1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
86-0746929
(I.R.S. Employer
Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(602) 994-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At November 9, 1998 there were 14,462,377 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
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RURAL/METRO CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page
Part I. Financial Statements
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(IN THOUSANDS)
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 6,658 $ 6,511
Accounts receivable, net 164,261 154,603
Inventories 13,438 13,128
Prepaid expenses and other 17,997 16,402
--------- ---------
Total current assets 202,354 190,644
PROPERTY AND EQUIPMENT, net 93,258 92,545
INTANGIBLE ASSETS, net 240,513 235,456
OTHER ASSETS 17,780 16,807
--------- ---------
$ 553,905 $ 535,452
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,754 $ 13,435
Accrued liabilities 52,132 44,406
Current portion of long-term debt 6,578 8,565
--------- ---------
Total current liabilities 72,464 66,406
LONG-TERM DEBT, net of current portion 254,255 243,831
NON-REFUNDABLE SUBSCRIPTION INCOME 13,847 13,682
DEFERRED INCOME TAXES 20,281 23,282
OTHER LIABILITIES 2,000 2,298
--------- ---------
Total liabilities 362,847 349,499
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 8,228 8,180
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 147 144
Additional paid-in capital 136,009 134,078
Retained earnings 48,201 45,139
Deferred compensation (22) (349)
Cumulative translation adjustment (266) --
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 182,830 177,773
--------- ---------
$ 553,905 $ 535,452
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
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RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended September 30,
--------------------------------
1998 1997
---- ----
REVENUE
Ambulance services $116,265 $ 77,598
Fire protection services 12,643 11,212
Other 9,887 8,963
-------- --------
Total revenue 138,795 97,773
-------- --------
OPERATING EXPENSES
Payroll and employee benefits 73,898 52,235
Provision for doubtful accounts 19,897 13,214
Depreciation 5,876 4,101
Amortization of intangibles 2,397 1,464
Other operating expenses 23,720 16,413
Restructuring charge 2,500 --
-------- --------
Total expenses 128,288 87,427
-------- --------
OPERATING INCOME 10,507 10,346
Interest expense, net 5,142 2,451
Other 48 --
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,317 7,895
PROVISION FOR INCOME TAXES 2,255 3,237
-------- --------
NET INCOME $ 3,062 $ 4,658
======== ========
BASIC EARNINGS PER SHARE $ 0.21 $ 0.36
======== ========
DILUTED EARNINGS PER SHARE $ 0.21 $ 0.35
======== ========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 14,270 12,910
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,520 13,405
The accompanying notes are an integral part of these
consolidated financial statements.
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RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
Three months ended September 30,
--------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,062 $ 4,658
Adjustments to reconcile net income to cash
provided by operations --
Depreciation and amortization 8,273 5,565
Amortization of deferred compensation 58 174
Amortization of gain on sale of real estate (26) (26)
Provision for doubtful accounts 19,897 13,640
Undistributed earnings of minority shareholder 48 --
Amortization of discount on Senior Notes 6 --
Change in assets and liabilities,
net of effect of businesses acquired --
Increase in accounts receivable (29,555) (25,536)
Increase in inventories (310) (453)
(Increase) decrease in prepaid expenses and other (1,701) 730
Increase in accounts payable 145 1,660
Increase in accrued liabilities and other 7,822 5,693
Increase in nonrefundable subscription income 166 237
Decrease in deferred income taxes (3,223) (656)
-------- --------
Net cash provided by operating activities 4,662 5,686
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 9,500 14,000
Repayment of debt and capital lease obligations (1,940) (6,549)
Issuance of common stock and treasury stock -- 75
-------- --------
Net cash provided by financing activities 7,560 7,526
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired (4,678) (3,152)
Capital expenditures (6,174) (7,514)
Increase in other assets (957) (2,760)
-------- --------
Net cash used in investing activities (11,809) (13,426)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (266) --
-------- --------
INCREASE (DECREASE) IN CASH 147 (214)
CASH, beginning of period 6,511 3,398
-------- --------
CASH, end of period $ 6,658 $ 3,184
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit plan $ 1,933 $ --
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for
the three month periods ended September 30, 1998 and 1997 include all
adjustments, consisting only of normal recurring adjustments necessary
for a fair statement of the consolidated financial position and results
of operations.
The results of operations for the three month periods ended September
30, 1998 and 1997 are not necessarily indicative of the results of
operations for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998.
(2) ACQUISITIONS
During the three months ended September 30, 1998, the Company purchased
all of the issued and outstanding stock of two companies that provide
urgent home medical attention and ambulance transport services in
Argentina and the assets of an ambulance service provider operating in
Pennsylvania (the 1999 Acquisitions).
The acquisitions were accounted for as purchases in accordance with
Accounting Principles Board (APB) Opinion No. 16 and, accordingly, the
purchased assets and assumed liabilities were recorded at their
estimated fair values at each respective acquisition date.
The aggregate purchase price consisted of the following:
(in thousands)
Cash $4,678
Notes payable to sellers 872
Assumption of liabilities 2,230
-------
$7,780
======
The unaudited pro forma combined condensed statement of income for the
fiscal year ended June 30, 1998 gives effect to the 1999 acquisitions
and the acquisitions completed by the Company during the year ended
June 30, 1998 as if each had been consummated on July 1, 1997. The
unaudited pro forma combined condensed statement of income for the
three months ended September 30, 1998 gives effect to the 1999
Acquisitions as if each had been consummated on July 1, 1998.
The pro forma combined condensed financial statements do not purport to
represent what the Company's actual results of operations or financial
position would have been had such transactions in fact occurred on such
dates. The pro forma combined condensed statements of income also do
not purport to project the results of operations of the Company for the
current year or for any future period.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
----------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PROFORMA PROFORMA
HISTORICAL COMBINED HISTORICAL COMBINED
---------- -------- ---------- --------
Revenue $ 475,558 $ 538,622 $ 138,795 $ 139,125
Net income $ 7,505 $ 9,768 $ 3,062 $ 3,087
Earnings per share - basic $ 0.55 $ 0.70 $ 0.21 $ 0.22
Earnings per share - diluted $ 0.54 $ 0.67 $ 0.21 $ 0.21
Pro forma adjustments include adjustments to: (i) reflect amortization
of the cost in excess of the fair value of net assets acquired; (ii)
adjust payroll and related expenses for the effect of certain former
owners of the acquired businesses not being employed by the Company and
to reflect the difference between the actual compensation paid to
officers of the businesses acquired and the lower level of aggregate
compensation such individuals would have received under the terms of
employment agreements executed between the Company and such
individuals; (iii) adjust other operating expenses to reflect the
reduction of expenses related to certain real estate and buildings not
acquired and sellers' costs incurred in connection with the sale of
their respective businesses; (iv) adjust interest expense to reflect
interest expense related to debt issued in connection with the
acquisitions; and (v) adjust income taxes to reflect the tax effect of
the adjustments and the tax effect of treating all of the acquisitions
as if they had C corporation status.
(3) CREDIT AGREEMENTS AND BORROWINGS
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 September 30, 1998 was
$244,000 and such amount is 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, results of operations and cash flows for
the three months ended September 30, 1998 of Rural/Metro Corporation
(Parent) and the guarantor subsidiaries (Guarantors) and the
subsidiaries which are not guarantors (Non-guarantors). Consolidating
financial statements for the three months ended September 30, 1997 have
not been presented as such presentation is considered to be
insignificant since most of the Non-guarantors did not exist in that
period. The Company has not presented separate financial statements and
related disclosures for each of the Guarantor subsidiaries because
management believes such information is inconsequential to the note
holders.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 3,052 $ 3,606 $ -- $ 6,658
Accounts receivable, net -- 149,193 15,068 -- 164,261
Inventories -- 12,425 1,013 -- 13,438
Prepaid expenses and other 531 15,704 1,762 -- 17,997
--------- --------- --------- --------- ---------
Total current assets 531 180,374 21,449 -- 202,354
PROPERTY AND EQUIPMENT, net -- 86,935 6,323 -- 93,258
INTANGIBLE ASSETS, net -- 166,426 74,087 -- 240,513
DUE TO (FROM) AFFILIATES 288,182 (245,626) (42,556) -- --
OTHER ASSETS 4,527 10,576 2,677 -- 17,780
INVESTMENT IN SUBSIDIARIES 135,725 -- -- (135,725) --
--------- --------- --------- --------- ---------
$ 428,965 $ 198,685 $ 61,980 $(135,725) $ 553,905
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 6,732 $ 7,022 $ -- $ 13,754
Accrued liabilities 879 36,375 14,878 -- 52,132
Current portion of long-term debt -- 6,010 568 -- 6,578
--------- --------- --------- --------- ---------
Total current liabilities 879 49,117 22,468 -- 72,464
LONG-TERM DEBT, net of current portion 245,256 7,358 1,641 -- 254,255
NON-REFUNDABLE SUBSCRIPTION INCOME -- 13,688 159 -- 13,847
DEFERRED INCOME TAXES -- 20,043 238 -- 20,281
OTHER LIABILITIES -- 2,000 -- -- 2,000
--------- --------- --------- --------- ---------
Total liabilities 246,135 92,206 24,506 -- 362,847
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 8,228 8,228
STOCKHOLDERS' EQUITY
Common stock 147 82 17 (99) 147
Additional paid-in capital 136,009 54,622 34,942 (89,564) 136,009
Retained earnings 48,201 51,775 2,781 (54,556) 48,201
Deferred compensation (22) -- -- -- (22)
Cumulative translation adjustment (266) -- (266) 266 (266)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- --------- --------- ---------
Total stockholders' equity 182,830 106,479 37,474 (143,953) 182,830
--------- --------- --------- --------- ---------
$ 428,965 $ 198,685 $ 61,980 $(135,725) $ 553,905
========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
REVENUE
Ambulance services $ -- $ 93,306 $ 22,959 $ -- $116,265
Fire protection services -- 12,387 256 -- 12,643
Other -- 9,791 96 -- 9,887
-------- -------- -------- -------- --------
Total revenue -- 115,484 23,311 -- 138,795
-------- -------- -------- -------- --------
OPERATING EXPENSES
Payroll and employee benefits -- 60,090 13,808 -- 73,898
Provision for doubtful accounts -- 18,163 1,734 -- 19,897
Depreciation -- 5,442 434 -- 5,876
Amortization of intangibles 128 1,718 551 -- 2,397
Other operating expenses -- 19,166 4,554 -- 23,720
Restructuring charge -- 2,500 -- -- 2,500
-------- -------- -------- -------- --------
Total expenses 128 107,079 21,081 -- 128,288
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (128) 8,405 2,230 -- 10,507
Interest expense, net 4,654 85 403 -- 5,142
Other -- -- -- 48 48
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (4,782) 8,320 1,827 (48) 5,317
PROVISION (BENEFIT) FOR INCOME TAXES (2,008) 3,423 840 -- 2,255
-------- -------- -------- -------- --------
(2,774) 4,897 987 (48) 3,062
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 5,836 -- -- (5,836) --
-------- -------- -------- -------- --------
NET INCOME $ 3,062 $ 4,897 $ 987 $ (5,884) $ 3,062
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,062 $ 4,897 $ 987 $ (5,884) $ 3,062
Adjustments to reconcile net income to cash
provided by (used in) operations --
Depreciation and amortization 128 7,160 985 -- 8,273
Amortization of deferred compensation 58 -- -- -- 58
Amortization of gain on sale of real estate -- (26) -- -- (26)
Provision for doubtful accounts -- 18,163 1,734 -- 19,897
Undistributed earnings of minority shareholder -- -- -- 48 48
Amortization of discount on Senior Notes 6 -- -- -- 6
Change in assets and liabilities,
net of effect of businesses acquired --
Increase in accounts receivable -- (27,683) (1,872) -- (29,555)
Increase in inventories -- (276) (34) -- (310)
Increase in prepaid expenses and other -- (1,226) (475) -- (1,701)
(Increase) decrease in due to/from affiliates (9,828) (1,286) 1,115 9,999 --
Increase (decrease) in accounts payable -- (2,096) 2,241 -- 145
Increase (decrease) in accrued liabilities and other (2,660) 11,955 (1,473) -- 7,822
Increase (decrease) in non-refundable subscription income -- 84 82 -- 166
Decrease in deferred income taxes -- (3,001) (222) -- (3,223)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (9,234) 6,665 3,068 4,163 4,662
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 9,500 -- -- -- 9,500
Repayment of debt and capital lease obligations -- (1,745) (195) -- (1,940)
Issuance of common stock -- -- 4,429 (4,429) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 9,500 (1,745) 4,234 (4,429) 7,560
-------- -------- -------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (250) (4,428) -- (4,678)
Capital expenditures -- (5,245) (929) -- (6,174)
Increase in other assets -- 710 (1,667) -- (957)
-------- -------- -------- -------- --------
Net cash used in investing activities -- (4,785) (7,024) -- (11,809)
-------- -------- -------- -------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (266) -- (266) 266 (266)
-------- -------- -------- -------- --------
INCREASE IN CASH -- 135 12 -- 147
CASH, beginning of period -- 2,917 3,594 -- 6,511
-------- -------- -------- -------- --------
CASH, end of period $ -- $ 3,052 $ 3,606 $ -- $ 6,658
======== ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Fair market value of stock issued to employee benefit plan $ 1,933 $ -- $ -- $ -- $ 1,933
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS
Except for the historical information contained herein, this Report contains
forward looking statements that involve risks and uncertainties regarding the
value of the Company's common stock, accounts receivable collection, working
capital and cash flow that could cause actual results to differ materially. The
health care industry in general and the ambulance industry in particular are in
a state of significant change. This makes the Company 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; 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 and
competitive market forces. This Report should be read in conjunction with the
Company's Report on Form 10-K for the fiscal year ended June 30, 1998.
INTRODUCTION
The Company derives its revenue primarily from fees charged for ambulance and
fire protection services. The Company provides 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 non-refundable 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 transport services as well as other competitive
factors. 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.
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 the
Company's ambulance service fee receipts. The Company established an allowance
for doubtful accounts based on credit risk applicable to certain types of
payors, historical trends and other relevant information. Provision for doubtful
accounts is made for the expected difference between ambulance services fees
charged and amounts actually collected. The Company's 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 the Company's 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 the Company's markets and is
generally higher in markets in which the calls are primarily "911" emergency
ambulance service calls. Rates in the Company's markets take into account the
anticipated number of calls that may not result in transports. The Company does
not separately account for expenses associated with calls that do not result in
transports. Revenue generated under the Company's capitated service arrangements
in Argentina and contractual agreements in Canada is included in ambulance
services revenue.
Revenue generated under fire protection service contracts is recognized over the
term of the related contract. Subscription fees received in advance are deferred
and recognized over the term of the subscription agreement, which is generally
one year.
Other revenue consists primarily of fees associated with alternative
transportation, dispatch, fleet, billing 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.
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE
Total revenue increased $41.0 million, or 41.9%, from $97.8 million for the
three months ended September 30, 1997 to $138.8 million for the three months
ended September 30, 1998. Approximately $33.3 million of this increase resulted
from the acquisition of ambulance service providers during the last three
quarters of fiscal 1998 and the first quarter of fiscal 1999. Ambulance service
revenue in markets served by the Company in both of the three month periods
ended September 30, 1997 and 1998 increased by approximately 7.8%. Fire
protection services revenue increased by $1.4 million, or 12.5%, from $11.2
million for the three months ended September 30, 1997 to $12.6 million for the
three months ended September 30, 1998. Other revenue increased by $0.9 million,
or 10.0%, in the three months ended September 30, 1998.
Total ambulance transports increased by 66,000, or 25.1%, from 263,000 for the
three months ended September 30, 1997 to 329,000 for the three months ended
September 30, 1998. The acquisition of ambulance service companies during the
last three quarters of fiscal 1998 and the first quarter of fiscal 1999
accounted for 63,000 of these additional transports.
Fire protection services revenue increased due to rate increases for fire
protection services and greater utilization of the Company's services under
fee-for-service arrangements.
Other revenue increased primarily because of an increase in alternative
transportation services revenue resulting from acquisitions completed during the
last three quarters of fiscal 1998 and the first quarter of fiscal 1999.
OPERATING EXPENSES
Payroll and employee benefit expenses increased $21.7 million, or 41.6%, from
$52.2 million for the three months ended September 30, 1997 to $73.9 million for
the three months ended September 30, 1998. This increase was primarily due to
the acquisition of ten ambulance service providers during the last three
quarters of fiscal 1998 and the first quarter of fiscal 1999. Payroll and
employee benefits expense decreased from 53.4% of total revenue for the three
months ended September 30, 1997 to 53.2% of total revenue for the three months
ended September 30, 1998.
Provision for doubtful accounts increased $6.7 million, or 50.8%, from $13.2
million for the three months ended September 30, 1997 to $19.9 million for the
three months ended September 30, 1998. Provision for doubtful accounts increased
from 13.5% of total revenue for the three months ended September 30, 1997 to
14.3% of total revenue for the three months ended September 30, 1998 and
increased from 16.8% of domestic ambulance service revenue for the three months
ended September 30, 1997 to 19.2% of domestic ambulance service revenue for the
three months ended September 30, 1998. The increase in the provision for
doubtful accounts resulted from increased revenue from both acquisitions and
internal growth. As identified in the Company's fiscal 1998 third quarter Form
10-Q, the Company began experiencing delays in payments from certain third party
payors and a general industry trend toward a lengthening payment cycle. During
the third and fourth quarters of fiscal 1998, the Company and its management
assessed the impact this more difficult medical reimbursement environment was
having on the timing and collectability of the Company's accounts receivable. At
the conclusion of management's assessment process and considering the results of
recent collection efforts as well as other factors, in the fourth quarter of
fiscal 1998 management determined that these adverse changes had increased the
level of effort and reasonable cost associated with obtaining reimbursement and
collection of certain accounts receivable to such an extent that an additional
provision for doubtful accounts of $17.9 million was recorded at that time. In
addition, management believes that future write-offs of accounts receivable will
exceed historical levels, thus necessitating a higher provision for doubtful
accounts
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and greater levels of expenditures to collect the accounts receivable. This more
difficult reimbursement environment has further complicated the process of
integrating new billing offices into the Company's regional billing centers and
has affected the Company's billing and collection procedures. Net accounts
receivable on non-integrated collection systems currently represent 13.8% of
total net accounts receivable at September 30, 1998. The Company anticipates the
remaining three non-integrated billing centers will be integrated during 1999.
Depreciation increased $1.8 million, or 43.9%, from $4.1 million for the three
months ended September 30, 1997 to $5.9 million for the three months ended
September 30, 1998, primarily as a result of increased property and equipment
from recent acquisition activity. Depreciation was 4.2% of total revenue for the
three months ended September 30, 1997 and 1998.
Amortization of intangibles increased by $0.9 million, or 60.0%, from $1.5
million for the three months ended September 30, 1997 to $2.4 million for the
three months ended September 30, 1998. This increase is primarily a result of
increased intangible assets caused by recent acquisition activity. Amortization
of intangibles increased from 1.5% of total revenue for the three months ended
September 30, 1997 to 1.7% of total revenue for the three months ended September
30, 1998.
Other operating expenses increased approximately $7.3 million, or 44.5%, from
$16.4 million for the three months ended September 30, 1997 to $23.7 million for
the three months ended September 30, 1998, primarily due to increased expenses
associated with the operation of the ten ambulance service providers acquired
during the last three quarters of fiscal 1998 and the first quarter of fiscal
1999. Other operating expenses increased from 16.8% of total revenue for the
three months ended September 30, 1997 to 17.1% of total revenue for the three
months ended September 30, 1998.
During the three months ended September 30, 1998, the Company recorded a
non-recurring pre-tax charge of $2.5 million for severance payments related to
certain members of senior management who have left or have announced their
intentions to leave the Company during the first quarter of fiscal 1999.
Management expects those severance payments will be substantially completed
during fiscal 2000.
Interest expense increased by $2.6 million from $2.5 million for the three
months ended September 30, 1997 to $5.1 million for the three months ended
September 30, 1998. 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 77/8% Senior Notes due 2008, during the third quarter of
fiscal 1998.
The Company's effective tax rate increased from 41.0% for the three months ended
September 30, 1997 to 42.0% for the three months ended September 30, 1998,
primarily the result of the effect of nondeductible goodwill amortization
applied against earnings.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its 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 September 30, 1998, the Company had working capital of $129.9 million,
including cash of $6.7 million, compared to working capital of $124.2 million,
including cash of $6.5 million at June 30, 1998.
During the three months ended September 30, 1998, the Company's cash flow
provided by operations was $4.7 million resulting primarily from an increase in
accrued and other liabilities of $7.8 million offset by a
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decrease in deferred income taxes of $3.2 million. Cash flow provided by
operations was $5.7 million for the three months ended September 30, 1997.
Cash provided by financing activities was $7.6 million for the three months
ended September 30, 1998 primarily due to borrowings on the revolving credit
facility offset by repayments on other debt and capital lease obligations.
Cash used in investing activities was $11.8 million for the three months ended
September 30, 1998 primarily because of cash paid for businesses acquired,
capital expenditures and increases in other assets.
The Company's gross accounts receivable as of September 30, 1998 and June 30,
1998 was $229.9 million and $224.2 million, respectively. The Company's accounts
receivable, net of the allowance for doubtful accounts, was $164.3 million and
$154.6 million as of such dates, respectively. The Company believes that the
increase in accounts receivable is related significantly to acquisition activity
and to recent revenue growth. The Company also attributes the increase in
accounts receivable and the increased age of receivables to certain factors,
including delays in payments from certain third-party payors, particularly in
certain of the Company's regional billing areas and a general industry trend
towards a lengthening payment cycle of accounts receivable due from third-party
payors. In addition, the Company believes certain transitional aspects of the
integration of acquired companies into the Company's centralized billing and
collection function has resulted in increases in the amount and age of accounts
receivable during the transition period.
The Company's $200.0 million 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%. At September 30, 1998 the interest
rate was 7.31% on the revolving credit facility. Interest rates and availability
under the revolving credit facility depend upon the Company meeting certain
financial covenants, including total debt leverage ratios, total debt to
capitalization ratios and fixed charge ratios. Approximately $95.5 million was
outstanding on the revolving credit facility at September 30, 1998. Subsequent
to September 30, 1998, the Company's revolving credit facility was amended to
adjust a financial covenant which restricts the Company's ratio of debt
(including outstanding letters of credit) to capitalization to .625 from .60.
Including the effect of this amendment, availability on the facility was
approximately $40 million at November 9, 1998.
In February 1998, the Company 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 commercial paper rate plus 1.7%. At September 30, 1998 the interest rate was
7.4% on the lease line of credit. Approximately $2.7 million was outstanding on
this line of credit at September 30, 1998.
In March 1998 the Company issued $150.0 million of 77/8% 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 the Term Loan and a portion of
the balances owed on the revolving credit facility. 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. 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 September 30, 1998 was $244,000 and such amount
is recorded as an offset to long-term debt in the consolidated financial
statements. In April 1998 the Company 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
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. See Note 3 of Notes to the Company's Consolidated Financial
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Statements. The Notes contain certain covenants that, among other things, limit
the Company's ability to incur certain indebtedness, sell assets, or enter into
certain mergers or consolidations.
During the three months ended September 30, 1998 the Company purchased all the
issued and outstanding stock of two companies that provide urgent home medical
care and ambulance transport services in Argentina and substantially all of the
assets of an ambulance service provider operating in Pennsylvania. The combined
purchase price of the operations was $7.8 million. The Company paid cash of $4.7
million, issued notes payable to sellers of $0.9 million and assumed $2.2
million of liabilities. The Company funded the cash portion of the acquisitions
primarily from the Company's revolving credit facility.
The Company expects that existing working capital, together with cash flow from
operations and additional borrowing capacity, will be sufficient to meet its
operating and capital needs for existing operations for the twelve months
subsequent to September 30, 1998. The Company's business growth occurs primarily
through new business contracts and acquisitions. The Company intends to finance
any contracts or acquisitions that it consummates through the use of cash from
operations, credit facilities, seller notes payable and the issuance of common
stock. In addition, the Company may seek to raise additional capital through
public or private debt or equity financings. The availability of these capital
sources will depend upon prevailing market conditions, interest rates, the
financial condition of the Company and the market price of the Company's common
stock. The market price of the Company's common stock will also impact the
ability of the Company to complete acquisitions. The Company may be unwilling to
utilize or potential acquired companies or their owners may be unwilling to
accept the Company's common stock in connection with acquisitions during periods
when the Company's common stock experiences substantial declines in market
price. The pace of acquisitions utilizing the Company's common stock may decline
unless and until the Company's common stock increases in price.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of operations of the Company for the periods discussed have not been
affected significantly by inflation or foreign currency fluctuations. The
Company's revenue from international operations is denominated primarily in the
currency of the country in which it is operating. At September 30, 1998 the
Company recorded a $266,000 equity adjustment (decrease) from foreign currency
translation, which resulted from the weakening of the Canadian dollar and the
effect it had on the Company's investment in its Canadian operations. Although
the Company has 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 the Company's business, financial
condition, cash flows and results of operations. The Company does not currently
engage in foreign currency hedging transactions. However, as the Company
continues to expand its international operations, exposure to gains and losses
on foreign currency transactions may increase. The Company may choose to limit
such exposure by entering into forward exchange contracts or engaging in similar
hedging strategies.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed to ensure
that the Company's medical equipment, ambulance and fire dispatch systems, and
computer systems and applications will function properly beyond 1999. The
Company's assessment of this equipment and systems, both internally developed
and purchased from third-party vendors, is nearly complete. The Company will
continue to monitor new medical equipment, ambulance and fire dispatch systems,
and computer systems and applications that the Company adds in its operations
for year 2000 compliance. The results of the assessments completed to date have
indicated that the Company's medical equipment, ambulance and fire dispatch
systems, and computer systems and applications are either year 2000 compliant,
can be upgraded, or in the case of certain ambulance and fire dispatch systems,
will be replaced in order to obtain compliance. If the Company's medical
equipment, ambulance and fire dispatch systems, and computer systems and
applications are not year 2000 compliant in a timely manner, the Company's
operations could be adversely affected and the Company may incur unanticipated
expenses to remedy any problems not addressed by these compliance efforts.
The Company also depends upon the ability of telephone systems to be year 2000
compliant in order for the Company to receive incoming calls for service to its
ambulance and fire dispatch systems. The failure of
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telephone service providers to adequately provide service could impact the
Company's ability to dispatch ambulance and fire protection services in a timely
manner. The failure of third-party payors, such as private insurers, managed
care providers, health care organizations, preferred provider organizations, and
federal and state government agencies that administer Medicare and/or Medicaid,
to adequately address their year 2000 issues could impact their ability to
reimburse the Company for services provided or otherwise adversely affect the
Company's business, financial condition, cash flows and results of operations.
To date, the Company has not completed its contingency plans in the event that
its medical equipment, ambulance and fire dispatch systems, computer systems and
applications, telephone systems, systems of third-party payors, or any other
components of its business operations fail to operate in compliance with the
year 2000 date change. The Company expects to develop contingency plans by the
end of fiscal 1999.
The cost of the Company's year 2000 compliance program has not had and is not
expected to have a material impact on the Company's results of operations,
financial condition or liquidity. There can be no assurance, however, that the
Company will not experience material adverse consequences in the event that the
Company's year 2000 compliance program is not successful or that its vendors or
third-party payors are not able to resolve their year 2000 compliance issues in
a timely manner.
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RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company, Warren S. Rustand, former Chairman of the Board and Chief
Executive Officer of the Company, James H. Bolin, Vice Chairman of the
Board, and Robert E. Ramsey, Jr., 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. Reference is made to the Company's most recently
filed Form 10-K for the fiscal year ended June 30, 1998 regarding these
legal proceedings instituted during this quarter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.5 Amended and Restated 1992 Stock Option Plan
of Registrant, as amended through October
15, 1998
10.6 Form of Stock option Agreement pursuant to
the Amended and Restated 1992 Stock Option
Plan of Registrant
10.18(a) Amended and Restated Employee Stock
Ownership Plan and Trust of the Registrant,
effective July 1, 1997
27 Financial Data Schedules
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Date: November 10, 1998 By /s/ Dean P. Hoffman
-----------------------------------
Dean P. Hoffman, Vice President,
Financial Services
and Principal Accounting Officer
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Exhibit Index
-------------
Exhibit
No. Description
------- -----------
10.5 Amended and Restated 1992 Stock Option Plan of Registrant, as
amended through October 15, 1998
10.6 Form of Stock option Agreement pursuant to the Amended and Restated
1992 Stock Option Plan of Registrant
10.18(a) Amended and Restated Employee Stock Ownership Plan and Trust of the
Registrant, effective July 1, 1997
27 Financial Data Schedules