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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 86-0746929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8401 EAST INDIAN SCHOOL ROAD
SCOTTSDALE, ARIZONA
85251
(Address of principal executive offices)
(Zip Code)
(480) 606-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ___
At November 10, 1999 there were 14,577,439 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
2
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
Consolidated Statements of Comprehensive Income 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND JUNE 30, 1999
(IN THOUSANDS)
September 30, 1999 June 30, 1999
------------------ -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 4,721 $ 7,180
Accounts receivable, net 195,970 185,454
Inventories 17,461 16,371
Prepaid expenses and other 11,900 13,630
--------- ---------
Total current assets 230,052 222,635
PROPERTY AND EQUIPMENT, net 95,668 95,032
INTANGIBLE ASSETS, net 238,288 240,360
OTHER ASSETS 22,865 21,880
--------- ---------
$ 586,873 $ 579,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,441 $ 17,782
Accrued liabilities 56,758 58,159
Current portion of long-term debt 8,057 5,765
--------- ---------
Total current liabilities 81,256 81,706
LONG-TERM DEBT, net of current portion 273,879 268,560
NON-REFUNDABLE SUBSCRIPTION INCOME 14,890 14,909
DEFERRED INCOME TAXES 9,376 9,438
OTHER LIABILITIES 179 205
--------- ---------
Total liabilities 379,580 374,818
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 8,230 8,250
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 149 148
Additional paid-in capital 138,177 137,792
Retained earnings 62,487 60,603
Cumulative translation adjustment (511) (465)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 199,063 196,839
--------- ---------
$ 586,873 $ 579,907
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
3
4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended September 30,
--------------------------------
1999 1998
--------- --------
REVENUE
Ambulance services $ 116,897 $116,265
Fire protection services 13,063 12,643
Other 11,240 9,887
--------- --------
Total revenue 141,200 138,795
--------- --------
OPERATING EXPENSES
Payroll and employee benefits 76,865 73,898
Provision for doubtful accounts 20,410 19,897
Depreciation 6,160 5,876
Amortization of intangibles 2,160 2,397
Other operating expenses 26,024 23,720
Restructuring charge -- 2,500
--------- --------
Total expenses 131,619 128,288
--------- --------
OPERATING INCOME 9,581 10,507
Interest expense, net 5,436 5,142
Other (20) 48
--------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 4,165 5,317
Provision for income taxes 1,740 2,255
--------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 2,425 3,062
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (541) --
--------- --------
NET INCOME $ 1,884 $ 3,062
========= ========
INCOME PER SHARE:
Basic --
Income before cumulative effect of
a change in accounting principle $ 0.17 $ 0.21
Cumulative effect of a change
in accounting principle (0.04) --
Net income $ 0.13 $ 0.21
========= ========
Diluted --
Income before cumulative effect of
a change in accounting principle $ 0.17 $ 0.21
Cumulative effect of a change
in accounting principle (0.04) --
Net income $ 0.13 $ 0.21
========= ========
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 14,538 14,270
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 14,671 14,520
The accompanying notes are an integral part of these
consolidated financial statements.
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5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
((UNAUDITED)
(IN THOUSANDS)
Three months ended September 30,
--------------------------------
1999 1998
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 1,884 $ 3,062
Adjustments to reconcile net income to cash provided by
(used in) operating activities
Cumulative effect of a change in accounting principle 541 --
Depreciation and amortization 8,320 8,273
Amortization of deferred compensation -- 58
Amortization of gain on sale of real estate (26) (26)
Provision for doubtful accounts 20,410 19,897
Undistributed earnings of minority shareholder (20) 48
Amortization of discount on Senior Notes 6 6
Change in assets and liabilities, net of effect
of businesses acquired
Increase in accounts receivable (30,926) (29,555)
Increase in inventories (1,090) (310)
(Increase) decrease in prepaid expenses and other 709 (1,701)
Increase (decrease) in accounts payable (1,341) 145
Increase (decrease) in accrued liabilities and other liabilities (1,009) 7,822
Increase (decrease) in nonrefundable subscription income (19) 166
Decrease in deferred income taxes (62) (3,223)
-------- --------
Net cash provided by (used in) operating activities (2,623) 4,662
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 9,102 9,500
Repayment of debt and capital lease obligations (1,497) (1,940)
Issuance of common stock 386 --
-------- --------
Net cash provided by financing activities 7,991 7,560
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired -- (4,678)
Capital expenditures (6,796) (6,174)
Increase in other assets (985) (957)
-------- --------
Net cash used in investing activities (7,781) (11,809)
-------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (46) (266)
-------- --------
INCREASE (DECREASE) IN CASH (2,459) 147
CASH, beginning of period 7,180 6,511
-------- --------
CASH, end of period $ 4,721 $ 6,658
======== ========
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
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
Three months ended September 30,
--------------------------------
1999 1998
------- -------
NET INCOME $ 1,884 $ 3,062
Foreign currency translation adjustments (46) (266)
------- -------
COMPREHENSIVE INCOME $ 1,838 $ 2,796
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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7
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for
the three month periods ended September 30, 1999 and 1998 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, 1999 and 1998 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, 1999.
(2) CREDIT AGREEMENTS AND BORROWINGS
In March 1998, the Company issued $150.0 million of 7 7/8% Senior Notes
due 2008 (the Notes). The Notes are general unsecured obligations of
the Company and are unconditionally guaranteed on a joint and several
basis by substantially all of the Company's domestic wholly-owned
current and future subsidiaries. The financial statements presented
below include the Consolidating Balance Sheets as of September 30, 1999
and June 30, 1999, the Consolidating Statements of Income for the three
months ended September 30, 1999 and 1998, and the Statements of Cash
Flows for the three months ended September 30, 1999 and 1998 of
Rural/Metro Corporation (Parent) and the guarantor subsidiaries
(Guarantors) and the subsidiaries which are not guarantors
(Non-guarantors). The Company has not presented separate financial
statements and related disclosures for each of the Guarantor
subsidiaries because management believes such information is
inconsequential to the note holders.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash $ -- $ 2,639 $ 2,082 $ -- $ 4,721
Accounts receivable, net -- 173,545 22,425 -- 195,970
Inventories -- 16,333 1,128 -- 17,461
Prepaid expenses and other 531 9,715 1,654 -- 11,900
--------- --------- -------- --------- ---------
Total current assets 531 202,232 27,289 -- 230,052
PROPERTY AND EQUIPMENT, net -- 84,927 10,741 -- 95,668
INTANGIBLE ASSETS, net -- 157,665 80,623 -- 238,288
DUE FROM (TO) AFFILIATES 306,164 (245,983) (60,181) -- --
OTHER ASSETS 4,033 15,927 2,905 -- 22,865
INVESTMENT IN SUBSIDIARIES 161,523 -- -- (161,523) --
--------- --------- -------- --------- ---------
Total assets $ 472,251 $ 214,768 $ 61,377 $(161,523) $ 586,873
========= ========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 9,916 $ 6,525 $ -- $ 16,441
Accrued liabilities 805 45,073 10,880 -- 56,758
Current portion of long-term debt 3,102 3,581 1,374 -- 8,057
--------- --------- -------- --------- ---------
Total current liabilities 3,907 58,570 18,779 -- 81,256
LONG-TERM DEBT, net of current portion 269,281 3,758 840 -- 273,879
NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,732 158 -- 14,890
DEFERRED INCOME TAXES -- 8,411 965 -- 9,376
OTHER LIABILITIES -- 179 -- -- 179
--------- --------- -------- --------- ---------
Total liabilities 273,188 85,650 20,742 -- 379,580
--------- --------- -------- --------- ---------
MINORITY INTEREST -- -- -- 8,230 8,230
STOCKHOLDERS' EQUITY
Common stock 149 82 17 (99) 149
Additional paid-in capital 138,177 54,622 34,942 (89,564) 138,177
Retained earnings 62,487 74,414 6,187 (80,601) 62,487
Cumulative translation adjustment (511) -- (511) 511 (511)
Treasury stock (1,239) -- -- -- (1,239)
--------- --------- -------- --------- ---------
Total stockholders' equity 199,063 129,118 40,635 (169,753) 199,063
--------- --------- -------- --------- ---------
Total liabilities and stockholders' equity $ 472,251 $ 214,768 $ 61,377 $(161,523) $ 586,873
========= ========= ======== ========= =========
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1999
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
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
========= ========= ========= ========= =========
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10
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
REVENUE
Ambulance services $ -- $ 96,147 $ 20,750 $ -- $ 116,897
Fire protection services -- 12,785 278 -- 13,063
Other -- 9,088 2,152 -- 11,240
------- --------- -------- ------- ---------
Total revenue -- 118,020 23,180 -- 141,200
------- --------- -------- ------- ---------
OPERATING EXPENSES
Payroll and employee benefits -- 62,158 14,707 -- 76,865
Provision for doubtful accounts -- 19,089 1,321 -- 20,410
Depreciation -- 5,554 606 -- 6,160
Amortization of intangibles -- 1,526 634 -- 2,160
Other operating expenses -- 20,580 5,444 -- 26,024
------- --------- -------- ------- ---------
Total expenses -- 108,907 22,712 -- 131,619
------- --------- -------- ------- ---------
OPERATING INCOME -- 9,113 468 -- 9,581
Interest expense, net 5,164 (277) 549 -- 5,436
Other -- -- -- (20) (20)
------- --------- -------- ------- ---------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (5,164) 9,390 (81) 20 4,165
PROVISION (BENEFIT) FOR INCOME TAXES (2,169) 3,935 (26) -- 1,740
------- --------- -------- ------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (2,995) 5,455 (55) 20 2,425
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE -- (541) -- -- (541)
------- --------- -------- ------- ---------
(2,995) 4,914 (55) 20 1,884
INCOME FROM WHOLLY-OWNED SUBSIDIARIES 4,879 -- -- (4,879) --
------- --------- -------- ------- ---------
NET INCOME (LOSS) $ 1,884 $ 4,914 $ (55) $(4,859) $ 1,884
======= ========= ======== ======= =========
Foreign currency translation adjustments -- -- (46) -- (46)
Comprehensive income (loss) from
wholly-owned subsidiaries (46) -- -- 46 --
------- --------- -------- ------- ---------
COMPREHENSIVE INCOME (LOSS) $ 1,838 $ 4,914 $ (101) $(4,813) $ 1,838
======= ========= ======== ======= =========
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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 (LOSS) $ 3,062 $ 4,897 $ 987 $(5,884) $ 3,062
======= ======== ======== ======= ========
Foreign currency translation
adjustments -- -- (266) -- (266)
Comprehensive income (loss)
from wholly-owned subsidiaries (266) -- -- 266 --
------- -------- -------- ------- --------
$ 2,796 $ 4,897 $ 721 $(5,618) $ 2,796
======= ======== ======== ======= ========
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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, 1999
(UNAUDITED)
(IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated
------- -------- ------- ------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ 1,884 $ 4,914 $ (55) $(4,859) $ 1,884
Adjustments to reconcile net income to cash
provided by (used in) operating activities --
Depreciation and amortization -- 7,080 1,240 -- 8,320
Cumulative effect of a change in accounting principle -- 541 -- -- 541
Amortization of gain on sale of real estate -- (26) -- -- (26)
Provision for doubtful accounts -- 19,089 1,321 -- 20,410
Undistributed earnings of minority shareholder -- -- -- (20) (20)
Amortization of discount on Senior Notes 6 -- -- -- 6
Change in assets and liabilities --
Increase in accounts receivable -- (27,934) (2,992) -- (30,926)
(Increase) decrease in inventories -- (1,095) 5 -- (1,090)
(Increase) decrease in prepaid expenses and other -- 968 (259) -- 709
(Increase) decrease in due to/from affiliates (8,506) 19 3,654 4,833 --
Increase in accounts payable -- (1,185) (156) -- (1,341)
Increase (decrease) in accrued liabilities
and other liabilities (2,962) 3,034 (1,081) -- (1,009)
Increase (decrease) in non-refundable subscription
income -- (158) 139 -- (19)
Decrease in deferred income taxes -- (62) -- -- (62)
------- -------- ------- ------- --------
Net cash provided by (used in) operating
activities (9,578) 5,185 1,816 (46) (2,623)
------- -------- ------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 9,102 -- -- -- 9,102
Repayment of debt and capital lease obligations -- (1,202) (295) -- (1,497)
Issuance of common stock 386 -- -- -- 386
------- -------- ------- ------- --------
Net cash provided by (used in) financing
activities 9,488 (1,202) (295) -- 7,991
------- -------- ------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures -- (6,033) (763) -- (6,796)
(Increase) decrease in other assets 136 (690) (431) -- (985)
------- -------- ------- ------- --------
Net cash provided by (used in) investing
activities 136 (6,723) (1,194) -- (7,781)
------- -------- ------- ------- --------
EFFECT OF CURRENCY EXCHANGE RATE CHANGE (46) -- (46) 46 (46)
------- -------- ------- ------- --------
INCREASE (DECREASE) IN CASH -- (2,740) 281 -- (2,459)
CASH, beginning of period -- 5,379 1,801 -- 7,180
------- -------- ------- ------- --------
CASH, end of period $ -- $ 2,639 $ 2,082 $ -- $ 4,721
======= ======== ======= ======= ========
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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) operating activities --
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 liabilities (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
======= ======== ======= ======= ========
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) FINANCIAL INSTRUMENTs
The Company has 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, the Company 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. The Company paid a
fixed rate of 4.72% and received a LIBOR-based floating rate. In June
1999, the Company terminated the interest rate swap agreement and
received a termination fee of $604,000. Such amount is being amortized
as a reduction of interest expense on a straight-line basis through
November 2000.
(4) RESTRUCTURING CHARGE
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 the
Company. During the years ended June 30, 1998 and 1997, the Company
recorded pre-tax charges totaling $7.8 million related to severance
payments. The charges related primarily to the cost of terminating
approximately 400 administrative employees throughout the Company, all
of which have been terminated as of September 30, 1999. As of September
30, 1999 and June 30, 1999, the balance of the allowance for severance
payments was $0.7 million and $1.3 million, respectively. The allowance
is included in accrued liabilities in the accompanying consolidated
balance sheets.
(5) 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. In the first quarter of fiscal year
2000, the Company wrote-off its capitalized organization costs and will
expense any future organization costs as incurred. The write-off was
$541,000 (net of a tax benefit of $392,000) and has been reflected in
the Consolidated Statement of Income for the three months ended
September 30, 1999 as the "Cumulative Effect of a Change in Accounting
Principle" in accordance with APB No. 20.
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RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average
number of shares outstanding) of the basic and diluted earnings per
share (EPS) computation for the three months ended September 30, 1999
and 1998 is a follows (in thousands, except per share amounts):
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
------------------------------------- -------------------------------------
Income Share Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
------ ------ ------- ------ ------ -------
Basic EPS $1,884 14,538 $ 0.13 $3,062 14,270 $ 0.21
======= =======
Effect of stock options -- 133 -- 250
------ ------ ------ ------
Diluted EPS $1,884 14,671 $ 0.13 $3,062 14,520 $ 0.21
====== ====== ======= ====== ====== =======
(7) SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for
reporting information about operating segments in annual financial
statements and requires selected information about operating segments
in interim financial statements. It also established standards for
related disclosures about products and services and geographic areas.
Operating segments are defined as components of a business, for which
separate financial information is available, that management regularly
evaluates in deciding how to allocate resources and assess performance.
The Company operates in two business segments: Ambulance and Fire and
Other. The Company's reportable segments are strategic business units
that offer different services. They are managed separately based on the
fundamental differences in their operations.
The Ambulance segment includes emergency medical and general medical
transport ambulance services provided to patients on a
fee-for-service basis, on a non-refundable subscription basis and
through capitated contracts. The Ambulance segment also includes urgent
home medical care and ambulance services provided under capitated
service arrangements in Argentina.
The Fire and Other segment includes the following services: fire
protection and training, alternative transportation, home health care
services, urgent and primary care in clinics, dispatch, fleet and
billing.
The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements filed
with the Form 10-K for the fiscal year ended June 30, 1999. The Company
defines segment profit (loss) as total revenue less total operating
expenses and interest expense associated with the segment. The Company
defines segment assets as the sum of net accounts receivable, inventory
and net property and equipment associated with the segments.
Included in Corporate are general corporate expenses as well as the
pre-tax charge of $2.5 million related to severance payments recorded
during the three months ended September 30, 1998.
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16
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information by operating segment is set forth below (in thousands):
Three months ended September 30, 1999 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $116,897 $24,303 $ --- $141,200
Segment profit (loss) $ 6,594 $ 1,626 $(4,075) $ 4,145
Segment assets $264,259 $42,184 $ 2,656 $309,099
Three months ended September 30, 1998 AMBULANCE FIRE AND OTHER CORPORATE TOTAL
--------- -------------- --------- -----
Net revenues from external customers $116,265 $22,530 $ --- $138,795
Segment profit (loss) $ 8,819 $ 2,714 $(6,168) $ 5,365
Segment assets $227,640 $40,164 $ 3,153 $270,957
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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 future
business prospects, the value of our common stock, revenue, working capital,
accounts receivable collection, liquidity, cash flow, and capital needs that
could cause actual results to differ materially.
The health care industry in general and the ambulance industry in particular are
in a state of significant change. This makes us susceptible to various factors
that may affect future results such as the following: no assurance of successful
integration and operation of acquired service providers; growth strategy and
difficulty in maintaining growth; risks of leverage; revenue mix; dependence on
certain business relationships; risks related to intangible assets; dependence
on government and third party payors; risks related to fee-for-service
contracts; possible adverse changes in reimbursement rates; impact of rate
structures; possible negative effects of prospective health care reform; high
utilization of services by customers under capitated service arrangements;
competitive market forces; fluctuation in quarterly results; volatility of stock
price; dependence on key personnel; and anti-takeover effect of certain of our
charter provisions.
All references to "we", "our", "us" or "Rural/Metro" refer to Rural/Metro
Corporation, and its predecessors, operating divisions and subsidiaries.
This Report should be read in conjunction with our Report on Form 10-K for the
fiscal year ended June 30, 1999.
INTRODUCTION
We derive our revenue primarily from fees charged for ambulance and fire
protection services. We provide ambulance services in response to emergency
medical calls ("911" emergency ambulance services) and non-emergency transport
services (general transport services) to patients on a fee-for-service basis, on
a non-refundable subscription fee basis and through capitated contracts. Per
transport revenue depends on various factors, including the mix of rates between
existing service areas and new service areas and the mix of activity between
"911" emergency ambulance services and general medical transport services as
well as other competitive factors. Fire protection services are provided either
under contracts with municipalities, fire districts or other agencies or on a
non-refundable subscription fee basis to individual homeowners or commercial
property owners.
Domestic ambulance service fees are recorded net of Medicare, Medicaid and other
reimbursement limitations and are recognized when services are provided.
Payments received from third-party payors represent a substantial portion of our
ambulance service fee receipts. We establish an allowance for doubtful accounts
based on credit risk applicable to certain types of payors, historical trends
and other relevant information. Provision for doubtful accounts is made for the
expected difference between ambulance services fees charged and amounts actually
collected. Our provision for doubtful accounts generally is higher with respect
to collections to be derived from patients than for collections to be derived
from third-party payors and generally is higher for "911" emergency ambulance
services than for general ambulance transport services. We also have an
ambulance service contract structured as a public utility model in which our
services are paid on a monthly basis by the contracting agency.
Because of the nature of our domestic ambulance services, it is necessary to
respond to a number of calls, primarily "911" emergency ambulance service calls,
which may not result in transports. Results of
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operations are discussed below on the basis of actual transports since
transports are more directly related to revenue. Expenses associated with calls
that do not result in transports are included in operating expenses. The
percentage of domestic ambulance service calls not resulting in transports
varies substantially depending upon the mix of general transport and "911"
emergency ambulance service calls in our service areas and is generally higher
in service areas in which the calls are primarily "911" emergency ambulance
service calls. Rates in our service areas take into account the anticipated
number of calls that may not result in transports. We do not separately account
for expenses associated with calls that do not result in transports. Revenue
generated under our capitated service arrangements in Argentina and contractual
agreements in Canada is included in ambulance services revenue.
Revenue generated under fire protection service contracts is recognized over the
term of the related contract. Subscription fees received in advance are deferred
and recognized over the term of the subscription agreement, which is generally
one year.
Other revenue consists primarily of fees associated with alternative
transportation, dispatch, fleet, billing, urgent and primary care services in
clinics, and home health care services and is recognized when the services are
provided.
Other operating expenses consist primarily of rent and related occupancy
expenses, maintenance and repairs, insurance, fuel and supplies, travel and
professional fees.
We have historically experienced, and expect to continue to experience,
seasonality in quarterly operating results. This seasonality has resulted from a
number of factors, including relatively higher second and third fiscal quarter
demand for transport services in our Arizona and Florida regions resulting from
the greater winter populations in those regions. Also, our Argentine operations
experience greater utilization of services by customers under capitated service
arrangements in the first and fourth fiscal quarters, as compared to the other
two quarters, when South America is in its winter season.
Public health conditions affect our operations differently in different regions.
For example, greater utilization of services by customers under capitated
service arrangements decreases our operating income. The same conditions
domestically, where we operate under fee-for-service arrangements, result in a
greater number of transports, increasing our operating income.
Income before cumulative effect of a change in accounting principle for the
three months ended September 30, 1999 was $2.4 million, or $0.17 per diluted
share as compared to $3.1 million, or $0.21 per diluted share for the three
months ended September 30, 1998. The operating results for the three months
ended September 30, 1999 were adversely affected by the magnitude of our
mobilization response to recent hurricanes and storms, which impacted our
regional operations in Texas, the Southeast and North Mid-Atlantic states. Our
disaster response teams as well as other fill-in personnel incurred significant
overtime to meet the needs of our service areas, while at the same time we lost
transport opportunities in those service areas due to reduced availability of
vehicles and personnel. The operating results for the three months ended
September 30, 1999 were also negatively impacted by reduced operating margins of
our Argentine operations. These operating margins 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.
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUE
Total revenue increased $2.4 million, or 1.7%, from $138.8 million for the three
months ended September 30, 1998 to $141.2 million for the three months ended
September 30, 1999. Ambulance services revenue increased $0.6 million, or 0.5%,
from $116.3 million for the three months ended September 30, 1998 to $116.9
million for the three months ended September 30, 1999. Domestic ambulance
services revenue in areas served by us in both of the three month periods ended
September 30, 1999 and 1998 increased by 2.1%. The increase in domestic
ambulance services revenue was partially offset by a decrease in ambulance
services revenue in our Argentine operations resulting from decreases in
memberships under capitated service arrangements. The decrease in memberships
was attributable to the impact of the economic recession in Argentina combined
with significant increases in service taxes on all medical services.
Total domestic ambulance transports decreased by 23,000, or 7.0%, from 329,000
for the three months ended September 30, 1998 to 306,000 for the three months
ended September 30, 1999 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.
Fire protection services revenue increased by $0.5 million, or 4.0%, from $12.6
million for the three months ended September 30, 1998 to $13.1 million for the
three months ended September 30, 1999. Fire protection services revenue
increased due to rate increases for fire protection services and greater
utilization of our services under fee-for-service arrangements.
Other revenue increased $1.3 million, or 13.1%, from $9.9 million for the three
months ended September 30, 1998 to $11.2 million for the three months ended
September 30, 1999. Other revenue increased 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. This increase was 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 $3.0 million, or 4.1%, from
$73.9 million for the three months ended September 30, 1998 to $76.9 million for
the three months ended September 30, 1999. This increase was primarily due to
the acquisition completed during the third quarter of fiscal 1999 and due to
higher average labor costs in certain service areas, partially attributable
to our mobilization response to the recent hurricanes and storms. 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. Increased service utilization
in our Argentine operations also contributed to the increase in payroll and
employee benefit expenses. Payroll and employee benefits expense increased from
53.2% of total revenue for the three months ended September 30, 1998 to 54.4%
of total revenue for the three months ended September 30, 1999.
Provision for doubtful accounts increased $0.5 million, or 2.5%, from $19.9
million for the three months ended September 30, 1998 to $20.4 million for the
three months ended September 30, 1999. Provision for doubtful accounts increased
from 14.3% of total revenue for the three months ended September 30, 1998 to
14.5% of total revenue for the three months ended September 30, 1999 and was
19.2% of domestic ambulance service revenue for the three months ended September
30, 1998 and 1999. Net accounts receivable on non-integrated collection systems
currently represent 9.2% of total net accounts
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20
receivable at September 30, 1999. We will continue to review the benefits and
timing of integrating our two non-integrated billing centers.
Depreciation increased $0.3 million, or 5.1%, from $5.9 million for the three
months ended September 30, 1998 to $6.2 million for the three months ended
September 30, 1999, primarily as a result of increased property and equipment
from the acquisition completed during the third quarter of fiscal 1999.
Depreciation was 4.2% and 4.4% of total revenue for the three months ended
September 30, 1998 and 1999, respectively.
Amortization of intangibles decreased $0.2 million, or 8.3%, from $2.4 million
for the three months ended September 30, 1998 to $2.2 million for the three
months ended September 30, 1999. Amortization of intangibles was 1.7% and 1.5%
of total revenue for the three months ended September 30, 1998 and 1999,
respectively.
Other operating expenses increased approximately $2.3 million, or 9.7%, from
$23.7 million for the three months ended September 30, 1998 to $26.0 million for
the three months ended September 30, 1999, primarily due to increased expenses
associated with the operation of the company acquired in the third quarter of
fiscal 1999, as well as increased service utilization in our Argentine
operations. Other operating expenses increased from 17.1% of total revenue for
the three months ended September 30, 1998 to 18.4% of total revenue for the
three months ended September 30, 1999.
Interest expense increased $0.3 million from $5.1 million for the three months
ended September 30, 1998 to $5.4 million for the three months ended September
30, 1999. This increase was caused by higher debt balances.
Our effective tax rate was 42.0% for both of the three month periods ended
September 30, 1998 and 1999.
The cumulative effect of a change in accounting principle resulted in a $541,000
charge (net of a 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.
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 September 30, 1999, we had working capital of $148.8 million, including cash
of $4.7 million, compared to working capital of $140.9 million, including cash
of $7.2 million, at June 30, 1999.
During the three months ended September 30, 1999, our cash flow used in
operating activities was $2.6 million, resulting primarily from an increase in
accounts receivable of $30.9 million and decreases in accounts payables, accrued
liabilities and other liabilities totaling $2.3 million offset by net income for
the three month period ending September 30, 1999 of $1.9 million plus non-cash
expenses of depreciation and amortization of $8.3 million and provision for
doubtful accounts of $20.4 million. Cash flow provided by operating activities
was $4.7 million for the three months ended September 30, 1998.
Cash provided by financing activities was $8.0 million for the three months
ended September 30, 1999, primarily due to borrowings on the revolving credit
facility offset by repayments on other debt and capital lease obligations.
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21
Cash used in investing activities was $7.8 million for the three months ended
September 30, 1999, primarily because of capital expenditures and increases in
other assets.
Our gross accounts receivable as of September 30, 1999 and June 30, 1999 was
$230.8 million and $228.9 million, respectively. Our accounts receivable, net of
the allowance for doubtful accounts, was $196.0 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 recent 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.
Our $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 1.75%. At September 30, 1999 the weighted
average interest rate was 7.1% 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 $122.6
million was outstanding on the revolving credit facility at September 30, 1999.
Availability on the facility was approximately $8.3 million at September 30,
1999. We expect to have funds available under the revolving credit facility of
approximately $28 million during the second quarter of fiscal 2000.
In February 1998, we entered into a $5.0 million capital equipment lease line of
credit. The lease line of credit matures at varying dates through July 2003. The
lease line of credit is priced at the higher of LIBOR plus 1.7% or the
commercial paper rate plus 1.7%. At September 30, 1999 the weighted average
interest rate was 7.1% on the lease line of credit. Approximately $1.9 million
was outstanding on this line of credit at September 30, 1999.
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
September 30, 1999 was $218,000 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 2 of Notes
to our Consolidated Financial Statements included in this Form 10-Q. The Notes
contain certain covenants that, among other things, limit our ability to incur
certain indebtedness, sell assets, or enter into certain mergers or
consolidations.
We expect that existing working capital, together with cash flow from operations
and additional borrowing capacity, will be sufficient to meet our operating and
capital needs for existing operations for the twelve months subsequent to
September 30, 1999. Our business growth occurs primarily through new business
contracts and acquisitions. We intend to finance any contracts or acquisitions
that we consummate through the use of cash from operations, credit facilities,
seller notes payable and the issuance of common stock. In addition, we may seek
to raise additional capital through public or private
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debt or equity financings. The availability of these capital sources will depend
upon prevailing market conditions, interest rates, our financial condition and
the market price of our common stock.
The market price of our common stock impacts our ability to complete
acquisitions. We may be unwilling to utilize, or potential acquired companies or
their owners may be unwilling to accept, our common stock in connection with
acquisitions. In addition, the market price performance of our common stock may
make raising funds more difficult and costly. As a result of the decline in the
market price of our common stock in the fourth quarter of fiscal 1998 and the
failure of our stock price to increase since that time, 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 made additional acquisitions. Declines in the market price of our
common stock could cause previously acquired companies to seek adjustments to
purchase prices or other remedies to offset the decline in value.
MEDICARE REIMBURSEMENT
In January 1999, HCFA announced its intention to form a negotiated rule-making
committee to create a new fee schedule for Medicare reimbursement of ambulance
services. The committee convened in February 1999. In August 1999, HCFA
announced that the implementation of the new fee schedule as well as the
mandatory acceptance of Medicare assignment will be postponed to January 2001.
HCFA also announced rules which became effective in February 1999. These rules
require, among other things, that a physician's certification be obtained for
certain ambulance transports. We have implemented a program to comply with the
new rules
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
Our results of operations for the periods discussed have not been affected
significantly by inflation or foreign currency fluctuations. Our revenue from
international operations is denominated primarily in the currency of the country
in which it is operating. At September 30, 1999 our balance sheet reflects a
$511,000 cumulative equity adjustment (decrease) from foreign currency
translation, which resulted from the weakening of the currencies of Canada and
Brazil and the effect it had on our investments in our Canadian operations and
our investment in certain property and equipment that we have deployed in
Brazil. 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.
YEAR 2000 COMPLIANCE
We have implemented a Year 2000 compliance program, utilizing both internal and
external resources, to ensure that our principal medical equipment, ambulance
and fire dispatch systems, and computer systems and applications will function
properly beyond 1999. Our assessment of this equipment and systems, both
internally developed and purchased from third-party vendors, is complete.
Included in this assessment is a formal communication program with our
significant vendors to determine the extent to which we are vulnerable to those
vendors who fail to remediate their own Year 2000 non-compliance.
We are highly dependent on vendor remediation and testing of vendor systems. The
results of the assessments and remediation efforts indicate that our principal
medical equipment, ambulance and fire dispatch systems, and computer systems and
applications are either Year 2000 compliant, have been upgraded, or in the case
of certain ambulance and fire dispatch systems, have been replaced in order to
obtain
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compliance. We continue to upgrade and replace non-compliant equipment and
systems and expect to complete such activities prior to January 1, 2000. We 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. If our medical equipment, ambulance and fire dispatch
systems, and computer systems and applications are not Year 2000 compliant, we
may not be able to respond to requests for ambulance and fire protection
services in a timely manner. This situation could adversely affect our
operations and we may incur unanticipated expenses to remedy any problems not
addressed by these compliance efforts.
We are dependent upon vendors who provide services such as electrical power,
water, fuel for vehicles and other necessary commodities. We also depend upon
the ability of telephone systems to be Year 2000 compliant in order for the
Company to receive incoming calls for service to our ambulance and fire dispatch
systems. The failure of telephone service providers to adequately provide
service could impact our ability to dispatch and respond to requests for
ambulance and fire protection services. 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 us for services provided. The
failure of any of these systems could adversely affect our business, financial
condition, cash flows and results of operations. We do not control these systems
and are dependent upon the service providers and third-party payors to remediate
any Year 2000 non-compliance related to their own systems.
We have completed our contingency plans in the event that our principal medical
equipment, ambulance and fire dispatch systems, computer systems and
applications, telephone systems, systems of third-party payors, or any other
components of our business operations fail to operate in compliance with the
Year 2000 date change.
The cost of our Year 2000 compliance program has not had and is not expected to
have a material impact on our results of operations, financial condition, or
liquidity. There can be no assurance, however, that we will not experience
material adverse consequences in the event that our Year 2000 compliance program
is not successful or that our vendors or third-party payors are not able to
resolve their Year 2000 compliance issues in a timely manner.
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ITEM 3 -- 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. In June 1999, we terminated the interest rate swap agreement and received
a termination fee of $604,000. Such amount is being amortized as a reduction of
interest expense on a straight-line basis through November 2000.
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RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
We, Warren S. Rustand, our former Chairman of the Board and Chief Executive
Officer of the Company, James H. Bolin, our 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. Reference is made to the
Company's most recently filed Form 10-K for the fiscal year ended June 30, 1999
regarding these legal proceedings instituted during the quarter ended September
30, 1998.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.16(g) Employment Agreement by and between
Registrant and John B. Furman,
effective July 29, 1999.
10.16(h) Change of Control Agreement by and
between Registrant and John B.
Furman, effective November 1, 1999.
10.16(i) Employment Agreement by and between
Registrant and Jack Brucker,
effective October 1, 1999.
27 Financial Data Schedules
(b) Reports on Form 8-K
On August 30, 1999 the Company filed a Form 8-K
disclosing its operating results for the fiscal
fourth quarter and the fiscal year ended June 30,
1999.
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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 12, 1999 By /s/ Dean P. Hoffman
---------------------
Dean P. Hoffman, Vice President,
Financial Services
and Principal Accounting Officer
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EXHIBIT INDEX
Exhibit Description
------- -----------
10.16(g) Employment Agreement by and between Registrant and John B.
Furman, effective July 29, 1999.
10.16(h) Change of Control Agreement by and between Registrant and
John B. Furman, effective November 1, 1999.
10.16(i) Employment Agreement by and between Registrant and Jack
Brucker, effective October 1, 1999.
27 Financial Data Schedules