** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**WASHINGTON,D.C. 20549**

** **

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**FORM 10-Q**

 

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** **

| **(Mark  one)** | ** **                                                                                         |
|-----------------|----------------------------------------------------------------------------------------------------|
| **x**           | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **      | ** **                                                                                         |
| ** **      | **For  the quarterly period ended September 30, 2007**                                             |
| ** **      | ** **                                                                                         |
| ** **      | **Or**                                                                                             |
| ** **      | ** **                                                                                         |
| **o**           | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |

 

** **

**Forthe transition period from                to               **

 

**Commissionfile numbers:**

 

**001-32701**

 

**333-127115**

** **

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**EMERGENCY MEDICAL SERVICES CORPORATION**

**EMERGENCYMEDICAL SERVICES L.P.**

 

(Exact name ofRegistrants 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’ telephonenumber, including area code: **303-495-1200**

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

**Notapplicable**

** **

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x     No  o

 

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

 

Large acceleratedfiler  o                                  Accelerated filer  x                                                 Non-accelerated filer  o

 

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

 

Shares of class Acommon stock outstanding at November ­1, 2007 — 9,320,347; shares of classB common stock outstanding at November ­­1, 2007 — 142,545; LPexchangeable units outstanding at November ­­1, 2007 — 32,107,500.

 

 

 

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**EMERGENCYMEDICAL SERVICES CORPORATION**

 

**INDEX TOQUARTERLY REPORT**

 

**ON FORM10-Q**

 

**FOR THETHREE AND NINE MONTHS ENDED**

 

**SEPTEMBER30, 2007**
| Part 1. Financial Information |
|-------------------------------|
|                          |   |   |
|                          | Item 1. | Financial  Statements (Unaudited): |
|                          |   |   |
|                          |   | Consolidated  Statements of Operations and Comprehensive Income |
|                          |   |   |
|                          |   | Consolidated Balance Sheets |
|                          |   |   |
|                          |   | Consolidated Statements of Cash Flows |
|                          |   |   |
|                          |   | Notes to Unaudited Consolidated Financial  Statements |
|                          |   |   |
|                          | Item 2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                          |   |   |
|                          | Item 3. | Quantitative  and Qualitative Disclosures About Market Risk |
|                          |   |   |
|                          | Item 4. | Controls and  Procedures |
|                          |   |   |
| Part II. Other Information    |
|                          |   |   |
|                          | Item  1. | Legal  Proceedings |
|                          |   |   |
|                          | Item 1A. | Risk  Factors |
|                          |   |   |
|                          | Item 6. | Exhibits |
|                          |   |   |
| Signatures                    |

 

 

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**EMERGENCYMEDICAL SERVICES CORPORATION**

**PART I. FINANCIALINFORMATION**

**FOR THETHREE AND NINE MONTHS ENDED**

**SEPTEMBER30, 2007**

 

**ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)**

 

**EmergencyMedical Services Corporation**

**Consolidated Statements of Operations and Comprehensive Income**

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

** **
| ** **                                                                      | ** ** | **Quarter ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **September 30,** | ** ** | **September 30,**     | ** ** |
| ** **                                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenue                                                                     |       | $                 | 529,752    |                  | $          | 485,697 |   | $ | 1,569,783 |   | $ | 1,433,272 |   |
| Compensation and  benefits                                                      |       | 366,835           |       | 333,406               |       | 1,079,076 |   | 990,380 |   |
| Operating  expenses                                                             |       | 82,473            |       | 80,513                |       | 238,731 |   | 216,170 |   |
| Insurance  expense                                                              |       | 13,465            |       | 13,714                |       | 51,242 |   | 58,510 |   |
| Selling, general  and administrative expenses                                   |       | 15,876            |       | 14,660                |       | 44,082 |   | 42,669 |   |
| Depreciation and  amortization expense                                          |       | 17,809            |       | 16,841                |       | 52,165 |   | 49,045 |   |
| Restructuring  charges                                                          |       | —            |       | 267                   |       | 2,242 |   | 1,186 |   |
| Income from  operations                                                         |       | 33,294            |       | 26,296                |       | 102,245 |   | 75,312 |   |
| Interest income  from restricted assets                                         |       | 1,919             |       | 1,603                 |       | 5,294 |   | 4,288 |   |
| Interest expense                                                                |       | (12,652           | )          | (11,532               | )          | (35,281 | ) | (34,269 | ) |
| Realized gain  (loss) on investments                                            |       | 9                 |       | 88                    |       | 68 |   | (437 | ) |
| Interest and  other income                                                      |       | 602               |       | 532                   |       | 1,791 |   | 1,664 |   |
| Loss on early  debt extinguishment                                              |       | —            |       | (184                  | )          | — |   | (377 | ) |
| Income before  income taxes and equity in earnings of unconsolidated subsidiary |       | 23,172            |       | 16,803                |       | 74,117 |   | 46,181 |   |
| Income tax  expense                                                             |       | (8,672            | )          | (6,540                | )          | (28,146 | ) | (17,956 | ) |
| Income before  equity in earnings of unconsolidated subsidiary                  |       | 14,500            |       | 10,263                |       | 45,971 |   | 28,225 |   |
| Equity in  earnings of unconsolidated subsidiary                                |       | 170               |       | 21                    |       | 425 |   | 38 |   |
| Net income                                                                      |       | 14,670            |       | 10,284                |       | 46,396 |   | 28,263 |   |
| Other  comprehensive income, net of tax:                                        |       |              |       |                  |       |   |   |   |   |
| Unrealized  holding gains during the period                                     |       | 1,439             |       | 1,568                 |       | 1,014 |   | 1,109 |   |
| Comprehensive  income                                                           |       | $                 | 16,109     |                  | $          | 11,852 |   | $ | 47,410 |   | $ | 29,372 |   |
|                                                                            |       |              |       |                  |       |   |   |   |   |
| Basic earnings  per common share                                                |       | $                 | 0.35       |                  | $          | 0.25 |   | $ | 1.12 |   | $ | 0.68 |   |
| Diluted earnings  per common share                                              |       | $                 | 0.34       |                  | $          | 0.24 |   | $ | 1.08 |   | $ | 0.67 |   |
| Weighted average  common shares outstanding, basic                              |       | 41,567,657        |       | 41,502,978            |       | 41,544,741 |   | 41,499,172 |   |
| Weighted average  common shares outstanding, diluted                            |       | 43,190,779        |       | 42,525,620            |       | 43,143,997 |   | 42,431,108 |   |

 

 

 

 

 

 

 

 

 

 

 

The accompanying notesare an integral part of these financial statements.

 

 

3

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**EmergencyMedical Services Corporation**

**Consolidated Balance Sheets**

**(inthousands, except share and per share data)**

** **
| ** **                                                                                                                                             | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------|
| ** **                                                                                                                                             | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |      |
| **Assets**                                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |      |
| Current assets:                                                                                                                                        |       |                         |       |                        |       |      |
| Cash and cash  equivalents                                                                                                                             |       | $                            | 22,394     |                        | $          | 39,336    |   |   |
| Insurance  collateral                                                                                                                                  |       | 43,818                       |       | 29,724                      |       |      |
| Trade and other  accounts receivable, net                                                                                                              |       | 492,521                      |       | 416,450                     |       |      |
| Parts and  supplies inventory                                                                                                                          |       | 18,905                       |       | 18,089                      |       |      |
| Prepaids and  other current assets                                                                                                                     |       | 20,313                       |       | 16,417                      |       |      |
| Current deferred  tax assets                                                                                                                           |       | 45,128                       |       | 12,473                      |       |      |
| Total current  assets                                                                                                                                  |       | 643,079                      |       | 532,489                     |       |      |
| Non-current  assets:                                                                                                                                   |       |                         |       |                        |       |      |
| Property, plant  and equipment, net                                                                                                                    |       | 150,915                      |       | 147,162                     |       |      |
| Intangible  assets, net                                                                                                                                |       | 60,748                       |       | 66,789                      |       |      |
| Non-current  deferred tax assets                                                                                                                       |       | 88,694                       |       | 103,370                     |       |      |
| Insurance  collateral                                                                                                                                  |       | 157,097                      |       | 163,300                     |       |      |
| Goodwill                                                                                                                                               |       | 341,134                      |       | 272,328                     |       |      |
| Other long-term  assets                                                                                                                                |       | 28,274                       |       | 32,779                      |       |      |
| Total assets                                                                                                                                           |       | $                            | 1,469,941  |                        | $          | 1,318,217 |   |   |
| **Liabilities  and Equity**                                                                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |      |
| Current  liabilities:                                                                                                                                  |       |                         |       |                        |       |      |
| Accounts payable                                                                                                                                       |       | $                            | 78,756     |                        | $          | 65,172    |   |
| Accrued  liabilities                                                                                                                                   |       | 227,172                      |       | 231,631                     |       |      |
| Current portion  of long-term debt                                                                                                                     |       | 4,691                        |       | 4,159                       |       |      |
| Total current  liabilities                                                                                                                             |       | 310,619                      |       | 300,962                     |       |      |
| Long-term debt                                                                                                                                         |       | 518,307                      |       | 475,616                     |       |      |
| Insurance  reserves and other long-term liabilities                                                                                                    |       | 205,451                      |       | 155,599                     |       |      |
| Total  liabilities                                                                                                                                     |       | 1,034,377                    |       | 932,177                     |       |      |
| Equity:                                                                                                                                                |       |                         |       |                        |       |      |
| Preferred stock  ($0.01 par value; 20,000,000 shares authorized, 0 issued and outstanding)                                                             |       | —                       |       | —                      |       |      |
| Class A common  stock ($0.01 par value; 100,000,000 shares authorized, 9,320,347 and  9,262,853 issued and outstanding in 2007 and 2006, respectively) |       | 93                           |       | 93                          |       |      |
| Class B common  stock ($0.01 par value; 40,000,000 shares authorized, 142,545 issued and  outstanding in 2007 and 2006)                                |       | 1                            |       | 1                           |       |      |
| Class B special  voting stock ($0.01 par value; 1 share authorized, issued and outstanding in  2007 and 2006)                                          |       | —                       |       | —                      |       |      |
| LP exchangeable  units (32,107,500 shares issued and outstanding in 2007 and 2006)                                                                     |       | 212,361                      |       | 212,361                     |       |      |
| Additional  paid-in capital                                                                                                                            |       | 116,585                      |       | 114,471                     |       |      |
| Retained  earnings                                                                                                                                     |       | 105,534                      |       | 59,138                      |       |      |
| Accumulated other  comprehensive income (loss)                                                                                                         |       | 990                          |       | (24                         | )          |      |
| Total equity                                                                                                                                           |       | 435,564                      |       | 386,040                     |       |      |
| Total  liabilities and equity                                                                                                                          |       | $                            | 1,469,941  |                        | $          | 1,318,217 |   |   |
|                                                                                                                                                        |            |                              |            |                             |            |           |  |  |  |  |  |  |

 

 

 

The accompanying notesare an integral part of these financial statements.

 

 

 

 

 

4

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**EmergencyMedical Services Corporation**

**Consolidated Statements of Cash Flows**

**(unaudited;in thousands)**
| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **Cash  Flows from Operating Activities**                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                       | 46,396     |   | $ | 28,263 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                                     |       | 53,712                                                  |       | 50,615 |   |
| Gain on disposal  of property, plant and equipment                                 |       | (166                                                    | )          | (762 | ) |
| Equity-based  compensation expense                                                 |       | 1,293                                                   |       | 1,031 |   |
| Equity in  earnings of unconsolidated subsidiary                                   |       | (425                                                    | )          | (38 | ) |
| Loss on early  debt extinguishment                                                 |       | —                                                  |       | 377 |   |
| Dividends  received                                                                |       | 416                                                     |       | — |   |
| Deferred income  taxes                                                             |       | 25,438                                                  |       | 17,368 |   |
| Changes in  operating assets/liabilities, net of acquisitions:                     |       |                                                    |       |   |   |
| Trade and other  accounts receivable                                               |       | (71,007                                                 | )          | 4,793 |   |
| Parts and  supplies inventory                                                      |       | (428                                                    | )          | (132 | ) |
| Prepaids and  other current assets                                                 |       | (3,623                                                  | )          | (2,076 | ) |
| Accounts payable  and accrued liabilities                                          |       | 5,325                                                   |       | 13,804 |   |
| Insurance  accruals                                                                |       | 15                                                      |       | 10,351 |   |
| Net cash provided  by operating activities                                         |       | 56,946                                                  |       | 123,594 |   |
| **Cash  Flows from Investing Activities**                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchases of  property, plant and equipment                                        |       | (31,570                                                 | )          | (43,297 | ) |
| Proceeds from  sale of property, plant and equipment                               |       | 300                                                     |       | 903 |   |
| Acquisition of  businesses, net of cash received                                   |       | (75,648                                                 | )          | (11,587 | ) |
| Insurance  collateral                                                              |       | (7,300                                                  | )          | (31,773 | ) |
| Other investing  activities                                                        |       | 3,076                                                   |       | (1,860 | ) |
| Net cash used in  investing activities                                             |       | (111,142                                                | )          | (87,614 | ) |
| **Cash  Flows from Financing Activities**                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| EMSC issuance of  class A common stock                                             |       | 382                                                     |       | 104 |   |
| EMSC equity  issuance costs                                                        |       | —                                                  |       | (2,408 | ) |
| Borrowings under  revolving credit facility                                        |       | 70,300                                                  |       | — |   |
| Repayments of  capital lease obligations and other debt                            |       | (35,815                                                 | )          | (25,389 | ) |
| Increase  (decrease) in bank overdrafts                                            |       | 2,387                                                   |       | (3,871 | ) |
| Net cash  provided by (used in) financing activities                               |       | 37,254                                                  |       | (31,564 | ) |
| Change in cash  and cash equivalents                                               |       | (16,942                                                 | )          | 4,416 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 39,336                                                  |       | 18,048 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                       | 22,394     |   | $ | 22,464 |   |
|                                                                               |       |                                                    |       |   |   |
| **Non-cash  Activities**                                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Re-financing of  equipment under existing capital lease                            |       | $                                                       | 8,038      |   | $ | — |   |

 

 

 

 

 

 

The accompanying notesare an integral part of these financial statements.

 

 

 

 

 

 

5

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**EmergencyMedical Services Corporation**

**Notes to Unaudited Consolidated Financial Statements**

**(inthousands, except share and per share data)**

 

**1.****             ****General**

 

***Basis of Presentation of Financial Statements***

 

The accompanying interimconsolidated financial statements for Emergency Medical Services Corporation (“EMSC”or the “Company”) have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) for interim reporting and accordingly, do notinclude all of the disclosures required for annual financial statements. In theopinion of management, all adjustments considered necessary for a fairpresentation have been included. All such adjustments are of a normal,recurring nature. Operating results for the three and nine month periods endedSeptember 30, 2007 are not necessarily indicative of the results that may beexpected for the full year ending December 31, 2007. For furtherinformation, see the Company’s consolidated financial statements, including theaccounting policies and notes thereto, included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2006.

 

The consolidatedfinancial statements of EMSC include those of its direct subsidiary, EmergencyMedical Services L.P. (“EMS LP”), a Delaware limited partnership. EMS LPacquired American Medical Response, Inc. and its subsidiaries (“AMR”) andEmCare Holdings Inc. and its subsidiaries (“EmCare”) from LaidlawInternational, Inc. (“Laidlaw”) on February 10, 2005, with an effectivetransaction date after the close of business on January 31, 2005. OnDecember 21, 2005, the Company effected a reorganization and issued classA common stock in an initial public offering.

 

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

 

Starting in the periodsended June 30, 2007, the Company reclassified income earned on insurancerelated assets as Interest Income from Restricted Assets in the accompanyingconsolidated statements of operations and comprehensive income; such income waspreviously reported as a component of insurance expense.

 

 

**2.****             ****Summary of Significant AccountingPolicies**

 

***Consolidation***

 

The consolidatedfinancial statements include all wholly-owned subsidiaries of EMSC, includingAMR and EmCare and their respective subsidiaries. All significant intercompanytransactions and balances have been eliminated.

 

***Use of Estimates***

 

The preparation offinancial statements requires management to make estimates and assumptionsrelating to the reporting of results of operations, financial condition andrelated disclosure of contingent assets and liabilities at the date of thefinancial statements. Actual results may differ from those estimates underdifferent assumptions or conditions.

 

***Insurance***

 

Insurance collateral iscomprised principally of government and investment grade securities and cashdeposits with third parties and supports the Company’s insurance program andreserves. Certain of these investments, if sold or otherwise liquidated, wouldhave to be replaced by other suitable financial assurances and are, therefore,considered restricted.

 

Insurance reserves areestablished for automobile, workers compensation, general liability andprofessional liability claims utilizing policies with both fully-insured andself-insured components. This includes the use of an off-shore captiveinsurance program through a wholly-owned subsidiary for certain professionalliability (malpractice) programs for EmCare. In those instances where theCompany has obtained third-party insurance coverage, the Company generallyretains liability for the first $1 to $2 million of the loss. Insurancereserves cover known claims and incidents within the level of Company retentionthat may result in the assertion of additional claims, as well as claims fromunknown incidents that may be asserted arising from activities through thebalance sheet date.

 

The Company establishesreserves for claims based upon an assessment of actual claims and claimsincurred but not reported.  The reservesare established based on quarterly consultation with third-party independentactuaries using actuarial principles and assumptions that consider a number offactors, including historical claim payment patterns (including legal 

 

 

6

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costs) and changes incase reserves and the assumed rate of inflation in healthcare costs andproperty damage repairs.

 

The Company’s most recentactuarial valuation was completed in September 2007. As a result of thisactuarial valuation, in the three and nine months ended September 30, 2007 theCompany recorded reductions in its provision for insurance liabilities ofapproximately $7.9 million and $21.7 million, respectively, related to itsreserves for losses in prior years.  In the three and nine months endedSeptember 30, 2006, the Company recorded a reduction in its provision forinsurance liabilities of approximately $4.8 million and $9.8 million,respectively, as a result of an actuarial valuation completed in September2006.

 

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

 

***Trade and Other Accounts Receivable, net***

 

The Company determinesits allowances based on payor reimbursement schedules, historical write-offexperience and other economic data. The allowances for contractual discountsand uncompensated care are reviewed monthly. Account balances are charged offagainst the uncompensated care allowance when it is probable the receivablewill not be recovered. Write-offs to the contractual allowance occur whenpayment is received. The allowance for uncompensated care is relatedprincipally to receivables recorded for self-pay patients.

 

***Revenue Recognition***

 

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

 

| ** **                           | ** ** | **Quarter ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                   | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross revenue                        |       | 100.0                                      | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Provision for  contractual discounts |       | 43.8                                       | %          | 41.0                                                | %          | 42.8 | % | 42.0 | % |
| Provision for  uncompensated care    |       | 19.4                                       | %          | 20.4                                                | %          | 19.6 | % | 19.6 | % |
| After  contractual discounts         |       | 34.5                                       | %          | 34.6                                                | %          | 34.3 | % | 33.8 | % |

 

Healthcare reimbursementis complex and may involve lengthy delays. Third-party payors are continuingtheir efforts to control expenditures for healthcare, including proposals torevise reimbursement policies. The Company has from time to time experienceddelays in reimbursement from third-party payors. In addition, third-partypayors may disallow, in whole or in part, claims for reimbursement based ondeterminations that certain amounts are not reimbursable under plan coverage,determinations of medical necessity, or the need for additional information.Laws and regulations governing the Medicare and Medicaid programs are verycomplex and subject to interpretation. As a result, there is a reasonablepossibility that recorded estimates will change materially in the short-term.Retroactive adjustments may change the amounts realized from third-party payorsand are considered in the recognition of revenue on an estimated basis in theperiod the related services are rendered. Such amounts, including adjustmentsbetween provisions for contractual discounts and uncompensated care, areadjusted in future periods, as adjustments become known.  Retroactiveadjustments recorded in the third quarter, which increased revenue, were 1.3%and 1.2 % of consolidated net revenue for the three months ended September 30,2007 and 2006, respectively.  Retroactive adjustments recorded in the ninemonth period ended September 30, 2007 and 2006, which increased revenue, were1.8% and 1.1% of consolidated net revenue, respectively.

 

The Company also providesservices to patients who have no insurance or other third-party payor coverage.In certain circumstances, federal law requires providers to render services toany 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 sharesof class A common stock in an initial public offering. Pursuant to thereorganization, EMS LP, the former top-tier holding company of AMR and EmCare,became the consolidated subsidiary of EMSC, a newly formed corporation. Toeffect the reorganization, the holders of the capital stock of the sole generalpartner of EMS LP contributed that capital stock to the Company in exchange forclass B common stock; the general partner was merged into the Company and the Companybecame the sole general partner of EMS LP. Concurrently, the holders of class Bunits of EMS LP contributed their units to the Company in exchange for sharesof the Company’s class A common stock, and the holders of certain class A unitsof EMS LP contributed their units to the Company

 

 

 

7

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

 

The Company holds 22.7%of the equity interests in EMS LP. LP exchangeable units, held by persons affiliatedwith the Company’s principal equity holder, represent the balance of the EMS LPequity. The LP exchangeable units are exchangeable at any time, at the optionof the holder, for shares of the Company’s class B common stock on aone-for-one basis. The holders of the LP exchangeable units have the right tovote, 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 commonstock or class B special voting stock are entitled to vote.

 

In the EMS LP partnershipagreement, the Company has agreed to maintain the economic equivalency of theLP exchangeable units and the class B common stock, and the holders of the LPexchangeable 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 LPexchangeable units are intended to be economically equivalent to the class Bcommon stock of the Company in that the LP exchangeable units carry the rightto vote (by virtue of the class B special voting stock) with the holders ofclass B common stock as one class, and entitle holders to receive distributionsonly if the equivalent dividends are declared on the Company’s class B commonstock. Accordingly, the Company accounts for the LP exchangeable units as ifthe LP exchangeable units were shares of its common stock, including reportingthe LP exchangeable units in the equity section of the Company’s balance sheetand including the number of outstanding LP exchangeable units in both its basicand diluted earnings per share calculations.

 

***Recent Accounting Pronouncements***

 

On January 1, 2007, theCompany adopted the recognition and disclosure provisions of FASBInterpretation No. 48, “*Accounting forUncertainty in Income Taxes - an interpretation of FASB Statement No. 109*”(“FIN 48”).  This interpretation addresses the determination of whethertax benefits claimed or expected to be claimed on a tax return should berecorded in the financial statements.  Under FIN 48, the Company mayrecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained on examination by thetaxing authorities, based on the technical merits of the position. The taxbenefits recognized in the financial statements from such a position should bemeasured based on the largest benefit that has a greater than fifty percentlikelihood of being realized upon ultimate settlement. FIN 48 also providesguidance on derecognition, classification, interest and penalties on incometaxes, and accounting in interim periods.

 

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

 

In accordance with theCompany’s accounting policy, EMSC recognized accrued interest and penaltiesrelated to unrecognized tax benefits as a component of tax expense, which isconsistent with the recognition of these items in prior reportingperiods.  As of January 1, 2007, the Company recorded a liability ofapproximately $4.8 million and $6.1 million for interest and penalties,respectively.  The liability for interest and penalties did not materiallychange as of September 30, 2007.

 

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

 

 

**3.****             ****Acquisitions**

 

In July 2007, the Companyacquired MedicWest Ambulance based in North Las Vegas, Nevada and AbbottAmbulance, Inc. based in St. Louis, Missouri, together with certain of theirrespective affiliates.  In September2007, the Company acquired certain ground ambulance assets from subsidiaries ofLifeguard Transportation Service, Inc. in Dallas, Texas and Atlanta,Georgia.  The total cost for acquisitionscompleted during the nine months ended September 30, 2007 was $77.7 million andwas paid primarily in cash.  The Companyis in the process of completing the purchase price allocation for theseacquisitions and has preliminarily recorded $67.6 million of goodwill as ofSeptember 30, 2007.

 

 

**4.****             ****Accrued Liabilities**

 

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

 

 

8

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| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                  | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Accrued wages  and benefits                 |       | $                 | 72,453     |             | $          | 71,578 |   |
| Accrued paid  time-off                      |       | 24,912            |       | 22,816           |       |
| Current portion  of self-insurance reserves |       | 58,126            |       | 57,596           |       |
| Accrued  restructuring                      |       | 1,181             |       | 5,738            |       |
| Current portion  of compliance and legal    |       | 4,690             |       | 4,910            |       |
| Accrued billing  and collection fees        |       | 4,982             |       | 5,085            |       |
| Accrued profit  sharing                     |       | 23,560            |       | 19,695           |       |
| Accrued interest                            |       | 4,229             |       | 11,810           |       |
| Other                                       |       | 33,039            |       | 32,403           |       |
| Total accrued  liabilities                  |       | $                 | 227,172    |             | $          | 231,631 |   |

 

 

**5.****             ****Long-Term Debt**

 

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

| ** **                                                                       | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Senior  subordinated notes due 2015 (10%)                                        |       | $                            | 250,000    |                        | $          | 250,000 |   |
| Senior secured  term loan due 2012 (7.72% at September 30, 2007)                 |       | 224,743                      |       | 226,472                     |       |
| Revolving credit  facility                                                       |       | 39,000                       |       | —                      |       |
| Notes due at  various dates from 2007 to 2022 with interest rates from 6% to 10% |       | 2,358                        |       | 1,856                       |       |
| Capital lease  obligations due at various dates from 2007 to 2010 (see note 6)   |       | 6,897                        |       | 1,447                       |       |
|                                                                             |       | 522,998                      |       | 479,775                     |       |
| Less current  portion                                                            |       | (4,691                       | )          | (4,159                      | )          |
| Total long-term  debt                                                            |       | $                            | 518,307    |                        | $          | 475,616 |   |

 

 

**6.****             ****Commitments and Contingencies**

 

***Lease Commitments***

 

The Company leasesvarious facilities and equipment under operating lease agreements.

 

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

 

***Services***

 

The Company is subject tothe Medicare and Medicaid fraud and abuse laws which prohibit, among otherthings, any false claims, or any bribe, kick-back or rebate in return for thereferral of Medicare and Medicaid patients. Violation of these prohibitions mayresult in civil and criminal penalties and exclusion from participation in theMedicare and Medicaid programs. Management has implemented policies andprocedures that management believes will assure that the Company is insubstantial compliance with these laws and regulations but there can be noassurance the Company will not be found to have violated certain of these lawsand regulations. From time to time, the Company receives requests forinformation from government agencies pursuant to their regulatory orinvestigational authority. Such requests can include subpoenas or demandletters for documents to assist the government in audits or investigations. TheCompany is cooperating with the government agencies conducting theseinvestigations and is providing requested information to the governmentagencies. Other than the proceedings described below, management believes thatthe outcome of any of these investigations would not have a material adverseeffect on the Company.

 

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

 

 

9

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the Company disagreeswith the OIG’s finding and has filed an administrative appeal. If AMR issuccessful in the administrative appeal the Company may be entitled torepayment of all or part of the $1.8 million.

 

***Other Legal Matters***

 

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

 

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

 

AMR and the City ofStockton, California, are parties to litigation regarding the terms andenforceability of a memorandum of understanding and a related joint ventureagreement between the parties to present a joint bid in response to a requestfor proposals to provide emergency ambulance services in the County of SanJoaquin, California. The suit was filed on June 28, 2005, in the UnitedStates District Court for the Eastern District of California. The parties wereunable to agree on the final terms of a joint bid. AMR has been awarded the SanJoaquin contract. While we are unable at this time to estimate the amount ofpotential damages, we believe that Stockton may claim as damages a portion ofour profit on the contract or the profit Stockton might have realized had thejoint venture proceeded.

 

 

**7.****             ****Restructuring Charges**

 

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

 

 

**8.****             ****Equity Based Compensation**

 

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

 

Under the Company’sEquity Option Plan, key employees were granted options that permit theindividuals to purchase class A common shares and vest ratably generally over aperiod of four years. In addition, certain performance measures must be met for50% of the options to become exercisable. Options with similar provisions weregranted to non-employee directors. The Company recorded a compensation chargeof $300 for each of the three months ended September 30, 2007 and 2006 and $900for each of the nine months ended September 30, 2007 and 2006.

 

In June 2006, the Boardof Directors of the Company adopted an equity compensation program fornon-employee directors of the Company, other than the Chair of the ComplianceCommittee (“Directors’ Plan”), which was subsequently approved by thestockholders of the Company in May 2007. Non-employee directors were granted 8,000Restricted Stock Units (“RSUs”) on June 1, 2006, and 2,705 RSUs on August10, 2007, each RSU representing one share of the Company’s class A commonstock. Following each annual stockholder meeting, each non-employee directorwill receive a grant of RSUs having a fair market value of $100 on the date ofgrant, based on the closing price of the Company’s class A common stock on thebusiness day immediately preceding the grant date. The Directors’ Plan allowsdirectors to defer income from the grant of RSUs. The RSUs vest immediatelyprior to the election of directors at the next following annual stockholdermeeting, and will be paid in shares of the Company’s class A common stock (oneshare for each RSU) at that time, unless deferred in accordance with theDirectors’ Plan. Each non-employee director (other than the Chair of theCompliance Committee) is also entitled to an annual cash retainer of $50 to bepaid in four quarterly installments. In connection with this plan, the Companyexpensed $100 and $300 in the three and nine months ended September 30, 2007and $100 and $131 in the three and nine months ended September 30, 2006,respectively.

 

On April 7, 2007, theBoard of Directors of the Company approved the adoption of the EMSC Long-TermIncentive Plan (the “Plan”), subject to stockholder approval. The stockholdersof EMSC approved the Plan at the Company’s 2007 Annual Meeting in May2007.  The Plan provides for the grant of long-term incentives, includingvarious equity-based incentives, to those persons with responsibility for thesuccess and growth of the Company and its subsidiaries.  No future grantswill be made under the Company’s previous Equity Option Plan referred toabove.  On June 14, 2007, the Board of Directors of the Company granted20,000 shares of restricted stock pursuant to the Plan, which shares vestratably over a period of three years. 

 

 

10

----

 

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

 

 

**9.****             ****Segment Information**

 

The Company is organizedaround two separately managed business units: healthcare transportationservices and emergency management services, which have been identified asoperating segments. The healthcare transportation services reportable segmentfocuses on providing a full range of medical transportation services from basicpatient transit to the most advanced emergency care and pre-hospitalassistance. The emergency management services reportable segment providesoutsourced business services to hospitals primarily for emergency departments,urgent care centers and for certain inpatient departments. The Chief ExecutiveOfficer has been identified as the chief operating decision maker (“CODM”) forpurposes of SFAS No. 131*Disclosures about Segments of an Enterprise and Related Information*(“SFAS 131”), as he assesses the performance of the business units anddecides how to allocate resources to the business units.

 

Net income before equityin earnings of unconsolidated subsidiary, income tax expense, loss on earlydebt extinguishment, interest and other income, realized gain (loss) oninvestments, interest expense, interest income from restricted assets anddepreciation and amortization (“Adjusted EBITDA”) is the measure of profit andloss that the CODM uses to assess performance, measure liquidity and makedecisions. The accounting policies for reported segments are the same as forthe Company as a whole.

 
| ** **                                           | ** ** | **Quarter ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2007**                        | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Healthcare  Transportation Services**              | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                              |       | $                               | 310,929    |                                | $          | 299,300 |   | $ | 914,341 |   | $ | 888,472 |   |
| Segment Adjusted  EBITDA                             |       | 26,007                          |       | 24,317                              |       | 74,316 |   | 71,920 |   |
| **Emergency  Management Services**                   | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                              |       | 218,823                         |       | 186,397                             |       | 655,442 |   | 544,800 |   |
| Segment Adjusted  EBITDA                             |       | 27,015                          |       | 20,423                              |       | 85,388 |   | 56,725 |   |
| **Total**                                            | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                        |       | 529,752                         |       | 485,697                             |       | 1,569,783 |   | 1,433,272 |   |
| Total Adjusted  EBITDA                               |       | 53,022                          |       | 44,740                              |       | 159,704 |   | 128,645 |   |
| **Reconciliation  of Adjusted EBITDA to Net Income** | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjusted EBITDA                                      |       | $                               | 53,022     |                                | $          | 44,740 |   | $ | 159,704 |   | $ | 128,645 |   |
| Depreciation and  amortization expense               |       | (17,809                         | )          | (16,841                             | )          | (52,165 | ) | (49,045 | ) |
| Interest expense                                     |       | (12,652                         | )          | (11,532                             | )          | (35,281 | ) | (34,269 | ) |
| Realized gain  (loss) on investments                 |       | 9                               |       | 88                                  |       | 68 |   | (437 | ) |
| Interest and  other income                           |       | 602                             |       | 532                                 |       | 1,791 |   | 1,664 |   |
| Loss on early  debt extinguishment                   |       | —                          |       | (184                                | )          | — |   | (377 | ) |
| Income tax  expense                                  |       | (8,672                          | )          | (6,540                              | )          | (28,146 | ) | (17,956 | ) |
| Equity in  earnings of unconsolidated subsidiary     |       | 170                             |       | 21                                  |       | 425 |   | 38 |   |
| Net income                                           |       | $                               | 14,670     |                                | $          | 10,284 |   | $ | 46,396 |   | $ | 28,263 |   |

 

 

**10.****      ****Guarantors of Debt**

 

EMS LP financed theacquisition of AMR and EmCare in part by issuing $250.0 million principalamount of senior subordinated notes and borrowing $370.2 million under itssenior secured credit facility. Its wholly-owned subsidiaries, AMR HoldCo, Inc.(f/k/a EMSC Management, Inc.) and EmCare HoldCo, Inc., are the issuers of thesenior subordinated notes and the borrowers under the senior secured creditfacility. As part of the transaction, AMR and its subsidiaries becamewholly-owned subsidiaries of AMR HoldCo, Inc. and EmCare and its subsidiariesbecame wholly-owned subsidiaries of EmCare HoldCo, Inc. The senior subordinatednotes and the senior secured credit facility include a full, unconditional andjoint and several guarantee by EMSC, EMS LP and EMSC’s domestic subsidiaries.The senior subordinated notes and senior secured credit facility do not includea guarantee by the Company’s captive insurance subsidiary. All of the operatingincome 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, fundsnecessary to meet the debt service obligations under the senior secured notesand senior secured credit facility described above are provided by thedistributions or advances from the subsidiary companies, AMR and EmCare.

 

 

11

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Investments in subsidiaryoperating 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/Adjustmentscolumn. Separate complete financial statements of the issuers, EMS LP andsubsidiary guarantors would not provide additional material information thatwould be useful in assessing the financial composition of the issuers, EMS LPor the subsidiary guarantors. The condensed consolidating and combiningfinancial statements for EMSC, EMS LP, the issuers, the guarantors and thenon-guarantor are as follows:

 

**ConsolidatingStatement of Operations**

 

**Forthe quarter ended September 30, 2007**

 

 
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Issuer AMR**

**HoldCo,  Inc.** | ** ** | **Issuer EmCare**

**HoldCo,  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------|------------|--------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **                    |
| ** **                                                       | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | ** **                        | ** ** | ** **                           | ** ** | ** **                 | **Total**  | ** **                    |
| Net revenue                                                      |       | $          | —     |       | $          | —                            |       | $                                    | —     |                       | $          | —                        |       | $                              | 529,752    |       | $          | 7,856 |   | $ | (7,856 | ) | $ | 529,752 |   |
| Compensation and  benefits                                       |       | —     |       | —     |       | —                            |       | —                               |       | 366,835                    |       | —                        |       | —                         |       | 366,835    |       |
| Operating  expenses                                              |       | —     |       | —     |       | —                            |       | —                               |       | 82,473                     |       | —                        |       | —                         |       | 82,473     |       |
| Insurance expense                                                |       | —     |       | —     |       | —                            |       | —                               |       | 12,257                     |       | 9,064                         |       | (7,856                         | )          | 13,465     |       |
| Selling, general  and administrative expenses                    |       | —     |       | —     |       | —                            |       | —                               |       | 15,876                     |       | —                        |       | —                         |       | 15,876     |       |
| Depreciation and  amortization expense                           |       | —     |       | —     |       | —                            |       | —                               |       | 17,809                     |       | —                        |       | —                         |       | 17,809     |       |
| Income from  operations                                          |       | —     |       | —     |       | —                            |       | —                               |       | 34,502                     |       | (1,208                        | )          | —                         |       | 33,294     |       |
| Interest income  from restricted assets                          |       | —     |       | —     |       | —                            |       | —                               |       | 720                        |       | 1,199                         |       | —                         |       | 1,919      |       |
| Interest expense                                                 |       | —     |       | —     |       | —                            |       | —                               |       | (12,652                    | )          | —                        |       | —                         |       | (12,652    | )          |
| Realized gain on  investments                                    |       | —     |       | —     |       | —                            |       | —                               |       | —                     |       | 9                             |       | —                         |       | 9          |       |
| Interest and  other income                                       |       | —     |       | —     |       | —                            |       | —                               |       | 602                        |       | —                        |       | —                         |       | 602        |       |
| Income before  income taxes                                      |       | —     |       | —     |       | —                            |       | —                               |       | 23,172                     |       | —                        |       | —                         |       | 23,172     |       |
| Income tax  expense                                              |       | —     |       | —     |       | —                            |       | —                               |       | (8,672                     | )          | —                        |       | —                         |       | (8,672     | )          |
| Income before  equity in earnings of unconsolidated subsidiaries |       | —     |       | —     |       | —                            |       | —                               |       | 14,500                     |       | —                        |       | —                         |       | 14,500     |       |
| Equity in  earnings of unconsolidated subsidiaries               |       | 14,670     |       | 14,670     |       | 2,901                             |       | 11,769                               |       | 170                        |       | —                        |       | (44,010                        | )          | 170        |       |
|                                                             |
| Net income                                                       |       | $          | 14,670     |       | $          | 14,670                            |       | $                                    | 2,901      |                       | $          | 11,769                        |       | $                              | 14,670     |       | $          | — |   | $ | (44,010 | ) | $ | 14,670 |   |

 

 

**ConsolidatingStatement of Operations**

 

**Forthe quarter ended September 30, 2006**

 
| ** **                                                       | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer  AMR**

**HoldCo,  Inc.** | ** ** | **Issuer EmCare**

**HoldCo,  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                           | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                           | ** ** |
| Net revenue                                                      |       | $          | —     |       | $          | —                             |       | $                                    | —     |                       | $          | —                        |       | $                              | 485,697    |      | $          | 9,645 |   | $ | (9,645 | ) | $ | 485,697 |   |
| Compensation and  benefits                                       |       | —     |       | —     |       | —                             |       | —                               |       | 333,406                    |       | —                        |       | —                         |       | 333,406   |       |
| Operating  expenses                                              |       | —     |       | —     |       | —                             |       | —                               |       | 80,513                     |       | —                        |       | —                         |       | 80,513    |       |
| Insurance expense                                                |       | —     |       | —     |       | —                             |       | —                               |       | 12,634                     |       | 10,725                        |       | (9,645                         | )          | 13,714    |       |
| Selling, general  and administrative expenses                    |       | —     |       | —     |       | —                             |       | —                               |       | 14,660                     |       | —                        |       | —                         |       | 14,660    |       |
| Depreciation and  amortization expense                           |       | —     |       | —     |       | —                             |       | —                               |       | 16,841                     |       | —                        |       | —                         |       | 16,841    |       |
| Restructuring  charge                                            |       | —     |       | —     |       | —                             |       | —                               |       | 267                        |       | —                        |       | —                         |       | 267       |       |
| Income from  operations                                          |       | —     |       | —     |       | —                             |       | —                               |       | 27,376                     |       | (1,080                        | )          | —                         |       | 26,296    |       |
| Interest income  from restricted assets                          |       | —     |       | —     |       | —                             |       | —                               |       | 611                        |       | 992                           |       | —                         |       | 1,603     |       |
| Interest expense                                                 |       | —     |       | —     |       | —                             |       | —                               |       | (11,532                    | )          | —                        |       | —                         |       | (11,532   | )          |
| Realized gain on  investments                                    |       | —     |       | —     |       | —                             |       | —                               |       | —                     |       | 88                            |       | —                         |       | 88        |       |
| Interest and  other income                                       |       | —     |       | —     |       | —                             |       | —                               |       | 532                        |       | —                        |       | —                         |       | 532       |       |
| Loss on early  debt extinguishment                               |       | —     |       | —     |       | —                             |       | —                               |       | (184                       | )          | —                        |       | —                         |       | (184      | )          |
| Income before  income taxes                                      |       | —     |       | —     |       | —                             |       | —                               |       | 16,803                     |       | —                        |       | —                         |       | 16,803    |       |
| Income tax  expense                                              |       | —     |       | —     |       | —                             |       | —                               |       | (6,540                     | )          | —                        |       | —                         |       | (6,540    | )          |
| Income before  equity in earnings of unconsolidated subsidiaries |       | —     |       | —     |       | —                             |       | —                               |       | 10,263                     |       | —                        |       | —                         |       | 10,263    |       |
| Equity in  earnings of unconsolidated subsidiaries               |       | 10,284     |       | 10,284     |       | 2,372                              |       | 7,912                                |       | 21                         |       | —                        |       | (30,852                        | )          | 21        |       |
| Net income                                                       |       | $          | 10,284     |       | $          | 10,284                             |       | $                                    | 2,372      |                       | $          | 7,912                         |       | $                              | 10,284     |      | $          | — |   | $ | (30,852 | ) | $ | 10,284 |   |

 

12

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**ConsolidatingStatement of Operations**

 

**Forthe nine months ended September 30, 2007**

 

 
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Issuer  AMR**

**HoldCo,  Inc.** | ** ** | **Issuer  EmCare**

**HoldCo,  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                    |
| ** **                                                       | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                 | **Total**  | ** **                    |
| Net revenue                                                      |       | $          | —     |       | $          | —                             |       | $                                     | —     |                       | $          | —                        |       | $                              | 1,569,783  |       | $          | 23,363 |   | $ | (23,363 | ) | $ | 1,569,783 |   |
| Compensation and  benefits                                       |       | —     |       | —     |       | —                             |       | —                                |       | 1,079,076                  |       | —                        |       | —                         |       | 1,079,076  |       |
| Operating  expenses                                              |       | —     |       | —     |       | —                             |       | —                                |       | 238,731                    |       | —                        |       | —                         |       | 238,731    |       |
| Insurance expense                                                |       | —     |       | —     |       | —                             |       | —                                |       | 48,040                     |       | 26,565                        |       | (23,363                        | )          | 51,242     |       |
| Selling, general  and administrative expenses                    |       | —     |       | —     |       | —                             |       | —                                |       | 44,082                     |       | —                        |       | —                         |       | 44,082     |       |
| Depreciation and  amortization expense                           |       | —     |       | —     |       | —                             |       | —                                |       | 52,165                     |       | —                        |       | —                         |       | 52,165     |       |
| Restructuring  charge                                            |       | —     |       | —     |       | —                             |       | —                                |       | 2,242                      |       | —                        |       | —                         |       | 2,242      |       |
| Income from  operations                                          |       | —     |       | —     |       | —                             |       | —                                |       | 105,447                    |       | (3,202                        | )          | —                         |       | 102,245    |       |
| Interest income  from restricted assets                          |       | —     |       | —     |       | —                             |       | —                                |       | 2,160                      |       | 3,134                         |       | —                         |       | 5,294      |       |
| Interest expense                                                 |       | —     |       | —     |       | —                             |       | —                                |       | (35,281                    | )          | —                        |       | —                         |       | (35,281    | )          |
| Realized gain on  investments                                    |       | —     |       | —     |       | —                             |       | —                                |       | —                     |       | 68                            |       | —                         |       | 68         |       |
| Interest and  other income                                       |       | —     |       | —     |       | —                             |       | —                                |       | 1,791                      |       | —                        |       | —                         |       | 1,791      |       |
| Income before  income taxes                                      |       | —     |       | —     |       | —                             |       | —                                |       | 74,117                     |       | —                        |       | —                         |       | 74,117     |       |
| Income tax  expense                                              |       | —     |       | —     |       | —                             |       | —                                |       | (28,146                    | )          | —                        |       | —                         |       | (28,146    | )          |
| Income before  equity in earnings of unconsolidated subsidiaries |       | —     |       | —     |       | —                             |       | —                                |       | 45,971                     |       | —                        |       | —                         |       | 45,971     |       |
| Equity in  earnings of unconsolidated subsidiaries               |       | 46,396     |       | 46,396     |       | 7,777                              |       | 38,619                                |       | 425                        |       | —                        |       | (139,188                       | )     | 425        |       |
| Net income                                                       |       | $          | 46,396     |       | $          | 46,396                             |       | $                                     | 7,777      |                       | $          | 38,619                        |       | $                              | 46,396     |       | $          | — |   | $ | (139,188 | ) | $ | 46,396 |   |

 

 

**ConsolidatingStatement of Operations**

 

**Forthe nine months ended September 30, 2006**

 
| ** **                                                       | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer  AMR**

**HoldCo,  Inc.** | ** ** | **Issuer  EmCare**

**HoldCo,  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                            | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                            | ** ** |
| Net revenue                                                      |       | $          | —     |       | $          | —                             |       | $                                     | —     |                       | $          | —                        |       | $                              | 1,433,272  |      | $          | 28,950 |   | $ | (28,950 | ) | $ | 1,433,272 |   |
| Compensation and  benefits                                       |       | —     |       | —     |       | —                             |       | —                                |       | 990,380                    |       | —                        |       | —                         |       | 990,380   |       |
| Operating  expenses                                              |       | —     |       | —     |       | —                             |       | —                                |       | 216,170                    |       | —                        |       | —                         |       | 216,170   |       |
| Insurance expense                                                |       | —     |       | —     |       | —                             |       | —                                |       | 56,492                     |       | 30,968                        |       | (28,950                        | )          | 58,510    |       |
| Selling, general  and administrative expenses                    |       | —     |       | —     |       | —                             |       | —                                |       | 42,669                     |       | —                        |       | —                         |       | 42,669    |       |
| Depreciation and  amortization expense                           |       | —     |       | —     |       | —                             |       | —                                |       | 49,045                     |       | —                        |       | —                         |       | 49,045    |       |
| Restructuring  charge                                            |       | —     |       | —     |       | —                             |       | —                                |       | 1,186                      |       | —                        |       | —                         |       | 1,186     |       |
| Income from  operations                                          |       | —     |       | —     |       | —                             |       | —                                |       | 77,330                     |       | (2,018                        | )          | —                         |       | 75,312    |       |
| Interest income  from restricted assets                          |       | —     |       | —     |       | —                             |       | —                                |       | 1,833                      |       | 2,455                         |       | —                         |       | 4,288     |       |
| Interest expense                                                 |       | —     |       | —     |       | —                             |       | —                                |       | (34,269                    | )          | —                        |       | —                         |       | (34,269   | )          |
| Realized loss on  investments                                    |       | —     |       | —     |       | —                             |       | —                                |       | —                     |       | (437                          | )          | —                         |       | (437      | )          |
| Interest and  other income                                       |       | —     |       | —     |       | —                             |       | —                                |       | 1,664                      |       | —                        |       | —                         |       | 1,664     |       |
| Loss on early  debt extinguishment                               |       | —     |       | —     |       | —                             |       | —                                |       | (377                       | )          | —                        |       | —                         |       | (377      | )          |
| Income before  income taxes                                      |       | —     |       | —     |       | —                             |       | —                                |       | 46,181                     |       | —                        |       | —                         |       | 46,181    |       |
| Income tax  expense                                              |       | —     |       | —     |       | —                             |       | —                                |       | (17,956                    | )          | —                        |       | —                         |       | (17,956   | )          |
| Income before  equity in earnings of unconsolidated subsidiaries |       | —     |       | —     |       | —                             |       | —                                |       | 28,225                     |       | —                        |       | —                         |       | 28,225    |       |
| Equity in  earnings of unconsolidated subsidiaries               |       | 28,263     |       | 28,263     |       | 7,723                              |       | 20,540                                |       | 38                         |       | —                        |       | (84,789                        | )          | 38        |       |
| Net income                                                       |       | $          | 28,263     |       | $          | 28,263                             |       | $                                     | 7,723      |                       | $          | 20,540                        |       | $                              | 28,263     |      | $          | — |   | $ | (84,789 | ) | $ | 28,263 |   |
|                                                                  |            |            |            |            |            |                                    |            |                                       |            |                            |            |                               |            |                                |            |           |            |  |  |  |  |  |  |  |  |  |

 

13

----

 

**ConsolidatingBalance Sheet**

 

**Asof September 30, 2007**

 

 
| ** **                                | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer AMR**

**HoldCo,  Inc.** | ** ** | **Issuer EmCare**

**HoldCo,  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------|------------|--------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           | ** ** |
| **Assets**                                |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Current assets:                           |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Cash and cash  equivalents                |       | $          | —     |       | $          | —                            |       | $                                    | —     |                       | $          | —                        |       | $                              | 22,278     |      | $          | 116 |   | $ | — |   | $ | 22,394 |   |
| Insurance  collateral                     |       | —     |       | —     |       | —                            |       | —                               |       | 32,252                     |       | 21,081                        |       | (9,515                         | )          | 43,818    |       |
| Trade and other  accounts receivable, net |       | —     |       | —     |       | —                            |       | —                               |       | 491,379                    |       | 1,142                         |       | —                         |       | 492,521   |       |
| Parts and  supplies inventory             |       | —     |       | —     |       | —                            |       | —                               |       | 18,905                     |       | —                        |       | —                         |       | 18,905    |       |
| Other current  assets                     |       | —     |       | —     |       | —                            |       | —                               |       | 19,614                     |       | 2,010                         |       | (1,311                         | )          | 20,313    |       |
| Current deferred  tax assets              |       | —     |       | —     |       | —                            |       | —                               |       | 41,965                     |       | 3,163                         |       | —                         |       | 45,128    |       |
| Current assets                            |       | —     |       | —     |       | —                            |       | —                               |       | 626,393                    |       | 27,512                        |       | (10,826                        | )          | 643,079   |       |
| Non-current  assets:                      |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Property, plant,  and equipment, net      |       | —     |       | —     |       | —                            |       | —                               |       | 150,915                    |       | —                        |       | —                         |       | 150,915   |       |
| Intercompany  receivable                  |       | 3,279      |       | 113,400    |       | 305,377                           |       | 201,726                              |       | —                     |       | —                        |       | (623,782                       | )          | —    |       |
| Intangible  assets, net                   |       | —     |       | —     |       | —                            |       | —                               |       | 60,748                     |       | —                        |       | —                         |       | 60,748    |       |
| Non-current deferred  tax assets          |       | —     |       | —     |       | —                            |       | —                               |       | 89,825                     |       | (1,131                        | )          | —                         |       | 88,694    |       |
| Insurance  collateral                     |       | —     |       | —     |       | —                            |       | —                               |       | 50,317                     |       | 106,780                       |       | —                         |       | 157,097   |       |
| Goodwill                                  |       | —     |       | —     |       | —                            |       | —                               |       | 340,676                    |       | 458                           |       | —                         |       | 341,134   |       |
| Other long-term  assets                   |       | —     |       | —     |       | 7,490                             |       | 3,393                                |       | 17,391                     |       | —                        |       | —                         |       | 28,274    |       |
| Investment and  advances in subsidiaries  |       | 432,285    |       | 318,885    |       | 214,743                           |       | 104,128                              |       | 7,710                      |       | —                        |       | (1,077,751                     | )          | —    |       |
| Assets                                    |       | $          | 435,564    |       | $          | 432,285                           |       | $                                    | 527,610    |                       | $          | 309,247                       |       | $                              | 1,343,975  |      | $          | 133,619 |   | $ | (1,712,359 | ) | $ | 1,469,941 |   |
| **Liabilities  and Equity**               |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Current  liabilities:                     |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Accounts payable                          |       | $          | —     |       | $          | —                            |       | $                                    | —     |                       | $          | —                        |       | $                              | 78,641     |      | $          | 115 |   | $ | — |   | $ | 78,756 |   |
| Accrued  liabilities                      |       | —     |       | —     |       | 2,384                             |       | 1,845                                |       | 194,008                    |       | 28,935                        |       | —                         |       | 227,172   |       |
| Current portion  of long-term debt        |       | —     |       | —     |       | 1,656                             |       | 744                                  |       | 2,291                      |       | —                        |       | —                         |       | 4,691     |       |
| Current  liabilities                      |       | —     |       | —     |       | 4,040                             |       | 2,589                                |       | 274,940                    |       | 29,050                        |       | —                         |       | 310,619   |       |
| Long-term debt                            |       | —     |       | —     |       | 308,827                           |       | 202,516                              |       | 6,964                      |       | —                        |       | —                         |       | 518,307   |       |
| Other long-term  liabilities              |       | —     |       | —     |       | —                            |       | —                               |       | 119,418                    |       | 96,859                        |       | (10,826                        | )          | 205,451   |       |
| Intercompany                              |       | —     |       | —     |       | —                            |       | —                               |       | 623,782                    |       | —                        |       | (623,782                       | )          | —    |       |
| Liabilities                               |       | —     |       | —     |       | 312,867                           |       | 205,105                              |       | 1,025,104                  |       | 125,909                       |       | (634,608                       | )          | 1,034,377 |       |
| Equity:                                   |       |       |       |       |       |                              |       |                                 |       |                       |       |                          |       |                           |       |      |       |
| Class A common  stock                     |       | 93         |       | —     |       | —                            |       | —                               |       | —                     |       | 30                            |       | (30                            | )          | 93        |       |
| Class B common  stock                     |       | 1          |       | —     |       | —                            |       | —                               |       | —                     |       | —                        |       | —                         |       | 1         |       |
| Partnership  equity                       |       | 212,361    |       | 325,761    |       | 189,394                           |       | 22,967                               |       | 212,361                    |       | —                        |       | (750,483                       | )          | 212,361   |       |
| Additional  paid-in capital               |       | 116,585    |       | —     |       | —                            |       | —                               |       | —                     |       | 6,690                         |       | (6,690                         | )          | 116,585   |       |
| Retained earnings                         |       | 105,534    |       | 105,534    |       | 25,349                            |       | 80,185                               |       | 105,520                    |       | —                        |       | (316,588                       | )          | 105,534   |       |
| Comprehensive  income (loss)              |       | 990        |       | 990        |       | —                            |       | 990                                  |       | 990                        |       | 990                           |       | (3,960                         | )          | 990       |       |
| Equity                                    |       | 435,564    |       | 432,285    |       | 214,743                           |       | 104,142                              |       | 318,871                    |       | 7,710                         |       | (1,077,751                     | )          | 435,564   |       |
| Liabilities and  Equity                   |       | $          | 435,564    |       | $          | 432,285                           |       | $                                    | 527,610    |                       | $          | 309,247                       |       | $                              | 1,343,975  |      | $          | 133,619 |   | $ | (1,712,359 | ) | $ | 1,469,941 |   |

 

14

----

 

**ConsolidatingBalance Sheet**

 

**Asof December 31, 2006**

** **
| ** **                                | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer  AMR  HoldCo, Inc.** | ** ** | **Issuer  EmCare  HoldCo, Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantor** | ** ** | **Eliminations/  Adjustments** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------|------------|------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------------------------|------------|------------|------------|
| **Assets**                                | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Current assets:                           |       |       |       |            |       |                               |       |                                  |       |                       |       |                          |       |                           |       |       |       |
| Cash and cash  equivalents                |       | $          | —     |            | $          | —                             |       | $                                     | —     |                       | $          | —                        |       | $                              | 39,329     |       | $          | 7 |   | $ | — |   | $ | 39,336 |   |
| Insurance  collateral                     |       | —     |       | —          |       | —                             |       | —                                |       | 24,912                     |       | 4,812                         |       | —                         |       | 29,724     |       |
| Trade and other  accounts receivable, net |       | —     |       | —          |       | —                             |       | —                                |       | 415,290                    |       | 1,160                         |       | —                         |       | 416,450    |       |
| Parts and  supplies inventory             |       | —     |       | —          |       | —                             |       | —                                |       | 18,089                     |       | —                        |       | —                         |       | 18,089     |       |
| Other current  assets                     |       | —     |       | —          |       | —                             |       | —                                |       | 16,972                     |       | 394                           |       | (949                           | )          | 16,417     |       |
| Current deferred  tax assets              |       | —     |       | —          |       | —                             |       | —                                |       | 9,310                      |       | 3,163                         |       | —                         |       | 12,473     |       |
| Current assets                            |       | —     |       | —          |       | —                             |       | —                                |       | 523,902                    |       | 9,536                         |       | (949                           | )          | 532,489    |       |
| Non-current  assets:                      |       |       |       |            |       |                               |       |                                  |       |                       |       |                          |       |                           |       |       |       |
| Property, plant,  and equipment, net      |       | —     |       | —          |       | —                             |       | —                                |       | 147,162                    |       | —                        |       | —                         |       | 147,162    |       |
| Intercompany  receivable                  |       | 400        |       | 114,165         |       | 282,691                            |       | 193,177                               |       | —                     |       | —                        |       | (590,433                       | )          | —     |       |
| Intangible  assets, net                   |       | —     |       | —          |       | —                             |       | —                                |       | 66,789                     |       | —                        |       | —                         |       | 66,789     |       |
| Non-current  deferred tax assets          |       | —     |       | —          |       | —                             |       | —                                |       | 104,501                    |       | (1,131                        | )          | —                         |       | 103,370    |       |
| Insurance  collateral                     |       | —     |       | —          |       | —                             |       | —                                |       | 59,599                     |       | 103,701                       |       | —                         |       | 163,300    |       |
| Goodwill                                  |       | —     |       | —          |       | —                             |       | —                                |       | 271,870                    |       | 458                           |       | —                         |       | 272,328    |       |
| Other long-term  assets                   |       | —     |       | —          |       | 8,590                              |       | 3,838                                 |       | 20,351                     |       | —                        |       | —                         |       | 32,779     |       |
| Investment and  advances in subsidiaries  |       | 385,640    |       | 271,475         |       | 206,969                            |       | 64,492                                |       | 6,696                      |       | —                        |       | (935,272                       | )          | —     |       |
| Assets                                    |       | $          | 386,040    |            | $          | 385,640                            |       | $                                     | 498,250    |                       | $          | 261,507                       |       | $                              | 1,200,870  |       | $          | 112,564 |   | $ | (1,526,654 | ) | $ | 1,318,217 |   |
| **Liabilities  and Equity**               | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Current  liabilities:                     |       |       |       |            |       |                               |       |                                  |       |                       |       |                          |       |                           |       |       |       |
| Accounts payable                          |       | $          | —     |            | $          | —                             |       | $                                     | —     |                       | $          | —                        |       | $                              | 65,172     |       | $          | — |   | $ | — |   | $ | 65,172 |   |
| Accrued  liabilities                      |       | —     |       | —          |       | 6,515                              |       | 5,295                                 |       | 192,501                    |       | 27,320                        |       | —                         |       | 231,631    |       |
| Current portion  of long-term debt        |       | —     |       | —          |       | 1,656                              |       | 744                                   |       | 1,759                      |       | —                        |       | —                         |       | 4,159      |       |
| Current  liabilities                      |       | —     |       | —          |       | 8,171                              |       | 6,039                                 |       | 259,432                    |       | 27,320                        |       | —                         |       | 300,962    |       |
| Long-term debt                            |       | —     |       | —          |       | 283,110                            |       | 190,962                               |       | 1,544                      |       | —                        |       | —                         |       | 475,616    |       |
| Other long-term  liabilities              |       | —     |       | —          |       | —                             |       | —                                |       | 78,000                     |       | 78,548                        |       | (949                           | )          | 155,599    |       |
| Intercompany                              |       | —     |       | —          |       | —                             |       | —                                |       | 590,433                    |       | —                        |       | (590,433                       | )          | —     |       |
| Liabilities                               |       | —     |       | —          |       | 291,281                            |       | 197,001                               |       | 929,409                    |       | 105,868                       |       | (591,382                       | )          | 932,177    |       |
| Equity:                                   |       |       |       |            |       |                               |       |                                  |       |                       |       |                          |       |                           |       |       |       |
| Class A common  stock                     |       | 93         |       | —          |       | —                             |       | —                                |       | —                     |       | 30                            |       | (30                            | )          | 93         |       |
| Class B common  stock                     |       | 1          |       | —          |       | —                             |       | —                                |       | —                     |       | —                        |       | —                         |       | 1          |       |
| Partnership  equity                       |       | 212,361    |       | 326,526         |       | 189,394                            |       | 22,967                                |       | 212,361                    |       | —                        |       | (751,248                       | )          | 212,361    |       |
| Additional  paid-in capital               |       | 114,471    |       | —          |       | —                             |       | —                                |       | —                     |       | 6,690                         |       | (6,690                         | )          | 114,471    |       |
| Retained earnings                         |       | 59,138     |       | 59,138          |       | 17,575                             |       | 41,563                                |       | 59,124                     |       | —                        |       | (177,400                       | )          | 59,138     |       |
| Comprehensive  income(loss)               |       | (24        | )          | (24             | )          | —                             |       | (24                                   | )          | (24                        | )          | (24                           | )          | 96                             |       | (24        | )          |
| Equity                                    |       | 386,040    |       | 385,640         |       | 206,969                            |       | 64,506                                |       | 271,461                    |       | 6,696                         |       | (935,272                       | )          | 386,040    |       |
| Liabilities and  Equity                   |       | $          | 386,040    |            | $          | 385,640                            |       | $                                     | 498,250    |                       | $          | 261,507                       |       | $                              | 1,200,870  |       | $          | 112,564 |   | $ | (1,526,654 | ) | $ | 1,318,217 |   |
|                                           |            |            |            |                 |            |                                    |            |                                       |            |                            |            |                               |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

15

----

 

**CondensedConsolidating Statement of Cash Flows**

**Forthe nine months ended September 30, 2007**

 
| ** **                                              | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer  AMR HoldCo Inc.** | ** ** | **Issuer  EmCare HoldCo Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-guarantors** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|----------------------------|------------|--------------------------------|------------|------------|------------|
| **Cash  Flows from Operating Activities**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities              |       | $          | —     |       | $          | —                      |       | $                              | —     |                       | $          | —                         |       | $          | 45,609     |   | $ | 11,337 |   | $ | 56,946 |   |
| **Cash  Flows from Investing Activities**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchase of  property, plant and equipment              |       | —     |       | —     |       | —                      |       | —                         |       | (31,570                    | )          | —                         |       | (31,570    | )          |
| Proceeds from  sale of property, plant and equipment    |       | —     |       | —     |       | —                      |       | —                         |       | 300                        |       | —                         |       | 300        |       |
| Acquisition of  businesses, net of cash received        |       | —     |       | —     |       | —                      |       | —                         |       | (75,648                    | )          |                           |       | (75,648    | )          |
| Insurance  collateral                                   |       | —     |       | —     |       | —                      |       | —                         |       | 3,928                      |       | (11,228                        | )          | (7,300     | )          |
| Net change in  deposits and other assets                |       | —     |       | —     |       | —                      |       | —                         |       | 3,076                      |       | —                         |       | 3,076      |       |
| Net cash used in  investing activities                  |       | —     |       | —     |       | —                      |       | —                         |       | (99,914                    | )          | (11,228                        | )          | (111,142   | )          |
| **Cash  Flows from Financing Activities**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Issuance of EMSC  equity                                |       | 382        |       | —     |       | —                      |       | —                         |       | —                     |       | —                         |       | 382        |       |
| Borrowings                                              |       | —     |       | —     |       | —                      |       | —                         |       | 70,300                     |       | —                         |       | 70,300     |       |
| Repayments of  capital lease obligations and other debt |       | —     |       | —     |       | —                      |       | —                         |       | (35,815                    | )          | —                         |       | (35,815    | )          |
| Net intercompany  borrowings (payments)                 |       | (382       | )          | —     |       | —                      |       | —                         |       | 382                        |       | —                         |       | —     |       |
| Increase in bank  overdrafts                            |       | —     |       | —     |       | —                      |       | —                         |       | 2,387                      |       | —                         |       | 2,387      |       |
| Net cash used in  financing activities                  |       | —     |       | —     |       | —                      |       | —                         |       | 37,254                     |       | —                         |       | 37,254     |       |
| Increase in cash  and cash equivalents                  |       | —     |       | —     |       | —                      |       | —                         |       | (17,051                    | )          | 109                            |       | (16,942    | )          |
| Cash and cash  equivalents, beginning of period         |       | —     |       | —     |       | —                      |       | —                         |       | 39,329                     |       | 7                              |       | 39,336     |       |
| Cash and cash  equivalents, end of period               |       | $          | —     |       | $          | —                      |       | $                              | —     |                       | $          | —                         |       | $          | 22,278     |   | $ | 116 |   | $ | 22,394 |   |

 

 

**CondensedConsolidating Statement of Cash Flows**

**Forthe nine months ended September 30, 2006**

 
| ** **                                              | ** ** | **EMSC**   | ** ** | **EMS LP** | ** ** | **Issuer  AMR**

**HoldCo  Inc.** | ** ** | **Issuer  EmCare**

**HoldCo  Inc.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-guarantors** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------|------------|--------------------------------------|------------|----------------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **                           |
| **Cash  Flows from Operating Activities**               |       |       |       |       |       |                              |       |                                 |       |                       |       |                           |       |      |       |
| Net cash provided  by operating activities              |       | $          | —     |       | $          | —                            |       | $                                    | —     |                       | $          | —                         |       | $         | 98,004     |   | $ | 25,590 |   | $ | 123,594 |   |
| **Cash  Flows from Investing Activities**               |       |       |       |       |       |                              |       |                                 |       |                       |       |                           |       |      |       |
| Purchase of  property, plant and equipment              |       | —     |       | —     |       | —                            |       | —                               |       | (43,297                    | )          | —                         |       | (43,297   | )          |
| Proceeds from  sale of property, plant and equipment    |       | —     |       | —     |       | —                            |       | —                               |       | 903                        |       | —                         |       | 903       |       |
| Acquisition of  business                                |       | —     |       | —     |       | —                            |       | —                               |       | (11,587                    | )          | —                         |       | (11,587   | )          |
| Insurance  collateral                                   |       | —     |       | —     |       | —                            |       | —                               |       | (6,189                     | )          | (25,584                        | )          | (31,773   | )          |
| Net change in  deposits and other assets                |       | —     |       | —     |       | —                            |       | —                               |       | (1,860                     | )          | —                         |       | (1,860    | )          |
| Net cash used in  investing activities                  |       | —     |       | —     |       | —                            |       | —                               |       | (62,030                    | )          | (25,584                        | )          | (87,614   | )          |
| **Cash  Flows from Financing Activities**               |       |       |       |       |       |                              |       |                                 |       |                       |       |                           |       |      |       |
| Issuance of EMSC  equity                                |       | 104        |       | —     |       | —                            |       | —                               |       | —                     |       | —                         |       | 104       |       |
| EMSC equity  issuance costs                             |       | (2,408     | )          | —     |       | —                            |       | —                               |       | —                     |       | —                         |       | (2,408    | )          |
| Repayments of  capital lease obligations and other debt |       | —     |       | —     |       | —                            |       | —                               |       | (25,389                    | )          | —                         |       | (25,389   | )          |
| Net intercompany  borrowings (payments)                 |       | 2,304      |       | —     |       | —                            |       | —                               |       | (2,304                     | )          | —                         |       | —    |       |
| Decrease in bank  overdrafts                            |       | —     |       | —     |       | —                            |       | —                               |       | (3,871                     | )          | —                         |       | (3,871    | )          |
| Net cash used in  financing activities                  |       | —     |       | —     |       | —                            |       | —                               |       | (31,564                    | )          | —                         |       | (31,564   | )          |
| Increase in cash  and cash equivalents                  |       | —     |       | —     |       | —                            |       | —                               |       | 4,410                      |       | 6                              |       | 4,416     |       |
| Cash and cash  equivalents, beginning of period         |       | —     |       | —     |       | —                            |       | —                               |       | 18,001                     |       | 47                             |       | 18,048    |       |
| Cash and cash  equivalents, end of period               |       | $          | —     |       | $          | —                            |       | $                                    | —     |                       | $          | —                         |       | $         | 22,411     |   | $ | 53 |   | $ | 22,464 |   |

 

16

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Forward-LookingStatements and Factors That May Affect Results**

 

Certain statements andinformation herein may be deemed to be “forward-looking statements” within themeaning of the Federal Private Securities Litigation Reform Act of 1995.Forward-looking statements may include, but are not limited to, statementsrelating to our objectives, plans and strategies, and all statements (otherthan statements of historical facts) that address activities, events ordevelopments that we intend, expect, project, believe or anticipate will or mayoccur in the future. Any forward-looking statements herein are made as of thedate this Quarterly Report on Form 10-Q is filed with the Securities andExchange Commission, and EMSC undertakes no duty to update or revise any suchstatements. Forward-looking statements are not guarantees of future performanceand are subject to risks and uncertainties. Important factors that could causeactual results, developments and business decisions to differ materially fromforward-looking statements are described in EMSC’s filings with the SEC fromtime to time, including in the section entitled “Risk Factors” in the Company’smost recent Annual Report on Form 10-K and in subsequent Quarterly Reports onForm 10-Q. Among the factors that could cause future results to differmaterially from those provided in this Quarterly Report on Form 10-Q are: theimpact on our revenue of changes in transport volume, mix of insured anduninsured patients, and third party reimbursement rates and methods; theadequacy of our insurance coverage and insurance reserves; potential penaltiesor changes to our operations if we fail to comply with extensive and complex governmentregulation of our industry, both as it exists now and as it may change in thefuture; our ability to recruit and retain qualified physicians and otherhealthcare professionals, and enforce our non-compete agreements with ourphysicians; the loss of one or more members of our senior management team; theoutcome of government investigations of certain of our business practices; ourability to generate cash flow to service our debt obligations and fund the costof capital expenditures to maintain and upgrade our vehicle fleet and medicalequipment; and the loss of existing contracts and the accuracy of ourassessment 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 isconducted primarily through two operating subsidiaries, American MedicalResponse, Inc., or AMR, and EmCare Holdings Inc., or EmCare.

 

This Report should beread in conjunction with the Company’s consolidated financial statements andnotes thereto included in our Annual Report on Form 10-K filed with the SEC onMarch 8, 2007.

 

***Company Overview***

 

We are a leading providerof emergency medical services in the United States. We operate our business andmarket our services under the AMR and EmCare brands. AMR is the leadingprovider of ambulance transport services in the United States. EmCare is theleading provider of outsourced emergency department staffing and management servicesin the United States.

 

**AmericanMedical Response**

 

Over its more than 50years of operating history, AMR has developed the largest network of ambulancetransport services in the United States based on net revenue and number oftransports. For the nine months ended September 30, 2007, approximately 55% ofAMR’s net revenue was generated from emergency 9-1-1 ambulance transportservices. Non-emergency ambulance transport services, including critical caretransfer, wheelchair transports and other interfacility transports, or IFTs,accounted for 31% of AMR’s net revenue for the same period, with the balancegenerated from fixed wing medical transportation services, Medicaid managedtransportation services, and the provision of training, dispatch and otherservices to communities and public safety agencies.

 

**EmCare**

 

Over its more than 30years of operating history, we believe that EmCare has become the largestprovider of outsourced emergency department staffing and related managementservices to healthcare facilities based on number of contracts with hospitalsand affiliated physician groups.

 

***Recent Developments***

 

On January 1, 2007, weadopted the recognition and disclosure provisions of FASB Interpretation No.48, “*Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109*” (“FIN 48”). This interpretation addresses the determination of whether tax benefitsclaimed or expected to be claimed on a tax return should be recorded in thefinancial statements.  Under FIN 48, EMSC may recognize the tax benefitfrom an uncertain tax position only if it is more likely than not that the taxposition will be sustained on examination by the taxing authorities, based onthe technical merits of the position. The 

 

17

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tax benefits recognizedin the financial statements from such a position should be measured based onthe largest benefit that has a greater than fifty percent likelihood of beingrealized upon ultimate settlement. FIN 48 also provides guidance onderecognition, classification, interest and penalties on income taxes, andaccounting in interim periods.

 

As a result of theimplementation of FIN 48 at January 1, 2007, we recorded a $49.0 millionliability with an offsetting increase to current deferred tax assets.

 

In accordance with ouraccounting policy, EMSC recognized accrued interest and penalties related tounrecognized tax benefits as a component of tax expense, which is consistentwith the recognition of these items in prior reporting periods.  As ofJanuary 1, 2007, we recorded a liability of approximately $4.8 million and $6.1million for interest and penalties, respectively.  The liability forinterest and penalties did not materially change as of September 30, 2007.

 

With limited exception,we are no longer subject to U.S. federal, state, and local income tax audits bytaxing authorities for years through 2002.

 

***Key Factors and Measures We Use to Evaluate Our Business***

 

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

 

We evaluate our revenuenet of provisions for contractual payor discounts and provisions for uncompensatedcare. Medicaid, Medicare and certain other payors receive discounts from ourstandard charges, which we refer to as contractual discounts. In addition,individuals we treat and transport may be personally responsible for adeductible or co-pay under their third party payor coverage, and most of ourcontracts require us to treat and transport patients who have no insurance orother third party payor coverage. Due to the uncertainty regardingcollectibility of charges associated with services we provide to thesepatients, which we refer to as uncompensated care, our net revenue recognitionis based on expected cash collections. Our net revenue is gross billings afterprovisions for contractual discounts and estimated uncompensated care.Provisions for contractual discounts and uncompensated care have increasedhistorically primarily as a result of increases in gross billing rates.

 

In addition tocontinually monitoring our payor mix, we also analyze certain measures in eachof our business segments.

 

**AMR**

 

Approximately 88% of AMR’snet revenue for the nine months ended September 30, 2007 was transport revenuederived from the treatment and transportation of patients, including fixed wingmedical transportation services, based on billings to third party payors,healthcare facilities and patients. The balance of AMR’s net revenue is derivedfrom direct billings to communities and government agencies for the provisionof training, dispatch center and other services.  AMR’s measures for netrevenue include transports (segregated into ambulance and wheelchair transportsand in certain analyses weighted) and net revenue per transport.

 

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

 

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

 

We have focused our riskmitigation 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 mitigationprocesses which we believe have resulted in a reduction in the frequency,severity and development of claims. We continue to see positive trends in ourclaims costs but cannot provide assurance that these trends will continue.

 

**EmCare**

 

Of EmCare’s net revenuefor the nine months ended September 30, 2007, approximately 99% was derivedfrom our hospital contracts for emergency department staffing, hospitalist andradiology services and other management services. Of this revenue,approximately 74% was generated from billings to third party payors andpatients for patient visits and approximately 26% was generated from billingsto hospitals and affiliated physician groups for professional services. EmCare’skey net revenue measures are patient visits, net revenue per patient visit, andnumber of contracts.

 

 The change fromperiod to period in the number of patient visits under our “same store”contracts is influenced by general 

 

18

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community conditions aswell as hospital-specific elements, many of which are beyond our directcontrol.

 

The costs incurred in ourEmCare business segment consist primarily of compensation and benefits forphysicians and other professional providers, professional liability costs, andcontract and other support costs. EmCare’s key cost measures include providercompensation per patient visit and professional liability costs.

 

We have developedextensive professional liability risk mitigation processes, including riskassessments on medical professionals and hospitals, extensive incidentreporting and tracking processes, clinical fail-safe programs, training andeducation and other risk mitigation programs which we believe have resulted ina continued reduction in the frequency, severity and development of claims. Wecontinue to see positive trends in our claims costs but cannot provideassurance that these trends will continue.

 

***Factors Affecting Operating Results***

 

**Changesin Net New Contracts**

 

Our operating results areaffected directly by the number of net new contracts and related volumes wehave in a period, reflecting the effects of both new contracts and contractexpirations. We regularly bid for new contracts, frequently in a formalcompetitive bidding process that often requires written responses to a Requestfor Proposal, or RFP, and, in any fiscal period, certain of our contracts willexpire. We may elect not to seek extension or renewal of a contract, or mayreduce certain services, if we determine that we cannot continue to providesuch services on favorable terms. With respect to expiring contracts we wouldlike to renew, we may be required to seek renewal through an RFP, and we maynot be successful in retaining any such contracts, or retaining them on termsthat are as favorable as present terms.

 

**Inflation**

 

Certain of our expenses,such as wages and benefits, insurance, fuel and equipment repair andmaintenance costs, are subject to normal inflationary pressures. Although wehave generally been able to offset inflationary cost increases throughincreased operating efficiencies and successful negotiation of fees and subsidies,we can provide no assurance that we will be able to offset any futureinflationary cost increases through similar efficiencies and fee changes.

 

***Critical Accounting Policies***

 

**RevenueRecognition**

 

Management also regularlyanalyzes the ultimate collectibility of accounts receivable after certainstages of the collection cycle using a look-back analysis to determine theamount of receivables subsequently collected. Retroactive adjustments recorded in the first nine months of the year,which increased revenue, were 1.8% of consolidated net revenue for the ninemonths ended September 30, 2007 compared to 1.1% of consolidated net revenuefor the nine months ended September 30, 2006.

 

**Resultsof Operations**

 

**Threeand Nine Months Ended September 30, 2007 Compared to Three and Nine MonthsEnded September 30, 2006**

 

The following tablespresent a comparison of financial data from our unaudited consolidatedstatements of operations for the three and nine months ended September 30, 2007and for the three and nine months ended September 30, 2006 for EMSC and our twooperating segments.

 

**Non-GAAPMeasures**

 

*AdjustedEBITDA. *Adjusted EBITDA is defined as net income before equityin earnings of unconsolidated subsidiary, income tax expense, loss on earlydebt extinguishment, interest and other income, realized gain (loss) oninvestments, interest expense, interest income from restricted assets anddepreciation and amortization.  AdjustedEBITDA is commonly used by management and investors as a measure of leveragecapacity, debt service ability and liquidity. Adjusted EBITDA is not considereda measure of financial performance under U.S. generally accepted accountingprinciples, or GAAP, and the items excluded from Adjusted EBITDA aresignificant components in understanding and assessing our financialperformance. Adjusted EBITDA should not be considered in isolation or as analternative to such GAAP measures as net income, cash flows provided by or usedin operating, investing or financing activities or other financial statementdata presented in our financial statements as an indicator of financialperformance or liquidity. Since Adjusted EBITDA is not a measure determined inaccordance with GAAP and is susceptible to varying calculations, AdjustedEBITDA, as presented, may not be comparable to other similarly titled measuresof other companies. The tables set forth a reconciliation of Adjusted EBITDA tonet income and cash flows provided by operating activities.

 

19

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**UnauditedConsolidated Results of Operations and as a Percentage of Net Revenue**

**(dollarsin thousands)**

 

**EMSC**

** **
| ** **                                       | ** ** | **Quarter ended  September 30, 2007** | ** ** | **Quarter ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                      | ** ** | **% of net  revenue**                 | ** ** | ** **                                               | ** ** | **% of net  revenue**                          | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** |
| Net revenue                                      |       | $                                               | 529,752    |                                            | 100.0      | %                                                        | $          | 485,697                                                  |       | 100.0 | % | $ | 1,569,783 |   | 100.0 | % | $ | 1,433,272 |   | 100.0 | % |
| Compensation and  benefits                       |       | 366,835                                         |       | 69.2                                            |       | 333,406                                                  |       | 68.6                                                     |       | 1,079,076 |   | 68.7 |   | 990,380 |   | 69.1 |   |
| Operating  expenses                              |       | 82,473                                          |       | 15.6                                            |       | 80,513                                                   |       | 16.6                                                     |       | 238,731 |   | 15.2 |   | 216,170 |   | 15.1 |   |
| Insurance expense                                |       | 13,465                                          |       | 2.5                                             |       | 13,714                                                   |       | 2.8                                                      |       | 51,242 |   | 3.3 |   | 58,510 |   | 4.1 |   |
| Selling, general  and administrative expenses    |       | 15,876                                          |       | 3.0                                             |       | 14,660                                                   |       | 3.0                                                      |       | 44,082 |   | 2.8 |   | 42,669 |   | 3.0 |   |
| Restructuring  charges                           |       | —                                          |       | —                                          |       | 267                                                      |       | 0.1                                                      |       | 2,242 |   | 0.1 |   | 1,186 |   | 0.1 |   |
| Interest income  from restricted assets          |       | (1,919                                          | )          | (0.4                                            | )          | (1,603                                                   | )          | (0.3                                                     | )          | (5,294 | ) | (0.3 | ) | (4,288 | ) | (0.3 | ) |
| Adjusted EBITDA                                  |       | 53,022                                          |       | 10.0                                            |       | 44,740                                                   |       | 9.2                                                      |       | 159,704 |   | 10.2 |   | 128,645 |   | 9.0 |   |
| Depreciation and  amortization expenses          |       | (17,809                                         | )          | (3.4                                            | )          | (16,841                                                  | )          | (3.5                                                     | )          | (52,165 | ) | (3.3 | ) | (49,045 | ) | (3.4 | ) |
| Interest expense                                 |       | (12,652                                         | )          | (2.4                                            | )          | (11,532                                                  | )          | (2.4                                                     | )          | (35,281 | ) | (2.2 | ) | (34,269 | ) | (2.4 | ) |
| Realized gain  (loss) on investments             |       | 9                                               |       | 0.0                                             |       | 88                                                       |       | 0.0                                                      |       | 68 |   | 0.0 |   | (437 | ) | (0.0 | ) |
| Interest and  other income                       |       | 602                                             |       | 0.1                                             |       | 532                                                      |       | 0.1                                                      |       | 1,791 |   | 0.1 |   | 1,664 |   | 0.1 |   |
| Loss on early  debt extinguishment               |       | —                                          |       | —                                          |       | (184                                                     | )          | (0.0                                                     | )          | — |   | — |   | (377 | ) | (0.0 | ) |
| Income tax  expense                              |       | (8,672                                          | )          | (1.6                                            | )          | (6,540                                                   | )          | (1.3                                                     | )          | (28,146 | ) | (1.8 | ) | (17,956 | ) | (1.3 | ) |
| Equity in  earnings of unconsolidated subsidiary |       | 170                                             |       | 0.0                                             |       | 21                                                       |       | 0.0                                                      |       | 425 |   | 0.0 |   | 38 |   | 0.0 |   |
| Net income                                       |       | $                                               | 14,670     |                                            | 2.8        | %                                                        | $          | 10,284                                                   |       | 2.1 | % | $ | 46,396 |   | 3.0 | % | $ | 28,263 |   | 2.0 | % |

 

 

**UnauditedReconciliation of Adjusted EBITDA to Cash Flows Provided by OperatingActivities**

**(dollarsin thousands)**

** **

| ** **                                    | ** ** | **For the nine months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** |
| ** **                                    | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| Adjusted EBITDA                               |       | $                                            | 159,704    |   | $ | 128,645 |   |
| Interest paid                                 |       | (33,734                                      | )          | (32,699 | ) |
| Change in  accounts receivable                |       | (71,007                                      | )          | 4,793 |   |
| Change in other  operating assets/liabilities |       | 1,289                                        |       | 21,947 |   |
| Equity based  compensation                    |       | 1,293                                        |       | 1,031 |   |
| Other                                         |       | (599                                         | )          | (123 | ) |
| Cash flows  provided by operating activities  |       | $                                            | 56,946     |   | $ | 123,594 |   |

 

20

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**UnauditedSegment Results of Operations and as a Percentage of Net Revenue**

**(dollarsin thousands)**

 

**AMR**

 
| ** **                                                   | ** ** | **Quarter ended  September 30, 2007** | ** ** | **Quarter ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                      | ** ** | **% of net  revenue**                 | ** ** | ** **                                               | ** ** | **% of net  revenue**                          | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** |
| Net revenue                                                  |       | $                                               | 310,929    |                                            | 100.0      | %                                                        | $          | 299,300                                                  |       | 100.0 | % | $ | 914,341 |   | 100.0 | % | $ | 888,472 |   | 100.0 | % |
| Compensation and  benefits                                   |       | 196,292                                         |       | 63.1                                            |       | 190,601                                                  |       | 63.7                                                     |       | 576,301 |   | 63.0 |   | 570,320 |   | 64.2 |   |
| Operating  expenses                                          |       | 71,682                                          |       | 23.1                                            |       | 71,132                                                   |       | 23.8                                                     |       | 207,289 |   | 22.7 |   | 190,259 |   | 21.4 |   |
| Insurance expense                                            |       | 6,752                                           |       | 2.2                                             |       | 3,828                                                    |       | 1.3                                                      |       | 26,045 |   | 2.8 |   | 27,522 |   | 3.1 |   |
| Selling, general  and administrative expenses                |       | 10,916                                          |       | 3.5                                             |       | 9,766                                                    |       | 3.3                                                      |       | 30,308 |   | 3.3 |   | 29,098 |   | 3.3 |   |
| Restructuring  charges                                       |       | —                                          |       | —                                          |       | 267                                                      |       | 0.1                                                      |       | 2,242 |   | 0.2 |   | 1,186 |   | 0.1 |   |
| Interest income  from restricted assets                      |       | (720                                            | )          | (0.2                                            | )          | (611                                                     | )          | (0.2                                                     | )          | (2,160 | ) | (0.2 | ) | (1,833 | ) | (0.2 | ) |
| Adjusted EBITDA                                              |       | 26,007                                          |       | 8.4                                             |       | 24,317                                                   |       | 8.1                                                      |       | 74,316 |   | 8.1 |   | 71,920 |   | 8.1 |   |
| Reconciliation of  Adjusted EBITDA to income from operations |       |                                            |       |                                            |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                                              |       | 26,007                                          |       | 8.4                                             |       | 24,317                                                   |       | 8.1                                                      |       | 74,316 |   | 8.1 |   | 71,920 |   | 8.1 |   |
| Depreciation and  amortization expense                       |       | (14,246                                         | )          | (4.6                                            | )          | (13,571                                                  | )          | (4.5                                                     | )          | (41,707 | ) | (4.6 | ) | (39,232 | ) | (4.4 | ) |
| Interest income  from restricted assets                      |       | (720                                            | )          | (0.2                                            | )          | (611                                                     | )          | (0.2                                                     | )          | (2,160 | ) | (0.2 | ) | (1,833 | ) | (0.2 | ) |
| Income from  operations                                      |       | $                                               | 11,041     |                                            | 3.6        | %                                                        | $          | 10,135                                                   |       | 3.4 | % | $ | 30,449 |   | 3.3 | % | $ | 30,855 |   | 3.5 | % |

 

 

**EmCare**

** **
| ** **                                                   | ** ** | **Quarter ended  September 30, 2007** | ** ** | **Quarter ended  September 30, 2006** | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                      | ** ** | **% of net  revenue**                 | ** ** | ** **                                               | ** ** | **% of net  revenue**                          | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** | ** ** | ** ** | **% of net  revenue** | ** ** |
| Net revenue                                                  |       | $                                               | 218,823    |                                            | 100.0      | %                                                        | $          | 186,397                                                  |       | 100.0 | % | $ | 655,442 |   | 100.0 | % | $ | 544,800 |   | 100.0 | % |
| Compensation and  benefits                                   |       | 170,543                                         |       | 77.9                                            |       | 142,805                                                  |       | 76.6                                                     |       | 502,775 |   | 76.7 |   | 420,060 |   | 77.1 |   |
| Operating  expenses                                          |       | 10,791                                          |       | 4.9                                             |       | 9,381                                                    |       | 5.0                                                      |       | 31,442 |   | 4.8 |   | 25,911 |   | 4.8 |   |
| Insurance expense                                            |       | 6,713                                           |       | 3.1                                             |       | 9,886                                                    |       | 5.3                                                      |       | 25,197 |   | 3.8 |   | 30,988 |   | 5.7 |   |
| Selling, general  and administrative expenses                |       | 4,960                                           |       | 2.3                                             |       | 4,894                                                    |       | 2.6                                                      |       | 13,774 |   | 2.1 |   | 13,571 |   | 2.5 |   |
| Interest income  from restricted assets                      |       | (1,199                                          | )          | (0.5                                            | )          | (992                                                     | )          | (0.5                                                     | )          | (3,134 | ) | (0.5 | ) | (2,455 | ) | (0.5 | ) |
| Adjusted EBITDA                                              |       | 27,015                                          |       | 12.3                                            |       | 20,423                                                   |       | 11.0                                                     |       | 85,388 |   | 13.0 |   | 56,725 |   | 10.4 |   |
| Reconciliation of  Adjusted EBITDA to income from operations |       |                                            |       |                                            |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA                                              |       | 27,015                                          |       | 12.3                                            |       | 20,423                                                   |       | 11.0                                                     |       | 85,388 |   | 13.0 |   | 56,725 |   | 10.4 |   |
| Depreciation and  amortization expenses                      |       | (3,563                                          | )          | (1.6                                            | )          | (3,270                                                   | )          | (1.8                                                     | )          | (10,458 | ) | (1.6 | ) | (9,813 | ) | (1.8 | ) |
| Interest income  from restricted assets                      |       | (1,199                                          | )          | (0.5                                            | )          | (992                                                     | )          | (0.5                                                     | )          | (3,134 | ) | (0.5 | ) | (2,455 | ) | (0.5 | ) |
| Income from  operations                                      |       | $                                               | 22,253     |                                            | 10.2       | %                                                        | $          | 16,161                                                   |       | 8.7 | % | $ | 71,796 |   | 11.0 | % | $ | 44,457 |   | 8.2 | % |

 

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***Quarter ended September 30, 2007 compared to the quarterended September 30, 2006***

 

***Consolidated***

 

Our results for the threemonths ended September 30, 2007 reflect an increase in net revenue of $44.1million and an increase in net income of $4.4 million compared to the threemonths ended September 30, 2006.  Theincrease in net income is attributable primarily to an increase of $8.3 millionin Adjusted EBITDA partially offset by increases in depreciation andamortization expense and income tax expense. Basic and diluted earnings per share were $0.35 and $0.34, respectively,for the three months ended September 30, 2007. Basic and diluted earnings per share were $0.25 and $0.24, respectively,for the same period in 2006.

 

*Netrevenue. *For the three months ended September 30, 2007, wegenerated net revenue of $529.8 million compared to net revenue of $485.7million for the three months ended September 30, 2006, representing an increaseof 9.1%.  The increase is attributableprimarily to increases in rates and volumes on existing contracts and increasedvolume from net new contracts.

 

*AdjustedEBITDA.*AdjustedEBITDA was $53.0 million, or 10.0% of net revenue, for the three months endedSeptember 30, 2007 compared to $44.7 million, or 9.2% of net revenue, for thethree months ended September 30, 2006. The increase is attributable primarilyto the net impact of revenue growth during the period and continued improvementin insurance claims costs.

 

*Depreciationand amortization expense.*Depreciation and amortization expense for the threemonths ended September 30, 2007 was $17.8 million, or 3.4% of net revenue,compared to $16.8 million, or 3.5% of net revenue, for the three monthsended September 30, 2006.  Theincrease is attributable to amortization expense on additional contractintangible assets recorded on acquisitions since September 30, 2006 anddepreciation expense related to growth in capital expenditures during 2006.

 

*Interestexpense.*Interestexpense for the three months ended September 30, 2007 was $12.7 millioncompared to $11.5 million for the three months ended September 30, 2006.  The increase is attributable primarily torising interest rates and borrowings on our revolving credit facility duringthe quarter.

 

*Incometax expense. *Income tax expense increased by $2.1million for the three months ended September 30, 2007 compared to the sameperiod in 2006, resulting primarily from increased operating income.  Oureffective tax rate for the three months ended September 30, 2007 was 37.4%and 38.9% for the same period in 2006.

 

***AMR***

 

*Netrevenue. *Net revenue for the threemonths ended September 30, 2007 was $310.9 million, an increase of $11.6million, or 3.9%, from $299.3 million for the same period in 2006. The increasein net revenue was due primarily to an increase in net revenue per transport of1.9%, or $5.8 million, and an increase of 1.9%, or $5.8 million, in weightedtransport volume.  The increase in netrevenue per transport is attributable primarily to additional stand by andspecial event revenue in the quarter including a limited deployment under ournewly executed agreement with the Federal Emergency Management Agency (“FEMA”).  Weighted transports increased 14,200 from thesame quarter last year, primarily due to our acquisitions of Abbott Ambulanceand MedicWest in July 2007, which added 33,600 transports in the quarter.  Ambulance transport volume in other marketsincreased 1.4%.  The increase was offsetby a loss of transports due to our restructuring and exit of certain of ouroperations in Los Angeles and East Michigan.

 

*Compensationand benefits. *Compensation and benefit costs for thethree months ended September 30, 2007 were $196.3 million, or 63.1% of netrevenue, compared to $190.6 million, or 63.7% of net revenue, for the threemonths ended September 30, 2006. Ambulance crew wages per ambulance unit hourincreased by approximately 0.6%, or $0.7 million, principally from annual wagerate increases.  Ambulance unit hours increased period over period by0.6%, or $0.6 million, due to the overall increase in transport volumes. Non-crew wages increased by $4.4 million, or 9.2%, due to annual salaryincreases and compensation expenses from our acquisitions of Abbott Ambulanceand MedicWest.

 

*Operatingexpenses. *Operating expenses for the three monthsended September 30, 2007 were $71.7 million, or 23.1% of net revenue, comparedto $71.1 million, or 23.8% of net revenue, for the three months ended September30, 2006. Operating expenses per weighted transport decreased 1.1% in the threemonths ended September 30, 2007 compared to the same period in 2006.

 

*Insuranceexpense. *Insurance expense for the three months ended September30, 2007 was $6.8 million, or 2.2% of net revenue, compared to $3.8 million, or1.3% of net revenue, for the same period in 2006.  Due to continued improvement in current andprior year ultimate claims costs, we recorded a reduction of prior year insuranceprovisions of $4.7 million during the three months ended September 30, 2007 and$4.8 million during the three months ended September 30, 2006.  The 2006 insurance expense also included areduction for provisions that were recorded in 2006.

 

*Selling,general and administrative. *Selling, general and administrativeexpense for the three months ended

 

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September 30, 2007 was $10.9 million, or 3.5% of netrevenue, compared to $9.8 million, or 3.3% of net revenue, for the three monthsended September 30, 2006.

 

*Restructuringcharges. *Restructuring charges of $0.3 million were recordedduring the three months ended September 30, 2006, related to the re-alignmentof certain billing offices.

 

*Depreciationand amortization. *Depreciation and amortization expense forthe three months ended September 30, 2007 was $14.2 million, or 4.6% of netrevenue, compared to $13.6 million, or 4.5% of net revenue, for the same periodin 2006. The increase is attributable to higher depreciation expense related togrowth in capital expenditures during 2006.

 

 

***EmCare***

 

*Netrevenue. *Net revenue for the three months ended September 30,2007 was $218.8 million, an increase of $32.4 million, or 17.4%, from $186.4million for the three months ended September 30, 2006. The increase was dueprimarily to an increase in patient visits from net new hospital contracts andnet revenue increases in existing contracts. Following June 30, 2006, we added36 net new contracts which accounted for a net revenue increase of $16.4million for the three months ended September 30, 2007.  Of the 36 net new contracts added since June30, 2006, 31 were added in 2006 resulting in an increase in 2007 net revenue of$10.8 million.  During 2007, EmCare added47 new contracts and terminated 42 contracts resulting in an increase in netrevenue of $5.6 million.  Net revenueunder our “same store” contracts (contracts in existence for the entirety ofboth periods) increased $16.0 million, or 10.0%, for the three months endedSeptember 30, 2007 due to a 6.9% increase in net revenue per patient visit fromrate increases from our third-party payors. Current period same store patient visits increased 3.1% over “same store”patient visits in the prior period.

 

*Compensationand benefits. *Compensation and benefits costs for thethree months ended September 30, 2007 were $170.5 million, or 77.9% of netrevenue, compared to $142.8 million, or 76.6% of net revenue, for the sameperiod in 2006. Provider compensation and benefits costs increased $13.4million from net new contract additions. “Same store” provider compensation andbenefits costs increased $10.2 million due to a 6.8% increase in providercompensation per patient visit attributable primarily to increases in netrevenue.

 

*Operatingexpenses. *Operating expenses for the three monthsended September 30, 2007 were $10.8 million, or 4.9% of net revenue, comparedto $9.4 million, or 5.0% of net revenue, for the same period in 2006.  Operating expenses increased primarily due toadditional patient visits from net new contracts and additional off-hoursradiology coverage.

 

*Insuranceexpense. *Professional liability insurance expense for the threemonths ended September 30, 2007 was $6.7 million, or 3.1% of net revenue, comparedto $9.9 million, or 5.3% of net revenue, for the three months ended September30, 2006.  The decrease is due to thecontinued improvement in current and prior year ultimate claims costs resultingin a reduction of prior year insurance provisions of $3.1 million during thethree months ended September 30, 2007. There were no adjustments for prior year reserves in the three monthsended September 30, 2006.

 

*Selling,general and administrative. *Selling, general and administrativeexpense for the three months ended September 30, 2007 was $5.0 million, or 2.3%of net revenue, compared to $4.9 million, or 2.6% of net revenue, for the threemonths ended September 30, 2006.

 

*Depreciationand amortization. *Depreciation and amortization expense forthe three months ended September 30, 2007 was $3.6 million, or 1.6% of netrevenue, compared to $3.3 million, or 1.8% of net revenue, for the three monthsended September 30, 2006.  Depreciationand amortization expense increased due to increased amortization expenserelated to the acquisition of Clinical Staffing Solutions, or CSS, in November2006.

 

 

***Nine months ended September 30, 2007 compared to the ninemonths ended September 30, 2006***

 

***Consolidated***

 

Our results for the ninemonths ended September 30, 2007 reflect an increase in net revenue of $136.5million and an increase in net income of $18.1 million compared to the ninemonths ended September 30, 2006. The increase in net income is attributableprimarily to an increase of $31.1 million in Adjusted EBITDA, partially offsetby increases in depreciation and amortization expense and income tax expense.Basic and diluted earnings per share were $1.12 and $1.08, respectively, forthe nine months ended September 30, 2007. Basic and diluted earnings per sharewere $0.68 and $0.67, respectively, for the same period in 2006.

 

*Netrevenue. *For the nine months ended September 30, 2007, wegenerated net revenue of $1,569.8 million compared to net 

 

23

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revenue of $1,433.3 million for the nine months endedSeptember 30, 2006, representing an increase of 9.5%. The increase isattributable primarily to increases in rates and volumes on existing contractsand increased volume from net new contracts.

 

*AdjustedEBITDA. *Adjusted EBITDA was $159.7 million, or 10.2% of netrevenue, for the nine months ended September 30, 2007 compared to $128.6million, or 9.0% of net revenue, for the nine months ended September 30, 2006.The increase is attributable primarily to the net impact of revenue growthduring the period and continued improvement in insurance claims costs.

 

*Depreciationand amortization expense. *Depreciation and amortization expense forthe nine months ended September 30, 2007 was $52.2 million, or 3.3% of netrevenue, compared to $49.0 million, or 3.4% of net revenue, for the nine monthsended September 30, 2006. The increase is attributable to higherdepreciation expense related to growth in capital expenditures during 2006 andamortization expense recorded on additional contract intangible assets onacquisitions since September 30, 2006.

 

*Interestexpense. *Interest expense for the nine months ended September30, 2007 was $35.3 million compared to $34.3 million for the nine months endedSeptember 30, 2006.  The increase isattributable primarily to rising interest rates and borrowings on our revolvingcredit facility during the nine months ended September 30, 2007.

 

*Incometax expense. *Income tax expense increased by $10.2million for the nine months ended September 30, 2007, compared to the sameperiod in 2006, resulted primarily from increased operating income.  Oureffective tax rate for the nine months ended September 30, 2007 was 38.0%compared with 38.9% for the same period in 2006.

 

 

***AMR***

 

*Netrevenue. *Net revenue for the ninemonths ended September 30, 2007 was $914.3 million, an increase of $25.9million, or 2.9%, from $888.5 million for the same period in 2006. The increasein net revenue was due primarily to an increase in our net revenue per weightedtransport of approximately 3.7%, or $32.9 million and a decrease of 0.8%,or $7.0 million, in weighted transport volume. Revenue per weighted transport increased due primarily to revenue fromour fixed wing air transportation services business acquired in July 2006, andfrom our Medicaid managed transportation business in Texas, a contract underwhich we began providing services in June 2006. Weighted transports decreased 17,600 primarily from our restructuringand exit of certain of our operations in Los Angeles and East Michigan.  These operations accounted for a decrease ofapproximately 116,500 weighted transports for the nine months ended September30, 2007 over the same period in 2006. The decrease was offset by an increase in transports from ouracquisition of Abbott Ambulance and MedicWest and by an increase in transportvolume in other markets of 3.0%.

 

*Compensationand benefits. *Compensation and benefit costs for thenine months ended September 30, 2007 were $576.3 million, or 63.0% of netrevenue, compared to $570.3 million, or 64.2% of net revenue, for the ninemonths ended September 30, 2006. Ambulance crew wages per ambulance unit hourincreased by approximately 2.3%, or $7.3 million, principally from annual wagerate increases.  Ambulance unit hours decreased period over period by 1.6%or $5.2 million, primarily in Los Angeles and East Michigan.  Non-crew wages increased $8.3 million, or5.8% primarily from annual salary increases and additional compensation and benefitcosts incurred under our fixed wing transportation services business, Medicaidmanagement transportation contract and newly acquired companies.  Benefit costs decreased by $2.8 million forthe nine months ended September 30, 2007 primarily due to reduced claims costsincurred under our self-insured health plans.

 

*Operatingexpenses. *Operating expenses for the nine monthsended September 30, 2007 were $207.3 million, or 22.7% of net revenue, comparedto $190.3 million, or 21.4% of net revenue, for the nine months ended September30, 2006. Operating expenses per weighted transport increased 9.8% in the ninemonths ended September 30, 2007 compared to the same period in 2006. Thischange is due to an additional $15.9 million of operating expenses incurredunder our fixed wing transportation services business and our Texas Medicaidmanaged transportation contract, under which we began providing services inJune 2006.

 

*Insuranceexpense. *Insurance expense for the nine months ended September30, 2007 was $26.0 million, or 2.8% of net revenue, compared to $27.5 million,or 3.1% of net revenue, for the same period in 2006. The decrease is due to thecontinued improvement in current and prior year ultimate claims costs resultingin a reduction of prior year insurance provisions of $11.9 million during thenine months ended September 30, 2007, compared to an $8.8 million reductionrecorded during the same period in 2006.

 

*Selling,general and administrative. *Selling, general and administrativeexpense for the nine months ended September 30, 2007 was $30.3 million, or 3.3%of net revenue, compared to $29.1 million, or 3.3% of net revenue, for the ninemonths ended September 30, 2006.

 

*Restructuringcharges. *Restructuring charges of $2.2 million were recordedduring the nine months ended September 30, 2007, related to the closure of oneof our billing offices and restructuring our operations in Los Angeles andOrange Counties in

 

24

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California. Restructuring charges of $1.2 million were recorded during the ninemonths ended September 30, 2006, related to the re-alignment of certain westcoast operations and billing offices.

 

*Depreciationand amortization. *Depreciation and amortization expense forthe nine months ended September 30, 2007 was $41.7 million, or 4.6% of netrevenue, compared to $39.2 million, or 4.4% of net revenue, for the same periodin 2006. The increase is attributable primarily to higher depreciation expenserelated to growth in capital expenditures during 2006.

 

 

***EmCare***

 

*Netrevenue. *Net revenue for the nine months ended September 30,2007 was $655.4 million, an increase of $110.6 million, or 20.3%, from $544.8million for the nine months ended September 30, 2006. The increase was dueprimarily to an increase in patient visits from net new hospital contracts andnet revenue increases in existing contracts. Following December 31, 2005, weadded 48 net new contracts which accounted for a net revenue increase of $59.9million.  Of the 48 net new contractsadded since December 31, 2005, 43 were added in 2006 resulting in an increasein 2007 net revenue of $49.0 million. For the nine months ended September 30, 2007, EmCare added 47 newcontracts and terminated 42 contracts resulting in an increase in net revenueof $10.9 million.  Net revenue under our “samestore” contracts (contracts in existence for the entirety of both periods)increased $50.8 million, or 11.4%, for the period ended September 30, 2007 dueto a 6.6% increase in net revenue per patient visit from rate increases fromour third-party payors and retroactive revenue adjustments of 3.4% recorded inthe period.  Current period same storepatient visits increased 1.4% compared to prior period patient visit levels.

 

*Compensationand benefits. *Compensation and benefits costs for the ninemonths ended September 30, 2007 were $502.8 million, or 76.7% of net revenue,compared to $420.1 million, or 77.1% of net revenue, for the same period in2006. Provider compensation and benefits costs increased $42.5 million from netnew contract additions. “Same store” provider compensation and benefits costsincreased $28.6 million due to an 8.7% increase in provider compensation perpatient visit primarily due to increases in net revenue per patient visit.  The remaining variance is related primarilyto higher expense for incentive compensation plans.

 

*Operatingexpenses. *Operating expenses for the nine monthsended September 30, 2007 were $31.4 million, or 4.8% of net revenue, comparedto $25.9 million, or 4.8% of net revenue, for the same period in 2006.  Operating expenses increased primarily due toadditional patient visits from net new contracts and additional off-hoursradiology coverage.

 

*Insuranceexpense. *Professional liability insurance expense for the ninemonths ended September 30, 2007 was $25.2 million, or 3.8% of net revenue,compared to $31.0 million, or 5.7% of net revenue, for the nine months endedSeptember 30, 2006. The decrease is due to the continued improvement in currentand prior year ultimate claims costs.  Asa result, a reduction of prior year insurance provisions of $9.7 million wasrecorded during the nine months ended September 30, 2007.  A reduction of $1.4 million was recorded forthe period ended September 30, 2006.

 

*Selling,general and administrative. *Selling, general and administrativeexpense for the nine months ended September 30, 2007 was $13.8 million, or 2.1%of net revenue, compared to $13.6 million, or 2.5% of net revenue, for the ninemonths ended September 30, 2006.

 

*Depreciationand amortization. *Depreciation and amortization expense forthe nine months ended September 30, 2007 was $10.5 million, or 1.6% of netrevenue, compared to $9.8 million, or 1.8% of net revenue, for the nine monthsended September 30, 2006.  Depreciationand amortization expense increased due to increased amortization expenserelated to the CSS acquisition.

 

 

**CriticalAccounting Policies**

 

For a discussion ofaccounting policies that we consider critical to our business operations andthe understanding of our results of operations that affect the more significantjudgments and estimates used in the preparation of our unaudited condensedconsolidated financial statements, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations — CriticalAccounting Policies” contained in our annual report on Form 10-K for the yearended December 31, 2006 and incorporated by reference herein. As ofSeptember 30, 2007, there were no significant changes in our criticalaccounting policies or estimation procedures.

 

**Liquidityand Capital Resources**

 

Our primary source ofliquidity is cash flows provided by our operating activities. We can also useour revolving senior secured credit facility, described below, to supplementcash flows provided by our operating activities if we decide to do so forstrategic or operating reasons. Our liquidity needs are primarily to servicelong-term debt and to fund working capital requirements, capital expendituresrelated to the acquisition of vehicles and medical equipment,technology-related assets and

 

25

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insurance-related deposits.

 

We believe our cash andcash equivalents, cash provided by our operating activities, and amountsavailable under our senior secured credit facility will meet the liquidityrequirements of our business through at least the next 12 months. We haveavailable to us, upon compliance with customary conditions, $100.0 millionunder the revolving credit facility, less outstanding borrowings of $39.0 millionand less outstanding letters of credit of $29.6 million at September 30, 2007.Further, we have a conditional right under our senior secured credit facilityto request new or existing lenders to provide up to an additional $100.0million of term debt (in $20.0 million increments).

 

**CashFlow**

 

The table belowsummarizes cash flow information derived from our statements of cash flows forthe periods indicated, amounts in thousands.

 

| ** **                       | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  September 30, 2006** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Net cash  provided by (used in): |       |                                                     |       |                                                     |       |
| Operating  activities            |       | $                                                        | 56,946     |                                                     | $          | 123,594 |   |
| Investing  activities            |       | (111,142                                                 | )          | (87,614                                                  | )          |
| Financing  activities            |       | 37,254                                                   |       | (31,564                                                  | )          |
|                                  |            |                                                          |            |                                                          |            |  |  |

 

*Operatingactivities*. Netcash provided by operating activities was $56.9 million for the nine monthsended September 30, 2007 compared to $123.6 million for the same period lastyear.  Operating cash flows were affected primarily by changes in accountsreceivable, which increased operating cash flows by $4.8 million for the nine monthsended September 30, 2006 and decreased operating cash flows by $71.0 millionfor the nine months ended September 30, 2007.  The 2006 period wasimpacted positively by the collection of hurricane-related and income taxreceivables recorded in 2005.  The 2007 period has been impactednegatively by increases in accounts receivable at our EmCare segment related toa significant increase in revenue and delays in obtaining provider numbers fromMedicare fiscal intermediaries required for billing, with resulting delays inthe collection process.  Our AMR segment was impacted negatively in the2007 period primarily due to the implementation of a new billing system inseveral markets and by our acquisition of MedicWest, in which we did notpurchase the existing accounts receivable balances.  We expect these to betemporary delays in our collection process and to have no material effect onour financial condition or results of operations.  Transport related collections showedimprovement in the third quarter of 2007.

 

*Investingactivities*.  Net cash used in investing activities was$111.1 million for the nine months ended September 30, 2007 compared to $87.6million for the same period in 2006.   The increase relates primarily toacquisitions of businesses of $75.6 million during the nine months endedSeptember 30, 2007 compared with acquisitions of businesses of $11.6 millionduring the same period in 2006.  Theincrease in acquisitions was offset partially by a $24.5 million reduction innet insurance collateral funding and an $11.1 million reduction in net capitalexpenditures.

 

*Financingactivities.*For the nine months ended September 30, 2007, netcash provided by financing activities was $37.3 million compared to net cashused in financing activities of $31.6 million for the nine months endedSeptember 30, 2006.  Net cash from financing activities for the ninemonths ended September 30, 2007 includes net borrowings of $39.0 million underour revolving credit facility.  Net cashused in financing activities for the same period in 2006 includes unscheduledrepayments of approximately $19.4 million on our senior secured creditfacility.

 

26

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Our primary exposure tomarket risk consists of changes in interest rates on certain of our borrowingsand changes in fuel prices. We have not entered into hedging transactions orused derivative instruments for speculative or trading purposes to mitigaterelated exposure.

 

As of September 30, 2007,we had $518.3 million of debt, of which $263.7 million was variable rate debtunder our senior secured credit facility and the balance was fixed rate debt,including $250.0 million aggregate principal amount of our senior subordinatednotes. Over the past twelve months, prime interest rates have decreased 0.5%and LIBOR interest rates have decreased approximately 0.3%. We expectcontinuing changes to these interest rates. Increases and decreases in interestrates affect our interest costs for our variable rate debt. For comparativepurposes, for every 0.125% change in interest rates, our interest costs on oursenior secured credit facility will change by approximately $0.3 million peryear based on our outstanding indebtedness at September 30, 2007.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

We maintain a system ofdisclosure 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 aredesigned to ensure that information required to be disclosed in the reportsthat we file under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or furnishesunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, our managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desired controlobjectives, and management is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Based on their evaluationof our disclosure controls and procedures conducted within 90 days of the dateof filing this Report on Form 10-Q, our principal executive officer and ourprincipal financial officer have concluded that, as of the date of theirevaluation, 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 inour internal control over financial reporting that occurred during our fiscalquarter ended September 30, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

We completed a conversionof our accounting and payroll systems on April 1, 2007 and have implemented anew billing system in several of our AMR markets. This new billing systemimplementation has impacted our cash collections process at AMR.  We donot believe these system conversions have affected our internal controls overfinancial reporting.

 

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**EMERGENCYMEDICAL SERVICES CORPORATION**

**PART II.OTHER INFORMATION**

**FORTHE THREE AND NINE MONTHS ENDED**

**SEPTEMBER30, 2007**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

For additionalinformation regarding legal proceedings, please refer to note 5, under thecaption “Commitments and Contingencies” of the notes accompanying theconsolidated financial statements included herein, to our Annual Report on Form10-K filed with the SEC on March 8, 2007 and to our Quarterly Report onForm 10-Q filed with the SEC on May 4, 2007.

 

**ITEM1A. RISK FACTORS**

 

There have been nomaterial changes from the risk factors disclosed in the “Risk Factors” sectionof the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

 

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**ITEM 6. EXHIBITS**
| 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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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrants have dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly authorized.

 
|             | **EMERGENCY MEDICAL SERVICES  CORPORATION** |
|------------------|---------------------------------------------|
|             | (registrant)                                |
|             |                                        |   |
| November 7, 2007 |                                        | 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 |
|             |                                        |   |
| November 7, 2007 |                                        | By: | /s/ William A. Sanger |
| Date             |                                        | William A. Sanger |
|             |                                        | Chairman and Chief Executive Officer |

 

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**EXHIBIT INDEX**
| 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.* |

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*    Filed with this Report

 

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