SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
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, 2002
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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
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $71,820,000
The number of outstanding shares of Common Stock as of March 21, 2003, was
9,554,065.
Portions of the registrant's definitive proxy statement for its 2003 annual
meeting of stockholders are incorporated by reference in Part III of this Annual
Report on Form 10-K.
TABLE OF CONTENTS
TO FORM 10-K
Page
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PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Competition. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Contracts in Process . . . . . . . . . . . . . . . . . . . . . 3
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Government Regulation. . . . . . . . . . . . . . . . . . . . . 4
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. . . . . . . . . . . . . . . 14
Outlook for 2003. . . . . . . . . . . . . . . . . . . . . . . 16
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . 17
Critical Accounting Policies. . . . . . . . . . . . . . . . . 19
New Accounting Standards. . . . . . . . . . . . . . . . . . . 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . 22
i
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 23
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 23
ITEM 14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . 23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. . . IV-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-4
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 the largest
provider of air medical emergency transport services and systems throughout the
United States of America. As of December 31, 2002, the Company's Community-Based
Model (CBM) provided air medical transportation services in 14 states, while its
Hospital-Based Model (HBM) provided air medical transportation services to
hospitals located in 27 states, plus Puerto Rico, under operating agreements
with original terms ranging from one to ten years. 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 or medical transport 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.
On October 16, 2002, the Company acquired 100% of the membership interest of
Rocky Mountain Holdings, LLC (RMH), a Delaware limited liability company, from
Rocky Mountain Holdings, Inc. and AMC Helicopters, Inc. for $33.6 million in
cash. RMH's long-term debt and outstanding balances on a line of credit totaled
approximately $41.4 million as of the closing date. Except for approximately
$1.6 million of RMH debt that was repaid in connection with the acquisition, the
long-term debt remains outstanding, either as debt of RMH or as debt assumed or
replaced by the Company. As provided for in the membership interest purchase
agreement, the purchase price was reduced by $1.5 million due to changes in net
equity of RMH from September 30, 2002, until October 16, 2002, the date of
closing, as determined by independent audit. The purchase price was negotiated
by Air Methods and the sellers, and includes an earn-out provision under which
the sellers may receive up to $2.6 million of additional consideration over the
next nine years based on actual collections against certain receivables. The
Company incurred costs and fees of approximately $1 million in connection with
the acquisition, including legal fees of Company counsel and a fee of $750,000
paid to Americas Partners for its services in connection with the acquisition.
Ralph Bernstein and Morad Tahbaz, directors of the Company, are partners of
Americas Partners. In addition, the Company incurred debt origination fees and
expenses of approximately $2.6 million, including fees paid to CIBC World
Markets Corp. for investment banking services in arranging financing for the
acquisition and legal fees paid to counsel for the lenders.
RMH provides air medical transport services throughout the United States under
both the community-based and hospital-based delivery models, using a fleet of
over 80 helicopters and fixed-wing aircraft. RMH also maintains a national
dispatch and communications center in Omaha, Nebraska, and aircraft maintenance
and overhaul operations in Provo, Utah, and Greenville, South Carolina. The
Company plans to continue all of RMH's HBM and CBM operations and to retain the
RMH bases, equipment and air medical transport service personnel.
Community-Based Model
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. CBM aircraft
are typically based at fire stations or airports. 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 July 1997 the Company acquired Mercy Air Service, Inc. (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
1
transportation services in the St. Louis metropolitan area and surrounding
communities since 1987. Following the acquisition of RMH in October 2002, its
CBM operations, also called LifeNet, were incorporated into the Company's CBM
division. The division operates 51 helicopters and three fixed wing aircraft
under both Instrument Flight Rules (IFR) and Visual Flight Rules (VFR) in 14
states, with concentrations in California, Arizona, the Midwest, and the
Southeast. Although the division does not generally contract directly with
specific hospitals, it has long-standing relationships with several leading
healthcare institutions in the metropolitan areas in which it operates.
Mercy Air also provides air medical services in the Santa Barbara, California,
community 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.
In 2002 the Company opened one new CBM location in the Los Angeles metropolitan
area and one in the St. Louis region.
Hospital-Based Model
The Company's HBM provides hospital clients with helicopters and airplanes which
are generally based at hospitals and are equipped with medical interiors
approved by the Federal Aviation Administration (FAA). The Company's
responsibility is to operate and maintain the aircraft in accordance with
Federal Aviation Regulations (FAR) Part 135 standards. Hospital clients provide
medical personnel and all medical care on board the aircraft. 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 liability insurance
premiums. Because the majority of the division's flight revenue is generated
from fixed monthly fees, seasonal fluctuations in flight hours do not
significantly impact monthly revenue in total.
In 2002, the Company expanded operations for a fixed wing customer in Oregon
with the addition of a third aircraft and began operations under new contracts
in Miami, Florida, and Farmington, New Mexico. The HBM operations of RMH are
being integrated into the division following the acquisition on October 16,
2002.
The Company performs non-destructive component testing, engine repair, and
component overhaul at its headquarters in metropolitan Denver, Colorado, and at
the former RMH headquarters in Provo, Utah. 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). The air medical transportation industry identifies the service mark
with the Company's high quality customer support and standard of service.
Products Division
The Company's Products Division manufactures modular medical interiors,
multi-mission interiors, and other aerospace and medical transport products. The
key features of the modular medical 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.
2
Development of the modular medical 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 2002 the Company completed the development of a litter system for the U.S.
Army's Medical Evacuation Vehicle (MEV) and received a contract for the
production of 42 units to be delivered in 2002 and 2003. The Company also
completed production of five HH60L Multi-Mission Medevac Systems for the U.S.
Army. During 2002 the division installed components of its modular or
multi-mission interiors for six commercial customers, in addition to completing
the refurbishment of two aircraft interiors and various other projects for the
Company's HBM and CBM operations. Subsequent to the acquisition of RMH in
October 2002, the Products Division began the process of integrating the
aircraft interior completion operations conducted in Provo, Utah, and
Greenville, South Carolina. The majority of RMH's interior completion work prior
to the acquisition, including the development of a medical interior for the
EC130 helicopter, was in support of its own fleet of aircraft.
COMPETITION
Competition in the air medical transportation industry comes primarily from
three national operators: Corporate Jets, Inc.; OmniFlight, Inc.; and Petroleum
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
in Europe. 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, 2002, the Company was completing the production of 42 MEV
units for the U.S. Army, with delivery of the remaining units scheduled for the
first and second quarters of 2003, and had received contracts to begin
production of two modular medical interiors for two commercial customers.
Remaining revenue for all contracts in process as of December 31, 2002, is
estimated at $940,000. As of December 31, 2001, the revenue remaining to be
recognized on medical interiors and other products in process was $1.3 million.
EMPLOYEES
As of December 31, 2002, the Company retained 1,343 full time and 165 part time
employees, comprised of 530 pilots; 317 aviation machinists, airframe and power
plant (A&P) engineers, and other manufacturing/maintenance positions; 394 flight
nurses and paramedics; and 268 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/or 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.
3
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. Air Methods, Mercy Air, ARCH, and RMH each hold a Part 135
Air Carrier Certificate and a Part 145 Repair Station Certificate from the FAA.
A Part 135 certificate requires that the voting interests of the holder of the
certificate cannot be more than 25% owned by foreign persons. As of December 31,
2002, the Company was aware of one foreign person who holds approximately 7.3%
of outstanding Common Stock.
ITEM 2. PROPERTIES
FACILITIES
The Company leases its headquarters, consisting of approximately 77,000 square
feet of office and hangar space, in metropolitan Denver, Colorado, at Centennial
Airport. The lease expires in August 2006 and the approximate annual rent is
$678,000. Mercy Air's headquarters consist of approximately 19,000 square feet
of office and hangar space owned by the Company in Rialto, California. Under a
ground lease which expires in May 2007, 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. RMH's headquarters consist of approximately
51,200 square feet of office and hangar space owned by the Company in Provo,
Utah. The Company also owns and leases various properties for depot level
maintenance and administration purposes. 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, 2002, the Company managed and operated a fleet of 157
aircraft, consisting of 141 helicopters and 16 airplanes, for its HBM and CBM
operations. Of these aircraft, the Company owns 66 helicopters and two airplanes
and leases 59 helicopters and 4 airplanes. The Company operates 16 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, 2002, is as follows (dollar amounts in
thousands):
4
COMPANY OWNED AIRCRAFT (1)
Type Number Total Cost Net Book Value
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Helicopters:
Bell 206 5 $ 4,832 $ 2,518
Bell 222 13 26,639 15,530
Bell 407 5 9,554 8,360
Bell 412 4 12,898 7,291
BO 105 2 1,406 1,392
AS 350 17 14,474 14,328
AS 355 1 935 925
EC 130 1 1,551 1,551
BK 117 18 36,892 32,888
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66 109,181 84,783
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Airplanes:
King Air E 90 1 594 579
King Air B 200 1 1,384 1,359
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2 1,978 1,938
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TOTALS 68 $ 111,159 $ 86,721
====================================
COMPANY LEASED AIRCRAFT
Average
Remaining Total Rents Remaining
Type Number Term in Years Over Lease Life Payments
----------------- -------------- ---------------- ---------
Helicopters:
Bell 222 5 7 $ 6,169 $ 4,533
Bell 407 7 7 13,666 9,688
Bell 412 1 7 2,463 1,580
MD902 2 9 7,613 6,874
BO 105 3 9 2,141 1,799
AS 350 15 7 20,919 15,534
EC 135 1 10 2,428 2,368
EC 130 2 10 4,052 3,782
BK 117 23 8 42,513 35,185
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59 101,964 81,343
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Airplanes:
King Air B100 2 7 1,523 1,104
Pilatus PC-12 2 8 5,714 4,363
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4 7,237 5,467
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TOTALS 63 $ 109,201 $ 86,810
================= ===========================
(1) Includes aircraft acquired under capital leases.
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.
5
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, 2002.
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, 2002
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Common Stock High Low
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First Quarter . . . . . . . . . . . . . . . $ 7.85 $ 6.04
Second Quarter. . . . . . . . . . . . . . . 11.64 7.00
Third Quarter . . . . . . . . . . . . . . . 8.76 5.23
Fourth Quarter. . . . . . . . . . . . . . . 7.14 5.25
YEAR ENDED DECEMBER 31, 2001
----------------------------
Common Stock High Low
------------------------------------------------------------------
First Quarter . . . . . . . . . . . . . . . $ 4.00 $ 3.00
Second Quarter. . . . . . . . . . . . . . . 4.00 3.03
Third Quarter . . . . . . . . . . . . . . . 4.91 3.96
Fourth Quarter . . . . . . . . . . . . . . . 6.23 4.40
As of March 21, 2003, there were approximately 315 holders of record of the
Company's common stock. The Company estimates that it has approximately 3,900
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 subsidiaries 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, expenses, assets, and
long-term liabilities as of and for the year ended December 31, 2002, increased
in part as a result of the acquisition of RMH. 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,
-----------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue $ 130,668 92,096 75,293 57,258 48,699
Operating expenses:
Operating 106,771 74,597 61,393 45,634 40,242
General and administrative 12,744 9,781 7,854 6,508 6,240
Other income (expense), net (2,694) (1,770) (1,889) (1,926) (1,960)
-----------------------------------------------------------
Income before income taxes 8,459 5,948 4,157 3,190 257
Income tax benefit (expense) (3,299) 615 - 255 -
-----------------------------------------------------------
Net income $ 5,160 6,563 4,157 3,445 257
===========================================================
Basic income per common share $ .56 .78 .50 .42 .03
===========================================================
Diluted income per common share $ .54 .76 .49 .42 .03
===========================================================
Weighted average number of shares
of Common Stock outstanding - basic 9,184,421 8,421,671 8,334,445 8,219,601 8,202,668
===========================================================
Weighted average number of shares
of Common Stock outstanding - diluted 9,478,502 8,659,302 8,559,389 8,222,187 8,449,904
===========================================================
Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------
BALANCE SHEET DATA:
Total assets $ 196,396 85,557 75,250 62,716 60,776
Long-term liabilities 115,225 34,210 29,885 27,003 28,140
Stockholders' equity 46,218 36,543 29,416 25,140 21,671
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, contains forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
The use of any of the words "believe," "expect," "anticipate," "plan,"
"estimate," and similar expressions are intended to identify such statements.
Forward-looking statements include statements concerning possible or assumed
future results of the Company; size, structure and growth of the Company's air
medical services and products markets; continuation and/or renewal of HBM
contracts; acquisition of new and profitable Products Division contracts; flight
volume of CBM operations; successful integration of RMH; 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, 2002 compared to 2001
The Company reported net income of $5,160,000 and income before income taxes of
$8,459,000 for the year ended December 31, 2002, compared to $6,563,000 and
$5,948,000, respectively, for the year ended December 31, 2001.
Flight revenue increased $41,246,000, or 50.1%, from $82,288,000 for the year
ended December 31, 2001, to $123,534,000 for the year ended December 31, 2002.
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 $26,713,000, or 58.8%, to $72,121,000 for
the following reasons:
- Acquisition of RMH in October 2002. Flight revenue for RMH CBM
operations totaled $14,750,000 from the acquisition date through
December 31, 2002.
- Revenue of $3,647,000 from the addition of one new base in the Los
Angeles metropolitan area and one in the St. Louis region during 2002.
- Purchase of the operating rights of another air ambulance service
provider in the Las Vegas metropolitan area in December 2001,
resulting in the expansion of operations to a third base in the
region. Transport volume for all CBM operations in the Las Vegas
region increased 105.4% in 2002 compared to 2001.
- Average price increase of approximately 10% for all CBM operations
effective November 1, 2002.
- Excluding the impact of the RMH acquisition and the addition of the
new bases discussed above, total flight volume for all CBM operations
remained relatively unchanged from 2001 to 2002.
- - HBM - Flight revenue increased $14,532,000, or 39.4%, to $51,414,000 for
the following reasons:
- Acquisition of RMH in October 2002. Flight revenue for RMH HBM
operations totaled $8,946,000 from the acquisition date through
December 31, 2002.
- Revenue of approximately $3,182,000 generated by the addition of three
new contracts in August 2001, April 2002, and August 2002.
- Annual price increases in the majority of contracts based on changes
in hull insurance rates and in the Consumer Price Index.
- Increase of 7.0% in flight volume for all contracts excluding RMH
contracts and the three new contracts discussed above.
Sales of medical interiors and products decreased $1,859,000, or 24.3%, from
$7,655,000 for the year ended December 31, 2001, to $5,796,000 for the year
ended December 31, 2002. Significant projects in 2002 included the completion of
five HH-60L Multi-Mission Medevac Systems and development of the MEV litter
system, both for the U.S. Army, and the manufacture of medical interiors or
modular interior components for six commercial customers. Revenue by product
line for the year ended December 31, 2002, was as follows:
- - $2,452,000 - manufacture and installation of modular, medical interiors
- - $808,000 - manufacture of multi-mission interiors
9
- - $2,536,000 - design and manufacture of other aerospace and medical
transport products
Significant projects in 2001 included manufacture of two Multi-Mission Medevac
Systems for a public service customer, medical interiors or modular interior
components for ten commercial customers, and five HH-60L 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, medical interiors
- - $3,578,000 - manufacture of multi-mission interiors
- - $311,000 - design and manufacture of other aerospace and medical transport
products
Cost of medical interiors and products decreased by 23.0% for the year ended
December 31, 2002, as compared to the previous year, reflecting the change in
sales volume over the same period.
Parts and maintenance sales and services decreased 34.5% for the year ended
December 31, 2002, compared to the prior year. Parts sales in 2001 included
$183,000 for the sale of an autopilot system to an HBM customer. In addition, in
the third quarter of 2002, the Company discontinued the aircraft parts sales
operation managed by Mercy Air in southern California. Cost of parts and
maintenance sales and services for the year decreased proportionately.
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.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased 51.9% to $42,958,000 for the year ended
December 31, 2002, compared to 2001. Changes by business segment are as follows:
- - CBM - Flight center costs increased $8,955,000, or 63.3%, to $23,094,000
for the following reasons:
- Acquisition of RMH in October 2002. Flight center costs related to RMH
CBM operations totaled approximately $5,108,000 from the acquisition
date through December 31, 2002.
- Approximately $2,344,000 for the addition of personnel to staff new
base locations described above.
- Increase in the cost of employee health insurance coverage paid by the
Company.
- Increases in salaries for merit pay raises.
- - HBM - Flight center costs increased $5,715,000, or 40.4%, to $19,864,000
primarily due to the following:
- Acquisition of RMH in October 2002. Flight center costs related to RMH
HBM operations totaled approximately $2,964,000 from the acquisition
date through December 31, 2002.
- Approximately $1,538,000 for the addition of personnel to staff new
base locations described above.
- Increases in salaries for merit pay raises.
Aircraft operating expenses increased 47.2% for the year ended December 31,
2002, in comparison to the year ended December 31, 2001. 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 RMH in October 2002. Expenses for the RMH fleet totaled
$4,317,000 from the acquisition date through December 31, 2002.
- Addition of four helicopters for CBM operations during 2002, resulting
in an increase of approximately $1,020,000 in aircraft operating
expenses.
- Addition of four fixed wing aircraft for HBM operations during the
third quarter of 2001 and four helicopters and two fixed wing aircraft
during 2002, resulting in an increase of approximately $1,611,000.
- Increase in the standard cost for overhaul of BK117 helicopter
transmissions by the equipment manufacturer.
- Hull and liability insurance rate increases of approximately 8%
effective July 2001 and 20% effective July 2002, due to overall
insurance market conditions.
Aircraft rental expense increased 63.7% for the year ended December 31, 2002, in
comparison to the year ended December 31, 2002. Expense for 37 RMH aircraft
under operating leases totaled $1,185,000 from the acquisition date through
December 31, 2002. Rental expense related to seven other leased aircraft added
to the Company's fleet during 2002 totaled $1,645,000. The increase for new
aircraft was offset in part during 2002 by the discontinuation of a short-term
lease for an aircraft used in the Company's backup fleet during 2001.
10
Depreciation and amortization expense increased 27.8% for the year ended
December 31, 2002. Depreciation related to assets added as part of the RMH
acquisition totaled $983,000 from the date of the acquisition through December
31, 2002. The year ended December 31, 2002, included $503,000 of amortization on
a non-compete agreement related to the purchase of the operating rights of
another air ambulance provider in the Las Vegas region in December 2001.
Expenses in 2001 included $188,000 of goodwill amortization compared to none in
2002, in accordance with the adoption of Statement 142 effective January 1,
2002.
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
Company responds to calls for air medical transport without pre-screening the
creditworthiness of the patient. Bad debt expense increased 60.4% for the year
ended December 31, 2002, compared to 2001, due primarily to the acquisition of
RMH and the increase in flight volume for CBM operations. Bad debt related to
RMH CBM operations totaled $4,829,000 from the date of acquisition through
December 31, 2002. Excluding the impact of the RMH transaction, bad debt as a
percentage of related net flight revenue decreased from 21.4% in 2001 to 18.7%
in 2002. The collection rate achieved in 2002 is consistent with historical
collection rates for CBM operations prior to 2001. The Company believes the
decrease in the collection rate in 2001 was due to general recessionary trends
in the economy. Bad debt expense related to HBM operations and Products Division
was not significant in either 2002 or 2001.
General and administrative expenses increased 30.3% for the year ended December
31, 2002, compared to the year ended December 31, 2001, reflecting the impact of
the RMH transaction. General and administrative expenses include accounting and
finance, human resources, aviation management, and pilot training. The number of
personnel in each area increased by approximately 50% to manage the expanded
operations with the acquisition of RMH and the growth outlined above in the
discussion of flight revenue.
The Company recorded income tax expense of $3,299,000 at an effective rate of
39% in the year ended December 31, 2002, and a tax benefit of $615,000 in 2001.
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, 2002, 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, 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.
- - 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.
11
- - 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 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, medical interiors
- - $3,578,000 - manufacture of multi-mission interiors
- - $311,000 - design and manufacture of other aerospace and medical transport
products
Significant projects in 2000 included completion of six HH-60L 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, medical interiors
- - $2,308,000 - manufacture of multi-mission interiors
- - $954,000 - design and manufacture of other aerospace and medical transport
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 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 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.
12
Aircraft operating expenses increased 14.7% for the year ended December 31,
2001, in comparison to the year ended December 31, 2000, 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.
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 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 Division 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. 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 had
been provided for net operating loss carryforwards which were not expected to be
realized prior to expiration.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $28,575,000 as of December 31, 2002, compared
to $15,315,000 at December 31, 2001. The change in working capital position is
primarily attributable to the acquisition of RMH in October 2002 and to an
increase in receivables consistent with increased revenue for CBM and HBM
divisions.
The Company had cash and cash equivalents of $1,410,000 as of December 31, 2002,
compared to $2,838,000 at December 31, 2001. Cash generated by operations
increased to $11,320,000 in 2002 from $6,702,000 in 2001 primarily due to the
acquisition of RMH and to improved pre-tax profitability for the reasons
discussed above in Results of Operations. Significant uses of cash in 2002
included an increase in receivables, net of bad debt expense, described above.
The balance of accrued overhaul and parts replacement costs grew during 2002 due
to the increased level of flight volume for both CBM and HBM operations. The
accrual increases with each hour flown by the fleet and is offset when
life-limited aircraft components are actually replaced or overhauled.
Cash used for investing activities totaled $39,144,000 in 2002, compared to
$3,902,000 in 2001, reflecting the impact of the RMH acquisition. Other
equipment acquisitions in 2002 consisted primarily of rotable equipment, medical
interior and avionics installations, and upgrades for existing equipment.
Significant acquisitions during 2001 included rotable equipment to replace fully
depreciated items and upgrades to existing avionics equipment and aircraft
interiors.
Financing activities generated $26,396,000 in 2002, compared to using $4,069,000
in 2001. 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.
The Company used proceeds from new note agreements originated in 2002 primarily
to finance the acquisition of RMH and to pay off existing debt with a higher
interest rate. Proceeds from the issuance of common stock increased in 2002
compared to 2001 primarily due to the higher stock price during the year,
resulting in an increased number of stock option exercises.
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:
- $1,474,000 in 2004
- $15,997,000 in 2006
- $24,588,000 in 2007
- $5,365,000 in 2008
- $1,918,000 in 2009
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
-------------------------------------------------------------------
2003 $ 952 215 737 5,604 12,515 18,856
2004 3,074 168 2,906 6,755 12,359 22,020
2005 227 7 220 5,901 12,219 18,340
2006 17 2 15 20,842 11,692 32,549
2007 9 -- 9 27,264 10,994 38,267
Thereafter -- -- -- 16,485 32,122 48,607
-------------------------------------------------------------------
Total $ 4,279 392 3,887 82,851 91,901 178,639
===================================================================
The Company has entered into various aircraft operating leases under
which it provides residual value guarantees to the lessor. As of December 31,
2002, the undiscounted maximum amount of potential future payments under the
guarantees is $4,156,000. No amounts have been accrued for any estimated losses
with respect to the guarantees, since it is not probable that the residual value
of the aircraft will be less than the amounts stipulated in the guarantee. The
assessment of whether it is probable that the Company will be required to make
payments under the terms of the guarantee is based on current market data and
the Company's actual and expected loss experience.
14
Senior Revolving Credit Facility
In October 2002, the Company entered into a $35 million senior revolving credit
facility with certain lenders to finance a portion of the purchase price and
related closing costs for the RMH acquisition and to provide working capital and
letter of credit availability for future activities of the Company. Borrowings
under the credit facility are secured by substantially all of the Company's
non-aircraft assets, including accounts receivable, inventory, equipment and
general intangibles. The facility matures October 16, 2006 but can be prepaid at
any time, subject to payment of an early termination fee ranging from .25% to 2%
if the termination occurs prior to October 16, 2004.
Indebtedness under the credit facility will bear interest, at the Company's
option, at either (i) the higher of the federal funds rate plus 0.50% or the
prime rate as announced by PNC plus an applicable margin ranging from 0 to 0.75%
or (ii) a rate equal to LIBOR plus an applicable margin ranging from 1.75% to
3.00%. As of December 31, 2002, the weighted average interest rate on the
outstanding balance against the line was 4.02%. The amount of borrowings
permitted under the credit facility is based on a borrowing base comprised of
(i) 75% of accounts receivable from Medicare, Medicaid, insurance companies and
community-based payers and 85% of other accounts receivable, and (ii) the lesser
of (A) 60% of inventory valued at the lower of cost or market, (B) 85% of
inventory valued at liquidation value, or (C) $15 million. At December 31, 2002,
approximately $29,843,000 was available under the credit facility, and
$12,554,000 was drawn against the line.
Payment obligations under the credit facility accelerate upon the occurrence of
defined events of default, including the following: failure to pay principal or
interest, or to perform covenants, under the credit facility or other
indebtedness; events of insolvency or bankruptcy; failure to timely discharge
judgments of $250,000 or more; failure to maintain the first priority status of
liens under the credit facility; levy against a material portion of the
Company's assets; default under other indebtedness; suspension of material
governmental permits; interruption of operations at any Company facility that
has a material adverse effect; and a change of control in the Company.
The credit facility contains various covenants that limit, among other things,
the Company's ability to create liens, declare dividends, make loans and
investments, enter into real property leases exceeding specified expenditure
levels, make any material change to the nature of the Company's business, enter
into any transaction with affiliates other than on arms' length terms, prepay
indebtedness, enter into a merger or consolidation, or sell assets. The credit
facility also places limits on the amount of new indebtedness, operating lease
obligations, and unfinanced capital expenditures which the Company can incur in
a fiscal year. The Company is required to maintain certain financial ratios as
defined in the credit facility. As of December 31, 2002, the Company was in
compliance with the covenants.
Subordinated Debt
On October 16, 2002, the Company issued $23 million in subordinated notes to
Prudential Capital Partners, L.P. and Prudential Capital Partners Management
Fund, L.P. (together, the Subordinated Lenders) to finance the acquisition of
RMH. The notes are unsecured and provide for quarterly payment of interest only
at 12% per annum, with all principal due October 16, 2007. With certain
exceptions as defined in the notes, the notes may not be prepaid until July 1,
2004, and prepayments after July 1, 2004, will be at a declining premium.
The purchase agreement entered into in connection with the notes contains
various covenants that limit, among other things, the Company's ability to
create liens, declare dividends, make certain loans, enter into real property
leases exceeding specified expenditure levels, make any material change to the
nature of the Company's business, enter into any transaction with affiliates
other than on arms' length terms, prepay indebtedness, enter into a merger or
consolidation, sell or discount receivables, or sell assets. The credit facility
also places limits on the amount of new indebtedness, operating lease
obligations, and unfinanced capital expenditures which the Company can incur in
a fiscal year. The Company is required to maintain certain financial ratios as
defined in the purchase agreement. As of December 31, 2002, the Company was in
compliance with the covenants.
Payment obligations under the credit facility accelerate upon the occurrence of
defined events of default, including the following: failure to pay principal or
interest, or to perform covenants, under the notes and related purchase
agreement or other indebtedness; events of insolvency or bankruptcy; failure to
timely discharge judgments of $500,000 or more; failure to file and keep
effective a registration statement relating to the warrants issued to the
Subordinated Lenders; and a change of control in the Company.
15
Other Notes
In June 2002 the Company originated a $1,290,000 note payable with interest at
6.7% to finance the buyout of an aircraft previously under an operating lease.
The note is collateralized by a Bell 407 helicopter. In October 2002 the Company
entered into a $7,670,000 note payable with interest at 6.60% to pay off
existing indebtedness. The note is collateralized by a Bell 412 helicopter and
five Bell 222 helicopters.
As of December 31, 2002, the Company held unencumbered aircraft with a net book
value of $7.0 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 $17,289,000 unused
capacity on its senior revolving credit facility. 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 2003
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
The Company opened CBM operations at new locations in Alabama and Illinois
during the first quarter of 2003. CBM flight volume during 2003 at all other
locations is expected to be consistent with historical levels attained by the
Company and RMH, subject to seasonal, weather-related fluctuations. The Company
continues to evaluate opportunities to expand the CBM model in other
communities.
Hospital-Based Model
Four hospital contracts are due for renewal in 2003. The Company expects 2003
flight activity for current hospital contracts to remain consistent with
historical levels attained by the Company and RMH.
Products Division
As of December 31, 2002, the Company was completing the production of 42 MEV
units for the U.S. Army, with delivery of the remaining units scheduled for the
first and second quarters of 2003, and had received contracts to begin
production of two modular medical interiors for two commercial customers.
Remaining revenue for all contracts in process as of December 31, 2002, is
estimated at $940,000. In the first quarter of 2003, the Company was also
awarded new contracts valued at approximately $1,210,000 to manufacture modular
medical interiors for three additional aircraft. Work on these contracts is
expected to continue throughout 2003.
The Company expects to be awarded a contract for 11 HH-60L Multi-Mission Medevac
Systems during 2003, with delivery to be completed in 2004. The current U.S.
Army Aviation Modernization Plan defines a requirement for 357 units in total
over 20 years beginning in 1996. The Company also expects to receive a contract
for 15 additional MEV litter systems in 2003, with delivery to be completed in
2004. The U.S. Army has defined a requirement for a total of 121 units over 4
years, beginning with the units produced in 2002. There is no assurance that the
current contract option for either program will be exercised or orders for
additional units will be received in 2003 or in future periods.
16
All Segments
There can be no assurance that the Company will successfully integrate RMH
operations into its three divisions or continue to renew operating agreements
for its HBM operations, generate new profitable contracts for the Products
Division, or maintain flight volume for CBM operations. 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 2003. The Company also has approximately
$17,289,000 in borrowing capacity available under the revolving credit facility
as of December 31, 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 2003" and
those described below.
- RMH integration - On October 16, 2002, the Company acquired RMH, one
of its competitors, effectively doubling the size of its operations.
While RMH is engaged in the same lines of business as Air Methods, it
has operated in different geographic areas and under different
procedures and protocols. Although most of RMH's employees will
continue as employees of the Company, few of its management level
employees have remained with the Company. As with any large
acquisition, a significant effort is required to assimilate the
operations, financial and accounting practices, and MIS systems, and
to integrate key personnel from the acquired business. This
acquisition may cause disruptions in Company operations and divert
management's attention from day-to-day operations. The Company may not
realize the anticipated benefits of this acquisition, profitability
may suffer due to acquisition-related costs or unanticipated
liabilities, and the Company's stock price may decrease if the
financial markets consider the acquisition to be inappropriately
priced.
- Highly leveraged balance sheet - The Company is obligated under debt
facilities providing for up to approximately $112 million of
indebtedness, of which approximately $89.3 million was outstanding at
December 31, 2002. If the Company fails to meet its payment
obligations or otherwise defaults under the agreements governing
indebtedness, the lenders under those agreements will have the right
to accelerate the indebtedness and exercise other rights and remedies
against the Company. These rights and remedies include the rights to
repossess and foreclose upon the assets that serve as collateral,
initiate judicial foreclosure against the Company, petition a court to
appoint a receiver for the Company, and initiate involuntary
bankruptcy proceedings against the Company. If lenders exercise their
rights and remedies, the Company's assets may not be sufficient to
repay outstanding indebtedness, and there may be no assets remaining
after payment of indebtedness to provide a return on common stock.
- Restrictive debt covenants - The subordinated notes and senior credit
facility, into which the Company entered to finance the acquisition of
RMH, both contain restrictive financial and operating covenants,
including restrictions on the Company's ability to incur additional
indebtedness, to exceed certain annual capital expenditure limits, and
to engage in various corporate transactions such as mergers,
acquisitions, asset sales and the payment of cash dividends. These
restrictions will restrict future growth through the limitation on
capital expenditures and acquisitions, and may adversely impact the
Company's ability to implement its business plan. Failure to comply
with the covenants defined in the agreements or to maintain the
required financial ratios could result in an event of default and
accelerate payment of the principal balances due under the
subordinated notes and the senior credit facility.
- 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 could have an adverse
impact on the Company's operating results. Typically, the months from
November through February tend to have lower flight volume due to
weather
17
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.
- Collection rates - The Company responds to calls for air medical
transport without pre-screening the creditworthiness of the patient.
The 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 affected by the number of
uninsured or indigent patients transported and is, therefore,
primarily dependent upon the health of the U.S. economy. 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.
- Aviation industry hazards and insurance limitations - 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 40% of any increases
in hull and liability insurance may be passed through to the 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 interruption of air medical services to client
hospitals, which could adversely affect the Company's relationship
with such hospitals and operating results.
- 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.
18
- Foreign ownership - Federal law requires that United States air
carriers be citizens of the United States. For a corporation to
qualify as a United States citizen, the president and at least
two-thirds of the directors and other managing officers of the
corporation must be United States citizens and at least 75% of the
voting interest of the corporation must be owned or controlled by
United States citizens. If the Company is unable to satisfy these
requirements, operating authority from the Department of
Transportation may be revoked. Furthermore, under certain loan
agreements, an event of default occurs if less than 80% of the voting
interest is owned or controlled by United States citizens. As of
December 31, 2002, the Company was aware of one foreign person who
holds approximately 7.3% of outstanding Common Stock. Because the
Company is unable to control the transfer of its stock, it is unable
to assure that it can remain in compliance with these requirements in
the future.
- 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.
- Department of Defense funding - Several of the projects which have
historically been significant sources of revenue for the Products
Division, including HH-60L and MEV systems, are dependent upon
Department of Defense funding. Failure of the U.S. Congress to approve
funding for the production of additional HH-60L or MEV units could
have a material adverse impact on Products Division revenue.
- Shareholder dilution - As of December 31, 2002, there were outstanding
stock options to purchase approximately 666,037 shares of common stock
and outstanding warrants to purchase 593,224 shares of common stock.
To the extent that the outstanding stock options or warrants 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-
19
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 discounts realized
are more or less than those projected by management, adjustments to 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 or less than estimated, the gross
margin on the project may be greater or 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 more or less than those projected by management, adjustments to
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
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 the 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 or less
than estimated by management, more or less aircraft operating costs may be
recorded in the period in which the price increase becomes effective or in which
the aircraft component is overhauled.
20
NEW ACCOUNTING STANDARDS
In April 2002 the FASB issued FASB Statement No. 145 (Statement 145), Rescission
of FASB Statements No. 4, 44, and 64, amendment of FASB Statement No. 13, and
Technical Corrections. Statement 145 updates, clarifies and simplifies existing
accounting pronouncements, including the rescission of Statement 4, which
required all gains and losses from extinguishments of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result the criteria in Opinion 30 will now be used to classify
those gains and losses. The Company adopted Statement 145 in 2002 and the impact
on its financial condition or results of operations was not material.
In June 2002 the FASB issued FASB Statement No. 146 (Statement 146), Accounting
for Costs Associated with Exit or Disposal Activities. Statement 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The principal
difference between Statement 146 and Issue No. 94-3 relates to the requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. Statement 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue No. 94-3, a liability for an exit cost (as defined in the issue) was
recognized at the date of an entity's commitment to an exit plan. Statement 146
also establishes that fair value is the objective for initial measurement of the
liability. Statement 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, and the Company does not expect the adoption
to have a material impact on its results of operations or financial position.
In December 2002, the FASB issued FASB Statement No. 148 (Statement 148),
Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123. This Statement provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement 148
amends the disclosure requirements of Statement 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company does not plan to adopt the fair value
based method, and, therefore, does not expect adoption of this standard to have
a material impact on it financial position or results of operations. The Company
has adopted the expanded disclosure provisions of Statement 148 in the
consolidated financial statements for the year ended December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Interpretation No. 45 elaborates on the disclosures made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. This interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded, and requires expanded
disclosures for certain types of obligations not covered by the accounting
provisions of this interpretation, such as warranty obligations. The Company is
required to apply the provisions of Interpretation No. 45 to guarantees that are
initiated or modified after December 31, 2002. The Company has adopted the
disclosure requirements of the interpretation in its financial statements for
the year ended December 31, 2002, and does not expect the adoption of
Interpretation No. 45 to have a material impact on the Company's financial
position or results of its operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 is an interpretation of
Accounting Research Bulletin No. 51, and addresses consolidation by business
enterprises of variable interest entities. This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of interests
that effectively recombines risks that were previously dispersed. The Company
is required to apply the provisions of Interpretation No. 45 to variable
interest entities created after January 31, 2003. The Company does not expect
the adoption of Interpretation No. 46 to have a material impact on the Company's
financial position or results of its operations.
21
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. As of December
31, 2002, the Company did not use financial instruments to any degree to manage
these risk and did 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 senior
revolving credit facility. Based on the amounts outstanding at December 30,
2002, the annual impact of a 1% change in interest rates would be approximately
$126,000. Interest rates on these instruments approximate current market rates
as of December 31, 2002.
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.
22
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, 2003, for the
Annual Meeting of Stockholders to be held June 11, 2003.
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, 2003, for the
Annual Meeting of Stockholders to be held June 11, 2003.
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, 2003, for the
Annual Meeting of Stockholders to be held June 11, 2003.
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, 2003, for the
Annual Meeting of Stockholders to be held June 11, 2003.
ITEM 14. CONTROL AND PROCEDURES
Based on their evaluation of the Company's internal controls, disclosure
controls and procedures within 90 days of the filing date of this report, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
effectiveness of such controls and procedures is satisfactory. Further, there
were not any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
23
PART IV
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
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, 2002, 2001, and 2000
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.
IV - 1
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
2.1 Membership Interest Purchase Agreement, dated June 6, 2002, among Air Methods Corporation; Rocky
Mountain Holdings, LLC; Rocky Mountain Holdings, Inc.; and AMC Helicopters, Inc.(7)
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 Common Stock Purchase Warrant, dated October 16, 2002, between Air Methods Corporation and Prudential
Capital Partners Management Fund, L.P.(7)
4.3 Common Stock Purchase Warrant, dated October 16, 2002, between Air Methods Corporation and Prudential
Capital Partners, L.P.(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 July 10, 1995, between the Company and Aaron D. Todd(8)
10.6 Employment Agreement dated April 1, 2000, between the Company and Neil Hughes(9)
10.7 Revolving Credit and Security Agreement, dated October 16, 2002, among Air Methods Corporation; Rocky
Mountain Holdings, LLC; Mercy Air Service, Inc.; ARCH Air Medical Service, Inc.; and PNC Bank N.A.(7)
10.8 Securities Purchase Agreement, dated October 16, 2002, between Air Methods Corporation; Rocky
Mountain Holdings, LLC; Mercy Air Service, Inc.; ARCH Air Medical Service, Inc.; Prudential Capital
Partners, L.P.; and Prudential Capital Partners Management Fund, L.P.(7)
10.9 Stockholders' Agreement by and between Air Methods Corporation, Prudential Capital Partners, L.P.; and
Prudential Capital Partners Management Fund, L.P.(7)
10.10 Senior Subordinated Note, dated October 16, 2002, between Air Methods Corporation; Rocky Mountain
Holdings, LLC; Mercy Air Service, Inc.; ARCH Air Medical Service, Inc.; and Prudential Capital Partners, L.P.(7)
10.11 Senior Subordinated Note, dated October 16, 2002, between Air Methods Corporation; Rocky Mountain
Holdings, LLC; Mercy Air Service, Inc.; ARCH Air Medical Service, Inc.; and Prudential Capital Partners
Management Fund, L.P.(7)
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
99.1 Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
IV - 2
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 16, 2002, regarding the
Company's acquisition of 100% of the membership interest of Rocky
Mountain Holdings, L.L.C.
________________________________
(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 Current Report on Form 8-K dated
October 16, 2002, 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 - 3
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 31, 2003 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 31, 2003
- ---------------------------
George W. Belsey Chief Executive Officer
/s/ Aaron D. Todd Chief Financial Officer March 31, 2003
- ---------------------------
Aaron D. Todd Secretary and Treasurer
/s/ Sharon J. Keck Chief Accounting Officer March 31, 2003
- ---------------------------
Sharon J. Keck
/s/ Ralph J. Bernstein Director March 31, 2003
- ---------------------------
Ralph J. Bernstein
/s/ Samuel H. Gray Director March 31, 2003
- ---------------------------
Samuel H. Gray
/s/ Carl H. McNair, Jr. Director March 31, 2003
- ---------------------------
Carl H. McNair, Jr.
/s/ Lowell D. Miller Director March 31, 2003
- ---------------------------
Lowell D. Miller, Ph.D.
/s/ Donald R. Segner Vice-Chairman of the Board March 31, 2003
- ---------------------------
Donald R. Segner
/s/ Morad Tahbaz Director March 31, 2003
- ---------------------------
Morad Tahbaz
IV - 4
SECTION 302 CHIEF EXECUTIVE OFFICER CERTIFICATION
I, George W. Belsey, certify that:
1. I have reviewed this annual report on Form 10-K of Air Methods
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ George W. Belsey
- -----------------------
George W. Belsey
Chief Executive Officer
IV - 5
SECTION 302 CHIEF FINANCIAL OFFICER CERTIFICATION
I, Aaron D. Todd, certify that:
1. I have reviewed this annual report on Form 10-K of Air Methods
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Aaron D. Todd
- -----------------------
Aaron D. Todd
Chief Financial Officer
IV - 6
AIR METHODS CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Independent Auditors' Report F-1
Consolidated Financial Statements
- ---------------------------------
CONSOLIDATED BALANCE SHEETS,
December 31, 2002 and 2001 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 2002, 2001, and 2000 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 2002, 2001, and 2000 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 2002, 2001, and 2000 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 2002 and 2001 F-9
Schedules
- ---------
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001, and 2000 F-30
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 - 7
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company
implemented Statement of Accounting Standards No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002.
KPMG LLP
Denver, Colorado
March 12, 2003
F - 1
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------
2002 2001
--------- ---------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,410 2,838
Current installments of notes receivable (note 4) 45 120
Receivables:
Trade (notes 5) 54,814 22,555
Less allowance for doubtful accounts (16,996) (5,673)
--------- ---------
37,818 16,882
Insurance proceeds 256 471
Other 4,243 851
--------- ---------
42,317 18,204
Inventories (note 5) 12,003 3,427
Work-in-process on medical interior and products contracts 203 253
Assets held for sale 3,242 --
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3) 703 797
Deferred tax asset (note 9) 1,684 3,397
Prepaid expenses and other current assets 1,921 1,083
--------- ---------
Total current assets 63,528 30,119
--------- ---------
Property and equipment (notes 5 and 6):
Land 190 --
Flight and ground support equipment 145,715 71,392
Buildings and office equipment 8,951 5,841
--------- ---------
154,856 77,233
Less accumulated depreciation and amortization (36,551) (30,561)
--------- ---------
Net property and equipment 118,305 46,672
Goodwill (note 2) 4,291 2,974
Notes receivable, less current installments (note 4) 124 472
Other assets, net of accumulated amortization of $720 and $447 at
December 31, 2002 and 2001, respectively 10,148 5,320
--------- ---------
Total assets $196,396 $ 85,557
========= =========
(Continued)
F - 2
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------
2002 2001
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 2,604 --
Current installments of long-term debt (note 5) 5,604 3,737
Current installments of obligations under capital leases (note 6) 737 351
Accounts payable 4,846 1,925
Accrued overhaul and parts replacement costs 8,657 3,407
Deferred revenue 1,258 1,158
Billings in excess of costs and estimated earnings on uncompleted contracts
(note 3) 530 --
Accrued wages and compensated absences 5,417 2,037
Other accrued liabilities 5,300 2,189
--------- --------
Total current liabilities 34,953 14,804
Long-term debt, less current installments (note 5) 77,247 17,335
Obligations under capital leases, less current installments (note 6) 3,150 2,882
Accrued overhaul and parts replacement costs 25,871 10,377
Deferred income taxes (note 9) 3,450 2,178
Other liabilities 5,507 1,438
--------- --------
Total liabilities 150,178 49,014
--------- --------
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 9,488,679
and 8,619,026 shares at December 31, 2002 and 2001, respectively 569 517
Additional paid-in capital 55,127 50,665
Accumulated deficit (9,477) (14,637)
Treasury stock at par, 15,700 and 37,005 common shares at December 31, 2002
and 2001, respectively (1) (2)
--------- --------
Total stockholders' equity 46,218 36,543
--------- --------
Commitments and contingencies (notes 5, 6, 10, and 12)
Total liabilities and stockholders' equity $196,396 85,557
========= ========
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
------------------------------------
2002 2001 2000
----------- ----------- ----------
Revenue:
Flight revenue (note 8) $ 123,534 $ 82,288 67,192
Sales of medical interiors and products 5,796 7,655 6,500
Parts and maintenance sales and services 1,338 2,042 1,258
Gain on disposition of assets, net -- 111 343
----------- ----------- ----------
130,668 92,096 75,293
----------- ----------- ----------
Operating expenses:
Flight centers 42,958 28,288 22,713
Aircraft operations 29,771 20,222 17,635
Aircraft rental (note 6) 6,175 3,772 3,176
Cost of medical interiors and products sold 4,280 5,556 4,597
Cost of parts and maintenance sales and services 1,279 1,806 1,092
Depreciation and amortization 6,695 5,239 5,485
Bad debt expense 15,586 9,714 6,695
Loss on disposition of assets, net 27 --- ---
General and administrative 12,744 9,781 7,854
----------- ----------- ----------
119,515 84,378 69,247
----------- ----------- ----------
Operating income 11,153 7,718 6,046
Other income (expense):
Interest expense (3,048) (1,945) (2,144)
Interest and dividend income 31 100 185
Loss on extinguishment of debt (101) -- --
Other, net 424 75 70
----------- ----------- ----------
Income before income taxes 8,459 5,948 4,157
Income tax benefit (expense) (note 9) (3,299) 615 --
----------- ----------- ----------
Net income $ 5,160 $ 6,563 4,157
=========== =========== ==========
Basic income per common share (note 7) $ .56 $ .78 .50
=========== =========== ==========
Diluted income per common share (note 7) $ .54 $ .76 .49
=========== =========== ==========
Weighted average number of common shares outstanding - basic 9,184,421 8,421,671 8,334,445
=========== =========== ==========
Weighted average number of common shares outstanding - diluted 9,478,502 8,659,302 8,559,389
=========== =========== ==========
See accompanying notes to consolidated financial statements.
F - 4
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(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, 2000 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
Issuance of common shares for options
and warrants exercised and services
rendered 1,041,752 62 -- -- 5,580 -- 5,642
Purchase of treasury shares -- -- 150,794 (9) (1,118) -- (1,127)
Retirement of treasury shares (172,099) (10) (172,099) 10 -- -- --
Net income -- -- -- -- -- 5,160 5,160
--------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2002 9,488,679 $ 569 15,700 $ (1) 55,127 (9,477) 46,218
==========================================================================
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
-----------------------------
2002 2001 2000
-----------------------------
Cash flows from operating activities:
Net income $ 5,160 6,563 4,157
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 6,695 5,239 5,485
Bad debt expense 15,586 9,714 6,695
Deferred income tax expense (benefit) 2,985 (1,274) (308)
Common stock options and warrants issued for services 40 95 60
Loss on extinguishment of debt 101 -- --
Loss (gain) on disposition of assets 27 (111) (343)
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in receivables (21,279) (12,808) (13,394)
Decrease (increase) in inventories 206 (285) 96
Decrease (increase) in prepaid expenses and other current assets 437 (59) 43
Decrease (increase) in work-in-process on medical interior and products
contracts and costs in excess of billings 176 (857) 751
Increase (decrease) in accounts payable and other accrued liabilities (2,023) 362 1,592
Increase in accrued overhaul and parts replacement costs 2,222 644 820
Increase (decrease) in deferred revenue, billings in excess of costs, and other
liabilities 987 (521) 1,473
-----------------------------
Net cash provided by operating activities 11,320 6,702 7,127
-----------------------------
Cash flows from investing activities:
Acquisition of net assets of Area Rescue Consortium of Hospitals and SkyLife
Aviation, LLC -- -- (2,367)
Acquisition of net assets of Rocky Mountain Holdings, LLC (note 2) (32,127) -- --
Acquisition of property and equipment (5,017) (4,106) (3,248)
Proceeds from disposition and sale of equipment and assets held for sale 845 210 1,158
Increase in notes receivable and other assets, net (2,845) (6) (1,004)
-----------------------------
Net cash used by investing activities (39,144) (3,902) (5,461)
-----------------------------
(Continued)
F - 6
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------
Year Ended December 31
---------------------------
2002 2001 2000
---------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 3,131 1,263 2,439
Payments for purchases of common stock (1,127) (1,021) (2,380)
Net borrowings (payments) under lines of credit 12,554 (1,000) 300
Proceeds from long-term debt 30,670 2,700 3,794
Payments of long-term debt (18,495) (5,678) (3,597)
Payments of capital lease obligations (337) (333) (357)
---------------------------
Net cash provided (used) by financing activities 26,396 (4,069) 199
---------------------------
Increase (decrease) in cash and cash equivalents (1,428) (1,269) 1,865
Cash and cash equivalents at beginning of year 2,838 4,107 2,242
---------------------------
Cash and cash equivalents at end of year $ 1,410 2,838 4,107
===========================
Interest paid in cash during the year $ 2,415 1,974 2,148
===========================
Income taxes paid in cash during the year $ 1,035 365 308
===========================
(Continued)
F - 7
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Non-cash investing and financing activities:
In the year ended December 31, 2002, the Company issued warrants to purchase
443,224 shares of common stock to various lenders in conjunction with the debt
incurred to acquire Rocky Mountain Holdings, LLC (RMH). The fair value of $2,198
was recorded as a discount to the face value of the related notes payable.
In the year ended December 31, 2002, the Company issued warrants to purchase
100,000 shares of common stock to Americas Partners, a related party, for its
services related to the acquisition of RMH. The fair value of $273 was recorded
as a component of the cost of the RMH acquisition.
In the year ended December 31, 2002, the Company recognized a liability of
$2,600 as additional consideration for the purchase of RMH. Payment of the
consideration is based on the collection of certain receivables and is
considered reasonably certain.
In the year ended December 31, 2002, the Company entered into a note payable
totaling $1,290 to finance the buyout of a helicopter previously under an
operating lease and into a capital lease obligation of $67 to finance the
acquisition of communications equipment.
In the year ended December 31, 2002, the Company repossessed an aircraft
previously sold to a former franchisee in Brazil. The $418 balance of the
Company's investment in the aircraft, consisting primarily of a note receivable
from the franchisee, was reclassified in the consolidated financial statements
as an asset held for sale.
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 - 8
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 the largest provider 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 October
2002, the Company acquired 100% of the membership interest of Rocky
Mountain Holdings, LLC (RMH). RMH and Mercy Air Service, Inc. (Mercy Air),
operate as wholly-owned subsidiaries of Air Methods, while 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 $141,000 and
$1,225,000 at December 31, 2002 and 2001, 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 - 9
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and Equipment
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.
Goodwill
In June 2001 the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 142, Accounting for Goodwill and Intangible Assets (Statement
142). Under Statement 142, goodwill and certain identifiable intangible
assets are not amortized, but instead are reviewed for impairment at least
annually in accordance with the provisions of the statement. The Company
adopted Statement 142 effective January 1, 2002. As required by Statement
142, the standard has not been retroactively applied to the results for the
periods prior to adoption. In 2002, the Company recorded goodwill totaling
$1,317,000 related to the acquisition of RMH and did not recognize any
losses related to impairment of existing goodwill.
F - 10
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The following table reconciles net income for the years ended December 31
to pro forma net income excluding the amortization of goodwill (amounts
in thousands, except share and per share amounts).
Year Ended December 31
2001 2000
----------------------
Reported net income $ 6,563 4,157
Amortization of goodwill 188 144
----------------------
Adjusted net income $ 6,751 4,301
======================
Basic income per common share $ .80 .52
======================
Diluted income per common share $ .78 .50
======================
Weighted average number of common
shares outstanding - basic 8,421,671 8,334,445
======================
Weighted average number of common
shares outstanding - diluted 8,659,302 8,559,389
======================
Long-lived Assets
The Company periodically reviews long-lived assets, including intangible
assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of long-lived assets is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. No
impairment has been recognized in the accompanying consolidated financial
statements.
Assets to be disposed of are reported at the lower of the carrying amount
or fair value less estimated selling costs. As of December 31, 2002, assets
held for sale consisted of three aircraft. The Company's intention is to
sell the three aircraft. Related debt is classified as short-term notes
payable in the consolidated financial statements.
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.
F - 11
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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). 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):
2002 2001 2000
------ ------ ------
Net income:
As reported $5,160 $6,563 $4,157
Pro forma 4,424 6,429 3,992
Basic income per share:
As reported $ .56 $ .78 $ .50
Pro forma .48 .76 .48
Diluted income per share:
As reported $ .54 $ .76 $ .49
Pro forma .42 .71 .45
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 2002, 2001, and 2000, respectively: dividend
yield of 0% for all years; expected volatility of 57%, 39%, and 59%;
risk-free interest rates of 1.8%, 4.0%, and 5.2%; and expected lives of 3
years for all years. The weighted average fair value of options granted
during the years ended December 31, 2002, 2001, and 2000, was $2.64, $1.46,
and $1.74, respectively.
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.
F - 12
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 Company believes that the overall effective interest rates on
these instruments approximate fair value in the aggregate.
New Accounting Pronouncements
In April 2002 the FASB issued Statement No. 145 (Statement 145), Rescission
of FASB Statements No. 4, 44, and 64, amendment of FASB Statement No. 13,
and Technical Corrections. Statement 145 updates, clarifies and simplifies
existing accounting pronouncements, including the rescission of Statement
4, which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income statement tax effect. As a result the criteria in Opinion 30
will now be used to classify those gains and losses. The Company adopted
Statement 145 in 2002 and the impact on its financial condition or results
of operations was not material.
In June 2002 the FASB issued FASB Statement No. 146 (Statement 146),
Accounting for Costs Associated with Exit or Disposal Activities. Statement
146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between Statement 146 and Issue
No. 94-3 relates to the requirements for recognition of a liability for a
cost associated with an exit or disposal activity. Statement 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost (as defined in the issue) was recognized at the
date of an entity's commitment to an exit plan. Statement 146 also
establishes that fair value is the objective for initial measurement of the
liability. Statement 146 is effective for exit or disposal activities that
are initiated after December 31, 2002, and the Company does not expect the
adoption to have a material impact on its results of operations or
financial position.
F - 13
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In December 2002, the FASB issued FASB Statement No. 148 (Statement 148),
Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, Statement
148 amends the disclosure requirements of Statement 123 to require more
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company does not plan to
adopt the fair value based method, and, therefore, does not expect adoption
of this standard to have a material impact on it financial position or
results of operations. The Company has adopted the expanded disclosure
provisions of Statement 148 in the consolidated financial statements for
the year ended December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Interpretation No. 45 elaborates on
the disclosures made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This interpretation does not prescribe
a specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superseded, and requires expanded disclosures for certain types of
obligations not covered by the accounting provisions of this
interpretation, such as warranty obligations. The Company is required to
apply the provisions of Interpretation No. 45 to guarantees that are
initiated or modified after December 31, 2002. The Company has adopted the
disclosure requirements of the interpretation in its financial statements
for the year ended December 31, 2002, and does not expect the adoption of
Interpretation No. 45 to have a material impact on the Company's financial
position or results of its operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 is an interpretation of
Accounting Research Bulletin No. 51, and addresses consolidation by
business enterprises of variable interest entities. This interpretation
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that effectively
recombines risks that were previously dispersed. The Company is required to
apply the provisions of Interpretation No. 45 to variable interest entities
created after January 31, 2003. The Company does not expect the adoption of
Interpretation No. 46 to have a material impact on the Company's financial
position or results of its operations.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
2002 presentation.
F - 14
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(2) ACQUISITION OF SUBSIDIARY
On October 16, 2002, the Company acquired 100% of the membership interest
of RMH, a Delaware limited liability company, for total consideration of
$36,774,000. The purchase price was negotiated by the Company and the
sellers, and includes an earn-out provision under which the sellers may
receive up to $2,600,000 of additional consideration over the next nine
years based on actual collections against certain receivables. The
acquisition was financed primarily by the issuance of $23,000,000 in
subordinated notes and by draws against a $35 million revolving credit
facility.
The initial allocation of the purchase price was as follows (amounts in
thousands):
Assets purchased:
Aircraft $ 44,250
Equipment and other property 9,587
Receivables, net of allowances 18,496
Inventory 8,852
Goodwill 1,317
Other 8,117
---------
90,619
Debt and other liabilities assumed (53,845)
---------
Purchase price $ 36,774
=========
The results of RMH's operations have been included with those of the
Company since October 16, 2002. The unaudited pro forma revenue, net
income, and income per common share for the years ended December 31, 2002
and 2001, assuming the acquisition occurred at the beginning of the periods
presented are as follows (amounts in thousands, except per share amounts):
Year ended December 31,
2002 2001
-----------------------
Revenue $ 221,433 191,808
=======================
Net income $ 6,450 4,923
=======================
Basic income per common share $ .70 .58
=======================
Diluted income per common share $ .68 .54
=======================
The pro forma information does not necessarily represent the results that
would have occurred if the acquisition had been consummated on January 1,
2001, nor are they necessarily indicative of the results of future
operations.
F - 15
(3) COSTS IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COSTS
As of December 31, 2002, the estimated period to complete contracts in
process ranges from one to six 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):
2002 2001
-------- -------
Direct costs incurred on uncompleted contracts $ 3,191 4,088
Estimated contribution to earnings and indirect costs 3,863 4,185
-------- -------
7,054 8,273
Less billings to date (6,881) (7,476)
-------- -------
Costs in excess of billings, net $ 173 797
======== =======
(4) NOTES RECEIVABLE
Future minimum payments under notes receivable are as follows (amounts in
thousands):
Year ending December 31:
2003 $ 62
2004 49
2005 42
2006 45
2007 --
------
198
Less amounts representing interest (29)
------
Present value of minimum payments 169
------
Less current installments (45)
------
$ 124
======
F - 16
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at December 31 (amounts in
thousands):
2002 2001
-------- -------
Subordinated notes payable with quarterly interest payments at 12.0%
and all principal due in 2007, unsecured (net of discount of $2,134) $20,866 --
Borrowings under revolving credit facility with monthly interest
payments and all principal due in 2006. Weighted average interest
rate at December 31, 2002, is 4.02%. 12,554 --
Note payable with interest at 6.60%, due in monthly installments of
principal and interest with all remaining principal due in 2009,
collateralized by aircraft. 7,507 --
Note payable with interest at 9.52%. Paid in full in 2002. -- 8,026
Notes payable with interest rates from 6.53% to 10.50%, due in monthly
installments of principal and interest at various dates through 2009,
collateralized aircraft and other flight equipment 7,194 7,785
Note payable, non-interest bearing, due in annual principal payments
through 2007. Annual principal payment amounts are contingent
upon transport volume for Community-Based Model operations in
Nevada. 2,250 2,750
Notes payable with interest rates from 6.89% to 7.48%, due in monthly
payments of principal and interest with all remaining principal due
in 2008, collateralized by aircraft 20,683 --
Notes payable with interest rates from 8.02% to 9.27%, due in monthly
payments of principal and interest with all remaining principal due
in 2006, collateralized by aircraft 5,365 --
Notes payable with interest rates from 8.49% to 8.96%, due in monthly
payments of principal and interest with all remaining principal due
in 2007, collateralized by aircraft 3,504 --
Notes payable with interest rates from 8.16% to 9.55%, due in monthly
payments of principal and interest with all remaining principal due
in 2004, collateralized by aircraft 1,868 929
Notes payable, non-interest bearing, with principal payments through
2006 dependent upon aircraft delivery. 1,017 --
Note payable with interest at 8.01%. Paid in full in 2002. -- 1,107
Note payable with interest at 5.0%. Paid in full in 2002. -- 207
Notes payable to sellers of Mercy Air with interest at 9%. Paid in full in
2002. -- 223
Other 43 45
-------- -------
82,851 21,072
Less current installments (5,604) (3,737)
-------- -------
$77,247 17,335
======== =======
F - 17
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
As of December 31, 2002, the Company had $12,554,000 outstanding against a
$35 million senior revolving credit facility with certain lenders.
Borrowings under the credit facility are secured by substantially all of
the Company's non-aircraft assets, including accounts receivable,
inventory, equipment and general intangibles. Indebtedness under the credit
facility will have a first priority claim to the assets pledged to secure
it. The facility matures October 16, 2006, but can be prepaid at any time,
subject to payment of an early termination fee ranging from .25% to 2% if
the termination occurs prior to October 16, 2004.
Indebtedness under the credit facility bears interest, at the Company's
option, at either (i) the higher of the federal funds rate plus 0.50% or
the prime rate as announced by PNC plus a margin ranging from 0 to 0.75% or
(ii) a rate equal to LIBOR plus a margin ranging from 1.75% to 3.00%. The
weighted average interest rate on the outstanding balance against the line
as of December 31, 2002, was 4.02%.
Payment obligations under the credit facility accelerate upon the
occurrence of defined events of default, including the following: failure
to pay principal or interest, or to perform covenants, under the credit
facility or other indebtedness; events of insolvency or bankruptcy; failure
to timely discharge judgments of $250,000 or more; failure to maintain the
first priority status of liens under the credit facility; levy against a
material portion of the Company's assets; default under other indebtedness;
suspension of material governmental permits; interruption of operations at
any Company facility that has a material adverse effect; and a change of
control in the Company.
The credit facility contains various covenants that limit, among other
things, the Company's ability to create liens, declare dividends, make
loans and investments, enter into real property leases exceeding specified
expenditure levels, make any material change to the nature of the Company's
business, enter into any transaction with affiliates other than on arms'
length terms, prepay indebtedness, enter into a merger or consolidation, or
sell assets. The credit facility also places limits on the amount of new
indebtedness, operating lease obligations, and unfinanced capital
expenditures which the Company can incur in a fiscal year. The Company is
required to maintain certain financial ratios as defined in the credit
facility and other notes. As of December 31, 2002, the Company was in
compliance with the covenants.
A substantial portion of property and equipment is pledged as collateral
under the Company's various notes payable.
F - 18
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt are as follows (amounts in
thousands):
Year ending December 31:
2003 $ 5,604
2004 6,755
2005 5,901
2006 20,842
2007 27,264
Thereafter 16,485
--------
82,851
========
(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, 2002, future minimum lease
payments under capital and operating leases are as follows (amounts in
thousands):
Capital Operating
leases leases
--------------------
Year ending December 31:
2003 $ 952 12,515
2004 3,074 12,359
2005 227 12,219
2006 17 11,692
2007 9 10,994
Thereafter -- 32,122
--------------------
Total minimum lease payments 4,279 $ 91,901
=========
Less amounts representing interest (392)
---------
Present value of minimum capital lease payments 3,887
Less current installments (737)
---------
$3,150
=========
Rent expense relating to operating leases totaled $8,670,000, $4,935,000,
and $4,215,000, for the years ended December 31, 2002, 2001, and 2000,
respectively.
At December 31, 2002 and 2001, leased property held under capital leases
included in equipment, net of accumulated depreciation, totaled $4,826,000
and $4,132,000, respectively.
F - 19
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY
(A) WARRANTS
In conjunction with debt incurred to acquire RMH in 2002, the Company
issued warrants to various lenders to purchase 443,224 shares of
common stock at $.06 per share. Also in 2002, the Company issued
warrants to purchase 100,000 shares of common stock to Americas
Partners, a related party, for services performed in the acquisition
of RMH and issued 25,000 warrants in payment of consulting services.
The weighted average fair value of warrants issued during 2002 was
$4.48. As of December 31, 2002, the following warrants to purchase the
Company's common stock are outstanding:
Number of Warrants Exercise Price per Share Expiration Date
------------------ ------------------------- -------------------
443,224 $ .06 October 16, 2008
100,000 5.28 October 16, 2007
25,000 6.60 August 8, 2007
25,000 3.156 July 1, 2005
------------------
593,224
==================
(B) STOCK OPTION PLANS
The Company has a Stock Option Plan (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 - 20
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, 2002, 2001, and 2000:
Weighted Average
Shares Exercise Price
------------- ----------------
Outstanding at January 1, 2000 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
Granted 675,000 7.27
Canceled (346,796) 8.05
Exercised (881,752) 3.00
---------------
Outstanding at December 31, 2002 666,037 4.91
===============
Options exercisable at:
December 31, 2000 1,167,828 $ 3.09
December 31, 2001 987,048 3.12
December 31, 2002 321,438 3.56
F - 21
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, 2002:
Weighted-Average Weighted-
Remaining Weighted- Average
Range of Number Contractual Average Number Exercise
Exercise Price Outstanding Life (Years) Exercise Price Exercisable Price
--------------- ---------------- ------------ --------------- ----------- --------
1.81 to 2.69 85,627 1.5 $ 2.63 85,627 $ 2.63
3.00 to 4.38 215,410 1.8 3.32 195,811 3.31
4.38 to 8.89 365,000 4.3 6.38 40,000 6.78
---------------- -----------
666,037 321,438
================ ===========
(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,
2002, 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, 2002, 1,036,038 shares, or
9.8% of common stock issued, had been repurchased under this plan.
F - 22
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:
2002 2001 2000
--------- --------- ---------
Weighted average number of common shares
outstanding - basic 9,184,421 8,421,671 8,334,445
Dilutive effect of:
Common stock options 227,765 199,683 198,000
Common stock warrants 66,316 37,948 26,944
--------- --------- ---------
Weighted average number of common shares
outstanding - diluted 9,478,502 8,659,302 8,559,389
========= ========= =========
Common stock options totaling 45,000, 41,535, and 139,736, were not
included in the diluted income per share calculation for the years
ended December 31, 2002, 2001, and 2000, 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 ending December 31 (amounts in thousands):
Year ending December 31:
2003 $52,695
2004 44,282
2005 36,925
2006 23,406
2007 9,131
Thereafter 7,054
-------
173,493
=======
F - 23
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:
2002 2001 2000
-----------------------
Current income tax expense:
Federal $ -- (241) (129)
State (314) (418) (179)
-----------------------
(314) (659) (308)
Deferred income tax benefit (expense):
Federal (2,601) 1,111 258
State (384) 163 50
-----------------------
(2,985) 1,274 308
-----------------------
Total income tax benefit (expense) $(3,299) 615 --
=======================
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):
2002 2001 2000
------------------------
Tax at the federal statutory rate $(2,876) (2,022) (1,413)
State income taxes, net of federal
benefit and adjustment based on filed
returns (423) (487) (275)
Change in valuation allowance,
including revisions for filed returns -- 3,301 1,688
Other -- (177) --
------------------------
Net income tax expense (benefit) $(3,299) 615 --
========================
For income tax purposes, at December 31, 2002, the Company has net
operating loss carryforwards of approximately $11 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 $2 million of the
aforementioned net operating loss carryforwards is subject to an annual
limitation under the provisions of Section 382 of the Internal Revenue
Code.
F - 24
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(9) INCOME TAXES, CONTINUED
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):
2002 2001
--------- --------
Deferred tax assets:
Overhaul and parts replacement cost,
principally due to the accrual method $ 6,598 5,376
Allowance for uncollectible accounts -- 1,399
Net operating loss carryforwards 4,532 6,409
Deferred revenue -- 234
Other 253 545
--------- --------
Total gross deferred tax assets 11,383 13,963
Less valuation allowance (235) (235)
--------- --------
Net deferred tax assets 11,148 13,728
--------- --------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases
and depreciation methods (12,488) (12,509)
Allowance for uncollectible accounts (211) --
Excess of cost over fair value of net assets
acquired (215) --
--------- --------
Total deferred tax liabilities (12,914) (12,509)
--------- --------
Net deferred tax asset (liability) $ (1,766) 1,219
========= ========
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.
(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. The Company also continued
the RMH defined contribution retirement plan which was in place at the
acquisition date. Under the RMH plan, employees may contribute up to
$12,000 annually and the Company matches 30% of the employees'
contributions up to 6% of their annual salaries. Company contributions
totaled approximately $1,598,000, $1,221,000, and $810,000, for the years
ended December 31, 2002, 2001, and 2000, respectively.
F - 25
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(11) RELATED PARTY TRANSACTIONS
In 2002, the Company paid $750,000 to Americas Partners for its services in
connection with the acquisition of RMH. Ralph Bernstein and Morad Tahbaz,
directors of the Company, are partners of Americas Partners. The form of
payment was $477,388 in cash and warrants to purchase 100,000 shares of
Company common stock. The warrants have an exercise price of $5.28 per
share and expire five years from issuance.
(12) COMMITMENTS AND CONTINGENCIES
The Company has entered into various aircraft operating leases under which
it provides residual value guarantees to the lessor. As of December 31,
2002, the undiscounted maximum amount of potential future payments under
the guarantees is $4,156,000. No amounts have been accrued for any
estimated losses with respect to the guarantees, since it is not probable
that the residual value of the aircraft will be less than the amounts
stipulated in the guarantee. The assessment of whether it is probable that
the Company will be required to make payments under the terms of the
guarantee is based on current market data and the Company's actual and
expected loss experience.
Prior to the acquisition, RMH entered into a commitment agreement to
purchase eight aircraft for approximately $16,000,000. As of December 31,
2002, five of the aircraft have been delivered and the deposit and related
note payable associated with this commitment totaled $424,000.
Prior to the acquisition, RMH entered into a commitment agreement to
purchase ten aircraft for approximately $16,600,000. As of December 31,
2002, three of the aircraft have been delivered and the deposit and related
note payable associated with this commitment totaled $593,000. The
remaining seven aircraft will be delivered prior to September 2005.
(13) 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
fourteen states. 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 and medical transport 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.
F - 26
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(13) BUSINESS SEGMENT INFORMATION, CONTINUED
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,
interest expense on debt incurred to finance the RMH acquisition, 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 - 27
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(13) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
-----------------------------------------------------------------------------
2002
External revenue $ 73,210 51,480 5,796 182 -- 130,668
Intersegment revenue -- -- 1,933 -- (1,933) --
-----------------------------------------------------------------------------
Total revenue 73,210 51,480 7,729 182 (1,933) 130,668
Operating expenses 44,257 42,885 6,150 5,135 (1,617) 96,810
Depreciation & amortization 2,848 3,499 149 199 -- 6,695
Bad debt expense 15,586 -- -- -- -- 15,586
Interest expense 1,218 1,008 -- 822 -- 3,048
Interest income (2) (10) -- (19) -- (31)
Loss on extinguishment of debt 101 -- -- -- -- 101
Income tax expense -- -- -- 3,299 -- 3,299
-----------------------------------------------------------------------------
Net income (loss) $ 9,202 4,098 1,430 (9,254) (316) 5,160
=============================================================================
Total assets $ 62,382 N/A N/A 136,177 (2,163) 196,396
=============================================================================
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
=============================================================================
F - 28
(14) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 2002 and 2001 is as
follows (amounts in thousands except per share data):
Quarter
First Second Third Fourth(1)
---------------------------------
2002
Revenue $26,329 27,750 28,908 47,681
Operating income 3,185 2,691 1,948 3,329
Income before income taxes 2,791 2,296 1,565 1,807
Net income 1,703 1,401 955 1,101
Basic income per common share .19 .15 .10 .12
Diluted income per common share .19 .15 .10 .11
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
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.
(1) Includes the effect of the acquisition of RMH.
F - 29
Independent Auditors' Report
----------------------------
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
Under date of March 12, 2003, we reported on the consolidated balance sheets of
Air Methods Corporation and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, which are included in the
Company's Annual Report on Form 10-K for the year 2002. 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.
As discussed in note 1 to the consolidated statements, the Company implemented
Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets,
on January 1, 2002.
KPMG LLP
Denver, Colorado
March 12, 2003
F - 30
AIR METHODS CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Balance at
Beginning Transfers and Balance at
Description of Period Additions (a) Other (c) Deductions (b) End of Period
- -----------------------------------------------------------------------------------------------------------
Allowance for trade receivables
Year ended December 31, 2002 $ 5,673 15,586 11,064 (15,327) 16,996
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
_______________________________
Notes:
(a) Amounts charged to expense.
(b) Bad debt write-offs and charges to allowances.
(c) Beginning allowance balance assumed in RMH acquisition.
See accompanying Independent Auditors' Report.
F - 31