SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-16079
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AIR METHODS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0915893
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7301 SOUTH PEORIA, ENGLEWOOD, COLORADO 80112
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 792-7400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.06 PAR VALUE PER SHARE (THE "COMMON STOCK")
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(Title of Class)
NASDAQ STOCK MARKET
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(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant as of March 13, 1998 was approximately $24,823,000./(1)/ The
number outstanding shares of Common Stock as of March 13, 1998 was 8,163,489.
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's proxy statement for its Annual Meeting of Stockholders to be
held June 11, 1998, is hereby incorporated by reference into Part III of this
Report.
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/(1)/ Excludes 1,315,821 shares of Common Stock held by directors, officers,
and shareholders whose ownership exceeds five percent of the shares
outstanding at March 13, 1998. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management of policies of the Registrant, or that such person is
controlled by or under common control with the Registrant.
TABLE OF CONTENTS
TO FORM 10-K
PAGE
PART I
ITEM 1. BUSINESS.......................................................1
General........................................................1
Competition....................................................3
Marketing Strategy.............................................3
Contracts in Process...........................................3
Employees......................................................4
Government Regulation..........................................4
ITEM 2. PROPERTIES.....................................................4
Facilities.....................................................4
Equipment and Parts............................................4
ITEM 3. LEGAL PROCEEDINGS..............................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................7
ITEM 6. SELECTED FINANCIAL DATA........................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................9
Results of Operations..........................................9
Liquidity and Capital Resources...............................12
Outlook for 1998..............................................13
Year 2000 Issues..............................................13
New Accounting Standards......................................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................14
i
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............15
ITEM 11. EXECUTIVE COMPENSATION........................................15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K......IV-1
SIGNATURES ............................................................IV-4
ii
PART I
ITEM 1. BUSINESS
GENERAL
Air Methods Corporation, a Delaware corporation ("Air Methods" or "the
Company"), was originally incorporated in Colorado in 1982 and now serves as one
of the largest providers of aeromedical emergency transport services and systems
throughout North America. As of December 31, 1997, the Company's Flight Services
Division provided aeromedical transportation services to hospitals located in 15
states under 20 operating agreements with terms ranging from one to ten years
and had transported approximately 128,000 patients. Mercy Air Service, Inc.
("Mercy"), the Company's wholly owned subsidiary, is an independent provider of
air medical transportation services in southern California. In addition the
Company's Products Division designs, manufactures, and installs medical aircraft
interiors and other aerospace products.
The Company's Flight Services Division provides its hospital clients with
dedicated helicopters and airplanes equipped with medical interiors approved by
the Federal Aviation Administration (FAA) to transport persons requiring
intensive medical care from either the scene of an accident or general care
hospitals to highly skilled trauma centers or tertiary care centers. In general,
the Company's hospital customers qualify as regional care centers because of
location and scope of service. The Flight Services Division conducts its
operations using predominantly Instrument Flight Rules ("IFR")-certified
aircraft and IFR-rated pilots. Maintenance and operation of the aircraft in
accordance with Federal Aviation Regulations (FAR) Part 135 standards is the
Company's responsibility. The hospital clients are responsible for providing the
medical personnel and all medical care. In addition, the hospitals generally are
responsible for all fuel costs. Operating agreements with the hospitals
typically provide that the Company receives approximately 70% of its revenue
from a fixed monthly fee and 30% from an hourly flight fee from the hospital,
regardless of when, or if, the hospital is reimbursed for these services by its
patients, their insurers, or the federal government. The fees are generally
subject to annual increases based on changes in the consumer price index and in
the Company's hull and liability insurance premiums. Because the majority of the
Company's flight revenue is generated from fixed monthly fees, seasonal
fluctuations in flight hours do not significantly impact the Company's monthly
revenue in total.
Internationally, the Company relies on developing business relationships with
strategic players in the medical industry within other countries to expand its
aeromedical transportation business. The Company's first international franchise
was established in 1995 in Brazil with Unimed Air S/A ("Unimed Air"), a member
of Brazil's largest healthcare cooperative, and commenced air medical operations
in January 1996. The Company has assisted the franchise with aircraft selection
and acquisition, medical interior and avionics installations, communications
center consultation, and pilot and medical personnel training. The franchise
agreement currently in effect provides for an initial acquisition price payable
over 10 years plus annual royalties based upon a percentage of the venture's
gross annual revenues. Revenue for the franchise is based on the number of
subscribers to the service rather than on the volume of medical missions flown
by the cooperative. Agreements to provide other services such as the manufacture
and installation of medical interiors or the procurement of aircraft on behalf
of the franchise are each negotiated and priced independently of the franchise
agreement. During 1997 the number of subscribers to the service remained
consistent with the levels reached in 1996.
The Company performs non-destructive component testing, engine repair, and
component overhaul at its headquarters in the Denver metropolitan area. The
Company is designated a Customer Service Facility for Bell Helicopter, Inc. and
an FAA-Certified Repair Station authorized to perform airframe, avionics, and
limited engine repair. In-house repair, maintenance, and testing capabilities
provide cost savings and decrease aircraft down time by avoiding the expense and
delay of having this work performed by nonaffiliated vendors.
1
The Company operates some of its domestic Flight Services Division contracts as
well as its international franchise under the service mark AIR LIFE(R) and has
successfully defended the service mark against infringement actions in Colorado
and California. The service mark is identified in the aeromedical transportation
industry with the Company's high quality of customer support and standard of
service.
In July 1997 the Company acquired all of the common stock of Mercy Air Service,
Inc., a California corporation, and substantially all of the net assets of
Helicopter Services, Inc., a California corporation (together "Mercy"), for
$6,007,000. Of the purchase price, $4,609,000 was paid in cash at closing with
the remaining balance financed by the selling shareholders over five years. Most
of the funding for the cash payment was provided by the refinancing of six of
Mercy's helicopters.
Mercy has operated as an independent provider of aeromedical transportation
services throughout southern California since 1988. As an independent provider,
operations include medical care, aircraft operation and maintenance, 24-hour
communications and dispatch, and medical billing and collections. Mercy operates
seven helicopters under Visual Flight Rules in southern California and is a
leading provider of aeromedical transportation services in Orange, Riverside,
San Diego, Kern, San Bernardino, and Los Angeles counties. Although Mercy does
not contract directly with specific hospitals, it has long-standing
relationships with several of the leading healthcare institutions in the area.
Revenue from Mercy's flight operations consists of flight fees billed directly
to the recipients of the services, their insurers, or governmental agencies.
Generally the number of flights is higher during the summer months than during
the remainder of the year, causing revenue generated from Mercy's operations to
fluctuate accordingly.
The Company's Product Division manufactures three main product lines: modular,
multi-functional medical interiors; multi-mission interiors; and medical suites
for fixed wing aircraft. The key features of the multi-functional and
multi-mission interiors are the flexibility of the configuration, which can be
easily converted for other transport needs, and the simplicity of installation
and maintenance. Although medical interiors ranging from basic life support
systems to intensive care units have comprised the majority of the Products
Division's business, the combination of its engineering, manufacturing, and
certification capabilities has also allowed the Company to perform systems
integration for other aerospace products, such as aircraft navigation systems,
environmental control systems, and structural and electrical systems.
Manufacturing capabilities include equipment fabrication, composites, machine
and welding shops, upholstery, and avionics engineering licensed and approved by
the FAA. To optimize the efficiency of the design phase, the engineering
department uses computer-aided design work stations and finite element analysis
software. The Company also offers quality assurance and certification services
pursuant to Parts Manufacturer Approvals ("PMA's").
The Products Division markets its services and products both domestically and
internationally to a variety of customers through an extensive network of
marketing representatives. Historically, each interior or other project has been
custom designed in accordance with specific customer contract requirements;
however, with the development of the modular, multi-functional interior,
components can now be marketed individually for a variety of airframes. The
Company maintains patents covering certain products and has patents pending for
the multi-functional floor, articulating patient loading system, and aft
equipment frame, all of which were developed as part of the modular interior.
The raw materials and components used in the manufacture of the interiors and
other products are generally widely available from several different vendors.
Air Methods Corporation is located at 7301 South Peoria, Englewood, Colorado
80112; the telephone number is (303) 792-7400.
2
COMPETITION
The Company believes that its competition in the aeromedical transportation
industry comes primarily from four national operators: Corporate Jets, Inc.;
OmniFlight, Inc.; Petroleum Helicopters, Inc.; and Rocky Mountain Helicopters,
Inc. The industry also includes numerous smaller regional carriers. Operators
generally compete on the basis of price, safety record, accident prevention and
training, and the medical capability of the aircraft offered. Price is becoming
a more significant element of competition as many healthcare organizations move
toward consolidation with other entities and toward strict cost containment,
reflecting the uncertainty concerning the future structure of healthcare
providers.
The Company's competition in the medical interior design and manufacturing
industry comes primarily from two companies based in the United States and one
European company. Competition is based mainly on product features and
performance, price, and weight of the product. The Company believes that the
Products Division competes favorably with other companies within this industry.
MARKETING STRATEGY
The Company believes that demand for comprehensive medical transportation will
continue to increase with the closing and consolidation of hospitals. Growth in
the Company's traditional business as an aeromedical transportation operator
will be pursued through responses to selected Requests for Proposal (RFP's)
received from healthcare centers; through growing independent programs based on
the Mercy model of operations; through business combinations such as joint
ventures, mergers and acquisitions; and through the development of additional
international programs. RFP's will be evaluated based upon the program's
expected contribution to the Company's profitability objectives as well as on
the potential increase in market share. The Company believes that consolidation
within the aeromedical transportation industry is necessary to realize economies
of scale and to spread the costs and risks of operation over a larger customer
base. Cost pressures and other changes within the healthcare industry recently
have led to the development of additional innovative approaches to aeromedical
transportation, including the turn key or independent provider (IP) model. With
the acquisition of Mercy in 1997, the Company has added IP capabilities to the
core competencies that it can offer current and potential customers. The Company
is pursuing geographical expansion of Mercy's IP operations, initially to other
contiguous regions.
The Company also intends to aggressively market its three aircraft interior
product lines through its domestic and foreign marketing representatives to
original equipment manufacturers as well as to aeromedical operators. The
government aeromedical industry continues to be a market of primary importance,
both domestically and internationally. Drawing on the background of developing
the UH-60Q medical evacuation helicopter multi-mission interior, the Products
Division has positioned itself to obtain the anticipated UH-60Q production
contract and to leverage the technology on a global basis. The Company believes
that demand for medical aircraft interiors will focus on products which are easy
to install, maintain, and operate and which can be rapidly converted to other
uses.
CONTRACTS IN PROCESS
As of December 31, 1997, the Company was completing the production of electrical
system components for the U.S. Air Force HH-60G helicopter and the manufacture
of multi-functional interior systems for the MD900 Explorer helicopter for a
British company. These projects are scheduled for delivery in the first quarter
of 1998, and remaining revenue is estimated at $430,000. In the first quarter of
1998 the Company received a follow-on contract for the manufacture of additional
electrical system components for the U.S. Air Force HH-60G helicopter. In
addition, the Company signed agreements in the first quarter of 1998 to complete
the design and integration for various avionics and communications systems in a
special-use police helicopter and to manufacture and install a medical interior
in a Bell 407 helicopter for one of the Company's hospital customers. As of
December 31, 1996, the portion of medical interiors and other products in
process to be completed was $570,000.
3
EMPLOYEES
As of December 31, 1997, the Company retained 329 full time and 44 part time
employees, comprised of 135 pilots; 116 aviation machinists, A&P engineers and
other manufacturing/maintenance positions; 48 flight nurses and paramedics; and
48 business and administrative personnel. All of the Company's pilots are
IFR-rated and have completed an extensive ground school and flight training
program at the commencement of their employment with the Company, as well as
local area orientation and annual training provided by the Company. All of the
Company's operating aircraft mechanics must possess FAA airframe and powerplant
licenses. All flight nurses and paramedics hold the appropriate state and county
licenses, as well as Cardiopulmonary Resuscitation, Advanced Cardiac Life
Support, and Pediatric Advanced Life Support certifications.
The Company's employees are not covered by any collective bargaining agreements
and management believes that its relations with employees are satisfactory. The
Company provides salary and benefits packages competitive with those offered by
other providers of aviation services based on the individual qualifications of
employees.
GOVERNMENT REGULATION
The Company is subject to the Federal Aviation Act of 1958, as amended. All
flight and maintenance operations of the Company are regulated and actively
supervised by the U.S. Department of Transportation through the FAA; in
addition, the medical interiors and other aerospace products developed by the
Company are subject to FAA certification. The Company holds a Part 135 Air
Carrier Certificate and Part 145 Repair Station (Maintenance and Avionics)
Certificates from the FAA. Mercy also holds its own Part 135 Air Carrier
Certificate and Part 145 Repair Station Certificate from the FAA.
The Company cannot predict the impact of new or changed laws or regulations on
the demand for aeromedical services in the future or the costs of complying with
such laws and regulations.
ITEM 2. PROPERTIES
FACILITIES
The Company leases its headquarters, consisting of approximately 60,000 square
feet of office and hangar space, in metropolitan Denver, Colorado at the
Centennial Airport. In the first quarter of 1998, the Company's lease was
extended to March 2003. The approximate annual rent under the terms of the
extension is $438,000.
Mercy's headquarters consist of approximately 6,700 square feet of office space
in Fontana, California and 19,000 square feet of office and hangar space in
Rialto, California. The facilities in Fontana are leased for an approximate
annual cost of $33,000 through August 1999; the Company owns the facilities at
Rialto and pays minimal rent for the land at the airport where they are located.
The Company expects to move all Mercy administrative operations to the Rialto
facility in 1999. The Company believes that these facilities are in good
condition and suitable for the Company's present requirements.
EQUIPMENT AND PARTS
As of December 31, 1997, the Company managed and operated a fleet of 40
aircraft, consisting of 36 helicopters and 4 airplanes. Of these aircraft, the
Company owns 25 helicopters and 1 airplane and leases 7 helicopters and 1
airplane. The Company operates 4 helicopters and 2 airplanes owned by client
hospitals and other third parties in connection with existing aeromedical
contracts. One helicopter owned by the Company has not yet been placed in
service pending completion of the medical interior and avionics installations.
The composition of the Company's owned and leased helicopter and airplane fleets
as of December 31, 1997, is as follows:
4
COMPANY OWNED AIRCRAFT/(1)/
(DOLLAR AMOUNTS IN THOUSANDS)
Net Book
TYPE NUMBER COST VALUE
Helicopters:
Bell 206 L-1 1 $ 663 $ 446
Bell 206 L-3 4 3,533 2,601
Bell 222A 1 1,883 1,164
Bell 222B 1 1,685 1,636
Bell 222UT 12 21,321 17,645
Bell 407 1 2,070 1,998
Bell 412 4 10,877 8,901
BK 117 1 5,882 4,133
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25 47,914 38,524
Airplanes:
Cessna 421B 1 251 135
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TOTALS 26 $ 48,165 $ 38,659
=== ======= =======
COMPANY LEASED AIRCRAFT
(DOLLAR AMOUNTS IN THOUSANDS)
Remaining Total Rents Remaining
TYPE NUMBER TERM IN YEARS OVER LEASE LIFE PAYMENTS
Helicopters:
Bell 206 L-3 1 1 $ 1,659 $ 48
Bell 222B 1 2 1,020 238
Bell 222UT 1 2 1,302 282
Bell 407 2 11 3,514 3,403
Bell 412 1 5 6,008 2,378
Sikorsky S-76 1 1 2,100 123
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7 15,603 6,472
Airplanes:
Learjet 25 1 1 1,044 85
-- ------ ------
TOTALS 8 $ 16,647 $ 6,557
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/(1)/ Includes aircraft acquired under capital leases.
5
The Company generally pays all insurance, taxes, and maintenance expense for
each aircraft in its fleet. Because helicopters are insured at replacement cost
which usually exceeds book value, the Company believes that helicopter accidents
covered by hull and liability insurance will generally result in full
reimbursement of any damages sustained. In the ordinary course of business, the
Company may from time to time purchase and sell helicopters in order to best
meet the specific needs of its contracts.
In the first quarter of 1998 one of the Company's Bell 222UT helicopters was
totally destroyed in a crash. The insured value of the helicopter exceeded the
book value, resulting in a gain on disposition. The Company believes that its
insurance provisions are adequate to cover costs or obligations incurred or to
be incurred as a direct result of this incident.
The Company has experienced no significant difficulties in obtaining required
parts for its helicopters. Repair and replacement components are purchased
primarily through Bell Helicopter Textron, Inc. ("Bell"), since Bell aircraft
make up the majority of the Company's fleet. Bell is a major helicopter
manufacturer with extensive links to the defense industry, and the Company does
not anticipate any interruption in Bell's manufacturing of replacement parts and
components in the near future. Any termination of production by Bell would
require the Company to obtain spare parts from other suppliers, which are not
currently in place.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1997.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ Stock Market under the
trading symbol "AIRM." The following table shows, for the periods indicated, the
high and low closing prices for the Company's common stock. The quotations for
the common stock represent prices between dealers and do not reflect adjustments
for retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
YEAR ENDED DECEMBER 31, 1997
COMMON STOCK HIGH LOW
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First Quarter........................... $ 3 $ 2 1/8
Second Quarter.......................... 3 2
Third Quarter........................... 4 7/16 2 3/8
Fourth Quarter.......................... 4 1/2 2 3/4
YEAR ENDED DECEMBER 31, 1996
COMMON STOCK HIGH LOW
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First Quarter........................... $ 4 1/16 $ 3
Second Quarter.......................... 4 5/8 3
Third Quarter........................... 4 3/4 2 7/8
Fourth Quarter.......................... 3 1/4 1 15/16
As of March 13, 1998 there were approximately 392 holders of record of the
Company's common stock. The Company estimates that it has approximately 3,700
beneficial owners of common stock.
The Company has not paid any cash dividends since its inception and intends to
retain any future earnings to finance the growth of the Company's business
rather than to pay dividends. Neither the declaration nor the payment of future
cash dividends is restricted by the Company's credit or financing arrangements.
7
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial information of the Company and
subsidiary which has been derived from the Company's audited consolidated
financial statements. This selected financial data should be read in conjunction
with the consolidated financial statements of the Company and notes thereto
appearing in Item 8 of this report. Revenue for the year ended 1997 increased in
part as a result of the Company's acquisition of Mercy. See "Business --
General" at Item 1 and "Management's Discussion and Analysis" at Item 7 of this
report.
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands except share and per share amounts)
Six Months
Ended
YEAR ENDED DECEMBER 31, December 31, YEAR ENDED JUNE 30,
1997 1996 1995 1994 1994 1993
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STATEMENT OF OPERATIONS DATA:
Revenue $ 38,977 30,257 30,122 13,871 27,898 25,340
Operating expenses:
Operating 31,017 25,052 24,248 12,678 25,314 20,319
General and administrative 4,645 3,845 3,873 2,176 5,761 4,479
Restructuring and other
non-recurring - - - - 3,010 -
Other income (expense), net (1,619) (1,052) (1,042) (872) (888) (976)
Extraordinary gain (loss) - - - - (182) 173
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Net income (loss) $ 1,696 308 959 (1,855) (7,257) (261)
==============================================================================
Basic and diluted income (loss) per
common share $ .21 .04 .12 (.23) (1.03) (.08)
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Weighted average number of shares
of Common Stock outstanding - basic 8,121,395 8,100,545 8,071,010 8,023,225 7,056,445 3,453,111
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Weighted average number of shares
of Common Stock outstanding - diluted 8,188,547 8,259,154 8,186,804 8,023,225 7,056,445 3,453,111
==============================================================================
As of
As of December 31, June 30,
--------------------------------------
1997 1996 1995 1994 1994
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BALANCE SHEET DATA:
Total assets $ 59,869 45,389 42,586 48,134 51,900
Long-term liabilities 29,013 19,354 16,329 18,375 18,688
Stockholders' equity 21,213 19,428 19,062 18,031 19,818
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included at Item 8 of this report. This report,
including the information incorporated by reference herein, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. For this purpose, statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "expects", "anticipates",
"plans", "estimates", and similar words and expressions are intended to identify
such statements. These forward-looking statements include statements concerning
the size, structure and growth of the Company's flight services and products
markets, the continuation and/or renewal of flight service contracts, the
acquisition of new and profitable Products Division contracts, the expansion of
Mercy's operations, continued royalty revenue from Unimed Air, and other
matters. The actual results that the Company achieves may differ materially from
those discussed in such forward-looking statements due to the risks and
uncertainties described in the Business section of this report, in Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
heading "Outlook for 1998" thereunder, and in other sections of this report, as
well as in the Company's Quarterly Reports on Form 10-Q.
RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to 1996
The Company reported net income of $1,696,000 for the year ended December 31,
1997, compared to $308,000 for the year ended December 31, 1996. The increase in
net income is primarily attributable to the acquisition of Mercy on July 30,
1997, and to improved operating results for the Company's Products Division.
Flight revenue increased $7,452,000 or 28.1% from $26,517,000 for the year ended
December 31, 1996, to $33,969,000 for the year ended December 31, 1997. The
increase is primarily due to flight revenue of $6.4 million generated by Mercy
from the acquisition date through December 31, 1997. Revenue from the Company's
other flight operations increased 4.0% for the year ended December 31, 1997,
reflecting rate increases in the majority of the Company's hospital contracts
based on changes in the Consumer Price Index and a 4.4% increase in revenue
flight hours from 12,600 in 1996 to 13,200 in 1997. Flight revenue is recorded
net of contractual allowances under agreements with third-party payors.
Sales of medical interiors and products increased $292,000 or 9.5% from
$3,058,000 for the year ended December 31, 1996, to $3,350,000 for the year
ended December 31, 1997. In 1997 the Company recognized revenue of $1,489,000
from the design and manufacture of four multi-mission medical interior systems
for the U.S. Army UH-60Q helicopter and $884,000 from the manufacture of
electrical system components for the U.S. Air Force HH-60G helicopter. Revenue
also included $338,000 from the installation of a Bell 407 interior. In 1996 the
Company recognized revenue of $1,036,000 from the design of a medical interior
for a Lockheed L-1011 aircraft, $812,000 from the sale of a Bell 412 medical
interior, and $721,000 from the design of medical interior systems for the U.S.
Army UH-60Q helicopter. Cost of medical interiors decreased by 18.5% for the
year ended December 31, 1997, as compared to the previous year, reflecting the
decrease in developmental costs incurred in 1997. The Company incurred $1.2
million in developmental costs in 1996 on the modular, multi-functional medical
interior and on the design of medical interior systems for the UH-60Q
helicopter. Cost of medical interiors in 1997 also included the reduction of
previously established warranty reserves based on the Company's historical
warranty claims experience.
The increases in parts and maintenance sales and services in 1997, as compared
with 1996, are due to the acquisition of Mercy in July 1997. Mercy provides
helicopter maintenance services and parts to customers primarily in Southern
California. Cost of parts and maintenance sales and services also increased
correspondingly in 1997.
9
The Company recognized revenue of $428,000 from its Brazilian franchise during
1997, compared to $262,000 in 1996. Revenue recognized in 1997 represents
royalties earned on franchise operations while revenue in 1996 was primarily the
second minimum installment of the 10-year franchise agreement. Under the
exclusive franchise agreement, the Brazilian company purchased the right to use
the trademarks and expertise of the Company in providing air medical services in
Brazil, in exchange for an acquisition price of $2,250,000 payable over 10 years
plus annual royalties based on gross revenues. The franchise commenced air
operations in January 1996 and generated $178,000 in royalties from operations
in 1997 in addition to the third installment of the initial acquisition price.
In 1997 the Company recognized net gains totaling $277,000 on the disposition of
assets, including $61,000 on the sale of an aircraft to the Company's Brazilian
franchisee and $255,000 from the insurance settlement for one of the Company's
helicopters destroyed in a crash in December 1997.
Flight center costs, consisting primarily of pilot and mechanics salaries and
fringe benefits, increased 22.3% in 1997 compared to 1996. The acquisition of
Mercy caused an increase of $1,480,000 in 1997. Without the effect of the Mercy
transaction, flight center costs increased 4.0% in 1997 as a result of increases
in pilot and mechanic salaries for merit pay raises. Costs in 1997 also
reflected approximately $50,000 to adjust workers compensation expense for the
expected impact of the helicopter crash on the Company's workers compensation
insurance rates.
Aircraft operating expenses increased 25.6% for the year ended December 31,
1997, compared to 1996. Aircraft operating expenses consist of fuel, insurance,
and maintenance costs and generally are a function of the size of the fleet, the
type of aircraft flown, and the number of hours flown. The Company has added 11
helicopters to its fleet since December 31, 1996, including 7 acquired in the
Mercy transaction. Absent the impact of the Mercy transaction, aircraft
operating expenses increased 12.6%, reflecting higher repair and maintenance
costs driven in part by a 2.6% increase in total flight hours for 1997. Repair
and maintenance costs in 1997 also included the cost of overhauling a Bell 412
combining gearbox, a Bell 206 engine, and a Bell 222 transmission prior to their
scheduled overhaul dates. Also in 1997 the Company began upgrading the Lycoming
engines in its Bell 222 fleet for changes in power turbine rotors.
Aircraft rental expense decreased by 2.7% for the year ended December 31, 1997,
as compared to 1996, reflecting the elimination of rental expense for a
helicopter previously leased from Mercy. This decrease was partially offset by
the short-term lease of a backup helicopter while one of the Company's aircraft
was undergoing a scheduled engine overhaul and by the addition of two leased
helicopters in Mercy's fleet.
Depreciation and amortization expense increased by 21.8% for the year ended
December 31, 1997. The addition of Mercy's fixed assets increased depreciation
by $313,000 in 1997. The remaining increase is primarily the result of adding
two Bell 407 helicopters and two new medical interiors to the fleet. The Company
also purchased rotable and office equipment totaling $797,000 in 1997 to replace
equipment with an original cost of $283,000 which became fully depreciated in
1997 and to meet the demands of growth in operations.
Bad debt expense is estimated during the period the related services are
performed based on historical experience for Mercy's operations. The provision
is adjusted as required based on actual collections in subsequent periods. Bad
debt expense increased in 1997 compared to an immaterial amount in 1996 because
Mercy bills patients and their insurers directly for services rendered rather
than billing hospital customers.
The increase in general and administrative expenses for the year ended December
31, 1997, compared to the corresponding periods in 1996 reflects the impact of
the acquisition of Mercy. Without the acquisition, general and administrative
expenses would have increased 2.8%. Synergies in administrative costs from the
consolidation of the Company's operations with Mercy are not expected to be
realized until 1998.
Interest expense increased 41.6% in 1997 compared to 1996 due to the addition of
debt related to the acquisition of Mercy in July 1997. New debt includes $10.2
million at 9.52% interest secured by Mercy's fleet.
10
Interest income decreased 30.5% for the year ended December 31, 1997, compared
to the year ended December 31, 1996. The decrease is due in part to the
settlement of notes receivable from Mercy to the Company in July 1997 at the
acquisition date.
Year ended December 31, 1996 compared to 1995
The Company reported net income of $308,000 for the year ended December 31,
1996, compared to $959,000 for the year ended December 31, 1995. The decrease in
net income is primarily attributable to the Company's investment in the
development of a new modular medical interior and in the design and
qualification of a medical interior system for the UH-60Q helicopter for the
U.S. Army.
Flight revenue increased $296,000 or 1.1% from $26,221,000 for the year ended
December 31, 1995, to $26,517,000 for the year ended December 31, 1996. Flight
revenue in 1995 included $654,000 from the lease of two helicopters, both of
which were purchased by the lessees in the second quarter of 1995. Revenue from
continuing contracts increased $951,000 primarily because of annual price
increases for the majority of the Company's contracts based on changes in the
Consumer Price Index. Flight hours remained relatively constant at 12,600 and
12,800 for the years ended December 31, 1996 and 1995, respectively.
Sales of medical interiors and products decreased by $323,000 or 8.5% from
$3,801,000 for the year ended December 31, 1995, to $3,478,000 for the year
ended December 31, 1996. In 1996 the Company recognized revenue of $1,036,000
from the design of a medical interior for a Lockheed L-1011 aircraft, $812,000
from the sale of a Bell 412 medical interior, and $721,000 from the design of
medical interior systems for the U.S. Army UH-60Q helicopter. Other projects in
1996 included the design and installation of modular, multi-functional interiors
in two MD-900 Explorer helicopters and the manufacture of a Bell 206 interior
for Unimed Air. In 1995 the Company recognized revenue of $1,469,000 from the
design of the Lockheed L-1011 medical interior and $723,000 from the sale of
passenger oxygen systems. The Company also earned revenue from the sales of a
Bell 206 and a Bell 412 medical interior. The cost of medical interiors
increased by 29.9% for the year ended December 31, 1996, as compared to the
previous year, reflecting the Company's investment of $1.2 million in the
development of the modular, multi-functional medical interior and in the design
of medical interior systems for the UH-60Q helicopter. The cost of this
investment is expected to be recovered against future units of production.
Without the effect of these two investments, the cost of medical interiors would
have decreased 9.1% from 1995 to 1996, reflecting the decrease in sales of
medical interiors.
The Company recognized revenue of $262,000 from its Brazilian franchise during
1996, compared to $100,000 in 1995. The franchise commenced air operations in
January 1996 and generated $112,000 in royalties from operations in addition to
the second installment of the initial acquisition price.
Flight center costs decreased 1.7% in 1996 compared to 1995. Health insurance
and workers compensation insurance premiums decreased $299,000 due to changes
enacted in 1996 encouraging the use of other health plans and higher deductibles
and to lower workers compensation claims. This decrease was offset by increases
in pilot and mechanic salaries for merit pay raises. Flight center costs
generally vary with the number of operating agreements served by the Company;
the Company did not add any new bases in 1996.
Aircraft operating expenses also remained basically unchanged for the year ended
December 31, 1996, in comparison to the same period in 1995. The addition of one
Bell 222 helicopter to the Company's fleet in late 1996 was offset by a
reduction in hull and liability insurance premiums effective July 1, 1996.
Aircraft rental expense decreased by 11.9% for the year ended December 31, 1996,
as compared to 1995, primarily because of the sale of a previously leased
aircraft to one of the Company's hospital customers. Lease expense recorded in
1995 for this helicopter totaled $122,000.
11
Depreciation and amortization expense increased by 15.1% for the year ended
December 31, 1996. The increase is due to the addition of one Bell 222
helicopter and two new medical interiors to the fleet in 1996 and to revisions
in the amortization periods for certain aircraft under capital lease. The
helicopter was placed in service to upgrade a hospital client to a larger
aircraft, while the two medical interiors replaced fully depreciated interiors
on existing aircraft.
Interest expense decreased 7.1% in 1996 compared to 1995. In 1995 interest
expense included $92,000 on a note which was retired when the helicopter
underlying the debt was sold in March 1995.
Other expenses for the year ended December 31, 1996, included an unrealized loss
of $115,000 on the Company's investment in the stock of a privately held
corporation based on the stock's valuation in recent transactions. The
corporation holds a licensing agreement to develop a biologic response modifier
introduced by the Company when doing business as a biotechnology research and
development company.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $3,396,000 and working capital of
$2,909,000 as of December 31, 1997, as compared to cash and cash equivalents of
$2,058,000 and working capital of $502,000 at December 31, 1996. The improvement
in the Company's cash and working capital positions in 1997 is primarily due to
positive cash flow generated by the Company's operations. Mercy's operations
generated net cash flow of approximately $3 million since the acquisition in
1997. An increase in deferred revenue on hospital contracts also contributed to
the improvement in cash flow from operations. The increase in costs in excess of
billings on uncompleted contracts in 1997 contributed to the improvement in the
working capital position. For all of the Company's significant projects in
process at December 31, 1997, including the electrical system components for the
U.S. Air Force HH-60G helicopter, the Company issued progress billings rather
than receiving funding advances.
In October 1996 the Company entered into an agreement with a financial
institution establishing a $2 million line of credit with a two-year term and an
interest rate of prime plus .25% to supplement cash flow from operations if
necessary. The agreement requires the Company to maintain a zero balance on the
line for 30 days during each year and to pay an annual commitment fee. The line
has various covenants which limit the Company's ability to dispose of assets,
merge with another entity, and pledge trade receivables and inventories as
collateral. The Company is also required to maintain certain financial ratios as
defined in the agreement; as of December 31, 1997, the Company was in compliance
with all covenants and had no borrowings under the line.
In July 1997 the Company entered into an agreement with a financial institution
establishing a $700,000 line of credit with a one-year term and an interest rate
of prime plus .50% in connection with the Mercy acquisition. This line also has
various covenants which limit the Company's ability to dispose of assets, merge
with another entity, and pledge trade receivables and inventories as collateral
and which required the Company to maintain certain financial ratios as defined
in the agreement. As of December 31, 1997, the Company was in compliance with
all covenants and had drawn $700,000 against the line. The line was paid in full
in March 1998.
In July 1997 the Company entered into a $10.2 million note payable with a
company with interest at 9.52% to finance the acquisition of Mercy. The Company
also originated notes payable to the former shareholders of Mercy for $1.4
million with interest at 9% to finance the transaction.
In June 1997 the Company retired a $386,000 capital lease obligation by
refinancing the aircraft with a different lender for $1.3 million. The
transaction provided an additional $910,000 in working capital.
As of December 31, 1997, the Company holds unencumbered aircraft with a net book
value of $1.5 million which could be utilized as collateral for borrowing funds
as an additional source of working capital if necessary. The Company believes
that these borrowing resources coupled with continued favorable results of
operations will allow the Company to meet its obligations in the coming year.
12
Repayment of debt and capital lease obligations as well as operating lease
agreements constitute the Company's long-term commitments to use cash. Balloon
payments on long-term debt of $1.8 million and $3.1 million are due in 2001 and
2007, respectively.
OUTLOOK FOR 1998
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
Operating agreements with four hospital clients are due for renewal in 1998,
three of which were successfully renewed in the first quarter. In the first
quarter of 1998, the Company decided not to pursue renewal of one of its
contracts expiring in 1998 and to redeploy the helicopter assigned to that
contract to its Mercy operations. The Company expects 1998 flight activity at
current hospital customers to remain consistent with historical levels and
expects to begin operations under one new contract in the first quarter of 1998.
As of December 31, 1997, the Company was completing the production of electrical
system components for the U.S. Air Force HH-60G helicopter and the manufacture
of multi-functional interior systems for the MD900 Explorer helicopter for a
British company. In the first quarter of 1998 the Company received a follow-on
contract for the manufacture of additional electrical system components for the
U.S. Air Force HH-60G helicopter. In addition, the Company signed agreements in
the first quarter of 1998 to complete the design and integration for various
avionics and communications systems in a special-use police helicopter and to
manufacture and install a medical interior in a Bell 407 helicopter for one of
the Company's hospital customers. Revenue from all of these projects is expected
to total approximately $1.6 million in 1998. The Company expects authorization
to produce and deliver seven additional UH-60Q helicopter upgrades which are
included in the 1997 and 1998 Department of Defense budgets. Final orders for
these units have not yet been received, however, and there is no assurance that
the work will be performed or units delivered in 1998 or in future periods.
During 1998 the Products Division also expects to complete medical interiors for
three Bell 222 helicopters for use by the Flight Services Division's current
hospital customers. The Products Division will also continue to actively market
its products and core competencies both domestically and internationally.
In 1998 the Company expects its subsidiary Mercy to expand the geographical
coverage of its operations to other contiguous regions. In addition, the Company
anticipates operating royalties generated by Unimed Air, its Brazilian
franchisee, to remain consistent with historical levels of operations in 1998.
There can be no assurance that the Company will continue to renew operating
agreements for the Flight Services Division, generate new profitable contracts
for the Products Division, or successfully expand its Mercy operations. In
addition, there can be no assurance that Unimed Air will continue to generate
royalties from operations. However, based on the anticipated level of flight
activity for its hospital customers, the backlog of projects for the Products
Division, and the expected growth in Mercy's operations, the Company anticipates
continued profitable operations in 1998.
YEAR 2000 ISSUES
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue which results
from computer programs being written using two digits rather than four to define
the applicable year. Any computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in a major system failure or miscalculations. The majority of the
Company's software has already been updated for the Year 2000 and updates on the
remaining programs are in process as of December 31, 1997. The Company does not
expect the changes required for the Year 2000 to have a material effect on its
financial position or results of operations. Because most of the software
updates completed prior to December 31, 1997, were covered by the Company's
existing maintenance contracts, the amounts expensed in 1997 were immaterial.
13
NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), which requires comprehensive income to be displayed
prominently within the financial statements. Comprehensive income is defined as
all recognized changes in equity during a period from transactions and other
events and circumstances except those resulting from investments by owners and
distributions to owners. Net income and items that previously have been recorded
directly in equity are included in comprehensive income. Statement 130 affects
only the reporting and disclosure of comprehensive income but does not affect
recognition or measurement of income. Statement 130 is effective for fiscal
years beginning after December 15, 1997, with earlier application permitted. The
Company plans to adopt Statement 130 in the first quarter of 1998 and does not
expect adoption to have an impact on its financial reporting.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 provides
guidance for reporting information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial reports of public companies. An operating segment
is defined as a component of a business that engages in business activities from
which it may earn revenue and incur expenses, a component whose operating
results are regularly reviewed by the company's chief operating decision maker,
and a component for which discrete financial information is available. Statement
131 establishes quantitative thresholds for determining operating segments of a
company. Statement 131 is effective for fiscal years beginning after December
15, 1997, with earlier application permitted. The Company plans to adopt
Statement 131 in the first quarter of 1998 by reporting operating segment
information on Form 10-Q.
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"), became effective in 1997 and was adopted by the Company. See
footnote 7 to the attached consolidated financial statements in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 1998, for the
Annual Meeting of Stockholders to be held June 11, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 1998, for the
Annual Meeting of Stockholders to be held June 11, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 1998, for the
Annual Meeting of Stockholders to be held June 11, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement to be filed on or prior to April 30, 1998, for the
Annual Meeting of Stockholders to be held June 11, 1998.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
1. Financial Statements included in Item 8 of this report:
Independent Auditors' Report.
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules included in Item 8 of this report:
Schedule II - Valuation and Qualifying Accounts
All other supporting schedules have been omitted because the
information required is included in the financial statements or
notes thereto or have been omitted as not applicable or not
required.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Stock Purchase Agreement, dated July 11, 1997, among
the Company and shareholders of Mercy Air Service,
Inc./11/
2.2 Asset Purchase Agreement, dated July 11, 1997, by and
among the Company, Helicopter Services, Inc., and
shareholders of Mercy Air Service, Inc./11/
3.1 Certificate of Incorporation/1/
3.2 Amendments to Certificate of Incorporation/2/
3.3 By-Laws as Amended/8/
4.1 Specimen Stock Certificate/2/
4.2 Warrant Agreement, and First and Second Amendment to
Warrant Agreement, and form of Warrant Certificate/3/
4.3 Third Amendment to Warrant Agreement/6/
4.4 Warrant Agreement, dated February 2, 1993, between
the Company and Sands Brothers & Co., Ltd. ("Sands
Brothers") covering Warrants issued to Sands Brothers/3/
4.5 Form of Sands Brothers Warrant/3/
4.6 Warrant Agreement, dated April 6, 1993, between the
Company and C.C.R.I. Corporation/6/
IV-1
4.7 Warrant Agreement dated February 14, 1994, between the
Company and C.C.R.I. Corporation/7/
4.8 Form of Reissued Warrant Agreement, dated May 3, 1995
between the Company and Americas Partners, concerning
warrants originally issued December 28, 1993/9/
4.9 Form of Reissued Warrant Agreement, dated May 3, 1995
between the Company and Americas Partners, concerning
warrants originally issued February 21, 1994/9/
10.1 1995 Air Methods Corporation Employee Stock Option Plan/5/
10.2 Nonemployee Director Stock Option Plan, as amended/6/
10.3 Equity Compensation Plan for Nonemployee Directors, adopted
March 12, 1993/4/
10.4 Form of Option Agreement between the Company and Alfred
Bjorseth/6/
10.5 Form of Option Agreement between the Company and Marlis E.
Smith/6/
10.6 Warrant Agreements, dated April 29, 1993, between the
Company and Bart Gutekunst/6/
10.7 Form of Consulting Agreement, dated November 30, 1994,
between the Company and Roy L. Morgan/9/
10.8 Employment Agreement, dated November 12, 1991, between the
Company and Maurice L. Martin, Jr./2/
10.9 Employment Agreement, dated June 1, 1994, between the
Company and George Belsey/8/
10.10 Employment Agreement, dated November 30, 1993, between the
Company and Michael Prieto/8/
10.11 Research and Licensing Agreement, dated December 6, 1993,
between the Company and Phylomed/8/
10.12 Equipment Leases, dated July 25, 1992, between the Company
and Ventana Leasing, Inc. or Praktikerfinans AB/2/
10.13 Employment Agreement dated July 10, 1995 between the
Company and Aaron D. Todd/10/
10.14 Secured Loan Agreement, dated July 31, 1997, between Mercy
Air Service, Inc. and Finova Capital Corporation/11/
10.15 Continuing Guaranty and Subordination Agreement, dated
July 31, 1997, between the Company and Finova Capital
Corporation/11/
21 Subsidiary of Registrant
23 Consent of KPMG Peat Marwick, LLP
27 Financial Data Schedule
IV-2
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
- --------------------
/1/ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-15007), as declared effective on August 27, 1987, and
incorporated herein by reference.
/2/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992, and incorporated herein by reference.
/3/ Filed as an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-59690), as declared effective on April 23, 1993, and
incorporated herein by reference.
/4/ Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 33-65370), filed with the Commission on July 1, 1993, and
incorporated herein by reference.
/5/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, and incorporated herein by reference.
/6/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993, and incorporated herein by reference.
/7/ Filed as an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-75744) filed with the Commission on February 25, 1994
and incorporated herein by reference.
/8/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein by reference.
/9/ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
transitional fiscal year ended December 31, 1994 and incorporated herein by
reference.
/10/ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by reference.
/11/ Filed as an exhibit to the Company's Current Report on Form 8-K dated July
31, 1997, and incorporated herein by reference.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AIR METHODS CORPORATION
Date: MARCH 25, 1998 By: GEORGE W. BELSEY
-------------------- ---------------------------------------
George W. Belsey
Chairman of the Board, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
GEORGE W. BELSEY Chairman of the Board March 25, 1998
- ----------------------- Chief Executive Officer
George W. Belsey
AARON D. TODD Chief Financial Officer March 25, 1998
- ----------------------- Secretary and Treasurer
Aaron D. Todd Principal Accounting Officer
JOSEPH E. BERNSTEIN Director March 25, 1998
- -----------------------
Joseph E. Bernstein
RALPH J. BERNSTEIN Director March 25, 1998
- -----------------------
Ralph J. Bernstein
LIAM F. DALTON Director March 25, 1998
- -----------------------
Liam F. Dalton
SAMUEL H. GRAY Director March 25, 1998
- -----------------------
Samuel H. Gray
CARL H. MCNAIR, JR. Director March 25, 1998
- -----------------------
Carl H. McNair, Jr.
LOWELL D. MILLER, PH.D. Director March 25, 1998
- -----------------------
Lowell D. Miller, Ph.D.
ROY L. MORGAN Director March 25, 1998
- -----------------------
Roy L. Morgan
DONALD R. SEGNER Vice-Chairman of the Board March 25, 1998
- -----------------------
Donald R. Segner
MORAD TAHBAZ Director March 25, 1998
- -----------------------
Morad Tahbaz
IV-4
AIR METHODS CORPORATION
AND SUBSIDIARY
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Independent Auditors' Report ..................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS,
December 31, 1997 and 1996 ............................. F-2
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 1997, 1996 and 1995............ F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 1997, 1996 and 1995............ F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 1997, 1996 and 1995............ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 1997 and 1996 ............................. F-8
SCHEDULES
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995........... F-25
All other supporting schedules are omitted because they are inapplicable, not
required, or the information is presented in the consolidated financial
statements or notes thereto.
IV-5
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
We have audited the consolidated financial statements of Air Methods Corporation
and subsidiary as listed in the accompanying table of contents. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Air Methods
Corporation and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
February 13, 1998
F-1
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $3,396 2,058
Current installments of notes receivable (note 4) 58 392
Receivables:
Trade (notes 5 and 9) 6,766 1,189
Less allowance for doubtful accounts (2,528) (24)
---------- ---------
4,238 1,165
Insurance proceeds -- 270
International franchise fee 145 --
Other 681 213
---------- ---------
5,064 1,648
Inventories (note 5) 2,082 1,583
Work-in-process on medical interior and products contracts 212 192
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 3) 1,120 682
Prepaid expenses and other current assets 620 554
---------- ---------
Total current assets 12,552 7,109
---------- ---------
Equipment and leasehold improvements (note 5 and 6):
Flight and ground support equipment 54,540 42,448
Furniture and office equipment 2,287 1,494
---------- ---------
56,827 43,942
Less accumulated depreciation and amortization (13,143) (10,013)
---------- ---------
Net equipment and leasehold improvements 43,684 33,929
Excess of cost over the fair value of net assets acquired, net of accumulated
amortization of $601 and $502 at December 31, 1997 and 1996,
respectively 1,957 1,925
Notes receivable, less current installments (note 4) 673 1,454
Patent application costs and other assets, net of accumulated amortization
of $717 and $588 at December 31, 1997 and 1996, respectively 1,003 972
---------- ---------
Total assets $59,869 45,389
========== =========
(Continued)
F-2
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 5) $729 352
Current installments of long-term debt (note 5) 2,655 1,780
Current installments of obligations under capital leases (note 6) 659 819
Accounts payable 1,050 614
Income taxes payable 156 --
Accrued overhaul and parts replacement costs 2,008 1,582
Deferred revenue 942 629
Deferred income taxes (note 9) 159 --
Other accrued liabilities 1,285 831
-------- ---------
Total current liabilities 9,643 6,607
Long-term debt, less current installments (note 5) 19,680 10,642
Obligations under capital leases, less current installments (note 6) 2,816 3,732
Accrued overhaul and parts replacement costs 4,837 4,157
Deferred income taxes (note 9) 944 --
Other liabilities 736 823
-------- ---------
Total liabilities 38,656 25,961
-------- ---------
Stockholders' equity (note 7):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares; issued
8,173,705 and 8,135,836 shares at December 31, 1997 and 1996,
respectively 490 488
Additional paid-in capital 49,783 49,696
Accumulated deficit (29,059) (30,755)
Treasury stock, 25,606 common shares, at cost (1) (1)
-------- ---------
Total stockholders' equity 21,213 19,428
-------- ---------
Commitments and contingencies (note 6)
Total liabilities and stockholders' equity $59,869 45,389
======== =========
See accompanying notes to consolidated financial statements.
F-3
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Revenue:
Flight revenue (note 8) $33,969 26,517 26,221
Sales of medical interiors and products 3,350 3,058 3,375
Parts sales 581 66 83
Maintenance services 372 354 343
International franchise fees 428 262 100
Gain on disposition of assets, net 277 -- --
------------ ------------ ------------
38,977 30,257 30,122
------------ ------------ ------------
Operating expenses:
Flight centers 9,886 8,086 8,227
Aircraft operations 10,531 8,383 8,503
Aircraft rental (note 6) 1,425 1,465 1,663
Cost of medical interiors and products sold 3,082 3,781 2,739
Cost of parts sales 411 29 49
Cost of maintenance services 352 235 325
Depreciation and amortization 3,722 3,056 2,656
Bad debt expense 1,608 20 --
General and administrative 4,645 3,825 3,873
Loss on disposition of assets, net -- 17 86
------------ ------------ ------------
35,662 28,897 28,121
------------ ------------ ------------
Operating income 3,315 1,360 2,001
Other income (expense):
Interest expense (1,836) (1,297) (1,396)
Interest and dividend income 248 357 289
Other, net (31) (112) 65
------------ ------------ ------------
Net income $1,696 308 959
============ ============ ============
Basic and diluted income per common share (note 7) $.21 .04 .12
============ ============ ============
Weighted average number of common shares outstanding - basic 8,121,395 8,100,545 8,071,010
============ ============ ============
Weighted average number of common shares outstanding - diluted 8,188,547 8,259,154 8,186,804
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK Additional Total
------------ -------------- Paid-in Accumulated Stockholders'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
BALANCES AT JANUARY 1, 1995 8,051,765 $482 25,606 $(1) 49,572 (32,022) 18,031
Issuance of common shares for options
exercised and services rendered 51,737 4 -- -- 72 -- 76
Amortization of deferred compensation
expense -- -- -- -- 6 -- 6
Retirement of unvested shares and
options forfeited under the Restricted
Stock Plan -- -- -- -- (10) -- (10)
Net income -- -- -- -- -- 959 959
----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 8,103,502 486 25,606 (1) 49,640 (31,063) 19,062
Issuance of common shares for options
exercised and services rendered 37,834 2 -- -- 69 -- 71
Retirement of common shares (note 7) (5,500) -- -- -- (13) -- (13)
Net income -- -- -- -- -- 308 308
------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 8,135,836 488 25,606 (1) 49,696 (30,755) 19,428
Issuance of common shares for options
exercised 37,869 2 -- -- 87 -- 89
Net income -- -- -- -- -- 1,696 1,696
------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 8,173,705 $490 25,606 $(1) 49,783 (29,059) 21,213
====================================================================================
See accompanying notes to consolidated financial statements.
F-5
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------------------------------
Cash flows from operating activities:
Net income $1,696 308 959
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 3,722 3,056 2,656
Bad debt expense 1,608 20 --
Common stock and options issued for services and in connection with employee
stock compensation agreements, net of forfeitures -- 26 72
Loss (gain) on disposition of assets (277) 17 86
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in receivables (1,870) (171) (438)
Decrease (increase) in inventories (258) (320) 260
Decrease in prepaid expenses and other current assets 108 57 900
Decrease (increase) in work-in-process on medical interior and products
contracts and costs in excess of billings (451) (743) 71
Increase (decrease) in accounts payable and other accrued liabilities 261 (412) (1,187)
Increase (decrease) in accrued overhaul and parts replacement costs (152) 3 373
Increase (decrease) in deferred revenue, billings in excess of costs, and
other liabilities 226 (377) 874
------------------------------------
Net cash provided by operating activities 4,613 1,464 4,626
------------------------------------
Cash flows from investing activities:
Acquisition of net assets of Mercy Air Service, Inc. and Helicopter Services, Inc. (4,609) -- --
Acquisition of equipment and leasehold improvements (2,185) (5,414) (1,169)
Proceeds from disposition and sale of equipment and assets held for sale 2,561 3 4,430
Decrease in notes receivable, patent application costs, and other assets, net 1,116 51 755
------------------------------------
Net cash provided (used) by investing activities (3,117) (5,360) 4,016
------------------------------------
(Continued)
F-6
AIR METHODS CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 89 45 --
Payments for retirement of common stock -- (13) --
Net repayments under short-term notes payable (323) (341) (1,585)
Proceeds from long-term debt 12,643 9,746 582
Payments of long-term debt (11,491) (5,430) (4,915)
Payments of capital lease obligations (1,076) (752) (721)
----------------------------------
Net cash provided (used) by financing activities (158) 3,255 (6,639)
----------------------------------
Increase (decrease) in cash and cash equivalents 1,338 (641) 2,003
Cash and cash equivalents at beginning of year 2,058 2,699 696
----------------------------------
Cash and cash equivalents at end of year $3,396 2,058 2,699
==================================
Interest paid in cash during the year $1,756 1,322 1,395
=================================
Non-cash investing and financing activity:
In connection with the acquisition of Mercy, the Company issued notes payable of
$1,398,000 to the sellers as partial consideration for the acquisition. (See
Note 2).
See accompanying notes to consolidated financial statements.
F-7
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation and Business
Air Methods Corporation, a Delaware corporation, and its subsidiary ("Air
Methods" or "the Company") serves as one of the largest providers of
aeromedical emergency transport services and systems throughout North and
South America. The Company also designs, manufactures, and installs medical
aircraft interiors and other aerospace products for domestic and
international customers. As discussed more fully in note 2, in July 1997
the Company acquired all of the common stock of Mercy Air Service, Inc. and
substantially all of the net assets of Helicopter Services, Inc., two
affiliated companies. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents of $2,575,000 and
$1,724,000 at December 31, 1997 and 1996, respectively, consist of
short-term money market funds.
Inventories
Inventories are comprised primarily of expendable aircraft parts which are
recorded at the lower of cost (average cost) or market.
Work-in-Process on Medical Interior and Products Contracts
Work-in-process on medical interior and products contracts represents costs
of the manufacture and installation of medical equipment and modification
of aircraft for third parties. Certain medical interior contracts provide
for reimbursement of all costs plus an incremental amount. Revenue on these
contracts is recorded as costs are incurred. In addition, when the total
cost to complete a medical interior under a fixed fee contract can be
reasonably estimated, revenue is recorded as costs are incurred using the
percentage of completion method of accounting.
If the total cost to complete a medical interior cannot be reasonably
estimated, revenue relating to fixed fee contracts is recognized using the
completed contract method of accounting. A contract is considered complete
when all costs except insignificant items have been incurred and the
installation is operating according to specification.
F-8
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Equipment and Leasehold Improvements
Hangar, equipment, and leasehold improvements are recorded at cost.
Maintenance and repairs are expensed when incurred. Major modifications and
costs incurred to place aircraft in service are capitalized. Improvements
to helicopters and airplanes leased under operating leases are included in
flight and ground support equipment in the accompanying financial
statements. Depreciation is computed using the straight-line method over
the shorter of the useful lives of the equipment or the lease term, as
follows:
DESCRIPTION LIVES RESIDUAL VALUE
----------- ----- --------------
Hangar 40 years 10%
Helicopters, including medical equipment 8 - 25 years 10 - 25%
Airplanes, including medical equipment 8 - 20 years 0 - 10%
Ground support equipment and rotables 5 - 10 years 0 - 10%
Furniture and office equipment 3 - 10 years -
Leasehold improvements to hangar and office space are amortized using the
straight-line method over the terms of the leases.
Excess of Cost Over the Fair Value of Net Assets Acquired
Excess of cost over the fair value of net assets acquired, or goodwill, is
being amortized using the straight-line method over 25 years.
Patent Application Costs and Supplemental Type Certificates
The Company capitalizes legal costs associated with new patent applications
and the defense of existing patents. At such time as patents are granted,
these costs will be amortized over the estimated useful economic life of
the patents. Costs relating to unsuccessful patent applications are charged
to operations.
The Company also capitalizes incremental direct costs related to the
application for multiple Supplemental Type Certificates (STC's). STC's are
issued by the Federal Aviation Administration (FAA) and represent the FAA's
approval and certification of the airworthiness of an aircraft
modification, such as a medical interior. A multiple STC allows the
modification to be made to more than one aircraft without additional
certification. STC costs are amortized using the straight-line method over
the estimated useful economic life of the STC. For the year ended December
31, 1997, the Company capitalized $51,000 in STC costs related to a new
medical interior system for the Bell 407 helicopter. For the year ended
December 31, 1996, the Company capitalized $213,000 in STC costs related to
a new modular, multifunctional medical interior system.
F-9
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Long-lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("Statement 121"). Statement 121 requires that long-lived assets and
certain identifiable intangible assets, including goodwill, to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company has evaluated its
long-lived assets in accordance with the provisions of Statement 121 and
does not believe any impairments exist which require a charge to the
Company's operations.
Engine and Airframe Overhaul Costs
The Company uses the accrual method of accounting for major engine and
airframe component overhauls and replacements whereby the cost of the next
overhaul or replacement is estimated and accrued based on usage of the
aircraft component over the period between overhauls or replacements.
Revenue Recognition and Uncollectible Receivables
Fixed fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the term of the agreements. Revenue relating to
emergency flights is recognized upon completion of the services. Revenue
and accounts receivable are recorded net of contractual allowances under
agreements with third-party payors. International franchise revenue is
recognized as royalties and fees are generated by the franchisee's
operations. Uncollectible trade receivables are charged to operations using
the allowance method.
Stock-based Compensation
The Company accounts for its employee stock compensation plans as
prescribed under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Pro forma disclosures of net income and income
per share required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation ("Statement 123"), are included in
Note 7 to the consolidated financial statements.
F-10
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes
The Company accounts for income taxes using the asset and liability method
of Statement of Financial Accounting Standard No. 109, Accounting for
Income Taxes ("Statement 109"). Deferred tax assets and liabilities are
recognized for the future income tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in rates is recognized in income in the
period that includes the enactment date.
Income Per Share
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("Statement
128"), effective for periods ending after December 15, 1997. Statement 128
changes the computation and presentation requirements for earnings per
share for entities with publicly held common stock or potential common
stock. Under such requirements the Company is required to present both
basic earnings per share and diluted earnings share. Basic earnings per
share is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing income available to
common stockholders by all dilutive potential common shares outstanding
during the period. The adoption of Statement 128 by the Company as of
December 31, 1997, had no effect on previously presented income per share
amounts for 1996 and 1995.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, accounts receivable, notes payable, and
accounts payable:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
Notes receivable and long-term debt:
The carrying amounts approximate fair value since the interest rates
on these instruments reflect current market rates.
F-11
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Reclassifications
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform with the 1997 presentation.
(2) ACQUISITION OF SUBSIDIARY
On July 31, 1997, the Company acquired all of the outstanding common stock
of Mercy Air Service, Inc. and substantially all of the net assets of
Helicopter Services, Inc. (together "Mercy"), two affiliated companies, for
cash and notes payable totaling $6,007,000, net of purchase price
adjustments. The allocation of the purchase price was as follows (amounts
in thousands):
Assets purchased:
Flight equipment $11,514
Receivables 3,218
Office equipment 576
Inventories 248
Goodwill 132
Other 271
-------------
15,959
Debt and other liabilities assumed (9,952)
-------------
Purchase price $6,007
=============
The acquisition has been accounted for using the purchase method of
accounting and the results of Mercy's operations have been included with
those of the Company since July 31, 1997. The unaudited pro forma revenue,
net income, and income per common share for the years ended December 31,
1997 and 1996, assuming the acquisition occurred at the beginning of the
periods presented, are as follows (amounts in thousands except per share
amounts):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
Revenue $47,985 45,847
============ ===========
Net income $2,392 1,073
============ ===========
Basic and diluted income per common share $0.29 0.13
============ ===========
F-12
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(2) ACQUISITION OF SUBSIDIARY, CONTINUED
The pro forma information does not necessarily represent the results that
would have occurred if the acquisition had been consummated on January 1,
1996, nor are they necessarily indicative of the results of future
operations.
(3) COSTS IN EXCESS OF BILLINGS
As of December 31, 1997, the estimated period to complete contracts in
process ranges from three to twelve months, and the Company expects to
collect all related accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts within one year. The following
summarizes contracts in process at December 31 (amounts in thousands):
1997 1996
---- ----
Costs incurred on uncompleted contracts $ 2,898 933
Estimated earnings 754 15
--------- ----------
3,652 948
Less billings to date (2,532) (266)
--------- ----------
Costs in excess of billings $ 1,120 682
========= ==========
(4) NOTES RECEIVABLE
Notes receivable at December 31, 1997, includes an aircraft lease,
accounted for as a sales-type lease. Future minimum payments under all
notes receivable are as follows (amounts in thousands):
Year ending December 31:
1998 $ 144
1999 144
2000 144
2001 144
2002 144
Thereafter 422
-----------
1,142
Less amounts representing interest (411)
-----------
Present value of minimum payments 731
Less current installments (58)
-----------
$673
===========
F-13
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consist of the following at December 31, 1997 and 1996
(amounts in thousands):
1997 1996
---- ----
Borrowings under a $700,000 line of credit with interest at
prime plus .50% (9.0% at December 31, 1997),
collateralized by certain receivables $ 700 --
Borrowings under a $2 million line of credit. Paid in full
in 1997 -- 300
Other 29 52
------------- -----------
$729 352
============= ============
The Company's $2 million line of credit agreement expires in October 1998
and requires the Company to maintain a zero balance on the line for 30 days
during each year. The Company's $700,000 line of credit agreement expires
in July 1998. Both lines have various covenants which limit the Company's
ability to dispose of assets, merge with another entity, and pledge trade
receivables and inventories as collateral. The Company is also required to
maintain certain financial ratios as defined in the agreements.
F-14
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Long-term debt consists of the following at December 31, 1997 and 1996
(amounts in thousands):
1997 1996
---- ----
Note payable to a company with interest at 9.52%, due in monthly
installments of principal and interest through July 2007 with all
remaining principal due in August 2007, collateralized by flight
equipment $10,239 --
Notes payable to companies with interest at 9.12%, due in monthly
installments of principal and interest through November 2001 with all
remaining principal due in December 2001, collateralized by flight
equipment 4,315 4,832
Notes payable to a company with interest at 8.5%, due in monthly
payments of principal and interest through September 2000,
collateralized by flight equipment 1,297 1,740
Note payable to a company with interest at 9.25%, due in monthly
payments of principal and interest through December 2001,
collateralized by a hangar 165 198
Note payable to a company with interest at 9.18%, due in monthly
installments of principal and interest through June 2002, collateralized
by flight equipment 1,196 --
Notes payable to former shareholders of Mercy with interest at 9%, due in
monthly installments of principal and interest through July 2002,
collateralized by certain receivables 1,312 --
Notes payable to a lender with interest at 8.47%, due in monthly
installments of principal and interest through March 2002,
collateralized by flight equipment 1,896 2,252
Note payable to a lender with interest at 9.84%, due in monthly
installments of principal and interest through August 2006,
collateralized by flight equipment 1,016 1,040
Notes payable to a lender with interest at 9.02%. Paid in full in 1997. -- 1,047
Note payable to a lender with interest at 9.02%, due in monthly
installments of principal and interest through December 2006,
collateralized by flight equipment 327 327
Note payable to a company with interest at 11%, due in monthly payments
of principal and interest through February 2002, collateralized by
equipment 400 472
Note payable to a company with interest at 10%, due in monthly payments
of principal and interest through May 2000, collateralized by flight
equipment 172 231
Note payable with interest at 6.25%. Paid in full in 1997. -- 255
Other -- 28
---------- ---------
22,335 12,422
Less current installments (2,655) (1,780)
---------- ---------
$19,680 10,642
========== =========
F-15
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Aggregate maturities of long-term debt are as follows (amounts in
thousands):
Year ending December 31:
1998 $ 2,655
1999 2,903
2000 2,872
2001 4,501
2002 1,361
Thereafter 8,043
-------------
$ 22,335
=============
(6) LEASES
The Company leases hangar and office space under noncancelable operating
leases and leases certain equipment and aircraft under noncancelable
operating and capital leases. As of December 31, 1997, future minimum lease
payments under capital and operating leases are as follows (amounts in
thousands):
Capital Operating
leases leases
---------- ------------
Year ending December 31:
1998 $ 889 1,897
1999 714 978
2000 553 863
2001 553 857
2002 553 713
Thereafter 1,069 1,717
------- -------
Total minimum lease payments 4,331 $ 7,025
=======
Less amounts representing interest (856)
-------
Present value of minimum capital lease
payments 3,475
Less current installments (659)
-------
$ 2,816
=======
Rent expense relating to operating leases totaled $2,255,000, $1,888,000,
and $2,061,000 for the years ended December 31, 1997, 1996 and 1995.
At December 31, 1997 and 1996, leased property held under capital leases
included in equipment, net of accumulated depreciation, totaled $6,356,000
and $8,596,000, respectively.
F-16
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY
(A) WARRANTS
In connection with various offerings of common stock and other
transactions by the Company, the following warrants to purchase the
Company's common stock were issued at or above market value and are
outstanding as of December 31, 1997:
NUMBER
OF WARRANTS EXERCISE PRICE PER SHARE EXPIRATION DATE
----------- ------------------------ ----------------
4,000 3.00 February 2, 1998
126,592 4.00 February 2, 1998
20,000 4.13 March 12, 1998
75,000 4.50 April 6, 1998
50,000 3.00 December 29, 1998
150,000 6.88 February 14, 1999
150,000 3.00 February 21, 1999
-------
575,592
=======
(B) STOCK OPTION PLANS
The Company has a Stock Option Plan and a predecessor plan (together,
"the Plan") which provides for the granting of incentive stock
options (ISOs) and nonqualified stock options (non-ISOs), stock
appreciation rights, and supplemental stock bonuses. Under the Plan,
2,500,000 shares of common stock are reserved for options. The
Company also grants non-ISOs outside of the Plan. Generally, the
options granted under the Plan have an exercise price equal to the
fair market value on the date of grant, become exercisable in three
equal installments beginning one year from the date of grant, and
expire five years from the date of grant.
The Nonemployee Director Stock Option Plan authorizes the grant of
nonstatutory stock options to purchase an aggregate of 300,000 shares
of common stock to nonemployee directors of the Company. Each
nonemployee director completing one fiscal year of service will
receive a five-year option to purchase 5,000 shares, exercisable at
the then current fair market value of the Company's common stock.
F-17
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, because the Company grants its
options at or above market value, no compensation cost has been
recognized relating to the plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent
with the provisions of Statement 123, the Company's net income and
income per share would have been reduced to the pro forma amounts
indicated below (amounts in thousands, except per share amounts):
1997 1996 1995
------ ------ ------
Net income (loss):
As reported $1,696 308 959
Pro forma 1,236 (8) 921
Basic and diluted
income (loss) per share:
As reported $ .21 .04 .12
Pro forma .15 -- .11
Pro forma net income or loss reflects only options granted in 1997,
1996 and 1995. Therefore, the full impact of calculating compensation
cost for stock options under Statement 123 is not reflected in the
pro forma net income or loss amounts presented above because
compensation cost is reflected over the options' vesting period of
5 years and compensation cost for options granted prior to January 1,
1995, is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1997, 1996 and 1995,
respectively: dividend yield of 0% for all years; expected volatility
of 59%, 64%, and 64%; risk-free interest rates of 5.5%, 7.3%, and
5.5%; and expected lives of 3 years, 3 years, and 4 years. The
weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995, was $1.33, $1.73, and $1.78,
respectively.
F-18
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following is a summary of option activity, including options
granted and outstanding outside of the Plan, during the years ended
December 31, 1997, 1996 and 1995:
Weighted Average
SHARES EXERCISE PRICE
------ --------------
Outstanding at January 1, 1995 1,252,684 $4.07
Granted 574,729 3.43
Canceled (52,727) 5.79
Exercised (2,560) 2.99
-----------
Outstanding at December 31, 1995 1,772,126 3.81
Granted 516,675 3.49
Canceled (467,408) 4.37
Exercised (25,410) 1.77
-----------
Outstanding at December 31, 1996 1,795,983 3.88
Granted 626,732 3.01
Canceled (104,882) 4.97
Exercised (36,175) 2.27
-----------
Outstanding at December 31, 1997 2,281,658 3.71
===========
As of December 31, 1997, exercisable options totaled 1,455,172.
Exercise prices of all options granted in the periods above range
from $1.75 to $13.13.
F-19
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Weighted-Average
Remaining Weighted-
Range of Number Contractual Average Number Weighted-Average
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ------------ -------------- ----------- --------------
$ 1.75 to 3.00 1,135,315 3.2 $ 2.79 549,337 $ 2.57
3.13 to 5.88 1,004,270 2.2 4.08 763,762 4.25
6.13 to 13.13 142,073 0.8 8.48 142,073 8.48
---------- ----------
2,281,658 1,455,172
========== ==========
(C) NONEMPLOYEE DIRECTOR COMPENSATION PLAN
In February 1993, the Board of Directors adopted the Air Methods
Corporation Equity Compensation Plan for Nonemployee Directors which
was subsequently approved by the Company's stockholders on March 12,
1993. Under this compensation plan, 150,000 shares of common stock
are reserved for issuance to non-employee directors. As of December
31, 1997, the Company had issued 51,014 shares under this plan.
(D) STOCK REPURCHASE PLAN
On August 5, 1994, the Board of Directors approved a stock repurchase
plan authorizing the repurchase of up to 10% of the outstanding
shares of the Company's common stock to be retired. Repurchases may
be made from time to time in the open market or in privately
negotiated transactions. The plan authorizes, but does not require,
the Company to repurchase shares. Actual repurchases in any period
are subject to approval by the Finance Committee of the Board of
Directors and will depend on market conditions and other factors. As
of December 31, 1997, 5,500 shares had been repurchased and retired
under this plan.
F-20
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY, CONTINUED
(E) INCOME PER SHARE
The reconciliation of basic income per common share to diluted income
per common share is as follows for the years ended December 31
(amounts in thousands except share and per share amounts):
1997 1996 1995
---- ---- ----
Weighted average number of common shares
outstanding - basic 8,121,395 8,100,545 8,071,010
Common stock options 67,152 136,211 107,321
Common stock warrants -- 22,398 8,473
-------------------------------------
Weighted average number of common shares
outstanding - diluted 8,188,547 8,259,154 8,186,804
=====================================
Net income $ 1,696 308 959
=====================================
Basic and diluted income per common share $ .21 .04 .12
=====================================
Common stock options totaling 2,030,352, 1,041,540, and 1,197,302 and
common stock warrants of 575,592, 439,530, and 469,530 were not
included in the diluted income per share calculation for the years
ended December 31, 1997, 1996, and 1995, respectively, because their
effect would have been anti-dilutive.
(8) REVENUE
The Company has operating agreements and leases with various hospitals and
hospital systems to provide services and aircraft for periods ranging from
1 to 10 years. The agreements provide for revenue from monthly fixed fees
and flight fees based upon the utilization of aircraft in providing
emergency medical services. The fixed-fee portions of the agreements and
leases provide for the following revenue for years subsequent to December
31, 1997 (amounts in thousands):
Year ending December 31:
1998 $ 16,227
1999 14,013
2000 12,175
2001 7,698
2002 4,959
Thereafter 8,082
-------
$ 63,154
=======
F-21
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(9) INCOME TAXES
For income tax purposes, the Company has net operating loss carry forwards
at December 31, 1997, of approximately $32,407,000 which will expire in
varying amounts through the year 2011. Alternative minimum tax (AMT) loss
carry forwards available to offset future AMT taxable income approximate
net operating loss carry forwards for regular federal income tax purposes.
In 1991, the Company acquired all of the outstanding common shares of Air
Methods Corporation, a Colorado corporation ("AMC"). As a result of the
acquisition of AMC and other issuances of stock, the utilization of a
portion of the aforementioned net operating loss carry forwards will be
limited annually by the provisions of Section 382 of the Internal Revenue
Code. Any future tax benefits recognized through utilization of AMC's net
operating loss carry forwards as of the acquisition date will be applied to
reduce the excess of cost over the fair value of net assets acquired.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows (amounts in thousands):
1997 1996
---------- ---------
Deferred tax assets:
Overhaul and parts replacement cost,
principally due to the accrual method $ 2,779 2,009
Accrued restructuring expenses and
valuation allowances 28 36
Allowance for uncollectible accounts 1,305 --
Net operating loss carry forwards 13,157 11,732
Other 235 199
---------- ---------
Total gross deferred tax assets 17,504 13,976
Less valuation allowance (6,716) (8,685)
---------- ---------
Net deferred tax assets 10,788 5,291
---------- ---------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases
and depreciation methods (10,530) (5,195)
Receivables, principally due to difference
in bases resulting from acquisition of
subsidiary (1,103) --
Other (258) (96)
---------- ---------
Total deferred tax liabilities (11,891) (5,291)
---------- ---------
Net deferred tax liability $ (1,103) --
========== =========
F-22
AIR METHODS CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(9) INCOME TAXES, CONTINUED
In the acquisition of Mercy in July 1997, the Company acquired trade
receivables of $3.1 million. Mercy, a subchapter S corporation, had elected
to be treated as a cash basis taxpayer. Upon acquisition, however, the new
subsidiary is required to use the accrual method of accounting for
receivables. This change in accounting method for tax purposes results in
the recognition of $3.1 million in taxable income over four years which may
not be offset by the Company's net operating loss carry forwards. The net
deferred tax liability represents the liability related to the taxable
income to be recognized in future years.
Income tax expense calculated at the federal statutory tax rate for the
year ended December 31, 1997, was primarily offset by the decrease in the
valuation allowance for deferred tax assets. Income tax expense calculated
at the federal statutory tax rate was offset entirely in the years ended
December 31, 1996 and 1995, by the decrease in the valuation allowance for
deferred tax assets.
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan whereby employees
who have completed one year of employment may contribute up to 12% of their
annual salaries. The Company will match 50% of the employees' contributions
up to 5% of their annual salaries. Company contributions totaled
approximately $181,000, $154,000, and $150,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
In 1995 the Board of Directors approved a profit sharing plan which
provides for the distribution of 5% of the Company's net income to its
employees beginning in 1996. The amount distributed to employees in the
years ended December 31, 1997 and 1996, totaled $57,000 and $31,000. The
continuation of the profit sharing plan is at the discretion of the Board
of Directors.
(11) BUSINESS AND CREDIT CONCENTRATIONS
A significant percentage of the Company's trade receivables are related to
the flight operations of Mercy in Southern California. Mercy receivables
are due from medical insurance companies and federal and state government
insurance programs, as well as private citizens. The diversity in types of
payors may mitigate the potential impact of the geographical concentration
of receivables.
F-23
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
Under date of February 13, 1998, we reported on the consolidated balance sheets
of Air Methods Corporation and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, which are included in the
Company's Annual Report on Form 10-K for the year 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Denver, Colorado
February 13, 1998
F-24
AIR METHODS CORPORATION
AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS
- -------------------------------------------------------------------------------------------------------------------
Balance at
Beginning of Transfers Balance at
Description Period Additions/(a)/ and Other Deductions/(b)/ End of Period
- -------------------------------------------------------------------------------------------------------------------
Allowance for trade receivables
Year ended December 31, 1997 $24 1,608 2,055(c)<F3> (1,159) 2,528
Year ended December 31, 1996 11 20 -- (7) 24
Year ended December 31, 1995 37 -- -- (26) 11
- ------------------
Notes:
/(a)/ Amounts charged to expense.
/(b)/ Bad debt write-offs and charges to allowances.
/(c)/ Allowance for Mercy receivables at the acquisition date.
See accompanying Independent Auditors' Report.
F-25
CONSENT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-24980, 33-46691, 33-55750, 33-65370 and 33-75742) and Form S-3
(Nos. 33-59690 and 33-75744) of Air Methods Corporation of our report dated
February 13, 1998, relating to the consolidated balance sheets of Air Methods
Corporation and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 Annual Report on Form 10-K of Air Methods
Corporation.
KPMG PEAT MARWICK, LLP
Denver, Colorado
March 27, 1998