Two biggest stockholders of Rural/Metro are fed up with company’s continuing need to delay, restate financial earnings
The company is under the gun with investors, creditors and Nasdaq for failing to file its year-end financial results for the 12 months that ended June 30. It also has to file multiple restatements because of accounting errors.
“You’ve got two disgruntled shareholders (Accipiter Capital Management and Stadium Capital Management) who want to make things happen,” said Salomon Kamalodine, an analyst with Los Angeles-based B. Riley & Co. who follows Rural/Metro.
Stockholders are increasingly frustrated by the company’s apparent unwillingness to address its financial problems, which they believe Rural/Metro has been downplaying for some time. Accipiter Capital Management, including Accipiter Life Sciences Fund and Accipiter Group, again is seeking to replace board members with its own candidates. Stockholders rejected its last effort in December, but more than 30 percent supported Accipiter’s candidates.
Rural/Metro’s board has agreed to meet with Accipiter on Wednesday . The company has scheduled its annual stockholders meeting for Feb. 28.
“We are always open to talking with our shareholders, and we take their comments and feedback very seriously,” said Liz Merritt, Rural/Metro’s corporate spokeswoman.
At least two board members will be up for re-election in February, including Jack Brucker, who also serves as the company’s president and CEO.
Brucker was unavailable for comment, as were Accipiter Capital Management and Stadium Capital Management.
Rural/Metro is far from alone in having to repeatedly restate earnings, said Jim Boatsman, KPMG professor in the W.P. Carey School of Business at Arizona State University.
“With the Sarbanes-Oxley Act of 2002, companies are having to do more thorough evaluations of accounting controls and any ... material weaknesses,” he said. “Without knowing anything about this particular company ... the negative perception of management is not that they’re fraudulent, but they’re just not willing to invest the necessary resources in accounting to get it right.”
In the summer of 2006, Gabe Hoffman, Accipiter Capital Management’s managing member, said Rural Metro’s shares were undervalued and it wasn’t responding swiftly enough to its shareholders.
Later that year, in the fall, Accipiter mounted an aggressive campaign to unseat the chairman and vice chairman of Rural/Metro’s board, Cor Clement Sr. and Henry Walker, and replace them with its own candidates.
Hoffman remains unsatisfied with the company’s performance. In an Aug. 30 letter to board members, he described Rural/Metro as “a company with meaningful deficiencies in both financial controls and senior leadership, at both board and management levels.”
Accipiter owns nearly 15 percent of the company’s outstanding shares, and now wants to gain three seats on the board with a new slate of candidates. None of them are invested in Rural/Metro.
Stadium Capital Management has stepped forward with its own criticism of Rural/Metro’s performance. It owns 11.5 percent of the company’s outstanding shares.
In a Sept. 19 letter to Rural/Metro’s board, Stadium Capital Management stated “aside from the fact that repeated restatements make a long-term analysis of any business virtually impossible, such a pattern suggests a fundamental lack of financial oversight at the management and board level.”
Stadium Capital Management isn’t proposing any changes to the board, but insists it restore shareholder confidence by either convincing shareholders that present management has addressed the fundamental issues, bringing in new management, or pursuing a sale of the company.
One of Rural/Metro’s biggest financial headaches continues to be uncompensated care, or not getting paid for emergency and nonemergency medical service. It is the reason the company reported a loss of $2.8 million or 11 cents per share for the third quarter of its fiscal year 2007.
It reported a loss of $4.1 million, or 16 cents per share, for the same quarter in fiscal 2006.
Rural/Metro did preliminarily report improvement in uncompensated care as a percentage of gross revenue for the fourth quarter. However, final figures have yet to be released.
In its Sept. 19 letter to Rural/Metro’s board, Stadium Capital Management said the company “has needed to re-engineer its collections process in every region in which it operates and address far-ranging issues such as staffing levels and location, contracting practices and technology requirements.”
In the meantime, the company is busy trying to pacify creditors and Nasdaq.
On Sept. 28, Rural/Metro received a notice of default from Wells Fargo Bank N.A., the trustee for its bondholders. Wells Fargo gave the company until Nov. 23 to complete its restatements and submit its year-end financial results.
“We are confident we will have those documents on file within that 60-day cure period, and so there should not be any issues thereafter,” Merritt said.
As for Rural/Metro’s credit debt, it is seeking a default waiver, she said. It has an outstanding principal balance of $83 million.
“We have made communication with the agents ... to obtain a waiver from the lenders and that process is ongoing,” Merritt said. “I would expect that we will hear about the waiver within the next two weeks.”
Rural/Metro received a staff determination letter from Nasdaq indicating the firm is not in compliance with its timely regulatory filing requirement.
Rural/Metro plans to submit a request for a hearing by the Nasdaq Listing Qualifications Panel to review the determination. Pending a decision, Rural/Metro’s stock will continue to be listed on the Nasdaq.
Dissatisfied major shareholders in Rural/Metro Corp.
Accipiter Capital Management:
• Owns nearly 15 percent of outstanding shares.
• Believes Rural/Metro’s stock is undervalued, is critical of continuing earnings delays/restatements and inadequate communication with investors.
• Wants to fill three spaces on the board of directors with its own candidates:
Eugene Davis, former chairman and CEO of PIRINATE Consulting Group, which specializes in turn-around management, mergers and acquisitions, and strategic planning advisory services. He serves on numerous boards of directors.
Earl Holland, former chief operating officer and vice chairman of Health Management Associates, a hospital company operator traded on the New York Stock Exchange. He is now retired and serves on numerous boards of directors.
Mohsin Meghji, a principal and co-founder of Loughlin Meghji & Co., a New York-based financial advisory firm.
Stadium Capital Management:
• Owns 11.5 percent of outstanding shares.
• Claims “destruction” of shareholder value from inadequate communication regarding the company’s uncompensated care problem and repeated financial restatements. Also, critical of company’s refusal to hold its annual stockholders meeting earlier than Feb. 28.
• Wants board to restore shareholder confidence by either convincing shareholders that present management has addressed these issues, bringing in new management or pursuing a sale of the company.
• Based in Scottsdale
• Provides emergency and nonemergency medical transportation, fire protection and other safety services in 23 states and about 400 communities across the United States.
• In the East Valley, it serves Apache Junction, Cave Creek, Chandler, Fountain Hills, Gilbert, Mesa, Paradise Valley, Scottsdale and Tempe, as well as Maricopa and Pinal counties.