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 March 31, 2008

 

 

 

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

 

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 May 5, 2008 — 9,322,096; shares of class B common stock outstanding at May 5, 2008 — 142,545; LP exchangeable units outstanding at May 5, 2008 — 32,107,500.

 

 



 

EMERGENCY MEDICAL SERVICES CORPORATION

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

FOR THE THREE MONTHS ENDED

MARCH 31, 2008

 

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 MONTHS ENDED

MARCH 31, 2008

 

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

 

 

 

March 31,

 

 

 

2008

 

2007

 

Net revenue

 

$

565,786

 

$

523,319

 

Compensation and benefits

 

394,351

 

354,932

 

Operating expenses

 

83,223

 

79,996

 

Insurance expense

 

20,963

 

20,301

 

Selling, general and administrative expenses

 

14,592

 

13,305

 

Depreciation and amortization expense

 

17,717

 

16,779

 

Restructuring charges

 

 

2,242

 

Income from operations

 

34,940

 

35,764

 

Interest income from restricted assets

 

1,755

 

1,715

 

Interest expense

 

(9,916

)

(11,234

)

Realized gain on investments

 

672

 

37

 

Interest and other income

 

302

 

657

 

Income before income taxes and equity in earnings (loss) of unconsolidated subsidiary

 

27,753

 

26,939

 

Income tax expense

 

(10,684

)

(10,462

)

Income before equity in earnings (loss) of unconsolidated subsidiary

 

17,069

 

16,477

 

Equity in earnings (loss) of unconsolidated subsidiary

 

(50

)

154

 

Net income

 

17,019

 

16,631

 

Other comprehensive income, net of tax:

 

 

 

 

 

Unrealized holding gains during the period

 

1,347

 

298

 

Unrealized holding losses on derivative financial instruments

 

(2,925

)

 

Comprehensive income

 

$

15,441

 

$

16,929

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.41

 

$

0.40

 

Diluted earnings per common share

 

$

0.40

 

$

0.39

 

Weighted average common shares outstanding, basic

 

41,570,412

 

41,521,155

 

Weighted average common shares outstanding, diluted

 

43,083,642

 

43,029,039

 

 

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)

 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,155

 

$

28,914

 

Insurance collateral

 

36,678

 

37,776

 

Trade and other accounts receivable, net

 

522,602

 

495,348

 

Parts and supplies inventory

 

20,130

 

20,010

 

Prepaids and other current assets

 

17,647

 

11,715

 

Current deferred tax assets

 

75,686

 

76,997

 

Total current assets

 

688,898

 

670,760

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

132,682

 

143,342

 

Intangible assets, net

 

80,353

 

81,717

 

Non-current deferred tax assets

 

86,433

 

94,961

 

Insurance collateral

 

147,520

 

146,638

 

Goodwill

 

323,101

 

313,124

 

Other long-term assets

 

27,741

 

29,021

 

Total assets

 

$

1,486,728

 

$

1,479,563

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

69,334

 

$

64,855

 

Accrued liabilities

 

223,345

 

237,319

 

Current portion of long-term debt

 

4,766

 

4,717

 

Total current liabilities

 

297,445

 

306,891

 

Long-term debt

 

477,136

 

478,166

 

Insurance reserves and other long-term liabilities

 

246,636

 

245,010

 

Total liabilities

 

1,021,217

 

1,030,067

 

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, 9,322,096 and 9,320,347 issued and outstanding in 2008 and 2007, respectively)

 

93

 

93

 

Class B common stock ($0.01 par value; 40,000,000 shares authorized, 142,545 issued and outstanding in 2008 and 2007)

 

1

 

1

 

Class B special voting stock ($0.01 par value; 1 share authorized, issued and outstanding in 2008 and 2007)

 

 

 

LP exchangeable units (32,107,500 shares issued and outstanding in 2008 and 2007)

 

212,361

 

212,361

 

Additional paid-in capital

 

117,653

 

117,079

 

Retained earnings

 

135,975

 

118,956

 

Accumulated other comprehensive income (loss)

 

(572

)

1,006

 

Total equity

 

465,511

 

449,496

 

Total liabilities and equity

 

$

1,486,728

 

$

1,479,563

 

 

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

 

4



 

Emergency Medical Services Corporation

Consolidated Statements of Cash Flows

(unaudited; in thousands)

 

 

 

Three months ended March 31,

 

 

 

2008

 

2007

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

17,019

 

$

16,631

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,296

 

17,268

 

Gain on disposal of property, plant and equipment

 

(13

)

(11

)

Equity-based compensation expense

 

562

 

400

 

Equity in loss (earnings) of unconsolidated subsidiary

 

50

 

(154

)

Dividends received

 

 

416

 

Deferred income taxes

 

10,356

 

10,637

 

Changes in operating assets/liabilities, net of acquisitions:

 

 

 

 

 

Trade and other accounts receivable

 

(26,308

)

(28,151

)

Parts and supplies inventory

 

(20

)

(13

)

Prepaids and other current assets

 

(5,932

)

(5,959

)

Accounts payable and accrued liabilities

 

(13,389

)

(19,934

)

Insurance accruals

 

(3,399

)

5,024

 

Net cash used in operating activities

 

(2,778

)

(3,846

)

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(2,527

)

(8,321

)

Proceeds from sale of property, plant and equipment

 

63

 

125

 

Acquisition of businesses, net of cash received

 

(13,278

)

 

Insurance collateral

 

2,125

 

(910

)

Other investing activities

 

653

 

3,021

 

Net cash used in investing activities

 

(12,964

)

(6,085

)

Cash Flows from Financing Activities

 

 

 

 

 

EMSC issuance of class A common stock

 

12

 

173

 

Borrowings under revolving credit facility

 

14,000

 

 

Repayments of capital lease obligations and other debt

 

(15,151

)

(2,333

)

Increase in bank overdrafts

 

4,122

 

2,587

 

Net cash provided by financing activities

 

2,983

 

427

 

Change in cash and cash equivalents

 

(12,759

)

(9,504

)

Cash and cash equivalents, beginning of period

 

28,914

 

39,336

 

Cash and cash equivalents, end of period

 

$

16,155

 

$

29,832

 

 

 

 

 

 

 

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 Presentatio n 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 months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008. 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, 2007.

 

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 the three months ended March 31, 2008 and 2007, the Company expensed $250 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 March 2008. As a result of this actuarial valuation, in the three months ended March 31, 2008 the Company recorded reductions in its provision for insurance liabilities of approximately $2.8 million related to its reserves for losses in prior years.  In the three months ended March 31, 2007, the Company recorded a reduction in its provision for insurance liabilities of approximately $5.2 million as a result of an actuarial valuation completed in March 2007.

 

The long-term portion of insurance reserves was $141.9 million and $144.7 million as of March 31, 2008 and December 31, 2007, 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.  The Company’s accounts receivable allowances are as follows:

 

 

 

March 31,
2008

 

December 31,
2007

 

Gross trade accounts receivable

 

$

1,775,388

 

$

1,698,862

 

Allowance for contractual discounts

 

873,928

 

832,738

 

Allowance for uncompensated care

 

448,722

 

431,920

 

Net trade accounts receivable

 

452,738

 

429,204

 

Other receivables, net

 

69,864

 

66,144

 

Net accounts receivable

 

$

522,602

 

$

495,348

 

 

Other receivables represent EmCare hospital subsidies and fees and AMR fees for stand-by and special events and subsidies from community organizations.

 

AMR contractual allowances are primarily determined on payor reimbursement schedules that are included and regularly updated in the billing systems, and by historical collection experience.  The billing systems calculate the difference between payor specific gross billings and contractually agreed to, or governmentally driven, reimbursement rates.  The allowance for uncompensated care at AMR is related principally to receivables recorded for self-pay patients.  AMR’s allowances on self-pay accounts receivable are estimated on claim level, historical write-off experience.

 

Accounts receivable allowances at EmCare are estimated based on cash collection and write-off experience at a facility level contract and facility specific payor mix.  These allowances are reviewed and adjusted monthly through revenue provisions.  In addition, an analysis is done after 15 months to compare actual cash collected on a date of service basis to the revenue recorded for that period.  Any adjustment necessary for an overage or deficit in these allowances based on actual collections is recorded through a retroactive revenue adjustment in the current period.

 

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 as a percentage of gross revenue less provision for contractual discounts are as follows:

 

 

 

Quarter ended
March 31,

 

 

 

2008

 

2007

 

Gross revenue

 

100.0

%

100.0

%

Provision for contractual discounts

 

45.7

%

42.4

%

Revenue net of contractual discounts

 

54.3

%

57.6

%

Provision for uncompensated care as a percentage of gross revenue

 

18.7

%

19.5

%

Provision for uncompensated care as a percentage of gross revenue less contractual discounts

 

34.4

%

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, on 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 first quarter, which increased revenue, were 0.7% and 2.8% of consolidated net revenue for the three months ended March 31, 2008 and 2007, 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

 

7



 

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

 

The Company holds 22.8% 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

 

 The Company adopted SFAS No. 157 Fair value measurement (“SFAS 157”) effective January 1, 2008, which among other things, requires additional disclosures about investments that are reported at fair value.  SFAS 157 establishes a hierarchal disclosure framework which ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment.  Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments measured and reported at fair value are classified and disclosed in one of the following categories.

 

Level 1 – Quoted prices are available in active markets for identical investments as of the reporting date.  As required by SFAS 157, the Company does not adjust the quoted price for these investments.

 

Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

 

The following table summarizes the valuation of EMSC’s investments by the above SFAS 157 fair value hierarchy levels as of March 31, 2008:

 

 

 

Fair value measurements at March 31, 2008
using:

 

Description

 

Total

 

Level 1

 

Level 2

 

Assets:

 

 

 

 

 

 

 

Securities

 

$

97,631

 

$

97,631

 

$

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Derivatives

 

$

5,856

 

$

 

$

5,856

 

 

3.                                      Acquisitions

 

In March 2008, the Company completed its acquisition of River Medical, Inc. based in Lake Havasu, Arizona, which provides exclusive emergency ambulance transportation services to Lake Havasu City, and La Paz and Mohave Counties in western Arizona.  This acquisition positions the Company for future expansion in the Arizona market.  The total cost of this acquisition was $13.3 million and the Company has recorded $8.6 million of goodwill, which amount is subject to adjustment based upon completion of the purchase price allocation.

 

8



 

4.                                      Accrued Liabilities

 

Accrued liabilities were as follows at March 31, 2008 and December 31, 2007:

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

Accrued wages and benefits

 

$

78,957

 

$

79,781

 

Accrued paid time-off

 

26,205

 

24,687

 

Current portion of self-insurance reserves

 

59,236

 

59,821

 

Accrued restructuring

 

591

 

600

 

Current portion of compliance and legal

 

2,566

 

2,245

 

Accrued billing and collection fees

 

5,389

 

5,046

 

Accrued profit sharing

 

15,389

 

23,661

 

Accrued interest

 

3,888

 

10,407

 

Other

 

31,124

 

31,071

 

Total accrued liabilities

 

$

223,345

 

$

237,319

 

 

5.                                      Long-Term Debt

 

Long-term debt consisted of the following at March 31, 2008 and December 31, 2007:

 

 

 

March 31,
2008

 

December 31,
2007

 

Senior subordinated notes due 2015

 

$

250,000

 

$

250,000

 

Senior secured term loan due 2012 (4.99% at March 31, 2008)

 

223,591

 

224,167

 

Notes due at various dates from 2008 to 2022 with interest rates from 6% to 10%

 

2,272

 

2,292

 

Capital lease obligations due at various dates from 2008 to 2010 (see note 6)

 

6,039

 

6,424

 

 

 

481,902

 

482,883

 

Less current portion

 

(4,766

)

(4,717

)

Total long-term debt

 

$

477,136

 

$

478,166

 

 

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.

 

9



 

However, 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. Stock options are valued using the Black-Scholes valuation method on the date of grant.

 

Equity Option Plan

 

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 $431 and $300 for the three months ended March 31, 2008 and 2007, respectively.

 

Non-Employee Director Compensation Plan

 

The Non-Employee Director Compensation Plan, approved in May 2007, is available to non-employee directors of the Company, other than the Chair of the Compliance Committee.  Under this plan, eligible directors are granted Restricted Stock Units (“RSUs”) immediately following each annual stockholder meeting with each RSU representing one share of the Company’s class A common stock.  Eligible directors 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 Non-Employee Director Compensation Plan allows directors to defer income from the grant of RSUs, which vest immediately prior to the election of directors at the next following annual stockholder meeting.  In connection with this plan, the Company granted 2,705 and 8,000 RSUs per director in 2007 and 2006, respectively, and expensed $100 for the three months ended March 31, 2008 and 2007.

 

Long-Term Incentive Plan

 

EMSC’s Long-Term Incentive Plan (the “Plan”) was approved by stockholders in May 2007 and 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.

 

10



 

The Company granted options to key employees during the three months ended March 31, 2008 under the Plan. The options permit employees to purchase 114,250 shares of class A common stock at a weighted average exercise price
of $29.70 per share, vest ratably over a period of 4 years and have a maximum term of ten years.

 

The Company recorded a compensation charge of $31 during the three months ended March 31, 2008 in connection with the Plan.

 

Stock Purchase Plan/Employee Stock Purchase Plan

 

The Company commenced an offering of its class A common stock to eligible employees and independent contractors associated with the Company during the three months ended March 31, 2008 pursuant to the Company’s Stock Purchase
Plan and Employee Stock Purchase Plan (together, the “SPPs”).  The purchases of stock under the SPPs will occur in September 2008 at a 5% discount to the closing price of the Company’s class A common stock on September 15, 2008, and
as such no compensation charge has been recorded for the SPPs during the three months ended March 31, 2008.

 

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 (loss) of unconsolidated subsidiary, income tax expense, interest and other income, realized gain on investments, interest expense, 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 March 31,

 

 

 

2008

 

2007

 

Healthcare Transportation Services

 

 

 

 

 

Revenue

 

$

326,316

 

$

308,108

 

Segment Adjusted EBITDA

 

28,398

 

24,945

 

Emergency Management Services

 

 

 

 

 

Revenue

 

239,470

 

215,211

 

Segment Adjusted EBITDA

 

26,014

 

29,313

 

Total

 

 

 

 

 

Total revenue

 

565,786

 

523,319

 

Total Adjusted EBITDA

 

54,412

 

54,258

 

Reconciliation of Adjusted EBITDA to Net Income

 

 

 

 

 

Adjusted EBITDA

 

$

54,412

 

$

54,258

 

Depreciation and amortization expense

 

(17,717

)

(16,779

)

Interest expense

 

(9,916

)

(11,234

)

Realized gain on investments

 

672

 

37

 

Interest and other income

 

302

 

657

 

Income tax expense

 

(10,684

)

(10,462

)

Equity in earnings (loss) of unconsolidated subsidiary

 

(50

)

154

 

Net income

 

$

17,019

 

$

16,631

 

 

11



 

A reconciliation of Adjusted EBITDA to cash flows used in operating activities is as follows:

 

 

 

Quarter ended March 31,

 

 

 

2008

 

2007

 

Adjusted EBITDA

 

$

54,412

 

$

54,258

 

Interest paid

 

(9,337

)

(10,745

)

Change in accounts receivable

 

(26,308

)

(28,151

)

Change in other operating assets/liabilities

 

(22,740

)

(20,882

)

Equity based compensation

 

562

 

400

 

Other

 

633

 

1,274

 

Cash flows used in operating activities

 

$

(2,778

)

$

(3,846

)

 

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. 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. 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 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 March 31, 2008

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

Eliminations/

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo, Inc.

 

HoldCo, Inc.

 

Guarantors

 

Non–Guarantor

 

Adjustments

 

Total

 

Net revenue

 

$

 

$

 

$

 

$

 

$

565,786

 

$

10,757

 

$

(10,757

)

$

565,786

 

Compensation and benefits

 

 

 

 

 

394,351

 

 

 

394,351

 

Operating expenses

 

 

 

 

 

83,223

 

 

 

83,223

 

Insurance expense

 

 

 

 

 

19,218

 

12,502

 

(10,757

)

20,963

 

Selling, general and administrative expenses

 

 

 

 

 

14,592

 

 

 

14,592

 

Depreciation and amortization expense

 

 

 

 

 

17,717

 

 

 

17,717

 

Restructuring charge

 

 

 

 

 

 

 

 

 

Income from operations

 

 

 

 

 

36,685

 

(1,745

)

 

34,940

 

Interest income from restricted assets

 

 

 

 

 

682

 

1,073

 

 

1,755

 

Interest expense

 

 

 

 

 

(9,916

)

 

 

(9,916

)

Realized gain on investments

 

 

 

 

 

 

672

 

 

672

 

Interest and other income

 

 

 

 

 

302

 

 

 

302

 

Income before income taxes

 

 

 

 

 

27,753

 

 

 

27,753

 

Income tax expense

 

 

 

 

 

(10,684

)

 

 

(10,684

)

Income before equity in earnings (loss) of unconsolidated subsidiaries

 

 

 

 

 

17,069

 

 

 

17,069

 

Equity in earnings (loss) of unconsolidated subsidiaries

 

17,019

 

17,019

 

5,061

 

11,958

 

(50

)

 

(51,057

)

(50

)

Net income

 

$

17,019

 

$

17,019

 

$

5,061

 

$

11,958

 

$

17,019

 

$

 

$

(51,057

)

$

17,019

 

 

12



 

Consolidating Statement of Operations

For the quarter ended March 31, 2007

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

Eliminations/

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo, Inc.

 

HoldCo, Inc.

 

Guarantors

 

Non-Guarantor

 

Adjustments

 

Total

 

Net revenue

 

$

 

$

 

$

 

$

 

$

523,319

 

$

8,640

 

$

(8,640

)

$

523,319

 

Compensation and benefits

 

 

 

 

 

354,932

 

 

 

354,932

 

Operating expenses

 

 

 

 

 

79,996

 

 

 

79,996

 

Insurance expense

 

 

 

 

 

19,269

 

9,672

 

(8,640

)

20,301

 

Selling, general and administrative expenses

 

 

 

 

 

13,305

 

 

 

13,305

 

Depreciation and amortization expense

 

 

 

 

 

16,779

 

 

 

16,779

 

Restructuring charge

 

 

 

 

 

2,242

 

 

 

2,242

 

Income from operations

 

 

 

 

 

36,796

 

(1,032

)

 

35,764

 

Interest income from restricted assets

 

 

 

 

 

720

 

995

 

 

1,715

 

Interest expense

 

 

 

 

 

(11,234

)

 

 

(11,234

)

Realized gain on investments

 

 

 

 

 

 

37

 

 

37

 

Interest and other income

 

 

 

 

 

657

 

 

 

657

 

Income before income taxes

 

 

 

 

 

26,939

 

 

 

26,939

 

Income tax expense

 

 

 

 

 

(10,462

)

 

 

(10,462

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

16,477

 

 

 

16,477

 

Equity in earnings of unconsolidated subsidiaries

 

16,631

 

16,631

 

2,826

 

13,805

 

154

 

 

(49,893

)

154

 

Net income

 

$

16,631

 

$

16,631

 

$

2,826

 

$

13,805

 

$

16,631

 

$

 

$

(49,893

)

$

16,631

 

 

13



 

Consolidating Balance Sheet

As of March 31, 2008

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

Eliminations/

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo, Inc.

 

HoldCo, Inc.

 

Guarantors

 

Non–Guarantor

 

Adjustments

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

 

$

 

$

15,328

 

$

827

 

$

 

$

16,155

 

Insurance collateral

 

 

 

 

 

23,388

 

46,123

 

(32,833

)

36,678

 

Trade and other accounts receivable, net

 

 

 

 

 

521,491

 

1,111

 

 

522,602

 

Parts and supplies inventory

 

 

 

 

 

20,130

 

 

 

20,130

 

Other current assets

 

 

 

 

 

14,955

 

2,692

 

 

17,647

 

Current deferred tax assets

 

 

 

 

 

72,523

 

3,163

 

 

75,686

 

Current assets

 

 

 

 

 

667,815

 

53,916

 

(32,833

)

688,898

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

 

 

 

132,682

 

 

 

132,682

 

Intercompany receivable

 

4,347

 

113,400

 

278,172

 

189,546

 

 

 

(585,465

)

 

Intangible assets, net

 

 

 

 

 

80,353

 

 

 

80,353

 

Non-current deferred tax assets

 

 

 

 

 

85,564

 

869

 

 

86,433

 

Insurance collateral

 

 

 

 

 

46,806

 

103,558

 

(2,844

)

147,520

 

Goodwill

 

 

 

 

 

322,643

 

458

 

 

323,101

 

Other long-term assets

 

 

 

6,759

 

3,016

 

17,966

 

 

 

27,741

 

Investment and advances in subsidiaries

 

461,164

 

347,764

 

216,161

 

131,590

 

20,179

 

 

(1,176,857

)

 

Assets

 

$

465,511

 

$

461,164

 

$

501,092

 

$

324,152

 

$

1,374,008

 

$

158,801

 

$

(1,797,999

)

$

1,486,728

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

 

$

 

$

69,236

 

$

98

 

$

 

$

69,334

 

Accrued liabilities

 

 

 

2,153

 

1,735

 

189,111

 

32,847

 

(2,501

)

223,345

 

Current portion of long-term debt

 

 

 

1,656

 

744

 

2,366

 

 

 

4,766

 

Current liabilities

 

 

 

3,809

 

2,479

 

260,713

 

32,945

 

(2,501

)

297,445

 

Long-term debt

 

 

 

281,122

 

190,069

 

5,945

 

 

 

477,136

 

Other long-term liabilities

 

 

 

 

 

174,135

 

105,677

 

(33,176

)

246,636

 

Intercompany

 

 

 

 

 

585,465

 

 

(585,465

)

 

Liabilities

 

 

 

284,931

 

192,548

 

1,026,258

 

138,622

 

(621,142

)

1,021,217

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

93

 

 

 

 

 

30

 

(30

)

93

 

Class B common stock

 

1

 

 

 

 

 

 

 

1

 

Partnership equity

 

212,361

 

325,761

 

189,394

 

22,967

 

212,361

 

 

(750,483

)

212,361

 

Additional paid-in capital

 

117,653

 

 

 

 

 

6,690

 

(6,690

)

117,653

 

Retained earnings

 

135,975

 

135,975

 

28,845

 

107,130

 

135,961

 

8,563

 

(416,474

)

135,975

 

Comprehensive income (loss)

 

(572

)

(572

)

(2,079

)

1,507

 

(572

)

4,896

 

(3,180

)

(572

)

Equity

 

465,511

 

461,164

 

216,161

 

131,604

 

347,750

 

20,179

 

(1,176,857

)

465,511

 

Liabilities and Equity

 

$

465,511

 

$

461,164

 

$

501,092

 

$

324,152

 

$

1,374,008

 

$

158,801

 

$

(1,797,999

)

$

1,486,728

 

 

14



 

Consolidating Balance Sheet

As of December 31, 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

 

$

 

$

 

$

 

$

 

$

24,987

 

$

3,927

 

$

 

$

28,914

 

Insurance collateral

 

 

 

 

 

24,498

 

13,278

 

 

37,776

 

Trade and other accounts receivable, net

 

 

 

 

 

494,376

 

972

 

 

495,348

 

Parts and supplies inventory

 

 

 

 

 

20,010

 

 

 

20,010

 

Other current assets

 

 

 

 

 

11,709

 

6

 

 

11,715

 

Current deferred tax assets

 

 

 

 

 

73,834

 

3,163

 

 

76,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

649,414

 

21,346

 

 

670,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

 

 

 

143,342

 

 

 

143,342

 

Intercompany receivable

 

3,773

 

113,400

 

281,598

 

192,635

 

 

 

(591,406

)

 

Intangible assets, net

 

 

 

 

 

81,717

 

 

 

81,717

 

Non-current deferred tax assets

 

 

 

 

 

94,092

 

869

 

 

94,961

 

Insurance collateral

 

 

 

 

 

49,200

 

102,280

 

(4,842

)

146,638

 

Goodwill

 

 

 

 

 

312,666

 

458

 

 

313,124

 

Other long-term assets

 

 

 

7,124

 

3,231

 

18,666

 

 

 

29,021

 

Investment and advances in subsidiaries

 

445,723

 

332,323

 

212,555

 

119,754

 

3,458

 

 

(1,113,813

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

449,496

 

$

445,723

 

$

501,277

 

$

315,620

 

$

1,352,555

 

$

124,953

 

$

(1,710,061

)

$

1,479,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

 

$

 

$

64,746

 

$

109

 

$

 

$

64,855

 

Accrued liabilities

 

 

 

5,547

 

4,860

 

196,565

 

30,347

 

 

237,319

 

Current portion of long-term debt

 

 

 

1,656

 

744

 

2,317

 

 

 

4,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

7,203

 

5,604

 

263,628

 

30,456

 

 

306,891

 

Long-term debt

 

 

 

281,519

 

190,248

 

6,399

 

 

 

478,166

 

Other long-term liabilities

 

 

 

 

 

158,813

 

91,039

 

(4,842

)

245,010

 

Intercompany

 

 

 

 

 

591,406

 

 

(591,406

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

288,722

 

195,852

 

1,020,246

 

121,495

 

(596,248

)

1,030,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

93

 

 

 

 

 

30

 

(30

)

93

 

Class B common stock