-----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, NHnyLnPKKRHkaPbs8FrcqGFph+XxlH7nZ3lAwJt2/k2AhHmbM2EwGGfQdgM55brO PBVFY6Bm0B5p5a/wkr303w== 0000950153-99-000644.txt : 19990517 0000950153-99-000644.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950153-99-000644 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99624503 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 [V] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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) (602) 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 May 13, 1999 there were 14,526,627 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 19 Item 3. Quantitative and Qualitative Disclosures About Market Risks 27 Part II. Other Information Item 1. Legal Proceedings 29 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 30 2 3 RURAL/METRO CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND JUNE 30, 1998 (IN THOUSANDS)
March 31, 1999 June 30, 1998 -------------- ------------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 5,264 $ 6,511 Accounts receivable, net 183,678 154,603 Inventories 14,653 13,128 Prepaid expenses and other 12,436 16,402 --------- --------- Total current assets 216,031 190,644 PROPERTY AND EQUIPMENT, net 92,665 92,545 INTANGIBLE ASSETS, net 246,367 235,456 OTHER ASSETS 22,622 16,807 --------- --------- $ 577,685 $ 535,452 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 11,019 $ 13,435 Accrued liabilities 41,572 44,406 Current portion of long-term debt 6,704 8,565 --------- --------- Total current liabilities 59,295 66,406 LONG-TERM DEBT, net of current portion 269,415 243,831 NON-REFUNDABLE SUBSCRIPTION INCOME 14,135 13,682 DEFERRED INCOME TAXES 31,273 23,282 OTHER LIABILITIES 1,287 2,298 --------- --------- Total liabilities 375,405 349,499 --------- --------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 8,318 8,180 --------- --------- STOCKHOLDERS' EQUITY Common stock 148 144 Additional paid-in capital 137,765 134,078 Retained earnings 57,551 45,139 Deferred compensation -- (349) Cumulative translation adjustment (263) -- Treasury stock (1,239) (1,239) --------- --------- Total stockholders' equity 193,962 177,773 --------- --------- $ 577,685 $ 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 NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Nine months ended March 31, March 31, 1999 1998 1999 1998 ---- ---- ---- ---- REVENUE Ambulance services $ 119,751 $ 107,279 $ 351,775 $ 274,646 Fire protection services 12,372 11,547 37,606 34,110 Other 10,810 10,957 31,936 30,142 --------- --------- --------- --------- Total revenue 142,933 129,783 421,317 338,898 --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits 74,966 68,599 222,084 179,103 Provision for doubtful 20,886 17,397 61,048 46,223 accounts Depreciation 6,096 4,871 17,981 13,684 Amortization of intangibles 2,134 2,010 6,922 5,155 Other operating expenses 25,109 22,623 73,152 57,905 Restructuring charge -- -- 2,500 -- --------- --------- --------- --------- Total expenses 129,191 115,500 383,687 302,070 --------- --------- --------- --------- OPERATING INCOME 13,742 14,283 37,630 36,828 Interest expense, net 5,519 3,705 15,992 9,114 Other 61 (126) 138 4 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 8,162 10,704 21,500 27,710 PROVISION FOR INCOME TAXES 3,451 4,332 9,088 11,256 --------- --------- --------- --------- NET INCOME $ 4,711 $ 6,372 $ 12,412 $ 16,454 ========= ========= ========= ========= BASIC EARNINGS PER SHARE $ 0.32 $ 0.47 $ 0.86 $ 1.23 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE $ 0.32 $ 0.45 $ 0.85 $ 1.18 ========= ========= ========= ========= AVERAGE NUMBER OF SHARES OF OUTSTANDING - BASIC 14,524 13,631 14,420 13,332 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 14,710 14,310 14,632 13,968
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RURAL/METRO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 ((UNAUDITED) (IN THOUSANDS)
Nine months ended March 31, --------------------------- 1999 1998 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 12,412 $ 16,454 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 24,903 18,839 Amortization of deferred compensation 80 270 Amortization of gain on sale of real estate (78) (78) Provision for doubtful accounts 61,048 46,223 Undistributed earnings of minority shareholder 138 4 Amortization of discount on Senior Notes 19 -- Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable (90,074) (97,827) Increase in inventories (1,526) (2,223) (Increase) decrease in prepaid expenses and other 3,824 (2,126) Increase (decrease) in accounts payable (4,071) 1,152 Increase (decrease) in accrued liabilities and other liabilities (4,851) 3,536 Increase in nonrefundable subscription income 453 46 Increase in deferred income taxes 7,770 6,772 ----- ----- Net cash provided by (used in) operating activities 10,047 (8,958) ------ ------ CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes -- 145,805 Borrowings (repayments) on revolving credit facility, net 27,500 (53,500) Repayment of debt and capital lease obligations (5,994) (23,499) Borrowings of debt -- 2,293 Issuance of common stock 1,758 2,783 ----- ----- Net cash provided by financing activities 23,264 73,882 ------ ------ CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired (12,665) (34,221) Capital expenditures (15,330) (22,157) Increase in other assets (6,300) (2,886) ------ ------ Net cash used in investing activities (34,295) (59,264) ------- ------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (263) -- ------- ------- INCREASE (DECREASE) IN CASH (1,247) 5,660 CASH, beginning of period 6,511 3,398 ------- ------- CASH, end of period $ 5,264 $ 9,058 ========= ========= 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 NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) (IN THOUSANDS)
Three months ended March 31, Nine months ended March 31, 1999 1998 1999 1998 ---- ---- ---- ---- NET INCOME $ 4,711 $ 6,372 $ 12,412 $ 16,454 Other comprehensive income (loss) net of tax: Foreign currency translation adjustments 31 -- (263) -- -------- -------- -------- -------- COMPREHENSIVE INCOME $ 4,742 $ 6,372 $ 12,149 $ 16,454 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 6 7 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 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 and nine month periods ended March 31, 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 and nine month periods ended March 31, 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, 1998. (2) BUSINESS DEVELOPMENT ACTIVITIES During the nine months ended March 31, 1999, the Company purchased all of the issued and outstanding stock of a company that provides urgent and primary care services in three clinics in Argentina and of two companies that provide urgent home medical attention and ambulance transport services in Argentina. The Company also purchased the assets of an ambulance service provider operating in Pennsylvania and an ambulance service provider operating in Georgia (collectively, 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 $12,665 Notes payable to sellers 872 Assumption of liabilities 7,104 ----- $20,641 =======
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 nine months ended March 31, 1999 gives effect to the 1999 Acquisitions as if each had been consummated on July 1, 1998. 7 8 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The pro forma combined condensed financial statements do not purport to represent what the Company's actual results of operations or financial position would have been had such transactions in fact occurred on such dates. The pro forma combined condensed statements of income also do not purport to project the results of operations of the Company for the current year or for any future period.
YEAR ENDED NINE MONTHS ENDED JUNE 30, 1998 MARCH 31, 1999 ------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PRO FORMA HISTORICAL COMBINED HISTORICAL COMBINED ---------- -------- ---------- -------- Revenue $ 475,558 $ 545,137 $ 421,317 $425,386 Net income $ 7,505 $ 9,382 $ 12,412 $ 12,074 Earnings per share - basic $ 0.55 $ 0.66 $ 0.86 $ 0.84 Earnings per share - diluted $ 0.54 $ 0.64 $ 0.85 $ 0.82
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. During the third quarter of fiscal 1999 and subsequent to March 31, 1999, the Company made investments in companies offering ambulance services, ambulance billing services and alternative transportation services. The Company contributed cash, accounts receivable and fixed assets totaling $0.8 million at March 31, 1999 and $2.6 million at May 13, 1999 to these businesses. These investments have been recorded using the cost method of accounting. (3) CREDIT AGREEMENTS AND BORROWINGS In March 1998, the Company issued $150.0 million of 7?% 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 March 31, 1999 and June 30, 1998, the Consolidating Statements of Income for the three months and nine months ended March 31, 1999 and 1998, and the Statements of Cash Flows for the nine months ended March 31, 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. 8 9 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- ------------- ----------- ------------ ASSETS CURRENT ASSETS Cash $ -- $ 14 $ 5,250 $ -- $ 5,264 Accounts receivable, net -- 164,813 18,865 -- 183,678 Inventories -- 13,589 1,064 -- 14,653 Prepaid expenses and other 531 11,053 852 -- 12,436 --------- --------- --------- --------- --------- Total current assets 531 189,469 26,031 -- 216,031 PROPERTY AND EQUIPMENT, net -- 83,134 9,531 -- 92,665 INTANGIBLE ASSETS, net -- 163,470 82,897 -- 246,367 OTHER ASSETS 4,304 15,264 3,054 -- 22,622 DUE FROM (TO) AFFILIATES 302,288 (249,083) (53,205) -- -- INVESTMENT IN SUBSIDIARIES 150,924 -- -- (150,924 -- --------- --------- --------- --------- --------- Total other assets 457,516 (70,349) 32,746 (150,924) 268,989 --------- --------- --------- --------- --------- Total assets $ 458,047 $ 202,254 $ 68,308 $(150,924) $ 577,685 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ -- $ 4,141 $ 6,878 $ -- $ 11,019 Accrued liabilities 816 22,897 17,859 -- 41,572 Current portion of long-term debt -- 4,629 2,075 -- 6,704 --------- --------- --------- --------- --------- Total current liabilities 816 31,667 26,812 -- 59,295 LONG-TERM DEBT, net of current portion 263,269 5,175 971 -- 269,415 NON-REFUNDABLE SUBSCRIPTION INCOME -- 14,059 76 -- 14,135 DEFERRED INCOME TAXES -- 31,035 238 -- 31,273 OTHER LIABILITIES -- 1,287 -- -- 1,287 --------- --------- --------- --------- --------- Total liabilities 264,085 83,223 28,097 -- 375,405 --------- --------- --------- --------- --------- MINORITY INTEREST -- -- -- 8,318 8,318 STOCKHOLDERS' EQUITY Common stock 148 82 17 (99) 148 Additional paid-in capital 137,765 54,622 34,942 (89,564) 137,765 Retained earnings 57,551 64,327 5,515 (69,842) 57,551 Deferred compensation -- -- -- -- -- Cumulative translation adjustment (263) -- (263) 263 (263) Treasury stock (1,239) -- -- -- (1,239) --------- --------- --------- --------- --------- Total stockholders' equity 193,962 119,031 40,211 (159,242) 193,962 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 458,047 $ 202,254 $ 68,308 $(150,924) $ 577,685 ========= ========= ========= ========= =========
9 10 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 FROM (TO) 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 ========= ========= ========= ========= =========
10 11 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated REVENUE Ambulance services $ -- $ 97,894 $ 21,857 $ -- $ 119,751 Fire protection services -- 12,095 277 -- 12,372 Other -- 9,577 1,233 -- 10,810 ------- -------- --------- --------- --------- Total revenue -- 119,566 23,367 -- 142,933 ------- -------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 60,702 14,264 -- 74,966 Provision for doubtful accounts -- 19,701 1,185 -- 20,886 Depreciation -- 5,586 510 -- 6,096 Amortization of intangibles -- 1,549 585 -- 2,134 Other operating expenses -- 21,050 4,059 -- 25,109 Restructuring charge -- -- -- -- ------- -------- --------- --------- --------- Total expenses -- 108,588 20,603 -- 129,191 ------- -------- --------- --------- --------- OPERATING INCOME -- 10,978 2,764 -- 13,742 Interest expense, net 5,122 (88) 485 -- 5,519 Other -- -- -- 61 61 ------- -------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (5,122) 11,066 2,279 (61) 8,162 PROVISION (BENEFIT) FOR INCOME TAXES (2,151) 4,627 975 -- 3,451 ------- -------- --------- --------- --------- (2,971) 6,439 1,304 (61) 4,711 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 7,682 -- -- (7,682) -- ------- -------- --------- --------- --------- NET INCOME $ 4,711 $ 6,439 $ 1,304 $ (7,743) $ 4,711 ======= ========= ========= ========= ========= Other comprehensive income (loss), net of tax Foreign currency translation adjustments -- -- 31 -- 31 Comprehensive income (loss) from wholly-owned subsidiaries 31 -- -- (31) -- ------- -------- --------- --------- --------- COMPREHENSIVE INCOME $ 4,742 $ 6,439 $ 1,335 $ (7,774) $ 4,742 ======= ========= ========= ========= =========
11 12 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 285,074 $ 66,701 $ -- $ 351,775 Fire protection services -- 36,791 815 -- 37,606 Other -- 29,562 2,374 -- 31,936 --------- --------- --------- ---------- --------- Total revenue -- 351,427 69,890 -- 421,317 --------- --------- --------- ---------- --------- OPERATING EXPENSES Payroll and employee benefits -- 179,958 42,126 -- 222,084 Provision for doubtful accounts -- 56,646 4,402 -- 61,048 Depreciation -- 16,587 1,394 -- 17,981 Amortization of intangibles 214 5,004 1,704 -- 6,922 Other operating expenses -- 60,646 12,506 -- 73,152 Restructuring charge -- 2,500 -- -- 2,500 --------- --------- --------- ---------- --------- Total expenses 214 321,341 62,132 -- 383,687 --------- --------- --------- ---------- --------- OPERATING INCOME (LOSS) (214) 30,086 7,758 -- 37,630 Interest expense, net 14,648 7 1,337 -- 15,992 Other -- -- -- 138 138 --------- --------- --------- ---------- --------- INCOME (LOSS) BEFORE INCOME TAXES (14,862) 30,079 6,421 (138) 21,500 PROVISION (BENEFIT) FOR INCOME TAXES (6,242) 12,630 2,700 -- 9,088 --------- --------- --------- ---------- --------- (8,620) 17,449 3,721 (138) 12,412 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 21,032 -- -- (21,032) -- --------- --------- --------- ---------- --------- NET INCOME $ 12,412 $ 17,449 $ 3,721 $ (21,170) $ 12,412 ========= ========= ========= ========= ========= Other comprehensive income (loss), net of tax Foreign currency translation -- -- (263) -- (263) adjustments Comprehensive income (loss) from wholly-owned subsidiaries (263) -- -- 263 -- --------- --------- --------- ---------- --------- COMPREHENSIVE INCOME $ 12,149 $ 17,449 $ 3,458 $ (20,907) $ 12,149 ========= ========= ========= ========= =========
12 13 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 90,549 $ 16,730 $ -- $ 107,279 Fire protection services -- 11,290 257 -- 11,547 Other -- 10,758 199 -- 10,957 --------- --------- --------- --------- --------- Total revenue -- 112,597 17,186 -- 129,783 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 56,556 12,043 -- 68,599 Provision for doubtful accounts -- 15,855 1,542 -- 17,397 Depreciation -- 4,657 214 -- 4,871 Amortization of intangibles 109 1,627 274 -- 2,010 Other operating expenses -- 18,480 4,143 -- 22,623 --------- --------- --------- --------- --------- Total expenses 109 97,175 18,216 -- 115,500 --------- --------- --------- --------- --------- OPERATING INCOME (109) 15,422 (1,030) -- 14,283 Interest expense, net 3,665 (92) 132 -- 3,705 Other -- -- -- (126) (126) --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (3,774) 15,514 (1,162) 126 10,704 PROVISION (BENEFIT) FOR INCOME TAXES (1,532) 6,155 (291) -- 4,332 --------- --------- --------- --------- --------- (2,242) 9,359 (871) 126 6,372 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 8,614 -- -- (8,614) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 6,372 $ 9,359 $ (871) $ (8,488) $ 6,372 ========= ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS) $ 6,372 $ 9,359 $ (871) $ (8,488) $ 6,372 ========= ========= ========= ========= =========
13 14 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ REVENUE Ambulance services $ -- $ 250,810 $ 23,836 $ -- $ 274,646 Fire protection services -- 33,380 730 -- 34,110 Other -- 29,738 404 -- 30,142 --------- --------- --------- --------- --------- Total revenue -- 313,928 24,970 -- 338,898 --------- --------- --------- --------- --------- OPERATING EXPENSES Payroll and employee benefits -- 162,914 16,189 -- 179,103 Provision for doubtful accounts -- 43,546 2,677 -- 46,223 Depreciation -- 13,196 488 -- 13,684 Amortization of intangibles 231 4,507 417 -- 5,155 Other operating expenses -- 52,420 5,485 -- 57,905 --------- --------- --------- --------- --------- Total expenses 231 276,583 25,256 -- 302,070 --------- --------- --------- --------- --------- OPERATING INCOME (231) 37,345 (286) -- 36,828 Interest expense, net 9,030 (162) 246 -- 9,114 Other -- -- -- 4 4 --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (9,261) 37,507 (532) (4) 27,710 PROVISION (BENEFIT) FOR INCOME TAXES (3,760) 15,027 (11) -- 11,256 --------- --------- --------- --------- --------- (5,501) 22,480 (521) (4) 16,454 INCOME FROM WHOLLY-OWNED SUBSIDIARIES 21,955 -- -- (21,955) -- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 16,454 $ 22,480 $ (521) $ (21,959) $ 16,454 ========= ========= ========= ========= ========= COMPREHENSIVE INCOME (LOSS) $ 16,454 $ 22,480 $ (521) $ (21,959) $ 16,454 ========= ========= ========= ========= =========
14 15 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating Consolidated ------ ---------- -------------- ----------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 12,412 $ 17,449 $ 3,721 $(21,170) $12,412 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 214 21,591 3,098 -- 24,903 Amortization of deferred compensation 80 -- -- -- 80 Amortization of gain on sale of real estate -- (78) -- -- (78) Provision for doubtful accounts -- 56,646 4,402 -- 61,048 Undistributed earnings of minority shareholder -- -- -- 138 138 Amortization of discount on Senior Notes 19 -- -- -- 19 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable -- (81,786) (8,288) -- (90,074) Increase in inventories -- (1,440) (86) -- (1,526) Increase in prepaid expenses and other 136 3,132 556 -- 3,824 (Increase) decrease in due to/from affiliates (39,133) 2,172 11,763 25,198 -- Increase (decrease) in accounts payable -- (4,687) 616 -- (4,071) Increase (decrease) in accrued liabilities and other liabilities (2,723) (2,259) 131 -- (4,851) Increase (decrease) in non-refundable subscription income -- 455 (2) -- 453 Decrease in deferred income taxes -- 7,991 (221) -- 7,770 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (28,995) 19,186 15,690 4,166 10,047 -------- -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Borrowings on revolving credit facility, net 27,500 -- -- -- 27,500 Repayment of debt and capital lease obligations -- (5,310) (684) -- (5,994) Issuance of common stock 1,758 -- 4,429 (4,429) 1,758 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 29,258 (5,310) 3,745 (4,429) 23,264 -------- -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired -- (445) (12,220) -- (12,665) Capital expenditures -- (12,580) (2,750) -- (15,330) Increase in other assets -- (3,754) (2,546) -- (6,300) -------- -------- -------- -------- -------- Net cash used in investing activities -- (16,779) (17,516) -- (34,295) -------- -------- -------- -------- -------- EFFECT OF CURRENCY EXCHANGE RATE CHANGE (263) -- (263) 263 (263) -------- -------- -------- -------- -------- INCREASE (DECREASE) IN CASH -- (2,903) 1,656 -- (1,247) CASH, beginning of period -- 2,917 3,594 -- 6,511 -------- -------- -------- -------- -------- CASH, end of period $ -- $ 14 $ 5,250 $ -- $ 5,264 ======== ======== ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Fair market value of stock issued to employee benefit plan $ 1,933 $ --- $ --- $ -- $ 1,933 ======== ======== ======== ======== ========
15 16 RURAL/METRO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS)
Parent Guarantors Non-Guarantors Eliminating ------ ---------- -------------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 16,454 $ 22,480 $ (521) $(21,959) Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 231 17,701 907 --- Amortization of deferred compensation 270 --- --- --- Amortization of gain on sale of real estate --- (78) --- --- Provision for doubtful accounts --- 43,546 2,677 --- Undistributed earnings of minority shareholder --- --- --- 4 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable --- (89,786) (8,041) --- Increase in inventories --- (2,192) (31) --- Increase (decrease) in prepaid expenses and other (5,173) 2,822 225 --- (Increase) decrease in due to/from affiliates (107,363) 43,980 41,428 21,955 Increase (decrease) in accounts payable --- 1,264 (112) --- Increase (decrease) in accrued liabilities 493 3,239 (196) --- and other liabilities Increase (decrease) in non-refundable subscription income --- (10) 56 --- Increase in deferred income taxes --- 6,772 --- --- ------- --------- --------- -------- Net cash provided by (used in) operating activities (95,088) 49,738 36,392 --- ------- --------- --------- -------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 145,805 --- --- --- Repayments on revolving credit facility, net (53,500) --- --- --- Repayment of debt and capital lease obligations --- (17,479) (6,020) --- Borrowings of debt --- 2,293 --- --- Issuance of common stock 2,783 --- --- --- ------- --------- --------- -------- Net cash provided by (used in) financing activities 95,088 (15,186) (6,020) --- ------- --------- --------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired --- (6,666) (27,555) --- Capital expenditures --- (21,393) (764) --- Increase in other assets --- (2,879) (7) --- ------- --------- --------- -------- Net cash used in investing activities --- (30,938) (28,326) --- ------- --------- --------- -------- INCREASE IN CASH --- 3,614 2,046 --- CASH, beginning of period --- 3,020 378 --- ------- --------- --------- -------- CASH, end of period $ --- $ 6,634 $ 2,424 $ --- ======= ========= ========= ========
Consolidated ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 16,454 Adjustments to reconcile net income to cash provided by (used in) operating activities -- Depreciation and amortization 18,839 Amortization of deferred compensation 270 Amortization of gain on sale of real estate (78) Provision for doubtful accounts 46,223 Undistributed earnings of minority shareholder 4 Change in assets and liabilities, net of effect of businesses acquired -- Increase in accounts receivable (97,827) Increase in inventories (2,223) Increase (decrease) in prepaid expenses and other (2,126) (Increase) decrease in due to/from affiliates --- Increase (decrease) in accounts payable 1,152 Increase (decrease) in accrued liabilities 3,536 and other liabilities Increase (decrease) in non-refundable subscription income 46 Increase in deferred income taxes 6,772 -------- Net cash provided by (used in) operating activities (8,958) -------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 145,805 Repayments on revolving credit facility, net (53,500) Repayment of debt and capital lease obligations (23,499) Borrowings of debt 2,293 Issuance of common stock 2,783 -------- Net cash provided by (used in) financing activities 73,882 -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for businesses acquired (34,221) Capital expenditures (22,157) Increase in other assets (2,886) -------- Net cash used in investing activities (59,264) -------- INCREASE IN CASH 5,660 CASH, beginning of period 3,398 -------- CASH, end of period $ 9,058 ========
16 17 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 March 31, 1999. 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 rates for the three months and nine months ended March 31, 1999 were 5.1% and 5.2%, respectively. As a result of this swap agreement interest expense was reduced during the three months and nine months ended March 31, 1999 by approximately $72,000 and $98,000, respectively. 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. (6) RESTRUCTURING CHARGE During the nine months ended March 31, 1999, 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 March 31, 1999. As of March 31, 1999, the balance of the allowance 17 18 for severance payments was $2.4 million. The allowance is included in accrued liabilities in the accompanying consolidated balance sheets. (7) 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 and nine months ended March 31, 1999 and 1998 is a follows (in thousands, except per share amounts):
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998 --------------------------------- --------------------------------- Income Share Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic EPS $4,711 14,524 $0.32 $6,372 13,631 $0.47 ===== ===== Effect of stock options -- 186 -- 679 ------ ------ ------ ------ Diluted EPS $4,711 14,710 $0.32 $6,372 14,310 $0.45 ====== ====== ===== ====== ====== =====
Nine Months Ended March 31, 1999 Nine Months Ended March 31, 1998 -------------------------------- -------------------------------- Income Shares Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic EPS $12,412 14,420 $0.86 $16,454 13,332 $1.23 ===== ===== Effect of stock options -- 212 -- 636 ------- ------ ------- ------ Diluted EPS $12,412 14,632 $0.85 $16,454 13,968 $1.18 ======= ====== ===== ======= ====== =====
18 19 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 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 service areas and new service areas 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 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 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 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 the Company's service areas and is generally higher in service areas in which the calls are primarily "911" emergency ambulance service calls. Rates in the Company's service areas take into account the anticipated number of calls that may not result in transports. The Company does not separately account for expenses associated with calls that do not result in transports. Revenue generated under the 19 20 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. The Company has historically experienced, and expects to continue to experience, moderate seasonality in quarterly operating results. This seasonality includes relatively higher demand in the third quarter, as compared to the fourth quarter, for transport services in the Company's Arizona and Florida regions resulting from the greater winter populations in those regions. Also, the Company's Argentine operations experience greater utilization of services by customers under capitated service arrangements in the fourth quarter, as compared to the third quarter, as South America enters into its winter season. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 REVENUE Total revenue increased $13.1 million, or 10.1%, from $129.8 million for the three months ended March 31, 1998 to $142.9 million for the three months ended March 31, 1999. Ambulance services revenue increased $12.5 million, or 11.6%, from $107.3 million for the three months ended March 31, 1998 to $119.8 million for the three months ended March 31, 1999, primarily as a result of acquisitions during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999. Domestic ambulance services revenue in areas served by the Company in both of the three month periods ended March 31, 1999 and 1998 increased by 5.5%. Fire protection services revenue increased by $0.9 million, or 7.8%, from $11.5 million for the three months ended March 31, 1998 to $12.4 million for the three months ended March 31, 1999. Other revenue decreased by $0.2 million, or 1.8%, in the three months ended March 31, 1999 compared to the three months ended March 31, 1999. Total domestic ambulance transports increased by 4,000, or 1.2%, from 326,000 for the three months ended March 31, 1998 to 330,000 for the three months ended March 31, 1999. The acquisition of ambulance service companies during the last quarter 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. Included in other revenue for the three months ended March 31, 1999 was $1.0 million of other revenue related to accelerated payments received from a tenant in connection with the early termination of a real estate lease. No expenses were associated with these accelerated payments. Other revenue, excluding the $1.0 million item noted above, decreased due to the lower volume of alternative transportation services. 20 21 OPERATING EXPENSES Payroll and employee benefit expenses increased $6.4 million, or 9.3%, from $68.6 million for the three months ended March 31, 1998 to $75.0 million for the three months ended March 31, 1999. This increase was primarily due to acquisitions during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999 and due to higher average labor costs in certain service areas. The Company expects 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. Payroll and employee benefits expense decreased from 52.9% of total revenue for the three months ended March 31, 1998 to 52.4% of total revenue for the three months ended March 31, 1999. Provision for doubtful accounts increased $3.5 million, or 20.1%, from $17.4 million for the three months ended March 31, 1998 to $20.9 million for the three months ended March 31, 1999. Provision for doubtful accounts increased from 13.4% of total revenue for the three months ended March 31, 1998 to 14.6% of total revenue for the three months ended March 31, 1999 and increased from 17.5% of domestic ambulance service revenue for the three months ended March 31, 1998 to 19.5% of domestic ambulance service revenue for the three months ended March 31, 1999. The increase in 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. The Company expects this more difficult reimbursement environment to continue for the foreseeable future. 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 11.5% of total net accounts receivable at March 31, 1999. The Company continues to review the benefits and timing of integrating its remaining three non-integrated billing centers. Depreciation increased $1.2 million, or 24.4%, from $4.9 million for the three months ended March 31, 1998 to $6.1 million for the three months ended March 31, 1999, primarily as a result of increased property and equipment from recent acquisition activity. Depreciation was 3.8% and 4.3% of total revenue for the three months ended March 31, 1998 and 1999, respectively. Amortization of intangibles increased $0.1 million, or 5.0%, from $2.0 million for the three months ended March 31, 1998 to $2.1 for the three months ended March 31, 1999. This increase is primarily a result of increased intangible assets caused by recent acquisition activity. Amortization of intangibles was 1.5% of total revenue for both three month periods ended March 31, 1998 and 1999. Other operating expenses increased approximately $2.5 million, or 11.1%, from $22.6 million for the three months ended March 31, 1998 to $25.1 million for the three months ended March 31, 1999, primarily due to increased expenses associated with the operation of companies acquired during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999. Other operating expenses increased from 17.4% of total revenue for the three months ended March 31, 1998 to 17.6% of total revenue for the three 21 22 months ended March 31, 1999. The increasing price of fuel in the United States is expected to impact other operating expenses in the fourth quarter of fiscal 1999. Interest expense increased $1.8 million from $3.7 million for the three months ended March 31, 1998 to $5.5 million for the three months ended March 31, 1999. 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 7?% Senior Notes due 2008 that occurred near the end of the third quarter of fiscal 1998. The Company's effective tax rate increased from 41.0% for the three months ended March 31, 1998 to 42.0% for the three months ended March 31, 1999, primarily the result of the effect of nondeductible goodwill amortization applied against earnings. NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998 REVENUE Total revenue increased $82.4 million, or 24.3%, from $338.9 million for the nine months ended March 31, 1998 to $421.3 million for the nine months ended March 31, 1999. Ambulance services revenue increased $77.2 million, or 28.1%, from $274.6 million for the nine months ended March 31, 1998 to $351.8 million for the nine months ended March 31, 1999, primarily as a result of acquisitions during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999. Domestic ambulance services revenue in areas served by the Company in both of the nine month periods ended March 31 1998 and 1999 increased by approximately 5.9%. Fire protection services revenue increased by $3.5 million, or 10.3%, from $34.1 million for the nine months ended March 31, 1998 to $37.6 million for the nine months ended March 31, 1999. Other revenue increased by $1.8 million, or 6.0%, in the nine months ended March 31, 1999. Total domestic ambulance transports increased by 94,000, or 10.6%, from 890,000 for the nine months ended March 31, 1998 to 984,000 for the nine months ended March 31, 1999. The acquisition of ambulance service companies during the last quarter 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. Included in other revenue for the nine months ended March 31, 1999 was $1.0 million of other revenue related to accelerated payments received from a tenant in connection with the early termination of a real estate lease. No expenses were associated with these accelerated payments. OPERATING EXPENSES Payroll and employee benefit expenses increased $43.0 million, or 24.0%, from $179.1 million for the nine months ended March 31, 1998 to $222.1 million for the nine months ended March 31, 1999. This increase was primarily due to acquisitions during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999 and due to higher average labor costs in certain service areas. The Company expects these higher average labor costs to continue in the future, including the increased costs associated with accounts receivable collection and HCFA compliance. Payroll and employee benefits expense decreased from 52.8% of total revenue for the nine month period ended March 31, 1998 to 52.7% of total revenue for the nine month period ended March 31, 1999. 22 23 Provision for doubtful accounts increased $14.8 million, or 32.0%, from $46.2 million for the nine months ended March 31, 1998 to $61.0 million for the nine months ended March 31, 1999. Provision for doubtful accounts increased from 13.6% of total revenue for the nine months ended March 31, 1998 to 14.5% of total revenue for the nine months ended March 31, 1999 and increased from 17.2% of domestic ambulance service revenue for the nine months ended March 31, 1998 to 19.5% of domestic ambulance service revenue for the nine months ended March 31, 1999. 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. The Company expects this more difficult reimbursement environment to continue for the forseeable future. 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 11.5% of total net accounts receivable at March 31, 1999. The Company continues to review the benefits and timing of integrating its remaining three non-integrated billing centers. Depreciation increased $4.3 million, or 31.4%, from $13.7 million for the nine months ended March 31, 1998 to $18.0 million, for the nine months ended March 31, 1999, primarily as a result of increased property and equipment from recent acquisition activity. Depreciation was 4.0% and 4.3% of total revenue for the nine months ended March 31, 1998 and 1999, respectively. Amortization of intangibles increased $1.7 million, or 32.6%, from $5.2 million for the nine months ended March 31, 1998 to $6.9 million for the nine months ended March 31, 1999. 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 nine months ended March 31, 1998 to 1.6% of total revenue for the nine months ended March 31, 1999. Other operating expenses increased approximately $15.3 million, or 26.4%, from $57.9 million for the nine months ended March 31, 1998 to $73.2 million for the nine months ended March 31, 1999, primarily due to increased expenses associated with the operation of companies acquired during the last quarter of fiscal 1998 and the first three quarters of fiscal 1999. Other operating expenses increased from 17.1% of total revenue for the nine months ended March 31, 1998 to 17.4% of total revenue for the nine months ended March 31, 1999. The increasing price of fuel in the United States is expected to impact other operating expenses in the fourth quarter of fiscal 1999. During the nine months ended March 31, 1999, 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. Management expects those severance payments will be substantially completed during fiscal 2000. Interest expense increased by $6.9 million from $9.1 million for the nine months ended March 31, 1998 to $16.0 million for the nine months ended March 31, 1999. This increase was caused by higher debt 23 24 balances and higher interest rates than historically incurred, primarily because of the issuance of $150.0 million of 7?% Senior Notes due 2008 that occurred near the end of the third quarter of fiscal 1998. The Company's effective tax rate increased from 40.7% for the nine months ended March 31, 1998 to 42.0% for the nine months ended March 31, 1999, 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 March 31, 1999, the Company had working capital of $156.7 million, including cash of $5.3 million, compared to working capital of $124.2 million, including cash of $6.5 million, at June 30, 1998. During the nine months ended March 31, 1999, the Company's cash flow provided by operating activities was $10.0 million, resulting primarily from net income for the nine month period ending March 31, 1999 of $12.4 million plus non-cash expenses of depreciation and amortization of $24.9 million and provision for doubtful accounts of $61.0 million offset by an increase in accounts receivable of $90.1 million. Cash flow used in operating activities was $9.0 million for the nine months ended March 31, 1998. Cash provided by financing activities was $23.3 million for the nine months ended March 31, 1999, 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 $34.3 million for the nine months ended March 31, 1999, primarily because of cash paid for businesses acquired, capital expenditures and increases in other assets. The Company's gross accounts receivable as of March 31, 1999 and June 30, 1998 was $223.4 million and $224.2 million, respectively. The Company's accounts receivable, net of the allowance for doubtful accounts, was $183.7 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 1.75%. At March 31, 1999 the interest rate was 6.57% 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 $113.5 million was outstanding on the revolving credit facility at March 31, 1999. Availability on the facility was approximately $45.1 million at March 31, 1999. 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 March 24 25 31, 1999. 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 rates for the three and nine months ended March 31, 1999 were 5.1% and 5.2%, respectively. As a result of this swap agreement interest expense was reduced by approximately $72,000 and $98,000 during the three months and nine months ended March 31, 1999, respectively. 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 the commercial paper rate plus 1.7%. At March 31, 1999 the interest rate was 6.7% on the lease line of credit. Approximately $2.2 million was outstanding on this line of credit at March 31, 1999. In March 1998 the Company issued $150.0 million of 7?% 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 March 31, 1999 was $231,000 and such amount is recorded as an offset to long-term debt in the consolidated financial statements. In April 1998 the Company filed a registration statement under the Securities Act relating to an exchange offer for the Notes. The registration became effective on May 14, 1998. The Notes are general unsecured obligations of the Company and are unconditionally guaranteed on a joint and several basis by substantially all of the Company's domestic wholly-owned current and future subsidiaries. See Note 3 of Notes to the Company's Consolidated Financial 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 nine months ended March 31, 1999 the Company purchased all of the issued and outstanding stock of a company that provides urgent and primary care services in three clinics in Argentina and of two companies that provide urgent home medical attention and ambulance transport services in Argentina. The Company also purchased the assets of an ambulance service provider operating in Pennsylvania and an ambulance service provider in Georgia. The combined purchase price of the operations was $20.7 million. The Company paid cash of $12.7 million, issued notes payable to sellers of $0.9 million and assumed $7.1 million of liabilities. The Company funded the cash portion of the acquisitions primarily from the Company's revolving credit facility. During the third quarter of fiscal 1999 and subsequent to March 31, 1999, the Company made investments in companies offering ambulance services, ambulance billing services and alternative transportation services. The Company contributed cash, accounts receivable and fixed assets totaling $0.8 million at March 31, 1999 and $2.6 million at May 13, 1999 to these businesses. These investments have been recorded using the cost method of accounting. 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 March 31, 1999. The Company's business growth occurs 25 26 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 the 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 made 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, 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. The negotiated rule-making process will govern rules for Medicare reimbursement to begin in 2000. 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. 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 March 31, 1999 the Company recorded a $263,000 equity adjustment (decrease) from foreign currency translation, which resulted from the weakening of the Canadian dollar and the effect it had on the Company's investment in its Canadian operations. Although the Company has not incurred any material exchange gains or losses to date, there can be no assurance that fluctuations in the currency exchange rates in the future will not have an adverse effect on the Company's business, financial condition, cash flows and results of operations. The Company does not currently engage in foreign currency hedging transactions. However, as the Company continues to expand its international operations, exposure to gains and losses on foreign currency transactions may increase. The Company may choose to limit such exposure by entering into forward exchange contracts or engaging in similar hedging strategies. YEAR 2000 COMPLIANCE The Company has implemented a Year 2000 compliance program, utilizing both internal and external resources, to ensure that the Company's principal 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 26 27 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 principal 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 principal 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. 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 27 28 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 March 31, 1999. 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 rates for the three months and nine months ended March 31, 1999 were 5.1% and 5.2%, respectively. As a result of this swap agreement interest expense was reduced by approximately $72,000 and $98,000 during the three months and nine months ended March 31, 1999, respectively. 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. 28 29 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 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (b) Reports on Form 8-K None 29 30 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: May 13, 1999 By /s/ Dean P. Hoffman --------------------------------------------------- Dean P. Hoffman, Vice President, Financial Services and Principal Accounting Officer 30 EX-27 2 EX-27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 U.S. DOLLARS 9-MOS JUN-30-1998 JUL-1-1998 MAR-31-1999 5,264 0 223,371 39,693 14,653 216,031 167,474 74,809 577,685 59,295 276,119 0 0 148 193,814 577,685 421,317 421,317 0 322,639 0 61,048 15,992 21,500 9,088 12,412 0 0 0 12,412 0.86 0.85
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