Rural/Metro plans debt refinancing, equity-based incentives; uncompensated care takes its toll on income

By Lisa Kerner

Charlotte, N.C., May 10 - Rural/Metro Corp. revealed its debt refinancing plans and the creation of an equity-based incentive program, as well as its strategy to reduce uncompensated care during its third-quarter earnings call on Thursday.

The company expects to refinance all or a portion of its debt in March 2009. At that time, the costs become significantly lower to tender for Rural/Metro's current 9 7/8% senior subordinated notes due in 2015 and 12¾% senior discount notes due in 2016.

"As we discussed during our last quarterly report, we have determined our initial evaluation of up to 24 months for a refinancing transaction remains our best choice," president and chief executive officer Jack Brucker said.

"We have worked very closely with our financial advisers to consider all possible deleveraging strategies and have determined that a near-term, complete refinancing would result in approximately $40 million in penalties. Such a transaction at this time would not result in the deleveraging that we desire."

In addition, a debt refinancing targeting only the company's 12¾% senior discount notes would require the consent of the holders of 9 7/8% senior subordinated notes due to their seniority.

Loan payments planned

Rural/Metro will further reduce debt through unscheduled principal payments on its senior term loan B credit facility, such as the $5 million payment on May 10 that reduced the principal balance of its term loan B to $88 million. The company has paid $47 million in unscheduled principally payments and generated annual interest savings of about $3.6 million since the loan was issued in March 2005, a company news release stated.

The goal of the compensation plan is to further align board and management incentives with stock performance.

"The board of directors' compensation committee has been actively studying various forms and structures for a plan and anticipate its design will be approved in the near future," Brucker explained.

"It is our expectation to bring this matter before our stockholders as soon as possible."

Of Rural/Metro's yearly uncompensated care, about 57% is due to write-offs that are generated from uninsured patients. Denials based on non-covered services under certain commercial insurance plans represent 20%, denied claims based on retrospective reviews of medical necessity comprise 15%, and unpaid co-pay and deductible amounts for Medicare and commercially insured patients make up 8% of total uncompensated care, according to Brucker.

To combat these write-offs, Rural/Metro will focus on technology, including use of an enhanced automated insurance verification tracking system, billing services and case management. The company expects to see results from these initiatives by the first quarter of fiscal 2008, Brucker said.

The decrease in operating income for the third quarter, down to $4.2 million from $9.5 million for the same prior-year period, was attributed primarily to increases in uncompensated care.

Rural/Metro also reported a third-quarter net loss $2.8 million, or $0.11 per diluted share, down from a net loss of $4.1 million, or $0.16 per diluted share, for the prior-year period.

Third-quarter 2007 EBITDA was $7.0 million, compared with $4.6 million for the third-quarter 2006. Adjusted EBITDA for the period was up at $7.2 million, from adjusted EBITDA of $4.6 million for the year-ago quarter. Fiscal 2007 EBITDA performance was also primarily affected by increases in uncompensated care.

Scottsdale, Ariz.-based Rural/Metro provides emergency and non-emergency medical transportation, private fire protection, and other safety services in 24 U.S. states.

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