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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-16079
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AIR METHODS CORPORATION
-----------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
7301 South Peoria, Englewood, Colorado 80112
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
--------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of Common Stock, par value $.06, outstanding as of May 7,
2004, was 10,839,822.
TABLE OF CONTENTS
Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2004 and December
31, 2003 1
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2004 2003
--------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,536 5,574
Current installments of notes receivable 59 58
Receivables:
Trade 92,701 82,786
Less allowance for doubtful accounts (25,158) (23,220)
--------------------------
67,543 59,566
Other 3,335 3,420
--------------------------
70,878 62,986
--------------------------
Inventories 9,129 9,143
Work-in-process on medical interiors and products contracts 340 145
Assets held for sale 432 431
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,877 2,249
Deferred tax asset -- 105
Prepaid expenses and other 2,344 1,653
--------------------------
Total current assets 86,595 82,344
--------------------------
Property and equipment:
Land 190 190
Flight and ground support equipment (note 2) 130,642 149,568
Buildings and office equipment 11,103 10,436
--------------------------
141,935 160,194
Less accumulated depreciation and amortization (46,218) (47,117)
--------------------------
Net property and equipment 95,717 113,077
--------------------------
Goodwill 6,485 6,485
Notes and other receivables, less current installments 1,289 1,426
Other assets, net of accumulated amortization of $1,512 and $1,347
at March 31, 2004 and December 31, 2003, respectively 10,576 10,675
--------------------------
Total assets $ 200,662 214,007
==========================
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2004 2003
-------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 6,050 6,110
Current installments of obligations under capital leases 2,821 2,886
Accounts payable 5,499 6,097
Accrued overhaul and parts replacement costs (note 2) -- 7,702
Deferred revenue 3,713 2,898
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,387 174
Deferred income taxes 1,487 --
Accrued wages and compensated absences 4,890 6,015
Other accrued liabilities 7,392 6,780
-------------------------
Total current liabilities 33,239 38,662
Long-term debt, less current installments 83,762 76,680
Obligations under capital leases, less current installments 151 251
Accrued overhaul and parts replacement costs (note 2) -- 26,107
Deferred income taxes (note 2) 8,715 5,151
Other liabilities 6,010 6,468
-------------------------
Total liabilities 131,877 153,319
-------------------------
Stockholders' equity (note 4):
Preferred stock, $1 par value. Authorized 5,000,000
shares, none issued -- --
Common stock, $.06 par value. Authorized 16,000,000
shares; issued 10,884,967 and 10,817,594 shares at
March 31, 2004 and December 31, 2003,
respectively 653 649
Additional paid-in capital 64,458 64,413
Retained earnings (accumulated deficit) (note 2) 3,677 (4,374)
Treasury stock at par, 45,624 common shares at March
31, 2004 (3) --
-------------------------
Total stockholders' equity 68,785 60,688
-------------------------
Total liabilities and stockholders' equity $ 200,662 214,007
=========================
See accompanying notes to consolidated financial statements.
2
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
----------------------------
Revenue:
Flight revenue $ 59,577 52,376
Sales of medical interiors and products 2,025 1,335
Parts and maintenance sales and services 32 243
----------------------------
61,634 53,954
----------------------------
Operating expenses:
Flight centers 24,246 20,311
Aircraft operations 13,721 13,184
Aircraft rental 3,330 2,801
Cost of medical interiors and products sold 638 1,124
Cost of parts and maintenance sales and services 47 241
Depreciation and amortization 2,677 2,748
Bad debt expense 9,740 7,986
Loss on disposition of assets, net 4 13
General and administrative 6,322 4,704
----------------------------
60,725 53,112
----------------------------
Operating income 909 842
Other income (expense):
Interest expense (2,087) (2,006)
Interest and dividend income 4 3
Other, net 282 315
----------------------------
Loss before income tax benefit and cumulative effect of change in
accounting principle (892) (846)
Income tax benefit 348 330
----------------------------
Loss before cumulative effect of change in accounting principle (544) (516)
Cumulative effect of change in method of accounting for maintenance
costs, net of income taxes (note 2) 8,595 --
----------------------------
Net income (loss) $ 8,051 (516)
============================
(Continued)
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
----------------------------
Income (loss) per common share - basic and diluted (note 3):
Loss before cumulative effect of change in accounting principle $ (.05) (.05)
Cumulative effect of change in method of accounting for
maintenance costs, net of income taxes .79 --
----------------------------
Net income (loss) $ .74 (.05)
============================
Pro forma results, assuming change in method of accounting for
maintenance costs was applied retroactively (note 2):
Net income $ 805
============
Basic and diluted income per common share $ .08
============
Weighted average number of common shares outstanding - basic 10,832,455 9,521,884
============================
Weighted average number of common shares outstanding - diluted 11,258,883 9,864,211
============================
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
----------------------------
Cash flows from operating activities:
Net income (loss) $ 8,051 (516)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization expense 2,677 2,748
Bad debt expense 9,740 7,986
Deferred income tax benefit (339) (330)
Loss on retirement and sale of equipment, net 4 13
Common stock options and warrants issued for services -- 75
Cumulative effect of change in method of accounting for maintenance (8,595) --
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets (692) 1,300
Increase in receivables (17,632) (10,175)
Decrease (increase) in inventories 14 (289)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings 177 (560)
Decrease in accounts payable, other accrued liabilities, and other
liabilities (2,017) (1,905)
Increase in deferred revenue and billings in excess of costs 2,028 168
Increase in accrued overhaul and parts replacement costs -- 1,124
----------------------------
Net cash used by operating activities (6,584) (361)
----------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (4,433) (988)
Proceeds from disposition and sale of equipment 9 10
Decrease in notes receivable and other assets, net 67 322
----------------------------
Net cash used by investing activities (4,357) (656)
----------------------------
(Continued)
5
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
----------------------------
Cash flows from financing activities:
Net borrowings under line of credit $ 8,169 $ 2,040
Proceeds from long-term debt 8,531 2,490
Payments of long-term debt (9,678) (1,768)
Payments of capital lease obligations (165) (176)
Payments for purchases of common stock (416) (32)
Proceeds from issuance of common stock, net 462 274
----------------------------
Net cash provided by financing activities 6,903 2,828
----------------------------
Increase (decrease) in cash and cash equivalents (4,038) 1,811
Cash and cash equivalents at beginning of period 5,574 1,410
----------------------------
Cash and cash equivalents at end of period $ 1,536 $ 3,221
============================
Non-cash investing and financing activities:
Effective January 1, 2004, the Company changed its method of accounting for
major engine and airframe component overhaul costs from the accrual method of
accounting to the direct expense method. Accordingly, the Company reversed its
major overhaul accrual totaling $33,809 for all owned and leased aircraft and
reversed the remaining capitalized maintenance included in fixed assets relating
to used aircraft purchases totaling $19,719, with the balance reflected as the
cumulative effect of change in accounting principle of $8,595 ($14,090, net of
income taxes of $5,495).
In the quarter ended March 31, 2003, the Company settled a note payable totaling
$1,121 in exchange for the aircraft securing the debt.
See accompanying notes to consolidated financial statements.
6
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
-----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10Q and
Regulation S-X. Accordingly, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the consolidated financial
statements for the respective periods. Interim results are not necessarily
indicative of results for a full year. The consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company
considers its critical accounting policies involving more significant
judgments and estimates to be those related to revenue recognition,
uncollectible receivables, deferred income taxes, and aircraft overhaul
costs. Actual results could differ from those estimates.
The Company operates under an FAA-approved continuous inspection and
maintenance program. The Company accounts for maintenance activities on the
direct expense method. Under this method, commencing January 1, 2004, all
maintenance costs are recognized as expense as costs are incurred. Prior to
January 1, 2004, the Company accrued for major engine and airframe
component overhaul costs based on usage of the aircraft component over the
period between overhauls or replacements in advance of performing the
maintenance services. (See Note 2).
Certain prior period amounts have been reclassified to conform with the
2004 presentation.
(2) ACCOUNTING CHANGE
------------------
Effective January 1, 2004, the Company changed its method of accounting for
major engine and airframe component overhaul costs from the accrual method
of accounting to the direct expense method. Under the new accounting
method, maintenance costs are recognized as expense as maintenance services
are performed. The Company believes the direct-expense method is preferable
in the circumstances because the maintenance liability is not recorded
until there is an obligating event (when the maintenance event is actually
being performed), the direct expense method eliminates significant
estimates and judgments inherent under the accrual method, and it is the
predominant method used in the transportation industry. Accordingly,
effective January 1, 2004, the Company reversed its major overhaul accrual
totaling $33,809,000 for all owned and leased aircraft and reversed the
remaining capitalized maintenance included in fixed assets relating to used
aircraft purchases totaling $19,719,000, with the balance reflected as the
cumulative effect of change in accounting principle of $8,595,000
($14,090,000, net of income taxes of $5,495,000).
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INCOME (LOSS) PER SHARE
--------------------------
Basic earnings per share is computed by dividing net income (loss) 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.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the quarters ended March 31:
2004 2003
---------- ---------
Weighted average number of common shares outstanding - basic 10,832,455 9,521,884
Dilutive effect of:
Common stock options 115,452 69,457
Common stock warrants 310,976 272,870
---------------------
Weighted average number of common shares outstanding - diluted 11,258,883 9,864,211
=====================
Common stock options totaling 640,000 were not included in the diluted
shares outstanding for the quarter ended March 31, 2004, because their
effect would have been anti-dilutive. Common stock options totaling 265,000
and common stock warrants totaling 25,000 were not included in the diluted
shares outstanding for the quarter ended March 31, 2003, because their
effect would have been anti-dilutive.
(4) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the three months ended March 31, 2004,
consisted of the following (amounts in thousands except share amounts):
Shares
Outstanding Amount
----------------------
Balances at January 1, 2004 10,817,594 $60,688
Issuance of common shares for options exercised 67,373 462
Purchase of treasury shares (45,624) (416)
Net income -- 8,051
----------------------
Balances at March 31, 2004 10,839,343 $68,785
======================
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) 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):
2004 2003
------- ------
Net loss before cumulative effect of change in
accounting principle:
As reported $ (544) $(516)
Pro forma (616) (564)
Net income (loss):
As reported $8,051 $(516)
Pro forma 7,979 (564)
Basic and diluted loss per share before cumulative
effect of change in accounting principle:
As reported $ (.05) $(.05)
Pro forma (.06) (.05)
Basic and diluted net income (loss) per share:
As reported $ .74 $(.05)
Pro forma .74 (.05)
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 2004: dividend yield of 0%; expected
volatility of 30%; risk-free interest rates of 3.3%; and expected life of 4
years. The weighted average fair value of options granted during the
quarter ended March 31, 2004, was $2.81. No options were granted during the
first quarter of 2003.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) BUSINESS SEGMENT INFORMATION
------------------------------
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,
corporate income tax expense, and results of insignificant operations. The
Company does not allocate assets between HBM, Products, and Corporate
Activities for internal reporting and performance evaluation purposes.
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 throughout the U.S. under exclusive operating
agreements. Services include aircraft operation and maintenance.
- Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace and medical transport products
for domestic and international customers.
Products Corporate Intersegment
FOR QUARTER ENDED MARCH 31: CBM HBM Division Activities Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
2004
External revenue $ 39,044 20,565 2,025 -- -- 61,634
Intersegment revenue -- -- 2,166 -- (2,166) --
-------------------------------------------------------------------------------
Total revenue 39,044 20,565 4,191 -- (2,166) 61,634
-------------------------------------------------------------------------------
Operating expenses 27,173 18,206 2,483 1,931 (1,767) 48,026
Depreciation & amortization 1,330 1,257 42 48 -- 2,677
Bad debt expense 9,740 -- -- -- -- 9,740
Interest expense 1,029 967 -- 91 -- 2,087
Interest income -- -- -- (4) -- (4)
Income tax benefit -- -- -- (348) -- (348)
-------------------------------------------------------------------------------
Segment net income (loss) before cumulative
effect of change in accounting principle (228) 135 1,666 (1,718) (399) (544)
Cumulative effect of change in accounting
principle, net -- -- -- 8,595 -- 8,595
-------------------------------------------------------------------------------
Segment net income (loss) $ (228) 135 1,666 6,877 (399) 8,051
===============================================================================
Total assets $ 56,027 N/A N/A 146,799 (2,164) 200,662
===============================================================================
2003
External revenue $ 31,370 21,035 1,335 214 -- 53,954
Intersegment revenue -- -- 1,117 -- (1,117) --
-------------------------------------------------------------------------------
Total revenue 31,370 21,035 2,452 214 (1,117) 53,954
-------------------------------------------------------------------------------
Operating expenses 20,756 18,032 2,080 2,177 (982) 42,063
Depreciation & amortization 1,115 1,155 45 433 -- 2,748
Bad debt expense 7,986 -- -- -- -- 7,986
Interest expense 991 911 -- 104 -- 2,006
Interest income (1) (2) -- -- -- (3)
Income tax benefit -- -- -- (330) -- (330)
-------------------------------------------------------------------------------
Segment net income (loss) $ 523 939 327 (2,170) (135) (516)
===============================================================================
Total assets $ 62,214 N/A N/A 136,354 (2,164) 196,404
===============================================================================
10
ITEM 2. 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 1 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; flight volume of CBM operations;
collection rates for patient transports; continuation and/or renewal of HBM
contracts; acquisition of new and profitable Products Division contracts; 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 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 annual report on Form 10-K. 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 the first quarter of 2004 the CBM Division generated 63% of
the Company's total revenue, increasing from 58% in the first quarter of
2003.
- - 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 the first quarter of 2004 the HBM Division generated 34% of
the Company's total revenue, decreasing from 39% in 2003.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. In the first quarter of 2004 the Products
Division generated 3% of the Company's total revenue, increasing from 2% in
2003.
See Note 6 to the consolidated financial statements included in Item 1 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. Total patient
transports for CBM operations were approximately 7,000 for the first
quarter of 2004 compared to approximately 5,100 for the first quarter of
2003. Patient transports for CBM bases open longer than one year (Same-Base
Transports) were approximately 5,300 in the first quarter of 2004 compared
to approximately 4,500 in the first three months of 2003.
11
- - 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
January 1, 2004, the Company instituted a price increase of approximately
5% for its CBM operations. However, net revenue after bad debt expense per
transport decreased 8.8% in the first quarter of 2004 compared to the first
quarter of 2003. The total allowance for expected uncollectible amounts,
including contractual discounts for Medicare/Medicaid and bad debts,
increased from 41.6% of related gross flight revenue for the quarter ended
March 31, 2003, to 49.6% in the first quarter of 2004. 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 2004,
the Company increased staffing in the billing and collections department,
segmented billing by region, and hired a national billing director 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 23.2% in the first quarter of 2004 compared to 2003,
while total flight volume for CBM and HBM operations increased 14.8% 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 past 12 months, the CBM division
commenced operations at two new locations which had previously been
hospital-based flight programs with either the Company or another vendor.
At the expiration of contracts in the fourth quarter of 2003 and first
quarter of 2004, two of the Company's 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.
12
- - 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.
RESULTS OF OPERATIONS
The Company reported net income of $8,051,000 for the three months ended March
31, 2004, compared to a net loss of $516,000 for the quarter ended March 31,
2003. Net income for the first quarter of 2004 included the cumulative effect of
a change in accounting principle of $8,595,000, as discussed more fully below.
Before the cumulative effect of the change in accounting principle, the Company
reported a net loss of $544,000. Although the Company experienced a 16% increase
in Same-Base Transports for its CBM bases during the first quarter of 2004 as
compared to the first quarter of 2003, net reimbursement (revenue after
Medicare/Medicaid discounts and bad debt expense) decreased 8.8%. The Company
also had higher aircraft maintenance costs in 2004 compared to 2003.
CHANGE IN ACCOUNTING METHOD
Effective January 1, 2004, the Company changed its method of accounting for
major engine and airframe component overhaul costs from the accrual method of
accounting to the direct expense method. Under the new accounting method,
maintenance costs are recognized as expense as maintenance services are
performed. Accordingly, effective January 1, 2004, the Company reversed its
major overhaul accrual totaling $33,809,000 for all owned and leased aircraft
and reversed the remaining capitalized maintenance included in fixed assets
relating to used aircraft purchases totaling $19,719,000, with the balance
reflected as the cumulative effect of change in accounting principle of
$8,595,000 ($14,090,000, net of income taxes of $5,495,000).
Pro forma results, assuming the change in accounting principle had been applied
retroactively, are as follows for the quarter ended March 31, 2003:
As Reported Pro Forma
------------- ---------
Aircraft operations expense $ 13,184 11,396
========================
Depreciation and amortization $ 2,748 2,370
========================
Net income (loss) $ (516) 805
========================
Basic and diluted income (loss) per share $ (.05) .08
========================
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
FLIGHT REVENUE increased $7,201,000, or 13.7%, from $52,376,000 to $59,577,000
for the three months ended March 31, 2004, compared to 2003. Flight revenue is
generated by both CBM and HBM operations and is recorded net of contractual
allowances under agreements with third-party payers and Medicare/Medicaid
discounts.
- - CBM - Flight revenue increased $7,658,000, or 24.4%, to $39,012,000 in the
three months ended March 31, 2004, compared to 2003, for the following
reasons:
- Revenue of $5,356,000 from the addition of 13 new CBM bases either
during or subsequent to the first quarter of 2003.
- Purchase of certain business assets from another air medical service
provider in southeastern Arizona in May 2003, resulting in the
expansion of operations from three bases to five. Transport volume for
all bases in the region increased 95.5% in the quarter ended March 31,
2004, compared to 2003, resulting in incremental revenue of
approximately $1,703,000.
13
- Closure of one base in the fourth quarter of 2003 and another in the
first quarter of 2004, resulting in a decrease in revenue of
approximately $708,000.
- Increase in flight volume for bases open longer than one year.
Excluding the impact of the new bases and base closures discussed
above, total flight volume for all CBM operations increased 16.0% in
the first quarter of 2004 compared to the prior year. The increase in
flight volume is primarily attributed to improved weather conditions
and an increase in flight requests, driven in part by enhanced crew
outreach and other marketing initiatives in 2004 compared to 2003.
- Average price increase of approximately 5% for all CBM operations
effective January 1, 2004.
- - HBM - Flight revenue decreased $457,000, or 2.2%, to $20,565,000 for the
quarter ended March 31, 2004, for the following reasons:
- Discontinuation of service under three contracts either prior to or
during the first quarter of 2004. In addition, during the fourth
quarter of 2003, one HBM customer converted to CBM operations. The
resulting decrease in revenue from all of these actions was
approximately $1,371,000.
- Revenue of approximately $139,000 generated by the addition of one new
contract during the first quarter of 2004.
- Annual price increases in the majority of contracts based on changes
in the Consumer Price Index and in hull insurance rates.
- Increase of 6.5% in flight volume for all contracts excluding the
discontinued contracts and the new contract discussed above.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $3,935,000, or 19.4%, to $24,246,000 for the
quarter ended March 31, 2004, compared to 2003. Changes by business segment are
as follows:
- - CBM - Flight center costs increased $3,791,000, or 31.6%, to $15,787,000
for the following reasons:
- Approximately $2,977,000 for the addition of personnel to staff new
base locations described above.
- Decrease of approximately $261,000 due to the closure of 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.
- Increase of approximately $200,000 for monthly service fees associated
with an updated flight tracking system.
- - HBM - Flight center costs increased $143,000, or 1.7%, to $8,458,000
primarily due to the following:
- Decrease of approximately $498,000 due to the closure of base
locations described above.
- Approximately $32,000 for the addition of personnel to staff 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.
AIRCRAFT OPERATING EXPENSES increased $537,000, or 4.1%, for the quarter ended
March 31, 2004, in comparison to the quarter ended March 31, 2003. On a pro
forma basis, assuming the change in accounting principle for maintenance costs
had been applied retroactively, aircraft operating expenses would have increased
$2,325,000, or 20.4%, in the first quarter of 2004 compared to the first quarter
of 2003. Aircraft operating expenses consist primarily of fuel, insurance, and
maintenance costs and generally are a function of the size of the fleet, type of
aircraft flown, and number of hours flown. The increase in costs is due to the
following:
- - Addition of 11 helicopters for CBM operations and 7 helicopters for HBM
operations since March 31, 2003, resulting in an increase of approximately
$462,000 in aircraft operating expenses.
- - Increase in maintenance costs for engine overhauls and aircraft interior
refurbishment. Refurbishment was required due to the age of the interiors.
- - Increase in the cost of aircraft fuel.
- - Decrease of approximately 15% in hull insurance rates effective July 2003.
AIRCRAFT RENTAL EXPENSE increased $529,000, or 18.9%, for the first quarter of
2004 compared to the first quarter of 2003. Rental expense for 14 leased
aircraft added to the Company's fleet since March 31, 2003, totaled $510,000 in
the three months ended March 31, 2004.
14
BAD DEBT EXPENSE increased $1,754,000, or 22.0%, for the quarter ended March 31,
2004, compared to 2003, due primarily to the increase in related CBM flight
revenue. Bad debt expense as a percentage of related net flight revenue remained
constant at 25.0% in the first quarters of 2004 and 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 41.6% of related gross flight revenue for the quarter ended March 31, 2003,
to 49.6% in the first quarter of 2004. 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 2004 or 2003.
MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS increased $690,000, or 51.7%, from
$1,335,000 for the three months ended March 31, 2003, to $2,025,000 for the
first quarter of 2004. Significant projects in the first quarter of 2004
included ongoing production of eleven Multi-Mission Medevac Systems for the U.
S. Army's HH-60L Black Hawk helicopter and 21 litter systems for the U.S. Army's
Medical Evacuation Vehicle (MEV). Revenue by product line was as follows:
- - $209,000 - manufacture and installation of modular medical interiors
- - $1,191,000 - manufacture of multi-mission interiors
- - $625,000 - design and manufacture of other aerospace and medical transport
products
Significant projects in the first quarter of 2003 included manufacture of
modular medical interiors for three commercial customers. Revenue by product
line was as follows:
- - $1,172,000 - manufacture and installation of modular medical interiors
- - $163,000 - design and manufacture of other aerospace and medical transport
products
COST OF MEDICAL INTERIORS AND PRODUCTS decreased $486,000, or 43.2%, for the
three months ended March 31, 2004, as compared to the previous year. The average
net margin earned on projects during the first quarter of 2004 was 49% compared
to 22% in 2003, primarily due to the change in product mix. The margin earned on
multi-mission interiors is typically higher than the margins earned on modular
medical interiors for commercial customers. In addition, aircraft interiors
completed for commercial customers during 2003 were for new types of aircraft in
which the Company had not previously installed its modular interior, leading to
higher engineering and documentation costs and lower profit margins. 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 decreased $71,000, or 2.6% for the three
months ended March 31, 2004, compared to 2003. The decrease is primarily the
result of the change in the method of accounting for major engine and airframe
component overhauls and replacements, as discussed more fully above. As part of
the change in method, the Company reversed the remaining capitalized maintenance
included in fixed assets relating to used aircraft purchases, resulting in a
decrease of approximately $378,000 in depreciation expense for the first quarter
of 2004. The decrease was offset in part by depreciation on engine upgrades,
rotable equipment, and computer hardware and software acquired subsequent to
March 31, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES increased $1,618,000, or 34.4%, for the
quarter ended March 31, 2004, compared to the quarter ended March 31, 2003,
reflecting the growth in the Company's operations. General and administrative
expenses include accounting and finance, billing and collections, human
resources, aviation management, pilot training, and CBM program administration.
During the last half of 2003, the Company formalized the organization structure
for its CBM division along regional and program lines and added administrative
personnel to manage the daily operations of CBM bases. The Company also
increased the number of billing and collections department personnel by 33% in
the first quarter of 2004, compared to the first quarter of 2003, to keep pace
with the growth in CBM operations and to address recent slowdowns in
collections. These increases were offset in part by a decrease in aviation
15
management costs resulting from the consolidation of FAA Part 135 operating
certificates from 4 certificates at the beginning of 2003 to 2 certificates by
the beginning of 2004.
INTEREST EXPENSE increased $81,000, or 4.0%, in the first quarter of 2004,
compared to the first quarter of 2003, primarily as a result increased
borrowings against the Company's line of credit. The balance drawn against the
line of credit was $23,370,000 as of March 31, 2004, compared to $14,594,000 at
March 31, 2003. This increase was partially offset by decreases in principal
balances as a result of regularly scheduled payments and the refinancing of
$17.5 million of debt at lower interest rates since March 31, 2003.
The Company recorded a DEFERRED INCOME TAX BENEFIT of $348,000 and $330,000 in
the first quarter of 2004 and 2003, respectively, both at an effective rate of
39%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $53,356,000 as of March 31, 2004, compared to
$43,682,000 at December 31, 2003. The change in working capital position is
primarily attributable to the following:
- - Increase of $7,892,000 in receivables consistent with the increased revenue
for the CBM division resulting from new base expansions and increases in
flight volume. 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.
- - Decrease of $7,702,000 in short-term accrued overhaul and parts replacement
costs liabilities, due to the change in the method of accounting for major
engine and airframe component overhaul costs from the accrual method of
accounting to the direct expense method. Effective January 1, 2004, the
Company reversed its major overhaul accrual for all owned and leased
aircraft.
SOURCES AND USES OF CASH
The Company had cash and cash equivalents of $1,536,000 as of March 31, 2004,
compared to $5,574,000 at December 31, 2003. Cash used by operations in the
first quarter of 2004 totaled $6,584,000 compared to $361,000 in 2003, primarily
due to the increase in receivables, net of bad debt expense, described above.
Cash used by investing activities totaled $4,357,000 in 2004 compared to
$656,000 in 2003. Equipment acquisitions in the first quarter of 2004 consisted
primarily of medical interior and avionics installations, information systems
hardware and software, and rotable equipment. Capital lease financing for the
hardware and software acquisitions is expected to be finalized during the second
quarter of 2004. Equipment acquisitions in the first quarter of 2003 consisted
primarily of medical interior and avionics installations or upgrades for
existing equipment. In the first quarter of 2003, the Company received $116,000
in full payment of a note receivable.
Financing activities generated $6,903,000 in 2004 compared to $2,828,000 in
2003. The Company used proceeds from new note agreements originated in 2004 to
refinance existing debt with higher interest rates and to fund the acquisition
of new software systems projected for implementation later in the year. The
primary use of cash in both 2004 and 2003 was regularly scheduled payments of
long-term debt and capital lease obligations. These payments were offset in both
2004 and 2003 by draws against the Company's line of credit and proceeds from
new note agreements.
In January 2004 the Company originated a note payable of $1,039,000 with
interest at 5.08% to refinance existing debt with a higher interest rate and to
fund the acquisition of computer hardware and software for systems integration
scheduled for 2004; the note is payable through January 2010. In March 2004 the
Company originated a note payable of $7,492,000 with interest at 5.60% to
refinance existing debt with a higher interest rate; the note is payable through
April 2010.
16
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, Virginia, and
Missouri 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 an additional location 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, subject to seasonal,
weather-related fluctuations. The Company continues to evaluate opportunities to
expand the CBM model in other communities.
Hospital-Based Model
The Company discontinued service under one contract 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 hospital contracts are due for
renewal in 2004. The Company expects 2004 flight activity for continuing
hospital contracts to remain consistent with historical levels.
Products Division
As of March 31, 2004, 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. In the first quarter of 2004, the Company was awarded a
contract to manufacture and install a multi-mission interior in a Sikorsky
FIREHAWK helicopter for the Los Angeles County Fire Department; work began in
the second quarter of 2004 and is expected to be completed in the second quarter
of 2005. Remaining revenue for all contracts in process as of March 31, 2004, is
estimated at $3.7 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. Based on the anticipated level of HBM and
CBM flight activity and the projects in process for the Products Division, the
Company expects to generate sufficient cash flow to meet its operational needs
throughout the remainder of 2004. The Company also had approximately $15,458,000
in borrowing capacity available under its revolving credit facility as of March
31, 2004.
17
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 $104.4 million of
indebtedness, of which approximately $92.8 million was outstanding at March
31, 2004. 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 covenants 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 the Company will be able
to obtain such waivers without payment of significant cash or equity
compensation to the lenders.
- - 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 the 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.
18
- - 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.
- - 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 May 14, 2004, the Company
was aware of one foreign person who, according to recent public securities
filings, is believed to hold approximately 5.5% 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.
19
- - Dependence on third party suppliers - The Company currently obtains a
substantial portion of its helicopter spare parts and components from Bell
Helicopter, Inc. (Bell) and American Eurocopter Corporation (AEC), because
its fleet is composed primarily of Bell and Eurocopter aircraft, and
maintains supply arrangements with other parties for its engine and related
dynamic components. Based upon the manufacturing capabilities and industry
contacts of Bell, AEC, and other suppliers, the Company believes it will
not be subject to material interruptions or delays in obtaining aircraft
parts and components but does not have an alternative source of supply for
Bell, AEC, and certain other aircraft parts. Failure or significant delay
by these vendors in providing necessary parts could, in the absence of
alternative sources of supply, have a material adverse effect on the
Company. Because of its dependence upon Bell and AEC for helicopter parts,
the Company may also be subject to adverse impacts from unusually high
price increases which are greater than overall inflationary trends.
Increases in the Company's 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.
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.
20
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 quarter ended March 31, 2004, a change of 1% in the percentage
of estimated contractual discounts would have resulted in a change of
approximately $580,000 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 quarter ended March 31,
2004, a change of 1% in the percentage of estimated uncollectible accounts would
have resulted in a change of approximately $390,000 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 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 operates under an FAA-approved continuous inspection and maintenance
program. The Company accounts for maintenance activities on the direct expense
method. Under this method, commencing January 1, 2004, all maintenance costs are
recognized as expense as costs are incurred. Prior to January 1, 2004, the
Company accrued for major engine and airframe component overhaul costs based on
usage of the aircraft component over the period between overhauls or
replacements in advance of performing the maintenance services.
21
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 3. 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 $23,348,000
outstanding against the line of credit and $2,276,000 in notes payable. Based on
the amounts outstanding at March 31, 2004, the annual impact of a 1% change in
interest rates would be approximately $256,000. Interest rates on these
instruments approximate current market rates as of March 31, 2004. Periodically
the Company enters into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates.
ITEM 4. 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 March 31, 2004, pursuant to Rule 13a-15(b) under the Exchange Act. Based on
that evaluation, the Certifying Officers have concluded that, as of March 31,
2004, 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, inventory, purchasing, and dispatch and
communications and is monitoring the progress of the upgrades.
22
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
18.1 Letter from KPMG LLP regarding Change in
Accounting Principle
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
32 Certification adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements 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: May 17, 2004 By \s\ Aaron D. Todd
-----------------------------------
Aaron D. Todd
Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 2004 By \s\ Trent J. Carman
-----------------------------------
Trent J. Carman
Chief Financial Officer
(Principal Financial Officer)
Date: May 17, 2004 By \s\ Sharon J. Keck
-----------------------------------
Sharon J. Keck
Chief Accounting Officer
(Principal Accounting Officer)
24