SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 --------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- Commission file number 0-16079 ------- AIR METHODS CORPORATION ------------------------- (Exact name of Registrant as Specified in Its Charter) Delaware 84-0915893 -------- ------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 7301 South Peoria, Englewood, Colorado 80112 - ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (303) 792-7400 -------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A 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 ----- ----- The number of shares of Common Stock, par value $.06, outstanding as of November 8, 2002, was 9,462,179. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 1 Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 PART I: FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AIR METHODS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------------------------ Assets - ------ Current assets: Cash and cash equivalents $ 3,606 2,838 Current installments of notes receivable 40 120 Receivables: Trade 34,669 22,555 Less allowance for doubtful accounts (10,398) (5,673) ------------------------------ 24,271 16,882 Insurance proceeds 266 471 Other 904 851 ------------------------------ Total receivables 25,441 18,204 ------------------------------ Inventories 4,165 3,427 Work-in-process on medical interiors and products contracts 42 253 Costs and estimated earnings in excess of billings on uncompleted contracts 866 797 Deferred tax asset 5,537 3,397 Assets held for sale 416 -- Prepaid expenses and other 1,532 1,083 ------------------------------ Total current assets 41,645 30,119 ------------------------------ Equipment and leasehold improvements: Flight and ground support equipment 74,936 71,392 Furniture and office equipment 6,337 5,841 ------------------------------ 81,273 77,233 Less accumulated depreciation and amortization (34,229) (30,561) ------------------------------ Net equipment and leasehold improvements 47,044 46,672 ------------------------------ Excess of cost over the fair value of net assets acquired 2,974 2,974 Notes receivable, less current installments 113 472 Other assets, net of accumulated amortization of $585 and $447 at September 30, 2002 and December 31, 2001, respectively 6,214 5,320 ------------------------------ Total assets $ 97,990 85,557 ============================== See accompanying notes to consolidated financial statements. (Continued) 1 AIR METHODS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2002 2001 ------------------------------ Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Current installments of long-term debt $ 3,384 3,737 Current installments of obligations under capital leases 379 351 Accounts payable 3,190 1,925 Accrued overhaul and parts replacement costs 3,963 3,407 Deferred revenue 1,442 1,158 Accrued wages and compensated absences 1,541 2,037 Other accrued liabilities 1,388 2,189 ------------------------------ Total current liabilities 15,287 14,804 Long-term debt, less current installments 15,893 17,335 Obligations under capital leases, less current installments 2,646 2,882 Accrued overhaul and parts replacement costs 13,010 10,377 Deferred income taxes 6,631 2,178 Other liabilities 1,917 1,438 ------------------------------ Total liabilities 55,384 49,014 ------------------------------ Stockholders' equity (note 3): Preferred stock, $1 par value. Authorized 5,000,000 shares, none issued -- -- Common stock, $.06 par value. Authorized 16,000,000 shares; issued 9,469,379 and 8,619,026 shares at September 30, 2002 and December 31, 2001, respectively 568 517 Additional paid-in capital 52,617 50,665 Accumulated deficit (10,578) (14,637) Treasury stock at par, 10,000 and 37,005 common shares at September 30, 2002 and December 31, 2001, respectively (1) (2) ------------------------------ Total stockholders' equity 42,606 36,543 ------------------------------ Total liabilities and stockholders' equity $ 97,990 85,557 ============================== See accompanying notes to consolidated financial statements. 2 AIR METHODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------- Revenue: Flight revenue $ 26,577 21,734 76,892 60,479 Sales of medical interiors and products 1,775 1,623 5,002 5,609 Parts and maintenance sales and services 556 588 1,093 1,291 Gain on disposition of assets, net -- -- -- 110 ----------------------------------------------- 28,908 23,945 82,987 67,489 ----------------------------------------------- Operating expenses: Flight centers 9,132 7,355 25,586 20,818 Aircraft operations 6,780 5,227 18,931 14,958 Aircraft rental 1,294 951 3,652 2,892 Medical interiors and products sold 1,267 1,163 3,444 4,042 Cost of parts and maintenance sales and services 512 533 1,005 1,148 Depreciation and amortization 1,436 1,291 4,221 3,936 Bad debt expense 3,865 2,493 10,588 6,913 Loss on disposition of assets, net 65 -- 51 -- General and administrative 2,609 2,265 7,685 6,999 ----------------------------------------------- 26,960 21,278 75,163 61,706 ----------------------------------------------- Operating income 1,948 2,667 7,824 5,783 Other income (expense): Interest expense (425) (475) (1,287) (1,498) Interest income 10 11 26 93 Other, net 32 19 89 56 ----------------------------------------------- Income before income taxes 1,565 2,222 6,652 4,434 Income tax expense 610 -- 2,593 -- ----------------------------------------------- Net income $ 955 2,222 4,059 4,434 =============================================== Basic income per common share $ .10 .26 .45 .53 =============================================== Diluted income per common share $ .10 .26 .44 .52 =============================================== Weighted average number of common shares outstanding - - basic 9,440,442 8,409,297 9,090,782 8,391,852 =============================================== Weighted average number of common shares outstanding - - diluted 9,564,604 8,693,832 9,250,558 8,605,986 =============================================== See accompanying notes to consolidated financial statements. 3 AIR METHODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 2002 2001 ------------------------------------ Cash flows from operating activities: Net income $ 4,059 4,434 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 4,221 3,936 Vesting of common stock options issued for services 40 45 Bad debt expense 10,588 6,913 Deferred income tax expense 2,313 -- Loss (gain) on retirement and sale of equipment, net 51 (110) Changes in assets and liabilities: Increase in prepaid expenses and other current assets (449) (1,413) Increase in receivables (17,825) (7,538) Increase in parts inventories (738) (184) Decrease (increase) in work-in-process on medical interiors and costs in excess of billings 142 (1,114) Decrease in accounts payable and other accrued liabilities (32) (1,376) Increase (decrease) in deferred revenue and other liabilities 763 (875) Increase in accrued overhaul and parts replacement costs 2,193 276 ------------------------------------ Net cash provided by operating activities 5,326 2,994 ------------------------------------ Cash flows from investing activities: Acquisition of equipment and leasehold improvements (2,782) (2,960) Proceeds from disposition and sale of equipment 818 207 Increase in notes receivable and other assets (1,198) (354) ------------------------------------ Net cash used by investing activities (3,162) (3,107) ------------------------------------ See accompanying notes to consolidated financial statements. (Continued) 4 AIR METHODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (AMOUNTS IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2002 2001 ------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock, net $ 3,035 371 Payments for purchases of common stock (1,071) (292) Net payments under short-term notes payable -- (636) Payments of long-term debt (3,085) (2,653) Payments of capital lease obligations (275) (257) ------------------------------- Net cash used by financing activities (1,396) (3,467) ------------------------------- Increase (decrease) in cash and cash equivalents 768 (3,580) Cash and cash equivalents at beginning of period 2,838 4,107 ------------------------------- Cash and cash equivalents at end of period $ 3,606 527 =============================== Non-cash investing and financing activities: In the nine months ended September 30, 2002, the Company entered into a note payable totaling $1,290 to finance the buyout of a helicopter previously under an operating lease and into a capital lease obligation of $67 to finance the acquisition of communications equipment. In the nine months ended September 30, 2002, the Company repossessed an aircraft previously sold to a former franchisee in Brazil. The $418 balance of the Company's investment in the aircraft, consisting primarily of a note receivable from the franchisee, was reclassified in the consolidated financial statements as an asset held for sale. In the nine months ended September 30, 2001, the Company recognized a total liability of $1,500 as additional consideration for the purchase of ARCH Air Medical Service, Inc. (ARCH). During the second quarter of 2001, the Company determined that the payment of this consideration, which was based on the cash flows of post-acquisition ARCH operations, was reasonably assured based on receivable collection trends to date. See accompanying notes to consolidated financial statements. 5 AIR METHODS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those related to revenue recognition, uncollectible receivables, deferred income taxes, and aircraft overhaul costs. Actual results could differ from those estimates. (2) INCOME PER SHARE ------------------ Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all common shares and dilutive potential common shares outstanding during the period. The reconciliation of basic to diluted weighted average common shares outstanding is as follows: 2002 2001 -------------------- FOR QUARTER ENDED SEPTEMBER 30: Weighted average number of common shares outstanding - basic 9,440,442 8,409,297 Dilutive effect of: Common stock options 110,662 249,397 Common stock warrants 13,500 35,138 -------------------- Weighted average number of common shares outstanding - diluted 9,564,604 8,693,832 ==================== FOR NINE MONTHS ENDED SEPTEMBER 30: Weighted average number of common shares outstanding - basic 9,090,782 8,391,852 Dilutive effect of: Common stock options 145,673 187,666 Common stock warrants 14,103 26,468 -------------------- Weighted average number of common shares outstanding - diluted 9,250,558 8,605,986 ==================== Common stock options totaling 330,000 and 14,987 were not included in the diluted income per share calculation for the quarters ended September 30, 2002 and 2001, respectively, because their effect would have been anti-dilutive. Common stock options totaling 280,000 and 49,987 were not included in the diluted income per share calculation for the nine months ended September 30, 2002 and 2001, respectively, because their effect would have been anti-dilutive. 6 (3) STOCKHOLDERS' EQUITY -------------------- Changes in stockholders' equity for the nine months ended September 30, 2002, consisted of the following (amounts in thousands, except share amounts): Shares Outstanding Amount ---------------------- Balances at January 1, 2002 8,582,021 $36,543 Issuance of common shares for options exercised 1,022,452 3,035 Purchase of treasury shares (145,094) (1,071) Vesting of common stock options for services rendered -- 40 Net income -- 4,059 ---------------------- Balances at September 30, 2002 9,459,379 $42,606 ====================== (4) INCOME TAXES ------------- The Company recorded income tax expense of $2,593,000 at an effective rate of 39% in the nine months ended September 30, 2002, and no tax provision in the nine months ended September 30, 2001. During 2001, income tax expense, as calculated at the statutory rate including estimated state income tax effect, was offset by recognition of deferred tax assets for which a valuation allowance had previously been provided. (5) NEW ACCOUNTING PRONOUNCEMENTS ------------------------------- In June 2001 the Financial Accounting Standards Board (FASB) issued FASB Statement No. 142, Accounting for Goodwill and Intangible Assets (Statement 142). Under Statement 142, goodwill and certain identifiable intangible assets are not amortized, but instead are reviewed for impairment at least annually in accordance with the provisions of the statement. The Company adopted Statement 142 effective January 1, 2002. As required by Statement 142, the standard has not been retroactively applied to the results for the period prior to adoption. The following table reconciles net income for the three and nine months ended September 30, 2001, to pro forma net income excluding the amortization of excess of cost over the fair value of net assets acquired (amounts in thousands, except share and per share amounts). Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 Reported net income $ 2,222 4,434 Amortization of excess of costs over net assets acquired 70 165 ------------------- ------------------ Adjusted net income $ 2,292 4,599 =================== ================== Basic income per common share $ .27 .55 =================== ================== Diluted income per common share $ .26 .53 =================== ================== Weighted average number of common shares outstanding - basic 8,409,297 8,391,852 =================== ================== Weighted average number of common shares outstanding - diluted 8,693,832 8,605,986 =================== ================== 7 (5) NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED ------------------------------------------- In April 2002 the FASB issued FASB Statement No. 145 (Statement 145), Rescission of FASB Statements No. 4, 44, and 64, amendment of FASB Statement No. 13, and Technical Corrections. Statement 145 updates, clarifies and simplifies existing accounting pronouncements, including the rescission of Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result the criteria in Opinion 30 will now be used to classify those gains and losses. The Company does not anticipate a material impact on its financial condition or results of operations as a result of implementing this standard. In June 2002 the FASB issued FASB Statement No. 146 (Statement 146), Accounting for Costs Associated with Exit or Disposal Activities. Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between Statement 146 and Issue No. 94-3 relates to the requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost (as defined in the issue) was recognized at the date of an entity's commitment to an exit plan. Statement 146 also establishes that fair value is the objective for initial measurement of the liability. Statement 146 is effective for exit or disposal activities that are initiated after December 31, 2002, and the Company does not expect the adoption to have a material impact on its results of operations or financial position. (6) SUBSEQUENT EVENT ----------------- On October 16, 2002, the Company acquired 100% of the membership interest of Rocky Mountain Holdings, L.L.C. (RMH), a Delaware limited liability company, from Rocky Mountain Holdings, Inc. and AMC Helicopters, Inc., for $33.6 million. RMH's long-term debt and outstanding balances on RMH's line of credit totaled $36.2 million as of September 30, 2002. Except for approximately $1.6 million of RMH debt that was repaid in connection with the acquisition, the long-term debt remains outstanding, either as debt of RMH or as debt assumed or replaced by the Company. The $5 million outstanding balance on the RMH line of credit was rolled into the new revolving credit facility described below. The purchase price is subject to changes in net equity from September 30, 2002, until the date of closing, to be determined by independent audit within 60 days of the closing date. The purchase price was negotiated by the Company and the sellers, and includes an earn-out provision under which the sellers may receive up to $2.6 million of additional consideration over the next nine years based on actual collections against certain receivables. The Company incurred costs and fees of approximately $3.6 million in connection with the acquisition and related financing arrangements. The purchase price was financed in part through the issuance of $23 million in subordinated notes to Prudential Capital Partners, L.P. (PCP) and an affiliate of PCP. The notes are unsecured and provide for quarterly payment of interest only at 12%, with all principal due in October 2007. As additional interest on the notes, the Company also issued transferable warrants to PCP to purchase 443,224 shares of Air Methods Common Stock with an exercise price of $.06 per share, exercisable through October 2008. 8 (6) SUBSEQUENT EVENT, CONTINUED ----------------------------- To finance the remainder of the purchase price and related closing costs and to provide working capital and letter of credit availability for the combined entities, the Company entered into a $35 million revolving credit facility with certain lenders, with PNC Bank, National Association (PNC) acting as agent. Borrowings under the credit facility are secured by substantially all of the Company's non-aircraft assets, including accounts receivable, inventory, equipment and general intangibles. The facility matures in October 2006. Indebtedness under the credit facility will bear interest, at the Company's option, at either (i) the higher of the federal funds rate plus 0.50% or the prime rate as announced by PNC plus an applicable margin ranging from 0 to 0.75% or (ii) at a rate equal to LIBOR plus an applicable margin ranging from 1.75% to 3.00%. The applicable margin in each case is based upon the ratio of senior debt (as defined in the credit facility) to EBITDA (as defined in the credit facility) for the four most recently completed fiscal quarters. The subordinated notes and revolving credit facility into which the Company entered to finance the acquisition both contain certain financial ratios and various other covenants. (7) BUSINESS SEGMENT INFORMATION ------------------------------ Summarized financial information for the Company's operating segments is shown in the following table (amounts in thousands). Amounts in the "Corporate Activities" column represent corporate headquarters expenses, income tax provision, and results of insignificant operations. The Company does not allocate assets between HBM, Products, and Corporate Activities for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows: - Community-Based Model (CBM) - provides air medical transportation services to the general population as an independent service in southern California, Nevada, Missouri, and Illinois. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection. - Hospital-Based Model (HBM) - provides air medical transportation services to hospitals throughout the U.S. under exclusive operating agreements. Services include aircraft operation and maintenance. - Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace products for domestic and international customers. 9 Products Corporate Intersegment FOR QUARTER ENDED SEPTEMBER 30: CBM HBM Division Activities Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------ 2002 External revenue $15,957 11,176 1,775 -- -- 28,908 Intersegment revenue -- -- 148 -- (148) -- ---------------------------------------------------------------------- Total revenue 15,957 11,176 1,923 -- (148) 28,908 ---------------------------------------------------------------------- Operating expenses 9,967 9,333 1,426 1,028 (127) 21,627 Depreciation & amortization 638 734 30 34 -- 1,436 Bad debt expense 3,865 -- -- -- -- 3,865 Interest expense 240 185 -- -- -- 425 Interest income (1) (4) -- (5) -- (10) Income tax expense -- -- -- 610 -- 610 ---------------------------------------------------------------------- Segment net income (loss) $ 1,248 928 467 (1,667) (21) 955 ====================================================================== Total assets $42,338 N/A N/A 57,816 (2,164) 97,990 ====================================================================== 2001 External revenue $12,303 10,078 1,564 -- -- 23,945 Intersegment revenue -- 3 780 -- (783) -- ---------------------------------------------------------------------- Total revenue 12,303 10,081 2,344 -- (783) 23,945 ---------------------------------------------------------------------- Operating expenses 7,253 8,341 1,849 723 (691) 17,475 Depreciation & amortization 453 709 50 79 -- 1,291 Bad debt expense 2,493 -- -- -- -- 2,493 Interest expense 275 196 -- 4 -- 475 Interest income -- (4) -- (7) -- (11) ---------------------------------------------------------------------- Segment net income (loss) $ 1,829 839 445 (799) (92) 2,222 ===================================================================== Total assets $31,146 N/A N/A 47,481 (2,164) 76,463 ===================================================================== FOR NINE MONTHS ENDED SEPTEMBER 30: 2002 External revenue $46,070 31,915 5,002 -- -- 82,987 Intersegment revenue -- -- 438 -- (438) -- ---------------------------------------------------------------------- Total revenue 46,070 31,915 5,440 -- (438) 82,987 ---------------------------------------------------------------------- Operating expenses 27,423 26,381 4,053 2,806 (398) 60,265 Depreciation & amortization 1,843 2,150 104 124 -- 4,221 Bad debt expense 10,588 -- -- -- -- 10,588 Interest expense 736 551 -- -- -- 1,287 Interest income (2) (9) -- (15) -- (26) Income tax expense -- -- -- 2,593 -- 2,593 ---------------------------------------------------------------------- Segment net income (loss) $ 5,482 2,842 1,283 (5,508) (40) 4,059 ===================================================================== Total assets $42,338 N/A N/A 57,816 (2,164) 97,990 ===================================================================== 2001 External revenue $34,002 28,494 4,993 -- -- 67,489 Intersegment revenue -- 16 2,165 -- (2,181) -- ---------------------------------------------------------------------- Total revenue 34,002 28,510 7,158 -- (2,181) 67,489 ---------------------------------------------------------------------- Operating expenses 21,284 23,460 5,603 2,343 (1,889) 50,801 Depreciation & amortization 1,370 2,185 148 233 -- 3,936 Bad debt expense 6,913 -- -- -- -- 6,913 Interest expense 852 637 -- 9 -- 1,498 Interest income (3) (41) -- (49) -- (93) ---------------------------------------------------------------------- Segment net income (loss) $ 3,586 2,269 1,407 (2,536) (292) 4,434 ===================================================================== Total assets $31,146 N/A N/A 47,481 (2,164) 76,463 ===================================================================== 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference 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 air medical services and products markets, the integration of RMH, the continuation and/or renewal of HBM contracts, the acquisition of new and profitable Products Division contracts, the volume of CBM operations, and other matters. The actual results that the Company achieves may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described below, as well as in the Company's annual report on Form 10-K. The Company undertakes no obligation to update any forward-looking statements. RESULTS OF OPERATIONS The Company reported net income of $955,000 and $4,059,000 for the three and nine months ended September 30, 2002, respectively, compared to net income of $2,222,000 and $4,434,000 for the three and nine months ended September 30, 2001, respectively. Net income for the quarter and nine months ended September 30, 2002, reflected income tax expense at an effective rate of 39%. For the quarter and nine months ended September 30, 2001, income tax expense, as calculated at the statutory rate including estimated state income tax effect, was offset by recognition of deferred tax assets for which a valuation allowance had previously been provided. Flight revenue increased $4,843,000, or 22.3%, and $16,413,000, or 27.1%, for the three and nine months ended September 30, 2002, respectively, compared to 2001. Flight revenue is generated by both CBM and HBM operations and is recorded net of contractual allowances under agreements with third-party payers and Medicare/Medicaid discounts. - - CBM - Flight revenue increased 28.1% and 35.4% in the three and nine months ended September 30, 2002, respectively, compared to 2001, for the following reasons: - Purchase of the operating rights of another air ambulance service provider in the Las Vegas metropolitan area in December 2001, resulting in the expansion of operations to a third base in the region. Transport volume for all CBM operations in the Las Vegas region increased 91.1% and 141.7% in the quarter and nine months ended September 30, 2002, compared to 2001. Flight volume for the region in the third quarter of 2002 was adversely impacted as the result of an accident which destroyed one of the Company's aircraft in September 2002. Determination of the cause of the accident is still pending review by the National Transportation Safety Board. Following the accident, all three of the Las Vegas bases were temporarily closed. By the end of the third quarter, two of the three bases were back in operation, with the third base expected to be back in service in December 2002. - Increase of 2.6% and 10.7% in transport volume for CBM operations in California for the quarter and nine months ended September 30, 2002, attributable primarily to favorable weather conditions in 2002 and to the expansion of operations to a fifth base within the Los Angeles metropolitan area in March 2002. - Increase of 5.2% and 8.1% in transport volume for CBM operations in the St. Louis metropolitan area for the three and nine months ended September 30, 2002. The Company opened operations during the second quarter of 2002 at an additional base in the St. Louis region. - Total volume for all CBM operations increased from approximately 2,500 patient transports in the third quarter of 2001 to 2,800 in the third quarter of 2002 and from 6,800 in the nine months ended September 30, 2001, to 8,200 in the nine-month period ended September 30, 2002. - Price increase for CBM operations in California and Nevada effective October 1, 2001. - Price increase for CBM operations in the St. Louis region effective January 1, 2002. 11 - - HBM - Flight revenue increased 15.1% and 17.0% for the three and nine months ended September 30, 2002, respectively, for the following reasons: - Revenue of approximately $1,509,000 and $3,765,000 for the three and nine months ended September 30, 2002, respectively, generated by the addition of two new contracts in the last half of 2001 and two new contracts in 2002. - Annual price increases in the majority of contracts with hospital clients based on changes in hull insurance rates and in the Consumer Price Index. - Increases of 5.9% and 6.9% in flight volume, excluding the impact of new contracts, in the three and nine months ended September 30, 2002, compared to the same periods in 2001. Sales of medical interiors and products increased $152,000, or 9.4%, for the third quarter of 2002 but decreased $607,000, or 10.8%, for the nine months ended September 30, 2002, compared to 2001. Significant projects in 2002 included the completion of five HH-60L Multi-Mission Medevac Systems for the U.S. Army and manufacture of medical interiors or multi-functional interior components for six commercial customers. In the first quarter of 2002, the Company began development of a litter system for the U.S. Army's Medical Evacuation Vehicle (MEV). Production of 42 MEV units began in the second quarter. Revenue by product line for the quarter and nine months ended September 30, 2002, respectively, was as follows: - - $30,000 and $808,000 - design and manufacture of multi-mission interiors - - $633,000 and $2,248,000 - manufacture and installation of modular, multi-functional interiors - - $1,112,000 and $1,946,000 - design and manufacture of other aerospace products Significant projects in 2001 included manufacture of two Multi-Mission Medevac Systems for a public service customer and manufacture of medical interiors or multi-functional interior components for ten commercial customers. In the third quarter of 2001, the Company also began production of five HH-60L Multi-Mission Medevac Systems for the U.S. Army. Revenue by product line for the quarter and nine months ended September 30, 2001, respectively, was as follows: - - $962,000 and $2,641,000 - design and manufacture of multi-mission interiors - - $620,000 and $2,688,000 - manufacture and installation of modular, multi-functional interiors - - $41,000 and $280,000 - design and manufacture of other aerospace products Cost of medical interiors and products increased 8.9% for the third quarter of 2002 but decreased 14.8% for the nine months ended September 30, 2002, as compared to the previous year. The changes are consistent with the changes in related product revenue over the same periods. Parts and maintenance sales and services decreased 5.4% and 15.3% for the quarter and nine months ended September 30, 2002, respectively, compared to 2001. Parts sales in the nine months ended September 30, 2001 included $183,000 for the sale of an autopilot system to an HBM customer. Cost of parts and maintenance sales and services for the quarter and nine months also decreased accordingly. In the nine months ended September 30, 2002, the Company recognized net losses totaling $51,000 on the disposition of assets, including a loss of $65,000 on a Bell 222 helicopter damaged in an accident. In the nine months ended September 30, 2001, the Company recognized a gain of $110,000 on the sale of a fixed wing aircraft which was no longer utilized in the fleet. Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased 24.2% and 22.9% for the quarter and nine months ended September 30, 2002, respectively, compared to 2001. Changes by business segment are as follows: - - CBM - Flight center costs increased 26.5% and 26.7% for the three and nine months ended September 30, 2002, for the following reasons: - Approximately $697,000 and $1,628,000 for the quarter and nine months ended September 30, 2002, for the addition of personnel to staff new base locations described above. - Increase in the cost of employee health insurance coverage paid by the Company. - Increases in salaries for merit pay raises. 12 - - HBM - Flight center costs increased 21.7% and 19.1% for the three and nine months ended September 30, 2002, primarily due to the following: - Approximately $429,000 and $1,479,000 for the quarter and nine months ended September 30, 2002, for the addition of personnel to staff new base locations described above. - Increases in salaries for merit pay raises. Aircraft operating expenses increased 29.7% and 26.6% for the three and nine months ended September 30, 2002, respectively, in comparison to the three and nine months ended September 30, 2001. Aircraft operating expenses consist of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, the type of aircraft flown, and the number of hours flown. The increase in costs is due to the following: - - Addition of three helicopters for CBM operations at the beginning of 2002. Resulting increases in maintenance and insurance costs were approximately $235,000 and $557,000 for the three and nine months ended September 30, 2002, respectively. - - Addition of four fixed wing aircraft for HBM operations during the third quarter of 2001 and four helicopters and two fixed wing aircraft during 2002. Resulting increases in maintenance and insurance costs were approximately $430,000 and $1,164,000 for the three and nine months ended September 30, 2002, respectively. - - Increase in the standard cost for overhaul of BK117 helicopter transmissions by the equipment manufacturer. - - Hull and liability insurance rate increases of approximately 8% effective July 2001 and 20% effective July 2002, due to overall insurance market conditions. - - Increase of approximately $26,000 per month in insurance premiums for war risk coverage effective October 1, 2001, through June 30, 2002, as a result of the events surrounding September 11, 2001. Subsequent to June 30, 2002, war risk coverage was included in the composite hull insurance rate. Aircraft rental expense increased 36.1% and 26.3% for the three and nine months ended September 30, 2002, respectively, in comparison to the three and nine months ended September 30, 2001. Rental expense related to seven leased aircraft added to the Company's fleet during 2002 totaled $356,000 and $1,152,000 for the three and nine months ended September 30, 2002, respectively. The increase for new aircraft was offset in part during the third quarter and nine-month period by the discontinuation of a short-term lease for an aircraft used in the Company's backup fleet during 2001 and by the purchase of an aircraft previously included in the Company's HBM fleet under an operating lease. Depreciation and amortization expense increased 11.2% and 7.2% for the three and nine months ended September 30, 2002, respectively, compared to 2001. The quarter and nine months ended September 30, 2002, included $126,000 and $376,000, respectively, of amortization on a non-compete agreement related to the purchase of the operating rights of another air ambulance provider in the Las Vegas region in December 2001. The Company also recorded depreciation expense on a previously leased aircraft which was acquired in the third quarter of 2002. Expenses in 2001 included two months of amortization of a non-compete agreement related to the buyout of another air ambulance service provider in San Diego. Amortization of this agreement was completed in February 2001. In addition, expenses in the quarter and nine months ended September 30, 2001, included $70,000 and $165,000 of goodwill amortization compared to none in 2002, as a result of the adoption of Statement 142 effective January 1, 2002. Bad debt expense is estimated during the period the related services are performed based on historical experience for CBM operations. The provision is adjusted as required based on actual collections in subsequent periods. The Company responds to calls for air medical transports without pre-screening the creditworthiness of the patient. Bad debt expense increased 55.0% and 53.2% for the quarter and nine months ended September 30, 2002, respectively, compared to 2001, due primarily to the increase in flight revenue for CBM operations and lower collection rates. Bad debt as a percentage of related net flight revenue also increased from 20.8% in 2001 to 23.5% in 2002, for the nine-month periods. The Company believes the decrease in the collection rate for CBM operations is due to general recessionary trends in the economy and to changes in previous collectibility estimates. Bad debt expense related to HBM operations and Products Division was not significant in either 2002 or 2001. General and administrative expenses increased 15.2% and 9.8% for the quarter and nine months ended September 30, 2002, respectively, compared to 2001. The change for the nine-month period reflects an expanded marketing effort for CBM operations in both the Los Angeles and St. Louis metropolitan areas designed to increase transport volume. Other factors contributing to the growth in general and administrative expenses for the three- and nine-month periods are merit pay and incentive compensation increases and increases in administrative staffing in anticipation of the acquisition of RMH and to manage the expanded employee base with the addition of new bases. 13 The Company recorded income tax expense of $2,593,000 at an effective rate of 39% in the nine months ended September 30, 2002, and no tax provision in the nine months ended September 30, 2001. During 2001, income tax expense, as calculated at the statutory rate including estimated state income tax effect, was offset by recognition of deferred tax assets for which a valuation allowance had previously been provided. FINANCIAL CONDITION Net working capital increased from $15,315,000 at December 31, 2001, to $26,358,000 at September 30, 2002, primarily due to an increase in receivables consistent with increased revenue for all operating divisions. Cash and cash equivalents increased $768,000 from $2,838,000 to $3,606,000 over the same period, for the reasons discussed below. Cash generated by operations in the nine months ended September 30, 2002, totaled $5,326,000 compared to $2,994,000 in 2001. Significant uses of cash in 2002 consisted primarily of an increase of $7,237,000 in receivables, net of bad debt expense, described above. Other liabilities increased as the Company received advance funding for the installation of a medical interior and avionics equipment in an aircraft leased for CBM operations. The balance of accrued overhaul and parts replacement costs also grew during the nine months ended September 30, 2002, due to the increased level of flight volume for both CBM and HBM operations. The accrual increases with each hour flown by the fleet and is offset when life-limited aircraft components are actually replaced or overhauled. Cash used by investing activities totaled $3,162,000 in 2002 compared to $3,107,000 in 2001. Equipment acquisitions in 2002 consisted primarily of medical interior and avionics installations or upgrades for existing equipment. During the first quarter of 2002, the Company also received proceeds from a sale-leaseback transaction for a BK117 helicopter. Equipment acquisitions in 2001 consisted primarily of rotable equipment purchases and upgrades to existing equipment. The cost of equipment acquisitions was offset in part in 2001 by proceeds from the sale of one of the Company's airplanes. Financing activities used $1,396,000 in 2002 compared with $3,467,000 in 2001. The primary uses of cash in 2002 were regularly scheduled payments of long-term debt and purchases of Company common stock into treasury. These payments were offset in part by proceeds from the issuance of common stock for options exercised during the nine months. The primary uses of cash in 2001 were regularly scheduled payments of long-term debt and repayment of draws against the Company's line of credit. OUTLOOK 2002 The statements contained in this Outlook are based on current expectations. These statements are forward looking, and actual results may differ materially. The Company undertakes no obligation to update any forward-looking statements. As described in note 6 to the financial statements included in Item 1 of this document, on October 16, 2002, the Company acquired 100% of the membership interest of RMH. RMH provides air medical transportation services throughout the United States under both the community-based and hospital-based models, utilizing a fleet of over 80 helicopters and fixed-wing aircraft. RMH has also manufactured and installed aircraft medical interiors for its own fleet as well as for third parties. The Company expects growth in revenue and in net income as a result of the acquisition in future years upon completion of the transition plan to integrate RMH into its three operating divisions. Community-Based Model In September 2002, one of the Company's aircraft based in the Las Vegas region was destroyed in an accident. Determination of the cause of the accident is still pending review by the National Transportation Safety Board. Following the accident, all three of the Las Vegas bases were temporarily closed. By the end of the third quarter, two of the three bases were back in operation, with the third base expected to be back in service in December 2002. The Company expects the resulting decrease in flight volume to offset the additional flight volume which would otherwise have been generated by the acquisition of the operating rights of another air ambulance service provider in the Las Vegas area in December 2001. 14 In the second quarter of 2002, the Company opened one new location in the Los Angeles metropolitan area and one in the St. Louis region. The Company expects to open a new base of operation in central Illinois at the end of the fourth quarter of 2002 or early in 2003. CBM flight volume at all other locations is expected to be consistent with historical levels during 2002, subject to seasonal, weather-related fluctuations. The Company continues to explore other opportunities to expand the CBM model in communities surrounding its hubs in Los Angeles and St. Louis. Hospital-Based Model Six hospital contracts were due for renewal in 2002. Four of these contracts have been renewed and two have been extended into the first quarter of 2003. Late in the first quarter of 2002, the Company expanded its operations for a fixed wing customer in Oregon with the addition of a third aircraft. The Company began operations under a new helicopter contract in Florida during the second quarter and under a new fixed wing contract in New Mexico in August 2002. The Company expects 2002 flight activity for all other hospital contracts to remain consistent with historical levels. Products Division Early in 2002 the Company was awarded a contract for the development and production of a litter system for the U.S. Army's Medical Evacuation Vehicle (MEV). The contract calls for the development and production of 42 units in 2002 and includes options for 76 additional units to be delivered from 2003 to 2007. The total contract value, including all options, is approximately $5,000,000. Work on the initial lot of production units is expected to continue into the fourth quarter of 2002. There is no assurance that the contract options will be exercised or orders for additional units received in 2002 or in future periods. During the second quarter of 2002, the Company completed the production of five HH60L Multi-Mission Medevac Systems. The Company expects to be awarded a contract for five to eight additional HH-60L units during the first half of 2003. Production will commence immediately upon award. The current U.S. Army Aviation Modernization Plan continues to define a requirement for 357 units in total over the next 20 years. The U.S. Army Program Objective Memorandum (POM) anticipates funding for this requirement with eight units per year scheduled in fiscal year 2003 and fifteen units per year scheduled from fiscal year 2004 through the end of the program. There is no assurance that the current contract option will be exercised or orders for additional units received in 2002 or in future periods. All Segments There can be no assurance that the Company will successfully integrate RMH operations into its three divisions or continue to renew operating agreements for its HBM operations, generate new profitable contracts for the Products Division, or maintain flight volume for CBM operations. Based on the anticipated level of HBM and CBM flight activity and the projects in process for the Products Division, the Company expects to generate sufficient cash flow to meet its operational needs throughout the remainder of 2002. The Company also has approximately $20 million in borrowing capacity available under the PNC revolving credit facility following the acquisition of RMH. RISK FACTORS Actual results achieved by the Company may differ materially from those described in forward-looking statements as a result of various factors, including but not limited to, those discussed above in "Outlook for 2002" and those described below. - - Flight volume - All CBM revenue and approximately 35% of HBM revenue is dependent upon flight volume. Approximately 20% of the Company's operating expenses also vary with number of hours flown. Poor visibility, high winds, and heavy precipitation can affect the safe operation of aircraft and therefore result in a reduced number of flight hours due to the inability to fly during these conditions. Prolonged periods of adverse weather conditions could have an adverse impact on the Company's operating results. The months from November through February tend to have lower flight volume due to weather conditions and other factors, resulting in lower CBM operating revenue during these months. Flight volume for CBM operations can also be affected by the distribution of calls among competitors by local government agencies and the entrance of new competitors into a market. 15 - - Collection rates -The Company's CBM division invoices patients and their insurers directly for services rendered and recognizes revenue net of estimated contractual allowances. The level of bad debt expense is driven by collection rates on these accounts. The Company responds to calls for air medical transports without pre-screening the creditworthiness of the patients. Collectibility is affected by the number of uninsured or indigent patients transported and is, therefore, primarily dependent upon the health of the U.S. economy. Changes in estimated contractual allowances and bad debts are recognized based on actual collections in subsequent periods. A significant or sustained downturn in the U.S. economy could have an adverse impact on the Company's bad debt expense. - - Dependence on third party suppliers - The Company currently obtains a substantial portion of its helicopter spare parts and components from Bell Helicopter, Inc. (Bell) and American Eurocopter Corporation (AEC), because its fleet is composed primarily of Bell and Eurocopter aircraft, and maintains supply arrangements with other parties for its engine and related dynamic components. Based upon the manufacturing capabilities and industry contacts of Bell, AEC, and other suppliers, the Company believes it will not be subject to material interruptions or delays in obtaining aircraft parts and components but does not have an alternative source of supply for Bell, AEC, and certain other aircraft parts. Failure or significant delay by these vendors in providing necessary parts could, in the absence of alternative sources of supply, have a material adverse effect on the Company. Because of its dependence upon Bell and AEC for helicopter parts, the Company may also be subject to adverse impacts from unusually high price increases which are greater than overall inflationary trends. Increases in the Company's flight fees billed to its HBM customers are generally limited to changes in the consumer price index. - - Department of Defense funding - One of the significant projects historically for the Products Division, the HH-60L program, is dependent upon Department of Defense funding. Failure of the U.S. Congress to approve funding for the production of additional HH-60L units could have a material adverse impact on Products Division revenue. - - Governmental regulation - The air medical transportation services and products industry is subject to extensive regulation by governmental agencies, including the Federal Aviation Administration, which imposes significant compliance costs on the Company. In addition, reimbursement rates for air ambulance services established by governmental programs such as Medicare directly affect CBM revenue and indirectly affect HBM revenue from hospital customers. Changes in laws or regulations or reimbursement rates could have a material adverse impact on the Company's cost of operations or revenue from flight operations. - - Competition - HBM operations face significant competition from several national and regional air medical transportation providers for contracts with hospitals and other healthcare institutions. CBM operations also face competition from smaller regional carriers and alternative air ambulance providers such as sheriff departments. Operators generally compete on the basis of price, safety record, accident prevention and training, and medical capability of the aircraft. The Company's competition in the aircraft interior design and manufacturing industry comes primarily from two companies based in the United States and one in Europe. Competition is based mainly on product features, performance, price, and weight. There can be no assurance that the Company will be able to continue to compete successfully for new or renewing contracts in the future. - - Insurance - Hazards are inherent in the aviation industry and may result in loss of life and property, thereby exposing the Company to potentially substantial liability claims arising out of the operation of aircraft. The Company may also be sued in connection with medical malpractice claims arising from events occurring during a medical flight. Under HBM operating agreements, hospitals customers have agreed to indemnify the Company against liability arising out of medical malpractice claims and to maintain insurance covering such liability, but there can be no assurance that a hospital will not challenge the indemnification rights or will have sufficient assets or insurance coverage for full indemnity. In CBM operations, Company personnel perform medical procedures on transported patients, which may expose the Company to significant direct legal exposure to medical malpractice claims. The Company maintains general liability aviation insurance, aviation product liability coverage, and medical malpractice insurance, and believes that the level of coverage is customary in the industry and adequate to protect against claims. However, there can be no assurance that it will be sufficient to cover potential claims or that present levels of coverage will be available in the future at reasonable cost. A limited number of hull and liability insurance underwriters provide coverage for air medical operators. A significant downturn in insurance market conditions could have a material adverse effect on the Company's cost of operations. Approximately 40% of any increases in hull and liability insurance may be passed through to the Company's customers according to contract terms. In addition, the loss of any aircraft as a result of an accident could cause both significant adverse publicity and significant interruptions of air medical services to client hospitals, which could adversely affect the relationship with such hospitals. 16 - - Loan covenants and events of default - The subordinated notes and revolving credit facility into which the Company entered to finance the acquisition of RMH both contain certain financial ratios and various other covenants. Events of default include a change of control which is defined as (i) any person's becoming the beneficial owner of 40% or more of the Company's stock, (ii) directors of the Company at October 16, 2002, or directors approved by them, ceasing to comprise a majority of the Company's board of directors, (iii) foreign persons in the aggregate owning or controlling 20% or more of the Company's voting stock, or (iv) the Company or any subsidiary that holds an air carrier certificate ceasing to be a citizen of the United States. Failure to perform these covenants or to maintain the required financial ratios could result in an event of default and accelerate payment of the principal balances due under the notes and credit revolver. CRITICAL ACCOUNTING POLICIES The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, uncollectible receivables, deferred income taxes, and aircraft overhaul costs. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Fixed flight fee revenue under the Company's operating agreements with hospitals is recognized monthly over the terms of the agreements. Flight revenue relating to patient transports is recognized upon completion of the services. Revenue and accounts receivable are recorded net of estimated contractual allowances under agreements with third-party payers. Estimates of contractual allowances are initially determined based on historical discount percentages for Medicare and Medicaid patients and adjusted periodically based on actual discounts. If actual future discounts are less favorable than those projected by management, additional contractual allowances may be required. Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. The Company estimates the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater than estimated, the gross margin on the project may be less than originally recorded under the percentage of completion method. Uncollectible Receivables The Company responds to calls for air medical transports without pre-screening the creditworthiness of the patients. Uncollectible trade receivables are charged to operations using the allowance method. Estimates of uncollectible receivables are determined monthly based on historical collection rates and adjusted monthly thereafter based on actual collections. If actual future collections are less favorable than those projected by management, additional allowances for uncollectible accounts may be required. While bad debt expenses have historically been within expectations and the allowances established, there can be no guarantee that the Company will continue to experience the same collection rates that it has in the past. 17 Deferred Income Taxes In preparation of the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets and maintenance reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company then assesses the likelihood that deferred tax assets will be recoverable from future taxable income and records a valuation allowance for those amounts it believes are not likely to be realized. Establishing or increasing a valuation allowance in a period results in income tax expense in the statement of operations. The Company considers estimated future taxable income, tax planning strategies, and the expected timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets. In the event the Company were to determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Aircraft Overhaul Costs The Company uses the accrual method of accounting for major engine and airframe component overhauls and replacements. The cost of overhaul or replacement is estimated using published manufacturers' price lists, when available, or historical experience. This cost is accrued based on usage of the aircraft component over the period between overhauls or replacements as mandated by the parts manufacturer. If the cost of overhaul or replacement is greater than estimated by management, additional aircraft operating costs may be recorded in the period in which the price increase becomes effective or in which the aircraft component is overhauled. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not use financial instruments to any degree to manage these risks and does not hold or issue financial instruments for trading purposes. All of the Company's product sales and related receivables are payable in U.S. dollars. The Company is subject to interest rate risk on its debt obligations and notes receivable, all of which have fixed interest rates, except the line of credit which did not have a balance outstanding as of September 30, 2002. ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation of the Company's internal controls, disclosure controls and procedures within 90 days of the filing date of this report, the Chief Executive Officer and the Chief Financial Officer have concluded that the effectiveness of such controls and procedures is satisfactory. Further, there were not any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 99.1 Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K Current Report on Form 8-K dated October 16, 2002, regarding the Company's acquisition of 100% of the membership interest of Rocky Mountain Holdings, L.L.C. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIR METHODS CORPORATION Date: November 14, 2002 By \s\ George W. Belsey ------------------------------------------------- George W. Belsey Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: November 14, 2002 By \s\ Aaron D. Todd ------------------------------------------------- Aaron D. Todd Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) Date: November 14, 2002 By \s\ Sharon J. Keck ------------------------------------------------- Sharon J. Keck Chief Accounting Officer (Principal Accounting Officer) 20 SECTION 302 CHIEF EXECUTIVE OFFICER CERTIFICATION I, George W. Belsey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Air Methods Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ George W. Belsey - --------------------------- George W. Belsey Chief Executive Officer SECTION 302 CHIEF FINANCIAL OFFICER CERTIFICATION I, Aaron D. Todd, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Air Methods Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Aaron D. Todd - -------------------------- Aaron D. Todd Chief Financial Officer