<PAGE> 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.
<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
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
<PAGE> 3
RURAL/METRO CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
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
========= =========
</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 AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
((UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
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 $ --
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
RURAL/METRO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 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:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash $12,665
Notes payable to sellers 872
Assumption of liabilities 7,104
-----
$20,641
=======
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
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
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
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
</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.
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
<PAGE> 9
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- ------------- ----------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
9
<PAGE> 10
RURAL/METRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- ------------- ----------- ------------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
<S> <C> <C> <C> <C> <C>
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
======= ========= ========= ========= =========
</TABLE>
11
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <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 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
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating Consolidated
------ ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
15
<PAGE> 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)
<TABLE>
<CAPTION>
Parent Guarantors Non-Guarantors Eliminating
------ ---------- -------------- -----------
<S> <C> <C> <C> <C>
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 $ ---
======= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Consolidated
------------
<S> <C>
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
========
</TABLE>
16
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
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
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
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
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
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
======= ====== ===== ======= ====== =====
</TABLE>
18
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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