UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

Or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                 to               

 

Commission file numbers:

 

001-32701

 

333-127115

 


 

 

EMERGENCY MEDICAL SERVICES CORPORATION

EMERGENCY MEDICAL SERVICES L.P.

 

(Exact name of Registrants as Specified in their Charters)

 

 

20-3738384

Delaware

20-2076535

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification Numbers)

 

 

6200 S. Syracuse Way, Suite 200

 

Greenwood Village, CO

80111

(Address of principal executive offices)

(Zip Code)

 

Registrants’ telephone number, including area code: 303-495-1200

Former name, former address and former fiscal year, if changed since last report:

Not applicable

 


 

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  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o                                   Accelerated filer  x                                                   Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).  Yes  o No  x

 

Shares of class A common stock outstanding at November ­1, 2007 — 9,320,347; shares of class B common stock outstanding at November ­­1, 2007 — 142,545; LP exchangeable units outstanding at November ­­1, 2007 — 32,107,500.

 

 

 



 

 

EMERGENCY MEDICAL SERVICES CORPORATION

 

INDEX TO QUARTERLY REPORT

 

ON FORM 10-Q

 

FOR THE THREE AND NINE MONTHS ENDED

 

SEPTEMBER 30, 2007

Part 1. Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 6.

Exhibits

 

 

 

Signatures

 

 



 

EMERGENCY MEDICAL SERVICES CORPORATION

PART I. FINANCIAL INFORMATION

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2007

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

Emergency Medical Services Corporation

Consolidated Statements of Operations and Comprehensive Income

(unaudited; in thousands, except share and per share data)

 

 

 

Quarter ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net revenue

 

$

529,752

 

$

485,697

 

$

1,569,783

 

$

1,433,272

 

Compensation and benefits

 

366,835

 

333,406

 

1,079,076

 

990,380

 

Operating expenses

 

82,473

 

80,513

 

238,731

 

216,170

 

Insurance expense

 

13,465

 

13,714

 

51,242

 

58,510

 

Selling, general and administrative expenses

 

15,876

 

14,660

 

44,082

 

42,669

 

Depreciation and amortization expense

 

17,809

 

16,841

 

52,165

 

49,045

 

Restructuring charges

 

 

267

 

2,242

 

1,186

 

Income from operations

 

33,294

 

26,296

 

102,245

 

75,312

 

Interest income from restricted assets

 

1,919

 

1,603

 

5,294

 

4,288

 

Interest expense

 

(12,652

)

(11,532

)

(35,281

)

(34,269

)

Realized gain (loss) on investments

 

9

 

88

 

68

 

(437

)

Interest and other income

 

602

 

532

 

1,791

 

1,664

 

Loss on early debt extinguishment

 

 

(184

)

 

(377

)

Income before income taxes and equity in earnings of unconsolidated subsidiary

 

23,172

 

16,803

 

74,117

 

46,181

 

Income tax expense

 

(8,672

)

(6,540

)

(28,146

)

(17,956

)

Income before equity in earnings of unconsolidated subsidiary

 

14,500

 

10,263

 

45,971

 

28,225

 

Equity in earnings of unconsolidated subsidiary

 

170

 

21

 

425

 

38

 

Net income

 

14,670

 

10,284

 

46,396

 

28,263

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized holding gains during the period

 

1,439

 

1,568

 

1,014

 

1,109

 

Comprehensive income

 

$

16,109

 

$

11,852

 

$

47,410

 

$

29,372

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.35

 

$

0.25

 

$

1.12

 

$

0.68

 

Diluted earnings per common share

 

$

0.34

 

$

0.24

 

$

1.08

 

$

0.67

 

Weighted average common shares outstanding, basic

 

41,567,657

 

41,502,978

 

41,544,741

 

41,499,172

 

Weighted average common shares outstanding, diluted

 

43,190,779

 

42,525,620

 

43,143,997

 

42,431,108

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

3



 

Emergency Medical Services Corporation

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,394

 

$

39,336

 

 

Insurance collateral

 

43,818

 

29,724

 

 

Trade and other accounts receivable, net

 

492,521

 

416,450

 

 

Parts and supplies inventory

 

18,905

 

18,089

 

 

Prepaids and other current assets

 

20,313

 

16,417

 

 

Current deferred tax assets

 

45,128

 

12,473

 

 

Total current assets

 

643,079

 

532,489

 

 

Non-current assets:

 

 

 

 

 

 

Property, plant and equipment, net

 

150,915

 

147,162

 

 

Intangible assets, net

 

60,748

 

66,789

 

 

Non-current deferred tax assets

 

88,694

 

103,370

 

 

Insurance collateral

 

157,097

 

163,300

 

 

Goodwill

 

341,134

 

272,328

 

 

Other long-term assets

 

28,274

 

32,779

 

 

Total assets

 

$

1,469,941

 

$

1,318,217

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

78,756

 

$

65,172

 

Accrued liabilities

 

227,172

 

231,631

 

 

Current portion of long-term debt

 

4,691

 

4,159

 

 

Total current liabilities

 

310,619

 

300,962

 

 

Long-term debt

 

518,307

 

475,616

 

 

Insurance reserves and other long-term liabilities

 

205,451

 

155,599

 

 

Total liabilities

 

1,034,377

 

932,177

 

 

Equity:

 

 

 

 

 

 

Preferred stock ($0.01 par value; 20,000,000 shares authorized, 0 issued and outstanding)

 

 

 

 

Class A common stock ($0.01 par value; 100,000,000 shares authorized, 9,320,347 and 9,262,853 issued and outstanding in 2007 and 2006, respectively)

 

93

 

93

 

 

Class B common stock ($0.01 par value; 40,000,000 shares authorized, 142,545 issued and outstanding in 2007 and 2006)

 

1

 

1

 

 

Class B special voting stock ($0.01 par value; 1 share authorized, issued and outstanding in 2007 and 2006)

 

 

 

 

LP exchangeable units (32,107,500 shares issued and outstanding in 2007 and 2006)

 

212,361

 

212,361

 

 

Additional paid-in capital

 

116,585

 

114,471

 

 

Retained earnings

 

105,534

 

59,138

 

 

Accumulated other comprehensive income (loss)

 

990

 

(24

)

 

Total equity

 

435,564

 

386,040

 

 

Total liabilities and equity

 

$

1,469,941

 

$

1,318,217

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

4



 

 

 

Emergency Medical Services Corporation

Consolidated Statements of Cash Flows

(unaudited; in thousands)

 

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

46,396

 

$

28,263

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

53,712

 

50,615

 

Gain on disposal of property, plant and equipment

 

(166

)

(762

)

Equity-based compensation expense

 

1,293

 

1,031

 

Equity in earnings of unconsolidated subsidiary

 

(425

)

(38

)

Loss on early debt extinguishment

 

 

377

 

Dividends received

 

416

 

 

Deferred income taxes

 

25,438

 

17,368

 

Changes in operating assets/liabilities, net of acquisitions:

 

 

 

 

 

Trade and other accounts receivable

 

(71,007

)

4,793

 

Parts and supplies inventory

 

(428

)

(132

)

Prepaids and other current assets

 

(3,623

)

(2,076

)

Accounts payable and accrued liabilities

 

5,325

 

13,804

 

Insurance accruals

 

15

 

10,351

 

Net cash provided by operating activities

 

56,946

 

123,594

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(31,570

)

(43,297

)

Proceeds from sale of property, plant and equipment

 

300

 

903

 

Acquisition of businesses, net of cash received

 

(75,648

)

(11,587

)

Insurance collateral

 

(7,300

)

(31,773

)

Other investing activities

 

3,076

 

(1,860

)

Net cash used in investing activities

 

(111,142

)

(87,614

)

Cash Flows from Financing Activities

 

 

 

 

 

EMSC issuance of class A common stock

 

382

 

104

 

EMSC equity issuance costs

 

 

(2,408

)

Borrowings under revolving credit facility

 

70,300

 

 

Repayments of capital lease obligations and other debt

 

(35,815

)

(25,389

)

Increase (decrease) in bank overdrafts

 

2,387

 

(3,871

)

Net cash provided by (used in) financing activities

 

37,254

 

(31,564

)

Change in cash and cash equivalents

 

(16,942

)

4,416

 

Cash and cash equivalents, beginning of period

 

39,336

 

18,048

 

Cash and cash equivalents, end of period

 

$

22,394

 

$

22,464

 

 

 

 

 

 

 

Non-cash Activities

 

 

 

 

 

Re-financing of equipment under existing capital lease

 

$

8,038

 

$

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

5



 

Emergency Medical Services Corporation

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share data)

 

1.              General

 

Basis of Presentation of Financial Statements

 

The accompanying interim consolidated financial statements for Emergency Medical Services Corporation (“EMSC” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting and accordingly, do not include all of the disclosures required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007. For further information, see the Company’s consolidated financial statements, including the accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

 

The consolidated financial statements of EMSC include those of its direct subsidiary, Emergency Medical Services L.P. (“EMS LP”), a Delaware limited partnership. EMS LP acquired American Medical Response, Inc. and its subsidiaries (“AMR”) and EmCare Holdings Inc. and its subsidiaries (“EmCare”) from Laidlaw International, Inc. (“Laidlaw”) on February 10, 2005, with an effective transaction date after the close of business on January 31, 2005. On December 21, 2005, the Company effected a reorganization and issued class A common stock in an initial public offering.

 

The Company is party to a management agreement with a wholly-owned subsidiary of Onex Corporation, the Company’s principal equityholder. In exchange for an annual management fee of $1.0 million, the Onex subsidiary provides the Company with corporate finance and strategic planning consulting services. For each of the three and nine months ended September 30, 2007 and 2006, the Company expensed $250 and $750, respectively, in respect of this fee.

 

Starting in the periods ended June 30, 2007, the Company reclassified income earned on insurance related assets as Interest Income from Restricted Assets in the accompanying consolidated statements of operations and comprehensive income; such income was previously reported as a component of insurance expense.

 

 

2.              Summary of Significant Accounting Policies

 

Consolidation

 

The consolidated financial statements include all wholly-owned subsidiaries of EMSC, including AMR and EmCare and their respective subsidiaries. All significant intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements requires management to make estimates and assumptions relating to the reporting of results of operations, financial condition and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates under different assumptions or conditions.

 

Insurance

 

Insurance collateral is comprised principally of government and investment grade securities and cash deposits with third parties and supports the Company’s insurance program and reserves. Certain of these investments, if sold or otherwise liquidated, would have to be replaced by other suitable financial assurances and are, therefore, considered restricted.

 

Insurance reserves are established for automobile, workers compensation, general liability and professional liability claims utilizing policies with both fully-insured and self-insured components. This includes the use of an off-shore captive insurance program through a wholly-owned subsidiary for certain professional liability (malpractice) programs for EmCare. In those instances where the Company has obtained third-party insurance coverage, the Company generally retains liability for the first $1 to $2 million of the loss. Insurance reserves cover known claims and incidents within the level of Company retention that may result in the assertion of additional claims, as well as claims from unknown incidents that may be asserted arising from activities through the balance sheet date.

 

The Company establishes reserves for claims based upon an assessment of actual claims and claims incurred but not reported.  The reserves are established based on quarterly consultation with third-party independent actuaries using actuarial principles and assumptions that consider a number of factors, including historical claim payment patterns (including legal

 

 

6



 

costs) and changes in case reserves and the assumed rate of inflation in healthcare costs and property damage repairs.

 

The Company’s most recent actuarial valuation was completed in September 2007. As a result of this actuarial valuation, in the three and nine months ended September 30, 2007 the Company recorded reductions in its provision for insurance liabilities of approximately $7.9 million and $21.7 million, respectively, related to its reserves for losses in prior years.  In the three and nine months ended September 30, 2006, the Company recorded a reduction in its provision for insurance liabilities of approximately $4.8 million and $9.8 million, respectively, as a result of an actuarial valuation completed in September 2006.

 

The long-term portion of insurance reserves was $149.0 million and $150.0 million as of September 30, 2007 and December 31, 2006, respectively.

 

Trade and Other Accounts Receivable, net

 

The Company determines its allowances based on payor reimbursement schedules, historical write-off experience and other economic data. The allowances for contractual discounts and uncompensated care are reviewed monthly. Account balances are charged off against the uncompensated care allowance when it is probable the receivable will not be recovered. Write-offs to the contractual allowance occur when payment is received. The allowance for uncompensated care is related principally to receivables recorded for self-pay patients.

 

Revenue Recognition

 

Revenue is recognized at the time of service and is recorded net of provisions for contractual discounts and estimated uncompensated care. Provisions for contractual discounts and estimated uncompensated care as a percentage of gross revenue and gross revenue less contractual discount provisions, are as follows:

 

 

 

Quarter ended
September 30,

 

Nine months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Gross revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Provision for contractual discounts

 

43.8

%

41.0

%

42.8

%

42.0

%

Provision for uncompensated care

 

19.4

%

20.4

%

19.6

%

19.6

%

After contractual discounts

 

34.5

%

34.6

%

34.3

%

33.8

%

 

Healthcare reimbursement is complex and may involve lengthy delays. Third-party payors are continuing their efforts to control expenditures for healthcare, including proposals to revise reimbursement policies. The Company has from time to time experienced delays in reimbursement from third-party payors. In addition, third-party payors may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimates will change materially in the short-term. Retroactive adjustments may change the amounts realized from third-party payors and are considered in the recognition of revenue on an estimated basis in the period the related services are rendered. Such amounts, including adjustments between provisions for contractual discounts and uncompensated care, are adjusted in future periods, as adjustments become known.  Retroactive adjustments recorded in the third quarter, which increased revenue, were 1.3% and 1.2 % of consolidated net revenue for the three months ended September 30, 2007 and 2006, respectively.  Retroactive adjustments recorded in the nine month period ended September 30, 2007 and 2006, which increased revenue, were 1.8% and 1.1% of consolidated net revenue, respectively.

 

The Company also provides services to patients who have no insurance or other third-party payor coverage. In certain circumstances, federal law requires providers to render services to any patient who requires emergency care regardless of their ability to pay.

 

Equity Structure

 

On December 21, 2005, the Company effected a reorganization and issued 8.1 million shares of class A common stock in an initial public offering. Pursuant to the reorganization, EMS LP, the former top-tier holding company of AMR and EmCare, became the consolidated subsidiary of EMSC, a newly formed corporation. To effect the reorganization, the holders of the capital stock of the sole general partner of EMS LP contributed that capital stock to the Company in exchange for class B common stock; the general partner was merged into the Company and the Company became the sole general partner of EMS LP. Concurrently, the holders of class B units of EMS LP contributed their units to the Company in exchange for shares of the Company’s class A common stock, and the holders of certain class A units of EMS LP contributed their units to the Company

 

 

 

7



 

in exchange for shares of the Company’s class B common stock.

 

The Company holds 22.7% of the equity interests in EMS LP. LP exchangeable units, held by persons affiliated with the Company’s principal equity holder, represent the balance of the EMS LP equity. The LP exchangeable units are exchangeable at any time, at the option of the holder, for shares of the Company’s class B common stock on a one-for-one basis. The holders of the LP exchangeable units have the right to vote, through the trustee holder of the Company’s class B special voting stock, at all stockholder meetings at which holders of the Company’s class B common stock or class B special voting stock are entitled to vote.

 

In the EMS LP partnership agreement, the Company has agreed to maintain the economic equivalency of the LP exchangeable units and the class B common stock, and the holders of the LP exchangeable units have no general voting rights. The LP exchangeable units, when considered with the class B special voting stock, have the same rights, privileges and characteristics of the Company’s class B common stock. The LP exchangeable units are intended to be economically equivalent to the class B common stock of the Company in that the LP exchangeable units carry the right to vote (by virtue of the class B special voting stock) with the holders of class B common stock as one class, and entitle holders to receive distributions only if the equivalent dividends are declared on the Company’s class B common stock. Accordingly, the Company accounts for the LP exchangeable units as if the LP exchangeable units were shares of its common stock, including reporting the LP exchangeable units in the equity section of the Company’s balance sheet and including the number of outstanding LP exchangeable units in both its basic and diluted earnings per share calculations.

 

Recent Accounting Pronouncements

 

On January 1, 2007, the Company adopted the recognition and disclosure provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”).  This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.

 

As a result of the implementation of FIN 48 at January 1, 2007, the Company recorded a $49.0 million liability with an offsetting increase to net current deferred tax assets.

 

In accordance with the Company’s accounting policy, EMSC recognized accrued interest and penalties related to unrecognized tax benefits as a component of tax expense, which is consistent with the recognition of these items in prior reporting periods.  As of January 1, 2007, the Company recorded a liability of approximately $4.8 million and $6.1 million for interest and penalties, respectively.  The liability for interest and penalties did not materially change as of September 30, 2007.

 

With limited exception, the Company is no longer subject to U.S. federal, state, and local income tax audits by taxing authorities for years through 2002.

 

 

3.              Acquisitions

 

In July 2007, the Company acquired MedicWest Ambulance based in North Las Vegas, Nevada and Abbott Ambulance, Inc. based in St. Louis, Missouri, together with certain of their respective affiliates.  In September 2007, the Company acquired certain ground ambulance assets from subsidiaries of Lifeguard Transportation Service, Inc. in Dallas, Texas and Atlanta, Georgia.  The total cost for acquisitions completed during the nine months ended September 30, 2007 was $77.7 million and was paid primarily in cash.  The Company is in the process of completing the purchase price allocation for these acquisitions and has preliminarily recorded $67.6 million of goodwill as of September 30, 2007.

 

 

4.              Accrued Liabilities

 

Accrued liabilities were as follows at September 30, 2007 and December 31, 2006:

 

 

8



 

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

Accrued wages and benefits

 

$

72,453

 

$

71,578

 

Accrued paid time-off

 

24,912

 

22,816

 

Current portion of self-insurance reserves

 

58,126

 

57,596

 

Accrued restructuring

 

1,181

 

5,738

 

Current portion of compliance and legal

 

4,690

 

4,910

 

Accrued billing and collection fees

 

4,982

 

5,085

 

Accrued profit sharing

 

23,560

 

19,695

 

Accrued interest

 

4,229

 

11,810

 

Other

 

33,039

 

32,403

 

Total accrued liabilities

 

$

227,172

 

$

231,631

 

 

 

5.              Long-Term Debt

 

Long-term debt consisted of the following at September 30, 2007 and December 31, 2006:

 

 

September 30,
2007

 

December 31,
2006

 

Senior subordinated notes due 2015 (10%)

 

$

250,000

 

$

250,000

 

Senior secured term loan due 2012 (7.72% at September 30, 2007)

 

224,743

 

226,472

 

Revolving credit facility

 

39,000

 

 

Notes due at various dates from 2007 to 2022 with interest rates from 6% to 10%

 

2,358

 

1,856

 

Capital lease obligations due at various dates from 2007 to 2010 (see note 6)

 

6,897

 

1,447

 

 

 

522,998

 

479,775

 

Less current portion

 

(4,691

)

(4,159

)

Total long-term debt

 

$

518,307

 

$

475,616

 

 

 

6.              Commitments and Contingencies

 

Lease Commitments

 

The Company leases various facilities and equipment under operating lease agreements.

 

The Company also leases certain vehicles under a capital lease and during the first quarter of 2007 extended the terms of this capital lease for an additional three years. Assets under capital lease are capitalized using inherent interest rates at the inception of each lease. Capital leases are collateralized by the leased vehicles.

 

Services

 

The Company is subject to the Medicare and Medicaid fraud and abuse laws which prohibit, among other things, any false claims, or any bribe, kick-back or rebate in return for the referral of Medicare and Medicaid patients. Violation of these prohibitions may result in civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Management has implemented policies and procedures that management believes will assure that the Company is in substantial compliance with these laws and regulations but there can be no assurance the Company will not be found to have violated certain of these laws and regulations. From time to time, the Company receives requests for information from government agencies pursuant to their regulatory or investigational authority. Such requests can include subpoenas or demand letters for documents to assist the government in audits or investigations. The Company is cooperating with the government agencies conducting these investigations and is providing requested information to the government agencies. Other than the proceedings described below, management believes that the outcome of any of these investigations would not have a material adverse effect on the Company.

 

On April 17, 2006, the Office of Inspector General for the United States Department of Health and Human Services, or OIG, finalized its draft report requesting that the Company’s Massachusetts subsidiary reimburse the Medicare program for approximately $1.8 million in alleged overpayments from Medicare for services performed between July 1, 2002 and December 31, 2002. The OIG claims that these payments were made for services that did not meet Medicare medical necessity and reimbursement requirements.   On December 10, 2006, AMR paid the $1.8 million in alleged overpayments. However,

 

 

9



 

the Company disagrees with the OIG’s finding and has filed an administrative appeal. If AMR is successful in the administrative appeal the Company may be entitled to repayment of all or part of the $1.8 million.

 

Other Legal Matters

 

On December 13, 2005, a lawsuit purporting to be a class action was commenced against AMR in Spokane, Washington in Washington State Court, Spokane County.  The complaint alleges that AMR billed patients and third party payors for transports it conducted between 1998 and 2005 at higher rates than contractually permitted.  The court has certified a class in this case, but the size and membership of the class has not been determined.  At this time, AMR does not believe that any incorrect billings are material in amount.

 

EmCare entered into a settlement agreement with respect to June Belt, et. al. v. EmCare, Inc. et. al. brought by a number of nurse practitioners and physician assistants under the Fair Labor Standards Act.  The suit was filed on February 25, 2003 in the Eastern District of Texas.  Pursuant to the settlement agreement, EmCare paid $1.7 million during the first quarter of 2007 in satisfaction of all claims in the lawsuit.

 

AMR and the City of Stockton, California, are parties to litigation regarding the terms and enforceability of a memorandum of understanding and a related joint venture agreement between the parties to present a joint bid in response to a request for proposals to provide emergency ambulance services in the County of San Joaquin, California. The suit was filed on June 28, 2005, in the United States District Court for the Eastern District of California. The parties were unable to agree on the final terms of a joint bid. AMR has been awarded the San Joaquin contract. While we are unable at this time to estimate the amount of potential damages, we believe that Stockton may claim as damages a portion of our profit on the contract or the profit Stockton might have realized had the joint venture proceeded.

 

 

7.              Restructuring Charges

 

The Company restructured certain billing functions of AMR and operations in the Los Angeles, California market during the first quarter of 2007 and recorded a restructuring charge of $2.2 million.  This restructuring charge included $0.2 million in lease termination and exit costs and $2.0 million related to termination benefits.

 

 

8.              Equity Based Compensation

 

The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) Share-Based Payment (“SFAS 123R”) on January 1, 2006 using the prospective transition method. The stock options are valued using the Black-Scholes valuation method on the date of grant.

 

Under the Company’s Equity Option Plan, key employees were granted options that permit the individuals to purchase class A common shares and vest ratably generally over a period of four years. In addition, certain performance measures must be met for 50% of the options to become exercisable. Options with similar provisions were granted to non-employee directors. The Company recorded a compensation charge of $300 for each of the three months ended September 30, 2007 and 2006 and $900 for each of the nine months ended September 30, 2007 and 2006.

 

In June 2006, the Board of Directors of the Company adopted an equity compensation program for non-employee directors of the Company, other than the Chair of the Compliance Committee (“Directors’ Plan”), which was subsequently approved by the stockholders of the Company in May 2007. Non-employee directors were granted 8,000 Restricted Stock Units (“RSUs”) on June 1, 2006, and 2,705 RSUs on August 10, 2007, each RSU representing one share of the Company’s class A common stock. Following each annual stockholder meeting, each non-employee director will receive a grant of RSUs having a fair market value of $100 on the date of grant, based on the closing price of the Company’s class A common stock on the business day immediately preceding the grant date. The Directors’ Plan allows directors to defer income from the grant of RSUs. The RSUs vest immediately prior to the election of directors at the next following annual stockholder meeting, and will be paid in shares of the Company’s class A common stock (one share for each RSU) at that time, unless deferred in accordance with the Directors’ Plan. Each non-employee director (other than the Chair of the Compliance Committee) is also entitled to an annual cash retainer of $50 to be paid in four quarterly installments. In connection with this plan, the Company expensed $100 and $300 in the three and nine months ended September 30, 2007 and $100 and $131 in the three and nine months ended September 30, 2006, respectively.

 

On April 7, 2007, the Board of Directors of the Company approved the adoption of the EMSC Long-Term Incentive Plan (the “Plan”), subject to stockholder approval. The stockholders of EMSC approved the Plan at the Company’s 2007 Annual Meeting in May 2007.  The Plan provides for the grant of long-term incentives, including various equity-based incentives, to those persons with responsibility for the success and growth of the Company and its subsidiaries.  No future grants will be made under the Company’s previous Equity Option Plan referred to above.  On June 14, 2007, the Board of Directors of the Company granted 20,000 shares of restricted stock pursuant to the Plan, which shares vest ratably over a period of three years. 

 

 

10



 

In addition, certain performance measures must be met for 50% of the shares to vest.  In connection with this plan, the Company expensed $93 for the three months ended September 30, 2007.

 

 

9.              Segment Information

 

The Company is organized around two separately managed business units: healthcare transportation services and emergency management services, which have been identified as operating segments. The healthcare transportation services reportable segment focuses on providing a full range of medical transportation services from basic patient transit to the most advanced emergency care and pre-hospital assistance. The emergency management services reportable segment provides outsourced business services to hospitals primarily for emergency departments, urgent care centers and for certain inpatient departments. The Chief Executive Officer has been identified as the chief operating decision maker (“CODM”) for purposes of SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), as he assesses the performance of the business units and decides how to allocate resources to the business units.

 

Net income before equity in earnings of unconsolidated subsidiary, income tax expense, loss on early debt extinguishment, interest and other income, realized gain (loss) on investments, interest expense, interest income from restricted assets and depreciation and amortization (“Adjusted EBITDA”) is the measure of profit and loss that the CODM uses to assess performance, measure liquidity and make decisions. The accounting policies for reported segments are the same as for the Company as a whole.

 

 

 

Quarter ended September 30,

 

Nine months ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Healthcare Transportation Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

310,929

 

$

299,300

 

$

914,341

 

$

888,472

 

Segment Adjusted EBITDA

 

26,007

 

24,317

 

74,316

 

71,920

 

Emergency Management Services

 

 

 

 

 

 

 

 

 

Revenue

 

218,823

 

186,397

 

655,442

 

544,800

 

Segment Adjusted EBITDA

 

27,015

 

20,423

 

85,388

 

56,725

 

Total

 

 

 

 

 

 

 

 

 

Total revenue

 

529,752

 

485,697

 

1,569,783

 

1,433,272

 

Total Adjusted EBITDA

 

53,022

 

44,740

 

159,704

 

128,645

 

Reconciliation of Adjusted EBITDA to Net Income

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

53,022

 

$

44,740

 

$

159,704

 

$

128,645

 

Depreciation and amortization expense

 

(17,809

)

(16,841

)

(52,165

)

(49,045

)

Interest expense

 

(12,652

)

(11,532

)

(35,281

)

(34,269

)

Realized gain (loss) on investments

 

9

 

88

 

68

 

(437

)

Interest and other income

 

602

 

532

 

1,791

 

1,664

 

Loss on early debt extinguishment

 

 

(184

)

 

(377

)

Income tax expense

 

(8,672

)

(6,540

)

(28,146

)

(17,956

)

Equity in earnings of unconsolidated subsidiary

 

170

 

21

 

425

 

38

 

Net income

 

$

14,670

 

$

10,284

 

$

46,396

 

$

28,263

 

 

 

10.       Guarantors of Debt

 

EMS LP financed the acquisition of AMR and EmCare in part by issuing $250.0 million principal amount of senior subordinated notes and borrowing $370.2 million under its senior secured credit facility. Its wholly-owned subsidiaries, AMR HoldCo, Inc. (f/k/a EMSC Management, Inc.) and EmCare HoldCo, Inc., are the issuers of the senior subordinated notes and the borrowers under the senior secured credit facility. As part of the transaction, AMR and its subsidiaries became wholly-owned subsidiaries of AMR HoldCo, Inc. and EmCare and its subsidiaries became wholly-owned subsidiaries of EmCare HoldCo, Inc. The senior subordinated notes and the senior secured credit facility include a full, unconditional and joint and several guarantee by EMSC, EMS LP and EMSC’s domestic subsidiaries. The senior subordinated notes and senior secured credit facility do not include a guarantee by the Company’s captive insurance subsidiary. All of the operating income and cash flow of EMSC, EMS LP, AMR HoldCo, Inc. and EmCare HoldCo, Inc. is generated by AMR, EmCare and their subsidiaries. As a result, funds necessary to meet the debt service obligations under the senior secured notes and senior secured credit facility described above are provided by the distributions or advances from the subsidiary companies, AMR and EmCare.

 

 

11



 

Investments in subsidiary operating companies are accounted for on the equity method. Accordingly, entries necessary to consolidate EMSC, EMS LP, AMR HoldCo, Inc., EmCare HoldCo, Inc. and all of their subsidiaries are reflected in the Eliminations/Adjustments column. Separate complete financial statements of the issuers, EMS LP and subsidiary guarantors would not provide additional material information that would be useful in assessing the financial composition of the issuers, EMS LP or the subsidiary guarantors. The condensed consolidating and combining financial statements for EMSC, EMS LP, the issuers, the guarantors and the non-guarantor are as follows:

 

Consolidating Statement of Operations

 

For the quarter ended September 30, 2007

 

 

 

 

 

 

 

 

Issuer AMR

HoldCo, Inc.

 

Issuer EmCare

HoldCo, Inc.

 

Subsidiary Guarantors

 

Subsidiary Non-Guarantor

 

Eliminations/ Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EMSC

 

EMS LP

 

 

 

 

 

 

Total

 

Net revenue

 

$

 

$

 

$

 

$

 

$

529,752

 

$

7,856

 

$

(7,856

)

$

529,752

 

Compensation and benefits

 

 

 

 

 

366,835

 

 

 

366,835

 

Operating expenses

 

 

 

 

 

82,473

 

 

 

82,473

 

Insurance expense

 

 

 

 

 

12,257

 

9,064

 

(7,856

)

13,465

 

Selling, general and administrative expenses

 

 

 

 

 

15,876

 

 

 

15,876

 

Depreciation and amortization expense

 

 

 

 

 

17,809

 

 

 

17,809

 

Income from operations

 

 

 

 

 

34,502

 

(1,208

)

 

33,294

 

Interest income from restricted assets

 

 

 

 

 

720

 

1,199

 

 

1,919

 

Interest expense

 

 

 

 

 

(12,652

)

 

 

(12,652

)

Realized gain on investments

 

 

 

 

 

 

9

 

 

9

 

Interest and other income

 

 

 

 

 

602

 

 

 

602

 

Income before income taxes

 

 

 

 

 

23,172

 

 

 

23,172

 

Income tax expense

 

 

 

 

 

(8,672

)

 

 

(8,672

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

14,500

 

 

 

14,500

 

Equity in earnings of unconsolidated subsidiaries

 

14,670

 

14,670

 

2,901

 

11,769

 

170

 

 

(44,010

)

170

 

 

Net income

 

$

14,670

 

$

14,670

 

$

2,901

 

$

11,769

 

$

14,670

 

$

 

$

(44,010

)

$

14,670

 

 

 

Consolidating Statement of Operations

 

For the quarter ended September 30, 2006

 

 

 

EMSC

 

EMS LP

 

Issuer
AMR

HoldCo, Inc.

 

Issuer EmCare

HoldCo, Inc.

 

Subsidiary Guarantors

 

Subsidiary Non-Guarantor

 

Eliminations/ Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

 

$

 

$

 

$

 

$

485,697

 

$

9,645

 

$

(9,645

)

$

485,697

 

Compensation and benefits

 

 

 

 

 

333,406

 

 

 

333,406

 

Operating expenses

 

 

 

 

 

80,513

 

 

 

80,513

 

Insurance expense

 

 

 

 

 

12,634

 

10,725

 

(9,645

)

13,714

 

Selling, general and administrative expenses

 

 

 

 

 

14,660

 

 

 

14,660

 

Depreciation and amortization expense

 

 

 

 

 

16,841

 

 

 

16,841

 

Restructuring charge

 

 

 

 

 

267

 

 

 

267

 

Income from operations

 

 

 

 

 

27,376

 

(1,080

)

 

26,296

 

Interest income from restricted assets

 

 

 

 

 

611

 

992

 

 

1,603

 

Interest expense

 

 

 

 

 

(11,532

)

 

 

(11,532

)

Realized gain on investments

 

 

 

 

 

 

88

 

 

88

 

Interest and other income

 

 

 

 

 

532

 

 

 

532

 

Loss on early debt extinguishment

 

 

 

 

 

(184

)

 

 

(184

)

Income before income taxes

 

 

 

 

 

16,803

 

 

 

16,803

 

Income tax expense

 

 

 

 

 

(6,540

)

 

 

(6,540

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

10,263

 

 

 

10,263

 

Equity in earnings of unconsolidated subsidiaries

 

10,284

 

10,284

 

2,372

 

7,912

 

21

 

 

(30,852

)

21

 

Net income

 

$

10,284

 

$

10,284

 

$

2,372

 

$

7,912

 

$

10,284

 

$

 

$

(30,852

)

$

10,284

 

 

12



 

Consolidating Statement of Operations

 

For the nine months ended September 30, 2007

 

 

 

 

 

 

 

 

Issuer AMR

HoldCo, Inc.

 

Issuer EmCare

HoldCo, Inc.

 

Subsidiary Guarantors

 

Subsidiary Non-Guarantor

 

Eliminations/ Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EMSC

 

EMS LP

 

 

 

 

 

 

Total

 

Net revenue

 

$

 

$

 

$

 

$

 

$

1,569,783

 

$

23,363

 

$

(23,363

)

$

1,569,783

 

Compensation and benefits

 

 

 

 

 

1,079,076

 

 

 

1,079,076

 

Operating expenses

 

 

 

 

 

238,731

 

 

 

238,731

 

Insurance expense

 

 

 

 

 

48,040

 

26,565

 

(23,363

)

51,242

 

Selling, general and administrative expenses

 

 

 

 

 

44,082

 

 

 

44,082

 

Depreciation and amortization expense

 

 

 

 

 

52,165

 

 

 

52,165

 

Restructuring charge

 

 

 

 

 

2,242

 

 

 

2,242

 

Income from operations

 

 

 

 

 

105,447

 

(3,202

)

 

102,245

 

Interest income from restricted assets

 

 

 

 

 

2,160

 

3,134

 

 

5,294

 

Interest expense

 

 

 

 

 

(35,281

)

 

 

(35,281

)

Realized gain on investments

 

 

 

 

 

 

68

 

 

68

 

Interest and other income

 

 

 

 

 

1,791

 

 

 

1,791

 

Income before income taxes

 

 

 

 

 

74,117

 

 

 

74,117

 

Income tax expense

 

 

 

 

 

(28,146

)

 

 

(28,146

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

45,971

 

 

 

45,971

 

Equity in earnings of unconsolidated subsidiaries

 

46,396

 

46,396

 

7,777

 

38,619

 

425

 

 

(139,188

425

 

Net income

 

$

46,396

 

$

46,396

 

$

7,777

 

$

38,619

 

$

46,396

 

$

 

$

(139,188

)

$

46,396

 

 

 

Consolidating Statement of Operations

 

For the nine months ended September 30, 2006

 

 

 

EMSC

 

EMS LP

 

Issuer
AMR

HoldCo, Inc.

 

Issuer EmCare

HoldCo, Inc.

 

Subsidiary Guarantors

 

Subsidiary Non-Guarantor

 

Eliminations/ Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

 

$

 

$

 

$

 

$

1,433,272

 

$

28,950

 

$

(28,950

)

$

1,433,272

 

Compensation and benefits

 

 

 

 

 

990,380

 

 

 

990,380

 

Operating expenses

 

 

 

 

 

216,170

 

 

 

216,170

 

Insurance expense

 

 

 

 

 

56,492

 

30,968

 

(28,950

)

58,510

 

Selling, general and administrative expenses

 

 

 

 

 

42,669

 

 

 

42,669

 

Depreciation and amortization expense

 

 

 

 

 

49,045

 

 

 

49,045

 

Restructuring charge

 

 

 

 

 

1,186

 

 

 

1,186

 

Income from operations

 

 

 

 

 

77,330

 

(2,018

)

 

75,312

 

Interest income from restricted assets

 

 

 

 

 

1,833

 

2,455

 

 

4,288

 

Interest expense

 

 

 

 

 

(34,269

)

 

 

(34,269

)

Realized loss on investments

 

 

 

 

 

 

(437

)

 

(437

)

Interest and other income

 

 

 

 

 

1,664

 

 

 

1,664

 

Loss on early debt extinguishment

 

 

 

 

 

(377

)

 

 

(377

)

Income before income taxes

 

 

 

 

 

46,181

 

 

 

46,181

 

Income tax expense

 

 

 

 

 

(17,956

)

 

 

(17,956

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

28,225

 

 

 

28,225

 

Equity in earnings of unconsolidated subsidiaries

 

28,263

 

28,263

 

7,723

 

20,540

 

38

 

 

(84,789

)

38

 

Net income

 

$

28,263

 

$

28,263

 

$

7,723

 

$

20,540

 

$

28,263

 

$

 

$

(84,789

)

$

28,263

 

 

13



 

Consolidating Balance Sheet

 

As of September 30, 2007

 

 

 

 

EMSC

 

EMS LP

 

Issuer AMR

HoldCo, Inc.

 

Issuer EmCare

HoldCo, Inc.

 

Subsidiary Guarantors

 

Subsidiary Non-Guarantor

 

Eliminations/ Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

 

$

 

$

22,278

 

$

116

 

$

 

$

22,394

 

Insurance collateral

 

 

 

 

 

32,252

 

21,081

 

(9,515

)

43,818

 

Trade and other accounts receivable, net

 

 

 

 

 

491,379

 

1,142

 

 

492,521

 

Parts and supplies inventory

 

 

 

 

 

18,905

 

 

 

18,905

 

Other current assets

 

 

 

 

 

19,614

 

2,010

 

(1,311

)

20,313

 

Current deferred tax assets

 

 

 

 

 

41,965

 

3,163

 

 

45,128

 

Current assets

 

 

 

 

 

626,393

 

27,512

 

(10,826

)

643,079

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

 

 

 

150,915

 

 

 

150,915

 

Intercompany receivable

 

3,279

 

113,400

 

305,377

 

201,726

 

 

 

(623,782

)

 

Intangible assets, net

 

 

 

 

 

60,748

 

 

 

60,748

 

Non-current deferred tax assets

 

 

 

 

 

89,825

 

(1,131

)

 

88,694

 

Insurance collateral

 

 

 

 

 

50,317

 

106,780

 

 

157,097

 

Goodwill

 

 

 

 

 

340,676

 

458

 

 

341,134

 

Other long-term assets

 

 

 

7,490

 

3,393

 

17,391

 

 

 

28,274

 

Investment and advances in subsidiaries

 

432,285

 

318,885

 

214,743

 

104,128

 

7,710

 

 

(1,077,751

)

 

Assets

 

$

435,564

 

$

432,285

 

$

527,610

 

$

309,247

 

$

1,343,975

 

$

133,619

 

$

(1,712,359

)

$

1,469,941

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

 

$

 

$

78,641

 

$

115

 

$

 

$

78,756

 

Accrued liabilities

 

 

 

2,384

 

1,845

 

194,008

 

28,935

 

 

227,172

 

Current portion of long-term debt

 

 

 

1,656

 

744

 

2,291

 

 

 

4,691

 

Current liabilities

 

 

 

4,040

 

2,589

 

274,940

 

29,050

 

 

310,619

 

Long-term debt

 

 

 

308,827

 

202,516

 

6,964

 

 

 

518,307

 

Other long-term liabilities

 

 

 

 

 

119,418

 

96,859

 

(10,826

)

205,451

 

Intercompany

 

 

 

 

 

623,782

 

 

(623,782

)

 

Liabilities

 

 

 

312,867

 

205,105

 

1,025,104

 

125,909

 

(634,608

)

1,034,377

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

93

 

 

 

 

 

30

 

(30

)

93

 

Class B common stock

 

1