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 June 30, 2003
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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 (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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of Common Stock, par value $.06, outstanding as of August
1, 2003, was 9,565,810.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 1
Consolidated Statements of Operations for the three and
six months ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
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)
JUNE 30, DECEMBER 31,
2003 2002
-------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 2,750 1,410
Current installments of notes receivable 17 45
Receivables:
Trade 63,830 54,814
Less allowance for doubtful accounts (16,467) (16,996)
-------------------------
47,363 37,818
Insurance proceeds 678 256
Other 3,675 4,243
-------------------------
Total receivables 51,716 42,317
-------------------------
Inventories 11,358 12,003
Work-in-process on medical interiors and products contracts 442 203
Assets held for sale 2,138 3,242
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,242 703
Deferred tax asset -- 1,684
Prepaid expenses and other 1,931 1,921
-------------------------
Total current assets 71,594 63,528
-------------------------
Equipment and leasehold improvements:
Land 190 190
Flight and ground support equipment 148,387 145,715
Furniture and office equipment 9,224 8,951
-------------------------
157,801 154,856
Less accumulated depreciation and amortization (41,816) (36,551)
-------------------------
Net equipment and leasehold improvements 115,985 118,305
-------------------------
Goodwill 3,218 4,291
Notes receivable, less current installments 18 124
Other assets, net of accumulated amortization of $1,005 and $720
at June 30, 2003 and December 31, 2002, respectively 9,713 10,148
-------------------------
Total assets $ 200,528 196,396
=========================
(Continued)
See accompanying notes to consolidated financial statements.
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
------------------------
2003 2002
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 1,483 2,604
Current installments of long-term debt 6,894 5,604
Current installments of obligations under capital
leases 754 737
Accounts payable 3,474 4,846
Accrued overhaul and parts replacement costs 10,023 8,657
Deferred revenue 1,958 1,258
Billings in excess of costs and estimated earnings on
uncompleted contracts 559 530
Accrued wages and compensated absences 5,313 5,417
Deferred income taxes 1,406 --
Other accrued liabilities 4,900 5,300
-------------------------
Total current liabilities 36,764 34,953
Long-term debt, less current installments 80,213 77,247
Obligations under capital leases, less current installments 2,771 3,150
Accrued overhaul and parts replacement costs 27,695 25,871
Deferred income taxes 796 3,450
Other liabilities 4,937 5,507
-------------------------
Total liabilities 153,176 150,178
-------------------------
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 9,581,222 and 9,488,679 shares at
June 30, 2003 and December 31, 2002, respectively 575 569
Additional paid-in capital 55,464 55,127
Accumulated deficit (8,686) (9,477)
Treasury stock at par, 18,337 and 15,700 common
shares at June 30, 2003 and December 31, 2002,
respectively (1) (1)
-------------------------
Total stockholders' equity 47,352 46,218
-------------------------
Total liabilities and stockholders' equity $ 200,528 196,396
=========================
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
Revenue:
Flight revenue $ 55,638 25,791 106,358 50,315
Sales of medical interiors and products 1,577 1,765 2,912 3,227
Parts and maintenance sales and services 249 194 492 537
Gain on disposition of assets, net -- -- -- 14
------------------------------------------------
57,464 27,750 109,762 54,093
------------------------------------------------
Operating expenses:
Flight centers 21,086 8,594 41,397 16,454
Aircraft operations 14,100 6,690 27,284 12,151
Aircraft rental 3,059 1,223 5,860 2,358
Medical interiors and products sold 1,379 1,239 2,503 2,177
Cost of parts and maintenance sales and services 250 171 491 493
Depreciation and amortization 2,808 1,414 5,556 2,785
Bad debt expense 5,572 3,239 11,902 6,723
Loss on disposition of assets, net 13 -- 26 --
General and administrative 5,520 2,489 10,224 5,076
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53,787 25,059 105,243 48,217
------------------------------------------------
Operating income 3,677 2,691 4,519 5,876
Other income (expense):
Interest expense (1,928) (417) (3,934) (862)
Interest income 3 10 6 16
Other, net 391 12 706 57
------------------------------------------------
Income before income taxes 2,143 2,296 1,297 5,087
Income tax expense 836 895 506 1,983
------------------------------------------------
Net income $ 1,307 1,401 791 3,104
================================================
Basic income per common share $ .14 .15 .08 .35
================================================
Diluted income per common share $ .13 .15 .08 .34
================================================
Weighted average number of common shares outstanding
- - basic 9,561,705 9,055,443 9,541,905 8,913,054
================================================
Weighted average number of common shares outstanding
- - diluted 9,931,526 9,306,469 9,896,207 9,120,950
================================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2003 2002
-------------------------------
Cash flows from operating activities:
Net income $ 791 $ 3,104
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 5,556 2,785
Common stock options and warrants issued for services 75 30
Bad debt expense 11,902 6,723
Deferred income tax expense 436 1,843
Loss (gain) on retirement and sale of equipment, net 26 (14)
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets 489 (345)
Increase in receivables (19,813) (12,917)
Decrease (increase) in parts inventories 645 (369)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings (778) 330
Decrease in accounts payable and other accrued liabilities (2,274) (269)
Increase in deferred revenue, billings in excess of cost, and other
liabilities 159 606
Increase in accrued overhaul and parts replacement costs 2,798 1,397
-------------------------------
Net cash provided by operating activities 12 2,904
-------------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (2,608) (2,287)
Proceeds from disposition and sale of equipment 20 764
Decrease (increase) in notes receivable and other assets 270 (5)
-------------------------------
Net cash used by investing activities (2,318) (1,528)
-------------------------------
(Continued)
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 300 2,787
Payments for purchases of common stock (32) (1,071)
Net borrowings under line of credit 4,445 --
Proceeds from issuance of long-term debt 2,490 --
Payments of long-term debt (3,195) (2,293)
Payments of capital lease obligations (362) (165)
------------------------------
Net cash provided (used) by financing activities 3,646 (742)
------------------------------
Increase in cash and cash equivalents 1,340 634
Cash and cash equivalents at beginning of period 1,410 2,838
------------------------------
Cash and cash equivalents at end of period $ 2,750 3,472
==============================
Non-cash investing and financing activities:
In the six months ended June 30, 2003, the Company settled a note payable
totaling $1,121 in exchange for the aircraft securing the debt. The Company also
entered into a note payable of $516 to finance insurance policies.
In the six months ended June 30, 2003, the Company made adjustments to the
purchase price allocation related to the acquisition of Rocky Mountain Holdings,
LLC (RMH), which decreased goodwill by $1,090, increased accounts receivable by
$1,488, and increased other accrued liabilities by $398.
In the six months ended June 30, 2002, the Company entered into a note payable
totaling $1,290 to finance the buyout of a helicopter previously under an
operating lease.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
-----------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, the accompanying unaudited 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 fiscal year
ended December 31, 2002.
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:
2003 2002
--------- ---------
FOR QUARTER ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 9,561,705 9,055,443
Dilutive effect of:
Common stock options 86,890 236,138
Common stock warrants 282,931 14,888
--------- ---------
Weighted average number of common shares outstanding - diluted 9,931,526 9,306,469
========= =========
FOR SIX MONTHS ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 9,541,905 8,913,054
Dilutive effect of:
Common stock options 76,223 193,545
Common stock warrants 278,079 14,351
--------- ---------
Weighted average number of common shares outstanding - diluted 9,896,207 9,120,950
========= =========
Common stock options totaling 187,500 and 173,825 were not included in the
diluted income per share calculation for the quarters ended June 30, 2003
and 2002, respectively, because their effect would have been anti-dilutive.
Common stock options totaling 187,500 and common stock warrants totaling
25,000 were not included in the diluted income per share calculation for
the six months ended June 30, 2003, and common stock options totaling
260,000 were not included in the diluted income per share calculation for
the six months ended June 30, 2002, because their effect would have been
anti-dilutive.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the six months ended June 30, 2003,
consisted of the following (amounts in thousands except share amounts):
Shares
Outstanding Amount
----------------------
Balances at January 1, 2003 9,472,979 $46,218
Issuance of common shares for options exercised 92,543 300
Purchase of treasury shares (2,637) (32)
Options and warrants issued for services -- 75
Net income -- 791
----------------------
Balances at June 30, 2003 9,562,885 $47,352
======================
(4) STOCK-BASED COMPENSATION
-------------------------
The Company accounts for its employee stock compensation plans as
prescribed under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB Opinion 25). Because the Company grants its
options at or above market value, no compensation cost has been recognized
relating to the plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the provisions of
Statement 123, the Company's net income and income per share would have
been reduced to the pro forma amounts indicated below (amounts in
thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-----------------------------------------
Net income:
As reported $ 1,307 1,401 791 3,104
Pro forma 1,244 1,357 679 3,015
Basic income per share:
As reported $ .14 .15 .08 .35
Pro forma .12 .13 .07 .30
Diluted income per share:
As reported $ .13 .15 .08 .34
Pro forma .12 .13 .06 .29
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 2003 and 2002, respectively: dividend yield
of 0%, expected volatility of 57%, and expected life of 3 years in both
2003 and 2002; and risk-free interest rates of 1.7% and 1.8%. The weighted
average fair value of options granted during the six months ended June 30,
2003 and 2002, was $3.11 and $2.47, respectively.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (Statement 150). Statement 150 establishes
standards for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. Statement 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. The
Company does not expect adoption of Statement 150 to have a material impact
on its results of operations or financial position.
(6) RECLASSIFICATIONS
-----------------
Certain prior period amounts have been reclassified to conform with the
2003 presentation.
(7) BUSINESS SEGMENT INFORMATION
------------------------------
Summarized financial information for the Company's operating segments is
shown in the following table (amounts in thousands). Amounts in the
"Corporate Activities" column represent corporate headquarters expenses,
corporate income tax expense, and results of insignificant operations. The
Company does not allocate assets between 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
fifteen states. Services include aircraft operation and maintenance,
medical care, dispatch and communications, and medical billing and
collection.
- Hospital-Based Model (HBM) - provides air medical transportation
services to hospitals 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 and medical transport products
for domestic and international customers.
8
Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: CBM HBM Division Activities Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------
2003
External revenue $33,605 22,072 1,577 210 -- 57,464
Intersegment revenue -- -- 967 -- (967) --
----------------------------------------------------------------------
Total revenue 33,605 22,072 2,544 210 (967) 57,464
----------------------------------------------------------------------
Operating expenses 23,255 18,374 2,278 1,867 (758) 45,016
Depreciation & amortization 1,186 1,147 44 431 -- 2,808
Bad debt expense 5,572 -- -- -- -- 5,572
Interest expense 929 956 -- 43 -- 1,928
Interest income -- -- -- (3) -- (3)
Income tax expense -- -- -- 836 -- 836
----------------------------------------------------------------------
Segment net income (loss) $ 2,663 1,595 222 (2,964) (209) 1,307
======================================================================
Total assets $66,503 N/A N/A 136,189 (2,164) 200,528
======================================================================
2002
External revenue $15,339 10,646 1,765 -- -- 27,750
Intersegment revenue -- -- 101 -- (101) --
----------------------------------------------------------------------
Total revenue 15,339 10,646 1,866 -- (101) 27,750
----------------------------------------------------------------------
Operating expenses 9,185 9,061 1,393 848 (93) 20,394
Depreciation & amortization 621 715 34 44 -- 1,414
Bad debt expense 3,239 -- -- -- -- 3,239
Interest expense 243 174 -- -- -- 417
Interest income -- (4) -- (6) -- (10)
Income tax expense -- -- -- 895 -- 895
----------------------------------------------------------------------
Segment net income (loss) $ 2,051 700 439 (1,781) (8) 1,401
======================================================================
Total assets $41,120 N/A N/A 55,052 (2,164) 94,008
======================================================================
FOR SIX MONTHS ENDED JUNE 30:
2003
External revenue $63,319 43,107 2,912 424 -- 109,762
Intersegment revenue -- -- 2,084 -- (2,084) --
----------------------------------------------------------------------
Total revenue 63,319 43,107 4,996 424 (2,084) 109,762
----------------------------------------------------------------------
Operating expenses 44,011 36,406 4,358 4,044 (1,740) 87,079
Depreciation & amortization 2,301 2,302 89 864 -- 5,556
Bad debt expense 11,902 -- -- -- -- 11,902
Interest expense 1,925 1,945 -- 64 -- 3,934
Interest income (1) (2) -- (3) -- (6)
Income tax expense -- -- -- 506 -- 506
----------------------------------------------------------------------
Segment net income (loss) $ 3,181 2,456 549 (5,051) (344) 791
======================================================================
Total assets $66,503 N/A N/A 136,189 (2,164) 200,528
======================================================================
2002
External revenue $30,127 20,739 3,227 -- -- 54,093
Intersegment revenue -- -- 290 -- (290) --
----------------------------------------------------------------------
Total revenue 30,127 20,739 3,517 -- (290) 54,093
----------------------------------------------------------------------
Operating expenses 17,470 17,048 2,627 1,778 (271) 38,652
Depreciation & amortization 1,205 1,416 74 90 -- 2,785
Bad debt expense 6,723 -- -- -- -- 6,723
Interest expense 496 366 -- -- -- 862
Interest income (1) (5) -- (10) -- (16)
Income tax expense -- -- -- 1,983 -- 1,983
----------------------------------------------------------------------
Segment net income (loss) $ 4,234 1,914 816 (3,841) (19) 3,104
======================================================================
Total assets $41,120 N/A N/A 55,052 (2,164) 94,008
======================================================================
9
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
contains forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. The use of any of the words "believe," "expect,"
"anticipate," "plan," "estimate," and similar expressions are intended to
identify such statements. Forward-looking statements include statements
concerning possible or assumed future results of the Company; size, structure
and growth of the Company's air medical services and products markets;
continuation and/or renewal of HBM contracts; acquisition of new and profitable
Products Division contracts; flight volume of CBM operations; successful
integration of Rocky Mountain Holdings, LLC (RMH); 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and in other sections of this report, as well as in the Company's
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 $1,307,000 and $791,000 for the three and six
months ended June 30, 2003, respectively, compared to net income of $1,401,000
and $3,104,000 for the three and six months ended June 30, 2002, respectively.
Flight revenue increased $29,847,000, or 115.7%, and $56,043,000, or 111.4%, for
the three and six months ended June 30, 2003, respectively, compared to 2002.
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 $18,413,000, or 121.3%, to $33,596,000 for
the second quarter of 2003 and $33,646,000, or 113.5%, to $63,294,000 for
the six months ended June 30, 2003, for the following reasons:
- Acquisition of RMH in October 2002. Flight revenue for RMH's CBM
operations totaled $19,746,000 and $37,663,000 for the three and six
months ended June 30, 2003.
- Revenue of $708,000 and $1,766,000 for the three and six months ended
June 30, 2003, respectively, from the addition of three new CBM bases
during or subsequent to the second quarter of 2002.
- Price increase of approximately 10% for all CBM operations effective
November 1, 2002.
- Decrease in flight volume for bases open longer than one year.
Excluding the impact of the RMH acquisition and the addition of the
new bases discussed above, total flight volume for all CBM operations
decreased 8.6% and 12.5% in the three and six months ended June 30,
2003, respectively, compared to the prior year. The decrease in flight
volume is primarily attributed to adverse weather conditions which
prevented operation of the aircraft. Over 1,400 flights in the second
quarter and 2,600 flights during the six-month period were canceled
due to weather.
- - HBM - Flight revenue increased $11,434,000, or 107.8%, to $22,042,000 for
the second quarter of 2003 and $22,397,000, or 108.4%, to $43,064,000 for
the six months ended June 30, 2003, for the following reasons:
- Acquisition of RMH in October 2002. Flight revenue for RMH's HBM
operations totaled $10,903,000 and $21,342,000, respectively, during
the three and six months ended June 30, 2003.
- Revenue of approximately $274,000 and $939,000 for the three and six
months ended June 30, 2003, respectively, generated by the addition of
one new contract in the second quarter of 2002 and one in the third
quarter of 2002.
- Annual price increases in the majority of contracts based on changes
in hull insurance rates and in the Consumer Price Index.
- Decrease of 1.5% and 4.8% in flight volume for all contracts excluding
RMH contracts and the new contracts discussed above for the three and
six months ended June 30, 2003, respectively.
Sales of medical interiors and products decreased $188,000, or 10.7%, and
$315,000, or 9.8%, for the three and six months ended June 30, 2003, compared to
2002. Significant projects in 2003 included the manufacture of eight modular
medical interiors for four commercial customers. Also in the second quarter of
2003, the Company began the manufacture of 11 Multi-Mission Medevac Systems for
the U. S. Army's HH-60L Black Hawk helicopter. Revenue by product line for the
quarter and six months ended June 30, 2003, respectively, was as follows:
- - $1,251,000 and $2,423,000 - manufacture and installation of modular,
medical interiors
- - $185,000 and $185,000 - manufacture of multi-mission interiors
- - $141,000 and $304,000 - design and manufacture of other aerospace products
10
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 modular interior components for six commercial customers. In the
first quarter of 2002, the Company also 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 six
months ended June 30, 2002, respectively, was as follows:
- - $1,134,000 and $1,615,000 - manufacture and installation of modular,
medical interiors
- - $10,000 and $778,000 - design and manufacture of multi-mission interiors
- - $621,000 and $834,000 - design and manufacture of other aerospace products
Cost of medical interiors and products increased 11.3% and 15.0% for the three
and six months ended June 30, 2003, as compared to the previous year. The
average net margin earned on projects during 2003 was 21% compared to 42% in
2002. Aircraft interiors completed for commercial customers during 2003 were for
new types of aircraft in which the Company had not previously installed its
modular interior, leading to higher engineering and documentation costs and
lower profit margins. The cost of medical interiors and products also includes
certain fixed costs, such as administrative salaries and facilities rent, which
do not vary with volume of sales.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased 145.4% and 151.6% for the quarter and six
months ended June 31, 2003, respectively, compared to 2002. Changes by business
segment are as follows:
- - CBM - Flight center costs increased 181.0% to $12,488,000 and 188.5% to
$24,484,000 for the three and six months ended June 30, 2003, respectively,
for the following reasons:
- Acquisition of RMH in October 2002. Flight center costs related to
RMH's CBM operations totaled approximately $7,055,000 and $13,895,000
for the three and six months ended June 30, 2003, respectively.
- Approximately $538,000 and $1,102,000 for the three and six months
ended June 30, 2003, for the addition of personnel to staff new base
locations described above.
- Increases in salaries for merit pay raises.
- Increases in the cost of medical and workers compensation insurance
premiums paid by the Company.
- - HBM - Flight center costs increased 107.2% to $8,599,000 and 112.3% to
$16,914,000 for the three and six months ended June 30, 2003, respectively,
primarily due to the following:
- Acquisition of RMH in October 2002. Flight center costs related to
RMH's HBM operations totaled approximately $4,324,000 and $8,304,000
for the three and six months ended June 30, 2003.
- Approximately $78,000 and $347,000 for the three and six months ended
June 30, 2003, for the addition of personnel to staff new base
locations described above.
- Increases in salaries for merit pay raises.
- Increases in the cost of medical and workers compensation insurance
premiums paid by the Company.
Aircraft operating expenses increased 110.8% and 124.5% for the three and six
months ended June 30, 2003, respectively, in comparison to the three and six
months ended June 30, 2002. 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:
- - Acquisition of RMH in October 2002. Expenses for the RMH fleet totaled
$6,122,000 and $12,192,000 for the three and six months ended June 30,
2003.
- - Addition of seven helicopters for CBM operations and one helicopter and one
fixed wing aircraft for HBM operations since June 30, 2002, resulting in an
increase of approximately $520,000 and $983,000 in aircraft operating
expenses for the quarter and six months ended June 30, 2003, respectively.
- - Addition of personnel in aircraft overhaul, avionics repair, purchasing,
and aircraft records departments to support the increase in the size of the
fleet resulting from the RMH acquisition.
- - Hull and liability insurance rate increase of approximately 20% effective
July 2002, due to overall insurance market conditions.
11
Aircraft rental expense increased 150.1% and 148.5% for the three and six months
ended June 30, 2003, respectively, in comparison to the three and six months
ended June 30, 2002. Expense for 37 RMH aircraft under operating leases totaled
$1,539,000 and $3,074,000 during the quarter and six months ended June 30, 2003.
Rental expense related to eight other leased aircraft added to the Company's
fleet since June 30, 2002, totaled $388,000 and $558,000 in the three and six
months ended June 30, 2003.
Depreciation and amortization expense increased 98.6% and 99.5% for the three
and six months ended June 30, 2003, respectively, compared to 2002. Depreciation
related to assets added as part of the RMH acquisition totaled $1,201,000 and
$2,462,000 during the quarter and six months ended June 30, 2003.
The Company responds to calls for air medical transports without pre-screening
the creditworthiness of the patient. For CBM operations, bad debt expense is
estimated during the period the related services are performed based on
historical collection experience. The provision is adjusted as required based on
actual collections in subsequent periods. Bad debt expense increased 72.0% and
77.0% for the quarter and six months ended June 30, 2003, compared to 2002, due
primarily to the acquisition of RMH. Bad debt as a percentage of related net
flight revenue decreased from 22.7% in six months ended June 30, 2002 to 18.8%
in the six months ended June 30, 2003, primarily as the result of an increase in
the number Medicare and Medicaid transports compared to total transports. Flight
revenue is recorded net of Medicare/Medicaid discounts. The total reserve for
expected uncollectible amounts, including contractual discounts and bad debts,
increased from 36.3% of related gross flight revenue in six-month period of 2002
to 42.4% in six-month period of 2003. The increase in total reserves is related
to the acquisition of RMH, whose collection experience had historically been
less favorable than other CBM operations owned by the Company. Excluding the
impact of the RMH acquisition, the Company's overall reserve rate for
uncollectible accounts, including contractual discounts, remained unchanged in
2003 compared to 2002. Bad debt expense related to HBM operations and Products
Division was not significant in either 2003 or 2002.
General and administrative expenses increased 121.8% and 101.4% for the quarter
and six months ended June 30, 2003, respectively, compared to 2002, reflecting
the impact of the RMH transaction. General and administrative expenses include
accounting and finance, human resources, aviation management, and pilot
training. On average, the Company doubled the number of personnel in each area
to manage the expanded operations with the acquisition of RMH and the growth
outlined above in the discussion of flight revenue. Also included in general and
administrative expenses is program administration costs for CBM operations.
Program administration costs for RMH's CBM operations totaled approximately
$784,000 and $1,361,000 for the three and six months ended June 30, 2003.
Interest expense increased 362.4% and 356.4% for the quarter and six months
ended June 30, 2003, compared to 2002, primarily as a result of the RMH
acquisition. Interest expense related to debt assumed or incurred in conjunction
with the RMH acquisition totaled $1,696,000 and $3,285,000 for the three and six
months ended June 30, 2003.
The Company recorded income tax expense of $506,000 in 2003 and $1,983,000 in
2002, both at an effective rate of 39%.
FINANCIAL CONDITION
Net working capital increased from $28,575,000 at December 31, 2002, to
$34,830,000 at June 30, 2003, primarily due to an increase in receivables
consistent with increased revenue for CBM and HBM operations. Cash and cash
equivalents increased $1,340,000 from $1,410,000 to $2,750,000 over the same
period, for the reasons discussed below.
12
Cash generated by operations in the six months ended June 30, 2003, totaled
$12,000 compared to $2,904,000 in 2002. Significant uses of cash in 2003
included the increase in receivables, net of bad debt expense, discussed above
and a decrease in accounts payable and other accrued liabilities. The decrease
in accounts payable and other accrued liabilities is due to the normal payment
cycles of the Company's business. These uses of cash were partially offset by an
increase in the balance of accrued overhaul and parts replacement costs 2003.
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 $2,318,000 in 2003 compared to
$1,528,000 in 2002. Equipment acquisitions in 2003 and 2002 consisted primarily
of medical interior and avionics installations, upgrades for existing equipment,
or rotable equipment. In 2003, the Company received $116,000 in full payment of
a note receivable. During 2002, the Company received proceeds from a
sale-leaseback transaction for a BK117 helicopter.
Financing activities generated $3,646,000 in 2003 compared to using $742,000 in
2002. The primary use of cash in both 2003 and 2002 was regularly scheduled
payments of long-term debt and capital lease obligations. These payments were
offset in 2003 by draws against the Company's line of credit and proceeds from
the new debt agreements described below. Payments for long-term debt and
purchases of common stock were offset in part in 2002 by proceeds from the
issuance of common stock for options exercised.
In February 2003 the Company originated notes payable totaling $2,490,000 with
interest at LIBOR plus 2.50% to refinance mortgages on buildings in St. Louis,
Missouri, and Provo, Utah. The notes are payable through February 2008.
OUTLOOK 2003
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
The Company undertakes no obligation to update any forward-looking statements.
Community-Based Model
During the second quarter of 2003, the Company opened CBM operations at new
locations in Georgia and Florida and acquired certain business assets from
another air medical service provider in southeastern Arizona, resulting in an
increase in the number of operating bases in the region from three to four. The
Company expects an increase in annual flight volume for the three previously
existing bases as a result of the acquisition, as well as an increase in flight
volume with the addition of the fourth base. The Company also expects to begin
operations at new locations in New York and California during the third quarter
of 2003.
CBM flight volume at all other locations is expected to be consistent with
historical levels attained by the Company and RMH, subject to seasonal,
weather-related fluctuations, during the remainder of 2003. The Company
continues to evaluate opportunities to expand the CBM model in other
communities.
Hospital-Based Model
Four hospital contracts are due for renewal in 2003. One contract was renewed
during the second quarter of 2003 for a five-year term; renewals on the other
three contacts are still pending. The Company expects 2003 flight activity for
current hospital contracts to remain consistent with historical levels attained
by the Company and RMH, subject to seasonal, weather-related fluctuations.
Products Division
As of June 30, 2003, the Company was completing the production of four modular
medical interiors for four commercial customers. During the second quarter, the
Company was awarded a contract for 11 HH-60L Multi-Mission Medevac Systems, with
delivery to be completed in 2004. Remaining revenue for all contracts is
estimated at $5,890,000 and is expected to be recognized during the remainder of
2003 and into the fourth quarter of 2004.
13
The current U.S. Army Aviation Modernization Plan defines a requirement for 357
HH-60L Multi-Mission Medevac units in total over 20 years beginning in 1996. The
Company also expects to receive a contract for 15 additional MEV litter systems
in 2003, with delivery to be completed in 2004. The U.S. Army has defined a
requirement for a total of 121 units over 4 years, beginning with the units
produced in 2002. There is no assurance that the current contract option for
either program will be exercised or orders for additional units will be received
in 2003 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 2003. The Company also had
approximately $14,594,000 in borrowing capacity available under the revolving
credit facility as of June 30, 2003.
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 2003" and
those described below.
- - RMH integration - On October 16, 2002, the Company acquired RMH, one of its
competitors, effectively doubling the size of its operations. While RMH is
engaged in the same lines of business as Air Methods, it has operated in
different geographic areas and under different procedures and protocols.
Although most of RMH's employees will continue as employees of the Company,
few of its management level employees have remained with the Company. As
with any large acquisition, a significant effort is required to assimilate
the operations, financial and accounting practices, and MIS systems, and to
integrate key personnel from the acquired business. This acquisition may
cause disruptions in Company operations and divert management's attention
from day-to-day operations. The Company may not realize the anticipated
benefits of this acquisition, profitability may suffer due to
acquisition-related costs or unanticipated liabilities, and the Company's
stock price may decrease if the financial markets consider the acquisition
to be inappropriately priced.
- - Highly leveraged balance sheet - The Company is obligated under debt
facilities providing for up to approximately $110 million of indebtedness,
of which approximately $92.1 million was outstanding at June 30, 2003. If
the Company fails to meet its payment obligations or otherwise defaults
under the agreements governing indebtedness, the lenders under those
agreements will have the right to accelerate the indebtedness and exercise
other rights and remedies against the Company. These rights and remedies
include the rights to repossess and foreclose upon the assets that serve as
collateral, initiate judicial foreclosure against the Company, petition a
court to appoint a receiver for the Company, and initiate involuntary
bankruptcy proceedings against the Company. If lenders exercise their
rights and remedies, the Company's assets may not be sufficient to repay
outstanding indebtedness, and there may be no assets remaining after
payment of indebtedness to provide a return on common stock.
- - Restrictive debt covenants - The subordinated notes and senior credit
facility, into which the Company entered to finance the acquisition of RMH,
both contain restrictive financial and operating covenants, including
restrictions on the Company's ability to incur additional indebtedness, to
exceed certain annual capital expenditure limits, and to engage in various
corporate transactions such as mergers, acquisitions, asset sales and the
payment of cash dividends. These restrictions will restrict future growth
through the limitation on capital expenditures and acquisitions, and may
adversely impact the Company's ability to implement its business plan.
Failure to comply with the covenants defined in the agreements or to
maintain the required financial ratios could result in an event of default
and accelerate payment of the principal balances due under the subordinated
notes and the senior credit facility.
14
- - 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.
Typically, the months from November through February tend to have lower
flight volume due to weather conditions and other factors, resulting in
lower CBM operating revenue during these months. Flight volume for CBM
operations can also be affected by the distribution of calls among
competitors by local government agencies and the entrance of new
competitors into a market.
- - Collection rates - The Company responds to calls for air medical transport
without pre-screening the creditworthiness of the patient. The CBM division
invoices patients and their insurers directly for services rendered and
recognizes revenue net of estimated contractual allowances. The level of
bad debt expense is driven by collection rates on these accounts.
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 customers are
generally limited to changes in the consumer price index.
- - Aviation industry hazards and insurance limitations - Hazards are inherent
in the aviation industry and may result in loss of life and property,
thereby exposing the Company to potentially substantial liability claims
arising out of the operation of aircraft. The Company may also be sued in
connection with medical malpractice claims arising from events occurring
during a medical flight. Under HBM operating agreements, 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 accidents could cause
both significant adverse publicity and interruption of air medical services
to client hospitals, which could adversely affect the Company's
relationship with such hospitals and operating results.
- - Governmental regulation - The air medical transportation services and
products industry is subject to extensive regulation by governmental
agencies, including the Federal Aviation Administration, which impose
significant compliance costs on the Company. In addition, reimbursement
rates for air ambulance services established by governmental programs such
as Medicare directly affect CBM revenue and indirectly affect HBM revenue
from 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.
15
- - Foreign ownership - Federal law requires that United States air carriers be
citizens of the United States. For a corporation to qualify as a United
States citizen, the president and at least two-thirds of the directors and
other managing officers of the corporation must be United States citizens
and at least 75% of the voting interest of the corporation must be owned or
controlled by United States citizens. If the Company is unable to satisfy
these requirements, operating authority from the Department of
Transportation may be revoked. Furthermore, under certain loan agreements,
an event of default occurs if less than 80% of the voting interest is owned
or controlled by United States citizens. As of June 30, 2003, the Company
was aware of one foreign person who holds approximately 9.9% of outstanding
Common Stock. Because the Company is unable to control the transfer of its
stock, it is unable to assure that it can remain in compliance with these
requirements in the future.
- - 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 offered. 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.
- - Department of Defense funding - Several of the projects which have
historically been significant sources of revenue for the Products Division,
including HH-60L and MEV systems, are dependent upon Department of Defense
funding. Failure of the U.S. Congress to approve funding for the production
of additional HH-60L or MEV units could have a material adverse impact on
Products Division revenue.
- - Shareholder dilution - As of June 30, 2003, there were outstanding stock
options to purchase approximately 707,783 shares of common stock and
outstanding warrants to purchase 593,224 shares of common stock. To the
extent that the outstanding stock options or warrants are exercised,
dilution to the interest of common stockholders will occur. Moreover, the
terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of the outstanding
options can be expected to exercise them at a time when any needed capital
may be able to be obtained on terms more favorable than those provided in
the outstanding options.
- - Employee recruitment and retention - An important aspect of the Company's
operations is the ability to hire and retain employees who have advanced
aviation, nursing, and other technical skills. In addition, hospital
contracts typically contain minimum certification requirements for pilots
and mechanics. Employees who meet these standards are in great demand and
are likely to remain a limited resource in the foreseeable future. If the
Company is unable to recruit and retain a sufficient number of these
employees, the ability to maintain and grow the business could be
negatively impacted.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
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.
16
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.
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 its 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.
17
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. All of the
Company's product sales and related receivables are payable in U.S. dollars. The
Company is subject to interest rate risk on its debt obligations and notes
receivable, most of which have fixed interest rates, except $17 million
outstanding against the senior revolving credit facility and $2.4 million in
notes payable. Based on the amounts outstanding at June 30, 2003, the annual
impact of a 1% change in interest rates on variable-rate debt would be
approximately $194,000. Interest rates on these instruments approximate current
market rates as of June 30, 2003. Periodically the Company enters into interest
rate risk hedges to minimize exposure to the effect of an increase in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
or submitted to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Commission's rules and forms,
and that information is accumulated and communicated to management, including
principal executive and financial officers (referred to in this report as the
Certifying Officers), as appropriate to allow timely decisions regarding
required disclosure. Management evaluated, with the participation of the
Certifying Officers, the effectiveness of disclosure controls and procedures as
of June 30, 2003, pursuant to Rule 13a-15(b) under the Exchange Act. Based on
that evaluation, the Certifying Officers have concluded that, as of June 30,
2003, the Company's disclosure controls and procedures were effective.
There were no changes in the Company's internal controls over financial
reporting that occurred during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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
The 2003 Annual Meeting of Stockholders was held on June 11, 2003. At
the meeting, Mr. Ralph J. Bernstein and Dr. Lowell D. Miller were
elected to Class III directorships. Voting results were as follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
-------------- -------------
Ralph J. Bernstein 7,692,938 734,938
Lowell D. Miller 8,273,338 154,538
ITEM 5. OTHER INFORMATION
The Office & Professional Employees International Union has scheduled
a vote on unionization of the Company's pilot workforce to be held
during the third quarter of 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -------------------------
10.1 Amendment to 1995 Stock Option Plan
31.1 Chief Executive Officer Certification adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 12, 2003, filing Consent of
KPMG LLP dated May 12, 2003, under Item 7
Current Report on Form 8-K dated May 13, 2003, reporting Items 7
and 12 (under Item 9) and furnishing the Company's press release
regarding financial results for the quarter ended March 31, 2003
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: August 14, 2003 By /s/ Aaron D. Todd
------------------------------------
Aaron D. Todd
Chief Executive Officer
Date: August 14, 2003 By /s/ Trent J. Carman
------------------------------------
Trent J. Carman
Chief Financial Officer
Date: August 14, 2003 By /s/ Sharon J. Keck
------------------------------------
Sharon J. Keck
Chief Accounting Officer
20