Table of Contents

 

 

 

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, 2009

 

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o  Yes   o  No

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer o 

 

Accelerated filer x

Non-accelerated filer   o 

(Do not check if a smaller reporting company)

Smaller reporting company 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 May 4, 2009 — 10,039,272; shares of class B common stock outstanding at May 4, 2009 — 142,545; LP exchangeable units outstanding at May 4, 2009 — 32,107,500.

 

 

 



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EMERGENCY MEDICAL SERVICES CORPORATION

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

FOR THE THREE MONTHS ENDED

MARCH 31, 2009

 

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

 

 

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EMERGENCY MEDICAL SERVICES CORPORATION

PART I. FINANCIAL INFORMATION

FOR THE THREE MONTHS ENDED

MARCH 31, 2009

 

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,

 

 

 

2009

 

2008

 

Net revenue

 

$

613,022

 

$

565,786

 

Compensation and benefits

 

426,534

 

394,351

 

Operating expenses

 

84,672

 

83,223

 

Insurance expense

 

22,504

 

20,963

 

Selling, general and administrative expenses

 

15,036

 

14,592

 

Depreciation and amortization expense

 

16,768

 

17,717

 

Income from operations

 

47,508

 

34,940

 

Interest income from restricted assets

 

1,266

 

1,755

 

Interest expense

 

(10,190

)

(9,916

)

Realized gain on investments

 

639

 

672

 

Interest and other income

 

517

 

302

 

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

 

39,740

 

27,753

 

Income tax expense

 

(15,726

)

(10,684

)

Income before equity in earnings (loss) of unconsolidated subsidiary

 

24,014

 

17,069

 

Equity in earnings (loss) of unconsolidated subsidiary

 

57

 

(50

)

Net income

 

24,071

 

17,019

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Unrealized holding (losses) gains during the period

 

(1,157

)

1,347

 

Unrealized holding gains (losses) on derivative financial instruments

 

351

 

(2,925

)

Comprehensive income

 

$

23,265

 

$

15,441

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.57

 

$

0.41

 

Diluted earnings per common share

 

$

0.56

 

$

0.40

 

Weighted average common shares outstanding, basic

 

41,924,218

 

41,570,412

 

Weighted average common shares outstanding, diluted

 

43,094,597

 

43,083,642

 

 

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)

 

 

 

March 31,
2009

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

194,148

 

$

146,173

 

Insurance collateral

 

45,315

 

55,052

 

Trade and other accounts receivable, net

 

475,126

 

472,501

 

Parts and supplies inventory

 

21,180

 

21,160

 

Prepaids and other current assets

 

36,218

 

28,378

 

Current deferred tax assets

 

91,249

 

91,910

 

Total current assets

 

863,236

 

815,174

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

119,641

 

124,869

 

Intangible assets, net

 

76,495

 

76,141

 

Non-current deferred tax assets

 

22,233

 

36,351

 

Insurance collateral

 

114,914

 

119,644

 

Goodwill

 

341,308

 

346,013

 

Other long-term assets

 

22,728

 

23,027

 

Total assets

 

$

1,560,555

 

$

1,541,219

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

64,383

 

$

57,318

 

Accrued liabilities

 

241,479

 

257,918

 

Current portion of long-term debt

 

4,543

 

4,905

 

Total current liabilities

 

310,405

 

320,141

 

Long-term debt

 

452,803

 

453,600

 

Insurance reserves and other long-term liabilities

 

231,121

 

228,439

 

Total liabilities

 

994,329

 

1,002,180

 

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, 9,871,084 and 9,606,766 issued and outstanding in 2009 and 2008, respectively)

 

99

 

96

 

Class B common stock ($0.01 par value; 40,000,000 shares authorized, 142,545 issued and outstanding in 2009 and 2008)

 

1

 

1

 

Class B special voting stock ($0.01 par value; 1 share authorized, issued and outstanding in 2009 and 2008)

 

 

 

LP exchangeable units (32,107,500 shares issued and outstanding in 2009 and 2008)

 

212,361

 

212,361

 

Additional paid-in capital

 

128,289

 

124,370

 

Retained earnings

 

227,874

 

203,803

 

Accumulated other comprehensive loss

 

(2,398

)

(1,592

)

Total equity

 

566,226

 

539,039

 

Total liabilities and equity

 

$

1,560,555

 

$

1,541,219

 

 

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)

 

 

 

Three months ended March 31,

 

 

 

2009

 

2008

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

24,071

 

$

17,019

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

17,080

 

18,296

 

Gain on disposal of property, plant and equipment

 

(2

)

(13

)

Equity-based compensation expense

 

650

 

562

 

Equity in (earnings) loss of unconsolidated subsidiary

 

(57

)

50

 

Dividends received

 

713

 

 

Deferred income taxes

 

14,595

 

10,356

 

Changes in operating assets/liabilities, net of acquisitions:

 

 

 

 

 

Trade and other accounts receivable

 

(2,625

)

(26,308

)

Parts and supplies inventory

 

(20

)

(20

)

Prepaids and other current assets

 

(7,840

)

(5,932

)

Accounts payable and accrued liabilities

 

(8,500

)

(13,389

)

Insurance accruals

 

3,877

 

(3,399

)

Net cash provided by (used in) operating activities

 

41,942

 

(2,778

)

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,207

)

(2,527

)

Proceeds from sale of property, plant and equipment

 

21

 

63

 

Acquisition of businesses, net of cash received

 

 

(13,278

)

Net change in insurance collateral

 

13,310

 

2,125

 

Other investing activities

 

(670

)

653

 

Net cash provided by (used in) investing activities

 

5,454

 

(12,964

)

Cash Flows from Financing Activities

 

 

 

 

 

EMSC issuance of class A common stock

 

898

 

12

 

Borrowings under revolving credit facility

 

 

14,000

 

Repayments of capital lease obligations and other debt

 

(1,159

)

(15,151

)

Increase in bank overdrafts

 

840

 

4,122

 

Net cash provided by financing activities

 

579

 

2,983

 

Change in cash and cash equivalents

 

47,975

 

(12,759

)

Cash and cash equivalents, beginning of period

 

146,173

 

28,914

 

Cash and cash equivalents, end of period

 

$

194,148

 

$

16,155

 

 

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 months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. 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, 2008.

 

The consolidated financial statements of EMSC include those of its direct subsidiary, Emergency Medical Services L.P. (“EMS LP”), a Delaware limited partnership. The Company’s business is conducted primarily through two operating subsidiaries, American Medical Response, Inc. (“AMR”), its healthcare transportation services segment, and EmCare Holdings Inc. (“EmCare”), its outsourced hospital-based physician services segment.

 

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, 2009 and 2008, the Company expensed $250 in respect of this fee.

 

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 normally 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 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 2009. As a result of this and previous actuarial valuations, the Company recorded an increase in its provision for insurance liabilities of approximately $0.7 million in the three months ended March 31, 2009 compared to a decrease of $2.8 million during the same period in 2008.

 

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The long-term portion of insurance reserves was $141.0 million and $139.0 million as of March 31, 2009 and December 31, 2008, respectively.

 

Trade and Other Accounts Receivable, net

 

The Company estimates its allowances based on payor reimbursement schedules, historical collections and 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 and allowances are as follows:

 

 

 

March 31,
2009

 

December 31,
2008

 

Gross trade accounts receivable

 

$

1,792,126

 

$

1,792,546

 

Allowance for contractual discounts

 

882,166

 

885,401

 

Allowance for uncompensated care

 

513,143

 

514,475

 

Net trade accounts receivable

 

396,817

 

392,670

 

Other receivables, net

 

78,309

 

79,831

 

Net accounts receivable

 

$

475,126

 

$

472,501

 

 

Other receivables represent EmCare hospital fees and subsidies 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, a look-back analysis is done, typically 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,

 

 

 

2009

 

2008

 

Gross revenue

 

100.0

%

100.0

%

Provision for contractual discounts

 

47.9

%

45.7

%

Revenue net of contractual discounts

 

52.1

%

54.3

%

Provision for uncompensated care as a percentage of gross revenue

 

19.6

%

18.7

%

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

 

37.7

%

34.4

%

 

Healthcare billing and collection 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

 

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care, are adjusted in future periods, as adjustments become known.  These adjustments were less than 1% of net revenue for the three month periods ended March 31, 2009 and 2008.

 

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

 

As of March 31, 2009, the Company holds 23.8% 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.

 

Fair Value Measurement

 

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 Fair Value Measurements (“SFAS 157”) effective January 1, 2008, which among other things, requires additional disclosures about financial instruments that are reported at fair value.  SFAS 157 establishes a hierarchal disclosure framework which ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of instrument and the characteristics specific to the instrument.  Instruments 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.

 

Financial instruments 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 assets or liabilities as of the reporting date.  As required by SFAS 157, the Company does not adjust the quoted price for these assets or liabilities.

 

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.

 

Level 3 — Pricing inputs are unobservable as of the reporting date and reflect the Company’s own assumptions about the fair value of the asset or liability.

 

The following table summarizes the valuation of EMSC’s financial instruments by the above SFAS 157 fair value hierarchy levels as of March 31, 2009:

 

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Description

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Securities

 

$

80,368

 

$

59,006

 

$

21,362

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives

 

$

5,195

 

$

 

$

5,195

 

$

 

 

FASB Staff Position No. 157-2 (“FSP 157-2”) delayed the application of SFAS 157 to nonfinancial assets and liabilities until January 1, 2009.  Adoption of FSP 157-2 did not have an impact on the Company’s financial statements during the three months ended March 31, 2009.

 

3.              Acquisitions

 

The Company adopted SFAS No. 141 (revised 2007) Business Combinations (“SFAS 141(R)”) effective January 1, 2009.  The impact to the Company’s consolidated financials statements and related disclosures will depend on the nature and terms of the business combinations entered into subsequent to adoption of SFAS 141(R).  The Company expensed $720 upon adoption of this standard during the three months ended March 31, 2009.

 

In January 2009, the Company entered into an agreement for the acquisition of the air ambulance business of Skyservice Business Aviation Inc. (“Skyservice Air Ambulance”), a fixed-wing air ambulance operator based in Montreal, Canada, with operations in Quebec, Ontario and British Columbia.  Founded in 1989, Skyservice Air Ambulance provides worldwide air ambulance service.  The transaction is subject to customary closing conditions and Canadian regulatory approval.

 

4.              Accrued Liabilities

 

Accrued liabilities were as follows at March 31, 2009 and December 31, 2008:

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

Accrued wages and benefits

 

$

90,288

 

$

95,029

 

Accrued paid time-off

 

26,209

 

25,505

 

Current portion of self-insurance reserves

 

63,004

 

61,099

 

Accrued restructuring

 

195

 

200

 

Current portion of compliance and legal

 

3,799

 

2,616

 

Accrued billing and collection fees

 

3,773

 

4,127

 

Accrued profit sharing

 

13,963

 

22,954

 

Accrued interest

 

3,534

 

9,964

 

Other

 

36,714

 

36,424

 

Total accrued liabilities

 

$

241,479

 

$

257,918

 

 

5.              Long-Term Debt

 

Long-term debt consisted of the following at March 31, 2009 and December 31, 2008:

 

 

 

March 31,
2009

 

December 31,
2008

 

Senior subordinated notes due 2015

 

$

250,000

 

$

250,000

 

Senior secured term loan due 2012 (3.02% at March 31, 2009)

 

201,338

 

201,862

 

Notes due at various dates from 2009 to 2022 with interest rates from 6% to 10%

 

1,563

 

1,632

 

Capital lease obligations due at various dates from 2010 to 2018 (see note 7)

 

4,445

 

5,011

 

 

 

457,346

 

458,505

 

Less current portion

 

(4,543

)

(4,905

)

Total long-term debt

 

$

452,803

 

$

453,600

 

 

6.              Derivative Instruments and Hedging Activities

 

The Company manages its exposure to changes in market interest rates.  The Company’s use of derivative instruments is limited to highly effective fixed interest rate swap agreements used to manage well-defined interest rate risk exposures.  The Company monitors its positions and the credit ratings of its counterparties and does not anticipate non-performance by the counterparties.  The Company does not enter into interest rate swap agreements for trading purposes.

 

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In March 2009, the Company amended the interest rate swap agreement originally entered into in December 2007.  The amendment changed the hedged interest rate from the 3-month LIBOR to the 1-month LIBOR.  The swap agreement is with major financial institutions with a notional principal balance of $200 million.  The amended swap agreement effectively converts $200 million of variable rate debt to fixed rate debt with an effective rate of 6.1%.  The Company continues to make interest payments based on the variable rate associated with the debt (based on LIBOR which had a rate of 1% at March 31, 2009) and periodically settles with its counterparties for the difference between the rate paid and the fixed rate. The swap agreement will expire in December 2009.  The Company recorded a decrease to the liability associated with the fair value of the fixed interest rate swap agreement in the amount of $0.6 million for the three months ended March 31, 2009 and an increase of $4.0 million during the same period in 2008 before applicable tax impacts as a component of other comprehensive income.  The net additional interest payments made or received under this swap agreement are recognized in interest expense.  Over the remaining term of the agreement, the Company expects to reclassify $5.2 million of deferred loss before applicable tax impacts, which represents the difference in our fixed interest rate and the projected variable interest rates, from accumulated other comprehensive loss to interest expense as related interest payments that are being hedged are recognized.

 

7.                 Commitments and Contingencies

 

Lease Commitments

 

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

 

The Company also leases certain vehicles and leasehold improvements under capital leases.  Assets under capital leases are capitalized using inherent interest rates at the inception of each lease. Capital leases are collateralized by the underlying assets.

 

Forward Purchase Commitment

 

In March 2009, AMR entered into a series of forward purchase contracts which fix the price for a portion of its total monthly diesel fuel usage from April 1, 2009 through June 30, 2010.  For the nine months ending December 31, 2009, the Company is under contract to purchase 200,000 gallons of diesel fuel per month at prices ranging from $2.63 to $2.79 per gallon.  In addition, for the twelve months ending June 30, 2010, the Company is under contract to purchase 50,000 gallons of diesel fuel per month at prices ranging from $2.85 to $2.99 per gallon.  These forward purchase contracts represent approximately 40% of the Company’s total monthly diesel fuel usage. Based on the terms of the contracts, the Company has concluded they do not qualify as derivatives.

 

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, kickback 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 directly below under “Other Legal Matters”, management believes that the outcome of any of these investigations would not have a material adverse effect on the Company.

 

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.

 

In December 2006, AMR received a subpoena from the DOJ.  The subpoena requested copies of documents for the period from January 2000 through the present.  The subpoena required AMR to produce a broad range of documents relating to the operations of certain AMR affiliates in New York.  The Company continues to cooperate with governmental requests for documents and information.

 

Three different lawsuits purporting to be class actions have been filed against AMR and certain subsidiaries in California alleging violations of California wage and hour laws.  On April 16, 2008, Lori Bartoni commenced a suit in the Superior Court for the State of California, County of Alameda, which has since been removed to the United States District Court,

 

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Northern District of California; on July 8, 2008, Vaughn Banta filed suit in the Superior Court of the State of California, County of Los Angeles; on January 22, 2009, Laura Karapetian filed suit in the Superior Court of the State of California, County of Los Angeles.  At the present time, courts have not certified classes in any of these cases.  Plaintiffs allege principally that the AMR entities failed to pay daily overtime rates pursuant to California law, and failed to provide required meal breaks or pay premium compensation for missed meal breaks.  Plaintiffs are seeking to certify the classes and seeking lost wages, punitive damages, attorneys’ fees and other sanctions permitted under California law for violations of wage and hour laws.  The Company is unable at this time to estimate the amount of potential damages, if any.

 

8.                 Equity Based Compensation

 

The Company adopted the provisions of 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; these performance measures were satisfied during the first quarter of 2009 with respect to the options granted in first quarter of 2005. Options with similar provisions were granted to non-employee directors. The Company recorded a compensation charge of $97 and $431 for the three months ended March 31, 2009 and 2008, respectively.  Options are no longer granted under the Equity Option Plan, but rather under the Company’s Amended and Restated 2007 Long-Term Incentive Plan described below.

 

Long-Term Incentive Plan

 

The Company’s original 2007 Long-Term Incentive Plan was approved by stockholders in May 2007 and an Amended and Restated 2007 Long-Term Incentive Plan (the “Plan”) was approved by stockholders in May 2008.  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.

 

The Company granted options and restricted stock to key employees during the three months ended March 31, 2009 under the Plan. The options permit employees to purchase 206,625 shares of class A common stock at a weighted average exercise price of $29.65 per share, vest ratably over a period of four years and have a maximum term of ten years.  The Company also granted 206,625 shares of restricted stock pursuant to the Plan, which vest ratably over a period of three years.

 

The Company recorded a compensation charge of $428 and $31 during the three months ended March 31, 2009 and 2008, respectively, in connection with the Plan.

 

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”) 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 annual stockholder meeting.  In connection with this plan, the Company granted 4,145 RSUs per director after the Company’s 2008 annual stockholder meeting, plus an additional prorated amount of 2,374 RSUs to a director upon his election to the board of directors in October 2008.  The Company granted 2,705 RSUs per director in 2007.  The Company expensed $125 and $100 for the three months ended March 31, 2009 and 2008, respectively.

 

9.                 Segment Information

 

The Company is organized around two separately managed business units: healthcare transportation services and hospital-based physician 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 hospital-based physician services reportable segment provides outsourced business services to hospitals primarily for emergency departments and urgent care centers, as well as for hospitalist/inpatient, radiology and anesthesiology services. 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

 

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(“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,

 

 

 

2009

 

2008

 

Healthcare Transportation Services

 

 

 

 

 

Revenue

 

$

336,446

 

$

326,316

 

Segment Adjusted EBITDA

 

33,888

 

28,398

 

Hospital-Based Physician Services

 

 

 

 

 

Revenue

 

276,576

 

239,470

 

Segment Adjusted EBITDA

 

31,654

 

26,014

 

Total

 

 

 

 

 

Total revenue

 

613,022

 

565,786

 

Total Adjusted EBITDA

 

65,542

 

54,412

 

Reconciliation of Adjusted EBITDA to Net Income

 

 

 

 

 

Adjusted EBITDA

 

$

65,542

 

$

54,412

 

Depreciation and amortization expense

 

(16,768

)

(17,717

)

Interest expense

 

(10,190

)

(9,916

)

Realized gain on investments

 

639

 

672

 

Interest and other income

 

517

 

302

 

Income tax expense

 

(15,726

)

(10,684

)

Equity in earnings (loss) of unconsolidated subsidiary

 

57

 

(50

)

Net income

 

$

24,071

 

$

17,019

 

 

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

 

 

 

Quarter ended March 31,

 

 

 

2009

 

2008

 

Adjusted EBITDA

 

$

65,542

 

$

54,412

 

Interest paid

 

(9,877

)

(9,337

)

Change in accounts receivable

 

(2,625

)

(26,308

)

Change in other operating assets/liabilities

 

(12,483

)

(22,740

)

Equity based compensation

 

650

 

562

 

Other

 

735

 

633

 

Cash flows provided by (used in) operating activities

 

$

41,942

 

$

(2,778

)

 

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:

 

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Consolidating Statement of Operations

For the three months ended March 31, 2009

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

Eliminations/

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo, Inc.

 

HoldCo, Inc.

 

Guarantors

 

Non-Guarantor

 

Adjustments

 

Total

 

Net revenue

 

$

 

$

 

$

 

$

 

$

613,022

 

$

6,883

 

$

(6,883

)

$

613,022

 

Compensation and benefits

 

 

 

 

 

426,534

 

 

 

426,534

 

Operating expenses

 

 

 

 

 

84,672

 

 

 

84,672

 

Insurance expense

 

 

 

 

 

21,154

 

8,233

 

(6,883

)

22,504

 

Selling, general and administrative expenses

 

 

 

 

 

15,036

 

 

 

15,036

 

Depreciation and amortization expense

 

 

 

 

 

16,768

 

 

 

16,768

 

Income (loss) from operations

 

 

 

 

 

48,858

 

(1,350

)

 

47,508

 

Interest income from restricted assets

 

 

 

 

 

555

 

711

 

 

1,266

 

Interest expense

 

 

 

 

 

(10,190

)

 

 

(10,190

)

Realized gain on investments

 

 

 

 

 

 

639

 

 

639

 

Interest and other income

 

 

 

 

 

517

 

 

 

517

 

Income before income taxes

 

 

 

 

 

39,740

 

 

 

39,740

 

Income tax expense

 

 

 

 

 

(15,726

)

 

 

(15,726

)

Income before equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

24,014

 

 

 

24,014

 

Equity in earnings of unconsolidated subsidiaries

 

24,071

 

24,071

 

9,344

 

14,728

 

57

 

 

(72,214

)

57

 

Net income

 

$

24,071

 

$

24,071

 

$

9,344

 

$

14,728

 

$

24,071

 

$

 

$

(72,214

)

$

24,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidating Statement of Operations

For the three months 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

 

Income (loss) 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

 

 

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Consolidating Balance Sheet

As of March 31, 2009

 

 

 

 

 

 

 

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

 

$

 

$

 

$

 

$

 

$

177,516

 

$

16,632

 

$

 

$

194,148

 

Insurance collateral

 

 

 

 

 

17,587

 

58,496

 

(30,768

)

45,315

 

Trade and other accounts receivable, net

 

 

 

 

 

474,272

 

854

 

 

475,126

 

Parts and supplies inventory

 

 

 

 

 

21,180

 

 

 

21,180

 

Other current assets

 

 

 

 

 

33,528

 

2,690

 

 

36,218

 

Current deferred tax assets

 

 

 

 

 

87,415

 

3,834

 

 

91,249

 

Current assets

 

 

 

 

 

811,498

 

82,506

 

(30,768

)

863,236

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

 

 

 

119,641

 

 

 

119,641

 

Intercompany receivable

 

14,989

 

113,400

 

265,042

 

182,146

 

 

 

(575,577

)

 

Intangible assets, net

 

 

 

 

 

76,495

 

 

 

76,495

 

Non-current deferred tax assets

 

 

 

 

 

26,548

 

(4,315

)

 

22,233

 

Insurance collateral

 

 

 

 

 

39,588

 

72,771

 

2,555

 

114,914

 

Goodwill

 

 

 

 

 

340,850

 

458

 

 

341,308

 

Other long-term assets

 

 

 

5,342

 

2,356

 

15,030

 

 

 

22,728

 

Investment and advances in subsidiaries

 

551,237

 

437,837

 

250,380

 

187,443

 

41,125

 

 

(1,468,022

)

 

Assets

 

$

566,226

 

$

551,237

 

$

520,764

 

$

371,945

 

$

1,470,775

 

$

151,420

 

$

(2,071,812

)

$

1,560,555

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

 

$

 

$

64,317

 

$

66

 

$

 

$

64,383

 

Accrued liabilities

 

 

 

1,915

 

1,619

 

204,615

 

34,581

 

(1,251

)

241,479

 

Current portion of long-term debt

 

 

 

1,447

 

650

 

2,446

 

 

 

4,543

 

Current liabilities

 

 

 

3,362

 

2,269

 

271,378

 

34,647

 

(1,251

)

310,405

 

Long-term debt

 

 

 

265,976

 

183,265

 

3,562

 

 

 

452,803

 

Other long-term liabilities

 

 

 

 

 

187,930

 

70,153

 

(26,962

)

231,121

 

Intercompany

 

 

 

 

 

570,082

 

5,495

 

(575,577

)

 

Liabilities

 

 

 

269,338

 

185,534

 

1,032,952

 

110,295

 

(603,790

)

994,329

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

99

 

 

 

 

 

30

 

(30

)

99

 

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

 

128,289

 

 

 

 

 

4,316

 

(4,316

)

128,289

 

Retained earnings

 

227,874

 

227,874

 

64,751

 

163,123

 

227,860

 

33,403

 

(717,011

)

227,874

 

Comprehensive income (loss)

 

(2,398

)

(2,398

)

(2,719

)

321

 

(2,398

)

3,376

 

3,818

 

(2,398

)

Equity

 

566,226

 

551,237

 

251,426

 

186,411

 

437,823

 

41,125

 

(1,468,022

)

566,226

 

Liabilities and Equity

 

$

566,226

 

$

551,237

 

$

520,764

 

$

371,945

 

$

1,470,775

 

$

151,420

 

$

(2,071,812

)

$

1,560,555

 

 

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Consolidating Balance Sheet

As of December 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

 

$

 

$

 

$

 

$

 

$

140,452

 

$

5,721

 

$

 

$

146,173

 

Insurance collateral

 

 

 

 

 

18,618

 

40,751

 

(4,317

)

55,052

 

Trade and other accounts receivable, net

 

 

 

 

 

471,546

 

955

 

 

472,501

 

Parts and supplies inventory

 

 

 

 

 

21,160

 

 

 

21,160

 

Other current assets

 

 

 

 

 

28,339

 

39

 

 

28,378

 

Current deferred tax assets

 

 

 

 

 

88,076

 

3,834

 

 

91,910

 

Current assets

 

 

 

 

 

768,191

 

51,300

 

(4,317

)

815,174

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

 

 

 

124,869

 

 

 

124,869

 

Intercompany receivable

 

11,067

 

113,400

 

268,581

 

185,250

 

 

 

(578,298

)

 

Intangible assets, net

 

 

 

 

 

76,141

 

 

 

76,141

 

Non-current deferred tax assets

 

 

 

 

 

40,666

 

(4,315

)

 

36,351

 

Insurance collateral

 

 

 

 

 

39,923

 

81,062

 

(1,341

)

119,644

 

Goodwill

 

 

 

 

 

345,555

 

458

 

 

346,013

 

Other long-term assets

 

 

 

5,496

 

2,513

 

15,018

 

 

 

23,027

 

Investment and advances in subsidiaries

 

527,972

 

414,572

 

241,438

 

173,120

 

33,216

 

 

(1,390,318

)

 

Assets

 

$

539,039

 

$

527,972

 

$

515,515

 

$

360,883

 

$

1,443,579

 

$

128,505

 

$

(1,974,274

)

$

1,541,219

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

 

$

 

$

57,260

 

$

58

 

$

 

$

57,318

 

Accrued liabilities

 

 

 

5,247

 

4,717

 

216,692

 

31,263

 

(1

)

257,918

 

Current portion of long-term debt

 

 

 

1,590

 

715

 

2,600

 

 

 

4,905

 

Current liabilities

 

 

 

6,837

 

5,432

 

276,552

 

31,321

 

(1

)

320,141

 

Long-term debt

 

 

 

266,194

 

183,363

 

4,043

 

 

 

453,600

 

Other long-term liabilities

 

 

 

 

 

175,623

 

58,473

 

(5,657

)

228,439

 

Intercompany

 

 

 

 

 

572,803

 

5,495

 

(578,298

)

 

Liabilities

 

 

 

273,031

 

188,795

 

1,029,021

 

95,289

 

(583,956

)

1,002,180

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

96

 

 

 

 

 

30

 

(30

)

96

 

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

 

124,370

 

 

 

 

 

4,316

 

(4,316

)

124,370

 

Retained earnings

 

203,803

 

203,803

 

55,406

 

148,397

 

203,789

 

24,337

 

(635,732

)

203,803

 

Comprehensive income (loss)

 

(1,592

)

(1,592

)

(2,316

)

724

 

(1,592

)

4,533

 

243

 

(1,592

)

Equity

 

539,039

 

527,972

 

242,484

 

172,088

 

414,558

 

33,216

 

(1,390,318

)

539,039

 

Liabilities and Equity

 

$

539,039

 

$

527,972

 

$

515,515

 

$

360,883

 

$

1,443,579

 

$

128,505

 

$

(1,974,274

)

$

1,541,219

 

 

15



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

For the three months ended March 31, 2009

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo Inc.

 

HoldCo Inc.

 

Guarantors

 

Non-guarantors

 

Total

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

 

$

 

$

 

$

 

$

42,976

 

$

(1,034

)

$

41,942

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

 

 

 

(7,207

)

 

(7,207

)

Proceeds from sale of property, plant and equipment

 

 

 

 

 

21

 

 

21

 

Net change in insurance collateral

 

 

 

 

 

1,365

 

11,945

 

13,310

 

Net change in deposits and other assets

 

 

 

 

 

(670

)

 

(670

)

Net cash provided by (used in) investing activities

 

 

 

 

 

(6,491

)

11,945

 

5,454

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EMSC issuance of class A common stock

 

898

 

 

 

 

 

 

898

 

Repayments of capital lease obligations and other debt

 

 

 

 

 

(1,159

)

 

(1,159

)

Increase in bank overdrafts

 

 

 

 

 

840

 

 

840

 

Net intercompany borrowings (payments)

 

(898

)

 

 

 

898

 

 

 

Net cash provided by financing activities

 

 

 

 

 

579

 

 

579

 

Change in cash and cash equivalents

 

 

 

 

 

37,064

 

10,911

 

47,975

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

140,452

 

5,721

 

146,173

 

Cash and cash equivalents, end of period

 

$

 

$

 

$

 

$

 

$

177,516

 

$

16,632

 

$

194,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Statement of Cash Flows

For the three months ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuer

 

Issuer

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR

 

EmCare

 

Subsidiary

 

Subsidiary

 

 

 

 

 

EMSC

 

EMS LP

 

HoldCo Inc.

 

HoldCo Inc.

 

Guarantors

 

Non-guarantors

 

Total

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

 

$

 

$

 

$

 

$

(1,053

)

$

(1,725

)

$

(2,778

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

 

 

 

(2,527

)

 

(2,527

)

Proceeds from sale of property, plant and equipment

 

 

 

 

 

63

 

 

63

 

Acquisition of businesses, net of cash received

 

 

 

 

 

(13,278

)

 

(13,278

)

Net change in insurance collateral

 

 

 

 

 

3,500

 

(1,375

)

2,125

 

Net change in deposits and other assets

 

 

 

 

 

653

 

 

653

 

Net cash used in investing activities

 

 

 

 

 

(11,589

)

(1,375

)

(12,964

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EMSC issuance of class A common stock

 

12

 

 

 

 

 

 

12

 

Repayments of capital lease obligations and other debt

 

 

 

 

 

(15,151

)

 

(15,151

)

Increase in bank overdrafts

 

 

 

 

 

4,122

 

 

4,122

 

Borrowings under revolving credit facility

 

 

 

 

 

14,000

 

 

14,000

 

Net intercompany borrowings (payments)

 

(12

)

 

 

 

12

 

 

 

Net cash provided by financing activities

 

 

 

 

 

2,983

 

 

2,983

 

Change in cash and cash equivalents

 

 

 

 

 

(9,659

)

(3,100

)

(12,759

)

Cash and cash equivalents, beginning of period

 

 

 

 

 

24,987

 

3,927

 

28,914

 

Cash and cash equivalents, end of period

 

$

 

$

 

$

 

$

 

$

15,328

 

$

827

 

$

16,155

 

 

16



Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements and Factors That May Affect Results

 

Certain statements and information herein may be deemed to be “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future. Any forward-looking statements herein are made as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, and EMSC undertakes no duty to update or revise any such statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in EMSC’s filings with the SEC from time to time, including in the section entitled “Risk Factors” in the Company’s most recent Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q. Among the factors that could cause future results to differ materially from those provided in this Quarterly Report on Form 10-Q are: the impact on our revenue of changes in transport volume, mix of insured and uninsured patients, and third party reimbursement rates and methods; the adequacy of our insurance coverage and insurance reserves; potential penalties or changes to our operations if we fail to comply with extensive and complex government regulation of our industry, both as it exists now and as it may change in the future; our ability to recruit and retain qualified physicians and other healthcare professionals, and enforce our non-compete agreements with our physicians; the loss of one or more members of our senior management team; the outcome of government investigations of certain of our business practices; our ability to generate cash flow to service our debt obligations and fund the cost of capital expenditures to maintain and upgrade our vehicle fleet and medical equipment; and the loss of existing contracts and the accuracy of our assessment of costs under new contracts.

 

All references to “we”, “our”, “us” or “EMSC” refer to Emergency Medical Services Corporation and its subsidiaries, including Emergency Medical Services L.P., or EMS LP. The Company’s business is conducted primarily through two operating subsidiaries, American Medical Response, Inc., or AMR, and EmCare Holdings Inc., or EmCare.

 

This Report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 23, 2009.

 

Company Overview

 

We are a leading provider of emergency medical services in the United States. We operate our business and market our services under the AMR and EmCare brands.   We believe that AMR, over its more than 50 years of operating history, has become the leading provider of ambulance transport services in the United States.  We believe that EmCare, over its more than 35 years of operating history, has become the leading provider of outsourced emergency department staffing and management services in the United States and also provides hospital-based services for hospitalist/inpatient, radiology, and anesthesiology departments.

 

Key Factors and Measures We Use to Evaluate Our Business

 

The key factors and measures we use to evaluate our business focus on the number of patients we treat and transport and the costs we incur to provide the necessary care and transportation for each of our patients.

 

We evaluate our revenue net of provisions for contractual payor discounts and provisions for uncompensated care. Medicaid, Medicare and certain other payors receive discounts from our standard charges, which we refer to as contractual discounts. In addition, individuals we treat and transport may be personally responsible for a deductible or co-pay under their third party payor coverage, and most of our contracts require us to treat and transport patients who have no insurance or other third party payor coverage. Due to the uncertainty regarding collectability of charges associated with services we provide to these patients, which we refer to as uncompensated care, our net revenue recognition is based on expected cash collections. Our net revenue is gross billings after provisions for contractual discounts and estimated uncompensated care. Provisions for contractual discounts and uncompensated care have increased historically primarily as a result of increases in gross billing rates.

 

The table below summarizes our approximate payor mix as a percentage of both net revenue and total transports and patient encounters for the quarters ended March 31, 2009 and 2008.  In determining the net revenue payor mix, we use cash collections in the period as an approximation of net revenue recorded.

 

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Table of Contents

 

 

 

Percentage of Net Revenue

 

Percentage of Total Volume

 

 

 

Q1 2009

 

Q1 2008

 

Q1 2009

 

Q1 2008

 

Medicare

 

23.8

%

24.9

%

25.9

%

26.8

%

Medicaid

 

4.5

%

4.6

%

10.8

%

10.6

%

Commercial insurance and managed care

 

49.8

%

49.5

%

42.2

%

41.7

%

Self-pay

 

4.1

%

4.6

%

21.1

%

20.9

%

Fees and subsidies

 

17.8

%

16.5

%

 

 

Total

 

100.0

%

100.0

%

100.0

%

100.0

%

 

In addition to continually monitoring our payor mix, we also analyze certain measures in each of our business segments.

 

AMR

 

Approximately 88% of AMR’s net revenue for the three months ended March 31, 2009 was transport revenue derived from the treatment and transportation of patients, including fixed wing medical transportation services, based on billings to third party payors, healthcare facilities and patients. The balance of AMR’s net revenue is derived from direct billings to communities and government agencies for the provision of training, dispatch center and other services.  AMR’s measures for net revenue include transports (segregated into ambulance and wheelchair transports, and weighted in certain of our analyses) and net revenue per transport.

 

The change from period to period in the number of transports is influenced by increases in transports in existing markets from both new and existing facilities we serve for non-emergency transports, the effects of general community conditions for emergency transports and the impact of newly acquired businesses.

 

The costs we incur in our AMR business segment consist primarily of compensation and benefits for medical crews and support personnel, direct and indirect operating costs to provide transportation services, and costs related to accident and insurance claims. AMR’s key cost measures include unit hours and cost per unit hour (to measure compensation-related costs and the efficiency of our ambulance deployment), operating costs per transport, and accident and insurance claims.

 

We have focused our risk mitigation efforts on employee training for proper patient handling techniques, development of clinical and medical equipment protocols, driving safety, implementation of technology to reduce auto incidents and other risk mitigation processes which we believe have resulted in a reduction in the frequency, severity and development of claims.

 

EmCare

 

Of EmCare’s net revenue for the three months ended March 31, 2009, approximately 85% was derived from our hospital contracts for emergency department staffing and approximately 15% was derived from hospitalist, anesthesiology, radiology and other hospital management services. Approximately 79% of EmCare’s net revenue was generated from billings to third party payors and patients for patient encounters and approximately 21% was generated from billings to hospitals and affiliated physician groups for professional services. EmCare’s key net revenue measures are patient encounters (segregated into emergency department visits, radiology reads, and anesthesiology and hospitalist encounters, and weighted in certain of our analyses), net revenue per patient encounter, and number of contracts.  Due to our expansion in the radiology and anesthesiology markets which typically generate lower net revenue per encounter than emergency room visits, patient encounters are now being weighted to make net revenue per encounter comparable across all of EmCare’s markets.

 

 The change from period to period in the number of patient encounters under our “same store” contracts is influenced by general community conditions as well as hospital-specific elements, many of which are beyond our direct control.

 

The costs incurred in our EmCare business segment consist primarily of compensation and benefits for physicians and other professional providers, professional liability costs, and contract and other support costs. EmCare’s key cost measures include provider compensation per patient encounter and professional liability costs.

 

We have developed extensive professional liability risk mitigation processes, including risk assessments on medical professionals and hospitals, extensive incident reporting and tracking processes, clinical fail-safe programs, training and education and other risk mitigation programs which we believe have resulted in a continued reduction in the frequency, severity and development of claims.

 

Recent Developments

 

The Company adopted SFAS No. 141 (revised 2007) Business Combinations (“SFAS 141(R)”) effective January 1, 2009.  The new standard replaces FASB Statement No. 141 and establishes requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interests.  The impact to the Company’s

 

18



Table of Contents

 

consolidated financial statements and related disclosures will depend on the nature and terms of the business combinations entered into subsequent to adoption of SFAS 141(R).

 

Factors Affecting Operating Results

 

Changes in Net New Contracts

 

Our operating results are affected directly by the number of net new contracts and related volumes we have in a period, reflecting the effects of both new contracts and contract expirations. We regularly bid for new contracts, frequently in a formal competitive bidding process that often requires written responses to a Request for Proposal, or RFP, and, in any fiscal period, certain of our contracts will expire. We may elect not to seek extension or renewal of a contract, or may reduce certain services, if we determine that we cannot continue to provide such services on favorable terms. With respect to expiring contracts we would like to renew, we may be required to seek renewal through an RFP, and we may not be successful in retaining any such contracts, or retaining them on terms that are as favorable as present terms.

 

Inflation

 

Certain of our expenses, such as wages and benefits, insurance, fuel and equipment repair and maintenance costs, are subject to normal inflationary pressures. Fuel expense represented 8.0% and 13.1% of AMR’s operating expenses for the three months ended March 31, 2009 and 2008, respectively.  Although we have generally been able to offset inflationary cost increases through increased operating efficiencies and successful negotiation of fees and subsidies, we can provide no assurance that we will be able to offset any future inflationary cost increases through similar efficiencies and fee changes.

 

Critical Accounting Policies

 

Revenue Recognition

 

Management regularly analyzes the ultimate collectibility of accounts receivable after certain stages of the collection cycle using a look-back analysis to determine the amount of receivables subsequently collected.  Adjustments related to this analysis were less than 1% of net revenue for the three month periods ended March 31, 2009 and 2008.

 

Results of Operations

 

Quarter Ended March 31, 2009 Compared to the Quarter Ended March 31, 2008

 

The following tables present a comparison of financial data from our unaudited consolidated statements of operations for the three months ended March 31, 2009 and 2008 for EMSC and our two operating segments.

 

Non-GAAP Measures

 

Adjusted EBITDA. Adjusted EBITDA is defined as 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 commonly used by management and investors as a performance measure and liquidity indicator. Adjusted EBITDA is not considered a measure of financial performance under U.S. generally accepted accounting principles, or GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to such GAAP measures as net income, cash flows provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of financial performance or liquidity. Since Adjusted EBITDA is not a measure determined in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The tables set forth a reconciliation of Adjusted EBITDA to net income and cash flows provided by (used in) operating activities.

 

19



Table of Contents

 

Unaudited Consolidated Results of Operations and as a Percentage of Net Revenue

(dollars in thousands)

EMSC

 

 

 

Quarter ended
 March 31, 2009

 

Quarter ended
 March 31, 2008

 

 

 

 

 

% of net
 revenue

 

 

 

% of net
 revenue

 

Net revenue

 

$

613,022

 

100.0

%

$

565,786

 

100.0

%

Compensation and benefits

 

426,534

 

69.6

 

394,351

 

69.7

 

Operating expenses

 

84,672

 

13.8

 

83,223

 

14.7

 

Insurance expense

 

22,504

 

3.7

 

20,963

 

3.7

 

Selling, general and administrative expenses

 

15,036

 

2.5

 

14,592

 

2.6

 

Interest income from restricted assets

 

(1,266

)

(0.2

)

(1,755

)

(0.3

)

Adjusted EBITDA

 

65,542

 

10.7

 

54,412

 

9.6

 

Depreciation and amortization expenses

 

(16,768

)

(2.7

)

(17,717

)

(3.1

)

Interest expense

 

(10,190

)

(1.7

)

(9,916

)

(1.8

)

Realized gain on investments

 

639

 

0.1

 

672

 

0.1

 

Interest and other income

 

517

 

0.1

 

302

 

0.1

 

Income tax expense

 

(15,726

)

(2.6

)

(10,684

)

(1.9

)

Equity in earnings (loss) of unconsolidated subsidiary

 

57

 

0.0

 

(50

)

(0.0

)

Net income

 

$

24,071

 

3.9

%

$

17,019

 

3.0

%

 

Unaudited Reconciliation of Adjusted EBITDA to Cash Flows Provided by (Used in) Operating Activities

(dollars in thousands)

 

 

 

Quarter ended March 31,

 

 

 

2009

 

2008

 

Adjusted EBITDA

 

$

65,542

 

$

54,412

 

Interest paid

 

(9,877

)

(9,337

)

Change in accounts receivable

 

(2,625

)

(26,308

)

Change in other operating assets/liabilities

 

(12,483

)

(22,740

)

Equity based compensation

 

650

 

562

 

Other

 

735

 

633

 

Cash flows provided by (used in) operating activities

 

$

41,942

 

$

(2,778

)

 

Unaudited Segment Results of Operations and as a Percentage of Net Revenue

(dollars in thousands)

AMR

 

 

 

Quarter ended
 March 31, 2009

 

Quarter ended
 March 31, 2008

 

 

 

 

 

% of net
 revenue

 

 

 

% of net
 revenue

 

Net revenue

 

$

336,446

 

100.0

%

$

326,316

 

100.0

%

Compensation and benefits

 

208,274

 

61.9

 

203,979

 

62.5

 

Operating expenses

 

74,535

 

22.2

 

74,091

 

22.7

 

Insurance expense

 

11,088

 

3.3

 

11,188

 

3.4

 

Selling, general and administrative expenses

 

9,216

 

2.7

 

9,342

 

2.9

 

Interest income from restricted assets

 

(555

)

(0.2

)

(682

)

(0.2

)

Adjusted EBITDA

 

33,888

 

10.1

 

28,398

 

8.7

 

Reconciliation of Adjusted EBITDA to income from operations

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

33,888

 

10.1

 

28,398

 

8.7

 

Depreciation and amortization expenses

 

(12,706

)

(3.8

)

(14,386

)

(4.4

)

Interest income from restricted assets

 

(555

)

(0.2

)

(682

)

(0.2

)

Income from operations

 

$

20,627

 

6.1

%

$

13,330

 

4.1

%

 

20



Table of Contents

 

EmCare

 

 

 

Quarter ended
 March 31, 2009

 

Quarter ended
 March 31, 2008

 

 

 

 

 

% of net
 revenue

 

 

 

% of net
 revenue

 

Net revenue

 

$

276,576

 

100.0

%

$

239,470

 

100.0

%

Compensation and benefits

 

218,260

 

78.9

 

190,372

 

79.5

 

Operating expenses

 

10,137

 

3.7

 

9,132

 

3.8

 

Insurance expense

 

11,416

 

4.1

 

9,775

 

4.1

 

Selling, general and administrative expenses

 

5,820

 

2.1

 

5,250

 

2.2

 

Interest income from restricted assets

 

(711

)

(0.3

)

(1,073

)

(0.4

)

Adjusted EBITDA

 

31,654

 

11.4

 

26,014

 

10.9

 

Reconciliation of Adjusted EBITDA to income from operations

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

31,654

 

11.4

 

26,014

 

10.9

 

Depreciation and amortization expenses

 

(4,062

)

(1.5

)

(3,331

)

(1.4

)

Interest income from restricted assets

 

(711

)

(0.3

)

(1,073

)

(0.4

)

Income from operations

 

$

26,881

 

9.7

%

$

21,610

 

9.0

%

 

Quarter ended March 31, 2009 compared to the quarter ended March 31, 2008

 

Consolidated

 

Our results for the three months ended March 31, 2009 reflect an increase in net revenue of $47.2 million and an increase in net income of $7.1 million compared to the three months ended March 31, 2008.  The increase in net income is attributable primarily to an increase in operating income of $12.6 million partially offset by an increase in income tax expense.  Basic and diluted earnings per share were $0.57 and $0.56, respectively, for the three months ended March 31, 2009.  Basic and diluted earnings per share were $0.41 and $0.40, respectively, for the same period in 2008.

 

Net revenue. For the three months ended March 31, 2009, we generated net revenue of $613.0 million compared to net revenue of $565.8 million for the three months ended March 31, 2008, representing an increase of 8.3%.  The increase is attributable primarily to increases in rates and increased volume from net new contracts and acquisitions.

 

Adjusted EBITDA. Adjusted EBITDA was $65.5 million, or 10.7% of net revenue, for the three months ended March 31, 2009 compared to $54.4 million, or 9.6% of net revenue, for the three months ended March 31, 2008.

 

Interest expense. Interest expense for the three months ended March 31, 2009 was $10.2 million compared to $9.9 million for the three months ended March 31, 2008.

 

Income tax expense. Income tax expense increased by $5.0 million for the three months ended March 31, 2009 compared to the same period in 2008.  Our effective tax rate for the three months ended March 31, 2009 was 39.5%, compared to 38.5% for the same period in 2008.

 

AMR

 

Net revenue. Net revenue for the three months ended March 31, 2009 was $336.4 million, an increase of $10.1 million, or 3.1%, from $326.3 million for the same period in 2008. The increase in net revenue was due primarily to an increase in net revenue per transport of 7.2%, or $22.5 million, partially offset by a decrease of 3.8%, or $12.3 million, in weighted transport volume.  Of the increase in net revenue per transport, 4.6% is attributable primarily to various rate increases, including a Medicare fee increase effective January 1, 2009, and the remainder is due primarily to growth in our managed transportation business.  Weighted transports decreased 28,900 from the same quarter last year.  The change was due to a decrease in weighted transport volume in existing markets of 3.3% due primarily to a milder flu season and one less day in the first quarter of 2009 and a decrease of 12,100 weighted transports from the exit of certain markets, partially offset by 7,700 weighted transports from our entrance into new markets.

 

Compensation and benefits. Compensation and benefit costs for the three months ended March 31, 2009 were $208.3 million, or 61.9% of net revenue, compared to $204.0 million, or 62.5% of net revenue, for the same period last year. Ambulance crew wages per ambulance unit hour increased by approximately 4.1%, or $4.5 million, attributable primarily to annual wage rate increases.   Ambulance unit hours decreased period over period by 1.1%, or $1.2 million, due primarily to the reduction in volume in existing markets and our exit of certain markets during 2008, partially offset by entrance into new markets.  Compensation and benefits decreased as a percentage of net revenue due primarily to improvements in the cost of deployment and the growth in our managed transportation business.  Our managed transportation costs are reflected primarily in operating expenses.

 

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Operating expenses. Operating expenses for the three months ended March 31, 2009 were $74.5 million, or 22.2% of net revenue, compared to $74.1 million, or 22.7% of net revenue, for the three months ended March 31, 2008. Operating expenses per weighted transport increased 4.6% in the three months ended March 31, 2009 compared to the same period in 2008.  The change is due primarily to an increase of $4.1 million in operating expenses associated with growth in our managed transportation business, partially offset by decreased fuel costs of $3.7 million, including approximately $3.0 million related to lower fuel rates.

 

Insurance expense. Insurance expense for the three months ended March 31, 2009 was $11.1 million, or 3.3% of net revenue, compared to $11.2 million, or 3.4% of net revenue, for the same period in 2008.  We recorded an increase of prior year insurance provisions of $0.6 million during the three months ended March 31, 2009 compared to a decrease of $1.9 million during the three months ended March 31, 2008.  Insurance expense was also reduced by lower premiums and fees in 2009.

 

Selling, general and administrative. Selling, general and administrative expense for the three months ended March 31, 2009 was $9.2 million, or 2.7% of net revenue, compared to $9.3 million, or 2.9% of net revenue, for the three months ended March 31, 2008.

 

Depreciation and amortization. Depreciation and amortization expense for the three months ended March 31, 2009 was $12.7 million, or 3.8% of net revenue, compared to $14.4 million, or 4.4% of net revenue, for the same period in 2008.  The decrease is related primarily to reduced annual capital expenditures in 2008.

 

EmCare

 

Net revenue. Net revenue for the three months ended March 31, 2009 was $276.6 million, an increase of $37.1 million, or 15.5%, from $239.5 million for the three months ended March 31, 2008. The increase was due primarily to an increase in patient encounters from net new hospital contracts and net revenue increases in existing contracts. Following December 31, 2007, we added 86 net new contracts which accounted for a net revenue increase of $28.1 million for the three months ended March 31, 2009.  Of the 86 net new contracts added since December 31, 2007, 79 were added in 2008 resulting in an incremental increase in 2009 net revenue of $26.9 million. Of the 79 contracts added in 2008, 45 were from our acquisition of Clinical Partners in August 2008 with related management fee revenue totaling $2.0 million during the three months ended March 31, 2009.  During the three months ended March 31, 2009, EmCare added 24 new contracts and terminated 17 contracts resulting in an increase in net revenue of $1.2 million.  Net revenue under our “same store” contracts (contracts in existence for the entirety of both periods) increased $6.7 million, or 3.3%, for the three months ended March 31, 2009.  The change is due primarily to a 3.9% increase in revenue per weighted patient encounter as a result of rate increases from our third-party payors.  The number of current period same store weighted patient encounters decreased 0.6% over same store weighted patient encounters in the prior period due primarily to a milder flu season and one less day in the first quarter of 2009.

 

Compensation and benefits. Compensation and benefits costs for the three months ended March 31, 2009 were $218.3 million, or 78.9% of net revenue, compared to $190.4 million, or 79.5% of net revenue for the same period in 2008. Provider compensation costs increased $20.8 million from net new contract additions. Same store provider compensation costs were $2.6 million over prior period due primarily to a 2.6% increase in provider compensation per weighted patient encounter.  Non-provider compensation and benefits costs increased by $4.5 million due primarily to our recent acquisitions and additional incentive related accruals.

 

Operating expenses. Operating expenses for the three months ended March 31, 2009 were $10.1 million, or 3.7% of net revenue, compared to $9.1 million, or 3.8% of net revenue, for the same period in 2008.  Operating expenses increased due primarily to the increase in off-hours radiology coverage for new contracts.

 

Insurance expense. Professional liability insurance expense for the three months ended March 31, 2009 was $11.4 million, or 4.1% of net revenue, compared to $9.8 million, or 4.1% of net revenue, for the three months ended March 31, 2008.  We recorded an increase of prior year insurance provisions of $0.1 million during the three months ended March 31, 2009 compared to a decrease of $0.9 million during the three months ended March 31, 2008.

 

Selling, general and administrative. Selling, general and administrative expense for the three months ended March 31, 2009 was $5.8 million, or 2.1% of net revenue, compared to $5.3 million, or 2.2% of net revenue, for the three months ended March 31, 2008.

 

Depreciation and amortization. Depreciation and amortization expense for the three months ended March 31, 2009 was $4.1 million, or 1.5% of net revenue, compared to $3.3 million, or 1.4% of net revenue, for the three months ended March 31, 2008.

 

Critical Accounting Policies

 

For a discussion of accounting policies that we consider critical to our business operations and the understanding of our results of operations that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” contained in our annual report on Form 10-K for the year ended

 

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Table of Contents

 

December 31, 2008 and incorporated by reference herein. As of March 31, 2009, there were no significant changes in our critical accounting policies or estimation procedures.

 

Liquidity and Capital Resources

 

Our primary source of liquidity is cash flows provided by our operating activities. We can also use our revolving senior secured credit facility, described below, to supplement cash flows provided by our operating activities if we decide to do so for strategic or operating reasons. Our liquidity needs are primarily to service long-term debt and to fund working capital requirements, capital expenditures related to the acquisition of vehicles and medical equipment, technology-related assets and insurance-related deposits.

 

We believe our cash and cash equivalents, net cash from our operating activities, and amounts available under our senior secured credit facility will meet the liquidity requirements of our business through at least the next 12 months. We have available to us, upon compliance with customary conditions, $100.0 million under the revolving credit facility, less outstanding letters of credit of $43.2 million at March 31, 2009. Further, we have a conditional right under our senior secured credit facility to request new or existing lenders to provide up to an additional $100.0 million of term debt (in $20.0 million increments).

 

Cash Flow

 

The table below summarizes cash flow information derived from our statements of cash flows for the periods indicated, amounts in thousands.

 

 

 

Quarter ended March 31,

 

 

 

2009

 

2008

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

41,942

 

$

(2,778

)

Investing activities

 

5,454

 

(12,964

)

Financing activities

 

579

 

2,983

 

 

Operating activities. Net cash provided by operating activities was $41.9 million for the three months ended March 31, 2009 compared to net cash used in operating activities of $2.8 million for the same period in 2008.  The increase in operating cash flows relates primarily to an increase in net income, further reductions in days sales outstanding, or DSO, and changes in insurance accruals.

 

We regularly analyze DSO which is calculated by taking our net revenue for the quarter divided by the number of days in the quarter.  The result is divided into net accounts receivable at the end of the period.  DSO provides us with a gauge to measure receivables, revenue and collection activities.  The reductions since December 31, 2008 shown below are due to additional collections on accounts receivable as a result of continued billing and collection process enhancements at both AMR and EmCare.  The following table outlines our DSO by segment and in total excluding the impact of AMR’s 2008 deployments under its contract with the Federal Emergency Management Agency:

 

 

 

Q1 2009

 

Q4 2008

 

Q3 2008

 

Q2 2008

 

Q1 2008

 

Q4 2007

 

AMR

 

74

 

79

 

83

 

86

 

87

 

89

 

EmCare

 

65

 

68

 

72

 

76

 

79

 

79

 

EMSC

 

70

 

74

 

78

 

82

 

84

 

85

 

 

Investing activities.  Net cash provided by investing activities was $5.5 million for the three months ended March 31, 2009 compared to net cash used in investing activities of $13.0 million for the same period in 2008.  The increase relates primarily to cash used for the acquisition of business of $13.3 million during the three months ended March 31, 2008.  There was no cash used for acquisitions during the first quarter of 2009.  Net capital expenditure spending was $7.2 million during the three months ended March 31, 2009 compared to $2.5 million for the same period in 2008 and was due primarily to timing differences.  Cash flows provided by changes in insurance collateral increased $11.2 million related primarily to timing differences in insurance funding.

 

Financing activities. For the three months ended March 31, 2009, net cash provided by financing activities was $0.6 million compared to $3.0 million for the same period in 2008.  At March 31, 2009, there were no amounts outstanding under our revolving credit facility.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary exposure to market risk consists of changes in interest rates on certain of our borrowings.  While we have entered into transactions to mitigate our exposure to both changes in interest rates and fuel prices, we do not use these instruments for speculative or trading purposes.

 

We monitor the risk from changing interest rates and evaluate ways to mitigate possible exposures, as appropriate, using derivative and hedging instruments.  Our use of derivative instruments is limited to highly effective fixed interest rate swap

 

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Table of Contents

 

agreements used to manage well-defined interest rate risk exposures.  In March 2009, we amended the interest rate swap agreement originally entered into in December 2007.  The amendment changed the hedged interest rate from the 3-month LIBOR to the 1-month LIBOR.  The amended swap agreement is with major financial institutions and amounts to $200 million of our variable rate debt.  This swap agreement effectively converts $200 million of variable rate debt to fixed rate debt with an effective rate of 6.1%.  The Company continues to make interest payments based on the variable rate associated with the debt (based on LIBOR which had rate of 1% at March 31, 2009) and periodically settles with its counterparties for the difference between the rate paid and the fixed rate.  The swap agreement expires in December 2009.

 

As of March 31, 2009, we had $452.9 million of debt excluding capital leases, of which $1.3 million was variable rate debt under our senior secured credit facility and the balance was fixed rate debt, including $250.0 million aggregate principal amount of our senior subordinated notes. An increase or decrease in interest rates of 0.2% will impact our interest costs by less than $0.1 million.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or furnishes under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on their evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this Report on Form 10-Q, our principal executive officer and our principal financial officer have concluded that, as of the date of their evaluation, our disclosure controls and procedures (as defined in Rules 13a -15(e) and 15d -15(e) promulgated under the Exchange Act) are effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

 

EMERGENCY MEDICAL SERVICES CORPORATION

PART II. OTHER INFORMATION

FOR THE THREE MONTHS ENDED

MARCH 31, 2009

 

ITEM 1. LEGAL PROCEEDINGS

 

For additional information regarding legal proceedings, please refer to note 6, under the caption “Commitments and Contingencies” of the notes accompanying the consolidated financial statements included herein, and to our Annual Report on Form 10-K filed with the SEC on February 23, 2009.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

ITEM 5. OTHER INFORMATION

 

In connection with Mark E. Bruning’s promotion as President of our American Medical Response segment, effective as of May 4, 2009, we approved an increase in Mr. Bruning’s annual base salary to $400,000. Mr. Bruning was deemed a named executive officer for the fiscal year ended December 31, 2008 in our most recent proxy statement on Form DEF 14A, which was filed with the Securities and Exchange Commission on April 22, 2009.

 

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Table of Contents

 

ITEM 6. EXHIBITS

 

10.1.2

 

Amendment to Employment Agreement, dated March 12, 2009, between William A. Sanger and Emergency Medical Services Corporation.*

 

 

 

10.3.1

 

Amendment to Employment Agreement, dated March 12, 2009, between Randel G. Owen and Emergency Medical Services Corporation.*

 

 

 

10.4.1

 

Amendment to Employment Agreement, dated March 12, 2009, between Todd G. Zimmerman and Emergency Medical Services Corporation.*

 

 

 

31.1

 

Certification of the Chief Executive Officer of Emergency Medical Services Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.2

 

Certification of the Chief Executive Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.3

 

Certification of the Chief Financial Officer of Emergency Medical Services Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.4

 

Certification of the Chief Financial Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer of Emergency Medical Services Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.2

 

Certification of the Chief Executive Officer and the Chief Financial Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P. pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 


*     Filed with this Report

 

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Table of Contents

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

 

 

 

EMERGENCY MEDICAL SERVICES CORPORATION

 

 

 

 

 

(registrant)

 

 

 

May 6, 2009

 

By:

/s/ William A. Sanger

 

Date

 

 

William A. Sanger

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

EMERGENCY MEDICAL SERVICES L.P.

 

 

(registrant)

 

 

 

 

 

By:

Emergency Medical Services Corporation, its General
Partner

 

 

 

May 6, 2009

 

By:

/s/ William A. Sanger

 

Date

 

 

William A. Sanger

 

 

 

Chairman and Chief Executive Officer

 

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Table of Contents

 

EXHIBIT INDEX

 

10.1.2

 

Amendment to Employment Agreement, dated March 12, 2009, between William A. Sanger and Emergency Medical Services Corporation.*

 

 

 

10.3.1

 

Amendment to Employment Agreement, dated March 12, 2009, between Randel G. Owen and Emergency Medical Services Corporation.*

 

 

 

10.4.1

 

Amendment to Employment Agreement, dated March 12, 2009, between Todd G. Zimmerman and Emergency Medical Services Corporation.*

 

 

 

31.1

 

Certification of the Chief Executive Officer of Emergency Medical Services Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.2

 

Certification of the Chief Executive Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.3

 

Certification of the Chief Financial Officer of Emergency Medical Services Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.4

 

Certification of the Chief Financial Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer of Emergency Medical Services Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.2

 

Certification of the Chief Executive Officer and the Chief Financial Officer of Emergency Medical Services Corporation, as general partner of Emergency Medical Services L.P. pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 


*    Filed with this Report

 

28