
Other -- 9,248 1,524 -- 10,772
--------- --------- --------- --------- ---------
Total revenue -- 111,954 16,284 -- 128,238
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 61,792 10,850 -- 72,642
Provision for doubtful accounts -- 18,245 1,147 -- 19,392
Depreciation -- 5,045 663 -- 5,708
Amortization of intangibles -- 1,265 604 -- 1,869
Other operating expenses -- 21,001 4,413 -- 25,414
--------- --------- --------- --------- ---------
Total expenses -- 107,348 17,677 -- 125,025
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) -- 4,606 (1,393) -- 3,213
Interest expense, net 7,568 (29) 337 -- 7,876
Other -- -- -- (489) (489)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (7,568) 4,635 (1,730) 489 (4,174)
Benefit from income taxes -- -- (89) -- (89)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (7,568) 4,635 (1,641) 489 (4,085)
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 3,483 -- -- (3,483) --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (4,085) $ 4,635 $ (1,641) $ (2,994) $ (4,085)
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- 1 -- 1
Comprehensive income from
wholly-owned subsidiaries 1 -- -- (1) --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (4,084) $ 4,635 $ (1,640) $ (2,995) $ (4,084)
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services $ -- $ 96,147 $ 20,750 $ -- $ 116,897
Fire protection services -- 12,785 278 -- 13,063
Other -- 9,088 2,152 -- 11,240
--------- --------- --------- --------- ---------
Total revenue -- 118,020 23,180 -- 141,200
--------- --------- --------- --------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 62,158 14,707 -- 76,865
Provision for doubtful accounts -- 19,089 1,321 -- 20,410
Depreciation -- 5,554 606 -- 6,160
Amortization of intangibles -- 1,526 634 -- 2,160
Other operating expenses -- 20,580 5,444 -- 26,024
--------- --------- --------- --------- ---------
Total expenses -- 108,907 22,712 -- 131,619
--------- --------- --------- --------- ---------
OPERATING INCOME -- 9,113 468 -- 9,581
Interest expense, net 5,164 (277) 549 -- 5,436
Other -- -- -- (20) (20)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES
AND A CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (5,164) 9,390 (81) 20 4,165
PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,169) 3,935 (26) -- 1,740
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (2,995) 5,455 (55) 20 2,425
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE -- (541) -- -- (541)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) (2,995) 4,914 (55) 20 1,884
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 4,879 -- -- (4,879) --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 1,884 $ 4,914 $ (55) $ (4,859) $ 1,884
========= ========= ========= ========= =========
Foreign currency translation adjustments -- -- (46) -- (46)
Comprehensive loss from
wholly-owned subsidiaries (46) -- -- 46 --
--------- --------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 1,838 $ 4,914 $ (101) $ (4,813) $ 1,838
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non-
Parent Guarantors Guarantors Eliminating Consolidated
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(4,085) $ 4,635 $(1,641) $(2,994) $(4,085)
Adjustments to reconcile net
income (loss) to cash provided by
(used in) operations--
Depreciation and amortization -- 6,310 1,267 -- 7,577
Amortization of gain on sale of real estate -- (26) -- -- (26)
(Gain) loss on sale of property and equipment -- (272) 2 -- (270)
Provision for doubtful accounts -- 18,245 1,147 -- 19,392
Undistributed loss of minority shareholder -- -- -- (489) (489)
Amortization of discount on Senior Notes 6 -- -- -- 6
Change in assets and liabilities --
(Increase) decrease in accounts receivable -- (14,469) 28 -- (14,441)
Increase in inventories -- (717) (88) -- (805)
Increase in prepaid expenses and other -- (527) (60) -- (587)
(Increase) decrease in due to/from affiliates 7,010 (9,763) (731) 3,484 --
Increase (decrease) in accounts payable -- (1,082) 257 -- (825)
Decrease in accrued liabilities and other liabilities (2,689) (4,588) (1,466) -- (8,743)
Increase (decrease) in nonrefundable subscription income -- 464 (18) -- 446
------- ------- ------- ------- -------
Net cash provided by (used in) operating activities 242 (1,790) (1,303) 1 (2,850)
------- ------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on revolving credit facility (500) -- -- -- (500)
Repayment of debt and capital lease obligations -- (636) (62) -- (698)
------- ------- ------- ------- -------
Net cash used in financing activities (500) (636) (62) -- (1,198)
------- ------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (555) 38 -- (517)
Proceeds from the sale of property and equipment -- 1,035 -- 1,035
(Increase) decrease in other assets 257 (1,030) 1,383 -- 610
------- ------- ------- ------- -------
Net cash provided by (used in) investing activities 257 (550) 1,421 -- 1,128
------- ------- ------- ------- -------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE 1 -- 1 (1) 1
------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH -- (2,976) 57 -- (2,919)
CASH, beginning of period -- 9,035 1,252 -- 10,287
------- ------- ------- ------- -------
CASH, end of period $ -- $ 6,059 $ 1,309 $ -- $ 7,368
======= ======= ======= ======= =======
</TABLE>
14
<PAGE> 15
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Non-
Parent Guarantors Guarantors Eliminating Consolidated
-------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 1,884 $ 4,914 $ (55) $(4,859) $ 1,884
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations--
Depreciation and amortization -- 7,080 1,240 -- 8,320
Cumulative effect of a change in accounting principle -- 541 -- -- 541
Amortization of gain on sale of real estate -- (26) -- -- (26)
(Gain) Loss on the sale of property and equipment -- 2 1 -- 3
Provision for doubtful accounts -- 19,089 1,321 -- 20,410
Undistributed loss of minority shareholder -- -- -- (20) (20)
Amortization of discount on Senior Notes 6 -- -- -- 6
Change in assets and liabilities ---
Increase in accounts receivable -- (27,934) (2,992) -- (30,926)
(Increase) decrease in inventories -- (1,095) 5 -- (1,090)
(Increase) decrease in prepaid expenses and other -- 968 (259) -- 709
(Increase) decrease in due to/from affiliates (8,506) 19 3,654 4,833 --
Decrease in accounts payable -- (1,185) (156) -- (1,341)
Increase (decrease) in accrued liabilities
and other liabilities (2,962) 3,034 (1,081) -- (1,009)
Increase (decrease) in nonrefundable subscription income -- (158) 139 -- (19)
Decrease in deferred income taxes -- (62) -- -- (62)
------- ------- ------- ------- --------
Net cash provided by (used in) operating activities (9,578) 5,187 1,817 (46) (2,620)
------- ------- ------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 9,102 -- -- -- 9,102
Repayment of debt and capital lease obligations -- (1,202) (295) -- (1,497)
Issuance of common stock 386 -- -- -- 386
------- ------- ------- ------- --------
Net cash provided by (used in) financing activities 9,488 (1,202) (295) -- 7,991
------- ------- ------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (6,201) (764) -- (6,965)
Proceeds from the sale of property and equipment -- 166 -- -- 166
(Increase) decrease in other assets 136 (690) (431) -- (985)
------- ------- ------- ------- --------
Net cash provided by (used in) investing activities 136 (6,725) (1,195) -- (7,784)
------- ------- ------- ------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (46) -- (46) 46 (46)
------- ------- ------- ------- --------
INCREASE (DECREASE) IN CASH -- (2,740) 281 -- (2,459)
CASH, beginning of period -- 5,379 1,801 -- 7,180
------- ------- ------- ------- --------
CASH, end of period $ -- $ 2,639 $ 2,082 $ -- $ 4,721
======= ======= ======= ======= ========
</TABLE>
15
<PAGE> 16
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) COMMITMENTS AND CONTINGENCIES
Included in accrued liabilities at September 30, 2000 in the
accompanying balance sheets is $3.5 million attributable to the
settlement of a Medicaid audit and the accrual of a proposed settlement
of a Medicare investigation.
(4) GOING CONCERN
The Company incurred a net loss of $101.3 million and $4.1 million for
the year ended June 30, 2000 and the three months ended September 30,
2000, respectively, and as a result is operating under a waiver of
covenant compliance of financial covenants under the Company's
revolving credit facility. In addition, no further amounts can be
borrowed under the revolving credit facility through the end of the
waiver period, January 31, 2001. The losses incurred in fiscal year
2000 primarily relate to the Company's restructuring program aimed at
closing or downsizing certain underperforming non-emergency service
areas, the reduction of corporate overhead and additional provision for
doubtful accounts due to the continuing difficulties experienced in the
healthcare reimbursement environment.
As no further amounts may be borrowed, the Company will have to fund
all operations, capital expenditures, regularly scheduled interest
payments on the revolving credit facility and Notes and principal
payments on other debt and capital lease obligations from existing cash
reserves and net cash flows from operations.
The Company has self funded all obligations, including regularly
scheduled interest payments on the revolving credit facility and the
Notes from operating cash flow since February 2000. The Company
believes that its existing cash reserves and operating cash flow will
provide sufficient cash for its operations, capital expenditures and
regularly scheduled debt service payments through the first quarter of
fiscal 2002. Management is actively working with it's revolving credit
facility lenders in order to obtain a long-term amendment to the credit
facility. The Company believes that its current business model and
strategy will generate sufficient cash flow to provide a basis for a
new long-term agreement with its current lenders or to restructure the
debt through public or private debt or equity financings. The
availability of these financing alternatives is dependent upon
prevailing market conditions, interest rates, covenants associated with
the Notes and the market price of the Company's common stock.
There can be no assurance that the Company's restructuring efforts will
be successful. In addition, an amendment to the revolving credit
facility could substantially alter the terms and conditions of the
credit facility, including potentially higher interest rates, which
could have a further adverse effect on the Company. Under current
circumstances, the Company's ability to continue as a going concern
depends upon the successful restructuring of the revolving credit
facility as well as success of its restructuring program. The financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
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 ended June 30, 2001,
their auditor's report on those financial statements will be modified
for this contingency.
(5) RESTRUCTURING CHARGE AND OTHER
During the year ended June 30, 2000, the Company recorded pre-tax
charges of $43.3 million 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 of approximately 300 employees, service area closing
costs, and write-offs of goodwill and other impaired assets. At
September 30, 2000 $5.6 million remains in accrued liabilities in the
accompanying financial
16
<PAGE> 17
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
statements. The usage of the restructuring charge and the remaining
accrual at September 30, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at June 30, 2000 $ 8,523
Severance costs (1,862)
Lease termination costs (293)
Write-off of impaired assets and other costs (778)
-------
Balance at September 30, 2000 $ 5,590
=======
</TABLE>
(6) CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities", effective July 1, 1999, the Company was
required to change its accounting principle for organization costs.
Previously, the Company capitalized such costs and amortized them using
the straight-line method over five years. 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 three months ended
September 30, 1999, as the "Cumulative Effect of a Change in Accounting
Principle" in accordance with APB No. 20. The Company has since
expensed any further amounts incurred for these purposes.
(7) 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 month periods ended September 30,
2000 and 1999 is a follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
------------------------------------- -------------------------------------
Loss Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ($4,085) 14,626 ($ 0.28) $ 1,884 14,538 $ 0.13
======= =======
Effect of stock options -- -- -- 133
------- ------ ------- ------
Diluted EPS ($4,085) 14,626 ($ 0.28) $ 1,884 14,671 $ 0.13
======= ====== ======= ======= ====== =======
</TABLE>
As a result of anti-dilutive effects, approximately 342 common stock
equivalents were not included in the computation of diluted earnings
per share for the three months ended September 30, 2000.
(8) 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.
17
<PAGE> 18
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company operates in two business segments: Ambulance and Fire and
Other. The Company's reportable segments are strategic business units
that offer different services. They are managed separately based on the
fundamental differences in their operations.
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a fee-for-service
basis, on a non-refundable subscription basis and through capitated
contracts. The Ambulance segment also includes urgent home medical care
and ambulance services provided under capitated service arrangements in
Argentina.
The Fire and Other segment includes the following services: fire
protection and training, alternative transportation, home health care
services, urgent and primary care in clinics, dispatch, fleet and
billing.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements filed
with the Form 10-K/A for the fiscal year ended June 30, 2000. 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. Information by operating segment is set forth below (in
thousands):
<TABLE>
<CAPTION>
Three months ended September 30, 2000 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues from external customers $ 101,742 $ 26,496 $ -- $ 128,238
Segment profit (loss) $ (2,598) $ 3,095 $ (5,160) $ (4,663)
Segment assets $ 200,590 $ 36,411 $ 1,791 $ 238,792
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from external customers $116,897 $ 24,303 -- $141,200
Segment profits (loss) $ 6,594 $ 1,626 $ (4,075) $ 4,145
Segment assets $264,259 $ 42,184 $ 2,656 $309,099
</TABLE>
18
<PAGE> 19
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/A for the
fiscal year ended June 30, 2000.
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
19
<PAGE> 20
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.
The loss for the three months ended September 30, 2000 was $4.1 million, or
$0.28 per diluted share as compared to net income of $1.9 million, or $0.13 per
diluted share for the three months ended September 30, 1999. The operating
results for the three months ended September 30, 2000 were negatively impacted
by negative operating margins in our Argentine operations due to the impact of
the economic recession in Argentina combined with significant increases in
service taxes on all medical services, relative increases in payroll due to
labor shortages and increased interest expense due additional interest and
waiver fees as stipulated in our current waiver agreement.
20
<PAGE> 21
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE
Total revenue decreased $13.0 million, or 9.2%, from $141.2 million for the
three months ended September 30, 1999 to $128.2 million for the three months
ended September 30, 2000. Ambulance services revenue decreased $15.2 million, or
13.0%, from $116.9 million for the three months ended September 30, 1999 to
$101.7 million for the three months ended September 30, 2000. Domestic ambulance
services revenue in areas served by us in both of the three-month periods ended
September 30, 2000 and 1999 decreased by $1.8 million, or 1.9%. The decreases in
those service areas were due to a greater focus on the quality of revenue and
the generation of more collectible transports. Approximately $9.4 million of the
decrease in revenue is attributable to the closure of certain underperforming
service areas that were closed in the fourth quarter of fiscal 2000.
Additionally there was a $2.2 million decrease in revenue derived from our
Canadian operations and $2.0 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 29,000, or 9.5%, from 306,000
for the three months ended September 30, 1999 to 277,000 for the three months
ended September 30, 2000 primarily due to decreases in those areas affected by
our restructuring program and a focus on the quality of revenue.
Fire protection services revenue increased by $2.7 million, or 20.6%, from $13.1
million for the three months ended September 30, 1999 to $15.7 million for the
three months ended September 30, 2000. Fire protection services revenue
increased due to new airport and industrial contracting activity of $1.1
million, forestry revenue increase of $0.7 million and rate and utilization
increases for fire protection services of $0.9 million.
Other revenue decreased $0.5 million, or 4.5%, from $11.2 million for the three
months ended September 30, 1999 to $10.8 million for the three months ended
September 30, 2000. The decrease was due to a $1.3 million decrease in
alternative transportation services due to our efforts to reduce transports in
certain areas and improve the quality of our revenue offset by a $1.0 million
increase in revenue related to our public/private alliance with the City of San
Diego.
OPERATING EXPENSES
Payroll and employee benefit expenses decreased $4.2 million, or 5.5%, from
$76.9 million for the three months ended September 30, 1999 to $72.6 million for
the three months ended September 30, 2000. Decreases in service areas that were
affected by closures as well as the reduction in corporate overhead totaled $5.3
million. The decrease was offset by increases in payroll and employee benefit
expenses in our remaining operations due to increases in payroll rates due to a
labor shortage. 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 54.4% of total revenue for
the three months ended September 30, 1999 to 56.6% of total revenue for the
three months ended September 30, 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 method of estimating 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
21
<PAGE> 22
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
method change during the second quarter of fiscal 2000. Under our method, we
have chosen to fully reserve our accounts receivable earlier in the collection
cycle than had previously been our practice. The new method 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. The provision for doubtful accounts, using the new method decreased $1.0
million, or 4.9% from $20.4 million for the three months ended September 30,
1999 to $19.4 million for the three months ended September 30, 2000. Provision
for doubtful accounts, using the new method increased from 14.5% of total
revenue for the three months ended September 30, 1999 to 15.1% of total revenue
for the three months ended September 30, 2000 and was 19.2% of domestic
ambulance service revenue for the three months ended September 30, 1999 and
20.3% of domestic ambulance service revenue for the three months ended September
30, 2000. During fiscal 2001, we have continued to increase our focus on revenue
of higher quality by reducing the amount of non-emergency ambulance transports
in selected service areas and have continued previously implemented initiatives
to maximize the collection of our accounts receivable. Net accounts receivable
on non-integrated collection systems currently represent 7.5% of total net
accounts receivable at September 30, 2000. We will continue to review the
benefits and timing of integrating our two non-integrated billing centers.
Depreciation decreased $0.5 million, or 8.1%, from $6.2 million for the three
months ended September 30, 1999 to $5.7 million for the three months ended
September 30, 2000. The decrease is primarily due to the disposal of certain
assets related to closed operations as well as a decrease in capital
expenditures during the current period. Depreciation was 4.4% and 4.5% of total
revenue for the three months ended September 30, 1999 and 2000, respectively.
Amortization of intangibles decreased $0.3 million, or 13.6%, from $2.2 million
for the three months ended September 30, 1999 to $1.9 million for the three
months ended September 30, 2000, primarily due to the write-off of goodwill
associated with the closure of underperforming operations in the third and
fourth quarters of fiscal 2000. Amortization of intangibles was 1.5% of total
revenue for both the three months ended September 30, 1999 and 2000,
respectively.
Other operating expenses decreased approximately $0.6 million, or 2.3%, from
$26.0 million for the three months ended September 30, 1999 to $25.4 million for
the three months ended September 30, 2000. The decrease is due to a decrease in
other operating expenses related to closed operations of approximately $1.5
million as well as decreases in existing operations due to the decrease in
transports offset by increases in insurance expenses of $2.6 million. Other
operating expenses increased from 18.4% of total revenue for the three months
ended September 30, 1999 to 19.8% of total revenue for the three months ended
September 30, 2000. The increased service utilization in our Argentine
operations also attributed to the increase in operating expenses as a percentage
of total revenue.
Interest expense increased $2.4 million from $5.4 million, or 44.4%, for the
three months ended September 30, 1999 to $7.9 million for the three months ended
September 30, 2000. This increase was caused by higher debt balances, fees and
additional interest incurred in conjunction with the waiver agreements and
higher interest rates than historically incurred.
22
<PAGE> 23
Our effective tax rate was 42.0% for the three months ended September 30, 1999
and 2.1% for the three months ended September 30, 2000. The decrease in the
effective tax rate is due to the impact of permanent differences, primarily
consisting of goodwill write-offs and amortization and a valuation allowance.
The permanent differences and the valuation allowance result in a reduction of
the tax benefits which could otherwise be available in a loss year, and thus a
reduction in the effective tax rate. A valuation allowance has been provided
because we believe that the realizability of the deferred tax asset does not
meet the more likely than not criteria under Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes."
The cumulative effect of a change in accounting principle resulted in a $541,000
charge (net of a tax benefit of $392,000) in the three months ended September
30, 1999 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 three months ended September 30, 2000, our cash flow used in
operating activities was $2.9 million, resulting primarily from an increase in
accounts receivable of $14.4 million, a decrease in accounts payable of $0.8
million, a decrease in accrued liabilities and other liabilities of $8.7 million
and a net loss of $4.1 million offset by depreciation and amortization of $7.6
million and provision for doubtful accounts of $19.4 million. Cash flow used in
operating activities was $2.6 million for the three months ended September 30,
1999.
Cash used in financing activities was $1.2 million for the three months ended
September 30, 2000, primarily due to repayments on the revolving credit facility
and on other debt and capital lease obligations. Cash provided by financing
activities was $8.0 million for the three months ended September 30, 1999.
Cash provided by investing activities was $1.1 million for the three months
ended September 30, 2000, primarily due to the proceeds from the sale of
property and equipment of $1.0 million. Cash used in investing activities was
$7.8 million for the three months ended September 30, 1999.
Our gross accounts receivable as of September 30, 2000 and June 30, 2000 was
$213.3 million and $231.7 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, was $139.0 million and $143.9 million as of
such dates, respectively. We believe that the decrease in gross accounts
receivable is due to many factors including collections on closed operations and
overall improvement in collections on existing operations.
The allowance for doubtful accounts decreased from $87.8 million at June 30,
2000 to $74.3 million at September 30, 2000. The primary reason for this
decrease is the write-off of uncollectible receivables offset by the current
period provision for doubtful accounts. Because of continuing difficulties in
the healthcare reimbursement environment, during fiscal 2001, 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
23
<PAGE> 24
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 method during the
second quarter of fiscal 2000. We concluded that, despite our efforts to improve
the quality of our revenue, the speed of payments from certain payors within our
accounts receivable mix was not increasing. Because of this, we determined that
it was prudent to change our method to fully reserve accounts receivable within
certain payor classes earlier in the collection cycle than had previously been
done. The new method 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 method change, management believes that we have a
more predictable method of determining the realizable value of our accounts
receivable.
We have a $200 million revolving credit facility that matures March 16, 2003.
The credit facility is unsecured and is unconditionally guaranteed on a joint
and several basis by substantially all of our domestic wholly owned current and
future subsidiaries. Interest rates and availability under the 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.
Our $200 million revolving credit facility was priced at (a) the Base Rate (i.e.
the greater of (i) the prime rate (ii) the Federal Funds rate, .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 become priced at prime rate plus 0.25 percentage points. At September
30, 2000, the weighted average interest rate on the revolving credit facility
was 9.75%. Approximately $146.3 million was outstanding on the revolving credit
facility at September 30, 2000. We have received a compliance waiver (as
amended) regarding the financial covenants contained in our revolving credit
facility, which covers the periods from December 31, 1999 through January 31,
2001. The waiver (as amended) 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 (as amended) stipulates that no
additional borrowings will be available to us through the end of the waiver
period in January 2001. In addition, the waiver (as amended) requires us: (i) to
engage certain financial advisors, (ii) to meet certain benchmarks for projected
cash balances and expenditures, (iii) maintain positive consolidated operating
income, net of restructuring charges, and (iv) 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. There is no assurance that we are in compliance with all of the
technical conditions of the waiver.
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 covered by the waiver (as amended), 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.
At November 10, 2000 the outstanding balance on the revolving credit facility
was $146.2 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 January 31, 2001. 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 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 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 September 30, 2000 in the accompanying
financial statements in accordance with Statement of Financial Accounting
Standards No. 78 "Classification of Obligations that are Callable by the
Creditor".
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Our inability to successfully negotiate an amendment of the revolving credit
facility could have a material adverse effect on our financial condition.
The senior notes and the credit facility have been reclassified as a current
liability under accounting rules relating to debt that is callable by the
creditor since we are operating under a waiver under the credit facility. This,
in addition to significant operating losses incurred in fiscal 2000, has
resulted in our independent accountants modifying their fiscal year end audit
report to include a statement that these uncertainties create substantial doubt
about our ability to continue as a going concern. The existence of a going
concern statement may make it more difficult to pursue additional capital
through public or private debt or equity financings. Our inability to
successfully negotiate an amendment to our revolving credit facility could have
a material adverse effect on our ability to continue as a going concern.
Because of the classification of entire outstanding balance under the revolving
credit facility as a current liability at September 30, 2000, we had negative
working capital of $188.9 million, including cash of $7.4 million, compared to
negative working capital of $192.5 million, including cash of $10.3 million, at
June 30, 2000.
In February 1998, we entered into a $5.0 million capital equipment lease line of
credit. The lease line of credit matures at varying dates through July 2003. The
lease line of credit is priced at the higher of LIBOR plus 1.7% or the
commercial paper rate plus 1.7%. At September 30, 2000 the weighted average
interest rate was 11.2% on the lease line of credit. Approximately $1.4 million
was outstanding on this line of credit at September 30, 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 September 30, 2000 was $193,000 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
September 30, 2000. We expect that cash flow from operations and our existing
cash reserves will be sufficient to meet our regularly scheduled debt service
and our operating capital needs for operations for the 12 months subsequent to
September 30, 2000. Through our restructuring program we have closed or
downsized several locations that were negatively impacting our cash flow. In
addition, we have significantly reduced our corporate overhead. We have improved
the quality of revenue and have experienced an upward trend in daily cash
collections. We are actively working with our lenders in order to obtain a
long-term amendment to the credit facility. We believe that our current business
model and strategy will generate sufficient cash flow to provide a basis for a
new long-term agreement with our current lenders or to restructure the debt
through public or private debt or equity financings. The availability of these
financing alternatives will depend upon prevailing market
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conditions, interest rates, our financial condition, covenants in our debt
agreements, 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.
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.
The proposed Medicare ambulance fee schedule and rule was published September
12, 2000 in the Federal Register, to be followed by a 60-day comment period. The
proposed rules have not been finalized. If implemented, these rules could result
in contract renegotiations or other action by us to offset any negative impact
of the proposed change in reimbursement policies that could have a material
adverse effect. The final outcome of the proposed rules and the effect of the
prospective fee schedule is uncertain. However, changes in reimbursement
policies, or other government action, together with the financial instability of
private third-party payors and budget pressures on payor sources could influence
the timing and, potentially, the ultimate receipt of payments and
reimbursements. A reduction in coverage or reimbursement rates by third party
payors, or an increase in our cost structure relative to the rate increase in
the CPI, could have a material adverse effect on our business, financial
condition, cash flows and results of operations.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Our results of operations for the periods discussed have not been affected
significantly by inflation or foreign currency fluctuations. Our revenue from
international operations is denominated primarily in the currency of the country
in which it is operating. At September 30, 2000 our balance sheet reflects a
$251,000 cumulative equity adjustment (decrease) from foreign currency
translation. 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, if we choose 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.
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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/A for the fiscal year ended June 30,
2000 regarding these legal proceedings instituted during the quarter ended
September 30, 1998.
ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.58 Press release dated October 18, 2000
announcing extension of waiver.
10.59 Third Amendment to Provisional Waiver
and Standstill Agreement dated
as of October 16, 2000
27 Financial Data Schedules
(b) Reports on Form 8-K
Form 8-K filed July 28, 2000 relating to Press
Release dated July 17, 2000 and the Second
Amendment to Provisional Waiver and Standstill
Agreement dated as of July 14, 2000.
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Date: November 14, 2000 By /s/ Jack E. Brucker
----------------------
Jack E. Brucker, President
& Chief Executive Officer
By /s/ Randall L. Harmsen
------------------------
Randall L. Harmsen, Vice
President of Finance and
Principal Accounting Officer
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description
----------- -----------
10.58 Press release dated October 18, 2000
announcing extension of waiver.
10.59 Third Amendment to Provisional Waiver and
Standstill Agreement dated as of October 16, 2000
27 Financial Data Schedule
</TABLE>
