<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-22056
RURAL/METRO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0746929
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
8401 EAST INDIAN SCHOOL ROAD, SCOTTSDALE, ARIZONA 85251
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (480) 994-3886
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AS OF OCTOBER 25, 2000 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE AVERAGE SALES
PRICE OF SUCH STOCK AS OF SUCH DATE ON THE NASDAQ SMALLCAP MARKET, WAS
$22,862,292. SHARES OF COMMON STOCK HELD BY EACH OFFICER AND DIRECTOR AND BY
EACH PERSON WHO OWNED 5% OR MORE OF THE OUTSTANDING COMMON STOCK HAVE BEEN
EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS DETERMINATION
OF AFFILIATE STATUS IS NOT NECESSARILY CONCLUSIVE.
As of October 25, 2000, there were 14,626,336 shares of the registrant's
Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS.......... 2
PART I
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 27
ITEM 3. LEGAL PROCEEDINGS........................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 79
ITEM 11. EXECUTIVE COMPENSATION...................................... 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 91
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 93
SIGNATURES.............................................................. 97
</TABLE>
i
<PAGE> 3
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Forward Looking Statements. Statements in this Report that are not
historical facts are hereby identified as "forward looking statements" as that
term is used under the securities laws. We caution readers that such "forward
looking statements," including those relating to our future business prospects,
the value of our common stock, revenue, working capital, accounts receivable
collection, liquidity, cash flow, and capital needs, wherever they appear in
this Report or in other statements attributable to us, are necessarily estimates
reflecting the best judgment of our senior management and involve a number of
risks and uncertainties that could cause actual results to differ materially
from those suggested by the "forward looking statements." You should consider
such "forward looking statements" in light of various important factors,
including those set forth below and others set forth from time to time in our
reports and registration statements filed with the Securities and Exchange
Commission.
These "forward looking statements" are found at various places throughout
this Report. Additionally, the discussions herein under the captions "Business
-- Strategy", "Business -- Management Systems", "Business -- Billings and
Collections", "Business -- Governmental Regulation",
"Business -- Reimbursement", "Legal Proceedings", and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" are susceptible
to the risks and uncertainties discussed below and under the caption
"Business -- Risk Factors." Moreover, we may from time to time make "forward
looking statements" about matters described herein or other matters concerning
us. We disclaim any intent or obligation to update "forward looking statements."
Factors That May Affect Future Results. The health care industry in
general and the ambulance industry in particular are in a state of significant
change. This makes us susceptible to various factors that may affect future
results such as the following: no assurance of successful integration and
operation of acquired service providers; growth strategy and difficulty in
maintaining growth; risks of leverage; revenue mix; dependence on certain
business relationships; risks related to intangible assets; dependence on
government and third-party payors; risks related to fee-for-service contracts;
possible adverse changes in reimbursement rates; impact of rate structures;
possible negative effects of prospective health care reform; high utilization of
services by customers under capitated service arrangements; competitive market
forces; fluctuation in quarterly results; volatility of stock price; dependence
on key personnel; and anti-takeover effect of certain of our charter provisions.
For a more detailed discussion of these factors and their potential impact
on future results, see the applicable discussions herein.
All references to "we," "our," "us," or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions, and direct and indirect
subsidiaries.
2
<PAGE> 4
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a leading provider of health and safety services, which include
"911" emergency ambulance and general medical transport services, fire
protection services, and other safety and health care related services, to
municipal, residential, commercial, and industrial customers. We believe that we
are the only multi-state provider of both ambulance and fire protection services
in the United States and that we rank as one of the largest private-sector
providers of ambulance and fire protection services in the world. We currently
serve over 400 communities in 25 states, the District of Columbia, and Latin
America. Ambulance services and fire protection services accounted for
approximately 82% and 10%, respectively, of our revenue for the fiscal year
ended June 30, 2000, and 83% and 9%, respectively, of our revenue for the fiscal
year ended June 30, 1999.
Founded in 1948, we have been instrumental in the development of protocols
and policies applicable to the emergency services industry. We have grown
significantly since the late 1970s both through internal growth and through
acquisitions. To manage this growth, we invested in the development of
management and operational systems that have resulted in productivity gains and
increased profitability. We believe our business competencies in communications
and logistics management position us to continue our growth internally as well
as through business alliances, select acquisitions, and joint ventures and
enable us to operate successfully in both large and small communities. Our
current focus is on building economies of scale and strengthening our existing
business. This includes (i) operational restructuring through the closure or
downsizing of financially non-performing operations, (ii) origination of new
contracts in established service areas, and (iii) highly selective growth
through acquisitions or strategic alliances.
We incurred a net loss of $101.3 million for the year ended June 30, 2000
and are currently operating under a waiver of financial covenant compliance
under our revolving credit facility. The loss primarily relates to our
restructuring program aimed at closing or downsizing certain underperforming
non-emergency service areas, the reduction of corporate overhead, and an
additional provision for doubtful accounts due to the continuing difficulties
experienced in the healthcare reimbursement environment. As a result of such
restructuring, we believe that our existing cash reserves and operating cash
flow will provide sufficient cash for our operations, capital expenditures, and
regularly scheduled debt service payments through fiscal 2001. We are actively
working with the lenders in order to obtain a long-term amendment to the credit
facility. We believe 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 conditions, interest rates, covenants associated with our
senior notes, and the market price of our common stock.
For a discussion of certain risks associated with our business, including
potential limitations on the future growth of our business, see "Risk Factors"
contained in Item 1 of this Report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Report.
INDUSTRY OVERVIEW
Based on generally available industry data, it is estimated that annual
expenditures for ambulance services in the United States are between $4 billion
and $7 billion. Public-sector entities, private companies, hospitals, and
volunteer organizations provide ambulance services. Public-sector entities often
serve as the first responder to requests for such emergency ambulance services
and often provide emergency ambulance transport. When the public sector serves
as first responder, private companies often serve as the second responder and
support the first responder as needed. The private sector provides the majority
of general transport services. It is estimated that the ambulance service
industry includes more than 10,000 providers of service, 2,000 or more of which
are private and approximately 1,000 of which are hospital-owned. Most commercial
providers are small companies serving one or a limited number of markets.
Several multi-state
3
<PAGE> 5
providers, including us, have emerged through the acquisition and consolidation
of smaller ambulance service providers in recent years.
The growth in ambulance service expenditures in the United States has
resulted from both an increase in the number of transports and an increase in
the average expenditures per transport. The growth and aging of the population,
the greater use of outpatient care facilities and home care in response to
health care cost containment efforts, and increased patient travel between
specialized treatment health care facilities have increased the demand for
emergency medical services and general transport services. The increased
availability of "911" emergency service, the impact of educational programs on
its use, and the practice of some members of the population of utilizing a
hospital's emergency room as the source of their primary medical care also have
increased the number of ambulance transports. Industry considerations require
ambulance service providers to acquire more sophisticated emergency medical,
dispatch, and communications equipment, hire more highly trained personnel, and
develop more sophisticated dispatch and management systems to satisfy the faster
response time and higher quality of medical care assurance criteria required by
municipalities and fire districts for emergency ambulance services. Average
expenditures per ambulance transport have increased as a result of the
additional costs to meet these requirements.
Market reform continues to reshape the health care delivery system, with a
shift from fee-for-service relationships to managed care organizations. Managed
care organizations are focusing on cost containment measures while seeking to
provide the most appropriate level of service at the most appropriate treatment
facility. While ambulances typically transport patients to the nearest treatment
facility or to the facility designated by the applicable medical protocol,
managed care organizations are attempting to manage hospital utilization by
working with ambulance service providers to ensure transport of patients to
affiliated facilities and avoid unnecessary inter-facility transports. For
non-life threatening medical emergencies, managed care providers are beginning
to explore programs that encourage plan members to call the provider. Under this
program, a nurse answers the call, analyzes the medical situation, and
determines the best course of action and mode of transport. In an emergency
situation, an advanced life support ambulance will generally be dispatched. In
certain cases, patients could receive the required treatment level with a less
costly basic life support ambulance or other transportation alternative. In
Latin America, the current business model utilizes mobile health care, call
centers, telephone triage, urgent and primary care clinics, and house calls by
physicians and nurses. To coordinate these programs, the managed care
organization must contract with an ambulance service provider that has the mix
of vehicles and geographic scope to cover the entire region served by the
managed care provider and that can provide call center services.
We believe the trend toward managed care benefits larger ambulance service
providers, which can service a larger portion of a managed care organization's
needs. This allows the managed care provider to reduce its number of suppliers,
cutting administrative costs and allowing it to negotiate more favorable rates.
Based on our experience, we believe that our ambulance and fire protection
services are complementary. Municipal fire departments, tax-supported fire
districts, and volunteer fire departments constitute the principal providers of
fire protection services in the United States. In most of the communities served
by municipal fire departments and tax-supported fire districts, the fire
department is the first to respond to a call for emergency medical services.
Approximately 27,000 volunteer fire departments, covering approximately 40% of
the United States population, operate throughout the United States. Volunteer
fire departments range from departments consisting entirely of volunteer
personnel to departments that utilize one or more paid personnel located at each
station supplemented by volunteers who proceed directly to the fire scene. In
addition to providing fire protection services to municipalities and
tax-supported fire districts, the private sector also provides fire protection
services to industrial complexes, including airports, large industrial and
petrochemical plants, power plants, and other large self-contained facilities.
STRATEGY
Our strategy is to leverage our experience and competencies in
communications and logistics management to enhance our position as a leading
provider of health and safety services in the United States and in other
countries. Key elements of this strategy include originating new contracts with
health care providers and
4
<PAGE> 6
municipalities in established service areas, highly selective targeting of
potential acquisitions, and developing strategic alliances. Having established a
regional presence in many geographic locations, we currently are focusing on
increased and selective marketing efforts in these areas to serve the health and
safety needs of the public and private sector, including services for health
care providers, expansion of fire protection and community safety services,
integration of health and safety operations, public/private partnering, and
outsourcing of other health and safety related services. We seek to improve
productivity, expand service offerings to customers, and attract new customers
through business alliances, joint ventures, or other cooperative business
arrangements, both domestically and internationally.
Expansion of Services to Meet the Evolving Needs of the Public Sector and
Health Care Providers
We plan to expand our general transport services through marketing efforts
to hospitals, health maintenance organizations, and other health care providers
and our emergency ambulance services through the pursuit of new contracts and
alliances with municipalities and fire districts. Based on our public/private
alliance with San Diego Fire & Life Safety Services, our ambulance service
contract in Aurora, Colorado, and our contracts with numerous Arizona
municipalities, we believe that, in certain circumstances, contracting and
partnering may provide a cost-effective approach to expanding into certain
service areas. We will continue to seek mutually beneficial public/private
alliances and municipal contracts. We intend to respond to the needs of health
care and managed care providers by delivering high-quality, efficient, and
cost-effective services and by transporting patients to the most appropriate
treatment facility, particularly in those geographic areas in which we have been
able to achieve market leadership. We believe that our communications and
logistics skills will allow us to offer services that will improve the
responsiveness and cost-effectiveness of health care services in a managed care
environment. We expect to pursue alliances with health care providers through
the establishment of service contracts, through the development of business
relationships, and through selective, strategic acquisitions of health care and
safety-related providers, which would provide opportunities for us to integrate
our services with such other service providers.
In Latin America our business utilizes mobile health care services, call
centers, telephone triage, and house calls by physicians and nurses. We intend
to expand this business model in Latin America by marketing these services
directly to individuals and large employers in government and private industry.
Expansion and Integration of Health and Safety Services
We plan to continue our efforts to offer our community safety services by
providing fire protection and other safety-related services. We emphasize the
benefits of our services in terms of lower per capita fire service costs,
reduced insurance rates, and lower loss of life and property resulting from our
experience, fire prevention initiatives, management and operational systems, and
utilization of full-time fire fighters and part-time reservists. We respond to
the economic pressures on the public sector to reduce taxes and expenditures for
emergency services, including fire protection and other safety-related services,
by establishing public/private alliances with fire districts and municipalities.
We are also pursuing opportunities to provide fire protection and safety
services to large industrial complexes, including airports, industrial and
petrochemical plants, power plants, and other large self-contained facilities.
We currently offer other safety-related services on a very limited basis,
including our personal emergency response systems. We plan to continue to
leverage our communications and logistics skills to develop and offer
safety-related services. We also intend to leverage our sophisticated systems
and substantial experience with third-party payors to provide fire districts and
municipalities with business services, such as billing and collection services.
Because emergency medical response represents a significant portion of fire
response activity within many fire departments, we believe that our ambulance
and fire protection services operations are complementary. Building upon our
successful delivery of integrated ambulance and fire services under our
contracts with the City of Scottsdale, Arizona, and with Knox County, Tennessee,
and through our public/private alliance with San Diego Fire & Life Safety
Services, we plan to continue the integration of our fire and ambulance services
in certain of our service areas and to pursue opportunities to provide
integrated services in new geographic areas. We believe that our integration of
health and safety services can provide operating economies,
5
<PAGE> 7
coordination of the delivery of services, efficiencies in the use of personnel
and equipment, and enhanced levels of service, especially in lower-utilization
communities.
Acquisition of Ambulance Service Providers
Our acquisition program focuses on very selective targeted strategic
acquisitions. We evaluate proposed acquisitions on the potential to increase
operating margins and returns on investment and our ability to establish a
strong strategic local relationship. We believe that the fragmented nature of
the industry, combined with the lack of capital and limited management systems
that characterize many providers, provides us with the opportunity to acquire
additional ambulance service providers, including hospital-owned providers, that
would benefit from our management and operational systems, resulting in
productivity gains and enhanced levels of service. Our ability to complete
acquisitions depends upon the availability of cash from operations or additional
debt or equity financing, our capitalization, and the market price of our common
stock. A continuation of the depressed market price of our common stock has
resulted and may continue to result in a slower pace of acquisitions in the
future. See "Risk Factors -- We have significant indebtedness," "-- We face
risks associated with our prior rapid growth, integration, and acquisitions,"
and "-- The market price of our common stock may be volatile" contained in Item
1 of this Report.
Productivity Improvement and Enhancement
We continue to strengthen our existing infrastructure. We utilize our
management and operational systems to enhance productivity and profitability in
our existing operations and in acquired operations and to enhance our
opportunities with joint venture and business alliance partners. The
standardization of certain functions and the centralization of certain key
management and operating systems development permit us to achieve economies of
scale at both the regional and corporate levels. We believe that establishing
market leadership in our various service areas enables us to more efficiently
utilize our equipment and personnel, to better serve large regional health care
providers, and to more effectively market our services and improve our
productivity. See "Risk Factors -- We face risks associated with our prior rapid
growth, integration, and acquisitions" contained in Item 1 of this Report.
Entrance into International Markets
We have capitalized on the growth opportunities created by the
privatization of health and safety services in markets such as Argentina and the
expansion of health insurance companies and health maintenance organizations
into Latin America. We believe select Latin America markets, including the
nations of the MERCOSUR, represent a growth opportunity and provide a model for
a capitated health care environment encompassing both ambulance transport and
mobile health care utilizing call centers, telephone triage, and house calls by
physicians and nurses. We evaluate opportunities to enter into international
markets through alliances based on factors such as the economic and political
climate, the availability of capital, our ability to establish a strong
strategic local relationship and a solid corporate infrastructure of systems and
management talent, the potential to increase operating margins and returns on
capital, and the opportunity to offer value-added services that broaden our
participation in the health care market. See "Risk Factors -- We face risks
associated with our prior rapid growth, integration, and acquisitions," and
"-- We face additional risks associated with our international operations"
contained in Item 1 of this Report.
6
<PAGE> 8
CURRENT SERVICE AREAS
We provide our services in more than 400 communities in the following 25
states, the District of Columbia, and Latin America:
<TABLE>
<S> <C> <C>
Alabama Kentucky Oregon
Arizona Louisiana Pennsylvania
California Maryland South Carolina
Colorado Mississippi South Dakota
Florida Nebraska Tennessee
Georgia New Jersey Texas
Indiana New York Virginia
Iowa Ohio Washington
Wisconsin
</TABLE>
We provide ambulance services in these states and the District of Columbia
primarily under the names Rural/Metro Ambulance and Rural/Metro Medical Services
and in certain areas of Arizona under the name Southwest Ambulance. In Latin
America, we provide urgent home medical care and ambulance transport services
under the name Emergencias Cardio Coronarias ("ECCO") and provide urgent and
primary care services in clinics under the name GEA. We may operate under other
names depending upon local statutes or contractual agreements. We generally
provide our ambulance services pursuant to a contract or certificate of
necessity on an exclusive or nonexclusive basis. We provide "911" emergency
ambulance services primarily pursuant to contracts or as a result of providing
fire protection services.
In certain service areas, we are the only provider of both emergency
ambulance and general transport services. In other service areas, we compete for
general transport services. In all service areas, we respond to "911" emergency
calls if requested by a municipality or fire district, even in the absence of a
contract.
We provide fire protection services under the name Rural/Metro Fire
Department in 10 states and in Latin America.
AMBULANCE TRANSPORT SERVICES AND URGENT HOME MEDICAL CARE
Emergency Medical Services
We generally provide emergency medical ambulance services pursuant to
contracts with counties, fire districts, and municipalities. These contracts
typically appoint us as the exclusive provider of "911" emergency ambulance
services in designated service areas and require us to respond to every "911"
emergency medical call in those areas. We respond to virtually all "911" calls
with advanced life support ("ALS") ambulance units. We staff our ALS ambulance
units with two paramedics or one paramedic and an emergency medical technician
("EMT") and equip these units with ALS equipment (such as cardiac monitors,
defibrillators, and oxygen delivery systems) as well as pharmaceuticals and
medical supplies.
Upon arrival at an emergency, the ALS crew members deploy portable life
support equipment, ascertain the patient's medical condition, and, if required,
begin life support techniques and procedures that may include airway intubation,
cardiac monitoring, defibrillation of cardiac arrhythmias, and the
administration of medications and intravenous solutions. The crew also may
perform basic life support ("BLS") services, which include basic airway
management, hemorrhage control, stabilization of fractures, emergency
childbirth, and basic vehicle extrication. As soon as medically appropriate, the
patient is placed on a portable gurney and carried into the ambulance. While a
paramedic monitors and treats the patient, the other crew member drives the
ambulance to a hospital designated either by the patient or the applicable
medical protocol. En route, the ALS crew alerts the hospital regarding the
patient's medical condition, and if necessary, the attending paramedic seeks
advice from a hospital emergency room physician as to treatment. Upon arrival at
the hospital, the patient generally is taken to the emergency room.
7
<PAGE> 9
General Medical Transport Services
We also provide ambulance services to patients requiring either advanced or
basic levels of medical supervision during transfer to and from residences and
health care facilities. These services may be provided when a home-bound patient
requires examination or treatment at a health care facility or when a hospital
inpatient requires tests or treatments (such as MRI testing, CAT scans,
dialysis, or chemotherapy treatment) available at another facility. We utilize
ALS or BLS ambulance units to provide general ambulance services depending on
the patient's needs and the proximity of available units. We staff our BLS
ambulance units with two EMTs and equip these units with medical supplies and
equipment necessary to administer first aid and basic medical treatment.
We also provide critical care transport services to medically unstable
patients (such as cardiac patients and neonatal patients) who require critical
care while being transported between health care facilities. Critical care
services differ from ALS services in that the ambulance may be equipped with
additional medical equipment and may be staffed by a medical specialist provided
by us or by a health care facility to attend to a patient's special medical
needs.
In addition to ambulance services, we provide non-medical transportation
for the handicapped and certain non-ambulatory persons in some service areas.
Such transportation generally takes place between residences or nursing homes
and hospitals or other health care facilities. In providing this service, we
utilize vans that contain hydraulic wheelchair lifts or ramps operated by
drivers who generally are trained in cardiopulmonary resuscitation ("CPR").
We provide ambulance services, critical care transports, and nonmedical
transportation services pursuant to contracts with governmental agencies, health
care facilities, or at the request of a patient. Such services may be scheduled
in advance or provided on an as needed basis. Contracts with managed care
organizations provide for reimbursement on a per transport basis or on a
capitated basis under which we receive a fixed fee per person per month.
Urgent Home Medical Care and Urgent and Primary Care in Clinics
In Argentina, we have approximately 650,000 individual and business
customers that prepay monthly for urgent home medical care and ambulance
services under a capitated service arrangement. Personnel conduct telephone
triage and prioritize the dispatch of services to subscribers. Mobile services
may include the dispatch of physicians to the patient in an ambulance for
serious life threatening situations, or more frequently, in the physician's car,
thus covering a wider scope of service than the traditional U.S. ambulance
service model. In Cordoba, Argentina, we also have approximately 60,000
individual and business customers that pay monthly for urgent and primary care
services in three clinics under a capitated service arrangement.
In Argentina, doctors and nurses perform urgent and primary care services
for our business customers. Argentine doctors are trained in medicine and are
licensed as such in Argentina at both the national and, in certain localities,
the local level. There are no continuing education requirements. Generally,
nurses are trained over periods ranging from six months to four years after high
school in accordance with local programs. Accordingly, as each nurse receives
additional training, his or her scope of practice increases.
Medical Personnel and Quality Assurance
Paramedics and EMTs must be state certified in order to transport patients
and to perform emergency care services. Certification as an EMT requires
completion of a minimum of 164 hours of training in a program designated by the
United States Department of Transportation and supervised by state authorities.
EMTs also may complete advanced training courses to become certified to provide
certain additional emergency care services, such as administration of
intravenous fluids and advanced airway management. In addition to completion of
the EMT training program, the certification as a paramedic requires the
completion of more than 800 hours of training in advanced patient care
assessment, pharmacology, cardiology, and clinical and field skills. Many of the
paramedics currently employed by us served as EMTs for us prior to their
certification as paramedics.
8
<PAGE> 10
Local physician advisory boards develop medical protocols to be followed by
paramedics and EMTs in a service area. In addition, instructions are conveyed on
a case-by-case basis through direct communications between the ambulance crew
and hospital emergency room physicians during the administration of advanced
life support procedures. Both paramedics and EMTs must complete continuing
education programs and, in some cases, state supervised refresher training
examinations to maintain their certifications. Certification and continuing
education requirements for paramedics and EMTs vary among states and counties.
We maintain a commitment to provide high quality pre-hospital emergency
medical care. In each location in which we provide services, a medical director,
who usually is a physician associated with a hospital we serve, monitors
adherence to medical protocol and conducts periodic audits of the care provided.
In addition, we hold retrospective care audits with our employees to evaluate
compliance with medical and performance standards.
We were one of the first ambulance service providers to obtain
accreditation for many of our larger ambulance operations from the Commission on
Accreditation of Ambulance Services, a joint program between the American
Ambulance Association and the American College of Emergency Physicians. The
process is voluntary and evaluates numerous qualitative factors in the delivery
of services. We believe municipalities and managed care providers will consider
accreditation as one of the criteria in awarding contracts in the future.
FIRE PROTECTION SERVICES
Fire protection services consist primarily of fire prevention and fire
suppression. Other fire protection related activities include hazardous material
containment, underwater search and recovery, mountain and confined space rescue,
and public education. We provide various levels of fire protection services,
ranging from fire stations that are fully staffed 24 hours per day to reserve
stations. We generally provide our services to municipalities and other
governmental bodies pursuant to master contracts and to residences, commercial
establishments, and industrial complexes pursuant to subscription fee and other
fee-for-service arrangements. Federal and state governments contract with us
from time to time to suppress forest fires or wildfires on government lands.
We have placed fire prevention and education in the forefront of our fire
protection services and have developed a comprehensive program to prevent and
minimize fires rather than emphasizing a standing army to respond to fires that
occur. We believe that effective fire protection requires the intensive training
of personnel, the effective utilization of fire equipment, the establishment of
effective communication centers for the receipt of emergency calls and the
dispatch of equipment and personnel, the establishment and enforcement of strict
fire codes, and community educational efforts. We believe that we provide fire
protection services at a cost significantly lower than the national average as a
result of our emphasis on fire prevention, our advanced systems, and our use of
a combination of full-time fire fighters and part-time reservists. Based upon
generally available industry data, we believe that fire loss per capita in the
areas we service has been substantially less than the national average.
Fire Protection Personnel
Our ability to provide our fire protection services at relatively low costs
results from our efficient use of personnel in addition to our fire prevention
efforts. Typically, personnel costs represent more than two-thirds of the cost
of providing fire protection services. We have been able to reduce our labor
costs through a system that utilizes full-time firefighters complemented by paid
part-time reservists as well as a modified every other day shift schedule. By
using trained reservists on an as needed basis, we have the ability to
supplement full-time fire fighters on a cost-effective basis.
All full-time and reservist firefighters undergo extensive training, which
exceeds the standards recommended by the National Fire Protection Association
("NFPA"), and must qualify for state certification before being eligible for
full-time employment by us. Because approximately 70% to 80% of our fire
response activity consists of emergency medical response, all of our
firefighters are trained EMTs and an increasing
9
<PAGE> 11
number of our firefighters are paramedics. Ongoing training includes instruction
in new fire service tactics and fire fighting techniques as well as continual
physical conditioning.
Fire Response
An alarm typically results in the dispatch of one or more engine companies
(each of which consists of an engine and two to four firefighters, including a
captain), a fire chief, and such other equipment as circumstances warrant. The
amount of equipment and personnel depends upon the type, location, and severity
of the incident. We utilize our dispatch capabilities to reposition equipment
and firefighters to maximize the availability and use of resources in a
cost-effective manner.
Fire Prevention
We believe that fire prevention programs result in both lower fire loss and
significant overall cost savings. Our fire prevention programs include advice
and recommendations for and the encouragement of various fire prevention
methods, including fire code design, building design to inhibit the spread of
fire, the design of automatic fire suppression sprinklers, fire detector and
smoke detector installations, the design of monitoring and alarm systems, the
placement and inspection of fire hydrants, fire code inspection and enforcement,
and the determination of fire cause and origin in arson suspected fires. In
addition, our personnel perform community education programs designed to reduce
the risk of fire and increase our community profile.
We believe that our long-standing public/private relationship with the City
of Scottsdale provides an example of an effective, cost-efficient fire
protection program. The Scottsdale program emphasizes our philosophy of fire
prevention. With our cooperation and assistance, the City of Scottsdale has
designed comprehensive fire prevention measures, including fire codes,
inspections, and sprinkler and smoke detector ordinances. We believe that as a
result of strict fire codes, the enactment of a sprinkler ordinance, and the
effectiveness of the services we provide, Scottsdale's per capita cost for fire
protection is 40% lower than the national average and that its per capita fire
loss is approximately one-third of the national average.
INDUSTRIAL FIRE PROTECTION SERVICES
We provide fire protection services and, on a limited basis, unarmed
security services to large industrial complexes, such as airports, large
industrial and petrochemical plants, power plants, and other self-contained
facilities. The combination of fire protection services with security services
in large industrial complexes has the potential to provide for greater
efficiency and utilization in the delivery of such services and to result in
reduced cost to our industrial customers for such services. We have contracts
ranging up to five years in duration and expiring at various dates up to October
1, 2005 to provide crash/rescue firefighting and hazardous materials response
services at locations in several states and at three airports in Bolivia. We
intend to pursue similar contracts domestically and internationally.
FIRE TRAINING SERVICES AND PROTECTION SERVICES
We have instituted industrial fire training services and provide
sophisticated training for industrial, professional, and specialized
firefighters using live burn training to simulate realistic firefighting
situations. We also provide shipboard fire training services to several cruise
lines from our training site in St. Thomas, Virgin Islands. The training permits
fire brigade, ship crew members, and emergency response teams to meet increased
federal training requirements, the Occupational Safety and Health Act ("OSHA")
requirements, and other regulatory requirements for work place safety and
on-site response teams.
We utilize certain of our communications centers for personal medical
emergency response systems monitoring to complement our regional emergency
services. We believe protection services can be integrated with fire protection
and ambulance services for optimal efficiency and maximum cost effectiveness.
10
<PAGE> 12
MANAGEMENT SYSTEMS
We utilize sophisticated management systems, which we believe enhance the
productivity and profitability of our existing operations and enable us to
enhance the productivity and profitability of acquired operations. These systems
permit us to achieve economies of scale at the local operational level through
the proper utilization of personnel and equipment and at the corporate level
through centralized systems for billings, collections, purchasing, accounting,
cash management, human resources, and risk management.
We have developed measurement systems that permit management to monitor the
performance level of each operation on a continual basis. Our centralized
management and information systems permit managers to direct their attention
primarily to operations. The systems include centralized billings and
collections procedures that provide for more efficient tracking and collection
of accounts receivable. Centralized purchasing permits us to achieve discounts
in the purchase of equipment and supplies through a company-developed catalogue
from which managers select items needed for their operations.
We believe our investment in management systems and our effective use of
these systems represent key components in our success. Our financial reporting
system facilitates our successful integration of acquired companies. We place a
high priority on evaluating the management and reporting systems of acquired
operations and subsequently integrating or transitioning these systems to
improve operating efficiencies. Upon completion of an acquisition, we establish
critical success factors, including number of transports, ratio of transports to
calls, resource utilization, and pricing statistics, which are monitored daily.
We focus on converting acquired businesses onto our technology to promote
consistent and timely reporting, taking over cash management functions, and
integrating acquired businesses into our LAN/WAN communications infrastructure.
We are committed to an ongoing enhancement of our systems to provide productive,
timely information and effective controls and believe that our management
systems have the capability to support sustained long-term growth. For
additional information regarding our ability to successfully integrate acquired
companies into our existing management systems, see "Risk Factors -- We face
risks associated with our prior rapid growth, integration, and acquisitions"
contained in Item 1 of this Report.
HUMAN RESOURCES
We strive to maximize operational autonomy of our managers. Managers
receive extensive training in the use of management systems, customer service,
and supervisory practices. Our human resources division is involved in the
training and integration of managers from acquired operations. Our centralized
human resources division increases our ability to assign the most appropriate
personnel for a position within any given operation and to reassign personnel as
necessary to meet operational needs. The human resources department participates
in training, career development, and succession planning of employees and
assesses our personnel needs.
DISPATCH AND COMMUNICATIONS
We use system status plans and flexible deployment systems to position our
ambulances within a designated service area because effective fleet deployment
represents a key factor in reducing response time and increasing efficient use
of resources. In certain service areas with a large volume of calls, we analyze
data on traffic patterns, demographics, usage frequency, and similar factors
with the aid of computers to help us determine optimal ambulance deployment and
selection. The center that controls the deployment and dispatch of ambulances in
response to calls for ambulance service may be owned and operated either by the
applicable county or municipality or by us. Each control center utilizes
computer hardware and software and sophisticated communications equipment and
maintains responsibility for fleet deployment and utilization 24 hours a day,
seven days a week.
Depending on the emergency medical dispatch system used in a designated
service area, the public authority that receives "911" emergency medical calls
either dispatches our ambulances directly from the public control center or
communicates information regarding the location and type of medical emergency to
our control center, which in turn dispatches ambulances to the scene. In most
service areas, our control center receives the calls from the police after the
police have determined the call is for emergency medical services.
11
<PAGE> 13
When we receive the "911" call, we dispatch one or more ambulances directly from
our control center while the call taker communicates with the caller. All call
takers and dispatchers are trained EMTs with additional training that enables
them to instruct a caller about applicable pre-arrival emergency medical
procedures, if necessary. In our larger control centers, a computer assists the
dispatcher by analyzing a number of factors, such as time of day, ambulance
location, and historical traffic patterns, in order to recommend optimal
ambulance selection. In all cases, a dispatcher selects and dispatches the
ambulance. While the ambulance is en route to the scene, the ambulance receives
information concerning the patient's condition prior to the ambulance's arrival
at the scene.
Our communication systems allow the ambulance crew to communicate directly
with the destination hospital to alert hospital medical personnel of the arrival
of the patient and the patient's condition and to receive instructions directly
from emergency room personnel on specific pre-hospital medical treatment. These
systems also facilitate close and direct coordination with other emergency
service providers, such as the appropriate police and fire departments that also
may be responding to a call.
Deployment and dispatch also represent important factors in providing
non-emergency ambulance services. We implement system status plans for these
services designed to assure appropriate response times to non-emergency calls.
We are working to develop a demand management system that integrates medical
protocols with our logistics and "911" based communications expertise. In our
Argentina operations, we combine telephone triage, medical transport services,
and urgent home medical care services in order to improve the responsiveness and
cost-effectiveness of health care delivery in a managed care system. Each call
center staff is supervised by physicians and uses medical protocols to analyze
and triage the medical situation and determine the best mode of care.
We utilize communication centers in our community fire protection
activities for the receipt of fire alarms and the dispatch of equipment and
personnel that are the same as or similar to those maintained for our ambulance
services. Response time represents an important criteria in the effectiveness of
fire suppression. Depending upon the area served, our response time from the
receipt of a call to the arrival on the scene generally varies from four to
fifteen minutes. Response times depend on the level of protection sought by our
customers in terms of fire station spacing, the size of the service area
covered, and the amount of equipment and personnel dedicated to fire protection.
BILLINGS AND COLLECTIONS
We currently maintain 15 domestic regional billing and payment processing
centers and a centralized private pay collection system at our headquarters in
Arizona. Invoices are generated at the regional level, and the account is
processed by the centralized collection system for private-pay accounts only if
payment is not received in a timely manner. Customer service is directed from
each of the regional centers. Substantially all of our revenue is billed and
collected through our integrated billing and collection system, except for our
operations in Rochester, New York; and the Metro New York City/ New Jersey area.
We will continue to review the benefits and timing of integrating the remaining
two non-integrated billing centers.
We derive a substantial portion of our ambulance fee collections through
our regional billing centers from reimbursement by third-party payors, including
payments under Medicare, Medicaid, and private insurance programs, typically
invoicing and collecting payments directly to and from those third-party payors.
We also collect payments directly from patients, including payments under
deductible and co-insurance provisions and otherwise. We derived domestic net
ambulance fee collections from the following:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Medicare................................................ 29% 24% 23%
Medicaid................................................ 11% 10% 11%
Private insurers........................................ 39% 41% 47%
Patients................................................ 21% 25% 19%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
12
<PAGE> 14
Companies in the ambulance service industry maintain high provisions for
doubtful accounts relative to companies in other industries. Collection of
complete and accurate patient billing information during an emergency service
call is sometimes difficult, and incomplete information hinders post-service
collection efforts. In addition, it is not possible for us to evaluate the
creditworthiness of patients requiring emergency transport services. Our
allowance for doubtful accounts generally is higher with respect to revenue
derived directly from patients than for revenue derived from third-party payors
and generally is higher for transports resulting from "911" emergency calls than
for general transport requests. See "Risk Factors -- We depend on reimbursements
by third-party payors and individuals," and "-- Proposed rules may adversely
affect our reimbursement rates of coverage" contained in Item 1 of this Report.
We have substantial experience in processing claims to third-party payors
and employ a collection staff specifically trained in third-party coverage and
reimbursement procedures. Our integrated billing and collection system uses
specialized proprietary software systems to specifically tailor the submission
of claims to Medicare, Medicaid, and certain other third-party payors and has
the capability to electronically submit claims to the extent third-party payors'
systems permit. Our integrated billing and collection system provides for
accurate tracking of accounts receivable and status pending payment, which
facilitates the effective utilization of personnel resources to resolve workload
distribution and problem invoices. When billing individuals rather than
third-party payors, we use an automated dialer that preselects and dials
accounts based on their status within the billing and collection cycle, which
optimizes the efficiency of the collection staff.
State licensing requirements as well as contracts with counties,
municipalities, and health care facilities typically require us to provide
ambulance services without regard to a patient's insurance coverage or ability
to pay. As a result, we often do not receive compensation for services provided
to patients who are not covered by Medicare, Medicaid, or private insurance. The
anticipated level of uncompensated care and allowance for uncollectible accounts
may be considered in determining our subsidy and permitted rates under contracts
with a county or municipality.
MARKETING AND SALES
Counties, fire districts, and municipalities generally award contracts to
provide "911" emergency services either through requests for competitive
proposals or bidding processes. In some instances in which we are the existing
provider, the county or municipality may elect to renegotiate our existing
contract rather than re-bid the contract. We believe that counties, fire
districts, and municipalities consider the quality of care, historical response
time performance, and total cost, both to the municipality or county and to the
public, to be among the most important factors in awarding contracts. In
addition, we will continue to seek to enter into public/ private alliances to
compete for new business. Our alliance with San Diego Fire & Life Safety
Services allowed the entities to bid for and win a five-year contract to provide
"911" and ambulance services throughout the City of San Diego.
We market our non-emergency ambulance services to hospitals, health
maintenance organizations, convalescent homes, and other health care facilities
that require a stable and reliable source of medical transportation for their
patients. We believe that our status as a "911" provider in a designated service
area increases our visibility and enhances our marketing efforts for
non-emergency services in that area. Contracts for non-emergency services
usually are based on criteria (such as quality of care, customer service,
response time, and cost) similar to those in contracts for emergency services.
We further believe that our strategy of building regional operations will better
position us to serve the developing managed care market.
We market our fire protection services to subscribers in rural and suburban
areas, volunteer fire departments, tax-supported fire districts, newly developed
communities, and industrial complexes, including airports, large industrial and
petrochemical plants, power plants, and other large self-contained facilities.
Contract and/or subscription fees are collected annually in advance. In the
event that we provide service for a nonsubscriber, we directly bill the property
owner for the cost of services rendered. We also provide fire protection
services to newly developed communities where the subscription fee may be
included in the homeowner's association assessment.
13
<PAGE> 15
CONTRACTS
We enter into contracts with counties, municipalities, and fire districts
to provide "911" emergency ambulance services in designated service areas. These
contracts typically specify maximum fees that we may charge and set forth
required criteria, such as response times, staffing levels, types of vehicles
and equipment, quality assurance, and insurance and indemnity coverage.
Counties, municipalities, and fire districts also may require us to provide a
performance bond or other assurances of financial responsibility. The amount of
the subsidy, if any, that we receive from a county, municipality, or fire
district, and the rates that we may charge for services under a contract for
emergency ambulance services, depend in large part on the nature of the services
rendered and performance requirements.
The four largest ambulance contracts accounted for 9% of total revenue
during fiscal 1998, 8% of total revenue during fiscal 1999, and 9% of total
revenue during fiscal 2000. The largest of these contracts was Orange County,
Florida, which accounted for 4% of total revenue during fiscal 1998, 3% of total
revenue during fiscal 1999, and 3% of total revenue during fiscal 2000. Rates
charged under the Orange County contract are agreed upon between us and the
County. We do not receive any subsidy from the county under this contract. The
Orange County contract was first entered into in 1962 by a provider acquired by
us in 1984 and was once again awarded to Rural/Metro for a two-year term
beginning October 1, 2000 with one optional one-year renewal.
We provide fire protection services pursuant to master contracts or on a
subscription basis. Master contracts provide for negotiated rates with
governmental entities. Certain contracts are performance-based and require us to
meet certain dispatch and response times in a certain percentage of responses.
These contracts also set maximum thresholds for variances from the performance
criteria. These contracts establish the level of service required and may
encompass fire prevention and education activities as well as fire suppression.
Other contracts are level-of-effort based and require us to provide a certain
number of personnel for a certain time period for a particular function, such as
fire prevention or fire suppression. The largest of these contracts accounted
for 2% of total revenue during the fiscal years ended June 30, 1998, 1999 and
2000.
We provide fire protection services on a subscription basis in areas where
no governmental entity has assumed the financial responsibility for providing
fire protection. We derived approximately 49% of our fire protection service
revenue from subscriptions for fiscal 1998, 48% for fiscal 1999, and 45% for
fiscal 2000. We experienced renewal rates of approximately 88% during the prior
three fiscal years. Fire subscription rates are not currently regulated by any
government agency in our service areas.
Our contracts generally extend for terms of two to five years, with several
contracts having terms of up to 10 years. We attempt to renegotiate contracts in
advance of the expiration date and generally have been successful in these
renegotiations. We monitor our performance under each contract. From time to
time, we may decide that certain contracts are no longer favorable and may seek
to modify or terminate these contracts. At June 30, 2000, we had approximately
130 contracts with counties, fire districts, and municipalities for ambulance
services and for fire protection services. The following table sets forth
certain information regarding our five primary contracts at June 30, 2000 with
counties, fire districts, and municipalities for ambulance services and for fire
protection services.
14
<PAGE> 16
<TABLE>
<CAPTION>
EXPIRATION
TERM IN YEARS DATE TYPE OF SERVICE(1)
------------- ------------ ------------------
<S> <C> <C> <C>
Ambulance
Orange County, Florida(2).................... 2 October 2002 911/General
Rochester, New York(3)....................... 4 October 2000 911
Knox County, Tennessee(4).................... 4 June 2002 911
Fort Worth, Texas(5)......................... 5 August 2004 911
Integrated Fire and Ambulance Scottsdale,
Arizona(6)................................... 5 July 2001 911
</TABLE>
---------------
(1) Type of service for ambulance contracts indicates whether "911" emergency or
general ambulance services or both are provided pursuant to the contract.
(2) The contract was first entered into in 1962 by a provider that was acquired
by us in July 1984. The current contract includes a 1-year optional renewal
exercisable on or before October 1, 2002.
(3) The contract was first entered into in 1988 by a provider that was acquired
by us in May 1994.
(4) The contract was first entered into in July 1985 by us.
(5) The contract was first entered into in August 1999 by us.
(6) The contract was first entered into in 1952 by us. The contract has two
five-year renewal options exercisable by the City of Scottsdale.
We also enter into contracts with hospitals, nursing homes, and other
health care facilities to provide non-emergency and critical care ambulance
services. These contracts typically designate us as the first ambulance service
provider contacted to provide non-emergency ambulance services to those
facilities and permit us to charge a base fee, mileage reimbursement, and
additional fees for the use of particular medical equipment and supplies. We
provide a discount in rates charged to facilities that assume the responsibility
for payment of the charges to the persons receiving services. At June 30, 2000,
we had approximately 1,100 contracts with hospitals, nursing homes and other
health care facilities. No significant contracts, individually or collectively,
were obtained or lost during the year ended June 30, 2000. See "Risk
Factors -- We depend on certain business relationships" contained in Item 1 of
this Report.
On August 1, 1999, we began operation of a five year contract in Fort
Worth, Texas and 12 surrounding communities. We are the sole provider of "911"
emergency and non-emergency ambulance services pursuant to our contract with the
Fort Worth Area Metropolitan Ambulance Authority. The contract provides for our
services to be paid on a monthly basis. We believe our costs of collection under
this contract will be substantially less than those historically incurred by us.
COMPETITION
The ambulance service industry is highly competitive. The principal
participants include governmental entities (including fire districts), other
national ambulance service providers, large regional ambulance service
providers, hospitals, and numerous local and volunteer private providers.
Counties, municipalities, fire districts, hospitals, or health care
organizations that presently contract for ambulance services may choose to
provide ambulance services directly in the future. We are experiencing increased
competition from fire departments in providing emergency ambulance service.
However, we believe that the general transport services market currently is not
attractive to fire departments. Some of our current competitors and certain
potential competitors have greater capital and other resources than we do.
Ambulance and general transport service providers compete primarily on the basis
of quality of service, performance, and cost. We believe that counties, fire
districts, and municipalities consider quality of care, historical response time
performance, and cost to be among the most important factors in awarding a
contract, although other factors, such as customer service, financial stability,
and personnel policies and practices, also may be considered. Although
commercial providers often compete intensely for business within a particular
community, it is generally difficult to displace a provider that has a history
of satisfying the quality of care and response time performance criteria
established within the service area. Moreover, significant start-up costs
together with the long-term nature of
15
<PAGE> 17
the contracts under which services are provided and the relationships many
providers have within their communities create barriers to providers seeking to
enter new markets other than through acquisition. We believe that our status as
a "911" provider in a service area increases our visibility and stature and
enhances our ability to compete for non-emergency services within that area.
Because smaller ambulance providers do not have the infrastructure to provide
"911" services, we believe we can compete favorably with such competitors for
general transport services contracts.
Fire protection services for residential and commercial properties are
provided primarily by tax-supported fire districts, municipal fire departments,
and volunteer departments. Private providers represent a small portion of the
total fire protection market and generally provide fire protection services
where a tax-supported fire district or municipality has decided to contract for
the provision of fire protection services or has not assumed financial
responsibility for fire protection. Fire districts or municipalities may not
continue to contract for fire protection services. In areas where no
governmental entity has assumed financial responsibility for providing fire
protection, we provide fire protection services on a subscription basis.
Municipalities may annex a subscription area or that area may be converted to a
fire district that provides service directly rather than through a master
contract. See "Risk Factors -- We are in a highly competitive industry"
contained in Item 1 of this Report.
GOVERNMENTAL REGULATION
Our business is subject to governmental regulation at the federal, state,
local, and foreign levels. At the federal level, we are subject to regulations
under OSHA designed to protect our employees. The federal government also
recommends standards for ambulance design and construction, medical training
curriculum, and designation of appropriate trauma facilities. Various state
agencies may modify these standards.
Each state in which we operate regulates various aspects of its ambulance
and fire business. State requirements govern the licensing or certification of
ambulance service providers, training and certification of medical personnel,
the scope of services that may be provided by medical personnel, staffing
requirements, medical control, medical procedures, communication systems,
vehicles, and equipment. Our contracts in our current service areas typically
prescribe maximum rates that we may charge for services. The process of
determining rates includes cost reviews, analyses of levels of reimbursement
from all sources, and determination of reasonable profits. Rate setting agencies
may set rates to compensate service providers by requiring paying customers to
subsidize those who do not or cannot pay. Regulations applicable to ambulance
services may vary widely from state to state.
Applicable federal, state, local, and foreign laws and regulations are
subject to change. We believe that we currently are in substantial compliance
with applicable regulatory requirements. These regulatory requirements, however,
may require us in the future to increase our capital and operating expenditures
in order to maintain current operations or initiate new operations. See "Risk
Factors -- Proposed rules may adversely affect our reimbursement rates of
coverage," "-- Certain state and local governments regulate rate structures and
limit rates of return," "-- Numerous governmental entities regulate our
business," and "-- Health care reforms and cost containment may affect our
business" contained in Item 1 of this Report.
REIMBURSEMENT
We must comply with various requirements in connection with our
participation in Medicare and Medicaid. Medicare is a federal health insurance
program for the elderly and for chronically disabled individuals, which pays for
ambulance services when medically necessary. Medicare uses a charge-based
reimbursement system for ambulance services and reimburses 80% of charges
determined to be reasonable by Medicare, subject to the limits fixed for the
particular geographic area. The patient is responsible for paying co-pays,
deductibles and the remaining balance, if we do not accept assignment, and
Medicare requires us to expend reasonable efforts to collect the balance. In
determining reasonable charges, Medicare considers and applies the lowest of
various charge factors, including the actual charge, the customary charge, the
prevailing charge in the same locality, the amount of reimbursement for
comparable services, or the inflation-indexed charge limit.
16
<PAGE> 18
Medicaid is a combined federal-state program for medical assistance to
impoverished individuals who are aged, blind, or disabled or members of families
with dependent children. Medicaid programs or a state equivalent exist in all
states in which we operate. Although Medicaid programs differ in certain
respects from state to state, all are subject to federal requirements. State
Medicaid agencies have the authority to set levels of reimbursement within
federal guidelines. We receive only the reimbursement permitted by Medicaid and
are not permitted to collect from the patient any difference between our
customary charge and the amount reimbursed.
Like other Medicare and Medicaid providers, we are subject to governmental
audits of our Medicare and Medicaid reimbursement claims. We have not
experienced significant losses as a result of any such audit. The Office of
Inspector General is currently investigating our operations in the Memphis,
Tennessee, and in the Scranton, Pennsylvania areas regarding compliance with
Medicare fraud and abuse statutes. We are cooperating with the federal agencies
conducting the investigations and are providing requested information to these
agencies. These investigations cover periods prior to and after our acquisition
of these operations. We believe that the remedies existing under specific
purchase agreements and reserves existing in the consolidated financial
statements are sufficient so that the ultimate outcome of these matters should
not have a material adverse effect on our financial condition.
Government funding for health care programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
determinations by intermediaries and governmental funding restrictions, all of
which could materially increase or decrease program reimbursements for ambulance
services. In recent years, Congress has consistently attempted to curb federal
spending on such programs. During June 1997, the Health Care Financing
Administration ("HCFA") issued proposed rules that would revise Medicare policy
on the coverage of ambulance services. Reimbursement is currently permitted if,
based on an assessment of the patient's condition, it is determined that ALS
service is medically necessary or if ALS response is required under "911"
contracts or state or local law. The new proposal would reimburse at ALS rates
only if ALS services were medically necessary. The proposed HCFA rules would
also require, among other things, that a physician's certification be obtained
prior to furnishing non-emergency ambulance service to patients, that certain
ambulance staffing requirements be maintained, that certain equipment be present
in each ambulance, and that certain additional information and documentation be
provided in order to qualify for reimbursement under the Medicare program. 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.
During August 1997, President Clinton signed the "Balanced Budget Act of
1997", or BBA. The BBA provides for certain changes to the Medicare
reimbursement system, including the development and implementation of a
prospective fee schedule by January 2000 for ambulance services provided to
Medicare beneficiaries. The BBA mandates that this fee schedule be developed
through a negotiated rulemaking process between HCFA and ambulance service
providers and must consider the following: (i) data from industry and other
organizations involved in the delivery of ambulance services; (ii) mechanisms to
control increases in expenditures for ambulance services; (iii) appropriate
regional and operational differences; (iv) adjustments to payment rates to
account for inflation and other relevant factors; and (v) the phase-in of
payment rates under the fee schedule in an efficient and fair manner. Charges
for ambulance services provided during calendar years 1998, 1999, and 2000 will
be increased by the Consumer Price Index less one percentage point.
The BBA requires that ambulance service providers accept assignment of
payment directly from Medicare and accept such amount, along with the co-pay and
deductible paid by the patient, as payment in full. The BBA also applies the
Skilled Nursing Facility Prospective Payment System ("SNFPPS") to a limited
number of ambulance trips to and from nursing homes. The application of SNFPPS
could require us to negotiate new contracts or arrangements with skilled nursing
facilities to provide ambulance services. The BBA also stipulates that
individual states may now elect not to provide payment for cost sharing for
coinsurance, or co-payments, for dual-qualified (Medicare and Medicaid)
beneficiaries.
17
<PAGE> 19
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 prospective fee schedule as well
as the mandatory acceptance of assignment would be postponed to January 2001.
HCFA also announced rules that became effective in February 1999, which require,
among other things, that a physician's certification be obtained for certain
ambulance transports. We have implemented a program to comply with these new
rules.
We could take certain actions to partially mitigate any adverse effect of
these changes. These actions could include renegotiation of rates and contract
subsidies provided in our "911" ambulance service contracts and changes in
staffing of ambulance crews based upon the negotiation for longer response times
under ambulance service contracts to reduce operating costs.
We face risks and uncertainties regarding the proposed HCFA rules or other
proposals involving various aspects of Medicare reimbursements including the
following:
- the proposed HCFA rules, or other proposals involving various aspects of
Medicare reimbursements may not be adopted or implemented;
- we are uncertain regarding the effect on us of any final rule;
- we are uncertain of the impact of a final prospective fee schedule; and
- future funding levels for Medicare and Medicaid programs may not be
comparable to present levels.
Changes in the reimbursement policies, or other government action, could
adversely affect our business, financial condition, cash flows, and results of
operations.
INSURANCE
We carry a broad range of automobile and general liability, comprehensive
property damage, malpractice, workers' compensation, and other insurance
coverage that we consider adequate for the protection of our assets and
operations, subject to certain self insurance retentions up to $1,000,000. We
operate in some states that adhere to legal standards that hold emergency
service providers to a gross negligence standard in the delivery of emergency
medical care, thereby subjecting them to less exposure for tort judgments. We
are subject to accident claims as a result of the normal operation of our fleet
of ambulances and fire vehicles. The coverage limits of our policies may not be
adequate or such insurance may not continue to be available on commercially
reasonable terms. A successful claim against us in excess of our insurance
coverage could have a material adverse effect on our business, financial
condition, cash flows, and results of operations. Claims against us, regardless
of their merit or outcome, also may have an adverse effect on our reputation and
business. We have undertaken to minimize our exposure through our risk
management program.
EMPLOYEES
At September 25, 2000, we employed approximately 7,200 full-time and 3,700
part-time employees, including approximately 6,150 involved in ambulance
services, 850 in fire protection services, 330 in integrated ambulance and fire
protection services, 1,040 in urgent home medical and clinical care services,
and 2,530 in management, administrative, clerical, and billing activities. Of
these employees, 2,560 are paramedics and 3,250 are EMTs. We are a party to
collective bargaining agreements relating to our Rochester, New York; Buffalo,
New York; Corning, New York; San Diego, California; Maricopa County, Arizona,
Integrated Fire employees; Gadsden, Alabama and Arlington, Texas operations and
to certain of our ambulance services employees in Arizona. We are currently
negotiating collective bargaining agreements in other service areas. We consider
our relations with employees to be good.
18
<PAGE> 20
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Report, should be carefully considered in evaluating us and our business.
WE HAVE SIGNIFICANT INDEBTEDNESS.
We have significant indebtedness. As of June 30, 2000, we owed lenders 3.2
times our total stockholders' equity, based on $302.0 million of consolidated
indebtedness and $95.6 million of stockholders' equity. In March 1998, we sold
$150 million of 7 7/8% senior notes due in 2008. At the same time as this debt
offering, we renegotiated our then existing $200 million bank revolving credit
facility to create a parity loan with the senior notes and to extend the
maturity of the credit facility to March 2003. We used the proceeds from the
senior notes to repay the then current outstanding bank revolving credit
facility.
The senior notes were issued under an agreement among us, certain of our
subsidiaries as guarantors, and the First National Bank of Chicago as trustee.
The agreement permits us to incur additional debt under certain conditions, and
we expect to incur such additional debt by obtaining advances on the bank
revolving credit facility. Our ability to repay the senior notes and other debt
depends on our future operating performance, which is affected by governmental
regulations, the state of the economy, financial factors, and other factors,
certain of which are beyond our control. We cannot provide assurance that we
will generate sufficient funds to enable us to make our periodic debt payments.
Our leverage and related covenants could materially and adversely affect
our competitive position and our ability to withstand adverse economic
conditions. Furthermore, our debt and related covenants could make it more
difficult for us to make material acquisitions, obtain future financing, or take
advantage of business opportunities that may arise. If we are unable to service
our debt, we will be required to pursue alternative means of repayment, which
could include restructuring or refinancing some or all of our debt, raising
additional equity, or selling all or a portion of our tangible and/or intangible
assets. We cannot provide assurance that we could implement any of these
strategies on satisfactory terms.
The amount of our debt could also have important consequences, including
the following:
- impairing our ability to obtain additional financing in the future for
operating expenses, acquisitions, or general corporate purposes;
- dedicating our cash flow from operations to making periodic principal and
interest payments on debt, instead of using these funds for operations;
- requiring continuous monitoring of our financial condition to ensure that
we comply with all of the required debt covenants;
- limiting our ability to incur additional debt, create other liens, pay
dividends, or sell assets; and
- making us vulnerable to industry changes, including new laws and changing
economic conditions.
LENDERS IMPOSE RESTRICTIVE COVENANTS ON US.
As stated above, the agreement governing the terms of the senior notes
contains certain covenants limiting our ability to
<TABLE>
<S> <C> <C> <C>
- incur certain additional debt - create certain liens
- pay dividends - issue guarantees
- redeem capital stock - enter into transactions with affiliates
- make certain investments - sell assets
- issue capital stock of subsidiaries - complete certain mergers and consolidations.
</TABLE>
The revolving credit facility contains other more restrictive covenants and
requires us to satisfy certain financial tests, including a total debt leverage
ratio, a total debt to total capitalization ratio, and a fixed charge ratio. Our
ability to satisfy those tests can be affected by events both within and beyond
our control, and we
19
<PAGE> 21
cannot provide assurance that we will be able to meet these tests. Our breach of
any of these covenants could cause a default under the revolving credit facility
or the agreement for the senior notes, resulting in possible difficulties with
customers, personnel, or others.
In February 2000, we were granted a waiver of covenant compliance under our
revolving credit facility, through March 14, 2000. We have received additional
waivers covering periods ending October 16, 2000. In accordance with the waiver
as amended, we will accrue an additional 2% annual interest expense. We continue
to work toward a long-term agreement on our revolving credit facility. A breach
of the waiver and any of the covenants could result in an event of default under
the credit facility. There is no assurance that we are in compliance with all of
the technical conditions of the waiver; however, the lenders have not asserted
that we have failed to comply with any such requirements.
OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE RENDERED A REPORT THAT INCLUDES A GOING
CONCERN STATEMENT.
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 the significant operating loss incurred in fiscal 2000 as
well as those items discussed in Note 1 in the company's Notes to Consolidated
Financial Statements have resulted in our independent public accountants
modifying their report to include a statement that these uncertainties create
substantial doubt about our company's 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.
WE OPERATE THROUGH OUR SUBSIDIARIES.
We are a holding company and conduct substantially all of our operations
through our direct and indirect subsidiaries. In order for us to make our
periodic debt payments, we must have access to the cash flow of our
subsidiaries, whether through loans, dividends, distributions, or otherwise. Our
ability to make our debt payments could be subject to legal, contractual, and
other restrictions that could hinder or prevent us from gaining access to this
cash flow. Each subsidiary is a separate and distinct legal entity from us and,
unless it is acting as a guarantor of the senior notes, has no obligation,
contingent or otherwise, to pay any amounts due in respect of the senior notes
or to make any amounts available for payment. The holders of any debt of our
subsidiaries will be entitled to payment from the assets of such subsidiaries
prior to the holders of any of our general, unsecured obligations, including the
senior notes and the guarantees of certain of our subsidiaries. As of June 30,
2000, our subsidiaries had $5.3 million of debt.
WE DEPEND ON CERTAIN BUSINESS RELATIONSHIPS.
We depend to a great extent on certain contracts with municipalities or
fire districts to provide "911" emergency ambulance services and fire protection
services. Our five largest contracts accounted for approximately 11% of total
revenue for the fiscal year ended June 30, 1999 and 12.0% of total revenue for
the fiscal year ended June 30, 2000. One of these contracts accounted for
approximately 3% of total revenue for the fiscal years ended June 30, 1999 and
2000. The loss or cancellation of any one or more of these contracts could have
a material adverse effect on our business, financial condition, cash flow, and
results of operations. We cannot provide assurance that we will be successful in
retaining our existing contracts or in obtaining new contracts for emergency
ambulance services or for fire protection services.
Our contracts with municipalities and fire districts and with managed care
organizations and health care providers are short term or open-ended or for
periods ranging from two years to five years. During such periods, we may
determine that a contract is no longer favorable and may seek to modify or
terminate the contract. When making such a determination, we could consider
factors, such as weaker than expected transport volume, geographical issues
adversely affecting response times, and delays in implementing technology
upgrades. We face certain risks in attempting to terminate unfavorable contracts
prior to their expiration because of the possibility of forfeiting performance
bonds and the potential adverse political and
20
<PAGE> 22
public relations consequences. Our inability to terminate or amend unfavorable
contracts could have a material adverse effect on our business, financial
condition, cash flows, and results of operations. We also face the risk that
areas in which we provide fire protection services through subscription
arrangements with residents and businesses will be converted to tax-supported
fire districts or annexed by municipalities.
NEW CONTRACTS REQUIRE SIGNIFICANT INVESTMENTS IN CAPITAL AND RESOURCES THAT WE
MAY NOT RECOVER.
We face risks and uncertainties associated with origination of contracts to
provide emergency ambulance services or fire protection services in new
geographic regions. Entering new markets to provide services where we have never
provided services requires us to expend a significant amount of capital to begin
operations, and to employ sufficient personnel to service the contract. We may
not recover our capital investments in these areas in the event of the loss or
cancellation of one or more of these contracts. The loss or cancellation of any
one or more of these contracts may have a material adverse effect on our
business.
WE FACE RISKS ASSOCIATED WITH OUR PRIOR RAPID GROWTH, INTEGRATION, AND
ACQUISITIONS.
In order for our strategy with respect to ambulance services to succeed, we
must integrate and successfully operate the ambulance service providers that we
have previously acquired or may acquire in the future. The process of
integrating management, operations, facilities, and accounting and billing and
collection systems and other information systems requires continued investment
of time and resources and can involve difficulties, which could have a material
adverse effect on our business, financial condition, cash flows, and results of
operations. Unforeseen liabilities and other issues also could arise in
connection with the operation of businesses that we have previously acquired or
may acquire in the future. Our acquisition agreements contain purchase price
adjustments, rights of set-off, and other remedies in the event that certain
unforeseen liabilities or issues arise in connection with an acquisition.
However, these purchase price adjustments, rights of set-off, and other remedies
may not be sufficient to compensate us in the event that any liabilities or
other issues arise.
We seek selective, strategic acquisition opportunities on a limited basis.
We cannot provide assurance that we will be able to identify additional suitable
companies to acquire, that we will be able to complete these acquisitions, or
that we will be able to integrate any such acquired companies successfully into
our operations. Consolidation in the ambulance industry has resulted in fewer
acquisition candidates, and our strategy prescribes highly selective targeting
of those potential candidates. Acquiring companies involves numerous short-term
and long-term risks, including the following:
- diversion of management's attention,
- failure to retain key personnel of the acquired company,
- adverse consequences to cash flow until accounts receivable of the
acquired company are fully integrated,
- incompatibility of acquired systems,
- loss of net revenue of the acquired company,
- possible regulatory issues of the acquired company,
- subjecting our company to regulatory reviews regarding compliance with
Medicare or Medicaid fraud and abuse statutes covering periods prior to
our acquisition of those companies or integration of those companies into
our billing and collection system,
- compliance with laws and regulations of new jurisdictions, and
- facing competitors with greater knowledge of local markets.
We expect to use primarily cash and our common stock to acquire companies
in the future. Our acquisition activity could be adversely affected if we do not
generate sufficient cash for future acquisitions from existing operations or
through additional debt or equity financings. We cannot provide assurance that
our
21
<PAGE> 23
operations will generate sufficient cash for acquisitions or that any additional
financings will be available if and when needed or on terms acceptable to us.
The market price of our common stock impacts our ability to complete
acquisitions. The market price of our common stock may affect our willingness to
use our common stock to acquire other companies and the willingness of potential
acquired companies or their owners to accept our common stock. In addition, the
market price performance of our common stock may make raising funds more
difficult and costly. As a result of a decline in the market price of our common
stock, 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.
WE DEPEND ON REIMBURSEMENTS BY THIRD-PARTY PAYORS AND INDIVIDUALS.
We receive a substantial portion of our payments for ambulance services
from third-party payors, including Medicare, Medicaid, and private insurers. We
received approximately 75% of our ambulance fee collections from such
third-party payors during fiscal 1999, including 24% from Medicare. In fiscal
2000, we received approximately 81% of ambulance fee collections from these
third parties, including 23% from Medicare.
The reimbursement process is complex and involves lengthy delays. From time
to time, we experience such delays. Third-party payors are continuing their
efforts to control expenditures for health care, including proposals to revise
reimbursement policies. We recognize revenue when we provide ambulance services;
however, there can be lengthy delays before we receive payment. In addition,
third-party payors may disallow, in whole or in part, requests for reimbursement
based on assertions that certain amounts are not reimbursable or additional
supporting documentation is necessary. Retroactive adjustments can change
amounts realized from third-party payors. We are subject to governmental audits
of our Medicare and Medicaid reimbursement claims and can be required to repay
these agencies if a finding is made that we were incorrectly reimbursed. Delays
and uncertainties in the reimbursement process adversely affect the level of
accounts receivable, increase the overall costs of collection, and may adversely
affect our working capital and cause us to incur additional borrowing costs.
We also face the continuing risk of nonreimbursement to the extent that
uninsured individuals require emergency ambulance service in service areas where
an adequate subsidy is not provided. Amounts not covered by third-party payors
are the obligations of individual patients. We continually review the mix of
activity between emergency and general medical transport in view of the
reimbursement environment.
We establish an allowance for doubtful accounts based on credit risk
applicable to certain types of payors, historical trends, and other relevant
information. We review our allowance for doubtful accounts on an ongoing basis
and may increase or decrease such allowances from time to time, including in
those instances when we determine that the level of effort and cost of
collection of certain accounts receivable is unacceptable.
Our gross accounts receivable as of June 30, 1999 and June 30, 2000, were
$228.8 million and $231.7 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, were $185.5 million and $143.9 million as
of June 30, 1999 and 2000, respectively. The provision for doubtful accounts at
June 30, 2000 includes $65.0 million recorded in the second quarter of fiscal
2000 as a change in accounting estimate, as well as a $9.8 million additional
provision related to specific accounts deemed uncollectible in certain service
areas that have been closed. Gross accounts receivable are affected by revenue
growth, delays in payments from certain third-party payors in certain service
areas, general industry trends of third-party payors taking more time to
reimburse claims and other factors, offset by the effect of write-offs.
The risks associated with third-party payors and uninsured individuals and
our failure to monitor and manage accounts receivable successfully could have a
material adverse effect on our business, financial condition, cash flows, and
results of operations. We cannot provide assurance that our collection policies
and allowances for doubtful accounts receivable will be adequate.
22
<PAGE> 24
PROPOSED RULES MAY ADVERSELY AFFECT OUR REIMBURSEMENT RATES OF COVERAGE.
During June 1997, the Health Care Financing Administration issued proposed
rules that would revise Medicare policy on the coverage of ambulance services.
These proposed rules have been subject to public comment and, despite the
passage of new laws addressing changes to the reimbursement of ambulance
services by Medicare (as discussed below), have not yet been withdrawn. The
proposed rules have not been finalized.
In addition, the "Balanced Budget Act of 1997" became law in August 1997.
This new law in part provides for the development, negotiation, and
implementation of prospective fee schedule for Medicare reimbursement of
ambulance services by January 2000. The new law also reduces the annual rate
adjustment for Medicare reimbursements from the Consumer Price Index, or CPI, to
CPI less one percentage point.
The new law requires that, beginning January 1, 2000, ambulance service
providers accept assignment whereby we receive payment directly from Medicare
and accept such amount, along with the co-pay and deductible paid by the
patient, as payment in full. The new law also applies the Skilled Nursing
Facility Prospective Payment System to a limited number of ambulance trips to
and from nursing homes. This application could require us to negotiate new
contracts or arrangements with skilled nursing facilities to provide ambulance
services. The new law also stipulates that individual states may now elect not
to provide payment for cost-sharing for coinsurance, or copayments, for
dual-qualified (Medicare and Medicaid) beneficiaries.
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 prospective fee schedule as well
as the mandatory acceptance of assignment will be postponed to January 2001.
HCFA also announced rules that became effective in February 1999, which require,
among other things, that a physician's certification be obtained for certain
ambulance transports. We have implemented a program to comply with these 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 of
increase in the CPI, could have a material adverse effect on our business,
financial condition, cash flows, and results of operations.
CERTAIN STATE AND LOCAL GOVERNMENTS REGULATE RATE STRUCTURES AND LIMIT RATES OF
RETURN.
State or local government regulations or administrative policies regulate
rate structures in most states in which we conduct ambulance operations. In
certain service areas in which we are the exclusive provider of services, the
municipality or fire district sets the rates for emergency ambulance services
pursuant to a master contract and establishes the rates for general ambulance
services that we are permitted to charge. Rates in most service areas are set at
the same amounts for emergency and general ambulance services. The state of
Arizona establishes a rate of return on sales we are permitted to earn in
determining the ambulance service rates we may charge in that state. Ambulance
services revenue generated in Arizona accounted for approximately 12% of total
revenue for fiscal 1999 and 13% of total revenue for fiscal 2000. We cannot
provide assurance that we will be able to receive ambulance service rate
increases on a timely basis where rates are regulated or to establish or
maintain satisfactory rate structures where rates are not regulated.
Municipalities and fire districts negotiate the payments to be made to us
for fire protection services pursuant to master contracts. These master
contracts are based on a budget and on level of effort or
23
<PAGE> 25
performance criteria desired by the municipalities and fire districts. We could
be unsuccessful in negotiating or maintaining profitable contracts with
municipalities and fire districts.
CLAIMS AGAINST US COULD EXCEED OUR INSURANCE COVERAGE.
We are subject to accident claims as a result of the normal operation of
our fleet of ambulances and fire vehicles. The coverage limits of our policies
may not be adequate or such insurance may not continue to be available on
commercially reasonable terms. A successful claim against us in excess of our
insurance coverage could have a material adverse effect on our business,
financial condition, cash flows, and results of operations. Claims against us,
regardless of their merit or outcome, also may have an adverse effect on our
reputation and business.
WE FACE ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We currently maintain operations in Latin America, with ambulance and
healthcare services provided in Argentina, as well as aircraft rescue and fire
fighting services to several airports in Bolivia. In addition to other business
risks discussed herein, we are subject to various risks associated with
international operations, including the following:
- management of a multi-national organization,
- fluctuations in currency exchange rates,
- compliance with local laws and other regulatory requirements and changes
in such laws and requirements,
- restrictions on the repatriation of funds,
- inflationary conditions,
- employment and severance issues,
- political and economic instability, including economic recessions,
- war or other hostilities,
- expropriation or nationalization of assets,
- overlap of tax structures and imposition of new taxes, and
- renegotiation or nullification of contracts.
The inability to effectively manage these and other risks could have a material
adverse effect on our business, financial condition, cash flows, and results of
operations.
Internationally, certain of our customers receive services under capitated
service arrangements. As a result, during periods of high utilization, as we
have experienced in Argentina particularly during the winter months, our
operations experience greater utilization of services under these capitated
service arrangements. During these periods, our operations incur increased
expenses without a corresponding increase in revenue.
Our revenue from international operations is denominated primarily in the
currencies of the countries in which we operate. A decrease in the value of such
foreign currencies relative to the U.S. dollar could result in losses from
currency exchange rate fluctuations. As we continue to expand our international
operations, exposures to gains and losses on foreign currency transactions may
increase. We do not currently engage in foreign currency hedging transactions.
In the future, we may seek to limit such exposure by entering into
forward-foreign exchange contracts or engaging in similar hedging strategies.
Any currency exchange strategy may be unsuccessful in avoiding exchange-related
losses, and the failure to manage currency risks effectively may have a material
adverse effect on our business, financial condition, cash flows, and results of
operations. In addition, revenue we earn in foreign countries may be subject to
taxation by more than one jurisdiction, thereby adversely affecting our
earnings.
24
<PAGE> 26
NUMEROUS GOVERNMENTAL ENTITIES REGULATE OUR BUSINESS
Numerous federal, state, local, and foreign laws and regulations govern
various aspects of the business of ambulance service providers, covering matters
such as licensing, rates, employee certification, environmental matters, and
other factors. Certificates of necessity may be required from state or local
governments to operate ambulance services in a designated service area. Master
contracts from governmental authorities are subject to risks of cancellation or
unenforceability as a result of budgetary and other factors and may subject us
to certain liabilities or restrictions that traditionally have applied only to
governmental bodies. Federal, state, local, or foreign governments could
- change existing laws or regulations,
- adopt new laws or regulations that increase our cost of doing business,
- lower reimbursement levels, or
- otherwise adversely affect our business, financial condition, cash flows,
and results of operations.
We and businesses acquired by us could encounter difficulty in complying
with all applicable laws and regulations.
HEALTH CARE REFORMS AND COST CONTAINMENT MAY AFFECT OUR BUSINESS.
Numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system. We cannot predict which, if any,
health care reforms may be proposed or enacted or the effect that any such
legislation would have on our business. In addition, managed care providers are
attempting to contain health care costs through the use of outpatient services
and specialized treatment facilities. Changing industry practices could have an
adverse effect on our business, financial condition, cash flows, accounts
receivable realization, and results of operations.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY.
The ambulance service industry is highly competitive. Ambulance and general
transport service providers compete primarily on the basis of quality of
service, performance, and cost. In order to compete successfully, we must make
continuing investments in our fleet, facilities, and operating systems. We
believe that counties, fire districts, and municipalities consider the following
factors in awarding a contract:
- quality of medical care,
- historical response time performance,
- customer service,
- financial stability, and
- personnel policies and practices.
We currently compete with the following entities to provide ambulance
services:
- governmental entities (including fire districts),
- hospitals,
- other national ambulance service providers,
- large regional ambulance service providers, and
- local and volunteer private providers.
Municipalities, fire districts, and health care organizations that
currently contract for ambulance services could choose to provide ambulance
services directly in the future. We are experiencing increased competition from
fire departments in providing emergency ambulance service. Some of our current
competitors and certain potential competitors have or have access to greater
capital and other resources than us.
25
<PAGE> 27
Tax-supported fire districts, municipal fire departments, and volunteer
fire departments represent the principal providers of fire protection services
for residential and commercial properties. Private providers represent only a
small portion of the total fire protection market and generally provide services
where a tax-supported municipality or fire district has decided to contract for
these services or has not assumed the financial responsibility for fire
protection. In these situations, we provide services for a municipality or fire
district on a contract basis or provide fire protection services directly to
residences and businesses who subscribe for this service. We cannot provide
assurance that
- we will be able to obtain additional fire protection business on a
contractual or subscription basis;
- fire districts or municipalities will not choose to provide fire
protection services directly in the future; or
- areas in which we provide services through subscriptions will not be
converted to tax-supported fire districts or annexed by municipalities.
WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL.
Our success depends upon our ability to recruit and retain key personnel.
We could experience difficulty in retaining our current key personnel or in
attracting and retaining necessary additional key personnel. Low unemployment in
certain market areas currently makes the recruiting, training, and retention of
full-time and part-time personnel more difficult and costly, including the cost
of overtime wages. Our internal growth and our expansion into new geographic
areas will further increase the demand on our resources and require the addition
of new personnel. We have entered into employment agreements with certain of our
executive officers and certain other key personnel.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Certain provisions of our certificate of incorporation and Delaware law
could make it more difficult for a third party to acquire control of our
company, even if a change in control might be beneficial to stockholders. This
could discourage potential takeover attempts and could adversely affect the
market price of our common stock.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock has been volatile since our initial
public offering in July 1993. The period was initially marked by generally
rising stock prices, favorable industry conditions, and improved operating
results by us. We experienced a significant decline in our stock price
commencing in the fourth quarter of fiscal 1998 as a result of various factors,
including the following:
- less favorable industry trends,
- an increase in our provision for doubtful accounts,
- an increase in our operating expenses,
- general stock market conditions, and
- the previously identified risk factors.
The trading price of our common stock in the future could be subject to
various factors, including the following:
- wide fluctuations in response to quarterly variations in our operating
results and others in our industry,
- actual or anticipated announcements concerning us or our competitors,
including government regulations and reimbursement changes,
- the announcement and implementation of health care reform proposals,
- changes in analysts' estimates of our financial performance,
26
<PAGE> 28
- general conditions in the health care industry,
- general economic and financial conditions,
- the inability of us to make any acquisitions, and
- other events or factors.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have affected the market prices for many companies involved
in health care and related industries and which often have been unrelated to the
operating performance of such companies. These broad market fluctuations and
other factors could adversely affect the market price of our common stock. The
market price and volatility of our common stock could increase the risk of
litigation, including from owners of companies previously acquired by us.
SHARES ELIGIBLE FOR SALE IN THE PUBLIC MARKETS AND RIGHTS TO ACQUIRE SHARES OF
COMMON STOCK CAN IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As of September 25, 2000, there were
14,626,336 shares of common stock outstanding, 10,889,252 shares of which were
freely transferable without restriction under the securities laws, unless held
by an "affiliate" of us, as that term is defined under the securities laws. We
also have outstanding 187,896 restricted shares, as that term is defined under
Rule 144 under the securities laws, that are eligible for sale in the public
market, subject to compliance with the holding period, volume limitations, and
other requirements of Rule 144. In addition, we have registered 6,700,000 shares
of common stock for issuance in connection with acquisitions (of which 3,549,188
shares have been issued and are outstanding), which are generally freely
tradable after their issuance under Rule 145 of the securities laws, unless held
by an affiliate of the acquired company, in which case such shares will be
subject to the volume and manner of sale restrictions under Rule 144.
We have registered or will register up to 8,000,000 shares of common stock
for issuance pursuant to our stock option plans. As of September 25, 2000,
approximately 800,000 stock options had been exercised and options to purchase
approximately 5,100,000 shares were outstanding. Shares issued after the
effective date of such registration statement upon the exercise of stock options
issued under our stock option plans generally will be eligible for sale in the
public market, except that affiliates of us will continue to be subject to
volume limitations. We also have the authority to issue additional shares of
common stock and shares of one or more series of preferred stock. The issuance
of such shares could dilute earnings per share, and the sale of such shares
could depress the market price of our common stock.
ITEM 2. PROPERTIES
FACILITIES AND EQUIPMENT
We lease our principal executive offices in Scottsdale, Arizona. We lease
administrative facilities and other facilities used principally for ambulance
and fire apparatus basing, garaging and maintenance in those areas in which we
provides ambulance and fire protection services. We also own six administrative
facilities and 20 other facilities within our service areas. Aggregate rental
expense was approximately $12.8 million during fiscal 1999, and approximately
$13.2 million during fiscal 2000. At September 25, 2000, our fleet included
1,642 owned and 282 leased ambulances, 119 owned and 26 leased fire vehicles,
and 537 owned and 72 leased other vehicles. We use a combination of in-house and
outsourced maintenance services to maintain our fleet, depending on the size of
the market and the availability of quality outside maintenance services.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to litigation arising in the ordinary
course of business. Our insurance coverage may not be adequate to cover all
liabilities arising out of such claims. We are not engaged in any
27
<PAGE> 29
legal proceedings in the ordinary course of business that are expected to have a
material adverse effect on our financial condition or results of operations.
We, Warren S. Rustand, our former Chairman of the Board and Chief Executive
Officer, James H. Bolin, our Vice Chairman of the Board, and Robert E. Ramsey,
Jr., our Executive Vice President and Director, have been named as defendants in
two purported class action lawsuits: Haskell v. Rural/Metro Corporation, et.
al., Civil Action No. C-328448 filed on August 25, 1998 in Pima County, Arizona
Superior Court and Ruble v. Rural/Metro Corporation, et al., CIV 98-413-TUC-JMR
filed on September 2, 1998 in United States District Court for the District of
Arizona. The two lawsuits, which contain virtually identical allegations, were
brought on behalf of a class of persons who purchased our publicly traded
securities including its common stock between April 28, 1997 and June 11, 1998.
Haskell v. Rural/Metro seeks unspecified damages under the Arizona Securities
Act, the Arizona Consumer Fraud Act, and under Arizona common law fraud, and
also seeks punitive damages, a constructive trust, and other injunctive relief.
Ruble v. Rural/ Metro seeks unspecified damages under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. The complaints in both actions allege
that between April 28, 1997 and June 11, 1998 the defendants issued certain
false and misleading statements regarding certain aspects of our financial
status and that these statements allegedly caused our common stock to be traded
at artificially inflated prices. The complaints also allege that Mr. Bolin and
Mr. Ramsey sold stock during this period, allegedly taking advantage of inside
information that the stock prices were artificially inflated. On May 25, 1999
the Arizona state court granted our request for a stay of the Haskell action
until the Ruble action is finally resolved. We and the individual defendants
have moved to dismiss the Ruble action. This motion is currently pending. We
intend to defend the actions vigorously. We are unable to predict the ultimate
outcome of this litigation. If the lawsuits were ultimately determined adversely
to us, it could have a material effect on our results of operations and
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
28
<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol RURL since our initial public offering on July 16, 1993. On August 4,
2000, our common stock began trading on the Nasdaq SmallCap Market. The
following table sets forth the high and low sale prices of the common stock for
the fiscal quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
YEAR ENDED JUNE 30, 1999
First quarter............................................. $13.50 $6.13
Second quarter............................................ $12.50 $6.13
Third quarter............................................. $12.00 $7.75
Fourth quarter............................................ $10.63 $7.00
YEAR ENDED JUNE 30, 2000
First quarter............................................. $10.00 $6.13
Second quarter............................................ $ 7.63 $3.94
Third quarter............................................. $ 5.94 $1.13
Fourth quarter............................................ $ 2.38 $1.13
YEAR ENDED JUNE 30, 2001
First quarter............................................. $ 2.31 $1.50
Second quarter (through October 25, 2000)................. $ 2.00 $1.63
</TABLE>
On October 25, 2000, the closing sale price of our common stock was $1.63
per share. On October 25, 2000, there were approximately 965 holders of record
of our common stock.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
plan to retain earnings to finance the growth of our business rather than to pay
cash dividends. Payments of any cash dividends in the future will depend on the
financial condition, results of operations and capital requirements of us as
well as other factors deemed relevant by our board of directors. Our senior
subordinated notes, term notes and revolving credit facility contain
restrictions on our ability to pay cash dividends, and future borrowings may
contain similar restrictions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" contained in Item 7 of this Report.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended June 30, 2000, 1999, 1998, 1997, and 1996 is derived from our consolidated
financial statements which have been audited by Arthur Andersen LLP, independent
public accountants. Their opinion on the financial statements for June 30, 2000
includes a going concern statement. The selected consolidated financial data
provided below should be read in
29
<PAGE> 31
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue
Ambulance services....................... $ 467,741 $467,632 $387,041 $257,488 $197,201
Fire protection services................. 57,549 50,490 45,971 42,163 38,770
Other.................................... 44,784 43,244 42,546 20,154 14,292
--------- -------- -------- -------- --------
Total revenue.................... 570,074 561,366 475,558 319,805 250,263
Operating expense
Payroll and employee benefits............ 323,285 297,341 254,806 170,833 135,464
Provision for doubtful accounts.......... 95,623 81,227 81,178 43,424 31,036
Provision for doubtful accounts -- change
in estimate........................... 65,000 -- -- -- --
Depreciation............................. 25,009 24,222 19,213 12,136 9,778
Amortization of intangibles.............. 8,687 9,166 7,780 4,660 3,569
Other operating expenses................. 118,516 98,739 80,216 54,922 45,752
Loss contract/restructuring charge....... 43,274 2,500 5,000 6,026 --
--------- -------- -------- -------- --------
Operating income (loss).................... (109,320) 48,171 27,365 27,804 24,664
Interest expense, net.................... 25,939 21,406 14,082 5,720 5,108
Other.................................... (2,890) 70 (199) -- --
--------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary loss and cumulative effect
of a change in accounting principle...... (132,369) 26,695 13,482 22,084 19,556
(Provision for) benefit from income
taxes.................................... 32,837 (11,231) (5,977) (9,364) (8,044)
--------- -------- -------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of a change in
accounting principle..................... (99,532) 15,464 7,505 12,720 11,512
Extraordinary loss on expropriation of
Canadian ambulance service licenses...... (1,200) -- -- -- --
Cumulative effect of a change in accounting
principle................................ (541) -- -- -- --
--------- -------- -------- -------- --------
Net income (loss).......................... $(101,273) $ 15,464 $ 7,505 $ 12,720 $ 11,512
========= ======== ======== ======== ========
Basic earnings per share(1)
Income (loss) before extraordinary
item.................................. $ (6.82) $ 1.07 $ .55 $ 1.10 $ 1.20
Extraordinary loss....................... (0.08) -- -- -- --
Cumulative effect........................ (0.04)
Net income (loss)................ $ (6.94) $ 1.07 $ .55 $ 1.10 $ 1.20
========= ======== ======== ======== ========
Diluted earnings per share(1)
Income (loss) before extraordinary
item.................................. $ (6.82) $ 1.06 $ .54 $ 1.04 $ 1.14
Extraordinary item....................... (0.08) -- -- -- --
Cumulative effect of change in accounting
principle............................. (0.04) -- -- -- --
--------- -------- -------- -------- --------
Net income (loss)................ $ (6.94) $ 1.06 $ .54 $ 1.04 $ 1.14
========= ======== ======== ======== ========
Weighted average number of shares
outstanding(1)
Basic.................................... 14,592 14,447 13,529 11,585 9,570
Diluted.................................. 14,592 14,638 14,002 12,271 10,075
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.................... $(192,512) $140,929 $110,529 $ 94,766 $ 55,402
Total assets....................... 491,217 579,907 535,452 364,066 230,114
Current portion of long-term
debt(2).......................... 299,104 5,765 8,565 9,814 6,610
Long-term debt, net of current
portion(2)....................... 2,850 268,560 243,831 144,643 60,731
Stockholders' equity............... 95,591 196,839 177,773 159,808 119,966
</TABLE>
---------------
(1) Earnings per share for all periods presented has been restated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share".
(2) Includes balances outstanding under our revolving credit facility of
$146,807,000 at June 30, 2000, $113,500,000 at June 30, 1999, $86,000,000 at
June 30, 1998, $134,000,000 at June 30, 1997, and $49,500,000 at June 30,
1996. At June 30, 2000 the amounts outstanding under our revolving credit
facility and the senior notes have been classified as a current liability.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our selected consolidated financial data and our consolidated financial
statements and notes appearing elsewhere in this Report.
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 both a fee-for-service
basis and nonrefundable subscription fee basis. Per transport revenue depends on
various factors, including the mix of rates between existing markets and new
markets and the mix of activity between "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 nonrefundable 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 derived approximately 75% of our net
ambulance fee collections during 1999 and 81% of our net ambulance fee
collections during 2000 from such third party payors. We establish an allowance
for doubtful accounts based on credit risks 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 directly 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.
Because of the nature of our ambulance services, it is necessary to respond
to a number of calls, primarily "911" emergency ambulance service calls, which
may not result in transports. Results of operations are discussed below on the
basis of actual transports since transports are more directly related to
revenue. Expenses associated with calls that do not result in transports are
included in operating expenses. The percentage of calls not resulting in
transports varies substantially depending upon the mix of general transport and
"911" emergency ambulance service calls in markets and is generally higher in
service areas in which the calls are primarily "911" emergency ambulance service
calls. Rates in our markets take into account the anticipated number of calls
that may not result in transports. We do not separately account for expenses
31
<PAGE> 33
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 life of the contract. Subscription fees received in advance are
deferred and recognized over the term of the subscription agreement, which is
generally one year.
Other revenue primarily consists 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 pledged assets with a net book value of $12,260,000 to secure
certain of our obligations under our insurance and bonding program, including
certain reimbursement obligations with respect to the workers' compensation,
performance bonds, appeal bonds and other aspects of such insurance and bonding
program.
Our net loss for the year ended June 30, 2000 was $101.3 million or a loss
of $6.94 per share. This compares to net income of $15.5 million or $1.06 per
share (diluted) for the year ended June 30, 1999, and $7.5 million or $.54 per
share (diluted) for the year ended June 30, 1998. The operating results for the
year ended June 30, 2000 were adversely affected by the recording of a $43.3
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 additional provision for doubtful accounts of $9.8 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 estimate related to our provision of 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 were also negatively impacted by reduced operating margins in
our Argentine operations. These operations 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.
32
<PAGE> 34
RESULTS OF OPERATIONS
The following table sets forth the years ended June 30, 2000, 1999, and
1998, certain items from our consolidated financial statements expressed as a
percentage of total revenue:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenue
Ambulance services........................................ 82.0% 83.3% 81.4%
Fire protection services.................................. 10.1 9.0 9.7
Other..................................................... 7.9 7.7 8.9
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
Operating expenses
Payroll and employee benefits............................. 56.7 53.0 53.6
Provision for doubtful accounts........................... 16.8 14.5 17.1
Provision for doubtful accounts -- change in estimate..... 11.4 -- --
Depreciation.............................................. 4.4 4.3 4.0
Amortization of intangibles............................... 1.5 1.6 1.6
Other operating expenses.................................. 20.8 17.6 16.9
Restructuring charge...................................... 7.6 0.4 1.0
----- ----- -----
Operating income (loss)..................................... (19.2) 8.6 5.8
Interest expense, net..................................... 4.6 3.8 3.0
Other..................................................... (0.5) 0.0 0.0
----- ----- -----
Income (loss) before income taxes, extraordinary loss and
cumulative effect of a change in accounting principle..... (23.3) 4.8 2.8
Provision (benefit) for income taxes...................... (5.8) 2.0 1.2
----- ----- -----
Net income (loss) before extraordinary loss and cumulative
effect of a change in accounting principle................ (17.5) 2.8 1.6
Extraordinary loss.......................................... (0.2) -- --
Cumulative effect of a change in accounting principle....... (0.1) -- --
----- ----- -----
Net income (loss)........................................... (17.8)% 2.8% 1.6%
===== ===== =====
</TABLE>
Year Ended June 30, 1999 Compared to Year Ended June 30, 2000
Revenue
Total revenue increased $8.7 million, or 1.5%, from $561.4 million for the
year ended June 30, 1999 to $570.1 million for the year ended June 30, 2000.
Ambulance services revenue increased $0.1 million, or 0.02%, from $467.6 million
for the year ended June 30, 1999 to $467.7 million for the year ended June 30,
2000. Domestic ambulance services revenue in areas served by our company in both
fiscal 2000 and 1999 increased by 2.5%. Fire protection services revenue
increased by $7.0 million, or 14.0%, from $50.5 million for the year ended June
30, 1999 to $57.5 million for the year ended June 30, 2000. Other revenue
increased by $1.6 million, or 3.7%, from $43.2 million for the year ended June
30, 1999 to $44.8 million for the year ended June 30, 2000.
Total domestic ambulance transports decreased by approximately 22,000, or
1.7%, from 1,288,000 for the year ended June 30, 1999 to 1,266,000 for the year
ended June 30, 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.
33
<PAGE> 35
Fire protection services revenue increased primarily due to revenue
generated from new fire protection contracts awarded to us through competitive
bidding as well as rate increases for fire protection services and greater
utilization of our services under fee-for-service arrangements.
Other revenue increased primarily due to revenue associated with urgent and
primary care services provided in Argentina by a company that we acquired in the
third quarter of fiscal 1999, partially offset by a decrease in alternative
transportation services revenue due to our efforts to reduce transports in
certain areas and improve the quality of our revenue.
Operating Expenses
Payroll and employee benefit expenses increased $26.0 million, or 8.7%,
from $297.3 million for the year ended June 30, 1999 to $323.3 million for the
year ended June 30, 2000. Payroll and employee benefit expenses for the fiscal
year ended June 30, 2000 includes $14.8 million of additional health and workers
compensation insurance expense due to a significant increase in the utilization
of insurance benefits experienced during the closure of certain service areas as
well as the development of certain existing claims. Payroll expense related to
our new contracting activity during the fiscal year ended June 30, 2000
contributed $7.3 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 benefit expenses
increased from 53.0% of total revenue during the year ended June 30, 1999 to
56.7 % of total revenue during the year ended June 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.
Because of the continuing difficulties encountered in the healthcare
reimbursement environment, we accelerated our emphasis during fiscal 2000 on
increasing the quality of our revenue in 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 shifted the focus of our billing personnel to
place greater emphasis on the billing process as opposed to the collection
process. We instituted mandatory comprehensive training for our paramedics and
emergency medical technicians on new standards of documentation of ambulance run
tickets. We analyzed the various payor classes within our accounts receivable
balance and the increasing costs to collect these receivables.
Based on the increasingly unpredictable nature of healthcare accounts
receivable and the increasing costs to collect those receivables, we concluded
that the process changes had not brought about the benefits anticipated. As a
result, we changed our method of estimating our allowance for doubtful accounts
effective October 1, 1999. Under our new method of estimation, we have chosen to
fully reserve our accounts receivable earlier in the collection cycle than had
previously been our practice. We provide specific allowances based upon the age
of the accounts receivable within each payor class and also provide 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 is stated separately in the accompanying financial statements. We
anticipate that this change will result in increases in our provision rate for
doubtful accounts in future periods. During fiscal 2000, we continued to
increase our focus on revenue of higher quality by reducing the amount of
non-emergency ambulance transports in selected service areas and continued
previously implemented initiatives to maximize the collection of our accounts
receivable. Also, during the fiscal year ended June 30, 2000, we recorded a $9.8
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 was $81.2 million for the year ended June
30, 1999 and $160.6 million for the year ended June 30, 2000. Provision for
doubtful accounts increased from 14.5% of total revenue for the year ended June
30, 1999 to 28.2% of total revenue for the year ended June 30, 2000. Provision
for doubtful accounts, using the new method of estimation but excluding the
$65.0 million additional provision due to the change in method of estimation and
the $9.8 million additional provision for doubtful accounts related to
34
<PAGE> 36
specific accounts deemed uncollectible in certain service areas that are being
closed or downsized as part of our restructuring program, was 14.5% of the total
revenue for the year ended June 30, 1999 and 15.1% of total revenue for the year
ended June 30, 2000. The provision for doubtful accounts increased from 19.5% of
domestic ambulance service revenue for the year ended June 30, 1999 to 19.6% of
domestic ambulance service revenue for the year ended June 30, 2000, excluding
the additional provision of $65.0 million described above and the $9.8 million
additional provision. Net accounts receivable on non-integrated collection
systems currently represent 7.6% of total net accounts receivable at June 30,
2000. We will continue to review the benefits and timing of integrating the
remaining non-integrated billing centers.
Depreciation increased $0.8 million, or 3.3%, from $24.2 million for the
year ended June 30, 1999 to $25.0 million for the year ended June 30, 2000,
primarily due to increased property and equipment from recent new contracting
activity. Depreciation increased from 4.3% of total revenue for the year ended
June 30, 1999 to 4.4% of total revenue for the year ended June 30, 2000.
Amortization of intangibles decreased by $0.5 million, or 5.4%, from $9.2
million for the year ended June 30, 1999 to $8.7 million for the year ended June
30, 2000. This decrease was the result of the write-off of approximately $22.3
million of goodwill in conjunction with the restructuring charges recorded in
the year ended June 30, 2000. Amortization decreased from 1.6% of total revenue
for the year ended June 30, 1999 to 1.5% of total revenue for the year ended
June 30, 2000.
Other operating expenses increased $19.8 million, or 20.1%, from $98.7
million for the year ended June 30, 1999 to $118.5 million for the year ended
June 30, 2000. Of the $19.8 million increase, $3.9 million was attributable to
the accrual of proposed settlements relating to a Medicare investigation and
certain Medicaid audits, $2.0 million was attributable to operations in services
areas with newly acquired contracts, $4.2 million was attributable to the
operation of a company that was acquired in the third quarter of fiscal 1999,
$3.8 million was attributable to additional insurance expense related primarily
to general liability claims, $1.8 million was attributable to the write-off of
impaired assets, and $1.7 million was attributable to an increase in domestic
fuel costs. Other operating expenses increased from 17.6% of total revenue for
the year ended June 30, 1999 to 20.8% of total revenue for the year ended June
30, 2000. The increased service utilization in our Argentine operations also
attributed to the increase in operating expenses as a percentage of total
revenue.
During the year ended June 30, 2000, we recorded a $43.3 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 $6.6 million of severance costs, $3.3 million of
lease termination costs, $22.3 million write-off of goodwill, and $11.1 million
write-off of other impaired assets and other costs. During the year ended June
30, 1999, we recorded a non-recurring pre-tax charge of $2.5 million for
severance payments related to certain members of senior management who have left
our company.
Interest expense increased by $4.5 million, or 21.0%, from $21.4 million
for the year ended June 30, 1999 to $25.9 million for the year ended June 30,
2000. This increase was caused by higher debt balances, fees, and additional
interest incurred in conjunction with various waiver agreements and higher
interest rates than historically incurred.
Our effective tax rate decreased from 42.0% for the year ended June 30,
1999 to 24.7% for the year ended June 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 of $12.8 million has been
provided because the company believes that the realizability of the deferred tax
asset does not meet the more likely than not criteria under SFAS No. 109,
"Accounting for Income Taxes."
During the year ended June 30, 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 form 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.
35
<PAGE> 37
The cumulative effect of a change in accounting principle resulted in a
$541,000 charge (net of 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.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1999
Revenue
Total revenue increased $85.8 million, or 18.0%, from $475.6 million for
the year ended June 30, 1998 to $561.4 million for the year ended June 30, 1999.
Ambulance services revenue increased $80.6 million, or 20.8%, from $387.0
million for the year ended June 30, 1998 to $467.6 million for the year ended
June 30, 1999, primarily the result of the acquisition of four ambulance service
providers in fiscal 1999 as well as a full year of activity from the eleven
acquisitions completed in fiscal 1998. Domestic ambulance services revenue in
areas served by our company in both fiscal 1999 and 1998 increased by 5.3%. Fire
protection services revenue increased by $4.5 million, or 9.8%, from $46.0
million for the year ended June 30, 1998 to $50.5 million for the year ended
June 30, 1999. Other revenue increased by $0.7 million, or 1.6%, from $42.5
million for the year ended June 30, 1998 to $43.2 million for the year ended
June 30, 1999.
Total domestic ambulance transports increased by approximately 73,000, or
6.0%, from 1,215,000 for the year ended June 30, 1998 to 1,288,000 for the year
ended June 30, 1999. The acquisition of two domestic ambulance service companies
during fiscal 1999, as well as a full year of transport activity from the
acquisitions completed in fiscal 1998, accounted for these additional
transports. Domestic ambulance transports in areas serviced by our company in
both fiscal 1999 and 1998 decreased by 6.0%, due to our concerted effort to
reduce the number of 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 due to rate increases for fire
protection services and greater utilization of our services under
fee-for-service arrangements. The increase also resulted from revenue generated
from new fire protection contracts awarded to us through competitive bidding.
Operating Expenses
Payroll and employee benefit expenses increased $42.5 million, or 16.7%,
from $254.8 million for the year ended June 30, 1998 to $297.3 million for the
year ended June 30, 1999. This increase was primarily due to the acquisition of
four ambulance service companies during fiscal 1999 as well as a full year of
activity from the acquisitions completed in fiscal 1998 and 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 benefit expenses decreased slightly from 53.6%
of total revenue during the year ended June 30, 1998 to 53.0% of total revenue
during the year ended June 30, 1999.
Provision for doubtful accounts was $81.2 million for the year ended June
30, 1998 and for the year ended June 30, 1999. Provision for doubtful accounts
decreased from 17.1% of total revenue for the year ended June 30, 1998 to 14.5%
of total revenue for the year ended June 30, 1999, and decreased from 22.3% of
domestic ambulance service revenue for the year ended June 30, 1998 to 19.5% of
domestic ambulance service revenue for the year ended June 30, 1999. In
comparison, provision for doubtful accounts was 13.6% of total revenue and 16.9%
of domestic ambulance service revenue for the year ended June 30, 1997.
Comparison of the provision for doubtful accounts for the year ended June 30,
1999 to the year ended June 30, 1998, is skewed by the effect of a $17.9 million
additional provision for doubtful accounts that was recorded in the fourth
quarter of fiscal 1998. In view of the continuing difficult reimbursement
environment and the potential for future write-offs of accounts receivable to
continue to be higher than pre-fiscal 1998 levels, we continued to add to the
provision for doubtful accounts during the fiscal year ended June 30, 1999.
Additionally during fiscal 1999, we increased our focus on revenue of higher
quality by reducing the amount of non-emergency ambulance transports in selected
service areas. We also implemented initiatives to maximize the collection of our
accounts receivable. We believe that because of these activities, our provision
for doubtful accounts
36
<PAGE> 38
remained constant with fiscal 1998 levels. Net accounts receivable on
non-integrated collection systems currently represented 11.1% of total net
accounts receivable at June 30, 1999.
Depreciation increased $5.0 million, or 26.0%, from $19.2 million for the
year ended June 30, 1998 to $24.2 million for the year ended June 30, 1999,
primarily due to increased property and equipment from recent acquisition
activity. Depreciation increased from 4.0% of total revenue for the year ended
June 30, 1998 to 4.3% of total revenue for the year ended June 30, 1999.
Amortization of intangibles increased by $1.4 million, or 17.9%, from $7.8
million for the year ended June 30, 1998 to $9.2 million for the year ended June
30, 1999. This increase was the result of increased intangible assets resulting
from recent acquisition activity. Amortization of intangibles was 1.6% of total
revenue for both of the years ended June 30, 1998 and 1999.
Other operating expenses increased $18.5 million, or 23.1%, from $80.2
million for the year ended June 30, 1998 to $98.7 million for the year ended
June 30, 1999, primarily as a result of increased expenses associated with the
operation of the four ambulance service companies acquired during fiscal 1999
and the eleven ambulance service companies acquired during fiscal 1998. Other
operating expenses increased from 16.9% of total revenue for the year ended June
30, 1998 to 17.6% of total revenue for the year ended June 30, 1999.
During the year ended June 30, 1999, we recorded a non-recurring pre-tax
charge of $2.5 million for severance payments related to certain members of
senior management who have left our company. We expect these severance payments
will be completed during fiscal 2001.
During the year ended June 30, 1998, we recorded a non-recurring pre-tax
charge of $5.0 million primarily for severance payments. This charge related to
our reduction of certain administrative personnel at corporate headquarters and
regional offices. These severance payments were substantially completed during
fiscal 1999.
Interest expense increased by $7.3 million, or 51.8%, from $14.1 million
for the year ended June 30, 1998 to $21.4 million for the year ended June 30,
1999. This increase was caused by higher debt balances and higher interest rates
than historically incurred, primarily because of the issuance of $150.0 million
of 7 7/8% Senior Notes due 2008 that occurred near the end of the third quarter
of fiscal 1998.
Our effective tax rate decreased from 45.0% for the year ended June 30,
1998 to 42.0% for the year ended June 30, 1999, primarily the result of the
effect of nondeductible goodwill amortization applied against reduced earnings
in the year ended June 30, 1998 compared to earnings in the year ended June 30,
1999.
37
<PAGE> 39
SEASONALITY AND QUARTERLY RESULTS
The following table reflects certain selected unaudited quarterly operating
results for each quarter of fiscal 2000 and 1999. The operating results of any
quarter are not necessarily indicative of results of any future period.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998(1) 1998 1999 1999 1999 1999(2) 2000(3) 2000(4)
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Ambulance service........ $116,265 $115,759 $119,751 $115,857 $116,897 $121,109 $119,902 $109,833
Fire protection.......... 12,643 12,591 12,372 12,884 13,063 14,551 14,981 14,954
Other revenue............ 9,887 11,239 10,810 11,308 11,240 11,447 11,515 10,582
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue............ 138,795 139,589 142,933 140,049 141,200 147,107 146,398 135,369
Operating income
(loss)................. 10,507 13,381 13,742 10,541 9,581 (57,978) (18,002) (42,921)
Net income (loss)........ 3,602 4,639 4,711 3,052 1,884 (42,386) (16,615) (44,156)
Diluted earnings (loss) per
share.................... $ 0.21 $ 0.32 $ 0.32 $ 0.21 $ 0.13 $ (2.91) $ (1.14) $ (3.02)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
---------------
(1) In the first quarter of the year ended June 30, 1999, we recorded a pre-tax
charge of $2.5 million related to severance payments.
(2) In the second quarter of the year ended June 30, 2000, we recorded a $65.0
million additional provision for doubtful accounts related to a change in
our method of estimating doubtful accounts.
(3) In the third quarter of the year ended June 30, 2000, we recorded a pre-tax
restructuring charge of $25.1 million related to the closure or downsizing
of certain non-emergency service areas and the reduction of corporate
overhead and $3.0 million additional provision for doubtful accounts related
to uncollectible accounts in those service areas that are being closed or
downsized.
(4) In the fourth quarter of the year ended June 30, 2000, we recorded a pre-tax
restructuring charge of $18.2 million related to the closure or downsizing
of certain non-emergency service areas and the reduction of corporate
overhead and $6.8 million additional provision for doubtful accounts related
to uncollectible accounts in those service areas that are being closed or
downsized.
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 fourth quarter, as compared to the other three quarters, as
South America enters into 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 decrease 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our cash requirements principally through
cash flow from operating activities, term and revolving indebtedness, capital
equipment lease financing, issuance of senior notes, the sale of common stock
through an initial public offering in July 1993 and subsequent public stock
offerings in May 1994 and April 1996, and the exercise of stock options.
At June 30, 2000, we had negative working capital of $192.5 million,
including cash of $10.3 million, compared to working capital of $140.9 million,
including cash of $7.2 million, at June 30, 1999. During the year ended June 30,
2000, our cash flow used in operations was $11.5 million resulting primarily
from net losses of $101.3 million, offset by non-cash expenses of depreciation
and amortization of $33.7 million,
38
<PAGE> 40
provision for doubtful accounts of $160.6 million, and write-offs of assets
included in restructuring charge of $28.9 million. Additionally, we experienced
a decrease in deferred income taxes of $9.4 million and an increase in accounts
receivable of $119.2 million. Cash flow provided by operations was $21.8 million
for the year ended June 30, 1999.
Cash provided by financing activities was $28.3 million for the year ended
June 30, 2000, primarily because of the increased borrowings on our revolving
credit facility, offset by the repayments on other debt and capital lease
obligations.
Cash used in investing activities was $13.9 million for the year ended June
30, 2000 due primarily to 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 June 30, 2000 and June 30, 1999 were
$231.7 million and $228.9 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, were $143.9 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 provision for doubtful accounts increased from $81.2 million at June
30, 1999 to $160.6 million at June 30, 2000. The primary reason for this
increase is the additional provision for doubtful accounts of $65.0 million
recorded in the year ended June 30, 2000 to reflect the effect of the change in
our method of estimating our provision for doubtful accounts. Because of
continuing difficulties in the healthcare reimbursement environment, during
fiscal 2000, we accelerated 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 shifted the focus of our billing
personnel to place greater emphasis on the billing process as opposed to the
collection process. We 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 our method of
estimating our allowance for doubtful accounts. 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 estimation methodology 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. Management believes that
we now have a more predictable method of determining the realizable value of our
accounts receivable.
During the year ended June 30, 1998, we increased the amount of our
revolving credit facility from $175.0 million to $200.0 million. The revolving
credit facility was also amended by extending the maturity date to March 16,
2003 and converting it to an unsecured credit facility that is unconditionally
guaranteed on a joint and several basis by substantially all of our domestic
wholly-owned current and future subsidiaries. The revolving credit facility is
priced at prime rate, Federal Funds Rate plus 0.5%, or a LIBOR-based rate. The
LIBOR-based rates range from LIBOR plus 0.875% to LIBOR plus 1.75%. At June 30,
1999 the interest rate was 6.7% on the revolving credit facility. Interest rates
and availability under the revolving credit facility depend upon our company
meeting certain financial covenants, including total debt leverage ratios, total
debt to capitalization ratios and fixed charge ratios.
39
<PAGE> 41
Our $200 million revolving credit facility was priced at the greater of (i)
prime rate, (ii) Federal Funds rate plus 0.5% plus the applicable margin, or
(iii) a LIBOR-based rate. The LIBOR-based rates ranged from LIBOR plus 0.875% to
LIBOR plus 1.75%. As discussed below, during March 2000, all borrowings become
priced at prime rate plus 0.25%. At June 30, 2000, the weighted average interest
rate was 9.75% on the revolving credit facility. Interest rates and availability
under the revolving credit facility depend upon our company meeting certain
financial covenants, including total debt leverage ratios, total debt to
capitalization ratios and fixed charge ratios. Approximately $146.8 million was
outstanding on the revolving credit facility at June 30, 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. Additional waivers were obtained in July
covering the period from July 14, 2000 to October 16, 2000 and in October
covering the period from October 16, 2000 to January 31, 2001. The waivers cover
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 waivers stipulate that no additional borrowings will be available to us
during the period of March 15, 2000 through January 31, 2001. 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, (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. We
have discussed with our lenders our failure to maintain positive consolidated
operating income net of restructuring charges at June 30, 2000, and the lenders
have not asserted that we have failed to comply with any requirements under 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 of April 13, 2000 through January 31, 2001, 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 January 31, 2001. 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.
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 we believe 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 June 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". Our inability to successfully negotiate an amendment
of our revolving credit facility could have a material adverse effect on our
financial condition. As a result of the unresolved status of our credit facility
and other factors, our independent public accountants have modified their report
to include a statement that these uncertainties create substantial doubt about
our company's ability to continue as a going concern.
In November 1998, we entered into an interest rate swap agreement that
originally expired in November 2003 with a provision for the lending party to
terminate the agreement in November 2000. The interest rate swap agreement
effectively converted $50.0 million of variable rate borrowings to fixed rate
borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating
rate. The weighted average floating rate for the year ended June 30, 1999 was
5.2%. As a result of this swap agreement interest expense was reduced by
approximately $106,000 during the year ended June 30, 1999. In June 1999, we
terminated the interest rate swap agreement and received a termination fee of
$604,000. Such amount will be amortized as a reduction of interest expense on a
straight-line basis through November 2000.
40
<PAGE> 42
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 June 30, 2000 the interest rate was 9.75% on
the lease line of credit. Approximately $1.5 million was outstanding on this
line of credit at June 30, 2000.
In March 1998, we issued $150.0 million of 7 7/8% Senior Notes due 2008
(the Notes) effected under Rule 144A under the Securities Act of 1933, as
amended ("Securities Act"). Interest under the Notes is payable semi-annually on
September 15 and March 15, and the Notes are not callable until March 2003
subject to the terms of the Indenture. We incurred expenses related to the
offering of approximately $5.3 million and will amortize these costs over the
life of the Notes. We recorded a $258,000 discount on the Notes and will
amortize this discount over the life of the Notes. Unamortized discount at June
30, 2000 was $199,000, and this amount is recorded as an offset to long-term
debt in the consolidated financial statements. In April 1998, we filed a
registration statement under the Securities Act relating to an exchange offer
for the Notes. The registration became effective on May 14, 1998. The Notes are
general unsecured obligations of our company and are unconditionally guaranteed
on a joint and several basis by substantially all of our domestic wholly owned
current and future subsidiaries. See Note 4 of notes to our consolidated
financial statements. 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.
During the year ended June 30, 1999, we made investments in companies
offering ambulance services, ambulance billing services, and alternative
transportation services. We contributed cash, accounts receivable, and fixed
assets totaling $1.9 million at June 30, 1999 to these businesses. During the
year ended June 30, 2000, one of these investments was determined to be impaired
and amounts totaling $1.6 million were written-off. These amounts represent the
initial investment plus other amounts loaned to the company. These investments
have been recorded using the cost method of accounting.
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 and capital needs for operations for the 12 months subsequent to June
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 the 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 conditions, interest rates, our
financial condition, covenants in our debt agreements, and the market price of
our common stock.
There can be no assurance that our restructuring efforts will be
successful. Under current circumstances, our ability to continue as a going
concern depends upon the successful restructuring of the revolving credit
facility as well as the success of our restructuring program.
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
41
<PAGE> 43
currency of the country in which it is operating. At June 30, 2000 our balance
sheet reflects a $252,000 cumulative equity adjustment (decrease) from foreign
currency translation. During the year ended June 30, 2000, we recognized
$173,000 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. See "Risk Factors -- We face risks
associated with international operations and foreign currency fluctuations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have entered into interest rate swap agreements to limit the effect of
increases in the interest rates on floating rate debt. The swap agreements are
contracts to exchange floating rate for fixed interest payments periodically
over the life of the agreements without the exchange of the underlying notional
amounts. The notional amounts of interest rate agreements are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. The net cash amounts paid or received on the agreements are accrued
and recognized as an adjustment to interest expense.
In November 1998, we entered into an interest rate swap agreement that
originally expired in November 2003 with a provision for the lending party to
terminate the agreement in November 2000. The interest rate swap agreement
effectively converted $50.0 million of variable rate borrowings to fixed rate
borrowings. We paid a fixed rate of 4.72% and received a LIBOR-based floating
rate. The weighted average floating rate for the year ended June 30, 1999 was
5.2%. As a result of this swap agreement interest expense was reduced by
approximately $106,000 during the year ended June 30, 1999. In June 1999, we
terminated the interest rate swap agreement and received a termination fee of
$604,000. Such amount will be amortized as a reduction of interest expense on a
straight-line basis through November 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of June 30, 2000 and for each of
the fiscal years in the three-year period ended June 30, 2000 together with
related notes and the report of Arthur Andersen LLP are set forth on the
following pages.
42
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rural/Metro Corporation:
We have audited the accompanying consolidated balance sheets of RURAL/METRO
CORPORATION (a Delaware corporation) and subsidiaries (collectively, the
Company) as of June 30, 2000 and 1999, and the related consolidated statements
of operations, changes in stockholders' equity, cash flows, and comprehensive
income (loss) for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rural/Metro Corporation and
subsidiaries as of June 30, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is operating under a waiver of certain
financial covenants contained in its revolving credit facility and had a
significant operating loss for the year ended June 30, 2000. These as well as
other matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
September 20, 2000
43
<PAGE> 45
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 10,287 $ 7,180
Accounts receivable, net of allowance for doubtful accounts
of $87,752 and $43,392 respectively (Note 1).............. 143,905 185,454
Inventories................................................. 19,070 16,371
Prepaid expenses and other.................................. 6,552 13,630
-------- --------
Total current assets.............................. 179,814 222,635
PROPERTY AND EQUIPMENT, net (Notes 1, 2 and 3).............. 85,919 95,032
INTANGIBLE ASSETS, net (Notes 1 and 2)...................... 207,200 240,360
OTHER ASSETS................................................ 18,284 21,880
-------- --------
$491,217 $579,907
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 16,135 $ 17,782
Accrued liabilities (Note 1)................................ 57,087 58,159
Current portion of long-term debt (Notes 1, 4 and 5)........ 299,104 5,765
-------- --------
Total current liabilities......................... 372,326 81,706
LONG-TERM DEBT, net of current portion (Notes 1, 4 and 5)... 2,850 268,560
NON-REFUNDABLE SUBSCRIPTION INCOME.......................... 14,989 14,909
DEFERRED INCOME TAXES....................................... -- 9,438
OTHER LIABILITIES........................................... 101 205
-------- --------
Total liabilities................................. 390,266 374,818
-------- --------
MINORITY INTEREST........................................... 5,360 8,250
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 7 and 8)
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none issued at June 30, 2000 and 1999......... -- --
Common stock, $.01 par value, 23,000,000 shares authorized,
14,626,336 and 14,530,312 shares outstanding at June 30,
2000 and 1999, respectively............................... 149 148
Additional paid-in capital.................................. 137,603 137,792
Retained earnings (accumulated deficit)..................... (40,670) 60,603
Cumulative translation adjustment........................... (252) (465)
Treasury stock, at cost, 149,456 shares at June 30, 2000 and
1999...................................................... (1,239) (1,239)
-------- --------
Total stockholders' equity........................ 95,591 196,839
-------- --------
$491,217 $579,907
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
44
<PAGE> 46
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE
Ambulance services........................................ $ 467,741 $467,632 $387,041
Fire protection services.................................. 57,549 50,490 45,971
Other..................................................... 44,784 43,244 42,546
--------- -------- --------
Total revenue...................................... 570,074 561,366 475,558
--------- -------- --------
OPERATING EXPENSES
Payroll and employee benefits............................. 323,285 297,341 254,806
Provision for doubtful accounts........................... 95,623 81,227 81,178
Provision for doubtful accounts -- change in accounting
estimate (Note 1)....................................... 65,000 -- --
Depreciation.............................................. 25,009 24,222 19,213
Amortization of intangibles............................... 8,687 9,166 7,780
Other operating expenses.................................. 118,516 98,739 80,216
Restructuring charge and other (Note 1)................... 43,274 2,500 5,000
--------- -------- --------
Total expenses..................................... 679,394 513,195 448,193
--------- -------- --------
OPERATING INCOME (LOSS)..................................... (109,320) 48,171 27,365
Interest expense, net (Note 4 and 5)...................... 25,939 21,406 14,082
Other..................................................... (2,890) 70 (199)
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... (132,369) 26,695 13,482
PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 10)......... (32,837) 11,231 5,977
--------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................ (99,532) 15,464 7,505
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN AMBULANCE
SERVICE LICENSES (NET 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)........................................... $(101,273) $ 15,464 $ 7,505
========= ======== ========
INCOME (LOSS) PER SHARE
Basic --
Income (loss) before extraordinary loss and cumulative
effect of a change in accounting principle............ $ (6.82) $ 1.07 $ 0.55
Extraordinary loss on expropriation of Canadian
ambulance service licenses............................ (0.08) -- --
Cumulative effect of change in accounting principle..... (0.04) -- --
--------- -------- --------
Net income (loss)......................................... $ (6.94) $ 1.07 $ 0.55
========= ======== ========
Diluted --
Income (loss) before extraordinary loss and cumulative
effect of a change in accounting principle............ $ (6.82) $ 1.06 $ 0.54
Extraordinary loss on expropriation of Canadian
ambulance service licenses............................ (0.08) -- --
Cumulative effect of change in accounting principle..... (0.04) -- --
--------- -------- --------
Net income (loss)......................................... $ (6.94) $ 1.06 $ 0.54
========= ======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING -- BASIC............... 14,592 14,447 13,529
========= ======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING -- DILUTED............. 14,592 14,638 14,002
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 47
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS CUMULATIVE
PREFERRED COMMON PAID-IN (ACCUMULATED DEFERRED TRANSLATION TREASURY
STOCK STOCK CAPITAL DEFICIT) COMPENSATION ADJUSTMENT STOCK TOTAL
--------- ------ ---------- ------------ ------------ ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997.... $-- $130 $121,355 $ 40,334 $(772) $ -- $(1,239) $ 159,808
Issuance of 803,565
shares of common stock
for
pooling-of-interests
(Note 2).............. -- 8 946 (2,700) -- -- -- (1,746)
-- ---- -------- --------- ----- ----- ------- ---------
BALANCE, June 30, 1997 as
restated for effect of
pooling-of-interests.... -- 138 122,301 37,634 (772) -- (1,239) 158,062
Issuance of 525,771
shares of common
stock................. -- 6 10,765 -- (135) -- -- 10,636
Tax benefit related to
the exercise of
nonqualified stock
options and vesting of
stock grants.......... -- -- 1,012 -- -- -- -- 1,012
Amortization of deferred
compensation.......... -- -- -- -- 558 -- -- 558
Net income................ -- -- -- 7,505 -- -- -- 7,505
-- ---- -------- --------- ----- ----- ------- ---------
BALANCE, June 30, 1998.... -- 144 134,078 45,139 (349) -- (1,239) 177,773
Issuance of 430,829
shares of common
stock................. -- 4 3,706 -- -- -- -- 3,710
Tax benefit related to
the exercise of
nonqualified stock
options and vesting of
stock grants.......... -- -- 8 -- -- -- -- 8
Amortization of deferred
compensation.......... -- -- -- -- 349 -- -- 349
Cumulative translation
adjustment............ -- -- -- -- -- (465) -- (465)
Net income................ -- -- -- 15,464 -- -- -- 15,464
-- ---- -------- --------- ----- ----- ------- ---------
BALANCE, June 30, 1999.... -- 148 137,792 60,603 -- (465) (1,239) 196,839
Issuance of 121,828
shares of common
stock................. -- 1 654 -- -- -- -- 655
Cancellation of shares
previously issued in
acquisitions.......... -- -- (843) -- -- -- -- (843)
Change in cumulative
translation adjustment
due to expropriation
of Canadian ambulance
service licenses...... -- -- -- -- -- 173 -- 173
Cumulative translation
adjustment............ -- -- -- -- -- 40 -- 40
Net loss.................. -- -- -- (101,273) -- -- -- (101,273)
-- ---- -------- --------- ----- ----- ------- ---------
BALANCE, June 30, 2000.... $-- $149 $137,603 $ (40,670) $ -- $(252) $(1,239) $ 95,591
== ==== ======== ========= ===== ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 48
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(101,273) $ 15,464 $ 7,505
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities --
Write-off of assets....................................... 28,873 -- --
Extraordinary loss........................................ 1,200 -- --
Cumulative effect of a change in accounting principle..... 541 -- --
Depreciation and amortization............................. 33,696 33,388 26,993
Amortization of deferred compensation..................... -- 80 558
Amortization of gain on sale of real estate............... (104) (103) (103)
Provision for doubtful accounts........................... 160,623 81,227 81,178
Undistributed earnings (loss) of minority shareholder..... (2,890) 70 (199)
Amortization of discount on Senior Notes.................. 26 26 7
Change in assets and liabilities, net of effect of
businesses acquired --
Increase in accounts receivable........................... (119,219) (112,030) (116,481)
Increase in inventories................................... (3,370) (3,244) (4,260)
(Increase) decrease in prepaid expenses and other......... 2,501 2,335 (2,285)
Increase (decrease) in accounts payable................... (1,669) 2,692 1,167
Increase (decrease) in accrued liabilities and other
liabilities............................................. (889) (3,030) 23,120
Increase in nonrefundable subscription income............. 80 1,227 305
Increase (decrease) in deferred income taxes.............. (9,438) 3,702 (4,934)
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... (11,312) 21,804 12,571
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes...................... -- -- 145,805
Borrowings (repayments) on revolving credit facility, net... 33,307 27,500 (50,000)
Repayment of debt and capital lease obligations............. (5,704) (7,794) (31,887)
Borrowings under capital lease obligations.................. -- -- 2,701
Issuance of common stock.................................... 655 1,785 1,665
--------- --------- ---------
Net cash provided by financing activities.......... 28,258 21,491 68,284
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for businesses acquired (Note 2).................. -- (12,665) (36,848)
Proceeds from the expropriation of Canadian ambulance
services licenses......................................... 2,191 -- --
Capital expenditures........................................ (15,911) (23,939) (31,043)
Increase in other assets.................................... (159) (5,557) (9,851)
--------- --------- ---------
Net cash used in investing activities.............. (13,879) (42,161) (77,742)
--------- --------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE..................... 40 (465) --
--------- --------- ---------
INCREASE IN CASH............................................ 3,107 669 3,113
CASH, beginning of year..................................... 7,180 6,511 3,398
--------- --------- ---------
CASH, end of year........................................... $ 10,287 $ 7,180 $ 6,511
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit
plan...................................................... $ -- $ 1,933 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE> 49
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME (LOSS)........................................... $(101,273) $15,464 $7,505
Foreign currency translation adjustments.................. 40 (465) --
--------- ------- ------
COMPREHENSIVE INCOME (LOSS)................................. $(101,233) $14,999 $7,505
========= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 50
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Operations
Rural/Metro Corporation, a Delaware corporation, and its subsidiaries
(collectively, the Company) is a diversified emergency services company
providing ambulance transport services, urgent home medical care, fire
protection and training services, alternative transportation services and home
health care services in 25 states, the District of Columbia and Latin America.
In the United States, the Company provides "911" emergency and general transport
ambulance services to patients on both a fee-for-service basis and a
non-refundable subscription fee basis. In Latin America, the Company provides
urgent home medical care and ambulance services under capitated service
arrangements. Fire protection services are provided either under contracts with
municipalities or fire districts, or on a non-refundable subscription fee basis
to individual homeowners or commercial property owners.
The Company depends on certain contracts with municipalities or fire
districts to provide "911" emergency ambulance services and fire protection
services. The five largest contracts accounted for 12%, 11% and 12% of total
revenue for the fiscal years ended June 30, 2000, 1999 and 1998, respectively,
with the largest of the five contracts accounting for 3%, 3% and 4%,
respectively, of total revenue for the same periods. These contracts are subject
to requests for proposals, competitive bid processes or renegotiation upon
expiration and may be subject to termination for failure to meet performance
criteria.
Restructuring, Revolving Credit Facility Default and Management's Plans
The Company has incurred a net loss of $101.3 million for the year ended
June 30, 2000 and as a result, is operating under a waiver of covenant
compliance of financial covenants under the Company's revolving credit facility
(See note 5). 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. See Note 1 for information about
the Company's restructuring charges and method for providing for doubtful
accounts.
The Company has been in discussions with the revolving credit facility
lenders ("Lenders") and has obtained waivers of covenant compliance through
January 31, 2001. 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 through the end of the waiver period. In addition, the waiver
(as amended through January 31, 2001) 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 the Company is in compliance with all of
the conditions of the waiver. The Company has discussed with the Lenders its
failure to maintain positive operating income (net of restructuring charges), at
June 30, 2000, as required under the waiver and the Lenders have not asserted
that the Company has failed to comply with any requirements under the waiver.
Although the Company believes no Event of Default is continuing either under the
terms of the revolving credit facility (as a result of the waiver agreement) or
the Company's $150 million 7 7/8% Senior Notes due 2008 ("Notes"), 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 in the accompanying financial statements at June 30, 2000.
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.
49
<PAGE> 51
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has self funded all obligations, including regularly scheduled
interest payments on the revolving credit facility and the Notes from operating
cash flow. 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 fiscal 2001. Management is
actively working with the 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 the 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.
Principles of Consolidation
The financial statements include the accounts of Rural/Metro Corporation
and its greater than 50% owned subsidiaries. Investments in affiliates, in which
the Company owns 20% to 50%, are carried on the equity method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Ambulance service fees are recorded net of Medicare, Medicaid and other
reimbursement limitations and recognized when services are provided. During the
years ended June 30, 2000, 1999 and 1998, the Company derived approximately 23%,
24% and 29%, respectively, of its net ambulance fee collections from Medicare
and 11%, 10% and 11%, respectively, from Medicaid. The reimbursement process is
complex and can involve lengthy delays. Third-party payors are continuing their
efforts to control expenditures for health care, including proposals to revise
reimbursement policies. Although the Company recognizes revenue when the
services are provided, there can be lengthy delays before reimbursement is
received. The Company has from time to time experienced delays in receiving
reimbursements from third-party payors. In addition, third-party payors may
disallow, in whole or in part, requests for reimbursement based on
determinations that certain amounts are not reimbursable or because additional
supporting documentation is necessary. Retroactive adjustments can change
amounts realized from third-party payors. Delays and uncertainties in the
reimbursement process adversely affect the Company's level of accounts
receivable and may adversely affect the Company's working capital. The Company
establishes 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 recorded for the expected difference between
net ambulance service fees and amounts actually collected. The continuing
efforts of third-party payors to control expenditures for health care could
affect the revenue, cash flows, accounts receivable realization and
profitability of the Company.
Effective October 1, 1999 the Company changed its methodology of
determining its provision for doubtful accounts. This change is being treated as
a change in accounting estimate. During the fiscal year ended June 30, 2000,
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 process changes have not brought about the benefits anticipated,
led to this change. Under the Company's new method of estimating its allowance
for doubtful accounts, the Company has chosen to fully reserve its accounts
receivable earlier in the collection cycle than had previously been the
practice. The new method 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
50
<PAGE> 52
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of this change was an additional $65.0 million provision for doubtful accounts,
which was recorded separately and is reflected in the accompanying statement of
operations for the fiscal year ended June 30, 2000.
During August 1997, President Clinton signed the "Balanced Budget Act of
1997" (the Act). The Act provides for certain changes to the Medicare
reimbursement system. These changes include, among other things, the creation of
a Medicare Payment Advisory Commission to review payment policies and health
care delivery, and make recommendations to Congress concerning such payment
policies.
In addition, the Act provides for the development and implementation of a
prospective fee schedule, by January 2000, for ambulance services. The Act
mandates that this fee schedule be developed through a negotiated rulemaking
process and must consider the following: (i) data from industry and other
organizations involved in the delivery of ambulance services, (ii) mechanisms to
control increases in expenditures for ambulance services, (iii) appropriate
regional and operational differences, (iv) adjustments to payment rates to
account for inflation and other relevant factors, and (v) the phase-in of
payment rates under the fee schedule in an efficient and fair manner.
The Act requires that, beginning January 1, 2001, ambulance service
providers accept assignment whereby the Company receives payment directly from
Medicare and accepts such amount, along with the co-pay and deductible paid by
the patient, as payment in full. The Act also applies the Skilled Nursing
Facility Prospective Payment System (SNFPPS) to a limited number of ambulance
trips to and from nursing homes. The application of SNFPPS could require the
Company to negotiate new contracts or arrangements with skilled nursing
facilities to provide ambulance services.
The Act also stipulates that individual states may now elect to no longer
provide payment for cost-sharing for coinsurance, or copayments, for
dual-qualified (Medicare and Medicaid) beneficiaries.
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 prospective fee schedule as well
as the mandatory acceptance of assignment would be postponed to January 2001.
HCFA also announced rules that became effective in February 1999, which require,
among other things, that a physician's certification be obtained for certain
ambulance transports.
Certain actions to partially mitigate any adverse effect of these changes
could be taken by the Company. These actions could include renegotiation of
rates and contract subsidies provided in the Company's "911" ambulance service
contracts and changes in staffing of ambulance crews based upon the negotiation
for longer response times under ambulance service contracts to reduce operating
costs.
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 actions by the Company to
offset any negative impact of the proposed change in reimbursement policies that
could have a material adverse effect.
Revenue generated under fire protection service contracts is recognized
over the life of the contract. Subscription fees received in advance are
deferred and recognized over the term of the subscription agreement, generally
one year.
Other revenue is comprised primarily of fees associated with alternative
transportation, dispatch, fleet, billing and home health care services and is
recognized when the services are provided.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." The statement modifies the calculation of primary and fully diluted
earnings per share (EPS) as previously required and replaces them with basic and
diluted EPS. SFAS No. 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997 and as a result, all prior
period EPS data presented has been restated in the consolidated financial
statements.
51
<PAGE> 53
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted EPS computations for the
years ended June 30, 2000, 1999 and 1998 is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------------- --------------------------------------- -----------
LOSS SHARES PER SHARE INCOME SHARES PER SHARE INCOME
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR)
----------- ------------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS.................. $(101,273) 14,592 $(6.94) $15,464 14,447 $1.07 $7,505
====== =====
Effect of stock options.... -- -- -- 191 --
--------- ------ ------- ------ ------
Diluted EPS................ $(101,273) 14,592 $(6.94) $15,464 14,638 $1.06 $7,505
========= ====== ====== ======= ====== ===== ======
<CAPTION>
1998
-------------------------
SHARES PER SHARE
(DENOMINATOR) AMOUNT
------------- ---------
<S> <C> <C>
Basic EPS.................. 13,529 $0.55
=====
Effect of stock options.... 473
------
Diluted EPS................ 14,002 $0.54
====== =====
</TABLE>
As a result of anti-dilutive effects, approximately 39 common stock
equivalents were not included in the computation of diluted earnings per share
for the year ended June 30, 2000.
Foreign Currency Translation
Financial information relating to the Company's foreign subsidiaries is
reported in accordance with SFAS No. 52, "Foreign Currency Translation." The
financial statements of non-U.S. subsidiaries are measured using the local
currency as the functional currency. Assets and liabilities of these non-U.S.
subsidiaries are translated at exchange rates in effect as of the end of each
balance sheet date, and related revenues and expenses are translated at average
exchange rates in effect during the period. During the year ended June 30, 2000,
the Company recognized $173,000 translation adjustment as a component of the
extraordinary loss on the expropriation of Canadian ambulance service licenses.
Inventories
Inventories, consisting of ambulance and fire supplies, are stated at the
lower of cost, on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation,
and is depreciated over the estimated useful lives using the straight-line
method. Equipment and vehicles are depreciated over three to ten years and
buildings are depreciated over fifteen to thirty years. Property and equipment
held under capital leases is stated at the present value of minimum lease
payments, net of accumulated amortization. These assets are amortized over the
lesser of the lease term or the estimated useful life of the underlying assets
using the straight-line method. Major additions and improvements are
capitalized; maintenance and repairs which do not improve or significantly
extend the life of assets are expensed as incurred.
Intangible Assets
Intangible assets include costs in excess of the fair value of net assets
of businesses acquired of $206,137,000 and $239,243,000 and covenants not to
compete of $1,063,000 and $1,117,000 at June 30, 2000 and 1999, respectively.
Costs in excess of the fair value of net assets acquired are amortized over
twenty-five to thirty-five years using the straight-line method. Covenants not
to compete are amortized using the straight-line method over the term of the
related agreements, generally three to five years. Accumulated amortization of
these intangible assets was $28,577,000 and $25,713,000 at June 30, 2000 and
1999, respectively.
Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." Under SFAS No. 121,
long-lived assets and certain identifiable intangible assets to be held and used
in operations are reviewed for
52
<PAGE> 54
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be fully recoverable. An impairment loss is recognized if the
sum of the expected long-term undiscounted cash flows is less than the carrying
amount of the long-lived assets being evaluated. See restructuring charge below
and Note 2.
Accrued Liabilities
Included in accrued liabilities is $11,264,000 and $14,780,000 for
salaries, wages and related payroll expenses and $0 and $2,657,000 for accrued
insurance premiums at June 30, 2000 and 1999, respectively.
Restructuring Charge
During the year ended June 30, 2000, the Company recorded pre-tax
restructuring and other charges, exclusive of the additional provision for
doubtful accounts, totaling $43.3 million associated with it's restructuring
program related to the closing or downsizing of certain non-emergency service
areas and reduction of corporate overhead. These charges primarily include
severance, service area closing costs, and the write-off of goodwill and other
impaired assets associated with the service area reduction. The components of
the amounts included in restructuring charges and other and the remaining
accrual at June 30, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
CHARGE JUNE 30,
RECORDED USAGE 2000
-------- -------- ----------
<S> <C> <C> <C>
Severance costs....................................... $ 6,621 $ (3,028) $3,593
Lease termination costs............................... 3,299 (52) 3,247
Write off of intangible assets........................ 22,250 (22,250) --
Write-off of impaired assets and other costs.......... 11,104 (9,421) 1,683
------- -------- ------
$43,274 $(34,751) $8,523
======= ======== ======
</TABLE>
The $6.6 million of severance costs is calculated based upon the severance
payments to be made to approximately 300 employees terminated under the
restructuring plan.
During the year ended June 30, 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 year ended June 30, 1998, the
Company recorded a charge of $5.0 million related to severance payments. The
$5.0 million charge related to the cost of terminating approximately 300
administrative employees throughout the Company. As of June 30, 1999 and June
30, 1998, the balance of the allowance for restructuring costs and severance
payments was $1.3 million and $5.4 million, respectively. The allowance is
included in accrued liabilities in the accompanying consolidated balance sheets.
There are no allowances remaining related to the restructuring charges recorded
in the years ended June 30, 1999 and June 30, 1998.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with federally-insured institutions and
limits the amount of credit exposure to any one institution. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's credit base and the geographical
dispersion of the customers.
Use of Estimates
In the preparation of financial statements in conformity with accounting
principles generally accepted in the United States, management of the Company
has made estimates and assumptions that affect the reported amounts of assets
and liabilities, particularly accounts receivable and its effect on revenue,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
53
<PAGE> 55
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value assumptions. The carrying values of cash,
accounts receivable, accounts payable, accrued liabilities and other liabilities
approximate fair value due to the short-term maturities of these instruments.
The revolving line of credit approximates fair value as it bears interest at a
rate indexed to LIBOR. The senior note, note payable and capital lease
obligations approximate fair value as rates on these instruments, in the
aggregate, approximate market rates currently available for instruments with
similar terms and remaining maturities.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 (as amended by SFAS No. 138), "Accounting for Derivative Instruments and
Hedging Activities," which requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the FASB issued SFAS No. 137
which deferred the effective date of SFAS No. 133. The Company will be required
to adopt SFAS No 133, as amended, during the fiscal year ending June 30, 2001.
The Company does not anticipate any material impact resulting from the adoption
of SFAS No. 133, as amended.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which was subsequently updated by SAB 101A. SAB 101 and SAB 101A
summarize certain of the SEC's views in applying accounting principles generally
accepted in the United States to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of its
fiscal year ending June 30, 2001. The Company does not anticipate any material
impact resulting from the adoption of SAB 101.
Change in Accounting Principle
In accordance with Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities," effective July 1, 1999, the Company was required to change
its accounting principle for organization costs. Previously, the Company
capitalized such costs and amortized them using the straight-line method over
five years. At June 30, 1999 such unamortized costs totaled $933,000. During the
fiscal year ended June 30, 2000, the Company wrote-off its capitalized
organization costs and will expense any future organization costs incurred. The
write-off was $541,000 (net of a tax benefit of $392,000) and has been reflected
in the Consolidated Statement of Operations as the "Cumulative Effect of a
Change in Accounting Principle" in accordance with APB No. 20.
(2) BUSINESS DEVELOPMENT ACTIVITIES
Acquisitions
The Company completed no acquisitions during the year ended June 30, 2000.
All five of the acquisitions completed during the year ended June 30, 1999 were
accounted for as purchases in accordance with Accounting Principles Board (APB)
Opinion No. 16, "Business Combinations" and, accordingly, the purchased assets
and assumed liabilities were recorded at their estimated fair values at each
respective acquisition date. Eight of the acquisitions completed during the year
ended June 30, 1998 were accounted for as purchases in accordance with APB No.
16 and three of the acquisitions were accounted for as poolings-of-interest in
accordance with APB No. 16.
54
<PAGE> 56
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price of the operations accounted for as purchases
in the year ended June 30, 1999 consisted of the following:
<TABLE>
<S> <C>
Cash........................................................ $12,665
Notes payable to sellers.................................... 872
Assumption of liabilities................................... 7,104
-------
Total.................................................. $20,641
=======
</TABLE>
The fair value of the assets purchased in the year ended June 30, 1999 was
allocated as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment...................................... $17,511
Intangible assets........................................... 2,770
Other assets................................................ 360
-------
Total.................................................. $20,641
=======
</TABLE>
The following consolidated pro forma financial information was prepared
assuming that each acquisition completed during the fiscal year ended June 30,
1999 had occurred as of the beginning of the fiscal year. This pro forma
information does not necessarily reflect the results of operations that would
have occurred had the acquisitions taken place at the beginning of each fiscal
year and is not necessarily indicative of results that may be obtained in the
future (unaudited):
<TABLE>
<S> <C>
Revenue..................................................... $565,435
Net income.................................................. $ 15,126
Earnings per share -- basic................................. $ 1.05
Earnings per share -- diluted............................... $ 1.03
</TABLE>
Joint Venture
During the fiscal year ended June 30, 1998, the Company entered into a
joint venture to provide non-emergency ambulance service and medical
transportation in Maryland, Washington D.C. and northern Virginia. The Company
is the majority shareholder and, therefore, the results of operations and the
assets and liabilities of the joint venture are consolidated and included in the
accompanying consolidated financial statements. Minority interest is recorded
for the results of operations and the equity interest attributable to the
minority joint venture partner. The minority joint venture partner contributed
to the joint venture all of the issued and outstanding stock of two ambulance
service companies. The Company contributed to the joint venture a commitment to
fund $8.0 million for additional acquisitions in the greater Baltimore, Maryland
and Washington D.C. area. As of June 30, 1998, the Company had completely
fulfilled the $8.0 million commitment. The joint venture agreement allows the
minority joint venture partner to exercise an option to repurchase one share of
stock of the joint venture, thereby increasing the minority joint venture
partner's interest to 50%. Should such option be exercised, the Company would no
longer be able to consolidate the joint venture into its consolidated financial
statements and the equity method of accounting would be applied. The Company
believes that the exercise of the option is not probable due to the mutually
beneficial ongoing relationship wherein the parties are on good terms and enjoy
a collaborative and participatory working relationship. The Company has received
no indication of interest to exercise the option. The repurchase option provides
for the repurchase at the price paid at the time of the creation of the joint
venture, which is $80,000.
Public/Private Alliance
During the year ended June 30, 1998, the Company entered into a
public/private alliance with the San Diego Fire and Life Safety Services to
provide all emergency and non-emergency transport services for the City of San
Diego. As part of the alliance, a limited liability corporation (the LLC) was
created with a 50/50 ownership between the Company and the City of San Diego. A
wholly-owned subsidiary of the Company contracts with the LLC to provide
operational and
55
<PAGE> 57
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative support. Revenue generated under this contract totaled $10.4
million and $7.3 million for the years ended June 30, 2000 and 1999,
respectively. Such revenue is included in other revenue in the accompanying
consolidated financial statements. San Diego Fire and Life Safety Services also
contracts with the LLC to provide emergency response and transportation
services. The Company accounts for the activities of the LLC using the equity
method. At June 30, 2000 and 1999, the Company's investment in the LLC was
$1,011,000 and $1,598,000, respectively and such amounts are included in other
assets in the accompanying consolidated financial statements. The Company's
share of the undistributed earnings of the LLC was $988,000 and $861,000 for the
years ended June 30, 2000 and 1999, respectively. The Company's share of such
undistributed earnings is included in other revenue in the accompanying
consolidated financial statements.
Other Investments
During the year ended June 30, 1999, the Company made investments in
companies offering ambulance services, ambulance billing services, and
alternative transportation services. The Company contributed cash, accounts
receivable, and fixed assets totaling $1.9 million at June 30, 1999 to these
businesses. These investments have been recorded using the cost method of
accounting and are included in other assets in the accompanying consolidated
financial statements. The Company has determined that one of these investments
is impaired as of June 30, 2000 and therefore has written off this investment
and related amounts loaned to the business. The amount written off totaled $1.6
million and is included in restructuring and other charges in the accompanying
consolidated statement of operations for the fiscal year ended June 30, 2000.
(3) PROPERTY AND EQUIPMENT
Property and equipment, including equipment held under capital leases,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment................................................... $ 64,085 $ 58,317
Vehicles.................................................... 90,511 87,359
Land and buildings.......................................... 19,707 19,819
Leasehold improvements...................................... 8,923 8,735
-------- --------
183,226 174,230
Less: Accumulated depreciation.............................. (97,307) (79,198)
-------- --------
$ 85,919 $ 95,032
======== ========
</TABLE>
No equipment was acquired under capital lease or other financing agreements
during the years ended June 30, 2000 and 1999.
The Company held vehicles and equipment with a net carrying value of
$19,120,000 and $19,889,000 at June 30, 2000 and 1999, respectively, under
capital lease agreements. Accumulated depreciation on these assets totaled
$13,663,000 and $12,404,000 June 30, 2000 and 1999, respectively.
The Company has pledged assets with a net book value of $12,260,000 to
secure certain of its obligations under its insurance and bonding program
including certain reimbursement obligations with respect to the workers'
compensation, performance bonds, appeal bonds and other aspects of such
insurance and bonding programs.
56
<PAGE> 58
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) CREDIT AGREEMENTS AND BORROWINGS
Notes payable and capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
2000 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
7 7/8% senior notes due 2008, net of discount of $199,000
and $225,000, respectively................................ $ 149,801 $149,775
Revolving credit facility................................... 146,807 113,500
Capital lease obligations and other notes payable,
collateralized by property and equipment, at varying
rates, from 6.89% to 21.01%, due through 2003............. 3,808 7,802
Unsecured promissory notes payable from acquisitions at
varying rates, from 6.0% to 9.0%, due through 2006........ 1,538 3,248
--------- --------
301,954 274,325
Less: Current maturities.................................... (299,104) (5,765)
--------- --------
$ 2,850 $268,560
========= ========
</TABLE>
7 7/8% Senior Notes Due 2008
In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due
2008 (the Notes) effected under Rule 144A under the Securities Act of 1933 as
amended (Securities Act). The net proceeds of the offering, sold through private
placement transactions, was used to repay certain indebtedness. Interest under
the Notes is payable semi-annually September 15, and March 15, and the Notes are
not callable until March 2003 subject to the terms of the Note Agreement. The
Company incurred expenses related to the offering of approximately $5.3 million
and will amortize such costs over the life of the Notes. The Company recorded a
$258,000 discount on the Notes and will amortize such discount over the life of
the Notes. Unamortized discount at June 30, 2000 and 1999 was $199,000 and
$225,000, respectively, and such amounts are recorded as an offset to long-term
debt in the accompanying consolidated financial statements. In April 1998, the
Company filed a registration statement under the Securities Act relating to an
exchange offer for the Notes. Such registration became effective on May 14,
1998. 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 Notes
contain certain covenants which, among other things, limit the Company's ability
to incur certain indebtedness, sell assets, or enter into certain mergers or
consolidations.
The financial statements presented below include the separate or combined
financial position for the years ended June 30, 2000 and 1999, results of
operations and cash flows for the three years ended June 30, 2000, 1999 and 1998
of Rural/Metro Corporation (Parent) and the guarantor subsidiaries (Guarantors)
and the subsidiaries which are not guarantors (Non-guarantors).
57
<PAGE> 59
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
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
Retained earnings (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>
58
<PAGE> 60
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
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>
59
<PAGE> 61
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services................................ $ -- $ 391,898 $ 75,843 $ -- $ 467,741
Fire protection services.......................... -- 56,437 1,112 -- 57,549
Other............................................. -- 37,041 7,743 -- 44,784
--------- --------- -------- ------- ---------
Total revenue.............................. -- 485,376 84,698 -- 570,074
--------- --------- -------- ------- ---------
OPERATING EXPENSES
Payroll and employee benefits..................... -- 272,944 50,341 -- 323,285
Provision for doubtful accounts................... -- 80,823 14,800 -- 95,623
Provision for doubtful accounts -- change in
accounting estimate............................. -- 65,000 -- -- 65,000
Depreciation...................................... -- 22,068 2,941 -- 25,009
Amortization of intangibles....................... -- 6,220 2,467 -- 8,687
Other operating expenses.......................... -- 97,967 20,549 -- 118,516
Restructuring charge and other.................... -- 41,119 2,155 -- 43,274
--------- --------- -------- ------- ---------
Total expenses............................. -- 586,141 93,253 -- 679,394
--------- --------- -------- ------- ---------
OPERATING LOSS...................................... -- (100,765) (8,555) -- (109,320)
Interest expense, net............................. 25,045 (1,125) 2,019 -- 25,939
Other............................................. -- -- -- (2,890) (2,890)
--------- --------- -------- ------- ---------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE......................................... (25,045) (99,640) (10,574) 2,890 (132,369)
BENEFIT FOR INCOME TAXES............................ (6,211) (24,046) (2,580) -- (32,837)
--------- --------- -------- ------- ---------
LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE............... (18,834) (75,594) (7,994) 2,890 (99,532)
EXTRAORDINARY LOSS ON EXPROPRIATION OF CANADIAN
AMBULANCE SERVICE LICENSES........................ -- -- (1,200) -- (1,200)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE......................................... -- (541) -- -- (541)
--------- --------- -------- ------- ---------
NET LOSS............................................ (18,834) (76,135) (9,194) 2,890 (101,273)
LOSS FROM WHOLLY-OWNED SUBSIDIARIES................. (82,439) -- -- 82,439 --
--------- --------- -------- ------- ---------
NET LOSS............................................ $(101,273) $ (76,135) $ (9,194) $85,329 $(101,273)
========= ========= ======== ======= =========
Foreign currency translation adjustments.......... -- -- 40 -- 40
Comprehensive income (loss) from wholly-owned
subsidiaries.................................... 40 -- -- (40) --
--------- --------- -------- ------- ---------
COMPREHENSIVE LOSS.................................. $(101,233) $ (76,135) $ (9,154) $85,289 $(101,233)
========= ========= ======== ======= =========
</TABLE>
60
<PAGE> 62
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services.................................. $ -- $379,653 $87,979 $ -- $467,632
Fire protection services............................ -- 49,397 1,093 -- 50,490
Other............................................... -- 38,813 4,431 -- 43,244
-------- -------- ------- -------- --------
Total revenue................................ -- 467,863 93,503 -- 561,366
-------- -------- ------- -------- --------
OPERATING EXPENSES
Payroll and employee benefits....................... -- 240,341 57,000 -- 297,341
Provision for doubtful accounts..................... -- 75,743 5,484 -- 81,227
Depreciation........................................ -- 22,230 1,992 -- 24,222
Amortization of intangibles......................... 214 6,601 2,351 -- 9,166
Other operating expenses............................ -- 81,633 17,106 -- 98,739
Restructuring charge and other...................... -- 2,500 -- -- 2,500
-------- -------- ------- -------- --------
Total expenses............................... 214 429,048 83,933 -- 513,195
-------- -------- ------- -------- --------
OPERATING INCOME (LOSS)............................... (214) 38,815 9,570 -- 48,171
Interest expense, net............................... 19,675 (139) 1,870 -- 21,406
Other............................................... -- -- -- 70 70
-------- -------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES............................................... (19,889) 38,954 7,700 (70) 26,695
PROVISION (BENEFIT) FOR INCOME TAXES.................. (8,353) 16,332 3,252 -- 11,231
-------- -------- ------- -------- --------
(11,536) 22,622 4,448 (70) 15,464
INCOME FROM WHOLLY-OWNED SUBSIDIARIES................. 27,000 -- -- (27,000) --
-------- -------- ------- -------- --------
NET INCOME............................................ $ 15,464 $ 22,622 $ 4,448 $(27,070) $ 15,464
======== ======== ======= ======== ========
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments............ -- -- (465) -- (465)
Comprehensive income (loss) from wholly-owned
subsidiaries...................................... (465) -- -- 465 --
-------- -------- ------- -------- --------
COMPREHENSIVE INCOME.................................. $ 14,999 $ 22,622 $ 3,983 $(26,605) $ 14,999
======== ======== ======= ======== ========
</TABLE>
61
<PAGE> 63
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Ambulance services................................... $ -- $341,668 $45,373 $ -- $387,041
Fire protection services............................. -- 44,985 986 -- 45,971
Other................................................ -- 42,184 362 -- 42,546
------- -------- ------- -------- --------
Total revenue................................. -- 428,837 46,721 -- 475,558
------- -------- ------- -------- --------
OPERATING EXPENSES
Payroll and employee benefits........................ -- 225,102 29,704 -- 254,806
Provision for doubtful accounts...................... -- 76,872 4,306 -- 81,178
Depreciation......................................... -- 18,329 884 -- 19,213
Amortization of intangibles.......................... 124 6,690 966 -- 7,780
Other operating expenses............................. -- 70,804 9,412 -- 80,216
Restructuring charge and other....................... -- 5,000 -- -- 5,000
------- -------- ------- -------- --------
Total expenses................................ 124 402,797 45,272 -- 448,193
------- -------- ------- -------- --------
OPERATING INCOME (LOSS)................................ (124) 26,040 1,449 -- 27,365
Interest expense, net................................ 5,630 7,900 552 -- 14,082
Other................................................ -- -- -- (199) (199)
------- -------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES................................................ (5,754) 18,140 897 199 13,482
PROVISION (BENEFIT) FOR INCOME TAXES................... (2,589) 8,146 420 -- 5,977
------- -------- ------- -------- --------
(3,165) 9,994 477 199 7,505
INCOME FROM WHOLLY-OWNED SUBSIDIARIES.................. 10,670 -- -- (10,670) --
------- -------- ------- -------- --------
NET INCOME............................................. $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505
======= ======== ======= ======== ========
COMPREHENSIVE INCOME................................... $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505
======= ======== ======= ======== ========
</TABLE>
62
<PAGE> 64
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)................................... $(101,273) $ (76,135) $ (9,194) $ 85,329 $(101,273)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations --
Write-off of assets............................... -- 28,873 -- -- 28,873
Extraordinary loss................................ -- -- 1,200 -- 1,200
Cumulative effect of a change in accounting
principle....................................... -- 541 -- -- 541
Depreciation and amortization..................... -- 28,288 5,408 -- 33,696
Amortization of gain on sale of real estate....... -- (104) -- -- (104)
Provision for doubtful accounts................... -- 145,823 14,800 -- 160,623
Undistributed earnings of minority shareholder.... -- -- -- (2,890) (2,890)
Amortization of discount on Senior Notes.......... 26 -- -- -- 26
Change in assets and liabilities --
Increase in accounts receivable................... -- (107,911) (11,308) -- (119,219)
(Increase) decrease in inventories................ -- (3,451) 81 -- (3,370)
Decrease in prepaid expenses and other............ -- 2,077 424 -- 2,501
(Increase) decrease in due to/from affiliates..... 64,300 10,932 7,167 (82,399) --
Decrease in accounts payable...................... -- 822 (2,491) -- (1,669)
Decrease in accrued liabilities and other
liabilities..................................... 2,162 1,707 (4,758) -- (889)
Increase (decrease) in nonrefundable subscription
income.......................................... -- 81 (1) -- 80
Decrease in deferred income taxes................. -- (9,198) (240) -- (9,438)
--------- --------- -------- -------- ---------
Net cash provided by (used in) operating
activities............................... (34,785) 22,345 1,088 40 (11,312)
--------- --------- -------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net........ 33,307 -- -- -- 33,307
Repayment of debt and capital lease obligations..... -- (3,993) (1,711) -- (5,704)
Issuance of common stock............................ 655 -- -- -- 655
--------- --------- -------- -------- ---------
Net cash provided by (used in) financing
activities............................... 33,962 (3,993) (1,711) -- 28,258
--------- --------- -------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from expropriation of Canadian ambulance
service licenses.................................. -- -- 2,191 -- 2,191
Capital expenditures................................ -- (13,945) (1,966) -- (15,911)
Increase in other assets............................ 783 (751) (191) -- (159)
--------- --------- -------- -------- ---------
Net cash provided by (used in) investing
activities............................... 783 (14,696) 34 -- (13,879)
--------- --------- -------- -------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE............. 40 -- 40 (40) 40
--------- --------- -------- -------- ---------
INCREASE (DECREASE) IN CASH......................... -- 3,656 (549) -- 3,107
CASH, beginning of year............................. -- 5,379 1,801 -- 7,180
--------- --------- -------- -------- ---------
CASH, end of year................................... $ -- $ 9,035 $ 1,252 $ -- $ 10,287
========= ========= ======== ======== =========
</TABLE>
63
<PAGE> 65
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
-------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income........................................... $ 15,464 $ 22,622 $ 4,448 $(27,070) $ 15,464
Adjustments to reconcile net income to cash provided
by (used in) operations --
Depreciation and amortization...................... 214 28,831 4,343 -- 33,388
Amortization of deferred compensation.............. 80 -- -- -- 80
Amortization of gain on sale of real estate........ -- (103) -- -- (103)
Provision for doubtful accounts.................... -- 75,743 5,484 -- 81,227
Undistributed earnings of minority shareholder..... -- -- -- 70 70
Amortization of discount on Senior Notes........... 26 -- -- -- 26
Change in assets and liabilities, net of effect of
businesses acquired --
Increase in accounts receivable.................... -- (100,770) (11,260) -- (112,030)
Increase in inventories............................ -- (3,089) (155) -- (3,244)
Decrease in prepaid expenses and other............. -- 1,328 1,007 -- 2,335
(Increase) decrease in due to/from affiliates...... (45,103) (948) 15,087 30,964 --
Increase in accounts payable....................... -- 2,273 419 -- 2,692
Increase (decrease) in accrued liabilities and
other liabilities................................ 228 2,509 (5,767) -- (3,030)
Increase (decrease) in non-refundable subscription
income........................................... -- 1,286 (59) -- 1,227
Increase in deferred income taxes.................. -- 3,198 504 -- 3,702
-------- --------- -------- -------- ---------
Net cash provided by (used in) operating
activities................................ (29,091) 32,880 14,051 3,964 21,804
-------- --------- -------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net......... 27,500 -- -- -- 27,500
Repayment of debt and capital lease obligations...... -- (6,573) (1,221) -- (7,794)
Issuance of common stock............................. 1,785 -- 4,429 (4,429) 1,785
-------- --------- -------- -------- ---------
Net cash provided by (used in) financing
activities................................ 29,285 (6,573) 3,208 (4,429) 21,491
-------- --------- -------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired.................... -- (445) (12,220) -- (12,665)
Capital expenditures................................. -- (19,537) (4,402) -- (23,939)
Increase in other assets............................. 271 (3,863) (1,965) -- (5,557)
-------- --------- -------- -------- ---------
Net cash used in investing activities....... 271 (23,845) (18,587) -- (42,161)
-------- --------- -------- -------- ---------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE.............. (465) -- (465) 465 (465)
-------- --------- -------- -------- ---------
INCREASE (DECREASE) IN CASH.......................... -- 2,462 (1,793) -- 669
CASH, beginning of year.............................. -- 2,917 3,594 -- 6,511
-------- --------- -------- -------- ---------
CASH, end of year.................................... $ -- $ 5,379 $ 1,801 $ -- $ 7,180
======== ========= ======== ======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit
plan............................................... $ 1,933 $ -- $ -- $ -- $ 1,933
======== ========= ======== ======== =========
</TABLE>
64
<PAGE> 66
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTORS NON-GUARANTORS ELIMINATING CONSOLIDATED
--------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income........................................ $ 7,505 $ 9,994 $ 477 $(10,471) $ 7,505
Adjustments to reconcile net income to cash
provided by (used in) operations --
Depreciation and amortization................... 131 25,012 1,850 -- 26,993
Amortization of deferred compensation........... 558 -- -- -- 558
Amortization of gain on sale of real estate..... -- (103) -- -- (103)
Provision for doubtful accounts................. -- 76,872 4,306 -- 81,178
Undistributed earnings of minority
shareholder................................... -- -- -- (199) (199)
Amortization of discount on Senior Notes........ 7 -- -- -- 7
Change in assets and liabilities, net of effect of
businesses acquired --
Increase in accounts receivable................. -- (104,836) (11,645) -- (116,481)
Increase in inventories......................... -- (3,722) (538) -- (4,260)
(Increase) decrease in prepaid expenses and
other......................................... (1,371) (2,923) 2,009 -- (2,285)
(Increase) decrease in due to/from affiliates... (244,101) 186,613 46,818 10,670 --
Increase (decrease) in accounts payable......... -- 1,696 (529) -- 1,167
Increase (decrease) in accrued liabilities and
other liabilities............................. 3,801 19,898 (579) -- 23,120
Increase (decrease) in nonrefundable
subscription income........................... -- 288 17 -- 305
Increase (decrease) in deferred income taxes.... -- (4,935) 1 -- (4,934)
--------- --------- -------- -------- ---------
Net cash provided by (used in) operating
activities............................. (233,470) 203,854 42,187 -- 12,571
--------- --------- -------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes............ 145,805 -- -- -- 145,805
Borrowings (repayments) on revolving credit
facility, net................................... 86,000 (136,000) -- -- (50,000)
Repayment of debt and capital lease obligations... -- (25,389) (6,498) -- (31,887)
Borrowings of debt................................ -- 2,701 -- -- 2,701
Issuance of common stock.......................... 1,665 -- -- -- 1,665
--------- --------- -------- -------- ---------
Net cash provided by (used in) financing
activities............................. 233,470 (158,688) (6,498) -- 68,284
--------- --------- -------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired................. -- (6,644) (30,204) -- (36,848)
Capital expenditures.............................. -- (29,767) (1,276) -- (31,043)
Increase in other assets.......................... -- (8,858) (993) -- (9,851)
--------- --------- -------- -------- ---------
Net cash used in investing activities.... -- (45,269) (32,473) -- (77,742)
--------- --------- -------- -------- ---------
INCREASE (DECREASE) IN CASH....................... -- (103) 3,216 -- 3,113
CASH, beginning of year........................... -- 3,020 378 -- 3,398
--------- --------- -------- -------- ---------
CASH, end of year................................. $ -- $ 2,917 $ 3,594 $ -- $ 6,511
========= ========= ======== ======== =========
</TABLE>
65
<PAGE> 67
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving Credit Facility
The Company has a fully underwritten credit agreement for a revolving
credit facility. The amount of the facility was increased from $125.0 million to
$175.0 million during the fiscal year ended June 30, 1997 and increased to
$200.0 million during the fiscal year ended June 30, 1998. The revolving credit
facility was also amended by extending the maturity date to March 16, 2003 and
converting it to an unsecured credit facility. The revolving credit facility is
priced at prime rate, Federal Funds Rate plus 0.5% or a LIBOR-based rate. The
LIBOR-based rates range from LIBOR plus 0.875% to LIBOR plus 1.7%. Interest
rates and availability under the revolving credit facility are dependent upon
the Company meeting certain financial covenants including total debt leverage
ratios, total debt to capitalization ratios and fixed charge ratios.
In February 2000, the Company received a compliance waiver regarding the
financial covenants contained in its revolving credit facility which covered the
period December 31, 1999 through March 14, 2000. The Company has negotiated
amendments to the original waiver covering periods through January 31, 2001. The
waiver covers the representations and warranties related to no material adverse
changes as well as the following financial covenants: total debt leverage ratio,
the total debt to capitalization ratio and the fixed charge coverage ratio.
There is no assurance that the Company is in compliance with all of the
conditions of the waiver. The Company has discussed with the Lenders its failure
to maintain positive operating income (net of restructuring charges), at June
30, 2000, as required under the waiver and the Lenders have not asserted that
the Company has failed to comply with any requirements under the waiver.
Although the Company believes no Event of Default is continuing either under the
terms of the revolving credit facility (as a result of the waiver agreement) or
the Company's $150 million 7 7/8% Senior Notes due 2008 ("Notes"), 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 in the accompanying financial statements at June 30, 2000. The
waiver stipulates that no additional borrowings will be available to the Company
during the period covered by 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), the Company will accrue additional interest expense at a rate of 2.0%
per annum on the outstanding balance on the revolving credit facility.
Approximately $146.8 million was outstanding on the revolving credit facility at
June 30, 2000.
At June 30, 2000, the revolving credit facility was priced at prime rate
plus 0.25 percentage points plus 2.0% as specified under the waiver agreement.
The weighted average interest rate on the revolving credit facility was 11.75%
and 6.66% at June 30, 2000 and 1999, respectively.
Debt Maturities
Aggregate debt maturities for each of the years ending June 30 are as
follows:
<TABLE>
<CAPTION>
NOTES PAYABLE CAPITAL LEASES
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
2001....................................................... $297,571 $1,777
2002....................................................... 414 1,027
2003....................................................... 344 513
2004....................................................... 144 1
2005....................................................... 150 --
Thereafter................................................. 513 --
-------- ------
$299,136 $3,318
Less: Amounts representing interest........................ (500)
------
$2,818
======
</TABLE>
The Company incurred interest expense of $26,474,000, $21,498,000 and
$14,259,000 and paid interest of $24,169,000, $21,669,000 and $11,519,000 in the
years ended June 30, 2000, 1999 and 1998, respectively.
66
<PAGE> 68
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had outstanding letters of credit totaling $6,515,000 and
$2,055,000 at June 30, 2000 and 1999, respectively.
(5) FINANCIAL INSTRUMENTS
The Company entered into interest rate swap agreements to limit the effect
of increases in the interest rates on floating rate debt. The swap agreements
were contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate agreements
are used to measure interest to be paid or received and do not represent the
amount of exposure to credit loss. The net cash amounts paid or received on the
agreements are accrued and recognized as an adjustment to interest expense.
In November 1998, the Company entered into an interest rate swap agreement
that originally expired in November 2003 and effectively converted $50.0 million
of variable rate borrowings to fixed rate borrowings. The Company paid a fixed
rate of 4.72% and received a LIBOR-based floating rate. The weighted average
floating rate for the year ended June 30, 1999 was 5.2%. As a result of this
swap agreement interest expense was reduced during the year ended June 30, 1999
by approximately $106,000. In June 1999, the Company terminated the interest
rate swap agreement and received a termination fee of $604,000. Such amount is
being amortized against interest on a straight-line basis beginning in July 1999
through November 2003.
(6) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases various facilities and equipment under non-cancelable
operating lease agreements. Rental expense charged to operations under these
leases was $13,160,000 $12,769,000 and $10,193,000 for the years ended June 30,
2000, 1999 and 1998, respectively.
Minimum rental commitments under non-cancelable operating leases for each
of the years ending June 30 are as follows (in thousands):
<TABLE>
<S> <C>
2001........................................................ $8,594
2002........................................................ 6,922
2003........................................................ 5,635
2004........................................................ 4,855
2005........................................................ 4,241
Thereafter.................................................. 7,512
</TABLE>
Legal Proceedings
The Company is a party to various lawsuits arising in the ordinary course
of business. Management believes, based upon discussions with legal counsel,
that losses, if any, will be substantially covered under insurance policies and
will not have a material adverse effect on the consolidated financial
statements.
On August 25, 1998, the Company was named as a defendant in two purported
class action lawsuits (Haskell and Ruble). The two lawsuits contain virtually
identical allegations and are brought on behalf of a class of those who
purchased the Company's publicly traded securities including its common stock
between April 28, 1997 and June 11, 1998. Both complaints allege that between
April 28, 1997 and June 11, 1998 the Company issued certain false and misleading
statements regarding certain aspects of the financial status of the Company and
that these statements allegedly caused the Company's common stock to be traded
at an artificially inflated price. On May 25, 1999 the Arizona state court
granted our request for a stay of the Haskell action until the Ruble action is
finally resolved. The Company and the individual defendants have moved to
dismiss the Ruble action. This motion is currently pending and therefore, no
67
<PAGE> 69
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discovery has taken place since our motion to dismiss was filed. As a result the
Company is unable to predict the ultimate outcome of this litigation. The
Company intends to defend the actions vigorously.
Other Disputes
In 1994, the Company entered into a Management Agreement with another
Corporation to manage the operations of one of the Company's subsidiaries that
does not provide ambulance or fire protection services. The Company also entered
into an option agreement whereby the Corporation had the option to purchase the
assets of the subsidiary and the Company had the option to sell the assets of
this subsidiary. The Company settled this dispute during the year ended June 30,
2000. Losses relating to this dispute totaled $1.3 million and are included in
restructuring charges and other in the consolidated statement of operations for
the year ended June 30, 2000.
Option Agreement
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 $25.0 million by a company providing ambulance and other
services in certain areas of Brazil. In June 2000, the Company terminated this
option.
Healthcare Compliance
The healthcare industry is subject to numerous laws and regulations of
federal, state, and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. The Company believes that it is substantially in
compliance with fraud and abuse statutes as well as their applicable government
review and interpretation as well as regulatory actions unknown or unasserted at
this time.
The Company is currently undergoing two investigations by certain
government agencies regarding compliance with Medicare fraud and abuse statutes.
The Company is cooperating with the government agencies conducting these
investigations and is providing requested information to the governmental
agencies. These reviews are covering periods prior to the Company's acquisition
of the operations and periods after acquisition. Management believes that the
remedies existing under specific purchase agreement and reserves established in
the consolidated financial statements are sufficient so that the ultimate
outcome of these matters should not have a material adverse effect on the
Company's financial condition.
(7) EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP)
The Company established the ESOP in 1979 and makes contributions to the
ESOP at the discretion of the Board of Directors. No discretionary contributions
were approved for the years ended June 30, 2000, 1999 and 1998. The ESOP held,
for the benefit of all participants, approximately 6% as of June 30, 2000 and
1999, of the outstanding common stock of the Company. The ESOP is administered
by the ESOP's Advisory Committee, consisting of certain officers of the Company.
In July 1999, the Company's Board of Directors approved an amendment to
"freeze" the ESOP, effective June 30, 1999 with respect to all employees other
than members of collective bargaining agreements that include participation in
the ESOP. All participants' accounts were fully vested as of June 30, 1999. The
Company does not intend to make any contributions to the ESOP in the future.
68
<PAGE> 70
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the decrease in stock price in the year ended June 30, 2000, the
ESOP assets were insufficient to cover participant balances, therefore the
Company made an additional contribution of $250,000.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (ESPP) through which
eligible employees may purchase shares of the Company's common stock, at
semi-annual intervals, through periodic payroll deductions. The ESPP is a
qualified employee benefit plan under Section 423 of the Internal Revenue Code.
The Company has reserved 450,000 shares of stock for issuance under the ESPP.
The purchase price per share is the lower of 85% of the closing price of the
stock on the first day or the last day of the offering period or on the nearest
prior day on which trading occurred on the NASDAQ Small Cap Market.
As of June 30, 2000, 353,580 shares of common stock have been issued under
the ESPP.
1992 Stock Option Plan
The Company's 1992 Stock Option Plan was adopted in November 1992 and
provides for the granting of options to acquire common stock of the Company,
direct granting of the common stock of the Company (Stock Awards), the granting
of stock appreciation rights (SARs), or the granting of other cash awards (Cash
Awards) (Stock Awards, SARs and Cash Awards are collectively referred to herein
as Awards). At June 30, 2000, the maximum number of shares of common stock
issuable under the 1992 Plan was 6.0 million of which approximately 800,000
options had been exercised. Options may be granted as incentive stock options or
non-qualified stock options.
Options and Awards may be granted only to persons who at the time of grant
are either (i) key personnel (including officers) of the Company or (ii)
consultants and independent contractors who provide valuable services to the
Company. Options that are incentive stock options may be granted only to key
personnel of the Company.
The 1992 Plan, as amended, provides for the automatic grant of options to
acquire the Company's common stock (the Automatic Grant Program), whereby each
non-employee member of the Board of Directors will be granted an option to
acquire 2,500 shares of common stock annually. Each non-employee member of the
Board of Directors also will receive an annual automatic grant of options to
acquire an additional number of shares equal to 1,000 shares for each $0.05
increase in the Company's earnings per share, subject to a maximum of 5,000
additional options. New non-employee members of the Board of Directors will
receive options to acquire 10,000 shares of common stock on the date of their
first appointment or election to the Board of Directors.
The expiration date, maximum number of shares purchasable and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the Plan
Administrator upon grant of the options. Options granted to date vest over
periods not exceeding five years. The exercise price of options will be
determined by the Plan Administrator, but may not be less than 100% (110% if the
option is granted to a stockholder who at the date the option is granted owns
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its subsidiaries) of the fair market value of the
common stock at the date of the grant.
Awards granted in the form of SARs would entitle the recipient to receive a
payment equal to the appreciation in market value of a stated number of shares
of common stock from the price stated in the award agreement to the market value
of the common stock on the date first exercised or surrendered. The Plan
Administrator may determine such terms, conditions, restrictions and/or
limitations, if any, on any SARs.
The 1992 Plan states that it is not intended to be the exclusive means by
which the Company may issue options or warrants to acquire its common stock,
Awards or any other type of award. To the extent permitted by applicable law,
the Company may issue any other options, warrants or awards other than pursuant
to the 1992 Plan without shareholder approval. The 1992 Plan will remain in
force until November 5, 2002.
69
<PAGE> 71
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes stock option activity:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
---------------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year......... 3,575,170 $1.25 - $36.00 $20.99
Granted........................................ 929,109 $1.38 - $ 8.00 $ 7.16
Canceled....................................... (921,408) $1.25 - $32.56 $21.20
Exercised...................................... (879) $1.25 $ 1.25
---------
Options outstanding at end of year............... 3,581,992 $1.25 - $36.00 $17.35
=========
Options exercisable at end of year............... 2,804,758 $1.25 - $36.00 $18.04
=========
Options available for grant at end of year....... 1,648,037
=========
Weighted average fair value per share of options
granted........................................ $ 3.01
======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
---------------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year......... 3,093,905 $1.25 - $36.00 $26.26
Granted........................................ 1,004,497 $6.63 - $11.81 $ 7.45
Canceled....................................... (513,590) $7.13 - $35.00 $26.90
Exercised...................................... (9,642) $1.25 - $ 7.13 $ 6.64
---------
Options outstanding at end of year............... 3,575,170 $1.25 - $36.00 $20.99
=========
Options exercisable at end of year............... 2,520,828 $1.25 - $36.00 $21.46
=========
Options available for grant at end of year....... 1,655,738
=========
Weighted average fair value per share of options
granted........................................ $ 2.55
======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
----------------------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
--------- --------------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year........ 2,301,397 $ 5.60 - $36.00 $24.45
Granted....................................... 1,031,343 $ 1.25 - $34.50 $29.10
Canceled...................................... (89,927) $16.25 - $36.00 $27.50
Exercised..................................... (148,908) $ 1.25 - $29.00 $14.40
---------
Options outstanding at end of year.............. 3,093,905 $ 1.25 - $36.00 $26.26
=========
Options exercisable at end of year.............. 1,875,149 $25.73
=========
Options available for grant at end of year...... 2,146,645
=========
Weighted average fair value per share of options
granted....................................... $11.04
======
</TABLE>
70
<PAGE> 72
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.25 - $6.92 317,250 7.30 $ 4.99 248,085 $ 5.01
$7.13 486,168 8.17 $ 7.13 391,683 $ 7.13
$7.56 - $7.69 27,500 9.11 $ 7.64 15,831 $ 7.64
$7.81 572,835 9.08 $ 7.81 274,016 $ 7.81
$8.00 - $16.25 450,022 6.72 $10.48 425,022 $10.61
$17.25 - $22.50 177,167 4.30 $17.80 177,167 $17.80
$24.00 473,627 5.23 $24.00 407,797 $24.00
$24.25 22,500 5.44 $24.25 22,500 $24.25
$29.00 463,100 7.20 $29.00 307,500 $29.00
$31.25 - $36.00 591,823 6.36 $32.46 535,157 $32.48
--------- ---- ------ --------- ------
$1.25 - $36.00 3,581,992 7.04 $17.35 2,804,758 $18.04
========= ==== ====== ========= ======
</TABLE>
2000 Non-qualified Stock Option Plan
The Company's 2000 Non-Qualified Stock Option Plan was adopted in August
2000 and provides for the granting of options to acquire common stock of the
Company. At the time of adoption, the maximum number of shares of common stock
issuable under the Plan was 2.0 million. Options may only be granted as
non-qualified stock options.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a
fair value based method of accounting for employee stock options or similar
equity instruments. SFAS No. 123 also allows an entity to continue to measure
compensation cost related to stock options issued to employees under these plans
using the method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Entities electing to remain with the accounting in
APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share, as if the fair value based method of accounting defined in SFAS No.
123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25; therefore, no compensation cost is recognized in the
accompanying financial statements for stock-based employee awards. However, the
Company has computed, for pro forma disclosure purposes, the value of all
options and ESPP shares granted during 2000, 1999 and 1998, using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
OPTIONS ESPP OPTIONS ESPP OPTIONS ESPP
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rate................... 6.03% 6.32% 5.92% 5.43% 5.01% 4.95%
Expected dividend yield................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Expected lives in years (after vesting for
options)................................ 1.35 0.50 1.33 0.50 1.32 0.50
Expected volatility....................... 67.51% 99.78% 57.66% 85.20% 46.65% 63.42%
</TABLE>
71
<PAGE> 73
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total value of options and ESPP shares granted was computed to be the
following approximate amounts, which would be amortized on the straight-line
basis over the vesting period (in thousands):
<TABLE>
<CAPTION>
OPTIONS ESPP
------- ----
<S> <C> <C>
For the year ended June 30, 2000 ........................... $ 2,724 $137
For the year ended June 30, 1999 ........................... $ 2,564 $340
For the year ended June 30, 1998 ........................... $11,386 $397
</TABLE>
If the Company had accounted for its stock-based compensation plans using a
fair value based method of accounting, the Company's year end net income and
diluted earnings per share would have been reported as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
2000 1999 1998
------------ ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss):
Historical................................................ $(101,273) $15,464 $7,505
Pro forma................................................. $(101,762) $11,939 $2,090
Diluted earnings per share:
Historical................................................ $ (6.94) $ 1.06 $ 0.54
Pro forma................................................. $ (6.97) $ 0.82 $ 0.15
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
2000, 1999 and 1998 are not likely to be representative of the effects on
reported net income and diluted earnings per share for future years, because
options vest over several years and additional awards are made each year.
During March 2000, the FASB issued Interpretation 44, "Accounting for
Certain Transactions Involving Stock Compensation-an Interpretation of APB
Opinion No. 25'("FIN 44"), which among other issues, addresses repricing and
other modifications made to previously issued stock options. The Company will be
required to adopt FIN 44 in the first quarter of its fiscal year ending June 30,
2001. The Company does not anticipate any material impact resulting from the
adoption of FIN 44.
401(k) Plan
The Company has a contributory retirement plan (the 401(k) Plan) covering
eligible employees who are at least 18 years old. The 401(k) Plan is designed to
provide tax-deferred income to the Company's employees in accordance with the
provisions of Section 401(k) of the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to 15% of
his or her respective salary, not to exceed the statutory limit. The Company, at
its discretion, may elect to make a matching contribution in the form of cash or
the Company's common stock to each participant's account as determined by the
Board of Directors. Under the terms of the 401(k) Plan, the Company may also
make discretionary profit sharing contributions. Profit sharing contributions
are allocated among participants based on their annual compensation. Each
participant has the right to direct the investment of his or her funds. The
Company has accrued a matching contribution of approximately $1,906,000 for the
401(k) Plan year ended December 31, 1999. The Company made a matching
contribution to the 401(k) Plan of approximately $2,206,000 for the 401(k) Plan
year ended December 31, 1998.
(8) STOCKHOLDERS' EQUITY
Shareholder Rights Plan
In August 1995, the Company's Board of Directors adopted a shareholder
rights plan, which authorized the distribution of one right to purchase one
one-thousandth of a share of $0.01 par value Series A Junior Participating
Preferred Stock (a Right) for each share of common stock of the Company. Rights
will become exercisable following the
72
<PAGE> 74
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tenth day (or such later date as may be determined by the Board of Directors)
after a person or group (a) acquires beneficial ownership of 15% or more of the
Company's common stock or (b) announces a tender or exchange offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock.
Upon exercise, each Right will entitle the holder (other than the party
seeking to acquire control of the Company) to acquire shares of the common stock
of the Company or, in certain circumstances, such acquiring person at a 50%
discount from market value. The Rights may be terminated by the Board of
Directors at any time prior to the date they become exercisable at a price of
$0.01 per Right; thereafter, they may be redeemed for a specified period of time
at $0.01 per Right.
(9) RELATED PARTY TRANSACTIONS
The Company incurred legal fees of approximately $96,000, $113,000 and
$148,000 for the years ended June 30, 2000, 1999 and 1998, respectively, with a
law firm in which a member of the Board of Directors is a partner.
The Company incurred rental expense of $114,000 in the year ended June 30,
2000 related to leases of fire and ambulance facilities with a director of the
Company and with employees that were previously owners of businesses acquired by
the Company. The Company incurred rental expense of $1,895,000 and $1,490,000,
in each of the years ended June 30, 1999 and 1998, respectively, related to
leases of fire and ambulance facilities with two directors of the Company and
with employees that were previously owners of businesses acquired by the
Company.
At June 30, 1999, the Company had notes payable to employees that were
previously owners of businesses acquired by the $138,000.
The Company incurred consulting fees of $85,000 in the year ended June 30,
2000 with a director of the Company. The Company incurred consulting fees of
$213,000 in the year ended June 30, 1999, with two directors of the Company.
(10) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred income taxes are provided for
differences between results of operations for financial reporting purposes and
income tax purposes.
No provision is made for U.S. income taxes applicable to undistributed
foreign earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations.
The sources of income (loss) before income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
2000 1999 1998
--------- ------- -------
<S> <C> <C> <C>
United States......................................... $(133,641) $19,189 $11,791
Foreign............................................... (861) 7,506 1,691
--------- ------- -------
Income (loss) before income taxes..................... $(134,502) $26,695 $13,482
========= ======= =======
</TABLE>
73
<PAGE> 75
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for (benefit from) income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C>
Current
U.S. federal and state................................ $ -- $ 58 $ 790
State................................................. 750 128 68
Foreign............................................... 1,560 1,532 762
-------- ------- ------
Total current provision....................... 2,310 1,718 1,620
-------- ------- ------
Deferred
U.S. federal.......................................... (33,179) 9,064 4,576
Foreign............................................... (2,360) 449 (219)
-------- ------- ------
Total deferred provision (benefit)............ (35,539) 9,513 4,357
-------- ------- ------
Total provision (benefit)..................... $(33,229) $11,231 $5,977
======== ======= ======
</TABLE>
Deferred tax assets and liabilities are recorded based on differences
between the financial statement and tax bases of amounts of assets and
liabilities and the tax rates in effect when those differences are expected to
reverse.
The components of net deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax liabilities
Amortization and accelerated depreciation................. $(19,157) $(15,730)
Accounts receivable valuation............................. (16,273) (30,820)
Accounting method changes................................. (1,350) (1,910)
Other..................................................... (1,421) (751)
-------- --------
(38,201) (49,211)
-------- --------
Deferred tax assets
Restructuring charge...................................... 6,634 2,997
Compensation accruals.................................. 828 974
Insurance reserves..................................... 6,314 1,758
Net operating loss benefits............................... 35,108 7,898
Alternative minimum tax credit carryforwards.............. 1,115 1,115
Business tax credits................................... 505 505
Foreign reserves....................................... 690 --
Other.................................................. 79 78
Valuation allowance.................................... (12,832) --
-------- --------
38,441 15,325
-------- --------
Net deferred tax liability.................................. 240 (33,886)
Less current portion........................................ (240) 24,448
-------- --------
Net long term deferred tax liability........................ $ -- $ (9,438)
======== ========
</TABLE>
For the years ended June 30, 1999 and 1998 income tax benefits of $8,000
and $1,012,000, respectively, were allocated to additional paid-in capital for
tax benefits associated with the exercise of nonqualified stock options and
vesting of stock grants. No income tax benefits were provided for the year ended
June 30, 2000.
74
<PAGE> 76
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the differences were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C>
Federal income tax provision at statutory rate.......... $(47,076) $ 9,343 $4,719
State taxes, net of federal benefit..................... (3,230) 568 293
Amortization of nondeductible goodwill.................. 3,792 1,590 900
Change in valuation allowance........................... 12,832 -- --
Other, net.............................................. 453 (270) 65
-------- ------- ------
Provision for (benefit from) income taxes............... $(33,229) $11,231 $5,977
======== ======= ======
</TABLE>
The Company has provided a valuation allowance because it believes that the
realizability of the deferred tax asset does not meet the more likely than not
criteria under SFAS No. 109. The Company has net operating losses of
approximately $85 million which expire in varying amounts between 2001 and 2020.
Cash payments for income taxes (net of refunds) were approximately
$2,397,000 during the year ended June 30, 2000. The Company received income tax
refunds (net of payments) of approximately $2,050,000 and $3,323,000 during the
years ended June 30, 1999 and 1998, respectively.
(11) SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of fiscal 1999.
SFAS No. 131 established 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: Emergency Medical Services
("EMS") 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 EMS segment includes emergency medical ambulance services provided
pursuant to contracts with counties, fire districts and municipalities, as well
as general transport ambulance services provided to patients requiring either
advanced or basic levels of medical supervision during the transfer to and from
residences and health care facilities. The EMS segment also includes critical
care transport services for medically unstable patients who require critical
care while being transported between health care facilities, as well as urgent
home medical care and ambulance services provided under capitated service
arrangements in Argentina.
The Fire and Other segment includes fire protection services consisting of
fire prevention and fire suppression, as well as hazardous material containment,
underwater search and recovery, mountain and confined space rescue and public
education. This segment also includes the following services: industrial fire
training, alarm monitoring, non-medical transportation for the handicapped and
certain non-ambulatory persons, 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.
75
<PAGE> 77
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information by operating segment is set forth below (in thousands):
<TABLE>
<CAPTION>
AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 2000
Net revenues from external customers..... $ 467,741 $102,333 $ -- $ 570,074
Depreciation and amortization............ 22,247 10,087 1,362 33,696
Interest expense, net.................... 21,057 4,595 286 25,938
Equity in net income of equity method
investees............................. 988 (8) -- 980
Segment profit (loss).................... (128,455) 11,122 (17,926) (135,259)
Segment assets........................... 209,810 37,069 2,015 248,894
Capital expenditures..................... 6,831 8,599 481 15,911
Investment in equity-method investees.... $ 1,011 $ 1,100 $ -- $ 2,111
</TABLE>
<TABLE>
<CAPTION>
AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
Net revenues from external customers...... $467,632 $93,734 $ -- $ 561,366
Depreciation and amortization............. 23,851 7,824 1,713 33,388
Interest expense, net..................... 16,088 4,928 390 21,406
Equity in net income of equity method
investees.............................. 725 17 -- 742
Segment profit (loss)..................... 33,239 11,905 (18,379) 26,765
Segment assets............................ 253,269 40,693 2,895 296,857
Capital expenditures...................... 19,467 4,390 82 23,939
Investment in equity-method investees..... $ 1,142 $ 1,671 $ -- $ 2,813
</TABLE>
<TABLE>
<CAPTION>
AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Net revenues from external customers..... $ 387,041 $ 88,517 $ -- $ 475,558
Depreciation and amortization............ 18,608 6,952 1,433 26,993
Interest expense, net.................... 9,731 4,085 266 14,082
Equity in net income of equity method
investees............................. 727 43 -- 770
Segment profit (loss).................... 23,407 12,917 (23,041) 13,283
Segment assets........................... 218,620 38,311 3,345 260,276
Capital expenditures..................... 22,988 5,638 2,417 31,043
Investment in equity-method investees.... $ 737 $ 1,160 $ -- $ 1,897
</TABLE>
Information concerning principal geographic areas is set forth below (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ----------------------- -----------------------
REVENUE NET PROPERTY REVENUE NET PROPERTY REVENUE NET PROPERTY
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
United States and Canada........ $517,315 $79,257 $506,817 $87,441 $462,179 $90,003
Latin America................... 52,759 6,662 54,549 7,591 13,379 2,542
-------- ------- -------- ------- -------- -------
Total................. $570,074 $85,919 $561,366 $95,032 $475,558 $92,545
======== ======= ======== ======= ======== =======
</TABLE>
76
<PAGE> 78
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended June 30, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
2000
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER(1) QUARTER(2) QUARTER(3)
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue.................................. $141,200 $147,107 $146,398 $135,369
Operating income (loss).................. 9,581 (57,978) (18,002) (42,921)
Net income (loss)........................ 1,884 (42,386) (16,615) (44,156)
Earnings (loss) per share................ $ 0.13 $ (2.91) $ (1.14) $ (3.02)
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(4) QUARTER QUARTER QUARTER
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue.................................. $138,795 $139,589 $142,933 $140,049
Operating income......................... 10,507 13,381 13,742 10,541
Net income............................... 3,062 4,639 4,711 3,052
Earnings per share....................... $ 0.21 $ 0.32 $ 0.32 $ 0.21
</TABLE>
---------------
(1) In the second quarter of the year ended June 30, 2000, the Company recorded
a $65.0 million additional provision for doubtful accounts related to a
change in its methodology of determining its allowance for doubtful
accounts.
(2) In the third quarter of the year ended June 30, 2000, the Company recorded a
pre-tax restructuring charge of $25.1 million related to the closure or
downsizing of certain non-emergency service areas and the reduction of
corporate overhead and $3.0 million additional provision for doubtful
accounts related to uncollectible accounts in those service areas that are
being closed or downsized.
(3) In the fourth quarter of the year ended June 30, 2000, the Company recorded
a pre-tax restructuring charge of $18.2 million related to the closure or
downsizing of certain non-emergency service areas and the reduction of
corporate overhead and $6.8 million additional provision for doubtful
accounts related to uncollectible accounts in those service areas that are
being closed or downsized.
(4) In the first quarter of the year ended June 30, 1999, the Company recorded a
pre-tax charge of $2.5 million related to severance payments.
77
<PAGE> 79
SCHEDULE II
RURAL/METRO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts
Balance at beginning of year.............................. $ 43,392 $ 69,552 $ 35,814
Provision charged to expense.............................. 160,623 81,227 81,178
Write-offs................................................ (116,263) (107,387) (47,440)
--------- --------- --------
Balance at end of year.................................... $ 87,752 $ 43,392 $ 69,552
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Restructuring allowance
Balance at beginning of year.............................. $ 1,328 $ 5,407 $ 4,815
Provision................................................. 43,274 2,500 5,000
Payments/usage............................................ (36,079) (6,579) (4,408)
-------- ------- -------
Balance at end of year.................................... $ 8,523 $ 1,328 $ 5,407
======== ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
78
<PAGE> 80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Cor J. Clement....................... 51 Chairman of the Board and Director(1)(3)
Jack E. Brucker...................... 48 President, Chief Executive Officer, and Director
Robert B. Hillier.................... 52 Senior Vice President, Human Resources, and Chief
Administrative Officer
John S. Banas III.................... 37 Senior Vice President and General Counsel
Michel A. Sucher, M.D................ 54 Senior Vice President, Medical Affairs and Chief
Medical Officer
Randall L. Harmsen................... 49 Vice President of Finance, Chief Accounting Officer
Louis G. Jekel....................... 58 Vice Chairman of the Board, Secretary, and Director
Mary Anne Carpenter.................. 54 Director(1)(4)
William C. Turner.................... 70 Director(1)(2)(3)(4)
Henry G. Walker...................... 52 Director
Louis A. Witzeman.................... 74 Director(1)(2)
</TABLE>
---------------
(1) Member of the Human Resource/Compensation/Organization Committee.
(2) Member of the Nominating Committee.
(3) Member of the Executive Committee.
(4) Member of the Audit Committee.
COR J. CLEMENT has served as Chairman of our Board of Directors since
August 1998 and as a member of our Board of Directors since May 1992. Mr.
Clement served as Vice Chairman of the Board of Directors from August 1994 to
August 1998. Mr. Clement served as the President and Chief Executive Officer of
NVD, an international provider of security and industrial fire protection
services headquartered in the Netherlands, from February 1980 until his
retirement in January 1997.
JACK E. BRUCKER has served as our President and Chief Executive Officer
since February 2000 and has been a member of our Board of Directors since
February 2000. Mr. Brucker served as our Senior Vice President and Chief
Operating Officer from December 1997 until February 2000. Mr. Brucker founded
and served as President of Pacific Holdings, a strategic consulting firm, from
July 1989 until December 1997. Mr. Brucker served as President of Pacific
Precision Metals, a consumer products company, from September 1987 until June
1989.
ROBERT B. HILLIER has served as our Senior Vice President -- Human
Resources and Chief Administrative Officer since February 2000 and as Vice
President -- Human Resources since October 1997. Mr. Hillier served as Account
Manager and Human Resources Consultant of Watson Wyatt Worldwide from January
1995 to October 1997. From November 1992 to December 1994, he contracted with
Bank of America to organize Caliber Bank of Arizona and later served as Director
of Human Resources of Caliber Bank of Arizona.
JOHN S. BANAS III has served as our Senior Vice President and General
Counsel since September 1999. Mr. Banas served as General Counsel at SpinCycle
Inc., a nationwide chain of branded coin-operated laundromats, from 1998 to
September 1999. From 1995 to 1998, he was Senior Corporate Counsel to Lam
Research Corporation in Fremont, California; and from 1992 to 1995 served as
corporate, real estate, and environmental counsel at the law firm of Wilson,
Sonsini, Goodrich & Rosati in Palo Alto, California. Mr. Banas served as
litigation counsel from 1989 to 1992 at the law firm of Thelen, Marrin, Johnson
& Bridges (now Thelen, Reid & Priest) in San Francisco, California.
79
<PAGE> 81
MICHEL A. SUCHER, M.D., has served as Senior Vice President and Medical
Affairs Director since February 2000. Dr. Sucher served as Vice President for
Medical Affairs from January 1995 until February 2000. He served as our National
Medical Director from 1984 to 1995. From 1974 to 1995, Dr. Sucher engaged in the
private practice of emergency medicine and held several positions at Scottsdale
Healthcare, including the most recent position as President of the Medical
Staff. Dr. Sucher is board certified by the American Board of Emergency Medicine
and is a member of the American College of Emergency Physicians.
RANDALL L. HARMSEN has served as Vice President of Finance, Chief
Accounting Officer, and Corporate Controller since July 2000. Mr. Harmsen served
as Vice President of Network Management and Chief Financial Officer for United
Healthcare of Arizona Inc. in Phoenix, Arizona, from 1997 until the time he
joined our company. From 1994 to 1997, he was Vice President of Finance for
Carondelet Health Care Corporation in Tucson, Arizona. From 1989 to 1994, Mr.
Harmsen served as Chief Financial Officer for Presbyterian Healthcare Services
in Albuquerque, New Mexico; and from 1977 to 1989, he was Chief Financial
Officer for St. Luke's Hospital in Davenport, Iowa.
LOUIS G. JEKEL has served as our Secretary and as a member of our Board of
Directors since 1968 and as Vice Chairman of our Board of Directors since August
1998. Mr. Jekel directs our Wildland Fire Protection Operations with the State
of Arizona and the federal government. Mr. Jekel is a partner in the law firm of
Jekel & Howard, Scottsdale, Arizona.
MARY ANNE CARPENTER has been a member of our Board of Directors since
January 1998. Since January 1993, Ms. Carpenter has served as Executive Vice
President and Executive Committee member of First Health Group Corp., a publicly
traded managed health care company. From October 1991 until January 1993, Ms.
Carpenter served as Senior Vice President, and from July 1986 through October
1991, as Vice President of First Health Group Corp. Ms. Carpenter is a board
member of the American Association of Health Plans and has served on panels for
several other national health care organizations.
WILLIAM C. TURNER has been a member of our Board of Directors since
November 1993. Mr. Turner is currently Chairman and Chief Executive of Argyle
Atlantic Corporation, an international merchant banking and management
consulting firm; a director of the Goodyear Tire & Rubber Company; a director of
Microtest, Inc.; a trustee and executive committee member of the United States
Council for International Business; and a Trustee and past Chairman of the
American Graduate School of International Management (Thunderbird). Mr. Turner
is also a former United States Ambassador and permanent representative to the
Organization for Economic Cooperation and Development.
HENRY G. WALKER has been a member of our Board of Directors since September
1997. Since April 1997, he has served as President and Chief Executive Officer
of the Sisters of Providence Health System, comprised of hospitals, long-term
care facilities, physician practices, managed care plans, and other health and
social services. From 1996 to March 1997, Mr. Walker served as President and
Chief Executive Officer of Health Partners of Arizona, a state-wide managed care
company. From 1992 to 1996, he served as President and Chief Executive Officer
of Health Partners of, a healthcare delivery system. Mr. Walker is a member of
the National Advisory Council of the Healthcare Forum, and also serves as a
director of Consolidated Catholic Healthcare a private non-profit company.
LOUIS A. WITZEMAN is the founder of our company. Mr. Witzeman has served as
a member of our Board of Directors since our formation in 1948, currently
serving as Chairman of the Board Emeritus. Mr. Witzeman served as our Chief
Executive Officer until his retirement in 1980.
Directors hold office until their successors have been elected and
qualified. All officers serve at the pleasure of the Board of Directors. There
are no family relationships among any of our directors or officers.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our directors and officers, and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by Securities and Exchange Commission regulation to furnish us with
copies of all Section 16(a) forms they file.
80
<PAGE> 82
Based solely on our review of the copies of such forms received by us
during the fiscal year ended June 30, 2000, and written representations that no
other reports were required, we believe that each person who, at any time during
such fiscal year, was a director, officer or beneficial owner of more than 10%
of our common stock complied with all Section 16(a) filing requirements during
such fiscal year or prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the total compensation received for services
rendered to us in all capacities for the fiscal years ended June 30, 1998, 1999,
and 2000 by our Chief Executive Officer and our three most highly compensated
executive officers who were in office at June 30, 2000. The table also sets
forth this information for our former Chief Executive Officer and two other
executive officers who were no longer with our company at June 30, 2000, whose
aggregate cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL ------------------------------- STOCK UNDERLYING COMPENSATION
POSITION AT YEAR-END YEAR SALARY($)(1) BONUS($) AWARD(S)($) OPTIONS(#) ($)(2)
-------------------- ---- ------------ -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jack E. Brucker..................... 2000 $314,246 $ -- $ -- 21,000 $ 3,200
Chief Executive Officer 1999 $250,000 $25,000 $45,000(4) 39,000 $ 65,559(5)
and President(3) 1998 $139,423 -- $ -- 21,000 $ 10,109(5)
Dr. Michel Sucher................... 2000 $184,231 $ -- $ -- 12,500 $ 3,200
Senior Vice President and 1999 $175,000 $ -- $ -- 21,600 $ 3,200
Chief Medical Officer(6) 1998 $171,595 $29,837 $ -- 18,000 $ 3,200
Robert B. Hillier................... 2000 $170,385 $ -- $ -- 12,500 $ 2,008
Senior Vice President and 1999 $137,500 $ -- $ -- 21,600 $ 2,600
Chief Administrative Officer(6) 1998 $ 87,500 $ -- $ -- 18,000 $ --
John S. Banas III................... 2000 $126,438 $ -- $ -- 17,500 $ --
Senior Vice President and General
Counsel(6)
John B. Furman...................... 2000 $392,500 $ -- $ -- 122,500 $ --
Former Chief Executive Officer 1999 $239,270 $ -- $ -- 148,005 $ 80,769(8)
and President(7)
Robert E. Ramsey.................... 2000 $150,714 $ -- $ -- 21,000 $ 2,374
Former Executive 1999 $238,460 $ -- $ -- 41,250 $ --
Vice President(9) 1998 $201,154 $ -- $ -- 20,000 $ --
Mark E. Liebner..................... 2000 $262,154(11) $ -- $ -- 20,000 $106,282(12)
Former Senior Vice President, 1999 $239,461 $ -- $ -- 33,600 $ 3,200
Chief Financial Officer and 1998 $192,706 $ -- $ -- 20,000 $ 3,200(13)
Treasurer(10)
</TABLE>
---------------
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any of the officers listed.
(2) Unless otherwise indicated, consists of company-matching contributions to
our 401(k) plan paid in cash.
(3) Mr. Brucker became our President and Chief Executive Officer in February
2000. From December 1997 until February 2000, Mr. Brucker served as our
Senior Vice President and Chief Operating Officer.
(4) Represents fair market value of restricted stock grants that vested in
December 1998.
(5) We paid Mr. Brucker $10,109 in fiscal 1998 and $62,359 in fiscal 1999 for
relocation costs, including moving expenses and closing costs on the sale
of his former residence.
81
<PAGE> 83
(6) Dr. Sucher and Mr. Hillier became executive officers of our company during
February 2000. Mr. Hillier joined our company during October 1997, and Mr.
Banas joined our company in September 1999.
(7) Mr. Furman served as our Chief Executive Officer and President from August
1998 until his resignation in January 2000. We will continue to compensate
Mr. Furman pursuant to the terms of his employment agreement through
January 2002.
(8) Represents additional compensation pursuant to an employment agreement with
Mr. Furman.
(9) Mr. Ramsey resigned as our Executive Vice President and Director during
January 2000.
(10) Mr. Liebner resigned as our Senior Vice President -- Chief Financial
Officer & Treasurer during March 2000.
(11) Includes $73,846 paid to Mr. Liebner pursuant to his severance agreement.
(12) Represents forgiveness of a note receivable from Mr. Liebner in connection
with his resignation.
(13) Includes 449 shares of common stock contributed to our 401(k) plan on
September 1, 1998 as our matching contribution.
OPTION GRANTS
The following table represents the options granted to the listed officers
in the last fiscal year and the value of the options.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
GRANTED(#)(1) FISCAL YEAR ($/SH) DATE $(2)
------------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Jack E. Brucker............. 21,000 3.1% $7.813 7/29/09 $ 70,546.70
Dr. Michael Sucher.......... 12,500 1.9% $7.813 7/29/09 $ 41,991.40
Robert B. Hillier........... 12,500 1.9% $7.813 7/29/09 $ 41,991.40
John S. Banas III........... 17,500 2.6% $7.688 9/20/09 $ 54,163.65
John B. Furman.............. 22,500 3.4% $7.813 7/29/09 $ 75,585.75
100,000(3) 15.0% $7.813 7/29/09 $261,030.00
Robert E. Ramsey............ 21,000(4) 3.1% $7.813 7/29/09 $ 70,546.70
Mark E. Liebner............. 20,000(5) 3.0% $7.813 7/29/09 $ 67,186.65
</TABLE>
---------------
(1) Except as otherwise indicated, all of the options vest and become
exercisable as follows: one-third at grant date in July 1999, one-third in
July 2000, and one-third in July 2001.
(2) The hypothetical present value of the options at the date of grant was
determined using the Black-Scholes option pricing model. The Black-Scholes
model estimates the present value of an option by considering a number of
factors, including the exercise price of the option, the volatility of our
common stock, the dividend rate, the term of the option, the time it is
expected to be outstanding, and interest rates. The Black-Scholes values
were calculated using the following assumptions: (a) a risk-free interest
rate of 6.26%; (b) a dividend yield of 0.00%; (c) an expected life of the
option after vesting of 2.35 years; and (d) an expected volatility of
67.51%.
(3) Mr. Furman resigned in January 2000. The options became exercisable upon
their grant in July 1999, and will remain exercisable through January 2003
pursuant to the terms of the options.
(4) Mr. Ramsey resigned in January 2000, and all of these options have expired
pursuant to the terms of the options.
(5) Mr. Liebner resigned in March 2000, and 13,333 of such options which were
unvested expired pursuant to the terms of the options. The remaining 6,667
options will remain exercisable through June 2001 unless previously
exercised.
82
<PAGE> 84
OPTION HOLDINGS
The following table represents certain information respecting the options
held by the listed officers as of June 30, 2000. None of the officers listed
exercised options during fiscal 2000.
FISCAL YEAR-END OPTIONS HELD
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT
FISCAL YEAR-END(#)(1)
----------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Jack E. Brucker............................................. 62,334 18,666
Dr. Michel Sucher........................................... 86,420 11,666
Robert B. Hillier........................................... 40,434 11,666
John S. Banas III........................................... 9,166 8,334
John B. Furman.............................................. 250,339 20,166
Robert E. Ramsey............................................ 26,250 --
Mark E. Liebner............................................. 185,780 --
</TABLE>
---------------
(1) None of the unexercised options listed had any value at fiscal year-end,
because the exercise price of all of the options held by the listed officers
were greater than $1.63, which was the closing sales price of our common
stock as quoted on the Nasdaq National Market on June 30, 2000.
EMPLOYMENT AGREEMENTS
In February 2000, Jack E. Brucker became our President and Chief Executive
Officer. We entered into an employment agreement with Mr. Brucker for a two-year
term expiring February 2002, renewable for one-year periods thereafter. Under
Mr. Brucker's employment agreement, he is to receive a base salary of $436,000.
In connection with the agreement, during August 2000 we granted Mr. Brucker
stock options to purchase 200,000 shares of our common stock. The agreement
provides that 50,000 of the options will vest upon grant, and the remaining
options shall vest ratably each April 20 beginning 2001. Mr. Brucker's
employment agreement provides that should we terminate his employment agreement
without cause, or should he terminate his employment agreement for good reason,
he will receive his base salary and other benefits provided by the agreement for
two years. In the event of such termination, if Mr. Brucker elects to solicit
clients, employees, or otherwise competes with us at any time following the
anniversary of his termination of employment, we will no longer be obligated to
pay Mr. Brucker any severance benefits.
Employment agreements with Dr. Sucher and Messrs. Hillier and Banas expire
in December 2000. Subject to annual review of the Human
Resources/Compensation/Organization Committee of the Board of Directors, each
agreement provides for a base salary (which currently are as follows: Dr. Sucher
$195,000; Mr. Hillier $200,000; and Mr. Banas, $180,000), and entitles the
executive to participate in stock option plans and other generally available
benefit programs. Each executive participates in our management incentive
program that provides bonuses to executive officers and other members of
management based upon our achieving certain financial and operating goals as
well as the achievement of individual objectives established for each
participant. Each employment agreement generally provides for each executive to
receive certain severance benefits if (i) we decide not to renew the agreement
for an additional term; (ii) we terminate the executive without cause; (iii) the
executive terminates the agreement for good reason; or (iv) the executive
becomes disabled and is unable to perform his duties.
Each of the employment agreements generally provides that if we decide not
to renew the employment agreement, the executive will receive his base salary
plus certain benefits for one year. Should we terminate the executive without
cause, the executive will receive his base salary plus certain benefits for the
greater of (i) the remainder of the contract term or (ii) one year. If the
executive terminates the agreement for good reason, the agreement provides that
the executive will receive his base salary plus certain benefits for one year.
83
<PAGE> 85
Should the executive become disabled and unable to perform his duties, we will
continue to pay the executive's salary for a period of six months.
In addition, each agreement provides for us to indemnify the executive for
certain liabilities arising from actions taken within the scope of employment.
Each employment agreement contains restrictive covenants pursuant to which the
executive has agreed not to compete with us or to solicit any of our clients or
employees of for a period of two years after the executive's employment ceases.
Change of control agreements entered into by Messrs. Brucker, Sucher,
Hillier, and Banas provide that in the event of a change of control and the
surviving entity or individuals in control do not offer such persons employment,
terminate their employment, or such persons terminate their employment for good
reason, such persons will receive one and one-half years' severance pay (two
years in the case of Mr. Brucker), plus certain benefits, including the
acceleration of exercisability of their stock options or the payment of the
value of such stock options in the event they are not accelerated or replaced
with comparable options. For purposes of the change of control agreements, "good
reason" includes a reduction of their respective duties and/or salary or the
surviving entity's failure to assume their respective employment and change of
control agreements. For purposes of the change of control agreements, a "change
of control" includes (i) the acquisition of beneficial ownership by certain
persons, acting alone or in concert with others, of 30% or more of the combined
voting power of our then outstanding voting securities; (ii) during any two-year
period, our Board members at the beginning of such period cease to constitute at
least a majority thereof (except that any new Board member approved by at least
two-thirds of the Board members then still in office, who were directors at the
beginning of such period, is considered to be a member of the current Board); or
(iii) approval by our stockholders of certain reorganizations, mergers,
consolidations, liquidations, or sales of all or substantially all of our
assets. Mr. Furman's and Mr. Liebner's change of control agreements terminated
upon their resignation.
During January 2000, John Furman resigned as our President and Chief
Executive Officer. Pursuant to the terms of his employment agreement, we will
continue to compensate Mr. Furman his base salary of $420,000 through January
2002. In connection with the agreement, during July 1999 we granted Mr. Furman
stock options to purchase 100,000 shares of our common stock. These stock
options were fully vested and exercisable on the date of grant, and will remain
exercisable through January 2003. In addition, any unvested options held by Mr.
Furman upon his resignation immediately vested and will remain exercisable
through January 2002.
Mr. Liebner resigned as our Senior Vice President, Chief Financial Officer,
and Treasurer in March 2000. We entered into a release and settlement agreement
with Mr. Liebner upon his resignation under which we will pay Mr. Liebner
$240,000 through March 2001. In connection with the agreement, Mr. Liebner
released our company from all claims that he may have against our company. In
conjunction with his employment with our company, Mr. Liebner entered into a
Conditional Stock Grant Agreement. The stock grant agreement provided for the
issuance of shares of common stock, subject to certain transfer and forfeiture
restrictions. The release and settlement agreement did not affect the terms of
the stock grant agreement.
We compensated Mr. Ramsey under an employment agreement with substantially
similar terms as those described above. Mr. Ramsey's base salary during fiscal
2000 was $257,800. Because this agreement was entered into as part of our
acquisition of his companies, the Southwest companies, the agreement did not
provide for a renewal term or severance benefits upon termination after June
2000. Mr. Ramsey resigned as our Executive Vice President in January 2000, and
pursuant to his employment agreement, we paid Mr. Ramsey his base salary through
June 2000.
EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP is a tax-qualified employee stock ownership trust for the benefit
of our current and former employees age 21 or over. The ESOP was established in
1978 through the purchase from Louis A. Witzeman, our founder, of approximately
63% of our then outstanding common stock in exchange for real estate and a note
in the principal amount of $728,000, with interest at 10% per annum, which note
has been paid in full. From time to time since the establishment of the ESOP, we
have contributed newly issued shares and treasury shares of common stock and
cash as employer contributions. The ESOP has used these cash contributions to
84
<PAGE> 86
pay the note to Mr. Witzeman and to repurchase shares of common stock
distributed from the ESOP. No contributions were made for the fiscal years ended
June 30, 1998 and 1999. We contributed $250,000 to the ESOP during fiscal year
ended 2000. As of September 30, 2000, there were approximately 5,300
participants in the ESOP.
David Stevens and Barry Landon are the Trustees of the ESOP. Our ESOP
Advisory Committee is responsible for directing the Trustee in the general
administration of the ESOP. With respect to the shares of our common stock held
by the ESOP, the participants in the ESOP are authorized to control how votes
are cast by giving instructions to the Trustee; however, if and to the extent
that the Trustee does not receive participant instructions, the Trustee will
vote the shares in accordance with instructions from our Advisory Committee.
Each participant may control the voting of such shares in the proportion that
the value of that participant's benefit in the ESOP fund bears to the total
value of all benefits therein. The ESOP permits any fully vested employee to
receive an in-service distribution of up to 50% of his or her account balance
while employed by us. An in-service distribution results in deferment of the
receipt of the balance of such employee's account until three years after the
employee's termination of employment other than as a result of the employee's
retirement at the ESOP's normal retirement age, disability, or death.
Participants in the ESOP otherwise may only request distribution of their ESOP
account balance in shares of common stock under certain circumstances including
termination of employment, early retirement, retirement, death, or disability.
In fiscal 2000, 56,266 shares were so distributed. In addition, upon completion
of 10 plan years of service and attainment of age 55, participants have the
right to direct the investment of 25% of their accounts into other diversified
investments.
In July 1999, our board of directors approved an amendment to "freeze" the
ESOP, effective June 30, 1999, with respect to all employees other than members
of collective bargaining agreements that include participation in the ESOP. All
participants' accounts were fully vested as of June 30, 1999. We do not intend
to make any contributions to the ESOP in the future.
1989 STOCK OPTION PLAN
The 1989 Stock Option Plan provides for the granting of nonqualified stock
options. Options may be issued to our key employees and directors. There are
currently outstanding options to acquire 139,000 shares of our common stock
under the 1989 Plan. No additional options will be granted under the 1989 Plan.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options, including vesting provisions, were established at the
time of grant. Options were granted for terms of up to 10 years and become
exercisable in whole or in one or more installments at such time as was
determined by the plan administrator upon the grant of the options. Exercise
prices of options are equal to the fair market value of our common stock at the
time of the grant. In the event of a change of control of our company, all
options will be terminated and the optionholder must be paid in cash the
difference between the fair market value of his or her options and their
exercise price.
1992 STOCK OPTION PLAN
General
The 1992 Plan, as amended, is divided into two programs: the Discretionary
Grant Program and the Automatic Option Program. The Discretionary Grant Program
provides for the granting of options to acquire our common stock, the direct
granting of our common stock, the granting of stock appreciation rights, or
SARs, and the granting of other cash awards. Options and awards under the 1992
Plan may be issued to executives, key employees, and others providing valuable
services to us. The options issued may be incentive stock options or
nonqualified stock options. We believe that the Discretionary Grant Program
represents an important factor in attracting and retaining executives and other
key employees and constitutes a significant part of the compensation program for
employees. The Automatic Option Program provides for the automatic grant of
options to acquire our common stock. Automatic options are granted to members of
our Board of Directors who are not employed by us. We believe that the Automatic
Option Program promotes our interests
85
<PAGE> 87
by providing such directors the opportunity to acquire a proprietary interest,
or otherwise increase their proprietary interest, in our company and an
increased personal interest in our continued success and progress.
If any change is made in the stock subject to the 1992 Plan, or subject to
any option or SAR granted under the 1992 Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure, or otherwise), the
1992 Plan provides that appropriate adjustments will be made as to the maximum
number of shares subject to the 1992 Plan and the number of shares and exercise
price per share of stock subject to outstanding options. An optionholder will
not have any of the rights of a stockholder with respect to optioned shares
until the holder exercises the option.
Eligibility and Administration
Options and awards may be granted only to persons who at the time of grant
are either (i) our key personnel (including officers and directors), or (ii)
consultants and independent contractors who provide valuable services to us.
Options that are incentive stock options may be granted only to our key
personnel who are also our employees.
The eligible persons under the Discretionary Grant Program are divided into
two groups, and there will be a separate administrator for each group. One group
consists of eligible persons who are our executive officers and directors and
all persons who own 10% or more of our issued and outstanding stock. The power
to administer the Discretionary Grant Program with respect to those persons may
be vested either with the Board of Directors or with the Senior Committee, a
committee comprised of two or more "Non-Employee Directors" (as that term is
defined in Rule 16(b)(3)(i) under the 1934 Act) who are appointed by the Board.
The Senior Committee, in its sole discretion, may require approval of the Board
of Directors for specific grants of options or awards under the Discretionary
Grant Program. Members of the Senior Committee may participate in the
Discretionary Grant Program as permitted by the rules. The second group consists
of eligible persons who are not our executive officers or directors and those
who do not own 10% or more of our issued and outstanding stock. The power to
administer the Discretionary Grant Program with respect to the second group of
eligible persons may be vested exclusively with our Board of Directors or with a
committee of two or more directors. Each plan administrator will determine (a)
which of the eligible persons in its group will be granted options and awards,
(b) the amount and timing of such grant, and (c) such other terms and conditions
as may be imposed by the plan administrator consistent with the 1992 Plan.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirements set forth in the Internal Revenue Code. The maximum number of
shares of stock with respect to which options or awards may be granted to any
employee during the term of the 1992 Plan may not exceed 25% of the shares of
stock covered by the 1992 Plan.
Exercise of Options
The expiration date, maximum number of shares purchasable, and other
provisions of the options, including vesting provisions, are established at the
time of grant. Options may be granted for terms of up to 10 years. Options vest
and thereby become exercisable in whole or in one or more installments at such
time as may be determined by the plan administrator upon the grant of the
options. However, a plan administrator has the discretion to provide for the
automatic acceleration of the vesting of any options or awards granted under the
Discretionary Grant Program in the event of a "change in control" as defined in
the 1992 Plan.
The exercise prices of options are determined by the plan administrator,
but if the option is intended to be an incentive stock option, it may not be
less than 100% (110% if the option is granted to a stockholder who at the time
the option is granted owns stock possessing more than 10% of the total combined
voting power of all classes of our stock) of the fair market value of our common
stock at the time of the grant.
Options or awards granted under the Discretionary Grant Program may be
assigned, encumbered, or otherwise transferred by the optionholder or grantee if
specifically allowed by the plan administrator upon the grant of the option or
award. If any optionholder ceases to be employed by us for a reason other than
disability
86
<PAGE> 88
or death, the optionholder or the optionholder's successor may, within three
months after the termination of employment, exercise some or all of the vested
incentive stock options held by the employee. If the optionholder ceases to be
employed due to disability, the three-month period is extended to 12 months.
However, termination for cause terminates all options held by the employee.
Under the 1992 Plan, options that are not incentive stock options and which
are outstanding at the time an optionholder's service to our company will
terminate three months after the date of termination of service, unless
otherwise determined by the plan administrator. If the service to our company
terminates by reason of the optionholder's permanent disability, however, the
options will terminate 12 months after the date of termination of service,
unless otherwise determined by the plan administrator. However, if the
optionholder is discharged for cause, all options held by the optionholder will
terminate immediately.
Awards
The plan administrators also may grant awards to eligible persons under the
1992 Plan. Awards may be granted in the form of SARs, stock awards, or cash
awards. Through June 30, 2000, stock awards in the amount of 35,916 shares have
been granted under the 1992 Plan.
Awards granted in the form of SARs entitle the recipient to receive a
payment equal to the appreciation in market value of a stated number of shares
of common stock from the price stated in the award agreement to the market value
of the common stock on the date first exercised or surrendered. The plan
administrators may determine, consistent with the 1992 Plan, such terms,
conditions, restrictions, and limitations, if any, on any SARs.
Awards granted in the form of stock awards entitle the recipient to receive
common stock directly. Awards granted in the form of cash entitle the recipient
to receive direct payments of cash depending on the market value or the
appreciation of the common stock or our other securities. The plan
administrators may determine such other terms, conditions, and limitations, if
any, on any awards.
The 1992 Plan provides that it is not intended to be the exclusive means by
which we may issue options or warrants to acquire our common stock, stock
awards, or any other type of award. To the extent permitted by applicable law,
we may issue any other options, warrants, or awards other than under the 1992
Plan without stockholder approval.
Terms and Conditions of Automatic Options
The 1992 Plan provides that (i) each year at the meeting of the Board of
Directors held immediately after the annual meeting of stockholders, each
eligible director will be granted an automatic option to acquire 2,500 shares of
common stock (except that the Chairman of the Board will receive an automatic
option to acquire 5,000 shares if the chairman is an eligible director), and
(ii) each year each eligible director will receive an automatic option, or
Formula Option, to acquire a number of shares equal to 1,000 shares for each
$0.05 increase of earnings per share from the prior fiscal year, subject to a
maximum of 5,000 shares of stock per eligible director. Automatic options (other
than the Formula Options) will vest one day prior to the next annual meeting of
stockholders after the applicable grant date unless the next annual meeting of
stockholders occurs less than six months after the applicable grant date, in
which case the automatic option will vest on the first anniversary of the
applicable grant date. Each Formula Option will vest on the first anniversary of
the applicable grant date.
The 1992 Plan provides for the grant to new eligible directors of automatic
options to acquire 10,000 shares of common stock on the date of their first
appointment or election to the Board. The automatic options granted to new
eligible directors vest one day prior to the next annual meeting of stockholders
that occurs after the applicable grant date unless the next annual meeting of
stockholders occurs less than six months after the applicable grant date, in
which case the automatic options become exercisable and vest on the first
anniversary of the applicable grant date. An eligible director is not eligible
to receive the 2,500 share automatic option or the Formula Option if that grant
date is within 30 days of such eligible director receiving the 10,000 share
automatic option.
87
<PAGE> 89
The 1992 Plan provides that, in the event of a change in control, all
unvested automatic options will automatically accelerate and immediately vest so
that each outstanding automatic option will become fully exercisable,
immediately prior to the effective date of such change in control.
The exercise price per share of stock subject to each automatic option is
equal to the 100% of the fair market value per share on the date of the grant of
the automatic option. Each automatic option expires on the tenth anniversary of
the date of grant. Eligible directors also may be eligible to receive options or
awards under the Discretionary Grant Program or option grants or direct stock
issuances under any four other plans. Cessation of service on the Board
terminates any automatic options for shares that were not vested at the time of
such cessation. Automatic options are nontransferable other than by will or the
laws of descent and distribution on the death of the optionholder and, during
the lifetime of the optionholder, are exercisable only by such optionholder.
Duration and Modification
The 1992 Plan will remain in force until November 5, 2002. Our Board of
Directors at any time may amend the 1992 Plan except that, without the approval
by the affirmative vote of the holders of a majority of the outstanding shares
of our common stock, the Board of Directors may not (i) increase, except in the
case of certain organic changes to our company, the maximum number of shares of
common stock subject to the 1992 Plan, (ii) reduce the exercise price at which
options may be granted or the exercise price for which any outstanding option
may be exercised, (iii) extend the term of the 1992 Plan, (iv) change the class
of persons eligible to receive options or awards under the 1992 Plan, or (v)
materially increase the benefits accruing to participants under the 1992 Plan.
In addition, the Board may not, without the consent of the optionholder, take
any action that disqualifies any option previously granted under the 1992 Plan
for treatment as an incentive stock option or which adversely affects or impairs
the rights of the optionholder of any outstanding option. Despite the foregoing,
the Board of Directors may amend the 1992 Plan from time to time as it deems
necessary in order to meet the requirements of any amendments to Rule 16b-3
under the 1934 Act without the consent of our stockholders.
Federal Income Tax Consequences for Stock Options
Certain options granted under the 1992 Plan will be intended to qualify as
incentive stock options under Code Section 422. Accordingly, there will be no
taxable income to an employee when an incentive stock option is granted to him
or her when that option is exercised. The amount by which the fair market value
of the shares at the time of exercise exceeds the option price generally will be
treated as an item of preference in computing the alternate minimum taxable
income of the optionholder. If an optionholder exercises an incentive stock
option and does not dispose of the shares within either two years after the date
of the grant of the option or one year after the date the shares were
transferred to the optionholder, any gain realized upon disposition will be
taxable to the optionholder as a capital gain. If the optionholder does not
satisfy the applicable holding periods, however, the difference between the
option price and the fair market value of the shares on the date of exercise of
the option will be taxed as ordinary income, and the balance of the gain, if
any, will be taxed as capital gain. If the shares are disposed of before the
expiration of the one-year or two-year periods and the amount realized is less
than the fair market value of the shares at the date of exercise, the employee's
ordinary income is limited to the amount realized less the option exercise price
paid. We will be entitled to a tax deduction only to the extent the optionholder
has ordinary income upon the sale or other disposition of the shares received
when the option was exercised.
Certain other options issued under the 1992 Plan, including options issued
automatically to the non-employee members of the Board of Directors, will be
nonqualified options. The income tax consequences of nonqualified options will
be governed by Code Section 83. Under Code Section 83, the excess of the fair
market value of the shares of the common stock acquired pursuant to the exercise
of any option over the amount paid for such stock, or Excess Value, must be
included in the gross income of the optionholder in the first taxable year in
which the common stock acquired by the optionholder is not subject to a
substantial risk of forfeiture. In calculating Excess Value, fair market value
will be determined on the date that the substantial risk of forfeiture expires,
unless a Section 83(b) election is made to include the Excess Value in income
88
<PAGE> 90
immediately after the acquisition, in which case fair market value will be
determined on the date of the acquisition. Generally, we will be entitled to a
federal income tax deduction in the same taxable year that the optionholder
recognizes income. We will be required to withhold income tax with respect to
income reportable pursuant to Code Section 83 by an optionholder. The basis of
the shares acquired by an optionholder will be equal to the option price of
those shares plus any income recognized pursuant to Code Section 83. Subsequent
sales of the acquired shares will produce capital gain or loss. Such capital
gain or loss will be long term if the stock has been held for one year from the
date of the substantial risk of forfeiture lapsed, or, if a Section 83(b)
election is made, one year from the date the shares were acquired.
2000 NON-QUALIFIED STOCK OPTION PLAN
Under our 2000 Non-Qualified Stock Option Plan, which was approved by our
board of directors and was effective on August 11, 2000, 2,000,000 shares of
Common Stock are reserved for issuance upon exercise of stock options granted
under the plan. The plan is designed as a means to retain and motivate qualified
and competent persons who provide services to our company. Our board of
directors or a committee of outside directors appointed by our board will
administer and interpret the plan. The board of directors and the committee each
are authorized to grant options to all eligible employees, consultants, and
independent contractors of our company; provided, however, that our directors
and officers will not be eligible to receive options under the plan. In the
event of a change in the common stock due to a stock dividend or
recapitalization, the plan provides for appropriate adjustment in the number of
shares available for grant under the plan and the number of shares and the
exercise price per share under any option then outstanding under the plan, so
that the same percentage of our issued and outstanding shares shall remain
subject to being optioned under the plan or subject to purchase at the same
aggregate exercise price under any such outstanding option, as applicable.
Unless otherwise provided in any option, the committee or the board of directors
may change the option price and/or number of shares under any outstanding option
when, in their discretion, such adjustment becomes appropriate so as to preserve
but not increase benefits under the plan. The aggregate number of shares subject
to options granted to any one optionee under the plan may not exceed 2,000,000
subject to adjustment as described above.
The plan provides for the granting of only nonqualified stock options.
Options may generally be granted under the plan on such terms and at such prices
as determined by the committee or the board of directors. Each option is
exercisable after the period or periods specified in the option agreement, but
no option may become exercisable after the expiration of ten years from the date
of grant. The board of directors or committee may accelerate the exercisability
or vesting of any option or shares previously acquired by the exercise of any
options, and, in the event of a change in control (as defined in the plan),
unless otherwise provided in the option, each outstanding option will become
immediately exercisable in full. Nonqualified stock options granted under the
plan are not transferable unless the prior written consent of the committee or
the board of directors is obtained and such transfer does not violate Rule 16b-3
under the Securities Exchange Act of 1934. The committee or the board of
directors may permit the option price to be paid by
- cash,
- certified or official bank check,
- personal check if accepted by the committee or the board of directors,
- money order,
- shares of common stock that have been held for at least 6 months (or such
other shares as we determine will not cause us to recognize for financial
accounting purposes, a charge for compensation expense),
- withholding of shares of common stock,
- any cashless exercise procedure approved by the committee or the board of
directors,
- other consideration deemed appropriate by the committee or the board of
directors, or
89
<PAGE> 91
- a combination of the above.
The plan also authorizes us to make or guarantee loans to optionees to enable
them to exercise their options. Such loans must
- provide for recourse to the optionee,
- bear interest at the prime rate of our principal lender,
- be secured by the shares of common stock purchased, and
- contain such other terms as the committee or the board of directors in
its sole discretion shall reasonably require.
The board of directors or the committee has the authority to amend or
terminate the plan or any options, provided that no such action may
substantially impair the rights or benefits of the holder of any outstanding
option without the consent of such holder, and provided further that certain
amendments to the plan are subject to stockholder approval. Unless terminated
sooner, the plan will continue in effect until all options granted thereunder
have expired or been exercised.
EMPLOYEE STOCK PURCHASE PLAN
We have adopted an Employee Stock Purchase Plan, or ESPP, which allows our
eligible employees to purchase shares of common stock at semi-annual intervals
through periodic payroll deductions. The ESPP is intended to promote superior
levels of performance from, and to encourage stock ownership by, our eligible
employees by increasing their interest in our success. The ESPP is designed to
meet this goal by offering financial incentives for employees to purchase our
common stock, thereby increasing the interest of employees in pursuing our
long-term growth, profitability, and financial success. The Board of Directors
has reserved 450,000 shares of common stock for this purpose. The purchase price
per share is the lower of (i) 85% of the closing price of our common stock on
the offering commencement date, or (ii) 85% of the closing price of our common
stock on the offering termination date. The purchase price is to be paid through
periodic payroll deductions not to exceed 10% of the participant's earnings due
each semi-annual period of participation within the offering period. However, no
participant may purchase more than $25,000 worth of common stock annually. As of
October 25, 2000, we had issued 353,580 shares of common stock under the ESPP.
The purchase right of a participant will terminate automatically in the
event the participant ceases to be an employee of ours, and any payroll
deductions collected from such individual during the semi-annual period in which
such termination occurs will be refunded. However, in the event of the
participant's disability or death, such payroll deduction may be applied to the
purchase of the common stock on the next semi-annual purchase date.
The ESPP provides for annual offerings through the end of July 2003.
401(k) PLAN
We have a 401(k) contributory retirement plan for the majority of our
employees. The 401(k) plan is designed to provide tax-deferred income to our
employees in accordance with the provisions of Section 401(k) of the Internal
Revenue Code.
The 401(k) plan provides that each participant may contribute up to 15% of
his or her salary, not to exceed the statutory limit. Matching contributions may
be made at the discretion of the Board of Directors. We have historically
elected to make a fixed matching contribution to each participant's account of
up to 2% of total annual cash compensation received by respective participants.
An additional discretionary matching contribution may also be made in an amount
equal to a percentage determined by the Board of Directors of the contribution
made by participants. Discretionary matching contributions vest over a period of
seven years. All contributions by participants and our fixed matching
contributions vest immediately. Under the terms of the 401(k) plan, we also may
make discretionary profit sharing contributions. Profit sharing contributions
are allocated among participants based on their annual compensation. Each
participant has the right to direct the
90
<PAGE> 92
investment of his or her funds among certain named plans. Our contributions may
be made in shares of our common stock.
Upon death, disability, retirement, or the termination of employment,
participants may elect to receive periodic or lump sum payments. Additionally,
amounts may be withdrawn in cases of demonstrated hardship. Amounts contributed
by us to the 401(k) plan for certain executive officers are set forth in the
Summary Compensation Table under the caption "Executive Compensation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 2000, our Human
Resource/Compensation/Organization Committee consisted of Messrs. Walker,
Turner, and Witzeman and Ms. Carpenter, currently directors of the company.
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS, AND OFFICERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock on October 25, 2000 by (i) each
director; (ii) the executive officers set forth in the Summary Compensation
Table under the section entitled "Executive Compensation;" (iii) all of our
directors and executive officers as a group; and (iv) each person known by us to
be the beneficial owner of more than 5% of our common stock.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY
OWNED
NAME OF BENEFICIAL OWNER (1)(2)(3) PERCENT(2)
------------------------ ------------ ----------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Jack E. Brucker............................................. 124,000(4) *
Dr. Michel Sucher........................................... 153,005(5) 1.0
Robert B. Hillier........................................... 72,934(6) *
John S. Banas III........................................... 63,333(7) *
Cor J. Clement.............................................. 33,250(8) *
Louis G. Jekel.............................................. 149,299(9) 1.0
William C. Turner........................................... 35,500(10) *
Henry G. Walker............................................. 22,500(11) *
Mary Anne Carpenter......................................... 20,000(12) *
Louis A. Witzeman........................................... 154,648(13) 1.0
John B. Furman.............................................. 265,005(14) 1.8
Robert E. Ramsey............................................ 519,773(15) 3.5
Mark E. Liebner............................................. 247,499(16) 1.7
Executive officers and directors as a group (10 persons).... 828,469 5.4
5% STOCKHOLDERS:
ESOP........................................................ 848,330(17) 5.4
Mark S. Howells............................................. 1,000,000(18) 6.8
</TABLE>
---------------
* Less than 1%
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) The percentages shown are calculated based upon 14,626,336 shares of common
stock outstanding on October 25, 2000. The number and percentages shown
include the shares of common stock actually owned as of October 25, 2000
and the shares of common stock that the identified person or group had a
right to acquire within 60 days after October 25, 2000. In calculating the
percentage of ownership,
91
<PAGE> 93
shares are deemed to be outstanding for the purpose of computing the
percentage of shares of common stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by any other stockholders.
(3) Excludes the following fully vested shares of common stock held by the ESOP
for the benefit of the following individuals: four shares for Mr. Brucker,
1,097 shares for Dr. Sucher, two shares for Mr. Hillier, 5,664 shares for
Mr. Jekel, 1,035 shares for Mr. Liebner, and four shares for Mr. Ramsey.
These persons have sole voting power with respect to the shares held in
their account by the ESOP.
(4) Represents shares of common stock issuable upon exercise of stock options.
(5) Includes 118,920 shares of common stock issuable upon exercise of stock
options.
(6) Represents shares of common stock issuable upon exercise of stock options.
(7) Represents shares of common stock issuable upon exercise of stock options.
(8) Includes 21,250 shares of common stock issuable upon exercise of stock
options.
(9) Includes 75,000 shares of common stock issuable upon exercise of stock
options; 3,175 shares held by the Louis G. Jekel Charitable Remainder Trust
UA dated March 1, 1996; and 71,124 shares held by a partnership of which
Mr. Jekel is the beneficial owner.
(10) Includes 27,500 shares of common stock issuable upon exercise of stock
options.
(11) Represents shares of common stock issuable upon exercise of stock options.
(12) Represents shares of common stock issuable upon exercise of stock options.
(13) Includes 36,062 shares held by the Louis A. Witzeman, Jr. Family Investment
Limited Partnership, of which 6,650 shares are held for the benefit of
other family members. Also includes 69,375 shares of common stock issuable
upon the exercise of stock options.
(14) Includes 263,005 shares of common stock issuable upon exercise of stock
options.
(15) Includes 26,250 shares of common stock issuable upon exercise of stock
options. Does not include 315,253 shares held by the Ramsey SW Revocable
Trust dated August 31, 1999, Robert L'Ecuyer, Trustee, for which Mr. Ramsey
disclaims beneficial ownership.
(16) Includes 185,780 shares of common stock issuable upon exercise of stock
options.
(17) Represents 848,330 shares of common stock owned by the Rural/Metro
Corporation Employee Stock Ownership Plan. Participants under the ESOP have
voting power as to shares allocated to their account and the ESOP trustee
has voting power as to unallocated shares and as to any shares for which
participants have chosen not to vote. The ESOP has sole dispositive power
over all of these shares of common stock. The address of the Rural/Metro
Corporation Employee Stock Ownership Plan is c/o Rural/Metro Corporation,
8401 East Indian School Road, Scottsdale, Arizona 85251.
(18) Represents 1,000,000 shares of common stock beneficially owned by Mark S.
Howells. Mr. Howells has sole voting and dispositive power of all of such
shares. The address of Mr. Howells is c/o Arizona Securities Group, 2390
East Camelback Road, Suite 203, Phoenix, Arizona 85016.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We paid approximately $96,000 during the year ended June 30, 2000 for legal
services to Jekel & Howard, of which Mr. Jekel is a principal. Mr. Jekel is a
participant in our ESOP. We paid Mr. Jekel $32,000 during the year ended June
30, 2000 for additional services rendered in connection with our forestry fire
fighting services.
We paid approximately $46,000 during the year ended June 30, 2000 to Louis
A. Witzeman under leases for five fire and ambulance stations. These leases can
be cancelled by us at any time. Mr. Witzeman received $85,000 during the fiscal
year ended June 30, 2000 for fire protection and EMS advisory and consulting
services and for serving on the Board of Directors. We also provide Mr. Witzeman
with an automobile for personal use.
92
<PAGE> 94
We engaged Mr. Bolin, our former President, as a special consultant to our
company through January 2002. The consulting agreement entitles Mr. Bolin to
participate in any benefit plans that we maintain for our employees. We paid Mr.
Bolin approximately $118,000 under this consulting agreement.
We engaged William R. Crowell, our former Senior Vice President, as a
consultant to our company through February 2001. Under the consulting agreement,
we will pay Mr. Crowell consulting fees of $75,000 in three equal monthly
installments on June 1, July 1, and August 1, 2000. Pursuant to the consulting
agreement, we also granted Mr. Crowell options to purchase 8,000 shares of
common stock.
We paid approximately $1,143,000 during the year ended June 30, 2000 to
companies owned by Robert E. Ramsey under leases for various offices, ambulance
stations, furniture, and equipment acquired in connection with the acquisition
of his companies.
In connection with Mr. Liebner's resignation from our company in March
2000, we forgave a note receivable from Mr. Liebner in the amount of
approximately $123,500. We issued this note to Mr. Liebner in July 1998 in
connection with his income tax liability incurred from his stock grant
agreement.
We believe that all of the related party transactions listed above were
provided on terms no less favorable to us than could have been obtained from
unrelated firms or third parties. All future transactions between us and our
officers, directors, and principal stockholders are expected to be on terms no
less favorable to us than could be obtained from unaffiliated persons and will
require the approval of our independent directors.
93
<PAGE> 95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(i) Financial Statements
(1) Report of Independent Public Accountants.................... 45
(2) Consolidated Financial Statements Consolidated Balance
Sheets at June 30, 2000 and 1999............................ 46
Consolidated Statements of Income for the Years Ended June
30, 2000, 1999, and 1998.................................... 47
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 2000, 1999, and 1998........... 48
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999, and 1998............................... 49
Consolidated Statements of Comprehensive Income for the
Years Ended June 30, 2000 and 1999.......................... 50
Notes to Consolidated Financial Statements.................. 51
(ii) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts............... 77
All other schedules have been omitted on the basis of
immateriality or because such schedules are not otherwise
applicable
</TABLE>
(b) Reports on Form 8-K:
Form 8-K filed April 14, 2000 relating to Provisional Wavier and
Standstill Agreement dated as of March 14, 2000 and the First Amendment
to Provisional Waiver and Standstill Agreement dated as of April 13,
2000
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
2 Plan and Agreement of Merger and Reorganization, dated as of
April 26, 1993(1)
3.1(a) Second Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of Delaware on
January 18, 1995(6)
3.1(b) Rights Agreement dated as of August 23, 1995 between the
Registrant and American Securities Transfer, Inc., the
Rights Agent(7)
3.2 Amended and Restated Bylaws of the Registrant(1)
4.1 Specimen Certificate representing shares of Common Stock,
par value $.01 per share(1)
4.2 Indenture dated as of March 16, 1998, by and among the
Company, the subsidiaries acting as Guarantors thereto, and
the First National Bank of Chicago, as Trustee(12)
4.3 Form of Global Note (included in Exhibit 4.2)(12)
4.4 Registration Rights Agreement dated March 11, 1998, by and
among Bear Stearns & Co. Inc., Salomon Brothers Inc, SBC
Warburg Dillon Reed Inc., First Union Capital Markets, the
Company, and certain subsidiaries of the Company, as
Guarantors(12)
10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted
August 10, 1989, as amended(1)
10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of
Registrant, dated February 4, 1994(2)
</TABLE>
94
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated
August 25, 1994(3)
10.4 Form of Stock Option Agreement pursuant to 1989 Employee
Stock Option Plan of Registrant(1)
10.5 Amended and Restated 1992 Stock Option Plan of Registrant,
amended through October 15, 1998(15)
10.6 Forms of Stock Option Agreements pursuant to the Amended and
Restated 1992 Stock Option Plan of Registrant(15)
10.15 Forms of Conditional Stock Grant and Repurchase Agreements
by and between Registrant and each of its executive officers
and directors, dated May 14, 1993, November 1, 1994, and
December 1, 1997(1)
10.16(a) Form of Employment Agreement by and between Registrant and
Mark E. Liebner, effective January 1, 1998(14)
10.16(c) Form of Change of Control Agreement by and between Mark E.
Liebner dated March 4, 1998(14)
10.16(d) Form of Change of Control Agreement by and between the
Registrant and the following executive officers: (i) Jack E.
Brucker, dated November 24, 1997, (ii) R. Bruce Hillier,
effective October 28, 1997, (iii) Dr. Michel A. Sucher,
effective December 1, 1995, and (iv) John S. Banas III,
effective March 10, 2000(14)
10.16(f) Employment Agreement by and between Registrant and Robert E.
Ramsey Jr., dated June 30, 1997(9)
10.16(g) Employment Agreement by and between Registrant and John B.
Furman effective July 29, 1999(17)
10.16(h) Change of Control Agreement by and between Registrant and
John B. Furman, effective November 1, 1999(17)
10.16(i) Severance Agreement by and between Warren S. Rustand and
Registrant effective August 24, 1998(14)
10.16(j) Consulting Agreement by and between James H. Bolin and
Registrant effective January 1, 1998(14)
10.16(k) Separation Agreement and Release by and between Registrant
and Robert T. Edwards effective December 31, 1998(16)
10.16(l) Employment Agreement by and between the Registrant and Jack
E. Brucker, effective February 22, 2000*
10.16(m) Form of Employment Agreement by and between the Registrant
and each of the following executive officers: (i) Dr. Michel
A. Sucher, effective November 7, 1997, (ii) R. Bruce
Hillier, effective October 20, 1997, and (iii) John S. Banas
III, effective March 10, 2000(18)
10.17 Form of Indemnity Agreement by and between Registrant and
each of its officers and directors, dated in April, May,
August and November 1993, as of October 13, 1994, and as of
September 25, 1998(1)
10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust
of the Registrant, effective July 1, 1997(15)
10.21 Retirement Savings Value Plan 401(k) of Registrant, as
amended, dated July 1, 1990(1)
10.22 Master Lease Agreement by and between Plazamerica, Inc. and
the Registrant, dated January 30, 1990(1)
10.36 Employee Stock Purchase Plan, as amended through November
20, 1997(14)
</TABLE>
95
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.37(a) Loan and Security Agreement by and among the CIT
Group/Equipment Financing, Inc. and the Registrant, together
with its subsidiaries, dated December 28, 1994, and related
Promissory Note and Guaranty Agreement(3)
10.37(b) Form of Loan and Security Agreement by and among Registrant
and CIT Group/Equipment Financing, Inc. first dated February
25, 1998 and related form of Guaranty and Schedule of
Indebtedness and Collateral(14)
10.41 Stock Purchase Agreement by and among Rural/Metro of New
York, Inc., and Douglas H. Baker with respect to the stock
of LaSalle Ambulance, Inc., and The Western New York
Emergency Medical Services Training Institute, Inc., dated
January 26, 1995(4)
10.42 Asset Purchase Agreement by and among EMS Ventures of South
Carolina, Inc., Midlands Ambulance Corp. and Jane L. East,
dated May 4, 1995(5)
10.45 Amended and Restated Credit Agreement dated as of March 16,
1998, by and among the Company as borrower, certain of its
subsidiaries as Guarantors, the lenders referred to therein,
and First Union National Bank, as agent and as lender, and
related Form of Amended and Restated Revolving Credit Note,
Form of Subsidiary Guarantee Agreement, and Form of
Intercompany Subordination Agreement(13)
10.49 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr. and Barry Landon, as
trustee of the Employee Stock Ownership Plan for the benefit
of the Company's employees, with respect to the stock of SW
General, Inc., as amended(8)
10.50 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr. with respect to the
stock of Southwest Ambulance of Casa Grande, Inc., as
amended(8)
10.51 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr., Patrick McGroder,
Barry Landon and Gary Ramsey, the vendors, with respect to
the stock of Southwest General Services, Inc., as amended(8)
10.52 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr., with respect to
Medical Emergency Devices and Services, Inc., as amended(8)
10.54 Purchase Agreement dated January 16, 1998 and Complementary
Agreement dated March 26, 1998 between Rural/Metro
Corporation and Messrs. Horacio Artagaueytia, Jose Mateo
Campomar, Alberto Fluerquin, Carlos Mezzera, Renato Ribeiro,
Gervasio Reyes, and Carlos Arturo Delmiro Marfetan with
respect to the stock of Peimu S.A., Recor S.A., Marlon S.A.,
and Semercor S.A(11)
10.55 Provisional Waiver and Standstill Agreement dated as of
March 14, 2000(19)
10.56 First Amendment to Provisional Waiver and Standstill
Agreement dated as of April 13, 2000(19)
10.57 Second Amendment to Provisional Waiver and Standstill
Agreement dated as of July 14, 2000(20)
21 Subsidiaries of Registrant*
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule*
</TABLE>
---------------
* Previously filed with the Registrant's Form 10-K filed with the Commission
on September 28, 2000.
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-63448) filed May 27, 1993 and declared
effective July 15, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-76458) filed March 15, 1994 and declared
effective May 5, 1994.
96
<PAGE> 98
(3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about May 12, 1995.
(4) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 7, 1995, as amended by the
Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and
August 1, 1995.
(5) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about May 19, 1995.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-88172) filed with the Commission on December
30, 1994 and declared effective January 19, 1995.
(7) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about August 28, 1995.
(8) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about July 15, 1997, as amended by the
Registrant's Form 8-K/A Current Report filed with Commission on or about
August 12, 1997.
(9) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1997.
(10) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 17, 1998.
(11) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 1, 1998, as amended by the
Registrant's Form 8-K/A Current Report filed on or about June 5, 1998.
(12) Incorporated by reference to the Registration Statement on Form S-4 of the
Registrant (Registration No. 333-51455) filed April 30, 1998 and declared
effective on May 14, 1998.
(13) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 of the Registrant (Registration No. 333-51455) filed May
11,1998 and declared effective on May 14, 1998.
(14) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1998.
(15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 10, 1998.
(16) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 11, 1999.
(17) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 15, 1999.
(18) Incorporated by reference to the Registrant's Form 10-K Annual Report for
the year ended June 30, 1996 filed with the Commission on or about
September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)).
(19) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on April 14, 2000.
(20) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on July 28, 2000.
97
<PAGE> 99
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURAL/METRO CORPORATION
By: /s/ JACK E. BRUCKER
------------------------------------
Jack E. Brucker
President and Chief Executive
Officer
November 2, 2000
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ COR J. CLEMENT Chairman of the Board of November 2, 2000
--------------------------------------------------- Directors
Cor J. Clement
/s/ LOUIS G. JEKEL Vice Chairman of the Board of November 2, 2000
--------------------------------------------------- Directors
Louis G. Jekel
/s/ JACK E. BRUCKER President, Chief Executive November 2, 2000
--------------------------------------------------- Officer and Director
Jack E. Brucker (Principal Executive
Officer)
/s/ RANDALL L. HARMSEN Vice President of Finance November 2, 2000
--------------------------------------------------- (Principal Financial
Randall L. Harmsen Officer and Principal
Accounting Officer)
/s/ MARY ANNE CARPENTER Director November 2, 2000
---------------------------------------------------
Mary Anne Carpenter
/s/ WILLIAM C. TURNER Director November 2, 2000
---------------------------------------------------
William C. Turner
Director
---------------------------------------------------
Henry G. Walker
/s/ LOUIS A. WITZEMAN Director November 2, 2000
---------------------------------------------------
Louis A. Witzeman
</TABLE>
98
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
2 Plan and Agreement of Merger and Reorganization, dated as of
April 26, 1993(1)
3.1(a) Second Restated Certificate of Incorporation of the
Registrant filed with the Secretary of State of Delaware on
January 18, 1995(6)
3.1(b) Rights Agreement dated as of August 23, 1995 between the
Registrant and American Securities Transfer, Inc., the
Rights Agent(7)
3.2 Amended and Restated Bylaws of the Registrant(1)
4.1 Specimen Certificate representing shares of Common Stock,
par value $.01 per share(1)
4.2 Indenture dated as of March 16, 1998, by and among the
Company, the subsidiaries acting as Guarantors thereto, and
the First National Bank of Chicago, as Trustee(12)
4.3 Form of Global Note (included in Exhibit 4.2)(12)
4.4 Registration Rights Agreement dated March 11, 1998, by and
among Bear Stearns & Co. Inc., Salomon Brothers Inc, SBC
Warburg Dillon Reed Inc., First Union Capital Markets, the
Company, and certain subsidiaries of the Company, as
Guarantors(12)
10.3(a) 1989 Employee Stock Option Plan of Registrant, adopted
August 10, 1989, as amended(1)
10.3(b) Third Amendment to the 1989 Employee Stock Option Plan of
Registrant, dated February 4, 1994(2)
10.3(c) Fourth Amendment to 1989 Employee Stock Option Plan, dated
August 25, 1994(3)
10.4 Form of Stock Option Agreement pursuant to 1989 Employee
Stock Option Plan of Registrant(1)
10.5 Amended and Restated 1992 Stock Option Plan of Registrant,
amended through October 15, 1998(15)
10.6 Forms of Stock Option Agreements pursuant to the Amended and
Restated 1992 Stock Option Plan of Registrant(15)
10.15 Forms of Conditional Stock Grant and Repurchase Agreements
by and between Registrant and each of its executive officers
and directors, dated May 14, 1993, November 1, 1994, and
December 1, 1997(1)
10.16(a) Form of Employment Agreement by and between Registrant and
Mark E. Liebner, effective January 1, 1998(14)
10.16(c) Form of Change of Control Agreement by and between Mark E.
Liebner dated March 4, 1998(14)
10.16(d) Form of Change of Control Agreement by and between the
Registrant and the following executive officers: (i) Jack E.
Brucker, dated November 24, 1997, (ii) R. Bruce Hillier,
effective October 28, 1997, (iii) Dr. Michel A. Sucher,
effective December 1, 1995, and (iv) John S. Banas III,
effective March 10, 2000(14)
10.16(f) Employment Agreement by and between Registrant and Robert E.
Ramsey Jr., dated June 30, 1997(9)
10.16(g) Employment Agreement by and between Registrant and John B.
Furman effective July 29, 1999(17)
10.16(h) Change of Control Agreement by and between Registrant and
John B. Furman, effective November 1, 1999(17)
10.16(i) Severance Agreement by and between Warren S. Rustand and
Registrant effective August 24, 1998(14)
10.16(j) Consulting Agreement by and between James H. Bolin and
Registrant effective January 1, 1998(14)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.16(k) Separation Agreement and Release by and between Registrant
and Robert T. Edwards effective December 31, 1998(16)
10.16(l) Employment Agreement by and between the Registrant and Jack
E. Brucker, effective February 22, 2000*
10.16(m) Form of Employment Agreement by and between the Registrant
and each of the following executive officers: (i) Dr. Michel
A. Sucher, effective November 7, 1997, (ii) R. Bruce
Hillier, effective October 20, 1997, and (iii) John S. Banas
III, effective March 10, 2000 (18)
10.17 Form of Indemnity Agreement by and between Registrant and
each of its officers and directors, dated in April, May,
August and November 1993, as of October 13, 1994, and as of
September 25, 1998(1)
10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust
of the Registrant, effective July 1, 1997(15)
10.21 Retirement Savings Value Plan 401(k) of Registrant, as
amended, dated July 1, 1990(1)
10.22 Master Lease Agreement by and between Plazamerica, Inc. and
the Registrant, dated January 30, 1990(1)
10.36 Employee Stock Purchase Plan, as amended through November
20, 1997(14)
10.37(a) Loan and Security Agreement by and among the CIT
Group/Equipment Financing, Inc. and the Registrant, together
with its subsidiaries, dated December 28, 1994, and related
Promissory Note and Guaranty Agreement(3)
10.37(b) Form of Loan and Security Agreement by and among Registrant
and CIT Group/Equipment Financing, Inc. first dated February
25, 1998 and related form of Guaranty and Schedule of
Indebtedness and Collateral(14)
10.41 Stock Purchase Agreement by and among Rural/Metro of New
York, Inc., and Douglas H. Baker with respect to the stock
of LaSalle Ambulance, Inc., and The Western New York
Emergency Medical Services Training Institute, Inc., dated
January 26, 1995(4)
10.42 Asset Purchase Agreement by and among EMS Ventures of South
Carolina, Inc., Midlands Ambulance Corp. and Jane L. East,
dated May 4, 1995(5)
10.45 Amended and Restated Credit Agreement dated as of March 16,
1998, by and among the Company as borrower, certain of its
subsidiaries as Guarantors, the lenders referred to therein,
and First Union National Bank, as agent and as lender, and
related Form of Amended and Restated Revolving Credit Note,
Form of Subsidiary Guarantee Agreement, and Form of
Intercompany Subordination Agreement(13)
10.49 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr. and Barry Landon, as
trustee of the Employee Stock Ownership Plan for the benefit
of the Company's employees, with respect to the stock of SW
General, Inc., as amended(8)
10.50 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr. with respect to the
stock of Southwest Ambulance of Casa Grande, Inc., as
amended(8)
10.51 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr., Patrick McGroder,
Barry Landon and Gary Ramsey, the vendors, with respect to
the stock of Southwest General Services, Inc., as amended(8)
10.52 Agreement of Purchase and Sale between Rural/Metro
Corporation and Robert E. Ramsey, Jr., with respect to
Medical Emergency Devices and Services, Inc., as amended(8)
10.54 Purchase Agreement dated January 16, 1998 and Complementary
Agreement dated March 26, 1998 between Rural/Metro
Corporation and Messrs. Horacio Artagaueytia, Jose Mateo
Campomar, Alberto Fluerquin, Carlos Mezzera, Renato Ribeiro,
Gervasio Reyes, and Carlos Arturo Delmiro Marfetan with
respect to the stock of Peimu S.A., Recor S.A., Marlon S.A.,
and Semercor S.A(11)
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.55 Provisional Waiver and Standstill Agreement dated as of
March 14, 2000(19)
10.56 First Amendment to Provisional Waiver and Standstill
Agreement dated as of April 13, 2000(19)
10.57 Second Amendment to Provisional Waiver and Standstill
Agreement dated as of July 14, 2000(20)
21 Subsidiaries of Registrant*
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule*
</TABLE>
---------------
* Previously filed with the Registrant's Form 10-K filed with the Commission
on September 28, 2000.
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-63448) filed May 27, 1993 and declared
effective July 15, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-76458) filed March 15, 1994 and declared
effective May 5, 1994.
(3) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about May 12, 1995.
(4) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 7, 1995, as amended by the
Registrant's Form 8-K/A Current Reports filed on or about May 15, 1995 and
August 1, 1995.
(5) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about May 19, 1995.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-88172) filed with the Commission on December
30, 1994 and declared effective January 19, 1995.
(7) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about August 28, 1995.
(8) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about July 15, 1997, as amended by the
Registrant's Form 8-K/A Current Report filed with Commission on or about
August 12, 1997.
(9) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1997.
(10) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 17, 1998.
(11) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on or about April 1, 1998, as amended by the
Registrant's Form 8-K/A Current Report filed on or about June 5, 1998.
(12) Incorporated by reference to the Registration Statement on Form S-4 of the
Registrant (Registration No. 333-51455) filed April 30, 1998 and declared
effective on May 14, 1998.
(13) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 of the Registrant (Registration No. 333-51455) filed May
11,1998 and declared effective on May 14, 1998.
(14) Incorporated by reference to the Registrant's Form 10-K filed with the
Commission on or about September 29, 1998.
(15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 10, 1998.
(16) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about February 11, 1999.
<PAGE> 103
(17) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
filed with the Commission on or about November 15, 1999.
(18) Incorporated by reference to the Registrant's Form 10-K Annual Report for
the year ended June 30, 1996 filed with the Commission on or about
September 30, 1996 (originally filed in that Report as Exhibit 10.16(a)).
(19) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on April 14, 2000.
(20) Incorporated by reference to the Registrant's Form 8-K Current Report filed
with the Commission on July 28, 2000.
