<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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-22056
RURAL/METRO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 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 May 11, 1998 there were 14,163,110 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 12
Part II. Other Information
Item 2(c). Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 9,058 $ 3,398
Accounts receivable, net 169,686 106,978
Inventories 11,196 8,645
Prepaid expenses and other 16,436 7,162
--------- ---------
Total current assets 206,376 126,183
PROPERTY AND EQUIPMENT, net 88,967 70,645
INTANGIBLE ASSETS, net 231,705 160,282
OTHER ASSETS 9,842 6,956
--------- ---------
$ 536,890 $ 364,066
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,302 $ 4,359
Accrued liabilities 30,365 17,244
Current portion of long-term debt 15,452 9,814
--------- ---------
Total current liabilities 58,119 31,417
LONG-TERM DEBT, net of current portion 239,500 144,643
NON-REFUNDABLE SUBSCRIPTION INCOME 13,423 13,367
DEFERRED INCOME TAXES 20,639 10,772
OTHER LIABILITIES 9,156 4,059
--------- ---------
Total liabilities 340,837 204,258
--------- ---------
MINORITY INTEREST 8,364 --
STOCKHOLDERS' EQUITY
Common stock 143 130
Additional paid-in capital 132,727 121,355
Retained earnings 56,561 40,334
Deferred compensation (503) (772)
Treasury stock (1,239) (1,239)
--------- ---------
Total stockholders' equity 187,689 159,808
--------- ---------
$ 536,890 $ 364,066
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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<PAGE> 4
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Ambulance services $ 107,279 $69,161 $274,646 $190,654
Fire protection services 11,547 10,551 34,110 31,205
Other 10,957 5,209 30,142 14,586
--------- ------- -------- --------
Total revenue 129,783 84,921 338,898 236,445
--------- ------- -------- --------
OPERATING EXPENSES
Payroll and employee benefits 68,599 44,706 179,103 127,207
Provision for doubtful accounts 17,397 11,878 46,223 32,037
Depreciation 4,871 2,995 13,684 8,646
Amortization of intangibles 2,010 1,149 5,155 3,349
Other operating expenses 22,623 14,693 57,905 41,640
--------- ------- -------- --------
Total expenses 115,500 75,421 302,070 212,879
--------- ------- -------- --------
OPERATING INCOME 14,283 9,500 36,828 23,566
Interest expense, net 3,705 1,576 9,114 3,658
Other (126) -- 4 --
--------- ------- -------- --------
INCOME BEFORE INCOME TAXES 10,704 7,924 27,710 19,908
PROVISION FOR INCOME TAXES 4,332 3,249 11,256 8,163
--------- ------- -------- --------
NET INCOME $ 6,372 $ 4,675 $ 16,454 $ 11,745
========= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.47 $ 0.40 $ 1.23 $ 1.03
========= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.45 $ 0.38 $ 1.18 $ 0.97
========= ======= ======== ========
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 13,631 11,727 13,332 11,413
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 14,310 12,369 13,968 12,154
</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 NINE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 1997
--------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 16,454 $ 11,745
Adjustments to reconcile net income to cash
used in operations --
Depreciation and amortization 18,802 11,995
Amortization of deferred compensation 270 502
Amortization of gain on sale of real estate (78) (78)
Provision for doubtful accounts 45,604 32,037
Undistributed earnings of minority shareholder 4 --
Change in assets and liabilities,
net of effect of businesses acquired --
Increase in accounts receivable (97,827) (56,523)
Increase in inventories (2,223) (1,328)
Increase in prepaid expenses and other (2,126) (1,036)
Increase (decrease) in accounts payable 1,152 (479)
Increase (decrease) in accrued liabilities and other 4,192 (4,785)
Increase in non-refundable subscription income 46 373
Increase in deferred income taxes 6,772 195
--------- --------
Net cash used in operating activities (8,958) (7,382)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes 145,805 --
(Repayments) borrowings on revolving credit facility, net (53,500) 45,200
Repayment of debt and capital lease obligations (23,499) (17,221)
Borrowings of debt 2,293 --
Issuance of common stock 2,783 8,076
--------- --------
Net cash provided by financing activities 73,882 36,055
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Cash paid for businesses acquired (34,221) (12,616)
Capital expenditures (22,157) (14,049)
Increase in other assets (2,886) (2,666)
--------- --------
Net cash used in investing activities (59,264) (29,331)
--------- --------
INCREASE (DECREASE) IN CASH 5,660 (658)
CASH, beginning of period 3,398 1,388
--------- --------
CASH, end of period $ 9,058 $ 730
========= ========
</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
MARCH 31, 1998
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements.
(1) INTERIM RESULTS
In the opinion of management, the consolidated financial statements for
the three and nine month periods ended March 31, 1998 and 1997 include
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the consolidated financial position
and results of operations for that period.
The results of operations for the three month and nine month periods
ended March 31, 1998 and 1997 are not necessarily indicative of the
results of operations for a full fiscal year.
(2) ACQUISITIONS
During the nine months ended March 31, 1998 the Company purchased all
of the issued and outstanding stock of ambulance service providers
operating in Arizona and Georgia and the assets of ambulance service
providers operating in Alabama, Maryland, New Jersey and South
Carolina. Also, during the nine months ended March 31, 1998 the Company
purchased all of the issued and outstanding stock of four operating
companies that provide urgent home medical attention and ambulance
transport services in three cities in Argentina.
These 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 $34,221
Rural/Metro common stock 8,520
Notes payable to sellers 6,470
Assumption of liabilities 28,109
-------
$77,320
=======
</TABLE>
During the nine months ended March 31, 1998, subsidiaries of the
Company merged with and into ambulance service providers operating in
Idaho, Mississippi, New Jersey, New York, Tennessee and Washington. The
Company issued an aggregate of 821,747 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 were not considered
significant; accordingly, prior year financial statements have not been
restated.
During the nine months ended March 31, 1998, the Company entered into a
joint venture to provide non-emergency ambulance service and medical
transportation in Maryland, Washington D.C. and northern Virginia. For
financial statement purposes, the results of operations and the assets
and liabilities of the joint venture are consolidated and included in
the accompanying consolidated
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<PAGE> 7
financial statements. Minority interest is recorded for the results of
operations and the equity interest attributable to the joint venture
partner.
The unaudited pro forma combined condensed statements of income for the
fiscal year ended June 30, 1997 and the nine months ended March 31,
1998 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.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1997 MARCH 31, 1998
----------------------- ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PROFORMA PROFORMA
HISTORICAL COMBINED HISTORICAL COMBINED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenue $ 319,805 $ 481,387 $ 338,898 $ 393,575
Net income $ 12,720 $ 18,889 $ 16,454 $ 18,644
Earnings per share - basic $ 1.10 $ 1.40 $ 1.23 $ 1.34
Earnings per share - diluted $ 1.04 $ 1.31 $ 1.18 $ 1.28
</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.
(2) CREDIT AGREEMENTS AND BORROWINGS
On March 16, 1998, the Company issued $150.0 million of 7 7/8% Senior
Notes due 2008 (the Notes) effected under Rule 144A under the
Securities Act of 1933 as amended (Securities Act). A portion of the
net proceeds of the offering, sold through private placement
transactions, was used to repay certain indebtedness. Interest under
the Notes is payable semi-annually commencing September 15, 1998, and
the Notes are not callable until March 2003 subject to the terms of the
Note Agreement. The Company incurred expenses related to the offering
of approximately $4.9 million and will amortize such costs over the
life of the Notes. In April 1998, the Company filed a registration
statement under the Securities Act relating to an exchange offer for
the Notes. Such registration became effective on May 14, 1998. The
Notes are general unsecured obligations of the Company and are
unconditionally guaranteed on a joint and several basis by
substantially all of the Company's domestic wholly-owned current and
future subsidiaries. The Notes contain certain covenants which, among
other things, limit the Company's ability to incur any indebtedness,
sell assets, or enter into certain mergers or consolidations. The
financial statements presented below include the separate or
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<PAGE> 8
combined financial position, results of operations and cash flows for
the nine months ended March 31, 1998 of Rural/Metro Corporation and the
guarantor subsidiaries (Parent/Guarantors) and the subsidiaries which
are not guarantors (Non-guarantors).
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<PAGE> 9
RURAL/METRO CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent/Guarantors Non-Guarantors Eliminating Consolidated
----------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,633 $ 2,425 $ -- $ 9,058
Accounts receivable, net 157,553 12,133 -- 169,686
Inventories 10,725 471 -- 11,196
Prepaid expenses and other 13,342 3,094 -- 16,436
--------- -------- --------- ---------
Total current assets 188,253 18,123 -- 206,376
PROPERTY AND EQUIPMENT, net 83,940 5,027 -- 88,967
INTANGIBLE ASSETS, net 168,037 63,668 -- 231,705
OTHER ASSETS 35,885 (35,885) -- --
DUE TO/FROM AFFILIATES 9,835 7 -- 9,842
INVESTMENT IN SUBSIDIARIES 192,531 873 (193,404) --
--------- -------- --------- ---------
$ 678,481 $ 51,813 $(193,404) $ 536,890
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,588 $ 4,714 $ -- $ 12,302
Accrued liabilities 18,955 11,410 -- 30,365
Current portion of long-term debt 14,806 646 -- 15,452
--------- -------- --------- ---------
Total current liabilities 41,349 16,770 -- 58,119
LONG-TERM DEBT, net of current portion 238,437 1,063 -- 239,500
NON-REFUNDABLE SUBSCRIPTION INCOME 13,306 117 -- 13,423
DEFERRED INCOME TAXES 20,639 -- -- 20,639
OTHER LIABILITIES 7,262 1,894 -- 9,156
--------- -------- --------- ---------
Total liabilities 320,993 19,844 -- 340,837
--------- -------- --------- ---------
MINORITY INTEREST -- -- 8,364 8,364
STOCKHOLDERS' EQUITY
Common stock 6,614 18 (6,489) 143
Additional paid-in capital 296,488 31,154 (194,915) 132,727
Retained earnings 56,128 797 (364) 56,561
Deferred compensation (503) -- -- (503)
Treasury stock (1,239) -- -- (1,239)
--------- -------- --------- ---------
Total stockholders' equity 357,488 31,969 (201,768) 187,689
--------- -------- --------- ---------
$ 678,481 $ 51,813 $(193,404) $ 536,890
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-9-
<PAGE> 10
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent/Guarantors Non-Guarantors Eliminating Consolidated
----------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
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 4,738 417 -- 5,155
Other operating expenses 52,420 5,485 -- 57,905
-------- -------- ---- --------
Total expenses 276,814 25,256 -- 302,070
-------- -------- ---- --------
OPERATING INCOME 37,114 (286) -- 36,828
Interest expense, net 8,868 246 -- 9,114
Other -- -- 4 4
-------- -------- ---- --------
INCOME BEFORE INCOME TAXES 28,246 (532) (4) 27,710
PROVISION FOR INCOME TAXES 11,267 (11) -- 11,256
-------- -------- ---- --------
NET INCOME $ 16,979 $ (521) $(4) $ 16,454
======== ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 11
RURAL/METRO CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent/Guarantors Non-Guarantors Eliminating
----------------- -------------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 16,979 $ (521) $(4)
Adjustments to reconcile net income to cash
used in operations --
Depreciation and amortization 17,895 907 --
Amortization of deferred compensation 270 -- --
Amortization of gain on sale of real estate (78) -- --
Provision for doubtful accounts 42,927 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 (2,351) 225 --
(Increase) decrease in due to/from affiliates (41,428) 41,428 --
Increase (decrease) in accounts payable 1,264 (112) --
Increase (decrease) in accrued liabilities and other 4,388 (196) --
Increase (decrease) in non-refundable subscription income (10) 56 --
Increase in deferred income taxes 6,772 -- --
--------- -------- ----
Net cash (used in) provided by operating activities (45,350) 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 79,902 (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 $ --
========= ======== ====
</TABLE>
<TABLE>
<CAPTION>
Consolidated
------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 16,454
Adjustments to reconcile net income to cash
used in operations --
Depreciation and amortization 18,802
Amortization of deferred compensation 270
Amortization of gain on sale of real estate (78)
Provision for doubtful accounts 45,604
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 and other 4,192
Increase (decrease) in non-refundable subscription income 46
Increase in deferred income taxes 6,772
---------
Net cash (used in) provided by 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
=========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-11-
<PAGE> 12
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. The Company's Argentine operations have customers who pre-pay monthly
for urgent home medical attention and ambulance transport services under a
capitated service arrangement. Revenue generated from the Company's Canadian
operations is recorded based upon contractual agreements with the Ontario
Ministry of Health. 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 for domestic operations 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
charged and amounts actually collected. The Company's provision for doubtful
accounts generally is higher with respect to collections to be derived directly
from patients than for collections to be derived from third-party payors and
generally is higher for "911" emergency ambulance services than for general
ambulance transport services.
Because of the nature of the Company's ambulance services, it is necessary to
respond to a number of calls, primarily "911" emergency ambulance service calls,
which may not result in transports. Results of operations are discussed below on
the basis of actual transports since transports are more directly related to
revenue. Expenses associated with calls that do not result in transports are
included in operating expenses. The percentage of calls not resulting in
transports varies substantially depending upon the mix of general transport and
"911" emergency ambulance service calls in the Company's markets and is
generally higher in markets in which the calls are primarily "911" emergency
ambulance service calls. Rates in the Company's markets take into account the
anticipated number of calls that may not result in transports. The Company does
not separately account for expenses associated with calls that do not result in
transports. Revenue generated under the Company's capitated service arrangements
in Argentina and contractual agreements in Canada is included in ambulance
services revenue on the accompanying financial statements.
Revenue generated under fire protection services contracts is recognized over
the life of the contract. Subscription fees received in advance are deferred and
recognized over the term of the subscription agreement, which generally is one
year.
Other revenue consists primarily of fees associated with alternative
transportation, dispatch, fleet, billing and home health care services and is
recognized when the services are provided.
Other operating expenses consist primarily of rent and related occupancy
expenses, maintenance and repairs, insurance, fuel and supplies, travel and
professional fees.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUE
Total revenue increased $44.9 million, or 52.9%, from $84.9 million for the
three months ended March 31, 1997 to $129.8 million for the three months ended
March 31, 1998. Approximately $35.5 million of this
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<PAGE> 13
increase resulted from acquisitions during the last quarter of fiscal 1997 and
the first three quarters of fiscal 1998. Ambulance service revenue in markets
served by the Company in both of the three month periods ended March 31, 1998
and 1997 increased by 5.5%. Fire protection services revenue increased by $0.9
million, or 8.5%, from $10.6 million for the three months ended March 31, 1997
to $11.5 million for the three months ended March 31, 1998. Other revenue
increased by $5.8 million, or 111.5%, in the three months ended March 31, 1998
compared to the three months ended March 31, 1997.
Total ambulance transports increased by 82,000 , or 33.6%, from 244,000 for the
three months ended March 31, 1997 to 326,000 for the three months ended March
31, 1998. The acquisition of ambulance service companies during the last quarter
of fiscal 1997 and the first three quarters of fiscal 1998 accounted for 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.
Other revenue increased primarily because of fees received for providing
billing, dispatch and other services pursuant to the Company's agreement with
San Diego Fire and Life Safety Services.
OPERATING EXPENSES
Payroll and employee benefits increased $23.9 million, or 53.5%, from $44.7
million for the three months ended March 31, 1997 to $68.6 million for the three
months ended March 31, 1998. This increase was primarily due to acquisitions
during the last quarter of fiscal 1997 and the first three quarters of fiscal
1998.
Provision for doubtful accounts increased $5.5 million, or 46.2%, from $11.9
million for the three months ended March 31, 1997 to $17.4 million for the three
months ended March 31, 1998, primarily the result of increased revenue from both
acquisitions and internal growth.
Depreciation increased $1.9 million, or 63.3%, from $3.0 million for the three
months ended March 31, 1997 to $4.9 million for the three months ended March 31,
1998, primarily as a result of depreciation expense on property and equipment
obtained through recent acquisition activity. Depreciation increased from 3.5%
of total revenue for the three months ended March 31, 1997 to 3.8% of total
revenue for the three months ended March 31, 1998.
Amortization of intangibles increased by $0.9 million, or 81.8%, from $1.1
million for the three months ended March 31, 1997 to $2.0 million for the three
months ended March 31, 1998. This increase is primarily due to increased
intangible assets which are the result of recent acquisition activity.
Amortization of intangibles increased from 1.3% of total revenue for the three
months ended March 31, 1997 to 1.5% of total revenue for the three months ended
March 31, 1998.
Other operating expenses increased approximately $7.9 million, or 53.7%, from
$14.7 million for the three months ended March 31, 1997 to $22.6 million for the
three months ended March 31, 1998, primarily due to increased expenses
associated with the operation of companies acquired during the last quarter of
fiscal 1997 and the first three quarters of fiscal 1998. Other operating
expenses increased from 17.3% of total revenue for the three months ended March
31, 1997 to 17.4% of total revenue for the three months ended March 31, 1998.
Interest expense increased $2.1 million from $1.6 million for the three months
ended March 31, 1997 to $3.7 million for the three months ended March 31, 1998.
This increase was caused by higher debt balances outstanding reflecting the
issuance of $150.0 million of Senior Notes during the period.
The Company's effective tax rate was 41.0% for both the three month periods
ended March 31, 1997 and 1998.
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<PAGE> 14
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
REVENUE
Total revenue increased $102.5 million, or 43.4%, from $236.4 million for the
nine months ended March 31, 1997 to $338.9 million for the nine months ended
March 31, 1998. Approximately $78.1 million of this increase resulted from
acquisitions during the last quarter of fiscal 1997 and the first three quarters
of fiscal 1998. Ambulance service revenue in markets served by the Company in
both of the nine month periods ended March 31, 1997 and 1998 increased by 5.1%.
Fire protection services revenue increased by $2.9 million, or 9.3%, from $31.2
million for the nine months ended March 31, 1997 to $34.1 million for the nine
months ended March 31, 1998. Other revenue increased by $15.5 million, or
106.2%, in the nine months ended March 31, 1997 compared to the nine months
ended March 31, 1998.
Total ambulance transports increased by 222,000, or 33.2%, from 668,000 for the
nine months ended March 31, 1997 to 890,000 for the nine months ended March 31,
1998. The acquisition of ambulance service companies during the last quarter of
fiscal 1997 and the first three quarters of fiscal 1998 accounted for 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.
Other revenue increased primarily because of fees received for providing
billing, dispatch and other services pursuant to the Company's agreement with
San Diego Fire and Life Safety Services.
OPERATING EXPENSES
Payroll and employee benefits increased $51.9 million, or 40.8%, from $127.2
million for the nine months ended March 31, 1997 to $179.1 million for the nine
months ended March 31, 1998. This increase was primarily due to acquisitions
during the last quarter of fiscal 1997 and the first three quarters of fiscal
1998.
Provision for doubtful accounts increased $14.2 million, or 44.4%, from $32.0
million for the nine months ended March 31, 1997 to $46.2 million for the nine
months ended March 31, 1998, primarily as a result of increased revenue from
both acquisitions and internal growth.
Depreciation increased $5.1 million, or 59.3%, from $8.6 million for the nine
months ended March 31, 1997 to $13.7 million for the nine months ended March 31,
1998, primarily as a result of depreciation expense on property and equipment
obtained through recent acquisition activity. Depreciation increased from 3.6%
of total revenue for the nine months ended March 31, 1997 to 4.0% of total
revenue for the nine months ended March 31, 1998.
Amortization of intangibles increased by $1.9 million, or 57.6%, from $3.3
million for the nine months ended March 31, 1997 to $5.2 million for the nine
months ended March 31, 1998. This increase is primarily a result of intangible
assets recorded in recent acquisitions. Amortization of intangibles increased
from 1.4% of total revenue for the nine months ended March 31, 1997 to 1.5% of
total revenue for the nine months ended March 31, 1998.
Other operating expenses increased $16.3 million, or 39.2%, from $41.6 million
for the nine months ended March 31, 1997 to $57.9 million for the nine months
ended March 31, 1998, primarily due to increased expenses associated with the
operation of companies acquired during the last quarter of fiscal 1997 and the
first three quarters of fiscal 1998. Other operating expenses decreased from
17.6% of total revenue for the nine months ended March 31, 1997 to 17.1% of
total revenue for the nine months ended March 31, 1998, as a result of
operational efficiencies realized through the integration of these acquired
companies.
-14-
<PAGE> 15
Interest expense increased by $5.4 million from $3.7 million for the nine months
ended March 31, 1997 to $9.1 million for the nine months ended March 31, 1998.
This increase was caused by higher debt balances outstanding reflecting the
issuance of $150.0 million of Senior Notes during the period.
The Company's effective tax rate decreased from 41.0% for the nine months ended
March 31, 1997 to 40.7% for the nine months ended March 31, 1998, primarily the
result of tax planning strategies implemented by the Company during fiscal 1996.
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 stock through
an initial public offering in July 1993 and subsequent public stock offerings in
May 1994 and April 1996, and the on-going exercise of stock options.
At March 31, 1998, the Company had working capital of $148.3 million, including
cash of $9.1 million, compared to working capital of $94.8 million, including
cash of $3.4 million at June 30, 1997. During the nine months ended March 31,
1998, the Company used cash flow from operations of $9.0 million. This compares
to cash flow used in operations of $7.4 million for the nine months ended March
31, 1997. This change resulted primarily from increases in accounts receivable
and inventories partially offset by an increase in accrued liabilities.
The Company's gross accounts receivable as of March 31, 1998 and June 30, 1997
were $219.0 million and $142.8 million, respectively. The Company's accounts
receivable, net of the allowance for doubtful accounts, were $169.7 million and
$107.0 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
toward 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.
During the nine months ended March 31, 1998, the Company increased the amount of
its revolving credit facility from $175.0 million to $200.0 million. The
revolving credit facility was also amended by extending the maturity date to
March 16, 2003 and converting it to an unsecured credit facility. The revolving
credit facility is priced at prime rate, Federal Fund Rate plus 0.5% or a
LIBOR-based rate. The LIBOR-based rates range from LIBOR plus 0.875% to LIBOR
plus 1.7%. Interest rates and availability under the revolving credit facility
are dependent upon the Company meeting certain financial covenants.
Approximately $82.5 million was outstanding on the revolving credit facility at
March 31, 1998. Availability on the facility was $24.2 million at March 31,
1998.
In November 1997, the Company entered into a $5.0 million term loan (Term
Loan). The Company used the proceeds from the loan to fund acquisitions,
capital expenditures and for general corporate purposes.
In February 1998, the Company entered into a $5.0 million capital equipment
lease line of credit. Approximately $1.5 million was outstanding on this line of
credit at March 31, 1998.
On March 16, 1998, the Company issued $150.0 million of 7 7/8% Senior Notes due
2008 (the Notes) effected under Rule 144A under the Securities Act of 1933 as
amended (Securities Act). A portion of 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
-15-
<PAGE> 16
commencing September 15, 1998, and the Notes are not callable until March 2003
subject to the terms of the Note Agreement. The Company incurred expenses
related to the offering of approximately $4.9 million and will amortize such
costs over the life of the Notes. In April 1998, the Company filed a
registration statement under the Securities Act relating to an exchange offer
for the Notes. Such registration became effective on May 14, 1998. The Notes are
general unsecured obligations of the Company and are unconditionally guaranteed
on a joint and several basis by substantially all of the Company's domestic
wholly-owned current and future subsidiaries. The Notes contain certain
covenants which, among other things, limit the Company's ability to incur any
indebtedness, sell assets, or enter into certain mergers or consolidations.
During the nine months ended March 31, 1998, the Company purchased all of the
issued and outstanding stock of two ambulance service providers operating in
Arizona and Georgia, and the assets of four ambulance service providers
operating in Alabama, Maryland, New Jersey and South Carolina. Also, during the
nine months ended March 31, 1998, the Company purchased all of the issued and
outstanding stock of four operating companies that provide urgent home medical
attention and ambulance transport services in three cities in Argentina. The
combined purchase price of the operations accounted for as purchases was $77.3
million. The Company paid cash of $34.2 million, issued notes payable to sellers
of $6.5 million, issued to sellers 311,330 shares of the Company's common stock
valued at $8.5 million, and assumed $28.1 million of liabilities. The Company
funded the cash portion of the acquisitions primarily from the Company's
revolving credit facility.
During the nine months ended March 31, 1998, subsidiaries of the Company merged
with and into three ambulance service providers operating in Idaho, Mississippi,
New Jersey, New York, Tennessee and Washington. The Company issued an aggregate
of 803,565 shares of its common stock in exchange for all of the issued and
outstanding stock of the acquired companies. These transactions were accounted
for as poolings-of-interest in accordance with Accounting Principles Board
Opinion No. 16. The acquisitions were not considered significant; accordingly,
prior year financial statements have not been restated.
During the nine months ended March 31, 1998 the Company entered into a joint
venture to provide non-emergency ambulance service and medical transportation in
Maryland, Washington D.C. and northern Virginia. For financial statement
purposes, the results of operations and the assets and liabilities of the joint
venture are consolidated and included in the accompanying consolidated financial
statements. Minority interest is recorded for the results of operations and the
equity interest attributable to the joint venture partner.
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 expansions and acquisitions
for the twelve months subsequent to March 31, 1998. The Company is engaged in an
active acquisition program. In addition to using cash from operations, credit
facilities, seller notes payable and the issuance of common stock, the Company
may seek to raise additional capital through public or private debt or equity
financing to fund acquisitions. The availability and desirability of these
capital sources will depend upon prevailing market conditions, interest rates
and the financial condition of the Company. There can be no assurance such
financing will be available on favorable terms, if at all.
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. 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.
-16-
<PAGE> 17
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 compliance program designed to ensure
that the Company's medical equipment, computer systems and applications will
function properly beyond 1999. Although the Company believes that it has
allocated adequate resources for this purpose and expects its Year 2000 date
conversion program to be completed on a timely basis without incurring
significant expenditures to address this issue, there can be no assurance that
the Company will not experience unforseen difficulties. The failure by medical
equipment suppliers or third-party payors, such as private insurers, managed
care providers, healthcare 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 or otherwise adversely affect the Company's business,
financial condition, cash flows and results of operations.
-17-
<PAGE> 18
PART II - OTHER INFORMATION
Item 2.(c) Changes in Securities
Pursuant to a private placement under Section 4(2) of the
Securities Act, in February 1998, the Company issued
81,275 shares at $33.83 per share to the former
shareholders of United Medical Services, Inc. ("UMS") in
connection with the Company's acquisition of UMS.
Pursuant to a private placement under Section 4(2) of the
Securities Act, in March 1998, the Registrant issued
$150.0 million 77/8% senior notes due 2008 to four
initial purchasers in a Rule 144A transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedules
(b) Reports on Form 8-K
Pursuant to a Purchase Agreement dated January 16, 1998
and a Complementary Agreement dated March 26, 1998
between Registrant as buyer and Messrs. Horacio
Artagaveytia, Jose Mateo Campomar, Alberto Fluerquin,
Carlos Mezzera, Renato Ribeiro, Gervasio Reyes and Carlos
Arturo Delmiro Marfetan, the Registrant acquired all of
the issued and outstanding stock of Peimu S.A., Recor
S.A., Marlon S.A. and Semercor S.A. The transaction was
reported on Form 8-K dated April 1, 1998.
On February 27, 1998, the Registrant filed a Form 8-K
announcing the Registrant's 144A Senior Note offering.
-18-
<PAGE> 19
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 15, 1998 By /s/ Dean P. Hoffman
---------------------
Dean P. Hoffman, Vice President
and Principal Accounting Officer
-19-
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