<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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) 994-3886
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At November 12, 1997 there were 13,513,448 shares of Common Stock outstanding,
exclusive of treasury shares held by the Registrant.
<PAGE> 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
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 2 (c). Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,184 $ 3,398
Accounts receivable, net 121,038 106,978
Inventories 9,117 8,645
Prepaid expenses and other 7,047 7,162
--------- ---------
Total current assets 140,386 126,183
PROPERTY AND EQUIPMENT, net 76,980 70,645
INTANGIBLE ASSETS, net 165,604 160,282
OTHER ASSETS 9,715 6,956
--------- ---------
$ 392,685 $ 364,066
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,678 $ 4,359
Accrued liabilities 29,645 20,570
Current portion of long-term debt 6,968 9,814
--------- ---------
Total current liabilities 43,291 34,743
LONG-TERM DEBT, net of current portion 159,301 144,643
NON-REFUNDABLE SUBSCRIPTION INCOME 13,605 13,367
DEFERRED INCOME TAXES 8,277 7,446
OTHER LIABILITIES 3,391 4,059
--------- ---------
Total liabilities 227,865 204,258
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 137 130
Additional paid-in capital 121,430 121,355
Retained earnings 45,090 40,334
Deferred compensation (598) (772)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 164,820 159,808
--------- ---------
$ 392,685 $ 364,066
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-3-
<PAGE> 4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended September 30,
1997 1996
------- -------
<S> <C> <C>
REVENUE
Ambulance services $77,598 $59,028
Fire protection services 11,212 10,305
Other 8,963 4,661
------- -------
Total revenue 97,773 73,994
------- -------
OPERATING EXPENSES
Payroll and employee benefits 52,235 40,634
Provision for doubtful accounts 13,214 9,755
Depreciation 4,101 2,733
Amortization of intangibles 1,464 1,090
Other operating expenses 16,413 13,190
------- -------
Total expenses 87,427 67,402
------- -------
OPERATING INCOME 10,346 6,592
INTEREST EXPENSE, net 2,451 1,010
------- -------
INCOME BEFORE INCOME TAXES 7,895 5,582
PROVISION FOR INCOME TAXES 3,237 2,283
------- -------
NET INCOME $ 4,658 $ 3,299
======= =======
EARNINGS PER COMMON STOCK
AND COMMON STOCK EQUIVALENT $ 0.35 $ 0.28
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK AND COMMON
STOCK EQUIVALENTS OUTSTANDING 13,405 11,944
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended September 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,658 $ 3,299
Adjustments to reconcile net income to cash
provided by (used in) operations --
Depreciation and amortization 5,565 3,823
Amortization of deferred compensation 174 163
Amortization of gain on sale of real estate (26) (26)
Provision for doubtful accounts 13,640 9,755
Change in assets and liabilities,
net of effect of businesses acquired --
Increase in accounts receivable (25,536) (17,645)
Increase in inventories (453) (386)
Decrease (increase) in prepaid expenses and other 730 (325)
Increase (decrease) in accounts payable 1,660 (608)
Increase (decrease) in accrued liabilities and other 5,693 (1,163)
Increase in nonrefundable subscription income 237 311
Decrease in deferred income taxes (656) (43)
-------- --------
Net cash provided by (used in) operating activities 5,686 (2,845)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on revolving credit facility, net 14,000 4,000
Repayment of debt and capital lease obligations (6,549) (1,462)
Issuance of common stock and treasury stock 75 3,727
-------- --------
Net cash provided by financing activities 7,526 6,265
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired (3,152) --
Capital expenditures (7,514) (3,537)
Increase in other assets (2,760) (526)
-------- --------
Net cash used in investing activities (13,426) (4,063)
-------- --------
DECREASE IN CASH (214) (643)
CASH, beginning of period 3,398 1,388
-------- --------
CASH, end of period $ 3,184 $ 745
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 6
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for
the three month periods ended September 30, 1997 and 1996 include all
adjustments, consisting only of normal recurring adjustments necessary
for a fair statement of the consolidated financial position and results
of operations for that period.
The results of operations for the three month periods ended September
30, 1997 and 1996 are not necessarily indicative of the results of
operations for a full fiscal year.
(2) ACQUISITIONS
During the three months ended September 30, 1997, the Company purchased
the stock of an ambulance service provider operating in
Georgia and the assets of an ambulance service provider operating in
Alabama.
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:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash $3,152
Notes payable to sellers 1,200
Assumption of liabilities 1,170
------
$5,522
</TABLE>
During the three months ended September 30, 1997, subsidiaries of the
Company merged with and into ambulance service providers operating in
Mississippi, New Jersey, New York and Tennessee. The Company issued an
aggregate of 641,009 shares of its common stock in exchange for all of
the issued and outstanding stock of the acquired companies. The
transactions were accounted for as poolings-of-interest in accordance
with APB 16. The acquisitions accounted for as poolings-of-interests
were not considered significant; accordingly, prior year financial
statements have not been restated.
The unaudited pro forma combined condensed statements of income for the
fiscal year ended June 30, 1997 and the three months ended September
30, 1997 give effect to the acquisitions as if each had been
consummated as of the beginning of each respective period.
The pro forma combined condensed financial statements do not purport to
represent what the Company's actual results of operations or financial
position would have been had such transactions in fact occurred on such
dates. The pro forma combined condensed statements of income also do
not purport to project the results of operations of the Company for the
current year or for any future period.
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<PAGE> 7
RURAL/METRO CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1997
----------------------- -----------------------
PROFORMA PROFORMA
HISTORICAL COMBINED HISTORICAL COMBINED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $319,805 $342,381 $ 97,773 $102,471
Net income $ 12,720 $ 13,863 $ 4,658 $ 4,959
Earnings per share $ 1.04 $ 1.07 $ 0.35 $ 0.36
</TABLE>
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) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" which supersedes APB 15, the existing
authoritative guidance. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December
15, 1997 and requires restatement of all prior period earnings per
share (EPS) data presented. The new statement modifies the calculation
of primary and fully diluted EPS and replaces them with basic and
diluted EPS. Pro forma EPS assuming implementation of SFAS No. 128 at
the beginning of the period for the three month periods ending
September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------- --------
<S> <C> <C>
Basic $ 0.36 $ 0.30
Diluted $ 0.35 $ 0.28
</TABLE>
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<PAGE> 8
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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.
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. Provision for doubtful accounts is
made for the expected difference between ambulance services fees 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 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 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUE
Total revenue increased $23.8 million, or 32.2%, from $74.0 million for the
three months ended September 30, 1996 to $97.8 million for the three months
ended September 30, 1997. Approximately $15.9 million of this increase resulted
from the acquisition of ambulance service providers during the last three
quarters of fiscal 1997 and the first quarter of fiscal 1998. Ambulance service
revenue in markets served by the Company in both of the three month periods
ended September 30, 1996 and 1997 increased by 4.5%. Fire protection services
revenue increased by $0.9 million, or 8.7%, for the three months ended September
30, 1997. Other revenue increased by $4.3 million, or 91.5%, in the three months
ended September 30, 1997.
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<PAGE> 9
Total ambulance transports increased by 56,000, or 27.1%, from 207,000 for the
three months ended September 30, 1996 to 263,000 for the three months ended
September 30, 1997. The acquisitions of twenty-two ambulance service companies
during the last three quarters of fiscal 1997 and the first quarter of fiscal
1998 accounted for 52,000 of these additional transports.
Fire protection services revenue increased due to revenue generated from new
fire protection contracts awarded to the Company through competitive bidding and
due to rate increases for fire protection services.
OPERATING EXPENSE
Payroll and employee benefit expenses increased $11.6 million, or 28.6%, from
$40.6 million for the three months ended September 30, 1996 to $52.2 million for
the three months ended September 30, 1997. This increase was primarily due to
the acquisition of twenty-two ambulance service providers during the last three
quarters of fiscal 1997 and the first quarter of fiscal 1998.
Provision for doubtful accounts increased $3.4 million, or 34.7%, from $9.8
million for the three months ended September 30, 1996 to $13.2 million for the
three months ended September 30, 1997. Provision for doubtful accounts increased
from 13.2% of total revenue for the three months ended September 30, 1996 to
13.5% of total revenue for the three months ended September 30, 1997, reflecting
the effect of the acquisition of ambulance service providers during the second
half of fiscal 1997 operating in markets with a greater mix of "911" emergency
activity.
Depreciation increased $1.4 million, or 51.9%, from $2.7 million for the three
months ended September 30, 1996 to $4.1 million for the three months ended
September 30, 1997, primarily as a result of increased property and equipment
caused primarily by recent acquisition activity. Depreciation increased from
3.7% of total revenue for the three months ended September 30, 1996 to 4.2% of
total revenue for the three months ended September 30, 1997.
Amortization of intangibles increased by $0.4 million, or 36.4%, from $1.1
million for the three months ended September 30, 1996 to $1.5 million for the
three months ended September 30, 1997. 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 the three months ended September
30, 1996 and 1997.
Other operating expenses increased approximately $3.2 million, or 24.2%, from
$13.2 million for the three months ended September 30, 1996 to $16.4 million for
the three months ended September 30, 1997, primarily due to increased expenses
associated with the operation of the twenty-two ambulance service providers
acquired during the last three quarters of fiscal 1997 and the first quarter of
fiscal 1998. Other operating expenses decreased from 17.8% of total revenue for
the three months ended September 30, 1996 to 16.8% of total revenue for the
three months ended September 30, 1997 as a result of operational efficiencies.
Interest expense increased by $1.5 million from $1.0 million for the three
months ended September 30, 1996 to $2.5 million for the three months ended
September 30, 1997. This increase was caused by higher debt balances reflecting
increased borrowings on the Company's revolving credit facility.
The Company's effective tax rate increased from 40.9% for the three months ended
September 30, 1996 to 41.0% for the three months ended September 30, 1997,
primarily the result of a higher percentage of the Company's taxable income
being generated in higher tax rate states and the effect of nondeductible
goodwill generated in connection with the acquisition of certain ambulance
service providers.
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, the sale of stock through an initial public offering
in July 1993, subsequent public stock offerings in May 1994 and April 1996, and
the on-going exercise of stock options.
-9-
<PAGE> 10
During the three months ended September 30, 1997 the Company generated cash flow
from operations of $5.7 million. This compares to cash flow used in operations
of $2.8 million for the three months ended September 30, 1996. This change
resulted primarily from increases in accounts payable and other accrued
liabilities.
Approximately $150.0 million was outstanding on the Company's revolving credit
facility at September 30, 1997. Availability on the facility was $21.0 million
at September 30, 1997.
During the three months ended September 30, 1997, the Company purchased the
stock of an ambulance service provider operating in Georgia and the assets of an
ambulance service provider operating in Alabama. The acquisitions were accounted
for as purchases in accordance with Accounting Principles Board Opinion No. 16
(APB 16). The aggregate purchase price was $5.5 million, consisting of cash of
$3.1 million, notes payable to sellers of $1.2 million and liabilities assumed
of $1.2 million. The Company funded the cash portion of the acquisition
primarily from the Company's revolving credit facility.
During the three months ended September 30, 1997, subsidiaries of the Company
merged with and into ambulance service providers operating in Mississippi, New
Jersey, New York and Tennessee. The Company issued 641,009 shares of its common
stock in exchange for all of the issued and outstanding stock of the acquired
companies. The transactions were accounted for as poolings-of-interest in
accordance with APB 16.
The Company expects that cash flow from operations and additional borrowing
capacity will be sufficient to meet its operating and capital needs for existing
operations as well as to fund certain service area expansion and acquisitions
for the twelve months subsequent to September 30, 1997. The Company is engaged
in an active acquisition program. The Company intends to fund any 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
financing. The availability of these capital sources will depend upon prevailing
market conditions, interest rates and the financial condition of the Company.
-10-
<PAGE> 11
RURAL/METRO CORPORATION AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 2 (c). Changes in Securities
Pursuant to a private placement under Section 4(2) of the
Securities Act, in August 1997, the Company issued 26,423
shares at $30.13 per share to the four former shareholders of
North Miss. Ambulance Service, Inc. ("NMAS") in connection
with the Company's acquisition of NMAS. In September 1997,
pursuant to Section 4(2), the Company issued 10,345 shares at
$29.00 per share to the four former shareholders of
Multi-Care Medical Car Service, Inc., and 74,138 shares at
$29.00 per share to the former shareholder of Ambulance
Transport Systems, Inc. in connection with the Company's
acquisition of such companies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27. Financial Data Schedules
(b) Reports on Form 8-K
Pursuant to an Agreement of Purchase and
Sale dated February 25, 1997, Registrant
acquired all of the issued and outstanding
stock of SW General, Inc., an Arizona
corporation.
Pursuant to an Agreement of Purchase and
Sale dated February 25, 1997, Registrant
acquired all of the issued and outstanding
stock of Southwest Ambulance of Casa Grande,
Inc., an Arizona corporation.
Pursuant to an Agreement of Purchase and
Sale dated February 25, 1997, Registrant
acquired all of the issued and outstanding
stock of Southwest General Services, Inc.,
an Arizona corporation.
Pursuant to an Agreement of Purchase and
Sale dated February 25, 1997, Registrant
acquired all of the issued and outstanding
stock of Medical Emergency Devices and
Services, Inc., an Arizona corporation.
The four transactions were reported on Form
8-K dated July 15, 1997, as amended on Form
8-K/A dated August 12, 1997.
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<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RURAL/METRO CORPORATION
Date: November 14, 1997 By /s/ Dean P. Hoffman
---------------------
Dean P. Hoffman, Vice President
and Principal Accounting Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,184
<SECURITIES> 0
<RECEIVABLES> 153,714
<ALLOWANCES> 32,676
<INVENTORY> 9,117
<CURRENT-ASSETS> 140,386
<PP&E> 123,756
<DEPRECIATION> 46,776
<TOTAL-ASSETS> 392,685
<CURRENT-LIABILITIES> 43,291
<BONDS> 166,269
0
0
<COMMON> 137
<OTHER-SE> 164,683
<TOTAL-LIABILITY-AND-EQUITY> 392,685
<SALES> 97,773
<TOTAL-REVENUES> 97,773
<CGS> 0
<TOTAL-COSTS> 74,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,214
<INTEREST-EXPENSE> 2,451
<INCOME-PRETAX> 7,895
<INCOME-TAX> 3,237
<INCOME-CONTINUING> 4,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,658
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
