-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P4jkyvHOnkBU+1t0bunLTGHBj/Y3QviHPALSREnaAueYBqX7G3NfLT93VhGAwZie cxVJe+6QOs8K39NedbkwgA== 0000950153-99-000134.txt : 19990212 0000950153-99-000134.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950153-99-000134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL METRO CORP /DE/ CENTRAL INDEX KEY: 0000906326 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 860746929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22056 FILM NUMBER: 99532049 BUSINESS ADDRESS: STREET 1: 8401 EAST INDIAN SCHOOL RD CITY: SCOTTSDALE STATE: AZ ZIP: 85251 BUSINESS PHONE: 6029443886 10-Q 1 10-Q 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 December 31, 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 February 10, 1999 there were 14,465,695 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 16 Item 3. Quantitative and Qualitative Disclosures About Market Risks 24 Part II. Other Information Item 1. Legal Proceedings 25 Item 4. Submission of Matters to Vote of Security Holders 25 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27
-2- 3 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND JUNE 30, 1998 (IN THOUSANDS)
December 31, 1998 June 30, 1998 ----------------- ------------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 2,995 $ 6,511 Accounts receivable, net 173,754 154,603 Inventories 13,724 13,128 Prepaid expenses and other 18,917 16,402 --------- --------- Total current assets 209,390 190,644 PROPERTY AND EQUIPMENT, net 92,116 92,545 INTANGIBLE ASSETS, net 238,521 235,456 OTHER ASSETS 21,744 16,807 --------- --------- $ 561,771 $ 535,452 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 12,456 $ 13,435 Accrued liabilities 51,549 44,406 Current portion of long-term debt 6,662 8,565 --------- --------- Total current liabilities 70,667 66,406 LONG-TERM DEBT, net of current portion 258,953 243,831 NON-REFUNDABLE SUBSCRIPTION INCOME 13,699 13,682 DEFERRED INCOME TAXES 20,281 23,282 OTHER LIABILITIES 1,267 2,298 --------- --------- Total liabilities 364,867 349,499 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 8,257 8,180 --------- --------- STOCKHOLDERS' EQUITY Common stock 147 144 Additional paid-in capital 137,193 134,078 Retained earnings 52,840 45,139 Deferred compensation -- (349) Cumulative translation adjustment (294) -- Treasury stock (1,239) (1,239) --------- --------- Total stockholders' equity 188,647 177,773 --------- --------- $ 561,771 $ 535,452 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. -3- 4 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended December 31, Six months ended December 31, ------------------------------- ----------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- REVENUE Ambulance services $115,759 $ 89,769 $232,024 $167,367 Fire protection services 12,591 11,351 25,234 22,563 Other 11,239 10,222 21,126 19,185 -------- -------- -------- -------- Total revenue 139,589 111,342 278,384 209,115 -------- -------- -------- -------- OPERATING EXPENSES Payroll and employee benefits 73,220 58,269 147,118 110,504 Provision for doubtful accounts 20,265 15,612 40,162 28,826 Depreciation 6,009 4,712 11,885 8,813 Amortization of intangibles 2,391 1,681 4,788 3,145 Other operating expenses 24,323 18,869 48,043 35,282 Restructuring charge -- -- 2,500 -- -------- -------- -------- -------- Total expenses 126,208 99,143 254,496 186,570 -------- -------- -------- -------- OPERATING INCOME 13,381 12,199 23,888 22,545 Interest expense, net 5,331 2,958 10,473 5,409 Other 29 130 77 130 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 8,021 9,111 13,338 17,006 PROVISION FOR INCOME TAXES 3,382 3,687 5,637 6,924 -------- -------- -------- -------- NET INCOME $ 4,639 $ 5,424 $ 7,701 $ 10,082 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ 0.32 $ 0.40 $ 0.54 $ 0.76 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ 0.32 $ 0.38 $ 0.53 $ 0.73 ======== ======== ======== ======== AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 14,465 13,482 14,368 13,196 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 14,665 14,200 14,593 13,805
The accompanying notes are an integral part of these consolidated financial statements. -4- 5 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS)
Six months ended December 31, ----------------------------- 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,701 $ 10,082 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 16,673 11,958 Amortization of deferred compensation 80 314 Amortization of gain on sale of real estate (52) (52) Provision for doubtful accounts 40,162 28,826 Undistributed earnings of minority shareholder 77 130 Amortization of discount on Senior Notes 13 -- Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable (59,312) (64,263) Increase in inventories (596) (997) Increase in prepaid expenses and other (2,759) (2,213) Increase (decrease) in accounts payable (1,154) 905 Increase in accrued liabilities and other 6,454 8,905 Increase (decrease) in nonrefundable subscription income 17 (129) Increase (decrease) in deferred income taxes (3,223) 516 -------- -------- Net cash provided by (used in) operating activities 4,081 (6,018) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 16,100 45,300 Repayment of debt and capital lease obligations (3,765) (14,416) Issuance of common stock 1,186 2,317 -------- -------- Net cash provided by financing activities 13,521 33,201 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired (4,873) (9,824) Capital expenditures (11,032) (14,909) Increase in other assets (4,919) (3,587) -------- -------- Net cash used in investing activities (20,824) (28,320) -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (294) -- -------- -------- DECREASE IN CASH (3,516) (1,137) CASH, beginning of period 6,511 3,398 -------- -------- CASH, end of period $ 2,995 $ 2,261 ======== ======== 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. -5- 6 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS)
Three months ended December 31, Six months ended December 31, ------------------------------- ----------------------------- 1998 1997 1998 1997 ------- ------ ------- ------- NET INCOME $ 4,639 $5,424 $ 7,701 $10,082 Other comprehensive income (loss) net of tax: Foreign currency translation adjustments (28) -- (294) -- ------- ------ ------- ------- COMPREHENSIVE INCOME $ 4,611 $5,424 $ 7,407 $10,082 ======= ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. -6- 7 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 and six month periods ended December 31, 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 and six month periods ended December 31, 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 six months ended December 31, 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 and an ambulance service provider operating in Georgia (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 $4,873 Notes payable to sellers 872 Assumption of liabilities 2,305 ------ $8,050 ======
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 six months ended December 31, 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 -7- 8 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) purport to project the results of operations of the Company for the current year or for any future period.
YEAR ENDED SIX MONTHS ENDED JUNE 30, 1998 DECEMBER 31, 1998 --------------------------- --------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL COMBINED HISTORICAL COMBINED ---------- -------- ---------- -------- Revenue $ 475,558 $ 538,991 $ 278,384 $ 278,868 Net income $ 7,505 $ 9,782 $ 7,701 $ 7,738 Earnings per share - basic $ 0.55 $ 0.70 $ 0.54 $ 0.54 Earnings per share - diluted $ 0.54 $ 0.67 $ 0.53 $ 0.53
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 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 certain indebtedness. 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 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 also recorded a $258,000 discount on the Notes and will amortize such discount over the life of the Notes. Unamortized discount at December 31, 1998 was $238,000 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 six months ended December 31, 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 six months ended December 31, 1997 -8- 9 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. -9- 10 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated --------- ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 943 $ 2,052 $ -- $ 2,995 Accounts receivable, net -- 157,044 16,710 -- 173,754 Inventories -- 12,669 1,055 -- 13,724 Prepaid expenses and other 531 15,675 2,711 -- 18,917 --------- --------- --------- --------- -------- Total current assets 531 186,331 22,528 -- 209,390 PROPERTY AND EQUIPMENT, net -- 85,007 7,109 -- 92,116 INTANGIBLE ASSETS, net -- 165,043 73,478 -- 238,521 DUE TO (FROM) AFFILIATES 295,992 (253,644) (42,348) -- -- OTHER ASSETS 4,440 14,693 2,611 -- 21,744 INVESTMENT IN SUBSIDIARIES 143,211 -- -- (143,211) -- --------- --------- --------- --------- -------- $ 444,174 $ 197,430 $ 63,378 $(143,211) $561,771 ========= ========= ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 6,390 $ 6,066 $ -- $ 12,456 Accrued liabilities 3,665 31,851 16,033 -- 51,549 Current portion of long-term debt -- 6,097 565 -- 6,662 --------- --------- --------- --------- -------- Total current liabilities 3,665 44,338 22,664 -- 70,667 LONG-TERM DEBT, net of current portion 251,862 5,625 1,466 -- 258,953 NON-REFUNDABLE SUBSCRIPTION INCOME -- 13,565 134 -- 13,699 DEFERRED INCOME TAXES -- 20,043 238 -- 20,281 OTHER LIABILITIES -- 1,267 -- -- 1,267 --------- --------- --------- --------- -------- Total liabilities 255,527 84,838 24,502 -- 364,867 --------- --------- --------- --------- -------- MINORITY INTEREST -- -- -- 8,257 8,257 STOCKHOLDERS' EQUITY Common stock 147 82 17 (99) 147 Additional paid-in capital 137,193 54,622 34,942 (89,564) 137,193 Retained earnings 52,840 57,888 4,211 (62,099) 52,840 Deferred compensation -- -- -- -- -- Cumulative translation adjustment (294) -- (294) 294 (294) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- -------- Total stockholders' equity 188,647 112,592 38,876 (151,468) 188,647 --------- --------- --------- --------- -------- $ 444,174 $ 197,430 $ 63,378 $(143,211) $561,771 ========= ========= ========= ========= ========
-10- 11 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1998 (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated --------- ---------- -------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 2,917 $ 3,594 $ -- $ 6,511 Accounts receivable, net -- 139,673 14,930 -- 154,603 Inventories -- 12,149 979 -- 13,128 Prepaid expenses and other 531 14,717 1,154 -- 16,402 --------- --------- --------- --------- -------- Total current assets 531 169,456 20,657 -- 190,644 PROPERTY AND EQUIPMENT, net -- 87,132 5,413 -- 92,545 INTANGIBLE ASSETS, net -- 167,630 67,826 -- 235,456 DUE TO (FROM) AFFILIATES 286,420 (244,979) (41,441) -- -- OTHER ASSETS 4,654 11,160 993 -- 16,807 INVESTMENT IN SUBSIDIARIES 125,726 -- -- (125,726) -- --------- --------- --------- --------- -------- $ 417,331 $ 190,399 $ 53,448 $(125,726) $ 535,452 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 8,828 $ 4,607 $ -- $ 13,435 Accrued liabilities 3,808 26,863 13,735 -- 44,406 Current portion of long-term debt -- 7,939 626 -- 8,565 --------- --------- --------- --------- -------- Total current liabilities 3,808 43,630 18,968 -- 66,406 LONG-TERM DEBT, net of current portion 235,750 7,100 981 -- 243,831 NON-REFUNDABLE SUBSCRIPTION INCOME -- 13,604 78 -- 13,682 DEFERRED INCOME TAXES -- 23,044 238 -- 23,282 OTHER LIABILITIES -- 1,439 859 -- 2,298 --------- --------- --------- --------- -------- Total liabilities 239,558 88,817 21,124 -- 349,499 --------- --------- --------- --------- -------- MINORITY INTEREST -- -- -- 8,180 8,180 STOCKHOLDERS' EQUITY Common stock 144 82 17 (99) 144 Additional paid-in capital 134,078 54,622 30,513 (85,135) 134,078 Retained earnings 45,139 46,878 1,794 (48,672) 45,139 Deferred compensation (349) -- -- -- (349) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- -------- Total stockholders' equity 177,773 101,582 32,324 (133,906) 177,773 --------- --------- --------- --------- -------- $ 417,331 $ 190,399 $ 53,448 $(125,726) $535,452 ========= ========= ========= ========= ========
-11- 12 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------- ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 93,874 $ 21,885 $ -- $115,759 Fire protection services -- 12,309 282 -- 12,591 Other -- 10,194 1,045 -- 11,239 ------- -------- -------- ------- -------- Total revenue -- 116,377 23,212 -- 139,589 ------- -------- -------- ------- -------- OPERATING EXPENSES Payroll and employee benefits -- 59,166 14,054 -- 73,220 Provision for doubtful accounts -- 18,782 1,483 -- 20,265 Depreciation -- 5,559 450 -- 6,009 Amortization of intangibles 86 1,737 568 -- 2,391 Other operating expenses -- 20,430 3,893 -- 24,323 Restructuring charge -- -- -- -- -- ------- -------- -------- ------- -------- Total expenses 86 105,674 20,448 -- 126,208 ------- -------- -------- ------- -------- OPERATING INCOME (LOSS) (86) 10,703 2,764 -- 13,381 Interest expense, net 4,872 10 449 -- 5,331 Other -- -- -- 29 29 ------- -------- -------- ------- -------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (4,958) 10,693 2,315 (29) 8,021 PROVISION (BENEFIT) FOR INCOME TAXES (2,083) 4,580 885 -- 3,382 ------- -------- -------- ------- -------- (2,875) 6,113 1,430 (29) 4,639 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 7,514 -- -- (7,514) -- ------- -------- -------- ------- -------- NET INCOME $ 4,639 $ 6,113 $ 1,430 $(7,543) $ 4,639 ======= ======== ======== ======= ========
-12- 13 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated -------- ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $187,180 $ 44,844 $ -- $232,024 Fire protection services -- 24,696 538 -- 25,234 Other -- 19,985 1,141 -- 21,126 -------- -------- -------- -------- -------- Total revenue -- 231,861 46,523 -- 278,384 -------- -------- -------- -------- -------- OPERATING EXPENSES Payroll and employee benefits -- 119,256 27,862 -- 147,118 Provision for doubtful accounts -- 36,945 3,217 -- 40,162 Depreciation -- 11,001 884 -- 11,885 Amortization of intangibles 214 3,455 1,119 -- 4,788 Other operating expenses -- 39,596 8,447 -- 48,043 Restructuring charge -- 2,500 -- -- 2,500 -------- -------- -------- -------- -------- Total expenses 214 212,753 41,529 -- 254,496 -------- -------- -------- -------- -------- OPERATING INCOME (LOSS) (214) 19,108 4,994 -- 23,888 Interest expense, net 9,526 95 852 -- 10,473 Other -- -- -- 77 77 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (9,740) 19,013 4,142 (77) 13,338 PROVISION (BENEFIT) FOR INCOME TAXES (4,091) 8,003 1,725 -- 5,637 -------- -------- -------- -------- -------- (5,649) 11,010 2,417 (77) 7,701 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 13,350 -- -- (13,350) -- -------- -------- -------- -------- -------- NET INCOME $ 7,701 $ 11,010 $ 2,417 $(13,427) $ 7,701 ======== ======== ========= ======== ========
-13- 14 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 7,701 $ 11,010 $ 2,417 $(13,427) $ 7,701 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 214 14,456 2,003 -- 16,673 Amortization of deferred compensation 80 -- -- -- 80 Amortization of gain on sale of real estate -- (52) -- -- (52) Provision for doubtful accounts -- 36,945 3,217 -- 40,162 Undistributed earnings of minority shareholder -- -- -- 77 77 Amortization of discount on Senior Notes 13 -- -- -- 13 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable -- (54,315) (4,997) -- (59,312) Increase in inventories -- (520) (76) -- (596) Increase in prepaid expenses and other -- (1,377) (1,382) -- (2,759) (Increase) decrease in due to/from affiliates (25,126) 6,774 867 17,485 -- Increase (decrease) in accounts payable -- (2,440) 1,286 -- (1,154) Increase (decrease) in accrued liabilities and other 126 6,607 (279) -- 6,454 Increase (decrease) in non-refundable subscription income -- (39) 56 -- 17 Decrease in deferred income taxes -- (3,001) (222) -- (3,223) -------- -------- ------- -------- -------- Net cash provided by (used in) operating activities (16,992) 14,048 2,890 4,135 4,081 -------- -------- ------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 16,100 -- -- -- 16,100 Repayment of debt and capital lease obligations -- (3,392) (373) -- (3,765) Issuance of common stock 1,186 -- 4,429 (4,429) 1,186 -------- -------- ------- -------- -------- Net cash provided by (used in) financing activities 17,286 (3,392) 4,056 (4,429) 13,521 -------- -------- ------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (445) (4,428) -- (4,873) Capital expenditures -- (8,867) (2,165) -- (11,032) Increase in other assets -- (3,318) (1,601) -- (4,919) -------- -------- ------- -------- -------- Net cash used in investing activities -- (12,630) (8,194) -- (20,824) -------- -------- ------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (294) -- (294) 294 (294) -------- -------- ------- -------- -------- DECREASE IN CASH -- (1,974) (1,542) -- (3,516) CASH, beginning of period -- 2,917 3,594 -- 6,511 -------- -------- ------- -------- -------- CASH, end of period $ -- $ 943 $ 2,052 $ -- $ 2,995 ======== ======== ======= ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan $ 1,933 $ -- $ -- $ -- $ 1,933 ======== ======== ======= ======== ========
-14- 15 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) FINANCIAL INSTRUMENTS The Company enters 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 expires in November 2003 and effectively converts $50.0 million of variable rate borrowings to fixed rate borrowings at December 31, 1998. The lender has the option of calling the swap agreement on November 19, 2000. The Company pays a fixed rate of 4.72% and receives a LIBOR-based floating rate. The weighted average floating rate for the three months and six months ended December 31, 1998 was 5.33%. As a result of this swap agreement interest expense was reduced by approximately $26,000 during the three months and six months ended December 31, 1998. A change in the LIBOR rate would affect the interest rate at which the Company could borrow funds on its revolving credit agreement in excess of the $50.0 million notional principal amount, which is fixed by the above swap agreement. (5) COMMITMENTS AND CONTINGENCIES In 1994, the Company entered into a Management Agreement with another Corporation (Corporation) to manage the operations of one of the Company's subsidiaries which does not provide ambulance or fire protection services. The Company also entered into an Option Agreement whereby the Corporation had the option to purchase the assets of this subsidiary and the Company had the option to sell the assets of this subsidiary. A dispute has arisen regarding the terms of the Option Agreement. Although the final outcome of this dispute is unknown at this time, the Company may incur a loss on its investment in this subsidiary upon final resolution of this matter. Any loss, however, is not expected to have a material impact on the Company's financial condition and results of operations. -15- 16 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 establishes an allowance for doubtful accounts based on credit risk applicable to certain types of payors, historical trends and other relevant information. Provision for doubtful accounts is 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 -16- 17 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. THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 REVENUE Total revenue increased $28.3 million, or 25.4%, from $111.3 million for the three months ended December 31, 1997 to $139.6 million for the three months ended December 31, 1998. Approximately $21.7 million of this increase resulted from the acquisition of ambulance service providers during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Ambulance service revenue in markets served by the Company in both of the three month periods ended December 31, 1997 and 1998 increased by approximately 4.8%. Fire protection services revenue increased by $1.2 million, or 10.5%, from $11.4 million for the three months ended December 31, 1997 to $12.6 million for the three months ended December 31, 1998. Other revenue increased by $1.0 million, or 9.8%, in the three months ended December 31, 1998. Total ambulance transports increased by 24,000, or 8.0%, from 301,000 for the three months ended December 31, 1997 to 325,000 for the three months ended December 31, 1998. The acquisition of ambulance service companies during the last two quarters of fiscal 1998 accounted for 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 two quarters of fiscal 1998. OPERATING EXPENSES Payroll and employee benefit expenses increased $14.9 million, or 25.6%, from $58.3 million for the three months ended December 31, 1997 to $73.2 million for the three months ended December 31, 1998. This increase was primarily due to the acquisition of seven ambulance service providers during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Payroll and employee benefits expense increased from 52.3% of total revenue for the three months ended December 31, 1997 to 52.5% of total revenue for the three months ended December 31, 1998. Provision for doubtful accounts increased $4.7 million, or 30.1%, from $15.6 million for the three months ended December 31, 1997 to $20.3 million for the three months ended December 31, 1998. Provision for doubtful accounts increased from 14.0% of total revenue for the three months ended December 31, 1997 to 14.5% of total revenue for the three months ended December 31, 1998 and increased from 17.5% of domestic -17- 18 ambulance service revenue for the three months ended December 31, 1997 to 19.7% of domestic ambulance service revenue for the three months ended December 31, 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 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 12.9% of total net accounts receivable at December 31, 1998. The Company anticipates the remaining three non-integrated billing centers will be integrated during 1999. Depreciation increased $1.3 million, or 27.7%, from $4.7 million for the three months ended December 31, 1997 to $6.0 million for the three months ended December 31, 1998, primarily as a result of increased property and equipment from recent acquisition activity. Depreciation was 4.2% and 4.3% of total revenue for the three months ended December 31, 1997 and 1998, respectively. Amortization of intangibles increased by $0.7 million, or 41.2%, from $1.7 million for the three months ended December 31, 1997 to $2.4 million for the three months ended December 31, 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 December 31, 1997 to 1.7% of total revenue for the three months ended December 31, 1998. Other operating expenses increased approximately $5.4 million, or 28.6%, from $18.9 million for the three months ended December 31, 1997 to $24.3 million for the three months ended December 31, 1998, primarily due to increased expenses associated with the operation of the seven ambulance service providers acquired during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Other operating expenses increased from 17.0% of total revenue for the three months ended December 31, 1997 to 17.4% of total revenue for the three months ended December 31, 1998. Interest expense increased by $2.3 million from $3.0 million for the three months ended December 31, 1997 to $5.3 million for the three months ended December 31, 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 40.0% for the three months ended December 31, 1997 to 42.0% for the three months ended December 31, 1998, primarily the result of the effect of nondeductible goodwill amortization applied against earnings. -18- 19 SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997 REVENUE Total revenue increased $69.3 million, or 33.1%, from $209.1 million for the six months ended December 31, 1997 to $278.4 million for the six months ended December 31, 1998. Approximately $54.3 million of this increase resulted from the acquisition of ambulance service providers during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Ambulance service revenue in markets served by the Company in both of the six month periods ended December 31, 1997 and 1998 increased by approximately 6.2% Fire protection services revenue increased by $2.6 million, or 11.5%, from $22.6 million for the six months ended December 31, 1997 to $25.2 million for the six months ended December 31, 1998. Other revenue increased by $1.9 million, or 9.9%, in the six months ended December 31, 1998. Total ambulance transports increased by 90,000, or 16.0%, from 564,000 for the six months ended December 31, 1997 to 654,000 for the six months ended December 31, 1998. The acquisition of ambulance service companies during the last two quarters of fiscal 1998 accounted for 88,000 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 two quarters of fiscal 1998. OPERATING EXPENSES Payroll and employee benefit expenses increased $36.6 million, or 33.1%, from $110.5 million for the six months ended December 31, 1997 to $147.1 million for the six months ended December 31, 1998. This increase was primarily due to the acquisition of seven ambulance service providers during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Payroll and employee benefits expense was 52.8% of total revenue for both the six month periods ended December 31, 1997 and 1998. Provision for doubtful accounts increased $11.4 million, or 39.6%, from $28.8 million for the six months ended December 31, 1997 to $40.2 million for the six months ended December 31, 1998. Provision for doubtful accounts increased from 13.8% of total revenue for the six months ended December 31, 1997 to 14.4% of total revenue for the six months ended December 31, 1998 and increased from 17.2% of domestic ambulance service revenue for the six months ended December 31, 1997 to 19.5% of domestic ambulance service revenue for the six months ended December 31, 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 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 -19- 20 non-integrated collection systems currently represent 12.9% of total net accounts receivable at December 31, 1998. The Company anticipates the remaining three non-integrated billing centers will be integrated during 1999. Depreciation increased $3.1 million, or 35.2%, from $8.8 million for the six months ended December 31, 1997 to $11.9 million for the six months ended December 31, 1998, primarily as a result of increased property and equipment from recent acquisition activity. Depreciation was 4.2% and 4.3% of total revenue for the six months ended December 31, 1997 and 1998, respectively. Amortization of intangibles increased by $1.7 million, or 54.8%, from $3.1 million for the six months ended December 31, 1997 to $4.8 million for the six months ended December 31, 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 six months ended December 31, 1997 to 1.7% of total revenue for the six months ended December 31, 1998. Other operating expenses increased approximately $12.7 million, or 36.0%, from $35.3 million for the six months ended December 31, 1997 to $48.0 million for the six months ended December 31, 1998, primarily due to increased expenses associated with the operation of the seven ambulance service providers acquired during the last two quarters of fiscal 1998 and the first two quarters of fiscal 1999. Other operating expenses increased from 16.9% of total revenue for the six months ended December 31, 1997 to 17.3% of total revenue for the six months ended December 31, 1998. During the six months ended December 31, 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 left or 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 $5.1 million from $5.4 million for the six months ended December 31, 1997 to $10.5 million for the six months ended December 31, 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 40.4% for the six months ended December 31, 1997 to 42.0% for the six months ended December 31, 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 December 31, 1998, the Company had working capital of $138.7 million, including cash of $3.0 million, compared to working capital of $124.2 million, including cash of $6.5 million at June 30, 1998. During the six months ended December 31, 1998, the Company's cash flow provided by operating activities was $4.1 million resulting primarily from an increase in accrued and other liabilities of $6.5 million offset by a decrease in deferred income taxes of $3.2 million. Cash flow used in operating activities was $6.0 million for the six months ended December 31, 1997. -20- 21 Cash provided by financing activities was $13.5 million for the six months ended December 31, 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 $20.8 million for the six months ended December 31, 1998 primarily because of cash paid for businesses acquired, capital expenditures and increases in other assets. The Company's gross accounts receivable as of December 31, 1998 and June 30, 1998 was $229.0 million and $224.2 million, respectively. The Company's accounts receivable, net of the allowance for doubtful accounts, was $173.8 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 December 31, 1998 the interest rate was 7.11% 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 $101.5 million was outstanding on the revolving credit facility at December 31, 1998. Availability on the facility was approximately $46.2 million at December 31, 1998. In November 1998, the Company entered into an interest rate swap agreement that expires in November 2003 and effectively converts $50.0 million of variable rate borrowings to fixed rate borrowings at December 31, 1998. The lender has the option of calling the swap agreement on November 19, 2000. The Company pays a fixed rate of 4.72% and receives a LIBOR-based floating rate. The weighted average floating rate for the three months and six months ended December 31, 1998 was 5.33%. As a result of this swap agreement interest expense was reduced by approximately $26,000 during the three months and six months ended December 31, 1998. A change in the LIBOR rate would affect the interest rate at which the Company could borrow funds on its revolving credit agreement in excess of the $50.0 million notional principal amount, which is fixed by the above swap agreement. 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 December 31, 1998 the interest rate was 7.4% on the lease line of credit. Approximately $2.3 million was outstanding on this line of credit at December 31, 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 December 31, 1998 was $238,000 and such amount is recorded as an offset to long-term debt in the consolidated financial statements. In April 1998 the Company -21- 22 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 Statements included in this Form 10-Q. 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 six months ended December 31, 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 and an ambulance service provider operating in Georgia. The combined purchase price of the operations was $8.1 million. The Company paid cash of $4.9 million, issued notes payable to sellers of $0.9 million and assumed $2.3 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 December 31, 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 impacts the Company's ability 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. In addition, the market price performance of the Company's common stock may make raising funds more difficult and costly. As a result of a decline in the market price of the Company's common stock in the fourth quarter of fiscal 1998, the pace of acquisitions utilizing the Company's common stock has declined. Continued weakness in the market price of the Company's common stock could adversely affect the Company's ability or willingness to make additional acquisitions. Declines in the market price of the Company's 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, the Health Care Financing Administration (HCFA) announced its intention to form a negotiated rule-making committee. The committee will convene in February 1999. The negotiated rule-making process will govern rules for Medicare reimbursement to begin in 2000. HCFA also announced rules which become effective in February 1999. These rules require, among other things, that a physician's certification be obtained for certain ambulance transports. The Company has implemented a program to comply with the new rules. The American Ambulance Association, on behalf of the Company and other association members, has requested interpretation and clarification of the new rules. 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 December 31, 1998 the Company recorded a $294,000 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. -22- 23 YEAR 2000 COMPLIANCE The Company has implemented a Year 2000 compliance program, utilizing both internal and external resources, 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. Included in this assessment is a formal communication program with the Company's significant vendors to determine the extent to which the Company is vulnerable to those vendors who fail to remediate their own Year 2000 non-compliance. The Company is highly dependent on vendor remediation and testing of vendor systems. 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. The upgrading or replacement of identified non-compliant equipment and systems has begun. 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. If the Company's medical equipment, ambulance and fire dispatch systems, and computer systems and applications are not Year 2000 compliant, the Company may not be able to respond to requests for ambulance and fire protection services in a timely manner. This situation could adversely affect the Company's operations and the Company may incur unanticipated expenses to remedy any problems not addressed by these compliance efforts. The Company is dependent upon vendors who provide services such as electrical power, water, fuel for vehicles and other necessary commodities. 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 telephone service providers to adequately provide service could impact the Company's 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 the Company for services provided. The failure of any of these systems could adversely affect the Company's business, financial condition, cash flows and results of operations. The Company does not control these systems and is dependent upon the service providers and third-party payors to remediate any Year 2000 non-compliance related to their own systems. 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. -23- 24 ITEM 3-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company enters 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 expires in November 2003 and effectively converts $50.0 million of variable rate borrowings to fixed rate borrowings at December 31, 1998. The lender has the option of calling the swap agreement on November 19, 2000. The Company pays a fixed rate of 4.72% and receives a LIBOR-based floating rate. The weighted average floating rate for the three months and six months ended December 31, 1998 was 5.33%. As a result of this swap agreement interest expense was reduced by approximately $26,000 during the three months and six months ended December 31, 1998. A change in the LIBOR rate would affect the interest rate at which the Company could borrow funds on its revolving credit agreement in excess of the $50.0 million notional principal amount, which is fixed by the above swap agreement. -24- 25 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 the quarter ended September 30, 1998. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 1998 Annual Meeting of Stockholders was held on November 19, 1998. The following nominees were elected to the Company's Board of Directors to serve as Class I directors for three-year terms or until their successors are elected and qualified:
Nominee Votes in Favor Withheld - ------- -------------- -------- Robert E. Ramsey 11,029,808 267,789 Louis A. Witzeman 11,150,270 147,327 Mary Anne Carpenter 11,066,341 231,256
The following directors' terms of office continued after the 1998 Annual Meeting of Stockholders: Cor J. Clement James H. Bolin Louis G. Jekel William C. Turner Henry G. Walker The following additional item was voted upon by the Company's stockholders: Proposal to ratify the appointment of Arthur Andersen LLP as the independent auditors of the Company for the fiscal year ending June 30, 1999.
Votes in Favor Opposed Abstained Broker Non-Vote -------------- ------- --------- --------------- 11,223,532 50,021 24,044 -0-
-25- 26 ITEM 5 -- OTHER INFORMATION On November 20, 1998, the Board of Directors unanimously elected John B. Furman to the Company's Board of Directors. ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.16(k) Separation Agreement and Release by and between Registrant and Robert T. Edwards effective December 31, 1998. 27 Financial Data Schedules (b) Reports on Form 8-K None -26- 27 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: February 11, 1999 By /s/ Dean P. Hoffman --------------------------------- Dean P. Hoffman, Vice President, Financial Services and Principal Accounting Officer -27- 28 Exhibit Index Exhibit No. Description ----------- ----------- 10.16(k) Separation Agreement and Release by and between Registrant and Robert T. Edwards effective December 31, 1998. 27 Financial Data Schedule EX-10.16.K 2 EX-10.16.K 1 Exhibit 10.16(k) SEPARATION AGREEMENT AND RELEASE THIS AGREEMENT is made and entered into as of the 31st day of December 1998 (the "Effective Date"), by and between RURAL/METRO CORPORATION AND ITS AFFILIATES AND SUBSIDIARIES ("Rural/Metro") and ROBERT T. EDWARDS ("Employee"). RECITALS: A. Employee has been employed by Rural/Metro in the position of Executive Vice President. B. Employee and Rural/Metro entered into the attached employment agreement dated October 27, 1995 ("Employment Agreement"), which governs the terms and conditions of Employee's employment with, and separation from, Rural/Metro. C. Employee and Rural/Metro have entered into the attached terms of resignation document dated September 30, 1998 ("Terms of Resignation"). D. Employee has resigned his position as of the Effective Date, and Rural/Metro and Employee now desire to enter into this Agreement. D. Employee has had the opportunity to be represented by independent legal counsel throughout the negotiations that resulted in this Agreement, as well as the opportunity to consult with legal counsel as to the meaning and legal significance of this Agreement. E. Employee has been given the opportunity to consider entering into this Agreement for twenty-one (21) days preceding its execution. Employee further acknowledges that this Agreement, including the Release of Claims, is revocable and does not take effect for seven (7) days following Employee's execution thereof. Following the expiration of that seven (7) day period, this Agreement, including the Release of Claims, is effective and irrevocable. F. Employee enters into this Agreement freely, voluntarily and with a full and complete understanding of the terms of this Agreement and all of the rights which are being forever surrendered, released, discharged, and settled as a result of this Agreement, including any legal rights or claims against Rural/Metro. G. The parties agree and understand that by entering into this Agreement, there is no implication or admission of liability or wrongdoing by either party and that the existence and execution of this Agreement shall not be considered, and shall not be admissible, in any proceeding as an admission by the parties, or any of the agents or employees, of any liability, error, or violation of law. 2 H. An integral part of this Agreement is the promise of the parties to keep all of the terms and conditions of this Agreement confidential, and not to disclose those terms to any third party who is not identified in this Agreement. NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants and promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. RECITALS. The recitals above are incorporated into this Agreement by this reference. 2. RESIGNATION OF EMPLOYMENT. Employee's last day of employment with Rural/Metro will be the Effective Date. As of such date, Employee shall have no further authority or obligation to act as an employee of Rural/Metro, or represent that Employee is an employee of Rural/Metro. 3. PAYMENT. In exchange and in consideration for the releases, waivers and promises contained in this Agreement, Rural/Metro shall pay Employee as follows, less any and all appropriate and lawful tax and fringe benefit deductions: a. SEVERANCE PAYMENT AND DEDUCTIONS. Rural/Metro shall continue to pay to Employee his final base salary through December 31, 2000, as severance pay. Said severance shall be payable on Rural/Metro's regular paydays each month in equal installments, with the first payment being due as soon as administratively possible following receipt by Rural/Metro of Employee's signed Agreement. b. VACATION PAY. Rural/Metro shall pay to Employee any unused vacation time earned during the calendar year 1998. Said vacation pay shall be payable by separate check. c. BENEFITS. Pursuant to the terms of the Employment Agreement, Employee is entitled to a continuation of his health, life, disability and other insurance benefits, including medical, dental and vision coverage. Employee's currant Rural/Metro health care coverage will remain in place through December 31, 1998. Thereafter, these benefits will be provided to Employee under COBRA should Employee so elect. For the period of January 1, 1999, through December 31, 2000, Rural/Metro shall pay the difference between the COBRA premiums and Employee's current regular health insurance deductions. A notification letter regarding COBRA benefits will be mailed to Employee. With regard to life insurance and disability premiums, these items will be handled in accordance with the attached memo dated December 28, 1998 ("Memo"). d. CONSULTING SERVICES. Commencing January 1, 1999, and terminating June 30, 1999 (unless renewed by mutual agreement), Employee agrees to provide consulting services to Rural/Metro pursuant to the Terms of Resignation. Monthly compensation shall be 3 Three Thousand Five Hundred Dollars ($3,500.00) plus approved expenses. In the event that it is found that the consulting services are exceeding twenty-five (25) hours per month, Rural/Metro shall pay for time in excess of twenty-five (25) hours per month at the rate of One Hundred Fifty Dollars ($150.00) per hour. 4. TERMINATION OF PAYMENTS. In the event Employee materially violates any portion of the Non-Disclosure, Confidentiality, or Communication provisions of this Agreement (Paragraphs 6, 7 and 8), or the Nonsolicitation of Clients, Nonsolicitation of Employees, or Competing Business provisions of this Agreement (Paragraphs 9, 10 and 11), any portion of the Employment Agreement, or any portion of the Terms of Resignation, Rural/Metro may immediately terminate the payments set forth in Paragraph 3(a), (c) and (d). Should such a termination of payments occur, it shall not invalidate or nullify any other provisions of this Agreement, nor shall it constitute a lack or failure of consideration for this Agreement. 5. RELEASE OF CLAIMS. In consideration of the promises, covenants and benefits provided herein, which the parties agree are sufficient consideration, and which Employee hereby acknowledges receipt hereof by Employee's signature below, Employee hereby discharges, releases and forever forgives Rural/Metro from any and all liabilities and claims under federal, state or common law arising out of Employee's employment and/or termination of employment, including but not limited to: employment discrimination under any state Civil Rights Act and Title VII of the Civil Rights Act of 1964; age discrimination under the Age Discrimination Employment Act (29 U.S.C. Section 626); wrongful discharge; breach of employment contract (express or implied); breach of duty of good faith and fair dealing; tortious interference with contract; intentional and negligent infliction of emotional distress; payment of wages, including vacation pay, sick leave pay, severance pay, "bonus" pay; and any other compensation; claims for payment of amounts due under Rural/Metro's ESOP; claims for benefits; claims for stock options; claims for recovery of attorneys' fees; and any and all other related claims that could be raised by Employee against Rural/Metro as a result of Employee's employment with Rural/Metro, which are now existing, presently known, or hereafter discovered. By this Agreement, Employee affirms that Employee understands Employee's release of any age discrimination claim is a release of any legal rights or claims pursuant to the Age Discrimination Employment Act of 1967 (29 U.S.C. Section 626, as amended October 1990) including, but not limited to, claims for back pay, reinstatement and liquidated damages relating to allegations or claims of age discrimination by Employee against Rural/Metro that exist as of the date of the execution of this Agreement, whether presently known or hereafter discovered. 6. NON-DISCLOSURE COVENANT. Employee understands and agrees that while employed by Rural/Metro, Employee worked with, was exposed to, and had access to a substantial amount of confidential and/or proprietary information, including, but not limited to: wage and salary information (general and specific); the financial condition and/or operation of Rural/Metro; employee names and positions; customer names and relationships; internal policies and procedures; pending claims, lawsuits, and administrative proceedings involving the corporation; strategic plans; trade secrets; and any and all other types of confidential and/or 4 proprietary information or documents (the "Confidential Information"). The parties expressly recognize that should Employee divulge the Confidential Information to any third party, it could seriously impair the goodwill and diminish the value of Rural/Metro. Therefore, on or before the Effective Date, Employee will return to Rural/Metro any and all documents and materials, originals and/or copies, computer printouts, floppy discs, etc., containing Confidential Information, including, but not limited to, financial information, business plans, strategic plans, marketing strategies, personnel and compensation information, and other such reports, documents or information. Employee shall not, at any time in the future, divulge any Confidential Information, including, but not limited to, that information identified above, to any third person, without the express written consent of the Chief Executive Officer of Rural/Metro. This Agreement is not intended to restrict the communication of information that is already in the public domain. 7. CONFIDENTIALITY. The parties promise and covenant that each and every term of this Agreement shall remain and be kept confidential by all parties and shall not be disclosed to any third party. If the release or disclosure of any of the terms of this Agreement are sought from any party to this Agreement, such party shall state, "The terms of our agreement require me not to disclose its terms." Thereafter, the party requested to disclose shall timely notify the other party of the request and will not voluntarily release the Agreement or any of its terms if the other party raises a valid objection. The other party shall promptly respond to any such notification. Failure to do so shall release the requested party from any responsibility if a disclosure is then made. Should one party breach this provision, that shall not release or permit the other party to breach the provision. Due to the nature of Employee's position with Rural/Metro, and with full realization that a violation of the non-disclosure and confidentiality provisions of this Agreement will cause immediate and irreparable injury and damage, which is not readily measurable, and to protect Rural/Metro's interests, Employee understands and agrees that in addition to instituting legal proceedings to recover damages resulting from such a breach of this Agreement, and forfeiture of benefits provided in Paragraph 3 above, Rural/Metro may seek to enforce the terms of this Agreement with an action for injunctive relief, to cease or prevent any actual or threatened violation on the part of Employee. 8. COMMUNICATION WITH THIRD PARTIES. The parties agree that in the event Rural/Metro is contacted by any third parties for a reference on Employee, Rural/Metro will inform them only of Employee's dates of employment, last position held, and duties and responsibilities of said position. If Employee is asked any questions about Rural/Metro, or if the topic of Rural/Metro becomes the topic of any inquiry, conversation, interview or other discussion, Employee shall not 5 make any negative or damaging comments about Rural/Metro or any aspect of Rural/Metro, including, but not limited to, its management, financial condition, operations, customer satisfaction, employee relations, customer base, etc. 9. NONSOLICITATION OF CLIENTS. For a period of twenty-four (24) months after the Effective Date, the Employee shall not directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, call upon, contact, encourage, or solicit client(s) of Rural/Metro with whom the Employee has worked as an employee of Rural/Metro at any time prior to the Effective Date, or on the Effective Date, for the purpose of soliciting or selling such client the same, similar, or related services that the Employee provided on behalf of Rural/Metro. 10. NONSOLICITATION OF EMPLOYEES. For a period of twenty-four (24) months after the Effective Date, the Employee shall not directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, seek to hire, and/or hire any of Rural/Metro's personnel or employees for the purpose of having such employee engage in services that are the same, similar or related to the services that such employee provided for Rural/Metro. 11. COMPETING BUSINESS. For a period of twenty-four (24) months after the Effective Date, the Employee shall not, directly or indirectly, for himself, or on behalf of, or in conjunction with, any other person(s), company, partnership, corporation, or governmental entity, in any manner whatsoever, engage in the same or similar business as Rural/Metro, which would be in direct competition with any Rural/Metro line of business, in any geographical service area where Rural/Metro is engaged in business, or was considering engaging in business at any time prior to the Effective Date, or on the Effective Date. For the purposes of this provision, the term "competition" shall mean directly engaging in or having a substantial interest in a business or operation which has been, is, or will be, performing the same services provided by Rural/Metro. 12. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties, their respective successors, heirs, legal representatives, and assigns. 13. ASSIGNMENT. This Agreement shall not be assignable by any party without the written prior consent of the other party and any attempted assignment without such consent shall be considered null and void. 14. LEGAL FEES. The parties shall be responsible for their own costs and attorneys' fees incurred in connection with this Agreement. In the event there is any litigation involving the enforcement of this Agreement, the prevailing party shall recover their reasonable attorneys' fees and costs in such a proceeding. 15. SEVERABILITY. In the event a court declares that any provision of this Agreement is unenforceable or invalid, it shall not affect or invalidate any of the remaining provisions. Further, the court shall have the authority to modify the provisions to make said 6 provisions enforceable, if possible. 16. ENTIRE AGREEMENT. This Agreement, including its attachments, constitutes the entire agreement and understanding among the parties with respect to the subject matter of this Agreement and supersedes any and all prior oral and written agreements or understandings. Any amendment, modification or change to this Agreement must be in writing and signed by the party against whom the enforcement of such modification or amendment is sought. 17. GOVERNING LAW. This Agreement shall be subject to and governed by the laws of the State of Arizona. IN WITNESS WHEREOF, Rural/Metro has caused this Agreement to be signed by its duly authorized representative and Employee has executed this Agreement, all as of the Effective Date. RURAL/METRO CORPORATION ROBERT T. EDWARDS /s/ John B. Furman /s/ Robert T. Edwards ___________________________________ __________________________________ By: John B. Furman Title: President and CEO Date: January 20, 1999 Date: January 4, 1999 EX-27 3 EX-27
5 1,000 6-MOS JUN-30-1998 JUL-01-1998 DEC-31-1998 2,995 0 228,948 55,194 13,724 209,390 161,832 69,716 561,771 70,667 265,615 0 0 147 188,500 561,771 278,384 278,384 0 214,334 0 40,162 10,473 13,338 5,637 7,701 0 0 0 7,701 0.54 0.53
-----END PRIVACY-ENHANCED MESSAGE-----