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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________

FORM 10-Q/A
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
o
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

AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
 
Delaware   84-0915893
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)
 
7301 South Peoria, Englewood, Colorado   80112
(Address of Principal Executive Offices)    (Zip Code)
 
Registrant’s Telephone Number, Including Area Code (303) 792-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated Filer o Accelerated Filer x
Non-accelerated Filer o  (Do not check if a smaller reporting company) Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o  No  x
 
The number of shares of Common Stock, par value $.06 per share, outstanding as of April 29, 2011, was 12,656,229.
 


 
 

 
 
TABLE OF CONTENTS

Form 10-Q/A

PART I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Condensed Consolidated Financial Statements
 
       
   
2
       
   
4
       
   
5
       
   
7
       
 
Item 2.
14
       
 
Item 3.
21
       
 
Item 4.
21
       
PART II.
OTHER INFORMATION
 
       
 
Item 1.
23
       
 
Item 1A.
23
       
 
Item 2.
23
       
 
Item 3.
23
       
 
Item 4.
23
       
 
Item 5.
23
       
 
Item 6.
23
       
 
24

 
EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (Amendment No. 1) amends the Quarterly Report on Form 10-Q of Air Methods Corporation (the Company) for the quarterly period ended March 31, 2011, as originally filed with the Securities and Exchange Commission (SEC) on May 6, 2011 (the Original Filing). This Form 10-Q/A amends the Original Filing to change the classification of most of the Company’s aircraft leases from operating leases to capital leases. Further explanation regarding such change is set forth in Note 2 to the consolidated financial statements contained in this Amendment No. 1. This Amendment No. 1 amends and restates the Original Filing in its entirety. Revisions to the Original Filing have been made to the following sections:
 
 
·
Item 1 – Financial Statements

 
·
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
·
Item 4 – Controls and Procedures
 
 
·
Item 6 – Exhibits

In addition, the Company’s principal executive officer and principal financial officer have provided new certifications in connection with this Amendment No. 1 (Exhibits 31.1, 31.2, and 32).

Except as described above, no other amendments have been made to the Original Filing. This Amendment continues to speak as of the date of the Original Filing, and the Company has not updated the disclosure contained herein to reflect events that have occurred since the date of the Original Filing. Notwithstanding the foregoing, the modifications made herein resulted from the guidance the Company received from the SEC after the date of the Original Filing concerning the appropriate GAAP interpretation of the maximum amount the Company could be required to pay as described in ASC 840-10-25-14, in the event of a non-performance-related default under the Company’s aircraft leases. Accordingly, this Amendment No. 1 should be read in conjunction with the Company’s other filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.
 
 
PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(unaudited)

   
March 31,
2011
   
December 31,
2010
 
   
(Restated)
   
(Restated)
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 56,412       60,710  
Current installments of notes receivable
    4       4  
Receivables:
               
Trade
    128,342       132,329  
Refundable income taxes
    2,262       2,403  
Other
    1,691       3,510  
      132,295       138,242  
                 
Inventories, including work-in-process on medical interiors and products contracts
    26,086        26,820  
Assets held for sale
    581       2,442  
Costs and estimated earnings in excess of billings on uncompleted contracts
    456        160  
Prepaid expenses and other
    14,116       9,614  
                 
Total current assets
    229,950       237,992  
                 
Property and equipment:
               
Land
    251       251  
Flight and ground support equipment
    235,944       217,133  
Aircraft under capital leases (note 2)
    376,684       382,171  
Aircraft rotable spare parts
    37,504       35,375  
Buildings and other equipment
    38,491       37,371  
      688,874       672,301  
Less accumulated depreciation and amortization
    (240,313 )     (227,558 )
Net property and equipment
    448,561       444,743  
                 
Goodwill
    27,874       25,506  
Notes and other receivables, less current installments
    120       121  
Other assets, net of accumulated amortization of $2,964 and $2,716 at March 31, 2011 and December 31, 2010, respectively
    15,256        14,748  
                 
Total assets
  $ 721,761       723,110  

 (Continued)
 
 
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and per share amounts)
(unaudited)
   
March 31,
2011
   
December 31,
2010
 
   
(Restated)
   
(Restated)
 
Liabilities and Stockholders' Equity
           
             
Current liabilities:
           
Notes payable
  $ 6,714       --  
Current installments of long-term debt
    14,731       14,871  
Current installments of obligations under capital leases (note 2)
    42,038       42,327  
Accounts payable
    12,485       13,633  
Deferred revenue
    4,818       6,089  
Billings in excess of costs and estimated earnings on uncompleted contracts
     2,037        638  
Accrued wages and compensated absences
    15,723       13,941  
Due to third party payers
    4,664       4,628  
Deferred income taxes
    7,963       7,143  
Other accrued liabilities
    12,211       12,123  
                 
Total current liabilities
    123,384       115,393  
                 
Long-term debt, less current installments
    76,752       80,352  
Obligations under capital leases, less current installments (note 2)
    220,191       232,464  
Deferred income taxes
    33,223       31,409  
Other liabilities
    26,887       30,063  
                 
Total liabilities
    480,437       489,681  
                 
Stockholders' equity (note 4):
               
Preferred stock, $1 par value.  Authorized 5,000,000 shares, none issued
     --        --  
Common stock, $.06 par value. Authorized 23,500,000 shares; issued 12,694,229 and 12,602,164 shares at March 31, 2011, and December 31, 2010, respectively; outstanding 12,641,729 and 12,600,998 shares at March 31, 2011, and December 31, 2010, respectively
     759        756  
Additional paid-in capital
    90,249       88,069  
Retained earnings
    150,316       144,604  
                 
Total stockholders' equity
    241,324       233,429  
                 
Total liabilities and stockholders’ equity
  $ 721,761       723,110  
 
See accompanying notes to condensed consolidated financial statements.
 
 
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
(unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Restated)
   
(Restated)
 
Revenue:
           
Flight revenue, net
  $ 124,521       113,279  
Sales of medical interiors and products
    5,801       3,905  
Other
    1,583       1,318  
      131,905       118,502  
                 
Operating expenses:
               
Flight centers
    55,654       53,136  
Aircraft operations
    25,113       26,597  
Cost of medical interiors and products sold
    3,978       3,672  
Depreciation and amortization
    16,492       15,743  
Gain on disposition of assets, net
    (361 )     (29 )
General and administrative
    18,307       15,935  
      119,183       115,054  
                 
Operating income
    12,722       3,448  
                 
Other income (expense):
               
Interest expense
    (4,510 )     (4,892 )
Other, net
    1,217       914  
                 
Income (loss) before income taxes
    9,429       (530 )
                 
Income tax benefit (expense)
    (3,717 )     207  
                 
Net income (loss)
  $ 5,712       (323 )
                 
Basic income (loss) per common share (note 5)
  $ .45       (.03 )
                 
Diluted income (loss) per common share (note 5)
  $ .45       (.03 )
                 
Weighted average number of common shares outstanding – basic
    12,607,522       12,459,592  
                 
Weighted average number of common shares outstanding – diluted
    12,758,669       12,459,592  
 
See accompanying notes to condensed consolidated financial statements.
 

Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Restated)
   
(Restated)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 5,712       (323 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization expense
    16,492       15,743  
Deferred income tax expense (benefit)
    2,634       (1,172 )
Stock-based compensation
    691       361  
Tax expense (benefit) from exercise of stock options
    (375 )     12  
Gain on disposition of assets, net
    (361 )     (29 )
Unrealized loss (gain) on derivative instrument
    (1,043 )     216  
Changes in assets and liabilities, net of effects of acquisitions:
               
Increase in prepaid expenses and other current assets
    (3,349 )     (1,595 )
Decrease in receivables
    6,871       7,642  
Decrease in inventories
    1,179       267  
Decrease (increase) in costs in excess of billings
    (296 )     2,254  
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities
    (3,588 )      6,324  
Increase (decrease) in deferred revenue and billings in excess of costs
    38       (465 )
Net cash provided by operating activities
    24,605       29,235  
                 
Cash flows from investing activities:
               
Acquisition of membership interest of United Rotorcraft Solutions, LLC (note 3)
    (1,554 )      --  
Acquisition of equipment and leasehold improvements
    (12,645 )     (11,994 )
Proceeds from disposition and sale of equipment and assets held for sale
    2,343       543  
Increase in notes receivable and other assets, net
    (400 )     (230 )
Net cash used by investing activities
    (12,256 )     (11,681 )

 (Continued)


Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(Amounts in thousands)
(unaudited)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Restated)
   
(Restated)
 
Cash flows from financing activities:
           
Proceeds from long-term debt
  $ --       3,750  
Payments for financing costs
    (36 )     (60 )
Payments of long-term debt and notes payable
    (4,224 )     (3,690 )
Payments of capital lease obligations
    (13,879 )     (13,555 )
Tax benefit (expense) from exercise of stock options
    375       (12 )
Proceeds from issuance of common stock, net
    1,117       98  
Net cash used by financing activities
    (16,647 )     (13,469 )
                 
Increase (decrease) in cash and cash equivalents
    (4,298 )     4,085  
                 
Cash and cash equivalents at beginning of period
    60,710       38,073  
                 
Cash and cash equivalents at end of period
  $ 56,412       42,158  
                 
Interest paid in cash during the period
  $ 4,456       3,413  
Income taxes paid in cash during the period
  $ 566       163  

Non-cash investing and financing activities:

In the quarter ended March 31, 2011, the Company entered into notes payable of $6,714 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of March 31, 2011, and entered into capital leases of $1,318 to finance the purchase of aircraft.

In the quarter ended March 31, 2010, the Company settled notes payable of $2,255 in exchange for the aircraft securing the debt and entered into capital leases of $4,540 to finance the purchase of aircraft.

See accompanying notes to condensed consolidated financial statements.
 
 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1) 
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2010, as restated.

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, deferred income taxes, valuation of long-lived assets, and fair values of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.
 
(2) 
Restatement – Accounting for Leases
 
The Company has restated most of its aircraft operating leases that should have been classified as capital leases based upon certain provisions included in the aircraft lease agreements. Specifically, the leases have certain default clauses, including material adverse change, cross-default provisions and other provisions which are not objectively determinable or do not represent pre-defined criteria at the inception of the lease. As a result, the maximum consideration the Company could be required to pay the lessor in the event of a default is included in the lease payments for lease classification purposes at the inception of the lease. For these leases, the maximum consideration usually approximates or exceeds the cost of the aircraft at the inception of the lease and, when included in minimum lease payments for purposes of applying ASC 840-10-25-1(d) (i.e., the 90% test), results in capital lease classification, in accordance with the guidance for default covenants related to non-performance as discussed in ASC 840-10-25-14. The Company has made an accounting policy election to exclude the maximum consideration it could be required to pay the lessor in the event of default from the calculation of the present value of the minimum lease payments in measuring the capital lease asset and related obligation, since there is no likely scenario whereby an aircraft lessor would require the Company to pay the full stipulated loss value in the event of a non-performance-related default, and, therefore, this maximum consideration has a remote probability of payment.

As a result of the restatement, the Company has recorded additional capital lease assets and related capital lease obligations on the consolidated balance sheets. The impact of deferred rent and unfavorable lease liability related to the acquisition of FSS Airholdings, LLC, (FSS) in 2007 was also reversed from other assets, other accrued liabilities, and other liabilities. Goodwill associated with the acquisition of FSS was revised to reflect capital lease classification and appropriate fair value measurement of FSS leases as of the acquisition date. The Company also adjusted its deferred income tax liability to take into account the temporary differences created to reflect the capital lease obligations and assets for financial reporting purposes. Lease payments related to these aircraft are now recognized as principal reductions in the capital lease obligations and interest expense, rather than as aircraft rental expense. The consolidated statements of income also include depreciation on the capital lease assets over the terms of the respective leases.


Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(2) 
Restatement – Accounting for Leases, continued
 
Rental expense related to the few remaining aircraft operating leases has now been combined into aircraft operations in the consolidated statements of income, due to immateriality. The restatement also impacted the classification of cash flows from operations, financing activities and investing activities and increased the non-cash investing and financing activities; however, there was no impact on the net increase or decrease in cash and cash equivalents reported in the consolidated statements of cash flows.

The adjustment to net income for the three months ended March 31, 2011 and 2010, is summarized below (amounts in thousands):

   
Three Months Ended 
March 31,
 
   
2011
   
2010
 
             
Net income, as previously reported
  $ 5,986       103  
Aircraft operations
    (259 )     (288 )
Aircraft rental
    11,741       12,303  
Depreciation and amortization
    (9,783 )     (10,148 )
Interest expense
    (3,182 )     (3,431 )
Other income, net
    1,037       868  
Tax effect of restatement adjustment
    172       270  
Net income (loss), as restated
  $ 5,712       (323 )
 
 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(2) 
Restatement – Accounting for Leases, continued
 
The impact of the restatement on the consolidated financial statements is summarized below (amounts in thousands except per share amounts):

   
March 31, 2011
   
December 31, 2010
 
   
As
Previously
Reported
   
 
As Restated
   
As
Previously
Reported
   
 
As Restated
 
Consolidated Balance Sheets:
                       
Assets held for sale
  $ 7,376       581       2,523       2,442  
Total current assets
    236,745       229,950       238,073       237,992  
Flight and ground support equipment
    233,134       235,944       220,591       217,133  
Aircraft under capital leases
    --       376,684       --       382,171  
Total property and equipment
    309,380       688,874       293,588       672,301  
Accumulated depreciation and amortization
    (98,780 )     (240,313 )     (92,713 )     (227,558 )
Net property and equipment
    210,600       448,561       200,875       444,743  
Goodwill
    22,659       27,874       20,291       25,506  
Other assets
    15,783       15,256       15,319       14,748  
Total assets
    485,907       721,761       474,679       723,110  
Current installments of obligations under capital leases
     880        42,038        964        42,327  
Other accrued liabilities
    12,232       12,211       12,145       12,123  
Total current liabilities
    82,247       123,384       74,052       115,393  
Obligations under capital leases, less current installments
     799        220,191        953        232,464  
Deferred income taxes
    44,378       33,223       42,392       31,409  
Other liabilities
    27,806       26,887       31,174       30,063  
Total liabilities
    231,982       480,437       228,923       489,681  
Retained earnings
    162,917       150,316       156,931       144,604  
Total stockholders' equity
    253,925       241,324       245,756       233,429  
Total liabilities and stockholders’ equity
    485,907       721,761       474,679       723,110  
 
 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(2) 
Restatement – Accounting for Leases, continued
 
   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
 
   
As
Previously
Reported
   
 
As Restated
   
As
Previously
Reported
   
 
As Restated
 
Consolidated Statements of Income:
                       
Aircraft operations
  $ 24,854       25,113       26,309       26,597  
Aircraft rental
    11,741       --       12,303       --  
Depreciation and amortization
    6,709       16,492       5,595       15,743  
Total operating expenses
    120,882       119,183       116,921       115,054  
Operating income
    11,023       12,722       1,581       3,448  
Interest expense
    (1,328 )     (4,510 )     (1,461 )     (4,892 )
Other, net
    180       1,217       46       914  
Income (loss) before income taxes
    9,875       9,429       166       (530 )
Income tax benefit (expense)
    (3,889 )     (3,717 )     (63 )     207  
Net income (loss)
    5,986       5,712       103       (323 )
Basic income (loss) per common share
    0.47       0.45       0.01       (0.03 )
Diluted income (loss) per common share
    0.47       0.45       0.01       (0.03 )
                                 
Consolidated Statements of Cash Flows:
                       
Net income (loss)
    5,986       5,712       103       (323 )
Depreciation and amortization expense
    6,709       16,492       5,595       15,743  
Deferred income tax expense (benefit)
    2,806       2,634       (902 )     (1,172 )
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities
    (4,311 )     (3,588 )     5,480       6,324  
Net cash provided by operating activities
    14,545       24,605       18,939       29,235  
Acquisition of property and equipment
    (16,270 )     (12,645 )     (15,049 )     (11,994 )
Increase in notes receivable and other assets
    (356 )     (400 )     (182 )     (230 )
Net cash used in investing activities
    (15,837 )     (12,256 )     (14,688 )     (11,681 )
Payments of capital lease obligations
    (238 )     (13,879 )     (252 )     (13,555 )
Net cash used by financing activities
    (3,006 )     (16,647 )     (166 )     (13,469 )
Increase (decrease) in cash and cash equivalents
    (4,298 )     (4,298 )     4,085       4,085  
Interest paid in cash during the period
    1,300       4,456       1,439       3,413  
Noncash investing and financing activities – new capital lease obligations
    --       1,318       --       4,540  

The cumulative effect of the restatement on retained earnings for all periods prior to January 1, 2010, was a decrease of $10,969,000.

Certain amounts in Notes 4, 5, and 7 have been restated to reflect the adjustments described above.

 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(3) 
Acquisition of Subsidiary
 
On March 2, 2011, the Company used cash reserves to acquire 100% of the membership interest of United Rotorcraft Solutions, LLC (URS), a Texas limited liability company, for an initial payment of $1,554,000. The purchase agreement contains a provision whereby the sellers may receive additional consideration based on the profitability of URS during an earn-out period ending December 31, 2011. The Company has accrued a liability of approximately $785,000 related to this earn-out provision.

URS is a full-service helicopter and fixed-wing completions center and maintenance repair operation. The acquisition is expected to expand Products Division’s capabilities and product lines and to provide additional capacity to perform completions and maintenance activities. The Company is still evaluating the valuation of certain intangible assets in the process of determining the purchase price allocation. The results of URS’s operations have been included with those of the Company since March 2, 2011.

(4) 
Stockholders’ Equity
 
Changes in stockholders’ equity for the three months ended March 31, 2011, consisted of the following (amounts in thousands except share amounts):

   
Shares Outstanding
   
Amount
 
         
(Restated)
 
             
Balances at January 1, 2011
    12,600,998     $ 233,429  
                 
Issuance of common shares for options exercised
    39,565       1,117  
Stock-based compensation
    1,166       691  
Tax benefit from exercise of stock options
    --       375  
Net income
    --       5,712  
                 
Balances at March 31, 2011
    12,641,729     $ 241,324  
 
 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(5) 
Income per Share
 
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all outstanding and dilutive potential common shares during the period.

The reconciliation of basic to diluted weighted average common shares outstanding is as follows for the quarters ended March 31:

   
2011
   
2010
 
         
(Restated)
 
             
Weighted average number of common shares outstanding – basic
    12,607,522       12,459,592  
Dilutive effect of:
               
Common stock options
    150,129       --  
Unvested restricted stock
    1,018       --  
Weighted average number of common shares outstanding – diluted
    12,758,669       12,459,592  
 
(6) 
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 receivable, notes payable, accounts payable, and accrued liabilities:

The carrying amounts approximate fair value because of the short maturity of these instruments.

Derivative instruments:
 
The Company’s financial derivative instrument covering 2011 fuel purchases is included in prepaid expenses and other current assets at fair value. Fair value is determined based on quoted prices in active markets for similar instruments. The fair value of the derivative instrument at March 31, 2011, was $1,630,000.

Long-term debt:

The fair value of long-term debt is determined based on the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of March 31, 2011, is estimated to be $95,347,000, compared to carrying value of $91,483,000. The fair value of long-term debt as of December 31, 2010, was estimated to be $99,747,000, compared to a carrying value of $95,223,000.
 
 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(7) 
Business Segment Information
 
Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:

 
·
Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service in 25 states at March 31, 2011. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.
 
·
Hospital-Based Services (HBS) - provides air medical transportation services to hospitals in 30 states under exclusive operating agreements at March 31, 2011. 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.

 
 
For quarter ended March 31:
 
CBS
(Restated)
   
HBS
(Restated)
   
Products
Division
   
Corporate
Activities
(Restated)
   
Intersegment
Eliminations
   
Consolidated
(Restated)
 
2011
                                   
External revenue
  $ 79,968       46,146       5,791       --       --       131,905  
Intersegment revenue
    57       --       5,668       --       (5,725 )     --  
Total revenue
    80,025       46,146       11,459       --       (5,725 )     131,905  
                                                 
Operating expenses, excluding depreciation & amortization
    (59,822 )     (32,892 )     (8,279 )     (5,847 )      4,149       (102,691 )
Depreciation & amortization
    (8,292 )     (7,704 )     (223 )     (273 )     --       (16,492 )
Interest expense
    (2,143 )     (2,228 )     (5 )     (134 )     --       (4,510 )
Other income, net
    556       497       --       164       --       1,217  
Income tax expense
    --       --       --       (3,717 )     --       (3,717 )
Segment net income (loss)
  $ 10,324       3,819       2,952       (9,807 )     (1,576 )     5,712  
                                                 
2010
                                               
External revenue
  $ 66,606       48,000       3,896       --       --       118,502  
Intersegment revenue
    55       --       3,887       --       (3,942 )     --  
Total revenue
    66,661       48,000       7,783       --       (3,942 )     118,502  
                                                 
Operating expenses, excluding depreciation & amortization
    (56,468 )     (34,826 )     (7,159 )     (4,237 )      3,379       (99,311 )
Depreciation & amortization
    (7,771 )     (7,590 )     (144 )     (238 )     --       (15,743 )
Interest expense
    (2,302 )     (2,404 )     (7 )     (179 )     --       (4,892 )
Other income, net
    470       416       --       28       --       914  
Income tax expense
    --       --       --       207       --       207  
Segment net income (loss)
  $ 590       3,596       473       (4,419 )     (563 )     (323 )


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations presented below reflects certain restatements to our previously reported results of operations for these periods. See Note 2 to the consolidated financial statements for a discussion of this matter.

The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume and collection rates for CBS operations; size, structure and growth of our air medical services and products markets; continuation and/or renewal of HBS contracts; execution of new and profitable Products Division contracts; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors 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 our annual report on Form 10-K/A. We undertake no obligation to update any forward-looking statements.

Overview

We provide air medical transportation services throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for domestic and international customers. Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:
·
Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service. Revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities. In the first quarter of 2011 the CBS Division generated 61% of our total revenue, compared to 56% in the first quarter of 2010.
·
Hospital-Based Services (HBS) - provides air medical transportation services to hospitals throughout the U.S. under exclusive operating agreements. Revenue consists of fixed monthly fees (approximately 80% of total contract revenue) and hourly flight fees (approximately 20% of total contract revenue) billed to hospital customers. In the first quarter of 2011 the HBS Division generated 35% of our total revenue, compared to 41% in 2010.
·
Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. In the first quarter of 2011 the Products Division generated 4% of our total revenue, compared to 3% in 2010.

See Note 7 to the condensed consolidated financial statements included in Item 1 of this report for operating results by segment.

We believe that the following factors have the greatest impact on our results of operations and financial condition:

·
Flight volume. Fluctuations in flight volume have a greater impact on CBS operations than HBS operations because almost all of CBS revenue is derived from flight fees, as compared to approximately 20% of HBS revenue. By contrast, 82% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the quarter ended March 31, 2011, are mainly fixed in nature. While flight volume is affected by many factors, including competition and the effectiveness of marketing and business development initiatives, the greatest single variable has historically been weather conditions. Adverse weather conditions—such as fog, high winds, or heavy precipitation—hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for CBS operations were approximately 8,900 for the first quarter of 2011 compared to approximately 8,600 for the first quarter of 2010. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 8,300 in the first quarter of 2011, compared to 8,400 in the first quarter of 2010. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 324 higher in the first quarter of 2011, compared to the first quarter of 2010. Requests for community-based services increased by 3.3% for bases open greater than one year.
 
 
·
Reimbursement per transport. We respond to calls for air medical transports without pre-screening the creditworthiness of the patient and are subject to collection risk for services provided to insured and uninsured patients. Medicare and Medicaid also receive contractual discounts from our standard charges for flight services. Flight revenue is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per transport for CBS operations is primarily a function of price, payer mix, and timely and effective collection efforts. 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. In addition, the collection rate is impacted by changes in the cost of healthcare and health insurance; as the cost of healthcare increases, health insurance coverage provided by employers may be reduced or eliminated entirely, resulting in an increase in the uninsured population. The impact of recently enacted healthcare legislation is still unknown since many of the legislation’s provisions have yet to take effect. Net reimbursement per transport increased 16.0% in the quarter ended March 31, 2011, compared to the quarter ended March 31, 2010, attributed to recent price increases. Provisions for contractual discounts and estimated uncompensated care for CBS operations were as follows:

   
For quarters ended March 31,
 
   
2011
   
2010
 
Gross billings
    100 %     100 %
Provision for contractual discounts
    44 %     40 %
Provision for uncompensated care
    16 %     20 %

Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers, Medicare, and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases will usually result in an increase in the percentage of uncollectible accounts. In 2011, increased collections from insurance payers offset the impact of price increases on the percentage collectible from other payers. Payer mix has remained relatively constant in the first quarter of 2011 compared to the first quarter of 2010. Although we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates.

·
Aircraft maintenance. Both CBS and HBS 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 tend to be higher for aircraft which are no longer in production. Two models of aircraft within our fleet, representing 22% 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. Since January 1, 2010, we have taken delivery of twelve new aircraft and expect to take delivery of a total of 35 additional aircraft during 2011 and 2012. We have replaced discontinued models and other older aircraft with the new aircraft, as well as provided capacity for base expansion. Replacement models of aircraft typically have higher ownership costs than the models targeted for replacement but lower maintenance costs. Total aircraft maintenance expense decreased 3.1% from the first quarter of 2010 to the first quarter of 2011, while total flight hours for CBS and HBS operations increased 3.1% over the same period.
 
 
·
Competitive pressures from low-cost providers. We are recognized within the industry for our standard of service and our use of cabin-class aircraft. Many of our 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, we believe that higher quality standards help to differentiate our service from competitors and, therefore, lead to higher utilization.

·
Employee recruitment and relations. The ability to deliver quality services is partially dependent upon our 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. The collective bargaining agreement covering our pilots expired on April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. No meetings were held by the mediator during the first and second quarters of 2010, but resumed during the third quarter of 2010. Although negotiations are active, no agreement has yet been reached. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $5,712,000 for the three months ended March 31, 2011, compared to a net loss of $323,000 for the three months ended March 31, 2010. Same-Base Transports for CBS operations were 1.4% lower in the first quarter of 2011 compared to the first quarter of 2010, while net reimbursement per transport for CBS operations increased 16.0%. Aircraft operating expenses decreased 5.6%, reflecting lower maintenance and fuel costs.

Flight Operations – Community-based Services and Hospital-based Services

Net flight revenue increased $11,242,000, or 9.9%, from $113,279,000 to $124,521,000 for the three months ended March 31, 2011, compared to 2010. Flight revenue is generated by both CBS and HBS operations and is recorded net of provisions for contractual discounts and uncompensated care.

·
CBS – Net flight revenue increased $13,096,000, or 20.1%, to $78,375,000 in the three months ended March 31, 2011, compared to 2010, for the following reasons:
 
·
Increase of 16.0% in net reimbursement per transport for the first quarter of 2011, compared to 2010, due to the benefit of recent price increases.
 
·
Decrease in Same-Base Transports of 114, or 1.4%, in the first quarter of 2011 compared to 2010. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 324 higher in the first quarter of 2011, compared to the first quarter of 2010. Requests for community-based services increased by 3.3% for bases open greater than one year.
 
·
Incremental net revenue of $5,384,000 generated from the addition of nine new CBS bases either during or subsequent to the first quarter of 2010.
 
·
Closure of three bases subsequent to the first quarter of 2010 due to insufficient flight volume, resulting in a decrease in net revenue of approximately $2,008,000.

·
HBS – Net flight revenue decreased $1,854,000, or 3.9%, to $46,146,000 for the quarter ended March 31, 2011, compared to 2010, for the following reasons:
 
·
Cessation of service under three contracts and the conversion of three contracts to CBS operations during or subsequent to the first quarter of 2010, resulting in a decrease in net revenue of approximately $3,996,000.
 
·
Increase of 0.8% in flight volume for all contracts excluding new contracts, contract expansions, and closed contracts.
 
·
Incremental net revenue of $1,413,000 generated from expansion under three contracts to additional bases of operation subsequent to the first quarter of 2010.
 
·
Annual price increases in the majority of contracts based on stipulated contractual increases, changes in the Consumer Price Index or spare parts prices from aircraft manufacturers, and the renewal of contracts at higher rates.
 
 
Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $2,518,000, or 4.7%, to $55,654,000 for the quarter ended March 31, 2011, compared to 2010. Changes by business segment are as follows:

·
CBS – Flight center costs increased $2,757,000, or 8.1%, to $36,767,000 for the following reasons:
 
·
Increase of approximately $2,050,000 for the addition of personnel to staff new base locations described above.
 
·
Decrease of $1,073,000 due to the closure of base locations described above.
 
·
Increase in salaries for merit pay raises.

·
HBS – Flight center costs decreased $239,000, or 1.2%, to $18,887,000 primarily due to the following:
 
·
Decrease of $1,234,000 due to the closure of base locations described above.
 
·
Increase of approximately $435,000 for the addition of personnel to staff new base locations described above.
 
·
Increase in salaries for merit pay raises.

Aircraft operating expenses decreased $1,484,000, or 5.6%, for the quarter ended March 31, 2011, in comparison to the quarter ended March 31, 2010. Aircraft operating expenses consist primarily of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, type of aircraft flown, and number of hours flown. The decrease in costs is due to the following:
·
Decrease of $607,000, or 3.1%, in aircraft maintenance expense to $19,003,000, due primarily to the timing of aircraft component overhaul and replacement cycles.
·
Decrease of approximately 13.2% in the cost of aircraft fuel per hour flown. Fuel cost decreased by $424,000 to a total expense of $2,526,000 for 2011. We have a financial derivative agreement to protect against aircraft fuel price increases greater than 20%, covering approximately 90% of our anticipated fuel consumption for 2011. Fuel expense for the quarter included a non-cash mark to market derivative gain of $1,043,000. Cash settlements under the terms of the agreements totaled $179,000 in the first quarter of 2011.
·
Decrease in hull insurance rates effective July 2010.

Medical Interiors and Products

Sales of medical interiors and products increased $1,896,000, or 48.6%, from $3,905,000 for the first quarter of 2010 to $5,801,000 for the first quarter of 2011. Significant projects in process during the first quarter of 2011 included 32 multi-mission interiors for the U.S. Army’s HH-60M helicopter, approximately 187 litter systems for the U.S. Army’s Medical Evacuation Vehicle, and two aircraft interior kits for commercial customers. Revenue by product line was as follows:
·
$4,803,000 – governmental entities
·
$998,000 – commercial customers

Significant projects in process during the first quarter of 2010 included six HH-60L units, eight interiors for an older generation of the U.S. Army’s Blackhawk helicopter, and six modular medical interior kits for commercial customers. Revenue by product line was as follows:
·
$1,919,000 – governmental entities
·
$1,986,000 – commercial customers

Cost of medical interiors and products increased $306,000, or 8.3%, for the first quarter of 2011, as compared to the previous year, due primarily to the change in sales volume and improved margins on both governmental and commercial projects. 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
 
Other revenue, consisting of fees earned for dispatch, transfer center, and patient billing services provided to third parties, increased $265,000, or 20.1%, in the first quarter of 2011 compared to the first quarter of 2010, primarily due to three new contracts entered into during 2010.

Depreciation and amortization expense increased $749,000, or 4.8% for the first quarter of 2011, compared to 2010. Since March 31, 2010, we have added 24 aircraft and 9 medical interiors, totaling approximately $28.5 million, to our depreciable assets.

General and administrative (G&A) expenses increased $2,372,000, or 14.9%, for the first quarter of 2011, compared to the first quarter of 2010. G&A expenses include executive management, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, and CBS and HBS program administration. G&A expenses were 13.9% of revenue in 2011, compared to 13.4% of revenue in 2010. The increase reflects accruals for amounts earned under the Economic Value Added Bonus Plan and additional headcount in our safety department to support the ongoing implementation of our Safety Management System (SMS).

Income tax expense was $3,717,000 in the first quarter of 2011, compared to a benefit of $207,000 in the first quarter of 2010, at effective tax rates of approximately 39% for both periods. Changes in our effective tax rate are affected by the apportionment of revenue and income before taxes for the various jurisdictions in which we operate and by changing tax laws and regulations in those jurisdictions.

Liquidity and Capital Resources

Our working capital position as of March 31, 2011, was $106,566,000, compared to $122,599,000 at December 31, 2010. Cash generated by operations was $24,605,000 in the first quarter of 2011, compared to $29,235,000 in the first quarter of 2010. In the first quarter of 2011, we paid approximately $5.4 million for amounts previously accrued under the Economic Value Added Bonus Plan and other incentive compensation plans for executive and employee performance in 2010. Days’ sales outstanding for CBS operations, measured by comparing net revenue for the annualized previous 3-month period to outstanding open net accounts receivable, increased from 91 days at December 31, 2010, to 101 days at March 31, 2011. Days’ sales outstanding as of March 31, 2010, were 100 days.

Cash used by investing activities totaled $12,256,000 in 2011 compared to $11,681,000 in 2010. In addition to the purchase of URS, equipment acquisitions in the first quarter of 2011 included the buy-out of seven previously leased aircraft for approximately $8.8 million. Equipment acquisitions in the first quarter of 2010 included six aircraft for approximately $6.1 million, as well as medical interiors and avionics upgrades.

Financing activities used $16,647,000 in 2011 compared $13,469,000 in 2010. The primary use of cash in both 2011 and 2010 was regularly scheduled payments of long-term debt and capital lease obligations. In 2011 we received proceeds of $1.1 million from the issuance of common stock upon the exercise of stock options previously granted to employees. In 2010 we used proceeds of $3.8 million from notes payable to finance three aircraft.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
 
 
On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. 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 our consolidated financial statements.

Revenue Recognition

Fixed flight fee revenue under our 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 and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past. If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts and uncompensated care may be required. Based on related flight revenue for the quarter ended March 31, 2011, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $1,980,000 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. We estimate 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.

Deferred Income Taxes

In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. 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. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income and record a valuation allowance for those amounts we believe are not likely to be realized. Establishing or increasing a valuation allowance in a period increases income tax expense. We consider 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 we were to determine that we would not be able to realize all or part of our 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 we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory tax rates applicable to the Company is also recognized in income in the period of the change.
 
 
Long-lived Assets Valuation

In accounting for long-lived assets, we make 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 our 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. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.

Goodwill Valuation

The Company’s goodwill relates to five acquisitions and has been allocated to our operating segments. Annually, at December 31, the Company evaluates goodwill for potential impairment using a two-step test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test to determine the amount of goodwill impairment loss to be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is compared to the book value of the goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.
 
We determine the fair value of each reporting unit based upon the reporting unit’s historical operating profit and the Company’s current public trading value. Estimated future operating profit for each reporting unit is also taken into consideration when determining the reporting unit’s fair value. Considerable management judgment is necessary to evaluate the impact of economic changes and to estimate future operating profit for the reporting units. Assumptions used in our impairment evaluations, such as forecasted growth rates and patient receivable collection rates, are based on the best available market information and are consistent with our internal forecasts. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.
 
The estimated fair values of the reporting units have historically exceeded the carrying values of the reporting units. We performed a sensitivity analysis on the Company’s public trading value and on each reporting unit’s historical and estimated future operating profits. Based on the amounts used in the evaluation of goodwill at December 31, 2010, either the Company’s current public trading value or any reporting unit’s operating profit would have to decrease by more than 65% before the carrying value of the reporting unit exceeded its fair value.
 
 
Item 3.    Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk at March 31, 2011, from that reported in our Annual Report on Form 10-K/A for the year ended December 31, 2010.
 
Item 4.    Controls and Procedures

Restatement of Previously Issued Financial Statements
 
On November 18, 2011, the U.S. Securities and Exchange Commission (SEC) responded to the Company’s request for guidance concerning aircraft lease-related accounting issues and the appropriate interpretation of the maximum amount that the Company could be required to pay as described in ASC 840-10-25-14, in the event of a non-performance-related default. In light of this response, management initiated a review of the Company’s aircraft lease accounting and determined that its previous method of accounting for aircraft leases as operating leases was not in accordance with U.S. generally accepted accounting principles (GAAP). As a result, the Company has restated its consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, included in the Company’s December 31, 2010, Annual Report on Form 10-K/A and the consolidated interim financial statements included in the Company’s Forms 10-Q/A as of and for the quarter and year-to-date periods ended March 31, 2011; June 30, 2011; and September 30, 2011; and related 2010 comparative prior quarter and year-to-date periods included in those Forms 10-Q/A.

Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified by the SEC’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 based on the definition of “disclosure controls and procedures” in Rule 13a-15(b) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating our controls and procedures.

Prior to the filing of our original Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (our Original Filing), our management, under the supervision and with the participation of our Certifying Officers, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (the Evaluation) as of the last day of the period covered by our Original Filing.
 
Based upon that Evaluation, our Certifying Officers had concluded that our disclosure controls and procedures were effective at a reasonable level of assurance. Subsequently, during the fourth quarter of fiscal year 2011, we concluded that our previously established aircraft lease accounting practices were not in accordance with GAAP. Correspondingly, as described above, management has restated its consolidated financial statements as of December 31, 2010 and for the quarters ended March 31, 2011; June 30, 2011; and September 30, 2011, to reflect the correction of the error. As a result of the material weakness in internal control over financial reporting described in the following paragraph, our Certifying Officers have now concluded that our disclosure controls and procedures were not effective as of the last day of the period covered by this Report.
 
 
The Company’s control to evaluate leases for capital versus operating lease classification was not designed to consider all of the relevant lease accounting literature applicable to lease classification, including nonperformance related default provisions as discussed in ASC 840-10-25-14.  This material weakness resulted in a material error in our accounting for aircraft leases and a restatement of our previously issued financial statements more fully described in Note 2 to the condensed consolidated financial statements set forth herein.
 
Remediation of the Material Weakness

To remediate the material weakness in the Company’s internal control over financial reporting, the Company implemented additional review procedures over the lease default provisions affecting aircraft lease accounting practices.

The Company’s remediation plan has been implemented; however, the above material weakness will not be considered remediated until the additional review procedures over aircraft lease default provisions have been operating effectively for an adequate period of time. Management will consider the status of this remedial effort when assessing the effectiveness of the Company’s internal controls over financial reporting and other disclosure controls and procedures as of December 31, 2011. While management believes that the remedial efforts will resolve the identified material weakness, there is no assurance that management’s remedial efforts conducted to date will be sufficient or that additional remedial actions will not be necessary.

Changes in Internal Controls over Financial Reporting

There were no significant changes in our 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, our internal control over financial reporting.
 
 
PART II: OTHER INFORMATION

Item 1.     Legal Proceedings

Not Applicable.

Item 1A.  Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K/A for the year ended December 31, 2010.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3.     Defaults Upon Senior Securities

Not Applicable.

Item 4.     Reserved

Item 5.     Other Information

Not Applicable.

Item 6.     Exhibits

Chief Executive Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Chief Financial Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS
XBRL Instance Document

101.SCH
XBRL Taxonomy Extension Schema Document

101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB
XBRL Taxonomy Extension Label Linkbase Document

101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AIR METHODS CORPORATION
 
       
Date:  December 22, 2011        
By:
/s/ Aaron D. Todd  
   
Aaron D. Todd
 
    Chief Executive Officer  
   
(Principal Executive Officer)
 
 
Date:  December 22, 2011
By:
/s/ Trent J. Carman  
   
Trent J. Carman
 
   
Chief Financial Officer
 
    (Principal Financial Officer)  
 
Date:  December 22, 2011
By:
/s/ Sharon J. Keck  
   
Sharon J. Keck
 
   
Chief Accounting Officer
 
    (Principal Accounting Officer)  

 
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