Air Methods (AIRM) 10-Q/A 2011 Q3 Quarterly report (amended)

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 SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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, outstanding as of October 28, 2011, was 12,708,185.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements (unaudited)
		Consolidated Balance Sheets – September 30, 2011 and December 31, 2010	2
		Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010	4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	5
		Notes to Unaudited Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3.	Defaults upon Senior Securities	27
	Item 4.	Reserved	27
	Item 5.	Other Information	27
	Item 6.	Exhibits	27
SIGNATURES			28

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 September 30, 2011, as originally filed with the Securities and Exchange Commission (SEC) on November 9, 2011 (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 1A – Risk Factors

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

· Item 4 – Controls and Procedures

In addition, the Company’s principal executive officer and principal financial officer have provided 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.

1

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

(unaudited)

	September 30, 2011			December 31, 2010
	(Restated)			(Restated)
Assets
Current assets:
Cash and cash equivalents	$	2,515			60,710
Current installments of notes receivable		4			4
Receivables:
Trade, net		179,462			132,329
Refundable income taxes		--			2,403
Other		2,050			3,510
Total receivables		181,512			138,242
Inventories, including work-in-process on medical interiors and products contracts		37,039			26,820
Assets held for sale		322			2,442
Costs and estimated earnings in excess of billings on uncompleted contracts		1,161			160
Prepaid expenses and other		21,845			9,614
Total current assets		244,398			237,992
Property and equipment:
Land		251			251
Flight and ground support equipment		304,095			217,133
Aircraft under capital leases (notes 2 and 4)		407,969			382,171
Aircraft rotable spare parts		41,962			35,375
Buildings and other equipment		41,265			37,371
		795,542			672,301
Less accumulated depreciation and amortization		(263,136	)		(227,558	)
Net property and equipment		532,406			444,743
Goodwill (note 4)		120,393			25,506
Intangible assets, net of accumulated amortization of $4,191 and $2,716 at September 30, 2011 and December 31, 2010, respectively (notes 3 and 4)		65,877			2,616
Notes receivable, less current installments		118			121
Other assets		23,180			12,132
Total assets	$	986,372			723,110

 (Continued)

2

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS, Continued

(Amounts in thousands, except share and per share amounts)

(unaudited)

	September 30, 2011		December 31, 2010
	(Restated)		(Restated)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable	$	20,353		--
Current installments of long-term debt		16,888		14,871
Current installments of obligations under capital leases (notes 2 and 4)		49,034		42,327
Accounts payable		16,656		13,633
Deferred revenue		3,767		6,089
Billings in excess of costs and estimated earnings on uncompleted contracts		936		638
Accrued wages and compensated absences		11,489		13,941
Due to third party payers		5,590		4,628
Deferred income taxes		7,059		7,143
Other accrued liabilities		26,651		12,123
Total current liabilities		158,423		115,393
Long-term debt, less current installments		238,193		80,352
Obligations under capital leases, less current installments (notes 2 and 4)		239,357		232,464
Deferred income taxes		47,523		31,409
Other liabilities		29,669		30,063
Total liabilities		713,165		489,681
Stockholders' equity (note 5):
Preferred stock, $1 par value.  Authorized 5,000,000 shares, none issued		--		--
Common stock, $.06 par value. Authorized 23,500,000 shares; issued 12,765,185 and 12,602,164shares at September 30, 2011, and December 31, 2010, respectively; outstanding 12,708,185 and 12,600,998 shares at September 30, 2011, and December 31, 2010, respectively		762		756
Additional paid-in capital		93,669		88,069
Retained earnings		178,776		144,604
Total stockholders' equity		273,207		233,429
Total liabilities and stockholders’ equity	$	986,372		723,110

See accompanying notes to unaudited consolidated financial statements.

3

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended  September 30,
	2011			2010			2011			2010
	(Restated)			(Restated)			(Restated)			(Restated)
Revenue:
Flight revenue, net	$	174,713			145,120			440,126			392,725
Medical interiors and products revenue		8,702			7,277			22,044			14,740
Other		1,757			1,537			5,069			4,153
		185,172			153,934			467,239			411,618
Operating expenses:
Flight centers		70,479			53,773			182,456			159,878
Aircraft operations		30,871			31,419			88,892			84,558
Cost of medical interiors and products sold		6,058			4,443			15,452			10,782
Depreciation and amortization		19,030			16,055			52,217			47,483
Gain on disposition of assets, net		(264	)		(157	)		(290	)		(498	)
General and administrative		23,331			17,219			60,338			50,175
		149,505			122,752			399,065			352,378
Operating income		35,667			31,182			68,174			59,240
Other income (expense):
Interest expense		(5,383	)		(4,707	)		(14,204	)		(14,558	)
Other, net		872			1,213			2,985			2,998
Income before income taxes		31,156			27,688			56,955			47,680
Income tax expense		(12,616	)		(9,579	)		(22,783	)		(17,456	)
Net income	$	18,540			18,109			34,172			30,224
Basic income per common share (note 6)	$	1.46			1.45			2.70			2.42
Diluted income per common share (note 6)	$	1.44			1.44			2.67			2.41
Weighted average number of common shares outstanding – basic		12,688,791			12,504,382			12,651,949			12,476,577
Weighted average number of common shares outstanding – diluted		12,837,530			12,583,414			12,806,716			12,556,788

See accompanying notes to unaudited consolidated financial statements.

4

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2011			2010
	(Restated)			(Restated)
Cash flows from operating activities:
Net income	$	34,172			30,224
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		52,217			47,483
Deferred income tax expense		9,076			772
Stock-based compensation		2,022			1,149
Excess tax benefit from exercise of stock options		(725	)		(383	)
Gain on disposition of assets, net		(290	)		(498	)
Unrealized loss on derivative instrument		305			343
Changes in assets and liabilities, net of effects of acquisitions:
Increase in prepaid expenses and other current assets		(13,922	)		(7,575	)
Increase in receivables		(14,379	)		(16,343	)
Decrease (increase) in inventories		(5,256	)		1,182
Decrease (increase) in costs in excess of billings		(1,001	)		5,289
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities		(6,381	)		10,883
Decrease in deferred revenue and billings in excess of costs		(1,534	)		(895	)
Net cash provided by operating activities		54,304			71,631
Cash flows from investing activities:
Acquisition of OF Air Holdings Corporation (note 4)		(201,728	)		--
Acquisition of membership interest of United Rotorcraft Solutions, LLC (note 3)		(1,554	)		--
Acquisition of property and equipment		(33,717	)		(27,173	)
Proceeds from disposition and sale of equipment and assets held for sale		7,595			6,644
Decrease in notes receivable and other assets		40			574
Net cash used in investing activities		(229,364	)		(19,955	)

 (Continued)

5

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Amounts in thousands)

(unaudited)

	Nine Months Ended September 30,
	2011			2010
	(Restated)			(Restated)
Cash flows from financing activities:
Proceeds from issuance of common stock, net	$	2,859			1,203
Excess tax benefit from exercise of stock options		725			383
Proceeds from issuance of long-term debt		200,000			6,188
Payments for financing costs		(1,788	)		(159	)
Payments of long-term debt and notes payable		(40,626	)		(11,826	)
Payments of capital lease obligations		(44,305	)		(39,941	)
Net cash provided (used) by financing activities		116,865			(44,152	)
Increase (decrease) in cash and cash equivalents		(58,195	)		7,524
Cash and cash equivalents at beginning of period		60,710			38,073
Cash and cash equivalents at end of period	$	2,515			45,597
Interest paid in cash during the period	$	13,321			14,348
Income taxes paid in cash during the period	$	5,091			11,385

Non-cash investing and financing activities:

In the nine months ended September 30, 2011, the Company entered into notes payable of $20,353 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of September 30, 2011, and entered into capital leases of $18,966 to finance the purchase of aircraft and other equipment.

In the nine months ended September 30, 2010, the Company settled notes payable of $4,510 in exchange for the aircraft securing the debt and entered into capital leases of $15,126 to finance the purchase of aircraft and other equipment. The Company also entered into notes payable of $10,322 to finance the purchase of aircraft which were held in property and equipment pending permanent lease financing as of September 30, 2010.

See accompanying notes to unaudited consolidated financial statements.

6

Air Methods Corporation and Subsidiaries

Notes to Unaudited 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 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. 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.

7

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(2)           Restatement – Accounting for Leases, continued

The adjustment to net income for the three and nine months ended September 30, 2011 and 2010, is summarized below (amounts in thousands):

	Three Months Ended September 30,						Nine Months ended September 30,
	2011			2010			2011			2010
Net income, as previously reported	$	18,462			18,629			34,531			31,492
Aircraft operations		(1,117	)		(394	)		(1,699	)		(1,099	)
Aircraft rental		12,612			11,820			36,245			35,834
Depreciation and amortization		(9,449	)		(9,674	)		(28,869	)		(29,369	)
Gain on disposition of assets, net		192			10			192			241
Interest expense		(2,928	)		(3,249	)		(9,130	)		(10,013	)
Other income, net		822			823			2,682			2,520
Tax effect of restatement adjustment		(54	)		144			220			618
Net income, as restated	$	18,540			18,109			34,172			30,224

The impact of the restatement on the consolidated financial statements is summarized below (amounts in thousands except per share amounts):

	September 30, 2011						December 31, 2010
	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Balance Sheets:
Assets held for sale	$	22,769			322			2,523			2,442
Total current assets		266,845			244,398			238,073			237,992
Flight and ground support equipment		286,079			304,095			220,591			217,133
Aircraft under capital leases		28,422			407,969			--			382,171
Total property and equipment		397,979			795,542			293,588			672,301
Accumulated depreciation and amortization		(109,430	)		(263,136	)		(92,713	)		(227,558	)
Net property and equipment		288,549			532,406			200,875			444,743
Goodwill		114,132			120,393			20,291			25,506
Other assets		23,606			23,180			12,703			12,132
Total assets		759,127			986,372			474,679			723,110
Current installments of obligations under capital leases		7,719			49,034			964			42,327
Deferred income taxes		6,436			7,059			7,143			7,143
Other accrued liabilities		26,440			26,651			12,145			12,123
Total current liabilities		116,274			158,423			74,052			115,393
Obligations under capital leases, less current installments		30,514			239,357			953			232,464
Deferred income taxes		59,470			47,523			42,392			31,409
Other liabilities		28,783			29,669			31,174			30,063
Total liabilities		473,234			713,165			228,923			489,681
Retained earnings		191,462			178,776			156,931			144,604
Total stockholders' equity		285,893			273,207			245,756			233,429
Total liabilities and stockholders’ equity		759,127			986,372			474,679			723,110

8

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(2)           Restatement – Accounting for Leases, continued

	Three Months Ended September 30, 2011						Three Months Ended September 30, 2010
	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Statements of Income:
Aircraft operations	$	29,754			30,871			31,025			31,419
Aircraft rental		12,612			--			11,820			--
Depreciation and amortization		9,581			19,030			6,381			16,055
Gain on disposition of assets, net		(72	)		(264	)		(147	)		(157	)
Total operating expenses		151,743			149,505			124,514			122,752
Operating income		33,429			35,667			29,420			31,182
Interest expense		(2,455	)		(5,383	)		(1,458	)		(4,707	)
Other, net		50			872			390			1,213
Income before income taxes		31,024			31,156			28,352			27,688
Income tax expense		(12,562	)		(12,616	)		(9,723	)		(9,579	)
Net income		18,462			18,540			18,629			18,109
Basic income per common share		1.45			1.46			1.49			1.45
Diluted income per common share		1.44			1.44			1.48			1.44

	Nine Months Ended September 30, 2011						Nine Months Ended  September 30, 2010
	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Statements of Income:
Aircraft operations	$	87,193			88,892			83,459			84,558
Aircraft rental		36,245			--			35,834			--
Depreciation and amortization		23,348			52,217			18,114			47,483
Gain on disposition of assets, net		(98	)		(290	)		(257	)		(498	)
Total operating expenses		404,934			399,065			357,985			352,378
Operating income		62,305			68,174			53,633			59,240
Interest expense		(5,074	)		(14,204	)		(4,545	)		(14,558	)
Other, net		303			2,985			478			2,998
Income before income taxes		57,534			56,955			49,566			47,680
Income tax expense		(23,003	)		(22,783	)		(18,074	)		(17,456	)
Net income		34,531			34,172			31,492			30,224
Basic income per common share		2.73			2.70			2.52			2.42
Diluted income per common share		2.70			2.67			2.51			2.41

9

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(2)           Restatement – Accounting for Leases, continued

	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Statements of Cash Flows:
Net income		34,531			34,172			31,492			30,224
Depreciation and amortization expense		23,348			52,217			18,114			47,483
Deferred income tax expense		9,507			9,076			1,390			772
Gain on disposition of assets, net		(98	)		(290	)		(257	)		(498	)
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities		(9,078	)		(6,381	)		8,403			10,883
Net cash provided by operating activities		23,720			54,304			41,909			71,631
Acquisition of property and equipment		(44,600	)		(33,717	)		(36,762	)		(27,173	)
Decrease in notes receivable and other assets		183			40			719			574
Net cash used in investing activities		(240,104	)		(229,364	)		(29,399	)		(19,955	)
Payments of capital lease obligations		(2,981	)		(44,305	)		(775	)		(39,941	)
Net cash provided (used) by financing activities		158,189			116,865			(4,986	)		(44,152	)
Increase (decrease) in cash and cash equivalents		(58,195	)		(58,195	)		7,524			7,524
Interest paid in cash during the period		3,945			13,321			4,398			14,348
Noncash investing and financing activities – new capital lease obligations		359			18,966			273			15,126

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 9 have been restated to reflect the adjustments described above.

(3)           Acquisition of United Rotorcraft Solutions, LLC

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 $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 does not expect that any additional payments will be due to the sellers, and, therefore, no liability has been accrued 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 results of URS’s operations have been included with those of the Company since March 2, 2011.

10

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(3)           Acquisition of United Rotorcraft Solutions, LLC, continued

During the second quarter, the Company completed its valuation of the URS customer list and, as a result, adjusted the purchase price allocation to reduce goodwill and increase the value assigned to the customer list. The current allocation of the purchase price is as follows (amounts in thousands):

Assets purchased:
Receivables	$	1,034
Inventories, including work-in-process on medical interiors and products contracts		325
Equipment and other property		526
Customer list		1,507
Other		183
Total assets		3,575
Long-term debt		(484	)
Other liabilities assumed		(1,537	)
Total liabilities assumed		(2,021	)
Purchase price	$	1,554

 (4) Acquisition of OF Air Holdings Corporation

On August 1, 2011, the Company acquired 100% of the outstanding common stock of OF Air Holdings Corporation and its subsidiaries, including Omniflight Helicopters, Inc. (together, Omniflight), for a cash purchase price of $201.7 million, subject to final determination of working capital, as defined in the merger agreement, as of the closing date. The Company has estimated the increase to the purchase price for the change in working capital to be $777,000 and has recorded the related liability as of September 30, 2011. The estimate is subject to review by the sellers during the fourth quarter of 2011, and payment of the additional amount is expected to be made prior to the end of the year. The purchase price was financed primarily through a term loan under the Company’s Amended Credit Facility.

Omniflight provides air medical transport services throughout the United States and provides these services under both the community-based and hospital-based service delivery models, utilizing a fleet of approximately 100 helicopters and fixed-wing aircraft. The acquisition is expected to further strengthen the Company’s position as the largest provider of air medical transport services in the U.S. and to result in certain operating efficiencies.

The Company is in the process of conducting counts of Omniflight’s aircraft spare parts inventory, reviewing related airworthiness documentation, verifying open repair orders with aircraft parts vendors, and confirming other liabilities relating to pre-acquisition events. In addition, the Company is analyzing the payer mix comprising Community-Based Services (CBS) receivables and obtaining historical collection data as of the acquisition date. Fair value and estimated useful lives of other intangible assets are based on preliminary estimates and are subject to review and finalization by the Company’s management. Other intangible assets are primarily attributed to CBS operating locations and are amortized to the CBS division on a straight-line basis over a sixteen-year life.

11

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(4) Acquisition of OF Air Holdings Corporation, continued

For the reasons described in the foregoing paragraph, the allocation of the purchase price is still subject to refinement. The initial allocation of the purchase price was as follows (amounts in thousands):

Assets purchased:
Receivables	$	28,673
Aircraft		33,500
Goodwill		94,887
Amortizable intangible and other assets		72,347
Aircraft under capital leases		29,405
Equipment and other property		5,614
Spare parts inventories		4,429
Other		2,073
Total assets		270,928
Capital lease obligations assumed		(38,938	)
Net deferred tax liabilities		(6,953	)
Other liabilities assumed		(22,532	)
Total liabilities assumed		(68,423	)
Purchase price	$	202,505

The results of Omniflight’s operations have been included with those of the Company since August 1, 2011. The unaudited pro forma revenue, net income, and income per common share for the nine months ended September 30, 2011 and 2010, assuming the acquisition occurred at the beginning of the periods presented, are as follows (amounts in thousands, except per share amounts):

	Nine Months ended September 30,
	2011		2010
	(Restated)		(Restated)
Revenue	$	573,130		530,893
Net income	$	41,012		29,974
Basic income per common share	$	3.24		2.40
Diluted income per common share	$	3.20		2.39

(5)           Stockholders’ Equity

Changes in stockholders’ equity for the nine months ended September 30, 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		106,021		2,859
Stock-based compensation		1,166		2,022
Tax benefit from exercise of stock options		--		725
Net income		--		34,172
Balances at September 30, 2011		12,708,185	$	273,207

12

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

 (6)           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 common shares outstanding during the period and dilutive potential common shares.

The reconciliation of basic to diluted weighted average common shares outstanding is as follows:

	2011		2010
For quarter ended September 30:
Weighted average number of common shares outstanding – basic		12,688,791		12,504,382
Dilutive effect of:
Common stock options		135,078		74,721
Unvested restricted stock		13,661		4,311
Weighted average number of common shares outstanding – diluted		12,837,530		12,583,414
For nine months ended September 30:
Weighted average number of common shares outstanding – basic		12,651,949		12,476,577
Dilutive effect of:
Common stock options		148,304		76,243
Unvested restricted stock		6,463		3,968
Weighted average number of common shares outstanding – diluted		12,806,716		12,556,788

Common stock options of 43,500 and 108,500 were not included in the diluted income per share calculation for the quarter and nine months ended September 30, 2010, respectively, because their effect would have been anti-dilutive.

(7) New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Some amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The ASU is effective for periods beginning after December 15, 2011. The Company does not expect the implementation of ASU No. 2011-04 to have a material effect on its financial position or results of operations.

In July 2011, the FASB issued ASU No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, requiring health care entities that recognize significant amounts of patient service revenue to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The ASU also requires enhanced disclosures about revenue recognition and bad debt assessment policies related to patient service revenue. The ASU is effective for periods beginning after December 15, 2011. The Company does not expect the implementation of ASU No. 2011-07 to have a material effect on its financial position or results of operations since it currently presents patient service revenue net of related provision for bad debts.

13

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(7) New Accounting Pronouncements, continued

In September 2011, the FASB issued ASU No. 2011-08, Testing for Goodwill Impairment, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU is effective for periods beginning after December 15, 2011. The Company does not expect the implementation of ASU No. 2011-08 to have a material effect on its financial position or results of operations.

(8) 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 endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call options. Financial derivative instruments covering fuel purchases are 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 all fuel derivative instruments included in prepaid expenses and other current assets was $281,000 at September 30, 2011 and $586,000 at December 31, 2010. The Company’s financial derivatives do not qualify for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in aircraft operations expense in the Company’s statement of income. Aircraft operations expense included non-cash mark to market derivative losses of $528,000 and $305,000 for the quarter and nine months ended September 30, 2011, compared to non-cash mark to market losses of $26,000 and $343,000 for the quarter and nine months ended September 30, 2010. Cash settlements under the terms of the agreements totaled $307,000 and $884,000 in the quarter and nine months ended September 30, 2011, respectively. There were no cash settlements under the agreements in the quarter and nine months ended September 30, 2010.

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 September 30, 2011, is estimated to be $256,098,000, compared to a carrying value of $255,081,000. 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.

14

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(9) 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 28 states at September 30, 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 33 states under exclusive operating agreements at September 30, 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.

15

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(9)           Business Segment Information, continued

For quarter ended September 30:	CBS (Restated)			HBS (Restated)			Products Division			Corporate Activities (Restated)			Intersegment Eliminations			Consolidated (Restated)
2011
External revenue	$	123,405			53,078			8,687			2			--			185,172
Intersegment revenue		20			--			7,946			--			(7,966	)		--
Total revenue		123,425			53,078			16,633			2			(7,966	)		185,172
Operating expenses, excluding depreciation & amortization		(78,424	)		(37,867	)		(11,979	)		(7,858	)		5,653			(130,475	)
Depreciation & amortization		(10,249	)		(8,164	)		(335	)		(282	)		--			(19,030	)
Interest expense		(2,732	)		(2,392	)		(4	)		(255	)		--			(5,383	)
Other income, net		444			394			--			34			--			872
Income tax expense		--			--			--			(12,616	)		--			(12,616	)
Segment net income (loss)	$	32,464			5,049			4,315			(20,975	)		(2,313	)		18,540
2010
External revenue	$	96,038			50,630			7,266			--			--			153,934
Intersegment revenue		56			--			2,919			--			(2,975	)		--
Total revenue		96,094			50,630			10,185			--			(2,975	)		153,934
Operating expenses, excluding depreciation & amortization		(59,541	)		(37,000	)		(6,873	)		(5,450	)		2,167			(106,697	)
Depreciation & amortization		(7,997	)		(7,594	)		(213	)		(251	)		--			(16,055	)
Interest expense		(2,233	)		(2,336	)		(6	)		(132	)		--			(4,707	)
Other income, net		439			394			--			380			--			1,213
Income tax expense		--			--			--			(9,579	)		--			(9,579	)
Segment net income (loss)	$	26,762			4,094			3,093			(15,032	)		(808	)		18,109

For nine months ended September 30:
2011
External revenue	$	297,381		147,850		21,986		22		--		467,239
Intersegment revenue		135		--		17,470		--		(17,605	)	--
Total revenue		297,516		147,850		39,456		22		(17,605	)	467,239
Operating expenses, excluding depreciation & amortization		(202,492	)	(108,402	)	(29,272	)	(19,687	)	13,005		(346,848	)
Depreciation & amortization		(26,968	)	(23,513	)	(913	)	(823	)	--		(52,217	)
Interest expense		(6,940	)	(6,686	)	(13	)	(565	)	--		(14,204	)
Other income, net		1,437		1,285		--		263		--		2,985
Income tax expense		--		--		--		(22,783	)	--		(22,783	)
Segment net income (loss)	$	62,553		10,534		9,258		(43,573	)	(4,600	)	34,172
2010
External revenue	$	249,227		147,683		14,708		--		--		411,618
Intersegment revenue		167		--		11,848		--		(12,015	)	--
Total revenue		249,394		147,683		26,556		--		(12,015	)	411,618
Operating expenses, excluding depreciation & amortization		(172,755	)	(106,595	)	(21,059	)	(14,569	)	10,083		(304,895	)
Depreciation & amortization		(23,511	)	(22,736	)	(509	)	(727	)	--		(47,483	)
Interest expense		(6,871	)	(7,098	)	(20	)	(569	)	--		(14,558	)
Other income, net		1,345		1,207		--		446		--		2,998
Income tax expense		--		--		--		(17,456	)	--		(17,456	)
Segment net income (loss)	$	47,602		12,461		4,968		(32,875	)	(1,932	)	30,224

16

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 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 the integration of Omniflight; the amount of the purchase price adjustment for the Omniflight acquisition, 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; acquisition 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 contained in Part II, Item 1A 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 nine months ended September 30, 2011, the CBS Division generated 64% of our total revenue, compared to 60% in the nine months ended September 30, 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 78% of total contract revenue) and hourly flight fees (approximately 22% of total contract revenue) billed to hospital customers. In the nine months ended September 30, 2011, the HBS Division generated 32% of our total revenue, compared to 36% in the nine months ended September 30, 2010.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for commercial and governmental entities. The Products Division generated 4% of our total revenue in the nine months ended September 30, 2011 and 2010.

See Note 9 to the consolidated financial statements included in Item 1 of this report for operating results by segment.

17

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 22% of HBS revenue. By contrast, 80% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the nine months ended September 30, 2011, were 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 in quarterly comparatives 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 13,200 and 32,400 for the quarter and nine months ended September 30, 2011, respectively, compared to approximately 10,900 and 30,000 for the quarter and nine months ended September 30, 2010, respectively. Patient transports for CBS bases open longer than one year, and excluding transports for Omniflight bases, (Same-Base Transports) were approximately 9,800 and 27,700 in the quarter and nine months ended September 30, 2011, respectively, compared to approximately 10,700 and 29,400 in the quarter and nine months ended September 30, 2010, respectively. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 55 lower and 613 higher in the quarter and nine months ended September 30, 2011, compared to 2010. Requests for community-based services decreased by 7.6% and 3.0% for the quarter and nine months ended September 30, 2011, respectively, 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 10.2% in the nine months ended September 30, 2011, compared to 2010, attributed to recent price increases. Provisions for contractual discounts and estimated uncompensated care for CBS operations are as follows:

	For quarters ended September 30,						For nine months ended  September 30,
	2011			2010			2011			2010
Gross billings		100	%		100	%		100	%		100	%
Provision for contractual discounts		43	%		38	%		43	%		39	%
Provision for uncompensated care		21	%		20	%		19	%		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. 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. The increase in the percentage of uncollectible accounts in the third quarter of 2011 also reflects the addition of Omniflight which had a higher gross charge structure and, therefore, a higher percentage of uncollectible accounts. In addition, the percentage of transports covered by insurance for Omniflight’s CBS operations is approximately three percentage points lower than the percentage of insured transports for the Company’s historical operations.

18

· 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 21% 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 28 new aircraft and expect to take delivery of a total of 23 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 maintenance expense for CBS and HBS operations decreased 17.3% and increased 1.2% for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Total flight volume for CBS and HBS operations increased 26.9% and 10.2% for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. The decrease in maintenance expense is due to normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

· 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. 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 $18,540,000 and $34,172,000 for the quarter and nine months ended September 30, 2011, respectively, compared to $18,109,000 and $30,224,000 for the three and nine months ended September 30, 2010, respectively. The results for 2011 included the impact of the acquisition of Omniflight effective August 1, 2011. Net reimbursement per transport for CBS operations increased 5.8% and 10.2% in the quarter and nine months ended September 30, 2011, compared to 2010, while Same-Base Transports for CBS operations were 8.5% and 5.7% lower over the same periods, respectively.

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

Net flight revenue increased $29,593,000, or 20.4%, and $47,401,000, or 12.1%, for the quarter and nine months ended September 30, 2011, respectively, 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 $27,145,000, or 28.7%, to $121,635,000 for the third quarter of 2011 and $47,234,000, or 19.3%, to $292,276,000 for the nine months ended September 30, 2011, for the following reasons:

· Net revenue of $21,284,000 from Omniflight’s CBS operations from the acquisition date through September 30, 2011.

· Increases of 5.8% and 10.2% in net reimbursement per transport for the quarter and nine months ended September 30, 2011, respectively, compared to 2010, due to the benefit of recent price increases net of the change in payer mix resulting from the Omniflight acquisition described above.

19

· Decreases of 908, or 8.5%, and 1,687, or 5.7%, in Same-Base Transports for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 55 lower and 613 higher in the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Requests for community-based services decreased by 7.6% and 3.0% for the quarter and nine months ended September 30, 2011, respectively, for bases open greater than one year.

· Incremental net revenue of $7,365,000 and $17,908,000 for the quarter and nine months ended September 30, 2011, respectively, generated from the addition of nineteen new CBS bases, including eleven bases resulting from the conversion of HBS contracts, during either 2011 or 2010.

· Closure of three bases due to insufficient flight volume during 2010, resulting in decreases in net revenue of approximately $714,000 and $4,247,000 during the quarter and nine months ended September 30, 2011, respectively.

· HBS – Net flight revenue increased $2,448,000, or 4.8%, to $53,078,000 for the third quarter of 2011 and $167,000, or 0.1%, to $147,850,000 for the nine months ended September 30, 2011, for the following reasons:

· Net revenue of $5,386,000 from Omniflight’s HBS operations from the acquisition date through September 30, 2011.

· Cessation of service under three contracts and the conversion of five contracts to CBS operations during either 2011 or 2010, resulting in decreases in net revenue of approximately $4,097,000 and $10,640,000 for the quarter and nine months ended September 30, 2011, respectively.

· Incremental net revenue of $1,003,000 and $4,016,000 for the quarter and nine months ended September 30, 2011, generated from the expansion of five contracts to additional bases of operation during either 2011 or 2010.

· Decreases of 1.9% and 2.7% in flight volume for the quarter and nine months ended September 30, 2011, for all contracts excluding contract expansions and closed contracts discussed above, as well as Omniflight’s HBS operations from the acquisition date through September 30, 2011.

· 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.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $16,706,000, or 31.1%, and $22,578,000, or 14.1%, for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Changes by business segment are as follows:

· CBS – Flight center costs increased $14,448,000, or 41.4%, to $49,363,000 for the third quarter of 2011 and $20,081,000, or 19.5%, to $123,280,000 for the nine months ended September 30, 2011, for the following reasons:

· Flight center costs of approximately $9,247,000 related to Omniflight’s CBS operations from the acquisition date through September 30, 2011.

· Increases of approximately $3,575,000 and $7,552,000 for the quarter and nine months ended September 30, 2011, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $761,000 and $2,836,000 for the quarter and nine months ended September 30, 2011, respectively, due to the closure of base locations described above.

· Increases in salaries for merit pay raises and in the cost of employee medical benefits.

· HBS - Flight center costs increased $2,258,000, or 12.0%, to $21,116,000 for the third quarter of 2011 and $2,497,000, or 4.4%, to $59,176,000 for the nine months ended September 30, 2011, primarily due to the following:

· Flight center costs of approximately $2,127,000 related to Omniflight’s CBS operations from the acquisition date through September 30, 2011.

· Decreases of approximately $1,475,000 and $3,527,000 for the quarter and nine months ended September 30, 2011, respectively, due to the closure of base locations described above.

· Increases of approximately $515,000 and $1,435,000 for the quarter and nine months ended September 30, 2011, respectively, for the addition of personnel to staff new base locations described above.

· Increases in salaries for merit pay raises and in the cost of employee medical benefits.

20

Aircraft operating expenses decreased $548,000, or 1.7%, and increased $4,334,000, or 5.1%, for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Aircraft operating expenses consist primarily 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 change in costs is due to the following:

· Decrease in aircraft maintenance expense of $4,136,000, or 17.3%, to $19,815,000 for the third quarter of 2011 and increase of $744,000, or 1.2%, to $62,824,000 for the nine months ended September 30, 2011, compared to the prior year. Total flight volume for CBS and HBS operations increased 26.9% and 10.2% for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Excluding the impact of the Omniflight fleet, aircraft maintenance expense decreased 32.0% and 4.5% for the quarter and nine months ended September 30, 2011, respectively. Total flight volume for CBS and HBS operations, excluding the Omniflight fleet, increased 7.2% and 3.0% for the quarter and nine months ended September 30, 2011, respectively. The decrease in maintenance expense is due to normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts. Maintenance expense in the third quarter also included a credit of approximately $1.6 million related to a negotiated revision in an agreement covering main rotor blade replacement costs for our BK-117 twin-engine aircraft. We recorded $1.3 million of expense related to this same agreement during the six months ended June 30, 2011.

· Increases of approximately 47.4% and 29.3% in the cost of aircraft fuel per hour flown for the quarter and nine months ended September 30, 2011, respectively. Total fuel costs increased $2,751,000 to $6,264,000 and $3,950,000 to $13,950,000 for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. 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, excluding the impact of the Omniflight fleet.Fuel expense included non-cash mark to market derivative losses of $528,000 and $305,000 for the quarter and nine months ended September 30, 2011, respectively, compared to non-cash mark to market losses of $26,000 and $343,000 for the quarter and nine months ended September 30, 2010. Cash settlements under the terms of the agreements totaled $307,000 and $884,000 in the quarter and nine months ended September 30, 2011, respectively. We received no cash settlements under the agreements in the quarter and nine months ended September 30, 2010.

· Decreases in hull insurance rates effective July 2011 and 2010.

· Total aircraft operating expenses related to the Omniflight fleet were $5,979,000 from the acquisition date through September 30, 2010.

Products Division

Medical interiors and products revenue increased $1,425,000, or 19.6%, and $7,304,000, or 49.6%, for the quarter and nine months ended September 30, 2011, respectively, compared to 2010. Significant projects in process during 2011 included work under two contracts to produce a total of fifty multi-mission interiors for the U.S. Army’s HH-60M helicopter, 77 interiors for an older generation of the U.S. Army’s Blackhawk helicopter, approximately 187 litter systems for the U.S. Army’s Medical Evacuation Vehicle (MEV), and six aircraft medical interior kits for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2011, was as follows:

· $5,748,000 and $15,537,000 – governmental entities

· $2,954,000 and $6,507,000 – commercial customers

Significant projects in process during 2010 included 32 multi-mission interiors for the U.S. Army’s HH-60M helicopter, eight interiors for an older generation of the U.S. Army’s Blackhawk helicopter, approximately 187 MEV litter systems, and eight aircraft medical interior kits for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2010, was as follows:

· $5,806,000 and $10,004,000 – governmental entities

· $1,471,000 and $4,736,000 – commercial customers

Cost of medical interiors and products increased $1,615,000, or 36.3%, and $4,670,000, or 43.3%, for the quarter and nine months ended September 30, 2011, respectively, as compared to the prior year, due primarily to changes in sales volume.

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Other Revenue and General Expenses

Other revenue—consisting of fees earned for dispatch, transfer center, and patient billing services provided to third parties—increased $220,000, or 14.3%, and $916,000, or 22.1%, for the quarter and nine months ended September 30, 2011, respectively, compared to 2010, primarily due to ten new contracts entered into during either 2011 or 2010.

Depreciation and amortization expense increased $2,975,000, or 18.5%, and $4,734,000, or 10.0%, for the quarter and nine months ended September 30, 2011, compared to 2010. Depreciation related to Omniflight’s fixed assets, including aircraft under capital leases, was approximately $1,740,000 from the acquisition date through September 30, 2011. Amortization of Omniflight’s intangible assets totaled $657,000 for the quarter and nine months ended September 30, 2011, and was allocated entirely to the CBS division. In addition, since the second quarter of 2010, we have added seventeen aircraft and six medical interiors, totaling approximately $15.0 million, to our depreciable assets.

General and administrative (G&A) expenses increased $6,112,000, or 35.5%, and $10,163,000, or 20.3%, for the quarter and nine months ended September 30, 2011, respectively, compared to 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 12.6% and 12.9% of revenue for the quarter and nine months ended September 30, 2011, compared to 11.2% and 12.2% of revenue for the quarter and nine months ended September 30, 2010. Expenses for the quarter and nine months ended September 30, 2011, included approximately $1,509,000 and $1,759,000 in transaction costs and employee severance related to the acquisition of Omniflight. We also incurred approximately $877,000 in expenses related to transitioning Omniflight’s G&A functions into existing Air Methods departments. The increase in expense also reflects additional headcount in our safety department to support the ongoing implementation of our Safety Management System (SMS) and in our billing department to support the increase in third party patient billing contracts, as well as accruals for amounts earned under the Economic Value Added Bonus Plan.

Interest expense increased $676,000, or 14.4%, and decreased $354,000, or 2.4%, for the quarter and nine months ended September 30, 2011. The increase in the third quarter is primarily due to interest of $295,000 recorded on capital lease obligations assumed in the Omniflight acquisition and to interest incurred on the $200 million term loan originated to fund the acquisition of Omniflight. The term loan bears interest at a variable rate which averaged 2.4% for the quarter ended September 30, 2011. The decrease in expense for the nine-month period is related primarily to the reduction in principal balances on long-term debt and capital lease obligations as a result of regularly scheduled payments.

Income tax expense was $12,616,000 and $22,783,000 in the quarter and nine months ended September 30, 2011, respectively, and $9,579,000 and $17,456,000 in the quarter and nine months ended September 30, 2010, respectively. The effective tax rate was approximately 40% for 2011 and 37% for 2010. The rate in 2010 was affected by apportionmentfactor adjustmentswhich reduced our expected blended state income tax rate and adjustments to previously filed state income tax returns which also reduced state income tax expense by approximately $625,000. Changes in our effective tax rate areaffected by the apportionment of revenue and income before taxesfor 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 September 30, 2011, was $85,975,000, compared to $122,599,000 at December 31, 2010. Cash generated by operations was $54,304,000 in 2011, compared to $71,631,000 in 2010. In 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 and approximately $9,740,000 for deposits on new aircraft purchases. Days’ sales outstanding for CBS operations, measured by comparing net revenue for the annualized previous 6-month period to outstanding open net accounts receivable, increased from 94 days at December 31, 2010, to 104 days at September 30, 2011, primarily because of administrative changes in the methods required to submit reimbursement claims to certain insurance providers.

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Cash used by investing activities totaled $229,364,000 in 2011 compared to $19,955,000 in 2010. In addition to the purchases of Omniflight and URS, equipment acquisitions in 2011 included the buy-out of sixteen previously leased aircraft for approximately $17.4 million. We sold five aircraft for $5.9 million during 2011. Equipment acquisitions in 2010 included eighteen aircraft for approximately $12.3 million, as well as medical interiors and avionics upgrades. We sold four aircraft for $5.9 million during 2010.

Financing activities provided $116,865,000 in 2011 compared to using $44,152,000 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 used cash reserves to retire our previous term loan and proceeds from the $200 million term loan under our Amended Credit Facility to fund the acquisition of Omniflight. We began making scheduled quarterly principal payments on the term loan beginning with the quarter ended September 30, 2011. In 2010 we used proceeds of $6.2 million from notes payable to finance the purchase of four aircraft.

Critical Accounting Policies

Our 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 nine months ended September 30, 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 $7,758,000 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.

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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. The Company’s analysis of goodwill valuation has not yet included the goodwill associated with the Omniflight acquisition since the analysis is prepared as of December 31 annually.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk at September 30, 2011, from that reported in our Annual Report on Form 10-K/A for the year ended December 31, 2010, except as follows:

We are subject to interest rate risk on our debt obligations and notes receivable, all of which have fixed interest rates except our line of credit (which has no balance outstanding at September 30, 2011) and $200,340,000 in notes payable. Based on the amounts outstanding at September 30, 2011, the annual impact of a change of 100 basis points in interest rates would be approximately $2,003,000. Interest rates on these instruments approximate current market rates as of September 30, 2011.

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 September 30, 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.

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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

In the third quarter of 2011, we implemented Ramco, a new enterprise resource planning (ERP) system which replaced our existing purchasing, materials management, and aircraft record systems. As with any significant change, we have identified certain control deficiencies resulting from business process, systems and user issues. Our implementation process is designed to identify and remediate issues of this nature, and we have monitoring controls in place to ensure the ongoing reliability of our financial reporting. We believe the controls, as implemented, are appropriate and functioning effectively.

Other than the change mentioned above, 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.

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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, except as follows:

· Omniflight acquisition – On August 1, 2011, we acquired 100% of the outstanding common stock of OF Air Holdings Corporation, parent company of Omniflight Helicopters, Inc. While Omniflight is engaged in the same lines of business as Air Methods, it has operated in different geographic areas and under different procedures and protocols. As with any large acquisition, a significant effort is required to assimilate the operations, financial and accounting practices, and information systems, and to integrate key personnel from the acquired business. This acquisition may cause disruptions in our operations and divert management's attention from day-to-day operations. We may not realize the anticipated benefits of this acquisition, profitability may suffer due to acquisition-related costs or unanticipated liabilities, and our stock price may decrease if the financial markets consider the acquisition to be inappropriately priced.

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

31.1	Chief Executive Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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

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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
Date:  December 22, 2011	By	/s/ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer
Date:  December 22, 2011	By	/s/ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer

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