SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-16079
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AIR METHODS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0915893
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7301 SOUTH PEORIA, ENGLEWOOD, COLORADO 80112
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 792-7400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.06 PAR VALUE PER SHARE (THE "COMMON STOCK")
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(Title of Class)
NASDAQ STOCK MARKET
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(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of March 15, 2002, was approximately $60,014,000.(1) The
number of outstanding shares of Common Stock as of March 15, 2002, was
8,906,129.
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1 Excludes 1,112,040 shares of Common Stock held by directors, officers, and
shareholders whose ownership exceeds five percent of the shares outstanding
at March 15, 2002. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management of policies of
the Registrant, or that such person is controlled by or under common
control with the Registrant.
i
TABLE OF CONTENTS
TO FORM 10-K
Page
----
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 3
Contracts in Process . . . . . . . . . . . . . . . . . . . . 3
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Government Regulation. . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 4
Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 4
Equipment and Parts. . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . 7
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 9
Results of Operations. . . . . . . . . . . . . . . . . . . . 9
Liquidity and Capital Resources. . . . . . . . . . . . . . . 13
Outlook for 2002 . . . . . . . . . . . . . . . . . . . . . . 14
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 15
Critical Accounting Policies . . . . . . . . . . . . . . . . 17
New Accounting Standards . . . . . . . . . . . . . . . . . . 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . 20
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K . . IV-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-3
ii
PART I
ITEM 1. BUSINESS
GENERAL
Air Methods Corporation, a Delaware corporation (Air Methods or the Company),
was originally incorporated in Colorado in 1982 and now serves as one of the
largest providers of air medical emergency transport services and systems
throughout the United States of America. The Company's Community-Based Model
(CBM), operated by its wholly owned subsidiary Mercy Air Service, Inc. (Mercy
Air), provides air medical transportation services in California, Nevada,
Missouri, and Illinois. As of December 31, 2001, the Company's Hospital-Based
Model (HBM), operated within its Air Medical Services Division, provided air
medical transportation services to hospitals located in 16 states under 23
operating agreements with original terms ranging from one to ten years and had
transported approximately 196,000 patients since inception. Under both CBM and
HBM operations, the Company transports persons requiring intensive medical care
from either the scene of an accident or general care hospitals to highly skilled
trauma centers or tertiary care centers. The Company's Products Division
designs, manufactures, and installs aircraft medical interiors and other
aerospace products. Financial information for each of the Company's operating
segments is included in the notes to the Company's consolidated financial
statements in Item 8 of this report.
Community-Based Model
In July 1997 the Company acquired Mercy Air which has operated as a
community-based provider of air medical transportation services throughout
southern California since 1988. In April 2000, the Company established a
wholly-owned subsidiary of Mercy Air, ARCH Air Medical Service, Inc. (ARCH), to
acquire substantially all of the business assets of Area Rescue Consortium of
Hospitals, which has provided air medical transportation services in the St.
Louis metropolitan area and surrounding communities since 1987. Services
provided under the CBM, also referred to as independent provider operations,
include medical care, aircraft operation and maintenance, 24-hour communications
and dispatch, and medical billing and collections. The division operates 17
helicopters and two fixed wing aircraft under both Instrument Flight Rules and
Visual Flight Rules in southern California, Las Vegas, and the St. Louis
metropolitan area. CBM aircraft are typically based at fire stations or
airports. Although the division does not generally contract directly with
specific hospitals, it has long-standing relationships with several leading
healthcare institutions in the greater Los Angeles, San Diego, and St. Louis
metropolitan areas. Mercy Air provides air medical services in the Santa Barbara
region under a joint venture agreement which calls for Mercy Air to provide
medical staffing, dispatch, and medical billing and collection and to share
equally in the net operating results of the venture with its partner. Revenue
from the CBM consists of flight fees billed directly to patients, their
insurers, or governmental agencies. Due to weather conditions and other factors,
the number of flights is generally higher during the summer months than during
the remainder of the year, causing revenue generated from operations to
fluctuate accordingly.
In 2001 the Company opened a CBM base of operations in Litchfield, Illinois. In
December 2001, the Company also bought the operating rights of another air
ambulance service provider in the Las Vegas metropolitan area and, as a result,
expanded to a third base of operation in Pahrump, Nevada.
Hospital-Based Model
The Company's HBM provides hospital clients with helicopters and airplanes
equipped with medical interiors approved by the Federal Aviation Administration
(FAA). Operations within this division are generally based at hospitals and are
conducted using predominantly Instrument Flight Rules (IFR) certified aircraft
and IFR-rated pilots. Maintenance and operation of the aircraft in accordance
with Federal Aviation Regulations (FAR) Part 135 standards is the Company's
responsibility. Hospital clients are responsible for providing medical personnel
and all medical care. Under the typical operating agreement with a hospital, the
Company earns approximately 65% of its revenue from a fixed monthly fee and 35%
from an hourly flight fee from the hospital, regardless of when, or if, the
hospital is reimbursed for these services by its patients, their insurers, or
the federal government. Both monthly and hourly fees are generally subject to
annual increases based on changes in the consumer price index and in hull and
1
liability insurance premiums. Because the majority of this division's flight
revenue is generated from fixed monthly fees, seasonal fluctuations in flight
hours do not significantly impact monthly revenue in total.
In 2001 HBM operations expanded under three existing agreements into Uvalde,
Texas; Cottonwood, Arizona; and Sioux City, Iowa; and opened operations under a
new contract with four fixed wing aircraft in Flagstaff, Arizona, and two
satellite locations. The division also discontinued services in Columbia, South
Carolina, when the hospital customer chose to transition to a different delivery
method for its air medical transportation services.
The Company performs non-destructive component testing, engine repair, and
component overhaul at its headquarters in the Denver metropolitan area. The
Company is a Customer Service Facility for Bell Helicopter, Inc. (Bell) and an
FAA-Certified Repair Station authorized to perform airframe, avionics, and
limited engine repairs. In-house repair, maintenance, and testing capabilities
provide cost savings and decrease aircraft down time by avoiding the expense and
delay of having this work performed by nonaffiliated vendors.
The Company operates some of its HBM contracts under the service mark AIR
LIFE(R) and has successfully defended the service mark against infringement
actions in Colorado, California, and Kansas. The air medical transportation
industry identifies the service mark with the Company's high quality of customer
support and standard of service.
Products Division
The Company's Products Division manufactures modular, multi-functional medical
interiors; multi-mission interiors; and other aerospace products. The key
features of the multi-functional and multi-mission interiors are flexibility of
configuration for multiple transport needs and simplicity of installation and
maintenance. Although medical interiors ranging from basic life support systems
to intensive care units have comprised the majority of the Products Division's
business, the combination of its engineering, manufacturing, and certification
capabilities has also allowed the division to design and integrate other
aerospace products, such as aircraft navigation systems, environmental control
systems, and structural and electrical systems. Manufacturing capabilities
include composites, machining and welding, sheetmetal, and upholstery. The
division also offers quality assurance and certification services pursuant to
Parts Manufacturer Approvals (PMA's) and maintains ISO9001: 1994 (Quality
Systems) and EN46001 (Medical Devices) certifications. ISO9001 is a general
quality management standard while the second certification relates to specific
standards for the Medical Device industry.
The Products Division markets its services and products both domestically and
internationally to a variety of customers through an extensive network of
marketing representatives. Development of the modular, multi-functional interior
has enabled the division to produce components individually for a variety of
airframes. The Company maintains patents covering several products, including
the Multi-Functional Floor, Articulating Patient Loading System, and Modular
Equipment Frame, all of which were developed as part of the modular interior.
Raw materials and components used in the manufacture of interiors and other
products are generally widely available from several different vendors.
In 2001 the Company manufactured two Multi-Mission Medevac Systems for a public
service customer and began production of five HH-60L (formerly known as UH-60Q)
Multi-Mission Medevac Systems for the U.S. Army. After completion of the
Development Contract of the Spinal Cord Injury Transport System (SCITS) program
for the U.S. Air Force (USAF) in 2001, the Company received notification that
the USAF does not intend to exercise its option on a production contract for
SCITS at this time. During 2001 the division installed components of its
multi-functional or multi-mission interiors for ten commercial customers, in
addition to completing three new medical interiors, refurbishment of three
aircraft interiors, and various other projects for the Company's HBM and CBM
operations.
2
COMPETITION
Competition in the air medical transportation industry comes primarily from four
national operators: Corporate Jets, Inc.; OmniFlight, Inc.; Petroleum
Helicopters, Inc.; and Rocky Mountain Helicopters, Inc. The CBM also faces
competition from smaller regional carriers and alternative air ambulance
providers such as local governmental entities. Operators generally compete on
the basis of price, safety record, accident prevention and training, and the
medical capability of the aircraft. Price is a significant element of
competition for HBM operations as many healthcare organizations continue to move
toward consolidation and strict cost containment, reflecting uncertainty
concerning the future structure of healthcare providers and reimbursement. The
Company believes that its competitive strengths center on the quality of its
customer service and the medical capability of the aircraft it deploys, as well
as its ability to tailor the service delivery model to a hospital's or
community's specific needs.
The Company's competition in the aircraft interior design and manufacturing
industry comes primarily from two companies based in the United States and one
European company. Competition is based mainly on product features, performance,
price, and weight. The Company believes that it has demonstrated the ability to
compete on the basis of each of these factors.
CONTRACTS IN PROCESS
As of December 31, 2001, the Company was continuing the production of five
HH-60L Multi-Mission Medevac Systems for the U.S. Army and multifunctional
interiors or interior components for five commercial customers. These projects
are scheduled for delivery in the first and second quarters of 2002, with
remaining revenue estimated at $1.3 million. As of December 31, 2000, the
revenue remaining to be recognized on medical interiors and other products in
process was $3 million.
EMPLOYEES
As of December 31, 2001, the Company retained 585 full time and 101 part time
employees, comprised of 228 pilots; 187 aviation machinists, airframe and
powerplant ("A&P") engineers and other manufacturing/maintenance positions; 146
flight nurses and paramedics; and 125 business and administrative personnel. The
Company's pilots are IFR-rated where required by contract, and all have
completed an extensive ground school and flight training program at the
commencement of their employment with the Company, as well as local area
orientation and annual training provided by the Company. All of the Company's
aircraft mechanics must possess FAA A&P licenses. All flight nurses and
paramedics hold the appropriate state and county licenses, as well as
Cardiopulmonary Resuscitation, Advanced Cardiac Life Support, and Pediatric
Advanced Life Support certifications.
The Company's employees are not covered by any collective bargaining agreements
and management believes that its relations with employees are satisfactory. The
Company provides salary and benefits packages competitive with those offered by
other providers of air medical services based on the individual qualifications
of employees.
GOVERNMENT REGULATION
The Company is subject to the Federal Aviation Act of 1958, as amended. All
flight and maintenance operations of the Company are regulated and actively
supervised by the U.S. Department of Transportation through the FAA. Medical
interiors and other aerospace products developed by the Company are subject to
FAA certification. The Company, Mercy Air, and ARCH each hold a Part 135 Air
Carrier Certificate and a Part 145 Repair Station Certificate from the FAA.
3
ITEM 2. PROPERTIES
FACILITIES
The Company leases its headquarters, consisting of approximately 70,000 square
feet of office and hangar space, in metropolitan Denver, Colorado, at Centennial
Airport. The lease expires in March 2003 and the approximate annual rent is
$630,000. Mercy Air's headquarters consist of approximately 19,000 square feet
of office and hangar space owned by the Company in Rialto, California. The
Company pays minimal rent for the land at the airport where the facilities are
located. ARCH's headquarters consist of approximately 11,500 square feet of
office and hangar space owned by the Company in St. Louis, Missouri. The Company
believes that these facilities are in good condition and suitable for the
Company's present requirements.
EQUIPMENT AND PARTS
As of December 31, 2001, the Company managed and operated a fleet of 70
aircraft, consisting of 57 helicopters and 13 airplanes, for its HBM and CBM
operations. Of these aircraft, the Company owns 25 helicopters and leases 22
helicopters and 3 airplanes. The Company operates 10 helicopters and 10
airplanes owned by client hospitals and other third parties in connection with
existing air medical contracts. The composition of the Company's owned and
leased fleet as of December 31, 2001, is as follows:
4
COMPANY OWNED AIRCRAFT (1)
(Dollar amounts in thousands)
--------------------------------
Total
Total Net Book
Type Number Cost Value
-------- --------- ------- -------
Helicopters:
Bell 206 5 $ 4,832 $ 2,780
Bell 222 13 26,230 16,477
Bell 407 2 4,010 3,200
Bell 412 4 12,618 7,680
BK 117 1 7,586 4,089
--------- ------- -------
TOTALS 25 $55,276 $34,226
========= ======= =======
COMPANY LEASED AIRCRAFT
(Dollar amounts in thousands)
--------------------------------
Average
Remaining Total Rents Remaining
Type Number Term in Years Over Lease Life Payments
------------- ------------ -------------- --------------- ---------
Helicopters:
Bell 222 4 7 $ 4,605 $3,332
Bell 407 6 7 11,762 8,285
Bell 412 1 7 2,463 1,826
MD902 2 10 7,613 7,613
BO 105 1 9 654 555
BK 117 8 9 15,415 11,775
-- -------- --------
22 42,512 33,386
-- -------- --------
Airplanes:
King Air B100 2 8 1,523 1,257
Pilatus PC-12 1 7 2,911 2,038
-- -------- --------
3 4,434 3,295
-- -------- --------
TOTALS 25 $ 46,946 $ 36,681
== ======== ========
(1) Includes aircraft acquired under capital leases.
5
The Company generally pays all insurance, taxes, and maintenance expense for
each aircraft in its fleet. Because helicopters are insured at replacement cost
which usually exceeds book value, the Company believes that helicopter accidents
covered by hull and liability insurance will generally result in full
reimbursement of any damages sustained. In the ordinary course of business, the
Company may from time to time purchase and sell helicopters in order to best
meet the specific needs of its operations.
The Company has experienced no significant difficulties in obtaining required
parts for its helicopters. Repair and replacement components are purchased
primarily through Bell and American Eurocopter Corporation (AEC), since Bell and
Eurocopter aircraft make up the majority of the Company's fleet. Based upon the
manufacturing capabilities and industry contacts of Bell and AEC, the Company
believes it will not be subject to material interruptions or delays in obtaining
aircraft parts and components. Any termination of production by Bell or AEC
would require the Company to obtain spare parts from other suppliers, which are
not currently in place.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2001.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the trading symbol "AIRM." The following table shows, for the periods
indicated, the high and low closing prices for the Company's common stock. The
quotations for the common stock represent prices between dealers and do not
reflect adjustments for retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
YEAR ENDED DECEMBER 31, 2001
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Common Stock High Low
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First Quarter . . . . . . . . $4.00 $3.00
Second Quarter . . . . . . . . 4.00 3.03
Third Quarter . . . . . . . . 4.91 3.96
Fourth Quarter . . . . . . . . 6.23 4.40
YEAR ENDED DECEMBER 31, 2000
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Common Stock High Low
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First Quarter . . . . . . . . $ 5 3/16 $3 1/16
Second Quarter . . . . . . . . 4 15/16 3 5/32
Third Quarter . . . . . . . . 5 3 3/16
Fourth Quarter . . . . . . . . 4 1/4 3 1/4
As of March 15, 2002, there were approximately 317 holders of record of the
Company's common stock. The Company estimates that it has approximately 3,400
beneficial owners of common stock.
The Company has not paid any cash dividends since its inception and intends to
retain any future earnings to finance the growth of the Company's business
rather than to pay dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information of the
Company and its subsidiary which has been derived from the Company's audited
consolidated financial statements. This selected financial data should be read
in conjunction with the consolidated financial statements of the Company and
notes thereto appearing in Item 8 of this report. Revenue for the years ended
December 31, 2001 and 2000, increased in part as a result of the acquisition of
ARCH. See "Business - General" in Item 1 and "Management's Discussion and
Analysis" in Item 7 of this report.
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands except share and per share amounts)
Year Ended December 31,
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2001 2000 1999 1998 1997
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STATEMENT OF OPERATIONS DATA:
Revenue $ 92,096 75,293 57,258 48,699 38,977
Operating expenses:
Operating 74,597 61,393 45,634 40,242 31,017
General and administrative 9,781 7,854 6,508 6,240 4,645
Other income (expense), net (1,770) (1,889) (1,926) (1,960) (1,619)
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Income before income taxes 5,948 4,157 3,190 257 1,696
Income tax benefit 615 - 255 - -
-----------------------------------------------------------
Net income $ 6,563 4,157 3,445 257 1,696
===========================================================
Basic income per common share $ .78 .50 .42 .03 .21
===========================================================
Diluted income per common share $ .76 .49 .42 .03 .21
===========================================================
Weighted average number of shares
of Common Stock outstanding - basic 8,421,671 8,334,445 8,219,601 8,202,668 8,121,395
===========================================================
Weighted average number of shares
of Common Stock outstanding - diluted 8,659,302 8,559,389 8,222,187 8,449,904 8,188,547
===========================================================
Year Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
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BALANCE SHEET DATA:
Total assets $ 85,557 75,250 62,716 60,776 59,869
Long-term liabilities 34,210 29,885 27,003 28,140 29,013
Stockholders' equity 36,543 29,416 25,140 21,671 21,213
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in Item 8 of this report. This report,
including the information incorporated by reference herein, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. For this purpose, statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "expects," "anticipates,"
"plans," "estimates," and similar words and expressions are intended to identify
such statements. These forward-looking statements include statements concerning
the size, structure and growth of the Company's air medical services and
products markets, the continuation and/or renewal of HBM contracts, the
acquisition of new and profitable Products Division contracts, the flight volume
of CBM operations, and other matters. The actual results that the Company
achieves may differ materially from those discussed in such forward-looking
statements due to the risks and uncertainties described in the Business section
of this report, in Management's Discussion and Analysis of Financial Condition
and Results of Operations, and in other sections of this report, as well as in
the Company's Quarterly reports on Form 10-Q. The Company undertakes no
obligation to update any forward-looking statements.
RESULTS OF OPERATIONS
Year ended December 31, 2001 compared to 2000
The Company reported net income of $6,563,000 for the year ended December 31,
2001, compared to $4,157,000 for the year ended December 31, 2000.
Flight revenue increased $15,096,000, or 22.5%, from $67,192,000 for the year
ended December 31, 2000, to $82,288,000 for the year ended December 31, 2001.
Flight revenue is generated by both HBM and CBM operations and is recorded net
of contractual allowances under agreements with third-party payers.
- - CBM - Flight revenue increased 34.7% to $45,407,000 for the following
reasons:
- Acquisition of ARCH in April 2000. Flight revenue for ARCH for the
year ended December 31, 2001, totaled $19,497,000, compared to
$11,604,000 from the acquisition date through December 31, 2000. ARCH
also expanded operations to one new location in the second quarter of
2001.
- Purchase of the operating rights of another air ambulance service
provider in the Las Vegas metropolitan area in December 2001.
- Increase of approximately 3% in the average transport charge for CBM
operations in California effective September 2000.
- Increase of approximately 10.7% in transport volume for CBM operations
at continuing bases in California and Nevada.
- - HBM - Flight revenue increased 10.7% to $36,881,000 for the following
reasons:
- Revenue of approximately $2,834,000 generated by the addition of a new
contract in August 2001 and the expansion of three existing contracts
to new satellite locations in 2001. The resulting increase in revenue
was offset in part by the discontinuation of one contract in July 2000
and another in October 2001.
- Annual price increases in the majority of contracts based on changes
in hull insurance rates and in the Consumer Price Index.
- Increase of 6.9% in flight volume for continuing contracts compared to
the prior year.
Sales of medical interiors and products increased $1,155,000, or 17.8%, from
$6,500,000 for the year ended December 31, 2000, to $7,655,000 for the year
ended December 31, 2001. Significant projects in 2001 included manufacture of
two Multi-Mission Medevac Systems for a public service customer, medical
interiors or multi-functional interior components for ten commercial customers,
and five HH-60L (formerly known as UH-60Q) Multi-Mission Medevac Systems for the
U.S. Army. Revenue by product line for the year ended December 31, 2001, was as
follows:
- - $3,766,000 - manufacture and installation of modular, multi-functional
interiors
- - $3,578,000 - manufacture of multi-mission interiors
- - $311,000 - design and manufacture of other aerospace products
9
Significant projects in 2000 included completion of six UH-60Q Multi-Mission
Medevac Systems for the U.S. Army and design work on SCITS for the U.S. Air
Force, as well as manufacture of medical interiors or multi-functional interior
components for eight commercial customers. Revenue by product line for the year
ended December 31, 2000, was as follows:
- - $3,238,000 - manufacture and installation of modular, multi-functional
interiors
- - $2,308,000 - manufacture of multi-mission interiors
- - $954,000 - design and manufacture of other aerospace products
Cost of medical interiors and products increased by 20.9% for the year ended
December 31, 2001, as compared to the previous year, reflecting the change in
sales volume over the same period.
Parts and maintenance sales and services increased 62.3% for the year ended
December 31, 2001, compared to the prior year, primarily due to the sale of
aircraft spare parts by the Company's HBM operations to a single customer. Cost
of parts and maintenance sales and services for the year also increased
accordingly.
In the year ended December 31, 2001, the Company recognized a gain of $110,000
on the sale of a fixed wing aircraft which was no longer utilized in the fleet.
In the year ended December 31, 2000, the Company recognized net gains totaling
$343,000 on the disposition of assets, including $330,000 from an insurance
settlement for one of the Company's helicopters damaged in an accident.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased 24.5% to $28,288,000 for the year ended
December 31, 2001, compared to 2000. Changes by business segment are as follows:
- - CBM - Flight center costs increased 35.6% to $14,139,000 for the following
reasons:
- Acquisition of ARCH in April 2000. Flight center costs related to ARCH
for the year ended December 31, 2001, totaled $5,695,000, compared to
$3,675,000 from the acquisition date through December 31, 2000. ARCH
also added personnel to staff the new base opened in 2001.
- Addition of personnel to staff one base location opened during the
second quarter of 2000 and one during the second quarter of 2001.
- Increases in supplemental contributions to the employee defined
contribution retirement plan effective July 2000 and January 2001.
Contributions increased 0.5% of salaries effective July 2000 and an
additional 0.5% effective January 2001.
- Increases in salaries for merit pay raises.
- - HBM - Flight center costs increased 15.2% to $14,149,000 for the year
primarily due to the following:
- Addition of personnel to staff the new base locations described above.
- Increases in supplemental contributions to the employee defined
contribution retirement plan as described above.
- Increase of approximately 21% in the cost of employee health insurance
coverage paid by the Company.
- Increases in salaries for merit pay raises.
Aircraft operating expenses increased 14.7% for the year ended December 31,
2001, in comparison to the year ended December 31, 2000. Aircraft operating
expenses consist of fuel, insurance, and maintenance costs and generally are a
function of the size of the fleet, type of aircraft flown, and number of hours
flown. The increase in costs is due to the following:
- - Acquisition of ARCH in April 2000. Expenses for the ARCH fleet totaled
$3,474,000 for the year ended December 31, 2001, compared to $2,203,000
from the acquisition date through December 31, 2000.
- - Addition of five fixed wing aircraft and two Bell 407 helicopters for HBM
operations during 2001.
- - Increase in on-condition costs for maintenance on the Company's Bell 407
fleet as four aircraft were subject to a 2500-hour airframe inspection
during the year compared to only one in the prior year.
- - Increase of approximately 8% in hull and liability insurance rates
effective July 2001, due to overall insurance market conditions.
- - Increase of approximately $26,000 per month in insurance premiums for war
risk coverage effective October 1, 2001, as a result of the events
surrounding September 11, 2001.
10
Aircraft rental expense increased 18.8% for the year ended December 31, 2001, in
comparison to the year ended December 31, 2000. Lease expense for ARCH aircraft
totaled $1,184,000 for the year ended December 31, 2001, compared to $728,000
from the acquisition date through December 31, 2000. In addition, two other
leased aircraft, including one under a month-to-month lease which terminated
mid-year 2001, were added to the backup fleet for HBM operations in the fourth
quarter of 2000.
Depreciation and amortization expense decreased 4.5% for the year ended December
31, 2001. Expenses in 2001 included two months of amortization of a non-compete
agreement related to the buyout of another air ambulance service provider in San
Diego, compared to twelve months in 2000. The agreement became fully amortized
in the first quarter of 2001. The increase in depreciation for the addition of
ARCH's buildings and equipment was offset in 2001 by the elimination of
depreciation on aircraft medical interiors, rotable equipment, and other assets
which are fully depreciated.
Bad debt expense is estimated during the period the related services are
performed based on historical experience for CBM operations. The provision is
adjusted as required based on actual collections in subsequent periods. Bad debt
expense increased 45.1% for the year ended December 31, 2001, compared to 2000,
due primarily to the increase in flight revenue for CBM operations. The year
ended December 31, 2001, included $3,740,000 for bad debt related to ARCH
operations compared to $2,784,000 recorded from the acquisition date through
December 31, 2000. For CBM operations in California and Nevada, bad debt as a
percentage of related net flight revenue increased from 19.9% in 2000 to 21.3%
in 2001, while decreasing from 24.0% to 19.2% for CBM operations in Missouri and
Illinois over the same period. The Company believes the decrease in the
collection rate for western CBM operations is due to general recessionary trends
in the economy. The improvement in the collection rate for eastern CBM
operations is due to stronger collections than originally anticipated at the
acquisition of ARCH in April 2000. Bad debt expense related to HBM operations
and Products Divisions was not significant in either 2001 or 2000.
General and administrative expenses increased 24.5% for the year ended December
31, 2001, compared to the year ended December 31, 2000, reflecting the impact of
the ARCH transaction. Excluding ARCH expenses, general and administrative
expenses increased 13.0%, primarily due to additional support for expanded
operations, merit pay increases, and changes in employee benefits (retirement
plan contributions and health insurance premiums) as discussed more fully above
in the analysis of flight center costs.
The Company recognized a tax benefit of $615,000 in 2001 and no tax expense or
benefit in 2000 primarily due to recognition of deferred tax assets for which a
valuation allowance had previously been provided. In 2000 and 2001, the Company
had taxable earnings for consecutive tax years for the first time in its
history. Based on the expected trend in taxable earnings, the majority of the
valuation allowance against deferred tax assets was reversed in 2001. As of
December 31, 2001, a valuation allowance has been provided for net operating
loss carryforwards which are not expected to be realized prior to expiration.
Based on management's assessment, realization of net deferred tax assets through
future taxable earnings is considered more likely than not, except to the extent
valuation allowances are provided.
Year ended December 31, 2000 compared to 1999
The Company reported net income of $4,157,000 for the year ended December 31,
2000, compared to $3,445,000 for the year ended December 31, 1999.
Flight revenue increased $16,446,000, or 32.4%, from $50,746,000 for the year
ended December 31, 1999, to $67,192,000 for the year ended December 31, 2000.
Flight revenue for CBM operations increased 74.6% for the year ended December
31, 2000, compared to 1999, primarily due to the acquisition of ARCH in April
2000. Flight revenue for ARCH totaled $11,604,000 from the acquisition date
through December 31, 2000. Absent the impact of the ARCH acquisition, flight
revenue for the CBM increased 14.4% for the year due to revenue of $1,185,000
from 2 new locations opened in 2000 and to an increase in transport volume of
approximately 12% during 2000 compared to 1999. Flight revenue for HBM
operations increased 6.5% for the year ended December 31, 2000, primarily due to
revenue of approximately $1,800,000 from new or expanded contracts and to annual
price increases in contracts with hospital clients, offset in part by the
expiration of a contract in July 2000. Flight volume for continuing contracts
also increased approximately 5% in 2000.
11
Sales of medical interiors and products increased $1,519,000, or 30.5%, from
$4,981,000 for the year ended December 31, 1999, to $6,500,000 for the year
ended December 31, 2000. Significant projects in 2000 included completion of six
UH-60Q Multi-Mission Medevac Systems for the U.S. Army and design work on a
SCITS for the U.S. Air Force, as well as manufacture of medical interiors or
multi-functional interior components for eight commercial customers. Revenue by
product line for the year ended December 31, 2000, was as follows:
- - $3,238,000 - manufacture and installation of modular, multi-functional
interiors
- - $2,308,000 - manufacture of multi-mission interiors
- - $954,000 - design and manufacture of other aerospace products
Significant projects in 1999 included design and manufacture of SCITS units for
the U.S. Air Force and manufacture of multi-functional interiors for six Bell
helicopters and one MD902 helicopter. The Company also began production of six
UH-60Q Multi-Mission Medevac Systems in the third quarter of 1999. Revenue by
product line for the year ended December 31, 1999, was as follows:
- - $2,480,000 - manufacture and installation of modular, multi-functional
interiors
- - $985,000 - manufacture of multi-mission interiors
- - $1,516,000 - design and manufacture of other aerospace products
Cost of medical interiors and products increased by 20.7% for the year ended
December 31, 2000, as compared to the previous year. The increase is consistent
with the increase in related product revenue over the same period. In addition,
the average net margin earned on projects during 2000 was 28% compared to 24% in
1999, primarily due to the maturity of product lines manufactured in 2000.
Parts and maintenance sales and services decreased 17.8% for the year ended
December 31, 2000, compared to the year ended December 31, 1999, due to a
decrease in sales volume. Cost of parts and maintenance sales and services for
the year also decreased accordingly.
In the year ended December 31, 2000, the Company recognized net gains totaling
$343,000 on the disposition of assets, including $330,000 from an insurance
settlement for one of the Company's helicopters damaged in an accident.
Flight center costs increased 40.5% for the year ended December 31, 2000,
compared to 1999. Flight center costs related to ARCH totaled $3,675,000 from
the acquisition date through year-end. Without the effect of the ARCH
acquisition, CBM flight center costs increased 21.6% for the year due to the
addition of personnel to staff two new base locations opened during the year and
increases in salaries for merit pay raises. The Company also increased matching
and supplemental contributions to the employee defined contribution retirement
plan in July 1999 and again in January 2000. Flight center costs for HBM
operations increased 15.7% for the year primarily due to the addition or
expansion of hospital contracts, merit pay raises, and increases in retirement
plan contributions.
Aircraft operating expenses increased 32.6% for the year ended December 31,
2000, in comparison to the year ended December 31, 1999. Aircraft operating
expenses consist of fuel, insurance, and maintenance costs and generally are a
function of the size of the fleet, type of aircraft flown, and number of hours
flown. The Company added 13 aircraft to its fleet since the prior year,
including 6 helicopters and 2 fixed wing aircraft added as a result of the ARCH
acquisition. Excluding the effect of the ARCH fleet, aircraft operating expenses
increased 16.1% in 2000. Aircraft maintenance costs increased due to additions
to the fleet and to growth in flight volume, as well as to the expiration of the
warranty period for most of the Company's Bell 407 helicopters and to increased
expenditures for on-condition aircraft parts. In addition, the Company's hull
and liability insurance rates increased approximately 20% effective July 1,
2000, due to generally hardening insurance market conditions.
Aircraft rental expense increased 62.0% for the year ended December 31, 2000, in
comparison to the year ended December 31, 1999. Lease expense for ARCH aircraft
totaled $728,000 from the acquisition date through December 31, 2000. Lease
expense related to five other new aircraft totaled $602,000 for 2000. The impact
of adding new aircraft was offset in part by the refinance of two helicopter
leases and expiration of two other lease agreements during 1999.
Depreciation and amortization expense increased 6.1% for the year ended December
31, 2000, reflecting the addition of ARCH's buildings and equipment and a Bell
222 helicopter to the fleet for CBM operations.
12
Bad debt expense is estimated during the period the related services are
performed based on historical experience for CBM operations. The provision is
adjusted as required based on actual collections in subsequent periods. The
increase of 72.5% for the year ended December 31, 2000, compared to 1999
reflects the acquisition of ARCH in April 2000. Bad debt expense related to ARCH
flight revenue totaled approximately $2,784,000 from the acquisition date
through year-end. Bad debt expense related to CBM operations in California and
Nevada remained unchanged as improved collection rates offset the increase in
flight volume. Bad debt expense related to HBM operations and the Products
Division was not significant in either 2000 or 1999.
General and administrative expenses increased 20.7% for the year ended December
31, 2000, compared to the year ended December 31, 1999, reflecting the impact of
the ARCH transaction. Excluding ARCH expenses, general and administrative
expenses increased 7.5%, primarily due to merit pay increases and changes in
administrative staffing to manage the expanded employee base with the
acquisition of ARCH and addition of new bases.
The Company recognized a tax benefit of $255,000 in 1999 and no tax expense or
benefit in 2000 primarily due to recognition of deferred tax assets for which a
valuation allowance had previously been provided.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $15,315,000 as of December 31, 2001, compared
to $7,735,000 at December 31, 2000. The change in working capital position is
primarily attributable to the recognition of a current deferred tax asset as
discussed above in "Results of Operations," an increase in receivables
consistent with increased revenue for all three operating segments, and a shift
in contract billings from billings in excess of costs to costs in excess of
billings in 2001. The balance of costs in excess of billings in 2001 consisted
primarily of costs on the HH-60L project which were invoiced in January 2002. In
addition, the Company received a $1,875,000 contract in December 2000 which
provided for a 50% downpayment prior to the commencement of production.
The Company had cash and cash equivalents of $2,838,000 as of December 31, 2001,
compared to $4,107,000 at December 31, 2000. Cash generated by operations
decreased to $6,702,000 in 2001 from $7,127,000 in 2000 primarily due to the
increase in costs in excess of billings, as noted in discussion of the change in
working capital. Inventories also increased to support the larger aircraft
fleet. The impact of these cash outflows was offset in part by improved
profitability for the reasons discussed above and a slower pace in the growth of
receivables compared to 2000 when ARCH was acquired.
Cash used for investing activities totaled $3,902,000 in 2001, compared to
$5,461,000 in 2000. Significant acquisitions during 2001 included rotable
equipment to replace fully depreciated items and upgrades to existing avionics
equipment and aircraft interiors. In 2000, the purchase of ARCH assets was
partially offset by proceeds from the disposition of a Bell 222 helicopter.
Other significant equipment acquisitions in 2000 included a Bell 222 helicopter
for the CBM fleet.
Financing activities used $4,069,000 in 2001, compared to generating $199,000 in
2000. Primary uses of cash in both years consisted of payments for long-term
debt and capital lease obligations and purchases of common stock into treasury.
In 2000, these payments were offset by proceeds from new note agreements and
issuance of common stock for options exercised. In 2001, the Company also paid
off the $1,000,000 balance outstanding as of December 31, 2000, on its line of
credit, and, as of December 31, 2001, had no draws outstanding against the line.
The Company used proceeds from new note agreements originated in 2001 to
primarily pay off existing debt with a higher interest rate.
Repayment of debt and capital lease obligations as well as operating lease
agreements constitute the Company's long-term commitments to use cash. Balloon
payments on long-term debt are due as follows: $700,000 in 2004 and $3.1 million
in 2007.
13
The following table outlines the Company's obligations for payments under its
capital leases, debt obligations, and operating leases for the years ended
December 31 (amounts in thousands).
Capital Leases
--------------------------------
Minimum
Lease Less: Net Present Long-term Operating Total
Payments Interest Value Debt Leases Obligations
-------------------------------------------------------------------
2002 $ 533 182 351 3,737 5,504 9,592
2003 534 161 373 3,158 5,005 8,536
2004 2,627 118 2,509 3,519 4,784 10,812
2005 -- -- -- 3,506 4,783 8,289
2006 -- -- -- 2,935 4,753 7,688
Thereafter -- -- -- 4,217 14,678 18,895
-------------------------------------------------------------------
Total $ 3,694 461 3,233 21,072 39,507 63,812
===================================================================
In May 2001 the Company increased its $1,500,000 line of credit with a financial
institution to $4,000,000. The line expires in May 2003 and bears interest on
all draws at a variable rate equal to the institution's prime rate. At December
31, 2001, no amounts were outstanding against the line. The line has covenants
which limit the Company's ability to merge or consolidate with another entity,
dispose of assets, and change the nature of business operations and which
require the Company to maintain certain financial ratios as defined in the
agreement. At December 31, 2001, the Company was in compliance with the
financial covenants.
In November 2001 the Company originated a $225,000 note payable with interest at
5.0% in settlement of a third party's interest in one of the Company's aircraft.
The note is unsecured. In December 2001 the Company entered into a $2.2 million
note payable with interest at 6.70% and a $500,000 note payable with interest at
6.53% primarily to pay off existing debt. The remaining proceeds from the notes
were placed into Company treasuries. The notes are collateralized by a Bell 412
helicopter and two Bell 206 helicopters. In December 2001, the Company entered
into a non-interest-bearing $2.75 million note payable in conjunction with the
purchase of the operating rights of another air ambulance service provider in
the Las Vegas metropolitan area. The note is unsecured.
As of December 31, 2001, the Company held unencumbered aircraft with a net book
value of $5.5 million and has additional equity in other encumbered aircraft
which could be utilized as collateral for borrowing funds as an additional
source of working capital if necessary. The Company also has $4.0 million unused
capacity on its line of credit. The Company believes that these borrowing
resources, coupled with continued favorable results of operations, will allow
the Company to meet its obligations in the coming year.
OUTLOOK FOR 2002
The statements contained in this Outlook are based on current expectations.
These statements are forward-looking, and actual results may differ materially.
The Company undertakes no obligation to update any forward-looking statements.
Community-Based Model
In December 2001, the Company acquired the operating rights of another air
ambulance service provider in the Las Vegas metropolitan area and, consequently,
expanded its services in the region from two helicopters to three. The Company
expects improved utilization for its two previously existing bases as well as
additional flight volume generated by the third aircraft base as a result of the
acquisition in 2002. CBM flight volume at all other locations is expected to be
consistent with historical levels during 2002, subject to seasonal,
weather-related fluctuations. The Company continues to explore opportunities to
expand the CBM model in communities surrounding its hubs in Los Angeles and St.
Louis.
Hospital-Based Model
14
Six hospital contracts are due for renewal in 2002. Two of these contracts were
renewed during the first quarter of 2002, one for two years and one for three.
The Company has also received notification of intent to renew for a multi-year
contract from another customer, although the formal contract has not yet been
finalized. Renewals on the other three contracts are still pending. During the
fourth quarter of 2001, the Company entered into a multi-year agreement to
provide air medical transportation services to a customer in Florida. Operations
under this agreement are scheduled to begin in the second quarter of 2002 with
the Company operating a hospital-owned Sikorsky S-76A+. Also in the fourth
quarter of 2001, the Company entered into an agreement to expand services for a
current hospital customer in Oregon with the deployment of an additional fixed
wing aircraft. Operations are expected to commence late in the first quarter of
2002. The Company expects 2002 flight activity for current hospital contracts to
remain consistent with historical levels.
Products Division
As of December 31, 2001, the Company was continuing the production of five
HH-60L Multi-Mission Medevac Systems for the U.S. Army and multifunctional
interiors or interior components for five commercial customers. These projects
are scheduled for delivery in the first and second quarters of 2002, with
remaining revenue estimated at $1.3 million. In the first quarter of 2002, the
Company was also awarded new contracts valued at approximately $2,000,000 to
develop and manufacture medical systems for multiple types of vehicles. Work on
all contracts is expected to continue throughout 2002.
The Company expects to be awarded a contract for eight additional HH-60L
Multi-Mission Medevac Systems during 2002. Production will commence immediately
upon award. The current U.S. Army Aviation Modernization Plan continues to
define a requirement for 357 units in total over the next 20 years. The U.S.
Army Program Objective Memorandum (POM) anticipates funding for this requirement
with eight units per year scheduled in fiscal years 2002 and 2003 and fifteen
units per year scheduled from fiscal year 2004 through the end of the program.
There is no assurance that the current contract option will be exercised or
orders for additional units received in 2002 or in future periods.
There can be no assurance that the Company will continue to renew operating
agreements for its HBM operations, generate new profitable contracts for the
Products Division, or expand flight volume for CBM operations. However, based on
the anticipated level of HBM and CBM flight activity and the projects in process
for the Products Division, the Company expects to generate sufficient cash flow
to meet its operational needs throughout 2002.
RISK FACTORS
Actual results achieved by the Company may differ materially from those
described in forward-looking statements as a result of various factors,
including but not limited to, those discussed above in "Outlook for 2002" and
those described below.
- - Flight volume - All CBM revenue and approximately 35% of HBM revenue is
dependent upon flight volume. Approximately 20% of the Company's operating
expenses also vary with number of hours flown. Poor visibility, high winds,
and heavy precipitation can affect the safe operation of aircraft and
therefore result in a reduced number of flight hours due to the inability
to fly during these conditions. Prolonged periods of adverse weather
conditions, especially in southern California, southern Nevada, and
Missouri where CBM operations are concentrated, could have an adverse
impact on the Company's operating results. In southern California and the
St. Louis region, the months from November through February tend to have
lower flight volume due to weather conditions and other factors, resulting
in lower CBM operating revenue during these months. Flight volume for CBM
operations can also be affected by the distribution of calls among
competitors by local government agencies and the entrance of new
competitors into a market.
15
- - Collection rates - The Company's CBM division invoices patients and their
insurers directly for services rendered and recognizes revenue net of
estimated contractual allowances. The level of bad debt expense is driven
by collection rates on these accounts. Collectibility is primarily
dependent upon the health of the U.S. economy, especially in southern
California, southern Nevada, and the St. Louis region. Changes in estimated
contractual allowances and bad debts are recognized based on actual
collections in subsequent periods. A significant or sustained downturn in
the U.S. economy could have an adverse impact on the Company's bad debt
expense.
- - Dependence on third party suppliers - The Company currently obtains a
substantial portion of its helicopter spare parts and components from Bell
Helicopter, Inc. (Bell) and American Eurocopter Corporation (AEC), because
its fleet is composed primarily of Bell and Eurocopter aircraft, and
maintains supply arrangements with other parties for its engine and related
dynamic components. Based upon the manufacturing capabilities and industry
contacts of Bell, AEC, and other suppliers, the Company believes it will
not be subject to material interruptions or delays in obtaining aircraft
parts and components but does not have an alternative source of supply for
Bell, AEC, and certain other aircraft parts. Failure or significant delay
by these vendors in providing necessary parts could, in the absence of
alternative sources of supply, have a material adverse effect on the
Company. Because of its dependence upon Bell and AEC for helicopter parts,
the Company may also be subject to adverse impacts from unusually high
price increases which are greater than overall inflationary trends.
Increases in the Company's flight fees billed to its customers are
generally limited to changes in the consumer price index.
- - Department of Defense funding - One of the significant projects in process
for the Products Division, HH-60L, is dependent upon Department of Defense
funding. Failure of the U.S. Congress to approve funding for the production
of additional HH-60L units could have a material adverse impact on Products
Division revenue.
- - Governmental regulation - The air medical transportation services and
products industry is subject to extensive regulation by governmental
agencies, including the Federal Aviation Administration, which impose
significant compliance costs on the Company. In addition, reimbursement
rates for air ambulance services established by governmental programs such
as Medicare directly affect CBM revenue and indirectly affect HBM revenue
from hospital customers. Changes in laws or regulations or reimbursement
rates could have a material adverse impact on the Company's cost of
operations or revenue from flight operations.
- - Competition - HBM operations face significant competition from several
national and regional air medical transportation providers for contracts
with hospitals and other healthcare institutions. CBM operations also face
competition from smaller regional carriers and alternative air ambulance
providers such as sheriff departments. Operators generally compete on the
basis of price, safety record, accident prevention and training, and
medical capability of the aircraft offered. The Company's competition in
the aircraft interior design and manufacturing industry comes primarily
from two companies based in the United States and one in Europe.
Competition is based mainly on product features, performance, price, and
weight. There can be no assurance that the Company will be able to continue
to compete successfully for new or renewing contracts in the future.
- - Insurance - Hazards are inherent in the aviation industry and may result in
loss of life and property, thereby exposing the Company to potentially
substantial liability claims arising out of the operation of aircraft. The
Company may also be sued in connection with medical malpractice claims
arising from events occurring during a medical flight. Under HBM operating
agreements, hospitals customers have agreed to indemnify the Company
against liability arising out of medical malpractice claims and to maintain
insurance covering such liability, but there can be no assurance that a
hospital will not challenge the indemnification rights or will have
sufficient assets or insurance coverage for full indemnity. In CBM
operations, Company personnel perform medical procedures on transported
patients, which may expose the Company to significant direct legal exposure
to medical malpractice claims. The Company maintains general liability
aviation insurance, aviation product liability coverage, and medical
malpractice insurance, and believes that the level of coverage is customary
in the industry and adequate to protect against claims. However, there can
be no assurance that it will be sufficient to cover potential claims or
that present levels of coverage will be available in the future at
reasonable cost. A limited number of hull and liability insurance
underwriters provide coverage for air medical operators. A significant
downturn in insurance market conditions could have a material adverse
effect on the Company's cost of operations. Approximately 30% of any
increases in hull and liability insurance may be passed through to the
16
Company's customers according to contract terms. In addition, the loss of
any aircraft as a result of accidents could cause both significant adverse
publicity and significant interruptions of air medical services to client
hospitals, which could adversely affect our relationship with such
hospitals.
- - Shareholder dilution - As of December 31, 2001, there were outstanding
stock options to purchase approximately 1,219,812 shares of common stock.
To the extent that the outstanding stock options are exercised, dilution to
the interest of common stockholders will occur. Moreover, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the outstanding options can be
expected to exercise them at a time when any needed capital may be able to
be obtained on terms more favorable than those provided in the outstanding
options.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates its estimates and judgments,
including those related to revenue recognition, uncollectible receivables,
deferred income taxes, and aircraft overhaul costs. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
Fixed flight fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the terms of the agreements. Flight revenue relating
to patient transports is recognized upon completion of the services. Revenue and
accounts receivable are recorded net of estimated contractual allowances under
agreements with third-party payers. Estimates of contractual allowances are
initially determined based on historical discount percentages for Medicare and
Medicaid patients and adjusted periodically based on actual discounts. If actual
future discounts are less favorable than those projected by management,
additional contractual allowances may be required.
Revenue related to fixed fee medical interior and products contracts is recorded
as costs are incurred using the percentage of completion method of accounting.
The Company estimates the percentage of completion based on costs incurred to
date as a percentage of an estimate of the total costs to complete the project.
Certain products contracts provide for reimbursement of all costs plus an
incremental amount. Revenue on these contracts is also recorded as costs are
incurred. Losses on contracts in process are recognized when determined. If
total costs to complete a project are greater than estimated, the gross margin
on the project may be less than originally recorded under the percentage of
completion method.
Uncollectible Receivables
The Company responds to calls for air medical transports without pre-screening
the credit worthiness of the patient. Uncollectible trade receivables are
charged to operations using the allowance method. Estimates of uncollectible
receivables are determined monthly based on historical collection rates and
adjusted monthly thereafter based on actual collections. If actual future
collections are less favorable than those projected by management, additional
allowances for uncollectible accounts may be required. While bad debt expenses
have historically been within expectations and the allowances established, there
can be no guarantee that the Company will continue to experience the same
collection rates that it has in the past.
Deferred Income Taxes
In preparation of the consolidated financial statements, the Company is required
to estimate income taxes in each of the jurisdictions in which it operates. This
17
process involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciable assets and maintenance reserves, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the consolidated balance sheets. The Company then assesses the
likelihood that deferred tax assets will be recoverable from future taxable
income and records a valuation allowance for those amounts it believes are not
likely to be realized. Establishing or increasing a valuation allowance in a
period results in income tax expense in the statement of operations. The Company
considers estimated future taxable income, tax planning strategies, and the
expected timing of reversals of existing temporary differences in assessing the
need for a valuation allowance against deferred tax assets. In the event the
Company were to determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the valuation
allowance would be charged to income in the period such determination was made.
Likewise, should the Company determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to valuation allowance would increase income in the period such
determination was made.
Aircraft Overhaul Costs
The Company uses the accrual method of accounting for major engine and airframe
component overhauls and replacements. The cost of overhaul or replacement is
estimated using published manufacturers' price lists, when available, or
historical experience. This cost is accrued based on usage of the aircraft
component over the period between overhauls or replacements as mandated by the
parts manufacturer. If the cost of overhaul or replacement is greater than
estimated by management, additional aircraft operating costs may be recorded in
the period in which the price increase becomes effective or in which the
aircraft component is overhauled.
NEW ACCOUNTING STANDARDS
In June 2001 the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 141, Accounting for Business Combinations (Statement 141), and
FASB Statement No. 142, Accounting for Goodwill and Intangible Assets (Statement
142). Statement 141 mandates use of the purchase method of accounting for all
business combinations and provides guidance for disclosure of intangible assets
acquired in a business combination. Statement 141 is effective for all business
combinations initiated after June 30, 2001. The Company does not anticipate a
material impact on its financial condition or results of operations as a result
of implementing this standard. Statement 142 addresses accounting for goodwill
and other intangible assets in and subsequent to a business combination. Under
Statement 142, goodwill and certain identifiable intangible assets will not be
amortized, but instead will be reviewed for impairment at least annually in
accordance with the provisions of this statement. Statement 142 is effective for
fiscal years beginning after December 15, 2001. The Company recorded
approximately $188,000 of expense for goodwill amortization in the year ended
December 31, 2001. Under Statement 142, no amortization expense will be recorded
in future years.
In June 2001, the FASB also issued FASB Statement No. 143, Accounting for Asset
Retirement Obligations (Statement 143), which addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. In October 2001, the FASB issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Although Statement 144
supersedes FASB Statement 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the
fundamental provisions of that statement. Statement 143 is effective for years
beginning after June 15, 2002, and Statement 144 is effective for years
beginning after December 15, 2001. The Company does not expect the impact of
adopting either Statement 143 or Statement 144 to be significant.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The Company
does not use financial instruments to any degree to manage these risk and does
not hold or issue financial instruments for trading purposes. All of the
Company's product sales and related receivables are payable in U.S. dollars. The
Company is subject to interest rate risk on its debt obligations and notes
receivable, all of which have fixed interest rates, except the line of credit
which does not have a balance outstanding as of December 31, 2001. Interest
rates on these instruments approximate current market rates as of December 31,
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 2002, for the
Annual Meeting of Stockholders to be held June 26, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 2002, for the
Annual Meeting of Stockholders to be held June 26, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 2002, for the
Annual Meeting of Stockholders to be held June 26, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 2002, for the
Annual Meeting of Stockholders to be held June 26, 2002.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
1. Financial Statements included in Item 8 of this report:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended
December 31,2001, 2000, and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules included in Item 8 of this report:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2001, 2000, and 1999
All other supporting schedules have been omitted because the
information required is included in the financial statements or
notes thereto or have been omitted as not applicable or not
required.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -------------------------
3.1 Certificate of Incorporation(1)
3.2 Amendments to Certificate of Incorporation(2)
3.3 By-Laws as Amended(6)
4.1 Specimen Stock Certificate(2)
4.2 Form of Reissued Warrant Agreement, dated May 3, 1995
between the Company and Americas Partners, concerning
warrants originally issued December 28, 1993(7)
4.3 Form of Reissued Warrant Agreement, dated May 3, 1995
between the Company and Americas Partners, concerning
warrants originally issued February 21, 1994(7)
10.1 1995 Air Methods Corporation Employee Stock Option
Plan(4)
10.2 Nonemployee Director Stock Option Plan, as amended(5)
10.3 Equity Compensation Plan for Nonemployee Directors, adopted
March 12, 1993(3)
10.4 Employment Agreement, dated June 1, 1994, between the
Company and George Belsey(6)
10.5 Employment Agreement, dated November 30, 1993, between the
Company and Michael Prieto(6)
10.6 Employment Agreement dated July 10, 1995, between the
Company and Aaron D. Todd(8)
10.7 Employment Agreement dated April 1, 2000, between the
Company and Neil Hughes(9)
IV-1
21 Subsidiary of Registrant
23 Consent of KPMG LLP
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2001.
- ---------------
1 Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-15007), as declared effective on August 27, 1987, and
incorporated herein by reference.
2 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992, and incorporated herein by reference.
3 Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 33-65370), filed with the Commission on July 1, 1993, and
incorporated herein by reference.
4 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, and incorporated herein by reference.
5 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993, and incorporated herein by reference.
6 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein by reference.
7 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
transitional fiscal year ended December 31, 1994, and incorporated herein
by reference.
8 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000, and incorporated herein by reference.
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AIR METHODS CORPORATION
Date: March 28, 2002 By: /s/ George W. Belsey
---------------- --------------------------------------
George W. Belsey
Chairman of the Board, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated.
/s/ George W. Belsey Chairman of the Board March 28, 2002
- ----------------------- Chief Executive Officer
George W. Belsey
/s/ Aaron D. Todd Chief Financial Officer March 28, 2002
- ----------------------- Secretary and Treasurer
Aaron D. Todd
/s/ Sharon J. Keck Chief Accounting Officer March 28, 2002
- -----------------------
Sharon J. Keck
/s/ Ralph J. Bernstein Director March 28, 2002
- -----------------------
Ralph J. Bernstein
/s/ Samuel H. Gray Director March 28, 2002
- -----------------------
Samuel H. Gray
/s/ Carl H. McNair, Jr. Director March 28, 2002
- -----------------------
Carl H. McNair, Jr.
/s/ Lowell D. Miller Director March 28, 2002
- -----------------------
Lowell D. Miller, Ph.D.
/s/ Donald R. Segner Vice-Chairman of the Board March 28, 2002
- -----------------------
Donald R. Segner
/s/ Morad Tahbaz Director March 28, 2002
- -----------------------
Morad Tahbaz
IV-3
AIR METHODS CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . F-1
Consolidated Financial Statements
- ---------------------------------
CONSOLIDATED BALANCE SHEETS,
December 31, 2001 and 2000 . . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 2001, 2000, and 1999 . . . . . . . . F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 2001, 2000, and 1999 . . . . . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 2001, 2000, and 1999 . . . . . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 2001 and 2000 . . . . . . . . . . . . . . . . . . . F-8
Schedules
- ---------
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2001, 2000, and 1999. . . . . . . . . . F-27
All other supporting schedules are omitted because they are inapplicable, not
required, or the information is presented in the consolidated financial
statements or notes thereto.
IV-4
Independent Auditors' Report
------------------------------
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
We have audited the accompanying consolidated balance sheets of Air Methods
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Air Methods
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Denver, Colorado
February 25, 2002
F-1
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
============================================================================================================
2001 2000
--------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,838 4,107
Current installments of notes receivable (note 4) 120 108
Receivables:
Trade (notes 5 and 11) 22,555 17,980
Less allowance for doubtful accounts (5,673) (4,231)
--------- --------
16,882 13,749
Insurance proceeds 471 499
Other 851 862
--------- --------
18,204 15,110
Inventories (note 5) 3,427 3,142
Work-in-process on medical interior and products contracts 253 193
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3) 797 --
Deferred tax asset (note 9) 3,397 --
Prepaid expenses and other current assets 1,083 1,024
--------- --------
Total current assets 30,119 23,684
--------- --------
Equipment and leasehold improvements (notes 5 and 6):
Flight and ground support equipment 71,392 67,819
Buildings and office equipment 5,841 5,541
--------- --------
77,233 73,360
Less accumulated depreciation and amortization (30,561) (26,001)
--------- --------
Net equipment and leasehold improvements 46,672 47,359
Excess of cost over the fair value of net assets acquired, net of accumulated
amortization of $1,091 and $922 at December 31, 2001 and 2000, respectively (note 2) 2,974 1,921
Notes receivable, less current installments (note 4) 472 618
Other assets, net of accumulated amortization of $447 and $1,721 at
December 31, 2001 and 2000, respectively 5,320 1,668
--------- --------
Total assets $ 85,557 75,250
========= ========
(Continued)
F-2
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
===================================================================================================
2001 2000
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable (note 5) $ -- 1,000
Current installments of long-term debt (note 5) 3,737 3,571
Current installments of obligations under capital leases (note 6) 351 331
Accounts payable 1,925 2,065
Accrued overhaul and parts replacement costs 3,407 4,143
Deferred revenue 1,158 1,071
Billings in excess of costs and estimated earnings on uncompleted contracts
(note 3) -- 1,011
Deferred income taxes (note 9) -- 55
Accrued wages and compensated absences 2,037 1,437
Other accrued liabilities (note 2) 2,189 1,265
--------- --------
Total current liabilities 14,804 15,949
Long-term debt, less current installments (note 5) 17,335 17,504
Obligations under capital leases, less current installments (note 6) 2,882 3,235
Accrued overhaul and parts replacement costs 10,377 7,901
Deferred income taxes (note 9) 2,178 --
Other liabilities 1,438 1,245
--------- --------
Total liabilities 49,014 45,834
--------- --------
Stockholders' equity (note 7):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares; issued
8,619,026 and 9,084,515 shares at December 31, 2001 and 2000, respectively
517 545
Additional paid-in capital 50,665 50,113
Accumulated deficit (14,637) (21,200)
Treasury stock at par, 37,005 and 701,576 common shares at December 31, 2001
and 2000, respectively (2) (42)
--------- --------
Total stockholders' equity 36,543 29,416
--------- --------
Commitments and contingencies (notes 5, 6, 10, and 11)
Total liabilities and stockholders' equity $ 85,557 75,250
========= ========
See accompanying notes to consolidated financial statements.
F-3
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
====================================================================================================
Year Ended December 31,
-----------------------
2001 2000 1999
----------- ---------- ----------
Revenue:
Flight revenue (note 8) $ 82,288 67,192 50,746
Sales of medical interiors and products 7,655 6,500 4,981
Parts and maintenance sales and services 2,042 1,258 1,531
Gain on disposition of assets, net 111 343 --
----------- ---------- ----------
92,096 75,293 57,258
----------- ---------- ----------
Operating expenses:
Flight centers 28,288 22,713 16,167
Aircraft operations 20,222 17,635 13,297
Aircraft rental (note 6) 3,772 3,176 1,960
Cost of medical interiors and products sold 5,556 4,597 3,808
Cost of parts and maintenance sales and services 1,806 1,092 1,239
Depreciation and amortization 5,239 5,485 5,168
Bad debt expense 9,714 6,695 3,882
Loss on disposition of assets, net --- --- 113
General and administrative 9,781 7,854 6,508
----------- ---------- ----------
84,378 69,247 52,142
----------- ---------- ----------
Operating income 7,718 6,046 5,116
Other income (expense):
Interest expense (1,945) (2,144) (2,138)
Interest and dividend income 100 185 155
Other, net 75 70 57
----------- ---------- ----------
Income before income taxes 5,948 4,157 3,190
Income tax benefit (note 9) 615 -- 255
----------- ---------- ----------
Net income $ 6,563 4,157 3,445
=========== ========== ==========
Basic income per common share (note 7) $ .78 .50 .42
=========== ========== ==========
Diluted income per common share (note 7) $ .76 .49 .42
=========== ========== ==========
Weighted average number of common shares outstanding - basic 8,421,671 8,334,445 8,219,601
=========== ========== ==========
Weighted average number of common shares outstanding - diluted 8,659,302 8,559,389 8,222,187
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
=====================================================================================================================
Total
Common Stock Treasury Stock Additional Stock-
-------------------- ------------------- Paid-in Accumulated holders'
Shares Amount Shares Amount Capital Deficit Equity
---------- -------- --------- -------- ----------- ------------ ---------
BALANCES AT JANUARY 1, 1999 8,281,343 $ 497 50,606 $ (3) 49,979 (28,802) 21,671
Issuance of common shares for options
exercised and services rendered 97,500 6 -- -- 245 -- 251
Purchase of treasury shares -- -- 77,216 (5) (222) -- (227)
Net income -- -- -- -- -- 3,445 3,445
-------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 8,378,843 503 127,822 (8) 50,002 (25,357) 25,140
Issuance of common shares for options
exercised and services rendered 705,672 42 -- -- 2,457 -- 2,499
Purchase of treasury shares -- -- 573,754 (34) (2,346) -- (2,380)
Net income -- -- -- -- -- 4,157 4,157
-------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 9,084,515 545 701,576 (42) 50,113 (21,200) 29,416
Issuance of common shares for options
and warrants exercised and services
rendered 402,856 24 -- -- 1,334 -- 1,358
Tax benefit from exercise of stock
options -- -- -- -- 227 -- 227
Purchase of treasury shares -- -- 203,774 (12) (1,009) -- (1,021)
Retirement of treasury shares (868,345) (52) (868,345) 52 -- -- --
Net income -- -- -- -- -- 6,563 6,563
-------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2001 8,619,026 $ 517 37,005 $ (2) 50,665 (14,637) 36,543
===============================================================================
See accompanying notes to consolidated financial statements.
F-5
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
=====================================================================================================================
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Cash flows from operating activities:
Net income $ 6,563 4,157 3,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 5,239 5,485 5,168
Bad debt expense 9,714 6,695 3,882
Deferred income tax benefit (1,274) (308) (251)
Tax benefit from exercise of stock options 227 -- --
Common stock options and warrants issued for services 95 60 60
Loss (gain) on disposition of assets (111) (343) 113
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in receivables (12,808) (13,394) (5,912)
Decrease (increase) in inventories (285) 96 (427)
Decrease (increase) in prepaid expenses and other current assets (59) 43 (170)
Decrease (increase) in work-in-process on medical interior and products
contracts and costs in excess of billings (857) 751 (797)
Increase (decrease) in accounts payable and other accrued liabilities 362 1,592 (96)
Increase in accrued overhaul and parts replacement costs 644 820 835
Increase (decrease) in deferred revenue, billings in excess of costs, and other
liabilities (748) 1,473 273
---------------------------------
Net cash provided by operating activities 6,702 7,127 6,123
---------------------------------
Cash flows from investing activities:
Acquisition of net assets of Area Rescue Consortium of Hospitals and SkyLife
Aviation, LLC (note 2) -- (2,367) --
Acquisition of equipment and leasehold improvements (4,106) (3,248) (2,868)
Proceeds from disposition and sale of equipment and assets held for sale 210 1,158 --
Increase in notes receivable and other assets, net (6) (1,004) (740)
---------------------------------
Net cash used by investing activities (3,902) (5,461) (3,608)
---------------------------------
(Continued)
F-6
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
=====================================================================================================================
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 1,263 2,439 191
Payments for purchases of common stock (1,021) (2,380) (227)
Net borrowings (payments) under short-term notes payable (1,000) 300 (425)
Proceeds from long-term debt 2,700 3,794 1,150
Payments of long-term debt (5,678) (3,597) (2,819)
Payments of capital lease obligations (333) (357) (550)
--------------------------------
Net cash provided (used) by financing activities (4,069) 199 (2,680)
--------------------------------
Increase (decrease) in cash and cash equivalents (1,269) 1,865 (165)
Cash and cash equivalents at beginning of year 4,107 2,242 2,407
--------------------------------
Cash and cash equivalents at end of year $ 2,838 4,107 2,242
================================
Interest paid in cash during the year $ 1,974 2,148 2,148
================================
Income taxes paid in cash during the year $ 365 308 290
================================
Non-cash investing and financing activities:
In the year ended December 31, 2001, the Company recognized a total liability of
$1,500 as additional consideration for the purchase of ARCH Air Medical Service,
Inc. (ARCH). During the second quarter of 2001, the Company determined that
payment of this consideration, which was based on the cash flows of
post-acquisition ARCH operations, was reasonably assured based on receivable
collection trends to date.
In the year ended December 31, 2001, the Company issued a note payable of $225
to buy out a third party's interest in one of the Company's aircraft. The
Company also issued a note payable of $2,750 to acquire the operating rights of
and establish a non-compete agreement with another air ambulance service
provider. The balance of the non-compete agreement is included in other assets
in the consolidated balance sheets.
In the year ended December 31, 2000, the Company assumed a capital lease
obligation of $1,568 to finance the buyout of a helicopter. The Company also
issued notes payable of $48 to finance insurance policies.
See accompanying notes to consolidated financial statements.
F-7
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation and Business
Air Methods Corporation, a Delaware corporation, and its subsidiaries (Air
Methods or the Company) serves as one of the largest providers of
aeromedical emergency transport services and systems throughout the United
States of America. The Company also designs, manufactures, and installs
medical aircraft interiors and other aerospace products for domestic and
international customers. As more fully discussed in Note 2, in April 2000,
Mercy Air Service, Inc. (Mercy Air), a wholly owned subsidiary of the
Company, acquired through a newly formed subsidiary substantially all of
the business assets of Area Rescue Consortium of Hospitals. The new
company, ARCH Air Medical Service, Inc. (ARCH), operates as a wholly owned
subsidiary of Mercy Air. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company holds a 50%
ownership interest in a joint venture which is accounted for under the
equity method.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company
considers its critical accounting policies involving more significant
judgments and estimates to be those related to revenue recognition,
uncollectible receivables, deferred income taxes, and aircraft overhaul
costs. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents of $1,225,000 and
$1,263,000 at December 31, 2001 and 2000, respectively, consist of
short-term money market funds.
Inventories
Inventories are comprised primarily of expendable aircraft parts which are
recorded at the lower of cost (average cost) or market.
Work-in-Process on Medical Interior and Products Contracts
Work-in-process on medical interior and products contracts represents costs
of the manufacture and installation of medical equipment and modification
of aircraft for third parties. When the total cost to complete a project
under a fixed fee contract can be reasonably estimated, revenue is recorded
as costs are incurred using the percentage of completion method of
accounting. Certain products contracts provide for reimbursement of all
costs plus an incremental amount. Revenue on these contracts is also
recorded as costs are incurred. Losses on contracts in process are
recognized when determined.
F-8
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Equipment and Leasehold Improvements
Hangar, equipment, and leasehold improvements are recorded at cost.
Maintenance and repairs, other than major overhauls, are expensed when
incurred. Major modifications and costs incurred to place aircraft in
service are capitalized. Improvements to helicopters and airplanes leased
under operating leases are included in flight and ground support equipment
in the accompanying financial statements. Leasehold improvements to hangar
and office space are included in buildings and office equipment in the
accompanying financial statements. Depreciation is computed using the
straight-line method over the shorter of the useful lives of the equipment
or the lease term, as follows:
Description Lives Residual value
---------------------------------------- ------------ ---------------
Buildings, including hangars 40 years 10%
Helicopters, including medical equipment 8 - 25 years 10 - 25%
Ground support equipment and rotables 5 - 10 years 0 - 10%
Furniture and office equipment 3 - 10 years --
Engine and Airframe Overhaul Costs
The Company uses the accrual method of accounting for major engine and
airframe component overhauls and replacements whereby the cost of the next
overhaul or replacement is estimated and accrued based on usage of the
aircraft component over the period between overhauls or replacements.
Excess of Cost Over the Fair Value of Net Assets Acquired
Excess of cost over the fair value of net assets acquired, or goodwill, is
being amortized using the straight-line method over 25 years.
F-9
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Long-lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("Statement 121"). Statement 121 requires that long-lived assets and
certain identifiable intangible assets, including goodwill, to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition and Uncollectible Receivables
Fixed fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the terms of the agreements. Revenue relating to
emergency flights is recognized upon completion of the services. Revenue
and accounts receivable are recorded net of estimated contractual
allowances under agreements with third-party payers. Uncollectible trade
receivables are charged to operations using the allowance method. Estimates
of uncollectible receivables are initially determined based on historical
collection rates and adjusted periodically based on actual collections.
Stock-based Compensation
The Company accounts for its employee stock compensation plans as
prescribed under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB Opinion 25). Pro forma disclosures of net
income and income per share required by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation (Statement 123),
are included in Note 7 to the consolidated financial statements.
F-10
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes
Deferred tax assets and liabilities are recognized for future income tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Income Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by all outstanding
and dilutive potential common shares during the period.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, accounts receivable, notes payable,
accounts payable, and accrued liabilities:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
Notes receivable and long-term debt:
The carrying amounts approximate fair value since the interest rates
on these instruments approximate current market rates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
2001 presentation.
F-11
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(2) ACQUISITION OF SUBSIDIARY
On April 25, 2000, Mercy Air acquired through a newly formed company
substantially all of the business assets of Area Rescue Consortium of
Hospitals for $11,268,000 and two fixed wing aircraft and related equipment
and inventory from SkyLife Aviation, LLC for $1,699,000. The purchase
agreement includes a provision under which the sellers will receive 50% of
all collections greater than 50% of standard billing rates for transports
older than six months, up to a maximum of $1,500,000. In 2001, the Company
determined that payment of this consideration was reasonably assured based
on receivable collection trends to date and recognized this amount as
additional purchase price (goodwill) and a total liability of $1,500,000.
As of December 31, 2001, other accrued liabilities included $901,000
remaining to be paid under this provision of the purchase agreement.
Funding for the acquisitions was provided primarily by the sale of five
helicopters and two fixed wing aircraft to a company for $10.6 million. The
aircraft are leased back from the company under a ten-year operating lease.
ARCH also entered into a $1,350,000 note payable. The remainder of the cash
payment was funded from Company treasuries. The allocation of the initial
purchase price for both acquisitions was as follows (amounts in thousands):
Assets purchased:
Aircraft $10,600
Equipment 1,749
Inventory 734
--------
13,083
Liabilities assumed (116)
--------
Purchase price $12,967
========
The acquisition has been accounted for using the purchase method of
accounting and the results of ARCH's operations have been included with
those of the Company since April 25, 2000.
(3) COSTS IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COSTS
As of December 31, 2001, the estimated period to complete contracts in
process ranges from one to eight months, and the Company expects to collect
all related accounts receivable and costs and estimated earnings in excess
of billings on uncompleted contracts within one year. The following
summarizes contracts in process at December 31 (amounts in thousands):
2001 2000
-------- --------
Direct costs incurred on uncompleted contracts $ 4,088 4,627
Estimated earnings 4,185 5,366
-------- --------
8,273 9,993
Less billings to date (7,476) (11,004)
-------- --------
Costs in excess of billings (billings in excess of costs) $ 797 (1,011)
======== ========
F-12
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(4) NOTES RECEIVABLE
Future minimum payments under notes receivable are as follows (amounts in
thousands):
Year ending December 31:
2002 $ 187
2003 181
2004 315
2005 37
2006 31
------
751
Less amounts representing interest (159)
------
Present value of minimum payments 592
Less current installments (120)
------
$ 472
======
(5) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable at December 31, 2000, consisted entirely of borrowings under
a $1.5 million line of credit, collateralized by certain receivables,
inventories, and equipment. In 2001, the line of credit was increased to $4
million and, as of December 31, 2001, no amounts were drawn against the
line. A commitment fee of 0.25% is charged to the Company quarterly for
average unused capacity on the line. The line expires in May 2003 and has
various covenants which limit the Company's ability to merge or consolidate
with another entity, dispose of assets, and change the nature of business
operations. The Company is also required to maintain certain financial
ratios as defined in the agreement. At December 31, 2001, the Company was
in compliance with the covenants.
Aggregate maturities of long-term debt are as follows (amounts in
thousands):
Year ending December 31:
2002 $ 3,737
2003 3,158
2004 3,519
2005 3,506
2006 2,935
Thereafter 4,217
-------
$21,072
=======
F-13
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Long-term debt consists of the following at December 31 (amounts in
thousands):
2001 2000
-------- -------
Note payable with interest at 9.52%, due in monthly installments of
principal and interest through July 2007 with all remaining principal
due in August 2007, collateralized by flight equipment $ 8,026 8,661
Note payable with interest at 7.5%. Paid in full in 2001. -- 2,723
Notes payable with interest rates from 6.53% to 9.18%, due in monthly
installments of principal and interest at various dates through April
2007, collateralized by flight and other equipment 7,785 6,711
Note payable, non-interest bearing, due in annual principal payments
through January 2007. Annual principal payment amounts are
contingent upon transport volume for Community-Based Model
operations in Nevada. 2,750 --
Note payable with interest at 8.01%, due in monthly payments of
principal and interest through April 2007,
collateralized by buildings 1,107 1,264
Note payable with interest at 8.16%, due in monthly payments of
principal and interest through March 2004 with all remaining
principal due in April 2004, collateralized by flight equipment 929 1,019
Note payable with interest at 5.0%, due in monthly installments of
principal and interest through November 2002, unsecured 207 --
Notes payable to sellers of Mercy Air with interest at 9%, due in
monthly installments of principal and interest through July 2002,
collateralized by certain receivables 223 534
Other 45 163
-------- -------
21,072 21,075
Less current installments (3,737) (3,571)
-------- -------
$17,335 17,504
======== =======
Two of the note agreements require the Company to maintain certain financial
ratios. As of December 31, 2001, the Company was in compliance with the
covenants.
F-14
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(6) LEASES
The Company leases hangar and office space under noncancelable operating
leases and leases certain equipment and aircraft under noncancelable
operating and capital leases. As of December 31, 2001, future minimum lease
payments under capital and operating leases are as follows (amounts in
thousands):
Capital Operating
leases leases
---------------------
Year ending December 31:
2002 $ 533 5,504
2003 534 5,005
2004 2,627 4,784
2005 -- 4,783
2006 -- 4,753
Thereafter -- 14,678
---------------------
Total minimum lease payments 3,694 $ 39,507
==========
Less amounts representing interest (461)
---------
Present value of minimum capital lease payments 3,233
Less current installments (351)
---------
$ 2,882
=========
Rent expense relating to operating leases totaled $4,935,000, $4,215,000, and
$2,850,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
At December 31, 2001 and 2000, leased property held under capital leases
included in equipment, net of accumulated depreciation, totaled $4,132,000 and
$4,321,000, respectively.
F-15
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) STOCKHOLDERS' EQUITY
(a) WARRANTS
In payment of consulting services performed for the Company, the
following warrants to purchase the Company's common stock were issued
at or above market value and are outstanding as of December 31, 2001:
Number of Warrants Exercise Price per Share Expiration Date
------------------ ------------------------ ------------------
160,000 3.00 February 21, 2002
25,000 3.156 July 1, 2005
-----------------
185,000
=================
All warrants expiring on February 21, 2002, were exercised during the
first quarter of 2002 prior to expiration.
(b) STOCK OPTION PLANS
The Company has a Stock Option Plan and a predecessor plan (together,
"the Plan") which provides for the granting of incentive stock options
(ISO's) and nonqualified stock options (NSO's), stock appreciation
rights, and supplemental stock bonuses. Under the Plan, 3,500,000
shares of common stock are reserved for options. The Company also
grants NSO's outside of the Plan. Generally, the options granted under
the Plan have an exercise price equal to the fair market value on the
date of grant, vest in three equal installments beginning one year
from the date of grant, and expire five years from the date of grant.
The Nonemployee Director Stock Option Plan authorizes the grant of
NSO's to purchase an aggregate of 300,000 shares of common stock to
nonemployee directors of the Company. Each nonemployee director
completing one fiscal year of service will receive a five-year option
to purchase 5,000 shares, exercisable at the then current fair market
value of the Company's common stock. All options under this plan are
vested immediately upon issue.
F-16
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following is a summary of option activity, including options granted
and outstanding outside of the Plan, during the years ended December 31,
2001, 2000, and 1999:
Weighted Average
Shares Exercise Price
---------- -----------------
Outstanding at January 1, 1999 1,875,196 $ 3.13
Granted 716,172 2.88
Canceled (312,740) 2.96
Exercised (97,500) 1.98
----------
Outstanding at December 31, 1999 2,181,128 3.12
Granted 37,112 3.96
Canceled (49,504) 3.41
Exercised (630,672) 3.33
----------
Outstanding at December 31, 2000 1,538,064 3.05
Granted 100,000 4.39
Canceled (55,623) 3.50
Exercised (362,856) 3.15
----------
Outstanding at December 31, 2001 1,219,585 3.11
==========
Options exercisable at:
December 31, 1999 2,070,510 $ 3.12
December 31, 2000 1,167,828 3.09
December 31, 2001 987,048 3.12
F-17
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) STOCKHOLDERS' EQUITY, CONTINUED
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, because the Company grants its
options at or above market value, no compensation cost has been recognized
relating to the plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the provisions of
Statement 123, the Company's net income and income per share would have
been reduced to the pro forma amounts indicated below (amounts in
thousands, except per share amounts):
2001 2000 1999
------ ------ -----
Net income:
As reported $6,563 $4,157 3,445
Pro forma 6,429 3,992 2,182
Basic income per share:
As reported $ .78 $ .50 .42
Pro forma .76 .48 .27
Diluted income per share:
As reported $ .76 $ .49 .42
Pro forma .71 .45 .27
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001, 2000, and 1999, respectively: dividend
yield of 0% for all years; expected volatility of 39%, 59%, and 69%;
risk-free interest rates of 4.0%, 5.2%, and 5.3%; and expected lives of 3
years for all years. The weighted average fair value of options granted
during the years ended December 31, 2001, 2000, and 1999, was $1.46, $1.74,
and $1.49, respectively.
F-18
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options outstanding
at December 31, 2001:
Weighted-
Weighted-Average Weighted- Average
Range of Number Remaining Contractual Average Number Exercise
Exercise Price Outstanding Life (Years) Exercise Price Exercisable Price
- --------------- ----------- ---------------------- --------------- ----------- ----------
1.81 to 2.69 232,715 2.6 $ 2.66 150,766 $ 2.66
2.88 to 4.31 949,509 1.6 3.09 803,921 3.08
4.38 to 6.23 37,361 4.8 6.11 32,361 6.09
----------- -----------
1,219,585 987,048
=========== ===========
(C) NONEMPLOYEE DIRECTOR COMPENSATION PLAN
In February 1993, the Board of Directors adopted the Air Methods
Corporation Equity Compensation Plan for Nonemployee Directors which was
subsequently approved by the Company's stockholders on March 12, 1993.
Under this compensation plan, 150,000 shares of common stock are reserved
for issuance to non-employee directors. As of December 31, 2001, no shares
have been issued under this plan.
(D) STOCK REPURCHASE PLAN
On August 5, 1994, the Board of Directors approved a stock repurchase plan
authorizing the repurchase of up to 10% of the outstanding shares of the
Company's common stock to be retired. Repurchases may be made from time to
time in the open market or in privately negotiated transactions. The plan
authorizes, but does not require, the Company to repurchase shares. As of
December 31, 2001, 885,244 shares, or 9.3% of common stock issued, had been
repurchased under this plan.
F-19
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) STOCKHOLDERS' EQUITY, CONTINUED
(e) INCOME PER SHARE
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the years ended December 31:
2001 2000 1999
--------- --------- ---------
Weighted average number of common shares
outstanding - basic 8,421,671 8,334,445 8,219,601
Dilutive effect of:
Common stock options 199,683 198,000 2,586
Common stock warrants 37,948 26,944 --
-------------------------------
Weighted average number of common shares
outstanding - diluted 8,659,302 8,559,389 8,222,187
===============================
Common stock options totaling 41,535, 139,736, and 2,170,439, and
common stock warrants of -0-, -0-, and 275,000 were not included in
the diluted income per share calculation for the years ended December
31, 2001, 2000, and 1999, respectively, because their effect would
have been anti-dilutive.
(8) REVENUE
The Company has operating agreements with various hospitals and hospital
systems to provide services and aircraft for periods ranging from 1 to 10
years. The agreements provide for revenue from monthly fixed fees and
flight fees based upon the utilization of aircraft in providing emergency
medical services. The fixed-fee portions of the agreements provide for the
following revenue for years subsequent to December 31, 2001 (amounts in
thousands):
Year ending December 31:
2002 $21,430
2003 17,216
2004 14,824
2005 11,990
2006 7,091
Thereafter 6,024
--------
$78,575
========
F-20
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(9) INCOME TAXES
Income tax benefit (expense) consists of the following for the years ended
December 31:
2001 2000 1999
---------------------
Current income tax expense:
Federal $ (241) (129) (231)
State (418) (179) (20)
---------------------
(659) (308) (251)
Deferred income tax benefit:
Federal 1,111 258 424
State 163 50 82
---------------------
1,274 308 506
---------------------
Total income tax benefit $ 615 -- 255
=====================
Actual current tax benefits are higher than reflected for the year ended
December 31, 2001, by $227,000 as a result of stock option deduction benefits
recorded as a credit to stockholders' equity.
In the acquisition of Mercy Air in July 1997, the Company acquired trade
receivables of $3.1 million. Mercy Air, a subchapter S corporation, had elected
to be treated as a cash basis taxpayer. Upon acquisition, however, the new
subsidiary was required to use the accrual method of accounting. This change in
accounting method for tax purposes resulted in the recognition of approximately
$3.1 million in taxable income over four years which could not be offset by the
Company's net operating loss carryforwards. In the year ended December 31, 1999,
the Company recorded an income tax benefit of $255,000 attributable to a
reduction in deferred tax liabilities recorded in the acquisition of Mercy Air
as a result of current period taxable losses of the Company.
Reconciliation of income taxes on income before income taxes computed at the
federal statutory rate of 34% and income taxes as recorded is as follows for the
years ended December 31 (amounts in thousands):
2001 2000 1999
--------------------------
Tax at the federal statutory rate $ 2,022 1,413 1,085
State income taxes, net of federal
benefit and adjustment based on filed
returns 487 275 211
Change in valuation allowance,
including revisions for filed returns (3,301) (1,688) (1,551)
Reduction in effective tax rate (50) -- --
Tax benefit from exercise of stock
options 227 -- --
--------------------------
Net income tax benefit $ (615) -- (255)
==========================
F-21
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(9) INCOME TAXES, CONTINUED
For income tax purposes, at December 31, 2001, the Company has net
operating loss carryforwards of approximately $16 million, expiring at
various dates through 2012. In 1991, the Company acquired all of the
outstanding common shares of Air Methods Corporation, a Colorado
corporation ("AMC"). As a result of the acquisition of AMC and other
issuances of stock, the utilization of approximately $7 million of the
aforementioned net operating loss carryforwards is subject to an annual
limitation of $1,032,000 per year, as adjusted for unused yearly
limitations, by the provisions of Section 382 of the Internal Revenue Code.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are as
follows (amounts in thousands):
2001 2000
--------- --------
Deferred tax assets:
Overhaul and parts replacement cost,
principally due to the accrual method $ 5,376 4,890
Allowance for uncollectible accounts 1,399 1,822
Net operating loss carryforwards 6,409 9,014
Deferred revenue 234 391
Other 545 399
--------- --------
Total gross deferred tax assets 13,963 16,516
Less valuation allowance (235) (3,536)
--------- --------
Net deferred tax assets 13,728 12,980
--------- --------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases and
depreciation methods (12,509) (12,980)
Receivables, principally due to difference in
bases resulting from acquisition
of subsidiary -- (55)
--------- --------
Total deferred tax liabilities (12,509) (13,035)
--------- --------
Net deferred tax asset (liability) $ 1,219 (55)
========= ========
In 2001 and 2000, the Company had taxable earnings for consecutive tax
years for the first time in its history. Based on the expected trend in
future taxable earnings, the majority of the valuation allowance against
deferred tax assets was reversed in the fourth quarter of 2001 upon
completion of returns for the tax year ended June 30, 2001. As of December
31, 2001, a valuation allowance has been provided for net operating loss
carryforwards which are not expected to be realized prior to expiration.
Based on management's assessment, realization of net deferred tax assets
through future taxable earnings is considered more likely than not, except
to the extent valuation allowances are provided.
F-22
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan whereby employees
may contribute up to 15% of their annual salaries. Effective January 1,
2001, the Company increased its contributions from 1.5% to 2% of annual
salaries for all employees. The Company also matches 50% of the employees'
contributions up to 6% of their annual salaries. Company contributions
totaled approximately $1,221,000, $810,000, and $399,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.
(11) BUSINESS AND CREDIT CONCENTRATIONS
A significant percentage of the Company's trade receivables are related to
the flight operations of its Community-Based Model (CBM) in southern
California, Nevada, Missouri and Illinois. CBM receivables are due from
medical insurance companies and federal and state government insurance
programs, as well as private citizens. The diversity in types of payers may
mitigate the potential impact of the geographical concentration of
receivables.
(12) BUSINESS SEGMENT INFORMATION
The Company identifies operating segments based on management
responsibility and the type of products or services offered. Operating
segments and their principal products or services are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in
southern California, Nevada, Missouri, and Illinois. Services include
aircraft operation and maintenance, medical care, dispatch and
communications, and medical billing and collection.
- Hospital-Based Model (HBM) - provides air medical transportation
services to hospitals throughout the U.S. under exclusive operating
agreements. Services include aircraft operation and maintenance.
- Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace products for domestic and
international customers.
The accounting policies of the operating segments are as described in Note
1. The Company evaluates the performance of its segments based on pretax
net income. Intersegment sales are reflected at cost-related prices.
Summarized financial information for the Company's operating segments is
shown in the following table (amounts in thousands). Amounts in the
"Corporate Activities" column represent corporate headquarters expenses and
results of insignificant operations. The Company does not allocate assets
between HBM, Products, and Corporate Activities for internal reporting and
performance evaluation purposes.
F-23
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(12) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
-----------------------------------------------------------------------------
2001
External revenue 46,320 $ 38,739 7,037 -- -- 92,096
Intersegment revenue -- 16 2,955 -- (2,971) --
-----------------------------------------------------------------------------
Total revenue 46,320 38,755 9,992 -- (2,971) 92,096
Operating expenses 28,624 31,946 7,874 3,470 (2,564) 69,350
Depreciation & amortization 1,843 2,893 191 312 -- 5,239
Bad debt expense 9,714 -- -- -- -- 9,714
Interest expense 1,109 811 -- 25 -- 1,945
Interest income (4) (44) -- (52) -- (100)
Income tax benefit -- -- -- (615) -- (615)
-----------------------------------------------------------------------------
Net income (loss) 5,034 $ 3,149 1,927 (3,140) (407) 6,563
=============================================================================
Total assets 35,699 N/A N/A 52,021 (2,163) 85,557
=============================================================================
2000
External revenue 34,752 $ 33,882 6,514 145 -- 75,293
Intersegment revenue -- 30 1,841 -- (1,871) --
-----------------------------------------------------------------------------
Total revenue 34,752 33,912 8,355 145 (1,871) 75,293
Operating expenses 22,171 27,037 6,474 2,889 (1,574) 56,997
Depreciation & amortization 1,642 3,320 209 314 -- 5,485
Bad debt expense 6,695 -- -- -- -- 6,695
Interest expense 1,128 970 -- 46 -- 2,144
Interest income (6) (54) -- (125) -- (185)
-----------------------------------------------------------------------------
Net income (loss) 3,122 $ 2,639 1,672 (2,979) (297) 4,157
=============================================================================
Total assets 29,481 N/A N/A 47,932 (2,163) 75,250
=============================================================================
1999
External revenue 20,522 $ 31,555 4,993 188 -- 57,258
Intersegment revenue -- 41 2,786 -- (2,827) --
-----------------------------------------------------------------------------
Total revenue 20,522 31,596 7,779 188 (2,827) 57,258
Operating expenses 12,271 24,035 6,357 2,702 (2,330) 43,035
Depreciation & amortization 1,213 3,466 205 284 -- 5,168
Bad debt expense 3,882 -- -- -- -- 3,882
Interest expense 1,046 1,040 -- 52 -- 2,138
Interest income (7) (74) -- (74) -- (155)
Income tax benefit (255) -- -- -- -- (255)
-----------------------------------------------------------------------------
Net income (loss) 2,372 $ 3,129 1,217 (2,776) (497) 3,445
=============================================================================
Total assets 19,295 N/A N/A 46,584 (3,163) 62,716
=============================================================================
F-24
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(13) QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for 2001 and 2000 is as follows
(amounts in thousands except per share data):
Quarter
First Second Third Fourth
-------------------------------
2001
Revenue $20,014 23,533 23,945 24,604
Operating income 989 2,127 2,667 1,935
Income before income taxes 532 1,680 2,222 1,514
Net income 532 1,680 2,222 2,129
Basic income per common share .06 .20 .26 .25
Diluted income per common share .06 .20 .26 .23
2000
Revenue $14,591 19,490 21,896 19,316
Operating income 876 2,474 2,347 349
Net income (loss) 417 2,015 1,853 (128)
Basic and diluted income (loss) per
common share .05 .24 .22 (.02)
Income per common share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly income per share does not
necessarily equal the total computed for the year.
F-25
Independent Auditors' Report
------------------------------
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
Under date of February 25, 2002, we reported on the consolidated balance sheets
of Air Methods Corporation and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, which are included in the
Company's Annual Report on Form 10-K for the year 2001. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule II. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
February 25, 2002
F-26
AIR METHODS CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
=====================================================================================================
Balance at
Beginning Transfers Balance at
Description of Period Additions (a) and Other Deductions (b) End of Period
- ------------------------------- ----------- ------------- --------- -------------- -------------
Allowance for trade receivables
Year ended December 31, 2001 $ 4,231 9,714 (8,272) 5,673
Year ended December 31, 2000 1,210 6,695 (3,674) 4,231
Year ended December 31, 1999 1,404 3,882 -- (4,076) 1,210
- ---------------
Notes:
(a) Amounts charged to expense.
(b) Bad debt write-offs and charges to allowances.
See accompanying Independent Auditors' Report.
F-27