UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
(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, 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 of (I.R.S. employer
incorporation or organization) identification no.)
7301 SOUTH PEORIA, ENGLEWOOD, COLORADO 80112
(Address of principal executive offices and zip code)
303-792-7400
(Registrant's telephone number, including area code)
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")
(Title of Class)
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 X No
--- ---
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: $85,811,000
The number of outstanding shares of Common Stock as of March 1, 2005, was
10,999,997.
TABLE OF CONTENTS
TO FORM 10-K
Page
----
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Competition. . . . . . . . . . . . . . . . . . . . . . . . 3
Contracts in Process . . . . . . . . . . . . . . . . . . . 3
Employees. . . . . . . . . . . . . . . . . . . . . . . . . 3
Government Regulation. . . . . . . . . . . . . . . . . . . 4
Internet Address . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . 4
Facilities . . . . . . . . . . . . . . . . . . . . . . . . 4
Equipment and Parts. . . . . . . . . . . . . . . . . . . . 5
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 7
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . 10
Overview . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations. . . . . . . . . . . . . . . . . . . 12
Liquidity and Capital Resources. . . . . . . . . . . . . . 17
Outlook for 2005 . . . . . . . . . . . . . . . . . . . . . 21
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 22
Critical Accounting Policies . . . . . . . . . . . . . . . 25
New Accounting Standards . . . . . . . . . . . . . . . . . 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . 28
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . 28
ITEM 9B. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 28
i
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . 29
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . 41
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . 41
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). 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. As of
December 31, 2004, the Company's CBM division provided air medical
transportation services in 17 states, while its HBM division 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. 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
CBM services, also referred to as independent provider operations, are performed
by the Company's LifeNet Division and 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, LifeNet, Inc. (formerly ARCH Air Medical
Service, Inc.), 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 were
combined with the Company's already existing CBM division. The division operates
78 helicopters and three fixed wing aircraft under both Instrument Flight Rules
(IFR) and Visual Flight Rules (VFR) in 17 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 2004 the Company opened seven new CBM locations throughout the U.S. and
closed two locations in the Southeast due to low flight volume and low
collection rates.
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. The division
operates 91 helicopters and 13 fixed wing aircraft in 26 states plus Puerto
Rico. 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, hull and liability
insurance premiums, or spare parts prices from aircraft manufacturers. 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 2004, the Company began
operations under a five-year contract with a new customer in Florida and
discontinued operations under a contract in New Mexico. The Company expanded a
contract in Missouri to a satellite location during the second quarter of 2004
and expanded contracts in Colorado and North Carolina to satellite locations
during the fourth quarter of 2004.
The Company operates some of its HBM contracts under the service mark AIR
LIFE(R), which is generally associated within the industry with the Company's
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 designs, manufactures, and certifies modular
medical interiors, multi-mission interiors, and other aerospace and medical
transport products. These interiors and other products range from basic life
support to intensive care suites to advanced search and rescue systems. The
modular design provides for flexibility of configuration for multiple transport
needs and optimizes space, weight, cost, and maintainability. With a full range
of engineering, manufacturing and certification capabilities, the division has
also designed and integrated aircraft communication and navigation systems,
environmental control systems, and structural and electrical systems.
Manufacturing capabilities include avionics, electrical, composites, machining,
welding, sheetmetal, and upholstery. The division also offers quality assurance
and certification services pursuant to Parts Manufacturer Approvals (PMA's) and
maintains ISO9001:2000 (Quality Systems) certification.
The Company maintains patents covering several products, including the Litter
Lift System, used in the U.S. Army's HH60L helicopter and in the Medical
Evacuation Vehicle (MEV), and the Articulating Patient Loading System and
Modular Equipment Frame, which were developed as part of the modular interior
concept. Raw materials and components used in the manufacture of interiors and
other products are generally widely available from several different vendors.
2
During 2004, the Company completed 21 MEV litter systems and continued
production of 19 additional MEV units and 13 HH-60L Multi-Mission Medevac
Systems for the U.S. Army, with delivery to be completed in 2005. The Company
also continued to support both the HH60L and MEV programs with the production of
spare parts and research of product enhancements. In the second quarter of 2004
the Company began production of a multi-mission interior for a FIREHAWK
helicopter for the Los Angeles County Fire Department; completion is expected in
the first half of 2005. Work on two modular medical interiors for a commercial
customer was also commenced in the fourth quarter of 2004.
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.
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 three companies based in the United States and
three in Europe. Competition is based mainly on product availability, price, and
product features, such as configuration and weight. With the development of a
line of interiors for Eurocopter aircraft to complement its established line of
interiors for Bell aircraft, 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, 2004, the Company had the following projects in process:
- Thirteen HH-60L units and nineteen MEV units for the U.S. Army.
Eleven of the HH60L units were nearly complete as of December 31,
2004.
- Multi-mission interior for Los Angeles County FIREHAWK helicopter
- Two modular medical interiors for a commercial customer
Deliveries under all contracts in process as of December 31, 2004, are expected
to be completed by the second quarter of 2005, and remaining revenue is
estimated at $2.1 million. As of December 31, 2003, the revenue remaining to be
recognized on medical interiors and other products in process was estimated at
$3.1 million.
EMPLOYEES
As of December 31, 2004, the Company had 1,623 full time and 210 part time
employees, comprised of 627 pilots; 348 aviation machinists, airframe and power
plant (A&P) engineers, and other manufacturing/maintenance positions; 525 flight
nurses and paramedics; and 333 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 have continued since early
2004, and a mediator was appointed in the fourth quarter of 2004 to assist with
resolving differences between the parties. 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.
3
GOVERNMENT REGULATION
The Company is subject to the Federal Aviation Act of 1958, as amended. All
flight and maintenance operations of the Company are regulated and actively
supervised by the U.S. Department of Transportation through the FAA. Medical
interiors and other aerospace products developed by the Company are subject to
FAA certification. Air Methods and LifeNet, Inc. each hold a Part 135 Air
Carrier Certificate, and Air Methods, Mercy, and LifeNet, Inc. 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, 2004, the Company was aware of
one foreign person who, according to recent public securities filings, is
believed to hold approximately 10.1% of outstanding Common Stock.
The Company is also subject to laws, regulations, and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, Securities and Exchange Commission regulations, and NASDAQ National Market
rules.
INTERNET ADDRESS
The Company's internet site is www.airmethods.com. The Company makes available
------------------
free of charge, on or through the website, all annual, quarterly, and current
reports, as well as any amendments to these reports, as soon as reasonably
practicable after electronically filing these reports with the Securities and
Exchange Commission. This reference to the website does not incorporate by
reference the information contained in the website and such information should
not be considered a part of this report.
ITEM 2. PROPERTIES
FACILITIES
The Company leases its headquarters, consisting of approximately 88,500 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
$980,000. CBM Division 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.
4
EQUIPMENT AND PARTS
As of December 31, 2004, the Company managed and operated a fleet of 185
aircraft, composed of the following:
Number of Number of Number of
Company-Owned Company-Leased Customer-
Type Aircraft 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 -- 2 1 3
Eurocopter AS 350 17 21 3 41
Eurocopter AS 355 1 -- -- 1
Eurocopter BK 117 16 25 -- 41
Eurocopter BO 105 2 3 1 6
Eurocopter EC 130 -- 4 -- 4
Eurocopter EC 135 -- 7 3 10
Eurocopter EC 145 -- -- 3 3
Boeing MD 902 -- 2 -- 2
Sikorsky S 76 -- -- 1 1
----------------------------------------------------
63 85 21 169
----------------------------------------------------
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
----------------------------------------------------
2 4 10 16
----------------------------------------------------
TOTALS 65 89 31 185
====================================================
The Company generally pays all insurance, taxes, and maintenance expense for
each aircraft in its fleet. Because helicopters are insured at replacement cost
which usually exceeds book value, the Company believes that helicopter accidents
covered by hull and liability insurance will generally result in full
reimbursement of any damages sustained. In the ordinary course of business, the
Company may from time to time purchase and sell helicopters in order to best
meet the specific needs of its operations.
The Company has experienced no significant difficulties in obtaining required
parts for its helicopters. Repair and replacement components are purchased
primarily through Bell and American Eurocopter Corporation (AEC), since Bell and
Eurocopter aircraft make up the majority of the Company's fleet. Based upon the
manufacturing capabilities and industry contacts of Bell and AEC, the Company
believes it will not be subject to material interruptions or delays in obtaining
aircraft parts and components. Any termination of production by Bell or AEC
would require the Company to obtain spare parts from other suppliers, which are
not currently in place.
5
ITEM 3. LEGAL PROCEEDINGS
None.
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, 2004.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the trading symbol "AIRM." The following table shows, for the periods indicated,
the high and low closing prices for the Company's common stock. The quotations
for the common stock represent prices between dealers and do not reflect
adjustments for retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
YEAR ENDED DECEMBER 31, 2004
----------------------------
Common Stock High Low
- ------------------------------------------
First Quarter . . . . . . . . $9.33 $8.45
Second Quarter. . . . . . . . 9.20 7.80
Third Quarter . . . . . . . . 8.88 6.22
Fourth Quarter. . . . . . . . 8.66 6.65
YEAR ENDED DECEMBER 31, 2003
----------------------------
Common Stock High Low
- ------------------------------------------
First Quarter . . . . . . . . $6.66 $5.32
Second Quarter. . . . . . . . 8.19 5.72
Third Quarter . . . . . . . . 8.88 6.83
Fourth Quarter. . . . . . . . 9.69 8.16
As of March 1, 2005, there were approximately 316 holders of record of the
Company's common stock. The Company estimates that it has approximately 3,900
beneficial owners of common stock.
The Company has not paid any cash dividends since its inception and intends to
retain any future earnings to finance the growth of the Company's business
rather than to pay dividends.
7
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information of the
Company and its subsidiaries which has been derived from the Company's audited
consolidated financial statements. This selected financial data should be read
in conjunction with the consolidated financial statements of the Company and
notes thereto appearing in Item 8 of this report. Revenue, expenses, assets, and
long-term liabilities as of and for the years ended December 31, 2004, 2003, and
2002, increased in part as a result of the acquisition of RMH in October 2002.
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,
-----------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue $ 273,103 242,455 130,668 92,096 75,293
Operating expenses:
Operating 232,400 205,342 106,771 74,597 61,393
General and administrative 28,641 21,550 12,744 9,781 7,854
Other income (expense), net (6,698) (7,197) (2,694) (1,770) (1,889)
-------------------------------------------------------------
Income before income taxes 5,364 8,366 8,459 5,948 4,157
Income tax benefit (expense) (2,121) (3,263) (3,299) 615 -
-------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 3,243 5,103 5,160 6,563 4,157
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes 8,595 - - - -
-------------------------------------------------------------
Net income $ 11,838 5,103 5,160 6,563 4,157
=============================================================
Basic income per common share:
Income before cumulative effect of change
in accounting principle $ .30 .53 .56 .78 .50
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes .79 - - - -
-------------------------------------------------------------
Net income $ 1.09 .53 .56 .78 .50
=============================================================
Diluted income per common share:
Income before cumulative effect of change
in accounting principle $ .29 .51 .54 .76 .49
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes .76 - - - -
-------------------------------------------------------------
Net income $ 1.05 .51 .54 .76 .49
=============================================================
Weighted average number of shares
of Common Stock outstanding - basic 10,894,863 9,665,278 9,184,421 8,421,671 8,334,445
=============================================================
Weighted average number of shares
of Common Stock outstanding - diluted 11,314,827 10,052,989 9,478,502 8,659,302 8,559,389
=============================================================
8
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands except share and per share amounts)
As of December 31,
------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------
BALANCE SHEET DATA:
Total assets $204,723 215,649 196,396 85,557 75,250
Long-term liabilities 89,490 114,657 115,225 34,210 29,885
Stockholders' equity 73,079 60,688 46,218 36,543 29,416
SELECTED OPERATING DATA
2004 2003 2002 2001 2000
--------------------------------------
FOR YEAR ENDED DECEMBER 31:
CBM patient transports 30,159 25,676 12,870 9,212 7,091
HBM medical missions 46,630 46,570 26,367 19,073 17,484
AS OF DECEMBER 31:
CBM bases 64 59 48 17 16
HBM contracts 44 43 47 22 22
9
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 and collection rates for 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 and medical transport products. 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 2004 the CBM Division generated 65% of
the Company's total revenue, increasing from 60% in 2003 and 56% in 2002.
- - 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 (approximately 65% of
total contract revenue) and hourly flight fees (approximately 35% of total
contract revenue) billed to hospital customers. In 2004 the HBM Division
generated 33% of the Company's total revenue, decreasing from 36% in 2003
and 39% in 2002.
- - Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace and medical transport products for
domestic and international customers. In 2004 the Products Division
generated 2% of the Company's total revenue, decreasing from 3% in 2003 and
4% in 2002.
See Note 13 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 variable 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 30,200 for 2004 compared
to approximately 25,700 for 2003. Patient transports for CBM bases open
longer than one year (Same-Base Transports) were approximately 25,600 in
2004 compared to approximately 24,600 in 2003.
10
- - 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. The Company
increased prices for its CBM operations approximately 5% effective January
2004 and an additional 10% effective September 2004. However, net revenue
after bad debt expense per transport increased only 0.5% from 2003 to 2004.
Generally, price increases result in incremental revenue from privately
insured patients only. Bad debt expense as a percentage of related net
flight revenue increased from 22.2% in 2003 to 24.1% in 2004. The Company
believes the decrease in collection rate is driven primarily by overall
economic conditions. In an effort to increase its collection rates, the
Company increased staffing in the billing and collections department,
segmented billing by region, and hired a national billing director in 2004.
- - 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 rotor wing 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, as adjusted for the change in accounting method
described below, increased 15.4% from 2003 to 2004, while total flight
volume for CBM and HBM operations increased 7.0% 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. As described more fully below in Liquidity and
Capital Resources, in 2004 the Company entered into two long-term purchase
commitments for a total of 25 aircraft, designed to replace the
discontinued models and other older aircraft over the next five to seven
years.
- - 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 first quarter of 2005, the CBM
division commenced operations at two new bases in California which had
previously been a hospital-based flight program. At the expiration of the
contract in the first quarter of 2004, one HBM customer also converted its
flight program 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 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 have continued since early 2004, and a
mediator was appointed in the fourth quarter of 2004 to assist with
resolving differences between the parties. 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.
11
RESULTS OF OPERATIONS
Year ended December 31, 2004 compared to 2003
The Company reported net income of $11,838,000 for the year ended December 31,
2004, compared to $5,103,000 for the year ended December 31, 2003. Net income
for the year ended December 31, 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
net income of $3,243,000 for 2004. An increase in flight volume during the year
was offset in part by increased aircraft maintenance costs and bad debt expense.
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).
In 2002, the impact of the major overhaul accrual relating to aircraft purchased
in the RMH acquisition was considered a component of the valuation of the
aircraft and did not affect the allocation of the purchase price to goodwill.
Accordingly, the change in method to the direct expense method in 2004 resulted
in a reduction in the asset value assigned to RMH aircraft. The amount of the
cumulative effect of the change in accounting principle related to RMH aircraft
was due exclusively to depreciation of the asset value or changes in the
liability balances which had been expensed subsequent to the acquisition.
Therefore, the majority of the cumulative effect of the change in accounting
principle related to aircraft which were in the Company's fleet prior to the RMH
acquisition.
Pro forma results, assuming the change in accounting principle had been applied
retroactively, are as follows for the year ended December 31, 2003 (amounts in
thousands):
As Reported Pro Forma
-----------------------
Aircraft operations expense $ 56,776 52,430
=======================
Depreciation and amortization $ 11,309 9,797
=======================
Net income $ 5,103 8,676
=======================
Basic income per share $ .53 .90
=======================
Diluted income per share $ .51 .86
=======================
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
FLIGHT REVENUE increased $31,010,000, or 13.2%, from $234,687,000 for the year
ended December 31, 2003, to $265,697,000 for the year ended December 31, 2004.
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 $30,542,000, or 20.9%, to $176,867,000
for the following reasons:
- Incremental revenue of $22,324,000 generated from the addition of
17 new CBM bases during either 2003 or 2004.
12
- 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 91.6% during the first four months
of 2004 compared to the same period in 2003, resulting in incremental
revenue of approximately $2,508,000.
- Closure of one base in the fourth quarter of 2003, one in the
first quarter of 2004, and one during the third quarter of 2004,
resulting in a decrease in revenue of approximately $3,293,000.
- Increase in Same Base Transports. Excluding the impact of the new
bases and base closures discussed above, total flight volume for all
CBM operations increased 4.1% in 2004, primarily attributable to
improved weather conditions and an increase in flight requests, driven
in part by enhanced crew outreach and other marketing initiatives.
- Average price increase of approximately 5% for all CBM operations
effective January 1, 2004, and an average price increase of
approximately 10% effective September 1, 2004.
- Decrease caused by a change in payer mix to a higher percentage
of Medicare/Medicaid transports, resulting in higher contractual
discounts which are offset against flight revenue. See discussion of
total provision for uncollectible accounts, including contractual
discounts and bad debt expense, below under "Bad Debt Expense."
- - HBM - Flight revenue increased $469,000, or 0.5%, to $88,831,000 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 $5,356,000.
- Revenue of $2,859,000 generated by the addition of one new
contract during the first quarter and the expansion of three contracts
in the second and fourth quarters of 2004.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index.
- Increase of 3.3% in flight volume for all contracts, excluding
the discontinued contracts and new contracts discussed above.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $13,309,000, or 15.3%, to $100,460,000 for the
year ended December 31, 2004, compared to 2003. Changes by business segment are
as follows:
- - CBM - Flight center costs increased $12,615,000, or 23.7%, to
$65,916,000 for the following reasons:
- Increase of $10,524,000 for the addition of personnel and
facilities for the new base locations described above.
- Decrease of $1,650,000 due to the closure of base locations
described above.
- Increases in salaries for merit pay raises.
- Increase of approximately $700,000 for telecommunications costs
associated with dispatch operations.
- - HBM - Flight center costs increased $694,000, or 2.1%, to $34,544,000
primarily due to the following:
- Decrease of $2,067,000 due to the closure of base locations
described above.
- Increase of $1,252,000 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 $3,140,000, or 5.5%, for the year ended
December 31, 2004, in comparison to 2003. 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:
- - Addition of 18 helicopters for CBM operations and 15 for HBM
operations during either 2003 or 2004. The resulting incremental impact for
2004 was an increase of approximately $2,723,000.
- - Increase of approximately 21% in the number of engine events requiring
significant repair or overhaul and increase of approximately 60% in the
number of blade repairs for BK117 helicopters compared to 2003.
- - Increase of approximately 12.8% in the cost of aircraft fuel per hour
flown.
- - Decrease in hull insurance rates effective July 2004.
AIRCRAFT RENTAL EXPENSE increased $3,230,000, or 27.3%, for the year ended
December 31, 2004, in comparison to the year ended December 31, 2003.
Incremental rental expense incurred in 2004 for 26 leased aircraft added to the
Company's fleet during either 2003 or 2004 totaled $3,639,000.
13
BAD DEBT EXPENSE increased $10,373,000, or 31.9%, for the year ended December
31, 2004, compared to 2003, due in part to the increase in related flight
revenue. In addition, bad debt expense as a percentage of related net flight
revenue was 24.1% in 2004, compared to 22.2% in 2003. Flight revenue is recorded
net of Medicare/Medicaid discounts. The total reserve for expected uncollectible
amounts, including contractual discounts and bad debts, increased from 43.6% of
related gross flight revenue for 2003 to 48.1% for 2004. The Company believes
the decrease in collection rates is due to general recessionary trends in the
economy and a related increase in the number of uninsured patients and in
patients covered by Medicaid, as well as the dilutive effect of price increases
on collection rates. 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 $497,000, or 7.3%, from
$6,803,000 for the year ended December 31, 2003, to $7,300,000 for the year
ended December 31, 2004. Significant projects in 2004 included production of 13
Multi-Mission Medevac Systems for the U. S. Army's HH-60L Black Hawk helicopter,
40 MEV litter systems, a multi-mission interior for a Sikorsky FIREHAWK
helicopter for the Los Angeles County Fire Department, and four modular medical
interiors for three commercial customers. Revenue by product line for the year
ended December 31, 2004, was as follows:
- - $811,000 - manufacture and installation of modular medical
interiors
- - $4,244,000 - manufacture of multi-mission interiors
- - $2,245,000 - design and manufacture of other aerospace and medical
transport products
Significant projects in 2003 included the manufacture of eight modular medical
interiors for four commercial customers and eleven HH60L Multi-Mission Medevac
Systems. 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
COST OF MEDICAL INTERIORS AND PRODUCTS decreased $2,052,000, or 43.1%, for the
year ended December 31, 2004, as compared to the previous year. The average net
margin earned on projects during 2004 was 44% compared to 24% 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 and which are absorbed
by both projects for external customers and interdivisional projects.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE decreased $326,000, or 2.9%, for the year
ended December 31, 2004, primarily due to 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 $1,512,000 in
depreciation expense in 2004. The decrease was offset in part by depreciation on
engine upgrades, medical interior and avionics upgrades, an upgraded flight
tracking system, and computer hardware and software placed into service in 2004.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $7,091,000, or 32.9%, for
the year ended December 31, 2004, compared to the year ended December 31, 2003,
reflecting the growth in the Company's operations. G&A expenses include
accounting and finance, billing and collections, human resources, aviation
management, pilot training, and CBM program administration. G&A expenses were
10.5% of revenue for 2004, compared to 8.9% for 2003. 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. This
14
increase in administrative staffing was offset in part by a reduction in Flight
Center Costs for personnel previously assigned exclusively to a single base of
operation. The Company also increased the number of billing and collections
personnel in 2004 to keep pace with the growth in CBM operations and to address
a slowdown in collections in early 2004. During 2004, the Company also incurred
approximately $1,178,000 in audit fees and outside consultant costs related to
the audit of internal controls required by Section 404 of the Sarbanes-Oxley Act
of 2002. These increases were offset in part by a decrease in aviation
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 decreased $396,000, or 4.8%, for the year ended December 31,
2004, compared to 2003, due to decreases in principal balances as a result of
regularly scheduled payments and the refinancing of $17.5 million of debt at
lower interest rates during the fourth quarter of 2003 and the first quarter of
2004.
The Company recorded INCOME TAX EXPENSE of $2,121,000 in 2004 and $3,263,000 in
2003, both at an effective rate of approximately 39%. For income tax purposes,
at December 31, 2004, the Company has net operating loss carryforwards (NOL's)
of approximately $23 million, expiring at various dates through 2024. During
2004, NOL's of $4.2 million, for which a valuation allowance had previously been
established, expired. As of December 31, 2004, a valuation allowance has been
provided for NOL's 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, 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.
- - 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.
15
FLIGHT CENTER COSTS 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.
- - 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. 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 also 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
HH60L Multi-Mission Medevac Systems. 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
16
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. 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%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $48,849,000 as of December 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 $3,070,000 in net receivables consistent with the
increased revenue for the CBM division resulting from new base expansions
and increases in flight volume.
- - 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.
- - Increase of $4,387,000 in deferred income tax liabilities, primarily
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. Previously, the accrual method of accounting for
engine and airframe component overhaul costs resulted in a deferred tax
asset, which had both a current and long-term component.
17
CASH REQUIREMENTS
Debt and Other Long-term Obligations
The following table outlines the Company's contractual obligations as of
December 31, 2004 (amounts in thousands):
Less than 1 After 5
Total year 1-3 years 4-5 years years
-------------------------------------------------------
Long-term debt $ 95,017 12,020 61,719 18,845 2,433
Less: interest payments (1) 16,283 5,979 8,998 1,251 55
-------------------------------------------------------
Principal payments 78,734 6,041 52,721 17,594 2,378
-------------------------------------------------------
Capital leases 722 454 268 -- --
Less: interest (63) (44) (19) -- --
-------------------------------------------------------
Net present value 659 410 249 -- --
-------------------------------------------------------
Operating leases 112,649 18,232 33,828 28,763 31,826
Aircraft purchase commitments 72,290 11,915 15,975 22,200 22,200
-------------------------------------------------------
Total $264,332 36,598 102,773 68,557 56,404
=======================================================
(1) Interest payments include an estimate of variable-rate interest on the
Company's senior revolving credit facility and two notes with principal
balances totaling $2,127,000 as of December 31, 2004. Variable interest was
estimated using the weighted average rate in effect as of December 31,
2004, for each note and the weighted average balance outstanding against
the revolving credit facility during 2004.
Repayment of debt and capital lease obligations as well as operating lease
agreements constitute the Company's primary long-term commitments to use cash.
Balloon payments on long-term debt are due as follows:
- $17,468,000 in 2006
- $23,997,000 in 2007
- $7,414,000 in 2008
- $1,918,000 in 2009
- $772,000 in 2010
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, 2004, the
undiscounted maximum amount of potential future payments under the guarantees is
$3,648,000. 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 acquisition by the Company, RMH entered into a commitment agreement to
take delivery of eight aircraft for approximately $16,000,000. As of December
31, 2004, the Company had taken delivery of all aircraft under the agreement.
18
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, 2004,
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 $347,000.
In March 2004, the Company entered into a commitment agreement to purchase 10
Eurocopter EC135 helicopters for approximately $34,300,000, with deliveries
scheduled through the first quarter of 2005. As of December 31, 2004, the
Company had taken delivery of seven helicopters under the agreement.
In July 2004, the Company entered into a commitment agreement to purchase 15
Bell 427 helicopters for approximately $55,500,000, beginning in 2007, with a
minimum of three deliveries per year. The agreement provides for special
incentives, including a trade-in option for up to fifteen Bell 222 helicopters,
with minimum guaranteed trade-in values.
The Company intends to place the new EC135's and Bell 427's primarily into
existing bases and to either sell the aircraft which are replaced or redeploy
them into the backup fleet. Typically the Company has financed aircraft acquired
under these or similar commitments through operating lease agreements.
Letter of Credit
In August 2004, the Company entered into a $1,208,000 letter of credit with a
financial institution to securitize an aircraft leased by the Company under an
operating lease agreement. Because the aircraft is operated in Puerto Rico, the
lessor is unable to perfect its security interest against the aircraft. The
letter of credit perpetually renews for consecutive one-year terms through the
end of the lease agreement in July 2010 or until the aircraft is moved from
Puerto Rico and reduces the available borrowing capacity under the Company's
senior revolving credit facility described below.
SOURCES AND USES OF CASH
The Company had cash and cash equivalents of $2,603,000 at December 31, 2004,
compared to $5,574,000 at December 31, 2003. Cash generated by operations
increased to $15,381,000 in 2004 from $4,403,000 in 2003. Receivable balances,
net of bad debt expense, increased $3,070,000 in 2004 compared to $21,436,000 in
2003 despite the continued growth in operations. The smaller increase reflects
the decline in the overall collection rate for receivables in 2004 compared to
2003 and the results of the Company's efforts to improve the pace of
collections. Total cash collected against CBM receivable balances was $135.7
million in 2004, compared to $92.8 million in 2003.
Cash used for investing activities totaled $11,893,000 in 2004, compared to
$8,197,000 in 2003. Equipment acquisitions in 2004 consisted primarily of
medical interior and avionics installations, information systems hardware and
software, and rotable equipment. In 2004 the Company received $1,600,000 from
the sale of two of its aircraft and approximately $1,300,000 from the refund of
deposits for the purchase of aircraft, primarily through the arrangement of
long-term operating lease financing. Equipment acquisitions in 2003 consisted
primarily of medical interior and avionics installations, upgrades for existing
equipment, and rotable equipment.
Financing activities used $6,459,000 in 2004, compared to generating $7,958,000
in 2003. The Company used proceeds from new note agreements originated in 2004
and 2003 to refinance existing debt with higher interest rates and to fund the
acquisition of new software systems and other capital expenditures. Primary uses
of cash in both 2004 and 2003 consisted of payments for long-term debt and
capital lease obligations. 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.
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,
19
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.
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, 2004, the weighted average interest rate on the
outstanding balance against the line was 4.72%. 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, 2004,
$35,000,000 was available under the credit facility, and $14,719,000 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, 2004, the Company was in
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 securities 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 purchase
agreement 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, 2004, 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, the Company accrued an amendment fee of
$500,000 in 2004 in exchange for the elimination of a financial covenant for the
duration of the agreement. The fee is expected to be paid in the first quarter
of 2005.
20
Other Notes
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 equipment and other capital expenditures; 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.
In December 2004 the Company originated a note payable of $1,953,000 with
interest at 5.36% to refinance the balloon payment due under a capital lease
obligation. The note is payable through December 2010.
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, 2004, the Company held unencumbered aircraft with a net book
value of $9.0 million and has additional equity in other encumbered aircraft
which could be utilized as collateral for borrowing funds as an additional
source of working capital if necessary. The Company also has $19,073,000 unused
capacity on its senior revolving credit facility. The Company believes that
these borrowing resources, coupled with favorable results of operations, will
allow the Company to meet its obligations in the coming year.
OUTLOOK FOR 2005
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 a new location in Kentucky during the
fourth quarter of 2004. In the first quarter of 2005, the Company purchased the
operations of a hospital-based program in northern California and expanded it
from one base to two. CBM flight volume at all other locations during 2005 is
expected to be consistent 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
In the fourth quarter of 2004, the Company expanded two existing contracts in
Colorado and North Carolina to additional satellite bases. The Company expects
similar expansions to satellite locations under four other existing contracts
during the second quarter of 2005. Twelve hospital contracts are due for renewal
in 2005. One was renewed for a 5-year term during the first quarter of 2005, and
renewals on the remaining eleven contracts are still pending. The Company
expects 2005 flight activity for continuing hospital contracts to remain
consistent with historical levels.
Products Division
As of December 31, 2004, the Company was continuing the production of 13 HH-60L
units and 19 MEV units for the U.S. Army, a multi-mission interior for the Los
Angeles County Fire Department, and two modular medical interiors for a
commercial customer. Remaining revenue for all contracts in process as of
December 31, 2004, is estimated at $2.1 million.
21
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 13 currently under contract. The U.S. Army has also forecasted a
requirement for a total of 119 MEV units over 4 years; the Company has
previously delivered 63 units, in addition to the 19 units currently under
contract. There is no assurance that orders for additional units will be
received in future periods.
All Segments
In the last six months of 2004 the Company implemented new finance and
accounting and new dispatch software and expects to implement new software for
several other major information technology systems in 2005. The majority of the
cost of new systems is expected to be financed through capital and operating
lease agreements.
During the first quarter of 2005, the Company reached an agreement to amend to
its senior revolving credit facility. The amendment extends the maturity of the
revolving credit facility to April 2010 and includes a $20 million term loan,
the proceeds of which will be used to retire the Company's 12% subordinated
debt. The terms and conditions of the senior revolving credit facility remain
relatively unchanged under the amendment. The term loan will be payable through
April 2010 and will bear interest, at the Company's option, at either (i) the
higher of the federal funds rate plus 0.50% or the prime rate as announced by
the lenders plus an applicable margin ranging from 0.50% to 1.50% or (ii) a rate
equal to LIBOR plus an applicable margin ranging from 2.75% to 3.75%. Payments
will consist of interest only during the first year with the principal payable
as follows: $6 million in each of years 2 and 3, $2 million in each of years 4
and 5, and $4 million at maturity. The Company expects to write off
approximately $2.0 million in debt origination costs and note discount related
to the subordinated debt and to pay a prepayment penalty of approximately $1.4
million. While there are certain conditions that must be met in order to
finalize the amendment, the Company expects to meet those conditions either late
in the first quarter or early in the second quarter of 2005. Closing costs
associated with the amendment are estimated to be $300,000.
There can be no assurance that the Company will continue to maintain flight
volume or current collection rates 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 2005" and
those described below.
- - Flight volume - All CBM revenue and approximately 35% of HBM revenue
is dependent upon flight volume. Approximately 35% 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.
- - 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.
22
- Highly leveraged balance sheet - The Company is obligated under
debt facilities providing for up to approximately $104.8 million of
indebtedness, of which approximately $84.5 million was outstanding at
December 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 to obtain such waivers, the Company will not
be required to pay lenders significant cash or equity compensation.
- 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 have continued since early 2004, and a
mediator was appointed in the fourth quarter of 2004 to assist with
resolving differences between the parties. 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 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. In January 2005 the Company experienced two fatal
accidents which are under investigation by the National Transportation
Safety Board. The outcome of these investigations and the potential
impact on the Company's operations cannot yet be ascertained.
- Compliance with corporate governance and public disclosure
regulations - New laws, regulations, and standards relating to
corporate governance and public disclosure-including the
Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ National
Market rules-are subject to varying interpretations in many cases due
to lack of specificity. Their application may evolve over time as new
guidance is provided by regulatory and governing bodies, which may
result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and
governance practices. The Company's efforts to maintain high standards
of corporate governance and public disclosure in compliance with
evolving laws and regulations have resulted in, and are likely to
continue to result in, increased general and administrative expenses
and a diversion of management's time and attention from
revenue-generating activities to compliance activities. In particular,
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which
requires the Company to include management and auditor reports on
internal controls as part of its annual report, has required
commitment of significant financial and managerial resources. In
addition, board members, the chief executive officer, and chief
financial officer could face an increased risk of personal liability
in connection with the performance of their duties. As a result, the
Company may have difficulty attracting and retaining qualified
23
board members and executive officers. If efforts to comply with
new or changed laws, regulations, and standards differ from the
activities intended by regulatory or governing bodies due to
ambiguities related to practice, the Company's reputation may be
harmed.
- Internal controls - The Company is required by Section 404 of the
Sarbanes-Oxley Act of 2002 to include management and auditor reports
on internal controls as part of its annual report. Management
concluded that internal control over financial reporting was effective
at December 31, 2004, and the Company's independent auditors attested
to that conclusion. There can be no assurance that material weaknesses
in internal controls over financial reporting will not be discovered
in the future or that the Company and its independent auditors will be
able to conclude that internal control over financial reporting is
effective in the future. Although it is unclear what impact failure to
comply fully with Section 404 or the discovery of a material weakness
in internal controls over financial reporting would have on the
Company, it may subject the Company to regulatory scrutiny and result
in additional expenditures to meet the requirements, a reduced ability
to obtain financing, or a loss of investor confidence in the accuracy
of the Company's financial reports.
- Competition - HBM operations face significant competition from
several national and regional air medical transportation providers for
contracts with hospitals and other healthcare institutions. In
addition to the national and regional providers, 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 the medical capability of the aircraft. The Company's
competition in the aircraft interior design and manufacturing industry
comes primarily from three companies based in the United States and
three in Europe. Competition is based mainly on product availability,
price, and product features, such as configuration 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.
- Fuel costs - Fuel accounted for 2.2% of total operating expenses
for the year ended December 31, 2004. Both the cost and availability
of fuel are influenced by many economic and political factors and
events occurring in oil-producing countries throughout the world, and
fuel costs fluctuate widely. Recently the price per barrel of oil has
been at an all-time high. The Company cannot predict the future cost
and availability of fuel. The unavailability of adequate fuel supplies
could have an adverse effect on the Company's cost of operations and
profitability. Generally, the Company's HBM customers pay for all fuel
consumed in medical flights. However, the Company's ability to pass on
increased fuel costs for CBM operations may be limited by economic and
competitive conditions and by reimbursement rates established by
Medicare, Medicaid, and insurance providers.
- 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 33% 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 operating
results and relationship with such hospitals.
24
- 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, 2004, the Company was aware of one foreign person who,
according to recent public securities filings, is believed to hold
approximately 10.1% 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.
- 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 may be 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.
- 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.
- 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.
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.
25
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 (i.e., Medicare and Medicaid). 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 related flight revenue for the year ended December 31, 2004, a change
of 1% in the percentage of estimated contractual discounts would have resulted
in a change of approximately $2,599,000 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 related net flight revenue for the year ended December
31, 2004, a change of 1% in the percentage of estimated uncollectible accounts
would have resulted in a change of approximately $1,777,000 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, 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.
26
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.
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.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123R (Statement 123R), Accounting for Stock-Based Compensation, an
amendment of FASB Statement No. 123. Statement 123R requires recognition of the
grant-date fair value of stock options and other equity-based compensation
issued to employees in the income statement and is effective for interim or
annual periods beginning after June 15, 2005. Statement 123R provides for either
a modified prospective or modified retrospective transition method for adopting
the statement. The Company has not yet determined which transition method it
will apply nor the impact of adopting Statement 123R on its financial position
or results of operations.
In December 2004, the FASB issued FASB Statement No. 153 (Statement 153),
Exchange of Nonmonetary Assets - an amendment of APB Opinion No. 29. Statement
153 eliminates certain exceptions provided for by APB Opinion No. 29 and instead
requires that an exchange of nonmonetary assets be accounted for at fair value,
including recognition of gain or loss, if the exchange has commercial substance
and the fair value is determinable within reasonable limits. The statement sets
forth the criteria to be considered in determining whether the exchange has
commercial substance. Statement 153 is effective for exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of Statement 153 to have a material impact on its financial position or
results of operations.
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 $14,719,000
outstanding against the line of credit and $2,127,000 in notes payable. Based on
the amounts outstanding at December 31, 2004, the annual impact of a 1% change
in interest rates would be approximately $168,000. Interest rates on these
instruments approximate current market rates as of December 31, 2004.
Periodically the Company enters into interest rate risk hedges to minimize
exposure to the effect of an increase in interest rates. As of December 31,
2004, the Company was party to one interest rate swap agreement. The swap
agreement provides that the Company will pay a 3.62% fixed interest rate on
$990,000 of notional principal and receive a floating interest rate (LIBOR plus
2.50%) on the same amount of notional principal from the counterparty.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE 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, under the supervision and with the
participation of the Certifying Officers, evaluated the effectiveness of
disclosure controls and procedures as of December 31, 2004, pursuant to Rule
13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying
Officers have concluded that, as of December 31, 2004, the Company's disclosure
controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes in the Company's internal control 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Management assessed the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, using criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and concluded that the Company maintained effective internal
control over financial reporting as of December 31, 2004.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004, has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
ITEM 9B. OTHER INFORMATION
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Summary information concerning the Company's directors and executive officers is
set forth below:
CLASS/YEAR
TERM AS
DIRECTOR
NAME Age Position EXPIRES(1)
- ---- --- -------- ----------
George W. Belsey 65 Chairman of the Board I/2007
Ralph J. Bernstein 47 Director III/2006
Samuel H. Gray 67 Director II/2005
C. David Kikumoto 55 Director I/2007
MG Carl H. McNair, Jr. (Ret.) 70 Director I/2007
Lowell D. Miller, Ph.D. 71 Director III/2006
Morad Tahbaz 49 Director II/2005
Paul H. Tate 54 Director III/2006
Aaron D. Todd 43 Director and Chief Executive Officer II/2005
David L. Dolstein 56 Senior Vice President, Community Based Services N/A
Neil M. Hughes 46 Senior Vice President, Air Medical Services N/A
Trent J. Carman 44 Chief Financial Officer, Secretary and Treasurer N/A
Sharon J. Keck 38 Chief Accounting Officer and Controller N/A
__________________
(1) Refers to the calendar year in which the annual meeting of
stockholders is contemplated to be held and at which the term of the
pertinent director class shall expire.
MR. GEORGE W. BELSEY has served as Chairman of the Board of Directors since
April 1994, having been appointed a director in December 1992. Mr. Belsey was
appointed Chief Executive Officer of the Company effective June 1, 1994, and
served in that capacity until July 2003. Mr. Belsey previously served in
executive and administrative positions at the American Hospital Association and
at a number of hospitals. He received his Bachelor's Degree in Economics from
DePauw University in Greencastle, Indiana, and holds a Master's Degree in
Business Administration from George Washington University, Washington, D.C.
MR. RALPH J. BERNSTEIN became a director in February 1994. He is a co-founder
and General Partner of Americas Partners, an investment firm. He holds a
Bachelor of Arts Degree in Economics from the University of California at Davis.
Mr. Bernstein currently serves on the board of Empire Resorts, Inc.
MR. SAMUEL H. GRAY became a director in March 1991. From 1989 to 2000, he was
Chief Executive Officer of The Morris Consulting Group, Inc., a health care
industry consulting firm, and since 2000 has been a Vice President of the
Mattson Jack Group, Inc., also a health care consulting firm. In 1959 Mr. Gray
received a Bachelor of Science Degree from the University of Florida.
MR. C. DAVID KIKUMOTO became a director in June 2004. Mr. Kikumoto is the
founder and Chief Executive Officer of Denver Management Advisors. From 1999 to
2000, Mr. Kikumoto was President and Vice Chairman at Anthem Blue Cross and Blue
Shield, Colorado and Nevada, and from 1987 to 1999, he served in several roles
at Blue Cross and Blue Shield of Colorado, Nevada and New Mexico. He received
his Bachelor of Science degree in accounting from the University of Utah,
pursued graduate studies at the University of Utah, and graduated from the
Executive Development Program at the University of Chicago.
29
MAJOR GENERAL CARL H. MCNAIR, JR. (RET.) was appointed to the board of directors
in March 1996. In April 1999, General McNair retired from his position as
Corporate Vice President and President, Enterprise Management, for DynCorp, a
technical and professional services company headquartered in Reston, Virginia,
where he was responsible for the company's core businesses in facility
management, marine operations, test and evaluation, administration and security,
and biotechnology and health services. He currently serves as Special Assistant,
Government Relations and Legislative Affairs, to the Vice President of Corporate
Communications and Marketing for the Computer Sciences Corporation, and as
Chairman of the Board of Managers for DynPort Vaccine Co., L.L.C., a subsidiary
of Computer Sciences Corporation. General McNair has a Bachelor of Science
Degree in Engineering from the U.S. Military Academy at West Point, a Bachelor's
Degree and Master's Degree in Aerospace Engineering from Georgia Institute of
Technology, and a Master of Science Degree in Public Administration from
Shippensburg University.
DR. LOWELL D. MILLER was named a director in June 1990. Since 1989, Dr. Miller
has been involved with various scientific endeavors including a pharmaceutical
consulting business. The University of Missouri awarded Dr. Miller a Bachelor of
Science Degree in 1957 as well as a Master's Degree in Biochemistry in 1958 and
a Biochemistry Doctorate Degree in 1960.
MR. MORAD TAHBAZ was elected to the board of directors in February 1994. He is
president and a director of Empire Resorts, Inc. and is a co-founder and General
Partner of Americas Partners, an investment firm. Mr. Tahbaz received his
Bachelor's Degree in Philosophy and Fine Arts from Colgate University and
attended the Institute for Architecture and Urban Studies in New York City. He
holds a Master's Degree in Business Administration from Columbia University
Graduate School of Business.
MR. PAUL H. TATE was elected to the board of directors in September 2003. Mr.
Tate is the Chief Financial Officer and a Senior Vice President of Frontier
Airlines. Prior to joining Frontier in October 2001, he was Executive Vice
President and Chief Financial Officer for Colgan Air, Inc., a U.S. Airways
Express carrier. Mr. Tate served as Senior Vice President-Finance and Chief
Financial Officer of Atlantic Coast Airlines Holdings, Inc. from 1997 to 2000,
and has served in financial officer positions with Midway Airlines and Reno Air,
Inc. Mr. Tate, a certified public accountant, received his undergraduate degree
in economics and his Master's Degree in Business Administration from
Northwestern University in 1973 and 1975, respectively.
MR. AARON D. TODD became a director in June 2002 and Chief Executive Officer in
July 2003. He joined the Company as Chief Financial Officer in July of 1995 and
was appointed Secretary and Treasurer during that same year. He was appointed
Chief Operating Officer in January 2002. Mr. Todd holds a Bachelor of Science
Degree in Accounting from Brigham Young University.
MR. DAVID L. DOLSTEIN joined the Company with the July 1997 acquisition of Mercy
Air Service, Inc. He serves as Senior Vice President, Community Based Services
and as President of Mercy Air Service, a continuation of his responsibilities
preceding the acquisition. Mr. Dolstein received a Bachelor of Science degree in
1974 from Central Missouri State University with postgraduate studies in
industrial safety.
MR. NEIL M. HUGHES was named Senior Vice President of the Air Medical Services
Division in January 2003 and Vice President in April 2000, and has served as
Director of Operations since August 1998. Since 1992, Mr. Hughes has served the
Company in several other positions including line pilot, area manager, training
captain/check airman and operations manager. Prior to joining the Company, Mr.
Hughes was a commercial pilot and for sixteen years served in a number of
capacities in the Royal Navy. Mr. Hughes has a Bachelor's Degree in
International Affairs and is a graduate of the Royal Naval College, Dartmouth,
England.
MR. TRENT J. CARMAN joined the Company in April 2003 and is the Chief Financial
Officer, Secretary and Treasurer. Prior to joining the Company, Mr. Carman
served as Chief Financial Officer of StorNet, Inc. from January 2000 until April
2003, and served in various capacities including Senior Vice President and Chief
Financial Officer for United Artists Theatre Circuit, Inc., from June 1992 until
January 2000. Mr. Carman received his Bachelor of Science Degree in Accounting
from Utah State University and holds a Master's Degree in Business
Administration-Finance from Indiana University.
30
MS. SHARON KECK joined the Company as Accounting Manager in October 1993 and was
named Controller in July of 1995. She assumed the additional position of Chief
Accounting Officer in January 2002. Ms. Keck holds a Bachelor of Science Degree
in Accounting from Bob Jones University.
AUDIT COMMITTEE
The Audit Committee currently consists of Messrs. McNair (Chairman), Kikumoto
and Tate. The Board of Directors has determined that all members of the Audit
Committee are "independent" within the meaning of the listing standards of the
NASDAQ Stock Market, Inc. and the Securities and Exchange Commission rules
governing audit committees. In addition, the Board of Directors has determined
that Mr. Tate meets the SEC criteria of an "audit committee financial expert" as
defined under the applicable SEC rules.
CODE OF ETHICS
The Company has adopted a Code of Ethics for directors, officers, and employees.
This Code of Ethics is intended to promote honest and ethical conduct,
compliance with applicable laws, full and accurate reporting, and prompt
internal reporting of violations of the code, as well as other matters. The
Company will provide a copy of its Code of Ethics to any person without charge,
upon written request to: Secretary, Air Methods Corporation, 7301 S. Peoria,
Englewood, Colorado 80112.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based on its review of the copies of reports filed and upon written
representations, the Company believes that during 2004, executive officers,
directors and ten percent stockholders of the Company were in compliance with
their filing requirements under Section 16(a) of the Exchange Act of 1934, as
amended, except for the following:
- - Form 4 related to one option exercise transaction for General Carl
McNair. The Form 4 was sent for filing within the timeframe required;
however, a notice of failure to transmit via EDGAR was received the
following day and the Form 4 was successfully transmitted later that
following day.
- - Forms 4 related to option grants to Neil Hughes, Aaron Todd, Trent
Carman, David Dolstein, and Sharon Keck. The late filing was due to an
administrative delay between grant date and delivery of formal option grant
agreements to the executive officers. For each officer, the filing related
to a single option grant transaction.
31
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the cash compensation payable by the Company that
was earned by the Chief Executive Officer and each of the other executive
officers whose annual salary and bonus for 2004 exceeded $100,000 (the "Named
Executive Officers") for the years 2002, 2003 and 2004.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
OTHER
ANNUAL SECURITIES ALL OTHER
BONUS COMP UNDERLYING COMPENSATION
----- ---- ------------
NAME AND POSITION YEAR SALARY ($) ($)(1) ($) OPTIONS (#) ($)(2)
- ----------------- ---- ---------- ------ --- ----------- ------
Aaron D. Todd(3) 2004 331,538 9,600(6) -- 150,000 14,606
Chief Executive Officer 2003 285,000 -- -- 50,000 17,250
2002 224,423 217,500 -- 125,000 12,093
David L. Dolstein 2004 216,538 6,300(6) -- 115,000 10,631
Senior Vice President, 2003 190,000 -- -- 25,000 13,131
Community Based 2002 169,692 118,000 -- 75,000 10,149
Services
Neil M. Hughes 2004 217,308 6,300(6) -- 90,000 11,906
Senior Vice-President, 2003 190,000 -- -- -- 13,027
Air Medical Services 2002 169,500 99,000 -- 50,000 10,500
Division
Trent J. Carman(5) 2004 212,500 6,200(6) -- 75,000 10,625
Chief Financial Officer, 2003 128,571 -- -- 37,500 2,625
Secretary and Treasurer and Controller 2002 -- -- -- -- --
Sharon J. Keck 2004 155,192 5,000(6) -- 60,000 7,881
Chief Accounting Officer 2003 135,000 -- -- -- 8,117
and Controller 2002 109,615 50,000(4) -- 15,000 6,546
(1) Unless otherwise noted, bonus for 2002 consists of an incentive bonus
payable under the Incentive Bonus Plan adopted in March 2002 and a
discretionary bonus related to the acquisition and integration of Rocky
Mountain Holdings. All 2002 bonuses were paid in 2003.
(2) Consists of employer matching contributions under the Company's 401(k)
Plan.
(3) Mr. Todd was appointed Chief Executive Officer effective July 1,
2003.
(4) Consists of a discretionary bonus related to the acquisition and
integration of Rocky Mountain Holdings and 2002 fiscal performance.
(5) Mr. Carman joined the Company in April 2003.
(6) Consists of a discretionary bonus related to management's performance
in 2004. All 2004 bonuses were paid in 2005.
32
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain summary information concerning stock option
grants for the Named Executive Officers during 2004.
% OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED GRANT DATE
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION PRESENT VALUE
NAME GRANTED FISCAL YEAR PRICE DATE PER SHARE
- ---- ------- ------------ ----- ---- ---------
Aaron D. Todd 125,000 22% $ 8.98 01/01/10 $ 3.08(1)
25,000 4% $ 8.98 01/01/09 $ 2.24(2)
David L. Dolstein 100,000 18% $ 8.98 01/01/10 $ 3.08(1)
15,000 3% $ 8.98 01/01/09 $ 2.24(2)
Neil Hughes 75,000 13% $ 8.98 01/01/10 $ 3.08(1)
15,000 3% $ 8.98 01/01/09 $ 2.24(2)
Trent J. Carman 60,000 11% $ 8.98 01/01/10 $ 3.08(1)
15,000 3% $ 8.98 01/01/09 $ 2.24(2)
Sharon Keck 50,000 9% $ 8.98 01/01/10 $ 3.08(1)
10,000 2% $ 8.98 01/01/09 $ 2.24(2)
(1) The present value is estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions:
dividend yield of 0%, expected volatility of 32%, risk-free interest rate
of 3.4% and expected option life of 5 years.
(2) The present value is estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions:
dividend yield of 0%, expected volatility of 32%, risk-free interest rate
of 2.5% and expected option life of 3 years.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides certain summary information concerning stock option
exercises during 2004 by, and option values as of December 31, 2004 for, the
Named Executive Officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- --------------- ------------ ------------- ----------------
Aaron D. Todd -- -- 75,000/175,000 104,333/52,167
David L. Dolstein 60,000 312,720 38,332/126,668 52,165/26,085
Neil M. Hughes 2,000 10,718 53,000/101,667 117,836/20,416
Trent J. Carman -- -- 30,000/82,500 17,000/8,500
Sharon J. Keck -- -- 13,334/61,666 24,500/12,250
(1) Amounts represent the fair market value of the underlying common stock
at December 31, 2004 of $8.60 per share less the exercise price.
33
DIRECTOR COMPENSATION
The Company has adopted compensation and incentive benefit plans to enhance its
ability to continue to attract, retain and motivate qualified persons to serve
as directors of the Company. Effective January 1, 2004, the payments to the
Company's non-employee directors, except for Mr. Belsey, were as follows:
- Annual retainer of $12,000
- $1,000 per Board of Directors meeting
- $600 per committee meeting for all committees except the Audit
Committee - $1,000 per Audit Committee meeting (effective April 2004)
- Fee per committee meeting for committee chairman as follows:
$4,000 for Audit Committee, $3,000 for Compensation/Stock Option
Committee, $2,000 for Nominating and Governance Committee and $1,000
for Finance/Strategic Planning Committee
Each non-employee director may elect to receive shares of Common Stock in lieu
of cash payments pursuant to the Company's Equity Compensation Plan for
Non-Employee Directors. The Company also reimburses its non-employee directors
for their reasonable expenses incurred in attending Board of Directors and
committee meetings. Board members who are also officers do not receive any
separate compensation nor fees for attending Board of Directors or committee
meetings.
A non-employee director is granted options for completion of each year of
service, if the director has attended a minimum of 75% of all Board of
Directors' and applicable committee meetings during that fiscal year. A year of
service is defined as a fiscal year of the Company during which the non-employee
director served on the Board of Directors for the entire fiscal year. On an
annual basis after the date of the last Board meeting for the year, each
qualified non-employee director receives a five-year option to purchase 10,000
shares, exercisable at the then-current fair market value of the Company's
common stock. As of December 31, 2004, directors held options granted for
director-related services to purchase a total of 145,000 shares of common stock.
The Company entered into an Executive Consulting Agreement with Mr. Belsey
effective July 1, 2003 for an initial term of five years. Under the agreement,
Mr. Belsey agreed to serve as Chairman of the Board of Directors, at the
pleasure of the Board of Directors, through the completion of the Annual Meeting
of Stockholders in 2004. Upon expiration of that term of service and his
re-election to the Board of Directors, Mr. Belsey was reappointed as Chairman
through the Annual Meeting of Stockholders in 2007. Mr. Belsey also agreed to
serve as a consultant with those responsibilities designated to him by the Board
of Directors, for a consulting fee of $750,000, payable in equal annual
installments from July 1, 2003 through June 30, 2007. This fee is payable
regardless of the amount of time Mr. Belsey spends performing his services as
Chairman and consultant, and whether or not he becomes disabled or dies during
such period. In addition, the Company has agreed to pay Mr. Belsey cash
compensation of $50,000 on each of July 1, 2003, January 1, 2004, and January 1,
2005, which Mr. Belsey intends to contribute to a personal retirement fund.
During the term of this agreement and for a period of 18 months following the
termination of the agreement with the Company, Mr. Belsey may not engage in any
business which competes with the Company anywhere in the United States.
In 2003 the Company purchased $50,000 life insurance policies for each
nonemployee director who had served longer than one year, excluding Messrs.
Belsey and McNair. A life insurance policy was purchased for Mr. Tate in 2004.
The policies vest over two years, and, as of June 2004, participating directors,
with the exception of Mr. Tate, were 50% vested. Effective December 22, 2003, an
annuity policy was purchased on behalf of Mr. McNair in the amount of $50,000 in
lieu of insurance policies purchased for other members of the Board of
Directors.
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement with Mr. Todd effective July 1,
2003 for an initial term of two years, subject to successive one-year
extensions. The agreement provides for annual compensation which was $320,000 in
2004 and may be terminated by either party upon 90 days' written notice, or
immediately by the Company for cause. In the event the Company terminates the
agreement without cause, Mr. Todd is entitled to severance payments for 18
months following termination at an annual rate equal to his highest cash
compensation during any 12-month period of his employment. During the term of
employment and for 18 months following the
34
termination of employment, Mr. Todd may not engage in any business which
competes with the Company anywhere in the United States.
The Company entered into an Employment Agreement with each of Mr. Carman, Mr.
Dolstein, Mr. Hughes, and Ms. Keck effective January 1, 2003, with the exception
of Mr. Carman's agreement, which was effective April 28, 2003. Each agreement is
for an initial term of one year starting on the effective date, and subject to
successive one-year extensions. Each of the agreements was extended for an
additional year in 2004. The agreements provide for annual compensation which
was $205,000, $210,000, $210,000, and $150,000, respectively, for 2004. Each
agreement may be terminated either by the Company or by the employee upon 90
days' written notice, or immediately by the Company for cause. In the event the
Company terminates an agreement without cause, the employee is entitled to
severance payments for 12 months following termination at an annual rate equal
to his highest cash compensation during any 12-month period of his employment.
During the term of employment and for 12 months following the termination of
employment, the employee may not engage in any business which competes with the
Company anywhere in the United States.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
COMPENSATION/STOCK OPTION COMMITTEE
The Compensation/Stock Option Committee currently consists of Dr. Miller
(Chairman) and Messrs. Bernstein and Gray. The Compensation/Stock Option
Committee is responsible for making recommendations to the Board of Directors
regarding executive compensation matters. The Board of Directors has determined
that all members of the Compensation/Stock Option Committee are "independent"
within the meaning of the NASDAQ Stock Market Inc.'s listing standards, except
for Mr. Bernstein whom the Board of Directors has determined, based on
exceptional and limited circumstances, should continue to serve on the
Compensation/Stock Option Committee until the Company's 2005 annual meeting of
stockholders.
COMPENSATION COMMITTEE REPORT
The Compensation/Stock Option Committee is responsible for recommending and
administering the Company's guidelines governing employee compensation. The
Compensation/Stock Option Committee evaluates the performance of management,
recommends compensation policies and levels, and makes recommendations
concerning salaries and incentive compensation.
Compensation Philosophy. The Company's executive compensation program is
- ------------------------
designed to attract and retain executives capable of leading the Company to meet
its business and development objectives and to motivate them to actions which
will have the effect of increasing the long-term value of stockholder investment
in the Company. The Compensation/Stock Option Committee considers a variety of
factors, both qualitative and quantitative, in evaluating the Company's
executive officers and making compensation decisions. These factors include the
compensation paid by comparable companies to individuals in comparable
positions, the individual contributions of each officer to the Company, and most
important, the progress of the Company towards its long-term objectives. At this
point in the Company's development, objectives against which executive
performance is gauged include the addition and retention of aeromedical service
contracts, growth of its independent services model and Products Division, and
the securing of necessary capital and financing to fund business expansion.
Annual compensation for the Company's executive officers for 2004 consisted of
base salary, discretionary bonuses, and 401(k) match.
Compensation of the Chief Executive Officer. Mr. Todd assumed the Office of
- ------------------------------------------------
Chief Executive Officer of the Company on July 1, 2003. Accordingly, the
Compensation/Stock Option Committee acted to increase Mr. Todd's annual salary
to $300,000 effective July 1, 2003, and subsequently increased Mr. Todd's annual
salary to $320,000 effective January 1, 2004. In determining the compensation to
be awarded to Mr. Todd for his services to the Company, the Committee considered
salaries paid to chief executive officers at competitive companies.
35
Base Salary. The base salary for each executive officer, including the Chief
- ------------
Executive Officer, is established initially by the Committee pursuant to written
employment agreements. Base salaries are reviewed annually by the Committee and
adjusted based on the Committee's review of salaries paid to executives at
competitive companies, the particular executive officer's performance and length
of time in a certain position and the Company's financial condition and overall
performance and profitability.
Incentive Bonus. In order to provide additional incentive to executive officers
- ----------------
to achieve corporate objectives within operating divisions and the Company as a
whole, the Compensation Committee adopted a plan in June 2004 which provided for
payment of year-end bonuses. The dollar amount of those bonuses was stated as a
percentage of base salary and was conditional to achievement of corporate
objectives. Because the objectives were not met in 2004, no bonuses were awarded
according to the terms of the plan. However, in the first quarter of 2005, the
Committee approved discretionary bonuses, as provided for within the plan, to
certain executive officers of the Company related to management's performance
under difficult circumstances in 2004.
Section 162(m) Compliance. Under Section 162(m) of the Code, federal income tax
- --------------------------
deductions of publicly traded companies may be limited to the extent total
compensation (including base salary, annual bonus, restricted stock awards,
stock option exercises and non-qualified benefits) for certain executive
officers exceeds $1 million in any one year. The Compensation Committee intends
to design the Company's compensation programs so that the total compensation
paid to any employee will not exceed $1 million in any one year.
By the Compensation/Stock Option Committee:
Lowell D. Miller, Ph.D., Chairman
Ralph J. Bernstein
Samuel H. Gray
STOCK PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder return
for the period from December 31, 2000 through December 31, 2004, against the
Standard & Poor's 500 Index (S&P 500) and "peer group" companies in industries
similar to those of the Company. The S&P 500 is a widely used composite index
reflecting the returns of five hundred publicly traded companies in a variety of
industries. Peer Group Index returns reflect the transfer of the value on that
date of the initial $100 investment into a peer group consisting of all publicly
traded companies in SIC Group 4522: "Non-scheduled Air Transport." The Company
believes that this Peer Group is its most appropriate peer group for stock
comparison purposes due to the limited number of publicly traded companies
engaged in medical air or ground transport and because this Peer Group contains
a number of companies with capital costs and operating constraints similar to
those of the Company.
ANNUAL RETURN PERCENTAGE
Years Ending
-------------------------------------------
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04
===========================================
AIR METHODS CORPORATION 24.00% 60.77% -8.49% 57.52% -4.23%
S & P 500 -9.11% -11.88% -22.10% 28.68% 10.88%
PEER GROUP 71.62% .71% 13.31% 9.67% 23.29%
INDEXED RETURNS
Base Years Ending
Period
--------------------------------------
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04
=============================================-
AIR METHODS CORPORATION 100.00 124.00 199.36 182.43 287.36 275.20
S & P 500 100.00 90.89 80.09 62.39 80.29 89.02
PEER GROUP 100.00 171.62 172.83 195.82 214.76 264.78
36
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN *
[GRAPHIC OMITED]
[GRAPHIC OMITED]
* $ 100 invested on 12/31/99 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
PEER GROUP COMPANIES (SIC = 4522)
Air Methods Corporation
Airnet Systems Income
Atlas Air Worldwide Holdings, Inc.
Elite Flight Solutions, Inc.
Offshore Logistics, Inc.
Petroleum Helicopters, Inc.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLANS
The following equity compensation plans have been previously approved by the
Company's shareholders:
- 1995 Employee Stock Option Plan - provides for the granting of
incentive stock options and nonqualified stock options, stock
appreciation rights, and supplemental stock bonuses to employees as
well as third party consultants and directors.
- Nonemployee Director Stock Option Plan - provides for the
granting of nonqualified stock options to nonemployee directors of the
Company upon the completion of each full year of service.
- Equity Compensation Plan for Nonemployee Directors - provides for
the issuance of shares of common stock to nonemployee directors, at
their election, in lieu of cash as payment for their director
services.
Information regarding the securities under all of these plans was as follows as
of December 31, 2004:
Number of securities
remaining available for
Number of securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, price of outstanding options, (excluding securities
Plan Category warrants, and rights warrants, and rights reflected in column (a))
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,035,814 $ 8.03 200,607
Equity compensation plans
not approved by security
holders -- N/A --
-------------------------------------------------------------------------------------------
Total 1,035,814 $ 8.03 200,607
===========================================================================================
38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 28, 2005, the beneficial ownership
of the Company's outstanding Common Stock: (i) by each person who owns (or is
known by the Company to own beneficially) more than 5% of the Common Stock, (ii)
by each director and executive officer of the Company, and (iii) by all
directors and executive officers as a group.
Number Percentage of
Name and Address of Shares Common Stock
- ---------------- --------- ------------
George W. Belsey 80,686(1) *
7301 South Peoria
Englewood, CO 80112
Ralph J. Bernstein 993,177(2) 8.64%
77 E. 77th St.
New York, NY 10021
Trent J. Carman 35,000(3) *
7301 South Peoria
Englewood, CO 80112
David L. Dolstein 91,940(4) *
1670 Miro Way
Rialto, CA 92376
Samuel H. Gray 15,000(5) *
95 Madison Avenue
Morristown, NJ 07960
Neil M. Hughes 75,665(6) *
7301 South Peoria
Englewood, CO 80112
Sharon J. Keck 22,061(7) *
7301 South Peoria
Englewood, CO 80112
David Kikumoto 3,000(8) *
6312 South Fiddler's Green Circle
Suite 200 East
Greenwood Village, CO 80111
MG Carl H. McNair, Jr. (Ret.) 55,637(9) *
11710 Plaza America Drive
Reston, VA 20190-6010
Lowell D. Miller, Ph.D. 60,000(10) *
16940 Stonehaven
Belton, MO 64012
Morad Tahbaz 175,183(11) 1.52%
77 E. 77th St.
New York, NY 10021
39
Paul H. Tate 5,000(12) *
7001 Tower Road
Denver, CO 80249
Aaron D. Todd 112,508(13) *
7301 South Peoria
Englewood, CO 80112
All Directors and Executive Officers as a group (13 persons) 1,624,857 (14) 14.13%
Acquisitor Holdings (Bermuda) Ltd.
Clarendon House
2 Church Street
Hamilton HM 11, Bermuda 1,094,000(15) 9.52%
FMR Corp.
82 Devonshire Street
Boston, MA 02109 940,251(16) 8.18%
Dimensional Fund Advisors
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 680,621(17) 5.92%
___________________
* Less than one percent (1%) of Common Stock outstanding on January 28,
2005.
(1) Consists of 80,686 shares directly owned by George and Phyllis
Belsey.
(2) Consists of (i) 30,000 shares subject to stock options exercisable
within 60 days, (ii) 802,677 shares directly owned, (iii) 60,500 shares
owned by Yasmeen Bernstein, Mr. Bernstein's spouse, and (iv) 100,000 shares
subject to currently exercisable warrants held by Americas Partners, of
which Mr. Bernstein is a general partner.
(3) Consists of 35,000 shares subject to stock options exercisable within
60 days.
(4) Consists of (i) 51,666 shares subject to stock options exercisable
within 60 days, (ii) 40,000 shares directly owned; and (iii) 274 shares
directly owned by David and Kathi Dolstein.
(5) Consists of (i) 15,000 shares subject to stock options exercisable
within 60 days.
(6) Consists of (i) 998 shares directly owned, and (ii) 74,667 shares
subject to stock options exercisable within 60 days.
(7) Consists of (i) 21,667 shares subject to stock options exercisable
within 60 days, and (ii) 394 shares directly owned.
(8) Consists of 3,000 shares directly owned.
(9) Consists of (i) 5,637 shares directly owned; (ii) 20,000 shares
jointly owned with spouse, Jo Ann McNair; and (iii) 30,000 shares subject
to stock options exercisable within 60 days.
(10) Consists of (i) 50,000 shares owned directly, and (ii) 10,000 shares
subject to stock options exercisable within 60 days.
(11) Consists of (i) 25,000 shares subject to stock options exercisable
within 60 days, (ii) 50,183 shares directly owned, and (iii) 100,000 shares
subject to currently exercisable warrants held by Americas Partners, of
which Mr. Tahbaz is a managing director.
(12) Consists of 5,000 shares subject to stock options exercisable within
60 days.
(13) Consists of (i) 10,240 shares directly owned, (ii) 2,267 shares
beneficially owned by Mr. Todd in the Company's 401(k) plan; and (iii)
100,001 shares subject to stock options exercisable within 60 days.
(14) Includes (i) 398,001 shares subject to stock options exercisable
within 60 days and (ii) 100,000 shares subject to currently exercisable
warrants.
(15) Based solely on Form 4 filed by the beneficial owner with the Securities
and Exchange Commission on December 29, 2004.
(16) Based solely on Schedule 13G filed by the beneficial owner with the
Securities and Exchange Commission on February 14, 2005.
(17) Based solely on Schedule 13G filed by the beneficial owner with the
Securities and Exchange Commission on February 9, 2005.
40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG LLP, independent registered public accounting firm, audited the
consolidated financial statements of the Company for the years ended December
31, 2004 and 2003. In addition to retaining KPMG LLP to audit the consolidated
financial statements for the year ended December 31, 2004, the Company and its
subsidiaries retained KPMG LLP to provide other services. The aggregate fees
incurred by the Company for audit, audit-related, tax and other services
provided by KPMG LLP during the years ended December 31, 2004 and 2003, were as
follows:
2004 2003
------------------
Audit fees $ 620,220 216,500
Audit-related fees 10,000 13,000
Tax fees 80,325 90,070
All other fees -- --
------------------
Total $ 710,545 319,570
==================
Audit fees include fees for the audit of the annual consolidated financial
statements, review of unaudited consolidated financial statements included in
quarterly reports on Form 10-Q, the audit of management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004, review of Securities and Exchange Commission filings, consents,
registration statements, comfort letters and other services normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for those years.
Audit-related fees include assurance and related services that are reasonably
related to the performance of the audit or review of financial statements. These
services include the audits of employee benefit plans and other services not
directly impacting the audit of the annual financial statements and related
services.
Tax fees include tax services related to the preparation and/or review of, and
consultations with respect to, federal, state, and local tax returns.
All other fees include fees for services not considered audit or tax services.
KPMG LLP performed no such services during 2004 or 2003.
PRE-APPROVAL POLICIES AND PROCEDURES
All audit and non-audit services performed by the Company's independent
certified public accountants during the fiscal year ended December 31, 2004,
were pre-approved by the Audit Committee, which concluded that the provision of
such services by KPMG, LLP was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions.
The Audit Committee's pre-approval policy provides for categorical pre-approval
of specified audit and permissible non-audit services. In addition, audit
services not covered by the annual engagement letter, audit-related services and
tax services require the specific pre-approval by the Audit Committee prior to
engagement. In addition, services to be provided by the independent certified
public accountants that are not within the category of pre-approved services
must be pre-approved by the Audit Committee prior to engagement, regardless of
the service being requested or the dollar amount involved.
The Audit Committee may delegate pre-approval authority to one or more of its
members. The member or members to whom such authority is delegated are required
to report any pre-approval decisions to the Audit Committee at the meeting of
the Audit Committee following the decision. The Audit Committee is not permitted
to delegate to management its responsibilities to pre-approve services to be
performed by the Company's independent certified public accountants.
41
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:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
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, 2004, 2003, and 2002
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 Incorporation (1)
3.2 Amendments to Certificate of Incorporation (2)
3.3 By-Laws as Amended (11)
4.1 Specimen Stock Certificate (2)
4.2 Common Stock Purchase Warrant, dated October 16, 2002, between Air Methods
Corporation and Prudential Capital Partners Management Fund, L.P. (8)
4.3 Common Stock Purchase Warrant, dated October 16, 2002, between Air Methods
Corporation and Prudential Capital Partners, L.P. (8)
4.4 Form of Common Stock Purchase Agreement, dated November 26, 2003 (9)
10.1 1995 Air Methods Corporation Employee Stock Option Plan (4)
10.2 Amendment to 1995 Air Methods Corporation Employee Stock Option Plan (6)
10.3 Nonemployee Director Stock Option Plan, as amended (5)
IV-1
10.4 Equity Compensation Plan for Nonemployee Directors, adopted March 12, 1993 (3)
10.5 Employment Agreement between the Company and Aaron D. Todd, dated July 1,
2003 (7)
10.6 Employment Agreement between the Company and David L. Dolstein, dated January 1,
2003 (7)
10.7 Employment Agreement between the Company and Neil M. Hughes, dated January 1,
2003 (7)
10.8 Consulting Agreement between the Company and George W. Belsey, dated April 15,
2003 (7)
10.9 Employment Agreement between the Company and Trent J. Carman, dated April 28,
2003 (7)
10.10 Employment Agreement between the Company and Sharon J. Keck, dated January 1,
2003 (7)
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)
18.1 Letter from KPMG LLP regarding Change in Accounting Principle10
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
IV-2
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
____________________
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.
10 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004, and incorporated herein by reference.
11 Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 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 16, 2005 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 16, 2005
- -----------------------
Aaron D. Todd
/s/ Trent J. Carman Chief Financial Officer March 16, 2005
- ----------------------- Secretary and Treasurer
Trent J. Carman
/s/ Sharon J. Keck Chief Accounting Officer March 16, 2005
- -----------------------
Sharon J. Keck
/s/ George W. Belsey Chairman of the Board March 16, 2005
- -----------------------
George W. Belsey
/s/ Ralph J. Bernstein Director March 16, 2005
- -----------------------
Ralph J. Bernstein
/s/ Samuel H. Gray Director March 16, 2005
- -----------------------
Samuel H. Gray
/s/ David Kikumoto Director March 16, 2005
- -----------------------
David Kikumoto
/s/ Carl H. McNair, Jr. Director March 16, 2005
- -----------------------
Carl H. McNair, Jr.
/s/ Lowell D. Miller Director March 16, 2005
- -----------------------
Lowell D. Miller, Ph.D.
/s/ Morad Tahbaz Director March 16, 2005
- -----------------------
Morad Tahbaz
/s/ Paul H. Tate Director March 16, 2005
- -----------------------
Paul H. Tate
IV-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
- ------------------------------------------------------------
Independent Registered Public Accounting Firm's Reports F-1
Consolidated Financial Statements
- ---------------------------------
CONSOLIDATED BALANCE SHEETS,
December 31, 2004 and 2003 . . . . . . . . . . . . . . F-3
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 2004, 2003, and 2002. . . . . F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 2004, 2003, and 2002 . . . . F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 2004, 2003, and 2002 . . . . F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 2004 and 2003. . . . . . . . . . . . . . F-11
Schedules
- ---------
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2004, 2003, and 2002 . . . . F-34
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
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors
Air Methods Corporation:
We have audited the accompanying consolidated balance sheets of Air Methods
Corporation and subsidiaries (the Company) as of December 31, 2004 and 2003, 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,
2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 3 to the consolidated financial statements, 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 in 2004.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Air Methods
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 15, 2005, expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
Denver, Colorado
March 15, 2005
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors
Air Methods Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A, that Air Methods Corporation and subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Air Methods Corporation's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Air Methods Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Air
Methods Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Air Methods Corporation and subsidiaries as of December 31, 2004 and 2003, 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,
2004, and our report dated March 15, 2005, expressed an unqualified opinion on
those consolidated financial statements. Our report refers to a change in
accounting for major engine and airframe component overhaul costs from the
accrual method of accounting to the direct expense method in 2004.
/s/ KPMG LLP
Denver, Colorado
March 15, 2005
F-2
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------
2004 2003
--------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,603 5,574
Current installments of notes receivable 61 58
Receivables:
Trade (note 5) 89,218 91,509
Less allowance for doubtful accounts (26,040) (30,301)
--------- --------
63,178 61,208
Other 4,520 3,420
--------- --------
67,698 64,628
Inventories (note 5) 8,667 9,143
Work-in-process on medical interior and products contracts 645 145
Assets held for sale (note 5) 5,705 431
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 4) 2,938 2,249
Deferred tax asset (note 9) -- 105
Prepaid expenses and other current assets 2,686 1,653
--------- --------
Total current assets 91,003 83,986
--------- --------
Property and equipment (notes 5 and 6):
Land 190 190
Flight and ground support equipment 137,742 149,568
Buildings and office equipment 11,805 10,436
--------- --------
149,737 160,194
Less accumulated depreciation and amortization (52,985) (47,117)
--------- --------
Net property and equipment 96,752 113,077
Goodwill (note 2) 6,485 6,485
Notes and other receivables, less current installments 572 1,426
Other assets, net of accumulated amortization of $2,108 and $1,347 at
December 31, 2004 and 2003, respectively 9,911 10,675
--------- --------
Total assets $204,723 215,649
========= ========
(Continued)
F-3
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------
2004 2003
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable (note 5) $ 5,105 --
Current installments of long-term debt (note 5) 6,041 6,110
Current installments of obligations under capital leases (note 6) 410 2,886
Accounts payable 7,193 6,097
Accrued overhaul and parts replacement costs -- 7,702
Deferred revenue 3,883 2,898
Billings in excess of costs and estimated earnings on uncompleted contracts
(note 4) 309 174
Accrued wages and compensated absences 3,668 6,015
Deferred income taxes (note 9) 4,387 --
Due to third party payers 2,867 1,642
Other accrued liabilities 8,291 6,780
-------- --------
Total current liabilities 42,154 40,304
Long-term debt, less current installments (note 5) 72,693 76,680
Obligations under capital leases, less current installments (note 6) 249 251
Accrued overhaul and parts replacement costs -- 26,107
Deferred income taxes (note 9) 8,284 5,151
Other liabilities 8,264 6,468
-------- --------
Total liabilities 131,644 154,961
-------- --------
Stockholders' equity (note 7):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares; issued
10,997,380 and 10,817,594 shares at December 31, 2004 and 2003,
respectively 660 649
Additional paid-in capital 64,955 64,413
Retained earnings (accumulated deficit) 7,464 (4,374)
Treasury stock at par, 4,040 shares at December 31, 2004 -- --
-------- --------
Total stockholders' equity 73,079 60,688
-------- --------
Commitments and contingencies (notes 5, 6, 10, and 12)
Total liabilities and stockholders' equity $204,723 215,649
======== ========
See accompanying notes to consolidated financial statements.
F-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------
2004 2003 2002
---------- -------- --------
Revenue:
Flight revenue (note 8) $ 265,697 234,687 123,534
Sales of medical interiors and products 7,300 6,803 5,796
Parts and maintenance sales and services 106 942 1,338
Gain on disposition of assets, net -- 23 --
---------- -------- --------
273,103 242,455 130,668
---------- -------- --------
Operating expenses:
Flight centers 100,460 87,151 42,958
Aircraft operations 59,916 56,776 29,771
Aircraft rental (note 6) 15,073 11,843 6,175
Cost of medical interiors and products sold 2,714 4,766 4,280
Cost of parts and maintenance sales and services 120 978 1,279
Depreciation and amortization 10,983 11,309 6,695
Bad debt expense 42,892 32,519 15,586
Loss on disposition of assets, net 242 -- 27
General and administrative 28,641 21,550 12,744
---------- -------- --------
261,041 226,892 119,515
---------- -------- --------
Operating income 12,062 15,563 11,153
Other income (expense):
Interest expense (7,856) (8,252) (3,048)
Interest and dividend income 18 143 31
Loss on extinguishment of debt -- -- (101)
Other, net 1,140 912 424
---------- -------- --------
Income before income taxes 5,364 8,366 8,459
Income tax expense (note 9) (2,121) (3,263) (3,299)
---------- -------- --------
Income before cumulative effect of change in accounting principle 3,243 5,103 5,160
Cumulative effect of change in method of accounting for maintenance
costs, net of income taxes (note 3) 8,595 -- --
---------- -------- --------
Net income $ 11,838 5,103 5,160
========== -======= ========
(Continued)
F-5
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------
2004 2003 2002
----------- ----------- ---------
Basic income per common share (note 7):
Income before cumulative effect of change in accounting principle $ .30 .53 .56
Cumulative effect of change in method of accounting for
maintenance costs, net of income taxes .79 -- --
----------- ----------- ---------
Net income $ 1.09 .53 .56
=========== =========== =========
Diluted income per common share (note 7):
Income before cumulative effect of change in accounting principle $ .29 .51 .54
Cumulative effect of change in method of accounting for
maintenance costs, net of income taxes .76 -- --
----------- ----------- ---------
Net income $ 1.05 .51 .54
=========== =========== =========
Pro forma results, assuming change in method of accounting for
maintenance costs was applied retroactively (note 3):
Net income $ 8,676 7,908
=========== =========
Basic income per common share $ .90 .86
=========== =========
Diluted income per common share $ .86 .83
=========== =========
Weighted average number of common shares outstanding - basic 10,894,863 9,665,278 9,184,421
=========== =========== =========
Weighted average number of common shares outstanding - diluted 11,314,827 10,052,989 9,478,502
=========== =========== =========
See accompanying notes to consolidated financial statements.
F-6
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
Retained Total
Additional Earnings Stock-
Common Stock Treasury Stock Paid-in (Accumulated holders'
------------ --------------
Shares Amount Shares Amount Capital Deficit) Equity
----------- -------- --------- -------- ----------- ------------- ---------
BALANCES AT JANUARY 1, 2002 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 7) 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
Issuance of common shares for options
and warrants exercised 225,410 14 -- -- 992 -- 1,006
Purchase of treasury shares -- -- 49,664 (3) (450) -- (453)
Retirement of treasury shares (45,624) (3) (45,624) 3 -- -- --
Net income -- -- -- -- -- 11,838 11,838
---------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2004 10,997,380 $ 660 4,040 $ -- 64,955 7,464 73,079
=================================================================================
See accompanying notes to consolidated financial statements.
F-7
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------
2004 2003 2002
------------------------------
Cash flows from operating activities:
Net income $ 11,838 5,103 5,160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 10,983 11,309 6,695
Bad debt expense 42,892 32,519 15,586
Deferred income tax expense 2,130 3,280 2,985
Common stock options and warrants issued for services -- 75 40
Loss on extinguishment of debt -- -- 101
Loss (gain) on disposition of assets 242 (23) 27
Cumulative effect of change in method of accounting for maintenance (note 3) (8,595) -- --
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in receivables (45,962) (53,955) (21,279)
Decrease in inventories 476 1,592 206
Decrease (increase) in prepaid expenses and other current assets (866) 708 437
Decrease (increase) in work-in-process on medical interior and products
contracts and costs in excess of billings (1,189) (1,521) 176
Increase (decrease) in accounts payable and other accrued liabilities 1,063 80 (2,023)
Increase in accrued overhaul and parts replacement costs -- 4,546 2,222
Increase in deferred revenue, billings in excess of costs, and other liabilities 2,369 690 987
------------------------------
Net cash provided by operating activities 15,381 4,403 11,320
------------------------------
Cash flows from investing activities:
Acquisition of net assets of Rocky Mountain Holdings, LLC (note 2) -- -- (32,127)
Acquisition of property and equipment (15,080) (7,996) (5,017)
Proceeds from disposition and sale of equipment and assets held for sale 1,651 910 845
Decrease (increase) in notes and other receivables and other assets, net 1,536 (1,111) (2,845)
------------------------------
Net cash used by investing activities (11,893) (8,197) (39,144)
------------------------------
(Continued)
F-8
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------
Year Ended December 31
----------------------
2004 2003 2002
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 1,006 9,458 3,131
Payments for purchases of common stock (453) (166) (1,127)
Net borrowings (payments) under lines of credit (482) 2,647 12,554
Proceeds from long-term debt 10,484 8,235 30,670
Payments of long-term debt (14,106) (11,455) (18,495)
Payments of capital lease obligations (2,908) (761) (337)
------------------------------
Net cash provided (used) by financing activities (6,459) 7,958 26,396
------------------------------
Increase (decrease) in cash and cash equivalents (2,971) 4,164 (1,428)
Cash and cash equivalents at beginning of year 5,574 1,410 2,838
------------------------------
Cash and cash equivalents at end of year $ 2,603 5,574 1,410
==============================
Interest paid in cash during the year $ 6,558 7,459 2,415
==============================
Income taxes paid in cash during the year $ 216 46 1,035
==============================
(Continued)
F-9
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Non-cash investing and financing activities:
As described in note 3, 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 year ended December 31, 2004, the Company settled a note payable totaling
$288 by applying a purchase deposit against it. The Company also entered into a
note payable of $336 to finance insurance policies and originated a capital
lease obligation of $430 to finance the acquisition of equipment.
In the year ended December 31, 2004, the Company entered into notes payable of
$5,105 to finance the purchase of aircraft which are held for sale as of
December 31, 2004.
In the year ended December 31, 2004, the Company recorded a liability of $500
for the fee associated with the amendment to its subordinated debt agreement.
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. 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.
See accompanying notes to consolidated financial statements.
F-10
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 and medical transport products for
domestic and international customers. As described more fully in note 2, in
October 2002, the Company acquired 100% of the membership interest of Rocky
Mountain Holdings, LLC (RMH). RMH, Mercy Air Service, Inc. (Mercy Air), and
LifeNet, Inc. (LifeNet) operate as wholly-owned subsidiaries of Air
Methods. LifeNet was formerly known as ARCH Air Medical Service, Inc. 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 $3,733,000 and
$377,000 at December 31, 2004 and 2003, 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 to manufacture and install medical equipment and modify 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-11
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and Equipment
Hangars, equipment, and leasehold improvements are recorded at cost.
Maintenance and repairs 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 0%
Engine and Airframe Overhaul Costs
The Company operates under an FAA-approved continuous inspection and
maintenance program. The Company accounts for maintenance activities under
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 further discussion in Note 3.
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 2004.
F-12
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, 2004,
assets held for sale consisted of three aircraft, which the Company intends
to sell within one year. Related debt is classified as short-term notes
payable in the consolidated financial statements. One of the aircraft is no
longer needed in the Company's operations and two are expected to be sold
and leased back under operating leases. During the year ended December 31,
2004, the Company recognized a loss of $89,000 to reduce one of the
aircraft to estimated fair value less selling costs.
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-13
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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):
2004 2003 2002
-------- ------ ------
Net income before cumulative effect of
change in accounting principle:
As reported $ 3,243 5,103 5,160
Less additional compensation expense,
net of tax effect (492) (319) (736)
------------------------
Pro forma $ 2,750 4,784 4,424
========================
Net income:
As reported $11,838 5,103 5,160
Less additional compensation expense,
net of tax effect (492) (319) (736)
------------------------
Pro forma $11,346 4,784 4,424
========================
Basic income per share before cumulative
effect of change in accounting principle:
As reported $ .30 .53 .56
Pro forma .25 .49 .48
Basic net income per share:
As reported $ 1.09 .53 .56
Pro forma 1.04 .49 .48
Diluted income per share before cumulative
effect of change in accounting principle:
As reported $ .29 .51 .54
Pro forma .24 .49 .46
Diluted net income per share:
As reported $ 1.05 .51 .54
Pro forma 1.01 .49 .46
F-14
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, 2003, and 2002, respectively:
dividend yield of 0% for all years; expected volatility of 33%, 32%, and
57%; risk-free interest rates of 3.2%, 2.4%, and 1.8%; and expected lives
of 5 years, 3 years, and 3 years. The weighted average fair value of
options granted during the years ended December 31, 2004, 2003, and 2002,
was $2.91, $2.03, and $2.64, 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.
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 potentially dilutive 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.
F-15
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
New Accounting Standards
In December 2004, the FASB issued FASB Statement No. 123R (Statement
123R), Accounting for Stock-Based Compensation, an amendment of FASB
Statement No. 123. Statement 123R requires recognition of the grant-date
fair value of stock options and other equity-based compensation issued to
employees in the income statement and is effective for interim or annual
periods beginning after June 15, 2005. Statement 123R provides for either a
modified prospective or modified retrospective transition method for
adopting the statement. The Company has not yet determined which transition
method it will apply nor the impact of adopting Statement 123R on its
financial position or results of operations.
In December 2004, the FASB issued FASB Statement No. 153 (Statement
153), Exchange of Nonmonetary Assets - an amendment of APB Opinion No. 29.
Statement 153 eliminates certain exceptions provided for by APB Opinion No.
29 and instead requires that an exchange of nonmonetary assets be accounted
for at fair value, including recognition of gain or loss, if the exchange
has commercial substance and the fair value is determinable within
reasonable limits. The statement sets forth the criteria to be considered
in determining whether the exchange has commercial substance. Statement 153
is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect the adoption of
Statement 153 to have a material impact on its financial position or
results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform with
the 2004 presentation, primarily to reclassify accrued overhaul and parts
replacement costs related to aircraft owned by hospital customers and
customer credit balances due to third party payers.
(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-16
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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. At the time of acquisition, the Company segregated certain
equipment and spare parts inventory whose airworthy status and usability
within Company operations had not yet been determined and commenced an
analysis to determine the valuation of these assets. The preliminary
allocation of the purchase price included these assets at the book value
assigned by RMH prior to the acquisition. During 2003, the Company
completed its analysis of this equipment and spare parts inventory and
determined that the assets had nominal realizable value. Neither the
equipment nor the spare parts inventory included in this analysis was
placed in service within the Company's operations. The purchase price
allocation was adjusted accordingly to reflect the results of the Company's
usability and valuation analysis.
The results of RMH's operations have been included with those of the
Company since October 16, 2002.
F-17
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) 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).
In 2002, the impact of the major overhaul accrual relating to aircraft
purchased in the RMH acquisition was considered a component of the
valuation of the aircraft and did not affect the allocation of the purchase
price to goodwill. Accordingly, the change in method to the direct expense
method in 2004 resulted in a reduction in the asset value assigned to RMH
aircraft. The amount of the cumulative effect of the change in accounting
principle related to RMH aircraft was due exclusively to depreciation of
the asset value or changes in the liability balances which had been
expensed subsequent to the acquisition. Therefore, the majority of the
cumulative effect of the change in accounting principle related to aircraft
which were in the Company's fleet prior to the RMH acquisition.
(4) COSTS IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COSTS
As of December 31, 2004, 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):
2004 2003
--------- -------
Costs incurred on uncompleted contracts $ 8,949 5,386
Estimated contribution to earnings 4,406 1,722
--------- -------
13,355 7,108
Less billings to date (10,726) (5,033)
--------- -------
Costs and estimated earnings in excess of billings, net $ 2,629 2,075
========= =======
(5) NOTES PAYABLE AND LONG-TERM DEBT
Short-term notes payable as of December 31, 2004, consist of two notes
with an aircraft manufacturer for the purchase of two aircraft. The notes
are non-interest-bearing and mature in the first quarter of 2005. The two
aircraft collateralizing the notes are expected to be sold and leased back
under operating leases and are classified in the consolidated financial
statements as assets held for sale.
F-18
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Long-term debt consists of the following at December 31 (amounts in
thousands):
2004 2003
-------- -------
Subordinated notes payable with quarterly interest payments at 12.0% and
all principal due in 2007, unsecured (net of discount of $1,140) $21,860 21,337
Borrowings under revolving credit facility with monthly interest payments
and all principal due in 2006. Weighted average interest rate at
December 31, 2004, is 4.72%. 14,719 15,201
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. 6,039 6,769
Notes payable with interest rates from 6.53% to 6.70%, due in monthly
installments of principal and interest at various dates through 2009,
collateralized by aircraft and other flight equipment 2,085 2,788
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. 1,250 1,750
Notes payable with interest rates from 6.89% to 8.49%, due in monthly
payments of principal and interest with all remaining principal due in
2008, collateralized by aircraft 10,288 18,806
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 3,361 3,790
Notes payable with interest at 8.96%, due in monthly payments of
principal and interest with all remaining principal due in 2007,
collateralized by aircraft 1,807 2,040
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, 2004, is 5.55%. 2,127 2,326
Note payable with interest rate at 5.60%, due in monthly installments of
principal and interest with all remaining principal due in 2010,
collateralized by aircraft 6,537 --
Notes payable with interest rates from 5.08% to 5.95%, due in monthly
installments of principal and interest at various dates through 2010,
collateralized by aircraft 8,311 5,744
Notes payable with interest rates from 8.16% to 9.55%. Paid in full in
2004. -- 1,593
Other 350 646
-------- -------
78,734 82,790
Less current installments (6,041) (6,110)
-------- -------
$72,693 76,680
======== =======
F-19
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
As of December 31, 2004, the Company had $14,719,000 outstanding
against a $35 million senior revolving credit facility with certain
lenders. Available capacity on the facility was $19,073,000 as of December
31, 2004. 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, 2004, was 4.72%.
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, 2004, the Company was in
compliance with the covenants of the credit facility.
F-20
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(5) 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. (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 securities 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 purchase agreement 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, 2004, 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, the Company accrued an amendment
fee of $500,000 in 2004 in exchange for the elimination of a financial
covenant for the duration of the agreement. The fee is expected to be paid
in the first quarter of 2005.
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:
2005 $ 6,041
2006 23,615
2007 29,106
2008 12,154
2009 5,440
Thereafter 2,378
--------
$ 78,734
========
F-21
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(6) LEASES
The Company leases hangar and office space under noncancelable
operating leases and leases certain equipment and aircraft under
noncancelable operating and capital leases. As of December 31, 2004, future
minimum lease payments under capital and operating leases are as follows
(amounts in thousands):
Capital Operating
leases leases
---------------------
Year ending December 31:
2005 $ 454 18,232
2006 246 17,450
2007 22 16,378
2008 -- 15,301
2009 -- 13,462
Thereafter -- 31,826
---------------------
Total minimum lease payments 722 $ 112,649
==========
Less amounts representing interest (63)
---------
Present value of minimum capital lease payments 659
Less current installments (410)
---------
$ 249
=========
Rent expense relating to operating leases totaled $19,508,000,
$15,424,000, and $8,670,000, for the years ended December 31, 2004, 2003,
and 2002, respectively.
At December 31, 2004 and 2003, leased property held under capital
leases included in equipment, net of accumulated depreciation, totaled
$885,000 and $4,393,000, respectively.
F-22
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(7) 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
As of December 31, 2004, the following warrants to purchase the
Company's common stock are outstanding:
Number of Warrants Exercise Price per Share Expiration Date
- ------------------ ------------------------- -----------------
449,716 $ .06 October 16, 2008
100,000 5.28 October 16, 2007
25,000 6.60 August 8, 2007
- ------------------
574,716
==================
(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 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. However, option grants to certain
officers and employees in 2004 included 460,000 options which had
different vesting terms. These options vest after five years and
expire six 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 market value
of the Company's common stock. All options under this plan are vested
immediately upon issue.
F-23
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following is a summary of option activity, including options
granted and outstanding outside of the Plan, during the years ended
December 31, 2004, 2003, and 2002:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at January 1, 2002 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
Granted 582,000 8.91
Canceled (1,778) 2.44
Exercised (200,410) 4.63
----------
Outstanding at December 31, 2004 1,035,814 8.03
==========
Options exercisable at:
December 31, 2002 321,438 $ 3.56
December 31, 2003 414,335 5.77
December 31, 2004 410,204 7.02
F-24
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options
outstanding at December 31, 2004:
Weighted-Average Weighted-
Remaining Contractual Weighted- Average
Range of Average Number Exercise
Exercise Price Number Outstanding Life (Years) Exercise Price Exercisable Price
- --------------- ------------------ ---------------------- --------------- ----------- ----------
3.35 to 4.31 37,981 1.1 $ 3.71 37,982 $ 3.71
5.60 to 7.92 335,833 2.7 6.66 250,555 6.58
8.89 to 8.98 662,000 4.7 8.97 121,667 8.97
------------------ -----------
1,035,814 410,204
================== ===========
(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,
2004, 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:
2004 2003 2002
---- ---- ----
Weighted average number of common shares
outstanding - basic 10,894,863 9,665,278 9,184,421
Dilutive effect of:
Common stock options 79,141 99,955 227,765
Common stock warrants 340,823 287,756 66,316
---------------------------------
Weighted average number of common shares
outstanding - diluted 11,314,827 10,052,989 9,478,502
=================================
Common stock options totaling 662,000, 252,500, and 45,000 were
not included in the diluted income per share calculation for the years
ended December 31, 2004, 2003, and 2002, respectively, because their
effect would have been anti-dilutive.
F-25
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(8) REVENUE
The Company has operating agreements with various hospitals and
hospital systems to provide services and aircraft for periods ranging from
1 to 10 years. The agreements provide for revenue from monthly fixed fees
and flight fees based upon the utilization of aircraft in providing
emergency medical services. The fixed-fee portions of the agreements
provide for the following revenue for years ending December 31 (amounts in
thousands):
2005 $ 54,759
2006 38,290
2007 24,078
2008 14,601
2009 8,514
Thereafter 6,518
---------
$ 146,760
=========
(9) INCOME TAXES
Income tax benefit (expense), excluding amounts recorded as the
cumulative effect of a change in accounting principle, consists of the
following for the years ended December 31 (amounts in thousands):
2004 2003 2002
--------------------------
Current income tax benefit (expense):
Federal $ -- (12) --
State 9 29 (314)
--------------------------
9 17 (314)
Deferred income tax benefit (expense):
Federal (1,857) (2,860) (2,601)
State (273) (420) (384)
--------------------------
(2,130) (3,280) (2,985)
--------------------------
Total income tax expense $(2,121) (3,263) (3,299)
==========================
F-26
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(9) 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):
2004 2003 2002
--------------------------
Tax at the federal statutory rate $(1,824) (2,844) (2,876)
State income taxes, net of federal
benefit, including adjustments based
on filed state income tax returns (268) (419) (423)
Change in valuation allowance -- (2,456) --
Revisions for filed returns -- 2,456 --
Other (29) -- --
--------------------------
Net income tax benefit (expense) $(2,121) (3,263) (3,299)
==========================
For income tax purposes, at December 31, 2004, the Company has net
operating loss carryforwards of approximately $23 million, expiring at
various dates through 2024. 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 $1.4 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-27
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(9) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are as
follows (amounts in thousands):
2004 2003
--------- --------
Deferred tax assets:
Overhaul and parts replacement cost,
principally due to the accrual method $ -- 8,289
Net operating loss carryforwards 9,220 7,135
Minimum tax credit carryforward 12 12
Other 1,887 529
--------- --------
Total gross deferred tax assets 11,119 15,965
Less valuation allowance (904) (2,691)
--------- --------
Net deferred tax assets 10,215 13,274
--------- --------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases and
depreciation methods (16,846) (15,610)
Allowance for uncollectible accounts (5,213) (2,363)
Goodwill (493) (338)
Other (334) (9)
--------- --------
Total deferred tax liabilities (22,886) (18,320)
--------- --------
Net deferred tax liability $(12,671) (5,046)
========= ========
The change in deferred tax assets in 2004 includes $5,495,000 recorded
as a component of the cumulative effect of the change in the method of
accounting for maintenance costs. In 2004 net operating loss carryforwards
of $4.2 million, for which a valuation allowance had been established,
expired. A valuation allowance has been provided for net operating loss
carryforwards which are not expected to be realized prior to expiration.
Based on management's assessment, realization of net deferred tax assets
through future taxable earnings is considered more likely than not, except
to the extent valuation allowances are provided.
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan whereby
employees may contribute any percentage of their gross pay up to the IRS
maximum ($13,000 for 2004). The Company contributes 2% of gross pay for all
employees and matches 60% of the employees' contributions up to 6% of their
gross pay. 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 any percentage of their gross pay up to the
IRS maximum ($13,000 for 2004), and the Company matches 30% of the
employees' contributions up to 6% of their gross pay. Company contributions
totaled approximately $2,284,000, $2,176,000, and $1,598,000 for the years
ended December 31, 2004, 2003, and 2002, respectively.
F-28
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(11) RELATED PARTY TRANSACTIONS
In 2002, the Company paid $750,000 to Americas Partners for its
services in connection with the acquisition of RMH. Ralph Bernstein and
Morad Tahbaz, directors of the Company, are partners of Americas Partners.
The form of payment was $477,388 in cash and warrants 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.
(12) COMMITMENTS AND CONTINGENCIES
The Company has entered into various aircraft operating leases under
which it provides residual value guarantees to the lessor. As of December
31, 2004, the undiscounted maximum amount of potential future payments
under the guarantees is $3,648,000. 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 acquisition by the Company, RMH entered into a commitment
agreement to take delivery of eight aircraft for approximately $16,000,000.
As of December 31, 2004, the Company had taken delivery of all aircraft
under the agreement.
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, 2004, 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 $347,000.
In March 2004, the Company entered into a commitment agreement to
purchase 10 Eurocopter EC135 helicopters for approximately $34,300,000,
with deliveries scheduled through the first quarter of 2005. As of December
31, 2004, the Company had taken delivery of seven helicopters under the
agreement.
In July 2004, the Company entered into a commitment agreement to
purchase 15 Bell 427 helicopters for approximately $55,500,000, beginning
in 2007, with a minimum of three deliveries per year. The agreement
provides for special incentives, including a trade-in option for up to
fifteen Bell 222 helicopters, with minimum guaranteed trade-in values.
The Company intends to place the new EC135's and Bell 427's primarily
into existing bases and to either sell the aircraft which are replaced or
redeploy them into the backup fleet. Typically the Company has financed
aircraft acquired under these or similar commitments through operating
lease agreements.
F-29
\
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED
In August 2004, the Company entered into a $1,208,000 letter of credit
with a financial institution to securitize an aircraft leased by the
Company under an operating lease agreement. Because the aircraft is
operated in Puerto Rico, the lessor is unable to perfect its security
interest against the aircraft. The letter of credit perpetually renews for
consecutive one-year terms through the end of the lease agreement in July
2010 or until the aircraft is moved from Puerto Rico and reduces the
available borrowing capacity under the Company's senior revolving credit
facility.
(13) BUSINESS SEGMENT INFORMATION
The Company identifies operating segments based on management
responsibility and the type of products or services offered. Operating
segments and their principal products or services are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in 17
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.
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-30
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(13) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
-----------------------------------------------------------------------------
2004
External revenue $ 176,968 88,835 7,300 -- -- 273,103
Intersegment revenue -- -- 8,753 -- (8,753) --
-----------------------------------------------------------------------------
Total revenue 176,968 88,835 16,053 -- (8,753) 273,103
Operating expenses 115,487 78,295 10,451 9,140 (7,347) 206,026
Depreciation & amortization 5,417 5,081 272 213 -- 10,983
Bad debt expense 42,505 387 -- -- -- 42,892
Interest expense 3,950 3,736 -- 170 -- 7,856
Interest income -- -- -- (18) -- (18)
Income tax expense -- -- -- 2,121 -- 2,121
-----------------------------------------------------------------------------
Income (loss) before
cumulative effect of change
in accounting principle 9,609 1,336 5,330 (11,626) (1,406) 3,243
Cumulative effect of change
in accounting principle, net -- -- -- 8,595 -- 8,595
-----------------------------------------------------------------------------
Net income (loss) $ 9,609 1,336 5,330 (3,031) (1,406) 11,838
=============================================================================
Total assets $ 67,156 N/A N/A 139,730 (2,163) 204,723
=============================================================================
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 $ 76,506 N/A N/A 141,306 (2,163) 215,649
=============================================================================
F-31
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(13) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
2002
External revenue $ 73,210 51,480 5,796 182 -- 130,668
Intersegment revenue -- -- 1,933 -- (1,933) --
-----------------------------------------------------------------------------
Total revenue 73,210 51,480 7,729 182 (1,933) 130,668
Operating expenses 44,257 42,885 6,150 5,135 (1,617) 96,810
Depreciation & amortization 2,848 3,499 149 199 -- 6,695
Bad debt expense 15,586 -- -- -- -- 15,586
Interest expense 1,218 1,008 -- 822 -- 3,048
Interest income (2) (10) -- (19) -- (31)
Loss on extinguishment of debt 101 -- -- -- -- 101
Income tax expense -- -- -- 3,299 -- 3,299
-----------------------------------------------------------------------------
Net income (loss) $ 9,202 4,098 1,430 (9,254) (316) 5,160
=============================================================================
Total assets $ 62,382 N/A N/A 136,177 (2,163) 196,396
=============================================================================
F-32
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(14) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 2004 and 2003 is as
follows (amounts in thousands except per share data):
Quarter
First Second Third Fourth
---------------------------------
2004
Revenue $61,634 74,255 68,949 68,265
Operating income 909 5,916 4,012 1,225
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (892) 4,160 2,378 (282)
Income (loss) before cumulative effect of
change in accounting principle (544) 2,518 1,452 (183)
Net income (loss) 8,051 2,518 1,452 (183)
Basic income (loss) per share before
cumulative effect of change in
accounting principle (.05) .23 .13 (.02)
Basic income (loss) per common share .74 .23 .13 (.02)
Diluted income (loss) per share before
cumulative effect of change in
accounting principle (.05) .22 .13 (.02)
Diluted income (loss) per common share .74 .22 .13 (.02)
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
Income per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly income per share
does not necessarily equal the total computed for the year.
F-33
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors
Air Methods Corporation:
Under date of March 15, 2005, we reported on the consolidated balance sheets of
Air Methods Corporation and subsidiaries (the Company) as of December 31, 2004
and 2003, 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, 2004, which are included in the Company's December 31, 2004 Annual
Report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement Schedule II - Valuation and Qualifying Accounts. 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.
/s/ KPMG LLP
Denver, Colorado
March 15, 2005
F-34
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
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Allowance for trade receivables
Year ended December 31, 2004 $ 30,301 42,892 -- (47,153) 26,040
Year ended December 31, 2003 19,315 32,519 800 (22,333) 30,301
Year ended December 31, 2002 7,735 15,586 11,064 (15,070) 19,315
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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 Report of Independent Registered Public Accounting Firm.
F-35