UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

 

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)

 

 

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.

 

 

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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.

 

 

 

 

 

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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.

 

 

 

 

 

 

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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

 

 

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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:

 

 

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:

 

 

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5.              Long-Term Debt

 

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

 

 

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. 

 

 

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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

 

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