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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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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
- --------------------------------------------------------------------------------
(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: $66,903,000
The number of outstanding shares of Common Stock as of March 22, 2004, was
10,839,343.
Portions of the registrant's definitive proxy statement for its 2004 annual
meeting of stockholders are incorporated by reference into 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 . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 4
Facilities. . . . . . . . . . . . . . . . . . . . . . . . . 4
Equipment and Parts . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 6
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 8
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Results of Operations . . . . . . . . . . . . . . . . . . . 10
Liquidity and Capital Resources . . . . . . . . . . . . . . 15
Outlook for 2004. . . . . . . . . . . . . . . . . . . . . . 18
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . 19
Critical Accounting Policies. . . . . . . . . . . . . . . . 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 23
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . 24
i
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . 25
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . 25
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. The Company provides air medical emergency transport
services under two separate operating models: the Community-Based Model (CBM)
and the Hospital-Based Model (HBM). As of December 31, 2003, the Company's CBM
provided air medical transportation services in 15 states, while its HBM
provided air medical transportation services to hospitals located in 26 states
and 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. In
October 2002, the Company acquired 100% of the membership interest of Rocky
Mountain Holdings, LLC (RMH), a Delaware limited liability company which
conducts both CBM and HBM operations. 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.
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 transportation services
in the St. Louis metropolitan area and surrounding communities since 1987.
Following the acquisition of RMH in October 2002, its CBM operations, known as
LifeNet, were combined with the Company's already existing CBM division. The
division operates 72 helicopters and three fixed wing aircraft under both
Instrument Flight Rules (IFR) and Visual Flight Rules (VFR) in 15 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.
Communications and dispatch operations for all CBM locations are conducted from
the Company's national center in Omaha, Nebraska, or from the regional center in
St. Louis, Missouri. Medical billing and collections are processed from the
Company's offices in San Bernardino, California, and Bountiful, Utah.
In 2003 the Company opened six new CBM locations throughout the U.S. and
converted a base in California from a joint venture to a fully owned operation.
In addition, the Company acquired certain business assets from another air
medical service provider in southeastern Arizona during the second quarter of
2003, resulting in an increase in the number of operating bases in the region
from three to four. In the fourth quarter of 2003, the Company transitioned an
HBM customer in New York to CBM operations, resulting in two new locations for
the division.
1
Hospital-Based Model
The Company's HBM provides hospital clients with medically-equipped helicopters
and airplanes which are generally based at hospitals. 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.
The HBM operations of RMH were integrated into the division following the
acquisition in October 2002. In the first quarter of 2003, the division phased
out fixed wing operations in Charleston, West Virginia, and, in the fourth
quarter of 2003, ceased operations under a contract in Fairfax, Virginia.
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.
Technical Services
The Company's technical services group performs non-destructive component
testing, engine repair, and component overhaul at its headquarters in
metropolitan Denver, Colorado, for both CBM and HBM divisions. 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 technical services
group also provides spare parts procurement and inventory and aircraft
recordkeeping services for the majority of the Company's flight operations.
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) certification.
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.
During 2003, the Company completed the production of eight modular medical
interiors for four commercial customers and began production of 11 HH-60L
Multi-Mission Medevac Systems for the U.S. Army, with delivery to be completed
in 2004. In the fourth quarter of 2003, the Company received a contract for the
production of 21 litter systems for the U.S. Army's Medical Evacuation Vehicle
(MEV), which are expected to be delivered in 2004, and two contracts to provide
spare parts and to research product enhancements for the HH-60L Multi-Mission
Medevac Systems over the next six to nine months.
2
COMPETITION
Competition in the air medical transportation industry comes primarily from
three national operators: CJ Systems, 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, 2003, the Company was continuing the production of 11 HH-60L
units and 21 MEV units for the U.S. Army, with delivery scheduled through the
third quarter of 2004, and had a contract to begin production of a modular
medical interior for a commercial customer. Remaining revenue for all contracts
in process as of December 31, 2003, is estimated at $3.1 million. As of December
31, 2002, the revenue remaining to be recognized on medical interiors and other
products in process was estimated at $940,000.
EMPLOYEES
As of December 31, 2003, the Company had 1,504 full time and 184 part time
employees, comprised of 587 pilots; 328 aviation machinists, airframe and power
plant (A&P) engineers, and other manufacturing/maintenance positions; 482 flight
nurses and paramedics; and 291 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.
In September 2003, the Company's pilots voted to be represented by a collective
bargaining unit, the Office and Professional Employees International Union.
Negotiations on a collective bargaining agreement began in early 2004. Other
employee groups may also elect to be represented by unions in the future.
Although the Company believes that current salary and benefits arrangements are
competitive with others within the industry, the impact of a collective
bargaining agreement on the cost of operations has not yet been determined.
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 and ARCH each hold a Part 135 Air Carrier
Certificate, and Air Methods, Mercy, and ARCH each hold 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, 2003, the Company was aware of one
foreign person who, according to recent public securities filings, is believed
to hold approximately 1.4% of outstanding Common Stock.
3
ITEM 2. PROPERTIES
FACILITIES
The Company leases its headquarters, consisting of approximately 87,000 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
$788,000. Mercy Air's headquarters consist of approximately 50,000 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. 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, 2003, the Company managed and operated a fleet of 174
aircraft, composed of the following:
Number of Number of Number of
Company-Owned Company-Leased Customer-
Type Aircraft (1) Aircraft Owned Aircraft Total
- -------------------------------------------------------------------------
Helicopters:
Bell 206 5 -- -- 5
Bell 222 13 9 -- 22
Bell 230 -- -- 2 2
Bell 407 5 9 5 19
Bell 412 4 3 2 9
Bell 430 -- 1 1 2
Eurocopter AS 350 17 21 3 41
Eurocopter AS 355 1 -- -- 1
Eurocopter BK 117 17 23 -- 40
Eurocopter BO 105 2 3 1 6
Eurocopter EC 130 1 3 -- 4
Eurocopter EC 135 -- 1 3 4
Boeing MD 902 -- 2 -- 2
Sikorsky S 76 -- -- 1 1
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65 75 18 158
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Airplanes:
King Air E 90 1 -- 4 5
King Air B 100 -- 2 -- 2
King Air B 200 1 -- 2 3
Pilatus PC 12 -- 2 4 6
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2 4 10 16
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TOTALS 67 79 28 174
=====================================================
(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.
4
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, 2003.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
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, 2003
----------------------------
Common Stock High Low
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First Quarter. . . . . . . . . $ 6.66 $5.32
Second Quarter . . . . . . . . 8.19 5.72
Third Quarter . . . . . . . . 8.88 6.83
Fourth Quarter . . . . . . . . 9.69 8.16
YEAR ENDED DECEMBER 31, 2002
- ------------------------------
Common Stock High Low
- ------------------------------ ------ -----
First Quarter. . . . . . . . . $ 7.85 $6.04
Second Quarter . . . . . . . . 11.64 7.00
Third Quarter . . . . . . . . 8.76 5.23
Fourth Quarter . . . . . . . . 7.14 5.25
As of March 22, 2004, there were approximately 317 holders of record of the
Company's common stock. The Company estimates that it has approximately 3,800
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.
RECENT SALES OF UNREGISTERED SECURITIES
On December 2, 2003, the Company sold 1.2 million shares of its common stock in
a private placement to institutional investors at $8.00 per share. The Company
used the net proceeds of the financing for general corporate purposes. The
securities offered and sold in the private placement were not registered under
the Securities Act, in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. The Company has filed a registration
statement with the SEC to permit resales of the shares of common stock sold in
the private placement.
6
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 years ended December 31, 2003 and 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,
-----------------------
2003 2002 2001 2000 1999
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STATEMENT OF OPERATIONS DATA:
Revenue $ 242,455 130,668 92,096 75,293 57,258
Operating expenses:
Operating 205,342 106,771 74,597 61,393 45,634
General and administrative 21,550 12,744 9,781 7,854 6,508
Other income (expense), net (7,197) (2,694) (1,770) (1,889) (1,926)
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Income before income taxes 8,366 8,459 5,948 4,157 3,190
Income tax benefit (expense) (3,263) (3,299) 615 - 255
------------------------------------------------------------
Net income $ 5,103 5,160 6,563 4,157 3,445
============================================================
Basic income per common share $ .53 .56 .78 .50 .42
============================================================
Diluted income per common share $ .51 .54 .76 .49 .42
============================================================
Weighted average number of shares
of Common Stock outstanding - basic 9,665,278 9,184,421 8,421,671 8,334,445 8,219,601
============================================================
Weighted average number of shares
of Common Stock outstanding - diluted 10,052,989 9,478,502 8,659,302 8,559,389 8,222,187
============================================================
As of December 31,
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2003 2002 2001 2000 1999
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BALANCE SHEET DATA:
Total assets $ 214,007 196,396 85,557 75,250 62,716
Long-term liabilities 114,657 115,225 34,210 29,885 27,003
Stockholders' equity 60,688 46,218 36,543 29,416 25,140
SELECTED OPERATING DATA
2003 2002 2001 2000 1999
------------------------------------------------------------
FOR YEAR ENDED DECEMBER 31:
CBM patient transports 25,624 12,870 9,212 7,091 3,563
HBM medical missions 46,570 26,367 19,073 17,484 16,534
AS OF DECEMBER 31:
CBM bases 59 48 17 16 8
HBM contracts 43 47 22 22 23
7
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; 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.
OVERVIEW
The Company provides air medical transportation services throughout the United
States and designs, manufactures, and installs medical aircraft interiors and
other aerospace products for domestic and international customers. The Company's
divisions, or business segments, are organized according to the type of service
or product provided and consist of the following:
- - Community-Based Model (CBM) - provides air medical transportation services
to the general population as an independent service. Revenue consists of
flight fees billed directly to patients, their insurers, or governmental
agencies, and cash flow is dependent upon collection from these individuals
or entities. In 2003 the CBM Division generated 60% of the Company's total
revenue, increasing from 56% in 2002 and 50% in 2001.
- - Hospital-Based Model (HBM) - provides air medical transportation services
to hospitals throughout the U.S. under exclusive operating agreements.
Revenue consists of fixed monthly fees (65% of total contract revenue) and
hourly flight fees (35% of total contract revenue) billed to hospital
customers. In 2003 the HBM Division generated 36% of the Company's total
revenue, decreasing from 39% in 2002 and 42% in 2001.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. In 2003 the Products Division generated 3% of
the Company's total revenue, decreasing from 4% in 2002 and 8% in 2001.
See Note 12 to the consolidated financial statements included in Item 8 of this
report for operating results by segment.
The Company believes that the following factors have the greatest impact on its
results of operations and financial condition:
- - FLIGHT VOLUME. Fluctuations in flight volume have a greater impact on CBM
operations than HBM operations because 100% of CBM revenue is derived from
flight fees, as compared to 35% of HBM revenue. By contrast, 64% of the
Company's costs primarily associated with flight operations (including
salaries, aircraft ownership costs, hull insurance, and general and
administrative expenses) are mainly fixed in nature. While flight volume is
affected by many factors, including competition and the distribution of
calls within a market, the greatest single factor has historically been
weather conditions. Adverse weather conditions-such as fog, high winds, or
heavy precipitation-hamper the Company's ability to operate its aircraft
safely and, therefore, result in reduced flight volume. During 2003, the
Company's CBM operations had 916, or 21%, more cancellations as a result of
unfavorable weather conditions than during 2002 for bases which had been in
operation for longer than one year. The increased weather cancellations
were more heavily weighted during the first six months of 2003. Total
patient transports for CBM operations were approximately 25,600 for 2003
compared to approximately 12,900 for 2002. Patient transports for CBM bases
open longer than one year (Same-Base Transports), including RMH bases prior
to acquisition, were approximately 22,000 in 2003 compared to approximately
22,300 in 2002.
8
- - RECEIVABLE COLLECTIONS. The Company responds to calls for air medical
transports without pre-screening the creditworthiness of the patient. For
CBM operations, bad debt expense is estimated during the period the related
services are performed based on historical collection experience. The
provision is adjusted as required based on actual collections in subsequent
periods. Both the pace of collections and the ultimate collection rate are
affected by the overall health of the U.S. economy, which impacts the
number of indigent patients and funding for state-run programs, such as
Medicaid. Medicaid reimbursement rates in many jurisdictions have remained
well below the cost of providing air medical transportation. Effective
November 2002, the Company instituted a price increase of approximately 10%
for its CBM operations. However, net revenue after bad debt expense per
transport increased only 3.4% from 2002 to 2003, partially due to a change
in payer mix caused by the acquisition of RMH. Bad debt as a percentage of
related net flight revenue increased from 21.6% in 2002 to 22.2% in 2003.
The Company believes the decrease in collection rate is driven primarily by
overall economic conditions. Staffing within the billing and collections
department also has a direct impact on the pace of collections, and
timeliness of collections may have an impact on the ultimate collectibility
of receivables. In the first quarter of 2004, the Company increased
staffing in the billing and collections department to address recent
slowdowns in collections.
- - AIRCRAFT MAINTENANCE. Both CBM and HBM operations are directly affected by
fluctuations in aircraft maintenance costs. Proper operation of the
aircraft by flight crews and standardized maintenance practices can help to
contain maintenance costs. Increases in spare parts prices from original
equipment manufacturers (OEM's) tend to be higher for aircraft which are no
longer in production. Three models of aircraft within the Company's fleet,
representing 28% of the total fleet, are no longer in production and are,
therefore, susceptible to price increases which outpace general
inflationary trends. In addition, on-condition components are more likely
to require replacement with age. Total maintenance expense for CBM and HBM
operations increased 88% from 2002 to 2003, while total flight volume for
CBM and HBM operations increased 76% over the same period. The Company
continues to evaluate opportunities to modernize its fleet in order to
enhance long-term control over maintenance costs. Replacement models of
aircraft, however, typically have higher ownership costs than the models
targeted for replacement.
- - COST PRESSURES ON HEALTHCARE INSTITUTIONS. Publicly and privately funded
healthcare institutions both face pressures to reduce the rising cost of
healthcare and to modify or eliminate certain non-core operations as a
result of reductions in funding. Flight programs based at a single hospital
typically require subsidization from other hospital operations. As a
result, a growing number of healthcare institutions are evaluating their
delivery model for air medical transportation services, creating expansion
opportunities for CBM operations. In the third quarter of 2003, the CBM
division commenced operations at a new base in Florida which had previously
been a hospital-based flight program with another vendor. In the fourth
quarter of 2003, one the Company's HBM customers converted its flight
program to the CBM operated by the Company. At the expiration of contracts
in the fourth quarter of 2003 and first quarter of 2004, two other HBM
customers also converted their flight programs to the community-based model
with services provided by another operator. The Company expects the trend
toward conversion of HBM programs to CBM operations to continue as
healthcare institutions recognize the viable alternatives available for
outsourcing.
- - COMPETITIVE PRESSURES FROM LOW-COST PROVIDERS. The Company is recognized
within the industry for its standard of service and its use of cabin-class
aircraft. Many of the Company's regional competitors utilize aircraft with
lower ownership and operating costs and do not require a similar level of
experience for aviation and medical personnel. Reimbursement rates
established by Medicare, Medicaid, and most insurance providers are not
contingent upon the type of aircraft used or the experience of the aviation
and medical personnel. However, the Company believes that higher quality
standards help to differentiate its service from competitors and,
therefore, lead to higher utilization. Deploying multiple aircraft in a
market also serves as a barrier to entry for lower cost providers.
- - EMPLOYEE RELATIONS. In September 2003, the Company's pilots voted to be
represented by a collective bargaining unit. Negotiations on a collective
bargaining agreement began in early 2004. Other employee groups may also
elect to be represented by unions in the future. Although the Company
believes that current salary and benefits arrangements are competitive with
others within the industry, the impact of a collective bargaining agreement
on the cost of operations has not yet been determined.
9
RESULTS OF OPERATIONS
Year ended December 31, 2003 compared to 2002
The Company reported net income of $5,103,000 and income before income taxes of
$8,366,000 for the year ended December 31, 2003, compared to $5,160,000 and
$8,459,000, respectively, for the year ended December 31, 2002. Results for 2003
included twelve months of RMH operations, while 2002 results included only two
and a half months of RMH operations from the acquisition date of October 16,
2002, through the end of the year. Total revenue increased $111,787,000, or
85.6%, in 2003 compared to 2002, primarily due to the RMH acquisition and to the
addition of ten new CBM bases during the year. Because the Company has a high
level of fixed costs, the slight decrease in net income from 2002 to 2003 was
principally attributed to a decrease in flight volume caused by adverse weather
conditions and a decline in collection rates on CBM operations, as discussed
more thoroughly below.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
FLIGHT REVENUE increased $111,153,000, or 90.0%, from $123,534,000 for the year
ended December 31, 2002, to $234,687,000 for the year ended December 31, 2003.
Flight revenue is generated by both HBM and CBM operations and is recorded net
of contractual allowances under agreements with third-party payers (i.e.,
Medicare and Medicaid).
- - CBM - Flight revenue increased $74,204,000, or 102.9%, to $146,325,000.
Total patient transports were approximately 25,700 for 2003 compared to
approximately 12,900 for 2002. The increase in flight revenue was due to
the following:
- Acquisition of RMH in October 2002. Flight revenue for RMH CBM
operations totaled $80,793,000 for 2003 compared to $14,750,000 from
the acquisition date through December 31, 2002.
- Revenue of $11,601,000 from the addition of ten new CBM bases
throughout 2003 and one new base in the second quarter of 2002.
- Price increase of approximately 10% for all CBM operations effective
November 1, 2002.
- Decrease in flight volume for bases open longer than one year.
Excluding the impact of the RMH acquisition and the addition of the
new bases discussed above, total flight volume for CBM operations
decreased 2.1% in 2003, compared to the prior year. The decrease in
flight volume is primarily attributed to adverse weather conditions in
the first half of 2003 which prevented operation of the aircraft.
- - HBM - Flight revenue increased $36,949,000, or 71.9%, to $88,362,000 for
the following reasons:
- Acquisition of RMH. Flight revenue for RMH's HBM operations totaled
$44,089,000 for 2003 compared to $8,946,000 from the acquisition date
through December 31, 2002.
- Incremental revenue of approximately $939,000 generated in 2003 by the
addition of one new contract in the second quarter of 2002 and one in
the third quarter of 2002.
- Annual price increases in the majority of contracts based on changes
in the Consumer Price Index.
- Flight volume for all contracts, excluding RMH contracts and the new
contracts discussed above, decreased 2.0% for 2003 compared to the
prior year.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $44,193,000, or 102.9%, to $87,151,000 for the
year ended December 31, 2003, compared to 2002. Changes by business segment are
as follows:
- - CBM - Flight center costs increased $30,208,000, or 130.8%, to $53,301,000
for the following reasons:
- Acquisition of RMH. Flight center costs related to RMH CBM operations
totaled approximately $28,868,000 in 2003 compared to $5,108,000 from
the acquisition date through December 31, 2002.
- Approximately $5,147,000 for the addition of personnel and facilities
for the new base locations described above.
- Increases in salaries for merit pay raises.
- Increases in the cost of medical and workers compensation insurance
premiums paid by the Company.
10
- - HBM - Flight center costs increased $13,985,000, or 70.4%, to $33,850,000
primarily due to the following:
- Acquisition of RMH. Flight center costs related to RMH HBM operations
totaled approximately $16,073,000 for 2003 compared to $2,964,000 from
the acquisition date through December 31, 2002.
- Incremental costs of $347,000 in 2003 for the addition of personnel
and facilities for the new base locations described above.
- Increases in salaries for merit pay raises.
AIRCRAFT OPERATING EXPENSES increased $27,005,000, or 90.7%, for the year ended
December 31, 2003, in comparison to 2002. Aircraft operating expenses consist of
fuel, insurance, and maintenance costs and generally are a function of the size
of the fleet, the type of aircraft flown, and the number of hours flown. The
increase in costs is due to the following:
- - Acquisition of RMH. Expenses for the RMH fleet totaled $25,009,000 for the
year ended December 31, 2003, compared to $4,317,000 from the acquisition
date through December 31, 2002.
- - Addition of eleven aircraft for CBM operations and three aircraft for HBM
operations in late 2002 or in 2003, resulting in an increase of
approximately $1,791,000 for the year ended December 31, 2003.
- - Addition of personnel in aircraft overhaul, avionics repair, purchasing,
and aircraft records departments to support the increase in the size of the
fleet resulting from the RMH acquisition.
- - Decrease of approximately 15% in hull insurance rates effective July 2003.
- - Annual price increases in the cost of spare parts and overhauls.
AIRCRAFT RENTAL EXPENSE increased $5,668,000, or 91.8%, for the year ended
December 31, 2003, in comparison to the year ended December 31, 2002. Expense
for RMH aircraft under operating leases totaled $6,174,000 for the year ended
December 31, 2003, compared to $1,185,000 from the acquisition date through
December 31, 2002. Rental expense related to 11 other leased aircraft added to
the Company's fleet totaled $903,000 for the year ended December 31, 2003.
BAD DEBT EXPENSE increased $16,933,000, or 108.6%, for the year ended December
31, 2003, compared to 2002, due primarily to the acquisition of RMH. Bad debt
related to RMH CBM operations totaled $20,702,000 for the year ended December
31, 2003, compared to $4,829,000 from the date of acquisition through December
31, 2002. Bad debt expense as a percentage of related net flight revenue
increased from 21.6% in 2002 to 22.2% in 2003. Flight revenue is recorded net of
Medicare/Medicaid discounts. The total allowance for expected uncollectible
amounts, including contractual discounts and bad debts, increased from 37.6% of
related gross flight revenue for the year ended December 31, 2002, to 43.6% in
the year ended December 31, 2003. The increase in total allowances is related
primarily to the acquisition of RMH, whose collection experience had
historically been less favorable than other CBM operations owned by the Company,
and to a decrease in the collection rate for other CBM operations. The Company
believes the decrease in collection rates is due to general recessionary trends
in the economy. Bad debt expense related to HBM operations and Products Division
was not significant in either 2003 or 2002.
MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS increased $1,007,000, or 17.4%, from
$5,796,000 for the year ended December 31, 2002, to $6,803,000 for the year
ended December 31, 2003. Significant projects in 2003 included the manufacture
of eight modular medical interiors for four commercial customers and eleven
Multi-Mission Medevac Systems for the U. S. Army's HH-60L Black Hawk helicopter.
Revenue by product line for the year ended December 31, 2003, was as follows:
- - $2,927,000 - manufacture and installation of modular, medical interiors
- - $2,782,000 - manufacture of multi-mission interiors
- - $1,094,000 - design and manufacture of other aerospace and medical
transport products
11
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
- - $2,536,000 - design and manufacture of other aerospace and medical
transport products
COST OF MEDICAL INTERIORS AND PRODUCTS increased by 11.4% for the year ended
December 31, 2003, as compared to the previous year, reflecting the change in
sales volume over the same period. The cost of medical interiors and products
also includes certain fixed costs, such as administrative salaries and
facilities rent, which do not vary with volume of sales.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $4,614,000, or 68.9%, for the
year ended December 31, 2003. Depreciation related to assets added as part of
the RMH acquisition totaled $4,915,000 for the year ended December 31, 2003,
compared to $983,000 from the date of the acquisition through December 31, 2002.
The remainder of the increase for the year is related to the purchase of rotable
and other equipment to support the expanded fleet and new bases of operation, as
well as the refurbishment of medical interiors for existing aircraft.
GENERAL AND ADMINISTRATIVE EXPENSES increased $8,806,000, or 69.1%, for the year
ended December 31, 2003, compared to the year ended December 31, 2002,
reflecting the impact of the RMH transaction. General and administrative
expenses include executive management, accounting and finance, billing and
collections, human resources, aviation management, and pilot training. On
average, the Company doubled the number of personnel in each area to manage the
expanded operations with the acquisition of RMH and the growth outlined above in
the discussion of flight revenue. Also included in general and administrative
expenses are program administration costs for CBM operations. Program
administration costs for RMH's CBM operations totaled $3,094,000 for the year
ended December 31, 2003.
INTEREST EXPENSE increased $5,204,000, or 170.7%, for the year ended December
31, 2003, compared to 2002, primarily as a result of the RMH acquisition.
Interest expense related to debt assumed or incurred in conjunction with the RMH
acquisition totaled $6,847,000 for the year ended December 31, 2003, compared to
$1,303,000 from the acquisition date through December 31, 2002.
The Company recorded INCOME TAX EXPENSE of $3,263,000 in 2003 and $3,299,000 in
2002, both at an effective rate of 39%. For income tax purposes, at December 31,
2003, the Company has net operating loss carryforwards of approximately $18
million, expiring at various dates through 2023. As of December 31, 2003, 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, 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 OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
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.
- - 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.
12
- 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.
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 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. 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.
13
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.
MEDICAL INTERIORS AND PRODUCTS
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
- - $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.
GENERAL EXPENSES
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.
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. 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.
14
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $43,682,000 as of December 31, 2003, compared
to $28,575,000 at December 31, 2002. The change in working capital position is
primarily attributable to the following:
- - Increase of $20,669,000 in receivables consistent with the increased
revenue for CBM and HBM divisions resulting from the acquisition of RMH and
new base expansions. In addition, receivables related to CBM operations
increased as a result of a slowdown in collections. The Company attributes
the slowdown primarily to the impact of understaffing in the billing and
collections department and general economic factors.
- - Increase of $1,546,000 in costs and estimated earnings in excess of
billings on uncompleted contracts. The Company's contract in progress for
11 HH60L units limited billings to 80% of incurred costs until shipments of
completed products begin. The Company began shipping completed components
in the first quarter of 2004.
- - Decrease of $2,860,000 in inventories, the majority of which was due to an
adjustment of the carrying value of the spare parts inventory acquired from
RMH and was reflected in the final purchase price allocation. At
acquisition, the Company identified slow-moving or obsolete inventory and
attempted to dispose of those items through a third party. The reduction in
value represents the net amount not recovered through sale and resulted in
an increase in goodwill related to the RMH acquisition.
CASH REQUIREMENTS
Debt and Other Long-term Obligations
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
-------------------------------------------------------------------------
2004 $ 3,044 158 2,886 6,110 15,849 24,845
2005 229 7 222 5,049 15,676 20,947
2006 21 2 19 23,625 15,094 38,738
2007 10 -- 10 28,336 14,150 42,496
2008 -- -- -- 15,142 13,097 28,239
Thereafter -- -- -- 4,528 35,018 39,546
-------------------------------------------------------------------------
Total $ 3,304 167 3,137 82,790 108,884 194,811
=========================================================================
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:
- - $3,609,000 in 2004
- - $17,949,000 in 2006
- - $24,577,000 in 2007
- - $10,846,000 in 2008
- - $1,918,000 in 2009
15
OFF-BALANCE SHEET ARRANGEMENTS
Residual Value Guarantees
The Company has entered into various aircraft operating leases under which it
provides residual value guarantees to the lessor. As of December 31, 2003, 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.
Aircraft Purchase Commitments
Prior to the acquisition, RMH entered into a commitment agreement to take
delivery of eight aircraft for approximately $16,000,000. As of December 31,
2003, one aircraft with a value of approximately $3,500,000 remained to be
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 take
delivery of ten aircraft for approximately $16,600,000. As of December 31, 2003,
four aircraft with a total value of approximately $6,500,000 remained to be
delivered and the deposit and related note payable associated with this
commitment totaled $211,000.
In the first quarter of 2004, the Company entered into a commitment to purchase
nine EC135 helicopters for approximately $32,000,000 in 2004.
Typically the Company has financed the aircraft acquired under these commitments
with operating lease agreements.
SOURCES AND USES OF CASH
The Company had cash and cash equivalents of $5,574,000 as of December 31, 2003,
compared to $1,410,000 at December 31, 2002. Cash generated by operations
decreased to $4,403,000 in 2003 from $11,320,000 in 2002 primarily due to the
increase in receivables, net of bad debt expense, described above.
Cash used for investing activities totaled $8,197,000 in 2003, compared to
$39,144,000 in 2002, which included the impact of the RMH acquisition.
Significant acquisitions in 2003 and 2002 consisted primarily of medical
interior and avionics installations, upgrades for existing equipment, and
rotable equipment.
Financing activities generated $7,958,000 in 2003, compared to $26,396,000 in
2002. In 2003, the Company issued 1.2 million shares of common stock at $8 per
share in a private placement transaction. Net proceeds, after syndication and
other costs, were $8,855,000 and were used primarily to fund current operations.
The Company used the proceeds from new note agreements originated in 2003 to
refinance existing debt with higher interest rates and to fund the acquisition
of new software systems projected for implementation in 2004. Primary uses of
cash in both 2003 and 2002 consisted of payments for long-term debt and capital
lease obligations. 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.
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 1%
if the termination occurs prior to October 16, 2005.
16
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 the lenders 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, 2003, the weighted average interest rate on the
outstanding balance against the line was 3.72%. 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, 2003,
approximately $31,071,000 was available under the credit facility, and
$15,201,000 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, 2003, the Company was in
compliance with or had received waivers for non-compliance with the covenants of
the credit facility.
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 January
1, 2005, and prepayments after January 1, 2005, 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, 2003, the Company was in
compliance with the covenants.
Payment obligations under the subordinated notes 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.
Under an amendment to the agreement signed in November 2003, the Company may be
assessed a one-time fee if consolidated Earnings before interest, taxes,
depreciation, and amortization (EBITDA), as defined in the agreement, for the
year ending December 31, 2004, is less than $34 million. The maximum fee would
be $500,000 if EBITDA is less than $30 million and reduces by $100,000 for each
$1 million incremental increase in EBITDA above $30 million.
17
Other Notes
In February 2003 the Company originated notes payable totaling $2,490,000 with
interest at LIBOR plus 2.50% to refinance mortgages on buildings in St. Louis,
Missouri, and Provo, Utah. The notes are payable through February 2008.
In December 2003 the Company originated a note payable of $4,818,000 with
interest at 5.51% and a note payable of $926,000 with interest at 5.49% to
refinance existing debt with higher interest rates and to fund the acquisition
of computer hardware and software in anticipation of systems integration
scheduled for 2004. In December 2003, the Company also negotiated a decrease in
interest rates from a weighted average rate of 7.67% to a weighted average rate
of 5.58% on $5,148,000 of debt.
New Community-based Operations
Opening a new community-based operation typically requires an investment in an
additional aircraft, aviation and medical personnel, and crew quarters. The
Company may take possession of the additional aircraft up to three months prior
to the commencement of operations in order to retrofit the aircraft for medical
transport. Staff may also be hired a month in advance of the operation start
date. Because of the delay between date of transport and collection of
receivables from the patients or their insurers, new community-based operations
may not produce positive cash flow during at least the first three months of
operation.
Other Sources
As of December 31, 2003, the Company held unencumbered aircraft with a net book
value of $8.7 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 $15,870,000 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 2004
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 Michigan and Virginia and
closed one location in Florida during the first quarter of 2004. The location in
Florida was closed due to low flight volume and low collection rates. The
Company expects to open two additional locations in the Midwest during the
second quarter of 2004. CBM flight volume at all other locations is expected to
be consistent during 2004 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
In the fourth quarter of 2003, one HBM contract converted to CBM operations. The
Company also discontinued service under one contract in Virginia in the fourth
quarter of 2003 and under one in New Mexico in the first quarter of 2004. In
March 2004, the Company began operations under a five-year contract with a new
customer in Florida. Four other hospital contracts are due for renewal in 2004.
The Company expects 2004 flight activity for continuing hospital contracts to
remain consistent with historical levels attained by the Company and RMH.
18
Products Division
As of December 31, 2003, the Company was continuing the production of 11 HH-60L
units and 21 MEV units for the U.S. Army, with delivery scheduled through the
third quarter of 2004, and had a contract to begin production of a modular
medical interior for a commercial customer. Remaining revenue for all contracts
in process as of December 31, 2003, is estimated at $3.1 million.
The current U.S. Army Aviation Modernization Plan defines a requirement for 180
HH-60L Multi-Mission Medevac units in total over an unspecified number of years.
The Company has already completed 15 HH-60L units under the program, in addition
to the 11 currently under contract, and expects to receive a contract for 4
additional units in 2004. The U.S. Army has also forecasted a requirement for a
total of 118 MEV units over 4 years; the Company has previously delivered 42
units, in addition to the 21 units currently under contract. There is no
assurance that orders for additional units will be received in future periods.
All Segments
In 2004 the Company expects to implement new software for several major
information technology systems and to upgrade the associated hardware for a
total cost of approximately $4.5 million. The majority of the cost is expected
to be financed through capital and operating lease agreements.
There can be no assurance that the Company will continue to maintain flight
volume or current levels of collections on receivables for CBM operations, renew
operating agreements for its HBM operations, or generate new profitable
contracts for the Products Division.
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 2004" and
those described below.
- - Highly leveraged balance sheet - The Company is obligated under debt
facilities providing for up to approximately $105.7 million of
indebtedness, of which approximately $85.9 million was outstanding at
December 31, 2003. 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 convenants 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. Given factors beyond the Company's
control, such as interruptions in operations from unusual weather patterns
not included in current projections, there can be no assurance that the
Company will be able to remain in compliance with financial covenants in
the future, or that, in the event of non-compliance, the Company will be
able to obtain waivers from the lenders, or that to obtain such waivers,
the Company will not be required to pay lenders significant cash or equity
compensation.
19
- - Flight volume - All CBM revenue and approximately 35% of HBM revenue is
dependent upon flight volume. Approximately 30% of the Company's total
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 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.
- - Employee unionization - In September 2003, the Company's pilots voted to be
represented by a collective bargaining unit, the Office and Professional
Employees International Union. Negotiations on a collective bargaining
agreement began in early 2004. Other employee groups may also elect to be
represented by unions in the future. Although the Company believes that
current salary and benefits arrangements are competitive with others within
the industry, the impact of a collective bargaining agreement on the cost
of operations has not yet been determined.
- - 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.
- - 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. Changes
in estimated contractual allowances and bad debts are recognized based on
actual collections in subsequent periods. 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. A significant or
sustained downturn in the U.S. economy could have an adverse impact on the
Company's bad debt expense.
- - 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, hospital 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 37% of any increases in hull and liability insurance may be
passed through to the Company's HBM 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.
20
- - 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, 2003, the
Company was aware of one foreign person who, according to recent public
securities filings, is believed to hold approximately 1.4% 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.
- - Acquisitions and integration - The Company has grown significantly through
acquisitions in the past and will continue to pursue acquisitions in the
future. 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.
Acquisitions 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 past or future acquisitions,
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 acquisitions to be inappropriately priced.
- - 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.
- - Dependence on third party suppliers - The Company currently obtains a
substantial portion of its helicopter spare parts and components from Bell
and 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 monthly and hourly flight fees billed to
its HBM customers are generally limited to changes in the consumer price
index. As a result, an unusually high increase in the price of parts may
not be fully passed on to the Company's HBM customers.
- - 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.
- - Employee recruitment and retention - An important aspect of the Company's
operations is the ability to hire and retain employees who have advanced
aviation, nursing, and other technical skills. In addition, hospital
contracts typically contain minimum certification requirements for pilots
and mechanics. Employees who meet these standards are in great demand and
are likely to remain a limited resource in the foreseeable future. If the
Company is unable to recruit and retain a sufficient number of these
employees, the ability to maintain and grow the business could be
negatively impacted.
21
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, aircraft overhaul costs, and depreciation and residual
values. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition
Fixed flight fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the terms of the agreements. Flight revenue relating
to patient transports is recognized upon completion of the services. Revenue and
accounts receivable are recorded net of estimated contractual allowances under
agreements with third-party payers. Estimates of contractual allowances are
initially determined based on historical discount percentages for Medicare and
Medicaid patients and adjusted periodically based on actual discounts. If actual
discounts realized are more or less than those projected by management,
adjustments to contractual allowances may be required. Based on CBM flight
revenue for the year ended December 31, 2003, a change of 1% in the percentage
of estimated contractual discounts would have resulted in a change of
approximately $2,000,000 in flight revenue.
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.
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. There can be no guarantee
that the Company will continue to experience the same collection rates that it
has in the past. Based on CBM net flight revenue for the year ended December 31,
2003, a change of 1% in the percentage of estimated uncollectible accounts would
have resulted in a change of approximately $1,400,000 in bad debt expense.
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 increases income tax expense. 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
22
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.
Depreciation and Residual Values
In accounting for long-lived assets, the Company makes estimates about the
expected useful lives, projected residual values and the potential for
impairment. Estimates of useful lives and residual values of aircraft are based
upon actual industry experience with the same or similar aircraft types and
anticipated utilization of the aircraft. Changing market prices of new and used
aircraft, government regulations and changes in the Company's maintenance
program or operations could result in changes to these estimates. Long-lived
assets are evaluated 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.
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. 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, most of which have fixed interest rates, except $15,201,000
outstanding against the line of credit and $2,326,000 in notes payable. Based on
the amounts outstanding at December 31, 2003, the annual impact of a 1% change
in interest rates would be approximately $175,000. Interest rates on these
instruments approximate current market rates as of December 31, 2003.
Periodically the Company enters into interest rate risk hedges to minimize
exposure to the effect of an increase in interest rates.
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.
23
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
or submitted to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Commission's rules and forms,
and that information is accumulated and communicated to management, including
the principal executive and financial officers (referred to in this report as
the Certifying Officers), as appropriate to allow timely decisions regarding
required disclosure. Management evaluated, with the participation of the
Certifying Officers, the effectiveness of disclosure controls and procedures as
of December 31, 2003, pursuant to Rule 13a-15(b) under the Exchange Act. Based
on that evaluation, the Certifying Officers have concluded that, as of December
31, 2003, the Company's disclosure controls and procedures were effective.
There were no significant changes in the Company's internal controls over
financial reporting that occurred during the most recently completed fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
In 2004, the Company expects to upgrade its hardware and software systems
relating to finance and accounting, billing and collections, inventory,
purchasing, and dispatch and communications and is monitoring the progress of
the upgrades.
24
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 29, 2004, for the
Annual Meeting of Stockholders to be held June 17, 2004.
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 29, 2004, for the
Annual Meeting of Stockholders to be held June 17, 2004.
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 29, 2004, for the
Annual Meeting of Stockholders to be held June 17, 2004.
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 29, 2004, for the
Annual Meeting of Stockholders to be held June 17, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 29, 2004, for the
Annual Meeting of Stockholders to be held June 17, 2004.
25
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, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
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, 2003, 2002, and 2001
All other supporting schedules have been omitted because the
information required is included in the financial statements or
notes thereto or have been omitted as not applicable or not
required.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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.8
3.1 Certificate of Incorporation1
3.2 Amendments to Certificate of Incorporation2
3.3 By-Laws as Amended
4.1 Specimen Stock Certificate2
4.2 Common Stock Purchase Warrant, dated October 16, 2002,
between Air Methods Corporation and Prudential Capital
Partners Management Fund, L.P.8
4.3 Common Stock Purchase Warrant, dated October 16, 2002,
between Air Methods Corporation and Prudential Capital
Partners, L.P8
4.4 Form of Common Stock Purchase Agreement, dated November 26,
20039
10.1 1995 Air Methods Corporation Employee Stock Option Plan4
10.2 Amendment to 1995 Air Methods Corporation Employee Stock
Option Plan6
10.3 Nonemployee Director Stock Option Plan, as amended5
IV-1
10.4 Equity Compensation Plan for Nonemployee Directors, adopted
March 12, 19933
10.5 Employment Agreement between the Company and Aaron D. Todd,
dated July 1, 20037
10.6 Employment Agreement between the Company and David L.
Dolstein, dated January 1, 20037
10.7 Employment Agreement between the Company and Neil M. Hughes,
dated January 1, 20037
10.8 Consulting Agreement between the Company and George W.
Belsey, dated April 15, 20037
10.9 Employment Agreement between the Company and Trent J.
Carman, dated April 28, 20037
10.10 Employment Agreement between the Company and Sharon J.
Keck, dated January 1, 20037
10.11 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.8
10.12 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.8
10.13 Fourth Amendment/Waiver dated November 12, 2003, to
Securities Purchase Agreement 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. and Prudential
Capital Partners Management Fund, L.P7
10.14 Stockholders' Agreement by and between Air Methods
Corporation, Prudential Capital Partners, L.P.; and
Prudential Capital Partners Management Fund, L.P.8
10.15 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.8
10.16 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.8
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
31.1 Chief Executive Officer Certification adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
IV-2
32 Certification adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
Current Report on Form 8-K dated December 3, 2003, regarding the
Company's issuance of common stock in a private placement transaction.
- --------------------------
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 Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, and incorporated herein by reference.
7 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 16, 2002, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 3, 2003, 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 30, 2004 By: /s/Aaron D. Todd
-------------------- ------------------------------------
Aaron D. Todd
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/ Aaron D. Todd Chief Executive Officer March 30, 2004
- -----------------
Aaron D. Todd
/s/Trent J. Carman Chief Financial Officer March 30, 2004
- ------------------
Trent J. Carman Secretary and Treasurer
/s/ Sharon J. Keck Chief Accounting Officer March 30, 2004
- ------------------
Sharon J. Keck
/s/ George W. Belsey Chairman of the Board March 30, 2004
- --------------------
George W. Belsey
/s/ Ralph J. Bernstein Director March 30, 2004
- ----------------------
Ralph J. Bernstein
/s/ Samuel H. Gray Director March 30, 2004
- ------------------
Samuel H. Gray
/s/ Carl H. McNair, Jr. Director March 30, 2004
- -----------------------
Carl H. McNair, Jr.
/s/ Lowell D. Miller Director March 30, 2004
- --------------------
Lowell D. Miller, Ph.D.
/s/ Donald R. Segner Vice-Chairman of the Board March 30, 2004
- --------------------
Donald R. Segner
/s/ Morad Tahbaz Director March 30, 2004
- ----------------
Morad Tahbaz
/s/Paul H. Tate Director March 30, 2004
- ---------------
Paul H. Tate
IV-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Financial Statements
- ---------------------------------
CONSOLIDATED BALANCE SHEETS,
December 31, 2003 and 2002. . . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 2003, 2002, and 2001 . . . . . . . . . . F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 2003, 2002, and 2001 . . . . . . . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 2003, 2002, and 2001 . . . . . . . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . F-9
Schedules
- ---------
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001 . . . . . . . . . . F-29
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-5
Independent Auditors' Report
----------------------------
BOARD OF DIRECTORS
AIR METHODS CORPORATION:
We have audited the accompanying consolidated balance sheets of Air Methods
Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Denver, Colorado
March 8, 2004
F-1
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------
2003 2002
--------- --------
ASSETS
- ------------------------
Current assets:
Cash and cash equivalents $ 5,574 1,410
Current installments of notes receivable 58 45
Receivables:
Trade (note 4) 82,786 54,814
Less allowance for doubtful accounts (23,220) (16,996)
--------- --------
59,566 37,818
Other 3,420 4,499
--------- --------
62,986 42,317
Inventories (note 4) 9,143 12,003
Work-in-process on medical interior and products contracts 145 203
Assets held for sale 431 3,242
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3) 2,249 703
Deferred tax asset (note 8) 105 1,684
Prepaid expenses and other current assets 1,653 1,921
--------- --------
Total current assets 82,344 63,528
--------- --------
Property and equipment (notes 4 and 5):
Land 190 190
Flight and ground support equipment 149,568 145,715
Buildings and office equipment 10,436 8,951
--------- --------
160,194 154,856
Less accumulated depreciation and amortization (47,117) (36,551)
--------- --------
Net property and equipment 113,077 118,305
Goodwill (note 2) 6,485 4,291
Notes and other receivables, less current installments 1,426 124
Other assets, net of accumulated amortization of $1,347 and $720 at
December 31, 2003 and 2002, respectively 10,675 10,148
--------- --------
Total assets $214,007 196,396
========= ========
(Continued)
F-2
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------
2003 2002
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
Current liabilities:
Notes payable $ -- 2,604
Current installments of long-term debt (note 4) 6,110 5,604
Current installments of obligations under capital leases (note 5) 2,886 737
Accounts payable 4,821 4,846
Accrued overhaul and parts replacement costs 9,127 8,657
Deferred revenue 2,898 1,258
Billings in excess of costs and estimated earnings on uncompleted contracts
(note 3) 174 530
Accrued wages and compensated absences 6,015 5,417
Other accrued liabilities 6,631 5,300
--------- ---------
Total current liabilities 38,662 34,953
Long-term debt, less current installments (note 4) 76,680 77,247
Obligations under capital leases, less current installments (note 5) 251 3,150
Accrued overhaul and parts replacement costs 28,614 25,871
Deferred income taxes (note 8) 5,151 3,450
Other liabilities 3,961 5,507
--------- ---------
Total liabilities 153,319 150,178
--------- ---------
Stockholders' equity (note 6):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares; issued
10,817,594 and 9,488,679 shares at December 31, 2003 and 2002, respectively 649 569
Additional paid-in capital 64,413 55,127
Accumulated deficit (4,374) (9,477)
Treasury stock at par, 15,700 common shares at December 31, 2002 -- (1)
--------- ---------
Total stockholders' equity 60,688 46,218
--------- ---------
Commitments and contingencies (notes 4, 5, 9, and 11)
Total liabilities and stockholders' equity $214,007 $196,396
========= =========
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
------------------------
2003 2002 2001
------------------------ ---------- ----------
Revenue:
Flight revenue (note 7) $ 234,687 123,534 82,288
Sales of medical interiors and products 6,803 5,796 7,655
Parts and maintenance sales and services 942 1,338 2,042
Gain on disposition of assets, net 23 -- 111
------------------------ ---------- ----------
242,455 130,668 92,096
------------------------ ---------- ----------
Operating expenses:
Flight centers 87,151 42,958 28,288
Aircraft operations 56,776 29,771 20,222
Aircraft rental (note 5) 11,843 6,175 3,772
Cost of medical interiors and products sold 4,766 4,280 5,556
Cost of parts and maintenance sales and services 978 1,279 1,806
Depreciation and amortization 11,309 6,695 5,239
Bad debt expense 32,519 15,586 9,714
Loss on disposition of assets, net -- 27 ---
General and administrative 21,550 12,744 9,781
------------------------ ---------- ----------
226,892 119,515 84,378
------------------------ ---------- ----------
Operating income 15,563 11,153 7,718
Other income (expense):
Interest expense (8,252) (3,048) (1,945)
Interest and dividend income 143 31 100
Loss on extinguishment of debt -- (101) --
Other, net 912 424 75
------------------------ ---------- ----------
Income before income taxes 8,366 8,459 5,948
Income tax benefit (expense) (note 8) (3,263) (3,299) 615
------------------------ ---------- ----------
Net income $ 5,103 5,160 6,563
======================== ========== ==========
Basic income per common share (note 6) $ .53 .56 .78
======================== ========== ==========
Diluted income per common share (note 6) $ .51 .54 .76
======================== ========== ==========
Weighted average number of common shares outstanding - basic 9,665,278 9,184,421 8,421,671
======================== ========== ==========
Weighted average number of common shares outstanding - diluted 10,052,989 9,478,502 8,659,302
======================== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(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, 2001 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
Issuance of common shares in private
offering, net of syndication costs of
$745 (note 6) 1,200,000 72 -- -- 8,783 -- 8,855
Issuance of common shares for options
exercised and services rendered 163,776 10 -- -- 668 -- 678
Purchase of treasury shares -- -- 19,161 (1) (165) -- (166)
Retirement of treasury shares (34,861) (2) (34,861) 2 -- -- --
Net income -- -- -- -- -- 5,103 5,103
-----------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2003 10,817,594 $ 649 -- $ -- 64,413 (4,374) 60,688
=============================================================================
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
------------------------------
2003 2002 2001
----------- -------- -------
Cash flows from operating activities:
Net income $ 5,103 5,160 6,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 11,309 6,695 5,239
Bad debt expense 32,519 15,586 9,714
Deferred income tax expense (benefit) 3,280 2,985 (1,274)
Common stock options and warrants issued for services 75 40 95
Loss on extinguishment of debt -- 101 --
Loss (gain) on disposition of assets (23) 27 (111)
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in receivables (53,955) (21,279) (12,808)
Decrease (increase) in inventories 1,592 206 (285)
Decrease (increase) in prepaid expenses and other current assets 708 437 (59)
Decrease (increase) in work-in-process on medical interior and products
contracts and costs in excess of billings (1,521) 176 (857)
Increase (decrease) in accounts payable and other accrued liabilities 80 (2,023) 362
Increase in accrued overhaul and parts replacement costs 4,546 2,222 644
Increase (decrease) in deferred revenue, billings in excess of costs, and other
liabilities 690 987 (521)
--------- -------- --------
Net cash provided by operating activities 4,403 11,320 6,702
--------- -------- --------
Cash flows from investing activities:
Acquisition of net assets of Rocky Mountain Holdings, LLC (note 2) -- (32,127) --
Acquisition of property and equipment (7,996) (5,017) (4,106)
Proceeds from disposition and sale of equipment and assets held for sale 910 845 210
Increase in notes and other receivables and other assets, net (1,111) (2,845) (6)
--------- -------- --------
Net cash used by investing activities (8,197) (39,144) (3,902)
--------- -------- --------
(Continued)
F-6
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- ----------------------
Year Ended December 31
----------------------------
2003 2002 2001
--------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 9,458 3,131 1,263
Payments for purchases of common stock (166) (1,127) (1,021)
Net borrowings (payments) under lines of credit 2,647 12,554 (1,000)
Proceeds from long-term debt 8,235 30,670 2,700
Payments of long-term debt (11,455) (18,495) (5,678)
Payments of capital lease obligations (761) (337) (333)
--------- -------- -------
Net cash provided (used) by financing activities 7,958 26,396 (4,069)
--------- -------- -------
Increase (decrease) in cash and cash equivalents 4,164 (1,428) (1,269)
Cash and cash equivalents at beginning of year 1,410 2,838 4,107
Cash and cash equivalents at end of year $ 5,574 1,410 2,838
========= ======== =======
Interest paid in cash during the year $ 7,459 2,415 1,974
========= ======== =======
Income taxes paid in cash during the year $ 46 1,035 365
========= ======== =======
(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, 2003, the Company settled notes payable totaling
$2,604 in exchange for the aircraft securing the debt. The Company also entered
into a note payable of $516 to finance insurance policies.
In the year ended December 31, 2003, the Company sold a hangar in exchange for a
note receivable totaling $315.
In the year ended December 31, 2003, the Company entered into a capital lease
obligation of $11 to finance the acquisition of telephone equipment.
In the year ended December 31, 2003, the Company made adjustments to the
preliminary purchase price allocation related to the acquisition of Rocky
Mountain Holdings, LLC (RMH), which increased goodwill by $2,194,000. See Note 2
for further detail on the adjustments.
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.
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 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, aircraft overhaul costs
and depreciation and residual values. 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 $377,000 and
$141,000 at December 31, 2003 and 2002, 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. 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
Hangars, 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:
Estimated
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
The Company accounts for goodwill under Financial Accounting Standards
Board (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 did not recognize any losses related to impairment
of existing goodwill during 2003.
F-10
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The following table reconciles net income for the year ended December 31,
2001, to pro forma net income excluding the amortization of goodwill
(amounts in thousands, except share and per share amounts).
Reported net income $ 6,563
Amortization of goodwill 188
------------
Adjusted net income $ 6,751
============
Basic income per common share $ .80
============
Diluted income per common share $ .78
============
Weighted average number of common
shares outstanding - basic 8,421,671
============
Weighted average number of common
shares outstanding - diluted 8,659,302
============
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, 2003, assets
held for sale consisted of one aircraft, which the Company intends to sell.
Revenue Recognition and Uncollectible Receivables
Fixed fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the terms of the agreements. Revenue relating to
emergency flights is recognized upon completion of the services. Revenue
and accounts receivable are recorded net of estimated contractual
allowances under agreements with third-party payers. Uncollectible trade
receivables are charged to operations using the allowance method. Estimates
of contractual allowances and uncollectible receivables are initially
determined based on historical collection rates and adjusted periodically
based on actual collections.
F-11
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(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):
2003 2002 2001
---- ---- ----
Net income:
As reported $ 5,103 5,160 6,563
Less additional compensation expense,
net of tax effect (319) (736) (82)
-------- ------- -------
Pro forma $ 4,784 4,424 6,481
======== ======= =======
Basic income per share:
As reported $ .53 .56 .78
Pro forma .49 .48 .77
Diluted income per share:
As reported $ .51 .54 .76
Pro forma .49 .46 .74
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 2003, 2002, and 2001, respectively: dividend
yield of 0% for all years; expected volatility of 32%, 57%, and 39%;
risk-free interest rates of 2.4%, 1.8%, and 4.0%; and expected lives of 3
years for all years. The weighted average fair value of options granted
during the years ended December 31, 2003, 2002, and 2001, was $2.03, $2.64,
and $1.46, 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
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(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.
(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 $1,300,000 of additional consideration over the next nine
years based on actual collections against certain receivables. The original
earn-out amount of $2,600,000 was reduced in 2003 as a result of the
forfeiture by one of the sellers of rights under the earn-out provision in
lieu of payment to the Company for a previously determined adjustment to
the purchase price. The acquisition was financed primarily by the issuance
of $23 million in subordinated notes and by draws against a $35 million
revolving credit facility.
F-13
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(2) ACQUISITION OF SUBSIDIARY, CONTINUED
The allocation of the purchase price was as follows (amounts in thousands):
Preliminary Final
Allocation Allocation
2002 Adjustments 2003
-------------------------------------
Assets purchased:
Aircraft $ 44,250 -- 44,250
Equipment and other property 9,587 (342) 9,245
Receivables, net of allowances 18,496 1,455 19,951
Inventory 8,852 (1,301) 7,551
Goodwill 1,317 2,194 3,511
Other 8,117 (86) 8,031
-------------------------------------
90,619 1,920 92,539
Debt and other liabilities assumed (53,845) (1,920) (55,765)
-------------------------------------
Purchase price $ 36,774 -- 36,774
=====================================
Adjustments to the preliminary purchase price allocation consisted
primarily of revised estimates of the value of receivables and inventories,
as well as increases in estimates for liabilities for severance and repair
costs for aircraft parts that could not be reasonably estimated at December
31, 2002.
The results of RMH's operations have been included with those of the
Company since October 16, 2002.
(3) COSTS IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COSTS
As of December 31, 2003, the estimated period to complete contracts in
process ranges from three 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):
2003 2002
-------- -------
Direct costs incurred on uncompleted contracts $ 3,591 3,191
Estimated contribution to earnings and indirect costs 3,517 3,863
-------- -------
7,108 7,054
Less billings to date (5,033) (6,881)
-------- -------
Costs and estimated earnings in excess of billings, net $ 2,075 173
======== =======
F-14
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at December 31 (amounts in thousands):
2003 2002
-------- -------
Subordinated notes payable with quarterly interest payments at 12.0% and
all principal due in 2007, unsecured (net of discount of $1,663) $21,337 20,866
Borrowings under revolving credit facility with monthly interest payments
and all principal due in 2006. Weighted average interest rate at
December 31, 2003, is 3.72%. 15,201 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. 6,769 7,507
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 2,788 7,194
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. 1,750 2,250
Notes payable with interest rates from 5.80% to 7.48%, due in monthly
payments of principal and interest with all remaining principal due in
2008, collateralized by aircraft 17,667 20,683
Notes payable with interest rates from 5.25% to 9.27%, due in monthly
payments of principal and interest with all remaining principal due in
2006, collateralized by aircraft 3,790 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 3,179 3,504
Notes payable with interest at LIBOR plus 2.50%, due in monthly
payments of principal and interest with all remaining principal due in
2008, collateralized by buildings. Weighted average rate at December 31,
2003, is 3.62%. 2,326 --
Notes payable with interest rates from 5.49% to 5.51%, due in monthly
installments of principal and interest at various dates through 2010,
collateralized by aircraft 5,744 --
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 1,593 1,868
Other 646 1,060
-------- -------
82,790 82,851
Less current installments (6,110) (5,604)
-------- -------
$76,680 77,247
======== =======
F-15
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(4) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
As of December 31, 2003, the Company had $15,201,000 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 has 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 1% if the
termination occurs prior to October 16, 2005.
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 the lenders 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, 2003, was 3.72%.
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, 2003, the Company was in
compliance with or had received waivers for non-compliance with the
covenants of the credit facility.
F-16
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(4) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
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. 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 January 1, 2005,
and prepayments after January 1, 2005, 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, 2003, the Company was in compliance with the
covenants.
Payment obligations under the subordinated notes 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.
Under an amendment to the agreement signed in November 2003, the Company
may be assessed a one-time fee if consolidated Earnings before interest,
taxes, depreciation, and amortization (EBITDA), as defined in the
agreement, for the year ending December 31, 2004, is less than $34 million.
The maximum fee would be $500,000 if EBITDA is less than $30 million and
reduces by $100,000 for each $1 million incremental increase in EBITDA
above $30 million.
Substantially all of the Company's property and equipment is pledged as
collateral under the Company's various notes payable.
Aggregate maturities of long-term debt are as follows (amounts in
thousands):
Year ending December 31:
2004 $ 6,110
2005 5,049
2006 23,625
2007 28,336
2008 15,142
Thereafter 4,528
-------
82,790
=======
F-17
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(5) 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, 2003, future minimum lease
payments under capital and operating leases are as follows (amounts in
thousands):
Capital Operating
leases leases
----------------------
Year ending December 31:
2004 $ 3,044 15,849
2005 229 15,676
2006 21 15,094
2007 10 14,150
2008 -- 13,097
Thereafter -- 35,018
----------------------
Total minimum lease payments 3,304 $ 108,884
==========
Less amounts representing interest (167)
-----------
Present value of minimum capital lease payments 3,137
Less current installments (2,886)
-----------
$251
===========
Rent expense relating to operating leases totaled $15,424,000, $8,670,000,
and $4,935,000, for the years ended December 31, 2003, 2002, and 2001,
respectively.
At December 31, 2003 and 2002, leased property held under capital leases
included in equipment, net of accumulated depreciation, totaled $4,393,000
and $4,826,000, respectively.
F-18
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(6) STOCKHOLDERS' EQUITY
(a) PRIVATE PLACEMENT
In December 2003, the Company issued 1.2 million shares of common
stock at $8 per share in a private placement of shares. Proceeds, net
of syndication and other costs, totaled $8,855,000.
(b) 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 total fair value of warrants issued during 2002 was approximately
$2,545,000 and the weighted average fair value was $4.48 per warrant.
As of December 31, 2003, 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
==================
(c) 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 receives a five-year option to
purchase 10,000 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-19
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(6) 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, 2003, 2002, and 2001:
Weighted Average
Shares Exercise Price
----------------- ---------------
Outstanding at January 1, 2001 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
Granted 227,500 8.22
Canceled (73,759) 2.56
Exercised (163,776) 3.44
-----------------
Outstanding at December 31, 2003 656,002 6.19
=================
Options exercisable at:
December 31, 2001 987,048 3.12
December 31, 2002 321,438 3.56
December 31, 2003 414,335 5.77
F-20
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(6) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options outstanding
at December 31, 2003:
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 68,035 0.6 $ 2.63 68,035 $ 2.63
3.00 to 4.31 90,467 1.5 3.48 73,800 3.51
5.60 to 7.92 407,500 3.8 6.77 199,167 6.49
8.89 to 8.98 90,000 4.6 8.95 73,333 8.97
---------------- -----------
656,002 414,335
================ ===========
(d) 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,
2003, no shares have been issued under this plan.
(e) INCOME PER SHARE
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the years ended December 31:
2003 2002 2001
---------- --------- ---------
Weighted average number of common shares
outstanding - basic 9,665,278 9,184,421 8,421,671
Dilutive effect of:
Common stock options 99,955 227,765 199,683
Common stock warrants 287,756 66,316 37,948
--------------------------------
Weighted average number of common shares
outstanding - diluted 10,052,989 9,478,502 8,659,302
================================
Common stock options totaling 252,500, 45,000, and 41,535, were not
included in the diluted income per share calculation for the years
ended December 31, 2003, 2002, and 2001, respectively, because their
effect would have been anti-dilutive.
F-21
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(7) 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):
2004 $ 50,419
2005 42,742
2006 25,706
2007 11,278
2008 4,614
Thereafter 3,115
---------
$ 137,874
=========
(8) INCOME TAXES
Income tax benefit (expense) consists of the following for the years ended
December 31:
2003 2002 2001
-------------------------
Current income tax benefit (expense):
Federal $ (12) -- (241)
State 29 (314) (418)
-------------------------
17 (314) (659)
Deferred income tax benefit (expense):
Federal (2,860) (2,601) 1,111
State (420) (384) 163
-------------------------
(3,280) (2,985) 1,274
-------- ------- ------
Total income tax benefit (expense) $(3,263) (3,299) 615
=========================
F-22
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(8) INCOME TAXES, CONTINUED
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):
2003 2002 2001
---------------------------
Tax at the federal statutory rate $(2,844) $(2,876) (2,022)
State income taxes, net of federal
benefit, including adjustments based on
filed state income tax returns (419) (423) (487)
Change in valuation allowance (2,456) -- 3,301
Revisions for filed returns 2,456 -- --
Other -- -- (177)
---------------------------
Net income tax benefit (expense) $(3,263) $(3,299) 615
===========================
For income tax purposes, at December 31, 2003, the Company has net
operating loss carryforwards of approximately $18 million, expiring at
various dates through 2023. 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 $6.9 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-23
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(8) 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):
2003 2002
--------- --------
Deferred tax assets:
Overhaul and parts replacement cost,
principally due to the accrual method $ 8,289 6,598
Net operating loss carryforwards 7,135 4,532
Minimum tax credit carryforward 12 --
Other 529 253
--------- --------
Total gross deferred tax assets 15,965 11,383
Less valuation allowance (2,691) (235)
--------- --------
Net deferred tax assets 13,274 11,148
--------- --------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases and
depreciation methods (15,610) (12,488)
Allowance for uncollectible accounts (2,363) (211)
Goodwill (338) (215)
Other (9) --
--------- --------
Total deferred tax liabilities (18,320) (12,914)
--------- --------
Net deferred tax liability $ (5,046) (1,766)
========= ========
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.
(9) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan whereby employees
may contribute up to 15% of their annual salaries. The Company contributes
2% of annual salaries for all employees and 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 $2,176,000, $1,598,000, and $1,221,000, for the years
ended December 31, 2003, 2002, and 2001, respectively.
F-24
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
================================================================================
(10) 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 valued at $273,000 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.
(11) 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,
2003, 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 take
delivery of eight aircraft for approximately $16,000,000. As of December
31, 2003, one aircraft with a value of approximately $3,500,000 remained to
be 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 take
delivery of ten aircraft for approximately $16,600,000. As of December 31,
2003, four aircraft with a total value of approximately $6,500,000 remained
to be delivered and the deposit and related note payable associated with
this commitment totaled $211,000.
(12) BUSINESS SEGMENT INFORMATION
The Company identifies operating segments based on management
responsibility and the type of products or services offered. Operating
segments and their principal products or services are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in 15
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 in 26 states and Puerto Rico 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.
F-25
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(12) BUSINESS SEGMENT INFORMATION, CONTINUED
The accounting policies of the operating segments are as described in Note
1. The Company evaluates the performance of its segments based on pretax
income. Intersegment sales are reflected at cost-related prices.
Summarized financial information for the Company's operating segments is
shown in the following table (amounts in thousands). Amounts in the
"Corporate Activities" column represent corporate headquarters expenses and
results of insignificant operations. The Company does not allocate assets
between HBM, Products, and Corporate Activities for internal reporting and
performance evaluation purposes.
F-26
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(12) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
------------------------------------------------------------------------
2003
External revenue $146,364 88,440 6,803 848 -- 242,455
Intersegment revenue -- -- 7,261 -- (7,261) --
------------------------------------------------------------------------
Total revenue 146,364 88,440 14,064 848 (7,261) 242,455
Operating expenses 94,506 74,429 10,360 8,213 (5,356) 182,152
Depreciation & amortization 4,857 4,539 173 1,740 -- 11,309
Bad debt expense 32,519 -- -- -- -- 32,519
Interest expense 3,962 4,121 -- 169 -- 8,252
Interest income (2) (130) -- (11) -- (143)
Income tax expense -- -- -- 3,263 -- 3,263
------------------------------------------------------------------------
Net income (loss) $ 10,522 5,481 3,531 (12,526) (1,905) 5,103
========= ======= ======== =========== ============= =============
Total assets $ 74,864 N/A N/A 141,306 (2,163) 214,007
========= ======= ======== =========== ============= =============
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
========= ======= ======== =========== ============= =============
F-27
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(13) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 2003 and 2002 is as
follows (amounts in thousands except per share data):
Quarter
First Second Third Fourth
---------------------------------
2003
Revenue $ 52,298 57,464 66,977 65,716
Operating income 842 3,677 6,579 4,465
Income (loss) before income taxes (846) 2,143 4,413 2,656
Net income (loss) (516) 1,307 2,692 1,620
Basic income (loss) per common share (.05) .14 .28 .16
Diluted income (loss) per common share (.05) .13 .27 .15
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
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.
Operating results for the fourth quarter of 2002 and for all of 2003
include the effect of the acquisition of RMH.
F-28
Independent Auditors' Report
----------------------------
BOARD OF DIRECTORS
AIR METHODS CORPORATION:
Under date of March 8, 2004, we reported on the consolidated balance sheets of
Air Methods Corporation and subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003, which are included in the
Company's Annual Report on Form 10-K for the year 2003. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule II. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
March 8, 2004
F-29
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, 2003 $ 16,996 32,519 800 (27,095) 23,220
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
- ------------------
Notes:
(a) Amounts charged to expense.
(b) Bad debt write-offs and charges to allowances.
(c) Beginning allowance balance assumed in RMH acquisition, as adjusted for final purchase price
allocation.
See accompanying Independent Auditors' Report.
F-30